UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

Or

 

001-38680

(Commission File No.)

CBM BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES ☒  NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐  NO ☒

As of November 10, 2020, the number of shares of common stock outstanding was 3,713,058.  

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

 

 

 

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CBM Bancorp, Inc.

Table of Contents

 

 

 

 

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PART I – FINANCIAL INFORMATION

ITEM 1 – Consolidated Financial Statements

CBM Bancorp, Inc.

Consolidated Statements of Financial Condition

September 30, 2020 (Unaudited) and December 31, 2019

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

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CBM Bancorp, Inc.

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended September 30, 2020 and 2019

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.  

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CBM Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

Three and Nine Months Ended September 30, 2020 and 2019

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

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CBM Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Three and Nine Months Ended September 30, 2020 and 2019

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

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CBM Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2020 and 2019

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

Basis of Presentation

Pursuant to the terms and conditions of a plan of conversion and reorganization, adopted by its Board of Directors and approved by its members, Banks of the Chesapeake, M.H.C. converted from the mutual holding company corporate structure to the public stock holding company structure as follows:  CBM Bancorp, Inc. (“CBM Bancorp” or “Company”) was incorporated on May 22, 2018 to serve as the successor holding company for Chesapeake Bank of Maryland (“Bank”),which was at that time the wholly owned subsidiary of Banks of the Chesapeake, M.H.C.  On September 27, 2018, in accordance with the plan of conversion and reorganization, CBM Bancorp became the parent holding company for the Bank and Banks of the Chesapeake, M.H.C. merged with and into CBM Bancorp, with the Company as the surviving corporation.  Upon consummation of the merger, Banks of the Chesapeake, M.H.C. ceased to exist.  

The conversion and reorganization was accomplished through the sale and issuance of 4,232,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $40.9 million, net of offering expenses of approximately $1.4 million.  Approximately 50% of the net proceeds of the offering, or $20.5 million was contributed by the Company to the Bank in return for 100% of the issued and outstanding shares of common stock of the Bank. In connection with the conversion and reorganization, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 338,560 shares of common stock sold in the offering.    

The plan of conversion and reorganization provided for the establishment of a liquidation account by CBM Bancorp for the benefit of eligible account holders in an amount equal to the value of the net assets of Banks of the Chesapeake, M.H.C. as of the date of the latest statement of financial condition of Banks of the Chesapeake, M.H.C. prior to the consummation of the conversion and reorganization. The plan of conversion and reorganization also provided for the establishment of a parallel liquidation account in the Bank to support the CBM Bancorp liquidation account in the event CBM Bancorp does not have sufficient assets to fund its obligations under the CBM Bancorp liquidation account.

In the unlikely event that the Bank were to liquidate after the conversion and reorganization, all claims of creditors, including those of depositors, would be paid first. However, except with respect to the liquidation account to be established in CBM Bancorp, depositors’ claims would be solely for the principal amount of their deposit accounts plus accrued interest. Depositors generally would not have an interest in the value of the assets of the Bank or CBM Bancorp above that amount.

Pursuant to the plan of conversion and reorganization, after two years from the date of conversion and reorganization, and upon the written request of the Federal Reserve Board, CBM Bancorp will transfer, or upon the prior written approval of the Federal Reserve Board, CBM Bancorp may transfer, the liquidation account and the depositors’ interests in such account to the Bank, and the liquidation account shall thereupon be subsumed into the liquidation account of the Bank..  The Company may not pay a dividend on, or repurchase any of, its capital stock, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements. In addition, the Company is subject to certain other regulations restricting the payment of dividends on, and the repurchase of, its capital stock.

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other period.  For further information, refer to the Bank’s annual audited consolidated financial statements and related notes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K dated March 27, 2020.  

 

Nature of Operations

CBM Bancorp, Inc.’s primary business is the ownership and operation of the Bank, a community-oriented federal stock savings bank regulated by the Office of the Comptroller of the Currency.  The Bank’s primary business activity is the acceptance of deposits from the general public and using the proceeds for loan originations and investments. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by the regulatory authorities.  

The accounting and reporting policies of CBM Bancorp, Inc. and Chesapeake Bank of Maryland conform to U.S. GAAP and to general practices in the banking industry.  The more significant policies follow:

Principles of Consolidation

The consolidated financial statements include the accounts of CBM Bancorp, Inc. and the Bank, its wholly owned subsidiary.  Material intercompany accounts and transactions have been eliminated in consolidation.  

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and the valuation of deferred tax assets.  In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and interest-bearing deposits in other banks.  

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Time Deposits in Other Banks

The Bank uses financial instruments to supplement the investment securities portfolio.  Interest income is recognized as earned.  Purchase premiums and discounts are recognized as part of interest income using the interest method over the terms of the investments.  Realized gains and losses on the sale of time deposits in other banks are included in earnings based on the trade date and are determined using the specific identification method.  Time deposits in other banks are not marked to market.  

Investment Securities

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost (including amortization of premium or accretion of discount).

Securities classified as available for sale are carried at fair value and are those securities that the Bank intends to hold for an indefinite period of time but not necessarily to maturity.  Unrealized gains and losses are reported as increases or decreases in other comprehensive income.  Realized gains and losses, determined on the basis of the cost of the specific securities sold, are included in earnings on a trade date basis.  Premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities.  Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary, if any, are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Federal Home Loan Bank Stock

Federal Home Loan Bank of Atlanta (“FHLB”) stock is an equity interest in the FHLB, which does not have a readily determinable fair value for purposes of U.S. GAAP related to Accounting for Certain Investments in Debt and Equity Securities, because its ownership is restricted and lacks a market. FHLB stock represents the required investment in the common stock of the Federal Home Loan Bank of Atlanta according to a predetermined formula.  FHLB stock can be sold back only at par value of $100 per share and only to the FHLB or another member institution.  

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value.   Fair value is derived from secondary market quotations for similar instruments. Gains and losses on loan sales are recorded in non-interest income, and loan origination fees, net of certain direct origination costs are deferred at origination of the loan and are recognized in non-interest income upon sale of the loan.  The Bank’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing.  Interest on loans held for sale is credited to income based on the principal amounts outstanding.  

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The Bank enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitment).  Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives.  The period of time between the issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 90 days.  The Bank protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with the intent that they buyer/investor has assumed the interest rate risk on the loan.  As a result, the Bank is not generally exposed to losses on loans sold utilizing best efforts, nor will it realize gains related to rate lock commitments due to changes in interest rates.  The fair value of rate lock commitments was considered immaterial at September 30, 2020 and December 31, 2019 and an adjustment was not recorded.  Loans held for sale that are not ultimately sold, but instead are placed into the Bank’s portfolio, are reclassified as loans held for investment and recorded at fair value.  

Loans

Loans are generally carried at the amount of unpaid principal, less the allowance for loan losses and adjusted for deferred loan origination fees and costs, which are recognized over the term of the loan as an adjustment to yield using a method that approximates the interest method.  Interest on loans is accrued based on the principal amounts outstanding.  It is the Bank’s policy to discontinue the accrual of interest when the principal or interest is delinquent for 90 days or more, or if collection of principal and interest in full is in doubt.  

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.  The carrying value of impaired loans is based on the present value of the loan’s expected future cash flows or, alternatively, the observable market price of the loan or the fair value of the collateral.  

Impaired loans also include certain loans that have been modified in a troubled debt restructuring (“TDR”) to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure.  These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  Generally, nonaccrual loans that are modified and are considered TDRs are classified as nonperforming at the time of the restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.  

 

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to earnings.  Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely.  The Bank maintains the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. The evaluation process by portfolio segment includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of the loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is likelihood that different amounts would be reported under different conditions or assumptions. The Office of the Comptroller of the Currency as an integral part of its examination process periodically reviews the allowance for loan losses and may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management.

