Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2017


March 31, 2021

or


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from       to .


Commission File Number 0-49731


SEVERN BANCORP, INC.

INC.

(Exact name of registrant as specified in its charter)


Maryland
52-1726127

Maryland

52-1726127

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)


200 Westgate Circle, Suite 200


Annapolis, Maryland

21401

(Address of principal executive offices)

(Zip Code)


410-260-2000

410-260-2000

(Registrant’s telephone number, including area code)


N/A

(Former name, former address and formal fiscal year, if changed since last report)


Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

SVBI

The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes     No 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer

Accelerated filer  

Non- accelerated filer (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company  


Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes No


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Common Stock, $0.01 par value – 12,245,425- 12,858,339 shares outstanding as of NovemberMay 13, 20172021



Table of Contents

SEVERN BANCORP, INC. AND SUBSIDIARIES

Table of Contents



Page

PART I – FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

1

5

2

6

3

7

4

8

5

9

6

10

Item 2.

26

33

Item 3.

41

50

Item 4.

42

51

PART II – OTHER INFORMATION

Item 1.

42

51

Item 1A.

42

51

Item 2.

42

52

Item 3.

42

52

Item 4.

42

52

Item 5.

43

52

Item 6.

43

52

44

53

45

54

1

i

Glossary of Defined Terms

The following terms may be used throughout this Quarterly Report on Form 10-Q, including the unaudited consolidated financial statements and related notes.

2035 Debentures

Junior Subordinated Debt Securities

2035 Indenture

Indenture dated December 17, 2004 pursuant to which the 2035 Debentures were issued

ADC

Acquisition, development, and construction loans

AFS

Available for sale

Allowance

Allowance for loan losses

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

Bank

Severn Savings Bank and subsidiaries

Basel III

Certain provisions of the Dodd-Frank Act

BOLI

Bank owned life insurance

Capital Securities

Corporation-obligated mandatorily redeemable capital securities

CARES Act

Coronavirus Aid, Relief and Economic Security Act

CDs

Certificates of deposit

CECL

Current expected credit losses

CEO

Chief executive officer

CFO

Chief financial officer

Commitments

Commitments to extend credit and unused portions of lines of credit, collectively.

Company

Severn Bancorp, Inc. and subsidiaries

COVID-19

Novel coronavirus

Crownsville

Crownsville Development Corporation

DTAs

Deferred tax assets

EVE

Economic value of equity

Exchange Act

Securities Exchange Act of 1934

FASB

Financial Accounting Standards Board

FDIC

Federal Deposit Insurance Corporation

FHLB

Federal Home Loan Bank of Atlanta

FHLMC

Federal Home Loan Mortgage Corporation

FNMA

Federal National Mortgage Association

FRB

Federal Reserve Board

GAAP

Accounting principles generally accepted in the United States of America

HTM

Held to maturity

IRLC(s)

Interest rate lock commitment(s)

LCM

Lower of cost or market

LHFS

Mortgage loans held for sale

LTV

Loan to value

MBS

Mortgage-backed securities

MSELF

Main Street expanded Loan Facility

MSNLF

Main Street New Loan Facility

MSRs

Mortgage servicing rights

NOLs

Net operating losses

NPA(s)

Nonperforming asset(s)

OCC

Office of the Comptroller of the Currency

OTTI

Other than temporary impairment

Plan

Stock compensation plan of Severn Bancorp, Inc.

PPP

Paycheck Protection Program

PPPLF

PPP Loan Facility

SBA

United States Small Business Administration

SBI

SBI Mortgage Company

SEC

Securities and Exchange Commission

Shore

Shore Bancshares, Inc. and subsidiaries

TDR(s)

Troubled debt restructuring(s)

Title Company

Mid-Maryland Title Company, Inc.

Trust

Severn Capital Trust 1

U.S.

United States of America

2

Caution

Unless the context otherwise requires, the terms “we,” “us,” “our,” and “Company” refer to Severn Bancorp, Inc. and its subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as other periodic reports filed with the Securities and Exchange Commission (“SEC”),SEC, and written or oral communications made from time to time by or on behalf of Severn Bancorp and its subsidiaries (the “Company”),the Company, may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend,” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.” Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth, and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

Forward-looking statements reflect our expectation or prediction of future conditions, events, or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 20162020 Annual Report on Form 10-K, Item 1A of Part II of the Company’s March 31, 2017 quarterly report on Form 10-Q, Item 1A of Part II of the Company’s June 30, 2017 quarterly report on Form 10-Q, Item 1A of Part II of this quarterly reportQuarterly Report on Form 10-Q, and the following:

·general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits, and other financial services that we provide and increases in loan delinquencies and defaults;

·changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits, and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;

·our liquidity requirements could be adversely affected by changes in our assets and liabilities;

·our investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates we use to value certain of the securities in our portfolio;

·the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance, and other aspects of the financial services industry;

·competitive factors among financial services companies, including product and pricing pressures, and our ability to attract, develop, and retain qualified banking professionals;

·the effect of fiscal and governmental policies of the United States (“U.S.”) federal government;

·the effect of any mergers, acquisitions, or other transactions to which we or our subsidiaries may from time to time be a party;

·potential delays or the failure to obtain the necessary regulatory and stockholder approvals for the merger with Shore;
costs and potential disruption or interruption of operations due to cyber-security incidents;
the effect of any change in federal government enforcement of federal laws affecting the medical-use cannabis industry;
costs and potential disruption or interruption of operations due to global pandemics such as COVID-19;

3

·the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board,FASB, the SEC, the Public Company Accounting Oversight Board, and other regulatory agencies; andand;

·geopolitical conditions, including acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism, and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad.

Forward-looking statements speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

4

PART I – FINANCIAL INFORMATION


Item 1.Financial Statements

Item 1.Financial Statements

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

  
September 30,
2017
  
December 31,
2016
 
ASSETS (unaudited)    
Cash and due from banks $1,654  $39,396 
Federal funds sold and interest-bearing deposits in other banks  39,981   27,718 
Cash and cash equivalents  41,635   67,114 
Securities available for sale, at fair value  3,129   - 
Securities held to maturity (fair value of $58,959 at September 30, 2017 and $62,827 at December 31, 2016)  58,764   62,757 
Loans held for sale, at fair value at September 30, 2017  4,871   10,307 
Loans receivable  650,964   610,278 
Allowance for loan losses  (7,936)  (8,969)
Loans, net  643,028   601,309 
Real estate acquired through foreclosure  1,104   973 
Restricted stock investments  4,699   5,103 
Premises and equipment, net  23,398   24,030 
Accrued interest receivable  2,503   2,249 
Bank owned life insurance  5,023   - 
Deferred income taxes  8,002   10,081 
Other assets  5,174   3,562 
Total assets $801,330  $787,485 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Liabilities:        
Deposits:        
Noninterest bearing $71,515  $58,145 
Interest-bearing  521,977   513,801 
Total deposits  593,492   571,946 
Short-term borrowings  4,950   - 
Long-term borrowings  88,500   103,500 
Subordinated debentures  20,619   20,619 
Accrued expenses and other liabilities  1,759   3,490 
Total liabilities  709,320   699,555 
         
Stockholders’ Equity:        
Preferred stock, $0.01 par value, 1,000,000 shares authorized:        
Preferred stock series “A,” 437,500 shares issued and outstanding and $3,500 liquidation preference at both September 30, 2017 and December 31, 2016  4   4 
Common stock, $0.01 par value, 20,000,000 shares authorized; 12,245,425 and 12,123,179 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  122   121 
Additional paid-in capital  65,290   63,960 
Retained earnings  26,598   23,845 
Accumulated other comprehensive loss  (4)  - 
Total stockholders’ equity  92,010   87,930 
Total liabilities and stockholders’ equity $801,330  $787,485 

(unaudited)

March 31, 

December 31, 

    

2021

    

2020

ASSETS

  

Cash and due from banks

$

6,248

$

4,819

Federal funds sold and interest-bearing deposits in other banks

 

250,847

 

151,790

Cash and cash equivalents

 

257,095

 

156,609

CDs held for investment

3,330

3,580

AFS securities, at fair value

 

132,698

 

65,098

HTM securities (fair value of $15,094 and $16,603 at March 31, 2021 and December 31, 2020, respectively)

 

14,516

 

15,943

LHFS, at fair value

 

50,124

 

36,299

Loans receivable

 

621,512

 

642,882

Allowance

 

(8,135)

 

(8,670)

Loans, net

 

613,377

 

634,212

Real estate acquired through foreclosure

 

1,010

 

1,010

Restricted stock investments

 

970

 

1,236

Premises and equipment, net

 

20,653

 

20,940

Accrued interest receivable

 

2,439

 

2,576

Deferred income taxes

882

1,145

BOLI

 

5,550

 

5,517

Goodwill

 

770

 

1,104

Other assets

 

9,555

 

7,284

Total assets

$

1,112,969

$

952,553

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Noninterest bearing

$

337,141

$

245,093

Interest-bearing

 

626,955

 

561,363

Total deposits

 

964,096

 

806,456

Long-term borrowings

 

10,000

 

10,000

Subordinated debentures

 

20,619

 

20,619

Accrued expenses and other liabilities

 

7,181

 

5,831

Total liabilities

 

1,001,896

 

842,906

Stockholders' Equity:

 

  

 

  

Common stock, $0.01 par value, 20,000,000 shares authorized; 12,856,989 and 12,843,349 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

 

129

 

128

Additional paid-in capital

 

66,359

 

66,251

Retained earnings

 

46,485

 

43,216

Accumulated other comprehensive (loss) income

 

(1,900)

 

52

Total stockholders' equity

 

111,073

 

109,647

Total liabilities and stockholders' equity

$

1,112,969

$

952,553

See accompanying notes to consolidated financial statements

5

1

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

INCOME

(dollars in thousands, except per share data)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
Interest income: (unaudited) 
Loans $7,742  $7,479  $22,267  $21,847 
Securities  330   280   927   890 
Other earning assets  167   83   498   251 
Total interest income  8,239   7,842   23,692   22,988 
Interest expense:                
Deposits  1,011   1,019   2,924   3,002 
Borrowings and subordinated debentures  897   1,106   2,844   3,493 
Total interest expense  1,908   2,125   5,768   6,495 
Net interest income  6,331   5,717   17,924   16,493 
Provision for (reversal of) loan losses  -   50   (650)  150 
Net interest income after provision for (reversal of) loan losses  6,331   5,667   18,574   16,343 
Noninterest income:                
Mortgage-banking revenue  334   1,042   1,150   2,693 
Real estate commissions  311   455   959   1,246 
Real estate management fees  197   214   513   564 
Credit report and appraisal fees  137   99   390   304 
Deposit service charges  190   32   265   105 
Other noninterest income  230   54   485   667 
Total noninterest income  1,399   1,896   3,762   5,579 
Noninterest expense:                
Compensation and related expenses  3,288   3,928   10,719   11,218 
Occupancy  354   333   1,015   942 
Legal fees  41   81   104   217 
Write-downs, losses, and costs of real estate acquired through foreclsoure, net  126   41   166   184 
Federal Deposit Insurance Corpation insurance premiums  69   126   133   296 
Professional fees  124   189   377   528 
Advertising  198   158   649   510 
Online charges  237   117   661   617 
Credit report and appraisal fees  203   148   478   480 
Licensing and software  152   115   326   345 
Mortgage leads purchased  48   205   234   559 
Other  681   689   2,158   2,405 
Total noninterest expense  5,521   6,130   17,020   18,301 
Income before income tax provision (benefit)  2,209   1,433   5,316   3,621 
Income tax provision (benefit)  950   378   2,150   (10,816)
Net income  1,259   1,055   3,166   14,437 
Amortization of discount on preferred stock  (68)  (68)  (203)  (203)
Dividends on preferred stock  (70)  (448)  (210)  (1,370)
Net income available to common stockholders $1,121  $539  $2,753  $12,864 
Net income per common share - basic $0.09  $0.04  $0.23  $1.14 
Net income per common share - diluted $0.09  $0.04  $0.22  $1.13 

(unaudited)

Three Months Ended March 31, 

2021

    

2020

Interest income:

Loans

$

8,244

$

8,338

Securities

 

292

 

219

Other earning assets

 

73

 

359

Total interest income

 

8,609

 

8,916

Interest expense:

 

 

Deposits

 

784

 

1,797

Borrowings and subordinated debentures

 

167

 

364

Total interest expense

 

951

 

2,161

Net interest income

 

7,658

 

6,755

(Reversal of) provision for loan losses

 

(750)

 

750

Net interest income after (reversal of) provision for loan losses

 

8,408

 

6,005

Noninterest income:

 

 

Mortgage-banking revenue

 

4,396

 

1,634

Real estate commissions

 

161

 

310

Real estate management fees

 

 

165

Deposit service charges

 

601

 

561

Title company revenue

 

335

 

238

ATM surcharges

87

62

Income from BOLI

33

37

Other noninterest income

146

 

18

Total noninterest income

 

5,759

 

3,025

Noninterest expense:

 

 

Compensation and related expenses

 

6,222

 

5,461

Occupancy

 

471

 

518

Legal fees

 

 

166

Write-downs, losses, and costs of real estate acquired through foreclosure, net of gains

 

2

 

74

FDIC insurance premiums

 

56

 

Professional fees

 

151

 

303

Advertising

 

198

 

220

Data processing

 

462

 

460

Credit report and appraisal fees

 

60

 

67

Licensing and software

 

240

 

218

Loss on disposal of premises and equipment

76

Internal audit and compliance

133

64

Office expenses, printing, and postage

88

109

Telecommunications

105

105

Merger expenses

238

Other noninterest expense

 

380

 

411

Total noninterest expense

 

8,806

 

8,252

Net income before income tax provision

 

5,361

 

778

Income tax provision

 

1,450

 

213

Net income

$

3,911

$

565

Net income per common share - basic

$

0.30

$

0.04

Net income per common share - diluted

$

0.30

$

0.04

See accompanying notes to consolidated financial statements

6

2

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (unaudited) 
Net income $1,259  $1,055  $3,166  $14,437 
Other comprehensive loss items:                
Unrealized holding losses on available-for-sale securities arising during the period (net of income tax benefit of $6 and $2, respectively, in 2017)  (9)  -   (3)  - 
Realized gains, net of income taxes of $1 and $1, respectively, in 2017  (1)  -   (1)  - 
Total other comprehensive loss  (10)  -   (4)  - 
Total comprehensive income $1,249  $1,055  $3,162  $14,437 

(unaudited)

Three Months Ended March 31, 

 

2021

    

2020

Net income

$

3,911

$

565

Other comprehensive income item:

 

 

Unrealized holding (losses) gains on AFS securities arising during the period (net of tax (benefit) expense of $(742) and $56)

 

(1,956)

 

149

Realized losses on AFS securities arising during the period (net of tax benefit of $1)

4

Total other comprehensive (loss) income

 

(1,952)

 

149

Total comprehensive income

$

1,959

$

714

See accompanying notes to consolidated financial statements

7

3

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share data)

  
Nine Months Ended September 30, 2017 (unaudited)
 
  
Number of
Shares of
Preferred
Stock
  
Number of
Shares of
Common
Stock
  
Preferred
Stock
  
Common
Stock
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Comprehensive
Loss
  
Total
Stockholders’
Equity
 
Balance at January 1, 2017  437,500   12,123,179  $4  $121  $63,960  $23,845  $-  $87,930 
Net income  -   -   -   -   -   3,166   -   3,166 
Stock-based compensation  -   -   -   -   146   -   -   146 
Stock issued in acquisition  -   108,084   -    1    774    -    -    775 
Stock issued, net of expense  -   14,162   -   -   207   -   -   207 
Dividend declared on Series A preferred stock  -   -   -   -   -   (210)  -   (210)
Amortization of discount on Series B preferred stock  -   -   -   -   203   (203)  -   - 
Other comprehensive loss  -   -   -   -   -   -   (4)  (4)
Balance at September 30, 2017  437,500   12,245,425  $4  $122  $65,290  $26,598  $(4) $92,010 

  
Nine Months Ended September 30, 2016 (unaudited)
 
  
Number of
Shares of
Preferred
Stock
  
Number of
Shares of
Common
Stock
  
Preferred
Stock
  
Common
Stock
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Comprehensive
Income
  
Total
Stockholders’
Equity
 
Balance at January 1, 2016  460,893   10,088,879  $4  $101  $76,335  $10,016  $-  $86,456 
Net income  -   -   -   -   -   14,437   -   14,437 
Stock-based compensation  -   -   -   -   143   -   -   143 
Stock issued, net of expense  -   2,015,500   -   20   10,490   -   -   10,510 
Stock redemption on Series B preferred stock  (23,393)  -   -   -   (23,393)  -   -   (23,393)
Dividend declared on Series A preferred stock  -   -   -   -   -   (140)  -   (140)
Dividend declared on Series B preferred stock  -   -   -   -   -   (1,230)  -   (1,230)
Amortization of discount on Series B preferred stock  -   -   -   -   203   (203)  -   - 
Balance at September 30, 2016  437,500   12,104,379  $4  $121  $63,778  $22,880  $-  $86,783 

(unaudited)

Three Months Ended March 31, 2021

    

Number of

    

    

    

    

Accumulated

    

Shares of

Additional

Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Stockholders'

Stock

Stock

Capital

 Earnings 

Income (Loss)

Equity

Balance at January 1, 2021

 

12,843,349

$

128

$

66,251

$

43,216

$

52

$

109,647

Net income

 

0

 

0

 

0

 

3,911

 

0

 

3,911

Stock-based compensation

 

0

 

0

 

23

 

0

 

0

 

23

Dividends paid on common stock at $0.05 per share

 

0

 

0

 

0

 

(642)

 

0

 

(642)

Exercise of stock options

13,640

1

85

86

Other comprehensive loss

 

0

 

0

 

0

 

0

 

(1,952)

 

(1,952)

Balance at March 31, 2021

 

12,856,989

$

129

$

66,359

$

46,485

$

(1,900)

$

111,073

Three Months Ended March 31, 2020

    

Number of

    

    

    

    

Accumulated

    

Shares of

Additional

Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Stockholders'

Stock

Stock

Capital

 Earnings 

(Loss) Income

Equity

Balance at January 1, 2020

 

12,810,926

$

128

$

65,944

$

38,560

$

(45)

$

104,587

Net income

 

0

 

0

 

0

 

565

 

0

 

565

Stock-based compensation

 

0

 

0

 

34

 

0

 

0

 

34

Dividends paid on common stock at $0.04 per share

 

0

 

0

 

0

 

(513)

 

0

 

(513)

Exercise of stock options

2,050

0

14

0

0

14

Other comprehensive income

 

0

 

0

 

0

 

0

 

149

 

149

Balance at March 31, 2020

 

12,812,976

$

128

$

65,992

$

38,612

$

104

$

104,836

See accompanying notes to consolidated financial statements

8

4

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands, except per share data)

  Nine Months Ended September 30, 
  2017  2016 
Cash flows from operating activities: (unaudited) 
Net income $3,166  $14,437 
Adjustments to reconcile net income to net cash from operating activities:        
Depreciation and amortization  919   863 
Amortization of deferred loan fees  (847)  (889)
Net amortization of premiums and discounts on securities  (202)  318 
(Reversal of) provision for loan losses  (650)  150 
Write-downs and losses on real estate acquired through foreclosure, net of gains  139   149 
Gain on sale of mortgage loans  (1,150)  (2,693)
Gain on sale of securities  (2)  - 
Proceeds from sale of mortgage loans held for sale  28,482   107,468 
Originations of loans held for sale  (22,556)  (104,533)
Stock-based compensation  146   143 
Increase in cash surrender value of bank owned life insurance  (23)  - 
Deferred income taxes  2,081   (10,916)
Increase in accrued interest receivable  (254)  (44)
(Increase) decrease in other assets  (837)  384 
Decrease in accrued expenses and other liabilities  (1,731)  (2,938)
Net cash provided by operating activities  6,681   1,899 
Cash flows from investing activities:        
Loan principal (disbursements), net of repayments  (40,265)  (14,448)
Redemption of restricted stock investments  404   396 
Purchases of premises and equipment, net  (287)  (740)
Purchase of bank owned life insurance  (5,000)  - 
Activity in securities held to maturity:        
Purchases  (6,679)  (3,562)
Maturities/calls/repayments  10,730   11,700 
Activity in available-for-sale securities:        
Purchases  (7,184)  - 
Sales  4,011   - 
Maturities/calls/repayments  184   - 
Proceeds from sales of real estate acquired through foreclosure  433   1,622 
Net cash used in investing activities  (43,653)  (5,032)
Cash flows from financing activities:        
Net increase in deposits  21,546   32,839 
Additional borrowings  39,950   10,500 
Repayment of borrowings  (50,000)  (18,500)
Series A preferred stock dividends  (210)  (140)
Series B preferred stock dividends  -   (7,781)
Stock redemption of Series B preferred stock  -   (23,393)
Proceeds from common stock issuance  207   10,510 
Net cash provided by financing activities  11,493   4,035 
(Decrease) increase in cash and cash equivalents  (25,479)  902 
Cash and cash equivalents at beginning of period  67,114   43,591 
Cash and cash equivalents at end of period $41,635  $44,493 
Supplemental Information:        
Interest paid on deposits and borrowed funds $5,828  $9,104 
Income taxes paid (recovered)  50   (852)
Real estate acquired in satisfaction of loans  703   1,370 
Transfers of loans held for sale to portfolio  660   - 

thousands)

(unaudited)

Three Months Ended March 31, 

    

2021

    

2020

Cash flows from operating activities:

Net income

$

3,911

$

565

Adjustments to reconcile net income to net cash from operating activities:

 

 

Depreciation and amortization

 

389

 

394

Amortization of deferred loan fees

 

(875)

 

(506)

Net amortization (accretion) of premiums and discounts on securities

 

435

 

(83)

(Reversal of) provision for loan losses

 

(750)

 

750

Write-downs and losses on real estate acquired through foreclosure, net of gains

 

0

 

80

Gain on sale of mortgage loans

 

(4,396)

 

(1,634)

Loss on disposal of property

 

0

 

76

Loss on sale of Hyatt Commercial assets

34

0

Proceeds from sale of LHFS

 

91,625

 

33,764

Originations of LHFS

 

(101,314)

 

(43,216)

Stock-based compensation

 

23

 

34

Increase in cash surrender value of bank-owned life insurance

 

(33)

 

(37)

Deferred income taxes

 

1,004

 

1

Decrease in accrued interest receivable

 

137

 

183

Increase in other assets

 

(2,304)

 

(1,160)

Increase in accrued expenses and other liabilities

 

1,349

 

1,024

Net cash used in operating activities

 

(10,765)

 

(9,765)

Cash flows from investing activities:

 

 

Redemption of CDs held for investment

250

0

Loan principal repayments, net of (disbursements)

 

22,720

 

10,271

Redemption of restricted stock investments

 

266

 

132

Purchases of premises and equipment, net

 

(102)

 

(57)

Activity in HTM securities:

 

 

Maturities/calls/repayments

 

1,198

 

3,202

Activity in AFS securities:

 

Purchases

 

(80,454)

 

(7,852)

Sales

4,451

0

Maturities/calls/repayments

5,504

2,225

Proceeds from sale of Hyatt Commercial

334

0

Proceeds from sales of real estate acquired through foreclosure

 

0

 

623

Net cash (used in) provided by investing activities

 

(45,833)

 

8,544

Cash flows from financing activities:

 

 

Net increase in deposits

 

157,640

 

29,163

Common stock dividends

 

(642)

 

(513)

Exercise of stock options

 

86

 

14

Net cash provided by financing activities

 

157,084

 

28,664

Increase in cash and cash equivalents

 

100,486

 

27,443

Cash and cash equivalents at beginning of period

 

156,609

 

88,193

Cash and cash equivalents at end of period

$

257,095

$

115,636

Supplemental Noncash Disclosures:

 

 

Interest paid on deposits and borrowed funds

$

955

$

2,170

Income taxes paid

 

0

 

493

Transfers of mortgage loans held for sale to loan portfolio

 

260

 

0

See accompanying notes to consolidated financial statements

9

5

Severn Bancorp, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as

(unaudited)

See the Glossary of Defined Terms at the beginning of this Quarterly Report on Form 10-Q for terms used throughout the consolidated financial statements and for the three and nine months ended September 30, 2017 and 2016 is unaudited)


related notes of this Quarterly Report on Form 10-Q.

