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;
25
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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. AtSeptember 30, 2022 , we had total assets of$406.2 million , loans, net of the allowance for loan losses and deferred fees of$311.5 million , total deposits of$315.9 million and total equity of$84.6 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.
Anticipated Increase in Expense
The completion of the conversion and stock offering, which resulted in us becoming anSEC public reporting company, has increased our noninterest expenses due to the increased costs of operating as a public company. In September, our shareholders approved a stock-based benefit plan, which we anticipate will further increase our noninterest expenses as the Board grants awards under theTC Bancshares, Inc. 2022 Equity Incentive Plan.
Comparison of Financial Condition at
Total Assets. Total assets increased$25.3 million , or 6.6%, to$406.2 million atSeptember 30, 2022 from$380.9 million atDecember 31, 2021 . The increase was principally due to an increase in net loans of$45.2 million partially offset by a decrease in cash and cash equivalents of$18.2 million . Cash and Cash Equivalents. Cash and cash equivalents decreased$18.2 million atSeptember 30, 2022 , compared toDecember 31, 2021 . These funds were deployed to finance loan growth of$45.2 million after$26.6 million in funds provided by deposit growth. The remaining funding was provided by maturities of certificates of deposits with other banks. Total Loans. Loans increased$45.5 million , or 16.8%, to$316.9 million atSeptember 30, 2022 from$271.4 million atDecember 31, 2021 . Commercial real estate loans increased$16.2 million , or 18.0%, to$106.0 million atSeptember 30, 2022 from$89.8 million atDecember 31, 2021 , due to new loan originations. Multi-family real estate loans increased$4.9 million , or 24.7%, to$24.9 million atSeptember 30, 2022 , from$19.9 million atDecember 31, 2021 , also due to new loan originations. Due to the rapid rise in secondary market rates, residential loans increased as customers chose to utilize our in-house portfolio adjustable rate mortgages. As 27 -------------------------------------------------------------------------------- a result, residential loans increased$27.8 million , or 28.3%, to$126.2 million atSeptember 30, 2022 , from$98.4 million atDecember 31, 2021 , due to new loan originations. Commercial and industrial loans increased$1.2 million , or 7.4% to$17.1 million atSeptember 30, 2022 from$15.9 million atDecember 31, 2021 . Home equity loans also increased$0.2 million , or 1.6%, to$11.7 million atSeptember 30, 2022 , from$11.5 million atDecember 31, 2021 . Construction and land development loans decreased$4.7 million , or 13.8%, to$29.7 million atSeptember 30, 2022 from$34.4 million atDecember 31, 2021 . This decrease is attributable to several construction 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 nine months endedSeptember 30, 2022 , eight loans totaling$3 .2MM were downgraded from pass to substandard, two loans totaling $3MM were upgraded from substandard to pass and five loans totaling$5 .0MM were upgraded from Special Mention to a rating of Acceptable and removed from the Watchlist. The largest loan downgraded was a$2 .9MM loan for a hotel located inSavannah, GA in which the borrower has made timely payments of principal and interest. The largest loan upgraded was a$2 .9MM loan for the renovations of an existing commercial property located inMontgomery, AL . 