GRANDSOUTH BANCORPORATION The following discussion and analysis is presented on a consolidated basis and focuses on the major components of our operations and significant changes in our results of operations for the periods presented. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information included elsewhere in this Annual Report on Form 10-K. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in our operations or results of operations for any future periods.
We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this Annual Report on Form
10-K. Overview The Company was incorporated in 2000 under the laws ofSouth Carolina and is a bank holding company registered under the Bank Holding Company Act of 1956. The Company's primary purpose is to serve as the holding company for the Bank. OnOctober 2, 2000 , pursuant to a Plan of Exchange approved by the shareholders of the Bank, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company, and the Company became the owner of all of the outstanding capital stock of the Bank. The Company presently engages in no business other than that of owning the Bank and has no employees. The Company has one non-bank subsidiary, the GrandSouth Capital Trust I, aDelaware statutory trust, formed to facilitate the issuance of trust preferred securities.The GrandSouth Trust is not consolidated in the Company's financial statements.
We provide a full range of financial services through offices located throughout
COVID-19 Pandemic The COVID-19 pandemic and variants of the virus continue to create disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. The impact of the COVID-19 pandemic and its related variants is fluid and continues to evolve, adversely affecting many of our customers. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and inthe United States as a whole. The unprecedented and rapid spread of COVID-19 and its variants and their associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities have resulted and continue to result in less economic activity, and volatility and disruption in financial markets. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations remains uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the continued rollout of vaccinations for the virus, whether such vaccinations will be effective against another resurgence of the virus, including any new strains, and the ability for customers and businesses to return to, and remain in, their pre-pandemic routine.
Lending Operations and Accommodations to Customers
We are focused on serving the needs of our commercial and consumer customers and have offered flexible loan payment arrangements, including short-term loan modifications or forbearance payments, and reduced or waived certain fees on deposit accounts. During 2020, we granted short-term deferrals related to the COVID-19 crisis for$93.0 million of loans, which as ofDecember 31, 2020 had all resumed payments or had been paid off. During 2021, the Bank did not grant any deferrals related to the COVID-19 crisis. 49 We also participated in theSmall Business Administration's Paycheck Protection Program ("PPP"). During 2020 and 2021, we secured funding of 272 loans and 95 loans, respectively, through the PPP totaling approximately$37.4 million and$12.0 million , net of deferred lending fees for the same periods, respectively. PPP loans totaled$1.3 million and$22.5 million as ofDecember 31, 2021 andDecember 31, 2020 , respectively.
Impact on Results of Operations and Financial Condition
We are monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our AFS investments and review our investment portfolio for impairment at each period end. Because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our investment portfolio. As ofDecember 31, 2021 , we had$0.7 million of goodwill. At each quarter end in 2021, we have considered whether a quantitative assessment of our goodwill was required because of the significant economic disruption caused by the COVID-19 pandemic. AtDecember 31, 2021 , we determined no goodwill impairment was required. However, further delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have an adverse effect on our results of operations and financial condition. Capital and Liquidity As ofDecember 31, 2021 , all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by loan losses.
We continue to monitor unfunded commitments through the pandemic, including home equity lines of credit, for evidence of increased credit exposure as borrowers utilize these lines for liquidity purposes. As clients manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit. We believe that we have ample liquidity to meet the needs of our customers through our low cost deposits, our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks, and our ability to obtain advances secured by certain securities and loans from theFederal Home Loan Bank ("FHLB"). Critical Accounting Estimates Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements, which could have a material impact on our future financial condition and results of operations. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of the allowance for loan losses to be an accounting area that requires the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate. Therefore, we consider this policy, discussed below, to be a critical accounting policy and estimate and discuss it directly with the Audit Committee of our board of directors. Additional information about our critical and significant accounting policies can be found in Note 1 of our audited consolidated financial statements as ofDecember 31, 2021 , included in Item 8 of this Annual Report on Form 10-K. 50 Allowance for Loan Losses ("ALL") - The ALL reflects our estimates of probable losses inherent in the loan portfolio at the balance sheet date. Our management evaluates the ALL on a regular basis. It is based on the collectability of our loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and such revisions can materially affect our financial results.
The methodology for determining the ALL has two main components: the evaluation of individual loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics.
A loan is considered impaired when it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. We individually evaluate loans, or relationships, greater than$200,000 for impairment that are classified as nonaccrual, TDRs, or performing substandard loans. If the impaired loan is considered collateral dependent, a charge-off is taken based upon the appraised value of the property (less an estimate of selling costs if foreclosure is anticipated) compared to the loan's carrying value, if necessary. If the impaired loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted cash flows after consideration of modifications and the likelihood of future default and prepayment. The allowance for non-impaired loans consists of a base historical loss reserve and a qualitative reserve. The loss rates for the base loss reserve, segmented into seven loan categories, contain average net loss rates ranging from approximately 0.00% to 0.56%.
The qualitative reserve adjusts the average loss rates utilized in the base loss reserve for trends in the following internal and external factors:
· Changes in lending and loan review policies;
· Economic conditions - including unemployment rates, federal macroeconomic data,
housing prices and sales, and regional economic outlooks;
· Changes in the nature and volume of the portfolio and in the terms of the
loans;
· Experience, ability, and depth of lending management;
· Volume and severity of past due, nonaccrual, and classified loans;
· Changes in the quality of the institution's loan review system;
· Collateral values;
· Loan concentrations and loan growth; and
· The effect of other external factors such as competition, legal and regulatory
requirements on the level of estimated credit losses. Qualitative reserve adjustment factors are decreased for favorable trends and increased for unfavorable trends. There is no certainty that our ALL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast; however, we believe our estimate has been reasonably accurate in determining ALL adequacy. Financial Highlights
The following table sets forth certain financial highlights (in thousands,
except per share data) concerning the Company and its wholly-owned subsidiary.
The information was derived from audited consolidated financial statements. The
information should be read in conjunction with the audited consolidated
financial statements and notes, which are presented elsewhere in this report.
51
As of and for the year ended December 31,
2021 2020 2019
Income Statement Data:
Net interest income $ 49,890 $ 41,714 $ 39,566
Provision for loan losses 1,270 3,073 2,768
Noninterest income 3,809 2,552 1,786
Noninterest expense 31,141 30,046 27,958
Income before taxes 21,288 11,147 10,626
Provision for income taxes 5,174 2,502 2,562
Net income $ 16,114 $ 8,645 $ 8,064
Per Common Share Data:
Weighted average shares of common stock
outstanding, basic 5,157,858 5,215,182 5,041,420
Weighted average shares of common stock
outstanding, diluted 5,287,413 5,273,350 5,111,577
Total shares of common stock outstanding 5,168,681 5,271,971 5,201,951
Basic income per common share $ 2.95 $ 1.57 $ 1.51
Diluted income per common share $ 2.88 $ 1.55 $ 1.49
Dividends declared per common share $ 0.40 $ 0.32 $ 0.08
Dividend payout ratio 13.56 % 20.60 % 5.54 %
Book value (at end of period) $ 18.61 $
16.17 $ 14.49
Balance Sheet Data:
Total loans $ 933,475 $ 878,545 $ 756,389 Allowance for loan losses$ (13,723 ) $
(12,572 ) $ (10,287 )
Total assets $ 1,203,722 $ 1,089,779 $ 911,645
Total Deposits $ 1,059,041 $ 946,480 $ 812,501 Total shareholders' equity$ 97,405 $ 86,525 $ 76,650 Common shareholders' equity$ 96,201 $
85,227
Performance Ratios: Return on average assets 1.39 % 0.88 % 0.94 % Return on average equity 17.78 % 10.59 % 11.45 % Net interest rate spread(1) 4.27 % 4.13 % 4.39 % Net interest margin(2) 4.44 % 4.42 % 4.78 % Efficiency ratio(3) 57.99 %
68.51 % 67.71 %
Asset Quality Data (at Period End): Net charge-offs to average loans 0.01 % 0.10 % 0.24 % Nonperforming assets to total loans 0.19 % 0.28 % 0.50 % Allowance for loan losses to nonperforming loans 1017.27 % 2358.72 % 542.56 % Allowance for loan losses to total loans 1.47 % 1.43 % 1.36 % Balance Sheet and Capital Ratios(4): Total loans to total deposits 88.14 % 92.82 % 93.09 % Tangible common equity to tangible assets 7.94 % 7.88 % 8.33 % Leverage ratio 8.59 % 8.72 % 9.34 % Tier 1 risk-based capital ratio 10.29 % 10.17 % 10.62 % Total risk-based capital ratio 14.28 %
14.46 % 13.11 %
(1) The interest rate spread represents the difference between the fully taxable
equivalent weighted-average yield on interest-earning assets and the
weighted-average cost of interest-bearing liabilities for the period.
