MB Bancorp Inc - FORM 10-Q

Attached files

file	filename
EX-32.0 - EXHIBIT 32.0 - MB Bancorp Inc	t1702259_ex32.htm
EX-31.2 - EXHIBIT 31.2 - MB Bancorp Inc	t1702259_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - MB Bancorp Inc	t1702259_ex31-1.htm

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 June 30, 2017

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

For the transition period from _________________________________ to _________________________________

Commission file number: 000-55341

MB BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

	(410) 420-9600
	(Registrant’s telephone number, including area code)

	Not Applicable
	(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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)
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of August 8, 2017, there were 1,890,200 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 June 30, 2017 (unaudited) and December 31, 2016 (audited)	3

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017 and 2016 (unaudited)	6

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	48

Part II. Other Information

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	49

Signatures		51

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

	As of			As of
	June 30,			December 31,
	2017			2016
(Dollars in thousands)	(unaudited)

Assets:
Cash and due from banks	$	4,023		$	5,399
Interest bearing deposits in other banks		4,282			3,868
Total cash and cash equivalents		8,305			9,267

Other interest-bearing deposits in other banks		3,985			7,222
Investment securities available-for-sale – at fair value		15,872			3,698
Investment securities held to maturity – amortized cost		17,746			18,818

Loans, net of unearned fees		87,742			87,248
Less allowance for loan losses		(1,222	)		(1,218	)
Loans, net		86,520			86,030

Real estate ground rents		828			829
Less allowance for credit losses		(130	)		(141	)
Ground rents, net		698			688

Federal Home Loan Bank stock, at cost		626			418
Property and equipment – net		3,716			3,677
Deferred income taxes		—			—
Bank-owned life insurance		4,479			931
Accrued interest receivable and other assets		505			562
TOTAL ASSETS	$	142,452		$	131,311

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits	$	99,326		$	93,015
Federal Home Loan Bank advances		12,000			7,000
Deferred compensation liability		154			170
Accounts payable and other liabilities		619			802
Total liabilities		112,099			100,987

STOCKHOLDERS' EQUITY:
Common stock .01 par value; authorized 19,000,000 shares; issued and outstanding, 1,890,200 and 1,902,900 shares at June 30, 2017 and December 31, 2016		19			19
Additional paid-in capital		18,048			18,132
Retained earnings - substantially restricted		13,698			13,770
Accumulated other comprehensive income (loss)		(11	)		(139	)
Unearned ESOP shares		(1,401	)		(1,458	)
Total stockholders' equity		30,353			30,324

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	142,452		$	131,311

See accompanying notes to consolidated financial statements.

Table of Contents

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended June 30,						For the Six Months Ended June 30
	2017			2016			2017			2016
(Dollars in thousands, except per share amount)	(unaudited)						(unaudited)

INTEREST INCOME:
Interest and fees on loans	$	810		$	939		$	1,648		$	1,886
Interest on federal funds sold and other investments		22			35			46			73
Interest and dividends on investment securities		233			181			430			349
Total interest income		1,065			1,155			2,124			2,308

INTEREST EXPENSE:
Interest on deposits		200			197			393			384
Interest on short-term borrowings		21			-			35			-
Interest on long term borrowings		2			126			9			252
Total interest expense		223			323			437			636

NET INTEREST INCOME		842			832			1,687			1,672

PROVISION (REVERSAL) FOR LOAN LOSSES		–			4			–			(251	)

NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR LOAN LOSSES		842			828			1,687			1,923

NON-INTEREST INCOME:
Service charges on deposit accounts		4			2			7			5
Fees and charges on loans		6			9			16			17
Increase in cash surrender value of life insurance		38			12			62			24
Gain on sale of other real estate owned		–			3			–			5
Gain on investment securities		26			–			42			–
Ground rent fees		10			11			22			24
Other income		12			6			23			36
Total non-interest income		96			43			172			111

NON-INTEREST EXPENSE:
Salaries and employee benefits		494			565			1,036			1,158
Occupancy expenses		102			91			216			208
Furniture and equipment expenses		10			10			19			22
Legal and professional expenses		94			88			175			154
Data processing and other outside services		79			82			154			149
FDIC insurance premiums		9			23			3			45
Advertising and marketing related expenses		2			6			5			14
Provision (reversal) for loss on ground rents		(10	)		11			(12	)		9
Other expenses		135			145			271			296
Total non-interest expenses		915			1,021			1,867			2,055

INCOME (LOSS) BEFORE INCOME TAXES		23			(150	)		(8	)		(21	)

INCOME TAX EXPENSE		–			22			–			150

NET INCOME (LOSS)	$	23		$	(172	)	$	(8	)	$	(171	)

Basic earnings (loss) per share	$	0.02		$	(.10	)	$	–		$	(.09	)

Diluted earnings (loss) per share	$	0.02		$	(.10	)	$	–		$	(.09	)

See accompanying notes to consolidated financial statements.

Table of Contents

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
(Dollars in thousands)	(unaudited)						(unaudited)

NET INCOME (LOSS)	$	23		$	(172	)	$	(8	)	$	(171	)
OTHER COMPREHENSIVE (LOSS) INCOME ON AVAILABLE-FOR-SALE INVESTMENT SECURITIES:
Unrealized gains (losses) arising during the period		150			(6	)		128			106
Reclassification of gains included in net income		(26	)		(2	)		(42	)		(27	)
Unrealized gains (losses) arising during the period		124			(8	)		86			79
Income tax benefits on unrealized gains (losses) arising during the period		–			3			–			(31	)
		124			(5	)		86			48
COMPREHENSIVE INCOME (LOSS)	$	147		$	(177	)	$	78		$	(123	)

See accompanying notes to consolidated financial statements.

Table of Contents

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2017 (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, 2016	$	21		$	20,158		$	16,284		$	(1,571	)	$	(11	)	$	34,881
Net loss		—			—			(171	)		—			—			(171	)
Net unrealized gains on available- for sale securities, net of taxes of ($31)		—			—			—			—			48			48
Repurchase of common stock		(2	)		(2,014	)		(744	)		—			—			(2,760	)
Stock-based compensation		—			10			—			57			—			67
BALANCES AT JUNE 30, 2016	$	19		$	18,154		$	15,369		$	(1,514	)	$	37		$	32,065

BALANCES AT JANUARY 1, 2017	$	19		$	18,132		$	13,770		$	(1,458	)	$	(139	)	$	30,324
Net loss		—			—			(8	)		—			—			(8	)
Net unrealized gains on available- for sale securities, net of taxes of ($0)		—			—			—			—			128			128
Repurchase of common stock		—			(121	)		(64	)		—			—			(185	)
Stock-based compensation		—			37			—			57			—			94
BALANCES AT JUNE 30, 2017	$	19		$	18,048		$	13,698		$	(1,401	)	$	(11	)	$	30,353

See accompanying notes to consolidated financial statements.

