UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF ~~1934.~~1934
	For the quarterly period ended September 30, ~~2019~~2020
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF ~~1934.~~1934
	For the transition period from to .

Commission ~~file number: 033-21202~~File Number: 001-39285

~~Delmar~~Partners Bancorp

(Exact name of registrant as specified in its charter)

Maryland	52-1559535
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2245 Northwood Drive, Salisbury, Maryland	21801
(Address of principal executive offices)	(Zip Code)

410-548-1100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: ~~None.~~


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	PTRS	Nasdaq Capital Market

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 pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer”, "accelerated filer", "smaller reporting company" and “emerging growth company” in Rule ~~12b‑2~~12b-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 Rule ~~12b‑2~~12b-2 of the Exchange Act). Yes ☐ No ☒

As of November ~~7, 2019~~13, 2020 there were ~~9,985,321~~17,810,213 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

PART I – FINANCIAL INFORMATION

~~DELMAR~~Item 1. Financial Statements

PARTNERS BANCORP

CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,
	2019		2018

					September 30,		December 31,
					2020		2019
(Dollars in thousands, except per share amounts)	(Unaudited)		Audited		(unaudited)		*
ASSETS
Cash and due from banks	$	31,483	$	24,347	$	220,612	$	36,295
Interest bearing deposits in other financial institutions		29,143		4,093		34,334		27,586
Federal funds sold		15,458		1,254		34,345		31,230
Cash and cash equivalents		76,084		29,694		289,291		95,111
Securities available for sale, at fair value		55,854		51,300		128,011		104,321
Loans, less allowance for credit losses of $7,054 at September 30, 2019 and $7,063 at December 31, 2018		626,607		625,513
Accrued interest receivable on loans and investment securities		2,098		2,103
Premises and equipment, at cost, less accumulated depreciation		10,134		10,048
Federal Home Loan Bank stock, at cost		2,761		2,652
Atlantic Central Bankers Bank stock, at cost		131		131
Loans held for sale						7,765		3,555
Loans, less allowance for credit losses of $11,396 at September 30, 2020 and $7,304 at December 31, 2019						1,043,143		986,684
Accrued interest receivable						6,254		3,138
Premises and equipment, less accumulated depreciation						15,667		13,705
Restricted stock						4,421		5,311
Operating lease right-of-use assets						3,958		4,504
Financing lease right-of-use assets						1,858		1,961
Other investments		1,571		1,537		6,734		4,773
Deferred tax asset		2,892		4,829
Bank owned life insurance						14,747		7,817
Other real estate owned		3,641		3,660		2,796		2,417
Core deposit intangible		843		1,069
Core deposit intangible, net						2,833		3,373
Goodwill		5,237		5,237		9,391		9,391
Other assets		4,990		1,643		7,088		6,544
Total assets	$	792,843	$	739,416	$	1,543,957	$	1,252,605
LIABILITIES
Deposits:
Non interest bearing demand	$	202,983	$	185,476	$	393,267	$	261,631
NOW		56,138		54,481		111,460		76,947
Savings and money market		124,722		123,949		296,532		222,975
Time, $100,000 or more		127,998		115,030		284,589		274,387
Other time		148,560		135,990		149,078		170,841
		660,401		614,926
Accrued interest payable on deposits		567		392
Short-term borrowings		—		7,000
Long-term borrowings		48,995		43,489
Subordinated notes payable		6,500		6,500
						1,234,926		1,006,781
Accrued interest payable						448		572
Short-term borrowings with the Federal Home Loan Bank						21,200		48,000
Long-term borrowings with the Federal Home Loan Bank						53,136		48,830
Subordinated notes payable, net						24,089		6,435
Other borrowings						65,475		1,249
Operating lease liabilities						4,267		4,797
Financing lease liabilities						2,270		2,355
Other liabilities		4,821		1,121		2,206		2,709
Total liabilities		721,284		673,428		1,408,017		1,121,728
COMMITMENTS, CONTINGENCIES & SUBSEQUENT EVENT
STOCKHOLDERS' EQUITY
Common stock, par value $.01, authorized 20,000,000 shares, issued and outstanding 9,985,321 as of September 30, 2019 and December 31, 2018		100		100
Common stock, par value $.01, authorized 40,000,000 shares, issued and outstanding 17,810,213 as of September 30, 2020 and 17,790,181 as of December 31, 2019						178		178
Surplus		29,486		29,470		87,562		87,437
Retained earnings		41,335		37,149		45,013		41,785
Accumulated other comprehensive income (loss), net of tax		638		(731)
Noncontrolling interest in consolidated subsidiaries						1,063		738
Accumulated other comprehensive income, net of tax						2,124		739
Total stockholders' equity		71,559		65,988		135,940		130,877
Total liabilities and stockholders' equity	$	792,843	$	739,416	$	1,543,957	$	1,252,605

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2020		2019		2020		2019
INTEREST INCOME ON:
Loans, including fees	$	12,816	$	8,688	$	39,308	$	25,916
Investment securities:
Taxable		473		171		1,337		518
Tax-exempt		241		154		702		445
Federal funds sold		5		58		117		81
Other interest income		119		215		478		527
		13,654		9,286		41,942		27,487
INTEREST EXPENSE ON:
Deposits		2,288		1,556		7,331		4,388
Borrowings		816		435		2,053		1,274
		3,104		1,991		9,384		5,662
NET INTEREST INCOME		10,550		7,295		32,558		21,825
Provision for credit losses		1,967		300		5,142		900
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		8,583		6,995		27,416		20,925
OTHER INCOME:
Service charges on deposit accounts		197		295		628		861
Gain on sales and calls of investment securities		—		97		568		97
Mortgage banking income		1,305		—		2,589		—
Other income		828		739		2,236		1,771
		2,330		1,131		6,021		2,729
OTHER EXPENSES:
Salaries and employee benefits		5,124		2,788		14,725		8,459
Premises and equipment		1,150		897		3,407		2,732
Amortization of core deposit intangible		177		76		540		226
Gains on other real estate owned		31		44		75		38
Other expenses		2,767		1,726		8,347		5,097
		9,249		5,531		27,094		16,552
INCOME BEFORE TAXES ON INCOME		1,664		2,595		6,343		7,102
Federal and state income taxes		308		810		1,410		2,167
NET INCOME	$	1,356	$	1,785	$	4,933	$	4,935
Net (income) attributable to noncontrolling interest		(239)		—		(370)		—
NET INCOME ATTRIBUTABLE TO PARTNERS BANCORP	$	1,117	$	1,785	$	4,563	$	4,935

Earnings per common share
Basic earnings per share	$	0.063	$	0.179	$	0.256	$	0.494
Diluted earnings per share	$	0.063	$	0.178	$	0.256	$	0.494

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019
NET INCOME	$	1,356	$	1,785	$	4,933	$	4,935
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains on securities available for sale arising during the period		65		356		2,452		1,960
Income tax expense		(17)		(95)		(650)		(519)
Other comprehensive income, net of tax		48		261		1,802		1,441

Reclassification adjustment for gains included in net income		—		(97)		(568)		(97)
Income tax expense		—		26		151		25
Other comprehensive income, net of tax		—		(71)		(417)		(72)
TOTAL OTHER COMPREHENSIVE INCOME		48		190		1,385		1,369
COMPREHENSIVE INCOME	$	1,404	$	1,975		6,318		6,304
COMPREHENSIVE (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST		(239)		—		(370)		—
COMPREHENSIVE INCOME ATTRIBUTABLE TO PARTNERS BANCORP	$	1,165	$	1,975	$	5,948	$	6,304

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)


For the three month periods:									Accumulated
									Other		Total
	Common				Retained		Noncontrolling		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Interest		Income (Loss)		Equity
Balances, June 30, 2019	$	100	$	29,481	$	39,800	$	—	$	448	$	69,829
Net income		—		—		1,785		—		—		1,785
Other comprehensive income, net of tax		—		—		—		—		190		190
												1,975
Cash dividends, $0.025 per share		—		—		(250)		—		—		(250)
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		5		—		—		—		5
Balances, September 30, 2019	$	100	$	29,486	$	41,335	$	—	$	638	$	71,559

Balances, June 30, 2020	$	178	$	87,552	$	44,341	$	824	$	2,076	$	134,971
Net income		—		—		1,117		239		—		1,356
Other comprehensive income, net of tax		—		—		—		—		48		48
												1,404
Cash dividends, $0.025 per share		—		—		(445)		—		—		(445)
Stock option exercises, net		—		4		—		—		—		4
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		6		—		—		—		6
Balances, September 30, 2020	$	178	$	87,562	$	45,013	$	1,063	$	2,124	$	135,940


For the nine month periods:									Accumulated
									Other		Total
	Common				Retained		Noncontrolling		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Interest		Income (Loss)		Equity
Balances, December 31, 2018	$	100	$	29,470	$	37,149	$	—	$	(731)	$	65,988
Net income		—		—		4,935		—		—		4,935
Other comprehensive income, net of tax		—		—		—		—		1,369		1,369
												6,304
Cash dividends, $0.075 per share		—		—		(749)		—		—		(749)
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		16		—		—		—		16
Balances, September 30, 2019	$	100	$	29,486	$	41,335	$	—	$	638	$	71,559

Balances, December 31, 2019	$	178	$	87,437	$	41,785	$	738	$	739	$	130,877
Net income		—		—		4,563		370		—		4,933
Other comprehensive income, net of tax		—		—		—		—		1,385		1,385
												6,318
Cash dividends, $0.075 per share		—		—		(1,335)		—		—		(1,335)
Minority interest contributed capital		—		—		—		(45)		—		(45)
Stock option exercises, net		—		98		—		—		—		98
Warrant exercises, net		—		10		—		—		—		10
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		17		—		—		—		17
Balances, September 30, 2020	$	178	$	87,562	$	45,013		1,063	$	2,124	$	135,940

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

Table of Contents

~~DELMAR~~PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF ~~INCOME~~CASH FLOWS

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands, except share data)

2019

2018

2019

2018

INTEREST INCOME ON:









Loans, including fees

$
8,688

$
8,109

$
25,916

$
22,696

Investment securities:







Taxable

171

158

518

465

Exempt from Federal income tax

154

137

445

411

Federal funds sold

58

48

81

86

Other interest income

215

140

527

360

9,286

8,592

27,487

24,018

INTEREST EXPENSE ON:









Deposits

1,556

1,006

4,388

2,658

Borrowings

435

396

1,274

1,117

1,991

1,402

5,662

3,775

NET INTEREST INCOME

7,295

7,190

21,825

20,243

Provision for credit losses

300

300

900

825

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

6,995

6,890

20,925

19,418

OTHER INCOME:









Service charges on deposit accounts

295

341

861

987

Gain on sale of investment securities

97

—

97

—

Gains on disposal of other assets

—

8

—

9

Other income

739

434

1,771

1,335

1,131

783

2,729

2,331

OTHER EXPENSES:









Salaries and employee benefits

2,788

2,696

8,459

8,165

Premises and equipment

897

785

2,732

2,347

Amortization of core deposit intangible

76

126

226

294

(Gains) losses on other real estate owned

44

41

38

142

Other expenses

1,726

1,545

5,097

5,368

5,531

5,193

16,552

16,316

INCOME BEFORE TAXES ON INCOME

2,595

2,480

7,102

5,433

Federal and state income taxes

810

592

2,167

1,485

NET INCOME

$
1,785

$
1,888

$
4,935

$
3,948

Earnings per common share









Basic earnings per share

$
0.179

$
0.189

$
0.494

$
0.411


	Nine Months Ended
	September 30,
(Dollars in thousands)	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,563	$	4,935
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for credit losses and unfunded commitments		5,142		900
Depreciation		1,076		864
Amortization and accretion		457		495
Gain on sales and calls of investment securities		(568)		(97)
Gain on equity securities		(47)		—
Gain on sale of loans held for sale, originated		(2,434)		—
Net (gains) losses on other real estate owned, including write‑downs		(18)		45
Increase in bank owned life insurance cash surrender value		(170)		—
Deferred income tax (benefits) expenses		(691)		1,444
Stock‑based compensation expense, net of employee tax obligation		17		16
Net accretion of certain acquistion related fair value adjustments		(843)		(127)
Changes in assets and liabilities:
Loans held for sale		(1,776)		—
Accrued interest receivable		(3,116)		5
Other assets		292		(3,383)
Accrued interest payable		(124)		176
Other liabilities		(1,033)		3,699
Net cash (used) provided by operating activities		727		8,972
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale		(59,258)		(12,084)
Purchases of other investments		(1,890)		—
Purchases of bank owned life insurance		(6,760)		—
Proceeds from maturities and paydowns of securities available for sale		19,509		9,348
Proceeds from sales of securities available for sale		18,052		—
Net increase in loans		(60,718)		(2,204)
Proceeds from sale of assets		1		—
Purchases of premises and equipment		(3,040)		(950)
Proceeds from the sales of foreclosed assets		147		184
Proceeds from sales of Federal Home Loan Bank stock		890		(1,729)
Net cash used by investing activities		(93,067)		(7,435)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in demand, NOW, money market, and savings deposits, net		239,706		19,938
Cash received for the exercise of stock options		98		—
Cash received for the exercise of warrants		10		—
(Decrease) increase in time deposits, net		(11,564)		25,538
Increase (decrease) in other borrowings, net		59,365		(1,494)
Net increase in minority interest contributed capital		325		—
Decrease in finance lease liability		(85)		—
Dividends paid		(1,335)		(749)
Net cash provided by financing activities		286,520		43,233
Net increase in cash and cash equivalents		194,180		44,770
Cash and cash equivalents, beginning of period		95,111		29,694
Cash and cash equivalents, ending of period	$	289,291	$	74,464
Supplementary cash flow information:
Interest paid	$	9,509	$	5,486
Income taxes paid		3,559		922
Total appreciation on securities available for sale	$	1,386	$	1,863
SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES
Loans converted to other real estate owned	$	508	$	209

The ~~Selected~~ Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

Table of Contents

~~DELMAR~~PARTNERS BANCORP

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

~~(Unaudited)~~

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2019

2018

2019

2018

NET INCOME

$
1,785

$
1,888

$
4,935

$
3,948

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:









Unrealized holding gains (losses) on securities available for sale arising during the period

259

(369)

1,863

(1,340)

Deferred income tax (liabilities) benefits

(69)

98

(494)

355

Other comprehensive income (loss), net of tax

190

(271)

1,369

(985)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

190

(271)

1,369

(985)

COMPREHENSIVE INCOME

$
1,975

$
1,617

$
6,304

$
2,963

~~The Selected Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.~~

~~Table of Contents~~

~~DELMAR BANCORP~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~~

~~(Unaudited)~~

For the three month period:

Accumulated

Other

Total

Common

Retained

Comprehensive

Stockholders'
(Dollars in thousands, except per share amounts)

Stock

Surplus

Earnings

Income (Loss)

Equity
Balances, June 30, 2018

100

29,427

34,226

(967)

62,786
COMPREHENSIVE INCOME










Net income

—

—

1,888

—

1,888
Other comprehensive income, net of tax:










Unrealized holding losses on securities available for sale arising during the period

—

—

—

(271)

(271)
TOTAL COMPREHENSIVE INCOME









1,617
Cash dividends, $0.025 per share

—

—

(249)

—

(249)
Common stock issued for stock options exercised

—

4

—

—

4
Stock-based compensation expense recognized in earnings, net of employee tax obligation

—

10

—

—

10
Balances, September 30, 2018

100

29,441

35,865

(1,238)

64,168

Balances, June 30, 2019

100

29,481

39,800

448

69,829
COMPREHENSIVE INCOME










Net income

—

—

1,785

—

1,785
Other comprehensive income, net of tax:










Unrealized holding gains on securities available for sale arising during the period

—

—

—

190

190
TOTAL COMPREHENSIVE INCOME









1,975
Cash dividends, $0.025 per share

—

—

(250)

—

(250)
Stock-based compensation expense recognized in earnings, net of employee tax obligation

—

5

—

—

5
Balances, September 30, 2019

$
100

$
29,486

$
41,335

$
638

$
71,559

For the nine month period:

Accumulated

Other

Total

Common

Retained

Comprehensive

Stockholders'
(Dollars in thousands, except per share amounts)

Stock

Surplus

Earnings

Income (Loss)

Equity
Balances, December 31, 2017

82

16,622

32,615

(253)

49,066
COMPREHENSIVE INCOME










Net income

—

—

3,948

—

3,948
Other comprehensive income, net of tax:










Unrealized holding losses on securities available for sale arising during the period

—

—

—

(985)

(985)
TOTAL COMPREHENSIVE INCOME









2,963
Cash dividends, $0.070 per share

—

—

(698)

—

(698)
Common stock issued for stock options exercised

—

12

—

—

12
Common stock issued to shareholders of Liberty Bell Bank

18

12,781

—

—

12,799
Stock-based compensation expense recognized in earnings, net of employee tax obligation

—

26

—

—

26
Balances, September 30, 2018

100

29,441

35,865

(1,238)

64,168

Balances, December 31, 2018

100

29,470

37,149

(731)

65,988
COMPREHENSIVE INCOME










Net income

—

—

4,935

—

4,935
Other comprehensive income, net of tax:










Unrealized holding gains on securities available for sale arising during the period

—

—

—

1,369

1,369
TOTAL COMPREHENSIVE INCOME









6,304
Cash dividends, $0.075 per share

—

—

(749)

—

(749)
Stock-based compensation expense recognized in earnings, net of employee tax obligation

—

16

—

—

16
Balances, September 30, 2019

$
100

$
29,486

$
41,335

$
638

$
71,559

~~The Selected Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.~~

~~Table of Contents~~

~~DELMAR BANCORP~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~Unaudited~~

Nine Months Ended

September 30,
(Dollars in thousands)

2019

2018
CASH FLOWS FROM OPERATING ACTIVITIES:




Net income

$
4,935

$
3,948
Adjustments to reconcile net income to net cash provided by operating activities:




Provision for credit losses and unfunded commitments

900

825
Depreciation

864

654
Amortization and accretion

368

461
Net gains on sales of assets

(97)

—
Net losses on other real estate owned, including write‑downs

45

143
Deferred income tax expenses

1,444

737
Stock‑based compensation expense, net of employee tax obligation

16

26
Changes in assets and liabilities:




Decrease (increase) in accrued interest receivable

5

(111)
(Increase) decrease in other assets

(3,383)

679
Increase in accrued interest payable

176

77
Increase (decrease) in other liabilities

3,699

(1,253)
Net cash provided by operating activities

8,972

6,186
CASH FLOWS FROM INVESTING ACTIVITIES:




Purchases of securities available for sale

(12,084)

(8,162)
Proceeds from maturities and paydowns of securities available for sale

9,348

4,743
Proceeds from sales of securities available for sale

—

2,591
Net increase in loans

(2,204)

(32,130)
Cash received in the purchase of Liberty Bell Bank

—

11,831
Purchases of premises and equipment

(950)

(1,264)
Cash paid to shareholders of Liberty Bell Bank

—

(4,471)
Proceeds from the sales of foreclosed assets

184

734
Proceeds from sales of Federal Home Loan Bank stock

810

551
Purchase of Federal Home Loan Bank stock

(919)

(451)
Net cash used by investing activities

(5,815)

(26,028)
CASH FLOWS FROM FINANCING ACTIVITIES:




Increase (decrease) in demand, NOW, money market, and savings deposits, net

19,938

(146)
Cash received for the exercise of stock options

—

12
Increase in time deposits, net

25,538

18,492
Proceeds from borrowings to fund acquisition of Liberty Bell Bank, net of loan costs

—

4,450
Decrease in other borrowings, net

(1,494)

(494)
Dividends paid

(749)

(647)
Net cash provided by financing activities

43,233

21,667
Net increase in cash and cash equivalents

46,390

1,825
Cash and cash equivalents, beginning

29,694

32,582
Cash and cash equivalents, ending

$
76,084

$
34,407
Supplementary cash flow information:




Interest paid

$
5,486

$
3,663
Income taxes paid

922

1,454
Total appreciation (depreciation) on securities available for sale

$
1,863

$
(1,340)
SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES




Fair value of assets acquired, net of cash and cash equivalents

$
—

$
139,701
Fair value of liabilities assumed, net of cash and cash equivalents

—

139,500
Value of shares provided to Liberty Bell Bank stockholders

—

12,798
Loans converted to other real estate owned

$
209

$
379

~~The Selected Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.~~

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~~DELMAR BANCORP~~

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Its Significant Accounting Policies

~~Delmar~~Partners Bancorp (the “Company”) is a ~~bank~~multi-bank holding company ~~which owns all the outstanding shares of capital stock of~~with two wholly owned subsidiaries (the “Subsidiaries”), The Bank of Delmarva (“Delmarva”), a commercial bank ~~operating~~headquartered in Seaford, Delaware that operates primarily in Wicomico and Worcester counties in Maryland, Sussex County in Delaware, and Camden and Burlington counties in New ~~Jersey.~~Jersey, and Virginia Partners Bank (“Partners”), a commercial bank headquartered in Fredericksburg, Virginia that operates primarily in and around the greater Fredericksburg, Virginia area, including Stafford County, Spotsylvania County, King George County, Caroline County, and the City of Fredericksburg, Virginia. Partners also operates in Anne Arundel County and the three counties of Southern Maryland, including Charles County, Calvert County, and St. Mary’s County. The ~~Bank provides~~Subsidiaries engage in the general banking business and provide a broad range of financial services to individual and corporate customers, and isare subject to competition from other financial institutions. The ~~Bank is~~Subsidiaries are also subject to the regulations of certain ~~Federal~~federal and state agencies and ~~undergoes~~undergo periodic examinations by those regulatory authorities. The accounting and reporting policies of the ~~Bank~~Company and its Subsidiaries conform to accounting principles generally accepted ~~accounting principles~~in the United States of America (“U.S. GAAP”) and practices within the banking industry.

Significant accounting policies not disclosed elsewhere in the consolidated financial statements are as follows:

Principles of Consolidation:

The consolidated financial statements include the accounts of Delmar Bancorp, a bank holding company (the Company); its wholly owned subsidiary — The Bank of Delmarva (the “Bank”), a commercial bank engaged in general commercial banking operations in Maryland, Delaware and New Jersey;the Company; the Subsidiaries, along with their consolidated subsidiaries: Delmarva Real Estate Holdings, LLC., a wholly owned subsidiary ~~of The Bank~~ of Delmarva, which is a real estate holding company; Davie Circle, LLC, a wholly owned subsidiary ~~of The Bank~~ of Delmarva, which is a real estate holding company; Delmarva BK Holdings, LLC, a wholly owned subsidiary of ~~The Bank of~~ Delmarva, which is a real estate holding company; DHB Development, LLC, of which ~~the Bank~~Delmarva holds a 40.55% interest, and is a real estate holding company; West Nithsdale Enterprises, LLC, of which ~~the Bank~~Delmarva holds a 10% interest, and is a real estate holding company; and FBW, LLC, of which ~~the Bank~~Delmarva holds 50% interest, and is ~~also~~ a real estate holding ~~company.~~company; Bear Holdings, Inc., a wholly owned subsidiary of Partners, and is a real estate holding company; Johnson Mortgage Company, LLC, of which Partners owns 51% interest, and is a residential mortgage company; and 410 William Street, LLC, a wholly owned subsidiary of Partners, and which holds investment property. All significant intercompany accounts and transactions have been ~~eliminated.~~eliminated in consolidation.

Financial Statement Presentation:

The unaudited interim consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations, changes in stockholder's equity, and cash flows in conformity with ~~accounting principles generally accepted in the United States of America.~~U.S. GAAP. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the results of its operations and its cash flows for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 in conformity with ~~accounting principles generally accepted in the United States of America.~~U.S. GAAP.

Operating results for the three and nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019,~~2020, or for any other period.

Use of Estimates:

The preparation of consolidated financial statements in conformity with ~~accounting principles generally accepted within the United States of America~~U.S. GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~Adoption of New Accounting Standard:~~

On January 1, 2019, the Company adopted ASU No. 2016-02, "Leases", utilizing the effective date method under the modified retrospective approach. The Company currently leases seven of its office leases under operating leases and one under a finance lease. The Company's present value of future lease payments, measured on a discounted

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basis, as of January 1, 2019 was $3.6 million, which was recorded as a right-of-use asset included in other assets with an offsetting liability included in other liabilities on the consolidated balance sheet. Additional disclosures related to lease commitments are provided in Note 5.

Securities Available for Sale:

Marketable debt ~~and equity~~ securities not classified as held to maturity are classified as available for sale. Securities available for sale are acquired as part of the ~~Bank's~~Subsidiaries' asset/liability management strategy and may be sold in response to changes in interest rates, loan demand, changes in prepayment risk, and other factors. Securities available for sale are carried at fair value as determined by quoted market prices. Unrealized gains or losses based on the difference between amortized cost and fair value are reported in other comprehensive income, net of deferred tax. Realized gains and losses, using the specific identification method, are included as a separate component of other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Additionally, declines in the fair value of individual investment securities below their cost that are other than temporary are reflected as realized losses in the consolidated statements of income.

Impairment may result from credit deterioration of the issuer or collateral underlying the security. In performing an assessment of recoverability, all relevant information is considered, including the length of time and extent to which fair value has been less than the amortized cost basis, the cause of the price decline, credit performance of the issuer and underlying collateral, and recoveries or further declines in fair value subsequent to the balance sheet date.

For debt securities, the Company measures and recognizes other-than-temporary impairment (“OTTI”) losses through earnings if (1) the Company has the intent to sell the security or (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In these circumstances, the impairment loss is equal to the full difference between the amortized cost basis and the fair value of the security. For securities that are considered OTTI that the Company has the intent and ability to hold in an unrealized loss position, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to other factors, which is recognized as a component of other comprehensive income (“OCI”).

Restricted Stock, Equity Securities and Other Investments:

Federal Home Loan Bank (“FHLB”) stock, at cost, and Atlantic Central Bankers Bank (“ACBB”), at cost, Community Bankers Bank (“CBB”) and Maryland Financial Bank (“MFB”) are equity interests in the FHLB, ACBB, CBB and MFB, respectively. These securities do not have a readily determinable fair value for purposes of Accounting Standards Codification (“ASC”) 320-10 Investments-Debts and Equity Securities because their ownership is restricted and they lack an active market. As there is no readily determinable fair value for these securities, they are carried at cost less any OTTI.

Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in net income. Any equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. The entirety of any impairment on equity securities is recognized in earnings.

Other investments includes an equity ownership of Solomon Hess SBA Loan Fund LLC which the value is adjusted for its prorata share of assets in the fund and investment in the stock of the Federal Reserve Bank (“FRB”). Other investments also includes equity securities the Company holds with Community Capital Management in their Community Reinvestment Act (“CRA”) Qualified Investment Fund.

Bank Owned Life Insurance

The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or amounts due that are probable at settlement.

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Loans and the Allowance for Credit Losses:

Loans are generally carried at the amount of unpaid principal, adjusted for unearned loan fees, which are amortized over the term of the loan using the effective interest rate method. Interest on loans is accrued based on the principal amounts outstanding. It is the ~~Bank's~~Subsidiaries' policy to discontinue the accrual of interest when a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Cash collections on such loans are applied as reductions of the loan principal balance and no interest income is recognized on those loans until the principal balance has been collected. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. 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.~~collateral if the loan is collateral dependent.

The allowance for ~~loan~~credit losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, the value of the underlying collateral, and current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions. Determination of the allowance for credit losses is inherently subjective, as it requires significant estimates, including the amounts and timing on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance for credit losses, while recoveries of amounts previously charged off are credited to the ~~allowance.~~allowance for credit losses. A provision for credit losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least monthly and more often if deemed necessary.

The allowance for credit losses typically consists of an allocated component and an unallocated component. The allocated component of the allowance for credit losses reflects expected losses resulting from analyses developed through specific credit allocations for individual loans and historical loss experience for each loan category.

The specific credit allocations are based on regular analyses of all loans ~~over~~that are considered impaired. Impairment is measured on a ~~fixed‑dollar amount where~~loan-by-loan basis by either the ~~internal credit rating~~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 ~~at or below a predetermined classification.~~ collateral dependent. The historical loan loss element is determined statistically using aan informal loss migration analysis that examines loss experience and the related internal gradings of loans charged ~~off over a current 3 year period.~~off. The loss migration analysis is performed quarterly and loss factors are updated regularly based on actual experience. The allocated component of the allowance for credit losses also includes consideration of concentrations and changes in portfolio mix and volume.

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Any unallocated portion of the allowance for credit losses reflects management's estimate of probable inherent but undetected losses within the loan portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. In addition, the unallocated portion of the allowance for credit losses includes a component that explicitly accounts for the inherent imprecision in loan loss migration models. The historical losses used in the migration analysis may not be representative of actual unrealized losses inherent in the loan portfolio. It is management's intent to continually refine the methodology for the allowance for credit losses in an attempt to directly allocate potential losses in the loan portfolio under ASC Topic 310 and minimize the unallocated portion of the allowance for credit losses.

Loan ~~Charge‑off~~Charge-off Policies

Loans are generally fully or partially charged down to the fair value of securing collateral when:

●

management deems the asset to be ~~uncollectible~~

uncollectible;

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●

repayment is deemed to be made beyond the reasonable time ~~frames~~

frames;

●

the asset has been classified as a loss by internal or external ~~review~~

review; and

●

the borrower has filed bankruptcy and the loss becomes evident owing to a lack of ~~assets~~

assets.

Acquired Loans

Loans acquired in ~~connections~~connection with business combinations are recorded at their ~~acquisition‑date~~acquisition-date fair value with no carry over of related allowance for credit losses. Any allowance for ~~loan~~credit loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not expected to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the ~~acquisition‑date~~acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

Acquired loans that ~~met~~meet the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans, including the impact of any accretable yield.

Loans acquired with deteriorated credit quality are accounted for in accordance with ~~Accounting Standards Codification (“ASC”) 310‑30,~~ ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC ~~310‑30)~~310-30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as an indicator that an acquired loan has evidence of deterioration in credit quality. These factors include; loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as ~~non‑accrual~~non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.

Under the ASC ~~310‑30~~310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable yield is recognized into income over the remaining life of the loan if the timing and/or amount of cash flows expected to be collected can be ~~reasonable~~reasonably estimated (the accretion method). If the timing or amount of cash flows expected to be collected cannot be reasonably estimated, the cost recovery method of income recognition is used. The difference between the loan's total scheduled principal and interest payment over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the ~~non‑accretable~~non-accretable difference. The ~~non‑accretable~~

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non-accretable difference represents contractually required principal and interest payments which the Company does not expect to collect.

Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for ~~loan~~credit losses resulting in an increase in the allowance for ~~loan~~credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized as interest income on a prospective basis over the loan's remaining life.

Acquired loans that were not individually determined to be purchased with deteriorated credit quality are accounted for in accordance with ASC ~~310‑20,~~310-20, Nonrefundable Fees and Other Costs (ASC ~~310‑20)~~310-20), whereby the premium or discount derived from the fair market value adjustment, on a ~~loan‑by‑loan~~loan-by-loan or pooled basis, is recognized into interest income on a level yield basis over the remaining expected life of the loan or pool.

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Troubled Debt Restructurings

A loan is accounted for and reported as a troubled debt restructuring (“TDR”) when, for economic or legal reasons, we grant a concession to a borrower experiencing financial difficulty that we would not otherwise consider. Management strives to identify borrowers in financial difficulty early and works with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. A restructuring that results in only an insignificant delay in payment is not considered a concession. A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is insignificant relative to the frequency of the payments, the debt’s original contractual maturity or original expected duration.

TDRs are designated as impaired loans because interest and principal payments will not be received in accordance with the original contract terms. TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR and impaired regardless of the accrual or performance status until the loan is paid off. However, if the TDR loan has been modified in a subsequent restructure with market terms and the borrower is not currently experiencing financial difficulty, then the loan may be no longer designated as a TDR.

Loans Held for Sale:

These loans consist of loans made through Partners’ majority owned subsidiary Johnson Mortgage Company, LLC (“JMC”).

JMC is engaged in the mortgage brokerage business in which JMC originates, closes, and immediately sells mortgage loans and related servicing rights to permanent investors in the secondary market. JMC has written commitments from several permanent investors (large financial institutions) and only closes loans that meet the lending requirements of the permanent investors. Loans are made in connection with the purchase or refinancing of existing and new one-to-four family residences primarily in southeastern and northern Virginia. Loans are initially funded primarily by JMC’s lines of credit. With the concurrent sale and delivery of mortgage loans to the permanent investors, JMC records receivables for mortgage loans sold and recognizes the related gains and losses on such sales. The receivables for mortgage loans sold are usually satisfied within 30 days of sale, whereupon the related borrowings on the lines of credit are repaid. Because of the short holding period, these loans are carried at the lower of cost or market and no market adjustments were deemed necessary in the first three quarters of 2020 or during 2019. JMC’s agreements with its permanent investors include provisions that could require JMC to repurchase loans under certain circumstances, and also provide for the assessment of fees if loans go into default or are refinanced within specified periods of time. JMC has never been required to repurchase a loan and no allowance has been made as of September 30, 2020 or December 31, 2019 for possible repurchases. Management does not believe that a provision for early default or refinancing costs is necessary at September 30, 2020 or December 31, 2019.

JMC enters into commitments with its customers to originate loans where the interest rate on the loans is determined (locked) prior to funding. While this subjects JMC to the risk that interest rates may change from the commitment date to the funding date, JMC simultaneously enters into financial agreements (best efforts forward sales commitments) with its permanent investors giving JMC the right to deliver (put) loans to the investors at specified yields, thus enabling JMC to manage its exposure to changes in interest rates such that JMC is not subject to fluctuations in fair values of these agreements due to changes in interest rates. However, a default by a permanent investor required to purchase loans under such an agreement would expose JMC to potential fluctuation in selling prices of loans due to changes in interest rate. The fair value of rate lock commitments and forward sales commitments was considered immaterial at September 30, 2020 and December 31, 2019 and an adjustment was not recorded. Gains and losses on the

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sale of mortgages as well as origination fees, brokerage fees, interest rate lock-in fees and other fees paid by mortgagors are included in Mortgage banking income on the Company’s consolidated statements of income.

