Annual Statements Open main menu

PARTNERS BANCORP - Quarter Report: 2022 March (Form 10-Q)

Table of Contents

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, 2022

or

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

For the transition period from           to           

Commission File Number: 001-39285

Partners Bancorp

(Exact name of registrant as specified in its charter)

Maryland

52-1559535

(State or other jurisdiction of incorporation or organization)

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

2245 Northwood Drive, Salisbury, Maryland

21801

(Address of principal executive offices)

(Zip Code)

410-548-1100

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

PTRS

Nasdaq Capital Market

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

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

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

As of May 13, 2022 there were 17,961,699 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

Table of Contents

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

74

Item 4. Controls and Procedures

74

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

75

Item 1A. Risk Factors

75

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

75

Item 3. Defaults Upon Senior Securities

75

Item 4. Mine Safety Disclosures

75

Item 5. Other Information

75

EXHIBIT INDEX

76

SIGNATURES

77

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PARTNERS BANCORP

CONSOLIDATED BALANCE SHEETS

    

March 31, 

December 31, 

2022

2021

(Dollars in thousands, except per share amounts)

(Unaudited)

*

ASSETS

 

  

 

  

Cash and due from banks

$

13,916

$

12,887

Interest bearing deposits in other financial institutions

 

308,016

 

297,902

Federal funds sold

 

23,982

 

28,040

Cash and cash equivalents

 

345,914

 

338,829

Securities available for sale, at fair value

 

125,129

 

122,021

Loans held for sale

1,342

4,064

Loans, less allowance for credit losses of $14,565 at March 31, 2022 and $14,656 at December 31, 2021

 

1,138,799

 

1,102,539

Accrued interest receivable

 

4,113

 

4,313

Premises and equipment, less accumulated depreciation

 

15,970

 

16,175

Restricted stock

 

4,935

 

4,869

Operating lease right-of-use assets

 

5,770

 

6,009

Financing lease right-of-use assets

 

1,653

 

1,687

Other investments

 

4,983

 

5,065

Bank owned life insurance

18,366

18,254

Other real estate owned, net

 

 

837

Core deposit intangible, net

 

1,926

 

2,060

Goodwill

 

9,582

 

9,582

Other assets

 

10,833

 

8,675

Total assets

$

1,689,315

$

1,644,979

LIABILITIES

 

  

 

  

Deposits:

 

  

 

  

Non-interest bearing demand

$

544,688

$

493,913

Interest bearing demand

 

149,187

 

159,421

Savings and money market

 

441,373

 

410,286

Time

 

356,207

 

379,256

 

1,491,455

 

1,442,876

Accrued interest payable on deposits

 

267

 

280

Long-term borrowings with the Federal Home Loan Bank

 

26,149

 

26,313

Subordinated notes payable, net

 

22,180

 

22,168

Other borrowings

750

755

Operating lease liabilities

6,166

6,372

Financing lease liabilities

2,096

2,125

Other liabilities

 

2,989

 

2,722

Total liabilities

 

1,552,052

1,503,611

COMMITMENTS, CONTINGENCIES & SUBSEQUENT EVENT

 

  

 

  

STOCKHOLDERS' EQUITY

 

  

 

  

Common stock, par value $.01, authorized 40,000,000 shares, issued and outstanding 17,961,699 as of March 31, 2022 and 17,941,604 as of December 31, 2021, including 28,000 nonvested shares as of March 31, 2022 and December 31, 2021

 

179

 

179

Surplus

 

88,529

 

88,390

Retained earnings

 

52,965

 

51,305

Noncontrolling interest in consolidated subsidiaries

1,118

1,179

Accumulated other comprehensive (loss) income, net of tax

 

(5,528)

 

315

Total stockholders' equity

 

137,263

 

141,368

Total liabilities and stockholders' equity

$

1,689,315

$

1,644,979

* Derived from audited consolidated financial statements

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

3

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended March 31, 

(Dollars in thousands, except per share data)

    

2022

    

2021

INTEREST INCOME ON:

 

  

 

  

 

Loans, including fees

$

12,894

$

12,906

Investment securities:

 

  

 

  

Taxable

 

396

 

121

Tax-exempt

 

184

 

225

Federal funds sold

 

17

 

10

Other interest income

 

162

 

138

 

13,653

 

13,400

INTEREST EXPENSE ON:

 

  

 

  

Deposits

 

1,243

 

1,859

Borrowings

 

506

 

607

 

1,749

 

2,466

NET INTEREST INCOME

 

11,904

 

10,934

Provision for credit losses

 

65

 

1,740

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

11,839

 

9,194

OTHER INCOME:

 

  

 

  

Service charges on deposit accounts

 

223

 

169

Gain on sales and calls of investment securities

 

 

14

Mortgage banking income, net

291

1,168

Gains on other real estate owned, net

7

4

Gains on disposal of other assets, net

 

 

1

Other income

 

778

 

902

 

1,299

 

2,258

OTHER EXPENSES:

 

  

 

  

Salaries and employee benefits

 

5,575

 

5,470

Premises and equipment

 

1,481

 

1,257

Amortization of core deposit intangible

 

135

 

155

Merger related expenses

396

Other expenses

 

2,805

 

2,962

 

10,392

 

9,844

INCOME BEFORE TAXES ON INCOME

 

2,746

 

1,608

Federal and state income taxes

 

696

 

333

NET INCOME

$

2,050

$

1,275

Net loss (income) attributable to noncontrolling interest

59

(185)

NET INCOME ATTRIBUTABLE TO PARTNERS BANCORP

$

2,109

$

1,090

Earnings per common share

 

  

 

  

Basic earnings per share

$

0.12

$

0.06

Diluted earnings per share

$

0.12

$

0.06

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

4

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended March 31, 

(Dollars in thousands)

2022

    

2021

NET INCOME

$

2,050

$

1,275

OTHER COMPREHENSIVE LOSS, NET OF TAX:

 

  

 

  

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

 

(7,659)

 

(2,185)

Deferred income tax effect

 

1,816

 

524

Other comprehensive loss, net of tax

 

(5,843)

 

(1,661)

Reclassification adjustment for gains included in net income

 

 

(14)

Deferred income tax effect

 

 

3

Other comprehensive loss, net of tax

 

 

(11)

TOTAL OTHER COMPREHENSIVE LOSS

 

(5,843)

 

(1,672)

COMPREHENSIVE LOSS

(3,793)

(397)

COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST

59

(185)

COMPREHENSIVE LOSS ATTRIBUTABLE TO PARTNERS BANCORP

$

(3,734)

$

(582)

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

5

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

For the three months ended:

Accumulated

Other

Total

Common

Retained

Noncontrolling

Comprehensive

Stockholders'

(Dollars in thousands, except per share amounts)

    

Stock

    

Surplus

    

Earnings

Interest

    

Income  (Loss)

    

Equity

Balances, December 31, 2020

 

$

178

 

$

87,200

 

$

45,673

$

1,346

 

$

2,298

 

$

136,695

Net income

 

 

 

1,090

185

 

 

1,275

Other comprehensive loss, net of tax

 

 

 

 

(1,672)

 

(1,672)

 

  

 

  

 

  

 

  

 

(397)

Cash dividends, $0.025 per share

 

 

 

(443)

 

 

(443)

Stock repurchases

(1)

(208)

(209)

Stock-based compensation expense

 

 

4

 

 

 

4

Balances, March 31, 2021

 

$

177

 

$

86,996

 

$

46,320

$

1,531

 

$

626

 

$

135,650

Balances, December 31, 2021

 

$

179

 

$

88,390

$

51,305

$

1,179

 

$

315

 

$

141,368

Net income (loss)

 

 

 

2,109

(59)

 

 

2,050

Other comprehensive loss, net of tax

 

 

 

 

(5,843)

 

(5,843)

 

  

 

  

 

  

 

  

 

(3,793)

Cash dividends, $0.025 per share

 

 

 

(449)

 

 

(449)

Minority interest equity distribution

(2)

(2)

Stock option exercises, net

 

115

 

 

 

115

Stock-based compensation expense

 

 

24

 

 

 

24

Balances, March 31, 2022

$

179

$

88,529

$

52,965

$

1,118

$

(5,528)

$

137,263

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

6

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

    

Three Months Ended

March 31, 

(Dollars in thousands)

2022

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

2,109

$

1,090

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

 

  

 

  

Provision for credit losses

 

65

 

1,740

Depreciation

 

470

 

394

Amortization and accretion

 

137

 

443

Gain on sales and calls of investment securities

(14)

Net losses on sales of assets

 

 

1

Loss on equity securities

89

35

Gain on sale of loans held for sale, originated

(258)

(1,094)

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

 

(5)

 

(8)

Increase in bank owned life insurance cash surrender value

(112)

(91)

Stock‑based compensation expense, net of employee tax obligation

 

24

 

4

Net accretion of certain acquisition related fair value adjustments

 

(193)

 

(262)

Changes in assets and liabilities:

 

  

 

  

Loans held for sale

2,980

4,411

Accrued interest receivable

 

200

 

223

Other assets

 

(361)

 

(270)

Accrued interest payable on deposits

 

(13)

 

(41)

Other liabilities

 

354

 

404

Net cash provided by operating activities

 

5,486

 

6,965

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchases of securities available for sale

 

(14,412)

 

(29,859)

Purchases of other investments

(7)

(7)

Proceeds from maturities and paydowns of securities available for sale

 

3,520

 

14,508

Proceeds from sales of securities available for sale

 

 

19,664

Net increase in loans

 

(35,995)

 

(43,262)

Proceeds from sale of assets

 

 

174

Purchases of premises and equipment

 

(265)

 

(1,160)

Proceeds from the sales of foreclosed assets

 

842

 

288

(Purchase) redemption of restricted stocks

 

(66)

 

274

Net cash used by investing activities

 

(46,383)

 

(39,380)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

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

 

71,627

 

106,830

Cash received for the exercise of stock options

 

115

 

Decrease in time deposits, net

 

(23,051)

 

(3,243)

Decrease in borrowings, net

 

(171)

 

(41,591)

Net (decrease) increase in minority interest contributed capital

(60)

185

Decrease in finance lease liability

(29)

(29)

Cash paid for stock repurchases

(208)

Dividends paid

 

(449)

 

(443)

Net cash provided by financing activities

 

47,982

 

61,501

Net increase in cash and cash equivalents

 

7,085

 

29,086

Cash and cash equivalents, beginning of period

 

338,829

 

282,611

Cash and cash equivalents, ending of period

$

345,914

$

311,697

Supplementary cash flow information:

 

  

 

  

Interest paid

$

2,021

$

2,507

Total loss on securities available for sale

$

(7,659)

$

(2,275)

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

7

Table of Contents

PARTNERS BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Its Significant Accounting Policies

Partners Bancorp (the “Company”) is a multi-bank holding company with 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 that operates in and around the greater Fredericksburg, Virginia area (Stafford County, Spotsylvania County, King George County, Caroline County, and the City of Fredericksburg, Virginia), the Greater Washington area (the District of Columbia, Arlington County, Clarke County, Fairfax County, Fauquier County, Loudoun County, Prince William County, Warren County, and the Cities of Alexandria, Fairfax, Falls Church, Manassas, Manassas Park, and Reston, Virginia) and Anne Arundel County and the three counties of Southern Maryland (Charles County, Calvert County and St. Mary’s County). The Subsidiaries engage in the general banking business and provide a broad range of financial services to individual and corporate customers, and are subject to competition from other financial institutions. The Subsidiaries are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. The accounting and reporting policies of the Company and its Subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and practices within the banking industry.

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

Principles of Consolidation:

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

Financial Statement Presentation:

The unaudited interim consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations, changes in stockholder's equity, and cash flows in conformity with U.S. GAAP. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position at March 31, 2022 and December 31, 2021, the results of its operations for three months and its cash flows for the three months ended March 31, 2022 and 2021 are in conformity with U.S. GAAP.

Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or for any other period.

8

Table of Contents

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. Certain of the critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company’s reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. Actual results could differ from those estimates. The more significant areas in which management of the Company applies critical assumptions and estimates that are most susceptible to change in the short term include the calculation of the allowance for credit losses, the valuation of impaired loans, and the unrealized gain or loss on investment securities available for sale.

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, or for premiums, to the first call date. Additionally, declines in the fair value of individual investment securities below their cost that are other than temporary are reflected as realized losses in the consolidated statements of income.

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

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

Restricted Stock, Equity Securities and Other Investments:

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

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

9

Table of Contents

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

Bank Owned Life Insurance

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

Loans and the Allowance for Credit Losses:

Loans are generally carried at the amount of unpaid principal, adjusted for unearned loan fees and costs, 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. As a general rule, a non-accrual loan may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and the Company expects repayment of the remaining contractual principal and interest, or (2) when it otherwise becomes well secured and in the process of collection. 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 securing the loan.

The allowance for credit losses is maintained at a level believed to be adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, the concentration of credits within each pool, the effects of any changes in lending policies, procedures, including underwriting standards and collections, charge off and recovery practices, the effects of changes in the experience, depth and ability of management, the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors, an assessment of individual problem loans and actual loss experience, the value of the underlying collateral, the condition of various market segments, both locally and nationally, and current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions, along with external factors such as competition and the legal environment. 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 over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss element is determined statistically using an informal loss migration analysis that examines loss experience and the related internal gradings of loans charged off over a current 3 year period. The loss migration analysis is performed quarterly and loss factors are updated regularly based on actual experience. The allocated component of the allowance for credit losses also includes consideration of concentrations and changes in portfolio mix and volume.

10

Table of Contents

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. 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;
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 carryover of related allowance for credit losses. Any allowance for credit losses on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not expected to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considered a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

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

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

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

11

Table of Contents

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.

Troubled Debt Restructurings

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

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

The COVID-19 pandemic has caused a significant disruption in economic activity worldwide, including in market areas served by the Company. Estimates for the allowance for credit losses at March 31, 2022 take into consideration the possibility of losses related to the COVID-19 pandemic. The Company expects that the COVID-19 pandemic will continue to have an effect on its results of operations. It is unknown how long these conditions will last and what the ultimate financial impact will be to the Company. Depending on the severity and duration of the economic consequences of the COVID-19 pandemic, the Company’s goodwill may become impaired.

The Company accommodated certain borrowers affected by the COVID-19 pandemic by granting short-term payment deferrals or periods of interest-only payments. As of March 31, 2022 and December 31, 2021, there were no loans that remained in deferral. Generally, a short-term payment deferral does not result in a loan modification being classified as a TDR. Additionally, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), enacted on March 27, 2020, and as subsequently supplemented, provided that certain loan modifications that were (1) related to the COVID-19 pandemic and (2) for loans that were not more than 30 days past due as of December 31, 2019 are not required to be designated as TDRs.  

Loans Held for Sale:

These loans consist of loans made through Partners’ majority owned subsidiary JMC.

12

Table of Contents

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 2022 or during 2021. 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 indemnification reserve has been made as of March 31, 2022 or December 31, 2021 for possible repurchases. Management does not believe that a provision for early default or refinancing cost is necessary at March 31, 2022 or December 31, 2021.

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 March 31, 2022 and December 31, 2021 and an adjustment was not recorded. Gains and losses on the sale of mortgages as well as origination fees, brokerage fees, interest rate lock-in fees and other fees paid by mortgagors are included in “Mortgage banking income, net” 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, net of estimated selling costs, at the date acquired creating a new cost basis. 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 and gains and losses realized from the sale of OREO are included in other expenses. At March 31, 2022 there were no properties included in OREO and at December 31, 2021, there were two properties with a combined value of $837 thousand included in OREO. At December 31, 2021, there were no residential real estate properties included in OREO balances.

Intangible Assets and Amortization:

During the fourth quarter of 2019, the Company acquired Partners and during the first quarter of 2018, the Company acquired Liberty Bell Bank (“Liberty”). ASC 350, Intangibles-Goodwill and Other (“ASC 350”) prescribes accounting for intangible assets subsequent to initial recognition. Acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Intangible assets related to the acquisitions of Partners and Liberty are being amortized over their remaining useful life (See Note 13 – Goodwill and Intangible Assets for further information).

Goodwill:

The Company’s goodwill was recognized in connection with the acquisitions of Partners and Liberty. The Company reviews the carrying value of goodwill at least annually during the fourth quarter 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,

13

Table of Contents

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. No impairment of goodwill was required for the three months ended March 31, 2022 or for the year ended December 31, 2021 based on management’s assessment.

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 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 17,958,104 and 17,732,521 for the three months ended March 31, 2022 and 2021, respectively. Calculations of diluted earnings per common share include the average dilutive common stock equivalents outstanding during the period, unless they are anti-dilutive. Dilutive common equivalent shares consist of stock options calculated using the treasury stock method and restricted stock awards (See Note 9 – Earnings Per Share for further information).