Table of Contents

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For Six Months Ended
	June 30,			June 30,
	2017			2016
(Dollars in thousands)	(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(8	)	$	(171	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation expense		64			68
Increase in cash surrender value of life insurance		(48	)		(25	)
Net amortization/accretion of premiums and discounts		25			(5	)
Reversal for loan losses		–			(251	)
(Reversal) provision for ground rent losses		(12	)		9
Decrease in deferred income taxes		—			156
Non-cash compensation under stock-based benefit plan		94			67
Decrease in accrued interest and other assets		57			86
Gain on redemption of investment securities		(42	)		—
Decrease in deferred compensation liability		(16	)		(83	)
(Decrease) increase in accounts payable and other liabilities		(183	)		46
Net cash used in operating activities		(69	)		(103	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in other interest bearing deposits in other banks		3,237			7,759
Purchase of available-for-sale investments		(12,835	)		—
Proceeds from calls/repayments of available-for-sale investments		466			6,095
Proceeds from sale of available for sale securities		338			—
Purchase of held-to-maturity investments		(1,732	)		(25,095	)
Proceeds from maturity/repayments of held-to-maturity investments		2,806			14,176
Net (increase) decrease in loans		(490	)		2,009
Proceeds from sale of ground rents		2			8
Purchase of bank-owned life insurance		(3,500	)		-
Purchase of property, plant and equipment		(103	)		(17	)
(Purchases) redemption of Federal Home Loan Bank stock		(208	)		15
Net cash provided by (used in) investing activities		(12,019	)		4,950

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		6,311			1,857
Federal Home Loan Bank advances		34,000			1,000
Federal Home Loan Bank repayments		(29,000	)		(1,000	)
Repurchase of common stock		(185	)		(2,760	)
Net cash provided by (used in) financing activities		11,126			(903	)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(962	)		3,944
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		9,267			3,721
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	8,305		$	7,665

Supplemental cash flow information:
Interest paid	$	440		$	636
Income taxes paid	$	—		$	—
Noncash:
Transfer of other real estate owned to loans	$	—		$	—

See accompanying notes to consolidated financial statements.

Table of Contents

MB BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Unaudited Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying consolidated financial statements as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 contains all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2017.

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, 2016. The results of operations and cash flows for the three and six months ended June 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the year ended December 31, 2017.

Principles of Consolidation

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

Table of Contents

Use of Estimates

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

Loans

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

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

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

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The Company maintains an allowance for loan losses at an amount estimated to equal all loan losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect the borrowers’ ability to pay.

Table of Contents

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

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

Other Real Estate Owned

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

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income Taxes

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

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

Recognition of Deferred Tax Valuation Allowance

During 2014, management established a valuation allowance for the net operating loss component of the Bank’s deferred tax assets as the Bank had remained in a cumulative loss position for three consecutive years and consequently management reevaluated the need for a valuation allowance of the deferred tax asset balance. Management’s evaluation included: management’s ability to fully implement our strategic plan 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. As of December 31, 2016, 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 deferred tax assets and placed a full valuation allowance on all net deferred tax assets.

Table of Contents

Stock-Based Compensation

The Company has stock-based incentive arrangements to attract and retain key personnel in order to promote the success of the business. In May 2016, the 2016 Equity Incentive Plan (the “2016 plan”) was approved by shareholders, which authorizes the issuance of restricted stock and stock options to the Board of Directors and key employees.

Compensation cost for all stock-based awards is measured at fair value on date of grant and recognized over the vesting period on a straight-line basis. Such value is recognized as expense over the service period, net of estimated forfeitures. The estimation of stock awards that ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.

Supplemental Executive Retirement Plans (“SERP”)

The Bank has SERP’s with various former officers and directors of the Bank. The liabilities under the majority of the agreements are capped at the cash values of insurance policies that have been purchased to fund the policies. The liability for a director who has already attained retirement age has been calculated on the present value of payments under the plan. There is also life insurance to protect the Bank under this director’s plan.

2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contract with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2016. In July 2015, the FASB voted to approve deferring the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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

Table of Contents

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

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 March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)—Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for us on December 31, 2018 and is not expected to have a significant impact on our financial statements.

Table of Contents

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification”. ASU 2017-09 was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. Diversity in practice has arisen in part because some entities apply modification accounting under Topic 718 for modifications to terms and conditions that they consider substantive, but do not when they conclude that particular modifications are not substantive. Others apply modification accounting for any change to an award, except for changes that they consider purely administrative in nature. Still others apply modification accounting when a change to an award changes the fair value, the vesting, or the classification of the award. In practice, it appears that the evaluation of a change in fair value, vesting, or classification may be used to evaluate whether a change is substantive. ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for the annual period, and interim periods within the annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for: (a) public business entities for reporting periods for which financial statements have not yet been issued, and (b) all other entities for reporting periods for which financial statements have not yet been made available for issuance. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company is currently in the process of evaluating the impact of ASU 2017-09 on its consolidated financial statements, but does not expect the adoption of ASU 2017-09 to have material impact on it 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:

	June 30, 2017 (unaudited)
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Investments available-for-sale:
U.S. Government securities	$	1,000	$	–	$	(35	)	$	965
U.S. Municipal securities		1,517		2		(2	)		1,517
Mortgage-backed securities:		13,366		63		(39	)		13,390
Total investments available-for-sale	$	15,883	$	65	$	(76	)	$	15,872

	December 31, 2016
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Investments available-for-sale:
U.S. Government securities	$	1,000	$	–	$	(67	)	$	933
Mortgage-backed securities:		2,837		10		(82	)		2,765
Total investments available-for-sale	$	3,837	$	10	$	(149	)	$	3,698

Table of Contents

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

	June 30, 2017 (unaudited)
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Investments held-to-maturity:
U.S. Government securities:	$	12,500	$	3	$	(209	)	$	12,294
Mortgage backed securities		5,246		135		(61	)		5,320
Total investments held-to-maturity	$	17,746	$	138	$	(270	)	$	17,614

	December 31, 2016
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Investments held-to-maturity:
U.S. Government securities:	$	12,500	$	—	$	(612	)	$	11,888
Mortgage-backed securities:		6,318		183		(118	)		6,383
Total U.S. Government securities	$	18,818	$	183	$	(730	)	$	18,271

Below are schedules of both available-for-sale and held-to-maturity securities with unrealized losses as of June 30, 2017 (unaudited) and December 31, 2016 and the length of time the individual security has been in a continuous unrealized loss position. Unrealized losses are the result of interest rate levels differing from those existing at the time of purchase of the securities and as to mortgage-backed securities, estimated prepayment speeds. At June 30, 2017 (unaudited) and December 31, 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.

	June 30, 2017 (unaudited)
	Less than 12 Months					12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	4,721	$	(99	)	$	–	$	–	$	4,721	$	(99	)
U.S. Municipal securities		1,051		(2	)		–		–		1,051		(2	)
U.S. Government securities		12,255		(245	)		–		–		12,255		(245	)
Total temporarily impaired securities	$	18,027	$	(346	)	$	–	$	–	$	18,027	$	(346	)

	December 31, 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	$	5,369	$	(200	)	$	—	$	—	$	5,369	$	(200	)
U.S. Government securities		12,821		(679	)		—		—		12,821		(679	)
Total temporarily impaired securities	$	18,190	$	(879	)	$	—	$	—	$	18,190	$	(879	)

Table of Contents

The scheduled maturities of debt securities at June 30, 2017 (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		5,009		4,953
Due after ten years		10,008		9,823
Mortgage-backed securities		18,612		18,710
Total	$	33,629	$	33,486

4. LOANS RECEIVABLE

Loans receivable consist of the following:

	June 30, 2017			December 31, 2016
(Dollars in thousands)	(unaudited)
Secured by real estate:
Residential:
One-to four-family	$	70,564		$	71,266
Multi-family		584			2,038
Total		71,148			73,304
Non-residential		9,738			7,021
Construction and land loans		3,881			5,104
Home equity line of credit (“HELOC”)		3,988			3,473
Commercial, Consumer and other loans:
Commercial loans		328			—
Loans to depositors, secured by savings		14			18
		89,097			88,920
Add:
Net (discount) premium on purchased loans		7			10
Unamortized net deferred costs		23			16
Less:
Undisbursed portion of construction loans		(1,318	)		(1,650	)
Unearned net loan origination fees		(67	)		(48	)
Less allowance for loan losses		(1,222	)		(1,218	)
Loans receivable, net	$	86,520		$	86,030

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.

