SEVERN BANCORP The following discussion should be read and reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations set forth inSevern Bancorp's Annual Report on Form 10-K as of and for the year endedDecember 31, 2020 . See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Quarterly Report on Form 10-Q.
The Company
The Company is a savings and loan holding company chartered as a corporation in the state ofMaryland in 1990. It conducts business primarily through three subsidiaries, the Bank, theTitle Company , and SBI.The Title Company is a real estate settlement company that handles commercial and residential real estate settlements inMaryland . SBI holds mortgages that do not meet the underwriting criteria of the Bank, and is the parent company ofCrownsville , which is doing business asAnnapolis Equity Group and acquires real estate for syndication and investment purposes. We maintained seven branches inAnne Arundel County, Maryland atJune 30, 2021 . The branches offer a full range of deposit products and we originate mortgages in the Bank's primary market ofAnne Arundel County, Maryland and, to a lesser extent, in other parts ofMaryland ,Delaware , andVirginia . As ofJune 30, 2021 , we had 175 full-time equivalent employees.
Asset Sale
OnJanuary 1, 2021 , we sold the majority of the assets of our real estate company, Hyatt Commercial, with the exception of cash and certain fixed assets. At the time of the sale, Hyatt Commercial had$1.6 million in assets,$1.1 million of which was in cash that stayed with the Company. The remainder of the net assets were sold for$334,000 and we realized a loss of approximately$34,000 .
Proposed Merger with Shore Bancshares, Inc.
OnMarch 3, 2021 , the Company and Shore entered into an agreement and plan of merger that provides that the Company will merge with and into Shore, with Shore as the surviving corporation (the "Merger"). Following the Merger, the Bank will merge with and into Shore's wholly-owned bank subsidiary,Shore United Bank , withShore United Bank as the surviving bank (the "Bank Merger"). At the effective time of the Merger, each outstanding share of the Company's common stock will be converted into the right to receive (i) 0.6207 shares of Shore common stock and (ii)$1.59 in cash, together with cash in lieu of fractional shares, if any. The merger consideration is 85% stock and 15% cash. The completion of the Merger and the Bank Merger are subject to customary closing conditions, including approval by the Company's stockholders, Shore's stockholders, and the receipt of regulatory approvals or waivers from the OCC and theBoard of Governors of theFederal Reserve System . Prior to the completion of the Bank Merger,Shore United Bank must obtain the approval of the OCC to convert to a national banking association. The Merger is expected to be completed in the fourth quarter of 2021.
Significant Developments - COVID-19
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread in different variants throughout theU.S. and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The COVID-19 pandemic in theU.S. has had a complex and significant adverse impact on the economy. To date, we have not experienced any significant adverse effects in our financial condition or results of operations due to the COVID-19 pandemic, but it may still have an adverse impact on the banking industry and the Company in future fiscal periods. 35 Table of Contents Effects on Our Market Areas Our commercial and consumer banking products and services are offered primarily inMaryland , where individual and governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity sinceMarch 2020 . InMaryland , the Governor issued a series of orders, including ordering schools to close for an indefinite period of time and an order that, subject to limited exceptions, all individuals stay at home and non-essential businesses cease all activities for an indeterminate amount of time. InMay 2021 , the Governor ofMaryland lifted all COVID-19 related restrictions and lifted the State of Emergency inMaryland effectiveJuly 1, 2021 . Due to the COVID-19 Delta Variant and the uptick in positive cases of the virus, at the beginning of August, certain local jurisdictions (includingAnne Arundel County, Maryland , our primary market area) have issued indoor mask mandates for all government buildings, libraries, and senior centers and strongly encourage mask wearing in all other indoor areas. At this time, it is unknown how long the mandates will stay in place. We have experienced an increase in unemployment levels in our market area as a result of the curtailment of business activities, the levels of which have not substantially dropped since the end of the COVID-19 related restrictions. It is unknown how far into the future to expect the unemployment levels in our market area to remain elevated.
Policy and Regulatory Developments
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
? The FRB decreased the range for the federal funds target rate in March
2020 to the current target range of 0.0% - 0.25%.
? On March 27, 2020 , the President of the U.S. signed the CARES Act,
which established a
cash payments to individuals, supplemental unemployment insurance
benefits and a $659.0 billion loan program (revised by subsequent
legislation) administered through the SBA, referred to as the PPP.
Under the PPP, small businesses, sole proprietorships, independent
contractors and self-employed individuals were able to apply forforgivable loans from existing SBA lenders and other approved regulated
lenders that enroll in the program, subject to numerous limitations and
eligibility criteria. PPP loans have an interest rate of 1.0%, a
two-year or five-year loan term to maturity, and principal and interest
payments deferred until the lender receives the applicable forgiven
amount or the end of the borrower's loan forgiveness. PPP loans are
100% guaranteed by the SBA. The Bank participates as a lender in the
PPP. In addition, the CARES Act provides financial institutions theoption to temporarily suspend certain requirements under GAAP related
to TDRs for a limited period of time to account for the effects of
COVID-19. The Consolidated Appropriations Act of 2021 extended the
period established by the CARES Act for consideration of TDR
identification to January 1, 2022 or 60 days after the date the
national COVID-19 pandemic emergency terminates.
? On April 7, 2020 , federal banking regulators issued a revisedInteragency Statement on Loan Modifications and Reporting for Financial
Institutions, which, among other things, encouraged financial
institutions to work prudently with borrowers
to meet their contractual payment obligations because of the effects of
COVID-19, and stated that institutions generally do not need to
categorize COVID-19-related modifications as TDRs and that the agencies
will not direct supervised institutions to automatically categorize all
COVID-19 related loan modifications as TDRs. On August 3, 2020 ,
Interagency Statement on Additional Loan Accommodations Related to
COVID-19 was issued that addresses loans nearing the end of their
original relief period and provides guidance for extension of such
relief period.
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? On April 9, 2020 , the FRB announced additional measures aimed atsupporting small and mid-sized businesses, as well as state and local
governments impacted by COVID-19. The FRB announced the
Business Lending Program, which established two new loan facilities
intended to facilitate lending to small and mid-sized businesses: (1)
the MSNLF and (2) the MSELF. MSNLF loans were unsecured term loans
originated on or after
as upsized tranches of existing loans originated before April 8, 2020 .
The combined size of the program was $600.0 billion . The program was
designed for businesses with up to 10,000 employees or
2019 revenues. To obtain a loan, borrowers had to confirm that they
were seeking financial support because of COVID-19 and that they would
not use proceeds from the loan to pay off debt. The FRB also stated
that it would provide additional funding to banks offering PPP loans to
help struggling small businesses. The PPPLF was created by the FRB on
institutions to small businesses under the PPP of the CARES Act. Under
the facility, the FRB lent to participating financial institutions on a
non-recourse basis, taking PPP loans as collateral. Lenders
participating in the PPP were able to exclude loans financed by the
facility from their leverage ratio. Due to our high liquidity levels,
we did not participate in the PPPLF.
