SEVERN BANCORP The following discussion should be read and reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations set forth inSevern Bancorp's Annual Report on Form 10-K as of and for the year endedDecember 31, 2020 . See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Quarterly Report on Form 10-Q.
The Company
The Company is a savings and loan holding company chartered as a corporation in the state ofMaryland in 1990. It conducts business primarily through three subsidiaries, the Bank, theTitle Company , and SBI.The Title Company is a real estate settlement company that handles commercial and residential real estate settlements inMaryland . SBI holds mortgages that do not meet the underwriting criteria of the Bank, and is the parent company ofCrownsville , which is doing business asAnnapolis Equity Group and acquires real estate for syndication and investment purposes. We maintained seven branches inAnne Arundel County, Maryland atMarch 31, 2021 . The branches offer a full range of deposit products and we originate mortgages in the Bank's primary market ofAnne Arundel County, Maryland and, to a lesser extent, in other parts ofMaryland ,Delaware , andVirginia . As ofMarch 31, 2021 , we had 181 full-time equivalent employees.
Asset Sale
OnJanuary 1, 2021 , we sold the majority of the assets of our real estate company, Hyatt Commercial, with the exception of cash and certain fixed assets. At the time of the sale, Hyatt Commercial had$1.6 million in assets,$1.1 million of which was in cash that stayed with the Company. The remainder of the net assets were sold for$334,000 and we realized a loss of approximately$34,000 .
Proposed Merger with Shore Bancshares, Inc.
OnMarch 3, 2021 , the Company and Shore entered into an agreement and plan of merger that provides that the Company will merge with and into Shore, with Shore as the surviving corporation (the "Merger"). Following the Merger, the Bank will merge with and into Shore's wholly-owned bank subsidiary,Shore United Bank , withShore United Bank as the surviving bank (the "Bank Merger"). At the effective time of the Merger, each outstanding share of the Company's common stock will be converted into the right to receive (i) 0.6207 shares of Shore common stock and (ii)$1.59 in cash, together with cash in lieu of fractional shares, if any. The merger consideration is 85% stock and 15% cash. The completion of the Merger and the Bank Merger are subject to customary closing conditions, including approval by the Company's stockholders, Shore's stockholders and the receipt of regulatory approvals or waivers from the OCC and theBoard of Governors of theFederal Reserve System . Prior to the completion of the Bank Merger,Shore United Bank must obtain the approval of the OCC to convert to a national banking association. The Merger is expected to be completed in the third quarter of 2021.
Significant Developments - COVID-19
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout theU.S. and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The COVID-19 pandemic in theU.S. has had and may continue to have a complex and significant adverse impact on the economy, the banking industry, and the Company in future fiscal periods, all subject to a high degree of uncertainty. Effects on Our Market Areas
Our commercial and consumer banking products and services are offered primarily
in
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2020. InMaryland , the Governor issued a series of orders, including ordering schools to close for an indefinite period of time and an order that, subject to limited exceptions, all individuals stay at home and non-essential businesses cease all activities for an indeterminate amount of time. SinceJune 2020 , many of these restrictions have been removed and some non-essential businesses were allowed to re-open in a limited capacity, adhering to social distancing and disinfection guidelines. The Bank has remained open during these orders because banks have been identified as essential services. The Bank had been serving its customers through its drive-ups, ATMs, and in all of its branch offices by appointment only. OnMay 3, 2021 , we re-opened our branches to customers unrestricted except for social distancing and masks. OnMay 12, 2021 , the Governor ofMaryland lifted all remaining COVID-19 related restrictions, with the exception of wearing masks indoors, effectiveMay 15, 2021 . OnMay 14, 2021 , the Governor also lifted the mask mandate effectiveMay 15, 2021 . Locally, as well as nationally, we have experienced an increase in unemployment levels in our market area as a result of the curtailment of business activities, the levels of which are expected to remain elevated for the near future.
Policy and Regulatory Developments
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
? The FRB decreased the range for the federal funds target rate by 0.5%
on March 3, 2020 , and by another 1.0% on March 16, 2020 , reaching the
current range of 0.0% - 0.25%.
? On March 27, 2020 , the President of the U.S. signed the CARES Act,
which established a
cash payments to individuals, supplemental unemployment insurance
benefits and a $659.0 billion loan program (revised by subsequent
legislation) administered through the SBA, referred to as the PPP.
Under the PPP, small businesses, sole proprietorships, independent
contractors and self-employed individuals were able to apply forforgivable loans from existing SBA lenders and other approved regulated
lenders that enroll in the program, subject to numerous limitations and
eligibility criteria. PPP loans have an interest rate of 1.0%, a
two-year or five-year loan term to maturity, and principal and interest
payments deferred until the lender receives the applicable forgiven
amount or the end of the borrower's loan forgiveness. PPP loans are
100% guaranteed by the SBA. The Bank participates as a lender in the
PPP. In addition, the CARES Act provides financial institutions theoption to temporarily suspend certain requirements under GAAP related
to TDRs for a limited period of time to account for the effects of
COVID-19. The Consolidated Appropriations Act of 2021 extended the
period established by the CARES Act for consideration of TDR
identification to January 1, 2022 or 60 days after the date the
national COVID-19 pandemic emergency terminates.
? On April 7, 2020 , federal banking regulators issued a revisedInteragency Statement on Loan Modifications and Reporting for Financial
Institutions, which, among other things, encouraged financial
institutions to work prudently with borrowers
to meet their contractual payment obligations because of the effects of
COVID-19, and stated that institutions generally do not need to
categorize COVID-19-related modifications as TDRs and that the agencies
will not direct supervised institutions to automatically categorize all
COVID-19 related loan modifications as TDRs. On August 3, 2020 ,
Interagency Statement on Additional Loan Accommodations Related to
COVID-19 was issued that addresses loans nearing the end of their
original relief period and provides guidance for extension of such
relief period.
