CBM BANCORP, INC. Overview
Management's discussion and analysis of financial condition atJune 30, 2021 andDecember 31, 2020 and results of operations for the three and six months endedJune 30, 2021 and 2020 is intended to assist in understanding the financial condition and results of operations of the Bank. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item1, of this quarterly report on Form 10-Q. Statement Regarding Forward-Looking Statements This report contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward- looking statements can be identified by use of such words as "may," "will," "anticipate," "believes," "expects," "plans," "estimates," "potential," "continue," "should," and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company's market, interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast and are subject to significant uncertainty. For details on factors that could affect these expectations, see the risk factors and other cautionary language included in the Company's Prospectus datedAugust 7, 2018 (filed with theSecurities and Exchange Commission onAugust 15, 2018 ), and in other periodic and current reports filed by the Company with theSecurities and Exchange Commission . Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward looking statements. GeneralChesapeake Bank of Maryland Our business operations are conducted throughChesapeake Bank of Maryland , a federally chartered stock savings association headquartered inBaltimore County, Maryland . Prior to 1998 and the creation of a mutual holding company structure,Chesapeake Bank of Maryland or its predecessors had operated as thrift institutions since 1913.Chesapeake Bank of Maryland conducts business out of its main office located inBaltimore County, Maryland , and out of three branch offices located inArbutus, Maryland ,Bel Air, Maryland , andPasadena, Maryland .Chesapeake Bank of Maryland operates as a community-oriented institution by offering a variety of loan and deposit products and serving other financial needs of its local community.Chesapeake Bank of Maryland takes its corporate citizenship seriously and is committed to meeting the credit needs of the community, consistent with safe and sound operations.Chesapeake Bank of Maryland's business consists principally of attracting retail deposits from the general public in our market area and using those funds, together with funds generated from operations and borrowings, to originate loans secured by residential and nonresidential real estate. Nonresidential real estate loans, construction and land development loans and commercial loans constitute a significant percentage of the loan portfolio and, in that respect,Chesapeake Bank of Maryland's lending operations are more diversified and have more risk than many traditional thrift institutions.Chesapeake Bank of Maryland's primary market area is theBaltimore Metropolitan Area and its surrounding counties. The economy ofChesapeake Bank of Maryland's market area is diversified, with a mix of services, manufacturing, wholesale/retail trade and federal and local government. See "Business ofChesapeake Bank of Maryland - Market Area."Chesapeake Bank of Maryland is subject to comprehensive regulation and examination by theOffice of the Comptroller of the Currency .Chesapeake Bank of Maryland is subject toMaryland banking laws except to the extent they are preempted by Federal law.Chesapeake Bank of Maryland is not regulated by theMaryland Commissioner of Financial Regulation. 34 -------------------------------------------------------------------------------- Table of ContentsCBM Bancorp, Inc. CBM Bancorp, Inc. aMaryland corporation is the savings and loan holding company forChesapeake Bank of Maryland . Our executive offices are located at2001 East Joppa Road ,Baltimore, Maryland 21234, and our telephone number is (410) 665-7600. Our website address is www.chesapeakebank.com . Information on this website is not and should not be considered a part of this prospectus. Critical Accounting Policies The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. As an "emerging growth company" we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards. The following represents our critical accounting policies: Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based onChesapeake Bank of Maryland's past loan loss experience, known and inherent risks 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 revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan category that are not considered impaired. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative risk factors. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, theOffice of the Comptroller of the Currency , as an integral part of their examination process, periodically reviews our allowance for loan losses. This agency may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. 35 -------------------------------------------------------------------------------- Table of Contents Deferred Tax Assets. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision. In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies, these assumptions require us to make judgments about future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. In evaluating the need for a valuation allowance, we must estimate our taxable income in future years and the impact of tax planning strategies. If we were to determine that we would not be able to realize a portion of our net deferred tax asset in the future for which there is no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. Conversely, if we were to make a determination that it is more likely than not that the deferred tax assets for which we had established a valuation allowance would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded. The ongoing COVID-19 pandemic and measures intended to prevent its spread and mitigate its adverse effects may have a material adverse effect on our business, results of operations, financial condition and prospects. Any such effect will depend on future developments which are uncertain and difficult to predict. The COVID-19 pandemic has created, and may continue to create, significant disruptions ofthe United States and global economies and financial markets. Governments, businesses, and the public have taken and will continue to take actions to contain the spread of COVID-19 and mitigate its effects, including quarantines, travel bans, "stay at home" orders, physical distancing, cancellation of events and travel, closures of businesses and schools, unprecedented levels of fiscal stimulus, and legislation intended to provide monetary aid and other relief. The scope, duration, and ultimate adverse effect of COVID-19 continue to evolve and cannot be known at this time. COVID-19 and related efforts to contain it have disrupted economic activity and the functioning of financial markets, impacted interest rates, and created financial uncertainty.The United States government has attempted to mitigate some of the most severe anticipated economic effects of the virus. Enactment of the CARES Act, the distribution of vaccinations and monetary assistance in various forms are intended to help contain spread of the virus and its economic impact. However, there can be no assurance that these actions will be effective, and the lasting impacts cannot be calculated. To date, our Bank has avoided many of the adverse financial effects of the virus. Nevertheless, the outbreak has adversely impacted, and may further adversely impact, our workforce and operations, and the operations of our borrowers and other customers. We may experience losses due to these adverse factors negatively impacting our business and/or causing our customers to be unable to meet obligations to us. In addition, the business and operations of third-party service providers who provide critical services for us could be adversely impacted. We may further adjust our business practices if required by government authorities or we determine are in the best interests of our employees and customers. There is no certainty that such measures will be sufficient to mitigate risks to us posed by the virus or will otherwise be satisfactory to government authorities. COVID-19 has caused us to reconsider and modify certain of our business practices, including adoption of work from home and social distancing policies and procedures for our employees and customers. Because the technology in employees' homes may be more limited or less reliable than in our offices, the Bank's work from home measures introduce additional operational risk, including increased cybersecurity risk. 36 -------------------------------------------------------------------------------- Table of Contents In response to the COVID-19 pandemic, we provided payment relief to qualified commercial and mortgage/consumer loans customers. As ofJune 30, 2021 , the majority of the loans granted modifications/deferrals had returned to their original payment plans without a significant impact on payment delinquencies. For additional information, see Note 4 of Notes to Consolidated Financial Statements. The extent to which COVID-19 impacts our business, results of operations, financial condition and prospectus will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, the effectiveness of vaccination programs for the virus, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience adverse impacts as a result of COVID-19's economic impact. Comparison of Financial Condition atJune 30, 2021 andDecember 31, 2020 Total Assets . Total assets increased$15.2 million , or 6.47%, to$250.0 million atJune 30, 2021 from$234.8 million atDecember 31, 2020 . The increase in total assets was primarily due to an increase in our balances being held in interest bearing deposits in other banks, an increase in investment securities offset by a decrease in loans held for sale, as discussed in more detail below. Cash and Cash Equivalents. Cash and cash equivalents increased$12.2 million , or 25.63%, to$59.8 million atJune 30, 2021 