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 September 30, 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		(I.R.S. Employer Identification No.)
Organization)
1920 Rock Spring Road, Forest Hill, Maryland		21050
(Address of Principal Executive Offices)		(Zip Code)

 

(410) 420-9600

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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 November 14, 2016, there were 1,904,400 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 September 30, 2016 (unaudited) and December 31, 2015	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	2
	Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52
Part II. Other Information
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
Signatures		54

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

 

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		As of				As of
		September 30,				December 31,
		2016				2015
(Dollars in thousands)		(unaudited)
ASSETS
Assets:
Cash and due from banks		$	3,119			$	2,924
Interest bearing deposits in other banks			3,658				797
Total cash and cash equivalents			6,777				3,721
Other interest-bearing deposits in other banks			11,057				18,310
Investment securities available-for-sale – at fair value			1,438				8,480
Investment securities held to maturity – amortized cost			20,136				9,145
Loans, net of unearned fees			90,885				94,686
Less allowance for loan losses			(1,219	)			(1,561	)
Loans, net			89,666				93,125
Real estate ground rents			828				831
Less allowance for credit losses			(152	)			(136	)
Ground rents, net			676				695
Federal Home Loan Bank stock, at cost			546				688
Property and equipment – net			3,709				3,793
Deferred income taxes			746				793
Bank-owned life insurance			933				896
Accrued interest receivable and other assets			565				543
TOTAL ASSETS		$	136,249			$	140,189
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits		$	93,608			$	92,692
Federal Home Loan Bank advances			10,000				12,000
Deferred compensation liability			167				246
Accounts payable and other liabilities			727				370
Total liabilities			104,502				105,308
STOCKHOLDERS' EQUITY:
Common stock .01 par value; authorized 19,000,000 shares; issued and outstanding, 1,904,400 and 2,116,000 shares at September 30, 2016 and December 31, 2015			19				21
Additional paid-in capital			18,159				20,158
Retained earnings - substantially restricted			15,023				16,284
Accumulated other comprehensive income (loss)			32				(11	)
Unearned ESOP shares			(1,486	)			(1,571	)
Total stockholders' equity			31,747				34,881
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	136,249			$	140,189

 

See accompanying notes to consolidated financial statements.

 

 

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30
		2016				2015				2016				2015
(Dollars in thousands, except per share amount)		(unaudited)								(unaudited)
INTEREST INCOME:
Interest and fees on loans		$	911			$	1,068			$	2,797			$	3,175
Interest on federal funds sold and other investments			34				48				107				136
Interest and dividends on investment securities			166				101				515				326
Total interest income			1,111				1,217				3,419				3,637
INTEREST EXPENSE:
Interest on deposits			194				181				578				545
Interest on short-term borrowings			-				-				-				3
Interest on long term borrowings			109				128				361				379
Total interest expense			303				309				939				927
NET INTEREST INCOME			808				908				2,480				2,710
REVERSAL FOR LOAN LOSSES			(6	)			(5	)			(257	)			(4	)
NET INTEREST INCOME AFTER REVERSAL OF LOAN LOSSES			814				913				2,737				2,714
NON-INTEREST INCOME:
Service charges on deposit accounts			2				3				7				9
Fees and charges on loans			7				17				24				37
Increase in cash surrender value of life insurance			13				13				37				38
Gain on sale of other real estate owned			2				3				7				10
Gain on sale of real estate held for sale			-				8				-				8
Gain on investment securities			4				-				31				-
Ground rent fees			9				10				33				30
Other income			4				6				13				16
Total non-interest income			41				60				152				148
NON-INTEREST EXPENSE:
Salaries and employee benefits			905				616				2,063				1,834
Occupancy expenses			94				97				302				314
Furniture and equipment expenses			11				13				33				38
Legal and professional expenses			110				82				264				280
Data processing and other outside services			71				58				220				179
FDIC insurance premiums			23				24				68				77
Advertising and marketing related expenses			8				14				22				52
Provision for loss on other real estate owned			-				96				-				147
Provision (reversal) for loss on ground rents			1				(1	)			10				(5	)
Other expenses			119				122				415				424
Total non-interest expenses			1,342				1,121				3,397				3,340
LOSS BEFORE INCOME TAXES			(487	)			(148	)			(508	)			(478	)
INCOME TAX (BENEFIT) EXPENSE			(141	)			157				9				262
NET LOSS		$	(346	)		$	(305	)		$	(517	)		$	(740	)
Basic loss per share		$	(.20	)		$	(.16	)		$	(.28	)		$	(.38	)
Diluted loss per share		$	(.20	)		$	(.16	)		$	(.28	)		$	(.38	)

 

See accompanying notes to consolidated financial statements

 

 

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2016				2015				2016				2015
(Dollars in thousands)		(unaudited)								(unaudited)
NET LOSS		$	(346	)		$	(305	)		$	(517	)		$	(740	)
OTHER COMPREHENSIVE (LOSS) INCOME ON AVAILABLE-FOR-SALE INVESTMENT SECURITIES:
Unrealized (losses) gains arising during the period			(4	)			25				102				12
Reclassification of gain included in net income			(4	)			—				(31	)			—
Unrealized (losses)  gains arising during the period			(8	)			25				71				12
Income taxes on unrealized (losses) gains arising during the period			3				(10	)			(28	)			(5	)
			(5	)			15				43				7
COMPREHENSIVE LOSS		$	(351	)		$	(290	)		$	(474	)		$	(733	)

 

See accompanying notes to consolidated financial statements

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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			—				—				(740	)			—				—				(740	)
Net unrealized gain on available- for sale securities, net of taxes of $(5)			—				—				—				—				7				7
Stock-based compensation			—				9				—				85				—				94
BALANCES AT SEPTEMBER 30, 2015		$	21			$	20,153			$	16,578			$	(1,599	)		$	22			$	35,175
BALANCES AT JANUARY 1, 2016		$	21			$	20,158			$	16,284			$	(1,571	)		$	(11	)		$	34,881
Net loss			—				—				(517	)			—				—				(517	)
Net unrealized gain on available- for sale securities, net of taxes of ($28)			—				—				—				—				43				43
Repurchase of common stock			(2	)			(2,014	)			(744	)			—				—				(2,760	)
Stock-based compensation			—				15				—				85				—				100
BALANCES AT SEPTEMBER 30, 2016		$	19			$	18,159			$	15,023			$	(1,486	)		$	32			$	31,747

 

See accompanying notes to consolidated financial statements.

