FARMERS AND MERCHANTS BANCSHARES, INC. Introduction
The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations ofFarmers and Merchants Bancshares, Inc. and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, and with Management's Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements and notes thereto, and the other statistical information contained in the Annual Report ofFarmers and Merchants Bancshares, Inc. on Form 10-K for the year endedDecember 31, 2020 (the "Form 10-K"). References in this report to "us", "we", "our", and "the Company" are toFarmers and Merchants Bancshares, Inc. and, unless the context clearly suggests otherwise, its consolidated subsidiaries. Forward-Looking Statements This report may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of "forward-looking statements." Statements that are not historical in nature, including those that include the words "intend", "believe", "estimate", "predict", "potential", or "continue" or the negative of those words and other comparable words, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions, including those impacted and/or driven by the COVID-19 pandemic; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of our loan and investment portfolios; our ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risks are discussed in detail in the registration statements and periodic reports thatFarmers and Merchants Bancshares, Inc. files with theSecurities and Exchange Commission (the "SEC") (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.
Farmers and Merchants Bancshares, Inc. is aMaryland corporation and a financial holding company registered with theBoard of Governors of theFederal Reserve System (the "FRB") under the Bank Holding Company Act of 1956, as amended. The Company was incorporated onAugust 8, 2016 for the purpose of becoming the holding company ofFarmers and Merchants Bank (the "Bank") in a share exchange transaction that was intended to constitute a tax-free exchange under Section 351 of the Internal Revenue Code of 1986, as amended (the "Reorganization"). The Reorganization was consummated onNovember 1, 2016 , at which time the Bank became a wholly-owned subsidiary of the Company and all of the Bank's stockholders became stockholders of the Company by virtue of the conversion of their shares of common stock of the Bank into an equal number of shares of common stock of the Company. The Company's primary business activities are serving as the parent company of the Bank and holding a series investment inFirst Community Bankers Insurance Co., LLC , aTennessee "series" limited liability company and licensed protected cell captive insurance company ("FCBI"). The Company owns 100% of one series of membership interests issued by FCBI, which series is deemed a "protected cell" underTennessee law and has been designated "Series Protected Cell FCB-4" (such series investment is hereinafter referred to as the "Insurance Subsidiary"). 29
-------------------------------------------------------------------------------- The Bank is aMaryland commercial bank chartered onOctober 24, 1919 that is engaged in a general commercial and retail banking business. The Bank has had one inactive subsidiary,Reliable Community Financial Services, Inc. , aMaryland corporation that was incorporated inApril 1992 to facilitate the sale of fixed rate annuity products and later positioned to sell a full array of investment and insurance products. The Insurance Subsidiary represents one protected cell of a protected cell captive insurance company (i.e., FCBI) that was formed onNovember 9, 2016 to better manage our risk programs, provide insurance efficiencies, and add operating income by both keeping insurance premiums paid with respect to such risks within our affiliated group of entities and realizing certain tax benefits that are unique to captive insurance companies. The Company's investment in the Insurance Subsidiary represents one series of membership interests in FCBI. As a "series" limited liability company, FCBI is authorized by state law and its governing instruments to issue one or more series of membership interests, each of which, for all purposes under state law, is deemed to be a legal entity separate and apart from FCBI and its other series.
Effective
The Company maintains an Internet site at www.fmb1919.bank on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, theSEC .
Estimates and Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. See Note 1 of the Notes to the audited consolidated financial statements as of and for the year endedDecember 31, 2020 , which were included in Item 8 of Part II of the Form 10-K. On an on-going basis, management evaluates estimates, including those related to loan losses and intangible assets, other-than-temporary impairment ("OTTI") of investment securities, income taxes, and fair value of investments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements. The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. 30
-------------------------------------------------------------------------------- Management applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on our results of operations, financial condition or disclosures of fair value information. In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statements of income. Examples include investment securities, goodwill and core deposit intangible, among others.
Management does not believe that any material changes in our critical accounting
policies have occurred since
COVID-19 Pandemic
The COVID-19 pandemic has materially impacted all companies, governmental
agencies, and individuals across the Country since the
TheU.S. and state governments reacted to the outbreak of the pandemic by issuing shelter-at-home orders and requiring that non-essential businesses be closed to prevent spread of the virus. The health crisis quickly turned into a financial crisis resulting in guidance and mandates regarding foreclosures and repossessions and accounting and regulatory changes designed to encourage banks to work with customers suffering detrimental financial impact. Although states, includingMaryland , have eased many of the previously-imposed COVID-19 restrictions, including stay-at-home orders and the required closure of non-essential businesses, and many individuals have been vaccinated, there are still a significant number of active infections throughout the Country, including in theState of Maryland , and individuals continue to become infected. As a result, it is possible that states, includingMaryland , will re-implement some or all of the COVID-19 related restrictions that have been lifted and again require some or all non-essential businesses to close or drastically alter their business operations, which could have a material adverse impact on our customers and, thus, our financial condition and results of operations. Paycheck Protection Program TheU.S. Government's Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") established theSmall Business Administration ("SBA") Paycheck Protection Program ("PPP"), which provided small businesses with resources to maintain payroll, hire back employeeswho may have been laid off, and to cover applicable overhead expenses. During 2020, we made over$32 million in PPP loans and acquired$6 million as a result of the Merger. During the first nine months of 2021, we made an additional$22 million of PPP loans. All PPP loans are 100% guaranteed by the SBA, have up to a five-year maturity, and have an interest rate of 1%. These loans may be forgiven by the SBA if the borrower meets certain conditions, including by using at least 75% of the loan proceeds for payroll costs. The majority of the PPP loans made in 2020 have been forgiven as ofSeptember 30, 2021 . The SBA also established processing fees from 1% to 5%, depending on the loan amount. During the nine months endedSeptember 30, 2021 , the Company collected approximately$1,037,000 in fees from the SBA in connection with the originations of the PPP loans compared to approximately$1,286,000 collected in 2020. The fees, net of related origination costs, are being recognized as interest income over the term of the loans using the straight-line method, with accelerated recognition when the loan pays off before maturity through SBA forgiveness or other means. During the nine months endedSeptember 30, 2021 , the Company recognized approximately$937,000 as interest income. 31