Table of Contents

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

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

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

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

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

•

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

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

Table of Contents

•

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

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

A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. Loans are generally placed on non-accrual status when they become 120 days delinquent. We may choose to consider loans from 90 to 119 days delinquent to be non-accrual, and generally do so except where a borrower has a history of periodically bringing a loan current after being 90 days or more delinquent. If the loan is less than 90 days delinquent, but information is brought to our attention that indicates the collection of interest is doubtful, the loan will immediately be considered non-accrual. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. If the loan is deemed collateral dependent, the impairment is measured on the net realizable value of the collateral. If loan repayment is not deemed collateral dependent, impairment is measured on the net present value of the expected discounted future cash flows.

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

Allowance for loan losses and recorded investment in loans for the three and six months ended June 30, 2017 (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, April 1, 2017	$	1,048		$	97		$	50		$	—	$	1,195
Charge-offs		(45	)		(62	)		—			—		(107	)
Recoveries		3			—			131			—		134
Provisions		29			99			(128	)		—		—
Ending balance, June 30, 2017	$	1,035		$	134		$	53		$	—	$	1,222

Beginning balance, January 1, 2017	$	973		$	158		$	87		$	—	$	1,218
Charge-offs		(49	)		(81	)		—			—		(130	)
Recoveries		3			—			131			—		134
Provisions		108			57			(165	)		—		—
Ending balance, June 30, 2017	$	1,035		$	134		$	53		$	—	$	1,222

Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	38		$	—		$	—		$	—	$	38
Ending balance: collectively evaluated for impairment	$	997		$	134		$	53		$	—	$	1,184
Loans:
Ending balance: individually evaluated for impairment. .	$	3,042		$	1,091		$	1,201		$	—	$	5,334
Ending balance: collectively evaluated for impairment	$	72,436		$	8,647		$	2,680		$	—	$	83,763

Table of Contents

Allowance for loan losses and recorded investment in loans for the three and six months ended June 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, April 1, 2016	$	964		$	196		$	146		$	—		$	1,306
Charge-offs		(2	)		—			(81	)		—			(83	)
Recoveries		—			—			—			—			—
Provisions		(1	)		(17	)		22			—			4
Ending balance, June 30, 2016	$	961		$	179		$	87		$	—		$	1,227

Beginning balance, January 1, 2016	$	960		$	194		$	157		$	250		$	1,561
Charge-offs		(2	)		—			(81	)		—			(83	)
Recoveries		—			—			—			—			—
Provisions		3			(15	)		11			(250	)		(251	)
Ending balance, June 30, 2016	$	961		$	179		$	87		$	—		$	1,227

Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	45		$	—		$	—		$	—		$	45
Ending balance: collectively evaluated for impairment	$	916		$	179		$	87		$	—		$	1,182
Loans:
Ending balance: individually evaluated for impairment. .	$	3,816		$	1,255		$	2,411		$	—		$	7,482
Ending balance: collectively evaluated for impairment	$	77,506		$	6,321		$	2,205		$	—		$	86,032

Table of Contents

Allowance for loan losses and recorded investment in loans for the year ended December 31, 2016 is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer			Non- residential Real Estate			Construction and Land			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	960		$	194		$	157		$	250		$	1,561
Charge-offs		(4	)		—			(81	)		—			(85	)
Recoveries		—			—			—			—			—
Provisions		17			(36	)		11			(250	)		(258	)
Ending balance	$	973		$	158		$	87		$	—		$	1,218
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	38		$	—		$	—			—		$	38
Ending balance: collectively evaluated for impairment	$	935		$	158		$	87		$	—		$	1,180
Loans:
Ending balance: individually evaluated for impairment . .	$	3,772		$	1,451		$	2,346			—		$	7,569
Ending balance: collectively evaluated for impairment	$	73,023		$	5,570		$	2,758			—		$	81,351

Credit risk profile by internally assigned classification as of June 30, 2017 (unaudited) is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, and Consumer		Non- residential Real Estate		Construction and Land		Total
Non-classified	$	69,886	$	8,647	$	2,681	$	81,214
Special mention		2,414		—		—		2,414
Substandard		3,178		1,091		1,200		5,469
Doubtful		—		—		—		—
Loss		—		—		—		—
Total	$	75,478	$	9,738	$	3,881	$	89,097

Credit risk profile by internally assigned classification as of December 31, 2016 is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer		Non-residential Real Estate		Construction and Land		Total
Non-classified	$	71,147	$	5,653	$	2,791	$	79,591
Special mention		3,005		159		87		3,251
Substandard		2,643		1,209		2,226		6,078
Doubtful		—		—		—		—
Loss		—		—		—		—
Total	$	76,795	$	7,021	$	5,104	$	88,920

Table of Contents

•

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 six months ended June 30, 2017 (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	$	2,679	$	1,091	$	1,201	$	4,971
Unpaid principal balance		3,667		1,670		2,240		7,577
Average recorded investment, for the three months ended June 30, 2017		2,724		756		816		4,296
Interest income recognized		37		8		13		58
Interest income foregone		9		—		12		21
Average recorded investment, for the six months ended June 30, 2017		2,578		1,054		1,278		4,910
Interest income recognized		103		23		25		151
Interest income foregone		16		—		30		46
With an allowance recorded:
Recorded investment		363		—		—		363
Unpaid principal balance		363		—		—		363
Related allowance		38		—		—		38
Average recorded investment, for the three months ended June 30, 2017		363		—		—		363
Interest income recognized		9		—		—		9
Interest income foregone		—		—		—		—
Average recorded investment, for the six months ended June 30, 2017		348		—		—		348
Interest income recognized		9		—		—		9
Interest income foregone		—		—		—		—
Total
Recorded investment		3,042		1,091		1,201		5,334
Unpaid principal balance		4,030		1,670		2,240		7,940
Related allowance		38		—		—		38
Average recorded investment, for the three months ended June 30, 2017		3,087		756		816		4,659
Interest income recognized		46		8		13		67
Interest income foregone		9		—		12		21
Average recorded investment, for the six months ended June 30, 2017		2,926		1,054		1,278		5,258
Interest income recognized		112		23		25		160
Interest income foregone		16		—		30		46

Table of Contents

Impaired loans as of the three and for the six months ended June 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	$	2,619	$	1,255	$	2,411	$	6,285
Unpaid principal balance		2,951		1,535		3,569		8,055
Average recorded investment, for the three months ended June 30, 2016		2,620		1,261		2,472		6,353
Interest income recognized		39		13		41		93
Interest income foregone		7		3		2		12
Average recorded investment, for the six months ended June 30, 2016		2,272		1,321		2,239		5,832
Interest income recognized		71		22		73		166
Interest income foregone		12		7		2		21
With an allowance recorded:
Recorded investment		1,197		—		—		1,197
Unpaid principal balance		1,197		—		—		1,197
Related allowance		45		—		—		45
Average recorded investment, for the three months ended June 30, 2016		1,200		—		—		1,200
Interest income recognized		15		—		—		15
Interest income foregone		1		—		—		1
Average recorded investment, for the six months ended June 30, 2016		1,191		—		—		1,191
Interest income recognized		23		—		—		23
Interest income foregone		1		—		—		1
Total
Recorded investment		3,816		1,255		2,411		7,482
Unpaid principal balance		4,148		1,535		3,569		9,252
Related allowance		45		—		—		45
Average recorded investment, for the three months ended June 30, 2016		3,820		1,261		2,472		7,553
Interest income recognized		54		13		41		108
Interest income foregone		8		3		2		13
Average recorded investment, for the six months ended June 30, 2016		3,463		1,321		2,239		7,023
Interest income recognized		94		22		73		189
Interest income foregone		13		7		2		22

