TC BANCSHARES, INC. General
This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the accompanying unaudited financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains certain forward-looking statements, which are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, and reflect management's beliefs and expectations based on information currently available. These forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "contemplate," "continue," "potential," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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the continuing effects of the COVID-19 pandemic on our business, customers, employees and third-party service providers;
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general economic conditions, either nationally or in our market areas, that are worse than expected;
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changes in the level and direction of loan delinquencies and write-offs and
changes in estimates of the adequacy of the allowance for loan losses, including
after implementation of the credit impairment model for Current Expected Credit
Losses ("CECL");
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our ability to access cost-effective funding;
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fluctuations in real estate values and both residential and commercial real estate market conditions;
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demand for loans and deposits in our market area;
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our ability to implement and change our business strategies;
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competition among depository and other financial institutions;
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inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
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adverse changes in the securities or secondary mortgage markets;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
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changes to statutes, regulations or regulatory policies or practices;
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our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;
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the impact of the Dodd-Frank Act and JOBS Act and the implementing regulations;
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changes in the quality or composition of our loan or investment portfolios;
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changes in consumer spending and saving habits;
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the effects of harsh weather conditions, including hurricanes, and man-made disasters;
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technological changes that may be more difficult or expensive than expected;
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the inability of third party providers to perform as expected;
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the efficiency and effectiveness of our internal control environment;
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our ability to manage market risk, credit risk, interest rate risk, liquidity risk and operational risk in the current economic environment;
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the soundness of other financial institutions;
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our ability to enter new markets successfully and capitalize on growth opportunities;
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our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
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changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the
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our ability to retain key employees;
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our management team's ability to focus primarily on the operation of our business rather than diversion of management attention to responses to the COVID-19 pandemic;
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our compensation expense associated with equity allocated or awarded to our employees;
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changes in the financial condition, results of operations or future prospects of issuers of securities that we own,
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the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers' supply chains or disruptions in transportation; and
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each of the factors and risks under the heading "Risk Factors" in the Company's
2021 Annual Report on Form 10-K and in subsequent filings we make with the
We caution readers that the foregoing list of factors is not exclusive, is not necessarily in order of importance and readers should not place undue reliance on any forward-looking statements. Because the Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements. Additionally, all statements in this Quarterly Report on Form10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events, except as required by applicable law.
Critical Accounting Estimates
For a description of the Company's critical accounting estimates, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in the Company's 2021 Annual Report. The Company considers its most significant accounting estimates to be those applied to the Allowance for Loan Losses and income Taxes. There have been no material changes to the Company's critical accounting estimates sinceDecember 31, 2021 .
Recent Mutual-to-Stock Conversion and Reorganization
The Company, aGeorgia corporation, was formed onMarch 5, 2021 to serve as the bank holding company for the Bank. The Bank is a federally chartered savings bank headquartered inThomasville, Georgia that has served the banking needs of our customers since 1934. OnJuly 20, 2021 , the Bank completed a mutual-to-stock conversion in a series of transactions by which it reorganized its corporate structure from a mutual savings bank to a federal stock savings bank, and became a wholly-owned subsidiary of the Company. In connection with the reorganization and conversion, the Company sold 4,898,350 shares of its common stock at a price of$10.00 per 26 --------------------------------------------------------------------------------
share, which we refer to as the "stock offering," and on
Before the reorganization and conversion, the Company conducted no operations other than organizational activities. In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, all references to "we," "us" and "our" refer to the Company and the Bank, except that if the discussions relate to a period beforeJuly 20, 2021 , these terms refer solely to the Bank.
Overview
We are a full service community bank that provides a variety of services to individual and commercial accounts in our market areas. Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from our operations, in one- to four-family residential real estate loans, commercial and multi-family residential real estate loans, commercial and industrial loans, construction and land development loans and consumer loans. AtJune 30, 2022 , we had total assets of$431.4 million , loans, net of the allowance for loan losses and deferred fees of$300.3 million , total deposits of$340.3 million and total equity of$85.5 million . During 2019, the Bank elected to be treated as a "covered savings association" which allows us to engage in the same activities as a national bank. Our primary deposit products are personal checking accounts, business checking accounts, savings accounts, money market accounts and certificates of deposit. Our lending products include single-family residential loans, construction loans, land development loans and SBA/USDA guaranteed loans. We expect to continue to focus on originating one- to four-family residential real estate loans, commercial and multi-family residential real estate loans, commercial and industrial loans, construction and land development loans and consumer loans. Although in recent years, we have increased our focus, consistent with what we believe to be conservative underwriting standards, on originating higher yielding commercial real estate and commercial and industrial loans. We also invest in securities, which have historically consisted primarily of mortgage-backed securities issued byU.S. government sponsored enterprises. In recent years, we have originated single-family owner-occupied loans for sale into the secondary market and for our own portfolio. We intend to continue this activity in the future in order to generate fee income. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. To help manage interest rate risk, we promote core deposit products and we are continuing to diversify our loan portfolio by adding more commercial-related loans. We will seek to continue to increase our core checking accounts during 2022.