-------------------------------------------------------------------------------- InApril 2020 , the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility ("PPPLF") which was established byCongress and administered by theFederal Reserve Bank . This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank. The majority of the PPP loan disbursements were to internal, non-interest-bearing accounts for use by borrowers. As a result, we have not yet accessed the PPPLF, but are prepared to utilize the fund when management determines the timing is appropriate. Financial Condition Total assets increased by$39,425,122 , or 5.8%, to$716,742,204 atSeptember 30, 2021 from$677,317,082 atDecember 31, 2020 . The increase in total assets was due primarily to increases of$65,593,659 in debt securities and$3,932,983 in bank owned life insurance, offset by decreases of$25,909,320 in loans,$1,373,806 in cash and cash equivalents, and$1,445,151 in premises and equipment due to the sale of a former branch location. The decrease in loans was due primarily to a decrease of$15,498,715 in PPP loans. Total liabilities increased$34,849,289 , or 5.6%, to$660,436,888 atSeptember 30, 2021 from$625,587,599 atDecember 31, 2020 . The increase was due primarily to a$48,531,012 increase in deposits, offset by a$14,278,851 decrease in securities sold under repurchase agreements. The increase in deposits was due to an inflow of funds from depositorswho have received numerous government stimulus funds. Stockholders' equity increased by$4,575,833 to$56,305,316 atSeptember 30, 2021 from$51,729,483 atDecember 31, 2020 . The increase was due primarily to net income for the nine-month period endedSeptember 30, 2021 of$6,184,341 , offset by a decrease of$1,028,563 in accumulated other comprehensive (loss) income and dividends paid, net of reinvestment, of$579,945 . Loans Major categories of loans atSeptember 30, 2021 andDecember 31, 2020 were as follows: September 30, December 31, 2021 2020 Real estate: Commercial$ 316,152,601 63 %$ 309,284,811 59 % Construction/Land development 28,668,642 6 % 33,641,916 6 % Residential 114,593,662 23 % 121,327,761 23 % Commercial 40,655,077 8 % 61,368,105 12 % Consumer 379,530 0 % 288,454 0 % 500,449,512 100 % 525,911,047 100 % Less: Allowance for loan losses 3,744,218
3,296,538
Deferred origination fees net of costs 924,100 923,995
$ 495,781,194 $ 521,690,514
Loans decreased by $25,909,320 , or 5.0%, to $495,781,194 at September 30, 2021
from $521,690,514 at December 31, 2020 . The decrease was due primarily to
decreases of $20,713,028 in commercial loans, $4,973,274 in construction/land
development loans, and $6,734,099 in residential loans, offset by an increase of
$6,867,790 in commercial real estate loans. The decrease in commercial loans was
driven primarily by a decrease of $15,760,157 in PPP loans. The allowance for
loan losses increased $447,680 to $3,744,218 at September 30, 2021 from
$3,296,538 at December 31, 2020 . Deferred origination fees, net of costs,
increased slightly to $924,100 at September 30, 2021 from $923,995 at December
31, 2020 .
32-------------------------------------------------------------------------------- The Company has adopted policies and procedures that seek to mitigate credit risk and to maintain the quality of the loan portfolio. These policies include underwriting standards for new credits as well as the continuous monitoring and reporting of asset quality and the adequacy of the allowance for loan losses. These policies, coupled with continuous training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan, and the experience of the lending officer. The Company's policy is to make the majority of its loan commitments in the market area it serves. Management believes that this tends to reduce risk because management is familiar with the credit histories of loan applicants and has in-depth knowledge of the risk to which a given credit is subject. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.
An age analysis of past due loans, segregated by class of loans, as of
90 Days Past Due 90
30 - 59 Days 60 - 89 Days or more Total Total Days or More
Past Due Past Due Past Due Past Due Current Loans and Accruing
September 30, 2021
Real estate:
Commerical $ - $ - $ 506,671 $ 506,671 $ 315,645,930 $ 316,152,601 $ -
Construction/Land development - - - - 28,668,642 28,668,642 -
Residential - - 31,500 31,500 114,562,162 114,593,662 -
Commercial - 154,469 - 154,469 40,500,608 40,655,077 -
Consumer - - - - 379,530 379,530 -
Total $ - $ 154,469 $ 538,171 $ 692,640 $ 499,756,872 $ 500,449,512 $ -
90 Days Past Due 90
30 - 59 Days 60 - 89 Days or more Total Total Days or More
Past Due Past Due Past Due Past Due Current Loans and Accruing
December 31, 2020
Real estate:
Commerical $ 182,656 $ - $ - $ 182,656 $ 309,102,155 $ 309,284,811 $ -
Construction/Land development - - - - 33,641,916 33,641,916 -
Residential 24,591 - 220,967 245,558 121,082,203 121,327,761 -
Commercial - - - - 61,368,105 61,368,105 -
Consumer - - - - 288,454 288,454 -
Total $ 207,247 $ - $ 220,967 $ 428,214 $ 525,482,833 $ 525,911,047 $ -
It is the Company's policy to place a loan in nonaccrual status whenever there
is substantial doubt about the ability of the borrower to pay principal or
interest on any outstanding credit. Management considers such factors as payment
history, the nature of the collateral securing the loan, and the overall
economic situation of the borrower when making a nonaccrual decision. Management
closely monitors nonaccrual loans. The Company returns a nonaccrual loan to
accruing status when (i) the loan is brought current with the full payment of
all principal and interest arrearages, (ii) all contractual payments are
thereafter made on a timely basis for at least nine months, and (iii) management
determines, based on a credit review, that it is reasonable to expect that
future payments will be made as and when required by the contract.
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At September 30, 2021 , the Company had two nonaccrual commercial real estate
loan totaling $4,849,857 , one nonaccrual residential real estate loan totaling
$31,500 , and one nonaccrual commercial loan totaling $154,469 . The loans were
secured by real estate, business assets, and personal guarantees. Gross interest
income of $281,720 would have been recorded for the nine months ended September
30, 2021 if these nonaccrual loans had been current and performing in accordance
with the original terms. The Company allocated $253,942 of its allowance for
loan losses to these nonaccrual loans. The recorded investment of the nonaccrual
loans was net of charge-offs and a nonaccretable discount totaling $27,146 at
September 30, 2021 .
