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SVBI Severn Bancorp

Filed: 17 May 21, 9:31am

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

or

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

For the transition period from                           to                          .

Commission File Number 0-49731

SEVERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland

52-1726127

(State or other jurisdiction of incorporation or organization)

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

200 Westgate Circle, Suite 200
Annapolis, Maryland

21401

(Address of principal executive offices)

(Zip Code)

410-260-2000

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

 

SVBI

 

The NASDAQ Stock Market, LLC

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

Indicate by check mark whether the registrant has submitted electronically 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 definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

    

Accelerated filer  ☐

 

 

Non- accelerated filer ☑

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 ☑

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

Common Stock, $0.01 par value - 12,858,339 shares outstanding as of May 13, 2021

Glossary of Defined Terms

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

2035 Debentures

Junior Subordinated Debt Securities

2035 Indenture

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

ADC

Acquisition, development, and construction loans

AFS

Available for sale

Allowance

Allowance for loan losses

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

Bank

Severn Savings Bank and subsidiaries

Basel III

Certain provisions of the Dodd-Frank Act

BOLI

Bank owned life insurance

Capital Securities

Corporation-obligated mandatorily redeemable capital securities

CARES Act

Coronavirus Aid, Relief and Economic Security Act

CDs

Certificates of deposit

CECL

Current expected credit losses

CEO

Chief executive officer

CFO

Chief financial officer

Commitments

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

Company

Severn Bancorp, Inc. and subsidiaries

COVID-19

Novel coronavirus

Crownsville

Crownsville Development Corporation

DTAs

Deferred tax assets

EVE

Economic value of equity

Exchange Act

Securities Exchange Act of 1934

FASB

Financial Accounting Standards Board

FDIC

Federal Deposit Insurance Corporation

FHLB

Federal Home Loan Bank of Atlanta

FHLMC

Federal Home Loan Mortgage Corporation

FNMA

Federal National Mortgage Association

FRB

Federal Reserve Board

GAAP

Accounting principles generally accepted in the United States of America

HTM

Held to maturity

IRLC(s)

Interest rate lock commitment(s)

LCM

Lower of cost or market

LHFS

Mortgage loans held for sale

LTV

Loan to value

MBS

Mortgage-backed securities

MSELF

Main Street expanded Loan Facility

MSNLF

Main Street New Loan Facility

MSRs

Mortgage servicing rights

NOLs

Net operating losses

NPA(s)

Nonperforming asset(s)

OCC

Office of the Comptroller of the Currency

OTTI

Other than temporary impairment

Plan

Stock compensation plan of Severn Bancorp, Inc.

PPP

Paycheck Protection Program

PPPLF

PPP Loan Facility

SBA

United States Small Business Administration

SBI

SBI Mortgage Company

SEC

Securities and Exchange Commission

Shore

Shore Bancshares, Inc. and subsidiaries

TDR(s)

Troubled debt restructuring(s)

Title Company

Mid-Maryland Title Company, Inc.

Trust

Severn Capital Trust 1

U.S.

United States of America

2

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

Cautionary Note Regarding Forward-Looking Statements

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

Forward-looking statements reflect our expectation or prediction of future conditions, events, or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2020 Annual Report on Form 10-K, Item 1A of Part II of this Quarterly Report on Form 10-Q, and the following:

general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits, and other financial services that we provide and increases in loan delinquencies and defaults;
changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits, and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;
our liquidity requirements could be adversely affected by changes in our assets and liabilities;
our investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates we use to value certain of the securities in our portfolio;
the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance, and other aspects of the financial services industry;
competitive factors among financial services companies, including product and pricing pressures, and our ability to attract, develop, and retain qualified banking professionals;
the effect of fiscal and governmental policies of the U.S. federal government;
the effect of any mergers, acquisitions, or other transactions to which we or our subsidiaries may from time to time be a party;
potential delays or the failure to obtain the necessary regulatory and stockholder approvals for the merger with Shore;
costs and potential disruption or interruption of operations due to cyber-security incidents;
the effect of any change in federal government enforcement of federal laws affecting the medical-use cannabis industry;
costs and potential disruption or interruption of operations due to global pandemics such as COVID-19;

3

the effect of changes in accounting policies and practices, as may be adopted by FASB, the SEC, the Public Company Accounting Oversight Board, and other regulatory agencies; and;
geopolitical conditions, including acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism, and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad.

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

4

PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

(unaudited)

March 31, 

December 31, 

    

2021

    

2020

ASSETS

  

Cash and due from banks

$

6,248

$

4,819

Federal funds sold and interest-bearing deposits in other banks

 

250,847

 

151,790

Cash and cash equivalents

 

257,095

 

156,609

CDs held for investment

3,330

3,580

AFS securities, at fair value

 

132,698

 

65,098

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

 

14,516

 

15,943

LHFS, at fair value

 

50,124

 

36,299

Loans receivable

 

621,512

 

642,882

Allowance

 

(8,135)

 

(8,670)

Loans, net

 

613,377

 

634,212

Real estate acquired through foreclosure

 

1,010

 

1,010

Restricted stock investments

 

970

 

1,236

Premises and equipment, net

 

20,653

 

20,940

Accrued interest receivable

 

2,439

 

2,576

Deferred income taxes

882

1,145

BOLI

 

5,550

 

5,517

Goodwill

 

770

 

1,104

Other assets

 

9,555

 

7,284

Total assets

$

1,112,969

$

952,553

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Noninterest bearing

$

337,141

$

245,093

Interest-bearing

 

626,955

 

561,363

Total deposits

 

964,096

 

806,456

Long-term borrowings

 

10,000

 

10,000

Subordinated debentures

 

20,619

 

20,619

Accrued expenses and other liabilities

 

7,181

 

5,831

Total liabilities

 

1,001,896

 

842,906

Stockholders' Equity:

 

  

 

  

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

 

129

 

128

Additional paid-in capital

 

66,359

 

66,251

Retained earnings

 

46,485

 

43,216

Accumulated other comprehensive (loss) income

 

(1,900)

 

52

Total stockholders' equity

 

111,073

 

109,647

Total liabilities and stockholders' equity

$

1,112,969

$

952,553

See accompanying notes to consolidated financial statements

5

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)

(unaudited)

Three Months Ended March 31, 

2021

    

2020

Interest income:

Loans

$

8,244

$

8,338

Securities

 

292

 

219

Other earning assets

 

73

 

359

Total interest income

 

8,609

 

8,916

Interest expense:

 

 

Deposits

 

784

 

1,797

Borrowings and subordinated debentures

 

167

 

364

Total interest expense

 

951

 

2,161

Net interest income

 

7,658

 

6,755

(Reversal of) provision for loan losses

 

(750)

 

750

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

 

8,408

 

6,005

Noninterest income:

 

 

Mortgage-banking revenue

 

4,396

 

1,634

Real estate commissions

 

161

 

310

Real estate management fees

 

 

165

Deposit service charges

 

601

 

561

Title company revenue

 

335

 

238

ATM surcharges

87

62

Income from BOLI

33

37

Other noninterest income

146

 

18

Total noninterest income

 

5,759

 

3,025

Noninterest expense:

 

 

Compensation and related expenses

 

6,222

 

5,461

Occupancy

 

471

 

518

Legal fees

 

 

166

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

 

2

 

74

FDIC insurance premiums

 

56

 

Professional fees

 

151

 

303

Advertising

 

198

 

220

Data processing

 

462

 

460

Credit report and appraisal fees

 

60

 

67

Licensing and software

 

240

 

218

Loss on disposal of premises and equipment

76

Internal audit and compliance

133

64

Office expenses, printing, and postage

88

109

Telecommunications

105

105

Merger expenses

238

Other noninterest expense

 

380

 

411

Total noninterest expense

 

8,806

 

8,252

Net income before income tax provision

 

5,361

 

778

Income tax provision

 

1,450

 

213

Net income

$

3,911

$

565

Net income per common share - basic

$

0.30

$

0.04

Net income per common share - diluted

$

0.30

$

0.04

See accompanying notes to consolidated financial statements

6

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

Three Months Ended March 31, 

 

2021

    

2020

Net income

$

3,911

$

565

Other comprehensive income item:

 

 

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

 

(1,956)

 

149

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

4

Total other comprehensive (loss) income

 

(1,952)

 

149

Total comprehensive income

$

1,959

$

714

See accompanying notes to consolidated financial statements

7

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share data)

(unaudited)

Three Months Ended March 31, 2021

    

Number of

    

    

    

    

Accumulated

    

Shares of

Additional

Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Stockholders'

Stock

Stock

Capital

 Earnings 

Income (Loss)

Equity

Balance at January 1, 2021

 

12,843,349

$

128

$

66,251

$

43,216

$

52

$

109,647

Net income

 