The Bank’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss, are those considered uncollectible and of such little value that their recognition as assets is not justified. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

While the Bank utilizes available information to recognize losses on loans, future additions to the allowances for loan losses may be necessary based on changes in economic conditions, particularly in its’ market area primarily in the state of Maryland.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses.  Such agencies may require the Bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.  Actual loan losses may be significantly more than the allowance for loan and lease losses the Bank has established, which could have a material negative effect on our consolidated financial statements.

Bank-Owned Life Insurance (“BOLI”)

The Bank maintains life insurance policies on certain present and former directors.  These policies are split-dollar or director insurance policies.  Under the split-dollar insurance policies, the Bank pays the premiums and upon the death of the insured, the Bank will receive an amount equal to the premiums paid on the policy from the policy date to the date of death.  Any remaining proceeds will be paid to the beneficiary.  If the policy is surrendered before the date of death, the Bank will receive the lesser of the cash surrender value or the sum of the premiums paid on the policy from the policy date to the date of surrender. Under the director insurance policies, the Bank receives the cash surrender value if the policy is surrendered or receives all benefits payable upon the death of the insured.  As of September 30, 2020 and December 31, 2019, $121,570 and $122,118, respectively, was included in other liabilities related to the split-dollar insurance policies.  

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Premises and Equipment

Land is carried at cost.  Property and equipment is carried at cost less accumulated depreciation.  Depreciation is computed on the straight-line method over estimated useful lives of assets.  Amortization of leasehold improvements is recognized on a straight-line basis over the term of the lease or the life of the improvement, whichever is shorter. The cost of maintenance and repairs is charged to expense as incurred whereas improvements are capitalized.  The range of estimated useful lives for premises and equipment are as follows:

 

 

Foreclosed Real Estate

Real estate acquired through foreclosure or other means is recorded at the fair value of the related real estate collateral at the transfer date less estimated selling costs.  Losses incurred at the time of the acquisition of the property are charged to the allowance for loan losses. Subsequent reductions in the estimated fair value of the property are included in noninterest expense.  Costs to maintain foreclosed real estate are expensed as incurred.  

Employee Stock Ownership Plan

Compensation expense is recognized based on the current market price of shares committed to be released to employees.  All shares released and committed to be released are deemed outstanding for purposes of earnings per share calculations.  Dividends declared and paid on allocated shares held by the ESOP are charged to retained earnings.  The value of unearned shares to be allocated to ESOP participants for future services not yet performed is reflected as a reduction of stockholders’ equity.  Dividends declared on unallocated shares held by the ESOP are recorded as a reduction of the ESOP’s loan payment to the Company.  

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards (“RSA”) issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for RSAs. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Income Taxes

The provision for income taxes includes taxes payable for the current year and deferred income taxes.   Deferred income taxes are provided for the temporary differences between financial and taxable income.  Deferred income taxes and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management it is more likely than not that some portion of the deferred tax asset will not be realized.  Deferred tax assets and liabilities are adjusted through earnings for the effects of changes in tax laws and rates on the date of enactment.  

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

Earnings per Common Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Weighted average shares include allocated ESOP shares and ESOP shares committed to be released but exclude unallocated ESOP shares. Diluted earnings per share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

 

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit.  These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet.  Such financial instruments are recorded when they are funded.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments is represented by the contractual amount of these instruments.  The Bank uses the same credit policies for these instruments as it does for the on-balance sheet instruments.

 

Concentrations of Credit Risk

The Bank did not have deposits in other financial institutions in excess of amounts insured by the FDIC, as of September 30, 2020 and December 31, 2019.  The Bank’s management considers deposits in excess of amounts insured by the FDIC to be a normal business risk. The Bank also maintains accounts with brokerage firms containing securities. These balances are insured up to $500,000 by the Securities Investor Protection Corporation.

 

Emerging Growth Company

The Company, as an emerging growth company (“EGC”), has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law.  The CARES Act creates a forbearance program for federally backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the National Emergency, and provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19.

Recent Accounting Pronouncements

ASU 2016-02, Leases (Topic 842). This ASU provides certain targeted improvements to align lessor accounting with the lessee accounting model. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, including interim reporting periods within that reporting period, for public business entities.  As the Company will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain a smaller reporting company, we will adopt the amendments in this update beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.  A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

ASU 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Bank to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures.  Entities will apply the standard’s provisions as a cumulative-effect (i.e., modified retrospective approach).   The Company has begun to gather loan information and consider acceptable methodologies to comply with this ASU.  The Company’s initial evaluation indicates that the provisions of this ASU are expected to impact its consolidated financial statements, in particular the level of reserve for loan losses and is continuing to evaluate and assess the impact of the adoption of this ASU on its consolidated financial statements. On October 16, 2019, the FASB approved its proposal to delay the effective date for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities.  As the Company will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain a smaller reporting company, we will adopt the amendments in this update beginning after December 15, 2022, including interim periods within those fiscal years.  

 

The amortized cost and estimated fair value of securities classified as available for sale at September 30, 2020 and December 31, 2019, are as follows:

 

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

Proceeds from the sale of available for sale securities totaled $7,312,769 realizing gross gains of $143,223 for the nine months ended September 30, 2020.  There were no sales of investment securities for the three months ended September 30, 2020 or for the three and nine months ended September 30, 2019.

The amortized cost and estimated fair value of securities as of September 30, 2020 and December 31, 2019, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

The Bank did not have any securities with gross unrealized losses at September 30, 2020.  Securities with gross unrealized losses at December 31, 2019 aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

At December 31, 2019, the Bank held seven investments with gross unrealized losses totaling $48,643. The unrealized losses that existed were a result of market changes in interest rates since the original purchase. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) structure of the security.

An impairment loss is recognized in earnings if any of the following are true: (1) the Bank intends to sell the debt security; (2) it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis; or (3) the Bank does not expect to recover the entire amortized cost basis of the security. In situations where the Bank intends to sell or when it is more likely than not that the Bank will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in equity as a component of other comprehensive income, net of deferred tax.

There were no securities pledged as of September 30, 2020 and December 31, 2019.

The Bank currently manages its credit products and respective exposure to credit losses by the following specific portfolio segments which are levels at which the Bank develops and documents its systematic methodology to determine the allowance for loan losses attributable to each respective portfolio segment.  The segments are:

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

Note 3.Loans (Continued)

The Bank makes loans to customers primarily in the Baltimore Metropolitan Area and its surrounding counties. The principal loan portfolio segment balances at September 30, 2020 and December 31, 2019 were as follows:

 

 

Overdraft deposits are reclassified as consumer loans and are included in the total loans on the balance sheet.  Overdrafts were $11,940 and $25,714 at September 30, 2020 and December 31, 2019, respectively.

Nonresidential real estate loans entail greater risks compared to residential real estate loans because they typically involved larger loan balances concentrated with single borrowers or groups of related borrowers.  In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the company, as repayment of the loan generally is dependent, in large part, on the sufficient income for the property to cover operating expenses and debt service.  Changes in economic conditions, such as the COVID-19 pandemic, that are not in the control of the borrower or lender could negatively impact the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for nonresidential real estate than residential properties.  

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

The following table provides information regarding our nonresidential real estate loans by type at September 30, 2020.

 

 

Paycheck Protection Program

The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).  

As a qualified SBA lender, we were automatically authorized to originate PPP loans.  An eligible business was able apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million dollars.  PPP loans have: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity depending on the date of loan origination; and (c) principal and interest payments deferred for six months from the date of disbursement.  The SBA will guarantee 100% of the PPP loans made to eligible borrowers.  The entire principal amount of the borrower’s PPP loan, including accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business entity are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.  

We limited our investment in PPP loans to 20% of the Bank’s capital or approximately $8.6 million in loans.  As of September 30, 2020, we have 101 PPP loan outstanding to qualified borrowers for $8,563,898, with deferred fees relating to PPP loans in the amount of $243,651.  

 

The allowance for loan losses is maintained at a level to provide for losses that are probable and can be reasonably estimated.  Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.  