Table of Contents

Impaired loans as of and for the year ended December 31, 2016 is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer		Non- residential Real Estate		Construction and Land		Total
With no related allowance recorded:
Recorded investment	$	2,633	$	1,451	$	2,346	$	6,430
Unpaid principal balance		2,971		1,665		3,512		8,148
Average recorded investment, for the twelve months ended December 31, 2016		2,522		1,353		2,309		6,184
Interest income recognized		166		45		122		333
Interest income foregone		11		18		7		36
With an allowance recorded:
Recorded investment		1,139		—		—		1,139
Unpaid principal balance		1,140		—		—		1,140
Related allowance		38		—		—		38
Average recorded investment, for the twelve months ended December 31, 2016		1,151		—		—		1,151
Interest income recognized		792		—		—		792
Interest income foregone		50		—		—		50
Total
Recorded investment		3,772		1,451		2,346		7,569
Unpaid principal balance		4,111		1,665		3,512		9,288
Related allowance		38		—		—		38
Average recorded investment, for the twelve months ended December 31, 2016		3,673		1,353		2,309		7,335
Interest income recognized		958		45		122		1,125
Interest income foregone		61		18		7		86

An aged analysis of past due loans as of June 30, 2017 (unaudited) are as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, and Consumer		Non- residential Real Estate		Construction and Land		Total
Current	$	74,607	$	9,693	$	3,160	$	87,460
30 - 59 days past due		77		—		—		77
60 - 89 days past due		4		—		—		4
Greater than 90 day past due and still accruing		—		—		—		—
Greater than 90 days past due		790		45		721		1,556
Total past due		871		45		721		1,637
Total	$	75,478	$	9,738	$	3,881	$	89,097

Table of Contents

An aged analysis of past due loans as of December 31, 2016 are as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer		Non- residential Real Estate		Construction and Land		Total
Current	$	74,773	$	6,912	$	3,312	$	84,997
30 - 59 days past due		908		—		1,792		2,700
60 - 89 days past due		433		—		—		433
Greater than 90 day past due and still accruing		—		—		—		—
Greater than 90 days past due		681		109		—		790
Total past due		2,022		109		1,792		3,923
Total	$	76,795	$	7,021	$	5,104	$	88,920

Non-performing loans as of June 30, 2017 (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	$	656	$	913	$	745	$	2,314
Other non-accrual loans		726		—		—		726
Total non-accrual loans		1,382		913		745		3,040
Accruing troubled debt restructured loans		995		336		—		1,331
Total	$	2,377	$	1,249	$	745	$	4,371

Non-performing loans as of December 31, 2016 are as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer		Non- residential Real Estate		Construction and Land		Total
Non-accruing troubled debt restructured loans	$	565	$	1,020	$	33	$	1,618
Other non-accrual loans		541		—		—		541
Total non-accrual loans		1,106		1,020		33		2,159
Accruing troubled debt restructured loans		1,172		348		1,760		3,280
Total	$	2,278	$	1,368	$	1,793	$	5,439

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.

There were no troubled debt restructurings during the six months ended June 30, 2017 and 2016 (unaudited).

Table of Contents

There were no troubled debt restructures that subsequently defaulted during the six months ended June 30, 2017 and 2016 (unaudited).

Loans serviced by the Bank for the benefit of others totaled $408,000 and $422,000 at June 30, 2017 (unaudited) and December 31, 2016, respectively.

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $207,000 as of June 30, 2017 (unaudited).

5. OTHER REAL ESTATE OWNED

The balance in other real estate owned at June 30, 2017 (unaudited) and December 31, 2016 was zero.

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

	June 30, 2017		December 31, 2016
(Dollars in thousands)	(unaudited)
Beginning balance	$	—	$	—
Additions		—		—
Transfers from Loans		—		—
Transfers to Loans		—		—
Sales		—		—
Provisions		—		—
Ending balance	$	—	$	—

6. DEPOSITS

Deposits are summarized as follows:

	June 30, 2017		December 31, 2016
(Dollars in thousands)	(unaudited)
Non-interest-bearing deposits	$	1,338	$	1,415
NOW and Money market		22,717		21,241
Savings		15,456		13,811
Certificates of deposit		59,815		56,548
Total deposits	$	99,326	$	93,015

The aggregate amount of time deposits in denominations of $250,000 or more as of June 30, 2017 (unaudited) and December 31, 2016 was $3,121,000 and $2,724,000, respectively. Deposit amounts in excess of $250,000 generally are not insured by the Federal Deposit Insurance Corporation.

Table of Contents

At June 30, 2017 (unaudited), the schedule maturities of certificates of deposit are as follows:

(Dollars in thousands)

2017	$	13,220
2018		18,398
2019		10,460
2020		6,934
2021		7,628
2022		3,175
Total	$	59,815

Executive officers’ and directors’ deposits were $243,000 and $237,000 at June 30, 2017 (unaudited) and December 31, 2016, respectively.

7. INCOME TAXES

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

	June 30, 2017			December 31, 2016
(Dollars in thousands)	(unaudited)
Deferred tax assets:
Deferred loan fees and costs, net	$	15		$	12
Allowance for credit losses		482			481
Deferred compensation		61			67
Severance payments		110			170
Restricted stock awards		6			2
Allowance for ground rents		51			56
Allowance for delinquent mortgage interest		147			141
Contribution carryforward		3			2
Net operating loss carryforward		1,908			1,831
Unrealized loss on available-for-sale securities		—			—
Total deferred tax assets		2,783			2,762
Valuation allowance		(2,618	)		(2,608	)
Deferred tax assets after valuation allowance		165			154
Deferred tax liabilities:
Depreciation		130			130
ESOP		35			24
Total deferred tax liabilities		165			154
Net deferred tax assets	$	—		$	—

Management evaluates deferred tax assets annually.

Table of Contents

The provision for income taxes is comprised of the following:

	June 30, 2017			June 30, 2016
(Dollars in thousands)	(unaudited)			(unaudited)
Tax expense (benefit):
Current federal and state	$	(11	)	$	(6	)
Deferred tax		11			156
Total	$	—		$	150

At June 30, 2017, the Bank had approximately $4,700,000 in federal and $5,000,000 in 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 six months ended June 30, 2017 (unaudited) and December 31, 2016 is as follows:

(Dollars in thousands)	Valuation Allowance
Balance of January 1, 2016	$	(1,442	)
Expiration of capital loss carryforwards		—
Increase in valuation allowance		(1,166	)
Balance of December 31, 2016	$	(2,608	)
Expiration of capital loss carryforwards		—
Increase in valuation allowance		(10	)
Balance of June 30, 2017	$	(2,618	)

As of December 31, 2016 and June 30, 2017, the Bank had remained in a cumulative loss position for three consecutive years and consequently management reevaluated the need for a valuation allowance of the deferred tax asset balance. Management’s evaluation included: management’s ability to fully implement our strategic plan, additional expenses 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 entire deferred tax asset.

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.

Table of Contents

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 June 30, 2017 and December 31, 2016 that the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 2016, 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 June 30, 2017 (unaudited) and December 31, 2016 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 June 30, 2017:
Total risk-based capital (to risk-weighted assets)	$	24,596		34.26	%	$	6,192		≥8.625	%
Tier I capital (to risk-weighted assets)		23,695		33.01			4,756		≥6.625
Tier I capital (to adjusted total assets)		23,695		17.29			6,338		≥4.625
Common equity tier 1 capital (to risk weighted assets)		23,695		33.01			3,679		>5.125

As of December 31, 2016:
Total risk-based capital (to risk-weighted assets)	$	24,359		37.47	%	$	5,606		≥8.625	%
Tier I capital (to risk-weighted assets)		23,541		36.22			4,306		≥6.625
Tier I capital (to adjusted total assets)		23,541		17.44			5,400		≥4.625
Common equity tier 1 capital (to risk weighted assets)		23,541		36.22			3,331		>5.125

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

	June 30, 2017			December 31, 2016
(Dollars in thousands)	(unaudited)
Total Company equity capital	$	30,353		$	30,324
LESS: Parent Only Equity		6,669			6,922
LESS: Net unrealized (losses) gains on available-for-sale securities		(11	)		(139	)
Tier 1 Capital	$	23,695		$	23,541
Tier 1 Capital	$	23,695		$	23,541
Allowance for loan and lease losses includible in Tier 2 capital		901			818
Total risk-based capital	$	24,596		$	24,359

Table of Contents

10. OTHER COMPREHENSIVE INCOME

The following table presents the components of other comprehensive gains and losses for the six months ended June 30, 2017 and 2016 (unaudited).