0

 

0

 

0

 

3,911

 

0

 

3,911

Stock-based compensation

 

0

 

0

 

23

 

0

 

0

 

23

Dividends paid on common stock at $0.05 per share

 

0

 

0

 

0

 

(642)

 

0

 

(642)

Exercise of stock options

13,640

1

85

86

Other comprehensive loss

 

0

 

0

 

0

 

0

 

(1,952)

 

(1,952)

Balance at March 31, 2021

 

12,856,989

$

129

$

66,359

$

46,485

$

(1,900)

$

111,073

Three Months Ended March 31, 2020

    

Number of

    

    

    

    

Accumulated

    

Shares of

Additional

Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Stockholders'

Stock

Stock

Capital

 Earnings 

(Loss) Income

Equity

Balance at January 1, 2020

 

12,810,926

$

128

$

65,944

$

38,560

$

(45)

$

104,587

Net income

 

0

 

0

 

0

 

565

 

0

 

565

Stock-based compensation

 

0

 

0

 

34

 

0

 

0

 

34

Dividends paid on common stock at $0.04 per share

 

0

 

0

 

0

 

(513)

 

0

 

(513)

Exercise of stock options

2,050

0

14

0

0

14

Other comprehensive income

 

0

 

0

 

0

 

0

 

149

 

149

Balance at March 31, 2020

 

12,812,976

$

128

$

65,992

$

38,612

$

104

$

104,836

See accompanying notes to consolidated financial statements

8

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

Three Months Ended March 31, 

    

2021

    

2020

Cash flows from operating activities:

Net income

$

3,911

$

565

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

 

 

Depreciation and amortization

 

389

 

394

Amortization of deferred loan fees

 

(875)

 

(506)

Net amortization (accretion) of premiums and discounts on securities

 

435

 

(83)

(Reversal of) provision for loan losses

 

(750)

 

750

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

 

0

 

80

Gain on sale of mortgage loans

 

(4,396)

 

(1,634)

Loss on disposal of property

 

0

 

76

Loss on sale of Hyatt Commercial assets

34

0

Proceeds from sale of LHFS

 

91,625

 

33,764

Originations of LHFS

 

(101,314)

 

(43,216)

Stock-based compensation

 

23

 

34

Increase in cash surrender value of bank-owned life insurance

 

(33)

 

(37)

Deferred income taxes

 

1,004

 

1

Decrease in accrued interest receivable

 

137

 

183

Increase in other assets

 

(2,304)

 

(1,160)

Increase in accrued expenses and other liabilities

 

1,349

 

1,024

Net cash used in operating activities

 

(10,765)

 

(9,765)

Cash flows from investing activities:

 

 

Redemption of CDs held for investment

250

0

Loan principal repayments, net of (disbursements)

 

22,720

 

10,271

Redemption of restricted stock investments

 

266

 

132

Purchases of premises and equipment, net

 

(102)

 

(57)

Activity in HTM securities:

 

 

Maturities/calls/repayments

 

1,198

 

3,202

Activity in AFS securities:

 

Purchases

 

(80,454)

 

(7,852)

Sales

4,451

0

Maturities/calls/repayments

5,504

2,225

Proceeds from sale of Hyatt Commercial

334

0

Proceeds from sales of real estate acquired through foreclosure

 

0

 

623

Net cash (used in) provided by investing activities

 

(45,833)

 

8,544

Cash flows from financing activities:

 

 

Net increase in deposits

 

157,640

 

29,163

Common stock dividends

 

(642)

 

(513)

Exercise of stock options

 

86

 

14

Net cash provided by financing activities

 

157,084

 

28,664

Increase in cash and cash equivalents

 

100,486

 

27,443

Cash and cash equivalents at beginning of period

 

156,609

 

88,193

Cash and cash equivalents at end of period

$

257,095

$

115,636

Supplemental Noncash Disclosures:

 

 

Interest paid on deposits and borrowed funds

$

955

$

2,170

Income taxes paid

 

0

 

493

Transfers of mortgage loans held for sale to loan portfolio

 

260

 

0

See accompanying notes to consolidated financial statements

9

Severn Bancorp, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2020 Annual Report on Form 10-K as filed with the SEC.

Principles of Consolidation

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

Use of Estimates

The preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The accounting policies we view as critical are those relating to the Allowance, the valuation of real estate acquired through foreclosure, and the valuation of deferred tax assets and liabilities.

Cash Flows

For reporting purposes, assets grouped in the Consolidated Statements of Financial Condition under the captions “Cash and due from banks” and “Federal funds sold and interest-bearing deposits in other banks” are considered cash or cash equivalents. For financial statement purposes, these assets are carried at cost. Federal funds sold and interest-bearing deposits in other banks generally have overnight maturities and are in excess of amounts that would be recoverable under FDIC insurance.

Reclassifications

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

10

2020 Correction of Prior Period Immaterial Error

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

COVID-19 Risks and Uncertainties

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

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

Asset Sale

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

Proposed Merger with Shore Bancshares, Inc.

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

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

11

Recent Accounting Pronouncements

Pronouncements Adopted

In December 2019, FASB issued ASU No. 2019-12, Simplifying the Accounting for Taxes, which simplifies the accounting for incomes taxes by removing certain exceptions in the current codification. The standard was effective for fiscal years beginning after December 15, 2020. The adoption of ASU No. 2019-12 did not have a material impact on our financial position, results of operations, or cash flows.

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

Pronouncements Issued

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

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

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

In November 2019, FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 2019-11 was issued to address issues raised by stakeholders during the implementation of ASU 2016-13.

12

ASU 2019-11 provides transition relief when adjusting the effective interest rate for TDRs that exist as of the adoption date, extends the disclosure relief in ASU 2019-04 to disclose accrued interest receivable balances separately from the amortized cost basis to additional disclosures involving amortized cost basis, and provides clarification regarding application of the guidance in paragraph 326-20-35-6 for financial assets secured by collateral maintenance provisions that provide a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of a financial asset and the fair value of collateral securing the financial asset as of the reporting date. The effective date and transition requirements for the amendment are the same as the effective date and transition requirements in ASU 2016-13.

 

Note 2 - Securities

The amortized cost and fair values of our AFS securities portfolio were as follows:

    

March 31, 2021

Amortized

    

Unrealized

    

Unrealized

    

Cost

Gains

Losses

Fair Value

(dollars in thousands)

U.S. government agency notes

$

9,366

$

1

$

192

$

9,175

Corporate obligations

2,000

21

2,021

MBS

123,953

82

2,533

121,502

$

135,319

$

104

$

2,725

$

132,698

    

December 31, 2020

Amortized

    

Unrealized

    

Unrealized

    

Cost

Gains

Losses

Fair Value

(dollars in thousands)

U.S. government agency notes

$

6,640

$

45

$

25

$

6,660

Corporate obligations

2,000

34

0

2,034

MBS

56,385

339

320

56,404

$

65,025

$

418

$

345

$

65,098

The amortized cost and fair values of our HTM securities portfolio were as follows:

March 31, 2021

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

Cost

Gains

Losses

Value

(dollars in thousands)

U.S. government agency notes

$

1,987

$

130

$

0

$

2,117

MBS

 

12,529

 

448

 

0

 

12,977

$

14,516

$

578

$

0

$

15,094

December 31, 2020

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

Cost

Gains

Losses

Value

(dollars in thousands)

U.S. government agency notes

$

1,986

$

145

$

0

$

2,131

MBS

 

13,957

 

515

 

0

 

14,472

$

15,943

$

660

$

0

$

16,603

13

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

March 31, 2021

Less than 12 months

12 months or more

Total

    

# of

    

Fair

    

Unrealized

    

# of

    

Fair

    

Unrealized

    

# of

    

Fair

    

Unrealized

Securities

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

(dollars in thousands)

U.S. government agency notes

8

$

9,056

$

192

0

$

0

$

0

8

$

9,056

$

192

MBS

61

 

103,718

 

2,523

1

 

511

 

10

62

 

104,229

2,533

69

$

112,774

$

2,715

1

$

511

$

10

70

$

113,285

$

2,725

December 31, 2020

Less than 12 months

12 months or more

Total

    

# of

    

Fair

    

Unrealized

    

# of

    

Fair

    

Unrealized

    

# of

    

Fair

    

Unrealized

Securities

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

(dollars in thousands)

U.S. government agency notes

5

$

4,015

$

25

$

$

5

$

4,015

$

25

MBS

27

 

27,454

 

320

27

27,454

320

32

$

31,469

$

345

$

$

32

$

31,469

$

345

We did not have any HTM securities in an unrealized loss position at either March 31, 2021 or December 31, 2020.

