Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

10‑Q

(Mark One)


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

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

For the quarterly period ended March 31, 2017


2018

or


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

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


0‑49731

SEVERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland

52-1726127

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

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-212b‑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 


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-212b‑2 of the Exchange Act)..YesYes 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 – 12,128,204–12,688,626 shares outstanding as of May 15, 201714, 2018



SEVERN BANCORP, INC. AND SUBSIDIARIES

Table of Contents

Page

PART I – FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

1

2

3

4

5

6

Item 2.

27
29

Item 3.

43
45

Item 4.

43
46

PART II – OTHER INFORMATION

Item 1.

44
46

Item 1A.

44
46

Item 2.

44
47

Item 3.

44
47

Item 4.

44
47

Item 5.

44
47

Item 6.

Exhibits

4447

45

46
48

SIGNATURES

49

i


i

Caution Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q,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”“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 20162017 Annual Report on Form 10-K,10‑K, Item 1A of Part II of this quarterly report on Form 10-Q,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 subsidiarysubsidiaries 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


ii

PART I–I – FINANCIAL INFORMATION


Item 1.Financial Statements

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


  
March 31,
2017
  
December 31,
2016
 
ASSETS (unaudited)    
Cash and due from banks $19,782  $39,396 
Federal funds sold and interest-earning deposits in other banks  63,775   27,718 
Cash and cash equivalents  83,557   67,114 
Securities available for sale, at fair value  7,151   - 
Securities held to maturity (fair value of $59,389 at March 31, 2017 and $62,827 at December 31, 2016)  59,283   62,757 
Loans held for sale, at fair value  2,755   10,307 
Loans receivable  609,741   610,278 
Allowance for loan losses  (8,332)  (8,969)
Loans, net  601,409   601,309 
Real estate acquired through foreclosure  1,243   973 
Restricted stock investments  4,701   5,103 
Premises and equipment, net  23,792   24,030 
Accrued interest receivable  2,262   2,249 
Deferred income taxes  9,473   10,081 
Other assets  3,114   3,562 
Total assets $798,740  $787,485 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Liabilities:        
Deposits:        
Noninterest bearing $77,982  $58,145 
Interest-bearing  515,780   513,801 
Total deposits  593,762   571,946 
Long-term borrowings  93,500   103,500 
Subordinated debentures  20,619   20,619 
Accrued expenses and other liabilities  2,019   3,490 
Total liabilities  709,900   699,555 
         
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, 2017 and December 31, 2016  4   4 
Common stock, $0.01 par value, 20,000,000 shares authorized; 12,128,204 and 12,123,179 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively  121   121 
Additional paid-in capital  64,098   63,960 
Retained earnings  24,632   23,845 
Accumulated other comprehensive loss  (15)  - 
Total stockholders’ equity  88,840   87,930 
Total liabilities and stockholders’ equity $798,740  $787,485 

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

 


  Three Months Ended March 31, 
  2017  2016 
Interest income: (unaudited) 
Loans $7,131  $7,107 
Securities  269   311 
Other earning assets  157   86 
Total interest income  7,557   7,504 
Interest expense:        
Deposits  975   979 
Long-term borrowings and subordinated debentures  996   1,290 
Total interest expense  1,971   2,269 
Net interest income  5,586   5,235 
Reversal of provision for loan losses  (275)  - 
Net interest income after reversal of provision for loan losses  5,861   5,235 
Noninterest income:        
Mortgage-banking revenue  535   721 
Real estate commissions  380   118 
Real estate management fees  194   165 
Other noninterest income  249   246 
Total noninterest income  1,358   1,250 
Noninterest expense:        
Compensation and related expenses  3,757   3,636 
Occupancy  336   452 
Legal fees  28   130 
Write-downs, losses, and costs of real estate acquired through foreclsoure, net  33   45 
Federal Deposit Insurance Corpation insurance premiums  (2)  130 
Professional fees  135   172 
Advertising  206   133 
Online charges  196   257 
Credit report and appraisal fees  103   103 
Other  883   520 
Total noninterest expense  5,675   5,578 
Net income before income tax provision  1,544   907 
Income tax provision  619   - 
Net income  925   907 
Amortization of discount on preferred stock  (68)  (68)
Dividends on preferred stock  (70)  (526)
Net income available to common stockholders $787  $313 
Net income per common share - basic $0.06  $0.03 
Net income per common share - diluted $0.06  $0.03 

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

 


  Three Months Ended March 31, 
  2017  2016 
  (unaudited) 
Net income $925  $907 
Other comprehensive loss item - unrealized holding losses on available-for-sale securities arising during the period (net of tax benefit of $10 in 2017)  (15)  - 
Total other comprehensive loss  (15)  - 
Total comprehensive income $910  $907 

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

  
Three Months Ended March 31, 2017 (unaudited)
 
  
Number of
Shares of
Preferred
Stock
  
Number of
Shares of
Common
Stock
  
Preferred
Stock
  
Common
Stock
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Comprehensive
Loss
  
Total
Stockholders’
Equity
 
Balance at January 1, 2017  437,500   12,123,179  $4  $121  $63,960  $23,845  $-  $87,930 
Net income  -   -   -   -   -   925   -   925 
Stock-based compensation  -   -   -   -   53   -   -   53 
Dividend declared on Series A preferred stock  -   -   -   -   -   (70)  -   (70)
Amortization of discount on Series B preferred stock  -   -   -   -   68   (68)  -   - 
Options exercised  -   5,025   -   -   17   -   -   17 
Other comprehensive loss  -   -   -   -   -   -   (15)  (15)
Balance at March 31, 2017  437,500   12,128,204  $4  $121  $64,098  $24,632  $(15) $88,840 

  
Three Months Ended March 31, 2016 (unaudited)
 
  
Number of
Shares of
Preferred
Stock
  
Number of
Shares of
Common
Stock
  
Preferred
Stock
  
Common
Stock
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Comprehensive
Income
  
Total
Stockholders’
Equity
 
Balance at January 1, 2016  460,893   10,088,879  $4  $101  $76,335  $10,016  $-  $86,456 
Net income  -   -   -   -   -   907   -   907 
Stock-based compensation  -   -   -   -   48   -   -   48 
Dividend declared on Series B preferred stock  -   -   -   -   -   (526)  -   (526)
Amortization of discount on Series B preferred stock  -   -   -   -   68   (68)  -   - 
Balance at March 31, 2016  460,893   10,088,879  $4  $101  $76,451  $10,329  $-  $86,885 

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


  Three Months Ended March 31, 
  2017  2016 
Cash flows from operating activities: (unaudited) 
Net income $925  $907 
Adjustments to reconcile net income to net cash from operating activities:        
Depreciation and amortization  298   286 
Amortization of deferred loan fees  (264)  (297)
Net amortization of premiums and discounts  (76)  104 
Reversal of provision for loan losses  (275)  - 
Write-downs and losses on real estate acquired through foreclosure, net of gains  40   13 
Gain on sale of mortgage loans held for sale  (535)  (721)
Proceeds from sale of mortgage loans held for sale  10,757   36,609 
Originations of mortgage loans held for sale  (2,670)  (28,409)
Stock-based compensation  53   48 
Deferred income taxes  619   - 
(Increase) decrease in accrued interest receivable  (13)  20 
Decrease in other assets  447   30 
(Decrease) increase in accrued expenses and other liabilities  (1,541)  1,438 
Net cash provided by operating activities  7,765   10,028 
Cash flows from investing activities:        
Loan principal (disbursements), net of repayments  (76)  (3,286)
Redemption of restricted stock investments  402   13 
Purchases of premises and equipment, net  (60)  (60)
Activity in securities held to maturity:        
Purchases  -   (1,021)
Maturities/calls/repayments  3,542   2,293 
Activity in available-for-sale securities:        
Purchases  (7,176)  - 
Maturities/calls/repayments  8   - 
Proceeds from sales of real estate acquired through foreclosure  205   578 
Net cash used in investing activities  (3,155)  (1,483)
Cash flows from financing activities:        
Net increase in deposits  21,816   962 
Repayment of long-term borrowings  (10,000)  - 
Proceeds from exercise of stock options  17   - 
Net cash provided by financing activities  11,833   962 
Increase in cash and cash equivalents  16,443   9,507 
Cash and cash equivalents at beginning of period  67,114   43,591 
Cash and cash equivalents at end of period $83,557  $53,098 
Supplemental Information:        
Interest paid on deposits and borrowed funds $2,002  $1,962 
Income taxes paid  52   - 
Real estate acquired in satisfaction of loans  515   584 

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, 20172018 and 20162017 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 8-018‑01 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, 20172018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 20172018 or any other interim or future period. Events occurring after the date of the financial statements up to May 15, 2017, 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 20162017 Annual Report on Form 10-K10‑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 share-basedstock-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


For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest-earning deposits

We consider all highly liquid securities with banks (items with stated original maturitymaturities of three months or less).


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.


6


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 March 2016,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,  Stock Compensation:  Improvements to Employee Share-Based Payment Accounting2014‑09, , the purpose of which is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows.  ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is permitted. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operation, or cash flows. We have elected to account for stock option forfeitures when they occur.

Pronouncements Issued

In May 2014, FASB issued 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

7


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. This standard may affect an entity’s financial statements, business processesWe adopted the pronouncement on January 1, 2018. Our accounting policies and internal control over financial reporting. The standard is effective for interim and annual periods beginning after December 15, 2017. The standard must be adopted using either a full retrospective approach for all periods presented inrevenue recognition principles did not change materially as the periodprinciples of adoption or a modified retrospective approach. WeASC 606 are currently evaluatinglargely consistent with the impact of this standard previous revenue recognition practices.  See additional information on the Company’s financial position, results of operations, and cash flows.revenue recognition above.


In January 2016, FASB issued ASU No. 2016-01, 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. Entities will haveThe 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 will 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. For public entities, the guidance in this ASU is effective for the first interim or annual period beginning after December 15, 2017. Early adoption by public entities is permitted as of the beginning of the year of adoption for selected amendments by a cumulative effect adjustment to the balance sheet. The adoption of this standard isdid not expected to 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, 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. 2016-022016‑02 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 cashflows.cash flows.

In June 2016, FASB issued ASU No. 2016-13, 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 the Company iswe are currently in the process of evaluating the impact of the amended guidance on itsour Consolidated Financial Statements, itwe currently expectsexpect the ALLLAllowance 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 the Company’sour loan and lease portfolio at the time of adoption.


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 standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASC No. 2016-15 to have a material impact on its financial position, results of operations, or cash flows.

In March 2017, FASB issued ASU No. 2017-08, R2017‑08, eceivablesReceivables - 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

8


Company does not expect the adoption of ASCASU No. 2017-082018-02 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 estimated fair values of our AFS securities portfolio waswere as follows as of March 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
  (dollars in thousands) 
U.S. government agency notes $7,176  $-  $25  $7,151 

We did not hold any AFS securities as of December 31, 2016.

The amortized cost and estimated 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


9

  March 31, 2017 
  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
  (dollars in thousands) 
U.S. Treasury securities $10,996  $143  $-  $11,139 
U.S. government agency notes  20,021   131   53   20,099 
Government sponsored mortgage-backed securities  28,266   62   177   28,151 
  $59,283  $336  $230  $59,389 

  December 31, 2016 
  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
  (dollars in thousands) 
U.S. Treasury securities $12,998  $167  $-  $13,165 
U.S. government agency notes  20,027   133   54   20,106 
Government sponsored mortgage-backed securities  29,732   52   228   29,556 
  $62,757  $352  $282  $62,827 

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

 

 

10

 

 

10,036

 

 

113

 

 

$

10,996

 

$

113

 

$

1,015

 

$

10

 

$

12,011

 

$

123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

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. government agency notes

 

$

10,119

 

$

50

 

$

 —

 

$

 —

 

$

10,119

 

$

50

 

 

$

10,119

 

$

50

 

$

 —

 

$

 —

 

$

10,119

 

$

50

Gross unrealized losses and fair value by length of time that the individual HTM 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

 

$

1,992

 

$

 8

 

$

 —

 

$

 —

 

$

1,992

 

$

 8

U.S. government agency notes

 

 

8,953

 

 

41

 

 

4,935

 

 

102

 

 

13,888

 

 

143

Mortgage-backed securities

 

 

21,284

 

 

568

 

 

6,557

 

 

257

 

 

27,841

 

 

825

 

 

$

32,229

 

$

617

 

$

11,492

 

$

359

 

$

43,721

 

$

976


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

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

 

$

1,993

 

$

 6

 

$

 —

 

$

 —

 

$

1,993

 

$

 6

U.S. government agency notes

 

 

6,977

 

 

23

 

 

6,964

 

 

76

 

 

13,941

 

 

99

Mortgage-backed securities

 

 

20,993

 

 

217

 

 

7,046

 

 

153

 

 

28,039

 

 

370

 

 

$

29,963

 

$

246

 

$

14,010

 

$

229

 

$

43,973

 

$

475

  March 31, 2017 
  Less than 12 months  12 months or more  Total 
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
 
  (dollars in thousands) 
U.S. government agency notes $15,154  $53  $-  $-  $15,154  $53 
Mortgage-backed securities  22,399   177           22,399   177 
  $37,553  $230  $-  $-  $37,553  $230 


  December 31, 2016 
  Less than 12 months  12 months or more  Total 
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
 
  (dollars in thousands) 
U.S. government agency notes $5,002  $54  $-  $-  $5,002  $54 
Mortgage-backed securities  23,457   228   -   -   23,457   228 
  $28,459  $282  $-  $-  $28,459  $282 

The gross

In the AFS securities portfolio, 10 securities were in a loss position as of March 31, 2018, with the largest single unrealized loss in any one security amounting to $24,000.In the AFSHTM securities portfolio is on $2.0 million fair value, 34 securities were in a loss position as of AFS securities and has existed for less than twelve months.

8March 31, 2018, with the largest single unrealized loss in any one security amounting to $114,000.

All of the securities that are currently in a gross unrealized loss position are so due to declines in fair values resulting from changes in interest rates or increased liquidity spreads since the time they were purchased. We have the intent and ability to hold these debt securities to maturity (including the AFS securities) and do not intend to sell, nor do we believe it will be more likely than not that we will be required to sell, any impaired securities prior to a recovery of amortized cost. We expect these securities will be repaid in full, with no losses realized. As such, management considers any impairment to be temporary.


10


Contractual maturities of debt securities at March 31, 20172018 are shown below. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFS Securities

 

HTM Securities

 

    

Amortized

    

Fair

    

Amortized

    

Fair

 

 

Cost

 

Value

 

Cost

 

Value

 

 

(dollars in thousands)

Due in one year or less

 

$

1,025

 

$

1,015

 

$

9,006

 

$

8,980

Due after one through five years

 

 

11,109

 

 

10,996

 

 

10,978

 

 

10,909

Due after five years through ten years

 

 

 —

 

 

 —

 

 

1,008

 

 

1,032

Mortgage-backed securities

 

 

 —

 

 

 —

 

 

28,919

 

 

28,105

 

 

$

12,134

 

$

12,011

 

$

49,911

 

$

49,026


  AFS Securities  HTM Securities 
  
Amortized
Cost
  
Estimated
Fair Value
  
Amortized
Cost
  
Estimated
Fair Value
 
  (dollars in thousands) 
Due in one year or less $-  $-  $10,003  $10,018 
Due after one through five years  7,176   7,151   19,052   19,166 
Due after five years through ten years  -   -   1,962   2,054 
Mortgage-backed securities  -   -   28,266   28,151 
  $7,176  $7,151  $59,283  $59,389 

We did not sell any securities during the three months ended March 31, 2018 or 2017.

There were no securities pledged as collateral as of March 31, 20172018 or December 31, 2016.


2017.

Note 34 -  Loans Receivable and Allowance for Loan Losses


Loans receivable are summarized as follows:

 

 

 

 

 

 

 

 

    

March 31, 2018

    

December 31, 2017

 

 

(dollars in thousands)

Residential mortgage

 

$

288,061

 

$

287,656

Commercial

 

 

39,015

 

 

37,356

Commercial real estate

 

 

230,336

 

 

236,302

Construction, land acquisition, and development

 

 

100,635

 

 

93,060

Home equity/2nds

 

 

13,853

 

 

15,703

Consumer

 

 

1,050

 

 

1,084

Total loans receivable

 

 

672,950

 

 

671,161

Unearned loan fees

 

 

(3,038)

 

 

(3,010)

Loans receivable

 

$

669,912

 

$

668,151


  March 31, 2017  December 31, 2016 
  (dollars in thousands) 
Residential mortgage $253,309  $260,603 
Commercial  16,695   16,811 
Commercial real estate  190,961   195,710 
Construction, land acquisition, and development  50,556   41,438 
Land  49,159   48,664 
Lines of credit  31,859   29,657 
Home equity  18,022   19,129 
Consumer  1,590   1,210 
Total loans receivable  612,151   613,222 
Unearned loan fees  (2,410)  (2,944)
Net loans receivable $609,741  $610,278 

Certain loans in the amount of $322.6$190.8 million have been pledged under a blanket floating lien to the Federal Home Loan Bank of Atlanta (“FHLB”) as collateral against advances.

At March 31, 2018, the Bank was servicing $32.7 million in loans for the Federal National Mortgage Association and $15.6 million in loans for the Federal Home Loan Mortgage Corporation.

Credit Quality

An Allowance is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible based on evaluations of the collectability of loans and prior loan loss experience. Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. The methodology takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Determining the amount of the Allowance requires the use of estimates and assumptions. Actual results could differ significantly from those estimates. Management believes the Allowance is adequate as of March 31, 2017 and December 31, 2016. While management uses all available information to estimate losses on loans, future additions to the Allowance may be necessary based on changes in economic conditions.conditions and our actual loss experience. In addition, various regulatory agencies periodically review the Allowance as an integral part of their examination process. Such agencies may require us to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of March 31, 2018 and December 31, 2017.

11


For purposes of determining the Allowance, we have segmented our loan portfolio by product type. Our portfolio loan segments are residential mortgage, commercial, commercial real estate, construction, land acquisition, and development land, lines of credit, home equity,(“ADC”), Home equity/2nds, and consumer. We have looked at all segments and have determined that no additional subcategorization is warranted based upon our credit review methodology and our portfolio classes are the same as our portfolio segments.


Inherent Credit Risks

The inherent credit risks within the loan portfolio vary depending upon the loan class as follows:


Residential mortgage- secured by one to four family dwelling units. The loans have limited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, at a loan-to-value ratio (“LTV”) of 80% or less.


Commercial- underwritten in accordance with our policies and include evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay the obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.


Commercial real estate - Additionally, lines of credit are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and, secondarily, as loans secured by real-estate and/or other assets. Repayment of these loans is generally dependent upon the principal business conducted on the property securing the loan. Line of credit loans may be adversely affected by conditions in the real estate.estate markets or the economy in general. Management monitors and evaluates line of credit loans based on collateral and risk-rating criteria.