(2) The net interest margin represents fully taxable equivalent net interest
income as a percentage of average interest-earning assets for the period.
(3) The efficiency ratio represents noninterest expense as a percentage of the
sum of net interest income on a fully taxable equivalent basis and
noninterest income.
(4) Capital ratios are for
basis.
52
Comparison of Financial Condition at
General Total assets increased$113.9 million , or 10.5%, to$1.2 billion atDecember 31, 2021 from$1.1 billion atDecember 31, 2020 . This increase in assets was primarily due to increases in interest-earnings deposits of$69.5 million , or 135.8%, from$51.1 million atDecember 31, 2020 to$120.6 million atDecember 31, 2021 , and loans, which increased$54.9 million , or 6.3%, from$878.5 million atDecember 31, 2020 to$933.5 million atDecember 31, 2021 . Total liabilities increased$103.1 million , or 10.3%, to$1.1 billion atDecember 31, 2021 from$1.0 billion atDecember 31, 2020 , due primarily to the$112.6 million increase in total deposits, which was partially offset by the$11.0 million decrease in FHLB advances. Total shareholders' equity increased$10.9 million to$97.4 million atDecember 31, 2021 compared to$86.5 million atDecember 31, 2020 . This increase was primarily attributable to$16.1 million of net income and$1.4 million from the exercise of stock options, partially offset by the repurchases of$3.9 million of our common stock and$0.1 million of our preferred stock and dividends declared of$2.2 million . Tangible book value per common share, a non-GAAP measure, increased$2.44 to$18.47 atDecember 31, 2021 from$16.03 atDecember 31, 2020 . Cash and Cash Equivalents Total cash and cash equivalents increased$61.1 million to$124.1 million atDecember 31, 2021 from$63.0 million atDecember 31, 2020 , primarily due to the increase of total deposits, partially offset by the increase in loans. We continue to hold adequate levels of liquid and short-term assets.
Our investment securities portfolio is classified as AFS. AFS securities are
carried at fair value. The following table shows the amortized cost and fair
value for our AFS investment portfolio at the dates indicated (in thousands).
December 31, 2021 December 31, 2020
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. government agencies $ 9,479 $ 9,439 $ - $ -
State and municipal obligations 26,011 26,677 16,684 17,820
Mortgage-backed securities - agency 33,191 33,418 31,056 31,487
Collateralized mortgage obligations -
agency 26,968 27,435 49,441 50,560
Asset-backed securities 2,599 2,590 6,268 6,235
Corporate bonds 12,200 12,403 4,500 4,605
$ 110,448 $ 111,962 $ 107,949 $ 110,707
AFS investment securities increased $1.3 million , or 1.1%, to $112.0 million at
December 31, 2021 from $110.7 million at December 31, 2020 . Corporate bonds,
which increased $7.8 million , or 169.3%, to $12.4 million at December 31, 2021
from $4.6 million at December 31, 2020 , include subordinated debt issued by
community banks that are within and outside of our footprint. We continue to
look for opportunities to re-deploy funds from investment securities to higher
yielding loans.
During 2021, we decided to sell $28.2 million of our AFS investment securities
that were below market rates and as a result in an unrealized loss position.
While this resulted in a $0.8 million loss on sale, we believe making this
balance sheet change will assist in positioning us for better earnings in the
future.
53
We believe the number of securities in an unrealized loss position is due
entirely to interest rate fluctuation from the time that many of these
securities were originally purchased. We regularly review our investment
portfolio for impairment that is other than temporary ("OTTI") and concluded
that no OTTI existed during the years ended December 31, 2021 and December 31,
2020 . In addition, we do not currently intend to sell the securities, nor do we
believe it is more likely than not that we would be required to sell these
securities before their anticipated recovery of amortized cost. The number and
dollar amount of securities in an unrealized loss position decreased between
December 31, 2020 and December 31, 2021 , as indicated in the table below (in
thousands).
12 Months or Less More Than 12 Months Total
Number of Unrealized Number of Unrealized Number of Unrealized
Securities Fair Value Losses
Securities Fair Value Losses Securities Fair Value Losses
As of
33 $ 52,348 $ 647 2 $ 2,590 $ 9 35 $ 54,938 $ 656
As of December 31, 2020 10 $ 28,374 $ 129 2$ 2,808 $ 38 12$ 31,182 $ 167
We closely monitor the financial condition of the issuers of our municipal securities. As ofDecember 31, 2021 , the fair value of our municipal securities portfolio balance consists of approximately 34.1% of general obligation bonds and 65.9% of revenue bonds. As ofDecember 30, 2021 , andDecember 31, 2020 , all of our municipal securities were performing and rated A or better by either Moody's or Standard and Poor's. The composition and maturities of the available-for-sale investment securities portfolio atDecember 31, 2021 are summarized in the following table (in thousands). Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. The composition and maturity distribution of the securities portfolio is subject to change depending on rate sensitivity, capital, and liquidity needs. The weighted average yield was calculated using net income (interest accrual plus or minus accretion/amortization) divided by ending book value. More than one year More than five years Less than one year through five years through ten years More than ten years Total securities Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield Cost YieldU.S. government agencies $ - - $ - -$ 9,479 1.36 % $ - 0.00 %$ 9,479 1.36 % State and municipal obligations - - $ - -$ 6,890 2.01 %$ 19,121 2.30 % 26,011 2.22 %
Mortgage-backed
securities - agency - - 187 3.80 % 9,221 0.87 % 23,783 1.18 % 33,191 1.11 % Collateralized mortgage obligations - agency - - - - 12,269 2.01 % 14,699
0.86 % 26,968 1.38 % Asset-backed securities - - - - 665 0.30 % 1,934 0.66 % 2,599 0.57 % Corporate bonds - - - - 10,200 4.25 % 2,000 3.66 % 12,200 4.15 % Total securities available-for-sale $ - 0.00 %$ 187 3.80 %$ 48,724 2.11 %$ 61,537 1.52 %$ 110,448 1.78 %
(1) Tax exempt municipal obligations are shown on a tax equivalent basis using a
21% federal tax rate.
Other Investments
As of December 31, 2021 , we held $3.0 million in other investments accounted for
at cost which was a decrease of $3.3 million , or 52.3%, compared to $6.3 million
at December 31, 2020 . The following table summarizes other investments as of the
dates indicated (in thousands):
December 31,
2021 2020
FHLB stock $ 733 $ 1,501
CRA qualified preferred stock 500 500Certificates of deposit with other banks 1,504 4,004 Investment in trust preferred securities 247 247 Total other investments
$ 2,984 $ 6,252 The amount of FHLB stock required to be owned by the Bank is determined by the amount of FHLB advances outstanding. The decrease in our FHLB stock of$0.8 million to$0.7 million atDecember 31, 2021 , compared to$1.5 million atDecember 31, 2020 was the result of decreased FHLB borrowings. FHLB advances totaled$5.0 million and$16.0 million as ofDecember 31, 2021 and 2020, respectively. 54 Loans The following table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated (in thousands). Other construction and land loans include residential acquisition and development loans and loans on commercial undeveloped land and one-to-four family improved and unimproved lots. Commercial real estate loans include loans on non-residential owner-occupied and non-owner-occupied real estate, multi-family, and owner-occupied investment property. Commercial loans include unsecured commercial loans and commercial loans secured by business assets.
