UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2019March 31, 2020

Or

 

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

For the transition period from    to                .

001-38680

(Commission File No.)

 

 

CBM BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland 83-1095537

(State or Other Jurisdiction of


Incorporation or Organization)

 

(I.R.S. Employer


Identification No.)

2001 East Joppa Road, Baltimore, Maryland 21234
(Address of Principal Executive Offices) (Zip Code)

410-665-7600

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common stockCBMBThe Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
  Emerging growth company 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    YES  ☐    NO  ☒

As of November 14, 2019,May 12, 2020, the number of shares of common stock outstanding was 4,232,000.3,843,158.

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class

Trading
Symbol(s)

Name of each exchange
on which registered

Common stockCBMBThe Nasdaq Capital Market LLC

 

 

 


CBM Bancorp, Inc.

Table of Contents

 

   Page No. 

Part I. Financial Information

  

Item 1.

 

Financial Statements

  

Consolidated Statements of Financial Condition as of September 30, 2019March  31, 2020 (unaudited) and December 31, 2018 (audited)2019

   3 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018 (unaudited)

   4 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018 (unaudited)

   5 

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018 (unaudited)

   6 

Consolidated Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2020 and 2019 and 2018 (unaudited)

   7 

Notes to Consolidated Financial Statements

   8 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   3639 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   4647 

Item 4.

 

Controls and Procedures

   4647 

Part II. Other Information

  

Item 1.

 

Legal Proceedings

   4748 

Item1A.Item 1A.

 

Risk Factors

   4748 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   4748 

Item 3.

 

Defaults Upon Senior Securities

   4748 

Item 4.

 

Mine Safety Disclosures

   4748 

Item 5.

 

Other Information

   4748 

Item 6.

 

Exhibits

   4748 

Signatures

   4849 


PART I – FINANCIAL INFORMATION

ITEM 1

ITEM 1 – Consolidated Financial Statements

CBM Bancorp, Inc.

Consolidated Statements of Financial Condition

September 30, 2019March 31, 2020 (Unaudited) and December 31, 20182019

 

  March 31,
2020
 December 31,
2019
 
  September 30,
2019
 December 31,
2018
   (Unaudited)   
Assets  (Unaudited) (Audited)    

Cash and due from banks

  $684,204  $1,071,335   $1,336,419  $787,050 

Interest-bearing deposits in other banks

   9,469,132  17,775,425    12,228,490  5,200,071 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents

   10,153,336  18,846,760    13,564,909  5,987,121 
  

 

  

 

   

 

  

 

 

Time deposits in other banks

   8,680,000  6,944,000    7,439,811  7,935,811 

Securities available for sale, at fair value

   41,812,969  37,447,423    32,679,206  37,090,591 

Federal Home Loan Bank stock, at cost

   279,100  245,200    729,700  300,400 

Loans held for sale

   1,753,583  211,107    2,639,875  1,730,430 

Loans, net of unearned fees

   147,027,779  143,508,813    163,842,313  159,624,611 

Allowance for loan losses

   (1,302,711 (1,188,352   (1,550,851 (1,379,150
  

 

  

 

   

 

  

 

 

Net loans

   145,725,068  142,320,461    162,291,462  158,245,461 

Accrued interest receivable

   697,632  695,928    697,408  655,146 

Bank-owned life insurance

   4,704,918  4,609,357    4,742,399  4,723,825 

Premises and equipment, net

   1,849,508  1,924,518    1,793,973  1,828,666 

Foreclosed real estate

   845,000  865,000    845,000  845,000 

Deferred income taxes

   660,998  900,994    653,821  724,658 

Prepaid expenses and other assets

   590,136  402,344    404,832  334,470 
  

 

  

 

   

 

  

 

 

Total assets

  $217,752,248  $215,413,092   $228,482,396  $220,401,579 
  

 

  

 

   

 

  

 

 
Liabilities and Stockholders’ Equity         

Liabilities

      

Noninterest-bearing deposits

  $18,528,466  $18,111,318   $21,658,012  $19,780,866 

Interest-bearing deposits

   136,719,084  135,638,917    136,283,138  136,660,007 
  

 

  

 

   

 

  

 

 

Total deposits

   155,247,550  153,750,235    157,941,150  156,440,873 

Advances by borrowers for taxes and insurance

   695,329  477,781    925,156  538,516 

Federal Home Loan Bank advances

   12,500,000  2,500,000 

Accounts payable and other liabilities

   1,042,046  838,301    1,088,377  986,814 
  

 

  

 

   

 

  

 

 

Total liabilities

   156,984,925  155,066,317    172,454,683  160,466,203 
  

 

  

 

   

 

  

 

 

Commitments and contingencies

   —     —      —     —   
  

 

  

 

   

 

  

 

 

Equity

   

Preferred stock, $.01 par value; authorized 1,000,000 shares, none issued

   —     —   

Common stock, $.01 par value; authorized 24,000,000 shares; issued and outstanding 4,232,000 shares at September 30, 2019 and December 31, 2018

   42,320  42,320 

Stockholders’ Equity

   

Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued

   —     —   

Common stock, $.01 par value; authorized 24,000,000 shares; issued and outstanding 3,861,742 shares at March 31, 2020 and 4,208,505 shares at December 31, 2019

   38,617  42,085 

Additional paid in capital

   41,333,955  40,987,146    36,653,283  41,210,056 

Retained earnings

   23,082,219  22,336,134    23,417,610  23,243,847 

Unearned common stock held by:

      

Employee Stock Ownership Plan

   (2,793,120 (3,047,040   (2,623,840 (2,708,480

2019 Equity Incentive Plan

   (1,409,321  —      (2,357,994 (2,357,994

Accumulated other comprehensive income

   511,270  28,215    900,037  505,862 
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   60,767,323  60,346,775    56,027,713  59,935,376 
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $217,752,248  $215,413,092   $228,482,396  $220,401,579 
  

 

  

 

   

 

  

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

3


CBM Bancorp, Inc.

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018

 

  For the Three Months Ended   For the Nine Months Ended   For the Three Months Ended 
  September 30,   September 30,   March 31, 
  2019 2018   2019   2018   2020   2019 

Interest and dividend income

           

Interest and fees on loans

  $1,848,479  $1,703,567   $5,400,671   $4,996,564   $1,965,446   $1,727,283 

Interest and dividends on investments

   468,301  226,982    1,386,236    521,303    318,404    453,221 
  

 

  

 

   

 

   

 

   

 

   

 

 

Total interest income

   2,316,780  1,930,549    6,786,907    5,517,867    2,283,850    2,180,504 
  

 

  

 

   

 

   

 

   

 

   

 

 

Interest expense

           

Interest on deposits

   367,558  253,311    1,030,152    696,724    369,363    316,037 

Interest on borrowings

   16,133    —   
  

 

  

 

   

 

   

 

   

 

   

 

 

Total interest expense

   367,558  253,311    1,030,152    696,724    385,496    316,037 
  

 

  

 

   

 

   

 

   

 

   

 

 

Net interest income

   1,949,222  1,677,238    5,756,755    4,821,143    1,898,354    1,864,467 

(Reversal of) provision for loan losses

   (60,000 75,000    90,000    225,000 
  

 

  

 

   

 

   

 

 

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

   2,009,222  1,602,238    5,666,755    4,596,143 

Provision for loan losses

   175,000    90,000 
  

 

   

 

 

Net interest income after provision for loan losses

   1,723,354    1,774,467 
  

 

  

 

   

 

   

 

   

 

   

 

 

Non-interest income

           

Service fees on deposit accounts

   33,828  33,635    92,068    101,171    35,881    28,392 

Income from bank-owned life insurance

   57,933  67,746    95,561    108,681    18,574    18,516 

Gain on sale of loans held for sale

   29,661  44,467    63,933    168,324    114,650    15,246 

Gain on sale of investment securities

   46,551    —   

Othernon-interest income

   33,462  31,537    100,239    95,730    29,324    30,120 
  

 

  

 

   

 

   

 

   

 

   

 

 

Totalnon-interest income

   154,884  177,385    351,801    473,906    244,980    92,274 
  

 

  

 

   

 

   

 

   

 

   

 

 

Non-interest expense

           

Salaries, director fees and employee benefits

   1,122,656  810,946    3,055,194    2,389,235    1,138,703    885,844 

Premises and equipment

   105,580  116,583    330,986    336,116    104,479    119,053 

Data processing

   140,979  134,743    419,559    404,873    141,141    139,893 

Professional fees

   140,315  65,943    425,452    224,455    115,317    122,688 

FDIC premiums and regulatory assessments

   18,722  31,529    76,648    94,158    16,587    30,215 

Marketing

   25,524  23,623    97,881    97,779    16,964    23,184 

Provision for losses and costs on foreclosed real estate

   4,040  4,693    33,214    10,988 

Other operating expenses

   187,603  161,438    565,319    456,165    180,449    178,405 
  

 

  

 

   

 

   

 

   

 

   

 

 

Totalnon-interest expense

   1,745,419  1,349,498    5,004,253    4,013,769    1,713,640    1,499,282 
  

 

  

 

   

 

   

 

   

 

   

 

 

Income before income taxes

   418,687  430,125    1,014,303    1,056,280    254,694    367,459 

Income tax expense

   116,980  105,913    268,218    259,452    80,931    95,436 
  

 

  

 

   

 

   

 

   

 

   

 

 

Net income

  $301,707  $324,212   $746,085   $796,828   $173,763   $272,023 
  

 

  

 

   

 

   

 

   

 

   

 

 

Earnings per common share

           

Basic

  $0.08  $0.08   $0.19   $0.20   $0.05    0.07 

Diluted

  $0.08  $0.08   $0.19   $0.20   $0.05    0.07 

The notes to consolidated financial statements are an integral part of these consolidated statements.

4


CBM Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018

 

   For the Three Months Ended  For the Nine Months Ended 
   September 30,  September 30, 
   2019  2018  2019  2018 

Net income

  $301,707  $324,212  $746,085  $796,828 

Other comprehensive income (loss)

     

Unrealized (loss) gain on investment securities available for sale

   (24,776  (19,583  666,443   (99,776

Income tax benefit (expense) relating to investment securities available for sale

   6,818   5,389   (183,388  27,456 
  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive (loss) income

   (17,958  (14,194  483,055   (72,320
  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income

  $283,749  $310,018  $1,229,140  $724,508 
  

 

 

  

 

 

  

 

 

  

 

 

 
   For the Three Months Ended
March 31,
 
   2020  2019 

Net income

  $173,763  $272,023 

Other comprehensive income

   

Unrealized gain on investment securities available for sale

   590,372   398,996 

Reclassification adjustment for realized gain on investments securities available for sale included in net income

   (46,551  —   
  

 

 

  

 

 

 

Total unrealized gain on investments securities available for sale

   543,821   398,996 

Income tax expense relating to investment securities available for sale

   (149,646  (109,793
  

 

 

  

 

 

 

Other comprehensive income

   394,175   289,203 
  

 

 

  

 

 

 

Total comprehensive income

  $567,938  $561,226 
  

 

 

  

 

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

5


CBM Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018

 

   Common
Stock
   Additional
Paid-In
Capital
   Retained
Earnings
   Unearned
ESOP
Shares
  Unearned
RRP Shares
  Accumulated
Other
Comprehensive
Income (Loss)
  Total
Stockholders’
Equity
 

Balance, July 1, 2019

  $42,320   $41,131,468   $22,780,512   $(2,877,760 $(497,439 $529,228  $61,108,329 

Net income

   —      —      301,707    —     —     —     301,707 

Other comprehensive loss

   —      —      —      —     —     (17,958  (17,958

ESOP shares committed to be released

   —      31,317    —      84,640   —     —     115,957 

Repurchase of common stock for RRP

   —      —      —      —     (911,882  —     (911,882

Stock based compensation

   —      171,170    —      —     —     —     171,170 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 30, 2019

  $42,320   $41,333,955   $23,082,219   $(2,793,120 $(1,409,321 $511,270  $60,767,323 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, January 1, 2019

  $42,320   $40,987,146   $22,336,134   $(3,047,040 $—    $28,215  $60,346,775 

Net income

   —      —      746,085    —     —     —     746,085 

Other comprehensive income

   —      —      —      —     —     483,055   483,055 

ESOP shares committed to be released

   —      86,333    —      253,920   —     —     340,253 

Repurchase of common stock for RRP

   —      —      —      —     (1,409,321  —     (1,409,321

Stock based compensation

   —      260,476    —      —     —     —     260,476 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 30, 2019

  $42,320   $41,333,955   $23,082,219   $(2,793,120 $(1,409,321 $511,270  $60,767,323 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, July 1, 2018

  $—     $—     $22,135,628   $—    $—    $(117,808 $22,017,820 

Net income

   —      —      324,212    —     —     —     324,212 

Other comprehensive loss

   —      —      —      —     —     (14,194  (14,194

Issuance of common stock

   42,320    41,220,201    —      —     —     —     41,262,521 

Stock purchased by the ESOP

   —      —      —      (3,385,600  —     —     (3,385,600

ESOP shares committed to be released

   —      —      —      15,000   —     —     15,000 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 30, 2018

  $42,320   $41,220,201   $22,459,840   $(3,370,600 $—    $(132,002 $60,219,759 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, January 1, 2018

  $—     $—     $21,653,191   $—    $—    $(49,861 $21,603,330 

Net income

   —      —      796,828    —     —     —     796,828 

Other comprehensive loss

   —      —      —      —     —     (72,320  (72,320

Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from accumulated other comprehensive loss

   —      —      9,821    —     —     (9,821  —   

Issuance of common stock

   42,320    41,220,201    —      —     —     —     41,262,521 

Stock purchased by the ESOP

   —      —      —      (3,385,600  —     —     (3,385,600

ESOP shares committed to be released

   —      —      —      15,000   —     —     15,000 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 30, 2018

  $42,320   $41,220,201   $22,459,840   $(3,370,600 $—    $(132,002 $60,219,759 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 
   Common
Stock
  Additional
Paid-In
Capital
  Retained
Earnings
   Unearned
ESOP
Shares
  Unearned
RRP Shares
  Accumulated
Other
Comprehensive
Income
   Total
Stockholders’
Equity
 

Balance, January 1, 2019

  $42,320  $40,987,146  $22,336,134   $(3,047,040 $—    $28,215   $60,346,775 

Net income

   —     —     272,023    —     —     —      272,023 

Other comprehensive income

   —     —     —      —     —     289,203    289,203 

ESOP shares committed to be

released

   —     24,122   —      84,640   —     —      108,762 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balance, March 31, 2019

  $42,320  $41,011,268  $22,608,157   $(2,962,400 $—    $317,418   $61,016,763 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balance, January 1, 2020

  $42,085  $41,210,056  $23,243,847   $(2,708,480 $(2,357,994 $505,862   $59,935,376 

Net income

   —     —     173,763    —��    —     —      173,763 

Other comprehensive income

   —     —     —      —     —     394,175    394,175 

ESOP shares committed to be

released

   —     27,931   —      84,640   —     —      112,571 

Stock based compensation

   —     168,847   —      —     —     —      168,847 

Repurchase of common stock

   (3,468  (4,753,551  —      —     —     —      (4,757,019
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balance March 31, 2020

  $38,617  $36,653,283  $23,417,610   $(2,623,840 $(2,357,994 $900,037   $56,027,713 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

6


CBM Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

NineThree Months Ended September 30,March 31, 2020 and 2019 and 2018

 

  For the Nine Months   For the Three Months 
  Ended September 30,   Ended March 31, 
  2019 2018   2020 2019 

Cash flows from operating activities:

      

Net income

  $746,085  $796,828   $173,763  $272,023 

Adjustments to reconcile net income to net cash provided by operating activities:

      

Amortization and accretion of securities

   39,773  (5,634   4,788  6,770 

Gain on sale of loans held for sale

   (63,933 (168,324   (114,650 (15,246

Originations of loans held for sale

   (4,957,118 (6,543,907   (5,210,152 (1,237,156

Proceeds from sales of loans held for sale

   3,478,575  7,507,438    4,415,357  996,985 

Amortization of net deferred loan origination fees

   (196,565 (54,423

Gain on sale of available for sale securities

   (46,551  —   

Amortization of deferred loan origination costs, net of fees

   (56,248 (23,122

Provision for loan losses

   90,000  225,000    175,000  90,000 

Increase in accrued interest receivable

   (1,704 (57,112   (42,262 (66,730

Increase in cash surrender value of life insurance

   (95,561 (105,187   (18,574 (18,516

Depreciation and amortization

   121,459  122,031    36,686  42,211 

ESOP compensation expense

   340,253  15,000    112,571  108,762 

Stock based compensation expense

   260,476   —      168,847   —   

Writedown of foreclosed real estate

   20,000   —   

Decrease in deferred income taxes

   17,681  224,050 

Deferred income tax benefit

   (78,809 (4,091

Increase in prepaid expenses and other assets

   (187,792 (27,182   (70,362 (58,830

Increase (decrease) in accounts payable and other liabilities

   203,745  (10,918

Increase in accounts payable and other liabilities

   101,563  97,606 
  

 

  

 

   

 

  

 

 

Net cash (used in) provided by operating activities

   (184,626 1,917,660    (449,033 190,666 
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

      

Net (purchases) maturities of time deposits in other banks

   (1,736,000 992,000 

Net maturities (purchases) of time deposits in other banks

   496,000  (497,752

Purchases of available for sale securities

   —    (8,037,204

Proceeds from maturities, payments and calls of available for sale securities

   13,921,440  1,000,000    3,431,232  2,787,427 

Proceeds from maturities, payments and calls of held to maturity securities

   —    480,094 

Purchases of available for sale securities

   (17,621,389 (958,044

Proceeds from sales of available for sale securities

   1,565,737   —   

Purchases of Federal Home Loan Bank stock

   (33,900 (3,100   (429,300 (33,900

Net increase in loans

   (3,298,042 (4,390,968   (4,164,753 (2,646,392

Proceeds from redemption of bank owned life insurance

   —    882,278 

Purchases of premises and equipment

   (46,449 (112,111   (1,993 (6,555
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (8,814,340 (2,109,851

Net cash provided by (used in) investing activities

   896,923  (8,434,376
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

      

Net increase in deposits

   1,497,315  890,521    1,500,277  642,528 

Net increase in advances by borrowers

   217,548  88,661    386,640  369,428 

Proceeds from issuance of common stock

   —    41,262,521 

Purchase of ESOP shares

   —    (3,385,600

Repurchase of common stock for 2019 Equity Incentive Plan

   (1,409,321  —   

Net increase in FHLB advances

   10,000,000   —   

Repurchase common stock

   (4,757,019  —   
  

 

  

 

   

 

  

 

 

Net cash provided by financing activities

   305,542  38,856,103    7,129,898  1,011,956 
  

 

  

 

   

 

  

 

 

Net (decrease) increase in cash and cash equivalents

   (8,693,424 38,663,912 

Net increase (decrease) increase in cash and cash equivalents

   7,577,788  (7,231,754

Cash and cash equivalents, beginning balance

   18,846,760  12,030,272    5,987,121  18,846,760 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents, ending balance

  $10,153,336  $50,694,184   $13,564,909  $11,615,006 
  

 

  

 

   

 

  

 

 

Supplemental disclosure of cash flows information:

      

Cash paid for interest

  $1,030,031  $696,976   $385,928  $315,927 

Cash paid for income taxes

   190,000   —      —     —   

The notes to consolidated financial statements are an integral part of these consolidated statements.

