Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation –

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP).

Consolidation, Policy [Policy Text Block]

Basis of Consolidation

– The consolidated financial statements include the accounts of Bancorp

and the Bank. All significant intercompany accounts and transactions have been eliminated.

Emerging Growth Company, Policy [Policy Text Block]

Emerging Growth Company Status

- Bancorp

is an emerging growth company under the JOBS Act and expects to lose its status as an emerging growth company at the end of

2019.

Bancorp

has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.

Reclassification, Policy [Policy Text Block]

Reclassifications

– Certain reclassifications have been made to prior period’s financial information to conform to the current period presentation.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates –

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

Significant estimates include, but are

not

limited to, allowance for loan losses, useful lives used in depreciation and amortization, deferred income taxes and related valuation allowance and core deposit intangibles.

Subsequent Events, Policy [Policy Text Block]

Subsequent Events

- Subsequent events have been evaluated through the date the consolidated financial statements were issued.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents –

Cash and cash equivalents include cash, due from banks, and federal funds sold. Generally, the Company considers all highly-liquid instruments with original maturities of

three

months or less to be cash equivalents. In monitoring credit risk associated with deposits in other banks, the Bank periodically evaluates the stability of the correspondent financial institutions.

Marketable Securities, Policy [Policy Text Block]

Available for Sale

Securities –

The Company reviews its financial position, liquidity, and future plans in evaluating the criteria for classifying securities. Available-for-sale securities consist of bonds, notes, debentures, mortgage-backed securities, municipal obligations and certain equity securities

not

classified as trading securities or as held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of stockholders’ equity. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual available-for-sale securities below their cost that are other-than-temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the expected life of the security.

Loans and Leases Receivable, Mortgage Banking Activities, Policy [Policy Text Block]

Mortgage Banking Operations –

The Company originates residential mortgage loans. Those operations include loan application, processing, documentation, underwriting, funding and the sale of loans to investors in the secondary market. Net operating income from mortgage banking operations include charges for loan origination and other fees, interest income, income (loss) on derivatives, and gain on sale of mortgage loans, less costs of loan originations and sales.

Finance, Loan and Lease Receivables, Held-for-sale, Policy [Policy Text Block]

Loans Held for Sale

– Loans held for sale includes

one

- to

four

-family residential real estate loans, and periodically, a portion of Small Business Administration (“SBA”) loans the Bank intends to sell. They are carried at fair value. Gains and losses on the sale of mortgage loans are recognized upon sale and are determined by the difference between the sales proceeds and carrying value of the loans. These loans are generally sold within

seven

days of origination. Net unrealized losses, if any, are recorded as a valuation allowance and charged to operations. The

December 31, 2018

and

2017

loans held for sale portfolio totaled

$26.9

million and

$15.4

million, respectively, all of which were

one

- to

four

-family residential real estate loans.

Derivatives, Policy [Policy Text Block]

Derivative Financial Instruments

In connection with its mortgage banking operation, the Company has the following derivative financial instruments which are carried at fair value and included in Prepaid and other assets or Other liabilities in the Consolidated Balance Sheets with fair value changes recorded in Gain on sale of loans in the Consolidated Statement of Comprehensive Income:

●

Interest Rate Lock Commitments

– The Company enters into Interest Rate Lock Commitments (“IRLCs”) to set mortgage loan interest rates with its mortgage loan customers prior to funding.

●

Forward Commitments

– The Company enters into forward commitments as part of its strategy to manage its exposure to changes in interest rates related to its interest rate lock commitments provided to customers to fund mortgages and on mortgage loans held for sale. These forward commitments have

not

been designated as hedges for accounting purposes under GAAP.

Finance, Loans and Leases Receivable, Policy [Policy Text Block]

Loans Held for Investment, Net

– Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific allowances and net of any deferred fees or costs. Loans are considered past due or delinquent based on the contractual terms in the loan agreement and how recently repayments have been received. Interest income is recognized based upon principal amounts outstanding. The accrual of interest is discontinued at the time the loan is

days past due or when, in the opinion of management, there is doubt about the ability of the borrower to pay interest or principal, unless the credit is well secured and in process of collection. Interest previously accrued but uncollected on such loans is reversed and charged against current income. Subsequent interest collected on such loans is credited to loan principal if, in the opinion of management, collectability of principal is doubtful; otherwise, the interest collected is recognized as income and resumption of interest accruals

may

occur. Loans are charged-off as uncollectible when, in the opinion of management, collectability of principal is improbable. Personal loans are typically charged off when

later than

180

days past due.

