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EX-32 - EX-32 - SEVERN BANCORP INCsvbi-20180331xex32.htm
EX-31.2 - EX-31.2 - SEVERN BANCORP INCsvbi-20180331ex312d61e9b.htm
EX-31.1 - EX-31.1 - SEVERN BANCORP INCsvbi-20180331ex311c6f86e.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)

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

For the quarterly period ended March 31, 2018

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 0‑49731

SEVERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

52‑1726127

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)

 

 

 

 

200 Westgate Circle, Suite 200
 Annapolis, Maryland

21401

(Address of principal executive offices)

(Zip Code)

 

410‑260‑2000

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition 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 (Do not check if a smaller reporting company)

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $0.01 par value –12,688,626 shares outstanding as of May 14, 2018

 

 

 


 

SEVERN BANCORP, INC. AND SUBSIDIARIES

Table of Contents

 

 

 

 

Page

PART I – FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Consolidated Statements of Financial Condition as of March 31, 2018 (unaudited) and December 31, 2017

1

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (unaudited)

2

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)

3

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2018 and 2017 (unaudited)

4

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)

5

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4. 

Controls and Procedures

46

 

 

 

 

 

 

PART II – OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

46

 

 

 

Item 1A. 

Risk Factors

46

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

Item 3. 

Defaults Upon Senior Securities

47

 

 

 

Item 4. 

Mine Safety Disclosures

47

 

 

 

Item 5. 

Other Information

47

 

 

 

Item 6. 

Exhibits

47

 

 

 

EXHIBIT INDEX 

48

 

 

SIGNATURES 

49

 

 

i


 

Caution Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10‑Q, as well as other periodic reports filed with the Securities and Exchange Commission (“SEC”), and written or oral communications made from time to time by or on behalf of Severn Bancorp and its subsidiaries (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,”  “plan,” “estimate,” “intend,” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.”  Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth, and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

Forward-looking statements reflect our expectation or prediction of future conditions, events, or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2017 Annual Report on Form 10‑K, Item 1A of Part II of this quarterly report on Form 10‑Q, and the following:

·

general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits, and other financial services that we provide and increases in loan delinquencies and defaults;

·

changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits, and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;

·

our liquidity requirements could be adversely affected by changes in our assets and liabilities;

·

our investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates we use to value certain of the securities in our portfolio;

·

the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance, and other aspects of the financial services industry;

·

competitive factors among financial services companies, including product and pricing pressures, and our ability to attract, develop, and retain qualified banking professionals;

·

the effect of fiscal and governmental policies of the United States (“U.S.”) federal government;

·

the effect of any mergers, acquisitions, or other transactions to which we or our subsidiaries may from time to time be a party;

·

costs and potential disruption or interruption of operations due to cyber-security incidents;

·

the effect of any change in federal government enforcement of federal laws affecting the medical-use cannabis industry;

·

the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and other regulatory agencies; and

·

geopolitical conditions, including acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism, and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad.

Forward-looking statements speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

 

ii


 

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

    

2018

    

2017

ASSETS

 

(unaudited)

 

  

 

Cash and due from banks

 

$

2,291

 

$

2,382

Federal funds sold and interest-bearing deposits in other banks

 

 

16,016

 

 

19,471

Cash and cash equivalents

 

 

18,307

 

 

21,853

Certificates of deposit held for investment

 

 

8,780

 

 

8,780

Securities available for sale, at fair value

 

 

12,011

 

 

10,119

Securities held to maturity (fair value of $49,026 and $54,004 at March 31, 2018 and December 31, 2017, respectively)

 

 

49,911

 

 

54,303

Loans held for sale, at fair value

 

 

5,803

 

 

4,530

Loans receivable

 

 

669,912

 

 

668,151

Allowance for loan losses

 

 

(8,169)

 

 

(8,055)

Loans, net

 

 

661,743

 

 

660,096

Real estate acquired through foreclosure

 

 

237

 

 

403

Restricted stock investments

 

 

4,844

 

 

4,489

Premises and equipment, net

 