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

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

AFS Securities

HTM Securities

    

Amortized

    

Fair

    

Amortized

    

Fair

Cost

Value

Cost

Value

(dollars in thousands)

Due after one through five years

$

118

$

119

$

1,987

$

2,117

Due after five years through ten years

 

7,874

 

7,815

 

0

 

0

Due after 10 years

3,374

3,262

MBS

 

123,953

 

121,502

 

12,529

 

12,977

$

135,319

$

132,698

$

14,516

$

15,094

During the three months ended March 31, 2021, we sold $4.5 million in securities and recognized $35,000 and $40,000 in gross unrealized gains and losses, respectively. We did not sell any securities during the three months ended March 31, 2020.

We had $2.9 million and $3.1 million fair value of securities pledged as collateral against certain deposits as of March 31, 2021 and December 31, 2020, respectively.

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Note 3 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized as follows:

    

March 31, 

December 31, 

2021

    

2020

(dollars in thousands)

Residential mortgage

$

186,591

$

209,659

Commercial

 

74,617

 

63,842

Commercial real estate

 

243,521

 

243,435

ADC

 

103,487

 

112,938

Home equity/2nds

 

15,173

 

14,712

Consumer

 

1,565

 

1,485

Total loans receivable, before net unearned fees

 

624,954

 

646,071

Unearned loan fees

 

(3,442)

 

(3,189)

Loans receivable

$

621,512

$

642,882

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

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

Credit Quality

An Allowance is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible based on evaluations of the collectability of loans and prior loan loss experience. Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. The methodology takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Determining the amount of the Allowance requires the use of estimates and assumptions. Actual results could differ significantly from those estimates. While management uses all available information to estimate losses on loans, future additions to the Allowance may be necessary based on changes in economic conditions and our actual loss experience. In addition, various regulatory agencies periodically review the Allowance as an integral part of their examination process. Such agencies may require us to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of March 31, 2021 and December 31, 2020.

For purposes of determining the Allowance, we have segmented our loan portfolio by product type. Our portfolio loan segments are residential mortgage, commercial, commercial real estate, ADC, Home equity/2nds, and consumer. We have looked at all segments and have determined that no additional subcategorization is warranted based upon our consideration of risk. Our portfolio classes are the same as our portfolio segments.

Inherent Credit Risks

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

Residential mortgage - secured by 1 to 4 family dwelling units. The loans generally have limited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, and are generally at a LTV of 80% or less.

15

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

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

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

ADC - underwritten in accordance with our underwriting policies which include a financial analysis of the developers, property owners, construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project rather than the ability of the borrower or guarantor to repay principal and interest. Additionally, land is underwritten according to our policies which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate.

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

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

Home equity/2nds - subject to the underwriting standards and processes similar to residential mortgages and secured by 1 to 4 family dwelling units. Home equity/2nds loans have greater risk than residential mortgages as a result of the Bank generally being in a second lien position.

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

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

16

national and local “stay at home” orders that were in place in many areas during the beginning of the second quarter of 2020. Although most “stay at home” orders have since been lifted, many businesses are operating at significantly reduced capacities and many people remain unemployed. During this time of economic uncertainty, borrowers have faced and could continue to face extended periods of unemployment and may not be able to meet their loan obligations. Additionally, real estate collateral values could significantly decline and full repayment of loans could be in doubt. We have adjusted some of our economic qualitative factors that affect our Allowance calculation to reflect our best estimate of these risks. Management will continue to evaluate the adequacy of the Allowance as more economic data becomes available and as changes within our portfolio are known. To date, we have not experienced a significant increase in delinquencies or NPAs.  However, the ongoing pandemic could still result in a deterioration in credit quality. The effects of the pandemic may require us to fund additional increases in the Allowance in future periods.

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to U.S. GAAP in certain circumstances. In addition, OCC Bulletin 2020-35 provides more limited circumstances in which a loan modification is not subject to classification as a TDR.

CARES Act Section 4013 and OCC Bulletin 2020-35 forbearance agreements are available to both qualified commercial and consumer loan borrowers. Due to the widespread impact of COVID-19, we have had loan borrowers seek loan forbearance or loan modification agreements under the CARES Act. We held $12.4 million in loans modified under the CARES Act as of March 31, 2021, most of which have an interest deferral component. Such deferral periods range from one month to six months. We have recorded $117,000 in interest that has not yet been collected on $10.5 million in loans due to the forbearance agreements.

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

Three Months Ended March 31, 2021

    

Residential

    

    

Commercial

    

    

Home Equity/

    

    

    

 

Mortgage

Commercial

Real Estate

ADC

2nds

Consumer

Unallocated

Total

(dollars in thousands)

Beginning Balance

$

2,259

$

1,670

$

1,516

$

2,947

$

168

$

0

$

110

$

8,670

Charge-offs

 

 

0

 

 

(34)

 

0

 

0

 

0

 

(34)

Recoveries

 

65

 

5

 

174

 

0

 

4

 

1

 

0

 

249

Net recoveries (charge-offs)

 

65

 

5

 

174

 

(34)

 

4

 

1

 

0

 

215

(Reversal of) provision for loan losses

 

(525)

105

(237)

(208)

47

 

(1)

 

69

 

(750)

Ending Balance

$

1,799

$

1,780

$

1,453

$

2,705

$

219

$

0

$

179

$

8,135

Ending balance - individually evaluated for impairment

$

226

$

0

$

$

29

$

0

$

0

$

0

$

255

Ending balance - collectively evaluated for impairment

 

1,573

1,780

1,453

2,676

219

0

179

 

7,880

$

1,799

$

1,780

$

1,453

$

2,705

$

219

$

0

$

179

$

8,135

Ending loan balance -individually evaluated for impairment

$

6,791

$

0

$

630

$

298

$

473

$

62

$

8,254

Ending loan balance -collectively evaluated for impairment

 

179,800

 

74,617

 

242,891

 

103,189

 

14,700

 

1,503

 

616,700

$

186,591

$

74,617

$

243,521

$

103,487

$

15,173

$

1,565

$

624,954

17

December 31, 2020

    

Residential

    

    

Commercial

    

    

Home Equity/

    

    

    

 

Mortgage

Commercial

Real Estate

ADC

2nds

Consumer

Unallocated

Total

(dollars in thousands)

Ending balance - individually evaluated for impairment

$

542

$

$

$

29

$

$

$

$

571

Ending balance - collectively evaluated for impairment

 

1,717

 

1,670

 

1,516

 

2,918

 

168

 

 

110

 

8,099

$

2,259

$

1,670

$

1,516

$

2,947

$

168

$

$

110

$

8,670

Ending loan balance - individually evaluated for impairment

$

10,131

$

$

547

$

308

$

491

$

63

$

11,540

Ending loan balance - collectively evaluated for impairment

 

199,528

 

63,842

 

242,888

 

112,630

 

14,221

 

1,422

 

634,531

$

209,659

$

63,842

$

243,435

$

112,938

$

14,712

$

1,485

$

646,071

Three Months Ended March 31, 2020

    

Residential

    

    

Commercial

    

    

Home Equity/

    

    

    

Mortgage

Commercial

Real Estate

ADC

2nds

Consumer

Unallocated

Total

(dollars in thousands)

Beginning Balance

$

2,264

$

1,421

$

984

$

2,286

$

134

$

$

49

$

7,138

Charge-offs

 

 

 

 

 

 

(15)

 

 

(15)

Recoveries

 

3

 

5

 

32

 

 

2

 

3

 

 

45

Net recoveries (charge-offs)

 

3

 

5

 

32

 

 

2

 

(12)

 

 

30

Provision for loan losses

 

217

139

24

329

15

 

12

 

14

 

750

Ending Balance

$

2,484

$

1,565

$

1,040

$

2,615

$

151

$

$

63

$

7,918

Ending balance - individually evaluated for impairment

$

742

$

$

62

$

29

$

$

$

$

833

Ending balance - collectively evaluated for impairment

 

1,742

 

1,565

 

978

 

2,586

 

151

 

 

63

 

7,085

$

2,484

$

1,565

$

1,040

$

2,615

$

151

$

$

63

$

7,918

Ending loan balance - individually evaluated for impairment

$

14,385

$

$

1,208

$

428

$

548

$

68

$

16,637

Ending loan balance - collectively evaluated for impairment

 

246,596

 

43,490

 

219,446

 

99,433

 

11,651

 

1,406

 

622,022

$

260,981

$

43,490

$

220,654

$

99,861

$

12,199

$

1,474

$

638,659

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

March 31, 2021

    

    

Special

    

    

 

Pass

Mention

Substandard

Total

 

(dollars in thousands)

Residential mortgage

$

185,245

$

0

$

1,346

 

$

186,591

Commercial

 

73,417

 

1,200

 

0

 

 

74,617

Commercial real estate

 

242,639

 

85

 

797

 

 

243,521

ADC

 