At December 31, 2020 , the Company had one nonaccrual commercial real estate loan
totaling $4,407,829 and two nonaccrual residential real estate loans totaling
$220,967 . The loans were secured by real estate, business assets, and personal
guarantees. Gross interest income of $13,395 would have been recorded in 2020 if
these nonaccrual loans had been current and performing in accordance with the
original terms. The Company allocated $0 of its allowance for loan losses to
these nonaccrual loans. The recorded investment of the nonaccrual loans was net
of charge-offs and a nonaccretable discount totaling $8,176 at December 31,
2020 .
Impaired loans as of September 30, 2021 and December 31, 2020 are set forth in
the following table:
September 30 December 31,
2021 2020
Impaired loans with no valuation allowance
662,140 -
Total impaired loans$ 7,070,182 $
6,704,878
Valuation allowance related to impaired loans
-
Impaired loans include troubled debt restructurings ("TDRs"), which are loans
that were modified to provide economic concessions to borrowers who have
experienced or are expected to experience financial difficulties. These
concessions typically result from the Company's loss mitigation activities and
could include reductions in the interest rate, payment extensions, forgiveness
of principal, forbearance, or other actions. Certain TDRs are classified as
nonperforming at the time of restructure and may only be returned to performing
status after considering the borrower's sustained repayment performance for a
reasonable period, generally six months.
Section 4013 of the U.S. Government's Coronavirus Aid, Relief, and Economic
Security Act allows financial institutions to suspend application of certain
current TDRs accounting guidance under the Financial Accounting Standards
Board's Accounting Standards Codification ("ASC") 310-40 for loan modifications
related to the COVID-19 pandemic made between March 1, 2020 and the earlier of
January 1, 2022 or 60 days after the end of the COVID-19 national emergency,
provided certain criteria are met. This relief can be applied to loan
modifications for borrowers that were not more than 30 days past due as of
December 31, 2019 and to loan modifications that defer or delay the payment of
principal or interest, or change the interest rate on the loan. In April 2020 ,
federal and state banking regulators issued the Interagency Statement on Loan
Modifications and Reporting for Financial Institutions Working with Customers
Affected by the Coronavirus to provide further interpretation of when a borrower
is experiencing financial difficulty, specifically indicating that if the
modification is either short-term (i.e., six months) or mandated by a federal or
state government in response to the COVID-19 pandemic, the borrower is not
experiencing financial difficulty under ASC 310-40. The Company continues to
prudently work with borrowers negatively impacted by the COVID-19 pandemic while
managing credit risks and recognizing appropriate allowance for loan losses on
its loan portfolio.
The Company has provided loan modifications to its borrowers who are impacted by
the COVID-19 pandemic. Modifications include deferrals of principal and interest
for periods up to three months and interest only periods of three months. These
deferrals can be extended for an additional three months, subject to approval by
the Company. As of September 30, 2021 , one loan totalling $4.3 million , or 1% of
the Company's loan portfolio, was operating under a three-month deferral. This
loan was not classified as a TDR as of September 30, 2021 because it met the
criteria discussed above. See Note 4 to the financial statements included
elsewhere in this report for additional information.
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At September 30, 2021 , the Company had one commercial real estate loan totaling
$2,025,230 and one residential real estate loan totaling $40,626 that were
classified as TDRs. All are included in impaired loans above. At September 30,
2021 , both loans were paying as agreed. There have been no charge-offs or
allowances associated with these loans.
At December 31, 2020 , the Company had two commercial real estate loans totaling
$2,252,316 and one residential loan totaling $44,733 classified as TDRs. One of
the commercial real estate loans with a principal balance of $182,656 was
restructured as a TDR during 2020. All three loans are included in impaired
loans above. There have been no charge-offs or allowances associated with these
loans.
September 30, December 31,
2021 2020
Restructured loans (TDRs):
Performing as agreed $ 2,065,856 $ 2,297,049
Not performing as agreed - -
Total TDRs $ 2,065,856 $ 2,297,049
The allowance for loan losses is a reserve established through a provision for
loan losses charged to expense. The allowance for loan losses represents an
amount which, in management's judgment, will be adequate to absorb probable
losses on existing loans and other extensions of credit that may become
uncollectible. The Company's allowance for loan loss methodology includes
allowance allocations calculated in accordance with ASC Topic 310, "Receivables"
and allowance allocations calculated in accordance with ASC Topic 450,
"Contingencies." Accordingly, the methodology is based on historical loss
experience by type of credit and internal risk grade, specific homogeneous risk
pools and specific loss allocations, with adjustments for current events and
conditions.
The Company's process for determining the appropriate level of the allowance for
loan losses is designed to account for credit deterioration as it occurs. The
provision for loan losses reflects loan quality trends, including the levels of
and trends related to non-accrual loans, past due loans, potential problem
loans, classified and criticized loans and net charge-offs or recoveries, among
other factors.
Although management believes that, based on information currently available, the
Company's allowance for loan losses is sufficient to cover losses inherent in
its loan portfolio at this time, no assurances can be given that the Company's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Company or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions at the time management
determined the current level of the allowance for loan losses.
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The following table details activity in the allowance for loan losses by
portfolio for the nine-month periods ended September 30, 2021 and 2020 and the
year ended December 31, 2020 . Allocation of a portion of the allowance to one
category of loans does not preclude its availability to absorb losses in other
categories.