Other Real Estate Owned (OREO):

OREO comprises properties acquired in partial or total satisfaction of problem loans. The properties are recorded at ~~the lower of cost or~~ fair value at the date acquired. Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. Subsequent ~~write‑downs~~write-downs that may be required and expenses of operation are included in other expenses. Gains and losses realized from the sale of OREO are included in other ~~income.~~expenses. At September 30, ~~2019~~2020 there were ~~seven~~five properties with a combined estimated value of $~~3.6~~$2.8 million included in ~~other real estate owned,~~OREO and at December 31, ~~2018~~2019, there were ~~nine~~four properties with a combined estimated value of ~~$3.7 million.~~$2.4 million included in OREO.

Intangible Assets and Amortization:

During the fourth quarter of 2019, the Company acquired Partners and during the first quarter of 2018, the ~~Bank~~Company acquired ~~Liberty Bell Bank.~~ Liberty. ASC 350, ~~Intangibles‑Goodwill~~Intangibles-Goodwill and Other ~~(ASC 350)~~ (“ASC 350”), prescribes accounting for intangible assets subsequent to initial recognition. Acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Intangible assets related to the ~~acquisition~~acquisitions are amortized ~~(see~~(See Note ~~12)~~12 – Goodwill and Intangible Assets for further information).

Goodwill

The Company’s goodwill was recognized in connection with the acquisitions of Partners and Liberty. The Company reviews the carrying value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying amount to determine whether an impairment exists.

Accounting for Stock Based Compensation:

The Company follows ASC ~~718‑10, Compensation —~~ 718-10, Compensation—Stock Compensation (“ASC 718-10”) for accounting and reporting for ~~stock‑based~~stock-based compensation plans. ASC ~~718‑10~~718-10 defines a fair value at grant date to be used for measuring compensation expense for ~~stock‑based~~stock-based compensation plans to be recognized in the statement of income.

Earnings Per Share:

Basic earnings per common share are determined by dividing net income ~~adjusted for preferred stock dividends declared and/or accumulated~~ and accretion of warrants by the weighted average number of shares outstanding for each ~~year,~~period, giving retroactive effect to stock splits and dividends. Weighted average common shares outstanding were17,810,090 and 17,808,212 for the three and nine months ended September 30, 2020, respectively, and 9,985,321 for the three and nine months ended September 30, 2020. Calculations of diluted earnings per common share include the average dilutive common stock equivalents outstanding during the ~~year,~~period, unless they are ~~anti‑dilutive.~~anti-dilutive. Dilutive common equivalent shares consist of stock options calculated using the treasury stock method and restricted stock awards (See Note 8)8 – Earnings Per Share for further information).

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Note 2. Investment Securities

Securities available for sale are as follows:


	September 30, 2019
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

									September 30, 2020
									Dollars in Thousands
											Gross		Gross
									Amortized		Unrealized		Unrealized		Fair
									Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	8,184	$	187	$	8	$	8,363	$	5,753	$	172	$	7	$	5,918
Obligations of States and political subdivisions		24,636		725		29		25,332		36,787		1,700		—		38,487
Mortgage-backed securities		20,665		120		78		20,707		79,132		1,074		160		80,046
Equity securities		1,500		—		48		1,452
	$	54,985	$	1,032	$	163	$	55,854
Subordinated debt investments										3,486		74		—		3,560
									$	125,158	$	3,020	$	167	$	128,011


	December 31, 2018
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

									December 31, 2019
									Dollars in Thousands
											Gross		Gross
									Amortized		Unrealized		Unrealized		Fair
									Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	9,469	$	47	$	96	$	9,420	$	10,186	$	162	$	36	$	10,312
Obligations of States and political subdivisions		21,383		139		426		21,096		33,885		716		43		34,558
Mortgage-backed securities		19,942		15		553		19,404		56,275		236		90		56,421
Equity securities		1,500		—		120		1,380
	$	52,294	$	201	$	1,195	$	51,300
Subordinated debt investments										2,988		42		—		3,030
									$	103,334	$	1,156	$	169	$	104,321

Gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, are as follows:


	September 30, 2019
	Dollars in Thousands
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss

													September 30, 2020
													Dollars in Thousands
													Less than 12 months				12 months or more				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
													Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies and corporations	$	999	$	2	$	2,997	$	6	$	3,996	$	8	$	1,493	$	7	$	—	$	—	$	1,493	$	7
Obligations of States and political subdivisions														—		—		—		—		—		—
Mortgage-backed securities		5,496		21		4,754		57		10,250		78		23,670		160		—		—		23,670		160
Obligations of States and political subdivisions		2,522		29		253		—		2,775		29
Equity Securities		—		—		1,452		48		1,452		48
Subordinated debt investments														—		—		—		—		—		—
Total securities with unrealized losses	$	9,017	$	52	$	9,456	$	111	$	18,473	$	163	$	25,163	$	167	$	—	$	—	$	25,163	$	167


	December 31, 2018
	Dollars in Thousands
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss

													December 31, 2019
													Dollars in Thousands
													Less than 12 months				12 months or more				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
													Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies and corporations	$	3,973	$	18	$	5,927	$	78	$	9,900	$	96	$	5,269	$	34	$	2,000	$	2	$	7,269	$	36
Obligations of States and political subdivisions														4,669		43		—		—		4,669		43
Mortgage-backed securities		5,485		111		13,440		442		18,924		553		11,600		32		4,489		58		16,089		90
Obligations of States and political subdivisions		9,119		81		11,977		345		21,096		426
Equity Securities		—		—		1,380		120		1,380		120
Subordinated debt investments														—		—		—		—		—		—
Total securities with unrealized losses	$	18,577	$	209	$	32,724	$	985	$	51,300	$	1,195	$	21,538	$	109	$	6,489	$	60	$	28,027	$	169

Table of Contents

The following is a summary of maturities, calls, or repricing of securities available for sale:

September 30, 2019

Securities

Available for Sale

Dollars in Thousands

Amortized

Fair

Cost

Value

September 30, 2020

Securities

Available for Sale

Dollars in Thousands

Amortized

Fair

Cost

Value

Due in one year or less

3,023

3,018

625

626

Due after one year through five years

2,491

2,489

2,238

2,435

Due after five years through ten years

12,680

13,139

21,456

22,168

Due after ten years or more

16,126

16,502

21,707

22,736

Mortgage-backed, due in monthly installments

20,665

20,706

54,985

55,854

Mortgage-backed securities, due in monthly installments

79,132

80,046

125,158

128,011

Note 3. Loans, Allowance for Credit Losses and Impaired Loans

Major categories of loans as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 are as follows:

(Dollars in thousands)

At September 30, 2019

At December 31, 2018
Originated Loans




Other real estate secured

$
369,039

$
356,141
1 - 4 Family residential secured

120,160

116,771
Other

51,643

48,960

540,842

521,872
Acquired Loans




Other real estate secured

$
56,698

$
70,080
1 - 4 Family residential secured

23,120

29,532
Other

13,669

12,420

93,487

112,032
Total Loans




Other real estate secured

$
425,737

$
426,221
1 - 4 Family residential secured

143,280

146,303
Other

65,312

61,379

634,329

633,903
Less: Unamortized discounts on acquired loans

(668)

(1,327)
Less: Allowance for loan losses

(7,054)

(7,063)

$
626,607

$
625,513


(Dollars in thousands)	At September 30, 2020		At December 31, 2019
Originated Loans
Real Estate Mortgage
Construction and land development	$	70,798	$	59,236
Residential real estate		120,746		108,590
Nonresidential		373,734		325,916
Home equity loans		16,072		13,736
Commercial		135,131		52,838
Consumer and other loans		3,032		2,669
		719,513		562,985
Acquired Loans
Real Estate Mortgage
Construction and land development	$	3,394	$	25,515
Residential real estate		81,032		100,696
Nonresidential		191,289		218,633
Home equity loans		17,286		23,979
Commercial		39,957		59,159
Consumer and other loans		2,065		3,021
		335,023		431,003
Total Loans
Real Estate Mortgage
Construction and land development	$	74,193	$	84,751
Residential real estate		201,779		209,286
Nonresidential		565,024		544,549
Home equity loans		33,358		37,715
Commercial		175,088		111,997
Consumer and other loans		5,097		5,690
		1,054,539		993,988
Less: Allowance for credit losses		(11,396)		(7,304)
	$	1,043,143	$	986,684

Table of Contents

Allowance for ~~Loan~~Credit Losses

Management has an established methodology to determine the adequacy of the allowance for ~~loan~~credit losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for ~~loan~~credit losses, the ~~Bank~~Company has segmented the loan portfolio into the following classifications:

●

~~Other~~ Real Estate ~~Secured~~

~~Commercial Real Estate~~

Mortgage (which includes Construction and Land Development,

Residential Real Estate, Nonresidential Real Estate and Home Equity Loans)

●

~~Farmland~~

Commercial

●

~~Multifamily~~

Consumer and other loans

~~1 – 4 Family Residential Secured~~

~~Other~~

~~Commercial and Industrial~~

~~Consumer Loans~~

~~Other Loans~~

~~Table of Contents~~

Each of these segments are reviewed and analyzed quarterly using ~~the weighted average~~ historical ~~charge‑offs over a current three year period~~charge-off experience for their respective segments as well as the following qualitative factors:

●

Changes in the levels and trends in delinquencies, ~~non‑accruals,~~non-accruals, classified assets and ~~troubled debt restructurings~~

TDRs

●

Changes in the nature and volume of the portfolio

●

Effects of any changes in lending policies, procedures, including underwriting standards and collections, charge off and recovery practices

●

Changes in the experience, depth and ability of management

●

Changes in the national and local economic conditions and developments, including the condition of various market segments

●

Changes in the concentration of credits within each pool

●

Changes in the quality of the ~~Bank's~~Company’s loan review system and the degree of oversight by the Company’s Board

of Directors

●

Changes in external factors such as competition and the legal environment.

The above factors result in a ~~FAS 5, as codified in~~ FASB ASC ~~450‑10‑~~450-10- 20 calculated reserve for environmental factors.

All credit exposures graded at a rating of ~~“5”, “6”, “7” or “8”~~“non-pass” with outstanding balances less than or equal to ~~$250,000~~$250 thousand and credit exposures graded at a rating of ~~“1”, “2”, “3” or “4”~~“pass” are reviewed and analyzed quarterly using ~~the weighted average~~ historical ~~charge‑offs over a current three year period as a percentage of total charge‑offs for the same period~~charge-off experience for their respective segments as well as the qualitative factors discussed above. The ~~weighted average~~ historical ~~percentage~~charge-off experience is further adjusted based on delinquency risk trend assessments and concentration risk assessments.

All credit exposures graded at a rating of ~~“5”, “6”, “7” or “8”~~“non-pass” with outstanding balances greater than ~~$250,000~~$250 thousand are to be reviewed no less than quarterly for the purpose of determining if a specific allocation is needed for that credit. The determination for a specific reserve is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management uses the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the loan is less than the recorded investment in the loan (net of previous ~~charge‑offs,~~charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance for credit losses estimate or a ~~charge‑off~~charge-off to the ~~allowance.~~allowance for credit losses.

Table of Contents

The establishment of a specific reserve does not necessarily mean that the credit with the specific reserve will definitely incur loss at the reserve level. It is only an estimation of the potential loss based upon anticipated events. A specific reserve will not be established unless loss elements can be determined and quantified based on known facts. The total allowance reflects management's estimate of ~~loan~~credit losses inherent in the loan portfolio as of September 30, ~~2019~~2020 and December 31, ~~2018.~~

~~Table of Contents~~

2019.

The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, ~~2019 and~~2020 and December 31, ~~2018:~~2019:


	Other		1 - 4 Family
	Real Estate		Residential

											Real Estate Mortgage
											Construction
											and Land		Residential								Consumer
Dollars in Thousands	Secured		Secured		Other		Unallocated		Total		Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
September 30, 2019
Balance at September 30, 2020
Purchased credit impaired loans
Balance in allowance											$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Related loan balance												44		1,855		2,248		—		407		—		—		4,554
Individually evaluated for impairment:
Balance in allowance	$	47	$	251	$	639	$	—	$	937	$	—	$	198	$	23	$	—	$	550	$	—	$	—	$	771
Related loan balance		14,114		4,102		1,218		—		19,434		176		3,029		8,690		—		539		—		—		12,434
Collectively evaluated for impairment:
Balance in allowance	$	4,346	$	1,210	$	102	$	459	$	6,117	$	907	$	1,736	$	6,114	$	216	$	1,039	$	20	$	593	$	10,625
Related loan balance		411,215		139,084		63,928		—		614,227		73,973		196,895		554,086		33,358		174,142		5,097		—		1,037,551

Note: The balances above include unamortized discounts on acquired loans of ~~$668,000.~~$4.1 million.


	Other		1 - 4 Family
	Real Estate		Residential

											Real Estate Mortgage
											Construction
											and Land		Residential								Consumer
Dollars in Thousands	Secured		Secured		Other		Unallocated		Total		Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
December 31, 2018
Balance at December 31, 2019
Purchased credit impaired loans
Balance in allowance											$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Related loan balance												44		1,986		2,323		—		1,020		—		—		5,373
Individually evaluated for impairment:
Balance in allowance	$	278	$	586	$	178	$	—	$	1,042	$	—	$	216	$	82	$	—	$	274	$	—	$	—	$	572
Related loan balance		14,947		8,775		1,732		—		25,454		177		3,123		9,504		—		1,274		—		—		14,078
Collectively evaluated for impairment:
Balance in allowance	$	3,998	$	1,057	$	476	$	490	$	6,021	$	602	$	1,164	$	3,991	$	142	$	552	$	14	$	267	$	6,732
Related loan balance		410,527		137,192		59,403		—		607,122		84,530		204,177		532,722		37,715		109,703		5,690		—		974,537

Note: The balances above include unamortized discounts on acquired loans of ~~$1.3~~$6.1 million.

Table of Contents

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the ~~the~~ three and nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.


	September 30, 2019
	Other		1 - 4 Family
	Real Estate		Residential

											September 30, 2020
											Real Estate Mortgage
											Construction
											and Land		Residential								Consumer
Dollars in Thousands	Secured		Secured		Other		Unallocated		Total		Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Quarter Ended
Beginning Balance	$	4,359	$	1,343	$	634	$	730	$	7,066	$	898	$	1,893	$	5,487	$	184	$	1,430	$	20	$	89	$	10,001
Charge-offs		—		—		(454)		—		(454)		—		—		(38)		—		(497)		(55)		—		(590)
Recoveries		84		24		34		—		142		—		2		6		—		1		9		—		18
Provision		(50)		94		527		(271)		300		9		39		682		32		655		46		504		1,967
Ending Balance		4,393		1,461		741		459		7,054	$	907	$	1,934	$	6,137	$	216	$	1,589	$	20	$	593	$	11,396
Nine Months Ended
Beginning Balance		4,276		1,643		654		490		7,063		602		1,380		4,073		142		826		14		267		7,304
Charge-offs		(421)		(198)		(632)		—		(1,251)		—		(25)		(163)		(13)		(828)		(103)		—		(1,132)
Recoveries		97		165		80		—		342		1		10		10		10		20		31		—		82
Provision		441		(149)		639		(31)		900		304		569		2,217		77		1,571		78		326		5,142
Ending Balance		4,393		1,461		741		459		7,054		907		1,934		6,137		216		1,589		20		593		11,396


	September 30, 2018
	Other		1 - 4 Family
	Real Estate		Residential

											September 30, 2019
											Real Estate Mortgage
											Construction
											and Land		Residential								Consumer
Dollars in Thousands	Secured		Secured		Other		Unallocated		Total		Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Quarter Ended
Beginning Balance	$	4,434	$	1,887	$	444	$	331	$	7,096	$	575	$	1,203	$	3,784	$	144	$	624	$	10	$	726	$	7,066
Charge-offs		(143)		—		(84)		—		(227)		—		—		—		—		(425)		(28)		—		(453)
Recoveries		9		19		28		—		56		5		24		80		—		23		9		—		141
Provision		142		29		29		100		300		15		86		(66)		8		504		20		(267)		300
Ending Balance		4,442		1,935		417		431		7,225	$	595	$	1,313	S	3,798	$	152	$	726	$	11	$	459	$	7,054
Nine Months Ended
Beginning Balance		3,858		1,744		536		565		6,703		647		1,521		3,629		122		641		13		490		7,063
Charge-offs		(347)		(52)		(202)		—		(601)		(11)		(193)		(410)		(4)		(534)		(99)		—		(1,251)
Recoveries		77		143		78		—		298		9		165		88		—		43		37		—		342
Provision		854		100		5		(134)		825		(50)		(180)		491		34		576		60		(31)		900
Ending Balance		4,442		1,935		417		431		7,225		595		1,313		3,798		152		726		11		459		7,054

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financial institutions through the SBA. The Company has provided $64.2 million in funding to over 600 customers through the PPP as of September 30, 2020. Because these loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve at this time.

Credit Quality Information

The following ~~table represents~~tables represent credit exposures by creditworthiness category at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The ~~Bank's~~Company’s internal creditworthiness is based on experience with similarly graded credits. The Company uses the definitions below for categorizing and managing its criticized loans. Loans catergorized as “Pass” do not meet the criteria set forth below and are not considered criticized.

Marginal — Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems. Loans in this category may not meet required underwriting criteria and have no mitigating factors. More than the ordinary amount of attention is warranted for these loans.

Substandard — Loans in this category exhibit well-defined weaknesses that ~~trend upward toward higher credit grades~~would typically bring normal repayment into jeopardy. These loans are no longer adequately protected due to well-defined weaknesses that affect the repayment capacity of the borrower. The possibility of loss is much more evident and above average supervision is required for these loans.

Doubtful — Loans in this category have ~~less credit risk~~all the weaknesses inherent in a loan categorized as Substandard, with the characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and ~~loans that migrate downward typically have more credit risk.~~values, highly questionable and improbable.

~~The Bank's internal risk ratings~~Loss — Loans in this category are of little value and are not warranted as ~~follows:~~

~~Excellent — minimal risk. Normally supported by pledged deposits, United States government securities, etc.~~

~~Superior — low risk. All of the risks associated with this credit based on each of the bank's creditworthiness criteria are minimal.~~

~~Good — moderately low risk. Most of the risks associated with this credit based on each of the bank's creditworthiness criteria are minimal.~~

~~Fair/Watch — moderate risk. The weighted overall risk associated with this credit based on each of the bank's creditworthiness criteria is acceptable.~~

~~Marginal — moderately high risk. (possesses deficiencies which corrective action by the bank would remedy; potential watch list)~~

~~Substandard — The bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected.~~

~~Doubtful — Weaknesses make collection or liquidation in full, based on currently existing facts, improbable.~~

~~Loss — Of little value; not warranted as~~ a bankable asset.

~~Table of Contents~~

~~Non‑accruals~~Non-accruals

In general, a loan will be placed on ~~non‑accrual~~non-accrual status at the end of the reporting month in which the interest or principal is past due more than 90 days. Exceptions to the policy are those loans that are in the process of collection and are well-secured. A ~~well‑secured~~well-secured loan is secured by collateral with sufficient market value to repay principal and all accrued interest.

A summary of loans by risk rating is as follows:

1 - 4 Family

Other Real

Residential

September 30, 2019

Estate Secured

Secured

Other

Total

Dollars in Thousands
Excellent

$
1,098

$
—

$
6,357

$
7,455
Superior

3,851

254

1,874

5,979
Good

404,785

136,693

53,530

595,008
Fair

7,968

2,977

1,619

12,564
Marginal

—

—

—

—
Substandard

7,628

3,261

1,766

12,655
TOTAL

$
425,330

$
143,185

$
65,146

$
633,661
Non-Accrual

$
2,806

$
2,107

$
214

$
5,127
Troubled debt restructures

$
8,178

$
2,443

$
166

$
10,787
Breakdown of TDRs








TDRs on Non-accrual

$
1,120

$
918

$
166

$
2,204
TDRs Past Due 30-89

—

213

—

213
Performing TDRs

7,058

1,312

—

8,370
TOTAL

$
8,178

$
2,443

$
166

$
10,787
Total Non-performing TDR accounts

$
1,120

$
1,131

$
166

$
2,417


	Real Estate Secured
	Construction &
	Land		Residential								Consumer &
September 30, 2020	Development		Real Estate		Nonresidential		Home Equity		Commercial		Other		Total

	Dollars in Thousands
Pass	$	74,017	$	198,513	$	557,334	$	33,304	$	174,349	$	5,097	$	1,042,614
Marginal		—		—		3,339		—		89		—		3,428
Substandard		176		3,266		4,351		54		650		—		8,497
TOTAL	$	74,193	$	201,779	$	565,024	$	33,358	$	175,088	$	5,097	$	1,054,539
Non-Accrual	$	176	$	3,215	$	412	$	54	$	489	$	—	$	4,346

1 - 4 Family

Other Real

Residential

December 31, 2018

Estate Secured

Secured

Other

Total

Dollars in Thousands
Excellent

$
1,143

$
—

$
9,756

$
10,899
Superior

7,523

267

2,015

9,805
Good

402,092

133,401

45,802

581,295
Fair

8,084

4,598

2,106

14,788
Marginal

407

112

268

787
Substandard

7,071

7,589

343

15,003
TOTAL

$
426,319

$
145,967

$
60,290

$
632,576
Non-Accrual

$
4,423

$
4,547

$
178

$
9,148
Troubled debt restructures

$
10,341

$
7,269

$
206

$
17,816
Breakdown of TDRs








TDRs on Non-accrual

$
2,546

$
3,290

$
175

$
6,012
TDRs Past Due 30-89

640

—

31

671
Performing TDRs

7,155

3,979

—

11,134
TOTAL

$
10,341

$
7,269

$
206

$
17,816
Total Non-performing TDR accounts

$
3,186

$
3,290

$
206

$
6,682

1820

Table of Contents


	Real Estate Secured
	Construction &
	Land		Residential								Consumer &
December 31, 2019	Development		Real Estate		Nonresidential		Home Equity		Commercial		Other		Total

	Dollars in Thousands
Pass	$	84,574	$	206,150	$	539,259	$	37,715	$	110,349	$	5,690	$	983,737
Marginal		—		—		—		—		—		—		—
Substandard		177		3,136		5,290		—		1,648		—		10,251
TOTAL	$	84,751	$	209,286	$	544,549	$	37,715	$	111,997	$	5,690	$	993,988
Non-Accrual	$	177	$	1,620	$	2,608	$	5	$	131	$	—	$	4,541

A summary of loans that were modified under the terms of a TDR during the three and nine month periods ended September 30, 2020 is shown below by class. The post-modification recorded balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal pay-downs, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged off, or foreclosed upon by period end are not reported. There were no loans modified under the terms of a TDR during the three and nine months ended September 30, 2019.


	Real Estate Secured
	Construction &
	Land		Residential								Consumer &
	Development		Real Estate		Nonresidential		Home Equity		Commercial		Other		Total

	Dollars in Thousands
Three months ended September 30, 2020
Number of loans modified during the period		—		—		—		—		—		—		—
Pre-modification recorded balance	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Post- modification recorded balance		—		—		—		—		—		—		—
Nine months ended September 30, 2020
Number of loans modified during the period		—		—		—		—		1		—		1
Pre-modification recorded balance	$	—	$	—	$	—	$	—	$	1,196	$	—	$	1,196
Post- modification recorded balance		—		—		—		—		489		—		489

During the nine months ended September 30, 2020, 2020, there was one loan modified as a TDRs that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. This loan had a balance of $1.2 million prior to charge-offs of $707 thousand. There were no loans modified as TDRs that subsequently

Table of Contents

defaulted during the year ended December 31, 2019 which had been modified as TDRs during the twelve months prior to default.

There were two loans secured by 1-4 family residential properties with an aggregrate balance of $362 thousand that were in the process of foreclosure at September 30, 2020. There were three loans secured by 1-4 family residential properties with aggregrate balances of $1.2 million that were in the process of foreclosure at December 31, 2019.

The following ~~table includes~~tables include an aging analysis of the recorded investment of past due financing receivables as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

Recorded

Investment

Greater than

Total

>90 Days

30 - 59 Days

60 - 89 Days

90 Days

Total

Current

Financing

Past Due
At September 30, 2019

Past Due*

Past Due**

Past Due***

Past Due

Balance

Receivables

and Accruing

Dollars in Thousands
Other Real Estate Secured

$
569

$
—

$
2,005

$
2,574

$
423,163

$
425,737

$
—
1 - 4 Family Residential

1,696

619

616

2,931

140,349

143,280

—
Other

158

20

—

178

65,134

65,312

—
TOTAL

$
2,423

$
639

$
2,621

$
5,683

$
628,646

$
634,329

$
—

Recorded

Investment

Greater than

Total

>90 Days

30 - 59 Days

60 - 89 Days

90 Days

Total

Current

Financing

Past Due

At September 30, 2020

Past Due*

Past Due

Past Due**

Past Due

Balance

Receivables

and Accruing

Dollars in Thousands

Real Estate

Construction and land development

—

176

242

73,951

74,193

—

Residential real estate

1,157

698

1,940

199,839

201,779

286

Nonresidential

207

871

1,327

2,405

562,619

565,024

—

Home equity loans

—

33,304

33,358

—

Commercial

129

489

668

174,420

175,088

—

Consumer and other loans

—

5,094

5,097

—

TOTAL

1,562

1,006

2,744

5,312

1,049,227

1,054,539

286

* Includes $~~1.2 million~~$901 thousand of ~~non‑accrual~~non-accrual loans.

** Includes $~~117,000~~2.5 million of non-accrual loans.


													Recorded
													Investment
					Greater than						Total		>90 Days
	30 - 59 Days		60 - 89 Days		90 Days		Total		Current		Financing		Past Due
At December 31, 2019	Past Due*		Past Due**		Past Due***		Past Due		Balance		Receivables		and Accruing

	Dollars in Thousands
Real Estate
Construction and land development	$	424	$	—	$	177	$	601	$	84,150	$	84,751	$	—
Residential real estate		1,296		677		702		2,675		206,611		209,286		—
Nonresidential		635		144		1,823		2,602		541,947		544,549		—
Home equity loans		—		—		—		—		37,715		37,715		—
Commercial		231		1,207		94		1,532		110,465		111,997		—
Consumer and other loans		1		19		—		20		5,670		5,690		5
TOTAL	$	2,587	$	2,047	$	2,796	$	7,430	$	986,558	$	993,988	$	5

* Includes $956 thousand of non-accrual loans.

** Includes $81 thousand of non-accrual loans.

*** Includes $2.6 million of ~~nonacrual~~non-accrual loans.

~~Total financing receivable balances do not include unamortized discounts of $668,000.~~

Recorded

Investment

Greater than

Total

>90 Days

30 - 59 Days

60 - 89 Days

90 Days

Total

Current

Financing

Past Due
At December 31, 2018

Past Due

Past Due

Past Due*

Past Due

Balance

Receivables

and Accruing

Dollars in Thousands
Other Real Estate Secured

$
876

$
1,742

$
3,129

$
5,747

$
420,474

$
426,221

$
338
1 - 4 Family Residential

1,292

383

1,722

3,397

142,906

146,303

—
Other

1,035

33

268

1,336

60,043

61,379

268
TOTAL

$
3,203

$
2,158

$
5,119

$
10,480

$
623,423

$
633,903

$
606

* Includes $4.5 million of non‑accrual loans.

~~Total financing receivable balances do not include unamortized discounts of $1.3 million.~~

Impaired Loans

Impaired loans are defined as ~~non‑accrual~~non-accrual loans, ~~troubled debt restructurings, purchase~~TDRs, purchased credit impaired loans (“PCI”) and loans risk rated ~~a “6”~~substandard or above. When management identifies a loan as impaired, the impairment is measured for potential loss based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management ~~used~~uses the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous ~~charge‑offs,~~charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a ~~charge‑off~~charge-off to the allowance.

Table of Contents

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on ~~non‑accrual~~non-accrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on ~~non‑accrual~~non-accrual status, contractual interest is credited to interest income when received, under the cash basis method.

The following ~~table includes~~tables include the recorded investment and unpaid principal balances for impaired financing receivables, excluding purchased credit impaired, with the associated allowance amount, if applicable. Management determined the specific reserve in the allowance based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded.

~~Table of Contents~~

Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. ~~When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on non‑accrual status, all payments are applied to principal, under the cost recovery method.~~

Unpaid

Interest

Average

Recorded

Principal

Income

Specific

Recorded
September 30, 2019

Investment

Balance

Recognized

Reserve

Investment

Dollars in Thousands
Impaired loans with specific reserves:










Other Real Estate Secured

$
2,278

$
2,278

$
188

$
47

$
2,777
1 - 4 Family Residential Secured

738

738

—

251

2,343
Other

214

214

11

639

129
Total impaired loans with specific reserves

$
3,230

$
3,230

$
199

$
937

$
5,249
Impaired loans with no specific reserve:

Other Real Estate Secured

$
12,339

$
12,815

$
768

$
—

$
12,594
1 - 4 Family Residential Secured

4,261

5,041

158

—

5,011
Other

2,325

2,325

110

—

2,065
Total impaired loans with no specific reserve

$
18,925

$
20,181

$
1,036

—
—

$
19,670
TOTAL

$
22,155

$
23,411

$
1,235

$
937

$
24,919


			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
September 30, 2020	Investment		Balance		Recognized		Reserve		Investment

	Dollars in Thousands
Impaired loans with specific reserves:
Real Estate Mortgage
Construction and land development	$	—	$	—	$	—	$	—	$	—
Residential real estate		938		938		5		198		833
Nonresidential		2,306		2,306		155		23		2,381
Home equity loans		—		—		—		—		—
Commercial		539		1,246		12		550		906
Consumer and other loans		—		—		—		—		—
Total impaired loans with specific reserves	$	3,783	$	4,490	$	172	$	771	$	4,120
Impaired loans with no specific reserve:
Real Estate Mortgage
Construction and land development	$	176	$	176	$	—	$	—	$	176
Residential real estate		2,091		2,141		76		—		2,244
Nonresidential		6,384		6,485		302		—		6,717
Home equity loans		—		—		—		—		—
Commercial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total impaired loans with no specific reserve	$	8,651	$	8,802	$	378	$	—	$	9,137
TOTAL	$	12,434	$	13,292	$	550	$	771	$	13,257

Total impaired loans of $~~22.2~~$12.4 million at September 30, ~~2019~~2020 do not include PCI loan balances of ~~$810,000~~,$4.6 million, which are net of a discount of ~~$257,000. Total impaired loans also included~~ $1.9 million of loans which did not meet the criteria whereby an individual evaluation for impairment was required. These loans were pooled with all other loans not requiring an evaluation for individual impairment and reviewed and analyzed using the weighted average historical charge‑offs over a current three year period for their respective segments along with the qualitative factors stated previously in this disclosure, to result in a ASC 450‑10‑20 (FAS 5) calculated reserve.$642,000.

Unpaid

Interest

Average

Recorded

Principal

Income

Specific

Recorded
December 31, 2018

Investment

Balance

Recognized

Reserve

Investment

Dollars in Thousands
Impaired loans with specific reserves:










Other Real Estate Secured

$
3,276

$
3,276

$
246

$
412

$
3,690
1 - 4 Family Residential Secured

3,947

4,075

174

586

4,989
Other

44

44

2

44

22
Total impaired loans with specific reserves

$
7,267

$
7,395

$
422

$
1,042

$
8,701
Impaired loans with no specific reserve:

Other Real Estate Secured

$
12,849

$
13,905

$
1,016

$
—

$
10,691
1 - 4 Family Residential Secured

5,761

7,011

256

—

3,902
Other

1,805

1,805

112

—

1,080
Total impaired loans with no specific reserve

$
20,415

$
22,721

$
1,384

$
—

$
15,672
TOTAL

$
27,682

$
30,116

$
1,806

$
1,042

$
24,374


			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
December 31, 2019	Investment		Balance		Recognized		Reserve		Investment

	Dollars in Thousands
Impaired loans with specific reserves:
Real Estate Mortgage
Construction and land development	$	—	$	—	$	—	$	—	$	—
Residential real estate		727		727		—		216		2,337
Nonresidential		2,456		2,456		260		82		2,866
Home equity loans		—		—		—		—		—
Commercial		1,274		1,274		53		274		659
Consumer and other loans		—		—		—		—		—
Total impaired loans with specific reserves	$	4,457	$	4,457	$	313	$	572	$	5,862
Impaired loans with no specific reserve:
Real Estate Mortgage
Construction and land development	$	177	$	177	$	—	$	—	$	198
Residential real estate		2,396		3,069		132		—		3,733
Nonresidential		7,048		7,326		501		—		9,839
Home equity loans		—		—		—		—		347
Commercial		—		—		—		—		902
Consumer and other loans		—		—		—		—		—
Total impaired loans with no specific reserve	$	9,621	$	10,572	$	633	$	—	$	15,019
TOTAL	$	14,078	$	15,029	$	946	$	572	$	20,881

2023

Table of Contents

Total impaired loans of $14.1 million at December 31, 2019 do not include PCI loan balances of $5.4 million, which are net of a discount of $1.1 million.