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accounting and reporting policies of Severn Bancorp, Inc. and subsidiaries (the “Company”)the Company conform to accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”)GAAP and prevailing practices within the financial services industry for interim financial information and Rule 8-018-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. In the opinion of management, all adjustments (comprising only of those of a normal recurring nature) necessary for a fair presentation of the results of operations for the interim periods presented have been made. The results of operations for the three and nine months ended September 30, 2017March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 20172021 or any other interim or future period. Events occurring after the date of the financial statements up toNovember 14, 2017, the date the financial statements were available to be issued were considered in the preparation of the consolidated financial statements.

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 20162020 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).

SEC.

Principles of Consolidation

The unaudited consolidated financial statements include the accounts of Severn Bancorp, Inc., and its wholly-owned subsidiaries, Mid-Maryland Title Company, Inc., SBI Mortgage Company, and SBI Mortgage Company’s subsidiary, Crownsville Development Corporation, and its subsidiary, Crownsville Holdings I, LLC, and Severn Savings Bank, FSB, (the “Bank”), andalong with the Bank’s subsidiaries, Louis Hyatt, Inc., Homeowners Title and Escrow Corporation, Severn Financial Services Corporation, SSB Realty Holdings, LLC, SSB Realty Holdings II, LLC, and HS West, LLC. Also included are the accounts of SBI Mortgage Company’s subsidiary, Crownsville Development Corporation, and its subsidiary, Crownsville Holdings I, LLC. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

Acquisition
On September 1, 2017, we acquired Mid-Maryland Title Company, Inc. (the “Title Company”) by issuing stock in a business combination. We issued 108,084 shares in the transaction valued at $775,000.  We recorded $759,000 in goodwill in the transaction.  The acquisition continues our growth strategy and focus on being a full-service provider and complements the mortgage services, commercial banking services, and commercial real estate services we provide. The acquisition of the Title Company has not had a material effect on the Company’s financial condition or results of operations.

Use of Estimates

The preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as ofat the date of the financial statements and affect the reported amounts of revenues earnedincome and expenses incurred during the reporting period. Actual results could differ fromperiods presented. The accounting policies we view as critical are those estimates. Estimates that could change significantly relaterelating to the provision for loan losses andAllowance, the related allowance for loan losses (“Allowance”), determination of impaired loans and the related measurement of impairment, valuation of investment securities, valuation of real estate acquired through foreclosure, and the valuation of share-based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, and the calculation of current and deferred income taxes and the realizability of net deferred tax assets.

assets and liabilities.

Cash Flows

For reporting purposes, assets grouped in the Consolidated Statements of reporting cash flows, cash and cash equivalents include cashFinancial Condition under the captions “Cash and due from banks, federalbanks” and “Federal funds sold and interest-earninginterest-bearing deposits with banks.

in other banks” are considered cash or cash equivalents. For financial statement purposes, these assets are carried at cost. Federal funds sold and interest-bearing deposits in other banks generally have overnight maturities and are in excess of amounts that would be recoverable under FDIC insurance.

Reclassifications

Certain reclassifications have been made to amounts previously reported to conform to current period presentation.

10

Table of Contents

2020 Correction of Prior Period Immaterial Error

As disclosed in the Company’s 2020 Annual Report on Form 10-K, during 2020, the Company corrected an immaterial accounting error related to $885,000 of DTAs related to NOLs recorded in years prior to 2020 by the holding company and which accumulated over the span of many years. As the holding company has not previously generated taxable income and continues to generate no taxable income, it has no ability to utilize the NOLs. To correct this immaterial accounting error, the Company recorded an adjustment to reduce 2019's opening retained earnings in the amount of $793,000 and additional tax expense of $92,000 (the amounts deemed applicable for 2019) for the year ended December 31, 2019. These adjustments then affected the beginning balances of March 31, 2020 retained earnings and total stockholders’ equity, both of which amounts are shown in this Quarterly Report on Form 10-Q reduced by $885,000 from the amounts previously stated.

COVID-19 Risks and Uncertainties

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the U.S. and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 has adversely impacted and could continue to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to a target range of 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak has affected and may continue to adversely affect the Company’s financial condition and results of operations. As a result of the spread of COVID-19, economic uncertainties have arisen which could negatively impact net interest income, noninterest income, credit quality, the Allowance, and the provision for loan losses. Additionally, there could be a potential for goodwill impairment. Other financial impact could occur though such potential impact is unknown at this time.

On May 12, 2021, the Governor of Maryland lifted all remaining COVID-19 related restrictions, with the exception of wearing masks indoors, effective May 15, 2021. On May 14, 2021, the Governor also lifted the mask mandate effective May 15, 2021.

Asset Sale

On January 1, 2021, we sold the majority of the assets of our real estate company, Hyatt Commercial, with the exception of cash and certain fixed assets. At the time of the sale, Hyatt Commercial had $1.6 million in assets, $1.1 million of which was in cash that stayed with the Company. The remainder of the net assets were sold for $334,000 and we realized a loss of approximately $34,000.

Proposed Merger with Shore Bancshares, Inc.

On March 3, 2021, the Company and Shore entered into an agreement and plan of merger that provides that the Company will merge with and into Shore, with Shore as the surviving corporation (the “Merger”). Following the Merger, the Bank will merge with and into Shore’s wholly-owned bank subsidiary, Shore United Bank, with Shore United Bank as the surviving bank (the “Bank Merger”). At the effective time of the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive (i) 0.6207 shares of Shore common stock and (ii) $1.59 in cash, together with cash in lieu of fractional shares, if any. The merger consideration is 85% stock and 15% cash.

The completion of the Merger and the Bank Merger are subject to customary closing conditions, including approval by the Company’s stockholders, Shore’s stockholders and the receipt of regulatory approvals or waivers from the OCC and the Board of Governors of the Federal Reserve System. Prior to the completion of the Bank Merger, Shore United Bank must obtain the approval of the OCC to convert to a national banking association. The Merger is expected to be completed in the third quarter of 2021.

11

Table of Contents

Recent Accounting Pronouncements

Pronouncements Adopted

In March 2016,December 2019, FASB issued ASU No. 2019-12, Simplifying the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,  Stock Compensation:  Improvements to Employee Share-Based Payment Accountingfor Taxes, the purpose of which is to simplify several aspects ofsimplifies the accounting for share-based payment transactions, includingincomes taxes by removing certain exceptions in the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows.  ASU No. 2016-09 iscurrent codification. The standard was effective for interim and annual reporting periodsfiscal years beginning after December 15, 2016. Early application is permitted.2020. The adoption of the guidanceASU No. 2019-12 did not have a material effect on the Company’s financial position, results of operation, or cash flows. We have elected to account for stock option forfeitures when they occur.

6

Pronouncements Issued
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended by ASU 2015-14, Revenue from Contracts with Customers:  Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers:  Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers:  Narrow-Scope Improvements and Practical Expedients, ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue form Contracts with Customers, that provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides for a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This standard may affect an entity’s financial statements, business processes and internal control over financial reporting. The standard is effective for interim and annual periods beginning after December 15, 2017. The standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The following revenue streams were identified to be within the scope of ASU No. 2014-09:  real estate commissions, real estate management fees, and deposit service charges.  For all affected revenue streams, we are currently planning to use a modified retrospective approach to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the impact of the ASU on uncompleted contracts at the date of adoption.  We are still evaluating the impact of guidance in this update, including method of implementation, and related changes to disclosures that may be required.
 In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall:  Recognition and Measurement of Financial Assets and Financial Liabilities, which requires entities to measure equity investments at fair value and recognize changes on fair value in net income. The guidance also provides a new measurement alternative for equity investments that do not have readily determinable fair values and don’t qualify for the net asset value practical expedient. Entities will have to record changes in instrument–specific credit risk for financial liabilities measured under the fair value option in other comprehensive income, except for certain financial liabilities of consolidated collateralized financing entities. Entities will also have to reassess the realizability of a deferred tax asset related to an available-for-sale (“AFS”) debt security in combination with their other deferred tax assets. For public entities, the guidance in this ASU is effective for the first interim or annual period beginning after December 15, 2017. Early adoption by public entities is permitted as of the beginning of the year of adoption for selected amendments by a cumulative effect adjustment to the balance sheet. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.
In February 2016, FASB issued ASU 2016-02, Leases, which requires a lessee to recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a “right-of-use” asset. The accounting applied by the lessor is relatively unchanged. The ASU also requires expanded qualitative and quantitative disclosures. For public business entities, the guidance is effective for interim and annual reporting periods beginning after December 15, 2018 and mandates a modified retrospective transition for all entities. Early application is permitted. We have determined that the provisions of ASU No. 2016-02 may result in an increase in assets to recognize the present value of the lease obligations, with a corresponding increase in liabilities, however, we do not expect this to have a material impact on our financial position, results of operations, or cash flows.

In JuneJanuary 2020, FASB issued ASU No. 2020-01, Investments – Equity securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarifies the interaction between the three Topics. The standard was effective for fiscal years beginning after December 15, 2020. The adoption of ASU No. 2020-01 did not have a material impact on our financial position, results of operations, or cash flows.

Pronouncements Issued

In September 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, which sets forth a current expected credit loss (“CECL”)the CECL model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU iswas originally effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In July 2019, the FASB issued a proposal to delay the implementation for smaller reporting companies such as us until January 2023. In October, 2019, that proposal was finalized with the issuance of ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief. ASU 2019-05 was issued to address concerns with the adoption of ASU 2016-13. ASU 2019-05 gives entities the ability to irrevocably elect the fair value option in Subtopic 825-10 for certain existing financial assets upon transition to ASU 2016-03. Financial assets that are eligible for this fair value election are those that qualify under Subtopic 825-10 and are within the scope of Subtopic 326-10, Financial Instruments - Credit Losses - Measured at Amortized Costs. An exception to this is HTM debt securities, which do not qualify for this transition election. The effective date for the amendment is the same as the effective date in ASU 2016-03. In November 2019, FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. ASU 2019-10 was issued to defer the effective dates for certain guidance for certain entities. The amendments in this update amend the mandatory effective dates for ASC 326, Financial Instruments - Credit Losses, for entities eligible to be smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2022, including interim reporting periods within that reporting period.

We have contracted with a third party vendor to assist in the transition to CECL. The Bank has purchased the third party vendor’s CECL software and has separately contracted with their advisory services group to help with the installation and transition. As the Bank has been using other software of this specific vendor, they have access to the Bank’s historical data. As the third party vendor has many financial institution clients, they will be able to provide peer group data to the extent the Bank’s data is not sufficient to make the many determinations required under CECL. We are continuing the process of determining appropriate loan pools and economic factors to be used for CECL calculations. Although the implementation of CECL has been delayed, the Bank is continuing with the implementation at a pace to ensure that we will be in position to completely transition to CECL by the required date.

While we are currentlystill in the process of evaluating the impact of the amended guidance on our Consolidated Financial Statements, we currently expectit is quite possible that the Allowance towill increase upon adoption given that the Allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of our loan and lease portfolio at the time of adoption.

In August 2016,November 2019, FASB issued ASU No. 2016-15, Classification2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 2019-11 was issued to address issues raised by stakeholders during the implementation of Certain Cash Receipts and Cash Payments, whichASU 2016-13.

12

Table of Contents

ASU 2019-11 provides guidance regardingtransition relief when adjusting the presentationeffective interest rate for TDRs that exist as of certain cash receipts and cash payments in the statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption date, extends the disclosure relief in ASU 2019-04 to disclose accrued interest receivable balances separately from the amortized cost basis to additional disclosures involving amortized cost basis, and provides clarification regarding application of ASC No. 2016-15the guidance in paragraph 326-20-35-6 for financial assets secured by collateral maintenance provisions that provide a practical expedient to havemeasure the estimate of expected credit losses by comparing the amortized cost basis of a material impact on our financial position, resultsasset and the fair value of operations, or cash flows.

In March 2017, FASB issued ASU No. 2017-08, Receivables - Nonrefundable Feescollateral securing the financial asset as of the reporting date. The effective date and Other costs, which provides guidance that callstransition requirements for the shortening ofamendment are the amortization period for certain callable debt securities held at a premium. The standard issame as the effective for interimdate and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We do not expect the adoption of ASC No. 2017-08 to have a material impact on our financial position, results of operations, or cash flows.
7

transition requirements in ASU 2016-13.

Table of Contents

Note 2 - Securities

The amortized cost and estimated fair values of our AFS securities portfolio were as follows as of September 30, 2017:


  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
  (dollars in thousands) 
U.S. government agency notes $3,135  $-  $6  $3,129 

We did not hold any AFS securities as of December 31, 2016.
follows:

    

March 31, 2021

Amortized

    

Unrealized

    

Unrealized

    

Cost

Gains

Losses

Fair Value

(dollars in thousands)

U.S. government agency notes

$

9,366

$

1

$

192

$

9,175

Corporate obligations

2,000

21

2,021

MBS

123,953

82

2,533

121,502

$

135,319

$

104

$

2,725

$

132,698

    

December 31, 2020

Amortized

    

Unrealized

    

Unrealized

    

Cost

Gains

Losses

Fair Value

(dollars in thousands)

U.S. government agency notes

$

6,640

$

45

$

25

$

6,660

Corporate obligations

2,000

34

0

2,034

MBS

56,385

339

320

56,404

$

65,025

$

418

$

345

$

65,098

The amortized cost and estimated fair values of our held-to-maturity (“HTM”)HTM securities portfolio were as follows:

March 31, 2021

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

Cost

Gains

Losses

Value

(dollars in thousands)

U.S. government agency notes

$

1,987

$

130

$

0

$

2,117

MBS

 

12,529

 

448

 

0

 

12,977

$

14,516

$

578

$

0

$

15,094

December 31, 2020

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

Cost

Gains

Losses

Value

(dollars in thousands)

U.S. government agency notes

$

1,986

$

145

$

0

$

2,131

MBS

 

13,957

 

515

 

0

 

14,472

$

15,943

$

660

$

0

$

16,603


13

  September 30, 2017 
  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
  (dollars in thousands) 
U.S. Treasury securities $7,996  $106  $-  $8,102 
U.S. government agency notes  19,008   137   43   19,102 
Mortgage-backed securities  31,760   97   102   31,755 
  $58,764  $340  $145  $58,959 
  December 31, 2016 
  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
  (dollars in thousands) 
U.S. Treasury securities $12,998  $167  $-  $13,165 
U.S. government agency notes  20,027   133   54   20,106 
Mortgage-backed securities  29,732   52   228   29,556 
  $62,757  $352  $282  $62,827 

Three AFS securities were in an unrealized loss position as

Gross unrealized losses and fair value by length of time that the individual HTMAFS securities have been in an unrealized loss position at the dates indicated are presented in the following tables:


  September 30, 2017 
  Less than 12 months  12 months or more  Total 
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
 
  (dollars in thousands) 
U.S. government agency notes $4,000  $2  $7,005  $41  $11,005  $43 
Mortgage-backed securities  11,687   39   7,501   63   19,188   102 
  $15,687  $41  $14,506  $104  $30,193  $145 
  December 31, 2016 
  Less than 12 months  12 months or more  Total 
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
 
  (dollars in thousands) 
U.S. government agency notes $5,002  $54  $-  $-  $5,002  $54 
Mortgage-backed securities  23,457   228   -   -   23,457   228 
  $28,459  $282  $-  $-  $28,459  $282 

In the

March 31, 2021

Less than 12 months

12 months or more

Total

    

# of

    

Fair

    

Unrealized

    

# of

    

Fair

    

Unrealized

    

# of

    

Fair

    

Unrealized

Securities

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

(dollars in thousands)

U.S. government agency notes

8

$

9,056

$

192

0

$

0

$

0

8

$

9,056

$

192

MBS

61

 

103,718

 

2,523

1

 

511

 

10

62

 

104,229

2,533

69

$

112,774

$

2,715

1

$

511

$

10

70

$

113,285

$

2,725

December 31, 2020

Less than 12 months

12 months or more

Total

    

# of

    

Fair

    

Unrealized

    

# of

    

Fair

    

Unrealized

    

# of

    

Fair

    

Unrealized

Securities

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

(dollars in thousands)

U.S. government agency notes

5

$

4,015

$

25

$

$

5

$

4,015

$

25

MBS

27

 

27,454

 

320

27

27,454

320

32

$

31,469

$

345

$

$

32

$

31,469

$

345

We did not have any HTM securities portfolio, 21 securities were in aan unrealized loss position as of September 30, 2017, with the largest single unrealized loss in any one security amounting to $29,000.

at either March 31, 2021 or December 31, 2020.

All of the securities that are currently in a gross unrealized loss position are so due to declines in fair values resulting from changes in interest rates or increased liquidity spreads since the time they were purchased. We have the intent and ability to hold these debt securities to maturity (including the AFS securities) and do not intend to sell, nor do we believe it will be more likely than not that we will be required to sell, any impaired securities prior to a recovery of amortized cost. We expect these securities will be repaid in full, with no losses realized. As such, management considers any impairment to be temporary.

Contractual maturities of debt securities at September 30, 2017March 31, 2021 are shown below. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


  AFS Securities  HTM Securities 
  
Amortized
Cost
  
Estimated
Fair Value
  
Amortized
Cost
  
Estimated
Fair Value
 
  (dollars in thousands) 
Due in one year or less $-  $-  $10,009  $10,014 
Due after one through five years  3,135   3,129   15,030   15,112 
Due after five years through ten years  -   -   1,965   2,078 
Mortgage-backed securities  -   -   31,760   31,755 
  $3,135  $3,129  $58,764  $58,959 

AFS Securities

HTM Securities

    

Amortized

    

Fair

    

Amortized

    

Fair

Cost

Value

Cost

Value

(dollars in thousands)

Due after one through five years

$

118

$

119

$

1,987

$

2,117

Due after five years through ten years

 

7,874

 

7,815

 

0

 

0

Due after 10 years

3,374

3,262

MBS

 

123,953

 

121,502

 

12,529

 

12,977

$

135,319

$

132,698

$

14,516

$

15,094

During both the three and nine months ended September 30, 2017,March 31, 2021, we sold $4.5 million in securities and recognized $35,000 and $40,000 in gross unrealized gains and losses, on the sale of securities of $4,000 and $2,000, respectively. We did not sell any securities during 2016.

There were nothe three months ended March 31, 2020.

We had $2.9 million and $3.1 million fair value of securities pledged as collateral against certain deposits as of September 30, 2017 orMarch 31, 2021 and December 31, 2016.2020, respectively.


14

Note 3 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized as follows:

  September 30, 2017  December 31, 2016 
  (dollars in thousands) 
Residential mortgage $292,068  $260,603 
Commercial  37,485   46,468 
Commercial real estate  223,167   195,710 
Construction, land acquisition, and development  84,164   90,102 
Home equity/2nds  15,861   19,129 
Consumer  1,118   1,210 
Total loans receivable  653,863   613,222 
Unearned loan fees  (2,899)  (2,944)
Net loans receivable $650,964  $610,278 

    

March 31, 

December 31, 

2021

    

2020

(dollars in thousands)

Residential mortgage

$

186,591

$

209,659

Commercial

 

74,617

 

63,842

Commercial real estate

 

243,521

 

243,435

ADC

 

103,487

 

112,938

Home equity/2nds

 

15,173

 

14,712

Consumer

 

1,565

 

1,485

Total loans receivable, before net unearned fees

 

624,954

 

646,071

Unearned loan fees

 

(3,442)

 

(3,189)

Loans receivable

$

621,512

$

642,882

Certain loans in the amount of $210.4$123.5 million have been pledged under a blanket floating lien to the Federal Home Loan Bank of Atlanta (“FHLB”)FHLB as collateral against advances.


advances at March 31, 2021.

At March 31, 2021, the Bank was servicing $215.4 million in loans for FNMA and $42.6 million in loans for FHLMC. At December 31, 2020, the Bank was servicing $159.8 million in loans for FNMA and $36.9 million in loans for FHLMC. These loans are not included in the table above. Also not included in the table above were MSRs of $2.9 million and $1.5 million as of March 31, 2021 and December 31, 2020, respectively.

Credit Quality


An Allowance is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible based on evaluations of the collectability of loans and prior loan loss experience. Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. The methodology takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Determining the amount of the Allowance requires the use of estimates and assumptions. Actual results could differ significantly from those estimates. While management uses all available information to estimate losses on loans, future additions to the Allowance may be necessary based on changes in economic conditions.conditions and our actual loss experience. In addition, various regulatory agencies periodically review the Allowance as an integral part of their examination process. Such agencies may require us to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of September 30, 2017March 31, 2021 and December 31, 2016.


2020.

For purposes of determining the Allowance, we have segmented our loan portfolio by product type. Our portfolio loan segments are residential mortgage, commercial, commercial real estate, construction, land acquisition, and development (“ADC”),ADC, Home equity/2nds, and consumer. We have looked at all segments and have determined that no additional subcategorization is warranted based upon our credit review methodology and ourconsideration of risk. Our portfolio classes are the same as our portfolio segments.

Inherent Credit Risks


The inherent credit risks within the loan portfolio vary depending upon the loan class as follows:


Residential mortgage- secured by one1 to four4 family dwelling units. The loans generally have limited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, and are generally at a loan-to-value ratio (“LTV”)LTV of 80% or less.


15

Commercial- underwritten in accordance with our policies and include evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment. Additionally, lines of credit are subject to the underwriting standards and processes similar to commercial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and, secondarily, as loans secured by real-estate and/or other assets. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Line of credit loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates line of credit loans based on collateral and risk-rating criteria.


SBA PPP - We are participating in the PPP and began origination of such loans that are expected to be 100% guaranteed by the SBA. These loans have a 2 year (origination prior to June 5, 2020) or 5 year (originated after June 5, 2020) term at a 1.0% rate of interest with forgiveness by the SBA at the end of the term. This loan program was designed to assist our commercial customers in remaining operational during this time of uncertainty surrounding the COVID-19 pandemic. As of March 31, 2021, we held $39.0 million in PPP loans in our loan portfolio, all of which have interest forbearance.

Commercial real estate- subject to the underwriting standards and processes similar to commercial, and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repaymentestate and secondarily as cash flow dependent. As repayment of these loans is generally dependent upon the successful operation of the property securing the loan, orwe look closely at the principal business conducted oncash flows generated by the property securing the loan.loan, although the primary underwriting criteria for these loan types is the sufficient value of the underlying collateral. Commercial real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate loans based on collateral and risk-rating criteria. The Bank also utilizes third-party experts to provide environmental and market valuations. The nature of commercial real estate loans makes them more difficult to monitor and evaluate.


ADC- underwritten in accordance with our underwriting policies which include a financial analysis of the developers, property owners, construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project rather than the ability of the borrower or guarantor to repay principal and interest. Additionally, land is underwritten according to our policies which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.


The sources of repayment of these loans is typically permanent financing expected to be obtained upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.


If the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of the loan as well as related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time.


Home equity/2nds - subject to the underwriting standards and processes similar to residential mortgages and secured by one1 to four4 family dwelling units. Home equity/2nds loans have greater risk than residential mortgages as a result of the Bank generally being in a second lien position.


Consumer- consist of loans to individuals through the Bank’s retail network and typically unsecured or secured by personal property. Consumer loans have a greater credit risk than residential loans because of the lower value of the underlying collateral, if any.

COVID-19 - The COVID-19 pandemic has created additional risk for all loan segments due to the economic downturn, both nationally and locally. Many businesses were temporarily shut down and many people were unemployed during the


16

Risk Ratings

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful,

national and loss.  Loans classified as special mention have potential weaknesseslocal “stay at home” orders that deserve management’s close attention. If uncorrected,were in place in many areas during the potential weaknesses may result in deteriorationbeginning of the repayment prospects.  Loans classified substandardsecond quarter of 2020. Although most “stay at home” orders have a well-defined weakness or weaknesses that jeopardize the liquidationsince been lifted, many businesses are operating at significantly reduced capacities and many people remain unemployed. During this time of the debt.  They include loans that are inadequately protected by the current sound net wortheconomic uncertainty, borrowers have faced and paying capacitycould continue to face extended periods of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditionsunemployment and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the Allowance.  Loans not classified are rated pass.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed in nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed in nonaccrual status or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, generally after nine months of consecutive current payments and completion of an updated analysis of the borrower’s ability to service the loan.