Allowance for loan losses ending Outstanding loan balances
Provision balance evaluated for impairment: evaluated for impairment:
Beginning for loan Charge Ending Purchase Credit Purchase Credit
September 30, 2021 balance losses offs Recoveries balance Individually Impaired Collectively Individually Impaired Collectively
Real estate:
Commercial $ 2,230,129 $ 348,650 $ - $ 9,500 $ 2,588,279 $ 99,473 $ - $ 2,488,806 $ 6,875,087 $ 87,708 $ 309,189,806
Construction and
land development 201,692 32,105 - 12,150 245,947 - - 245,947 - 1,531,846 27,136,796
Residential 644,639 (28,549 ) (18,970 ) - 597,120 - - 597,120 40,626 570,860 113,982,176
Commercial 111,390 125,133 - 15,000 251,523 154,469 - 97,054 154,469 - 40,500,608
Consumer 2,138 1,863 - - 4,001 - - 4,001 - - 379,530
Unallocated 106,550 (49,202 ) - - 57,348 - - 57,348 - - -
$ 3,296,538 $ 430,000 $ (18,970 ) $ 36,650 $ 3,744,218 $ 253,942 $ - $ 3,490,276 $ 7,070,182 $ 2,190,414 $ 491,188,916
Allowance for loan losses ending Outstanding loan balances
Provision balance evaluated for impairment: evaluated for impairment:
Beginning for loan Charge Ending Purchase Credit Purchase Credit
September 30,
2020 balance losses offs Recoveries balance Individually Impaired Collectively Individually Impaired Collectively
Real estate:
Commercial
- $ - $ 2,149,907 $ 2,266,855 $ - $ 236,839,421
Construction and
land development 192,828 51,804 - 10,800 255,432 - - 255,432 - - 23,889,344
Residential 478,124 102,515 - - 580,639 - - 580,639 46,075 - 70,582,197
Commercial 107,782 5,429 - 15,835 129,046 - - 129,046 - - 60,442,374
Consumer 4,133 2,260 - - 6,393 - - 6,393 - - 239,062
Unallocated 46,987 (27,092 ) - - 19,895 - - 19,895 - - -
$ 2,593,715 $ 475,000 $ - $ 72,597 $ 3,141,312 $ - $ - $ 3,141,312 $ 2,312,930 $ - $ 391,992,398
Allowance for loan losses ending Outstanding loan balances
Provision balance evaluated for impairment: evaluated for impairment:
Beginning for loan Charge Ending Purchase Credit Purchase Credit
December 31, 2020 balance losses offs Recoveries balance Individually Impaired Collectively Individually Impaired Collectively
Real estate:
Commercial
- $ - $ 2,230,129 $ 6,660,245 $ 151,453 $ 302,473,113
Construction and
land development 192,828 (5,536 ) - 14,400 201,692 - - 201,692 - 1,566,174 32,075,742
Residential 478,124 166,515 - - 644,639 - - 644,639 215,230 595,433 120,517,098
Commercial 107,782 (12,353 ) - 15,961 111,390 - - 111,390 - - 61,368,105
Consumer 4,133 (1,995 ) - - 2,138 - - 2,138 - - 288,454
Unallocated 46,987 59,563 - - 106,550 - - 106,550 - - -
$ 2,593,715 $ 625,000 $ - $ 77,823 $ 3,296,538 $ - $ - $ 3,296,538 $ 6,875,475 $ 2,313,060 $ 516,722,512 The provision for loan losses was
36
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During the nine-month periods ended September 30, 2021 and 2020, the Company had
recoveries from loans written off in prior periods totaling $36,650 and $72,597 ,
respectively, and charge-offs of $18,970 and $0 , respectively.
As of September 30, 2021 , the Company had $7,894,164 of loans on a watch list,
other than impaired loans, for which the borrowers have the potential for
experiencing financial difficulties. As of December 31, 2020 , the Company had
$9,546,879 of such loans. These loans are subject to ongoing management
attention and their classifications are reviewed regularly. Watch list loans
include loans classified as Special Mention, Substandard, and Doubtful.
Management believes that the $3 .7MM reserve at September 30, 2021 and the
$430,000 provision for the nine-month period ended September 30, 2021 are
appropriate to adequately cover the probable and estimable losses inherent in
the loan portfolio. The Company has recorded an elevated level of provision,
$600,000 , as compared to both the second quarter of 2021 and the third quarter
of 2020. The factors driving the elevated quarter-to-date reserve are the same
reasons that the year-to-date reserve as of September 30, 2021 is comparable to
the amount experienced in the prior year during the height of the COVID-19
pandemic.
First, the results of our quarterly evaluation of the non-PCI loan portfolio
evidenced that the required reserve under our allowance policy was in excess of
the remaining fair value discount on that portion of the portfolio. The results
of this evaluation are directly related to the unique circumstances that were
present during the year ended December 31, 2020 . Changes in market interest
rates declined rapidly in the prior year across the country resulting in a large
liquidity premium on our acquired non-PCI portfolio. This premium largely offset
the credit discount calculated by senior management during the Day 1 valuation
process for the merger. This resulted in a net fair value discount of
approximately $140,000 . Absent increases in the general reserve components under
our allowance policy methodology going forward, Management does not expect this
level of provision for the non-PCI acquired portfolio to continue.
Second, two loans to the same borrower that had been granted COVID-19 deferrals
are now delinquent and one has been moved to nonaccrual status. This
deterioration can be observed in our credit metrics for delinquent and
nonaccrual loans and are evident in the increased level of specific reserve in
our overall allowance for loan losses. The two loans had an aggregate reserve of
$253,000 at September 30, 2021 .
Third, a $4 .3MM hotel loan has been operating under a COVID-19 deferral for 18
months. The borrower is currently paying as agreed under the deferral agreement
and has been making payments of 25% to 50% of the contractually required monthly
interest due during 2021. Management has included an allowance factor within the
general reserve for COVID-19 deferred loans that have not returned to their
contractual payment terms. This factor amounted to 8% as of September 2021 as
management senses uncertainty in occupancy rates as the customer moves out of
their peak season and into a slower time of year.
These factors increasing the reserve were slightly offset by continued payments
made on several other previously COVID-19 deferred loans in which Management has
been gradually reducing the allowance factor as payment performance is
solidified over time. Management will continue to monitor COVID-19 deferred
loans and adjust reserves appropriately based on the facts and circumstances
present.
Investment Securities
Investments in debt securities increased by $65,593,659 , or 84.6%, to
$143,149,464 at September 30, 2021 from $77,555,805 at December 31, 2020 . At
September 30, 2021 and December 31, 2020 , the Company had classified 85% and
70%, respectively, of the investment portfolio as available for sale. The
balance of the portfolio was classified as held to maturity.
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Securities classified as available for sale are held for an indefinite period of
time and may be sold in response to changing market and interest rate conditions
as part of the Company's asset/liability management strategy. Available for sale
debt securities are carried at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of income taxes. Securities classified as held to maturity, which
the Company has both the positive intent and ability to hold to maturity, are
reported at amortized cost. The Company records unrealized gains and losses on
equity securities in earnings. The Company does not currently follow a strategy
of making security purchases with a view to near-term sales, and, therefore,
does not own trading securities. The Company manages the investment portfolio
within policies that seek to achieve desired levels of liquidity, manage
interest rate sensitivity, meet earnings objectives, and provide required
collateral for deposit and borrowing activities.