 

The allowance consists of specific, general, and unallocated components.  The specific component relates to loans that are classified as impaired.  The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.  Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due.  A loan in considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for all loans secured by real estate by the fair value of the collateral if the loan is collateral dependent.  If the loan repayment is not deemed collateral dependent, impairment is measured on the net present value of the expected discounted future cash flows.  

 

Loans are automatically placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent. The Bank’s charge-off policy states after all collection efforts have been exhausted, the loan is deemed to be a loss and the amount has been determined, the loss amount will be charged to the allowance for loan losses.  

 

The following tables summarize the activity in the allowance for losses for the three and nine months ended September 30, 2020 and 2019 and for the year ended December 31, 2019 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of September 30, 2020, September 30, 2019 and December 31, 2019.  

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

As part of the ongoing monitoring of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of classified loans, net chargeoffs, nonperforming loans, credit scores, and the general economic conditions in the Bank’s market area.  

The Bank utilizes an internal rating system to monitor the credit quality of the overall loan portfolio.  A description of the general characteristics is as follows:

When assets are classified as impaired, the Bank allocates a portion of the related general loss allowances to such assets as the Bank deems prudent.  Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

The following table is a summary of the loan portfolio quality indicators by loan class recorded investment as of September 30, 2020 and December 31, 2019:

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

The following table sets forth certain information with respect to our loan portfolio delinquencies by loan class and amount as of September 30, 2020 and December 31, 2019:

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

At September 30, 2020 and December 31, 2019 there were no loans 90 days past due and still accruing interest.  At September 30, 2020, the Bank had six loans on non-accrual status with foregone interest in the amount of $9,085.  At December 31, 2019, the Bank had seven loans on non-accrual status with foregone interest in the amount of $17,925.  

 

The CARES Act provided financial institutions the option, which the Bank has elected to apply, to temporarily suspend certain requirements under U.S. GAAP relating to TDRs for a limited period of time to account for the effects of COVID-19.  Financial institutions were encouraged to work prudently with borrowers who are or may be unable to meet their contractual obligations because of the effects of COVID-19.  Financial institutions generally do not need to categorize a COVID-19 related short-term modification as a TDR as long as the borrower was not experiencing financial difficulty prior to the effects of COVID-19.

 

As of September 30, 2020, the Bank had received and approved requests to modify 61 loans due to the effects of COVID-19.  The Bank’s modifications primarily consist of interest only payments with the deferral of principal for up to six months, dependent on the borrower and their financial situation.  

 

The breakdown of loan modifications due to the effects of COVID-19 by loan category is as follows:

 

 

Of the 61 loans modified due to the effects of COVID-19, all loans were in compliance with their loan modification agreements at September 30, 2020.  

 

The Bank accounts for impaired loans under U.S.GAAP An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan.  Loans are individually evaluated for impairment.  When the Bank classifies a problem asset as impaired, it provides a specific reserve for that portion of the asset that is deemed uncollectible based on the present value of expected future cash flows discounted at the loan’s original effective interest rate, or based on the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

The following table is a summary of impaired loans for the three and nine months ended September 30, 2020 and 2019 and the year ended December 31, 2019:

 

 

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

 

Impaired loans also include certain loans that have been modified in a TDR to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure.  These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  Generally, nonaccrual loans that are modified and are considered TDRs are classified as nonperforming at the time of the restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.  A summary of TDRs at September 30, 2020 and December 31, 2019 are as follows:

 

 

 

The Bank had one TDR at September 30, 2020 totaling $36,844 and one TDR at December 31, 2019 totaling $40,442.   The Bank has no commitments to loan additional funds to borrowers whose loans have been modified.  There were no nonperforming TDRs reclassified to nonperforming loans during the three and nine months ended September 30, 2020 and 2019.  A default is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. If loans modified in a TDR subsequently default, the Bank evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

 

At September 30, 2020 and December 31, 2019, the Bank had $775,000 and $845,000 in foreclosed real estate, respectively.  The Bank did not dispose of any foreclosed real estate during the three and nine months ended September 30, 2020 and 2019 and the twelve months ended December 31, 2019.  

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

The following table summarizes changes in foreclosed real estate for the nine months ended September 30, 2020 and 2019 and for the year ended December 31, 2019, which are measured on a nonrecurring basis using significant unobservable, Level 3, inputs:

 

 

At September 30, 2020 there were no residential real estate loans in the process of foreclosure.  At December 31, 2019 there were no residential real estate loans in the process of foreclosure.  At September 30, 2020 and December 31, 2019, there were no residential real estate properties included in foreclosed real estate.  

Deposits are summarized as follows:

 

 

Deposit accounts in the Bank are federally insured up to $250,000 per depositor.  The aggregate amount of certificates of deposit with balances of $250,000 or more totaled $17,232,194 and $14,113,578 at September 30, 2020 and December 31, 2019, respectively.  

At September 30, 2020 certificates of deposit and their remaining maturities were as follows:

 

 

Deposit balances of officers and directors totaled $957,418 and $419,857 at September 30, 2020 and December 31, 2019, respectively.  

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

The Bank has advances outstanding from the FHLB.  A schedule of borrowings is as follows:

 

 

The advance at December 31, 2019 was an overnight advance that was repaid in March 2020.

 

 

The Bank has an agreement with the Federal Home Loan Bank of Atlanta (“FHLB”) that allows it to obtain advances secured by assets owned by the Bank.  Total advances are limited to 25% of the Bank’s total assets. As of September 30, 2020 and December 31, 2019, the Bank had availability of $58,700,000 and $55,100,000, respectively, and remaining credit availability of approximately $53,700,000 and $52,600,000, respectively, with FHLB. As of September 30, 2020 and December 31, 2019, the Bank pledged a portion of its one-to four-family residential mortgages as collateral.  The amount of loans that were deemed eligible to pledge as collateral totaled approximately $50,800,000 and $52,700,000 at September 30, 2020 and December 31, 2019, respectively.  

The Bank also has a $2,000,000 unsecured federal funds line of credit available with another financial institution, for which no amounts were outstanding as of September 30, 2020 and December 31, 2019.  

In connection with the Bank’s mutual to stock conversion in September 2018, the Bank established the Chesapeake Bank of Maryland ESOP for all eligible employees. The Bank intends to make annual contributions to the ESOP that at a minimum will permit the ESOP to repay the principal and interest due on the ESOP debt.  However, the Bank may prepay the principal of the note, partially or in full and without penalty or premium at any time and from time to time without prior notice to the holder. Any dividends declared on Company common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan. As the ESOP loan is repaid, shares of Company common stock pledged as collateral for the loan are released from the loan suspense account for allocation to Plan participants on the basis of each active participant’s proportional share of compensation.

Participants vest 100% in their ESOP allocations after three years of service. In connection with the implementation of the ESOP, participants were given credit for past service with the Bank for vesting purposes. Participants will become fully vested upon age 65, death or disability, a change in control, or termination of the ESOP. Generally, participants will receive distributions from the ESOP upon separation from service.  The plan reallocates any unvested shares of common stock forfeited upon termination of employment among the remaining participants in the plan.

The ESOP compensation expense was $104,953 and $325,017 and for the three and nine months ended September 30, 2020 and $115,957 and $340,253 for the three and nine months ended September 30, 2019. This amount represents the average fair market value of the shares of Company common stock allocated or committed to be released as of that date. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends, if any, on allocated shares are recorded as a reduction of retained earnings and dividends, if any, on unallocated shares are recorded as a reduction of the debt service. At September 30, 2020, there were 270,848 shares not yet released having an aggregate market value of approximately $3,320,596.

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

On May 14, 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (“2019 Plan”), which was approved at the Annual Meeting of Stockholders.  The 2019 Plan allows for up to 169,280 shares to be issued to employees, executive officers or Directors in the form of restricted stock, and up to 423,200 shares to be issued to employees, executive officers or Directors in the form of stock options.  At September 30, 2020, there were 169,280 restricted stock awards granted and 423,200 stock option awards granted under the 2019 Plan.  

