0001558370-20-010504.txt : 20200813 0001558370-20-010504.hdr.sgml : 20200813 20200813100137 ACCESSION NUMBER: 0001558370-20-010504 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 99 CONFORMED PERIOD OF REPORT: 20200630 FILED AS OF DATE: 20200813 DATE AS OF CHANGE: 20200813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELMAR BANCORP CENTRAL INDEX KEY: 0000832090 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 521559535 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-39285 FILM NUMBER: 201097687 BUSINESS ADDRESS: STREET 1: 2245 NORTHWOOD DRIVE CITY: SALISBURY STATE: MD ZIP: 21801 BUSINESS PHONE: 410-548-1100 MAIL ADDRESS: STREET 1: 2245 NORTHWOOD DRIVE CITY: SALISBURY STATE: MD ZIP: 21801 10-Q 1 dbcp-20200630x10q.htm 10-Q

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 June 30, 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 August 12, 2020 there were 17,810,213 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

47

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

76

Item 4. Controls and Procedures

76

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

76

Item 1A. Risk Factors

76

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

76

Item 3. Defaults Upon Senior Securities

76

Item 4. Mine Safety Disclosures

76

Item 5. Other Information

76

EXHIBIT INDEX

77

SIGNATURES

78

2


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

DELMAR BANCORP

CONSOLIDATED BALANCE SHEETS

    

June 30, 

December 31, 

2020

2019

(Dollars in thousands, except per share amounts)

(unaudited)

*

ASSETS

 

  

 

  

Cash and due from banks

$

177,305

$

36,295

Interest bearing deposits in other financial institutions

 

34,557

 

27,586

Federal funds sold

 

36,469

 

31,230

Cash and cash equivalents

 

248,331

 

95,111

Securities available for sale, at fair value

 

129,920

 

104,321

Loans held for sale

6,927

3,555

Loans, less allowance for credit losses of $10,003 at June 30, 2020 and $7,304 at December 31, 2019

 

1,043,275

 

986,684

Accrued interest receivable

 

6,205

 

3,138

Premises and equipment, less accumulated depreciation

 

14,332

 

13,705

Restricted stock

 

4,420

 

5,311

Operating lease right-of-use assets

 

4,123

 

4,504

Financing lease right-of-use assets

 

1,892

 

1,961

Other investments

 

6,730

 

4,773

Bank owned life insurance

7,917

7,817

Other real estate owned

 

2,546

 

2,417

Core deposit intangible, net

 

3,010

 

3,373

Goodwill

 

9,391

 

9,391

Other assets

 

6,983

 

6,544

Total assets

$

1,496,002

$

1,252,605

LIABILITIES

 

  

 

  

Deposits:

 

  

 

  

Non interest bearing demand

$

377,448

$

261,631

NOW

 

102,197

 

76,947

Savings and money market

 

270,168

 

222,975

Time, $100,000 or more

 

287,344

 

274,387

Other time

 

153,575

 

170,841

 

1,190,732

 

1,006,781

Accrued interest payable

 

508

 

572

Short-term borrowings with the Federal Home Loan Bank

 

21,200

 

48,000

Long-term borrowings with the Federal Home Loan Bank

 

53,301

 

48,830

Subordinated notes payable, net

 

23,883

 

6,435

Other borrowings

62,532

1,249

Operating lease liabilities

4,429

4,797

Financing lease liabilities

2,299

2,355

Other liabilities

 

2,147

 

2,709

Total liabilities

 

1,361,031

1,121,728

COMMITMENTS, CONTINGENCIES & SUBSEQUENT EVENT

 

  

 

  

STOCKHOLDERS' EQUITY

 

  

 

  

Common stock, par value $.01, authorized 40,000,000 shares, issued and outstanding 17,809,185 as of June 30, 2020 and 17,790,181 as of December 31, 2019

 

178

 

178

Surplus

 

87,552

 

87,437

Retained earnings

 

44,341

 

