What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-31 compared with 2021-03-26 · 211 added, 164 removed, 385 unchanged (49% of the section changed)

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The Company recorded net income of $15.37 million for 2021 and net income of $15.73 million for 2020.

The basic and diluted income per share was $1.27 and $1.28 from continuing operations for fiscal year 2020 and 2019, respectively.

When comparing net income from continuing operations for 2020 to 2019, earnings decreased due to a higher provision for credit losses and higher noninterest expenses, almost entirely offset by an increase in net interest income and noninterest income.

Total assets were $1.933 billion at December 31, 2020, a $374.1 million, or 24.0%, increase when compared to the $1.559 billion at December 31, 2019.

The primary factors contributing to the increase were increases in gross loans of $205.6 million, which included PPP loans of $122.9 million, interest-bearing deposits with other banks of $93.7 million and $73.2 million in securities.

Total deposits increased $359.4 million, or 26.8%, to $1.701 billion at December 31, 2020.

The overall increase in deposits can be attributed to a combination of factors which include, direct stimulus payments to customers, customers improving their liquidity position by participating in our deferred loan program and the result of new business and municipal relationships developed during 2020.

Total stockholders’ equity increased $2.2 million, or 1.1%, to $195.0 million, or 10.09% of total assets at December 31, 2020.

The increase in total stockholders’ equity was primarily due to current year earnings and other comprehensive income, partially offset by repurchases of the Company’s common stock throughout the year totaling $9.1 million.

COVID-19 Pandemic

The outbreak of COVID-19 has led to adverse impacts on economic conditions and created uncertainty in financial markets.

Correspondingly, in early March 2020, the Company began preparing for potential disruptions and government limitations of activity in the markets in which we serve.

Our team activated our Business Continuity Program and was able to quickly execute on multiple initiatives to adjust our operations to protect the health and safety of our employees and clients.

Since the beginning of the crisis, we have been in close contact with our clients, assessing the level of impact on their businesses, and providing relief programs according to each client’s specific situation and qualifications.

We have also enhanced awareness of digital banking offerings, expanded services at our drive through locations, and allowed customers to make appointments in the branch for critical services.

The Company’s branches remain open and have taken steps to comply with various government directives regarding “social distancing,” as well as, enhanced cleaning and disinfecting of all surface areas to protect its clients and employees.

The basic and diluted income per share was $1.17 and $1.27 for fiscal year 2021 and 2020, respectively.

When comparing net income for 2021 to 2020, earnings decreased due to higher noninterest expenses, which included merger-related expenses of $8.5 million related to the acquisition of Severn.

Without these merger-related expenses, noninterest expense increased $9.9 million, among all expense categories except other real-estate owned expense and general legal and professional fees (non-merger related).

However, in fiscal 2021 compared to fiscal 2020, the Company recorded increases in net interest income of $11.5 million, noninterest income of $2.7 million and a decrease in provision for credit losses of $4.3 million.

Total assets were $3.460 billion at December 31, 2021, a $1.5 billion, or 79.0%, increase when compared to $1.933 billion at the end of 2020.

The merger with Severn, added approximately $1.1 billion to total assets as of October 31, 2021.

Excluding the day 1 value of acquired assets, total assets increased $406.8 million, or 21.0%, when compared to the end of 2020.

This non-merger related growth in assets reflected increases in investment securities held to maturity of $214.6 million, interest-bearing deposits with other banks of $77.6 million, loans of $80.3 million and loans held for sale of $28.1 million, partially offset by a decrease in investment securities available for sale of $43.6 million.

Total deposits increased $1.326 billion, or 77.9%, when compared to December 31, 2020.

The merger with Severn, added approximately $955.3 million to total deposits as of October 31, 2021.

Excluding these assumed deposits, total deposits increased $370.2 million, or 21.8%, when compared to the end of 2020.

The significant movement into deposit accounts, excluding the deposits acquired from Severn, continues to be driven by new account openings and municipal deposit inflows.

Total stockholders’ equity increased $155.7 million, or 79.8%, when compared to December 31, 2020, primarily due to the acquisition of Severn.

At December 31, 2021, the ratio of total equity to total assets was 10.14% and the ratio of total tangible equity to total tangible assets was 8.25%.

Small Business Administration’s Paycheck Protection Program

We established our process for participating in the Small Business Administration’s Paycheck Protection Program (“PPP”) that enabled our clients to utilize this valuable resource beginning in April 2020.

Loans under the PPP are designed to provide assistance for small businesses during the COVID-19 pandemic to help meet the costs associated with payroll, mortgage interest, rent and utilities.

Loans under the PPP were designed to provide assistance for small businesses during the COVID-19 pandemic to help meet the costs associated with payroll, mortgage interest, rent and utilities.

These loans are guaranteed by the SBA and forgiveness of the loans, by the SBA, is granted to the borrower if the borrower uses at least 60% of the funds to cover payroll costs and benefits.

Forgiveness is also based on the small business maintaining or quickly rehiring their employees and maintaining salary levels for their employees.

Loans under the PPP do not require any collateral or personal guarantees, as such, these loans are included in the Company’s commercial loans segment.

Through August 8, 2020, our team was able to process 1,488 PPP loans for approximately $126.7 million in the first and second rounds of the program, which has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals.

We are also closely monitoring

the credit quality of the loan portfolio and monitor lines of credit draws for deviation from normal activity to improve loan performance and reduce credit risk.

Short-term Modifications for Borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company is providing modifications where appropriate, including interest only payments or payment deferrals for clients that could be adversely affected by the COVID-19 pandemic.

Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs.

In accordance with interagency guidance issued in April 2020, these short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented.

For the year ended December 31, 2020, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million, of which only $34.9 million, or 2.40% of the total portfolio remained on deferral as of December 31, 2020.