 

 

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For Nine Months Ended
		September 30,				September 30,
		2016				2015
(Dollars in thousands)		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(517	)		$	(740	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation expense			101				106
Increase in cash surrender value of life insurance			(37	)			(38	)
Net amortization/accretion of premiums and discounts			(7	)			(8	)
Reversal for loan losses			(257	)			(4	)
Provision (reversal) for ground rent losses			10				(5	)
Decrease in deferred income taxes			19				267
Provision for loss on other real estate owned			—				147
Non-cash compensation under stock-based benefit plan			100				93
Gain on sale of other real estate owned			(7	)			(10	)
(Increase) Decrease in accrued interest and other assets			(22	)			5
Gain on sale of real estate held for sale			—				(8	)
Gain on redemption of investment securities			(31	)			—
Decrease in deferred compensation liability			(79	)			(137	)
Increase in accounts payable and other liabilities			364				143
Net cash used in operating activities			(363	)			(189	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in other interest bearing deposits in other banks			7,253				(12,532	)
Purchase of available-for-sale investments			—				(3,501	)
Proceeds from calls/repayments of available-for-sale investments			7,138				64
Purchase of held-to-maturity investments			(31,596	)			—
Proceeds from maturity/repayments of held-to-maturity investments			20,618				5,809
Net decrease in loans			3,716				7,957
Proceeds from sale of ground rents			9				6
Proceeds from sale of other real estate owned			—				171
Proceeds from sale of real estate held for sale			—				8
Purchase of property, plant and equipment			(17	)			(28	)
Redemption of Federal Home Loan Bank stock			142				241
Net cash provided by (used in) investing activities			7,263				(1,805	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			916				(4,452	)
Federal Home Loan Bank advances			1,000				4,750
Federal Home Loan Bank repayments			(3,000	)			(8,500	)
Repurchase of common stock			(2,760	)			—
Net cash used in financing activities			(3,844	)			(8,202	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			3,056				(10,196	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			3,721				15,190
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	6,777			$	4,994
Supplemental cash flow information:
Interest paid		$	958			$	927
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 NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015 (UNAUDITED)

 

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

In 2002, Bohemian American Federal Savings and Loan Association, Inc., founded in 1899 in the State of Maryland, merged with Madison & Bradford Federal Savings & Loan Association, founded 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 distribution 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 September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 contains all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at September 30, 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 and nine months ended September 30, 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 its 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 (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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 the loan is placed on non-accrual status until the Company receives six consecutive monthly payments. 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.

 

Real Estate Ground Rents

 

Ground rents are a form of real estate ownership where the land is owned by one entity, but the improved property located on the land is owned by the homeowner. The Company’s ground rents are supported by deeds that have been registered with Maryland State Department of Assessments and Taxation. Under Maryland law, homeowners are required to pay the ground rent owner an annual fee that is stated in the original ground rent deed. The fee is typically 6% of the original value of the land as stipulated in the deed and is paid biannually. In addition, Maryland law stipulates that ground rent owners are required to sell or redeem the ground rent to the homeowner when requested. The redemption price on the ground rent is the lesser of the annual ground rent fee divided by a statutory redemption rate, which ranges from 6% to 12%, or the contractual sales price. Maryland also limits the collection of ground rent fees to amounts due for three years or less.

 

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

 

The Bank has remained in a cumulative loss position for four consecutive years and consequently management on a quarterly basis 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, maintains a valuation allowance to offset the net operating loss carryforward related deferred tax asset. As of September 30, 2016, management’s assessment has not changed.

 

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 issued 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 consolidated 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 Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company's consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company's 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:

 

		September 30, 2016 (unaudited)
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments available-for-sale:
U.S. Government sponsored securities:
FFCB bonds		$	—			$	—			$	—			$	—
Total U.S. Government sponsored securities			—				—				—				—
Mortgage-backed securities:
FHLMC certificates			621				19				—				640
FNMA certificates			89				7				—				96
GNMA certificates			675				27				—				702
Total mortgage-backed securities			1,385				53				—				1,438
Total investments available-for-sale		$	1,385			$	53			$	—			$	1,438

 

		December 31, 2015
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments available-for-sale:
U.S. Government sponsored securities:
FHLMC bonds		$	1,983			$	—			$	(19	)		$	1,964
FFCB bonds			4,991				3				(14	)			4,980
Total U.S. Government sponsored 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:

 

		September 30, 2016 (unaudited)
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments held-to-maturity:
U.S. Government sponsored securities:
FHLB bonds		$	9,500			$	11			$	(1	)		$	9,510
FNMA bonds			1,000				31				—				1,031
FFCB bonds			3,000				20				—				3,020
Total U.S. Government sponsored securities			13,500				62				(1	)			13,561
Mortgage-backed securities:
FHLMC certificates			2,481				87				(6	)			2,562
FNMA certificates			2,257				164				—				2,421
GNMA certificates			1,898				52				—				1,950
Total mortgage backed securities			6,636				303				(6	)			6,933
Total investments held-to-maturity		$	20,136			$	365			$	(7	)		$	20,494

 

		December 31, 2015
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Investments held-to-maturity:
U.S. Government sponsored securities:
FHLMC bonds		$	998			$	—			$	(21	)		$	977
FNMA bonds			1,000				—				(10	)			990
FFCB bonds			3,000				—				(57	)			2,943
Total U.S. Government sponsored 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 is the schedule of both available-for-sale and held-to-maturity securities with unrealized losses as of September 30, 2016 (unaudited) and December 31, 2015 and the length of time the individual security has been in a continuous unrealized loss position which were comprised of 2 and  11 securities, respectively. 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 September 30, 2016, 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.

 

		September 30, 2016
		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		$	—			$	—			$	44			$	(6	)		$	44			$	(6	)
U.S. Government sponsored securities			—				—				499				(1	)			499				(1	)
Total temporarily impaired securities		$	—			$	—			$	543			$	(7	)		$	543			$	(7	)

 

		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 sponsored securities			—				—				10,852				(121	)			10,852				(121	)
Total temporarily impaired securities		$	—			$	—			$	11,969			$	(125	)		$	11,969			$	(125	)

 

The scheduled maturities of debt securities at September 30, 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			3,000				3,033
Due after ten years			10,500				10,528
Mortgage-backed securities			8,021				8,371
Total		$	21,521			$	21,932

 

 

4.   LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

		September 30, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Secured by real estate:
Residential:
One-to four-family		$	73,791			$	76,632
Multi-family			2,056				2,100
Total			75,847				78,732
Non-residential			7,503				8,290
Construction and land loans			4,665				4,835
Home equity line of credit (“HELOC”)			3,714				3,695
Consumer and other loans:
Loans to depositors, secured by savings			20				27
			91,749				95,579
Add:
Net discount on purchased loans			(9	)			(9	)
Unamortized net deferred costs			19				26
Less:
Undisbursed portion of construction loans			(820	)			(871	)
Unearned net loan origination fees			(54	)			(39	)
Less allowance for loan losses			(1,219	)			(1,561	)
Loans receivable, net		$	89,666			$	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 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 using a rolling two year average 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 and nine months ended September 30, 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, July 1, 2016		$	961			$	179			$	87			$	—			$	1,227
Charge-offs			(2	)			—				—				—				(2	)
Recoveries			—				—				—				—				—
Provisions (Reversals)			15				(21	)			—				—				(6	)
Ending balance, September 30, 2016		$	974			$	158			$	87			$	—			$	1,219
Beginning balance, January 1, 2016		$	960			$	194			$	157			$	250			$	1,561
Charge-offs			(4	)			—				(81	)			—				(85	)
Recoveries			—				—				—				—				—
Provisions (Reversals)			18				(36	)			11				(250	)			(257	)
Ending balance, September 30, 2016		$	974			$	158			$	87			$	—			$	1,219
Allowance for loan losses:
Ending balance: individually evaluated for impairment		$	39			$	—			$	—			$	—			$	39
Ending balance: collectively evaluated for impairment		$	935			$	158			$	87			$	—			$	1,180
Loans:
Ending balance: individually evaluated for impairment. .		$	3,992			$	1,406			$	2,388			$	—			$	7,786
Ending balance: collectively evaluated for impairment		$	75,589			$	6,097			$	2,277			$	—			$	83,963

