UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from ________________ to ________________

 

Commission file number: 000-55341

 

MB BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

	Maryland		47-1696350
	(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

	1920 Rock Spring Road, Forest Hill, Maryland		21050
	(Address of Principal Executive Offices)		(Zip Code)

 

(410) 420-9600

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of May 13, 2015, there were 2,116,000 shares of common stock outstanding.

 

 

MB BANCORP, INC.

 

Table of Contents

 

		Page
		No.
Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	1
	Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (unaudited)	2
	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2015 and 2014 (unaudited)	3
	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
Part II. Other Information
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47
Signatures

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

 

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

 

		As of				As of
		March 31,				December 31,
		2015				2014
(Dollars in thousands)		(unaudited)
Assets:
Cash and due from banks		$	2,623			$	3,627
Interest bearing deposits in other banks			2,667				11,563
Total cash and cash equivalents			5,290				15,190
Other interest-bearing deposits in other banks			21,650				10,445
Investment securities available-for-sale – at fair value			474				502
Investment securities held to maturity – amortized cost			12,836				14,139
Loans, net of unearned fees			101,536				103,667
Less allowance for loan losses			(1,723	)			(1,731	)
Loans, net			99,813				101,936
Real estate ground rents			842				842
Less allowance for credit losses			(135	)			(139	)
Ground rents, net			707				703
Federal Home Loan Bank stock, at cost			805				929
Property and equipment – net			3,890				3,907
Deferred income taxes			1,100				1,120
Bank-owned life insurance			860				847
Other real estate owned			287				379
Accrued interest receivable and other assets			608				588
TOTAL ASSETS		$	148,320			$	150,685
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits		$	97,337			$	98,473
Federal Home Loan Bank advances			14,750				15,750
Deferred compensation liability			217				318
Accounts payable and other liabilities			376				330
Total liabilities			112,680				114,871
STOCKHOLDERS’ EQUITY:
Common stock .01 par value; authorized 19,000,000 shares; issued and outstanding 2,116,000 shares at March 31, 2015 and December 31, 2014			21				21
Additional paid-in capital			20,145				20,144
Retained earnings - substantially restricted			17,114				17,318
Accumulated other comprehensive income			15				15
Unearned ESOP shares			(1,655	)			(1,684	)
Total stockholders’ equity			35,640				35,814
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	148,320			$	150,685

 

See accompanying notes to consolidated financial statements.

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended
		March 31,
		2015				2014
(Dollars in thousands, except per share amount)		(unaudited)
INTEREST INCOME:
Interest and fees on loans		$	1,062			$	1,143
Interest on federal funds sold and other investments			40				11
Interest and dividends on investment securities			117				125
Total interest income			1,219				1,279
INTEREST EXPENSE:
Interest on deposits			184				216
Interest on short-term borrowings			2				4
Interest on long term borrowings			125				125
Total interest expense			311				345
NET INTEREST INCOME			908				934
PROVISION (REVERSAL) FOR LOAN LOSSES			6				(5	)
NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR LOAN LOSSES			902				939
NON-INTEREST INCOME:
Service charges on deposit accounts			2				4
Fees and charges on loans			12				16
Increase in cash surrender value of life insurance			13				1
Gain on sale of other real estate owned			5				—
Gain on sale of real estate held for sale			—				131
Ground rent fees			9				10
Other income			5				6
Total non-interest income			46				168
NON-INTEREST EXPENSE:
Salaries and employee benefits			609				557
Occupancy expenses			126				136
Furniture and equipment expenses			12				20
Legal and professional expenses			83				45
Data processing and other outside services			63				64
FDIC insurance premiums			26				31
Advertising and marketing related expenses			21				17
Provision for loss on other real estate owned			51				—
(Reversal) provision for loss on ground rents			(7	)			9
Other expenses			149				107
Total non-interest expenses			1,133				986
(LOSS) INCOME BEFORE INCOME TAXES			(185	)			121
INCOME TAX EXPENSE			19				47
NET (LOSS) INCOME		$	(204	)		$	74
Basic loss per share		$	(.10	)		$	N/A
Diluted loss per share		$	(.10	)		$	N/A

 

See accompanying notes to consolidated financial statements

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

		For the Three Months Ended_
		March 31,				March 31,
(Dollars in thousands)		2015				2014
		(unaudited)
NET (LOSS) INCOME		$	(204	)		$	74
OTHER COMPREHENSIVE (LOSS) INCOME ON
AVAILABLE-FOR-SALE INVESTMENT SECURITIES:
Unrealized gains arising during the period			—				9
Income taxes on unrealized gains arising during the period			—				(3	)
			—				6
COMPREHENSIVE (LOSS) INCOME		$	(204	)			80

 

See accompanying notes to consolidated financial statements

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015 (UNAUDITED)

 

(Dollars in thousands)		Common Stock				Additional Paid In Capital				Retained Earnings				Unearned ESOP Shares				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
BALANCE AT JANUARY 1, 2014		$	—			$	—			$	18,495			$	—			$	7			$	18,502
Net income			—				—				74				—				—				74
Net unrealized gain on available- for sale securities, net of tax benefit of ($3)			—				—				—				—				6				6
BALANCE AT MARCH 31, 2014		$	—			$	—			$	18,569			$	—			$	13			$	18,582
BALANCES AT JANUARY 1, 2015		$	21			$	20,144			$	17,318			$	(1,684	)		$	15			$	35,814
Net Loss			—				—				(204	)			—				—				(204	)
Stock-based compensation			—				1				—				29				—				30
BALANCE AT MARCH 31, 2015		$	21			$	20,145			$	17,114			$	(1,655	)		$	15			$	35,640

 

See accompanying notes to consolidated financial statements.

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For Three Months Ended
		March 31,				March 31,
		2015				2014
(Dollars in thousands)		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(204	)		$	74
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation expense			35				43
Increase in cash surrender value of life insurance			(13	)			(1	)
Net amortization/accretion of premiums and discounts			(3	)			(1	)
Provision (reversal) for loan losses			6				(5	)
Provision (reversal) for ground rent losses			(7	)			9
Decrease (increase) in deferred income taxes			20				—
Provision for loss on other real estate owned			51				—
Non-cash compensation under stock-based benefit plan			30				—
(Gain) Loss on sale of other real estate owned			(5	)			—
Increase in accrued interest and other assets			(21	)			(5	)
Loss on disposal of equipment			—				—
Gain on sale of real estate held for sale			—				(131	)
Decrease in deferred compensation liability			(101	)			(78	)
Increase (decrease) in accounts payable and other liabilities			46				(64	)
Net cash used in operating activities			(166	)			(159	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in other interest bearing deposits in other banks			(11,205	)			(249	)
Purchase of available-for-sale investments			—				(120	)
Proceeds from calls/repayments of available-for-sale investments			29				10
Purchase of held-to-maturity investments			—				(968	)
Proceeds from maturity/repayments of held-to-maturity investments			1,305				242
Net decrease in loans			2,163				2,004
Proceeds from sale of ground rents			3				2
Proceeds from sale of other real estate owned			—				—
Proceeds from sale of real estate held for sale			—				574
Purchase of property, plant and equipment			(18	)			(20	)
Net decrease (increase) in Federal Home Loan Bank stock			124				55
Net cash (used in) provided by investing activities			(7,599	)			1,530
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		$	(1,135	)		$	(291	)
Federal Home Loan Bank advances			3,750				2,750
Federal Home Loan Bank repayments			(4,750	)			(2,750	)
Net cash used in financing activities			(2,135	)			(291	)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(9,900	)			1,080
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			15,190				4,011
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	5,290			$	5,091
Supplemental cash flow information:
Interest paid		$	305			$	346
Income taxes paid		$	—			$	—
Noncash:
Transfer of other real estate owned to loans		$	41			$	—

 

See accompanying notes to consolidated financial statements.

 

 

MB BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014 (UNAUDITED)

 

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

In 2002, Bohemian American Federal Savings and Loan Association, Inc., incorporated in 1899 in the State of Maryland, merged with Madison & Bradford Federal Savings & Loan Association, incorporated in 1904 in the State of Maryland, to form Madison Bohemian Savings Bank. On September 1, 2009 Madison Bohemian Savings Bank changed its name to Madison Bank of Maryland (the “Bank”). The Bank’s principal business is providing mortgage and consumer loans in Baltimore and Harford County. The Bank also provides construction and lot loans. Significant accounting policies followed by the Bank are presented below.

 

On August 26, 2014, the Bank’s Board of Directors approved a plan (the “Plan”) to convert from a federally-chartered mutual savings bank to a federally-chartered stock savings bank form of organization, which was subsequently approved by the Bank’s members. The Plan included the formation of MB Bancorp, Inc. (the “Company”) to own all of the outstanding capital stock of the Bank. On December 29, 2014, the Bank completed its mutual-to-stock conversion. On that date, the Bank became the wholly owned subsidiary of the Company and the Company sold 2,116,000 shares of its common stock for gross offering proceeds of $21,160,000.

 

The cost of conversion and issuing and selling the capital stock was deducted from the proceeds of the offering. The Bank incurred $995,000 in conversion cost, which was recorded in prepaid expenses and other assets on the Consolidated Balance Sheet. At the time of conversion, the Bank established a liquidation account in an amount equal to its retained earnings as reflected in the latest balance sheet used in the final conversion prospectus. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their deposit accounts in the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. In the event of a complete liquidation of the Bank, eligible depositors who continue to maintain accounts in accordance with Office of the Comptroller of the Currency (“OCC”) regulations will be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to the Company’s common stock. The conversion will be accounted for as change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result. The Bank may not declare or pay a cash dividend if the effect thereof would cause its net worth to be reduced below either the amount required for the liquidation account discussed below or the regulatory capital requirements imposed by the OCC.

 

Unaudited Interim Financial Statements

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying consolidated financial statements as of March 31, 2015 and for the three months ended March 31, 2015 and 2014 contains all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at March 31, 2015.