? On April 9, 2020 , the FRB announced additional measures aimed at
supporting small and mid-sized businesses, as well as state and local
governments impacted by COVID-19. The FRB announced the Main Street Business Lending Program, which established two new loan facilities
intended to facilitate lending to small and mid-sized businesses: (1)
the MSNLF and (2) the MSELF. MSNLF loans were unsecured term loans
originated on or after
as upsized tranches of existing loans originated before April 8, 2020 .
The combined size of the program was $600.0 billion . The program
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was designed for businesses with up to 10,000 employees or $2.5
billion in 2019 revenues. To obtain a loan, borrowers had to
confirm that they were seeking financial support because of
COVID-19 and that they would not use proceeds from the loan to
pay off debt. The FRB also stated that it would provide
additional funding to banks offering PPP loans to help
struggling small businesses. The PPPLF was created by the FRB
on April 9, 2020 to facilitate lending by participating
financial institutions to small businesses under the PPP of the
CARES Act. Under the facility, the FRB lent to participating
financial institutions on a non-recourse basis, taking PPP
loans as collateral. Lenders participating in the PPP were able
to exclude loans financed by the facility from their leverage
ratio. Due to our high liquidity levels, we did not participate
in the PPPLF.
The FRB also created a Municipal Liquidity Facility to support
state and local governments with up to $500.0 billion in
lending, with the Treasury Department backing $35.0 billion for
the facility using funds appropriated by the CARES Act. The
facility made short-term financing available to cities with a
population of more than one million or counties with a
population of greater than two million. The FRB expanded both
the size and scope of its Primary and Secondary Market
Corporate Credit Facilities to support up to $750.0 billion in
credit to corporate debt issuers. This allowed companies that
were investment grade before the onset of COVID-19 but then
subsequently downgraded after March 22, 2020 to gain access to
the facility. Finally, the FRB announced that its Term
Asset-Backed Securities Loan Facility would be scaled up in
scope to include the triple A-rated tranche of commercial
mortgage-backed securities and newly issued collateralized loan
obligations. The size of the facility was $100.0 billion .
Effects on Our Business
The COVID-19 pandemic and the specific developments referred to above have had
and could continue to have a significant impact on our business. The outbreak of
COVID-19 could continue to adversely impact a broad range of industries in which
the Company's customers operate and impair their ability to fulfill their
financial obligations to the Company. In particular, we anticipate that a
significant portion of the Bank's borrowers in the hotel, restaurant, and retail
industries will continue to endure significant economic distress, which has
caused, and may continue to cause, them to draw on their existing lines of
credit and adversely affect their ability to repay existing indebtedness, and is
expected to adversely impact the value of collateral. These developments,
together with economic conditions generally, are also expected to impact our
commercial real estate portfolio, particularly with respect to real estate with
exposure to these industries, and the value of certain collateral securing our
loans. As a result, we anticipate that our financial condition, capital levels,
and results of operations could be adversely affected. As of March 31, 2021 , we
held $4.1 million , $15.5 million , and $49.1 million in hotel, restaurant, and
retail industry loans, respectively.
Our Response
We have taken numerous steps in response to the COVID-19 pandemic, including the following:
? actively working with loan customers to evaluate prudent loan
modification terms;
? continuing to promote our digital banking options through our website.
Customers are encouraged to utilize online and mobile banking tools,
and our customer service and retail departments are fully staffed and
available to assist customers remotely;
? acted as a participating lender in the PPP as well as the second round
of PPP that was extended until
the SBA announced that the PPP had run out of funds for most banks. We
believe it is our responsibility as a community bank to assist the SBA
in the distribution of funds authorized under the CARES Act and
subsequent legislation to our customers and communities, which we have
carried out in a prudent and responsible manner. As of
we held
working diligently with customers on the loan forgiveness aspect of the
program (see "Notes to Consolidated Financial Statements - Note 3 -
Loans Receivable and the Allowance" in this Quarterly Report on Form
10-Q and "Financial Condition - Credit Risk Management and the
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Allowance - TDRs" later in this Item for more information regarding PPP
loans and loan modifications under the CARES Act); and
? closing all branches to customer activity until
drive-up and appointment only services. On
our branches to customers unrestricted except for social distancing and
masks. We have continued to pay all employees according to their normal
work schedule, even if their work has been reduced. No employees have
been furloughed. Employees whose job responsibilities can be
effectively carried out remotely are working from home. Employees whosecritical duties require their continued presence on-site are observing
social distancing and cleaning protocols.
Overview
The Company provides a wide range of personal and commercial banking services.
Personal services include mortgage lending and various other lending services as
well as deposit products such as personal Internet banking and online bill pay,
checking accounts, individual retirement accounts, money market accounts, and
savings and time deposit accounts. Commercial services include commercial
secured and unsecured lending services as well as business Internet banking,
corporate cash management services, and deposit services to commercial
customers, including those in the medical-use cannabis industry. The Company
also provides ATMs, credit cards, debit cards, safe deposit boxes, and telephone
banking, among other products and services.
We have experienced increased profitability during the three months ended
March 31, 2021 , primarily due to mortgage-banking activities. Additionally, we
reversed $750,000 in provision for loan losses. Net interest income increased
primarily due to a declining interest rate environment, resulting from rate
reductions by the FRB in response to the COVID-19 pandemic, which significantly
reduced our interest expense. Noninterest expenses increased for the three
months ended March 31, 2021 due primarily to increased investments in staff and
increased commissions corresponding to the increased mortgage production.
Additionally, we recognized $238,000 in merger related expenses. See discussion
of pending merger above.
The Company expects to experience similar market conditions during the remainder
of 2021, provided interest rates do not increase or decrease rapidly. If
interest rates change rapidly, demand for loans may fluctuate and our interest
rate spread could change significantly. Additionally, significant changes in
interest rates could also affect the origination volumes related to our
mortgage-banking activities. We continue to manage loan and deposit pricing
against the potential risks of rising costs of our deposits and borrowings.