Restricted Stock

The specific terms of each restricted stock award are determined by the Compensation Committee at the date of the grant.  Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the date of the grant.  Participants will vest in their share awards at a rate of 20% per year over a five year period, beginning one year after the date of the plan share award.  If service to the Company is terminated for any reason other than death, disability or change in control, the unvested share awards will be forfeited.  

The 2019 Equity Incentive Plan Trust (“Trust”) has been established to acquire, hold, administer, invest and make distributions from the Trust in accordance with provisions of the Plan and Trust.  The Company contributed sufficient funds to the Trust for the Trust to acquire 169,280 shares of common stock which is held in the Trust subject to the restricted stock award vesting requirements.  The 2019 Plan provides that grants to each employee and non-employee director shall not exceed 25% and 5% of the shares available under the 2019 Plan, respectively.  Shares awarded to non-employee directors in the aggregate shall not exceed 30% of the shares available under the 2019 Plan.  

The following table presents a summary of the activity in the Company’s restricted stock for the periods ended:

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The following table outlines the vesting schedule of the nonvested restricted stock awards as of September 30, 2020:

 

 

The Company recorded compensation expense related to restricted stock awards of $113,450 and $330,566 during the three months and nine months ended September 30, 2020 and $108,973 and $165,828 during the three and nine months ended September 30, 2019.  As of September 30, 2020, there was $1,651,045 of total unrecognized compensation expense related to nonvested shares granted under the 2019 Plan.  The cost is expected to be recognized over a weighted average period of 3.7 years.

Stock Options

Under the above 2019 Plan, stock options are granted to provide the Company’s directors and key employees with a proprietary interest in the Company as an as incentive to contribute to its success. The Board of Directors of the Company may grant options to eligible employees and non-employee directors based on these factors. The 2019 Plan participants will vest in their options at a rate no more rapid than 20% per year over a five-year period, beginning one year after the grant date of the option. Vested options will have an exercise period of ten years commencing on the date of grant. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested options shall be forfeited. The Company recognizes compensation expense during the vesting period based on the fair value of the option on the date of the grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below.  Expected volatilities are based on historical data. The Company uses historical data to estimate option exercise and post-vesting termination behavior.  The expected term of the options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.  The risk-free interest rate for the expected term of the option is based on the U.S. Treasury rate equal to the expected term of the option at the time of the grant.  

The fair value of options granted to date was determined using the following assumptions as of the grant date.  

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The following table summarizes the Company’s stock option activity and related information for the periods ended:

 

 

 

The Company recorded compensation expense related to stock options of $70,524 and $197,017 during the three and nine months ended September 30, 2020 and $62,197 and $94,648 during the three and nine months ended September 30, 2019.  As of September 30, 2020, there was $1,048,486 of total unrecognized compensation expense related to nonvested stock options granted under the plan.  The cost is expected to be recognized over a weighted average period of 3.8 years.  The intrinsic value of a stock option is the amount that the market value of the underlying stock exceeds the exercise price of the option.  Based upon a fair market value of $12.26 at September 30, 2020, the intrinsic value of the stock is currently less than the weighted average exercise price of the option.  

On May 14, 2019, the Board of Directors authorized the repurchase of up to 169,280 shares of the Company’s outstanding common stock for the Trust.  The repurchase program was equal to the number of restricted stock shares eligible to be granted in the 2019 Plan and 169,280 shares were repurchased during the year ending December 31, 2019.  

On December 2, 2019, the Board of Directors authorized a plan to repurchase up to $6,000,000 of the Company’s outstanding common stock.  The repurchases will be made during a one-year period on the open market, in privately negotiated transactions, or in such other manner as will comply with applicable policy, laws and regulations.  

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The following table sets forth information in connection with repurchases of the Company’s shares of common stock during the periods listed, including the nine months ended September 30, 2020.

 

 

On August 18, 2020, upon completion of the previous plan dated December 31, 2019, the Board of Directors authorized a plan to repurchase up to an additional $3,500,000 of the Company’s outstanding common stock.  The repurchases will be made during a one-year period on the open market, in privately negotiated transactions, or in such other manner as will comply with applicable policy, laws and regulations.  

 

 

Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  Net income available to common stockholders is net income to the Company.  Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per share until they are committed to be released. Basic earnings per share excludes dilution and is computed by dividing net income by weighted average number of common shares outstanding during the period.  Dilutive earnings per share reflects the potential dilution that could occur if stock options were exercised and is computed by dividing net income by the dilutive weighted average number of common shares outstanding during the period.  

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The Bank is subject to various regulatory capital requirements administered by Federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. These capital requirements were modified in 2013 with the Basel III capital rules, which establish a new comprehensive capital framework for U.S. banking organizations.  The Bank became subject to the new rules on January 1, 2015, with a phase-in period for many of the new provisions which was fully phased in on January 1, 2019.  As of September 30, 2020, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy 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 classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Common Equity Tier 1 Capital, Tier 1 Capital, and Total Capital to Risk Weighted Assets and of Tier 1 Capital to Average Assets.  Management believes, as of September 30, 2020 and December 31, 2019, all applicable capital adequacy requirements have been met.

The most recent notification from the OCC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.  To be categorized as well capitalized the Bank must maintain minimum total risk-based capital, Tier 1 capital to risk-weighted assets, and Tier 1 capital to adjusted total assets, ratios.  There have been no conditions or events since that notification that management believes have changed the Bank’s category.

The actual and required capital amounts and ratios of the Bank as of September 30, 2020 and December 31, 2019 were as follows (dollars in thousands):

 

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

ASC Topic 820 provides a framework for measuring and disclosing fair value under U.S. GAAP. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or a nonrecurring basis (for example, impaired loans).

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Bank utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available-for-sale is recorded at fair value on a recurring basis. Additionally, from time to time, the Bank may be required to record at fair value all other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

ASC Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market for the asset or liability, for substantially the full term of the financial instrument.

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement and based on the Bank’s own assumptions about market participants’ assumptions.

The following is a description of the valuation methods used for instruments measured at fair value as the general classification of such instruments pursuant to the applicable valuation method.  

Fair value measurements on a recurring basis

Securities available for sale – If quoted prices are available in an active market for identical assets, securities are classified within Level 1 of the hierarchy.  If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and securities dare included within Level 2 of the hierarchy.  

As of September 30, 2020 and December 31, 2019 the Bank has categorized its investment securities available for sale as follows:

 

 

Fair value measurements on a nonrecurring basis

Impaired loans – The Bank measures impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values.  As of September 30, 2020 and December 31, 2019 the fair values consisted of loan balances of $511,709 and $2,828,148 that have been written down by $270 and $681, respectively, as a result of specific loan loss allowances.  

Foreclosed real estate – The Bank’s foreclosed real estate is measured at fair value less estimated cost to sell. As of September 30, 2020 and December 31, 2019, the fair value of foreclosed real estate was estimated to be $775,000 and $845,000, respectively.  Fair value was determined based on offers and/or appraisals.  Cost to sell the real estate was based on standard market factors.  The Bank has categorized its foreclosed real estate as Level 3.  

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

The following table presents quantitative information about Level 3 fair value measurements for selected financial instruments measured at fair value on a non-recurring basis at September 30, 2020 and December 31, 2019:

 

 

The remaining financial assets and liabilities are not reported on the balance sheet at fair value on a recurring basis.  The calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.  

The estimated fair values of the Bank’s financial instruments, whether carried at cost or fair value are as follows:

 

 

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CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

 

 

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statement Regarding Forward-Looking Statements

Overview

Management’s discussion and analysis of financial condition at September 30, 2020 and December 31, 2019 and results of operations for the three and nine months ended September 30, 2020 and 2019 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.

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 dated August 7, 2018 (filed with the Securities and Exchange Commission on August 15, 2018), and in other periodic and current reports filed by the Company with the Securities 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.