Loans that experience insignificant payment delays and payment shortfalls may not be placed in nonaccrual status or classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding theable to meet their loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Allowance Methodology

The Allowance consists of specific and general components.  The specific component relates to loans that are classified as impaired.  The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as loans that are not classified.

A loan is considered impaired if it meets any of the following three criteria:

·Loans that are 90 days or more in arrears (nonaccrual loans);
·Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement; or
·Loans that are modified and qualify as troubled debt restructured loans (“TDR” or “TDRs”).

If a loan is considered to be impaired, it is then determined to be either cash flow or collateral dependent for purposes of Allowance determination.

With respect to all loan segments, we do not charge off a loan, or a portion of a loan, until one of the following conditions have been met:

·The loan has been foreclosed. At the time of foreclosure, a charge off is recorded for the difference between the recorded amount of the loan and the fair value of the underlying collateral.

·An agreement to accept less than the recorded balance of the loan has been made with the borrower. Once an agreement has been finalized, a charge-off is recorded for the difference between the recorded amount of the loan and the agreed upon proceeds amount.

·The loan is considered to be a collateral dependent impaired loan when its collateral valuation is less than the recorded balance. The loan is written down for accounting purposes by the amount of the difference between the recorded balance and collateral value.

Specific Allowance Component

Impaired loans secured byobligations. Additionally, real estate - when a secured real estate loan becomes impaired, a decision is made ascollateral values could significantly decline and full repayment of loans could be in doubt. We have adjusted some of our economic qualitative factors that affect our Allowance calculation to whether an updated certified appraisalreflect our best estimate of these risks. Management will continue to evaluate the real estate is necessary.  This decision is based on various considerations, including the age of the most recent appraisal, the LTV ratio based on the original appraisal, and the condition of the property. Appraised values are discounted, if appropriate, to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include estimated costs to sell the property.

Impaired loans secured by collateral other than real estate - for loans secured by nonreal estate collateral, such as accounts receivable, inventory, and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging, or equipment appraisals or invoices.  Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
For such loans that are classified as impaired, an Allowance is established when the current fair value of the underlying collateral less its estimated disposal costs is lower than the carrying value of the loan.  For loans that are not solely collateral dependent, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of the loan.

General Allowance Component

The general componentadequacy of the Allowance as more economic data becomes available and as changes within our portfolio are known. To date, we have not experienced a significant increase in delinquencies or NPAs.  However, the ongoing pandemic could still result in a deterioration in credit quality. The effects of the pandemic may require us to fund additional increases in the Allowance in future periods.

Section 4013 of the CARES Act provides that a qualified loan modification is based on historical loss experience adjusted for qualitative factors. Loansexempt by law from classification as a TDR pursuant to U.S. GAAP in certain circumstances. In addition, OCC Bulletin 2020-35 provides more limited circumstances in which a loan modification is not subject to classification as a TDR.

CARES Act Section 4013 and OCC Bulletin 2020-35 forbearance agreements are pooled by portfolio classavailable to both qualified commercial and an historical loss percentage, based upon a four-year net charge-off history, is applied to each class.  The result of that calculation for eachconsumer loan class is then appliedborrowers. Due to the currentwidespread impact of COVID-19, we have had loan portfolio balancesborrowers seek loan forbearance or loan modification agreements under the CARES Act. We held $12.4 million in loans modified under the CARES Act as of March 31, 2021, most of which have an interest deferral component. Such deferral periods range from one month to determine the required general component of the Allowance per loan class.six months. We then apply additional loss multipliershave recorded $117,000 in interest that has not yet been collected on $10.5 million in loans due to the different classes of loans to reflect various qualitative factors. These qualitative factors include, but are not limited to:


·Levels and trends in delinquencies and nonaccruals;
·Inherent risk in the loan portfolio;
·Trends in volume and terms of the loan;
·Effects of any change in lending policies and procedures;
·Experience, ability, and depth of management;
·National and local economic trends and conditions;
·Effect of any changes in concentration of credit; and
·Industry conditions.
forbearance agreements.

The following tables present, by portfolio segment, the changes in the Allowance and the recorded investment in loans:

Three Months Ended March 31, 2021

    

Residential

    

    

Commercial

    

    

Home Equity/

    

    

    

 

Mortgage

Commercial

Real Estate

ADC

2nds

Consumer

Unallocated

Total

(dollars in thousands)

Beginning Balance

$

2,259

$

1,670

$

1,516

$

2,947

$

168

$

0

$

110

$

8,670

Charge-offs

 

 

0

 

 

(34)

 

0

 

0

 

0

 

(34)

Recoveries

 

65

 

5

 

174

 

0

 

4

 

1

 

0

 

249

Net recoveries (charge-offs)

 

65

 

5

 

174

 

(34)

 

4

 

1

 

0

 

215

(Reversal of) provision for loan losses

 

(525)

105

(237)

(208)

47

 

(1)

 

69

 

(750)

Ending Balance

$

1,799

$

1,780

$

1,453

$

2,705

$

219

$

0

$

179

$

8,135

Ending balance - individually evaluated for impairment

$

226

$

0

$

$

29

$

0

$

0

$

0

$

255

Ending balance - collectively evaluated for impairment

 

1,573

1,780

1,453

2,676

219

0

179

 

7,880

$

1,799

$

1,780

$

1,453

$

2,705

$

219

$

0

$

179

$

8,135

Ending loan balance -individually evaluated for impairment

$

6,791

$

0

$

630

$

298

$

473

$

62

$

8,254

Ending loan balance -collectively evaluated for impairment

 

179,800

 

74,617

 

242,891

 

103,189

 

14,700

 

1,503

 

616,700

$

186,591

$

74,617

$

243,521

$

103,487

$

15,173

$

1,565

$

624,954

17

  Three Months Ended September 30, 2017 
  
Residential
Mortgage
  Commercial  
Commercial
Real Estate
  ADC  
Home Equity/
2nds
  Consumer  Total 
  (dollars in thousands) 
Beginning Balance $3,403  $389  $2,571  $984  $367  $4  $7,718 
Charge-offs  -   -   -   -   -   -   - 
Recoveries  156   -   40   -   22   -   218 
Net recoveries  156   -   40   -   22   -   218 
(Reversal of) provision for loan losses  (137)  53   (44)  158   (28)  (2)  - 
Ending Balance $3,422  $442  $2,567  $1,142  $361  $2  $7,936 

  Nine Months Ended September 30, 2017 
  (dollars in thousands) 
Beginning Balance $3,833  $478  $2,535  $1,390  $728  $5  $8,969 
Charge-offs  (707)  -   -   -   (98)  -   (805)
Recoveries  295   -   100   -   27   -   422 
Net (charge-offs) recoveries  (412)  -   100   -   (71)  -   (383)
Provision for (reversal of) loan losses  1   (36)  (68)  (248)  (296)  (3)  (650)
Ending Balance $3,422  $442  $2,567  $1,142  $361  $2  $7,936 
                             
Ending balance - individually evaluated for impairment $1,544  $-  $186  $50  $-  $2  $1,782 
Ending balance - collectively evaluated for impairment  1,878   442   2,381   1,092   361   -   6,154 
  $3,422  $442  $2,567  $1,142  $361  $2  $7,936 
                             
Ending loan balance - individually evaluated for impairment $20,379  $-  $3,419  $1,003  $-  $87  $24,888 
Ending loan balance - collectively evaluated for impairment  268,790   37,485   219,748   83,161   15,861   1,031   626,076 
  $289,169  $37,485  $223,167  $84,164  $15,861  $1,118  $650,964 

  December 31, 2016 
  
Residential
Mortgage
  Commercial  
Commercial
Real Estate
  ADC  
Home Equity/
2nds
  Consumer  Total 
  (dollars in thousands) 
Ending Allowance balance - individually evaluated for impairment $1,703  $15  $196  $53  $402  $4  $2,373 
Ending Allowance balance - collectively evaluated for impairment  2,130   463   2,339   1,337   326   1   6,596 
  $3,833  $478  $2,535  $1,390  $728  $5  $8,969 
                             
Ending loan balance - individually evaluated for impairment $20,403  $148  $5,656  $858  $3,137  $96  $30,298 
Ending loan balance - collectively evaluated for impairment  237,256   46,320   190,054   89,244   15,992   1,114   579,980 
  $257,659  $46,468  $195,710  $90,102  $19,129  $1,210  $610,278 
  Three Months Ended September 30, 2016 
  
Residential
Mortgage
  Commercial  
Commercial
Real Estate
  ADC  
Home Equity/
2nds
  Consumer  Total 
  (dollars in thousands) 
Beginning Balance $3,892  $752  $2,577  $983  $593  $7  $8,804 
Charge-offs  -   -   -   (72)  -   -   (72)
Recoveries  137   10   4   -   2   50   203 
Net recoveries (charge-offs)  137   10   4   (72)  2   50   131 
(Reversal of) provision for loan losses  (161)  (63)  (189)  289   226   (52)  50 
Ending Balance $3,868  $699  $2,392  $1,200  $821  $5  $8,985 

  Nine Months Ended September 30, 2016 
  (dollars in thousands) 
Beginning Balance $4,188  $291  $2,792  $956  $528  $3  $8,758 
Charge-offs  (151)  (17)  (178)  (72)  (28)  -   (446)
Recoveries  322   43   4   100   4   50   523 
Net recoveries (charge-offs)  171   26   (174)  28   (24)  50   77 
(Reversal of) provision for loan losses  (491)  382   (226)  216   317   (48)  150 
Ending Balance $3,868  $699  $2,392  $1,200  $821  $5  $8,985 
                             
Ending balance - individually evaluated for impairment $1,583  $15  $200  $55  $402  $4  $2,259 
Ending balance - collectively evaluated for impairment  2,285   684   2,192   1,145   419   1   6,726 
  $3,868  $699  $2,392  $1,200  $821  $5  $8,985 
                             
Ending loan balance -  individually evaluated for impairment $22,521  $495  $5,696  $1,446  $3,519  $100  $33,777 
Ending loan balance - collectively evaluated for impairment  246,375   41,864   193,219   79,894   16,220   1,109   578,681 
  $268,896  $42,359  $198,915  $81,340  $19,739  $1,209  $612,458 

December 31, 2020

    

Residential

    

    

Commercial

    

    

Home Equity/

    

    

    

 

Mortgage

Commercial

Real Estate

ADC

2nds

Consumer

Unallocated

Total

(dollars in thousands)

Ending balance - individually evaluated for impairment

$

542

$

$

$

29

$

$

$

$

571

Ending balance - collectively evaluated for impairment

 

1,717

 

1,670

 

1,516

 

2,918

 

168

 

 

110

 

8,099

$

2,259

$

1,670

$

1,516

$

2,947

$

168

$

$

110

$

8,670

Ending loan balance - individually evaluated for impairment

$

10,131

$

$

547

$

308

$

491

$

63

$

11,540

Ending loan balance - collectively evaluated for impairment

 

199,528

 

63,842

 

242,888

 

112,630

 

14,221

 

1,422

 

634,531

$

209,659

$

63,842

$

243,435

$

112,938

$

14,712

$

1,485

$

646,071

Three Months Ended March 31, 2020

    

Residential

    

    

Commercial

    

    

Home Equity/

    

    

    

Mortgage

Commercial

Real Estate

ADC

2nds

Consumer

Unallocated

Total

(dollars in thousands)

Beginning Balance

$

2,264

$

1,421

$

984

$

2,286

$

134

$

$

49

$

7,138

Charge-offs

 

 

 

 

 

 

(15)

 

 

(15)

Recoveries

 

3

 

5

 

32

 

 

2

 

3

 

 

45

Net recoveries (charge-offs)

 

3

 

5

 

32

 

 

2

 

(12)

 

 

30

Provision for loan losses

 

217

139

24

329

15

 

12

 

14

 

750

Ending Balance

$

2,484

$

1,565

$

1,040

$

2,615

$

151

$

$

63

$

7,918

Ending balance - individually evaluated for impairment

$

742

$

$

62

$

29

$

$

$

$

833

Ending balance - collectively evaluated for impairment

 

1,742

 

1,565

 

978

 

2,586

 

151

 

 

63

 

7,085

$

2,484

$

1,565

$

1,040

$

2,615

$

151

$

$

63

$

7,918

Ending loan balance - individually evaluated for impairment

$

14,385

$

$

1,208

$

428

$

548

$

68

$

16,637

Ending loan balance - collectively evaluated for impairment

 

246,596

 

43,490

 

219,446

 

99,433

 

11,651

 

1,406

 

622,022

$

260,981

$

43,490

$

220,654

$

99,861

$

12,199

$

1,474

$

638,659

The following tables present the credit quality breakdown of our loan portfolio by class:

March 31, 2021

    

    

Special

    

    

 

Pass

Mention

Substandard

Total

 

(dollars in thousands)

Residential mortgage

$

185,245

$

0

$

1,346

 

$

186,591

Commercial

 

73,417

 

1,200

 

0

 

 

74,617

Commercial real estate

 

242,639

 

85

 

797

 

 

243,521

ADC

 

103,044

 

0

 

443

 

 

103,487

Home equity/2nds

 

15,076

 

0

 

97

 

 

15,173

Consumer

 

1,565

 

0

 

0

 

 

1,565

$

620,986

$

1,285

$

2,683

 

$

624,954

18

  September 30, 2017 
  Pass  
Special
Mention
  Substandard  Total 
  (dollars in thousands) 
Residential mortgage $281,954  $1,397  $5,818  $289,169 
Commercial  37,299   50   136   37,485 
Commercial real estate  216,373   4,668   2,126   223,167 
ADC  82,958   -   1,206   84,164 
Home equity/2nds  14,531   471   859   15,861 
Consumer  1,118   -   -   1,118 
  $634,233  $6,586  $10,145  $650,964 
  December 31, 2016 
  Pass  
Special
Mention
  Substandard  Total 
  (dollars in thousands) 
Residential mortgage $248,819  $4,316  $4,524  $257,659 
Commercial  46,011   204   253   46,468 
Commercial real estate  184,820   7,420   3,470   195,710 
ADC  89,324   -   778   90,102 
Home equity/2nds  16,056   472   2,601   19,129 
Consumer  1,210   -   -   1,210 
  $586,240  $12,412  $11,626  $610,278 

December 31, 2020

    

    

Special

    

    

 

Pass

Mention

Substandard

Total

(dollars in thousands)

Residential mortgage

$

205,225

$

0

$

4,434

$

209,659

Commercial

 

62,642

 

1,200

 

0

 

63,842

Commercial real estate

 

242,435

 

86

 

914

 

243,435

ADC

 

112,479

 

0

 

459

 

112,938

Home equity/2nds

 

14,606

 

0

 

106

 

14,712

Consumer

 

1,485

 

0

 

0

 

1,485

$

638,872

$

1,286

$

5,913

$

646,071

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans:

  September 30, 2017 
   
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
Past Due
  Current  Total  
Non-
Accrual
 
   (dollars in thousands) 
Residential mortgage $1,173  $1,216  $2,364  $4,753  $284,416  $289,169  $4,531 
Commercial  -   -   -   -   37,485   37,485   84 
Commercial real estate  -   478   -   478   222,689   223,167   160 
ADC  -   -   239   239   83,925   84,164   318 
Home equity/2nds  -   -   458   458   15,403   15,861   1,284 
Consumer  -   -   -   -   1,118   1,118   - 
   $1,173  $1,694  $3,061  $5,928  $645,036  $650,964  $6,377 
  December 31, 2016 
  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
Past Due
  Current  Total  
Non-
Accrual
 
  (dollars in thousands) 
Residential mortgage $1,472  $2,074  $964  $4,510  $253,149  $257,659  $3,580 
Commercial  -   -   -   -   46,468   46,468   151 
Commercial real estate  -   171   515   686   195,024   195,710   2,938 
ADC  106   -   6   112   89,990   90,102   269 
Home equity/2nds  34   -   2,174   2,208   16,921   19,129   2,914 
Consumer  4   -   -   4   1,206   1,210   - 
  $1,616  $2,245  $3,659  $7,520  $602,758  $610,278  $9,852 

loans, excluding any CARES Act forbearance loans that may be contractually past due, but not considered such due to the legal forbearance:

March 31, 2021

Past Due

 

30-59

60-89

90+

Non-

    

Days

    

Days

    

Days

    

Total

    

Current

    

Total

    

Accrual

(dollars in thousands)

Residential mortgage

$

0

$

0

$

331

$

331

$

186,260

$

186,591

$

910

Commercial

 

0

 

0

 

0

 

0

 

74,617

 

74,617

 

0

Commercial real estate

 

0

 

0

 

126

 

126

 

243,395

 

243,521

 

213

ADC

 

0

 

0

 

0

 

0

 

103,487

 

103,487

 

54

Home equity/2nds

 

59

 

0

 

97

 

156

 

15,017

 

15,173

 

106

Consumer

 

0

 

0

 

0

 

0

 

1,565

 

1,565

 

0

$

59

$

0

$

554

$

613

$

624,341

$

624,954

$

1,283

December 31, 2020

Past Due

30-59

60-89

90+

Non-

    

Days

    

Days

    

Days

    

Total

    

Current

    

Total

    

Accrual

 

(dollars in thousands)

Residential mortgage

$

674

$

213

$

3,393

$

4,280

$

205,379

$

209,659

$

4,080

Commercial

 

0

 

0

 

0

 

0

 

63,842

 

63,842

 

0

Commercial real estate

 

5

 

87

 

126

 

218

 

243,217

 

243,435

 

126

ADC

 

0

 

0

 

0

 

0

 

112,938

 

112,938

 

60

Home equity/2nds

 

60

 

0

 

106

 

166

 

14,546

 

14,712

 

114

Consumer

 

0

 

0

 

0

 

0

 

1,485

 

1,485

 

0

$

739

$

300

$

3,625

$

4,664

$

641,407

$

646,071

$

4,380

We dodid not have any loans greater than 90 days past due and still accruing loans as of September 30, 2017March 31, 2021 or December 31, 2016.


2020.

The interest which would have been recorded on the above nonaccrual loans if those loans had been performing in accordance with their contractual terms was approximately $1.2 million$151,000 and $338,000$467,000 for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. The actual interest income recordedearned on those loans was approximately $403,000amounted to $31,000 and $130,000$60,000 for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively.

19

15

The following tables summarize impaired loans:

March 31, 2021

December 31, 2020

    

Unpaid

    

    

    

Unpaid

    

    

 

Principal

Recorded

Related

Principal

Recorded

Related

Balance

Investment

Allowance

Balance

Investment

Allowance

With no related Allowance:

(dollars in thousands)

Residential mortgage

$

6,211

$

5,793

$

$

7,432

$

7,152

$

Commercial

��

0

 

0

 

 

0

 

0

 

Commercial real estate

 

631

 

630

 

 

548

 

547

 

ADC

 

205

 

197

 

 

212

 

206

 

Home equity/2nds

 

896

 

473

 

 

910

 

491

 

Consumer

 

62

 

62

 

 

63

 

63

 

With a related Allowance:

 

 

 

 

 

 

Residential mortgage

 

998

 

998

 

226

 

3,104

 

2,979

 

542

Commercial

 

0

 

0

 

0

 

0

 

0

 

0

Commercial real estate

 

0

 

0

 

 

0

 

0

 

0

ADC

 

101

 

101

 

29

 

102

 

102

 

29

Home equity/2nds

 

0

 

0

 

0

 

0

 

0

 

0

Consumer

 

0

 

0

 

0

 

0

 

0

 

0

Totals:

 

 

 

 

 

 

Residential mortgage

 

7,209

 

6,791

 

226

 

10,536

 

10,131

 

542

Commercial

 

0

 

0

 

0

 

0

 

0

 

0

Commercial real estate

 

631

 

630

 

 

548

 

547

 

0

ADC

 

306

 

298

 

29

 

314

 

308

 

29

Home equity/2nds

 

896

 

473

 

0

 

910

 

491

 

0

Consumer

 

62

 

62

 

0

 

63

 

63

 

0

Three Months Ended March 31, 

2021

2020

    

Average

    

Interest

    

Average

    

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

With no related Allowance:

(dollars in thousands)

Residential mortgage

$

5,848

$

83

$

9,648

$

89

Commercial

 

 

 

 

Commercial real estate

 

632

 

9

 

664

 

15

ADC

 

200

 

3

 

235

 

5

Home equity/2nds

 

292

 

7

 

553

 

6

Consumer

 

63

 

1

 

82

 

1

With a related Allowance:

 

 

 

 

Residential mortgage

 

1,000

 

16

 

4,571

 

57

Commercial

 

 

 

 

Commercial real estate

 

 

 

549

 

8

ADC

 

101

 

1

 

104

 

1

Home equity/2nds

 

 

 

 

Consumer

 

 

 

2

 

1

Totals:

 

 

 

 

Residential mortgage

 

6,848

 

99

 

14,219

 

146

Commercial

 

 

 

 

Commercial real estate

 

632

 

9

 

1,213

 

23

ADC

 

301

 

4

 

339

 

6

Home equity/2nds

 

292

 

7

 

553

 

6

Consumer

 

63

 

1

 

84

 

2


20

  September 30, 2017  December 31, 2016 
  
Unpaid
Principal
Balance
  
Recorded
Investment
  
Related
Allowance
  
Unpaid
Principal
Balance
  
Recorded
Investment
  
Related
Allowance
 
With no related Allowance: (dollars in thousands) 
Residential mortgage $12,856  $11,306  $-  $9,854  $9,338  $- 
Commercial  -   -   -   -   -   - 
Commercial real estate  1,576   1,527   -   3,900   3,698   - 
ADC  636   636   -   441   441   - 
Home equity/2nds  -   -   -   2,139   1,529   - 
Consumer  -   -   -   -   -   - 
With a related Allowance:                        
Residential mortgage  9,306   9,073   1,544   11,176   11,065   1,703 
Commercial  -   -   -   148   148   15 
Commercial real estate  1,892   1,892   186   1,958   1,958   196 
ADC  402   367   50   417   417   53 
Home equity/2nds  -   -   -   1,608   1,608   402 
Consumer  87   87   2   96   96   4 
Totals:                        
Residential mortgage  22,162   20,379   1,544   21,030   20,403   1,703 
Commercial  -   -   -   148   148   15 
Commercial real estate  3,468   3,419   186   5,858   5,656   196 
ADC  1,038   1,003   50   858   858   53 
Home equity/2nds  -   -   -   3,747   3,137   402 
Consumer  87   87   2   96   96   4 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related Allowance: (dollars in thousands) 
Residential mortgage $10,423  $138  $12,734  $132  $9,696  $353  $13,774  $417 
Commercial  -   -   274   2   -   -   150   3 
Commercial real estate  1,531   22   3,730   57   2,652   69   4,655   134 
ADC  637   9   1,031   9   487   21   1,431   36 
Home equity/2nds  918   15   1,911   18   679   40   1,991   59 
Consumer  -   -   -   -   -   -   23   - 
With a related Allowance:                                
Residential mortgage  8,910   116   9,831   106   9,231   286   10,684   356 
Commercial  -   -   149   2   37   -   182   7 
Commercial real estate  1,896   23   1,977   25   1,919   73   2,040   77 
ADC  369   6   426   6   385   16   513   20 
Home equity/2nds  180   -   1,078   6   715   -   370   7 
Consumer  88   1   102   1   91   2   73   2 
Totals:                                
Residential mortgage  19,333   254   22,565   238   18,927   639   24,458   773 
Commercial  -   -   423   4   37   -   332   10 
Commercial real estate  3,427   45   5,707   82   4,571   142   6,695   211 
ADC  1,006   15   1,457   15   872   37   1,944   56 
Home equity/2nds  1,098   15   2,989   24   1,394   40   2,361   66 
Consumer  88   1   102   1   91   2   96   2 

Residential

There were 0 consumer mortgage properties included in real estate acquired through foreclosure at March 31, 2021 or December 31, 2020. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction totaled $3.1$505,000 as of March 31, 2021 and $3.6 million as of September 30, 2017. Residential mortgage loans in real estate acquired through foreclosure amounted to $287,000 and $393,000 at September 30, 2017 and December 31, 2016, respectively.