December 31,
2021 2020 2019
Balance Percent Balance Percent Balance PercentReal estate mortgage loans: One-to four-family residential$ 132,836 14.22$ 114,119 12.98$ 101,071 13.37 Commercial real estate 423,552 45.36 369,706 42.03 306,802 40.55 Home equity loans and lines of credit 21,568 2.31 17,174 1.95 17,811 2.35 Residential construction 38,881 4.16 30,989 3.52 8,375 1.11 Other construction and land 75,682 8.10 68,611 7.80 55,505 7.34 Commercial 234,355 25.09 243,617 27.70 225,629 29.82 Consumer 7,129 0.76 35,362 4.02 41,335 5.46 Loans receivable, gross 934,003 100.00 879,578 100.00 756,528 100.00 Net deferred loan costs (fees) (528 ) (956 ) (73 ) Unamortized discount - (274 ) (304 ) Unamortized premium - 197 238 Loans receivable, net of deferred fees$ 933,475 $ 878,545 $ 756,389
Loans receivable, net of deferred fees increased$54.9 million , or 6.3%, to$933.5 million atDecember 31, 2021 , compared to$878.5 million atDecember 31, 2020 . Most of our loan growth in concentrated in One-to-four family residential and Commercial real estate with increases of$18.7 million , or 16.4% and$53.8 million , or 14.6%, respectively, as compared to relative balances as ofDecember 31, 2020 . This growth was partially offset by a decrease in our Consumer loan portfolio, which contracted by$28.2 million , or 79.8%, as compared to the relative balance as ofDecember 31, 2020 . In 2021, we processed 95 loans under the PPP for a total of$12.0 million in loans funded and$0.6 million of lender fees collected. As ofDecember 31, 2021 , 83 of these loans totaling$10.8 million had been forgiven and lender fee income totaling$0.5 million had been recognized and is included in Interest and fees on loans in the Consolidated Statements of Income. In 2020, we processed 272 loans under the PPP for a total of$39.0 million in loans funded and$1.6 million of lender fees collected. As ofDecember 31, 2020 , 80 of these loans totaling$15.9 million had been forgiven and lender fee income totaling$1.0 million had been recognized and is included in Interest and fees on loans in the Consolidated Statements of Income. As ofDecember 31, 2021 , 271 of the loans originated under the PPP in 2020 totaling$38.9 million had been forgiven and lender fees income totaling$1.6 million had been recognized and is included in Interest and fees on loans in the Consolidated Statements of Income. In 2021,$24.6 million of the purchased student loan portfolio was sold which, along with the continued paydowns, decreased the balance as ofDecember 31, 2021 to$0.7 million from$25.6 million atDecember 31, 2020 . The sale resulted
in a net gain of$1.2 million . 55
Maturities and Sensitivity of Loans to Changes in Interest Rates
Renewal of loans is subject to the same credit approval and underwriting
standards as new loans, the terms of which may be modified upon renewal. The
information in the following table is based on the contractual maturities of
individual loans, including loans which may be subject to renewal at their
contractual maturity (in thousands).
December 31, 2021
Over one Over five
One year year to five years to fifteen Over
or less years years fifteen years TotalReal estate loans: One-to-four family residential$ 12,572 $ 61,168 $ 14,866$ 43,999 $ 132,605 Commercial 37,814 264,229 120,834 - 422,877 Home equity loans and lines of credit 1,640 4,384 15,543 34 21,601 Residential construction 29,260 6,304 1,828 1,358 38,750 Other construction and land 16,186 53,376
5,787 - 75,349 Commercial 46,762 167,011 21,261 22 235,056 Consumer 1,364 4,756 1,092 25 7,237 Loans receivable, net of deferred fees$ 145,598 $ 561,228 $
181,211$ 45,438 $ 933,475
Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.
Longer term One-to-four family residential, Residential construction, Commercial
real estate, and Home equity loans and lines of credit typically carry interest
rates which adjust to certain LIBOR indexes or The Wall Street Journal Prime
Rate. Longer term One-to-four family residential construction loans represent
construction-to-permanent loans which, upon completion of the construction
phase, become One-to-four family residential loans.
The following table sets forth the recorded investment of all loans maturing
after one year that have either fixed interest rates or floating or adjustable
interest rates (in thousands).
December 31, 2021
Floating or
Fixed adjustable Total
Real estate loans:
One-to-four family residential $ 70,124 $ 49,909 $ 120,033
Commercial 304,432 80,631 385,063
Home equity loans and lines of credit 2,663 17,298
19,961 Residential construction 8,104 1,386 9,490 Other construction and land 34,841 24,322 59,163 Commercial 179,642 8,652 188,294 Consumer 5,873 - 5,873 Total$ 605,679 $ 182,198 $ 787,877 56 Delinquent Loans
When a loan becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. When a loan becomes 30 days or more past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and the Bank, the borrower is referred to the Bank'sCredit Administration staff to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined that restructuring is not a viable option, the Bank's counsel is instructed to pursue foreclosure. The accrual of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs first, unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction to the principal outstanding until the loan is returned to accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.
If a loan is modified in a TDR, the loan is generally placed on non-accrual until there is a period of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive months, and the ultimate collectability of all amounts contractually due is not in doubt. For a discussion of TDRs, see the section entitled "Troubled Debt Restructurings" below.
We had one loan 90 days or more past due that was still accruing interest as ofDecember 31, 2021 for$50.0 thousand that was not 98% guaranteed by the issuing agency. We had no loans 90 days or more past due that are still accruing interest as ofDecember 31, 2020 that are not 98% guaranteed by the issuing
agency.
57
Delinquent loans
90 Days
(In thousands) 30-59 Days 60-89 Days and over Total
December, 2021
Real estate loans:One-to-four family residential $ - $ - $
50$ 50 Commercial 54 - - 54 Consumer - - 590 590 Total delinquent loans $ 54 $ -$ 640 $ 694 % of total loans, net 0.01 % 0.00 % 0.07 % 0.07 % December, 2020 Real estate loans:
One-to-four family residential $ - $ - $
15$ 15 Commercial 6 - 2 8 Consumer 1,840 727 2,549 5,116 Total delinquent loans$ 1,846 $ 727 $ 2,566 $ 5,139 % of total loans, net 0.21 % 0.08 % 0.29 % 0.58 % December 31, 2019 Real estate loans:
One-to-four family residential$ 107 $ 15 $
-$ 122 Commercial 570 - - 570 Residential construction - - 296 296 Other construction and land - 172 - 172 Commercial 242 - 2 244 Consumer 1,999 642 3,122 5,763 Total delinquent loans$ 2,918 $ 829 $ 3,420 $ 7,167 % of total loans, net 0.39 % 0.11 % 0.45 % 0.95 % December 31, 2018 Real estate loans:
One-to-four family residential$ 324 $ 1,265 $
-$ 1,589 Commercial 554 - - 554 Other construction and land 972 - - 972 Commercial 208 - 1 209 Consumer 2,029 1,121 4,281 7,431 Total delinquent loans$ 4,087 $ 2,386 $ 4,282 $ 10,755 % of total loans, net 0.62 % 0.36 % 0.65 % 1.62 % December 31, 2017 Real estate loans: One-to-four family residential$ 145 $ 66$ 552 $ 763 Commercial - - 510 510 Other construction and land 122 - - 122 Commercial 55 58 157 270 Consumer 1,360 1,597 3,418 6,375 Total delinquent loans$ 1,682 $ 1,721 $ 4,637 $ 8,040 % of total loans, net 0.31 % 0.31 % 0.84 % 1.46 % 58 Total delinquencies as a percentage of loans have decreased from 0.58% atDecember 31, 2020 to 0.07% atDecember 31, 2021 , representing a decrease of 87.29% over the period. Delinquent loans decreased$4.4 million , or 86.50%, to$0.7 million atDecember 31, 2021 from$5.1 million atDecember 31, 2020 . The decrease in 30-59 days delinquencies of$1.8 million , or 97.07%, fromDecember 31, 2020 toDecember 31, 2021 is concentrated primarily in consumer loans. The sale of$24.6 million of the purchased student loan portfolio in 2021 drove the past due consumer balances lower. As ofDecember 31, 2020 , purchased student loans made up 99.6% of the$5.1 million total consumer past due balance. We continue to focus on collection efforts and favorable resolutions.