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$38,000 was recorded for the nine months endedSeptember 30, 2022 compared to$107,000 for the nine months endedSeptember 30, 2021 . The Company had 25 impaired loans totaling$1.4 million atSeptember 30, 2022 compared to 27 impaired loans totaling$1.5 million atDecember 31, 2021 . AtSeptember 30, 2022 , there were no specific reserves and$24,000 of the allowance was unallocated. We had net recoveries of$27,000 during the nine months endedSeptember 30, 2022 , compared to net recoveries of$21,000 for the nine months endedSeptember 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 1.37% of gross loans, atSeptember 30, 2022 , is adequate to cover losses inherent in the loan portfolio.Investment Securities . Investment securities, all of which are available-for-sale, decreased$1.4 million , or -3.1%, to$44.2 million atSeptember 30, 2022 from$45.6 million atDecember 31, 2021 . This decrease resulted from investments made inU.S. treasuries of$5.0 million less paydowns on mortgage-backed securities of$2.5 million and additional unrealized losses on our investments of$4.1 million during the nine months endedSeptember 30, 2022 . Unrealized losses on our investments increased to$4.6 million atSeptember 30, 2022 from$485,000 atDecember 31, 2021 . This increase in unrealized losses was not due to a decrease in credit quality, but rather from an aggregate increase of 300 basis points in the federal funds target range by theFederal Open Market Committee ("FOMC") during the nine months endedSeptember 30, 2022 , the first increases in the federal funds target range by theFOMC since 2018. Other Real Estate Owned. 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. InAugust 2022 , the selling price of the property was reduced to$985,000 less 10% selling costs resulting in a write-down of this property to$886,500 of which 75% is guaranteed by the SBA and 25%, or$41,675 was recognized by the Bank. Bank Owned Life Insurance. Our investment in bank owned life insurance increased$0.2 million , or 1.8%, to$11.3 million atSeptember 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 atSeptember 30, 2022 was 16.3% of our Tier 1 capital plus our allowance for loan losses. Deposits. Total deposits increased$26.6 million , or 9.2%, to$315.9 million atSeptember 30, 2022 from$289.3 million atDecember 31, 2021 . Non-interest-bearing demand accounts increased$10.7 million , or 29.7%, to$46.6 million atSeptember 30, 2022 , from$35.9 million atDecember 31, 2021 . Interest-bearing demand accounts increased$13.7 million , or 9.4%, to$160.6 million atSeptember 30, 2022 , from$146.8 million atDecember 31, 2021 . Savings accounts increased$318,000 , or .9%, to$34.3 million atSeptember 30, 2022 from$34.0 million atDecember 31, 2021 . Certificates of deposit increased$1.8 million , or 2.5%, to$74.3 million atSeptember 30, 2022 from$72.5 million atDecember 31, 2021 . 28 -------------------------------------------------------------------------------- Accrued interest payable and other liabilities. Accrued interest payables and other liabilities increased$893,000 , or 18.6%, to$5.7 million atSeptember 30, 2022 , from$4.8 million atDecember 31, 2021 . Of this amount, first mortgage loan escrows increased$639,000 , or 331.1% to$832,000 atSeptember 30, 2022 , from$193,000 atDecember 31, 2021 . Shareholders' Equity. Total shareholders' equity decreased$2.2 million , or 2.5%, to$84.6 million atSeptember 30, 2022 from$86.8 million atDecember 31, 2021 . The decrease resulted primarily from the$3.2 million , or 1,839.1%, increase in the unrealized loss after taxes on our investment securities available for sale of$3.4 million atSeptember 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, the Company purchased$734,000 of its own stock that is held in treasury and reported as a reduction in equity. Additionally, the Company declared$245,000 of cash dividends to shareholders inJune 2022 and paid onJuly 15, 2022 . These decreases were partially offset by net income of$2.0 million for the nine months endedSeptember 30, 2022 .