Interest rates are outside of our control, so we must attempt to balance the
pricing and duration of the loan portfolio against the risks of rising or
declining costs of our deposits and borrowings. The continued success and
attraction of Anne Arundel County, Maryland , and vicinity, will also be
important to our ability to originate and grow loans and deposits, as will our
continued focus on maintaining a low overhead. If volatility in the market and
the economy continues to occur, our business, financial condition, results of
operations, access to funds, and the price of our stock could be materially and
adversely impacted. We believe the Company is well prepared for the economic and
social consequences of the COVID-19 global pandemic in future periods.
Critical Accounting Policies
Our accounting and financial reporting policies conform to GAAP and prevailing practices within the banking industry. Accordingly, preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The accounting policies we view as critical are those relating to the Allowance, the valuation of real estate acquired through foreclosure, and the valuation of deferred tax assets and liabilities. Significant accounting policies are discussed in detail in "Notes to Consolidated Financial Statements - Note 1 - Summary of Significant Account Policies" in our Annual Report on Form 10-K as of and for the year endedDecember 31, 2020 . There have been no material changes to the significant accounting policies as described in the Annual Report other than those that may be mentioned in Note 1 to the consolidated financial statements in this Quarterly Report on Form 10-Q. Disclosures regarding 36
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the effects of new accounting pronouncements are included in Note 1 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Results of OperationsNet Income
Net income increased by
Net Interest Income
Net interest income was significantly impacted by a declining interest rate environment directly related to the COVID-19 pandemic. The abrupt decline in interest rates during 2020 not only reduced interest income on floating-rate commercial loans and other liquid assets, but it also reduced competitive pressures and depositor expectations concerning deposit interest rates. Because of the need to maintain higher levels of liquidity and delays in business investment activity due to COVID-19 disruptions, some further compression of our net interest margin is likely in future periods, but a reasonably robust recovery in business conditions could enable us to deploy our additional asset generation resources and thus reallocate some of our excess liquidity. Additionally, atMarch 31, 2021 , we held$39.0 million in low-yielding PPP loans, which reduced our net interest margin. Our average yields, net interest spread, and net interest margin could be affected in future periods by the effect of the forgiveness aspect of the PPP loans as the recognition of the net origination fees will be accelerated once payments are received. Net interest income increased by$903,000 or 13.4%, to$7.7 million for the three months endedMarch 31, 2021 , compared to$6.8 million for the same period of 2020 as a result of the decrease in interest expense due to the decrease in the average rate of interest-bearing liabilities. Our net interest margin decreased from 3.38% for the three months endedMarch 31, 2020 to 3.08% for the three months endedMarch 31, 2021 .
Interest Income
Interest income decreased by$307,000 , or 3.4%, to$8.6 million for the three months endedMarch 31, 2021 , compared to$8.9 million for the three months endedMarch 31, 2020 , due primarily to the low interest rate environment created by the COVID-19 pandemic. The average yield on interest-earning assets decreased 100 basis points to 3.46% for the three months endedMarch 31, 2021 from 4.46% for the three months endedMarch 31, 2020 . The average yield on other interest-earning assets decreased to 0.11% for the three months endedMarch 31, 2021 from 1.25% for the three months endedMarch 31, 2020 , primarily due to a change in the mix of other interest-earning asset types and the decreased rate environment. We held less CDs held for investment during the three months endedMarch 31, 2021 than during the three months endedMarch 31, 2020 . Average interest-earning assets increased from$803.2 million for the three months endedMarch 31, 2020 to$1.0 billion for the three months endedMarch 31, 2021 , due primarily to an increase in average other interest-earning assets of$115.2 million and an increase in average AFS securities of$75.6 million . The increase in average other interest-earning assets resulted primarily from increased average interest-earning deposits in banks, which was the result of increased deposits from our medical-use cannabis customers. The increase in average AFS securities was due to utilization of excess liquidity through security purchases during the first quarter of 2021. Average loans outstanding decreased$10.4 million as a result of significant loan payoffs in the first quarter of 2021. Average LHFS increased$35.1 million due to increased mortgage-banking originations. 37 Table of Contents Interest Expense Total interest expense was$951,000 for the three months endedMarch 31, 2021 and$2.2 million for the three months endedMarch 31, 2020 . The decrease in interest expense was primarily due to the decreased interest rate environment. The average rate on interest-bearing liabilities decreased 91 basis points from 1.51% for the three months endedMarch 31, 2020 to 0.60% for the three months endedMarch 31, 2021 . Average rates decreased in all interest-bearing liability categories. Partially offsetting the decrease in average rates were increased average interest-bearing liabilities which increased from$575.1 million for the three months endedMarch 31, 2020 to$640.6 million for the three months endedMarch 31, 2021 . The average balance of interest-bearing checking and savings accounts increased from$323.7 million for the three months endedMarch 31, 2020 to$453.8 million for the three months endedMarch 31, 2021 , primarily due to increases in our medical-use cannabis related accounts. The average balance of CDs decreased from$195.7 million for the three months endedMarch 31, 2020 to$156.1 million for the same period of 2021 due to runoff from maturing CDs. Average borrowings decreased$25.0 during the three months endedMarch 31, 2021 compared to the same period of 2020 due to payoffs of FHLB advances. The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities and the resulting yields on average interest-earning assets and average rates paid on average interest-bearing liabilities. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities. Three Months Ended March 31, 2021 2020 Average Yield/ Average Yield/ Balance Interest (2) Rate (4) Balance Interest (2) Rate (4) ASSETS (dollars in thousands) Loans (1)$ 633,698 $ 8,142 5.21 %$ 644,087 $ 8,240 5.15 % LHFS 48,632 102 0.85 % 13,528 98 2.91 % AFS securities 89,822 212 0.96 % 14,247 81 2.29 % HTM securities 15,275 80 2.12 % 24,267 138 2.29 % Other interest-earning assets (3) 219,828 62 0.11 % 104,614 325 1.25 % Restricted stock investments, at cost 1,198 11 3.72 % 2,431 34 5.63 % Total interest-earning assets 1,008,453 8,609 3.46 % 803,174 8,916 4.46 % Allowance (8,737) (7,156) Cash and other noninterest-earning assets 43,339 45,497 Total assets$ 1,043,055 8,609$ 841,515 8,916 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Checking and savings$ 453,841 132 0.12 %$ 323,709 661 0.82 % CDs 156,141 652 1.69 % 195,722 1,136 2.33 % Total interest-bearing deposits 609,982 784 0.52 % 519,431 1,797 1.39 % Borrowings 30,619 167 2.21 % 55,619 364 2.63 % Total interest-bearing liabilities 640,601 951 0.60 % 575,050 2,161 1.51 %
Noninterest-bearing deposits 287,828
150,628
Other noninterest-bearing
liabilities 4,642 8,085
Stockholders' equity 109,984 107,752
Total liabilities and
stockholders' equity $ 1,043,055 951 $ 841,515 2,161
Net interest income/net interest
spread $ 7,658 2.86 % $ 6,755 2.95 %
Net interest margin 3.08 % 3.38 %
Nonaccrual loans are included in average loans. Amortization of loan fees
(1) included in interest income amounted to
months ended March 31, 2021 and 2020, respectively.