COVID-19 Pandemic
Our historically careful underwriting practices and diverse loan portfolio has helped minimize the adverse impact of the pandemic on our operating results. In addition, the combination of the vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the impact of the pandemic on our business, financial condition, results of operations, and our customers as ofJune 30, 2022 . While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including increases in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccines along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages and wage increases continuing to impact many industries; decreases in consumer confidence and spending; and rising geopolitical tensions. Given the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict its future adverse financial impact to the Company, although we expect to continue to be impacted by the pandemic in 2022
Anticipated Increase in Expense
Now that we have completed the conversion and stock offering, which resulted in us becoming anSEC public reporting company, we expect our noninterest expense may increase due to the increased costs of operating as a public company, and the possible implementation of one or more stock-based benefit plans, if approved by our shareholders. At this time, we anticipate seeking shareholder approval for a stock-based benefit plan after the one year anniversary of the completion of the conversion. 27 --------------------------------------------------------------------------------
Comparison of Financial Condition at
Total Assets. Total assets increased$50.4 million , or 13.2%, to$431.4 million atJune 30, 2022 from$380.9 million atDecember 31, 2021 . The increase was principally due to increases in net loans of$34.0 million , and cash and cash equivalents of$16.6 million . Cash and Cash Equivalents. Cash and cash equivalents increased$16.6 million atJune 30, 2022 , compared toDecember 31, 2021 , primarily from deposits increasing$51.0 million . Most of these funds were deployed into loans of$34.0 million with the remainder retained in cash and cash equivalents. Total Loans. Loans increased$34.2 million , or 12.6%, to$305.6 million atJune 30, 2022 from$271.4 million atDecember 31, 2021 . Commercial real estate loans increased$15.4 million , or 17.1%, to$105.2 million atJune 30, 2022 from$89.8 million atDecember 31, 2021 , due to new loan originations, multi-family real estate loans increased 5.2 million, or 26.2%, to$25.2 million atJune 30, 2022 , from$19.9 million atDecember 31, 2021 , also due to new loan originations. Similarly, residential loans increased$14.8 million , or 15.0%, to$113.2 million atJune 30, 2022 , from$98.4 million atDecember 31, 2021 . Due to the rapid rise in secondary market rates, residential loans increased as customers chose to utilize our in-house portfolio adjustable rate mortgages. Commercial and industrial loans increased$2.2 million , or 13.8% to$18.1 million atJune 30, 2022 from$15.9 million atDecember 31, 2021 . Home equity loans also increased$0.5 million , or 4.2%, to$12.0 million atJune 30, 2022 , from$11.5 million atDecember 31, 2021 . Construction and land development loans decreased$3.9 million , or 11.3%, to$30.5 million atJune 30, 2022 from$34.4 million atDecember 31, 2021 . This decrease is attributable to several constructions loans converting to permanent financing. Allowances for Loan Losses. The amount of our allowance for loan losses is based on management's evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management's estimate of probable loan losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. During the six months endedJune 30, 2022 , seven loans, totaling$3.1 million were downgraded from pass to substandard and two loans totaling$3.0 million were upgraded from substandard to pass. The largest loan downgraded was a$2.9 million loan for a hotel located inSavannah, Georgia , in which the borrower has made timely payments of principal and interest. The largest loan upgraded was a$2.9 million loan for the renovations of an existing commercial property located inMontgomery, Alabama . The property had experienced lower rental rates than anticipated and an extension of the interest only period was requested in 2020. The property stabilized in 2021 and occupancy improved such