 

 

 

Allowance for loan losses and recorded investment in loans for the three and nine months ended September 30, 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, July 1, 2015		$	1,202			$	88			$	185			$	250			$	1,725
Charge-offs			—				(247	)			(25	)			—				(272	)
Recoveries			4				—				170				—				174
Provisions (Reversals)			(129	)			331				(207	)			—				(5	)
Ending balance, September 30, 2015		$	1,077			$	172			$	123			$	250			$	1,622
Beginning balance, January 1, 2015		$	1,228			$	79			$	174			$	250			$	1,731
Charge-offs			(17	)			(247	)			(25	)			—				(289	)
Recoveries			14				—				170				—				184
Provisions (Reversals)			(148	)			340				(196	)			—				(4	)
Ending balance, September 30, 2015		$	1,077			$	172			$	123			$	250			$	1,622
Allowance for loan losses:
Ending balance: individually evaluated for impairment		$	40			$	—			$	—			$	—			$	40
Ending balance: collectively evaluated for impairment		$	1,037			$	172			$	123			$	250			$	1,582
Loans:
Ending balance: individually evaluated for impairment		$	3,276			$	1,667			$	2,165			$	—			$	7,108
Ending balance: collectively evaluated for impairment		$	79,764			$	7,059			$	2,894			$	—			$	89,717

 

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 (Reversals)			(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 September 30, 2016 (unaudited) is as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Pass		$	73,715			$	6,097			$	2,277			$	82,089
Special mention			3,256				161				89				3,506
Substandard			2,610				1,245				2,299				6,154
Doubtful			—				—				—				—
Loss			—				—				—				—
Total		$	79,581			$	7,503			$	4,665			$	91,749

 

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
Pass		$	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 the three and for the nine months ended September 30, 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		$	2,841			$	1,406			$	2,388			$	6,635
Unpaid principal balance			3,172				1,696				3,547				8,415
Average recorded investment, for the three months ended September 30, 2016			2,785				1,355				2,396				6,536
Interest income recognized			37				12				23				72
Interest income foregone			11				4				1				16
Average recorded investment, for the nine months ended September 30, 2016			2,468				1,333				2,291				6,092
Interest income recognized			111				34				96				241
Interest income foregone			24				11				2				37
With an allowance recorded:
Recorded investment			1,151				—				—				1,151
Unpaid principal balance			1,151				—				—				1,151
Related allowance			39				—				—				39
Average recorded investment, for the three months ended September  30, 2016			1,156				—				—				1,156
Interest income recognized			9				—				—				9
Interest income foregone			3				—				—				3
Average recorded investment, for the nine months ended September 30, 2016			1,154				—				—				1,154
Interest income recognized			31				—				—				31
Interest income foregone			4				—				—				4
Total
Recorded investment			3,992				1,406				2,388				7,786
Unpaid principal balance			4,323				1,696				3,547				9,566
Related allowance			39				—				—				39
Average recorded investment, for the three months ended September  30, 2016			3,941				1,355				2,396				7,692
Interest income recognized			46				12				23				81
Interest income foregone			14				4				1				19
Average recorded investment, for the nine months ended September  30, 2016			3,622				1,333				2,291				7,246
Interest income recognized			142				34				96				272
Interest income foregone			28				11				2				41

 

 

Impaired loans as of the three and for the nine months ended September 30, 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		$	2,226			$	1,667			$	2,165			$	6,058
Unpaid principal balance			2,629				1,973				3,209				7,811
Average recorded investment, for the three months ended September 30, 2015			2,739				1,835				2,188				6,762
Interest income recognized			123				17				26				166
Interest income foregone			7				9				1				17
Average recorded investment, for the nine months ended September 30, 2015			3,711				1,919				2,209				7,839
Interest income recognized			233				34				80				347
Interest income foregone			36				24				4				64
With an allowance recorded:
Recorded investment			1,050				—				—				1,050
Unpaid principal balance			1,049				—				—				1,049
Related allowance			40				—				—				40
Average recorded investment, for the three months ended September 30, 2015			1,052				—				—				1,052
Interest income recognized			8				—				—				8
Interest income foregone			1				—				—				1
Average recorded investment, for the nine months ended September 30, 2015			872				—				—				872
Interest income recognized			25				—				—				25
Interest income foregone			1				—				—				1
Total
Recorded investment			3,276				1,667				2,165				7,108
Unpaid principal balance			3,678				1,973				3,209				8,860
Related allowance			40				—				—				40
Average recorded investment, for the three months ended September 30, 2015			3,791				1,835				2,188				7,814
Interest income recognized			131				17				26				174
Interest income foregone			8				9				1				18
Average recorded investment, for the nine months ended September 30, 2015			4,583				1,919				2,209				8,711
Interest income recognized			258				34				80				372
Interest income foregone			37				24				4				65

 

 

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 September 30, 2016 (unaudited) are as follows:

 

(Dollars in thousands)		Residential Real Estate, HELOC, and Consumer				Non- residential Real Estate				Construction and Land				Total
Current		$	77,451			$	7,395			$	4,629			$	89,475
30 - 59 days past due			1,191				—				—				1,191
60 - 89 days past due			160				—				—				160
Greater than 90 day past due and still accruing			212				—				—				212
Greater than 90 days past due			567				108				36				711
Total past due			2,130				108				36				2,274
Total		$	79,581			$	7,503			$	4,665			$	91,749

 

 

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 September 30, 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		$	413			$	1,222			$	36			$	1,671
Other non-accrual loans			564				—				—				564
Total non-accrual loans			977				1,222				36				2,235
Accruing troubled debt restructured loans			1,494				184				1,792				3,470
Total		$	2,471			$	1,406			$	1,828			$	5,705

 

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 they yield a market rate may be removed from the TDR status after a period of one year.

 

 

The following includes loans classified as troubled debt restructurings during the three and nine months ended September 30, 2016 (unaudited).

 

(Dollars in thousands)		Number of Contracts				Pre- modification Outstanding Recorded Investment				Post- modification Outstanding Recorded Investment
Residential real estate and consumer			2			$	347			$	347
Non-residential real estate			—				—				—
Construction and land			—				—				—
Total			2			$	347			$	347

 

For the three months ended September 30, 2015 (unaudited), there were no loans classified as troubled debt restructurings.

 

The following includes loans classified as troubled debt restructurings during the nine months ended September 30, 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 nine months ended September 30, 2016 and 2015 (unaudited).

 

Loans serviced by the Bank for the benefit of others totaled $422,000 and $434,000 at September 30, 2016 (unaudited) and December 31, 2015, respectively.

 

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $5,000 as of September 30, 2016 (unaudited).

 

5.   OTHER REAL ESTATE OWNED

 

The balance in other real estate owned at September 30, 2016 (unaudited) and December 31, 2015 was zero.