All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance ~~sheet~~sheets are as follows:



Dollars in Thousands	September 30, 2019		December 31, 2018		September 30, 2020		December 31, 2019
Accountable for under ASC 310-30 (PCI loans)
Outstanding balance	$	1,067	$	1,692	$	5,196	$	6,426
Carrying amount		810		1,110		4,554		5,373
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	92,420	$	110,340	$	334,173	$	430,711
Carrying amount		92,009		109,595		330,469		425,630
Total acquired loans
Outstanding balance	$	93,487	$	112,032	$	339,369	$	437,137
Carrying amount		92,819		110,705		335,023		431,003

The following table provides changes in accretable yield for all acquired loans accounted for under ASC ~~310‑20:~~310-20:



Dollars in Thousands	September 30, 2019		December 31, 2018		September 30, 2020		December 31, 2019
Balance at beginning of period	$	745	$	—	$	5,081	$	745
Acquisitions		—		1,703		—		4,990
Accretion		(335)		(958)		(1,376)		(654)
Other changes, net						(1)		—
Balance at end of period	$	410	$	745	$	3,704	$	5,081

During the three and nine months ended September 30, ~~2019,~~2020, the Company recorded ~~$24,000~~$54 thousand and ~~$80,000,~~$180 thousand, respectively, in accretion on acquired loans accounted for under ASC 310-30. During the three and nine months ended September 30, ~~2018,~~2019, the Company recorded ~~$33,000~~$24 thousand and ~~$65,000,~~$80 thousand, respectively, in accretion on acquired loans accounted for under ASC 310-30.

~~Non‑accretable~~Non-accretable yield on ~~purchased credit impaired~~PCI loans was ~~$232,000 and $463,000~~$1.6 million at September 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019.

Concentration of Risk:

The ~~Bank~~Company makes loans to customers located primarily within Anne Arundel, Charles, Calvert, St. Mary’s, Wicomico, and Worcester Counties, ~~Maryland,~~Maryland; Sussex County, ~~Delaware and~~Delaware; Camden and Burlington Counties, New ~~Jersey.~~Jersey; Stafford, Spotsylvania, King George, and Caroline Counties, Virginia; and the City of Fredericksburg, Virginia. A substantial portion of its loan portfolio consists of residential and commercial real estate mortgages. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.

The ~~Bank~~Company had no commitments to loan additional funds to the borrowers of restructured, impaired, or ~~non‑accrual~~non-accrual loans as of September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

Note 4. ~~Credit Facilities~~Borrowings and Notes Payable

The ~~Bank~~Company owns capital stock of the ~~Federal Home Loan Bank of Atlanta (FHLB)~~FHLB as a condition for a $1~~92.4~~$373.8 million convertible advance credit facility from the FHLB. As of September 30, ~~2019~~2020 the ~~Bank~~Company had remaining credit availability of ~~$143.4~~$299.5 million under this facility.

Table of Contents

The following table details the ~~long-term~~ advances the Company had outstanding with the FHLB at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019 and outstanding lines of credit:


	September 30, 2020
Dollars in Thousands	Outstanding Balance	Interest Rate		Maturity Date	Interest Payment
Fixed rate	12,000	0.24	%	October 2020	Fixed, at maturity
Fixed rate	6,000	0.19	%	October 2020	Fixed, at maturity
Fixed rate	3,200	0.19	%	October 2020	Fixed, at maturity
Fixed rate hybrid	5,000	3.04	%	November 2020	Fixed, paid monthly
Fixed rate hybrid	5,000	2.91	%	November 2020	Fixed, paid quarterly
Fixed rate hybrid	6,000	2.44	%	April 2021	Fixed, paid quarterly
Convertible	10,000	2.68	%	May 2021	Fixed, paid quarterly
Fixed rate hybrid	5,000	3.15	%	October 2022	Fixed, paid quarterly
Principal reducing credit	1,071	1.62	%	March 2023	Fixed, paid quarterly
Fixed rate hybrid	9,900	1.29	%	March 2024	Fixed, paid quarterly
Fixed rate hybrid	9,900	1.29	%	March 2024	Fixed, paid quarterly
Principal reducing credit	1,265	1.99	%	March 2026	Fixed, paid quarterly
Total advances	74,336

~~Table of Contents~~

September 30, 2019
Dollars in Thousands

Outstanding Balance

Interest Rate

Maturity Date

Interest Payment
Fixed rate hybrid

15,000

2.09
%
June 2020

Fixed, paid monthly
Fixed rate hybrid

5,000

3.04
%
November 2020

Fixed, paid monthly
Fixed rate hybrid

5,000

2.91
%
November 2020

Fixed, paid quarterly
Fixed rate hybrid

6,000

2.44
%
April 2021

Fixed, paid quarterly
Convertible*

10,000

2.68
%
May 2021

Fixed, paid quarterly
Fixed rate hybrid

5,000

3.15
%
October 2022

Fixed, paid quarterly
Principal reducing credit

1,500

1.62
%
March 2023

Fixed, paid quarterly
Principal reducing credit

1,495

1.99
%
March 2026

Fixed, paid quarterly
Total long-term advances

48,995


	December 31, 2018

						December 31, 2019
Dollars in Thousands	Outstanding Balance	Interest Rate		Maturity Date	Interest Payment	Outstanding Balance	Interest Rate		Maturity Date	Interest Payment
Fixed rate						12,000	1.73	%	January 2020	Fixed, at maturity
Fixed rate						4,500	1.76	%	January 2020	Fixed, at maturity
Fixed rate						7,600	1.68	%	January 2020	Fixed, at maturity
Fixed rate						7,700	1.68	%	January 2020	Fixed, at maturity
Fixed rate						6,000	1.70	%	January 2020	Fixed, at maturity
Fixed rate						3,200	1.71	%	January 2020	Fixed, at maturity
Fixed rate						7,000	1.70	%	January 2020	Fixed, at maturity
Fixed rate hybrid	15,000	1.51	%	June 2019	Fixed, paid monthly	15,000	2.09	%	June 2020	Fixed, paid monthly
Fixed rate hybrid	5,000	3.04	%	November 2020	Fixed, paid monthly	5,000	3.04	%	November 2020	Fixed, paid monthly
Fixed rate hybrid	5,000	2.91	%	November 2020	Fixed, paid quarterly	5,000	2.91	%	November 2020	Fixed, paid quarterly
Convertible*	10,000	2.68	%	May 2021	Fixed, paid quarterly
Fixed rate hybrid						6,000	2.44	%	April 2021	Fixed, paid quarterly
Convertible						10,000	2.68	%	May 2021	Fixed, paid quarterly
Fixed rate hybrid	5,000	3.15	%	October 2022	Fixed, paid quarterly	5,000	3.15	%	October 2022	Fixed, paid quarterly
Principal reducing credit	1,821	1.62	%	March 2023	Fixed, paid quarterly	1,393	1.62	%	March 2023	Fixed, paid quarterly
Principal reducing credit	1,668	1.99	%	March 2026	Fixed, paid quarterly	1,437	1.99	%	March 2026	Fixed, paid quarterly
Total long-term advances	43,489
Total advances						96,830

* The FHLB has the option of converting the rate on this long-term borrowing to a three month LIBOR-based floating rate in May 2020.

Average ~~short‑term borrowing~~short-term borrowings under FHLB approximated $~~3.2~~$42.4 million and ~~$1.4~~$9.3 million for the nine months ended September 30, ~~2019~~2020 and the year ended December 31, ~~2018,~~2019, respectively. Borrowings with the FHLB are considered short-term if they have an original maturity of less than a year.

The ~~Bank~~Company has pledged a portion of its residential and commercial mortgage loan portfolio as collateral for these credit facilities. Principal balances outstanding on these pledged loans totaled approximately ~~$157.2~~$215.0 million and ~~$135.3~~$223.5 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

In addition to the FHLB credit facility, in October 2015, the Company entered into a subordinated loan agreement for an aggregate principal amount of $2.0 ~~million. Interest‑only~~million, net of issuance costs. Interest-only payments are due quarterly at 6.71% per annum, and the outstanding principal balance matures in October 2025. In January 2018, the Company entered into a subordinated loan agreement for an aggregate principal amount of $4.5 million to fund the acquisition of Liberty Bell Bank, net of loan costs. ~~Interest‑only~~Interest-only payments are due quarterly at 6.875% per annum, and the outstanding principal balance matures in April 2028. In June 2020, the Company entered into a subordinated loan agreement for an aggregate principal amount of $17.6 million, net of issuance costs, to provide capital to support organic

Table of Contents

growth or growth through strategic acquisitions and capital expenditures. The notes will initially bear interest at 6.000% per annum, beginning June 25, 2020 to but excluding July 1, 2025, payable semi-annually in arrears. From and including July 1, 2025 to but excluding July 1, 2030, or up to an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 590 basis points, payable quarterly in arrears. Beginning on July 1, 2025 through maturity, the notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The notes will mature on July 1, 2030. The notes are subject to customary representations, warranties and covenants made by the Company and the purchasers.

Partners owns a one-half undivided interest in 410 William Street, Fredericksburg, Virginia. Partners purchased a one-half interest in the land for cash, plus additional settlement costs, and assumption of one-half of the remaining deed of trust loan on December 14, 2012. Partners indemnified the indemnities, who are the personal guarantors of the deed of trust loan in the amount of $886 thousand, which was one-half of the outstanding balance of the loan as of the purchase date. Partners has a remaining obligation under the note payable of $660 thousand as of September 30, 2020. The loan was refinanced on April 30, 2015 with a twenty-five year amortization. The interest rate is fixed at 3.60% for the first 10 years, and then becomes a variable rate of 3.0% plus the 10 year Treasury rate until maturity.

The Company provides JMC a warehouse line of credit, which is eliminated in consolidation. In addition, JMC has a warehouse line of credit with another financial institution in the amount of $3.0 million. The interest rate is the weekly average of the one month LIBOR plus 2.250%, rounded to the nearest 0.125% (2.750% at September 30, 2020 and 4.0% at December 31, 2019). The rate is subject to change the first of every month. Amounts borrowed are collateralized by a security interest in the mortgage loans financed under the line and are payable upon demand. The warehouse line of credit is set to renew or mature on August 31, 2021. The balance outstanding at September 30, 2020 and December 31, 2019 was $615 thousand and $576 thousand, respectively. Interest expense on the warehouse lines of credit was $32 thousand and $83 thousand during the three month and nine month periods ended September 30, 2020, respectively.

During the second quarter of 2020, in connection with the loans originated as part of the PPP, the Company borrowed under the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”). Under the terms of the PPPLF, the Company can borrow funds which are secured by the Company’s PPP loans. As of September 30, 2020, the Company’s outstanding advances under the PPPLF were $64.2 million. The interest rate on the advances is fixed at a rate of 0.35% through the advance maturities ranging from April 2022 to June 2025. The Company’s available borrowing capacity under the PPPLF as of September 30, 2020 was $64.2 million, all of which was currently outstanding.

The proceeds of these ~~long‑term~~long-term borrowings were generally used to purchase higher yielding investment securities, fund additional loans, redeem preferred stock, or fund acquisitions. Additionally, the ~~Bank~~Company has secured credit availability of $5.0 million with a correspondent bank and an unsecured credit availability of ~~$5.0~~$59.0 million with aseveral other correspondent ~~bank~~banks for ~~short‑term~~short-term liquidity needs, if necessary. The secured facility must be collateralized by specific securities at the time of any usage. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were no borrowings outstanding under these credit agreements.

The Company has pledged investment securities available for sale with an amortized cost and fair value of $2.4 million and $2.5 million, respectively, with the FRB to secure Discount Window borrowings at September 30, 2020. The combined amortized cost and fair value of these pledged investment securities were $2.3 million at December 31, 2019. At September 30, 2020 and December 31, 2019 there were no outstanding borrowings under these facilities.

Maturities on ~~long‑term~~ debt ~~over the next five years~~ are as follows (dollars in thousands):


2019	$	165

2020		25,659	$	31,357
2021		16,659		17,244
2022		5,659		66,246
2023		337		310
2024 and thereafter				48,743

Note 5. Lease Commitments

The ~~Bank~~Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using a modified-retrospective approach, whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. The ~~Bank~~Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things allowed the ~~Bank~~Company to carry forward the historical lease classifications. Additionally, the ~~Bank~~Company elected the hindsight practical expedient to determine the lease term for existing leases.

The ~~Bank~~Company leases ~~eight~~eighteen locations for administrative offices and branch locations. ~~Seven~~Sixteen leases were classified as operating leases and ~~one~~two as a finance ~~lease.~~leases. Leases with an initial term of 12 months or less as well as leases with a discounted present value of future cash flows below ~~$25,000~~$25 thousand are not recorded on the balance sheet and the related lease expense is recognized over the lease term. The ~~Bank~~Company elected to use the practical expedient to not recognize short-term leases on the consolidated balance sheet and instead account for them as executory contracts.

Certain leases include options to renew, with renewal terms that can extend the lease term, typically for five years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The ~~Bank~~Company has determined that it will place a limit on exercises of available lease renewal options that would extend the lease term up to a maximum of fifteen years, including the initial term. The depreciable life of leased assets are limited by the expected lease term.

Adoption of this standard resulted in the Company recognizing a right of use asset and a corresponding lease liability of $3.6 million on January 1, 2019.

Supplemental lease information at or for the nine months ended September 30, ~~2019~~2020 is as follows:

Balance Sheet

Dollars in Thousands

Right-of-use asset classified as premises and equipment

$
3,274

Lease liability classified as other liabilities

3,314

Income Statement

Operating lease cost classified as premises and equipment

$
364

Weighted average lease term, in years

7.55

Weighted average discount rate (1)

3.28
%
Operating cash flows

$
376


	Dollars in Thousands
Balance Sheet
Operating Lease Amounts
Right-of-use asset	$	3,958
Lease liability		4,267
Finance Lease Amounts
Right-of-use asset	$	1,858
Lease liability		2,270

Income Statement
Three Months Ended September 30, 2020
Operating lease cost classified as premises and equipment	$	223
Finance lease cost classified as interest on borrowings		16
Nine Months Ended September 30, 2020
Operating lease cost classified as premises and equipment	$	658
Finance lease cost classified as interest on borrowings		49

Weighted average lease term - Operating Leases (Yrs.)		8.44
Weighted average lease term - Finance Leases (Yrs.)		13.34
Weighted average discount rate - Operating Leases (1)		2.83	%
Weighted average discount rate - Finance Leases (1)		2.84	%
Operating outgoing cash flows from operating leases	$	625
Operating outgoing cash flows from finance leases	$	134

(1)

~~(1)~~

The discount rate was developed by using the fixed rate credit advance borrowing rate at the ~~Federal Home Loan Bank~~FHLB of Atlanta for a term correlating to the remaining life of each lease. Management believes this rate closely mirrors its incremental borrowing rate for similar terms.

~~A maturity analysis of the Company's lease liabilities at September 30, 2019 was as follows:~~

Dollars in Thousands
One year or less

$
468
One to three years

772
Three to five years

714
Over 5 years

2,002
Total lease payments

3,956
Less: Interest

(642)
Present value of lease liabilities

$
3,314

2327

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A maturity analysis of the Company’s lease liabilities at September 30, 2020 was as follows:


	Dollars in Thousands
Operating Leases:
One year or less	$	668
One to three years		1,189
Three to five years		1,071
Over 5 years		1,968
Total undiscounted cash flows		4,896
Less: Discount		(629)
Lease Liabilities	$	4,267

Finance Leases:
One year or less	$	178
One to three years		363
Three to five years		393
Over 5 years		1,824
Total undiscounted cash flows		2,758
Less: Discount		(488)
Lease Liabilities	$	2,270

Note 6. Stock Option Plans

~~Delmar~~Partners Bancorp Stock Option Plan

The ~~Bank~~Company had employee and director stock option plans and had reserved shares of stock for issuance thereunder. Options granted under these plans had a ~~ten‑year~~ten-year life with a ~~four‑year~~four-year vesting period that began one year after date of grant, and were exercisable at a price equal to the fair value of the ~~Company's~~Company’s stock on the date of the grant. Each award from all plans was evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the grantor determines. The plan term ended in 2014, therefore no new options can be granted.

~~No stock options were exercised during the the nine months ended September 30, 2019.~~ All remaining stock options expired during the second quarter of 2019.

Liberty Bell Bank Stock Option Plans

In 2004, Liberty Bell Bank (“Liberty”) adopted the 2004 Incentive Stock Option Plan and the 2004 ~~Non‑Qualified~~Non-Qualified Stock Option Plan, which were ~~stock‑based~~stock-based incentive compensation plans (the ~~Plans)~~“Liberty Plans”). In February 2014, the Liberty Plans expired pursuant to their terms. Options under these plans had a 10 year life and vested over 5 years. Remaining options under ~~these plans~~the Liberty Plans became fully vested with the approval by the board of directors of Liberty signing the Agreement of Merger with ~~Delmar Bancorp~~the Company in July ~~2017.~~2017 (the “Liberty Merger”). In accordance with the terms of the Agreement of Merger between ~~Delmar~~the Company and Liberty, the ~~Plan was~~Liberty Plans were assumed by ~~Delmar,~~the Company, and the options were converted into and became an option to purchase an adjusted number of shares of the common stock of ~~Delmar~~the Company at an adjusted exercise price per share. The number of shares was determined by multiplying the number of shares of Liberty common stock for which the option was exercisable by the number of shares of ~~Delmar~~the Company’s common stock into which shares of Liberty common stock were convertible in the Liberty Merger, which was 0.2857 (the ~~“Conversion~~“Liberty Conversion Ratio”), rounded to the next lower whole share. The exercise price was determined by dividing the exercise price per share of Liberty common stock by the Liberty Conversion Ratio, rounded up to the nearest cent. At the effective time of the ~~merger~~Liberty Merger there were 48,225 options outstanding at an exercise price of $1.18. These shares were converted to 13,771 options outstanding at an exercise price of $4.14.

~~Remaining options~~28

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A summary of stock option transactions for ~~8,709 shares were outstanding~~the nine months ended September 30, 2020 is as follows:

Employees

Directors

Average

Average


Shares

Price

Amount

Shares

Price

Amount
September 30, 2019

2,355

$
4.14

$
9,750

6,354

$
4.14

$
26,306

Employees

Directors

Average

Price

Amount

Price

Amount

December 31, 2019

2,355

4.14

9,750

6,354

4.14

26,307

Exercised in 2020

—

4.14

—

(1,028)

4.14

(4,256)

September 30, 2020

2,355

4.14

9,750

5,326

4.14

22,051

Virginia Partners Bank Stock Option Plan

In 2015, Partners adopted the 2015 Stock Option Plan (the “2015 Partners Plan”), which allowed both incentive stock options and nonqualified stock options to be granted. The exercise price of each stock option equaled the market price of Partners' common stock on the date of grant and a stock option’s maximum term was 10 years. Stock options granted in the years ended December 31, 2018 and 2017 vested over 3 years. Partners previous stock compensation plan (the “2008 Partners Plan”) provided for the grant of share based awards in the form of incentive stock options and nonqualified stock options to Partners’ directors, officers and employees. In April 2015 the 2008 Partners Plan was terminated and replaced with the 2015 Partners Plan. Stock options outstanding prior to April 2015 were granted under the 2008 Partners Plan and became subject to the provisions of the 2015 Partners Plan. The 2008 Partners Plan also provided for stock options to be granted to seed investors as a reward for the contribution to organizational funds which were at risk if Partners’ organization had not been successful. Under the 2008 Partners Plan, Partners granted stock options to seed investors in 2008, which were fully vested upon the date of the grant.

As a result of the Company’s acquisition of Partners in November 2019 through an exchange of shares in an all-stock transaction, (the “Partners Share Exchange”), each stock option (the "Partners Options"), whether vested or unvested, issued and outstanding immediately prior to the effective time under the 2008 Partners Plan or the 2015 Partners Plan and together with the 2008 Partners Plan, (the "Partners Stock Plans"), immediately 100% vested, to the extent not already vested, and converted into and became stock options to purchase the Company’s common stock. In addition, the Company assumed each of the Partners Stock Plans, and assumed each Partners Option in accordance with the terms and conditions of the Partners Stock Plan pursuant to which it was issued. As such, Partners Options to acquire 149,200 shares of Partner’s common stock at a weighted average exercise price of $10.52 per share were converted into stock options to acquire 256,294 shares of the Company’s common stock at a weighted average exercise price of $6.13 per share. The number of shares was determined by multiplying the number of shares of Partners common stock for which the option was exercisable by the number of shares of the Company’s common stock into which shares of Partners common stock were convertible in the Partners Share Exchange, which was 1.7179 (the “Partners Conversion Ratio”), rounded to the next lower whole share. The exercise price was determined by dividing the exercise price per share of Partners common stock by the Partners Conversion Ratio, rounded up to the nearest cent.

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A summary of stock option transactions for the nine months ended September 30, 2020 is as follows:


		September 30, 2020
					Weighted
				Weighted	Average
				Average	Remaining
				Exercise	Contractual		Intrinsic
		Shares		Price	Life		Value
Outstanding at beginning of period		247,705	$	6.14	3.81
Granted		—		—	—
Exercised		(16,147)		5.83	—
Forfeited		(8,589)		5.83	—
Outstanding at end of period		222,969	$	6.17	3.34	$	121,207

Options exercisable at September 30, 2020		222,969	$	6.17

Weighted average fair value of options granted during the period	$	—

The intrinsic value represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock options exceeds the exercise price) that would have been received by the holders had they exercised their stock options on September 30, 2020.

As stated in Note 1, the Company follows ASC ~~Topic 718‑10~~718-10 which requires that ~~stock‑based~~stock-based compensation to employees and directors be recognized as compensation cost in the income statement based on their fair values on the measurement date, which, for the Company, is the date of the grant. All stock option expenses had been fully recognized prior to ~~2018. No stock options were exercised or forfeited during the nine months ended September 30,~~ 2019. ~~All remaining stock options expire during the first quarter of 2023.~~

Note 7. Restricted Stock Plan

The ~~Bank~~Company had an employee and director restricted stock plan (the “Company Plan”) and reserved 405,805 shares of stock for issuance thereunder. The Company adopted the Company Plan, pursuant to which employee and directors of the Company could acquire shares of common stock. The Company Plan was adopted by the ~~Company's~~Company’s Board of Directors in April 2014, and was subject to the right of the Board of Directors to terminate the Company Plan at any ~~time,~~time. The Company Plan terminated at its scheduled date on June 30, 2018. The termination of the Company Plan, either at the scheduled termination date or before such date, did not affect any award issued prior to termination.

~~Table of Contents~~

As of September 30, ~~2019 non‑vested~~2020 non-vested restricted stock awards totaling ~~6,000~~3,000 were outstanding as follows:

Employees

Weighted

Average

Shares

Fair Value
Nonvested Awards December 31, 2018

9,000

$
7.30
Vested in 2019

(3,000)

7.30
Nonvested Awards September 30, 2019

6,000

$
7.30


	Employees
		Weighted
		Average
	Shares	Fair Value
Nonvested Awards December 31, 2019	6,000	$	7.30
Vested in 2020	(3,000)		7.30
Nonvested Awards September 30, 2020	3,000	$	7.30

As stated in Note 1, the Company follows ASC ~~Topic 718‑10~~718-10 which requires that restricted ~~stock‑based~~stock-based compensation to employees and directors be recognized as compensation cost in the income statement based on their fair values on the measurement date. The fair value of restricted stock granted is equal to the underlying fair value of the stock. As a result

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of applying the provisions of ASC ~~Topic 718‑10,~~718-10, during ~~the three and nine months ended September 30, 2018 the Company recognized restricted stock‑based compensation expense of $10,000, or $7,000 net of tax, and $26,000, or $19,000~~ ~~net of tax, respectively, related to the 2014 restricted stock awards. During~~ the three and nine months ended September 30, 2019 the Company recognized ~~stock‑based~~restricted stock-based compensation expense of ~~$5,000~~$6 thousand, or ~~$4,000~~$4 thousand net of tax, and ~~$16,000,~~$17 thousand, or ~~$12,000~~$12 thousand net of tax, respectively, related to the 2014 restricted stock ~~awards.~~awards under the Company Plan. Unrecognized restricted ~~stock‑based~~stock-based compensation expense related to 2014 restricted stock awards under the Company Plan totaled approximately $31,000 at September 30, ~~2019.~~2020. The remaining period over which this unrecognized expense is expected to be recognized is approximately ~~two years.~~five months.

Note 8. Earnings Per Share

~~Diluted~~Basic earnings per share ~~are calculated as follows:~~(EPS) is computed by dividing net income or loss by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of shares outstanding during the period, including the effect of all potentially dilutive shares outstanding attributable to stock instruments.

Applicable guidance requires that outstanding, unvested share-based payment awards that contain voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s outstanding restricted common stock.

The following table presents basic and diluted EPS for the three and nine month periods ended September 30, 2020 and 2019:

Quarter Ended September 30,

Nine Months Ended September 30,
(Dollars in thousands, except per share data)

2019

2018

2019

2018
Net income applicable to basic earnings per common share

$
1,785

$
1,888

$
4,935

$
3,948
Weighted average shares outstanding

9,985

9,976

9,985

9,595
Basic earnings per share

$
0.179

$
0.189

$
0.494

$
0.411
Effect of dilutive securities:








Weighted average shares outstanding under options Delmar 2004 stock option plan (1)

—

23

10

28
Weighted average exercise price per share

$
—

$
7.54

$
9.05

$
9.55
Assumed proceeds on exercise

$
—

$
173

$
91

$
267
Average market value per share

$
7.42

$
7.79

$
7.34

$
7.47
Weighted average shares outstanding under options Liberty 2004 stock option plan

12

14

12

12
Weighted average exercise price per share

$
3.98

$
4.01

$
3.98

$
4.02
Assumed proceeds on exercise

$
48

$
56

$
48

$
48
Average market value per share

$
7.42

$
7.79

$
7.34

$
7.47
Less: Treasury stock purchased with assumed proceeds from exercise

$
6

$
7

$
6

$
6
Weighted average shares outstanding under restricted stock plans (2)

9

14

9

10
Diluted weighted average shares and common stock equivalents

10,000

9,997

10,000

9,611
Diluted earnings per share

$
0.179

$
0.189

$
0.494

$
0.411

~~(1)~~

~~Options were excluded from the calculation of dilutive earnings per share because they are anti‑dilutive.~~


	Net Income Applicable
(Dollars in thousands, except per share data)	to Basic Earnings		Weighted Average
For the three months ended September 30, 2020	Per Common Share		Shares Outstanding
Basic EPS	$	1,118		17,810,090	$	0.063
Effect of dilutive stock awards		—		8,102		—
Diluted EPS	$	1,118		17,818,192	$	0.063

For the nine months ended September 30, 2020
Basic EPS	$	4,564		17,808,212	$	0.256
Effect of dilutive stock awards		—		30,159		—
Diluted EPS	$	4,564		17,838,371	$	0.256


For the three months ended September 30, 2019
Basic EPS	$	1,785		9,985,321	$	0.179
Effect of dilutive stock awards		—		14,358		(0.001)
Diluted EPS	$	1,785		9,999,679	$	0.178

For the nine months ended September 30, 2019
Basic EPS	$	4,935		9,985,321	$	0.494
Effect of dilutive stock awards		—		14,290		—
Diluted EPS	$	4,935		9,999,611	$	0.494

~~Table of Contents~~

~~(2)~~

~~Includes vested shares not yet issued and nonvested shares as of September 30.~~

Note 9. Regulatory Capital Requirements

The ~~Company and the Bank~~Company’s subsidiaries are 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~~Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the ~~Company and the Bank~~Company’s subsidiaries must meet specific capital adequacy guidelines that involve quantitative measures of the ~~Bank's~~Company’s

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subsidiaries assets, liabilities, and certain ~~off‑balance‑sheet~~off-balance-sheet items as calculated under regulatory accounting practices. The ~~Bank's~~Company’s subsidiaries’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Federal banking regulations also impose regulatory capital requirements on bank holding companies. Under the small bank holding company policy statement of the Federal Reserve Board, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Company is not subject to regulatory capital requirements.

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of at least 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The Company has elected not to opt into the CBLR framework at this time.

Quantitative measures established by regulation to ensure capital adequacy require the ~~Company and the Bank~~Company’s subsidiaries to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier I1 capital to ~~risk‑weighted~~risk-weighted assets, Tier I1 capital to average assets, and ~~beginning in 2015,~~ common equity Tier I1 capital to ~~risk‑weighted~~risk-weighted assets. Management believes as of September 30, ~~2019~~2020 that the ~~Company and the Bank meet~~Company’s subsidiaries met all capital adequacy requirements to which they are subject.

As of September 30, ~~2019,~~2020, the most recent notification from the ~~FDIC~~Federal Deposit Insurance Corporation (“FDIC”) categorized the ~~Bank~~Company’s subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the ~~Bank~~Company’s subsidiaries must maintain minimum total ~~risk‑based,~~risk-based, Tier ~~I risk‑based,~~1 risk-based, Tier I1 leverage and ~~beginning in 2015,~~ common equity Tier ~~I risk‑based~~1 risk-based ratios. There are no conditions or events since that notification that management believes have changed the ~~Bank's~~Company’s subsidiaries category.

The Common Equity Tier I,1, Tier I1 and Total capital ratios are calculated by dividing the respective capital amounts by ~~risk‑weighted~~risk-weighted assets. ~~Risk‑weighted~~Risk-weighted assets are calculated based on regulatory requirements and include total assets, with certain exclusions, allocated by risk weight category, and certain ~~off‑balance‑sheet~~off-balance-sheet items, among other things. The Tier 1 leverage ratio is calculated by dividing Tier I1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.

~~When fully phased in on January 1, 2019, the~~The Basel III Capital Rules ~~required~~require the ~~Bank and Bancorp~~Company’s subsidiaries to maintain (i) a minimum ratio of Common Equity Tier I1 capital to ~~risk‑weighted~~risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier I1 capital ratio, ~~as that buffer is phased in,~~ effectively resulting in a minimum ratio of Common Equity Tier I1 capital to ~~risk‑weighted~~risk-weighted assets of at least 7.0% ~~upon full implementation)~~), (ii) a minimum ratio of Tier I1 capital to ~~risk‑weighted~~risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier I1 capital ratio, ~~as that buffer is phased in,~~ effectively resulting in a minimum Tier I1 capital ratio of 8.5% ~~upon full implementation)~~), (iii) a minimum ratio of Total capital (that is, Tier I1 capital plus Tier 2)2 capital) to ~~risk‑weighted~~risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% ~~total~~Total capital ratio, ~~as that buffer is phased in,~~ effectively resulting in a minimum ~~total~~Total capital ratio of 10.5% ~~upon full implementation)~~) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier I1 capital to average quarterly assets.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and bewas phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the ~~Bank~~Subsidiaries or ~~Bancorp.~~the Company. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required ~~risk‑weighted~~risk-weighted capital ratios. Banking institutions with a ratio of Common Equity Tier I 1

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capital to ~~risk‑weighted~~risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

~~Table of Contents~~

The following table presents actual and required capital ratios as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 for the ~~Bank and Company~~Company’s subsidiaries under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 based on the ~~phase‑in~~fully phased-in provisions of the Basel III Capital ~~Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased‑in.~~Rules. Capital levels required to be considered well capitalized are based ~~upon~~on prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A comparison of the ~~Company's and the Bank's~~Company’s subsidiaries’ capital amounts and ratios as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 with the minimum requirements are presented below.


									To Be
									Well Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action

																					To Be
																					Well Capitalized
																	For Capital				Under Prompt
																	Adequacy				Corrective Action
In Thousands	Actual				Purposes				Provisions				Actual				Purposes				Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019
													Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2020
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	78,392	12.6	%	$	65,525	10.5	%	$	—	N/A
The Bank of Delmarva		77,192	12.4	%		65,469	10.5	%		62,351	10.0	%		81,828	12.8	%		67,195	10.5	%		63,995	10.0	%
Virginia Partners Bank														51,045	13.0	%		41,085	10.5	%		39,129	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		53,044	8.5	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		52,999	8.5	%		49,881	8.0	%		73,802	11.5	%		54,396	8.5	%		51,196	8.0	%
Virginia Partners Bank														49,599	12.7	%		33,259	8.5	%		31,303	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		43,683	7.0	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		43,646	7.0	%		40,528	6.5	%		73,802	11.5	%		44,796	7.0	%		41,597	6.5	%
Virginia Partners Bank														49,599	12.7	%		27,390	7.0	%		25,434	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		64,573	8.3	%		31,052	4.0	%		—	N/A
The Bank of Delmarva		69,873	9.0	%		31,052	4.0	%		38,814	5.0	%		73,802	8.0	%		37,081	4.0	%		46,352	5.0	%
As of December 31, 2018
Virginia Partners Bank														49,599	9.5	%		20,797	4.0	%		25,997	5.0	%

As of December 31, 2019
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	72,344	11.8	%	$	60,466	9.9	%	$	—	N/A
The Bank of Delmarva		71,498	11.7	%		60,425	9.9	%		61,190	10.0	%		79,080	12.7	%		65,132	10.5	%		62,030	10.0	%
Virginia Partners Bank														47,122	12.5	%		39,676	10.5	%		37,787	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		58,516	9.6	%		48,220	7.9	%		—	N/A
The Bank of Delmarva		64,170	10.5	%		48,187	7.9	%		48,952	8.0	%		71,752	11.6	%		52,726	8.5	%		49,624	8.0	%
Virginia Partners Bank														46,881	12.4	%		32,119	8.5	%		30,230	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		58,516	9.6	%		39,035	6.4	%		—	N/A
The Bank of Delmarva		64,170	10.5	%		39,009	6.4	%		39,774	6.5	%		71,752	11.6	%		43,421	7.0	%		40,320	6.5	%
Virginia Partners Bank														46,881	12.4	%		26,451	7.0	%		24,562	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		58,516	8.0	%		29,377	4.0	%		—	N/A
The Bank of Delmarva		64,170	8.7	%		29,377	4.0	%		36,721	5.0	%		71,752	9.1	%		31,520	4.0	%		39,399	5.0	%
Virginia Partners Bank														46,881	10.4	%		18,093	4.0	%		22,616	5.0	%

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Banking regulations also limit the amount of dividends that may be paid without prior approval of the ~~Bank's~~Company’s regulatory agencies. Regulatory approval is required to pay dividends, which exceed the ~~Bank's~~Company’s net profits for the current year plus its retained net profits for the preceding two years.