Note 2. Investment Securities

Investment securities available for sale are as follows:

March 31, 2022

Dollars in Thousands

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies and corporations

$

8,365

$

$

618

$

7,747

Obligations of States and political subdivisions

 

29,502

 

160

 

907

 

28,755

Mortgage-backed securities

 

92,450

 

5

 

5,839

 

86,616

Subordinated debt investments

1,990

24

3

2,011

$

132,307

$

189

$

7,367

$

125,129

December 31, 2021

Dollars in Thousands

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies and corporations

$

6,547

$

46

$

142

$

6,451

Obligations of States and political subdivisions

 

29,792

 

1,397

 

63

 

31,126

Mortgage-backed securities

 

83,213

 

279

 

1,089

 

82,403

Subordinated debt investments

1,990

51

2,041

$

121,542

$

1,773

$

1,294

$

122,021

14

Table of Contents

Gross unrealized losses and fair values, aggregated by investment category and length of time that individual investment securities have been in a continuous unrealized loss position, at March 31, 2022 and December 31, 2021, are as follows:

March 31, 2022

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

$

5,100

$

260

$

2,646

$

358

$

7,747

$

618

Obligations of States and political subdivisions

 

17,618

 

907

 

 

 

17,618

 

907

Mortgage-backed securities

 

63,469

 

3,793

 

22,343

 

2,046

 

85,812

 

5,839

Subordinated debt investments

497

3

497

3

Total investment securities with unrealized losses

$

86,684

$

4,963

$

24,989

$

2,404

$

111,674

$

7,367

December 31, 2021

Dollars in Thousands

Less than 12 months

12 months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Loss

    

Value

    

Loss

    

Value

    

Loss

Obligations of U.S. Government agencies and corporations

$

1,289

$

35

$

2,397

$

107

$

3,686

$

142

Obligations of States and political subdivisions

 

2,473

 

63

 

 

 

2,473

 

63

Mortgage-backed securities

 

59,236

 

744

 

11,349

 

345

 

70,585

 

1,089

Total investment securities with unrealized losses

$

62,998

$

842

$

13,746

$

452

$

76,744

$

1,294

For individual investment 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 investment 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 March 31, 2022 there were fifty-one mortgage-backed investment securities (“MBS”), six agency investment securities, one subordinated debt investment security and thirty-six municipal investment securities that have been in a continuous unrealized loss position for less than twelve months. At March 31, 2022 there were nine MBS investment securities and three agency investment 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 investment securities and believes that the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary. As of March 31, 2022, management also believes it has the ability and intent to hold the investment securities for a period of time sufficient for a recovery of cost.

During the three months ended March 31, 2022, the Company did not sell any investment securities. During the three months ended March 31, 2021, the Company sold ten investment securities, resulting in a gain of $14 thousand. During the three months ended March 31, 2022 and 2021, one and three investment securities either matured or called, respectively, resulting in no gain or loss for either period.

15

Table of Contents

The Company has pledged certain investment securities as collateral for qualified customers’ deposit accounts at March 31, 2022 and December 31, 2021. The amortized cost and fair value of these pledged investment securities was $10.7 million and $10.3 million, respectively, at March 31, 2022. The amortized cost and fair value of these pledged investment securities was $11.1 million and $11.2 million, respectively, at December 31, 2021.

The Company realized a loss of $89 thousand and $35 thousand on equity securities during the three months ended March 31, 2022 and 2021, respectively, which is included in “Other expenses” in the Consolidated Statements of Income.

Contractual maturities of investment securities at March 31, 2022 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. MBS have no stated maturity and primarily reflect investments in various Pass-through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association. Repayment of MBS is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

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

March 31, 2022

 

Securities Available for Sale

Dollars in Thousands

Amortized

Fair

    

Cost

    

Value

Due in one year or less

$

$

Due after one year through five years

 

3,183

 

3,235

Due after five years through ten years

 

19,175

 

18,840

Due after ten years or more

 

17,499

 

16,438

Mortgage-backed securities, due in monthly installments

 

92,450

 

86,616

$

132,307

$

125,129

16

Table of Contents

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

Major categories of loans as of March 31, 2022 and December 31, 2021 are as follows:

(Dollars in thousands)

    

March 31, 2022

    

December 31, 2021

Originated Loans

 

  

 

  

Real Estate Mortgage

Construction and land development

$

105,618

$

107,478

Residential real estate

177,726

159,701

Nonresidential

558,960

513,873

Home equity loans

21,905

19,246

Commercial

107,422

109,470

Consumer and other loans

 

3,269

 

3,546

 

974,900

 

913,314

Acquired Loans

 

  

 

  

Real Estate Mortgage

Construction and land development

$

460

$

505

Residential real estate

 

34,037

 

41,529

Nonresidential

113,738

128,344

Home equity loans

9,958

11,149

Commercial

19,426

21,438

Consumer and other loans

 

845

 

916

178,464

203,881

Total Loans

 

  

 

  

Real Estate Mortgage

 

 

Construction and land development

$

106,078

$

107,983

Residential real estate

211,763

201,230

Nonresidential

672,698

642,217

Home equity loans

31,863

30,395

Commercial

126,848

130,908

Consumer and other loans

 

4,114

 

4,462

 

1,153,364

 

1,117,195

Less: Allowance for credit losses

 

(14,565)

 

(14,656)

$

1,138,799

$

1,102,539

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

17

Table of Contents

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

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

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

All credit exposures graded at a rating of “non-pass” with outstanding balances greater than $250 thousand, as well as any loans considered TDRs, 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 known events that are subject to change. A specific reserve will not be established unless loss elements can be determined and quantified based on known facts. The total allowance for credit losses reflects management's estimate of loan losses inherent in the loan portfolio as of March 31, 2022 and December 31, 2021.

18

Table of Contents

The following tables include impairment information relating to loans and the allowance for credit losses as of March 31, 2022 and December 31, 2021:

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

    

Development

    

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

and Other

    

Unallocated

    

Total

Balance at March 31, 2022

Purchased credit impaired loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$

$

$

$

$

$

$

$

Related loan balance

 

 

1,621

 

369

 

 

128

 

 

 

2,118

Individually evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$

$

2

$

939

$

$

365

$

$

$

1,306

Related loan balance

 

598

 

1,718

6,338

 

53

 

492

 

 

 

9,199

Collectively evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance in allowance

$

1,002

$

1,905

$

8,360

$

231

$

1,321

$

32

$

408

$

13,259

Related loan balance

 

105,480

 

208,424

 

665,991

 

31,810

 

126,228

 

4,114

 

 

1,142,047

Note: The balances above include unamortized discounts on acquired loans of $2.0 million.

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

    

Development

    

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

and Other

    

Unallocated

    

Total

Balance at December 31, 2021

Purchased credit impaired loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$

$

9

$

$

$

$

$

$

9

Related loan balance

 

46

 

1,633

 

376

 

 

126

 

 

 

2,181

Individually evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Balance in allowance

$

$

3

$

1,000

$

$

452

$

$

$

1,455

Related loan balance

 

598

 

2,082

 

9,901

 

53

 

584

 

 

 

13,218

Collectively evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance in allowance

$

1,143

$

1,881

$

8,239

$

212

$

1,433

$

36

$

248

$

13,192

Related loan balance

 

107,339

 

197,515

 

631,940

 

30,342

 

130,198

 

4,462

 

 

1,101,796

Note: The balances above include unamortized discounts on acquired loans of $2.3 million.

19

Table of Contents

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2022 and the year ended December 31, 2021. Allocation of a portion of the allowance for credit losses to one loan class does not preclude its availability to absorb losses in other loan classes.

March 31, 2022

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

    

Development

    

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

and Other

    

Unallocated

    

Total

Three Months Ended

 

  

 

  

 

  

 

  

 

  

Beginning Balance

$

1,143

$

1,893

$

9,239

$

212

$

1,885

$

36

$

248

$

14,656

Charge-offs

 

(132)

(25)

 

(22)

 

(11)

 

 

(190)

Recoveries

 

21

5

2

 

4

 

2

 

 

34

Provision/(recovery)

 

(141)

(7)

187

42

 

(181)

 

5

 

160

 

65

Ending Balance

$

1,002

$

1,907

$

9,299

$

231

$

1,686

$

32

$

408

$

14,565

December 31, 2021

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Dollars in Thousands

    

Development

    

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

and Other

    

Unallocated

    

Total

Year Ended

 

  

 

  

 

  

 

  

 

  

Beginning Balance

$

903

$

2,351

$

7,584

$

271

$

1,943

$

37

$

114

$

13,203

Charge-offs

 

(39)

(692)

(7)

 

(184)

 

(66)

 

 

(988)

Recoveries

 

1

23

53

3

 

16

 

22

 

 

118

Provision/(recovery)

 

239

(442)

2,294

(55)

 

110

 

43

 

134

 

2,323

Ending Balance

$

1,143

$

1,893

$

9,239

$

212

$

1,885

$

36

$

248

$

14,656

On March 27, 2020, the CARES Act was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions. Under the program, the Small Business Administration (“SBA”) will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for paycheck and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00%, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and payments are deferred for the first six months of the loan. The Company receives a processing fee ranging from 1% to 5% based on the size of the loan from the SBA. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/ HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized additional funding under the CARES Act of $310.0 billion for PPP loans to be issued by financial institutions through the SBA. The Company has provided $95.1 million in funding to over 1,130 customers through the PPP, of which approximately $5.8 million and $8.2 million remained outstanding as of March 31, 2022 and December 31, 2021, respectively. Because these loans are 100% guaranteed by the SBA and did not undergo the Company’s typical underwriting process, they are not graded and do not have an associated allocation for credit losses at this time.

Credit Quality Information

The following tables represent credit exposures by creditworthiness category at March 31, 2022 and December 31, 2021. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Company’s internal creditworthiness is based on experience with similarly graded credits. The Company uses the definitions below for categorizing and managing its criticized loans. Loans categorized as “Pass” do not meet the criteria set forth below and are not considered criticized.

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

20

Table of Contents

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

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

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

Non-accruals

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

A summary of loans by risk rating is as follows:

Real Estate Secured

Construction &

Land

Residential

Consumer &

March 31, 2022

    

Development

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

Other

    

Total

Dollars in Thousands

Pass

$

105,480

$

209,318

$

655,751

$

31,722

$

125,086

$

3,637

$

1,130,994

Marginal

 

 

953

 

12,734

 

44

 

1,270

 

477

 

15,478

Substandard

 

598

 

1,492

 

4,213

 

97

 

492

 

 

6,892

TOTAL

$

106,078

$

211,763

$

672,698

$

31,863

$

126,848

$

4,114

$

1,153,364

Non-Accrual

$

598

$

1,107

$

3,947

$

$

492

$

$

6,144

Real Estate Secured

Construction &

Land

Residential

Consumer &

December 31, 2021

    

Development

Real Estate

    

Nonresidential

    

Home Equity

    

Commercial

    

Other

    

Total

Dollars in Thousands

Pass

$

107,339

$

199,037

$

622,648

$

30,159

$

128,949

$

3,960

$

1,092,092

Marginal

 

46

 

507

 

12,819

 

183

 

1,364

 

502

 

15,421

Substandard

 

598

 

1,686

 

6,750

 

53

 

595

 

 

9,682

TOTAL

$

107,983

$

201,230

$

642,217

$

30,395

$

130,908

$

4,462

$

1,117,195

Non-Accrual

$

598

$

1,293

$

6,486

$

$

584

$

$

8,961

There were no loans modified under the terms of a TDR during the three months ended March 31, 2022 and 2021. Loans modified as TDRs that were fully paid down, charged off, or foreclosed upon by period end are not reported.

During the three months ended March 31, 2022, there were no loans modified as a TDR that subsequently defaulted during the period ended March 31, 2022 which had been modified as a TDR during the twelve months prior to default. During the three months ended March 31, 2021, there were no loans modified as a TDR that subsequently defaulted during the period ended March 31, 2021 which had been modified as a TDR during the twelve months prior to default.

21

Table of Contents

There was one loan secured by 1-4 family residential properties with a balance of $80 thousand that was in the process of foreclosure at March 31, 2022. There were two loans secured by 1-4 family residential properties with aggregate balances of $345 thousand that were in the process of foreclosure at December 31, 2021.

The following tables include an aging analysis of the recorded investment of past due financing receivables as of March 31, 2022 and December 31, 2021:

Recorded

Investment

Greater than

Total

>90 Days

30 - 59 Days

60 - 89 Days

90 Days

Total

Current

Financing

Past Due

At March 31, 2022

    

Past Due*

    

Past Due

    

Past Due**

    

Past Due

    

Balance***

    

Receivables

    

and Accruing

Dollars in Thousands

Real Estate Mortgage

Construction and land development

$

$

$

598

$

598

$

105,480

$

106,078

$

Residential real estate

716

192

908

210,855

211,763

Nonresidential

115

666

385

1,166

671,532

672,698

Home equity loans

45

45

31,818

31,863

Commercial

18

77

95

126,753

126,848

Consumer and other loans

 

3

 

3

 

 

6

 

4,108

 

4,114

 

TOTAL

$

852

$

714

$

1,252

$

2,818

$

1,150,546

$

1,153,364

$

* Includes $669 thousand of non-accrual loans.

** Includes $1.3 million of non-accrual loans.

*** Includes $4.2 million of non-accrual loans.

Recorded

Investment

Greater than

Total

>90 Days

30 - 59 Days

60 - 89 Days

90 Days

Total

Current

Financing

Past Due

At December 31, 2021

    

Past Due*

    

Past Due

    

Past Due**

    

Past Due

    

Balance***

    

Receivables

    

and Accruing

Dollars in Thousands

Real Estate Mortgage

Construction and land development

$

$

$

598

$

598

$

107,385

$

107,983

$

Residential real estate

658

245

361

1,264

199,966

201,230

Nonresidential

2,915

2,915

639,302

642,217

Home equity loans

160

160

30,235

30,395

Commercial

46

77

123

130,785

130,908

Consumer and other loans

 

15

 

 

 

15

 

4,447

 

4,462

 

TOTAL

$

879

$

245

$

3,951

$

5,075

$

1,112,120

$

1,117,195

$

*      Includes $55 thousand of non-accrual loans.

**    Includes $4.0 million of non-accrual loans.

***  Includes $5.0 million of non-accrual loans.

22

Table of Contents

Impaired Loans

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

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

The following tables include the recorded investment and unpaid principal balances for impaired financing receivables, excluding PCI, with the associated allowance amount, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.

Unpaid

Interest

Average

Recorded

Principal

Income

Specific

Recorded

March 31, 2022

    

Investment

    

Balance

    

Recognized

    

Reserve

    

Investment

Dollars in Thousands

Impaired loans with specific reserves:

 

  

 

  

 

  

 

  

 

  

Real Estate Mortgage

Construction and land development

$

$

$

$

$

Residential real estate

422

422

5

2

424

Nonresidential

3,562

3,559

12

939

3,564

Home equity loans

Commercial

365

376

10

365

382

Consumer and other loans

 

 

 

 

 

Total impaired loans with specific reserves

$

4,349

$

4,357

$

27

$

1,306

$

4,370

Impaired loans with no specific reserve:

 

 

 

 

 

Real Estate Mortgage

Construction and land development

$

598

$

598

$

$

$

598

Residential real estate

1,296

1,296

4

1,304

Nonresidential

2,776

2,776

69

2,783

Home equity loans

53

53

1

53

Commercial

127

204

154

Consumer and other loans

 

 

 

 

 

Total impaired loans with no specific reserve

$

4,850

$

4,927

$

74

$

$

4,892

TOTAL

$

9,199

$

9,284

$

101

$

1,306

$

9,262

Total impaired loans of $9.2 million at March 31, 2022 do not include PCI loan balances of $2.1 million, which are net of a discount of $406 thousand.

23

Table of Contents

Unpaid

Interest

Average

Recorded

Principal

Income

Specific

Recorded

December 31, 2021

    

Investment

    

Balance

    

Recognized

    

Reserve

    

Investment

Dollars in Thousands

Impaired loans with specific reserves:

 

  

 

  

 

  

 

  

 

  

Real Estate Mortgage

Construction and land development

$

$

$

$

$

Residential real estate

426

426

22

3

433

Nonresidential

6,437

6,559

369

1,000

6,528

Home equity loans

Commercial

507

517

119

452

583

Consumer and other loans

 

 

 

 

 

Total impaired loans with specific reserves

$

7,370

$

7,502

$

510

$

1,455

$

7,544

Impaired loans with no specific reserve:

 

 

 

 

 

Real Estate Mortgage

Construction and land development

$

598

$

598

$

13

$

$

599

Residential real estate

1,656

1,687

26

1,698

Nonresidential

3,464

3,462

344

3,510

Home equity loans

53

53

1

53

Commercial

77

154

2

109

Consumer and other loans

 

 

 

 

 

Total impaired loans with no specific reserve

$

5,848

$

5,954

$

386

$

$

5,969

TOTAL

$

13,218

$

13,456

$

896

$

1,455

$

13,513

Total impaired loans of $13.2 million at December 31, 2021 do not include PCI loan balances of $2.2 million, which are net of a discount of $432 thousand. At December 31, 2021, there was $9 thousand in specific reserves related to PCI loans included in the allowance for credit losses.

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

Dollars in Thousands

    

March 31, 2022

    

December 31, 2021

Accountable for under ASC 310-30 (PCI loans)

 

  

 

  

Outstanding balance

$

2,523

$

2,613

Carrying amount

 

2,118

 

2,181

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

 

 

Outstanding balance

$

177,948

$

203,596

Carrying amount

 

176,346

 

201,700

Total acquired loans

 

 

Outstanding balance

$

180,471

$

206,209

Carrying amount

 

178,464

 

203,881

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-20 for the three months ended March 31, 2022 and the year ended December 31, 2021:

Dollars in Thousands

    

March 31, 2022

    

December 31, 2021

Balance at beginning of period

$

1,896

$

3,361

Acquisitions

 

 

Accretion

 

(295)

 

(1,464)

Other changes, net

1

(1)

Balance at end of period

$

1,602

$

1,896

During the three months ended March 31, 2022, the Company recorded $36 thousand in accretion on acquired loans accounted for under ASC 310-30. During the three months ended March 31, 2021, the Company recorded $8 thousand in accretion on acquired loans accounted for under ASC 310-30.

Non-accretable yield on PCI loans was $1.4 million at March 31, 2022 and December 31, 2021.

24

Table of Contents

The Company had no commitments to loan additional funds to the borrowers of restructured, impaired, or non-accrual loans as of March 31, 2022 and December 31, 2021.