103,044

 

0

 

443

 

 

103,487

Home equity/2nds

 

15,076

 

0

 

97

 

 

15,173

Consumer

 

1,565

 

0

 

0

 

 

1,565

$

620,986

$

1,285

$

2,683

 

$

624,954

18

December 31, 2020

    

    

Special

    

    

 

Pass

Mention

Substandard

Total

(dollars in thousands)

Residential mortgage

$

205,225

$

0

$

4,434

$

209,659

Commercial

 

62,642

 

1,200

 

0

 

63,842

Commercial real estate

 

242,435

 

86

 

914

 

243,435

ADC

 

112,479

 

0

 

459

 

112,938

Home equity/2nds

 

14,606

 

0

 

106

 

14,712

Consumer

 

1,485

 

0

 

0

 

1,485

$

638,872

$

1,286

$

5,913

$

646,071

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans, excluding any CARES Act forbearance loans that may be contractually past due, but not considered such due to the legal forbearance:

March 31, 2021

Past Due

 

30-59

60-89

90+

Non-

    

Days

    

Days

    

Days

    

Total

    

Current

    

Total

    

Accrual

(dollars in thousands)

Residential mortgage

$

0

$

0

$

331

$

331

$

186,260

$

186,591

$

910

Commercial

 

0

 

0

 

0

 

0

 

74,617

 

74,617

 

0

Commercial real estate

 

0

 

0

 

126

 

126

 

243,395

 

243,521

 

213

ADC

 

0

 

0

 

0

 

0

 

103,487

 

103,487

 

54

Home equity/2nds

 

59

 

0

 

97

 

156

 

15,017

 

15,173

 

106

Consumer

 

0

 

0

 

0

 

0

 

1,565

 

1,565

 

0

$

59

$

0

$

554

$

613

$

624,341

$

624,954

$

1,283

December 31, 2020

Past Due

30-59

60-89

90+

Non-

    

Days

    

Days

    

Days

    

Total

    

Current

    

Total

    

Accrual

 

(dollars in thousands)

Residential mortgage

$

674

$

213

$

3,393

$

4,280

$

205,379

$

209,659

$

4,080

Commercial

 

0

 

0

 

0

 

0

 

63,842

 

63,842

 

0

Commercial real estate

 

5

 

87

 

126

 

218

 

243,217

 

243,435

 

126

ADC

 

0

 

0

 

0

 

0

 

112,938

 

112,938

 

60

Home equity/2nds

 

60

 

0

 

106

 

166

 

14,546

 

14,712

 

114

Consumer

 

0

 

0

 

0

 

0

 

1,485

 

1,485

 

0

$

739

$

300

$

3,625

$

4,664

$

641,407

$

646,071

$

4,380

We did not have any loans greater than 90 days past due and still accruing as of March 31, 2021 or December 31, 2020.

The interest which would have been recorded on the above nonaccrual loans if those loans had been performing in accordance with their contractual terms was approximately $151,000 and $467,000 for the three months ended March 31, 2021 and 2020, respectively. The actual interest earned on those loans amounted to $31,000 and $60,000 for the three months ended March 31, 2021 and 2020, respectively.

19

The following tables summarize impaired loans:

March 31, 2021

December 31, 2020

    

Unpaid

    

    

    

Unpaid

    

    

 

Principal

Recorded

Related

Principal

Recorded

Related

Balance

Investment

Allowance

Balance

Investment

Allowance

With no related Allowance:

(dollars in thousands)

Residential mortgage

$

6,211

$

5,793

$

$

7,432

$

7,152

$

Commercial

��

0

 

0

 

 

0

 

0

 

Commercial real estate

 

631

 

630

 

 

548

 

547

 

ADC

 

205

 

197

 

 

212

 

206

 

Home equity/2nds

 

896

 

473

 

 

910

 

491

 

Consumer

 

62

 

62

 

 

63

 

63

 

With a related Allowance:

 

 

 

 

 

 

Residential mortgage

 

998

 

998

 

226

 

3,104

 

2,979

 

542

Commercial

 

0

 

0

 

0

 

0

 

0

 

0

Commercial real estate

 

0

 

0

 

 

0

 

0

 

0

ADC

 

101

 

101

 

29

 

102

 

102

 

29

Home equity/2nds

 

0

 

0

 

0

 

0

 

0

 

0

Consumer

 

0

 

0

 

0

 

0

 

0

 

0

Totals:

 

 

 

 

 

 

Residential mortgage

 

7,209

 

6,791

 

226

 

10,536

 

10,131

 

542

Commercial

 

0

 

0

 

0

 

0

 

0

 

0

Commercial real estate

 

631

 

630

 

 

548

 

547

 

0

ADC

 

306

 

298

 

29

 

314

 

308

 

29

Home equity/2nds

 

896

 

473

 

0

 

910

 

491

 

0

Consumer

 

62

 

62

 

0

 

63

 

63

 

0

Three Months Ended March 31, 

2021

2020

    

Average

    

Interest

    

Average

    

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

With no related Allowance:

(dollars in thousands)

Residential mortgage

$

5,848

$

83

$

9,648

$

89

Commercial

 

 

 

 

Commercial real estate

 

632

 

9

 

664

 

15

ADC

 

200

 

3

 

235

 

5

Home equity/2nds

 

292

 

7

 

553

 

6

Consumer

 

63

 

1

 

82

 

1

With a related Allowance:

 

 

 

 

Residential mortgage

 

1,000

 

16

 

4,571

 

57

Commercial

 

 

 

 

Commercial real estate

 

 

 

549

 

8

ADC

 

101

 

1

 

104

 

1

Home equity/2nds

 

 

 

 

Consumer

 

 

 

2

 

1

Totals:

 

 

 

 

Residential mortgage

 

6,848

 

99

 

14,219

 

146

Commercial

 

 

 

 

Commercial real estate

 

632

 

9

 

1,213

 

23

ADC

 

301

 

4

 

339

 

6

Home equity/2nds

 

292

 

7

 

553

 

6

Consumer

 

63

 

1

 

84

 

2

20

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

TDRs

See discussion above in this Note regarding the CARES Act relating to loan modifications during the COVID-19 pandemic.

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

March 31, 2021

    

    

    

    

    

Total

    

Total

Number of

Accrual

Number of

Nonaccrual

Number of

Balance of

Modifications

Status

Modifications

Status

Modifications

Modifications

(dollars in thousands)

Residential mortgage

 

21

$

5,618

 

2

$

159

 

23

$

5,777

Commercial real estate

 

1

 

417

 

0

 

0

 

1

 

417

ADC

 

1

 

127

 

0

 

0

 

1

 

127

Home equity/2nds

1

187

0

 

0

1

 

187

Consumer

 

1

 

62

 

0

 

0

 

1

 

62

 

25

$

6,411

 

2

$

159

 

27

$

6,570

December 31, 2020

    

    

    

    

    

Total

    

Total

Number of

Accrual

Number of

Nonaccrual

Number of

Balance of

Modifications

Status

Modifications

Status

Modifications

Modifications

(dollars in thousands)

Residential mortgage

 

22

$

5,787

 

2

$

163

 

24

$

5,950

Commercial real estate

 

1

 

421

 

0

 

0

 

1

 

421

ADC

 

1

 

128

 

0

 

0

 

1

 

128

Home equity/2nds

1

190

0

 

0

1

 

190

Consumer

 

1

 

63

 

0

 

0

 

1

 

63

 

26

$

6,589

 

2

$

163

 

28

$

6,752

We did not modify any loans that would qualify as TDRs during the three months ended March 31, 2021 or 2020.

There were 0 TDRs that defaulted during the three months ended March 31, 2021 or 2020 which were modified during the previous 12 month period.

Note 4 - Regulatory Matters

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

In July 2013, federal bank regulatory agencies issued final rules to revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with Basel III. On January 1, 2015, the Basel III

21

rules became effective and included transition provisions which implement certain portions of the rules through January 1, 2019. Under the final rules, the effects of certain accumulated other comprehensive income items are not excluded, however, banking organizations like us that are not considered “advanced approaches” banking organizations may make a one-time permanent election to continue to exclude these items, which we have done.

The Basel III rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

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

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

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

To be Well

 

Capitalized Under

 

Prompt Corrective

 

Actual

Action Provision

 

    

Amount

    

Ratio

    

Amount

    

Ratio

 

March 31, 2021

(dollars in thousands)

Community bank leverage ratio

$

125,768

 

12.1

%  

 

88,419

 

8.5

%

December 31, 2020

 

Community bank leverage ratio

$

122,196

 

13.7

%  

 

71,495

 

8.0

%

Note 5 - Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for each period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method. There were 10,500 shares that were anti-dilutive for the three months ended March 31, 2020. There were 0 anti-dilutive shares for the three months ended March 31, 2021.

