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, 2016

 

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. Yesx 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, 2016, there were 1,926,800 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, 2016 (unaudited) and December 31, 2015	1
	Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (unaudited)	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2016 and 2015 (unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (unaudited)	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
Part II. Other Information
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
Signatures		50

 

 

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,
(Dollars in thousands)		2016				2015
		(unaudited)
Assets:
Cash and due from banks		$	2,508			$	2,924
Interest bearing deposits in other banks			2,330				797
Total cash and cash equivalents			4,838				3,721
Other interest-bearing deposits in other banks			14,583				18,310
Investment securities available-for-sale – at fair value			3,543				8,480
Investment securities held to maturity – amortized cost			21,289				9,145
Loans, net of unearned fees			94,008				94,686
Less allowance for loan losses			(1,306	)			(1,561	)
Loans, net			92,702				93,125
Real estate ground rents			833				831
Less allowance for credit losses			(139	)			(136	)
Ground rents, net			694				695
Federal Home Loan Bank stock, at cost			673				688
Property and equipment – net			3,776				3,793
Deferred income taxes			629				793
Bank-owned life insurance			908				896
Accrued interest receivable and other assets			610				543
TOTAL ASSETS		$	144,245			$	140,189
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits		$	96,758			$	92,692
Federal Home Loan Bank advances			12,000				12,000
Deferred compensation liability			159				246
Accounts payable and other liabilities			360				370
Total liabilities			109,277				105,308
STOCKHOLDERS' EQUITY:
Common stock .01 par value; authorized 19,000,000 shares; issued and outstanding, 2,116,000 shares at March 31, 2016 and December 31, 2015			21				21
Additional paid-in capital			20,162				20,158
Retained earnings - substantially restricted			16,285				16,284
Accumulated other comprehensive income (loss)			42				(11	)
Unearned ESOP shares			(1,542	)			(1,571	)
Total stockholders' equity			34,968				34,881
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	144,245			$	140,189

 

See accompanying notes to consolidated financial statements.

 

 

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended March 31,
		2016				2015
(Dollars in thousands, except per share amount)		(unaudited)
INTEREST INCOME:
Interest and fees on loans		$	947			$	1,062
Interest on federal funds sold and other investments			38				40
Interest and dividends on investment securities			168				117
Total interest income			1,153				1,219
INTEREST EXPENSE:
Interest on deposits			187				184
Interest on short-term borrowings			—				2
Interest on long-term borrowings			126				125
Total interest expense			313				311
NET INTEREST INCOME			840				908
(REVERSAL) PROVISION FOR LOAN LOSSES			(255	)			6
NET INTEREST INCOME AFTER (REVERSAL) PROVISION FOR LOAN LOSSES			1,095				902
NON-INTEREST INCOME:
Service charges on deposit accounts			3				2
Fees and charges on loans			8				12
Increase in cash surrender value of life insurance			12				13
Gain on sale of other real estate owned			2				5
Gain on investment securities			25				—
Ground rent fees			13				9
Other income			5				5
Total non-interest income			68				46
NON-INTEREST EXPENSE:
Salaries and employee benefits			593				609
Occupancy expenses			117				126
Furniture and equipment expenses			12				12
Legal and professional expenses			66				83
Data processing and other outside services			67				63
FDIC insurance premiums			22				26
Advertising and marketing related expenses			8				21
Provision for loss on other real estate owned			—				51
Reversal for loss on ground rents			(2	)			(7	)
Other expenses			151				149
Total non-interest expenses			1,034				1,133
INCOME (LOSS) BEFORE INCOME TAXES			129				(185	)
INCOME TAX EXPENSE			128				19
NET INCOME (LOSS)		$	1			$	(204	)
Basic earnings (loss) per share		$	.00			$	(.10	)
Diluted earnings (loss) per share		$	.00			$	(.10	)

 

See accompanying notes to consolidated financial statements

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

		For the Three Months Ended
		March 31,				March 31,
		2016				2015
(Dollars in thousands)		(unaudited)
NET INCOME (LOSS)		$	1			$	(204	)
OTHER COMPREHENSIVE INCOME (LOSS) ON AVAILABLE-FOR-SALE INVESTMENT  SECURITIES:
Unrealized gains arising during the period			112				—
Reclassification of gain included in net income			(25	)			—
Unrealized gains arising during the period			87				—
Income taxes on unrealized gains arising during the period			(34	)			—
			53				—
COMPREHENSIVE INCOME (LOSS)		$	54			$	(204	)

 

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, 2015 AND 2016 (UNAUDITED)

 

(Dollars in thousands)		Common Stock				Additional Paid In Capital				Retained Earnings				Unearned ESOP Shares				Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity
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
BALANCES AT MARCH 31, 2015		$	21			$	20,145			$	17,114			$	(1,655	)		$	15			$	35,640
BALANCES AT JANUARY 1, 2016		$	21			$	20,158			$	16,284			$	(1,571	)		$	(11	)		$	34,881
Net Income			—				—				1				—				—				1
Net unrealized gain on available- for sale securities, net of taxes of ($34)			—				—				—				—				53				53
Stock-based compensation			—				4				—				29				—				33
BALANCES AT MARCH 31, 2016		$	21			$	20,162			$	16,285			$	(1,542	)		$	42			$	34,968

 

