UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

001-38680

(Commission File No.)

 

 

CBM BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland		83-1095537
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
2001 East Joppa Road, Baltimore, Maryland		21234
(Address of Principal Executive Offices)		(Zip Code)

410-665-7600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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.

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☒

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 May 15, 2019, the number of shares of common stock outstanding was 4,232,000.

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock		CBMB		Nasdaq Capital Market

 

 

 

CBM Bancorp, Inc.

Table of Contents

 

				Page No.
Part I. Financial Information
Item 1.		Financial Statements
Consolidated Statements of Financial Condition as of March  31, 2019 (unaudited) and December 31, 2018 (audited)					3
Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)					4
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (unaudited)					5
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited)					6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)					7
Notes to Consolidated Financial Statements					8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			42
Item 4.		Controls and Procedures			42
Part II. Other Information
Item 1.		Legal Proceedings			42
Item1A.		Risk Factors			42
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3.		Defaults Upon Senior Securities			42
Item 4.		Mine Safety Disclosures			42
Item 5.		Other Information			42
Item 6.		Exhibits			43
Signatures					44

 

2

PART I – FINANCIAL INFORMATION

ITEM 1 – Consolidated Financial Statements

CBM Bancorp, Inc.

Consolidated Statements of Financial Condition

March 31, 2019 (Unaudited) and December 31, 2018

 

		March 31, 2019				December 31, 2018
		(Unaudited)				(Audited)
Assets
Cash and due from banks		$	909,221			$	1,071,335
Interest-bearing deposits in other banks			10,705,785				17,775,425
Cash and cash equivalents			11,615,006				18,846,760
Time deposits in other banks			7,441,752				6,944,000
Securities available for sale, at fair value			43,089,426				37,447,423
Federal Home Loan Bank stock, at cost			279,100				245,200
Loans held for sale			466,524				211,107
Loans, net of unearned fees			146,178,327				143,508,813
Allowance for loan losses			(1,278,352	)			(1,188,352	)
Net loans			144,899,975				142,320,461
Accrued interest receivable			762,658				695,928
Bank-owned life insurance			4,627,873				4,609,357
Premises and equipment, net			1,888,862				1,924,518
Foreclosed real estate			865,000				865,000
Deferred income taxes			795,292				900,994
Prepaid expenses and other assets			461,174				402,344
Total assets		$	217,192,642			$	215,413,092
Liabilities and Stockholders’ Equity
Liabilities
Noninterest-bearing deposits		$	18,400,153			$	18,111,318
Interest-bearing deposits			135,992,610				135,638,917
Total deposits			154,392,763				153,750,235
Advances by borrowers for taxes and insurance			847,209				477,781
Accounts payable and other liabilities			935,907				838,301
Total liabilities			156,175,879				155,066,317
Commitments and contingencies			—				—
Stockholders’ Equity
Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued			—				—
Common stock, $.01 par value; authorized 24,000,000 shares; issued and outstanding 4,232,000 shares at March 31, 2019 and December 31, 2018			42,320				42,320
Additional paid in capital			41,011,268				40,987,146
Retained earnings			22,608,157				22,336,134
Unearned ESOP shares			(2,962,400	)			(3,047,040	)
Accumulated other comprehensive income			317,418				28,215
Total stockholders’ equity			61,016,763				60,346,775
Total liabilities and stockholders’ equity		$	217,192,642			$	215,413,092

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

 

3

CBM Bancorp, Inc.

Consolidated Statements of Operations (Unaudited)

Three Months Ended March 31, 2019 and 2018

 