7


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1.

Note 1. Significant Accounting Policies

Basis of Presentation

Pursuant to the terms and conditions of a plan of conversion and reorganization, adopted by its Board of Directors and approved by its members, Banks of the Chesapeake, M.H.C. converted from the mutual holding company corporate structure to the public stock holding company structure as follows: CBM Bancorp, Inc. (“CBM Bancorp” or “Company”) was incorporated on May 22, 2018 to serve as the successor holding company for Chesapeake Bank of Maryland (“Bank”),which was at that time the wholly owned subsidiary of Banks of the Chesapeake, M.H.C. On September 27, 2018, in accordance with the plan of conversion and reorganization, CBM Bancorp became the parent holding company for the Bank and Banks of the Chesapeake, M.H.C. merged with and into CBM Bancorp, with the Company as the surviving corporation. Upon consummation of the merger, Banks of the Chesapeake, M.H.C. ceased to exist.

The conversion and reorganization was accomplished through the sale and issuance of 4,232,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $40.9 million, net of offering expenses of approximately $1.4 million. Approximately 50% of the net proceeds of the offering, or $20.5 million was contributed by the Company to the Bank in return for 100% of the issued and outstanding shares of common stock of the Bank. In connection with the conversion and reorganization, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 338,560 shares of common stock sold in the offering.

The plan of conversion and reorganization provided for the establishment of a liquidation account by CBM Bancorp for the benefit of eligible account holders in an amount equal to the value of the net assets of Banks of the Chesapeake, M.H.C. as of the date of the latest statement of financial condition of Banks of the Chesapeake, M.H.C. prior to the consummation of the conversion and reorganization. The plan of conversion and reorganization also provided for the establishment of a parallel liquidation account in the Bank to support the CBM Bancorp liquidation account in the event CBM Bancorp does not have sufficient assets to fund its obligations under the CBM Bancorp liquidation account.

In the unlikely event that the Bank were to liquidate after the conversion and reorganization, all claims of creditors, including those of depositors, would be paid first. However, except with respect to the liquidation account to be established in CBM Bancorp, depositors’ claims would be solely for the principal amount of their deposit accounts plus accrued interest. Depositors generally would not have an interest in the value of the assets of the Bank or CBM Bancorp above that amount.

Pursuant to the plan of conversion and reorganization, after two years from the date of conversion and reorganization, and upon the written request of the Federal Reserve Board, CBM Bancorp will transfer, or upon the prior written approval of the Federal Reserve Board, CBM Bancorp may transfer, the liquidation account and the depositors’ interests in such account to the Bank, and the liquidation account shall thereupon be subsumed into the liquidation account of the Bank.

The Company may not pay a dividend on, or repurchase any of, its capital stock, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements. In addition, the Company is subject to certain other regulations restricting the payment of dividends on, and the repurchase of, its capital stock.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form10-Q and Article 8 of RegulationS-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the three and nine months ended September 30, 2019,March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019,2020, or any other period. For further information, refer to the Bank’s annual audited consolidated financial statements and related notes for the year ended December 31, 20182019 included in the Company’s Annual Report on Form10-K dated March 27, 2019.

82020.


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1.

Note 1. Significant Accounting Policies (Continued)

 

Nature of Operations

CBM Bancorp, Inc.’s primary business is the ownership and operation of the Bank, a community-oriented federal stock savings bank regulated by the Office of the Comptroller of the Currency. The Bank’s primary business activity is the acceptance of deposits from the general public and using the proceeds for loan originations and investments. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by the regulatory authorities.

The accounting and reporting policies of CBM Bancorp, Inc. and Chesapeake Bank of Maryland conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices in the banking industry. The more significant policies follow:

Principles of Consolidation

The consolidated financial statements include the accounts of CBM Bancorp, Inc. and the Bank, its wholly owned subsidiary. Material intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and the valuation of deferred tax assets. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and interest-bearing deposits in other banks and federal funds sold. Generally federal funds are sold as overnight investments.banks.

Time Deposits in Other Banks

The Bank uses financial instruments to supplement the investment securities portfolio. Interest income is recognized as earned. Purchase premiums and discounts are recognized as part of interest income using the interest method over the terms of the investments. Realized gains and losses on the sale of time deposits in other banks are included in earnings based on the trade date and are determined using the specific identification method. Time deposits in other banks are not marked to market.

Investment Securities

Management determines the appropriate classification of debt securities at the time of purchase andre-evaluates such designation as of each balance sheet date. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost (including amortization of premium or accretion of discount).

Securities classified as available for sale are carried at fair value and are those securities that the Bank intends to hold for an indefinite period of time but not necessarily to maturity. Unrealized gains and losses are reported as increases or decreases in other comprehensive income. Realized gains and losses, determined on the basis of the cost of the specific securities sold, are included in earnings on a trade date basis. Premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities. Declines in the fair value of available for sale securities below their cost that are deemed to be other than

9


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1.

Note 1. Significant Accounting Policies (Continued)

 

temporary, if any, are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value

Federal Home Loan Bank Stock

Federal Home Loan Bank of Atlanta (“FHLB”) stock is an equity interest in the FHLB, which does not have a readily determinable fair value for purposes of Generally Accepted Accounting Standards related toAccounting for Certain Investments in Debt and Equity Securities,because its ownership is restricted and it lacks a market. FHLB stock represents the required investment in the common stock of the Federal Home Loan Bank of Atlanta according to a predetermined formula. FHLB stock can be sold back only at par value of $100 per share and only to the FHLB or another member institution. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Bank owned shares totaling $279,100$729,700 and $245,200,$300,400, respectively.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on loan sales are recorded innon-interest income, and loan origination fees, net of certain direct origination costs are deferred at origination of the loan and are recognized innon-interest income upon sale of the loan. The Bank’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing. Interest on loans held for sale is credited to income based on the principal amounts outstanding.

The Bank enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitment). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. The period of time between the issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 90 days. The Bank protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with the intent that thethey buyer/investor has assumed the interest rate risk on the loan. As a result, the Bank is not generally exposed to losses on loans sold utilizing best efforts.efforts, nor will it realize gains related to rate lock commitments due to changes in interest rates.

Loans held for sale that are not ultimately sold, but instead are placed into the Bank’s portfolio, are reclassified as loans held for investment and recorded at fair value.

Loans

Loans are generally carried at the amount of unpaid principal, less the allowance for loan losses and adjusted for deferred loan origination fees and costs, which are recognized over the term of the loan as an adjustment to yield using a method that approximates the interest method. Interest on loans is accrued based on the principal amounts outstanding. It is the Bank’s policy to discontinue the accrual of interest when the principal or interest is delinquent for 90 days or more, or if collection of principal and interest in full is in doubt.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The carrying value of impaired loans is based on the present value of the loan’s expected future cash flows or, alternatively, the observable market price of the loan or the fair value of the collateral.

10


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1.

Note 1. Significant Accounting Policies (Continued)

 

Impaired loans also include certain loans that have been modified in a troubled debt restructuring (“TDR”) to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Generally, nonaccrual loans that are modified and are considered TDRs are classified as nonperforming at the time of the restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to earnings. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The Bank maintains the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. The evaluation process by portfolio segment includes, among other things, an analysis of delinquency trends,non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of the loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.

The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is likelihood that different amounts would be reported under different conditions or assumptions. The Office of the Comptroller of the Currency as an integral part of its examination process periodically reviews the allowance for loan losses and may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management.

The Bank’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss, are those considered uncollectible and of such little value that their recognition as assets is not justified. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is likelihood that different amounts would be reported under different conditions or assumptions. While the Bank utilizes available information to recognize losses on loans, future additions to the allowances for loan losses may be necessary based on changes in economic conditions, particularly in its’ market area primarily in the state of Maryland. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Actual loan losses may be significantly more than the allowance for loan and lease losses the Bank has established, which could have a material negative effect on our consolidated financial statements.

Bank-Owned Life Insurance (“BOLI”)

The Bank maintains life insurance policies on certain present and former directors. These policies are split-dollar or director insurance policies. Under the split-dollar insurance policies, the Bank pays the premiums and upon the death of the insured, the Bank will receive an amount equal to the premiums paid on the policy from the policy date to the date of death. Any remaining proceeds will be paid to the beneficiary. If the policy is surrendered before the date of death, the Bank will receive the lesser of the cash surrender value or the sum of the premiums paid on the policy from the policy date to the date of surrender. Under the director insurance policies, the Bank receives the cash surrender value if the policy is surrendered or receives all benefits payable upon the death of the insured. As of September 30, 2019,March 31, 2020, and December 31, 2018, $122,3732019, $126,201 and $129,775,$122,118, respectively, was included in other liabilities related to the split-dollar insurance policies.

11


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note1.

Note 1. Significant Accounting Policies (Continued)

 

Premises and Equipment

Land is carried at cost. Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over estimated useful lives of assets. Amortization of leasehold improvements is recognized on a straight-line basis over the term of the lease or the life of the improvement, whichever is shorter. The cost of maintenance and repairs is charged to expense as incurred whereas improvements are capitalized. The range of estimated useful lives for premises and equipment are as follows:

 

Buildings and land improvements

   - 50 years 

Leasehold improvements

   10 - 15 years 

Furniture, fixtures and equipment

   - 10 years 

Automobile

   5 years 

Foreclosed Real Estate

Real estate acquired through foreclosure or other means is recorded at the fair value of the related real estate collateral at the transfer date less estimated selling costs. Losses incurred at the time of the acquisition of the property are charged to the allowance for loan losses. Subsequent reductions in the estimated fair value of the property are included in noninterest expense. Costs to maintain foreclosed real estate are expensed as incurred.

Employee Stock Ownership Plan (“ESOP”)

Compensation expense is recognized based on the current market price of shares committed to be released to employees. All shares released and committed to be released are deemed outstanding for purposes of earnings per share calculations. Dividends declared and paid on allocated shares held by the ESOP are charged to retained earnings. The value of unearned shares to be allocated to ESOP participants for future services not yet performed is reflected as a reduction of stockholders’ equity. Dividends declared on unallocated shares held by the ESOP are recorded as a reduction of the ESOP’s loan payment to the Company.

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards (“RRP”RSA”) issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for RRPs.RSAs. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Income Taxes

The provision for income taxes includes taxes payable for the current year and deferred income taxes. Deferred income taxes are provided for the temporary differences between financial and taxable income. Deferred income taxes and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted through earnings for the effects of changes in tax laws and rates on the date of enactment.

Earnings per Common Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Weighted average shares include allocated ESOP shares and ESOP shares committed to be released but exclude unallocated ESOP shares. Diluted earnings per share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

12


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1.

Note 1. Significant Accounting Policies (Continued)

 

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Bank has entered intooff-balance sheet financial instruments consisting of commitments to extend credit. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet. Such financial instruments are recorded when they are funded.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments is represented by the contractual amount of these instruments. The Bank uses the same credit policies for these instruments as it does for theon-balance sheet instruments.

Concentrations of Credit Risk

The Bank had $0approximately $416,000 and approximately $128,000$0 in deposits in other financial institutions in excess of amounts insured by the FDIC, as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The Bank’s management considers this a normal business risk. The Bank also maintains accounts with brokerage firms containing securities. These balances are insured up to $500,000 by the Securities Investor Protection Corporation.

Emerging Growth Company

The Company, as an emerging growth company (“EGC”), has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act was signed into law. The CARES ACT creates a forbearance program for federally backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the National Emergency, and provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects ofCOVID-19.

The CARES Act also provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by theCOVID-19 pandemic.

Recent Accounting Pronouncements

ASU2016-02, Leases (Topic 842). This ASU provides certain targeted improvements to align lessor accounting with the lessee accounting model. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, including interim reporting periods within that reporting period, for public business entities. As the Company will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain an emerging growtha smaller reporting company, (“EGC”), we will adopt the amendments in this update beginning after December 15, 2019,2020, and interim periods withwithin fiscal years beginning after December 15, 2019.2021. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies (Continued)

ASU2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Bank to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to someoff-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, for public business entities. As the Company will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain an EGC, we will adopt the amendments in this update beginning after December 15, 2020, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect (i.e., modified retrospective approach). The Company has begun to gather loan information and consider acceptable methodologies to comply with this ASU. The Company’s initial evaluation indicates that the provisions of this ASU are expected to impact its consolidated financial statements, in particular the level of reserve for loan losses. The Companylosses and is continuing to evaluate and assess the impact of the adoption of this ASU on its consolidated financial statements. In July 2019, the FASB proposed changes to the effective date for smaller reporting companies, as defined by the SEC, and othernon-SEC reporting entities. The proposal would delay the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company for fiscal year 2020, the proposed delay would be applicable. On October 16, 2019, the FASB approved its proposal to delay the effective date for smaller reporting companies, as defined by the SEC, and othernon-SEC reporting entities and plans to releaseentities. As the Company will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain a final ASUsmaller reporting company, we will adopt the amendments inmid-November. this update beginning after December 15, 2022, including interim periods within those fiscal years.

13


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 2.

Note 2. Securities

The amortized cost and estimated fair value of securities classified as available for sale at September 30, 2019March 31, 2020 and December 31, 2018,2019, are as follows:

 

  September 30, 2019   March 31, 2020 
  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

Securities Available for Sale

                

U.S. Government and Federal Agency obligations

  $12,469,206   $90,381   $11,048   $12,548,539   $7,474,916   $143,416   $—     $7,618,332 

Residential mortgage-backed securities

   27,133,387    643,311    54,517    27,722,181    23,962,560    1,098,314    —      25,060,874 

Municipal securities

   1,505,006    37,243    —      1,542,249 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $41,107,599   $770,935   $65,565   $41,812,969   $31,437,476   $1,241,730   $—     $32,679,206 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  December 31, 2018   December 31, 2019 
  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

Securities Available for Sale

                

U.S. Government and Federal Agency obligations

  $18,264,805   $45,850   $90,583   $18,220,072   $9,472,370   $76,651   $4,679   $9,544,342 

Residential mortgage-backed securities

   17,637,729    111,837    4,580    17,744,986    25,415,647    638,856    43,964    26,010,539 

Municipal securities

   1,505,962    —      23,597    1,482,365    1,504,664    31,046    —      1,535,710 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $37,408,496   $157,687   $118,760   $37,447,423   $36,392,681   $746,553   $48,643   $37,090,591 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Proceeds from the sale of available for sale municipal securities totaled $1,565,737, realizing gross gains of $46,551 for the three months ended March 31, 2020. There were no sales of investment securities for the three months ended March 31, 2019.

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 2. Securities (Continued)

The amortized cost and estimated fair value of securities as of September 30, 2019March 31, 2020 and December 31, 2018,2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

  March 31, 2020 
  September 30, 2019   Securities Available for Sale 
  Securities Available for Sale   Amortized   Fair 
  Amortized
Cost
   Fair
Value
   Cost   Value 

Due in one year or less

  $6,998,531   $7,021,652   $3,998,494   $4,035,061 

Due after one year through five years

   6,472,992    6,543,821    3,476,422    3,583,271 

Due five years to ten years

   502,689    525,315    —      —   

Due after ten years

   —      —      —      —   

Mortgage-backed, in monthly installments

   27,133,387    27,722,181    23,962,560    25,060,874 
  

 

   

 

   

 

   

 

 
  $ 41,107,599   $ 41,812,969   $31,437,476   $32,679,206 
  

 

   

 

   

 

   

 

 

 

   December 31, 2019 
   Securities Available for Sale 
   Amortized   Fair 
   Cost   Value 

Due in one year or less

  $1,000,000   $998,407 

Due after one year through five years

   9,474,467    9,560,135 

Due five years to ten years

   502,567    521,510 

Due after ten years

   —      —   

Mortgage-backed, in monthly installments

   25,415,647    26,010,539 
  

 

 

   

 

 

 
  $36,392,681   $37,090,591 
  

 

 

   

 

 

 

14


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 2.