Loans Modified

Balance as of

Modified as of

Only Payments

(Dollars in thousands)

December 31, 2020

(6 months or less)

Hospitality Industry

Non-owner occupied Retail Stores

Non-owner occupied Restaurants

Owner-occupied Retail Stores

Owner-occupied Restaurants

Oil & Gas Industry

Other Commercial Loans

Total Commercial Loans

Residential 1-4 family Personal

Residential 1-4 family Rentals

Home Equity Loans

Total Residential Real Estate Loans

Consumer Loans

Mortgage Warehouse Loans

Credit Card, Overdrafts and Other

Loans under the PPP did not require any collateral or personal guarantees, as such, these loans are included in the Company’s commercial loans segment.

Between April 2020 and through the date the PPP program ended we processed 1,488 PPP loans for approximately $126.7 million, which has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals.

We are also closely monitoring the credit quality of the loan portfolio and monitor lines of credit draws for deviation from normal activity to improve loan performance and reduce credit risk.

As of December 31, 2021, the Company had 227 PPP loans totaling $27.6 million that were outstanding, inclusive of loans issued pre-merger and those acquired from Severn.

The Company had no COVID related loan deferrals as of December 31, 2021.

CRITICAL ACCOUNTING POLICIES

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These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses and goodwill are critical accounting policies.

These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

Loans Acquired in a Business Combination

Acquired loans are classified as either (i) purchase credit-impaired (“PCI”) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments.

When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status.

The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans.

Estimates of cash flows for PCI loans require significant judgment.

Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses.

Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans.

Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.

PCI loans are not classified as nonperforming by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows.

Purchased performing loans are recorded at fair value, including a credit discount.

The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans.

There is no allowance for loan losses established at the acquisition date for purchased performing loans.

A provision for loan losses may be required for any deterioration in these loans in future periods.

Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of credit losses inherent in the loan portfolio as of the balance sheet date.

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A discussion of the allowance determination and factors driving changes in the amount of the allowance for credit losses is included in the Asset Quality - Provision for Credit Losses and Risk Management section below.

Goodwill Impairment

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.

Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment.

Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate.

Goodwill is tested at least annually for impairment, usually during the fourth quarter, and on an interim basis if circumstances dictate.

Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill.

If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss.

As of December 31, 2020, the Company had only one banking reporting unit.

As of December 31, 2021, the Company had banking and mortgage reporting unit.

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

The Notes to the Consolidated Financial Statements discuss new accounting policies that the Company adopted during 2020 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted.

The Notes to the Consolidated Financial Statements discuss the expected impact of accounting policies recently issued or proposed but not yet required to be adopted.

To the extent the adoption of new accounting standards materially affects our financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of this discussion and Notes to the Consolidated Financial Statements.

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This represented a $11.5 million, or 21.9%, increase from 2020.

The increase in net interest income when comparing 2020 to 2019 was primarily the result of higher average balances on loans and lower average rates paid on interest-bearing deposits, partially offset by lower average yields on taxable investment securities and interest-bearing deposits with other banks.

In addition, the issuance of subordinated debt in the third quarter of 2020, contributed to the offset in the increase in net interest income when comparing the periods.

Our net interest margin (i.e., tax-equivalent net interest income divided by average earning assets) represents the net yield on earning assets minus the cost of average interest liabilities.

The net interest margin is managed through loan and deposit pricing and asset/liability strategies.

The increase in net interest income when comparing 2021 to 2020 was primarily the result of higher average balances on earnings assets of $574.1 million, or 35.6% and lower rates paid on interest-bearing deposits of 30bps, partially offset by the addition of subordinated debt from the acquisition of Severn and a full year of legacy subordinated debt issued by the Company in the third quarter of 2020.

Our net interest margin (i.e., tax-equivalent net interest income divided by average earning assets) is managed through loan and deposit pricing and asset/liability strategies.

The net interest margin was 2.94% for 2021 and 3.27% for 2020.

The net interest margin decreased when comparing 2021 to 2020 primarily due to a decline in the average yields on total earning assets of 50bps, which was compounded by the significant increase in deposits, resulting in excess liquidity being invested in lower yielding assets.

Partially offsetting the decrease in average yields on earnings assets was a decline in the average rates paid on interest-bearing deposits of 34bps and the decrease in the average balance on long-term advances from the FHLB.

In addition, subordinated debt both issued by the Company in 2020 and acquired in the Severn merger, contributed $1.0 million in additional interest expense.

Partially offsetting the decrease in average yields on earnings assets and subordinated debt, was a decline in the average rates paid on interest-bearing deposits of 30bps and the decrease in the average balance on long-term advances from the FHLB.

The net interest spread, which is the difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities was 2.80% for 2021 and 3.05% for 2020.

The following table sets forth the major components of net interest income, on a tax-equivalent basis, for the years ended December 31, 2020 and 2019.

The following table sets forth the major components of net interest income, on a tax-equivalent basis, for the presented years ended December 31.

(Dollars in thousands)

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Money market and savings deposits

Brokered Deposits

Certificates of deposit $100,000 or more

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(2) Average loan balances include nonaccrual loans.

(3) Interest income on loans includes amortized loan fees, net of costs, and all are included in the yield calculations.

(3) Interest income on loans includes amortized loan fees, net of costs, and accretion of discounts on acquired loans, which are included in the yield calculations.

On a tax-equivalent basis, total interest income was $70.3 million for 2021 compared to $59.8 million for 2020.

The decrease in interest income for 2020 compared to 2019 was primarily due to the decrease in the average yields of loans, offset by the increase in the average balance on loans and the addition of fees, net of costs, on PPP loans during 2020.

The average balance of loans in 2020 increased $142.5 million and the yield earned on these loans declined to 4.13% from 4.53%.