Commercial real estate - subject to the underwriting standards and processes similar to commercial, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as loans secured by real estate and secondarily as cash flow dependent. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate loans based on collateral and risk-rating criteria. The Bank also utilizes third-party experts to provide environmental and market valuations. The nature of commercial real estate loans makes them more difficult to monitor and evaluate.


Construction, land acquisition, and development (“ADC”) ADC- underwritten in accordance with our underwriting policies which include a financial analysis of the developers, property owners, construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project rather than the ability of the borrower or guarantor to repay principal and interest. Additionally, land is underwritten according to our policies which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate.


Sources

The sources of repayment of these loans is typically are permanent financing expected to be obtained upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.


If the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of the loan as well as related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time.


12


Land Home equity/2nds- underwritten according to our policies which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.


Lines of credit - subject to the underwriting standards and processes similar to commercial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and, secondarily, as loans secured by real-estate and/or other assets. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Line of credit loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates line of credit loans based on collateral and risk-rating criteria.
Home equity - subject to the underwriting standards and processes similar to residential mortgages and are secured by one to four family dwelling units. Home equityequity/2nds loans have greater risk than residential mortgages as a result of the Bank generally being in a second lien position.
Consumer - consist of loans to individuals through the Bank’s retail network and are typically unsecured or secured by personal property. Consumer loans have a greater credit risk than residential loans because of the lower value of the underlying collateral, if any.

Risk Ratings

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss.  Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the Allowance.  Loans not classified are rated pass.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed in nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed in nonaccrual status or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, generally after six months of consecutive current payments and an updated analysis of the borrower’s ability to service the loan.
Loans that experience insignificant payment delays and payment shortfalls generally are not placed in nonaccrual status or classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of 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.

Allowance Methodology

The Allowance consists of specific and general components.  The specific component relates to loans that are classified as impaired.  The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as loans that are not classified.

A loan is considered impaired if it meets any of the following three criteria:
·Loans that are 90 days or more in arrears (nonaccrual loans); or
·Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.
·Loans that are modified and qualify as troubled debt restructured loans (“TDR” or “TDRs”)

If a loan is considered to be impaired, it is then determined to be either cash flow or collateral dependent for purposes of Allowance determination.

With respect to all loan segments, we do not charge off a loan, or a portion of a loan, until one of the following conditions have been met:

·The loan has been foreclosed. At the time of foreclosure, a charge off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral.

·An agreement to accept less than the recorded balance of the loan has been made with the borrower. Once an agreement has been finalized and any proceeds from the borrower are received, a charge-off is recorded for the difference between the recorded amount of the loan and proceeds received.

·The loan is considered to be a collateral dependent impaired loan when its collateral valuation is less than the recorded balance. The loan is written down for accounting purposes by the amount of the difference between the recorded balance and collateral value.
Specific Allowance Component

Impaired loans secured by real estate - when a secured real estate loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary.  This decision is based on various considerations, including the age of the most recent appraisal, the LTV ratio based on the original appraisal, and the condition of the property. Appraised values are discounted, if appropriate, to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include estimated costs to sell the property.

Impaired loans secured by collateral other than real estate - for loans secured by nonreal estate collateral, such as accounts receivable, inventory, and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging, or equipment appraisals or invoices.  Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

For such loans that are classified as impaired, an Allowance is established when the current fair value of the underlying collateral less its estimated disposal costs is lower than the carrying value of the loan.  For loans that are not solely collateral dependent, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of the loan.

General Allowance Component

The general component of the Allowance is based on historical loss experience adjusted for qualitative factors. Loans are pooled by portfolio class and an historical loss percentage, based upon a four-year net charge-off history, is applied to each class.  The result of that calculation for each loan class is then applied to the current loan portfolio balances to determine the required general component of the Allowance per loan class.  We then apply additional loss multipliers to the different classes of loans to reflect various qualitative factors. These qualitative factors include, but are not limited to:
·Levels and trends in delinquencies and nonaccruals;
·Inherent risk in the loan portfolio;
·Trends in volume and terms of the loan;
·Effects of any change in lending policies and procedures;
·Experience, ability and depth of management;
·National and local economic trends and conditions; and
·Effect of any changes in concentration of credit.

The following tables present, by portfolio segment, the changes in the Allowance and the recorded investment in loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

    

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Total

 

 

(dollars in thousands)

Beginning Balance

 

$

3,099

 

$

527

 

$

2,805

 

$

1,236

 

$

386

 

$

 2

 

$

8,055

Charge-offs

 

 

(323)

 

 

 —

 

 

 —

 

 

(13)

 

 

 —

 

 

 —

 

 

(336)

Recoveries

 

 

221

 

 

 —

 

 

211

 

 

 —

 

 

18

 

 

 —

 

 

450

Net (charge-offs) recoveries

 

 

(102)

 

 

 —

 

 

211

 

 

(13)

 

 

18

 

 

 —

 

 

114

Provision for (reversal of) loan losses

 

 

304

 

 

(13)

 

 

(21)

 

 

(163)

 

 

(107)

 

 

 —

 

 

 —

Ending Balance

 

$

3,301

 

$

514

 

$

2,995

 

$

1,060

 

$

297

 

$

 2

 

$

8,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - individually evaluated for impairment

 

$

1,285

 

$

 —

 

$

318

 

$

47

 

$

 2

 

$

 1

 

$

1,653

Ending balance - collectively evaluated for impairment

 

 

2,016

 

 

514

 

 

2,677

 

 

1,013

 

 

295

 

 

 1

 

 

6,516

 

 

$

3,301

 

$

514

 

$

2,995

 

$

1,060

 

$

297

 

$

 2

 

$

8,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance -individually evaluated for impairment

 

$

17,439

 

$

296

 

$

2,820

 

$

981

 

$

1,260

 

$

82

 

$

22,878

Ending loan balance -collectively evaluated for impairment

 

 

267,584

 

 

38,719

 

 

227,516

 

 

99,654

 

 

12,593

 

 

968

 

 

647,034

 

 

$

285,023

 

$

39,015

 

$

230,336

 

$

100,635

 

$

13,853

 

$

1,050

 

$

669,912


13

  Three Months Ended March 31, 2017 
                            
  
Residental
Mortgage
  Commercial  
Commercial
Real Estate
  ADC  Land  
Lines of
Credit
  
Home
Equity
  Consumer  Total 
  (dollars in thousands) 
Beginning Balance $3,833  $421  $2,535  $527  $863  $57  $728  $5  $8,969 
Charge-offs  (499)  -   -   -   -   -   -   -   (499)
Recoveries  107   27   -   -   -   -   3   -   137 
Net (charge-offs) recoveries  (392)  27   -   -   -   -   3   -   (362)
Provision for (reversal of) loan losses  348   (22)  (20)  (140)  (153)  (10)  (278)  -   (275)
Ending Balance $3,789  $426  $2,515  $387  $710  $47  $453  $5  $8,332 
                                     
Ending balance -                                    
individually evaluated for impairment $1,757  $-  $191  $-  $52  $-  $81  $3  $2,084 
Ending balance -                                    
collectively evaluated for impairment  2,032   426   2,324   387   658   47   372   2   6,248 
  $3,789  $426  $2,515  $387  $710  $47  $453  $5  $8,332 
                                     
Ending loan balance -                                    
individually evaluated for impairment $19,008  $-  $3,130  $-  $818  $-  $2,438  $92  $25,486 
Ending loan balance -                                    
collectively evaluated for impairment  234,301   16,695   187,831   50,556   48,341   31,859   15,584   1,498   586,665 
  $253,309  $16,695  $190,961  $50,556  $49,159  $31,859  $18,022  $1,590  $612,151 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Residential

    

 

    

Commercial

    

 

    

 

Home Equity/

    

 

    

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Total

 

 

(dollars in thousands)

Ending balance - individually evaluated for impairment

 

$

1,181

 

$

 —

 

$

182

 

$

48

 

$

 —

 

$

 2

 

$

1,413

Ending balance - collectively evaluated for impairment

 

 

1,918

 

 

527

 

 

2,623

 

 

1,188

 

 

386

 

 

 —

 

 

6,642

 

 

$

3,099

 

$

527

 

$

2,805

 

$

1,236

 

$

386

 

$

 2

 

$

8,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance - individually evaluated for impairment

 

$

18,219

 

$

 —

 

$

2,917

 

$

991

 

$

 —

 

$

84

 

$

22,211

Ending loan balance - collectively evaluated for impairment

 

 

266,427

 

 

37,356

 

 

233,385

 

 

92,069

 

 

15,703

 

 

1,000

 

 

645,940

 

 

$

284,646

 

$

37,356

 

$

236,302

 

$

93,060

 

$

15,703

 

$

1,084

 

$

668,151

 Three Months Ended March 31, 2016 
                            
  
Residental
Mortgage
  Commercial  
Commercial
Real Estate
  ADC  Land  
Lines of
Credit
  
Home
Equity
  Consumer  Total 
  (dollars in thousands) 
Beginning Balance $4,188  $234  $2,792  $446  $510  $57  $528  $3  $8,758 
Charge-offs  (140)  (17)  (47)  -   -   -   (28)  -   (232)
Recoveries  82   19   -   -   -   5   1   -   107 
Net (charge-offs) recoveries  (58)  2   (47)  -   -   5   (27)  -   (125)
Provision for (reversal of) loan losses  93   112   (397)  (111)  174   (20)  149   -   - 
Ending Balance $4,223  $348  $2,348  $335  $684  $42  $650  $3  $8,633 
                                     
Ending balance -                                    
individually evaluated for impairment $1,760  $4  $221  $-  $81  $15  $2  $1  $2,084 
Ending balance -                                    
collectively evaluated for impairment  2,463   344   2,127   335   603   27   648   2   6,549 
  $4,223  $348  $2,348  $335  $684  $42  $650  $3  $8,633 
                                     
Ending loan balance -                                    
individually evaluated for impairment $26,477  $99  $3,800  $351  $1,444  $150  $1,929  $215  $34,465 
Ending loan balance -                                    
collectively evaluated for impairment  258,224   13,057   182,470   41,482   30,166   21,708   21,513   926   569,546 
  $284,701  $13,156  $186,270  $41,833  $31,610  $21,858  $23,442  $1,141  $604,011 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

 

    

 

 

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Total

 

 

 

(dollars in thousands)

Beginning Balance

    

$

3,833

    

$

478

    

$

2,535

    

$

1,390

    

$

728

 

$

 5

 

$

8,969

 

Charge-offs

 

 

(499)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(499)

 

Recoveries

 

 

107

 

 

27

 

 

 —

 

 

 —

 

 

 3

 

 

 —

 

 

137

 

Net (charge-offs) recoveries

 

 

(392)

 

 

27

 

 

 —

 

 

 —

 

 

 3

 

 

 —

 

 

(362)

 

Provision for (reversal of) loan losses

 

 

348

 

 

(32)

 

 

(20)

 

 

(293)

 

 

(278)

 

 

 —

 

 

(275)

 

Ending Balance

 

$

3,789

 

$

473

 

$

2,515

 

$

1,097

 

$

453

 

$

 5

 

$

8,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - individually evaluated for impairment

 

$

1,757

 

$

 —

 

$

191

 

$

52

 

$

81

 

$

 3

 

$

2,084

 

Ending balance - collectively evaluated for impairment

 

 

2,032

 

 

473

 

 

2,324

 

 

1,045

 

 

372

 

 

 2

 

 

6,248

 

 

 

$

3,789

 

$

473

 

$

2,515

 

$

1,097

 

$

453

 

$

 5

 

$

8,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance - individually evaluated for impairment

 

$

19,008

 

$

 —

 

$

3,130

 

$

818

 

$

2,438

 

$

92

 

$

25,486

 

Ending loan balance - collectively evaluated for impairment

 

 

231,891

 

 

48,554

 

 

187,831

 

 

98,897

 

 

15,584

 

 

1,498

 

 

584,255

 

 

 

$

250,899

 

$

48,554

 

$

190,961

 

$

99,715

 

$

18,022

 

$

1,590

 

$

609,741

 

14


The following tables present the credit quality breakdown of our loan portfolio by class:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

    

 

    

 Special

    

 

    

 

 

 

 Pass 

 

 Mention 

 

Substandard

 

Total

 

 

(dollars in thousands)

Residential mortgage

 

$

278,721

 

$

1,367

 

$

4,935

 

$

285,023

Commercial

 

 

38,981

 

 

34

 

 

 —

 

 

39,015

Commercial real estate

 

 

224,274

 

 

4,185

 

 

1,877

 

 

230,336

ADC

 

 

99,455

 

 

 —

 

 

1,180

 

 

100,635

Home equity/2nds

 

 

12,542

 

 

457

 

 

854

 

 

13,853

Consumer

 

 

1,050

 

 

 —

 

 

 —

 

 

1,050

 

 

$

655,023

 

$

6,043

 

$

8,846

 

$

669,912


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

 

    

Special

    

 

    

 

 

 

Pass

 

Mention

 

Substandard

 

Total

 

 

(dollars in thousands)

Residential mortgage

 

$

277,867

 

$

1,563

 

$

5,216

 

$

284,646

Commercial

 

 

37,312

 

 

44

 

 

 —

 

 

37,356

Commercial real estate

 

 

228,746

 

 

4,615

 

 

2,941

 

 

236,302

ADC

 

 

91,868

 

 

 —

 

 

1,192

 

 

93,060

Home equity/2nds

 

 

14,384

 

 

465

 

 

854

 

 

15,703

Consumer

 

 

1,084

 

 

 —

 

 

 —

 

 

1,084

 

 

$

651,261

 

$

6,687

 

$

10,203

 

$

668,151

  March 31, 2017 
  Pass  
Special
Mention
  Substandard  Total 
  (dollars in thousands) 
Residential mortgage $245,391  $4,008  $3,910  $253,309 
Commercial  16,565   130   -   16,695 
Commercial real estate  182,158   6,950   1,853   190,961 
ADC  50,556   -   -   50,556 
Land  48,420   -   739   49,159 
Lines of credit  31,521   114   224   31,859 
Home equity  15,211   471   2,340   18,022 
Consumer  1,590   -   -   1,590 
  $591,412  $11,673  $9,066  $612,151 
 December 31, 2016 
  Pass  
Special
Mention
  Substandard  Total 
  (dollars in thousands) 
Residential mortgage $251,763  $4,316  $4,524  $260,603 
Commercial  16,722   88   1   16,811 
Commercial real estate  184,820   7,420   3,470   195,710 
ADC  41,438   -   -   41,438 
Land  47,886   -   778   48,664 
Lines of credit  29,289   116   252   29,657 
Home equity  16,056   472   2,601   19,129 
Consumer  1,210   -   -   1,210 
  $589,184  $12,412  $11,626  $613,222 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

    

30-59

    

60-89

    

90+

    

 

    

 

    

 

    

 

 

 

Days

 

Days

 

Days

 

Total

 

 

 

 

 

Non-

 

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Total

 

Accrual

 

 

(dollars in thousands)

Residential mortgage

 

$

99

 

$

95

 

$

2,652

 

$

2,846

 

$

282,177

 

$

285,023

 

$

3,619

Commercial

 

 

 —

 

 

16

 

 

225

 

 

241

 

 

38,774

 

 

39,015

 

 

296

Commercial real estate

 

 

 —

 

 

 —

 

 

216

 

 

216

 

 

230,120

 

 

230,336

 

 

216

ADC

 

 

 —

 

 

 —

 

 

239

 

 

239

 

 

100,396

 

 

100,635

 

 

310

Home equity/2nds

 

 

76

 

 

 —

 

 

1,136

 

 

1,212

 

 

12,641

 

 

13,853

 

 

1,260

Consumer

 

 

36

 

 

 —

 

 

 —

 

 

36

 

 

1,014

 

 

1,050

 

 

 —

 

 

$

211

 

$

111

 

$

4,468

 

$

4,790

 

$

665,122

 

$

669,912

 

$

5,701


15

  March 31, 2017 
  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
Past Due
  Current  Total  
Non-
Accrual
 
  (dollars in thousands) 
Residential mortgage $1,670  $-  $3,304  $4,974  $248,335  $253,309  $3,938 
Commercial  64   -   -   64   16,631   16,695   - 
Commercial real estate  488   -   -   488   190,473   190,961   262 
ADC  -   -   -   -   50,556   50,556   - 
Land  -   -   6   6   49,153   49,159   93 
Lines of credit  -   -   -   -   31,859   31,859   - 
Home equity  141   -   673   814   17,208   18,022   2,355 
Consumer  -   -   -   -   1,590   1,590   - 
  $2,363  $-  $3,983  $6,346  $605,805  $612,151  $6,648 

  December 31, 2016 
  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
Past Due
  Current  Total  
Non-
Accrual
 
  (dollars in thousands) 
Residential mortgage $1,472  $2,074  $964  $4,510  $256,093  $260,603  $3,580 
Commercial  -   -       -   16,811   16,811   1 
Commercial real estate  -   171   515   686   195,024   195,710   2,938 
ADC  -   -   -   -   41,438   41,438   - 
Land  106   -   6   112   48,552   48,664   269 
Lines of credit  -   -   -   -   29,657   29,657   150 
Home equity  34   -   2,174   2,208   16,921   19,129   2,914 
Consumer  4   -   -   4   1,206   1,210   - 
  $1,616  $2,245  $3,659  $7,520  $605,702  $613,222  $9,852 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

30-59

    

60-89

    

90+

    

 

    

 

    

 

    

    

 

 

Days

 

Days

 

Days

 

Total

 

 

 

 

 

Non-

 

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Total

 

Accrual

 

 

(dollars in thousands)

Residential mortgage

 

$

1,006

 

$

 —

 

$

 —

 

$

1,006

 

$

283,640

 

$

284,646

 

$

3,891

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

37,356

 

 

37,356

 

 

78

Commercial real estate

 

 

948

 

 

 —

 

 

 —

 

 

948

 

 

235,354

 

 

236,302

 

 

159

ADC

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

93,060

 

 

93,060

 

 

314

Home equity/2nds

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15,703

 

 

15,703

 

 

1,268

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,084

 

 

1,084

 

 

 —

 

 

$

1,954

 

$

 —

 

$

 —

 

$

1,954

 

$

666,197

 

$

668,151

 

$

5,710

We dodid not have any loans greater than 90 days past due and still accruing loans as of March 31, 20172018 or December 31, 2016.

2017.