41,785

Noncontrolling interest in consolidated subsidiaries

824

738

Accumulated other comprehensive income, net of tax

 

2,076

 

739

Total stockholders' equity

 

134,971

 

130,877

Total liabilities and stockholders' equity

$

1,496,002

$

1,252,605


* Derived from audited consolidated financial statements

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

3


DELMAR BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands, except per share data)

    

2020

    

2019

    

2020

    

2019

INTEREST INCOME ON:

 

  

 

  

 

  

 

  

 

Loans, including fees

$

13,132

$

8,762

$

26,491

$

17,228

Investment securities:

 

  

 

 

  

 

  

Taxable

 

429

 

167

 

864

 

348

Tax-exempt

 

236

 

148

 

461

 

291

Federal funds sold

 

15

 

8

 

112

 

23

Other interest income

 

126

 

135

 

359

 

311

 

13,938

 

9,220

 

28,287

 

18,201

INTEREST EXPENSE ON:

 

  

 

  

 

  

 

  

Deposits

 

2,456

 

1,486

 

5,043

 

2,832

Borrowings

 

585

 

416

 

1,237

 

838

 

3,041

 

1,902

 

6,280

 

3,670

NET INTEREST INCOME

 

10,897

 

7,318

 

22,007

 

14,531

Provision for credit losses

 

2,527

 

300

 

3,175

 

600

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

8,370

 

7,018

 

18,832

 

13,931

OTHER INCOME:

 

  

 

  

 

  

 

  

Service charges on deposit accounts

 

142

 

279

 

432

 

566

Gain on sales and calls of investment securities

 

472

 

 

568

 

Mortgage banking income

820

1,284

Other income

 

705

 

551

 

1,408

 

1,022

 

2,139

 

829

 

3,692

 

1,588

OTHER EXPENSES:

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

4,822

 

2,833

 

9,601

 

5,671

Premises and equipment

 

1,133

 

896

 

2,257

 

1,834

Amortization of core deposit intangible

 

180

 

76

 

363

 

151

Gains on other real estate owned

 

23

 

30

 

44

 

28

Other expenses

 

2,897

 

1,566

 

5,580

 

3,327

 

9,055

 

5,401

 

17,845

 

11,011

INCOME BEFORE TAXES ON INCOME

 

1,454

 

2,446

 

4,679

 

4,508

Federal and state income taxes

 

299

 

695

 

1,102

 

1,358

NET INCOME

$

1,155

$

1,751

$

3,577

$

3,150

Net (income) attributable to noncontrolling interest

(115)

(131)

NET INCOME ATTRIBUTABLE TO DELMAR BANCORP

$

1,040

$

1,751

$

3,446

$

3,150

Earnings per common share

 

  

 

  

 

  

 

  

Basic earnings per share

$

0.058

$

0.175

$

0.194

$

0.315

Diluted earnings per share

$

0.058

$

0.175

$

0.193

$

0.315

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

4


DELMAR BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

    

Three Months Ended June 30, 

    

Six Months Ended June 30, 

(Dollars in thousands)

    

2020

    

2019

    

2020

    

2019

NET INCOME

$

1,155

$

1,751

$

3,577

$

3,150

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

  

 

  

 

  

 

  

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

 

1,391

 

744

 

2,388

 

1,604

Income tax expense

 

(369)

 

(197)

 

(633)

 

(425)

Other comprehensive income, net of tax

 

1,022

 

547

 

1,755

 

1,179

Reclassification adjustment for gains included in net income

 

(472)

 

 

(568)

 

Income tax expense

 

125

 

 

150

 

Other comprehensive income, net of tax

 

(347)

 

 

(418)

 

TOTAL OTHER COMPREHENSIVE INCOME

 

675

 

547

 

1,337

 

1,179

COMPREHENSIVE INCOME

$

1,830

$

2,298

4,914

4,329

COMPREHENSIVE (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST

(115)

(131)