This was primarily the result of the origination of PPP loans which had an average balance at the end of 2020 of $58.6 million and an average yield of 2.18%, well below the average yield on the Bank’s traditional loans.

The decrease in interest income on interest-bearing deposits and taxable investment securities was impacted by Federal Reserve rate cuts during the first quarter of 2020, as seen in the Rate/Volume Variance Analysis below.

The increase in interest income for 2021 compared to 2020 was primarily due to the increase in the average balance in earning assets of $574.1 million which was due to both the acquisition of Severn and organic growth in 2021.

The interest on loans had the most significant impact on total interest income, which increased $8.4 million in 2021, due to the increase in the average balance of loans of $199.6 million, or 14.6%, combined with accretion income of approximately $628 thousand in relation to acquired loans.

In addition, PPP loan forgiveness for the year 2021 also contributed to fees, net of costs, of $3.8 million in 2021 compared to $977 thousand in 2020.

The increase in interest income on taxable investment securities and interest-bearing deposits was due to increases in their respective average balances of $191.5 million and $183.0 million, the result of excess liquidity and the acquisition of Severn during the fourth quarter of 2021.

As a percentage of total average earning assets, loans, investment securities, and interest-bearing deposits were 71.8%, 15.1%, and 13.1%, respectively, for 2021.

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Interest expense was $6.0 million for 2021 compared to $7.1 million for 2020.

The decrease in interest expense for 2020 was primarily due to decreases in the average rates paid on interest-bearing deposits, partially offset by the addition of interest on subordinated debt in the third quarter of 2020.

During 2020, demand deposits, money market/savings deposits and certificates of deposit over $100 thousand experienced the most significant growth with increases in the average balances of $90.9 million, $45.8 million and $16.1 million, respectively, while the average rates paid on these deposits (decreased)/increased (43), (45) and 7bps, respectively.

In addition, the elimination of brokered deposits resulted in a decrease in the average balance of $16.4 million for 2020.

During 2020, the lower average rates on interest-bearing liabilities, specifically short-term and long-term advances from the FHLB produced $229 thousand less in interest expense and decreased volume produced $563 thousand less in interest expense, as shown in the table below.

Partially offsetting these decreases was the addition of subordinated debt during 2020 resulting in an average balance of $8.6 million with a rate of 6.06%.

The decrease in interest expense for 2021 was primarily due to the decrease in the average rates paid on interest-bearing deposits, partially offset by a full year of legacy subordinated debt and the addition of subordinated debt acquired from Severn.

During 2021, money market/savings deposits, demand deposits and certificates of deposit over $100 thousand experienced the most significant growth with increases in the average balances of $260.3 million, $106.6 million and $15.1 million, respectively, while the average rates paid on these deposits decreased 6, 12 and 86bps, respectively.

The long-term advances from the FHLB declined in both the average balance and rates paid on these borrowings due to the payoff of these advances by the Company in April of 2020, partially offset by the addition of these borrowings from the acquisition of Severn, which are scheduled to mature in October of 2022.

The following Rate/Volume Variance Analysis identifies the portion of the changes in tax-equivalent net interest income attributable to changes in volume of average balances or to changes in the yield on earning assets and rates paid on interest-bearing liabilities.

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Money market and savings deposits

Brokered deposits

Time deposits

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Noninterest Income

Noninterest income from continuing operations increased $729 thousand, or 7.3%, in 2020 when compared to 2019.

The increase in noninterest income in 2020 when compared to 2019 was primarily due to increases in other noninterest income of $1.4 million which was the result of increases in BOLI and COLI income of $656 thousand, swap fee income of $495 thousand and other fees on bank services of $264 thousand, partially offset by a decrease in service charges on deposit accounts of $1.1 million.

In addition, the Bank had gains on sales of securities during 2020 of $347 thousand and an increase in trust and investment fee income of $36 thousand.

The significant decrease in bank service fees was due to the Bank providing fee waivers during 2020 for customers who were impacted by the pandemic.

The increase in BOLI income was attributed to a full year of earnings from $25.6 million in insurance contracts purchased in 2019 used to offset future employee benefit costs.

The following table summarizes our noninterest income from continuing operations for the years ended December 31.

Noninterest income increased $2.7 million, or 25.6%, in 2021 when compared to 2020.

The increase in noninterest income was largely due to the addition of the mortgage division and Mid-Maryland title from Severn.

The mortgage division added $948 thousand and Mid-Maryland contributed $247 thousand in 2021.

In addition, the increase in noninterest income in 2021 included increases in debit card interchange fees of $958 thousand, service charges on deposit accounts of $557 thousand and trust and investment fee income of $323 thousand, partially offset by a decrease in the gains on sales and calls of investment securities of $345 thousand.

The following table summarizes our noninterest income from continuing operations for the presented years ended December 31.

Change from Prior Year

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Gains on sales and calls of investment securities

Interchange credits

Mortgage-banking revenue

Title Company revenue

Other noninterest income

Noninterest Expense

Noninterest expense from continuing operations increased $842 thousand, or 2.2%, in 2020 when compared to 2019.

The increase in noninterest expenses was primarily due to increases in employee benefits of $1.2 million, due to an increase in medical claims from the Company’s self-funded insurance program and a full year of expense for the supplemental executive retirement plans (“SERPs”) in 2020, data processing of $498 thousand, the result of utilizing additional services from our core processor, occupancy expense of $161 thousand due to the addition of a new branch in 2020 and FDIC insurance premium expense due to the absence of a credit received in 2019, partially offset by decreases in salaries and wages of $478 thousand, OREO expenses, net of $369 thousand and other noninterest expenses of $432 thousand.

The decrease in salaries and wages resulted from the deferral of direct origination costs related to the origination of PPP loans in 2020.