(Dollars in thousands)	Before Tax		Tax Effect			Net of Tax
Six Months Ended June 30, 2017 (unaudited)
Net unrealized gains on securities available-for-sale	$	86	$	-		$	86
Other Comprehensive Gain	$	86	$	-		$	86
Six Months Ended June 30, 2016 (unaudited)
Net unrealized gains on securities available-for-sale	$	79	$	(31	)	$	48
Other Comprehensive Gain	$	79	$	(31	)	$	48

The following table presents the changes in each components of accumulated other comprehensive income, net of tax, for the six months ended June 30, 2017 and 2016 (unaudited).

(Dollars in thousands)	Securities Available-for- Sale			Accumulated Other Comprehensive Income
Six Months Ended June 30, 2017 (unaudited)
Balance at Beginning of Year	$	(139	)	$	(139	)
Other comprehensive gain		128			128
Balance at End of Period	$	(11	)	$	(11	)

(Dollars in thousands)	Securities Available-for- Sale			Accumulated Other Comprehensive Income
Six Months Ended June 30, 2016 (unaudited)
Balance at Beginning of Year	$	(11	)	$	(11	)
Other comprehensive gain		48			48
Balance at End of Period	$	37		$	37

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

Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income						Affected Line Item in the Statement Where Net Income Is Presented
	June 30, 2017			June 30, 2016
(Dollars in thousands)	(unaudited)
Redemption of Investment Securities Available-for-Sale	$	(42	)	$	(27	)	Realized gain on redemption of investment securities

		-			9		Provision for Income Tax
	$	(42	)	$	(18	)	Net of Tax

Total Reclassifications for the Period	$	(42	)	$	(18	)	Net of Tax

Table of Contents

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, 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 six months ended June 30, 2017 and 2016 are as follows:

	Three Months Ended June 30, 2017 (unaudited)
(Dollars in thousands, except per share amount)	Income (Loss) (Numerator)		Shares (Denominator)		Per Share Amount

Basic EPS
Net loss available to shareholders	$	23		1,748,729	$	0.02

Diluted EPS
Effect of dilutive shares		-		-		-

Net loss available to shareholders	$	23		1,748,729	$	0.02

	Six Months Ended June 30, 2017 (unaudited)
(Dollars in thousands, except per share amount)	Income (Loss) (Numerator)			Shares (Denominator)		Per Share Amount

Basic EPS
Net loss available to shareholders	$	(8	)		1,751,116	$	(0.00	)

Diluted EPS
Effect of dilutive shares		—			—		—

Net loss available to shareholders	$	(8	)		1,751,116	$	(0.00	)

	Three Months Ended June 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	$	(172	)		1,792,806	$	(0.10	)

Diluted EPS
Effect of dilutive shares		-			-		-

Net loss available to shareholders	$	(172	)		1,792,806	$	(0.10	)

Table of Contents

	Six Months Ended June 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	$	(171	)		1,876,346	$	(0.09	)

Diluted EPS
Effect of dilutive shares		-			-		-

Net loss available to shareholders	$	(171	)		1,876,346	$	(0.09	)

There were no anti-dilutive shares excluded from the June 30, 2017 and 2016 diluted earnings per share calculation.

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.

Table of Contents

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 June 30, 2017 and December 31, 2016, substantially all of the totally impaired loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

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

	Fair Value Measurements at June 30, 2017 (unaudited) Using:
Description (Dollars in thousands)	Fair Value June 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Trading Gains and (Losses)		Total Changes in Fair Values Included in Period Earnings

Investments (available-for-sale) :
Obligations of U.S. Government Agencies	$	965	$	—	$	965	$	—	$	—	$	—
U.S. Municipal securities		1,517		—		1,517		—		—		—
Mortgage-backed securities		13,390		—		13,390		—		—		—
Total assets measured at fair value on a recurring basis	$	15,872	$	—	$	15,872	$	--	$	--	$	--

Table of Contents

	Fair Value Measurements at December 31, 2016 Using:
Description (Dollars in thousands)	Fair Value December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Trading Gains and (Losses)		Total Changes in Fair Values Included in Period Earnings

Investments (available-for-sale) :
Obligations of U.S. Government Agencies	$	933	$	—	$	933	$	—	$	—	$	—
Mortgage-backed securities		2,765		—		2,765		—		—		—
Total assets measured at fair value on a recurring basis	$	3,698	$	—	$	3,698	$	--	$	--	$	--

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 June 30, 2017 (unaudited) Using:
Description (Dollars in thousands)	Fair Value June 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Trading Gains and (Losses)		Total Changes in Fair Values Included in Period Earnings
Impaired loans:
Residential	$	3,004	$	—	$	2,641	$	363	$	—	$	—
Commercial		1,091		—		1,091		—		—		—
Land		1,201		—		1,201		—		—		—
Construction		—		—		—		—		—		—
Other real estate owned		—		—		—		—		—		—
Total assets measured at fair value on a non-recurring basis	$	5,304	$	—	$	4,933	$	363	$	—	$	—

The significant unobservable inputs (Level 3) are determined by using the net present value of the expected discounted future cash flows methodology. Loans were modified based on the expected cash flows with modified terms and rates ranging from 3.00% to 4.00% discounted at contractual rates ranging from 5.25% to 7.375%.

	Fair Value Measurements at December 31, 2016 Using:
Description (Dollars in thousands)	Fair Value December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Trading Gains and (Losses)		Total Changes in Fair Values Included in Period Earnings
Impaired loans:
Residential	$	3,734	$	—	$	2,633	$	1,101	$	—	$	—
Commercial		1,451		—		1,451		—		—		—
Land		2,346		—		2,346		—		—		—
Construction		—		—		—		—		—		—
Other real estate owned		—		—		—		—		—		—
Total assets measured at fair value on a non-recurring basis	$	7,531	$	—	$	6,430	$	1,101	$	—	$	—

Table of Contents

In accordance with the disclosure requirements of ASC Topic 825, the estimated fair values of financial instruments at June 30, 2017 (unaudited) and December 31, 2016 are as follows:

(Dollars in thousands)	Carrying Value June 30, 2017 (unaudited)		Fair Value June 30, 2017 (unaudited)		Quoted Prices In Active Markets For Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Observable Inputs (Level 3)
ASSETS
Cash, interest bearing deposits and federal funds sold	$	8,305	$	8,305	$	—	$	8,305	$	—
Other interest bearing deposits in other banks		3,985		3,985		—		3,985		—
Investment securities		33,618		33,486		—		33,486		—
Federal Home Loan Bank stock		626		626		—		626		—
Loans, net		86,520		87,348		—		4,933		82,415
Bank owned life insurance		4,479		4,479		—		4,479		—
Accrued interest receivable		372		372		—		372		—

LIABILITIES
Deposits	$	99,326	$	96,204	$	—	$	—	$	96,204
FHLB advances		12,000		12,000		—		—		12,000

(Dollars in thousands)	Carrying Value December 31, 2016		Fair Value December 31, 2016		Quoted Prices In Active Markets For Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Observable Inputs (Level 3)
ASSETS
Cash, interest bearing deposits and federal funds sold	$	5,399	$	5,399	$	—	$	5,399	$	—
Other interest bearing deposits in other banks		11,090		11,090		—		11,090		—
Investment securities		22,516		21,969		—		21,969		—
Federal Home Loan Bank stock		418		418		—		418		—
Loans, net		86,030		85,525		—		6,430		79,095
Bank owned life insurance		931		931		—		931		—
Accrued interest receivable		356		356		—		356		—

LIABILITIES
Deposits	$	93,015	$	90,912	$	—	$	—	$	90,912
FHLB advances		7,000		7,005		—		—		7,005

Table of Contents

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of June 30, 2017 (unaudited) and December 31, 2016:

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

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

Investment Securities

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

Federal Home Loan Bank Stock

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

Accrued Interest Receivable

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

Loans, Deposits and Federal Home Loan Bank Advances

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

Bank-Owned Life Insurance

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

Table of Contents

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 June 30, 2017, we had total assets of $142.5 million, total deposits of $99.3 million and total equity of $30.4 million.