COMPREHENSIVE INCOME ATTRIBUTABLE TO DELMAR BANCORP

$

1,715

$

2,298

$

4,783

$

4,329

The Selected Notes to the Unaudited 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 periods:

Accumulated

Other

Total

Common

Retained

Noncontrolling

Comprehensive

Stockholders'

(Dollars in thousands, except per share amounts)

    

Stock

    

Surplus

    

Earnings

    

Interest

    

Income (Loss)

    

Equity

Balances, March 31, 2019

 

$

100

 

$

29,475

 

$

38,299

 

$

 

$

(99)

 

$

67,775

COMPREHENSIVE INCOME

 

  

 

  

 

  

 

  

 

  

 

  

Net income

 

 

 

1,751

 

 

 

1,751

Other comprehensive income, net of tax:

 

  

 

  

 

  

 

  

 

  

 

  

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

 

 

 

 

 

547

 

547

TOTAL COMPREHENSIVE INCOME

 

  

 

  

 

  

 

  

 

  

 

2,298

Cash dividends, $0.025 per share

 

 

 

(250)

 

 

 

(250)

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

 

 

6

 

 

 

 

6

Balances, June 30, 2019

 

$

100

 

$

29,481

 

$

39,800

 

$

 

$

448

 

$

69,829

Balances, March 31, 2020

 

$

178

 

$

87,538

 

$

43,746

 

$

709

 

$

1,401

 

$

133,572

COMPREHENSIVE INCOME

 

  

 

  

 

  

 

  

 

  

 

  

Net income

 

 

 

1,040

 

115

 

 

1,155

Other comprehensive income, net of tax:

 

  

 

  

 

  

 

  

 

  

 

  

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

 

 

 

 

 

1,022

 

1,022

Reclassification adjustment for gains included in net income

(347)

(347)

TOTAL COMPREHENSIVE INCOME

 

  

 

  

 

  

 

  

 

  

 

1,830

Cash dividends, $0.025 per share

 

 

 

(445)

 

 

 

(445)

Stock option exercises, net

9

9

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

 

 

5

 

 

 

 

5

Balances, June 30, 2020

$

178

$

87,552

$

44,341

$

824

$

2,076

$

134,971

For the six month periods:

Accumulated

Other

Total

Common

Retained

Noncontrolling

Comprehensive

Stockholders'

(Dollars in thousands, except per share amounts)

    

Stock

    

Surplus

    

Earnings

Interest

    

Income (Loss)

    

Equity

Balances, December 31, 2018

 

$

100

 

$

29,470

 

$

37,149

$

 

$

(731)

 

$

65,988

COMPREHENSIVE INCOME

 

  

 

  

 

  

 

  

 

  

Net income

 

 

 

3,150

 

 

3,150

Other comprehensive income, net of tax:

 

  

 

  

 

  

 

  

 

  

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

 

 

 

 

1,179

 

1,179

TOTAL COMPREHENSIVE INCOME

 

  

 

  

 

  

 

  

 

4,329

Cash dividends, $0.050 per share

 

 

 

(499)

 

 

(499)

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

 

 

11

 

 

 

11

Balances, June 30, 2019

 

$

100

 

$

29,481

 

$

39,800

$

 

$

448

 

$

69,829

Balances, December 31, 2019

 

$

178

 

$

87,437

 

$

41,785

$

738

 

$

739

 

$

130,877

COMPREHENSIVE INCOME

 

  

 

  

 

  

 

  

 

  

Net income

 

 

 

3,446

131

 

 

3,577

Other comprehensive income, net of tax:

 

  

 

  

 

  

 

  

 

  

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

 

 

 

 

1,755

 

1,755

Reclassification adjustment for gains included in net income

(418)

(418)

TOTAL COMPREHENSIVE INCOME

 

  

 

  

 

  

 

  

 

4,914

Cash dividends, $0.050 per share

 

 

 

(890)

 

 

(890)

Minority interest contributed capital

(45)