The FRB also created a Municipal Liquidity Facility to support state
and local governments with up to $500.0 billion in lending, with the
Treasury Department backing $35.0 billion for the facility using fundsappropriated by the CARES Act. The facility made short-term financing
available to cities with a population of more than one million or
counties with a population of greater than two million. The FRB
expanded both the size and scope of its Primary and Secondary Market
Corporate Credit Facilities to support up to $750.0 billion in creditto corporate debt issuers. This allowed companies that were investment
grade before the onset of COVID-19 but then subsequently downgraded
after
announced that its Term Asset-Backed Securities Loan Facility would be
scaled up in scope to include the triple A-rated tranche of commercial
mortgage-backed securities and newly issued collateralized loan
obligations. The size of the facility was $100.0 billion .
Effects on Our Business
The COVID-19 pandemic and the specific developments referred to above have not
had a significant impact on our financial condition or results of operations.
The continuing pandemic could, however, continue to adversely impact a broad
range of industries in which the Company's customers operate and impair their
ability to fulfill their financial obligations to the Company. In particular, we
anticipate that a significant portion of the Bank's borrowers in the hotel,
restaurant, and retail industries could continue to endure significant economic
distress, which has caused, and may continue to cause, them to draw on their
existing lines of credit and adversely affect their ability to repay existing
indebtedness, and is expected to adversely impact the value of collateral. These
developments, together with economic conditions generally, are also expected to
impact our commercial real estate portfolio, particularly with respect to real
estate with exposure to these industries, and the value of certain collateral
securing our loans. As a result, we anticipate that our financial condition,
capital levels, and results of operations could be adversely affected. As of
June 30, 2021 , we held $4.1 million , $15.5 million , and $49.1 million in hotel,
restaurant, and retail industry loans, respectively.
Our Response
We have taken numerous steps in response to the COVID-19 pandemic, including the following:
? actively working with loan customers to evaluate prudent loan
modification terms;
? continuing to promote our digital banking options through our website.
Customers are encouraged to utilize online and mobile banking tools,
and our customer service and retail departments are fully staffed and
available to assist customers remotely;
? acted as a participating lender in both rounds of the PPP. We believe
it is our responsibility as a community bank to assist the SBA in the
distribution of funds authorized under the CARES Act and subsequent
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legislation to our customers and communities, which we have carried out
in a prudent and responsible manner. As of
diligently with customers on the loan forgiveness aspect of the program
(see "Notes to Consolidated Financial Statements - Note 3 - Loans
Receivable and the Allowance" in this Quarterly Report on Form 10-Q and
"Financial Condition - Credit Risk Management and the Allowance - TDRs"
later in this Item for more information regarding PPP loans and loan
modifications under the CARES Act); and
? closing all branches to customer activity until
drive-up and appointment only services. On
our branches to customers unrestricted except for social distancing and
masks. On
We have continued to pay all employees according to their normal work
schedule, even if their work has been reduced. No employees have beenfurloughed. Employees whose job responsibilities can be effectively
carried out remotely are working from home. Employees whose critical
duties require their continued presence on-site are observing social
distancing and cleaning protocols.
Overview
The Company provides a wide range of personal and commercial banking services.
Personal services include mortgage lending and various other lending services as
well as deposit products such as personal Internet banking and online bill pay,
checking accounts, individual retirement accounts, money market accounts, and
savings and time deposit accounts. Commercial services include commercial
secured and unsecured lending services as well as business Internet banking,
corporate cash management services, and deposit services to commercial
customers, including those in the medical-use cannabis industry. The Company
also provides ATMs, credit cards, debit cards, safe deposit boxes, and telephone
banking, among other products and services.
We have experienced increased profitability during the six months ended June
30, 2021 , primarily due to mortgage-banking activities. Additionally, we
reversed $1.1 million in provision for loan losses. Net interest income
increased $1.3 million primarily due to a declining interest rate environment,
resulting from rate reductions by the FRB in response to the COVID-19 pandemic,
which significantly reduced our interest expense. Noninterest expenses increased
for the six months ended June 30, 2021 due primarily to increased investments in
staff and increased commissions corresponding to the increased mortgage
production. Additionally, we recognized $329,000 in merger related expenses. See
discussion of pending merger above.
The Company expects to experience similar market conditions during the remainder
of 2021, provided interest rates do not increase or decrease rapidly. If
interest rates change rapidly, demand for loans may fluctuate and our interest
rate spread could change significantly. Additionally, significant changes in
interest rates could also affect the origination volumes related to our
mortgage-banking activities. We continue to manage loan and deposit pricing
against the potential risks of rising costs of our deposits and borrowings.
Interest rates are outside of our control, so we must attempt to balance the
pricing and duration of the loan portfolio against the risks of rising or
declining costs of our deposits and borrowings. The continued success and
attraction of Anne Arundel County, Maryland , and vicinity, will also be
important to our ability to originate and grow loans and deposits, as will our
continued focus on maintaining a low overhead. If volatility in the market and
the economy continues to occur, our business, financial condition, results of
operations, access to funds, and the price of our stock could be materially and
adversely impacted. Although we are still in a global pandemic, we believe the
Company is well prepared for the economic and social consequences of the
COVID-19 pandemic in future periods.
Critical Accounting Policies
Our accounting and financial reporting policies conform to GAAP and prevailing
practices within the banking industry. Accordingly, preparation of the financial
statements requires management to exercise significant judgment or discretion or
make significant assumptions and estimates based on the information available
that have, or could have, a material impact on the carrying value of certain
assets or on income. These estimates and assumptions affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the
38
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periods presented. The accounting policies we view as critical are those relating to the Allowance, the valuation of real estate acquired through foreclosure, and the valuation of deferred tax assets and liabilities. Significant accounting policies are discussed in detail in "Notes to Consolidated Financial Statements - Note 1 - Summary of Significant Account Policies" in our Annual Report on Form 10-K as of and for the year endedDecember 31, 2020 . There have been no material changes to the significant accounting policies as described in the Annual Report other than those that may be mentioned in Note 1 to the consolidated financial statements in this Quarterly Report on Form 10-Q. Disclosures regarding the effects of new accounting pronouncements are included in Note 1 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Results of OperationsNet Income Three Months EndedJune 30 : Net income remained relatively stable at$1.7 million for both the three months endedJune 30, 2021 and 2020. Basic and diluted income per share were$0.13 for the three months endedJune 30, 2021 , compared to$0.14 for the three months endedJune 30, 2020 . Six Months EndedJune 30 :
Net income increased by$3.3 million , or 144.6% to$5.6 million for the six months endedJune 30, 2021 compared to$2.3 million for the six months endedJune 30, 2020 . Basic and diluted income per share were$0.44 for the six months endedJune 30, 2021 , compared to$0.18 for the six months endedJune 30, 2020 . The increase in net income reflected increased net interest income, a decrease in provision for loan losses, and increased noninterest income, partially offset by increased noninterest expenses.