22

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

Three Months Ended March 31, 

    

2021

    

2020

(dollars in thousands, except for per share data)

Weighted-average shares outstanding - basic

 

12,847,418

 

12,812,642

Dilution

 

54,067

 

37,499

Weighted-average share outstanding - diluted

 

12,901,485

 

12,850,141

Net income

$

3,911

$

565

Net income per share - basic

$

0.30

$

0.04

Net income per share - diluted

$

0.30

$

0.04

Note 6 - Stock-Based Compensation

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

We account for stock-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the Statement of Income at fair value. Additionally, we are required to recognize the expense of employee services received in share-based payment transactions and measure the expense based on the grant date fair value of the award. The expense is recognized over the period during which an employee is required to provide service in exchange for the award. Stock-based compensation expense included in the Consolidated Statements of Income for the three months ended March 31, 2021 and 2020 totaled $23,000 and $34,000, respectively.

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

2021

2020

    

    

    

Weighted-

    

    

    

    

Weighted-

    

 

Weighted-

Average

Aggregate

Weighted-

Average

Aggregate

Average

Remaining

Intrinsic

Average

Remaining

Intrinsic

Number

Exercise

Contractual

Value

Number

Exercise

Contractual

Value

of Shares

Price

Term (in years)

(in thousands)

of Shares

Price

Term (in years)

(in thousands)

Outstanding at beginning of period

 

220,250

$

6.89

 

  

 

  

 

234,173

$

6.60

 

  

 

  

Granted

 

 

 

  

 

  

 

10,500

 

8.26

 

  

 

  

Exercised

 

(13,640)

 

6.28

 

  

 

$

79

 

(2,050)

 

6.78

 

  

 

$

Outstanding at end of period

 

206,610

$

6.93

 

1.2

$

1,069

 

242,623

$

6.67

 

2.7

$

69

Exercisable at end of period

 

155,306

$

6.78

 

0.8

$

827

 

159,884

$

6.37

 

2.3

$

69

23

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

Expected life

    

5.5 years

 

Risk-free interest rate

0.95

%  

Expected volatility

27.83

%  

Expected dividend yield

$

1.95

 

Weighted average per share fair value of options granted

$

1.75

As of March 31, 2021, there was $129,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over the next 23 months.

Note 7 - Commitments and Contingencies

Off-Balance Sheet Instruments

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

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

    

March 31, 2021

December 31, 2020

(dollars in thousands)

Standby letters of credit

$

2,804

$

3,251

Home equity lines of credit

 

18,678

 

17,005

Unadvanced construction commitments

 

84,866

 

74,626

Lines of credit

 

30,510

 

30,190

Loans sold and serviced with limited repurchase provisions

 

38,877

 

41,800

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

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

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

24

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

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

Other Contingencies

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

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

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

Note 8 - Derivatives

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

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

25

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

March 31, 2021

December 31, 2020

Notional

Estimated

Notional

Estimated

    

Amount

    

Fair Value

    

Amount

    

Fair Value

 

(dollars in thousands)

Asset - IRLCs

$

46,317

$

781

$

44,243

$

1,128

Asset - mandatory forward contracts

 

17,553

94

Asset - TBA securities

78,000

1,465

Liability - mandatory forward contracts

$

67,928

$

1,061

$

$

Liability - TBA securities

2,500

4

79,500

557

Note 9 – Segments

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

The following tables present certain information regarding our business segments for the three months ended March 31, 2021 and 2020:

2021

Commercial and

Mortgage-

    

Consumer Banking

    

Banking

    

Total

(dollars in thousands)

Interest income

$

8,354

$

255

$

8,609

Interest expense

(912)

(39)

(951)

Net interest income

 

7,442

 

216

 

7,658

Reversal of provision for loan losses

 

750

 

 

750

Net interest income after reversal of provision for loan losses

 

8,192

 

216

 

8,408

Noninterest income

 

1,363

 

4,396

 

5,759

Noninterest expense

 

(6,562)

 

(2,244)

 

(8,806)

Net income before income taxes

2,993

2,368

5,361

Income tax provision

 

(798)

 

(652)

 

(1,450)

Net income

$

2,195

$

1,716

$

3,911

Total Assets

$

1,062,845

$

50,124

$

1,112,969

2020

Commercial and

Mortgage-

    

Consumer Banking

    

Banking

    

Total

(dollars in thousands)

Interest income

$

8,785

$

131

$

8,916

Interest expense

(2,117)

(44)

(2,161)

Net interest income

 

6,668

 

87

 

6,755

Provision for loan losses

 

(750)

 

 

(750)

Net interest income after provision for loan losses

 

5,918

 

87

 

6,005

Noninterest income

 

1,391

 

1,634

 

3,025

Noninterest expense

 

(7,189)

 

(1,063)

 

(8,252)

Net income before income taxes

120

658

778

Income tax provision

 

(32)

 

(181)

 

(213)

Net income

$

88

$

477

$

565

Total Assets

$

834,474

$

21,996

$

856,470

26

Note 10 - Fair Value

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

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

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

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

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

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

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

Assets Measured on a Recurring Basis

The following table presents fair value measurements for assets that are measured at fair value on a recurring basis as of and for the three months ended March 31, 2021:

    

  

    

  

    

Significant

    

  

    

  

  

  

Other

Significant

Total Changes

  

Quoted

Observable

Unobservable

In Fair Values

Carrying

Prices

Inputs

Inputs

Included In

Value

(Level 1)

(Level 2)

(Level 3)

Period Income

Assets:

(dollars in thousands)

AFS securities - U.S. government agency notes

$

9,175

$

0

$

9,175

$

0

$

0

AFS securities - corporate obligations

2,021

0

2,021

0

0

AFS securities - MBS

121,502

0

121,502

0

0

LHFS

 

50,124

 

0

 

50,124

 

0

 

305

MSRs

 

2,927

 

0

 

0

 

2,927

 

826

IRLCs

 

781

 

0

 

0

 

781

 

(347)

Best efforts forward contracts

 

26

 

0

 

26

 

0

 

25

Mandatory forward contracts

 

94

 

0

 

94

 

0

 

(736)

TBA securities

1,465

0

 

1,465

 

0

1,465

Liabilities:

Mandatory forward contracts

 

1,061

 

0

 

1,061

 

0

 

1,055

TBA securities

 

4

 

0

 

4

 

0

 

553

27

The following table presents fair value measurements for assets and liabilities that are measured at fair value on a recurring basis as of and for the year ended December 31, 2020:

    

  

    

  

    

Significant

    

  

    

  

  

  

Other

Significant

Total Changes

  

Quoted

Observable

Unobservable

In Fair Values

Carrying

Prices

Inputs

Inputs

Included In

Value

(Level 1)

(Level 2)

(Level 3)

Period Income

Assets:

(dollars in thousands)

AFS securities - U.S. government agency notes

6,660

$

0

$

6,660

$

0

$

0

AFS securities - corporate obligations

2,034

0

2,034

0

0

AFS securities - MBS

56,404

0

56,404

0

0

LHFS

 

36,299

 

0

 

36,299

 

0

 

323

MSRs

 

1,451

 

0

 

0

 

1,451

 

(1,013)

IRLCs

 

1,128

 

0

 

0

 

1,128

 

949

Liabilities:

TBA securities

 

557

 

0

 

557

 

0

 

(557)

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

    

Fair Value

    

Valuation

    

    

Range

 

Estimate

Technique

Unobservable Input

(Weighted-Average)

 

March 31, 2021:

(dollars in thousands)

MSRs (1)

$

2,927

 

Market Approach

 

Weighted average prepayment speed

 

155

%

IRLCs - net asset

781

Market Approach

Range of pull through rate

78% - 100

%

Average pull through rate

97

%

  

 

  

 

  

 

  

 

  

December 31, 2020:

 

  

 

  

 

  

 

  

MSRs (1)

$

1,451

 

Market Approach

 

Weighted average prepayment speed

 

326

%

IRLCs - net asset

1,128

 

Market Approach

 

Range of pull through rate

77% - 100

%

Average pull through rate

93

%

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

The following table shows the activity in the MSRs:

Three Months Ended March 31, 

    

2021

    

2020

(dollars in thousands)

Beginning balance

$

1,451

$

323

Additions

650

0

Valuation adjustment

826

(83)

Ending balance

$

2,927

$

240

The following table shows the activity in the IRLCs:

Three Months Ended March 31, 

    

2021

    

2020

(dollars in thousands)

Beginning balance

$

1,128

$

179

Valuation adjustment

(347)

(240)

Ending balance

$

781

$

(61)

28

AFS Securities

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

LHFS

LHFS are carried at fair value, which is determined based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements or third party pricing models.