The following tables summarize impaired loans:

           Three Months Ended March 31, 
  March 31, 2017  2017  2016 
  
Unpaid
Principal
Balance
  
Recorded
Investment
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related Allowance: (dollars in thousands) 
Residential mortgage $11,294  $10,187  $-  $10,592  $117  $15,217  $168 
Commercial  -   -   -   1   7   18   - 
Commercial real estate  1,244   1,209   -   2,494   39   2,381   16 
ADC  -   -   -   -   -   331   4 
Land  437   437   -   438   6   878   10 
Lines of credit  -   -   -   86   1   99   - 
Home equity  1,727   1,187       1,615   15   2,148   20 
Consumer  -   -   -   -   -   68   - 
With a related Allowance:                            
Residential mortgage  8,932   8,821   1,757   8,839   97   11,433   123 
Commercial  -   -   -   -   -   100   1 
Commercial real estate  1,921   1,921   191   1,925   24   2,148   27 
ADC  -   -   -   -   -   -   - 
Land  412   381   52   383   5   649   8 
Lines of credit  -   -   -   -   -   150   2 
Home equity  1,299   1,251   81   1,338   48   16   1 
Consumer  92   92   3   93   1   10   - 
Totals:                            
Residential mortgage  20,226   19,008   1,757   19,431   214   26,650   291 
Commercial  -   -   -   1   7   118   1 
Commercial real estate  3,165   3,130   191   4,419   63   4,529   43 
ADC  -   -   -   -   -   331   4 
Land  849   818   52   821   11   1,527   18 
Lines of credit  -   -   -   86   1   249   2 
Home equity  3,026   2,438   81   2,953   63   2,164   21 
Consumer  92   92   3   93   1   78   - 
 December 31, 2016 
  
Unpaid
Principal
Balance
  
Recorded
Investment
  
Related
Allowance
 
With no related Allowance: (dollars in thousands) 
Residential mortgage $9,854  $9,338  $- 
Commercial  -   -   - 
Commercial real estate  3,900   3,698   - 
ADC  -   -   - 
Land  441   441   - 
Lines of credit  -   -   - 
Home equity  2,139   1,529   - 
Consumer  -   -   - 
With a related Allowance:            
Residential mortgage  11,176   11,065   1,703 
Commercial  -   -   - 
Commercial real estate  1,958   1,958   196 
ADC  -   -   - 
Land  417   417   53 
Lines of credit  148   148   15 
Home equity  1,608   1,608   402 
Consumer  96   96   4 
Totals:            
Residential mortgage  21,030   20,403   1,703 
Commercial  -   -   - 
Commercial real estate  5,858   5,656   196 
ADC  -   -   - 
Land  858   858   53 
Lines of credit  148   148   15 
Home equity  3,747   3,137   402 
Consumer  96   96   4 

We recognized $360,000interest which would have been recorded on the above nonaccrual loans if those loans had been performing in accordance with their contractual terms was approximately $462,000 and $380,000 of interest income on impaired loans using a cash-basis method of accounting $172,000 for the three months ended March 31, 2018 and 2017, and 2016, respectively. We did not record anyThe actual interest income attributable torecorded on those loans was approximately $34,000 and $71,000 for the change in present value due to the passagethree months ended March 31, 2018 and 2017, respectively.

The following tables summarize impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

    

Unpaid

    

 

    

 

    

Unpaid

    

 

    

 

 

 

Principal

 

Recorded

 

Related

 

Principal

 

Recorded

 

Related

 

 

Balance

 

Investment

 

Allowance

 

Balance

 

Investment

 

Allowance

With no related Allowance:

 

(dollars in thousands)

Residential mortgage

 

$

11,610

 

$

9,958

 

$

 —

 

$

12,929

 

$

11,572

 

$

 —

Commercial

 

 

349

 

 

296

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate

 

 

1,262

 

 

1,148

 

 

 —

 

 

1,562

 

 

1,507

 

 

 —

ADC

 

 

633

 

 

633

 

 

 —

 

 

636

 

 

636

 

 

 —

Home equity/2nds

 

 

1,684

 

 

1,247

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

With a related Allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

7,596

 

 

7,481

 

 

1,285

 

 

6,761

 

 

6,647

 

 

1,181

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate

 

 

1,566

 

 

1,672

 

 

318

 

 

1,410

 

 

1,410

 

 

182

ADC

 

 

387

 

 

348

 

 

47

 

 

392

 

 

355

 

 

48

Home equity/2nds

 

 

14

 

 

13

 

 

 2

 

 

 —

 

 

 —

 

 

 —

Consumer

 

 

82

 

 

82

 

 

 1

 

 

84

 

 

84

 

 

 2

Totals:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

19,206

 

 

17,439

 

 

1,285

 

 

19,690

 

 

18,219

 

 

1,181

Commercial

 

 

349

 

 

296

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate

 

 

2,828

 

 

2,820

 

 

318

 

 

2,972

 

 

2,917

 

 

182

ADC

 

 

1,020

 

 

981

 

 

47

 

 

1,028

 

 

991

 

 

48

Home equity/2nds

 

 

1,698

 

 

1,260

 

 

 2

 

 

 —

 

 

 —

 

 

 —

Consumer

 

 

82

 

 

82

 

 

 1

 

 

84

 

 

84

 

 

 2

16


Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2018

 

2017

 

    

Average

    

Interest

    

Average

    

Interest

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

Investment

 

Recognized

 

Investment

 

Recognized

With no related Allowance:

 

(dollars in thousands)

Residential mortgage

 

$

10,765

 

$

110

 

$

10,592

 

$

117

Commercial

 

 

148

 

 

13

 

 

87

 

 

 8

Commercial real estate

 

 

1,328

 

 

10

 

 

2,494

 

 

39

ADC

 

 

634

 

 

 8

 

 

438

 

 

 6

Home equity/2nds

 

 

623

 

 

 4

 

 

1,615

 

 

15

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

With a related Allowance:

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

7,064

 

 

58

 

 

8,839

 

 

97

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate

 

 

1,541

 

 

19

 

 

1,925

 

 

24

ADC

 

 

351

 

 

 4

 

 

383

 

 

 5

Home equity/2nds

 

 

 7

 

 

 —

 

 

1,338

 

 

48

Consumer

 

 

83

 

 

 1

 

 

93

 

 

 1

Totals:

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

17,829

 

 

168

 

 

19,431

 

 

214

Commercial

 

 

148

 

 

13

 

 

87

 

 

 8

Commercial real estate

 

 

2,869

 

 

29

 

 

4,419

 

 

63

ADC

 

 

985

 

 

12

 

 

821

 

 

11

Home equity/2nds

 

 

630

 

 

 4

 

 

2,953

 

 

63

Consumer

 

 

83

 

 

 1

 

 

93

 

 

 1

Residential mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction totaled $4.1$4.0 million as of March 31, 2017. Consumer mortgage loans in real estate acquired through foreclosure amounted to $188,000 and $393,000 at March 31, 2017 and December 31, 2016, respectively.

TDRs
In situations where, for economic2018.

Troubled Debt Restructure Loans (“TDR” or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR.  Such concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  At the time that a loan is modified, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole remaining source of repayment for the loan is the liquidation of the collateral.  In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows.  Any impairment amount is then set up as a specific reserve in the Allowance.

The following table presents loans that were modified during the three months ended March 31 by type of concession:

  2017  2016 
  
Number of
Modifications
  
Recorded
Investment
Prior to
Modification
  
Recorded
Investment
After
Modification
  
Number of
Modifications
  
Recorded
Investment
Prior to
Modification
  
Recorded
Investment
After
Modification
 
Residential Mortgage: (dollars in thousands) 
Combination  -  $-  $-   3  $624  $624 
   -  $-  $-   3  $624  $624 
Interest on our“TDRs”)

Our portfolio of TDRs was accounted for under the following methods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

    

 

    

 

    

 

    

 

    

Total

    

Total

 

 

Number of

 

Accrual

 

Number of

 

Nonaccrual

 

Number of

 

Balance of

 

 

Modifications

 

Status

 

Modifications

 

Status

 

Modifications

 

Modifications

 

 

(dollars in thousands)

Residential mortgage

 

40

 

$

10,692

 

 4

 

$

811

 

44

 

$

11,503

Commercial real estate

 

 3

 

 

1,848

 

 —

 

 

 —

 

 3

 

 

1,848

ADC

 

 1

 

 

136

 

 —

 

 

 —

 

 1

 

 

136

Consumer

 

 3

 

 

82

 

 —

 

 

 —

 

 3

 

 

82

 

 

47

 

$

12,758

 

 4

 

$

811

 

51

 

$

13,569


17

  March 31, 2017 
  
Number of
Modifications
  
Accrual
Status
  
Number of
Modifications
  
Nonaccrual
Status
  
Total
Number of
Modifications
  
Total
Balance of
Modifications
 
 (dollars in thousands) 
Residential mortgage  45  $14,143   5  $2,566   50  $16,709 
Commercial real estate  3   1,901   2   210   5   2,111 
Land  1   28   2   146   3   174 
Consumer  4   92   -   -   4   92 
   53  $16,164   9  $2,922   62  $19,086 

  December 31, 2016 
  
Number of
Modifications
  
Accrual
Status
  
Number of
Modifications
  
Nonaccrual
Status
  
Total
Number of
Modifications
  
Total
Balance of
Modifications
 
 (dollars in thousands) 
Residential mortgage  48  $15,886   4  $2,137   52  $18,023 
Commercial real estate  3   1,914   2   249   5   2,163 
Land  2   170   1   6   3   176 
Consumer  5   96   -   -   5   96 
   58  $18,066   7  $2,392   65  $20,458 

In the first quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

 

    

 

    

 

    

 

    

Total

    

Total

 

 

Number of

 

Accrual

 

Number of

 

Nonaccrual

 

Number of

 

Balance of

 

 

Modifications

 

Status

 

Modifications

 

Status

 

Modifications

 

Modifications

 

 

(dollars in thousands)

Residential mortgage

 

42

 

$

11,631

 

 2

 

$

736

 

44

 

$

12,367

Commercial real estate

 

 3

 

 

1,862

 

 1

 

 

78

 

 4

 

 

1,940

ADC

 

 1

 

 

137

 

 1

 

 

 6

 

 2

 

 

143

Consumer

 

 4

 

 

84

 

 —

 

 

 —

 

 4

 

 

84

 

 

50

 

$

13,714

 

 4

 

$

820

 

54

 

$

14,534

There were no TDRs that subsequently defaulted during the 12three month periodperiods ended March 31, 2018 or 2017 and 2016.


Off-Balance Sheet Instruments
The Bank is a party to financial instruments with off-balance sheet risk inwhich were modified during the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The contract amounts of these instruments express the extent of involvement we have in each class of financial instruments.

Our exposure to credit loss from nonperformance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments.  We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Unless otherwise noted, we require collateral or other security to support financial instruments with off-balance-sheet credit risk.
The following table shows the contract amounts for our off-balance sheet instruments:

  
March 31,
2017
  
December 31,
2016
 
  (dollars in thousands) 
Standby letters of credit $3,713  $4,022 
Home equity lines of credit  7,069   7,736 
Unadvanced construction commitments  12,960   15,728 
Mortgage loan commitments  1,158   574 
Lines of credit  57,289   34,125 
Loans sold and serviced with limited repurchase provisions  51,228   70,773 

Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to various municipalities. These guarantees are issued primarily to support performance arrangements and are limited to real estate transactions.  The majority of these standby letters of credit expire within twelve months.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  The Bank requires collateral supporting these letters of credit as deemed necessary.  Management believes, except for certain standby letters of credit, that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of March 31, 2017 and December 31, 2016 for guarantees under standby letters of credit issued was $93,000 and $94,000, respectively.

Home equity lines of credit are loan commitments to individuals as long as there is no violation of any condition established in the contract. Commitments under home equity lines expire ten years after the date the loan closes and are secured by real estate. We evaluate each customer’s credit worthiness on a case-by-case basis.

Unadvanced construction commitments are loan commitments made to borrowers for both residential and commercial projects that are either in process or are expected to begin construction shortly.

Mortgage loan commitments not reflected in the accompanying statements of financial condition at March 31, 2017 included two loans at fixed interest rates of 3.75% and 4.75%, respectively, totaling $1.2 million. At December 31, 2016 such commitments included two loans at a fixed interest rate of 4.25% totaling $574,000.

Lines of credit are loan commitments to individuals and companies as long as there is no violation of any condition established in the contract. Lines of credit have a fixed expiration date. The Bank evaluates each customer’s credit worthiness on a case-by-case basis.

The Bank has entered into several agreements to sell mortgage loans to third parties. These agreements contain limited provisions that require the Bank to repurchase a loan if the loan becomes delinquent within a period ranging generally from 120 to 180 days after the sale date depending on the investor’s agreement. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers.  We established a reserve for potential repurchases for these loans, which amounted to $52,000 at March 31, 2017 and $48,000 at December 31, 2016.  previous 12 month period.

We did not repurchasemodify any loans during the first quarter of 2017three months ended March 31, 2018 or 2016.


2017.

Note 45 -  Regulatory Matters


The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.


In July 2015,2013, federal bank regulatory agencies issued final results to revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (“Basel III”). On January 1, 2015, the Basel III rules became effective and include transition provisions which implement certain portions of the rules through January 1, 2019. Under the final rules, the effects of certain accumulated other comprehensive items are not excluded, however, banking organizations like us that are not considered “advanced approaches” banking organizations may make a one-time permanent election to continue to exclude these items. With the submission of the Call Report for the first quarter of 2015, we made this election in order to avoid significant variations in the level of capital that can be caused by interest rate fluctuations on the fair value of the Bank’s AFS securities portfolio.

The Basel III rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The new capital conservation buffer requirements began to phase in effective January 2016 at 0.625% of risk-weighted assets and increase by that amount each year until fully implemented in January 2019 (1.25 % at March 31, 2017)2019. In 2018 the capital conservation buffer is 1.875%. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

As of the date of the last regulatory exam, the Bank was considered “well capitalized” and as of March 31, 2017,2018, the Bank continued to meet the requirements to be considered “well capitalized” based on applicable U.S. regulatory capital ratio requirements.


18

Our

The Bank’s regulatory capital amounts and ratios were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

Minimum

 

To be Well

 

 

 

 

 

 

 

Requirements

 

Requirements

 

Capitalized Under

 

 

 

 

 

 

 

for Capital Adequacy

 

with Capital

 

Prompt Corrective

 

 

 

Actual

 

 

 

Purposes

 

Conservation Buffer

 

Action Provision

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

 

 

(dollars in thousands)

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital (to risk-weighted assets)

 

$

107,618

 

16.8

%  

$

28,750

 

4.5

%  

$

40,729

 

6.4

%  

$

41,527

 

6.5

%

Total capital (to risk-weighted assets)

 

 

115,614

 

18.1

%

 

51,111

 

8.0

%

 

63,090

 

9.9

%

 

63,888

 

10.0

%

Tier 1 capital (to risk-weighted assets)

 

 

107,618

 

16.8

%  

 

38,333

 

6.0

%  

 

50,312

 

7.9

%  

 

51,111

 

8.0

%

Tier 1 capital (to average quarterly assets)

 

 

107,618

 

13.5

%  

 

31,835

 

4.0

%  

 

46,757

 

5.9

%  

 

39,793

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital (to risk-weighted assets)

 

$

105,721

 

16.5

%  

$

28,904

 

4.5

%  

$

36,933

 

5.8

%  

$

41,750

 

6.5

%

Total capital (to risk-weighted assets)

 

 

113,758

 

17.7

%

 

51,385

 

8.0

%

 

59,414

 

9.3

%

 

64,231

 

10.0

%

Tier 1 capital (to risk-weighted assets)

 

 

105,721

 

16.5

%  

 

38,539

 

6.0

%  

 

46,567

 

7.3

%  

 

51,385

 

8.0

%

Tier 1 capital (to average quarterly assets)

 

 

105,721

 

13.5

%  

 

31,440

 

4.0

%  

 

41,264

 

5.3

%  

 

39,300

 

5.0

%


  Actual     
Minimum
Requirements
for Capital Adequacy
Purposes
  
Minimum
Requirements
with Capital
Conservation Buffer
  
To be Well
Capitalized Under
Prompt Corrective
Action Provision
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
March 31, 2017 (dollars in thousands) 
Common Equity Tier 1 Capital (to risk-weighted assets) $100,246   16.9% $26,668   4.5% $33,779   5.8% $38,520   6.5%
                                 
Total capital (to risk-weighted assets)  107,682   18.2%  47,409   8.0%  54,520   9.3%  59,261   10.0%
                                 
Tier 1 capital (to risk-weighted assets)  100,246   16.9%  35,557   6.0%  42,668   7.3%  47,409   8.0%
                                 
Tier 1 capital (to average quarterly assets)  100,246   12.9%  31,169   4.0%  40,520   5.3%  38,962   5.0%
                                 
December 31, 2016   
Common Equity Tier 1 Capital (to risk-weighted assets) $98,970   16.5% $26,983   4.5% $30,730   5.1% $38,975   6.5%
                                 
Total capital (to risk-weighted assets)  106,517   17.8%  47,969   8.0%  51,717   8.6%  59,962   10.0%
                                 
Tier 1 capital (to risk-weighted assets)  98,970   16.5%  35,977   6.0%  39,725   6.6%  47,969   8.0%
                                 
Tier 1 capital (to average quarterly assets)  98,970   12.9%  30,634   4.0%  35,420   4.6%  38,292   5.0%

Note 56 -  Earnings Per Share


Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for each period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options, warrants, and convertible preferred stock, and are determined using the treasury stock method.


Not included in the diluted earnings per share calculation for the three month periods ended March 31,2018 and 2017 and March 31, 2016, because they were anti-dilutive, were 22,000 and 20,000 and 136,500 shares, respectively, of common stock issuable upon exercise of outstanding stock options 556,976 shares of common stock issuable upon the exercise of a warrant, and 437,500 shares of common stock issuable upon conversion of the Company’s Series A Preferred Stock.

Information relating to the calculations of our income per common share is summarized as follows for the three months ended March 31:follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

    

 

 

(dollars in thousands, except for per share data)

 

Weighted-average shares outstanding - basic

 

 

12,241,554

 

 

12,125,553

 

Dilution

 

 

93,083

 

 

85,027

 

Weighted-average share outstanding - diluted

 

 

12,334,637

 

 

12,210,580

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

1,815

 

$

855

 

Net income per share - basic

 

$

0.15

 

$

0.07

 

Net income per share - diluted

 

$

0.15

 

$

0.07

 


19

  2017  2016 
  (dollars in thousands, except for per share data) 
Weighted-average shares outstanding - basic  12,125,553   10,088,879 
Dilution  85,027   39,372 
Weighted-average share outstanding - diluted  12,210,580   10,128,251 
         
Net income available to common stockholders $787  $313 
         
Net income per share - basic $0.06  $0.03 
Net income per share - diluted $0.06  $0.03 


Note 67 - Stock-Based Compensation


We maintain a stock-based compensation plan for directors, officers, and other key employees of the Company. The aggregate number of shares of common stock that may be issued with respect to the awards granted under the plan is 500,000 plus any shares forfeited under the Company’s old stock-based compensation plan. Under the terms of the stock-based compensation plan, the Company has the ability to grant various stock compensation incentives, including stock options, stock appreciation rights, and restricted stock. The stock-based compensation is granted under terms and conditions determined by the Compensation Committee of the Board of Directors. Under the stock-based compensation plan, stock options generally have a maximum term of ten years, and are granted with an exercise price at least equal to the fair market value of the common stock on the date the options are granted. Generally, options granted to directors, officers, and employees of the Company vest over a five-year period, although the Compensation Committee has the authority to provide for different vesting schedules.