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,
		2016				2015
(Dollars in thousands)		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	1			$	(204	)
Adjustment to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense			34				35
Increase in cash surrender value of life insurance			(12	)			(13	)
Net amortization/accretion of premiums and discounts			(2	)			(3	)
(Reversal) provision for loan losses			(255	)			6
Reversal for ground rent losses			(2	)			(7	)
Decrease in deferred income taxes			131				20
Provision for loss on other real estate owned			—				51
Non-cash compensation under stock-based benefit plan			33				30
Gain on sale of other real estate owned			(2	)			(5	)
Increase in accrued interest and other assets			(67	)			(21	)
Gain on redemption of investment securities			(25	)			—
Decrease in deferred compensation liability			(87	)			(101	)
(Decrease) increase in accounts payable and other liabilities			(7	)			46
Net cash used in operating activities			(260	)			(166	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in other interest bearing deposits in other banks			3,727				(11,205	)
Proceeds from calls/repayments of available-for-sale investments			5,047				29
Purchase of held-to-maturity investments			(14,347	)			—
Proceeds from maturity/repayments of held-to-maturity investments			2,207				1,305
Net decrease in loans			676				2,163
Proceeds from sale of ground rents			3				3
Purchase of property, plant and equipment			(17	)			(18	)
Redemption of Federal Home Loan Bank stock			15				124
Net cash used in investing activities			(2,689	)			(7,599	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		$	4,066			$	(1,135	)
Federal Home Loan Bank advances			1,000				3,750
Federal Home Loan Bank repayments			(1,000	)			(4,750	)
Net cash provided by (used in) financing activities			4,066				(2,135	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			1,117				(9,900	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			3,721				15,190
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	4,838			$	5,290
Supplemental cash flow information:
Interest paid		$	313			$	305
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, 2016 AND 2015 (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 of approximately $995,000 was deducted from the proceeds of the offering. 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 was accounted for as change in corporate form with the historic base 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, 2016 and for the three months ended March 31, 2016 and 2015 contains all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at March 31, 2016.

 

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, 2015. The results of operations and cash flows for the three months ended March 31, 2016 and 2015 are not necessarily indicative of the results to be expected for the year ended December 31, 2016.

 

 

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.

 

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 31, 2015, the Bank had remained 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 to offset the net operating loss carryforward related deferred tax asset.

  

2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

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. In July 2015, the FASB voted to approve deferring the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

In January 2016, FASB issues ASU 2016-1, “No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

 

 

In February 2016, FASB issued ASU-2016-02, “Leases (Topic 842).” The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. For finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments in Topic 842 are effective for the Company beginning January 1, 2019, including interim periods within that fiscal year. We are currently evaluating the impact of adopting the new guidance of the consolidated financial statements.

 

 

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, 2016 (unaudited)
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments available-for-sale:
U.S. Government securities:
FFCB bonds.		$	1,998			$	25			$	—			$	2,023
Total U.S. Government securities. .			1,998				25				—				2,023
Mortgage-backed securities:
FHLMC certificates			675				18				—				693
FNMA certificates			108				6				—				114
GNMA certificates			694				19				—				713
Total mortgage-backed securities			1,477				43				—				1,520
Total investments available-for-sale		$	3,475			$	68			$	—			$	3,543

 

		December 31, 2015
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments available-for-sale:
U.S. Government securities:
FHLMC bonds		$	1,983			$	—			$	(19	)		$	1,964
FFCB bonds			4,991				3				(14	)			4,980
Total U.S. Government securities			6,974				3				(33	)			6,944
Mortgage-backed securities:
FHLMC certificates			700				7				(4	)			703
FNMA certificates			117				6				—				123
GNMA certificates			708				2				—				710
Total mortgage-backed securities			1,525				15				(4	)			1,536
Total investments available-for-sale		$	8,499			$	18			$	(37	)		$	8,480

 

 

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

 

		March 31, 2016 (unaudited)
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments held-to-maturity:
U.S. Government securities:
FHLB bonds		$	2,500			$	1			$	(1	)		$	2,500
FNMA bonds			1,000				18				—				1,018
FFCB bonds			13,847				13				—				13,860
Total U.S. Government securities			17,347				32				(1	)			17,378
Mortgage-backed securities:
FHLMC certificates			1,068				76				—				1,144
FNMA certificates			2,498				160				—				2,658
GNMA certificates			376				35				—				411
Total mortgage backed securities			3,942				271				—				4,213
Total investments held-to-maturity		$	21,289			$	303			$	(1	)		$	21,591

 

		December 31, 2015
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments held-to-maturity:
U.S. Government securities:
FHLMC bonds		$	998			$	—			$	(21	)		$	977
FNMA bonds			1,000				—				(10	)			990
FFCB bonds			3,000				—				(57	)			2,943
Total U.S. Government securities			4,998				—				(88	)			4,910
Mortgage-backed securities:
FHLMC certificates			1,156				78				—				1,234
FNMA certificates			2,591				125				—				2,716
GNMA certificates			400				35				—				435
Total mortgage backed securities			4,147				238				—				4,385
Total investments held-to-maturity		$	9,145			$	238			$	(88	)		$	9,295

 

 

Below are schedules of both available-for-sale and held-to-maturity securities with unrealized losses as of March 31, 2016 (unaudited) and December 31, 2015 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, 2016 (unaudited) and December 31, 2015, 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, 2016 (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			—				—				1,500				(1	)			1,500				(1	)
Total temporarily impaired securities		$	—			$	—			$	1,500			$	(1	)		$	1,500			$	(1	)

 

		December 31, 2015
		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		$	—			$	—			$	1,117			$	(4	)		$	1,117			$	(4	)
U.S. Government securities			—				—				10,852				(121	)			10,852				(121	)
Total temporarily impaired securities		$	—			$	—			$	11,969			$	(125	)		$	11,969			$	(125	)

 

 

The scheduled maturities of debt securities at March 31, 2016 (unaudited) were as follows:

 

		Amortized Cost (in thousands)				Fair Value (in thousands)
Due over one year through five years		$	—			$	—
Due over five years through ten years			10,148				10,194
Due after ten years			9,197				9,207
Mortgage-backed securities			5,419				5,733
Total		$	24,764			$	25,134