 

23,121

 

 

23,139

Accrued interest receivable

 

 

2,454

 

 

2,640

Deferred income taxes

 

 

4,565

 

 

5,302

Bank owned life insurance

 

 

5,104

 

 

5,064

Goodwill

 

 

1,104

 

 

1,099

Other assets

 

 

3,101

 

 

2,970

Total assets

 

$

801,085

 

$

804,787

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest bearing

 

$

73,670

 

$

72,833

Interest-bearing

 

 

516,246

 

 

529,395

Total deposits

 

 

589,916

 

 

602,228

Short-term borrowings

 

 

8,000

 

 

 —

Long-term borrowings

 

 

88,500

 

 

88,500

Subordinated debentures

 

 

20,619

 

 

20,619

Accrued expenses and other liabilities

 

 

1,633

 

 

2,340

Total liabilities

 

 

708,668

 

 

713,687

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

  

 

 

  

Preferred stock, $0.01 par value, 1,000,000 shares authorized:

 

 

  

 

 

  

Preferred stock series ''A,'' 437,500 shares issued and outstanding and $3,500 liquidation preference at both March 31, 2018 and December 31, 2017

 

 

 4

 

 

 4

Common stock, $0.01 par value, 20,000,000 shares authorized; 12,247,626 and 12,233,424 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

122

 

 

122

Additional paid-in capital

 

 

65,060

 

 

65,137

Retained earnings

 

 

27,320

 

 

25,872

Accumulated other comprehensive loss

 

 

(89)

 

 

(35)

Total stockholders' equity

 

 

92,417

 

 

91,100

Total liabilities and stockholders' equity

 

$

801,085

 

$

804,787

 

See accompanying notes to consolidated financial statements

1


 

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

    

Interest income:

 

(unaudited)

Loans

 

$

8,371

 

$

7,131

 

Securities

 

 

320

 

 

269

 

Other earning assets

 

 

186

 

 

157

 

Total interest income

 

 

8,877

 

 

7,557

 

Interest expense:

 

 

  

 

 

  

 

Deposits

 

 

1,133

 

 

975

 

Long-term borrowings and subordinated debentures

 

 

760

 

 

996

 

Total interest expense

 

 

1,893

 

 

1,971

 

Net interest income

 

 

6,984

 

 

5,586

 

Reversal of provision for loan losses

 

 

 —

 

 

(275)

 

Net interest income after reversal of provision for loan losses

 

 

6,984

 

 

5,861

 

Noninterest income:

 

 

  

 

 

  

 

Mortgage-banking revenue

 

 

595

 

 

535

 

Real estate commissions

 

 

385

 

 

380

 

Real estate management fees

 

 

183

 

 

194

 

Credit report and appraisal fees

 

 

76

 

 

70

 

Deposit service charges

 

 

295

 

 

34

 

Title company revenue

 

 

142

 

 

 —

 

Other noninterest income

 

 

193

 

 

145

 

Total noninterest income

 

 

1,869

 

 

1,358

 

Noninterest expense:

 

 

  

 

 

  

 

Compensation and related expenses

 

 

4,278

 

 

3,757

 

Occupancy

 

 

344

 

 

336

 

Legal fees

 

 

11

 

 

28

 

Write-downs, losses, and costs of real estate acquired through foreclosure, net

 

 

32

 

 

33

 

Federal Deposit Insurance Corporation insurance premiums

 

 

55

 

 

(2)

 

Professional fees

 

 

109

 

 

135

 

Advertising

 

 

233

 

 

206

 

Data processing

 

 

264

 

 

196

 

Credit report and appraisal fees

 

 

70

 

 

103

 

Licensing and software

 

 

121

 

 

75

 

Mortgage leads purchased

 

 

 —

 

 

95

 

Other noninterest expense

 

 

706

 

 

713

 

Total noninterest expense

 

 

6,223

 

 

5,675

 

Net income before income tax provision

 

 

2,630

 

 

1,544

 

Income tax provision

 

 

745

 

 

619

 

Net income

 

 