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(2) There are no tax equivalency adjustments.
(3) Other interest-earning assets include interest-earning deposits, federal
funds sold, and CDs held for investment.
(4) Annualized.
The "Rate/Volume Analysis" below indicates the changes in our net interest
income as a result of changes in volume and rates. We maintain an asset and
liability management policy designed to provide a proper balance between
rate-sensitive assets and rate-sensitive liabilities to attempt to optimize
interest margins while providing adequate liquidity for our anticipated needs.
Changes in interest income and interest expense that result from variances in
both volume and rates have been allocated to rate and volume changes in
proportion to the absolute dollar amounts of the change in each.
Three Months Ended March 31,
2021 vs. 2020
Due to Variances in
Rate Volume Total
Interest earned on: (dollars in thousands)
Loans $ 428 $ (526) $ (98)
LHFS (438) 442 4
AFS securities (327) 458 131
HTM Securities (10) (48) (58)
Other interest-earning assets (1,421) 1,158 (263)
Restricted stock investments, at cost (9) (14) (23) Total interest income (1,777) 1,470 (307) Interest paid on: Interest-bearing deposits: Checking and savings (1,815) 1,286 (529) CDs (279) (205) (484) Total interest-bearing deposits (2,094) 1,081 (1,013) Borrowings (52) (145) (197) Total interest expense (2,146) 936 (1,210) Net interest income$ 369 $ 534 $ 903 Provision for Loan Losses Our loan portfolio is subject to varying degrees of credit risk and an Allowance is maintained to absorb losses inherent in our loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what we determined it was worth at the time of the granting of the loan. We monitor loan delinquencies at least monthly. All loans that are delinquent and all loans within the various categories of our portfolio as a group are evaluated. Management, with the advice and recommendation of the Company's Board of Directors, estimates an Allowance to be set aside for probable losses inherent in the loan portfolio. Included in determining the calculation are such factors as historical losses for each loan portfolio, current market value of the loan's underlying collateral, inherent risk contained within the portfolio after considering the state of the general economy, economic trends, consideration of particular risks inherent in different kinds of lending and consideration of known information that may affect loan collectability. We recorded a reversal of provision for loan losses of$750,000 for the three months endedMarch 31, 2021 and a provision for loan losses of$750,000 for the three months endedMarch 31, 2020 . In 2020, we recorded the provision primarily due to economic factors related to the COVID-19 pandemic. In 2021, we adjusted those factors as the losses we originally projected related to COVID-19 have not been realized. Additionally in the first quarter of 2021, we experienced a significant drop in loan volume, which also contributed to the provision reversal.
See additional information about the provision for loan losses under "Credit Risk Management and the Allowance" later in this Item.
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Noninterest Income
Total noninterest income increased by $2.7 million or 90.4%, to $5.8 million for
the three months ended March 31, 2021 , compared to $3.0 million for the three
months ended March 31, 2020 , with the majority of the increase from
mortgage-banking revenue. Mortgage-banking revenue increased $2.8 million
or 169.0%, due to the increased volume of loans originated from $43.2 million
during the three months ended March 31, 2020 to $101.3 million during the three
months ended March 31, 2021 . A significant portion of the originations were
refinances due to the drop in interest rates. The Title Company generated
$335,000 in revenue during the three months ended March 31, 2021 compared to
$238,000 for the three months ended March 31, 2020 . Servicing fee income
(included in other noninterest income) increased $107,000 from $33,000 for the
three months ended March 31, 2020 to $140,000 for the same period of 2021 as the
volume of loans serviced for FHLMC and FNMA increased during the first quarter
of 2021. Real estate commissions decreased $149,000 and real estate management
fees decreased $165,000 during the three months ended March 31, 2021 compared to
the same period of 2020 as we wound down the operations of the Bank's
subsidiary, Louis Hyatt, Inc. after the Hyatt Commercial asset sale on January
1, 2021 .
Noninterest Expense
Total noninterest expense increased$554,000 , or 6.7%, to$8.8 million for the three months endedMarch 31, 2021 , compared to$8.3 million for the three months endedMarch 31, 2020 , primarily due to increases in compensation and related expenses and merger costs related to the pending merger withShore Bank . Compensation and related expenses increased by$761,000 , or 13.9%, to$6.2 million for the three months endedMarch 31, 2021 , compared to$5.5 million for the three months endedMarch 31, 2020 . This increase was primarily due to annual salary increases, additional hirings, primarily in the mortgage-banking division, and increased commission expense that corresponds with our increased mortgage-banking volumes. Merger expenses amounted to$238,000 for the three months endedMarch 31, 2021 , primarily consisting of legal fees. Professional fees decreased$152,000 primarily due to decreased external audit and consulting fees in the first quarter of 2021. Additionally, we recognized a$34,000 loss on the sale of Hyatt Commercial during the three months endedMarch 31, 2021 .