The following table sets forth the carrying value of investments in debt
securities at
September 30, December 31,
2021 2020
Available for sale
State and municipal $ 768,750 $ 986,532
SBA pools 1,572,673 1,783,807
Corporate bonds 7,543,482 6,797,431Mortgage-backed securities 111,380,677 44,909,516
$ 121,265,582 $ 54,477,286 Held to maturity State and municipal$ 21,883,882 $ 23,078,519
The following table sets forth the scheduled maturities of investments in debt
securities at
Available for Sale Held to Maturity
Amortized Cost Fair Value Amortized Cost Fair Value
Within 1 year $ 499,858 $ 508,520 $ - $ -
Over 1 to 5 years 3,361,396 3,456,435 797,949 813,733
Over 5 to 10 years 4,336,240 4,347,277 2,039,074 2,237,176
Over 10 years - - 19,046,859 19,925,303
8,197,494 8,312,232 21,883,882 22,976,212
SBA Pools 1,594,777 1,572,673 - -
Mortgage-backed securities 111,917,951 111,380,677 - -
$ 121,710,222 $ 121,265,582 $ 21,883,882 $ 22,976,212 SBA pools and mortgage-backed securities are due in monthly installments.
Other Real Estate Owned
Other real estate owned ("OREO") at September 30, 2021 and December 31, 2020
included two properties with an aggregate carrying value of $1,411,605 . The
first property is an apartment building in Baltimore, Maryland with a carrying
value of $1,411,605 that was acquired in the Merger. The property is under an
optional sales contract with no projected closing date. The other property is
land in Cecil County, Maryland with a carrying value of $0 . It was acquired
through foreclosure in 2007. The latter property consists of 10.43 acres and is
currently under contract for a gross sales price of $295,000 with closing
expected in 2022. Due to the length of time the property has been held, Maryland
banking law required a write-down of the value to $0 in 2019.
38
--------------------------------------------------------------------------------Deposits Total deposits increased by$48,531,012 , or 8.5%, to$621,932,559 atSeptember 30, 2021 from$573,401,547 atDecember 31, 2020 . The increase in deposits was due to a$22,686,309 increase in noninterest-bearing accounts, a$25,738,605 increase in savings and money market accounts, and a$13,192,331 increase in interest bearing checking accounts, offset by a$13,086,233 decrease in time deposits.
The following table shows the average balances and average costs of deposits for
the nine months ended
September 30, 2021 September 30, 2020
Average Average
Balance Cost Balance Cost
Noninterest bearing demand deposits $ 119,284,008 0.00 % $ 74,243,150 0.00 %
Interest bearing demand deposits 115,751,651 0.19 % 73,702,521 0.30 %
Savings and money market deposits 180,734,271 0.16 % 107,353,960 0.26 %
Time deposits 189,068,595 0.94 % 153,264,507 1.79 %
$ 604,838,525 0.38 % $ 408,564,138 0.79 %
Liquidity Management
Liquidity describes our ability to meet financial obligations that arise out of
the ordinary course of business. Liquidity is primarily needed to meet depositor
withdrawal requirements, to fund loans, and to fund our other debts and
obligations as they come due in the normal course of business. We maintain our
asset liquidity position internally through short-term investments, the maturity
distribution of the investment portfolio, loan repayments, and income from
earning assets. On the liability side of the balance sheet, liquidity is
affected by the timing of maturing liabilities and the ability to generate new
deposits or borrowings as needed. The Bank is approved to borrow 75% of eligible
pledged single-family residential loans and 50% of eligible pledged commercial
loans as well as investment securities, or approximately $87.5 million under a
secured line of credit with the Federal Home Loan Bank ("FHLB"). The Bank also
has a facility with the Federal Reserve Bank of Richmond (the "Reserve Bank ")
under which the Bank can borrow approximately $25.4 million . Finally, the Bank
has $23,500,000 ($14,500,000 unsecured and $9,000,000 secured) of overnight
federal funds lines of credit available from commercial banks. FHLB advances of
$5,000,000 were outstanding as of September 30, 2021 and December 31, 2020 . The
Company borrowed $17,000,000 to facilitate the acquisition of Carroll as more
fully described below. There were no borrowings from the Reserve Bank or our
commercial bank lenders at September 30, 2021 and December 31, 2020 . Management
believes that we have adequate liquidity sources to meet all anticipated
liquidity needs over the next 12 months. Management knows of no trend or event
which is likely to have a material impact on our ability to maintain liquidity
at satisfactory levels.
Borrowings and Other Contractual Obligations
The Company's contractual obligations consist primarily of borrowings and operating leases for various facilities.
OnSeptember 30, 2020 , the Company borrowed$17,000,000 fromFirst Horizon Bank ("FHN") for the purpose of funding a portion of the merger consideration that was payable to the stockholders of Carroll when it was merged with and into the Company onOctober 1, 2020 . Net of issuance costs, the amount of the net long-term debt was$16,977,499 and$16,973,280 as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The loan matures onSeptember 30, 2025 . The interest rate on the loan is fixed at 4.10%. The Company is required to make quarterly interest-only payments throughOctober 1, 2021 . The Company expects that the amount of these quarterly interest-only payments to be$174,250 . During the remaining term of the loan, the Company is required to make quarterly interest and principal payments of approximately$646,472 , which will be based on a nine-year straight-line amortization schedule. The remaining balance of approximately$9,916,667 will be due at maturity. To secure its obligations under this loan, the Company pledged all of its shares of common stock of the Bank to FHN. 39
-------------------------------------------------------------------------------- Securities sold under agreements to repurchase represent overnight borrowings from customers. Securities owned by the Company which are used as collateral for these borrowings are primarilyU.S. government agency securities.