 

Certain prior period information has been reclassified to conform to the current period presentation.

 

These statements should be read in conjunction with the audited consolidation financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations and cash flows for the three months ended March 31, 2015 and 2014 are not necessarily indicative of the results to be expected for the year ended December 31, 2015.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of MB Bancorp, Inc. (“The Company”) and it’s wholly owned subsidiaries, Madison Bank of Maryland (“The Bank”), 1920 Rock Spring Road, LLC formed in 1998 to own and hold real estate and Mutual, LLC formed in 2011 to hold other real estate owned. All significant intercompany accounts and transactions have been eliminated. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles and to general practices in the banking industry.

 

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

 

  Loans

 

Loans are stated at the principal amount outstanding net of any deferred fees and costs. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. Direct loan origination fees, net of direct loan origination costs, are amortized or accreted over the contractual life of the loan using the interest method.

 

Loans are considered impaired when, based on current information; it is probable that the Company will not collect all principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal and interest payments are past due and they are placed on non-accrual. Management also considers the financial condition of the borrower, cash flows of the loan and the value of the related collateral. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate and consumer installment loans, which are evaluated collectively for impairment. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (usually ninety days or less) provided eventual collection of all amounts due is expected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on a loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. The Company recognizes interest income on impaired loans on a cash basis if the borrower demonstrates the ability to meet the contractual obligation and collateral is sufficient. If there is doubt regarding the borrower’s ability to make payments or the collateral is not sufficient, payments received are accounted for as a reduction in principal.

 

A loan is considered to be a troubled debt restructured loan (“TDR”) when the Company grants a concession to the borrower that the Company would not otherwise consider to a borrower of comparable risk and placed on non-accrual status. Such concessions include the reduction of interest rates, forgiveness of all or a portion of principal or interest, extension of loan term or other modifications at interest rates that are less than the current market rate for new obligations with similar risk. If a loan is in nonaccrual status at the time we restructure it and classify the restructure as a troubled debt restructuring, it is our policy to maintain the loan as nonaccrual until we receive six consecutive monthly payments under the restructured terms. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of one year.

 

Allowance for Loan Losses

 

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The Company maintains an allowance for loan losses at an amount estimated to equal all loan losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. 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 and trends that may affect the borrowers’ ability to pay.

 

 

The allowance for loan losses represents an estimation done pursuant to either Accounting Standards Codification (“ASC”) Topic 450 “Contingencies” or Topic 310 “Receivables.” The Company uses a loan grading system where loans are graded based on management’s evaluation of the risk associated with each loan. A factor, based on the loan grading is applied to the loan allowance to provide for losses. In addition, management judgmentally establishes an additional nonspecific reserve. The nonspecific portion of the allowance reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlates perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. The adequacy of the allowance is determined through careful and continuous evaluation of the loan portfolio, which involves the consideration of a number of factors to establish a prudent level. Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change.

 

While management believes it has established the allowance for loan losses in accordance with generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment, there can be no assurance that in the future the Bank’s regulators or the economic environment will not require further increases in the allowance.

 

Other Real Estate Owned

Real estate acquired in satisfaction of a debt is carried at fair value net of estimated selling costs. Costs incurred in maintaining foreclosed real estate and write-downs to reflect declines in the fair value of the properties after acquisition are included in noninterest expenses.

 

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Bank, (2) 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 (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

Income Taxes

 

The Bank uses the liability method of accounting for income taxes. Under the liability method, deferred-tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse. Deferred income taxes are recognized when it is deemed more likely than not that the benefits of such deferred income taxes will be realized. The Bank recognizes interest and/or penalties related to income tax matters in income tax expense. Tax years subsequent to December 31, 2010 remain subject to examination by Federal and State of Maryland jurisdictions.

 

ASC Topic 740, “Income Taxes,” provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Bank has not identified any income tax uncertainties.

 

Recognition of Deferred Tax Valuation Allowance

 

As of December 2014, the Bank recorded a provision for loan losses totaling $810,000 and a provision for losses on other real estate owned of $118,000. The provision for loan losses was principally the result of the third quarter receipt of an updated appraisal on a land loan and the establishment of an unallocated reserve of $250,000. The provision on other real estate owned was the result of reducing the sales prices of properties below the fair value previously estimated. The impairment identified on the land loan was charged-off in September. In addition, the Bank has four impaired loans that were scheduled for foreclosure in the quarter ended December 31, 2014. The Bank is in receipt of current appraisals, which did not include interior inspections, on the properties. The Bank’s recent experience indicates that foreclosed properties had interior damage that was only discovered upon the Bank’s inspection at the time of possession and consequently resulted in losses in excess of the original fair value estimate

 

 

(i.e., appraised values or listed sales price less estimated selling costs). Based on the appraisals discussed above, our exterior inspection of the properties currently in the process of foreclosure and the Bank’s correspondence with the borrowers, an unallocated reserve of $250,000 was established at September 30, 2014. Excluding the establishment of the unallocated reserve, the Bank’s methodology for computing the allowance for loan losses did not change from prior periods.

 

The combination of the unanticipated additional loan losses and provision for losses in other real estate owned resulted in a loss before income tax of $882,000 for the period ended December 31, 2014. As of December 31, 2014 the deferred tax asset for the net operating loss was estimated at approximately $841,000. As a result, the Bank became in a cumulative loss position for three consecutive years and consequently management reevaluated the need for a valuation allowance of the deferred tax asset balance. Management’s evaluation included: management’s ability to fully implement our strategic plan, which included the ability to raise capital through the proposed public stock offering; additional expenses expected to be incurred as the result of becoming a public company; and the ability to generate sufficient taxable income to fully realize the Bank’s net operating loss carryforwards. Management concluded that it is more likely than not the Bank will be unable to generate sufficient taxable income in the foreseeable future to fully utilize the cumulative net operating loss carryforward and, therefore, established a valuation allowance for the net operating loss carryforward related deferred tax asset of approximately $841,000.

 

2.  IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the FASB issued ASU No. 2014-4, “Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”. The guidance clarifies when an “in substance repossession or foreclosure” occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, such that all or a portion of the loan should be derecognized and the real estate property recognized. ASU 2014-04 states that a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments of ASU 2014-04 was effective for Madison Bank of Maryland on January 1, 2015, and was applied using a prospective transition method as described in ASU 2014-04. The application of ASU 2014-04 did not have an impact on the Company’s financial position or results of operations.

 

In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contract with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts

 

 

or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

In August 2014, FASB issues ASU-2014-14, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”. The guidance requires that a government-guaranteed mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: the loan has a government guarantee that is not separable from the loan before foreclosure; at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The amendments of ASU-2014-14 was effective for Madison Bank of Maryland on January 1, 2015 and was applied using a prospective transition method as described in ASU-2014-14. The application of ASU 2014-14 did not have an impact on the Company’s financial position or results of operation.

 

 

3.   INVESTMENT SECURITIES

 

The carrying amount and estimated fair market value of investment securities classified as available-for-sale are summarized as follows:

 

		March 31, 2015 (unaudited)
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Mortgage-backed securities:
FHLMC certificates		$	232			$	12			$	—			$	244
FNMA certificates			143				9				—				152
GNMA certificates			75				3				—				78
Total mortgage-backed securities			450				24				—				474
Total investments available-for-sale		$	450			$	24			$	—			$	474

 

		December 31, 2014
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Mortgage-backed securities:
FHLMC certificates		$	239			$	10			$	—			$	249
FNMA certificates			154				10				—				164
GNMA certificates			85				4				—				89
Total mortgage-backed securities			478				24				—				502
Total investments available-for-sale		$	478			$	24			$	—			$	502

 

The carrying amount and estimated fair market value of investment securities classified as held-to-maturity are summarized as follows:

 

		March 31, 2015 (unaudited)
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments held-to-maturity:
U.S. Government securities:
FHLMC bonds		$	4,997			$	9			$	(4	)		$	5,002
FNMA bonds			1,000				—				(2	)			998
FFCB bonds			2,000				—				(30	)			1,970
Total U.S. Government securities			7,997				9				(36	)			7,970
Mortgage-backed securities:
FHLMC certificates			1,391				109				—				1,500
FNMA certificates			2,968				185				—				3,153
GNMA certificates			480				44				—				524
Total mortgage backed securities			4,839				338				—				5,177
Total investments held-to-maturity		$	12,836			$	347			$	(36	)		$	13,147

 

 

		December 31, 2014
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments held-to-maturity:
U.S. Government securities:
FHLMC bonds		$	4,997			$	10			$	(15	)		$	4,992
FNMA bonds			1,000				—				(26	)			974
FFCB bonds			3,000				—				(67	)			2,933
Total U.S. Government securities			8,997				10				(108	)			8,899
Mortgage-backed securities:
FHLMC certificates			1,466				107				—				1,573
FNMA certificates			3,181				203				—				3,384
GNMA certificates			495				47				—				542
Total mortgage backed securities			5,142				357				—				5,499
Total investments held-to-maturity		$	14,139			$	367			$	(108	)		$	14,398

 

Below are schedules of both available-for-sale and held-to-maturity securities with unrealized losses as of March 31, 2015 (unaudited) and December 31, 2014 and the length of time the individual security has been in a continuous unrealized loss position. Unrealized losses are the result of interest rate levels differing from those existing at the time of purchase of the securities and as to mortgage-backed securities, estimated prepayment speeds. At March 31, 2015 (unaudited) and December 31, 2014, these unrealized losses are considered temporary as they reflect changes in fair values and are subject to change daily as interest rates fluctuate and the Bank has the ability and intent to hold the securities until the earlier of maturity or recovery.