from$47.6 million atDecember 31, 2020 . The increase in cash and cash equivalents was primarily in interest bearing deposits in other banks and was funded with an increase in deposits. Time Deposits in Other Banks. Time deposits in other banks increased by$496,000 , or 7.75%, to$6.9 million atJune 30, 2021 from$6.4 million atDecember 31, 2020 . This increase was due to purchases of time deposits in other banks offset by calls of time deposits in other banks.Investment Securities . Investment securities increased$6.0 million , or 36.36%, to$22.5 million atJune 30, 2021 from$16.5 million atDecember 31, 2020 . The increase was due to purchases of investment securities in the amount of$9.0 offset by principal repayments and calls in the amount of$2.7 million . AtJune 30, 2021 all of our investment securities are classified as available for sale. Loans Held for Sale. Loans held for sale decreased$2.9 million to$3.2 million atJune 30, 2021 compared to$6.1 million atDecember 31, 2020 as a result of the proceeds from the sale of loans exceeding loans originated for sale. Proceeds from the sale of loans held for sale were$22.0 million and loans originated for sale were$18.5 million for the six months endedJune 30, 2021 , respectively. Net Loans. Net loans decreased slightly to$148.5 million atJune 30, 2021 compared to$148.6 million atDecember 31, 2020 . Commercial loans increased$2.2 million , or 21.57%, to$12.4 million atJune 30, 2021 from$10.8 million atDecember 31, 2020 which was due in part to the origination of$5.1 million in PPP loans. Our construction and land development loans increased$551,000 , or 5.10%, to$11.3 million atJune 30, 2021 from$10.8 million atDecember 31, 2020 . Home equity loans and lines of credit decreased$2.5 million , or 36.23%, to$4.4 million atJune 30, 2021 from$6.9 million atDecember 31, 2020 due to the payoff and reduction in outstanding balances for several of the larger home equity loans and lines credit loans in the portfolio. One-to four-family residential real estate loans and nonresidential loans remained relatively unchanged atJune 30, 2021 compared toDecember 31, 2020 . Deposits. Deposits increased$18.1 million , or 10.35%, to$192.9 million atJune 30, 2021 from$174.8 million atDecember 31, 2020 . Our non-interest-bearing demand deposits increased$4.2 million , or 12.84%, to$36.9 million atJune 30, 2021 from$32.7 million atDecember 31, 2020 . Our interest-bearing demand deposits increased$2.2 million , or 8.73%, to$27.4 million atJune 30, 2021 from$25.2 million atDecember 31, 2020 . Our money market deposit accounts increased$826,000 , or 7.72%, to$11.5 million atJune 30, 2021 from$10.7 million atDecember 31, 2020 . Our savings accounts increased$11.5 million , or 41.97%, to$38.9 million atJune 30, 2021 from$27.4 million atDecember 31, 2020 . Our certificates of deposit decreased$630,000 , or 0.80%, to$78.2 million atJune 30, 2021 from$78.8 million atDecember 31, 2020 . Total Stockholders' Equity. Total stockholders' equity decreased by$3.4 million , or 6.34%, to$50.2 million atJune 30, 2021 from$53.6 million atDecember 31, 2020 . Earnings of$226,000 and an increase of$601,000 in additional 37 -------------------------------------------------------------------------------- Table of Contents paid in capital for the recording of stock-based compensation relating to the ESOP and the 2019 Plan were offset by a decrease of$205,000 in other comprehensive income related to interest fluctuations on the Company's available for sale securities, a cash dividend in the amount of$1.7 million paid to stockholders and the repurchase of$2.3 million in common stock, which was part of the stock repurchase plan that was approved by the Board of Directors onAugust 18, 2020 . Average Balance Sheets The following table set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax equivalent yield adjustments have been made, as the effects would immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances of loans. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Loan balances exclude loans held for sale. For
the Three Months Ended
2021 2020
Average Average Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Interest earning assets:
Loans $ 150,217 $ 1,844 4.92 %
55,924 14 0.10 % 21,067 5 0.10 %
Time deposits in other banks 7,255 47 2.60 % 7,287 53 2.92 %
Investment securities 19,558 108 2.21 % 23,941 190 3.18 %
Federal Home Loan Bank stock 330 3 3.65 % 681 7 4.12 %
Total interest-earning assets 233,284 2,016 3.50 % 221,623 2,235 4.09 %
Non-interest-earning
assets 12,536 12,260
Total assets $ 245,820 $ 233,883
Interest bearing liabilities:
Interest-bearing demand $ 27,398 $ 9 0.13 % $ 24,155 $ 8 0.13 %
Money market 11,256 6 0.21 % 10,004 5 0.20 %
Savings 35,631 4 0.05 % 25,944 3 0.05 %
Certificates of deposit 78,459 276 1.41 % 78,549 339 1.73 %
Total deposits 152,744 295 0.77 % 138,652 355 1.03 %
Borrowed funds 5,000 12 0.96 % 11,346 20 0.71 %
Total interest-bearing liabilities 157,744 307 0.78 % 149,998 375 1.00 %
Non-interest-bearing
