10-Q 1 dbcp-20200331x10q.htm 10-Q dbcp_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


 

 

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

 

For the quarterly period ended March 31, 2020

or

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

 

For the transition period from           to           .

 

Commission file number: 001-39285

Delmar Bancorp

(Exact name of registrant as specified in its charter)

Maryland

52-1559535

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

2245 Northwood Drive, Salisbury, Maryland

21801

(Address of principal executive offices)

(Zip Code)

 

410-548-1100

(Registrant’s telephone number, including area code)

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

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

DBCP

Nasdaq Capital Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer”, "accelerated filer", "smaller reporting company" and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer 

    Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company 

Emerging growth company 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes  No 

As of May 13, 2020 there were 17,807,639 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

 

 

 

 

TABLE OF CONTENTS

PART I 

FINANCIAL INFORMATION 

 

 

 

 

 

 

 

 

Page

Item 1. Financial Statements 

 

 

 

Consolidated Balance Sheets (Unaudited) 

 

3

 

 

 

Consolidated Statements of Income (Unaudited) 

 

4

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) 

 

5

 

 

 

Consolidated Statements of Stockholders' Equity (Unaudited) 

 

6

 

 

 

Consolidated Statements of Cash Flows (Unaudited) 

 

7

 

 

 

Notes to Consolidated Financial Statements (Unaudited) 

 

8

 

 

 

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

 

45

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 

 

69

 

 

 

Item 4. Controls and Procedures 

 

69

 

 

 

PART II 

OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1. Legal Proceedings 

 

70

 

 

 

Item 1A. Risk Factors 

 

70

 

 

 

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

 

72

 

 

 

Item 3. Defaults Upon Senior Securities 

 

72

 

 

 

Item 4. Mine Safety Disclosures 

 

72

 

 

 

Item 5. Other Information 

 

72

 

 

 

EXHIBIT INDEX 

 

73

 

 

 

SIGNATURES 

 

74

 

 

2

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

DELMAR BANCORP

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

2020

 

2019

(Dollars in thousands, except per share amounts)

 

(unaudited)

 

(audited)

ASSETS

 

 

  

 

 

  

Cash and due from banks

 

$

29,882

 

$

36,295

Interest bearing deposits in other financial institutions

 

 

23,221

 

 

27,586

Federal funds sold

 

 

31,587

 

 

31,230

Cash and cash equivalents

 

 

84,690

 

 

95,111

Securities available for sale, at fair value

 

 

104,652

 

 

106,256

Loans held for sale, at fair value

 

 

5,190

 

 

3,555

Loans, less allowance for credit losses of $7,819 at March 31, 2020 and $7,304 at December 31, 2019

 

 

1,007,370

 

 

986,684

Accrued interest receivable on loans and investment securities

 

 

3,302

 

 

3,138

Premises and equipment, at cost, less accumulated depreciation

 

 

13,454

 

 

13,705

Federal Home Loan Bank stock, at cost

 

 

4,959

 

 

5,180

Atlantic Central Bankers Bank stock, at cost

 

 

131

 

 

131

Other investments

 

 

2,849

 

 

2,838

Bank owned life insurance

 

 

7,867

 

 

7,817

Other real estate owned

 

 

2,417

 

 

2,417

Core deposit intangible, net

 

 

3,190

 

 

3,373

Goodwill

 

 

9,391

 

 

9,391

Other assets

 

 

12,981

 

 

13,074

Total assets

 

$

1,262,443

 

$

1,252,670

LIABILITIES

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Non interest bearing demand

 

$

268,226

 

$

261,631

NOW

 

 

83,758

 

 

76,947

Savings and money market

 

 

233,754

 

 

222,975

Time, $100,000 or more

 

 

276,152

 

 

274,387

Other time

 

 

158,834

 

 

170,841

 

 

 

1,020,724

 

 

1,006,781

Accrued interest payable on deposits

 

 

584

 

 

572

Short-term borrowings with the Federal Home Loan Bank

 

 

21,200

 

 

48,000

Long-term borrowings with the Federal Home Loan Bank

 

 

68,466

 

 

48,830

Subordinated notes payable

 

 

6,500

 

 

6,500

Other borrowings

 

 

1,113

 

 

1,249

Other liabilities

 

 

10,284

 

 

9,861

Total liabilities

 

 