We account for stock-based compensation in accordance with FASB Accounting Standards CodificationASC Topic 718, Compensation – Stock Compensation, whichrequires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statement of operations at fair value. Additionally, we are required to recognize the expense of employee services received in share-based payment transactions and measure the expense based on the grant date fair value of the award. The expense is recognized over the period during which an employee is required to provide service in exchange for the award. Stock-based compensation expense included in the consolidated statements of operations for the three months ended March 31, 2018 and 2017 totaled $56,000 and 2016 totaled $53,000, and $48,000, respectively. 


There were no options granted during the three months ended March 31, 2017 or 2016.

Information regarding our stock-based compensation plan is as follows as of and for the three  months ended March 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

    

 

    

 

    

Weighted-

    

 

    

 

    

 

    

Weighted-

    

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

Number

 

Exercise

 

Contractual

 

Value

 

Number

 

Exercise

 

Contractual

 

Value

 

 

of Shares

 

Price

 

Term (in years)

 

(in thousands)

 

of Shares

 

Price

 

Term (in years)

 

(in thousands)

Outstanding at beginning of period

 

434,275

 

$

5.87

 

  

 

 

  

 

339,500

 

$

5.31

 

  

 

 

  

Granted

 

6,500

 

 

7.41

 

  

 

 

  

 

 —

 

 

 —

 

  

 

 

  

Exercised

 

(14,202)

 

 

3.95

 

  

 

 

  

 

(5,025)

 

 

3.37

 

  

 

 

  

Forfeited

 

(250)

 

 

7.10

 

  

 

 

  

 

 —

 

 

 —

 

  

 

 

  

Outstanding at end of period

 

426,323

 

$

5.96

 

6.2

 

$

549

 

334,475

 

$

5.34

 

7.7

 

$

627

Exercisable at end of period

 

200,028

 

$

5.03

 

6.1

 

$

453

 

151,249

 

$

4.61

 

6.8

 

$

397

The fair values of options at the time of the grants were derived using the Black-Scholes option-pricing model.  The followings weighted average assumptions were used to value options granted for the three months ended March 31, 2018:


 

 

 

 

 

 

    

2018

    

Expected life

 

 

5.5 years

 

Risk-free interest rate

 

 

2.67

%  

Expected volatility

 

 

32.20

%  

Expected dividend yield

 

 

 —

 

Weighted average per share fair value of options granted

 

$

2.57

 

  2017  2016 
  
Number
of Shares
  
Weighted-
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (in years)
  
Aggregate
Intrinsic
Value
(in thousands)
  
Number
of Shares
  
Weighted-
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (in years)
  
Aggregate
Intrinsic
Value
(in thousands)
 
Outstanding at beginning of period  339,500  $5.31         339,800  $4.83       
Granted  -   -         -   -       
Exercised  (5,025)  3.37         -   -       
Outstanding at end of period  334,475  $5.34   7.7  $627   339,800  $4.83   8.0  $131 
Exercisable at end of period  151,249  $4.61   6.8  $397   138,771  $4.27   6.9  $131 

As of March 31, 2017,31,2018, there was $590,000$662,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over a period of sixty months.the next 60 months.

20


Note 78 - Other Comprehensive Loss


Commitments and Contingencies

Off-Balance Sheet Instruments

The following table presents the changesBank is a party to financial instruments with off-balance sheet risk in the componentsnormal course of accumulatedbusiness to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The contract amounts of these instruments express the extent of involvement we have in each class of financial instruments.

Our exposure to credit loss from nonperformance by the other comprehensive loss,party to the above mentioned financial instruments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless otherwise noted, we require collateral or other security to support financial instruments with off-balance sheet credit risk.

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

2018

    

2017

 

 

(dollars in thousands)

Standby letters of credit

 

$

3,434

 

$

3,480

Home equity lines of credit

 

 

14,221

 

 

13,321

Unadvanced construction commitments

 

 

50,021

 

 

74,720

Mortgage loan commitments

 

 

3,148

 

 

595

Lines of credit

 

 

16,796

 

 

16,612

Loans sold and serviced with limited repurchase provisions

 

 

24,592

 

 

21,409

Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to various municipalities. These guarantees are issued primarily to support performance arrangements and are limited to real estate transactions. The majority of these standby letters of credit expire within twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes, except for certain standby letters of credit, that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of March 31, 2018 and December 31, 2017 for guarantees under standby letters of credit issued was $44,000 and $42,000, respectively.

Home equity lines of credit are loan commitments to individuals as long as there is no violation of any condition established in the contract. Commitments under home equity lines expire ten years after the date the loan closes and are secured by real estate. We evaluate each customer’s credit worthiness on a case-by-case basis.

Unadvanced construction commitments are loan commitments made to borrowers for both residential and commercial projects that are either in process or are expected to begin construction shortly.

Mortgage loan commitments not reflected in the accompanying statements of financial condition at March 31, 2018 included three loans totaling $3.1 million.Such commitments at December 31, 2017 consisted of two loans totaling $595,000.

Lines of credit are loan commitments to individuals and companies as long as there is no violation of any condition established in the contract. Lines of credit have a fixed expiration date. The Bank evaluates each customer’s credit worthiness on a case-by-case basis.

The Bank has entered into several agreements to sell mortgage loans to third parties. These agreements contain limited provisions that require the Bank to repurchase a loan if the loan becomes delinquent within a period ranging generally from 120 to 180 days after the sale date depending on the investor’s agreement. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. We established a reserve for

21


potential repurchases for these loans, which amounted to $67,000 at March 31, 2018 and $63,000 at December 31, 2017. We did not repurchase any loans during the three months ended March 31, 2018 or 2017.

Other Contingencies

The Company provides banking services to customers who do business in the medical-use cannabis industry. While the growing, processing, and sales of medical-use cannabis is legal in the state of Maryland, the business currently violates Federal law. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. The strict enforcement of Federal laws regarding medical-use cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s consolidated financial statements if the Federal government takes actions against the Company. As of March 31, 2018, the Company has not accrued an amount for the potential impact of any such actions.

Following is a summary of the level of business activities with our medical-use cannabis customers:

•  Deposit and loan balances at March 31, 2018 were approximately $16.5 million, 2.8% of total deposits, and $12.7 million, 1.9% of total loans, respectively. Deposit and loan balances at December 31, 2017 were approximately $19.2 million, 3.2% of total deposits, and $11.9 million, 1.8% of total loans, respectively.

•Interest and noninterest income for the three months ended March 31, 2017(dollars in thousands):


Balance at beginning of period $- 
Other comprehensive loss before reclassification  (15)
Amounts reclassified from accumulated other comprehensive loss  - 
Net other comprehensive loss during period $(15)
Balance at end of period $(15)

We did not have any accumulated other comprehensive2018 were approximately $176,000 and $230,000, respectively. There was no interest or noninterest income or lossrecognized on medical-use cannabis accounts for the three months ended March 31, 2016.

2017.

•Volume of deposits in the accounts of medical-use cannabis customers for the three months ended March 31, 2018 was approximately $17.9 million. No deposits were made in medical-use cannabis accounts during the three months ended March 31, 2017.

Note 89 - Fair Value of Financial Instruments


A fair value hierarchy that prioritizes the inputs to valuation methods is used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair market hierarchy are as follows:


Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,    unrestricted assets or liabilities.


Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.


Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).


An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

We record transfers between levels at the end of the reporting period in which the change in significant inputs occurs.

22


Assets and Liabilities Measured on a Recurring Basis

The following tables present fair value measurements for assets and liabilities that are measured at fair value on a recurring basis as of and for the three months ended March 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

  

 

    

  

    

Significant

    

  

    

  

 

 

  

 

 

  

 

Other

 

Significant

 

Total Changes

 

 

  

 

 

Quoted

 

Observable

 

Unobservable

 

In Fair Values

 

 

Carrying

 

Prices

 

Inputs

 

Inputs

 

Included In

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period Income

Assets:

 

(dollars in thousands)

AFS Securities - U.S. Treasury and government agency notes

 

$

12,011

 

$

1,975

 

$

10,036

 

$

 —

 

$

 —

Loans held for sale ("LHFS")

 

 

5,803

 

 

 —

 

 

5,803

 

 

 —

 

 

38

Mortgage servicing rights ("MSRs")

 

 

499

 

 

 —

 

 

 —

 

 

499

 

 

22

Interest-rate lock commitments ("IRLCs")

 

 

184

 

 

 —

 

 

 —

 

 

184

 

 

162

Mandatory forward contracts

 

 

41

 

 

 —

 

 

41

 

 

 —

 

 

28

Best efforts forward contracts

 

 

15

 

 

 —

 

 

15

 

 

 —

 

 

12


  
Carrying
Value
  
Quoted
Prices
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total Changes
In Fair Values
Included In
Period Income
 
Assets: (dollars in thousands) 
AFS Securities - U.S. government agency notes $7,151  $-  $7,151  $-  $- 
Loans held for sale (“LHFS”)  2,755   -   2,755   -   85 
Mortgage servicing rights (“MSRs”)  546   -   -   546   43 
Interest-rate lock commitments (“IRLCs”)  169   -   169   -   7 
Mandatory forward contracts  2   -   2   -   (151)
                     
Liabilities:                    
Best efforts forward contracts  26   -   26   -   (26)

The following tables present fair value measurements for assets and liabilities that are measured at fair value on a recurring basis as of and for the year ended December 31, 2016:2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

  

    

  

    

Significant

    

  

    

  

 

 

  

 

  

 

Other

 

Significant

 

Total Changes

 

 

  

 

Quoted

 

Observable

 

Unobservable

 

In Fair Values

 

 

Carrying

 

Prices

 

Inputs

 

Inputs

 

Included In

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period Income

Assets:

 

(dollars in thousands)

AFS Securities - U.S. Treasury and government agency notes

 

$

10,119

 

$

 —

 

$

10,119

 

$

 —

 

$

 —

LHFS

 

 

4,530

 

 

 —

 

 

4,530

 

 

 —

 

 

131

MSRs

 

 

477

 

 

 —

 

 

 —

 

 

477

 

 

(80)

IRLCs

 

 

22

 

 

 —

 

 

 —

 

 

22

 

 

(140)

Mandatory forward contracts

 

 

13

 

 

 —

 

 

13

 

 

 —

 

 

(140)

Best efforts forward contracts

 

 

 3

 

 

 —

 

 

 3

 

 

 —

 

 

 3


  
Carrying
Value
  
Quoted
Prices
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total Changes
In Fair Values
Included In
Period Income
 
Assets: (dollars in thousands) 
MSRs $557  $-  $-  $557  $181 
IRLCs  162   -   162   -   (21)
Mandatory forward contracts  153   -   153   -   42 

The following table provides additional quantitative information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair Value

    

Valuation

    

Unobservable

    

Range

 

 

 

Estimate

 

Technique

 

Input

 

(Weighted-Average)

 

 

 

(dollars in thousands)

 

 

 

 

 

March 31, 2018:

 

 

  

 

  

 

  

 

  

 

MSRs

 

$

499

 

Market Approach

 

Weighted average prepayment speed

 

3.97

%

IRLCs

 

 

184

 

Market Approach

 

Average pull through rate

 

90.00

%

  

 

 

  

 

  

 

  

 

  

 

December 31, 2017:

 

 

  

 

  

 

  

 

  

 

MSRs

 

$

477

 

Market Approach

 

Weighted average prepayment speed

 

3.94

%

IRLCs

 

 

22

 

Market Approach

 

Average pull through rate

 

90.00

%


  
Fair Value
Estimate
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted-Average)
 
  (dollars in thousands)     
March 31, 2017:         
MSRs $546 Market Approach Weighted average prepayment speed  3.96 %
            
December 31, 2016:        
MSRs $557 Market Approach Weighted average prepayment speed  3.95 %

AFS Securities


The estimated fair values of AFS debt securities are obtained from a nationally-recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying

23


exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things, and are based on market data obtained from sources independent from the Bank. The Level 2 investments in the Bank’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. The Bank has determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in the Bank’s portfolio are not exchange-traded, and such nonexchange-traded fixed income securities are typically priced by correlation to observed market data.


LHFS


At March 31,2017,

LHFS wereare carried at fair value, which is determined based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements or third party pricing models. At December 31, 2017, LHFS were carried at the lower-of-cost or market value (“LCM”) utilizing the same method.


MSRs


The fair value of MSRs is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees. Management reviews all significant assumptions on a monthly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.

IRLCs


We utilize a third party specialist model to estimate the fair value of our IRLCs, which are valued based upon mandatory pricing quotes from correspondent lenders less estimated costs to process and settle the loan. Fair value is adjusted for the estimated probability of the loan closing with the borrower.


Forward Contracts


To avoid interest rate risk, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and the bank measures and reports them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a level 2 input. We have elected to measure and report best efforts commitments at fair value using a valuation methodology similar to that used for our mandatory commitments.


24


Assets Measured on a Nonrecurring Basis

We may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of LCMlower-of-cost-or-market value (“LCM”) accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other 

 

Significant

 

 

 

 

 

 

 

 

 

 

Quoted 

 

Observable

 

Unobservable

 

 

 

 

 

 

 

Carrying 

 

Prices

 

Inputs

 

Inputs

 

Range of

 

Weighted

 

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average

 

 

 

(dollars in thousands)

 

 

 

 

 

Impaired loans

 

$

8,697

 

$

 —

 

$

 —

 

$

8,697

 

0% - 19%

 

8.2

%

Real estate acquired through

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

 

foreclosure

 

 

23

 

 

 —

 

 

 —

 

 

23

 

0% - 36%

 

36.0

%


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other 

 

Significant

 

 

 

 

 

 

 

 

 

 

Quoted 

 

Observable

 

Unobservable

 

 

 

 

 

 

 

Carrying 

 

Prices

 

Inputs

 

Inputs

 

Range of

 

Weighted

 

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average

  

 

 

(dollars in thousands)

 

 

 

 

 

Impaired loans

 

$

2,793

 

$

 —

 

$

 —

 

$

2,793

 

0% - 33%

 

14.5

%

Real estate acquired through

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

 

foreclosure

 

 

178

 

 

 —

 

 

 —

 

 

178

 

0% - 22%

 

11.5

%

  March 31, 2017 
  
Carrying
Value
  
Quoted
Prices
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Range of
Discount
  
Weighted
Average
 
  (dollars in thousands)       
Impaired loans $1,989  $-  $-  $1,989   0% - 32%  18.4%
Real estate acquired through foreclosure  735   -   -   735   0% - 26%  4.9%


(1)

Discount based on current market conditions and estimated selling costs

  December 31, 2016 
  
Carrying
Value
  
Quoted
Prices
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Range of
Discount
  
Weighted
Average
 
  (dollars in thousands)       
Impaired loans $2,136  $-  $-  $2,136   0% - 2%  2.0%
Real estate acquired through foreclosure  767   -   -   767   0% - 10%  10.0%

Impaired Loans


Impaired loans are those for which we have measured impairment based on the present value of expected future cash flows or on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. If it is determined that the repayment of the loan will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment, the loan is considered collateral dependent. Impaired loans that are considered collateral dependent are carried at the LCM. Collateral may be in the form of real estate or business assets including equipment, inventory, andand/or accounts receivable. The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within level 3 of the fair value hierarchy.

For such loans that are classified as impaired, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan. For such impaired loans that are classified as collateral dependent, an Allowance is established when the current market value of the underlying collateral less its estimated disposal costs has not been finalized, but management determines that it is likely that the value is lower than the carrying value of that loan. Once the net collateral value has been determined, a charge-off is taken for the difference between the net collateral value and the carrying value of the loan.


Real Estate Acquired Through Foreclosure


We record foreclosed real estate assets at the fair value less estimated selling costs on their acquisition dates and at the lower of such initial amount or estimated fair value less estimated selling costs thereafter. We generally obtain certified external appraisals of real estate acquired through foreclosure and estimate fair value using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent, and executed sale agreements.

