HOWARD BA The following is a discussion of our consolidated financial condition as ofJune 30, 2021 , as compared toDecember 31, 2020 , and our results of operations for the six and three month periods endedJune 30, 2021 andJune 30, 2020 . This discussion and analysis should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes as well as the financial and statistical data appearing elsewhere in this report and in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations for any future periods. We have made, and will continue to make, various forward-looking statements with respect to financial, business and economic matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the cautionary note regarding "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this report.
In this report, unless the context suggests otherwise, references to the
"Company" refer to
Overview
Howard Bancorp, Inc. is the holding company forHoward Bank .Howard Bank was formed in 2004.Howard Bank's business has consisted primarily of originating both commercial and real estate loans secured by property in our market area. We are headquartered inBaltimore, Maryland . We consider our primary market area to be theGreater Baltimore - Washington Metropolitan Area . We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services primarily to small- and medium-sized businesses and their owners, professionals and executives, and high-net-worth individuals. Our loans are primarily funded by core deposits of customers in our market. Recent Developments
OnJuly 12, 2021 , the Company and F.N.B. Corporation ("F.N.B."), the parent company ofFirst National Bank of Pennsylvania , entered into an Agreement and Plan of Merger, pursuant to which the Company will merge with and into F.N.B. As a result of the merger, the separate corporate existence of the Company will cease and F.N.B. will continue as the surviving corporation (the "Merger"). Immediately after the Merger is completed, the Bank will merge with and intoFirst National Bank of Pennsylvania , a national association, withFirst National Bank of Pennsylvania being the surviving entity. Subject to the terms and conditions of the Merger Agreement and in connection with the Merger, holders of the Company's common stock will have the right to receive shares of F.N.B. common stock at a fixed exchange ratio of 1.80 shares of F.N.B. common stock for each share of Company common stock, plus cash in lieu of any fractional shares. The Merger is expected to be completed in early 2022, subject to approval by the Company's stockholders and receipt of required regulatory and other approvals and satisfaction of customary closing conditions.
COVID-19 Pandemic
Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary market and inthe United States as a whole. The impact of the COVID-19 pandemic is fluid and continues to evolve. The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals to contain the spread of the virus caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including our local markets. As these restrictive measures have eased, theU.S. economy 33
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continues to recover and, with the broad availability and distribution of
COVID-19 vaccines, we anticipate continued improvements in commercial and
consumer activity, our local economy, and the
While there are reasons for optimism, we recognize that our customers are experiencing varying degrees of financial distress, which we expect to continue into the second half of 2021. Commercial activity continues to improve, but has not yet returned to the levels existing before the outbreak of the pandemic, which may result in our borrowers' inability to meet their loan obligations. Economic pressures and uncertainties related to the COVID-19 pandemic have also resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. In addition, our loan portfolio includes customers in industries such as hotels, restaurants and caterers, arts / entertainment / recreation, and retail commercial real estate, all of which have been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as some consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely. In addition, due to the COVID-19 pandemic, market interest rates declined significantly, with the 10-yearTreasury bond falling to a low of 0.52% inAugust 2020 . While this rate steadily increased from its low to a high of 1.73% atMarch 31, 2021 , this rate has fallen since that time to 1.45% atJune 30, 2021 and to 1.23% atJuly 30, 2021 . Additionally, inMarch 2020 , theFederal Open Market Committee reduced the targeted federal funds interest rate range to 0% - 0.25%; this low rate was still in effect as ofJune 30, 2021 . A continuing low interest rate environment could have, possibly materially, an adverse effect on our business, financial condition, and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the ability to reach a sufficient vaccination rate to achieve herd immunity, whether such vaccinations will be effective against any resurgence of the virus, including new strains such as the Delta variant, and the ability of customers and businesses to return to, and remain in, their pre-pandemic routines. In addition, it is reasonably possible that certain significant estimates made in our financial statements could be materially and adversely affected in the near term as a result of these conditions.
Lending Operations and Accommodations to Borrowers
We actively participated in theSmall Business Administration's ("SBA") Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief and Economic Security Act ("CARES" Act), as amended and extended. Lending under the PPP commenced onApril 3, 2020 and the SBA notified lenders that PPP funds were exhausted on or aroundApril 16, 2020 . OnApril 24, 2020 , additional funds were allocated to the PPP and were available throughAugust 8, 2020 . An additional stimulus package, approved onDecember 27, 2020 , authorized additional PPP funds. While the PPP program ended onMay 31, 2021 , we are now focused on assisting our customers through the loan forgiveness process. We originated$201.0 million of PPP loans in 2020, consisting of 1,062 loans with an average loan size of$189 thousand . During the second quarter of 2021, 329 PPP loans originated in 2020, with an aggregate principal balance of$62.5 million , were forgiven. During the six months endedJune 30, 2021 , 738 loans originated in 2020, with an aggregate principal balance of$122.6 million , were forgiven. Of the 1,062 PPP loans we originated in 2020, 887 had been forgiven totaling$152.7 million throughJune 30, 2021 , representing 83.5% of the number of 2020 PPP loans and 76.0% of 2020 principal balances. After the relaunch of the program by the SBA onJanuary 19, 2021 , we originated$100.5 million of PPP loans in the first and second quarters of 2021, consisting of 591 loans with an average loan size of$170 thousand ;$4.8 million of this total were originated in the second quarter of 2021 before the program ended. Of these 2021 originations, 36 loans, with an aggregate principal balance of$2.4 million , were forgiven during the second quarter of 2021. We received processing fees from the SBA for the PPP loans originated in 2020 totaling$6.7 million , which were deferred. In addition, we deferred$782 thousand of origination costs attributable to the 2020 PPP originations. We also received processing fees from the SBA for the PPP loans originated in the first and second quarter of 2021 totaling$4.2 million , which were deferred. In addition, we also deferred$547 thousand of origination costs attributable
to
the PPP loans
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originated in the first and second quarter of 2021. The net deferred fees are
being accreted as a yield adjustment over the contractual term of the underlying
PPP loans.
PPP lending generated pretax income of $3.8 million , or $0.16 after tax per
share, in 2020. PPP loans, net of unaccreted net deferred fees, totaled $167.6
million at December 31, 2020 . PPP lending generated pretax income of $1.6
million , or $0.06 after tax per share, in the second quarter of 2021. For the
six months ended June 30, 2021 , PPP lending generated pretax income of $3.7
million , or $0.14 after tax per share. Total PPP loans, net of unaccreted net
deferred fees, were $142.7 million at June 30, 2021 .
In response to the pandemic, we also established client assistance programs,
including offering loan modifications, on a case by case basis, in the form of
payment deferrals for periods up to six months, to both commercial and retail
customers as discussed in the "Nonperforming and Problem Assets; COVID-19 Loan
Deferrals" section of this Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"). We have also temporarily ceased
making collection calls, are temporarily waiving a higher proportion of late
fees assessed for consumer loans, and have paused new foreclosure and
repossession actions. We will continue to re-evaluate these temporary actions
based on the ongoing COVID-19 pandemic. These programs may negatively impact our
revenue and other results of operations in the near term and, if not effective
in mitigating the effect of COVID-19 on our customers, may adversely affect our
business and results of operations more substantially over a longer period of
time. Current and future governmental actions may require these and other types
of customer-related responses.
The CARES Act also permits financial institutions to suspend requirements under
GAAP for certain loan modifications to borrowers affected by COVID-19 that would
otherwise be characterized as TDRs, as discussed in the "Nonperforming and
Problem Assets; COVID-19 Related Loan Deferrals" section of this MD&A.
Impact on Our Results of Operation and Financial Condition
We continue to monitor the impact of the COVID-19 pandemic on our results of operation and financial condition. While the pandemic did not have a significant impact on our financial condition during the year endedDecember 31, 2020 or the six months endedJune 30, 2021 , in the form of significant incurred losses or any communications from our borrowers that significant losses were imminent, we nevertheless determined it prudent to increase our allowance for loan and lease losses (the "allowance") by$7.9 million sinceDecember 31, 2019 (the last balance sheet date before the COVID-19 pandemic began), related to changes in qualitative factors, primarily as a result of the abrupt slowdown in commercial economic activity related to COVID-19, as well as the dramatic rise in the unemployment rate in our market area. Our allowance may also be materially impacted in future periods by the COVID-19 pandemic. In addition, due to the pandemic and the related economic fallout during the first half of 2020, including most specifically, declining stock prices at both the Company and peer banks, theFederal Reserve's significant reduction in interest rates, and other business and market considerations, we performed an interim goodwill impairment analysis as ofJune 30, 2020 . Based on this analysis, the estimated fair value of the Company was less than book value, resulting in a$34.5 million impairment charge, recorded in noninterest expense, in the second quarter of 2020. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, or liquidity position. As ofJune 30, 2021 , all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession resulting from the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by potential future loan and lease losses.
Use of Non-GAAP Financial Measures and Related Reconciliations
This report contains references to financial measures that are not defined in
GAAP. Such non-GAAP financial measures include the presentation of our tangible
book value per share, portfolio loans, and portfolio loan-related asset quality
ratios.
Management believes that the presentation of these non-GAAP financial measures
(a) provides important supplemental information that contributes to a proper
understanding of our operating performance and provides a meaningful comparison
to our peers, (b) enables a more complete understanding of factors and trends
affecting our business, and (c) allows investors to evaluate our performance in
a manner similar to management, the financial services industry, bank stock
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analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered in isolation or as an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below. Certain information in this report is presented with respect to "portfolio loans," a non-GAAP financial measure defined as total loans and leases, but excluding PPP loans. Portfolio loans is calculated by subtracting PPP loans (net of unamortized deferred fees and origination costs) from total loans and leases. We also provide certain asset quality ratios such as nonperforming loans and the allowance for loan and lease losses as a percentage of portfolio loans. We believe that the presentation of portfolio loans and the related asset quality measures provide additional useful information for purposes of evaluating our results of operations and financial condition with respect to the quarter endedJune 30, 2021 and the year endedDecember 31, 2020 when comparing to other periods, since the PPP loans are 100% guaranteed, were not subject to traditional loan underwriting standards, and a substantial portion of these loans are expected to be forgiven and repaid by the SBA within the next twelve months. We also present "tangible book value per common share." We believe that this measure is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of risk-based capital ratios. Accordingly, we believe that this non-GAAP financial measure provides information that is important to investors and that is useful in understanding our capital position and ratios. In addition, tangible book value per share is the key metric used by bank analysts in evaluating bank stock price performance. Tangible book value per common share is calculated by dividing tangible common stockholders' equity by total common shares outstanding. Tangible common stockholders' equity is calculated by subtracting goodwill and our net core deposit intangible from total stockholders' equity.
