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PTRS Partners Bancorp

Filed: 12 Nov 21, 8:42am

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

For the quarterly period ended September 30, 2021

or

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

For the transition period from           to           

Commission File Number: 001-39285

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:

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 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 of the Exchange Act). Yes  No 

As of November 12, 2021 there were 17,856,472 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PARTNERS BANCORP

CONSOLIDATED BALANCE SHEETS

    

September 30, 

December 31, 

2021

2020

(Dollars in thousands, except per share amounts)

(Unaudited)

*

ASSETS

 

  

 

  

Cash and due from banks

$

16,176

$

13,643

Interest bearing deposits in other financial institutions

 

300,771

 

218,667

Federal funds sold

 

29,995

 

50,301

Cash and cash equivalents

 

346,942

 

282,611

Securities available for sale, at fair value

 

115,550

 

124,925

Loans held for sale

5,803

9,858

Loans, less allowance for credit losses of $15,031 at September 30, 2021 and $13,203 at December 31, 2020

 

1,090,169

 

1,022,302

Accrued interest receivable

 

4,408

 

5,229

Premises and equipment, less accumulated depreciation

 

16,347

 

15,439

Restricted stock

 

4,869

 

5,445

Operating lease right-of-use assets

 

6,726

 

3,983

Financing lease right-of-use assets

 

1,721

 

1,824

Other investments

 

5,075

 

5,091

Bank owned life insurance

18,141

14,841

Other real estate owned, net

 

1,303

 

2,677

Core deposit intangible, net

 

2,205

 

2,660

Goodwill

 

9,582

 

9,582

Other assets

 

9,007

 

7,754

Total assets

$

1,637,848

$

1,514,221

LIABILITIES

 

  

 

  

Deposits:

 

  

 

  

Non-interest bearing demand

$

493,786

$

390,511

Interest bearing demand

 

148,955

 

125,131

Savings and money market

 

382,992

 

323,488

Time

 

409,720

 

429,010

 

1,435,453

 

1,268,140

Accrued interest payable on deposits

 

311

 

402

Long-term borrowings with the Federal Home Loan Bank

 

26,478

 

32,972

Subordinated notes payable, net

 

22,157

 

24,101

Other borrowings

640

42,382

Operating lease liabilities

7,053

4,301

Financing lease liabilities

2,155

2,242

Other liabilities

 

4,053

 

2,986

Total liabilities

 

1,498,300

1,377,526

COMMITMENTS, CONTINGENCIES & SUBSEQUENT EVENT

 

  

 

  

STOCKHOLDERS' EQUITY

 

  

 

  

Common stock, par value $.01, authorized 40,000,000 shares, issued and outstanding 17,788,472 as of September 30, 2021 and 17,758,448 as of December 31, 2020, including 58,824 nonvested shares as of September 30, 2021 and 0 nonvested shares as of December 31, 2020

 

177

 

178

Surplus

 

87,058

 

87,200

Retained earnings

 

50,289

 

45,673

Noncontrolling interest in consolidated subsidiaries

1,121

1,346

Accumulated other comprehensive income, net of tax

 

903

 

2,298

Total stockholders' equity

 

139,548

 

136,695

Total liabilities and stockholders' equity

$

1,637,848

$

1,514,221

* Derived from audited consolidated financial statements

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

3

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

(Dollars in thousands, except per share data)

    

2021

    

2020

    

2021

    

2020

INTEREST INCOME ON:

 

  

 

  

 

  

 

  

 

Loans, including fees

$

13,381

$

12,816

$

39,619

$

39,308

Investment securities:

 

  

 

 

  

 

  

Taxable

 

310

 

473

 

757

 

1,337

Tax-exempt

 

216

 

241

 

661

 

702

Federal funds sold

 

25

 

5

 

44

 

117

Other interest income

 

149

 

119

 

404

 

478

 

14,081

 

13,654

 

41,485

 

41,942

INTEREST EXPENSE ON:

 

  

 

  

 

  

 

  

Deposits

 

1,639

 

2,288

 

5,234

 

7,331

Borrowings

 

507

 

816

 

1,667

 

2,053

 

2,146

 

3,104

 

6,901

 

9,384

NET INTEREST INCOME

 

11,935

 

10,550

 

34,584

 

32,558

Provision for (recovery of) credit losses

 

(30)

 

1,967

 

2,568

 

5,142

NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) CREDIT LOSSES

 

11,965

 

8,583

 

32,016

 

27,416

OTHER INCOME:

 

  

 

  

 

  

 

  

Service charges on deposit accounts

 

225

 

197

 

575

 

628

Gain on sales and calls of investment securities

 

3

 

 

22

 

568

Mortgage banking income, net

957

1,305

3,065

2,589

Gains on disposal of other assets

 

 

 

1

 

Other income

 

891

 

828

 

2,880

 

2,236

 

2,076

 

2,330

 

6,543

 

6,021

OTHER EXPENSES:

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

5,837

 

5,124

 

16,783

 

14,725

Premises and equipment

 

1,313

 

1,150

 

3,789

 

3,407

Amortization of core deposit intangible

 

148

 

177

 

455

 

540

Losses on other real estate owned, net

 

35

 

31

 

183

 

75

Other expenses

 

3,057

 

2,767

 

9,130

 

8,347

 

10,390

 

9,249

 

30,340

 

27,094

INCOME BEFORE TAXES ON INCOME

 

3,651

 

1,664

 

8,219

 

6,343

Federal and state income taxes

 

839

 

308

 

1,847

 

1,410

NET INCOME

$

2,812

$

1,356

$

6,372

$

4,933

Net (income) attributable to noncontrolling interest

(116)

(239)

(426)

(370)

NET INCOME ATTRIBUTABLE TO PARTNERS BANCORP

$

2,696

$

1,117

$

5,946

$

4,563

Earnings per common share

 

  

 

  

 

  

 

  

Basic earnings per share

$

0.152

$

0.063

$

0.335

$

0.256

Diluted earnings per share

$

0.151

$

0.063

$

0.334

$

0.256

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

4

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

(Dollars in thousands)

    

2021

    

2020

    

2021

    

2020

NET INCOME

$

2,812

$

1,356

$

6,372

$

4,933

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

  

 

  

 

  

 

  

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

 

287

 

65

 

(1,818)

 

2,452

Deferred income tax effect

 

(490)

 

(17)

 

440

 

(650)

Other comprehensive income (loss), net of tax

 

(203)

 

48

 

(1,378)

 

1,802

Reclassification adjustment for gains included in net income

 

(2)

 

 

(22)

 

(568)

Deferred income tax effect

 

4

 

 

5

 

151

Other comprehensive income (loss), net of tax

 

2

 

 

(17)

 

(417)

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME

 

(201)

 

48

 

(1,395)

 

1,385

COMPREHENSIVE INCOME

$

2,611

$

1,404

4,977

6,318

COMPREHENSIVE (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST

(116)

(239)

(426)

(370)

COMPREHENSIVE INCOME ATTRIBUTABLE TO PARTNERS BANCORP

$

2,495

$

1,165

$

4,551

$

5,948

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

5

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

For the three months ended:

Accumulated

Other

Total

Common

Retained

Noncontrolling

Comprehensive

Stockholders'

(Dollars in thousands, except per share amounts)

    

Stock

    

Surplus

    

Earnings

    

Interest

    

Income

    

Equity

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

 

 

6

 

 

 

 

6

Balances, September 30, 2020

 

$

178

 

$

87,562

 

$

45,013

 

$

1,063

 

$

2,124

 

$

135,940

Balances, June 30, 2021

 

$

177

 

$

87,021

 

$

48,038

 

$

1,005

 