2020.

TDRs


In situations where, for economic or legal reasons related

See discussion above in this Note regarding the CARES Act relating to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR.  Such concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  At the time that a loan is modified, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole remaining source of repayment for the loan is the liquidation of the collateral.  In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows.  Any impairment amount is then set up as a specific reserve in the Allowance.

The following table presents loans that were modifiedmodifications during the nine months ended September 30:
  2017  2016 
  
Number of
Modifications
  
Recorded
Investment
Prior to
Modification
  
Recorded
Investment
After
Modification
  
Number of
Modifications
  
Recorded
Investment
Prior to
Modification
  
Recorded
Investment
After
Modification
 
  (dollars in thousands) 
Residential Mortgage           3  $624  $624 
   -  $-  $-   3  $624  $624 

We did not modify any loans during the three months ended September 30, 2017 or 2016.

Interest on ourCOVID-19 pandemic.

Our portfolio of TDRs was accounted for under the following methods:

  September 30, 2017 
  
Number of
Modifications
  
Accrual
Status
  
Number of
Modifications
  
Nonaccrual
Status
  
Total
Number of
Modifications
  
Total
Balance of
Modifications
 
  (dollars in thousands) 
Residential mortgage  43  $13,086   4  $2,285   47  $15,371 
Commercial real estate  3   1,875   1   84   4   1,959 
ADC  1   138   1   6   2   144 
Home equity/2nds  1   230   -   -   1   230 
Consumer  4   87   -   -   4   87 
   52  $15,416   6  $2,375   58  $17,791 
  December 31, 2016 
  
Number of
Modifications
  
Accrual
Status
  
Number of
Modifications
  
Nonaccrual
Status
  
Total
Number of
Modifications
  
Total
Balance of
Modifications
 
  (dollars in thousands) 
Residential mortgage  48  $15,886   4  $2,137   52  $18,023 
Commercial real estate  3   1,914   2   249   5   2,163 
ADC  2   170   1   6   3   176 
Consumer  5   96   -   -   5   96 
   58  $18,066   7  $2,392   65  $20,458 

During

March 31, 2021

    

    

    

    

    

Total

    

Total

Number of

Accrual

Number of

Nonaccrual

Number of

Balance of

Modifications

Status

Modifications

Status

Modifications

Modifications

(dollars in thousands)

Residential mortgage

 

21

$

5,618

 

2

$

159

 

23

$

5,777

Commercial real estate

 

1

 

417

 

0

 

0

 

1

 

417

ADC

 

1

 

127

 

0

 

0

 

1

 

127

Home equity/2nds

1

187

0

 

0

1

 

187

Consumer

 

1

 

62

 

0

 

0

 

1

 

62

 

25

$

6,411

 

2

$

159

 

27

$

6,570

December 31, 2020

    

    

    

    

    

Total

    

Total

Number of

Accrual

Number of

Nonaccrual

Number of

Balance of

Modifications

Status

Modifications

Status

Modifications

Modifications

(dollars in thousands)

Residential mortgage

 

22

$

5,787

 

2

$

163

 

24

$

5,950

Commercial real estate

 

1

 

421

 

0

 

0

 

1

 

421

ADC

 

1

 

128

 

0

 

0

 

1

 

128

Home equity/2nds

1

190

0

 

0

1

 

190

Consumer

 

1

 

63

 

0

 

0

 

1

 

63

 

26

$

6,589

 

2

$

163

 

28

$

6,752

We did not modify any loans that would qualify as TDRs during the three and nine months ended September 30, 2017 and 2016, thereMarch 31, 2021 or 2020.

There were no0 TDRs that subsequently defaulted during the three months ended March 31, 2021 or 2020 which were modified during the previous 12 month period ended September 30, 2017 and 2016.


Off-Balance Sheet Instruments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The contract amounts of these instruments express the extent of involvement we have in each class of financial instruments.

Our exposure to credit loss from nonperformance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments.  We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless otherwise noted, we require collateral or other security to support financial instruments with off-balancesheet credit risk.
The following table shows the contract amounts for our off-balance sheet instruments:
  
September 30,
2017
  
December 31,
2016
 
  (dollars in thousands) 
Standby letters of credit $3,854  $4,022 
Home equity lines of credit  12,425   7,736 
Unadvanced construction commitments  72,045   15,728 
Mortgage loan commitments  -   574 
Lines of credit  13,092   34,125 
Loans sold and serviced with limited repurchase provisions  19,979   70,773 

Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to various municipalities. These guarantees are issued primarily to support performance arrangements and are limited to real estate transactions.  The majority of these standby letters of credit expire within twelve months.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  The Bank requires collateral supporting these letters of credit as deemed necessary.  Management believes, except for certain standby letters of credit, that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of September 30, 2017 and December 31, 2016 for guarantees under standby letters of credit issued was $79,000 and $94,000, respectively.

Home equity lines of credit are loan commitments to individuals as long as there is no violation of any condition established in the contract. Commitments under home equity lines expire ten years after the date the loan closes and are secured by real estate. We evaluate each customer’s credit worthiness on a case-by-case basis.

Unadvanced construction commitments are loan commitments made to borrowers for both residential and commercial projects that are either in process or are expected to begin construction shortly.

Mortgage loan commitments not reflected in the accompanying statements of financial condition at December 31, 2016 included two loans at a fixed interest rate of 4.25% totaling $574,000. There were no such commitments at September 30, 2017.

Lines of credit are loan commitments to individuals and companies as long as there is no violation of any condition established in the contract. Lines of credit have a fixed expiration date. The Bank evaluates each customer’s credit worthiness on a case-by-case basis.

The Bank has entered into several agreements to sell mortgage loans to third parties. These agreements contain limited provisions that require the Bank to repurchase a loan if the loan becomes delinquent within a period ranging generally from 120 to 180 days after the sale date depending on the investor’s agreement. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers.  We established a reserve for potential repurchases for these loans, which amounted to $59,000 at September 30, 2017 and $48,000 at December 31, 2016.  We did not repurchase any loans during the nine months ended September 30, 2017 or 2016.

period.

Note 4 - Regulatory Matters


The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.


In July 2015,2013, federal bank regulatory agencies issued final resultsrules to revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (“Basel III”).III. On January 1, 2015, the Basel III

21

rules became effective and includeincluded transition provisions which implement certain portions of the rules through January 1, 2019. Under the final rules, the effects of certain accumulated other comprehensive income items are not excluded, however, banking organizations like us that are not considered “advanced approaches” banking organizations may make a one-time permanent election to continue to exclude these items.  With the submission of the Call Report for the first quarter of 2015,items, which we made this election in order to avoid significant variations in the level of capital that can be caused by interest rate fluctuations on the fair value of the Bank’s AFS securities portfolio.

have done.

The Basel III rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital.  The new capital conservation buffer requirements began to phase in effective January 2016 at 0.625% of risk-weighted assets and increase by that amount each year until fully implemented in January 2019 (1.25% at September 30, 2017). An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.


As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have developed a “Community Bank Leverage Ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies have set the Community Bank Leverage Ratio at 9%. A financial institution can elect to be subject to this new definition, which we did on January 1, 2020. The CARES Act temporarily lowered this ratio to 8% beginning in the second quarter of 2020. The ratio then rose to 8.5% for 2021 and re-establishes at 9% on January 1, 2022.

As of the date of theour last regulatory exam, the Bank was considered “well capitalized” and as of September 30, 2017,March 31, 2021, the Bank continued to meet the requirements to be considered “well capitalized” based on applicable U.S. regulatory capital ratio requirements.


The Bank’s regulatory capital amounts and ratios were as follows:

  Actual     
Minimum
Requirements
for Capital Adequacy
Purposes
  
Minimum
Requirements
with Capital
Conservation Buffer
  
To be Well
Capitalized Under
Prompt Corrective
Action Provision
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
September 30, 2017 (dollars in thousands) 
Common Equity Tier 1 Capital (to risk-weighted assets) $104,318   16.8% $27,907   4.5% $35,658   5.8% $40,309   6.5%
                                 
Total capital (to risk-weighted assets)  112,086   18.1%  49,612   8.0%  57,363   9.3%  62,015   10.0%
                                 
Tier 1 capital (to risk-weighted assets)  104,318   16.8%  37,209   6.0%  44,961   7.3%  49,612   8.0%
                                 
Tier 1 capital (to average quarterly assets)  104,318   13.3%  31,313   4.0%  41,099   5.3%  39,142   5.0%
                                 
December 31, 2016   
Common Equity Tier 1 Capital (to risk-weighted assets) $98,970   16.5% $26,983   4.5% $30,730   5.1% $38,975   6.5%
                                 
Total capital (to risk-weighted assets)  106,517   17.8%  47,969   8.0%  51,717   8.6%  59,962   10.0%
                                 
Tier 1 capital (to risk-weighted assets)  98,970   16.5%  35,977   6.0%  39,725   6.6%  47,969   8.0%
                                 
Tier 1 capital (to average quarterly assets)  98,970   12.9%  30,634   4.0%  35,420   4.6%  38,292   5.0%

To be Well

 

Capitalized Under

 

Prompt Corrective

 

Actual

Action Provision

 

    

Amount

    

Ratio

    

Amount

    

Ratio

 

March 31, 2021

(dollars in thousands)

Community bank leverage ratio

$

125,768

 

12.1

%  

 

88,419

 

8.5

%

December 31, 2020

 

Community bank leverage ratio

$

122,196

 

13.7

%  

 

71,495

 

8.0

%

Note 5 - Earnings Per Share


Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for each period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options warrants, and convertible preferred stock, and are determined using the treasury stock method.


Not included in the diluted earnings per share calculation for 2017 and 2016 because they There were 10,500 shares that were anti-dilutive for the three months ended March 31, 2020. There were 20,000 and 126,6000 anti-dilutive shares respectively,for the three months ended March 31, 2021.

22


Information relating to the calculations of our income per common share is summarized as follows:

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (dollars in thousands, except for per share data) 
Weighted-average shares outstanding - basic  12,172,586   12,104,379   12,140,689   11,324,660 
Dilution  150,986   79,360   107,525   51,193 
Weighted-average share outstanding - diluted  12,323,572   12,183,739   12,248,214   11,375,853 
                 
Net income available to common stockholders $1,121  $539  $2,753  $12,864 
                 
Net income per share - basic $0.09  $0.04  $0.23  $1.14 
Net income per share - diluted $0.09  $0.04  $0.22  $1.13 
19

Three Months Ended March 31, 

    

2021

    

2020

(dollars in thousands, except for per share data)

Weighted-average shares outstanding - basic

 

12,847,418

 

12,812,642

Dilution

 

54,067

 

37,499

Weighted-average share outstanding - diluted

 

12,901,485

 

12,850,141

Net income

$

3,911

$

565

Net income per share - basic

$

0.30

$

0.04

Net income per share - diluted

$

0.30

$

0.04

Table of Contents

Note 6 - Stock-Based Compensation


We maintain a stock-based compensation plan for directors, officers, and other key employees of the Company. The aggregate number of shares of common stock that maycould be issued with respect to the awards granted under the planPlan is 500,000 plus any shares forfeited under the Company’s old stock-based compensation plan.500,000. Under the terms of the stock-based compensation plan,Plan, the Company has the ability to grant various stock compensation incentives, including stock options, stock appreciation rights, and restricted stock. The stock-based compensation isPlan was granted under terms and conditions determined by the Compensation Committee of the Board of Directors. Under the stock-based compensation plan,Plan, stock options generally have a maximum term of ten years and are granted with an exercise price at least equal to the fair market value of the common stock on the date the options are granted. Generally, options granted to directors, officers, and employees of the Company vest over a five-year period, although the Compensation Committee has the authority to provide for different vesting schedules.


We account for stock-based compensation in accordance with FASB Accounting Standards CodificationASC Topic 718, Compensation – Stock Compensation, whichrequires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statementStatement of operationsIncome at fair value. Additionally, we are required to recognize the expense of employee services received in share-based payment transactions and measure the expense based on the grant date fair value of the award. The expense is recognized over the period during which an employee is required to provide service in exchange for the award. Stock-based compensation expense included in the consolidated statementsConsolidated Statements of operationsIncome for the three months ended September 30, 2017March 31, 2021 and 20162020 totaled $44,000$23,000 and $48,000,$34,000, respectively. Stock-based compensation expense included in the consolidated statements of operations for the nine months ended September 30, 2017 and 2016 totaled $146,000 and $143,000, respectively.


The weighted average fair value of the options issued during the three and nine months ended September 30, 2017 was $2.56.  There were no options granted during the three or nine months ended September 30, 2016.  The fair value of the options was calculated using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions for the three and nine months ended September 30, 2017:
Dividend yield0.00%
Expected volatility36.02%
Risk-free interest rate1.76%
Expected lives5.5 years

Information regarding our stock-based compensation plan is as follows as of and for the ninethree months ended September 30:March 31:

2021

2020

    

    

    

Weighted-

    

    

    

    

Weighted-

    

 

Weighted-

Average

Aggregate

Weighted-

Average

Aggregate

Average

Remaining

Intrinsic

Average

Remaining

Intrinsic

Number

Exercise

Contractual

Value

Number

Exercise

Contractual

Value

of Shares

Price

Term (in years)

(in thousands)

of Shares

Price

Term (in years)

(in thousands)

Outstanding at beginning of period

 

220,250

$

6.89

 

  

 

  

 

234,173

$

6.60

 

  

 

  

Granted

 

 

 

  

 

  

 

10,500

 

8.26

 

  

 

  

Exercised

 

(13,640)

 

6.28

 

  

 

$

79

 

(2,050)

 

6.78

 

  

 

$

Outstanding at end of period

 

206,610

$

6.93

 

1.2

$

1,069

 

242,623

$

6.67

 

2.7

$

69

Exercisable at end of period

 

155,306

$

6.78

 

0.8

$

827

 

159,884

$

6.37

 

2.3

$

69

23

  2017  2016 
  
Number
of Shares
  
Weighted-
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (in years)
  
Aggregate
Intrinsic
Value
(in thousands)
  
Number
of Shares
  
Weighted-
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (in years)
  
Aggregate
Intrinsic
Value
(in thousands)
 
Outstanding at beginning of period  339,500  $5.31         339,800  $4.83       
Granted  20,000   7.10         -   -       
Exercised  (5,025)  3.37         -   -       
Forfeited  (16,000)  4.59         (54,500)  5.07       
Outstanding at end of period  338,475   5.48   7.2  $526   285,300   4.79   8.2  $491 
Exercisable at end of period  173,702   4.78   6.5  $398   136,125   4.37   7.0  $292 

The stock-based compensation expense amounts and fair values of options at the time of the grants were derived using the Black-Scholes option-pricing model. The following weighted average assumptions were used to value options granted for the three months ended March 31, 2020. There were 0 options granted in 2021.

Expected life

    

5.5 years

 

Risk-free interest rate

0.95

%  

Expected volatility

27.83

%  

Expected dividend yield

$

1.95

 

Weighted average per share fair value of options granted

$

1.75

As of September 30, 2017,March 31, 2021, there was $520,000$129,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over the next 59 months.

20

23 months.

Table of Contents

Note 7 - Commitments and Contingencies

Off-Balance Sheet Instruments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contract amounts of these instruments express the extent of involvement we have in each class of financial instruments.

Our exposure to credit loss from nonperformance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless otherwise noted, we require collateral or other security to support financial instruments with off-balance sheet credit risk.

    

March 31, 2021

December 31, 2020

(dollars in thousands)

Standby letters of credit

$

2,804

$

3,251

Home equity lines of credit

 

18,678

 

17,005

Unadvanced construction commitments

 

84,866

 

74,626

Lines of credit

 

30,510

 

30,190

Loans sold and serviced with limited repurchase provisions

 

38,877

 

41,800

Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to various municipalities. These guarantees are issued primarily to support performance arrangements and are limited to real estate transactions. The majority of these standby letters of credit expire within twelve months, with automatic one year renewals. The Bank has the option to stop any automatic renewal. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes, except for certain standby letters of credit, that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of both March 31, 2021 and December 31, 2020 for guarantees under standby letters of credit issued was $8,000.

Home equity lines of credit are loan commitments to individuals as long as there is no violation of any condition established in the contract. Commitments under home equity lines expire ten years after the date the loan closes and are secured by real estate. We evaluate each customer’s credit worthiness on a case-by-case basis.

Unadvanced construction commitments are loan commitments made to borrowers for both residential and commercial projects that are either in process or are expected to begin construction shortly.

24

Lines of credit are loan commitments to individuals and companies as long as there is no violation of any condition established in the contract. Lines of credit have a fixed expiration date. The Bank evaluates each customer’s credit worthiness on a case-by-case basis.

The Bank has entered into several agreements to sell mortgage loans to third parties. These agreements contain limited provisions that require the Bank to repurchase a loan if the loan becomes delinquent within a period ranging generally from 120 to 180 days after the sale date depending on the investor agreement. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. We did not repurchase any loans during the three months ended March 31, 2021 or 2020.

Other Comprehensive IncomeContingencies

The Company provides banking services to customers who do business in the medical-use cannabis industry. While the growing, processing, and sales of medical-use cannabis is legal in the state of Maryland, the business currently violates Federal law. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. The strict enforcement of Federal laws regarding medical-use cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s consolidated financial statements if the Federal government takes actions against the Company. As of March 31, 2021, the Company has not accrued an amount for the potential impact of any such actions.

Following is a summary of the level of business activities with our medical-use cannabis customers:

Deposit and loan balances at March 31, 2021 were approximately $60.7 million, or 6.3% of total deposits, and $22.9 million, or 3.7% of total loans, respectively. Deposit and loan balances at December 31, 2020 were approximately $42.8 million, or 5.3% of total deposits, and $18.7 million, or 2.9% of total loans, respectively.
Interest and noninterest income for the three months ended March 31, 2021 were approximately $219,000 and $564,000, respectively. Interest and noninterest income for the three months ended March 31, 2020 were approximately $155,000 and $519,000, respectively.
The volume of deposits in the accounts of medical-use cannabis customers for the three months ended March 31, 2021 and 2020 was approximately $171.3 million and $100.8 million, respectively.

Note 8 - Derivatives

We maintain and account for derivatives, in the form of IRLCs and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses on IRLCs, mandatory forward contracts, and best effort forward contracts on the loan pipeline through mortgage-banking revenue in the Consolidated Statements of Income.

IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan closes until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 60 days. For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of best efforts and mandatory forward contracts. Mandatory forward contracts are also considered derivatives and are reported in the table below. Best efforts forward contracts are not derivatives, however, we have elected to measure and report these commitments at fair value. These assets and liabilities are included in the Consolidated Statements of Financial Condition in other assets and accrued expenses and other liabilities, respectively.


25

Information pertaining to the carrying amounts of our derivative financial instruments follows:

March 31, 2021

December 31, 2020

Notional

Estimated

Notional

Estimated

    

Amount

    

Fair Value

    

Amount

    

Fair Value

 

(dollars in thousands)

Asset - IRLCs

$

46,317

$

781

$

44,243

$

1,128

Asset - mandatory forward contracts

 

17,553

94

Asset - TBA securities

78,000

1,465

Liability - mandatory forward contracts

$

67,928

$

1,061

$

$

Liability - TBA securities

2,500

4

79,500

557

Note 9 – Segments

We are in the business of providing financial services and we operate in 2 business segments – commercial and consumer banking and mortgage-banking. Commercial and consumer banking is conducted through the Bank and involves delivering a broad range of financial services, including lending and deposit taking, to individuals and commercial enterprises. This segment also includes our treasury and administrative functions. Mortgage-banking is conducted through the Bank’s secondary marketing department and involves originating first- and second-lien residential mortgages for sale in the secondary market and to the Bank.

The following table presents the changes in the components of accumulated other comprehensive losstables present certain information regarding our business segments for the three and nine months ended September 30, 2017:March 31, 2021 and 2020:

2021

Commercial and

Mortgage-

    

Consumer Banking

    

Banking

    

Total

(dollars in thousands)

Interest income

$

8,354

$

255

$

8,609

Interest expense

(912)

(39)

(951)

Net interest income

 

7,442

 

216

 

7,658

Reversal of provision for loan losses

 

750

 

 

750

Net interest income after reversal of provision for loan losses

 

8,192

 

216

 

8,408

Noninterest income

 

1,363

 

4,396

 

5,759

Noninterest expense

 

(6,562)

 

(2,244)

 

(8,806)

Net income before income taxes

2,993

2,368

5,361

Income tax provision

 

(798)

 

(652)

 

(1,450)

Net income

$

2,195

$

1,716

$

3,911

Total Assets

$

1,062,845

$

50,124

$

1,112,969

2020

Commercial and

Mortgage-

    

Consumer Banking

    

Banking

    

Total

(dollars in thousands)

Interest income

$

8,785

$

131

$

8,916

Interest expense

(2,117)

(44)

(2,161)

Net interest income

 

6,668

 

87

 

6,755

Provision for loan losses

 

(750)

 

 

(750)

Net interest income after provision for loan losses

 

5,918

 

87

 

6,005

Noninterest income

 

1,391

 

1,634

 

3,025

Noninterest expense

 

(7,189)

 

(1,063)

 

(8,252)

Net income before income taxes

120

658

778

Income tax provision

 

(32)

 

(181)

 

(213)

Net income

$

88

$

477

$

565

Total Assets

$

834,474

$

21,996

$

856,470


26

  Three Months  Nine Months 
  (dollars in thousands) 
Balance at beginning of period $6  $- 
Other comprehensive loss before reclassification  (9)  (3)
Amounts reclassified from accumulated other comprehensive loss  (1)  (1)
Net other comprehensive loss during period  (10)  (4)
Balance at end of period $(4) $(4)
We did not have any accumulated other comprehensive income or loss for the three or nine months ended September 30, 2016.

Note 810 - Fair Value of Financial Instruments


Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

A fair value hierarchy that prioritizes the inputs to valuation methods is used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair market hierarchy are as follows:


Level 1:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets, or liabilities.

Level 2:Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3:Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.


We record transfers between levels at the end of the reporting period in which the change in significant inputs occurs.