25


Fair Value of All Financial Instruments

The carrying value and estimated fair value of all financial instruments are summarized in the following tables. The descriptions of the fair value calculations for AFS securities, LHFS, MSRs, IRLCs, best efforts forward contracts, mandatory forward contracts, and impaired loans and real estate acquired through foreclosure are included in the discussions above.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

Carrying

 

Fair Value

 

    

Value

    

Level 1

    

Level 2

    

Level 3

    

 Total

Assets:

 

(dollars in thousands)

Cash and cash equivalents

 

$

18,307

 

$

18,307

 

$

 —

 

$

 —

 

$

18,307

Certificates of deposit held for investment

 

 

8,780

 

 

8,780

 

 

 —

 

 

 —

 

 

8,780

AFS securities

 

 

12,011

 

 

1,975

 

 

10,036

 

 

 —

 

 

12,011

HTM securities

 

 

49,911

 

 

5,025

 

 

44,001

 

 

 —

 

 

49,026

LHFS

 

 

5,803

 

 

 —

 

 

5,803

 

 

 —

 

 

5,803

Loans receivable, net

 

 

661,743

 

 

 —

 

 

 —

 

 

668,451

 

 

668,451

Restricted stock investments

 

 

4,844

 

 

 —

 

 

4,844

 

 

 —

 

 

4,844

Accrued interest receivable

 

 

2,454

 

 

 —

 

 

2,454

 

 

 —

 

 

2,454

MSRs

 

 

499

 

 

 —

 

 

 —

 

 

499

 

 

499

IRLCs

 

 

184

 

 

 —

 

 

 —

 

 

184

 

 

184

Mandatory forward contracts

 

 

41

 

 

 —

 

 

41

 

 

 —

 

 

41

Best effort forward contracts

 

 

15

 

 

 —

 

 

15

 

 

 —

 

 

15

Liabilities:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

Deposits

 

 

589,916

 

 

 —

 

 

578,257

 

 

 —

 

 

578,257

Accrued interest payable

 

 

416

 

 

 —

 

 

416

 

 

 —

 

 

416

Borrowings

 

 

96,500

 

 

 —

 

 

89,198

 

 

 —

 

 

89,198

Subordinated debentures

 

 

20,619

 

 

 —

 

 

 —

 

 

20,619

 

 

20,619


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Carrying

 

Fair Value

 

    

Value

    

Level 1

    

Level 2

    

Level 3

    

 Total

Assets:

 

(dollars in thousands) 

Cash and cash equivalents

 

$

21,853

 

$

21,853

 

$

 —

 

$

 —

 

$

21,853

Certificates of deposit held for investment

 

 

8,780

 

 

8,780

 

 

 —

 

 

 —

 

 

8,780

AFS securities

 

 

10,119

 

 

 —

 

 

10,119

 

 

 —

 

 

10,119

HTM securities

 

 

54,303

 

 

5,056

 

 

48,948

 

 

 —

 

 

54,004

LHFS

 

 

4,530

 

 

 —

 

 

4,530

 

 

 —

 

 

4,530

Loans receivable, net

 

 

660,096

 

 

 —

 

 

 —

 

 

672,349

 

 

672,349

Restricted stock investments

 

 

4,489

 

 

 —

 

 

4,489

 

 

 —

 

 

4,489

Accrued interest receivable

 

 

2,640

 

 

 —

 

 

2,640

 

 

 —

 

 

2,640

MSRs

 

 

477

 

 

 —

 

 

 —

 

 

477

 

 

477

IRLCs

 

 

22

 

 

 —

 

 

 —

 

 

22

 

 

22

Mandatory forward contracts

 

 

13

 

 

 —

 

 

13

 

 

 —

 

 

13

Best effort forward contracts

 

 

 3

 

 

 —

 

 

 3

 

 

 —

 

 

 3

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Deposits

 

 

602,228

 

 

 —

 

 

594,659

 

 

 —

 

 

594,659

Accrued interest payable

 

 

395

 

 

 —

 

 

395

 

 

 —

 

 

395

Borrowings

 

 

88,500

 

 

 —

 

 

81,303

 

 

 —

 

 

81,303

Subordinated debentures

 

 

20,169

 

 

 —

 

 

 —

 

 

20,619

 

 

20,619

  March 31, 2017 
  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
Assets: (dollars in thousands) 
Cash and cash equivalents $83,557  $83,557  $-  $-  $83,557 
AFS securities  7,151   -   7,151   -   7,151 
HTM securities  59,283   11,139   48,250   -   59,389 
LHFS  2,755   -   2,755   -   2,755 
Loans receivable  601,409   -   -   598,174   598,174 
Restricted stock investments  4,701   -   4,701   -   4,701 
MSRs  546   -   -   546   546 
IRLCs  169   -   169   -   169 
Mandatory forward contracts  2   -   2   -   2 
Liabilities:                    
Deposits  593,762   -   594,288   -   594,288 
Borrowings  93,500   -   90,000   -   90,000 
Subordinated debentures  20,619   -   -   20,619   20,619 
Best effort forward contracts  26   -   26   -   26 

  December 31, 2016 
  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
Assets: (dollars in thousands) 
Cash and cash equivalents $67,114  $67,114  $-  $-  $67,114 
HTM securities  62,757   13,165   49,662   -   62,827 
LHFS  10,307   -   10,313   -   10,313 
Loans receivable  601,309   -   -   602,953   602,953 
Restricted stock investments  5,103   -   5,103   -   5,103 
MSRs  557   -   -   557   557 
IRLCs  162   -   162   -   162 
Mandatory forward contracts  153   -   153   -   153 
Liabilities:                    
Deposits  571,946   -   572,556   -   572,556 
Borrowings  103,500   -   97,961   -   97,961 
Subordinated debentures  20,619   -   -   20,619   20,619 

At March 31, 201731,2018 and December 31, 2016,2017, the Bank had loan funding commitments of $78.5$84.2 million and $58.2$105.2 million, respectively, and standby letters of credit outstanding of $3.7$3.4 million and $4.0$3.5 million, respectively. The fair value of these commitments is nominal.


26


Cash and Cash Equivalents


The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents approximate those assets’ fair values.


Certificates Held for Investment

The carrying amount reported in the consolidated statements of financial condition for Certificates of Deposit Held for Investment approximate those assets’ fair values.

HTM securities


The Company utilizes a third party source to determine the fair value of its securities. The methodology consists of pricing models based on asset class and includes available trade, bid, other market information, broker quotes, proprietary models, various databases, and trading desk quotes. U.S TreasuaryTreasury Securities are considered Level 1 and all of our other securities are considered Level 2.


Loans Receivable


The

As of March 31, 2018, the fair valuesvalue of loans receivable werewas estimated using an exit price analysis, in accordance with current FASB guidance, contracted through a third party service provider. As of December 31, 2017, the fair value of loans receivable was estimated using discounted cash flow analyses, using market interest rates currently beingthen offered for loans with similar terms to borrowers of similar credit quality.  These rates were used for each aggregated category of loans as reported on the Office of the Comptroller of the Currency Quarterly Report.


loans.

Restricted Stock Investments


The carrying value of restricted stock investments is a reasonable estimate of fair value as these investments do not have a readily available market.


Accrued Interest Receivable and Payable

The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.

Deposits


The fair values disclosed for demand deposit accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.


Borrowings


Long-term and short-term borrowings were segmented into categories with similar financial characteristics. Carrying values were discounted using a cash flow approach based on market rates.


Subordinated debentures


Current economic conditions have rendered the market for this liability inactive. As such, the Company is unable to determine a good estimate of fair value. Since the rate paid on the debentures held is lower than what would be required to secure an interest in the same debt at year end and we are unable to obtain a current fair value, the Company has disclosed thatwe consider the carrying value approximatesof these instruments to approximate the fair value.


27

Limitations

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from a one-time sale of our total holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates. The above information should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only provided for a limited portion of our assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between our disclosures and those of other companies may not be meaningful.

There were no transfers between any of Levels 1, 2, and 3 for the three months ended March 31, 20172018 or 20162017 or for the year ended December 31, 2016.2017.

28


Note 10 -  Subsequent Event

On April 2, 2018, the Company exercised its option to convert all 437,500 outstanding shares of Preferred Stock into shares of the Company’s common stock. The conversion ratio was one share of Preferred Stock for one share of common stock. As of April 2, 2018, the Preferred Stock was no longer deemed outstanding and all rights with respect to such stock ceased and terminated.

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

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

When used in this report, the terms “the Company,” “we,” “us,” and “our” refer to Severn Bancorp and, unless the context requires otherwise, its consolidated subsidiaries. The following discussion should be read and reviewed in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Severn Bancorp’s Annual Report on Form 10-K10‑K for the year ended December 31, 2016.


2017.

The Company


The Company is a savings and loan holding company chartered as a corporation in the state of Maryland in 1990. It conducts business primarily through twothree subsidiaries, Severn Savings Bank, FSB (the “Bank”), Mid-Maryland Title Company, Inc. (the “Title Company”), and SBI Mortgage Company (“SBI”).  The Bank’s principal subsidiary Louis Hyatt, Inc. (“Hyatt Commercial”), conducts business as Hyatt Commercial, a commercial real estate brokerage and property management company. SBI holds mortgages that do not meet the underwriting criteria of the Bank, and is the parent company of Crownsville Development Corporation (“Crownsville”), which is doing business as Annapolis Equity Group, whichand acquires real estate for syndication and investment purposes. The Title Company is a real estate settlement company that handles commercial and residential real estate settlements in Maryland. The Bank’s principal subsidiary Louis Hyatt, Inc. (“Hyatt Commercial”), conducts business as Hyatt Commercial, a commercial real estate brokerage and property management company. The Bank has five branches in Anne Arundel County, Maryland, which offer a full range of deposit products, and originate mortgages in its primary market of Anne Arundel County, Maryland and, to a lesser extent, in other parts of Maryland, Delaware, and Virginia.


As of March 31, 2018, we had 143 full-time equivalent employees.

Overview


The Company provides a wide range of personal and commercial banking services. Personal services include mortgage lending and various other lending services as well as deposit products such as personal Internet banking and online bill pay, checking accounts, individual retirement accounts, money market accounts, and savings and time deposit accounts. Commercial services include commercial secured and unsecured lending services as well as business Internet banking, corporate cash management services, and deposit services. The Company also provides ATMs, credit cards, debit cards, safe deposit boxes, and telephone banking, among other products and services.


We have experienced a slightlyan improved level of profitability for the three months ended March 31, 2017,2018, primarily due to the payoffimproved profitability of $10.0 millionour mortgage-banking operations as well as an improvement in Federal Home Loan Bankour net interest margin. We recognized increased deposit service charges as a result of Atlanta (“FHLB”) advancesfees from medical-use cannabis deposit accounts and a reversal of the provision for loan losses. Management believes that, while conditions continue to improve and real estate values in the Company’s market area continue to stabilize, certain detrimental factors, including job losses, still exist for some customers. The interest rate spread between our cost of funds and what we earn on loans has shrunk somewhat from 2016 levelsrealized lower income taxes due to slightly rising interest rates and competition for new loans and deposits. We recorded no incomea lower federal tax provision during the first quarter of 2016 as we maintained a valuation allowance against the full amount of our deferred tax assests at that time. During the latter part of 2016, we reversed the valuation allowance and recorded a tax provision for the first quarter of 2017.


rate in 2018. 

The Company expects to experience similar market conditions during the remainder of 2017, as the national and local economies continue to improve and as the employment environment in our market improves.2018, provided interest rates do not increase rapidly. If interest rates increase rapidly, demand for borrowingloans may decrease and our interest rate spread could decrease. We will continue to manage loan and deposit pricing against the risks of rising costs of our deposits and borrowings. Interest rates are outside of our control, so we must attempt to balance the pricing and duration of the loan portfolio against the risks of rising costs of our deposits and borrowings.


The continued success and attraction of Anne Arundel County, Maryland, and vicinity, will also be important to our ability to originate and grow mortgage loans and deposits, as will our continued focus on maintaining a low overhead.

If the volatility in the market and the economy continues or worsens,occurs, our business, financial condition, results of operations, access to funds, and the price of our stock could be materially and adversely impacted.


29


Critical Accounting Policies


Our significant accounting policies are set forth in Note 1 of the audited consolidated financial statements for the year ended December 31, 20162017 which were included in our Annual Report on Form 10-K.10‑K. Of these significant accounting policies, we consider our policies regarding the valuation of  investment securities, the Allowance for loan losses (“Allowance”), the valuation of real estate acquired through foreclosure, the valuation of  investment securities, and the valuation of the net deferred tax asset to be our most critical accounting policies, due to the fact that these policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried onin the consolidated financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. When applying accounting policies in such areas that are subjective in nature, management must use its best judgment to arrive at the carrying value of certain assets and liabilities. Below is a discussion of our critical accounting policies.

Securities

We designate securities into one of three categories at the time of purchase. Debt securities that we have the intent and ability to hold to maturity are classified as held to maturity (“HTM”) and recorded at amortized cost. Debt and equity securities are classified as trading if bought and held principally for the purpose of sale in the near term. Trading securities are reported at estimated fair value, with unrealized gains and losses included in earnings. Debt securities not classified as HTM and debt and equity securities not classified as trading securities are considered available for sale (“AFS”) and are reported at estimated fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity, net of tax effects, in accumulated other comprehensive loss.


AFS and HTM securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security.


The initial indications of other-than-temporary impairment (“OTTI”) for both debt and equity securities are a decline in the market value below the amount recorded for a security and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, our intent to sell the security, and if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. We also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, and any change in agencies’ ratings at evaluation date from acquisition date and any likely imminent action. Once a decline in value is determined to be other than temporary, the security is segmented into credit- and noncredit-related components. Any impairment adjustment due to identified credit-related components is recorded as an adjustment to current period earnings, while noncredit-related fair value adjustments are recorded through accumulated other comprehensive loss. In situations where we intend to sell or it is more likely than not that we will be required to sell the security, the entire OTTI loss is recognized in earnings.


Allowance for Loan Losses


The Allowance is maintained at an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Determining the amount of the Allowance requires the use of estimates and assumptions. Actual results could differ significantly from those estimates.


30


Future additions or reductionreductions in the Allowance may be necessary based on changes in economic conditions, particularly in Anne Arundel County and the State of Maryland.Maryland and our actual loss experience. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s Allowance. Such agencies may require the Bank to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination.


The Allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. When a real estate secured loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value (“LTV”) ratio based on the original appraisal and the condition of the property. Appraised values are discounted, if appropriate, to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For loans secured by collateral other than real estate, such as accounts receivable, inventory, and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging, or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.


For such loans that are classified as impaired, an Allowance is established when the current fair value of the underlying collateral less its estimated disposal costs has not been finalized, but management determines that it is likely that the value is lower than the carrying value of that loan. Once the netfair collateral value has been determined, a charge off is taken for the difference between the net collateralfair value and the carrying value of the loan. For loans that are not solely collateral dependent, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan.  The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as nonclassified loans.  The general reserve is based on historical loss experience adjusted for qualitative factors.  These qualitative factors include, but are not limited to:

28

·Levels and trends in delinquencies and nonaccruals;
·Inherent risk in the loan portfolio;
·Trends in volume and terms of the loan;
·Effects of any change in lending policies and procedures;
·Experience, ability and depth of management;
·National and local economic trends and conditions; and
·Effect of any changes in concentration of credit.

A loan is considered impaired if it meets any of the following three criteria:

·

Loans that are 90 days or more in arrears (nonaccrual loans); or

·

Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.agreement; or

·

Loans that are modified and qualify as troubled debt restructured loans (“TDR” or “TDRs”).

Loans that experience insignificant payment delays and payment shortfalls may not be classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of 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.

The general component relates to loans that are classified as substandard, or special mention that are not considered impaired, as well as nonclassified loans. The general reserve is based on historical loss experience adjusted for qualitative factors. These qualitative factors include, but are not limited to:

·

Levels and trends in delinquencies and nonaccruals;


·

Inherent risk in the loan portfolio;

·

Trends in volume and terms of the loan;

·

Effects of any change in lending policies and procedures;

·

Experience, ability, and depth of management;

·

National and local economic trends and conditions;

·

Effect of any changes in concentration of credit; and

·

Industry conditions.

We assign risk ratings to the loans in our portfolio. These credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the

31


debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the Allowance. Loans not classified are rated pass.


Loans that experience insignificant payment delays and payment shortfalls generally are

With respect to all loan segments, we do not classified as impaired.  Management determines the significancecharge off a loan, or a portion of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of circumstances surrounding the loan, and the borrower, including the lengthuntil one 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.following conditions have been met:

·

The property collateralizing the loan has been foreclosed upon. At the time of foreclosure, a charge-off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral;


·

An agreement to accept less than the recorded balance of the loan has been made with the borrower. Once an agreement has been finalized and any proceeds from the borrower are received, a charge-off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral; or

·

The collateral valuation on a collateral dependent impaired loan is less than the recorded balance. The loan is charged off for accounting purposes by the amount of the difference between the recorded balance and collateral value.

Real Estate Acquired Through Foreclosure


Real estate acquired through or in the process of foreclosure is recorded at fair value less estimated disposal costs. Management periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using estimates as described under Allowance“Allowance for Loan LossesLosses” above. In the event of a subsequent change in fair value, the carrying amount is adjusted to the lesser of the new fair value, less disposal costs, or the carrying value recorded at acquisition. The amount of the change is charged or credited to othernoninterest expense. Expenses on real estate acquired through foreclosure incurred prior to the disposition of the property, such as maintenance, insurance and taxes, and physical security, are charged to expense. Material expenses that improve the property to its best use are capitalized to the property. If a foreclosed property is sold for more or less than the carrying value, a gain or lossesloss is recognized upon the sale of the property.


Deferred Income Taxes


Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are recognized only to the extent that it is more likely than not that such amount will be realized based on consideration of available evidence.


The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. We recognizes a tax position as a benefit only if it “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination presumed to occur. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The judgment about the level of future taxable income is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.


Results of Operations


Net Income

Net income increased by $18,000,$960,000, or 2.0%103.8%, to $1.9 million for the three months ended March 31, 2018, compared to $925,000 for the first quarter of 2017, compared to $907,000 for the first quarter of 2016.three months ended March 31, 2017. Basic and diluted income per share increased to $0.06were $0.15 for the first quarterthree months

32


ended March 31, 2018 compared to $0.03$0.07 for the first quarter of 2016.three months ended March 31, 2017. The primary contributors to the increase in net income werereflected improved net interest income and a reduced loan loss provision,noninterest income, partially offset by an increased income tax provision.

noninterest expense and provision for loan losses.

Net Interest Income


Net interest income, which is interest earned net of interest expense, increased by $351,000,$1.4 million, or 6.7%25.0%, to $7.0 million for the three months ended March 31, 2018, compared to $5.6 million for the three months ended March 31, 2017. Our net interest margin increased from 3.09% for the first quarter of 2017 to 3.66% for the first quarter of 2018. Our net interest spread increased from 2.88% for the first quarter of 2017 to 3.46% for the first quarter of 2018.

Interest Income

Interest income increased by $1.3 million, or 17.5%, to $8.9 million for the three months ended March 31, 2018, compared to $7.6 million for the three months ended March 31, 2017. Average interest-earning assets increased from $732.3 million for the first quarter of 2017 compared to $5.2$773.9 million for the first quarter of 2016. The increase2018, due primarily to growth in net interest income was primarily due to a decrease in the average balance of interest-bearing liabilities and an increase in the average balance of interest-earning assets.  Our net interest margin increased slightly from 3.08% in the first quarter of 2016 to 3.09% in the first quarter of 2017.


Interest Income

Interest income increased by $53,000, or 0.7% to $7.6 million for the first quarter of 2017, compared to $7.5 million for the first quarter of 2016.  Average interest-earning assets increased from $682.6 million in the first quarter of 2016 to $732.3 million in the first quarter of 2017.  loans outstanding.Average loans outstanding increased by $20.0 million due$60.2 milliondue to increased originations.originations in all loan categories. The average yield on loans held for investment increased from 4.72% for the three months ended March 31, 2017 to 5.06% for the three months ended March 31, 2018 as a result of the increased interest rate environment. Average HTM securities decreased by $14.5 million due$8.2 milliondue to security maturities and repayments from mortgage-backed securities. The proceeds were used to fund the purchase of AFS securities, the average balance of which increased $7.9 million during the three months ended March 31, 2018, and, along with other available funds, the purchase of certificates of deposit, which contributed to the increase in average other interest-earning assets.

loan originations.

