ASU 2019-11 provides ~~guidance regarding~~transition relief when adjusting the ~~presentation~~effective 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. 2016-15~~the guidance in paragraph 326-20-35-6 for financial assets secured by collateral maintenance provisions that provide a practical expedient to ~~have~~measure the estimate of expected credit losses by comparing the amortized cost basis of a ~~material impact on our~~ financial ~~position, results~~asset and the fair value of ~~operations, or cash flows.~~

~~In March 2017, FASB issued ASU No. 2017-08,~~ ~~Receivables - Nonrefundable Fees~~collateral securing the financial asset as of the reporting date. The effective date and ~~Other costs,~~ ~~which provides guidance that calls~~transition requirements for the ~~shortening of~~amendment are the ~~amortization period for certain callable debt securities held at a premium. The standard is~~same as the effective ~~for interim~~date 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.

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

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~~

Table of ~~September 30, 2017 for less than twelve months, with the largest single unrealized loss in any one security amounting to~~ ~~$3,000.~~Contents

Gross unrealized losses and fair value by length of time that the individual ~~HTM~~AFS 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.~~

~~Table of Contents~~

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, 2017~~March 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 no~~the 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 or~~March 31, 2021 and December 31, ~~2016.~~2020, respectively.

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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, 2017~~March 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 our~~consideration of risk. Our portfolio classes are the same as our portfolio segments.

~~Table of Contents~~

Inherent Credit Risks

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

Residential mortgage- secured by ~~one~~1 to ~~four~~4 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.

Table of Contents

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. Repayment~~estate 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 on~~cash 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 ~~one~~1 to ~~four~~4 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

~~Risk Ratings~~

Table of Contents

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

national and ~~loss. Loans classified as special mention have potential weaknesses~~local “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 deterioration~~beginning of the ~~repayment prospects. Loans classified substandard~~second quarter of 2020. Although most “stay at home” orders have ~~a well-defined weakness or weaknesses that jeopardize the liquidation~~since 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 worth~~economic uncertainty, borrowers have faced and ~~paying capacity~~could 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.~~

~~Table of Contents~~

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 by~~obligations. Additionally, real estate ~~- when a secured real estate loan becomes impaired, a decision is made as~~collateral 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 appraisal~~reflect 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.

~~Table of Contents~~

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 component~~adequacy 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. Loans~~exempt 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 class~~available 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 each~~consumer loan ~~class is then applied~~borrowers. Due to the ~~current~~widespread impact of COVID-19, we have had loan ~~portfolio balances~~borrowers 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 multipliers~~have 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.~~

~~Table of Contents~~

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

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

Table of Contents

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

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

Table of Contents

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, 2017~~March 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 ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively. The actual interest ~~income recorded~~earned on those loans ~~was approximately $403,000~~amounted to $31,000 and ~~$130,000~~$60,000 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively.

Table of Contents

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

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~~

Table of Contents

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.

~~Table of Contents~~

~~The following table presents loans that were modified~~modifications 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 our~~COVID-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, there~~March 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.

~~Table of Contents~~

~~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

In July ~~2015,~~2013, federal bank regulatory agencies issued final ~~results~~rules 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

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rules became effective and ~~include~~included 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.~~

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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 ~~the~~our 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 126,600~~0 anti-dilutive shares ~~respectively,~~for the three months ended March 31, 2021.

Table of common stock issuable upon exercise of outstanding stock options, 437,500 shares of common stock issuable upon conversion of the Company’s Series A Preferred Stock, and, in 2016, 556,976 shares of common stock issuable upon the exercise of a warrant were also anti-dilutive and excluded from the calculation.Contents

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


	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 ~~may~~could be issued with respect to the awards granted under the ~~plan~~Plan 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 is~~Plan 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 Codification~~ASC 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 ~~statement~~Statement of ~~operations~~Income 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 statements~~Consolidated Statements of ~~operations~~Income for the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 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 yield~~		~~0.00~~	%
~~Expected volatility~~		~~36.02~~	%
~~Risk-free interest rate~~		~~1.76~~	%
~~Expected lives~~	~~5.5 years~~

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

2021

2020

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

(2,050)

6.78

—

Outstanding at end of period

206,610

6.93

1.2

1,069

242,623

6.67

2.7

Exercisable at end of period

155,306

6.78

0.8

827

159,884

6.37

2.3

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

Table of Contents

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.~~

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.