 

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

 

		Nine Months Ended September 30, 2016				Year Ended 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:

 

		September 30,  2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Non-interest-bearing deposits		$	1,446			$	1,758
NOW and Money market			21,445				20,591
Savings			14,194				14,721
Certificates of deposit			56,523				55,622
Total deposits		$	93,608			$	92,692

 

The aggregate amount of time deposits in denominations of $250,000 or more as of September 30, 2016 (unaudited) and December 31, 2015 was $2,214,000 and $1,575,000, respectively. Deposit amounts in excess of $250,000 generally are not insured by the Federal Deposit Insurance Corporation.

 

At September 30, 2016 (unaudited), the schedule maturities of certificates of deposit are as follows:

 

(Dollars in thousands)
2016		$	6,834
2017			19,867
2018			10,075
2019			7,077
2020			6,419
2021			6,251
Total		$	56,523

 

Executive officers’ and directors’ deposits were $498,000 and $609,000 at September 30, 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:

 

		September 30, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Deferred tax assets:
Deferred loan fees and costs, net		$	14			$	5
Allowance for credit losses			481				616
Deferred compensation			65				97
Allowance for ground rents			60				54
Allowance for delinquent mortgage interest			155				149
Contribution carryforward			2				2
Net operating loss carryforward			1,648				1,442
Accrued severance			138				—
Unrealized loss on available-for-sale securities			—				7
Total deferred tax assets			2,563				2,372
Valuation allowance			(1,648	)			(1,442	)
Deferred tax assets after valuation allowance			915				930
Deferred tax liabilities:
Depreciation			129				128
ESOP			20				9
Unrealized gain on available-for-sale securities			20				—
Total deferred tax liabilities			169				137
Net deferred tax assets		$	746			$	793

 

The provision for income taxes is comprised of the following:

 

		Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
(Dollars in thousands)		(unaudited)				(unaudited)
Tax expense (benefit):
Current federal and state		$	(10	)		$	(5	)
Deferred tax			19				267
Total		$	9			$	262

 

 

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.

 

At September 30, 2016, the Bank had approximately $3,300,000 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 and nine months ended September 30, 2016 (unaudited) and December 31, 2015 is as follows:

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2016				2015				2016				2015
(Dollars in thousands)			(unaudited)								(unaudited)
Balance at beginning of period		$	(1,598	)		$	(1,079	)		$	(1,442	)		$	(843	)
Expiration of capital loss carryforwards			—				—				—				—
Increase in valuation allowance			(50	)			(215	)			(206	)			(451	)
Balance as of September 30		$	(1,648	)		$	(1,294	)		$	(1,648	)		$	(1,294	)

 

(Dollars in thousands)		For the Year Ended December 31, 2015
Balance of January 1, 2015		$	(843	)
Expiration of capital loss carryforwards			2
Increase in valuation allowance			(601	)
Balance of December 31, 2015		$	(1,442	)

 

As of December 31, 2015 and June 30, 2016, the Bank had remained in a cumulative loss position for four consecutive years and consequently management reevaluated the need for a valuation allowance of the deferred tax asset balance.  Management’s evaluation included: 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 $746,000: 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. The Bank hired a new CEO/President effective September 30, 2016, who has a strong background in Commercial lending/management. In addition, we are actively searching for additional CRE professionals to add to our staff in order to strengthen our CRE management processes and increase our loan production. In the fourth quarter of 2016 one of our long term high rate FHLB advances will be maturing and paid off. 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 September 30, 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.   STOCK BASED COMPENSATION

 

On May 24, 2016, the stockholders of MB Bancorp, Inc. (the “Company”) approved the MB Bancorp, Inc. 2016 Equity Incentive Plan (the “Plan”). The 2016 Equity Incentive Plan allows for up to 84,640 shares to be issued to employees, officers and directors of the Company in the form of restricted stock, and up to 211,600 shares to be issued to employees, officers and directors of the Company in the form of stock options. At September 30, 2016, there were no stock options granted under the 2016 Equity Incentive Plan.

 

On September 30, 2016 the company awarded 2,500 shares of time vested restricted stock to the new President and Chief Executive Officer. The shares vest in two equal annual installments with the first one half vesting on September 30, 2017, the first anniversary of the date of the award. The Company recorded no restricted stock awards expense during the three months ended September 30, 2016. As of September 30, 2016, there was $33,500 of unrecognized compensation cost related to non-vested shares granted under the 2016 equity incentive plan. The cost is expected to be recognized over the vesting period of 2 years.

 

9.   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 September 30, 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 September 30, 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 September 30, 2016:
Total risk-based capital (to risk-weighted assets)		$	25,542				37.84	%		$	5,822				≥8.625	%
Tier I capital (to risk-weighted assets)			24,694				36.58				4,472				≥6.625
Tier I capital (to adjusted total assets)			24,694				18.13				5,449				≥4.000
Common equity tier 1 capital (to risk weighted assets)			24,694				36.58				3,459				>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.

 

		September 30, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Total Company equity capital		$	31,747			$	34,881
LESS: Parent Only Equity			7,021				9,899
LESS: Net unrealized (losses) gains on available-for-sale securities			32				(11	)
Tier 1 Capital		$	24,694			$	24,993
Tier 1 Capital		$	24,694			$	24,993
Allowance for loan and lease losses includible in Tier 2 capital			848				904
Total risk-based capital		$	25,542			$	25,897

 

 

10.   OTHER COMPREHENSIVE INCOME

 

The following table presents the components of other comprehensive gains and losses for the three and nine months ended September 30, 2016 and 2015 (unaudited).

 

(Dollars in thousands)		Before Tax				Tax Effect				Net of Tax
Three Months Ended September 30, 2016 (unaudited)
Net unrealized loss on securities available-for-sale		$	(8	)		$	3			$	(5	)
Other Comprehensive Loss		$	(8	)		$	3			$	(5	)
Three Months Ended September 30, 2015 (unaudited)
Net unrealized loss on securities available-for-sale		$	25			$	(10	)		$	15
Other Comprehensive Gain		$	25			$	(10	)		$	15

 

(Dollars in thousands)		Before Tax				Tax Effect				Net of Tax
Nine Months Ended September 30, 2016 (unaudited)
Net unrealized gain on securities available-for-sale		$	71			$	(28	)		$	43
Other Comprehensive Gain		$	71			$	(28	)		$	43
Nine Months Ended September 30, 2015 (unaudited)
Net unrealized loss on securities available-for-sale		$	12			$	(5	)		$	7
Other Comprehensive Gain		$	12			$	(5	)		$	7

 

The following table presents the changes in each components of accumulated other comprehensive income, net of tax, for the three and nine months ended September 30, 2016 and 2015 (unaudited).