General

Impact of COVID-19

The COVID-19 pandemic has continued to adversely affect our ability to conduct normal business, has adversely affected our customers, and the adverse impacts could be significant. The COVID-19 pandemic also could cause actual results to differ materially from those discussed in our forward-looking statements. The extent to which the COVID-19 pandemic may impact our results of operations and financial condition during the remainder of 2020 and into 2021 cannot be currently estimated.

The COVID-19 pandemic has continued to adversely impact our business and financial results, and its ultimate impact on our business will depend on highly uncertain and unpredictable future developments, including the magnitude and duration of the pandemic and actions taken by governmental authorities in response to the pandemic, particularly within our geographic footprint. The pandemic has resulted in temporary closures of many businesses, some of which include our borrowers, and the institution of social distancing and sheltering in place requirements in many states and communities, including our market area. In many cases the business disruptions have been significant, which could adversely affect our business and financial position. Furthermore, the pandemic could result in the recognition of credit losses in our loan portfolio and increases in our allowance for credit losses, particularly if businesses remain closed, or open and subsequently must close again, the impact on the national economy and our market area continues to be adverse or worsens, or more clients draw on their lines or credit or seek additional loans to help finance their businesses. Small and mid-sized businesses make up the majority of our commercial loan portfolio and are particularly vulnerable to the financial effects of the COVID-19 pandemic due to their increased reliance on continuing cash flow to fund day-to-day operations. Although government programs have provided relief to these types of businesses, and may provide additional future relief, there can be no assurance that these programs will ultimately be successful. Our business operations may also be disrupted if significant portions of our workforce, key personnel or third-party service providers are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. Until the COVID-19 pandemic subsides, it will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios.

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In addition to other factors discussed in this report, factors related to the COVID-19 pandemic that could cause actual results to differ materially from those discussed in our forward-looking statements include the following: the length and severity of the COVID-19 pandemic, including its impact on our financial condition and business operations; the pace of economic recovery following the COVID-19 pandemic; and changes in government legislation, regulations and policies to address the impact of COVID-19 through the CARES Act and other responses to the COVID-19 pandemic.

Impact on Our Financial Statements and Results of Operations

As a result of a shelter-at-home mandate that was in force early in the second quarter 2020, commercial activity throughout Maryland, as well as nationally, decreased significantly. As of September 30, 2020, many locations in Maryland allowed businesses to re-open at limited capacities and with caution as to social-distancing and other restrictions. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the pandemic. This continued depression in commercial activity may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic appear to have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue for the remainder of 2020, especially if COVID-19 infections increase and new economic restrictions are mandated. Our borrowers include hotels, restaurants, retail and other commercial real estate, all of which have been and are likely to continue to be significantly impacted by the COVID-19 pandemic. We continue to monitor these customers closely.

In response to the COVID-19 pandemic, we implemented a short-term modification program in the second quarter of 2020 to provide temporary payment relief to borrowers who meet the program’s qualifications. This program allows interest only payments with deferral of principal for up to six months, dependent on the borrower and their financial situation.  Through September 30, 2020, we granted temporary modifications on 61 loans with a total outstanding balances of $26.0 million and as of September 30, 2020 all loans were in compliance with their modification agreements.  Under applicable guidance, none of these loans were considered restructured as of September 30, 2020.

We have taken actions to ensure that we are able to continue to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position. Current economic conditions and their impact on our customers contributed to an increased provision for credit losses for the first nine months of 2020. We continue to monitor closely the impact of the COVID-19 pandemic on our customers, as well as the effects of the CARES Act and the Paycheck Protection Program which are described below.

Impact on our Business Operations

In order to protect the health of our customers and employee, and to comply with applicable government directives, we have modified our business practices, including allowing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary. Our branch locations are currently available by appointment during normal branch banking business hours. Many in-branch transactions can now be completed in branches with drive-through service. We are taking additional precautions within our branch locations, including enhanced cleaning procedures to ensure the safety of our customers and our employees.

Our participation in the SBA Paycheck Protection Program (“PPP”) may expose us to credit losses as well as litigation and compliance risks.

The CARES Act, enacted on March 27, 2020, included a $349 billion loan program administered through the SBA, referred to as the PPP. The $349 billion in funds for the PPP were exhausted on April 16, 2020. On April 27, 2020, the program was reopened with an additional $310 billion approved by Congress. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to detailed qualifications and eligibility criteria. See Note 3 of Notes to Consolidated Financial Statements.

Among other regulatory requirements, PPP loans are subject to forbearance of loan payments for a six-month period to the extent that loans are not eligible for forgiveness. If PPP borrowers fail to qualify for loan forgiveness, including by failing to use the funds appropriately in order to qualify for forgiveness under the program, the Bank will have a greater risk of holding these loans at unfavorable interest rates.

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In addition, the short time period between the passing of the CARES Act and the implementation of the PPP resulted in ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. There is risk that the SBA or another governmental entity could conclude there was a deficiency in the manner in which the Bank originated, funded, or serviced PPP loans, which may or may not be related to the ambiguity in the CARES Act or the rules and guidance promulgated by the SBA and the U.S. Department of the Treasury regarding the operation of the PPP. In the event of such deficiency, the remedies the SBA may seek against the Bank are unknown, but may include the SBA’s denial of its liability under the guaranty, the reduction of the amount of the guaranty, or, if the SBA has already paid under the guaranty, the recovery of any loss related to the deficiency from the Company.

Since the opening of the PPP, several other banks have been subject to litigation regarding the process and procedures that these banks followed in accepting and processing applications for the PPP. We may be exposed to the risk of similar litigation, from both clients and non-clients that solicited the Bank for PPP loans, regarding processes and procedures we used to process applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation may be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

Chesapeake Bank of Maryland

Our business operations are conducted through Chesapeake Bank of Maryland, a federally chartered stock savings association headquartered in Baltimore 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 in Baltimore County, Maryland, and out of three branch offices located in Arbutus, Maryland, Bel Air, Maryland, and Pasadena, 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 the Baltimore Metropolitan Area and its surrounding counties. The economy of Chesapeake Bank of Maryland’s market area is diversified, with a mix of services, manufacturing, wholesale/retail trade and federal and local government. See “Business of Chesapeake Bank of Maryland - Market Area.”

Chesapeake Bank of Maryland is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Chesapeake Bank of Maryland is subject to Maryland banking laws except to the extent they are preempted by Federal law. Chesapeake Bank of Maryland is not regulated by the Maryland Commissioner of Financial Regulation.

CBM Bancorp, Inc.

CBM Bancorp, Inc. is a newly formed Maryland corporation. Following the completion of the conversion, reorganization and offering, CBM Bancorp became the holding company for Chesapeake Bank of Maryland.

Our executive offices are located at 2001 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.

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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 in the 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.

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. 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.

On March 27, 2020, the CARES Act was signed into law. The CARES Act contains provisions that, among other things, provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19.  We intend to follow the guidance provided under the CARES Act.  

Because of the short timeframe between the passing of the CARES Act and the opening of the PPP on April 3, 2020, there is some ambiguity in the laws, rules and guidance regarding operation of the PPP. The SBA subsequently notified lenders that the funds initially earmarked for the PPP were exhausted. Congress has approved additional funding for the PPP, and President Trump signed the new legislation on April 24, 2020.

Since commencement of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant litigation costs, financial liability or reputational damage.

The Bank also may have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which loans were originated, funded, or serviced by the Bank. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

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.

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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 on Chesapeake 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, general and unallocated 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, the Office 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.

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.

Fair Value Measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Comparison of Financial Condition at September 30, 2020 and December 31, 2019

 

Total Assets.  Total assets increased $11.8 million, or 5.35%, to $232.2 million at September 30, 2020 from $220.4 million at December 31, 2019.  The increase in total assets was primarily the result of an increase in interest-bearing deposits

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in other banks offset by a decrease in investment securities due to principal payments, sales and calls, as discussed in more detail below.  