1,885

 

 

925

 

Dividends on preferred stock

 

 

(70)

 

 

(70)

 

Net income available to common stockholders

 

$

1,815

 

$

855

 

Net income per common share - basic

 

$

0.15

 

$

0.07

 

Net income per common share - diluted

 

$

0.15

 

$

0.07

 

 

See accompanying notes to consolidated financial statements

2


 

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

    

 

    

2018

    

2017

    

 

 

(unaudited)

Net income

 

$

1,885

 

$

925

 

Other comprehensive loss items:

 

 

  

 

 

  

 

Unrealized holding losses on available-for-sale securities arising during the period (net of tax benefit of $19 and $9 in 2018 and 2017)

 

 

(54)

 

 

(15)

 

Total other comprehensive loss

 

 

(54)

 

 

(15)

 

Total comprehensive income

 

$

1,831

 

$

910

 

 

See accompanying notes to consolidated financial statements

 

 

 

3


 

Severn Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

    

Number of

    

Number of

    

 

    

 

    

 

    

 

    

Accumulated

    

 

 

 

Shares of

 

Shares of

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

Preferred

 

Common

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders'

 

 

Stock

 

Stock

 

Stock

 

Stock

 

Capital

 

 Earnings 

 

Loss

 

Equity

 

 

(unaudited)

Balance at January 1, 2018

 

437,500

 

12,233,424

 

$

 4

 

$

122

 

$

65,137

 

$

25,872

 

$

(35)

 

$

91,100

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,885

 

 

 —

 

 

1,885

Stock-based compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

56

 

 

 —

 

 

 —

 

 

56

Dividend declared on Series A preferred stock

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(70)

 

 

 —

 

 

(70)

Dividends paid on common stock at $0.03 per share

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(367)

 

 

 —

 

 

(367)

Exercise of stock options

 

 —

 

14,202

 

 

 —

 

 

 —

 

 

56

 

 

 —

 

 

 —

 

 

56

Other

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(189)

 

 

 —

 

 

 —

 

 

(189)

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(54)

 

 

(54)

Balance at March 31, 2018

 

437,500

 

12,247,626

 

$

 4

 

$

122

 

$

65,060

 

$

27,320

 

$

(89)

 

$

92,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

    

Number of

    

Number of

    

 

    

 

    

 

    

 

    

Accumulated

    

 

 

 

Shares of

 

Shares of

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

Preferred

 

Common

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders'

 

 

Stock

 

Stock

 

Stock

 

Stock

 

Capital

 

 Earnings 

 

Loss

 

Equity

 

 

(unaudited)

Balance at January 1, 2017

 

437,500

 

12,123,179

 

$

 4

 

$

121

 

$

64,471

 

$

23,334

 

$

 —

 

$

87,930

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

925

 

 

 —

 

 

925

Stock-based compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

53

 

 

 —

 

 

 —

 

 

53

Dividend declared on Series A preferred stock

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(70)

 

 

 —

 

 

(70)

Exercise of stock options

 

 —

 

5,025

 

 

 —

 

 

 —

 

 

17

 

 

 —

 

 

 —

 

 

17

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15)

 

 

(15)

Balance at March 31, 2017

 

437,500

 

12,128,204

 

$

 4

 

$

121

 

$

64,541

 

$

24,189

 

$

(15)

 

$

88,840

 

See accompanying notes to consolidated financial statements

 

 

 

4


 

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2018

    

2017

Cash flows from operating activities:

 

(unaudited)

Net income

 

$

1,885

 

$

925

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

  

Depreciation and amortization

 

 

307

 

 

298

Amortization of deferred loan fees

 

 

(409)

 

 

(264)

Net amortization of premiums and discounts

 

 

57

 

 

(76)

Reversal of provision for loan losses

 

 

 —

 

 

(275)

Write-downs and losses on real estate acquired through foreclosure, net of gains

 

 

44

 

 

40

Gain on sale of mortgage loans

 

 

(595)

 

 

(535)

Proceeds from sale of mortgage loans held for sale

 