The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined under GAAP:
Tangible Book Value per Common Share
June 30, December 31, June 30, Jun 2021 vs Dec 2020
(in thousands, except share
data) 2021 2020 2020 $ Change % Change
Total stockholders' equity (GAAP)$ 303,263 $ 294,632 $ 283,281 $ 8,631 2.9 % Subtract: Goodwill 31,449 31,449 31,449 - - Core deposit intangible, net of deferred tax liability 3,501 4,393 5,358 (892) (20.3) Total subtractions 34,950 35,842 36,807$ (892) (2.5) Tangible common stockholders' equity (non-GAAP)$ 268,313 $ 258,790 $ 246,474 $ 9,523 3.7 % Total common shares outstanding at end of period 18,794,586 18,744,710 18,715,678 49,876 0.3 Book value per common share (GAAP)$ 16.14 $ 15.72 $ 15.14 $ 0.42 2.7 % Tangible book value per common share (non-GAAP)$ 14.28 $ 13.81 $ 13.17 $ 0.47 3.4 % 36 Table of Contents
Portfolio Loans and Related Asset Quality Ratios
June 30, December 31, June 30, Jun 2021 vs Dec 2020
(in thousands) 2021 2020 2020 $ Change % Change
Total loans and leases (GAAP)$ 1,942,507 $ 1,865,961 $ 1,898,630 $ 76,546 4.1 % Subtract PPP loans, net 142,660 167,639 193,719 (24,979) (14.9) Total portfolio loans (non-GAAP)$ 1,799,847 $ 1,698,322 $ 1,704,911 $ 101,525 6.0 % Nonperforming loans$ 16,219 $ 19,430 $ 18,469 As a % of: Total loans and leases (GAAP) 0.83 % 1.04 % 0.97 % Portfolio loans (non-GAAP) 0.90 1.14 1.08
Allowance for loan and lease losses
16,356 As a % of: Total loans and leases (GAAP) 0.94 % 1.03 % 0.86 % Portfolio loans (non-GAAP) 1.02 1.13 0.96 Financial Highlights
Financial highlights during the six and three months ended
We reported net income of
the six months ended
? a loss of
2020. The first six months of 2020 included a goodwill impairment charge, which
was not tax deductible, of
recorded in the second quarter of 2020.
We reported net income of
? the second quarter of 2021 compared to a net loss of
of
Our allowance was 0.94% of total loans and leases and 1.02% of portfolio loans
(a non-GAAP financial measure - refer to the section "Use of Non-GAAP Financial
? Measures and Related Reconciliations" for additional detail) at
compared to 1.03% of total loans and leases and 1.13% of portfolio loans at
No provision for credit losses was recorded during the second quarter of 2021,
compared to
? first quarter of 2021. Our total provision for credit losses for the first six
months of 2021 was
months of 2020.
Our net interest margin was 3.41% in the first six months of 2021, an increase
of 13 basis points ("bp") from the first six months of 2020, with 9 bp of the
? increase attributable to the impact of PPP loans. For the second quarter of
2021, our net interest margin was 3.39%, an increase of 17 bp from the second
quarter of 2020, with 10 bp of the increase attributable to the impact of PPP
loans.
? Total assets were
billion at
Total loans and leases were
from
? increase of
million during the quarter ended
million partially offset by a
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? Total deposits were
Our return on average assets ("ROA") and return on average equity ("ROE") were
1.07% and 9.22%, respectively, for the first six months of 2021 compared to
? negative ratios due to the impact of the goodwill impairment charge for the
first six months of 2020. Our ROA and ROE were 1.16% and 9.96%, respectively,
for the second quarter of 2021 compared to 0.99% and 8.46%, respectively for
the first quarter of 2021.
? We remained "well capitalized" by all regulatory measures at
Our book value per common share was
?
(diluted) for the first six months of 2021 were partially offset by a decrease
in accumulated other comprehensive income ("AOCI") of $0.29 per share.Our tangible book value per common share (a non-GAAP financial measure - refer
to the "Use of Non-GAAP Financial Measures and Related Reconciliations" for
? additional detail) was
per share from
first six months of 2021 partially offset by the decrease in AOCI of
share. Critical Accounting Policies Our accounting and financial reporting policies conform to GAAP and general practice within the banking industry. These policies require management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. In reviewing and understanding financial information for us, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. Certain accounting measurements inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. The accounting policies we view as requiring the most significant estimates, our critical accounting policies, are those relating to the allowance for loan and lease losses, the valuation of goodwill and other intangible assets, and income taxes. These critical accounting policies and the significant assumptions and estimates made by management related to them are more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Our significant accounting policies are discussed in the "Notes to Consolidated Financial Statements - Note 1: Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no material changes to the significant accounting policies or critical accounting policies as described in the Annual Report on Form 10-K for the year endedDecember 31, 2020 . Disclosures regarding the effects of new accounting pronouncements are included in Note
1 of this report. Financial Condition
A comparison between
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General
Total assets increased $61.6 million , or 2.4%, to $2.60 billion at June 30, 2021
compared to $2.54 billion at December 31, 2020 . Our asset growth consisted
primarily of increases in our total loans and leases of $76.5 million , with
$101.5 million of this growth in portfolio loans, which excludes PPP loans (a
non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures
and Related Reconciliations" for additional detail), while PPP loans decreased
$25.0 million . The primary source of funding our net asset growth was deposits.
Total deposits increased by $50.1 million , including an increase in customer
deposits of $97.5 million . Borrowings increased by $5.1 million , primarily as a
result of an increase of $5.0 million in Federal Home Loan Bank of Atlanta
("FHLB") borrowings. Total stockholders' equity increased by $8.6 million due
primarily to net income of $13.7 million partially offset by a decrease of$5.5 million in AOCI.Investment Securities
The following table sets forth the composition of our investment securities portfolio at the dates indicated.
(in thousands) June 30, 2021 December 31, 2020 2021 vs. 2020
Amortized Estimated Amortized Estimated $ Change in
Cost Fair Value Cost Fair Value Fair Value % Change
Available for sale
U.S. Government
Agencies $ 41,257 $ 42,144 $ 48,297 $ 49,605 $ (7,461) (15.0) %
Mortgage-backed 317,380 316,470 310,289 316,672 (202) (0.1)
Other investments 9,008 9,259 9,008 9,120 139 1.5
$ 367,645 $ 367,873 $ 367,594 $ 375,397 $ (7,524) (2.0) %
Held to maturity
Corporate debentures $ 6,000 $ 6,028 $ 7,250 $ 7,235 $ (1,207) (16.7) % Available for sale
Our available for sale securities are reported at fair value. At bothJune 30, 2021 andDecember 31, 2020 , we heldU.S. agency debentures, mortgage backed securities ("MBS"), and corporate debentures. This portfolio is used primarily to provide sufficient liquidity to fund our loans and provide funds for withdrawals of deposits. In addition, this portfolio is used as collateral for borrowings such as commercial customer overnight securities sold under agreement to repurchase ("repurchase agreements") and as a source of earnings. AtJune 30, 2021 andDecember 31, 2020 ,$242.3 million and$226.2 million in fair value of available for sale securities, respectively, were pledged as collateral for both repurchase agreements and deposits of local government entities that require pledged collateral as a condition of maintaining these deposit accounts. Available for sale securities were$367.9 million atJune 30, 2021 , a decrease of$7.5 million , or 2.0% fromDecember 31, 2020 . Available for sale securities, at amortized cost, were$367.6 million atJune 30, 2021 , a$51 thousand increase fromDecember 31, 2020 . Our available for sale securities portfolio contained 59 securities with unrealized losses of$3.2 million atJune 30, 2021 , and 11 securities with unrealized losses of$58 thousand atDecember 31, 2020 . Changes in the fair value of these securities resulted primarily from interest rate fluctuations. We neither intend to sell these securities nor is it more likely than not that we would be required to sell these securities before their anticipated recovery. Furthermore, we believe the collection of the investment and related interest is probable. Based on this analysis, we do not consider any of the unrealized losses to be other-than-temporary impairment. Note 2 to our Condensed Consolidated Financial Statements provides more detail concerning the composition of our portfolio and our process for evaluating the portfolio for other-than-temporary impairment. 39 Table of Contents Held to maturity Held to maturity securities are reported at amortized cost. The only investments that we have classified as held to maturity are certain corporate debentures. These investments are intended to be held until maturity. There was one held to maturity security in an unrealized loss position of$2 thousand atJune 30, 2021 , compared to three securities in an unrealized loss position totaling$32 thousand atDecember 31, 2020 . Based on our analysis of these securities, we do not consider the unrealized losses to be other-than-temporary impairment. We had two held to maturity securities totaling$1.5 million called in the first six months of 2021. Note 2 to our Condensed Consolidated Financial Statements provides more detail concerning the composition of our portfolio and our process for evaluating the portfolio for other-than-temporary impairment.
We held an investment in stock of the FHLB atJune 30, 2021 andDecember 31, 2020 of$9.0 million and$10.6 million , respectively. This investment is required for continued FHLB membership and is based partially upon the amount of borrowings outstanding from the FHLB. This FHLB stock is carried at cost which approximates fair value. Loan and Lease Portfolio
Total loans and leases (hereinafter referred to as "loans") increased$76.5 million , or 4.1%, to$1.94 billion atJune 30, 2021 from$1.87 billion atDecember 31, 2020 . AtJune 30, 2021 , PPP loans totaled$142.7 million , a$25.0 million decrease fromDecember 31, 2020 . We originated$100.5 million of PPP loans during the first six months of 2021 while PPP loans forgiven totaled$125.0 million during the first six months of 2021. Our portfolio loans, which exclude PPP loans (a non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures and Related Reconciliations" section for additional detail), increased by$101.5 million , or 6.0%, to$1.80 billion atJune 30, 2021 from$1.70 billion atDecember 31, 2020 . The$101.5 million increase in portfolio loans was primarily driven by growth in commercial real estate loans ("CRE"), residential real estate first lien loans ("residential mortgage"), commercial loans and leases ("C&I"), and consumer loans. Loan originations and purchases of$284.3 million during the first six months of 2021 were partially offset by$182.8 million in loan maturities, payoffs, partial paydowns, and lower line utilization. Residential mortgage loans were up$27.5 million , or 7.2%, with secondary market loan purchases of$91.7 million partially offset by$64.2 million of prepayments. C&I loans were up$23.7 million , or 7.1%, CRE loans were up$32.0 million , or 4.3%, and consumer loans were up$21.4 million , or 33.4%, reflecting continued success in some niche lending activities. The following table sets forth the composition of our loan portfolio at the dates indicated. June 30, 2021 December 31, 2020 (in thousands) Total % of Total Total % of Total $ Change % Change Real estate Construction and land$ 118,442 6.1 %$ 116,675 6.3 %$ 1,767 1.5 % Residential - first lien 408,340 21.1 380,865 20.4 27,475 7.2 Residential - junior lien 55,192 2.8 60,002 3.2 (4,810) (8.0) Total residential real estate 463,532 23.9 440,867 23.6 22,665 5.1 Commercial - owner occupied 252,344 13.0 251,061 13.5 1,283 0.5 Commercial - non-owner occupied 522,374 26.9 491,630 26.3 30,744 6.3 Total commercial real estate 774,718 39.9 742,691 39.8 32,027 4.3 Total real estate loans 1,356,692 69.9 1,300,233 69.7 56,459 4.3 Commercial loans and leases (1) 357,761 18.4 334,086 17.9 23,675 7.1 Consumer 85,394 4.4 64,003 3.4 21,391 33.4 Total portfolio loans (2) 1,799,847 92.7 1,698,322 91.0 101,525 6.0 Paycheck protection program (PPP) loans 142,660 7.3 167,639
9.0 (24,979) (14.9)
Total loans and leases
(1) Includes equipment financing leases of
December 31, 2020 , respectively 40 Table of Contents
(2) Denotes a non-GAAP measure - refer to the section "Use of Non-GAAP Financial
Measures and Related Reconciliations" for additional detail
Interest-Bearing Deposits with Banks
Interest-bearing deposits with banks, primarily with theFederal Reserve Bank of Richmond , were$59.8 million atJune 30, 2021 , a decrease of$5.4 million from$65.2 million atDecember 31, 2020 . Since theBoard of Governors of theFederal Reserve System reduced the reserve requirement to zero percent inMarch 2020 due to COVID-19, we continue to actively manage our interest-bearing deposits with banks at levels lower than they were prior to the pandemic.