Specific information about the Company's borrowings and contractual obligations is set forth in the following table:
September 30, December 31,
2021 2020
Amount oustanding at period-end:
Securities sold under repurchase agreements $ 10,475,121 $ 24,753,972
Federal Home Loan Bank advances 5,000,000 5,000,000
Long-term debt (net of issuance costs) 16,977,499
16,973,280
Weighted average rate paid at period-end: Securites sold under repurchase agreements 0.34 % 0.61 % Federal Home Loan Bank advances 1.00 % 1.00 % Long-term debt 4.10 % 4.10 %
Year endingDecember 31, 2022 1,888,889 Year endingDecember 31, 2023 1,888,889 Year endingDecember 31, 2024 1,888,889 Year endingDecember 31, 2025 16,333,333
Capital Resources and Adequacy
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain offbalance sheet items as calculated under regulatory accounting practices.
Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital, and Total capital (as defined in the regulations) to riskweighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
Additional information regarding the capital requirements that apply to us can
be found in Note 6 to the consolidated financial statements presented elsewhere
in this report and in Item 1 of Part I of the Form 10-K under the heading,
"Supervision and Regulation - Capital Requirements".
40
--------------------------------------------------------------------------------
The following table presents actual and required capital ratios as of September
30, 2021 and December 31, 2020 for the Bank under the Basel III Capital Rules.
The minimum required capital amounts presented include the minimum required
capital levels as of September 30, 2021 and December 31, 2020 , based on the
phase-in provisions of the Basel III Capital Rules. Capital levels required to
be considered well capitalized are based upon prompt corrective action
regulations, as amended to reflect the changes under the Basel III Capital
Rules.
Minimum To Be Well
(Dollars in thousands) Actual Capital Adequacy Capitalized
September 30, 2021 Amount Ratio Amount Ratio Amount Ratio
Total capital (to
risk-weighted assets) $ 68,258 13.08 % $ 54,809 10.50 % $ 52,199 10.00 %
Tier 1 capital (to
risk-weighted assets) 64,514 12.36 % 44,369 8.50 % 41,759 8.00 %
Common equity tier 1 (to
risk- weighted assets) 64,514 12.36 % 36,539 7.00 % 33,929 6.50 %
Tier 1 leverage (to average
assets) 64,514 9.17 % 28,146 4.00 % 35,182 5.00 %
December 31, 2020
Total capital (to
risk-weighted assets) $ 63,400 12.62 % $ 52,732 10.50 % $ 50,221 10.00 %
Tier 1 capital (to
risk-weighted assets) 60,104 11.97 % 42,688 8.50 % 40,177 8.00 %
Common equity tier 1 (to
risk- weighted assets) 60,104 11.97 % 35,155 7.00 % 32,644 6.50 %
Tier 1 leverage (to average
assets) 60,104 9.05 % 26,569 4.00 % 33,211 5.00 %
The Company intends to fund future growth primarily with cash, federal funds,
maturities of investment securities and deposit growth. Management knows of no
other trend or event that will have a material impact on capital.
Off-Balance Sheet Arrangements
In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. Outstanding loan commitments, unused lines of credit, and letters of credit as ofSeptember 30, 2021 andDecember 31, 2020 are as follows: September 30, December 31, 2021 2020 Loan commitments Construction and land development$ 4,433,714 $ 4,668,250 Commercial 830,000 1,000,000 Commercial real estate 21,009,439 15,772,020 Residential 2,588,000 4,668,750$ 28,861,153 $ 26,109,020 Unused lines of credit Home-equity lines$ 12,775,191 $ 13,716,894 Commercial lines 20,450,433 23,996,679$ 33,225,624 $ 37,713,573 Letters of credit$ 1,284,742 $ 1,891,428 Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. 41
-------------------------------------------------------------------------------- The maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss that is likely to be incurred as a result of funding its credit commitments. RESULTS OF OPERATIONS
Comparison of Operating Results for the Nine Months Ended
General
Net income for the nine months ended
The Company incurred significant one-time costs during 2020 in connection with the Merger. The table below provides a comparison of the Company's results for the nine months endedSeptember 30, 2021 versus the same period of the prior year with and without$1,612,321 of acquisition costs incurred during the nine months endedSeptember 30, 2020 . Nine Months Ended September 30, 2021 September 30, 2020 Excluding Acquisition As Reported As Reported Costs Income before taxes$ 7,946,059 $ 2,724,959 $ 4,337,280 Income taxes 1,761,718 460,350 849,235 Net income$ 6,184,341 $ 2,264,609 $ 3,488,045 Earnings per share, basic and diluted$ 2.05 $ 0.76 $ 1.17 Return on average assets 1.18 % 0.63 % 0.97 % Return on average equity 15.17 % 5.88 % 9.06 % Net Interest Income
Net interest income was
Total interest income for the nine months ended
42
--------------------------------------------------------------------------------
Total interest income on loans for the nine months ended September 30, 2021
increased by $4,622,113 when compared to the same period of 2021 due to a $140.8
million higher average loan balance for the first nine months of 2021 when
compared to the same period of 2020 primarily due to the acquisition of Carroll,
offset by a lower loan yield of 4.55% for the first nine months of 2021 versus
4.62% for the same period of 2020. Investment income for the nine months ended
September 30, 2021 increased by $406,859 , or 39.8%, when compared to the same
period of 2020 due to a $43.5 million higher average investment balance, offset
by a decrease in fully-taxable equivalent yield to 1.97% for nine months ended
September 30, 2021 , compared to 2.46% for the same period of 2020. The
fully-taxable equivalent yield on total interest-earning assets decreased 26
basis points to 3.94% for the nine months ended September 30, 2021 , compared to
4.20% for the same period of 2020. The average balance of total interest-earning
assets increased by $200.3 million to $657.7 million for the nine months ended
September 30, 2021 , compared to $457.4 million for the same period of 2020
primarily due to the Merger.
Total interest expense for the nine months ended September 30, 2021 was
$2,198,006 , compared to $2,550,932 for the same period of 2020, a decrease of
$352,926 , or 13.8%. The decrease was due to a lower overall cost of funds on
interest bearing deposits and borrowings of 0.56% for the nine months ended
September 30, 2021 , compared to 0.98% for the same period of 2020, offset by a
$171.3 million increase in the average balance of interest-bearing liabilities
to $518.8 million in the first nine months of 2021, compared to $347.5 million
in the same period of 2020. Cost of funds for time deposits decreased to 0.94%
for the nine months ended September 30, 2021 from 1.79% for the same period of
2020. Securities sold under repurchase agreements cost of funds decreased to
0.45% for the first nine months of 2021 from 1.30% for the first nine months of
2020.