Income Tax Provision
We recorded a$1.5 million tax provision on net income before income taxes of$5.4 million for the three months endedMarch 31, 2021 for an effective tax rate of 27.1%, compared to an income tax provision of$213,000 on net income before income taxes of$778,000 for the three months endedMarch 31, 2020 , for an effective tax rate of 27.4%.
Financial Condition
Total assets increased$160.4 million to$1.1 billion atMarch 31, 2021 , compared to$952.6 million atDecember 31, 2020 . This increase was primarily due to a$100.5 million , or 64.2%, increase in cash and cash equivalents, to$257.1 million atMarch 31, 2021 from$156.6 million atDecember 31, 2020 due primarily to increased deposits. Additionally, AFS securities increased$67.6 million as we as we redirected some of our excess liquidity in the form of security purchases. Partially offsetting the increase in total assets was a$21.4 million decrease in total loans in the first quarter of 2021 as a result of significant pay offs. Total deposits increased$157.6 million , or 19.5%, to$964.1 million atMarch 31, 2021 compared to$806.5 million atDecember 31, 2020 primarily due to deposits from medical-cannabis related customers. Stockholders' equity increased$1.4 million to$111.1 million atMarch 31, 2021 compared to$109.6 million atDecember 31, 2020 , due to net income to date for the year, partially offset by dividends paid to stockholders and an increased accumulated other comprehensive loss. Securities
We utilize the securities portfolio as part of our overall asset/liability management practices to enhance interest revenue while providing necessary liquidity for the funding of loan growth or deposit withdrawals. We continually monitor the credit risk associated with investments and diversify the risk in the securities portfolios. We held$132.7 million and$65.1 million in AFS securities as ofMarch 31, 2021 andDecember 31, 2020 , respectively. We held$14.5 million and$15.9 million , respectively, in HTM securities as ofMarch 31, 2021 andDecember 31, 2020 . 40
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Changes in current market conditions, such as interest rates and the economic
uncertainties in the mortgage, housing, and banking industries impact the
securities market. Quarterly, we review each security in our portfolio to
determine the nature of any decline in value and evaluate if any impairment
should be classified as OTTI. For the three months ended
All of the AFS and HTM securities that are temporarily impaired as ofMarch 31, 2021 were so due to declines in fair values resulting from changes in interest rates or decreased credit/liquidity spreads compared to the time they were purchased. We have the intent to hold these securities to maturity (including those designated as AFS) and it is more likely than not that we will not be required to sell the securities before recovery of value. As such, management considers the impairments to be temporary.
Our securities portfolio composition is as follows:
AFS HTM
March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020
(dollars in thousands)
U.S. government agency notes $ 9,175 $ 6,660 $ 1,987 $ 1,986
Corporate obligations 2,021 2,034 - -
MBS 121,502 56,404 12,529 13,957
$ 132,698 $ 65,098 $ 14,516 $ 15,943
LHFS
We originate residential mortgage loans for sale on the secondary market. Such
LHFS, which are carried at fair value, amounted to $50.1 million at
March 31, 2021 and $36.3 million at December 31, 2020 , the majority of which are
subject to purchase commitments from investors. The increase in LHFS was
primarily due to increased originations and to the timing of loans pending
sale
on the secondary market.
Loans
Our loan portfolio is expected to produce higher yields than investment
securities and other interest-earning assets; the absolute volume and mix of
loans and the volume and mix of loans as a percentage of total interest-earning
assets is an important determinant of our net interest margin.
The following table sets forth the composition of our loan portfolio before net
unearned loan fees:
March 31, 2021 December 31, 2020
Percent Percent
Amount of Total Amount of Total
(dollars in thousands)
Residential Mortgage $ 186,591 29.9 % $ 209,659 32.4 %
Commercial 74,617 11.9 % 63,842 9.9 %
Commercial real estate 243,521 39.0 % 243,435 37.7 %
ADC 103,487 16.6 % 112,938 17.5 %
Home equity/2nds 15,173 2.4 % 14,712 2.3 %
Consumer 1,565 0.2 %
1,485 0.2 %
Loans receivable, before net unearned fees
Total loans, net of unearned loan fees, decreased by$21.4 million , or 3.3%, to$621.5 million atMarch 31, 2021 , compared to$642.9 million atDecember 31, 2020 . This decrease was due primarily to increased payoffs of residential real estate and ADC loans, partially offset by increased commercial loan originations (primarily PPP loans). 41
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Credit Risk Management and the Allowance
Credit risk is the risk of loss arising from the inability of a borrower to meet
his or her obligations and entails both general risks, which are inherent in the
process of lending, and risks specific to individual borrowers. Our credit risk
is mitigated through portfolio diversification, which limits exposure to any
single customer, industry, or collateral type.
We manage credit risk by evaluating the risk profile of the borrower, repayment
sources, the nature of the underlying collateral, and other support given
current events, conditions, and expectations. We attempt to manage the risk
characteristics of our loan portfolio through various control processes, such as
credit evaluation of borrowers, establishment of lending limits, and application
of lending procedures, including the holding of adequate collateral and the
maintenance of compensating balances. However, we seek to rely primarily on the
cash flow of our borrowers as the principal source of repayment. Although credit
policies and evaluation processes are designed to minimize our risk, management
recognizes that loan losses will occur and the amount of these losses will
fluctuate depending on the risk characteristics of our loan portfolio, as well
as general and regional economic conditions.