liabilities 37,948 29,844 Total liabilities 195,692 179,842 Equity 50,128 54,041 Total liabilities and equity$ 245,820 $ 233,883 Net interest income$ 1,709 $ 1,860 Interest rate spread (1) 2.72 % 3.09 % Net interest-earning assets (2)$ 75,540 $ 71,625 Net interest margin (3) 2.94 % 3.37 % Average interest-earning assets to average-interest bearing liabilities 147.89 % 147,75 %
1) Interest rate spread represents the difference between the average yield on
average interest-earning assets and the average cost of average
interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
38--------------------------------------------------------------------------------
Table of Contents
For the Six Months Ended
2021 2020
Average Average Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Interest earning assets:
Loans $ 149,600 $ 3,630 4.89 %
53,731 27 0.10 % 13,925 20 0.29 %
Time deposits in other banks 7,040 94 2.69 % 7,606 109 2.89 %
Investment securities 18,079 218 2.43 % 29,176 434 3.00 %
Federal Home Loan Bank stock 364 7 3.88 % 552 11 4.02 %
Total interest-earning assets 228,814 3,976 3.50 % 216,916 4,519 4.20 %
Non-interest-earning
assets 12,791 11,269
Total assets $ 241,605 $ 228,185
Interest bearing liabilities:
Interest-bearing demand $ 26,576 $ 18 0.14 % $ 23,722 $ 25 0.21 %
Money market 10,965 12 0.22 % 9,988 10 0.20 %
Savings 32,454 8 0.05 % 25,242 6 0.05 %
Certificates of deposit 79,039 570 1.45 % 79,257 683 1.74 %
Total deposits 149,034 608 0.82 % 138,209 724 1.06 %
Borrowed funds 5,000 24 0.97 % 8,349 36 0.87 %
Total interest-bearing liabilities 154,034 632 0.83 % 146,558 760 1.05 %
Non-interest-bearing
liabilities 36,561 25,530 Total liabilities 190,595 172,088 Equity 51,010 56,097 Total liabilities and equity$ 241,605 $ 228,185 Net interest income$ 3,344 $ 3,759 Interest rate spread (1) 2.68 % 3.16 % Net interest-earning assets (2)$ 74,780 $ 70,358 Net interest margin (3) 2.95 % 3.49 % Average interest-earning assets to average-interest bearing liabilities 148.55 % 148.01 %
(1) Interest rate spread represents the difference between the average yield on
average interest-earning assets and the average cost of average
interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
39-------------------------------------------------------------------------------- Table of Contents Comparison of Operating Results for the Three Months EndedJune 30, 2021 andJune 30, 2020 General. Net income was$104,000 for the three months endedJune 30, 2021 compared to$131,000 for the three months endedJune 30, 2020 , a decrease of$27,000 , or 20.61%. The decrease was due to a decrease in net interest income of$152,000 , or 8.00%, to$1.7 million for the three months endedJune 30, 2021 from$1.9 million for the three months endedJune 30, 2020 , as well as an increase in non-interest expense of$164,000 , or 8.63%, to$2.0 million for three months endedJune 30, 2021 from$1.9 million for the three months endedJune 30, 2020 offset by a decrease in provision for loan losses of$250,000 to a$100,000 reversal of provision for loan losses for the three months endedJune 30, 2021 from a provision for loan losses of$150,000 for the three months endedJune 30, 2020 , as discussed in more detail below. Interest Income . Interest and dividend income decreased$219,000 , or 9.52%, to$2.0 million for the three months endedJune 30, 2021 from$2.2 million for the three months endedJune 30, 2020 . The decrease in interest and dividend income was due to the decrease in the average yield on interest-earning assets for the three months endedJune 30, 2021 compared to the average yield on interest-earning assets for the three months endedJune 30, 2020 offset by an increase in average interest-earning assets for the three months endedJune 30, 2021 compared to the average interest-earning assets for the three months endedJune 30, 2020 . Interest and fees on loans decreased$136,000 , or 6.80%, to$1.8 million for the three months endedJune 30, 2021 from$2.0 million for the three months endedJune 30, 2020 . The decrease was due to a decrease in the average balance of our loans offset by an increase in the average yield on our loans. Our average balance of loans decreased$18.4 million , or 10.91%, to$150.2 million for the three months endedJune 30, 2021 from$168.6 million for the three months endedJune 30, 2020 . Our average yield on loans increased 21 basis points to 4.92% for the three months endedJune 30, 2021 from 4.71% for the three months endedJune 30, 2020 due to the amortization of PPP deferred loan fees during the three months endedJune 30, 2021 . For the three months endedJune 30, 2021 , we had recorded income relating to the amortization of PPP deferred loan fees of approximately$151,000 . Interest and dividends on interest-bearing deposits in other banks, time deposits in other banks, and investments decreased$83,000 , or 32.55%, to$172,000 for the three months endedJune 30, 2021 from$255,000 for the three months endedJune 30, 2020 . The average balances on interest-bearing deposits in other banks, time deposits in