that the borrower has been able to service the debt in 2022. Loan loss provision of$61,000 was recorded for the six months endedJune 30, 2022 compared to$16,000 for the six months endedJune 30, 2021 . The Company had 23 impaired loans totaling$1.3 million atJune 30, 2022 compared to 27 impaired loans totaling$1.5 million atDecember 31, 2021 . AtJune 30, 2022 , there were no specific reserves and$24,000 of the allowance was unallocated. We had net recoveries of$27,000 during the six months endedJune 30, 2022 , compared to net recoveries of$17,000 for the six months endedJune 30, 2021 . None of the charge-offs taken in 2022 related to the COVID-19 pandemic. Management believes that the allowance for loan losses, which was$4.3 million , or 1.40% of gross loans, atJune 30, 2022 , is adequate to cover losses inherent in the loan portfolio.Investment Securities . Investment securities, all of which are available-for-sale, increased$0.6 million , or 1.3%, to$46.2 million atJune 30, 2022 from$45.6 million atDecember 31, 2021 , primarily as a result of investments made inU.S. treasuries of$5.0 million . These investments were partially offset by an increase of$2.9 million , or 606.3%, in unrealized losses on our investments to$3.4 million atJune 30, 2022 from$485,000 atDecember 31, 2021 . This increase in losses was not due to a decrease in credit quality, but rather from the increases in the federal funds target range from 0.25% to 0.50% onMarch 17, 2022 , and from 0.50% to 1.25% onJune 15, 2022 , by theFederal Open Market Committee ("FOMC"). These are the first increases in the federal funds target range by theFOMC since 2018. Bank Owned Life Insurance. Our investment in bank owned life insurance increased$0.1 million , or 1.2%, to$11.3 million atJune 30, 2022 from$11.2 million atDecember 31, 2021 . We invest in bank owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. Our investment in bank owned life insurance atJune 30, 2022 was 16.3% of our Tier 1 capital plus our allowance for loan losses. 28 -------------------------------------------------------------------------------- Deposits. Total deposits increased$51.0 million , or 17.6%, to$340.3 million atJune 30, 2022 from$289.3 million atDecember 31, 2021 . Non-interest-bearing demand accounts increased$31.2 million , or 86.9%, to$67.2 million atJune 30, 2022 , from$35.9 million atDecember 31, 2021 . It should be noted that$27.0 million of this increase relates to one customer that received proceeds from the sale of a business,$24.0 million of which was subsequently moved from the Bank to the customer's brokerage account at another firm. Interest-bearing demand accounts increased$17.9 million , or 12.2%, to$164.8 million atJune 30, 2022 , from$146.8 million atDecember 31, 2021 . Savings accounts increased$769,000 , or 2.3%, to$34.8 million atJune 30, 2022 from$34.0 million atDecember 31, 2021 . Certificates of deposit increased$1.1 million , or 1.5%, to$73.6 million atJune 30, 2022 from$72.5 million atDecember 31, 2021 . Accrued interest payable and other liabilities. Accrued interest payables and other liabilities increased$672,000 , or 14.0%, to$5.5 million atJune 30, 2022 , from$4.8 million atDecember 31, 2021 . Contributing to the increase was$245,000 of accrued dividend ps declared by the board to be paid to shareholders of record as ofJune 27, 2022 onJuly 15, 2022 which was declared by the Board at theJune 2022 meeting. In addition, first mortgage loan escrows increased$348,000 , or 180.1% to$542,000 atJune 30, 2022 , from$193,000 atDecember 31, 2021 . Shareholders' Equity. Total shareholders' equity decreased$1.3 million , or 1.5%, to$85.5 million atJune 30, 2022 from$86.8 million atDecember 31, 2021 . The decrease resulted primarily from the$2.3 million , or 1,335.5%, increase in the unrealized loss after taxes on our investment securities available for sale of$2.5 million atJune 30, 2022 , from$0.2 million atDecember 31, 2021 . This decrease was not due to a change in credit quality, but resulted from the increase in the federal funds rates as noted above. Also contributing to the decrease was$245,000 of cash dividends declared to our shareholders inJune 2022 which will be paid onJuly 15, 2022 . These decreases were partially offset by net income of$1.3 million for the six months endedJune 30, 2022 .