Deposits
Total deposits were$2.03 billion atJune 30, 2021 , a$50.1 million , or 2.5%, increase from$1.98 billion atDecember 31, 2020 . Customer deposits, which excludes brokered and other non-customer deposits, were up$97.5 million , or 5.7%, atJune 30, 2021 , compared toDecember 31, 2020 . Low-cost, non-maturity deposits increased by$115.6 million , or 7.8%, atJune 30, 2021 , compared toDecember 31, 2020 .$95.9 million of the growth was in transaction accounts (noninterest-bearing demand and interest-bearing checking), with$101.6 million of the transaction account growth in noninterest-bearing demand deposits. The increase in non-maturity deposits was partially offset by the continued managed decline in customer CD balances, down$47.9 million , or 20.4%, atJune 30, 2021 , compared toDecember 31, 2020 . The Company continues to manage for lower retention rates on maturing CDs with substantially higher rates than current market rates. Our strategy is to not offer above-market renewal rates on non-transactional, non-relationship deposits. Brokered and other non-customer deposits were$231.8 million atJune 30, 2021 , a decrease of$47.4 million when compared to$279.2 million atDecember 31, 2020 . Non-customer deposits are currently our lowest-cost incremental funding source.
The following table sets forth the distribution of total deposits, by account type, at the dates indicated.
June 30, 2021 December 31, 2020
% of % of
(in thousands) Amount Total Amount Total $ Change % ChangeNoninterest-bearing demand$ 778,388 38.5 %$ 676,801 34.2 %$ 101,587 15.0 % Interest-bearing checking 209,079 10.3 214,717 11.1 (5,638) (2.6) Total transaction accounts 987,467 48.8
891,518 45.3 95,949 10.8 Money market accounts 438,366 21.6 439,510 22.2 (1,144) (0.3) Savings 180,756 8.9 159,914 8.1 20,842 13.0 Total nonmaturity deposits 1,606,589 79.3 1,490,942 75.6 115,647 7.8 Certificates of deposit$250 and over 36,818 1.8 51,918 2.6 (15,100) (29.1) Certificates of deposit under$250 382,150 18.9 432,554 21.8 (50,404) (11.7) Total certificates of deposit 418,968 20.7
484,472 24.4 (65,504) (13.5) Total deposits$ 2,025,557 100.0 %$ 1,975,414 100.0 %$ 50,143 2.5 % By deposit source: Customer deposits$ 1,793,777 88.6 %$ 1,696,260 85.9 %$ 97,517 5.7 %
Brokered and other non-customer deposits 231,780 11.4
279,154 14.1 (47,374) (17.0) Total deposits$ 2,025,557 100.0 %$ 1,975,414 100.0 %$ 50,143 2.5 % FHLB Advances Our primary source of non-deposit funding is FHLB advances. We use a variety of term structures in order to manage liquidity and interest rate risk. FHLB advances were$205.0 million atJune 30, 2021 , an increase of$5.0 million fromDecember 31, 2020 . As ofJune 30, 2021 ,$200.0 million of FHLB advances have maturities beyond one year. 41 Table of Contents Stockholders' Equity Total stockholders' equity was$303.3 million atJune 30, 2021 , an$8.6 million increase from$294.6 million atDecember 31, 2020 . The increase in stockholders' equity was primarily the result of net income of$13.7 million for the first six months of 2021, partially offset by a$5.5 million decrease in AOCI, which represents the after tax impact of changes in the fair value of available-for-sale securities. The decline in the fair value of available-for-sale securities was the result of the increase in intermediate and long-term treasury yields fromDecember 31, 2020 toJune 30, 2021 . Book value per common share was$16.14 atJune 30, 2021 , an increase of$0.42 per share sinceDecember 31, 2020 , with diluted EPS of$0.72 for the first six months of 2021 partially offset by a decrease in AOCI of$0.29 per share. Tangible stockholders' equity (a non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures and Related Reconciliations" section for additional detail), which deducts goodwill and other intangible assets (net of any applicable deferred tax liabilities), was$268.3 million atJune 30, 2021 . This compares to$258.8 million atDecember 31, 2020 , with the$9.5 million increase primarily due to net income of$13.7 million for the first six months of 2021 and the$892 thousand after tax effect of core deposit intangible amortization, partially offset by the decrease in AOCI of$5.5 million . Tangible book value per common share (a non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures and Related Reconciliations" section for additional detail), which divides tangible stockholders' equity by the number of shares outstanding, was$14.28 per share atJune 30, 2021 , an increase of$0.47 per share sinceDecember 31, 2020 . The increase is attributable to diluted EPS of$0.72 per share for the first six months of 2021 and the effect of core deposit intangible amortization of$0.05 per share partially offset by a decrease in AOCI of$0.29 per share.
Results of Operations
A comparison of the six months ended
We reported net income of$13.7 million , or$0.73 per basic and$0.72 per diluted common share, for the six months endedJune 30, 2021 , compared to a net loss of$26.1 million , or a loss of$1.39 per both basic and diluted common share, for the six months endedJune 30, 2020 . Net income increased by$39.7 million , or$2.12 per basic and$2.11 per diluted common share, in the first six months of 2021 when compared to the first six months of 2020, primarily as a result of the following:
The first six months of 2020 included a goodwill impairment charge, which was
? not tax deductible, of
share in 2021), recorded in the second quarter of 2020.
A
2021 when compared to the first six months of 2020 (an EPS increase of
? after tax per share in 2021); the provision for credit losses in the first half
of 2020 was significantly higher as we increased our allowance for loan and
lease losses in response to the initial impacts of the pandemic.
PPP loan pretax income of
? compared to
second quarter of 2020.
The first six months of 2020 included
? attributable to the departure of our former CFO (an EPS increase of
tax per share in 2021), recorded in the first quarter of 2020; there was no
comparable item in the first six months of 2021.
The first six months of 2020 included a
? increase of
of 2020; there was no comparable item in the first six months of 2021.
42
Table of Contents
The first six months of 2020 included a
? FHLB advances (an EPS increase of
in the second quarter of 2020; there was no comparable item in the first six
months of 2021.
These items were partially offset by:
The first six months of 2020 included an income tax benefit of
? EPS decrease of
2020, resulting from a net operating loss carryback provision in the CARES Act;
there was no comparable item in the first six months of 2021.
The first six months of 2020 included
? decrease of
in the first six months of 2021.
The first six months of 2020 included
? decrease of
activities, which were concluded in the first six months of 2020.
Net Interest Income
Net interest income for the first six months of 2021 was$39.8 million , an increase of$4.1 million from the first six months of 2020. Our net interest margin was 3.41% for the first six months of 2021, an increase of 13 bp from 3.28% for the first six months of 2020. Average earning assets for the first six months of 2021 were$2.35 billion , an increase of$163.1 million , or 7.5%, from the first six months of 2020. Total interest income decreased by$1.1 million in the first six months of 2021, compared to the like period in 2020, resulting from the 36 bp decrease in the yield on our average earning assets, which more than offset the benefit attributable to the growth in average earning assets. Our average interest-bearing liabilities for the first six months of 2021 were$1.51 billion , a decrease of$52.9 million , or 3.4%, from the first six months of 2020. Total interest expense decreased by$5.2 million in the first six months of 2021, when compared to the like period in 2020, as the average rate paid on our interest-bearing liabilities decreased by 66 bp and average interest bearing liabilities decreased by$52.9 million . The net accretion of fair value adjustments on acquired loans added 12 bp to our net interest margin and 15 bp to our average yield on loans in the first six months of 2021, an increase from the first six months of 2020 of 7 bp and 9 bp, respectively. We expect the impact of this net accretion to decrease in future periods. PPP loans, with an average yield of 4.41% and an interest spread (net of an assumed funding cost at 0.35%) of 4.06%, increased our net interest margin by 5 bp in the first six months of 2021; this compared to an average yield of 2.52% and an interest spread (net of an assumed funding cost at 0.35%) of 2.17%, which decreased our net interest margin by 4 bp in the first six months of 2020.
Interest Income
Interest income decreased by$1.1 million , or 2.5%, to$42.6 million for the first six months of 2021 compared to$43.7 million for the first six months of 2020. Interest income on loans and leases decreased by$148 thousand , or 0.4%, while average loans increased by$97.9 million , or 5.4%, to$1.92 billion in the first six months of 2021 compared to the first six months of 2020. The average yield on loans was 4.14% in the first six months of 2021, down 23 bp from 4.37% for the first six months of 2020, primarily driven by the lower interest rate environment. PPP loan interest income was$4.0 million in the first six months of 2021 compared to$896 thousand in the first six months of 2020; the PPP program began in the second quarter of 2020. PPP loans increased our average loan yield by 2 bp in the first six months of 2021 but decreased our average loan yield by 8 bp in the first six months of 2020. The average yield on available for sale securities decreased by 97 bp to 1.53% in the first six months of 2021, as securities purchases were at substantially lower market rates. The average balance of available for sale securities increased by$124.5 million , or 49.5%, in the first six months of 2021, compared to the first six months of 2020, with$149.6 million of this increase in our MBS portfolio. The average yield on our interest-bearing deposits in banks fell 54 bp to 0.06% in the first six months of 2021, compared to the same period in 2020, reflective of the significant decline in market rates of interest. 43 Table of Contents Interest Expense Interest expense decreased by$5.2 million , or 64.7%, to$2.8 million for the first six months of 2021, compared to$8.1 million for the same period in 2020. The average rate on our interest-bearing liabilities decreased by 66 bp to 0.38% for the first six months of 2021 compared to the first six months of 2020. Interest expense on deposits decreased by$4.5 million for the first six months of 2021 compared to the first six months of 2020; our average interest-bearing deposits increased by$28.2 million while the average rate on interest-bearing deposits decreased by 74 bp. We lowered the interest rates paid on interest-bearing deposits in response to the lower prevailing competitive market rates starting in lateFebruary 2020 , with the full impact of those rate reductions expected to be reflected in future periods as maturing time deposits reprice at lower market interest rates. In addition, our interest expense on FHLB advances decreased by$648 thousand and the average balance decreased by$81.4 million in the first six months of 2021 compared to the first six months of 2020. The average rate paid on FHLB advances, at 0.86% for the first six months of 2021, decreased by 21 bp when compared to the same period in 2020. 44 Table of Contents
Average Balances, Yields and Rates
The following table sets forth average balances, annualized yields and rates,
and certain other information for the periods indicated. No tax-equivalent yield
adjustments were made, as the effect thereof was not material. All average
balances are daily average balances. Nonaccrual loans were included in the
computation of average balances, and have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense as well as any amortization and accretion of fair value adjustments.