 

		March 31, 2015 (unaudited)
		Less than 12 Months								12 Months or More								Total
(Dollars in thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Mortgage-backed securities		$	—			$	—			$	—			$	—			$	—			$	—
U.S. Government securities			—				—				7,970				(36	)			7,970				(36	)
Total temporarily impaired securities		$	—			$	—			$	7,970			$	(36	)		$	7,970			$	(36	)

 

		December 31, 2014
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
(Dollars in thousands)
Mortgage-backed securities		$	—			$	—			$	—			$	—			$	—			$	—
U.S. Government securities			—				—				4,889				(108	)			4,889				(108	)
Total temporarily impaired securities		$	—			$	—			$	4,889			$	(108	)		$	4,889			$	(108	)

 

The scheduled maturities of debt securities at March 31, 2015 (unaudited) were as follows:

 

		Amortized Cost (in thousands)				Fair Value (in thousands)
Due over one year through five years		$	999			$	1,002
Due over five years through ten years			3,000				2,998
Due after ten years			3,998				3,970
Mortgage-backed securities			5,289				5,651
Total		$	13,286			$	13,621

 

 

4.   LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

		March 31, 2015				December 31, 2014
(Dollars in thousands)		(unaudited)
Secured by real estate:
Residential:
One-to four-family		$	80,973			$	83,227
Multi-family			2,143				2,160
Total			83,116				85,387
Non-residential			9,361				9,230
Construction and land loans			4,904				4,856
Home equity line of credit (“HELOC”)			5,068				5,106
Consumer and other loans:
Loans to depositors, secured by savings			4				5
			102,453				104,584
Add:
Net (discount) premium on purchased loans			(9	)			(8	)
Unamortized net deferred costs			34				35
Less:
Undisbursed portion of construction loans			(897	)			(897	)
Unearned net loan origination fees			(45	)			(47	)
Less allowance for loan losses			(1,723	)			(1,731	)
Loans receivable, net		$	99,813			$	101,936

 

The risks associated with lending activities differ among the various loan types and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact the borrower’s ability to repay its loans and impact the associated collateral.

 

Residential real estate includes mortgage loans with the underlying one- to four-family or multi-family residential property (primarily owner-occupied) securing the debt. The Bank’s attempt to minimize risk exposure is minimized in these types of loans through the evaluation of the credit worthiness of the borrower, including debt-to-income ratios and underwriting standards which limit the loans-to-value ratio to generally no more than 80% unless the borrower obtains private mortgage insurance.

 

Residential real estate also includes home equity loans and lines of credit. These present a slightly higher risk to the Bank than one-to four-family first lien mortgages as they can be first or second liens on the underlying property. These loans are generally limited with respect to loan-to-value ratios and the credit worthiness of the borrower is considered including debt-to-income ratios.

 

Non-residential real estate includes various types of loans which have differing levels of credit risk associated with them. Owner-occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with cash flows generated from the business being the primary source of loan repayment. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy. The Bank, attempts to minimize this credit risk through its underwriting standards which include the credit worthiness of the borrower, a limitation on loan amounts to the value of the property securing the loan, and an evaluation of debt service coverage ratios. Non-owner occupied commercial real estate loans present a different credit risk to the Bank than owner-occupied commercial real estate, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirement and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinder the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Bank generally follows the same underwriting standards for these loans as with owner occupied commercial real estate, but recognizes the greater risk inherent in these credit relationships in its loan pricing.

 

Construction and land loans consist of one- to four-family residential construction and land development loans. The risk of loss on these loans is largely dependent on the Bank’s ability to assess the property’s value at the

 

 

completion of the project. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition and real estate market conditions which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Bank must rely upon other repayment sources, including the borrowers and/or guarantors of the project or other collateral securing the loan. The Bank attempts to mitigate credit risk through strict underwriting standards including evaluation of the credit worthiness of the borrowers and their success in other projects, adequate loan-to-value ratios and continual monitoring of the project during its construction phase.

 

Consumer loans consist primarily of loans secured by the borrower’s deposit balance at the Bank. As these loans are typically 100% secured by savings and certificate of deposits, the risk of credit loss is not deemed significant.

 

The Bank maintains an allowance for loan losses at an amount estimated to equal all loan losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. Our determination as to the classification of our assets is subject to review by the OCC and the FDIC. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulatory guidelines.

 

The Bank provides for loan losses based upon the consistent application of our documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition is estimating probable losses. We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with Generally Accepted Accounting Principles (“GAAP”). The allowance for loan losses consists of two components:

 

•

Specific allowances are only established for non-collateral dependent troubled-debt restructured loans and are established at the modification date of the troubled loan. The specific valuation allowance is computed as the excess of the loan’s expected cash flow based on the remaining original loan terms and the expected cash flow of the corresponding modified loan discounted at the original loan rate. As long as the borrower performs under the terms of the modification agreement, on a monthly basis we recalculate the specific valuation using the discounted cash-flow method described above. If the borrower fails to perform under the modification agreement, we will treat the loan as a collateral dependent and measure the loss by using the fair value of the collateral less disposition costs.

 

Losses on non-modified loans are charged-off in the month the loss is measured. Non-modified loans are measured for loss at the point the loan becomes 90 to 120 days delinquent or at maturity if an extension is requested. We obtain a third party appraisal to determine the fair value of the collateral. We measure these loans for loss by using the fair value of collateral less disposition costs method and if any loss is determined it is charged off directly. Subsequently, these loans are re-evaluated at least annually by obtaining an updated third party appraisal to determine if there should be any further loss recognition.

 

•

General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below.

 

Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s historical loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, and the estimated value of any underlying collateral. The historical loss experience is further adjusted for qualitative factors which include: changes in composition of the loan portfolio, current economic conditions, trends of past due and classified loans, quality of loan review system and Board oversight, existence and effect of concentrations and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

 

A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. Loans are generally placed on non-accrual status when they become 120 days delinquent. We may choose to consider loans from 90 to 119 days delinquent to be non-accrual, and generally do so except where a borrower has a history of periodically bringing a loan current after being 90 days or more delinquent. If the loan is less than 90 days

 

 

delinquent, but information is brought to our attention that indicates the collection of interest is doubtful, the loan will immediately be considered non-accrual. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. If the loan is deemed collateral dependent, the impairment is measured on the net realizable value of the collateral. If loan repayment is not deemed collateral dependent, impairment is measured on the net present value of the expected discounted future cash flows.

 

The Bank charges off loans after, the loan or a portion of the loan is deemed to be a loss and the loss amount has been determined. The loss amount is charged to the established allowance for loan losses. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.

 

Allowance for loan losses and recorded investment in loans for the three months ended March 31, 2015 (unaudited) is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Unallocated				Total
Allowance for loan losses:
Beginning balance		$	1,228			$	79			$	174			$	250			$	1,731
Charge-offs			(16	)			—				—				—				(16	)
Recoveries			2				—				—				—				2
Provisions			6				—				—				—				6
Ending balance		$	1,220			$	79			$	174			$	250			$	1,723
Allowance for loan losses:
Ending balance: individually evaluated for impairment		$	51			$	—			$	—				—			$	51
Ending balance: collectively evaluated for impairment		$	1,169			$	79			$	174			$	250			$	1,672
Loans:
Ending balance: individually evaluated for impairment		$	5,387			$	1,963			$	2,221				—			$	9,571
Ending balance: collectively evaluated for impairment		$	82,801			$	7,398			$	2,683				—			$	92,882

 

 

Allowance for loan losses and recorded investment in loans for the three months ended March 31, 2014 (unaudited) is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Unallocated				Total
Allowance for loan losses:
Beginning balance		$	1,586			$	127			$	77			$	—			$	1,790
Charge-offs			(48	)			—				(88	)			—				(136	)
Recoveries			—				—				—				—				—
Provisions			(5	)			—				—				—				(5	)
Ending balance		$	1,533			$	127			$	(11	)		$	—			$	1,649
Allowance for loan losses:
Ending balance: individually evaluated for impairment		$	54			$	—			$	—				—			$	54
Ending balance: collectively evaluated for impairment		$	1,479			$	127			$	(11	)		$	—			$	1,595
Loans:
Ending balance: individually evaluated for impairment		$	5,262			$	2,747			$	2,927			$	—			$	10,936
Ending balance: collectively evaluated for impairment		$	92,047			$	7,876			$	2,682			$	—			$	102,605

 

Allowance for loan losses and recorded investment in loans for the year ended December 31, 2014 is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Unallocated				Total
Allowance for loan losses:
Beginning balance		$	1,586			$	127			$	77			$	—			$	1,790
Charge-offs			(123	)			(39	)			(722	)			—				(884	)
Recoveries			2				13				—				—				15
Provisions			(237	)			(22	)			819				250				810
Ending balance		$	1,228			$	79			$	174			$	250			$	1,731
Allowance for loan losses:
Ending balance: individually evaluated for impairment		$	45			$	—			$	—			$	—			$	45
Ending balance: collectively evaluated for impairment		$	1,183			$	79			$	174			$	250			$	1,686
Loans:
Ending balance: individually evaluated for impairment		$	5,280			$	1,979			$	2,240			$	—			$	9,499
Ending balance: collectively evaluated for impairment		$	85,218			$	7,251			$	2,616			$	—			$	95,085

 

  

Credit risk profile by internally assigned classification as of March 31, 2015 (unaudited) is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Non-classified		$	83,576			$	7,567			$	2,745			$	93,888
Special mention			2,002				—				142				2,144
Substandard			2,610				1,794				2,017				6,421
Doubtful			—				—				—				—
Loss			—				—				—				—
Total		$	88,188			$	9,361			$	4,904			$	102,453

 

Credit risk profile by internally assigned classification as of December 31, 2014 is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non-residential Real Estate				Construction and Land				Total
Non-classified		$	85,231			$	7,420			$	2,616			$	95,267
Special mention			2,793				—				144				2,937
Substandard			2,474				1,810				2,096				6,380
Doubtful			—				—				—				—
Loss			—				—				—				—
Total		$	90,498			$	9,230			$	4,856			$	104,584

 

•

Special Mention — A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not considered adversely classified in accordance with regulatory guidelines and do not expose an institution to sufficient risk to warrant adverse classification.