Interest Expense


Interest expense decreased by $298,000,$78,000, or 13.1%4.0%, to $1.9 million for the three months ended March 31, 2018, compared to $2.0 million for the three months ended March 31, 2017. The decrease was primarily due to a decrease in the average rate paid on borrowings from 3.35% for the first quarter of 2017 compared to $2.3 million2.63% for the first quarter of 2016.  The decrease was primarily due to both the decreased2018. Additionally, average balance and decreased average rate in our borrowings.  Average borrowings decreased $18.6by $3.2 million from the first quarter of 2016 and the rate paid on borrowings decreased from 3.73%to $117.4 million for the first quarter of 2016three months ended March 31, 2018 compared to 3.35%$120.6 million for the first quartersame period of 2017.  WeDuring the latter part of 2017, we paid off $3.5 millionhigher-costing Federal Home Loan Bank of 8.0% subordinated debentures in the later part of 2016 as well as $10.0 million FHLBAtlanta (“FHLB”) advances in 2017.and replaced them with lower-costing advances.

33


The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities and the resulting yields on average interest-earning assets and average rates paid on average interest-bearing liabilities. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 Three Months Ended March 31, 

 

2018

 

2017

 

 2017  2016 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

 
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
  
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
 

    

Balance (1)

    

Interest (2)

    

Rate (4)

    

Balance (1)

    

Interest (2)

    

Rate (4)

  

ASSETS (dollars in thousands) 

 

(dollars in thousands)

 

Loans $608,417  $7,081   4.72% $588,443  $7,020   4.80%

 

$

668,615

 

$

8,335

 

5.06

%  

$

608,417

 

$

7,081

 

4.72

%

Loans held for sale (“LHFS”)  4,416   50   4.59%  8,196   87   4.27%

Loans held for sale ("LHFS")

 

 

3,421

 

 

36

 

4.27

%  

 

4,416

 

 

50

 

4.59

%

AFS securities  3,671   15   1.66%  -   -   - 

 

 

11,597

 

 

51

 

1.78

%  

 

3,671

 

 

15

 

1.66

%

HTM securities  60,762   254   1.70%  75,218   311   1.66%

 

 

52,586

 

 

269

 

2.07

%  

 

60,762

 

 

254

 

1.70

%

Other interest-earning assets (3)
  50,297   97   0.78%  4,984   20   1.61%

 

 

32,852

 

 

126

 

1.56

%  

 

50,297

 

 

97

 

0.78

%

Restricted stock investments,at cost  4,784   60   5.09%  5,795   66   4.58%

Restricted stock investments, at cost

 

 

4,847

 

 

60

 

5.02

%  

 

4,784

 

 

60

 

5.09

%

Total interest-earning assets  732,347   7,557   4.18%  682,636   7,504   4.42%

 

 

773,918

 

 

8,877

 

4.65

%  

 

732,347

 

 

7,557

 

4.18

%

Allowance for loan losses  (9,000)          (8,717)        

Allowance

 

 

(8,141)

 

 

  

 

  

 

 

(9,000)

 

 

  

 

  

 

Cash and other noninterest-earning assets  65,926           87,713         

 

 

43,233

 

 

  

 

  

 

 

65,926

 

 

  

 

  

 

Total assets $789,273    7,557      $761,632    7,504     

 

$

809,010

 

 

8,877

 

  

 

$

789,273

 

 

7,557

 

  

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY                 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing deposits:                        

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Checking and savings $278,499   215   0.31% $213,195   155   0.29%

 

$

304,037

 

 

332

 

0.44

%  

$

278,499

 

 

215

 

0.31

%

Certificates of deposit  217,455   760   1.42%  278,290   824   1.19%

 

 

222,508

 

 

801

 

1.46

%  

 

217,455

 

 

760

 

1.42

%

Total interest-bearing deposits  495,954   975   0.80%  491,485   979   0.80%

 

 

526,545

 

 

1,133

 

0.87

%  

 

495,954

 

 

975

 

0.80

%

Borrowings  120,563   996   3.35%  139,119   1,290   3.73%

 

 

117,352

 

 

760

 

2.63

%  

 

120,563

 

 

996

 

3.35

%

Total interest-bearing liabilities  616,517   1,971   1.30%  630,604   2,269   1.45%

 

 

643,897

 

 

1,893

 

1.19

%  

 

616,517

 

 

1,971

 

1.30

%

Noninterest-bearing deposit accounts  81,569           32,159         

Noninterest-bearing deposits

 

 

88,160

 

 

  

 

  

 

 

81,569

 

 

  

 

  

 

Other noninterest-bearing liabilities  2,716           13,931         

 

 

2,103

 

 

  

 

  

 

 

2,716

 

 

  

 

  

 

Stockholders’ equity  88,471           84,938         
Total liabilities and stockholders’ equity $789,273   1,971      $761,632   2,269     

Stockholders' equity

 

 

74,850

 

 

  

 

  

 

 

88,471

 

 

  

 

  

 

Total liabilities and stockholders' equity

 

$

809,010

 

 

1,893

 

  

 

$

789,273

 

 

1,971

 

  

 

Net interest income/net interest spreadNet interest income/net interest spread  $5,586   2.88%     $5,235   2.97%

 

 

  

 

$

6,984

 

3.46

%  

 

  

 

$

5,586

 

2.88

%

Net interest margin          3.09%          3.08%

 

 

  

 

 

  

 

3.66

%  

 

  

 

 

  

 

3.09

%


(1)Nonaccrual loans are included in average loans.

(1)Nonaccrual loans are included in average loans.

(2)There are no tax equivalency adjustments.

(3)Other interest-earning assets include interest-earning deposits, federal funds sold, and certificates of deposit held for investment

(4)Annualized

(2)There are no tax equivalency adjustments.

34

(3)Other interest-earning assets include interest-earning deposits and federal funds sold
(4)Annualized

The “Rate/Volume Analysis” below indicates the changes in our net interest income as a result of changes in volume and rates. We maintain an asset and liability management policy designed to provide a proper balance between rate-sensitive assets and rate-sensitive liabilities to attempt to optimize interest margins while providing adequate liquidity for our anticipated needs. Changes in interest income and interest expense that result from variances in both volume and rates have been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018 vs. 2017

 

 

 

Due to Variances in

 

    

    

Rate

    

Volume

    

Total

Interest earned on:

 

 

(dollars in thousands)

Loans

 

 

$

524

 

$

730

 

$

1,254

LHFS

 

 

 

(3)

 

 

(11)

 

 

(14)

AFS securities

 

 

 

 1

 

 

35

 

 

36

HTM Securities

 

 

 

183

 

 

(168)

 

 

15

Other interest-earning assets

 

 

 

224

 

 

(195)

 

 

29

Restricted stock investments, at cost

 

 

 

(3)

 

 

 3

 

 

 —

Total interest income

 

 

 

926

 

 

394

 

 

1,320

 

 

 

 

 

 

 

 

 

 

 

Interest paid on:

 

 

 

  

 

 

  

 

 

  

Interest-bearing deposits:

 

 

 

  

 

 

  

 

 

  

Checking and savings

 

 

 

96

 

 

21

 

 

117

Certificates of deposit

 

 

 

23

 

 

18

 

 

41

Total interest-bearing deposits

 

 

 

119

 

 

39

 

 

158

Borrowings

 

 

 

(210)

 

 

(26)

 

 

(236)

Total interest expense

 

 

 

(91)

 

 

13

 

 

(78)

Net interest income

 

 

$

1,017

 

$

381

 

$

1,398


  Three Months Ended March 31, 2017 vs. 2016 
  Due to Variances in 
  Rate  Volume  Total 
Interest earned on: (dollars in thousands) 
Loans $(611) $672  $61 
LHFS  40   (77)  (37)
AFS securities  -   15   15 
HTM Securities  51   (108)  (57)
Other interest-earning assets  (74)  151   77 
Restricted stock investments, at cost  34   (40)  (6)
Total interest income  (560)  613   53 
             
Interest paid on:            
Interest-bearing deposits:         
Checking and savings  12   48   60 
Certificates of deposit  657   (721)  (64)
Total interest-bearing deposits  669   (673)  (4)
Borrowings  (748)  454   (294)
Total interest expense  (79)  (219  (298)
Net interest income $(481) $832  $351 

Provision for Loan Losses


The Company’s

Our loan portfolio is subject to varying degrees of credit risk and an allowance for loan lossesAllowance is maintained to absorb losses inherent in itsour loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what the Companywe determined it was worth at the time of the granting of the loan. We monitor loan delinquencies at least monthly. All loans that are delinquent and all loans within the various categories of our portfolio as a group are evaluated. Management, with the advice and recommendation of the Company’s Board of Directors, estimates an Allowance to be set aside for loan losses. Included in determining the calculation are such factors as historical losses for each loan portfolio, current market value of the loan’s underlying collateral, inherent risk contained within the portfolio after considering the state of the general economy, economic trends, consideration of particular risks inherent in different kinds of lending and consideration of known information that may affect loan collectability.  During the first quarter of 2017, as a result of our Allowance analysis, we determined that

We did not record a provision for loan losses during the three months ended March 31, 2018.  We recorded a reversal of the provision for loan losses of $275,000 was appropriate.


during the three months ended March 31, 2017. See additional information about the provision for loan losses under “Credit Risk Management and the Allowance” later in this Item.

Noninterest Income


Total noninterest income increased by $108,000,$511,000, or 8.6%37.6%, to $1.9 million for the three months ended March 31, 2018, compared to $1.4 million for the first quarter ofthree months ended March 31, 2017, compared to $1.3 million for the first quarter of 2016, primarily due to increased real estate commissionsmortgage-banking revenue, deposit service charges, and management fees, partially offset by decreased mortgage-bankingtitle company revenue. Real estate commissions by Hyatt CommercialMortgage-banking revenue increased by $262,000,$60,000, or 222.0%11.2%, to $380,000 for the first quarter of 2017, compared to $118,000 for the first quarter of 2016.  The increase was due to an increase in commercial sales activityincreased volume of loans originated in the first quarter of 2017.  Real estate management fees increased by $29,000, or 17.6%, to $194,000 for the first quarter of 2017, compared to $165,000 for the first quarter of 2016, due primarily to a management fee rate increase in 2017. Mortgage banking revenue decreased $186,000, or 25.8%, to $535,000 for the first quarter of 2017, compared to $721,000 for the first quarter of 2016.  This decrease in activity was the result of a decrease in loans booked through our Internet mortgage platform (“E-Home Finance”) in the first quarter of 20172018 compared to the first quarter of 2016.2017. In 2017, the decision was made to move away from the purchased lead model previously used and instead focus on internally generated leads. We are beginning to see increased origination volume from the switch in models. Deposit service charges increased $261,000 due primarily to fees associated with medical-use cannabis customer accounts. Other noninterest income includes $142,000 in revenue generated by the Title Company during the first quarter of 2018.

35


Noninterest Expense


Total noninterest expenses increased $97,000,$548,000, or 1.7%9.7%, to $6.2 million for the three months ended March 31, 2018, compared to $5.7 million for the first quarter of 2017, compared to $5.6 million for the first quarter of 2016, primarily due to increases in compensation and related expenses and advertising expenses, partially offset by decreases in Federal Deposit Insurance Corporation (“FDIC”) assessments, occupancy, professional fees, online charges, and legal fees.expenses.  Compensation and related expenses increased by $121,000,$521,000, or 3.3%13.9%, to $4.3 million for the three months ended March 31, 2018, compared to $3.8 million for the first quarter of 2017, compared to $3.6 million for the first quarter of 2016.three months ended March 31, 2017. This increase was primarily due to severanceannual salary increases, as well as increased commission expense that corresponds with our increased loan origination and mortgage-banking volume. Partially offsetting the increase in compensation and related expenses, paid inmortgage leads purchased decreased $95,000 due to the first quartertransition away from the purchased lead model.

Income Tax Provision

We recorded745,000 income tax provision on net income before income taxes of 2017.  Net occupancy costs decreased by $116,000, or 25.7%, to $336,000$2.6 million for the first quarter of 2017,three months ended March 31, 2018, compared to $452,000a tax provision of $619,000 on net income before income taxes of $1.5 million for the first quarter of 2016, primarily duethree months ended March 31, 2017. The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, which lowered the corporate federal tax rate from 35% to lower maintenance and utility expenses.  Legal fees21% effective January 1, 2018.  Among other things, the new law has significantly lowered our effective tax rate.

Financial Condition

Total assets decreased by $102,000, or 78.5%,$3.7 million to $28,000 for the first quarter of 2017,$801.1 million at March 31, 2018, compared to $130,000 for the first quarter of 2016.$804.8 million at December 31, 2017. This decrease was primarily due to a higher level of legal activity during the first quarter of 2016 on certain foreclosures compared to the first quarter of 2017.  During the first quarter of 2017, we reversed an over accrual of FDIC assessment expense due to a lower first quarter 2017 rate assessment that arose from the termination of the formal agreements with the Office of the Comptroller of the Currency (“OCC”)decreases in interest-bearing deposits in other banks and the Federal Reserve Board (“FRB”) in 2016. Professional fees decreased by $37,000,total securities. Loans increased $1.8 million, or 21.5%0.3%, to $135,000 for the first quarter of 2017, compared to $172,000 for the first quarter of 2016, primarily due to a decrease in fees incurred for consulting. Advertising increased $73,000, or 54.9%, to $206,000 for the first quarter of 2017, compared to $133,000 for the first quarter of 2016, primarily due to timing of marketing campaigns.  During the first quarter of 2017, we received a refund of certain fees that were overbilled in late 2016.  This refund caused online charges to decrease by $61,000, or 23.7%.

Income Tax Provision

We incurred $619,000 in income tax expense during the first quarter of 2017 compared to none in 2016 as we fully released our deferred tax asset valuation allowance in the latter part of 2016.
Financial Condition

Total assets increased $11.2 million to $798.7$669.9 million at March 31, 2017, compared to $787.52018 from $668.2 million at December 31, 2016.  Cash and cash equivalents increased by $16.42017. Total deposits decreased $12.3 million, or 24.5%2.0%, to $83.6$589.9 million at March 31, 2017,2018 compared to $67.1$602.2 million at December 31, 2016.  This increase was primarily due to management’s decision to increase liquid assets to preserve liquidity at March 31, 2017, compared to December 31, 2016. LHFS decreased $7.52017. Total borrowings increased by $8.0 million, or 73.3%9.0%, to $2.8$96.5 million at March 31, 2017,2018 compared to $10.3$88.5 million at December 31, 2016.  This decrease was primarily2017 due to the timing of loans pending sale.  Real estate acquired through foreclosure increased $270,000, or 27.7%, to $1.2an additional $8.0 million at March 31, 2017 compared to $973,000 at December 31, 2016. This increase was due to the addition of one property.  Total deposits increased $21.8 million, or 3.8%, to $593.8 million at March 31, 2017 compared to $571.9 million at December 31, 2016.  Long-term borrowings decreased by $10.0 million, or 9.7 %, to $93.5 million at March 31, 2017 compared to $103.5 million at December 31, 2016.  These borrowings began to mature in February, 2017.
short-term FHLB advances obtained in 2018.

Securities

We utilize the securities portfolio as part of our overall asset/liability management practices to enhance interest revenue while providing necessary liquidity for the funding of loan growth or deposit withdrawals. We continually monitor the credit risk associated with investments and diversify the risk in the securities portfolios. We held $7.2$12.0 million and $10.1 million in securities classified as AFS as of March 31, 2017.2018 and December 31, 2017, respectively. We held $59.3$49.9 million and $62.8$54.3 million, respectively,, in securities classified as HTM as of March 31, 20172018 and December 31, 2016.

2017.

Changes in current market conditions, such as interest rates and the economic uncertainties in the mortgage, housing, and banking industries impact the securities market. Quarterly, we review each security in our AFS portfolio to determine the nature of any decline in value and evaluate if any impairment should be classified as OTTI. For the three months ended March 31, 2017,2018, we determined that no OTTI charges were required during 2017.


required.

All of the AFS and HTM securities that are temporarily impaired as of March 31, 20172018 are so due to declines in fair values resulting from changes in interest rates or increaseddecreased credit/liquidity spreads compared to the time they were purchased. We have the intent to hold these securities to maturity (including those designated as AFS) and it is more likely than not that we will not be required to sell the securities before recovery of value. As such, management considers the impairments to be temporary.


36

Our AFS securities portfolio consists


Our HTM securities portfolio composition is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFS

 

HTM

 

    

March 31, 2018

    

December 31, 2017

    

March 31, 2018

    

December 31, 2017

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,975

 

$

 —

 

$

4,993

 

$

4,994

U.S. government agency notes

 

 

10,036

 

 

10,119

 

 

15,999

 

 

19,004

Mortgage-backed securities

 

 

 —

 

 

 —

 

 

28,919

 

 

30,305

 

 

$

12,011

 

$

10,119

 

$

49,911

 

$

54,303


  March 31, 2017  December 31, 2016 
  (dollars in thousands) 
U.S. Treasury securities $10,996  $12,998 
U.S. government agency notes  20,021   20,027 
Mortgage-backed securities  28,266   29,732 
  $59,283  $62,757 

LHFS


We originate residential mortgage loans for sale on the secondary market. At March 31, 2017,2018, such LHFS, which are carried at fair value, amounted to $2.8$5.8 million at March 31, 2018 and $4.5 million at December 31, 2017, the majority of which are subject to purchase commitments from investors. The LHFS balance atincreased by $1.3 million, or 28.1%, compared to December 31, 2016 was $10.3 million and was recorded at lower-of-cost on market value (“LCM”).  LHFS decreased by $7.5 million, or 73.3%, to $2.8 million at March 31, 2017, compared to $10.3 at December 31, 2016.  This decrease was primarily due to a higher origination volume and the timing of loans pending sale on the secondary market.


Loans


Our loan portfolio is expected to produce higher yields than investment securities and other interest-earning assets; the absolute volume and mix of loans and the volume and mix of loans as a percentage of total earninginterest-earning assets is an important determinant of our net interest margin.


The following table sets forth the composition of our loan portfolio before unearned loan fees:portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

Percent

 

 

 

Percent

 

 

 

    

Amount

    

of Total

    

Amount

    

of Total

 

    

 

 

(dollars in thousands)

 

 

Residential Mortgage

 

$

285,023

 

42.5

%  

$

284,646

 

42.6

%

 

Commercial

 

 

39,015

 

5.8

%  

 

37,356

 

5.5

%

 

Commercial real estate

 

 

230,336

 

34.4

%  

 

236,302

 

35.4

%

 

Land acquisition, development, and construction ("ADC")

 

 

100,635

 

15.0

%  

 

93,060

 

13.9

%

 

Home equity/2nds

 

 

13,853

 

2.1

%  

 

15,703

 

2.4

%

 

Consumer

 

 

1,050

 

0.2

%  

 

1,084

 

0.2

%

 

 

 

$

669,912

 

100.0

%  

$

668,151

 

100.0

%

 


  March 31, 2017  December 31, 2016 
  Amount  
Percent
of Total
  Amount  
Percent
of Total
 
  (dollars in thousands) 
Residential Mortgage $253,309   41.4% $260,603   42.5%
Commercial  16,695   2.7%  16,811   2.7%
Commercial real estate  190,961   31.2%  195,710   31.9%
Construction, land acquisition, and development  50,556   8.3%  41,438   6.8%
Land  49,159   8.0%  48,664   7.9%
Lines of credit  31,859   5.2%  29,657   4.8%
Home equity  18,022   2.9%  19,129   3.1%
Consumer  1,590   0.3%  1,210   0.3%
  $612,151   100.0% $613,222   100.0%

Loans (before unearned income) decreasedincreased by $1.1$1.8 million, or 0.2%0.3%, to $612.2$669.9 million at March 31, 2017,2018, compared to $613.2$668.2 million at December 31, 2016.2017. This decreaseincrease was primarily due to decreasedincreased demand and originations of residential mortgages, commercial, and commercial real estate loan demand.