Six Months Ended June 30,
2021 2020
Average Income Yield Average Income Yield Change
(dollars in thousands) Balance / Expense / Rate Balance / Expense / Rate Prior Yr
Earning assets
Loans and leases: (1)
Commercial loans and leases $ 351,950 $ 6,356 3.64 % $ 376,517 $ 8,034 4.29 % (0.65) %
Commercial real estate 746,102 17,084 4.62 692,772 16,589 4.82 (0.20)
Construction and land 117,982 2,225 3.80 132,194 2,750 4.18 (0.38)
Residential real estate 445,014 8,321 3.77 499,572 10,193 4.10 (0.33)
Consumer 72,819 1,405 3.89 45,641 1,056 4.65 (0.76)
Total portfolio loans 1,733,867 35,391 4.12 1,746,696 38,622 4.45 (0.33) Paycheck Protection Program loans
182,112 3,979 4.41 71,357 896 2.52 1.88
Total loans and leases 1,915,979 39,370 4.14 1,818,053 39,518 4.37 (0.23)
Securities available for
sale: (2)
U.S Gov agencies 46,746 562 2.42 75,523 1,024 2.73 (0.30)
Mortgage-backed 320,017 2,017 1.27 170,409 1,923 2.27 (1.00)
Corporate debentures 9,224 279 6.11 5,515 184 6.72 (0.61)
Total available for sale
securities 375,987 2,858 1.53 251,447 3,131 2.50 (0.97) Securities held to maturity: (2)
6,244 177 5.71 7,747 225 5.83 (0.12)
FHLB Atlanta stock, at cost 9,843 200 4.09 14,361 393 5.51 (1.42)
Interest bearing deposit in
banks 42,039 12 0.06 85,521 254 0.60 (0.54)
Loans held for sale - - - 9,894 179 3.64 (3.64)
Total earning assets 2,350,092 42,617 3.66 % 2,187,023 43,700 4.02 % (0.36) % Cash and due from banks
10,684 14,833
Bank premises and equipment, net 40,792 42,560 Goodwill 31,449 65,760 Core deposit intangible 5,258 7,871 Other assets 144,099 143,843 Less: allowance for credit losses (18,743) (12,068) Total assets$ 2,563,631 $ 2,449,822 Interest-bearing liabilities Deposits: Interest-bearing demand accounts$ 222,688 41 0.04 %$ 185,043 $ 214 0.23 % (0.20) % Money market 435,509 149 0.07 367,218 1,047 0.57 (0.50) Savings 176,276 27 0.03 137,240 70 0.10 (0.07) Time deposits 423,894 853 0.41 540,691 4,262 1.59 (1.18) Total interest-bearing deposits 1,258,367 1,070 0.17 1,230,192 5,593 0.91 (0.74) Borrowings: FHLB advances 206,959 884 0.86 288,407 1,532 1.07 (0.21) Fed funds and other borrowings 11,860 2 0.03 11,707 17 0.29 (0.26) Subordinated debt 28,532 891 6.30 28,282 913 6.49 (0.19) Total borrowings 247,351 1,777 1.45
328,396 2,462 1.51 (0.06) Total interest-bearing funds 1,505,718 2,847 0.38 %
1,558,588 8,055 1.04 % (0.66) % Noninterest-bearing deposits 736,630
548,390
Other liabilities 22,518 25,864
Total liabilities 2,264,866 2,132,842
Stockholders' equity 298,765 316,980
Total liabilities & equity $ 2,563,631 $ 2,449,822
Net interest income $ 39,770 $ 35,645
Net interest rate spread (3) 3.28 % 2.98 %
Effect of noninterest-bearing
funds 0.13 0.30
Net interest margin on
earning assets (4) 3.41 % 3.28 %
45
Table of Contents
Loan fee income is included in the interest income calculation, and (1) nonaccrual loans are included in the average loan balance; they have been
reflected as loans carrying a zero yield.
(2) Available for sale securities are presented at fair value, held to maturity
securities are presented at amortized cost.
(3) Net interest rate spread represents the difference between the yield on
average earning assets and the cost of average interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate) as well as any impact of number of days
and
mix.
46
Table of Contents
The total of the changes set forth in the rate and volume columns are presented
in the total column.
Six Months Ended June 30,
2021 vs. 2020
Due to variances in
(in thousands) Total Rates Volumes
Effect on interest income on earning assets:
Loans and leases:
Commercial loans and leases $ (1,678) $ (1,212) $ (466)
Commercial real estate 495 (680) 1,175
Construction and land (525) (249) (276)
Residential real estate (1,872) (824) (1,048)
Consumer 349 (173) 522
Total interest on portfolio loans (3,231) (3,138) (93)
Paycheck Protection Program (PPP) 3,083 666 2,417
Total interest on loans and leases (148) (2,472) 2,324
Securities available for sale:
U.S. Gov agencies (462) (113) (349)
Mortgage-backed 94 (844) 938
Corporate debentures 95 (17) 112
Total interest on available for sale securities (273) (974) 701
Securities held to maturity (48) (4) (44)
FHLB Atlanta stock, at cost (193) (101) (92)
Interest bearing deposit in banks (242) (228) (14)
Loans held for sale (179) (179) (0)
Total interest income (1,083) (3,958) 2,875
Effect on interest expense on interest-bearing
liabilities:
Deposits:
Interest-bearing demand accounts (173) (179) 6
Money market (898) (919) 21
Savings (43) (49) 6
Time deposits (3,409) (3,162) (247)
Total interest on deposits (4,523) (4,309) (214)
Borrowings:
FHLB advances (648) (296) (352)
Fed funds and other borrowings (15) (15) (0)
Subordinated debt (22) (27) 5
Total interest on borrowings (685) (338) (347)
Total interest expense (5,208) (4,647) (561)
Effect on net interest earned $ 4,125 $ 689$ 3,436
Provision for Credit Losses
We recorded a provision for credit losses of$1.0 million for the first six months of 2021, compared to$6.4 million for the first six months of 2020, a decrease of$5.4 million . The higher provision for credit losses in the first six months of 2020 reflected the rapidly changing economic environment and uncertainty resulting from the COVID-19 pandemic. For the first six months of 2021, the provision for credit losses, net of net charge-offs of$1.9 million , resulted in a decrease in the allowance for loan and lease losses of$874 thousand . For the first six months of 2020, the provision for credit losses, net of net charge-offs of$490 thousand , resulted in an increase in the allowance for loan and lease losses of$6.0 million . Our allowance for loan and lease losses is more fully discussed below under the sections entitled "Nonperforming and Problem Assets; COVID-19 Related Loan Deferrals" and "Allowance for Loan and Lease Losses" of this MD&A. 47 Table of Contents Noninterest Income
The following table presents the major categories of noninterest income for the
six months ended
Six Months Ended
June 30,
(in thousands) 2021 2020 $ Change % ChangeService charges on deposit accounts$ 1,193 $ 1,075 $ 118 11.0 % Realized and unrealized gains on mortgage banking activity - 1,036 (1,036) (100.0) Gain on the sale of securities - 3,044 (3,044) (100.0) Income from bank owned life insurance 845 886 (41) (4.6) Loan related fees and service charges 568 755 (187) (24.8) Other operating income 1,816 1,329 487 36.6 Total noninterest income$ 4,422 $ 8,125 $ (3,703) (45.6) %
Noninterest income was$4.4 million for the six months endedJune 30, 2021 , a decrease of$3.7 million , or 45.6%, compared to$8.1 million for the same period in 2020. The primary drivers of this decrease in the first six months of 2021 were a$3.0 million decrease in gains on the sale of securities and a$1.4 million decrease in noninterest income attributable to our former mortgage banking activities. The noninterest income from our former mortgage banking activities, consisting of$1.0 million of realized and unrealized gains on mortgage banking activity and$389 thousand in loan related fees and service charges, was all recorded in the first quarter of 2020. There was no noninterest income from either securities gains or our former mortgage banking activities in the first six months of 2021. Noninterest income other than from securities gains and from mortgage banking activities for the first six months of 2021 increased by$766 thousand , or 21.0%, from the first six months of 2020. Service charges on deposit accounts, which consist of account activity fees such as nonsufficient funds ("NSF") and overdraft fees in addition to other standard deposit fees, increased$118 thousand in the first six months of 2021, compared to the first six months of 2020. While our standard deposit fees were up$258 thousand in the first six months of 2021, NSF and overdraft fees were down$141 thousand from the first six months of 2020, with a portion of this reduction representing accommodations to COVID-19 impacted customers in the current economic environment and higher liquidity maintained by other customers. Loan related fees and service charges were$568 thousand in the first six months of 2021, a decrease of$187 thousand from the first six months of 2020. Loan related fees and service charges, other than from our former mortgage banking activities for the first six months of 2020, increased by$202 thousand , or 55.1%, when compared to the first six months of 2020, due to increased lending activity. Other operating income, which consists mainly of non-depository account fees such as interchange, wire, merchant card and ATM services, increased$487 thousand in the first six months of 2021 compared to the first six months of 2020. The primary driver was a$305 thousand increase in interchange fees, as consumer spending and card utilization increased from the first six months 2020, when spending and card utilization were adversely impacted by the initial drop in economic activity due to the pandemic. 48 Table of Contents Noninterest Expenses
The following table presents the major categories of noninterest expense for the
six months ended
Six Months Ended
June 30,
(in thousands) 2021 2020 $ Change % Change
Compensation and benefits $ 14,065 $ 14,700 $ (635) (4.3) %
Occupancy and equipment 2,643 2,275 368 16.2
Marketing and business development 638 903 (265) (29.3)
Professional fees 1,543 1,360 183 13.5
Data processing fees 1,866 1,776 90 5.1
FDIC assessment 466 397 69 17.4
Other real estate owned 40 346 (306) (88.4)
Loan production expense 335 660 (325) (49.2)
Amortization of core deposit intangible 1,209 1,379 (170) (12.3)
Other operating expense 1,834 3,891 (2,057) (52.9)
Total noninterest expense before goodwill
impairment 24,639 27,687 (3,048) (11.0)
Goodwill impairment - 34,500 (34,500) (100.0)
Total noninterest expense $ 24,639 $ 62,187 $ (37,548) (60.4) %
Noninterest expenses were$24.6 million for the first six months of 2021, a decrease of$37.5 million , or 60.4%, compared to$62.2 million for the first six months of 2020. The decrease was primary attributable to the$34.5 million goodwill impairment charge recorded in the second quarter of 2020; there was no additional goodwill impairment charge in the first six months of 2021. In addition, noninterest expenses attributable to our former mortgage banking activities were$1.4 million in the first six months of 2020, primarily consisting of$928 thousand in compensation and benefits expense,$259 thousand in loan production expense, and$251 thousand in all other expense categories. There were no noninterest expenses from our former mortgage banking activities in the first six months of 2021. Noninterest expenses in the first six months of 2021, other than from the goodwill impairment charge and our former mortgage banking activities, decreased by$1.6 million , or 6.1%, from the first six months of 2020. Compensation and benefits expense is typically the largest component of our noninterest expense. Compensation and benefits expense other than from our former mortgage banking activities increased by$293 thousand , or 2.1%, in the first six months of 2021, compared to the same period in 2020. The first six months of 2020 included$698 thousand of additional compensation expense attributable to the departure of our former CFO, recorded in the first quarter of 2020. Occupancy and equipment expense increased by$368 thousand in the first six months of 2021, compared to the first six months of 2020. The first six months of 2021 included$152 thousand of non-capitalizable branch renovation costs, a higher level of ongoing incremental expenses associated with COVID-19 deep cleaning efforts, and a higher level of snow removal expenses when compared to the first six months of 2020, partially offset by a reduction in rental expenses as a result of our branch closures in early 2021. In addition, the first six months of 2020 included$224 thousand of branch closing cost accrual reversals related to a favorable lease termination. Our marketing and business development expenses decreased by$265 thousand in the first six months of 2021, driven primarily by a lower level of corporate sponsorships and the impact of COVID-19 that resulted in lower expenses for customer and non-customer direct contact. OREO expense decreased$306 thousand in the first six months of 2021, primarily as a result of a$257 thousand OREO valuation allowance recorded in the first six months of 2020 with no valuation allowance recorded in 2021. 49
Table of Contents
Other operating expense decreased by$2.1 million in the first six months of 2021. Other operating expense consists mainly of a variety of general expenses such as telephone and data lines, supplies and postage, courier services, general insurance, director fees, and miscellaneous losses. Included in other operating expense for the first six months of 2020 was a$1.0 million litigation accrual stemming from certain mortgages originated byFirst Mariner Bank before its merger withHoward Bank ,$224 thousand in prepayment penalties on FHLB advances, and$403 thousand of additional expenses that were the result of the reevaluation of certain expense accruals in the first quarter of 2020.