 

 

4.   LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

		March 31, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Secured by real estate:
Residential:
One-to four-family		$	76,060			$	76,632
Multi-family			2,085				2,100
Total			78,145				78,732
Non-residential			7,930				8,290
Construction and land loans			5,138				4,835
Home equity line of credit (“HELOC”)			3,700				3,695
Consumer and other loans:
Loans to depositors, secured by savings			25				27
			94,938				95,579
Add:
Net (discount) premium on purchased loans			(9	)			(9	)
Unamortized net deferred costs			22				26
Less:
Undisbursed portion of construction loans			(895	)			(871	)
Unearned net loan origination fees			(48	)			(39	)
Less allowance for loan losses			(1,306	)			(1,561	)
Loans receivable, net		$	92,702			$	93,125

 

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, 2016 (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		$	960			$	194			$	157			$	250			$	1,561
Charge-offs			—				—				—				—				—
Recoveries			—				—				—				—				—
Provisions			4				2				(11	)			(250	)			(255	)
Ending balance		$	964			$	196			$	146			$	—			$	1,306
Allowance for loan losses:
Ending balance: individually evaluated for impairment		$	41			$	—			$	—				—			$	41
Ending balance: collectively evaluated for impairment		$	923			$	196			$	146			$	—			$	1,265
Loans:
Ending balance: individually evaluated for impairment		$	3,036			$	1,275			$	1,953			$	—			$	6,264
Ending balance: collectively evaluated for impairment		$	78,834			$	6,655			$	3,185			$	—			$	88,674

 

 

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 year ended December 31, 2015 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			(22	)			(247	)			(106	)			—				(375	)
Recoveries			29				5				170				—				204
Provisions			(275	)			357				(81	)			—				1
Ending balance		$	960			$	194			$	157			$	250			$	1,561
Allowance for loan losses:
Ending balance: individually evaluated for impairment		$	46			$	—			$	—				—			$	46
Ending balance: collectively evaluated for impairment		$	914			$	194			$	157			$	250			$	1,561
Loans:
Ending balance: individually evaluated for impairment		$	3,189			$	1,299			$	1,971				—			$	6,459
Ending balance: collectively evaluated for impairment		$	79,265			$	6,991			$	2,864				—			$	89,120

 

 

Credit risk profile by internally assigned classification as of March 31, 2016 (unaudited) is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Non-classified		$	78,916			$	6,655			$	3,185			$	88,756
Special mention			1,635				165				92				1,892
Substandard			1,319				1,110				1,861				4,290
Doubtful			—				—				—				—
Loss			—				—				—				—
Total		$	81,870			$	7,930			$	5,138			$	94,938

 

Credit risk profile by internally assigned classification as of December 31, 2015 is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non-residential Real Estate				Construction and Land				Total
Non-classified		$	79,697			$	7,156			$	2,863			$	89,716
Special mention			1,481				—				94				1,575
Substandard			1,276				1,134				1,878				4,288
Doubtful			—				—				—				—
Loss			—				—				—				—
Total		$	82,454			$	8,290			$	4,835			$	95,579

 

•

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, 2016 (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		$	2,219			$	1,275			$	1,953			$	5,447
Unpaid principal balance			2,548				1,552				3,031				7,131
Average recorded investment, for the three months ended March 31, 2016			2,320				1,382				2,006				5,708
Interest income recognized			32				9				25				66
Interest income foregone			7				3				2				12
With an allowance recorded:
Recorded investment			817				—				—				817
Unpaid principal balance			817				—				—				817
Related allowance			41				—				—				41
Average recorded investment, for the three months ended March 31, 2016			696				—				—				696
Interest income recognized			6				—				—				6
Interest income foregone			—				—				—				—
Total
Recorded investment			3,036				1,275				1,953				6,264
Unpaid principal balance			3,365				1,552				3,031				7,948
Related allowance			41				—				—				41
Average recorded investment, for the three months ended March 31, 2016			3,016				1,382				2,006				6,404
Interest income recognized			38				9				25				72
Interest income foregone			7				3				2				12

 

  

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 year ended December 31, 2015 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		$	2,199			$	1,299			$	1,971			$	5,469
Unpaid principal balance			2,528				1,570				3,048				7,146
Average recorded investment, for the twelve months ended December 31, 2015			3,321				1,766				2,176				7,263
Interest income recognized			270				44				104				418
Interest income foregone			39				28				7				74
With an allowance recorded:
Recorded investment			990				—				—				990
Unpaid principal balance			990				—				—				990
Related allowance			46				—				—				46
Average recorded investment, for the twelve months ended December 31, 2015			880				—				—				880
Interest income recognized			33				—				—				33
Interest income foregone			—				—				—				—
Total
Recorded investment			3,189				1,299				1,971				6,459
Unpaid principal balance			3,518				1,570				3,048				8,136
Related allowance			46				—				—				46
Average recorded investment, for the twelve months ended December 31, 2015			4,201				1,766				2,176				8,143
Interest income recognized			303				44				104				451
Interest income foregone			39				28				7				74

 

An aged analysis of past due loans as of March 31, 2016 (unaudited) is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Current		$	80,260			$	7,825			$	5,100			$	93,185
30 – 59 days past due			1,044				—				—				1,044
60 – 89 days past due			229				—				38				267
Greater than 90 day past due and still accruing			56				—				—				56
Greater than 90 days past due			281				105				—				386
Total past due			1,610				105				38				1,753
Total		$	81,870			$	7,930			$	5,138			$	94,938

 

  