1,128,871

 

 

1,121,793

COMMITMENTS, CONTINGENCIES & SUBSEQUENT EVENT

 

 

  

 

 

  

STOCKHOLDERS' EQUITY

 

 

  

 

 

  

Common stock, par value $.01, authorized 40,000,000 shares, issued and outstanding 17,807,639 as of March 31, 2020 and 17,790,181 as of December 31, 2019

 

 

178

 

 

178

Surplus

 

 

87,538

 

 

87,437

Retained earnings

 

 

43,746

 

 

41,785

Noncontrolling interest in consolidated subsidiaries

 

 

709

 

 

738

Accumulated other comprehensive income, net of tax

 

 

1,401

 

 

739

Total stockholders' equity

 

 

133,572

 

 

130,877

Total liabilities and stockholders' equity

 

$

1,262,443

 

$

1,252,670

 

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

3

DELMAR BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(Dollars in thousands, except per share data)

    

2020

    

2019

 

INTEREST INCOME ON:

 

 

  

 

 

  

 

Loans, including fees

 

$

13,359

 

$

8,466

 

Investment securities:

 

 

  

 

 

  

 

Taxable

 

 

435

 

 

181

 

Exempt from Federal income tax

 

 

225

 

 

144

 

Federal funds sold

 

 

97

 

 

15

 

Other interest income

 

 

233

 

 

176

 

 

 

 

14,349

 

 

8,982

 

INTEREST EXPENSE ON:

 

 

  

 

 

  

 

Deposits

 

 

2,587

 

 

1,346

 

Borrowings

 

 

652

 

 

422

 

 

 

 

3,239

 

 

1,768

 

NET INTEREST INCOME

 

 

11,110

 

 

7,214

 

Provision for credit losses

 

 

648

 

 

300

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

 

10,462

 

 

6,914

 

OTHER INCOME:

 

 

  

 

 

  

 

Service charges on deposit accounts

 

 

289

 

 

287

 

Gain on investment securities

 

 

127

 

 

 —

 

Other income

 

 

1,137

 

 

471

 

 

 

 

1,553

 

 

758

 

OTHER EXPENSES:

 

 

  

 

 

  

 

Salaries and employee benefits

 

 

4,779

 

 

2,838

 

Premises and equipment

 

 

1,124

 

 

938

 

Amortization of core deposit intangible

 

 

183

 

 

76

 

Gains on other real estate owned

 

 

 —

 

 

(1)

 

Other expenses

 

 

2,703

 

 

1,760

 

 

 

 

8,789

 

 

5,611

 

INCOME BEFORE TAXES ON INCOME

 

 

3,226

 

 

2,061

 

Federal and state income taxes

 

 

804

 

 

663

 

NET INCOME

 

$

2,422

 

$

1,398

 

Net (income) attributable to noncontrolling interest

 

 

(16)

 

 

 —

 

NET INCOME ATTRIBUTABLE TO DELMAR BANCORP

 

$

2,406

 

$

1,398

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

  

 

 

  

 

Basic earnings per share

 

$

0.135

 

$

0.140

 

Diluted earnings per share

 

$

0.135

 

$

0.140

 

 

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

4

DELMAR BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

Three Months Ended March 31, 

(Dollars in thousands)

2020

    

2019

NET INCOME

$

2,422

 

$

1,398

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

  

 

 

  

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

 

1,027

 

 

860

Deferred income tax liabilities

 

(272)

 

 

(228)

Other comprehensive income, net of tax

 

755

 

 

632

 

 

 

 

 

 

Reclassification adjustment for gains included in net income

 

(127)

 

 

 —

Deferred income tax benefits

 

34

 

 

 —

Other comprehensive income, net of tax

 

(93)

 

 

 —

TOTAL OTHER COMPREHENSIVE INCOME

 

662

 

 

632

COMPREHENSIVE INCOME

 

3,084

 

 

2,030

COMPREHENSIVE (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(16)

 

 

 —

COMPREHENSIVE INCOME ATTRIBUTABLE TO DELMAR BANCORP

$

3,068

 

$

2,030

 

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

5

DELMAR BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three month period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

Common

 

 

 

 

Retained

 

Noncontrolling

 

Comprehensive

 

Stockholders'

(Dollars in thousands, except per share amounts)

    

Stock

    

Surplus

    