The decrease in other noninterest expense was primarily due to decreases in advertising, marketing, travel and entertainment expenses due to the pandemic, coupled with a decrease in other loan expenses.

Noninterest expense excluding merger related expenses, increased $9.9 million, or 25.7%, when compared to the same period in 2020.

The increase was mainly the result of increases in salaries and wages, employee related benefits, occupancy expense, data processing, amortization of intangible assets and FDIC insurance premium expense, which were all significantly impacted by adding Severn and its operations in the last two months of 2021.

In addition, as previously mentioned, during 2021, the Company recorded merger-related expenses of $8.5 million due to the acquisition of Severn .

The Company had 454 full-time equivalent employees at December 31, 2021, and 287 full-time equivalent employees at December 31, 2020.

The following table summarizes our noninterest expense from continuing operations for the years ended December 31.

The following table summarizes our noninterest expense for the years ended December 31.

Change from Prior Year

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Legal and professional fees

Merger related expenses

Other noninterest expenses

The Company reported an income tax expense for continuing operations of $5.3 million for 2020, compared to an income tax expense for continuing operations of $5.6 million for 2019.

The effective tax rate for continuing operations was 25.3% for 2020 and 25.6% for 2019.

The Company’s effective tax rate remained relatively unchanged for 2020 compared to 2019.

The Company reported an income tax expense of $5.8 million for 2021, compared to an income tax expense of $5.3 million for 2020.

The effective tax rate was 27.4% for 2021 and 25.3% for 2020.

The Company’s effective tax rate increased in 2021 due to slightly higher pre-tax earnings, nondeductible expenses related to the merger and the reapportionment of assets and revenue for state income tax purposes.

Please refer to Note 18 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K for further information.

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These liquid investments are maintained at a level that management believes is necessary to meet current liquidity needs.

However, in recent years, due to the significant increases in deposits, both organically and through acquisition, the amounts invested exceeded then current liquidity needs.

Total interest-bearing deposits with other banks increased $396.4 million from $170.3 million at December 31, 2020 to $566.7 million at December 31, 2021.

This significant increase was the result of deposit growth of $359.4 million, or 26.8%.

Average interest-bearing deposits with other banks increased $63.8 million in 2020 when compared to 2019.

The increase in 2020 was due to higher average balances on interest and noninterest-bearing deposits of $139.0 million and $82.7 million, respectively.

This significant increase was primarily due to the acquisition of Severn on October 31, 2021 which added $318.8 million in interest-bearing deposits with other banks.

Organic growth in customer deposits, excluding the acquisition of Severn, which increased $370.2 million, or 21.8%, during 2021 when compared to 2020, also contributed to the increase in interest-bearing deposits with other banks.

Investment Securities

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Total investment securities increased $316.8 million from $210.3 million at December 31, 2020 to $527.1 million at December 31, 2021.

The Bank purchased $130.7 million in securities in 2020, of which $73.5 million was classified as available for sale and $57.2 million as held to maturity.

The significant change in investment strategy when comparing 2020 to 2019 was due to excess liquidity experienced in 2020, which was partially utilized to purchase securities with a higher yield than the then current overnight Fed funds rate.

The Bank acquired $146.3 million from the acquisition of Severn in the fourth quarter of 2021.

Excluding acquired securities, the Bank purchased $255.5 million in securities in 2021, all of which were classified as held to maturity.

The investment strategy remained relatively consistent when comparing 2021 to 2020 due to excess liquidity, which was partially utilized to purchase securities with higher average yields than current overnight Fed funds rate.

The one exception to the investment strategy in 2021 was classifying new security purchases as held to maturity.

This change in investment strategy was implement by management to avoid large unrealized losses in available for sale securities which are accounted for within accumulated other comprehensive income and the intention to hold such securities to maturity to avoid any realized losses.

The larger percentage of securities designated as held to maturity reflects the amount that management believes is not needed to support our anticipated growth and liquidity needs.

We do not typically invest in derivative securities and held no such investments at December 31, 2020 or December 31, 2019.

Investment securities available for sale were $117.0 million at the end of 2021 and $139.6 million at the end of 2020.

The Bank purchased $73.5 million in available for sale securities in 2020 and $0 for 2019.

During 2020, the Bank purchased thirteen mortgage-backed securities and four government agency bonds of $55.4 million and $18.0 million, respectively.

The Bank did not purchase any available for sale securities in 2021 and purchased $73.5 million in available for sale securities in 2020.

During 2020, the Bank purchased thirteen mortgage-backed securities and four government agency bonds aggregating $55.4 million and $18.0 million, respectively.

At year-end 2021, 19.1% of the available for sale securities in the portfolio were U.S.

Government agencies and 83.1% of the securities were mortgage-backed securities, compared to 19.4% and 80.6%, respectively, at year-end 2019.

Government agencies, 79.2% of the securities were mortgage-backed securities and 1.7% were corporate bonds, compared to 16.9%, 83.1% and 0%, respectively, at year-end 2020.

Our investments in mortgage-backed securities are issued or guaranteed by U.S.

Government agencies or government-sponsored agencies.

Investment securities held to maturity were $65.7 million at the end of 2020 and $8.8 million at the end of 2019.

Investment securities held to maturity amounted to $404.6 million at the end of 2021 and $65.7 million at the end of 2020.

The Bank purchased $255.5 million in held to maturity securities in 2021 and $57.2 million for 2020.

During 2020, the Bank purchased six mortgage-backed securities of $27.4 million, five government agency bonds of $17.7 million and seven subordinated debt instruments from other banks of $12.1 million.

In 2019, the Company purchased one corporate bond of $4.0 million.

During 2021, the Bank purchased thirty-two mortgage-backed securities totaling $177.1 million, fifteen government agency bonds totaling $75.9 million and two subordinated debt instruments from other banks amounting to $2.5 million.