Assets Measured on a Recurring Basis


The following tables presenttable presents fair value measurements for assets that are measured at fair value on a recurring basis as of and for the ninethree months ended September 30, 2017:March 31, 2021:

    

  

    

  

    

Significant

    

  

    

  

  

  

Other

Significant

Total Changes

  

Quoted

Observable

Unobservable

In Fair Values

Carrying

Prices

Inputs

Inputs

Included In

Value

(Level 1)

(Level 2)

(Level 3)

Period Income

Assets:

(dollars in thousands)

AFS securities - U.S. government agency notes

$

9,175

$

0

$

9,175

$

0

$

0

AFS securities - corporate obligations

2,021

0

2,021

0

0

AFS securities - MBS

121,502

0

121,502

0

0

LHFS

 

50,124

 

0

 

50,124

 

0

 

305

MSRs

 

2,927

 

0

 

0

 

2,927

 

826

IRLCs

 

781

 

0

 

0

 

781

 

(347)

Best efforts forward contracts

 

26

 

0

 

26

 

0

 

25

Mandatory forward contracts

 

94

 

0

 

94

 

0

 

(736)

TBA securities

1,465

0

 

1,465

 

0

1,465

Liabilities:

Mandatory forward contracts

 

1,061

 

0

 

1,061

 

0

 

1,055

TBA securities

 

4

 

0

 

4

 

0

 

553


27

  
Carrying
Value
  
Quoted
Prices
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total Changes
In Fair Values
Included In
Period Income
 
  (dollars in thousands) 
AFS Securities - U.S. government agency notes $3,129  $-  $3,129  $-  $- 
Loans held for sale (“LHFS”)  4,871   -   4,871   -   139 
Mortgage servicing rights (“MSRs”)  473   -   -   473   (84)
Interest-rate lock commitments (“IRLCs”)  42   -   42   -   (120)
Mandatory forward contracts  7   -   7   -   (146)
Best efforts forward contracts  6   -   6   -   6 

The following tables presenttable presents fair value measurements for assets and liabilities that are measured at fair value on a recurring basis as of and for the year ended December 31, 2016:


  
Carrying
Value
  
Quoted
Prices
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total Changes
In Fair Values
Included In
Period Income
 
  (dollars in thousands) 
MSRs $557  $-  $-  $557  $66 
IRLCs  162   -   162   -   (21)
Mandatory forward contracts  153   -   153   -   42 

2020:

    

  

    

  

    

Significant

    

  

    

  

  

  

Other

Significant

Total Changes

  

Quoted

Observable

Unobservable

In Fair Values

Carrying

Prices

Inputs

Inputs

Included In

Value

(Level 1)

(Level 2)

(Level 3)

Period Income

Assets:

(dollars in thousands)

AFS securities - U.S. government agency notes

6,660

$

0

$

6,660

$

0

$

0

AFS securities - corporate obligations

2,034

0

2,034

0

0

AFS securities - MBS

56,404

0

56,404

0

0

LHFS

 

36,299

 

0

 

36,299

 

0

 

323

MSRs

 

1,451

 

0

 

0

 

1,451

 

(1,013)

IRLCs

 

1,128

 

0

 

0

 

1,128

 

949

Liabilities:

TBA securities

 

557

 

0

 

557

 

0

 

(557)

The following table provides additional quantitative information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:

    

Fair Value

    

Valuation

    

    

Range

 

Estimate

Technique

Unobservable Input

(Weighted-Average)

 

March 31, 2021:

(dollars in thousands)

MSRs (1)

$

2,927

 

Market Approach

 

Weighted average prepayment speed

 

155

%

IRLCs - net asset

781

Market Approach

Range of pull through rate

78% - 100

%

Average pull through rate

97

%

  

 

  

 

  

 

  

 

  

December 31, 2020:

 

  

 

  

 

  

 

  

MSRs (1)

$

1,451

 

Market Approach

 

Weighted average prepayment speed

 

326

%

IRLCs - net asset

1,128

 

Market Approach

 

Range of pull through rate

77% - 100

%

Average pull through rate

93

%

(1)The weighted average was calculated with reference to the principal balance of the underlying mortgages.

The following table shows the activity in the MSRs:

Three Months Ended March 31, 

    

2021

    

2020

(dollars in thousands)

Beginning balance

$

1,451

$

323

Additions

650

0

Valuation adjustment

826

(83)

Ending balance

$

2,927

$

240

The following table shows the activity in the IRLCs:

Three Months Ended March 31, 

    

2021

    

2020

(dollars in thousands)

Beginning balance

$

1,128

$

179

Valuation adjustment

(347)

(240)

Ending balance

$

781

$

(61)

28

  
Fair Value
Estimate
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted-Average)
 
  (dollars in thousands)     
September 30, 2017:         
MSRs $473 Market Approach Weighted average prepayment speed  3.95%
            
December 31, 2016:           
MSRs $557 Market Approach Weighted average prepayment speed  3.95%

AFS Securities


The estimated fair values of AFS debt securities are obtained from a nationally-recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things, and are based on market data obtained from sources independent from the Bank. U.S Treasury Securities are considered Level 1 and all of our other securities are considered Level 2. The Level 2 investments in the Bank’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. The Bank has determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in the Bank’s portfolio are not exchange-traded, and such nonexchange-traded fixed income securities are typically priced by correlation to observed market data.


LHFS


At September 30, 2017,

LHFS wereare carried at fair value, which is determined based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements or third party pricing models. At December 31, 2016, LHFS were carried at the lower-of-cost or market value (“LCM”) utilizing the same method.


MSRs


The fair value of MSRs is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees. Management reviews all significant assumptions on a monthly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.

IRLCs


We utilize a third party specialist model to estimate the fair value of our IRLCs, which are valued based upon mandatory pricing quotes from correspondent lenders less estimated costs to process and settle the loan. Fair value is adjusted for the estimated probability of the loan closing with the borrower.


Forward Contracts


To avoid interest rate risk, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and the bank measures and reports them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a level 2 input. We have elected to measure and report best efforts commitments at fair value using a valuation methodology similar to that used for our mandatory commitments.


29

Assets Measured on a Nonrecurring Basis

March 31, 2021

 

Significant

 

Other 

Significant

 

Quoted 

Observable

Unobservable

 

Carrying 

Prices

Inputs

Inputs

Range of

Weighted

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average (2)

 

(dollars in thousands)

Impaired loans

$

844

$

0

$

0

$

844

 

12% - 14%

12

%

December 31, 2020

Significant

 

Other 

Significant

 

Quoted 

Observable

Unobservable

 

Carrying 

Prices

Inputs

Inputs

Range of

Weighted

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average (2)

  

(dollars in thousands)

Impaired loans

$

2,510

$

0

$

0

$

2,510

 

0% - 14%

9

%


We may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis.  These adjustments to fair value usually result from application of LCM accounting or write-downs of individual assets.  For assets measured at fair value on a nonrecurring basis, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of assets:
  September 30, 2017 
  
Carrying
Value
  
Quoted
Prices
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Range of
Discount
  
Weighted
Average
 
  (dollars in thousands)       
Impaired loans $1,597  $-  $-  $1,597   0% - 33%  25.5%
Real estate acquired through foreclosure  691   -   -   691   0% - 26%  20.9%
  December 31, 2016 
  
Carrying
Value
  
Quoted
Prices
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Range of
Discount
  
Weighted
Average
 
  (dollars in thousands)       
Impaired loans $2,136  $-  $-  $2,136   0% - 2%  2.0%
Real estate acquired through foreclosure  767   -   -   767   0% - 10%  10.0%

(1)Discount based on current market conditions and estimated selling costs
(2)Inputs are weighted based on the relative fair values of the instruments

Impaired Loans


Impaired loans are those for which we have measured impairment based on the present value of expected future cash flows or on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. If it is determined that the repayment of the loan will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment, the loan is considered collateral dependent. Impaired loans that are considered collateral dependent are carried at the LCM. Collateral may be in the form of real estate or business assets including equipment, inventory, and/or accounts receivable. The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within level 3 of the fair value hierarchy.


For such loans that are classified as impaired, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan. For such impaired loans that are classified as collateral dependent, an Allowance is established when the current market value of the underlying collateral less its estimated disposal costs has not been finalized, but management determines that it is likely that the value is lower than the carrying value of that loan. Once the net collateral value has been determined, a charge-off is taken for the difference between the net collateral value and the carrying value of the loan.

Real Estate Acquired Through Foreclosure


We record foreclosed real estate assets at the fair value less estimated selling costs on their acquisition dates and at the lower of such initial amount or estimated fair value less estimated selling costs thereafter. We generally obtain certified external appraisals of real estate acquired through foreclosure and estimate fair value using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent, and executed sale agreements.


30

Fair Value of All Financial Instruments


The carrying value and estimated fair value of all financial instruments are summarized in the following tables.  The descriptions of the fair value calculations for AFS securities, LHFS, MSRs, IRLCs, best efforts forward contracts, mandatory forward contracts, impaired loans, and real estate acquired through foreclosure are included in the discussions above.

  September 30, 2017 
  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
Assets: (dollars in thousands) 
Cash and cash equivalents $41,635  $41,635  $-  $-  $41,635 
AFS securities  3,129   -   3,129   -   3,129 
HTM securities  58,764   8,102   50,857   -   58,959 
LHFS  4,871   -   4,871   -   4,871 
Loans receivable  643,028   -   -   653,381   653,381 
Restricted stock investments  4,699   -   4,699   -   4,699 
Accrued interest receivable  2,503   -   2,503   -   2,503 
MSRs  473   -   -   473   473 
IRLCs  42   -   42   -   42 
Mandatory forward contracts  7   -   7   -   7 
Best effort forward contracts  6   -   6   -   6 
Liabilities:                    
Deposits  593,492   -   586,594   -   586,594 
Borrowings  93,450   -   87,909   -   87,909 
Subordinated debentures  20,619   -   -   20,619   20,619 
Accrued interest payable  478   -   478   -   478 

  December 31, 2016 
  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
Assets: (dollars in thousands) 
Cash and cash equivalents $67,114  $67,114  $-  $-  $67,114 
HTM securities  62,757   13,165   49,662   -   62,827 
LHFS  10,307   -   10,313   -   10,313 
Loans receivable  601,309   -   -   602,953   602,953 
Restricted stock investments  5,103   -   5,103   -   5,103 
Accrued interest receivable  2,249   -   2,249   -   2,249 
MSRs  557   -   -   557   557 
IRLCs  162   -   162   -   162 
Mandatory forward contracts  153   -   153   -   153 
Liabilities:                    
Deposits  571,946   -   572,556   -   572,556 
Borrowings  103,500   -   97,961   -   97,961 
Subordinated debentures  20,619   -   -   20,619   20,619 
Accrued interest payable  538   -   538   -   538 
At September 30, 2017 and December 31, 2016, the Bank had loan funding commitments of $97.6 million and $58.2 million, respectively, and standby letters of credit outstanding of $3.9 million and $4.0 million, respectively.  The fair value of these commitments is nominal.

Cash and Cash Equivalents

The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents approximate those assets’ fair values.

HTM securities

The Company utilizes a third party source to determine the fair value of its securities.  The methodology consists of pricing models based on asset class and includes available trade, bid, other market information, broker quotes, proprietary models, various databases, and trading desk quotes.  U.S Treasury Securities are considered Level 1 and all of our other securities are considered Level 2.

Loans Receivable

The fair values of loans receivable were estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. These rates were used for each aggregated category of loans.

Restricted Stock Investments

The carrying value of restricted stock investments is a reasonable estimate of fair value as these investments do not have a readily available market.

Deposits

The fair values disclosed for demand deposit accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings

Long-term and short-term borrowings were segmented into categories with similar financial characteristics. Carrying values were discounted using a cash flow approach based on market rates.

Subordinated debentures

Current economic conditions have rendered the market for this liability inactive.  As such, the Company is unable to determine a good estimate of fair value.  Since the rate paid on the debentures held is lower than what would be required to secure an interest in the same debt at year end and we are unable to obtain a current fair value, the Company has disclosed that the carrying value approximates the fair value.

tables:

March 31, 2021

Carrying

Fair Value

    

Value

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

(dollars in thousands)

Cash and cash equivalents

$

257,095

$

257,095

$

0

$

0

$

257,095

CDs held for investment

3,330

 

3,330

0

0

 

3,330

AFS securities

 

132,698

 

0

 

132,698

 

0

 

132,698

HTM securities

 

14,516

 

0

 

15,094

 

0

 

15,094

LHFS

 

50,124

 

0

 

50,124

 

0

 

50,124

Loans receivable, net

 

613,377

 

0

 

0

 

618,858

 

618,858

Restricted stock investments

 

970

 

0

 

970

 

0

 

970

Accrued interest receivable

 

2,439

 

0

 

2,439

 

0

 

2,439

MSRs

 

2,927

 

0

 

0

 

2,927

 

2,927

IRLCs

 

781

 

0

 

0

 

781

 

781

Best effort forward contracts

 

26

 

0

 

26

 

0

 

26

Mandatory forward contracts

 

94

 

0

 

94

 

0

 

94

TBA securities

 

1,465

 

0

 

1,465

 

0

 

1,465

Liabilities:

 

 

 

Deposits

 

964,096

 

0

 

970,488

 

0

 

970,488

Accrued interest payable

 

160

 

0

 

160

 

0

 

160

Borrowings

 

10,000

 

0

 

10,273

 

0

 

10,273

Subordinated debentures

 

20,619

 

0

 

0

 

16,276

 

16,276

Mandatory forward contracts

 

1,061

 

0

 

1,061

 

0

 

1,061

TBA securities

 

4

 

0

 

4

 

0

 

4

December 31, 2020

Carrying

Fair Value

    

Value

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

(dollars in thousands) 

Cash and cash equivalents

$

156,609

$

156,609

$

0

$

0

$

156,609

CDs held for investment

3,580

 

3,580

0

0

 

3,580

AFS securities

 

65,098

 

0

 

65,098

 

0

 

65,098

HTM securities

 

15,943

 

0

 

16,603

 

0

 

16,603

LHFS

 

36,299

 

0

 

36,299

 

0

 

36,299

Loans receivable, net

 

634,212

 

0

 

0

 

639,597

 

639,597

Restricted stock investments

 

1,236

 

0

 

1,236

 

0

 

1,236

Accrued interest receivable

 

2,576

 

0

 

2,576

 

0

 

2,576

MSRs

 

1,451

 

0

 

0

 

1,451

 

1,451

IRLCs

 

1,128

 

0

 

0

 

1,128

 

1,128

Liabilities:

 

Deposits

 

806,456

 

0

 

806,444

 

0

 

806,444

Accrued interest payable

 

164

 

0

 

164

 

0

 

164

Borrowings

 

10,000

 

0

 

10,313

 

0

 

10,313

Subordinated debentures

 

20,619

 

0

 

0

16,157

 

16,157

TBA securities

 

557

 

0

 

557

 

0

 

557

Limitations


Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from a one-time sale of our total holdings of a particular financial instrument. Because no market exists for a significant portion of our financial

31

instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates. The above information should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only provided for a limited portion of our assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between our disclosures and those of other companies may not be meaningful.


There were no0 transfers between any of Levels 1, 2 and 3 for the ninethree months ended September 30, 2017March 31, 2021 or 20162020 or for the year ended December 31, 2016.2020.

32

Item 2.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations


When used in this report, the terms “the Company,” “we,” “us,” and “our” refer to Severn BancorpAnalysis of Financial Condition and unless the context requires otherwise, its consolidated subsidiaries.  Results of Operations

The following discussion should be read and reviewed in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Severn Bancorp’s Annual Report on Form 10-K as of and for the year ended December 31, 2016.


2020. See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Quarterly Report on Form 10-Q.

The Company


The Company is a savings and loan holding company chartered as a corporation in the state of Maryland in 1990. It conducts business primarily through three subsidiaries, Severn Savingsthe Bank, FSB (the “Bank”), Mid-Marylandthe Title Company, Inc. (the “Title Company”), and SBI MortgageSBI. The Title Company (“SBI”).is a real estate settlement company that handles commercial and residential real estate settlements in Maryland. SBI holds mortgages that do not meet the underwriting criteria of the Bank, and is the parent company of Crownsville, Development Corporation (“Crownsville”), which is doing business as Annapolis Equity Group and acquires real estate for syndication and investment purposes. The Title Company is a real estate settlement company that handles commercial and residential real estate settlements in Maryland. The Bank’s principal subsidiary Louis Hyatt, Inc. (“Hyatt Commercial”), conducts business as Hyatt Commercial, a commercial real estate brokerage and property management company.  The Bank has fiveWe maintained seven branches in Anne Arundel County, Maryland whichat March 31, 2021. The branches offer a full range of deposit products and we originate mortgages in itsthe Bank’s primary market of Anne Arundel County, Maryland and, to a lesser extent, in other parts of Maryland, Delaware, and Virginia. As of September 30, 2017,March 31, 2021, we had 132181 full-time equivalent employees.

Asset Sale

On January 1, 2021, we sold the majority of the assets of our real estate company, Hyatt Commercial, with the exception of cash and certain fixed assets. At the time of the sale, Hyatt Commercial had $1.6 million in assets, $1.1 million of which was in cash that stayed with the Company. The remainder of the net assets were sold for $334,000 and we realized a loss of approximately $34,000.

Proposed Merger with Shore Bancshares, Inc.

On March 3, 2021, the Company and Shore entered into an agreement and plan of merger that provides that the Company will merge with and into Shore, with Shore as the surviving corporation (the “Merger”). Following the Merger, the Bank will merge with and into Shore’s wholly-owned bank subsidiary, Shore United Bank, with Shore United Bank as the surviving bank (the “Bank Merger”). At the effective time of the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive (i) 0.6207 shares of Shore common stock and (ii) $1.59 in cash, together with cash in lieu of fractional shares, if any. The merger consideration is 85% stock and 15% cash.

The completion of the Merger and the Bank Merger are subject to customary closing conditions, including approval by the Company’s stockholders, Shore’s stockholders and the receipt of regulatory approvals or waivers from the OCC and the Board of Governors of the Federal Reserve System. Prior to the completion of the Bank Merger, Shore United Bank must obtain the approval of the OCC to convert to a national banking association. The Merger is expected to be completed in the third quarter of 2021.

Significant Developments - COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the U.S. and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The COVID-19 pandemic in the U.S. has had and may continue to have a complex and significant adverse impact on the economy, the banking industry, and the Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on Our Market Areas

Our commercial and consumer banking products and services are offered primarily in Maryland, where individual and governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity since March


33

Overview

2020. In Maryland, the Governor issued a series of orders, including ordering schools to close for an indefinite period of time and an order that, subject to limited exceptions, all individuals stay at home and non-essential businesses cease all activities for an indeterminate amount of time. Since June 2020, many of these restrictions have been removed and some non-essential businesses were allowed to re-open in a limited capacity, adhering to social distancing and disinfection guidelines. The Bank has remained open during these orders because banks have been identified as essential services. The Bank had been serving its customers through its drive-ups, ATMs, and in all of its branch offices by appointment only. On May 3, 2021, we re-opened our branches to customers unrestricted except for social distancing and masks. On May 12, 2021, the Governor of Maryland lifted all remaining COVID-19 related restrictions, with the exception of wearing masks indoors, effective May 15, 2021. On May 14, 2021, the Governor also lifted the mask mandate effective May 15, 2021.

Locally, as well as nationally, we have experienced an increase in unemployment levels in our market area as a result of the curtailment of business activities, the levels of which are expected to remain elevated for the near future.

Policy and Regulatory Developments

Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

The FRB decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching the current range of 0.0% - 0.25%.

On March 27, 2020, the President of the U.S. signed the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $659.0 billion loan program (revised by subsequent legislation) administered through the SBA, referred to as the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals were able to apply for forgivable loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. PPP loans have an interest rate of 1.0%, a two-year or five-year loan term to maturity, and principal and interest payments deferred until the lender receives the applicable forgiven amount or the end of the borrower's loan forgiveness. PPP loans are 100% guaranteed by the SBA. The Bank participates as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. The Consolidated Appropriations Act of 2021 extended the period established by the CARES Act for consideration of TDR identification to January 1, 2022 or 60 days after the date the national COVID-19 pandemic emergency terminates.

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. On August 3, 2020, Interagency Statement on Additional Loan Accommodations Related to COVID-19 was issued that addresses loans nearing the end of their original relief period and provides guidance for extension of such relief period.

On April 9, 2020, the FRB announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19. The FRB announced the Main Street Business Lending Program, which established two new loan facilities intended to facilitate lending to small and mid-sized businesses: (1) the MSNLF and (2) the MSELF. MSNLF loans were unsecured term loans originated on or after April 8, 2020, while MSELF loans were provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program was $600.0 billion. The program

34

was designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers had to confirm that they were seeking financial support because of COVID-19 and that they would not use proceeds from the loan to pay off debt. The FRB also stated that it would provide additional funding to banks offering PPP loans to help struggling small businesses. The PPPLF was created by the FRB on April 9, 2020 to facilitate lending by participating financial institutions to small businesses under the PPP of the CARES Act. Under the facility, the FRB lent to participating financial institutions on a non-recourse basis, taking PPP loans as collateral. Lenders participating in the PPP were able to exclude loans financed by the facility from their leverage ratio. Due to our high liquidity levels, we did not participate in the PPPLF.

The FRB also created a Municipal Liquidity Facility to support state and local governments with up to $500.0 billion in lending, with the Treasury Department backing $35.0 billion for the facility using funds appropriated by the CARES Act. The facility made short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The FRB expanded both the size and scope of its Primary and Secondary Market Corporate Credit Facilities to support up to $750.0 billion in credit to corporate debt issuers. This allowed companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to the facility. Finally, the FRB announced that its Term Asset-Backed Securities Loan Facility would be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility was $100.0 billion.

Effects on Our Business

The COVID-19 pandemic and the specific developments referred to above have had and could continue to have a significant impact on our business. The outbreak of COVID-19 could continue to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel, restaurant, and retail industries will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels, and results of operations could be adversely affected. As of March 31, 2021, we held $4.1 million, $15.5 million, and $49.1 million in hotel, restaurant, and retail industry loans, respectively.

Our Response

We have taken numerous steps in response to the COVID-19 pandemic, including the following:

actively working with loan customers to evaluate prudent loan modification terms;

continuing to promote our digital banking options through our website. Customers are encouraged to utilize online and mobile banking tools, and our customer service and retail departments are fully staffed and available to assist customers remotely;

acted as a participating lender in the PPP as well as the second round of PPP that was extended until May 31, 2021. However, on May 4, 2021, the SBA announced that the PPP had run out of funds for most banks. We believe it is our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act and subsequent legislation to our customers and communities, which we have carried out in a prudent and responsible manner. As of March 31, 2021, we held $39.0 million in PPP loans in our loan portfolio, and are working diligently with customers on the loan forgiveness aspect of the program (see “Notes to Consolidated Financial Statements – Note 3 – Loans Receivable and the Allowance” in this Quarterly Report on Form 10-Q and “Financial Condition – Credit Risk Management and the

35

Allowance – TDRs” later in this Item for more information regarding PPP loans and loan modifications under the CARES Act); and

closing all branches to customer activity until May 3, 2021, except for drive-up and appointment only services. On May 3, 2021, we re-opened our branches to customers unrestricted except for social distancing and masks. We have continued to pay all employees according to their normal work schedule, even if their work has been reduced. No employees have been furloughed. Employees whose job responsibilities can be effectively carried out remotely are working from home. Employees whose critical duties require their continued presence on-site are observing social distancing and cleaning protocols.

Overview

The Company provides a wide range of personal and commercial banking services. Personal services include mortgage lending and various other lending services as well as deposit products such as personal Internet banking and online bill pay, checking accounts, individual retirement accounts, money market accounts, and savings and time deposit accounts. Commercial services include commercial secured and unsecured lending services as well as business Internet banking, corporate cash management services, and deposit services.services to commercial customers, including those in the medical-use cannabis industry. The Company also provides ATMs, credit cards, debit cards, safe deposit boxes, and telephone banking, among other products and services.


We have experienced a slightly improved level ofincreased profitability forduring the three and nine months ended September 30, 2017,March 31, 2021, primarily due to the payoff of high costing Federal Home Loan Bank of Atlanta (“FHLB”) advances and reversals of themortgage-banking activities. Additionally, we reversed $750,000 in provision for loan losses. Management believes that, while conditions continueNet interest income increased primarily due to improve and real estate values in the Company’s market area continue to stabilize, certain detrimental factors still exist in the market. Thea declining interest rate spread betweenenvironment, resulting from rate reductions by the FRB in response to the COVID-19 pandemic, which significantly reduced our cost of funds and what we earn on loans has grown somewhat from 2016 levelsinterest expense. Noninterest expenses increased for the three months ended March 31, 2021 due primarily to increased investments in staff and increased commissions corresponding to the aforementioned payoffincreased mortgage production. Additionally, we recognized $238,000 in merger related expenses. See discussion of FHLB advances and a change in the mix from higher costing time deposits to lower costing transaction accounts. During the second quarter of 2016, we reversed the valuation allowance maintained on the net deferred tax asset, which resulted in an $11.2 million tax benefit. With the reversal of the valuation allowance, we are now recording a provision for income taxes.


pending merger above.

The Company expects to experience similar market conditions during the remainder of 2017, as the national and local economies continue to improve and as the employment environment in our market improves.2021, provided interest rates do not increase or decrease rapidly. If interest rates increase,change rapidly, demand for loans may decreasefluctuate and our interest rate spread could decrease.change significantly. Additionally, significant changes in interest rates could also affect the origination volumes related to our mortgage-banking activities. We continue to manage loan and deposit pricing against the potential risks of rising costs of our deposits and borrowings. Interest rates are outside of our control, so we must attempt to balance the pricing and duration of the loan portfolio against the risks of rising or declining costs of our deposits and borrowings. The continued success and attraction of Anne Arundel County, Maryland, and vicinity, will also be important to our ability to originate and grow mortgage loans and deposits, as will our continued focus on maintaining a low overhead. If the volatility in the market and the economy continues or worsens,to occur, our business, financial condition, results of operations, access to funds, and the price of our stock could be materially and adversely impacted.