	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.

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.

Table of Contents

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 Income~~Contingencies

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.

Table of Contents

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 loss~~tables 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

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.~~

Table of Contents

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 present~~table presents fair value measurements for assets that are measured at fair value on a recurring basis as of and for the ~~nine~~three 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

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

Table of Contents

The following ~~tables present~~table 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:~~

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)

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 %

Table of Contents

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 ~~were~~are 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.

~~Table of Contents~~

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.

Table of Contents

Assets Measured on a Nonrecurring Basis

March 31, 2021

Significant

Other

Significant

Quoted

Observable

Unobservable

Carrying

Prices

Inputs

Range of

Weighted

Value

(Level 1)

(Level 2)

(Level 3)

Discount (1)

Average (2)

(dollars in thousands)

Impaired loans

844

12% - 14%

December 31, 2020

Significant

Other

Significant

Quoted

Observable

Unobservable

Carrying

Prices

Inputs

Range of

Weighted

Value

(Level 1)

(Level 2)

(Level 3)

Discount (1)

Average (2)

(dollars in thousands)

Impaired loans

2,510

0% - 14%

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.

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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.

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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

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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

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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 ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 or ~~2016~~2020 or for the year ended December 31, ~~2016.~~2020.

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~~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 Bancorp~~Analysis 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 Savings~~the Bank, ~~FSB (the “Bank”), Mid-Maryland~~the Title Company, ~~Inc. (the “Title Company”),~~ and ~~SBI Mortgage~~SBI. 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 ~~which~~at March 31, 2021. The branches offer a full range of deposit products and we originate mortgages in ~~its~~the 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 ~~132~~181 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

~~Overview~~

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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

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		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

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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 of~~increased profitability ~~for~~during 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 the~~mortgage-banking activities. Additionally, we reversed $750,000 in provision for loan losses. ~~Management believes that, while conditions continue~~Net 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. The~~a declining interest rate ~~spread between~~environment, 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 levels~~interest 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 payoff~~increased 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 ~~decrease~~fluctuate 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 in~~is well prepared for the ~~transaction valued at $775,000. We recorded $759,000 in goodwill in the transaction. The acquisition continues our growth strategy~~economic 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~~social consequences of the ~~Title Company has not had~~COVID-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 ~~effect~~impact on the ~~Company’s financial condition~~carrying value of certain assets or ~~results~~on income. These estimates and assumptions affect the reported amounts of ~~operations.~~

~~Critical Accounting Policies~~

~~Our significant accounting policies are set forth in Note 1~~assets and liabilities at the date of the ~~audited consolidated~~ financial statements ~~for~~and the ~~year ended December 31, 2016 which were included in our Annual Report on Form 10-K. Of these significant~~reported amounts of income and expenses during the periods presented. The accounting policies we ~~consider our policies regarding~~view 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 critical~~assets and liabilities. Significant accounting policies ~~due~~are 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 these~~significant 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 carried~~Annual 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

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~~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 maturity~~new 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 losses~~this 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.

~~Table of Contents~~

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 Losses~~” above. 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.

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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, 2017~~March 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 of~~decrease in provision for loan ~~loss provision,~~losses, and ~~decreased~~increased noninterest ~~expense,~~income, partially offset by ~~decreased~~increased 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 ~~earned~~margin. 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 2016~~March 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, compared~~March 31, 2020, due primarily to ~~$7.8 million~~the 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 increased~~March 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, 2016~~March 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 repayments~~March 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 million~~1.25% for the three months ended ~~September 30, 2017, compared to $2.1 million for the three months ended September 30, 2016. The decrease was~~March 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 compared~~March 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.