 

15,195

 

 

10,757

Originations of loans held for sale

 

 

(15,873)

 

 

(2,670)

Stock-based compensation

 

 

56

 

 

53

Increase in cash surrender value of bank-owned life insurance

 

 

(40)

 

 

 —

Deferred income taxes

 

 

757

 

 

619

Decrease (increase)  in accrued interest receivable

 

 

186

 

 

(13)

(Increase) decrease in other assets

 

 

(328)

 

 

447

Decrease in accrued expenses and other liabilities

 

 

(707)

 

 

(1,541)

Net cash provided by operating activities

 

 

535

 

 

7,765

Cash flows from investing activities:

 

 

  

 

 

  

Loan principal (disbursements), net of repayments

 

 

(1,238)

 

 

(76)

Redemption of restricted stock investments

 

 

(355)

 

 

402

Purchases of premises and equipment, net

 

 

(288)

 

 

(60)

Activity in securities held to maturity:

 

 

 

 

 

  

Maturities/calls/repayments

 

 

4,356

 

 

3,542

Activity in available-for-sale securities:

 

 

  

 

 

  

Purchases

 

 

(2,000)

 

 

(7,176)

Maturities/calls/repayments

 

 

15

 

 

 8

Proceeds from sales of real estate acquired through foreclosure

 

 

122

 

 

205

Net cash provided by (used in) investing activities

 

 

612

 

 

(3,155)

Cash flows from financing activities:

 

 

  

 

 

  

Net (decrease) increase in deposits

 

 

(12,312)

 

 

21,816

Net increase in short-term borrowings

 

 

8,000

 

 

 —

Additional long-term borrowings

 

 

5,000

 

 

 —

Repayments of long-term borrowings

 

 

(5,000)

 

 

(10,000)

Common stock dividends

 

 

(367)

 

 

 —

Preferred stock dividends

 

 

(70)

 

 

 —

Proceeds from common stock issuance

 

 

56

 

 

17

Net cash (used in) provided by financing activities

 

 

(4,693)

 

 

11,833

(Decrease) increase in cash and cash equivalents

 

 

(3,546)

 

 

16,443

Cash and cash equivalents at beginning of period

 

 

21,853

 

 

67,014

Cash and cash equivalents at end of period

 

$

18,307

 

$

83,457

Supplemental Information:

 

 

  

 

 

  

Interest paid on deposits and borrowed funds

 

$

1,872

 

$

2,002

Income taxes paid

 

 

12

 

 

52

Real estate acquired in satisfaction of loans

 

 

 —

 

 

515

 

See accompanying notes to consolidated financial statements

 

 

5


 

Severn Bancorp, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of and for the three months ended March 31, 2018 and 2017 is unaudited)

Note 1 -  Summary of Significant Accounting Policies

Basis of Presentation

The accounting and reporting policies of Severn Bancorp, Inc. and subsidiaries (the “Company”) conform to accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 8‑01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. In the opinion of management, all adjustments (comprising only of those of a normal recurring nature) necessary for a fair presentation of the results of operations for the interim periods presented have been made. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018 or any other interim or future period. Events occurring after the date of the financial statements up to the date the financial statements were available to be issued, were considered in the preparation of the consolidated financial statements.

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2017 Annual Report on Form 10‑K as filed with the Securities and Exchange Commission (“SEC”).

Principles of Consolidation

The unaudited consolidated financial statements include the accounts of Severn Bancorp, Inc., and its wholly-owned subsidiaries, Mid-Maryland Title Company, Inc., SBI Mortgage Company and SBI Mortgage Company’s subsidiary, Crownsville Development Corporation, and its subsidiary, Crownsville Holdings I, LLC, and Severn Savings Bank, FSB (the “Bank”), and the Bank’s subsidiaries, Louis Hyatt, Inc., Homeowners Title and Escrow Corporation, Severn Financial Services Corporation, SSB Realty Holdings, LLC, SSB Realty Holdings II, LLC, and HS West, LLC. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and affect the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for loan losses and the related allowance for loan losses (“Allowance”), determination of impaired loans and the related measurement of impairment, valuation of investment securities, valuation of real estate acquired through foreclosure, valuation of stock-based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, and the calculation of current and deferred income taxes and the realizability of net deferred tax assets.