Nonperforming Assets
Nonperforming loans include all loans past due 90 days and over that are not 98%
guaranteed by the issuing agency, certain impaired loans, and TDR loans that
have not yet established a satisfactory period of payment performance (some of
which may be contractually current). Nonperforming assets include nonperforming
loans and real estate owned ("REO"). The table below sets forth the amounts and
categories of our nonperforming assets at the dates indicated (in thousands).
December 31,
2021 2020 2019
Nonaccrual loans:
Real estate loans:
One-to-four family residential $ 107 $ 39 $ 29
Commercial 767 31 573
Home equity loans and lines of credit - - -
Residential construction - - 296
Other construction and land - 126 313
Commercial 473 324 667
Consumer 2 13 18
Total nonperforming loans(1) 1,349 533 1,896
REO:
One-to-four family residential - - -
Commercial real estate - 513 -
Other construction and land 842 1,419 1,855
Total foreclosed real estate 842 1,932 1,855
Total nonperforming assets $ 2,191 $ 2,465 $ 3,751
TDRs still accruing $ 1,780 $ 1,254 $ 1,459
Ratios:Nonperforming loans to total loans 0.14 % 0.06 % 0.25 % Nonperforming assets to total assets 0.18 % 0.23 % 0.41 %
(1) At
nonaccrual loans.
Nonperforming loans as a percentage of total loans increased from 0.06% atDecember 31, 2020 , to 0.14% atDecember 31, 2021 , representing an increase of 133.3% over the period. Nonperforming assets as a percentage of total assets decreased from 0.23% atDecember 31, 2020 , to 0.18% atDecember 31, 2021 , or a decrease of 21.7% over the period. The gross interest income that would have been recorded under the original terms of the nonaccrual loans was$0.1 million as ofDecember 31, 2021 and$0.2 million as ofDecember 31, 2020 . The changes in nonperforming loans and nonperforming assets is the result of the resolution and disposal of nonperforming loans and nonperforming assets by means of restructure, foreclosure, deed in lieu of foreclosure and short sales for less than the indebtedness, in which cases the deficiency is charged-off.
REO was
Troubled Debt Restructurings In situations where, for economic or legal reasons related to a borrower's financial difficulties, we grant a concession that we would not otherwise consider, for other than an insignificant period of time, the related loan is classified as a TDR. We strive to identify borrowers in financial difficulty early so that we may work with them to modify their loans before they reach nonaccrual status. Modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates, periods of interest-only payments, and principal deferments. A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. While unusual, there may be instances of forgiveness of loan principal. We individually evaluate all substandard loans that experience a modification of terms to determine if a TDR has occurred. 59
All TDRs over$200,000 are considered to be impaired loans and are reported as such for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and the ultimate collectability of all amounts contractually due is not in doubt. We may also remove a loan from TDR and impaired status if the loan is subsequently restructured and at the time of the subsequent restructuring the borrower is not experiencing financial difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted to the borrower. The following table presents our TDRs by accrual status as of the dates indicated (in thousands). December 31, 2021 2020 TDRs still accruing interest$ 1,780 $ 1,254 TDRs not accruing interest 112 308 Total TDRs$ 1,892 $ 1,562 As noted in the above table, the majority of our borrowers with restructured loans have been able to comply with the revised payment terms for at least six consecutive months, resulting in their respective loans being restored to accrual status. The following table presents details of TDRs made in each of the periods indicated (in thousands): Pre-Modification Post-Modification Number of Recorded Recorded Modification Type TDR Loans Investment Investment
Year endedDecember 31, 2021 Extended payment terms 4 $ 398 $ 398 Year endedDecember 31, 2020 Extended payment terms 3 $ 173 $ 61
During 2021, we have continued to be proactive in working with borrowers to identify potential issues and restructure certain loans to prevent future losses.
As of
Classification of Loans
The following table sets forth amounts of classified and criticized loans at the
dates indicated. As indicated in the table, loans classified as "doubtful" or
"loss" are charged off immediately (in thousands).
December 31,
2021 2020 2019
Classified loans:
Substandard $ 4,304 $ 3,701 $ 10,295
Doubtful - - -
Loss - - -
Total classified loans: 4,304 3,701 10,295
Special mention 9,647 7,777 3,153
Total criticized loans $ 13,951 $ 11,478 $ 13,448 Total classified loans as a% of total loans, net 0.46 % 0.42 %
1.36 %
Total criticized loans as a% of total loans, net 1.49 % 1.31 %
1.78 %
Total classified loans to total loans increased to 0.46% at December 31, 2021 ,
from 0.42% at December 31, 2020 . Total criticized loans to total loans increased
to 1.48% at December 31, 2021 , from 1.31% at December 31, 2020 . Management
continues to dedicate resources to monitoring and resolving classified andcriticized loans. 60 Allowance for Loan Losses The allowance for loan losses reflects our estimates of probable losses inherent in our loan portfolio at the balance sheet date. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of our loans in light of historical experience, the nature and volume of our loan portfolio, adverse situations that may affect our borrowers' abilities to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology for determining the allowance for loan losses has two main components: the evaluation of individual loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics. A loan is considered impaired when it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan. We individually evaluate loans, or relationships, greater than$200,000 for impairment that are classified as nonaccrual, TDRs, or performing substandard loans. If the impaired loan is considered collateral dependent, a charge-off is taken based upon the appraised value of the property less an estimate of selling costs if foreclosure or sale of the property is anticipated. If the impaired loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted cash flows after consideration of modifications and the likelihood of future default and prepayment. The allowance for homogenous loans consists of a base loss reserve and a qualitative reserve. The loss rates for the base loss reserve, segmented into seven loan categories, contain average net loss/(recovery) rates ranging from approximately 0.0% to 0.6%.
The qualitative reserve adjusts the average loss rates utilized in the base loss reserve for trends in the following internal and external factors:
· Changes in lending and loan review policies;
· Economic conditions - including unemployment rates, federal macroeconomic data,
housing prices and sales, and regional economic outlooks;
· Changes in the nature and volume of the portfolio and in the terms of the
loans;
· Experience, ability, and depth of lending management;
· Volume and severity of past due, nonaccrual, and classified loans;
· Changes in the quality of the institution's loan review system;
· Collateral values;
· Loan concentrations and loan growth; and
· The effect of other external factors such as competition, legal and regulatory
requirements on the level of estimated credit losses. Qualitative reserve adjustment factors are decreased for favorable trends and increased for unfavorable trends. There is no certainty that our ALL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast.
The following table summarizes the net charge-off detail as a percenrage of average loans by loan composition for the periods indicated (in thousands).
61
Year ended December 31,
2021 2020 2019
Amount Percent Amount Percent Amount PercentReal Estate: One -to-four family residential$ 3 0.00 %$ (6 ) 0.00 %$ (11 ) -0.01 % Commercial real estate 52 0.01 % - 0.00 % 43 1.00 % Home equity loans and lines of credit - 0.00 % - 0.00 % (2 ) -0.01 % Residential construction - 0.00 % - 0.00 % - 0.00 % Other construction and land (17 ) -0.02 % (1 ) 0.00 % (16 ) -0.02 % Commercial 79 0.02 % 792 0.30 % 1,618 0.56 % Consumer 2 0.02 % 3 0.04 % 37 0.25 % Total$ 119 $ 788 $ 1,669 Ratios: Net charge-offs to average loans outstanding 0.01 % 0.10 % 0.11 % Allowance to nonperforming loans at period end(1) 1,017.27 % 2,358.72 % 41.56 % Allowance to total loans at period end 1.47 % 1.43 % 1.36 %
(1) At
nonaccrual loans.