MSRs

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

IRLCs

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

Forward Contracts

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

29

Assets Measured on a Nonrecurring Basis

March 31, 2021

 

Significant

 

Other 

Significant

 

Quoted 

Observable

Unobservable

 

Carrying 

Prices

Inputs

Inputs

Range of

Weighted

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average (2)

 

(dollars in thousands)

Impaired loans

$

844

$

0

$

0

$

844

 

12% - 14%

12

%

December 31, 2020

Significant

 

Other 

Significant

 

Quoted 

Observable

Unobservable

 

Carrying 

Prices

Inputs

Inputs

Range of

Weighted

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average (2)

  

(dollars in thousands)

Impaired loans

$

2,510

$

0

$

0

$

2,510

 

0% - 14%

9

%

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

Impaired Loans

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

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

Real Estate Acquired Through Foreclosure

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

30

Fair Value of All Financial Instruments

The carrying value and fair value of all financial instruments are summarized in the following tables:

March 31, 2021

Carrying

Fair Value

    

Value

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

(dollars in thousands)

Cash and cash equivalents

$

257,095

$

257,095

$

0

$

0

$

257,095

CDs held for investment

3,330

 

3,330

0

0

 

3,330

AFS securities

 

132,698

 

0

 

132,698

 

0

 

132,698

HTM securities

 

14,516

 

0

 

15,094

 

0

 

15,094

LHFS

 

50,124

 

0

 

50,124

 

0

 

50,124

Loans receivable, net

 

613,377

 

0

 

0

 

618,858

 

618,858

Restricted stock investments

 

970

 

0

 

970

 

0

 

970

Accrued interest receivable

 

2,439

 

0

 

2,439

 

0

 

2,439

MSRs

 

2,927

 

0

 

0

 

2,927

 

2,927

IRLCs

 

781

 

0

 

0

 

781

 

781

Best effort forward contracts

 

26

 

0

 

26

 

0

 

26

Mandatory forward contracts

 

94

 

0

 

94

 

0

 

94

TBA securities

 

1,465

 

0

 

1,465

 

0

 

1,465

Liabilities:

 

 

 

Deposits

 

964,096

 

0

 

970,488

 

0

 

970,488

Accrued interest payable

 

160

 

0

 

160

 

0

 

160

Borrowings

 

10,000

 

0

 

10,273

 

0

 

10,273

Subordinated debentures

 

20,619

 

0

 

0

 

16,276

 

16,276

Mandatory forward contracts

 

1,061

 

0

 

1,061

 

0

 

1,061

TBA securities

 

4

 

0

 

4

 

0

 

4

December 31, 2020

Carrying

Fair Value

    

Value

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

(dollars in thousands) 

Cash and cash equivalents

$

156,609

$

156,609

$

0

$

0

$

156,609

CDs held for investment

3,580

 

3,580

0

0

 

3,580

AFS securities

 

65,098

 

0

 

65,098

 

0

 

65,098

HTM securities

 

15,943

 

0

 

16,603

 

0

 

16,603

LHFS

 

36,299

 

0

 

36,299

 

0

 

36,299

Loans receivable, net

 

634,212

 

0

 

0

 

639,597

 

639,597

Restricted stock investments

 

1,236

 

0

 

1,236

 

0

 

1,236

Accrued interest receivable

 

2,576

 

0

 

2,576

 

0

 

2,576

MSRs

 

1,451

 

0

 

0

 

1,451

 

1,451

IRLCs

 

1,128

 

0

 

0

 

1,128

 

1,128

Liabilities:

 

Deposits

 

806,456

 

0

 

806,444

 

0

 

806,444

Accrued interest payable

 

164

 

0

 

164

 

0

 

164

Borrowings

 

10,000

 

0

 

10,313

 

0

 

10,313

Subordinated debentures

 

20,619

 

0

 

0

16,157

 

16,157

TBA securities

 

557

 

0

 

557

 

0

 

557

Limitations

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

31

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

There were 0 transfers between any of Levels 1, 2 and 3 for the three months ended March 31, 2021 or 2020 or for the year ended December 31, 2020.

32

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

The following discussion should be read and reviewed in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Severn Bancorp’s Annual Report on Form 10-K as of and for the year ended December 31, 2020. See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Quarterly Report on Form 10-Q.

The Company

The Company is a savings and loan holding company chartered as a corporation in the state of Maryland in 1990. It conducts business primarily through three subsidiaries, the Bank, the Title Company, and SBI. The Title Company is a real estate settlement company that handles commercial and residential real estate settlements in Maryland. SBI holds mortgages that do not meet the underwriting criteria of the Bank, and is the parent company of Crownsville, which is doing business as Annapolis Equity Group and acquires real estate for syndication and investment purposes. We maintained seven branches in Anne Arundel County, Maryland at March 31, 2021. The branches offer a full range of deposit products and we originate mortgages in the Bank’s primary market of Anne Arundel County, Maryland and, to a lesser extent, in other parts of Maryland, Delaware, and Virginia. As of March 31, 2021, we had 181 full-time equivalent employees.

Asset Sale

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

Proposed Merger with Shore Bancshares, Inc.

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

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

Significant Developments - COVID-19

 

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

 

Effects on Our Market Areas 

 

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

33

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

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

 

Policy and Regulatory Developments

 

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

 

 

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

 

 

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

  

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

 

 

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

34

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

 

 

 

 

 

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

Effects on Our Business

 

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

 

Our Response

 

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

 

 

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

 

 

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

 

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

35

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

  

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

Overview

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

We have experienced increased profitability during the three months ended March 31, 2021, primarily due to mortgage-banking activities. Additionally, we reversed $750,000 in provision for loan losses. Net interest income increased primarily due to a declining interest rate environment, resulting from rate reductions by the FRB in response to the COVID-19 pandemic, which significantly reduced our interest expense. Noninterest expenses increased for the three months ended March 31, 2021 due primarily to increased investments in staff and increased commissions corresponding to the increased mortgage production. Additionally, we recognized $238,000 in merger related expenses. See discussion of pending merger above.

The Company expects to experience similar market conditions during the remainder of 2021, provided interest rates do not increase or decrease rapidly. If interest rates change rapidly, demand for loans may fluctuate and our interest rate spread could change significantly. Additionally, significant changes in interest rates could also affect the origination volumes related to our mortgage-banking activities. We continue to manage loan and deposit pricing against the potential risks of rising costs of our deposits and borrowings. Interest rates are outside of our control, so we must attempt to balance the pricing and duration of the loan portfolio against the risks of rising or declining costs of our deposits and borrowings. The continued success and attraction of Anne Arundel County, Maryland, and vicinity, will also be important to our ability to originate and grow loans and deposits, as will our continued focus on maintaining a low overhead. If volatility in the market and the economy continues to occur, our business, financial condition, results of operations, access to funds, and the price of our stock could be materially and adversely impacted. We believe the Company is well prepared for the economic and social consequences of the COVID-19 global pandemic in future periods.

Critical Accounting Policies

Our accounting and financial reporting policies conform to GAAP and prevailing practices within the banking industry. Accordingly, preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The accounting policies we view as critical are those relating to the Allowance, the valuation of real estate acquired through foreclosure, and the valuation of deferred tax assets and liabilities. Significant accounting policies are discussed in detail in “Notes to Consolidated Financial Statements - Note 1 - Summary of Significant Account Policies” in our Annual Report on Form 10-K as of and for the year ended December 31, 2020. There have been no material changes to the significant accounting policies as described in the Annual Report other than those that may be mentioned in Note 1 to the consolidated financial statements in this Quarterly Report on Form 10-Q. Disclosures regarding

36

the effects of new accounting pronouncements are included in Note 1 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Results of Operations

Net Income

Net income increased by $3.3 million, or 592.2%, to $3.9 million for the three months ended March 31, 2021 compared to $565,000 for the three months ended March 31, 2020. Basic and diluted income per share were $0.30 for the three months ended March 31, 2021, compared to $0.04 for the three months ended March 31, 2020. The increase in net income reflected increased net interest income, a decrease in provision for loan losses, and increased noninterest income, partially offset by increased noninterest expenses.

Net Interest Income

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

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

Interest Income

Interest income decreased by $307,000, or 3.4%, to $8.6 million for the three months ended March 31, 2021, compared to $8.9 million for the three months ended March 31, 2020, due primarily to the low interest rate environment created by the COVID-19 pandemic.