In 2020, the Bank purchased six mortgage-backed securities totaling $27.4 million, five government agency bonds amounting to $17.7

million and seven subordinated debt instruments from other banks amounting to $12.1 million.

At year-end 2021, 21.5% of the held to maturity securities in the portfolio were U.S.

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At year-end 2020, 28.7% of the held to maturity securities in the portfolio were U.S.

Government agencies, 79.4% of the securities were subordinated debt instruments and 4.6% were community reinvestment bonds.

The following tables set forth the weighted average yields by maturity category of the bond investment portfolio as of December 31, 2020 and 2019.

Government agencies, 41.5% of the securities were mortgage-backed securities, 29.2% of the securities were subordinated debt instruments and less than 1% were community reinvestment bonds.

The following tables set forth the weighted average yields by maturity category of the bond investment portfolio as of December 31.

1 Year or Less

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Mortgage-backed

Other Debt Securities

Total available for sale

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Government agencies

Mortgage-backed

States and political subdivisions 2

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2 Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.

Loans Held for Sale

We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value.

At December 31, 2021, the fair value of loans held for sale amounted to $37.7 million.

At December 31, 2020, the Company had no loans held for sale.

When we sell mortgage loans we make certain representations to the purchaser related to loan ownership, loan compliance and legality, and accurate documentation, among other things.

If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, we may be required to repurchase the loan or indemnify the purchaser.

Loans Held for Investment

The loan portfolio is the primary source of our income.

Loans totaled $1.5 billion at December 31, 2020, an increase of $205.6 million, or 16.5%, from 2019.

At December 31, 2020, PPP loans accounted for $122.9 million of total loans.

Loans totaled $2.1 billion at December 31, 2021, an increase of $664.9 million, or 45.7%, from year end 2020.

The following table represents the composition of the Company’s loan portfolio for the presented years ended December 31.

Loans acquired from

(Dollars in thousands)

Severn acquisition

Residential real estate

Commercial real estate

Total loans excluding PPP loans

Allowance for credit losses

Total loans, net

The acquisition of Severn, added $584.6 million in total loans as of the acquisition date, of which $553.0 million in total loans remained outstanding as of December 31, 2021.

Excluding these loans and legacy PPP loans, total legacy loans increased $216.3 million, or 16.2% when compared to December 31, 2020.

At December 31, 2021 and December 31, 2020, PPP loans accounted for $27.6 million and $122.8 million of total loans, respectively.

Most of our loans, excluding PPP loans, are secured by real estate and are classified as construction, residential or commercial real estate loans.

The increase in loans, excluding PPP loans, was comprised of increases in commercial real estate loans of $74.7 million, or 12.7%, consumer loans of $13.7 million, or 77.4%, construction loans of $6.9 million, or 6.9% and residential loans of $1.0 million, or less than 1%, at December 31, 2020 compared to December 31, 2019.

These increases

were partially offset by a decrease of $13.6 million, or 13.4%, in commercial loans, excluding PPP loans.

At December 31, 2020, excluding PPP loans, the loan portfolio was comprised of 49.7% commercial real estate, 33.3% residential real estate, 8.0% construction, 6.6% commercial and 2.4% consumer.

The increase in legacy loans, excluding PPP loans, was comprised of increases in consumer loans of $93.0 million, or 295.7%, commercial loans of $40.0 million, or 45.2%, construction loans of $38.4 million, or 36.0%, residential real estate loans of $26.3 million, or 5.9% and commercial real estate loans of $18.6 million, or 2.8% at December 31, 2021 compared to December 31, 2020.

At December 31, 2021, the legacy loan portfolio, excluding PPP loans was comprised of 43.9% commercial real estate, 30.4% residential real estate, 9.4% construction, 8.3% commercial and 8.0% consumer.

That compares to 49.7%, 33.3%, 8.0%, 6.6% and 2.4, respectively, at December 31, 2020.

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See the discussion below under the caption “Asset Quality - Provision for Credit Losses and Risk Management” and Note 4, “Loans and Allowance for Credit Losses”, in the Notes to Consolidated Financial Statements for additional information.

At December 31, 2020 and 2019, the Company did not have any loans held for sale.

We do not engage in foreign or subprime lending activities.

The table below sets forth the maturities and interest rate sensitivity of the loan portfolio at December 31, 2020.

The following table below sets forth the maturities and interest rate sensitivity of the loan portfolio at December 31, 2021.

Maturing after

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The Bank uses deposits primarily to fund loans and to purchase investment securities.

Total deposits increased from $1.34 billion at December 31, 2019 to $1.70 billion at December 31, 2020 due to increases in every deposit product, with the exception of a decrease in time deposits of $2.2 million.

The increases in deposit products consisted of the following:

noninterest-bearing deposits of $152.5 million, interest-bearing checking deposits of $144.0 million, and savings and money market accounts of $65.1 million.

Average interest-bearing deposits increased $139.0 million, or 15.1%, in 2020, compared to an increase of $64.0 million, or 7.5% in 2019.

Average certificates of deposit and other time deposits increased $18.6 million, or 7.2% in 2020, compared to a increase of $14.5 million, or 5.9% in 2019.

Average noninterest-bearing deposits increased $82.7 million, or 23.7%, in 2020, compared to an increase of $22.0 million, or 6.7% in 2019.

The elimination of brokered deposits in late 2019 decreased the average balance in these deposits in 2020 by $16.4 million.

Deposits provided funding for approximately 92.4% and 89.0% of average earning assets for 2020 and 2019, respectively.

The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years ended December 31, 2020 and 2019.

Total deposits increased from $1.70 billion at December 31, 2020 to $3.03 billion at December 31, 2021.

The Severn acquisition added approximately $955.3 million to total deposits as of October 31, 2021.