Concentration of Risk:

The Company makes loans to customers located primarily within Anne Arundel, Charles, Calvert, St. Mary’s, Wicomico and Worcester Counties, Maryland, Sussex County, Delaware, Camden and Burlington Counties, New Jersey, the Greater Fredericksburg, Virginia area (Stafford County, Spotsylvania County, King George County, Caroline County, and the City of Fredericksburg, Virginia) and the Greater Washington area (the District of Columbia, Arlington County, Clarke County, Fairfax County, Fauquier County, Loudoun County, Prince William County, Warren County, and the Cities of Alexandria, Fairfax, Falls Church, Manassas, Manassas Park, and Reston, Virginia). A substantial portion of its loan portfolio consists of residential and commercial real estate mortgages. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.

Note 4. Borrowings and Notes Payable

The Company owns capital stock of the FHLB as a condition for a $410.8 million convertible advance credit facility from the FHLB. As of March 31, 2022, the Company had remaining credit availability of $384.6 million under this facility.

The following table details the advances the Company had outstanding with the FHLB at March 31, 2022 and December 31, 2021:

March 31, 2022

Dollars in Thousands

    

Outstanding Balance

    

Interest Rate

    

Maturity Date

    

Interest Payment

Fixed rate hybrid

$

5,000

 

3.15

%  

October 2022

 

Fixed, paid monthly

Principal reducing credit

429

1.62

%  

March 2023

Fixed, paid quarterly

Fixed rate hybrid

9,900

1.29

%  

March 2024

 

Fixed, paid quarterly

Fixed rate hybrid

9,900

1.29

%  

March 2024

 

Fixed, paid quarterly

Principal reducing credit

 

920

 

1.99

%  

March 2026

 

Fixed, paid quarterly

Total advances

$

26,149

 

  

 

  

 

  

December 31, 2021

Dollars in Thousands

Outstanding Balance

    

Interest Rate

    

Maturity Date

    

Interest Payment

Fixed rate hybrid

$

5,000

 

3.15

%  

October 2022

 

Fixed, paid monthly

Principal reducing credit

 

536

 

1.62

%  

March 2023

 

Fixed, paid quarterly

Fixed rate hybrid

9,900

1.29

%  

March 2024

 

Fixed, paid quarterly

Fixed rate hybrid

9,900

1.29

%  

March 2024

 

Fixed, paid quarterly

Principal reducing credit

 

977

 

1.99

%  

March 2026

 

Fixed, paid quarterly

Total advances

$

26,313

 

  

 

  

 

  

The Company did not have any short-term borrowings from the FHLB for the three months ended March 31, 2022 and 2021. Borrowings from the FHLB are considered short-term if they have an original maturity of less than a year.

The Company has pledged a portion of its residential and commercial mortgage loan portfolio as collateral for these credit facilities. The lendable collateral value outstanding on these pledged loans totaled approximately $183.6 million and $181.8 million at March 31, 2022 and December 31, 2021, respectively.

25

Table of Contents

In addition to the FHLB credit facility, in October 2015, the Company entered into a subordinated loan agreement for an aggregate principal amount of $2.0 million, net of issuance costs. Interest-only payments were due quarterly at 6.710% per annum, and the outstanding principal balance would have matured in October 2025. During July 2021, the prepayment provisions in the subordinated debt agreement were exercised, and the principal balance and any remaining accrued interest of this subordinated debt were paid in full. In January 2018, the Company entered into a subordinated loan agreement for an aggregate principal amount of $4.5 million to fund the acquisition of Liberty, net of issuance costs. Interest-only payments are due quarterly at 6.875% per annum, and the outstanding principal balance matures in April 2028. In June 2020, the Company entered into a subordinated loan agreement for an aggregate principal amount of $18.1 million, net of issuance costs, to provide capital to support organic growth or growth through strategic acquisitions and capital expenditures. The subordinated notes will initially bear interest at 6.000% per annum, beginning June 25, 2020 to but excluding July 1, 2025, payable semi-annually in arrears. From and including July 1, 2025 to but excluding July 1, 2030, or an earlier redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 590 basis points, payable quarterly in arrears. Beginning on July 1, 2025 through maturity, the subordinated notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The subordinated notes will mature on July 1, 2030. The subordinated notes are subject to customary representations, warranties and covenants made by the Company and the purchasers.

Partners owns a one-half undivided interest in 410 William Street, Fredericksburg, Virginia. Partners purchased a one-half interest in the land for cash, plus additional settlement costs, and assumption of one-half of the remaining deed of trust loan on December 14, 2012. Partners indemnified the indemnities, who are the personal guarantors of the deed of trust loan in the amount of $886 thousand, which was one-half of the outstanding balance of the loan as of the purchase date. Partners has a remaining obligation under the note payable of $649 thousand as of March 31, 2022, which was carried on the balance sheet net of a discount of $19 thousand. The loan was refinanced on April 30, 2015 with a twenty-five year amortization. The interest rate is fixed at 3.60% for the first 10 years, and then becomes a variable rate of 3.0% plus the 10 year Treasury rate until maturity.

The Company provides JMC a warehouse line of credit, which is eliminated in consolidation. In addition, JMC has a warehouse line of credit with another financial institution in the amount of $3.0 million. The interest rate is the weekly average of the one month LIBOR plus 2.250%, rounded to the nearest 0.125% (3.250% at March 31, 2022). The rate is subject to change the first of every month. Amounts borrowed are collateralized by a security interest in the mortgage loans financed under the line and are payable upon demand. The warehouse line of credit is set to renew or mature on November 30, 2022. The balance outstanding at March 31, 2022 and December 31, 2021 was $120 thousand. Interest expense on the warehouse lines of credit was $14 thousand and $32 thousand during the three months ended March 31, 2022 and 2021, respectively.

During the second quarter of 2020, in connection with the loans originated as part of the PPP, the Company borrowed under the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).  Under the terms of the PPPLF, the Company can borrow funds which are secured by the Company’s PPP loans.  During the first quarter of 2021, the Company used a portion of its excess cash and cash equivalents to repay all borrowings that were previously outstanding under the PPPLF. As of March 31, 2022 and December 31, 2021, the Company did not have any outstanding advances under the PPPLF.

The proceeds of these long-term borrowings were generally used to purchase higher yielding investment securities, fund additional loans, redeem preferred stock, or fund acquisitions. Additionally, the Company has secured credit availability of $5.0 million and unsecured credit availability of $87.0 million with various correspondent banks for short-term liquidity needs, if necessary. The secured facility must be collateralized by specific securities at the time of any usage. At March 31, 2022, there were no borrowings outstanding under these credit agreements, and securities pledged under this secured credit facility had an amortized cost and fair value of $4 thousand. At December 31, 2021, there were no borrowings outstanding under these credit agreements, and securities pledged under this secured credit facility had an amortized cost and fair value of $4 thousand and $5 thousand, respectively.

26

Table of Contents

The Company has pledged investment securities available for sale with an amortized cost and fair value of $3.6 million and $3.3 million, respectively, with the FRB to secure Discount Window borrowings at March 31, 2022. The combined amortized cost and fair value of these pledged investment securities available for sale were $3.7 million at December 31, 2021. At March 31, 2022 and December 31, 2021 there were no outstanding borrowings under these facilities.

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

2022

    

$

5,596

2023

 

314

2024

 

20,008

2025

 

210

2026

39

Thereafter

 

22,912

$

49,079

Note 5. Lease Commitments

The Company accounts for leases in accordance with ASU 2016-02, Leases (Topic 842) (“ASC 2016-02”). The Company leases nineteen locations for administrative and loan production offices and branch locations. Seventeen leases were classified as operating leases and two leases were classified as finance leases. Leases with an initial term of 12 months or less as well as leases with a discounted present value of future cash flows below $25 thousand are not recorded on the balance sheet and the related lease expense is recognized over the lease term. The Company elected to use the practical expedient to not recognize short-term leases on the consolidated balance sheet and instead account for them as executory contracts.

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

27

Table of Contents

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

Dollars in Thousands

    

March 31, 2022

 

December 31, 2021

Balance Sheet

Operating Lease Amounts

Right-of-use asset

$

5,770

$

6,009

Lease liability

 

6,166

6,372

Finance Lease Amounts

Right-of-use asset

$

1,653

$

1,687

Lease liability

2,096

2,125

Supplemental balance sheet information

Weighted average lease term - Operating Leases (Yrs.)

 

7.80

7.99

Weighted average lease term - Finance Leases (Yrs.)

 

11.84

12.09

Weighted average discount rate - Operating Leases (1)

2.26

%

2.24

%

Weighted average discount rate - Finance Leases (1)

2.84

%

2.84

%

Income Statement

Three Months Ended

March 31, 2022

March 31, 2021

Operating lease cost classified as premises and equipment

$

286

$

213

Finance lease cost classified as interest on borrowings

15

16

Operating outgoing cash flows from operating leases

$

241

$

186

Operating outgoing cash flows from finance leases

$

45

$

45

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

Minimum lease payments at March 31, 2022, for the next five years and thereafter, assuming renewal options are exercised, are approximately as follows:

    

Dollars in Thousands

Operating Leases:

One year or less

$

1,050

One to three years

 

1,605

Three to five years

 

1,119

Over 5 years

 

3,172

Total undiscounted cash flows

 

6,946

Less: Discount

 

(780)

Lease Liabilities

$

6,166

Finance Leases:

One year or less

$

178

One to three years

387

Three to five years

407

Over 5 years

1,519

Total undiscounted cash flows

2,491

Less: Discount

(395)

Lease Liabilities

$

2,096

28

Table of Contents

Note 6. Stock Option Plans

Liberty Bell Bank Stock Option Plans

In 2004, Liberty adopted the 2004 Incentive Stock Option Plan and the 2004 Non-Qualified Stock Option Plan, which were stock-based incentive compensation plans (the “Liberty Plans”). In February 2014, the Liberty Plans expired pursuant to their terms. Options under these plans had a 10 year life and vested over 5 years. Remaining options under these plans became fully vested with the signing of the Agreement of Merger with the Company in February 2018. In accordance with the terms of the Agreement of Merger between the Company and Liberty, the Liberty Plans were assumed by the Company, and the options were converted into and became an option to purchase an adjusted number of shares of the common stock of the Company at an adjusted exercise price per share. The number of shares was determined by multiplying the number of shares of Liberty common stock for which the option was exercisable by the number of shares of the Company’s common stock into which shares of Liberty common stock were convertible in the Merger, which was 0.2857 (the “Conversion Ratio”), rounded to the next lower whole share. The exercise price was determined by dividing the exercise price per share of Liberty common stock by the Conversion Ratio, rounded up to the nearest cent. At the effective time of the Liberty Merger there were 48,225 options outstanding at an exercise price of $1.18. These shares were converted to 13,771 options outstanding at an exercise price of $4.14.

A summary of stock option transactions with respect to such options for the three months ended March 31, 2022 is as follows:

March 31, 2022

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Intrinsic

Shares

Price

Life

Value

Outstanding at beginning of period

5,761

$

4.14

1.23

Granted

Exercised

(1,028)

4.14

Forfeited

Outstanding at end of period

4,733

$

4.14

0.99

$

23,996

Options exercisable at March 31, 2022

4,733

$

4.14

Virginia Partners Bank Stock Option Plan

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

29

Table of Contents

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

A summary of stock option transactions with respect to such options for the three months ended March 31, 2022 is as follows:

March 31, 2022

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Intrinsic

Shares

Price

Life

Value

Outstanding at beginning of period

128,147

$

6.40

3.18

Granted

Exercised

(19,067)

5.83

Forfeited

(4,294)

6.26

Outstanding at end of period

104,786

$

6.51

3.33

$

283,103

Options exercisable at March 31, 2022

104,786

$

6.51

The intrinsic value represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock options exceeds the exercise price) that would have been received by the holders had they exercised their stock options on March 31, 2022.

As stated in Note 1, the Company follows ASC 718-10 which requires that stock-based compensation to employees and directors be recognized as compensation cost in the income statement based on their fair values on the measurement date, which, for the Company, is the date of the grant. All stock option expenses had been fully recognized prior to 2020 and there was no expense recorded related to stock options during the periods ended March 31, 2022 or 2021.

Note 7. Restricted Stock Plan

The Company had an employee and director restricted stock plan (the “Company Plan”) and reserved 405,805 shares of stock for issuance thereunder. The Company adopted the Company Plan, pursuant to which employee and directors of the Company could acquire shares of common stock. The Company Plan was adopted by the Company’s Board of Directors in April 2014, and subject to the right of the Board of Directors to terminate the Company Plan at any time, terminated on June 30, 2018. The termination of the Company Plan, either at the scheduled termination date or before such date, did not affect any award issued prior to termination. During the years ended December 31, 2017 and 2018 the Company awarded 5,000 and 9,000 shares, respectively, to individual employees based on certain employment criteria. These shares vested over two or three years, based on the specific employment agreement. Each award from the plan is evidenced by an award agreement that specifies the vesting period of the restricted stock plan, the number of shares to which the award pertains, and such other provisions as the grantor determines.

30

Table of Contents

As of March 31, 2022 there were no remaining non-vested restricted stock awards.

As stated in Note 1, the Company follows ASC 718-10 which requires that restricted stock-based compensation to employees and directors be recognized as compensation cost in the income statement based on their fair values on the measurement date. The fair value of restricted stock granted was equal to the underlying fair value of the stock. The Company did not recognize any restricted stock-based compensation expense during the period ended March 31, 2022. As a result of applying the provisions of ASC Topic 718-10, during the three months ended March 31, 2021 the Company recognized restricted stock-based compensation expense of $4 thousand, or $3 thousand net of tax, related to the restricted stock awards under the Company Plan. The Company did not have any unrecognized restricted stock-based compensation expense related to restricted stock awards under the Company Plan at March 31, 2022.

Note 8. Incentive Stock Plan

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

On April 28, 2021, the Company’s Board of Directors granted 58,824 shares of restricted stock to two senior officers of Partners in accordance with Nasdaq Listing Rule 5635(c)(4) as inducements material to each of them accepting employment with Partners.  All of these shares were subject to time vesting in three equal annual installments beginning on April 28, 2022. On December 10, 2021, in accordance with the terms and conditions set forth in the definitive agreement and plan of merger with OceanFirst Financial Corp. (“OCFC”), the Company’s Board of Directors approved to immediately vest these outstanding and unvested awards. The accelerated vesting of these awards was not contingent upon the merger closing. Each grantee irrevocably and unconditionally covenanted and agreed to not transfer, convey or sell any share of Company common stock, along with certain other terms, in respect of such accelerated vesting of the restricted stock awards.

On October 12, 2021, the Company’s Board of Directors granted 68,000 shares of restricted stock to employees of Partners under the 2021 Incentive Stock Plan. All of these shares were subject to time vesting in three equal annual installments beginning on June 1, 2022. On December 10, 2021, in accordance with the terms and conditions set forth in the definitive agreement and plan of merger with OCFC, the Company’s Board of Directors approved to immediately vest 40,000 of these outstanding and unvested awards. The accelerated vesting of these awards was not contingent upon the merger closing. Each grantee of awards that were subject to the accelerated vesting provisions irrevocably and unconditionally covenanted and agreed to not transfer, convey or sell any share of Company common stock, along with certain other terms, in respect of such accelerated vesting of the restricted stock awards.

On October 27, 2021, the Company’s Board of Directors granted 27,000 shares of restricted stock to a director of the Company and Partners under the 2021 Incentive Stock Plan.  All of these shares were subject to time vesting in three equal annual installments beginning on June 1, 2022. On December 10, 2021, in accordance with the terms and conditions set forth in the definitive agreement and plan of merger with OCFC, the Company’s Board of Directors approved to immediately vest these outstanding and unvested awards. The accelerated vesting of these awards was not contingent upon the merger closing. The grantee irrevocably and unconditionally covenanted and agreed to not transfer, convey or sell any share of Company common stock, along with certain other terms, in respect of such accelerated vesting of the restricted stock awards.

31

Table of Contents

As of March 31, 2022, there were 28,000 non-vested shares related to restricted stock awards.  A schedule of non-vested shares related to restricted stock awards as of March 31, 2022 is as follows:

Employees

Weighted

Average 

Shares

Fair Value

Nonvested Awards December 31, 2021

    

28,000

    

$

8.99

Awarded in 2022

 

 

Vested in 2022

Nonvested Awards March 31, 2022

 

28,000

$

8.99

As a result of applying the provisions of ASC 718-10, during the three months ended March 31, 2022, the Company recognized restricted stock-based compensation expense of $24 thousand, or $17 thousand net of tax, related to the restricted stock awards.  Restricted stock-based compensation expense is accounted for using the fair value of the Company’s common stock on the date the restricted shares were awarded, which was $7.65 for the awards granted on April 28, 2021, $8.99 for the awards granted on October 12, 2021, and $8.72 for the awards granted on October 21, 2021.  Unrecognized restricted stock-based compensation expense related to the restricted stock awards totaled approximately $205 thousand at March 31, 2022. The remaining period over which this unrecognized restricted stock-compensation expense is expected to be recognized is approximately 2.2 years.

Note 9. Earnings Per Share

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

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

The following table presents basic and diluted EPS for the three months ended March 31, 2022 and 2021:

    

Net Income Applicable

    

    

to Basic Earnings

Weighted Average

(Dollars in thousands, except per share data)

Per Common Share

Shares Outstanding

For the three months ended March 31, 2022

  

  

  

Basic EPS

$

2,109

17,958

$

0.117

Effect of dilutive stock awards

 —

39

Diluted EPS

$

2,109

17,997

$

0.117

For the three months ended March 31, 2021

  

  

  

Basic EPS

$

1,090

17,733

$

0.061

Effect of dilutive stock awards

 —

28

Diluted EPS

$

1,090

17,761

$

0.061

32

Table of Contents

Note 10. Regulatory Capital Requirements

The Company’s subsidiaries are subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company’s subsidiaries must meet specific capital adequacy guidelines that involve quantitative measures of the Company’s subsidiaries assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s subsidiaries’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Federal banking regulations also impose regulatory capital requirements on bank holding companies. Under the small bank holding company policy statement of the Federal Reserve Board, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Company is not subject to regulatory capital requirements.