Securities (Continued)

   December 31, 2018 
   Securities Available for Sale 
   Amortized
Cost
   Fair
Value
 

Due in one year or less

  $1,000,000   $989,119 

Due after one year through five years

   14,453,375    14,391,553 

Due five years to ten years

   4,317,392    4,321,765 

Due after ten years

   —      —   

Mortgage-backed, in monthly installments

   17,637,729    17,744,986 
  

 

 

   

 

 

 
   $ 37,408,496   $ 37,447,423 
  

 

 

   

 

 

 

The Bank did not have any securities with gross unrealized losses at March 31, 2020. Securities with gross unrealized losses at September 30, 2019 and December 31, 20182019 aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

  September 30, 2019   December 31, 2019 
  Less than 12 Months   12 Months or Greater   Total   Less than 12 Months   12 Months or Greater   Total 
  Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 

Securities Available for Sale

                        

U.S. Government and Federal Agency obligations

  $—     $—     $1,988,952   $11,048   $1,988,952   $11,048   $—     $—     $1,995,321   $4,679   $1,995,321   $4,679 

Residential mortgage-backed securities

   5,049,621    54,517    —      —      5,049,621    54,517    4,862,213    43,964    —      —      4,862,213    43,964 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $5,049,621   $54,517   $1,988,952   $11,048   $7,038,573   $65,565   $4,862,213   $43,964   $1,995,321   $4,679   $6,857,534   $48,643 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  December 31, 2018 
  Less than 12 Months   12 Months or Greater   Total 
  Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 

Securities Available for Sale

            

U.S. Government and Federal Agency obligations

  $963,945   $63   $ 4,408,553   $ 90,520   $ 5,372,498   $ 90,583 

Residential mortgage-backed securities

   2,838,108    4,580    —      —      2,838,108    4,580 

Municipal obligations

   —      —      1,482,365    23,597    1,482,365    23,597 
  

 

   

 

   

 

   

 

   

 

   

 

 
  $ 3,802,053   $ 4,643   $ 5,890,918   $ 114,117   $ 9,692,971   $ 118,760 
  

 

   

 

   

 

   

 

   

 

   

 

 

At March 31, 2020, the Bank held no investments with gross unrealized losses. At December 31, 2019, the Bank held seven investments with gross unrealized losses totaling $48,643. The unrealized losses that existed were a result of market changes in interest rates since the original purchase. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) structure of the security.

The Bank transferred during 2018 its entire held to maturity portfolio of residential mortgage-backed securities to available for sale. The securities were transferred at a fair market value of $2,923,932 with a corresponding adjustment to accumulated other comprehensive income in the amount of $56,276 to account for the unrealized gain in the investment securities at the date of transfer. The Bank is prohibited from classifying any investments as held to maturity for the next two years.

15


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 2.

Note 2. Securities (Continued)

 

At September 30, 2019, the Bank held six investments with gross unrealized losses totaling $65,565. At December 31, 2018, the Bank held twelve investments with gross unrealized losses totaling $118,760.

An impairment loss is recognized in earnings if any of the following are true: (1) the Bank intends to sell the debt security; (2) it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis; or (3) the Bank does not expect to recover the entire amortized cost basis of the security. In situations where the Bank intends to sell or when it is more likely than not that the Bank will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in equity as a component of other comprehensive income, net of deferred tax.

There were no securities pledged as of September 30, 2019March 31, 2020 and December 31, 2018.2019.

Note 3.

Note 3. Loans

The Bank makes loans to customers primarily in the Baltimore Metropolitan Area and its surrounding counties. The principal loan portfolio segment balances at September 30, 2019 and December 31, 2018 were as follows:

   September 30,
2019
   December 31,
2018
 

Real estate loans

    

One-to four-family

  $70,415,865   $70,197,875 

Home equity loans and lines of credit

   6,889,663    7,547,195 

Construction and land development

   9,089,247    8,232,067 

Nonresidential

   53,585,416    51,904,782 
  

 

 

   

 

 

 

Total real estate loans

   139,980,191    137,881,919 
  

 

 

   

 

 

 

Other loans

    

Commercial

   6,694,040    5,250,815 

Consumer

   543,943    529,283 
  

 

 

   

 

 

 

Total other loans

   7,237,983    5,780,098 
  

 

 

   

 

 

 

Total loans

   147,218,174    143,662,017 
  

 

 

   

 

 

 

Net deferred loan origination fees

   (190,395   (153,204

Allowance for loan losses

   (1,302,711   (1,188,352
  

 

 

   

 

 

 

Total loans, net

  $145,725,068   $142,320,461 
  

 

 

   

 

 

 

Overdraft deposits are reclassified as consumer loans and are included in the total loans on the balance sheet. Overdrafts were $13,008 and $7,824 at September 30, 2019 and December 31, 2018, respectively.

Portfolio segments

The Bank currently manages its credit products and respective exposure to credit losses by the following specific portfolio segments (classes) which are levels at which the Bank develops and documents its systematic methodology to determine the allowance for loan losses attributable to each respective portfolio segment. The segments are:

 

One-to four-family real estate loans – This residential real estate category contains permanent mortgage loans and construction permanent mortgage loans to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores,debt-to-income ratios, and collateral values. Loans may either be conforming ornon-conforming.

16


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 3.

Loans (Continued)

 

Home equity loans and lines of credit – This residential real estate category includes mortgage loans and lines of credit secured byone-to four-family residential real estate. These loans are typically secured with second mortgages on the homes.

 

Construction and land development – Commercial acquisition, development and construction loans are intended to finance the construction of commercial and residential properties and include loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan.

 

Nonresidential real estate loans– Nonresidential real estate loans consist of commercial permanent mortgage loans and commercial construction permanent mortgage loans secured by owner occupied andnon-owner occupied properties. Owner occupied commercial property loans involve a variety of property types to conduct the borrower’s operations. The primary source of repayment for this type of loan is the cash flow from the business and is based upon the borrower’s financial health and ability of the borrower and the business to repay.Non-owner occupied commercial property loans involve investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. This real estate category contains commercial mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale to repay the loan.

 

Commercial loans – Commercial loans are made to provide funds for equipment and general corporate needs. Repayment of the loan primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or finance a percentage of eligible receivables and inventory.

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 3. Loans (Continued)

 

Consumer loans – This category of loans includes primarily installment loans, personal lines of credit. Consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles.

The Bank makes loans to customers primarily in the Baltimore Metropolitan Area and its surrounding counties. The principal loan portfolio segment balances at March 31, 2020 and December 31, 2019 were as follows:

   March 31,   December 31, 
   2020   2019 

Real estate loans

    

One-to four-family

  $77,108,832   $74,655,376 

Home equity loans and lines of credit

   7,281,582    7,488,348 

Construction and land development

   10,176,933    9,260,520 

Nonresidential

   61,935,252    61,012,514 
  

 

 

   

 

 

 

Total real estate loans

   156,502,599    152,416,758 
  

 

 

   

 

 

 

Other loans

    

Commercial

   7,105,201    6,946,372 

Consumer

   456,814    522,566 
  

 

 

   

 

 

 

Total other loans

   7,562,015    7,468,938 
  

 

 

   

 

 

 

Total loans

   164,064,614    159,885,696 
  

 

 

   

 

 

 

Net deferred loan origination fees and costs

   (222,301   (261,085

Allowance for loan losses

   (1,550,851   (1,379,150
  

 

 

   

 

 

 

Total loans, net

  $162,291,462   $158,245,461 
  

 

 

   

 

 

 

Overdraft deposits are reclassified as consumer loans and are included in the total loans on the balance sheet. Overdrafts were $2,797 and $25,714 at March 31, 2020 and December 31, 2019, respectively.

Nonresidential real estate loans entail greater risks compared to residential real estate loans because they typically involved larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the company, as repayment of the loan generally is dependent, in large part, on the sufficient income for the property to cover operating expenses and debt service. Changes in economic conditions, such as theCOVID-19 pandemic, that are not in the control of the borrower or lender could negatively impact the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for nonresidential real estate than residential properties.

The following table provides information regarding our nonresidential real estate loans by type at March 31, 2020.

Type of Loan

  Number of Loans   Balance 

Office

   33   $16,728,139 

Retail

   17    13,189,040 

Warehouse/Industrial

   16    10,974,929 

Apartment/Multifamily

   16    8,276,994 

Hotel

   5    7,465,906 

Other

   11    3,118,332 

Restaurant

   4    1,256,752 

Religious/Church Related

   5    925,160 
  

 

 

   

 

 

 
   107   $61,935,252 
  

 

 

   

 

 

 

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 3. Loans (Continued)

Paycheck Protection Program

The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).

As a qualified SBA lender, we were automatically authorized to originate PPP loans. An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million dollars. PPP loans will have: (a) an interest rate of 1.0%, (b)two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including an accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business entity are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

We intend to limit our investment in PPP loans to up to 20% of the Bank’s capital or approximately $8.6 million in loans. As of April 24, 2020, we had received 79 applications for up to $8.2 million of loans under the PPP and have received approval for 35 applications for $6.1 million of loans.

Note 4.

Note 4. Credit Quality of Loans and the Allowance for Loan Losses

The allowance for loan losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as impaired. The general component coversnon-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

17


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4.

Credit Quality of Loans and the Allowance for Loan Losses (Continued)

A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. A loan in considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the 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. Impairment is measured on a loan by loan basis for all loans secured by real estate by the fair value of the collateral if the loan is collateral dependent. If the loan repayment is not deemed collateral dependent, impairment is measured on the net present value of the expected discounted future cash flows.

Loans are automatically placed onnon-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed onnon-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured. When loans are placed onnon-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent. The Bank’scharge-off policy states after all collection efforts have been exhausted, the loan is deemed to be a loss and the amount has been determined, the loss amount will be charged to the allowance for loan losses.

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

The following tables summarize the activity in the allowance for losses for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 and for the year ended December 31, 20182019 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of September 30,March 31, 2020, March 31, 2019 September 30, 2018 and December 31, 2018.

182019.


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

Note 4.

   As of March 31, 2020 
   One –to
Four-Family
  Home Equity
Loans and Lines
of Credit
   Construction
and Land
Development
   Nonresidential   Commercial   Consumer  Unallocated  Total 

Allowance for loans losses:

             

Beginning Balance – January 1, 2020

  $331,605  $62,603   $179,541   $683,453   $55,571   $6,950  $59,427  $1,379,150 

Charge-offs

   (263  —      —      —      —      (3,633  —     (3,896

Recoveries

   —     597    —      —      —      —     —     597 

Provision

   48,887   1,643    27,241    125,565    11,928    2,210   (42,474  175,000 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Ending Balance – March 31, 2020

  $380,229  $64,843   $206,782   $809,018   $67,499   $5,527  $16,953  $1,550,851 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Ending balance: individually evaluated for impairment

  $—    $385   $—     $—     $—     $—    $—    $385 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Ending balance: collectively evaluated for impairment

  $380,229  $64,458   $206,782   $809,018   $67,499   $5,527  $16,953  $1,550,466 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Loans:

             

Ending balance

  $77,108,832  $7,281,582   $10,176,933   $61,935,252   $7,105,201   $456,814   $164,064,614 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $265,377  $39,103   $—     $1,560,753   $—     $—     $1,865,233 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $76,843,455  $7,242,479   $10,176,933   $60,374,499   $7,105,201   $456,814   $162,199,381 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

   As of March 31, 2019 
   One –to
Four-Family
   Home Equity
Loans and Lines
of Credit
  Construction
and Land
Development
   Nonresidential   Commercial   Consumer  Unallocated  Total 

Allowance for loans losses:

             

Beginning Balance – January 1, 2019

  $244,781   $68,837  $185,170   $626,031   $28,879   $6,669  $27,985  $1,188,352 

Charge-offs

   —      —     —      —      —      —     —     —   

Recoveries

   —      —     —      —      —      —     —     —   

Provision

   61,263    (7,115  33,825    5,068    770    (369  (3,442  90,000 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Ending Balance – March 31, 2019

  $306,044   $61,722  $218,995   $631,099   $29,649   $6,300  $24,543  $1,278,352 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Ending balance: individually evaluated for impairment

  $61,125   $1,541  $6,074   $—     $—     $—    $—    $68,740 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Ending balance: collectively evaluated for impairment

  $244,919   $60,181  $212,921   $631,099   $29,649   $6,300  $24,543  $1,209,612 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Loans:

             

Ending balance

  $70,401,955   $7,291,555  $9,831,129   $52,909,540   $5,390,814   $496,036   $146,321,029 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $661,784   $127,200  $86,728   $484,223   $—     $—     $1,359,935 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $69,740,171   $7,164,355  $9,744,401   $52,425,317   $5,390,814   $496,036   $144,961,094 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

   As of December 31, 2019 
   One –to
Four-Family
  Home Equity
Loans and Lines
of Credit
  Construction
and Land
Development
  Nonresidential  Commercial   Consumer   Unallocated   Total 

Beginning Balance

  $244,781  $68,837  $185,170  $626,031  $28,879   $6,669   $27,985   $1,188,352 

Charge-offs

   (90,111  —     (11,000  —     —      —      —      (101,111

Recoveries

   —     2,439   —     114,470   —      —      —      116,909 

Provision

   176,935   (8,673  5,371   (57,048  26,692    281    31,442    175,000 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $331,605  $62,603  $179,541  $683,453  $55,571   $6,950   $59,427   $1,379,150 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $—    $681  $—    $—    $—     $—     $—     $681 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $331,605  $61,922  $179,541  $683,453  $55,571   $6,950   $59,427   $1,378,469 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

            

Ending balance

  $74,655,376  $7,488,348  $9,260,520  $61,012,514  $6,946,372   $522,566     $159,885,696 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

     

 

 

 

Ending balance: individually evaluated for impairment

  $337,984  $116,721  $791,625  $1,581,818  $—     $—       $2,828,148 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

     

 

 

 

Ending balance: collectively evaluated for impairment

  $74,317,392  $7,371,627  $8,468,895  $59,430,696  $6,946,372   $522,566     $157,057,548 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

     

 

 

 

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

   As of September 30, 2019 
   One –to
Four-Family
  Home Equity
Loans and Lines

of Credit
  Construction
and Land
Development
  Nonresidential  Commercial  Consumer   Unallocated   Total 

Allowance for loans losses:

           

Beginning Balance – July 1, 2019

  $340,637  $60,589  $165,934  $583,285  $55,079  $6,404   $76,588   $1,288,516 

Charge-offs

   (40,275  —     —     —     —     —      —      (40,275

Recoveries

   —     —     —     114,470   —     —      —      114,470 

Reversal of provision

   21,542   (5,436  17,464   (94,637  (1,527  504    2,090    (60,000
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Ending Balance – September 30, 2019

  $321,904  $55,153  $183,398  $603,118  $53,552  $6,908   $78,678   $1,302,711 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Beginning Balance – January 1, 2019

  $244,781  $68,837  $185,170  $626,031  $28,879  $6,669   $27,985   $1,188,352 

Charge-offs

   (90,111  —     —     —     —     —      —      (90,111

Recoveries

   —     —     —     114,470   —     —      —      114,470 

Provision

   167,234   (13,684  (1,772  (137,383  24,673   239    50,693    90,000 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Ending Balance – September 30, 2019

  $321,904  $55,153  $183,398  $603,118  $53,552  $6,908   $78,678   $1,302,711 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $—    $737  $13,184  $—    $—    $—     $—     $13,921 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $321,904  $54,416  $170,214  $603,118  $53,552  $6,908   $ 78,678   $1,288,790 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Loans:

           

Ending balance

  $70,415,865  $6,889,663  $9,089,247  $53,585,416  $6,694,040  $543,943     $147,218,174 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

     

 

 

 

Ending balance: individually evaluated for impairment

  $310,585  $87,601  $826,438  $1,592,485  $—    $—       $2,817,109 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

     

 

 

 

Ending balance: collectively evaluated for impairment

  $ 70,105,280  $6,802,062  $8,262,809  $ 51,992,931  $6,694,040  $543,943     $144,401,065 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

     

 

 

 

19


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4.

Credit Quality of Loans and the Allowance for Loan Losses (Continued)

   As of September 30, 2018 
   One –to
Four-Family
  Home Equity
Loans and Lines

of Credit
  Construction
and Land
Development
   Nonresidential   Commercial  Consumer  Unallocated   Total 

  Allowance for loans losses:

            

Beginning Balance – July 1, 2018

  $202,457  $70,328  $171,304   $591,189   $30,137  $16,801  $ 34,051   $1,116,267 

Charge-offs

   —     —     —      —      —     —     —      —   

Recoveries

   —     —     —      —      —     —     —      —   

Provision

   37,553   (22,155  37,955    4,724    (1,006  (79  18,008    75,000 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending Balance – September 30, 2018

  $240,010  $48,173  $209,259   $595,913   $29,131  $16,722  $52,059   $1,191,267 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Beginning Balance – January 1, 2018

  $238,148  $83,129  $173,167   $446,576   $44,199  $15,933  $37,253   $1,038,405 

Charge-offs

   (88,000  —     —      —      —     —     —      (88,000

Recoveries

   7,563   —     8,299    —      —     —     —      15,862 

Provision

   82,299   (34,956  27,793    149,337    (15,068  789   14,806    225,000 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending Balance – September 30, 2018

  $240,010  $48,173  $209,259   $595,913   $29,131  $16,722  $52,059   $1,191,267 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $—    $1,178  $7,267   $—     $—    $5,901  $—     $14,346 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $242,010  $46,995  $201,992   $595,913   $29,131  $10,821  $52,059   $1,176,921 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Loans:

            

Ending balance

  $69,301,180  $8,072,429  $ 9,990,514   $51,438,876   $5,296,630  $ 526,669    $144,628,298 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

  $726,891  $142,847  $210,815   $—     $—    $5,901    $1,086,454 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

  $ 68,574,289  $7,929,582  $9,779,699   $ 51,438,876   $5,296,630  $522,768    $143,541,844 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

    

 

 

 

20


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4.