Excluding these deposits, total deposits increased $370.2 million, or 23.7%, when compared to December 31, 2020.

The increase in deposit products consisted of the following:

demand/money market/savings deposits of $464.4 million and other time deposits of $9.4 million.

Noninterest-bearing deposits decreased $71.5 million.

The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years ended December 31.

Average Balances

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Money market and savings

Brokered deposits

Certificates of deposit, $100,000 to $249,999

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Other time deposits

The increase in average balances in 2021 was significantly impacted by the addition of acquired Severn deposits in the fourth quarter of 2021.

Average interest-bearing deposits increased $384.5 million, or 36.4%, in 2021, compared to an increase of $139.0 million, or 15.1%, in 2020.

Average noninterest-bearing deposits increased $143.2 million, or 33.2%, in 2021, compared to an increase of $82.7 million, or 23.7%, in 2020.

Deposits provided funding for approximately 92.2% and 92.4% of average earning assets for 2021 and 2020, respectively.

The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2021.

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Over 12 months

Total estimated uninsured deposits amounted to $974.8 million and $353.1 million at December 31, 2021 and December 31, 2020, respectively.

Securities Sold Under Retail Repurchase Agreements

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Long-Term Advances from FHLB

The Company occasionally borrows from Federal Home Loan Bank to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient.

The Company had no long-term FHLB borrowings outstanding at the end of 2020 and $15.0 million outstanding at the end of 2019.

The amount of outstanding long-term borrowings at December 31, 2019 consisted of a long-term advance from the FHLB of $15.0 million, which carried an interest rate of 2.82%.

This advance was paid off in April of 2020.

The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient.

The acquisition of Severn added $10.1 million in long-term FHLB borrowings outstanding at the end of 2021, which carried an interest rate of 2.19%, with a maturity date of October 2022.

There were no long-term FHLB borrowings at the end of 2020.

Subordinated Debt

On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain accredited purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.

The Company plans to use the net proceeds of the offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios.

The Notes were structured to qualify as Tier 2 capital of the Company for regulatory capital purposes and bear an initial interest rate of 5.375% until September 1, 2025, with interest during this period payable semi-annually in arrears.

The Company has used the net proceeds of the offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios.

The Notes were structured to qualify as Tier 2 capital of the Company for regulatory capital purposes.

The Notes bear an initial interest rate of 5.375% until September 1, 2025, with interest during this period payable semi-annually in arrears.

From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears.

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The debt balance of $24.6 million is presented net of unamortized issuance costs of $448 thousand at December 31, 2021.

Acquired from Severn

On October 31, 2021, the Company acquired from the Severn merger, Junior Subordinated Debt Securities due in 2035 (“2035 Debentures”) which had an outstanding principal balance of $20.6 million.

The debt balance of $18.2 million is presented net of a fair value adjustment on the date of acquisition of $2.4 million at December 31, 2021.

The 2035 Debentures were issued pursuant to an Indenture dated as of December 17, 2004 (the “2035 Indenture”) between the Company and Wells Fargo Bank, National Association as Trustee.

The 2035 Debentures pay interest quarterly at a floating rate of interest of 3-month LIBOR plus 200 basis points and mature on January 7, 2035.

Payments of principal, interest, premium, and other amounts under the 2035 Debentures are subordinated and junior in right of payment to the prior payment in full of all senior indebtedness of the Company, as defined in the 2035 Indenture.

The 2035 Debentures

are currently redeemable, in whole or in part, by the Company.

regulators have directed banks to cease offering new LIBOR-based products after December 31, 2021.

Existing LIBOR contracts, per above, can continue to be serviced through the June 30, 2023 cessation date;

however, Wells Fargo will be working with customers to move to an ARR in advance of LIBOR cession, where possible.

The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the common equity is owned by the Company.

The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures.

The 2035 Debentures held by the Trust are the sole assets of the Trust.

Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures.

The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures.

We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee.

Under the terms of the 2035 Debentures, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing.

As of December 31, 2021, we were current on all interest due on the 2035 Debentures.

Capital Resources Management

Total stockholders’ equity for the Company was $195.0 million at December 31, 2020, compared to $192.8 million at December 31, 2019.

The increase in stockholders’ equity in 2020 was primarily due to 2020 earnings and accumulated other comprehensive income, which primarily consisted of unrealized gains in available-for-sale securities, which was partially offset by dividends paid to common stockholders and stock repurchases.

Total stockholders’ equity was $350.7 million at December 31, 2021, compared to $195.0 million at December 31, 2020.

The increase in stockholders’ equity in 2021 was primarily due to the acquisition of Severn which added $148.8 million to common stock and additional paid in capital, partially offset by common stock repurchases in the first quarter of 2021.

The ratio of period-end equity to total assets was 10.14% for 2021, as compared to 10.09% for 2020.

We record unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

At December 31, 2020, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding gain, net of tax, of $1.5 million compared to net unrealized holding gain, net of tax, of $218 thousand at December 31, 2019.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

At December 31, 2021, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding gain, net of tax, of $56 thousand compared to net unrealized holding gain, net of tax, of $1.5 million at December 31, 2020.

The Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.

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The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion.

The Company has total consolidated assets of less than $3 billion and is currently exempt from the consolidated capital requirements.

As of December 31, 2020, the Bank was in compliance with all applicable regulatory capital requirements to which it was subject, and was classified as “well capitalized” for purposes of the prompt corrective action regulations.

The following table compares the Bank’s capital ratios to the minimum regulatory requirements as of December 31, 2020 and 2019.

The Company had total consolidated assets of more than $3 billion as of December 31, 2021, due to the acquisition of Severn in the fourth quarter of 2021.

As such, the Company was required to comply with the consolidated capital requirements for the first quarterly report date following the effective date of the business combination as its total assets exceeded $3 billion.