The average yield on interest-earning assets decreased 100 basis points to 3.46% for the three months ended March 31, 2021 from 4.46% for the three months ended March 31, 2020. The average yield on other interest-earning assets decreased to 0.11% for the three months ended March 31, 2021 from 1.25% for the three months ended March 31, 2020, primarily due to a change in the mix of other interest-earning asset types and the decreased rate environment. We held less CDs held for investment during the three months ended March 31, 2021 than during the three months ended March 31, 2020. Average interest-earning assets increased from $803.2 million for the three months ended March 31, 2020 to $1.0 billion for the three months ended March 31, 2021, due primarily to an increase in average other interest-earning assets of $115.2 million and an increase in average AFS securities of $75.6 million. The increase in average other interest-earning assets resulted primarily from increased average interest-earning deposits in banks, which was the result of increased deposits from our medical-use cannabis customers. The increase in average AFS securities was due to utilization of excess liquidity through security purchases during the first quarter of 2021.

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

37

Interest Expense

Total interest expense was $951,000 for the three months ended March 31, 2021 and $2.2 million for the three months ended March 31, 2020. The decrease in interest expense was primarily due to the decreased interest rate environment. The average rate on interest-bearing liabilities decreased 91 basis points from 1.51% for the three months ended March 31, 2020 to 0.60% for the three months ended March 31, 2021. Average rates decreased in all interest-bearing liability categories. Partially offsetting the decrease in average rates were increased average interest-bearing liabilities which increased from $575.1 million for the three months ended March 31, 2020 to $640.6 million for the three months ended March 31, 2021. The average balance of interest-bearing checking and savings accounts increased from $323.7 million for the three months ended March 31, 2020 to $453.8 million for the three months ended March 31, 2021, primarily due to increases in our medical-use cannabis related accounts. The average balance of CDs decreased from $195.7 million for the three months ended March 31, 2020 to $156.1 million for the same period of 2021 due to runoff from maturing CDs. Average borrowings decreased $25.0 during the three months ended March 31, 2021 compared to the same period of 2020 due to payoffs of FHLB advances.

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

Three Months Ended March 31, 

 

2021

2020

 

Average

Yield/

Average

Yield/

 

    

Balance

    

Interest (2)

    

Rate (4)

    

Balance 

    

Interest (2)

    

Rate (4)

  

ASSETS

(dollars in thousands)

Loans (1)

$

633,698

$

8,142

 

5.21

%  

$

644,087

$

8,240

 

5.15

%

LHFS

 

48,632

 

102

 

0.85

%  

 

13,528

 

98

 

2.91

%

AFS securities

 

89,822

 

212

 

0.96

%  

 

14,247

 

81

 

2.29

%

HTM securities

 

15,275

 

80

 

2.12

%  

 

24,267

 

138

 

2.29

%

Other interest-earning assets (3)

 

219,828

 

62

 

0.11

%  

 

104,614

 

325

 

1.25

%

Restricted stock investments, at cost

 

1,198

 

11

 

3.72

%  

 

2,431

 

34

 

5.63

%

Total interest-earning assets

 

1,008,453

 

8,609

 

3.46

%  

 

803,174

 

8,916

 

4.46

%

Allowance

 

(8,737)

 

 

 

(7,156)

 

 

Cash and other noninterest-earning assets

 

43,339

 

 

 

45,497

 

 

Total assets

$

1,043,055

8,609

 

$

841,515

8,916

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Checking and savings

$

453,841

 

132

 

0.12

%  

$

323,709

 

661

 

0.82

%

CDs

 

156,141

 

652

 

1.69

%  

 

195,722

 

1,136

 

2.33

%

Total interest-bearing deposits

 

609,982

 

784

 

0.52

%  

 

519,431

 

1,797

 

1.39

%

Borrowings

 

30,619

 

167

 

2.21

%  

 

55,619

 

364

 

2.63

%

Total interest-bearing liabilities

 

640,601

 

951

 

0.60

%  

 

575,050

 

2,161

 

1.51

%

Noninterest-bearing deposits

 

287,828

 

 

 

150,628

 

 

Other noninterest-bearing liabilities

 

4,642

 

 

 

8,085

 

 

Stockholders' equity

 

109,984

 

 

 

107,752

 

 

Total liabilities and stockholders' equity

$

1,043,055

 

951

 

$

841,515

 

2,161

 

Net interest income/net interest spread

 

$

7,658

 

2.86

%  

 

$

6,755

 

2.95

%

Net interest margin

 

 

 

3.08

%  

 

 

 

3.38

%

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

38

(2)There are no tax equivalency adjustments.
(3)Other interest-earning assets include interest-earning deposits, federal funds sold, and CDs held for investment.
(4)Annualized.

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

Three Months Ended March 31, 

2021 vs. 2020

Due to Variances in

    

Rate

    

Volume

    

Total

Interest earned on:

(dollars in thousands)

Loans

$

428

$

(526)

$

(98)

LHFS

 

(438)

 

442

 

4

AFS securities

 

(327)

 

458

 

131

HTM Securities

 

(10)

 

(48)

 

(58)

Other interest-earning assets

 

(1,421)

 

1,158

 

(263)

Restricted stock investments, at cost

 

(9)

 

(14)

 

(23)

Total interest income

 

(1,777)

 

1,470

 

(307)

Interest paid on:

 

 

 

Interest-bearing deposits:

 

 

 

Checking and savings

 

(1,815)

 

1,286

 

(529)

CDs

 

(279)

 

(205)

 

(484)

Total interest-bearing deposits

 

(2,094)

 

1,081

 

(1,013)

Borrowings

 

(52)

 

(145)

 

(197)

Total interest expense

 

(2,146)

 

936

 

(1,210)

Net interest income

$

369

$

534

$

903

Provision for Loan Losses

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

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

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

39

Noninterest Income

Total noninterest income increased by $2.7 million or 90.4%, to $5.8 million for the three months ended March 31, 2021, compared to $3.0 million for the three months ended March 31, 2020, with the majority of the increase from mortgage-banking revenue. Mortgage-banking revenue increased $2.8 million or 169.0%, due to the increased volume of loans originated from $43.2 million during the three months ended March 31, 2020 to $101.3 million during the three months ended March 31, 2021. A significant portion of the originations were refinances due to the drop in interest rates. The Title Company generated $335,000 in revenue during the three months ended March 31, 2021 compared to $238,000 for the three months ended March 31, 2020. Servicing fee income (included in other noninterest income) increased $107,000 from $33,000 for the three months ended March 31, 2020 to $140,000 for the same period of 2021 as the volume of loans serviced for FHLMC and FNMA increased during the first quarter of 2021. Real estate commissions decreased $149,000 and real estate management fees decreased $165,000 during the three months ended March 31, 2021 compared to the same period of 2020 as we wound down the operations of the Bank’s subsidiary, Louis Hyatt, Inc. after the Hyatt Commercial asset sale on January 1, 2021.

Noninterest Expense

Total noninterest expense increased $554,000, or 6.7%, to $8.8 million for the three months ended March 31, 2021, compared to $8.3 million for the three months ended March 31, 2020, primarily due to increases in compensation and related expenses and merger costs related to the pending merger with Shore Bank. Compensation and related expenses increased by $761,000, or 13.9%, to $6.2 million for the three months ended March 31, 2021, compared to $5.5 million for the three months ended March 31, 2020. This increase was primarily due to annual salary increases, additional hirings, primarily in the mortgage-banking division, and increased commission expense that corresponds with our increased mortgage-banking volumes. Merger expenses amounted to $238,000 for the three months ended March 31, 2021, primarily consisting of legal fees. Professional fees decreased $152,000 primarily due to decreased external audit and consulting fees in the first quarter of 2021. Additionally, we recognized a $34,000 loss on the sale of Hyatt Commercial during the three months ended March 31, 2021.

Income Tax Provision

We recorded a $1.5 million tax provision on net income before income taxes of $5.4 million for the three months ended March 31, 2021 for an effective tax rate of 27.1%, compared to an income tax provision of $213,000 on net income before income taxes of $778,000 for the three months ended March 31, 2020, for an effective tax rate of 27.4%.

Financial Condition

Total assets increased $160.4 million to $1.1 billion at March 31, 2021, compared to $952.6 million at December 31, 2020. This increase was primarily due to a $100.5 million, or 64.2%, increase in cash and cash equivalents, to $257.1 million at March 31, 2021 from $156.6 million at December 31, 2020 due primarily to increased deposits. Additionally, AFS securities increased $67.6 million as we as we redirected some of our excess liquidity in the form of security purchases. Partially offsetting the increase in total assets was a $21.4 million decrease in total loans in the first quarter of 2021 as a result of significant pay offs. Total deposits increased $157.6 million, or 19.5%, to $964.1 million at March 31, 2021 compared to $806.5 million at December 31, 2020 primarily due to deposits from medical-cannabis related customers. Stockholders’ equity increased $1.4 million to $111.1 million at March 31, 2021 compared to $109.6 million at December 31, 2020, due to net income to date for the year, partially offset by dividends paid to stockholders and an increased accumulated other comprehensive loss.