Cash Flows

We consider all highly liquid securities with original maturities of three months or less to be cash equivalents.  For reporting purposes, assets grouped in the Consolidated Statements of Financial Condition under the captions “Cash and due from banks” and “Federal funds sold and interest-bearing deposits in other banks” are considered cash or cash equivalents.  For financial statement purposes, these assets are carried at cost.  Federal funds sold and interest-bearing deposits in other banks generally have overnight maturities and are in excess of amounts that would be recoverable under Federal Deposit Insurance Corporation (“FDIC”) insurance.

Reclassifications

Certain reclassifications have been made to amounts previously reported to conform to current period presentation.

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Revenue Recognition

 

Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage-banking and mortgage servicing activities. Our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income, are service charges on deposit accounts, real estate commissions, and real estate management fees.

 

Service Charges on Deposit Accounts

 

Service charges on deposit accounts represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

 

Real Estate Commissions

 

Real Estate Commissions represent commissions received on properties sold. Revenue is recognized when our performance obligation is completed, which is generally the time the property is sold and payment has been received. 

 

Real Estate Management Fees

 

Real Estate Management Fees represent monthly fees received on property maintenance and management.  We perform daily services for these fees and bill for those services on a monthly basis.  We have determined that each day of the performance of the services represents a distinct service.  The overall service of property management each day is substantially the same and has the same pattern of transfer (daily) over the term of the contract.  Further, each distinct day of service represents a performance obligation that would be satisfied over time (over the length of the contract, not at a point in time) and has the same measure of progress (elapsed time).  Management has therefore determined that property management services are a single performance obligation composed of a series of distinct services. In performing the daily management activities, the customer is simultaneously receiving and consuming the benefits provided by our performance of the contract.  Revenue is earned evenly and daily over the life of the contract.  For purposes of expedience, we record the fees when monthly invoices are processed.  Each month contains 1/12 of the contract revenue.

 

Recent Accounting Pronouncements

Pronouncements Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014‑09, Revenue from Contracts with Customers, as amended by ASU 2015‑14, Revenue from Contracts with Customers:  Deferral of the Effective Date, ASU 2016‑08, Revenue from Contracts with Customers:  Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), ASU 2016‑10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016‑12, Revenue from Contracts with Customers:  Narrow-Scope Improvements and Practical Expedients, ASU 2016‑20, Technical Corrections and Improvements to Topic 606, Revenue form Contracts with Customers, that provides accounting guidance for all revenue arising from contracts with

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customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides for a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. We adopted the pronouncement on January 1, 2018. Our accounting policies and revenue recognition principles did not change materially as the principles of ASC 606 are largely consistent with the previous revenue recognition practices.  See additional information on revenue recognition above.

 

In January 2016, FASB issued ASU No. 2016‑01, Financial Instruments – Overall:  Recognition and Measurement of Financial Assets and Financial Liabilities, which requires entities to measure equity investments at fair value and recognize changes on fair value in net income. The guidance also provides a new measurement alternative for equity investments that do not have readily determinable fair values and don’t qualify for the net asset value practical expedient. The standard requires entities to record changes in instrument–specific credit risk for financial liabilities measured under the fair value option in other comprehensive income, except for certain financial liabilities of consolidated collateralized financing entities. Entities also have to reassess the realizability of a deferred tax asset related to an available-for-sale (“AFS”) debt security in combination with their other deferred tax assets. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In August 2016, FASB issued ASU No. 2016‑15, Classification of Certain Cash Receipts and Cash Payments, which provides guidance regarding the presentation of certain cash receipts and cash payments in the statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. The adoption of ASC No. 2016‑15 did not have a material impact on our financial position, results of operations, or cash flows.