As of December 31, 2021, the Bank and Company were in compliance with all applicable regulatory capital requirements to which they were subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations.

The following table compares the Company’s capital ratios to the minimum regulatory requirements as of December 31.

(Dollars in thousands)

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includes phased in capital conservation buffer of 2.50%

See Note 18 to the Consolidated Financial Statements for further information about the regulatory capital positions of the Bank (December 31, 2020 and 2019).

See Note 20 to the Consolidated Financial Statements for further information about the regulatory capital positions of the Bank (December 31, 2021 and 2020) and Company (December 2021).

Asset Quality - Provision for Credit Losses and Risk Management

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The Company’s goal in managing risk is to reduce earnings volatility, control exposure to unnecessary risk, and ensure appropriate returns for risk assumed.

members of management actively manage risk at the product level, supplemented with corporate level oversight through the Asset/Liability Management Committee and internal audit function.

Senior members of management actively manage risk at the product level, supplemented with corporate level oversight through the Asset/Liability Management Committee and internal audit function.

The risk management structure is designed to identify risk through a systematic process, enabling timely and appropriate action to avoid and mitigate risk.

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The specific allowance is established against impaired loans until charge offs are made.

Loans are considered impaired when it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms.

The qualitative formula allowance is determined based on management’s assessment of industry trends and economic factors in the markets in which we operate.

The determination of the formula allowance involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in our historical loss factors.

Loans are considered impaired when it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms when due.

The qualitative formula allowance is determined based on management’s assessment of industry trends, economic factors in the markets in which we operate, as well as other portfolio related factors.

The determination of the qualitative formula allowance involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in our historical loss factors.

The specific allowance is used to individually allocate an allowance to loans identified as impaired.

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Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer).

Each loan type is assigned allowance factors based on management’s estimate of the risk, complexity and size of individual loans within a particular category using average historical charge-offs by segment over the last 16 quarters.

The qualitative formula allowance is used to estimate the losses on loans stemming from more global factors such as delinquencies, loss history, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of external factors as deemed appropriate.

Each loan type is assigned allowance factors based on management’s estimate of the risk, within a particular category using average historical charge-offs by segment over the last 16 quarters.

Loans that are identified as pass-watch, special mention, substandard and doubtful are considered to have elevated credit risk.

These loans are assigned higher allowance factors than favorably rated loans due to

management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower.

As seen in the table below, the provision for credit losses was $3.9 million for 2020 and $700 thousand for 2019.

The increase in the provision for credit losses was the result of new and elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic.

Net loan charge-offs totaled $519 thousand in 2020 and $536 thousand in 2019.

The allowance for credit losses was $13.9 million, or 1.04% of period end loans, excluding PPP loans, at December 31, 2020, compared to an allowance of $10.5 million, or 0.84% of period end loans at December 31, 2019.

The higher allowance percentage at the end of 2020 when compared to the end of 2019 was the result of higher qualitative factors in the analysis of the allowance for loan losses as it related to current economic conditions and the COVID-19 pandemic.

While the majority of our credit quality metrics have shown improvement or stability from the prior year end, our allowance and related provision is reflective of our evaluation of risks related to the pandemic’s impact on our borrowers and the overall lending environment.

The ratio of net charge-offs to average loans was 0.04% for both 2020 and 2019.

The overall credit quality improved in 2020 compared to 2019 primarily due to a reduction in nonaccrual loans of $5.1 million, loans 90 days and still accruing of $522 thousand and OREO of $74 thousand.

In addition, accruing TDRs declined $504 thousand when comparing 2020 to 2019 which reflects continued workout efforts on outstanding problem loans.

When comparing 2020 to 2019 loan risk categories, substandard and special mention loans decreased $2.5 million and $2.1 million, respectively.

These loans are assigned higher allowance factors than favorably rated loans due to management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower.

As seen in the table below, the provision for credit losses was $(358) thousand for 2021 and $3.9 million for 2020.

The reversal in the provision for credit losses for 2021 was the result of recoveries in 2021 compared to charge-offs in 2020 and the reduction of qualitative factors established in 2020 related to the COVID-19 pandemic.

Net loan recoveries totaled $414 thousand in 2021, compared to net loan charge-offs of $519 thousand in 2020.

The allowance for credit losses was $13.9 million, or 0.93% of period end loans, excluding PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest, at December 31, 2021, compared to an allowance of $13.9 million, or 1.09% of period end loans, excluding PPP loans and acquired loans from Northwest with associated purchase discount mark at December 31, 2020.

The primary drivers for the decrease in the percentage of the allowance for credit losses to total period end loans were improved credit quality and the reduced impact of qualitative factors related to the pandemic.

The ratio of net (recoveries) charge-offs to average loans was (0.03)% for 2021, compared to 0.04% for 2020.

The overall credit quality improved in 2021 compared to 2020 primarily due to a reduction in nonaccrual loans of $3.5 million and loans 90 days and still accruing of $296 thousand, partially offset by an increase in OREO of $532 thousand.

In addition, accruing TDRs declined $1.3 million when comparing 2021 to 2020 which reflects continued workout efforts on outstanding problem loans.

When comparing 2021 to 2020 loan risk categories, substandard and special mention loans

decreased $8.1 million and $3.3 million, respectively.

The decrease in substandard and special mention loans was primarily due to property sales, payoffs and credit risk rating upgrades during 2021.

Pass/Watch loans increased $41.3 million during 2020 when compared to 2019 due to specific industry loans being added due to the impact of the pandemic.

Pass/Watch loans increased $12.0 million during 2021 when compared to 2020 primarily due to pass/watch loans acquired from Severn.

These loans consisted of hospitality, restaurants, retail stores and other commercial loans.