Earnings

    

Interest

    

Income (Loss)

    

Equity

Balances, December 31, 2018

 

$

100

 

$

29,470

 

$

37,149

 

$

 —

 

$

(731)

 

$

65,988

COMPREHENSIVE INCOME

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Net income

 

 

 —

 

 

 —

 

 

1,398

 

 

 —

 

 

 —

 

 

1,398

Other comprehensive income, net of tax:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

632

 

 

632

TOTAL COMPREHENSIVE INCOME

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

2,030

Cash dividends, $0.025 per share

 

 

 —

 

 

 —

 

 

(250)

 

 

 —

 

 

 —

 

 

(250)

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

 

 

 —

 

 

 5

 

 

 —

 

 

 —

 

 

 —

 

 

 5

Balances, March 31, 2019

 

$

100

 

$

29,475

 

$

38,297

 

$

 —

 

$

(99)

 

$

67,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2019

 

$

178

 

$

87,437

 

$

41,785

 

$

738

 

$

739

 

$

130,877

COMPREHENSIVE INCOME

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Net income

 

 

 —

 

 

 —

 

 

2,406

 

 

16

 

 

 —

 

 

2,422

Other comprehensive income, net of tax:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

755

 

 

755

Reclassification adjustment for gains included in net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(93)

 

 

(93)

TOTAL COMPREHENSIVE INCOME

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

3,084

Cash dividends, $0.025 per share

 

 

 —

 

 

 —

 

 

(445)

 

 

 —

 

 

 —

 

 

(445)

Minority interest equity distribution

 

 

 —

 

 

 —

 

 

 —

 

 

(45)

 

 

 —

 

 

(45)

Warrant exercises, net

 

 

 —

 

 

10

 

 

 —

 

 

 —

 

 

 —

 

 

10

Stock option exercises, net

 

 

 —

 

 

86

 

 

 —

 

 

 —

 

 

 —

 

 

86

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

 

 

 —

 

 

 5

 

 

 —

 

 

 —

 

 

 —

 

 

 5

Balances, March 31, 2020

 

$

178

 

$

87,538

 

$

43,746

 

$

709

 

$

1,401

 

$

133,572

 

 

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

6

 

DELMAR BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

March 31, 

(Dollars in thousands)

 

2020

 

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

  

 

 

  

Net income

 

$

2,406

 

$

1,398

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

 

 

  

 

 

  

Provision for credit losses and unfunded commitments

 

 

648

 

 

300

Depreciation

 

 

356

 

 

281

Amortization and accretion

 

 

164

 

 

124

Gain on investment securities

 

 

(96)

 

 

 —

Gain on equity securities

 

 

(31)

 

 

 —

Gain on sale of loans held for sale, originated

 

 

(435)

 

 

 —

Increase in bank owned life insurance cash surrender value

 

 

(50)

 

 

 —

Deferred income tax (benefits) expenses

 

 

(366)

 

 

462

Stock‑based compensation expense, net of employee tax obligation

 

 

 5

 

 

 5

Changes in assets and liabilities:

 

 

  

 

 

  

Increase in loans held for sale

 

 

(1,199)

 

 

 —

Increase in accrued interest receivable

 

 

(165)

 

 

(133)

Decrease (increase) in other assets

 

 

516

 

 

(3,432)

(Decrease) increase in accrued interest payable

 

 

(9)

 

 

62

Increase in other liabilities

 

 

295

 

 

3,675

Net cash provided by operating activities

 

 

2,039

 

 

2,742

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

 

 

  

Purchases of securities available for sale

 

 

(6,315)

 

 

(1,124)

Proceeds from maturities and paydowns of securities available for sale

 

 

8,831

 

 

1,713

Net increase in loans

 

 

(21,334)

 

 

(17,297)

Purchases of premises and equipment

 

 

(105)

 

 

(212)

Proceeds from sales of Federal Home Loan Bank stock

 

 

272

 

 

810

Purchase of Federal Home Loan Bank stock

 

 

(51)

 

 

(919)

Net cash used by investing activities

 

 

(18,702)

 

 

(17,029)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

 

 

  

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

 

 

24,185

 

 

948

Cash received for the exercise of stock options

 

 

85

 

 

 —

Cash received for the exercise of warrants

 

 

10

 

 

 —

(Decrease) increase in time deposits, net

 