Net Interest Income
Net interest income was significantly impacted by a declining interest rate environment directly related to the COVID-19 pandemic. The abrupt decline in interest rates beginning in 2020 not only reduced interest income on our liquid assets, but it also reduced our interest expense on both deposits and borrowings. Because of the need to maintain higher levels of liquidity and delays in business investment activity due to COVID-19 disruptions, some further compression of our net interest margin is possible in future periods, but a reasonably robust recovery in business conditions should enable us to deploy our additional asset generation resources and thus reallocate some of our excess liquidity. Additionally, atJune 30, 2021 , we held$36.9 million in low-yielding PPP loans, which reduced our net interest margin. We could experience compression of our average yields, net interest spread, and net interest margin in future periods by the effect of the forgiveness aspect of the PPP loans as the recognition of the net origination fees will be accelerated once payments are received. Three Months EndedJune 30 :
Net interest income increased by$365,000 or 5.5%, to$7.0 million for the three months endedJune 30, 2021 , compared to$6.6 million for the same period of 2020 as a result of the decrease in interest expense due to the decrease in the average rate of interest-bearing liabilities and also the increase in volume of average interest-earning assets. Our net interest margin decreased from 3.22% for the three months endedJune 30, 2020 to 2.71% for the three months endedJune 30, 2021 . Six Months EndedJune 30 :
Net interest income increased by$1.3 million or 9.5%, to$14.7 million for the six months endedJune 30, 2021 , compared to$13.4 million for the same period of 2020 as a result of the decrease in interest expense due to the decrease in the average rate of interest-bearing liabilities and also the increase in volume of average interest-earning assets. Our net interest margin decreased from 3.30% for the six months endedJune 30, 2020 to 2.89% for the six months endedJune 30, 2021 . 39 Table of Contents Interest Income
Three Months Ended
Interest income decreased by$478,000 or 5.7%, to$7.9 million for the three months endedJune 30, 2021 , compared to$8.4 million for the three months endedJune 30, 2020 , due primarily to the low interest rate environment created by the COVID-19 pandemic. We experienced decreased yields in most interest-earning asset categories. The average yield on interest-earning assets decreased 100 basis points to 3.05% for the three months endedJune 30, 2021 from 4.05% for the three months endedJune 30, 2020 . Average interest-earning assets increased from$830.4 million for the three months endedJune 30, 2020 to$1.0 billion for the three months endedJune 30, 2021 , due primarily to an increase in average other interest-earning assets of$121.6 million and an increase in average total securities of$89.8 million . The increase in average other interest-earning assets resulted primarily from increased average interest-earning deposits in banks, which was the result of increased deposits from our medical-use cannabis customers. The increase in average total securities was due to utilization of excess liquidity through securities purchases during the second quarter of 2021. Average loans outstanding decreased$30.1 million as a result of significant loan payoffs in the second quarter of 2021, primarily in commercial loans due to PPP loan forgiveness. Average LHFS increased$26.3 million due to increased mortgage-banking originations.
Six Months Ended
Interest income decreased by$785,000 , or 4.5%, to$16.5 million for the six months endedJune 30, 2021 , compared to$17.3 million for the six months endedJune 30, 2020 , due primarily to the low interest rate environment created by the COVID-19 pandemic. We experienced decreased yields in all interest-earning asset categories. The average yield on interest-earning assets decreased 100 basis points to 3.25% for the six months endedJune 30, 2021 from 4.25% for the six months endedJune 30, 2020 . The average yield on other interest-earning assets decreased to 0.11% for the six months endedJune 30, 2021 from 0.66% for the six months endedJune 30, 2020 , primarily due to a change in the mix of other interest-earning asset types and the decreased rate environment. We held less CDs held for investment during the six months endedJune 30, 2021 than during the six months endedJune 30, 2020 . Average interest-earning assets increased from$816.8 million for the six months endedJune 30, 2020 to$1.0 billion for the six months endedJune 30, 2021 , due primarily to an increase in average other interest-earning assets of$118.4 million and an increase in average total securities of$78.2 million . The increase in average other interest-earning assets resulted primarily from increased average interest-earning deposits in banks due to increased deposits from our medical-use cannabis customers. The increase in average total securities was due to utilization of excess liquidity through securities purchases during the first half of 2021. Average loans outstanding decreased$20.3 million as a result of significant loan payoffs in the first half of 2021, primarily in commercial loans due to PPP loan forgiveness. Average LHFS increased$30.7 million due to increased mortgage-banking originations.
Interest Expense
Three Months Ended
Total interest expense was$873,000 for the three months endedJune 30, 2021 and$1.7 million for the three months endedJune 30, 2020 . The decrease in interest expense was primarily due to the decreased interest rate environment. The average rate on interest-bearing liabilities decreased 68 basis points from 1.24% for the three months endedJune 30, 2020 to 0.56% for the three months endedJune 30, 2021 . Average rates decreased in all interest-bearing liability categories. Partially offsetting the decrease in average rates were increased average interest-bearing liabilities which increased from$556.8 million for the three months endedJune 30, 2020 to$621.6 million for the three months endedJune 30, 2021 . The average balance of interest-bearing checking and savings accounts increased from$307.4 million for the three months endedJune 30, 2020 to$436.8 million for the three months endedJune 30, 2021 , primarily due to increases in our medical-use 40
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cannabis related accounts and increased customer savings during the ongoing pandemic. The average balance of CDs decreased from$193.8 million for the three months endedJune 30, 2020 to$154.2 million for the same period of 2021 due to runoff from maturing CDs. Average borrowings decreased$25.0 million during the three months endedJune 30, 2021 compared to the same period of 2020 due to payoffs of FHLB advances.