Management has an established methodology to determine the adequacy of the
Allowance that assesses the risks and losses inherent in the loan portfolio. Our
Allowance methodology employs management's assessment as to the level of future
losses on existing loans based on our internal review of the loan portfolio,
including an analysis of the borrowers' current financial position, and the
consideration of current and anticipated economic conditions and their potential
effects on specific borrowers and/or lines of business. In determining our
ability to collect certain loans, we also consider the fair value of any
underlying collateral. In addition, we evaluate credit risk concentrations,
including trends in large dollar exposures to related borrowers, industry and
geographic concentrations, and economic and environmental factors. Our risk
management practices are designed to ensure timely identification of changes in
loan risk profiles; however, undetected losses may inherently exist within the
loan portfolio. The assessment aspects involved in analyzing the quality of
individual loans and assessing collateral values can also contribute to
undetected, but probable, losses. In 2020, we adjusted our economic risk factors
to incorporate the current economic implications and rising unemployment rate
from the COVID-19 pandemic. In 2021, we re-adjusted those economic factors as we
experienced the benefit of improving economic conditions. For more detailed
information about our Allowance methodology and risk rating system, see Note 3
to the Consolidated Financial Statements.
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The following table summarizes the activity in our Allowance by portfolio
segment:
Three Months Ended
March 31,
2021 2020
(dollars in thousands)Allowance, beginning of period$ 8,670
$ 7,138 Charge-offs: Residential mortgage - - Commercial - - Commercial real estate - - ADC (34) - Home equity/2nds - - Consumer - (15) Total charge-offs (34) (15) Recoveries: Residential mortgage 65 3 Commercial 5 5 Commercial real estate 174 32 ADC - - Home equity/2nds 4 2 Consumer 1 3 Total recoveries 249 45 Net recoveries 215 30
(Reversal of) provision for loan losses (750)
750
Allowance, end of period $ 8,135 $ 7,918
Loans:
Period-end balance $ 621,512 $ 635,950
Average balance during period 633,698 644,087Allowance as a percentage of period-end loan balance (1) 1.31 %
1.25 %
Percent of average loans (annualized):
(Reversal of) provision for loan losses (0.48) %
0.47 %
Net recoveries 0.14 % 0.02 %
(1) The Allowance at
PPP loans was 1.40%
The following table summarizes our allocation of the Allowance by loan segment:
March 31, 2021 December 31, 2020
Percent Percent
of Loans of Loans
Percent to Total Percent to Total
Amount of Total Loans Amount of Total Loans
(dollars in thousands)
Residential mortgage$ 1,799 22.1 % 29.9 %$ 2,259 26.0 % 32.4 % Commercial 1,780 21.9 % 11.9 % 1,670 19.3 % 9.9 % Commercial real estate 1,453 17.9 % 39.0 % 1,516 17.5 % 37.7 % ADC 2,705 33.2 % 16.6 % 2,947 34.0 % 17.5 % Home equity/2nds 219 2.7 % 2.4 % 168 1.9 % 2.3 % Consumer - - % 0.2 % - - % 0.2 % Unallocated 179 2.2 % - % 110 1.3 % - % Total$ 8,135 100.0 % 100.0 %$ 8,670 100.0 % 100.0 % 43 Table of Contents Based upon management's evaluation, provisions are made to maintain the Allowance as a best estimate of inherent losses within the portfolio. The Allowance totaled$8.1 million atMarch 31, 2021 and$8.7 million atDecember 31, 2020 . Any changes in the Allowance from period to period reflect management's ongoing application of its methodologies to establish the Allowance, which, for the three months endedMarch 31, 2021 , resulted in decreased allocated Allowances for the majority of the loan segments, with the exception of commercial loans and home equity/2nds. As a result of our Allowance analysis, we recorded a (reversal of) provision for loan losses of$(750,000) and$750,000 during the three months endedMarch 31, 2021 and 2020, respectively. In 2020, we recorded the provision primarily due to economic factors related to the COVID-19 pandemic. In 2021, we adjusted those factors as the losses we originally projected related to COVID-19 have not been realized. Additionally in the first quarter of 2021, we experienced a significant drop in loan volume, which also contributed to the provision reversal. We recorded net recoveries of$215,000 and$30,000 , respectively, during the three months endedMarch 31, 2021 and 2020, respectively. During the three months endedMarch 31, 2021 and 2020, annualized net recoveries as a percentage of average loans outstanding amounted to 0.14% and 0.02%, respectively. The Allowance as a percentage of outstanding loans was 1.31% as ofMarch 31, 2021 compared to 1.35% as ofDecember 31, 2020 , the decrease in which was primarily the result of the reversal of provision for loan losses. PPP loans are fully guaranteed by the SBA and, therefore, not required to have an allocated Allowance. The Allowance as a percentage of outstanding loans less PPP loans amounted to 1.40% atMarch 31, 2021 . Although management uses available information to establish the appropriate level of the Allowance, future additions or reductions to the Allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions, and other factors. As a result, our Allowance may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our Allowance and related methodology. Such agencies may require us to recognize adjustments to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as ofMarch 31, 2021 and is sufficient to address the credit losses inherent in the current loan portfolio. Management will continue to evaluate the adequacy of the Allowance as more economic data becomes available and as changes within our portfolio are known. The effects of the COVID-19 pandemic may still require us to fund additional increases in the Allowance in future periods.