 

•

Substandard — Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. These loans include non-accrual loans between 90 to 180 days that may not be individually evaluated for impairment.

 

•

Doubtful — Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

 

•

Loss — Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

 

  

Impaired loans as of and for the three months ended March 31, 2015 (unaudited) is as follows: 

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
With no related allowance recorded:
Recorded investment		$	4,322			$	1,963			$	2,221			$	8,506
Unpaid principal balance			5,127				2,007				3,241				10,375
Average recorded investment, for the three months ended March 31, 2015			4,357				1,966				2,227				8,550
Interest income recognized			57				11				28				96
Interest income foregone			20				13				3				36
With an allowance recorded:
Recorded investment			1,065				—				—				1,065
Unpaid principal balance			1,065				—				—				1,065
Related allowance			51				—				—				51
Average recorded investment, for the three months ended March 31, 2015			1,067				—				—				1,067
Interest income recognized			8				—				—				8
Interest income foregone			—				—				—				—
Total:
Recorded investment			5,387				1,963				2,221				9,571
Unpaid principal balance			6,192				2,007				3,241				11,440
Related allowance			51				—				—				51
Average recorded investment, for the three months ended March 31, 2015			5,424				1,966				2,227				9,617
Interest income recognized			65				11				28				104
Interest income foregone			20				13				3				36

 

  

Impaired loans as of and for the three months ended March 31, 2014 (unaudited) is as follows: 

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
With no related allowance recorded:
Recorded investment		$	3,889			$	2,747			$	2,927			$	9,563
Unpaid principal balance			4,523				2,768				3,307				10,598
Average recorded investment, for the three months ended March 31, 2014			4,064				2,617				2,919				9,600
Interest income recognized			60				13				30				103
Interest income foregone			33				21				8				62
With an allowance recorded:
Recorded investment			1,373				—				—				1,373
Unpaid principal balance			1,426				—				—				1,426
Related allowance			54				—				—				54
Average recorded investment, for the three months ended March 31, 2014			1,375				—				—				1,375
Interest income recognized			13				—				—				13
Interest income foregone			1				—				—				1
Total:
Recorded investment			5,262				2,747				2,927				10,936
Unpaid principal balance			5,949				2,768				3,307				12,024
Related allowance			54				—				—				54
Average recorded investment, for the three months ended March 31, 2014			5,439				2,617				2,919				10,975
Interest income recognized			73				13				30				116
Interest income foregone			34				21				8				63

 

  

Impaired loans as of and for the year ended December 31, 2014 is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
With no related allowance recorded:
Recorded investment		$	4,389			$	1,979			$	2,240			$	8,608
Unpaid principal balance			5,204				2,021				3,260				10,485
Average recorded investment, for the twelve months ended December 31, 2014			4,577				2,640				2,691				9,908
Interest income recognized			251				66				107				424
Interest income foregone			91				48				8				147
With an allowance recorded:
Recorded investment			891				—				—				891
Unpaid principal balance			891				—				—				891
Related allowance			45				—				—				45
Average recorded investment, for the twelve months ended December 31, 2014			898				—				—				898
Interest income recognized			34				—				—				34
Interest income foregone			4				—				—				4
Total:
Recorded investment			5,280				1,979				2,240				9,499
Unpaid principal balance			6,095				2,021				3,260				11,376
Related allowance			45				—				—				45
Average recorded investment, for the twelve months ended December 31, 2014			5,475				2,640				2,691				10,806
Interest income recognized			285				66				107				458
Interest income foregone			95				48				8				151

 

An aged analysis of past due loans as of March 31, 2015 (unaudited) is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Current		$	86,278			$	8,980			$	4,776			$	100,034
30 – 59 days past due			821				79				—				900
60 – 89 days past due			—				—				—				—
Greater than 90 day past due and still accruing			6				—				—				6
Greater than 90 days past due			1,083				302				128				1,513
Total past due			1,910				381				128				2,419
Total		$	88,188			$	9,361			$	4,904			$	102,453

 

  

An aged analysis of past due loans as of December 31, 2014 is as follows: 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Current		$	88,268			$	8,932			$	4,664			$	101,864
30 – 59 days past due			981				—				—				981
60 – 89 days past due			154				—				—				154
Greater than 90 day past due and still accruing			—				—				—				—
Greater than 90 days past due			1,095				298				192				1,585
Total past due			2,230				298				192				2,720
Total		$	90,498			$	9,230			$	4,856			$	104,584

 

Non-performing loans as of March 31, 2015 (unaudited) are as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Non-accruing troubled debt restructured loans		$	1,052			$	1,358			$	61			$	2,471
Other non-accrual loans			867				383				128				1,378
Total non-accrual loans			1,919				1,741				189				3,849
Accruing troubled debt restructured loans			2,519				222				1,889				4,630
Total		$	4,438			$	1,963			$	2,078			$	8,479

 

Non-performing loans as of December 31, 2014 are as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Non-accruing troubled debt restructured loans		$	866			$	1,368			$	64			$	2,298
Other non-accrual loans			917				—				128				1,045
Total non-accrual loans			1,783				1,368				192				3,343
Accruing troubled debt restructured loans			2,539				227				1,904				4,670
Total		$	4,322			$	1,595			$	2,096			$	8,013

 

Troubled debt restructurings (“TDRs”) are modifications of loans to assist borrowers who are unable to meet the original terms of their loans, in an effort to minimize the potential loss on the loan. Modifications of the loan terms includes but is not necessarily limited to: reduction of interest rates, forgiveness of all or a portion of principal or interest, extension of loan term or other modifications at interest rates that are less than the current market rate for new obligations with similar risk. If a loan is in non-accrual status at the time we restructure it and classify the restructure as a troubled debt restructuring, it is our policy to maintain the loan as nonaccrual until we receive six consecutive monthly payments under the restructured terms. TDR loans that are in compliance with their modified terms and that yield a market rate, may be removed from the TDR status after a period of one year.

 

  

The following includes loans classified as troubled debt restructurings during the three months ended March 31, 2015 (unaudited).

 

(Dollars in thousands)		Number of Contracts				Pre- modification Outstanding Recorded Investment				Post- modification Outstanding Recorded Investment
Residential real estate and consumer			7			$	844			$	844
Non-residential real estate			—				—				—
Construction and land			—				—				—
Total			7			$	844			$	844

 

The following includes loans classified as troubled debt restructurings during the three months ended March 31, 2014 (unaudited).

 

(Dollars in thousands)

Number of Contracts

Pre- modification Outstanding Recorded Investment

Post- modification Outstanding Recorded Investment

Residential real estate and consumer

—

$

—

$

—

Non-residential real estate

—

—

—

Construction and land

—

—

—

Total

—

$

—

$

—

  

 

The following includes loans classified as troubled debt restructures that subsequently defaulted during the three months ended March 31, 2015 (unaudited).

 

		During the Three Months Ended at Marh 31, 2015 (unaudited)
(Dollars in thousands)		Number of Contracts				Recorded Investment
TDRs that subsequently defaulted
Residential real estate and consumer			—			$	—
Non-residential real estate			—				—
Construction and land			—				—

  

  

The following includes loans classified as troubled debt restructures that subsequently defaulted during the year ended March 31, 2014 (unaudited).

 

		During Three Months Ended March 31, 2014 (Unaudited)
(Dollars in thousands)		Number of Contracts				Recorded Investment
TDRs that subsequently defaulted
Residential real estate and consumer			—			$	—
Non-residential real estate			—				—
Construction and land			—				—

 

 

Loans serviced by the Bank for the benefit of others totaled $447,000 and $450,000 at March 31, 2015 (audited) and December 31,2014, respectively.

 

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $646,000 as of March 31, 2015 (unaudited).

 

5.   OTHER REAL ESTATE OWNED

 

The balance in other real estate owned at March 31, 2015 (unaudited) and December 31, 2014 was $287,000 and $379,000, respectively.

 

The activity in residential other real estate owned is as follows:

 

(Dollars in thousands)
BALANCE AS OF DECEMBER 31, 2014		$	379
Additions			—
Transfers from Loans			—
Transfers to Loans			(41	)
Sales			—
Provisions			(51	)
BALANCE AS OF MARCH 31, 2015 (unaudited)		$	287

 

 

 

6.   DEPOSITS

Deposits are summarized as follows:

 

		March 31, 2015 (unaudited)				December 31, 2014
(Dollars in thousands)
Non-interest-bearing deposits		$	950			$	842
NOW and Money market			20,866				20,895
Savings			14,919				15,143
Certificates of deposit			60,602				61,593
Total deposits		$	97,337			$	98,473

 

  

The aggregate amount of time deposits in denominations of $100,000 or more as of March 31, 2015 (unaudited) and December 31, 2014 was $27,285,000 and $26,650,000, respectively. Deposit amounts in excess of $250,000 generally are not insured by the Federal Deposit Insurance Corporation.

 

At March 31, 2015 (unaudited), the schedule maturities of certificates of deposit are as follows:

 

(Dollars in thousands)
2015		$	23,868
2016			19,311
2017			8,065
2018			4,457
2019			4,186
2020			715
Total		$	60,602

 

Executive officers’ and directors’ deposits were $579,000 and $454,000 at March 31, 2015 (unaudited) and December 31, 2014, respectively.