Six Months Ended
Total interest expense was$1.8 million for the six months endedJune 30, 2021 and$3.9 million for the six months endedJune 30, 2020 . The decrease in interest expense was primarily due to the decreased interest rate environment. The average rate on interest-bearing liabilities decreased 80 basis points from 1.38% for the six months endedJune 30, 2020 to 0.58% for the six months endedJune 30, 2021 . Average rates decreased in all interest-bearing liability categories. Partially offsetting the decrease in average rates were increased average interest-bearing liabilities which increased from$565.9 million for the six months endedJune 30, 2020 to$631.1 million for the six months endedJune 30, 2021 . The average balance of interest-bearing checking and savings accounts increased from$315.5 million for the six months endedJune 30, 2020 to$445.3 million for the six months endedJune 30, 2021 , primarily due to increases in our medical-use cannabis related accounts and increased customer savings during the ongoing pandemic. The average balance of CDs decreased from$194.8 million for the six months endedJune 30, 2020 to$155.2 million for the same period of 2021 due to runoff from maturing CDs. Average borrowings decreased$25.0 million during the six months endedJune 30, 2021 compared to the same period of 2020 due to payoffs of FHLB advances. The following tables set forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities and the resulting yields on average interest-earning assets and average rates paid on average interest-bearing liabilities. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities. Three Months Ended June 30, 2021 2020 Average Yield/ Average Yield/ Balance Interest (2) Rate (4) Balance Interest (2) Rate (4) ASSETS (dollars in thousands) Loans (1)$ 625,222 $ 7,353 4.72 %$ 655,366 $ 7,972 4.89 % LHFS 44,747 25 0.22 % 18,463 106 2.31 % AFS securities 61,861 51 0.33 % 16,021 94 2.36 % HTM securities 67,137 375 2.24 % 23,222 122 2.11 % Other interest-earning assets (3) 236,584 67 0.11 % 114,973 35 0.12 % Restricted stock investments, at cost 1,083 12 4.44 % 2,364 32 5.44 % Total interest-earning assets 1,036,634 7,883 3.05 % 830,409 8,361 4.05 % Allowance (8,462) (7,593) Cash and other noninterest-earning assets 42,680 44,868 Total assets$ 1,070,852 7,883$ 867,684 8,361 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Checking and savings$ 436,805 185 0.17 %$ 307,363 372 0.49 % Certificates of deposit 154,184 522 1.36 % 193,846 1,011 2.10 % Total interest-bearing deposits 590,989 707 0.48 % 501,209 1,383 1.11 % Borrowings 30,619 166 2.17 % 55,619 333 2.41 % Total interest-bearing liabilities 621,608 873 0.56 % 556,828 1,716 1.24 % Noninterest-bearing deposit accounts 333,625 195,283 Other noninterest-bearing liabilities 3,624 8,243 Stockholders' equity 111,995 107,330 Total liabilities and stockholders' equity$ 1,070,852 873$ 867,684 1,716 Net interest income/net interest spread$ 7,010 2.49 %$ 6,645 2.81 % Net interest margin 2.71 % 3.22 % 41 Table of Contents Six Months Ended June 30, 2021 2020 Average Yield/ Average Yield/ Balance Interest (2) Rate (4) Balance Interest (2) Rate (4) ASSETS (dollars in thousands) Loans (1)$ 629,460 $ 15,495 4.96 %$ 649,726 $ 16,212 5.02 % LHFS 46,689 127 0.55 % 15,996 204 2.56 % AFS securities 56,442 81 0.29 % 15,134 175 2.33 % HTM securities 60,606 637 2.12 % 23,744 260 2.20 % Other interest-earning assets (3) 228,206 129 0.11 % 109,794 360 0.66 % Restricted stock investments, at cost 1,140 23 4.07 % 2,398 66 5.53 % Total interest-earning assets 1,022,543 16,492 3.25 % 816,792 17,277 4.25 % Allowance (8,600) (7,374) Cash and other noninterest-earning assets 43,010 45,182 Total assets$ 1,056,953 16,492$ 854,600 17,277 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Checking and savings$ 445,323 317 0.14 %$ 315,536 1,033 0.66 % CDs 155,163 1,174 1.53 % 194,784 2,147 2.22 % Total interest-bearing deposits 600,486 1,491 0.50 % 510,320 3,180 1.25 % Borrowings 30,619 333 2.19 % 55,619 697 2.52 % Total interest-bearing liabilities 631,105 1,824 0.58 % 565,939 3,877 1.38 % Noninterest-bearing deposits 310,726 172,955 Other noninterest-bearing liabilities 4,132 8,165 Stockholders' equity 110,990 107,541 Total liabilities and stockholders' equity$ 1,056,953 1,824$ 854,600 3,877 Net interest income/net interest spread$ 14,668 2.67 %$ 13,400 2.87 % Net interest margin 2.89 % 3.30 %
Nonaccrual loans are included in average loans. Amortization of loan fees
(1) included in interest income amounted to
months ended
million for the six months ended
(2) There are no tax equivalency adjustments.
(3) Other interest-earning assets include interest-earning deposits, federal
funds sold, and CDs held for investment.
(4) Annualized.
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The "Rate/Volume Analysis" below indicates the changes in our net interest
income as a result of changes in volume and rates. We maintain an asset and
liability management policy designed to provide a proper balance between
rate-sensitive assets and rate-sensitive liabilities to attempt to optimize
interest margins while providing adequate liquidity for our anticipated needs.
Changes in interest income and interest expense that result from variances in
both volume and rates have been allocated to rate and volume changes in
proportion to the absolute dollar amounts of the change in each.
Three Months Ended June 30, Six Months Ended June 30,
2021 vs. 2020 2021 vs. 2020
Due to Variances in Due to Variances in
Rate Volume Total Rate Volume Total
Interest earned on: (dollars in thousands) Loans$ (271) $ (348) $ (619) $ (183) $ (534) $ (717) LHFS (503) 422 (81) (480) 403 (77) AFS securities (514) 471 (43) (570) 476 (94) HTM Securities 8 245 253 441 (64) 377 Other interest-earning assets (15) 47 32 (778) 547 (231) Restricted stock investments, at cost (5) (15) (20) (14) (29) (43) Total interest income (1,300) 822 (478) (1,584) 799 (785) Interest paid on: Interest-bearing deposits: Checking and savings (879) 692 (187) (1,589) 873 (716) CDs (309) (180) (489) (589) (384) (973) Total interest-bearing deposits (1,188) 512 (676) (2,178) 489 (1,689) Borrowings (29) (138) (167) (82) (282) (364) Total interest expense (1,217) 374 (843) (2,260) 207 (2,053) Net interest income$ (83) $ 448 $ 365 $ 676 $ 592 $ 1,268 Provision for Loan Losses Our loan portfolio is subject to varying degrees of credit risk and an Allowance is maintained to absorb losses inherent in our loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what we determined it was worth at the time of the granting of the loan. We monitor loan delinquencies at least monthly. All loans that are delinquent and all loans within the various categories of our portfolio as a group are evaluated. Management, with the advice and recommendation of the Company's Board of Directors, estimates an Allowance to be set aside for probable losses inherent in the loan portfolio. Included in determining the calculation are such factors as historical losses for each loan portfolio, current market value of the loan's underlying collateral, inherent risk contained within the portfolio after considering the state of the general economy, economic trends, consideration of particular risks inherent in different kinds of lending and consideration of known information that may affect loan collectability.
Three Months Ended
We recorded a reversal of provision for loan losses of$325,000 for the three months endedJune 30, 2021 and no provision for loan losses three months endedJune 30, 2020 primarily due to significant loan runoff and a reduction in required specific reserves.
Six Months Ended
We recorded a (reversal of) provision for loan losses of$(1.1 million) and$750,000 for the six months endedJune 30, 2021 and 2020, respectively. In 2020, we recorded the provision primarily due to economic factors related to the COVID-19 pandemic. In the first half of 2021, we experienced a significant drop in loan volume and a reduction in required specific reserves, which were the most significant contributors to the provision reversal. 43
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See additional information about the provision for loan losses under "Credit Risk Management and the Allowance" later in this Item.