$

1,104

 

$

137,345

Net income

 

 

 

2,696

 

116

 

 

2,812

Other comprehensive loss, net of tax

 

 

 

 

 

(201)

 

(201)

 

  

 

  

 

  

 

  

 

  

 

2,611

Cash dividends, $0.025 per share

 

 

 

(445)

 

 

 

(445)

Stock-based compensation expense

 

 

37

 

 

 

 

37

Balances, September 30, 2021

$

177

$

87,058

$

50,289

$

1,121

$

903

$

139,548

For the nine months ended:

Accumulated

Other

Total

Common

Retained

Noncontrolling

Comprehensive

Stockholders'

(Dollars in thousands, except per share amounts)

    

Stock

    

Surplus

    

Earnings

Interest

    

Income 

    

Equity

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 equity distribution

(45)

(45)

Stock option exercises, net

98

98

Warrant exercises, net

10

10

Stock-based compensation expense

 

 

17

 

 

 

17

Balances, September 30, 2020

 

$

178

 

$

87,562

 

$

45,013

$

1,063

 

$

2,124

 

$

135,940

Balances, December 31, 2020

 

$

178

 

$

87,200

$

45,673

$

1,346

 

$

2,298

 

$

136,695

Net income

 

 

 

5,946

426

 

 

6,372

Other comprehensive loss, net of tax

 

 

 

 

(1,395)

 

(1,395)

 

  

 

  

 

  

 

  

 

4,977

Cash dividends, $0.075 per share

 

 

 

(1,330)

 

 

(1,330)

Stock repurchases

(1)

(208)

(209)

Minority interest equity distribution

(651)

(651)

Stock-based compensation expense

 

 

66

 

 

 

66

Balances, September 30, 2021

$

177

$

87,058

$

50,289

1,121

$

903

$

139,548

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

6

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

    

Nine Months Ended

September 30, 

(Dollars in thousands)

2021

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

5,946

$

4,563

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

 

  

 

  

Provision for credit losses

 

2,568

 

5,142

Depreciation

 

1,209

 

1,076

Amortization and accretion

 

847

 

457

Gain on sales and calls of investment securities

(22)

(568)

Net gains on sales of assets

 

(1)

 

Loss (gains) on equity securities

38

(47)

Gain on sale of loans held for sale, originated

(2,863)

(2,434)

Net losses (gains) on other real estate owned, including write‑downs

 

118

 

(18)

Increase in bank owned life insurance cash surrender value

(300)

(170)

Stock‑based compensation expense, net of employee tax obligation

 

66

 

17

Net accretion of certain acquisition related fair value adjustments

 

(679)

 

(843)

Changes in assets and liabilities:

 

  

 

  

Loans held for sale

6,918

(1,776)

Accrued interest receivable

 

821

 

(3,116)

Other assets

 

(3,447)

 

(399)

Accrued interest payable on deposits

 

(91)

 

(124)

Other liabilities

 

3,819

 

(1,033)

Net cash provided by operating activities

 

14,947

 

727

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchases of securities available for sale

 

(43,912)

 

(59,258)

Purchases of other investments

(23)

(1,890)

Purchases of bank owned life insurance

(3,000)

(6,760)

Purchase of restricted stock

(90)

Proceeds from maturities and paydowns of securities available for sale

 

24,477

 

19,509

Proceeds from sales of securities available for sale

 

26,200

 

18,052

Net increase in loans

 

(69,460)

 

(60,718)

Proceeds from sale of assets

 

174

 

1

Purchases of premises and equipment

 

(2,116)

 

(3,040)

Proceeds from the sales of foreclosed assets

 

1,256

 

147

Proceeds from redemption of restricted stock

 

666

 

890

Net cash used by investing activities

 

(65,828)

 

(93,067)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Increase in demand, money market, and savings deposits, net

 

186,603

 

239,706

Cash received for the exercise of stock options

 

 

98

Cash received for the exercise of warrants

10

Decrease in time deposits, net

 

(19,301)

 

(11,564)

(Decrease) increase in borrowings, net

 

(50,239)

 

59,365

Net (decrease) increase in minority interest contributed capital

(225)

325

Decrease in finance lease liability

(87)

(85)

Cash paid for stock repurchases

(209)

Dividends paid

 

(1,330)

 

(1,335)

Net cash provided by financing activities

 

115,212

 

286,520

Net increase in cash and cash equivalents

 

64,331

 

194,180

Cash and cash equivalents, beginning of period

 

282,611

 

95,111

Cash and cash equivalents, ending of period

$

346,942

$

289,291

Supplementary cash flow information:

 

  

 

  

Interest paid

$

7,422

$

9,509

Income taxes paid

 

2,400

 

3,559

Right of use assets and corresponding lease liabilities

3,016

Total (loss) gain on securities available for sale

$

(1,840)

$

1,386

SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES

 

  

 

  

Loans converted to other real estate owned

$

$

508

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

7

PARTNERS BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Its Significant Accounting Policies

Partners Bancorp (the “Company”) is a multi-bank holding company with 2 wholly owned subsidiaries (the “Subsidiaries”), The Bank of Delmarva (“Delmarva”), a commercial bank 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, 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 Cities of Fredericksburg and Reston, 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 Subsidiaries engage in the general banking business and provide a broad range of financial services to individual and corporate customers, and are subject to competition from other financial institutions. The Subsidiaries are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. The accounting and reporting policies of the Company and its Subsidiaries conform to accounting principles generally accepted 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 the Company; the Subsidiaries, along with their consolidated subsidiaries: Delmarva Real Estate Holdings, LLC., a wholly owned subsidiary of Delmarva, which is a real estate holding company; Davie Circle, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; Delmarva BK Holdings, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; DHB Development, LLC, of which Delmarva holds a 40.55% interest, and which is a real estate holding company; West Nithsdale Enterprises, LLC, of which Delmarva holds a 10% interest, and which is a real estate holding company; and FBW, LLC, of which Delmarva holds 50% interest, and which is a real estate holding company; Bear Holdings, Inc., a wholly owned subsidiary of Partners, which is a real estate holding company; Johnson Mortgage Company, LLC, of which Partners owns a 51% interest, and which is a residential mortgage company; and 410 William Street, LLC, a wholly owned subsidiary of Partners, which holds investment property. All significant intercompany accounts and transactions have been 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 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, 2021 and December 31, 2020, the results of its operations for three and nine months and its cash flows for the nine months ended September 30, 2021 and 2020 are in conformity with U.S. GAAP.

Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or for any other period.

Use of Estimates:

The preparation of consolidated financial statements in conformity with 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.

8

Securities Available for Sale:

Marketable debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are acquired as part of the 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 Reserve Bank (“FRB”) stock, at cost, Federal Home Loan Bank (“FHLB”) stock, at cost, Atlantic Central Bankers Bank (“ACBB”) stock, at cost, and Community Bankers Bank (“CBB”) stock, are equity interests in the FRB, FHLB, ACBB, and CBB, respectively. These securities do not have a readily determinable fair value for purposes of ASC 320-10 Investments-Debts and Equity Securities (“ASC 320-10”) 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. 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.

9

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 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.

The allowance for loan losses is maintained at a level believed to be 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 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, while recoveries of amounts previously charged off are credited to the allowance. 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 a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss element is determined statistically using an informal loss migration analysis that examines loss experience and the related internal gradings of loans charged off over a current 3 year period. 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.

Any unallocated portion of the allowance reflects management's estimate of probable inherent but undetected losses within the 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. The historical losses used in the migration analysis may not be representative of actual unrealized losses inherent in the 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 Policies

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

management deems the asset to be uncollectible;
repayment is deemed to be made beyond the reasonable time frames;

10

the asset has been classified as a loss by internal or external review; and
the borrower has filed bankruptcy and the loss becomes evident owing to a lack of assets.