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

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

Quantitative measures established by regulation to ensure capital adequacy require the Company’s subsidiaries to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and common equity Tier 1 capital to risk-weighted assets. Management believes as of March 31, 2022 that the Company’s subsidiaries met all capital adequacy requirements to which they are subject.

As of March 31, 2022, the most recent notification from the Federal Deposit Insurance Corporation (“FDIC”) categorized the Company’s subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company’s subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 risk-based ratios. There are no conditions or events since that notification that management believes have changed the Company’s subsidiaries’ categories.

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

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

33

Table of Contents

The implementation of the capital conservation buffer became fully phased in on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The following table presents actual and required capital ratios as of March 31, 2022 and December 31, 2021 for the Company’s subsidiaries under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2022 and December 31, 2021 based on the fully phased-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based on prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A comparison of the Company’s subsidiaries’ capital amounts and ratios as of March 31, 2022 and December 31, 2021 with the minimum requirements are presented below.

34

Table of Contents

To Be

 

Well Capitalized

 

For Capital

Under Prompt

 

Adequacy

Corrective Action

 

In Thousands

Actual

Purposes

Provisions

 

    

Amount

    

Ratio

    

Amount

    

Ratio

     

Amount

    

Ratio

 

As of March 31, 2022

 

  

 

  

 

  

 

  

 

  

 

  

Total Capital Ratio

 

  

 

  

 

  

 

  

 

  

 

  

(To Risk Weighted Assets)

 

  

 

  

 

  

 

  

 

  

 

  

The Bank of Delmarva

$

90,770

 

12.6

%  

$

75,870

 

10.5

%  

$

72,257

 

10.0

%

Virginia Partners Bank

 

56,666

 

11.5

%  

 

51,956

 

10.5

%  

 

49,482

 

10.0

%

Tier I Capital Ratio

 

 

 

 

 

 

  

(To Risk Weighted Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

81,712

 

11.3

%  

 

61,419

 

8.5

%  

 

57,806

 

8.0

%

Virginia Partners Bank

 

53,003

 

10.7

%  

 

42,059

 

8.5

%  

 

39,585

 

8.0

%

Common Equity Tier I Ratio

 

 

 

 

 

 

  

(To Risk Weighted Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

81,712

 

11.3

%  

 

50,580

 

7.0

%  

 

46,967

 

6.5

%

Virginia Partners Bank

 

53,003

 

10.7

%  

 

34,637

 

7.0

%  

 

32,163

 

6.5

%

Tier I Leverage Ratio

 

 

 

 

 

 

  

(To Average Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

81,712

 

8.2

%  

 

40,079

 

4.0

%  

 

50,099

 

5.0

%

Virginia Partners Bank

 

53,003

 

8.1

%  

 

26,091

 

4.0

%  

 

32,614

 

5.0

%

As of December 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Total Capital Ratio

 

  

 

  

 

  

 

  

 

  

 

  

(To Risk Weighted Assets)

 

  

 

  

 

  

 

  

 

  

 

  

The Bank of Delmarva

$

91,928

 

12.9

%  

$

74,963

 

10.5

%  

$

71,394

 

10.0

%

Virginia Partners Bank

56,192

 

12.0

%  

49,103

 

10.5

%

46,765

 

10.0

%

Tier I Capital Ratio

 

 

 

 

 

 

  

(To Risk Weighted Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

82,972

 

11.6

%  

 

60,684

 

8.5

%  

 

57,115

 

8.0

%

Virginia Partners Bank

52,844

 

11.3

%

39,750

 

8.5

%

37,412

 

8.0

%

Common Equity Tier I Ratio

 

 

 

 

 

 

  

(To Risk Weighted Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

82,972

 

11.6

%  

 

49,975

 

7.0

%  

 

46,406

 

6.5

%

Virginia Partners Bank

52,844

 

11.3

%

32,735

 

7.0

%

30,397

 

6.5

%

Tier I Leverage Ratio

 

 

 

 

 

 

  

(To Average Assets)

 

 

 

 

 

 

  

The Bank of Delmarva

 

82,972

 

8.1

%  

 

40,926

 

4.0

%  

 

51,158

 

5.0

%

Virginia Partners Bank

52,844

 

8.5

%

25,009

 

4.0

%

31,261

 

5.0

%

Banking regulations also limit the amount of dividends that may be paid without prior approval of the Company’s regulatory agencies. Regulatory approval is required to pay dividends, which exceed the Company’s and its Subsidiaries’ net profits for the current year plus its retained net profits for the preceding two years. At March 31, 2022 and December 31, 2021, approximately $11.2 million and $14.2 million, respectively, was available for the payment of dividends to stockholders by the Company without regulatory approval. Dividends from the Subsidiaries to the Company are also limited by the amount of retained net profits of the Subsidiaries in the current year and the preceding two years. At March 31, 2022 and December 31, 2021, approximately $14.0 million and $17.9 million, respectively, was available for payment of dividends to the Company from the Subsidiaries without regulatory approval.

35

Table of Contents

Note 11. Fair Values of Financial Instruments

FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

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

Dollars are in thousands

Fair Value Measurements at March 31, 2022

Quoted Prices in

Significant

Significant

Active Markets for

Other

Unobservable

Carrying

Identical Assets

Observable Inputs

Inputs

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Balance

Financial assets:

  

Cash and due from banks

$

13,916

$

13,916

$

$

$

13,916

Interest bearing deposits

 

308,016

 

308,016

 

 

 

308,016

Federal funds sold

 

23,982

 

23,982

 

 

 

23,982

Securities:

 

  

 

  

 

 

  

 

Available for sale

 

125,129

 

 

125,129

 

 

125,129

Loans held for sale

1,342

1,342

1,342

Loans, net of allowance for credit losses

 

1,138,799

 

 

 

1,119,549

 

1,119,549

Accrued interest receivable

 

4,113

 

 

4,113

 

 

4,113

Restricted stock

 

4,935

 

 

4,935

 

 

4,935

Other investments

 

4,983

 

 

4,983

 

 

4,983

Bank owned life insurance

18,366

18,366

18,366

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits

$

1,491,455

$

$

1,135,248

$

351,556

$

1,486,804

Accrued interest payable

 

267

 

 

267

 

 

267

FHLB advances

 

26,149

 

 

26,686

 

 

26,686

Subordinated notes payable

 

22,180

 

 

28,272

 

 

28,272

Other borrowings

750

750

750

36

Table of Contents

Dollars are in thousands

Fair Value Measurements at December 31, 2021

Quoted Prices in

Significant

Significant

Active Markets for

Other

Unobservable

Carrying

Identical Assets

Observable Inputs

Inputs

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Balance

Financial assets:

  

Cash and due from banks

$

12,887

$

12,887

$

$

$

12,887

Interest bearing deposits

 

297,902

 

297,902

 

 

 

297,902

Federal funds sold

 

28,040

 

28,040

 

 

 

28,040

Securities:

 

  

 

  

 

 

  

 

Available for sale

 

122,021

 

 

122,021

 

 

122,021

Loans held for sale

4,064

4,064

4,064

Loans, net of allowance for credit losses

 

1,102,539

 

 

 

1,089,812

 

1,089,812

Accrued interest receivable

 

4,313

 

 

4,313

 

 

4,313

Restricted stock

 

4,869

 

 

4,869

 

 

4,869

Other investments

 

5,065

 

 

5,065

 

 

5,065

Bank owned life insurance

18,254

18,254

18,254

Other real estate owned

 

837

 

 

 

837

 

837

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits

$

1,442,876

$

$

1,063,619

$

380,245

$

1,443,864

Accrued interest payable

 

280

 

 

280

 

 

280

FHLB advances

 

26,313

 

 

27,007

 

 

27,007

Subordinated notes payable

 

22,168

 

 

30,091

 

 

30,091

Other borrowings

755

755

755

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to repay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.

Note 12. Fair Value Measurements

The Company follows ASC 820-10 Fair Value Measurements and Disclosures (“ASC 820-10”), which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investments securities) or on a nonrecurring basis (for example, impaired loans).

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Fair Value Hierarchy

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

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

37

Table of Contents

Level 2 - Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 - Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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

Investment Securities Available for Sale:

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

The following tables present the balances of financial assets measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:

Fair

Dollars are in thousands

    

Level 1

    

Level 2

    

Level 3

    

Value

March 31, 2022

Securities available for sale:

 

  

 

  

 

  

 

  

Obligations of U.S. Government agencies and corporations

$

$

7,747

$

$

7,747

Obligations of States and political subdivisions

 

 

28,755

 

 

28,755

Mortgage-backed securities

 

 

86,616

 

 

86,616

Subordinated debt investments

 

2,011

 

 

2,011

Total securities available for sale

$

$

125,129

$

$

125,129

December 31, 2021

Securities available for sale:

Obligations of U.S. Government agencies and corporations

$

$

6,451

$

$

6,451

Obligations of States and political subdivisions

 

 

31,126

 

 

31,126

Mortgage-backed securities

 

 

82,403

 

 

82,403

Subordinated debt investments

 

2,041

 

 

2,041

Total securities available for sale

$

$

122,021

$

$

122,021

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these financial assets usually result from the application of lower of cost or market accounting or write-downs of individual assets.

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

Loans Held for Sale:

Loans held for sale are loans originated by JMC for sale in the secondary market. Loans originated for sale by JMC are recorded at lower of cost or market. No market adjustments were required at March 31, 2022; therefore, loans

38

Table of Contents

held for sale were carried at cost. Because of the short-term nature, the book value of these loans approximates fair value at March 31, 2022 and December 31, 2021.

Impaired Loans:

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

Other Real Estate Owned:

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

The following table presents the balances of financial assets measured at fair value on a non-recurring basis as of March 31, 2022 and December 31, 2021.

Fair

Dollars are in thousands

    

Level 1

    

Level 2

    

Level 3

    

Value

March 31, 2022

Impaired loans

$

$

$

2,620

$

2,620

Total

$

$

$

2,620

$

2,620

December 31, 2021

Impaired loans

$

$

$

4,653

$

4,653

OREO

837

837

Total

$

$

$

5,490

$

5,490

39

Table of Contents

The following table presents additional quantitative information about financial assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value as of March 31, 2022 and December 31, 2021:

March 31, 2022

Valuation

Unobservable

Range of

Dollars are in thousands

Fair Value

Technique

Inputs

Inputs

Impaired loans

    

$

2,620

    

Appraisals

    

Discount to reflect current market conditions and estimated selling costs

    

8%

Total

$

2,620

December 31, 2021

Valuation

Unobservable

Range of

Dollars are in thousands

Fair Value

Technique

Inputs

Inputs

Impaired loans

    

$

4,653

    

Appraisals

    

Discount to reflect current market conditions and estimated selling costs

    

8%

OREO

837

Appraisals or Listing Price

Discount to reflect current market conditions and estimated selling costs

8-10%

Total

$

5,490

Note 13. Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”). The Company records goodwill when the purchase price of an acquired entity is greater than the fair value of the identifiable tangible and intangible assets acquired minus the liabilities assumed. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amount of the intangible assets may be impaired. The Company does not amortize goodwill or any acquired intangible assets with an indefinite useful economic life, but reviews them for impairment on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2021.

Goodwill: The Company acquired goodwill in the purchases of Liberty, which was effective in 2018, and Partners, which was effective in 2019. There were no changes in goodwill during the three months ended March 31, 2022 and the year ended December 31, 2021.

Core Deposit Intangible: The Company acquired core deposit intangibles in the acquisitions of Liberty and Partners. For the core deposit intangible related to Liberty, the Company utilizes the double declining balance method of amortization, in which the straight line amortization rate is doubled and applied to the remaining unamortized portion of the intangible asset. The amortization method changes to the straight line method of amortization when the straight line amortization amount exceeds the amount that would be calculated under the double declining balance method. This core deposit intangible will be amortized over seven years. For the core deposit intangible related to Partners, the Company utilizes the sum of months method and an estimated average life of 120 months.

40

Table of Contents

The following table provides changes for the three months ended March 31, 2022, and the year ended December 31, 2021:

March 31, 

December 31, 

Dollars in Thousands

    

2022

    

2021

Balance at the beginning of the period

$

2,060

$

2,660

Amortization

 

(134)

 

(600)

Balance at the end of the period

$

1,926

$

2,060

The following table provides the remaining amortization expense for the core deposit intangible over the years indicated below:

March 31, 

Dollars in Thousands

2022

2022

$

385

2023

467

2024

415

2025

246

2026

182

Thereafter

231

$

1,926

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

The following table provides changes in the net deposit discount for the three months ended March 31, 2022 and the year ended December 31, 2021:

March 31, 

December 31, 

Dollars in Thousands

    

2022

    

2021

Balance at the beginning of the period

$

(9)

$

(23)

Accretion, net

 

3

 

14

Balance at the end of the period

$

(6)

$

(9)

The following table provides the remaining accretion for the net deposit discount over the years indicated below:

March 31, 

Dollars in Thousands

2022

2022

$

4

2023

2

$

6

41

Table of Contents

The net effect of the amortization of premiums and accretion of discounts associated with the Company’s acquisition accounting adjustments to assets acquired and liabilities assumed had the following impact on the consolidated statement of income for the periods indicated below:

March 31, 

March 31, 

    

2022

    

2021

Three Months Ended

Dollars in Thousands

Adjustments to net income

Loans (1)

$

330

$

422

Time deposits (2)

 

(2)

 

(4)

Core deposit intangible (3)

(134)

(155)

Note Payable (4)

(1)

(1)

Net impact to income before taxes

$

193

$

262

(1)Loan discount accretion is included in the "Loans, including fees" section of "Interest Income" in the Consolidated Statements of Income.
(2)Time deposit discount accretion is included in the "Deposits" section of "Interest Expense" in the Consolidated Statements of Income.
(3)Core deposit intangible premium amortization is included in the "Other Expenses" section of "Non-interest Expense" in the Consolidated Statements of Income.
(4)Note payable discount accretion is included in the "Borrowings" section of "Interest Expense" in the Consolidated Statements of Income.

Note 14. Revenue Recognition

The Company follows ASU No. 2014-09 Revenue from Contracts with Customers (“Topic 606”) and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees and merchant income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

42

Table of Contents

Other Noninterest Income

Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment.

Gain or loss on sale or disposal of other assets

Gain or loss on sale of fixed assets is recorded when control of the property transfers to the buyer. Gain or loss on disposal of fixed assets is recorded when the asset is determined to no longer be in service.

Gain or loss on sale of other real estate owned

Gain or loss on sale of foreclosed properties is recorded when control of the property transfers to the buyer, which generally occurs at the time of transfer of the deed. If the Company finances the sale of a foreclosed property to the buyer, we assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed property is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer.

Note 15. Transaction with Ocean First Financial Corporation

On November 4, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OCFC and Coastal Merger Sub Corp., a Maryland corporation and a direct wholly owned subsidiary of OCFC (“Merger Sub”). Pursuant to the Agreement, Merger Sub will be merged with and into the Company, whereby the separate corporate existence of Merger Sub will cease and the Company will be the surviving corporation as a wholly owned direct subsidiary of OCFC (the “First-Step Merger”). Immediately thereafter, the Company will be merged with and into OCFC, whereby the separate corporate existence of the Company will cease and OCFC will be the surviving corporation in the merger (the “Second-Step Merger”, and together with the First-Step Merger, the “Integrated Mergers”). Immediately following the consummation of the Integrated Mergers, Delmarva will be merged with and into OceanFirst Bank N.A., the wholly owned national banking association subsidiary of OCFC (“OceanFirst”), with OceanFirst as the surviving bank (the “Delmarva Merger”). Immediately following the consummation of the Delmarva Merger, Partners will be merged with and into OceanFirst, with OceanFirst as the surviving bank (the “Partners Merger”).

At the effective time of the First-Step Merger, each share of Company common stock that is issued and outstanding immediately prior to the effective time of the First-Step Merger, other than Exception Shares (as defined in the Agreement), will be converted into the right to receive either (a) 0.4512 shares of common stock, par value $0.01 per share, of OCFC or (b) $10.00, in each case, at the election of the holder of the Company’s common stock, subject to (x) a maximum of forty percent (40%) of the shares of the Company’s common stock being convertible into cash and (y) the allocation and proration provisions of the Agreement. The mergers remain subject to receipt of all required regulatory approvals and fulfillment of other customary closing conditions.

43

Table of Contents

Note 16. Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses” (“Topic 326”): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (“SEC”) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently evaluating the potential impact of ASU 2016-13 on our consolidated financial statements. We are currently working through our implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and systems configuration, among other things. We are also in the process of working with our third-party vendor to assist us in the application of the ASU 2016-13.

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

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (“SAB”) 119. SAB 119 updated portions of SEC interpretative guidance to align with ASC 326. It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“Topic 848”). These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope”. This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is assessing ASU

44

Table of Contents

2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments, and is currently evaluating the effect that ASU 2020-04 will have on the Company’s consolidated financial statements.

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

In May 2021, the FASB issued ASU No. 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. The ASU was effective for the Company on January 1, 2022, and did not have a material impact on the Company’s consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. The Company does not expect the adoption of ASU 2021-08 to have a material impact on its consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2022-01 to have a material impact on its consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL

45

Table of Contents

model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company does not expect the adoption of ASU 2022-02 to have a material impact on its consolidated financial statements.