Noninterest Income
Three Months Ended
Total noninterest income increased by$519,000 or 16.0%, to$3.8 million for the three months endedJune 30, 2021 , compared to$3.2 million for the three months endedJune 30, 2020 , with the majority of the increase from mortgage-banking revenue andTitle Company revenue. Mortgage-banking revenue increased$310,000 or 15.6%, due to the increased volume of loans originated from$80.6 million during the three months endedJune 30, 2020 to$87.6 million during the three months endedJune 30, 2021 .The Title Company generated$442,000 in revenue during the three months endedJune 30, 2021 compared to$226,000 for the three months endedJune 30, 2020 , the increase of which was due to increased settlement volumes. Servicing fee income (included in other noninterest income) increased$159,000 from$35,000 for the three months endedJune 30, 2020 to$194,000 for the same period of 2021 as the volume of loans serviced for FHLMC andFNMA increased during the second quarter of 2021. Real estate commissions decreased$123,000 and real estate management fees decreased$155,000 during the three months endedJune 30, 2021 compared to the same period of 2020 as we wound down the operations of the Bank's subsidiary,Louis Hyatt, Inc. after the Hyatt Commercial asset sale onJanuary 1, 2021 .
Six Months Ended
Total noninterest income increased by$3.2 million or 51.9%, to$9.5 million for the six months endedJune 30, 2021 , compared to$6.3 million for the six months endedJune 30, 2020 , with the majority of the increase from mortgage-banking revenue andTitle Company revenue. Mortgage-banking revenue increased$3.1 million or 84.8%, due to the increased volume of loans originated from$123.8 million during the six months endedJune 30, 2020 to$188.9 million during the six months endedJune 30, 2021 .The Title Company generated$777,000 in revenue during the six months endedJune 30, 2021 compared to$464,000 for the six months endedJune 30, 2020 , the increase of which was due to increased settlement volumes. Servicing fee income (included in other noninterest income) increased$266,000 from$68,000 for the six months endedJune 30, 2020 to$334,000 for the same period of 2021 as the volume of loans serviced for FHLMC andFNMA increased during the first half of 2021. Real estate commissions decreased$272,000 and real estate management fees decreased$320,000 during the six months endedJune 30, 2021 compared to the same period of 2020 as we wound down the operations ofLouis Hyatt, Inc.
Noninterest Expense
Three Months Ended
Total noninterest expense increased$1.2 million , or 15.8%, to$8.7 million for the three months endedJune 30, 2021 , compared to$7.5 million for the three months endedJune 30, 2020 , primarily due to increases in compensation and related expenses, internal audit and compliance fees, and merger costs related to the pending merger with Shore. Compensation and related expenses increased by$658,000 , or 12.7%, to$5.8 million for the three months endedJune 30, 2021 , compared to$5.2 million for the three months endedJune 30, 2020 . This increase was primarily due to annual salary increases, additional hirings, primarily in the mortgage-banking division, and increased commission expense that corresponds with our increased mortgage-banking volumes. Internal audit and compliance fees increased$129,000 due to increased internal audit costs. Merger expenses amounted to$91,000 for the three months endedJune 30, 2021 , primarily consisting of legal fees.
Six Months Ended
Total noninterest expense increased$1.7 million , or 11.0%, to$17.5 million for the six months endedJune 30, 2021 , compared to$15.7 million for the six months endedJune 30, 2020 , primarily due to increases in compensation and related expenses, internal audit and compliance fees, and merger costs. Compensation and related expenses increased by$1.4 million , or 13.3%, to$12.1 million for the six months endedJune 30, 2021 , compared to$10.6 million for the six months 44 Table of Contents endedJune 30, 2020 , primarily due to annual salary increases, additional hirings, and increased mortgage-banking related commission expense. Internal audit and compliance fees increased$198,000 due to increased internal audit costs. Merger expenses amounted to$329,000 for the six months endedJune 30, 2021 , primarily consisting of legal fees. Professional fees decreased$167,000 for the six months endedJune 30, 2021 compared to the same period in 2020 primarily due to decreased external audit and consulting fees in the first half of 2021. Additionally, we recognized a$34,000 loss on the sale of Hyatt Commercial during the six months endedJune 30, 2021 .
Income Tax Provision
Three Months Ended
We recorded a$699,000 tax provision on net income before income taxes of$2.4 million for the three months endedJune 30, 2021 for an effective tax rate of 28.9%, compared to an income tax provision of$658,000 on net income before income taxes of$2.4 for the three months endedJune 30, 2020 , for an effective tax rate of 27.5%.
Six Months Ended
We recorded a$2.1 million tax provision on net income before income taxes of$7.8 million for the six months endedJune 30, 2021 for an effective tax rate of 27.6%, compared to an income tax provision of$871,000 on net income before income taxes of$3.2 million for the six months endedJune 30, 2020 , for an effective tax rate of 27.5%.
Financial Condition
Total assets increased$191.1 million to$1.1 billion atJune 30, 2021 , compared to$952.6 million atDecember 31, 2020 . This increase was primarily due to a$153.2 million , or 97.8%, increase in cash and cash equivalents, to$309.8 million atJune 30, 2021 from$156.6 million atDecember 31, 2020 due primarily to increased deposits. Additionally, total securities increased$73.9 million as we redirected some of our excess liquidity in the form of securities purchases. Partially offsetting the increase in total assets was a$29.6 million decrease in total loans in the first half of 2021 as a result of significant payoffs. Total deposits increased$189.3 million , or 23.5%, to$995.7 million atJune 30, 2021 compared to$806.5 million atDecember 31, 2020 primarily due to deposits from medical-cannabis related customers, as well as to customers maintaining higher savings balances during the ongoing pandemic. Stockholders' equity increased$3.0 million to$112.6 million atJune 30, 2021 compared to$109.6 million atDecember 31, 2020 , due to net income to date for the year, partially offset by dividends paid to stockholders and the accumulated other comprehensive loss during the period.
Securities
We utilize the securities portfolio as part of our overall asset/liability management practices to enhance interest revenue while providing necessary liquidity for the funding of loan growth or deposit withdrawals. We continually monitor the credit risk associated with investments and diversify the risk in the securities portfolios. We held$21.3 million and$65.1 million in AFS securities as ofJune 30, 2021 andDecember 31, 2020 , respectively. We held$133.7 million and$15.9 million , respectively, in HTM securities as ofJune 30, 2021 andDecember 31, 2020 , respectively. Near the end of the second quarter of 2021, we transferred$118.7 million in AFS securities that had unrealized losses of$2.1 million at the time the securities were transferred. The unrealized losses at the time of transfer continue to be reported in accumulated other comprehensive loss and will be amortized over the remaining lives of the securities. Changes in current market conditions, such as interest rates and the economic uncertainties in the mortgage, housing, and banking industries impact the securities market. Quarterly, we review each security in our portfolio to determine the nature of any decline in value and evaluate if any impairment should be classified as OTTI. For the three and six months endedJune 30, 2021 , we determined that no OTTI charges were required.
All of the AFS and HTM securities that are temporarily impaired as of
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that we will not be required to sell the securities before recovery of value. As such, management considers the impairments to be temporary.
