MB Bancorp Inc - FORM 10-Q

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EX-32.0 - EXHIBIT 32.0 - MB Bancorp Inc	tv492972_ex32-0.htm
EX-31.2 - EXHIBIT 31.2 - MB Bancorp Inc	tv492972_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - MB Bancorp Inc	tv492972_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 March 31, 2018

¨ 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 May 11, 2018, there were 1,940,200 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 March 31, 2018 (unaudited) and December 31, 2017 (audited)	3

	Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2018 and 2017 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2018 and 2017 (unaudited)	6

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

Part II. Other Information

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

Signatures		49

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

	As of			As of
	March 31,			December 31,
	2018			2017
(Dollars in thousands)	(unaudited)			(audited)

Assets:
Cash and due from banks	$	3,905		$	6,603
Interest bearing deposits in other banks		4,111			1,362
Total cash and cash equivalents		8,016			7,965

Other interest-bearing deposits in other banks		1,245			1,245
Investment securities available-for-sale – at fair value		15,696			16,605
Investment securities held to maturity – amortized cost		17,280			17,410

Loans, net of unearned fees		97,492			95,053
Less allowance for loan losses		(1,294	)		(1,288	)
Loans, net		96,198			93,765

Real estate ground rents		819			822
Less allowance for credit losses		(146	)		(141	)
Ground rents, net		673			681

Federal Home Loan Bank stock, at cost		855			754
Property and equipment – net		3,631			3,664
Deferred income taxes		—			—
Bank-owned life insurance		4,605			4,574
Accrued interest receivable and other assets		643			668
TOTAL ASSETS	$	148,842		$	147,331

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits	$	101,028		$	103,308
Federal Home Loan Bank advances		17,000			13,000
Deferred compensation liability		141			159
Accounts payable and other liabilities		545			504
Total liabilities		118,714			116,971

STOCKHOLDERS' EQUITY:
Common stock .01 par value; authorized 19,000,000 shares; issued 1,940,200 and 1,940,200 shares at March 31, 2018 and December 31, 2017, respectively		19			19
Additional paid-in capital		18,196			18,135
Retained earnings - substantially restricted		13,758			13,780
Accumulated other comprehensive loss		(528	)		(229	)
Unearned ESOP shares		(1,317	)		(1,345	)
Total stockholders' equity		30,128			30,360

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	148,842		$	147,331

See accompanying notes to consolidated financial statements.

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended
	March 31,
	2018			2017
(Dollars in thousands, except per share amount)	(unaudited)

INTEREST INCOME:
Interest and fees on loans	$	949		$	838
Interest on federal funds sold and other investments		15			24
Interest and dividends on investment securities		235			197
Total interest income		1,199			1,059

INTEREST EXPENSE:
Interest on deposits		232			193
Interest on short-term borrowings		17			14
Interest on long-term borrowings		28			7
Total interest expense		277			214

NET INTEREST INCOME		922			845

PROVISION FOR LOAN LOSSES		—			—

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		922			845

NON-INTEREST INCOME:
Service charges on deposit accounts		4			3
Fees and charges on loans		7			10
Increase in cash surrender value of life insurance		37			24
Gain on investment securities		—			16
Ground rent fees		10			12
Other income		11			28
Total non-interest income		69			93

NON-INTEREST EXPENSE:
Salaries and employee benefits		590			542
Occupancy expenses		102			114
Furniture and equipment expenses		11			9
Legal and professional expenses		103			115
Data processing and other outside services		82			75
FDIC insurance premiums		9			(6	)
Advertising and marketing related expenses		2			3
Other expenses		114			117
Total non-interest expenses		1,013			969

LOSS BEFORE INCOME TAXES		(22	)		(31	)

INCOME TAX EXPENSE		—			—

NET LOSS	$	(22	)	$	(31	)

Basic loss per share	$	(0.01	)	$	(0.02	)

Diluted loss per share	$	(0.01	)	$	(0.02	)

See accompanying notes to consolidated financial statements.