Acquisition
On September 1, 2017, we acquired We believe the Title Company by issuing stock in a business combination. We issued 108,084 shares inis well prepared for the transaction valued at $775,000.  We recorded $759,000 in goodwill in the transaction.  The acquisition continues our growth strategyeconomic and focus on being a full-service provider and complements the mortgage services, commercial banking services, and commercial real estate services we provide. The acquisitionsocial consequences of the Title Company has not hadCOVID-19 global pandemic in future periods.

Critical Accounting Policies

Our accounting and financial reporting policies conform to GAAP and prevailing practices within the banking industry. Accordingly, preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material effectimpact on the Company’s financial conditioncarrying value of certain assets or resultson income. These estimates and assumptions affect the reported amounts of operations.

Critical Accounting Policies

Our significant accounting policies are set forth in Note 1assets and liabilities at the date of the audited consolidated financial statements forand the year ended December 31, 2016 which were included in our Annual Report on Form 10-K. Of these significantreported amounts of income and expenses during the periods presented. The accounting policies we consider our policies regardingview as critical are those relating to the valuation of  investment securities, the Allowance, for loan losses (“Allowance”), the valuation of real estate acquired through foreclosure, and the valuation of the net deferred tax asset to be our most criticalassets and liabilities. Significant accounting policies dueare discussed in detail in “Notes to Consolidated Financial Statements - Note 1 - Summary of Significant Account Policies” in our Annual Report on Form 10-K as of and for the year ended December 31, 2020. There have been no material changes to the fact that thesesignificant accounting policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a declinedescribed in the value of an asset not carriedAnnual Report other than those that may be mentioned in Note 1 to the consolidated financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility.  When applying accounting policies in such areas that are subjective in nature, management must use its best judgment to arrive at the carrying value of certain assets and liabilities.  Below is a discussion of our critical accounting policies.this Quarterly Report on Form 10-Q. Disclosures regarding

36

Securities

We designate securities into one

the effects of three categories at the time of purchase. Debt securities that we have the intent and ability to hold to maturitynew accounting pronouncements are classified as held to maturity (“HTM”) and recorded at amortized cost. Debt and equity securities are classified as trading if bought and held principally for the purpose of sale in the near term. Trading securities are reported at estimated fair value, with unrealized gains and losses included in earnings. Debt securities not classified as HTM and debt and equity securities not classified as trading securities are considered available for sale (“AFS”) and are reported at estimated fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity, net of tax effects,Note 1 to our Consolidated Financial Statements included in accumulated other comprehensive loss.


AFS and HTM securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security.

The initial indications of other-than-temporary impairment (“OTTI”) for both debt and equity securities are a decline in the market value below the amount recorded for a security and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, our intent to sell the security, and if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. We also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, and any change in agencies’ ratings at evaluation date from acquisition date and any likely imminent action. Once a decline in value is determined to be other than temporary, the security is segmented into credit- and noncredit-related components.  Any impairment adjustment due to identified credit-related components is recorded as an adjustment to current period earnings, while noncredit-related fair value adjustments are recorded through accumulated other comprehensive loss.  In situations where we intend to sell or it is more likely than not that we will be required to sell the security, the entire OTTI loss is recognized in earnings.

Allowance for Loan Losses

The Allowance is maintained at an amount that management believes will be adequate to absorb lossesthis Quarterly Report on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay.  Determining the amount of the Allowance requires the use of estimates and assumptions.  Actual results could differ significantly from those estimates.

Future additions or reductions in the Allowance may be necessary based on changes in economic conditions, particularly in Anne Arundel County and the State of Maryland.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s Allowance.  Such agencies may require the Bank to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination.

The Allowance consists of specific and general components. The specific component relates to loans that are classified as impaired.  When a real estate secured loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary.  This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value (“LTV”) ratio based on the original appraisal and the condition of the property.  Appraised values are discounted, if appropriate, to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include estimated costs to sell the property.  For loans secured by collateral other than real estate, such as accounts receivable, inventory, and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging, or equipment appraisals or invoices.  Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

For such loans that are classified as impaired, an Allowance is established when the current fair value of the underlying collateral less its estimated disposal costs has not been finalized, but management determines that it is likely that the value is lower than the carrying value of that loan.  Once the fair collateral value has been determined, a charge off is taken for the difference between the fair value and the carrying value of the loan.  For loans that are not solely collateral dependent, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan.
The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as nonclassified loans.  The general reserve is based on historical loss experience adjusted for qualitative factors.  These qualitative factors include, but are not limited to:

·Levels and trends in delinquencies and nonaccruals;
·Inherent risk in the loan portfolio;
·Trends in volume and terms of the loan;
·Effects of any change in lending policies and procedures;
·Experience, ability, and depth of management;
·National and local economic trends and conditions;
·Effect of any changes in concentration of credit; and
·Industry conditions.

A loan is considered impaired if it meets any of the following three criteria:

·Loans that are 90 days or more in arrears (nonaccrual loans);
·Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement; or
·Loans that are modified and qualify as troubled debt restructured loans (“TDR” or “TDRs”).
Loans that experience insignificant payment delays and payment shortfalls may not be classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
We assign risk ratings to the loans in our portfolio.  These credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss.  Loans classified special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the Allowance.  Loans not classified are rated pass.
Real Estate Acquired Through Foreclosure

Real estate acquired through or in the process of foreclosure is recorded at fair value less estimated disposal costs.  Management periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using estimates as described under Allowance for Loan Lossesabove. In the event of a subsequent change in fair value, the carrying amount is adjusted to the lesser of the new fair value, less disposal costs, or the carrying value recorded at acquisition. The amount of the change is charged or credited to noninterest expense.  Expenses on real estate acquired through foreclosure incurred prior to the disposition of the property, such as maintenance, insurance and taxes, and physical security, are charged to expense.  Material expenses that improve the property to its best use are capitalized to the property. If a foreclosed property is sold for more or less than the carrying value, a gain or loss is recognized upon the sale of the property.

Deferred Income Taxes

Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are recognized only to the extent that it is more likely than not that such amount will be realized based on consideration of available evidence.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. We recognizes a tax position as a benefit only if it “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination presumed to occur.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The judgment about the level of future taxable income is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.
Form 10-Q.

Results of Operations


Net Income


Three months ended September 30

Net income increased by $204,000,$3.3 million, or 19.3%592.2%, to $1.3$3.9 million for the three months ended September 30, 2017,March 31, 2021 compared to $1.1 million$565,000 for the three months ended September 30, 2016.March 31, 2020. Basic and diluted income per share were $0.09$0.30 for the three months ended September 30, 2017March 31, 2021, compared to $0.04 for the three months ended September 30, 2016.March 31, 2020. The increase in net income reflected improved net interest income, decreased noninterest expenses, and a reduced loan loss provision, partially offset by decreased noninterest income.


Nine months ended September 30

Net income decreased by $11.3 million, or 78.1%, to $3.2 million for the nine months ended September 30, 2017, compared to $14.4 million for the nine months ended September 30, 2016.  Basic and diluted income per share were $0.23 and $0.22, respectively, for the nine months ended September 30, 2017, compared to $1.14 (basic) and $1.13 (diluted) for the nine months ended September 30, 2016.  During 2016, we recorded a one-time reversal of the valuation allowance held against the net deferred tax asset in the amount of $11.2 million.  Income before taxes amounted to $5.3 million for the nine months ended September 30, 2017, compared to $3.6 million for the nine months ended September 30, 2016. The increase in pre-tax income reflected improvedincreased net interest income, a reversal ofdecrease in provision for loan loss provision,losses, and decreasedincreased noninterest expense,income, partially offset by decreasedincreased noninterest income.

expenses.

Net Interest Income


Three months ended September 30

Net interest income was significantly impacted by a declining interest rate environment directly related to the COVID-19 pandemic. The abrupt decline in interest rates during 2020 not only reduced interest income on floating-rate commercial loans and other liquid assets, but it also reduced competitive pressures and depositor expectations concerning deposit interest rates. Because of the need to maintain higher levels of liquidity and delays in business investment activity due to COVID-19 disruptions, some further compression of our net interest margin is likely in future periods, but a reasonably robust recovery in business conditions could enable us to deploy our additional asset generation resources and thus reallocate some of our excess liquidity. Additionally, at March 31, 2021, we held $39.0 million in low-yielding PPP loans, which isreduced our net interest earnedmargin. Our average yields, net interest spread, and net interest margin could be affected in future periods by the effect of the forgiveness aspect of the PPP loans as the recognition of the net origination fees will be accelerated once payments are received.

Net interest expense,income increased by $614,000,$903,000 or 10.7%13.4%, to $6.3$7.7 million for the three months ended September 30, 2017,March 31, 2021, compared to $5.7$6.8 million for the same period of 2020 as a result of the decrease in interest expense due to the decrease in the average rate of interest-bearing liabilities. Our net interest margin decreased from 3.38% for the three months ended March 31, 2020 to 3.08% for the three months ended March 31, 2021.

Interest Income

Interest income decreased by $307,000, or 3.4%, to $8.6 million for the three months ended September 30, 2016. Our net interest margin increased from 3.19% for the third quarter of 2016March 31, 2021, compared to 3.38% for the third quarter of 2017.  Our net interest spread increased from 3.04% for the third quarter of 2016 to 3.16% for the third quarter of 2017.


Interest Income

Interest income increased by $397,000, or 5.1%, to $8.2$8.9 million for the three months ended September 30, 2017, comparedMarch 31, 2020, due primarily to $7.8 millionthe low interest rate environment created by the COVID-19 pandemic.

The average yield on interest-earning assets decreased 100 basis points to 3.46% for the three months ended September 30, 2016.  Average interest-earning assets increasedMarch 31, 2021 from $713.4 million for the third quarter of 2016 to $743.9 million for the third quarter of 2017.  Average loans outstanding increased by $12.1 million due to increased originations. The average yield on loans increased from 4.80%4.46% for the three months ended September 30, 2016March 31, 2020. The average yield on other interest-earning assets decreased to 4.92%0.11% for the three months ended September 30, 2017 as a result of a slightly increased rate environment.  Average HTM securities decreased by $11.6 million due to security maturities and repaymentsMarch 31, 2021 from mortgage-backed securities.  The proceeds were used to fund the purchase of AFS securities and, along with other available funds, the purchase of certificates of deposit from other banks, which contributed to the increase in average other interest-earning assets.


Interest Expense

Interest expense decreased by $217,000, or 10.2%, to $1.9 million1.25% for the three months ended September 30, 2017, compared to $2.1 million for the three months ended September 30, 2016.  The decrease wasMarch 31, 2020, primarily due to a decrease in the average rate paid on transaction accounts from 0.23% for the third quarter of 2016 to 0.12% for the third quarter of 2017, due to a change in the mix of other interest-earning asset types and the decreased rate environment. We held less CDs held for investment during the three months ended March 31, 2021 than during the three months ended March 31, 2020. Average interest-earning assets increased from higher costing time deposits to lower costing transaction accounts. Additionally, average interest-bearing liabilities decreased by $19.0 million to $615.3$803.2 million for the three months ended September 30, 2017 comparedMarch 31, 2020 to $634.3$1.0 billion for the three months ended March 31, 2021, due primarily to an increase in average other interest-earning assets of $115.2 million and an increase in average AFS securities of $75.6 million. The increase in average other interest-earning assets resulted primarily from increased average interest-earning deposits in banks, which was the result of increased deposits from our medical-use cannabis customers. The increase in average AFS securities was due to utilization of excess liquidity through security purchases during the first quarter of 2021.

Average loans outstanding decreased $10.4 million as a result of significant loan payoffs in the first quarter of 2021. Average LHFS increased $35.1 million due to increased mortgage-banking originations.

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Interest Expense

Total interest expense was $951,000 for the three months ended March 31, 2021 and $2.2 million for the three months ended March 31, 2020. The decrease in interest expense was primarily due to the decreased interest rate environment. The average rate on interest-bearing liabilities decreased 91 basis points from 1.51% for the three months ended March 31, 2020 to 0.60% for the three months ended March 31, 2021. Average rates decreased in all interest-bearing liability categories. Partially offsetting the decrease in average rates were increased average interest-bearing liabilities which increased from $575.1 million for the three months ended March 31, 2020 to $640.6 million for the three months ended March 31, 2021. The average balance of interest-bearing checking and savings accounts increased from $323.7 million for the three months ended March 31, 2020 to $453.8 million for the three months ended March 31, 2021, primarily due to increases in our medical-use cannabis related accounts. The average balance of CDs decreased from $195.7 million for the three months ended March 31, 2020 to $156.1 million for the same period of 2016.


Nine months ended September 30

Net interest income increased by $1.4 million, or 8.7%, to $17.9 million for the nine months ended September 30, 2017, compared to $16.5 million for the nine months ended September 30, 2016. Our net interest margin increased from 3.07% for the nine months ended September 30, 2016 to 3.25% for the nine months ended September 30, 2017.  Our net interest spread increased from 2.94% for the nine months ended September 30, 2016 to 3.04% for the nine months ended September 30, 2017.
Interest Income

Interest income increased by $704,000, or 3.1%, to $23.7 million for the nine months ended September 30, 2017, compared to $23.0 million for the comparable period of 2016.  Average interest-earning assets increased from $718.0 million for the nine months ended September 30, 2016 to $738.4 million for the nine months ended September 30, 2017.  Average loans outstanding increased by $6.7 million2021 due to increased originations. The average yield on loans increasedrunoff from 4.74% for the nine months ended September 30, 2016 to 4.81% for the nine months ended September 30, 2017.  Average HTM securities decreased by $9.5 million due to security maturities and repayments from mortgage-backed securities.  As mentioned above, the purchase of AFS securities and certificates of deposit from other banks contributed to the increase in average other interest-earning assets.

Interest Expense

Interest expense decreased by $727,000, or 11.2%, to $5.8 million for the nine months ended September 30, 2017, compared to $6.5 million for the comparable period of 2016.  The decrease was primarily due to the decreased average rate of our borrowings.maturing CDs. Average borrowings decreased $18.0 million and$25.0 during the average rate paid on borrowings decreased from 3.47% for the ninethree months ended September 30, 2016 to 3.26% for the nine months ended September 30, 2017. Additionally, average interest-bearing liabilities decreased by $30.7 million to $614.7 million for the nine months ended September 30, 2017March 31, 2021 compared to $645.4 million for the same period of 2016.

2020 due to payoffs of FHLB advances.

The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities and the resulting yields on average interest-earning assets and average rates paid on average interest-bearing liabilities. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

Three Months Ended March 31, 

 

2021

2020

 

Average

Yield/

Average

Yield/

 

    

Balance

    

Interest (2)

    

Rate (4)

    

Balance 

    

Interest (2)

    

Rate (4)

  

ASSETS

(dollars in thousands)

Loans (1)

$

633,698

$

8,142

 

5.21

%  

$

644,087

$

8,240

 

5.15

%

LHFS

 

48,632

 

102

 

0.85

%  

 

13,528

 

98

 

2.91

%

AFS securities

 

89,822

 

212

 

0.96

%  

 

14,247

 

81

 

2.29

%

HTM securities

 

15,275

 

80

 

2.12

%  

 

24,267

 

138

 

2.29

%

Other interest-earning assets (3)

 

219,828

 

62

 

0.11

%  

 

104,614

 

325

 

1.25

%

Restricted stock investments, at cost

 

1,198

 

11

 

3.72

%  

 

2,431

 

34

 

5.63

%

Total interest-earning assets

 

1,008,453

 

8,609

 

3.46

%  

 

803,174

 

8,916

 

4.46

%

Allowance

 

(8,737)

 

 

 

(7,156)

 

 

Cash and other noninterest-earning assets

 

43,339

 

 

 

45,497

 

 

Total assets

$

1,043,055

8,609

 

$

841,515

8,916

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Checking and savings

$

453,841

 

132

 

0.12

%  

$

323,709

 

661

 

0.82

%

CDs

 

156,141

 

652

 

1.69

%  

 

195,722

 

1,136

 

2.33

%

Total interest-bearing deposits

 

609,982

 

784

 

0.52

%  

 

519,431

 

1,797

 

1.39

%

Borrowings

 

30,619

 

167

 

2.21

%  

 

55,619

 

364

 

2.63

%

Total interest-bearing liabilities

 

640,601

 

951

 

0.60

%  

 

575,050

 

2,161

 

1.51

%

Noninterest-bearing deposits

 

287,828

 

 

 

150,628

 

 

Other noninterest-bearing liabilities

 

4,642

 

 

 

8,085

 

 

Stockholders' equity

 

109,984

 

 

 

107,752

 

 

Total liabilities and stockholders' equity

$

1,043,055

 

951

 

$

841,515

 

2,161

 

Net interest income/net interest spread

 

$

7,658

 

2.86

%  

 

$

6,755

 

2.95

%

Net interest margin

 

 

 

3.08

%  

 

 

 

3.38

%

  Three Months Ended September 30, 
  2017  2016 
  
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
  
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
 
ASSETS (dollars in thousands) 
Loans $621,177  $7,702   4.92% $609,096  $7,346   4.80%
Loans held for sale (“LHFS”)  3,117   40   5.09%  10,384   133   5.10%
AFS securities  5,853   26   1.76%  -   -   - 
HTM securities  62,249   304   1.94%  73,872   280   1.51%
Other interest-earning assets (3)  46,825   106   0.90%  14,134   16   0.45%
Restricted stock investments, at cost  4,676   61   5.18%  5,885   67   4.53%
Total interest-earning assets  743,897   8,239   4.39%  713,371   7,842   4.37%
Allowance  (8,383)          (8,808)        
Cash and other noninterest-earning assets  56,589           71,805         
Total assets $792,103   8,239      $776,368   7,842     
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                     
Interest-bearing deposits:                        
Checking and savings $287,299   89   0.12% $271,003   154   0.23%
Certificates of deposit  214,282   922   1.71%  221,778   865   1.55%
Total interest-bearing deposits  501,581   1,011   0.80%  492,781   1,019   0.82%
Borrowings  113,719   897   3.13%  141,537   1,106   3.11%
Total interest-bearing liabilities  615,300   1,908   1.23%  634,318   2,125   1.33%
Noninterest-bearing deposits  86,437           39,685         
Other noninterest-bearing liabilities  2,665           4,530         
Stockholders’ equity  87,701           97,835         
Total liabilities and stockholders’ equity $792,103   1,908      $776,368   2,125     
Net interest income/net interest spread  $6,331   3.16%     $5,717   3.04%
Net interest margin          3.38%          3.19%

(1)Nonaccrual loans are included in average loans. Amortization of loan fees included in interest income amounted to $875,000 and $506,000 for the three months ended March 31, 2021 and 2020, respectively.

38

(2)There are no tax equivalency adjustments.
(3)Other interest-earning assets include interest-earning deposits, and federal funds sold, and CDs held for investment.
(4)AnnualizedAnnualized.
  Nine Months Ended September 30, 
  2017  2016 
  
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
  
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
 
ASSETS (dollars in thousands) 
Loans $613,833  $22,105   4.81% $607,113  $21,561   4.74%
LHFS  3,690   162   5.87%  7,570   286   5.05%
AFS securities  4,984   71   1.90%  -   -   - 
HTM securities  61,705   856   1.85%  71,253   890   1.67%
Other interest-earning assets (3)  49,353   317   0.86%  26,479   50   0.25%
Restricted stock investments, at cost  4,791   181   5.05%  5,573   201   4.82%
Total interest-earning assets  738,356   23,692   4.29%  717,988   22,988   4.28%
Allowance  (8,687)          (8,857)        
Cash and other noninterest-earning assets  61,758           69,151         
Total assets $791,427   23,692      $778,282   22,988     
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                     
Interest-bearing deposits:                        
Checking and savings $282,649   618   0.29% $290,518   481   0.22%
Certificates of deposit  215,499   2,306   1.43%  220,337   2,521   1.53%
Total interest-bearing deposits  498,148   2,924   0.78%  510,855   3,002   0.78%
Borrowings  116,539   2,844   3.26%  134,546   3,493   3.47%
Total interest-bearing liabilities  614,687   5,768   1.25%  645,401   6,495   1.34%
Noninterest-bearing deposits  85,928           36,725         
Other noninterest-bearing liabilities  2,624           4,559         
Stockholders’ equity  88,188           91,597         
Total liabilities and stockholders’ equity $791,427   5,768      $778,282   6,495     
Net interest income/net interest spread  $17,924   3.04%     $16,493   2.94%
Net interest margin          3.25%          3.07%


(1)Nonaccrual loans are included in average loans.
(2)There are no tax equivalency adjustments.
(3)Other interest-earning assets include interest-earning deposits and federal funds sold
(4)Annualized

The “Rate/Volume Analysis” below indicates the changes in our net interest income as a result of changes in volume and rates. We maintain an asset and liability management policy designed to provide a proper balance between rate-sensitive assets and rate-sensitive liabilities to attempt to optimize interest margins while providing adequate liquidity for our anticipated needs. Changes in interest income and interest expense that result from variances in both volume and rates have been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.

  Three Months Ended September 30, 2017 vs. 2016  Nine Months Ended September 30, 2017 vs. 2016 
  Due to Variances in  Due to Variances in 
  Rate  Volume  Total  Rate  Volume  Total 
Interest earned on: (dollars in thousands) 
Loans $169  $187  $356  $312  $232  $544 
LHFS  -   (93)  (93)  65   (189)  (124)
AFS securities  -   26   26   -   71   71 
HTM Securities  240   (216)  24   109   (143)  (34)
Other interest-earning assets  28   62   90   196   71   267 
Restricted stock investments, at cost  39   (45)  (6)  14   (34)  (20)
Total interest income  476   (79)  397   696   8   704 
                         
Interest paid on:                        
Interest-bearing deposits:                        
Checking and savings  (123)  58   (65)  158   (21)  137 
Certificates of deposit  217   (160)  57   (160)  (55)  (215)
Total interest-bearing deposits  94   (102)  (8)  (2)  (76)  (78)
Borrowings  53   (262)  (209)  (199)  (450)  (649)
Total interest expense  147   (364)  (217)  (201)  (526)  (727)
Net interest income $329  $285  $614  $897  $534  $1,431 

Three Months Ended March 31, 

2021 vs. 2020

Due to Variances in

    

Rate

    

Volume

    

Total

Interest earned on:

(dollars in thousands)

Loans

$

428

$

(526)

$

(98)

LHFS

 

(438)

 

442

 

4

AFS securities

 

(327)

 

458

 

131

HTM Securities

 

(10)

 

(48)

 

(58)

Other interest-earning assets

 

(1,421)

 

1,158

 

(263)

Restricted stock investments, at cost

 

(9)

 

(14)

 

(23)

Total interest income

 

(1,777)

 

1,470

 

(307)

Interest paid on:

 

 

 

Interest-bearing deposits:

 

 

 

Checking and savings

 

(1,815)

 

1,286

 

(529)

CDs

 

(279)

 

(205)

 

(484)

Total interest-bearing deposits

 

(2,094)

 

1,081

 

(1,013)

Borrowings

 

(52)

 

(145)

 

(197)

Total interest expense

 

(2,146)

 

936

 

(1,210)

Net interest income

$

369

$

534

$

903

Provision for Loan Losses


Our loan portfolio is subject to varying degrees of credit risk and an Allowance is maintained to absorb losses inherent in our loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what we determined it was worth at the time of the granting of the loan. We monitor loan delinquencies at least monthly. All loans that are delinquent and all loans within the various categories of our portfolio as a group are evaluated. Management, with the advice and recommendation of the Company’s Board of Directors, estimates an Allowance to be set aside for probable losses inherent in the loan losses.portfolio. Included in determining the calculation are such factors as historical losses for each loan portfolio, current market value of the loan’s underlying collateral, inherent risk contained within the portfolio after considering the state of the general economy, economic trends, consideration of particular risks inherent in different kinds of lending and consideration of known information that may affect loan collectability.  As

We recorded a resultreversal of our Allowance analysis, duringprovision for loan losses of $750,000 for the ninethree months ended September 30, 2017, we determined thatMarch 31, 2021 and a provision reversalfor loan losses of $650,000 was appropriate.