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio; credit concentrations; trends in historical loss experience; and specific impaired loans and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance

may

change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on the current level of net loan losses, known and inherent risks in the portfolio, adverse situations that

may

affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.

Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

Property, Plant and Equipment, Policy [Policy Text Block]

Premises and Equipment

– Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method in amounts sufficient to relate the cost of depreciable assets to operations over the estimated useful lives of the assets which range from

three

seven

years for equipment and

fifteen

forty

years for leasehold improvements and buildings. Maintenance and repairs that do

not

extend the useful lives of premises and equipment are charged to expense as incurred.

Investment, Policy [Policy Text Block]

Stock in Financial Institutions -

The Bank has investments in other financial institutions including the Federal Home Loan Bank (FHLB) and other correspondent banks. The Bank is a member of FHLB system. Members are required to own stock in the FHLB. The level of stock ownership is based on the level of borrowing and other factors, and member banks

may

invest in additional amounts at times. Financial institution stock is carried at cost, is classified as a restricted security and is periodically evaluated for impairment based on ultimate recovery. Cash and stock dividends are recorded in Other income in the Consolidated Statement of Comprehensive Income.

Transfers and Servicing of Financial Assets, Policy [Policy Text Block]

Transfers of Financial Assets

– Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and the Company does

not

maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank Life Insurance, Policy [Policy Text Block]

Bank Owned Life Insurance (BOLI) –

The Bank holds BOLI representing life insurance on the lives of certain executives of the Bank purchased in order to help offset the costs of the Bank’s benefit expenses. BOLI is carried on our consolidated balance sheets at the net cash surrender value of the policies and increases in the net cash surrender value are recorded in noninterest income in the consolidated statements of comprehensive income (loss) as bank owned life insurance income.

Intangible Assets, Finite-Lived, Policy [Policy Text Block]

Core deposit intangible (CDI)

–

Core deposit intangible represents a premium paid to acquire core deposits representing the net present value of core deposits acquired over their book value on the acquisition date. The core deposit intangible is amortized using the double declining balance method over the

-year estimated useful lives of the core deposits. Core deposit intangibles are tested for impairment whenever events or changes in circumstances indicate the carrying value of the assets

may

be larger than the value of the future undiscounted cash flows.

Real Estate, Policy [Policy Text Block]

Other Real Estate (ORE)

– ORE consists of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties are carried at fair value based on appraisal value less estimated sales costs. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses; any subsequent valuation adjustments are charged to expense, and the basis of the properties is reduced accordingly. These properties are

not

held for the production of income and, therefore, are

not

depreciated. Significant improvements expected to increase the resale value are capitalized and added to the value of the property.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value Measurements –

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A

three

-level fair value hierarchy prioritizes the inputs used to measure fair value:

●	Level 1 – Quoted prices in active markets for identical assets or liabilities; includes certain U.S. Treasury and other U.S. Government agency debt that is highly-liquid and is actively traded in over-the-counter markets.

●

Level

– Inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are

not

active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level

– Unobservable inputs that are supported by little or

market activity and that are significant to the fair value of the assets or liabilities. Level

assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Escrow Accounts Policy [Policy Text Block]

Escrow Accounts

– Funds collected from loan customers for insurance, real estate taxes and other purposes are maintained in escrow accounts and carried as a liability in the Consolidated Balance Sheets. These funds are periodically remitted to the appropriate entities to satisfy those claims.

Off-Balance-Sheet Credit Exposure, Policy [Policy Text Block]

Financial Instruments with Off-Balance-Sheet Risk –

In the ordinary course of business, the Bank enters into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The credit risk associated with these instruments is evaluated using the same methodology as for loans held for investment.