Our securities portfolio composition is as follows:
AFS HTM
June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
(dollars in thousands)
U.S. government agency notes $ 4,798 $ 6,660 $ 8,702 $ 1,986
Corporate obligations 2,033 2,034 - -
MBS 14,447 56,404 124,955 13,957
$ 21,278 $ 65,098 $ 133,657 $ 15,943
LHFS
We originate residential mortgage loans for sale on the secondary market. Such
LHFS, which are carried at fair value, amounted to
Loans
Our loan portfolio is expected to produce higher yields than investment
securities and other interest-earning assets; the absolute volume and mix of
loans and the volume and mix of loans as a percentage of total interest-earning
assets is an important determinant of our net interest margin.
The following table sets forth the composition of our loan portfolio before net
unearned loan fees:
June 30, 2021 December 31, 2020
Percent Percent
Amount of Total Amount of Total
(dollars in thousands)
Residential Mortgage $ 171,484 27.8 % $ 209,659 32.4 %
Commercial 72,073 11.7 % 63,842 9.9 %
Commercial real estate 244,563 39.6 % 243,435 37.7 %
ADC 112,814 18.3 % 112,938 17.5 %
Home equity/2nds 15,011 2.4 % 14,712 2.3 %
Consumer 1,070 0.2 %
1,485 0.2 %
Loans receivable, before net unearned fees
Total loans, net of unearned loan fees, decreased by
Credit Risk Management and the Allowance
Credit risk is the risk of loss arising from the inability of a borrower to meet
his or her obligations and entails both general risks, which are inherent in the
process of lending, and risks specific to individual borrowers. Our credit risk
is mitigated through portfolio diversification, which limits exposure to any
single customer, industry, or collateral type.
We manage credit risk by evaluating the risk profile of the borrower, repayment
sources, the nature of the underlying collateral, and other support given
current events, conditions, and expectations. We attempt to manage the risk
characteristics of our loan portfolio through various control processes, such as
credit evaluation of borrowers, establishment of lending limits, and application
of lending procedures, including the holding of adequate collateral and the
maintenance of compensating balances. However, we seek to rely primarily on the
cash flow of our borrowers as the
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principal source of repayment. Although credit policies and evaluation processes
are designed to minimize our risk, management recognizes that loan losses will
occur and the amount of these losses will fluctuate depending on the risk
characteristics of our loan portfolio, as well as general and regional economic
conditions.
Management has an established methodology to determine the adequacy of the
Allowance that assesses the risks and losses inherent in the loan portfolio. Our
Allowance methodology employs management's assessment as to the level of future
losses on existing loans based on our internal review of the loan portfolio,
including an analysis of the borrowers' current financial position, and the
consideration of current and anticipated economic conditions and their potential
effects on specific borrowers and/or lines of business. In determining our
ability to collect certain loans, we also consider the fair value of any
underlying collateral. In addition, we evaluate credit risk concentrations,
including trends in large dollar exposures to related borrowers, industry and
geographic concentrations, and economic and environmental factors. Our risk
management practices are designed to ensure timely identification of changes in
loan risk profiles; however, undetected losses may inherently exist within the
loan portfolio. The assessment aspects involved in analyzing the quality of
individual loans and assessing collateral values can also contribute to
undetected, but probable, losses. For more detailed information about our
Allowance methodology and risk rating system, see Note 3 to the Consolidated
Financial Statements.
The following table summarizes the activity in our Allowance by portfolio
segment:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(dollars in thousands)
Allowance, beginning of period $ 8,135 $ 7,918 $ 8,670 $ 7,138
Charge-offs:
Residential mortgage - - - -
Commercial - - - -
Commercial real estate - - - -
ADC - - (34) -
Home equity/2nds - - - -
Consumer (154) - (154) (15)
Total charge-offs (154) - (188) (15)
Recoveries:
Residential mortgage 2 177 67 180
Commercial 4 3 9 8
Commercial real estate 21 70 195 102
ADC - - - -
Home equity/2nds 182 1 186 3
Consumer 13 - 14 3
Total recoveries 222 251 471 296
Net recoveries 68 251 283 281(Reversal of) provision for loan losses (325)
- (1,075) 750 Allowance, end of period$ 7,878 $ 8,169 $ 7,878 $ 8,169 Loans: Period-end balance$ 613,329 $ 661,372 $ 613,329 $ 661,372 Average balance during period 625,222 655,366 629,460 649,726 Allowance as a percentage of period-end loan balance (1) 1.28 % 1.24 % 1.28 % 1.24 % Percent of average loans (annualized): (Reversal of) provision for loan losses (0.21) % - % (0.34) % 0.23 % Net recoveries 0.04 % 0.15 % 0.09 % 0.09 %
The Allowance at
loans, excluding PPP loans was 1.33%.
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The following table summarizes our allocation of the Allowance by loan segment:
June 30, 2021 December 31, 2020
Percent Percent
of Loans of Loans
Percent to Total Percent to Total
Amount of Total Loans Amount of Total Loans
(dollars in thousands)
Residential mortgage$ 1,475 18.7 % 27.8 %$ 2,259 26.0 % 32.4 % Commercial 1,762 22.4 % 11.7 % 1,670 19.3 % 9.9 % Commercial real estate 1,390 17.6 % 39.6 % 1,516 17.5 % 37.7 % ADC 2,950 37.5 % 18.3 % 2,947 34.0 % 17.5 % Home equity/2nds 183 2.3 % 2.4 % 168 1.9 % 2.3 % Consumer 1 - % 0.2 % - - % 0.2 % Unallocated 117 1.5 % - % 110 1.3 % - % Total$ 7,878 100.0 % 100.0 %$ 8,670 100.0 % 100.0 %
Based upon management's evaluation, provisions are made to maintain the
Allowance as a best estimate of inherent losses within the portfolio. The
Allowance totaled
As a result of our Allowance analysis, we recorded a reversal of provision for loan losses of$325,000 during the three months endedJune 30, 2021 . We did not record any provision or reversal of provision for loan losses during the three months endedJune 30, 2020 . We recorded a (reversal of) provision for loan losses of$(1.1 million) and$750,000 during the six months endedJune 30, 2021 and 2020, respectively. In 2020, we recorded the provision primarily due to economic factors related to the COVID-19 pandemic. In the first half of 2021, we experienced a significant drop in loan volume and specific reserves, which were the most significant contributors to the reversal of provision. We recorded net recoveries of$68,000 and$251,000 during the three months endedJune 30, 2021 and 2020, respectively, and net recoveries of$283,000 and$281,000 during the six months endedJune 30, 2021 and 2020, respectively. During the three months endedJune 30, 2021 and 2020, annualized net recoveries as a percentage of average loans outstanding amounted to 0.04% and 0.15%, respectively. During both the six months endedJune 30, 2021 and 2020, annualized net recoveries as a percentage of average loans outstanding amounted to 0.09%. The Allowance as a percentage of outstanding loans was 1.28% as ofJune 30, 2021 compared to 1.35% as ofDecember 31, 2020 . PPP loans are fully guaranteed by the SBA and, therefore, not required to have an allocated Allowance. The Allowance as a percentage of outstanding loans less PPP loans amounted to 1.37% and 1.42% atJune 30, 2021 andDecember 31, 2020 , respectively. Although management uses available information to establish the appropriate level of the Allowance, future additions or reductions to the Allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions, and other factors. As a result, our Allowance may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our Allowance and related methodology. Such agencies may require us to recognize adjustments to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as ofJune 30, 2021 and is sufficient to address the credit losses inherent in the current loan portfolio. Management will continue to evaluate the adequacy of the Allowance as more economic data becomes available and as changes within our portfolio are known. The effects of the COVID-19 pandemic may still require us to fund additional increases in the Allowance in future periods. 48 Table of Contents NPAs