$750,000 for the three months ended March 31, 2020. In 2020, we recorded the provision primarily due to economic factors related to the COVID-19 pandemic. In 2021, we adjusted those factors as the losses we originally projected related to COVID-19 have not been realized. Additionally in the first quarter of 2021, we experienced a significant drop in loan volume, which also contributed to the provision reversal.

See additional information about the provision for loan losses under “Credit Risk Management and the Allowance” later in this Item.


39

Noninterest Income


Three months ended September 30

Total noninterest income decreasedincreased by $497,000,$2.7 million or 26.2%90.4%, to $1.4$5.8 million for the three months ended September 30, 2017,March 31, 2021, compared to $1.9$3.0 million for the three months ended September 30, 2016, primarily due to decreasedMarch 31, 2020, with the majority of the increase from mortgage-banking revenue. Mortgage-banking revenue decreased $708,000,increased $2.8 million or 67.9%169.0%, due to a decreasedthe increased volume of loans originated through our Internet mortgage platform (“E-Home Finance”) in the third quarter of 2017 compared to the third quarter of 2016. In 2017, the decision was made to move away from the E-Home Finance purchased lead model and instead focus on internally generated leads.  We have experienced a temporary reduction in volume during this transition. Deposit service charges increased $158,000 due primarily to onboarding fees received on a new deposit product$43.2 million during the three months ended September 30, 2017.  Other noninterest income includes $48,000March 31, 2020 to $101.3 million during the three months ended March 31, 2021. A significant portion of the originations were refinances due to the drop in interest rates. The Title Company generated $335,000 in revenue generated byduring the Title Company after the acquisition on September 1, 2017.


Ninethree months ended September 30

Total noninterest income decreased by $1.8 million, or 32.6%,March 31, 2021 compared to $3.8 million$238,000 for the ninethree months ended September 30, 2017, compared to $5.6 millionMarch 31, 2020. Servicing fee income (included in other noninterest income) increased $107,000 from $33,000 for the comparable period in 2016, primarily due to decreased real estate commissions and mortgage-banking revenue. Real estate commissions by Hyatt Commercial decreased by $287,000, or 23.0%, to $959,000 for the ninethree months ended September 30, 2017, comparedMarch 31, 2020 to $1.2 million$140,000 for the same period of 2016.  The decrease was due to a decreased2021 as the volume of commercial sales inloans serviced for FHLMC and FNMA increased during the ninefirst quarter of 2021. Real estate commissions decreased $149,000 and real estate management fees decreased $165,000 during the three months ended September 30, 2017March 31, 2021 compared to the same period in 2016.  Mortgage-banking revenue decreased $1.5 million,of 2020 as we wound down the operations of the Bank’s subsidiary, Louis Hyatt, Inc. after the Hyatt Commercial asset sale on January 1, 2021.

Noninterest Expense

Total noninterest expense increased $554,000, or 57.3%6.7%, to $1.2$8.8 million for the ninethree months ended September 30, 2017,March 31, 2021, compared to $2.7$8.3 million for the comparable period of 2016.  This decrease in activity was the result of a decrease in the volume of loans originated through E-Home Finance in the ninethree months ended September 30, 2017 comparedMarch 31, 2020, primarily due to increases in compensation and related expenses and merger costs related to the ninepending merger with Shore Bank. Compensation and related expenses increased by $761,000, or 13.9%, to $6.2 million for the three months ended September 30, 2016 due to the transition from the E-Home Finance purchased lead model to internally generated leads. Deposit service charges increased $160,000 due primarily to onboarding fees received on a new deposit product during the nine months ended September 30, 2017.  Other noninterest income includes $48,000 in revenue generated by the Title Company after the acquisition on September 1, 2017.


Noninterest Expense

Three months ended September 30

Total noninterest expenses decreased $609,000, or 9.9%,March 31, 2021, compared to $5.5 million for the three months ended September 30, 2017, comparedMarch 31, 2020. This increase was primarily due to $6.1annual salary increases, additional hirings, primarily in the mortgage-banking division, and increased commission expense that corresponds with our increased mortgage-banking volumes. Merger expenses amounted to $238,000 for the three months ended March 31, 2021, primarily consisting of legal fees. Professional fees decreased $152,000 primarily due to decreased external audit and consulting fees in the first quarter of 2021. Additionally, we recognized a $34,000 loss on the sale of Hyatt Commercial during the three months ended March 31, 2021.

Income Tax Provision

We recorded a $1.5 million tax provision on net income before income taxes of $5.4 million for the three months ended September 30, 2016, primarily dueMarch 31, 2021 for an effective tax rate of 27.1%, compared to decreases in compensation and related expenses, Federal Deposit Insurance Corporation (“FDIC”) assessments, mortgage leads purchased, and professional fees. Compensation and related expenses decreased by $640,000, or 16.3%, to $3.3 millionan income tax provision of $213,000 on net income before income taxes of $778,000 for the three months ended September 30, 2017,March 31, 2020, for an effective tax rate of 27.4%.

Financial Condition

Total assets increased $160.4 million to $1.1 billion at March 31, 2021, compared to $3.9$952.6 million for the three months ended September 30, 2016.at December 31, 2020. This decreaseincrease was primarily due to staff reductions. Our FDIC insurance premiums decreased duringa $100.5 million, or 64.2%, increase in cash and cash equivalents, to $257.1 million at March 31, 2021 from $156.6 million at December 31, 2020 due primarily to increased deposits. Additionally, AFS securities increased $67.6 million as we as we redirected some of our excess liquidity in the thirdform of security purchases. Partially offsetting the increase in total assets was a $21.4 million decrease in total loans in the first quarter of 20172021 as a result of the termination of the formal agreements with the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Board (“FRB”) in 2016.  Professional fees decreased by $65,000,significant pay offs. Total deposits increased $157.6 million, or 34.4%19.5%, to $124,000 for the three months ended September 30, 2017,$964.1 million at March 31, 2021 compared to $189,000 for the three months ended September 30, 2016, primarily due to decreased fees incurred for consulting. Mortgage leads purchased decreased $157,000 due to the transition away from the E-Home Finance purchased lead model. Partially offsetting the decreases in noninterest expense, on-line charges increased $120,000, credit reports and appraisal fees increased $55,000, and we recorded increased write-downs and incurred increased costs on real estate acquired through foreclosure during the three months ended September 30, 2017 compared to the same period in 2016.


Nine months ended September 30

Total noninterest expenses decreased $1.3 million, or 7.0%, to $17.0 million for the nine months ended September 30, 2017, compared to $18.3 million for the nine months ended September 30, 2016, with decreases in the majority of expense categories.  Compensation and related expenses decreased by $499,000, or 4.4%, to $10.7 million for the nine months ended September 30, 2017, compared to $11.2 million for the nine months ended September 30, 2016 due to staff reductions. During the nine months ended September 30, 2017, we reversed an over accrual of FDIC assessment expense due to a lower 2017 rate assessment that arose from the termination of the OCC and FRB agreements in 2016. Professional fees decreased by $151,000, or 28.6%, to $377,000 for the nine months ended September 30, 2017, compared to $528,000 for the same period of 2016, primarily due to a decrease in fees incurred for consulting. Mortgage leads purchased decreased $325,000 due to the transition away from the E-Home Finance purchased lead model.
Income Tax Provision

We recorded $950,000 and $2.2 million in income tax provisions during the three and nine months ended September 30, 2017, respectively, compared to a tax provision of $378,000 for the three months ended September 30, 2016 and a $10.8 million income tax benefit for the nine months ended September 30, 2016.  We fully released our net deferred tax asset valuation allowance in the first half of 2016.

Financial Condition

Total assets increased $13.8 million to $801.3 million at September 30, 2017, compared to $787.5$806.5 million at December 31, 2016.  LHFS decreased $5.42020 primarily due to deposits from medical-cannabis related customers. Stockholders’ equity increased $1.4 million or 52.7%, to $4.9$111.1 million at September 30, 2017,March 31, 2021 compared to $10.3$109.6 million at December 31, 2016.  This decrease was2020, due to a lower volume of loan originations,net income to date for the year, partially offset by dividends paid to stockholders and to a lesser extent, the timing of loans pending sale.  Loansan increased $40.7 million, or 6.7%, to $651.0 million at September 30, 2017 from $610.3 million at December 31, 2016 due to increased residential mortgage and commercial real estate originations during 2017.  Total deposits increased $21.5 million, or 3.8%, to $593.5 million at September 30, 2017 compared to $571.9 million at December 31, 2016.  Total borrowings decreased by $10.1 million, or 9.7%, to $93.5 million at September 30, 2017 compared to $103.5 million at December 31, 2016.  The borrowings held at December 31, 2016 began to mature in February of 2017.  To facilitate the funding of the loan growth and the repayment of FHLB advances, cash and cash equivalents decreased by $25.5 million, or 38.0%, to $41.6 million at September 30, 2017, compared to $67.1 million at December 31, 2016.

accumulated other comprehensive loss.

Securities


We utilize the securities portfolio as part of our overall asset/liability management practices to enhance interest revenue while providing necessary liquidity for the funding of loan growth or deposit withdrawals. We continually monitor the credit risk associated with investments and diversify the risk in the securities portfolios. We held $3.1$132.7 million and $65.1 million in AFS securities classified as AFS as of September 30, 2017.March 31, 2021 and December 31, 2020, respectively. We held $58.8$14.5 million and $62.8$15.9 million, respectively, in HTM securities classified as HTM as of September 30, 2017March 31, 2021 and December 31, 2016.2020.


40

Changes in current market conditions, such as interest rates and the economic uncertainties in the mortgage, housing, and banking industries impact the securities market. Quarterly, we review each security in our portfolio to determine the nature of any decline in value and evaluate if any impairment should be classified as OTTI. For the three and nine months ended September 30, 2017,March 31, 2021, we determined that no OTTI charges were required.


All of the AFS and HTM securities that are temporarily impaired as of September 30, 2017 areMarch 31, 2021 were so due to declines in fair values resulting from changes in interest rates or decreased credit/liquidity spreads compared to the time they were purchased. We have the intent to hold these securities to maturity (including those designated as AFS) and it is more likely than not that we will not be required to sell the securities before recovery of value. As such, management considers the impairments to be temporary.


Our AFS securities portfolio consists of United States of America (“U.S.”) government agency notes in the amount of $3.1 million at September 30, 2017, all of which were purchased in 2017.


Our HTM securities portfolio composition is as follows:
  September 30, 2017  December 31, 2016 
  (dollars in thousands) 
U.S. Treasury securities $7,996  $12,998 
U.S. government agency notes  19,008   20,027 
Mortgage-backed securities  31,760   29,732 
  $58,764  $62,757 

AFS

HTM

    

March 31, 2021

    

December 31, 2020

    

March 31, 2021

    

December 31, 2020

    

(dollars in thousands)

U.S. government agency notes

$

9,175

$

6,660

$

1,987

$

1,986

Corporate obligations

2,021

2,034

MBS

 

121,502

 

56,404

 

12,529

 

13,957

$

132,698

$

65,098

$

14,516

$

15,943

LHFS


We originate residential mortgage loans for sale on the secondary market. At September 30, 2017, suchSuch LHFS, which are carried at fair value, amounted to $4.9$50.1 million at March 31, 2021 and $36.3 million at December 31, 2020, the majority of which are subject to purchase commitments from investors. The increase in LHFS balance at December 31, 2016 was $10.3 million and was recorded at lower-of-cost or market value (“LCM”).  LHFS decreased by $5.4 million, or 52.7%, compared to December 31, 2016.  This decrease was primarily due to a lower origination volumeincreased originations and to the timing of loans pending sale on the secondary market.

Loans


Our loan portfolio is expected to produce higher yields than investment securities and other interest-earning assets; the absolute volume and mix of loans and the volume and mix of loans as a percentage of total interest-earning assets is an important determinant of our net interest margin.


The following table sets forth the composition of our loan portfolio:

  September 30, 2017  December 31, 2016 
  Amount  
Percent
of Total
  Amount  
Percent
of Total
 
  (dollars in thousands) 
Residential Mortgage $289,169   44.4% $257,659   42.2%
Commercial  37,485   5.8%  46,468   7.6%
Commercial real estate  223,167   34.3%  195,710   32.1%
Construction, land acquisition, and development (“ADC”)  84,164   12.9%  90,102   14.8%
Home equity/2nds  15,861   2.4%  19,129   3.1%
Consumer  1,118   0.2%  1,210   0.2%
  $650,964   100.0% $610,278   100.0%
Loans increasedportfolio before net unearned loan fees:

March 31, 2021

December 31, 2020

Percent

Percent

    

Amount

    

of Total

    

Amount

    

of Total

    

(dollars in thousands)

Residential Mortgage

$

186,591

29.9

%  

$

209,659

32.4

%

Commercial

 

74,617

 

11.9

%  

 

63,842

 

9.9

%

Commercial real estate

 

243,521

 

39.0

%  

 

243,435

 

37.7

%

ADC

 

103,487

 

16.6

%  

 

112,938

 

17.5

%

Home equity/2nds

 

15,173

 

2.4

%  

 

14,712

 

2.3

%

Consumer

 

1,565

 

0.2

%  

 

1,485

 

0.2

%

Loans receivable, before net unearned fees

$

624,954

 

100.0

%  

$

646,071

 

100.0

%

Total loans, net of unearned loan fees, decreased by $40.7$21.4 million, or 6.7%3.3%, to $651.0$621.5 million at September 30, 2017,March 31, 2021, compared to $610.3$642.9 million at December 31, 2016.2020. This increasedecrease was due primarily to increased demand and originationspayoffs of residential mortgages and commercial real estate loans.and ADC loans, partially offset by increased commercial loan originations (primarily PPP loans).


41

Credit Risk Management and the Allowance


Credit risk is the risk of loss arising from the inability of a borrower to meet his or her obligations and entails both general risks, which are inherent in the process of lending, and risks specific to individual borrowers. Our credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type.


We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.


Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. Our Allowance methodology employs management’s assessment as to the level of future losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers’ current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and/or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. In addition, we evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors. Our risk management practices are designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may inherently exist within the loan portfolio. The assessment aspects involved in analyzing the quality of individual loans and assessing collateral values can also contribute to undetected, but probable, losses. In 2020, we adjusted our economic risk factors to incorporate the current economic implications and rising unemployment rate from the COVID-19 pandemic. In 2021, we re-adjusted those economic factors as we experienced the benefit of improving economic conditions. For more detailed information about our Allowance methodology and risk rating system, see Note 3 to the Consolidated Financial Statements.

42

The following table summarizes the activity in our Allowance by portfolio segment:

Three Months Ended

March 31, 

2021

    

2020

    

(dollars in thousands)

Allowance, beginning of period

$

8,670

$

7,138

Charge-offs:

 

 

Residential mortgage

 

 

Commercial

 

 

Commercial real estate

 

 

ADC

 

(34)

 

Home equity/2nds

 

 

Consumer

 

 

(15)

Total charge-offs

 

(34)

 

(15)

Recoveries:

 

 

Residential mortgage

 

65

 

3

Commercial

 

5

 

5

Commercial real estate

 

174

 

32

ADC

 

 

Home equity/2nds

 

4

 

2

Consumer

 

1

 

3

Total recoveries

 

249

 

45

Net recoveries

 

215

 

30

(Reversal of) provision for loan losses

 

(750)

 

750

Allowance, end of period

$

8,135

$

7,918

Loans:

 

 

Period-end balance

$

621,512

$

635,950

Average balance during period

 

633,698

 

644,087

Allowance as a percentage of period-end loan balance (1)

1.31

%

1.25

%

Percent of average loans (annualized):

 

 

(Reversal of) provision for loan losses

 

(0.48)

%  

 

0.47

%  

Net recoveries

 

0.14

%  

 

0.02

%  

(1)The Allowance at March 31, 2021, as a percentage of total loans, excluding PPP loans was 1.40%
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (dollars in thousands) 
Allowance, beginning of period $7,718  $8,804  $8,969  $8,758 
Charge-offs:                
Residential mortgage  -   -   (707)  (151)
Commercial  -   -   -   (17)
Commercial real estate  -   -   -   (178)
ADC  -   (72)  -   (72)
Home equity/2nds  -   -   (98)  (28)
Consumer  -   -   -   - 
Total charge-offs  -   (72)  (805)  (446)
Recoveries:                
Residential mortgage  156   137   295   322 
Commercial  -   10   -   43 
Commercial real estate  40   4   100   4 
ADC  -   -   -   100 
Home equity/2nds  22   2   27   4 
Consumer  -   50   -   50 
Total recoveries  218   203   422   523 
Net recoveries (charge offs)  218   131   (383)  77 
Provision for (reversal of) loan losses  -   50   (650)  150 
Allowance, end of period $7,936  $8,985  $7,936  $8,985 
Loans:                
Period-end balance $650,964  $612,458  $650,964  $612,458 
Average balance during period  621,177   609,096   613,833   607,113 
Allowance as a percentage of period-end loan balance  1.22%  1.47%  1.22%  1.47%
Percent of average loans (annualized):                
Provision for (reversal of) loan losses  -   0.03%  (0.14)%  0.03%
Net recoveries (charge offs)  0.14%  0.09%  (0.08)%  0.02%

The following table summarizes our allocation of the Allowance by loan segment:

March 31, 2021

December 31, 2020

    

    

    

Percent

    

    

    

Percent

  

of Loans

of Loans

Percent

to Total

Percent

to Total

Amount

of Total

Loans

Amount

of Total

Loans

(dollars in thousands)

Residential mortgage

$

1,799

 

22.1

%  

29.9

%  

$

2,259

 

26.0

%  

32.4

%

Commercial

 

1,780

 

21.9

%  

11.9

%  

 

1,670

 

19.3

%  

9.9

%

Commercial real estate

 

1,453

 

17.9

%  

39.0

%  

 

1,516

 

17.5

%  

37.7

%

ADC

 

2,705

 

33.2

%  

16.6

%  

 

2,947

 

34.0

%  

17.5

%

Home equity/2nds

 

219

 

2.7

%  

2.4

%  

 

168

 

1.9

%  

2.3

%

Consumer

 

 

%  

0.2

%  

 

 

%  

0.2

%

Unallocated

 

179

 

2.2

%  

%  

 

110

 

1.3

%  

%

Total

$

8,135

 

100.0

%  

100.0

%  

$

8,670

 

100.0

%  

100.0

%

43

  September 30, 2017  December 31, 2016 
  Amount  
Percent
of Total
  
Percent
of Loans
to Total
Loans
  Amount  
Percent
of Total
  
Percent
of Loans
to Total
Loans
 
  (dollars in thousands) 
Residential mortgage $3,422   43.1%  44.4% $3,833   42.7%  42.2%
Commercial  442   5.6%  5.8%  478   5.3%  7.6%
Commercial real estate  2,567   32.3%  34.3%  2,535   28.3%  32.1%
ADC  1,142   14.4%  12.9%  1,390   15.5%  14.8%
Home equity/2nds  361   4.6%  2.4%  728   8.1%  3.1%
Consumer  2   -   0.2%  5   0.1%  0.2%
Total $7,936   100.0%  100.0% $8,969   100.0%  100.0%

Based upon management’s evaluation, provisions are made to maintain the Allowance as a best estimate of inherent losses within the portfolio. The Allowance totaled $7.9$8.1 million at September 30, 2017March 31, 2021 and  $9.0$8.7 million at December 31, 2016.2020. Any changes in the Allowance from period to period reflect management’s ongoing application of its methodologies to establish the Allowance, which, for the ninethree months ended September 30, 2017,March 31, 2021, resulted in decreased allocated Allowances for most loan segments.  The allocated Allowance for commercial real estate increased over the December 31, 2016 level. The changes inmajority of the Allowances for the respective loan segments, were a functionwith the exception of the changes in the corresponding loan balancescommercial loans and asset quality.

home equity/2nds.

As a result of our Allowance analysis, we recorded a (reversal of) provision for loan losses of $(750,000) and overall improved asset quality, we released $650,000 from the Allowance during the nine months ended September 30, 2017.  We did not record a provision, nor did we release any Allowance$750,000 during the three months ended September 30, 2017.  WeMarch 31, 2021 and 2020, respectively. In 2020, we recorded $50,000 and $150,000, respectively,the provision primarily due to economic factors related to the COVID-19 pandemic. In 2021, we adjusted those factors as the losses we originally projected related to COVID-19 have not been realized. Additionally in the first quarter of 2021, we experienced a significant drop in loan volume, which also contributed to the provision for losses for the three and nine months ended September 30, 2016.  reversal.

We recorded net recoveries of $218,000$215,000 and net charge-offs $383,000, respectively, during the three and nine months ended September 30, 2017 compared to net recoveries of $131,000 and $77,000,$30,000, respectively, during the three months ended March 31, 2021 and nine2020, respectively. During the three months ended September 30, 2016.  During the nine months ended September 30, 2017,March 31, 2021 and 2020, annualized net (charge-offs) recoveries as compared toa percentage of average loans outstanding amounted to (0.08)%0.14% and 0.02%, compared to 0.02% during the first nine months of 2016.respectively. The Allowance as a percentage of outstanding loans decreased from 1.47%was 1.31% as of March 31, 2021 compared to 1.35% as of  December 31, 20162020, the decrease in which was primarily the result of the reversal of provision for loan losses.

PPP loans are fully guaranteed by the SBA and, therefore, not required to 1.22%have an allocated Allowance. The Allowance as a percentage of September 30, 2017, reflecting the improvement in our overall asset quality.


outstanding loans less PPP loans amounted to 1.40% at March 31, 2021.

Although management uses available information to establish the appropriate level of the Allowance, future additions or reductions to the Allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions, and other factors. As a result, our Allowance may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our Allowance and related methodology. Such agencies may require us to recognize adjustments to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of September 30, 2017March 31, 2021 and is sufficient to address the credit losses inherent in the current loan portfolio.


Nonperforming Assets (“NPAs”)

Management will continue to evaluate the adequacy of the Allowance as more economic data becomes available and as changes within our portfolio are known. The effects of the COVID-19 pandemic may still require us to fund additional increases in the Allowance in future periods.

NPAs

Given the volatility of the real estate market, it is very important for us to have current appraisalsvaluations on our NPAs. Generally, we obtain appraisals or alternative valuations on NPAs annually. In addition, as part of our asset monitoring activities, we maintain a Loss Mitigation Committee that meets monthly. During these Loss Mitigation Committee meetings, all NPAs and loan delinquencies are reviewed. Additionally, loans in industries vulnerable to the effects of COVID-19 and loans that were or continue to be on interest deferral are reviewed. We also produce an NPA report which is distributed monthly to senior management and is also discussed and reviewed at the Loss Mitigation Committee meetings. This report contains all relevant data on the NPAs, including the latest appraised value (or alternative valuation vehicle) and valuation date. Accordingly, these reports identify which assets will require an updated appraisal.valuation. As a result, we have not experienced any internal delays in identifying which loans/credits require appraisals.updated valuations. With respect to the ordering process of the appraisals, we have not experienced any delays in turnaround time nor has this been an issue over the past three years. Furthermore, we have not had any delays in turnaround time or variances thereof in our specific loan operating markets.


NPAs, expressed as a percentage of total assets, totaled 0.93%0.2% at September 30, 2017March 31, 2021 and 1.37%0.6% at December 31, 2016.2020. The ratio of the Allowance to nonperforming loans was 124.4%634.1% at September 30, 2017March 31, 2021 and 91.0%197.9% at December 31, 2016.  The increase in this ratio from December 31, 2016 to September 30, 2017 was a reflection2020.

44


The distribution of our NPAs is illustrated in the following table. We did not have any loans greater than 90 days past due and still accruing at September 30, 2017 andMarch 31, 2021 or December 31, 2016.

  September 30, 2017  December 31, 2016 
Nonaccrual Loans: (dollars in thousands) 
Residential mortgage $4,531  $3,580 
Commercial  84   151 
Commercial real estate  160   2,938 
ADC  318   269 
Home equity/2nds  1,284   2,914 
Consumer  -   - 
   6,377   9,852 
         
Real Estate Acquired Through Foreclosure:        
Residential mortgage  287   393 
Commercial  -   - 
Commercial real estate  601   341 
ADC  216   239 
Home equity/2nds  -   - 
Consumer  -   - 
   1,104   973 
Total Nonperforming Assets $7,481  $10,825 
2020.