~~Table of Contents~~

Note 10. Fair Values of Financial Instruments

~~The following table shows the estimated~~FASB ASC 825, Financial Instruments, requires disclosure about fair value ~~and the related carrying values~~ of ~~the Company's~~ financial instruments, ~~at September 30, 2019~~including those financial assets and ~~December 31, 2018. Items~~financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments ~~are~~and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not ~~included.~~

September 30,

December 31,
Dollars are in thousands

2019

2018

Estimated

Estimated

Carrying

Fair

Carrying

Fair


Amount

Value

Amount

Value
Financial assets:


Cash and due from banks

$
31,483

$
31,483

$
24,347

$
24,347
Interest bearing deposits

29,143

29,143

4,093

4,093
Federal funds sold

15,458

15,458

1,254

1,254
Securities:







Available for sale

55,854

55,854

51,300

51,300
Loans, net of allowance for credit losses

626,607

612,003

625,513

604,290
Accrued interest receivable

2,098

2,098

2,103

2,103
Federal Home Loan Bank stock

2,761

2,761

2,652

2,652
Atlantic Central Bankers stock

131

131

131

131
Other investments

1,571

1,571

1,537

1,537
Financial liabilities:








Deposits

$
660,401

$
629,813

$
614,926

$
570,509
Accrued interest payable

567

567

392

392
FHLB advances and note payable

55,495

56,065

56,989

56,979
Unrecognized financial instruments:








Commitments to extend credit

$
104,101

$
104,101

$
114,395

$
114,395
Standby letters of credit

1,853

1,853

3,276

3,276

~~For purposes~~necessarily represent the underlying fair value of the ~~above disclosures~~Company. Additionally, in accordance with ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of ~~estimated~~financial instruments not measured at fair value ~~the following assumptions were used.~~on a recurring basis.

~~Cash and cash equivalents:~~

The estimated fair ~~value for cash~~values, and ~~due from banks, interest‑bearing deposits in other banks, and Federal funds purchased is considered to approximate cost because~~related carrying amounts, of ~~their short‑term nature.~~the Company’s financial instruments are as follows:

~~Investment securities:~~

Dollars are in thousands

Fair Value Measurements at September 30, 2020

Quoted Prices in

Significant

Carrying

Active Markets for

Other

Unobservable

Amount

Identical Assets

Observable Inputs

Inputs

September 30, 2020

(Level 1)

(Level 2)

(Level 3)

Balance

Financial assets:

Cash and due from banks

220,612

—

220,612

Interest bearing deposits

34,334

—

34,334

Federal funds sold

34,345

—

34,345

Securities:

Available for sale

128,011

—

128,011

—

128,011

Loans held for sale

7,765

—

7,765

—

7,765

Loans, net of allowance for credit losses

1,043,143

—

1,041,511

Accrued interest receivable

6,254

—

6,254

—

6,254

Restricted stock

4,421

—

4,421

—

4,421

Other investments

6,734

—

6,734

—

6,734

Bank owned life insurance

14,747

—

14,747

—

14,747

Other real estate owned

2,796

—

2,796

Financial liabilities:

Deposits

1,234,926

—

1,243,447

—

1,243,447

Accrued interest payable

448

—

448

—

448

FHLB advances

74,336

—

76,025

—

76,025

Subordinated notes payable

24,089

—

36,461

—

36,461

Other borrowings

65,475

—

65,475

Estimated fair values are based on quoted market prices for actual or similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the audit risk, overhead costs, and optionality of such investments.

~~Loans:~~

The estimated fair value for certain homogeneous categories of loans, such as residential mortgages, is based on the quoted market price for securities backed by similar loans, adjusted for differences in loan characteristics. The estimated fair value of other loans is determined by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

~~Deposits:~~

The estimated fair value of deposits with no stated maturity, such as noninterest‑bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the rates currently offered for deposits of similar maturities and using a discounted cash flow analysis. The fair value estimates do not include the

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Dollars are in thousands			Fair Value Measurements at December 31, 2019
			Quoted Prices in		Significant		Significant
	Carrying		Active Markets for		Other		Unobservable
	Amount		Identical Assets		Observable Inputs		Inputs
	December 31, 2019		(Level 1)		(Level 2)		(Level 3)		Balance
Financial assets:
Cash and due from banks	$	36,295	$	36,295	$	—	$	—	$	36,295
Interest bearing deposits		27,586		27,586		—		—		27,586
Federal funds sold		31,230		31,230		—		—		31,230
Securities:
Available for sale		104,321		—		104,321		—		104,321
Loans held for sale		3,555		—		3,555		—		3,555
Loans, net of allowance for credit losses		986,684		—		—		976,636		976,636
Accrued interest receivable		3,138		—		3,138		—		3,138
Restricted stock		5,311		—		5,311		—		5,311
Other investments		4,773		—		4,773		—		4,773
Bank owned life insurance		7,817		—		7,817		—		7,817
Other real estate owned		2,417		—		—		2,417		2,417
Financial liabilities:
Deposits	$	1,006,781	$	—	$	1,008,842	$	—	$	1,008,842
Accrued interest payable		572		—		572		—		572
FHLB advances		96,830		—		97,248		—		97,248
Subordinated notes payable		6,435		—		9,006		—		9,006
Other borrowings		1,249		—		—		1,249		1,249

~~benefit~~

The Company assumes interest rate risk (the risk that ~~results from~~general interest rate levels will change) as a result of its normal operations. As a result, the ~~low‑cost funding provided by~~fair values of the ~~deposit liabilities compared~~Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the ~~cost~~Company. Management attempts to match maturities of ~~borrowing funds in the market.~~

~~Borrowings:~~

~~The fair value of long‑term fixed rate borrowings is estimated by discounting future cash flows using current interest rates currently offered for similar financial instruments.~~

~~Unrecognized financial instruments:~~

The fair value of unrecognized financial instruments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers.

~~Other assets and liabilities:~~

~~Other~~ assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to repay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Bank that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, non‑financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill, and similar items.Bank's overall interest rate risk.

The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments not disclosed elsewhere as of September 30, 2019 and December 31, 2018. This table excludes financial instruments for which the carrying amount approximates fair value.

Dollars are in thousands

Fair Value Hierarchy

Carrying

Fair


Amount

Value

Level 1

Level 2

Level 3
September 30, 2019

Financial assets:










Loans, net

$
626,607

$
612,003

$
—

$
—

$
612,003
Financial liabilities:










Deposits

$
660,401

$
629,813

$
—

$
629,813

$
—
FHLB advances and notes payable

55,495

56,065

—

56,065

—

December 31, 2018

Financial assets:










Loans, net

$
625,513

$
604,290

$
—

$
—

$
604,290
Financial liabilities:








Deposits

$
614,926

$
570,509

$
—

$
570,509

$
—
FHLB advances and notes payable

56,989

56,979

—

56,979

—

Note 11. Fair Value Measurements

~~Effective January 1, 2008, the~~The Company ~~adopted~~ follows ASC ~~820‑10~~820-10 Fair Value Measurements and Disclosures (“ASC 820-10”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. 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 investments securities) or on 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

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requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair ~~value~~value.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 ~~— Quoted~~ - Valuation is based on quoted prices in active markets for identical assets ~~or liabilities~~and liabilities.

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Level 2 ~~— Other significant~~ - Valuation is based on observable inputs ~~(including~~including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or ~~liabilities)~~

~~Level 3 — Significant unobservable inputs (including the Bank's own assumptions in determining the fair value of assets or liabilities)~~

~~In determining the appropriate levels, the Bank performs a detailed analysis of~~similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 - Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are ~~subject to ASC Topic 820.~~unobservable in the market.

The following ~~table presents~~describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value ~~measurements~~ on a recurring basis ~~as of September 30, 2019 and December 31, 2018:~~in the financial statements:

Fair
Dollars are in thousands

Level 1

Level 2

Level 3

Value
September 30, 2019

Securities available for sale:








Obligations of U.S. Government agencies

$
—

$
8,363

$
—

$
8,363
Obligations of States and political subdivisions

—

25,332

—

25,332
Mortgage-backed securities

—

20,707

—

20,707
Equity securities

—

1,452

—

1,452
Total securities available for sale

$
—

$
55,854

$
—

$
55,854
December 31, 2018

Securities available for sale:

Obligations of U.S. Government agencies

$
—

$
9,420

$
—

$
9,420
Obligations of States and political subdivisions

—

21,096

—

21,096
Mortgage-backed securities

—

19,404

—

19,404
Equity securities

—

1,380

—

1,380
Total securities available for sale

$
—

$
51,300

$
—

$
51,300

Investment Securities Available for Sale:

~~Securities~~Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based onupon quoted market prices, ~~where available.~~when available (Level 1). If quoted market prices are not available, fair values are ~~based on quoted~~measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of ~~comparable instruments, which~~identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s investment securities available for sale are considered ~~level~~to be Level 2 ~~inputs. For these securities, management obtains fair value measurements from an independent pricing service.~~securities.

The ~~Bank may also be required, from time to time, to measure certain other~~following tables present the balances of financial ~~and non‑financial~~ assets and liabilities at fair value on a non‑recurring basis in accordance with GAAP. The following table presents all fair value measurements on a non‑recurring basis as of September 30, 2019 and December 31, 2018:

Dollars are in thousands

Fair
September 30, 2019

Level 1

Level 2

Level 3

Value
Impaired loans

$
—

$
—

$
21,218

$
21,218
OREO

—

3,641

—

3,641
Total

$
—

$
3,641

$
21,218

$
24,859
December 31, 2018

Impaired loans

$
—

$
—

$
26,640

$
26,640
OREO

—

3,660

—

3,660
Total

$
—

$
3,660

$
26,640

$
30,300

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~~Measured on a Non‑Recurring Basis:~~

~~Financial Assets and Liabilities~~

The Bank is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. Loans which are deemed to be impaired financial assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Bank determines such fair values from independent appraisals, which management considers level 3 inputs.

~~Non Financial Assets and Non Financial Liabilities~~

~~The Company has no non‑financial assets and non‑financial liabilities~~ measured at fair value on a recurring ~~basis.~~ basis as of September 30, 2020 and December 31, 2019:


							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
September 30, 2020
Securities available for sale:
Obligations of U.S. Government agencies and corporations	$	—	$	5,918	$	—	$	5,918
Obligations of States and political subdivisions		—		38,487		—		38,487
Mortgage-backed securities		—		80,046		—		80,046
Subordinated debt investments		—		3,560		—		3,560
Total securities available for sale	$	—	$	128,011	$	—	$	128,011
December 31, 2019
Securities available for sale:
Obligations of U.S. Government agencies and corporations	$	—	$	10,312	$	—	$	10,312
Obligations of States and political subdivisions		—		34,558		—		34,558
Mortgage-backed securities		—		56,421		—		56,421
Subordinated debt investments		—		3,030		—		3,030
Total securities available for sale	$	—	$	104,321	$	—	$	104,321

Certain ~~non‑~~financial assets ~~and non‑financial liabilities typically~~are measured at fair value on a ~~non‑recurring~~nonrecurring basis ~~include foreclosed assets (upon initial recognition or subsequent impairment), non‑~~in accordance with U.S. GAAP. Adjustments to the fair value of these financial assets usually result from the application of lower of cost or market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Loans Held for Sale:

Loans held for sale are loans originated by JMC for sale in the secondary market. Loans originated for sale by JMC are recorded at lower of cost or market. No market adjustments were required at September 30, 2020; therefore,

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loans held for sale were carried at cost. Because of the short-term nature, the book value of these loans approximates fair value at September 30, 2020.

Impaired Loans:

Loans are designated as impaired when, in the judgment of management based on current information and ~~non‑~~events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial ~~liabilities~~statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as a ~~goodwill impairment test,~~provision for loan losses on the consolidated statement of income.

Other Real Estate Owned:

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and ~~intangible assets and~~included in other ~~non‑~~noninterest expense on the consolidated statement of income.

The following table presents the balances of financial ~~long‑lived~~ assets measured at fair value on a non-recurring basis as of September 30, 2020 and December 31, 2019.


							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
September 30, 2020
Impaired loans	$	—	$	—	$	3,012	$	3,012
OREO		—		—		2,796		2,796
Total	$	—	$	—	$	5,808	$	5,808
December 31, 2019
Impaired loans	$	—	$	—	$	3,885	$	3,885
OREO		—		—		2,417		2,417
Total	$	—	$	—	$	6,302	$	6,302

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The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for ~~impairment assessment.~~which Partners has utilized Level 3 inputs to determine fair value as of September 30, 2020:

~~Foreclosed real estate were adjusted~~

Dollars are in thousands

Valuation

Unobservable

Range of

Fair Value

Technique

Inputs

Impaired loans

3,012

Appraisals

Discount to reflect current market conditions and estimated selling costs

OREO

2,796

Appraisals

Discount to reflect current market conditions and estimated selling costs

Total

5,808

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which Partners has utilitzed Level 3 inputs to ~~their~~determine fair values, resulting in an impairment charge, which was included in earnings for the period. Foreclosed real estate, which are considered to be non‑financial assets, have been valued using a market approach at the time they are recorded in OREO. The values were determined using current market pricesvalue as of ~~similar real estate assets, which the Bank considers to be level 2 inputs.~~December 31, 2019:

Dollars are in thousands

Valuation

Unobservable

Range of

Fair Value

Technique

Inputs

Impaired loans

3,885

Appraisals

Discount to reflect current market conditions and estimated selling costs

OREO

2,417

Appraisals

Discount to reflect current market conditions and estimated selling costs

Total

6,302

Note 12. Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with ASC ~~Topic 350, “Intangibles — Goodwill and Other.”~~805. The Company records the excess of cost acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amount of the intangible assets may be impaired. The Company does not amortize goodwill or any acquired intangible assets with an indefinite useful economic life, but reviews them for impairment on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, ~~2018.~~2019. The Company is currently in the process of evaluating goodwill impairment for the current year ended December 31, 2020.

Goodwill: The Company acquired goodwill in the purchase of ~~Liberty Bell Bank~~Partners (see Note ~~13)~~13 – Virginia Partners Bank Transaction for further information). The following table provides changes in goodwill for the ~~the~~ nine months ended September 30, ~~2019~~2020 and the year ended December 31, ~~2018:~~2019:


	September 30,		December 31,

					September 30,		December 31,
Dollars in Thousands	2019		2018		2020		2019
Balance at the beginning of the period	$	5,237	$	—	$	9,391	$	5,237
Liberty Bell Bank acquisition		—		5,237
Partners acquisition						—		4,154
Impairment		—		—		—		—
Balance at the end of the period	$	5,237	$	5,237	$	9,391	$	9,391

Core Deposit Intangible: The Company acquired acore deposit intangibles in the Liberty merger and the Partners Share Exchange. For the core deposit intangible inrelated to Liberty, the ~~acquisition of Liberty Bell Bank. The~~ Company utilizes the double declining balance method of amortization, in which the straight line amortization rate is doubled and applied to the remaining

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unamortized portion of the intangible asset. The amortization method changes to the straight line method of amortization when the straight line amortization amount exceeds the amount that would be calculated under the double declining balance method. ~~The~~This core deposit intangible is being amortized

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over seven years. For the core deposit intangible related to Partners, the Company utilizes the sum of months method and an estimated average life of 120 months. The following table provides changes ~~in the core deposit intangible~~ for ~~the~~ the nine months ended September 30, ~~2019,~~2020, and the year ended December 31, ~~2018:~~2019:


	September 30,		December 31,

					September 30,		December 31,
Dollars in Thousands	2019		2018		2020		2019
Balance at the beginning of the period	$	1,069	$	—	$	3,373	$	1,069
Liberty Bell Bank acquisition		—		1,489
Accumulated amortization		(226)		(420)
Partners acquisition						—		2,650
Amortization						(540)		(346)
Balance at the end of the period	$	843	$	1,069	$	2,833	$	3,373

The ~~Company recorded~~following table provides the amortization expense ~~related to~~for the core deposit intangible ~~of $76,000~~ and $126,000 during the three months ended September 30, 2019 and 2018, respectively, and $226,000 and $294,000 during the nine months ended September 30, 2019 and 2018, respectively. Remaining amortization on the core deposit intangible is $76,000 through December 31, 2019 and $216,000, $155,000, $128,000, $128,000, and $140,000 forover the years ~~ended December 31, 2020, 2021, 2022, 2023, and 2024 and thereafter, respectively.~~indicated below:


	September 30,
Dollars in Thousands	2020
2020	$	173
2021		600
2022		520
2023		467
2024 and thereafter		1,073
	$	2,833

Net Deposits Purchased ~~Premium:~~Premium and Discount: The Company paid a deposit premium in the ~~acquisition of~~ Liberty ~~Bell Bank,~~Merger and received a deposit discount in the Partners Share Exchange, which isare included in the balances of time deposits on the balance sheets. The premium amount is amortized as a reduction in interest expense over the life of the acquired time deposits and the discount is accreted as an increase in interest expense over the life of the acquired time deposits. The premium and discount on deposits will both be amortized and accreted over approximately five years.

The following table provides changes in the net deposit ~~premium~~discount for the nine months ended September 30, ~~2019~~2020 and the year ended December 31, ~~2018:~~2019:


	September 30,		December 31,

					September 30,		December 31,
Dollars in Thousands	2019		2018		2020		2019
Balance at the beginning of the period	$	27	$	—	$	(31)	$	27
Liberty Bell Bank acquisition		—		108
Accumulated accretion		(19)		(81)
Partners acquisition						—		(38)
Amortization, net						3		(20)
Balance at the end of the period	$	8	$	27	$	(28)	$	(31)

The ~~Company recorded~~following table provides the accretion for the net deposit discount over the years indicated below:


	September 30,
Dollars in Thousands	2020
2020	$	5
2021		14
2022		6
2023		2
2024 and thereafter		1
	$	28

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The net effect of the amortization of premiums and accretion of discounts associated with the Bank’s acquisition accounting adjustments to assets acquired and liabilities assumed had the following impact on the ~~deposit premium~~consolidated statement of ~~$6,000 and $27,000 during~~income for the three months ended September 30, 2019 and 2018, respectively, and $19,000 and $63,000 during the nine months ended September 30, 2019 and 2018, respectively. Remaining accretion on the deposits purchased premium is $4,000 through December 31, 2019 and $4,000 thereafter.periods indicated below:


	September 30,		September 30,
	2020		2019
Nine Months Ended	Dollars in Thousands
Adjustments to net income
Loans (1)	$	1,391	$	335
Time deposits (2)		(3)		19
Core deposit intangible (3)		(540)		(227)
Note Payable (4)		(5)		—
Net impact to income before taxes	$	843	$	127


	September 30,		September 30,
	2020		2019
Three Months Ended	Dollars in Thousands
Adjustments to net income
Loans (1)	$	307	$	104
Time deposits (2)		(2)		6
Core deposit intangible (3)		(177)		(76)
Note Payable (4)		(1)		—
Net impact to income before taxes	$	127	$	34

(1)	Loan discount accretion is included in the "Loans, including fees" section of "Interest Income" in the Consolidated Statement of Income.

(2)	Time deposit discount accretion is included in the "Deposits" section of "Interest Expense" in the Consolidated Statement of Income.

(3)	Core deposit intangible premium amortization is included in the "Other Expense" section of "Non-interest Expense" in the Consolidated Statement of Income.

(4)	Note payable discount accretion is included in the "Borrowings" section of "Interest Expense" in the Consolidated Statement of Income.

Note 13. ~~Liberty Bell~~Virginia Partners Bank Transaction

On ~~March 1, 2018,~~November 15, 2019, the Company completed its ~~acquisition of Liberty Bell Bank (“LBB”),~~share exchange with Partners, a ~~New Jersey~~Virginia chartered commercial bank. ~~LBB shareholders~~Partners stockholders received ~~0.2857~~1.7179 shares of the ~~Company's~~Company’s common stock for each share of ~~LBB~~Partners common stock they owned as of the effective date of the ~~acquisition, cash consideration of $1.70 per~~ share ~~or a combination thereof.~~exchange. The aggregate consideration paid to ~~LBB shareholders~~Partners stockholders was ~~$17.3~~ $52.3 million. Additionally, $350 thousand was included as consideration for replacement stock option awards per the share exchange agreement and $2 thousand in cash in lieu of fractional shares. The results of ~~LBB's~~Partners' operations are included in the ~~Company's~~Company’s consolidated statements of income for the ~~year~~nine months ended ~~December 31, 2018~~September 30, 2020 and for the period beginning ~~March 1, 2018,~~after November 15, 2019, the date of the ~~acquisition.~~effectiveness of the share exchange.

~~The acquisition of LBB added market share in Burlington and Camden Counties in Southern New Jersey.~~

The acquisition resulted in three new branches, an operations center and administrative headquarters in ~~Evesham, Cherry Hill,~~Fredericksburg, Virginia, along with an additional branch office in La Plata, Maryland and ~~Moorestown, New Jersey.~~a loan production office in Annapolis, Maryland.

The acquisition of ~~LBB~~Partners was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess consideration paid over the fair value of net assets acquired has been reported as goodwill in the ~~Company's~~Company’s consolidated ~~statements of financial condition~~balance sheet as of September 30, 2020 and December 31, ~~2018.~~2019.

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The assets acquired and liabilities assumed in the acquisition of ~~LBB~~Partners were recorded at their estimated fair values based on management's best estimates using information available at the date of the acquisition and are subject to

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adjustment for up to one year after the closing date of the acquisition. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:


	Estimated Fair
	Value as of

			Estimated Fair
			Value as of
Dollars in Thousands	March 1, 2018		November 15, 2019
Consideration paid:
Cash	$	4,471	$	2
Common stock issued in acquisition		12,798		52,282
Stock options issued in acquisition (replacement awards)				350
Total consideration paid		17,270	$	52,634
Assets acquired:
Cash and cash equivalents		11,831		6,743
Investment securities		7,605		65,373
Investments in correspondent bank stock		180		3,670
Loans		121,674		357,127
Premises and equipment		2,148		3,627
Other real estate owned		946
Accrued interest receivable		358		1,155
Core deposit intangible		1,489		2,650
Deferred tax asset		4,263		1,239
Other assets		1,039		12,584
Total assets acquired	$	151,532	$	454,168
Liabilities assumed:
Deposits	$	138,241	$	348,552
Other liabilities		1,259		56,408
Total liabilities assumed	$	139,500	$	404,960
Net assets acquired	$	12,032	$	49,208
Noncontrolling interest in consolidated subsidiaries			$	728
Goodwill recorded in acquisition		5,237	$	4,154

Acquired loans (impaired and ~~non‑impaired)~~nonimpaired) are initially recorded at their ~~acquisition‑~~acquisition date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected ~~life‑~~life time losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Company has prepared three separate loan fair value adjustments that it believes a market participant might employ in estimating the entire fair value adjustment necessary under ASC ~~820‑10~~820-10 for the acquired loan portfolio. The three separate fair valuation methodologies employed are: (i) an interest rate loan fair value adjustment, (ii) a general credit fair value adjustment, and (iii) a specific credit fair value adjustment for ~~purchased credit impaired~~PCI loans subject to ASC ~~310‑30~~310-30 provisions. The acquired loans were recorded at fair value at the acquisition date without carryover of ~~LBB's~~Partners’ previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a principal balance, prior to fair value adjustments, of ~~$124.5~~$362.9 million.

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The table below illustrates the fair value adjustments made to the amortized cost basis to present a fair value of the loans acquired:



Dollars in Thousands	At March 1, 2018		At November 15, 2019
Gross principal balance	$	124,545	$	362,916
Fair value adjustment on pools of non-credit impaired loans		(1,703)		(4,990)
Fair value adjustment on purchased credit impaired loans		(1,168)
Fair value adjustment on PCI loans				(799)
Fair value of acquired loans	$	121,674	$	357,127

The credit adjustment on acquired impaired loans is derived in accordance with ASC ~~310‑30~~310-30 and represents the portion of the loan balances that have been deemed uncollectible based on the ~~Company's~~Company’s expectations of future cash flows for each respective loan:



Dollars in Thousands	At March 1, 2018		At November 15, 2019
Contractually required principal and interest at acquisition	$	2,469	$	6,713
Contractual cashflows not expected to be collected (non-accretable discount)		(922)		(1,371)
Expected cash flows at acquisition		1,547		5,342
Interest component of expected cash flows		(246)		(673)
Fair value for loans acquired under ASC 310-30	$	1,301	$	4,669

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Mortgage Banking Income

~~On December 13, 2018~~Mortgage banking income, which is included is noninterest income, consists of fees for loans originated by the Company ~~entered into~~through an application process that are sent to a ~~share~~mortgage broker. The loan application and underwriting processes are completed by other various financial institutions. The Company receives a pre-negotiated fee at settlement for initiating the loan origination. The Company receives the fee and recognizes the income when the loan goes to settlement.

Other Noninterest Income

Other noninterest income consists of: fees, exchange, ~~agreement with Virginia Partners Bank (“Partners”). Partners~~other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a ~~commercial bank chartered by~~Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the ~~Commonwealth of Virginia Bureau of Financial Institutions and insured by~~services are rendered or upon completion. Payment is typically received immediately or in the Federal Deposit Insurance Corporation. Partners is headquartered in Fredericksburg, Virginia, which is the location of the operations center and administrative headquarters and three branch offices. An additional branch office is located in La Plata, Maryland, and a loan production office is located in Annapolis, Maryland. Each share of Partners common stock will be converted into the right to receive 1.7179 shares of Delmar Bancorp common stock. From and after the effective time of the share exchange, former holders of Partners Common Stock shall be shareholders of Delmar, and shall have no rights or interest as a shareholder of Partners. As of September 30, 2019, there were 4,085,181 shares of Partners common stock outstanding which were held by approximately 320 holders of record. Partners will continue to conduct its business as a wholly owned first tier subsidiary of Delmar, under the name “Virginia Partners Bank”. The share exchange is anticipated to become effective during the fourth quarter of 2019.

~~Direct costs related~~following month. Safe deposit box rental fees are charged to the ~~share exchange were accrued~~customer on an annual basis and expensed as incurred. During the three and nine months ended September 30, 2019, the Company incurred $168,000 and $539,000, respectively, in Partners share exchange related expenses. There were no expenses related to the share exchange during ~~the nine months ended September 30, 2018~~.recognized upon receipt of payment.

Note 15. Recent Accounting Pronouncements

Information about certain recently issued accounting standards updates is presented below.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the ASC. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts, including leases and insurance contracts, are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods

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or services. The amendments also require expanded disclosures concerning the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date by one year from the date in the original guidance. In March 2016, the FASB issued ASU No. 2016-08 to clarify the implementation guidance on principal versus agent considerations. The guidance is effective for fiscal years and interim periods beginning after December 15, 2016. The Company’s adoption of this item did not have a material impact on its results of operations or financial condition.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10)”: Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities. ASU 2016-01 becomes effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company’s adoption of this item did not have a material impact on its results of operations or financial condition. The disclosures to the Company’s consolidated financial statements have been updated appropriately using the exit price notion in “Note 10 – Fair Value of Financial Instruments”.

On February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 will, among other things, require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. The Company recorded a right of use asset and lease liability on the adoption date of January 1, 2019 (see Note 5).

In March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815)”: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. ASU No. 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU No. 2016-05 was effective for us on January 1, 2017 and did not have a material impact on our results of operations or financial condition.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718)”: Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU No. 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to

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vest (current GAAP) or account for forfeitures when they occur. ASU No. 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU No. 2016-09 was effective on January 1, 2017 and did not have a material impact on our results of operations or financial condition.

~~During~~ June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments -– Credit Losses (Topic 326)”: Measurement of Credit Losses on Financial ~~Instruments.~~Instruments (“ASU 2016-13”).” The amendments in ASU 2016-13, ~~requires~~among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable ~~forecasts~~forecasts. Financial institutions and ~~requires enhanced disclosures related~~other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the ~~significant estimates and judgments used in estimating~~loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit ~~losses, as well as the credit quality and underwriting standards of an organization’s portfolio.~~losses. In addition, ASU 2016-13 amends the accounting for credit losses on ~~available for sale~~available-for-sale debt securities and purchased financial assets with credit deterioration. ~~In April 2019,~~The FASB has issued multiple updates to ASU ~~2019-04, “Codification Improvements to~~2016-13 as codified in Topic 326, ~~Financial Instruments – Credit Losses, Topic 815, Derivatives~~including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and ~~Hedging,~~2020-03. These ASU’s have provided for various minor technical corrections and ~~Topic 825, Financial Instruments,” was issued~~improvements to ~~address certain~~the codification ~~improvements and to provide certain accounting policy electives related to accrued interest~~ as well as ~~disclosure related to credit losses, among~~ other ~~things. In May 2019, ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” was issued to provide~~ transition ~~relief in connection~~matters. Smaller reporting companies who file with the adoption of ASU 2016-03 whereby entities would have the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. ASU 2016-13, as updated, will be effective for U.S. Securities and Exchange Commission ~~(SEC) filers~~(the “SEC”) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those ~~fiscal~~ years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. In October 2019, the FASB approved the deferral of the effective date of ASU 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. This will delay the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company, this deferral would be applicable to the Company. 2022. The Company is currently evaluating the potential impact of ASU 2016-13 on our consolidated financial statements. We are currently working through our implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and systems configuration, among other things. We are also in the process of implementing a third-party vendor solution to assist us in the application of ~~the~~ ASU 2016-13.

The adoption of ~~the~~ ASU 2016-13 could result in an increase in the allowance for ~~loan~~credit losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230)”: Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU were issued to reduce diversity in how certain cash receipts and payments are presented and classified in the statement of cash flows in eight specific areas. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows. ASU No. 2016-15 was effective on January 1, 2018 and did not have a material impact on our results of operations or financial condition.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230)” - Restricted Cash: a Consensus of the FASB Emerging Issues Task Force. This ASU requires a company’s cash flow statement to explain the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents. Additionally, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the total cash balances for a reporting period.

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Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (“SAB”) No. 119 (“SAB 119”). SAB 119 updated portions of SEC interpretative guidance to align with ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In December 2019, the FASB issued ASU ~~No. 2016-18 was~~2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”).” ASU 2019-12 is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. ASU 2019-12 is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

In January ~~1, 2018~~2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and ~~did~~Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (“ASU 2020-01”).” ASU 2020-01 is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2020-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in ASU 2020-01 are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Management does not expect the adoption of ASU 2020-01 to have a material impact on ~~our results~~its consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of ~~operations~~the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”).” ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial ~~condition.~~instruments, and is currently evaluating the effect that ASU 2020-04 will have on the Company’s consolidated financial statements.

On March 12, 2020, the SEC finalized amendments to the definitions of its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date.Prior to these changes, the Company had not been required to comply with section 404(b) of the Sarbanes Oxley Act of 2002 concerning auditor attestation over internal control over financial reporting (“ICFR”) as an “accelerated filer” as it had less than $75 million in public float. The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues. The Company will continue to be a smaller reporting company under the expanded definition. The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of ICFR and include the opinion on ICFR in its annual report on Form 10-K. Smaller reporting companies also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for smaller reporting companies. This change does not affect the Company’s annual reporting and audit requirements.

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In August 2020,the FASB issued ASU No. 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.(ASU 2020-06)” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. Management does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs (ASU 2020-08).” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. Management does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU ~~No. 2017-01, “Business Combinations~~2017-04, “Intangibles - Goodwill and Other (Topic ~~805)”: Clarifying~~350) - Simplifying the ~~Definition of~~Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a Business. ASU No. 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU No. 2017-01 is intended to provide guidance when evaluating whether transactions shouldreporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 was effective for us on January 1, 2018 and did not have a significant impact on our consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables - Nonrefundable Fees and other Costs (Subtopic 320-20)”: Premium Amortization on Purchased Callable Debt Securities. This standard shortens the amortization period for the premiumlimited to the ~~earliest call date~~amount of goodwill allocated to ~~more closely align interest income recorded on bonds held at~~that reporting unit. ASU 2017-04 eliminates the prior requirement to calculate a ~~premium or a discount~~goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with ~~the economics of the underlying instrument. Adoption of~~its carrying amount. ASU ~~2017-08 is required for fiscal years and interim periods within those fiscal years, beginning after December, 15, 2018, early adoption is permitted. ASU 2017-08~~2017-04 was effective for the Company on January 1, ~~2019 and~~2020. The guidance did not have a significant impact on ~~our~~the Company’s financial ~~statements.~~position, results of operations, or disclosures.

In August ~~2017,~~2018, the FASB issued ASU ~~No. 2017-12, “Derivatives~~2018-13, “Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and ~~Hedging (Topic 815)”: Targeted Improvements~~weighted average of significant unobservable inputs used to ~~Accounting for Hedging Activities. This standard better aligns~~develop those fair value measurements. For certain unobservable inputs, an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentationentity may disclose other quantitative information in lieu of the ~~effects~~weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of ~~the hedge instruments and the hedged item~~unobservable inputs used to develop Level 3 fair value measurements. Certain disclosure requirements in ~~the financial statements. Adoption for this~~Topic 820 were also removed or modified. ASU ~~is required for fiscal years and interim periods beginning after December 15, 2018 and early adoption is permitted. ASU 2017-12~~2018-13 was effective for the Company on January 1, ~~2019 and did not have a significant impact on our financial statements. In April 2019,~~2020. The adoption of ASU ~~2019-04 was issued to clarify certain aspects of accounting for hedging activities addressed by ASU 2017-12, among other things.~~

In February 2018, the FASB issued ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220)”. This ASU was issued to allow a reclassification from accumulated other comprehensive income to retained earnings from stranded tax effects resulting from the revaluation of the net deferred tax asset (“DTA”) to the new corporate tax rate of 21% as a result of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. The Company elected to early adopt this ASU and to reclassify $44,000 of stranded tax effects from accumulated other comprehensive income to retained earnings in the fourth quarter of 2017.