Given the volatility of the real estate market, it is very important for us to have current valuations on our NPAs. Generally, we obtain appraisals or alternative valuations on NPAs annually. In addition, as part of our asset monitoring activities, we maintain a Loss Mitigation Committee that meets monthly. During these Loss Mitigation Committee meetings, all NPAs and loan delinquencies are reviewed. Additionally, loans in industries vulnerable to the effects of COVID-19 and loans that were or continue to be on interest deferral are reviewed. We also produce an NPA report which is distributed monthly to senior management and is also discussed and reviewed at the Loss Mitigation Committee meetings. This report contains all relevant data on the NPAs, including the latest appraised value (or alternative valuation vehicle) and valuation date. Accordingly, these reports identify which assets will require an updated valuation. As a result, we have not experienced any internal delays in identifying which loans/credits require updated valuations. With respect to the ordering process of appraisals, we have not experienced any delays in turnaround time nor has this been an issue over the past three years. Furthermore, we have not had any delays in turnaround time or variances thereof in our specific loan operating markets. NPAs, expressed as a percentage of total assets, totaled 0.2% atJune 30, 2021 and 0.6% atDecember 31, 2020 . The ratio of the Allowance to nonperforming loans was 638.4% atJune 30, 2021 and 197.9% atDecember 31, 2020 . The distribution of our NPAs is illustrated in the following table. We did not have any loans greater than 90 days past due and still accruing atJune 30 ,
2021 orDecember 31, 2020 . June 30, 2021 December 31, 2020 Nonaccrual Loans: (dollars in thousands) Residential mortgage $ 822 $ 4,080 Commercial real estate 210 126 ADC 47 60 Home equity/2nds 155 114 1,234 4,380 Real Estate Acquired Through Foreclosure: Commercial real estate 452 452 ADC 558 558 1,010 1,010 Total NPAs $ 2,244 $ 5,390
Nonaccrual loans totaled$1.2 million , or 0.2% of total loans, atJune 30, 2021 and$4.4 million , or 0.7% of total loans atDecember 31, 2020 . Significant activity in nonaccrual loans during the six months endedJune 30, 2021 included the addition of four loans in the amount of$187,000 to nonaccrual and the payoff of two residential mortgage loans that were in nonaccrual status atDecember 31, 2020 in the amount of$3.1 million .
Real estate acquired through foreclosure remained unchanged at
TDRs
In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. See Significant Developments - COVID-19 for information regarding the CARES Act and its effect on modifications.
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The composition of our TDRs is illustrated in the following table:
June 30, 2021 December 31, 2020
Residential mortgage: (dollars in thousands)
Nonaccrual $ 155 $ 163
<90 days past due/current 5,055 5,787
Commercial real estate:
Nonaccrual - -
<90 days past due/current 414 421
ADC:
Nonaccrual - -
<90 days past due/current 126 128
Home equity/2nds:
Nonaccrual - -
<90 days past due/current 183 190
Consumer:
Nonaccrual - -
<90 days past due/current 61 63
Totals:
Nonaccrual 155 163
<90 days past due/current 5,839 6,589
$ 5,994 $ 6,752
CARES Act Loans
In the wake of the COVID-19 pandemic, loan modification requests have been granted to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the CARES Act are met. The table below presents information related to loan modifications made in compliance with the CARES Act for the three and six months endedJune 30, 2021 :
Three Months Ended
Residential Commercial Commercial Real Estate Home Equity/2nds Consumer Total
(dollars in thousands)
Balance at beginning of
period $ 547 $ 1,415 $ 10,319 $ - $ 157 $ 12,438
Additional modifications
granted 1,457 - - - - 1,457
CARES Act modifications
returned to normal payment
status (455) (1,396) (3,843) - (157) (5,851)
Principal payments net of
draws on active deferred
loans (120) (4) (6,476) - - (6,600)
Balance at end of period $ 1,429 $ 15 $ - $ - $ - $ 1,444
Six Months Ended June 30, 2021
Residential Commercial Commercial Real Estate Home Equity/2nds Consumer Total
(dollars in thousands)
Balance at beginning of
period $ 6,009 $ 2,052 $ 14,990 $ 141 $ 158 $ 23,350
Additional modifications
granted 1,912 398 3,694 - 157 6,161
CARES Act modifications
returned to normal payment
status (455) (1,396) (3,843) - (157) (5,851)
Principal payments net of
draws on active deferred
loans (6,037) (1,039) (14,841) (141) (158) (22,216)
Balance at end of period $ 1,429 $ 15 $
- $ - $ - $ 1,444
See additional information on TDRs in Note 3 to the Consolidated Financial
Statements herein.
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Deposits
Deposits totaled $995.7 million at June 30, 2021 and $806.5 million
at December 31, 2020 . The $189.3 million increase was primarily the result of
short-term medical-use cannabis related funds (funds that have not yet actually
been used in the medical-use cannabis industry) that account holders have placed
at the Bank temporarily while looking for desired investments in the industry.
Management is aware of the short-term nature of such medical-use cannabis
related deposits and offset those funds by maintaining short-term liquidity to
meet any deposit outflows. Additionally, customers have been maintaining higher
savings balances during the ongoing pandemic.
The deposit breakdown is as follows:
June 30, 2021 December 31, 2020
Percent Percent
Balance of Total Balance of Total
(dollars in thousands)
NOW $ 190,839 19.2 % $ 106,589 13.2 %
Money market 64,362 6.5 % 191,506 23.7 %
Savings 194,951 19.6 % 63,464 7.9 %
Certificates of deposit 190,715 19.1 % 199,804 24.8 %Total interest-bearing deposits 640,867 64.4 % 561,363
69.6 % Noninterest-bearing deposits 354,855 35.6 % 245,093 30.4 % Total deposits$ 995,722 100.0 %$ 806,456 100.0 % The following table provides the maturities of CDs in amounts of$250,000 or more: June 30, 2021 December 31, 2020 Maturing in: (dollars in thousands) 3 months or less $ 5,471 $ 5,230 Over 3 months through 6 months 3,269 2,798 Over 6 months through 12 months 6,644 6,217 Over 12 months 8,527 9,575$ 23,911 $ 23,820
Total deposits with balances of$250,000 or more amounted to$593.2 million and$377.8 million atJune 30, 2021 andDecember 31, 2020 , respectively. Total uninsured deposits amounted to$512.2 million and$353.0 million atJune 30, 2021 andDecember 31, 2020 , respectively.