~~Table of Contents~~

~~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 increased~~runoff 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 nine~~three 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.

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(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)

~~Annualized~~Annualized.

~~Table of Contents~~

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

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	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 ~~result~~reversal of ~~our Allowance analysis, during~~provision for loan losses of $750,000 for the ~~nine~~three months ended ~~September 30, 2017, we determined that~~March 31, 2021 and a provision ~~reversal~~for 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.

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Noninterest Income

~~Three months ended September 30~~

Total noninterest income ~~decreased~~increased 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 decreased~~March 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 decreased~~the 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 $48,000~~March 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 by~~during the ~~Title Company after the acquisition on September 1, 2017.~~

~~Nine~~three 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 ~~nine~~three months ended ~~September 30, 2017, compared to $5.6 million~~March 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, compared~~March 31, 2020 to ~~$1.2 million~~$140,000 for the same period of ~~2016. The decrease was due to a decreased~~2021 as the volume of ~~commercial sales in~~loans serviced for FHLMC and FNMA increased during the ~~nine~~first quarter of 2021. Real estate commissions decreased $149,000 and real estate management fees decreased $165,000 during the three months ended ~~September 30, 2017~~March 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 ~~nine~~three 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 nine~~three months ended ~~September 30, 2017 compared~~March 31, 2020, primarily due to increases in compensation and related expenses and merger costs related to the ~~nine~~pending 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, compared~~March 31, 2020. This increase was primarily due to ~~$6.1~~annual 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 due~~March 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 ~~decrease~~increase was primarily due to ~~staff reductions. Our FDIC insurance premiums decreased during~~a $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 ~~third~~form of security purchases. Partially offsetting the increase in total assets was a $21.4 million decrease in total loans in the first quarter of ~~2017~~2021 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.

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~~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 $5.4~~2020 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 was~~2020, 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. Loans~~an 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, 2017~~March 31, 2021 and December 31, ~~2016.~~2020.

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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 are~~March 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, such~~Such 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 volume~~increased originations and to the timing of loans pending sale on the secondary market.

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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 increased~~portfolio 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 ~~increase~~decrease was due primarily to increased ~~demand and originations~~payoffs of residential ~~mortgages and commercial~~ real estate ~~loans.~~and ADC loans, partially offset by increased commercial loan originations (primarily PPP loans).

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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.

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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	%

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 %

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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, 2017~~March 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 ~~nine~~three 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 in~~majority of the ~~Allowances for the respective~~ loan segments, ~~were a function~~with the exception of ~~the changes in the corresponding loan balances~~commercial loans and ~~asset quality.~~

~~Table of Contents~~

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. We~~March 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 ~~nine~~2020, 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 to~~a 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, ~~2016~~2020, 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, 2017~~March 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 ~~appraisals~~valuations 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, 2017~~March 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, 2017~~March 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 reflection~~2020.

Table of ~~the decrease in nonperforming loans, as well as an increase in total assets.~~Contents

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 and~~March 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 $6.4~~totaled $1.3 million, or ~~1.0%~~0.21% of total loans, at ~~September 30, 2017~~March 31, 2021 and ~~$9.9~~$4.4 million, or ~~1.6%~~0.68% of total loans at December 31, ~~2016. We added six~~2020. 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. Of~~and the ~~balance~~payoff of two loans that were in nonaccrual ~~loans~~status 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.~~

~~Table~~2020 in the amount of ~~Contents~~

$3.1 million.

Real estate acquired through foreclosure ~~increased $131,000 compared to~~remained 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.