Advertising Costs, Policy [Policy Text Block]

Advertising Cost

– The Bank conducts direct and non-direct response advertising and purchases prospective customer lists from various sources. These costs are expensed as incurred. Advertising costs for the years ended

December 31, 2018

and

2017

were

$527,000

and

$454,000,

respectively,

Employee Stock Ownership Plan (ESOP), Policy [Policy Text Block]

Employee Stock Ownership Plan (ESOP) –

The Bank sponsors an internally leveraged ESOP. The cost of shares issued to the ESOP but

not

yet released is shown as unearned employee stock ownership plan (ESOP) shares, an element of stockholders’ equity in our consolidated balance sheets. As shares are committed to be released, compensation expense is recorded equal to the market price of the shares, and the shares become outstanding for purposes of earnings per share calculations. To the extent that the fair value of ESOP shares committed differs from the cost of such shares, the difference is charged or credited to additional paid-in capital in stockholders’ equity.

Cash dividends on unallocated shares are charged to compensation expense and used to make payments on the ESOP loan which releases shares to be allocated to participant accounts in proportion to their account balances. Cash dividends paid on allocated shares are recorded as a reduction of retained earnings and, at the direction of the employer

may

be: a) credited directly to participant accounts in proportion to their account balances, or b) distributed directly to participants (outside the plan) in proportion to their account balances, or c) used to make payments on the ESOP loan requiring the release of shares with at least a similar fair market value be allocated to participant accounts. In addition, participants have the right to receive an immediate distribution of their vested cash dividends paid on shares of common stock credited to their accounts.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Other

Stock-Based Compensation

– The Company has stock-based compensation plans which provide for the award of various benefits to Directors and employees, including restricted stock and options to purchase stock. Each award is separated into vesting tranches and compensation expense is recognized based on the fair value at the date of grant for each tranche on a straight-line basis over the vesting period reduced for estimated forfeitures. The fair value of stock option awards granted is estimated using the Black-Scholes-Merton option pricing model using inputs including the option exercise price and risk free rate of return, and assumptions for expected dividend yield, expected stock price volatility and the expected life of the awards. The closing market price of the Company’s stock on the date of grant is the exercise price for the stock options and the estimated fair value of the restricted stock awards. Expense is recognized over the required service period, defined as the vesting period. For awards with graded vesting, expense is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize expense net of estimated forfeitures.

Income Tax, Policy [Policy Text Block]

Income Taxes

– Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Accrued interest and penalties associated with uncertain tax positions are recognized as part of the income tax provision. The Company has

uncertain tax provisions.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive

Income (

Loss

)

– Comprehensive income (loss) consists of net income (loss) and net unrealized gains and losses on securities available-for-sale, net of taxes when applicable.

Earnings Per Share, Policy [Policy Text Block]

Earnings per Common Share

- Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Maryland corporate law does

not

provide for treasury shares; therefore, shares repurchased are removed from issued and outstanding immediately and would

not

be considered outstanding. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options. Earnings per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements. The Company has restricted stock awards that participate in dividends (“participating securities”), and is required to apply the

two

-class method to compute earnings per share. The

two

-class method is an earnings allocation method under which earnings per share is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period.

Business Combinations Policy [Policy Text Block]

Business Combinations –

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC

805,

“Business Combinations” (“ASC

805”

). The Company recognizes the full estimated fair value of the assets received and liabilities assumed, immediately expenses transaction costs and accounts for restructuring plans separately from the business combination. There is

recognition of the acquired allowance for loan losses on our consolidated balance sheet as credit related factors are incorporated directly into the estimated fair value of the loans recorded at the effective date of the business combination. The excess of the cost of the merger over the fair value of the net tangible and intangible assets acquired, if any, is recorded as goodwill. Alternatively, a bargain purchase gain is recorded equal to the amount by which the estimated fair value of assets received exceeds the estimated fair value of liabilities assumed and consideration paid. Results of operations of the acquired business are included in our statement of comprehensive income (loss) from the effective date of the business combination.

New Accounting Pronouncements, Policy [Policy Text Block]

Summary of Recent Accounting Pronouncements

Bancorp

is an emerging growth company and has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements

may

not

be comparable to the financial statements of public companies that comply with such new or revised accounting standards. The Company expects to lose its status as an emerging growth company at the end of

2019,

which is the end of the

fifth

year after the Bank

1440

acquisition.

Revenue Recognition

- In

May 2014,

the Financial Accounting Standards Board (“FASB”) issued

Accounting Standards Update (“ASU”)

2014

09,

“Revenue from Contracts with Customers (Topic

606

)

.”