In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)”. This ASU was issued to provide guidance on the income tax accounting implications of the Tax Act and allows for entities to report provisional amounts for specific income tax effects of the Tax Act for which the accounting under Topic 740 was not yet complete, but a reasonable estimate could be determined. A measurement period of one-year is allowed to complete the accounting effects under Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this ASU with the provisional adjustments as reported in the consolidated financial statements as of December 31, 2017. As of September 30, 2019, the Company did not incur any adjustments to the provisional recognition.

In July 2018, the FASB issued ASU No. 2018-11, “Leases – Targeted Improvements (Topic 842)”. ASU 2018-11 provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02

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~~(January 1, 2019 for the Company). The Company elected both transition options. ASU 2018-11~~2018-13 did not have a material impact on the Company’s consolidated financial statements.

In ~~August 2018,~~March 2020, (revised in April 2020) various regulatory agencies, including the ~~FASB~~Board of Governors of the Federal Reserve System and the FDIC, (“the Agencies”) issued ~~ASU No. 2018-13, “Fair Value Measurement (Topic 820)~~an interagency statement on loan modifications and reporting for financial institutions working with customers affected by a novel strain of coronavirus disease (“COVID-19”). The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, “Receivables – Troubled Debt Restructurings by Creditors,”~~: Disclosure Framework — Changes to~~ (“ASC 310-40”), a restructuring of debt constitutes a TDR if the ~~Disclosure Requirements~~creditor, for ~~Fair Value Measurement. This ASU contains some technical adjustments~~economic or legal reasons related to the ~~fair value disclosure requirements~~debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Agencies confirmed with the staff of public companies. Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.

~~In August 2018,~~ the FASB ~~issued ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)”. ASU 2018-14 amends and modifies the disclosure requirements for employers~~ that ~~sponsor defined benefit pension~~short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other ~~post-retirement plans. The amendments~~delays in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

In October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815)” - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. ASU 2018-16 was effective for us on January 1, 2019 and did not have a significant impact on our financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases – Codification Improvements (Topic 842)”. ASU 2019-01 amends certain aspects of the Board’s new leasing standard, ASU 2016-02 to address two lessor implementation issues and clarify when lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new leases standard, Topic 842, Leases. ASU 2019-01 aligns the guidance for fair value of the underlying asset by lessorspayment that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset and is acquired and when the lease commences, the definition of fair value (in Topic 820, Fair Value Measurement) should be applied. The ASU also requires lessors within the scope of Topic 942, Financial Services – Depository and Lending, to present all “principal payments received under leases” within investing activities. Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. As ASU 2019-01 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.

insignificant. Borrowers considered current

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are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The Company has granted loan payment deferrals to certain borrowers, who were current on their payments prior to the COVID-19 pandemic, on a short-term basis of three to six months. As of September 30, 2020, on a consolidated basis, the Company had approved loan payment deferrals or payments of interest only for 116 loans totaling $93.8 million. Management expects this interagency guidance to have an impact on the Company’s financial statements; however, the full impact cannot be quantified at this time.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the ~~Delmar~~Partners Bancorp ~~(“Delmar”~~(the “Company”) consolidated financial statements, and notes thereto, for the year ended December 31, ~~2018,~~2019, and the other information included in this report. Operating results for the three and nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results for the year ending December 31, ~~2019~~2020 or any other period.

Forward-Looking Statements

~~Portions~~Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, projections, predictions, expectations, or beliefs about future events or results that are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:

●	changes in interest rates;

●

general economic and financial market conditions, in the United States generally and particularly in the markets in which the Company operates and in which its loans are concentrated, including the effects of declines in real estate values, increases in or sustained high levels of unemployment and bankruptcies and slowdowns in economic growth, including as a result of the pandemic caused by a novel strain of coronavirus (“COVID-19”);

●	the quality or composition of the loan or investment portfolios and changes therein;

●	demand for loan products and financial services in the Company’s market area;

●	The Company’s ability to manage its growth or implement its growth strategy;

●	the introduction of new lines of business or new products and services;

●	The Company’s ability to recruit and retain key employees;

●	real estate values in the Company’s lending area;

●	an insufficient allowance for credit losses;

●	The Company’s liquidity and capital positions;

●	concentrations of loans secured by real estate, particularly commercial real estate;

●	the effectiveness of the Company’s credit processes and management of the Company’s credit risk;

●	The Company’s ability to compete in the market for financial services;

●	technological risks and developments, and cyber threats, attacks, or events;

●

the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (including the COVID-19 pandemic), and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company’s borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company’s loans or its other products and services, on incidents of cyberattack and fraud, on the

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Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company’s business operations and on financial markets and economic growth;

●

the effect of steps the Company takes in response to the COVID-19 pandemic, the severity and duration of the pandemic, including whether there is a “second wave” as a result of the loosening of governmental restrictions, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein;

●	the potential effect of the COVID-19 pandemic including on lending under the Paycheck Program Program (“PPP”) under the Small Business Administration (“SBA”)

●	performance by the Company’s counterparties or vendors;

●	deposit flows;

●	the availability of financing and the terms thereof;

●	the level of prepayments on loans and mortgage-backed securities;

●	legislative or regulatory changes and requirements;

●	the effects of changes in federal, state or local tax laws and regulations, including the impact of the Coronavirus Aid, Relief, and Security, or “CARES,” Act and other legislative and regulatory reactions to the COVID-19 pandemic;

●	monetary and fiscal policies of the U.S. government including policies of the U.S. Department of the Treasury and the Federal Reserve;

●	changes to applicable accounting principles and guidelines; and

●	other factors, many of which are beyond the control of the Company.

Please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s 2019 Form 10-K and comparable sections of this Quarterly Report on Form 10-Q ~~contain~~for the quarter ended September 30, 2020 (this “Quarterly Report”) and related disclosures in other filings, including our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov. All of the forward-looking statements ~~within~~made in this Quarterly Report are expressly qualified by the ~~meaning of~~cautionary statements contained or referred to in this Quarterly Report. The Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, including statements that include the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are expressions about our confidence, policies, and strategies, the adequacy of capital levels, and liquidity and are not guarantees of future performance. Such forward-looking statements involve certain risks and uncertainties, including economic conditions, competition in the geographic and business areas in which we operate, inflation, fluctuations in interest rates, legislation, and governmental regulation. These factors shouldactual results or developments anticipated may not be ~~considered exhaustive and should be read together with other cautionary statements that~~realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Readers are ~~included in Delmar’s Registration Statement~~cautioned not to rely too heavily on ~~Form S-4, as amended, including those discussed in~~ the ~~section entitled “Risk Factors” and “Caution about Forward-Looking Information. If one or more of the factors affecting our~~ forward-looking ~~information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and~~ statements contained in this ~~report. Therefore, we caution you~~Quarterly Report. Forward-looking statements speak only as of the date they are made and the Company does not undertake any obligation to ~~place undue reliance on our forward-looking information and statements. We will not~~ update, ~~the~~revise, or clarify these forward-looking statements ~~to reflect actual results~~whether as a result of new information, future events or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.otherwise.

Overview

~~Delmar,~~Partners Bancorp, a bank holding corporation, through its wholly owned ~~subsidiary,~~subsidiaries, The Bank of Delmarva ~~(‘‘Delmarva’’~~(“Delmarva”) and Virginia Partners Bank (“Partners”), aeach of which are commercial banking ~~corporation,~~corporations, engages in general commercial banking operations, with ~~fourteen~~eighteen branches throughout Wicomico, Charles, Anne Arundel, and Worcester Counties in Maryland, Sussex County in Delaware, ~~and~~ Camden and Burlington Counties in New ~~Jersey.~~Jersey, the city of Fredericksburg, Virginia, and Spotsylvania County, Virginia.

~~Delmar~~The Company derives the majority of its income from interest received on our loans and investment securities. The primary source of funding for making these loans and investments are deposits and secondarily, borrowings. Consequently, one of the key measures of ~~Delmar’s~~the Company’s success is the amount of net interest income, or the difference between the income on ~~interest-earning~~interest earning assets, such as loans and investments, and the expense on ~~interest-bearing~~interest bearing liabilities, such as deposits and borrowings. The resulting ratio of that difference as a percentage of average earning assets represents the net interest margin. Another key measure is the spread between the yield earned on ~~interest-earning~~interest earning assets and the rate paid on ~~interest-bearing~~interest bearing liabilities, which is called the net interest spread. In addition to earning interest on loans and investments, ~~Delmar~~the Company earns income through fees and other charges to customers. Also included is a discussion of the various components of this noninterest income, as well as of noninterest expense.

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There are risks inherent in all loans, so we maintain an allowance for ~~loan~~credit losses to absorb probable losses on existing loans that may become uncollectible. We maintain this allowance by charging a provision for ~~loan~~credit losses as needed against our operating earnings for each period. We have included a detailed discussion of this process, as well as several tables describing our allowance for ~~loan~~credit losses.

~~Delmar~~The Company plans to continue to grow both organically and possibly through future acquisitions, including potential expansion into new market areas. ~~Delmar~~The Company believes its current financial condition, coupled with its scalable operational capabilities, will allow it to act upon growth opportunities in the current banking environment.The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent on the business environment in the Company’s primary markets where the Company operates and in the United States as a whole.

In December 2019, COVID-19 was reported in Wuhan, China. The World Health Organization (the “WHO”) declared the outbreak to constitute a Public Health Emergency of International Concern on January 30, 2020. Over the course of the first quarter of 2020, COVID-19 developed into a worldwide outbreak and, on March 11, 2020, the WHO characterized COVID-19 as a pandemic. On March 13, 2020, President Trump issued a proclamation declaring a national state of emergency in response to COVID-19. During the final two weeks of March 2020, the governors of multiple U.S. states, including Maryland, where the Company has its principal place of business, and Virginia and New Jersey, in which the Company has significant operations, issued stay-at-home orders that directed the closing of non-essential businesses and restricted public gatherings. The COVID-19 pandemic continues to spread in the Company’s areas of operation, the United States and across the globe. The pandemic has severely disrupted supply chains and adversely affected production, demand, sales and employee productivity across a range of industries and dramatically increased unemployment in the Company’s areas of operation and nationally. These events have affected the Company’s operations in the first three quarters of 2020 and are expected to impact the Company’s financial results throughout the remainder of fiscal year 2020. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on the Company’s customers, employees and vendors and the nature and effect of past and future federal and state governmental and private sector responses to the pandemic, all of which are uncertain and cannot be predicted.

In connection with the ongoing COVID-19 pandemic, both Delmarva and Partners continue to follow their pandemic response plans, which were enacted in February 2020. To date, we believe that the plans have been implemented successfully. The operation of these plans continues to require daily oversight in order to properly navigate this complex and ever changing environment. The roll out of these plans previously resulted in adjustments to both Delmarva and Partners branch operations, including, but not limited to, lobby and drive-thru hours as well as physical access, the provision of personal protective equipment to employees and customers, and having employees work remotely whenever possible. As of September 30, 2020, both Delmarva and Partners branch operations are operating under normal lobby and drive-thru hours with no modifications or restrictions on physical access. In addition, the majority of Delmarva’s and Partners’ employees, with a few exceptions, have returned to the office on a full-time basis. Delmarva and Partners continue to proactively work with their local, state and federal government agencies to ensure their response to the COVID-19 pandemic is both safe and sound with as little disruption to their customers as possible. Additionally, Delmarva and Partners continue to take necessary precautions in order to protect our staff, customers and their families as well as our community, and to limit the ongoing impact of this virus.

Future developments with respect to COVID-19 are highly uncertain and cannot be predicted and new information may emerge concerning the severity of the outbreak and the actions to contain the outbreak or treat its impact, among others. Other national health concerns, including the outbreak of other contagious diseases or pandemics may adversely affect the Company in the future. Please refer to the “Provision and Allowance for Credit Losses” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information related to payment deferrals, concentrations in higher risk industries, and the impact on the allowance for credit losses.

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The following discussion and analysis also identifies significant factors that have affected ~~Delmar’s~~the Company’s financial position and operating results during the periods included in the consolidated financial statements accompanying this report.

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You are encouraged to read this management's discussion and analysis in conjunction with the consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report.

Critical Accounting Policies

Certain critical accounting policies affect significant judgments and estimates used in the preparation of ~~Delmar’s~~the Company’s consolidated financial statements. These significant accounting policies are described in the notes to the consolidated financial statements included in this Quarterly Report as well as in Item 8 of the Company’s Annual Report on Form ~~10-Q and~~10-K for the ~~audited consolidated financial statements included in Delmar’s~~ ~~Registration Statement on Form S-4, as amended, and related prospectus filed pursuant~~ ~~to Rule-424(b) on July 8,~~year ended December 31, 2019. The accounting principles ~~Delmar~~the Company follows and the methods of applying these principles conform to U.S. GAAP and general banking industry practices. ~~Delmar’s~~The Company’s most critical accounting policy relates to the determination of the allowance for ~~loan~~credit losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance involves significant judgment and complexity and is based on many factors. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for ~~loan~~credit losses may be required. See ~~‘‘Provision~~“Provision and Allowance for ~~Loan Losses’’~~Credit Losses” and Note 1 and Note 3 of the ~~unaudited~~ consolidated financial statements for the nine months ended September 30, ~~2019.~~2020

Another of ~~Delmar’s~~the Company’s critical accounting policies, with the acquisitions of Liberty in 2018 and Partners in 2019, relates to the valuation of goodwill, intangible assets and other acquisition accounting adjustments. ~~During 2018, Delmar acquired Liberty Bell Bank (“Liberty”) –see Note 13 of the unaudited consolidated financial statements for the nine months ended September 30, 2019. Delmar~~The Company accounted for the ~~acquisition of~~ Liberty Merger and the Partners Share Exchange in accordance with ~~Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’)~~ASC Topic No. 805, which requires the use of the acquisition method of accounting. Under this method, assets acquired, including intangible assets, and liabilities assumed, are recorded at their fair value. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from the ~~acquisition of~~ Liberty Merger and the Partners Share Exchange, which totaled approximately $5.2 million and $4.2 million, respectively, under the acquisition method of accounting represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to ~~earnings.~~earnings, which is limited to the amount of goodwill allocated to that reporting unit. In evaluating the goodwill on its consolidated balance sheet for impairment after the consummation date of the ~~acquisition of~~ Liberty ~~Delmar~~Merger and the Partners Share Exchange, the Company will first assess qualitative factors to determine whether it is more likely than not that the fair value of our acquired assets is less than the carrying amount of the acquired assets, as allowed under ~~Accounting Standards Update 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment.~~ASU 2017-04. After making the assessment based on several factors, which will include, but is not limited to, the current economic environment, the economic outlook in our markets, our financial performance and common stock value as compared to our peers, we will determine if it is more likely than not that the fair value of our assets is greater than their carrying amount and, accordingly, will determine whether impairment of goodwill should be recorded as a charge to earnings in years subsequent to the ~~acquisition of Liberty.~~Liberty Merger and the Partners Share Exchange. This assessment was performed at the end of ~~2018,~~2019, and resulted in no impairment of goodwill. Depending on the severity of the economic consequences of the COVID-19 pandemic and their impact on the Company, management may determine that goodwill is required to be evaluated for impairment due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations. Management considered the impact of the pandemic on goodwill and determined that a triggering event had not occurred as of September 30, 2020. See Note ~~12 and Note~~ 13 – Virginia Partners Bank Transaction in the unaudited consolidated financial statements for the nine months ended September 30, ~~2019~~2020 for more information related to the fair value of net assets acquired in the acquisition of ~~Liberty,~~Partners, including goodwill and intangible assets.

~~Another~~In addition to the Company’s policies related to the valuation of goodwill, intangible assets and other acquisition accounting adjustments, ongoing accounting for acquired loans is considered a critical accounting ~~policy relates to deferred tax assets~~policy. Acquired loans are classified as either PCI loans or purchased performing loans and ~~liabilities. Delmar records deferred tax assets~~are recorded at fair value on the date of acquisition. PCI loans are those for which there is evidence of credit deterioration since origination and ~~deferred tax liabilities~~ for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits, such as net operating loss carry forwards available from the Liberty acquisition, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax basis of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided when it is ~~more likely than not~~probable at the date of acquisition that ~~a portion or~~ the ~~full amount of the deferred tax asset~~Company will not ~~be realized. In assessing the ability to realize the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income,~~collect all contractually required principal and ~~tax planning strategies. Such a deferred tax liability will only be recognized when it becomes apparent that~~interest payments. The

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~~those temporary differences will reverse in~~difference between contractually required payments at acquisition and the ~~foreseeable future. A tax position~~cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a ~~benefit only if it is ‘‘more likely than not’’ that~~reasonable expectation about the ~~tax position would~~amount and timing of such cash flows. Periodically, we evaluate our estimate of cash flows expected to be ~~sustained~~collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a ~~tax examination, with~~provision for loan losses resulting in an increase to the allowance for credit losses. Subsequent significant increases in cash flows may result in a ~~tax examination being presumed~~reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to ~~occur.~~accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans. The ~~amount recognized~~Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the ~~largest amount~~estimated lives of ~~tax benefit that~~the loans. There is ~~greater than 50 percent more likely of being realized on examination. For tax positions not meeting~~no allowance for credit losses established at the ~~‘‘more likely than not’’ test, no tax benefit is recorded.~~acquisition date for purchased performing loans, but a provision for credit losses may be required for any deterioration in these loans in future periods. The Company evaluates purchased performing loans quarterly for deterioration and records any required additional provision for credit losses.

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) ~~Delmar~~The Company has the intent to sell a debt security, (2) it is more likely than not that ~~Delmar~~the Company will be required to sell the debt security before recovery of its amortized cost basis, or (3) ~~Delmar~~The Company does not expect to recover the entire amortized cost basis of the debt security. If ~~Delmar~~the Company has the intent to sell a debt security, or if it is more likely than not that it will be required to sell the debt security before its recovery, the other-than-temporary write-down is equal to the entire difference between the debt security’s amortized cost and its fair value. If ~~Delmar~~the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.

Results of Operations

Net income for the three months ended September 30, ~~2019~~2020 totaled ~~$1.8~~$1.1 million compared to net income for the same period in ~~2018~~2019 of ~~$1.9~~$1.8 million, a decrease of ~~$103,000~~$667 thousand or ~~5.5%~~37.4%. This decrease was mainly due to an increase in the provision for credit losses of $1.7 million, or 555.7%, and an increase in other expenses of $3.7 million or 40.4%, and was partially offset by increases in net interest ~~expense on deposits~~income and ~~borrowing as well as~~other income, and lower federal and state income taxes. ~~Increases were $589,000 and $218,000, respectively. These increases in expenses were partially offset by an~~The increase in ~~loan interest income of $579,000 or 7.1%. Basic earnings per share were $0.18~~the provision for credit losses for the three months ended September 30, ~~2019,~~2020 was due to adjustments made to qualitative factors related to increasing risk within the loan portfolio due to the ongoing impact of the COVID-19 pandemic. Net interest income for the three months ended September 30, 2020 totaled $10.6 million compared to ~~$0.19~~net interest income of $7.3 million for the same period in ~~2018.~~2019, an increase of $3.3 million or 44.6%. Basic earnings per share were $0.06 for the three months ended September 30, 2020, compared to $0.18 for the same period in 2019. Net income for the nine months ended September 30, ~~2019~~2020 totaled ~~$4.9~~$4.6 million compared to net income for the same period in ~~2018~~2019 of ~~$3.9~~$4.9 million, ~~an increase~~a decrease of ~~$987~~$371 thousand or ~~25.0%~~7.5%. Basic earnings per share were ~~$0.49~~$0.26 for the nine months ended September 30, ~~2019,~~2020, compared to ~~$0.41~~$0.49 for the same period in ~~2018.~~2019. Average loan balances significantly increased during the three months and nine months ended September 30, ~~2019~~2020 as compared to the same periods ended September 30, ~~2018.~~2019, mainly due to the Partners acquisition. Average balances for the three month and nine ~~months~~month periods ended September 30, ~~2019~~2020 were ~~$639.9 million~~$1.056 billion and ~~$643.6 million,~~$1.039 billion, respectively, as compared to average balances for the three month and nine ~~months~~month periods ended September 30, ~~2018~~2019 of ~~$612.0~~$640.4 million and ~~$581.0~~$644.2 million, respectively. ~~In addition to higher average~~The increase in loan balances ~~Delmar earned higher~~was offset by the Company earning lower yields on those loans during the three and nine ~~months~~month periods ended September 30, ~~2019~~2020 as compared to the same periods in ~~2018.~~2019. As the Federal Reserve lowered the federal funds rate the Company has seen downward pressure on its loan yield. The cost of funds was affected by increased competition for deposits, which resulted in Delmar paying higher yields on deposits during the three and nine months ended September 30, 2019 as compared to the same periods ending September 30, 2018. In addition, the average balance of interest bearing deposits increased from ~~$432.8 million during the three months ended September 30, 2018 to~~ $449.7 million during the three months ended September 30, ~~2019.~~2019 to

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$830.6 million during the three months ended September 30, 2020. This caused interest expense for the three months ended September 30, 2020 to increase $1.1 million or 55.9% compared with the same period in 2019 while cost of funds for the same periods decreased 56 basis points. The average balance of interest bearing deposits increased from ~~$408.3 million during the nine months ended September 30, 2018 to~~ $444.9 million during the nine months ended September 30, ~~2019.~~2019 to $788.8 million during the nine months ended September 30, 2020. Interest expense for the nine months ended September 30, 2020 increased $3.7 million or 65.8% compared with the same period in 2019 while cost of funds for the same periods decreased eight basis points. The increase in interest expense were primarily due to the inclusion of $307.7 million in Partners average total interest-bearing deposit balances partially offset by decreases on rates of interest bearing deposits. Earnings and average asset and liability balances for three and nine months ended September 30, ~~2018~~2019 were significantly impacted by the ~~Liberty transaction,~~Partners Share Exchange, which closed on March 1, 2018. During the nine months ended September 30, 2018 Delmar expensed $1.3 million of merger related expenses in other expenses. During the nine months ended September 30, 2019 Delmar expensed $539,000 related to the Partners transaction.November 15, 2019.

Financial Condition

Consolidated assets totaled ~~$792.8 million~~$1.544 billion at September 30, ~~2019 and $739.4 million at December 31, 2018,~~2020, an increase of ~~7.2%~~23.3% or ~~$53.4 million.~~$291.4 million from December 31, 2019. The growth in assets during the nine months ended September 30, ~~2019~~2020 is mainly attributable to ~~a $46.4~~an increase of $194.2 million ~~or 156.2% increase in cash and cash equivalents. The significant increase~~ in cash and cash equivalents, ~~was~~or 204.2%, growth in investment securities available for sale, at fair value, of $23.7 million, or 22.7%, and growth of loans, net of the allowance for credit losses, of $56.5 million or 5.7%. Cash and cash equivalents balances increased due to ~~relatively flat~~significant deposit growth in excess of loan ~~balances overall~~growth and an increase in borrowings, partially offset by the increase in the available for sale investment security portfolio. Growth in available for sale investment securities were the result of management of the portfolio in light of the Company’s liquidity needs and an increase in unrealized gains on the investment securities available for sale portfolio. The significant inflow of deposits presented the Company with the opportunity to deploy excess cash and cash equivalents primarily into liquid, cash-flowing products while expanding net interest margin and increasing earnings per share. The increase in loans was mainly due to the origination and funding of approximately $64.2 million in PPP loans, which was partially offset by a decrease in organic loan growth due to higher pay-offs and decreased loan demand due to the uncertaintly surrounding the COVID-19 pandemic. Liabilities increased due to growth in total deposits outpacing total loan growth and an increase in other borrowings, which were partially offset by a decrease in FHLB borrowings. Deposits increased $228.1 million or 22.7% during the first nine months of ~~2019, augmented by increases~~2020. The increase in ~~deposit balances of $45.5 million. This increase was mainly~~deposits in ~~time deposits,~~both noninterest bearing accounts and savings and money market accounts, which grew ~~$25.5~~by $131.6 million, or

~~Table~~ 50.3%, and $73.6 million, or 33.0%, respectively, and interest bearing demand, which grew $34.5 million, or 44.9%. Significant factors resulting in this change were organic growth as a result of ~~Contents~~

~~10.2%. There was also an increase~~our continued focus on total relationship banking, customers seeking the liquidity and safety of deposit accounts in ~~other assets~~light of continuing economic uncertainty surrounding the COVID-19 pandemic, and ~~other liabilities~~the funding of ~~$3.3 million and $3.7 million, respectively,~~PPP loans, the proceeds of which ~~$3.3 million in both categories related to~~are deposited directly into the ~~implementation~~operating account of these customers at the ~~new lease accounting standard as described in Note 5 of the unaudited consolidated financial statements~~Company. Total borrowings as of September 30, 2020 were $163.9 million, an increase of $59.4 million, or 57.8%, from December 31, 2019. This increase was the result of an increase in borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the PPP loans originated by the Company have been pledged as collateral, and the issuance of $18.1 million in subordinated debt in June 2020, which were partially offset by decreases in Federal Home Loan Bank borrowings due to maturities that were not replaced.

~~Delmarva’s~~Delmarva's Tier 1 leverage capital ratio was ~~9.0%~~8.0% at September 30, ~~2019~~2020 as compared to ~~8.7%~~9.1% at December 31, ~~2018.~~2019. At September 30, ~~2019, Delmarva’s~~2020, Delmarva's Tier 1 risk‑weighted capital ratio and Total risk-weighted capital ratio were 11.5% and ~~total-risk rated capital were 11.2% and 12.4%~~12.8%, respectively, as compared to Tier 1 ~~risk-weighted~~risk‑weighted capital ratio and ~~total risk-weighted~~Total risk‑weighted capital ratios of ~~10.5%~~11.6% and ~~11.7%~~12.7%, respectively, at December 31, ~~2018.~~2019. Partners’ Tier 1 leverage capital ratio was 9.5% at September 30, 2020 and 10.4% at December 31, 2019, respectively, while its Tier 1 risk‑weighted capital ratio and Total risk‑weighted capital ratios were 12.7% and 13.0%, respectively, at September 30, 2020 and 12.4% and 12.5%, respectively, at December 31, 2019. See ~~‘‘Capital Ratios’’~~“Capital” below for additional information about ~~Delmar’s~~Delmarva’s and ~~Delmarva’s~~Partners’ capital ratios and requirements.

At September 30, ~~2019, adversely classified~~2020, nonperforming assets totaled ~~$16.3~~$7.4 million, a decrease of ~~$2.4 million~~ $ 1.4from December 31, ~~2018. The decrease was mainly due to one relationship which had payoffs~~2019 balances of ~~approximately $2.4 million on five different loans. OREO properties~~$7.0 million. Nonaccrual loans totaled ~~$3.6~~$4.3 million at September 30, 2019 and December 31, 2018, which included two OREO properties that were acquired in the Liberty acquisition with a fair value of $946,000. During the third quarter of 2019 one of these properties was written down approximately $41,000. Nonaccrual loans totaled $5.1 million at September 30, 20192020 compared with a balance of ~~$9.1~~$4.5 million at December 31, ~~2018. Nonaccrual loans as a percentage of total loans~~2019. There was ~~0.8% at September 30, 2019 and 1.4% at December 31, 2018. There were no loans~~one loan past due 90 days or more and still accruing interest with a balance of $286 thousand at September 30, ~~2019~~2020 compared to ~~three loans~~one loan past due 90 days or more and still accruing interest at December 31, ~~2018~~2019 with ~~an aggregate~~a balance of ~~$606,000. Adversely classified assets were 22.8%~~$5 thousand. Nonperforming loans as a percentage of ~~Delmarva’s~~ total ~~capital~~loans was 0.4% at September 30, 2020 and December 31, 2019. Other real estate owned as of September 30, ~~2019~~ 2020 was $2.8 million, as

Table of Contents

compared to ~~28.1%~~$2.4 million at December 31, ~~2018.~~2019. Nonperforming assets to total assets as of September 30, 2020 ws 0.48%, as compared to 0.56% at December 31, 2019. Loans classified as ~~troubled debt restructurings (‘‘TDRs’’)~~TDRs totaled ~~$10.8~~$9.9 million at September 30, ~~2019~~2020 and ~~$17.8~~$10.3 million at December 31, ~~2018,~~2019, a ~~39.5% decline~~$- during the nine months ended September 30, 2019. The decreases in nonaccrual and TDR loans was due to approximately $3.7 million in nonaccrual loans that were classified as TDR’s that paid off, as well as another $2.7 million in payoffs on multiple loans, classified as TDR’s still accruing interest as of December 31, 2018, from a single relationship.2020.

~~Net charge-offs were 0.1% of average total loans for the year ended December 31, 2018.~~ Net loans charged off during the nine months ended September 30, ~~2019~~2020 were ~~$909,000,~~$1.1 million, compared to ~~$814,000 for the year~~$909 thousand forthe nine months ended ~~December 31, 2018.~~September 30, 202019. The allowance for ~~loan~~credit losses to total loans ratio was 1.1% at September 30, ~~2019~~2020 and 0.7% at December 31, ~~2018.~~2019. The allowance for credit losses at September 30, 2020 does not include a reserve for approximately $64.2 million of PPP loans funded by the Company during the second quarter of 2020 because these loans are 100% guaranteed by the SBA. In addition to the allowance for ~~loan~~credit losses, there was an unamortized discount related to the loans acquired in the Liberty ~~transaction~~Merger and the Partners Share Exchange with a balance of ~~$668,000 and $1.3~~$4.3 million at September 30, ~~2019~~2020 and $6.1 million at December 31, ~~2018, respectively. This~~2019. The accretable portion of this discount, which had a balance of $2.7 million at September 30, 2020, is being amortized over the life of the remaining loans.

Stockholders’ equity at September 30, ~~2019~~2020 was ~~$71.6~~$135.9 million, an increase of ~~8.4%~~3.9% during the first nine months of ~~2019.~~2020. This increase was mainly due to income earned during the ~~year,~~quarter, net of dividends of ~~$749,000~~$1.3 million paid to ~~shareholders~~stockholders and the increase in unrealized holding ~~losses~~gains on securities available for sale during the period.

Summary of Return on Equity and Assets

September 30,

December 31,


2019


(annualized)

2018

Yield on earning assets

5.09
%
4.96
%
Return on average assets

0.86
%
0.84
%
Return on average equity

9.59
%
9.53
%
Average equity to average assets

8.98
%
8.84
%
Tier I risk-based capital ratio/CET1 ratio (Bank)

11.21
%
10.49
%
Total risk-based capital ratio (Bank)

12.38
%
11.68
%
Leverage capital ratio (Bank)

9.00
%
8.74
%



	September 30,		December 31,
	2020		2019
Yield on earning assets (annualized)	4.15	%	5.06	%
Return on average assets (annualized)	0.44	%	0.70	%
Return on average equity (annualized)	4.56	%	7.22	%
Average equity to average assets	9.59	%	9.75	%
Tier I risk-based capital ratio/CET1 ratio (Delmarva)	11.5	%	11.6	%
Tier I risk-based capital ratio/CET1 ratio (Partners)	12.7	%	12.4	%
Total risk-based capital ratio (Delmarva)	12.8	%	12.7	%
Total risk-based capital ratio (Partners)	13.0	%	12.5	%
Leverage capital ratio (Delmarva)	8.0	%	9.1	%
Leverage capital ratio (Partners)	9.5	%	10.4	%

(See Note 9 – Regulatory Capital Requirements of ~~Delmar’s~~the Company’s consolidated financial statements for the nine months ended September 30, ~~2019.~~2020.)

Earnings Analysis

~~Delmar’s~~The Company’s primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investments, ~~Delmar~~the Company seeks to deploy as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations.

~~Table of Contents~~

To ensure sufficient liquidity, ~~Delmar~~the Company also maintains a portion of its deposits in cash, government securities, deposits with other financial institutions, and overnight loans of excess reserves (known as ‘‘Federal Funds Sold’’) to correspondent banks. The revenue which ~~Delmar~~the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of ~~Delmar’s~~the Company’s loans and deposits, as well as the profit margin (‘‘interest spread’’) and fee income which can be generated on these amounts.

~~Delmar~~The Company reported net income of ~~$1.8~~$1.1 million and ~~$1.9~~$1.8 million for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and reported net income of ~~$4.9~~$4.6 million and ~~$3.9~~$4.9 million for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The following discussion should be read in conjunction with ~~Delmar’s~~the Company’s unaudited consolidated financial statements for the period ended September 30, ~~2019~~2020 and the notes thereto.

The following is a summary of the results of operations by ~~Delmar~~the Company for the three and nine ~~month periods~~months ended September 30, ~~2019~~2020 and ~~2018.~~2019.

Three Months Ended

Nine Months Ended

September 30,

September 30,


2019

2018

2019

2018

(Dollars in Thousands)
Net interest income

$
7,295

$
7,190

$
21,825

$
20,243
Provision for loan losses

300

300

900

825
Provision for income taxes

810

592

2,167

1,485
Noninterest income

1,131

783

2,729

2,331
Noninterest expense

5,531

5,193

16,552

16,316
Total income

10,417

9,375

30,216

26,349
Total expenses

8,632

7,487

25,281

22,401
Net income

1,785

1,888

4,935

3,948
Basic earnings per share

0.179

0.189

0.494

0.411

Table of Contents


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

					(Dollars in Thousands)
Net interest income	$	10,550	$	7,295	$	32,558	$	21,825
Provision for credit losses		1,967		300		5,142		900
Provision for income taxes		308		810		1,410		2,167
Noninterest income		2,330		1,131		6,021		2,729
Noninterest expense		9,249		5,531		27,094		16,552
Total income		15,984		10,417		47,963		30,216
Total expenses		14,628		8,632		43,030		25,281
Net income		1,356		1,785		4,933		4,935
Net income attributable to Partners Bancorp		1,117		1,785		4,563		4,935
Basic earnings per share		0.063		0.179		0.256		0.494
Diluted earnings per share		0.063		0.178		0.256		0.494

Net Interest Income

The largest component of net income for ~~Delmar~~the Company is net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on ~~Delmar’s~~the Company’s interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.