Table of Contents

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 $593.5~~totaled $964.1 million at ~~September 30, 2017~~March 31, 2021 and ~~$571.9~~$806.5 million at December 31, ~~2016. During~~2020. The $157.6 million increase was primarily the ~~nine months ended September 30, 2017, we obtained significant new noninterest-bearing~~result 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 designed~~offset those funds by maintaining short-term liquidity to ~~attract deposits in certain local emerging markets. The decrease in certificates of~~meet any deposit ~~(“CDs”) was due to the payoff of regularly maturing CDs.~~outflows.

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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, 2017~~both March 31, 2021 and December 31, ~~2016~~2020 was ~~$90.0 million and $100.0 million, respectively.~~

~~On September 30, 2016,~~$10.0 million.

At March 31, 2021, we ~~entered into~~also maintained a ~~loan agreement~~line of credit with a ~~commercial~~bankers’ bank ~~whereby~~in 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.

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

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Subordinated Debentures

As of both ~~September 30, 2017~~March 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.

~~Table of Contents~~

The 2035 Debentures were issued and sold to ~~Severn Capital~~the 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 ~~December~~March 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, 2017~~March 31, 2021 compared to ~~$87.9~~$109.6 million as of December 31, ~~2016.~~2020. The increase was ~~principally~~ the result of ~~2017~~2021 net income to date, partially offset by an increase in accumulated other comprehensive loss and ~~stock issuance related~~dividends 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’s~~Company’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, 2017~~March 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.

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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 deposits~~CDs of $100,000 or more. The Bank’s experience has been that a substantial portion of ~~certificates of deposit~~CDs 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 we~~We 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.”

~~Derivatives~~

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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 Board~~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 ~~Operations.~~

~~Table of Contents~~

Income.

~~Information pertaining~~

See Note 8 to the ~~carrying amounts of~~consolidated 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

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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.

~~Table of Contents~~

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)
+400 bp $ 160,130 $ (16,836 ) -9.51 %
+300 bp 166,030 (10,936 ) -6.18 %
+200 bp 170,894 (6,072 ) -3.43 %
+100 bp 174,580 (2,386 ) -1.35 %
0 bp 176,966
-100 bp 176,569 (397 ) -0.22 %
-200 bp 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 Officer~~CEO 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 Officer~~CEO and ~~Chief Financial Officer~~CFO 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, 2017~~March 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 ~~has~~have been no material ~~change~~changes in our risk factors since the filing of our December 31, ~~2016~~2020 Annual Report on Form 10-K.

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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.

~~Table of Contents~~

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, 2017~~Inline XBRL and ~~for the three and nine months ended September 30, 2017, formatted~~contained 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)

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EXHIBIT INDEX

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, 2017~~Inline XBRL and ~~for the three and nine months ended September 30, 2017, formatted~~contained 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)

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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)

~~Maryland~~		~~52-1726127~~
Maryland	52-1726127
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)


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

Large accelerated filer ☐		Accelerated filer ☐

Non- accelerated filer ☐ ~~(Do not check if a smaller reporting company)~~ ☑		Smaller reporting company ☑

Emerging growth company ☐

	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

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

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

			Page
PART I – FINANCIAL INFORMATION		~~Page~~

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of ~~September 30, 2017 (unaudited)~~March 31, 2021 and December 31, ~~2016~~2020 (unaudited)	1	5

	Consolidated Statements of ~~Operations~~Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (unaudited)	2	6

	Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (unaudited)	3	7

	Consolidated Statements of Changes in Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (unaudited)	4	8

	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (unaudited)	5	9

	Notes to Consolidated Financial Statements (unaudited)	6	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41	50

Item 4.	Controls and Procedures	42	51

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	42	51

Item 1A.	Risk Factors	42	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42	52

Item 3.	Defaults Upon Senior Securities	42	52

Item 4.	Mine Safety Disclosures	42	52

Item 5.	Other Information	43	52

Item 6.	Exhibits	43	52

EXHIBIT INDEX		44	53

SIGNATURES		45	54


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

	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

	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


	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

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

	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

	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

	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

	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

	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

	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

	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

	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

	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

	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	%

	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

	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	)

	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

	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	%

	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

	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

	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

	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	%

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