ASU

2014

implements a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

ASU

2015

“Revenue from Contracts with Customers – Deferral of the Effective Date”

deferred the effective date of ASU

2014

one

year and as a result, the new standard will be effective the

first

quarter of

2018.

The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU

2014

09,

and non-interest income. The Company does

not

expect adoption of ASU

2014

will have a material impact on our consolidated financial statements and disclosures. We adopted the revenue recognition guidance in the

first

quarter of

2018

and implementation did

not

have a significant impact to the Company’s consolidated financial statements.

Financial Instruments –

January 2016,

the FASB issued ASU

No.

2016

01,

Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic

825

). The amendment has a number of provisions including the requirements that public business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, a separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans receivables), and eliminating the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendment was effective for annual and interim reporting periods beginning after

December 15, 2017

and implementation did

not

have a significant impact to the Company’s consolidated financial statements.

Leases –

February 2016,

the FASB issued ASU

2016

“Leases (Topic

842

).”

This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and interim periods within those fiscal years beginning after

December 15, 2018 for public companies, but the Company will have until the first quarter of 2020 to adopt due to its emerging growth company status.

The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements and collecting the data necessary for that assessment and adoption.

Share-Based Payments –

March 2016,

the FASB issued ASU

No.

2016

09,

“Improvements to Employee Share-Based Payment Accounting,

” which simplifies certain aspects of accounting for share-based payment transactions, including transactions in which an employee uses shares to satisfy the employer’s minimum statutory income tax withholding obligation, forfeitures and income taxes when awards vest or are settled. The guidance also requires that tax benefits from employee share-based transactions be run directly through the income statement when realized as adjustments to tax expense or benefit. Therefore, diluted earnings per share computations

longer include an adjustment for estimated tax benefits. This guidance is effective for annual periods beginning after

December 15, 2016,

with early adoption permitted. The Company adopted ASU

No.

2016

beginning as of

January 1, 2017

and the adoption did

not

have a material impact on the Company’s financial statements.

Credit Losses -

June 2016,

the FASB issued ASU

2016

13,

“

Financial Instruments—Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments

”

The amendments in this update replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to create credit loss estimates. The new guidance is effective for public companies that are U.S. Securities and Exchange Commission filers for fiscal years beginning after

December 15, 2019

including interim periods within those fiscal years. For all other public companies, the amendments are effective for fiscal years beginning after

December 15, 2020,

including interim periods within those fiscal years. For all other companies, including emerging growth companies, the amendments are effective for fiscal years beginning after

December 15, 2020,

and interim periods within fiscal years beginning after

December 15, 2021.

The guidance is required to be applied by the modified retrospective approach. Early adoption is permitted as of the fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.

Premium on Callable Debt -

March 2017,

the FASB issued ASU

No.

2017

08,

“

Receivables–Nonrefundable Fees and Other Costs (Subtopic

310

)

”

to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does

not

change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after

December 15, 2018,

and interim periods within those fiscal years. Early adoption is permitted, including in an interim period. ASU

2017

not

expected to have a significant impact on our consolidated financial statements.

Share-Based Payment Modification -

May 2017,

the FASB issued ASU

2017

09,

“Compensation - Stock Compensation (Subtopic

718

): Scope of Modification Accounting.”

ASU

2017

clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will

not

apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU

2017

is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2017.

Early adoption was permitted. We adopted ASU

2017

effective

January 1, 2018

and it did

not

have a significant impact on our consolidated financial statements.

Reporting Tax Effects of Tax Cuts and Jobs Act

February 2018,

the FASB issued ASU

No.

2018

02,

“

Income Statement-

eporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

”

that helps organizations address certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the

2017

Tax Cuts and Jobs Act. The ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The ASU requires financial statement preparers to disclose a description of the accounting policy for releasing income tax effects from AOCI, whether they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act, and information about the other income tax effects that are reclassified. The amendments are effective for all organizations for fiscal years beginning after

December 15, 2018,

and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We adopted ASU

2018

effective

December 2018

and reclassified the stranded tax effects from AOCI to retained earnings. Adoption did

not

have a significant impact on our consolidated financial statements.