Comparison of Operating Results for the Three Months Ended
General. Net income increased$105,000 , or 17.6%, to$703,000 for the three months endedSeptember 30, 2022 , compared to$598,000 for the three months endedSeptember 30, 2021 . The increase in net income resulted primarily from a$625,000 increase in net interest income partially offset by a$318,000 decrease in gains on sale of mortgage loans and a$221,000 increase in other expense. Interest Income. Interest and dividend income increased$676,000 , or 20.0%, to$4.0 million for the three months endedSeptember 30, 2022 from$3.4 million for the three months endedSeptember 30, 2021 . This increase was primarily due to increases in interest income on the loan portfolio of$433,000 , or 13.5%, as well as increases in interest and dividends on taxable investment securities available for sale of$107,000 and interest on deposits with other banks and federal funds sold of$135,000 . The average balance of loans, including loans held for sale, increased$45.0 million , or 16.8%, to$313.1 million for the three months endedSeptember 30, 2022 , from$268.1 million for the three months endedSeptember 30, 2021 , and the average yield on loans decreased to 4.62% for the three months endedSeptember 30, 2022 from 4.75% for three months endedSeptember 30, 2021 . The average balance of investment securities increased$14.1 million , or 44.2%, to$45.9 million for the three months endedSeptember 30, 2022 , from$31.9 million for the three months endedSeptember 30, 2021 , while the average yield on investment securities increased 55 basis points to 1.93% for the three months endedSeptember 30, 2022 , from 1.38% for the three months endedSeptember 30, 2021 . The average balance of other interest-earning deposits decreased$25.2 million , or -43.3%, to$33.0 million for three months endedSeptember 30, 2022 , from$58.2 million for the three months endedSeptember 30, 2021 , while the average yield on other interest-earning deposits increased 184 basis points to 2.16% for the three months endedSeptember 30, 2022 , from 0.32% for the three months endedSeptember 30, 2021 . Interest Expense. Total interest expense increased$51,000 , or 21.7%, to$284,000 for the three months endedSeptember 30, 2022 from$233,000 for the three months endedSeptember 30, 2021 . The increase was primarily due to an increase in interest rates offered on money market accounts and certificate of deposits due to the federal funds target range increasing 300 basis points to 3.25% onSeptember 30, 2022 , from 0.25% onSeptember 30, 2021 . The average balance of interest-bearing deposits increased$13.8 million , or 5.3%, to$274.8 million for the three months endedSeptember 30, 2022 , from$261.0 million for the three months endedSeptember 30, 2021 , with a 6 basis point increase in the average cost of interest-bearing deposits to 0.41% for the three months endedSeptember 30, 2022 , from 0.35% for the three months endedSeptember 30, 2021 . The average balances of FHLB advances decreased$797,000 , or 100%, to$0 for the three months endedSeptember 30, 2022 . For the three months endedSeptember 30, 2021 , the average cost of FHLB advances was 0.50%. Net Interest Income. Net interest income increased$625,000 , or 19.9%, to$3.8 million for the three months endedSeptember 30, 2022 from$3.1 million for the three months endedSeptember 30, 2021 . Our average interest-earning assets increased$34.5 million , or 9.6%, period over period. This increase was due primarily to increases in our loan portfolio of$45.0 million and securities of$14.0 million , partially offset by a$25.2 million decrease in the average balance of our interest-earning deposits with other banks. Our interest rate spread increased to 3.68% for the three months endedSeptember 30, 2022 from 3.38% for the three months endedSeptember 30, 2021 , and our net interest margin increased to 3.80% for the three months endedSeptember 30, 2022 from 3.47% for the three months endedSeptember 30, 2021 . The increases in interest rate spread and net interest margin were primarily the result of the mix of our interest earning assets. As stated earlier, average loans which is our highest yielding asset increased$45.0 million fromSeptember 30, 2021 , and our interest-bearing deposits, which are our lowest yield assets, decreased$25.2 million fromSeptember 30, 2021 . The cost on our earning assets increased 24 bps; whereas, the yield on our interest-bearing liabilities increased only 6 bps. Provision for Loan Losses. We recorded$38,000 in provision for loan losses for the three months endedSeptember 30, 2022 , compared to a$107,000 provision for the three months endedSeptember 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 29 -------------------------------------------------------------------------------- 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 1.37% of total loans, atSeptember 30, 2022 , and$4.2 million , or 1.54%, of total loans atDecember 31, 2021 , and$4.2 million , or 1.57% of total loans, atSeptember 30, 2021 . Classified (substandard, doubtful and loss) loans decreased to$4.2 million atSeptember 30, 2022 compared to$4.3 million atDecember 31, 2021 and$4.7 million atSeptember 30, 2021 . We had$524,000 of nonperforming loans atSeptember 30, 2022 , compared to$414,000 atDecember 31, 2021 and$690,000 atSeptember 30, 2021 . Net recoveries for the three months endedSeptember 30, 2022 and 2021 were$27,000 and$21,000 , respectively. We had no loans in deferral atSeptember 30, 2022 , orDecember 31, 2021 .
Other Income. Other income information is as follows.