		For the Three Months Ended March 31,
		2019				2018
Interest and dividend income
Interest and fees on loans		$	1,727,283			$	1,645,619
Interest and dividends on investments			453,221				134,895
Total interest income			2,180,504				1,780,514
Interest expense
Interest on deposits			316,037				214,539
Total interest expense			316,037				214,539
Net interest income			1,864,467				1,565,975
Provision for loan losses			90,000				75,000
Net interest income after provision for loan losses			1,774,467				1,490,975
Non-interest income
Service fees on deposit accounts			28,392				34,060
Income from bank-owned life insurance			18,516				21,653
Gain on sale of loans held for sale			15,246				65,592
Other non-interest income			30,120				29,994
Total non-interest income			92,274				151,299
Non-interest expense
Salaries, director fees and employee benefits			885,844				780,880
Premises and equipment			119,053				105,163
Data processing			139,893				136,211
Professional fees			122,688				76,371
FDIC premiums and regulatory assessments			30,215				29,547
Marketing			23,184				36,384
Other operating expenses			178,405				141,551
Total non-interest expense			1,499,282				1,306,107
Income before income taxes			367,459				336,167
Income tax expense			95,436				80,162
Net income		$	272,023			$	256,005
Earnings per common share
Basic		$	0.07				N/A
Diluted		$	0.07				N/A

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

 

4

CBM Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended March 31, 2019 and 2018

 

		For the Three Months Ended March 31,
		2019				2018
Net income		$	272,023			$	256,005
Other comprehensive income (loss)
Unrealized gain (loss) on investment securities available for sale			398,996				(64,722	)
Income tax (expense) benefit relating to investment securities available for sale			(109,793	)			17,811
Other comprehensive income (loss)			289,203				(46,911	)
Total comprehensive income		$	561,226			$	209,094

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

 

5

CBM Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Three Months Ended March 31, 2019 and 2018

 

		Common Stock				Additional Paid-In Capital				Retained Earnings				Unearned ESOP Shares				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance, January 1, 2018		$	—			$	—			$	21,653,191			$	—			$	(49,861	)		$	21,603,330
Net income			—				—				256,005				—				—				256,005
Other comprehensive loss			—				—				—				—				(46,911	)			(46,911	)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from accumulated other comprehensive loss			—				—				9,821				—				(9,821	)			—
Balance, March 31, 2018		$	—			$	—			$	21,919,017			$	—			$	(106,593	)		$	21,812,424
Balance, January 1, 2019		$	42,320			$	40,987,146			$	22,336,134			$	(3,047,040	)		$	28,215			$	60,346,775
Net income			—				—				272,023				—				—				272,023
Other comprehensive income			—				—				—				—				289,203				289,203
ESOP shares committed to be released			—				24,122				—				84,640				—				108,762
Balance, March 31, 2019		$	42,320			$	41,011,268			$	22,608,157			$	(2,962,400	)		$	317,418			$	61,016,763

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

 

6

CBM Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31, 2019 and 2018

 

		For the Three Months Ended March 31,
		2019				2018
Cash flows from operating activities:
Net income		$	272,023			$	256,005
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion of securities			6,770				(1,329	)
Gain on sale of loans held for sale			(15,246	)			(65,592	)
Originations of loans held for sale			(1,237,156	)			(2,431,564	)
Proceeds from sales of loans held for sale			996,985				3,055,280
Amortization of deferred loan origination costs, net of fees			(23,122	)			(17,331	)
Provision for loan losses			90,000				75,000
(Increase) decrease in accrued interest receivable			(66,730	)			47,093
Increase in cash surrender value of life insurance			(18,516	)			(18,158	)
Depreciation and amortization			42,211				39,405
ESOP compensation expense			108,762				—
Deferred income tax (benefit)			(4,091	)			80,162
Increase in prepaid expenses and other assets			(58,830	)			(82,300	)
Increase (decrease) in accounts payable and other liabilities			97,606				(57,824	)
Net cash provided by operating activities			190,666				878,847
Cash flows from investing activities:
Net (purchases) maturities of time deposits in other banks			(497,752	)			1,240,000
Purchases of available for sale securities			(8,037,204	)			—
Proceeds from maturities, payments and calls of available for sale securities			2,787,427				—
Proceeds from maturities, payments and calls of held to maturity securities			—				137,879
Purchases of Federal Home Loan Bank stock			(33,900	)			(3,100	)
Net increase in loans			(2,646,392	)			(987,929	)
Proceeds from redemption of bank owned life insurance			—				882,278
Purchases of premises and equipment			(6,555	)			(11,814	)
Net cash (used in) provided by investing activities			(8,434,376	)			1,257,314
Cash flows from financing activities:
Net increase in deposits			642,528				1,583,229
Net increase in advances by borrowers			369,428				401,081
Net cash provided by financing activities			1,011,956				1,984,310
Net (decrease) increase in cash and cash equivalents			(7,231,754	)			4,120,471
Cash and cash equivalents, beginning balance			18,846,760				12,030,272
Cash and cash equivalents, ending balance		$	11,615,006			$	16,150,743
Supplemental disclosure of cash flows information:
Cash paid for interest		$	315,927			$	214,440
Cash paid for income taxes			—				—