An aged analysis of past due loans as of December 31, 2015 are as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Current		$	81,278			$	8,187			$	4,796			$	94,261
30 – 59 days past due			910				—				39				949
60 – 89 days past due			6				—				—				6
Greater than 90 day past due and still accruing			—				—				—				—
Greater than 90 days past due			260				103				—				363
Total past due			1,176				103				39				1,318
Total		$	82,454			$	8,290			$	4,835			$	95,579

 

Non-performing loans as of March 31, 2016 (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		$	425			$	1,078			$	38			$	1,541
Other non-accrual loans			292				—				—				292
Total non-accrual loans			717				1,078				38				1,833
Accruing troubled debt restructured loans			1,518				197				1,823				3,538
Total		$	2,235			$	1,275			$	1,861			$	5,371

 

Non-performing loans as of December 31, 2015 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		$	430			$	1,097			$	39			$	1,566
Other non-accrual loans			294				—				—				294
Total non-accrual loans			724				1,097				39				1,860
Accruing troubled debt restructured loans			1,657				202				1,838				3,697
Total		$	2,381			$	1,299			$	1,877			$	5,557

 

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 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.

 

  

There were no troubled debt restructurings during the three months ended March 31, 2016 (unaudited).

 

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

 

There were no troubled debt restructures that subsequently defaulted during the 3 months ended March 31, 2016 (unaudited) and for the 3 months ended March 31, 2015.

 

Loans serviced by the Bank for the benefit of others totaled $430,000 and $434,000 at March 31, 2016 (audited) and December 31, 2015, respectively.

 

There were no consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure as of March 31, 2016 (unaudited).

 

  

5. OTHER REAL ESTATE OWNED

 

The balance in other real estate owned at March 31, 2016 (unaudited) and December 31, 2015 was zero.

 

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

 

		March 31, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Beginning balance		$	—			$	379
Additions			—				—
Transfers from Loans			—				—
Transfers to Loans			—				(41	)
Sales			—				(180	)
Provisions			—				(158	)
Ending balance		$	—			$	—

 

6.   DEPOSITS

 

Deposits are summarized as follows:

 

		March 31, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Non-interest-bearing deposits		$	1,260			$	1,758
NOW and Money market			20,418				20,591
Savings			14,570				14,721
Certificates of deposit			60,510				55,622
Total deposits		$	96,758			$	92,692

 

The aggregate amount of time deposits in denominations of $250,000 or more as of March 31, 2016 (unaudited) and December 31, 2015 was $1,832,000 and $1,575,000, respectively. Deposit amounts in excess of $250,000 generally are not insured by the Federal Deposit Insurance Corporation.

 

At March 31, 2016 (unaudited), the schedule maturities of certificates of deposit are as follows:

  

(Dollars in thousands)
2016		$	22,883
2017			13,620
2018			7,621
2019			5,913
2020			6,126
2021			4,347
Total		$	60,510

 

Executive officers’ and directors’ deposits were $632,000 and $609,000 at March 31, 2016 (unaudited) and December 31, 2015, respectively.

 

  

7.   INCOME TAXES

 

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

 

		March 31, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Deferred tax assets:
Deferred loan fees and costs, net		$	10			$	5
Allowance for credit losses			515				616
Deferred compensation			63				97
Allowance for ground rents			55				54
Allowance for delinquent mortgage interest			150				149
Contribution carryforward			2				2
Net operating loss carryforward			1,531				1,442
Unrealized loss on available-for-sale securities			—				7
Total deferred tax assets			2,326				2,372
Valuation allowance			(1,531	)			(1,442	)
Deferred tax assets after valuation allowance			795				930
Deferred tax liabilities:
Depreciation			128				128
ESOP			12				9
Unrealized gain on available-for-sale securities			26				—
Total deferred tax liabilities			166				137
Net deferred tax assets		$	629			$	793

 

Management evaluates deferred tax assets annually.

 

The provision for income taxes is comprised of the following:

 

		March 31, 2016				March 31, 2015
(Dollars in thousands)		(unaudited)				(unaudited)
Tax expense (benefit):
Current federal and state		$	(3	)		$	(1	)
Deferred tax			131				20
Total		$	128			$	19

 

  

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 expired in 2015, as did the respective related deferred tax assets of approximately $2,000. The amount of loss carryforwards available for any one year may be limited if the Bank is subject to the alternative minimum tax.

 

At March 31, 2016, the Bank had approximately $3,700,000 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, 2016 (unaudited) and the year ended December 31, 2015 is as follows:

 

(Dollars in thousands)		Valuation Allowance
Balance of January 1, 2015		$	(843	)
Expiration of capital loss carryforwards			2
Increase in valuation allowance			(601	)
Balance of December 31, 2015		$	(1,442	)
Increase in valuation allowance			(89	)
Balance of March 31, 2016		$	(1,531	)

 

As of December 31, 2015 and March 31, 2016, the Bank had remained 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 to offset the net operating loss carryforward related deferred tax asset.

 

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 $629,000: 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 2015 and 2016, 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, 2015 and March 31, 2016; 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, 2016 and December 31, 2015 that the Bank met all capital adequacy requirements to which it is subject.