Our allowance as a percentage of total loans increased to 1.47% atDecember 31, 2021 from 1.43% atDecember 31, 2020 primarily as the result of loan growth and changes in the composition of the bank's loan portfolio. We have continued to experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss rate used in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated from the calculation as time passes. Our coverage ratio of nonperforming loans decreased to 1,017.27% atDecember 31, 2021 from 2,358.72% atDecember 31, 2020 primarily as the result of the increased balance of nonperforming loans during the period.
Allocation of Allowance for Loan Losses
The table below summarizes the allowance for loan losses balance and percent of total loans by loan category (in thousands).
December 31,
2021 2020 2019
Allowance %* Allowance %* Allowance %*
Real estate mortgage loans:
One-to-four family residential $ 1,363 14.22 $ 1,297 12.98 $ 1,098 13.37
Commercial real estate 4,688 45.36 4,559 42.03 3,122 40.55
Home equity loans and lines of credit 246 2.31 231 1.95 188 2.35
Residential construction 430 4.16 389 3.52 84 1.11
Other construction and land 824 8.10 843 7.80 584 7.34 Commercial 5,985 25.09 5,118 27.70 5,024 29.82 Consumer 187 0.76 135 4.02 187 5.46
Total allowance for loan losses
* Loan balance in each category, expressed as a percentage of total loans, net of
deferred fees.
As discussed above, we compute our allowance for loan losses either through a specific allowance to individually impaired loans or through a general allowance applied to homogeneous loans by loan type. The above allocation represents the allocation of the allowance by loan type regardless of specific or general allocations. The largest allocation has been made to one-to-four family, commercial real estate, and commercial due to the elevated risk in those categories of loans. 62
The table below summarizes balances, charge-offs, and specific allowances related to impaired loans as of the dates indicated (in thousands).
% of Specific
Allowance & Partial
Recorded Unpaid Principal Partial Specific Charge-off to Unpaid
Balance Balance
Charge-Offs Allowance Principal Balance
As of
$ 2,495 $ 2,547 $ 52 $ - 2.0% Loans with a valuation allowance 348
348 - 20 5.7% Total$ 2,843 $ 2,895 $ 52$ 20 2.5% As ofDecember 31, 2020 Loans without a valuation allowance$ 1,768 $ 2,000 $ 232 $ - 11.6% Loans with a valuation allowance 12
12 - 1 8.3% Total$ 1,780 $ 2,012 $ 232$ 1 11.6% As indicated in the above table, during the periods presented, we have consistently maintained more than 2% of impaired loans in a reserve, either through a direct charge-off or in a specific reserve included as part of the allowance for loan losses. The total dollar amount of impaired loans increased$1.1 million , or 59.7%, to$2.8 million atDecember 31, 2021 compared to$1.8 million atDecember 31, 2020 . The increase in impaired loans is attributable to loans becoming impaired during 2021 in excess of those that were paid off, charged off or returned to non-impaired status upon changes to borrowers' status that made collectability of all amounts contractually due no longer in doubt. REO
The tables below summarize the balances and activity in REO as of the dates and for the periods indicated (in thousands).
As of December 31,
2021 2020
Commercial real estate $ - $ 513
Other construction and land 842 1,419
Total $ 842 $ 1,932
As of December 31,
2021 2020
Balance, beginning of year $ 1,932 $ 1,855
Additions - 513
Disposals (977 ) (160 )
Writedowns (113 ) (276 )
Balance, end of year $ 842 $ 1,932 As indicated in the above table, the balance in REO has totaled
As ofDecember 31, 2021 , our REO property with the largest balance of$0.7 million consisted of approximately eight acres of commercial land with frontage onU.S. Highway 153 inAnderson, South Carolina . The property was acquired
inOctober 2013 .
Bank Owned Life Insurance ("BOLI")
BOLI policies are recorded at book value based on cash surrender values provided by a third-party administrator. The assets of the separate BOLI account are invested in theLincoln National Life Insurance Co. Investment Allocation account rated AA- which is composed primarily ofU.S. Government agency sponsored funds and mortgage-backed securities fund. The assets in the general account are invested in four insurance carriers with ratings ranging from AA- to AA+. The assets of the hybrid account are invested in two different insurance carriers with ratings ranging from A+ to A++. 63 The following table summarizes the composition of BOLI as of the dates indicated (in thousands): December 31, 2021 2020 Separate account$ 754 $ 747 General account 11,043 10,899 Hybrid 2,981 3,215 Total$ 14,778 $ 14,861 Net Deferred Tax Assets Deferred income tax assets and liabilities are determined using the asset and liability method and are reported on a net basis in our consolidated balance sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rates and laws. When deferred tax assets are recognized, they are subject to a valuation allowance based on management's judgment as to whether realization is more likely than not. In determining the need for a valuation allowance, we consider the following sources of taxable income:
· future reversals of existing taxable temporary differences;
· future taxable income exclusive of reversing temporary differences and
carryforwards;
· taxable income in prior carryback years; and
· tax planning strategies that would, if necessary, be implemented.
We determined a tax valuation allowance totaling$0.4 million and$0.3 million was required as ofDecember 31, 2021 and 2020, respectively, related to state net operating losses of the Company.
Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as business combinations.Goodwill has an indefinite useful life and is evaluated for impairment annually, or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of the reporting unit exceeds its fair value. We had$0.7 million of goodwill as ofDecember 31, 2021 , and 2020.
Deposits
The following table presents average deposits by category, percentage of total
average deposits and average rates for the periods indicated (in thousands).
For the Years Ended December 31,
2021 2020
Percent of Percent of
Total Weighted Total Weighted
Average Average Average Average Average Average
Balance Balance Rate Balance Balance Rate
Deposit type:
Savings accounts $ 13,135 1.3 0.10 % $ 8,179 1.0 0.10 %
Time deposits 243,066 23.9 0.49 % 332,453 38.8 1.63 %
Money market accounts 442,451 43.6 0.43 % 306,694 35.8 0.62 %Interest-bearing demand accounts 65,176 6.4 0.26 % 33,644 3.9 0.22 % Noninterest-bearing demand accounts 251,295 24.8
0.00 % 175,871 20.5 0.00 % Total deposits$ 1,015,123 100.0 0.32 %$ 856,841 100.0 1.09 % As indicated in the above table, average deposit balances increased approximately$158.3 million , or 18.5%, for the year endedDecember 31, 2021 comparedDecember 31, 2020 . The increase in total average deposits was mainly attributable to the$135.8 million , or 44.3%, increase in money market accounts and$75.4 million , or 42.9%, in noninterest-bearing demand accounts, offset by a$89.4 million , or 26.9%, decline in time deposits. 64
The following table presents details of the applicable interest rates on our certificates of deposit at the dates indicated (in thousands).
December 31,
2021 2020
Interest Rate:
Less than 1.00% $ 203,089 $ 203,890
1.00% to 2.00% 5,723 79,384
2.00% to 3.00% 117 668
Total $ 208,929 $ 283,942
The following table presents contractual maturities for certificates of deposit,
as of December 31, 2021 , in amounts equal to or greater than $250,000 (in
thousands):
Equal to or
greater than
$250
Three months or less $ 8,255
Over three months through six months 7,278
Over six months through one year 10,339
Over one year 19,194
Total $ 45,066
At December 31, 2021 and 2020, we estimate that we have approximately $393.8
million and $295.0 million , respectively, in uninsured deposits including
related interest accrued and unpaid. Since it is not reasonably practicable to
provide a precise measure of uninsured deposits, these amounts are estimates and
are based on the same methodologies and assumptions used for the Bank's
regulatory reporting requirements by the FDIC for the Call Report.