 

7.   INCOME TAXES

 

The sources of deferred tax assets and liabilities and the tax effect of each are as follows:

 

(Dollars in thousands)		March 31, 2015 (unaudited)				December 31, 2014
Deferred tax assets:
Deferred loan fees and costs, net		$	4			$	5
Allowance for credit losses			680				683
Deferred compensation			86				126
Allowance for ground rents			53				55
Allowance for delinquent mortgage interest			282				276
Capital loss carryforward			—				2
Contribution carryforward			—				—
Net operating loss carryforward			935				840
Allowance for real estate owned			133				113
Total deferred tax assets			2,173				2,100
Valuation allowance			(936	)			(843	)
Deferred tax assets after valuation allowance			1,237				1,257
Deferred tax liabilities:
Depreciation			128				128
Unrealized gain on available-for-sale securities			9				9
Total deferred tax liabilities			137				137
Net deferred tax assets		$	1,100			$	1,120

 

Management evaluates deferred tax assets annually.

 

During 2008, 2009, and 2010, the Bank sold mutual fund investments that resulted in cumulative capital losses of $799,000. Since management determined that it was unlikely that the Bank would be able to fully utilize the corresponding deferred tax asset of $315,000 before expiration of the carryforward period, a valuation allowance was established for 100% of the corresponding deferred tax asset. During the year ended December 31, 2013, capital loss carryforwards of $692,000 and the related deferred tax asset and valuation allowance of $273,000 expired. During the year ended December 31, 2014, capital loss carryforwards of $101,000 and the related deferred tax asset and valuation allowance of $40,000 expired. The remaining capital loss carryforwards of $5,000 expire in 2015, as will the respective related deferred tax assets of approximately $2,000. Realization depends on generating

 

  

sufficient taxable capital gains before the expiration of the loss carryforward periods. The amount of loss carryforwards available for any one year may be limited if the Bank is subject to the alternative minimum tax.

 

At December 31, 2014, the Bank had approximately $2,100,000 in federal and state net operating loss carryforwards. These net operating loss carryforwards begin to expire in 2032. Realization depends on generating sufficient taxable income before the expiration of the loss carryforward period. The amount of the loss carryforward available for any one year may be limited if the Bank is subject to the alternative minimum tax.

 

Valuation allowance for deferred taxes for the three months ended March 31, 2015 (unaudited) and December 31, 2014 is as follows:

 

		Valuation Allowance
Balance of January 1, 2014		$	(42	)
Expiration of capital loss carryforwards			40
Increase in valuation allowance			(841	)
Balance of December 31, 2014		$	(843	)
Increase in valuation allowance			(93	)
Balance of March 31, 2015		$	(936	)

 

The combination of the unanticipated additional loan losses and provision for losses in other real estate owned resulted in a loss before income tax of $882,000 for the period ended December 31, 2014. As of December 31, 2014 the deferred tax asset for the net operating loss was estimated at approximately $841,000. As a result, the Bank became in a cumulative loss position for three consecutive years and consequently management reevaluated the need for a valuation allowance of the deferred tax asset balance. Management’s evaluation included: management’s ability to fully implement our strategic plan, which included the ability to raise capital through the proposed public stock offering; additional expenses expected to be incurred as the result of becoming a public company; and the ability to generate sufficient taxable income to fully realize the Bank’s net operating loss carryforwards. Management concluded that it is more likely than not the Bank will be unable to generate sufficient taxable income in the foreseeable future to fully utilize the cumulative net operating loss carryforward and, therefore, established a valuation allowance for the net operating loss carryforward related deferred tax asset of approximately $841,000.

 

Management considered the following positive and negative evidence in its evaluation of the need for a valuation allowance of the remaining deferred tax assets and liabilities relating to the timing difference in the aggregate of $1,100,000: the Bank reported taxable income in 2011, 2010 and 2009; the Bank was able to carry back all of the federal and substantially all of the net operating loss realized in 2012. The Bank had no history of net operating losses expiring unused. In addition, the local economy of the markets in which the Bank conducts business have been showing signs of continued improvement over the past two years and was a significant factor when considering the need for a valuation allowance. During 2014 and 2015, the trends continued to be positive; however, if these trends flatten or reverse, there is a potential that such negative evidence could outweigh the prevailing positive factors. Based on the considerations discussed above, the preponderance of positive factors and the mitigation of negative factors, the Bank concluded that at December 31, 2014 and March 31, 2015; it was more likely than not that the Bank would be able to realize in the future the net deferred tax assets related to timing differences.

 

8.   REGULATORY CAPITAL REQUIREMENTS

 

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 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 classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

  

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of Total and Common Equity and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets. Management believes as of March 31, 2015 and December 31, 2014 that the Bank met all capital adequacy requirements to which it is subject.

 

As of December 31, 2014, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events that management believes will adversely affect the Bank’s ability to remain in the well-capitalized category.

 

The following table presents the Bank’s capital position based on the March 31, 2015 (unaudited) and December 2014 financial statements and the current capital requirements:

 

		Actual								Minimum Requirements for Capital Adequacy Purposes and to be Adequately Capitalized Under the Prompt Corrective Action Provisions
(Dollars in thousands)		Amount				Ratio				Amount				Ratio
As of March 31, 2015 (unaudited):
Total risk-based capital (to risk-weighted assets)		$	26,541				35.16	%		$	6,038				≥8.0	%
Tier I capital (to risk-weighted assets)			25,589				33.90				4,529				≥6.0
Tier I capital (to adjusted total assets)			25,589				17.62				5,809				≥4.0
Common equity tier 1 capital (to risk weighted assets)			25,589				33.90				3,397				>4.5
As of December 31, 2014:
Total risk-based capital (to risk-weighted assets)		$	26,739				33.97	%		$	6,298				≥8.0	%
Tier I capital (to risk-weighted assets)			25,746				32.70				3,149				≥4.0
Tier I capital (to adjusted total assets)			25,746				17.09				6,027				≥4.0

 

The following table presents a reconciliation of the Bank’s GAAP capital to each major category of regulatory capital for the dates indicated.

 

		March 31, 2015				December 31, 2014
(Dollars in thousands)		(unaudited)
Total Company equity capital		$	35,640			$	35,814
LESS: Parent Only Equity			10,036				10,053
LESS: Net unrealized gains on available-for-sale securities			15				15
LESS: Disallowed deferred tax assets			—				—
Tier 1 Capital		$	25,589			$	25,746
Tier 1 Capital		$	25,589			$	25,746
Allowance for loan and lease losses includible in Tier 2 capital			952				993
Total risk-based capital		$	26,541			$	26,739

 

  

9.   OTHER COMPREHENSIVE INCOME

 

The following table presents the components of other comprehensive gains and losses for the three months ended March 31, 2015 and 2014 (unaudited).

 

(Dollars in thousands)		Before Tax				Tax Effect				Net of Tax
Three Months Ended March 31, 2015 (unaudited)
Net unrealized gain on securities available-for-sale		$	—			$	—			$	—
Other Comprehensive Gain		$	—			$	—			$	—
Three Months Ended March 31, 2014 (unaudited)
Net unrealized loss on securities available-for-sale		$	9			$	(3	)		$	6
Other Comprehensive Loss		$	9			$	(3	)		$	6

 

The following table presents the changes in each components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2015 and 2014 (unaudited).

 

(Dollars in thousands)		Securities Available-for- Sale				Accumulated Other Comprehensive Income
Three Months Ended March 31, 2015 (unaudited)
Balance at Beginning of Year		$	15			$	15
Other comprehensive loss			—				—
Balance at End of Period		$	15			$	15

 

(Dollars in thousands)		Securities Available-for- Sale				Accumulated Other Comprehensive Income
Three Months Ended March 31, 2014 (unaudited)
Balance at Beginning of Year		$	7			$	7
Other comprehensive gain			6				6
Balance at End of Period		$	13			$	13

 

  

10.    EARNINGS PER SHARE

 

Basic per share amounts are based on the weighted average shares of common stock outstanding. Unearned ESOP shares are not included in outstanding shares. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. The basic and diluted weighted average shares outstanding for the three months ended March 31, 2015 are as follows:

 

		Three Months Ended March 31, 2015 (unaudited)
(Dollars in thousands, except per share amount)		Income (Loss) (Numerator)				Shares (Denominator)				Per Share Amount
Basic EPS
Net loss available to shareholders		$	(204	)			1,948,600			$	(0.10	)
Diluted EPS
Effect of dilutive shares			—				—				—
Net loss available to shareholders		$	(204	)			1,948,600			$	(0.10	)

 

There were no anti-dilutive shares excluded from the March 31, 2015 diluted earnings per share calculation.

 

11.   FAIR VALUE MEASUREMENTS

 

Effective January 1, 2009, the Bank adopted the Guidance in ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 which provides a framework for measuring and disclosing fair value under GAAP. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or a nonrecurring basis (for example, impaired loans).

 

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The Bank utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available-for-sale is recorded at fair value on a recurring basis. Additionally, from time to time, the Bank may be required to record at fair value all other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

ASC Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

 

Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

 

Level 2 Inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and the yield curves that are observable at commonly quoted intervals.

 

Level 3 Inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

 

  

Investment Securities Available-for-Sale. Investment securities available-for-sale (“AFS”) is recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in illiquid markets.