 

As of December 31, 2015, 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, 2016 (unaudited) and December 31, 2015 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, 2016:
Total risk-based capital (to risk-weighted assets)		$	25,947				36.79	%		$	6,083				≥8.625	%
Tier I capital (to risk-weighted assets)			25,061				35.53				4,672				≥6.625
Tier I capital (to adjusted total assets)			25,061				18.28				6,341				≥4.625
Common equity tier 1 capital (to risk weighted assets)			25,061				35.53				3,615				≥5.125
As of December 31, 2015:
Total risk-based capital (to risk-weighted assets)		$	25,897				36.11	%		$	5,737				≥8.0	%
Tier I capital (to risk-weighted assets)			24,993				34.85				4,303				≥6.0
Tier I capital (to adjusted total assets)			24,993				17.94				5,573				≥4.0
Common equity tier 1 capital (to risk weighted assets)			24,993				34.85				3,227				≥4.5

 

  

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, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Total Company equity capital		$	34,968			$	34,881
LESS: Parent Only Equity			9,865				9,899
LESS: Net unrealized (losses) gains on available-for-sale securities			42				(11	)
Tier 1 Capital		$	25,061			$	24,993
Tier 1 Capital		$	25,061			$	24,993
Allowance for loan and lease losses includible in Tier 2 capital			886				904
Total risk-based capital		$	25,947			$	25,897

  

9.   OTHER COMPREHENSIVE INCOME

 

The following table presents the components of other comprehensive gains and losses for the three months ended March 31, 2016 and 2015 (unaudited).

 

(Dollars in thousands)		Before Tax				Tax Effect				Net of Tax
Three Months Ended March 31, 2016 (unaudited)
Net unrealized gain on securities available-for-sale		$	87			$	(34	)		$	53
Other Comprehensive Gain		$	87			$	(34	)		$	53
Three Months Ended March 31, 2015 (unaudited)
Net unrealized loss on securities available-for-sale		$	—			$	—			$	—
Other Comprehensive Loss		$	—			$	—			$	—

 

The following table presents the changes in each components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2016 and 2015 (unaudited).

 

(Dollars in thousands)		Securities Available-for- Sale				Accumulated Other Comprehensive Income
Three Months Ended March 31, 2016 (unaudited)
Balance at Beginning of Year		$	(11	)		$	(11	)
Other comprehensive gain			53				53
Balance at End of Period		$	42			$	42

 

(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 gain			—				—
Balance at End of Period		$	15			$	15

 

  

The following table presents the amount reclassified out of accumulated other comprehensive income:

 

Details about Accumulated Other Comprehensive Income Components		Amount Reclassified from Accumulated Other Comprehensive Income								Affected Line Item in the Statement Where Net Income Is Presented
		March 31, 2016				March 31, 2015
(Dollars in thousands)		(unaudited)
Redemption of Investment Securities Available-for-Sale		$	(25	)		$	—			Realized gain on redemption of investment securities
			9				—			Provision for Income Tax
		$	(16	)		$	—			Net of Tax
Total Reclassifications for the Period		$	(16	)		$	—			Net of Tax

 

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, 2016 and 2015 are as follows:  

 

		Three Months Ended March 31, 2016 (unaudited)
(Dollars in thousands, except per share amount)		Income (Loss) (Numerator)				Shares (Denominator)				Per Share Amount
Basic EPS
Net income available to shareholders		$	1				1,959,885			$	0.00
Diluted EPS
Effect of dilutive shares			—				—				—
Net income available to shareholders		$	1				1,959,885			$	0.00

 

  

		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, 2016 and 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, 2016 and December 31, 2015, 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, 2016 (unaudited) Using:
Description  (Dollars in thousands)		Fair Value March 31, 2016				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
Investments (available-for-sale) :
FFCB  AFS		$	2,023			$	—			$	2,023			$	—			$	—			$	—
Mortgage-backed securities:
FHLMC AFS			693				—				693				—				—				—
FNMA AFS			114				—				114				—				—				—
GNMA  AFS			713				—				713				—				—				—
Total assets measured at fair value on a recurring basis		$	3,543			$	—			$	3,543			$	—			$	—			$	—

 

  

		Fair Value Measurements at December 31, 2015 Using:
Description  (Dollars in thousands)		Fair Value December 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
Investments (available-for-sale) :
FHLMC  AFS		$	1,964			$	—			$	1,964			$	—			$	—			$	—
FFCB  AFS			4,980				—				4,980				—				—				—
Mortgage-backed securities:
FHLMC AFS			703				—				703				—				—				—
FNMA AFS			123				—				123				—				—				—
GNMA  AFS			710				—				710				—				—				—
Total assets measured at fair value on a recurring basis		$	8,480			$	—			$	8,480			$	—			$	—			$	—

 

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, 2016 (unaudited) Using:
Description (Dollars in thousands)		Fair Value March 31, 2016				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		$	2,995			$	—			$	2,219			$	776			$	—			$	—
Commercial			1,275				—				1,275				—				—				—
Land			1,953				—				1,953				—				—				—
Construction			—				—				—				—				—				—
Other real estate owned			—				—				—				—				—				—
Total assets measured at fair value on a non-recurring basis		$	6,223			$	—			$	5,447			$	776			$	—			$	—

 

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 5.25% to 7.375%.

 

  

		Fair Value Measurements at December 31, 2015 Using:
Description (Dollars in thousands)		Fair Value December 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		$	3,143			$	—			$	2,199			$	944			$	—			$	—
Commercial			1,299				—				1,299				—				—				—
Land			1,971				—				1,971				—				—				—
Construction			—				—				—				—				—				—
Other real estate owned			—				—				—				—				—				(158	)
Total assets measured at fair value on a non-recurring basis		$	6,413			$	—			$	5,469			$	944			$	—			$	(158	)

 

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 5.25% to 7.375%.