Comparison of Operating Results for the Three Months Ended
General. Net income increased$24,000 , or 4.3%, to$594,000 for the three months endedJune 30, 2022 , compared to$570,000 for the three months endedJune 30, 2021 . The increase in net income resulted primarily from a$563,000 increase in net interest income partially offset by a$220,000 decrease in gains on sale of mortgage loans and a$271,000 increase in other expense. Interest Income. Interest and dividend income increased$459,000 , or 14.7%, to$3.6 million for the three months endedJune 30, 2022 from$3.1 million for the three months endedJune 30, 2021 . This increase was primarily due to increases in interest income on the loan portfolio of$283,000 , or 9.5%, as well as increases in interest and dividends on taxable investment securities available for sale of$84,000 and interest on deposits with other banks and federal funds sold of$93,000 . The average balance of loans, including loans held for sale, increased$25.1 million , or 9.5%, to$289.5 million for the three months endedJune 30, 2022 , from$264.4 million for the three months endedJune 30, 2021 , and the average yield on loans remained stable at 4.58% for both the three months endedJune 30, 2022 , andJune 30, 2021 . The average balance of investment securities increased$24.4 million , or 104.0%, to$47.8 million for the three months endedJune 30, 2022 , from$23.4 million for the three months endedJune 30, 2021 , while the average yield on investment securities decreased five basis points to 1.44% for the three months endedJune 30, 2022 , from 1.49% for the three months endedJune 30, 2021 . The average balance of other interest-earning deposits decreased$8.4 million , or 13.9%, to$51.6 million for three months endedJune 30, 2022 , from$60.0 million for the three months endedJune 30, 2021 and the average yield on other interest-earning deposits increased 70 basis points to 1.01% for the three months endedJune 30, 2022 , from 0.31% for the three months endedJune 30, 2021 . Interest Expense. Total interest expense decreased$104,000 , or 37.1%, to$176,000 for the three months endedJune 30, 2022 from$280,000 for the three months endedJune 30, 2021 . The decrease was primarily due to lower interest rates offered on all deposit products even though the federal funds target range increased 75 basis points to 1.25% onJune 15, 2022 fromMarch 17, 2022 . The average balance of interest-bearing deposits decreased$4.3 million , or 1.6%, to$269.2 million for the three months endedJune 30, 2022 , from$273.5 million for the three months endedJune 30, 2021 , which was partially offset by a 13 basis point decline in the average cost of interest-bearing deposits to 0.27% for the three months endedJune 30, 2022 , from 0.40% for the three months endedJune 30, 2021 . The average balances of FHLB advances decreased$8.8 million , or 100%, to$0 for the three months endedJune 30, 2022 . For the three months endedJune 30, 2021 , the average cost of FHLB advances was 0.87%. Net Interest Income. Net interest income increased$563,000 , or 19.8%, to$3.4 million for the three months endedJune 30, 2022 from$2.8 million for the three months endedJune 30, 2021 . Our average interest-earning assets increased$41.4 million , or 11.9%, period over period. This increase was due primarily to increases in our loan portfolio of$25.1 million and securities of$24.4 million , partially offset by a$8.4 million decrease in the average balance of our interest-earning deposits with other banks. Our interest rate spread increased to 3.46% for the three months endedJune 30, 2022 from 3.24% for the three months endedJune 30, 2021 , and our net interest margin increased to 3.51% for the three months endedJune 30, 2022 from 3.27% for the three months endedJune 30, 2021 . The increase in interest rate spread and net interest margin were primarily the result of the increase in the average balances of our higher yielding loan and investment securities, and enhanced further by a reduction in our cost of funds. 29 -------------------------------------------------------------------------------- Provision for Loan Losses. We recorded$61,000 in provision for loan losses for the three months endedJune 30, 2022 , compared to a$16,000 provision for the three months endedJune 30, 2021 . Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See the section entitled "Allowance for Loan Losses" in this Item 2, and Note 3 of the Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. The allowance for loan losses was$4.3 million , or 1.40% of total loans, atJune 30, 2022 , and$4.2 million , or 1.54%, of total loans atDecember 31, 2021 , and$4.1 million , or 1.50% of total loans, atJune 30, 2021 . Classified (substandard, doubtful and loss) loans decreased to$4.2 million atJune 30, 2022 compared to$4.3 million atDecember 31, 2021 and$6.0 million atJune 30, 2021 . We had$570,000 of nonperforming loans atJune 30, 2022 , compared to$414,000 atDecember 31, 2021 and$1.8 million atJune 30, 2021 . InJuly 2021 , an SBA guaranteed owner occupied property securing a commercial real estate loan was moved to other real estate owned resulting in a$1.0 million increase in other real estate owned. Net recoveries for the three months endedJune 30, 2022 and 2021 were$5 and$15,000 , respectively. We had no loans in deferral atJune 30, 2022 orDecember 31, 2021 .
Other Income. Other income information is as follows.