Credit Quality of Loans and the Allowance for Loan Losses (Continued)

   As of December 31, 2018 
   One –to
Four-Family
  Home Equity
Loans and
Lines

of Credit
  Construction
and Land
Development
   Nonresidential  Commercial  Consumer  Unallocated  Total 

Beginning Balance

  $238,148  $83,129  $173,167   $446,576  $44,199  $15,933  $37,253  $1,038,405 

Charge-offs

   (88,000  (12,013  —      (335,000  —     (5,901  —     (440,914

Recoveries

   7,562   —     8,299    —     —     —     —     15,861 

Provision

   87,071   (2,279  3,704    514,455   (15,320  (3,363  (9,268  575,000 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending Balance

  $244,781  $68,837  $185,170   $626,031  $28,879  $6,669  $27,985  $1,188,352 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance: individually evaluated for impairment

  $—    $2,089  $6,074   $—    $—    $—    $—    $8,163 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance: collectively evaluated for impairment

  $244,781  $66,748  $179,096   $626,031  $28,879  $6,669  $ 27,985  $1,180,189 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans:

          

Ending balance

  $ 70,197,875  $ 7,547,195  $ 8,232,067   $51,904,782  $5,250,815  $ 529,283   $143,662,017 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $585,047  $130,795  $86,728   $484,223  $—    $—     $1,286,793 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $69,612,828  $7,416,400  $8,145,339   $ 51,420,559  $5,250,815  $529,283   $142,375,224 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

21


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4.

Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

As part of the ongoing monitoring of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of classified loans, net chargeoffs, nonperforming loans, credit scores, and the general economic conditions in the Bank’s market area.

The Bank utilizes an internal rating system to monitor the credit quality of the overall loan portfolio. A description of the general characteristics is as follows:

 

Pass – A pass loan is considered of sufficient quality to preclude a special mention or an adverse rating. Pass assets are generally well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. The pass classification also includes watch credits which have all of the characteristics of a pass loan but warrant more than the normal level of supervision.

 

Special mention – A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

 

Substandard – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well definedwell-defined weakness, or weaknesses, that jeopardize the collection or liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This will be the measurement for determining if a loan is impaired.

 

Doubtful – A doubtful loan has all of the weaknesses inherent in a substandard credit with the added factor that the weaknesses make the collection or liquidation in full, on the basis of current information, conditions and values, highly questionable and improbable. Loans in this category must be placed onnon-accrual status and all payments applied to principal recapture. Doubtful classification should be used only when a distinct possibility of loss exists. When identified, adequate loss should be recorded for the specific assets. It is not necessary to classify an entire credit doubtful when collection of a specific portion appears highly probable.

 

Loss – A loan classified as loss is considered uncollectable and of such little value that continuance as a loan in unjustified. A loss classification does not mean that the credit has absolutely no value; partial recoveries may be received in the future. Amounts classified as loss must becharged-off in the period in which they are deemed uncollectible.

When assets are classified as impaired, the Bank allocates a portion of the related general loss allowances to such assets as the Bank deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

22


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4.

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

The following table is a summary of the loan portfolio quality indicators by loan class recorded investment as of September 30, 2019March 31, 2020 and December 31, 2018:2019:

 

   September 30, 2019 
   One-to
Four-Family
   Home Equity
Loans and
Lines of Credit
   Construction
and Land
Development
   Nonresidential 

Grade:

        

Pass

  $69,462,293   $6,843,583   $8,262,809   $51,992,931 

Special Mention

   642,987    —      —      —   

Substandard

   310,585    46,080    826,438    1,592,485 

Doubtful

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 
  $70,415,865   $6,889,663   $9,089,247   $53,585,416 
  

 

 

   

 

 

   

 

 

   

 

 

 

   Commercial   Consumer   Totals 

Grade:

      

Pass

  $6,694,040   $543,943   $143,799,599 

Special Mention

   —      —      642,987 

Substandard

   —      —      2,775,588 

Doubtful

   —      —      —   
  

 

 

   

 

 

   

 

 

 
  $6,694,040   $543,943   $147,218,174 
  

 

 

   

 

 

   

 

 

 

   December 31, 2018 
   One-to Four-
Family
   Home Equity
Loans and
Lines of Credit
   Construction
and Land
Development
   Nonresidential 

Grade:

        

Pass

  $69,499,216   $7,462,230   $7,351,165   $49,781,890 

Special Mention

   113,612    —      794,174    1,638,669 

Substandard

   585,047    84,965    86,728    484,223 

Doubtful

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 
  $70,197,875   $7,547,195   $8,232,067   $51,904,782 
  

 

 

   

 

 

   

 

 

   

 

 

 

   Commercial   Consumer   Totals 

Grade:

      

Pass

  $5,250,815   $529,283   $139,874,599 

Special Mention

   —      —      2,546,455 

Substandard

   —      —      1,240,963 

Doubtful

   —      —      —   
  

 

 

   

 

 

   

 

 

 
  $5,250,815   $529,283   $143,662,017 
  

 

 

   

 

 

   

 

 

 

23

   March 31, 2020 
   One-to Four-
Family
   Home Equity
Loans and
Lines of Credit
   Construction
and Land
Development
   Nonresidential 

Grade:

        

Pass

  $76,597,036   $7,281,582   $10,176,933   $60,374,499 

Special Mention

   246,419    —      —      —   

Substandard

   265,377    —      —      1,560,753 

Doubtful

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 
  $77,108,832   $7,281,582   $10,176,933   $61,935,252 
  

 

 

   

 

 

   

 

 

   

 

 

 
   Commercial   Consumer   Totals     

Grade:

      

Pass

  $7,105,201   $456,814   $161,992,065 

Special Mention

   —      —      246,419 

Substandard

   —      —      1,826,130 

Doubtful

   —      —      —   
  

 

 

   

 

 

   

 

 

 
  $7,105,201   $456,814   $164,064,614 
  

 

 

   

 

 

   

 

 

 
   December 31, 2019 
   One-to Four-
Family
   Home Equity
Loans and
Lines of Credit
   Construction
and Land
Development
   Nonresidential 

Grade:

        

Pass

  $73,856,550   $7,412,069   $8,468,895   $59,430,696 

Special Mention

   460,842    —      —      —   

Substandard

   337,984    76,279    791,625    1,581,818 

Doubtful

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 
  $74,655,376   $7,488,348   $9,260,520   $61,012,514 
  

 

 

   

 

 

   

 

 

   

 

 

 
   Commercial   Consumer   Totals     

Grade:

      

Pass

  $6,946,372   $522,566   $156,637,148 

Special Mention

   —      —      460,842 

Substandard

   —      —      2,787,706 

Doubtful

   —      —      —   
  

 

 

   

 

 

   

 

 

 
  $6,946,372   $522,566   $159,885,696 
  

 

 

   

 

 

   

 

 

 


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4.

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

The following table sets forth certain information with respect to our loan portfolio delinquencies by loan class and amount as of September 30, 2019March 31, 2020 and December 31, 2018:2019:

 

  September 30, 2019   March 31, 2020 
  Loans
30-59 Days
Past Due
   Loans
60-89 Days
Past Due
   Loans
90 or More
Days
Past Due
   Total Past
Due Loans
   Current
Loans
   Total
Loans
   Recorded
Investment >
90 Days and
Accruing
   Nonaccrual
Loans
   Loans
30-59 Days
Past Due
   Loans
60-89 Days
Past Due
   Loans
90 or More
Days
Past Due
   Total Past
Due Loans
   Current
Loans
   Total
Loans
   Recorded
Investment >
90 Days and
Accruing
   Nonaccrual
Loans
 

Real estate loans:

                                

One-to four-family

  $426,739   $371,129   $155,704   $953,572   $69,462,293   $70,415,865   $—     $310,585   $221,635   $—     $113,102   $334,737   $76,774,095   $77,108,832   $—     $265,377 

Home equity loans and lines of credit

   —      —      46,080    46,080    6,843,583    6,889,663    —      46,080    —      —      —      —      7,281,582    7,281,582    —      —   

Construction and land development

   —      —      86,728    86,728    9,002,519    9,089,247    —      86,728    —      —      —      —      10,176,933    10,176,933    —      —   

Nonresidential

   —      —      —      —      53,585,416    53,585,416    —      —      —      —      —      —      61,935,252    61,935,252    —      —   

Other loans:

                                

Commercial

   —      —      —      —      6,694,040    6,694,040    —      —      —      —      —      —      7,105,201    7,105,201    —      —   

Consumer

   —      —      —      —      543,943    543,943    —      —      —      —      —      —      456,814    456,814    —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

  $426,739   $371,129   $288,512   $1,086,380   $146,131,794   $147,218,174   $—     $443,393   $221,635   $—     $113,102   $334,737   $163,729,877   $164,064,614   $—     $265,377 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  December 31, 2018 
  Loans
30-59 Days
Past Due
   Loans
60-89 Days
Past Due
   Loans
90 or More
Days
Past Due
   Total Past
Due Loans
   Current Loans   Total
Loans
   Recorded
Investment >
90 Days and
Accruing
   Nonaccrual
Loans
 

Real estate loans:

                

One-to four-family

  $101,183   $158,134   $343,651   $602,968   $69,594,907   $70,197,875   $—     $585,047 

Home equity loans and lines of credit

   35,606    —      48,005    83,611    7,463,584    7,547,195    —      84,965 

Construction and land development

   86,728    —      —      86,728    8,145,339    8,232,067    —      86,728 

Nonresidential

   —      —      484,223    484,223    51,420,559    51,904,782    —      484,223 

Other loans:

                

Commercial

   —      —      —      —      5,250,815    5,250,815    —      —   

Consumer

   233    —      —      233    529,050    529,283    —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

  $223,750   $158,134   $875,879   $1,257,763   $142,404,254   $143,662,017   $—     $1,240,963 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

   December 31, 2019 
   Loans
30-59 Days
Past Due
   Loans
60-89 Days
Past Due
   Loans
90 or More
Days
Past Due
   Total Past
Due Loans
   Current
Loans
   Total
Loans
   Recorded
Investment >
90 Days and
Accruing
   Nonaccrual
Loans
 

Real estate loans:

                

One-to four-family

  $220,316   $—     $337,984   $558,300   $74,097,076   $74,655,376   $—     $337,984 

Home equity loans and lines of credit

   169,329    —      76,279    245,608    7,242,740    7,488,348    —      76,279 

Construction and land development

   —      —      75,728    75,728    9,184,792    9,260,520    —      75,728 

Nonresidential

   —      —      —      —      61,012,514    61,012,514    —      —   

Other loans:

                

Commercial

   31,510    —      —      31,510    6,914,862    6,946,372    —      —   

Consumer

   24,759    —      —      24,759    497,807    522,566    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $445,914   $—     $489,991   $935,905   $158,949,791   $159,885,696   $—     $489,991 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2019March 31, 2020 and December 31, 20182019 there were no loans 90 days past due and still accruing interest. At September 30, 2019,March 31, 2020, the Bank had fivethree loans onnon-accrual status with foregone interest in the amount of $14,386.$6,511. At December 31, 2018,2019, the Bank had tenseven loans onnon-accrual status with foregone interest in the amount of $36,054.$17,925.

The Bank accounts for impaired loans under generally accepted accounting principles. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Loans are individually evaluated for impairment. When the Bank classifies a problem asset as impaired, it provides a specific reserve for that portion of the asset that is deemed uncollectible based on the present value of expected future cash flows discounted at the loan’s original effective interest rate, or based on the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.

24


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4.

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

The following table is a summary of impaired loans for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 and the year ended and December 31, 2018:2019:

 

   Impaired Loans at September 30, 2019   Three Months Ended
September 30, 2019
   Nine Months Ended
September 30, 2019
 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 

With no related allowance recorded:

              

One-to four-family

  $310,585   $314,605   $—     $311,238   $1,882   $314,072   $7,997 

Home equity loans and lines of credit

   46,080    46,080    —      46,080    —      47,043    1,408 

Construction and land development

   739,710    739,710    —      750,741    14,145    766,942    42,085 

Nonresidential

   1,592,485    1,592,485    —      1,600,167    16,673    1,615,077    49,542 

With an allowance recorded:

              

Home equity loans and lines of credit

  $41,521   $41,521   $737   $42,362   $659   $43,676   $2,202 

Construction and land development

   86,728    86,728    13,184    86,728    —      86,728    —   

Total

              

One-to four-family

  $310,585   $314,605   $—     $311,238   $1,882   $314,072   $7,997 

Home equity loans and lines of credit

   87,601    87,601    737    88,441    659    90,718    3,610 

Construction and land development

   826,438    826,438    13,184    837,469    14,145    853,670    42,085 

Nonresidential

   1,592,485    1,592,485    —      1,600,167    16,673    1,615,077    49,542 
   Impaired Loans at September 30, 2018   Three Months Ended
September 30, 2018
   Nine Months Ended
September 30, 2018
 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 

With no related allowance recorded:

              

One-to four-family

  $726,891   $785,890   $—     $758,508   $4,212   $794,549   $24,943 

Home equity loans and lines of credit

   96,978    96,978    —      97,098    258,    99,646    2,582 

Construction and land development

   123,338    123,338    —      123,338    —      123,338    —   

With an allowance recorded:

              

Home equity loans and lines of credit

  $45,869   $45,869   $1,178   $46,823   $493   $47,479   $2,182 

Construction and land development

   87,477    87,477    7,267    87,551    356    87,916    2,145 

Consumer

   5,901    5,901    5,901    5,952    82    6,089    280 

Total

              

One-to four-family

  $726,891   $785,890   $—     $758,508   $4,212   $794,549   $24,943 

Home equity loans and lines of credit

   142,847    142,847    1,178    143,921    751    147,125    4,764 

Construction and land development

   210,815    210,815    7,267    210,889    356    211,254    2,145 

Consumer

   5,901    5,901    5,901    5,952    82    6,089    280 

25

               Three Months Ended 
   Impaired Loans at March 31, 2020   March 31, 2020 
       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
   Investment   Balance   Allowance   Investment   Recognized 

With no related allowance recorded:

          

One-to four-family

  $265,377   $267,279   $—     $266,868   $4,896 

Nonresidential

   1,560,753    1,560,753    —      1,571,286    23,466 

With an allowance recorded:

          

Home equity loans and lines of credit

  $39,103   $39,103   $385   $39,773   $2,964 

Total

          

One-to four-family

  $265,377   $267,279   $—     $266,868   $4,896 

Home equity loans and lines of credit

   39,103    39,103    385    39,773    2,964 

Nonresidential

   1,560,753    1,560,753    —      1,571,286    23,466 
               Three Months Ended 
   Impaired Loans at March 31, 2019   March 31, 2019 
       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
   Investment   Balance   Allowance   Investment   Recognized 

With no related allowance recorded:

          

One-to four-family

  $459,430   $463,756   $—     $462,049   $5,301 

Home equity loans and lines of credit

   82,885    82,885    —      83,925    1,934 

Nonresidential

   484,223    871,107    —      484,223    —   

With an allowance recorded:

          

One-to four-family

  $202,354   $263,605   $61,125   $202,601   $1,337 

Home equity loans and lines of credit

   44,315    44,315    1,541    45,073    875 

Construction and land development

   86,728    86,728    6,074    86,728    —   

Nonresidential

          

Total

          

One-to four-family

  $661,784   $727,361   $61,125   $664,650   $6,638 

Home equity loans and lines of credit

   127,200    127,200    1,541    128,998    2,809 

Construction and land development

   86,728    86,728    6,074    86,728    —   

Nonresidential

   484,223    871,107    —      484,223    —   


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4.

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

  December 31, 2019 
      Unpaid       Average   Interest 
  December 31, 2018   Recorded   Principal   Related   Recorded   Income 
  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Investment   Balance   Allowance   Investment   Recognized 

With no related allowance recorded:

                    

One-to four-family

  $585,047   $650,982   $—     $622,738   $22,214   $337,984   $342,345   $—     $342,907   $11,765 

Home equity loans and lines of credit

   84,965    84,965    —      86,032    3,197    76,279    76,279    —      82,117    2,727 

Construction and land development

   791,625    802,625      836,264    54,478 

Nonresidential

   484,223    872,655    —      847,383    26,452    1,581,818    1,581,818    —      1,609,744    61,141 

With an allowance recorded:

                    

Home equity loans and lines of credit

  $45,830   $45,869   $2,089   $47,459   $2,743   $40,442   $40,442   $681   $43,136   $2,964 

Construction and land development

   86,728    86,728    6,074    87,542    3,916 

Total

                    

One-to four-family

  $585,047   $650,982   $—     $622,738   $22,214   $337,984   $342,345   $—     $342,907   $11,765 

Home equity loans and lines of credit

   130,795    130,834    2,089    133,491    5,940    116,721    116,721    681    125,252    5,691 

Construction and land development

   86,728    86,728    6,074    87,542    3,916    791,625    802,625    —      836,264    54,478 

Nonresidential

   484,223    872,655    —      847,383    26,452    1,581,818    1,581,818    —      1,609,744    61,141 

Impaired loans also include certain loans that have been modified in a troubled debt restructuring (a “TDR”)TDR to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Generally, nonaccrual loans that are modified and are considered TDRs are classified as nonperforming at the time of the restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. A summary of TDRs at September 30, 2019March 31, 2020 and December 31, 20182019 are as follows:

 

September 30, 2019

  Number of Contracts   Performing   Nonperforming   Total 

One-to four-family

   —     $—     $—     $—   

Home equity loans and lines of credit

   1    41,521    —      41,521 

Construction and land development

   —      —      —      —   

Nonresidential

   —      —      —      —   

Commercial

   —      —      —      —   

Consumer

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 
   1   $41,521   $—     $41,521 
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2018

  Number of Contracts   Performing   Nonperforming   Total 

One-to four-family

   1   $—     $120,380   $120,380 

Home equity loans and lines of credit

   1    45,830    —      45,830 

Construction and land development

   —      —      —      —   

Nonresidential

   —      —      —      —   

Commercial

   —      —      —      —   

Consumer

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 
   2   $45,830   $120,380   $166,210 
  

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2020

  Number of Contracts   Performing   Nonperforming   Total 

Home equity loans and lines of credit

   1   $39,103   $—     $39,103 

December 31, 2019

  Number of Contracts   Performing   Nonperforming   Total 

Home equity loans and lines of credit

   1   $40,442   $—     $40,442 

The Bank had one TDR at September 30, 2019March 31, 2020 totaling $41,521$39,103 and two TDRsone TDR at December 31, 20182019 totaling $166,210.$40,442. The Bank has no commitments to loan additional funds to borrowers whose loans have been modified. There were no nonperforming TDRs reclassified to nonperforming loans during the three and nine months ended September 30, 2019March 31, 2020 and 2018.2019. A default is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. If loans modified in a TDR subsequently default, the Bank evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

26The CARES Act provided financial institutions the option, which the Bank has elected to apply, to temporarily suspend certain requirements under U.S. GAAP relating to TDRs for a limited period of time to account for the effects ofCOVID-19. Financial institutions were encouraged to work prudently with borrowers who are or may be unable to meet their contractual obligations because of the effects ofCOVID-19. Financial institutions generally do not need to categorizeCOVID-19 related modifications as TDRs as long as the borrower was not experiencing financial difficulty prior to the effects of COVID-19.