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

 

7

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies

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, it 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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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 accounting principles generally accepted in the United States 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 months ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, 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, 2018 included in the Company’s Annual Report on Form 10-K dated March 27, 2019.

 

8

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies (Continued)

 

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 accounting principles generally accepted in the United States of America (“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 accounting principles generally accepted in the United States of America 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, interest-bearing deposits in other banks and federal funds sold. Generally federal funds are sold as overnight investments.

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

 

9

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies (Continued)

 

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 Generally Accepted Accounting Standards related to Accounting for Certain Investments in Debt and Equity Securities, because its ownership is restricted and it 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. As of March 31, 2019 and December 31, 2018, the Bank owned shares totaling $279,100 and $245,200, respectively.

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.

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.

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.

 

10

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies (Continued)

 

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.

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 March 31, 2019, and December 31, 2018, $126,201 and $129,775, respectively, was included in other liabilities related to the split-dollar insurance policies.

 

11

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies (Continued)

 

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:

 

Buildings and land improvements			5 - 50 years
Leasehold improvements			10 - 15 years
Furniture, fixtures and equipment			3 - 10 years
Automobile			5 years

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 (“ESOP”)

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.

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.

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 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.

 

12

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies (Continued)

 

Concentrations of Credit Risk

The Bank had approximately $1,288,000 and approximately $128,000 in deposits in other financial institutions in excess of amounts insured by the FDIC, as of March 31, 2019 and December 31, 2018, respectively. The Bank’s management considers this 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.

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 an emerging growth company (“EGC”), we will adopt the amendments in this update beginning after December 15, 2019, and interim periods with fiscal years beginning after December 15, 2019. 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.

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. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, 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 an EGC, we will adopt the amendments in this update beginning after December 15, 2020, including interim periods within those fiscal years. 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. The Company is continuing to evaluate and assess the impact of the adoption of this ASU on its consolidated financial statements.

ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20)—Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 was effective for the Company on January 1, 2019, with early adoption permitted. The Company amortizes to the call date and therefore the adoption did not have any impact on the Company’s consolidated financial condition or results of operations.

 

13

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

 

Note 2. Securities

The amortized cost and estimated fair value of securities classified as available for sale at March 31, 2019 and December 31, 2018, are as follows:

 

		March 31, 2019
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities Available for Sale
U.S. Government and Federal Agency obligations		$	21,252,762			$	107,809			$	47,966			$	21,312,605
Residential mortgage-backed securities			19,893,086				372,446				201				20,265,331
Municipal securities			1,505,655				6,419				584				1,511,490
		$	42,651,503			$	486,674			$	48,751			$	43,089,426
		December 31, 2018
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities Available for Sale
U.S. Government and Federal Agency obligations		$	18,264,805			$	45,850			$	90,583			$	18,220,072
Residential mortgage-backed securities			17,637,729				111,837				4,580				17,744,986
Municipal securities			1,505,962				—				23,597				1,482,365
		$	37,408,496			$	157,687			$	118,760			$	37,447,423

The amortized cost and estimated fair value of securities as of March 31, 2019 and December 31, 2018, 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.

 

		March 31, 2019
		Securities Available for Sale
		Amortized Cost				Fair Value
Due in one year or less		$	3,815,589			$	3,819,158
Due after one year through five years			17,457,680				17,500,241
Due five years to ten years			1,485,148				1,504,696
Due after ten years			—				—
Mortgage-backed, in monthly installments			19,893,086				20,265,331
		$	42,651,503			$	43,089,426

 

14

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 2. Securities (Continued)

 

		December 31, 2018
		Securities Available for Sale
		Amortized Cost				Fair Value
Due in one year or less		$	1,000,000			$	989,119
Due after one year through five years			14,453,375				14,391,553
Due five years to ten years			4,317,392				4,321,765
Due after ten years			—				—
Mortgage-backed, in monthly installments			17,637,729				17,744,986
		$	37,408,496			$	37,447,423

Securities with gross unrealized losses at March 31, 2019 and December 31, 2018 aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

		March 31, 2019
		Less than 12 Months								12 Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Securities Available for Sale
U.S. Government and Federal Agency obligations		$	—			$	—			$	4,451,167			$	47,966			$	4,451,167			$	47,966
Residential mortgage-backed securities			215,394				201				—				—				215,394				201
Municipal obligations			—				—				1,002,160				584				1,002,160				584
		$	215,394			$	201			$	5,453,327			$	48,550			$	5,668,721			$	48,751
		December 31, 2018
		Less than 12 Months								12 Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Securities Available for Sale
U.S. Government and Federal Agency obligations		$	963,945			$	63			$	4,408,553			$	90,520			$	5,372,498			$	90,583
Residential mortgage-backed securities			2,838,108				4,580				—				—				2,838,108				4,580
Municipal obligations			—				—				1,482,365				23,597				1,482,365				23,597
		$	3,802,053			$	4,643			$	5,890,918			$	114,117			$	9,692,971			$	118,760

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.

The Bank transferred during 2018 its entire held to maturity portfolio of residential mortgage-backed securities to available for sale. The securities were transferred at a fair market value of $2,923,932 with a corresponding adjustment to accumulated other comprehensive income in the amount of $56,276 to account for the unrealized gain in the investment securities at the date of transfer. The Bank is prohibited from classifying any investments as held to maturity for the next two years.

 

15

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 2. Securities (Continued)

 

At March 31, 2019, the Bank held eight investments with gross unrealized losses totaling $48,751. At December 31, 2018, the Bank held twelve investments with gross unrealized losses totaling $118,760.

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 March 31, 2019 and December 31, 2018.

Note 3. Loans

The Bank makes loans to customers primarily in the Baltimore Metropolitan Area and its surrounding counties. The principal loan portfolio segment balances at March 31, 2019 and December 31, 2018 were as follows:

 

		March 31, 2019				December 31, 2018
Real estate loans
One-to four-family		$	70,401,955			$	70,197,875
Home equity loans and lines of credit			7,291,555				7,547,195
Construction and land development			9,831,129				8,232,067
Nonresidential			52,909,540				51,904,782
Total real estate loans			140,434,179				137,881,919
Other loans
Commercial			5,390,814				5,250,815
Consumer			496,036				529,283
Total other loans			5,886,850				5,780,098
Total loans			146,321,029				143,662,017
Net deferred loan origination fees and costs			(142,702	)			(153,204	)
Allowance for loan losses			(1,278,352	)			(1,188,352	)
Total loans, net		$	144,899,975			$	142,320,461

Overdraft deposits are reclassified as consumer loans and are included in the total loans on the balance sheet. Overdrafts were $4,644 and $7,824 at March 31, 2019 and December 31, 2018, respectively.

Portfolio segments

The Bank currently manages its credit products and respective exposure to credit losses by the following specific portfolio segments (classes) 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:

 

•

One-to four-family real estate loans – This residential real estate category contains permanent mortgage loans and construction permanent mortgage loans to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Loans may either be conforming or non-conforming.

 

16

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 3. Loans (Continued)

 

•

Home equity loans and lines of credit – This residential real estate category includes mortgage loans and lines of credit secured by one-to four-family residential real estate. These loans are typically secured with second mortgages on the homes.

 

•

Construction and land development – Commercial acquisition, development and construction loans are intended to finance the construction of commercial and residential properties and include loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan.

 

•

Nonresidential real estate loans – Nonresidential real estate loans consist of commercial permanent mortgage loans and commercial construction permanent mortgage loans secured by owner occupied and non-owner occupied properties. Owner occupied commercial property loans involve a variety of property types to conduct the borrower’s operations. The primary source of repayment for this type of loan is the cash flow from the business and is based upon the borrower’s financial health and ability of the borrower and the business to repay. Non-owner occupied commercial property loans involve investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. This real estate category contains commercial mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale to repay the loan.

 

•

Commercial loans—Commercial loans are made to provide funds for equipment and general corporate needs. Repayment of the loan primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or finance a percentage of eligible receivables and inventory.

 

•

Consumer loans – This category of loans includes primarily installment loans, personal lines of credit. Consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles.

Note 4. Credit Quality of Loans and the Allowance for Loan Losses

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.

 

17

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

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 months ended March 31, 2019 2018 and for the year ended December 31, 2018 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of March 31, 2019, March 31, 2018 and December 31, 2018.

 

18

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

		As of March 31, 2019
		One –to Four-Family				Home Equity Loans and Lines of Credit				Construction and Land Development				Nonresidential				Commercial				Consumer				Unallocated				Total
Allowance for loans losses:
Beginning Balance – January 1, 2019		$	244,781			$	68,837			$	185,170			$	626,031			$	28,879			$	6,669			$	27,985			$	1,188,352
Charge-offs			—				—				—				—				—				—				—				—
Recoveries			—				—				—				—				—				—				—				—
Provision			61,263				(7,115	)			33,825				5,068				770				(369	)			(3,442	)			90,000
Ending Balance – March 31, 2019		$	306,044			$	61,722			$	218,995			$	631,099			$	29,649			$	6,300			$	24,543			$	1,278,352
Ending balance: individually evaluated for impairment		$	61,125			$	1,541			$	6,074			$	—			$	—			$	—			$	—			$	68,740
Ending balance: collectively evaluated for impairment		$	244,919			$	60,181			$	212,921			$	631,099			$	29,649			$	6,300			$	24,543			$	1,209,612
Loans:
Ending balance		$	70,401,955			$	7,291,555			$	9,831,129			$	52,909,540			$	5,390,814			$	496,036							$	146,321,029
Ending balance: individually evaluated for impairment		$	661,784			$	127,200			$	86,728			$	484,223			$	—			$	—							$	1,359,935
Ending balance: collectively evaluated for impairment		$	69,740,171			$	7,164,355			$	9,744,401			$	52,425,317			$	5,390,814			$	496,036							$	144,961,094

 

19

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

		As of March 31, 2018
		One –to Four-Family				Home Equity Loans and Lines of Credit				Construction and Land Development				Nonresidential				Commercial				Consumer				Unallocated				Total
Allowance for loans losses:
Beginning Balance – January 1, 2018		$	238,148			$	83,129			$	173,167			$	446,576			$	44,199			$	15,933			$	37,253			$	1,038,405
Charge-offs			(30,000	)			—				—				—				—				—				—				(30,000	)
Recoveries			—				—				8,299				—				—				—				—				8,299
Provision			51,071				(8,518	)			4,940				34,805				(17,675	)			250				10,127				75,000
Ending Balance – March 31, 2018		$	259,219			$	74,611			$	186,406			$	481,381			$	26,524			$	16,183			$	47,380			$	1,091,704
Ending balance: individually evaluated for impairment		$	59,152			$	20,124			$	—			$	—			$	—			$	6,052			$	—			$	85,328
Ending balance: collectively evaluated for impairment		$	200,067			$	54,487			$	186,406			$	481,381			$	26,524			$	10,131			$	47,380			$	1,006,376
Loans:
Ending balance		$	69,628,606			$	9,181,975			$	9,477,151			$	47,545,898			$	4,822,632			$	536,178							$	141,192,440
Ending balance: individually evaluated for impairment		$	670,266			$	66,662			$	123,338			$	—			$	—			$	6,052							$	866,318
Ending balance: collectively evaluated for impairment		$	68,958,340			$	9,115,313			$	9,353,813			$	47,545,898			$	4,822,632			$	530,126							$	140,326,122

 

20

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

		As of December 31, 2018
		One –to Four-Family				Home Equity Loans and Lines of Credit				Construction and Land Development				Nonresidential				Commercial				Consumer				Unallocated				Total
Beginning Balance		$	238,148			$	83,129			$	173,167			$	446,576			$	44,199			$	15,933			$	37,253			$	1,038,405
Charge-offs			(88,000	)			(12,013	)			—				(335,000	)			—				(5,901	)			—				(440,914	)
Recoveries			7,562				—				8,299				—				—				—				—				15,861
Provision			87,071				(2,279	)			3,704				514,455				(15,320	)			(3,363	)			(9,268	)			575,000
Ending Balance		$	244,781			$	68,837			$	185,170			$	626,031			$	28,879			$	6,669			$	27,985			$	1,188,352
Ending balance: individually evaluated for impairment		$	—			$	2,089			$	6,074			$	—			$	—			$	—			$	—			$	8,163
Ending balance: collectively evaluated for impairment		$	244,781			$	66,748			$	179,096			$	626,031			$	28,879			$	6,669			$	27,985			$	1,180,189
Loans:
Ending balance		$	70,197,875			$	7,547,195			$	8,232,067			$	51,904,782			$	5,250,815			$	529,283							$	143,662,017
Ending balance: individually evaluated for impairment		$	585,047			$	130,795			$	86,728			$	484,223			$	—			$	—							$	1,286,793
Ending balance: collectively evaluated for impairment		$	69,612,828			$	7,416,400			$	8,145,339			$	51,420,559			$	5,250,815			$	529,283							$	142,375,224

 

21

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

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:

 

•

Pass – A pass loan is considered of sufficient quality to preclude a special mention or an adverse rating. Pass assets are generally well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. The pass classification also includes watch credits which have all of the characteristics of a pass loan, but warrant more than the normal level of supervision.

 

•

Special mention – A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

 

•

Substandard – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well defined weakness, or weaknesses, that jeopardize the collection or liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This will be the measurement for determining if a loan is impaired.

 

•

Doubtful – A doubtful loan has all of the weaknesses inherent in a substandard credit with the added factor that the weaknesses make the collection or liquidation in full, on the basis of current information, conditions and values, highly questionable and improbable. Loans in this category must be placed on non-accrual status and all payments applied to principal recapture. Doubtful classification should be used only when a distinct possibility of loss exists. When identified, adequate loss should be recorded for the specific assets. It is not necessary to classify an entire credit doubtful when collection of a specific portion appears highly probable.

 

•

Loss – A loan classified as loss is considered uncollectable and of such little value that continuance as a loan in unjustified. A loss classification does not mean that the credit has absolutely no value; partial recoveries may be received in the future. Amounts classified as loss must be charged-off in the period in which they are deemed uncollectible.

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.

 

22

CBM Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 4. Credit Quality of Loans and the Allowance for Loan Losses (Continued)

 

The following table is a summary of the loan portfolio quality indicators by loan class recorded investment as of March 31, 2019 and December 31, 2018:

 

		March 31, 2019
		One-to Four-Family				Home Equity Loans and Lines of Credit				Construction and Land Development				Nonresidential
Grade:
Pass		$	69,740,171			$	7,208,670			$	8,953,892			$	50,802,673
Special Mention			82,817				36,805				790,509				1,622,644
Substandard			578,967				46,080				86,728				484,223
Doubtful			—				—				—				—
		$	70,401,955			$	7,291,555			$	9,831,129			$	52,909,540
		Commercial				Consumer				Totals
Grade:
Pass		$	5,390,814			$	496,036			$	142,592,256
Special Mention			—				—				2,532,775
Substandard			—				—				1,195,998
Doubtful			—				—				—
		$	5,390,814			$	496,036			$	146,321,029
		December 31, 2018
		One-to Four-Family				Home Equity Loans and Lines of Credit				Construction and Land Development				Nonresidential
Grade:
Pass		$	69,499,216			$	7,462,230			$	7,351,165			$	49,781,890
Special Mention			113,612				—				794,174				1,638,669
Substandard			585,047				84,965				86,728				484,223
Doubtful			—				—				—				—
		$	70,197,875			$	7,547,195			$	8,232,067			$	51,904,782
		Commercial				Consumer				Totals
Grade:
Pass		$	5,250,815			$	529,283			$	139,874,599
Special Mention			—				—				2,546,455
Substandard			—				—				1,240,963
Doubtful			—				—				—
		$	5,250,815			$	529,283			$	143,662,017

 

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