Borrowings
Our borrowings consist of advances from the FHLB.
The FHLB advances are available under a specific collateral pledge and security agreement, which requires that we maintain collateral for all of our borrowings equal to 30% of total assets. Our advances from the FHLB may be in the form of short-term or long-term obligations. Short-term advances have maturities for one year or less and may contain prepayment penalties. Long-term borrowings through the FHLB have original maturities up to 15 years and generally contain prepayment penalties. AtJune 30, 2021 , our total credit line with the FHLB was$333.1 million . The Bank, from time to time, utilizes the line of credit when interest rates are more favorable than obtaining deposits from the public. Our outstanding FHLB advance balance at bothJune 30, 2021 andDecember 31, 2020 was$10.0 million .
At
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The following table sets forth information concerning the interest rates and
maturity dates of the advances from the FHLB as of
Principal
Amount (in thousands) Rate Maturity
$10,000 2.19% 2022
Certain loans in the amount of
Subordinated Debentures
As of bothJune 30, 2021 andDecember 31, 2020 , the Company had outstanding$20.6 million in principal amount of 2035 Debentures. The 2035 Debentures were issued pursuant to the 2035 Indenture between the Company andWells Fargo Bank, National Association as Trustee. The 2035 Debentures pay interest quarterly at a floating rate of interest of 3-month LIBOR plus 200 basis points, and mature onJanuary 7, 2035 . Payments of principal, interest, premium and other amounts under the 2035 Debentures are subordinated and junior in right of payment to the prior payment in full of all senior indebtedness of the Company, as defined in the 2035 Indenture. The 2035 Debentures became redeemable, in whole or in part, by the Company onJanuary 7, 2010 . The 2035 Debentures were issued and sold to the Trust, of which 100% of the common equity is owned by the Company. The Trust was formed for the purpose of issuing Capital Securities to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures. The 2035 Debentures held by the Trust are the sole assets of the Trust. Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures.The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures. We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee. Under the terms of the 2035 Debentures, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing. As ofJune 30, 2021 , we were current on all interest due on the 2035 Debentures.
Capital Resources
Total stockholders' equity increased$3.0 million to$112.6 million atJune 30, 2021 compared to$109.6 million as ofDecember 31, 2020 . The increase was the result of 2021 net income to date, partially offset by dividends paid to stockholders and the accumulated other comprehensive loss during the six months endedJune 30, 2021 . Capital Adequacy
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary, actions by the 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As ofJune 30, 2021 andDecember 31, 2020 , the Bank exceeded all capital adequacy requirements to which it is subject and meets the qualifications to be considered "well capitalized." As ofJanuary 1, 2020 , the Bank elected to follow the Community Bank Leverage Ratio. See details of our capital ratios in Note 4 to the Consolidated Financial Statements. 52 Table of Contents Liquidity Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers, to fund the operations of our mortgage-banking business, as well as to meet current and planned expenditures. These cash requirements are met on a daily basis through the inflow of deposit funds, the maintenance of short-term overnight investments, maturities and calls in our securities portfolio, and available lines of credit with the FHLB, which requires pledged collateral. Fluctuations in deposit and short-term borrowing balances may be influenced by the interest rates paid, general consumer confidence, and the overall economic environment. There can be no assurances that deposit withdrawals and loan fundings will not exceed all available sources of liquidity on a short-term basis. Such a situation would have an adverse effect on our ability to originate new loans and maintain reasonable loan and deposit interest rates, which would negatively impact earnings. Our principal sources of liquidity are loan repayments, maturing investments, deposits, borrowed funds, and proceeds from loans sold on the secondary market. The levels of such sources are dependent on the Bank's operating, financing, and investing activities at any given time. We consider core deposits stable funding sources and include all deposits, except CDs of$100,000 or more. The Bank's experience has been that a substantial portion of CDs renew at time of maturity and remain on deposit with the Bank. Additionally, loan payments, maturities, deposit growth, and earnings contribute to our flow of funds. In addition to our ability to generate deposits, we have external sources of funds, which may be drawn upon when desired. The primary source of external liquidity is an available line of credit with the FHLB. The Bank's total credit availability under the FHLB's credit availability program was$333.1 million atJune 30, 2021 , of which$10.0 million was outstanding. In addition, atJune 30, 2021 , we also maintained a line of credit with a bankers' bank in the amount of$11.0 million , which we had not drawn upon. The borrowing requirements of customers include commitments which totaled$158.9 million atJune 30, 2021 . Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. We expect to fund these commitments from the sources of liquidity described above. Customer withdrawals are also a principal use of liquidity, but are generally mitigated by growth in customer funding sources, such as deposits and short-term borrowings. In addition to the foregoing, the payment of dividends is a use of cash, but is not expected to have a material effect on liquidity. As ofJune 30, 2021 , we had no material commitments for capital expenditures. Our ability to acquire deposits or borrow could be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. As ofJune 30, 2021 , we have not experienced any negative impact on our liquidity due to COVID-19. AtJune 30, 2021 , management considered the Company's liquidity level to be sufficient for the purposes of meeting our cash flow requirements. We are not aware of any undisclosed known trends, demands, commitments, or uncertainties that are reasonably likely to result in material changes in our liquidity. We anticipate that our primary sources of liquidity over the next twelve months will be from loan repayments, maturing investments, deposit growth, and borrowed funds. We believe that these sources of liquidity will be sufficient for us to meet our liquidity needs over the next twelve months.
Off-Balance Sheet Arrangements and Derivatives
We enter into off-balance sheet arrangements in the normal course of business.
These arrangements consist primarily of commitments to extend credit, lines of
credit, and letters of credit.
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Credit Commitments
Credit commitments are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates fixed at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. Our exposure to credit loss in the event of nonperformance by the borrower is the contract amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. We are not aware of any accounting loss we would incur by funding our commitments.
See detailed information on credit commitments above under "Liquidity."
Derivatives
We maintain and account for derivatives, in the form of IRLCs and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses on IRLCs forward contracts on the loan pipeline through mortgage-banking revenue in the Consolidated Statements of Income. IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan closes until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 60 days. For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of forward contracts, primarily consisting of TBA securities.
See Note 8 to the consolidated financial statements for more detailed information on our derivatives.
Inflation
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with GAAP and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. As a financial institution, virtually all of our assets and liabilities are monetary in nature and interest rates have a more significant impact on our performance than the effects of general levels of inflation. A prolonged period of inflation could cause interest rates, wages, and other costs to increase and could adversely affect our results of operations unless mitigated by a corresponding increase in our revenues. However, we believe that the impact of inflation on our operations was not material for the three and six months endedJune 30, 2021 and 2020.
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