Construction Loans

Construction loans are funded, at the request of the borrower, typically not more than once per month, based on the extent of work completed, and are monitored, throughout the life of the project, by independent professional construction inspectors and the Company’s commercial real estate lending department. Interest is advanced to the borrower, upon request, based upon the progress of the project toward completion. The amount of interest advanced is added to the total outstanding principal under the loan commitment. Should the project not progress as scheduled, the adequacy of the interest reserve necessary to carry the project through to completion is subject to close monitoring by management. Should the interest reserve be deemed to be inadequate, the borrower is required to fund the deficiency. Similarly, once a loan is fully funded, the borrower is required to fund all interest payments.
Construction loans are reviewed for extensions upon expiration of the loan term. Provided the loan is performing in accordance with contractual terms, extensions may be granted to allow for the completion of the project, marketing or sales of completed units, or to provide for permanent financing. Extension terms generally do not exceed 12 to 18 months.

In general, our construction loans are used to finance improvements to commercial, industrial, or residential property. Repayment is typically derived from the sale of the property as a whole, the sale of smaller individual units, or by a take-out from a permanent mortgage. The term of the construction period generally does not exceed two years. Loan commitments are based on established construction budgets which represent an estimate of total costs to complete the proposed project including both hard (direct) costs (building materials, labor, etc.) and soft (indirect) costs (legal and architectural fees, etc.). In addition, project costs may include an appropriate level of interest reserves to carry the project through to completion. If established, such interest reserves are determined based on (i) a percentage of the committed loan amount, (ii) the loan term, and (iii) the applicable interest rate. Regardless of whether a loan contains an interest reserve, the total project cost statement serves as the basis for underwriting and determining which items will be funded by the loan and which items will be funded through borrower equity. The Company has not advanced additional interest reserves to keep a loan from becoming nonperforming.

We recognized $73,000 and $61,000 of interest income and capitalized interest from interest reserves during the three months ended March 31, 2017 and 2016, respectively.  None of the loans where interest reserves were recorded as capitalized interest were nonperforming.

Extensions and Guarantees

We have experienced extension requests for commercial real estate and construction loans, some of which have related repayment guarantees. An extension may be granted to allow for the completion of the project, marketing, or sales of completed units, or to provide for permanent financing, and is based on a re-underwriting of the loan and management’s assessment of the borrower’s ability to perform according to the agreed-upon terms. Typically, at the time of an extension, borrowers are performing in accordance with contractual loan terms. Extension terms generally do not exceed 12 to 18 months and typically require the borrower to provide additional economic support in the form of partial repayment, additional collateral, or guarantees. In cases where the fair value of the collateral or the financial resources of the borrower are deemed insufficient to repay the loan, reliance may be placed on the support of a guarantee, if applicable. However, such guarantees are not relied on when evaluating a loan for impairment and never considered the sole source of repayment.

We evaluate the financial condition of guarantors based on the most current financial information available. Most often, such information takes the form of (i) personal financial statements of net worth, cash flow statements, and tax returns (for individual guarantors) and (ii) financial and operating statements, tax returns, and financial projections (for legal entity guarantors). Our evaluation is primarily focused on various key financial metrics, including net worth, leverage ratios, and liquidity. It is our policy to update such information annually, or more frequently as warranted, over the life of the loan.

While we do not specifically track the frequency with which we have pursued guarantor performance under a guarantee, our underwriting process, both at origination and upon extension, as applicable, includes an assessment of the guarantor’s reputation, creditworthiness, and willingness to perform. Historically, when we have found it necessary to seek performance under a guarantee, we have been able to effectively mitigate our losses. When a loan becomes impaired, repayment is sought from both the underlying collateral and the guarantor (as applicable). In the event that the guarantor is unwilling or unable to perform, a legal remedy is pursued.

ADC loans.

Credit Risk Management and the Allowance


Credit risk is the risk of loss arising from the inability of a borrower to meet his or her obligations and entails both general risks, which are inherent in the process of lending, and risks specific to individual borrowers. Our credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type.


We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.

37


Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. Our Allowance methodology employs management’s assessment as to the level of future losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers’ current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and/or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. In addition, we evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors. Our risk management practices are designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may inherently exist within the loan portfolio. The assessment aspects involved in analyzing the quality of individual loans and assessing collateral values can also contribute to undetected, but probable, losses. For more detailed information about our Allowance methodology and risk rating system, see Note 34 to the Consolidated Financial Statements.


The following table summarizes the activity in our Allowance by portfolio segment for the three months ended March 31:segment:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2018

    

2017

 

 

(dollars in thousands)

Allowance, beginning of year

 

$

8,055

 

$

8,969

 

Charge-offs:

 

 

  

 

 

  

 

Residential mortgage

 

 

(323)

 

 

(499)

 

Commercial

 

 

 —

 

 

 —

 

Commercial real estate

 

 

 —

 

 

 —

 

ADC

 

 

(13)

 

 

 —

 

Home equity/2nds

 

 

 —

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

Total charge-offs

 

 

(336)

 

 

(499)

 

Recoveries:

 

 

  

 

 

  

 

Residential mortgage

 

 

221

 

 

107

 

Commercial

 

 

 —

 

 

27

 

Commercial real estate

 

 

211

 

 

 —

 

ADC

 

 

 —

 

 

 —

 

Home equity/2nds

 

 

18

 

 

 3

 

Consumer

 

 

 —

 

 

 —

 

Total recoveries

 

 

450

 

 

137

 

Net recoveries (charge offs)

 

 

114

 

 

(362)

 

Reversal of provision for loan losses

 

 

 —

 

 

(275)

 

Allowance, end of period

 

$

8,169

 

$

8,332

 

Loans:

 

 

  

 

 

  

 

Period-end balance

 

$

669,912

 

$

609,741

 

Average balance during period

 

 

668,615

 

 

608,417

 

Allowance as a percentage of

 

 

 

 

 

 

 

   period-end loan balance

 

 

1.22

%  

 

1.37

%  

Percent of average loans:

 

 

 

 

 

  

 

Reversal of provision for loan losses

 

 

 —

%  

 

(0.18)

%  

Net recoveries (charge offs )

 

 

0.07

%  

 

(0.24)

%  


38

  2017  2016 
  (dollars in thousands) 
Allowance, beginning of period $8,969  $8,758 
Charge-offs:        
Residential mortgage  (499)  (140)
Commercial  -   (17)
Commercial real estate  -   (47)
Construction, land acquisition, and development  -   - 
Land  -   - 
Lines of credit  -   - 
Home equity  -   (28)
Consumer      - 
Total charge-offs  (499)  (232)
Recoveries:        
Residential mortgage  107   82 
Commercial  27   19 
Commercial real estate  -   - 
Construction, land acquisition, and development  -   - 
Land  -   - 
Lines of credit  -   5 
Home equity  3   1 
Consumer  -   - 
Total recoveries  137   107 
Net charge offs  (362)  (125)
Reversal of provision for loan losses  (275)  - 
Allowance, end of period $8,332  $8,633 
Loans (before unearned loan fees):        
Period-end balance $612,151  $604,011 
Average balance during period  608,417   588,443 
Allowance as a percentage of period-end loan balance  1.36%  1.43%
Percent of average loans (annualized):        
Reversal of provision for loan losses  (0.18)%  - 
Net charge-offs  0.24%  0.09%

The following table summarizes our allocation of the Allowance by loan segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

    

 

    

 

    

Percent

    

 

    

 

    

Percent

 

    

 

 

 

 

 

 

of Loans

 

 

 

 

 

of Loans

 

 

 

 

 

 

Percent

 

to Total

 

 

 

Percent

 

to Total

 

 

 

 

Amount

 

of Total

 

Loans

 

Amount

 

of Total

 

Loans

 

 

 

 

(dollars in thousands)

 

 

Residential mortgage

 

$

3,301

 

40.4

%  

42.5

%  

$

3,099

 

38.5

%  

42.6

%

 

Commercial

 

 

514

 

6.3

%  

5.8

%  

 

527

 

6.6

%  

5.5

%

 

Commercial real estate

 

 

2,995

 

36.7

%  

34.4

%  

 

2,805

 

34.8

%  

35.4

%

 

ADC

 

 

1,060

 

13.0

%  

15.0

%  

 

1,236

 

15.3

%  

13.9

%

 

Home equity/2nds

 

 

297

 

3.6

%  

2.1

%  

 

386

 

4.8

%  

2.4

%

 

Consumer

 

 

 2

 

0.0

%  

0.2

%  

 

 2

 

0.0

%  

0.2

%

 

Total

 

$

8,169

 

100.0

%  

100.0

%  

$

8,055

 

100.0

%  

100.0

%

 


  March 31, 2017  December 31, 2016 
  Amount  
Percent
of Total
  
Percent
of Loans
to Total
Loans
  Amount  
Percent
of Total
  
Percent
of Loans
to Total
Loans
 
  (dollars in thousands) 
Residential mortgage $3,789   45.5%  41.4% $3,833   42.7%  42.5%
Commercial  426   5.1%  2.7%  421   4.7%  2.7%
Commercial real estate  2,515   30.2%  31.2%  2,535   28.3%  31.9%
Construction, land acquisition, and development  387   4.6%  8.3%  527   5.9%  6.8%
Land  710   8.5%  8.0%  863   9.6%  7.9%
Lines of credit  47   0.6%  5.2%  57   0.6%  4.8%
Home equity  453   5.4%  2.9%  728   8.1%  3.1%
Consumer  5   0.1%  0.3%  5   0.1%  0.3%
Total $8,332   100.0%  100.0% $8,969   100.0%  100.0%

Based upon management’s evaluation, provisions are made to maintain the Allowance as a best estimate of inherent losses within the portfolio. The Allowance totaled  $8.3$8.2  million at March 31, 20172018 and  $9.0$8.1 million at December 31, 2016.2017. Any changes in the Allowance from period to period reflect management’s ongoing application of its methodologies to establish the Allowance, which, for the three months ended March 31, 2017, 2018, resulted in increased allocated Allowances for residential mortgage and commercial real estate loans, with the other categories resulting in decreased allocated Allowances for all loan segments except for commercial and consumer.Allowances. The changes in the AllowancesAllowances for the respective loan segments were a function of the changes in the corresponding loan balances and asset quality.


During 2017, as a

As result of our Allowance analysis, and overall improved asset quality, we released $275,000 from the Allowance. We recorded net charge-offs of $362,000 and $125,000did not record a provision, nor did we release any Allowance during the three months ended March 31, 20172018. We recorded a $275,000 reversal of provision for losses for the three months ended March 31, 2017. We recorded net recoveries of $114,000 during the three months ended March 31, 2018 and 2016, respectively.net charge-offs of $362,000 during the three months ended March 31, 2017. During 2017,the three months ended March 31, 2018, annualized net recoveries as compared to average loans outstanding amounted to 0.07%, compared to annualized net charge-offs as compared to average loans outstanding increased toof 0.24%, compared to 0.09% during 2016.the first three months of 2017. The Allowance as a percentage of outstanding loans decreased from 1.43%remained fairly stable at 1.22%  as of March 31, 2018 and 1.21% as of December 31, 2016 to 1.36% as of March 31, 2017, reflecting the improvement in our overall asset quality.


2017. 

Although management uses available information to establish the appropriate level of the Allowance, future additions or reductions to the Allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions, and other factors. As a result, our Allowance may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our Allowance and related methodology. Such agencies may require us to recognize adjustments to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of March 31, 20172018 and is sufficient to address the credit losses inherent in the current loan portfolio.


Nonperforming Assets (“NPAs”)


Given the volatility of the real estate market, it is very important for us to have current appraisals on our NPAs. Generally, we annually obtain appraisals on NPAs. annually. In addition, as part of our asset monitoring activities, we maintain a Loss Mitigation Committee that meets once a month.monthly. During these Loss Mitigation Committee meetings, all NPAs and loan delinquencies are reviewed. We also produce an NPA report which is distributed monthly to senior management and is also discussed and reviewed at the Loss Mitigation Committee meetings. This report contains all relevant data on the NPAs, including the latest appraised value and valuation date. Accordingly, these reports identify which assets will require an updated appraisal. As a result, we have not experienced any internal delays in identifying which loans/credits require appraisals. With respect to the ordering process of the appraisals, we have not experienced any delays in turnaround time nor has this been an issue over the past three years. Furthermore, we have not had any delays in turnaround time or variances thereof in our specific loan operating markets.


39


NPAs, expressed as a percentage of total assets, totaled 1.0%0.74% at March 31, 20172018 and 1.4%0.76% at December 31, 2016.2017. The ratio of the Allowance to nonperforming loans was 125.3%143.3% at March 31, 2017 2018 and 91.0%141.1% at December 31, 2016.  The increase in this ratio from December 31, 2016 to March 31, 2017 was a reflection of the decrease in nonperforming loans. 

2017.

The distribution of our NPAs is illustrated in the following table. We did not have any loans greater than 90 days past due and still accruing at March 31, 20172018 and December 31, 2016.2017.

 

 

 

 

 

 

 

 

 

 

March 31, 2018

    

December 31, 2017

    

Nonaccrual Loans:

 

(dollars in thousands)

 

Residential mortgage

 

$

3,619

 

$

3,891

 

Commercial

 

 

296

 

 

78

 

Commercial real estate

 

 

216

 

 

159

 

ADC

 

 

310

 

 

314

 

Home equity/2nds

 

 

1,260

 

 

1,268

 

Consumer

 

 

 —

 

 

 —

 

 

 

 

5,701

 

 

5,710

 

Real Estate Acquired Through Foreclosure:

 

 

  

 

 

  

 

Residential mortgage

 

 

 —

 

 

 —

 

Commercial

 

 

 —

 

 

 —

 

Commercial real estate

 

 

90

 

 

187

 

ADC

 

 

147

 

 

216

 

Home equity/2nds

 

 

 —

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

 

 

 

237

 

 

403

 

Total Nonperforming Assets

 

$

5,938

 

$

6,113

 


  March 31, 2017  December 31, 2016 
Nonaccrual Loans: (dollars in thousands) 
Residential mortgage $3,938  $3,580 
Commercial  -   1 
Commercial real estate  262   2,938 
Construction, land acquisition, and development  -   - 
Land  93   269 
Lines of credit  -   150 
Home equity  2,355   2,914 
Consumer  -   - 
   6,648   9,852 
         
Real Estate Acquired Through Foreclosure:        
Residential mortgage  188   393 
Commercial  -   - 
Commercial real estate  827   341 
Construction, land acquisition, and development  -   - 
Land  228   239 
Lines of credit  -   - 
Home equity  -   - 
Consumer  -   - 
   1,243   973 
Total Nonperforming Assets $7,891  $10,825 

Nonaccrual loans amounted to  $6.6$5.7 million, or 0.85% of total loans, at both March 31, 20172018 and $9.9 million at December 31, 2016.2017. We added three$377,000 in loans in the amount of $921,000 to nonaccrual status during 2017.  Of the balance of nonaccrual loans at Decemberthree months ended March 31, 2016, $3.3 million were either returned to accrual status, charged off, or paid off.


2018.

Real estate acquired through foreclosure increased $270,000decreased $166,000 compared to December 31, 2016, with decreases in all loan segments, with the exception of commercial real estate,2017 due to resolutionthe sale of thetwo properties through foreclosure sales or buyouts. The increase in commercial real estate was primarily from one foreclosure in the amount of $515,000.


held at December 31, 2017.

The activity in our real estate acquired through foreclosure was as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2018

    

2017

 

 

(dollars in thousands)

Balance at beginning of year

 

$

403

 

$

973

Real estate acquired in satisfaction of loans

 

 

 —

 

 

515

Write-downs and losses on real estate acquired through foreclosure

 

 

(44)

 

 

(40)

Proceeds from sales of real estate acquired through foreclosure

 

 

(122)

 

 

(205)

Balance at end of year

 

$

237

 

$

1,243


  Three Months Ended March 31, 
  2017  2016 
  (dollars in thousands) 
Balance at beginning of period $973  $1,744 
Real estate acquired in satisfaction of loans  515   584 
Write-downs and losses on real estate acquired through foreclosure  (40)  (13)
Proceeds from sales of real estate acquired through foreclosure  (205)  (578)
Balance at end of period $1,243  $1,737 

TDRs


In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR.

40


The composition of our TDRs is illustrated in the following table:

 

 

 

 

 

 

 

 

 

    

March 31, 2018

    

December 31, 2017

    

Residential mortgage:

 

(dollars in thousands)

 

Nonaccrual

 

$

811

 

$

736

 

<90 days past due/current

 

 

10,692

 

 

11,631

 

Commercial real estate:

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

78

 

<90 days past due/current

 

 

1,848

 

 

1,862

 

ADC:

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

 6

 

<90 days past due/current

 

 

136

 

 

137

 

Consumer:

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

 —

 

<90 days past due/current

 

 

82

 

 

84

 

Totals:

 

 

  

 

 

  

 

Nonaccrual

 

 

811

 

 

820

 

<90 days past due/current

 

 

12,758

 

 

13,714

 

 

 

$

13,569

 

$

14,534

 


  March 31, 2017  December 31, 2016 
Residential mortgage: (dollars in thousands) 
Nonaccrual $2,566  $2,137 
>= 90 days past due  -   - 
<90 days past due/current  14,143   15,886 
Commercial real estate:        
Nonaccrual  210   249 
>= 90 days past due  -   - 
<90 days past due/current  1,901   1,914 
Land:        
Nonaccrual  146   6 
>= 90 days past due  -   - 
<90 days past due/current  28   170 
Consumer        
Nonaccrual  -   - 
>= 90 days past due  -   - 
<90 days past due/current  92   96 
Totals        
Nonaccrual  2,922   2,392 
>= 90 days past due  -   - 
<90 days past due/current  16,164   18,066 
  $19,086  $20,458 

See additional information on TDRs in Note 34 to the Consolidated Financial Statements.