46

Table of Contents

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

The following discussion compares the Company’s financial condition at March 31, 2022 to its financial condition at December 31, 2021 and the results of operations for the three months ended March 31, 2022 and 2021. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto in Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and the other information included in this Quarterly Report on Form 10-Q. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or any other period.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, projections, predictions, expectations, or beliefs about future events or results that are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:

the risk that the cost savings, any revenue synergies and other anticipated benefits of the proposed merger with OceanFirst Financial Corp. (“OceanFirst”) may not be realized or may take longer than anticipated to be realized, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the condition of the economy and competitive factors in areas where OceanFirst and the Company do business;
deposit attrition, operating costs, customer losses and other disruptions to the parties’ businesses as a result of the announcement and pendency of the proposed merger, and diversion of management’s attention from ongoing business operations and opportunities;
the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement;
the risk that the integration of OceanFirst and the Company’s operations will be materially delayed or will be more costly or difficult than expected or that OceanFirst and the Company are otherwise unable to successfully integrate their businesses;
the outcome of any legal proceedings instituted against OceanFirst and/or the Company;
the failure to obtain required governmental approvals (and the risk that such governmental approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed transaction);
reputational risk and potential adverse reactions of OceanFirst and/or the Company’s customers, suppliers, employees or other business partners, including those resulting from the announcement or completion of the proposed merger;
the failure of any of the closing conditions in the merger agreement to be satisfied on a timely basis or at all;
changes in interest rates, such as volatility in yields on U.S. Treasury bonds and increases or volatility in mortgage rates;

47

Table of Contents

general business conditions, as well as conditions within the financial markets, including the impact thereon of geopolitical conflicts such as the military conflict between Russia and Ukraine;
general economic conditions, in the United States generally and particularly in the markets in which the Company operates and which its loans are concentrated, including the effects of declines in real estate values, an increase in unemployment levels and slowdowns in economic growth, including as a result of the COVID-19 pandemic;
the effect of steps the Company takes in response to the COVID-19 pandemic, the severity and duration of the pandemic and the distribution and efficacy of vaccines, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein;
legislative or regulatory changes and requirements, including further legislative and regulatory changes related to the COVID-19 pandemic;
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, and the effect of these policies on interest rates and business in our markets;
changes in the value of securities held in the Company’s investment portfolios;
changes in the quality or composition of the loan portfolios and the value of the collateral securing those loans;
changes in the level of net charge-offs on loans and the adequacy of our allowance for credit losses;
demand for loan products;
deposit flows;
the strength of the Company’s counterparties;
competition from both banks and non-banks;
demand for financial services in the Company’s market area;
reliance on third parties for key services;
changes in the commercial and residential real estate markets;
cyber threats, attacks or events;
expansion of Delmarva’s and Virginia Partners’ product offerings;
changes in accounting principles, policies and guidelines, and elections by the Company thereunder;
potential claims, damages, and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic; and
other factors, many of which are beyond the control of the Company.

Please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s 2021 Annual Report on Form 10-K and comparable sections of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (this “Quarterly Report”) and related disclosures in other filings which have been filed with the Securities and Exchange Commission (the “SEC”) and are available on the SEC’s website at www.sec.gov. All of the forward-looking statements made in this Quarterly Report are expressly qualified by the cautionary statements contained or referred to in this Quarterly Report. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Readers are cautioned not to rely too heavily on the forward-looking statements contained in this Quarterly Report. Forward-looking statements speak only as of the date they are made and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.

Overview

Partners Bancorp, a bank holding corporation, through its wholly owned subsidiaries, The Bank of Delmarva (“Delmarva”) and Virginia Partners Bank (“Virginia Partners”), each of which are commercial banking corporations, engages in general commercial banking operations, with twenty branches throughout Wicomico, Charles, Anne Arundel,

48

Table of Contents

and Worcester Counties in Maryland, Sussex County in Delaware, Camden and Burlington Counties in New Jersey, the cities of Fredericksburg and Reston, Virginia, and Spotsylvania County, Virginia.

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

There are risks inherent in all loans, so the Company maintains an allowance for credit losses to absorb probable losses on existing loans that may become uncollectible. The Company maintains this allowance for credit losses by charging a provision for credit losses as needed against our operating earnings for each period. The Company has included a detailed discussion of this process, as well as several tables describing its allowance for credit losses.

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

As previously disclosed, on November 4, 2021, the Company and OceanFirst announced that they have entered into a definitive agreement and plan of merger pursuant to which the Company will merge into OceanFirst, with OceanFirst surviving, and following which Virginia Partners and Delmarva will each successively merge with and into OceanFirst Bank, N.A., with OceanFirst Bank surviving each bank merger. The mergers remain subject to receipt of all required regulatory approvals and fulfillment of other customary closing conditions.

The ongoing COVID-19 pandemic has severely disrupted supply chains and adversely affected production, demand, sales and employee productivity across a range of industries, dramatically increased unemployment in the Company’s areas of operation and nationally, and previously resulted in orders directing the closing or limited operation of certain businesses and restrictions on public gatherings. These events affected the Company’s operations during fiscal year 2021 and the first quarter of 2022, and are expected to impact the Company’s financial results throughout the remainder of fiscal year 2022. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on the Company’s customers, employees and vendors and the nature and effect of past and future federal and state governmental and private sector responses to the pandemic, all of which are uncertain and cannot be predicted.

In connection with the ongoing COVID-19 pandemic, both Delmarva and Virginia Partners continue to follow their pandemic response plans, which were enacted in February 2020. To date, management believes that the plans have been implemented successfully. As of March 31, 2022, both Delmarva and Virginia Partners branch operations were operating under normal lobby and drive-thru hours. In addition, the majority of Delmarva’s and Virginia Partners’ employees, with a few exceptions, have shifted from remote work to returning to the office on either a full-time or hybrid basis. Delmarva and Virginia Partners continue to take necessary precautions in order to protect their staffs, customers and their families as well as their communities, and to limit the ongoing impact of the COVID-19 pandemic.

Future developments with respect to the COVID-19 pandemic are highly uncertain and cannot be predicted and new information may emerge concerning the severity of the outbreak and the actions to contain the outbreak or treat its impact, among others. Other national health concerns, including the outbreak of other contagious diseases or pandemics

49

Table of Contents

may adversely affect the Company in the future. Please refer to the “Provision and Allowance for Credit Losses” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information related to payment deferrals, concentrations in higher risk industries, and the impact on the allowance for credit losses.

The following discussion and analysis also identifies significant factors that have affected the Company’s financial position and operating results during the periods included in the consolidated financial statements accompanying this report. This management's discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report on Form 10-Q, and the other statistical information included in this Quarterly Report.

Critical Accounting Estimates

Certain critical accounting policies affect significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. These significant accounting policies are described in the notes to the consolidated financial statements included in this Quarterly Report as well as in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The accounting principles the Company follows and the methods of applying these principles conform to U.S. GAAP and general banking industry practices. The Company’s most critical accounting policy relates to the determination of the allowance for credit losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance for credit losses involves significant judgment and complexity and is based on many factors. If the financial condition of the Company’s borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for credit losses may be required. See “Provision for Credit Losses and Allowance for Credit Losses” and Note 1 and Note 3 of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Another of the Company’s critical accounting policies, with the acquisitions of Liberty in 2018 and Virginia Partners in 2019, relates to the valuation of goodwill and intangible assets. The Company accounted for the Liberty Merger and the Virginia Partners Share Exchange in accordance with ASC Topic No. 805, Business Combinations, which requires the use of the acquisition method of accounting. Under this method, assets acquired, including intangible assets, and liabilities assumed, are recorded at their fair value. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from the Liberty Merger and the Virginia Partners Share Exchange, which totaled approximately $5.2 million and $4.4 million, respectively, under the acquisition method of accounting represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings, which is limited to the amount of goodwill allocated to that reporting unit. In evaluating the goodwill on its consolidated balance sheet for impairment after the consummation date of the Liberty Merger and the Virginia Partners Share Exchange, the Company will first assess qualitative factors to determine whether it is more likely than not that the fair value of our acquired assets is less than the carrying amount of the acquired assets, as allowed under ASU 2017-04. After making the assessment based on several factors, which will include, but is not limited to, the current economic environment, the economic outlook in our markets, our financial performance and common stock value as compared to our peers, we will determine if it is more likely than not that the fair value of our assets is greater than their carrying amount and, accordingly, will determine whether impairment of goodwill should be recorded as a charge to earnings in years subsequent to the Liberty Merger and the Virginia Partners Share Exchange. This assessment was performed during the fourth quarter of 2021, and resulted in no impairment of goodwill. Depending on the severity of the economic consequences of the COVID-19 pandemic and their impact on the Company, management may determine that goodwill is required to be evaluated for impairment due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations. Management considered the impact of the COVID-19 pandemic on goodwill and determined that a triggering event had not occurred as of March 31, 2022. See Note 13 – Goodwill and Intangible Assets of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for more information related to goodwill and intangible assets.

50

Table of Contents

In addition to the Company’s policies related to the valuation of goodwill and intangible assets, ongoing accounting for acquired loans is considered a critical accounting policy. Acquired loans are classified as either PCI loans or purchased performing loans and are recorded at fair value on the date of acquisition. PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Periodically, the Company evaluates its estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for credit losses resulting in an increase to the allowance for credit losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for credit losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for credit losses established at the acquisition date for purchased performing loans, but a provision for credit losses may be required for any deterioration in these loans in future periods. The Company evaluates purchased performing loans quarterly for deterioration and records any required additional provision for credit losses.

Results of Operations

Net income attributable to the Company was $2.1 million, or $0.12 per basic and diluted share, for the three months ended March 31, 2022, a $1.0 million, or 93.5%, increase when compared to net income attributable to the Company of $1.1 million, or $0.06 per basic and diluted share, for the same period in 2021.

The Company’s results of operations for the three months ended March 31, 2022 were directly impacted by the following:

Positive Impacts:

An increase in net interest income due primarily to lower rates paid on average interest-bearing deposit balances, a decrease in average borrowings balances, an increase in average loan balances, and an increase in average investment securities balances and yields earned, which were partially offset by lower loan yields earned, an increase in average cash and cash equivalents balances, and an increase in average interest-bearing deposit balances. Net interest income was negatively impacted during the three months ended March 31, 2022 due to lower net loan fees earned related to the forgiveness of loans originated and funded under the Paycheck Protection Program (“PPP”) of the Small Business Administration; and
A significantly lower provision for credit losses due to the current economic environment and the milder impact of the COVID-19 pandemic compared to the three months ended March 31, 2021.

Negative Impacts:

A lower net interest margin (tax equivalent basis);
Lower gains on sales and calls of investment securities;
Reduced operating results from Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC and lower mortgage division fees at Delmarva;
Expenses associated with Virginia Partners’ new key hires and expansion into the Greater Washington market, including opening its new full-service branch and commercial banking office in Reston, Virginia during the third quarter of 2021, and Delmarva opening its twelfth full-service branch at 26th Street in Ocean City, Maryland during the second quarter of 2021; and

51

Table of Contents

Merger related expenses of $396 thousand were incurred during the first quarter of 2022 in connection with the Company’s pending merger with OceanFirst.

For the three months ended March 31, 2022, the Company’s annualized return on average assets, annualized return on average equity and efficiency ratio were 0.51%, 6.17% and 78.41%, respectively, as compared to 0.29%, 3.28% and 74.36%, respectively, for the same period in 2021.

The increase in net income attributable to the Company for the three months ended March 31, 2022, as compared to the same period in 2021, was driven by an increase in net interest income and a lower provision for credit losses, and was partially offset by a decrease in other income and higher other expenses and federal and state income taxes.

Financial Condition

Total assets as of March 31, 2022 were $1.69 billion, an increase of $44.3 million, or 2.7%, from December 31, 2021. Key drivers of this change were increases in cash and cash equivalents and total loans held for investment. Changes in key balance sheet components as of March 31, 2022 compared to December 31, 2021 were as follows:

Interest bearing deposits in other financial institutions as of March 31, 2022 were $308.0 million, an increase of $10.1 million, or 3.4%, from December 31, 2021. Key drivers of this change were total deposit growth outpacing total loan growth and the Company repositioning its excess liquidity in order to earn higher amounts of interest income, which were partially offset by an increase in investment securities available for sale, at fair value;
Federal funds sold as of March 31, 2022 were $24.0 million, a decrease of $4.1 million, or 14.5%, from December 31, 2021. Key drivers of this change were the aforementioned items noted in the analysis of interest bearing deposits in other financial institutions;
Investment securities available for sale, at fair value as of March 31, 2022 were $125.1 million, an increase of $3.1 million, or 2.5%, from December 31, 2021. Key drivers of this change were management of the investment securities portfolio in light of the Company's liquidity needs, which were partially offset by a higher yielding investment security being called, and an increase in unrealized losses on the investment securities available for sale portfolio;
Loans, net of unamortized discounts on acquired loans of $2.0 million as of March 31, 2022 were $1.15 billion, an increase of $36.2 million, or 3.2%, from December 31, 2021. The key driver of this change was an increase in organic growth, including growth of approximately $17.8 million in loans related to Virginia Partners’ recent expansion into the Greater Washington market, which was partially offset by forgiveness payments received of approximately $2.3 million under round two of the PPP. As of March 31, 2022, approximately $6.4 million in loans under round two of the PPP were still outstanding;
Total deposits as of March 31, 2022 were $1.49 billion, an increase of $48.6 million, or 3.4%, from December 31, 2021. Key drivers of this change were organic growth as a result of our continued focus on total relationship banking and Virginia Partners’ recent expansion into the Greater Washington market, and customers seeking the liquidity and safety of deposit accounts in light of continuing economic uncertainty surrounding the COVID-19 pandemic;
Total borrowings as of March 31, 2022 were $49.1 million, a decrease of $158 thousand, or 0.3%, from December 31, 2021. The key driver of this change was a decrease in long-term borrowings with the Federal Home Loan Bank resulting from scheduled principal curtailments; and
Total stockholders’ equity as of March 31, 2022 was $137.3 million, a decrease of $4.1 million, or 2.9%, from December 31, 2021. Key drivers of this change were an increase in accumulated other comprehensive (loss), net of tax, and cash dividends paid to shareholders, which were partially offset by the net income attributable to the Company for the three months ended March 31, 2022, the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards.

Delmarva's Tier 1 leverage capital ratio was 8.2% at March 31, 2022 as compared to 8.1% at December 31, 2021. At March 31, 2022, Delmarva's Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 11.3% and 12.6%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.6% and 12.9%, respectively, at December 31, 2021.

52

Table of Contents

Virginia Partners’ Tier 1 leverage capital ratio was 8.1% at March 31, 2022 as compared to 8.5% at December 31, 2021. At March 31, 2022, Virginia Partners’ Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 10.7% and 11.5%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.3% and 12.0%, respectively, at December 31, 2021.

As of March 31, 2022, all of the capital ratios of Delmarva and Virginia Partners continue to exceed regulatory requirements, with total risk-based capital substantially above well-capitalized regulatory requirements.

See “Capital” below for additional information about Delmarva’s and Virginia Partners’ capital ratios and requirements.

At March 31, 2022, nonperforming assets totaled $6.1 million, a decrease from December 31, 2021 balances of $9.8 million. The primary drivers of this decrease were decreases in nonaccrual loans and other real estate owned (“OREO”), net. Nonaccrual loans totaled approximately $6.1 million at March 31, 2022, as compared to $9.0 million at December 31, 2021. Loans past due 90 days or more and still accruing interest totaled $0 at March 31, 2022 and December 31, 2021, respectively. OREO, net as of March 31, 2022 totaled $0, as compared to $837 thousand at December 31, 2021. Nonperforming loans as a percentage of total assets was 0.36% at March 31, 2022, as compared to 0.54% at December 31, 2021. Nonperforming assets to total assets as of March 31, 2022 was 0.36%, as compared to 0.60% at December 31, 2021. Loans classified as TDRs totaled $6.9 million at March 31, 2022, as compared to $7.9 million at December 31, 2021, representing a decrease of $1.0 million during the first three months of 2022.  This decrease was primarily due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR.  At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers.

Net charge-offs were $156 thousand, or 0.06% of average total loans (annualized), for the three months ended March 31, 2022, as compared to $192 thousand, or 0.07% of average total loans (annualized), for the same period of 2021. The allowance for credit losses to total loans ratio was 1.26% at March 31, 2022, as compared to 1.31% at December 31, 2021. In addition to the allowance for credit losses, as of March 31, 2022 and December 31, 2021, the Company had $2.0 million and $2.3 million, respectively, in unamortized discounts on acquired loans related to the acquisitions of Liberty and Virginia Partners. This discount is amortized over the life of the remaining loans.

Summary of Return on Equity and Assets

Three Months

Ended

Year Ended

    

March 31, 

December 31, 

2022

2021

Yield on earning assets

 

3.45

%  

3.60

%

Return on average assets

 

0.51

%  

0.46

%

Return on average equity

 

6.17

%  

5.43

%

Average equity to average assets

 

8.34

%  

8.52

%

53

Table of Contents

Earnings Analysis

The Company’s primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investment securities, the Company seeks to deploy as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations. To ensure sufficient liquidity, the Company also maintains a portion of its deposits in cash and cash equivalents, government securities, interest bearing deposits in other financial institutions, and overnight loans of excess reserves (known as ‘‘Federal Funds Sold’’) to correspondent banks. The revenue which the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of the Company’s loans and deposits, as well as the profit margin (‘‘interest spread’’) and fee income which can be generated on these amounts.

Net income attributable to the Company was $2.1 million for the three months ended March 31, 2022, as compared to net income attributable to the Company of $1.1 million for the same period of 2021.

The following is a summary of the results of operations by the Company for the three months ended March 31, 2022 and 2021.