    

March 31, 2021

    

December 31, 2020

    

Nonaccrual Loans:

(dollars in thousands)

Residential mortgage

$

910

 

$

4,080

Commercial real estate

 

213

 

 

126

ADC

 

54

 

 

60

Home equity/2nds

 

106

 

 

114

Consumer

 

 

 

 

1,283

 

 

4,380

Real Estate Acquired Through Foreclosure:

 

  

 

 

  

Commercial real estate

 

452

 

 

452

ADC

 

558

 

 

558

 

1,010

 

 

1,010

Total NPAs

$

2,293

 

$

5,390

Nonaccrual loans amounted to $6.4totaled $1.3 million, or 1.0%0.21% of total loans, at September 30, 2017March 31, 2021 and $9.9$4.4 million, or 1.6%0.68% of total loans at December 31, 2016.  We added six2020. Significant activity in nonaccrual loans during the three months ended March 31, 2021 included the addition of three loans in the amount of $2.6 million$138,000 to nonaccrual status during 2017.  Ofand the balancepayoff of two loans that were in nonaccrual loansstatus at December 31, 2016, $2.6 million were returned to accrual status, $422,000 were charged off, $515,000 were transferred to real estate acquired through foreclosure, and $1.7 million were paid off.

$3.1 million.

Real estate acquired through foreclosure increased $131,000 compared toremained unchanged at $1.0 million at both March 31, 2021 and December 31, 2016. The increase in commercial real estate was primarily from one foreclosure in the amount of $515,000.


2020.

The activity in our real estate acquired through foreclosure was as follows:

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (dollars in thousands) 
Balance at beginning of period $1,015  $1,112  $973  $1,744 
Real estate acquired in satisfaction of loans  188   293   703   1,370 
Write-downs and losses  (99)  (62)  (139)  (149)
Proceeds from sales  -   -   (433)  (1,622)
Balance at end of period $1,104  $1,343  $1,104  $1,343 

Three Months Ended March 31, 

    

2021

    

2020

    

(dollars in thousands)

Balance at beginning of period

$

1,010

$

2,387

Write-downs and losses on real estate acquired through foreclosure

 

 

(80)

Proceeds from sales of real estate acquired through foreclosure

 

 

(623)

Balance at end of period

$

1,010

$

1,684

TDRs


In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. See Significant Developments – COVID-19 for information regarding the CARES Act and its effect on modifications.


45

The composition of our TDRs is illustrated in the following table:

  September 30, 2017  December 31, 2016 
Residential mortgage: (dollars in thousands) 
Nonaccrual $2,285  $2,137 
<90 days past due/current  13,086   15,886 
Commercial real estate:        
Nonaccrual  84   249 
<90 days past due/current  1,875   1,914 
ADC:        
Nonaccrual  6   6 
<90 days past due/current  138   170 
Home equity/2nds:        
Nonaccrual  -   - 
<90 days past due/current  230   - 
Consumer        
Nonaccrual  -   - 
<90 days past due/current  87   96 
Totals        
Nonaccrual  2,375   2,392 
<90 days past due/current  15,416   18,066 
  $17,791  $20,458 

    

March 31, 2021

    

December 31, 2020

    

Residential mortgage:

(dollars in thousands)

Nonaccrual

$

159

$

163

<90 days past due/current

 

5,618

 

5,787

Commercial real estate:

 

  

 

  

Nonaccrual

 

 

<90 days past due/current

 

417

 

421

ADC:

 

  

 

  

Nonaccrual

 

 

<90 days past due/current

 

127

 

128

Home equity/2nds:

Nonaccrual

 

 

<90 days past due/current

 

187

 

190

Consumer:

 

  

 

  

Nonaccrual

 

 

<90 days past due/current

 

62

 

63

Totals:

 

  

 

  

Nonaccrual

 

159

 

163

<90 days past due/current

 

6,411

 

6,589

$

6,570

$

6,752

CARES Act Loans

In the wake of the COVID-19 pandemic, loan modifications requests have been granted to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Cares Act are met. The table below presents information related to loan modifications made in compliance with the CARES Act for the three months ended March 31, 2021:

    

Residential

    

Commercial

    

Commercial Real Estate

    

Home Equity/2nds

    

Consumer

    

Total

(dollars in thousands)

Balance at beginning of period

$

6,009

$

2,052

$

14,990

$

141

$

158

$

23,350

Additional modifications granted

 

455

 

398

 

3,694

 

 

157

 

4,704

Principal payments net of draws on active deferred loans

 

(5,917)

 

(1,035)

 

(8,365)

 

(141)

 

(158)

 

(15,616)

Balance at end of period

$

547

$

1,415

$

10,319

$

$

157

$

12,438

See additional information on TDRs in Note 3 to the Consolidated Financial Statements.


Statements herein.

Deposits


Deposits were $593.5totaled $964.1 million at September 30, 2017March 31, 2021 and $571.9$806.5 million at December 31, 2016.  During2020. The $157.6 million increase was primarily the nine months ended September 30, 2017, we obtained significant new noninterest-bearingresult of short-term medical-use cannabis related funds (funds that have not yet actually been used in the medical-use cannabis industry) that account holders have placed at the Bank temporarily while looking for desired investments in the industry. Management is aware of the short-term nature of such medical-use cannabis related deposits and interest-bearing checking accounts through a campaign designedoffset those funds by maintaining short-term liquidity to attract deposits in certain local emerging markets. The decrease in certificates ofmeet any deposit (“CDs”) was due to the payoff of regularly maturing CDs.outflows.

46

The deposit breakdown is as follows:

  September 30, 2017  December 31, 2016 
  Balance  
Percent
of Total
  Balance  
Percent
of Total
 
  (dollars in thousands) 
Checking and savings $261,581   44.1% $239,985   41.9%
Certificates of deposit  260,396   43.9%  273,816   47.9%
Total interest-bearing deposits  521,977   88.0%  513,801   89.8%
Noninterest-bearing deposits  71,515   12.0%  58,145   10.2%
Total deposits $593,492   100.0% $571,946   100.0%

March 31, 2021

December 31, 2020

 

    

    

Percent

    

    

Percent

 

Balance

of Total

Balance

of Total

 

    

(dollars in thousands)

 

NOW

$

188,968

19.6

%  

$

106,589

13.2

%

Money market

177,898

18.4

%  

191,506

23.7

%

Savings

65,451

6.8

%  

63,464

7.9

%

Certificates of deposit

 

194,638

 

20.2

%  

 

199,804

 

24.8

%

Total interest-bearing deposits

 

626,955

 

65.0

%  

 

561,363

 

69.6

%

Noninterest-bearing deposits

 

337,141

 

35.0

%  

 

245,093

 

30.4

%

Total deposits

$

964,096

 

100.0

%  

$

806,456

 

100.0

%

The following table provides the maturities of CDs in amounts of $250,000 or more:

    

March 31, 2021

    

December 31, 2020

Maturing in:

(dollars in thousands)

3 months or less

$

3,054

$

5,230

Over 3 months through 6 months

 

5,137

 

2,798

Over 6 months through 12 months

 

6,276

 

6,217

Over 12 months

 

9,400

 

9,575

$

23,867

$

23,820

Total deposits with balances of $250,000 or more amounted to $528.3 million and $377.8 million at March 31, 2021 and December 31, 2020, respectively. Total uninsured deposits amounted to $467.0 million and $353.0 million at March 31, 2021 and December 31, 2020, respectively.

Borrowings


Our borrowings consist of advances from the FHLB and a term loan from a commercial bank.


FHLB.

The FHLB advances are available under a specific collateral pledge and security agreement, which requires that we maintain collateral for all of our borrowings equal to 30% of total assets. Our advances from the FHLB may be in the form of short-term or long-term obligations. Short-term advances have maturities for one year or less and may contain prepayment penalties. Long-term borrowings through the FHLB have original maturities up to 15 years and generally contain prepayment penalties.


At September 30, 2017,March 31, 2021, our total credit line with the FHLB was  $231.7$285.0 million. The Bank, from time to time, utilizes the line of credit when interest rates are more favorable than obtaining deposits from the public. Our outstanding FHLB advance balance at September 30, 2017both March 31, 2021 and December 31, 20162020 was $90.0 million and $100.0 million, respectively.


On September 30, 2016,$10.0 million.

At March 31, 2021, we entered intoalso maintained a loan agreementline of credit with a commercialbankers’ bank wherebyin the amount of $11.0 million, which we borrowed $3,500,000 for a term of 8 years. The unsecured note bears interest at a fixed rate of 4.25% for the first 36 months then, at the option of the Company, converts to either (1) floating rate of the Wall Street Journal Prime plus 50 basis points or (2) fixed rate at two hundred seventy five (275) basis points over the five year amortizing FHLB rate for the remaining five years. Repayment terms are monthly interest only payments for the first 36 months, then quarterly principal payments of $175,000 plus interest. The loan is subject to a prepayment penalty of 1% of the principal amount prepaid during the first 36 months. If we elect the 5 year fixed rate of 275 basis points over the FHLB rate (“FHLB Rate Period”), the loan will be subject to a prepayment penalty of 2% during the first and second years of the FHLB Rate Period and 1% of the principal repaid during the third, fourth, and fifth years of the FHLB Rate Period. We may make additional principal payments from internally generated funds of up to $875,000 per year during any fixed rate period without penalty. There is no prepayment penalty during any floating rate period.

had not drawn upon.

The following table sets forth information concerning the interest rates and maturity dates of the advances from the FHLB as of September 30, 2017:March 31, 2021:

Principal

    

Amount (in thousands)

Rate

Maturity

$10,000

 

2.19%

2022

Certain loans in the amount of $123.5 million have been pledged under a blanket floating lien to the FHLB as collateral against advances at March 31, 2021.

47

Principal
Amount (in thousands)
  Rate  Maturity 
$24,950  1.21% to 4.05%  2017 
 15,000  2.58% to 3.43%  2018 
 35,000  1.55% to 4.00%  2019 
 15,000  1.75%  2020 
$89,950        

Subordinated Debentures


As of both September 30, 2017March 31, 2021 and December 31, 2016,2020, the Company had outstanding $20.6 million in principal amount of Junior Subordinated Debt Securities, due in 2035 (the “2035 Debentures”).Debentures. The 2035 Debentures were issued pursuant to anthe 2035 Indenture dated as of December 17, 2004 (the “2035 Indenture”) between the Company and Wells Fargo Bank, National Association as Trustee. The 2035 Debentures pay interest quarterly at a floating rate of interest of 3-month LIBOR plus 200 basis points, and mature on January 7, 2035. Payments of principal, interest, premium and other amounts under the 2035 Debentures are subordinated and junior in right of payment to the prior payment in full of all senior indebtedness of the Company, as defined in the 2035 Indenture. The 2035 Debentures became redeemable, in whole or in part, by the Company on January 7, 2010.

The 2035 Debentures were issued and sold to Severn Capitalthe Trust, I (the “Trust”), of which 100% of the common equity is owned by the Company. The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures. The 2035 Debentures held by the Trust are the sole assets of the Trust. Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures. We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee.


Under the terms of the 2035 Debenture,Debentures, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing. As of DecemberMarch 31, 2015, we had deferred the payment of fifteen quarters of interest and the cumulative amount of interest in arrears not paid, including interest on unpaid interest, was $1,863,000.  During the third quarter of 2016, we paid all of the deferred interest and as of September 30, 2017,2021, we were current on all interest due on the 2035 Debenture.


Debentures.

Capital Resources


Total stockholders’ equity increased $4.1$1.4 million to $92.0$111.1 million at September 30, 2017March 31, 2021 compared to $87.9$109.6 million as of December 31, 2016.2020. The increase was principally the result of 20172021 net income to date, partially offset by an increase in accumulated other comprehensive loss and stock issuance relateddividends paid to stockholders during the purchase of the Title Company.


Series A Preferred Stock

On November 15, 2008, the Company completed a private placement offering consisting of a total of 70 units, at an offering price of $100,000 per unit, for gross proceeds of $7,000,000. Each unit consists of 6,250 shares of the Company’s Series A 8.0% Non-Cumulative Convertible Preferred Stock. Dividends will not be paid on our common stock in any quarter until the dividend on the Series A Preferred Stock has been paid for such quarter; however, there is no requirement that our Board of Directors declare any dividends on the Series A Preferred Stock and any unpaid dividends are not cumulative.

Series B Preferred Stock

On November 21, 2008, we entered into an agreement with the United States Department of the Treasury (“Treasury”), pursuant to which we issued and sold (i) shares of our Series B Fixed Rate Cumulative Perpetual Preferred Stock (“Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 556,976 shares of the Company’s common stock, par value $0.01 per share.  As of Decemberthree months ended March 31, 2016, the Company had redeemed all outstanding shares of the Preferred Stock. At September 30, 2017 the Treasury continues to hold the Warrant.

The Warrant has a 10-year term and is immediately exercisable at an exercise price of $6.30 per share of Common Stock.  The exercise price and number of shares subject to the Warrant are both subject to anti-dilution adjustments.  Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant. The warrant expires November 11, 2018.

2021.

Capital Adequacy


The Bank is 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 the Bank’sCompany’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the Bank exceeded all capital adequacy requirements to which it is subject and meets the qualifications to be considered “well capitalized.” As of January 1, 2020, the Bank elected to follow the Community Bank Leverage Ratio. See details of our capital ratios in Note 4 ofto the Consolidated Financial Statements.


Liquidity


Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers, to fund the operations of our mortgage-banking business, as well as to meet current and planned expenditures. These cash requirements are met on a daily basis through the inflow of deposit funds, the maintenance of short-term overnight investments, maturities and calls in our securities portfolio, and available lines of credit with the FHLB, which requires pledged collateral. Fluctuations in deposit and short-term borrowing balances may be influenced by the interest rates paid, general consumer confidence, and the overall economic environment. There can be no assurances that deposit withdrawals and loan fundings will not exceed all available sources of liquidity on a short-term basis. Such a situation would have an adverse effect on our ability to originate new loans and maintain reasonable loan and deposit interest rates, which would negatively impact earnings.

48

Our principal sources of liquidity are loan repayments, maturing investments, deposits, borrowed funds, and proceeds from loans sold on the secondary market. The levels of such sources are dependent on the Bank’s operating, financing, and investing activities at any given time. We consider core deposits stable funding sources and include all deposits, except time depositsCDs of $100,000 or more. The Bank’s experience has been that a substantial portion of certificates of depositCDs renew at time of maturity and remain on deposit with the Bank. Additionally, loan payments, maturities, deposit growth, and earnings contribute to our flow of funds.


In addition to our ability to generate deposits, we have external sources of funds, which may be drawn upon when desired. The primary source of external liquidity is an available line of credit with the FHLB. The Bank’s total credit availability under the FHLB’s credit availability program was $231.7$285.0 million at September 30, 2017,March 31, 2021, of which $90.0$10.0 million was outstanding.


 In addition, at March 31, 2021, we also maintained a line of credit with a bankers’ bank in the amount of $11.0 million, which we had not drawn upon.

The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit (collectively “commitments”), which totaled $101.4$134.1 million at September 30, 2017.March 31, 2021. Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. As of September 30, 2017, we had $72.0 million in unadvanced construction commitments, which weWe expect to fund these commitments from the sources of liquidity described above.  These amounts do not include undisbursed lines of credit, home equity lines of credit, and standby letters of credit, in the aggregate amount of $29.2 million at September 30, 2017, which we anticipate we will be able to fund, if required, from these liquidity sources in the regular course of business.


Customer withdrawals are also a principal use of liquidity, but are generally mitigated by growth in customer funding sources, such as deposits and short-term borrowings.


In addition to the foregoing, the payment of dividends is a use of cash, but is not expected to have a material effect on liquidity. As of September 30, 2017,March 31, 2021, we had no material commitments for capital expenditures.


Our ability to acquire deposits or borrow could be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. As of March 31, 2021, we have not experienced any negative impact on our liquidity due to COVID-19. At September 30, 2017,March 31, 2021, management considered the Company’s liquidity level to be sufficient for the purposes of meeting our cash flow requirements. We are not aware of any undisclosed known trends, demands, commitments, or uncertainties that are reasonably likely to result in material changes in our liquidity.


We anticipate that our primary sources of liquidity over the next twelve months will be from loan repayments, maturing investments, deposit growth, and borrowed funds. We believe that these sources of liquidity will be sufficient for us to meet our liquidity needs over the next twelve months.


Off-Balance Sheet Arrangements and Derivatives


We enter into off-balance sheet arrangements in the normal course of business. These arrangements consist primarily of commitments to extend credit, lines of credit, and letters of credit. In addition, we have certain operating lease obligations.


Credit Commitments


Credit commitments 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 fixed 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.


Our exposure to credit loss in the event of nonperformance by the borrower is the contract amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. We are not aware of any accounting loss we would incur by funding our commitments.


See detailed information on credit commitments above under “Liquidity.”


49

Derivatives

Derivatives

We maintain and account for derivatives, in the form of interest-rate lock commitments (“IRLCs”) ,IRLCs and mandatory forward contracts, and best effort forward contracts, in accordance with the Financial Accounting Standards BoardFASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses on IRLCs, mandatory forward contracts, and best effort forward contracts on the loan pipeline through mortgage-banking revenue in the Consolidated Statements of Operations.

Income.

IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan closes until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 60 days. For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of best efforts and mandatory forward contracts.


Information pertaining

See Note 8 to the carrying amounts ofconsolidated financial statements for more detailed information on our derivative financial instruments follows:

  September 30, 2017  December 31, 2016 
  
Notional
Amount
  
Estimated
Fair Value
  
Notional
Amount
  
Estimated
Fair Value
 
  (dollars in thousands) 
Asset - IRLCs $2,329  $42  $9,725  $162 
Asset - Mandatory forward contracts  4,731   7   10,302   153 
Asset - Best effort forward contracts  2,329   6   -   - 
derivatives.

Inflation


The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the U.S.GAAP and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. As a financial institution, virtually all of our assets and liabilities are monetary in nature and interest rates have a more significant impact on our performance than the effects of general levels of inflation. A prolonged period of inflation could cause interest rates, wages, and other costs to increase and could adversely affect our results of operations unless mitigated by a corresponding increase in our revenues. However, we believe that the impact of inflation on our operations was not material in 2017 or 2016.


Item 3.
Quantitative and Qualitative Disclosures About Market Risk

for the three months ended March 31, 2021 and 2020.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The principal objective of the Company’s interest rate risk management is to evaluate the interest rate risk included in balance sheet accounts, determine the level of risks appropriate given our business strategy, operating environment, capital and liquidity requirements, and performance objectives, and manage the risk consistent with our interest rate risk management policy. Through this management, we seek to reduce the vulnerability of our operations to changes in interest rates. The Board of Directors of the Company is responsible for reviewing our asset/liability policy and interest rate risk position. The Board of Directors reviews the interest rate risk position on a quarterly basis and, in connection with this review, evaluates the Company’s business activities and strategies, the effect of those strategies on the Company’s net interest margin and the effect that changes in interest rates will have on the loan portfolio. While continuous movement of interest rates is certain, the extent and timing of these movements is not always predictable. Any movement in interest rates has an effect on our profitability. We face the risk that rising interest rates could cause the cost ofinterest-bearing liabilities, such as deposits and borrowings, to rise faster than the yield on interest-earning assets, such as loans and investments. Our interest rate spread and interest rate margin also may be negatively impacted in a declining interest rate environment even though we generally borrow at short-term interest rates and lend at longer-term interest rates. This is because loans and other interest-earning assets may be prepaid and replaced with lower yielding assets before the supporting interest-bearing liabilities reprice downward. Our interest rate margin may also be negatively impacted in a flat or inverse-yield curve environment. Mortgage origination activity tends to increase when interest rates trend lower and decrease when interest rates rise.


Our primary strategy to control interest rate risk is to strive to balance our loan origination activities with the interest rate market. We attempt to maintain a substantial portion of our loan portfolio in short-term loans such as construction loans. This has proven to be an effective hedge against rapid increases in interest rates as the construction loan portfolio reprices rapidly.


The matching of maturity or repricing of interest-earning assets and interest-bearing liabilities may be analyzed by examining the extent to which these assets and liabilities are interest rate sensitive and by monitoring the Bank’s interest rate sensitivity gap. An interest-earning asset or interest-bearing liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. The difference between rate sensitive assets and rate sensitive

50

liabilities represents the Bank’s interest sensitivity gap. At September 30, 2017,March 31, 2021, we had a one-year cumulative negative gap of approximately $159.2$30.0 million.

Exposure to interest rate risk is actively monitored by management. The objective is to maintain a consistent level of profitability within acceptable risk tolerances across a broad range of potential interest rate environments. We use the PROFITstar® model to monitor our exposure to interest rate risk, which calculates changes in the economic value of equity (“EVE”).

EVE.

The following table represents our EVE as of September 30, 2017:

Change in Rates  Amount  $ Change  % Change 
   (dollars in thousands)    
+400bp $160,130  $(16,836)  -9.51%
+300bp  166,030   (10,936)  -6.18%
+200bp  170,894   (6,072)  -3.43%
+100bp  174,580   (2,386)  -1.35%
0bp  176,966         
-100bp  176,569   (397)  -0.22%
-200bp  169,398   (7,568)  -4.28%
March 31, 2021:

Change in Rates

    

Amount

    

$ Change

    

% Change

(dollars in thousands)

+400

bp  

$

232,146

$

(30,756)

 

(11.7)

%

+300

bp  

 

230,812

 

(32,090)

 

(12.2)

%

+200

bp  

 

223,246

 

(39,656)

 

(15.1)

%

+100

bp  

 

234,062

 

(28,840)

 

(11.0)

%

0

bp  

 

262,902

 

 

 -100

bp  

 

144,939

 

(117,963)

 

(44.9)

%

The preceding income simulation analysis does not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable-rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed.


Item 4.
Controls and Procedures

Item 4.    Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive OfficerCEO and Chief Financial Officer,CFO, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934.Act. Based on that evaluation, the Chief Executive OfficerCEO and Chief Financial OfficerCFO concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the three months ended September 30, 2017March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II – OTHER INFORMATION


Item 1.
Legal Proceedings

Item 1.    Legal Proceedings

In the normal course of business, we are party to litigation arising from the banking, financial, and other activities we conduct. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results, or liquidity as of September 30, 2017.


March 31, 2021.

Item 1A.Risk Factors

Item 1A. Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Annual Report on Form 10-K of Severn Bancorp as of and for the year ended December 31, 2016.2020.  There hashave been no material changechanges in our risk factors since the filing of our December 31, 20162020 Annual Report on Form 10-K.


51

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.    Defaults Upon Senior Securities

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

None.

Item 5.
Other Information
None.

Item 6.    Exhibits

Item 6.Exhibits

Exhibit No.

Description

31.1

31.1

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

101.INS

The following financial statements from the Severn Bancorp, Inc. Quarterly Report on Form 10-Q

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definitions Linkbase Document

104

Cover Page Interactive Data File (formatted as of September 30, 2017Inline XBRL and for the three and nine months ended September 30, 2017, formattedcontained in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.Exhibit 101)

52

EXHIBIT INDEX

Exhibit No.

Description

31.1

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

101.INS

The following financial statements from the Severn Bancorp, Inc. Quarterly Report on Form 10-Q

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definitions Linkbase Document

104

Cover Page Interactive Data File (formatted as of September 30, 2017Inline XBRL and for the three and nine months ended September 30, 2017, formattedcontained in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.Exhibit 101)

53

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


SEVERN BANCORP, INC.

November 14, 2017

May 17, 2021

/s/ Alan J. Hyatt

Alan J. Hyatt,
Chairman of the Board, President and Chief Executive Officer

(Principal Executive Officer)

November 14, 2017

May 17, 2021

/s/ Paul B. Susie

Vance W. Adkins

Paul B. Susie,
Executive Vice President,

Vance W. Adkins,
Chief Financial Officer

(Principal Financial and Accounting Officer)

45

54