Securities

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

40

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

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

Our securities portfolio composition is as follows:

AFS

HTM

    

March 31, 2021

    

December 31, 2020

    

March 31, 2021

    

December 31, 2020

    

(dollars in thousands)

U.S. government agency notes

$

9,175

$

6,660

$

1,987

$

1,986

Corporate obligations

2,021

2,034

MBS

 

121,502

 

56,404

 

12,529

 

13,957

$

132,698

$

65,098

$

14,516

$

15,943

LHFS

We originate residential mortgage loans for sale on the secondary market. Such LHFS, which are carried at fair value, amounted to $50.1 million at March 31, 2021 and $36.3 million at December 31, 2020, the majority of which are subject to purchase commitments from investors. The increase in LHFS was primarily due to increased originations and to the timing of loans pending sale on the secondary market.

Loans

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

The following table sets forth the composition of our loan portfolio before net unearned loan fees:

March 31, 2021

December 31, 2020

Percent

Percent

    

Amount

    

of Total

    

Amount

    

of Total

    

(dollars in thousands)

Residential Mortgage

$

186,591

29.9

%  

$

209,659

32.4

%

Commercial

 

74,617

 

11.9

%  

 

63,842

 

9.9

%

Commercial real estate

 

243,521

 

39.0

%  

 

243,435

 

37.7

%

ADC

 

103,487

 

16.6

%  

 

112,938

 

17.5

%

Home equity/2nds

 

15,173

 

2.4

%  

 

14,712

 

2.3

%

Consumer

 

1,565

 

0.2

%  

 

1,485

 

0.2

%

Loans receivable, before net unearned fees

$

624,954

 

100.0

%  

$

646,071

 

100.0

%

Total loans, net of unearned loan fees, decreased by $21.4 million, or 3.3%, to $621.5 million at March 31, 2021, compared to $642.9 million at December 31, 2020. This decrease was due primarily to increased payoffs of residential real estate and ADC loans, partially offset by increased commercial loan originations (primarily PPP loans).

41

Credit Risk Management and the Allowance

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

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

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

42

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

Three Months Ended

March 31, 

2021

    

2020

    

(dollars in thousands)

Allowance, beginning of period

$

8,670

$

7,138

Charge-offs:

 

 

Residential mortgage

 

 

Commercial

 

 

Commercial real estate

 

 

ADC

 

(34)

 

Home equity/2nds

 

 

Consumer

 

 

(15)

Total charge-offs

 

(34)

 

(15)

Recoveries:

 

 

Residential mortgage

 

65

 

3

Commercial

 

5

 

5

Commercial real estate

 

174

 

32

ADC

 

 

Home equity/2nds

 

4

 

2

Consumer

 

1

 

3

Total recoveries

 

249

 

45

Net recoveries

 

215

 

30

(Reversal of) provision for loan losses

 

(750)

 

750

Allowance, end of period

$

8,135

$

7,918

Loans:

 

 

Period-end balance

$

621,512

$

635,950

Average balance during period

 

633,698

 

644,087

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

1.31

%

1.25

%

Percent of average loans (annualized):

 

 

(Reversal of) provision for loan losses

 

(0.48)

%  

 

0.47

%  

Net recoveries

 

0.14

%  

 

0.02

%  

(1)The Allowance at March 31, 2021, as a percentage of total loans, excluding PPP loans was 1.40%

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

March 31, 2021

December 31, 2020

    

    

    

Percent

    

    

    

Percent

  

of Loans

of Loans

Percent

to Total

Percent

to Total

Amount

of Total

Loans

Amount

of Total

Loans

(dollars in thousands)

Residential mortgage

$

1,799

 

22.1

%  

29.9

%  

$

2,259

 

26.0

%  

32.4

%

Commercial

 

1,780

 

21.9

%  

11.9

%  

 

1,670

 

19.3

%  

9.9

%

Commercial real estate

 

1,453

 

17.9

%  

39.0

%  

 

1,516

 

17.5

%  

37.7

%

ADC

 

2,705

 

33.2

%  

16.6

%  

 

2,947

 

34.0

%  

17.5

%

Home equity/2nds

 

219

 

2.7

%  

2.4

%  

 

168

 

1.9

%  

2.3

%

Consumer

 

 

%  

0.2

%  

 

 

%  

0.2

%

Unallocated

 

179

 

2.2

%  

%  

 

110

 

1.3

%  

%

Total

$

8,135

 

100.0

%  

100.0

%  

$

8,670

 

100.0

%  

100.0

%

43

Based upon management’s evaluation, provisions are made to maintain the Allowance as a best estimate of inherent losses within the portfolio. The Allowance totaled $8.1 million at March 31, 2021 and  $8.7 million at December 31, 2020. Any changes in the Allowance from period to period reflect management’s ongoing application of its methodologies to establish the Allowance, which, for the three months ended March 31, 2021, resulted in decreased allocated Allowances for the majority of the loan segments, with the exception of commercial loans and home equity/2nds.

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

We recorded net recoveries of $215,000 and $30,000, respectively, during the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021 and 2020, annualized net recoveries as a percentage of average loans outstanding amounted to 0.14% and 0.02%, respectively. The Allowance as a percentage of outstanding loans was 1.31% as of March 31, 2021 compared to 1.35% as of  December 31, 2020, the decrease in which was primarily the result of the reversal of provision for loan losses.

PPP loans are fully guaranteed by the SBA and, therefore, not required to have an allocated Allowance. The Allowance as a percentage of outstanding loans less PPP loans amounted to 1.40% at March 31, 2021.

Although management uses available information to establish the appropriate level of the Allowance, future additions or reductions to the Allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions, and other factors. As a result, our Allowance may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our Allowance and related methodology. Such agencies may require us to recognize adjustments to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of March 31, 2021 and is sufficient to address the credit losses inherent in the current loan portfolio. Management will continue to evaluate the adequacy of the Allowance as more economic data becomes available and as changes within our portfolio are known. The effects of the COVID-19 pandemic may still require us to fund additional increases in the Allowance in future periods.

NPAs

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

NPAs, expressed as a percentage of total assets, totaled 0.2% at March 31, 2021 and 0.6% at December 31, 2020. The ratio of the Allowance to nonperforming loans was 634.1% at March 31, 2021 and 197.9% at December 31, 2020.

44

The distribution of our NPAs is illustrated in the following table. We did not have any loans greater than 90 days past due and still accruing at March 31, 2021 or December 31, 2020.

    

March 31, 2021

    

December 31, 2020

    

Nonaccrual Loans:

(dollars in thousands)

Residential mortgage

$

910

 

$

4,080

Commercial real estate

 

213

 

 

126

ADC

 

54

 

 

60

Home equity/2nds

 

106

 

 

114

Consumer

 

 

 

 

1,283

 

 

4,380

Real Estate Acquired Through Foreclosure:

 

  

 

 

  

Commercial real estate

 

452

 

 

452

ADC

 

558

 

 

558

 

1,010

 

 

1,010

Total NPAs

$

2,293

 

$

5,390

Nonaccrual loans totaled $1.3 million, or 0.21% of total loans, at March 31, 2021 and $4.4 million, or 0.68% of total loans at December 31, 2020. Significant activity in nonaccrual loans during the three months ended March 31, 2021 included the addition of three loans in the amount of $138,000 to nonaccrual and the payoff of two loans that were in nonaccrual status at December 31, 2020 in the amount of $3.1 million.

Real estate acquired through foreclosure remained unchanged at $1.0 million at both March 31, 2021 and December 31, 2020.

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

Three Months Ended March 31, 

    

2021

    

2020

    

(dollars in thousands)

Balance at beginning of period

$

1,010

$

2,387

Write-downs and losses on real estate acquired through foreclosure

 

 

(80)

Proceeds from sales of real estate acquired through foreclosure

 

 

(623)

Balance at end of period

$

1,010

$

1,684

TDRs

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

45

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

    

March 31, 2021

    

December 31, 2020

    

Residential mortgage:

(dollars in thousands)

Nonaccrual

$

159

$

163

<90 days past due/current

 

5,618

 

5,787

Commercial real estate:

 

  

 

  

Nonaccrual

 

 

<90 days past due/current

 

417

 

421

ADC:

 

  

 

  

Nonaccrual

 

 

<90 days past due/current

 

127

 

128

Home equity/2nds:

Nonaccrual

 

 

<90 days past due/current

 

187

 

190

Consumer:

 

  

 

  

Nonaccrual

 

 

<90 days past due/current

 

62

 

63

Totals:

 

  

 

  

Nonaccrual

 

159

 

163

<90 days past due/current

 

6,411

 

6,589

$

6,570

$

6,752

CARES Act Loans

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

    

Residential

    

Commercial

    

Commercial Real Estate

    

Home Equity/2nds

    

Consumer

    

Total

(dollars in thousands)

Balance at beginning of period

$

6,009

$

2,052