other banks and investments increased$30.1 million to$83.1 million for the three months endedJune 30, 2021 from$53.0 million for the three months endedJune 30, 2020 and this increase in the average balances was driven primarily by an increase in our average interest-bearing deposits in other banks. The average rate we earned on interest-bearing deposits in other banks, time deposits in other banks and investments decreased by 111 basis points to 0.84% for the three months endedJune 30, 2021 from 1.95% for the three months endedJune 30, 2020 primarily due to the overall increase in our average interest-bearing deposits in other banks as ofJune 30, 2021 , which is our lowest yielding interest-earning asset. Interest Expense. Interest expense decreased$68,000 , or 18.13%, to$307,000 for the three months endedJune 30, 2021 from$375,000 for the three months endedJune 30, 2020 . Our average balance of interest-bearing liabilities increased$7.7 million , or 5.13%, to$157.7 million for the three months endedJune 30, 2021 from$150.0 million for the three months endedJune 30, 2020 . The increase was due primarily to an increase in average balances of our interest-bearing deposit accounts and our savings accounts offset by a decrease in borrowed funds. Our average rate paid on interest-bearing deposits decreased 26 basis points to 0.77% for the three months endedJune 30, 2021 compared to 1.03% the three months endedJune 30, 2020 due to a decrease in the average rate paid on our certificates of deposit. The average rate paid on our borrowings was 0.96 % as ofJune 30, 2021 . Net Interest Income . Net interest income decreased$152,000 , or 8.00%, to$1.7 million for the three months endedJune 30, 2021 compared to$1.9 million for the three months endedJune 30, 2020 . The decrease was primarily the result of lower net interest spread and net interest margin. Our average net interest-earning assets, which represents total interest-earning assets, less total interest-bearing liabilities, increased by$3.9 million , or 5.45%, to$75.5 million for the three months endedJune 30, 2021 from$71.6 million for the three months endedJune 30, 2020 . Our net interest rate spread decreased by 37 basis points to 2.72% for the three months endedJune 30, 2021 from 3.09% for the three months endedJune 30, 2020 and our net interest margin decreased by 43 basis points to 2.94% for the three months endedJune 30, 2021 from 3.37% for the three months endedJune 30, 2020 . Provisions for Loan Losses . Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors, including, but not limited to, management's ongoing review and 40 -------------------------------------------------------------------------------- Table of Contents grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance. Provision for loan losses decreased$250,000 to a reversal of provision for loan losses of$100,000 for the three months endedJune 30, 2021 from a provision for loan losses for the three months endedJune 30, 2020 of$150,000 . The decrease in provision for loan losses to a was due to a decrease in the qualitative factors across the entire loan portfolio during the three months endedJune 30, 2021 . During the three months endedJune 30, 2020 , we had increased the qualitative factors, including current economic conditions, adequacy of underlying collateral and the financial strength of our borrowers, due to the uncertainty that existed related to the COVID-19 pandemic. The impact of those qualitative factors was cautiously evaluated given the ongoing impacts of the COVID-19 pandemic on economic activity and a reduction in those qualitative factors reflects improvements in those economic conditions. We did not record any charge-offs for three months endedJune 30, 2021 or for the three months endedJune 30, 2020 . Non-performing loans totaled$253,000 atJune 30, 2021 compared to$494,000 atJune 30, 2020 . The decrease of$241,000 in non-performing loans was primarily the result of a decrease in one-to four-family residential loans. Our non-performing loans to total loans decreased to 0.10% atJune 30, 2021 from 0.30% atJune 30, 2020 . We have provided for losses that are probable and reasonably estimable atJune 30, 2021 . Non-Interest Income. Non-interest income increased by$31,000 , or 9.09%, to$372,000 for the three months endedJune 30, 2021 from$341,000 for the three months endedJune 30, 2020 . The increase was primarily due to an increase of$112,000 in gain on sale of loans to$284,000 for the three months endedJune 30, 2021 from$172,000 for the three months endedJune 30, 2020 offset by the gain on sale of investments of$97,000 that occurred during the three months endedJune 30, 2020 . Non-Interest Expense. Non-interest expense increased by$164,000 , or 8.63%, to$2.0 million for the three months endedJune 30, 2021 from$1.9 million for the three months endedJune 30, 2020 . Professional fees increased$37,000 , or 28.03%, to$169,000 for the three months endedJune 30, 2021 from$132,000 for the three months endedJune 30, 2020 primarily due