For the three months
ended June 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Service charges on deposit accounts
5.5 %
Gain on sale of loans 341 561 (220 ) (39.2 )%
Other 72 75 (3 ) (4.0 )%
Total non-interest income $ 547 $ 763 $ (216 ) (28.3 )%
Other income decreased $216,000 , or 28.3%, to $547,000 for the three months
ended June 30, 2022 from $763,000 for the three months ended June 30, 2021 . The
decrease was primarily due to a $220,000 decrease in gain on sale of mortgage
loans into the secondary market of $341,000 for the three months ended June 30,
2022 , compared to $561,000 for the three months ended June 30, 2021 . This
decrease is primarily due to the decrease in mortgage loan refinancings and home
purchases as interest rates have increased since December 31, 2021 .
Other Expense. Other expense information is as follows.
For the three months
ended June 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 1,964 $ 1,960 $ 4 0.2 %
Occupancy and equipment 211 195 16 8.2 %
Advertising 70 54 16 29.6 %
Audit and examination 116 80 36 45.0 %
Checking account related expenses 223 206 17 8.3 %
Consulting and advisory fees 27 26 1 3.8 %
Data processing fees 119 55 64 116.4 %
Director fees 56 79 (23 ) (29.1 )%
Legal 88 13 75 576.9 %
Other real estate loss/(gain) on sale 21 - 21
and write-downs 100.0 %
Other 228 185 43 23.2 %
Total non-interest expense $ 3,123 $ 2,853 $ 270 9.5 %
Other expense increased $270,000 , or 9.5%, to $3.1 million for the three months
ended June 30, 2022 , from $2.9 million for the three months ended June 30, 2021 .
The increase was due primarily to a $75,000 and $64,000 increase in legal and
data processing fees, respectively. In addition, audit and examination expenses
increased $36,000 , or 45.0%, to $116,000 for the three months ended June 30,
2022 from $80,000 for the three months ended June 30, 2021 . Our increase in data
processing fees was attributable to our having not
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received invoices for two months from our core provider in 2021. Our increases
in legal and audit and examination fees were attributable to expenses associated
with the additional SEC filing and compliance requirements of being a public
company.
Income Tax Expense. Income tax expense increased $7,000 to $176,000 for the
three months ended June 30, 2022 , compared to $169,000 for the three months
ended June 30, 2021 . The increase resulted from the $31,000 increase in income
before income taxes. For the three months ended June 30, 2022 , income before
taxes was $770,000 , compared to $739,000 for the three months ended June 30,
2021 . Our effective tax rate was 23% for both the three months ended June 30,
2022 and June 30, 2021 .
Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin (otherwise known as net yield on interest-earning assets),
and the ratio of average interest-earning assets to average interest-bearing
liabilities. All average balances are daily average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield. Loan fees are
included in interest income on loans and are not material. No tax-equivalent
yield adjustments have been made, as the effects would be immaterial.
For
the quarter ended
2022 2022 2021
Yield/rate Average Interest Average Average Interest Average
At 6-30 Balance Earned/ Yield/ Balance Earned/ Yield/
2022 Outstanding Paid Rate Outstanding Paid Rate
(Dollars in thousands)
Interest-earning
assets:
Loans receivable 4.27 % $ 289,503 $ 3,270 4.58 % $ 264,419 $ 2,987 4.58 %
Securities
available-for-sale 1.31 % 47,804 170 1.44 % 23,434 86 1.49 %
Interest-earning
deposits 1.72 % 51,632 128 1.01 % 59,985 46 0.31 %
Other interest-earning
assets 3.74 % 924 16 7.02 % 598 6 4.07 %
Total interest-earning
assets 3.58 % 389,863 $ 3,584 3.73 % 348,436 $ 3,125 3.64 %
Non-interest-earning
assets 22,865 20,225
Total assets $ 412,728 $ 368,661
Interest-bearing
liabilities:
Savings and money
market
accounts 0.24 % $ 135,716 $ 77 0.23 % $ 140,536 $ 72 0.21 %
Interest-bearing
checking
accounts 0.07 % 59,830 13 0.09 % 52,622 12 0.09 %
Certificate accounts 0.46 % 73,702 86 0.47 % 80,342 177 0.89 %
Total interest-bearing
deposits 0.26 % 269,248 176 0.27 % 273,500 261 0.39 %
Borrowings - % - - - % 8,848 19 0.87 %
Total interest-bearing
liabilities 0.26 % 269,248 176 0.27 % 282,348 280 0.40 %
Non-interest-bearing
liabilities 57,343 45,376
Total liabilities 326,591 327,724
Total equity 86,137 40,967
Total liabilities and
equity $ 412,728 $ 368,691
Net interest income $ 3,408 $ 2,845
Net earning assets $ 120,615 $ 66,088
Net interest rate
spread(1) 3.17 % 3.46 % 3.24 %