Acquired Loans

Loans acquired in connection with business combinations are recorded at their acquisition-date fair value with no carry over of related allowance for credit losses. Any allowance for 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 considered a number of factors in evaluating the 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 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 ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 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 considered several factors as an indicator that an acquired loan had 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 by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.

Under the ASC 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 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 difference. The 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 credit losses resulting in an increase in the allowance for 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, Nonrefundable Fees and Other Costs (ASC 310-20), whereby the premium or discount derived from the fair market value adjustment, on a 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.

11

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.

The COVID-19 pandemic has caused a significant disruption in economic activity worldwide, including in market areas served by the Company. Estimates for the allowance for loan losses at September 30, 2021 include probable losses related to the pandemic. The Company expects that the pandemic will continue to have an effect on its results of operations. If economic conditions deteriorate further, then additional provision for loan losses may be required in future periods. It is unknown how long these conditions will last and what the ultimate financial impact will be to the Company. Depending on the severity and duration of the economic consequences of the pandemic, the Company’s goodwill may become impaired.

The Company had accommodated certain borrowers affected by the COVID-19 pandemic by granting short-term payment deferrals or periods of interest-only payments. As of September 30, 2021, all of the loan balances that were approved by the Company, on a consolidated basis, for loan payment deferrals or payments of interest only have either resumed regular payments or have been paid off.  Generally, a short-term payment deferral does not result in a loan modification being classified as a TDR. Additionally, the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, and as subsequently supplemented, provided that certain loan modifications that were (1) related to COVID-19 and (2) for loans that were not more than 30 days past due as of December 31, 2019 are not required to be designated as TDRs.  

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 1-to-4 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 0

12

market adjustments were deemed necessary in the first three quarters of 2021 or during 2020. 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 0 allowance has been made as of September 30, 2021 or December 31, 2020 for possible repurchases. Management does not believe that a provision for early default or refinancing costs is necessary at September 30, 2021 or December 31, 2020.

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, 2021 and December 31, 2020 and an adjustment was not recorded. Gains and losses on the 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 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 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 expenses. At September 30, 2021 there were 3 properties with a combined estimated value of $1.3 million included in OREO and at December 31, 2020, there were 5 properties with a combined estimated value of $2.7 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 Company acquired Liberty Bell Bank (“Liberty”). ASC 350, Intangibles-Goodwill and Other (“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 acquisitions are amortized (See Note 13 – 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—Stock Compensation (“ASC 718-10”) for accounting and reporting for stock-based compensation plans. ASC 718-10 defines a fair value at grant date to be used for measuring compensation expense for stock-based compensation plans to be recognized in the statement of income.

13

Earnings Per Share:

Basic earnings per common share are determined by dividing net income and accretion of warrants by the weighted average number of shares outstanding for each period, giving retroactive effect to stock splits and dividends. Weighted average common shares outstanding were 17,788,472 and 17,758,074 for the three and nine months ended September 30, 2021, respectively. Calculations of diluted earnings per common share include the average dilutive common stock equivalents outstanding during the period, unless they are anti-dilutive. Dilutive common equivalent shares consist of stock options calculated using the treasury stock method and restricted stock awards (See Note 9 – Earnings Per Share for further information).

Note 2. Investment Securities

Securities available for sale are as follows:

September 30, 2021

Dollars in Thousands

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies and corporations

$

5,575

$

65

$

118

$

5,522

Obligations of States and political subdivisions

 

34,047

 

1,395

 

35

 

35,407

Mortgage-backed securities

 

72,700

 

421

 

540

 

72,581

Subordinated debt investments

1,990

52

2

2,040

$

114,312

$

1,933

$

695

$

115,550

December 31, 2020

Dollars in Thousands

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies and corporations

$

6,758

$

137

$

12

$

6,883

Obligations of States and political subdivisions

 

36,245

 

1,878

 

 

38,123

Mortgage-backed securities

 

74,857

 

1,127

 

108

 

75,876

Subordinated debt investments

3,985

62

4

4,043

$

121,845

$

3,204

$

124

$

124,925

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, 2021 and December 31, 2020, are as follows:

September 30, 2021

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

$

2,233

$

91

$

1,473

$

27

$

3,706

$

118

Obligations of States and political subdivisions

 

1,252

 

35

 

 

 

1,252

 

35

Mortgage-backed securities

 

50,226

 

502

 

2,613

 

38

 

52,839

 

540

Subordinated debt investments

498

2

498

2

Total securities with unrealized losses

$

54,209

$

630

$

4,086

$

65

$

58,295

$

695

14

December 31, 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

$

2,494

$

12

$

$

$

2,494

$

12

Obligations of States and political subdivisions

 

 

 

 

 

 

Mortgage-backed securities

 

18,525

 

108

 

 

 

18,525

 

108

Subordinated debt investments

 

996

 

4

 

 

 

996

 

4

Total securities with unrealized losses

$

22,015

$

124

$

$

$

22,015

$

124

For individual securities classified as either available for sale or held to maturity, the Company must determine whether a decline in fair value below the amortized cost basis is other than temporary. In estimating OTTI losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. If the decline in fair value is considered to be other than temporary, the cost basis of the individual security shall be written down to the fair value as a new cost basis and the amount of the write-down shall be included in earnings (that is, accounted for as a realized loss).

At September 30, 2021 there were 16 mortgage-backed securities (“MBS”), 3 agency investments, 1 subordinated debt investment and 4 municipal securities that have been in a continuous unrealized loss position for less than twelve months. At September 30, 2021 there was 1 MBS security and 1 agency security that had been in a continuous unrealized loss position for more than twelve months. Management found no evidence of OTTI on any of these securities and believes that unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary. As of September 30, 2021, management also believes it has the ability and intent to hold the securities for a period of time sufficient for a recovery of cost.

During the three and nine months ended September 30, 2021 the Company sold 4 and 14 securities, respectively, resulting in a gain of $3 thousand and $17 thousand, respectively. During the three and nine months ended September 30, 2020, the Company sold 10 securities, resulting in a gain of $401 thousand. During the three and nine months ended September 30, 2021, 3 and 10 securities were either matured or called, respectively, resulting in a gain of $0 and $5 thousand, respectively. During the three and nine months ended September 30, 2020, 14 securities were either matured or called, resulting in a net gain of $167 thousand for both periods.

The Company has pledged certain securities as collateral for qualified customers’ deposit accounts at September 30, 2021 and December 31, 2020. The amortized cost and fair value of these pledged securities was $11.2 million and $11.6 million, respectively, at September 30, 2021. The amortized cost and fair value of these pledged securities was $8.9 million and $9.3 million, respectively, at December 31, 2020.