Table of Contents

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

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

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

Table of Contents

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 June 30, 2017, our assets totaled $142.5 million, an increase of $11.1 million, or 8.5%, from total assets of $131.3 million at December 31, 2016. The increase in assets for the six months ended June 30, 2017 was due mainly to, a $12.2 million, or 329.2% increase in investment securities available for sale, a $3.5 million, or 381.1% increase in bank-owned life insurance and a $490,000 increase in loans, net, partially offset by a $3.2 million, or 44.8%, decrease in other interest-bearing deposits in other banks, a $1.1 million decrease in investment securities held to maturity and a $1.0 million decrease in cash and cash equivalents.

Loans. At June 30, 2017, residential mortgage loans totaled $71.1 million, or 79.9% of the total loan portfolio compared to $73.3 million, or 82.4% of the total loan portfolio at December 31, 2016. Residential mortgage loans decreased by $2.2 million, or 2.9%, during the six months ended June 30, 2017 primarily due to increased level of paid off loans. Residential loan originations during the six months ended June 30, 2017 was $6.3 million as compared to $3.5 million for the comparable period for the prior year.

Non-residential real estate loans totaled $9.7 million, or 10.9% of total loans at June 30, 2017, compared to $7.0 million, or 7.9% of total loans, at December 31, 2016. Non-residential mortgage loans increased by $2.7 million, or 38.7%, during the six months ended June 30, 2017 primarily due to increased loan originations.

Table of Contents

Construction and land loans totaled $3.9 million, and represented 4.4% of total loans, at June 30, 2017, compared to $5.1 million, or 5.7% of total loans, at December 31, 2016. At June 30, 2017, we had $1.9 million of construction loans, amounting to 47.7% of our construction and land loan portfolio, and $2.0 million of land loans, amounting to 52.3% of our construction and land loan portfolio.

Home equity lines of credit, all of which are secured by residential properties, totaled $4.0 million, or 4.5% of total loans, at June 30, 2017, compared to $3.5 million, or 3.9% of total loans, at December 31, 2016.

Our non-real estate loans consist of commercial loans, secured by equipment and consumer loans, which are loans to depositors, secured by savings. Such loans totaled $342,000 at June 30, 2017, representing less than 0.5% of the loan portfolio.

Securities. At June 30, 2017, our securities available-for-sale, recorded at fair value, increased by $12.2 million, or 329.2%, from $3.7 million at December 31, 2016 to $15.9 million at June 30, 2017. The increase is due to the purchase of $11.3 million in collateralized mortgage obligations issued by Freddie Mac and Fannie Mae and $1.5 million in taxable state municipal bonds offset slightly by the sale of securities as well as payments received during the quarter. Securities available-for-sale at June 30, 2017 consisted of U.S. Agency bonds, mortgage-backed securities, including collateralized mortgage obligations issued by U.S Government Agencies such as Freddie Mac, Fannie Mae and Ginnie Mae, and taxable state municipal bonds. At June 30, 2017, our securities held-to-maturity decreased by $1.1 million, or 5.7%, from $18.8 million at December 31, 2016 to $17.7 million at June 30, 2017. Securities held-to-maturity at March 31, 2017 consisted of U.S. Agency bonds and mortgage-backed securities issued by U.S Government Agencies such as 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 June 30, 2017, we also held a $626,000 investment in the common stock of the Federal Home Loan Bank of Atlanta. At June 30, 2017, we held no stock in Fannie Mae and Freddie Mac.

Ground Rents. Ground rents, net amounted to $698,000 at June 30, 2017 compared to $688,000 at December 31, 2016.

Deposits. Total deposits increased by $6.3 million, or 6.8%, to $99.3 million at June 30, 2017 from $93.0 million at December 31, 2016. Balances in non-interest-bearing deposits decreased by $77,000, or 5.4%, from $1.4 million at December 31, 2016. Interest-bearing deposits increased by $6.4 million, or 7.0%, to $98.0 million at June 30, 2017 compared to $91.6 million at December 31, 2016.

Borrowings. At June 30, 2017, we had $12.0 million in borrowings from the Federal Home Loan Bank of Atlanta compared to $7.0 million at December 31, 2016, a $5.0 million, or 71.4% increase in FHLB advances. During the six months ending June 30, 2017, we had the $7.0 million of advances outstanding as of December 31, 2016 mature and as of June 30, 2017 had the following advances: a $4.0 million advance maturing on December 14, 2018 with a 1.41% rate, a $4.0 million advance maturing on June 27, 2018 with a 1.32% rate and a $4.0 million daily rate credit advance with a 1.18% rate.

Equity. Equity increased by $29,000, or 0.1%, to $30.4 million at June 30, 2017 from $30.3 million at December 31, 2016 primarily due to the decrease in accumulated other comprehensive loss, offset slightly by the repurchase of common shares during the six months ended June 30, 2017.

Table of Contents

Results of Operations for the Three Months Ended June, 2017 and 2016

Overview. We had net income of $23,000 for the three months ended June 30, 2017, as compared to net loss of $172,000 for the three months ended June 30, 2016. The increase in net income for the three months ended June 30, 2017 was primarily due to a decrease in non-interest expense and an increase in net interest income.

Net Interest Income. Net interest income increased by $10,000, or 1.2%, for the three months ended June 30, 2017 compared to the three months ended June 30, 2016. The increase in net interest income was primarily attributable to an increase in net interest margin caused by the decline in the cost of interest-bearing liabilities, offset slightly by the decrease in average earning assets and the yield on average earning assets. The decrease in the average balance of interest-earning assets was due primarily to a $8.7 million or 9.3% decrease in the average balance of loans receivable, net of unearned fees (due to high volume of loan payoffs and very low loan originations) and a $7.9 million or 50.6% decrease in the average balance of interest bearing deposits in other banks, partially offset by a $13.1 million increase in the average balance of investment securities available-for-sale.

Interest on loans receivable, net of unearned fees, decreased by $129,000, or 13.7%, for the three months ended June 30, 2017 as compared to the comparable period in 2016, due to a $8.7 million decrease in the average balance and a 19 basis point decrease in the average yield from 4.02% at June 30, 2016 to 3.83% at June 30, 2017.

Interest on investment securities available-for-sale increased by $88,000 for the three months ended June 30, 2017 as compared to the comparable period in 2016. There was a one basis point decrease in the average yield on investment securities available-for-sale and a $13.1 million increase in the average balance of investment securities available-for-sale. Interest on investment securities held-to-maturity decreased by $35,000 for the three months ended June 30, 2017 as compared to the comparable period in 2016. There was a 37 basis point decrease in the average yield on investment securities held-to-maturity and a $2.4 million decrease in the average balance of investment securities held-to-maturity.

Interest on certificates of deposit decreased by $2,000, or 1.1%, during the three months ended June 30, 2017 as compared to the three months ended June 30, 2016, due to a four basis point decrease in the average cost of certificates of deposit.

Interest on Federal Home Loan Bank of Atlanta advances decreased by $103,000, or 81.7%, during the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. During the year ending December 31, 2016 we paid off most of our higher rate advances, and the remaining $1.0 million at 4.397% matured in February 2017.