 

Cash and Cash Equivalents.  Cash and cash equivalents increased $27.2 million to $33.2 million at September 30, 2020 from $6.0 million at December 31, 2019.  The increase in cash and cash equivalents was primarily in interest-bearing deposits in other banks and was funded with sales, principal payments and calls of available for sale securities, an increase in deposits and an increase in borrowings from the FHLB to provide additional liquidity during COVID-19.  Additional liquidity is being maintained as a result of COVID-19 in order to ensure that we have the necessary funding available to fund loans, as well as meet the demands of our depositors, if necessary.

 

Time Deposits in Other Banks.  Time deposits in other banks decreased by $1.0 million, or 12.66%, to $6.9 million at September 30, 2020 from $7.9 million at December 31, 2019 due to calls of time deposits in other banks.

 

Investment Securities.  Investment securities decreased $17.8 million, or 47.98%, to $19.3 million at September 30, 2020 from $37.1 million at December 31, 2019.  The decrease was due to the sale of municipal securities and residential mortgage backed securities in the amount of $7.3 million and principal repayments and calls in the amount of $10.9 million.  At September 30, 2020 all of our investment securities are classified as available for sale.  

 

Net Loans.  Net loans increased $924,000, or 0.58%, to $159.2 million at September 30, 2020 from $158.3 million at December 31, 2019.  One-to four-family residential real estate loans decreased $6.7 million, or 8.97%, to $68.0 million at September 30, 2020 from $74.7 million at December 31, 2019 as higher yielding loans have been repaid and refinanced due to the current low rate environment for residential loans. Our construction and land development loans increased $1.6 million, or 17.20%, to $10.9 million at September 30, 2020 from $9.3 million at December 31, 2019.  Commercial loans increased $8.9 million to $15.9 million at September 30, 2020 from $7.0 million at December 31, 2019 due to the origination of $8.6 million in PPP loans.  Our nonresidential loans decreased $2.0 million, or 3.28%, to $59.0 million at September 30, 2020 from $61.0 million at December 31, 2019.  Our home equity loans and lines of credit decreased $359,000, or 4.79%, to $7.1 million at September 30, 2020 from $7.5 million at December 31, 2019.  Our consumer loans decreased $135,000, or 25.81%, to $388,000 at September 30, 2020 from $523,000 at December 31, 2019.  

 

Bank-owned Life Insurance.  We invest in bank-owned life insurance (“BOLI”) to provide us with a funding source for our benefit plan obligations.  Bank-owned life insurance also generally provides us noninterest income that is non-taxable.  Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses at the time of investment.  This investment is accounted for using the cash surrender value method and is recorded at the amount that can be realized under the insurance policies at the balance sheet date.  At September 30, 2020 and December 31, 2019, the aggregate cash surrender value of these policies was $4.8 million and $4.7 million, respectively.  

 

Deposits.   Deposits increased $16.0 million, or 10.23%, to $172.4 million at September 30, 2020 from $156.4 million at December 31, 2019.  Our non-interest-bearing demand deposits increased $12.0 million, or 60.61%, to $31.8 million at September 30, 2020 from $19.8 million at December 31, 2019.  This increase was primarily the result of the PPP loan origination funding being deposited into the non-interesting bearing accounts of our borrowers.  Our savings accounts increased $2.2 million, or 9.05%, to $26.5 million at September 30, 2020 from $24.3 million at December 31, 2019.  Our interest-bearing demand deposits increased $1.3 million, or 5.46%, to $25.1 million at September 30, 2020 from $23.8 million at December 31, 2019.  Our money market deposit accounts and certificates of deposit remained relatively the same at September 30, 2020 compared to December 31, 2019.  

 

Total Stockholders’ Equity.  Total stockholders’ equity decreased by $6.6 million, or 11.02%, to $53.3 million at September 30, 2020 from $59.9 million at December 31, 2019.  Earnings of $555,000, an increase of $229,000 in other comprehensive income related to interest fluctuations on the  Company’s available for sale securities and an increase of $853,000 in additional paid in capital for the recording of stock-based compensation relating to the ESOP and the 2019 Equity Incentive Plan were offset by a cash dividend in the amount of $1.8 million paid to stockholders and the repurchase of $6.5 million in common stock, which was part of the stock repurchase plan that was approved by the Board of Directors on December 2, 2019 and completed in August 2020 and the additional stock repurchase plan that was approved by the Board of Directors on August 18, 2020.  

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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.  

 

 

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Comparison of Operating Results for the Three Months Ended September 30, 2020 and September 30, 2019

 

General.  Net income was $251,000 for the three months ended September 30, 2020 compared to $302,000 for the three months ended September 30, 2019.  The decrease was due to a decrease in net interest income after provision of $301,000, or 15.05%, to $1.7 million for the three months ended September 30, 2020 from $2.0 million for the three months ended September 30, 2019 as well as an increase in non-interest expense of $49,000, or 2.88%, to $1.8 million for three months ended September 30, 2020 from $1.7 million for the three months ended September 30, 2019 offset by an increase non-interest income of $298,000 to $453,000 for the three months ended September 30, 2020 from $155,000 for the three months ended September 30, 2019.  

 

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Interest Income. Interest and dividend income decreased $214,000, or 9.30%, to $2.1 million for the three months ended September 30, 2020 from $2.3 million for the three months ended September 30, 2019.   The decrease in interest and dividend income was due to the decrease in the average yield on interest-earning assets for the three months ended September 30, 2020 compared to the average yield on interest-earning assets for the three months ended September 30, 2019 offset by increase in average interest-earning assets for the three months ended September 30, 2020 compared to the average interest-earning assets for the three months ended September 30, 2019.

 

Interest and fees on loans increased $34,000, or 1.89%, to $1.9 million for the three months ended September 30, 2020 from $1.8 million for the three months ended September 30, 2019.  The increase was primarily due to an increase in the average balance of our loans offset by a decrease in the average yield on our loans.  Our average balance of loans increased $20.5 million, or 14.26%, to $164.3 million for the three months ended September 30, 2020 from $143.8 million for the three months ended September 30, 2019.   Our average yield on loans decreased 56 basis points to 4.54% for the three months ended September 30, 2020 from 5.10% for the three months ended September 30, 2019, as higher-yielding loans have been repaid or refinanced and replaced with lower-yielding loans due to the current rate environment, as well as our origination of lower yielding PPP loans.  As of September 30, 2020 we had originated $8.6 million in PPP loans and the interest rate on these loans is 1.00%.  The rate does not include deferred fees of approximately $245,000 that will be amortized and recorded as an increase in loan income over the life of the loan depending on the date of loan origination.   For the three months ended September 30, 2020, we had recorded an increase in loan income relating to the amortization of PPP deferred fees of approximately $30,000.

 

Interest and dividends on interest-bearing deposits in other banks, time deposits in other banks, and investments decreased $248,000, or 45.51%, to $220,000 for the three months ended September 30, 2020 from $465,000 for the three months ended September 30, 2019.  The average balances on interest-bearing deposits in other banks, time deposits in other banks and investments decreased $5.5 million, or 8.49%, to $59.3 million for the three months ended September 30, 2020 from $64.8 million for the three months ended September 30, 2019 and this decrease in the average balances was driven primarily by the decrease in investment securities due to sales, calls and maturities, a decrease in time deposits in other banks due to calls, offset by an increase in 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 139 basis points to 1.48% for the three months ended September 30, 2020 from 2.87% for the three months ended September 30, 2019 primarily due to our interest-bearing deposits in other banks repricing due to federal funds rate decreases as well as the sales, calls and maturities of higher yielding investment securities and the calls of higher yielding time deposits in other banks.  

 

Interest Expense. Interest expense increased $2,000, or 0.54%, to $370,000 for the three months ended September 30, 2020 from $368,000 for the three months ended September 30, 2019.  Our average balance of interest-bearing liabilities increased $12.1 million, or 8.86%, to $148.7 million for the three months ended September 30, 2020 from $136.6 million for the three months ended September 30, 2019. The increase was due primarily to an increase in borrowed funds and an increase in savings account balances. Our average rate paid on interest-bearing deposits decreased seven basis points to 1.00% for the three months ended September 30, 2020 compared to 1.07% for the three months ended September 30, 2019.  The average rate paid on our borrowings was 0.79% for the three months ended September 30, 2020.