 

In accordance with the disclosure requirements of ASC Topic 825, the estimated fair values of financial instruments at March 31, 2016 (unaudited) and December 31, 2015 are as follows:

 

		Carrying Value March 31, 2016				Fair Value March 31, 2016				Quoted Prices In Active Markets For Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Observable Inputs (Level 3)
(Dollars in thousands)		(unaudited)				(unaudited)
ASSETS
Cash, interest bearing deposits and federal funds sold		$	2,508			$	2,508			$	—			$	2,508			$	—
Other interest bearing deposits in other banks			16,913				16,913				—				16913				—
Investment securities			24,832				22,017				—				22,017				—
Federal Home Loan Bank stock			673				673				—				673				—
Loans, net			92,702				91,555				—				5,447				86,108
Bank owned life insurance			908				908				—				908				—
Accrued interest receivable			398				398				—				398				—
LIABILITIES
Deposits		$	95,502			$	93,095			$	—			$	—			$	93,095
FHLB advances			12,000				11,731				—				—				11,731

 

  

(Dollars in thousands)		Carrying Value December 31, 2015				Fair Value December 31, 2015				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		$	2,924			$	2,924			$	—			$	2,924			$	—
Other interest bearing deposits in other banks			19,107				19,128				—				19,128				—
Investment securities			17,625				17,775				—				17,775				—
Federal Home Loan Bank stock			688				688				—				688				—
Loans, net			93,125				90,004				—				5,469				84,535
Bank owned life insurance			896				896				—				896				—
Accrued interest receivable			324				324				—				324				—
LIABILITIES
Deposits		$	92,692			$	89,354			$	—			$	—			$	89,354
FHLB advances			12,000				12,400				—				—				12,400

 

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of March 31, 2016 (unaudited) and December 31, 2015:

 

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.

 

12. SUBSEQUENT EVENTS

 

On March 30, 2016, MB Bancorp, Inc. (the “Company”), the holding company for Madison Bank of Maryland, issued a press release announcing that the Board of Directors had approved a stock repurchase program authorizing the Company to repurchase shares of common stock equaling up to 10% of the Company’s outstanding shares. As of May 13, 2016, MB Bancorp, Inc. has repurchased approximately 189,200 shares.

 

 

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, 2016, we had total assets of $144.2 million, total deposits of $96.8 million and total equity of $35.0 million.

 

 

Our executive offices are located at 1920 Rock Spring Road, Forest Hill, Maryland 21050 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. Annually, management has a third party perform an independent assessment of the methodology and adequacy of the allowance. 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, 2016, our assets totaled $144.2 million, an increase of $4.0 million, or 2.9%, from total assets of $140.2 million at December 31, 2015. The increase in assets for the three months ended March 31, 2016 was due mainly to, a $12.2 million, or 132.8%, increase in investment securities held to maturity and a $1.1 million, or 30.0% increase in cash and cash equivalents, partially offset by, a $5.0 million, or 58.2% decrease investment securities available for sale and a $3.7 million, or 20.4% decrease in other interest-bearing deposits in other banks.

  

Loans.   At March 31, 2016, residential mortgage loans totaled $78.1 million, or 82.4% of the total loan portfolio compared to $78.7 million, or 82.3% of the total loan portfolio at December 31, 2015. Residential mortgage loans decreased by $587,000, or 0.8%, during the three months ended March 31, 2016 primarily due to weak loan demand in our market area.

 

Non-residential real estate loans totaled $7.9 million, or 8.4% of total loans at March 31, 2016, compared to $8.3 million, or 8.7% of total loans, at December 31, 2015.

 

Construction and land loans totaled $5.1 million, and represented 5.4% of total loans, at March 31, 2016, compared to $4.8 million, or 5.0% of total loans, at December 31, 2015. At March 31, 2016, we had $1.7 million of construction loans, amounting to 34.4% of our construction and land loan portfolio, and $3.4 million of land loans, amounting to 65.6% of our construction and land loan portfolio.

 

Home equity lines of credit, all of which are secured by residential properties, totaled $3.7 million, and represented 3.9% of total loans, at March 31, 2016 and December 31, 2015.

 

Our non-real estate loans consist of consumer loans, all of which are loans to depositors, secured by savings. Such loans totaled $25,000 at March 31, 2016, representing less than .03% of the loan portfolio.

 

  

Securities.    At March 31, 2016, our securities held-to-maturity increased by $12.2 million, or 132.8%, from $9.1 million at December 31, 2015 to $21.3 million at March 31, 2016. The increase is due to the purchase of $10.9 million in Federal Farm Credit Bureau bonds and $2.5 million in Federal Home Loan Bank Bonds. Securities held-to-maturity at March 31, 2016 consisted of bonds issued by Federal Home Loan Bank, 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, 2016, our securities available-for-sale at fair value decreased by $5.0 million, or 58.2%, from $8.5 million at December 31, 2015 to $3.5 million at March 31, 2016. Securities available-for-sale at March 31, 2016 consisted of bonds issued by Federal Farm Credit Bureau and 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, 2016, we also held a $673,000 investment in the common stock of the Federal Home Loan Bank of Atlanta. At March 31, 2016, we held no stock in Fannie Mae and Freddie Mac.

 

Ground Rents.    Ground rents, net amounted to $694,000 at March 31, 2016 compared to $695,000 at December 31, 2015.

 

Deposits.    Total deposits increased by $4.1 million, or 4.4%, to $96.8 million at March 31, 2016 from $92.7 million at December 31, 2015. Balances in non-interest-bearing deposits decreased by $498,000, or 28.3%, from $1.8 million at December 31, 2015 to $1.3 million at March 31, 2016. Interest-bearing deposits increased by $4.6 million, or 5.0%, to $95.5 million at March 31, 2016 compared to $90.9 million at December 31, 2015. The increase was due mainly to the increase in Qwickrate Certificate deposits, which were used to fund investment securities and loan originations.

 

Borrowings.    Borrowings from the Federal Home Loan Bank of Atlanta totaled, $12.0 million at March 31, 2016 and December 31, 2015.

 

Stockholders’ Equity.    Equity increased by $87,000, or 0.2%, to $35.0 million at March 31, 2016 from $34.9 million at December 31, 2015 primarily as the result of an increase in accumulated other comprehensive income for the three months ended March 31, 2016.