(45)

Stock option exercises, net

 

 

94

 

 

 

94

Warrant exercises, net

 

 

10

 

 

 

10

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

 

 

11

 

 

 

11

Balances, June 30, 2020

$

178

$

87,552

$

44,341

824

$

2,076

$

134,971

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

6


DELMAR BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

    

Six Months Ended

June 30, 

(Dollars in thousands)

2020

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

3,446

$

3,150

Adjustments to reconcile net income to net cash (used) provided by operating activities:

 

  

 

  

Provision for credit losses and unfunded commitments

 

3,175

 

600

Depreciation

 

716

 

564

Amortization and accretion

 

248

 

91

Gain on sales and calls of investment securities

(568)

Gain on equity securities

(47)

Gain on sale of loans held for sale, originated

(1,202)

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

 

 

2

Increase in bank owned life insurance cash surrender value

(100)

Deferred income tax (benefits) expenses

 

(546)

 

1,317

Stock‑based compensation expense, net of employee tax obligation

 

11

 

11

Net accretion of certain acquistion related fair value adjustments

 

(717)

 

(93)

Changes in assets and liabilities:

 

  

 

  

Increase in loans held for sale

(2,170)

Increase in accrued interest receivable

 

(3,067)

 

(132)

Increase in other assets

 

(1,423)

 

(3,895)

(Decrease) increase in accrued interest payable

 

(64)

 

125

(Decrease) increase in other liabilities

 

(986)

 

3,579

Net cash (used) provided by operating activities

 

(3,294)

 

5,319

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchases of securities available for sale

 

(56,198)

 

(2,582)

Purchases of other investments

(390)

Proceeds from maturities and paydowns of securities available for sale

 

14,662

 

4,478

Proceeds from sales of securities available for sale

 

18,054

 

Net increase in loans

 

(58,811)

 

(14,714)

Purchases of premises and equipment

 

(1,343)

 

(469)

Proceeds from the sales of foreclosed assets

 

 

186

Proceeds from sales of Federal Home Loan Bank stock

 

942

 

810

Purchase of Federal Home Loan Bank stock

 

(51)

 

(919)

Net cash used by investing activities

 

(83,135)

 

(13,210)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

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

 

188,260

 

854

Cash received for the exercise of stock options

 

94

 

Cash received for the exercise of warrants

10

(Decrease) increase in time deposits, net

 

(4,310)

 

23,750

Increase (decrease) in other borrowings, net

 

56,399

 

(1,329)

Net decrease in minority interest contributed capital

86

Dividends paid

 

(890)

 

(499)

Net cash provided by financing activities

 

239,649

 

22,776

Net increase in cash and cash equivalents

 

153,220

 

14,885

Cash and cash equivalents, beginning of period

 

95,111

 

29,694

Cash and cash equivalents, ending of period

$

248,331

$

44,579

Supplementary cash flow information:

 

  

 

  

Interest paid

$

6,344

$

3,545

Income taxes paid

 

2,655

 

473

Total appreciation on securities available for sale

$

1,819

$

1,604

SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES

 

  

 

  

Loans converted to other real estate owned

$

129

$

209

The Selected Notes to the Unaudited 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”or “Delmar”) 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 that operates primarily in Wicomico and Worcester counties in Maryland, Sussex County in Delaware, and Camden and Burlington counties in New Jersey, and Virginia Partners Bank (“Partners”), a commercial bank headquartered in Fredericksburg, Virginia and that operates primarily in and around the Greater Fredericksburg, Virginia area, including Stafford County, Spotsylvania County, King George County, Caroline County, and the City of Fredericksburg, Virginia. Partners also operates in Anne Arundel County and the three counties of Southern Maryland, including Charles County, Calvert County, and St. Mary’s County. The 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 June 30, 2020 and December 31, 2019, the results of its operations and its cash flows for the six months ended June 30, 2020 and 2019 in conformity with U.S. GAAP.