 

Loans. The Bank does not report loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for credit loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired; management measures impairment in accordance with ASC Topic 450 “Contingencies”. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2015 and December 31, 2014, substantially all of the totally impaired loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

 

Assets measured at fair value on a recurring basis are included in the table below:

 

		Fair Value Measurements at March 31, 2015 (unaudited) Using:
Description  (Dollars in thousands)		Fair Value March 31, 2015				Quoted Prices in Active Markets for Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Trading Gains and (Losses)				Total Changes in Fair Values Included in Period Earnings
Mortgage-backed securities:
FHLMC AFS		$	244			$	—				244			$	—			$	—			$	—
FNMA AFS			152				—				152				—				—				—
GNMA  AFS			78				—				78				—				—				—
Total assets measured at fair value on a recurring basis		$	474			$	—				474			$	—			$	—			$	—

 

		Fair Value Measurements at December 31, 2014 Using:
Description  (Dollars in thousands)		Fair Value December 31, 2014				Quoted Prices in Active Markets for Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Trading Gains and (Losses)				Total Changes in Fair Values Included in Period Earnings
Mortgage-backed securities:
FHLMC AFS		$	249			$	—				249			$	—			$	—			$	—
FNMA AFS			164				—				164				—				—				—
GNMA  AFS			89				—				89				—				—				—
Total assets measured at fair value on a recurring basis		$	502			$	—				502			$	—			$	—			$	—

 

  

The Bank may be required from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below:

 

		Fair Value Measurements at March 31,2015 (unaudited) Using:
Description (Dollars in thousands)		Fair Value March 31, 2015				Quoted Prices in Active Markets for Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Trading Gains and (Losses)				Total Changes in Fair Values Included in Period Earnings
Impaired loans:
Residential		$	5,336			$	—			$	4,322			$	1,014			$	—			$	—
Commercial			1,963				—				1,963				—				—				—
Land			2,221				—				2,221				—				—				—
Construction			—				—				—				—				—				—
Other real estate owned			287				—				287				—				—				(51	)
Total assets measured at fair value on a non-recurring basis		$	9,807			$	—			$	8,793			$	1,014			$	—			$	(51	)

 

The significant unobservable inputs (Level 3) are determined by using the net present value of the expected discounted future cash flows methodology. Loans were modified based on the expected cash flows with modified terms and rates ranging from 3.00% to 4.00% discounted at contractual rates ranging from 5.00% to 7.375%.

 

		Fair Value Measurements at December 31, 2014 Using:
Description (Dollars in thousands)		Fair Value December 31, 2014				Quoted Prices in Active Markets for Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Trading Gains and (Losses)				Total Changes in Fair Values Included in Period Earnings
Impaired loans:
Residential		$	5,235			$	—			$	4,389			$	846			$	—			$	—
Commercial			1,979				—				1,979				—				—				—
Land			2,240				—				2,240				—				—				—
Construction			—				—				—				—				—				—
Other real estate owned			379				—				379				—				—				(118	)
Total assets measured at fair value on a non-recurring basis		$	9,833			$	—			$	8,987			$	846			$	—			$	(118	)

 

The significant unobservable inputs (Level 3) are determined by using the net present value of the expected discounted future cash flows methodology. Loans were modified based on the expected cash flows with modified terms and rates ranging from 3.00% to 4.00% discounted at contractual rates ranging from 5.00% to 7.375%.

 

  

In accordance with the disclosure requirements of ASC Topic 825, the estimated fair values of financial instruments at March 31, 2015 unaudited and December 31, 2014 are as follows:

 

(Dollars in thousands)		Carrying Value March  31, 2015				Fair Value March 31, 2015				Quoted Prices In Active Markets For Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Observable   Inputs (Level 3)
		(unaudited)				(unaudited)
ASSETS
Cash, interest bearing deposits and federal funds sold		$	5,290			$	5,290			$	—			$	5,290			$	—
Other interest bearing deposits in other banks			21,650				21,650				—				21,650				—
Investment securities			13,310				13,621				—				13,621				—
Federal Home Loan Bank stock			805				805				—				805				—
Loans, net			99,813				98,581				—				8,793				89,788
Bank owned life insurance			860				860				—				860				—
Accrued interest receivable			360				360				—				360				—
LIABILITIES
Deposits		$	97,337			$	95,378			$	—			$	—			$	95,378
FHLB Borrowings			14,750				15,409				—				—				15,409

 

(Dollars in thousands)		Carrying Value December 31, 2014				Fair Value December 31, 2014				Quoted Prices In Active Markets For Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Observable Inputs (Level 3)
ASSETS
Cash, interest bearing deposits and federal funds sold		$	15,190			$	15,190			$	—			$	15,190			$	—
Other interest bearing deposits in other banks			10,445				10,445				—				10,445				—
Investment securities			14,641				14,900				—				14,900				—
Federal Home Loan Bank stock			929				929				—				929				—
Loans, net			101,936				98,301				—				8,987				89,314
Bank owned life insurance			847				847				—				847				—
Accrued interest receivable			337				337				—				337				—
LIABILITIES
Deposits		$	98,473			$	97,673			$	—			$	—			$	97,673
FHLB Borrowings			15,750				16,246				—				—				16,246

 

 

 

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of March 31, 2015 (unaudited) and December 31, 2014:

 

Cash, Interest-Bearing Deposits and Federal Funds Sold and Other Interest-Bearing Deposits in Other Banks

 

The amounts reported in the balance sheet approximate the fair value of these assets.

 

Investment Securities

 

The fair values are based on the quoted market prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

 

Federal Home Loan Bank Stock

 

The par value of Federal Home Loan Bank stock report on the balance sheet is a reasonable estimate of fair value.

 

Accrued Interest Receivable

 

The amounts reported in the balance sheet approximate the fair value of these assets.

 

Loans, Deposits and Federal Home Loan Bank Advances

 

Loans receivable were discounted using a single discount rate, comparing the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered on deposits of similar remaining maturities. The fair value of Federal Home Loan Bank advances is estimated using rates currently offered on advances of similar remaining maturities.

 

Bank-Owned Life Insurance

 

The amounts reported in the balance sheet approximate the fair value of these assets.

 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

When used in this Quarterly Report on Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and information provided by third-party vendors and the matters described herein under “Item 1A. Risk Factors” in the Annual Report on Form 10-K that could cause actual results to differ materially from historical results and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

 

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

General

 

MB Bancorp, Inc. MB Bancorp (the “Company”) was incorporated in August 2014 to be the holding company for Madison Bank of Maryland (the “Bank”) following the Bank’s conversion from the mutual to the stock form of ownership. On December 29, 2014, the mutual to stock conversion was completed and the Bank became the wholly owned subsidiary of the Company. Also on that date, the Company sold and issued 2,116,000 shares of its common stock at a price of $10.00 per share, through which the Company received net offering proceeds of $20,165,000. The Company’s principal business activity is the ownership of the outstanding shares of the common stock of the Bank. The Company does not own or lease any property, but instead uses the premises, equipment and other property of the Bank, with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement entered into with the Bank.

 

Madison Bank of Maryland. Madison Bank of Maryland is the product of the merger of three institutions, The Back & Middle River Building and Loan Association, Inc. (founded in 1912), Madison & Bradford Federal Savings & Loan Association (founded in 1904) and Bohemian American Federal Savings & Loan Association (founded in 1899). In 2002, Bohemian American merged with Madison & Bradford, at which time we changed our name to Madison Bradford/Bohemian American Savings Bank, and in 2004 we shortened our name to Madison Bohemian Savings Bank. In 2006, Back & Middle River merged into Madison Bohemian. In 2009, we adopted our current name, Madison Bank of Maryland.

 

Madison Bank of Maryland is a community-oriented financial institution, dedicated to serving the financial service needs of customers within its market area, which consists of Baltimore and Harford counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located primarily in our market area. Our real estate loans consist primarily of residential mortgage loans, as well as non-residential real estate loans, construction and land loans and home equity lines of credit. We currently operate out of our corporate headquarters and main office in Forest Hill, Maryland and two full-service branch offices located in Aberdeen and Perry Hall, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer. At March 31, 2015, we had total assets of $148.3 million, total deposits of $97.3 million and total equity of $35.6 million.

 

 

Our executive offices are located at 1920 Rock Spring Road, Forest Hill, Maryland and the telephone number is (410) 420-9600.

 

Available Information

 

The Bank maintains an internet website at http://www.mbofmd.com. The Company makes available its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports filed with the Securities and Exchange Commission (“SEC”) as well as other information related to the Company. SEC reports are available on this site as soon as reasonably practicable after electronically filed. The SEC’s website and the information contained therein or connected thereto are not intended to be incorporated into this Quarterly Report on Form 10-Q.

 

Critical Accounting Policies

 

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The Jumpstart Our Business Startups Act (the “JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. An emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. We have irrevocably elected not to adopt new or revised accounting standards on a delayed basis, and will be required to adopt new or revised accounting standards in the same manner as other public companies that are not emerging growth companies.

 

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

 

Other-Than-Temporary Impairment. Management evaluates securities for other-than-temporary impairment (“OTTI”) on a monthly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under Statement of Financial Accounting Standards ASC 320, “Accounting for Certain Investments in Debt and Equity Securities.”

 

In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-

 

 

temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

When OTTI occurs the amount of the OTTI recognized in earnings depends on whether we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

Deferred Tax Assets. We account for income taxes under the asset/liability method. Deferred tax assets are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period indicated by the enactment date. A valuation allowance is established for deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond our control. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

 

Balance Sheet Analysis

 

Assets. At March 31, 2015, our assets totaled $148.3 million, a decrease of $2.4 million, or 1.6%, from total assets of $150.7 million at December 31, 2014. The decrease in assets for the three months ended March 31, 2015 was due mainly to, a $9.9 million, or 65.2%, decrease in cash and cash equivalents and a $2.1 million, or 2.1%, decrease in loans, net of unearned fees, reflecting weak loan demand in our market area, partially offset by a $11.2 million, or 107.3% increase in other interest-bearing deposits in other banks as we invested the net proceeds of our mutual-to-stock conversion into interest-bearing deposits in other banks.

 

Loans. At March 31, 2015, residential mortgage loans totaled $83.1 million, or 81.1% of the total loan portfolio compared to $85.4 million, or 81.6% of the total loan portfolio at December 31, 2014. Residential mortgage loans decreased by $2.3 million, 2.7%, during the three months ended March 31, 2015 primarily due to weak loan demand in our market area.

 

Non-residential real estate loans totaled $9.4 million and represented 9.1% of total loans at March 31, 2015, compared to $9.2 million, or 8.8% of total loans, at December 31, 2014. We currently do not offer non-residential real estate loans. The increase in non-residential real estate loans is due to a draw on an existing line of credit.