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

As of April 24, 2020, the Bank had received requests to modify 52 loans due to the effects ofCOVID-19. The modifications primarily consist of interest only payments with the deferral of principal for up to six months, dependent on the borrower and their financial situation. The breakdown of loan modification requests by type is as follows:

   Number of loans   Balance 

Real estate loans

    

One-to four-family

   18   $3,107,843 

Home equity loans and lines of credit

   3    94,728 

Construction and land development

   2    327,843 

Nonresidential

   21    17,305,269 
  

 

 

   

 

 

 

Total real estate loans

   44    20,835,863 
  

 

 

   

 

 

 

Other loans

    

Commercial

   6    1,716,312 

Consumer

   2    56,149 
  

 

 

   

 

 

 

Total other loans

   8    1,772,461 
  

 

 

   

 

 

 

Total loans

   52   $22,608,144 
  

 

 

   

 

 

 
Note 5.

Note 5. Foreclosed Real Estate

At September 30, 2019both March 31, 2020 and December 31, 2018,2019, the Bank had $845,000 and $865,000 in foreclosed real estate. The Bank did not dispose of any foreclosed real estate during the three and nine months ended September 30,March 31, 2020 and March 31, 2019 and September 30, 2018 and the twelve months ended December 31, 2018.2019.

The following table summarizes changes in foreclosed real estate for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 and for the year ended December 31, 2018, which are measured on a nonrecurring basis using significant unobservable, Level 3, inputs:

 

  September 30,   December 31,   March 31,   December 31, 
  2019   2018   2018   2020   2019   2019 

Balance, beginning of period

  $865,000   $865,000   $865,000   $845,000   $865,000   $865,000 

Transfer to foreclosed real estate

   —      —      —   

Proceeds from sale of foreclosed real estate

   —      —      —   

Gain (loss) on sale of foreclosed real estate

   —      —      —   

Write-down of foreclosed real estate

   (20,000   —      —      —      —      (20,000
  

 

   

 

   

 

   

 

   

 

   

 

 

Balance, end of period

  $845,000   $865,000   $865,000   $845,000   $865,000   $845,000 
  

 

   

 

   

 

   

 

   

 

   

 

 

At September 30, 2019March 31, 2020 there were no residential real estate loans in the process of foreclosure. At December 31, 20182019 there were twono residential real estate loans totaling $184,228 and one nonresidential real estate loan totaling $484,223 in the process of foreclosure. At September 30, 2019March 31, 2020 and December 31, 2018,2019, there were no residential real estate properties included in foreclosed real estate.

Note 6.

Note 6. Deposits

Deposits are summarized as follows:

 

  September 30,
2019
   December 31,
2018
   March 31, 2020   December 31, 2019 

Noninterest-bearing demand

  $18,528,466   $18,111,318   $21,658,012   $19,780,866 

Interest-bearing demand

   24,549,964    23,354,687    23,459,259    23,779,145 

Money market

   10,177,785    11,775,372    9,670,363    10,242,323 

Savings

   23,782,600    24,881,515    24,515,788    24,295,700 

Certificates of deposit

   78,208,735    75,627,343    78,637,728    78,342,839 
  

 

   

 

   

 

   

 

 

Total deposits

  $155,247,550   $153,750,235   $157,941,150   $156,440,873 
  

 

   

 

   

 

   

 

 

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 6. Deposits (Continued)

Deposit accounts in the Bank are federally insured up to $250,000 per depositor. The aggregate amount of time deposits with balances of $250,000 or more totaled $13,739,076$15,135,158 and $11,415,706$14,113,578 at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

At September 30, 2019March 31, 2020 certificates of deposit and their remaining maturities were as follows:

 

2020

  $  28,175,940 

March 31,

    

2021

   23,389,328   $29,264,377 

2022

   11,996,295    19,178,981 

2023

   9,154,119    14,368,762 

2024

   5,493,053    8,959,675 

2025

   6,865,933 
  

 

   

 

 
  $  78,208,735   $78,637,728 
  

 

   

 

 

Deposit balances of officers and directors totaled $986,477$921,560 and $730,168$419,857 at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

Note 7. Borrowings

27The Bank has advances outstanding from the Federal Home Loan Bank of Atlanta (“FHLB”). A schedule of borrowings is as follows:

March 31, 2020  December 31, 2019 
Advance
Amount
  Rate  Maturity
Date
  Advance
Amount
  Rate  Maturity
Date
 
$2,500,000   0.33  05/20/2020  $2,500,000   1.78  12/17/2020 
 5,000,000   0.55  09/14/2020    
 5,000,000   0.95  03/06/2023    

 

 

    

 

 

   
$12,500,000    $2,500,000   

 

 

    

 

 

   

At March 31, 2020 FHLB advances and their remaining maturities were as follows:

March 31,

    

2021

  $7,500,000 

2022

   —   

2023

   5,000,000 

2024

   —   

2025

   —   
  

 

 

 
  $12,500,000 
  

 

 

 


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 7. Borrowings (Continued)

Note 7.

Borrowings

The Bank has an agreement with the Federal Home Loan Bank of Atlanta (“FHLB”) that allows it to obtain advances secured by assets owned by the Bank. Total advances are limited to 25% of the Bank’s total assets. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Bank had availability of $55,200,000$55,085,000 and $54,400,000,$55,100,000, respectively, and remaining credit availability of approximately $42,600,000 and $52,600,000, respectively, with FHLB. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Bank pledged a portion of itsone-to four-family residential mortgages as collateral. The amount of loans that were deemed eligible to pledge as collateral totaled approximately $51,400,000$53,300,000 and $50,320,000 at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The Bank had no outstanding advances at September 30, 2019 and December 31, 2018.

The Bank also has a $2,000,000 unsecured federal funds line of credit available with another financial institution, for which no amounts were outstanding as of September 30, 2019March 31, 2020 and December 31, 2018.2019.

Note 8.

Note 8. Employee Stock Ownership Plan

In connection with the Bank’s mutual to stock conversion in September 2018, the Bank established the Chesapeake Bank of Maryland Employee Stock Ownership Plan (“ESOP”) for all eligible employees. The ESOP purchased 338,560 shares of Company common stock in the Company’s initial public offering at $10.00 per share with the proceeds of a ten (10) year loan from the Company. The Bank intends to make annual contributions to the ESOP that at a minimum will permit the ESOP to repay the principal and interest due on the ESOP debt. However, the Bank may prepay the principal of the note, partially or in full and without penalty or premium at any time and from time to time without prior notice to the holder. DividendsAny dividends declared on Company common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan. As the ESOP loan is repaid, shares of Company common stock pledged as collateral for the loan are released from the loan suspense account for allocation to Plan participants on the basis of each active participant’s proportional share of compensation.

Participants vest 100% in their ESOP allocations after three years of service. In connection with the implementation of the ESOP, participants were given credit for past service with the Bank for vesting purposes. Participants will become fully vested upon age 65, death or disability, a change in control, or termination of the ESOP. Generally, participants will receive distributions from the ESOP upon separation from service. The plan reallocates any unvested shares of common stock forfeited upon termination of employment among the remaining participants in the plan.

The ESOP compensation expense for the three and nine months ended September 30,March 31, 2020 and 2019 was $115,957$112,571 and $340,253,$108,762, respectively. The ESOP compensation expense for the three and nine months ended September 30, 2018 was $15,000. This amount represents the average fair market value of the shares of Company common stock allocated or committed to be released as of that date. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additionalpaid-in capital. Dividends, if any, on allocated shares are recorded as a reduction of retained earnings and dividends, if any, on unallocated shares are recorded as a reduction of the debt service. At September 30, 2019,March 31, 2020, there were 304,704270,848 shares not yet released having an aggregate market value of approximately $4,265,856.$3,136,420.

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 9.

Note 9. Stock Based Compensation

On May 14, 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (“2019 Plan”), which was approved at the Annual Meeting of Stockholders. The 2019 Plan allows for up to 169,280 shares to be issued to employees, executive officers or Directors in the form of restricted stock, and up to 423,200 shares to be issued to employees, executive officers or Directors in the form of stock options. At September 30, 2019,March 31, 2020, there were 161,320 restricted stock awards granted and 368,300 stock option awards granted under the 2019 Plan.

Restricted Stock

The specific terms of each restricted stock award are determined by the Compensation Committee at the date of the grant. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the date of the grant. Participants will vest in their share awards at a rate of 20% per year over a five year period, beginning one year after the date of the plan share award. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested share awards will be forfeited.

28


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 9.

Stock Based Compensation (Continued)

The 2019 Equity Incentive Plan Trust (“Trust”) has been established to acquire, hold, administer, invest and make distributions from the Trust in accordance with provisions of the Plan and Trust. The Company will contributecontributed sufficient funds to the Trust so thatfor the Trust canto acquire 169,280 shares of common stock which will beis held in the Trust subject to the restricted stock award vesting requirements. At September 30, 2019, there were 67,323 shares remaining to be acquired by the Trust. The 2019 Plan provides that grants to each employee andnon-employee director shall not exceed 25% and 5% of the shares available under the 2019 Plan, respectively. Shares awarded tonon-employee directors in the aggregate shall not exceed 30% of the shares available under the 2019 Plan.

The following table presents a summary of the activity in the Company’s restricted stock for the ninethree months ended September 30, 2019:March 31, 2020:

 

  Shares   Weighted Average
Grant Date Fair Value
   Shares   Weighted Average
Grant Date Fair Value
 

Nonvested at January 1, 2019

   —     $—   

Nonvested at January 1, 2020

   —     $—   

Granted

   161,320    13.40    161,320    13.40 

Vested

   —      —      —      —   

Forfeited

   —      —      —      —   
  

 

   

 

   

 

   

 

 

Nonvested at September 30, 2019

   161,320   $13.40 

Nonvested at March 31, 2020

   161,320   $13.40 
  

 

   

 

   

 

   

 

 

Fair value of vested shares

  $—       $—     
  

 

     

 

   

The 2019 Plan was not adopted until May 14, 2019, therefore there were no shares granted for the three months ended March 31, 2019.

The following table outlines the vesting schedule of the nonvested restricted stock awards as of September 30, 2019:March 31, 2020:

 

Year Ending December 31,

  Number of Restricted Shares   Number of Restricted Shares 

2019

   —   

2020

   32,264    32,264 

2021

   32,264    32,264 

2022

   32,264    32,264 

2023

   32,264    32,264 

2024

   32,264    32,264 
  

 

   

 

 
   161,320    161,320 
  

 

   

 

 

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 9. Stock Based Compensation (Continued)

The Company recorded compensation expense related to restricted stock awards of $108,973 and $165,828$107,494 during the three and nine months ended September 30, 2019, respectively.March 31, 2020. No compensation expense was recorded for the three and nine months ended September 30, 2018.March 31, 2019. As of September 30, 2019,March 31, 2020, there was $1,995,860$1,779,393 of total unrecognized compensation expense related to nonvested shares granted under the 2019 Plan. The cost is expected to be recognized over a weighted average period of 4.64.1 years.

Stock Options

Under the above 2019 Plan, stock options are granted to provide the Company’s directors and key employees with a proprietary interest in the Company as an as incentive to contribute to its success. The Board of Directors of the Company may grant options to eligible employees andnon-employee directors based on these factors. The 2019 Plan participants will vest in their options at a rate no more rapid than 20% per year over a five yearfive-year period, beginning one year after the grant date of the option. Vested options will have an exercise period of ten years commencing on the date of grant. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested options shall be forfeited. The Company recognizes compensation expense during the vesting period based on the fair value of the option on the date of the grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table

29


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 9.

Stock Based Compensation (Continued)

below. Expected volatilities are based on historical data. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of the options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury rate equal to the expected term of the option at the time of the grant.

The fair value of options granted to date was determined using the following assumptions as of the grant date.

 

Expected Stock Price Volatility

   17.08

Expected Dividend Yield

   0.00

Expected Term (In Years)

   7.0 

Risk-Free Rate

   2.30

Fair Value of Options Granted

  $3.35 

The following table summarizes the Company’s stock option activity and related information for the ninethree months ended September 30, 2019:March 31, 2020:

 

  Shares   Weighted
Average
Exercise Price
   Weighted Average
Remaining Contractual
Term (in years)
   Shares   Weighted
Average

Exercise Price
   Weighted Average
Remaining Contractual
Term (in years)
 

Outstanding at January 1, 2019

   —     $—     

Outstanding at January 1, 2020

   —     $—     

Granted

   368,300    13.40    9.40    368,300    13.40    9.40 

Vested

   —        —      —        —   

Forfeited

   —        —      —        —   
  

 

   

 

   

 

   

 

   

 

   

 

 

Outstanding at September 30, 2019

   368,300   $13.40    9.40 

Outstanding at March 31, 2020

   368,300   $13.40    9.40 
  

 

   

 

   

 

   

 

   

 

   

 

 

Fair value of vested shares

  $—         $—       
  

 

       

 

     

The 2019 Plan was not adopted until May 14, 2019, therefore there were no shares granted for the three months ended March 31, 2019.

The Company recorded compensation expense related to stock options of $62,197 and $94,648$61,353 during the three and nine months ended September 30, 2019, respectively.March 31, 2020. No compensation expense was recorded for the three and nine months ended September 30, 2018March 31, 2019 relating to stock options. As of September 30, 2019,March 31, 2020, there was $1,139,157$1,015,607 of total unrecognized compensation expense related to nonvested stock options granted under the plan. The cost is expected to be recognized over a weighted average period of 4.6 years.4.1years. The intrinsic value of a stock option is the amount that the market value of the underlying stock exceeds the exercise price of the option. Based upon a fair market value of $14.00$11.58 at September 30, 2019,March 31, 2020, the options outstanding had an intrinsic value of $220,980.the stock is currently less than the exercise price of the option.

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

Note 10.

Note 10. Common Stock Repurchases

On May 14, 2019, the Board of Directors authorized the repurchase of up to 169,280 shares of the Company’s outstanding common stock for the Trust. The repurchase program iswas equal to the number of restricted stock shares eligible to be granted in the 2019 Plan. Plan and 169,280 shares were repurchased during the year ending December 31, 2019.

On December 2, 2019, the Board of Directors authorized a plan to repurchase up to $6,000,000 of the Company’s outstanding common stock. The repurchases will be made during aone-year period in privately negotiated transactions, or in such other manner as will comply with applicable policy, laws and regulations.

The following table sets forth information in connection with repurchases of the Company’s shares of common stock during the period listed.

 

Period

  Total Number
of Shares
Purchased
   Average Price
Paid per Share
   Total��Number of
Shares Purchased as
Part of Publicly
Announced Plans
   Maximum Number
of Shares That May
Yet Be Purchased
Under the Plan
 

May 14 – 31, 2019

   2,822   $13.69    2,822    166,458 

June 1 – 30, 2019

   33,135   $13.85    35,957    133,323 

August 1 – 31, 2019

   30,000   $13.69    65,957    103,323 

September 1 – 30, 2019

   36,000   $13.92    101,957    67,323 

Period

  Total Number
of Shares
Purchased
   Average Price
Paid per Share
   Total Value of
Shares Purchased as
Part of Publicly
Announced Plans
   Maximum Value of
Shares That May
Yet Be Purchased
Under the Plan
 

December 2 – 31, 2019

   23,495   $13.69   $332,545   $5,667,455 

January 1 – 31, 2020

   76,675    14.23    1,423,565    4,576,435 

February 1 – 29, 2020

   7,500    14.34    1,531,121    4,468,879 

March 1 – 31, 2020

   262,588    13.55    5,089,565    910,435 

30


CBM Bancorp, Inc.

NotesOn March 25, 2020, the Board of Directors of the Company declared a special cash dividend of $0.50 per share on the Company’s outstanding shares of common stock. The special cash dividend is payable to Consolidated Financial Statementsthe Company’s stockholders of record as of April 6, 2020 and was paid on April 17, 2020.

Note 11.

Note 11. Earnings Per Common Share

Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Net income available to common stockholders is net income to the Company. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per share until they are committed to be released. Basic earnings per share excludes dilution and is computed by dividing net income by weighted average number of common shares outstanding during the period. Dilutive earnings per share reflects the potential dilution that could occur if stock options were exercised and is computed by dividing net income by the dilutive weighted average number of common shares outstanding during the period.

 

  Three Months Ended   Nine Months Ended 
  September 30,
2019
   September 30,
2018
   September 30,
2019
   September 30,
2018
   Three Months Ended
March 31, 2020
   Three Months Ended
March 31, 2019
 

Net income

  $301,707   $324,212   $746,085   $796,828   $173,763   $272,023 
  

 

   

 

 

Weighted average common shares outstanding - basic

   3,927,296    3,893,440    3,927,296    3,893,440    3,804,938    3,927,296 
  

 

   

 

 

Weighted average common shares outstanding - dilutive

   3,943,080    3,893,440    3,943,080    3,893,440    3,804,938    3,927,296 
  

 

   

 

 

Earnings per common share, basic and diluted

  $0.08   $0.08   $0.19   $0.20   $0.05   $0.07 
  

 

   

 

 

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 12.

Note 12. Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. These capital requirements were modified in 2013 with the Basel III capital rules, which establish a new comprehensive capital framework for U.S. banking organizations. The Bank became subject to the new rules on January 1, 2015, with aphase-in period for many of the new provisions which was fully phased in on January 1, 2019. As of September 30, 2019,March 31, 2020, the Company’s capital levels remained characterized as “well-capitalized” under the new rules. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Common Equity Tier 1 Capital, Tier 1 Capital, and Total Capital to Risk Weighted Assets and of Tier 1 Capital to Average Assets. Management believes, as of September 30, 2019March 31, 2020 and December 31, 2018,2019, all applicable capital adequacy requirements have been met.