Operating results for the three and six months ended June 30, 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 securities not classified as held to maturity are classified as available for sale. Securities available for sale are acquired as part of the Subsidiaries' asset/liability management strategy and may be sold in response to changes in interest rates, loan demand, changes in prepayment risk, and other factors. Securities available for sale are carried at fair value as determined by quoted market prices. Unrealized gains or losses based on the difference between amortized cost and fair value are reported in other comprehensive income, net of deferred tax. Realized gains and losses, using the specific identification method, are included as a separate component of other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Additionally, declines in the fair value of individual investment securities below their cost that are other than temporary are reflected as realized losses in the consolidated statements of income.

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

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

Restricted Stock, Equity Securities and Other Investments:

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

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

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

Bank Owned Life Insurance

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

9


Loans and the Allowance for Credit Losses:

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

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 for credit losses is inherently subjective, as it requires significant estimates, including the amounts and timing on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance for credit losses, while recoveries of amounts previously charged off are credited to the allowance for credit losses. A provision for credit losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least monthly and more often if deemed necessary.

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

The specific credit allocations are based on regular analyses of all loans that are considered impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The 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. 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 for credit losses reflects management's estimate of probable inherent but undetected losses within the loan portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. In addition, the unallocated portion of the allowance for credit losses includes a component that explicitly accounts for the inherent imprecision in loan loss migration models. The historical losses used in the migration analysis may not be representative of actual unrealized losses inherent in the loan portfolio. It is management's intent to continually refine the methodology for the allowance for credit losses in an attempt to directly allocate potential losses in the loan portfolio under ASC Topic 310 and minimize the unallocated portion of the allowance for credit losses.

Loan Charge-off Policies

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

management deems the asset to be uncollectible;

10


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 expected to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date 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 an indicator that an acquired loan has evidence of deterioration in credit quality. These factors include; loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.

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

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

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

11


Troubled Debt Restructurings

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

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

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 or second 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 June 30, 2020 or December 31, 2019 for possible repurchases. Management does not believe that a provision for early default or refinancing costs is necessary at June 30, 2020 or December 31, 2019.

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

12


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 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 June 30, 2020, there were five properties with a combined estimated value of $2.5 million included in OREO and at 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 and during the first quarter of 2018, the Company acquired Liberty. ASC 350, Intangibles-Goodwill and Other (“ASC 350”), prescribes accounting for intangible assets subsequent to initial recognition. Acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Intangible assets related to the acquisitions are amortized (See Note 12 – Goodwill and Intangible Assets for further information).

Goodwill

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

Accounting for Stock Based Compensation:

The Company follows ASC 718-10, Compensation—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.

Earnings Per Share:

Basic earnings per common share are determined by dividing net income and accretion of warrants by the weighted average number of shares outstanding for each period, giving retroactive effect to stock splits and dividends. Weighted average common shares outstanding were 17,808,811 and 17,807,263 for the three month and six month periods ended June 30, 2020, respectively, and 9,985,321 for the three and six month periods ended June 30, 2019. 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:

June 30, 2020

Dollars in Thousands

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies and corporations

$

4,254

$

132

$

$

4,386

Obligations of States and political subdivisions

 

36,832

 

1,620

 

 

38,452

Mortgage-backed securities

 

83,063

 

1,151

 

155

 

84,059

Subordinated debt investments

2,987

67

31

3,023

$

127,136

$

2,970

$

186

$

129,920

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

$

103,334

$

1,156

$

169

$

104,321

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

June 30, 2020

Dollars in Thousands

Less than 12 months

12 months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Loss

    

Value

    

Loss

    

Value

    

Loss

Obligations of U.S. Government agencies and corporations

$

$

$

$

$

$

Obligations of States and political subdivisions

 

 

 

 

 

 

Mortgage-backed securities

 

35,430

 

155

 

 

 

35,430

 

155

Subordinated debt investments

964

31

964

31

Total securities with unrealized losses

$

36,394

$

186

$

$

$

36,394

$

186

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

14


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

At June 30, 2020 there were seven mortgage-backed securities (MBS) and one subordinated debt investment that have been in a continuous unrealized loss position for less than twelve months. At June 30, 2020 there were no securities that had been in a continuous unrealized loss position for more than twelve months. Management found no evidence of OTTI on any of these securities and believes that unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary. As of June 30, 2020, management also believes it has the ability and intent to hold the securities for a period of time sufficient for a recovery of cost.