to higher levels of consulting expenses during the three months endedJune 30, 2021 relating to the Company's public company status.FDIC premiums and regulatory expenses increased$12,000 , or 70.59%, to$29,000 for the three months endedJune 30, 2021 from$17,000 for the three months endedJune 30, 2020 due to theFDIC awarding small banks credits for a portion of their assessment during the second quarter of 2020. Marketing expenses increased$19,000 to$31,000 for the three months endedJune 30, 2021 compared to$12,000 for the three months endedJune 30, 2020 due to an increase in marketing outlays during the second quarter of 2021 compared to 2020. Provision for losses and costs on foreclosed real estate increased by$104,000 to$179,000 for the three months endedJune 30, 2021 from$75,000 for the three months endedJune 30, 2020 due to the sale of foreclosed real estate during the three months endedJune 30, 2021 resulting in a loss of$173,000 compared to a writedown in the valuation of foreclosed real estate of$70,000 during the three months endedJune 30, 2020 . Other operating expenses increased by$15,000 , or 8.98%, to$182,000 for the three months endedJune 30, 2021 from$167,000 for the three months endedJune 30, 2020 primarily due to an increase in ATM expenses and an increase in software maintenance costs. Income Tax Expense. Income tax expense decreased by$9,000 , or 15.00%, to$51,000 for the three months endedJune 30, 2021 from$60,000 for the three months endedJune 30, 2020 . The effective tax rate was 32.94% and 31.51% for the three months endedJune 30, 2021 and 2020, respectively. Income before taxes decreased by$35,000 , or 18.32%, to$156,000 for the three months endedJune 30, 2021 compared to$191,000 for the three months endedJune 30, 2020 . 41 -------------------------------------------------------------------------------- Table of Contents Comparison of Operating Results for the Six Months EndedJune 30, 2021 andJune 30, 2020 General. Net income was$226,000 for the six months endedJune 30, 2021 compared to$304,000 for the six months endedJune 30, 2020 . The decrease of$78,000 , or 25.66%, was due primarily to a decrease in net interest income, an increase in non-interest expense offset by a decrease in provision for loan losses and an increase in non-interest income. Net interest income decreased by$417,000 , or 10.97%, to$3.3 million for the six months endedJune 30, 2021 compared to$3.8 million for the six months endedJune 30, 2020 . Non-interest expense increased by$273,000 , or 7.58%, to$3.8 million for the six months endedJune 30, 2021 compared to$3.6 million for the six months endedJune 30, 2020 . The provision for loan losses decreased$425,000 to a$100,000 reversal of provision for loan losses for the six months endedJune 30, 2021 from a provision for loan losses of$325,000 for the six months endedJune 30, 2020 . Non-interest income increased$165,000 , or 28.16%, to$751,000 for the six months endedJune 30, 2021 compared to$586,000 for the six months endedJune 30, 2020 , as discussed in more detail below. Interest Income . Interest and dividend income decreased$545,000 , or 12.11%, to$4.0 million for the six months endedJune 30, 2021 compared to$4.5 million for the six months endedJune 30, 2020 . The average interest-earning assets for the six months endedJune 30, 2021 increased compared to the average interest-earning assets for the six months endedJune 30, 2020 however the average yield on interest-earning assets decreased for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Interest and fees on loans decreased$316,000 , or 8.10%, to$3.6 million for the six months endedJune 30, 2021 from$3.9 million for the six months endedJune 30, 2020 . The decrease was primarily due to a decrease in the average balance of our loans offset by an increase in the average yield on our loans. Our average balance of loans decreased$16.1 million , or 9.72%, to$149.6 million for the six months endedJune 30, 2021 from$165.7 million for the six months endedJune 30, 2020 . Our average yield on loans increased 9 basis points to 4.89% for the six months endedJune 30, 2021 from 4.80% for the six months endedJune 30, 2020 , due to the amortization of PPP deferred loan fees during the six months endedJune 30, 2021 . For the six months endedJune 30, 2021 , we had recorded income relating to the amortization of PPP deferred loan fees of approximately$233,000 . Interest and dividends on interest-bearing deposits in other banks, time deposits in other banks, and investments decreased$229,000 , or 39.90%, to$345,000 for the six months endedJune 30, 2021 from$574,000 for the six months endedJune 30, 2020 . The average balances on interest-bearing deposits in other banks, time deposits in other banks and investments increased$27.9 million , or 54.39%, to$79.2 million for the six months endedJune 30, 2021 from$51.3 million for the six months endedJune 30, 2020 and this increase in the average balances was driven primarily by a decrease in our average balances of loans offset by an