 

(Dollars in thousands)		Securities Available-for- Sale				Accumulated Other Comprehensive Income
Three Months Ended September 30, 2016 (unaudited)
Balance at Beginning of Period		$	37			$	37
Other comprehensive loss			(5	)			(5	)
Balance at End of Period		$	32			$	32

 

(Dollars in thousands)		Securities Available-for- Sale				Accumulated Other Comprehensive Income
Nine Months Ended September 30, 2016 (unaudited)
Balance at Beginning of Year		$	(11	)		$	(11	)
Other comprehensive gain			43				43
Balance at End of Period		$	32			$	32

 

 

(Dollars in thousands)		Securities Available-for- Sale				Accumulated Other Comprehensive Income
Three Months Ended September 30, 2015 (unaudited)
Balance at Beginning of Period		$	7			$	7
Other comprehensive gain			15				15
Balance at End of Period		$	22			$	22

 

(Dollars in thousands)		Securities Available-for- Sale				Accumulated Other Comprehensive Income
Nine Months Ended September 30, 2015 (unaudited)
Balance at Beginning of Year		$	15			$	15
Other comprehensive gain			7				7
Balance at End of Period		$	22			$	22

 

The following table presents the amount reclassified out of accumulated other comprehensive income for the three months ended September 30, 2016 and 2015:

 

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
		September 30, 2016				September 30, 2015
(Dollars in thousands)		(unaudited)
Redemption of Investment Securities Available-for-Sale		$	(4	)		$	—			Realized gain on redemption of investment securities
			2				—			Provision for Income Tax
		$	(2	)		$	—			Net Loss
Total Reclassifications for the Period		$	(2	)		$	—			Net of Tax

 

The following table presents the amount reclassified out of accumulated other comprehensive income for the nine months ended September 30, 2016 and 2015:

 

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
		September 30, 2016				September 30, 2015
(Dollars in thousands)		(unaudited)
Redemption of Investment Securities Available-for-Sale		$	(31	)		$	—			Realized gain on redemption of investment securities
			11				—			Provision for Income Tax
		$	(20	)		$	—			Net Loss
Total Reclassifications for the Period		$	(20	)		$	—			Net of Tax

 

 

11. 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, restricted stock, 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 and nine months ended September 30, 2016 and 2015 are as follows:  

 

		Three Months Ended September 30, 2016 (unaudited)
(Dollars in thousands, except per share amount)		Income (Loss) (Numerator)				Shares (Denominator)				Per Share Amount
Basic EPS
Net loss available to shareholders		$	(346	)			1,753,942			$	(0.20	)
Diluted EPS
Effect of dilutive shares			—				—				—
Net loss available to shareholders		$	(346	)			1,753,942			$	(0.20	)

 

		Nine Months Ended September 30, 2016 (unaudited)
(Dollars in thousands, except per share amount)		Income (Loss) (Numerator)				Shares (Denominator)				Per Share Amount
Basic EPS
Net loss available to shareholders		$	(517	)			1,835,247			$	(0.28	)
Diluted EPS
Effect of dilutive shares			—				—				—
Net loss available to shareholders		$	(517	)			1,835,247			$	(0.28	)

 

 

		Three Months Ended September 30, 2015 (unaudited)
(Dollars in thousands, except per share amount)		Income (Loss) (Numerator)				Shares (Denominator)				Per Share Amount
Basic EPS
Net loss available to shareholders		$	(305	)			1,954,240			$	(0.16	)
Diluted EPS
Effect of dilutive shares			-				-				-
Net loss available to shareholders		$	(305	)			1,954,240			$	(0.16	)

 

		Nine Months Ended September 30, 2015 (unaudited)
(Dollars in thousands, except per share amount)		Income (Loss) (Numerator)				Shares (Denominator)				Per Share Amount
Basic EPS
Net loss available to shareholders		$	(740	)			1,951,437			$	(0.38	)
Diluted EPS
Effect of dilutive shares			-				-				-
Net loss available to shareholders		$	(740	)			1,951,437			$	(0.38	)

 

There were no anti-dilutive shares excluded from the three and nine months ended September 30, 2016 and 2015 diluted earnings per share calculations.

 

 

12.   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 September 30, 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 3. 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 September 30, 2016 (unaudited) Using:
Description (Dollars in thousands)		Fair Value September 30, 2016				Quoted Prices in Active Markets for Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Changes in Fair Values Included in Period Earnings
Investments (available-for-sale):
FFCB Bonds		$	—			$	—			$	—			$	—			$	—
Mortgage-backed securities:
FHLMC Certificates			640				—				640				—				—
FNMA Certificates			96				—				96				—				—
GNMA  Certificates			702				—				702				—				—
Total assets measured at fair value on a recurring basis		$	1,438			$	—			$	1,438			$	—			$	—

 

		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)				Total Changes in Fair Values Included in Period Earnings
Investments (available-for-sale):
FHLMC Bonds		$	1,964			$	—			$	1,964			$	—			$	—
FFCB Bonds			4,980				—				4,980				—				—
Mortgage-backed securities:
FHLMC Certificates			703				—				703				—				—
FNMA Certificates			123				—				123				—				—
GNMA  Certificates			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 September 30, 2016 (unaudited) Using:
Description (Dollars in thousands)		Fair Value September 30, 2016				Quoted Prices in Active Markets for Identical Assets (Level 1)				Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Changes in Fair Values Included in Period Earnings
Impaired loans:
Residential		$	3,953			$	—			$	—			$	3,953			$	—
Commercial			1,406				—				—				1,406				—
Land			2,388				—				—				2,388				—
Construction			—				—				—				—				—
Other real estate owned			—				—				—				—				—
Total assets measured at fair value on a non-recurring basis		$	7,747			$	—			$	—			$	7,747			$	—

 

The significant unobservable inputs (Level 3) are determined by using either an updated appraisal determining the fair value of the collateral or 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%.

 

During the second quarter of 2016, management reevaluated its fair value leveling methodology and the inputs utilized in determining the valuation of impaired loans for the current and prior periods. Management concluded that due to the significant reliance on observable inputs, the fair values of its impaired loans should be classified as level 3 rather than level 2 as previously disclosed. Therefore impaired loans with a fair value of $6.4 million as of December 31, 2015, were reclassified from level 2 to level 3.

 

		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)				Total Changes in Fair Values Included in Period Earnings
Impaired loans:
Residential		$	3,143			$	—			$	—			$	3,143			$	—
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			$	—			$	—			$	6,413			$	(158	)

 

The significant unobservable inputs (Level 3) are determined by using either an updated appraisal determining the fair value of the collateral or 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 September 30, 2016 (unaudited) and December 31, 2015 are as follows:

 

		Carrying Value September 30,  2016				Fair Value September 30, 2016				Quoted Prices In Active  Markets For Identical Assets (Level 1)				Other Unobservable Inputs (Level 2)				Significant Observable Inputs (Level 3)
(Dollars in thousands)		(unaudited)				(unaudited)
ASSETS
Cash, interest bearing deposits and federal funds sold		$	3,119			$	3,119			$	3,119			$	—			$	—
Other interest bearing deposits in other banks			14,715				14,715				—				14,715				—
Investment securities			21,574				21,931				—				21,931				—
Federal Home Loan Bank stock			546				546				—				546				—
Loans, net			89,666				90,906				—				6,285				90,906
Bank owned life insurance			933				933				—				933				—
Accrued interest receivable			372				372				—				372				—
LIABILITIES
Deposits		$	93,608			$	93,535			$	—			$	—			$	93,535
FHLB advances			10,000				10,194				—				—				10,194
Accrued interest payable			49				49				—				49				—

 

(Dollars in thousands)		Carrying Value December 31, 2015				Fair Value December 31, 2015				Quoted Prices In Active  Markets For Identical Assets (Level 1)				Other Unobservable 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
Accrued interest payable			68				68				—				68				—

 

 

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of September 30, 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 and Accrued Interest Payable

 

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

 

Loans, Deposits and Federal Home Loan Bank Advances

 

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

 

Bank-Owned Life Insurance

 

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

 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

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

 

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

 

General

 

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

 

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

 

Madison Bank of Maryland is a community-oriented financial institution, dedicated to serving the financial service needs of customers within its market area, which consists of Baltimore and Harford counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located primarily in our market area. Our real estate loans consist primarily of residential mortgage loans, as well as non-residential real estate loans, construction and land loans and home equity lines of credit. We currently operate out of our corporate headquarters and main office in Forest Hill, Maryland and two full-service branch offices located in Aberdeen and Perry Hall, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer. At September 30, 2016, we had total assets of $136.2 million, total deposits of $93.6 million and total equity of $31.7 million.