Borrowings
We had fixed rate FHLB advances totaling$5.0 million and$16.0 million as ofDecember 31, 2021 and 2020, respectively. FHLB advances are secured by qualifying one-to-four family permanent and commercial loans and by a blanket collateral agreement with the FHLB. AtDecember 31, 2021 , we had unused borrowing capacity with the FHLB of$30.7 million based on collateral pledged at that date. We had total additional credit availability with the FHLB of$355.7 million as ofDecember 31, 2021 , if additional collateral was available and pledged. The following table sets forth information concerning balances and interest rates on our FHLB advances as of or for the period indicated (in thousands). As of or for the Year Ended December 31, 2021 Balance at end of period $ 5,000 Average balance during period $ 15,005 Maximum outstanding at any month end $ 16,000 Weighted average interest rate at end of period 0.40 % Weighted average interest rate during period 0.87 % Junior Subordinated Notes We had$35.9 million and$35.7 million in three issuances of junior subordinated notes outstanding atDecember 31, 2021 and 2020. Notes totaling$8.2 million , payable to an unconsolidated subsidiary, accrue interest at 1.85% above the 90-day LIBOR, adjusted quarterly. Notes totaling$10.0 million accrue interest at a fixed rate of 6.50% untilNovember 30, 2023 , at which time the interest will accrue at 3.43% above the 90-day LIBOR, adjusted quarterly. Notes totaling$18.0 million issued in 2020 accrue interest at a fixed rate of 4.375% untilNovember 15, 2025 , at which time the interest will accrue at 4.16% above the 90-day Secured Overnight Financing Rate (SOFR), adjusted quarterly. The effective interest rate on the notes was 4.43% atDecember 31, 2021 and 4.44% atDecember 31, 2020 . 65 Equity Total shareholders' equity increased$10.9 million to$97.4 million atDecember 31, 2021 compared to$86.5 million atDecember 31, 2020 . This increase was primarily attributable to$16.1 million of net income partially offset by common and preferred stock repurchases of$4.0 million and dividends declared totaling$2.2 million .
Discussion of Results of Operation
Like most financial institutions, net interest income is our primary source of
revenue. Net interest income is the difference between interest income earned on
interest-earning assets, such as loans and investment securities, and interest
incurred on interest-bearing liabilities, such as deposits and borrowings. Net
interest income depends upon the relative mix of interest-earning assets and
interest-bearing liabilities, the ratio of interest-earning assets to total
assets and of interest-bearing liabilities to total funding sources, and
movements in market interest rates. Our net interest income can be significantly
influenced by a variety of factors, including overall loan demand, economic
conditions, credit risk, the amount of nonearning assets, the amounts of and
rates at which assets and liabilities reprice, variances in prepayment of loans
and securities, early withdrawal of deposits, exercise of call options on
borrowings or securities, a general rise or decline in interest rates, changes
in the slope of the yield-curve, and balance sheet growth or contraction. Our
asset and liability management committee ("ALCO") seeks to manage interest rate
risk under a variety of rate environments by structuring our balance sheet and
off-balance sheet positions.
Average Balances and Net Interest Income Analysis
The following table sets forth the average balances of assets and liabilities,
the total dollar amounts of interest income and dividends from average
interest-earning assets on a tax-equivalent basis, the total dollar amounts of
interest expense on average interest-bearing liabilities, and the resulting
average tax-equivalent yields and cost for the periods indicated. All average
balances are daily average balances. Nonaccrual loans were included in the
computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense.
66
For the Years Ended December 31,
2021 2020 2019
Average Average Average
Outstanding Yield/ Outstanding Yield/ Outstanding Yield/(In thousands, fully taxable equivalent) Balance Interest
Rate Balance Interest Rate Balance Interest Rate
Interest-earning assets:
Loans - Core Bank(1) $ 824,901 $ 34,415 4.17 % $ 733,894 $ 32,024 4.36 % $ 613,709 $ 31,049 5.06 %
Loans - CarBucks(2) 89,694 18,694 20.84 % 76,031 16,555 21.77 % 83,708 18,671 22.30 %
Investments - taxable 114,380 1,406 1.23 % 79,589 1,223 1.54 % 45,186 1,058 2.34 %
Investment tax exempt(3) 12,666 352 2.78 % 8,702 252 2.90 % 4,081 144 3.54 %
Federal funds sold and other interest
earning deposits 78,747 107 0.14 % 38,781 113 0.29 % 68,412 1,376 2.01 %
Other investments, at cost 4,654 108 2.32 % 8,465 216 2.55 % 12,698 303 2.39 %
Total interest-earning assets 1,125,042 55,082 4.90 % 945,462 50,383 5.33 % 827,794 52,601 6.35 %
Noninterest-earning assets 37,387
34,982 32,140
Total assets $ 1,162,429 $ 980,444 $ 859,934
Interest-bearing liabilities:
Savings accounts $ 13,135 $ 13 0.10 % $ 8,179 $ 8 0.10 % $ 5,536 $ 7 0.13 %
Time deposits 243,066 1,192 0.49 % 332,453 5,416 1.63 % 369,194 8,247 2.23 %Money market accounts 442,451 1,888 0.43 % 306,694 1,915 0.62 % 243,999 3,568 1.46 % Interest bearing transaction accounts 65,176 167 0.26 % 33,644 75 0.22 % 20,918 25 1.20 % Total interest bearing deposits 763,828 3,260
0.43 % 680,970 7,414 1.09 % 639,647 11,847 1.85 %
FHLB advances 15,005 130 0.87 % 16,691 161 0.96 % 4,123 102 2.48 %Junior subordinated debentures 35,802 1,727 4.82 % 20,466 1,035 5.06 % 18,067 1,056 5.84 % Federal funds purcahsed 101 1 0.99 % 454 7 1.64 % - - 0.00 %
Total interest-bearing liabilities 814,736 5,118 0.63 % 718,581 8,617 1.20 % 661,837 13,005 1.96 % Noninterest-bearing deposits 251,295 175,871
122,879
Other non interest bearing liabilities 5,770
4,393 4,799
Total liabilities 1,071,801 898,845 789,515
Total equity 90,628 81,599 70,419
Total liabilities and equity$ 1,162,429 $ 980,444 $
859,934
Tax-equivalent net interest income$ 49,964 $ 41,766 $ 39,596 Net interest-earning assets(2)$ 310,306 $ 226,881 $
165,957
Average interest-earning assets to interest-bearing liabilities 138.09 % 131.57 %
125.08 %
Tax-equivalent net interest rate spread(3) 4.27 % 4.13 % 4.39 % Tax-equivalent net interest margin(4)
4.44 % 4.42 % 4.78 %
(1) Tax exempt loans and investments are calculated giving effect to a 21%
federal tax rate, or
(2) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(3) Tax-equivalent net interest rate spread represents the difference between the
tax equivalent yield on average interest-earning assets and the cost of
average interest-bearing liabilities.
(4) Tax-equivalent net interest margin represents tax equivalent net interest
income divided by average total interest-earning assets.
67
For the years ended
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to change in volume (changes in
volume multiplied by prior rate). The total column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately, based
on the absolute values of changes due to rate and the changes due to volume.