Average noninterest-earning assets increased by $19.4 million to $40.0 million
in the first nine months of 2021, compared to $20.6 million in the same period
of 2020. Average noninterest-bearing deposits increased by $45.0 million to
$119.3 million during the first nine months of 2021, compared to $74.2 million
in the same period of 2020. The average balance in stockholders' equity
increased by $3.0 million for the nine months ended September 30, 2021 , when
compared with the same period of 2020.
43
--------------------------------------------------------------------------------
The following table sets forth information regarding the average balances of
interest-earning assets and interest-bearing liabilities, the amount of interest
income and interest expense and the resulting yields on average interest-earning
assets and rates paid on average interest-bearing liabilities for the nine-month
periods ended September 30, 2021 and 2020. Average balances are also provided
for noninterest-earning assets and noninterest-bearing liabilities.
Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Average Average
Balance Interest Yield Balance Interest Yield
Assets:
Loans $ 521,978,666 $ 17,828,026 4.55 % $ 381,189,719 $ 13,205,913 4.62 %
Securities, taxable 85,644,831 971,070 1.51 % 41,209,087 564,540 1.83 %
Securities, tax exempt 20,393,689 595,078 3.89 % 21,334,547 590,741 3.69 % Federal funds sold and other interest-earning assets
29,701,715 50,341 0.23 % 13,641,105 60,940 0.60 %
Total interest-earning assets 657,718,901 19,444,515 3.94 % 457,374,458 14,422,134 4.20 %
Noninterest-earning assets 39,965,396 20,569,704
Total assets $ 697,684,297 $ 477,944,162
Liabilities and Stockholders'
Equity:
NOW, savings, and money market $ 296,485,922 259,248 0.12 % $ 181,056,481 376,248 0.28 %
Certificates of deposit 189,068,595 1,330,086 0.94 % 153,264,507 2,053,248 1.79 %
Securities sold under
repurchase agreements 11,269,845 38,130 0.45 % 9,804,072 95,710 1.30 %
Long-term debt 16,975,390 532,777 4.18 % - - -
FHLB advances and other
borrowings 5,000,000 37,765 1.01 % 3,397,814 25,726 1.01 %
Total interest-bearing
liabilities 518,799,752 2,198,006 0.56 % 347,522,874 2,550,932 0.98 %
Noninterest-bearing deposits 119,284,008 74,243,150
Noninterest-bearing
liabilities 5,246,770 4,858,736
Total liabilities 643,330,530 426,624,760
Stockholders' equity 54,353,767 51,319,402
Total liabilities and
stockholders' equity $ 697,684,297 $ 477,944,162
Net interest income $ 17,246,509 $ 11,871,202
Interest rate spread 3.38 % 3.23 %
Net yield on interest-earning
assets 3.50 % 3.46 %
Ratio of average
interest-earning assets to
Average interest-bearing
liabilities 126.78 % 131.61 %
Interest on tax-exempt
securities and other
tax-exempt investments are
reported on fully taxable
equivalent basis based upon
tax rates of 21% for Federal
and 8.25% for State.
Noninterest Income
Noninterest income for the nine months ended September 30, 2021 was $1,637,479 ,
compared to $1,397,596 for the same period of 2020, an increase of $239,883 , or
17.2%. The increase was primarily a result of a $105,510 increase in bank owned
life insurance income due to the Merger along with a $3.7 million purchase of
additional BOLI in the first quarter of 2021, a $108,314 increase in service
charges, as ATM usage and other bank services returned to more normal levels
when compared to the beginning of the COVID-19 pandemic in March 2020 , and a
$44,510 gain on the sale of a former Carroll branch office and equipment, offset
by a $56,718 decrease in the gain on sale of SBA loans.
44
--------------------------------------------------------------------------------Noninterest Expense Noninterest expense for the nine months endedSeptember 30, 2021 totaled$10,369,385 , compared to$9,934,323 for the same period of 2020, an increase of$435,062 , or 4.4%. The increase was due primarily to increases in salaries and benefits of$1,369,197 , in occupancy, furniture and equipment of$262,117 , and in other expenses of$416,069 , offset by a decrease in costs incurred related to the Merger of$1,612,321 . All of the increases resulted from the employees, locations, and customers added in the Merger. Income Tax Expense Income tax expense for the nine months endedSeptember 30, 2021 was$1,761,718 , compared to$460,350 for the same period of 2020. The effective tax rate was 22.2% for the nine months endedSeptember 30, 2021 , compared to 16.9% for the same period of 2020. The increase in income tax expense was due primarily to higher income before income taxes and a lower percentage of tax exempt revenue for the nine months endedSeptember 30, 2021 when compared to the same period in 2020.
Comparison of Operating Results for the Three Months Ended
General Net income for the three months endedSeptember 30, 2021 was$2,122,547 , compared to$385,247 for the same period of 2020. The increase of$1,737,300 , or 451.0%, was due to a$1,891,240 increase in net interest income, a$44,610 increase in noninterest income, and a$660,879 decrease in noninterest expenses, offset by a$330,000 increase in the loan loss provision, and a$529,429 increase in income taxes. The Company incurred significant one-time costs during 2020 in connection with the Merger. The table below provides a comparison of the Company's results for the second quarter of 2021 versus the same period of the prior year with and without$1,267,401 of acquisition costs incurred during the second quarter of 2020. Three Months Ended September 30, 2021 September 30, 2020 Excluding Acquisition As Reported As Reported Costs Income before taxes$ 2,728,839 $ 462,110 $ 1,729,511 Income taxes 606,292 76,863 370,835 Net income$ 2,122,547 $ 385,247 $ 1,358,676 Earnings per share, basic and diluted$ 0.70 $ 0.13 $ 0.45 Return on average assets 1.19 % 0.31 % 1.10 % Return on average equity 15.15 % 2.95 % 10.40 % Net Interest Income
Net interest income was
Total interest income for the three months ended
45
--------------------------------------------------------------------------------
Total interest income on loans for the three months ended September 30, 2021
increased by $1,569,717 when compared to the same period of 2020 due to a $119.7
million higher average loan balance for the three months ended September 30,
2021 when compared to the same period of 2020 primarily due to the Merger and a
higher loan yield of 4.73% for the three months ended September 30, 2021 versus
4.57% for the same period of 2020. Investment income for the three months ended
September 30, 2021 increased by $253,462 , or 78.5%, when compared to the same
period of 2020 due to a $60.3 million higher average investment balance, offset
by a decrease in fully-taxable equivalent yield to 1.94% for three months ended
September 30, 2021 , compared to 2.12% for the same period of 2020. The
fully-taxable equivalent yield on total interest-earning assets decreased 15
basis points to 3.98% for the three months ended September 30, 2021 , compared to
4.13% for the same period of 2020. The average balance of total interest-earning
assets increased by $202.0 million to $672.3 million for the three months ended
September 30, 2021 , compared to $470.3 million for the same period of 2020
primarily due to the Merger.