 

(10,243)

 

 

14,802

Decrease in other borrowings, net

 

 

(7,301)

 

 

(1,165)

Net decrease in minority interest contributed capital

 

 

(29)

 

 

 —

Decrease in finance lease liability

 

 

(20)

 

 

 —

Dividends paid

 

 

(445)

 

 

(250)

Net cash provided by financing activities

 

 

6,242

 

 

14,335

Net (decrease) increase in cash and cash equivalents

 

 

(10,421)

 

 

48

Cash and cash equivalents, beginning of period

 

 

95,111

 

 

29,694

Cash and cash equivalents, ending of period

 

$

84,690

 

$

29,742

Supplementary cash flow information:

 

 

  

 

 

  

Interest paid

 

$

3,227

 

$

1,706

Income taxes paid

 

 

 —

 

 

25

Total appreciation on securities available for sale

 

$

901

 

$

860

SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES

 

 

  

 

 

  

Loans converted to other real estate owned

 

$

 —

 

$

209

 

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

7

 DELMAR BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Its Significant Accounting Policies

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

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

Principles of Consolidation:

The consolidated financial statements include the accounts of the Company; the Subsidiaries, along with their consolidated subsidiaries: Delmarva Real Estate Holdings, LLC., a wholly owned subsidiary of Delmarva, which is a real estate holding company; Davie Circle, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; Delmarva BK Holdings, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; DHB Development, LLC, of which Delmarva holds a 40.55% interest, and is a real estate holding company; West Nithsdale Enterprises, LLC, of which Delmarva holds a 10% interest, and is a real estate holding company; and FBW, LLC, of which Delmarva holds 50% interest, and is a real estate holding company; Bear Holdings, Inc., a wholly owned subsidiary of Partners, and is a real estate holding company; Johnson Mortgage Company, LLC, of which Partners owns 51% interest, and is a residential mortgage company; and 410 William Street, LLC, a wholly owned subsidiary of Partners, and which holds investment property. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial Statement Presentation:

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

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or for any other period.

Use of Estimates:

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

8

Securities Available for Sale:

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

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

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

For equity securities, the Company recognizes OTTI losses through earnings if the Company intends to sell the security.  The Company also considers other relevant factors, including its intent and ability to retain the security for a period of time sufficient to allow for any anticipated recovery in market value, and whether evidence exists to support a realizable value equal to or greater than the carrying value.  Any OTTI loss on an equity security is equal to the full difference between the amortized cost basis and the fair value of the security.

Equity Securities:

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

Other Securities:

Federal Home Loan Bank (“FHLB”) stock, at cost,  and Atlantic Central Bankers Bank (“ACBB”), at cost, Community Bankers Bank (“CBB”) and Maryland Financial Bank (“MFB”) are equity interests in the FHLB, ACBB, CBB and MFB, respectively. These securities do not have a readily determinable fair value for purposes of Accounting Standards Codification (“ASC”) 320‑10 Investments‑Debts and Equity Securities because their ownership is restricted and they lack an active market. As there is no readily determinable fair value for these securities, they are carried at cost less any OTTI. Other investments consists of an equity ownership of Solomon Hess SBA Loan Fund LLC which the value is adjusted for its prorata share of assets in the fund and investment in the stock of the Federal Reserve Bank (“FRB”).

9

Bank Owned Life Insurance:

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

Loans and the Allowance for Credit Losses:

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

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

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

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

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

10

Loan Charge‑off Policies

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

·

management deems the asset to be uncollectible;

·

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

·

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

·

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

Acquired Loans

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

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

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

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

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

11

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

Troubled Debt Restructurings

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

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

Loans Held for Sale:

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

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

JMC e,nters into commitments with its customers to originate loans where the interest rate on the loans is determined (locked) prior to funding.  While this subjects JMC to the risk that interest rates may change from the commitment date to the funding date, JMC simultaneously enters into financial agreements (best efforts forward sales commitments) with its permanent investors giving JMC the right to deliver (put) loans to the investors at specified yields, thus enabling JMC to manage its exposure to changes in interest rates such that JMC is not subject to fluctuations

12

in fair values of these agreements due to changes in interest rates.  However, a default by a permanent investor required to purchase loans under such an agreement would expose JMC to potential fluctuation in selling prices of loans due to changes in interest rate.  The fair value of rate lock commitments and forward sales commitments was considered immaterial at March 31, 2020 and December 31, 2019.  Gains and losses on the sale of mortgages as well as origination fees, brokerage fees, interest rate lock-in fees and other fees paid by mortgagors are include in other income on the Company’s consolidated statements of income.