 

Net Interest Income.  Net interest income decreased $216,000, or 11.37%, to $1.7 million for the three months ended September 30, 2020 compared to $1.9 million for the three months ended September 30, 2019.  The decrease was primarily the result of lower net interest spread and net interest margin offset by an increase in our net-interest earning assets.  Our net interest rate spread decreased by 60 basis points to 2.74% for the three months ended September 30, 2020 from 3.34% for the three months ended September 30, 2019 and our net interest margin decreased by 63 basis points to 3.08% for the three months ended September 30, 2020 from 3.71% for the three months ended September 30, 2019. Our average net interest-earning assets increased by $3.0 million, or 4.17%, to $74.9 million for the three months ended September 30, 2020 from $71.9 million for the three months ended September 30, 2019.  

 

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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 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 increased by $85,000 to $25,000 for the three months ended September 30, 2020 from a reversal of the provision for loan losses for the three months ended September 30, 2019 of $60,000.  We recorded net recoveries of $1,000 for the three months ended September 30, 2020 and net recoveries of $74,000 for the three months ended September 30, 2019.  Non-performing loans totaled $475,000 at September 30, 2020 compared to $443,000 at September 30, 2019.  Our non-performing loans to total loans remained at 0.30% at September 30, 2020 and September 30, 2019.  The increase in provision for loan losses was necessary due to an increase in our overall loan balances as well as an increase in our qualitative factors, such as current economic  conditions, the adequacy of underlying collateral and the financial strength of our borrowers affected by the COVID-19 pandemic.  We have provided for losses that are probable and reasonably estimable at September 30, 2020.  

 

Non-Interest Income.  Non-interest income increased by $298,000 to $453,000 for the three months ended September 30, 2020 from $155,000 for the three months ended September 30, 2019.  The increase was primarily due to an increase of $312,000 in gain on sale of loans to $342,000 for the three months ended September 30, 2020 from $30,000 for the three months ended September 30, 2019.  The increase in gain on sale of loans is due to an increase in refinancing in the residential mortgage market due to the lower rate environment.

 

Non-Interest Expense.  Non-interest expense increased by $49,000, or 2.88%, to $1.8 million for the three months ended September 30, 2020 from $1.7 million for the three months ended September 30, 2019.  Salaries, director fees and employee benefits increased $42,000, or 3.82%, to $1.2 million for the three months ended September 30, 2020 from $1.1 million for the three months ended September 30, 2019 primarily due to commissions paid to loan officers for the increase in loans originated for sale. FDIC premiums and regulatory expenses increased $6,000, or 31.58%, to $25,000 for the three months ended September 30, 2020 from $19,000 for the three months ended September 30, 2019 due to the small banks credits that were awarded by the FDIC were fully utilized early in the third quarter of 2020 which resulted in a net assessment due to the FDIC.  Marketing expenses decreased $6,000, or 23.08%, to $20,000 for the three months ended September 30, 2020 compared to $26,000 for the three months ended September 30, 2019 due to reductions in marketing outlays during the third quarter of 2020.  

 

Income Tax Expense.  Income tax expense decreased by $1,000, or 0.85%, to $116,000 for the three months ended September 30, 2020 from $117,000 for the three months ended September 30, 2019. The effective tax rate was 31.54% and 27.94% for the three months ended September 30, 2020 and 2019, respectively.  Income before taxes decreased by $53,000, or 12.65%, to $366,000 for the three months ended September 30, 2020 compared to $419,000 for the three months ended September 30, 2019.  Although income before taxes decreased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, income tax expense and our effective tax rate increased as a result of the increase in non-deductible compensation expense relating to the 2019 Equity Incentive Plan relative to the overall income during the three months ended September 30, 2020 compared to the non-deductible compensation expense relating to the 2019 Equity Incentive Plan relative to the overall income during the three months ended September 30, 2019.

 

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Comparison of Operating Results for the Nine Months Ended September 30, 2020 and September 30, 2019

 

General.  Net income was $555,000 for the nine months ended September 30, 2020 compared to $746,000 for the nine months ended September 30, 2019.  The decrease of $191,000, or 25.60%, was due primarily to a decrease net interest income, an increase in provision for loan losses, an increase in non-interest expense offset by an increase in non-interest income.  Net interest income decreased by $265,000, or 6.96%, to $5.5 million for the nine months ended September 30, 2020 compared to $5.8 million for the nine months ended September 30, 2019.  Provision for loan losses increased $260,000 to $525,000 for the nine months ended September 30, 2020 compared to $90,000 for the nine months ended September 30, 2020.  Non-interest expenses increased by $365,000, or 9.30%, to $5.4 million for the nine months ended September 30, 2020 compared to $5.0 million for the nine months ended September 30, 2019.  Non-interest income increased $687,000 to $1.0 million for the nine months ended September 30, 2020 compared to $352,000 for the nine months ended September 30, 2019.  

 

Interest Income. Interest and dividend income decreased $165,000, or 2.43%, to $6.6 million for the nine months ended September 30, 2020 from $6.8 million for the nine months ended September 30, 2019.  The average interest-earning assets for the nine months ended September 30, 2020 increased compared to the average interest-earning assets for the nine months ended September 30, 2019 however the average yield on interest-earning assets decreased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.  

Interest and fees on loans increased $427,000, or 7.91%, to $5.8 million for the nine months ended September 30, 2020 from $5.4 million for the nine months ended September 30, 2019. The increase was primarily due to an increase in the average balance of our loans offset by a decrease in the average yield on our loans.   Our average balance of loans increased $20.8 million, or 14.40%, to $165.2 million for the nine months ended September 30, 2020 from $144.4 million for the nine months ended September 30, 2019.   Our average yield on loans decreased 28 basis points to 4.72% for the nine months ended September 30, 2020 from 5.00% for the nine months ended September 30, 2019, as higher-yielding loans have been repaid or refinanced and replaced with lower-yielding loans due to the current rate environment, as well as our origination of lower yielding PPP loans.  As of September 30, 2020 we had originated $8.6 million in PPP loans at an interest rate of 1.00%.  The rate does not include deferred fees of approximately $245,000 that will be amortized and recorded as an increase in loan income over the life of the loan and depending on the date of loan origination. For the nine months ended September 30, 2020, we had recorded an increase in loan income relating to the amortization of PPP deferred fees of approximately $52,000.    

 

Interest and dividends on interest-bearing deposits in other banks, time deposits in other banks, and investments decreased $592,000, or 42.29%, to $794,000 for the nine months ended September 30, 2020 from $1.4 million for the nine months ended September 30, 2019.  The average balances on interest-bearing deposits in other banks, time deposits in other banks and investments decreased $10.1 million, or 15.78%, to $53.9 million for the nine months ended September 30, 2020 from $64.0 million for the nine months ended September 30, 2019 and this decrease in the average balances was driven primarily by the decrease in investment securities due to sales, calls and maturities, a decrease in time deposits in other banks due to calls and maturities, offset by an increase in 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 93 basis points to 1.97% for the nine months ended September 30, 2020 from 2.90% for the nine months ended September 30, 2019 primarily due to our interest-bearing deposits in other banks repricing due to federal funds rate decreases as well as decreases in the average yield on our investment portfolio after the sales, calls and maturities of higher yielding investment securities.  

 

Interest Expense. Interest expense increased $100,000, or 10.00%, to $1.1 million for the nine months ended September 30, 2020 from $1.0 million for the nine months ended September 30, 2019.  Our average balance of interest-bearing liabilities increased $10.7 million, or 7.83%, to $147.3 million for the nine months ended September 30, 2020 from $136.6 million for the nine months ended September 30, 2019.   The increase was due primarily to an increase in borrowed funds, an increase in certificates of deposit balances and an increase in savings account balances.  Our average rate paid on interest-bearing deposits increased three basis points to 1.04% for the nine months ended September 30, 2020 from 1.01% for the nine months ended September 30, 2019 primarily due to an increase in the average rate paid on certificates of deposit.    The average rate paid on our borrowings was 0.84% as of September 30, 2020.