Total interest expense for the three months ended September 30, 2021 was
$662,279 , compared to $721,605 for the same period of 2020, a decrease of
$59,326 , or 8.2%. The decrease was due to a lower overall cost of funds on
interest bearing deposits and borrowings of 0.50% for the three months ended
September 30, 2021 , compared to 0.81% for the same period of 2020, offset by a
$168.2 million increase in the average balance of interest-bearing liabilities
to $524.7 million in the three months ended September 30, 2021 , compared to
$356.5 million in the same period of 2020 primarily due to the Merger. Cost of
funds for time deposits decreased to 0.75% for the three months ended September
30, 2021 from 1.58% for the same period of 2020. Securities sold under
repurchase agreements cost of funds decreased to 0.36% for the three months
ended September 30, 2021 from 0.83% for the same period of 2020.
Average noninterest-earning assets increased by $12.4 million to $38.2 million
for the three months ended September 30, 2021 , compared to $25.8 million in the
same period of 2020. Average noninterest-bearing deposits increased by $41.7
million to $124.1 million during the three months ended September 30, 2021 ,
compared to $82.5 million in the same period of 2020. The average balance in
stockholders' equity increased by $3.8 million for the three months ended
September 30, 2021 when compared with the same period of 2020.
46
--------------------------------------------------------------------------------
The following table sets forth information regarding the average balances of
interest-earning assets and interest-bearing liabilities, the amount of interest
income and interest expense and the resulting yields on average interest-earning
assets and rates paid on average interest-bearing liabilities for the
three-month periods ended September 30, 2021 and 2020. Average balances are also
provided for noninterest-earning assets and noninterest-bearing liabilities.
Three Months Ended September 30, 2021 Three Months Ended September 30, 2020
Average Average
Balance Interest Yield Balance Interest Yield
Assets:
Loans $ 512,953,631 $ 6,059,709 4.73 %
107,912,735 428,037 1.59 % 43,770,543 150,272 1.37 % Securities, tax exempt
19,811,359 189,950 3.84 % 23,659,811 207,940 3.52 % Federal funds sold and other interest-earning assets
31,630,398 19,369 0.24 % 9,651,367 10,069 0.42 %
Total interest-earning assets 672,308,123 6,697,065 3.98 % 470,307,678 4,858,273 4.13 %
Noninterest-earning assets 38,217,888 25,768,859
Total assets $ 710,526,011 $ 496,076,537
Liabilities and Stockholders'
Equity:
NOW, savings, and money market $ 307,799,463 115,652 0.15 % $ 194,896,794 106,356 0.22 %
Certificates of deposit 184,058,190 344,725 0.75 % 147,923,538 584,477 1.58 %
Securities sold under
repurchase agreements 10,847,773 9,647 0.36 % 8,651,764 18,020 0.83 %
Long-term debt 16,976,796 179,528 4.23 % - - -
FHLB advances and other
borrowings 5,000,120 12,727 1.02 % 5,043,489 12,752 1.01 %
Total interest-bearing
liabilities 524,682,342 662,279 0.50 % 356,515,585 721,605 0.81 %
Noninterest-bearing deposits 124,149,640 82,493,506
Noninterest-bearing
liabilities 5,667,596 4,804,935
Total liabilities 654,499,578 443,814,026
Stockholders' equity 56,026,433 52,262,511
Total liabilities and
stockholders' equity $ 710,526,011 $ 496,076,537
Net interest income $ 6,034,786 $ 4,136,668
Interest rate spread 3.48 % 3.32 %
Net yield on interest-earning
assets 3.59 % 3.52 %
Ratio of average
interest-earning assets to
Average interest-bearing
liabilities 128.14 % 131.92 %
Interest on tax-exempt
securities and other
tax-exempt investments
are reported on fully
taxable equivalent basis
based upon tax rates of
21% for Federal and
8.25% for State.
Noninterest Income
Noninterest income for the three months ended September 30, 2021 was $531,978 ,
compared to $487,368 for the same period of 2020, an increase of $44,610 , or
9.2%. The increase was primarily a result of a $37,692 increase in bank owned
life insurance income and a $48,853 increase in service charge revenue, as ATM
usage and other bank services returned to more normal levels when compared to
the beginning of the COVID-19 pandemic in March 2020 , offset by a $64,826
decrease in mortgage banking income as a result of residential refinance
activity declining from the all-time high levels at the beginning of the
COVID-19 pandemic in the second quarter of 2020 when the FRB reduced interest
rates to historic lows.
47--------------------------------------------------------------------------------
Noninterest Expense Noninterest expense for the three months endedSeptember 30, 2021 totaled$3,465,128 , compared to$4,126,007 for the same period of 2020, a decrease of$660,879 , or 16.0%. The decrease was due primarily to a decrease in costs incurred in connection with the Merger of$1,267,401 , offset by increases in salaries and benefits of$444,853 , in occupancy, furniture and equipment of$81,022 , and in other expenses of$80,647 . All of the increases resulted from the employees, locations, and customers added in the Merger. Income Tax Expense Income tax expense for the three months endedSeptember 30, 2021 was$606,292 , compared to$76,863 for the same period of 2020. The effective tax rate was 22.2% for the three months endedSeptember 30, 2021 , compared to 16.6% for the same period of 2020. The increase in income tax expense was due primarily to higher income before income taxes and a lower percentage of tax exempt revenue for the three months endedSeptember 30, 2021 when compared to the same period in 2020.
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