Income Tax Expense
For the first six months of 2021, we recorded an income tax expense of$4.9 million compared to an income tax expense of$1.2 million in the first six months of 2020. The first six months of 2020 was favorably impacted by certain provisions of the CARES Act that was signed into law onMarch 27, 2020 . The CARES Act permits corporate taxpayers to recover prior period taxes paid by carrying back net operating losses incurred in tax years ending afterDecember 31, 2017 to tax years ending up to five years earlier. As a result, we were able to carryback the 2018 tax net operating loss of$9.1 million to tax years 2013-2015. The$1.2 million carryback tax benefit represents the difference between the current federal statutory tax rate of 21% and the 34% statutory federal tax rate applicable during the carryback years. Our effective tax rate for the first six months of 2021 was 26.4% compared to an effective tax rate -4.8% for the first six months of 2020; outside the impact of the$34.5 million non-deductible goodwill impairment charge and the$1.2 million benefit from the CARES Act, the effective tax rate for the first six months of 2020 would have been 24.7%.
A comparison of the three months ended
We reported net income of$7.5 million , or$0.40 per both basic and diluted common share, for the three months endedJune 30, 2021 , compared to a net loss for the three months endedJune 30, 2020 of$29.4 million , or a loss of$1.57 per both basic and diluted common share. Net income increased by$36.9 million , or$1.97 per both basic and diluted common share, in the second quarter of 2021 when compared to the second quarter of 2020, primarily as a result of the following:
The second quarter of 2020 included a goodwill impairment charge, which was not
? tax deductible, of
share).
No provision for credit losses was recorded in the second quarter of 2021,
? compared to a
2020 (an increase in 2021 of
PPP loan pretax income of
? thousand higher than the
quarter of 2020 (an increase in 2021 of
The second quarter of 2020 included a
? increase in 2021 of
the second quarter of 2021.
The second quarter of 2020 included a
? advances (an increase in 2021 of
comparable item in the first six months of 2021.
These items were partially offset by:
The second quarter of 2020 included
? decrease in 2021 of
in the second quarter of 2021.
50
Table of Contents
Net Interest Income
Net interest income for the second quarter of 2021 was $20.1 million , an
increase of $2.0 million from the second quarter of 2020. Our net interest
margin was 3.39% for the second quarter of 2021, an increase of 17 bp from 3.22%
for the second quarter of 2020. Average earning assets for the second quarter of
2021 were $2.37 billion , an increase of $109.5 million , or 4.8%, from the second
quarter of 2020. Total interest income decreased $92 thousand in the second
quarter of 2021, compared to the like period in 2020, resulting from the 20 bp
decrease in the yield on our average earning assets, which more than offset the
benefit attributable to the growth in average earning assets.
Our average interest-bearing liabilities for the second quarter of 2021 were
$1.49 billion , a decrease of $60.3 million , or 3.9%, from the second quarter of
2020. Total interest expense decreased by $2.1 million in the second quarter of
2021, when compared to the like period in 2020, as the average rate paid on our
interest-bearing liabilities decreased by 52 bp. The net accretion of fair value
adjustments on acquired loans added 12 bp to our net interest margin and 13 bp
to our average yield on loans in the second quarter of 2021, an increase from
the first second quarter of 2020 of 2 bp and 1 bp, respectively. We expect the
impact of this net accretion to decrease in future periods. PPP loans, with an
average yield of 4.01% and an interest spread (net of an assumed funding cost at
0.35%) of 3.66%, increased our net interest margin by 2 bp in the second quarter
of 2021; this compared to an average yield of 2.53% and an interest spread (net
of an assumed funding cost at 0.35%) of 2.18%, which decreased our net interest
margin by 8 bp in the second quarter of 2020.
Interest Income
Interest income decreased by$92 thousand , or 0.4%, to$21.4 million for the second quarter of 2021 compared to$21.5 million for the second quarter of 2020. Interest income on loans and leases increased by$148 thousand , or 0.8%, while average loans increased by$56.5 million , or 3.0%, to$1.94 billion in the second quarter of 2021 compared to the second quarter of 2020. The average yield on loans was 4.07% in the second quarter of 2021, down 11 bp from 4.18% for the second quarter of 2020, primarily driven by the lower interest rate environment. PPP loan interest income was$1.8 million in the second quarter of 2021 compared to$896 thousand in the second quarter of 2020. PPP loans reduced our average loan yield in the second quarter of 2021 and the second quarter of 2020 by 1 bp and 13 bp, respectively. The average yield on available for sale securities decreased by 69 bp to 1.60% in the second quarter of 2021, as purchases were at substantially lower market rates. The average balance of available for sale securities increased by$100.4 million , or 36.5%, in the second quarter of 2021, compared to the second quarter of 2020, with$131.5 million of this increase in our MBS portfolio. Interest Expense Interest expense decreased by$2.1 million , or 61.2%, to$1.3 million for the second quarter of 2021, compared to$3.4 million for the same period in 2020. The average rate on our interest-bearing liabilities decreased by 52 bp to 0.35% for the second quarter of 2021 compared to the second quarter of 2020. Interest expense on deposits decreased by$2.0 million for the second quarter of 2021 compared to the second quarter of 2020; our average interest-bearing deposits decreased by$4.9 million while the average rate on interest-bearing deposits decreased by 64 bp. We lowered the interest rates paid on interest-bearing deposits in response to the lower prevailing competitive market rates starting in lateFebruary 2020 , with the full impact of those rate reductions expected to be reflected in future periods as maturing time deposits reprice at lower market interest rates. In addition, our interest expense on FHLB advances decreased by$63 thousand and the average balance of FHLB advances decreased by$49.7 million in the second quarter of 2021 compared to the second quarter of 2020. The average rate paid on FHLB advances, at 0.86% for the second quarter of 2021, increased by 6 bp when compared to the same period in 2020. This increase was the result of a lower balance of low rate, short-term FHLB advances in the second quarter of 2021 when compared to the same period in 2020. 51
Table of Contents
Average Balances, Yields and Rates
The following table sets forth average balances, annualized yields and rates,
and certain other information for the periods indicated. No tax-equivalent yield
adjustments were made, as the effect thereof was not material. All average
balances are daily average balances. Nonaccrual loans were included in the
computation of average balances, and have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense as well as any amortization and accretion of fair value adjustments.
Three Months Ended June 30,
2021 2020
Average Income Yield Average Income Yield Change
(dollars in thousands) Balance / Expense / Rate Balance / Expense / Rate Prior Yr
Earning assets
Loans and leases: (1)Commercial loans and leases$ 358,980 $ 3,271
3.65 %$ 375,835 $ 3,730 3.99 % (0.34) % Commercial real estate 755,815 8,528 4.53 694,613 8,143 4.71 (0.19) Construction and land 118,704 1,116 3.77 132,899 1,287 3.89 (0.12) Residential real estate 446,784 4,249 3.81 490,110 4,948 4.06 (0.25) Consumer 80,418 748 3.73 45,619 536 4.73 (0.99) Total portfolio loans 1,760,701 17,912
4.08 1,739,076 18,644 4.31 (0.23) Paycheck Protection Program loans
177,546 1,776 4.01 142,715 896 2.53 1.49
Total loans and leases 1,938,247 19,688 4.07 1,881,791 19,540 4.18 (0.10)
Securities available for sale: (2)
U.S Gov agencies 45,256 274 2.43 80,217 532 2.67 (0.24)
Mortgage-backed 320,960 1,088 1.36 189,419 945 2.01 (0.65)
Corporate debentures 9,294 139 6.00 5,507 92 6.72 (0.72)Total available for sale securities 375,510 1,501
1.60 275,143 1,569 2.29 (0.69) Securities held to maturity: (2)
6,206 88 5.69 7,745 112 5.82 (0.13)
FHLB Atlanta stock, at cost 9,008 99 4.39 13,015 220 6.78 (2.39)
Interest bearing deposit in banks 45,741 6 0.06 86,181 20 0.09 (0.04) Loans held for sale - - - 1,365 13 3.83 (3.83) Total earning assets 2,374,712 21,382 3.61 % 2,265,240 21,474 3.81 % (0.20) % Cash and due from banks 10,781 16,056
Bank premises and equipment, net 40,593
42,431
Goodwill 31,449 65,570
Core deposit intangible 4,956 7,522
Other assets 143,052 146,395Less: allowance for credit losses (18,392)
(13,417)
Total assets $ 2,587,151 $ 2,529,797
Interest-bearing liabilities
Deposits:Interest-bearing demand accounts$ 227,272 19
0.03 %$ 186,781 $ 57 0.12 % (0.09) % Money market 428,169 66 0.06 365,658 342 0.38 (0.31) Savings 180,992 15 0.03 140,904 25 0.07 (0.04) Time deposits 409,404 310
0.30 557,401 1,959 1.41 (1.11) Total interest-bearing deposits
1,245,837 410 0.13 1,250,744 2,383 0.77 (0.63) Borrowings: FHLB advances
206,231 443 0.86 255,945 506 0.80 0.07
Fed funds and other borrowings 10,751 1 0.04 16,747 13 0.31 Subordinated debt 28,608 446 6.25 28,307 452 6.42 (0.17) Total borrowings 245,590 890 1.45 300,999 971 1.30 0.16
Total interest-bearing funds 1,491,427 1,300
0.35 % 1,551,743 3,354 0.87 % (0.52) % Noninterest-bearing deposits
773,825 632,080
Other liabilities 21,665 26,822
Total liabilities 2,286,917 2,210,645
Stockholders' equity 300,234 319,152
Total liabilities & equity $ 2,587,151 $ 2,529,797
Net interest income $ 20,082 $ 18,120 Net interest rate spread (3) 3.26 % 2.94 % Effect of noninterest-bearing funds 0.13 0.28 Net interest margin on earning assets (4)
3.39 % 3.22 %
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Loan fee income is included in the interest income calculation, and (1) nonaccrual loans are included in the average loan balance; they have been
reflected as loans carrying a zero yield.
(2) Available for sale securities are presented at fair value, held to maturity
securities are presented at amortized cost.
(3) Net interest rate spread represents the difference between the yield on
average earning assets and the cost of average interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate) as well as any impact of number of days
and
mix.
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The total of the changes set forth in the rate and volume columns are presented
in the total column.