Pronouncements Issued

In February 2016, FASB issued ASU 2016‑02, Leases, which requires a lessee to recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a “right-of-use” asset. The accounting applied by the lessor is relatively unchanged. The ASU also requires expanded qualitative and quantitative disclosures. For public business entities, the guidance is effective for interim and annual reporting periods beginning after December 15, 2018 and mandates a modified retrospective transition for all entities. Early application is permitted. We have determined that the provisions of ASU No. 2016‑02 may result in an increase in assets to recognize the present value of the lease obligations, with a corresponding increase in liabilities, however, we do not expect this to have a material impact on our financial position, results of operations, or cash flows.

In June 2016, FASB issued ASU No. 2016‑13, Financial Instruments – Credit Losses, which sets forth a current expected credit loss (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. While we are currently in the process of evaluating the impact of the amended guidance on our Consolidated Financial Statements, we currently expect the Allowance to increase upon adoption given that the Allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of our loan and lease portfolio at the time of adoption.

In March 2017, FASB issued ASU No. 2017‑08, Receivables - Nonrefundable Fees and Other costs, which provides guidance that calls for the shortening of the amortization period for certain callable debt securities held at a premium. The standard is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We do not expect the adoption of ASC No. 2017‑08 to have a material impact on our financial position, results of operations, or cash flows.

In February 2018, FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted.  The

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Company does not expect the adoption of ASU No. 2018-02 to have a material impact on its financial position, results of operations, or cash flows.

 

Note 2 – Correction of an Immaterial Prior Year Error

In 2016, we redeemed the Series B preferred stock sold in 2008 to the U.S. Department of the Treasury (the “TARP Shares”). At the time of the redemption, the remaining unamortized discount of $511,000 should have been fully amortized into additional paid-in capital and retained earnings and reflected as a reduction to net income available to common stockholders. This treatment was not reflected in the consolidated financial statements included in the March 31, 2017 Quarterly Report on Form 10‑Q. We determined that this amount was not material to the 2017 consolidated financial statements. Our March 31, 2017 consolidated financial statements within these consolidated financial statements have been adjusted to reflect the proper recognition of the remaining discount at the time of the redemption as a $68,000 adjustment to net income available to common stockholders, revising the originally reported amount from $787,000 to $855,000. The adjustment had no impact on total assets at March 31, 2017 or December 31, 2017 and no impact on net income for the three months ended March 31, 2017.

Note 3 - Securities

The amortized cost and fair values of our AFS securities portfolio were as follows as of March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2018

 

 

Amortized

 

Unrealized

    

Unrealized

    

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,985

 

$

 —

 

$

10

 

$

1,975

U.S. government agency notes

 

 

10,149

 

 

 —

 

 

113

 

 

10,036

 

 

$

12,134

 

$

 —

 

$

123

 

$

12,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2017

 

 

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(dollars in thousands)

U.S. government agency notes

 

$

10,169

 

$

 —

 

$

50

 

$

10,119

 

 

$

10,169

 

$

 —

 

$

50

 

$

10,119

 

The amortized cost and fair values of our held-to-maturity (“HTM”) securities portfolio were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

4,993

 

$

40

 

$

 8

 

$

5,025

U.S. government agency notes

 

 

15,999

 

 

40

 

 

143

 

 

15,896

Mortgage-backed securities

 

 

28,919

 

 

11

 

 

825

 

 

28,105

 

 

$

49,911

 

$

91

 

$

976

 

$

49,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

4,994

 

$

68

 

$

 6

 

$

5,056

U.S. government agency notes

 

 

19,004

 

 

81

 

 

99

 

 

18,986

Mortgage-backed securities

 

 

30,305

 

 

27

 

 

370

 

 

29,962

 

 

$

54,303

 

$

176

 

$

475

 

$

54,004

 

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Gross unrealized losses and fair value by length of time that the individual AFS securities have been in an unrealized loss position at the dates indicated are presented in the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

Less than 12 months

 

12 months or more

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,975

 

$

10

 

$

 —

 

$

 —

 

$

1,975

 

$

10

U.S. government agency notes

 

 

9,021

 

 

103

 

 

1,015