NPAs
Given the volatility of the real estate market, it is very important for us to have current valuations on our NPAs. Generally, we obtain appraisals or alternative valuations on NPAs annually. In addition, as part of our asset monitoring activities, we maintain a Loss Mitigation Committee that meets monthly. During these Loss Mitigation Committee meetings, all NPAs and loan delinquencies are reviewed. Additionally, loans in industries vulnerable to the effects of COVID-19 and loans that were or continue to be on interest deferral are reviewed. We also produce an NPA report which is distributed monthly to senior management and is also discussed and reviewed at the Loss Mitigation Committee meetings. This report contains all relevant data on the NPAs, including the latest appraised value (or alternative valuation vehicle) and valuation date. Accordingly, these reports identify which assets will require an updated valuation. As a result, we have not experienced any internal delays in identifying which loans/credits require updated valuations. With respect to the ordering process of appraisals, we have not experienced any delays in turnaround time nor has this been an issue over the past three years. Furthermore, we have not had any delays in turnaround time or variances thereof in our specific loan operating markets. NPAs, expressed as a percentage of total assets, totaled 0.2% atMarch 31, 2021 and 0.6% atDecember 31, 2020 . The ratio of the Allowance to nonperforming loans was 634.1% atMarch 31, 2021 and 197.9% atDecember 31, 2020 . 44
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The distribution of our NPAs is illustrated in the following table. We did not
have any loans greater than 90 days past due and still accruing at
March 31, 2021 December 31, 2020
Nonaccrual Loans: (dollars in thousands)
Residential mortgage $ 910 $ 4,080
Commercial real estate 213 126
ADC 54 60
Home equity/2nds 106 114
Consumer - -
1,283 4,380
Real Estate Acquired Through Foreclosure:
Commercial real estate 452 452
ADC 558 558
1,010 1,010
Total NPAs $ 2,293 $ 5,390
Nonaccrual loans totaled $1.3 million , or 0.21% of total loans, at
March 31, 2021 and $4.4 million , or 0.68% of total loans at December 31, 2020 .
Significant activity in nonaccrual loans during the three months ended
March 31, 2021 included the addition of three loans in the amount of $138,000 to
nonaccrual and the payoff of two loans that were in nonaccrual status at
December 31, 2020 in the amount of $3.1 million .
Real estate acquired through foreclosure remained unchanged at
The activity in our real estate acquired through foreclosure was as follows:
Three Months Ended March 31,
2021 2020
(dollars in thousands)
Balance at beginning of period $ 1,010 $ 2,387 Write-downs and losses on real estate acquired through foreclosure
- (80)
Proceeds from sales of real estate acquired through
foreclosure - (623)
Balance at end of period $ 1,010 $ 1,684
TDRs
In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. See Significant Developments - COVID-19 for information regarding the CARES Act and its effect on modifications.
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The composition of our TDRs is illustrated in the following table:
March 31, 2021 December 31, 2020
Residential mortgage: (dollars in thousands)
Nonaccrual $ 159 $ 163
<90 days past due/current 5,618 5,787
Commercial real estate:
Nonaccrual - -
<90 days past due/current 417 421
ADC:
Nonaccrual - -
<90 days past due/current 127 128
Home equity/2nds:
Nonaccrual - -
<90 days past due/current 187 190
Consumer:
Nonaccrual - -
<90 days past due/current 62 63
Totals:
Nonaccrual 159 163
<90 days past due/current 6,411 6,589
$ 6,570 $ 6,752
CARES Act Loans
In the wake of the COVID-19 pandemic, loan modifications requests have been granted to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Cares Act are met. The table below presents information related to loan modifications made in compliance with the CARES Act for the three months endedMarch 31, 2021 : Residential Commercial
(dollars in thousands)
Balance at beginning of
period $ 6,009 $ 2,052 $ 14,990 $ 141 $ 158 $ 23,350
Additional modifications
granted 455 398 3,694 - 157 4,704
Principal payments net of
draws on active deferred
loans (5,917) (1,035) (8,365) (141) (158) (15,616)
Balance at end of period $ 547 $ 1,415 $
10,319 $ - $ 157 $ 12,438 See additional information on TDRs in Note 3 to the Consolidated Financial Statements herein.
Deposits Deposits totaled$964.1 million atMarch 31, 2021 and$806.5 million atDecember 31, 2020 . The$157.6 million increase was primarily the result of short-term medical-use cannabis related funds (funds that have not yet actually been used in the medical-use cannabis industry) that account holders have placed at the Bank temporarily while looking for desired investments in the industry. Management is aware of the short-term nature of such medical-use cannabis related deposits and offset those funds by maintaining short-term liquidity
to
meet any deposit outflows.
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The deposit breakdown is as follows:
March 31, 2021 December 31, 2020
Percent Percent
Balance of Total Balance of Total
(dollars in thousands)
NOW $ 188,968 19.6 % $ 106,589 13.2 %
Money market 177,898 18.4 % 191,506 23.7 %
Savings 65,451 6.8 % 63,464 7.9 %
Certificates of deposit 194,638 20.2 % 199,804 24.8 %Total interest-bearing deposits 626,955 65.0 % 561,363
69.6 % Noninterest-bearing deposits 337,141 35.0 % 245,093 30.4 % Total deposits$ 964,096 100.0 %$ 806,456 100.0 % The following table provides the maturities of CDs in amounts of$250,000 or more: March 31, 2021 December 31, 2020 Maturing in: (dollars in thousands) 3 months or less $ 3,054 $ 5,230 Over 3 months through 6 months 5,137 2,798 Over 6 months through 12 months 6,276 6,217 Over 12 months 9,400 9,575$ 23,867 $ 23,820
Total deposits with balances of$250,000 or more amounted to$528.3 million and$377.8 million atMarch 31, 2021 andDecember 31, 2020 , respectively. Total uninsured deposits amounted to$467.0 million and$353.0 million atMarch 31, 2021 andDecember 31, 2020 , respectively.
Borrowings
Our borrowings consist of advances from the FHLB.
The FHLB advances are available under a specific collateral pledge and security agreement, which requires that we maintain collateral for all of our borrowings equal to 30% of total assets. Our advances from the FHLB may be in the form of short-term or long-term obligations. Short-term advances have maturities for one year or less and may contain prepayment penalties. Long-term borrowings through the FHLB have original maturities up to 15 years and generally contain prepayment penalties. AtMarch 31, 2021 , our total credit line with the FHLB was$285.0 million . The Bank, from time to time, utilizes the line of credit when interest rates are more favorable than obtaining deposits from the public. Our outstanding FHLB advance balance at bothMarch 31, 2021 andDecember 31, 2020 was$10.0 million .