Three Months Ended June 30,
2021 vs. 2020
Due to variances in
(in thousands) Total Rates Volumes
Effect on interest income on earning assets:
Loans and leases:
Commercial loans and leases $ (459) $ (316) $ (143)
Commercial real estate 385 (328) 713
Construction and land (171) (41) (130)
Residential real estate (699) (301) (398)
Consumer 212 (113) 325
Total interest on portfolio loans (732) (1,099) 367
Paycheck Protection Program (PPP) 880 529 351
Total interest on loans and leases 148 (570) 718
Securities available for sale:
U.S. Gov agencies (258) (48) (210)
Mortgage-backed 143 (305) 448
Corporate debentures 47 (10) 57Total interest on available for sale securities (68)
(363) 295 Securities held to maturity (24) (2) (22) FHLB Atlanta stock, at cost (121) (77) (44)
Interest bearing deposit in banks (14)
(8) (6) Loans held for sale (13) (13) 0 Total interest income (92) (1,033) 941 Effect on interest expense on interest-bearing liabilities: Deposits: Interest-bearing demand accounts (38)
(42) 4 Money market (276) (287) 11 Savings (10) (13) 3 Time deposits (1,649) (1,542) (107) Total interest on deposits (1,973) (1,884) (89) Borrowings: FHLB advances (63) 42 (105)
Fed funds and other borrowings (12) (11) (1) Subordinated debt (6) (12) 6 Total interest on borrowings (81) 19 (100) Total interest expense (2,054) (1,865) (189) Effect on net interest income$ 1,962 $
832$ 1,130 Provision for Credit Losses No provision for credit losses was recorded in the second quarter of 2021 compared to a$3.0 million provision for the second quarter of 2020. The higher provision for credit losses in the second quarter 2020 reflected the rapidly changing economic environment and uncertainty resulting from the COVID-19 pandemic. Second quarter of 2021 net charge-offs of$80 thousand resulted in an$80 thousand decrease in the allowance for loan and lease losses atJune 30, 2021 . For the second quarter of 2020, the$3.0 million provision for credit losses, net of net charge-offs of$28 thousand , resulted in an increase in the allowance for loan and lease losses of$3.0 million . Our allowance for loan and lease losses is more fully discussed below under the sections entitled "Nonperforming and Problem Assets; COVID-19 Related Loan Deferrals" and "Allowance for Loan and Lease Losses" of this MD&A. 54 Table of Contents Noninterest Income
The following table presents the major categories of noninterest income for the
three months ended
Three Months Ended
June 30,
(in thousands) 2021 2020 $ Change % Change
Service charges on deposit accounts $ 654 $ 432 $ 222 51.4 %
Gain on the sale of securities - 3,044 (3,044) (100.0)
Income from bank owned life insurance 421 441 (20) (4.5)
Loan related fees and service charges 271 175 96 54.9
Other operating income 1,007 667 340 51.0
Total noninterest income $ 2,353 $ 4,759 $ (2,406) (50.6) %
Noninterest income was $2.4 million for the three months ended June 30, 2021 , a
decrease of $2.4 million , or 50.6%, compared to $4.8 million for the same period
in 2020. The primary driver of this decrease was a $3.0 million decrease in
noninterest income attributable to gains on the sale of securities in the second
quarter of 2020; there were no securities gains in the second quarter of 2021.
Noninterest income other than from securities gains for the second quarter of
2021 increased by $638 thousand , or 37.2%, from the second quarter of 2020.
Service charges on deposit accounts, which consist of account activity fees such
as nonsufficient funds ("NSF") and overdraft fees in addition to other standard
deposit fees, increased $222 thousand in the second quarter of 2021, compared to
the second quarter of 2020. Our standard deposit fees were up $208 thousand in
the second quarter of 2021 while NSF and overdraft fees were up $14 thousand
from the second quarter of 2020.
Loan related fees and service charges were $271 thousand in the second quarter
of 2021, an increase of $96 thousand from the second quarter of 2020. Increases
in loan related fees and service charges were due to increased lending activity.
Other operating income, which consists mainly of non-depository account fees
such as interchange, wire, merchant card and ATM services, increased $340
thousand in the second quarter of 2021 compared to the second quarter of 2020.
The primary driver was a $225 thousand increase in interchange fees, as consumer
spending and card utilization increased from the second quarter 2020, when
spending and card utilization were adversely impacted by the initial drop in
economic activity due to the pandemic.
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Noninterest Expenses
The following table presents the major categories of noninterest expense for the
three months ended
Three Months Ended
June 30,
(in thousands) 2021 2020 $ Change % Change
Compensation and benefits $ 7,143 $ 6,259 $ 884 14.1 %
Occupancy and equipment 1,318 1,242 76 6.1
Marketing and business development 341 453 (112) (24.7) Professional fees 809 634 175 27.6 Data processing fees 982 849 133 15.7 FDIC assessment 171 236 (65) (27.5)
Other real estate owned - 268 (268) (100.0) Loan production expense 181 192 (11) (5.7) Amortization of core deposit intangible 594 680 (86) (12.6) Other operating expense 758 2,315 (1,557) (67.3) Total noninterest expense before goodwill impairment 12,297 13,128 (831) (6.3) Goodwill impairment - 34,500 (34,500) (100.0) Total noninterest expense$ 12,297 $ 47,628 $ (35,331) (74.2) % Noninterest expenses were$12.3 million for the second quarter of 2021, a decrease of$35.3 million , or 74.2%, compared to$47.6 million for the second quarter of 2020. The decrease was primary attributable to the$34.5 million goodwill impairment charge recorded in the second quarter of 2020; there was no additional goodwill impairment charge in the second quarter of 2021. Noninterest expenses in the second quarter of 2021, other than from the goodwill impairment charge, decreased by$831 thousand , or 6.3%, from the second quarter of 2020. Compensation and benefits expense is typically the largest component of our noninterest expense. Compensation and benefits expense increased by$884 thousand , or 14.1%, in the second quarter of 2021, compared to the same period in 2020. The higher level of compensation and benefits expense included an increase in staff costs and benefits of$544 thousand , resulting from talent acquisitions since the second quarter of 2020, including staff increases in connection with the Company'sGreater Washington initiative. In addition, loan origination internal cost deferrals attributable to the PPP program in the second quarter of 2021 were$231 thousand lower than the$242 thousand reported in the second quarter of 2020. Occupancy and equipment expense increased by$76 thousand in the second quarter of 2021, compared to the same period in 2020. The second quarter of 2021 included$152 thousand of non-capitalizable branch renovation costs, partially offset by a$66 thousand reduction in rental expenses as a result of our branch closures in early 2021.
Professional fees increased by
Data processing fees increased by$133 thousand in the second quarter of 2021, compared to the same period in 2020, with this increase primarily attributable to higher account and transaction volumes.
Our marketing and business development expenses decreased by
OREO expense decreased$268 thousand in the second quarter of 2021, primarily as a result of a$257 thousand OREO valuation allowance recorded in the second quarter of 2020; there was no valuation allowance recorded in the second quarter of 2021. 56 Table of Contents
Other operating expense decreased by
Other operating expense consists mainly of a variety of general expenses such as telephone and data lines, supplies and postage, courier services, general insurance, director fees, and miscellaneous losses. Included in other operating expense for the second quarter of 2020 was a$1.0 million litigation accrual, stemming from certain mortgages originated byFirst Mariner Bank before its merger withHoward Bank , and$224 thousand in prepayment penalties on FHLB advances. In addition, fraud and other miscellaneous losses declined by$134 thousand in the second quarter of 2021.
Income Tax Expense
For the second quarter of 2021, we recorded an income tax expense of$2.7 million compared to$1.7 million in the second quarter of 2020. Our effective tax rate for the second quarter of 2021 was 26.5%. The goodwill impairment charge of$34.5 million recorded during the second quarter of 2020 was not tax deductible. Our effective tax rate for the second quarter of 2020 was -6.0%; outside the impact of the$34.5 million non-deductible goodwill impairment charge, our effective tax rate for the second quarter of 2020 would have been 24.6%.
Nonperforming and Problem Assets; COVID - Related Loan Deferrals
We perform reviews of all delinquent loans and our loan officers contact customers to attempt to resolve potential credit issues in a timely manner.
Loans are placed on nonaccrual status when payment of principal or interest is
90 days or more past due and the value of the collateral securing the loan, if
any, is less than the outstanding balance of the loan. Loans are also placed on
nonaccrual status if we have serious doubt about further collectability of
principal or interest on the loan, even though the loan is currently performing.
When loans are placed on a nonaccrual status, unpaid accrued interest is fully
reversed, and subsequent income, if any, is recognized only to the extent
received. The loan may be returned to accrual status if the loan is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time, and ultimate collectability of the total contractual principal
and interest is no longer in doubt.
Under GAAP we are required to account for certain loan modifications or
restructurings as troubled debt restructurings ("TDRs"). In general, the
modification or restructuring of a debt constitutes a TDR if we, for economic or
legal reasons related to the borrower's financial difficulties, grant a
concession, such as a reduction in the effective interest rate, to the borrower
that we would not otherwise consider. However, all debt restructurings or loan
modifications for a borrower do not necessarily constitute troubled debt
restructurings. We believe loan modifications will potentially result in a lower
level of loan losses and loan collection costs than if we proceeded immediately
through the foreclosure process with these borrowers.
The CARES Act, as extended by certain provisions of the Consolidated
Appropriations Act, 2021, permits banks to suspend requirements under GAAP for
loan modifications to borrowers affected by COVID-19 that may otherwise be
characterized as TDRs and suspend any determination related thereto if (i) the
borrower was not more than 30 days past due as of December 31, 2019 , (ii) the
modifications are related to COVID-19, and (iii) the modification occurs between
March 1, 2020 and the earlier of 60 days after the date of termination of the
national emergency or January 1, 2022 . Federal bank regulatory authorities also
issued guidance to encourage banks to make loan modifications for borrowers
affected by COVID-19 and confirmed in working with the staff of the FASB that
short-term modifications made on a good faith basis in response to COVID-19 to
borrowers who were current prior to any relief are not TDRs.
Our level of COVID-19-related loan deferrals, after a large decline from their
2020 peak through December 31, 2020 , have continued to decline. As of June 30,
2021 , a total of $30.4 million of loans, representing 1.6% of total loans and
1.7% of portfolio loans, were performing under some form of deferral or other
payment relief. By comparison, a total of $56.1 million of loans, representing
3.0% of total loans and 3.3% of portfolio loans, were performing under some form
of deferral or other payment relief as of December 31, 2020 . Included in total
deferrals at June 30, 2021 are second deferrals (including deferrals where the
cumulative inception to date deferral is greater than six months) of $17.6
million . Full payment deferrals at June 30, 2021 represent 5% of total deferrals
while principal only deferrals represent 95% of total deferrals. We expect that
the level of COVID-19 related deferrals will continue to decline in future
periods.
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The table below sets forth the amounts and categories of our nonperforming assets, which consist of nonaccrual loans, troubled debt restructurings and OREO (which includes real estate acquired through, or in lieu of, foreclosure),
at
the dates indicated.
June 30, December 31,
(in thousands) 2021 2020
Non-accrual loans:
Real estate loans:
Construction and land $ 246 $ 581
Residential - first lien 8,769 12,635
Residential - junior lien 1,607 1,250
Commercial owner occupied 311 416
Commercial non-owner occupied 3,198 528
Commercial and leases 856 2,508
Total non-accrual loans 14,987 17,918
Accruing troubled debt restructured loans:
Residential real estate - first lien 1,228 1,153
Commercial and leases 4
359
Total accruing troubled debt restructured loans 1,232
1,512 Total nonperforming loans 16,219 19,430 Other real estate owned: Land 534 648 Residential - first lien 95 95 Total other real estate owned 629 743 Total nonperforming assets$ 16,848 $ 20,173 Ratios:
Nonperforming loans to total loans and leases 0.83 % 1.04 % Nonperforming loans to portfolio loans (1) 0.90 % 1.14 % Nonperforming assets to total assets 0.65 %
0.79 %
Loans past due 90 days still accruing:
Real estate loans:
Residential - first lien $ - $ 34
Commercial owner occupied - 83
Commercial non-owner occupied 5,628 -
Commercial and leases - 251
$ 5,628 $ 368
(1) Denotes a non-GAAP measure; refer to the section "Use of Non-GAAP Financial
Measures and Related Reconciliations" for additional detail
Nonperforming Loans
Government fiscal stimulus and relief programs appear to have delayed, and
possibly mitigated, any materially adverse financial impact to our loan
portfolio resulting from the COVID-19 pandemic. Despite these measures, however,
we believe our credit metrics could worsen and loan losses could ultimately
materialize. Any potential loan losses will be contingent upon a number of
factors beyond our control, such as the ability to reach a sufficient
vaccination rate to achieve herd immunity, whether such vaccinations will be
effective against any resurgence of the virus, including new strains such as the
Delta variant, and the ability of customers and businesses to return to, and
remain in, their pre-pandemic routines.