Other Real Estate Owned (OREO):

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

Intangible Assets and Amortization:

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

Accounting for Stock Based Compensation:

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

During 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016‑10 Technical Corrections and Improvements, which replaced the definition of fair value previously used in ASC Topic 718 with the definition of fair value from ASC Topic 820, Fair Value Measurement (“ASC Topic 820”). The amendments affecting ASC 718‑10 were effective and applied prospectively by the Company beginning January 1, 2016. Management believes the resulting change in fair value measurement methodology is immaterial to the financial statements.

Earnings Per Share:

Basic earnings per common share are determined by dividing net income adjusted for preferred stock dividends declared and/or accumulated and accretion of warrants by the weighted average number of shares outstanding for each period, giving retroactive effect to stock splits and dividends. Weighted average common shares outstanding were 17,805,714 and 9,985,321 for the three month periods ended March 31, 2020 and 2019, respectively. Calculations of diluted earnings per common share include the average dilutive common stock equivalents outstanding during the period, unless they are anti‑dilutive. Dilutive common equivalent shares consist of stock options calculated using the treasury stock method and restricted stock awards (See Note 8 – Earnings Per Share for further information).     

 

13

Note 2. Investment Securities

Securities available for sale are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Dollars in Thousands

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies and corporations

 

$

5,761

 

$

205

 

$

 —

 

$

5,966

Obligations of States and political subdivisions

 

 

34,942

 

 

855

 

 

409

 

 

35,388

Mortgage-backed securities

 

 

57,113

 

 

1,239

 

 

33

 

 

58,319

Subordinated debt investments

 

 

2,988

 

 

68

 

 

43

 

 

3,013

Equity securities

 

 

1,966

 

 

 —

 

 

 —

 

 

1,966

 

 

$

102,770

 

$

2,367

 

$

485

 

$

104,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

Dollars in Thousands

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies and corporations

 

$

10,186

 

$

162

 

$

36

 

$

10,312

Obligations of States and political subdivisions

 

 

33,885

 

 

716

 

 

43

 

 

34,558

Mortgage-backed securities

 

 

56,275

 

 

236

 

 

90

 

 

56,421

Subordinated debt investments

 

 

2,988

 

 

42

 

 

 —

 

 

3,030

Equity securities

 

 

1,935

 

 

 —

 

 

 —

 

 

1,935

 

 

$

105,269

 

$

1,156

 

$

169

 

$

106,256

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Dollars in Thousands

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Loss

    

Value

    

Loss

    

Value

    

Loss

Obligations of U.S. Government agencies and corporations

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Obligations of States and political subdivisions

 

 

9,027

 

 

409

 

 

 —

 

 

 —

 

 

9,027

 

 

409

Mortgage-backed securities

 

 

1,587

 

 

33

 

 

 —

 

 

 —

 

 

1,587

 

 

33

Subordinated debt investments

 

 

952

 

 

43

 

 

 —

 

 

 —

 

 

952

 

 

43

Total securities with unrealized losses

 

$

11,566

 

$

485

 

$

 —

 

$

 —

 

$

11,566

 

$

485

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

Dollars in Thousands

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Loss

    

Value

    

Loss

    

Value

    

Loss

Obligations of U.S. Government agencies and corporations

 

$

5,269

 

$

34

 

$

2,000

 

$

 2

 

$

7,269

 

$

36

Obligations of States and political subdivisions

 

 

4,669

 

 

43

 

 

 —

 

 

 —

 

 

4,669

 

 

43

Mortgage-backed securities

 

 

11,600

 

 

32

 

 

4,489

 

 

58

 

 

16,089

 

 

90

Subordinated debt investments

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total securities with unrealized losses

 

$

21,538

 

$

109

 

$

6,489

 

$

60

 

$

28,027

 

$

169

 

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

Contractual maturities of investment securities at March 31, 2020 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage‑backed securities have no stated maturity and primarily reflect investments in various Pass‑through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association. Repayment of mortgage‑backed securities is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

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