 

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Net Interest Income.  Net interest income decreased $265,000, or 6.96%, to $5.5 million for the nine months ended September 30, 2020 from $5.8 million for the nine months ended September 30, 2019.  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 slightly to $71.9 million at September 30, 2020 from $71.8 million at September 30, 2019. Our net interest rate spread decreased by 34 basis points to 3.01% for the nine months ended September 30, 2020 from 3.35% for the nine months ended September 30, 2019 and our net interest margin decreased by 34 basis points to 3.35% for the nine months ended September 30, 2020 from 3.69% for the nine months ended September 30, 2019.

 

Provisions for Loan Losses.  Provision for loan losses increased $260,000 to $350,000 for the nine months September 30, 2020 from $90,000 for the nine months ended September 30, 2019.  We recorded net charge-offs of $2,000 for the nine months ended September 30, 2020 and net recoveries of $24,000 for the nine months ended September 30, 2019.  Non-performing loans totaled $475,000 at September 30, 2020 compared to $443,000 million at September 30, 2019.  Our non-performing loans to total loans remained at 0.30% at September 30, 2020 and September 30, 2019.  The increase in provision for loan losses was necessary due to an increase in our overall loan balances as well as an increase in our qualitative factors, such as current economic  conditions, the adequacy of underlying collateral and the financial strength of our borrowers affected by the COVID-19 pandemic.  We have provided for losses that are probable and reasonably estimable at September 30, 2020.  

 

Non-Interest Income.  Non-interest income increased by $687,000 to $1.0 million for the nine months ended September 30, 2020 from $352,000 for the nine months ended September 30, 2019.  The increase was primarily due to an increase of $564,000 in gain on sale of loans to $628,000 for the nine months ended September 30, 2020 from $64,000 for the nine months ended September 30, 2019 due to an increase in refinancing in the residential mortgage market due to the lower rate environment and the gain on sale of investments of $143,000 recorded for the nine months ended September 30, 2020.

 

Non-Interest Expense.  Non-interest expense increased by $365,000, or 9.30%, to $5.4 million for the nine months ended September 30, 2020 from $5.0 million for the nine months ended September 30, 2019.  Salaries, director fees and employee benefits increased $456,000, or 14.71%, to $3.5 million for the nine months ended September 30, 2020 from $3.1 million for the nine months ended September 30, primarily due to an increase of $344,000 for the recording of stock-based compensation of $528,000 for the nine months ended September 30, 2020 compared to $184,000 for the nine months ended September 30, 2019 relating to the 2019 Equity Incentive Plan which was approved in May 2019, commissions paid to loan officers for the increase in loans originated for sale as well as the expansion of our employee base, including sales and relationship management personnel to help support our continued growth strategy. Professional fees decreased $36,000, or 8.47%, to $389,000 for the nine months ended September 30, 2020 from $425,000 for the nine months ended September 30, 2019 primarily due to higher levels of  consulting expenses during the nine months ended September 30, 2019 relating to the Company’s public company status.  FDIC premiums and regulatory expenses decreased $19,000, or 24.68%, to $58,000 for the nine months ended September 30, 2020 from $77,000 for the nine months ended September 30, 2019 due to the FDIC awarding small banks credits for a portion of their assessment during the nine months ended September 30, 2020.  Marketing expenses decreased $49,000 to $49,000 for the nine months ended September 30, 2020 compared to $98,000 for the nine months ended September 30, 2019 due to reductions in marketing outlays during the nine months ended September 30, 2020.   Provision for losses and costs on foreclosed real estate increased by $49,000 to $82,000 for the nine months ended September 30, 2020 from $33,000 for the nine months ended September 30, 2019 due to a writedown in the valuation of the foreclosed real estate to its current fair market value.  Other operating expenses decreased by $33,000, or 5.84%, to $532,000 for the nine months ended September 30, 2020 from $565,000 for the nine months ended September 30, 2019 primarily due to a decrease in insurance costs offset by an increase in software maintenance costs.  

 

Income Tax Expense.  Income tax expense decreased by $11,000, or 4.10%, to $257,000 for the nine months ended September 30, 2020 from $268,000 for the nine months ended September 30, 2019.  The effective tax rate was 31.61% and 26.44% for the nine months ended September 30, 2020 and 2019, respectively.  The decrease in tax expense was the result of a decrease in income before income taxes of $203,000, or 20.30%, to $812,000 for the nine months ended September 30, 2020 from $1.0 million for the nine months ended September 30, 2019.   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 overall income during the nine months ended September 30, 2020 compared to the non-deductible compensation expense relating to the 2019 Equity Incentive Plan relative to the overall income during the nine months ended September 30, 2019.

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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 the Federal 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.

The COVID-19 pandemic could have a negative effect on our liquidity and capital resources due to reductions in principal and interest payments on our loans, an increase in deposit withdrawals and the potential tightening of the capital markets.  While we have not yet experienced a significant decrease in our loan principal and interest payments, we do however anticipate there could be a decline in the third quarter ending September 30, 2020 based on our current level of loan modification requests for those customers affected by COVID-19.  The loan type, number of loans and balances of these loan modifications are discussed in Note 4 of Notes to Consolidated Financial Statements.  As a qualified SBA lender, we were authorized to originate PPP loans as discussed in Note 3 of Notes to Consolidated Financial Statements.  We limited our investment in these loans to 20% of the Bank’s capital, or $8.6 million in loans, and funded approximately this amount in PPP loans as of September 30, 2020.  Deposit balances increased during the six months ended September 30, 2020, and although a reduction in our deposits did not occur as anticipated, we continue to prepare for deposit outflow from consumers and businesses relating to the potential disruption in their income and the adverse business consequences due to COVID-19.   

In order to meet the our potential current short-term and long-term liquidity needs, to include the funding of our investment in PPP loans, as discussed above, we increased our borrowings with the Federal Home Loan Bank to $10.0 million as of September 30, 2020 and as of September 30, 2020, we had sold $7.3 million in municipal and residential mortgage-backed securities, recognizing a gain of approximately $143,000.  We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2020.  

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.

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. At September 30, 2020, cash and cash equivalents totaled $33.2 million, which included, $483,000 in cash and due from banks and interest-bearing deposits in other banks of $32.7 million. Time deposits in other banks and securities classified as available-for-sale, which provide additional sources of liquidity, totaled $6.9 million and $19.3 million, respectively at September 30, 2020.

Our cash flows are comprised of three primary classifications:  cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $1.1 million and $185,000 for the nine months ended September 30, 2020 and 2019, respectively. Net cash provided by (used in) 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 $18.0 million and $(8.8) million for the nine months ended September 30, 2020 and 2019, 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 $10.2 million and $306,000 for the nine months ended September 30, 2020 and 2019, respectively.

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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 of September 30, 2020 totaled $36.7 million, or 21.29% 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.  At September 30, 2020, 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.  At September 30, 2020, we had outstanding commitments to originate loans of $24.6 million.  We anticipate that we will have sufficient funds available to meet our current lending commitments.  

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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 the Securities 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.

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Part II – OTHER INFORMATION

Item 1 – Legal Proceedings

The Company was not involved in any pending legal proceedings.  The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Company’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Company’s consolidated financial condition and results of operations.

Item 1A – Risk Factors

Not applicable as CBM Bancorp, Inc. is a smaller reporting company.

Item 2 - Unregistered Sales of Equity Securities and Use or Proceeds

For information regarding stock repurchases during the quarter and nine months ended September 30, 2020, see Note 10 of Notes to Consolidated Financial Statements which is incorporated by reference.

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Mine Safety Disclosures

Not applicable

Item 5 – Other Information

None

Item 6 – Exhibits

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  

 

 

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