During the three and six month periods ended June 30, 2020 the Company sold nine and ten securities, respectively, resulting in a gain of $378 thousand and $401 thousand, respectively. During the three and six month periods ended June 30, 2019, the Company did not sell any securities. During the three and six month periods ended June 30, 2020, six and fourteen securities were either matured or called, respectively, resulting in a net gain of $94 thousand and $167 thousand, respectively. During the three and six month periods ended June 30, 2019, four and six securities were either matured or called, respectively, resulting in no gains or losses for either period.

The Company has pledged certain securities as collateral for qualified customers’ deposit accounts at June 30, 2020 and December 31, 2019. The amortized cost and fair value of these pledged securities was $8.9 million and $9.3 million, respectively, at June 30, 2020. The amortized cost and fair value of these pledged securities was $9.1 million and $9.2 million, respectively, at December 31, 2019.

Contractual maturities of investment securities at June 30, 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:

June 30, 2020

Securities

 

Available for Sale

Dollars in Thousands

Amortized

Fair

    

Cost

    

Value

Due in one year or less

$

625

$

626

Due after one year through five years

 

1,236

 

1,263

Due after five years through ten years

 

19,962

 

20,729

Due after ten years or more

 

22,250

 

23,243

Mortgage-backed securities, due in monthly installments

 

83,063

 

84,059

$

127,136

$

129,920

15


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

Major categories of loans as of June 30, 2020 and December 31, 2019 are as follows:

(Dollars in thousands)

    

At June 30, 2020

    

At December 31, 2019

Originated Loans

 

  

 

  

Real Estate Mortgage

Construction and land development

$

68,929

$

59,236

Residential real estate

116,307

108,590

Nonresidential

359,626

325,916

Home equity loans

15,792

13,736

Commercial

123,862

52,838

Consumer and other loans

 

3,061

 

2,669

 

687,577

 

562,985

Acquired Loans

 

  

 

  

Real Estate Mortgage

Construction and land development

$

12,712

$

25,515

Residential real estate

 

81,836

 

100,696

Nonresidential

201,405

218,633

Home equity loans

18,859

23,979

Commercial

48,281

59,159

Consumer and other loans

 

2,608

 

3,021

365,701

431,003

Total Loans

 

  

 

  

Real Estate Mortgage

 

 

Construction and land development

$

81,641

$

84,751

Residential real estate

198,143

209,286

Nonresidential

561,031

544,549

Home equity loans

34,651

37,715

Commercial

172,143

111,997

Consumer and other loans

 

5,669

 

5,690

 

1,053,278

 

993,988

Less: Allowance for credit losses

 

(10,003)

 

(7,304)

$

1,043,275

$

986,684

Allowance for Credit Losses

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

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

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

Changes in the levels and trends in delinquencies, non-accruals, classified assets and TDRs

16


Changes in the nature and volume of the portfolio
Effects of any changes in lending policies, procedures, including underwriting standards and collections, charge off and recovery practices
Changes in the experience, depth and ability of management
Changes in the national and local economic conditions and developments, including the condition of various market segments
Changes in the concentration of credits within each pool
Changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors
Changes in external factors such as competition and the legal environment.

The above factors result in a FASB ASC 450-10- 20 calculated reserve for environmental factors.

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

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

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

17


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

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

    

Development

    

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

and Other

    

Unallocated

    

Total

Balance at June 30, 2020

Purchased credit impaired loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$