Contractual maturities of investment securities at September 30, 2021 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. MBS have no stated maturity and primarily reflect investments in various Pass-through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association. Repayment of MBS is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

15

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

September 30, 2021

 

Securities Available for Sale

Dollars in Thousands

Amortized

Fair

    

Cost

    

Value

Due in one year or less

$

$

Due after one year through five years

 

2,719

 

2,913

Due after five years through ten years

 

19,865

 

20,415

Due after ten years or more

 

19,028

 

19,641

Mortgage-backed securities, due in monthly installments

 

72,700

 

72,581

$

114,312

$

115,550

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

Major categories of loans as of September 30, 2021 and December 31, 2020 are as follows:

(Dollars in thousands)

    

September 30, 2021

    

December 31, 2020

Originated Loans

 

  

 

  

Real Estate Mortgage

Construction and land development

$

102,550

$

71,361

Residential real estate

159,243

128,285

Nonresidential

477,229

394,539

Home equity loans

21,433

18,526

Commercial

108,953

115,387

Consumer and other loans

 

3,708

 

2,924

 

873,116

 

731,022

Acquired Loans

 

  

 

  

Real Estate Mortgage

Construction and land development

$

583

$

3,345

Residential real estate

 

50,653

 

71,064

Nonresidential

141,048

175,206

Home equity loans

12,067

15,700

Commercial

26,662

37,411

Consumer and other loans

 

1,071

 

1,757

232,084

304,483

Total Loans

 

  

 

  

Real Estate Mortgage

 

 

Construction and land development

$

103,133

$

74,706

Residential real estate

209,896

199,349

Nonresidential

618,277

569,745

Home equity loans

33,500

34,226

Commercial

135,615

152,798

Consumer and other loans

 

4,779

 

4,681

 

1,105,200

 

1,035,505

Less: Allowance for credit losses

 

(15,031)

 

(13,203)

$

1,090,169

$

1,022,302

16

Allowance for Credit Losses

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

Real Estate Mortgage (which includes Construction and Land Development, Residential Real Estate, Nonresidential Real Estate and Home Equity Loans)
Commercial
Consumer and other loans

Each of these segments are reviewed and analyzed quarterly using historical charge-off experience for their respective segments as well as the following qualitative factors:

Changes in the levels and trends in delinquencies, non-accruals, classified assets and TDRs
Changes in the value of underlying collateral
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 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 FASB ASC 450-10- 20 calculated reserve for environmental factors.

All credit exposures graded at a rating of “non-pass” with outstanding balances less than or equal to $250 thousand and credit exposures graded at a rating of “pass” are reviewed and analyzed quarterly using historical charge-off experience for their respective segments as well as the qualitative factors discussed above. The historical charge-off experience is further adjusted based on delinquency risk trend assessments and concentration risk assessments.

All credit exposures graded at a rating of “non-pass” with outstanding balances greater than $250 thousand and all credit exposures classified as TDR’s 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, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance for credit losses estimate or a charge-off to the allowance for credit losses.

17

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 credit losses inherent in the loan portfolio as of September 30, 2021 and December 31, 2020.

The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, 2021 and December 31, 2020:

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

    

Development

    

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

and Other

    

Unallocated

    

Total

Balance at September 30, 2021

Purchased credit impaired loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$

$

$

$

$

41

$

$

$

41

Related loan balance

 

45

 

1,652

 

1,896

 

 

160

 

 

 

3,753

Individually evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$

$

89

$

1,239

$

$

459

$

$

$

1,787

Related loan balance

 

598

 

2,332

7,427

 

52

 

595

 

 

 

11,004

Collectively evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance in allowance

$

1,126

$

2,062

$

7,842

$

268

$

1,401

$

37

$

467

$

13,203

Related loan balance

 

102,490

 

205,912

 

608,954

 

33,448

 

134,860

 

4,779

 

 

1,090,443

Note: The balances above include unamortized discounts on acquired loans of $2.7 million.

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

    

Development

    

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

and Other

    

Unallocated

    

Total

Balance at December 31, 2020

Purchased credit impaired loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$

$

$

$

$

41

$

$

$

41

Related loan balance

 

44

 

1,839

 

2,237

 

 

361

 

 

 

4,481

Individually evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$

$

156

$

17

$

$

500

$

$

$

673

Related loan balance

 

175

 

2,947

 

6,990

 

 

489

 

 

 

10,601

Collectively evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance in allowance

$

903

$

2,195

$

7,567

$

271

$

1,402

$

37

$

114

$

12,489

Related loan balance

 

74,487

 

194,563

 

560,518

 

34,226

 

151,948

 

4,681

 

 

1,020,423

Note: The balances above include unamortized discounts on acquired loans of $4.0 million.

18

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for three and nine months ended September 30, 2021 and the year ended December 31, 2020. 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, 2021

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

$

1,038

$

2,206

$

8,654

$

228

$

1,803

$

32

$

1,348

$

15,309

Charge-offs

 

 

(11)

 

(138)

 

 

(91)

 

(23)

 

 

(263)

Recoveries

 

 

6

 

 

 

2

 

7

 

 

15

Provision/(recovery)

 

88

 

(50)

 

565

 

40

 

187

 

21

 

(881)

 

(30)

Ending Balance

$

1,126

$

2,151

$

9,081

$

268

$

1,901

$

37

$

467

$

15,031

Nine Months Ended

 

  

 

  

 

  

 

  

 

  

Beginning Balance

$

903

$

2,351

$

7,584

$

271

$

1,943

$

37

$

114

$

13,203

Charge-offs

 

(39)

(570)

(6)

 

(185)

 

(46)

 

 

(846)

Recoveries

 

1

22

53

 

11

 

19

 

 

106

Provision/(recovery)

 

222

(183)

2,014

3

 

132

 

27

 

353

 

2,568

Ending Balance

$

1,126

$

2,151

$

9,081

$

268

$

1,901

$

37

$

467

$

15,031

December 31, 2020

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

    

Development

    

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

and Other

    

Unallocated

    

Total

Year Ended

 

  

 

  

 

  

 

  

 

  

Beginning Balance

$

602

$

1,380

$

4,074

$

142

$

826

$

14

$

266

$

7,304

Charge-offs

 

(112)

(575)

(13)

 

(918)

 

(120)

 

 

(1,738)

Recoveries

 

1

70

512

10

 

109

 

41

 

 

743

Provision

 

300

1,013

3,573

132

 

1,926

 

102

 

(152)

 

6,894

Ending Balance

$

903

$

2,351

$

7,584

$

271

$

1,943

$

37

$

114

$

13,203

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions. Under the PPP, the Small Business Administration (“SBA”) will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for Paycheck and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and payments are deferred for the first six months of the loan. The Bank receives a processing fee ranging from 1% to 5% based on the size of the loan from the SBA. In April 2020, the PPP was established and the Health Care Enhancement Act was signed into law and authorized additional funding of $310.0 billion for PPP loans. In December 2020, the Consolidated Appropriations Act 2021 (“CAA”) was passed, which extended the PPP and allocated additional funds for 2021. The Company has provided $95.1 million in funding to over 1,100 customers through the PPP as of September 30, 2021. 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. At September 30, 2021, the Company had $13.7 million of PPP loans outstanding, net of fees, included in commercial loan balances.

Credit Quality Information

The following tables represent credit exposures by creditworthiness category at September 30, 2021 and December 31, 2020. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The 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 categorized as “Pass” do not meet the criteria set forth below and are not considered criticized.

19

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 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 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 values, highly questionable and improbable.

Loss — Loans in this category are of little value and are not warranted as a bankable asset.

Non-accruals

In general, a loan will be placed on 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 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:

Real Estate Secured

Construction &

Land

Residential

Consumer &

September 30, 2021

    

Development

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

Other

    

Total

Dollars in Thousands

Pass

$

102,490

$

207,180

$

597,275

$

32,732

$

133,341

$

4,252

$

1,077,270

Marginal

 

45

 

508

 

16,598

 

684

 

1,679

 

527

 

20,041

Substandard

 

598

 

2,208

 

4,404

 

84

 

595

 

 

7,889

TOTAL

$

103,133

$

209,896

$

618,277

$

33,500

$

135,615

$

4,779

$

1,105,200

Non-Accrual

$

598

$

1,533

$

4,131

$

32

$

463

$

$

6,757

Real Estate Secured

Construction &

Land

Residential

Consumer &

December 31, 2020

    

Development

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

Other

    

Total

Dollars in Thousands

Pass

$

74,487

$

195,599

$

552,758

$

33,479

$

151,779

$

4,681

$

1,012,783

Marginal

 

44

 

575

 

12,542

 

693

 

420

 

 

14,274

Substandard

 

175

 

3,175

 

4,445

 

54

 

599

 

 

8,448

TOTAL

$

74,706

$

199,349

$

569,745

$

34,226

$

152,798

$

4,681

$

1,035,505

Non-Accrual

$

175

$

2,022

$

2,170

$

54

$

489

$

$

4,910

20

A summary of loans that were modified under the terms of a TDR for the three and nine months ended September 30, 2021 and 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.