Three Months Ended

March 31, 

    

2022

    

2021

(Dollars in Thousands)

Net interest income

$

11,904

$

10,934

Provision for credit losses

 

65

 

1,740

Provision for income taxes

 

696

 

333

Noninterest income

 

1,299

 

2,258

Noninterest expense

 

10,392

 

9,844

Total income

 

14,952

 

15,658

Total expenses

 

12,902

 

14,383

Net income

 

2,050

 

1,275

Net income attributable to Partners Bancorp

2,109

1,090

Basic earnings per share

 

0.117

 

0.061

Diluted earnings per share

 

0.117

 

0.061

Interest Income and Expense – Three Months Ended March 31, 2022 and 2021

Net interest income and net interest margin

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

Net interest income in the first quarter of 2022 increased by $970 thousand, or 8.9%, when compared to the first quarter of 2021. The Company's net interest margin (tax equivalent basis) decreased to 3.01%, representing a decrease of 2 basis points for the three months ended March 31, 2022 as compared to the same period in 2021. The decrease in the net interest margin (tax equivalent basis) was primarily due to a decrease in the yields earned on average loans, due primarily to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP, and higher average balances of interest-bearing liabilities, which were partially offset by higher average balances of loans, higher average balances of and yields earned on average investment securities, and lower rates paid on average interest-bearing liabilities. The Company’s net interest margin (tax equivalent basis) was also negatively impacted by higher average balances of cash and due from banks, interest bearing deposits in other financial institutions and federal funds sold, each of which are lower yielding interest-earning assets. Total interest income increased by $242 thousand, or

54

Table of Contents

1.8%, for the three months ended March 31, 2022, while total interest expense decreased by $717 thousand, or 29.1%, both as compared to the same period in 2021.

The most significant factors impacting net interest income during the three month period ended March 31, 2022 were as follows:

Positive Impacts:

Increases in average loan balances, primarily due to organic loan growth, which was partially offset by the forgiveness of loans originated and funded under the PPP;
Increases in average investment securities balances and higher investment securities yields, primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the low interest rate environment;
Decrease in the rate paid on average interest-bearing deposit balances, primarily due to lower rates paid on average interest bearing demand, money market and time deposits, partially offset by increases in average interest-bearing deposit balances, primarily due to organic deposit growth; and
Decrease in average borrowings balances, primarily due to a decrease in the average balance of Federal Home Loan Bank advances resulting from maturities and payoffs of borrowings that were not replaced, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, the early redemption of $2.0 million in subordinated notes payable, net, in early July 2021, and offset by higher rates paid. The increase in average rates paid was primarily due to the decreases in the average balances of Federal Home Loan Bank advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, both of which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.

Negative Impacts:

Lower loan yields, primarily due to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP; and
Increases in average cash and due from banks, interest bearing deposits in other financial institutions and federal funds sold, primarily due to deposit growth outpacing loan growth, and higher yields on each.

Loans

Average loan balances increased by $72.7 million, or 6.8%, and average yields earned decreased by 0.32% to 4.61% for the three months ended March 31, 2022, as compared to the same period in 2021. The increase in average loan balances was primarily due to organic loan growth, including average growth of approximately $51.5 million in loans related to Virginia Partners’ recent expansion into the Greater Washington market, which was partially offset by the forgiveness of loans originated and funded under the PPP. Organic loan growth continued to be negatively impacted by higher pay-offs and tempered loan demand due to the uncertainty surrounding the COVID-19 pandemic. The decrease in average yields earned was primarily due to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP, pay-offs of higher yielding fixed rate loans, repricing of variable rate loans, and lower average yields on new loan originations, including loans originated under the PPP at an interest rate of 1%. Total average loans were 70.3% of total average interest-earning assets for the three months ended March 31, 2022, compared to 72.2% for the three months ended March 31, 2021.

Investment securities

Average total investment securities balances increased by $5.3 million, or 4.1%, and average yields earned increased by 0.52% to 2.07% for the three months ended March 31, 2022, as compared to the same period in 2021. The increases in average total investment securities balances and average yields earned was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, lower accelerated pre-payments on

55

Table of Contents

mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the low interest rate environment. During the first quarter of 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. Total average investment securities were 8.3% of total average interest-earning assets for the three months ended March 31, 2022, compared to 8.8% for the three months ended March 31, 2021.

Interest-bearing deposits

Average total interest-bearing deposit balances increased by $48.7 million, or 5.5%, and average rates paid decreased by 0.31% to 0.54% for the three months ended March 31, 2022, as compared to the same period in 2021, primarily due to organic deposit growth, including average growth of approximately $28.1 million in interest-bearing deposits related to Virginia Partners’ recent expansion into the Greater Washington market, and a decrease in the average rate paid on interest bearing demand, money market and time deposits due to the decline in interest rates beginning late in the first quarter of 2020 that continued until late in the fourth quarter of 2021.

Borrowings

Average total borrowings decreased by $33.2 million, or 40.3%, and average rates paid increased by 1.13% to 4.04% for the three months ended March 31, 2022, as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of Federal Home Loan Bank advances resulting from maturities and payoffs of borrowings that were not replaced, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of $2.0 million in subordinated notes payable, net, in early July 2021. The increase in average rates paid was primarily due to the decreases in the average balances of Federal Home Loan Bank advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.

Interest earned on assets and interest paid on liabilities is significantly influenced by market factors, specifically interest rate targets established by the Federal Reserve.

The Federal Open Markets Committee (“FOMC”) raised Federal Funds target rates by 25 basis points in March 2022, which was the first increase since December 2018. This increase was done in an effort to address spiraling inflation without negatively impacting economic growth. The FOMC currently projects an aggressive path of rate increases, with rate increases targeted at each of the remaining six FOMC meetings in 2022. The FOMC’s current Federal Funds target rate range is 0.25% to 0.50%. As a result, long-term interest rates have increased. The Company anticipates that the current and projected interest rate environment will lead to an expanded net interest margin for the Company. In general, the Company believes interest rate increases lead to improved net interest margins whereas interest rate decreases result in correspondingly lower net interest margins.

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

56

Table of Contents

Three Months Ended

Three Months Ended

March 31, 2022

March 31, 2021

(Dollars in Thousands)

    

Average

    

Interest/

    

    

Average

    

Interest/

    

Balance

Expense

Yield/Rate

Balance

Expense

Yield/Rate

Assets

Cash & Due From Banks

$

147,451

$

50

 

0.14

%  

$

136,573

$

31

 

0.09

%

Interest Bearing Deposits From Banks

 

138,776

 

54

 

0.16

%  

 

89,874

 

20

 

0.09

%

Taxable Securities (1)

 

104,920

 

454

 

1.75

%  

 

94,012

 

208

 

0.90

%

Tax‑exempt Securities (2)

 

29,615

 

233

 

3.19

%  

 

35,265

 

285

 

3.28

%

Total Investment Securities (1) (2)

 

134,535

 

687

 

2.07

%  

 

129,277

 

493

 

1.55

%

Federal Funds Sold

 

57,659

 

17

 

0.12

%  

 

52,272

 

10

 

0.08

%

Loans: (3)

 

  

 

  

 

 

  

 

 

Commercial and Industrial (4)

 

134,916

 

1,640

 

4.93

%  

 

178,411

 

2,400

 

5.46

%

Real Estate (4)

 

976,706

 

11,041

 

4.58

%  

 

860,218

 

10,272

 

4.84

%

Consumer (4)

 

2,691

 

35

 

5.27

%  

 

3,584

 

56

 

6.34

%

Keyline Equity (4)

 

17,941

 

160

 

3.62

%  

 

16,643

 

151

 

3.68

%

Visa Credit Card

 

 

 

%  

 

194

 

5

 

10.45

%

State and Political

 

923

 

11

 

4.83

%  

 

481

 

8

 

6.75

%

Keyline Credit

 

125

 

7

 

22.71

%  

 

136

 

12

 

35.78

%

Other Loans

 

1,204

 

2

 

0.67

%  

 

2,149

 

4

 

0.75

%

Total Loans (2)

 

1,134,506

 

12,896

 

4.61

%  

 

1,061,816

 

12,908

 

4.93

%

Allowance For Credit Losses

 

14,685

 

  

 

  

 

13,969

 

  

 

  

Unamortized Discounts on Acquired Loans

2,235

3,875

Total Loans, Net

 

1,117,586

 

  

 

  

 

1,043,972

 

  

 

  

Other Assets

 

67,864

 

  

 

  

 

72,001

 

  

 

  

Total Assets/Interest Income

$

1,663,871

$

13,704

 

  

$

1,523,969

$

13,462

 

  

Liabilities and Stockholders' Equity

 

  

 

  

 

  

 

  

 

  

 

  

Deposits In Domestic Offices

 

  

 

  

 

  

 

  

 

  

 

  

Non‑interest Bearing Demand

$

530,759

$

 

%  

$

412,816

$

 

%

Interest Bearing Demand

 

139,319

 

77

 

0.22

%  

 

126,599

 

105

 

0.34

%

Money Market Accounts

 

285,070

 

124

 

0.18

%  

 

215,745

 

190

 

0.36

%

Savings Accounts

 

143,251

 

52

 

0.15

%  

 

117,434

 

48

 

0.17

%

All Time Deposits

 

366,243

 

990

 

1.10

%  

 

425,451

 

1,516

 

1.45

%

Total Interest Bearing Deposits

 

933,883

 

1,243

 

0.54

%  

 

885,229

 

1,859

 

0.85

%

Total Deposits

 

1,464,642

 

 

 

1,298,045

 

 

Borrowings

 

26,376

 

124

 

1.91

%  

 

57,155

 

202

 

1.43

%

Notes Payable

 

22,806

 

367

 

6.53

%  

 

25,203

 

389

 

6.26

%

Lease Liability

2,114

 

15

 

2.88

%  

 

2,232

 

16

 

2.91

%

Other Liabilities

 

9,245

 

 

  

 

6,497

 

 

  

Stockholder's Equity

 

138,688

 

 

  

 

134,837

 

 

  

Total Liabilities & Equity/Interest Expense

$

1,663,871

$

1,749

 

  

$

1,523,969

$

2,466

 

  

Earning Assets/Interest Income (2)

$

1,612,927

$

13,704

 

3.45

%  

$

1,469,812

$

13,462

 

3.71

%

Interest Bearing Liabilities/Interest Expense

$

985,179

$

1,749

 

0.72

%  

$

969,819

$

2,466

 

1.03

%

Net interest income

 

  

$

11,955

 

  

 

  

$

10,996

 

  

Earning Assets/Interest Expense

 

  

 

  

 

0.44

%  

 

  

 

  

 

0.68

%

Net Interest Spread (2)

 

  

 

  

 

2.73

%  

 

  

 

  

 

2.68

%

Net Interest Margin (2)

 

  

 

  

 

3.01

%  

 

  

 

  

 

3.03

%

(1)Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which is reflected as a component of stockholder's equity.
(2)Presented on a taxable-equivalent basis using the statutory income tax rate of 21.0%. Taxable equivalent adjustment of $49 thousand and $2 thousand are included in the calculation of tax exempt income for investment interest income and loan interest income, respectively for the three months ended March 31, 2022 and $60 thousand and $2 thousand respectively, for the three months ended March 31, 2021.
(3)Loans placed on nonaccrual are included in average balances.
(4)Yields do not include the average balance of the fair value adjustment for pools of non-credit impaired loans acquired or discounts on credit impaired loans acquired.

The level of net interest income is affected primarily by variations in the volume and mix of these interest-earning assets and interest-bearing liabilities, as well as changes in interest rates. The following table shows the effect

57

Table of Contents

that these factors had on the interest earned from the Company’s interest-earning assets and interest paid on its interest-bearing liabilities for the period indicated.

Rate and Volume Analysis

Three Months Ended March 31, 2022 Versus March 31, 2021

(Dollars in Thousands)

Increase (Decrease) Due to

    

Volume

    

Yield/Rate

    

Net

Earning Assets

Loans (1)

$

884

$

(896)

$

(12)

Investment securities

 

  

 

 

Taxable

 

24

 

222

 

246

Exempt from Federal income tax

 

(46)

 

(6)

 

(52)

Federal funds sold

 

1

 

6

 

7

Other interest income

 

13

 

40

 

53

Total interest income

 

876

 

(634)

 

242

Interest Bearing Liabilities

 

  

 

  

 

  

Interest bearing deposits

 

101

 

(717)

 

(616)

Notes payable and leases

 

(37)

 

14

 

(23)

Funds purchased

 

(109)

 

31

 

(78)

Total Interest Expense

(45)

(672)

(717)

Net Interest Income

$

921

$

38

$

959

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

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

At March 31, 2022 and December 31, 2021, the Company was asset sensitive within the one-year time frame when looking at a repricing gap analysis. The cumulative gap, in an unchanged interest rate environment, as a percentage of total assets up to one year is 27.0% at March 31, 2022 and December 31, 2021. A positive gap indicates more assets than liabilities are repricing within the indicated time frame. Management believes there is more upside potential than downside risk and, based on the current and projected interest rate environment, management expects to see net interest income rise in the future.

Provision for Credit Losses and Allowance for Credit Losses

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

58

Table of Contents

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

The second part of the allowance for credit losses is determined in accordance with guidance issued by the FASB regarding impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the Company's opinion the ultimate source of repayment will be generated from the liquidation of collateral.

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

At March 31, 2022, the Company’s allowance for credit losses was $14.6 million, or 1.26% of total outstanding loans. At December 31, 2021, the Company's allowance for credit losses was $14.7 million, or 1.31% of total outstanding loans. The Company’s provision for credit losses in the first quarter of 2022 was $65 thousand, a decrease of $1.7 million, or 96.3%, when compared to the provision for credit losses of $1.7 million in the first quarter of 2021. The decrease in the provision for credit losses during the three months ended March 31, 2022, as compared to the same period of 2021, was primarily due to a reduction of qualitative adjustment factors that had previously been increased in the allowance for credit losses related to the COVID-19 pandemic and the uncertainty in the economic environment, the reversal of a specific reserve on one loan relationship due to a large principal curtailment and improved performance, and lower net charge-offs, which were partially offset by loans acquired in the Virginia Partners acquisition that have converted from acquired to originated status, and organic loan growth.

The provision for credit losses during the three months ended March 31, 2022, as well as the allowance for credit losses as of March 31, 2022, represents management’s best estimate of the impact of the COVID-19 pandemic on the ability of the Company’s borrowers to repay their loans. Management continues to carefully assess the exposure of the Company’s loan portfolio to COVID-19 pandemic related factors, economic trends and their potential effect on asset quality. As of March 31, 2022, the Company’s delinquencies and nonperforming assets had not been materially impacted by the COVID-19 pandemic. In addition, as of March 31, 2022, all of the loan balances that were approved by the Company, on a consolidated basis, for loan payment deferrals or payments of interest only have either resumed regular payments or have been paid off.

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

59

Table of Contents

The following tables illustrate the Company’s past due and nonaccrual loans at March 31, 2022 and December 31, 2021:

Past Due and Nonaccrual Loans

(Dollars in Thousands)

At March 31, 2022 and December 31, 2021

    

30 - 89 Days

    

Greater than 90 Days

    

Total

    

March 31, 2022

Past Due

Past Due

Past Due

NonAccrual

Real Estate Mortgage

Construction and land development

$

$

598

$

598

$

598

Residential real estate

716

192

908

1,107

Nonresidential

781

385

1,166

3,947

Home equity loans

45

45

Commercial

18

77

95

492

Consumer and other loans

 

6

 

 

6

 

TOTAL

$

1,566

$

1,252

$

2,818

$

6,144

    

30 - 89 Days

    

Greater than 90 Days

    

Total

    

December 31, 2021

Past Due

Past Due

Past Due

NonAccrual

Real Estate Mortgage

Construction and land development

$

$

598

$

598

$

598

Residential real estate

903

361

1,264

1,293

Nonresidential

2,915

2,915

6,486

Home equity loans

160

160

Commercial

46

77

123

584

Consumer and other loans

 

15

 

 

15

 

TOTAL

$

1,124

$

3,951

$

5,075

$

8,961

Total nonaccrual loans at March 31, 2022 were $6.1 million, which reflects a decrease of approximately $2.8 million from $9.0 million at December 31, 2021. Management believes the relationships on nonaccrual were adequately reserved at March 31, 2022. TDR’s not past due more than 90 days or on nonaccrual at March 31, 2022 amounted to $2.8 million, as compared to $3.9 million at December 31, 2021. This decrease was primarily due to five loan relationships that are no longer considered TDR’s due to restructuring of the loans subsequent to them initially being classified as a TDR.  At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers.  Total TDR’s decreased $1.0 million to $6.9 million at March 31, 2022, compared to $7.9 million at December 31, 2021. This decrease was due to the aforementioned reasons noted above for the decrease in performing TDR’s.

Nonperforming assets, defined as nonaccrual loans, loans past due 90 days or more and accruing, and OREO, net, at March 31, 2022 was $6.1 million compared to $9.8 million at December 31, 2021. The Company's ratio of nonperforming assets to total assets was 0.36% at March 31, 2022 compared to 0.60% at December 31, 2021. As noted above, there was a decrease in nonaccrual loans during the three months ended March 31, 2022. Loans past due 90 days or more and accruing were $0 as of March 31, 2022 and December 31, 2021, respectively. OREO, net decreased during the three months ended March 31, 2022 by $837 thousand. There were two properties with aggregate values of $837 thousand that were sold at a gain of $7 thousand during the first three months of 2022.

It is likely that the COVID-19 pandemic and the economic disruption related to it will continue to negatively impact the Company’s financial position and results of operations throughout the remainder of fiscal year 2022.

60

Table of Contents

The following tables provide additional information on the Company’s nonperforming assets at March 31, 2022 and December 31, 2021.