Net interest margin(2) 3.51 % 3.27 %
Average
interest-earning
assets to average
interest-bearing
liabilities 144.80 % 123.41 %
(1)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
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Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Quarter Ended
June 30,
2022 vs. 2021
Increase/
(decrease) Total
due to increase/
Volume Rate (decrease)
(In thousands)
Interest-earning assets:
Loans receivable $ 283 $ - $ 283
Securities available for sale 89 (5 ) 84
Interest-earning deposits (6 ) 88 82
Other interest-earning assets 3 7 10
Total interest-earning assets 369 90 459
Interest-bearing liabilities:
Savings and money market accounts (2 ) 7 5
Interest-bearing checking accounts 2 (1 ) 1
Certificate accounts (15 ) (76 ) (91 )
Total interest-bearing deposits (15 ) (70 ) (85 )
Borrowings (19 ) (19 )
Total interest-bearing liabilities (34 ) (70 ) (104 )
Change in net interest income
Comparison of Operating Results for the Six Months Ended
General. Net income decreased$45,000 , or 3.4%, to$1.3 million for the six months endedJune 30, 2022 , compared to$1.3 million for the six months endedJune 30, 2021 . The decrease in net income resulted primarily from a$406,000 decrease in gains on sale of mortgage loans, and increases of$322,000 and$44,000 in other expense and provision for loan losses, respectively, partially offset by a$722,000 increase in our net interest income. Interest Income. Interest and dividend income increased$463,000 , or 7.2%, to$6.9 million for the six months endedJune 30, 2022 from$6.5 million for the six months endedJune 30, 2021 . This increase was primarily due to increases in interest on our loan portfolio of$196,000 , and interest income and dividends on taxable investment securities available for sale of$185,000 as well as interest on deposits with other banks and federal funds sold of$83,000 . The average balance of loans, including loans held for sale, increased$36.8 million , or 13.9%, to$300.6 million for the six months endedJune 30, 2022 , from$263.8 million for the six months endedJune 30, 2021 , and the average yield on loans decreased 45 basis points to 4.30% for the six months endedJune 30, 2022 , from 4.75% for the six months endedJune 30, 2021 . The average balance of investment securities increased$27.7 million , or 141.3%, to$47.3 million for the six months endedJune 30, 2022 , from$19.6 million for the six months endedJune 30, 2021 , while the average yield on investment securities increased one basis point to 1.42% for the six months endedJune 30, 2022 , from 1.41% for the six months endedJune 30, 2021 . The average balance of other interest-earning deposits increased$5.1 million , or 8.9%, to$63.1 million for six months endedJune 30, 2022 , from$58.0 million for the six months endedJune 30, 2021 and the average yield on other interest-earning deposits increased 17 basis points to 0.56% for the six months endedJune 30, 2022 , from 0.39% for the six months endedJune 30, 2021 . Interest Expense. Total interest expense decreased$259,000 , or 43.1%, to$342,000 for the six months endedJune 30, 2022 from$601,000 for the six months endedJune 30, 2021 . The decrease was primarily due to lower interest rates offered on all deposit products even though the federal funds target range increased 25 basis points to 0.50% onMarch 17, 2022 and from 0.50% to 1.25% onJune 15, 2022 . The average balance of interest-bearing deposits decreased$5.7 million , or 2.1%, to$275.1 million for the six months ended 32 --------------------------------------------------------------------------------June 30, 2022 , from$269.4 million for the six months endedJune 30, 2021 , which was partially offset by a 17 basis point decline in the average cost of interest-bearing deposits to 0.25% for the six months endedJune 30, 2022 , from 0.42% for the six months endedJune 30, 2021 . The average balances of FHLB advances decreased$9.1 million , or 100%, to$0 for the six months endedJune 30, 2022 . For the six months endedJune 30, 2021 , the average cost of FHLB advances was 0.86%. Net Interest Income. Net interest income increased$722,000 , or 12.3%, to$6.6 million for the six months endedJune 30, 2022 from$5.9 million for the six months endedJune 30, 2021 . Our average interest-earning assets increased$69.9 million , or 20.4%, period over period. This increase was due primarily to increases in our investment securities of$27.7 million , loans of$36.8 million , and interest-earning deposits with other banks of$5.1 million . Our interest rate spread decreased to 3.14% for the six months endedJune 30, 2022 from 3.38% for the six months endedJune 30, 2021 , and our net interest margin decreased to 3.23% for the six months endedJune 30, 2022 from 3.46% for the six months endedJune 30, 2021 . The decrease in interest rate spread and net interest margin were primarily the result of our lower yield on our loan portfolio, partially offset by a reduction in our cost of funds. Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See the section entitled "Allowance for Loan Losses" in this Item 2, and Note 3 of the Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. We recorded$61,000 in provision for loan losses for the six months endedJune 30, 2022 compared to$16,000 for the six months endedJune 30, 2021 . The allowance for loan losses was$4.3 million , or 1.40% of total loans atJune 30, 2022 , and$4.2 million , or 1.54% of total loans atDecember 31, 2021 , and$4.1 million , or 1.54% of total loans, atJune 30, 2021 . Classified (substandard, doubtful and loss) loans decreased to$4.2 million atJune 30, 2022 compared to$4.3 million atDecember 31, 2021 and$6.0 million atJune 30, 2021 . We had$570,000 of nonperforming loans atJune 30, 2022 , compared to$414,000 atDecember 31, 2021 and$1.8 million atJune 30, 2021 . InJuly 2021 , an SBA guaranteed owner occupied property securing a commercial real estate loan was moved to other real estate owned resulting in a$1.0 million increase in other real estate owned. Net recoveries for the six months endedJune 30, 2022 and 2021 were$27,000 and$17,000 , respectively. We had no loans in deferral atJune 30, 2022 orDecember 31, 2021 .
Other Income. Other income information is as follows.
For the six
months ended
June 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Service charges on deposit accounts
0.7 % Gain on sale of loans 695 1,101 (406 ) (36.9 )% Other 143 150 (7 ) (4.7 )% Total non-interest income$ 1,109 $ 1,520 $ (411 ) (27.0 )% Other income decreased$411,000 , or 27.0%, to$1,109,000 for the six months endedJune 30, 2022 , from$1,520,000 for the six months endedJune 30, 2021 . The decrease was primarily due to a decrease in gain on sale of mortgage loans into the secondary market of$695,000 for the six months endedJune 30, 2022 , compared to$1,101,000 for the six months endedJune 30, 2021 . This decrease is primarily due to the decrease in mortgage loan refinancings and home purchases as interest rates have increased sinceDecember 31, 2021 . 33 --------------------------------------------------------------------------------
Other Expense. Other expense information is as follows.
For the six
months ended
June 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 3,708 $ 3,670 $ 38 1.0 %
Occupancy and equipment 411 400 11 2.8 %
Advertising 130 112 18 16.1 %
Audit and examination 251 199 52 26.1 %
Checking account related expenses 286 248 38 15.3 %
Consulting and advisory fees 67 56 11 19.6 %
Data system conversion costs - 1 (1 ) (100.0 )%
Data processing fees 231 204 27 13.2 %
Director fees 121 163 (42 ) (25.8 )%
Legal 116 37 79 213.5 %
Other real estate loss/(gain) on sale
and write-downs 32 1 31 3,100.0 %
Other 609 549 60 10.9 %
Total non-interest expense $ 5,962 $ 5,640 $ 322 5.7 %
Other expense increased $322,000 , or 5.7%, to $6.0 million for the six months
ended June 30, 2022 , from $5.6 million for the six months ended June 30, 2021 .
The increase was due primarily to a $79,000 and $52,000 increase in legal and
audit and examination expenses, respectively, which are attributable to expenses
associated with the additional SEC filing and compliance requirements of being a
public company.
Income Tax Expense. Income tax expense decreased $10,000 to $390,000 for the six
months ended June 30, 2022 , compared to $400,000 for the six months ended June
30, 2021 . The decrease resulted from the $55,000 decrease in income before
income taxes. For the six months ended June 30, 2022 , and June 30, 2021 , income
before taxes was $1.7 million . Our effective tax rate was 23.2% and 23.1% for
the six months ended June 30, 2022 and June 30, 2021 , respectively.
34
--------------------------------------------------------------------------------Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin (otherwise known as net yield on interest-earning assets),
and the ratio of average interest-earning assets to average interest-bearing
liabilities. All average balances are daily average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield. Loan fees are
included in interest income on loans and are not material. No tax-equivalent
yield adjustments have been made, as the effects would be immaterial.