Net interest income was $10.6 million for the three months ended September 30, 2020 compared to $7.3 million for the three months ended September 30, ~~2019 compared to $7.2~~2019. Net interest income was $32.6 million for the ~~three~~nine months ended September 30, ~~2018. Net interest income was~~2020 compared to $21.8 million for the nine months ended September 30, ~~2019 compared to $20.2 million for the nine months ended September 30, 2018.~~2019. This increase is ~~mainly~~ the direct result of increased loan ~~volumes. Average~~volumes, including the increase in balances ~~on loans~~as a result of the Partners Share Exchange in late 2019 which increased ~~from $581.0 million for~~ the ~~nine months ended September 30, 2018 to $643.6 million for the nine months ended September 30, 2019.~~ Company’s loan portfolio by $357.1 million.

In addition to the primary interest earning assets and interest bearing liabilities held at Delmarva and Partners, the ~~holding company~~Company has additional borrowings with a balance, net of ~~$6.5~~issuance costs, of $24.1 million at September 30, ~~2019~~2020 and $6.4 million at December 31, ~~2018. During~~2019. This increase was due to the ~~first quarter~~subordinated loan agreement the Company entered into in June 2020 for an aggregate principal amount of ~~2018 $4.5 million was advanced to fund the cash portion of the payment to Liberty shareholders.~~ $18.1 million. Interest expense on these ~~loans,~~borrowings, which is included in consolidated net income, was approximately ~~$337,000~~$633 thousand and ~~$314,000~~$337 thousand for the nine months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively.

For the three months ended September 30, ~~2019,~~2020, the consolidated net interest spread, the difference between the yield on interest earning assets and the rates paid on interest-bearing liabilities, was ~~3.4%~~2.5% compared to ~~3.8%~~3.3% for the three months ended September 30, ~~2018. For the nine months ended September 30, 2019 and 2018, the consolidated net interest spread was 3.6% and 3.8%, respectively.~~2019. The consolidated net interest margin (which is net interest income divided by average interest earning assets), calculated on a tax equivalent basis, was ~~3.9% and 4.0%~~2.9% for the three ~~and nine~~ months ended September 30, ~~2019~~2020 and ~~4.1%~~3.8% for the three ~~and nine month periods ending~~months ended September 30, ~~2018.~~2019. Rates paid on average interest-bearing liabilities at ~~Delmar~~the Company were ~~1.6%~~1.2% and ~~1.5%~~1.6% for the three months ended September 30, 2020 and 2019, respectively. The decrease in the net interest margin (tax equivalent basis) was primarily due to a decrease in the yields earned on average loans and investment securities. Total interest income increased by $4.4 million, or 47.1%, for the three months ended September 30, 2020 while total interest expense increased by $1.1 million, or 55.9%, both as compared to the same period in 2019. For the nine months ended September 30, ~~2019, respectively, and 1.2% and 1.1%~~2020, the consolidated net interest spread was 2.8% compared to 3.4% for the ~~three months and~~ nine months ended September 30, ~~2018,~~2019. The consolidated net interest margin, calculated on a tax equivalent basis, was 3.2% for the nine months ended September 30, 2020 and 3.9% for the nine months ended September 30, 2019. Rates paid on average interest-bearing liabilities at the Company were 1.4% and 1.5% for the nine months ended September 30, 2020 and 2019, respectively. The decrease in the net interest margin (tax equivalent basis) was primarily due to a decrease in the yields earned on average loans and investment securities, and higher average balances of interest-bearing liabilities. The Company’s net interest margin (tax equivalent basis) was also negatively impacted by higher average balances of cash and due from banks, interest bearing deposits from banks and federal funds sold which are lower yielding interest-earning assets. Total interest income increased by $14.5 million, or 52.6%, for the nine months ended

4354

Table of Contents

September 30, 2020 while total interest expense increased by $3.7 million, or 65.8%, both as compared to the same period in 2019. The most significant factors impacting net interest income during the three and nine month periods ended September 30, 2020 were (1) increases in average loan balances, primarily due to the acquisition of Partners, partially offset by lower loan yields, (2) increases in average investment securities balances, primarily due to the acquisition of Partners, partially offset by lower investment securities yields, (3) decrease in the rate paid on average interest-bearing deposit balances, primarily due to lower rates paid on average time deposits, partially offset by increases in average interest-bearing deposit balances, primarily due to the acquisition of Partners and organic deposit growth, (4) increases in average cash and due from banks, interest bearing deposits from banks and federal funds sold, primarily due to the acquisition of Partners and deposit growth outpacing loan growth, and lower yields on each, and (5) increases in average borrowings balances, partially offset by lower rates paid on borrowings, in each case primarily due to the acquisition of Partners and the Company’s issuance of subordinated debt late in the second quarter of 2020.

Interest earned on assets and interest accrued on liabilities is also significantly influenced by market factors, specifically interest rate targets established by the Federal Reserve. ~~Average loans net of the allowance and discounts on purchased loans comprised 86.4% of average earning assets~~

The Federal Open Markets Committee (“FOMC”) lowered Federal Funds target rates for the ~~three months ended~~first time in 11 years on July 31, 2019 and then again in September ~~30,~~ 2019 ~~compared~~and October 2019, for a combined decrease of 75 basis points during 2019. In response to ~~87.7%~~market volatility related to the COVID-19 pandemic, the FOMC again lowered Federal Funds target rates twice in March 2020, for a combined decrease of 150 basis points. The FOMC’s current Federal Funds target rate range is currently 0% to 0.25%. As a consequence, long-term interest rates have decreased. The Company anticipates that these actions by the ~~three months ended September 30, 2018. Average loans~~FOMC will continue to put downward pressure on its net ofinterest margin. In general, the ~~allowance and discounts on purchased loans comprised 88.8% of average earning assets for the nine months ended September 30, 2019, compared~~Company believes rate increases lead to ~~87.9% for the nine months ended September 30, 2018.~~improved net interest margins whereas rate decreases result in correspondingly lower net interest margins.

The following ~~tables depict,~~table depicts, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities for ~~Delmarva.~~the Company. Such yields or costs are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.

Three Months Ended

Three Months Ended

September 30, 2019

September 30, 2018

(Dollars in Thousands)

Average

Yield

Average



Yield

(Unaudited)

Balance

Interest

(Annualized)

Balance

Interest

(Annualized)

Assets













Cash & Due From Banks

$
28,749

$
72

0.99
%
$
25,522

$
61

0.95
%
Interest Bearing Deposits From Banks

19,341

99

2.03
%

9,202

41

1.77
%
Taxable Securities (1)

35,694

214

2.38
%

36,179

195

2.14
%
Tax-exempt Securities (2)

23,004

209

3.60
%

20,317

185

3.61
%
Total Investment Securities (1) (2)

58,698

423

2.86
%

56,496

380

2.67
%
Federal Funds Sold

13,440

58

1.71
%

10,508

48

1.81
%
Loans: (3)









Commercial and Industrial (4)

61,915

835

5.35
%

51,831

704

5.39
%
Real Estate (4)

557,883

7,487

5.32
%

537,815

7,063

5.21
%
Consumer (4)

1,186

16

5.35
%

1,438

20

5.52
%
Keyline Equity (4)

17,711

269

6.03
%

19,506

274

5.57
%
Visa Credit Card

254

4

6.25
%

288

5

6.89
%
State and Political

648

11

6.73
%

793

12

6.00
%
Keyline Credit

215

9

16.61
%

216

10

18.37
%
Other Loans

101

2

7.86
%

123

2

6.45
%
Total Loans (2)

639,913

8,633

5.35
%

612,010

8,090

5.24
%
Allowances For Credit Losses and Discounts on Loans

7,987



8,245





Total Loans, Net

631,926



603,765





Other Assets

36,887



36,748





Total Assets/Interest Income

$
789,041

$
9,213

$
742,241

$
8,559



Liabilities and Stockholders' Equity













Deposits In Domestic Offices













Non-interest Bearing Demand

$
201,926

$
—

—
%
$
187,490

$
—

—
%
Interest Bearing Demand

54,115

52

0.38
%

53,431

35

0.26
%
Money Market Accounts

55,198

41

0.29
%

70,280

50

0.28
%
Savings Accounts

65,100

24

0.15
%

65,169

24

0.15
%
All Time Deposits

275,238

1,438

2.07
%

243,945

897

1.46
%
Total Interest Bearing Deposits

449,651

1,555

1.37
%

432,825

1,006

0.92
%
Total Deposits

651,577

—

620,315

—

Funds Purchased

49,103

316

2.55
%

43,761

283

2.57
%
Notes Payable

6,500

113

6.90
%

6,500

113

6.90
%
Lease Liability

676

6

3.52
%

—

—

—
%
Other Liabilities

4,715

—

1,676

—



Stockholder's Equity

76,470

—

69,989

—



Total Liabilities & Equity/Interest Expense

$
789,041

$
1,990

$
742,241

$
1,402



Earning Assets/Interest Income (2)

$
731,392

$
9,213

5.00
%
$
688,216

$
8,559

4.93
%
Interest Bearing Liabilities/Interest Expense

$
505,930

$
1,990

1.56
%
$
483,086

$
1,402

1.15
%
Net interest income (5)

$
7,223





$
7,157



Earning Assets/Interest Expense

1.08
%





0.81
%
Net Interest Spread (2)

3.44
%





3.78
%
Net Interest Margin (2)

3.92
%





4.13
%

4455

Table of Contents


	Three Months Ended						Three Months Ended
	September 30, 2020						September 30, 2019
(Dollars in Thousands)	Average				Yield		Average				Yield
(Unaudited)	Balance		Interest		(Annualized)		Balance		Interest		(Annualized)
Assets
Cash & Due From Banks	$	202,812	$	48	0.09	%	$	28,749	$	72	0.99	%
Interest Bearing Deposits From Banks		34,239		6	0.07	%		19,341		99	2.03	%
Taxable Securities (1)		103,629		538	2.06	%		35,694		214	2.38	%
Tax-exempt Securities (2)		36,816		328	3.53	%		23,004		209	3.60	%
Total Investment Securities (1) (2)		140,445		866	2.45	%		58,698		423	2.86	%
Federal Funds Sold		38,028		5	0.05	%		13,440		58	1.71	%
Loans: (3)
Commercial and Industrial (4)		190,733		2,045	4.25	%		62,085		835	5.34	%
Real Estate (4)		843,266		10,483	4.93	%		558,072		7,488	5.32	%
Consumer (4)		4,374		64	5.81	%		1,186		16	5.35	%
Keyline Equity (4)		15,259		139	3.61	%		17,809		269	5.99	%
Visa Credit Card		227		3	5.24	%		254		4	6.25	%
State and Political		529		9	6.75	%		648		11	6.73	%
Keyline Credit		150		7	18.51	%		215		9	16.61	%
Other Loans		1,024		6	2.32	%		101		2	7.86	%
Total Loans (2)		1,055,562		12,756	4.79	%		640,370		8,634	5.35	%
Allowance For Credit Losses		10,754						7,702
Unamoritized Discounts on Acquired Loans		4,914						742
Total Loans, Net		1,039,894						631,926
Other Assets		65,988						36,887
Total Assets/Interest Income	$	1,521,406	$	13,681			$	789,041	$	9,286

Liabilities and Stockholders' Equity
Deposits In Domestic Offices
Non-interest Bearing Demand	$	384,796	$	—	—	%	$	201,926	$	—	—	%
Interest Bearing Demand		109,033		122	0.44	%		54,115		52	0.38	%
Money Market Accounts		176,221		223	0.50	%		55,198		41	0.29	%
Savings Accounts		107,780		44	0.16	%		65,100		24	0.15	%
All Time Deposits		437,560		1,899	1.72	%		275,238		1,439	2.07	%
Total Interest Bearing Deposits		830,594		2,288	1.09	%		449,651		1,556	1.37	%
Total Deposits		1,215,390		—				651,577		—
Funds Purchased		138,030		398	1.14	%		49,103		316	2.55	%
Borrowings		25,131		402	6.35	%		6,500		113	6.90	%
Lease Liability		2,291		16	2.77	%		676		6	3.52	%
Other Liabilities		5,825		—				4,715		—
Stockholder's Equity		134,739		—				76,470		—
Total Liabilities & Equity/Interest Expense	$	1,521,406	$	3,104			$	789,041	$	1,991

Earning Assets/Interest Income (2)	$	1,471,086	$	13,681	3.69	%	$	760,598	$	9,286	4.84	%
Interest Bearing Liabilities/Interest Expense	$	996,046	$	3,104	1.24	%	$	505,930	$	1,991	1.56	%
Net interest income (5)			$	10,577					$	7,295

Earning Assets/Interest Expense					0.84	%					1.04	%
Net Interest Spread (2)					2.45	%					3.28	%
Net Interest Margin (2)					2.85	%					3.81	%

(1)

~~(1)~~

Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which is reflected as a component of ~~shareholder's~~stockholder's equity.

(2)

~~(2)~~

Presented on a taxable-equivalent basis using the statutory federal and state income tax rate of 26.5%. Taxable equivalent adjustment of ~~$55~~$87 thousand and $3$2 thousand are included in the calculation of tax exempt income for investment interest income and loan interest income, respectively for the period ended September 30, ~~2019~~2020 and ~~$49~~$55 thousand and $3 thousand respectively, for the period ended September 30, ~~2018.~~

2019.

(3)

~~(3)~~

Loans placed on nonaccrual are included in average balances.

(4)

~~(4)~~

Yields do not include the average balance of the fair value adjustment for pools of non-credit impaired loans acquired or discounts on credit impaired loans acquired.

(5)

~~(5)~~

Net interest income on the ~~financial~~consolidated statements of income includes fees and charges on loans of $62 thousand and $58 ~~and $24~~thousand for the periods ended September 30, 2020 and 2019 ~~and 2018~~ respectively.

Nine Months Ended

Nine Months Ended

September 30, 2019

September 30, 2018


Average



Yield

Average



Yield

(Dollars in Thousands)

Balance

Interest

(Annualized)

Balance

Interest

(Annualized)

Assets

Cash & Due From Banks

$
26,372

$
211

1.07
%
$
23,507

$
142

0.81
%
Interest Bearing Deposits From Banks

9,656

144

1.99
%

8,950

112

1.67
%
Taxable Securities (1)

34,558

689

2.67
%

35,489

571

2.15
%
Tax‑exempt Securities (2)

21,946

606

3.69
%

19,646

559

3.80
%
Total Investment Securities (1) (2)

56,504

1,295

3.06
%

55,135

1,130

2.74
%
Federal Funds Sold

5,623

81

1.93
%

6,223

86

1.85
%
Loans: (3)









Commercial and Industrial (4)

62,884

2,588

5.50
%

50,369

1,884

5.00
%
Real Estate (4)

560,426

22,215

5.30
%

509,773

19,749

5.18
%
Consumer (4)

1,186

49

5.52
%

1,492

62

5.56
%
Keyline Equity (4)

17,822

772

5.79
%

17,930

731

5.45
%
Visa Credit Card

267

14

7.01
%

286

16

7.48
%
State and Political

684

33

6.45
%

829

38

6.13
%
Keyline Credit

219

29

17.70
%

222

29

17.47
%
Other Loans

104

5

6.43
%

126

5

5.31
%
Total Loans (2)

643,592

25,705

5.34
%

581,027

22,514

5.18
%
Allowances For Credit Losses and Discounts on Loans

8,157





8,442





Total Loans, Net

635,435





572,585





Other Assets

37,781





35,431





Total Assets/Interest Income

$
771,371

$
27,225



$
701,831

$
23,842



Liabilities and Stockholders' Equity













Deposits In Domestic Offices













Non‑interest Bearing Demand

$
190,106

$
—

—
%
$
175,056

$
—

—
%
Interest Bearing Demand

53,795

157

0.39
%

49,053

76

0.21
%
Money Market Accounts

56,179

123

0.29
%

69,490

155

0.30
%
Savings Accounts

64,735

72

0.15
%

63,696

72

0.15
%
All Time Deposits

270,184

4,035

2.00
%

226,022

2,354

1.39
%
Total Interest Bearing Deposits

444,893

4,387

1.32
%

408,261

2,657

0.87
%
Total Deposits

634,999

—

583,317

—

Funds Purchased

49,855

922

2.47
%

45,628

803

2.35
%
Lease Liability

684

16

3.13
%

—

—

—
%
Notes Payable

6,500

337

6.93
%

6,088

314

6.90
%
Other Liabilities

4,623

—



1,316

—



Stockholder's Equity

74,710

—



65,482

—



Total Liabilities & Equity/Interest Expense

$
771,371

$
5,662



$
701,831

$
3,774



Earning Assets/Interest Income (2)

$
715,375

$
27,225

5.09
%
$
651,335

$
23,842

4.89
%
Interest Bearing Liabilities/Interest Expense

$
501,932

$
5,662

1.51
%
$
459,977

$
3,774

1.10
%
Net interest income (5)



$
21,563





$
20,068



Earning Assets/Interest Expense





1.06
%





0.77
%
Net Interest Spread (2)





3.58
%





3.80
%
Net Interest Margin (2)





4.03
%





4.12
%

4556

Table of Contents


	Nine Months Ended						Nine Months Ended
	September 30, 2020						September 30, 2019
	Average				Yield		Average				Yield
(Dollars in Thousands)	Balance		Interest		(Annualized)		Balance		Interest		(Annualized)
Assets
Cash & Due From Banks	$	113,150	$	121	0.14	%	$	26,372	$	211	1.07	%
Interest Bearing Deposits From Banks		31,967		101	0.42	%		9,656		144	1.99	%
Taxable Securities (1)		89,828		1,592	2.36	%		34,558		689	2.67	%
Tax‑exempt Securities (2)		35,591		956	3.58	%		21,946		606	3.69	%
Total Investment Securities (1) (2)		125,419		2,548	2.71	%		56,504		1,295	3.06	%
Federal Funds Sold		35,702		117	0.44	%		5,623		81	1.93	%
Loans: (3)
Commercial and Industrial (4)		164,446		5,515	4.47	%		63,079		2,588	5.49	%
Real Estate (4)		851,609		32,811	5.13	%		560,690		22,215	5.30	%
Consumer (4)		4,477		202	6.01	%		1,186		49	5.52	%
Keyline Equity (4)		16,011		479	3.99	%		17,934		772	5.76	%
Visa Credit Card		231		11	6.34	%		267		14	7.01	%
State and Political		557		28	6.70	%		684		33	6.45	%
Keyline Credit		90		24	35.52	%		219		29	17.70	%
Other Loans		1,917		11	0.76	%		104		5	6.43	%
Total Loans (2)		1,039,338		39,081	5.01	%		644,163		25,705	5.34	%
Allowance For Credit Losses		8,761						7,720
Unamoritized Discounts on Acquired Loans		5,373						1,008
Total Loans, Net		1,025,204						635,435
Other Assets		59,358						37,781
Total Assets/Interest Income	$	1,390,800	$	41,968			$	771,371	$	27,436

Liabilities and Stockholders' Equity
Deposits In Domestic Offices
Non‑interest Bearing Demand	$	326,746	$	—	—	%	$	190,106	$	—	—	%
Interest Bearing Demand		94,320		296	0.42	%		53,795		157	0.39	%
Money Market Accounts		156,985		652	0.55	%		56,179		123	0.29	%
Savings Accounts		98,407		141	0.19	%		64,735		72	0.15	%
All Time Deposits		439,066		6,242	1.89	%		270,184		4,036	2.00	%
Total Interest Bearing Deposits		788,778		7,331	1.24	%		444,893		4,388	1.32	%
Total Deposits		1,115,524		—				634,999		—
Borrowings		119,228		1,348	1.51	%		49,855		921	2.47	%
Notes Payable		13,590		656	6.43	%		6,500		337	6.93	%
Lease Liability		2,318		49	2.82	%		684		16	3.13	%
Other Liabilities		6,734		—				4,623		—
Stockholder's Equity		133,406		—				74,710		—
Total Liabilities & Equity/Interest Expense	$	1,390,800	$	9,384			$	771,371	$	5,662

Earning Assets/Interest Income (2)	$	1,345,576	$	41,968	4.15	%	$	742,318	$	27,436	4.94	%
Interest Bearing Liabilities/Interest Expense	$	923,914	$	9,384	1.35	%	$	501,932	$	5,662	1.51	%
Net interest income (5)			$	32,584					$	21,774

Earning Assets/Interest Expense					0.93	%					1.02	%
Net Interest Spread (2)					2.80	%					3.43	%
Net Interest Margin (2)					3.23	%					3.92	%

(1)

~~(1)~~

(2)

~~(2)~~

Presented on a taxable-equivalent basis using the statutory income tax rate of 26.5% ~~for 2019 and 2018.~~. Taxable equivalent ~~adjustments~~adjustment of ~~$160~~$253 thousand and $9$7 thousand are included in the calculation of tax exempt income for investment interest income and loan interest income, respectively for the nine months ended September 30, ~~2019~~2020 and ~~$148~~$160 thousand and ~~$10~~$9 thousand respectively, for the nine months ended September 30, ~~2018.~~

2019.

(3)

~~(3)~~

Loans placed on nonaccrual are included in average balances.

(4)

~~(4)~~

Yields do not include the average balance of the fair value adjustment for pools of non-credit impaired loans acquired or discounts on credit impaired loans acquired.

(5)

~~(5)~~

Net interest income on the ~~financial~~consolidated statements of income includes fees and charges on loans of $234 thousand and $220 ~~and $191~~thousand for the nine month periods ~~ending~~ended September 30, 2020 and 2019, ~~and 2018~~ respectively.

Table of Contents

The level of interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. The following ~~tables show~~table shows the effect that these factors had on the interest earned from ~~Delmarva’s~~the Company’s interest-earning assets and interest incurred on its interest-bearing liabilities for the periods indicated.

Rate and Volume Analysis

Three Months Ended September 30, ~~2019~~2020 Versus September 30, ~~2018~~2019

(Dollars in Thousands)


	Increase (Decrease) Due to
(Unaudited)	Volume		Rate		Net

							Increase (Decrease) Due to
							Volume		Rate		Net
Earning Assets
Loans (1)	$	369	$	174	$	543	$	5,598	$	(1,474)	$	4,124
Investment securities
Taxable		(3)		22		19		407		(83)		324
Exempt from Federal income tax		24		—		24		125		(6)		119
Federal funds sold		13		(3)		10		106		(159)		(53)
Other interest income		45		13		58		673		(790)		(117)
Total interest income		448		206		654		6,909		(2,512)		4,397
Interest Bearing Liabilities
Interest bearing deposits		39		510		549		1,318		(584)		734
Notes payable and leases		12		(6)		6		336		(37)		299
Funds purchased		35		(2)		33		572		(490)		82
Total Interest Expense		86		502		588		2,226		(1,111)		1,115
Net Interest Income	$	362	$	(296)	$	66	$	4,683	$	(1,401)	$	3,282

(1)

~~(1)~~

Nonaccrual loans are included in average balances and do not have a material effect on the average yield.

~~Table of Contents~~

Rate and Volume Analysis

Nine Months Ended September 30, ~~2019~~2020 Versus September 30, ~~2018~~2019

(Dollars in Thousands)


	Increase (Decrease) Due to
	Volume		Rate		Net

							Increase (Decrease) Due to
							Volume		Rate		Net
Earning Assets
Loans (1)	$	2,424	$	767	$	3,191	$	15,768	$	(2,392)	$	13,376
Investment securities
Taxable		(15)		133		118		1,102		(199)		903
Exempt from Federal income tax		65		(18)		47		377		(27)		350
Federal funds sold		(8)		3		(5)		433		(397)		36
Other interest income		9		23		32		1,075		(1,208)		(133)
Total interest income		2,475		908		3,383		18,755		(4,223)		14,532
Interest Bearing Liabilities
Interest bearing deposits		238		1,492		1,730		3,391		(447)		2,944
Notes payable and leases		57		(18)		39		429		(77)		352
Funds purchased		74		45		119		1,283		(857)		426
Total Interest Expense		369		1,519		1,888		5,103		(1,381)		3,722
Net Interest Income	$	2,106	$	(611)	$	1,495	$	13,652	$	(2,842)	$	10,810

(1)

~~(1)~~

Nonaccrual loans are included in average balances and do not have a material effect on the average ~~yield.~~

yield

Table of Contents

Interest Sensitivity. ~~Delmar~~The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. ~~Delmar~~The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. ~~Delmar~~The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.

At September 30, ~~2019~~2020 and December 31, ~~2018, Delmar~~2019, the Company was asset sensitive within the one-year time frame when looking at a repricing gap analysis. The cumulative gap as a percentage of total assets up to one year was ~~23.72%~~20.0% and ~~25.6%~~14.0% as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. A positive gap indicates more assets than liabilities are repricing within the indicated time frame.

Provision and Allowance for ~~Loan~~Credit Losses

~~Delmar~~The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and for timely identifying potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon ~~a number of~~past charge-off history and assumptions ~~about future events~~regarding qualitative factors related to the current environment and the economy, which it believes to be reasonable, ~~but which~~however may not prove to be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for ~~loan~~credit losses or that additional increases in the ~~loan loss~~ allowance for credit losses will not be required.

~~Delmar’s~~The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance. ~~Delmar’s~~The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the prior three years is utilized in determining the appropriate allowance. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The historical loss factors may also be modified based upon other qualitative factors including, but not limited to, local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio.

~~Table of Contents~~

The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. A loan is considered impaired when, based on current information and events, it is probable that ~~Delmar~~the Company 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 a case-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. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in ~~Delmar’s~~the Company’s opinion the ultimate source of repayment will be generated from the liquidation of collateral.

The sum of the two parts constitutes management’s best estimate of an appropriate allowance for ~~loan~~credit losses. When the estimated allowance is determined, it is presented to ~~Delmar’s~~the Company’s Board of Directors for review and approval on a quarterly basis.

At September 30, ~~2019~~2020 and December 31, ~~2018, Delmar’s~~2019, the Company’s allowance for ~~loan~~credit losses amounted to approximately ~~$7.1~~$11.4 million and $7.3 million, or 1.1% and 0.7% of outstanding ~~loans. Delmar’s~~loans, respectively. The Company’s provision for loan losses was ~~$300,000~~$2.0 million for the three months ended September 30, ~~2019 and~~2020, compared to $300 thousand for the three months ended September 30, ~~2018. Delmar’s~~2019. The Company’s provision for ~~loan~~credit losses was ~~$900,000~~$5.1 million for the

Table of Contents

nine months ended September 30, 2020, compared to $900 thousand for the nine months ended September 30, ~~2019, compared to $825,000~~2019. This increase in the provision for the three and nine month periods ended September 30, 2020 compared with the same periods in 2019 was primarily related to the COVID-19 pandemic and qualitative adjustment factors made to the allowance for credit losses related to rising unemployment and economic uncertainty in the Company’s markets; however, it was also partially due to the inclusion of Partners. The provision for credit losses during the three and nine months ended September 30, ~~2018.~~2020, as well as the allowance for credit losses as of September 30, 2020, represents management’s best estimate of the impact of the COVID-19 pandemic on the ability of the Company’s borrowers to repay their loans. Management continues to carefully assess the exposure of the Company’s loan portfolio to the COVID-19 pandemic related factors, including economic trends and their potential effect on asset quality. As of September 30, 2020, the Company’s delinquencies and nonperforming assets have not been materially impacted by the COVID-19 pandemic.

~~Delmar~~The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, ~~Delmar~~the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

The following table illustrates ~~Delmar’s~~the Company’s past due and nonaccrual loans at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

Past Due and Nonaccrual Loans

(Dollars in Thousands)

At September 30, ~~2019~~2020 and December 31, ~~2018~~2019

30 - 89 Days

Greater than 90 Days

Total


September 30, 2019

Past Due

Past Due

Past Due

NonAccrual
Other Real Estate Secured

$
569

$
2,005

$
2,574

$
2,806
1-4 Family Residential

2,315

616

2,931

2,107
Other

178

—

178

214
TOTAL

$
3,062

$
2,621

$
5,683

$
5,127


	30 - 89 Days		Greater than 90 Days		Total
September 30, 2020	Past Due		Past Due		Past Due		NonAccrual
Real Estate Mortgage
Construction and land development	$	66	$	176	$	242	$	176
Residential real estate		1,242		698		1,940		3,215
Nonresidential		1,078		1,327		2,405		412
Home equity loans		—		54		54		54
Commercial		179		489		668		489
Consumer and other loans		3		—		3		—
TOTAL	$	2,568	$	2,744	$	5,312	$	4,346

30 - 89 Days

Greater than 90 Days

Total


December 31, 2018

Past Due

Past Due

Past Due

NonAccrual
Other Real Estate Secured

$
2,618

$
3,129

$
5,747

$
4,423
1-4 Family Residential

1,675

1,722

3,397

4,547
Other

1,068

268

1,336

178
TOTAL

$
5,361

$
5,119

$
10,480

$
9,148


	30 - 89 Days		Greater than 90 Days		Total
December 31, 2019	Past Due		Past Due		Past Due		NonAccrual
Real Estate Mortgage
Construction and land development	$	424	$	177	$	601	$	177
Residential real estate		1,973		702		2,675		1,620
Nonresidential		779		1,823		2,602		2,608
Home equity loans		—		—		—		5
Commercial		1,438		94		1,532		131
Consumer and other loans		20		—		20		—
TOTAL	$	4,634	$	2,796	$	7,430	$	4,541

Nonaccrual loans decreased ~~$4.0 million~~$195 thousand over the nine months ended September 30, 2020 to $4.3 million. At December 31, 2019, ~~to $5.1 million. There were two relationships with combined aggregate balances~~the Company had $4.5 million of ~~$3.2 million that were paid off during~~loans classified as nonaccrual. During the first ~~three quarters~~nine months of ~~2019. Charge-offs~~2020 the Company moved an additional $1.5 million of ~~remaining balances~~loans to nonaccrual status. This increase in loans classified as nonaccruals was offset by paydowns on ~~these two relationships totaled approximately $200,000. One loan with a balance of approximately $400,000, reduced by a charge-off of $190,000, was reclassed into~~ other ~~real estate~~

~~Table of Contents~~

~~owned.~~loans classified as nonaccrual. Management believes these relationships were adequately reserved at September 30, ~~2019~~2020 and December 31, ~~2018. Restructured loans~~2019. TDRs must have ~~six~~nine months of continuous contractual payments to return to accrual status. ~~Restructured loans~~TDRs not past due or classified as nonaccrual at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 amounted to ~~$8.4~~$7.9 million and ~~$11.1~~$8.4 million, respectively. Total ~~restructured loans~~TDRs decreased ~~$7.0 million~~ $403 thousand

Table of Contents

from December 31, ~~2018~~2019 to September 30, ~~2019. Approximately $3.8 million~~2020. This decrease is attributable to paydowns of ~~this decrease related to~~loan balances on loans ~~that were on nonaccrual~~considered TDRs, offset by one loan relationship with a balance of $500 thousand at ~~December~~September 31, ~~2018 that were paid off~~2020, which was also classified as a TDR during the first ~~nine months of 2019. In addition, there was one relationship with aggregate balances of $2.7 million that paid off during the second~~ quarter of ~~2019.~~2020.

Nonperforming assets, defined as nonaccrual loans, loans contractually past due 90 days or more as to principal or interest and still accruing, and OREO, at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 were ~~$8.8~~$7.4 million and ~~$13.4~~$7.0 million, respectively. ~~Delmar’s~~The Company’s ratio of nonperforming assets to total assets was ~~1.1%~~0.48% at September 30, ~~2019~~2020 and ~~1.8%~~0.56% at December 31, ~~2018. Nonperforming assets at December 31, 2018 included five loan relationships acquired~~2019. This decrease is mainly due to asset growth as well as the decrease in nonaccruals over the ~~Liberty transaction which are carried at fair value and against which no additional reserves have been established. During the first~~ nine months ended September 30, 2020.

It is likely that the COVID-19 pandemic and the economic disruption related to it will negatively impact the Company’s financial position and operating results for the balance of ~~2019 two~~2020. Although it is too early to determine what the ultimate impact will be on the Company, we believe we may experience deterioration in asset quality, increased levels of ~~these relatioships had paid off, leaving three relationships with aggregrate balances~~charge-offs, and an increased level of ~~$810,000, which are net of remaining discounts of $258,000.~~ provision for credit losses.