At
The following table sets forth information concerning the interest rates and
maturity dates of the advances from the FHLB as of
Principal
Amount (in thousands) Rate Maturity
$10,000 2.19% 2022
Certain loans in the amount of
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Subordinated Debentures
As of both March 31, 2021 and December 31, 2020 , the Company had outstanding
$20.6 million in principal amount of 2035 Debentures. The 2035 Debentures were
issued pursuant to the 2035 Indenture between the Company 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 became redeemable, in whole or in part,
by the Company on January 7, 2010 .
The 2035 Debentures were issued and sold to the Trust, of which 100% of the
common equity is owned by the Company. The Trust was formed for the purpose of
issuing Capital Securities to third-party investors and using the proceeds from
the sale of such Capital Securities to purchase the 2035 Debentures. The 2035
Debentures held by the Trust are the sole assets of the Trust. Distributions on
the Capital Securities issued by the Trust are payable quarterly at a rate per
annum equal to the interest rate being earned by the Trust on the 2035
Debentures. The Capital Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the 2035 Debentures. We have entered into an
agreement which, taken collectively, fully and unconditionally guarantees the
Capital Securities subject to the terms of the guarantee.
Under the terms of the 2035 Debentures, we are permitted to defer the payment of
interest on the 2035 Debentures for up to 20 consecutive quarterly periods,
provided that no event of default has occurred and is continuing. As of March
31, 2021 , we were current on all interest due on the 2035 Debentures.
Capital Resources
Total stockholders' equity increased$1.4 million to$111.1 million atMarch 31, 2021 compared to$109.6 million as ofDecember 31, 2020 . The increase was the result of 2021 net income to date, partially offset by an increase in accumulated other comprehensive loss and dividends paid to stockholders during the three months endedMarch 31, 2021 .
Capital Adequacy
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As ofMarch 31, 2021 andDecember 31, 2020 , the Bank exceeded all capital adequacy requirements to which it is subject and meets the qualifications to be considered "well capitalized." As ofJanuary 1, 2020 , the Bank elected to follow the Community Bank Leverage Ratio. See details of our capital ratios in Note 4 to the Consolidated Financial Statements.
Liquidity
Liquidity describes our ability to meet financial obligations, including lending
commitments and contingencies, which arise during the normal course of business.
Liquidity is primarily needed to meet the borrowing and deposit withdrawal
requirements of our customers, to fund the operations of our mortgage-banking
business, as well as to meet current and planned expenditures. These cash
requirements are met on a daily basis through the inflow of deposit funds, the
maintenance of short-term overnight investments, maturities and calls in our
securities portfolio, and available lines of credit with the FHLB, which
requires pledged collateral. Fluctuations in deposit and short-term borrowing
balances may be influenced by the interest rates paid, general consumer
confidence, and the overall economic environment. There can be no assurances
that deposit withdrawals and loan fundings will not exceed all available sources
of liquidity on a short-term basis. Such a situation would have an adverse
effect on our ability to originate new loans and maintain reasonable loan and
deposit interest rates, which would negatively impact earnings.
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Our principal sources of liquidity are loan repayments, maturing investments, deposits, borrowed funds, and proceeds from loans sold on the secondary market. The levels of such sources are dependent on the Bank's operating, financing, and investing activities at any given time. We consider core deposits stable funding sources and include all deposits, except CDs of$100,000 or more. The Bank's experience has been that a substantial portion of CDs renew at time of maturity and remain on deposit with the Bank. Additionally, loan payments, maturities, deposit growth, and earnings contribute to our flow of funds. In addition to our ability to generate deposits, we have external sources of funds, which may be drawn upon when desired. The primary source of external liquidity is an available line of credit with the FHLB. The Bank's total credit availability under the FHLB's credit availability program was$285.0 million atMarch 31, 2021 , of which$10.0 million was outstanding. In addition, atMarch 31, 2021 , we also maintained a line of credit with a bankers' bank in the amount of$11.0 million , which we had not drawn upon. The borrowing requirements of customers include commitments which totaled$134.1 million atMarch 31, 2021 . Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. We expect to fund these commitments from the sources of liquidity described above. Customer withdrawals are also a principal use of liquidity, but are generally mitigated by growth in customer funding sources, such as deposits and short-term borrowings. In addition to the foregoing, the payment of dividends is a use of cash, but is not expected to have a material effect on liquidity. As ofMarch 31, 2021 , we had no material commitments for capital expenditures. Our ability to acquire deposits or borrow could be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. As ofMarch 31, 2021 , we have not experienced any negative impact on our liquidity due to COVID-19. AtMarch 31, 2021 , management considered the Company's liquidity level to be sufficient for the purposes of meeting our cash flow requirements. We are not aware of any undisclosed known trends, demands, commitments, or uncertainties that are reasonably likely to result in material changes in our liquidity. We anticipate that our primary sources of liquidity over the next twelve months will be from loan repayments, maturing investments, deposit growth, and borrowed funds. We believe that these sources of liquidity will be sufficient for us to meet our liquidity needs over the next twelve months.
Off-Balance Sheet Arrangements and Derivatives
We enter into off-balance sheet arrangements in the normal course of business. These arrangements consist primarily of commitments to extend credit, lines of credit, and letters of credit.
Credit Commitments
Credit commitments are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates fixed at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. Our exposure to credit loss in the event of nonperformance by the borrower is the contract amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. We are not aware of any accounting loss we would incur by funding our commitments.
See detailed information on credit commitments above under "Liquidity."
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Derivatives
We maintain and account for derivatives, in the form of IRLCs and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses on IRLCs, 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 closes until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 60 days. For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of best efforts and mandatory forward contracts.
See Note 8 to the consolidated financial statements for more detailed information on our derivatives.
Inflation
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with GAAP and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. As a financial institution, virtually all of our assets and liabilities are monetary in nature and interest rates have a more significant impact on our performance than the effects of general levels of inflation. A prolonged period of inflation could cause interest rates, wages, and other costs to increase and could adversely affect our results of operations unless mitigated by a corresponding increase in our revenues. However, we believe that the impact of inflation on our operations was not material for the three months endedMarch 31, 2021 and 2020.
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