For the Year Ended December 31, 2021 For the Year Ended December 31, 2020
Compared to the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Increase (decrease) due to: Increase (decrease) due to:
(In thousands) Volume Rate Total Volume Rate Total
Interest-earning assets:
Loans - Core Bank(1) $ 3,842 $ (1,451 ) $ 2,391 $ 5,589 $ (4,614 ) $ 975
Loans - CarBucks(1) 2,871 (732 ) 2,139 (1,680 ) (460 ) (2,116 )
Investment - taxable 462 (279 ) 183 615 (450 ) 165
Investments - tax exempt(2) 110 (10 ) 100 139 (31 ) 108
Interest-earning deposits 75 (81 ) (6 ) (425 ) (838 ) (1,263 )
Other investments, at cost (90 ) (18 ) (108 ) (106 ) 19 (87 )
Total interest-earning assets 7,270 (2,571 ) 4,699 4,132 (6,374 ) (2,218 )
Interest-bearing liabilities:
Savings accounts 5 - 5 3 (2 ) 1
Time deposits (1,173 ) (3,051 ) (4,224 ) (760 ) (2,071 ) (2,831 )
Money market accounts 692 (719 ) (27 ) 754 (2,407 ) (1,653 )Interest bearing transaction accounts 80
12 92 21 29 50
FHLB advances (15 ) (16 ) (31 ) 153 (94 ) 59Junior subordinated debentures 742
(50 ) 692 130 (151 ) (21 )
Other borrowings (7 ) 1 (6 ) 7 - 7Total interest-bearing liabilities 324 (3,823 ) (3,499 ) 308 (4,696 ) (4,388 ) Change in tax-equivalent net interest income $ 6,946 $
1,252 $ 8,198 $ 3,824 $ (1,678 ) $ 2,170
(1) Nonaccrual loans are included in the above analysis.
(2) Interest income on tax exempt loans and investments are adjusted for based on
a 21% federal tax rate.
Comparison of Years Ended
General. Net income for the year endedDecember 31, 2021 was$16.1 million , compared to$8.6 million for 2020. The increase in net income was primarily the result of increases in net interest income and noninterest income of$8.2 million and$1.3 million , respectively, and a decrease in provision for loan losses of$1.8 million , partially offset by increases in noninterest expense totaling$1.1 million .
Net Interest Income. Net interest income increased$8.2 million , or 19.6%, to$49.9 million for the year endedDecember 31, 2021 , compared to$41.7 million for 2020. The increase in net interest income was primarily due to a$104.7 million increase in average loans, a$38.8 million increase in average investments, both taxable and tax exempt and decreases in costs on our average time deposits and money market accounts. These changes were partially offset by the decline in yields on our loans and investments during the period and a$82.9 million increase in our average interest-bearing liabilities. Our tax-equivalent net interest margin was 4.44% for the year endedDecember 31, 2021 , compared to 4.42% for 2020, an increase of two basis points. The increase in net interest margin was primarily attributable to interest rate reductions which impacted our cost of funds in the year endedDecember 31, 2021 , partially offset by the impact of these interest rate reductions on our loans, investments, and interest-earning deposits. 68 CarBucks provides specialty floor plan inventory financing for more than 2,000 small automobile dealers in over 20 states. Credit lines are established for each approved dealer using Board approved underwriting guidelines. Advances and repayments on credit lines averaging$0.1 million are vehicle specific. The inventory typically consists of over 12,000 floored used vehicles with an average price of$8,400 per unit, generally has an average 61-day turnover, and generates approximately$250 in financing fees per vehicle which is included in loan interest income. CarBucks net income increased$1.9 million to$5.3 million for the year endedDecember 31, 2021 compared to$3.5 million for the same period in 2020. Net interest income increased$2.3 million to$17.2 million for the 2021 period from$14.9 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses decreased$0.6 million for the year endedDecember 31, 2021 compared to 2020 due to decreased net charge offs and lower qualitative adjustments related to COVID-19 uncertainty in 2021. Noninterest expense increased$0.3 million to$9.9 million for the 2021 period compared to$9.6 million for the same period in 2020 due primarily to increased salary and overhead allocation expenses. Provision for Loan Losses. We recorded a provision for loan losses for the year endedDecember 31, 2021 of$1.3 million due to organic loan growth and certain qualitative adjustments in response to shifts in used car demand which could impact our CarBucks portfolio. This compares to a$3.1 million provision for loan losses in 2020. We are experiencing continued stabilization in asset quality, low charge-off amounts and a decline in the historical loss rates used in our allowance for loan losses model. In light of ongoing supply chain disruptions, labor shortages and the associated impact on monetary policy, there is a risk that loss rates could increase. Noninterest Income The following table summarizes the components of noninterest income and the corresponding changes between the years endedDecember 31, 2021 and 2020 (in thousands): Years Ended December 31, 2021 2020 Change
Service charges on deposit accounts$ 1,244 $ 983 $ 261 Gain (loss) on sale of investment securities available for sale (819 ) 392 (1,211 ) Net gain on sale of loan portfolio 1,227 - 1,227 Net gain on settlement of litigation 828 - 828 Bank owned life insurance 344 414 (70 ) Net gain on sale of premises and equipment 26
14 12 Other noninterest income 959 749 210 Total noninterest income$ 3,809 $ 2,552 $ 1,257 Our noninterest income increased$1.3 million to$3.8 million in the year endedDecember 31, 2021 , compared to 2020. This increase was driven by a$1.2 million gain on sale of a portion of the loan portfolio and a$0.8 million gain on the settlement of litigation, partially offset by a$0.8 million loss on sale of investment securities available for sale. 69 Noninterest Expense
The following table summarizes the components of noninterest expense and the
corresponding change between the years ended
Years Ended December 31,
2021 2020 Change
Compensation and employee benefits
760 Net occupancy 2,309 2,186 123 Federal deposit insurance 634 522 112 Professional and advisory 1,139 1,328 (189 ) Data processing 2,021 1,880 141 Marketing and advertising 185 163 22 Net cost of operation of REO 90 371 (281 ) Other 3,632 3,225 407 Total noninterest expenses$ 31,141 $ 30,046 $ 1,095
Our noninterest expense increased
· Compensation and employee benefits increased
year ended
related to increased full-time equivalent employees, annual raises and increases in employee benefits, incentives and commissions.
· Federal deposit insurance premiums increased
· Professional and advisory expenses decreased
reliance on external advisors.
· Data processing expenses increased
2021, compared to 2020, primarily due to an increased number of accounts and
transactions.
· Marketing and advertising increased
31, 2021, compared to 2020, primarily due to sponsorship contributions and
donations in 2021 that were not paid in 2020.
· Net cost of operation of REO decreased
31, 2021, compared to 2020, primarily due to valuation adjustments for updated
appraisals or sales contract amounts.
· Other noninterest expense increased
31, 2021, compared to 2020, primarily as the result of software maintence and
license fees and a one-time fee rated to the prepayment of FHLB advances,
partially offset by a decrease in office supplies expense. Income Taxes Income tax expense totaled$5.2 million for the year endedDecember 31, 2021 compared to$2.5 million for 2020. Income tax expense for the years endingDecember 31, 2021 and 2020 benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 24.3% and 22.4%, respectively. The increase in the effective tax rate is primarily attributable to the growth of taxable income exceeding that of nontaxable income.
We continue to have unutilized net operating losses for state income tax purposes and do not have a material current tax receivable or liability.
Liquidity, Market Risk, and Capital Resources
Liquidity. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB, and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our ALCO, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We believe that, as ofDecember 31, 2021 , we have enough sources of liquidity to satisfy our liquidity needs for the next twelve months and thereafter. 70
We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally inFHLB andFederal Reserve Bank of Richmond ("FRB") interest-earning deposits and investment securities and are also used to pay off short-term borrowings. AtDecember 31, 2021 , cash and cash equivalents totaled$124.1 million . Included in this total was$102.5 million held at the FRB,$1.2 million held at the FHLB, and$16.9 million held at correspondent banks in interest-earning accounts. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated statements of cash flows included in our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The following summarizes the most significant sources and uses of liquidity during the years endedDecember 31, 2021 and
2020
(in thousands):
Years Ended December 31,
2021 2020
Investing activities:
Purchases of investments $ (57,950 ) $ (67,337 ) Maturities and principal repayments of investments 25,286
13,684 Sales of investments 28,836 18,787 Net increase in loans (55,049 ) (112,622 ) Purchase of fixed assets (2,100 ) (4,253 )
Redemption of other investments, at cost 3,268
4,129 Financing activities: Net increase in deposits$ 112,561 $ 133,979 Repurchase of common stock (3,946 ) -
Proceeds from issuance of subordinated debt -
17,602 Proceeds from FHLB advances - 27,000 Repayment of FHLB advances (11,000 ) (11,000 )
Dividends paid on common stock (2,066 )
(1,668 ) In addition, because the Company is a separate entity from the Bank, it must provide for its own liquidity. The Company is responsible for payment of dividends declared on its common and preferred stock and interest and principal on any outstanding debt or trust preferred securities. The Company currently has internal capital resources to meet these obligations. While the Company has access to capital, the ultimate sources of its liquidity are dividends from the Bank and tax allocation agreements, which are limited by applicable law and regulations. The Bank paid no dividends to the Company in 2021 or 2020.