Real Estate Secured

Construction &

Land

Residential

Consumer &

    

Development

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

Other

    

Total

Dollars in Thousands

Three months ended September 30, 2021

Number of loans modified during the period

 

 

 

1

 

 

 

 

1

Pre-modification recorded balance

$

$

$

2,919

$

$

$

$

2,919

Post- modification recorded balance

2,907

2,907

Nine months ended September 30, 2021

Number of loans modified during the period

2

2

Pre-modification recorded balance

$

$

$

3,197

$

$

$

$

3,197

Post- modification recorded balance

 

 

 

2,907

 

 

 

 

2,907

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, 2021, there were 0 loans modified as TDRs that subsequently defaulted during the period ended September 30, 2021 which had been modified as TDRs during the twelve months prior to default. During the nine months ended September 30, 2020, there was 1 loan modified as a TDR 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.

21

There was 1 loan secured by 1-4 family residential properties with a balance of $266 thousand that was in the process of foreclosure at September 30, 2021. There were 2 loans secured by 1-4 family residential properties with aggregate balances of $353 thousand that were in the process of foreclosure at December 31, 2020.

The following tables include an aging analysis of the recorded investment of past due financing receivables as of September 30, 2021 and December 31, 2020:

Recorded

Investment

Greater than

Total

>90 Days

30 - 59 Days

60 - 89 Days

90 Days

Total

Current

Financing

Past Due

At September 30, 2021

    

Past Due*

    

Past Due**

    

Past Due***

    

Past Due

    

Balance****

    

Receivables

    

and Accruing

Dollars in Thousands

Real Estate

Construction and land development

$

$

$

598

$

598

$

102,535

$

103,133

$

Residential real estate

184

79

504

767

209,129

209,896

Nonresidential

1,585

2,652

534

4,771

613,506

618,277

Home equity loans

30

32

62

33,438

33,500

Commercial

77

77

135,538

135,615

Consumer and other loans

 

4

 

 

 

4

 

4,775

 

4,779

 

TOTAL

$

1,803

$

2,763

$

1,713

$

6,279

$

1,098,921

$

1,105,200

$

*      Includes $39 thousand of non-accrual loans.

** Includes $111 thousand of non-accrual loans.

*** Includes $1.7 million of non-accrual loans.

****Includes $4.9 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, 2020

    

Past Due*

    

Past Due**

    

Past Due***

    

Past Due

    

Balance****

    

Receivables

    

and Accruing

Dollars in Thousands

Real Estate

Construction and land development

$

642

$

66

$

175

$

883

$

73,823

$

74,706

$

Residential real estate

2,520

244

679

3,443

195,906

199,349

Nonresidential

2,552

1,240

2,377

6,169

563,576

569,745

Home equity loans

80

54

134

34,092

34,226

Commercial

86

169

489

744

152,054

152,798

Consumer and other loans

 

7

 

 

2

 

9

 

4,672

 

4,681

 

2

TOTAL

$

5,887

$

1,719

$

3,776

$

11,382

$

1,024,123

$

1,035,505

$

2

*      Includes $683 thousand of non-accrual loans.

**    Includes $227 thousand of non-accrual loans.

***  Includes $3.5 million of non-accrual loans.

****Includes $458 thousand of non-accrual loans.

22

Impaired Loans

Impaired loans are defined as non-accrual loans, TDRs, purchased credit impaired loans (“PCI”) and loans risk rated 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 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, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

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

The following tables include the recorded investment and unpaid principal balances for impaired financing receivables, excluding purchased credit impaired, with the associated allowance amount, if applicable. 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.

Unpaid

Interest

Average

Recorded

Principal

Income

Specific

Recorded

September 30, 2021

    

Investment

    

Balance

    

Recognized

    

Reserve

    

Investment

Dollars in Thousands

Impaired loans with specific reserves:

 

  

 

  

 

  

 

  

 

  

Real Estate Mortgage

Construction and land development

$

$

$

$

$

Residential real estate

430

430

15

89

435

Nonresidential

5,863

5,863

202

1,239

5,886

Home equity loans

Commercial

518

528

108

459

590

Consumer and other loans

 

 

 

 

 

Total impaired loans with specific reserves

$

6,811

$

6,821

$

325

$

1,787

$

6,911

Impaired loans with no specific reserve:

 

 

 

 

 

Real Estate Mortgage

Construction and land development

$

598

$

598

$

13

$

$

599

Residential real estate

1,902

1,941

27

1,932

Nonresidential

1,564

1,561

354

1,587

Home equity loans

52

52

53

Commercial

77

154

2

120

Consumer and other loans

 

 

 

 

 

Total impaired loans with no specific reserve

$

4,193

$

4,306

$

396

$

$

4,291

TOTAL

$

11,004

$

11,127

$

721

$

1,787

$

11,202

Total impaired loans of $11.0 million at September 30, 2021 do not include PCI loan balances of $3.8 million, which are net of a discount of $426,000.

23

Unpaid

Interest

Average

Recorded

Principal

Income

Specific

Recorded

December 31, 2020

    

Investment

    

Balance

    

Recognized

    

Reserve

    

Investment

Dollars in Thousands

Impaired loans with specific reserves:

 

  

 

  

 

  

 

  

 

  

Real Estate Mortgage

Construction and land development

$

$

$

$

$

Residential real estate

614

614

156

671

Nonresidential

2,151

2,151

259

17

2,304

Home equity loans

Commercial

489

1,196

11

500

881

Consumer and other loans

 

 

 

 

 

Total impaired loans with specific reserves

$

3,254

$

3,961

$

270

$

673

$

3,856

Impaired loans with no specific reserve:

 

 

 

 

 

Real Estate Mortgage

Construction and land development

$

175

$

175

$

$

$

176

Residential real estate

2,333

2,425

107

2,365

Nonresidential

4,839

5,260

174

5,944

Home equity loans

Commercial

Consumer and other loans

 

 

 

 

 

Total impaired loans with no specific reserve

$

7,347

$

7,860

$

281

$

$

8,485

TOTAL

$

10,601

$

11,821

$

551

$

673

$

12,341

Total impaired loans of $10.6 million at December 31, 2020 do not include PCI loan balances of $4.5 million, which are net of a discount of $644 thousand.

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 sheets are as follows:

Dollars in Thousands

    

September 30, 2021

    

December 31, 2020

Accountable for under ASC 310-30 (PCI loans)

 

  

 

  

Outstanding balance

$

4,179

$

5,125

Carrying amount

 

3,753

 

4,481

Accountable for under ASC 310-20 (non-PCI loans)

 

 

Outstanding balance

$

230,565

$

303,363

Carrying amount

 

228,331

 

300,002

Total acquired loans

 

 

Outstanding balance

$

234,744

$

308,488

Carrying amount

 

232,084

 

304,483

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

Dollars in Thousands

    

September 30, 2021

    

December 31, 2020

Balance at beginning of period

$

3,361

$

5,081

Acquisitions

 

 

(1)

Accretion

 

(1,126)

 

(1,718)

Other changes, net

(1)

(1)

Balance at end of period

$

2,234

$

3,361

During the three and nine months ended September 30, 2021, the Company recorded $9 thousand and $23 thousand, respectively, in accretion on acquired loans accounted for under ASC 310-30. During the three and nine months ended September 30, 2020, the Company recorded $54 thousand and $180 thousand, respectively, in accretion on acquired loans accounted for under ASC 310-30.