For the three months
ended September 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Service charges on deposit accounts $ 144 $ 152 $ (8 ) (5.3 )%
Gain on sale of loans 219 537 (318 ) (59.2 )%
Other 75 88 (13 ) (14.8 )%
Total non-interest income $ 438 $ 777 $ (339 ) (43.6 )%
Other income decreased $339,000 , or 43.6%, to $438,000 for the three months
ended September 30, 2022 from $777,000 for the three months ended September 30,
2021 . The decrease was primarily due to a $318,000 decrease in gain on sale of
mortgage loans into the secondary market to $219,000 for the three months ended
September 30, 2022 , compared to $537,000 for the three months ended September
30, 2021 . This decrease is primarily due to the decrease in mortgage loan
refinancings and home purchases sold into the secondary market as interest rates
have increased since December 31, 2021 .
Other Expense. Other expense information is as follows.
For the three months
ended September 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 1,987 $ 1,892 $ 95 5.0 %
Occupancy and equipment 213 217 (4 ) (1.8 )%
Advertising 67 58 9 15.5 %
Audit and examination 159 107 52 48.6 %
Checking account related expenses 138 168 (30 ) (17.9 )%
Consulting and advisory fees 24 79 (55 ) (69.6 )%
Data processing fees 115 133 (18 ) (13.5 )%
Director fees 105 68 37 54.4 %
Legal 131 48 83 172.9 %
Other real estate loss/(gain) on sale 27 2 25
and write-downs 1,250.0 %
Other 284 257 27 10.5 %
Total non-interest expense $ 3,250 $ 3,029 $ 221 7.3 %
Other expense increased $221,000 , or 9.5%, to $3.25 million for the three months
ended September 30, 2022 , from $3.03 million for the three months ended
September 30, 2021 . The increase was due primarily to a $95,000 and $83,000
increase in salaries and employee benefits and legal fees, respectively. In
addition, audit and examination expenses increased $52,000 , or 48.6%, to
$159,000 for the three months ended September 30, 2022 from $107,000 for the
three months ended September 30, 2021 . The increase in salaries and benefits was
attributable to additional staff hired. The 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 $29,000 to $212,000 for the
three months ended September 30, 2022 , compared to $183,000 for the three months
ended September 30, 2021 . The increase resulted from the $134,000 increase in
income before income taxes. For the three months ended September 30, 2022 ,
income before taxes was $915,000 , compared to $781,000 for the three months
ended September 30, 2021 . Our effective tax rate was 23.2% for the three months
ended September 30, 2022 and 23.5% for the three months ended September 30,
2021 .
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--------------------------------------------------------------------------------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 9-30 Balance Earned/ Yield/ Balance Earned/ Yield/
2022 Outstanding Paid Rate Outstanding Paid Rate
(Dollars in thousands)
Interest-earning
assets:
Loans receivable 4.46 % $ 313,134 $ 3,644 4.62 % $ 268,161 $ 3,210 4.75 %
Securities
available-for-sale 2.11 % 45,940 223 1.93 % 31,880 111 1.38 %
Interest-earning
deposits 3.15 % 33,006 180 2.16 % 58,169 47 0.32 %
Other interest-earning
assets 4.11 % 926 2 0.86 % 284 5 6.98 %
Total interest-earning
assets 4.12 % 393,006 $ 4,049 3.97 % 358,494 $ 3,373 3.73 %
Non-interest-earning
assets 20,030 10,197
Total assets $ 413,036 $ 368,691
Interest-bearing
liabilities:
Savings and money
market
accounts 0.58 % $ 141,281 $ 168 0.47 % $ 141,467 $ 66 0.19 %
Interest-bearing
checking
accounts 0.09 % 58,255 17 0.12 % 42,073 13 0.12 %
Certificate accounts 0.59 % 75,221 99 0.52 % 77,418 153 0.78 %
Total interest-bearing
deposits 0.26 % 274,757 284 0.41 % 260,958 232 0.35 %
Borrowings - % - - - % 797 1 0.50 %
Total interest-bearing
liabilities 0.48 % 274,757 284 0.41 % 261,755 233 0.35 %
Non-interest-bearing
liabilities 52,577 65,969
Total liabilities 327,334 327,724
Total equity 85,702 40,967
Total liabilities and
equity $ 413,036 $ 368,691
Net interest income $ 3,765 $ 3,140
Net earning assets $ 118,249 $ 96,739
Net interest rate
spread(1) 3.64 % 3.68 % 3.38 %
Net interest margin(2) 3.80 % 3.47 %
Average
interest-earning
assets to average
interest-bearing
liabilities 143.04 % 136.96 %
(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.