At
During 2021, we entered into an agreement to fund capital contributions of up to$1 million with a financial technology company. As ofDecember 31, 2021 , none of the commitment has been funded. We will account for our ownership interest in the financial technology company in accordance with Subtopic 946-323 as an equity method investment. We have unfunded commitments of$1 million related to this agreement as ofDecember 31, 2021 . Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates of deposit. Based on historical experience and current market interest rates, we anticipate that following their maturity we will retain a large portion of our retail certificates of deposit with maturities of one year or less as of December
31, 2021. In addition to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Our securities portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed securities (which allow borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise call options and borrowers to prepay higher-rate loans, producing higher than otherwise scheduled cash flows. 71
Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have a borrowing agreement with the FHLB. The following summarizes our borrowing capacity as ofDecember 31, 2021 (in thousands): Total Used Unused Capacity Capacity Capacity FHLB Loan collateral capacity$ 355,725 Pledgeable marketable securities 111,462 FHLB totals 467,187$ 5,000 $ 462,187 Fed funds lines 49,000 - 49,000$ 516,187 $ 5,000 $ 511,187 Market Risk. One of the most significant forms of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive risk can threaten our earnings, capital, liquidity and solvency. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. The board of directors of the Bank has established an ALCO, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Our ALCO monitors and seeks to manage market risk through rate shock analyses, economic value of equity analyses and simulations in order to avoid unacceptable earnings and market value fluctuations due to changes in interest rates. From a funding perspective, we expect to satisfy the majority of our future requirements with retail deposit growth, including checking and savings accounts, money market accounts and certificates of deposit generated within our primary markets. If our funding needs exceed our deposits, we will utilize our excess funding capacity with the FHLB.
We have taken the following steps to reduce our interest rate risk:
· increased our personal and business checking accounts and our money market
accounts, which are less rate-sensitive than certificates of deposit and which
provide us with a stable, low-cost source of funds;
· limited the fixed rate period on loans within our portfolio;
· utilized our securities portfolio for positioning based on projected interest
rate environments;
· priced certificates of deposit to encourage customers to extend to longer
terms; and
· utilized FHLB advances for positioning.
Net Interest Income. We analyze the impact of changing rates on our net interest income. Using our balance sheet as of a given date, we analyze the repricing components of individual assets, and, adjusting for changes in interest rates at 100 basis point increments, we analyze the impact on our net interest income. Changes to our net interest income are shown in the following table based on immediate changes to interest rates in 100 basis point increments.
The table below reflects the impact of an immediate increase in interest rates in 100 basis point increments on Pretax Net Interest Income ("NII").
December 31,
2021 2020
% Change in % Change in
Change in Interest Rates Pretax Net Pretax Net(basis points) Interest Income Interest Income +400 7.6 7.1 +300 8.1 7.5 +200 5.9 5.4 +100 3.6 3.2 - - - -100 (0.7 ) 0.5 72
The results from the rate shock analysis on NII are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means assets will reprice at a faster pace than liabilities during the short-term horizon. The implications of an asset sensitive balance sheet will differ depending upon the change in market rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, the interest rate on assets will decrease at a faster pace than liabilities. This situation generally results in a decrease in NII and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, the interest rate on assets will increase at a faster pace than liabilities. This situation generally results in an increase in NII and operating income. As indicated in the table above, a 200 basis point increase in rates would result in a 5.9% increase in NII as ofDecember 31, 2021 as compared to a 5.4% increase in NII as ofDecember 31, 2020 , suggesting that there is a benefit for the Company to net interest income in rising interest rates The Company generally seeks to remain neutral to the impact of changes in interest rates by maximizing current earnings while balancing the risk of changes in interest rates. Capital Resources. Regulatory capital rules adopted inJuly 2013 and fully-phased in as ofJanuary 1, 2019 , which we refer to as the Basel III rules or Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than "small bank holding companies," generally holding companies with consolidated assets of less than$3 billion (such as the Company). In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a "capital conservation buffer" on top of our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of common equity Tier 1 equal to 2.5% of risk-weighted assets. The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based guidelines and framework under prompt corrective action provisions include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.
The tables below summarize the capital amounts and ratios of the Bank and the
minimum regulatory requirements in accordance with Basel III and the prompt
corrective action provisions at
To Be Well-
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes(1) Action ProvisionsAs of December 31, 2021: Amount Ratio Amount Ratio Amount Ratio Tier 1 Leverage Capital$ 123,344 10.21 %$ 48,317 >4.0%$ 60,396 >5.0% Common Equity Tier 1 Capital$ 123,344 12.24 %$ 70,517 >7.0%$ 65,480 >6.5% Tier 1 Risk-based Capital$ 123,344 12.24 %$ 85,628 >8.5%$ 80,591 >8.0% Total Risk-based Capital$ 135,951 13.50 %$ 105,776 >10.5%$ 100,739 >10% As ofDecember 31, 2020 : Tier 1 Leverage Capital$ 105,820 10.05 %$ 36,100 >4.0%$ 45,125 >5.0% Common Equity Tier 1 Capital$ 105,820 11.73 %$ 63,174 >7.0%$ 58,662 >6.5% Tier 1 Risk-based Capital$ 105,820 11.73 %$ 76,712 >8.5%$ 72,199 >8.0% Total Risk-based Capital$ 117,117 12.98 %$ 94,761 >10.5%$ 90,249 >10% (1) Includes capital conservation buffer of 2.50%. Under theFederal Reserve's Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by theFederal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes. The Company is not subject to the prompt corrective action provisions applicable to the Bank. The tables below summarize the capital amounts and ratios of the Company and the minimum regulatory requirements in accordance with Basel III atDecember 31, 2021 andDecember 31, 2020 (in thousands). 73 For Capital Adequacy Actual Purposes(1) As of December 31, 2021: Amount Ratio Amount Ratio Tier I Leverage Capital$ 103,730 8.59 %$ 48,327 >4.0% Common Equity Tier 1 Capital$ 95,482 9.47 %$ 70,574 >7.0% Tier I Risk-based Capital$ 103,730 10.29 %$ 85,696 >8.5%Total Risk Based Capital $ 143,963 14.28 %$ 105,860 >10.5% As ofDecember 31, 2020 : Tier I Leverage Capital$ 91,876 8.72 %$ 42,189 >4.0% Common Equity Tier 1 Capital$ 83,629 9.26 %$ 63,248 >7.0% Tier I Risk-based Capital$ 91,876 10.17 %$ 76,801 >8.5%Total Risk Based Capital $ 130,683 14.46 %$ 94,871 >10.5%
(1) Includes capital conservation buffer of 2.50%.
Off-Balance Sheet Arrangements
To accommodate the financial needs of our customers, we make commitments under
various terms to lend funds. These commitments include revolving credit
agreements, term loan commitments and short-term borrowing agreements.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since we expect many of these commitments to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. We evaluate each customer's creditworthiness
and the amount of collateral we obtain, if we deem it to be necessary upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held includes first and second mortgages on one-to-four
family residential real estate, accounts receivable, inventory, and commercial
real estate. Certain lines of credit are unsecured.
The following summarizes our approximate commitments to extend credit (in
thousands):
December 31,
2021
Lines of credit $ 322,712
Standby letters of credit 4,928
$ 327,640 © Edgar Online, source