Table of Contents

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 2017 and 2016, 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 June 30,
	2017 (unaudited)								2016 (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	$	7,741		$	22		1.14	%	$	15,683		$	35		.89	%
Loans receivable, net of unearned fees		84,702			810		3.83			93,363			939		4.02
Investment securities available-for-sale – amortized cost		15,713			106		2.70			2,652			18		2.71
Investment securities held-to-maturity		18,104			119		2.63			20,528			154		3.00
Other interest-earning assets		689			8		4.64			673			9		5.35
Total interest-earning assets		126,949			1,065		3.36			132,899			1,155		3.48
Cash and due from banks		5,020								2,769
Allowance for credit losses		(1,285	)							(1,304	)
Other non-interest-earning assets		9,325								6,528
Total assets	$	140,009							$	140,892

Interest-bearing liabilities:
Certificates of deposit	$	59,693		$	178		1.19	%	$	58,544		$	180		1.23	%
NOW and money market		23,033			18		.31			21,325			13		.24
Savings		14,536			4		.11			14,406			4		.11
Federal Home Loan Bank advances		10,846			23		.85			12,000			126		4.20
Total interest-bearing liabilities		108,108			223		.83			106,275			323		1.22
Non-interest-bearing demand deposits		1,341								1,390
Other non-interest-bearing liabilities		290								503
Total liabilities		109,739								108,168
Total equity		30,270								32,724
Total liabilities and equity	$	140,009							$	140,892
Net interest income				$	842							$	832
Interest rate spread							2.53	%							2.26	%
Net interest margin							2.65	%							2.50	%
Ratio of average interest-earning assets to average interest-bearing liabilities							117.43	%							125.05	%

Table of Contents

Provision for Loan Losses. We did not have any provision for loan losses for the three months ended June 30, 2017, compared to a provision for loan losses of $4,000 for the three months ended June 30, 2016. At June 30, 2017, the allowance for loan losses was $1.2 million, or 1.41% of the total loan portfolio, compared to $1.2 million, or 1.39% of the total loan portfolio, at December 31, 2016.

There were net loan charge offs of $19,000 during the three months ended June 30, 2017, compared to net loan charge-off recovery of $83,000 during the three months ended June 30, 2016.

Non-interest Income. Total non-interest income was $96,000 and $43,000 for the three months ended June 30, 2017 and 2016. The increase in total non-interest income was due to a $26,000 gain on sale of securities and increased income from bank-owned life insurance.

Non-interest Expenses. Total non-interest expenses decreased by $106,000, or 10.4%. We had non-interest expenses of $915,000 for the three months ended June 30, 2017 and $1.0 million for the three months ended June 30, 2016. The decrease primarily was attributable to a $71,000 decrease in salaries and employee benefits, a $21,000 decrease in provision (reversal) for loss on ground rents and a $14,000 decrease in FDIC premiums, partially offset by an $11,000 increase in occupancy expenses.

Income Tax Expense. We recorded no income tax expense during the three months ended June 30, 2017 as compared to $22,000 during the three months ended June 30, 2016.

Results of Operations for the Six Months Ended June 30, 2017 and 2016

Overview. We had a net loss of $8,000 for the six months ended June 30, 2017, as compared to a net loss of $171,000 for the six months ended June 30, 2016. The net loss for the six months ended June 30, 2017 was primarily due to our non-interest expenses exceeding our net interest income and non-interest income, although we continue to focus on reducing our non-interest expenses and increase our net interest income.

Net Interest Income. Net interest income increased by $15,000, or 0.9%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The increase in net interest income was primarily attributable to a decrease in the cost of our interest-bearing liabilities offset by a decrease in average interest-earning assets. The decrease in the average balance of interest-earning assets was due primarily to a $8.4 million or 9.0% decrease in the average balance of loans receivable, net of unearned fees due to a lack of qualified loan personnel. The Bank hired two qualified loan originators, one for residential lending and the other for commercial lending, during the end of 2016; however it takes time to rebuild their pipeline and close new loans. At June 30, 2017, the total outstanding loans have increased since December 31, 2016 but are still well below the totals for most of 2016 thus causing a decrease in the average balance of loans receivable.

Interest on loans receivable, net of unearned fees decreased by $238,000, or 12.6%, for the six months ended June 30, 2017 as compared to the comparable period in 2016, due to a $8.4 million decrease in the average balance and a 17 basis point decrease in the average yield from 4.03% at June 30, 2016 to 3.86% at June 30, 2017.

Interest on investment securities available-for-sale increased by $82,000 for the six months ended June 30, 2017 as compared to the comparable period in 2016. There was a 27 basis point decrease in the average yield on investment securities available-for-sale and $6.9 million increase in the average balance of investment securities available-for-sale. Interest on investment securities held-to-maturity increased by $2,000 for the six months ended June 30, 2017 as compared to the comparable period in 2016. There was a 27 basis point decrease in the average yield on investment securities held-to-maturity and a $1.8 million increase in the average balance of investment securities held-to-maturity.

Table of Contents

Interest on deposits increased by $9,000, or 2.3%, during the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. The average balance of deposits increased by $2.0 million, or 2.1% when comparing the six month period ending June 30, 2017 to the prior year.

Interest on Federal Home Loan Bank of Atlanta advances decreased by $208,000, or 82.5%, during the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. During the year ending December 31, 2016 we paid off most of our higher rate advances, and the remaining $1.0 million at 4.397% matured in February 2017.

	Six Months Ended June 30,
	2017 (unaudited)								2016 (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	$	8,831		$	46		1.04	%	$	16,906		$	73		.86	%
Loans receivable, net of unearned fees		85,292			1,648		3.86			93,705			1,886		4.03
Investment securities available-for-sale – amortized cost		12,067			156		2.59			5,170			74		2.86
Investment securities held-to-maturity		18,855			260		2.76			17,018			258		3.03
Other interest-earning assets		689			14		4.06			680			17		5.00
Total interest-earning assets		125,734			2,124		3.38			133,479			2,308		3.46
Cash and due from banks		4,894								2,844
Allowance for credit losses		(1,248	)							(1,430	)
Other non-interest-earning assets		8,471								6,622
Total assets	$	137,851							$	141,515

Interest-bearing liabilities:
Certificates of deposit	$	59,069		$	354		1.20	%	$	58,210		$	352		1.21	%
NOW and money market		22,461			32		.28			20,837			25		.24
Savings		14,027			7		.10			14,507			7		.10
Federal Home Loan Bank advances		9,890			44		.89			12,159			252		4.15
Total interest-bearing liabilities		105,447			437		.83			105,713			636		1.20
Non-interest-bearing demand deposits		1,368								1,481
Other non-interest-bearing liabilities		784								505
Total liabilities		107,599								107,699
Total equity		30,252								33,816
Total liabilities and equity	$	137,851							$	141,515
Net interest income				$	1,687							$	1,672
Interest rate spread							2.55	%							2.25	%
Net interest margin							2.68	%							2.51	%
Ratio of average interest-earning assets to average interest-bearing liabilities							119.24	%							126.27	%

Table of Contents

Provision for Loan Losses. We did not have any provision for loan losses for the six months ended June 30, 2017, compared to a reversal for loan losses of $251,000 for the six months ended June 30, 2016. In 2015 we established an unallocated reserve of $250,000 on loans which were in the process of foreclosure to cover potential interior damage that may not have been reflected in the exterior only appraised values. After being sold at foreclosure to a third party, it was subsequently determined that the reserve was not necessary and was therefore reversed in 2016. At June 30, 2017, the allowance for loan losses was $1.2 million, or 1.39% of the total loan portfolio, compared to $1.2 million, or 1.39% of the total loan portfolio, at December 31, 2016.

Non-accrual loans amounted to $3.0 million at June 30, 2017 compared to $2.2 million at December 31, 2016. The increase in non-accrual loans of $881,000 was due to $721,000 land loans (one customer with two loans) that matured and are currently performing under a forbearance agreement. As a percentage of non-performing loans and accruing troubled debt restructurings, the allowance for loan losses was 28.0% at June 30, 2017 compared to 22.7% at December 31, 2016. There were net loan recoveries of $4,000 during the six months ended June 30, 2017, compared to net loan charge-offs of $83,000 during the six months ended June 30, 2016.