Nonperforming Assets

At March 31, 2022 and December 31, 2021

(Dollars in thousands)

March 31, 

December 31, 

    

2022

    

2021

Nonperforming assets:

Nonaccrual loans

$

6,144

$

8,961

Loans past due 90 days or more and accruing

 

 

Total nonperforming loans (NPLs)

$

6,144

$

8,961

Other real estate owned (OREO)

 

 

837

Total nonperforming assets (NPAs)

$

6,144

$

9,798

Performing TDR's and TDR's 30-89 days past due

$

2,772

$

3,922

NPLs/Total Assets

 

0.36

%  

 

0.54

%

NPAs/Total Assets

 

0.36

%  

 

0.60

%

NPAs and TDRs/Total Assets

 

0.53

%  

 

0.83

%

Allowance for credit losses/Nonaccrual Loans

237.06

%  

163.55

%

Allowance for credit losses/NPLs

 

237.06

%  

 

163.55

%

Nonperforming Loans by Type

At March 31, 2022 and December 31, 2021

(Dollars in thousands)

March 31, 

December 31, 

    

2022

    

2021

    

Real Estate Mortgage

Construction and land development

$

598

$

598

Residential real estate

1,107

1,293

Nonresidential

3,947

6,486

Home equity loans

Commercial

492

584

Consumer and other loans

 

 

Total

$

6,144

$

8,961

61

Table of Contents

The following table provides data related to loan balances and the allowance for credit losses for the three months ended March 31, 2022 and the year ended December 31, 2021.

Allowance for Credit Losses Data

(Dollars in Thousands)

At March 31, 2022 and December 31, 2021

March 31, 

December 31, 

    

2022

    

2021

Average loans outstanding

$

1,134,506

$

1,089,069

Total loans outstanding

 

1,153,364

 

1,117,195

Total nonaccrual loans

 

6,144

 

8,961

Net loans charged off

 

156

 

870

Provision for credit losses

 

65

2,323

Allowance for credit losses

 

14,565

 

14,656

Allowance as a percentage of total loans outstanding

 

1.3

%  

 

1.3

%

Net loans charged off to average loans outstanding

 

0.0

%  

 

0.1

%

Nonaccrual loans as a percentage of total loans outstanding

 

0.5

%  

 

0.8

%

Allowance as a percentage of nonaccrual loans outstanding

237.1

%  

163.6

%

The following table represents the activity of the allowance for credit losses for the three months ended March 31, 2022 and 2021 by loan type:

Allowance for Credit Losses and Recorded Investments in Financing Receivables

(Dollars in Thousands)

March 31, 2022

Real Estate Mortgage

Construction

    

    

    

    

and Land

    

Residential

    

    

Consumer

Development

Real Estate

Nonresidential

Home Equity

Commercial

and Other

Unallocated

Total

Beginning Balance

$

1,143

$

1,893

$

9,239

$

212

$

1,885

$

36

$

248

$

14,656

Charge-offs

 

 

 

(132)

 

(25)

 

(22)

 

(11)

 

 

(190)

Recoveries

 

 

21

 

5

 

2

 

4

 

2

 

 

34

Provision

 

(141)

 

(7)

 

187

 

42

 

(181)

 

5

 

160

 

65

Ending Balance

$

1,002

$

1,907

$

9,299

$

231

$

1,686

$

32

$

408

$

14,565

March 31, 2021

    

Real Estate Mortgage

Construction

    

    

    

    

and Land

    

Residential

    

    

Consumer

Development

Real Estate

Nonresidential

Home Equity

Commercial

and Other

Unallocated

Total

Beginning Balance

$

903

$

2,351

$

7,584

$

271

$

1,943

$

37

$

114

$

13,203

Charge-offs

 

(28)

(212)

(6)

(9)

 

(255)

Recoveries

 

2

51

4

6

 

63

Provision

 

151

78

1,215

(17)

51

(5)

267

 

1,740

Ending Balance

$

1,054

$

2,403

$

8,638

$

248

$

1,998

$

29

$

381

$

14,751

62

Table of Contents

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

Allocation of the Allowance for Credit Losses

At March 31, 2022 and December 31, 2021

(Dollars in thousands)

March 31, 

December 31, 

2022

2021

Percent

Percent

of

of

Loan

Total

Loan

Total

    

Balances

    

Allocation

    

Loans

    

Balances

    

Allocation

    

Loans

Real Estate Mortgage

Construction and land development

$

106,078

$

1,002

9

$

107,983

$

1,143

10

%

Residential real estate

 

211,763

 

1,907

 

18

 

201,230

 

1,893

 

18

%

Nonresidential

672,698

9,299

58

642,217

9,239

57

%

Home equity loans

31,863

231

3

30,395

212

3

%

Commercial

126,848

1,686

11

130,908

1,885

12

%

Consumer and other loans

4,114

32

0

4,462

36

0

%

Unallocated

 

 

408

 

 

 

248

 

%

$

1,153,364

$

14,565

 

100

$

1,117,195

$

14,656

 

100

%

Additional information related to net charge-offs (recoveries) is presented in the table below.

March 31, 

March 31, 

2022

2021

Net

Net

Net

Net

Charge-Offs

Average

Charge-Off

Charge-Offs

Average

Charge-Off

(Dollars in thousands)

    

(Recoveries)

    

Loans

    

Ratio

    

(Recoveries)

    

Loans

    

Ratio

Real Estate Mortgage

Construction and land development

$

$

105,290

$

$

83,756

%

Residential real estate

 

(21)

 

208,485

 

(0.01)

 

26

 

203,863

 

0.01

%

Nonresidential

127

653,543

0.02

161

582,316

0.03

%

Home equity loans

23

27,993

0.08

6

30,112

0.02

%

Commercial

18

135,372

0.01

(4)

157,549

(0.00)

%

Consumer and other loans

9

3,823

0.24

3

4,220

0.07

%

Total Loans Receivable

$

156

$

1,134,506

 

0.01

$

192

$

1,061,816

 

0.02

%

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

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

63

Table of Contents

In addition, in an effort to support the Company’s borrowers in their times of need, the Company has granted loan payment deferrals to certain borrowers, who were current on their payments prior to the COVID-19 pandemic, on a short-term basis of three to six months. At the peak, which occurred during the second quarter of 2020, the Company, on a consolidated basis, had approved loan payment deferrals or payments of interest only for 548 loans totaling $286.6 million, which represented approximately 28.8% of total loan balances outstanding. As of March 31, 2022, all of the loan balances that were approved by the Company, on a consolidated basis, for loan payment deferrals or payments of interest only have either resumed regular payments or have been paid off. As of March 31, 2022, on a consolidated basis, there were no loans outstanding with respect to which the Company has granted loan payment deferrals or payments of interest only.

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

The table below identifies these higher risk industries and the Company’s exposure to them as of March 31, 2022:

As of March 31, 2022

Loan balances

As a percentage of

outstanding

Number of loans

total loan balances

Higher Risk Industries

(dollars in thousands)

outstanding

outstanding (%)*

Hospitality (Hotels)

    

$

87,264

    

37

    

7.60

%

Amusement Services

10,127

10

0.88

Restaurants

50,786

70

4.42

Retail Commercial Real Estate

53,764

69

4.68

Movie Theatres

6,140

2

0.53

Charter Boats/Cruises

1,661

4

0.14

Commuter Services

59

4

0.01

Manufacturing/Distribution

2,471

8

0.22

Totals

$

212,272

204

18.48

%

* Excludes loans originated under the PPP of the SBA.

As of March 31, 2022, there were no loans within these higher risk industries with respect to which the Company has granted loan payment deferrals.

Noninterest Income

Noninterest Income. The Company's primary source of noninterest income is service charges on deposit accounts, mortgage banking income and other income. Sources of other noninterest income include ATM, merchant card and credit card fees, debit card income, safe deposit box income, earnings on bank owned life insurance policies and investment fees and commissions.

Noninterest income during the three months ended March 31, 2022 decreased by $959 thousand, or 42.5%, when compared to the three months ended March 31, 2021. Key changes in the components of noninterest income for the three months ended March 31, 2022, as compared to the same period in 2021, are as follows:

Service charges on deposit accounts increased by $54 thousand, or 31.9%, due primarily to increases in overdraft fees as a result of the easing of restrictions and the lifting of lockdowns in the Company’s markets of operation and Virginia Partners no longer automatically waiving overdraft fees which was previously done in an effort to provide all necessary financial support and services to its customers and communities, both as related to the ongoing COVID-19 pandemic as compared to the same period of 2021;
Gains on sales and calls of investment securities decreased by $14 thousand, or 100.0%, due primarily to Virginia Partners recording gains of $14 thousand on sales or calls of investment securities during the first quarter of 2021, as compared to recording no gains on sales or calls of investment securities during the same period of 2022;

64

Table of Contents

Mortgage banking income decreased by $877 thousand, or 75.1%, due primarily to Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC having a lower volume of loan closings as compared to the same period in 2021;
Gains on sales of other assets decreased by less than $1 thousand as a result of Delmarva selling its VISA credit card portfolio during the first quarter of 2021. There were no gains on sales of other assets for the same period of 2022; and
Other income decreased by $124 thousand, or 13.7%, due primarily to lower mortgage division fees at Delmarva, and Virginia Partners recording lower fees from its participation in a loan hedging program with a correspondent bank, which were partially offset by increases in debit card income and ATM fees and Delmarva recording higher earnings on bank owned life insurance policies due to additional purchases made in 2021.

Noninterest Expense

Noninterest Expense. Noninterest expense includes all expenses with the exception of those paid for interest on deposits and borrowings. Significant expense items included in this component are salaries and employee benefits, premises and equipment and other operating expenses.

Noninterest expense during the three months ended March 31, 2022 increased by $548 thousand, or 5.6%, when compared to the three months ended March 31, 2021. Key changes in the components of noninterest expense for the three months ended March 31, 2022, as compared to the same period in 2021, are as follows:

Salaries and employee benefits increased by $105 thousand, or 1.9%, primarily due to increases related to staffing changes, including expenses associated with Virginia Partners’ new key hires and expansion into the Greater Washington market and Delmarva opening its new full-service branch at 26th Street in Ocean City, Maryland, merit increases, stock-based compensation expense, payroll taxes and benefit costs. In addition, due to the decrease in mortgage banking income from Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC, salaries and employee benefits decreased due to a decrease in commissions expense paid;
Premises and equipment increased by $224 thousand, or 17.8%, primarily due to increases related to Delmarva opening its new full-service branch at 26th Street in Ocean City, Maryland during the second quarter of 2021 and Virginia Partners opening its new full-service branch and commercial banking office in Reston, Virginia during the third quarter of 2021;
Amortization of core deposit intangible decreased by $20 thousand, or 12.9%, primarily due to lower amortization related to the $2.7 million and $1.5 million, respectively, in core deposit intangibles recognized in the Virginia Partners and Liberty Bell Bank acquisitions;
(Gains) on other real estate owned increased by $3 thousand, or 77.6%, primarily due to gains being recorded on the sales of two properties during the first quarter of 2022, as compared to a gain being recorded on the sale of one property during the same period of 2021;
Merger related expenses increased by $396 thousand, or 100.0%, primarily due to legal fees and other costs associated with the pending merger with OceanFirst; and
Other expenses decreased by $156 thousand, or 5.3%, primarily due to lower expenses related to legal, subscriptions and publications, insurance, data and item processing, and other losses, which were partially offset by higher expenses related to advertising, printing and postage, FDIC insurance assessments, consulting, loans, Virginia Partners state franchise tax, and debit/credit/merchant card transactions.

Income Taxes

The provision for income taxes was $696 thousand during the three months ended March 31, 2022, compared to the provision for income taxes of $333 thousand during the three months ended March 31 2021, an increase of $363 thousand or 109.0%. This increase was due primarily to higher consolidated income before taxes, higher merger related expenses, which are typically non-deductible, and lower earnings on tax-exempt income, primarily tax-exempt investment securities. For the three months ended March 31, 2022, the Company’s effective tax rate was approximately 24.8% as compared to 23.4% for the same period in 2021.

65

Table of Contents

In addition, Virginia Partners is not subject to Virginia state income tax, but instead pays Virginia franchise tax. The Virginia franchise tax paid by Virginia Partners is recorded in the “Other operating expenses” line item on the Consolidated Statements of Income for the three months ended March 31, 2022 and 2021.

Financial Condition    

Interest Earning Assets

Loans. Loans typically provide higher yields than the other types of interest-earning assets, and thus one of the Company's goals is to increase loan balances. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Total gross loans, including unamortized discounts on acquired loans, averaged $1.13 billion and $1.06 billion during the three months ended March 31, 2022 and 2021, respectively.

The following table shows the composition of the loan portfolio by category at March 31, 2022 and December 31, 2021:

Composition of Loan Portfolio by Category

(Dollars in Thousands)

As of March 31, 2022 and December 31, 2021

March 31, 

December 31, 

    

2022

    

2021

Real Estate Mortgage

Construction and land development

$

106,078

$

107,983

Residential real estate

211,763

201,230

Nonresidential

672,698

642,217

Home equity loans

31,863

30,395

Commercial

126,848

130,908

Consumer and other loans

 

4,114

 

4,462

$

1,153,364

$

1,117,195

Less: Allowance for credit losses

 

(14,565)

 

(14,656)

$

1,138,799

$

1,102,539

66

Table of Contents

The following table sets forth the repricing characteristics and sensitivity to interest rate changes of the Companys loan portfolio at March 31, 2022:

Loan Maturities and Interest Rate Sensitivity

(Dollars in thousands)

    

    

Between

    

Between

    

    

One Year

One and

Five and

After

March 31, 2022

or Less

Five Years

Fifteen Years

Fifteen Years

Total

Real Estate Mortgage

Construction and land development

$

53,946

$

28,566

$

14,753

$

8,813

$

106,078

Residential real estate

42,182

97,568

41,167

30,846

211,763

Nonresidential

150,190

354,980

149,167

18,361

672,698

Home equity loans

21,009

3,733

5,457

1,664

31,863

Commercial

38,105

48,194

24,222

16,327

126,848

Consumer and other loans

 

1,062

 

1,777

 

733

542

 

4,114

Total loans receivable

$

306,494

$

534,818

$

235,499

$

76,553

$

1,153,364

Fixed-rate loans:

Real Estate Mortgage

Construction and land development

$

29,421

$

19,414

$

9,561

$

1,045

$

59,441

Residential real estate

28,715

82,783

18,846

1,136

131,480

Nonresidential

117,519

334,272

108,348

5,193

565,332

Home equity loans

10

10

Commercial

8,437

44,586

22,348

842

76,213

Consumer and other loans

 

190

 

1,774

 

648

534

 

3,146

Total fixed-rate loans

$

184,282

$

482,829

$

159,751

$

8,760

$

835,622

Floating-rate loans:

Real Estate Mortgage

Construction and land development

$

24,525

$

9,152

$

5,192

$

7,768

$

46,637

Residential real estate

13,467

14,785

22,321

29,710

80,283

Nonresidential

32,671

20,708

40,819

13,168

107,366

Home equity loans

21,009

3,733

5,457

1,654

31,853

Commercial

29,668

3,608

1,874

15,485

50,635

Consumer and other loans

 

872

 

3

 

85

8

 

968

Total floating-rate loans

$

122,212

$

51,989

$

75,748

$

67,793

$

317,742

At March 31, 2022, real estate mortgage loans included $315.1 million of owner-occupied non-farm, non-residential loans, and $314.9 million of other non-farm, non-residential loans, which is 30.8% and 30.8% of real estate mortgage loans, respectively. By comparison, at December 31, 2021, real estate mortgage loans included $287.4 million of owner-occupied non-farm, non-residential loans, and $313.8 million of other non-farm, non-residential loans, which is 29.3% and 32.0% of real estate mortgage loans, respectively. This represents an increase at March 31, 2022 of $27.8 million and $1.1 million, or 9.7% and 0.4%, in owner-occupied non-farm, non-residential loans and other non-farm, non-residential loans, respectively.

At March 31, 2022, real estate mortgage loans included $106.1 million of construction and land development loans, and $24.8 million of multi-family residential loans, which are 10.4% and 2.4% of real estate mortgage loans, respectively. By comparison, at December 31, 2021, real estate mortgage loans included $107.9 million of construction and land development loans, and $24.4 million of multi-family residential loans, which were 11.0% and 2.5% of real estate mortgage loans, respectively. This represents a decrease at March 31, 2022 of $1.8 million, or 1.7%, in construction and land development loans, and an increase at March 31, 2022 of $352 thousand, or 1.4%, in multi-family residential loans, respectively.

67

Table of Contents

Commercial real estate loans, excluding owner-occupied non-farm, non-residential loans, were 264.7% of total risk-based capital at March 31, 2022, as compared to 267.9% at December 31, 2021. Construction and land development loans were 63.0% of total risk-based capital at March 31, 2022, as compared to 64.8% at December 31, 2021.

At March 31, 2022, real estate mortgage loans included home equity loans of $31.9 million and residential real estate loans of $211.8 million, compared to $30.4 million and $201.2 million at December 31, 2021, respectively. Home equity loans increased $1.5 million, or 4.8%, during the three months ended March 31, 2022, and residential real estate loans increased $10.5 million, or 5.2%, during the three months ended March 31, 2022. At March 31, 2022, commercial loans were $126.8 million, compared to $130.9 million at December 31, 2021, a decrease of $4.1 million, or 3.1%, during the three months ended March 31, 2022.

The overall increase in loans from the year ended December 31, 2021 to March 31, 2022 was due primarily to an increase in organic growth, including growth of approximately $17.8 million in loans related to Virginia Partners’ recent expansion into the Greater Washington market, which was partially offset by forgiveness payments received of approximately $2.3 million under round two of the PPP.

Beginning late in the first quarter of 2020, both Delmarva and Virginia Partners began assisting their customers in obtaining loans under the PPP in order to further assist their communities. Delmarva had provided access for customers and noncustomers to the program, allowing individuals or businesses visiting their website to access the SBA loan application and complete the process through a third party vendor. Loans processed through Delmarva’s website were funded by other banks or outside funding sources. During round one of this program, Virginia Partners, an SBA approved lender, directly originated and funded almost 700 loans totaling approximately $64.2 million, all of which were previously pledged as collateral to the Federal Reserve Bank Discount Window under the PPP Liquidity Facility. Beginning in the fourth quarter of 2020 and continuing through the fourth quarter of 2021, Virginia Partners received forgiveness payments from the SBA related to all of these loans. As of March 31, 2022, Virginia Partners had no loans outstanding under round one of this program.