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--------------------------------------------------------------------------------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
September 30,
2022 vs. 2021
Increase/
(decrease) Total
due to increase/
Volume Rate (decrease)
(In thousands)
Interest-earning assets:
Loans receivable $ 538 $ (104 ) $ 434
Securities available for sale 49 63 112
Interest-earning deposits (20 ) 153 133
Other interest-earning assets 11 (14 ) (3 )
Total interest-earning assets 578 98 676
Interest-bearing liabilities:
Savings and money market accounts - 102 102
Interest-bearing checking accounts 5 (1 ) 4
Certificate accounts (4 ) (50 ) (54 )
Total interest-bearing deposits 1 51 52
Borrowings (1 ) (1 )
Total interest-bearing liabilities - 51 51
Change in net interest income
Comparison of Operating Results for the Nine Months Ended
General. Net income increased$60,000 , or 3.1%, to$1,993,000 for the nine months endedSeptember 30, 2022 , compared to$1,933,000 for the nine months endedSeptember 30, 2021 . The increase in net income resulted primarily from a$1.3 million increase in net interest income that was reduced primarily by a decrease in gain on sale of mortgage loans of$814,000 and an increase in other expenses of$543,000 . Interest Income. Interest and dividend income increased$1,139,000 , or 11.6%, to$11.0 million for the nine months endedSeptember 30, 2022 from$9.8 million for the nine months endedSeptember 30, 2021 . This increase was primarily due to an increase in interest on our loan portfolio of$629,000 , and interest income and dividends on taxable investment securities available for sale of$292,000 as well as interest on deposits with other banks and federal funds sold of$218,000 . The average balance of loans, including loans held for sale, increased$26.5 million , or 9.95%, to$292.8 million for the nine months endedSeptember 30, 2022 , from$266.3 million for the nine months endedSeptember 30, 2021 , and the average yield on loans decreased 14 basis points to 4.59% for the nine months endedSeptember 30, 2022 , from 4.73% for the nine months endedSeptember 30, 2021 . The average balance of investment securities increased$22.6 million , or 95.29%, to$46.4 million for the nine months endedSeptember 30, 2022 , from$23.7 million for the nine months endedSeptember 30, 2021 , while the average yield on investment securities increased 11 basis points to 1.61% for the nine months endedSeptember 30, 2022 , from 1.50% for the nine months endedSeptember 30, 2021 . The average balance of other interest-earning deposits decreased$16.7 million , or 26.48%, to$46.3 million for nine months endedSeptember 30, 2022 , from$63.0 million for the nine months endedSeptember 30, 2021 , and the average yield on other interest-earning deposits increased 73 basis points to 1.03% for the nine months endedSeptember 30, 2022 , from 0.30% for the nine months endedSeptember 30, 2021 . Interest Expense. Total interest expense decreased$209,000 , or 14.9%, to$625,000 for the nine months endedSeptember 30, 2022 from$834,000 for the nine months endedSeptember 30, 2021 . The decrease was primarily due to lower interest rates offered on all deposit products even though the federal funds target range increased 300 basis points to 3.25% onSeptember 21, 2022 from 0.25% onJanuary 1, 2022 . The average balance of interest-bearing deposits decreased$2.3 million , or 0.85%, to$268.1 million for the nine months endedSeptember 30, 2022 , from$270.4 million for the nine months endedSeptember 30, 2021 with an 8 basis point decline in the average cost of interest-bearing deposits to 0.31% for the nine months endedSeptember 30, 2022 , from 0.40% for the nine months 32 -------------------------------------------------------------------------------- endedSeptember 30, 2021 . The average balances of FHLB advances decreased$6.3 million , or 100%, to$0 for the nine months endedSeptember 30, 2022 . For the nine months endedSeptember 30, 2021 , the average