Deposits

Deposits


Deposits were $593.8amounted to $589.9 million at March 31, 20172018 and $571.9$602.2 million at December 31, 2016.  During the three months ended March 31, 2017, we experienced increases in checking accounts and savings accounts due to new account openings and higher account balances.  We obtained significant new noninterest-bearing deposits in the first quarter of 2017 through a campaign designed to attract deposits in certain local emerging markets.2017. The decrease in certificates of depositdeposit (“CDs”) was due to the payoff of regularly maturing CDs.

The deposit breakdown is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

    

 

    

Percent

    

 

    

Percent

 

    

 

 

Balance

 

of Total

 

Balance

 

of Total

 

 

 

 

(dollars in thousands)

 

 

NOW

 

$

66,121

 

11.2

%  

$

63,616

 

10.6

%

 

Money market

 

 

103,514

 

17.6

%  

 

103,649

 

17.2

%

 

Savings

 

 

95,092

 

16.1

%  

 

98,717

 

16.4

%

 

Certificates of deposit

 

 

251,519

 

42.6

%  

 

263,413

 

43.7

%

 

Total interest-bearing deposits

 

 

516,246

 

87.5

%  

 

529,395

 

87.9

%

 

Noninterest-bearing deposits

 

 

73,670

 

12.5

%  

 

72,833

 

12.1

%

 

Total deposits

 

$

589,916

 

100.0

%  

$

602,228

 

100.0

%

 


  March 31, 2017  December 31, 2016 
  Balance  
Percent
of Total
  Balance  
Percent
of Total
 
  (dollars in thousands) 
Checking and savings $247,546   41.69% $239,985   41.96%
Certificates of deposit  268,234   45.18%  273,816   47.87%
Total interest-bearing deposits  515,780   86.87%  513,801   89.83%
Noninterest-bearing deposits  77,982   13.13%  58,145   10.17%
Total deposits $593,762   100.00% $571,946   100.00%

Borrowings

Our borrowings consist of advances from the FHLB and a term loan from a commercial bank.


The FHLB advances are available under a specific collateral pledge and security agreement, which requires that we maintain collateral for all of our borrowings equal to 30% of total assetsOurassets. Our advances from the FHLB may be in the form of short-term or long-term obligations. Short-term advances have maturities for one year or less and may contain prepayment penalties. Long-term borrowings through the FHLB have original maturities up to 15 years and generally contain prepayment penalties.


At March 31, 2017,2018, our total available credit line with the FHLB was $145.3$240.3 million. The Bank, from time to time, utilizes the line of credit when interest rates are more favorable than obtaining deposits from the public.public. Our outstanding FHLB advance balance at March 31, 20172018 and December 31, 20162017 was  $90.0$93.0 million and  $100.0$85.0 million, respectively. During the latter part

41



On September 30, 2016, we entered into a loan agreement with a commercial bank whereby we borrowed $3,500,000$3.5 million out of an available $7.5 million credit line for a term of 8 years. The unsecured note bears interest at a fixed rate of 4.25% for the first 36 months then, at the option of the Company, converts to either (1) floating rate of the Wall Street Journal Prime plus 50 basis points or (2) fixed rate at two hundred seventy five (275) basis points over the five year amortizing FHLB rate for the remaining five years. Repayment terms are monthly interest only payments for the first 36 months, then quarterly principal payments of $175,000 plus interest. The loan is subject to a prepayment penalty of 1% of the principal amount prepaid during the first 36 months. If we elect the 5 year fixed rate of 275 basis points over the FHLB rate (“FHLB Rate Period”), the loan will be subject to a prepayment penalty of 2% during the first and second years of the FHLB Rate Period and 1% of the principal repaid during the third, fourth, and fifth years of the FHLB Rate Period. We may make additional principal payments from internally generated funds of up to $875,000 per year during any fixed rate period without penalty. There is no prepayment penalty during any floating rate period.

The following table sets forth information concerning the interest rates and maturity dates of the advances from the FHLB as of March 31, 2017:2018:

 

 

 

 

 

 

Principal

    

 

    

 

Amount (in thousands)

 

Rate

 

Maturity

$

15,000

 

2.58% to 3.43%

 

2018

 

43,000

 

1.55% to 4.00%

 

2019

 

25,000

 

1.75% to 1.92%

 

2020

 

10,000

 

2.19%

 

2022

$

93,000

 

  

 

  


Principal
Amount (in thousands)
  Rate  Maturity 
$60,000  2.85% to 4.05%   2017 
 15,000  2.58% to 3.43%   2018 
 15,000   4.00%   2019 
$90,000         

Subordinated Debentures


As of both March 31, 2018 and December 31, 2017, the Company had outstanding $20.6$20.6 million in principal amount of Junior Subordinated Debt Securities, due in 2035 (the “2035 Debentures”). The 2035 Debentures were issued pursuant to an Indenture dated as of December 17, 2004 (the “2035 Indenture”) between the Company and Wells Fargo Bank, National Association as Trustee. The 2035 Debentures pay interest quarterly at a floating rate of interest of 3-month 3‑month LIBOR plus 200 basis points, and mature on January 7, 2035. Payments of principal, interest, premium and other amounts under the 2035 Debentures are subordinated and junior in right of payment to the prior payment in full of all senior indebtedness of the Company, as defined in the 2035 Indenture. The 2035 Debentures became redeemable, in whole or in part, by the Company on January 7, 2010.


The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the common equity is owned by the Company. The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures. The 2035 Debentures held by the Trust are the sole assets of the Trust. Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures.  We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee.


Under the terms of the 2035 Debenture, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing. As of December 31, 2015, we had deferred the payment of fifteen quarters of interest and the cumulative amount of interest in arrears not paid, including interest on unpaid interest, was $1,863,000.  During the second quarter of 2016, we paid all of the deferred interest and as of March 31, 2017,2018 we were current on all interest due on the 2035 Debenture.


Capital Resources


Total stockholders’ equity increased $910,000$1.3 million to $88.8$92.4 million at March 31, 20172018 compared to $87.9$91.1 million as of December 31, 2016.2017. The increase was principally athe result of 2018 net income, partially offset by dividends paid during the first quarter 2017 net income.of 2018.


42


Series A Preferred Stock


On November 15, 2008, the Company completed a private placement offering consisting of a total of 70 units, at an offering price of $100,000 per unit, for gross proceeds of $7,000,000.$7.0 million. Each unit consists of 6,250 shares of the Company’s Series A 8.0% Non-Cumulative Convertible Preferred Stock. Dividends will not be paid on ourOn March 13, 2018, the Company notified holders of its Series A preferred stock that the Company had exercised its option to convert all 437,500 outstanding shares of Series A preferred stock for one share of common stock in any quarter until the dividend onstock.  The Company converted the Series A Preferred Stock has been paid for such quarter; however, there is no requirementpreferred stock on April 2, 2018.  As of that our Board of Directors declare any dividends ondate, the Series A Preferred Stockpreferred stock was no longer deemed outstanding, and any unpaid dividends are not cumulative.


Series B Preferred Stock

On November 21, 2008, we entered into an agreement with the United States Department of the Treasury (“Treasury”), pursuant to which we issued and sold (i) shares of our Series B Fixed Rate Cumulative Perpetual Preferred Stock (“Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 556,976 shares of the Company’s common stock, par value $0.01 per share.  As of December 31, 2016, the Company had redeemed all outstanding shares of the Preferred Stock. At March 31, 2017 the Treasury continues to hold the Warrant.
The Warrant has a 10-year term and is immediately exercisable at an exercise price of $6.30 per share of Common Stock.   The exercise price and number of shares subject to the Warrant are both subject to anti-dilution adjustments.  Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting powerrights with respect to any shares of Common Stock issued upon exercise of the Warrant. The warrant expires November 11, 2018.

such stock have ceased and terminated. 

Capital Adequacy


The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings,risk-weightings, and other factors. As of March 31, 20172018 and December 31, 2016,2017, the Bank exceeded all capital adequacy requirements to which it is subject and meets the qualifications to be considered “well-capitalized.“well capitalized.”  See details of our capital ratios in Note 45 of the Consolidated Financial Statements.


Liquidity


Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers, to fund the operations of our mortgage-banking business, as well as to meet current and planned expenditures. These cash requirements are met on a daily basis through the inflow of deposit funds, the maintenance of short-term overnight investments, maturities and calls in our securities portfolio, and available lines of credit with the FHLB, which requires pledged collateral. Fluctuations in deposit and short-term borrowing balances may be influenced by the interest rates paid, general consumer confidence, and the overall economic environment. There can be no assurances that deposit withdrawals and loan fundings will not exceed all available sources of liquidity on a short-term basis. Such a situation would have an adverse effect on our ability to originate new loans and maintain reasonable loan and deposit interest rates, which would negatively impact earnings.


Our principal sources of liquidity are loan repayments, maturing investments, deposits, borrowed funds, and proceeds from loans sold on the secondary market. The levels of such sources are dependent on the Bank’s operating, financing, and investing activities at any given time. We consider core deposits stable funding sources and include all deposits, except time deposits of $100,000 or more. The Bank’s experience has been that a substantial portion of certificates of deposit renew at time of maturity and remain on deposit with the Bank. Additionally, loan payments, maturities, deposit growth, and earnings contribute to our flow of funds.


In addition to our ability to generate deposits, we have external sources of funds, which may be drawn upon when desired. The primary source of external liquidity is an available line of credit with the FHLB. The Bank’s total credit availability under the FHLB’s credit availability program was $145.3$240.3 million at March 31, 2017,2018, of which $90.0$93.0 million was outstanding.


We also have $7.5 million in credit availability with another financial institution, of which $3.5 million was outstanding at March 31, 2018.

The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit (collectively “commitments”), which totaled $78.5$84.2 million at March 31, 2017.2018. Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. As of March 31, 2017, we had $1.2 million outstanding in mortgage loan commitments and $13.0 million in unadvanced construction commitments, which weWe expect to fund these commitments from the sources of liquidity described above.  These amounts do not include undisbursed lines

43



Customer withdrawals are also a principal use of liquidity, but are generally mitigated by growth in customer funding sources, such as deposits and short-term borrowings.


In addition to the foregoing, the payment of dividends is a use of cash, but is not expected to have a material effect on liquidity. As of March 31, 2017,2018, we had no material commitments for capital expenditures.


Our ability to acquire deposits or borrow could be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. At March 31, 2017,2018, management considered the Company’s liquidity level to be sufficient for the purposes of meeting our cash flow requirements. We are not aware of any undisclosed known trends, demands, commitments, or uncertainties that are reasonably likely to result in material changes in our liquidity.

We anticipate that our primary sources of liquidity over the next twelve months will be from loan repayments, maturing investments, deposit growth, and borrowed funds. We believe that these sources of liquidity will be sufficient for us to meet our liquidity needs over the next twelve months.


Off-Balance Sheet Arrangements and Derivatives


We enter into off-balance sheet arrangements in the normal course of business. These arrangements consist primarily of commitments to extend credit, lines of credit, and letters of credit. In addition, we have certain operating lease obligations.


obligations.

Credit Commitments


Credit commitments are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates fixed at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party.


Our exposure to credit loss in the event of nonperformance by the borrower is the contract amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. We are not aware of any accounting loss we would incur by funding our commitments.


See detailed information on credit commitments above under “Liquidity.”


Derivatives


We maintain and account for derivatives, in the form of interest-rate lock commitments (“IRLCs”) ,and mandatory forward contracts, and best effort forward contracts, in accordance with the Financial Accounting Standards Board guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses on IRLCs, mandatory forward contracts, and best effort forward contracts on the loan pipeline through mortgage-banking revenue in the Consolidated Statements of Operations.


IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan closes until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 60 days. For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of best efforts and mandatory forward contracts.


44


Information pertaining to the carrying amounts of our derivative financial instruments follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

    

Notional

    

Estimated

    

Notional

    

Estimated

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

(dollars in thousands)

Asset - IRLCs

 

$

9,050

 

$

184

 

$

1,144

 

$

22

Asset - Mandatory forward contracts

 

 

5,633

 

 

41

 

 

4,399

 

 

13


  March 31, 2017  December 31, 2016 
  
Notional
Amount
  
Estimated
Fair Value
  
Notional
Amount
  
Estimated
Fair Value
 
  (dollars in thousands) 
Asset - IRLCs $5,965  $169  $9,725  $162 
Asset - Mandatory forward contracts  2,670   2   10,302   153 
Liability - Best effort forward contracts  5,965   26   -   - 

Inflation


The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the U.S. and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. As a financial institution, virtually all of our assets and liabilities are monetary in nature and interest rates have a more significant impact on our performance than the effects of general levels of inflation. A prolonged period of inflation could cause interest rates, wages, and other costs to increase and could adversely affect our results of operations unless mitigated by increasesa corresponding increase in our revenues correspondingly.revenues. However, we believe that the impact of inflation on our operations was not material forin the first quarter of 20172018 or 2016.

2017.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

The principal objective of the Company’s interest rate risk management is to evaluate the interest rate risk included in balance sheet accounts, determine the level of risks appropriate given our business strategy, operating environment, capital and liquidity requirements, and performance objectives, and manage the risk consistent with our interest rate risk management policy. Through this management, we seek to reduce the vulnerability of our operations to changes in interest rates. The Board of Directors of the Company is responsible for reviewing assets/our asset/liability policiespolicy and interest rate risk position. The Board of Directors reviews the interest rate risk position on a quarterly basis and, in connection with this review, evaluates the Company’s business activities and strategies, the effect of those strategies on the Company’s net interest margin and the effect that changes in interest rates will have on the loan portfolio. While continuous movement of interest rates is certain, the extent and timing of these movements is not always predictable. Any movement in interest rates has an effect on our profitability.  We face the risk that rising interest rates could cause the cost of interest-bearing liabilities, such as deposits and borrowings, to rise faster than the yield on interest-earning assets, such as loans and investments. Our interest rate spread and interest rate margin also may be negatively impacted in a declining interest rate environment even though we generally borrow at short-term interest rates and lend at longer-term interest rates. This is because loans and other interest-earning assets may be prepaid and replaced with lower yielding assets before the supporting interest-bearing liabilities reprice downward. Our interest rate margin may also be negatively impacted in a flat or inverse-yield curve environment. Mortgage origination activity tends to increase when interest rates trend lower and decrease when interest rates rise.


Our primary strategy to control interest rate risk is to strive to balance our loan origination activities with the interest rate market. We attempt to maintain a substantial portion of our loan portfolio in short-term loans such as construction loans. This has proven to be an effective hedge against rapid increases in interest rates as the construction loan portfolio reprices rapidly.


The matching of maturity or repricing of interest-earning assets and interest-bearing liabilities may be analyzed by examining the extent to which these assets and liabilities are interest rate sensitive and by monitoring the Bank’s interest rate sensitivity gap. An interest-earning asset or interest-bearing liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. The difference between rate sensitive assets and rate sensitive liabilities represents the Bank’s interest sensitivity gap. At March 31, 2017,2018, we had a one-year cumulative positivenegative gap of approximately $33.6$139.8 million.


Exposure to interest rate risk is actively monitored by management. The objective is to maintain a consistent level of profitability within acceptable risk tolerances across a broad range of potential interest rate environments. We use the BankersGPS

45


PROFITstar® model to monitor our exposure to interest rate risk, which calculates changes in the economic value of equity (“EVE”).


The following table represents our EVE atas of March 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

Change in Rates

    

Amount

    

$ Change

    

% Change

 

 

 

(dollars in thousands)

 

 

 

+400

bp

$

167,503

 

$

(40,124)

 

(0.19)

%

+300

bp

 

179,862

 

 

(27,765)

 

(0.13)

%

+200

bp

 

190,517

 

 

(17,110)

 

(0.08)

%

+100

bp

 

199,717

 

 

(7,910)

 

(0.04)

%

0

bp

 

207,627

 

 

  

 

  

 

-100

bp

 

200,706

 

 

(6,921)

 

(0.03)

%

-200

bp

 

184,128

 

 

(23,499)

 

(0.11)

%


Change in Rates  Amount  $ Change  % Change 
   (dollars in thousands)    
 +400bp $100,725  $(3,386)  -3.25%
 +300bp   101,139   (2,972)  -2.85%
 +200bp   101,837   (2,274)  -2.18%
 +100bp   102,839   (1,272)  -1.22%
 0bp   104,111         
 -100bp   105,680   1,569   1.51%
 -200bp   109,086   4,975   4.78%
 -300bp  112,183   8,072   7.75%
 -400bp  118,237   14,126   13.57%

The preceding income simulation analysis does not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable-rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed.


Item 4.Controls and Procedures

Item 4.     Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), 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 13a-1513a‑15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive OfficerCEO and Chief Financial OfficerCFO concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-1513a‑15 under the Securities Act of 1934) during the three months ended March 31, 20172018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.Legal Proceedings

Item 1.     Legal Proceedings

In the normal course of business, we are party to litigation arising from the banking, financial, and other activities we conduct. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results, or liquidity.


Item 1A.
Risk Factors
liquidity as of March 31, 2018.

Item 1A.  Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Annual Report on Form 10-K10‑K of Severn Bancorp for the year ended December 31, 2016.2017. There has been no material change in our risk factors since the filing of our December 31, 2017 Annual Report on Form 10‑K.


46

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

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

None.


Item 3.
Defaults Upon Senior Securities

Item 3.     Defaults Upon Senior Securities

None.


Item 4.
Mine Safety Disclosures

Item 4.     Mine Safety Disclosures

Not applicable.


Item 5.Other Information

Item 5.     Other Information

None.


Item 6.     Exhibits

Item 6.Exhibits

Exhibit No.

Description

31.1

31.1

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following financial statements from the Severn Bancorp, Inc. Quarterly Report on Form 10-Q10‑Q as of March 31, 20172018 and for the three months ended March 31, 2017,2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Loss;Income; (iv) the Consolidated Statements of Stockholder’s Equity:Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial StatementsStatements.

47


SIGNATURESEXHIBIT INDEX

Exhibit No.

Description

31.1

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following financial statements from the Severn Bancorp, Inc. Quarterly Report on Form 10‑Q as of March 31, 2018 and for the three months ended March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.

48


SIGNATURES

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


SEVERN BANCORP, INC.

May 15, 2017

2018

/s/ Alan J. Hyatt

Alan J. Hyatt,
Chairman of the Board, President and Chief Executive Officer

(Principal Executive Officer)

May 15, 2017

2018

/s/ Paul B. Susie

Paul B. Susie,


Executive Vice President, Chief Financial Officer

(Principal Financial and Accounting Officer)

45

49


EXHIBIT INDEX

Exhibit No.
Description
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following financial statements from the Severn Bancorp, Inc. Quarterly Report on Form 10-Q as of March 31, 2017 and for the three months ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Loss; (iv) the Consolidated Statements of Stockholder’s Equity: (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.
46