 

Construction and land loans totaled $4.9 million, and represented 4.8% of total loans, at March 31, 2015, compared to $4.9 million, or 4.6% of total loans, at December 31, 2014. At March 31, 2015, we had $1.0 million of construction loans, amounting to 20.4% of our construction and land loan portfolio, and $3.9 million of land loans, amounting to 79.6% of our construction and land loan portfolio.

 

Home equity lines of credit, all of which are secured by residential properties, totaled $5.1 million, and represented 5.0% of total loans, at March 31, 2015, compared to $5.1 million, or 4.9% of total loans, at December 31, 2014.

 

 

Our non-real estate loans consist of consumer loans, all of which are loans to depositors, secured by savings. Such loans totaled $4,000 at March 31, 2015, representing less than .01% of the loan portfolio.

 

Securities. At March 31, 2015, our securities held-to-maturity decreased by $1.3 million, or 9.2%, from $14.1 million at December 31, 2014 to $12.8 million at March 31, 2015. Securities held-to-maturity at March 31, 2015 consisted of bonds issued by Freddie Mac, Fannie Mae and the Federal Farm Credit Bureau as well as mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. At March 31, 2015, we had $474,000 of securities available-for-sale at fair value, as compared to $502,000 at December 31, 2014. Securities available-for-sale at March 31, 2015 consisted of mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. Our securities portfolio is used to invest excess funds for increased yield and manage interest rate risk. At March 31, 2015, we also held a $805,000 investment in the common stock of the Federal Home Loan Bank of Atlanta. At March 31, 2015, we held no stock in Fannie Mae and Freddie Mac.

 

Ground Rents. Ground rents, net amounted to $707,000 at March 31, 2015 compared to $703,000 at December 31, 2014.

 

Deposits. Total deposits decreased by $1.2 million, or 1.2%, to $97.3 million at March 31, 2015 from $98.5 million at December 31, 2014. Balances in non-interest-bearing deposits increased by $108,000, or 12.8%, from $842,000 at December 31, 2014 to $950,000 at March 31, 2015. Interest-bearing deposits decreased by $1.2 million, or 1.3%, to $96.4 million at March 31, 2015 compared to $97.6 million at December 31, 2014.

 

Borrowings. At March 31, 2015, we had $14.8 million in borrowings from the Federal Home Loan Bank of Atlanta compared to $15.8 million in borrowings at December 31, 2014.

 

Equity. Equity decreased by $174,000, or 0.5%, to $35.6 million at March 31, 2015 from $35.8 million at December 31, 2014 primarily as the result of net losses of $204,000 for the three months ended March 31, 2015.

 

Results of Operations for the Three Months Ended March 31, 2015 and 2014

 

Overview. We had net loss of $204,000 for the three months ended March 31, 2015, as compared to net income of $74,000 for the three months ended March 31, 2014. The net loss for the three months ended March 31, 2015 was primarily due to additional expenses resulting from being a public company.

 

Net Interest Income. Net interest income decreased by $26,000, or 2.8%, for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The decrease in net interest income was primarily attributable to a 35 basis point decrease in our average yield on interest earning assets from 3.81% for the three months ended March 31, 2014 to 3.45% for the three months ended March 31, 2015 (primarily due to investing our mutual-to-stock conversion proceeds into lower rate short term interest-bearing deposits with other banks), partially offset by a $6.8 million, or 5.1%, increase in the average balance of interest-earning assets. The increase in the average balance of interest-earning assets was due primarily to a $19.0 million or 386.0%, increase in the average balance of interest bearing deposits in other banks, partially offset by a $10.9 million, or 9.6%, decrease in the average balance of loans receivable, net of unearned fees (due to weak loan demand in our market area during the three months ended March 31, 2015) and a $1.2 million or 8.1%, decrease in the average balance of investment securities held-to-maturity.

 

Interest on investment securities held-to-maturity decreased by $9,000, or 8.0%, for the three months ended March 31, 2015 as compared to the comparable period in 2014, due to a $1.2 million decrease in the average balance.

 

 

Interest on investment securities available-for-sale was $4,000, for the three months ended March 31, 2015 and 2014. There was an 8 basis point decrease in the average yield on investment securities available-for-sale and a $21,000, or 4.1%, decrease in the average balance of investment securities available-for-sale.

 

Interest on certificates of deposit decreased by $32,000, or 16.0%, during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014, due to a 7 basis point decrease in the average cost of certificates of deposit, resulting from declining market interest rates during the three months ended March 31, 2015, and a $7.4 million, or 10.8%, decrease in the average balance of certificates of deposit, as we elected to offer less competitive rates on shorter term certificates of deposit.

 

Interest on Federal Home Loan Bank of Atlanta advances decreased by $2,000, or 1.6%, during the three months ended March 31, 2015, due to a $2.0 million, or 11.4%, decrease in the average balance of Federal Home Loan Bank of Atlanta advances, which was partially offset by a 33 basis point increase in the average cost of Federal Home Loan Bank of Atlanta advances. In the first quarterly of 2015, we began paying off the Federal Home Loan Bank of Atlanta advances with relatively short terms that carried low interest rates, which had the effect of increasing our cost of funds.

 

At March 31, 2015, we had $14.8 million in advances from the Federal Home Loan Bank of Atlanta, including $12.0 million that mature between July 2016 and September 2017 and carry interest rates ranging from 3.65% to 5.07% with a weighted average interest rate of 4.16%. Paying such advances in full at March 31, 2015, we would have incurred prepayment penalties totaling $760,000. To date we have elected not to repay any of these long-term advances. However, while such advances remain outstanding they will continue to have a negative effect on our interest rate spread.

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances for 2015 and monthly balances for 2014, and non-accrual loans are included in average balances only. Loan fees are included in interest income on loans and are insignificant. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

 

 

		Three Months Ended March 31,
		2015 (unaudited)												2014 (unaudited)
		Average				Interest and				Yield/				Average				Interest and				Yield/
(Dollars in thousands)		Balance				Dividends				Cost				Balance				Dividends				Cost
Interest-earning assets:
Interest-bearing deposits in other banks		$	23,897			$	40				.67	%		$	4,917			$	11				0.89	%
Loans receivable, net of unearned fees			102,696				1,062				4.14				113,633				1,143				4.02
Investment  securities available-for-sale – amortized cost			488				4				3.27				509				4				3.35
Investment securities held-to-maturity			13,198				103				3.13				14,356				112				3.12
Other interest-earning assets			912				10				4.35				966				9				3.74
Total interest-earning assets			141,191				1,219				3.45				134,381				1,279				3.81
Cash and due from banks			2,983												3,643
Allowance for credit losses			(1,732	)											(1,740	)
Other non-interest-earning assets			7,502												8,408
Total assets		$	149,944											$	144,692
Interest-bearing liabilities:
Certificates of deposit			61,238				168				1.10				68,639				200				1.17
NOW and money market			22,977				12				0.20				22,148				12				0.20
Savings			14,945				4				0.10				16,324				4				0.10
Federal Home Loan Bank advances			15,728				127				3.23				17,750				129				2.90
Total interest-bearing liabilities			114,888				311				1.08				124,861				345				1.10
Non-interest-bearing demand deposits			907												711
Other non-interest-bearing liabilities			530												576
Total liabilities			116,325												126,148
Total equity			33,619												18,544
Total liabilities and equity		$	149,944											$	144,692
Net interest income						$	908											$	934
Interest rate spread											2.37	%											2.70	%
Net interest margin											2.57	%											2.78	%
Ratio of average interest-earning assets to average interest-bearing liabilities											122.89	%											107.62	%

 

 

 

Provision for Loan Losses. We had a provision for loan losses of $6,000 for the three months ended March 31, 2015, compared to a reversal of $5,000 for the three months ended March 31, 2014. The provision for loan losses was principally the result of new troubled debt modifications and the reversal was payment of troubled debt restructured loans in compliance with their modified terms. At March 31, 2015, the allowance for loan losses was $1.7 million, or 1.68% of the total loan portfolio, compared to $1.7 million, or 1.66% of the total loan portfolio, at December 31, 2014.

 

Non-accrual loans amounted to $3.8 million at March 31, 2015 compared to $3.3 million at December 31, 2014. As a percentage of non-performing loans and accruing troubled debt restructurings, the allowance for loan losses was 20.31% at March 31, 2015 compared to 21.60% at December 31, 2014. Net loan charge-offs amounted to $14,000 during the three months ended March 31, 2015, compared to $136,000 during the three months ended March 31, 2014.

 

Non-interest Income. Total non-interest income decreased by $122,000, or 72.7%, from $168,000 for the three months ended March 31, 2014 to $46,000 for the three months ended March 31, 2015. The decrease in total non-interest income primarily was due to a $131,000 decrease in gain on sale of real estate held for sale. This decrease was offset, in part, by a $12,000, or 1,044.2%, increase in cash surrender value of life insurance.

 

Non-interest Expenses. Total non-interest expenses increased by $147,000, or 14.9%, from $986,000 for the three months ended March 31, 2014 to $1.1 million for the three months ended March 31, 2015. The increase primarily was attributable to $52,000 increase in salaries and employee benefits (primarily due to new stock-based compensation expenses), a $38,000 increase in legal and professional fees and $42,000 in other expenses due to additional expenses resulting from being a public company and a $51,000, increase in the provision for losses on other real estate owned. During the three months ended March 31, 2015, we wrote-down two properties scheduled for auction in the second quarter 2015. This increase was offset, in part, by a $16,000 decrease in the provision for loss on ground rents and a $10,000 decrease in occupancy expenses.

 

Income Tax Expense. We had an income tax expense of $19,000 and $47,000 during the three months ended March 31, 2015 and 2014, respectively.