Non-accretable yield on PCI loans was $1.4 million and $1.6 million at September 30, 2021 and December 31, 2020, respectively.

24

Concentration of Risk:

The Company makes loans to customers located primarily within Anne Arundel, Charles, Calvert, St. Mary’s, Wicomico, and Worcester Counties, Maryland; Sussex County, Delaware; Camden and Burlington Counties, New Jersey; Stafford, Spotsylvania, King George, and Caroline Counties, Virginia; and the Cities of Fredericksburg and Reston, 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 Company had 0 commitments to loan additional funds to the borrowers of restructured, impaired, or non-accrual loans as of September 30, 2021 and December 31, 2020.

Note 4. Borrowings and Notes Payable

The Company owns capital stock of the FHLB as a condition for a $401.8 million convertible advance credit facility from the FHLB. As of September 30, 2021, the Company had remaining credit availability of $375.3 million under this facility.

The following table details the advances the Company had outstanding with the FHLB at September 30, 2021 and December 31, 2020 and outstanding lines of credit:

September 30, 2021

Dollars in Thousands

    

Outstanding Balance

    

Interest Rate

    

Maturity Date

    

Interest Payment

Fixed rate hybrid

$

5,000

 

3.15

%  

October 2022

 

Fixed, paid monthly

Principal reducing credit

643

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

 

1,035

 

1.99

%  

March 2026

 

Fixed, paid quarterly

Total advances

$

26,478

 

  

 

  

 

  

December 31, 2020

Dollars in Thousands

Outstanding Balance

    

Interest Rate

    

Maturity Date

    

Interest Payment

Fixed rate hybrid

$

6,000

2.44

%  

April 2021

 

Fixed, paid quarterly

Fixed rate hybrid

 

5,000

 

3.15

%  

October 2022

 

Fixed, paid monthly

Principal reducing credit

 

964

 

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

 

1,208

 

1.99

%  

March 2026

 

Fixed, paid quarterly

Total advances

$

32,972

 

  

 

  

 

  

The Company did 0t have any short-term borrowings from the FHLB for the nine months ended September 30, 2021 and average short-term borrowings from FHLB approximated $24.8 million for the year ended December 31, 2020. Borrowings from the FHLB are considered short-term if they have an original maturity of less than a year.

The 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 $188.0 million and $178.6 million at September 30, 2021 and December 31, 2020, respectively.

25

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, net of issuance costs. Interest-only payments were due quarterly at 6.710% per annum, and the outstanding principal balance would have matured in October 2025. During July 2021, the prepayment provisions in the agreement were exercised, and the principal balance and any remaining accrued interest of this subordinated debt were paid in full. 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 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 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 an earlier 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 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 $661 thousand as of September 30, 2021. This note is carried on the balance sheet net of a discount of $21 thousand. 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, 2021 and December 31, 2020). 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 November 30, 2021. The balance outstanding at September 30, 2021 and December 31, 2020 was $0 and $142 thousand, respectively. Interest expense on the warehouse lines of credit was $21 thousand and $77 thousand during the three and nine months ended September 30, 2021.

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, 2021, the Company did 0t have any outstanding advances under the PPPLF. At December 31, 2020, the Company had outstanding advances under the PPPLF of $41.6 million.  

The proceeds of these long-term borrowings were generally used to purchase higher yielding investment securities, fund additional loans, redeem preferred stock, or fund acquisitions. Additionally, the Company has secured credit availability of $5.0 million with a correspondent bank and unsecured credit availability of $87.0 million with several other correspondent banks for short-term liquidity needs, if necessary. The secured facility must be collateralized by specific securities at the time of any usage. At September 30, 2021 and December 31, 2020, there were 0 borrowings outstanding under these credit agreements.

The Company has pledged investment securities available for sale with an amortized cost and fair value of $3.9 million with the FRB to secure Discount Window borrowings at September 30, 2021. The combined amortized cost and fair value of these pledged investment securities were $2.3 million and $2.4 million, respectively, at December 31, 2020. At September 30, 2021 and December 31, 2020 there were 0 outstanding borrowings under these facilities.

26

Maturities on debt are as follows (dollars in thousands):

2021

    

$

158

2022

 

5,634

2023

 

314

2024

 

20,008

2025

210

Thereafter

 

22,951

$

49,275

Note 5. Lease Commitments

The Company leases 19 locations for administrative offices and branch locations. NaN leases were classified as operating leases and 2 as finance 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 thousand are not recorded on the balance sheet and the related lease expense is recognized over the lease term. The 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 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.

The following tables present information about the Company’s leases for the periods ended:

Dollars in Thousands

    

September 30, 2021

 

December 31, 2020

Balance Sheet

Operating Lease Amounts

Right-of-use asset

$

6,726

$

3,983

Lease liability

 

7,053

4,301

Finance Lease Amounts

Right-of-use asset

$

1,721

$

1,824

Lease liability

2,155

2,242

Supplemental balance sheet information

Weighted average lease term - Operating Leases (Yrs.)

 

8.46

8.00

Weighted average lease term - Finance Leases (Yrs.)

 

12.34

13.09

Weighted average discount rate - Operating Leases (1)

2.33

%

2.74

%

Weighted average discount rate - Finance Leases (1)

2.84

%

2.84

%

Income Statement

 

  

Three Months Ended

September 30, 2021

September 30, 2020

Operating lease cost classified as premises and equipment

$

252

$

223

Finance lease cost classified as interest on borrowings

15

22

Nine Months Ended

Operating lease cost classified as premises and equipment

$

691

$

457

Finance lease cost classified as interest on borrowings

47

33

Operating outgoing cash flows from operating leases

$

643

$

433

Operating outgoing cash flows from finance leases

$

134

$

89

27

(1)The discount rate was developed by using the fixed rate credit advance borrowing rate at the 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.

Minimum lease payments at September 30, 2021, for the next five years and thereafter, assuming renewal options are exercised, are approximately as follows:

    

Dollars in Thousands

Operating Leases:

One year or less

$

1,031

One to three years

 

1,934

Three to five years

 

1,445

Over 5 years

 

3,555

Total undiscounted cash flows

 

7,965

Less: Discount

 

(912)

Lease Liabilities

$

7,053

Finance Leases:

One year or less

$

178

One to three years

376

Three to five years

406

Over 5 years

1,620

Total undiscounted cash flows

2,580

Less: Discount

(425)

Lease Liabilities

$

2,155

Note 6. Stock Option Plans

Partners Bancorp Stock Option Plan

The 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 life with a 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 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 0 new options can be granted. All remaining stock options expired during the second quarter of 2019.

Liberty Bell Bank Stock Option Plans

In 2004, Liberty adopted the 2004 Incentive Stock Option Plan and the 2004 Non-Qualified Stock Option Plan, which were stock-based incentive compensation plans (the “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 the Liberty Plans became fully vested with the approval by the board of directors of Liberty signing the Agreement of Merger with the Company in July 2017 (the “Liberty Merger”). In accordance with the terms of the Agreement of Merger between the Company and Liberty, the Liberty Plans were assumed by the Company, and the options were converted into and became an option to purchase an adjusted number of shares of the common stock of 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 the Company’s common stock into which shares of Liberty common stock were convertible in the Liberty Merger, which was 0.2857 (the “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

28

effective time of the 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.