increase in our average deposits. The average rate we earned on interest-bearing deposits in other banks, time deposits in other banks and investments decreased 138 basis points to 0.88% for the six months endedJune 30, 2021 from 2.26% for the six months endedJune 30, 2020 primarily due to our interest-bearing deposits in other banks repricing due to federal funds rate decreases that occurred during the six months endedJune 30, 2020 , the overall increase in our average interest-bearing deposits in other banks as ofJune 30, 2021 which is our lowest yielding interest-earning asset, as well as decreases in the average yield on our investment portfolio after the sales and calls of higher yielding investment securities during the six months endedJune 30, 2020 . Interest Expense. Interest expense decreased$128,000 , or 16.84%, to$632,000 for the six months endedJune 30, 2021 from$760,000 for the six months endedJune 30, 2020 . Our average balance of interest-bearing liabilities increased$7.4 million , or 5.05%, to$154.0 million for the six months endedJune 30, 2021 from$146.6 million for the six months endedJune 30, 2020 . The increase was due primarily to an increase in savings accounts and interest-bearing demand deposit accounts offset by a decrease in borrowings. Our average rate paid on interest-bearing deposits decreased 24 basis points to 0.82% for the six months endedJune 30, 2021 from 1.06% for the six months endedJune 30, 2020 primarily due to a decrease in the average rate paid on certificates of deposit. The average rate paid on our borrowings was 0.97% as ofJune 30, 2021 . Net Interest Income . Net interest income decreased$417,000 , or 10.97%, to$3.3 million for the six months endedJune 30, 2021 compared to$3.8 million for the three months endedJune 30, 2020 . The decrease was primarily the result of lower net interest spread and net interest margin. Our average net interest-earning assets, which represents total interest-earning assets, less total interest-bearing liabilities, increased by$4.4 million , or 6.25%, to$74.8 million for the six months endedJune 30, 2021 from$70.4 million for the six months endedJune 30, 2020 . Our net interest rate spread decreased by 48 basis points to 2.68% for the six months endedJune 30, 2021 from 3.16% for the six months endedJune 30, 2020 and our net interest margin decreased by 54 basis points to 2.95% for the six months endedJune 30, 2021 from 3.49% for the six months endedJune 30, 2020 . 42 -------------------------------------------------------------------------------- Table of Contents Provisions for Loan Losses . Provision for loan losses decreased$425,000 to a reversal of provision of$100,000 for the six months endedJune 30, 2021 from a provision for loan losses of$325,000 for the six months endedJune 30, 2020 . The decrease in provision for loan losses was due to a decrease in the qualitative factors across the entire loan portfolio during the six months endedJune 30, 2021 . During the six months endedJune 30, 2020 , we had increased the qualitative factors, including current economic conditions, adequacy of underlying collateral and the financial strength of our borrowers, due to the uncertainty that existed related to the COVID-19 pandemic. The impact of those qualitative factors was cautiously evaluated given the ongoing impacts of the COVID-19 pandemic on economic activity and a reduction in those qualitative factors reflects improvements in those economic conditions. We did not record any charge-offs for six months endedJune 30, 2021 and recorded$3,000 in net charge-offs for the six months endedJune 30, 2020 . Non-performing loans totaled$253,000 atJune 30, 2021 compared to$494,000 atJune 30, 2020 . The decrease of$241,000 in non-performing loans was primarily the result of a decrease in one-to four-family residential loans. Our non-performing loans to total loans decreased to 0.10% atJune 30, 2021 from 0.30% atJune 30, 2020 . We have provided for losses that are probable and reasonably estimable atJune 30, 2021 . Non-Interest Income. Non-interest income increased by$165,000 , or 28.16%, to$751,000 for the six months endedJune 30, 2021 from$586,000 for the six months endedJune 30, 2020 . The increase was primarily due to an increase of$300,000 in gain on sale of loans to$587,000 for the six months endedJune 30, 2021 from$287,000 for the six months endedJune 30, 2020 offset by the gain on sale of investments of$143,000 recorded for the six months endedJune 30, 2020 . Non-Interest Expense. Non-interest expense increased by$273,000 , or 7.58%, to$3.8 million for the six months endedJune 30, 2021 from$3.6 million for the six months endedJune 30, 2020 .FDIC premiums and regulatory expenses increased$25,000 , or 75.76%, to$58,000 for the six months endedJune 30, 2021 from$33,000 for the six months endedJune 30, 2020 due to theFDIC awarding small banks credits for a portion of their assessment during the first and second quarters of 2020. Marketing expenses increased$26,000 , or 89.66%, to$55,000 for the six