The most recent notification from the OCC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based capital, Tier 1 capital to risk-weighted assets, and Tier 1 capital to adjusted total assets, ratios. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

31


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 12.

Regulatory Capital Requirements (Continued)

The actual and required capital amounts and ratios of the Bank as of September 30, 2019March 31, 2020 and December 31, 20182019 were as follows (dollars in thousands):

 

  Actual Minimum
Regulatory Capital
Ratios under Basel
III
 To Be Well
Capitalized under
Basel III
   Actual Minimum Regulatory
Capital Ratios under
Basel III
 To Be Well
Capitalized under
Basel III
 
  Amount   Ratio Amount   Ratio Amount   Ratio   Amount   Ratio Amount   Ratio Amount   Ratio 
        (dollars in thousands)         (dollars in thousands) 

As of September 30, 2019:

          

As of March 31, 2020:

          

Common equity tier 1 capital (to risk-weighted assets)

  $41,205    30.24 $8,857    ³6.50 $8,857    ³6.50  $42,070    27.48 $9,950    ³6.50 $9,950    ³6.50

Total risk-based capital (to risk-weighted assets)

   42,543    31.22 13,627    ³10.0 13,627    ³10.0   43,661    28.52 15,308    ³10.0 15,308    ³10.0

Tier 1 capital (to risk-weighted assets)

   41,205    30.24 10,901    ³8.0 10,901    ³8.0   42,070    27.48 12,246    ³8.0 12,246    ³8.0

Tier 1 capital (to average assets)

   41,205    18.87 8,733    ³4.0 10,916    ³5.0   42,070    18.92 8,893    ³4.0 11,116    ³5.0

As of December 31, 2018:

          

As of December 31, 2019:

          

Common equity tier 1 capital (to risk-weighted assets)

  $39,871    29.67 $8,566    ³6.375 $8,734    ³6.50  $41,635    27.74 $9,569    ³6.375 $9,757    ³6.50

Total risk-based capital (to risk-weighted assets)

   41,094    30.58 13,269    ³9.875 13,437    ³10.0   43,054    28.68 14,823    ³9.875 15,010    ³10.0

Tier 1 capital (to risk-weighted assets)

   39,871    29.67 10,581    ³7.875 10,749    ³8.0   41,635    27.74 11,821    ³7.875 12,008    ³8.0

Tier 1 capital (to average assets)

   39,871    18.45 8,643    ³4.000 10,804    ³5.0   41,635    19.08 8,731    ³4.000 10,913    ³5.0

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 13.

Note 13. Fair Value Measurements

ASC Topic 820 provides a framework for measuring and disclosing fair value under GAAP. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example,available-for-sale investment securities) or a nonrecurring basis (for example, impaired loans).

ASC Topic 820 defines fair value as 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. ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Bank utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securitiesavailable-for-sale is recorded at fair value on a recurring basis. Additionally, from time to time, the Bank may be required to record at fair value all other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

ASC Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1– Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market for the asset or liability, for substantially the full term of the financial instrument.

32


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 13.

Fair Value Measurements (Continued)

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement and based on the Bank’s own assumptions about market participants’ assumptions.

The following is a description of the valuation methods used for instruments measured at fair value as the general classification of such instruments pursuant to the applicable valuation method.

Fair value measurements on a recurring basis

Securities available for sale – If quoted prices are available in an active market for identical assets, securities are classified within Level 1 of the hierarchy. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and securities dare included within Level 2 of the hierarchy.

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 13. Fair Value Measurements (Continued)

As of September 30, 2019March 31, 2020 and December 31, 20182019 the Bank has categorized its investment securities available for sale as follows:

 

  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 

September 30, 2019

        

March 31, 2020

        

Securities available for sale:

        

U.S. Government Agency and Federal Obligations

  $—     $7,618,332   $—     $7,618,332 

Residential mortgage-backed securities

     25,060,874    —      25,060,874 

December 31, 2019

        

Securities available for sale:

                

U.S. Government Agency and Federal Obligations

  $—     $12,548,539   $—     $12,548,539   $—     $9,544,342   $—     $9,544,342 

Residential mortgage-backed securities

     27,722,181    —      27,722,181      26,010,539    —      26,010,539 

Municipal Securities

   —      1,542,249    —      1,542,249    —      1,535,710    —      1,535,710 

December 31, 2018

        

Securities available for sale:

        

U.S. Government Agency and Federal Obligations

  $—     $18,220,072   $—     $18,220,072 

Residential mortgage-backed securities

     17,744,986    —      17,744,986 

Municipal Securities

   —      1,482,365    —      1,482,365 

Fair value measurements on a nonrecurring basis

Loans held for sale – The Bank’s loans held for sale are carried at the lower of cost or market. Fair value of loans held for sale is based upon outstanding investor commitments or, in the absence of such commitments, based on current investor yield requirements or third party pricing models and are considered Level 2.

Impaired loans – The Bank measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. As of September 30, 2019March 31, 2020 and December 31, 20182019 the fair values consisted of loan balances of $2,817,109$1,865,233 and $1,286,793$2,828,148 that have been written down by $13,921$385 and $8,163,$681, respectively, as a result of specific loan loss allowances.

Foreclosed real estate – The Bank’s foreclosed real estate is measured at fair value less estimated cost to sell. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the fair value of foreclosed real estate was estimated to be $845,000 and $865,000, respectively.$845,000. Fair value was determined based on offers and/or appraisals. Cost to sell the real estate was based on standard market factors. The Bank has categorized its foreclosed real estate as Level 3.

 

33

   Level 1   Level 2   Level 3   Total 

March 31, 2020

        

Impaired loans

  $—     $—     $1,864,848   $1,864,848 

Foreclosed real estate

   —      —      845,000    845,000 

December 31, 2019

        

Impaired loans

  $—     $—     $2,827,467   $2,827,467 

Foreclosed real estate

   —      —      845,000    845,000 


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 13.

Note 13. Fair Value Measurements (Continued)

 

   Level 1   Level 2   Level 3   Total 

September 30, 2019

        

Loans held for sale

  $—     $1,753,853   $—     $1,753,583 

Impaired loans

   —      —      2,803,188    2,803,188 

Foreclosed real estate

   —      —      845,000    845,000 

December 31, 2018

        

Loans held for sale

  $—     $211,107   $—     $211,107 

Impaired loans

   —      —      1,278,630    1,278,630 

Foreclosed real estate

   —      —      865,000    865,000 

The following table presents quantitative information about Level 3 fair value measurements for selected financial instruments measured at fair value on anon-recurring basis at September 30, 2019March 31, 2020 and December 31, 2018:2019:

 

  Fair
Value
   

Value

Technique(s)

  

Unobservable Inputs

  Range or Rate
Used
   Fair
Value
   

Value

Technique(s)

  

Unobservable Inputs

  Range or Rate
Used
 

September 30, 2019

        

March 31, 2020

        

Impaired loans

  $2,803,188   Appraised value  Discount to reflect current market conditions   0.00%-15.20%   $1,864,848   Appraised value  Discount to reflect current market conditions   0.00
    Discounted cash flows  Discount rates   1.78%     Discounted cash flows  Discount rates   0.98

Foreclosed real estate

  $845,000   Appraised value  Discount to reflect current market conditions   10.11%   $845,000   Appraised value  Discount to reflect current market conditions   10.11

December 31, 2018

        

December 31, 2019

        

Impaired loans

  $1,278,630   Appraised value  Discount to reflect current market conditions   0.00%-7.00%   $2,827,467   Appraised value  Discount to reflect current market conditions   0.00
    Discounted cash flows  Discount rates   4.55%     Discounted cash flows  Discount rates   1.68

Foreclosed real estate

  $865,000   Appraised value  Discount to reflect current market conditions   27.92%   $845,000   Appraised value  Discount to reflect current market conditions   10.11

The remaining financial assets and liabilities are not reported on the balance sheet at fair value on a recurring basis. The calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

The estimated fair values of the Bank’s financial instruments, whether carried at cost or fair value are as follows:

 

   Fair Value Measurements at September 30, 2019
Using
     Fair Value Measurements at March 31, 2020 Using 
  Carrying
Value
   Quoted
Prices in
Active
Market
for
Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Fair
Value
   Carrying
Value
   Quoted
Prices in
Active
Market for
Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Fair
Value
 
  (dollars in thousands)   (dollars in thousands) 

Financial assets:

                    

Cash and cash equivalents

  $10,153   $10,153   $—     $—     $10,153   $13,565   $13,565   $—     $—     $13,565 

Time deposits in other banks

   8,680    —      8,881    —      8,881    7,440    —      7,474    —      7,474 

Securities available for sale

   41,813    —      41,813    —      41,813    32,679    —      32,679    —      32,679 

Federal Home Loan Bank stock

   279    —      279    —      279    730    —      730    —      730 

Loans held for sale

   —      —      —      —      —      2,640    —      2,722    —      2,722 

Loans, net (1)

   145,725    —      —      152,679    152,679    162,291    —      —      167,410    167,410 

Foreclosed real estate

   845    —      —      845    845    845    —      —      845    845 

Accrued interest receivable

   698    —      698    —      698    654    —      654    —      654 

Financial liabilities:

                    

Deposits

   155,248    —      140,633    —      140,633    157,941    —      151,883    —      151,883 

Borrowings

   12,500    —      12,829      12,829 

 

(1)

Carrying amount is net of unearned income and the allowance for loan losses. In accordance with the prospective adoption of ASUNo. 2016-01, the fair value of loans was measured using an exit price notion.

34


CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 13.

Note 13. Fair Value Measurements (Continued)

 

      Fair Value Measurements at December 31, 2018 Using       Fair Value Measurements at December 31, 2019 Using 
  Carrying
Value
   Quoted
Prices in
Active
Market
for
Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Fair
Value
   Carrying
Value
   Quoted
Prices in
Active
Market for
Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Fair
Value
 
      (dollars in thousands)   (dollars in thousands) 

Financial assets:

                    

Cash and cash equivalents

  $18,847   $18,847   $—     $—     $18,847   $5,987   $5,987   $—     $—     $5,987 

Time deposits in other banks

   6,944    —      6,867    —      6,867    7,936    —      8,127    —      8,127 

Securities available for sale

   37,447    —      37,447    —      37,447    37,091    —      37,091    —      37,091 

Federal Home Loan Bank stock

   245    —      245    —      245    300    —      300    —      300 

Loans held for sale

   211    —      211    —      211    1,730    —      1,823    —      1,823 

Loans, net (1)

   142,320    —      —      141,563    141,563    158,245    —      —      161,954    161,954 

Foreclosed real estate

   865    —      —      865    865    845    —      —      845    845 

Accrued interest receivable

   696    —      696    —      696    655    —      655    —      655 

Financial liabilities:

                    

Deposits

   153,750    —      136,090    —      136,090    156,441    —      145,617    —      145,617 

Borrowings

   2,500      2,550      2,550 

 

(1)(2)

Carrying amount is net of unearned income and the allowance for loan losses. In accordance with the prospective adoption of ASUNo. 2016-01, the fair value of loans was measured using an exit price notion.

35


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statement Regarding Forward-Looking Statements

Overview

Management’s discussion and analysis of financial condition at September 30, 2019March 31, 2020 and December 31, 20182019 and results of operations for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 is intended to assist in understanding the financial condition and results of operations of the Company.Bank. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item1, of this quarterly report on Form10-Q.

This report contains forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward- looking statements can be identified by use of such words as “may,” “will,” “anticipate,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast and are subject to significant uncertainty. For details on factors that could affect these expectations, see the risk factors and other cautionary language included in the Company’s Prospectus dated August 7, 2018 (filed with the Securities and Exchange Commission on August 15, 2018), and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward looking statements.

General

The COVID-19 pandemic has adversely affected our ability to conduct normal business, has adversely affected our customers, and the adverse impacts could be significant.

The COVID-19 pandemic has adversely impacted our business and financial results, and its ultimate impact on our business will depend on highly uncertain and unpredictable future developments, including the magnitude and duration of the pandemic and actions taken by governmental authorities in response to the pandemic, particularly within our geographic footprint. The pandemic has resulted in temporary closures of many businesses, some of which include our borrowers, and the institution of social distancing and sheltering in place requirements in many states and communities, including our market area. As a result, the business disruption may be significant, which could adversely affect our business, and financial position. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the national economy and our market area worsens, or more clients draw on their lines or credit or seek additional loans to help finance their businesses. Small and mid-sized businesses make up a large portion of our commercial loan portfolio, and are particularly vulnerable to the financial effects of the COVID-19 pandemic due to their increased reliance on continuing cash flow to fund day-to-day operations. Although government programs have sought, and may further seek, to provide relief to these types of businesses, there can be no assurance that these programs will succeed. Our business operations may also be disrupted if significant portions of our workforce, key personnel or third-party service providers are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. Until the COVID-19 pandemic subsides, it will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios.

Chesapeake Bank of Maryland

Our business operations are conducted through Chesapeake Bank of Maryland, a federally chartered stock savings association headquartered in Baltimore County, Maryland. Prior to 1998 and the creation of a mutual holding company structure, Chesapeake Bank of Maryland or its predecessors had operated as thrift institutions since 1913. Chesapeake Bank of Maryland conducts business out of its main office located in Baltimore County, Maryland, and out of three branch offices located in Arbutus, Maryland, Bel Air, Maryland, and Pasadena, Maryland.

Chesapeake Bank of Maryland operates as a community-oriented institution by offering a variety of loan and deposit products and serving other financial needs of its local community. Chesapeake Bank of Maryland takes its corporate citizenship seriously and is committed to meeting the credit needs of the community, consistent with safe and sound operations.

Chesapeake Bank of Maryland’s business consists principally of attracting retail deposits from the general public in our market area and using those funds, together with funds generated from operations and borrowings, to originate loans secured by residential and nonresidential real estate. Nonresidential real estate loans, construction and land development loans and commercial loans constitute a significant percentage of the loan portfolio and, in that respect, Chesapeake Bank of Maryland’s lending operations are more diversified and have more risk than many traditional thrift institutions.

Chesapeake Bank of Maryland’s primary market area is the Baltimore Metropolitan Area and its surrounding counties. The economy of Chesapeake Bank of Maryland’s market area is diversified, with a mix of services, manufacturing, wholesale/retail trade and federal and local government. See “Business of Chesapeake Bank of Maryland—Market Area.”

Chesapeake Bank of Maryland is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Chesapeake Bank of Maryland is subject to Maryland banking laws except to the extent they are preempted by Federal law. Chesapeake Bank of Maryland is not regulated by the Maryland Commissioner of Financial Regulation.

36


CBM Bancorp, Inc.

CBM Bancorp, Inc. is a newly formed Maryland corporation. Following the completion of the conversion, reorganization and offering, CBM Bancorp became the holding company for Chesapeake Bank of Maryland.

Our executive offices are located at 2001 East Joppa Road, Baltimore, Maryland 21234, and our telephone number is (410)665-7600. Our website address iswww.chesapeakebank.com. Information on this website is not and should not be considered a part of this prospectus.

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

On April 5, 2012, the Jumpstart Our Business StartupsJOBS Act was signed into law. ThisThe JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

On March 27, 2020, the CARES Act was signed into law. The CARES Act contains provisions that, among other things, provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects ofCOVID-19. We intend to follow the guidance provided under the CARES Act.

Because of the short timeframe between the passing of the CARES Act and the opening of the PPP on April 3, 2020, there is some ambiguity in the laws, rules and guidance regarding operation of the PPP. The SBA subsequently notified lenders that the funds initially earmarked for the PPP were exhausted. Congress has approved additional funding for the PPP, and President Trump signed the new legislation on April 24, 2020.

Since commencement of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant litigation costs, financial liability or reputational damage.

The Bank also may have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which loans were originated, funded, or serviced by the Bank. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

The following represents our critical accounting policies:

Allowance for Loan Losses.The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.

The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on Chesapeake Bank of Maryland’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan category that are not considered impaired. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative risk factors.

37


Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of their examination process, periodically reviews our allowance for loan losses. This agency may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Deferred Tax Assets. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies, these assumptions require us to make judgments about future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. In evaluating the need for a valuation allowance, we must estimate our taxable income in future years and the impact of tax planning strategies. If we were to determine that we would not be able to realize a portion of our net deferred tax asset in the future for which there is no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. Conversely, if we were to make a determination that it is more likely than not that the deferred tax assets for which we had established a valuation allowance would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded.

Fair Value Measurements. Fair value is defined as 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. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

38


Comparison of Financial Condition at September 30, 2019March 31, 2020 and December 31, 20182019

Total Assets. Total assets increased $2.4$8.1 million, or 1.11%3.68%, to $217.8$228.5 million at September 30, 2019March 31, 2020 from $215.4$220.4 million at December 31, 2018.2019. The increase in total assets was primarily due to a growthan increase in timeour balances being held in interest bearing deposits in other banks, investment securities andan increase in loans fundedoffset by a decrease in interest-bearing deposits in other banksinvestment securities due to principal payments, sales and growth in deposits,calls, as discussed in more detail below.

Cash and Cash Equivalents. Cash and cash equivalents decreased $8.7increased $7.5 million or 46.03%, to $10.2$13.6 million at September 30, 2019March 31, 2020 from $18.9$6.0 million at December 31, 2018.2019. The decrease was primarily the result ofincrease cash and cash equivalents being diverted to timewas primarily in interest bearing deposits in other banks investment securities and loans.was funded with borrowings from the FHLB to provide additional liquidity duringCOVID-19. Additional liquidity is being maintained as a result ofCOVID-19 in order to ensure that we have the necessary funding available to fund loans, including PPP loans, as well as meet the demands of our depositors, if necessary.