A summary of stock option transactions with respect to such options for the nine months ended September 30, 2021 is as follows:

September 30, 2021

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Intrinsic

Shares

Price

Life

Value

Outstanding at beginning of period

7,681

$

4.14

2.23

Granted

Exercised

Forfeited

Outstanding at end of period

7,681

$

4.14

1.48

$

31,723

Options exercisable at September 30, 2021

7,681

$

4.14

Virginia Partners Bank Stock Option Plan

In 2015 Virginia Partners Bank 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 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 common stock. In addition, the Company assumed each Partners Stock Plan, 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 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 common stock into which shares of Partners common stock were convertible in the Share Exchange, which was 1.7179 (the “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 Conversion Ratio, rounded up to the nearest cent.

29

A summary of stock option transactions with respect to such options for the nine months ended September 30, 2021 is as follows:

September 30, 2021

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Intrinsic

Shares

Price

Life

Value

Outstanding at beginning of period

186,552

$

6.22

3.47

Granted

Exercised

Forfeited

Outstanding at end of period

186,552

$

6.22

2.73

$

382,267

Options exercisable at September 30, 2021

186,552

$

6.22

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, 2021.

As stated in Note 1, the Company follows ASC 718-10 which requires that 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 2020.

Note 7. Restricted Stock Plan

The 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 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. 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. During 2017 and 2018 the Company awarded 5,000 and 9,000 shares, respectively, to individual employees based on certain employment criteria. These shares vested over two or three years, based on the specific employment agreement. Each award from the plan is evidenced by an award agreement that specifies the vesting period of the restricted stock plan, the number of shares to which the award pertains, and such other provisions as the grantor determines.

As of September 30, 2021 there were 0 remaining non-vested restricted stock awards. A schedule of vested awards in 2021 as of September 30, 2021 is as follows:

Employees

Weighted

Average 

Shares

Fair Value

Nonvested Awards December 31, 2020

    

3,000

    

$

7.30

Vested in 2021

 

(3,000)

 

7.30

Nonvested Awards September 30, 2021

 

$

30

As stated in Note 1, the Company follows ASC 718-10 which requires that restricted 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. NaN expense was recognized during the three months ended September 30, 2021. During the nine months ended September 30, 2021 the Company recognized restricted stock-based compensation expense of $4 thousand, or $3 thousand net of tax, related to the restricted stock awards under the Company Plan. During the three months ended September 30, 2020 the Company recognized restricted stock-based compensation expense of $6 thousand, or $4 thousand net of tax, related to the restricted stock awards under the Company Plan. During the nine months ended September 30, 2020 the Company recognized restricted stock-based compensation expense of $17 thousand, or $12 thousand net of tax, related to the restricted stock awards under the Company Plan. The Company did 0t have any unrecognized restricted stock-based compensation expense related to restricted stock awards under the Company Plan at September 30, 2021.

Note 8. Incentive Stock Plan

At the 2021 annual meeting of shareholders held on May 19, 2021 (the “2021 Annual Meeting”), the Company’s shareholders approved the Partners Bancorp 2021 Incentive Stock Plan (the “2021 Incentive Stock Plan”), which the Company’s Board of Directors had adopted, subject to shareholder approval, on January 27, 2021, based on the recommendation of the Compensation Committee of the Company’s Board of Directors (the “Committee”). The 2021 Incentive Stock Plan became effective upon shareholder approval at the 2021 Annual Meeting.  The 2021 Incentive Stock Plan authorizes the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards and performance units to key employees and non-employee directors, including members of advisory boards, of the Company and certain of its subsidiaries, as determined by the Committee.  Subject to the right of the Board of Directors to terminate the 2021 Incentive Stock Plan at any time, awards may be granted under the 2021 Incentive Stock Plan until May 18, 2031.  Subject to adjustment in the event of certain changes in the Company’s capital structure, the maximum number of shares of the Company’s common stock that may be issued under the 2021 Incentive Stock Plan is 1,250,000.  As of September 30, 2021, there are 0 awards outstanding under the 2021 Incentive Stock Plan.

On April 28, 2021, the Company’s Board of Directors granted 58,824 shares of restricted stock to 2 senior officers of Partners in accordance with Nasdaq Listing Rule 5635(c)(4) as inducements material to each of them accepting employment with Partners.  All of these shares are subject to time vesting in 3 equal annual installments beginning on April 28, 2022.

As of September 30, 2021, there were 58,824 non-vested shares related to restricted stock awards.  A schedule of non-vested shares related to restricted stock awards as of September 30, 2021 is as follows:

Employees

Weighted

Average 

Shares

Fair Value

Nonvested Awards December 31, 2020

    

    

$

Awarded in 2021

 

58,824

 

7.65

Nonvested Awards September 30, 2021

 

58,824

$

7.65

As a result of applying the provisions of ASC 718-10, during the three and nine months ended September 30, 2021, the Company recognized restricted stock-based compensation expense of $37 thousand, or $28 thousand net of tax, and $62 thousand, or $46 thousand net of tax, respectively, related to the restricted stock awards.  Restricted stock-based compensation expense is accounted for using the fair value of the Company’s common stock on the date the restricted shares were awarded, which was $7.65 for the awards granted on April 28, 2021.  Unrecognized restricted stock-based compensation expense related to the restricted stock awards totaled approximately $388 thousand at September 30, 2021. The remaining period over which this unrecognized restricted stock-compensation expense is expected to be recognized is approximately 2.6 years.

31

Note 9. Earnings Per Share

Basic earnings per share (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 months ended September 30, 2021 and 2020:

    

Net Income Applicable

    

    

to Basic Earnings

Weighted Average

(Dollars in thousands, except per share data)

Per Common Share

Shares Outstanding

For the three months ended September 30, 2021

Basic EPS

$

2,696

17,788

$

0.152

Effect of dilutive stock awards

 —

56

Diluted EPS

$

2,696

17,844

$

0.151

 

 

For the nine months ended September 30, 2021

  

  

  

Basic EPS

$

5,946

17,758

$

0.335

Effect of dilutive stock awards

 —

42

Diluted EPS

$

5,946

17,800

$

0.334

For the three months ended September 30, 2020

 

 

Basic EPS

$

1,117

17,810

$

0.063

Effect of dilutive stock awards

 —

1

Diluted EPS

$

1,117

17,811

$

0.063

For the nine months ended September 30, 2020

  

  

  

Basic EPS

$

4,563

17,808

$

0.256

Effect of dilutive stock awards

 —

30

Diluted EPS

$

4,563

17,838

$

0.256

Note 10. Regulatory Capital Requirements

The 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 Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company’s subsidiaries must meet specific capital adequacy guidelines that involve quantitative measures of the Company’s subsidiaries assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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.

32

On September 17, 2019, the Federal Deposit Insurance Corporation finalized a rule that introduced 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’s subsidiaries to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and common equity Tier 1 capital to risk-weighted assets. Management believes as of September 30, 2021 that the Company’s subsidiaries met all capital adequacy requirements to which they are subject.

As of September 30, 2021, the most recent notification from the Federal Deposit Insurance Corporation (“FDIC”) categorized the Company’s subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company’s subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 risk-based ratios. There are no conditions or events since that notification that management believes have changed the Company’s subsidiaries category.

The Common Equity Tier 1, Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. 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 items, among other things. The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.

The Basel III Capital Rules require the Company’s subsidiaries to maintain (i) a minimum ratio of Common Equity Tier 1 capital to 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 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% Total capital ratio, effectively resulting in a minimum Total capital ratio of 10.5%) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The implementation of the capital conservation buffer became fully phased in on January 1, 2019. 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 capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to 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.