 

Results of Operations for the Three Months Ended March 31, 2016 and 2015

 

Overview.    We had net income of $1,000 for the three months ended March 31, 2016, as compared to net loss of $204,000 for the three months ended March 31, 2015. The net income for the three months ended March 31, 2016 was primarily due to the reversal of the unallocated loan loss reserve, offset by an increase in income tax expense and a decrease in net interest income

 

Net Interest Income.   Net interest income decreased by $68,000, or 7.5%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The decrease in net interest income was primarily attributable to a decrease in the average balance of interest-earning assets. The decrease in the average balance of interest-earning assets was due primarily to a $8.6 million or 8.4% 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, 2016) and a $5.8 million or 24.1% decrease in the average balance of interest bearing deposits in other banks, partially offset by a $7.2 million increase in the average balance of investment securities available-for-sale.

 

Interest on loans receivable, net of unearned fees decreased by $115,000, or 10.8%, for the three months ended March 31, 2016 as compared to the comparable period in 2015, due to a $8.6 million decrease in the average balance and an 11 basis point decrease in the average yield from 4.14% at December 31, 2015 to 4.03% at March 31, 2016.

 

Interest on investment securities available-for-sale increased by $52,000 for the three months ended March 31, 2016 as compared to the comparable period in 2015. There was a 36 basis point decrease in the average yield on investment securities available-for-sale and a $7.2 million increase in the average balance of investment securities available-for-sale.

 

  

Interest on certificates of deposit increased by $3,000, or 1.8%, during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, due to a 8 basis point increase in the average cost of certificates of deposit.

 

Interest on Federal Home Loan Bank of Atlanta advances decreased by $1,000, or 0.8%, during the three months ended March 31, 2016, due to a $3.4 million, or 21.7%, decrease in the average balance of Federal Home Loan Bank of Atlanta advances, which was partially offset by a 86 basis point increase in the average cost of Federal Home Loan Bank of Atlanta advances. In the first quarter 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, 2016, we had $12.0 million in advances from the Federal Home Loan Bank of Atlanta, which 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%. Had we paid such advances in full at March 31, 2016, we would have incurred prepayment penalties totaling approximately $390,000. To date we have elected not to prepay 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.

 

The interest rate spread decreased due to the average balance of the higher yielding loan portfolio decreasing, along with the increasing of investment securities at a lower yield.

 

  

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 2016 and 2015, 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,
		2016 (unaudited)												2015 (unaudited)
(Dollars in thousands)		Average Balance				Interest and Dividends				Yield/ Cost				Average Balance				Interest and Dividends				Yield/ Cost
Interest-earning assets:
Interest-bearing deposits in other banks		$	18,130			$	38				.84	%		$	23,897			$	40				.67	%
Loans receivable, net of unearned fees			94,047				947				4.03				102,696				1,062				4.14
Investment securities available-for-sale – amortized cost			7,687				56				2.91				488				4				3.27
Investment securities held-to-maturity			13,507				104				3.08				13,198				103				3.13
Other interest-earning assets			687				8				4.66				912				10				4.35
Total interest-earning assets			134,058				1,153				3.44				141,191				1,219				3.45
Cash and due from banks			2,920												2,983
Allowance for credit losses			(1,556	)											(1,732	)
Other non-interest-earning assets			6,716												7,502
Total assets			142,138												149,944
Interest-bearing liabilities:
Certificates of deposit			57,875				171				1.18				61,238				168				1.10
NOW and money market			20,349				12				.24				22,977				12				.20
Savings			14,608				4				.11				14,945				4				.10
Federal Home Loan Bank advances			12,319				126				4.09				15,728				127				3.23
Total interest-bearing liabilities			105,151				313				1.19				114,888				311				1.08
Non-interest-bearing demand deposits			1,572												907
Other non-interest-bearing liabilities			508												530
Total liabilities			107,231												116,325
Total equity			34,907												33,619
Total liabilities and equity		$	142,138											$	149,944
Net interest income						$	840											$	908
Interest rate spread											2.25	%											2.37	%
Net interest margin											2.51	%											2.57	%
Ratio of average interest-earning assets to average interest-bearing liabilities											127.49	%											122.89	%

 

  

Provision for Loan Losses.   We had a reversal for loan losses of $255,000 for the three months ended March 31, 2016, compared to a provision for loan losses of $6,000 for the three months ended March 31, 2015. The reversal for loan losses was due primarily to the reversal of the unallocated reserve of $250,000 established in September 2014. The 2015 reversal was due to the repayment of troubled debt restructured loans in compliance with their modified terms. At March 31, 2016, the allowance for loan losses was $1.3 million, or 1.38% of the total loan portfolio, compared to $1.6 million, or 1.63% of the total loan portfolio, at December 31, 2015.

 

Non-accrual loans amounted to $1.8 million at March 31, 2016 compared to $1.9 million at December 31, 2015. The decrease in non-accrual loans of $27,000 was primarily due to payoffs. As a percentage of non-performing loans and accruing troubled debt restructurings, the allowance for loan losses was 24.32% at March 31, 2016 compared to 28.09% at December 31, 2015. There were no net loan charge offs during the three months ended March 31, 2016, compared to net loan charge-offs of $14,000 during the three months ended March 31, 2015.

 

Non-interest Income.   Total non-interest income increased by $22,000, or 47.8%, from $46,000 for the three months ended March 31, 2015 to $68,000 for the three months ended March 31, 2016. The increase in total non-interest income was due to a $25,000 gain on calls of securities

 

Non-interest Expenses.   Total non-interest expenses decreased by $99,000, or 8.7%. We had non-interest expenses of $1.0 million for the three months ended March 31, 2016 and $1.1 million for the three months ended March 31, 2015. The decrease primarily was attributable to a $51,000 decrease in provision for loss on other real estate owned, a $16,000 decrease in salaries and employee benefits, a $17,000 decrease in legal and professional fees and a $13,000 decrease in advertising and marketing related expenses.