 

 

Our executive offices are located at 1920 Rock Spring Road, Forest Hill, Maryland 21050. 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.

 

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 September 30, 2016, our assets totaled $136.2 million, a decrease of $4.0 million, or 2.8%, from total assets of $140.2 million at December 31, 2015. The decrease in assets for the nine months ended September 30, 2016 was due mainly to: a $7.2 million, or 39.6% decrease in other interest-bearing deposits in other banks, a $7.1 million, or 83.0% decrease in investment securities available for sale, and a $3.4 million, or 3.7% decrease in loans, net, partially offset by a $11.0 million, or 120.2%, increase in investment securities held to maturity and a $3.1 million, or 82.1% increase in cash and cash equivalents. 

 

Loans. At September 30, 2016, residential mortgage loans totaled $75.8 million, or 82.7% of the total loan portfolio compared to $78.7 million, or 82.4% of the total loan portfolio at December 31, 2015. Residential mortgage loans decreased by $2.9 million, or 3.66%, during the nine months ended September 30, 2016 primarily due to weak loan demand in our market area.

 

Non-residential real estate loans totaled $7.5 million, or 8.2% of total loans at September 30, 2016, compared to $8.3 million, or 8.7% of total loans, at December 31, 2015.

 

Construction and land loans totaled $4.7 million, and represented 5.1% of total loans, at September 30, 2016, compared to $4.8 million, or 5% of total loans, at December 31, 2015. At September 30, 2016, we had $1.5 million of construction loans, amounting to 31.2% of our construction and land loan portfolio, and $3.2 million of land loans, amounting to 68.8% of our construction and land loan portfolio.

 

Home equity lines of credit, all of which are secured by residential properties, totaled $3.7 million, or 4.0% of total loans, at September 30, 2016, compared to $3.7 million, or 3.9% of total loans, at 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 $20,000 at September, 2016, representing less than .02% of the loan portfolio.

 

Securities. At September 30, 2016, our securities held-to-maturity increased by $11.0 million, or 120.2%, from $9.1 million at December 31, 2015 to $20.1 million at September 30, 2016. The increase is due to the purchase of Federal Farm Credit Bureau bonds and Federal Home Loan Bank bonds. The bond growth was a reinvestment of repayments of securities, loan payoffs and loan amortizations. The Bank purchases securities until the demand for loan volume increases. Securities held-to-maturity at September 30, 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 September 30, 2016, our securities available-for-sale at fair value decreased by $7.1 million, or 83.0%, from $8.5 million at December 31, 2015 to $1.4 million at September 30, 2016. Securities available-for-sale at September 30, 2016 consisted of mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. Our securities portfolio is used to invest excess funds for increased yield and manage interest rate risk. At September 30, 2016 other interest-bearing deposits in other banks decreased by $7.2 million, or 39.6% from $18.3 million at December 31, 2015 to $11.1 million at September 30, 2016. At September 30, 2016, we also held a $546,000 investment in the common stock of the Federal Home Loan Bank of Atlanta.

 

Ground Rents. Ground rents, net amounted to $676,000 at September 30, 2016 compared to $695,000 at December 31, 2015.

 

Deposits. Total deposits increased by $900,000, or 1.0%, to $93.6 million at September 30, 2016 from $92.7 million at December 31, 2015. Balances in non-interest-bearing deposits decreased by $312,000, or 17.8%, from $1.8 million at December 31, 2015 to $1.4 million at September 30, 2016. Interest-bearing deposits increased by $1.2 million, or 1.4%, to $92.2 million at September 30, 2016 compared to $90.9 million at December 31, 2015.

 

Borrowings. Borrowings from the Federal Home Loan Bank of Atlanta decreased by $2.0 million, or 16.7%, to $10.0 million at September 30, 2016 from $12.0 million at December 31, 2015. We paid off a 5.07%, long term FHLB advance that matured in July 2016.

 

Equity. Equity decreased by $3.2 million, or 9.0%, to $31.7 million at September 30, 2016 from $34.9 million at December 31, 2015 primarily as the result of the $2.8 million repurchase of 211,600 shares of common stock during the second quarter of 2016 and net losses of $517,000 for the nine months ended September 30, 2016.

 

 

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

 

Overview. We had a net loss of $346,000 for the three months ended September 30, 2016, as compared to net loss of $305,000 for the three months ended September 30, 2015. The increased net loss for the three months ended September 30, 2016 was primarily due to a decrease in net interest income and an increase in non-interest expense, offset by a decrease in income tax expense.

 

Net Interest Income. Net interest income decreased by $100,000, or 11.0%, for the three months ended September 30, 2016 compared to the three months ended September 30, 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 $10.8 million or 43.3% decrease in the average balance of interest bearing deposits in other banks and a $5.5 million or 5.7% decrease in the average balance of loans receivable, net of unearned fees (due to loan payoffs and intense competition in our market area during the three months ended September 30, 2016), partially offset by a $4.6 million increase in the average balance of investment securities held-to-maturity.

 

Interest on loans receivable, net of unearned fees decreased by $157,000, or 14.7%, for the three months ended September 30, 2016 as compared to the comparable period in 2015, due to a $5.5 million decrease in the average balance and an 42 basis point decrease in the average yield from 4.41% at September 30, 2015 to 3.99% at September 30, 2016.

 

Interest on investment securities held-to-maturity increased by $71,000 for the three months ended September 30, 2016 as compared to the comparable period in 2015. There was a 98 basis point increase in the average yield from 3.19% for the three months ended September 30, 2015 to 4.17% for the three months ended September 30, 2016 and a $4.6 million increase in the average balance.

 

Interest on certificates of deposit increased by $13,000, or 7.9%, during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, due to a 12 basis point increase in the average cost of certificates of deposit.

 

Interest on Federal Home Loan Bank of Atlanta advances decreased by $19,000, or 14.8%, during the three months ended September 30, 2016, due to a $1.4 million, or 12.0%, decrease in the average balance of Federal Home Loan Bank of Atlanta advances. In July 2016, we began paying off the Federal Home Loan Bank of Atlanta advances with longer terms that carried high interest rates, which decreased the average cost of funds by 12 basis points.

 

At September 30, 2016, we had $10.0 million in advances from the Federal Home Loan Bank of Atlanta, which mature between October 2016 and September 2017 and carry interest rates ranging from 3.65% to 4.40% with a weighted average interest rate of 3.98%. Paying off such advances in full at September 30, 2016, we would have incurred prepayment penalties totaling approximately $194,000. 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.