33

The following table presents actual and required capital ratios as of September 30, 2021 and December 31, 2020 for the 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, 2021 and December 31, 2020 based on the fully phased-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based on prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A comparison of the Company’s subsidiaries’ capital amounts and ratios as of September 30, 2021 and December 31, 2020 with the minimum requirements are presented below.

To Be

 

Well Capitalized

 

For Capital

Under Prompt

 

Adequacy

Corrective Action

 

In Thousands

Actual

Purposes

Provisions

 

    

Amount

    

Ratio

    

Amount

    

Ratio

     

Amount

    

Ratio

 

As of September 30, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Total Capital Ratio

 

  

 

  

 

  

 

  

 

  

 

  

(To Risk Weighted Assets)

 

  

 

  

 

  

 

  

 

  

 

  

The Bank of Delmarva

$

89,443

 

12.8

%  

$

73,341

 

10.5

%  

$

69,848

 

10.0

%

Virginia Partners Bank

 

55,846

 

12.4

%  

 

47,450

 

10.5

%  

 

45,190

 

10.0

%

Tier I Capital Ratio

 

 

 

 

 

 

  

(To Risk Weighted Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

80,670

 

11.5

%  

 

59,371

 

8.5

%  

 

55,879

 

8.0

%

Virginia Partners Bank

 

52,703

 

11.7

%  

 

38,412

 

8.5

%  

 

36,152

 

8.0

%

Common Equity Tier I Ratio

 

 

 

 

 

 

  

(To Risk Weighted Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

80,670

 

11.5

%  

 

48,894

 

7.0

%  

 

45,401

 

6.5

%

Virginia Partners Bank

 

52,703

 

11.7

%  

 

31,633

 

7.0

%  

 

29,374

 

6.5

%

Tier I Leverage Ratio

 

 

 

 

 

 

  

(To Average Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

80,670

 

7.9

%  

 

40,823

 

4.0

%  

 

51,029

 

5.0

%

Virginia Partners Bank

 

52,703

 

8.8

%  

 

23,920

 

4.0

%  

 

29,900

 

5.0

%

As of December 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Total Capital Ratio

 

  

 

  

 

  

 

  

 

  

 

  

(To Risk Weighted Assets)

 

  

 

  

 

  

 

  

 

  

 

  

The Bank of Delmarva

$

85,497

 

12.9

%  

$

69,608

 

10.5

%  

$

66,294

 

10.0

%

Virginia Partners Bank

51,971

 

13.5

%  

40,381

 

10.5

%

38,459

 

10.0

%

Tier I Capital Ratio

 

 

 

 

 

 

  

(To Risk Weighted Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

77,168

 

11.6

%  

 

56,350

 

8.5

%  

 

53,035

 

8.0

%

Virginia Partners Bank

50,271

 

13.1

%

32,690

 

8.5

%

30,767

 

8.0

%

Common Equity Tier I Ratio

 

 

 

 

 

 

  

(To Risk Weighted Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

77,168

 

11.6

%  

 

46,406

 

7.0

%  

 

43,091

 

6.5

%

Virginia Partners Bank

50,271

 

13.1

%

26,921

 

7.0

%

24,998

 

6.5

%

Tier I Leverage Ratio

 

 

 

 

 

 

  

(To Average Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

77,168

 

8.1

%  

 

38,262

 

4.0

%  

 

47,827

 

5.0

%

Virginia Partners Bank

50,271

 

9.5

%

21,253

 

4.0

%

26,567

 

5.0

%

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

34

Note 11. Fair Values of Financial Instruments

FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure about fair value of financial instruments, including those financial assets and 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 and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the 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 financial instruments not measured at fair value on a recurring basis.

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

Dollars are in thousands

Fair Value Measurements at September 30, 2021

Quoted Prices in

Significant

Significant

Active Markets for

Other

Unobservable

Carrying

Identical Assets

Observable Inputs

Inputs

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Balance

Financial assets:

  

Cash and due from banks

$

16,176

$

16,176

$

$

$

16,176

Interest bearing deposits

 

300,771

 

300,771

 

 

 

300,771

Federal funds sold

 

29,995

 

29,995

 

 

 

29,995

Securities:

 

  

 

  

 

 

  

 

Available for sale

 

115,550

 

 

115,550

 

 

115,550

Loans held for sale

5,803

5,803

5,803

Loans, net of allowance for credit losses

 

1,090,169

 

 

 

1,081,854

 

1,081,854

Accrued interest receivable

 

4,408

 

 

4,408

 

 

4,408

Restricted stock

 

4,869

 

 

4,869

 

 

4,869

Other investments

 

5,075

 

 

5,075

 

 

5,075

Bank owned life insurance

18,141

18,141

18,141

Other real estate owned

 

1,303

 

 

 

1,303

 

1,303

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits

$

1,435,453

$

$

1,026,186

$

413,171

$

1,439,357

Accrued interest payable

 

311

 

 

311

 

 

311

FHLB advances

 

26,478

 

 

27,297

 

 

27,297

Subordinated notes payable

 

22,157

 

 

30,468

 

 

30,468

Other borrowings

640

640

640

Dollars are in thousands

Fair Value Measurements at December 31, 2020

Quoted Prices in

Significant

Significant

Active Markets for

Other

Unobservable

Carrying

Identical Assets

Observable Inputs

Inputs

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Balance

Financial assets:

  

Cash and due from banks

$

13,643

$

13,643

$

$

$

13,643

Interest bearing deposits

 

218,667

 

218,667

 

 

 

218,667

Federal funds sold

 

50,301

 

50,301

 

 

 

50,301

Securities:

 

  

 

  

 

 

  

 

Available for sale

 

124,925

 

 

124,925

 

 

124,925

Loans held for sale

9,858

9,858

9,858

Loans, net of allowance for credit losses

 

1,022,302

 

 

 

1,018,649

 

1,018,649

Accrued interest receivable

 

5,229

 

 

5,229

 

 

5,229

Restricted stock

 

5,445

 

 

5,445

 

 

5,445

Other investments

 

5,091

 

 

5,091

 

 

5,091

Bank owned life insurance

14,841

14,841

14,841

Other real estate owned

 

2,677

 

 

 

2,677

 

2,677

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits

$

1,268,140

$

$

839,122

$

435,910

$

1,275,032

Accrued interest payable

 

402

 

 

402

 

 

402

FHLB advances

 

32,972

 

 

34,147

 

798

 

34,945

Subordinated notes payable

 

24,101

 

 

34,810

 

 

34,810

Other borrowings

42,382

41,585

41,585

35

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.  As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.  Management attempts to match maturities of 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's overall interest rate risk.

Note 12. Fair Value Measurements

The Company follows ASC 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 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.

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 - Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 - Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or 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 unobservable in the market.

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

Investment Securities Available for Sale:

Investment securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted market prices, when available (Level 1).  If quoted market prices are not available, fair values are 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 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 to be Level 2 securities.

36

The following tables present the balances of financial assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:

Fair

Dollars are in thousands

    

Level 1

    

Level 2

    

Level 3

    

Value

September 30, 2021

Securities available for sale:

 

  

 

  

 

  

 

  

Obligations of U.S. Government agencies and corporations

$

$

5,522

$

$

5,522

Obligations of States and political subdivisions

 

 

35,407

 

 

35,407

Mortgage-backed securities

 

 

72,581

 

 

72,581

Subordinated debt investments

 

2,040

 

 

2,040

Total securities available for sale

$

$

115,550

$

$

115,550

December 31, 2020

Securities available for sale:

Obligations of U.S. Government agencies and corporations

$

$

6,883