cost of FHLB advances was 0.83%. Net Interest Income. Net interest income increased$1.4 million , or 14.9%, to$10.4 million for the nine months endedSeptember 30, 2022 from$9.0 million for the nine months endedSeptember 30, 2021 . Our average interest-earning assets increased$32.8 million , or 9.28%, period over period. This increase was due primarily to increases in our loan portfolio of$26.5 million and investment securities available for sale of$22.6 million offset by a decrease in interest-earning deposits with other banks of$16.7 million . Our interest rate spread increased to 3.49% for the nine months endedSeptember 30, 2022 from 3.32% for the nine months endedSeptember 30, 2021 , and our net interest margin increased to 3.58% for the nine months endedSeptember 30, 2022 from 3.41% for the nine months endedSeptember 30, 2021 . The increases in interest rate spread and net interest margin were primarily the result of the mix of our earning assets. As stated earlier average loans which is our highest yielding asset increased$26.5 million and our interest-bearing deposits, which are our lowest yield assets, decreased$16.7 million fromDecember 31, 2021 . The yield on our earning assets increased 8 bps; whereas, the yield on our interest-bearing liabilities decreased 9 bps as we paid off our FHLB advances in 2021. 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$98,000 in provision for loan losses for the nine months endedSeptember 30, 2022 compared to$123,000 for the nine months endedSeptember 30, 2021 . The allowance for loan losses was$4.3 million , or 1.37% of total loans atSeptember 30, 2022 , and$4.2 million , or 1.54% of total loans atDecember 31, 2021 , and$4.1 million , or 1.56% of total loans, atSeptember 30, 2021 . Classified (substandard, doubtful and loss) loans decreased to$4.2 million atSeptember 30, 2022 compared to$4.3 million atDecember 31, 2021 and$4.6 million atSeptember 30, 2021 . We had$524,000 of nonperforming loans atSeptember 30, 2022 , compared to$414,000 atDecember 31, 2021 and$690,000 atSeptember 30, 2021 . Net recoveries for the nine months endedSeptember 30, 2022 and 2021 were$55,000 and$38,000 , respectively. We had no loans in deferral atSeptember 30, 2022 orDecember 31, 2021 .
Other Income. Other income information is as follows.
For the nine
months ended
September 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Service charges on deposit accounts
(1.4 )% Gain on sale of loans 825 1,639 (814 ) (49.7 )% Other 307 237 70 29.5 % Total non-interest income$ 1,547 $ 2,297 $ (750 ) (32.7 )% Other income decreased$750,000 , or 32.7%, to$1,547,000 for the nine months endedSeptember 30, 2022 , from$2,297,000 for the nine months endedSeptember 30, 2021 . The decrease was primarily due to a$814,000 decrease in gain on sale of mortgage loans into the secondary market to$9825,000 for the nine months endedSeptember 30, 2022 , compared to$1,639,000 for the nine months endedSeptember 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 nine
months ended
September 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 5,695 $ 5,562 $ 133 2.4 %
Occupancy and equipment 624 617 7 1.1 %
Advertising 197 170 27 15.9 %
Audit and examination 410 306 104 34.0 %
Checking account related expenses 424 416 8 1.9 %
Consulting and advisory fees 91 135 (44 ) (32.6 )%
Data system conversion costs - 1 (1 ) (100.0 )%
Data processing fees 346 337 9 2.7 %
Director fees 226 231 (5 ) (2.2 )%
Legal 247 37 210 567.6 %
Other real estate loss/(gain) on sale
and write-downs 59 4 55 1,375.0 %
Other 893 853 40 4.7 %
Total non-interest expense $ 9,212 $ 8,669 $ 543 6.3 %
Other expense increased $543,000 , or 6.3%, to $9.2 million for the nine months
ended September 30, 2022 , from $8.7 million for the nine months ended September
30, 2021 . The increase was due primarily to a $148,000 and $104,000 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. In addition, salaries and employee
benefits increased $133,000 increased due to hiring additional staff.