 

Income Tax Expense.  We had an income tax expense of $128,000 and $19,000 during the three months ended March 31, 2016 and 2015, respectively. The deferred tax asset related to net operating losses increased for the three months ended March 31, 2016, which increased the valuation allowance and caused an income tax expense to be recorded instead of an income tax benefit normally associated with a net loss.

 

Analysis of Non-performing and Classified 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 or if there are extenuating circumstances. 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 payments, 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 costs and declines 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.

 

		March 31, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Non-accrual loans:
Residential, home equity lines of credit and consumer		$	717			$	724
Non-residential			1,078				1,097
Construction and land			38				39
Total			1,833				1,860
Accruing loans past due 90 days or more:
Residential, home equity lines of credit and consumer			56				—
Total			56				—
Total of non-performing loans and accruing loans 90 days or more past due			1,889				1,860
Assets acquired through foreclosure			—				—
Ground rents			139				136
Total non-performing assets			2,028				1,996
Troubled debt restructurings accruing			3,538				3,697
Troubled debt restructurings accruing and total non-performing assets		$	5,566			$	5,693
Total of non-performing loans and accruing loans past due 90 days or more to total loans			1.99	%			1.95	%
Total non-performing loans to total assets			1.27				1.33
Total non-performing assets and accruing loans past due 90 days or more to total assets			1.41				1.42
Total non-performing loans and accruing troubled  debt restructurings to total assets			3.72				3.96
Total non-performing assets and accruing loans past due 90 days or more and accruing troubled  debt restructurings to total assets			3.86				4.06

 

At March 31, 2016, non-accrual loans consisted of 16 residential mortgage loans totaling $717,000, two non-residential loans totaling $1.1 million, one construction and land loan totaling $38,000 and no home equity lines of credit. The decrease in non-performing loans at March 31, 2016 as compared to December 31, 2015 is primarily the result of loan payments. We had one loan 90 days or more but still accruing at March 31, 2016 and no loans 90 days or more but still accruing at December 31, 2015.

 

  

At March 31, 2016, our largest non-performing loan relationships consisted of the following:

 

·

A $1.0 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, 2016 as the borrower had not made six consecutive monthly payments under the restructured terms. We also had a $31,000 loan secured by a third mortgage on this church. The loan secured by the third mortgage was accruing at March 31, 2016, and we receive certain rental payments that are paid directly to us to meet the debt service requirements on that loan.

 

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, 2016 and December 31, 2015, we had $3.5 million, $3.7 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, 2016, 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, and the borrower has made payments in accordance with the restructured terms, so the loan was considered accruing at March 31, 2016. At March 31, 2016, the borrower had a second loan with an outstanding balance of $53,000 secured by the same property. The borrower is seeking to sell the property securing these loans. In 2014 and 2015, we received updated appraisals indicating impairments of $634,000 and $5,000, respectively. Accordingly, the impairment losses were charged off.

 

Interest income that would have been recorded for the three months ended March 31, 2016 and 2015 had non-accrual loans been current according to their original terms, amounted to approximately $12,000 and $36,000, respectively. Interest income of $72,000 and $104,000 related to non-accrual loans was included in interest income for the three months ended March 31, 2016 and 2015, respectively.

 

At March 31, 2016, we had no other real estate owned.

 

  

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,
		2016				2015
(Dollars in thousands)		(unaudited)				(unaudited)
Allowance at beginning of period		$	1,561			$	1,731
Charge-Offs:
Residential, home equity lines of credit and consumer			—				(16	)
Non-residential			—				—
Construction and land loans			—				—
Total charge-offs			—				(16	)
Recoveries:
Residential, home equity lines of credit and consumer			—				2
Non-residential			—				—
Construction and land loans			—				—
Total recoveries			—				2
Net charge-offs			—				(14	)
(Reversal) provision for loan losses			(255	)			6
Allowance at end of period		$	1,306			$	1,723
Allowance for loan losses to non-performing loans and accruing troubled debt restricting at end of period			24.32	%			20.31	%
Allowance for loan losses to total loans at end of period			1.38	%			1.68	%
Net charge-offs to average loans outstanding during the period			.00	%			.01	%

 

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, 2016, cash and cash equivalents totaled $4.8 million. Securities classified as available-for-sale amounting to $3.5 million at March 31, 2016, provide an additional source of liquidity. In addition, at March 31, 2016, we had the ability to borrow a total of approximately $26.9 million from the Federal Home Loan Bank of Atlanta. At March 31, 2016, we had $12 million in Federal Home Loan Bank advances outstanding. In addition, the Bank maintains 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, 2016.

 

  

At March 31, 2016, we had $915,000 in commitments to extend credit outstanding. Certificates of deposit due by December 31, 2016 totaled $22.8 million, or 37.8% 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, 2016. 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, 2016, 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.

 

On March 30, 2016, we announced a stock repurchase program, pursuant to which we may repurchase up to 211,600 shares of common stock. As of May 13, 2016, we have repurchased approximately 189,200 shares.

 

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, 2016 and 2015, 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, 2016 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, 2016 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, 2015 (the “Form 10-K”) (File No. 000-55341). As of March 31, 2016, 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, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in 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, 2016	By:	/s/ Julia A. Newton
			Julia A. Newton
			President and Chief Executive Officer
			(principal executive officer)
Dated:	May 13, 2016	By:	/s/ Robin L. Taylor
			Robin L. Taylor
			Vice President and Chief Financial Officer
			(principal financial and accounting officer)