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Nonperforming loans ("NPLs") were $16.2 million , or 0.83% of total loans and
0.90% of portfolio loans, at June 30, 2021 compared to $19.4 million , or 1.04%
of total loans and 1.14% of portfolio loans, at December 31, 2020 . The $3.2
million decrease in NPLs was the result of $1.1 million in payoffs and $2.1
million of charge-offs in the first six months of 2021. $677 thousand of the
first six months 2021 charge-offs were attributable to the partial charge-off of
loans to one borrower where we had recorded a specific allocation of the
allowance for loan and lease losses of $894 thousand at December 31, 2020 .
Included in nonaccrual loans at June 30, 2021 are two TDRs with a carrying
balance totaling $318 thousand that were not performing in accordance with their
modified terms, and the accrual of interest has ceased. In addition, there were
five TDRs totaling $1.2 million that were performing in accordance with their
modified terms at June 30, 2021 . During the six months ended June 30, 2021 , we
reported a new $104 thousand residential real estate TDR, downgraded to
nonperforming a $237 thousand commercial loan TDR that previously had been
performing in accordance with its modified terms, and fully charged-off a $413
thousand nonperforming commercial loan TDR.
The composition of our nonperforming loans at
Nonaccrual Loans:
? Two construction and land loans
? 45 residential first lien loans, one with a fair value of
process of foreclosure
? 35 residential junior lien loans
? Two commercial real estate owner-occupied loans
? Ten commercial real estate non-owner occupied loans, (including six that were
placed on nonaccrual in the second quarter 2021)
? Five commercial loans, representing three lending relationships
Accruing Troubled Debt Restructured Loans:
? Four residential real estate loans
? One commercial loan
Nonperforming Assets
Nonperforming assets ("NPAs") consist of NPLs and other real estate owned
("OREO"). Our NPAs were $16.8 million , or 0.65% of total assets, at June 30,
2021 compared to $20.2 million , or 0.79% of total assets, at December 31, 2020 .
The $3.4 million decrease in NPAs since December 31, 2020 was primarily the
result of the $3.2 million decrease in NPLs. NPAs represented 0.87% of total
loans and OREO at June 30, 2021 .
Other Real Estate Owned
Real estate we acquire as a result of foreclosure is classified as OREO. When a property is acquired as a result of foreclosure, it is recorded at fair value less the anticipated cost to sell at the date of foreclosure. If there is a subsequent change in the value of OREO, we record a valuation allowance to adjust the carrying value of the real estate to its current fair value less estimated disposal costs. Costs relating to holding such real estate are expensed in the current period while costs relating to improving such real estate are capitalized up to the property's net realizable value until a saleable condition is reached. Costs in excess of the property's net realizable value would be expensed in the current period. Our OREO totaled$629 thousand atJune 30, 2021 , a$114 thousand decrease from$743 thousand atDecember 31, 2020 . There was no valuation expense included in noninterest expense during the first six months of 2021. For the same period of 2020, there was$257 thousand attributable to net increases in valuation allowances as the then current appraised value of OREO properties, less estimated cost to sell, was insufficient to cover the recorded OREO amount. In addition, we sold one parcel of land with a carrying balance of$144 thousand in the first six months of 2021, recording a$25 thousand loss on the sale. There were no additions to OREO during the first six months of 2021. 59
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OREO at
? Several parcels of unimproved land
? Two residential 1-4 family properties
Allowance for Loan and Lease Losses
Our allowance for loan and lease losses (the "allowance") atJune 30, 2021 was$18.3 million , a decrease of$874 thousand from$19.2 million atDecember 31, 2020 . Net charge-offs of$1.9 million in the first six months of 2021 were partially offset by the provision for credit losses of$1.0 million in the first six months of 2021. Net charge-offs represented 0.20% of average loans (annualized); this compares to net charge-offs of$490 thousand , or 0.05% of average loans (annualized) in the first six months of 2020. Included in the first six months of 2021 net charge-offs was$677 attributable to one loan relationship where we had established an$894 thousand specific allocation of the allowance as ofDecember 31, 2020 . There were no specific allocations of the allowance atJune 30, 2021 . Because the Company is a smaller reporting company underSEC rules, the allowance was determined under the incurred loss model. The$18.3 million allowance atJune 30, 2021 represented 0.94% of total loans, 1.02% of portfolio loans, and 112.8% of NPLs. By comparison, the$19.2 million allowance atDecember 31, 2020 represented 1.03% of total loans, 1.13% of portfolio loans, and 98.6% of NPLs.
The following table sets forth activity in our allowance for loan and lease losses for the periods indicated:
Six Months Ended Year Ended
(in thousands) June 30, 2021 December 31, 2020
Balance at beginning of year $ 19,162 $ 10,401
Charge-offs:
Real estate
Residential first lien loans (560) (43)
Residential junior lien loans (45) (41)Commercial owner occupied loans (1)
(44)
Commercial non-owner occupied loans -
(37)
Commercial loans and leases (1,388)
(698)
Consumer loans (113) (187)
Total charge-offs (2,107) (1,050)
Recoveries:
Real estateResidential first lien loans 129 25 Residential junior lien loans 10 75 Commercial owner occupied loans 8 - Commercial non-owner occupied loans 15 2 Commercial loans and leases 67
182
Consumer loans 4 2
Total recoveries 233 286
Net charge-offs (1,874) (764)Provision for credit losses (1) 1,000
9,525
Balance at end of period $ 18,288 $
19,162
Allowance as a % of total loans and leases 0.94 % 1.03 % Allowance as a % of portfolio loans (2) 1.02
1.13
Allowance as a % of nonperforming loans 112.76
98.62
Net charge-offs to average total loans and leases 0.20
0.04
Provision for credit losses to average total loans and leases 0.11 0.51
(1) Portion attributable to loan and lease losses
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(2) Denotes a non-GAAP measure - refer to the section "Use of Non-GAAP Financial
Measures and Related Reconciliations" for additional detail
COVID-19 and Our Evaluation of the Allowance
TheJune 30, 2021 allowance includes our quarterly reassessment of the impact of COVID-19 on the national and local economies and the impact on various categories of our loan portfolio. Management's methodology for the evaluation of COVID-19's impact on the allowance, which is essentially unchanged sinceJune 30, 2020 , identified the following qualitative factors for further review:
changes in international, national, regional, and local economic and business
? conditions and developments that affect the collectability of the portfolio,
including the condition of various market segments;
? the existence and effect of any concentrations of credit, and changes in the
level of such concentrations;
? changes in the value of underlying collateral for collateral-dependent loans;
and
? changes in the volume and severity of past due, nonaccrual, and adversely
classified loans.
While our allowance of$18.3 million atJune 30, 2021 was down$874 thousand fromDecember 31, 2020 , it increased by$7.9 million fromDecember 31, 2019 , the last balance sheet date before the COVID-19 pandemic began, with cumulative provisions for credit losses attributable to the allowance of$10.5 million fromDecember 31, 2019 toJune 30, 2021 , partially offset by cumulative net charge-offs of$2.6 million during the same period. The allowance as a percentage of total loans increased from a pre-COVID level of 0.60% atDecember 31, 2019 to 1.03% of total loans and 1.13% of portfolio loans atDecember 31, 2020 before decreasing to 0.94% of total loans and 1.02% of portfolio loans atJune 30, 2021 . The$7.9 million increase in the ALLL from the pre-COVID level atDecember 31, 2019 toJune 30, 2021 was primarily attributable to the qualitative factors noted above and portfolio loan growth, partially offset by the impact of lower historical loss rates. Our evaluation of the existence and effect of any concentrations of credit, and changes in the level of such concentrations, has focused on the identification of our exposure to industry segments that may potentially be the most highly impacted by COVID-19. The following table identifies those industry segments within our loan portfolio that we believe may potentially be most highly impacted by COVID-19. All balances are as ofJune 30, 2021 ; note that the column "Initial SBA PPP Loan Relief" presents the total balance of PPP loans received by our borrowers in each of the identified loan segments since the inception of the program. The potentially highly impacted loan segments total$338.9 million , or 17.4% of total loans, atJune 30, 2021 . However, the table presents each of these loan segments as a percentage of portfolio loans, which we believe is a more meaningful measure of our potentially highly impacted loan concentration. The definition of our potentially highly impacted ("PHI") loan segments has remained unchanged throughout the pandemic. As % of Total Credit As % of Balance As % of Initial SBA As % of (in millions) Loan Portfolio Exposure Total Credit with Loan PPP Loan Loan Loan Category Balance Loans (1) (2) Exposure Deferrals Category Relief Category CRE - retail$ 100.9 5.7 %$ 102.7 4.4 %$ 7.8 7.7 % $ - - Hotels 61.4 3.4 % 71.8 3.1 % 5.5 9.0 % 3.9 6.3 % CRE - residential rental 31.4 1.7 % 31.4 1.4 % - - - - Nursing and residential care 39.9 2.2 % 44.5 1.9 % - - 2.8 7.0 % Retail trade 36.9 2.1 % 60.5 2.6 % - - 17.6 47.7 % Restaurants and caterers 23.7 1.3 % 27.9 1.2 % - - 30.1 126.8 %
Religious and similar organizations 29.5 1.6 % 31.1
1.3 % - - 7.6 25.8 %
Arts, entertainment, and recreation 15.2 0.8 % 16.3 0.7 % 2.3 15.1 % 6.0 39.4 %
Total - selected categories $ 338.9 18.8 % $ 386.2 16.6 % $ 15.6 4.6 % $ 68.0 20.1 %
(1) A non-GAAP financial measure - refer to the section "Use of Non-GAAP
Financial Measures and Related Reconciliation" for additional detail
(2) Includes unused lines of credit, unfunded commitments, and letters of credit
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The PHI breakdown, by loan portfolio segment, at June 30, 2021 is as follows:
(in millions) As % of As % of
Loan As % of Portfolio Total PHI
Loan Portfolio Segment Balance Total Loans Loans (1) Loans
Commercial real estate - non-owner occupied $ 199.7 10.3 % 11.0 % 58.8 %
Commercial real estate - owner occupied 67.0 3.4 %
3.7 % 19.8 %
Construction and land 35.2 1.8 % 2.0 % 10.4 %
Commercial loans and leases 35.1 1.8 % 2.0 % 10.4 %
Other 1.9 0.1 % 0.1 % 0.6 %
Total $ 338.9 17.4 % 18.8 % 100.0 %
We will continue to closely monitor portfolio conditions and reevaluate the adequacy of the allowance. While our ongoing active management of the portfolio, government fiscal stimulus, COVID-19 related payment deferrals, and PPP loan assistance have reduced the short-term risk in our loan portfolio and traditional lagging indicators of delinquencies and nonperforming loans remain historically modest, we believe there still is the potential for additional risk rating downgrades and an increase in charge-offs in future periods.