Time Deposits in Other Banks. Time deposits in other banks increaseddecreased by $1.8 million,$496,000, or 26.09%6.25%, to $8.7$7.4 million at September 30, 2019March 31, 2020 from $6.9$7.9 million at December 31, 2018.2019. This increasedecrease was due to investing in time deposits in other banks offset by maturitiescalls of time deposits in other banks.

Investment Securities. Investment securities increaseddecreased $4.4 million, or 11.76%11.86%, to $41.8$32.7 million at September 30, 2019March 31, 2020 from $37.4$37.1 million at December 31, 2018.2019. The increasedecrease was due to purchasesthe sale of $17.6our municipal securities in the amount of $1.6 million offset by maturities,and calls and principal repayments of $13.9$3.4 million. At September 30, 2019March 31, 2020 all of our investment securities wereare classified as available for sale.

Net Loans. Net loans increased $3.4$4.0 million, or 2.39%2.59%, to $145.7$162.3 million at September 30, 2019March 31, 2020 from $142.3$158.3 million at December 31, 2018. Our2019.one-toOne-to four-family residential real estate loans increased $518,000,$2.4 million, or 0.74%3.21%, to $70.8$77.1 million at September 30, 2019March 31, 2020 from $70.2$74.7 million at December 31, 2018.2019. Our construction and land development loans increased $857,000,$916,000, or 10.41%9.89%, to $9.1$10.2 million at September 30, 2019March 31, 2020 from $8.2$9.3 million at December 31, 2018.2019. Our nonresidential loans increased $1.7 million,$923,000, or 3.28%1.51%, to $53.6$61.9 million at SeptemberMarch 31, 20192020 from $51.9$61.0 million at December 31, 2018.2019. Our commercial loans increased $1.4 million,$159,000, or 26.42%2.29%, to $6.7$7.1 million at September 30, 2019March 31, 2020 from $5.3$7.0 million at December 31, 2018.2019. Our home equity loans and lines of credit decreased $658,000,by $207,000, or 8.72%2.76%, to $6.9$7.3 million at September 30, 2019March 31, 2020 from $7.5 million atas of December 31, 2018.2019. Our consumer loans remained relatively the same at March 31, 2020 compared to December 31, 2019.

Bank-owned Life Insurance. We invest in bank-owned life insurance (“BOLI”) to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that isnon-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses at the time of investment. This investment is accounted for using the cash surrender value method and is recorded at the amount that couldcan be realized under the insurance policies at the balance sheet date. At September 30, 2019March 31, 2020 and December 31, 2018,2019, the aggregate cash surrender value of these policies werewas $4.7 million and $4.6 million, respectively.million.

Deposits.Deposits increased $1.5 million, or 0.98%0.96%, to $155.2$157.9 million at September 30, 2019March 31, 2020 from $153.7$156.4 million at December 31, 2018.2019. Ournon-interest-bearing demand deposits increased $417,000,$1.9 million, or 2.30%9.60%, to $18.5$21.7 million at September 30, 2019March 31, 2020 from $18.1$19.8 million at December 31, 2018.2019. Our interest-bearing demand deposits increased $1.2 million,decreased $320,000, or 5.15%1.35%, to $24.5$23.4 million at September 30, 2018March 31, 2020 from $23.3$23.8 million at December 31, 2018. Our certificates of deposit increased $2.6 million, or 3.44%, to $78.2 million at September 30, 2019 from $75.6 million at December 31, 2018.2019. Our money market deposits decreased $1.6 million,$572,000, or 13.56%5.58%, to $10.2$9.7 million at September 30, 2019March 31, 2020 from $11.8$10.2 million at December 31, 2018.2019. Our savings depositsaccounts and certificates of deposit remained relatively the same at March 31, 2020 compared to December 31, 2019.

Total Stockholders’ Equity. Total stockholders’ equity decreased $1.1by $3.9 million or 4.42%, to $23.8$56.0 million at September 30, 2019March 31, 2020 from $24.9$59.9 million at December 31, 2018.

Total Equity. Total equity increased by $421,000, or 0.70%, to $60.8 million at September 30, 2019 from $60.3 million at December 31, 2018. Factors relating to changes in stockholders’ equity include earnings2019. Earnings of $746,000,$173,000, an increase of $483,000$394,000 in other comprehensive income related to the interest fluctuations on the Company’s available for sale securities portfolio,and an increase of $601,000$281,000 in additional paid in capital for the recording of stock-based compensation relating to the ESOP and the 2019 Equity Incentive Plan were offset by the repurchase of $1.4$4.8 million in common stock, relating towhich is part of the 2019 Equity Incentive Plan.

39stock repurchase plan that was approved by the Board of Directors on December 2, 2019.


Average Balance Sheets

The following tablestable set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax equivalent yield adjustments have been made, as the effects would immaterial. All average balances are daily average balances.Non-accrual loans were included in the computation of average balances of loans. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Loan balances exclude loans held for sale.

 

  For the Three Months Ended March 31, 
  2020 2019 
  For the Three Months Ended September 30,   Average     Average Average     Average 
  2019 2018   Outstanding     Yield/ Outstanding     Yield/ 
  Average
Outstanding
Balance
 Interest   Average
Yield/
Rate
 Average
Outstanding
Balance
 Interest   Average
Yield/
Rate
   Balance Interest   Rate Balance Interest   Rate 
  (Dollars in thousands)   (Dollars in thousands) 

Interest earning assets:

                  

Loans

  $143,787  $1,848    5.10 $142,262  $1,704    4.75  $162,016  $1,965    4.86 $143,684  $1,727    4.87

Federal funds sold and interest- bearing deposits in other banks

   15,077  81    2.13 28,959  133    1.82

Interest-bearing deposits in other banks

   6,783  15    0.89 15,280  87    2.31

Time deposits in other banks

   9,018  64    2.82 4,685  25    2.12   7,925  56    2.83 7,146  51    2.89

Investment securities

   40,382  319    3.13 10,171  65    2.54   34,412  244    2.84 40,516  312    3.12

Federal Home Loan Bank stock

   279  5    7.11 245  4    6.48   424  4    3.78 248  3    4.91
  

 

  

 

    

 

  

 

     

 

  

 

    

 

  

 

   

Total interest-earning assets

   208,543  2,317    4.41 186,322  1,931    4.11   211,560  2,284    4.33 206,874  2,180    4.27

Non-interest-earning assets

   10,016     9,288       10,926     9,138    
  

 

     

 

      

 

     

 

    

Total assets

  $218,559     $195,610      $222,486     $216,012    
  

 

     

 

      

 

     

 

    

Interest bearing liabilities:

                  

Interest-bearing demand

  $24,361  $19    0.31 $24,298  $13    0.22  $23,289  $17    0.29 $23,325  $13    0.23

Money market

   10,321  5    0.20 12,403  7    0.21   9,971  5    0.20 11,606  6    0.21

Savings

   23,883  3    0.05 25,478  3    0.05   24,498  3    0.05 25,150  3    0.05

Certificates of deposit

   78,080  341    1.73 76,714  230    1.19   79,964  344    1.73 75,881  294    1.57
  

 

  

 

    

 

  

 

     

 

  

 

    

 

  

 

   

Total deposits

   137,722  369    1.07 135,962  316    0.94

Borrowed funds

   5,352  16    1.20  —     —      —   
  

 

  

 

    

 

  

 

   

Total interest-bearing liabilities

   136,545  368    1.07 138,893  253    0.72   143,074  385    1.08 135,962  316    0.94
   

 

     

 

      

 

     

 

   

Non-interest-bearing liabilities

   20,886     32,790       21,258     19,393    
  

 

     

 

      

 

     

 

    

Total liabilities

   157,531     171,683       164,332     155,355    

Equity

   61,028     23,927       58,154     60,657    
  

 

     

 

      

 

     

 

    

Total liabilities and equity

  $218,559     $195,610      $222,486     $216,012    
  

 

     

 

      

 

     

 

    

Net interest income

   $1,949     $1,678      $1,899     $1,864   
   

 

     

 

      

 

     

 

   

Interest rate spread(1)

      3.34     3.39      3.25     3.33

Net interest-earning assets(2)

  $71,898     $47,429      $68,486     $70,912    
  

 

     

 

    

Net interest margin(3)

      3.71     3.57      3.60     3.65

Average interest-earning assets to average-interest bearing liabilities

   152.62    134.15      147,87    152.16   

 

(1)

Interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

(2)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3)

Net interest margin represents net interest income divided by average interest-earning assets.

40


   For the Nine Months Ended September 30, 
   2019  2018 
   Average
Outstanding
Balance
  Interest   Average
Yield/
Rate
  Average
Outstanding
Balance
  Interest   Average
Yield/
Rate
 
   (Dollars in thousands) 

Interest earning assets:

         

Loans

  $144,433  $5,401    5.00 $140,151  $4,997    4.77

Federal funds sold and interest- bearing deposits in other banks

   14,915   249    2.23  20,361   259    1.70

Time deposits in other banks

   8,097   173    2.86  4,706   60    1.70

Investment securities

   40,670   951    3.13  10,302   191    2.48

Federal Home Loan Bank stock

   270   13    6.44  244   11    6.03
  

 

 

  

 

 

    

 

 

  

 

 

   

 

 

 

Total interest-earning assets

   208,385   6,787    4.35  175,764   5,518    4.20

Non-interest-earning assets

   9,581      9,488    
  

 

 

     

 

 

    

Total assets

  $217,966     $185,252    
  

 

 

     

 

 

    

Interest bearing liabilities:

         

Interest-bearing demand

  $24,191  $50    0.28 $25,215  $43    0.23

Money market

   10,840   17    0.21  12,847   20    0.21

Savings

   24,647   9    0.05  25,080   9    0.05

Certificates of deposit

   76,898   954    1.66  76,089   625    1.10
  

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-bearing liabilities

   136,576   1,030    1.01  139,231   697    0.67
   

 

 

     

 

 

   

Non-interest-bearing liabilities

   20,420      23,433    
  

 

 

     

 

 

    

Total liabilities

   156,996      162,664    

Equity

   60,970      22,588    
  

 

 

     

 

 

    

Total liabilities and equity

  $217,966     $185,252    
  

 

 

     

 

 

    

Net interest income

   $5,757     $4,821   
   

 

 

     

 

 

   

Interest rate spread(1)

      3.35     3.53

Net interest-earning assets(2)

  $71,809     $36,533    

Net interest margin(3)

      3.69     3.67

Average interest-earning assets to average-interest bearing liabilities

   152.58     126.24   

(1)

Interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

(2)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3)

Net interest margin represents net interest income divided by average interest-earning assets.

41


Comparison of Operating Results for the Three Months Ended September 30,March 31, 2020 and March 31, 2019 and September 30, 2018

General. Net income was $302,000$174,000 for the three months ended September 30, 2019March 31, 2020 compared to $324,000$272,000 for the three months ended September 30, 2018.March 31, 2019. The decrease was due primarily to an increase innon-interest expense of $396,000,$214,000, or 29.28%14.28%, to $1.7 million for the three months ended September 30, 2019 from $1.3March 31, 2020 compared to $1.5 million for the three months ended September 30, 2018.March 31, 2019 and a decrease in net interest income after provision for loan losses of $52,000, or 2.93%, to $1.7 million for the three months ended March 31, 2020 from $1.8 million for the three months ended March 31, 2019. The decrease was offset by an increase in netnon-interest income of $153,000 to $245,000 for the three months ended March 31, 2020 from $92,000 for the three months ended March 31, 2019.

Interest Income. Total interest income after provisionincreased $103,000, or 4.72%, to $2.3 million for the three months ended March 31, 2020 from $2.2 million for the three months ended March 31, 2019. The increase in interest income was due toa combination of $407,000,the increase in average interest-earning assets and an increase in the average yield on interest-earning assets for the three months March 31, 2020 compared to the three months ended March 31, 2019.

Interest income and fees on loans increased $238,000, or 25.41%13.78%, to $2.0 million for the three months ended September 30, 2019March 31, 2020 from $1.6$1.7 million for three months ended March 31, 2019. Our average balance of loans increased $18.3 million, or 12.73%, to $162.0 million for the three months ended September 30, 2018.

Interest Income. Interest and dividend income increased $386,000, or 19.99%, to $2.3March 31, 2020 from $143.7 million for the three months ended September 30, 2019 from $1.9 millionMarch 31, 2019. Our average yield on loans decreased one basis point to 4.86% for the three months ended September 30, 2018. The increase in interest income was due primarily to the increase in average interest-earning assetsMarch 31, 2020 from 4.87% for the three months ended September 30, 2019 compared to the average interest-earning assets for the three months ended September 30, 2018 as well as an increase in the average yield on earning assets for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.

Interest and fees on loans increased $145,000, or 8.51%, to $1.8 million for the three months ended September 30, 2019 from $1.7 million for the three months ended September 30, 2018. The increase was primarily due to an increase in the average balance of our loans as well as an increase in the average yield on our loans. Our average balance of loans increased $1.5 million, or 1.05%, to $143.8 million for the three months ended September 30, 2019 from $142.3 million for the three months ended September 30, 2018. Our average yield on loans increased 35 basis points to 5.10% for the three months ended September 30, 2019 from 4.75% for the three months ended September 30, 2018, as lower-yielding loans have been repaid or refinanced and replaced with higher-yielding loans as well as the collection of loan fees on loan relationships during the third quarter ofMarch 31, 2019.

Interest and dividends on interest-bearing deposits in other banks, time deposits in other banks, and investments increased $241,000decreased $134,000, or 29.58%, to $469,\000$319,000 for the three months ended September 30, 2019March 31, 2020 from $227,000$453,000 for the three months ended September 30, 2018.March 31, 2019. The average balances onin interest-bearing deposits in other banks, time deposits in other banks and investments increased $20.7decreased $13.7 million to $64.8$49.5 million for the three months ended September 30, 2019March 31, 2020 from $44.1$63.2 million for the three months ended September 30, 2018 as this increase inMarch 31, 2019 primarily due to the average balances was driven primarily by the net proceeds received from the stock offering.funding of loan growth. . The average rate we earned on interest-bearing deposits in other banks, time deposits in other banks and investments increased 83decreased 30 basis points to 2.87%2.61% for the three months ended September 30, 2019March 31, 2020 from 2.04%2.91% for the three months ended September 30, 2018March 31, 2019 primarily due to our interest-bearing deposits in other banks repricing due to federal funds rate increasesdecreases as well as increasesdecreases in average interest rates on the purchases of higher yielding time deposits in other banksinvestments due to sales and increases in interest rates on the purchasescalls of higher yielding investment securities.

Interest Expense. Interest expense increased $115,000,$69,000, or 45.45%21.84%, to $368,000$385,000 for the three months ended September 30, 2019March 31, 2020 from $253,000$316,000 for the three months ended September 30, 2018.March 31, 2019. Our average balance of interest-bearing liabilities decreased $2.3increased $7.1 million, or 1.66%5.22%, to $136.7$143.1 million for the three months ended September 30, 2019March 31, 2020 from $138.9$136.0 million for the three months ended September 30, 2018.March 31, 2019. The decreaseincrease was due primarily to a reduction in balances of money market and savings accounts offset by an increase in ourborrowed funds and an increase in certificates of deposit.deposit balances offset by decreases in money market accounts. Our average rate paid on interest-bearing deposits increased 3513 basis points to 1.07% for the three months ended September 30, 2019March 31, 2020 from 0.72%0.94% for the three months ended September 30, 2018March 31, 2019 primarily due to an increase in the average rate paid on certificates of deposit.deposit accounts and the average rate paid on borrowings which was 1.20% as of March 31, 2020.

Net Interest Income. Net interest income increased $272,000,$34,000, or 16.22%1.82%, to $1.9 million for the three months ended September 30, 2019March 31, 2020 from $1.7$1.9 million for the three months ended September 30, 2018,March 31, 2019. The increase in net interest income was primarily asdue to an increase in our average loans, which is our highest interest-earning asset, which increased $18.3 million, to $162.0 million at March 31, 2020 from $143.7 million at March 31, 2019. This increase in income attributed to the result ofincrease in average loans was offset by the overall decrease in net interest-earning assets and a higher balance ofdecrease in our net interest rate spread and net interest margin. Our net interest-earning assets, which represents total interest–earning assets, less total interest–bearing liabilities, offsetdecreased by a lower net interest rate spread. Our average net$2.4 million, or 3.39% to $68.5 million at March 31, 2020 from $70.9 million at March 31, 2019, due to an increase in interest-bearing liabilities which was greater than the increase in interest-earning assets, increased by $31.5 million to $71.9 million for the three months ended September 30, 2019 from $47.4 million for the three months ended September 30, 2018, duewhich was attributed primarily to our growthan increase in time deposits in other banksborrowings. Our borrowings at March 31, 2020 were $5.4 million and investments described above.we did not have borrowings at March 31, 2019. Our net interest rate spread decreased by 58 basis points to 3.34%3.25% for the three months ended September 30, 2019March 31, 2020 from 3.39%3.33% for the three months ended September 30, 2018 and ourMarch 31, 2019. Our net interest margin increaseddecreased by 145 basis points to 3.71%3.60% for the three months ended September 30, 2019March 31, 2020 from 3.57%3.65% for the three months ended September 30, 2018.March 31, 2019. Both the decrease in the net interest rate spread and net interest margin can be primarily attributed to the increase in the average rate paid on certificates of deposit and borrowings.

Provisions for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management

42


analyzes several qualitative loan portfolio risk factors, including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due andnon-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance.