For
the six months ended
2022 2022 2021
Yield/rate Average Interest Average Average Interest Average
At 6-30 Balance Earned/ Yield/ Balance Earned/ Yield/
2022 Outstanding Paid Rate Outstanding Paid Rate
(Dollars in thousands)
Interest-earning
assets:
Loans receivable 4.27 % $ 300,643 $ 6,408 4.30 % $ 263,848 $ 6,212 4.75 %
Securities
available-for-sale 1.31 % 47,288 334 1.42 % 19,599 137 1.41 %
Interest-earning
deposits 1.72 % 63,145 176 0.56 % 58,001 111 0.39 %
Other interest-earning
assets 3.74 % 926 18 3.92 % 655 13 4.00 %
Total interest-earning
assets 3.58 % 412,002 6,936 3.39 % 342,103 6,473 3.82 %
Non-interest-earning
assets 23,343 20,029
Total assets $ 435,345 $ 362,132
Interest-bearing
liabilities:
Savings and money
market
accounts 0.24 % $ 141,455 143 0.20 % $ 137,383 140 0.21 %
Interest-bearing
checking
accounts 0.07 % 59,932 26 0.09 % 49,903 22 0.09 %
Certificate accounts 0.46 % 73,694 173 0.47 % 82,131 400 0.98 %
Total interest-bearing
deposits 0.26 % 275,081 342 0.25 % 269,417 562 0.42 %
Borrowings - - - 9,096 39 0.86 %
Total interest-bearing
liabilities 0.26 % 275,081 342 0.25 % 278,513 601 0.44 %
Non-interest-bearing
liabilities 74,084 43,244
Total liabilities 349,165 321,757
Total equity 86,180 40,375
Total liabilities and
equity $ 435,345 $ 362,132
Net interest income $ 6,594 $ 5,872
Net earning assets $ 136,921 $ 63,590
Net interest rate
spread(1) 3.17 % 3.14 % 3.38 %
Net interest margin(2) 3.23 % 3.46 %
Average
interest-earning
assets to average
interest-bearing
liabilities 149.77 % 122.83 %
(1)
Net interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(2)
Net interest margin represents net interest income divided by average total
interest-earning assets.
35
--------------------------------------------------------------------------------Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Six Months Ended
June 30,
2022 vs. 2021
Increase/
(decrease) Total
due to increase/
Volume Rate (decrease)
(In thousands)
Interest-earning assets:
Loans receivable $ 866 $ (670 ) $ 196
Securities available for sale 194 3 197
Interest-earning deposits 10 55 65
Other interest-earning assets 5 - 5
Total interest-earning assets 1,075 (612 ) 463
Interest-bearing liabilities:
Savings and money market accounts 4 (1 ) 3
Interest-bearing checking accounts 4 - 4
Certificate accounts (41 ) (186 ) (227 )
Total interest-bearing deposits (33 ) (187 ) (220 ) Borrowings
(39 ) - (39 )
Total interest-bearing liabilities (72 ) (187 ) (259 )
Change in net interest income
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our liquidity is a measure of our ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. Our short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, other borrowings, and new advances from theFederal Home Loan Bank . There has been no material adverse change during the six months endedJune 30, 2022 in our ability to fund our operations. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from theFederal Home Loan Bank of Atlanta . AtJune 30, 2022 , we had$45.5 million in borrowing capacity with theFederal Home Loan Bank of Atlanta , and had no advances outstanding. In addition, we have$19.5 million in unsecured federal funds lines of credit through our correspondent banks and$6.0 million secured borrowing capacity through theFederal Reserve Bank of Atlanta . No amounts were outstanding on these lines of credit atJune 30, 2022 . We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our current strategy to increase our loan portfolio, we will seek to increase core deposits and useFederal Home Loan Bank of Atlanta advances as well as brokered certificates of deposit as needed. Capital Requirements AtJune 30, 2022 , the Bank's Tier 1 capital as a percentage of the Bank's total assets was 15.1%, and total qualifying capital as a percentage of risk-weighted assets was 23.3%. As ofJune 30, 2022 , the Bank was classified as "well capitalized" for regularity capital purposes. Note 6 to the Financial Statements describes the regulatory capital requirements applicable to the Bank. 36 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. Note 5 to the Financial Statements describes the financial instruments with off-balance-sheet risk that we enter into in the normal course of business to meet the financing needs of our customers.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
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