Non-interest Income. Total non-interest income increased by $61,000, or 55.0%, from $111,000 for the six months ended June 30, 2016 to $172,000 for the six months ended June 30, 2017. The increase in total non-interest income was due to a $42,000 gain on sale of securities and increased income from bank-owned life insurance.

Non-interest Expenses. Total non-interest expenses decreased by $188,000, or 9.1%. We had non-interest expenses of $1.9 million for the six months ended June 30, 2017 and $2.1 million for the six months ended June 30, 2016. The decrease primarily was attributable to a $122,000 decrease in salaries and employee benefits, and a $42,000 decrease in FDIC insurance premiums as our premiums decreased and we were over-accrued at December 31, 2016, offset lightly by $21,000 increase in legal and professional fees. The decrease in salaries and employee benefits was attributable to the implementation of the expense reduction program pursuant to which management reduced the Bank’s workforce by seven employees effective December 31, 2016. This reduction in workforce followed the separation of employment of two additional employees during the quarter ended December 31, 2016.

Income Tax Expense. We recorded no income tax expense during the six months ended June 30, 2017 as compared to $150,000 during the six months ended June 30, 2016. During the year ended December 31, 2016, management concluded that based on existing accounting guidance it is more likely than not the Bank will be unable to generate sufficient taxable income in the foreseeable future to fully utilize the deferred tax assets and placed a full valuation allowance on all net deferred tax assets. As of June 30, 2017, management reached the same conclusions, however it is at least reasonably possible that management’s judgment regarding the need for a valuation allowance for deferred tax assets could change in the future. The effective tax rate for these respective periods was 0% and (714.3)%.

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.

Table of Contents

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

	June 30, 2017			December 31, 2016
(Dollars in thousands)	(unaudited)
Non-accrual loans:
Residential, home equity lines of credit and consumer	$	1,382		$	1,106
Non-residential		913			1,020
Construction and land		745			33
Total		3,040			2,159
Accruing loans past due 90 days or more:
Residential, home equity lines of credit and consumer		—			181
Total		—			181
Total of non-performing loans and accruing loans 90 days or more past due		3,040			2,340
Assets acquired through foreclosure		—			—
Ground rents		130			141
Total non-performing assets		3,170			2,481
Troubled debt restructurings accruing		1,331			3,280
Troubled debt restructurings accruing and total non-performing assets	$	4,501		$	5,761
Total of non-performing loans and accruing loans past due 90 days or more to total loans		3.46	%		2.68	%
Total non-performing loans to total assets		2.13			1.64
Total non-performing assets and accruing loans past due 90 days or more to total assets		2.13			1.78
Total non-performing loans and accruing troubled debt restructurings to total assets		3.07			4.14
Total non-performing assets and accruing loans past due 90 days or more and accruing troubled debt restructurings to total assets		3.07			4.28

Table of Contents

At June 30, 2017 non-accrual loans consisted of 23 residential mortgage loans totaling $1,382,000, two non-residential loans totaling $913,000, and three construction and land loans totaling $745,000. The increase in non-performing loans at June 30, 2017 as compared to December 31, 2016 is primarily the result of a new non-performing loan relationship consisting of $721,000 of land loans (one customer with two loans) that have matured and currently performing under a forbearance agreement. This loan was previously classified as an accruing troubled debt restructured loan. We had no loans 90 days or more past due but still accruing at June 30, 2017 and December 31, 2016.

At June 30, 2017, our largest non-performing loan relationships consisted of the following:

An $868,000 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 June 30, 2017 even though we are receiving periodic monthly payments in accordance with the restructured terms. We also had a $4,000 loan secured by a third mortgage on this church. The loan secured by the third mortgage was accruing at June 30, 2017, and we receive certain rental payments that are paid directly to us to meet the debt service requirements on that loan.

A $669,000 land loan secured by two 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 was making payments in accordance with the restructured terms. During the first quarter of 2017, the borrower sold two lots and paid the loan down by $1.0 million. The loan matured during the quarter ended March 31, 2017, and the Bank negotiated a forbearance agreement to allow the borrower more time to pay the loan off. The borrower has made payments in accordance with the forbearance agreement. At June 30, 2017, the borrower had a second loan with an outstanding balance of $52,000 secured by the same property

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 June 30, 2017 and December 31, 2016, we had $1.3 million and $3.3 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 June 30, 2017, our largest accruing troubled debt restructured loan was a $331,000 residential loan secured by the borrower’s primary residence and is current on its payments.

Interest income that would have been recorded for the six months ended June 30, 2017 and 2016 had non-accrual loans been current according to their original terms, amounted to approximately $46,000 and $22,000, respectively. Interest income of $160,000 and $189,000 related to non-accrual loans was included in interest income for the six months ended June 30, 2017 and 2016, respectively.

At June 30, 2017, we had no other real estate owned.

Table of Contents

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

	Six Months Ended June 30,
	2017			2016
(Dollars in thousands)	(unaudited)			(unaudited)
Allowance at beginning of period	$	1,218		$	1,561

Charge-Offs:
Residential, home equity lines of credit and consumer		(49	)		(2	)
Non-residential		(81	)		—
Construction and land loans		—			(81	)
Total charge-offs		(130	)		(83	)

Recoveries:
Residential, home equity lines of credit and consumer		3			—
Non-residential		131			—
Construction and land loans		—			—
Total recoveries		134			—

Net charge-offs		(4	)		(83	)
(Reversal) provision for loan losses		—			(251	)
Allowance at end of period	$	1,222		$	1,227
Allowance for loan losses to non-performing loans and accruing troubled debt restructuring at end of period		27.96	%		22.83	%
Allowance for loan losses to total loans at end of period		1.39	%		1.31	%
Net charge-offs to average loans outstanding during the period		.00	%		.09	%

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 June 30, 2017, cash and cash equivalents totaled $8.3 million. Securities classified as available-for-sale amounting to $15.9 million at June 30, 2017, provide an additional source of liquidity. In addition, at June 30, 2017, we had the ability to borrow a total of approximately $34.6 million from the Federal Home Loan Bank of Atlanta. At June 30, 2017, we had $12.0 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 June 30, 2017.

Table of Contents

At June 30, 2017, we had $1.9 million in commitments to extend credit outstanding. Certificates of deposit due by December 31, 2017 totaled $13.2 million, or 22.1% 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, 2017. 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 June 30, 2017, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

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

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

For the six months ended June 30, 2017 and 2016, 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.

Table of Contents

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 six months ended June 30, 2017 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 June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

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, 2016 (the “Form 10-K”) (File No. 000-55341). As of June 30, 2017, 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

The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended June 30, 2017.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number Of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)

April 1-30		2,000	$	14.50		2,000		78,520
May 1-31		—		—		—		78,520
June 1-30		—		—		—		78,520
Total		2,000	$	14.50		2,000

(1) On May 16, 2017, the Company announced a program to repurchase up to 78,520 shares of its common stock. The Company’s repurchase program was set to terminate upon the completion of the purchase of 78,520 shares or on November 15, 2017 if not all shares have been purchased by that date.

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)

Table of Contents

	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 June 30, 2017, 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).

Table of Contents

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:	August 8, 2017	By:	/s/ Philip P. Phillips
			Philip P. Phillips
			President and Chief Executive Officer
			(principal executive officer)

Dated:	August 8, 2017	By:	/s/ John M. Wright
			John M. Wright
			Executive Vice President and Chief Financial Officer
			(principal financial and accounting officer)

MB Bancorp Inc - FORM 10-Q - August 8, 2017

Attached files

MB Bancorp Inc Reports