Management will continue to monitor and charge off nonperforming assets as rapidly as possible, and focus on the generation of healthy loan growth and new business development opportunities.

The following table sets forth a summary of our loan loss experience for the years ended December 31.

The following table sets forth a summary of our loan loss experience for the presented years ended December 31.

Percentage of net

charge-offs (recoveries)

(annualized) to

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(Dollars in thousands)

Average balances

during the year

Average balances

during the year

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Allowance for credit losses at period end as a percentage of total period end loans (1)

Allowance for credit losses at period end as a percentage of total period end loans (2)

Allowance for credit losses at period end as a percentage of average loans (3)

Allowance for credit losses at period end as a percentage of period end nonaccrual loans

(1) As of December 31, 2020, this ratio includes PPP loans of $122.9 million.

Excluding these loans, the ratio is 1.04% for December 31, 2020.

(2) As of December 31, 2020, this ratio includes average PPP loans of $85.6 million.

Excluding these loans, the ratio is 1.08% for December 31,2020.

The following table sets forth the allocation of the allowance for credit losses and the percentage of loans in each category to total loans for the years ended December 31.

(1) As of December 31, 2021 and December 31, 2020, these ratios included all loans held for investment, including PPP loans of $27.6 million and $122.8 million, respectively.

(2) As of December 31, 2021 and December 31, 2020, these ratios exclude PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest.

(3) As of December 31, 2021 and December 31, 2020, these ratios included all loans held for investment, including PPP loans of $85.5 million and $85.6 million, respectively.

The following table sets forth the allocation of the allowance for credit losses and the percentage of loans in each category to total loans for the presented years ended December 31.

(Dollars in thousands)

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At December 31, 2021, nonperforming assets were $3.0 million, a decrease of $3.2 million, or 51.4%, when compared to December 31, 2020.

The decrease in nonperforming assets was due to diligent workout efforts by the Company to reduce nonaccrual loans and other real estate owned properties.

Accruing TDRs were $7.0 million at December 31, 2020, a decrease of $504 thousand, or 6.7%, when compared to December 31, 2019.

The decrease in nonperforming assets was due to diligent workout efforts by the Company to reduce nonaccrual loans and loans 90 days past due and still accruing, partially offset by an increase in other real estate owned properties which was significantly impacted by the acquisition of OREO from Severn.

Accruing TDRs were $5.7 million at December 31, 2021, a decrease of $1.3 million, or 19.0%, when compared to December 31, 2020.

At December 31, 2021, the ratio of nonaccrual loans to total assets was 0.06%, a decrease from 0.28% at December 31, 2020.

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The reduction of nonperforming and problem loans is and will continue to be a high priority for the Company.

The following table summarizes our nonperforming assets and accruing TDRs as of December 31.

The following table summarizes our nonperforming assets and accruing TDRs for the years ended December 31.

(Dollars in thousands)

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The Company’s Board of Directors has established a comprehensive asset liability management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”).

The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in the yield curve of U.S.

change in the yield curve of U.S.

Treasury interest rates for maturities from one day to thirty years.

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Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.

Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset.

Additionally, certain assets, such as adjustable rate mortgage loans, have features

which restrict changes in interest rates on a short-term basis and over the life of the asset.

Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the tables.

The Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with GAAP and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation.

As a financial institution, virtually all of our assets and liabilities are monetary in nature and interest rates have a more significant impact on our performance than the effects of general levels of inflation.

A prolonged period of inflation could cause interest rates, wages, and other costs to increase and could adversely affect our results of operations unless mitigated by increases in our revenues correspondingly.

Off-Balance Sheet Arrangements

Credit Commitments

In the normal course of business, to meet the financing needs of its customers, the Bank is party to financial instruments with off-balance sheet risk.

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Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

We maintain and account for derivatives, in the form of interest rate lock commitments (“IRLCs”) and mandatory forward contracts, in accordance with the Financial Accounting Standards Board (“FASB”) guidance on accounting for derivative instruments and hedging activities.

We recognize gains and losses on IRLCs, mandatory forward contracts, and best effort forward contracts on the loan pipeline through mortgage-banking revenue in the Consolidated Statements of Income.

IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives.

We are exposed to price risk from the time a mortgage loan is locked in until the time the loan is sold.

The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 120 days.

For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of to be announced (“TBA”) securities, which are forward contracts, as well as loan level commitments, on a limited basis, in the form of best efforts and mandatory forward contracts.

Mandatory forward contracts are also considered derivatives.

Best efforts forward contracts are not derivatives, however, we have elected to measure and report these commitments at fair value.

These assets and liabilities are included in the Consolidated Statements of Financial Condition in other assets and accrued expenses and other liabilities, respectively.

See Note 15 to the Consolidated Financial Statements contained in this Annual Report on Form 10-K for more information on our derivatives.

Liquidity Management

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To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets.

We have arrangements with correspondent banks whereby we

have $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.

We have arrangements with correspondent banks whereby we have $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.

The Bank is also a member of the FHLB, which provides another source of liquidity, and had credit availability of approximately $363.7 million from the FHLB as of December 31, 2021.

At December 31, 2021, our loan to deposit ratio was approximately 70.0%, lower than the 85.5% at year-end 2020.

This decrease is the result of our excess liquidity position due to our deposits increasing $359.4 million, or 26.8% since year end 2019.

Investment securities available for sale totaling $139.6 million at the end of 2020 were available for the management of liquidity and interest rate risk.

This decrease is the result of our excess liquidity position due to our deposits increasing $1.33 billion, or 77.9%, since year end 2020.

Investment securities available for sale totaling $117.0 million at the end of 2021 were available for the management of liquidity and interest rate risk, subject to certain pledging requirements, which can be easily transitioned to held to maturity securities.

The comparable amount was $139.6 million at December 31, 2020.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis