DELMAR BANCORP (Form: 10-Q, Received: 11/07/2019 16:46:46)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the quarterly period ended September 30, 2019
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the transition period from to .

Commission file number: 033-21202

Delmar Bancorp

(Exact name of registrant as specified in its charter)

Maryland	52-1559535
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2245 Northwood Drive, Salisbury, Maryland	21801
(Address of principal executive offices)	(Zip Code)

410-548-1100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None.

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 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 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 November 7, 2019 there were 9,985,321 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

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TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION



		Page
Item 1. Financial Statements
Consolidated Balance Sheets		3

Consolidated Statements of Income (Unaudited)		4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)		5

Consolidated Statements of Stockholders' Equity (Unaudited)		6

Consolidated Statements of Cash Flows		7

Notes to Consolidated Financial Statements		8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		59

Item 4. Controls and Procedures		59

PART II OTHER INFORMATION


Item 1. Legal Proceedings.		60

Item 1A. Risk Factors.		60

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		60

Item 3. Defaults Upon Senior Securities.		60

Item 4. Mine Safety Disclosures.		60

Item 5. Other Information.		60

EXHIBIT INDEX		61

SIGNATURES		63

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DELMAR BANCORP

CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,
	2019		2018
(Dollars in thousands, except per share amounts)	(Unaudited)		Audited
ASSETS
Cash and due from banks	$	31,483	$	24,347
Interest bearing deposits in other financial institutions		29,143		4,093
Federal funds sold		15,458		1,254
Cash and cash equivalents		76,084		29,694
Securities available for sale, at fair value		55,854		51,300
Loans, less allowance for credit losses of $7,054 at September 30, 2019 and $7,063 at December 31, 2018		626,607		625,513
Accrued interest receivable on loans and investment securities		2,098		2,103
Premises and equipment, at cost, less accumulated depreciation		10,134		10,048
Federal Home Loan Bank stock, at cost		2,761		2,652
Atlantic Central Bankers Bank stock, at cost		131		131
Other investments		1,571		1,537
Deferred tax asset		2,892		4,829
Other real estate owned		3,641		3,660
Core deposit intangible		843		1,069
Goodwill		5,237		5,237
Other assets		4,990		1,643
Total assets	$	792,843	$	739,416
LIABILITIES
Deposits:
Non interest bearing demand	$	202,983	$	185,476
NOW		56,138		54,481
Savings and money market		124,722		123,949
Time, $100,000 or more		127,998		115,030
Other time		148,560		135,990
		660,401		614,926
Accrued interest payable on deposits		567		392
Short-term borrowings		—		7,000
Long-term borrowings		48,995		43,489
Subordinated notes payable		6,500		6,500
Other liabilities		4,821		1,121
Total liabilities		721,284		673,428
COMMITMENTS, CONTINGENCIES & SUBSEQUENT EVENT
STOCKHOLDERS' EQUITY
Common stock, par value $.01, authorized 20,000,000 shares, issued and outstanding 9,985,321 as of September 30, 2019 and December 31, 2018		100		100
Surplus		29,486		29,470
Retained earnings		41,335		37,149
Accumulated other comprehensive income (loss), net of tax		638		(731)
Total stockholders' equity		71,559		65,988
Total liabilities and stockholders' equity	$	792,843	$	739,416

The Selected Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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DELMAR BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except share data)	2019		2018		2019		2018
INTEREST INCOME ON:
Loans, including fees	$	8,688	$	8,109	$	25,916	$	22,696
Investment securities:
Taxable		171		158		518		465
Exempt from Federal income tax		154		137		445		411
Federal funds sold		58		48		81		86
Other interest income		215		140		527		360
		9,286		8,592		27,487		24,018
INTEREST EXPENSE ON:
Deposits		1,556		1,006		4,388		2,658
Borrowings		435		396		1,274		1,117
		1,991		1,402		5,662		3,775
NET INTEREST INCOME		7,295		7,190		21,825		20,243
Provision for credit losses		300		300		900		825
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		6,995		6,890		20,925		19,418
OTHER INCOME:
Service charges on deposit accounts		295		341		861		987
Gain on sale of investment securities		97		—		97		—
Gains on disposal of other assets		—		8		—		9
Other income		739		434		1,771		1,335
		1,131		783		2,729		2,331
OTHER EXPENSES:
Salaries and employee benefits		2,788		2,696		8,459		8,165
Premises and equipment		897		785		2,732		2,347
Amortization of core deposit intangible		76		126		226		294
(Gains) losses on other real estate owned		44		41		38		142
Other expenses		1,726		1,545		5,097		5,368
		5,531		5,193		16,552		16,316
INCOME BEFORE TAXES ON INCOME		2,595		2,480		7,102		5,433
Federal and state income taxes		810		592		2,167		1,485
NET INCOME	$	1,785	$	1,888	$	4,935	$	3,948
Earnings per common share
Basic earnings per share	$	0.179	$	0.189	$	0.494	$	0.411

The Selected Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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DELMAR BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
NET INCOME	$	1,785	$	1,888	$	4,935	$	3,948
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding gains (losses) on securities available for sale arising during the period		259		(369)		1,863		(1,340)
Deferred income tax (liabilities) benefits		(69)		98		(494)		355
Other comprehensive income (loss), net of tax		190		(271)		1,369		(985)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		190		(271)		1,369		(985)
COMPREHENSIVE INCOME	$	1,975	$	1,617	$	6,304	$	2,963

The Selected Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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DELMAR BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)


For the three month period:
							Accumulated
							Other		Total
	Common				Retained		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Income (Loss)		Equity
Balances, June 30, 2018		100		29,427		34,226		(967)		62,786
COMPREHENSIVE INCOME
Net income		—		—		1,888		—		1,888
Other comprehensive income, net of tax:
Unrealized holding losses on securities available for sale arising during the period		—		—		—		(271)		(271)
TOTAL COMPREHENSIVE INCOME										1,617
Cash dividends, $0.025 per share		—		—		(249)		—		(249)
Common stock issued for stock options exercised		—		4		—		—		4
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		10		—		—		10
Balances, September 30, 2018		100		29,441		35,865		(1,238)		64,168

Balances, June 30, 2019		100		29,481		39,800		448		69,829
COMPREHENSIVE INCOME
Net income		—		—		1,785		—		1,785
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale arising during the period		—		—		—		190		190
TOTAL COMPREHENSIVE INCOME										1,975
Cash dividends, $0.025 per share		—		—		(250)		—		(250)
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		5		—		—		5
Balances, September 30, 2019	$	100	$	29,486	$	41,335	$	638	$	71,559


For the nine month period:
							Accumulated
							Other		Total
	Common				Retained		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Income (Loss)		Equity
Balances, December 31, 2017		82		16,622		32,615		(253)		49,066
COMPREHENSIVE INCOME
Net income		—		—		3,948		—		3,948
Other comprehensive income, net of tax:
Unrealized holding losses on securities available for sale arising during the period		—		—		—		(985)		(985)
TOTAL COMPREHENSIVE INCOME										2,963
Cash dividends, $0.070 per share		—		—		(698)		—		(698)
Common stock issued for stock options exercised		—		12		—		—		12
Common stock issued to shareholders of Liberty Bell Bank		18		12,781		—		—		12,799
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		26		—		—		26
Balances, September 30, 2018		100		29,441		35,865		(1,238)		64,168

Balances, December 31, 2018		100		29,470		37,149		(731)		65,988
COMPREHENSIVE INCOME
Net income		—		—		4,935		—		4,935
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale arising during the period		—		—		—		1,369		1,369
TOTAL COMPREHENSIVE INCOME										6,304
Cash dividends, $0.075 per share		—		—		(749)		—		(749)
Stock-based compensation expense recognized in earnings, net of employee tax obligation		—		16		—		—		16
Balances, September 30, 2019	$	100	$	29,486	$	41,335	$	638	$	71,559

The Selected Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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DELMAR BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited


	Nine Months Ended
	September 30,
(Dollars in thousands)	2019		2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,935	$	3,948
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses and unfunded commitments		900		825
Depreciation		864		654
Amortization and accretion		368		461
Net gains on sales of assets		(97)		—
Net losses on other real estate owned, including write‑downs		45		143
Deferred income tax expenses		1,444		737
Stock‑based compensation expense, net of employee tax obligation		16		26
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		5		(111)
(Increase) decrease in other assets		(3,383)		679
Increase in accrued interest payable		176		77
Increase (decrease) in other liabilities		3,699		(1,253)
Net cash provided by operating activities		8,972		6,186
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale		(12,084)		(8,162)
Proceeds from maturities and paydowns of securities available for sale		9,348		4,743
Proceeds from sales of securities available for sale		—		2,591
Net increase in loans		(2,204)		(32,130)
Cash received in the purchase of Liberty Bell Bank		—		11,831
Purchases of premises and equipment		(950)		(1,264)
Cash paid to shareholders of Liberty Bell Bank		—		(4,471)
Proceeds from the sales of foreclosed assets		184		734
Proceeds from sales of Federal Home Loan Bank stock		810		551
Purchase of Federal Home Loan Bank stock		(919)		(451)
Net cash used by investing activities		(5,815)		(26,028)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in demand, NOW, money market, and savings deposits, net		19,938		(146)
Cash received for the exercise of stock options		—		12
Increase in time deposits, net		25,538		18,492
Proceeds from borrowings to fund acquisition of Liberty Bell Bank, net of loan costs		—		4,450
Decrease in other borrowings, net		(1,494)		(494)
Dividends paid		(749)		(647)
Net cash provided by financing activities		43,233		21,667
Net increase in cash and cash equivalents		46,390		1,825
Cash and cash equivalents, beginning		29,694		32,582
Cash and cash equivalents, ending	$	76,084	$	34,407
Supplementary cash flow information:
Interest paid	$	5,486	$	3,663
Income taxes paid		922		1,454
Total appreciation (depreciation) on securities available for sale	$	1,863	$	(1,340)
SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES
Fair value of assets acquired, net of cash and cash equivalents	$	—	$	139,701
Fair value of liabilities assumed, net of cash and cash equivalents		—		139,500
Value of shares provided to Liberty Bell Bank stockholders		—		12,798
Loans converted to other real estate owned	$	209	$	379

The Selected Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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DELMAR BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Its Significant Accounting Policies

Delmar Bancorp is a bank holding company which owns all the outstanding shares of capital stock of The Bank of Delmarva, a commercial bank operating in Wicomico and Worcester counties in Maryland, Sussex County in Delaware, and Camden and Burlington counties in New Jersey. The Bank provides financial services to individual and corporate customers, and is subject to competition from other financial institutions. The Bank is also subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by those regulatory authorities. The accounting policies of the Bank conform to generally accepted accounting principles and practices within the banking industry.

Significant accounting policies not disclosed elsewhere in the consolidated financial statements are as follows:

Principles of Consolidation:

The consolidated financial statements include the accounts of Delmar Bancorp, a bank holding company (the Company); its wholly owned subsidiary — The Bank of Delmarva (the “Bank”), a commercial bank engaged in general commercial banking operations in Maryland, Delaware and New Jersey; Delmarva Real Estate Holdings, LLC., a wholly owned subsidiary of The Bank of Delmarva, which is a real estate holding company; Davie Circle, LLC, a wholly owned subsidiary of The Bank of Delmarva, which is a real estate holding company; Delmarva BK Holdings, LLC, a wholly owned subsidiary of The Bank of Delmarva, which is a real estate holding company; DHB Development, LLC, of which the Bank holds a 40.55% interest, and is a real estate holding company; West Nithsdale Enterprises, LLC, of which the Bank holds a 10% interest, and is a real estate holding company; and FBW, LLC, of which the Bank holds 50% interest, and is also a real estate holding company. All significant intercompany accounts and transactions have been eliminated.

Financial Statement Presentation:

The unaudited interim consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations, changes in stockholder's equity, and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position at September 30, 2019 and December 31, 2018, the results of its operations and its cash flows for the nine months ended September 30, 2019 and 2018 in conformity with accounting principles generally accepted in the United States of America.

Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or for any other period.

Use of Estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted within 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Adoption of New Accounting Standard:

On January 1, 2019, the Company adopted ASU No. 2016-02, "Leases", utilizing the effective date method under the modified retrospective approach. The Company currently leases seven of its office leases under operating leases and one under a finance lease. The Company's present value of future lease payments, measured on a discounted

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basis, as of January 1, 2019 was $3.6 million, which was recorded as a right-of-use asset included in other assets with an offsetting liability included in other liabilities on the consolidated balance sheet. Additional disclosures related to lease commitments are provided in Note 5.

Securities Available for Sale:

Marketable debt and equity securities not classified as held to maturity are classified as available for sale. Securities available for sale are acquired as part of the Bank's asset/liability management strategy and may be sold in response to changes in interest rates, loan demand, changes in prepayment risk, and other factors. Securities available for sale are carried at fair value as determined by quoted market prices. Unrealized gains or losses based on the difference between amortized cost and fair value are reported in other comprehensive income, net of deferred tax. Realized gains and losses, using the specific identification method, are included as a separate component of other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Additionally, declines in the fair value of individual investment securities below their cost that are other than temporary are reflected as realized losses in the consolidated statements of income.

Loans and the Allowance for Credit Losses:

Loans are generally carried at the amount of unpaid principal, adjusted for unearned loan fees, which are amortized over the term of the loan using the effective interest rate 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 a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Cash collections on such loans are applied as reductions of the loan principal balance and no interest income is recognized on those loans until the principal balance has been collected. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. 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.

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, the value of the underlying collateral, and current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least monthly and more often if deemed necessary.

The allowance for credit losses typically consists of an allocated component and an unallocated component. The allocated component of the allowance for credit losses reflects expected losses resulting from analyses developed through specific credit allocations for individual loans and historical loss experience for each loan category.

The specific credit allocations are based on regular analyses of all loans over a fixed‑dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss element is determined statistically using a loss migration analysis that examines loss experience and the related internal gradings of loans charged off over a current 3 year period. The loss migration analysis is performed quarterly and loss factors are updated regularly based on actual experience. The allocated component of the allowance for credit losses also includes consideration of concentrations and changes in portfolio mix and volume.

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Any unallocated portion of the allowance reflects management's estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in loan loss migration models. The historical losses used in the migration analysis may not be representative of actual unrealized losses inherent in the portfolio. It is management's intent to continually refine the methodology for the allowance for credit losses in an attempt to directly allocate potential losses in the loan portfolio under ASC Topic 310 and minimize the unallocated portion of the allowance for credit losses.

Loan Charge‑off Policies

Loans are generally fully or partially charged down to the fair value of securing collateral when:

management deems the asset to be uncollectible

repayment is deemed to be made beyond the reasonable time frames

the asset has been classified as a loss by internal or external review

the borrower has filed bankruptcy and the loss becomes evident owing to a lack of assets

Acquired Loans

Loans acquired in connections with business combinations are recorded at their acquisition‑date fair value with no carry over of related allowance for credit losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition‑date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans, including the impact of any accretable yield.

Loans acquired with deteriorated credit quality are accounted for in accordance with Accounting Standards Codification (“ASC”) 310‑30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310‑30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as indicator that an acquired loan has evidence of deterioration in credit quality. These factors include; loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non‑accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.

Under the ASC 310‑30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable yield is recognized into income over the remaining life of the loan if the timing and/or amount of cash flows expected to be collected can be reasonable estimated (the accretion method). If the timing or amount of cash flows expected to be collected cannot be reasonably estimated, the cost recovery method of income recognition is used. The difference between the loan's total scheduled principal and interest payment over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non‑accretable difference. The non‑accretable

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difference represents contractually required principal and interest payments which the Company does not expect to collect.

Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized as interest income on a prospective basis over the loan's remaining life.

Acquired loans that were not individually determined to be purchased with deteriorated credit quality are accounted for in accordance with ASC 310‑20, Nonrefundable Fees and Other Costs (ASC 310‑20), whereby the premium or discount derived from the fair market value adjustment, on a loan‑by‑loan or pooled basis, is recognized into interest income on a level yield basis over the remaining expected life of the loan or pool.

Other Real Estate Owned (OREO):

OREO comprises properties acquired in partial or total satisfaction of problem loans. The properties are recorded at the lower of cost or fair value at the date acquired. Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. Subsequent write‑downs that may be required and expenses of operation are included in other expenses. Gains and losses realized from the sale of OREO are included in other income. At September 30, 2019 there were seven properties with a combined estimated value of $3.6 million included in other real estate owned, and at December 31, 2018 there were nine properties with a combined estimated value of $3.7 million.

Intangible Assets and Amortization:

During the first quarter of 2018 the Bank acquired Liberty Bell Bank. ASC 350, Intangibles‑Goodwill and Other (ASC 350), prescribes accounting for intangible assets subsequent to initial recognition. Acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Intangible assets related to the acquisition are amortized (see Note 12).

Accounting for Stock Based Compensation:

The Company follows ASC 718‑10, Compensation — Stock Compensation for accounting and reporting for stock‑based compensation plans. ASC 718‑10 defines a fair value at grant date to be used for measuring compensation expense for stock‑based compensation plans to be recognized in the statement of income.

Earnings Per Share:

Basic earnings per common share are determined by dividing net income adjusted for preferred stock dividends declared and/or accumulated and accretion of warrants by the weighted average number of shares outstanding for each year, giving retroactive effect to stock splits and dividends. Calculations of diluted earnings per common share include the average dilutive common stock equivalents outstanding during the year, unless they are anti‑dilutive. Dilutive common equivalent shares consist of stock options calculated using the treasury stock method and restricted stock awards (See Note 8).

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Note 2. Investment Securities

Securities available for sale are as follows:


	September 30, 2019
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	8,184	$	187	$	8	$	8,363
Obligations of States and political subdivisions		24,636		725		29		25,332
Mortgage-backed securities		20,665		120		78		20,707
Equity securities		1,500		—		48		1,452
	$	54,985	$	1,032	$	163	$	55,854


	December 31, 2018
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	9,469	$	47	$	96	$	9,420
Obligations of States and political subdivisions		21,383		139		426		21,096
Mortgage-backed securities		19,942		15		553		19,404
Equity securities		1,500		—		120		1,380
	$	52,294	$	201	$	1,195	$	51,300

Gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2019 and December 31, 2018, are as follows:


	September 30, 2019
	Dollars in Thousands
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies and corporations	$	999	$	2	$	2,997	$	6	$	3,996	$	8
Mortgage-backed securities		5,496		21		4,754		57		10,250		78
Obligations of States and political subdivisions		2,522		29		253		—		2,775		29
Equity Securities		—		—		1,452		48		1,452		48
Total securities with unrealized losses	$	9,017	$	52	$	9,456	$	111	$	18,473	$	163

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	December 31, 2018
	Dollars in Thousands
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies and corporations	$	3,973	$	18	$	5,927	$	78	$	9,900	$	96
Mortgage-backed securities		5,485		111		13,440		442		18,924		553
Obligations of States and political subdivisions		9,119		81		11,977		345		21,096		426
Equity Securities		—		—		1,380		120		1,380		120
Total securities with unrealized losses	$	18,577	$	209	$	32,724	$	985	$	51,300	$	1,195

For individual securities classified as either available for sale or held to maturity, the Bank must determine whether a decline in fair value below the amortized cost basis is other than temporary. In estimating other‑than‑temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near‑term prospects of the issuer, and (iii) 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. If the decline in fair value is considered to be other than temporary, the cost basis of the individual security shall be written down to the fair value as a new cost basis and the amount of the write‑down shall be included in earnings (that is, accounted for as a realized loss).

Contractual maturities of investment securities at September 30, 2019 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage‑backed securities have no stated maturity and primarily reflect investments in various Pass‑through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association. Repayment of mortgage‑backed securities is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

The following is a summary of maturities, calls, or repricing of securities available for sale:


	September 30, 2019
	Securities
	Available for Sale
	Dollars in Thousands
		Amortized		Fair
		Cost		Value
Due in one year or less	$	3,023	$	3,018
Due after one year through five years		2,491		2,489
Due after five years through ten years		12,680		13,139
Due after ten years or more		16,126		16,502
Mortgage-backed, due in monthly installments		20,665		20,706
	$	54,985	$	55,854

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Note 3. Loans, Allowance for Credit Losses and Impaired Loans

Major categories of loans as of September 30, 2019 and December 31, 2018 are as follows:


(Dollars in thousands)	At September 30, 2019		At December 31, 2018
Originated Loans
Other real estate secured	$	369,039	$	356,141
1 - 4 Family residential secured		120,160		116,771
Other		51,643		48,960
		540,842		521,872
Acquired Loans
Other real estate secured	$	56,698	$	70,080
1 - 4 Family residential secured		23,120		29,532
Other		13,669		12,420
		93,487		112,032
Total Loans
Other real estate secured	$	425,737	$	426,221
1 - 4 Family residential secured		143,280		146,303
Other		65,312		61,379
		634,329		633,903
Less: Unamortized discounts on acquired loans		(668)		(1,327)
Less: Allowance for loan losses		(7,054)		(7,063)
	$	626,607	$	625,513

Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented the loan portfolio into the following classifications:

Other Real Estate Secured

Commercial Real Estate

Construction and Land Development

Farmland

Multifamily

1 – 4 Family Residential Secured

Other

Commercial and Industrial

Consumer Loans

Other Loans

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Each of these segments are reviewed and analyzed quarterly using the weighted average historical charge‑offs over a current three year period for their respective segments as well as the following qualitative factors:

Changes in the levels and trends in delinquencies, non‑accruals, classified assets and troubled debt restructurings

Changes in the nature and volume of the portfolio

Effects of any changes in lending policies, procedures, including underwriting standards and collections, charge off and recovery practices

Changes in the experience, depth and ability of management

Changes in the national and local economic conditions and developments, including the condition of various market segments

Changes in the concentration of credits within each pool

Changes in the quality of the Bank's loan review system and the degree of oversight by the Board

Changes in external factors such as competition and the legal environment.

The above factors result in a FAS 5, as codified in FASB ASC 450‑10‑ 20, calculated reserve for environmental factors.

All credit exposures graded at a rating of “5”, “6”, “7” or “8” with outstanding balances less than or equal to $250,000 and credit exposures graded at a rating of “1”, “2”, “3” or “4” are reviewed and analyzed quarterly using the weighted average historical charge‑offs over a current three year period as a percentage of total charge‑offs for the same period for their respective segments as well as the qualitative factors discussed above. The weighted average historical percentage is further adjusted based on delinquency risk trend assessments and concentration risk assessments.

All credit exposures graded at a rating of “5”, “6”, “7” or “8” with outstanding balances greater than $250,000 are to be reviewed no less than quarterly for the purpose of determining if a specific allocation is needed for that credit. The determination for a specific reserve is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management uses the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the loan is less than the recorded investment in the loan (net of previous charge‑offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge‑off to the allowance.

The establishment of a specific reserve does not necessarily mean that the credit with the specific reserve will definitely incur loss at the reserve level. It is only an estimation of potential loss based upon anticipated events. A specific reserve will not be established unless loss elements can be determined and quantified based on known facts. The total allowance reflects management's estimate of loan losses inherent in the loan portfolio as of September 30, 2019 and December 31, 2018.

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The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, 2019 and and December 31, 2018:


	Other		1 - 4 Family
	Real Estate		Residential
Dollars in Thousands	Secured		Secured		Other		Unallocated		Total
September 30, 2019
Individually evaluated for impairment:
Balance in allowance	$	47	$	251	$	639	$	—	$	937
Related loan balance		14,114		4,102		1,218		—		19,434
Collectively evaluated for impairment:
Balance in allowance	$	4,346	$	1,210	$	102	$	459	$	6,117
Related loan balance		411,215		139,084		63,928		—		614,227

Note: The balances above include unamortized discounts on acquired loans of $668,000.


	Other		1 - 4 Family
	Real Estate		Residential
Dollars in Thousands	Secured		Secured		Other		Unallocated		Total
December 31, 2018
Individually evaluated for impairment:
Balance in allowance	$	278	$	586	$	178	$	—	$	1,042
Related loan balance		14,947		8,775		1,732		—		25,454
Collectively evaluated for impairment:
Balance in allowance	$	3,998	$	1,057	$	476	$	490	$	6,021
Related loan balance		410,527		137,192		59,403		—		607,122

Note: The balances above include unamortized discounts on acquired loans of $1.3 million.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the the three and nine months ended September 30, 2019 and 2018. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.


	September 30, 2019
	Other		1 - 4 Family
	Real Estate		Residential
Dollars in Thousands	Secured		Secured		Other		Unallocated		Total
Quarter Ended
Beginning Balance	$	4,359	$	1,343	$	634	$	730	$	7,066
Charge-offs		—		—		(454)		—		(454)
Recoveries		84		24		34		—		142
Provision		(50)		94		527		(271)		300
Ending Balance		4,393		1,461		741		459		7,054
Nine Months Ended
Beginning Balance		4,276		1,643		654		490		7,063
Charge-offs		(421)		(198)		(632)		—		(1,251)
Recoveries		97		165		80		—		342
Provision		441		(149)		639		(31)		900
Ending Balance		4,393		1,461		741		459		7,054

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	September 30, 2018
	Other		1 - 4 Family
	Real Estate		Residential
Dollars in Thousands	Secured		Secured		Other		Unallocated		Total
Quarter Ended
Beginning Balance	$	4,434	$	1,887	$	444	$	331	$	7,096
Charge-offs		(143)		—		(84)		—		(227)
Recoveries		9		19		28		—		56
Provision		142		29		29		100		300
Ending Balance		4,442		1,935		417		431		7,225
Nine Months Ended
Beginning Balance		3,858		1,744		536		565		6,703
Charge-offs		(347)		(52)		(202)		—		(601)
Recoveries		77		143		78		—		298
Provision		854		100		5		(134)		825
Ending Balance		4,442		1,935		417		431		7,225

The Bank had an unallocated amount (overage) of approximately $459,000 in the allowance that is reflected in the above table as of September 30, 2019. The Bank had an unallocated amount (overage) of approximately $431,000 in the allowance that is reflected in the above table as of September 30, 2018. Management is comfortable with this amount as they feel it is adequate to absorb additional inherent but as yet unidentified losses in the loan portfolio.

Credit Quality Information

The following table represents credit exposures by creditworthiness category at September 30, 2019 and December 31, 2018. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Bank's internal creditworthiness is based on experience with similarly graded credits. Loans that trend upward toward higher credit grades typically have less credit risk and loans that migrate downward typically have more credit risk.

The Bank's internal risk ratings are as follows:

Excellent — minimal risk. Normally supported by pledged deposits, United States government securities, etc.

Superior — low risk. All of the risks associated with this credit based on each of the bank's creditworthiness criteria are minimal.

Good — moderately low risk. Most of the risks associated with this credit based on each of the bank's creditworthiness criteria are minimal.

Fair/Watch — moderate risk. The weighted overall risk associated with this credit based on each of the bank's creditworthiness criteria is acceptable.

Marginal — moderately high risk. (possesses deficiencies which corrective action by the bank would remedy; potential watch list)

Substandard — The bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected.

Doubtful — Weaknesses make collection or liquidation in full, based on currently existing facts, improbable.

Loss — Of little value; not warranted as a bankable asset.

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Non‑accruals

In general, a loan will be placed on non‑accrual status at the end of the reporting month in which the interest or principal is past due more than 90 days. Exceptions to the policy are those loans that are in the process of collection and are well-secured. A well‑secured loan is secured by collateral with sufficient market value to repay principal and all accrued interest.

A summary of loans by risk rating is as follows:


			1 - 4 Family
	Other Real		Residential
September 30, 2019	Estate Secured		Secured		Other		Total
	Dollars in Thousands
Excellent	$	1,098	$	—	$	6,357	$	7,455
Superior		3,851		254		1,874		5,979
Good		404,785		136,693		53,530		595,008
Fair		7,968		2,977		1,619		12,564
Marginal		—		—		—		—
Substandard		7,628		3,261		1,766		12,655
TOTAL	$	425,330	$	143,185	$	65,146	$	633,661
Non-Accrual	$	2,806	$	2,107	$	214	$	5,127
Troubled debt restructures	$	8,178	$	2,443	$	166	$	10,787
Breakdown of TDRs
TDRs on Non-accrual	$	1,120	$	918	$	166	$	2,204
TDRs Past Due 30-89		—		213		—		213
Performing TDRs		7,058		1,312		—		8,370
TOTAL	$	8,178	$	2,443	$	166	$	10,787
Total Non-performing TDR accounts	$	1,120	$	1,131	$	166	$	2,417


			1 - 4 Family
	Other Real		Residential
December 31, 2018	Estate Secured		Secured		Other		Total
	Dollars in Thousands
Excellent	$	1,143	$	—	$	9,756	$	10,899
Superior		7,523		267		2,015		9,805
Good		402,092		133,401		45,802		581,295
Fair		8,084		4,598		2,106		14,788
Marginal		407		112		268		787
Substandard		7,071		7,589		343		15,003
TOTAL	$	426,319	$	145,967	$	60,290	$	632,576
Non-Accrual	$	4,423	$	4,547	$	178	$	9,148
Troubled debt restructures	$	10,341	$	7,269	$	206	$	17,816
Breakdown of TDRs
TDRs on Non-accrual	$	2,546	$	3,290	$	175	$	6,012
TDRs Past Due 30-89		640		—		31		671
Performing TDRs		7,155		3,979		—		11,134
TOTAL	$	10,341	$	7,269	$	206	$	17,816
Total Non-performing TDR accounts	$	3,186	$	3,290	$	206	$	6,682

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The following table includes an aging analysis of the recorded investment of past due financing receivables as of September 30, 2019 and December 31, 2018:


													Recorded
													Investment
					Greater than						Total		>90 Days
	30 - 59 Days		60 - 89 Days		90 Days		Total		Current		Financing		Past Due
At September 30, 2019	Past Due*		Past Due**		Past Due***		Past Due		Balance		Receivables		and Accruing
	Dollars in Thousands
Other Real Estate Secured	$	569	$	—	$	2,005	$	2,574	$	423,163	$	425,737	$	—
1 - 4 Family Residential		1,696		619		616		2,931		140,349		143,280		—
Other		158		20		—		178		65,134		65,312		—
TOTAL	$	2,423	$	639	$	2,621	$	5,683	$	628,646	$	634,329	$	—

* Includes $1.2 million of non‑accrual loans.

** Includes $117,000 of non-accrual loans.

*** Includes $2.6 million of nonacrual loans.

Total financing receivable balances do not include unamortized discounts of $668,000.


													Recorded
													Investment
					Greater than						Total		>90 Days
	30 - 59 Days		60 - 89 Days		90 Days		Total		Current		Financing		Past Due
At December 31, 2018	Past Due		Past Due		Past Due*		Past Due		Balance		Receivables		and Accruing
	Dollars in Thousands
Other Real Estate Secured	$	876	$	1,742	$	3,129	$	5,747	$	420,474	$	426,221	$	338
1 - 4 Family Residential		1,292		383		1,722		3,397		142,906		146,303		—
Other		1,035		33		268		1,336		60,043		61,379		268
TOTAL	$	3,203	$	2,158	$	5,119	$	10,480	$	623,423	$	633,903	$	606

* Includes $4.5 million of non‑accrual loans.

Total financing receivable balances do not include unamortized discounts of $1.3 million.

Impaired Loans

Impaired loans are defined as non‑accrual loans, troubled debt restructurings, purchase credit impaired loans (“PCI”) and loans risk rated a “6” or above. When management identifies a loan as impaired, the impairment is measured for potential loss based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management used the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge‑offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge‑off to the allowance.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on non‑accrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on non‑accrual status, contractual interest is credited to interest income when received, under the cash basis method.

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable. Management determined the specific reserve in the allowance based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded.

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Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on non‑accrual status, all payments are applied to principal, under the cost recovery method.


			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
September 30, 2019	Investment		Balance		Recognized		Reserve		Investment
	Dollars in Thousands
Impaired loans with specific reserves:
Other Real Estate Secured	$	2,278	$	2,278	$	188	$	47	$	2,777
1 - 4 Family Residential Secured		738		738		—		251		2,343
Other		214		214		11		639		129
Total impaired loans with specific reserves	$	3,230	$	3,230	$	199	$	937	$	5,249
Impaired loans with no specific reserve:
Other Real Estate Secured	$	12,339	$	12,815	$	768	$	—	$	12,594
1 - 4 Family Residential Secured		4,261		5,041		158		—		5,011
Other		2,325		2,325		110		—		2,065
Total impaired loans with no specific reserve	$	18,925	$	20,181	$	1,036	—	—	$	19,670
TOTAL	$	22,155	$	23,411	$	1,235	$	937	$	24,919

Total impaired loans of $22.2 million at September 30, 2019 include PCI loan balances of $810,000, which are net of a discount of $257,000. Total impaired loans also included $1.9 million of loans which did not meet the criteria whereby an individual evaluation for impairment was required. These loans were pooled with all other loans not requiring an evaluation for individual impairment and reviewed and analyzed using the weighted average historical charge‑offs over a current three year period for their respective segments along with the qualitative factors stated previously in this disclosure, to result in a ASC 450‑10‑20 (FAS 5) calculated reserve.


			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
December 31, 2018	Investment		Balance		Recognized		Reserve		Investment
	Dollars in Thousands
Impaired loans with specific reserves:
Other Real Estate Secured	$	3,276	$	3,276	$	246	$	412	$	3,690
1 - 4 Family Residential Secured		3,947		4,075		174		586		4,989
Other		44		44		2		44		22
Total impaired loans with specific reserves	$	7,267	$	7,395	$	422	$	1,042	$	8,701
Impaired loans with no specific reserve:
Other Real Estate Secured	$	12,849	$	13,905	$	1,016	$	—	$	10,691
1 - 4 Family Residential Secured		5,761		7,011		256		—		3,902
Other		1,805		1,805		112		—		1,080
Total impaired loans with no specific reserve	$	20,415	$	22,721	$	1,384	$	—	$	15,672
TOTAL	$	27,682	$	30,116	$	1,806	$	1,042	$	24,374

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All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows:


Dollars in Thousands	September 30, 2019		December 31, 2018
Accountable for under ASC 310-30 (PCI loans)
Outstanding balance	$	1,067	$	1,692
Carrying amount		810		1,110
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	92,420	$	110,340
Carrying amount		92,009		109,595
Total acquired loans
Outstanding balance	$	93,487	$	112,032
Carrying amount		92,819		110,705

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310‑20:


Dollars in Thousands	September 30, 2019		December 31, 2018
Balance at beginning of period	$	745	$	—
Acquisitions		—		1,703
Accretion		(335)		(958)
Balance at end of period	$	410	$	745

During the three and nine months ended September 30, 2019, the Company recorded $24,000 and $80,000, respectively in accretion on acquired loans accounted for under ASC 310-30. During the three and nine months ended September 30, 2018, the Company recorded $33,000 and $65,000, respectively in accretion on acquired loans accounted for under ASC 310-30.

Non‑accretable yield on purchased credit impaired loans was $232,000 and $463,000 at September 30, 2019 and December 31, 2018, respectively.

Concentration of Risk:

The Bank makes loans to customers located primarily within Wicomico and Worcester Counties, Maryland, Sussex County, Delaware and Camden and Burlington Counties, New Jersey. A substantial portion of its loan portfolio consists of residential and commercial real estate mortgages.

The Bank had no commitments to loan additional funds to the borrowers of restructured, impaired, or non‑accrual loans as of September 30, 2019 and December 31, 2018.

Note 4. Credit Facilities

The Bank owns capital stock of the Federal Home Loan Bank of Atlanta (FHLB) as a condition for a $192.4 million convertible advance credit facility from the FHLB. As of September 30, 2019 the Bank had remaining credit availability of $143.4 million under this facility.

The following table details the long-term advances the Company had outstanding with the FHLB at September 30, 2019 and December 31, 2018:

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	September 30, 2019
Dollars in Thousands	Outstanding Balance	Interest Rate		Maturity Date	Interest Payment
Fixed rate hybrid	15,000	2.09	%	June 2020	Fixed, paid monthly
Fixed rate hybrid	5,000	3.04	%	November 2020	Fixed, paid monthly
Fixed rate hybrid	5,000	2.91	%	November 2020	Fixed, paid quarterly
Fixed rate hybrid	6,000	2.44	%	April 2021	Fixed, paid quarterly
Convertible*	10,000	2.68	%	May 2021	Fixed, paid quarterly
Fixed rate hybrid	5,000	3.15	%	October 2022	Fixed, paid quarterly
Principal reducing credit	1,500	1.62	%	March 2023	Fixed, paid quarterly
Principal reducing credit	1,495	1.99	%	March 2026	Fixed, paid quarterly
Total long-term advances	48,995


	December 31, 2018
Dollars in Thousands	Outstanding Balance	Interest Rate		Maturity Date	Interest Payment
Fixed rate hybrid	15,000	1.51	%	June 2019	Fixed, paid monthly
Fixed rate hybrid	5,000	3.04	%	November 2020	Fixed, paid monthly
Fixed rate hybrid	5,000	2.91	%	November 2020	Fixed, paid quarterly
Convertible*	10,000	2.68	%	May 2021	Fixed, paid quarterly
Fixed rate hybrid	5,000	3.15	%	October 2022	Fixed, paid quarterly
Principal reducing credit	1,821	1.62	%	March 2023	Fixed, paid quarterly
Principal reducing credit	1,668	1.99	%	March 2026	Fixed, paid quarterly
Total long-term advances	43,489

* The FHLB has the option of converting the rate on this long-term borrowing to a three month LIBOR-based floating rate in May 2020.

Average short‑term borrowing under FHLB approximated $3.2 million and $1.4 million for the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.

The Bank has pledged a portion of its residential and commercial mortgage loan portfolio as collateral for these credit facilities. Principal balances outstanding on these pledged loans totaled approximately $157.2 million and $135.3 million at September 30, 2019 and December 31, 2018, respectively.

In addition to the FHLB credit facility, in October 2015, the Company entered into a subordinated loan agreement for an aggregate principal amount of $2.0 million. Interest‑only payments are due quarterly at 6.71% per annum, and the outstanding principal balance matures in October 2025. In January 2018, the Company entered into a subordinated loan agreement for an aggregate principal amount of $4.5 million to fund the acquisition of Liberty Bell Bank, net of loan costs. Interest‑only payments are due quarterly at 6.875% per annum, and the outstanding principal balance matures in April 2028.

The proceeds of these long‑term borrowings were generally used to purchase higher yielding investment securities, fund additional loans, redeem preferred stock, or fund acquisitions. Additionally, the Bank has secured credit availability of $5.0 million with a correspondent bank and an unsecured credit availability of $5.0 million with a correspondent bank for short‑term liquidity needs, if necessary. The secured facility must be collateralized by specific securities at the time of any usage. At September 30, 2019 and December 31, 2018, there were no borrowings outstanding under these credit agreements.

Maturities on long‑term debt over the next five years are as follows (dollars in thousands):


2019	$	165
2020		25,659
2021		16,659
2022		5,659
2023		337

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Note 5. Lease Commitments

The Bank adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using a modified-retrospective approach, whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. The Bank also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things allowed the Bank to carry forward the historical lease classifications. Additionally, the Bank elected the hindsight practical expedient to determine the lease term for existing leases.

The Bank leases eight locations for administrative offices and branch locations. Seven leases were classified as operating leases and one as a finance lease. Leases with an initial term of 12 months or less as well as leases with a discounted present value of future cash flows below $25,000 are not recorded on the balance sheet and the related lease expense is recognized over the lease term. The Bank elected to use the practical expedient to not recognize short-term leases on the consolidated balance sheet and instead account for them as executory contracts.

Certain leases include options to renew, with renewal terms that can extend the lease term, typically for five years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The Bank has determined that it will place a limit on exercises of available lease renewal options that would extend the lease term up to a maximum of fifteen years, including the initial term. The depreciable life of leased assets are limited by the expected lease term.

Adoption of this standard resulted in the Company recognizing a right of use asset and a corresponding lease liability of $3.6 million on January 1, 2019.

Supplemental lease information at or for the nine months ended September 30, 2019 is as follows:


Balance Sheet	Dollars in Thousands

Right-of-use asset classified as premises and equipment	$	3,274
Lease liability classified as other liabilities		3,314

Income Statement

Operating lease cost classified as premises and equipment	$	364

Weighted average lease term, in years		7.55
Weighted average discount rate (1)		3.28	%
Operating cash flows	$	376

(1)

The discount rate was developed by using the fixed rate credit advance borrowing rate at the Federal Home Loan Bank of Atlanta for a term correlating to the remaining life of each lease. Management believes this rate closely mirrors its incremental borrowing rate for similar terms.

A maturity analysis of the Company's lease liabilities at September 30, 2019 was as follows:


	Dollars in Thousands
One year or less	$	468
One to three years		772
Three to five years		714
Over 5 years		2,002
Total lease payments		3,956
Less: Interest		(642)
Present value of lease liabilities	$	3,314

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Note 6. Stock Option Plans

Delmar Bancorp Stock Option Plan

The Bank had employee and director stock option plans and had reserved shares of stock for issuance thereunder. Options granted under these plans had a ten‑year life with a four‑year vesting period that began one year after date of grant, and were exercisable at a price equal to the fair value of the Company's stock on the date of the grant. Each award from all plans was evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the grantor determines. The plan term ended in 2014, therefore no new options can be granted.

No stock options were exercised during the the nine months ended September 30, 2019. All remaining stock options expired during the second quarter of 2019.

Liberty Bell Bank Stock Option Plans

In 2004 Liberty Bell Bank adopted the 2004 Incentive Stock Option Plan and the 2004 Non‑Qualified Stock Option Plan, which were stock‑based incentive compensation plans (the Plans). In February 2014 the Plans expired pursuant to their terms. Options under these plans had a 10 year life and vested over 5 years. Remaining options under these plans became fully vested with the approval by the board of directors of Liberty signing the Agreement of Merger with Delmar Bancorp in July 2017. In accordance with the terms of the Agreement of Merger between Delmar and Liberty, the Plan was assumed by Delmar, and the options were converted into and became an option to purchase an adjusted number of shares of the common stock of Delmar at an adjusted exercise price per share. The number of shares was determined by multiplying the number of shares of Liberty common stock for which the option was exercisable by the number of shares of Delmar common stock into which shares of Liberty common stock were convertible in the Merger, which was 0.2857 (the “Conversion Ratio”), rounded to the next lower whole share. The exercise price was determined by dividing the exercise price per share of Liberty common stock by the Conversion Ratio, rounded up to the nearest cent. At the effective time of the merger there were 48,225 options outstanding at an exercise price of $1.18. These shares were converted to 13,771 options outstanding at an exercise price of $4.14.

Remaining options for 8,709 shares were outstanding as follows:


	Employees					Directors
		Average					Average
	Shares	Price		Amount		Shares	Price		Amount
September 30, 2019	2,355	$	4.14	$	9,750	6,354	$	4.14	$	26,306

As stated in Note 1, the Company follows ASC Topic 718‑10 which requires that stock‑based compensation to employees and directors be recognized as compensation cost in the income statement based on their fair values on the measurement date, which, for the Company, is the date of the grant. All stock option expenses had been fully recognized prior to 2018. No stock options were exercised or forfeited during the nine months ended September 30, 2019. All remaining stock options expire during the first quarter of 2023.

Note 7. Restricted Stock Plan

The Bank had an employee and director restricted stock plan and reserved 405,805 shares of stock for issuance thereunder. The Company adopted the Plan, pursuant to which employee and directors of the Company could acquire shares of common stock. The Plan was adopted by the Company's Board of Directors in April 2014, and was subject to the right of the Board of Directors to terminate the Plan at any time, terminated on June 30, 2018. The termination of the Plan, either at the scheduled termination date or before such date, did not affect any award issued prior to termination.

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As of September 30, 2019 non‑vested restricted stock awards totaling 6,000 were outstanding as follows:


	Employees
		Weighted
		Average
	Shares	Fair Value
Nonvested Awards December 31, 2018	9,000	$	7.30
Vested in 2019	(3,000)		7.30
Nonvested Awards September 30, 2019	6,000	$	7.30

As stated in Note 1, the Company follows ASC Topic 718‑10 which requires that restricted stock‑based compensation to employees and directors be recognized as compensation cost in the income statement based on their fair values on the measurement date. The fair value of restricted stock granted is equal to the underlying fair value of the stock. As a result of applying the provisions of ASC Topic 718‑10, during the three and nine months ended September 30, 2018 the Company recognized restricted stock‑based compensation expense of $10,000, or $7,000 net of tax, and $26,000, or $19,000 net of tax, respectively, related to the 2014 restricted stock awards. During the three and nine months ended September 30, 2019 the Company recognized stock‑based compensation expense of $5,000 or $4,000 net of tax, and $16,000, or $12,000 net of tax, respectively, related to the 2014 restricted stock awards. Unrecognized restricted stock‑based compensation expense related to 2014 restricted stock awards totaled approximately $31,000 at September 30, 2019. The remaining period over which this unrecognized expense is expected to be recognized is approximately two years.

Note 8. Earnings Per Share

Diluted earnings per share are calculated as follows:


	Quarter Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2019		2018		2019		2018
Net income applicable to basic earnings per common share	$	1,785	$	1,888	$	4,935	$	3,948
Weighted average shares outstanding		9,985		9,976		9,985		9,595
Basic earnings per share	$	0.179	$	0.189	$	0.494	$	0.411
Effect of dilutive securities:
Weighted average shares outstanding under options Delmar 2004 stock option plan (1)		—		23		10		28
Weighted average exercise price per share	$	—	$	7.54	$	9.05	$	9.55
Assumed proceeds on exercise	$	—	$	173	$	91	$	267
Average market value per share	$	7.42	$	7.79	$	7.34	$	7.47
Weighted average shares outstanding under options Liberty 2004 stock option plan		12		14		12		12
Weighted average exercise price per share	$	3.98	$	4.01	$	3.98	$	4.02
Assumed proceeds on exercise	$	48	$	56	$	48	$	48
Average market value per share	$	7.42	$	7.79	$	7.34	$	7.47
Less: Treasury stock purchased with assumed proceeds from exercise	$	6	$	7	$	6	$	6
Weighted average shares outstanding under restricted stock plans (2)		9		14		9		10
Diluted weighted average shares and common stock equivalents		10,000		9,997		10,000		9,611
Diluted earnings per share	$	0.179	$	0.189	$	0.494	$	0.411

(1)

Options were excluded from the calculation of dilutive earnings per share because they are anti‑dilutive.

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(2)

Includes vested shares not yet issued and nonvested shares as of September 30.

Note 9. Regulatory Capital Requirements

The Company and the Bank are 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 financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and 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 classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier I capital to risk‑weighted assets, Tier I capital to average assets, and beginning in 2015, common equity Tier I capital to risk‑weighted assets. Management believes as of September 30, 2019 that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of September 30, 2019, the most recent notification from the FDIC 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, Tier I risk‑based, Tier I leverage and, beginning in 2015, common equity Tier I risk‑based ratios. There are no conditions or events since that notification that management believes have changed the Bank's category.

The Common Equity Tier I, Tier I and Total capital ratios are calculated by dividing the respective capital amounts by risk‑weighted assets. Risk‑weighted assets are calculated based on regulatory requirements and include total assets, with certain exclusions, allocated by risk weight category, and certain off‑balance‑sheet items, among other things. The leverage ratio is calculated by dividing Tier I capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.

When fully phased in on January 1, 2019, the Basel III Capital Rules required the Bank and Bancorp to maintain (i) a minimum ratio of Common Equity Tier I capital to risk‑weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier I capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier I capital to risk‑weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier I capital to risk‑weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier I capital ratio as that buffer is phased in, effectively resulting in a minimum Tier I capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier I plus Tier 2) to risk‑weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier I capital to average quarterly assets.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Bank or Bancorp. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk‑weighted capital ratios. Banking institutions with a ratio of Common Equity Tier I capital to risk‑weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

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The following table presents actual and required capital ratios as of September 30, 2019 and December 31, 2018 for the Bank and Company under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2019 and December 31, 2018 based on the phase‑in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased‑in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A comparison of the Company's and the Bank's capital amounts and ratios as of September 30, 2019 and December 31, 2018 with the minimum requirements are presented below.


									To Be
									Well Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
In Thousands	Actual				Purposes				Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	78,392	12.6	%	$	65,525	10.5	%	$	—	N/A
The Bank of Delmarva		77,192	12.4	%		65,469	10.5	%		62,351	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		53,044	8.5	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		52,999	8.5	%		49,881	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		43,683	7.0	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		43,646	7.0	%		40,528	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		64,573	8.3	%		31,052	4.0	%		—	N/A
The Bank of Delmarva		69,873	9.0	%		31,052	4.0	%		38,814	5.0	%
As of December 31, 2018
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	72,344	11.8	%	$	60,466	9.9	%	$	—	N/A
The Bank of Delmarva		71,498	11.7	%		60,425	9.9	%		61,190	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		58,516	9.6	%		48,220	7.9	%		—	N/A
The Bank of Delmarva		64,170	10.5	%		48,187	7.9	%		48,952	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		58,516	9.6	%		39,035	6.4	%		—	N/A
The Bank of Delmarva		64,170	10.5	%		39,009	6.4	%		39,774	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		58,516	8.0	%		29,377	4.0	%		—	N/A
The Bank of Delmarva		64,170	8.7	%		29,377	4.0	%		36,721	5.0	%

Banking regulations also limit the amount of dividends that may be paid without prior approval of the Bank's regulatory agencies. Regulatory approval is required to pay dividends, which exceed the Bank's net profits for the current year plus its retained net profits for the preceding two years.

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Note 10. Fair Values of Financial Instruments

The following table shows the estimated fair value and the related carrying values of the Company's financial instruments at September 30, 2019 and December 31, 2018. Items that are not financial instruments are not included.


	September 30,				December 31,
Dollars are in thousands	2019				2018
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	31,483	$	31,483	$	24,347	$	24,347
Interest bearing deposits		29,143		29,143		4,093		4,093
Federal funds sold		15,458		15,458		1,254		1,254
Securities:
Available for sale		55,854		55,854		51,300		51,300
Loans, net of allowance for credit losses		626,607		612,003		625,513		604,290
Accrued interest receivable		2,098		2,098		2,103		2,103
Federal Home Loan Bank stock		2,761		2,761		2,652		2,652
Atlantic Central Bankers stock		131		131		131		131
Other investments		1,571		1,571		1,537		1,537
Financial liabilities:
Deposits	$	660,401	$	629,813	$	614,926	$	570,509
Accrued interest payable		567		567		392		392
FHLB advances and note payable		55,495		56,065		56,989		56,979
Unrecognized financial instruments:
Commitments to extend credit	$	104,101	$	104,101	$	114,395	$	114,395
Standby letters of credit		1,853		1,853		3,276		3,276

For purposes of the above disclosures of estimated fair value, the following assumptions were used.

Cash and cash equivalents:

The estimated fair value for cash and due from banks, interest‑bearing deposits in other banks, and Federal funds purchased is considered to approximate cost because of their short‑term nature.

Investment securities:

Estimated fair values are based on quoted market prices for actual or similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the audit risk, overhead costs, and optionality of such investments.

Loans:

The estimated fair value for certain homogeneous categories of loans, such as residential mortgages, is based on the quoted market price for securities backed by similar loans, adjusted for differences in loan characteristics. The estimated fair value of other loans is determined by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits:

The estimated fair value of deposits with no stated maturity, such as noninterest‑bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the rates currently offered for deposits of similar maturities and using a discounted cash flow analysis. The fair value estimates do not include the

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benefit that results from the low‑cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Borrowings:

The fair value of long‑term fixed rate borrowings is estimated by discounting future cash flows using current interest rates currently offered for similar financial instruments.

Unrecognized financial instruments:

The fair value of unrecognized financial instruments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers.

Other assets and liabilities:

Other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, non‑financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill, and similar items.

The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments not disclosed elsewhere as of September 30, 2019 and December 31, 2018. This table excludes financial instruments for which the carrying amount approximates fair value.


Dollars are in thousands					Fair Value Hierarchy
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
September 30, 2019
Financial assets:
Loans, net	$	626,607	$	612,003	$	—	$	—	$	612,003
Financial liabilities:
Deposits	$	660,401	$	629,813	$	—	$	629,813	$	—
FHLB advances and notes payable		55,495		56,065		—		56,065		—

December 31, 2018
Financial assets:
Loans, net	$	625,513	$	604,290	$	—	$	—	$	604,290
Financial liabilities:
Deposits	$	614,926	$	570,509	$	—	$	570,509	$	—
FHLB advances and notes payable		56,989		56,979		—		56,979		—

Note 11. Fair Value Measurements

Effective January 1, 2008, the Company adopted ASC 820‑10 Fair Value Measurements and Disclosures which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. 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 investments securities) or on 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

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requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value

Fair Value Hierarchy

Level 1 — Quoted prices in active markets for identical assets or liabilities

Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)

Level 3 — Significant unobservable inputs (including the Bank's own assumptions in determining the fair value of assets or liabilities)

In determining the appropriate levels, the Bank performs a detailed analysis of assets and liabilities that are subject to ASC Topic 820.

The following table presents fair value measurements on a recurring basis as of September 30, 2019 and December 31, 2018:


							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
September 30, 2019
Securities available for sale:
Obligations of U.S. Government agencies	$	—	$	8,363	$	—	$	8,363
Obligations of States and political subdivisions		—		25,332		—		25,332
Mortgage-backed securities		—		20,707		—		20,707
Equity securities		—		1,452		—		1,452
Total securities available for sale	$	—	$	55,854	$	—	$	55,854
December 31, 2018
Securities available for sale:
Obligations of U.S. Government agencies	$	—	$	9,420	$	—	$	9,420
Obligations of States and political subdivisions		—		21,096		—		21,096
Mortgage-backed securities		—		19,404		—		19,404
Equity securities		—		1,380		—		1,380
Total securities available for sale	$	—	$	51,300	$	—	$	51,300

Securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, which are considered level 2 inputs. For these securities, management obtains fair value measurements from an independent pricing service.

The Bank may also be required, from time to time, to measure certain other financial and non‑financial assets and liabilities at fair value on a non‑recurring basis in accordance with GAAP. The following table presents all fair value measurements on a non‑recurring basis as of September 30, 2019 and December 31, 2018:


Dollars are in thousands							Fair
September 30, 2019	Level 1		Level 2		Level 3		Value
Impaired loans	$	—	$	—	$	21,218	$	21,218
OREO		—		3,641		—		3,641
Total	$	—	$	3,641	$	21,218	$	24,859
December 31, 2018
Impaired loans	$	—	$	—	$	26,640	$	26,640
OREO		—		3,660		—		3,660
Total	$	—	$	3,660	$	26,640	$	30,300

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Measured on a Non‑Recurring Basis:

Financial Assets and Liabilities

The Bank is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. Loans which are deemed to be impaired financial assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Bank determines such fair values from independent appraisals, which management considers level 3 inputs.

Non Financial Assets and Non Financial Liabilities

The Company has no non‑financial assets and non‑financial liabilities measured at fair value on a recurring basis. Certain non‑financial assets and non‑financial liabilities typically measured at fair value on a non‑recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non‑financial assets and non‑financial liabilities measured at fair value in a goodwill impairment test, and intangible assets and other non‑financial long‑lived assets measured at fair value for impairment assessment.

Foreclosed real estate were adjusted to their fair values, resulting in an impairment charge, which was included in earnings for the period. Foreclosed real estate, which are considered to be non‑financial assets, have been valued using a market approach at the time they are recorded in OREO. The values were determined using current market prices of similar real estate assets, which the Bank considers to be level 2 inputs.

Note 12. Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles — Goodwill and Other.” The Company records the excess of cost acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amount of the intangible assets may be impaired. The Company does not amortize goodwill or any acquired intangible assets with an indefinite useful economic life, but reviews them for impairment on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2018.

Goodwill: The Company acquired goodwill in the purchase of Liberty Bell Bank (see Note 13). The following table provides changes in goodwill for the the nine months ended September 30, 2019 and the year ended December 31, 2018:


	September 30,		December 31,
Dollars in Thousands	2019		2018
Balance at the beginning of the period	$	5,237	$	—
Liberty Bell Bank acquisition		—		5,237
Impairment		—		—
Balance at the end of the period	$	5,237	$	5,237

Core Deposit Intangible: The Company acquired a core deposit intangible in the acquisition of Liberty Bell Bank. The Company utilizes the double declining balance method of amortization, in which the straight line amortization rate is doubled and applied to the remaining unamortized portion of the intangible asset. The amortization method changes to the straight line method of amortization when the straight line amortization amount exceeds the amount that would be calculated under the double declining balance method. The core deposit intangible is amortized

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over seven years. The following table provides changes in the core deposit intangible for the the nine months ended September 30, 2019, and the year ended December 31, 2018:


	September 30,		December 31,
Dollars in Thousands	2019		2018
Balance at the beginning of the period	$	1,069	$	—
Liberty Bell Bank acquisition		—		1,489
Accumulated amortization		(226)		(420)
Balance at the end of the period	$	843	$	1,069

The Company recorded amortization expense related to the core deposit intangible of $76,000 and $126,000 during the three months ended September 30, 2019 and 2018, respectively, and $226,000 and $294,000 during the nine months ended September 30, 2019 and 2018, respectively. Remaining amortization on the core deposit intangible is $76,000 through December 31, 2019 and $216,000, $155,000, $128,000, $128,000, and $140,000 for the years ended December 31, 2020, 2021, 2022, 2023, and 2024 and thereafter, respectively.

Deposits Purchased Premium: The Company paid a deposit premium in the acquisition of Liberty Bell Bank, which is included in the balances of time deposits on the balance sheets. The premium amount is amortized as a reduction in interest expense over the life of the acquired time deposits. The premium on deposits will be amortized over five years. The following table provides changes in the deposit premium for the nine months ended September 30, 2019 and the year ended December 31, 2018:


	September 30,		December 31,
Dollars in Thousands	2019		2018
Balance at the beginning of the period	$	27	$	—
Liberty Bell Bank acquisition		—		108
Accumulated accretion		(19)		(81)
Balance at the end of the period	$	8	$	27

The Company recorded accretion on the deposit premium of $6,000 and $27,000 during the three months ended September 30, 2019 and 2018, respectively, and $19,000 and $63,000 during the nine months ended September 30, 2019 and 2018, respectively. Remaining accretion on the deposits purchased premium is $4,000 through December 31, 2019 and $4,000 thereafter.

Note 13. Liberty Bell Transaction

On March 1, 2018, the Company completed its acquisition of Liberty Bell Bank (“LBB”), a New Jersey chartered commercial bank. LBB shareholders received 0.2857 shares of the Company's common stock for each share of LBB common stock they owned as of the effective date of the acquisition, cash consideration of $1.70 per share or a combination thereof. The aggregate consideration paid to LBB shareholders was $17.3 million. The results of LBB's operations are included in the Company's consolidated statements of income for the year ended December 31, 2018 for the period beginning March 1, 2018, the date of the acquisition.

The acquisition of LBB added market share in Burlington and Camden Counties in Southern New Jersey. The acquisition resulted in three new branches in Evesham, Cherry Hill, and Moorestown, New Jersey.

The acquisition of LBB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess consideration paid over the fair value of net assets acquired has been reported as goodwill in the Company's consolidated statements of financial condition as of December 31, 2018.

The assets acquired and liabilities assumed in the acquisition of LBB were recorded at their estimated fair values based on management's best estimates using information available at the date of the acquisition and are subject to

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adjustment for up to one year after the closing date of the acquisition. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:


	Estimated Fair
	Value as of
Dollars in Thousands	March 1, 2018
Consideration paid:
Cash	$	4,471
Common stock issued in acquisition		12,798
Total consideration paid		17,270
Assets acquired:
Cash and cash equivalents		11,831
Investment securities		7,605
Investments in correspondent bank stock		180
Loans		121,674
Premises and equipment		2,148
Other real estate owned		946
Accrued interest receivable		358
Core deposit intangible		1,489
Deferred tax asset		4,263
Other assets		1,039
Total assets acquired	$	151,532
Liabilities assumed:
Deposits	$	138,241
Other liabilities		1,259
Total liabilities assumed	$	139,500
Net assets acquired	$	12,032
Goodwill recorded in acquisition		5,237

Acquired loans (impaired and non‑impaired) are initially recorded at their acquisition‑date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected life‑ time losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Company has prepared three separate loan fair value adjustments that it believes a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820‑10 for the acquired loan portfolio. The three separate fair valuation methodologies employed are: (i) an interest rate loan fair value adjustment, (ii) a general credit fair value adjustment, and (iii) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310‑30 provisions. The acquired loans were recorded at fair value at the acquisition date without carryover of LBB's previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a principal balance, prior to fair value adjustments, of $124.5 million.

The table below illustrates the fair value adjustments made to the amortized cost basis to present a fair value of the loans acquired:


Dollars in Thousands	At March 1, 2018
Gross principal balance	$	124,545
Fair value adjustment on pools of non-credit impaired loans		(1,703)
Fair value adjustment on purchased credit impaired loans		(1,168)
Fair value of acquired loans	$	121,674

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The credit adjustment on acquired impaired loans is derived in accordance with ASC 310‑30 and represents the portion of the loan balances that have been deemed uncollectible based on the Company's expectations of future cash flows for each respective loan:


Dollars in Thousands	At March 1, 2018
Contractually required principal and interest at acquisition	$	2,469
Contractual cashflows not expected to be collected (non-accretable discount)		(922)
Expected cash flows at acquisition		1,547
Interest component of expected cash flows		(246)
Fair value for loans acquired under ASC 310-30	$	1,301

The fair value of savings and transaction deposit accounts acquired from LBB provide value to the Company as a source of below market rate funds. The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of capital for a market participant. To calculate cash flows, the sum of deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available to the Company. The expected cash flows of the deposit base included estimated attrition rates. The core deposit intangible was valued at $1.49 million or 2.04% of core deposits. The core deposit intangible asset is being amortized on a double declining basis over 7 years.

Direct costs related to the merger were accrued and expensed as incurred. During the three and nine months ended September 30, 2018 the Company incurred approximately $135,000 and $1.3 million, respectively, in Liberty merger‑related expenses. There were no expenses related to the merger with Liberty during the nine months ended September 30, 2019.

Note 14. Bank Acquisition

On December 13, 2018 the Company entered into a share exchange agreement with Virginia Partners Bank (“Partners”). Partners is a commercial bank chartered by the Commonwealth of Virginia Bureau of Financial Institutions and insured by the Federal Deposit Insurance Corporation. Partners is headquartered in Fredericksburg, Virginia, which is the location of the operations center and administrative headquarters and three branch offices. An additional branch office is located in La Plata, Maryland, and a loan production office is located in Annapolis, Maryland. Each share of Partners common stock will be converted into the right to receive 1.7179 shares of Delmar Bancorp common stock. From and after the effective time of the share exchange, former holders of Partners Common Stock shall be shareholders of Delmar, and shall have no rights or interest as a shareholder of Partners. As of September 30, 2019, there were 4,085,181 shares of Partners common stock outstanding which were held by approximately 320 holders of record. Partners will continue to conduct its business as a wholly owned first tier subsidiary of Delmar, under the name “Virginia Partners Bank”. The share exchange is anticipated to become effective during the fourth quarter of 2019.

Direct costs related to the share exchange were accrued and expensed as incurred. During the three and nine months ended September 30, 2019, the Company incurred $168,000 and $539,000, respectively, in Partners share exchange related expenses. There were no expenses related to the share exchange during the nine months ended September 30, 2018.

Note 15. Recent Accounting Pronouncements

Information about certain recently issued accounting standards updates is presented below.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the ASC. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts, including leases and insurance contracts, are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods

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or services. The amendments also require expanded disclosures concerning the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date by one year from the date in the original guidance. In March 2016, the FASB issued ASU No. 2016-08 to clarify the implementation guidance on principal versus agent considerations. The guidance is effective for fiscal years and interim periods beginning after December 15, 2016. The Company’s adoption of this item did not have a material impact on its results of operations or financial condition.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10)”: Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities. ASU 2016-01 becomes effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company’s adoption of this item did not have a material impact on its results of operations or financial condition. The disclosures to the Company’s consolidated financial statements have been updated appropriately using the exit price notion in “Note 10 – Fair Value of Financial Instruments”.

On February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 will, among other things, require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. The Company recorded a right of use asset and lease liability on the adoption date of January 1, 2019 (see Note 5).

In March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815)”: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. ASU No. 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU No. 2016-05 was effective for us on January 1, 2017 and did not have a material impact on our results of operations or financial condition.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718)”: Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU No. 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to

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vest (current GAAP) or account for forfeitures when they occur. ASU No. 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU No. 2016-09 was effective on January 1, 2017 and did not have a material impact on our results of operations or financial condition.

During June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”: Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. In April 2019, ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” was issued to address certain codification improvements and to provide certain accounting policy electives related to accrued interest as well as disclosure related to credit losses, among other things. In May 2019, ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” was issued to provide transition relief in connection with the adoption of ASU 2016-03 whereby entities would have the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. ASU 2016-13, as updated, will be effective for U.S. Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. In October 2019, the FASB approved the deferral of the effective date of ASU 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. This will delay the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company, this deferral would be applicable to the Company. The Company is currently evaluating the potential impact of ASU 2016-13 on our consolidated financial statements. We are currently working through our implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and systems configuration, among other things. We are also in the process of implementing a third-party vendor solution to assist us in the application of the ASU 2016-13. The adoption of the ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230)”: Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU were issued to reduce diversity in how certain cash receipts and payments are presented and classified in the statement of cash flows in eight specific areas. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows. ASU No. 2016-15 was effective on January 1, 2018 and did not have a material impact on our results of operations or financial condition.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230)” - Restricted Cash: a Consensus of the FASB Emerging Issues Task Force. This ASU requires a company’s cash flow statement to explain the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents. Additionally, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the total cash balances for a reporting period.

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ASU No. 2016-18 was effective on January 1, 2018 and did not have a material impact on our results of operations or financial condition.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805)”: Clarifying the Definition of a Business. ASU No. 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU No. 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 was effective for us on January 1, 2018 and did not have a significant impact on our consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables - Nonrefundable Fees and other Costs (Subtopic 320-20)”: Premium Amortization on Purchased Callable Debt Securities. This standard shortens the amortization period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. Adoption of ASU 2017-08 is required for fiscal years and interim periods within those fiscal years, beginning after December, 15, 2018, early adoption is permitted. ASU 2017-08 was effective for the Company on January 1, 2019 and did not have a significant impact on our financial statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815)”: Targeted Improvements to Accounting for Hedging Activities. This standard better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedge instruments and the hedged item in the financial statements. Adoption for this ASU is required for fiscal years and interim periods beginning after December 15, 2018 and early adoption is permitted. ASU 2017-12 was effective for the Company on January 1, 2019 and did not have a significant impact on our financial statements. In April 2019, ASU 2019-04 was issued to clarify certain aspects of accounting for hedging activities addressed by ASU 2017-12, among other things.

In February 2018, the FASB issued ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220)”. This ASU was issued to allow a reclassification from accumulated other comprehensive income to retained earnings from stranded tax effects resulting from the revaluation of the net deferred tax asset (“DTA”) to the new corporate tax rate of 21% as a result of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. The Company elected to early adopt this ASU and to reclassify $44,000 of stranded tax effects from accumulated other comprehensive income to retained earnings in the fourth quarter of 2017.

In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)”. This ASU was issued to provide guidance on the income tax accounting implications of the Tax Act and allows for entities to report provisional amounts for specific income tax effects of the Tax Act for which the accounting under Topic 740 was not yet complete, but a reasonable estimate could be determined. A measurement period of one-year is allowed to complete the accounting effects under Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this ASU with the provisional adjustments as reported in the consolidated financial statements as of December 31, 2017. As of September 30, 2019, the Company did not incur any adjustments to the provisional recognition.

In July 2018, the FASB issued ASU No. 2018-11, “Leases – Targeted Improvements (Topic 842)”. ASU 2018-11 provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02

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(January 1, 2019 for the Company). The Company elected both transition options. ASU 2018-11 did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820)”: Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies. Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)”. ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

In October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815)” - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. ASU 2018-16 was effective for us on January 1, 2019 and did not have a significant impact on our financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases – Codification Improvements (Topic 842)”. ASU 2019-01 amends certain aspects of the Board’s new leasing standard, ASU 2016-02 to address two lessor implementation issues and clarify when lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new leases standard, Topic 842, Leases. ASU 2019-01 aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset and is acquired and when the lease commences, the definition of fair value (in Topic 820, Fair Value Measurement) should be applied. The ASU also requires lessors within the scope of Topic 942, Financial Services – Depository and Lending, to present all “principal payments received under leases” within investing activities. Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. As ASU 2019-01 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Delmar Bancorp (“Delmar”) consolidated financial statements, and notes thereto, for the year ended December 31, 2018, and the other information included in this report. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the year ending December 31, 2019 or any other period.

Forward-Looking Statements

Portions of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, including statements that include the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are expressions about our confidence, policies, and strategies, the adequacy of capital levels, and liquidity and are not guarantees of future performance. Such forward-looking statements involve certain risks and uncertainties, including economic conditions, competition in the geographic and business areas in which we operate, inflation, fluctuations in interest rates, legislation, and governmental regulation. These factors should not be considered exhaustive and should be read together with other cautionary statements that are included in Delmar’s Registration Statement on Form S-4, as amended, including those discussed in the section entitled “Risk Factors” and “Caution about Forward-Looking Information. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

Overview

Delmar, a bank holding corporation, through its wholly owned subsidiary, The Bank of Delmarva (‘‘Delmarva’’), a commercial banking corporation, engages in general commercial banking operations, with fourteen branches throughout Wicomico and Worcester Counties in Maryland, Sussex County in Delaware, and Camden and Burlington Counties in New Jersey.

Delmar derives the majority of its income from interest received on our loans and investment securities. The primary source of funding for making these loans and investments are deposits and secondarily, borrowings. Consequently, one of the key measures of Delmar’s success is the amount of net interest income, or the difference between the income on interest-earning assets, such as loans and investments, and the expense on interest-bearing liabilities, such as deposits and borrowings. The resulting ratio of that difference as a percentage of average earning assets represents the net interest margin. Another key measure is the spread between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, which is called the net interest spread. In addition to earning interest on loans and investments, Delmar earns income through fees and other charges to customers. Also included is a discussion of the various components of this noninterest income, as well as of noninterest expense.

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We maintain this allowance by charging a provision for loan losses as needed against our operating earnings for each period. We have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses.

Delmar plans to continue to grow both organically and possibly through future acquisitions, including potential expansion into new market areas. Delmar believes its current financial condition, coupled with its scalable operational capabilities, will allow it to act upon growth opportunities in the current banking environment.

The following discussion and analysis also identifies significant factors that have affected Delmar’s financial position and operating results during the periods included in the consolidated financial statements accompanying this report.

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Critical Accounting Policies

Certain critical accounting policies affect significant judgments and estimates used in the preparation of Delmar’s consolidated financial statements. These significant accounting policies are described in the notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements included in Delmar’s Registration Statement on Form S-4, as amended, and related prospectus filed pursuant to Rule-424(b) on July 8, 2019. The accounting principles Delmar follows and the methods of applying these principles conform to GAAP and general banking industry practices. Delmar’s most critical accounting policy relates to the determination of the allowance for loan losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance involves significant judgment and complexity and is based on many factors. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for loan losses may be required. See ‘‘Provision and Allowance for Loan Losses’’ and Note 1 and Note 3 of the unaudited consolidated financial statements for the nine months ended September 30, 2019.

Another of Delmar’s critical accounting policies relates to the valuation of goodwill, intangible assets and other acquisition accounting adjustments. During 2018, Delmar acquired Liberty Bell Bank (“Liberty”) –see Note 13 of the unaudited consolidated financial statements for the nine months ended September 30, 2019. Delmar accounted for the acquisition of Liberty in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic No. 805, which requires the use of the acquisition method of accounting. Under this method, assets acquired, including intangible assets, and liabilities assumed, are recorded at their fair value. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from the acquisition of Liberty, which totaled approximately $5.2 million, under the acquisition method of accounting represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings. In evaluating the goodwill on its consolidated balance sheet for impairment after the consummation date of the acquisition of Liberty, Delmar will first assess qualitative factors to determine whether it is more likely than not that the fair value of our acquired assets is less than the carrying amount of the acquired assets, as allowed under Accounting Standards Update 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. After making the assessment based on several factors, which will include, but is not limited to, the current economic environment, the economic outlook in our markets, our financial performance and common stock value as compared to our peers, we will determine if it is more likely than not that the fair value of our assets is greater than their carrying amount and, accordingly, will determine whether impairment of goodwill should be recorded as a charge to earnings in years subsequent to the acquisition of Liberty. This assessment was performed at the end of 2018, and resulted in no impairment of goodwill. See Note 12 and Note 13 in the unaudited consolidated financial statements for the nine months ended September 30, 2019 for more information related to the fair value of assets acquired in the acquisition of Liberty, including goodwill and intangible assets.

Another critical accounting policy relates to deferred tax assets and liabilities. Delmar records deferred tax assets and deferred tax liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits, such as net operating loss carry forwards available from the Liberty acquisition, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax basis of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided when it is more likely than not that a portion or the full amount of the deferred tax asset will not be realized. In assessing the ability to realize the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Such a deferred tax liability will only be recognized when it becomes apparent that

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those temporary differences will reverse in the foreseeable future. A tax position is recognized as a benefit only if it is ‘‘more likely than not’’ that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent more likely of being realized on examination. For tax positions not meeting the ‘‘more likely than not’’ test, no tax benefit is recorded.

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) Delmar has the intent to sell a debt security, (2) it is more likely than not that Delmar will be required to sell the debt security before recovery of its amortized cost basis, or (3) Delmar does not expect to recover the entire amortized cost basis of the debt security. If Delmar has the intent to sell a debt security, or if it is more likely than not that it will be required to sell the debt security before its recovery, the other-than-temporary write-down is equal to the entire difference between the debt security’s amortized cost and its fair value. If Delmar does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.

Results of Operations

Net income for the three months ended September 30, 2019 totaled $1.8 million compared to net income for the same period in 2018 of $1.9 million, a decrease of $103,000 or 5.5%. This decrease was mainly due to increases in interest expense on deposits and borrowing as well as federal and state income taxes. Increases were $589,000 and $218,000, respectively. These increases in expenses were partially offset by an increase in loan interest income of $579,000 or 7.1%. Basic earnings per share were $0.18 for the three months ended September 30, 2019, compared to $0.19 for the same period in 2018. Net income for the nine months ended September 30, 2019 totaled $4.9 million compared to net income for the same period in 2018 of $3.9 million, an increase of $987 or 25.0%. Basic earnings per share were $0.49 for the nine months ended September 30, 2019, compared to $0.41 for the same period in 2018. Average loan balances increased during the three and nine months ended September 30, 2019 as compared to the same periods ended September 30, 2018. Average balances for the three and nine months ended September 30, 2019 were $639.9 million and $643.6 million, respectively, as compared to average balances for the three and nine months ended September 30, 2018 of $612.0 million and $581.0 million, respectively. In addition to higher average balances, Delmar earned higher yields during the three and nine months ended September 30, 2019 as compared to the same periods in 2018. The cost of funds was affected by increased competition for deposits, which resulted in Delmar paying higher yields on deposits during the three and nine months ended September 30, 2019 as compared to the same periods ending September 30, 2018. In addition, the average balance of interest bearing deposits increased from $432.8 million during the three months ended September 30, 2018 to $449.7 million during the three months ended September 30, 2019. The average balance of interest bearing deposits increased from $408.3 million during the nine months ended September 30, 2018 to $444.9 million during the nine months ended September 30, 2019. Earnings and average asset and liability balances for three and nine months ended September 30, 2018 were significantly impacted by the Liberty transaction, which closed on March 1, 2018. During the nine months ended September 30, 2018 Delmar expensed $1.3 million of merger related expenses in other expenses. During the nine months ended September 30, 2019 Delmar expensed $539,000 related to the Partners transaction.

Financial Condition

Consolidated assets totaled $792.8 million at September 30, 2019 and $739.4 million at December 31, 2018, an increase of 7.2% or $53.4 million. The growth in assets during the nine months ended September 30, 2019 is mainly attributable to a $46.4 million or 156.2% increase in cash and cash equivalents. The significant increase in cash and cash equivalents was due to relatively flat growth in loan balances overall during the first nine months of 2019, augmented by increases in deposit balances of $45.5 million. This increase was mainly in time deposits, which grew $25.5 million, or

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10.2%. There was also an increase in other assets and other liabilities of $3.3 million and $3.7 million, respectively, of which $3.3 million in both categories related to the implementation of the new lease accounting standard as described in Note 5 of the unaudited consolidated financial statements as of September 30, 2019.

Delmarva’s Tier 1 leverage capital ratio was 9.0% at September 30, 2019 as compared to 8.7% at December 31, 2018. At September 30, 2019, Delmarva’s Tier 1 risk-weighted capital and total-risk rated capital were 11.2% and 12.4%, respectively, as compared to Tier 1 risk-weighted capital and total risk-weighted capital ratios of 10.5% and 11.7%, respectively, at December 31, 2018. See ‘‘Capital Ratios’’ below for additional information about Delmar’s and Delmarva’s capital ratios and requirements. At September 30, 2019, adversely classified assets totaled $16.3 million, a decrease of $2.4 million from December 31, 2018. The decrease was mainly due to one relationship which had payoffs of approximately $2.4 million on five different loans. OREO properties totaled $3.6 million at September 30, 2019 and December 31, 2018, which included two OREO properties that were acquired in the Liberty acquisition with a fair value of $946,000. During the third quarter of 2019 one of these properties was written down approximately $41,000. Nonaccrual loans totaled $5.1 million at September 30, 2019 compared with a balance of $9.1 million at December 31, 2018. Nonaccrual loans as a percentage of total loans was 0.8% at September 30, 2019 and 1.4% at December 31, 2018. There were no loans past due 90 days or more and still accruing interest at September 30, 2019 compared to three loans past due 90 days or more and still accruing interest at December 31, 2018 with an aggregate balance of $606,000. Adversely classified assets were 22.8% of Delmarva’s total capital as of September 30, 2019 compared to 28.1% at December 31, 2018. Loans classified as troubled debt restructurings (‘‘TDRs’’) totaled $10.8 million at September 30, 2019 and $17.8 million at December 31, 2018, a 39.5% decline during the nine months ended September 30, 2019. The decreases in nonaccrual and TDR loans was due to approximately $3.7 million in nonaccrual loans that were classified as TDR’s that paid off, as well as another $2.7 million in payoffs on multiple loans, classified as TDR’s still accruing interest as of December 31, 2018, from a single relationship.

Net charge-offs were 0.1% of average total loans for the year ended December 31, 2018. Net loans charged off during the nine months ended September 30, 2019 were $909,000, compared to $814,000 for the year ended December 31, 2018. The allowance for loan losses to total loans ratio was 1.1% at September 30, 2019 and December 31, 2018. In addition to the allowance for loan losses, there was an unamortized discount related to the loans acquired in the Liberty transaction with a balance of $668,000 and $1.3 million at September 30, 2019 and December 31, 2018, respectively. This discount is amortized over the life of the remaining loans.

Stockholders’ equity at September 30, 2019 was $71.6 million, an increase of 8.4% during the first nine months of 2019. This increase was mainly due to income earned during the year, net of dividends of $749,000 paid to shareholders and the increase in unrealized holding losses on securities available for sale during the period.

Summary of Return on Equity and Assets


	September 30,		December 31,
	2019
	(annualized)		2018
Yield on earning assets	5.09	%	4.96	%
Return on average assets	0.86	%	0.84	%
Return on average equity	9.59	%	9.53	%
Average equity to average assets	8.98	%	8.84	%
Tier I risk-based capital ratio/CET1 ratio (Bank)	11.21	%	10.49	%
Total risk-based capital ratio (Bank)	12.38	%	11.68	%
Leverage capital ratio (Bank)	9.00	%	8.74	%

(See Note 9 of Delmar’s consolidated financial statements for the nine months ended September 30, 2019.)

Earnings Analysis

Delmar’s primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investments, Delmar seeks to deploy as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations.

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To ensure sufficient liquidity, Delmar also maintains a portion of its deposits in cash, government securities, deposits with other financial institutions, and overnight loans of excess reserves (known as ‘‘Federal Funds Sold’’) to correspondent banks. The revenue which Delmar earns (prior to deducting its overhead expenses) is essentially a function of the amount of Delmar’s loans and deposits, as well as the profit margin (‘‘interest spread’’) and fee income which can be generated on these amounts.

Delmar reported net income of $1.8 million and $1.9 million for the three months ended September 30, 2019 and 2018, respectively, and reported net income of $4.9 million and $3.9 million for the nine months ended September 30, 2019 and 2018, respectively. The following discussion should be read in conjunction with Delmar’s unaudited consolidated financial statements for the period ended September 30, 2019 and the notes thereto.

The following is a summary of the results of operations by Delmar for the three and nine month periods ended September 30, 2019 and 2018.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	(Dollars in Thousands)
Net interest income	$	7,295	$	7,190	$	21,825	$	20,243
Provision for loan losses		300		300		900		825
Provision for income taxes		810		592		2,167		1,485
Noninterest income		1,131		783		2,729		2,331
Noninterest expense		5,531		5,193		16,552		16,316
Total income		10,417		9,375		30,216		26,349
Total expenses		8,632		7,487		25,281		22,401
Net income		1,785		1,888		4,935		3,948
Basic earnings per share		0.179		0.189		0.494		0.411

Net Interest Income

The largest component of net income for Delmar is net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on Delmar’s interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.

Net interest income was $7.3 million for the three months ended September 30, 2019 compared to $7.2 million for the three months ended September 30, 2018. Net interest income was $21.8 million for the nine months ended September 30, 2019 compared to $20.2 million for the nine months ended September 30, 2018. This increase is mainly the result of increased loan volumes. Average balances on loans increased from $581.0 million for the nine months ended September 30, 2018 to $643.6 million for the nine months ended September 30, 2019.

In addition to the primary earning assets and interest bearing liabilities held at Delmarva, the holding company has additional borrowings with a balance of $6.5 million at September 30, 2019 and December 31, 2018. During the first quarter of 2018 $4.5 million was advanced to fund the cash portion of the payment to Liberty shareholders. Interest expense on these loans, which is included in consolidated net income, was approximately $337,000 and $314,000 for the nine months ended September 30, 2019 and 2018, respectively.

For the three months ended September 30, 2019, the consolidated net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.4% compared to 3.8% for the three months ended September 30, 2018. For the nine months ended September 30, 2019 and 2018, the consolidated net interest spread was 3.6% and 3.8%, respectively. The consolidated net interest margin (which is net interest income divided by average earning assets), calculated on a tax equivalent basis, was 3.9% and 4.0% for the three and nine months ended September 30, 2019 and 4.1% for the three and nine month periods ending September 30, 2018. Rates paid on average interest-bearing liabilities at Delmar were 1.6% and 1.5% for the three months and nine months ended September 30, 2019, respectively, and 1.2% and 1.1% for the three months and nine months ended September 30, 2018, respectively.

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Interest earned on assets and interest accrued on liabilities is significantly influenced by market factors, specifically interest rate targets established by the Federal Reserve. Average loans net of the allowance and discounts on purchased loans comprised 86.4% of average earning assets for the three months ended September 30, 2019, compared to 87.7% for the three months ended September 30, 2018. Average loans net of the allowance and discounts on purchased loans comprised 88.8% of average earning assets for the nine months ended September 30, 2019, compared to 87.9% for the nine months ended September 30, 2018.

The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities for Delmarva. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.


	Three Months Ended						Three Months Ended
	September 30, 2019						September 30, 2018
(Dollars in Thousands)	Average				Yield		Average				Yield
(Unaudited)	Balance		Interest		(Annualized)		Balance		Interest		(Annualized)
Assets
Cash & Due From Banks	$	28,749	$	72	0.99	%	$	25,522	$	61	0.95	%
Interest Bearing Deposits From Banks		19,341		99	2.03	%		9,202		41	1.77	%
Taxable Securities (1)		35,694		214	2.38	%		36,179		195	2.14	%
Tax-exempt Securities (2)		23,004		209	3.60	%		20,317		185	3.61	%
Total Investment Securities (1) (2)		58,698		423	2.86	%		56,496		380	2.67	%
Federal Funds Sold		13,440		58	1.71	%		10,508		48	1.81	%
Loans: (3)
Commercial and Industrial (4)		61,915		835	5.35	%		51,831		704	5.39	%
Real Estate (4)		557,883		7,487	5.32	%		537,815		7,063	5.21	%
Consumer (4)		1,186		16	5.35	%		1,438		20	5.52	%
Keyline Equity (4)		17,711		269	6.03	%		19,506		274	5.57	%
Visa Credit Card		254		4	6.25	%		288		5	6.89	%
State and Political		648		11	6.73	%		793		12	6.00	%
Keyline Credit		215		9	16.61	%		216		10	18.37	%
Other Loans		101		2	7.86	%		123		2	6.45	%
Total Loans (2)		639,913		8,633	5.35	%		612,010		8,090	5.24	%
Allowances For Credit Losses and Discounts on Loans		7,987						8,245
Total Loans, Net		631,926						603,765
Other Assets		36,887						36,748
Total Assets/Interest Income	$	789,041	$	9,213			$	742,241	$	8,559

Liabilities and Stockholders' Equity
Deposits In Domestic Offices
Non-interest Bearing Demand	$	201,926	$	—	—	%	$	187,490	$	—	—	%
Interest Bearing Demand		54,115		52	0.38	%		53,431		35	0.26	%
Money Market Accounts		55,198		41	0.29	%		70,280		50	0.28	%
Savings Accounts		65,100		24	0.15	%		65,169		24	0.15	%
All Time Deposits		275,238		1,438	2.07	%		243,945		897	1.46	%
Total Interest Bearing Deposits		449,651		1,555	1.37	%		432,825		1,006	0.92	%
Total Deposits		651,577		—				620,315		—
Funds Purchased		49,103		316	2.55	%		43,761		283	2.57	%
Notes Payable		6,500		113	6.90	%		6,500		113	6.90	%
Lease Liability		676		6	3.52	%		—		—	—	%
Other Liabilities		4,715		—				1,676		—
Stockholder's Equity		76,470		—				69,989		—
Total Liabilities & Equity/Interest Expense	$	789,041	$	1,990			$	742,241	$	1,402

Earning Assets/Interest Income (2)	$	731,392	$	9,213	5.00	%	$	688,216	$	8,559	4.93	%
Interest Bearing Liabilities/Interest Expense	$	505,930	$	1,990	1.56	%	$	483,086	$	1,402	1.15	%
Net interest income (5)			$	7,223					$	7,157

Earning Assets/Interest Expense					1.08	%					0.81	%
Net Interest Spread (2)					3.44	%					3.78	%
Net Interest Margin (2)					3.92	%					4.13	%

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(1)

Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which is reflected as a component of shareholder's equity.

(2)

Presented on a taxable-equivalent basis using the statutory income tax rate of 26.5%. Taxable equivalent adjustment of $55 and $3 are included in the calculation of tax exempt income for investment interest income and loan interest income, respectively for the period ended September 30, 2019 and $49 and $3 respectively, for the period ended September 30, 2018.

(3)

Loans placed on nonaccrual are included in average balances.

(4)

Yields do not include the average balance of the fair value adjustment for pools of non-credit impaired loans acquired or discounts on credit impaired loans acquired.

(5)

Net interest income on the financial statements includes fees and charges on loans of $58 and $24 for the periods ended September 30, 2019 and 2018 respectively.


	Nine Months Ended						Nine Months Ended
	September 30, 2019						September 30, 2018
	Average				Yield		Average				Yield
(Dollars in Thousands)	Balance		Interest		(Annualized)		Balance		Interest		(Annualized)
Assets
Cash & Due From Banks	$	26,372	$	211	1.07	%	$	23,507	$	142	0.81	%
Interest Bearing Deposits From Banks		9,656		144	1.99	%		8,950		112	1.67	%
Taxable Securities (1)		34,558		689	2.67	%		35,489		571	2.15	%
Tax‑exempt Securities (2)		21,946		606	3.69	%		19,646		559	3.80	%
Total Investment Securities (1) (2)		56,504		1,295	3.06	%		55,135		1,130	2.74	%
Federal Funds Sold		5,623		81	1.93	%		6,223		86	1.85	%
Loans: (3)
Commercial and Industrial (4)		62,884		2,588	5.50	%		50,369		1,884	5.00	%
Real Estate (4)		560,426		22,215	5.30	%		509,773		19,749	5.18	%
Consumer (4)		1,186		49	5.52	%		1,492		62	5.56	%
Keyline Equity (4)		17,822		772	5.79	%		17,930		731	5.45	%
Visa Credit Card		267		14	7.01	%		286		16	7.48	%
State and Political		684		33	6.45	%		829		38	6.13	%
Keyline Credit		219		29	17.70	%		222		29	17.47	%
Other Loans		104		5	6.43	%		126		5	5.31	%
Total Loans (2)		643,592		25,705	5.34	%		581,027		22,514	5.18	%
Allowances For Credit Losses and Discounts on Loans		8,157						8,442
Total Loans, Net		635,435						572,585
Other Assets		37,781						35,431
Total Assets/Interest Income	$	771,371	$	27,225			$	701,831	$	23,842

Liabilities and Stockholders' Equity
Deposits In Domestic Offices
Non‑interest Bearing Demand	$	190,106	$	—	—	%	$	175,056	$	—	—	%
Interest Bearing Demand		53,795		157	0.39	%		49,053		76	0.21	%
Money Market Accounts		56,179		123	0.29	%		69,490		155	0.30	%
Savings Accounts		64,735		72	0.15	%		63,696		72	0.15	%
All Time Deposits		270,184		4,035	2.00	%		226,022		2,354	1.39	%
Total Interest Bearing Deposits		444,893		4,387	1.32	%		408,261		2,657	0.87	%
Total Deposits		634,999		—				583,317		—
Funds Purchased		49,855		922	2.47	%		45,628		803	2.35	%
Lease Liability		684		16	3.13	%		—		—	—	%
Notes Payable		6,500		337	6.93	%		6,088		314	6.90	%
Other Liabilities		4,623		—				1,316		—
Stockholder's Equity		74,710		—				65,482		—
Total Liabilities & Equity/Interest Expense	$	771,371	$	5,662			$	701,831	$	3,774

Earning Assets/Interest Income (2)	$	715,375	$	27,225	5.09	%	$	651,335	$	23,842	4.89	%
Interest Bearing Liabilities/Interest Expense	$	501,932	$	5,662	1.51	%	$	459,977	$	3,774	1.10	%
Net interest income (5)			$	21,563					$	20,068

Earning Assets/Interest Expense					1.06	%					0.77	%
Net Interest Spread (2)					3.58	%					3.80	%
Net Interest Margin (2)					4.03	%					4.12	%

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(1)

(2)

Presented on a taxable-equivalent basis using the statutory income tax rate of 26.5% for 2019 and 2018. Taxable equivalent adjustments of $160 and $9 are included in the calculation of tax exempt income for investment interest income and loan interest income, respectively for the nine months ended September 30, 2019 and $148 and $10 respectively, for the nine months ended September 30, 2018.

(3)

Loans placed on nonaccrual are included in average balances.

(4)

Yields do not include the average balance of the fair value adjustment for pools of non-credit impaired loans acquired or discounts on credit impaired loans acquired.

(5)

Net interest income on the financial statements includes fees and charges on loans of $220 and $191 for the nine month periods ending September 30, 2019 and 2018 respectively.

The level of interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. The following tables show the effect that these factors had on the interest earned from Delmarva’s interest-earning assets and interest incurred on its interest-bearing liabilities for the periods indicated.

Rate and Volume Analysis

Three Months Ended September 30, 2019 Versus September 30, 2018

(Dollars in Thousands)


	Increase (Decrease) Due to
(Unaudited)	Volume		Rate		Net
Earning Assets
Loans (1)	$	369	$	174	$	543
Investment securities
Taxable		(3)		22		19
Exempt from Federal income tax		24		—		24
Federal funds sold		13		(3)		10
Other interest income		45		13		58
Total interest income		448		206		654
Interest Bearing Liabilities
Interest bearing deposits		39		510		549
Notes payable and leases		12		(6)		6
Funds purchased		35		(2)		33
Total Interest Expense		86		502		588
Net Interest Income	$	362	$	(296)	$	66

(1)

Nonaccrual loans are included in average balances and do not have a material effect on the average yield.

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Rate and Volume Analysis

Nine Months Ended September 30, 2019 Versus September 30, 2018

(Dollars in Thousands)


	Increase (Decrease) Due to
	Volume		Rate		Net
Earning Assets
Loans (1)	$	2,424	$	767	$	3,191
Investment securities
Taxable		(15)		133		118
Exempt from Federal income tax		65		(18)		47
Federal funds sold		(8)		3		(5)
Other interest income		9		23		32
Total interest income		2,475		908		3,383
Interest Bearing Liabilities
Interest bearing deposits		238		1,492		1,730
Notes payable and leases		57		(18)		39
Funds purchased		74		45		119
Total Interest Expense		369		1,519		1,888
Net Interest Income	$	2,106	$	(611)	$	1,495

(1)

Nonaccrual loans are included in average balances and do not have a material effect on the average yield.

Interest Sensitivity. Delmar monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. Delmar also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. Delmar evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.

At September 30, 2019 and December 31, 2018, Delmar was asset sensitive within the one-year time frame when looking at a repricing gap analysis. The cumulative gap as a percentage of total assets up to one year was 23.72% and 25.6% as of September 30, 2019 and December 31, 2018, respectively. A positive gap indicates more assets than liabilities are repricing within the indicated time frame.

Provision and Allowance for Loan Losses

Delmar has developed policies and procedures for evaluating the overall quality of its credit portfolio and for timely identifying potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

Delmar’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance. Delmar’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the prior three years is utilized in determining the appropriate allowance. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The historical loss factors may also be modified based upon other qualitative factors including, but not limited to, local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio.

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The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. A loan is considered impaired when, based on current information and events, it is probable that Delmar 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. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in Delmar’s opinion the ultimate source of repayment will be generated from the liquidation of collateral.

The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to Delmar’s Board for review and approval on a quarterly basis.

At September 30, 2019 and December 31, 2018, Delmar’s allowance for loan losses amounted to approximately $7.1 million, or 1.1% of outstanding loans. Delmar’s provision for loan losses was $300,000 for the three months ended September 30, 2019 and the three months ended September 30, 2018. Delmar’s provision for loan losses was $900,000 for the nine months ended September 30, 2019, compared to $825,000 for the nine months ended September 30, 2018.

Delmar discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, Delmar will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

The following table illustrates Delmar’s past due and nonaccrual loans at September 30, 2019 and December 31, 2018:

Past Due and Nonaccrual Loans

(Dollars in Thousands)

At September 30, 2019 and December 31, 2018


	30 - 89 Days		Greater than 90 Days		Total
September 30, 2019	Past Due		Past Due		Past Due		NonAccrual
Other Real Estate Secured	$	569	$	2,005	$	2,574	$	2,806
1-4 Family Residential		2,315		616		2,931		2,107
Other		178		—		178		214
TOTAL	$	3,062	$	2,621	$	5,683	$	5,127


	30 - 89 Days		Greater than 90 Days		Total
December 31, 2018	Past Due		Past Due		Past Due		NonAccrual
Other Real Estate Secured	$	2,618	$	3,129	$	5,747	$	4,423
1-4 Family Residential		1,675		1,722		3,397		4,547
Other		1,068		268		1,336		178
TOTAL	$	5,361	$	5,119	$	10,480	$	9,148

Nonaccrual loans decreased $4.0 million over the nine months ended September 30, 2019 to $5.1 million. There were two relationships with combined aggregate balances of $3.2 million that were paid off during the first three quarters of 2019. Charge-offs of remaining balances on these two relationships totaled approximately $200,000. One loan with a balance of approximately $400,000, reduced by a charge-off of $190,000, was reclassed into other real estate

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owned. Management believes these relationships were adequately reserved at September 30, 2019 and December 31, 2018. Restructured loans must have six months of continuous contractual payments to return to accrual status. Restructured loans not past due or nonaccrual at September 30, 2019 and December 31, 2018 amounted to $8.4 million and $11.1 million, respectively. Total restructured loans decreased $7.0 million from December 31, 2018 to September 30, 2019. Approximately $3.8 million of this decrease related to loans that were on nonaccrual at December 31, 2018 that were paid off during the first nine months of 2019. In addition, there was one relationship with aggregate balances of $2.7 million that paid off during the second quarter of 2019.

Nonperforming assets, defined as nonaccrual loans, loans contractually past due 90 days or more as to principal or interest and still accruing, and OREO, at September 30, 2019 and December 31, 2018 were $8.8 million and $13.4 million, respectively. Delmar’s ratio of nonperforming assets to total assets was 1.1% at September 30, 2019 and 1.8% at December 31, 2018. Nonperforming assets at December 31, 2018 included five loan relationships acquired in the Liberty transaction which are carried at fair value and against which no additional reserves have been established. During the first nine months of 2019 two of these relatioships had paid off, leaving three relationships with aggregrate balances of $810,000, which are net of remaining discounts of $258,000.

The following tables provide additional information on Delmar’s nonperforming assets at September 30, 2019 and December 31, 2018.

Nonperforming Assets

At September 30, 2019 and December 31, 2018

(Dollars in thousands)


	September 30,			December 31,
	2019			2018
Nonperforming assets:
Nonaccrual loans	$	5,127		$	9,148
Loans past due 90 days or more and accruing		—			606
Total nonperforming loans (NPLs)	$	5,127		$	9,754
Other real estate owned (OREO)		3,641			3,660
Total nonperforming assets (NPAs)	$	8,768		$	13,414
Performing TDR's and TDR's 30-89 days past due	$	8,583		$	11,805
NPLs/Total Assets		0.65	%		1.32	%
NPAs/Total Assets		1.11	%		1.81	%
NPAs and TDRs/Total Assets		2.19	%		3.41	%
Allowance for loan losses/NPLs		137.59	%		72.41	%

Nonperforming Loans by Type

At September 30, 2019 and December 31, 2018

(Dollars in thousands)


	September 30,		December 31,
	2019		2018
Other real estate secured	$	2,806	$	4,761
1-4 family residential secured		2,263		4,547
Other		214		446
	$	5,283	$	9,754

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The following table provides data related to loan balances and the allowance for loan losses for the nine months ended September 30, 2019 and the year ended December 31, 2018.

Allowance for Loan Losses Data

(Dollars in Thousands)

At September 30, 2019 and December 31, 2018


	September 30,			December 31,
	2019			2018
Average loans outstanding	$	643,592		$	592,528
Total loans outstanding		633,661			632,577
Total nonaccrual loans		5,127			9,148
Net loans charged off		909			814
Provision for loan losses		900			1,175
Allowance for loan losses		7,054			7,063
Allowance as a percentage of total loans		1.1	%		1.1	%
Net loans charged off to average loans outstanding		0.1	%		0.1	%
Nonaccrual loans as a percentage of total loans		0.8	%		1.4	%

The following table represents the activity of the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018 by loan type:

Allowance for Credit Losses and Recorded Investments in Financing Receivables

(Dollars in Thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Balance at beginning of period	$	7,066	$	7,096	$	7,063	$	6,703
Charge-offs
Other real estate secured		—		(143)		(421)		(347)
1 - 4 family residential secured		—		—		(198)		(52)
Other		(454)		(84)		(632)		(202)
Total		(454)		(227)		(1,251)		(601)
Recoveries
Other real estate secured		84		9		97		77
1 - 4 family residential secured		24		19		165		143
Other		34		28		80		78
Total		142		56		342		298
Provision		300		300		900		825
Balance at end of period		7,054		7,225		7,054		7,225

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The following table provides information related to the allocation of the allowance for loan losses by loan category, the related loan balance for each category, and the percentage of loan balance to total loans by category:

Allocation of the Allowance for Loan Losses

At September 30, 2019 and December 31, 2018

(Dollars in thousands)


	September 30,						December 31,
	2019						2018
					Percent						Percent
					of						of
	Loan				Total		Loan				Total
	Balances		Allocation		Loans		Balances		Allocation		Loans
Other real estate secured	$	425,329	$	4,393	67	%	$	425,474	$	4,276	67	%
1-4 family residential secured		143,186		1,461	23	%		145,967		1,643	23	%
Other		65,146		741	10	%		61,135		654	10	%
Unallocated		—		459	—	%		—		490	—	%
	$	633,661	$	7,054	100	%	$	632,576	$	7,063	100	%

Noninterest Income and Expense

Noninterest Income. Delmar’s primary source of noninterest income is service charges on deposit accounts. Other sources of noninterest income include ATM activity income, debit card income, safe deposit box income and investment fees and commissions.

Noninterest income during the three months ended September 30, 2019 was $1.1 million, compared to noninterest income during the three months ended September 30, 2018 of $783,000, an increase of $348,000, or 44.4%. Noninterest income during the nine months ended September 30, 2019 was $2.7 million, compared to noninterest income during the nine months ended September 30, 2018 of $2.3 million, an increase of $398,000, or 17.1%. This increase was primarily attributable to gains on securities that were called during 2019 of $97,000 and approximately $239,000 in gains on purchased credit impaired loans during the three month and nine month periods ending September 30, 2019.

Noninterest expense during the three months ended September 30, 2019 was $5.5 million, compared to noninterest expense during the three months ended September 30, 2018 of $5.2 million. This was an increase of $338,000, or 6.5%. Noninterest expense for the nine months ended September 30, 2019 was $16.6 million, which was an increase of $238,000, or 1.5%, from the nine months ended September 30, 2018 expenses of $16.3 million. Other expenses decreased by $271,000 during the first nine months of 2019 as compared to the first nine months of 2018. This decrease was mainly due to a decrease in bank acquisition costs, conversion costs, and legal fees related to the acquisition of Liberty Bell Bank expensed during the first nine months of 2018. This decrease was offset by increases in salaries and employee benefits and premises and equipment, which reflect a full nine months of expenditures for Liberty Bell Bank employees and facilities in 2019 as compared to 2018.

Income Taxes

During the three month period ended September 30, 2019, Delmar recorded $810,000 in the provision for income taxes, compared to $592,000 for the same period in 2018. During the nine month period ended September 30, 2019, Delmar recorded $2.2 million in the provision for income taxes, compared to $1.5 million for the same period in 2018. The provision for income taxes approximated 31.2% and 23.9% of income before taxes for the three month period ended September 30, 2019 and 2018, respectively. The provision for income taxes approximated 30.5% and 27.3% of income before taxes for the nine months ended September 30, 2019 and 2018, respectively.

The fair value of the deferred tax asset acquired in the Liberty transaction was $4.3 million, of which $3.4 million related to federal net operating loss carryforwards Delmar could use against future federal tax liabilities. At December 31, 2018 the value of the deferred tax asset related to total net operating loss carryforwards was $1.9 million.

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The value of the deferred tax asset related to total net operating loss carryforwards was estimated at $233,000 as of September 30, 2019.

Earning Assets

Loans. Loans typically provide higher yields than the other types of earning assets, and thus one of Delmar’s goals is to increase loan balances. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Gross loans averaged $643.6 million and $592.5 million during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.

The following table shows the composition of the loan portfolio by category:

Composition of Loan Portfolio by Category

(Dollars in Thousands)

As of September 30, 2019 and December 31, 2018


	September 30,		December 31,
	2019		2018
Other real estate secured	$	425,737	$	426,221
1‑4 Family residential secured		143,280		146,303
Other		65,312		61,379
	$	634,329	$	633,903
Less: Unamortized discounts on acquired loans		(668)		(1,327)
Less: Allowance for loan losses		(7,054)		(7,063)
	$	626,607	$	625,513

The following table sets forth the repricing characteristics and sensitivity to interest rate changes of Delmar’s loan portfolio at September 30, 2019 and December 31, 2018. The amounts shown do not include unamortized discount balances.

Loan Maturities and Interest Rate Sensitivity

At September 30, 2019 and December 31, 2018

(Dollars in thousands)


			Between
	One Year		One and		After
September 30, 2019	or Less		Five Years		Five Years		Total
Other real estate secured	$	133,867	$	260,436	$	31,434	$	425,737
1-4 family residential secured		60,434		63,221		19,625		143,280
Other		39,561		19,491		6,260		65,312
Total loans receivable	$	233,862	$	343,148	$	57,319	$	634,329
Fixed-rate loans	$	130,015	$	294,577	$	24,880	$	449,472
Floating-rate loans		103,847		48,571		32,439		184,857
	$	233,862	$	343,148	$	57,319	$	634,329

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			Between
	One Year		One and		After
December 31, 2018	or Less		Five Years		Five Years		Total
Other real estate secured	$	125,066	$	266,166	$	34,989	$	426,221
1-4 family residential secured		62,673		61,785		21,845		146,303
Other		37,485		19,670		4,224		61,379
Total loans receivable	$	225,224	$	347,621	$	61,058	$	633,903
Fixed-rate loans	$	122,730	$	294,447	$	27,051	$	444,228
Floating-rate loans		102,494		53,174		34,007		189,675
	$	225,224	$	347,621	$	61,058	$	633,903

At September 30, 2019 other real estate secured loans included $164.8 million of owner-occupied non-farm, non-residential loans, and $152.1 million of other non-farm, non-residential loans, which is 38.7% and 35.8% of other real estate secured loans, respectively. The other real estate secured category also included $38.3 million of construction and land development loans and $18.0 million of multi-family residential loans at September 30, 2019. These balances represent an increase at September 30, 2019 of $10.0 million and $1.5 million, or 6.5% and 1.0%, in owner-occupied non-farm, non-residential loans and other non-farm, non-residential loans, respectively, during the nine months ended September 30, 2019. Construction and land development loans decreased during the nine month period ended September 30, 2019 by $6.0 million, or 13.5%, while multi-family residential decreased approximately $1.2 million, or 6.4% from $18.9 million at the end of 2018. Commercial real estate loans, not including owner occupied real estate loans, were 304.6% of risk based capital at September 30, 2019, as compared to 340.0% at December 31, 2018. This decrease was mainly due to accelerated paydowns of loan balances during the third quarter. Construction loans were 84.7% of risk based capital at September 30, 2019, as compared to 103.0% at December 31, 2018. The Bank had a number of large contruction projects that paid off during the third quarter of 2019.

At September 30, 2019 1-4 family residential secured loans included home equity revolving loans of $20.7 million and closed end 1-4 family residential loans of $122.5 million. Home equity revolving loans decreased approximately $131,000 or 0.6% during the nine month period ending September 30, 2019, while closed end 1-4 family residential loans decreased $2.7 million or 2.1%. At September 30, 2019 other loans included $62.6 million of commercial and industrial loans, an increase of approximately $4.4 million or 7.6% over the nine month period ending September 30, 2019.

Investment Securities. The investment securities portfolio is a significant component of Delmar’s total earning assets. Total securities averaged $56.5 million during the nine months ended September 30, 2019, which represents 7.9% of average earning assets for the period. Total securities averaged $55.4 million during the year ended December 31, 2018, which represents 8.1% of average earning assets for the year ended December 31, 2018. The fair value of investments acquired in the Liberty transaction was $7.6 million, of which approximately $3.7 million still remains at September 30, 2019.

Delmar classifies all its investment securities as available for sale. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of shareholder’s equity (accumulated other comprehensive income), net of deferred taxes. At September 30, 2019, available for sale investment securities totaled $55.9 million, an increase of $4.6 million over the December 31, 2018 balance of $51.3 million. Delmar attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as Delmar focuses on growing its loan portfolio. Delmar primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations. At September 30, 2019 and December 31, 2018 there were no issuers, other than the U.S. Government and its agencies, whose securities owned by Delmar had a book or fair value exceeding 10% of Delmar’s shareholders’ equity.

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The following table summarizes the amortized cost and fair value of securities available for sale for the dates indicated:

Amortized Cost and Fair Value of Investment Securities

(Dollars in Thousands)

As of September 30, 2019 and December 31, 2018


	September 30, 2019
					Gross		Gross
	Amortized		Percentage		Unrealized		Unrealized		Fair
	Cost		of Total		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	8,184	14.9	%	$	187	$	8	$	8,363
Obligations of States and political subdivisions		24,636	44.8	%		725		29		25,332
Mortgage-backed securities		20,665	37.6	%		120		78		20,707
Equity securities		1,500	2.7	%		—		48		1,452
	$	54,985	100.0	%	$	1,032	$	163	$	55,854


	December 31, 2018
					Gross		Gross
	Amortized		Percentage		Unrealized		Unrealized		Fair
	Cost		of Total		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	9,469	18.1	%	$	47	$	96	$	9,420
Obligations of States and political subdivisions		21,383	40.9	%		139		426		21,096
Mortgage-backed securities		19,942	38.1	%		15		553		19,404
Equity securities		1,500	2.9	%		—		120		1,380
	$	52,294	100.0	%	$	201	$	1,195	$	51,300

In addition, Delmar holds stock in various correspondent banks. The balance of these securities was $4.5 million at September 30, 2019 and $4.3 million at December 31, 2018, an increase of $143,000 for the nine months ended September 30, 2019.

Deposits

Deposits. Average total deposits increased $42.8 million, or 7.2%, over the nine month period ending September 30, 2019. Total deposits at September 30, 2019 were $660.4 million, an increase of $45.5 million or 7.4% over December 31, 2018 balances. At September 30, 2019, noninterest bearing deposits balances were $203.0 million, an increase of $17.5 million, or 9.4% from the end of 2018.

The following table sets forth the deposits of Delmar by category for the period indicated:

Deposits by Category

As of September 30, 2019 and December 31, 2018

(Dollars in Thousands)


	September 30,		Percentage		December 31,		Percentage
	2019		of Deposits		2018		of Deposits
Noninterest bearing deposits	$	202,983	30.74	%	$	185,476	30.16	%
Interest bearing deposits:
Money market, NOW, and savings accounts		180,860	27.39	%		178,430	29.02	%
Certificates of deposit, $100,000 or more		127,998	19.38	%		115,030	18.71	%
Other certificates of deposit		148,560	22.50	%		135,990	22.11	%
Total interest bearing deposits		457,418	69.26	%		429,450	69.84	%
Total	$	660,401	100.00	%	$	614,926	100.00	%

Delmar’s loan-to-deposit ratio decreased over the nine months ended September 30, 2019 to 96.1% from 103.0% at December 31, 2018. Core deposits, which exclude time deposits of $250,000 or more, provide a relatively

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stable funding source for Delmar’s loan portfolio and other earning assets. Delmar’s core deposits increased to $575.4 million at September 30, 2019. Management anticipates that a stable base of deposits will be Delmar’s primary source of funding to meet both its short-term and long-term liquidity needs in the future. Delmar held $37.7 million in brokered deposits at September 30, 2019, compared to $41.0 at December 31, 2018.

The following table provides a summary of Delmar’s maturity distribution for certificates of deposit at the dates indicated:

Maturities of Certificates of Deposit

(Dollars in Thousands)


	September 30,
	2019
Three months or less	$	36,737
Over three months through six months		35,441
Over six months through twelve months		98,451
Over twelve months		105,929
Total	$	276,558

The following table provides a summary of Delmar’s maturity distribution for certificates of deposit of greater than $100,000 or more at the dates indicated:

Maturities of Certificates of Deposit Greater than $100,000

(Dollars in Thousands)


	September 30,
	2019
Three months or less	$	20,598
Over three months through six months		12,002
Over six months through twelve months		51,907
Over twelve months		43,491
Total	$	127,998

Borrowed Funds

Borrowed funds consist of advances from the Federal Home Loan Bank (‘‘FHLB’’) at September 30, 2019 and December 31, 2018. At September 30, 2019 long-term advances from the FHLB totaled $49.0 million compared to $43.5 million at December 31, 2018. At December 31, 2018, Delmar had short-term advances from the FHLB $7.0 million. At September 30, 2019 there were no outstanding short-term balances with the FHLB. Delmar is required to hold a certain level of FHLB stock in relation to outstanding advance balances.

The following table provides a summary of average outstanding short term borrowings and weighted average rate for each period:

Average Short Term Borrowings

At September 30, 2019 and December 31, 2018

(Dollars in Thousands)


September 30,			December 31,
2019			2018
	Weighted			Weighted
Average	Average		Average	Average
Balance	Rate		Balance	Rate
3,249	2.65	%	1,389	1.76	%

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Delmar also has two subordinated notes, having an aggregate principal amount of $6.5 million. For additional information on these subordinated notes, please refer to Note 4 of the unaudited consolidated financial statements for the period ended September 30, 2019.

Capital

September 30, 2019 stockholder’s equity was $71.6 million, an increase of $5.6 million, or 8.4% from the end of the prior year. This increase during the first nine months of 2019 was due to retained income earned during the period, net of dividends paid during the period, in addition to a decrease of $1.4 million in the accumulated other comprehensive loss, net of deferred tax benefits, on securities available for sale. At September 30, 2019, Delmar had an accumulated other comprehensive gain, net of deferred taxes, of $638,000, compared to an accumulated other comprehensive loss, net of deferred tax benefits, of $731,000 at December 31, 2018.

The Federal Reserve and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The following table presents actual and required capital ratios as of September 30, 2019 and December 31, 2018 for Delmarva and Delmar under Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2019 and December 31, 2018 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A more in depth discussion of regulatory capital requirements is included in Note 9 of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Capital Components

At September 30, 2019 and December 31, 2018

(Dollars in Thousands)


									To Be Well
									Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
	Actual				Purposes				Provisions
In Thousands	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019
Total Capital Ratio
Delmar Bancorp	$	78,392	12.6	%	$	65,525	10.5	%	$	—	N/A
The Bank of Delmarva		77,192	12.4	%		65,469	10.5	%		62,351	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		53,044	8.5	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		52,999	8.5	%		49,881	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		43,683	7.0	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		43,646	7.0	%		40,528	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		64,573	8.3	%		31,052	4.0	%		—	N/A
The Bank of Delmarva		69,873	9.0	%		31,052	4.0	%		38,814	5.0	%

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									To Be Well
									Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
	Actual				Purposes				Provisions
In Thousands	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2018
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	72,344	11.8	%	$	60,466	9.9	%	$	—	N/A
The Bank of Delmarva		71,498	11.7	%		60,425	9.9	%		61,190	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		58,516	9.6	%		48,220	7.9	%		—	N/A
The Bank of Delmarva		64,170	10.5	%		48,187	7.9	%		48,952	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		58,516	9.6	%		39,035	6.4	%		—	N/A
The Bank of Delmarva		64,170	10.5	%		39,009	6.4	%		39,774	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		58,516	8.0	%		29,377	4.0	%		—	N/A
The Bank of Delmarva		64,170	8.7	%		29,377	4.0	%		36,721	5.0	%

Liquidity Management

Liquidity management involves monitoring Delmar’s sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in Delmar’s market area. Delmar’s Federal Funds Sold position averaged $5.6 million during the period ended September 30, 2019 and totaled $15.5 million at September 30, 2019, as compared to an average of $6.0 million during the year ended December 31, 2018 and a year-end position of $1.3 million at December 31, 2018. Delmar has available advances from the FHLB. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At September 30, 2019, advances available totaled approximately $192.4 million of which $49.0 million had been drawn, or used for letters of credit. At December 31, 2018, advances available totaled approximately $184.5 million of which $50.5 million had been drawn, or used for letters of credit. Management regularly reviews the liquidity position of Delmar and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources.

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as Delmar are primarily monetary in nature. Therefore, interest rates have a more significant effect on Delmar’s performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

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Off-Balance Sheet Arrangements

With the exception of Delmar’s obligations in connection with its irrevocable letters of credit and loan commitments, Delmar has no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.

Quantitative and Qualitative Disclosures about Market Risk

As a financial institution, Delmar is exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the re-pricings and maturities of interest-earning assets and interest-bearing liabilities, changes in the expected maturities of assets and liabilities arising from embedded options, such as a borrowers’ ability to prepay loans and depositors’ ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR. Delmar’s goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that Delmar maintains. Delmar manages interest rate risk through and asset and liability committee, or ALCO. ALCO is responsible for managing Delmar’s interest rate risk in conjunction with liquidity and capital management.

Delmar engages an independent consulting firm to model its interest rate sensitivity. Delmar uses a net interest income simulation model as its primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of the assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how Delmar expects rates to change on non-maturity of deposits such as interest checking, money market checking, savings accounts as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of 100 to 400 basis points is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of Delmar’s interest rate risk position over a historical time frame for comparison purposes.

At September 30, 2019 Delmar’s asset/liability position was asset sensitive based on its interest rate sensitivity model. Delmar’s net interest income would increase by 6.3% in an up 100 basis point scenario and would increase by 25.0% in an up 400 basis point scenario over a one-year timeframe as of September 30, 2019. Delmar’s net interest income would decrease by 8.9% in down 100 basis point scenario and would decrease by 25.4% in a down 400 basis point scenario over a one-year timeframe as of September 30, 2019. In the two-year horizon, Delmar’s net interest income would increase by 7.3% in an up 100 basis point scenario and would decrease by 11.3% in a down 100 basis point scenario, and would increase by 29.0% in an up 400 basis point scenario at September 30, 2019 and decrease by 33.9% in a down 400 basis point scenario. At September 30, 2019 all interest rate risk stress test measures related to net interest income were within Delmar’s board policy established limits in each of the rate scenarios.

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Additional information on Delmar’s interest rate risk sensitivity for a static balance sheet over a one-year time horizon as of September 30, 2019 can be found below.


Interest Rate Risk in Earning (Net Interest Income)
September 30, 2019
Change in interest rates (basis	Percentage change in net
points)	interest income
+400	24.97	%
+300	18.76	%
+200	12.57	%
+100	6.32	%
−100	(8.90)	%
−200	(18.46)	%
−300	(23.05)	%
−400	(25.41)	%

Economic value of equity, or EVE, measures the period end market value of assets less the market value of liabilities and the change in this value as rates change. It models simultaneous parallel shifts in the market interest rates, implied by the forward yield curve. The EVE model calculates the market value of capital by taking the present value of all asset cash flows less the present value of all liability cash flows.

The interest rate risk to capital at September 30, 2019 is shown below and reflects that Delmar’s market value of capital is in an asset sensitive position in which an increase in short-term interest rates is expected to generate higher market values of capital.


Interest Rate Risk to Capital
September 30, 2019
Change in interest rates (basis	Percentage change in
points)	market value
+400	31.87	%
+300	24.91	%
+200	17.50	%
+100	9.23	%
−100	(11.88)	%
−200	(21.85)	%
−300	(12.27)	%
−400	(1.47)	%

Accounting Standards Update

See Recent Accounting Pronouncements—Note 15 of the unaudited consolidated financial statements for the nine months ended September 30, 2019 for details on recently issued accounting pronouncements and their expected impact on the financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary market risk is interest rate fluctuation and management has procedures in place to evaluate and mitigate this risk. This risk and these procedures are discussed in Part 1, Item 2, of this report under the caption “Quantitative and Qualitative Disclosures about Market Risk”.

ITEM 4. CONTROLS AND PROCEDURES.

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 15d-15 under the

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Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting as defined in the Exchange Act Rule 15d-15(f) that occurred during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time Delmar and Delmarva are a party to various litigation matters incidental to the conduct of their respective businesses. Delmar and Delmarva are not presently party to any legal proceedings the resolution of which Delmar and Delmarva believes would have a material adverse effect on their respective businesses, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

ITEM 1A. RISK FACTORS.

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBIT


2.1	Agreement and Plan of Share Exchange, dated as of December 31, 2018, between Delmar Bancorp and Virigina Partners Bank (1)
3.1	Articles of Incorporation of Delmar Bancorp, with amendments thereto (2)
3.2	Bylaws of Delmar Bancorp
4.1	Specimen Certificate for Common Stock (3)
10.1	Employment Agreement dated as of December 13, 2015 between John W. Breda and The Bank of Delmarva (4)
10.2	Noncompete Agreement dated as of January 27, 2017 between the Bank of Delmarva and Edward M. Thomas (5)
10.3	Delmar Bancorp 2014 Stock Plan (6)
10.4	Delmar Bancorp 2004 Stock Plan (7)
10.5	Liberty Bell Bank 2004 Incentive Stock Option Plan (8)
10.6	Liberty Bell Bank Non-Qualified Stock Option Plan (9)
10.7	Employment Agreement dated March 24, 2019 between Elizabeth Eicher and The Bank of Delmarva (10)
21	Subsidiaries of the Registrant (11)
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer
32.1	Section 1350 Statement of Principal Executive Officer
32.2	Section 1350 Statement of Principal Financial Officer

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

(1)

Incorporated by reference to Exhibit 2.1 to Delmar’s Registration Statement on S-4 (Registration No. 333-230599) filed on March 29, 2019.

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(2)

Incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 1 to Delmar’s Registration Statement on Form S-4 filed on May 10, 2019.

(3)

Incorporated by reference to Exhibit 3 to Delmar’s Form 1-A filed on November 22, 2017.

(4)

Incorporated by reference to Exhibit 6.1 to Delmar’s Form 1-A filed on November 22, 2017.

(5)

Incorporated by reference to Exhibit 6.2 to Delmar’s Form 1-A filed on November 22, 2017.

(6)

Incorporated by reference to Exhibit 6.3 to Delmar’s Form 1-A filed on November 22, 2017.

(7)

Incorporated by reference to Exhibit 6.4 to Delmar’s Form 1-A filed on November 22, 2017.

(8)

Incorporated by reference to Exhibit 10.9 to Pre-Effective Amendment No. 1 to Delmar’s Registration Statement on Form S-4 filed on May 10, 2019.

(9)

Incorporated by reference to Exhibit 10.10 to Pre-Effective Amendment No. 1 to Delmar’s Registration Statement on Form S-4 filed on May 10, 2019.

(10)

Incorporated by reference to Exhibit 10.11 to Delmar’s Registration Statement on S-4 (Registration No. 333-230599) filed on March 29, 2019.

(11)

Incorporated by reference to Exhibit 21 to Delmar’s Registration Statement on S-4 (Registration No. 333-230599) filed on March 29, 2019.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Delmar Bancorp (Registrant)

Date: November 7, 2019	By: /s/ John W. Breda John W. Breda President and Chief Executive Officer (Principal Executive Officer)


Date: November 7, 2019	By: /s/ Elizabeth Eicher Holland Elizabeth Eicher Holland Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Exhibit 3.2

DELMAR BANCORP

BYLAWS

(As amended and restated as of October 15, 2019)

ARTICLE I

STOCKHOLDERS

Annual Meeting. The Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, at such date and time as the Board of Directors of the Corporation may determine by resolution. Except as the Charter or applicable law provides otherwise, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation’s existence or affect any otherwise valid corporate acts.

Special Meeting.

At any time in the interval between annual meetings, a special meeting of the stockholders may be called by the Chairman of the Board, the Chief Executive Officer or the President or by a majority of the Board of Directors then in office by vote at a meeting or in writing (addressed to the Secretary of the Corporation) with or without a meeting.

A special meeting of the stockholders may be called upon the submission to the Secretary of the Corporation of a written request therefore by stockholders entitled to cast at least 25% of all the votes entitled to be cast at the meeting. The request for the meeting shall state the purpose of and the matters proposed to be acted upon at such meeting. The Secretary shall inform the stockholders making the request of the reasonably estimated costs of preparing and mailing a notice for such meeting and, upon payment of such costs to the Corporation, notify each stockholder entitled to notice of such meeting in accordance with Section ‎0. Unless requested by stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding 12 months.

No business shall be transacted at a special meeting of the stockholders except as designated by the Secretary in the notice thereof.

Place of Meetings and Order of Business.

Meetings of stockholders shall be held at such place in the United States as is set from time to time by the Board of Directors. The Chairman of the Board or, in the Chairman of the Board’s absence, the Chief Executive Officer, shall preside over all meetings of the stockholder as chairman of the meeting. In the absence of the Chairman of the Board and the Chief Executive Officer a majority of the shares entitled to vote at a meeting may appoint any person entitled to vote at the meeting to act as chairman of the meeting.

Each meeting of stockholders shall be conducted in accordance with rules and procedures established by the Board of Directors. Notwithstanding, the chairman of the meeting shall have the authority to make such rules and regulations, to establish such procedures and to take such steps as he or she may deem necessary or desirable for the proper conduct of each meeting of the stockholders, including, without limitation, the authority to make the agenda and to establish procedures for dismissing of business not properly presented, maintaining order and safety, placing limitations on the time allotted to questions or comments on the affairs of the Corporation, placing restrictions on attendance at a meeting by persons or classes of persons who are not stockholders or their proxies, restricting entry to a meeting after the time prescribed for the commencement thereof, and commencing, conducting and closing voting on any matter.

Notice of Meetings; Waiver of Notice. Not less than ten nor more than 90 days before each stockholders’ meeting, the Secretary shall give written notice of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled to notice of the meeting. The notice shall state the time, day, and place of the meeting and, if the meeting is a special meeting or notice of the purpose is required by applicable law, the purpose of the meeting. Notice is given to a stockholder when it is (i) personally delivered to him, (ii) left at his or her residence or usual place of business, (iii) mailed to him or her at his or her address as it appears on the records of the Corporation, or (iv) transmitted to him or her by an electronic transmission to any address or number of the stockholder at which the stockholder receives electronic transmissions unless the Corporation has received a request from the stockholder that notice not be sent by electronic transmission. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage prepaid thereon. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he or she before or after the meeting signs a waiver of the notice which is filed with the records of stockholders’ meetings, or is present at the meeting in person or by proxy.

Quorum; Voting. Unless applicable law or the Charter provides otherwise, at a meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director. In the absence of a quorum, the stockholders present in person or by proxy, by majority vote and without notice other than by announcement, may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. In the event that at any meeting a quorum exists for the transaction of some business but does not exist for the transaction of other business, the business as to which a quorum is present may be transacted by the holders of stock present in person or by proxy who are entitled to vote thereon.

Adjournments. Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time by (i) the chairman of the meeting or (ii) the stockholders present in person or by proxy by a majority vote. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. No further notice of an adjourned meeting other than by announcement shall be necessary if held on a date not more than 120 days after the original record date.

General Right to Vote; Proxies. Unless applicable law or the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders. In all elections for directors, each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. Each stockholder entitled to vote at any meeting of stockholders of the Corporation may authorize another person or persons to act for him or her as proxy by (i) signing a writing authorizing the other person to act as proxy in the manner permitted by Maryland law or (ii) transmitting, or authorizing the transmission of, an authorization for the person to act as proxy to (a) the person authorized to act as proxy or (b) any other person authorized to receive the proxy authorization on behalf of the person authorized to act as the proxy, including a proxy solicitation or proxy support service organization. The authorization may be transmitted by a telegram, cablegram, datagram, electronic mail, or any other electronic or telephonic means. Further, to the extent permitted by Maryland law, the placing of a stockholder’s name on a proxy pursuant to telephonic or electronically transmitted instructions obtained pursuant to procedures reasonably designed to verify that such instructions have been authorized by such stockholder shall constitute execution of such proxy by or on behalf of such stockholder. No proxy shall be valid after the expiration of eleven months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder authorizing it, except in those cases in which the proxy states that it is irrevocable and where an irrevocable proxy is permitted by law. A proxy purporting to be by or on behalf of the stockholder authorizing it shall be deemed valid unless challenged at or prior to its exercise. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or, in the absence of such direction, as determined by a majority of the Board of Directors then in office.

List of Stockholders. The Secretary, or such officer or agent having charge of the stock transfer books for shares of the Corporation, shall make, at least ten days before each meeting of stockholders, a complete record of the

stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and number of shares held by each. The record, for a period of ten days before such meeting, shall be kept on file at the principal office of the Corporation. The original stock transfer books shall be prima facie evidence as to who the stockholders entitled to examine such record or transfer books or to vote at any meeting of stockholders.

Inspectors of Election.

In advance of any meeting of stockholders, the Board of Directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. The number of inspectors shall be either one or three. If the Board of Directors so appoints either one or three inspectors, that appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the meeting may make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the Board of Directors in advance of the meeting or at the meeting by the chairman of the meeting.

Unless otherwise prescribed by applicable law or the Charter, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result of the election and reporting such results to the chairman of the meeting; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. If there is more than one inspector, the report of a majority shall be the report of the inspectors.

Voting of Shares in the Name of Two or More Persons. When ownership of stock stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, at any meeting of the stockholders of the Corporation any one or more of such stockholders may cast, in person or by proxy, votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or proxy, by the several persons in whose name shares of stock stand, the vote or votes to which these persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting. If the directions of those holding such stock and present in person or by proxy at such meeting are evenly split on any particular matter, each faction may vote the stock in question proportionally.

Voting of Shares by Certain Holders.

Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the Bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed.

A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee and thereafter the pledgee shall be entitled to vote the shares so transferred.

Neither treasury shares of its own stock held by the Corporation, nor shares held by another corporation, if the majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.

Advance Notice of Nominations and Shareholder Business.

Annual Meetings of Shareholders.

Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (i) pursuant to the Corporation’s notice of meeting (or any supplement thereto), (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record of the Corporation who is entitled to vote at the meeting at the time the notice provided for in this Section 1.12 is delivered to the Secretary of the Corporation and who complies with the notice procedures set forth in this Section 1.12.

For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 1.12, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and any such proposed business other than the nominations of persons for election to the Board of Directors must constitute a proper matter for stockholder action. To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or after such anniversary date, notice by such stockholder must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period, or extend any time period, for the giving of a stockholder’s notice as described above. Such stockholder’s notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such person’s written consent to being named as a nominee and to serving as such a director if elected and a description of any amount of cash property or other consideration or payment which such proposed nominee will or may be entitled to receive or have paid on such proposed nominee’s behalf, by any person or entity other than the Corporation or any direct or indirect subsidiary of the Corporation, for service as a member of the Board of Directors of the Corporation, or for standing as a nominee for election as a member of the Board of Directors of the Corporation; (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the complete text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and for the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, (2) the class and number of shares of capital stock of the Corporation that are owned beneficially and of record by such stockholder and such beneficial owner, (3) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (4) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group that intends (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (B) otherwise to solicit proxies from stockholders in support of such proposal or nomination. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation.

Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time the stockholder’s notice

provided for in this Section 1.12 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section 1.12. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder entitled to vote in such election of directors may nominate a person or persons, as the case may be, for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by paragraph (a)(2) of this Section 1.12 is delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such special meeting, and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period, or extend any time period, for giving of a stockholder’s notice as described above.

General.

Only such persons who are nominated in accordance with the procedures set forth in this Section 1.12 shall be eligible at an annual or special meeting of stockholders of the Corporation to be elected to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.12. Except as otherwise provided by law, the chairman of the meeting shall have the power and duty (i) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.12 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder’s nominee or proposal in compliance with such stockholder’s representation as required by clause (a)(2)(iii)(4) of this Section 1.12) and (ii) to declare that such nomination shall be disregarded or that such proposed business shall not be considered or transacted. Notwithstanding the foregoing provisions of this Section 1.12, if the stockholder (or a designated representative of the stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or item of business, such nomination shall be disregarded and such proposed business shall not be considered or transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation.

For purposes of this Section 1.12, “public announcement” shall include disclosure in a press release reported in the Corporation’s market area.

BOARD OF DIRECTORS

Section 1.01. Function of Directors. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the stockholders by statute or by the Charter or Bylaws.

Section 1.02. Number of Directors; Qualification. The Corporation shall have at least three directors; provided that if there is no stock outstanding, the number of directors may be less than three but not less than one, and if there is stock outstanding and so long as there are less than three stockholders, the number of directors may be less than three but not less than the number of stockholders. The Corporation shall have the number of directors provided in the Charter until changed as herein provided. A majority of the entire Board of Directors may alter the number of directors set by the Charter to not exceeding 15 nor less than the minimum number permitted herein, but the action may not affect the tenure of office of any director. A director must retire on December 31 of the calendar year in which he or she reaches age 75. Each director must be the registered owner of at least 100 shares of Common Stock of the Corporation. Notwithstanding the foregoing, any director appointed to the Board of Directors by the holders of the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A or Fixed Rate Cumulative Perpetual Preferred Stock, Series B, initially issued to the United States Department of the Treasury, in accordance with the provisions thereof, shall not have to comply with the provisions of the two immediately preceding sentences.

Section 1.03. Election and Tenure of Directors. The directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1989 Annual Meeting of Stockholders, the term of office of the second class to expire at the 1990 Annual Meeting of Stockholders, and the term of office of the third class to expire at the 1991 Annual Meeting of Stockholders. At each annual meeting of stockholders beginning in 1989, successors to the class of directors whose term expires at that annual meeting shall be elected for a three year term and until their successors are elected and qualified.

Section 1.04. Removal of Director. Unless statute or the Charter provides otherwise, the stockholders may remove any director, only with cause, by the affirmative vote of at least 80% of all the votes entitled to be cast for the election of directors.

Section 1.05. Vacancy on Board. The stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director. A director elected by the stockholders to fill a vacancy which results from the removal of a director serves for the balance of the term of the removed director. A majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors and a majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. A director elected by the Board of Directors to fill a vacancy serves until the next annual meeting of stockholders and until his or her successor is elected and qualifies.

Section 1.06. Regular Meetings. Within two weeks after each meeting of stockholders at which a Board of Directors shall have been elected, the Board of Directors so elected shall meet for the purpose of organization and the transaction of other business. Such first regular meeting shall be held at any place as may be designated by the Chairman of the Board of Directors or the Board of Directors. No notice of such first meeting other than this Section 2.06 shall be necessary. Any other regular meeting of the Board of Directors shall be held on such date and at any place as may be resolved from time to time by the Board of Directors without other notice than such resolution.

Section 1.07. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the Chief Executive Officer or by a majority of the Board of Directors then in office by vote at a meeting, or in writing with or without a meeting. A special meeting of the Board of Directors shall be held at such time and on such date and at any place as may be designated from time to time by the Board of Directors. In the absence of designation, such meeting shall be held at such place as may be designated in the call for such meeting.

Section 1.08. Notice of Meeting. Except as provided in Section ‎1.06 above, the Secretary shall give notice to each director of each regular and special meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him, left at his or her residence or usual place of business, or sent by electronic transmission, at least 24 hours before the time of the meeting or, in the alternative, by mail to his or her address as it shall appear on the records of the Corporation, at least 72 hours before the time of the meeting. Unless the Charter, the Bylaws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any regular or special meeting of the Board of Directors. No notice of any meeting of the Board of Directors need be given to any director who attends, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, regular or special, may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement.

Section 1.09. Action by Directors; Quorum; Action without a Meeting. Unless applicable law or the Charter or Bylaws requires a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is action of the Board of Directors. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present by majority vote and without notice other than by announcement may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if an unanimous written consent

which sets forth the action is signed, either in writing or by electronic transmission, by each member of the Board and filed in paper or electronic form with the minutes of proceedings of the Board.

Section 1.10. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (i) he or she announces his or her dissent at the meeting and (ii) his or her dissent or abstention is entered in the minutes of the meeting, he or she files his or her written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof, or he or she forwards written dissent by certified U.S. mail, return receipt requested, to the Secretary of the Corporation within 24 hours after the adjournment of the meeting. Such right to dissent shall not apply to a director who votes in favor of such action or failed to make such dissent known at the meeting.

Section 1.11. Meeting by Conference Telephone. Members of the Board of Directors may participate in any regular or special meeting by means of a conference telephone or similar electronic communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in any regular or special meeting by these means constitutes presence in person at such a meeting.

Section 1.12. Compensation. By resolution of the Board of Directors, a fixed sum and expenses, if any, for attendance at each regular or special meeting of the Board of Directors or of committees thereof, and other compensation for their services as such or on committees of the Board of Directors, may be paid to directors. Nothing herein shall be construed to preclude any director from serving the Corporation in any other capacity and a director who serves the Corporation in any other capacity may also receive compensation for such other services, pursuant to a resolution of the Board of Directors.

Section 1.13. Advisory Directors. The Board of Directors may by resolution appoint advisory directors to the Board, who may also serve as directors emeriti, and shall have such authority and receive such compensation and reimbursement as the Board of Directors shall provide consistent with Section ‎1.12 above. Advisory directors or director’s emeriti shall not have the authority to participate by vote in the transaction of business.

COMMITTEES

Section 1.01. Committees. The Board of Directors may, by resolution passed by a majority of the Board of Directors then in office, appoint from among its members an Executive Committee and other committees composed of three or more directors and delegate to these committees any of the powers of the Board of Directors, except the power to declare dividends or other distributions on stock, elect directors, issue stock other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend the Bylaws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock, a committee of the Board, in accordance with a general formula or method specified by the Board by resolution or by adoption of a stock option or other plan or program, may fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors.

Committee Procedure.

Each committee may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the committee and filed in paper or electronic form with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section ‎1.11 above.

The Board of Directors shall have power, by the vote of a majority of the Board of Directors then in office, at any time to change the members of, to fill vacancies in, and to discharge any committee of the Board. Any member of any such committee may resign at any time by giving notice to the Corporation; provided, however, that notice to the Board, the Chairman of the Board, the Chief Executive Officer, the chairman of such committee, or the Secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause, by the vote of a majority of the Board of Directors than in office at any meeting of the Board called for that purpose.

Emergency. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation by its directors and officers as contemplated by the Charter and the Bylaws, any two or more available members of the then incumbent Executive Committee shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Corporation in accordance with the provisions of Section ‎1.01 above. In the event of the unavailability, at such time, of a minimum of two members of the then incumbent Executive Committee, the available directors shall elect an Executive Committee consisting of any two members of the Board of Directors, whether or not they be officers of the Corporation, which two members shall constitute the Executive Committee for the full conduct and management of the affairs of the Corporation in accordance with the foregoing provisions of this Section. This Section shall be subject to implementation by resolution of the Board of Directors passed from time to time for that purpose, and any provisions of the Bylaws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Executive Committee acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs and business under all the other provisions of the Bylaws.

OFFICERS

Section 1.01. Executive and Other Officers. The Corporation shall have a President, a Secretary, and a Treasurer who shall be the executive officers of the Corporation. It may also have a Chairman of the Board, who shall be an executive officer if he or she is also designated as the Chief Executive Officer of the Corporation. The Board of Directors may also designate a Chief Executive Officer, having general supervision of the business and affairs of the Corporation, and a Chief Operating Officer, having supervision of the operations of the Corporation. In the absence of such designation, the President shall serve as chief executive officer and chief operating officer. It may also have one or more Vice Presidents, assistant officers, and subordinate officers as may be established by the Board of Directors. A person may hold more than one office in the Corporation but may not serve concurrently as both President and Vice President of the Corporation. The Chairman of the Board shall be a director; the other officers may be directors.

Powers and Duties. Consistent with the following, the officers of the Corporation shall exercise such powers and perform such duties as are usually incident to their respective offices or as may be, from time to time, determined by the Board of Directors or, in the case of officers other than the Chief Executive Officer, by the Chief Executive Officer.

Chairman of the Board. The Chairman of the Board, if one be elected, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present; and, in general, he or she shall perform all such duties as are from time to time assigned to him or her by the Board of Directors.

Chief Executive Officer. The Chief Executive Officer shall be responsible for the execution of the policies of the Board of Directors and shall have supervision over the business of the Corporation and its several officers, subject to the authority of the Board of Directors. The Chief Executive Officer may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases where the signing and the execution thereof shall have been expressly delegated by the Board of Directors to some other officer or agent of the Corporation or shall be required by law otherwise to be signed or executed; he or she

shall perform all duties incident to the office of the Chief Executive Officer and such other duties as from time to time may be assigned to him or her by the Board of Directors. The Chief Executive Officer, in the absence of the Chairman of the Board, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present;

President. The President may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated to some other officer or agent of the Corporation; and, in general, he or she shall perform all duties usually performed by a president of a corporation and such other duties as are from time to time assigned to him or her by the Board of Directors or the Chief Executive Officer of the Corporation.

Vice Presidents. The Vice President or Vice Presidents, at the request of the Chief Executive Officer or the President, or in the President’s absence or during his or her inability to act, shall perform the duties and exercise the functions of the President, and when so acting shall have the powers of the President. If there be more than one Vice President, the Board of Directors may determine which one or more of the Vice Presidents shall perform any of such duties or exercise any of such functions, or if such determination is not made by the Board of Directors, the Chief Executive Officer, or the President may make such determination; otherwise any of the Vice Presidents may perform any of such duties or exercise any of such functions. The Vice President or Vice Presidents shall have such other powers and perform such other duties, and have such additional descriptive designations in their titles (if any), as are from time to time assigned to them by the Board of Directors, the Chief Executive Officer, or the President.

Secretary. The Secretary shall keep the minutes of the meetings of the stockholders, of the Board of Directors and of any committees, in books provided for the purpose; he or she shall see that all notices are duly given in accordance with the provisions of the Bylaws or as required by law; he or she shall be custodian of the records of the Corporation; he or she may witness any document on behalf of the Corporation, the execution of which is duly authorized, see that the corporate seal is affixed where such document is required or desired to be under its seal, and, when so affixed, may attest the same; and, in general, he or she shall perform all duties incident to the office of a secretary of a corporation, and such other duties as are from time to time assigned to him or her by the Board of Directors, the Chief Executive Officer, or the President.

Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he or she shall render to the Chief Executive Officer and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation; and, in general, he or she shall perform all the duties incident to the office of a treasurer of a corporation, and such other duties as are from time to time assigned to him or her by the Board of Directors, the Chief Executive Officer, or the President.

Assistant and Subordinate Officers. The assistant and subordinate officers of the Corporation are all officers below the office of Vice President, Secretary, or Treasurer. The assistant or subordinate officers shall have such duties as are from time to time assigned to them by the Board of Directors, the Chief Executive Officer, or the President.

Election, Tenure and Removal of Officers. The Board of Directors shall elect the officers. The Board of Directors may from time to time authorize any committee or officer to appoint assistant and subordinate officers. All officers shall be appointed to hold their offices, respectively, during the pleasure of the Board. If the Board of Directors in its judgment finds that the best interests of the Corporation will be served, the Board (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may remove any officer at any time, with or without cause. The removal of an officer does not prejudice any of his or her contract rights. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may fill a vacancy which occurs in any office for the unexpired portion of the term. Any officer may resign at any time by giving written notice to the Chairman of the Board, the Chief Executive Officer, the President, or the Secretary. Any such resignation shall take effect at the time specified therein or, if no time is specified therein, at the time of delivery thereof, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Compensation. The Board of Directors shall have power to fix the salaries and other compensation and remuneration, of whatever kind, of all officers of the Corporation. It may authorize any committee or officer, upon whom the power of appointing assistant and subordinate officers may have been conferred, to fix the salaries, compensation and remuneration of such assistant and subordinate officers. No officer shall be prevented from receiving such salary, compensation and remuneration by reason of the fact that he or she is also a director of the Corporation.

STOCK

Section 1.01. Certificates for Stock.

(a) The shares of the Corporation may be certificated or uncertificated as provided under applicable law, and shall be entered in the books of the Corporation and registered as they are issued.

(b) When shares are represented by certificates, each stock certificate shall include on its face the name of the Corporation, the name of the stockholder or other person to whom it is issued, the class of stock and number of shares it represents, and any other information required therein under applicable law. It shall be in such form, not inconsistent with applicable law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the Chief Executive Officer, the President, or a Vice President, and countersigned by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued.

(c) Within a reasonable time following a request from a stockholder holding shares that are not represented by certificates, the Corporation shall send, or cause to be sent, without charge, to the requesting stockholder a written notice that shall set forth the name of the Corporation, the name of the stockholder or other person to the shares have been issued, the class of stock and number of shares it represents, and any other information required therein under applicable law.

Transfers; Restrictions on Transferability.

The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of shares of stock; and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined.

Each certificate representing stock which is restricted as to its transferability or voting powers, which is preferred or limited as to its dividends or as to its share of the assets upon liquidation or which is redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. In lieu of such statement of summary, the Corporation may set forth upon the face or back of the certificate a statement that the Corporation will furnish to any stockholder, upon request and without charge, a full statement of such information. With respect to shares of stock that are not represented by certificates, the Corporation shall provide such information in accordance with Section 5.01(c) above.

Record Date and Closing of Transfer Books. The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be more than 90 days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date or the closing of the transfer books shall be at least ten days before the date of the meeting.

Stock Ledger. The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the principal office in the State of Maryland or the principal executive offices of the Corporation.

Certification of Beneficial Owners. The Board of Directors may adopt by resolution a procedure by which a stockholder of the Corporation may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may certify; the purpose for which the certification may be made; the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board considers necessary or desirable. On receipt of a certification which complies with the procedure adopted by the Board in accordance with this Section, the person specified in the certification is, for the purpose set forth in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification.

Lost Stock Certificates. The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen, or destroyed, or the Board of Directors may delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate save upon the order of some court having jurisdiction in the premises. The Board of Directors or such officer or officers may require the owner of the certificate to give bond, with sufficient surety, to indemnify the Corporation against any loss or claim arising as a result of the issuance of a new certificate. In no event shall the issuance of a new certificate under this Section constitute an overissue of the shares it represents.

FINANCE

Section 1.01. Checks, Drafts, Etc. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall, unless otherwise provided by resolution of the Board of Directors, be signed by the Chief Executive Officer, the President, a Vice President, an Assistant Vice President, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary.

Section 1.01. Loans and Other Indebtedness. No indebtedness shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name except as expressly authorized by the Board of Directors. Such authority may be general or confined to specific instances pursuant to a resolution of the Board of Directors.

Annual Statement of Affairs. The Chief Executive Officer shall prepare annually a full and correct statement of the affairs of the Corporation, to include a balance sheet and a financial statement of operations for the preceding fiscal year. The statement of affairs shall be submitted at the annual meeting of the stockholders and, within 20 days after the meeting, placed on file at the Corporation’s principal office.

Fiscal Year. The fiscal year of the Corporation shall be the twelve calendar month period ending December 31 in each year, unless otherwise provided by the Board of Directors.

Dividends. If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or in shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Charter.

MISCELLANEOUS PROVISIONS

Section 1.01. Books and Records. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its stockholders and Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of the Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of the Bylaws shall be kept at the principal office of the Corporation.

Corporate Seal. The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word “Seal” adjacent to the signature of the person authorized to sign the document on behalf of the Corporation.

Bonds. The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his or her duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors.

Voting Upon Shares in Other Corporations. Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the Chief Executive Officer, the President, a Vice President, or a proxy appointed by any of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution.

Mail. Any notice or other document which is required by these Bylaws to be mailed shall be deposited in the United States mails, postage prepaid.

Execution of Documents. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer.

Amendments. Subject to the special provisions of Section ‎1.02 and except as provided in the next sentence, any and all provisions of these Bylaws may be altered or repealed and new Bylaws may be adopted at any annual meeting of the stockholders, or at any special meeting called for that purpose, and the Board of Directors shall have the power, at any regular or special meeting thereof, to make and adopt new Bylaws, or to amend, alter or repeal any of the Bylaws of the Corporation. Notwithstanding anything in the Charter or these Bylaws to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all classes of shares entitled to vote in the election of directors shall be required to amend, repeal, or to adopt any provision inconsistent with Sections ‎1.01 through ‎1.05 of the Bylaws.

Exclusive Forum. Unless the Corporation expressly consents in writing to the selection of an alternative forum, the United States District Court for the District of Maryland, Northern Division, or in the event that court lacks jurisdiction to hear such action, the Circuit Court of the County of Wicomico, Maryland, shall be the sole and exclusive forum for any derivative action or proceeding brought on behalf of the Corporation, any action asserting a claim of breach of a legal duty owed by any current or former director, officer or other employee or agent of the Corporation to the Corporation or the Corporation’s stockholders, any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation arising pursuant to any provision of the Code of Maryland or the Articles of Incorporation or these Bylaws (as either may be amended from time to time), or any action asserting a claim against the Corporation or any current or former director or officer or other employee or agent of the Corporation governed by the internal affairs doctrine.

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. Breda, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Delmar Bancorp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Intentionally Omitted.

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2019/s/ John W. Breda
President and Chief Executive Officer of the Company

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Elizabeth Eicher Holland, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Delmar Bancorp.;

(b) Intentionally Omitted.

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2019/s/ Elizabeth Eicher Holland, CPA
Senior Vice-President and Chief Financial Officer of the Company

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Delmar Bancorp (the “Company”) on Form 10‑Q for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John W. Breda, President and Chief Executive Officer of Delmar Bancorp, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ John W. Breda Date: November 7, 2019

President and Chief Executive Officer of the Company

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Delmar Bancorp (the “Company”) on Form 10‑Q for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Elizabeth Eicher Holland, CPA, Senior Vice-President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Elizabeth Eicher Holland, CPA Date: November 7, 2019

Senior Vice President and Chief Financial Officer of the Company