The following tables provide additional information on ~~Delmar’s~~the Company’s nonperforming assets at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

Nonperforming Assets

At September 30, ~~2019~~2020 and December 31, ~~2018~~2019

(Dollars in thousands)


	September 30,			December 31,
	2019			2018

							September 30,			December 31,
							2020			2019
Nonperforming assets:
Nonaccrual loans	$	5,127		$	9,148		$	4,346		$	4,541
Loans past due 90 days or more and accruing		—			606			286			5
Total nonperforming loans (NPLs)	$	5,127		$	9,754		$	4,632		$	4,546
Other real estate owned (OREO)		3,641			3,660			2,796			2,417
Total nonperforming assets (NPAs)	$	8,768		$	13,414		$	7,428		$	6,963
Performing TDR's and TDR's 30-89 days past due	$	8,583		$	11,805		$	7,908		$	8,427
NPLs/Total Assets		0.65	%		1.32	%		0.30	%		0.36	%
NPAs/Total Assets		1.11	%		1.81	%		0.48	%		0.56	%
NPAs and TDRs/Total Assets		2.19	%		3.41	%		0.99	%		1.23	%
Allowance for loan losses/NPLs		137.59	%		72.41	%
Allowance for credit losses/NPLs								246.03	%		160.67	%

Nonperforming Loans by Type

At September 30, ~~2019~~2020 and December 31, ~~2018~~2019

(Dollars in thousands)

September 30,

December 31,

2019

2018
Other real estate secured

$
2,806

$
4,761
1-4 family residential secured

2,263

4,547
Other

214

446

$
5,283

$
9,754


	September 30,		December 31,
	2020		2019
Real Estate Mortgage
Construction and land development	$	176	$	177
Residential real estate		3,501		1,620
Nonresidential		412		2,608
Home equity loans		54		5
Commercial		489		131
Consumer and other loans		—		5
Total	$	4,632	$	4,546

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The following table provides data related to loan balances and the allowance for ~~loan~~credit losses for the nine months ended September 30, ~~2019~~2020 and the year ended December 31, ~~2018.~~2019.

Allowance for ~~Loan~~Credit Losses Data

(Dollars in Thousands)

At September 30, ~~2019~~2020 and December 31, ~~2018~~2019


	September 30,			December 31,
	2019			2018

							September 30,			December 31,
							2020			2019
Average loans outstanding	$	643,592		$	592,528		$	1,039,338		$	685,985
Total loans outstanding		633,661			632,577			1,054,539			993,988
Total nonaccrual loans		5,127			9,148			4,346			4,541
Net loans charged off		909			814			1,050			1,201
Provision for loan losses		900			1,175
Allowance for loan losses		7,054			7,063
Allowance as a percentage of total loans		1.1	%		1.1	%
Provision for credit losses								5,142			1,441
Allowance for credit losses								11,396			7,304
Allowance as a percentage of total loans outstanding								1.1	%		0.7	%
Net loans charged off to average loans outstanding		0.1	%		0.1	%		0.1	%		0.2	%
Nonaccrual loans as a percentage of total loans		0.8	%		1.4	%
Nonaccrual loans as a percentage of total loans outstanding								0.4	%		0.5	%

The following table represents the activity of the allowance for ~~loan~~credit losses for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 by loan type:

Allowance for Credit Losses and Recorded Investments in Financing Receivables

(Dollars in Thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2019

2018

2019

2018
Balance at beginning of period

$
7,066

$
7,096

$
7,063

$
6,703
Charge-offs

Other real estate secured

—

(143)

(421)

(347)
1 - 4 family residential secured

—

—

(198)

(52)
Other

(454)

(84)

(632)

(202)
Total

(454)

(227)

(1,251)

(601)
Recoveries

Other real estate secured

84

9

97

77
1 - 4 family residential secured

24

19

165

143
Other

34

28

80

78
Total

142

56

342

298
Provision

300

300

900

825
Balance at end of period

7,054

7,225

7,054

7,225

September 30, 2020

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

Development

Real Estate

Nonresidential

Home Equity

Commercial

and Other

Unallocated

Total

Quarter Ended

Beginning Balance

898

1,893

5,487

184

1,430

10,001

Charge-offs

—

(38)

—

(497)

(55)

—

(590)

Recoveries

—

Provision

682

��

655

504

1,967

Ending Balance

907

1,934

6,137

216

1,589

593

11,396

Nine Months Ended

Beginning Balance

602

1,380

4,073

142

826

267

7,304

Charge-offs

—

(25)

(163)

(13)

(828)

(103)

—

(1,132)

Recoveries

—

Provision

304

569

2,217

1,571

326

5,142

Ending Balance

907

1,934

6,137

216

1,589

593

11,396

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	September 30, 2019
	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Quarter Ended										��
Beginning Balance	$	575	$	1,203	$	3,784	$	144	$	624	$	10	$	726	$	7,066
Charge-offs		—		—		—		—		(425)		(28)		—		(453)
Recoveries		5		24		80		—		23		9		—		141
Provision		15		86		(66)		8		504		20		(267)		300
Ending Balance	$	595	$	1,313	S	3,798	$	152	$	726	$	11	$	459	$	7,054
Nine Months Ended
Beginning Balance		647		1,521		3,629		122		641		13		490		7,063
Charge-offs		(11)		(193)		(410)		(4)		(534)		(99)		—		(1,251)
Recoveries		9		165		88		—		43		37		—		342
Provision		(50)		(180)		491		34		576		60		(31)		900
Ending Balance		595		1,313		3,798		152		726		11		459		7,054

The following table provides information related to the allocation of the allowance for ~~loan~~credit losses by loan category, the related loan balance for each category, and the percentage of loan balance to total loans by category:

Allocation of the Allowance for ~~Loan~~Credit Losses

At September 30, ~~2019~~2020 and December 31, ~~2018~~2019

(Dollars in thousands)

September 30,

December 31,

2019

2018

Percent

Percent

of

of

Loan

Total

Loan

Total


Balances

Allocation

Loans

Balances

Allocation

Loans

Other real estate secured

$
425,329

$
4,393

67
%
$
425,474

$
4,276

67
%
1-4 family residential secured

143,186

1,461

23
%

145,967

1,643

23
%
Other

65,146

741

10
%

61,135

654

10
%
Unallocated

—

459

—
%

—

490

—
%

$
633,661

$
7,054

100
%
$
632,576

$
7,063

100
%


	September 30,						December 31,
	2020						2019
					Percent						Percent
					of						of
	Loan				Total		Loan				Total
	Balances		Allocation		Loans		Balances		Allocation		Loans
Real Estate Mortgage
Construction and land development	$	74,193	$	907	7	%	$	84,751	$	602	9	%
Residential real estate		201,779		1,934	19	%		209,286		1,380	21	%
Nonresidential		565,024		6,137	54	%		544,549		4,073	55	%
Home equity loans		33,358		216	3	%		37,715		142	4	%
Commercial		175,088		1,589	17	%		111,997		826	11	%
Consumer and other loans		5,097		20	0	%		5,690		14	1	%
Unallocated		—		593	—	%				267	—	%
	$	1,054,539	$	11,396	100	%	$	993,988	$	7,304	100	%

On March 22, 2020 (revised April 7, 2020), the five federal bank regulatory agencies and the Conference of State Bank Supervisors issued joint guidance with respect to loan modifications for borrowers affected by COVID-19 (the “March 22 Joint Guidance”). The March 22 Joint Guidance encouraged banks, savings associations, and credit unions to make loan modifications for borrowers affected by COVID-19 and, importantly, assured those financial institutions that they will not (i) receive supervisory criticism for such prudent loan modifications and (ii) be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. The federal banking regulators confirmed with FASB that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current (i.e., less than 30 days past due on contractual payments) prior to any loan modification are not TDRs.

In addition, Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law by President Trump on March 27, 2020 provides banks, savings associations, and credit unions with the ability to make loan modifications related to COVID-19 without categorizing the loans as a TDR or conducting the analysis to make the determination, which is intended to streamline the loan modification process. Any such suspension is effective for the term of the loan modification; however, the suspension is only permitted for loan modifications made during the effective period and only for those loans that were not more than thirty (30) days past due as of December 31, 2019.

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In an effort to support the Company’s borrowers in their times of need, the Company has granted loan payment deferrals to certain borrowers, who were current on their payments prior to the COVID-19 pandemic, on a short-term basis of three to six months. As of September 30, 2020, on a consolidated basis, the Company had approved loan payment deferrals or payments of interest only for 116 loans totaling $93.8 million, all of which are still accruing interest, which represents approximately 9.4% of total loans outstanding. At June 30, 2020 the Company had approved loan payment deferrals or payments of interest only for loans totaling $286.6 million, which represented approximately 28.8% of total loans outstanding. This decrease of $192.8 million in loans balances consists of 432 loans, which demonstrates that a significant portion of the portfolio returned to a normal payment schedule during the third quarter.

The following table presents a summary of the loan payment deferrals, full payment and interest only payment deferrals, as a of percentage of the number of loans outstanding and loan balances outstanding, granted by the Company as of September 30, 2020 related to the COVID-19 pandemic:


As of September 30, 2020
Loan Payment Deferrals - COVID 19 pandemic

Number of loans for full payment deferral completed		96	Number of Loans Outstanding (%)	2.22	%

Number of loans for interest only payment deferral completed		20	Number of Loans Outstanding (%)	0.46	%

Number of loans for loan payment deferral completed		116	Number of Loans Outstanding (%)	2.68	%

Loan balances for full payment deferral completed (dollars in thousands)	$	69,938	Loan Balances Outstanding (%)	7.01	%

Loan balances for interest only payment deferral completed (dollars in thousands)	$	23,889	Loan Balances Outstanding (%)	2.39	%

Loan balances for loan payment deferral completed (dollars in thousands)	$	93,827	Loan Balances Outstanding (%)	9.41	%

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The following table presents a summary of the loan payment deferrals by loan portfolio segmentation, full payment and interest only payment deferral, as of percentage of total loan balances outstanding and total loan portfolio segmentation balances outstanding, granted by the Company as of September 30, 2020 related to the COVID-19 pandemic:


As of September 30, 2020
						Loan balances for loan
				Loan balances for loan		payment deferral completed
		Loan balances for loan		payment deferral completed		as a percentage of total loan
		payment deferral completed	Number of loans for loan	as a percentage of total loan		portfolio segmentation
Loan portfolio segmentation:		(dollars in thousands)	payment deferral completed	balances outstanding (%)		balances outstanding (%)
Commercial and Industrial (full payment deferral)	$	8,061	22	0.81	%	6.74	%
Commercial and Industrial (interest only payment deferral)		1,027	6	0.10		0.86
Non-Owner Occupied Commercial Real Estate (full payment deferral)		35,884	19	3.60		13.57
Non-Owner Occupied Commercial Real Estate (interest only payment deferral)		5,624	3	0.56		2.13
Owner Occupied Commercial Real Estate (full payment deferral)		14,578	18	1.46		5.79
Owner Occupied Commercial Real Estate (interest only payment deferral)		14,717	8	1.48		5.84
Owner Occupied 1-4 Family (full payment deferral)		1,429	6	0.14		2.18
Non-Owner Occupied 1-4 Family (full payment deferral)		8,154	25	0.82		6.22
Non-Owner Occupied 1-4 Family (interest only payment deferral)		1,004	2	0.10		0.77
Consumer Loans (full payment deferral)		—	—	—		—
Consumer Loans (interest only payment deferral)		—	—	—		—
Agriculture Loans (full payment deferral)		—	—	—		—
Agriculture Loans (interest only payment deferral)		—	—	—		—
Residential Construction (interest only payment deferral)		1,482	3	0.15		4.64
Commercial Construction (interest only payment deferral)		1,693	2	0.17		4.13
Home Equity Installment Loans (interest only payment deferral)		35	1	0.01		0.88
Home Equity Line of Credit (interest only payment deferral)		139	1	0.01		0.41
Totals	$	93,827	116	9.41	%

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The Company continues to closely monitor credit risk and its exposure to increased loan losses resulting from the impact of the COVID-19 pandemic on its borrowers. The Company has identified nine specific higher risk industries to monitor the credit exposure of during this crisis.


As of September 30, 2020
		Loan balances		As a percentage of
		outstanding	Number of loans	total loan balances
Higher Risk Industries		(dollars in thousands)	outstanding	outstanding (%)
Hospitality (Hotels)	$	78,910	37	7.91	%
Amusement Services		9,178	13	0.92
Restaurants		44,913	75	4.5
Retail Commercial Real Estate		46,913	46	4.7
Movie Theatres		2,450	2	0.25
Aviation		—	—	—
Charter Boats/Cruises		—	—	—
Commuter Services		180	7	0.02
Manufacturing/Distribution		3,219	16	0.32
Totals	$	185,763	196	18.62	%

The tables below identify these higher risk industries, the Company’s exposure to them and the balance of the loans within these higher risk industries which have requested and the Company has granted loan payment deferrals for.


As of September 30, 2020
					Loan balances for loan
					payment deferral completed
		Loan balances for loan			as a percentage of total loan
		payment deferral completed	Number of loans for loan		portfolio segmentation
Higher Risk Industries		(dollars in thousands)	payment deferral completed		balances outstanding (%)
Hospitality (Hotels)	$	—	—		—	%
Amusement Services		—	—		—
Restaurants		—	—	��	—
Retail Commercial Real Estate		56,827	35		121.13
Movie Theatres		—	—		—
Aviation		—	—		—
Charter Boats/Cruises		—	—		—
Commuter Services		—	—		—
Manufacturing/Distribution		—	—		—
Totals	$	56,827	35		30.59	%

Noninterest Income and Expense

Noninterest Income. ~~Delmar’s~~The Company’s primary source of noninterest income is service charges on deposit accounts. Other sources of noninterest income include ATM activity income, debit card income, safe deposit box income, mortgage banking income at Delmarva, mortgage banking income related to Partners’ majority owned subsidiary JMC, and ~~investment fees and commissions.~~earnings on bank owned life insurance policies.

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Noninterest income during the three months ended September 30, 2019 was $1.1 million, compared to noninterest income during the three months ended September 30, 2018 of $783,000, an increase of $348,000, or 44.4%. Noninterest income during theand nine months ended September 30, ~~2019 was $2.7~~2020 increased $1.2 million ~~compared to noninterest income during~~and $3.3 million, or 109.0% and 122.0%, respectively, over the ~~nine months ended September 30, 2018 of $2.3 million, an increase of $398,000, or 17.1%.~~same periods in 2019. This increase was primarily attributable to the Partners Share Exchange, which contributed $1.5 million and $3.5 million, respectively, to the Company’s noninterest income during the three and nine months ended September 30, 2020. Service charges on deposit accounts decreased $98 thousand and $233 thousand, or 33.4% and 27.0%, respectively, for the three and nine months ended September 30, 2020 as compared to the same time periods in 2019. These decreases were due primarily to a decrease in overdraft and nonsufficient fund balance fees, which is a result of the increase in deposit balances. Gains on sale of investment securities decreased by $97 thousand and increased by $471 thousand, respectively, during the three and nine month periods ended September 30, 2020 as compared to the same periods of 2019. During the nine months ended September 30,, the Company recorded a gain of $381 thousand on the sale of $17.5 million in mortgage-backed investment securities that was not present during the same periods ended September 30, 2019. The sale of the investment securities allowed the Company to take advantage of temporarily inflated prices in agency pass-through securities, harvest a one-time gain that is not exhauseted over the life of the investment securities sold, and reduce premium risk as prepayment speeds on these investment securities were projected to pick up. The Company reinvested the sales proceeds and deployed excess cash through the purchase of $38.7 million in mortgage-backed investment securities. The remaining increases were due primarily to gains on investment securities that were called ~~during 2019 of $97,000 and approximately $239,000~~as well as equity investment gains recorded in ~~gains on purchased credit impaired loans~~income during the first three ~~month~~quarters of 2020 due to market factors that were not present during the first nine months of 2019. In addition, mortgage banking income increased by $1.3 million and $2.6 million, or 100%, for the three and nine ~~month periods ending~~months ended September 30, 2020 compared with the same periods in 2019. This new income stream is due to the acquisition of Partners late in 2019 and their majority owned subsidiary, Johnson Mortgage.

Noninterest expense during the three months ended September 30, 2019 was $5.5 million, compared to noninterest expense during the three months ended September 30, 2018 of $5.2 million. This was an increase of $338,000, or 6.5%. Noninterest expense for theand nine months ended September 30, 2020 and 2019 ~~was $16.6~~increased $3.7 million and $10.6 million, or 67.7% and 63.8%, respectively, compared with the same periods in 2019. The significant increase is due to the Partners Share Exchange which ~~was an increase of $238,000, or 1.5%, from~~contributed $3.8 million and $10.6 million towards the Company’s noninterest expense total for the three months and nine months ended September 30, ~~2018 expenses of $16.3 million. Other expenses decreased~~2020, respectively. Salaries and employee benefits increased by ~~$271,000 during~~$2.3 million and $6.3 million, or 83.8% and 74.1%, respectively, for the ~~first~~three and nine months ~~of 2019 as~~ended September 30, 2020 compared to the ~~first nine months of 2018. This decrease was mainly~~same periods in 2019. These increases were primarily due to ~~a decrease~~the inclusion of $2.2 million and $6.0 million in ~~bank acquisition costs, conversion costs, and legal fees related to the acquisition of Liberty Bell Bank expensed during the first nine months of 2018. This decrease was offset by increases in~~Partners salaries and employee benefits and increases due to staffing related changes, merit increases and benefit costs for the three and nine month periods ended September 30, 2020 compared to the same periods in 2019. Premises and equipment expense during the three and nine months ended September 30, 2020 increased by $252 thousand and $676 thousand, or 28.1% and 24.7%, respectively, compared to the same periods in 2019. These increases were primarily due to the inclusion of $244 thousand and $742 thousand in Partners premises and equipment ~~which reflect a full~~during the three and nine months ended September 30, 2020, respectively, and were partially offset by decreases in repairs and maintenance costs and the expiration of ~~expenditures for~~legacy Liberty ~~Bell Bank employees~~maintenance and ~~facilities~~software contracts. Other expenses increased by $1.1 million and $3.4 million, or 70.2% and 67.1%, respectively, during the three and nine months ended September 30, 2020 compared with the same periods in ~~2019 as compared~~2019. These increases were primarily due to ~~2018.~~the inclusion of $1.2 million and $3.6 million in Partners other expenses during the three and nine months ended September 30, 2020, respectively, along with increases in legal, accounting, listing, and directors fees. These increases were offset by decreases related to sponsorships, FDIC insurance assessments, training, travel, miscellaneous operating expenses and merger costs.

Income Taxes

During the three month period ended September 30, ~~2019, Delmar~~2020, the Company recorded ~~$810,000~~$308 thousand in the provision for income taxes, compared to ~~$592,000~~$810 thousand for the same period in ~~2018.~~2019. During the nine month period ended September 30, ~~2019, Delmar~~2020, the Company recorded ~~$2.2~~$1.4 million in the provision for income taxes, compared to ~~$1.5~~$2.2 million for the same period in ~~2018.~~2019. The provision for income taxes approximated ~~31.2%~~18.5% and ~~23.9%~~31.2% of income ~~before taxes~~ for the three month period ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The provision for income taxes approximated ~~30.5%~~22.2% and ~~27.3%~~30.5% of income before taxes for the nine months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively.

~~The fair value~~ This decrease is caused by lower merger expenses, which are typically non-deductible, during the first quarter of 2020 as compared to the ~~deferred tax asset acquired~~same period in 2019 as well as the ~~Liberty transaction was $4.3 million, of which $3.4 million related~~decrease in pretax income in 2020 as compared to federal net operating loss carryforwards Delmar could use against future federal tax liabilities. At December 31, 2018 the value of the deferred tax asset related to total net operating loss carryforwards was $1.9 million. 2019.

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In addition, Partners is not subject to Virginia state income tax, but instead pays Virginia franchise tax. The ~~value~~Virginia franchise tax paid by Partners is recorded in the “Other expenses” line item on the Consolidated Statements of ~~the deferred tax asset related to total net operating loss carryforwards was estimated at $233,000 as of~~Income for three and nine months ended September 30, ~~2019.~~2020

Earning Assets

Loans. Loans typically provide higher yields than the other types of earning assets, and thus one of ~~Delmar’s~~the Company’s goals is to increase loan balances. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Gross loans averaged ~~$643.6 million~~$1.039 billion and ~~$592.5~~$686.0 million during the nine months ended September 30, ~~2019~~2020 and the year ended December 31, ~~2018,~~2019, respectively.

The following table shows the composition of the loan portfolio by category:

Composition of Loan Portfolio by Category

(Dollars in Thousands)

As of September 30, ~~2019~~2020 and December 31, ~~2018~~2019

September 30,

December 31,

2019

2018
Other real estate secured

$
425,737

$
426,221
1‑4 Family residential secured

143,280

146,303
Other

65,312

61,379

$
634,329

$
633,903
Less: Unamortized discounts on acquired loans

(668)

(1,327)
Less: Allowance for loan losses

(7,054)

(7,063)

$
626,607

$
625,513


	September 30,		December 31,
	2020		2019
Real Estate Mortgage
Construction and land development	$	74,193	$	84,751
Residential real estate		201,779		209,286
Nonresidential		565,024		544,549
Home equity loans		33,358		37,715
Commercial		175,088		111,997
Consumer and other loans		5,097		5,690
	$	1,054,539	$	993,988
Less: Allowance for credit losses		(11,396)		(7,304)
	$	1,043,143	$	986,684

The following table sets forth the repricing characteristics and sensitivity to interest rate changes of ~~Delmar’s~~the Company’s loan portfolio at September30, ~~2019~~2020 and December 31, ~~2018.~~2019. The amounts shown do not include unamortized discount balances.

Loan Maturities and Interest Rate Sensitivity

At September 30, ~~2019~~2020 and December 31, ~~2018~~2019

(Dollars in thousands)

Between




One Year

One and

After

September 30, 2019

or Less

Five Years

Five Years

Total
Other real estate secured

$
133,867

$
260,436

$
31,434

$
425,737
1-4 family residential secured

60,434

63,221

19,625

143,280
Other

39,561

19,491

6,260

65,312
Total loans receivable

$
233,862

$
343,148

$
57,319

$
634,329
Fixed-rate loans

$
130,015

$
294,577

$
24,880

$
449,472
Floating-rate loans

103,847

48,571

32,439

184,857

$
233,862

$
343,148

$
57,319

$
634,329


			Between
	One Year		One and		After
September 30, 2020	or Less		Five Years		Five Years		Total
Real Estate Mortgage
Construction and land development	$	36,107	$	28,791	$	9,327	$	74,225
Residential real estate		44,192		104,575		53,466		202,233
Nonresidential		113,397		356,929		97,491		567,817
Home equity loans		17,837		2,929		12,814		33,580
Commercial		40,567		109,694		25,629		175,890
Consumer and other loans		2,082		2,403		655		5,140
Total loans receivable	$	254,182	$	605,321	$	199,382	$	1,058,885
Fixed-rate loans	$	184,676	$	549,790	$	105,720	$	840,186
Floating-rate loans		69,506		55,531		93,662		218,699
	$	254,182	$	605,321	$	199,382	$	1,058,885

5268

Table of Contents

Between




One Year

One and

After

December 31, 2018

or Less

Five Years

Five Years

Total
Other real estate secured

$
125,066

$
266,166

$
34,989

$
426,221
1-4 family residential secured

62,673

61,785

21,845

146,303
Other

37,485

19,670

4,224

61,379
Total loans receivable

$
225,224

$
347,621

$
61,058

$
633,903
Fixed-rate loans

$
122,730

$
294,447

$
27,051

$
444,228
Floating-rate loans

102,494

53,174

34,007

189,675

$
225,224

$
347,621

$
61,058

$
633,903


			Between
	One Year		One and		After
December 31, 2019	or Less		Five Years		Five Years		Total
Real Estate Mortgage
Construction and land development	$	34,653	$	34,022	$	16,595	$	85,270
Residential real estate		45,749		76,964		86,965		209,678
Nonresidential		113,838		267,523		166,628		547,989
Home equity loans		18,165		1,769		17,978		37,912
Commercial		40,681		26,254		46,578		113,513
Consumer and other loans		903		1,462		3,395		5,760
Total loans receivable	$	253,989	$	407,994	$	338,139	$	1,000,122
Fixed-rate loans	$	143,007	$	354,251	$	209,296	$	706,554
Floating-rate loans		110,982		53,743		128,843		293,568
	$	253,989	$	407,994	$	338,139	$	1,000,122

At September 30, ~~2019~~2020, other real estate secured loans included ~~$164.8~~$251.2 million of owner-occupied non-farm, non-residential loans, and ~~$152.1~~$263.8 million of other non-farm, non-residential loans, which is ~~38.7%~~28.7% and ~~35.8%~~30.2% of ~~other~~ real estate ~~secured~~mortgage loans, respectively. ~~The other real estate secured category also included $38.3 million of construction and land development loans and $18.0 million of multi-family residential loans at September 30, 2019.~~ These balances represent an increase at September 30, ~~2019~~2020 of ~~$10.0~~$13.1 million and ~~$1.5~~$12.5 million, or ~~6.5%~~5.2% and ~~1.0%~~4.8%, in owner-occupied non-farm, non-residential loans and other non-farm, non-residential loans, respectively, during the nine months ended September 30, 2020.The real estate mortgage category also included $41.0 million of construction and land development loans and $26.7 million of multi-family residential loans at September 30, 2020. Construction and land development as well as multi-family residential loans decreased during the nine months ended September 30, 2020 by $7.0 million and $358 thousand, or 17.0% and 1.3%, respectively. Commercial real estate loans, not including owner-occupied real estate loans, were 277.3% of risk-based capital at September 30, 2020, as compared to 288.5% at December 31, 2019. Construction and land development loans ~~decreased during the nine month period ended September 30, 2019 by $6.0 million, or 13.5%, while multi-family residential decreased approximately $1.2 million, or 6.4% from $18.9 million at the end~~were 56.4% of ~~2018. Commercial real estate loans, not including owner occupied real estate loans, were 304.6% of risk based~~risk-based capital at September 30, ~~2019,~~2020, as compared to ~~340.0%~~67.3% at December 31, 2018. This decrease was mainly due to accelerated paydowns of loan balances during the third quarter. Construction loans were 84.7% of risk based capital at September 30, 2019, as compared to 103.0% at December 31, 2018. The Bank had a number of large contruction projects that paid off during the third quarter of 2019.

At September 30, ~~2019 1-4 family residential secured~~2020, real estate mortgage loans included home equity ~~revolving~~ loans of ~~$20.7~~$33.6 million and ~~closed end 1-4 family~~ residential real estate loans of ~~$122.5 million.~~$201.8 million, compared to $37.7 million and $209.3 million at December 31, 2019, respectively. Home equity revolving loans decreased approximately ~~$131,000~~$4.3 million or ~~0.6%~~13.0% during ~~the nine month period ending September 30, 2019,~~2020, while ~~closed end 1-4 family~~ residential real estate loans decreased ~~$2.7~~$11.2 million or ~~2.1%~~5.5%. At September 30, ~~2019 other~~2020, commercial loans included ~~$62.6~~$175.1 million of commercial and industrial loans, compared to $112.0 million at December 31, 2019, an increase of approximately ~~$4.4~~$63.5 million or ~~7.6% over~~36.3%. Increases in all categories of loans primarily reflects organic growth.

Beginning in March 2020, both Delmarva and Partners began assisting their customers in obtaining PPP loans in order to further assist their communities. Delmarva has provided access for customers and noncustomers to the ~~nine month period ending September 30, 2019.~~program, allowing individuals or businesses visiting their website to access the SBA’s loan application and complete the process through a third party vendor. Loans processed through Delmarva’s website are funded by other banks or outside funding sources. Partners, an approved SBA lender, directly originated and funded PPP loans for its customers totaling approximately $64.2 million. In addition, Partners has funded these PPP loans through its participation in the Federal Reserve Bank’s PPP Liquidity Facility.

Investment Securities. The investment debt securities portfolio is a significant component of ~~Delmar’s~~the Company’s total interest earning assets. Total investment securities averaged ~~$56.5~~$125.4 million during the nine months ended September 30, ~~2019,~~2020, which represents ~~7.9%~~9.3% of average interest earning assets for the period. Total investment securities averaged ~~$55.4~~$61.0 million during the year ended December 31, ~~2018,~~2019, which represents ~~8.1%~~7.6% of average interest earning assets for the year ended December 31, ~~2018.~~2019. The ~~fair value~~increase in average investment securities during the nine months ended September 30, 2020 as compared to the year ended December 31, 2019 was due to additional investment securities obtained as a result of ~~investments acquired~~the strategic management of the Company’s liquidity position as well as an increase in the ~~Liberty transaction was $7.6 million, of which approximately $3.7 million still remains at September 30, 2019.~~unrealized gains on the investment securities portfolio.

~~Delmar~~The Company classifies all of its investment securities as available for sale. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of ~~shareholder’s~~stockholders’ equity (accumulated other comprehensive income), net of deferred taxes. At September 30, ~~2019,~~2020, available for sale

Table of Contents

investment securities totaled ~~$55.9~~$128.0 million, an increase of ~~$4.6~~$23.7 million over the December 31, ~~2018~~2019 balance of ~~$51.3~~$104.3 million. ~~Delmar~~The Company attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as ~~Delmar~~the Company focuses on growing its loan portfolio. ~~Delmar~~The Company primarily invests in securities of U.S. Government agencies, municipals, mortgage-backed securities, and corporate obligations. At September 30, ~~2019~~2020 and December 31, ~~2018~~2019 there were no issuers, other than the U.S. Government and its agencies, whose securities owned by ~~Delmar~~the Company had a book or fair value exceeding 10% of ~~Delmar’s shareholders’~~the Company’s stockholders’ equity.

~~Table of Contents~~

The following table summarizes the amortized cost and fair value of securities available for sale for the dates indicated:

Amortized Cost and Fair Value of Investment Securities

(Dollars in Thousands)

As of September 30, ~~2019~~2020 and December 31, ~~2018~~2019


	September 30, 2019
					Gross		Gross
	Amortized		Percentage		Unrealized		Unrealized		Fair
	Cost		of Total		Gains		Losses		Value

											September 30, 2020
															Gross		Gross
											Amortized		Percentage		Unrealized		Unrealized		Fair
											Cost		of Total		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	8,184	14.9	%	$	187	$	8	$	8,363	$	5,753	4.6	%	$	172	$	7	$	5,918
Obligations of States and political subdivisions		24,636	44.8	%		725		29		25,332		36,787	29.4	%		1,700		—		38,487
Mortgage-backed securities		20,665	37.6	%		120		78		20,707		79,132	63.3	%		1,074		160		80,046
Equity securities		1,500	2.7	%		—		48		1,452
	$	54,985	100.0	%	$	1,032	$	163	$	55,854
Subordinated debt investments												3,486	2.8	%		74		—		3,560
											$	125,158	100.0	%	$	3,020	$	167	$	128,011


	December 31, 2018
					Gross		Gross
	Amortized		Percentage		Unrealized		Unrealized		Fair
	Cost		of Total		Gains		Losses		Value

											December 31, 2019
															Gross		Gross
											Amortized		Percentage		Unrealized		Unrealized		Fair
											Cost		of Total		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	9,469	18.1	%	$	47	$	96	$	9,420	$	10,186	9.9	%	$	162	$	36	$	10,312
Obligations of States and political subdivisions		21,383	40.9	%		139		426		21,096		33,885	32.8	%		716		43		34,558
Mortgage-backed securities		19,942	38.1	%		15		553		19,404		56,275	54.5	%		236		90		56,421
Equity securities		1,500	2.9	%		—		120		1,380
	$	52,294	100.0	%	$	201	$	1,195	$	51,300
Subordinated debt investments												2,988	2.9	%		42		—		3,030
											$	103,334	100.0	%	$	1,156	$	169	$	104,321

In addition, ~~Delmar~~the Company holds stock in various correspondent banks. The balance of these securities was ~~$4.5~~$4.4 million at September 30, ~~2019~~2020 and ~~$4.3~~$5.3 million at December 31, ~~2018, an increase~~2019, a decrease of ~~$143,000~~$891 thousand for the nine months ended September 30, ~~2019.~~2020.

~~Deposits~~Due to the rapid decline and ongoing volatility in the securities markets, as well as the rapid interest rate cuts, during the first half of 2020, the net unrealized gains in the Company’s investment securities portfolio increased by approximately $1.9 million, or 189.1%, to $2.9 million at September 30, 2020.

Subsequent interest rate fluctuations could have an adverse effect on our investment portfolio by increasing reinvestment risk and reducing our ability to achieve our targeted investment returns.

Deposits

Deposits. Average total deposits increased ~~$42.8~~$431.0 million, or ~~7.2%~~63.0%, ~~over~~during the nine ~~month period ending~~months ended September 30, ~~2019.~~2020. Total deposits at September 30, 2020 were $1.235 billion, an increase of $228.1 million or 22.7% over December 31, 2019 balances. At September 30, 2020, noninterest bearing demand deposits balances were ~~$660.4~~$393.3 million, an increase of ~~$45.5~~$131.6 million, or ~~7.4% over December 31, 2018 balances. At September 30, 2019, noninterest bearing deposits balances were $203.0 million, an increase of $17.5 million, or 9.4%~~50.3% from the end of ~~2018.~~2019.

Table of Contents

The following table sets forth the deposits of ~~Delmar~~the Company by category for the period indicated:

Deposits by Category

As of September 30, ~~2019~~2020 and December 31, ~~2018~~2019

(Dollars in Thousands)


	September 30,		Percentage		December 31,		Percentage
	2019		of Deposits		2018		of Deposits

									September 30,		Percentage		December 31,		Percentage
									2020		of Deposits		2019		of Deposits
Noninterest bearing deposits	$	202,983	30.74	%	$	185,476	30.16	%	$	393,267	31.85	%	$	261,631	25.99	%
Interest bearing deposits:
Money market, NOW, and savings accounts		180,860	27.39	%		178,430	29.02	%		407,992	33.04	%		299,922	29.79	%
Certificates of deposit, $100,000 or more		127,998	19.38	%		115,030	18.71	%
Certificates of deposit, $100 thousand or more										284,589	23.05	%		274,387	27.25	%
Other certificates of deposit		148,560	22.50	%		135,990	22.11	%		149,078	12.07	%		170,841	16.97	%
Total interest bearing deposits		457,418	69.26	%		429,450	69.84	%		841,659	68.15	%		745,150	74.01	%
Total	$	660,401	100.00	%	$	614,926	100.00	%	$	1,234,926	100.00	%	$	1,006,781	100.00	%

~~Delmar’s~~The Company’s loan-to-deposit ratio decreased over the nine months ended September 30, ~~2019~~2020 to ~~96.1%~~85.4% from ~~103.0%~~98.7% at December 31, ~~2018.~~2019. Core deposits, which exclude time deposits of ~~$250,000~~$250 thousand or more, provide a relatively

~~Table of Contents~~

stable funding source for ~~Delmar’s~~the Company’s loan portfolio and other interest earning assets. ~~Delmar’s~~The Company’s core deposits increased to ~~$575.4 million~~$1.081 billion at September 30, ~~2019.~~2020. Management anticipates that a stable base of deposits will be ~~Delmar’s~~the Company’s primary source of funding to meet both its short-term and long-term liquidity needs in the future. ~~Delmar~~The Company held ~~$37.7~~$45.4 million in brokered deposits at September 30, ~~2019,~~2020, compared to ~~$41.0~~$60.2 million at December 31, ~~2018.~~2019.