Beginning early in the first quarter of 2021, both Delmarva and Virginia Partners began assisting their customers in obtaining loans under round two of this program in an identical manner as was done by each under round one of the program. As of March 31, 2022, Virginia Partners directly originated and funded over 430 loans totaling approximately $30.9 million, none of which have been pledged as collateral to the Federal Reserve Bank Discount Window under the PPP Liquidity Facility. As of March 31, 2022, Virginia Partners had approximately $5.8 million in loans still outstanding under round two of this program. Aggregate fees, net of costs to originate, from the SBA of approximately $246 thousand will continue to be recognized in interest income over the life of these loans. Upon forgiveness of these loans, the remaining aggregate fees, net of costs to originate, will be recognized in interest income on an accelerated basis.

Investment Securities. The investment securities portfolio is a significant component of the Company's total interest-earning assets. Total investment securities averaged $134.5 million during the three months ended March 31, 2022 as compared to $129.3 million for the three months ended March 31, 2021. This represented 8.3% and 8.8% of total average interest-earning assets for the three months ended March 31, 2022 and 2021, respectively. The increase in average total investment securities for the three months ended March 31, 2022, as compared to the same period of 2021, was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the low interest rate environment. During the first quarter of 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned.

The Company classifies all of its investment securities as available for sale. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of stockholders’ equity (accumulated other comprehensive income (loss)), net of deferred taxes. At March 31, 2022 and December 31, 2021, investment securities available for sale, at fair value totaled $125.1 million and $122.0 million, respectively.

68

Table of Contents

Investment securities available for sale, at fair value increased by $3.1 million, or 2.5%, during the three months ended March 31, 2022. This increase was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, which were partially offset by a higher yielding investment security being called, and an increase in unrealized losses on the investment securities available for sale portfolio. The Company attempts to maintain an investment securities portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations. At March 31, 2022 and December 31, 2021 there were no issuers, other than the U.S. Government and its agencies, whose securities owned by the Company had a book or fair value exceeding 10% of the Company's stockholders' equity.

The following table summarizes the amortized cost and fair value of investment securities available for sale as of March 31, 2022:

Amortized Cost and Fair Value of Investment Securities

(Dollars in Thousands)

March 31, 2022

    

    

    

Gross

    

Gross

    

Amortized

Percentage

Unrealized

Unrealized

Fair

Cost

of Total

Gains

Losses

Value

Obligations of U.S. Government agencies and corporations

$

8,365

 

6.3

%  

$

$

618

$

7,747

Obligations of States and political subdivisions

 

29,502

 

22.3

%  

 

160

 

907

 

28,755

Mortgage-backed securities

 

92,450

 

69.9

%  

 

5

 

5,839

 

86,616

Subordinated debt investments

1,990

1.5

%  

24

3

2,011

$

132,307

 

100.0

%  

$

189

$

7,367

$

125,129

The following table sets forth the fair value and weighted average yields by maturity category of the investment securities available for sale portfolio as of March 31, 2022. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

March 31, 2022

Within 1 Year

1-5 Years

5-10 years

After 10 Years

Total

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

Fair

Average

Fair

Average

Fair

Average

Fair

Average

Fair

Average

Value

Yield

Value

Yield

Value

Yield

Value

Yield

Value

Yield

Obligations of U.S. Government agencies and corporations

$

 

%  

$

 

%  

$

5,520

 

1.85

%  

$

2,227

 

1.92

%  

$

7,747

 

1.87

%  

Obligations of States and political subdivisions

 

 

%  

 

3,235

 

2.89

%  

 

11,309

 

2.42

%  

 

14,211

 

2.46

%  

 

28,755

 

2.50

%  

Mortgage-backed securities

 

 

%  

 

47

 

3.41

%  

 

16,673

 

1.99

%  

 

69,896

 

1.46

%  

 

86,616

 

1.56

%  

Subordinated debt investments

%  

%  

2,011

5.54

%  

%  

2,011

5.54

%  

$

 

%  

$

3,282

 

2.90

%  

$

35,513

 

2.31

%  

$

86,334

 

1.64

%  

$

125,129

 

1.86

%  

In addition, the Company holds stock in various correspondent banks as well as the Federal Reserve Bank. The balance of these securities was $4.9 million at March 31, 2022 and December 31, 2021, respectively, an increase of $65 thousand, or 1.4%, for the three months ended March 31, 2022.

69

Table of Contents

Due to the increase in longer term interest rates and ongoing volatility in the securities markets during the three months ended March 31, 2022, the net unrealized losses in the Company’s investment securities available for sale portfolio increased by approximately $7.7 million, or 1,598.5%, to $7.2 million at March 31, 2022.

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

Interest Bearing Liabilities

Deposits. Average total deposits increased from $1.30 billion to $1.46 billion, an increase of $166.6 million, or 12.8%, for the three months ended March 31, 2022 over the average total deposits for the three months ended March 31, 2021. This increase was primarily due to organic deposit growth. At March 31, 2022, total deposits were $1.49 billion as compared to $1.44 billion at December 31, 2021, an increase of $48.6 million, or 3.4%. This increase was primarily driven by organic growth as a result of our continued focus on total relationship banking and Virginia Partners’ recent expansion into the Greater Washington market, and customers seeking the liquidity and safety of deposit accounts in light of continuing economic uncertainty surrounding the COVID-19 pandemic. Non-interest bearing demand deposits increased to $544.7 million at March 31, 2022, a $50.8 million, or 10.3%, increase from $493.9 million in non-interest bearing demand deposits at December 31, 2021, due primarily to the aforementioned items above with respect to actual and average total deposits.

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

Deposits by Category

As of March 31, 2022 and December 31, 2021

(Dollars in Thousands)

    

March 31, 

    

Percentage

    

December 31,

    

Percentage

2022

of Deposits

2021

of Deposits

Noninterest bearing demand deposits

$

544,688

 

36.52

%  

$

493,913

 

34.23

%

Interest bearing deposits:

 

  

 

  

 

  

 

  

Money market, NOW, and savings accounts

 

590,560

 

39.60

%  

 

569,707

 

39.48

%

Certificates of deposit, $250 thousand or more

102,885

6.90

%  

82,083

5.69

%

Other certificates of deposit

 

253,322

 

16.98

%  

 

297,173

 

20.60

%

Total interest bearing deposits

 

946,767

 

63.48

%  

 

948,963

 

65.77

%

Total

$

1,491,455

 

100.00

%  

$

1,442,876

 

100.00

%

The Company's loan-to-deposit ratio was 77.3% at March 31, 2022 as compared to 77.4% at December 31, 2021. Core deposits, which exclude certificates of deposit of more than $250 thousand, provide a relatively stable funding source for the Company's loan portfolio and other interest-earning assets. The Company's core deposits were $1.39 billion at March 31, 2022, an increase of $27.8 million, or 2.0%, from $1.36 billion at December 31, 2021, and excluded $102.9 million and $82.1 million in certificates of deposit of $250 thousand or more as of those dates, respectively. Management anticipates that a stable base of deposits will be the Company's primary source of funding to meet both its short-term and long-term liquidity needs in the future, and, therefore, feels that presenting core deposits provides valuable information to investors.

70

Table of Contents

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

Maturities of Certificates of Deposit

(Dollars in Thousands)

March 31, 

December 31, 

    

2022

    

2021

Three months or less

$

64,907

$

46,845

Over three months through six months

 

57,476

 

64,574

Over six months through twelve months

 

120,836

 

129,517

Over twelve months

 

112,988

 

138,320

Total

$

356,207

$

379,256

The following table provides a summary of the Company’s maturity distribution for certificates of deposit of greater than $250 thousand or more at the date indicated:

Maturities of Certificates of Deposit Greater than $250 Thousand

(Dollars in Thousands)

    

March 31, 

December 31, 

2022

2021

Three months or less

    

$

15,373

    

$

13,359

Over three months through six months

 

10,563

 

14,803

Over six months through twelve months

 

42,292

 

20,124

Over twelve months

 

34,657

 

33,797

Total

$

102,885

$

82,083

Borrowings. Borrowings at March 31, 2022 and December 31, 2021 consist primarily of long-term borrowings with the FHLB, subordinated notes payable, net, and other borrowings.

At March 31, 2022 and December 31, 2021, there were no short-term borrowings with the FHLB. At March 31, 2022, long-term borrowings with the FHLB were $26.1 million as compared to $26.3 million at December 31, 2021, a decrease of $165 thousand, or 0.6%. This decrease was primarily due to scheduled principal curtailments. These borrowings are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB.

At March 31, 2022 and December 31, 2021, subordinated notes payable, net, were $22.2 million, respectively, an increase of $12 thousand, or 0.1% related to the amortization of the debt issuance costs.

At March 31, 2022, other borrowings were $750 thousand as compared to $755 thousand at December 31, 2021, a decrease of $5 thousand, or 0.7%. This decrease was primarily due to scheduled principal curtailments on Virginia Partners note payable on 410 William Street, Fredericksburg, Virginia, partially offset by the amortization of the related discount on the note payable. In addition, Virginia Partners majority owned subsidiary, Johnson Mortgage Company, LLC, has a warehouse line of credit with another financial institution in the amount of $3.0 million, of which $120 thousand was outstanding as of March 31, 2022 and December 31, 2021, respectively.

See Note 4 – Borrowings and Notes Payable of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the Company’s subordinated notes payable, net, Virginia Partners note payable, and Johnson Mortgage Company, LLC’s warehouse line of credit.

Average total borrowings decreased by $33.2 million, or 40.3%, and average rates paid increased by 1.13% to 4.04% for the three months ended March 31, 2022, as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from

71

Table of Contents

maturities and payoffs of borrowings that were not replaced, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of $2.0 million in subordinated notes payable, net, in early July 2021. The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.

Capital

Total stockholders’ equity as of March 31, 2022 was $137.3 million, a decrease of $4.1 million, or 2.9%, from December 31, 2021. Key drivers of this change were an increase in accumulated other comprehensive (loss), net of tax, and cash dividends paid to shareholders, which were partially offset by the net income attributable to the Company for the three months ended March 31, 2022, the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards.

The Federal Reserve and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The following table presents actual and required capital ratios as of March 31, 2022 and December 31, 2021 for Delmarva and Virginia Partners under Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2022 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required for an institution to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See Note 10 – Regulatory Capital Requirements of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for a more in depth discussion of regulatory capital requirements.

72

Table of Contents

Capital Components

Capital Components

At March 31, 2022 and December 31, 2021

(Dollars in Thousands)

To Be Well

 

Capitalized

 

For Capital

Under Prompt

 

Adequacy

Corrective Action

 

Actual

Purposes

Provisions

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

As of March 31, 2022

  

  

  

  

  

  

Total Capital Ratio

 

  

 

  

 

  

 

  

 

  

 

  

(To Risk Weighted Assets)

 

  

 

  

 

  

 

  

 

  

 

  

The Bank of Delmarva

 

90,770

12.6

%  

 

75,870

10.5

%  

 

72,257

10.0

%

Virginia Partners Bank

56,666

11.5

%  

 

51,956

10.5

%  

 

49,482

10.0

%

Tier 1 Capital Ratio

 

 

  

 

 

(To Risk Weighted Assets)

 

 

  

 

 

The Bank of Delmarva

 

81,712

11.3

%  

 

61,419

8.5

%  

 

57,806

8.0

%

Virginia Partners Bank

53,003

10.7

%  

 

42,059

8.5

%  

 

39,585

8.0

%

Common Equity Tier 1 Ratio

 

 

  

 

 

(To Risk Weighted Assets)

 

 

  

 

 

The Bank of Delmarva

 

81,712

11.3

%  

 

50,580

7.0

%  

 

46,967

6.5

%

Virginia Partners Bank

53,003

10.7

%  

 

34,637

7.0

%  

 

32,163

6.5

%

Tier 1 Leverage Ratio

 

 

 

(To Average Assets)

 

 

 

The Bank of Delmarva

 

81,712

8.2

%  

 

40,079

4.0

%  

 

50,099

5.0

%

Virginia Partners Bank

53,003

8.1

%  

 

26,091

4.0

%  

 

32,614

5.0

%

To Be Well

Capitalized

For Capital

Under Prompt

Adequacy

Corrective Action

Actual

Purposes

Provisions

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

As of December 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Total Capital Ratio

 

  

 

  

 

  

 

  

 

  

 

  

(To Risk Weighted Assets)

 

  

 

  

 

  

 

  

 

  

 

  

The Bank of Delmarva

 

91,928

 

12.9

%  

 

74,963

 

10.5

%  

 

71,394

 

10.0

%

Virginia Partners Bank

56,192

12.0

%  

49,103

10.5

%  

46,765

10.0

%

Tier 1 Capital Ratio

 

(To Risk Weighted Assets)

 

The Bank of Delmarva

 

82,972

 

11.6

%  

 

60,684

 

8.5

%  

 

57,115

 

8.0

%

Virginia Partners Bank

52,844

11.3

%  

39,750

8.5

%  

37,412

8.0

%

Common Equity Tier 1 Ratio

 

(To Risk Weighted Assets)

 

The Bank of Delmarva

 

82,972

 

11.6

%  

 

49,975

 

7.0

%  

 

46,406

 

6.5

%

Virginia Partners Bank

52,844

11.3

%  

32,735

7.0

%  

30,397

6.5

%

Tier1I Leverage Ratio

 

(To Average Assets)

 

The Bank of Delmarva

 

82,972

 

8.1

%  

 

40,926

 

4.0

%  

 

51,158

 

5.0

%

Virginia Partners Bank

52,844

8.5

%  

25,009

4.0

%  

31,261

5.0

%

73

Table of Contents

Liquidity Management

Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the available for sale investment securities portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company's market area. The Company's cash and cash equivalents position, which includes funds in cash and due from banks, interest bearing deposits in other financial institutions, and federal funds sold, averaged $343.9 million during the three months ended March 31, 2022, and totaled $345.9 million at March 31, 2022, as compared to an average of $278.7 million during the three months ended March 31, 2021, and a year-end position of $338.8 million at December 31, 2021.

Also, the Company has available advances from the FHLB. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At March 31, 2022, advances available totaled approximately $410.8 million of which approximately $26.2 million had been drawn, or used for letters of credit. Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources. Subject to certain aggregation rules, FDIC deposit insurance covers the funds in deposit accounts up to $250 thousand.

Impact of Inflation

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

Accounting Standards Update

See Note 16 - Recent Accounting Pronouncements of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for details on recently issued accounting pronouncements and their expected impact on the Company’s financial statements.

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required.

ITEM 4.     CONTROLS AND PROCEDURES.

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022. There were no changes in the Company’s internal control over financial reporting as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the first three months of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

74

Table of Contents

PART II – OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS.

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

ITEM 1A.    RISK FACTORS.

During the three months ended March 31, 2022, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A. “Risk Factors” in the Company’s 2021 Annual Report on Form 10-K.

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

In November 2020 the Company’s Board of Directors approved, and the Company announced, a stock repurchase program (the “Program”). Under the Program, the Company is authorized to repurchase up to 356,000 shares of its common stock, which represented approximately 2% of its outstanding shares of common stock at the time of the Board of Directors’ approval. The Program may be limited or terminated at any time without prior notice. The Company did not repurchase any of its common stock during the quarter ended March 31, 2022.

The following table provides information with respect to purchases made by or on behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of the Company’s common stock during the first quarter of 2022.

Issuer Purchases of Equity Securities

Total Number

Maximum Number

Total Number

Average Price

of Shares Purchased as Part

Of Shares that May Yet Be

of Shares

Paid Per

of the Publicly Announced

Purchased Under the

Period

    

Purchased

    

Share

    

Plans or Programs

    

Plans or Programs

January 1, 2022 to January 31, 2022

 

 

$ -

 

255,800

February 1, 2022 to February 28, 2022

$ -

255,800

March 1, 2022 to March 31, 2022

$ -

255,800

Total

$ -

255,800

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4.      MINE SAFETY DISCLOSURES.

None.

ITEM 5.     OTHER INFORMATION.

None.

75

Table of Contents

ITEM 6. EXHIBIT

2.1

Agreement and Plan of Merger, dated as of November 4, 2021, by and among OceanFirst Financial Corp, Coastal Merger Sub Corp., and Partners Bancorp (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 4, 2021).*

3.1

Articles of Incorporation of Partners Bancorp (incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-4 (Registration No. 333-230599) filed on May 10, 2019)

3.1.1

Amendment to the Articles of Incorporation of Delmar Bancorp, dated December 20, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 20, 2019)

3.1.2

Amendment to the Articles of Incorporation of Partners Bancorp, effective as of August 19, 2020 (incorporated by reference to Exhibit 3.1.2 to the Company’s Current Report on Form 8-K filed on August 20, 2020)

3.2

Bylaws of Partners Bancorp, effective as of August 19, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on August 20, 2020)

31.1

Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer

32.1

Section 1350 Statement of Principal Executive Officer

32.2

Section 1350 Statement of Principal Financial Officer

101.INS

Inline XBRL Instance Document (embedded within the Inline XBRL document).

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File – formatted as Inline XBRL and contained in Exhibit 101.

* The schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Partners Bancorp agrees to furnish a copy of such schedules and exhibits, or any section thereof, to the SEC upon request.

76

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Partners Bancorp

(Registrant)

Date: May 13, 2022

/s/ Lloyd B. Harrison, III

Lloyd B. Harrison, III

Chief Executive Officer

(Principal Executive Officer)

Date: May 13, 2022

/s/ J. Adam Sothen

J. Adam Sothen

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

77