 

 

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 September 30,
		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		$	14,104			$	34				.96	%		$	24,873			$	48				.78	%
Loans net of unearned fees			91,362				911				3.99				96,871				1,068				4.41
Investment securities available-for-sale – amortized cost			2,074				14				2.70				2,667				18				2.65
Investment securities held-to-maturity			13,921				145				4.17				9.321				74				3.19
Other interest-earning assets			582				7				4.81				688				9				4.90
Total interest-earning assets			122,043				1,111				3.64				134,420				1,217				3.62
Cash and due from banks			3,274												3,742
Allowance for credit losses			(1,227	)											(1,795	)
Other non-interest-earning assets			6,562												7,059
Total assets		$	130,652											$	143,426
Interest-bearing liabilities:
Certificates of deposit		$	56,999			$	177				1.24	%		$	58.390			$	164				1.12	%
NOW and money market			21,439				13				.24				21,141				12				.24
Savings			14,342				4				.11				15,030				5				.10
Federal Home Loan Bank advances			10,565				109				4.13				12,000				128				4.25
Total interest-bearing liabilities			103,345				303				1.17				106,561				309				1.15
Non-interest-bearing demand deposits			1,478												849
Other non-interest-bearing liabilities			444												580
Total liabilities			105,267												107,990
Total equity			25,385												35,436
Total liabilities and equity		$	130,652											$	143,426
Net interest income						$	808											$	908
Interest rate spread											2.47	%											2.46	%
Net interest margin											2.65	%											2.70	%
Ratio of average interest-earning assets to average interest-bearing liabilities											118.09	%											126.14	%

 

 

Provision for Loan Losses. We had a reversal for loan losses of $6,000 for the three months ended September 30, 2016, compared to a reversal for loan losses of $5,000 for the three months ended September 30, 2015. The 2016 and 2015 reversals were due to the repayment of troubled debt restructured loans in compliance with their modified terms. At September 30, 2016, the allowance for loan losses was $1.2 million, or 1.33% 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 $2.2 million at September 30, 2016 compared to $1.9 million at December 31, 2015. As a percentage of non-performing loans and accruing troubled debt restructurings, the allowance for loan losses was 21.37% at September 30, 2016 compared to 28.09% at December 31, 2015. There were net loan charge offs of $2,000 during the three months ended September 30, 2016, compared to net loan charge-offs of $98,000 during the three months ended September 30, 2015.

 

Non-interest Income. Total non-interest income decreased by $19,000, or 31.7%, from $60,000 for the three months ended September 30, 2015 to $41,000 for the three months ended September 30, 2016. The decrease in total non-interest income was due to a $10,000 decrease in fees and charges on loans and an $8,000 decrease in gain on sale of real estate held for sale.

 

Non-interest Expenses. Total non-interest expenses increased by $221,000, or 19.7%. We had non-interest expenses of $1.3 million for the three months ended September 30, 2016 and $1.1 million for the three months ended September 30, 2015. The increase primarily was attributable to a $289,000 increase in salaries and employee benefits (due to the severance agreement for the prior president), a $28,000 increase in legal and professional fees and a $13,000 increase in data processing and other outside services, partially offset by a $96,000 decrease in provision for loss on other real estate owned.

 

Income Tax Expense. We had an income tax benefit of $141,000 during the three months ended September 30, 2016 and an income tax expense of $157,000 during the three months ended September 30, 2015. The change in various temporary differences had the effect of reducing our NOL, which then caused the valuation allowance to be reduced, which caused a tax benefit to be recorded. For 2015, the deferred tax asset related to net operating losses increased for the three months ended September 30, 2015, 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.

 

 

Results of Operations for the Nine Months Ended September 30, 2016 and 2015

 

Overview. We had a net loss of $517,000 for the nine months ended September 30, 2016, as compared to net loss of $740,000 for the nine months ended September 30, 2015. The reduced net loss for the nine months ended September 30, 2016 was primarily due to the reversal of the unallocated loan loss reserve established September 2014, and a decrease in income tax expense, offset by a decrease in net interest income and an increase in non-interest expenses.

 

Net Interest Income. Net interest income decreased by $230,000, or 8.5%, for the nine months ended September 30, 2016 compared to the nine months ended September 30, 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 $8.9 million or 35.9% decrease in the average balance of interest bearing deposits in other banks and a $6.9 million or 7.0% decrease in the average balance of loans receivable, net of unearned fees (due to weak loan demand in our market area during the nine months ended September 30, 2016), partially offset by a $2.6 million increase in the average balance of investment securities available-for-sale and a $7.4 million increase in the average balance of investment securities held-to-maturity.

 

Interest on loans receivable, net of unearned fees decreased by $378,000, or 11.9%, for the nine months ended September 30, 2016 as compared to the comparable period in 2015, due to a $6.9 million decrease in the average balance and an 23 basis point decrease in the average yield from 4.24% at September 30, 2015 to 4.01% at September 30, 2016. The decrease in average yield is due to higher yielding loan payoffs being replaced by lower yielding originations.

 

Interest on investment securities available-for-sale increased by $56,000 for the nine months ended September 30, 2016 as compared to the comparable period in 2015. There was a $2.6 million increase in the average balance of investment securities available-for-sale.

 

Interest on investment securities held-to-maturity increased by $146,000 for the nine months ended September 30, 2016 as compared to the comparable period in 2015. There was a $7.4 million increase in the average balance of investment securities held-to-maturity.

 

Interest on certificates of deposit increased by $32,000, or 6.4%, during the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015, due to a 12 basis point increase in the average cost of certificates of deposit.

 

Interest on Federal Home Loan Bank of Atlanta advances decreased by $21,000, or 5.5%, during the nine months ended September 30, 2016, due to a $2.1 million, or 15.3%, decrease in the average balance of Federal Home Loan Bank of Atlanta advances, which was partially offset by a 44 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 average cost of funds.

 

 

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.

 

		Nine Months Ended September 30,
		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		$	15,965			$	107				.89	%		$	24,888			$	136				.73	%
Loans net of unearned fees			92,918				2,797				4.01				99,860				3,175				4.24
Investment securities available-for-sale – amortized cost			4,130				88				2.85				1,565				32				2.73
Investment securities held-to-maturity			18,260				404				2.95				10,902				258				3.16
Other interest-earning assets			647				23				4.74				773				36				6.14
Total interest-earning assets			131,920				3,419				3.46				137,988				3,637				3.51
Cash and due from banks			2,989												3,358
Allowance for credit losses			(1,362	)											(1,752	)
Other non-interest-earning assets			6,551												7,280
Total assets		$	140,098											$	146,874
Interest-bearing liabilities:
Certificates of deposit		$	57,803			$	529				1.22	%		$	60,151			$	497				1.10	%
NOW and money market			21,039				38				.24				21,650				36				.22
Savings			14,451				11				.10				15,002				12				.10
Federal Home Loan Bank advances			11,624				361				4.15				13,722				382				3.71
Total interest-bearing liabilities			104,917				939				1.19				110,525				927				1.12
Non-interest-bearing demand deposits			1,480												875
Other non-interest-bearing liabilities			485												558
Total liabilities			106,882												111,958
Total equity			33,216												34,916
Total liabilities and equity		$	140,098											$	146,874
Net interest income						$	2,480											$	2,710
Interest rate spread											2.27	%											2.40	%
Net interest margin											2.51	%											2.62	%
Ratio of average interest-earning assets to average interest-bearing liabilities											125.74	%											124.85	%

 

 

Provision for Loan Losses. We had a reversal for loan losses of $257,000 for the nine months ended September 30, 2016, compared to a reversal for loan losses of $4,000 for the nine months ended September 30, 2015. The reduction in provision for loan losses was due primarily to the reversal of the unallocated reserve of $250,000. The unallocated reserve was established in September 2014 for properties in the process of foreclosure to cover potential interior damage that may not have been reflected in the exterior only appraisals. Since the Bank sold all other real estate owned (REO) properties, the Bank reduced this unallocated reserve that was no longer needed. The 2015 provision was principally the result of loan charge offs, REO payoffs and writedowns and new troubled debt modifications. At September 30, 2016, the allowance for loan losses was $1.2 million, or 1.33% 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 $2.2 million at September 30, 2016 compared to $1.9 million at December 31, 2015. As a percentage of non-performing loans and accruing troubled debt restructurings, the allowance for loan losses was 21.37% at September 30, 2016 compared to 28.09% at December 31, 2015.There were net loan charge offs of $85,000 during the nine months ended September 30, 2016, compared to net loan charge-offs of $105,000 during the nine months ended September 30, 2015.

 

Non-interest Income. Total non-interest income increased by $4,000, or 2.7%, from $148,000 for the nine months ended September 30, 2015 to $152,000 for the nine months ended September 30, 2016. The increase in total non-interest income was due to a $31,000 gain on calls of securities.

 

Non-interest Expenses. Total non-interest expenses increased by $57,000, or 1.7%. We had non-interest expenses of $3.4 million for the nine months ended September 30, 2016 and $3.3 million for the nine months ended September 30, 2015. The increase primarily was attributable to a $229,000 increase in salaries and employee benefits (due to the severance agreement for the prior president) and a $41,000 increase in data processing and other outside services, offset by a $147,000 decrease in provision for loss on other real estate owned, a $30,000 decrease in advertising and marketing related expenses, and a $16,000 decrease in legal and professional fees.

 

Income Tax Expense. We had an income tax expense of $9,000 and $262,000 during the nine months ended September 30, 2016 and 2015, respectively. The change in various temporary differences had the effect of reducing our NOL, which then caused the valuation allowance to be reduced, which caused a tax benefit to be recorded. For 2015, the deferred tax asset related to net operating losses increased for the nine months ended September 30, 2015, 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.

 

		September 30, 2016				December 31, 2015
(Dollars in thousands)		(unaudited)
Non-accrual loans:
Residential, home equity lines of credit and consumer		$	977			$	724
Non-residential			1,222				1,097
Construction and land			36				39
Total			2,235				1,860
Accruing loans past due 90 days or more:
Residential, home equity lines of credit and consumer			212				—
Total			212				—
Total of non-performing loans and accruing loans 90 days or more past due			2,447				1,860
Assets acquired through foreclosure			—				—
Ground rents			152				136
Total non-performing assets			2,599				1,996
Troubled debt restructurings accruing			3,470				3,697
Troubled debt restructurings accruing and total non-performing assets		$	6,069				5,693
Total of non-performing loans and accruing loans past due 90 days or more to total loans			2.67	%			1.95	%
Total non-performing loans to total assets			1.64				1.33
Total non-performing assets and accruing loans past due 90 days or more to total assets			1.91				1.42
Total non-performing loans and accruing troubled  debt restructurings to total assets			4.19				3.96
Total non-performing assets and accruing loans past due 90 days or more and accruing troubled  debt restructurings to total assets			4.45				4.06

 

 

At September 30, 2016 non-accrual loans consisted of 21 residential mortgage loans totaling $977,000, three non-residential loans totaling $1.2 million, one construction and land loan totaling $36,000. The increase in non-performing loans at September 30, 2016 as compared to December 31, 2015 is primarily the result of five new non-performing loans totaling $416,000. We had two loans 90 days or more but still accruing at September 30, 2016 and no loans 90 days or more but still accruing at December 31, 2015.

 

At September 30, 2016, our largest non-performing loan relationships consisted of a $933,000 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 September 30, 2016 as the borrower had not made six consecutive monthly payments under the restructured terms. We also had a $23,000 loan secured by a third mortgage on this church. The loan secured by the third mortgage was accruing at September 30, 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 September 30, 2016 and December 31, 2015, we had $3.5 million and $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 September 30, 2016, our largest accruing troubled debt restructured loan was a $1.7 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 September 30, 2016. At September 30, 2016, the borrower had a second loan with an outstanding balance of $52,000 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. Both loans will mature November 1, 2016.

 

Interest income that would have been recorded for the nine months ended September 30, 2016 and 2015 had non-accrual loans been current according to their original terms, amounted to approximately $41,000 and $65,000, respectively. Interest income of $272,000 and $372,000 related to non-accrual loans was included in interest income for the nine months ended September 30, 2016 and 2015, respectively.

 

At September 30, 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.

 

		Nine Months Ended September 30,
		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			(4	)			(17	)
Non-residential			—				(247	)
Construction and land loans			(81	)			(25	)
Total charge-offs			(85	)			(289	)
Recoveries:
Residential, home equity lines of credit and consumer			—				14
Non-residential			—				—
Construction and land loans			—				170
Total recoveries			—				184
Net charge-offs			(85	)			(105	)
(Reversal) provision for loan losses			(257	)			(4	)
Allowance at end of period		$	1,219			$	1,622
Allowance for loan losses to non-performing loans and accruing troubled debt restructuring at end of period			21.37	%			26.32	%
Allowance for loan losses to total loans at end of period.			1.33	%			1.68	%
Net charge-offs to average loans outstanding during the period			.09	%			.10	%

 

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 September 30, 2016, cash and cash equivalents totaled $6.8 million. Securities classified as available-for-sale amounting to $1.4 million at September 30, 2016, provide an additional source of liquidity. In addition, at September 30, 2016, we had the ability to borrow a total of approximately $33.9 million from the Federal Home Loan Bank of Atlanta. At September 30, 2016, we had $10 million in Federal Home Loan Bank advances outstanding. In addition, we maintain a $2.5 million line of credit with another bank and access to the Federal Reserve Bank Discount Window. No amounts were outstanding under such lines of credit at September 30, 2016.

 

 

At September 30, 2016, we had $746,000 in commitments to extend credit outstanding. Certificates of deposit due by December 31, 2016 totaled $6.8 million, or 12.1% 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 September 30, 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. Going forward, we may use capital management tools such as cash dividends and common share repurchases. During the six months ended June 30, 2016, we repurchased 211,600 shares of our common stock at a total cost of $2.8 million.

 

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 nine months ended September 30, 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 September 30, 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 September 30, 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 September 30, 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)
	10.1	Two-Year Change in Control Agreement dated September 30, 2016 by and between Madison Bank of Maryland, Philip P.  Phillips and MB Bancorp, Inc.
	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 September 30, 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: November 14, 2016	By:	/s/ Philip P. Phillips
		Philip P. Phillips
		President and Chief Executive Officer
		(principal executive officer)
Dated: November 14, 2016	By:	/s/ Robin L. Taylor
		Robin L. Taylor
		Vice President and Chief Financial Officer
		(principal financial and accounting officer)