The following table provides a summary of ~~Delmar’s~~the Company’s maturity distribution for certificates of deposit at the dates indicated:

Maturities of Certificates of Deposit

(Dollars in Thousands)


	September 30,
	2019

			September 30,
			2020
Three months or less	$	36,737	$	57,168
Over three months through six months		35,441		47,596
Over six months through twelve months		98,451		97,123
Over twelve months		105,929		231,780
Total	$	276,558	$	433,667

The following table provides a summary of ~~Delmar’s~~the Company’s maturity distribution for certificates of deposit of greater than ~~$100,000~~$100 thousand or more at the dates indicated:

Maturities of Certificates of Deposit Greater than ~~$100,000~~$100 Thousand

(Dollars in Thousands)


	September 30,
	2019

			September 30,
			2020
Three months or less	$	20,598	$	32,415
Over three months through six months		12,002		29,675
Over six months through twelve months		51,907		59,627
Over twelve months		43,491		162,872
Total	$	127,998	$	284,589

Table of Contents

Borrowed Funds

Borrowed funds mainly consist of advances from the ~~Federal Home Loan Bank (‘‘FHLB’’)~~FHLB, subordinated debt, and borrowings from the FRB Discount Window under the PPP Liquidity Facility at September 30, ~~2019 and~~2020 December 31, ~~2018.~~2019 borrowed funds mainly consisted of advances from the FHLB and subordinated debt. At September 30, ~~2019~~2020, long-term advances from the FHLB totaled ~~$49.0~~$53.1 million compared to ~~$43.5~~$48.8 million at December 31, ~~2018.~~2019. At ~~December 31, 2018, Delmar~~September 30, 2020, the Company had short-term advances from the FHLB ~~$7.0 million. At September 30, 2019 there were no outstanding short-term balances with the FHLB. Delmar~~of $21.2 million compared to $48.0 million at December 31, 2019. The Company is required to hold a certain level of FHLB stock in relation to outstanding advance balances. During the second quarter of 2020 the Company was issued over $60 million in borrowings from the FRB Discount Window under the PPP Liquidity Facility in which the loans under the PPP of the SBA originated by the Company have been pledged as collateral. Additionally, during June 2020 the Company acquired an additional $17.6 million in subordinated debt, net of issuance costs.

The following table provides a summary of average outstanding short term borrowings and weighted average rate for each period:

Average Short Term Borrowings

At September 30, ~~2019~~2020 and December 31, ~~2018~~2019

(Dollars in Thousands)

September 30,

December 31,

September 30,

December 31,

2019

2018

Weighted

2020

2019

Weighted

Average

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

3,249

2.65

1,389

1.76

42,427

1.05

9,299

2.04

~~Delmar~~Average short term borrowings and average total borrowings increased by $33.1 million, or 356.3%, and $63.3 million, or 113.0%, respectively, and rates paid decreased by .99% and 0.91%, respectively, for the nine months ended September 30, 2020, primarily due to the inclusion of Partners average short term borrowings and Partners average total borrowings.

The Company also has ~~two~~three subordinated notes, having an aggregate principal amount outstanding of ~~$6.5~~$23.9 million. ~~For additional information on these subordinated notes, please refer to~~Partners’ majority owned subsidiary, JMC, has a warehouseline of credit with another financial institution in the amount of $3.0 million. (See Note 4 – Credit Facilities of the unaudited consolidated financial statements for the period ended September 30, ~~2019.~~2020 for additional information on these subordinated notes and JMC’s warehouse line of credit.).

Capital

At September 30, ~~2019 stockholder’s~~2020 stockholders’ equity was ~~$71.6~~$135.9 million, an increase of ~~$5.6~~$5.1 million, or ~~8.4%~~3.9% from the end of the prior year. This increase during the first nine months of ~~2019~~2020 was due to retained income earned during the period, net of dividends paid during the period, in addition to ~~a decrease~~an increase of $1.4 million in the accumulated other comprehensive ~~loss,~~income, net of deferred tax ~~benefits,~~expense, on securities available for sale. At September 30, 2019, Delmar had an accumulated other comprehensive gain, net of deferred taxes, of $638,000, compared to an accumulated other comprehensive loss, net of deferred tax benefits, of $731,000 at December 31, 2018.

The Federal Reserve and other bank regulatory agencies ~~require bank holding companies and~~ financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The following table presents actual and required capital amounts and ratios as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 for Delmarva and ~~Delmar~~Partners under Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 based on the ~~phase-in~~ provisions of the Basel III Capital Rules and the minimum required capital ~~levels as of January 1, 2019 when the Basel III Capital Rules were fully phased-in.~~levels. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended, to reflect the changes under the Basel III Capital Rules. ~~A more in depth discussion of regulatory capital requirements is included in~~(See Note 9 – Regulatory Capital Requirements of the unaudited consolidated financial statements included in this Quarterly Report on Form ~~10-Q.~~

~~Capital Components~~

~~At September 30, 2019 and December 31, 2018~~

~~(Dollars~~10-Q for a more in ~~Thousands)~~depth discussion of regulatory capital requirements.)

To Be Well

Capitalized

For Capital

Under Prompt

Adequacy

Corrective Action

Actual

Purposes

Provisions

In Thousands

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2019













Total Capital Ratio













Delmar Bancorp

$
78,392

12.6
%
$
65,525

10.5
%
$
—

N/A

The Bank of Delmarva

77,192

12.4
%

65,469

10.5
%

62,351

10.0
%
Tier I Capital Ratio



(To Risk Weighted Assets)



Delmar Bancorp

64,573

10.3
%

53,044

8.5
%

—

N/A

The Bank of Delmarva

69,873

11.2
%

52,999

8.5
%

49,881

8.0
%
Common Equity Tier I Ratio



(To Risk Weighted Assets)



Delmar Bancorp

64,573

10.3
%

43,683

7.0
%

—

N/A

The Bank of Delmarva

69,873

11.2
%

43,646

7.0
%

40,528

6.5
%
Tier I Leverage Ratio

(To Average Assets)

Delmar Bancorp

64,573

8.3
%

31,052

4.0
%

—

N/A

The Bank of Delmarva

69,873

9.0
%

31,052

4.0
%

38,814

5.0
%

Table of Contents

Capital Components

At September 30, 2020 and December 31, 2019

(Dollars in Thousands)


									To Be Well
									Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
	Actual				Purposes				Provisions
In Thousands	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2020
Total Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		81,828	12.8	%		67,195	10.5	%		63,995	10.0	%
Virginia Partners Bank		51,045	13.0	%		41,085	10.5	%		39,129	10.0	%
Tier 1 Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		73,802	11.5	%		54,396	8.5	%		51,196	8.0	%
Virginia Partners Bank		49,599	12.7	%		33,259	8.5	%		31,303	8.0	%
Common Equity Tier 1 Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		73,802	11.5	%		44,796	7.0	%		41,597	6.5	%
Virginia Partners Bank		49,599	12.7	%		27,390	7.0	%		25,434	6.5	%
Tier 1 Leverage Ratio
(To Average Assets)
The Bank of Delmarva		73,802	8.0	%		37,081	4.0	%		46,352	5.0	%
Virginia Partners Bank		49,599	9.5	%		20,797	4.0	%		25,997	5.0	%


									To Be Well
									Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
	Actual				Purposes				Provisions
In Thousands	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2019
Total Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		79,080	12.7	%		65,132	10.5	%		62,030	10.0	%
Virginia Partners Bank		47,122	12.5	%		39,676	10.5	%		37,787	10.0	%
Tier 1 Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		71,752	11.6	%		52,726	8.5	%		49,624	8.0	%
Virginia Partners Bank		46,881	12.4	%		32,119	8.5	%		30,230	8.0	%
Common Equity Tier 1 Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		71,752	11.6	%		43,421	7.0	%		40,320	6.5	%
Virginia Partners Bank		46,881	12.4	%		26,451	7.0	%		24,562	6.5	%
Tier1I Leverage Ratio
(To Average Assets)
The Bank of Delmarva		71,752	9.1	%		31,520	4.0	%		39,399	5.0	%
Virginia Partners Bank		46,881	10.4	%		18,093	4.0	%		22,616	5.0	%

To Be Well

Capitalized

For Capital

Under Prompt

Adequacy

Corrective Action

Actual

Purposes

Provisions

In Thousands

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2018













Total Capital Ratio













(To Risk Weighted Assets)













Delmar Bancorp

$
72,344

11.8
%
$
60,466

9.9
%
$
—

N/A

The Bank of Delmarva

71,498

11.7
%

60,425

9.9
%

61,190

10.0
%
Tier I Capital Ratio













(To Risk Weighted Assets)













Delmar Bancorp

58,516

9.6
%

48,220

7.9
%

—

N/A

The Bank of Delmarva

64,170

10.5
%

48,187

7.9
%

48,952

8.0
%
Common Equity Tier I Ratio













(To Risk Weighted Assets)













Delmar Bancorp

58,516

9.6
%

39,035

6.4
%

—

N/A

The Bank of Delmarva

64,170

10.5
%

39,009

6.4
%

39,774

6.5
%
Tier I Leverage Ratio













(To Average Assets)













Delmar Bancorp

58,516

8.0
%

29,377

4.0
%

—

N/A

The Bank of Delmarva

64,170

8.7
%

29,377

4.0
%

36,721

5.0
%

Table of Contents

Liquidity Management

Liquidity management involves monitoring ~~Delmar’s~~the Company’s sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in ~~Delmar’s~~the Company’s market area. ~~Delmar’s~~The Company’s Federal Funds Sold position averaged ~~$5.6~~$35.7 million during the period ended September 30, ~~2019~~2020 and totaled ~~$15.5~~$34.3 million at September 30, ~~2019,~~2020, as compared to an average of ~~$6.0~~$9.3 million during the year ended December 31, ~~2018~~2019 and a year-end position of ~~$1.3~~$31.2 million at December 31, ~~2018. Delmar~~2019. The Company has available advances from the FHLB. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At September 30, ~~2019,~~2020, advances available totaled approximately ~~$192.4~~$373.8 million of which ~~$49.0~~$74.3 million had been drawn, or used for letters of credit. At December 31, ~~2018,~~2019, advances available totaled approximately ~~$184.5~~$308.6 million of which ~~$50.5~~$96.8 million had been drawn, or used for letters of credit. Management regularly reviews the liquidity position of ~~Delmar~~the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources.

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as ~~Delmar~~the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on ~~Delmar’s~~the Company’s performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

SUPERVISION AND REGULATION

The following information is intended to update, and should be read in conjunction with, the information contained under the caption “Supervision and Regulation” in the Company’s 2019 Annual Report on Form 10-K and the supplement related thereto contained under the same caption in the the Company’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 filed with the SEC on May 15, 2020 and June 30, 2020 filed with the SEC on August 13, 2020.

The CARES Act

On March 27, 2020, the CARES Act was passed by Congress and signed into law by the President of the United States. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of U.S. financial institutions like the Company, Delmarva and Partners. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company, Delmarva and Partners. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including new bills comparable in scope to the CARES Act, prior to the end of 2020.

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Set forth below is a brief overview of select provisions of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company and its subsidiaries, including both Delmarva and Partners. The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein. Future legislation and/or amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the Company Such legislation and related regulations and supervisory guidance will be implemented over time and will remain subject to review by Congress and the implementing regulations issued by federal regulatory authorities. The Company continues to assess the impact of the CARES Act, the potential impact of new COVID-19 legislation and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

Paycheck Protection Program. A principal provision of the CARES Act amended the SBA’s loan program, which Partners participates in, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act (“PPFA”) into law, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of the COVID-19 pandemic, the President signed additional legislation authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020. As a participating lender in the PPP, Partners continues to monitor legislative, regulatory, and supervisory developments related thereto.

Troubled Debt Restructuring and Loan Modifications for Affected Borrowers. The CARES Act permits banks to suspend requirements under U.S. GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so.

Debt Guarantees, Account Insurance Increase, and Temporary Lending Limit Relief. The CARES Act also authorized several key initiatives directly applicable to federal bank regulatory authorities, including (i) the establishment of a program by the FDIC to guarantee the debt obligations of solvent insured depository institutions and their affiliates (including their holding companies) through December 31, 2020 and (ii) an increase by the FDIC and the National Credit Union Association to the insurance coverage on any noninterest-bearing transaction accounts through December 31, 2020.

Federal Reserve Programs and Other Recent Initiatives

Main Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities. On April 9, 2020, the Federal Reserve proposed the creation of the Main Street Lending Program (“MSLP”) to implement certain of these recommendations. On June 15, 2020, the Federal Reserve Bank of Boston opened the MSLP for lender registration. The MSLP supports lending to small- and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP operates through three facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. The Federal Reserve is currently working to refine the MSLP’s operational infrastructure and facilities and is expected to release further rules and operational guidance. Partners has registered as a lender under the MSLP and continues to monitor developments related thereto.

Off-Balance Sheet Arrangements

With the exception of ~~Delmar’s~~the Company’s obligations in connection with its irrevocable letters of credit and loan commitments, ~~Delmar~~the Company has no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.

~~Quantitative and Qualitative Disclosures about Market Risk~~

As a financial institution, Delmar is exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the re-pricings and maturities of interest-earning assets and interest-bearing liabilities, changes in the expected maturities of assets and liabilities arising from embedded options, such as a borrowers’ ability to prepay loans and depositors’ ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR. Delmar’s goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that Delmar maintains. Delmar manages interest rate risk through and asset and liability committee, or ALCO. ALCO is responsible for managing Delmar’s interest rate risk in conjunction with liquidity and capital management.

Delmar engages an independent consulting firm to model its interest rate sensitivity. Delmar uses a net interest income simulation model as its primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of the assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how Delmar expects rates to change on non-maturity of deposits such as interest checking, money market checking, savings accounts as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of 100 to 400 basis points is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of Delmar’s interest rate risk position over a historical time frame for comparison purposes.

At September 30, 2019 Delmar’s asset/liability position was asset sensitive based on its interest rate sensitivity model. Delmar’s net interest income would increase by 6.3% in an up 100 basis point scenario and would increase by 25.0% in an up 400 basis point scenario over a one-year timeframe as of September 30, 2019. Delmar’s net interest income would decrease by 8.9% in down 100 basis point scenario and would decrease by 25.4% in a down 400 basis point scenario over a one-year timeframe as of September 30, 2019. In the two-year horizon, Delmar’s net interest income would increase by 7.3% in an up 100 basis point scenario and would decrease by 11.3% in a down 100 basis point scenario, and would increase by 29.0% in an up 400 basis point scenario at September 30, 2019 and decrease by 33.9% in a down 400 basis point scenario. At September 30, 2019 all interest rate risk stress test measures related to net interest income were within Delmar’s board policy established limits in each of the rate scenarios.

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~~Additional information on Delmar’s interest rate risk sensitivity for a static balance sheet over a one-year time horizon as of September 30, 2019 can be found below.~~


~~Interest Rate Risk in Earning (Net Interest Income)~~
~~September 30, 2019~~
~~Change in interest rates (basis~~	~~Percentage change in net~~
~~points)~~	~~interest income~~
~~+400~~	~~24.97~~	%
~~+300~~	~~18.76~~	%
~~+200~~	~~12.57~~	%
~~+100~~	~~6.32~~	%
~~−100~~	~~(8.90)~~	%
~~−200~~	~~(18.46)~~	%
~~−300~~	~~(23.05)~~	%
~~−400~~	~~(25.41)~~	%

Economic value of equity, or EVE, measures the period end market value of assets less the market value of liabilities and the change in this value as rates change. It models simultaneous parallel shifts in the market interest rates, implied by the forward yield curve. The EVE model calculates the market value of capital by taking the present value of all asset cash flows less the present value of all liability cash flows.

The interest rate risk to capital at September 30, 2019 is shown below and reflects that Delmar’s market value of capital is in an asset sensitive position in which an increase in short-term interest rates is expected to generate higher market values of capital.


~~Interest Rate Risk to Capital~~
~~September 30, 2019~~
~~Change in interest rates (basis~~	~~Percentage change in~~
~~points)~~	~~market value~~
~~+400~~	~~31.87~~	%
~~+300~~	~~24.91~~	%
~~+200~~	~~17.50~~	%
~~+100~~	~~9.23~~	%
~~−100~~	~~(11.88)~~	%
~~−200~~	~~(21.85)~~	%
~~−300~~	~~(12.27)~~	%
~~−400~~	~~(1.47)~~	%

Accounting Standards Update

See ~~Recent~~Note 15-Recent Accounting ~~Pronouncements—Note 15~~Pronouncements of the unaudited consolidated financial statements for the nine months ended September 30, ~~2019~~2020 for details on recently issued accounting pronouncements and their expected impact on the Company’s financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary market risk is interest rate fluctuation and management has procedures in place to evaluate and mitigate this risk. This risk and these procedures are discussed in Part 1, Item 2, of this report under the caption “Quantitative and Qualitative Disclosures about Market Risk”. Not required.

ITEM 4.CONTROLS AND PROCEDURES.

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the the Company’s disclosure controls and procedures, as defined in Rule 15d-15 under the

~~Table of Contents~~

Securities Exchange Act of ~~1934.~~1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting as defined in the Exchange Act Rule 15d-15(f) that occurred during the third quarter of ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time ~~Delmar~~the Company, Delmarva and ~~Delmarva~~Partners are a party to various litigation matters incidental to the conduct of their respective businesses. ~~Delmar~~The Company, Delmarva and ~~Delmarva~~Partners are not presently party to any legal proceedings the resolution of which ~~Delmar~~the Company, Delmarva and ~~Delmarva~~Partners believes would have a material adverse effect on their respective businesses, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

ITEM 1A. RISK FACTORS.

~~None.~~During the three months ended September 30, 2020, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A. “Risk Factors” in the Company’s 2019 Annual Report on Form 10-K and under Part II, Item 1A. “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5.OTHER INFORMATION.

None.

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ITEM 6.EXHIBIT


2.1	Agreement and Plan of Share Exchange, dated as of December ~~31,~~13, 2018, between ~~Delmar~~Partners Bancorp and ~~Virigina~~Virginia Partners Bank (1)
2.1.1	Second Amendment, dated as of August 13, 2019, to Agreement and Plan of Share Exchange, dated as of December 31, 2018, between Partners Bancorp and Virginia Partners Bank (2)
3.1	Articles of Incorporation of Partners Bancorp (3)
3.1.1	Amendment to the Articles of Incorporation of Delmar Bancorp, ~~with amendments thereto (2)~~dated December 20, 2019 (4)
3.1.2	Amendment to the Articles of Incorporation of Partners Bancorp, effective as of August 19, 2020 (5)
3.2	Bylaws of ~~Delmar~~Partners Bancorp,
~~4.1~~	~~Specimen Certificate for Common Stock (3)~~
~~10.1~~	~~Employment Agreement dated~~ effective as of ~~December 13, 2015 between John W. Breda and The Bank of Delmarva (4)~~
~~10.2~~	~~Noncompete Agreement dated as of January 27, 2017 between the Bank of Delmarva and Edward M. Thomas (5)~~
~~10.3~~	~~Delmar Bancorp 2014 Stock Plan~~August 19, 2020 (6)
~~10.4~~	~~Delmar Bancorp 2004 Stock Plan (7)~~
~~10.5~~	~~Liberty Bell Bank 2004 Incentive Stock Option Plan (8)~~
~~10.6~~	~~Liberty Bell Bank Non-Qualified Stock Option Plan (9)~~
~~10.7~~	~~Employment Agreement dated March 24, 2019 between Elizabeth Eicher and The Bank of Delmarva (10)~~
21	~~Subsidiaries of the Registrant (11)~~
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer
32.1	Section 1350 Statement of Principal Executive Officer
32.2	Section 1350 Statement of Principal Financial Officer

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

(1)

Incorporated by reference to Exhibit 2.1 to ~~Delmar’s~~The Company’s Registration Statement on S-4 (Registration No. 333-230599) filed on March 29, 2019.

~~Table of Contents~~

(2)

Incorporated by reference to Exhibit 2.1 to The Company’s Current Report on Form 8-K filed on August 30, 2019.

(3)

Incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 1 to ~~Delmar’s~~The Company’s Registration Statement on Form ~~S-4 filed on May 10, 2019.~~

~~(3)~~

~~Incorporated by reference to Exhibit 3 to Delmar’s Form 1-A filed on November 22, 2017.~~

~~(4)~~

~~Incorporated by reference to Exhibit 6.1 to Delmar’s Form 1-A filed on November 22, 2017.~~

~~(5)~~

~~Incorporated by reference to Exhibit 6.2 to Delmar’s Form 1-A filed on November 22, 2017.~~

~~(6)~~

~~Incorporated by reference to Exhibit 6.3 to Delmar’s Form 1-A filed on November 22, 2017.~~

~~(7)~~

~~Incorporated by reference to Exhibit 6.4 to Delmar’s Form 1-A filed on November 22, 2017.~~

~~(8)~~

~~Incorporated by reference to Exhibit 10.9 to Pre-Effective Amendment No. 1 to Delmar’s Registration Statement on Form S-4 filed on May 10, 2019.~~

~~(9)~~

~~Incorporated by reference to Exhibit 10.10 to Pre-Effective Amendment No. 1 to Delmar’s Registration Statement on Form S-4 filed on May 10, 2019.~~

~~(10)~~

~~Incorporated by reference to Exhibit 10.11 to Delmar’s Registration Statement on~~ S-4 (Registration No. 333-230599) filed on ~~March 29,~~May 10, 2019.

~~(11)~~

(4)

Incorporated by reference to Exhibit 213.1 to ~~Delmar’s Registration Statement~~The Company’s Current Report on ~~S-4 (Registration No. 333-230599)~~Form 8-K filed on ~~March 29,~~December 20, 2019.

(5)

Incorporated by reference to Exhibit 3.1.2 to The Company’s Current Report on Form 8-K filed on August 20, 2020.

(6)

Incorporated by reference to Exhibit 3.2 to The Company’s Current Report on Form 8-K filed on August 20, 2020.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the ~~Company~~registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	~~Delmar~~Partners Bancorp (Registrant)


Date: November ~~7, 2019~~13, 2020	/s/ Lloyd B. Harrison, III
~~By: /s/ John W. Breda~~	~~John W. Breda~~Lloyd B. Harrison, III
~~President and~~	Chief Executive Officer
	(Principal Executive Officer)


Date: November 13, 2020	/s/ J. Adam Sothen
~~Date: November 7, 2019~~	J. Adam Sothen
~~By: /s/ Elizabeth Eicher Holland~~	~~Elizabeth Eicher Holland~~ ~~Senior~~Executive Vice President and Chief Financial Officer
	(Principal Financial ~~Officer and Principal Accounting~~ Officer)

6378




		Page
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)		3

Consolidated Statements of Income (Unaudited)		4

Consolidated Statements of Comprehensive Income ~~(Loss)~~ (Unaudited)		5

Consolidated Statements of Stockholders' Equity (Unaudited)		6

Consolidated Statements of Cash Flows (Unaudited)		7

Notes to Consolidated Financial Statements (Unaudited)		8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		39 47

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		59 76

Item 4. Controls and Procedures		59 76

PART II OTHER INFORMATION


Item 1. Legal ~~Proceedings.~~Proceedings		60 76

Item 1A. Risk ~~Factors.~~Factors		60 76

Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds.~~Proceeds		60 76

Item 3. Defaults Upon Senior ~~Securities.~~Securities		60 76

Item 4. Mine Safety ~~Disclosures.~~Disclosures		60 76

Item 5. Other ~~Information.~~Information		60 76

EXHIBIT INDEX		61 77

SIGNATURES		63 78


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except share data)	2019		2018		2019		2018
INTEREST INCOME ON:
Loans, including fees	$	8,688	$	8,109	$	25,916	$	22,696
Investment securities:
Taxable		171		158		518		465
Exempt from Federal income tax		154		137		445		411
Federal funds sold		58		48		81		86
Other interest income		215		140		527		360
		9,286		8,592		27,487		24,018
INTEREST EXPENSE ON:
Deposits		1,556		1,006		4,388		2,658
Borrowings		435		396		1,274		1,117
		1,991		1,402		5,662		3,775
NET INTEREST INCOME		7,295		7,190		21,825		20,243
Provision for credit losses		300		300		900		825
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		6,995		6,890		20,925		19,418
OTHER INCOME:
Service charges on deposit accounts		295		341		861		987
Gain on sale of investment securities		97		—		97		—
Gains on disposal of other assets		—		8		—		9
Other income		739		434		1,771		1,335
		1,131		783		2,729		2,331
OTHER EXPENSES:
Salaries and employee benefits		2,788		2,696		8,459		8,165
Premises and equipment		897		785		2,732		2,347
Amortization of core deposit intangible		76		126		226		294
(Gains) losses on other real estate owned		44		41		38		142
Other expenses		1,726		1,545		5,097		5,368
		5,531		5,193		16,552		16,316
INCOME BEFORE TAXES ON INCOME		2,595		2,480		7,102		5,433
Federal and state income taxes		810		592		2,167		1,485
NET INCOME	$	1,785	$	1,888	$	4,935	$	3,948
Earnings per common share
Basic earnings per share	$	0.179	$	0.189	$	0.494	$	0.411


For the three month period:
							Accumulated
							Other		Total
	Common				Retained		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Income (Loss)		Equity
Balances, June 30, 2018		100		29,427		34,226		(967)		62,786
COMPREHENSIVE INCOME
Net income		—		—		1,888		—		1,888
Other comprehensive income, net of tax:
Unrealized holding losses on securities available for sale arising during the period		—		—		—		(271)		(271)
TOTAL COMPREHENSIVE INCOME										1,617
Cash dividends, $0.025 per share		—		—		(249)		—		(249)
Common stock issued for stock options exercised		—		4		—		—		4
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		10		—		—		10
Balances, September 30, 2018		100		29,441		35,865		(1,238)		64,168

Balances, June 30, 2019		100		29,481		39,800		448		69,829
COMPREHENSIVE INCOME
Net income		—		—		1,785		—		1,785
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale arising during the period		—		—		—		190		190
TOTAL COMPREHENSIVE INCOME										1,975
Cash dividends, $0.025 per share		—		—		(250)		—		(250)
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		5		—		—		5
Balances, September 30, 2019	$	100	$	29,486	$	41,335	$	638	$	71,559


For the nine month period:
							Accumulated
							Other		Total
	Common				Retained		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Income (Loss)		Equity
Balances, December 31, 2017		82		16,622		32,615		(253)		49,066
COMPREHENSIVE INCOME
Net income		—		—		3,948		—		3,948
Other comprehensive income, net of tax:
Unrealized holding losses on securities available for sale arising during the period		—		—		—		(985)		(985)
TOTAL COMPREHENSIVE INCOME										2,963
Cash dividends, $0.070 per share		—		—		(698)		—		(698)
Common stock issued for stock options exercised		—		12		—		—		12
Common stock issued to shareholders of Liberty Bell Bank		18		12,781		—		—		12,799
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		26		—		—		26
Balances, September 30, 2018		100		29,441		35,865		(1,238)		64,168

Balances, December 31, 2018		100		29,470		37,149		(731)		65,988
COMPREHENSIVE INCOME
Net income		—		—		4,935		—		4,935
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale arising during the period		—		—		—		1,369		1,369
TOTAL COMPREHENSIVE INCOME										6,304
Cash dividends, $0.075 per share		—		—		(749)		—		(749)
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		16		—		—		16
Balances, September 30, 2019	$	100	$	29,486	$	41,335	$	638	$	71,559


(Dollars in thousands)	At September 30, 2019		At December 31, 2018
Originated Loans
Other real estate secured	$	369,039	$	356,141
1 - 4 Family residential secured		120,160		116,771
Other		51,643		48,960
		540,842		521,872
Acquired Loans
Other real estate secured	$	56,698	$	70,080
1 - 4 Family residential secured		23,120		29,532
Other		13,669		12,420
		93,487		112,032
Total Loans
Other real estate secured	$	425,737	$	426,221
1 - 4 Family residential secured		143,280		146,303
Other		65,312		61,379
		634,329		633,903
Less: Unamortized discounts on acquired loans		(668)		(1,327)
Less: Allowance for loan losses		(7,054)		(7,063)
	$	626,607	$	625,513


			1 - 4 Family
	Other Real		Residential
September 30, 2019	Estate Secured		Secured		Other		Total
	Dollars in Thousands
Excellent	$	1,098	$	—	$	6,357	$	7,455
Superior		3,851		254		1,874		5,979
Good		404,785		136,693		53,530		595,008
Fair		7,968		2,977		1,619		12,564
Marginal		—		—		—		—
Substandard		7,628		3,261		1,766		12,655
TOTAL	$	425,330	$	143,185	$	65,146	$	633,661
Non-Accrual	$	2,806	$	2,107	$	214	$	5,127
Troubled debt restructures	$	8,178	$	2,443	$	166	$	10,787
Breakdown of TDRs
TDRs on Non-accrual	$	1,120	$	918	$	166	$	2,204
TDRs Past Due 30-89		—		213		—		213
Performing TDRs		7,058		1,312		—		8,370
TOTAL	$	8,178	$	2,443	$	166	$	10,787
Total Non-performing TDR accounts	$	1,120	$	1,131	$	166	$	2,417


Balance Sheet	Dollars in Thousands

Right-of-use asset classified as premises and equipment	$	3,274
Lease liability classified as other liabilities		3,314

Income Statement

Operating lease cost classified as premises and equipment	$	364

Weighted average lease term, in years		7.55
Weighted average discount rate (1)		3.28	%
Operating cash flows	$	376


	Quarter Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2019		2018		2019		2018
Net income applicable to basic earnings per common share	$	1,785	$	1,888	$	4,935	$	3,948
Weighted average shares outstanding		9,985		9,976		9,985		9,595
Basic earnings per share	$	0.179	$	0.189	$	0.494	$	0.411
Effect of dilutive securities:
Weighted average shares outstanding under options Delmar 2004 stock option plan (1)		—		23		10		28
Weighted average exercise price per share	$	—	$	7.54	$	9.05	$	9.55
Assumed proceeds on exercise	$	—	$	173	$	91	$	267
Average market value per share	$	7.42	$	7.79	$	7.34	$	7.47
Weighted average shares outstanding under options Liberty 2004 stock option plan		12		14		12		12
Weighted average exercise price per share	$	3.98	$	4.01	$	3.98	$	4.02
Assumed proceeds on exercise	$	48	$	56	$	48	$	48
Average market value per share	$	7.42	$	7.79	$	7.34	$	7.47
Less: Treasury stock purchased with assumed proceeds from exercise	$	6	$	7	$	6	$	6
Weighted average shares outstanding under restricted stock plans (2)		9		14		9		10
Diluted weighted average shares and common stock equivalents		10,000		9,997		10,000		9,611
Diluted earnings per share	$	0.179	$	0.189	$	0.494	$	0.411


							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
September 30, 2019
Securities available for sale:
Obligations of U.S. Government agencies	$	—	$	8,363	$	—	$	8,363
Obligations of States and political subdivisions		—		25,332		—		25,332
Mortgage-backed securities		—		20,707		—		20,707
Equity securities		—		1,452		—		1,452
Total securities available for sale	$	—	$	55,854	$	—	$	55,854
December 31, 2018
Securities available for sale:
Obligations of U.S. Government agencies	$	—	$	9,420	$	—	$	9,420
Obligations of States and political subdivisions		—		21,096		—		21,096
Mortgage-backed securities		—		19,404		—		19,404
Equity securities		—		1,380		—		1,380
Total securities available for sale	$	—	$	51,300	$	—	$	51,300


	30 - 89 Days		Greater than 90 Days		Total
September 30, 2019	Past Due		Past Due		Past Due		NonAccrual
Other Real Estate Secured	$	569	$	2,005	$	2,574	$	2,806
1-4 Family Residential		2,315		616		2,931		2,107
Other		178		—		178		214
TOTAL	$	3,062	$	2,621	$	5,683	$	5,127


			Between
	One Year		One and		After
September 30, 2019	or Less		Five Years		Five Years		Total
Other real estate secured	$	133,867	$	260,436	$	31,434	$	425,737
1-4 family residential secured		60,434		63,221		19,625		143,280
Other		39,561		19,491		6,260		65,312
Total loans receivable	$	233,862	$	343,148	$	57,319	$	634,329
Fixed-rate loans	$	130,015	$	294,577	$	24,880	$	449,472
Floating-rate loans		103,847		48,571		32,439		184,857
	$	233,862	$	343,148	$	57,319	$	634,329


									To Be Well
									Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
	Actual				Purposes				Provisions
In Thousands	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019
Total Capital Ratio
Delmar Bancorp	$	78,392	12.6	%	$	65,525	10.5	%	$	—	N/A
The Bank of Delmarva		77,192	12.4	%		65,469	10.5	%		62,351	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		53,044	8.5	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		52,999	8.5	%		49,881	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		43,683	7.0	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		43,646	7.0	%		40,528	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		64,573	8.3	%		31,052	4.0	%		—	N/A
The Bank of Delmarva		69,873	9.0	%		31,052	4.0	%		38,814	5.0	%