 

Analysis of Non-performing and Classif ied Assets. We consider repossessed assets, non-accrual loans and ground rents delinquent in excess of three years to be non-performing assets. Loans generally are placed on non-accrual status when they become 120 days delinquent. We may choose to consider loans from 90 to 119 days delinquent to be non-accrual, and generally do so except where a borrower has a history of periodically bringing a loan current after being 90 days or more delinquent. If the loan is less than 90 days delinquent, but information is brought to our attention that indicates the collection of interest is doubtful, the loan will immediately be considered non-accrual. When a loan is deemed non-accrual, the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against interest income. Typically, payments received on a non-accrual loan are first applied to unpaid interest and thereafter, in order, to escrow payment, the outstanding principal balance and late charges.

 

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until it is sold. When property is acquired it is recorded at the fair market value at the date of foreclosure less estimated selling costs. Any holding cost and decline in fair value after acquisition of the property result in charges against income.

 

 

The following table provides information with respect to our non-performing assets at the dates indicated.

 

(Dollars in thousands)		March 31, 2015 (unaudited)				December 31, 2014
Non-accrual loans:
Residential, home equity lines of credit and consumer		$	1,919			$	1,783
Non-residential			1,741				1,368
Construction and land			189				192
Total			3,849				3,343
Accruing loans past due 90 days or more:
Residential, home equity lines of credit and consumer			6				—
Total			6				—
Total of non-performing loans and accruing loans 90 days or more past due			3,855				3,343
Assets acquired through foreclosure			287				379
Ground rents			135				139
Total non-performing assets			4,277				3,861
Troubled debt restructurings accruing			4,630				4,670
Troubled debt restructurings accruing and total non-performing assets			8,907			$	8,531
Total of non-performing loans and accruing loans past due 90 days or more to total loans			3.76	%			3.20	%
Total non-performing loans to total assets			2.60				2.22
Total non-performing assets and accruing loans past due 90 days or more to total assets			2.88				2.56
Total non-performing loans and accruing troubled  debt restructurings to total assets			5.72				5.32
Total non-performing assets and accruing loans past due 90 days or more and accruing troubled  debt restructurings to total assets			6.01				5.66

 

 

At March 31, 2015, non-accrual loans consisted of 20 residential mortgage loans totaling $1.9 million, 4 non-residential loans totaling $1.7 million, 2 construction and land loans totaling $189,000 and no home equity lines of credit. The increase in non-performing loans at March 31, 2015 as compared to December 31, 2014 is primarily the result of two non-residential loans transferring to non-accrual status, offset by loans returning to accrual status, payoffs and loans transferred to other real estate owned during year

 

 

ended December 31, 2014. At March 31, 2015, we had $6,000 of accruing loans 90 or more delinquent, which consisted of 1 residential mortgage loan. We had no loans 90 days or more but still accruing at December 31, 2014.

 

At March 31, 2015, our largest non-performing loan relationships consisted of the following:

 

•

A $1.1 million loan secured by a first mortgage on a church in Baltimore City. We restructured the loan to reduce the interest rate on the loan, and this loan was considered non-accrual at March 31, 2015 as the borrower had not made six consecutive monthly payments under the restructured terms. We also had a $53,000 loan secured by a third mortgage on this church. The loan secured by the third mortgage was accruing at March 31, 2015, and we receive certain rental payments that are paid directly to us to meet the debt service requirements on that loan.

 

•

A relationship consisting of seven residential mortgage loans totaling $911,000 secured by six single-family investment properties located in Baltimore City. We commenced foreclosure proceedings on two of these loans totaling $226,000. The borrower has brought the remaining five loans, totaling $685,000 at March 31, 2015, current, and we have an assignments of rent agreement that generally are sufficient to keep the loans current on an ongoing basis.

 

We occasionally modify loans to extend the term or make other concessions to help borrowers stay current on their loans and to avoid foreclosure. We do not forgive principal or interest on loans but have modified the interest rates on loans to rates that are below market rates. In the case of non-residential mortgage loans or large residential mortgage loans, before agreeing to modify a loan, we perform a financial analysis of the borrower to determine that the borrower will be able to comply with the terms of the loan as restructured. At March 31, 2015 and December 31, 2014, we had $4.6 million and $4.7 million, respectively, in modified loans, which are also referred to as troubled debt restructurings, on which we continue to accrue interest.

 

If a loan is in non-accrual status at the time we restructure it and classify the restructure as a troubled debt restructuring, it is our policy to maintain the loan as non-accrual until we receive six consecutive monthly payments under the restructured terms.

 

At March 31, 2015, our largest accruing troubled debt restructured loan was a $1.8 million land loan secured by multiple waterfront lots in Queen Anne’s County on the Eastern shore of the Chesapeake Bay. Because of difficulties experienced by the borrower, we restructured this loan to lower the interest rate and defer outstanding amounts. The loan was considered accruing at March 31, 2015 as the borrower has made payments in accordance with the restructured terms. At March 31, 2015, the borrower had a second loan with an outstanding balance of $54,000 secured by the same property. The borrower is seeking to sell the property securing these loans.

 

At March 31, 2015, accruing troubled debt restructurings also included two loans secured by residential property in Queen Anne’s County, Maryland. One loan was a $603,000 loan secured by a first mortgage, and the second loan was a home equity line of credit with an outstanding balance of $751,000 secured by a second mortgage on the same property. We agreed to restructure the first mortgage loan and defer outstanding amounts. As of January 1, 2015 the first mortgage converted to principal and interest payments at the contractual rate of interest. The borrower was in compliance with the terms of both loans at March 31, 2015, and the loans were accruing at that date. The property is listed for sale.

 

Interest income that would have been recorded for the three months ended March 31, 2015 and 2014 had non-accrual loans been current according to their original terms, amounted to approximately $36,000 and $63,000, respectively. Interest income of $104,000 and $116,000 related to non-accrual loans was included in interest income for the three months ended March 31, 2015 and 2014, respectively.

 

 

At March 31, 2015, we had $287,000 of other real estate owned, consisting of three one-to four-family residential properties located in Baltimore City and Harford County and four lots located in Baltimore and Harford Counties. Two lots in Baltimore County sold in the first quarter of 2015.

 

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

			Three months Ended March 31,
(Dollars in thousands)	(unaudited)		2015				2014
Allowance at beginning of period			$	1,731			$	1,790
Charge-offs:
Residential, home equity lines of credit and consumer				(16	)			(48	)
Non-residential				—				—
Construction and land loans				—				(88	)
Total charge-offs				(16	)			(136	)
Recoveries:
Residential, home equity lines of credit and consumer				2				—
Non-residential				—				—
Construction and land loans				—				—
Total recoveries				2				—
Net charge-offs				(14	)			(136	)
Provision (reversal) for loan losses				6				(5	)
Allowance at end of period			$	1,723			$	1,649
Allowance for loan losses to non-performing loans and accruing troubled debt restructurings at end of period				20.31	%			12.92	%
Allowance for loan losses to total loans at end of period				1.68	%			1.45	%
Net charge-offs to average loans outstanding during the period				.01	%			.12	%

 

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds available to meet short-term liquidity needs consist of deposit inflows, loan repayments and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

 

We regularly adjust our investments in liquid assets available to meet short-term liquidity needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of our asset/liability management policy. We do not have long-term debt or other financial obligations that would create long-term liquidity concerns.

 

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At March 31, 2015, cash and cash equivalents totaled $5.3 million. Securities classified as available-for-sale, amounting to $474,000 at March 31, 2015, provide an additional source of liquidity. In addition, at March 31, 2015, we had the ability to borrow a total of approximately $30.0 million from the Federal Home Loan Bank of Atlanta. At March 31, 2015, we had $14.8 million in Federal Home Loan Bank advances outstanding. In addition, we maintain a $2.5 million line of credit with another bank and access to the Federal Reserve Bank Discount Window. No amounts were outstanding under such lines of credit at March 31, 2015.

 

At March 31, 2015, we had $401,000 in commitments to extend credit outstanding. Certificates of deposit due by December 31, 2015 totaled $23.9 million, or 39.4% of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressures. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2015. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Our primary investing activities are the origination of loans and the purchase of investment securities. Our primary financing activity is in deposit accounts. Deposit flows are affected by the overall level of interest rates, the interest rates and product offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

 

 

Financing and Investing Activities

 

Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2015, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

 

The capital from the offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations was enhanced by the capital from the offering, resulting in increased net interest-earning assets and income. However, the large increase in equity resulting from the capital raised in the offering, initially, has had an adverse impact on our return on equity. Following the offering, we may use capital management tools such as cash dividends and common share repurchases. However, under Office of the Comptroller of the Currency regulations, we will not be allowed to repurchase any shares during the first year following the offering, except to fund the restricted stock awards under the equity benefit plan after its approval by shareholders, unless extraordinary circumstances exist and we receive regulatory approval.

 

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit.

 

For the three months ended March 31, 2015 and 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3. Qualitative and Quantitative Disclosures About Market Risk

 

This item is not applicable as the Company is a smaller reporting company.

 

Item 4. Controls and Procedures

 

(a)  Disclosure Controls and Procedures

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

(b)  Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

(c)   Changes to Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2015 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

 

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.  The Company’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Company’s financial condition and results of operations.

 

Item 1A.  Risk Factors

 

For information regarding the Company’s risk factors, see the section entitled “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “Form 10-K”) (File No. 000-55341).  As of March 31, 2015, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

 

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

 

Not applicable.

 

 

Item 3.  Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

Not applicable.

 

Item 6.  Exhibits

 

3.1

Articles of Incorporation of MB Bancorp, Inc. (1)

 

3.2

Bylaws of MB Bancorp, Inc. (1)

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

32.0

Section 1350 Certifications

 

101.0

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.

 

(1)

Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1, as amended (File No. 333-198700).

 

 

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.

 

			MB BANCORP, INC.
Dated:   May 13, 2015		By:	/s/ Julia A. Newton
			Julia A. Newton
			President and Chief Executive Officer
			(principal executive officer)
Dated:   May 13, 2015		By:	/s/ Robin L. Taylor
			Robin L. Taylor
			Vice President and Chief Financial Officer
			(principal financial and accounting officer)