Credit Risk Management and Allowance Methodology
We provide for loan and lease losses (hereinafter referred to as "loan losses") based upon the consistent application of our documented allowance methodology. All loan losses are charged to the allowance and all recoveries are credited to it. Additions to the allowance are provided by charges to income based on various factors that, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for credit losses in order to maintain the allowance in accordance with GAAP. In accordance with accounting guidance for business combinations, there was no allowance brought forward on any acquired loans in our acquisitions. For acquired performing loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance. We recorded acquired credit impaired loans in our acquisitions net of purchase accounting adjustments. Subsequent to the acquisition date, we continue to monitor cash flows on a quarterly basis, to determine the performance of each acquired credit impaired loan in comparison to our initial performance expectations. Subsequent decreases in the present value of expected cash flows will be recorded as an increase in the allowance through a provision for credit losses. Subsequent significant increases in cash flows result in a reversal of the provision for credit losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods. The allowance consists of two components - specific and general allowances:
Specific allowances may be established for loans classified as Substandard or
Doubtful. For loans classified as impaired, the allowance is established when
the net realizable value (collateral value less costs to sell) of the impaired
loan is lower than the carrying amount of the loan. The amount of impairment 1) provided for as a specific allowance is represented by the deficiency, if any,
between the underlying collateral value and the carrying value of the loan.
Impaired loans for which the estimated fair value of the loan, or the loan's
observable market price or the fair value of the underlying collateral, if the
loan is collateral dependent, exceeds the carrying value of the loan are not
considered in establishing specific allowances; and
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General allowances established for loan losses on a portfolio basis for loans
that do not meet the definition of impaired loans. The portfolio is grouped
into similar risk characteristics, primarily loan type and regulatory
classification. We apply an estimated loss rate to each loan group. The loss 2) rates applied are based upon our loss experience adjusted, as appropriate, for
the qualitative factors discussed below. This evaluation is inherently
subjective, as it requires material estimates that may be susceptible to
significant revisions based upon changes in economic and real estate market
conditions.
The allowance is maintained at a level to provide for loan losses that are probable and can be reasonably estimated. Our periodic evaluation of the adequacy of the allowance is based on past credit loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. A loan is considered impaired when, based on current information and events, it is probable that we 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. We determine 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. The impairment of a loan may be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if repayment is expected to be provided by the collateral. Generally, our impairment on such loans is measured by reference to the fair value of the collateral. Interest income on impaired loans is recognized on the cash basis. Our loan policies state that after all collection efforts have been exhausted, and the loan is deemed to be a loss, then the remaining loan balance will be charged off against the allowance. All loans are evaluated for loss potential once it has been determined by our Watch Committee that the likelihood of repayment is in doubt. When a loan is past due for at least 90 days or a deterioration in debt service coverage ratio, guarantor liquidity, or loan-to-value ratio has occurred that would cause concern regarding the likelihood of the full repayment of principal and interest, and the loan is deemed not to be well secured, the loan is moved to nonaccrual status and a specific reserve is established if the net realizable value is less than the principal value of the loan balance(s). Once the actual loss value has been determined, this amount is charged off against the allowance. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.
The adjustments to historical loss experience are based on our evaluation of several qualitative factors, including:
? changes in lending policies, procedures, and practices;
changes in international, national, state and local economic and business
? conditions and developments that affect the collectability of the portfolio,
including the condition of various market segments;
? changes in the nature and volume of the loan portfolio;
? changes in the experience, ability and depth of the lending staff;
? changes in the volume and severity of past due, nonaccrual, and adversely
classified loans;
? changes in the quality of our loan review system;
? changes in the value of underlying collateral for collateral-dependent loans;
? the existence of any concentrations of credit, and changes in the level of such
concentrations;
? the effect of other external factors such as competition and legal and
regulatory requirements; and
? any other factors that management considers relevant to the quality or
performance of the loan portfolio.
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We evaluate the allowance based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease. Commercial and commercial real estate loans generally have greater credit risks compared to the one- to four-family residential mortgage loans in our loan portfolio, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Actual loan and lease losses may be significantly more than the allowance we have established, which could have a material negative effect on our financial results. Generally, we underwrite commercial loans based on cash flow and business history and receive personal guarantees from the borrowers where appropriate. We generally underwrite commercial real estate loans and residential real estate loans at a loan-to-value ratio of 85% or less at origination. In the event that a loan becomes significantly past due, we will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to ascertain property values. We will also obtain formal appraisals on a regular basis even if we are not considering liquidation of the property to repay a loan. It is our practice to obtain updated appraisals if there is a material change in market conditions or if we become aware of new or additional facts that indicate a potential material reduction in the value of any individual property collateral. For impaired loans, we utilize the appraised value or present value of expected cash flows in determining the appropriate specific allowance attributable to the loan. In addition, changes in the appraised value of multiple properties securing our loans may result in an increase or decrease in our general allowance as an adjustment to our historical loss experience due to qualitative and environmental factors, as described above. Nonperforming loans are evaluated at the time the loan is identified as impaired, on a case by case basis, and reported at the lower of cost or net realizable value. Net realizable value is measured based on the value of the collateral securing the loan, less estimated costs to sell. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by us. Appraised values may be discounted based on management's historical experience, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business. The difference between the appraised value and the principal balance of the loan will determine the specific allowance valuation required for the loan, if any. Nonperforming loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. We evaluate the loan portfolio on at least a quarterly basis, more frequently if conditions warrant, and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, theMaryland Office of the Commissioner of Financial Regulation ("the Commissioner") and theFDIC will periodically review the allowance. The Commissioner and theFDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination. 64 Table of Contents
Allocation of Allowance for Loan and Lease Losses
The following table sets forth the allocation of the allowance by loan category and the allowance within each category as a percent of loans in each category at the dates indicated. The allowance allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. Loans funded through the PPP program are fully guaranteed by theU.S. government and we anticipate that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Therefore, no allowance is attributable to this loan portfolio segment. June 30, 2021 December 31, 2020 Allowance Allowance (in thousands) Amount Ratio Amount Ratio Real estate loans: Construction and land loans$ 1,102 0.93 %$ 1,349 1.16 % Residential first lien loans 2,533 0.62 2,309 0.61 Residential junior lien loans 476 0.86 832 1.39 Commercial owner occupied loans 2,047 0.81 2,207 0.88 Commercial non-owner occupied loans 7,614 1.46 7,156 1.46 Total real estate loans 13,772 1.02 13,853 1.07 Commercial loans and leases 3,218 0.90 4,131 1.24 Consumer loans 1,298 1.52 1,178 1.84 Total portfolio loans (1) 18,288 1.02 19,162 1.13
Paycheck Protection Program (PPP) loans - -
- - Total loans and leases$ 18,288 0.94 %$ 19,162 1.03 %
(1) Denotes a non-GAAP measure - refer to the section "Use of Non-GAAP Financial
Measures and Related Reconciliations" for additional detail
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our
primary sources of funds consist of deposit inflows, loan repayments, advances
from the FHLB, and the sale of securities available for sale. While maturities
and scheduled amortization of loans and securities are predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. Our management
Asset/Liability Committee ("ALCO") is responsible for establishing and
monitoring our liquidity targets and strategies in order to ensure that
sufficient liquidity exists for meeting the borrowing needs and deposit
withdrawals of our customers as well as unanticipated contingencies. We believe
that we have enough sources of liquidity to satisfy our short- and long-term
liquidity needs as of June 30, 2021 and December 31, 2020 .
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
? Expected loan demand
? Expected deposit flows and borrowing maturities
? Yields available on interest-bearing deposits with banks and securities
? The objectives of our asset/liability management program
The most liquid of all assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. AtJune 30, 2021 andDecember 31, 2020 , cash and cash equivalents totaled$72.4 million and$74.6 million , respectively. Our excess liquid assets were invested in interest-bearing deposits in banks (primarily theFederal Reserve Bank of Richmond ). Our cash flows are derived from operating activities, investing activities and financing activities as reported in our statements of cash flows included in our unaudited Condensed Consolidated Financial Statements. 65
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Our total commitments to extend credit and available credit lines are discussed in the "Commitments and Off-Balance Sheet Arrangements" section of this MD&A, including a table presenting our comparative exposure atJune 30, 2021 andDecember 31, 2020 . CDs maturing within one year atJune 30, 2021 totaled$401.0 million , or 95.7% of total CDs and 19.8% of total deposits; by comparison, CDs maturing within one year atDecember 31, 2020 totaled$416.1 million , or 85.9% of total CDs and 21.1% of total deposits. If we do not retain these deposits, we may be required to seek other sources of funds, including loan and securities sales and FHLB advances. Based on current market conditions, approximately 24% of our$120.4 million in customer CDs with maturities of one year or less are at significantly higher rates than current market rates for both customer CDs and other funding sources. As a result, we do not expect to retain some portion of our customer CDs with maturities of one year or less as ofJune 30, 2021 . Our primary investing activity is originating loans. During the six months endedJune 30, 2021 andJune 30, 2020 , cash used to fund net loan growth was$77.5 million and$153.1 million , respectively. Portfolio loans accounted for$101.5 million of the net loan growth while PPP loans declined by$25.0 million in the first six months of 2021. During the first six months of 2021, we purchased$54.6 million of securities to substantially offset$55.8 million of securities maturities / calls / paydowns. In the first six months of 2020, we purchased$179.7 million of securities which were partially offset$130.8 million of securities maturities / calls / paydowns. Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase in cash provided from deposits during the first six months of 2021 and 2020 of$50.1 million and$116.3 million , respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors, including the pandemic which caused significant growth in deposit balances held by both households and businesses. Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB, which can provide an additional source of funds. FHLB advances increased to$205.0 million atJune 30, 2021 compared to$200.0 million atDecember 31, 2020 . AtJune 30, 2021 , we had an available line of credit for$656.3 million at the FHLB, with borrowings limited to a total of$485.0 million based on pledged collateral. AtDecember 31, 2020 , we had an available line of credit for$639.7 million at the FHLB, with borrowings limited to a total of$475.0 million based on pledged collateral. Additionally, we participated in and continue to have access to borrowing availability under the FRB's PPP Lending Facility ("PPPLF"). AtJune 30, 2021 andDecember 31, 2020 we had no outstanding PPPLF advances. The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. AtJune 30, 2021 andDecember 31, 2020 , we exceeded all regulatory capital requirements and are considered "well capitalized" under regulatory guidelines.
Commitments and Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These financial instruments are limited to commitments to originate loans and involve, to varying degrees, elements of credit, interest rate, and liquidity risk. We do not believe these represent unusual risks, and management does not anticipate any losses that would have a material effect on us. Outstanding loan commitments and lines of credit at the dates indicated were as follows: (in thousands) June 30, 2021 December 31, 2020 Unfunded loan commitments$ 145,428 $ 147,603 Unused lines of credit 424,356 407,722 Letters of credit 14,018 14,707 Total commitments to extend credit and available credit lines$ 583,802 $ 570,032 66 Table of Contents Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. We generally base the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any one time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer's credit-worthiness on a case-by-case basis. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. Our reserve for potential credit losses related to these commitments, recorded in other liabilities on the unaudited Condensed Consolidated Balance Sheets, was$320 thousand at bothJune 30, 2021 andDecember 31, 2020 .
Impact of Inflation and Changing Prices
Our financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
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