months endedJune 30, 2021 compared to$29,000 for the six months endedJune 30, 2020 due to increases in marketing outlays during the first and second quarters of 2021. Provision for losses and costs on foreclosed real estate increased by$104,000 to$182,000 for the six months endedJune 30, 2021 from$78,000 for the six months endedJune 30, 2020 due to the sale of foreclosed real estate resulting in a loss of$173,000 during the six months endedJune 30, 2021 compared to a writedown in the valuation of the foreclosed real estate of$70,000 during the six months endedJune 30, 2020 . Other operating expenses increased by$25,000 , or 7.25%, to$370,000 for the six months endedJune 30, 2021 from$345,000 for the six months endedJune 30, 2020 primarily due to an increase in ATM expenses and an increase in software maintenance costs. Income Tax Expense. Income tax expense decreased by$21,000 , or 14.89%, to$120,000 for the six months endedJune 30, 2021 from$141,000 for the six months endedJune 30, 2020 . The effective tax rate was 34.65% and 31.66% for the six months endedJune 30, 2021 and 2020, respectively. The decrease in tax expense was the result of a decrease in income before income taxes of$99,000 , or 22.25%, to$346,000 for the six months endedJune 30, 2021 from$445,000 for the six months endedJune 30, 2020 . The increase in the effective tax rate was due to the increase in non-deductible compensation expense relating to the 2019 Equity Incentive Plan relative to the income before income taxes during the six months endedJune 30, 2021 compared to the income before income taxes during the six months endedJune 30, 2020 . Liquidity and Capital Resources Liquidity is the ability to meet current and future financial obligations of a short-term nature. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. The board of directors 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. Our primary sources of funds are deposits and, principal and interest payments on loans and securities. We also have the ability to borrow funds from theFederal Home Loan Bank of Atlanta , and we have credit availability with a correspondent bank. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We monitor and adjust our investments in liquid assets based upon our assessments of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset liability management program. Excess liquid assets are invested generally in interest-earning deposits and short and intermediate securities. 43 -------------------------------------------------------------------------------- Table of Contents Our most liquid assets are cash and cash equivalents, which include interest-bearing deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. AtJune 30, 2021 , cash and cash equivalents totaled$59.8 million , which included$916,000 in cash and due from banks and interest-bearing deposits in other banks of$58.9 million . Time deposits in other banks and securities classified as available-for-sale, which provide additional sources of liquidity, totaled$6.9 million and$22.5 million , respectively atJune 30, 2021 . Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was$ 2.9 million and$(20,000) for the six months endedJune 30, 2021 and 2020, respectively. Net cash (used in) provided by investing activities, which consists primarily of disbursements for loan originations and the purchases of securities, offset by principal collections on loans, proceeds from sales and maturing securities and pay-downs on mortgage-backed securities was$(5.5) million and$8.8 million for the six months endedJune 30, 2021 and 2020, respectively. Net cash provided by financing activities, consisting of activities in deposit accounts and borrowings, as well as the repurchase of common stock and payment of dividends was$14.8 million and$13.8 million for the six months endedJune 30, 2021 and 2020, respectively. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year ofJune 30, 2021 totaled$36.9 million , or 19.13% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. We are 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 ,Chesapeake Bank of Maryland exceeded all regulatory capital requirements and was considered "well capitalized" under regulatory guidelines. See "Historical and Pro Forma Regulatory Capital Compliance." Off-Balance Sheet Arrangements As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. AtJune 30, 2021 , we had outstanding commitments to originate loans of$28.0 million . We anticipate that we will have sufficient funds available to meet our current lending commitments. Item 3. Quantitative and Qualitative Disclosures About Market Risk A smaller reporting company is not required to provide the information relating to this item. Item 4. Controls and Procedures Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by the quarterly report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission's rules and forms. There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. 44
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