Income Tax Expense. Income tax expense increased $18,000 to $602,000 for the
nine months ended September 30, 2022 , compared to $584,000 for the nine months
ended September 30, 2021 . The increase resulted from a $79,000 increase in
income before income taxes. For the nine months ended September 30, 2022 , income
before taxes was $2,596,000 compared to $2,517,000 for the nine months ended
September 30, 2021 . Our effective tax rate was 23.2% both the nine months ended
September 30, 2022 and 2021.
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
nine months ended
2022 2022 2021
Yield/rate Average Interest Average Average Interest Average
At 9-30 Balance Earned/ Yield/ Balance Earned/ Yield/
2022 Outstanding Paid Rate Outstanding Paid Rate
(Dollars in thousands)
Interest-earning
assets:
Loans receivable 4.46 % $ 292,803 $ 10,051 4.59 % $ 266,312 $ 9,422 4.73 %
Securities
available-for-sale 2.11 % 46,355 558 1.61 % 23,737 266 1.50 %
Interest-earning
deposits 3.15 % 46,322 356 1.03 % 63,006 140 0.30 %
Other interest-earning
assets 4.11 % 926 20 2.89 % 530 18 4.54 %
Total interest-earning
assets 4.12 % 386,406 10,985 3.80 % 353,585 9,846 3.72 %
Non-interest-earning
assets 18,839 20,616
Total assets $ 405,245 $ 374,201
Interest-bearing
liabilities:
Savings and money
market
accounts 0.58 % $ 135,444 311 0.31 % $ 138,760 206 0.20 %
Interest-bearing
checking
accounts 0.09 % 58,705 44 0.10 % 51,076 35 0.09 %
Certificate accounts 0.59 % 73,938 271 0.49 % 80,543 554 0.92 %
Total interest-bearing
deposits 0.26 % 268,087 626 0.31 % 270,379 795 0.39 %
Borrowings - % - - - 6,299 39 0.83 %
Total interest-bearing
liabilities 0.48 % 268,087 626 0.31 % 276,678 834 0.40 %
Non-interest-bearing
liabilities 50,910 57,148
Total liabilities 318,997 333,826
Total equity 86,248 40,375
Total liabilities and
equity $ 405,245 $ 374,201
Net interest income $ 10,359 $ 9,012
Net earning assets $ 118,319 $ 76,907
Net interest rate
spread(1) 3.64 % 3.49 % 3.32 %
Net interest margin(2) 3.58 % 3.41 %
Average
interest-earning
assets to average
interest-bearing
liabilities 144.13 % 127.80 %
(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.
Nine Months Ended
September 30,
2022 vs. 2021
Increase/
(decrease) Total
due to increase/
Volume Rate (decrease)
(In thousands)
Interest-earning assets:
Loans receivable $ 937 $ (308 ) $ 629
Securities available for sale 253 39 292
Interest-earning deposits (37 ) 253 216
Other interest-earning assets 13 (11 ) 2Total interest-earning assets 1,166 (27 ) 1,139 Interest-bearing liabilities: Savings and money market accounts (5 ) 110
105
Interest-bearing checking accounts 5 4 9
Certificate accounts (45 ) (238 ) (283 )
Total interest-bearing deposits (45 ) (124 ) (169 ) Borrowings
(39 ) - (39 )
Total interest-bearing liabilities (84 ) (124 ) (208 )
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 nine months endedSeptember 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 . AtSeptember 30, 2022 , we had$48.8 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$5.8 million secured borrowing capacity through theFederal Reserve Bank of Atlanta . No amounts were outstanding on these lines of credit atSeptember 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 AtSeptember 30, 2022 , the Bank's Tier 1 capital as a percentage of the Bank's total assets was 16.30%, and total qualifying capital as a percentage of risk-weighted assets was 23.86%. As ofSeptember 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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