Provision for loan losses decreasedincreased by $135,000$85,000 to a reversal of the provision of $60,000$175,000 for the three months ended September 30, 2019March 31, 2020 from a provision for loan losses for the three months ended September 30, 2018March 31, 2019 of $75,000.$90,000. We recorded $4,000 net recoveries of $74,000charge-offs for the three months ended September 30, 2019 andMarch 31, 2020 compared to zero in net charge-offs of $50,000 for the three months ended September 30, 2018.March 31, 2019.Non-performing loans totaled $443,000$265,000 at September 30, 2019March 31, 2020 compared to $1.0$1.2 million at September 30, 2018.March 31, 2019. The decrease of $592,000$1.0 million innon-performing loans was primarily the result of a decrease of $416,000$315,000 innon-performingone-to four-family residential loans, and a decrease of $124,000$83,000 in home equity loans and lines of credit, a decrease of $87,000 in construction and land development loans and a decrease of $484,000 in nonresidential loans. The decrease innon-performingone-to four-family loans, home equity loans and lines of $416,000credit and construction and land development loans was attributed to several loans paying in full without loss to the Company, aone-to four-familyfour family residential loans was primarily the result of four loans from September 30, 2018 totaling $288,000 paying off by September 30, 2019 and one loan in the amount of $120,000property selling at foreclosure resulting inwith acharge-off recorded on the transaction of $50,000 recorded during the year ended December 31, 2019 and the construction and land development loan settling with acharge-off of approximately $40,000.$11,000 recorded during the year ended December 31, 2019. The decrease innon-performing nonresidential loans was due to the settlement of a loan relationship where the Company reported acharge-off of $335,000 during the year ended December 31, 2018 and a subsequent recovery of $115,000 during the year ended December 31, 2019 for which the Company has no additional exposure. Ournon-performing loans to total loans decreased to 0.30%0.16% at September 30, 2019March 31, 2020 from 0.72%0.84% at September 30, 2018.March 31, 2019. The increase in provision for loan losses was necessary due to an overall increase in our loan balances as well as an increase in our qualitative factors, such as current economic conditions, the adequacy of underlying collateral and the financial strength of our borrowers affected by theCOVID-19 pandemic. We have provided for losses that are probable and reasonably estimable at September 30, 2019.March 31, 2020.

Non-interest Income.Non-interest income decreasedincreased by $22,000, or 12.43%,$153,000 to $155,000$245,000 for the three months ended September 30, 2019March 31, 2020 from $177,000$92,000 for the three months ended September 30, 2018.March 31, 2019. The decreaseincrease was primarily due to the decreasean increase of $10,000 on income from bank-owned life insurance to $58,000 for the three months ended September 30, 2019 from $68,000 for the three months ended September 30, 2018 and a decrease of $14,000 in gain on sale of loans to $30,000 forand an increase of $46,000 on the three months ended September 30, 2019 from $44,000 for the three months ended September 30, 2018.gain on sale of investment securities.

Non-interest Expense.Non-interest expense increased by $396,000,$214,000, or 29.28%14.28%, to $1.7 million for the three months ended September 30, 2019March 31, 2020 from $1.3$1.5 million for the three months ended September 30, 2018.March 31, 2019. Salaries, director fees and employee benefits increased $312,000,$253,000, or 38.47%28.56%, to $1.1 million for the three months ended September 30, 2019March 31, 2020 from $811,000$886,000 for the three months ended September 30, 2018March 31, 2019 due primarily to the recording of $340,000$169,000 in stock-based compensation expense relating to the ESOP and 2019 Equity Incentive Plan. Professional fees increased $74,000,Plan which was approved in May 2019, as well as the expansion of our employee base, including sales and relationship management personnel to help support our continued growth strategy. Premises and equipment expenses decreased $15,000, or 112.12%12.61%, to $140,000$104,000 for the three months ended September 30, 2019March 31, 2020 from $66,000$119,000 for the three months ended September 30, 2018March 31, 2019 due primarily due to increased consulting fees relating to information technology system enhancements and the increased expenses relating to reporting requirements associated with the Company’s public company status.a decrease in office maintenance costs. FDIC premiums and regulatory assessmentsexpenses decreased $13,000, or 40.63%43.33%, to $19,000$17,000 for the three months ended September 30, 2019March 31, 2020 from $32,000$30,000 for the three months ended September 30, 2018 primarilyMarch 31, 2019 due to the FDIC awarding small banks credits for a portion of their assessment during the thirdfirst quarter of 2019. Other operating expenses increased by $27,000, or 16.77%, to $188,000 for the three months ended September 30, 2019 from $161,000 for the three months ended September 30, 2018 primarily due to an increase in insurance costs as well as an increase in software maintenance costs.2020.

Income Tax Expense. Income tax expense increased by $11,000,decreased $14,000, or 10.38%14.74%, to $117,000$81,000 for the three months ended September 30, 2019March 31, 2020 from $106,000$95,000 for the three months ended September 30, 2018.March 31, 2019. The effective tax rate was 27.94%31.78% and 24.62%25.97% for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively. The increasedecrease in tax expense was the result of a decrease in nontaxable income before taxes of $112,000, or 69.48%, to $255,000 for the three months ended September 30, 2019March 31, 2020 compared to the three months ended September 30, 2018 as well as the increase in nondeductible compensation expenses relating to the 2019 Equity Incentive Plan.

Comparison of Operating Results for the Nine Months Ended September 30, 2019 and September 30, 2018

General. Net income was $746,000 for the nine months ended September 30, 2019 compared to $797,000 for the nine months ended September 30, 2018. The decrease was due primarily to an increase innon-interest expense and a decrease innon-interest income. The decrease was offset by an increase in net interest income and a decrease in provision for loan losses.Non-interest expenses increased by $1.0 million or 25.00%, to $5.0 million for the nine months ended September 30, 2019 compared to $4.0 million for the nine months ended September 30, 2018.Non-interest income decreased $122,000, or 25.74%, to $352,000 for the nine months ended September 30, 2019 compared to $474,000 for the nine months ended September 30, 2018. Net interest income increased $1.0 million, or 20.83%, to $5.8 million for the nine months ended September 30, 2019 from $4.8 million for the nine months ended September 30, 2018. The provision for loan losses decreased by $135,000 to $90,000$367,000 for the three months ended September 30, 2019 from $225,000 for the three months ended September 30, 2018.

43


Interest Income. Interest and dividend income increased $1.3 million, or 23.64%, to $6.8 million for the nine months ended September 30, 2019 from $5.5 million for the nine months ended September 30, 2018.March 31, 2019. The increase in interest incomethe effective tax rate was due primarily to the increase in average interest-earning assets for the nine months ended September 30, 2019 compared to the average interest earnings assets for the nine months ended September 30, 2018 offset by a decrease in the net interest spread for the nine months September 30, 2019 compared to the nine months ended September 30, 2018.

Interest and fees on loans increased $404,000, or 8.08%, to $5.4 million for the nine months ended September 30, 2019 from $5.0 million for the nine months ended September 30, 2018. The increase was primarily due to an increase in the average balance of our loans as well as an increase in the average yield on our loans. Our average balance of loans increased $4.2 million, or 3.00%, to $144.4 million for the nine months ended September 30, 2019 from $140.2 million for the nine months ended September 30, 2018. Our average yield on loans increased 23 basis points to 5.00% for the nine months ended September 30, 2019 from 4.77% for the nine months ended September 30, 2018, as lower-yielding loans have been repaid or refinanced and replaced with higher-yielding loans as well as the collection of nonaccrual interest and fees on past due loan relationships that were resolved in the nine months ended September 30, 2019.

Interest and dividends on interest-bearing deposits in other banks, time deposits in other banks, and investments increased $865,000 to $1.4 million for the nine months ended September 30, 2019 from $521,000 for the nine months ended September 30, 2018. The average balances on interest-bearing deposits in other banks, time deposits in other banks and investments increased $28.4 million to $64.0 million for the nine months ended September 30, 2019 from $35.6 million for the nine months ended September 30, 2018. The average rate we earned on interest-bearing deposits in other banks, time deposits in other banks and investments increased 94 basis points to 2.90% for the nine months ended September 30, 2019 from 1.96% for the nine months ended September 30, 2018 primarily due to our interest-bearing deposits in other banks repricing due to federal funds rate increases as well as increases in interest rates on the purchases of higher yielding time deposits in other banks and increases in interest rates on the purchases of higher yielding investment securities.

Interest Expense. Interest expense increased $333,000, or 47.78%, to $1.0 million for the nine months ended September 30, 2019 from $697,000 for the nine months ended September 30, 2018. Our average balance of interest-bearing liabilities decreased $2.6 million, or 1.87%, to $136.6 million for the nine months ended September 30, 2019 from $139.2 million for the nine months ended September 30, 2018. Our average rate paid on interest-bearing deposits increased 34 basis points to 1.01% for the nine months ended September 30, 2019 from 0.67% for the nine months ended September 30, 2018 primarily due to an increase in the average rate paid on certificates of deposit.

Net Interest Income. Net interest income increased $1.0 million, or 20.83%, to $5.8 million for the nine months ended September 30, 2019 from $4.8 million for the nine months ended September 30, 2018, primarily as the result of a higher balance of net interest-earning assets, which represents total interest–earning assets, less total interest–bearing liabilities offset by a lower net interest rate spread. Our average net interest-earning assets increased by $35.3 million to $71.8 million for the nine months ended September 30, 2019 from $36.5 million for the nine months ended September 30, 2018. Our net interest rate spread decreased by 18 basis points to 3.35% for the nine months ended September 30, 2019 from 3.53% for the nine months ended September 30, 2018 and our net interest margin increased by two basis points to 3.69% for the nine months ended September 30, 2019 from 3.67% for the nine months ended September 30, 2018.

Provisions for Loan Losses. Provision for loan losses decreased by $135,000 to $90,000 for the nine months ended September 30, 2019 from $225,000 for the nine months ended September 30, 2018. We recorded net recoveries of $25,000 for the nine months ended September 30, 2019 and recorded net charge-offs of $72,000 for the nine months ended September 30, 2018.Non-performingnon-deductible loans totaled $443,000 at September 30, 2019 compared to $1.0 million at September 30, 2018. The decrease of $592,000 innon-performing loans was primarily the result of a decrease of $416,000 innon-performingone-to four-family residential loans and a decrease of $124,000 in construction and land development loans. The decrease of $416,000 inone-to four-family residential loans was primarily the result of four loans from September 30, 2018 totaling $288,000 paying off by September 30, 2019 and one loan in the amount of $120,000 selling at foreclosure resulting in acharge-off of approximately $40,000. Ournon-performing loans to total loans decreased to 0.30% at September 30, 2019 from 0.72% at September 30, 2018. We have provided for losses that are probable and reasonably estimable at September 30, 2019.

44


Non-interest Income.Non-interest income decreased by $122,000, or 25.74%, to $352,000 for the nine months ended September 30, 2019 from $474,000 for the nine months ended September 30, 2018. The decrease was primarily due to a decrease of $9,000 on service fees on deposit accounts to $92,000 for the nine months ended September 30, 2019 from $101,000 for the nine months ended September 30, 2018, a decrease of $13,000 in income from bank-owned life insurance to $96,000 for the nine months ended September 30, 2019 from $109,000 for the nine months ended September 30, 2018 and a decrease of $104,000 in gain on sale of loans to $64,000 for the nine months September 30, 2019 from $168,000 for the nine months ended September 30, 2018.

Non-interest Expense.Non-interest expense increased by $1 million, or 25.00%, to $5.0 million for the nine months ended September 30, 2019 from $4.0 million for the nine months ended September 30, 2018. Salaries, director fees and employee benefits increased $666,000, or 27.75%, to $3.1 million for the nine months ended September 30, 2019 from $2.4 million for the nine months ended September 30, 2018 due primarily to the recording of $601,000 in stock-based compensation expense relating to the ESOP and 2019 Equity Incentive Plan. Professional fees increased $201,000, or 89.73%, to $425,000 for the nine months ended September 30, 2019 from $224,000 for the nine months ended September 30, 2018 primarily due to increased consulting fees relating to information technology system enhancements, the increased expenses relating to reporting requirements associated with the Company’s public company status offset by a recovery of legal fee expenses relating to past due loan relationships that were resolved in the nine months ended September 2019. FDIC premiums and regulatory assessments decreased $17,000, or 18.09% to $77,000 for the nine months ended September 30, 2019 from $94,000 for the nine months ended September 30, 2018 primarily due to the FDIC awarding small banks assessment credits for a portion of their assessments during the third quarter of 2019. Provision for losses and costs on foreclosed real estate increased by $22,000 to $33,000 for the nine months ended September 30, 2019 from $11,000 for the nine months ended September 30, 2018 primarily due to a writedown in the valuation of the foreclosed real estate to its current fair market value. Other operating expenses increased by $109,000, or 23.90%, to $565,000 for the nine months ended September 30, 2019 from $456,000 for the nine months ended September 30, 2018 primarily due to an increase in insurance costs as well as an increase in software maintenance costs.

Income Tax Expense. Income tax expense decreased by $9,000, or 3.47%, to $268,000 for the nine months ended September 30, 2019 from $259,000 for the nine months ended September 30, 2018. The effective tax rate was 26.44% and 24.56% for the nine months ended September 30, 2019 and 2018, respectively. The increase in tax expense was the result of a decrease in nontaxable income for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, as well as the increase in nondeductible compensation expenses relating to the 2019 Equity Incentive Plan.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fundsfund current and planned expenditures. The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. Our primary sources of funds are deposits and, principal and interest payments on loans and securities. We also have the ability to borrow funds from the Federal Home Loan Bank of Atlanta, and we have credit availability with a correspondent bank. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Board of Directors is responsible for establishing and monitoringCOVID-19 pandemic could have a negative effect on our liquidity targets and strategiescapital resources due to reductions in principal and interest payments on our loans, funding PPP loans for our customers, an increase in deposit withdrawals and the potential tightening of the capital markets. While we have not yet experienced a decrease in our loan principal and interest payments, we do however expect for there to be a decline in the second quarter ending June 30, 2020 based on our current level of loan modification requests for those customers affected byCOVID-19. The loan type, number of loans and balances of these loan modifications are discussed in Note 4 of Notes to Consolidated Financial Statements. As a qualified SBA lender, we were authorized to originate PPP loans as discussed in Note 3 of Notes to Consolidated Financial Statements. We intend to limit our investment up to 20% of the Bank’s capital, or $8.6 million in loans, and have received SBA approval to fund $6.1 million in PPP loans. Deposit balances increased during the three months ended March 31, 2020, however, we are anticipating deposit outflow from consumers and businesses relating to the potential disruption in their income and the adverse business consequences due toCOVID-19.    

In order to ensure that sufficientmeet the our potential current short-term and long-term liquidity exists for meetingneeds, to include the borrowing needs and deposit withdrawalsfunding of our customersinvestment in PPP loans, as welldiscussed above we have increased our borrowings with the Federal Home Loan Bank to $12.5 million as unanticipated contingencies.of March 31, 2020 and subsequent to March 31, 2020, we sold $5.7 million in residential mortgage-backed securities, recognizing a gain of approximately $100,000. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2019.March 31, 2020.

We monitor and adjust our investments in liquid assets based upon our assessments of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset liability management program. Excess liquid assets are invested generally in interest-earning deposits and short and intermediate securities.

Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-bearing deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2019,March 31, 2020, cash and cash equivalents totaled $10.2$13.6 million, which included, $684,000$1.3 million in cash and due from banks and interest-bearing deposits in other banks of $9.5$12.3 million. Time deposits in other banks and securities classified asavailable-for-sale, which provide additional sources of liquidity, totaled $8.7$7.4 million and $41.8$32.7 million, respectively at September 30, 2019.March 31, 2020.

45


Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash (used in) provided by operating activities was ($184,000)$(449,000) and $1.9 million$191,000 for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. Net cash used inprovided by (used in) investing activities, which consists primarily of disbursements for loan originations and the purchases of securities, offset by principal collections on loans, proceeds from maturing securities andpay-downs on mortgage-backed securities was $8.8 million$896,000 and $2.1$(8.4) million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. Net cash provided by financing activities, consisting of activities in deposit accounts issuance of common stock and repurchasesborrowings, as well as the repurchase of common stock was $306,000$7.1 million and $38.9$1.0 million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of September 30, 2019March 31, 2020 totaled $28.2$29.3 million, or 18.17%,18.56% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

We are subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets andoff-balance sheet items to broad risk categories. At September 30, 2019,March 31, 2020, Chesapeake Bank of Maryland exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. See “Historical and Pro Forma Regulatory Capital Compliance.”

Off-Balance Sheet Arrangements

As a financial services provider, we routinely are a party to various financial instruments withoff-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2019,March 31, 2020, we had outstanding commitments to originate loans of $23.0$25.1 million. We anticipate that we will have sufficient funds available to meet our current lending commitments.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information relating to this item.

 

Item 4.

Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule12a-15(e)13a-15(e) and15d-15(e) under the Exchange Act) as of the end of the period covered by the quarterly report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

46


Part II – OTHER INFORMATION

Item 1 –

Legal Proceedings

The Company was not involved in any pending legal proceedings. The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Company’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Company’s consolidated financial condition and results of operations.

Item 1A –

Risk Factors

Not required forapplicable, as CBM Bancrop, Inc. is a smaller reporting companies.company.

Item 2 –

Unregistered Sales of Equity Securities and Use or Proceeds

For information regarding stock repurchases during the quarter ended September 30, 2019, see Note 10 of Notes to Consolidated Financial Statements which is incorporated by reference.Equity Securities and Use or Proceeds

None.

Item 3 –

Defaults Upon Senior Securities

None

Item 4 –

Mine Safety Disclosures

Not applicable

Item 5 –

Other Information

None

Item 6 – Exhibits

Exhibits

 

  31.1 Rule13a-14(a)/15d-14(a) Certification of principal executive officer
31.2 Rule13a-14(a)/15d-14(a) Certification of principal financial officer
32.0 Section 1350 Certifications
101.0 The following materials from the Company’s Quarterly Report on Form10-Q for the quarter ended September 30, 2019,March 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.

47


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.

 

   CBM BANCORP, INC.
Dated: November 14, 2019May 15, 2020  By: 

/s/ Joseph M. Solomon

   Joseph M. Solomon
   President
   (principal executive officer)
Dated: November 14, 2019May 15, 2020  By: 

/s/ Jodi L. Beal

   Jodi L. Beal
   Executive Vice President and Chief Financial Officer
   (principal financial and accounting officer)

 

4849