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	For the Three Months Ended
	March 31,			March 31,
	2018			2017
(Dollars in thousands)	(unaudited)

NET LOSS	$	(22	)	$	(31	)
OTHER COMPREHENSIVE LOSS ON
AVAILABLE-FOR-SALE INVESTMENT SECURITIES:
Unrealized losses arising during the period		(299	)		(22	)
Reclassification of gain included in net income		—			(16	)
Unrealized losses arising during the period		(299	)		(38	)
Income taxes on unrealized losses arising during the period		—			—
		(299	)		(38	)

COMPREHENSIVE LOSS	$	(321	)	$	(69	)

See accompanying notes to consolidated financial statements.

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2018 (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, 2017	$	19	$	18,132		$	13,770		$	(1,458	)	$	(139	)	$	30,324
Net loss		—		—			(31	)		—			—			(31	)
Net unrealized loss on available- for sale securities, net of taxes of $0		—		—			—			—			(22	)		(22	)
Stock - based compensation		—		18			—			28			—			46
Repurchase of shares		—		(101	)		(54	)		—			—			(155	)
BALANCES AT MARCH 31, 2017	$	19	$	18,049		$	13,685		$	(1,430	)	$	(161	)	$	30,162

BALANCES AT JANUARY 1, 2018	$	19	$	18,135		$	13,780		$	(1,345	)	$	(229	)	$	30,360
Net loss		—		—			(22	)		—			—			(22	)
Net unrealized loss on available- for sale securities, net of taxes of $0		—		—			—			—			(299	)		(299	)
Stock - based compensation		—		61			—			28			—			89
BALANCES AT MARCH 31, 2018	$	19	$	18,196		$	13,758		$	(1,317	)	$	(528	)	$	30,128

See accompanying notes to consolidated financial statements.

MB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For Three Months Ended
	March 31,			March 31,
	2018			2017
(Dollars in thousands)	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(22	)	$	(31	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation expense		33			31
Increase in cash surrender value of life insurance		(31	)		(24	)
Net amortization/accretion of premiums and discounts		21			7
Non-cash compensation under stock-based benefit plan		89			46
Decrease (increase) in accrued interest and other assets		25			(14	)
Gain on sale of investment securities		—			(16	)
Decrease in deferred compensation liability		(18	)		(17	)
(Decrease) increase in accounts payable and other liabilities		49			(113	)
Net cash provided by (used in) operating activities		146			(131	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in other interest bearing deposits in other banks		—			1,494
Purchase of available-for-sale securities		—			(9,677	)
Proceeds from calls/repayments of available-for-sale investments		587			122
Proceeds from sale of available-for-sale securities		—			312
Purchase of held-to-maturity investments		—			(1,732	)
Proceeds from maturity/repayments of held-to-maturity investments		132			2,086
Net (increase) decrease in loans		(2,433	)		2,776
Purchase of bank-owned life insurance		—			(3,500	)
Purchase of property, plant and equipment		—			(56	)
Redemption of Federal Home Loan Bank stock		(101	)		(208	)
Net cash used in investing activities		(1,815	)		(8,383	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		(2,280	)		4,726
Federal Home Loan Bank advances		8,000			11,000
Federal Home Loan Bank repayments		(4,000	)		(7,000	)
Repurchase of common stock		—			(155	)
Net cash provided by financing activities		1,720			8,571

INCREASE IN CASH AND CASH EQUIVALENTS		51			57
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		7,965			9,267
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	8,016		$	9,324

Supplemental cash flow information:
Interest paid	$	276		$	217
Income taxes paid	$	—		$	—
Noncash:
Transfer of other real estate owned to loans	$	—		$	—

See accompanying notes to consolidated financial statements.

MB BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Unaudited Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying consolidated financial statements as of March 31, 2018 and for the three months ended March 31, 2018 and 2017 contains all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at March 31, 2018.

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, 2017. The results of operations and cash flows for the three months ended March 31, 2018 and 2017 are not necessarily indicative of the results to be expected for the year ended December 31, 2018.

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

The Company has included cash and due from banks, interest-bearing deposits in other banks with original maturities of 90 days or less, and federal funds sold and other overnight investments as cash and cash equivalents for the purpose of reporting cash flows.

Credit Risk

The Company has unsecured deposits with several other financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (“FDIC”).

Investments Securities

As securities are purchased, management determines if the securities should be classified as held to maturity or available for sale. Securities which management has the intent and ability to hold to maturity are recorded at amortized cost. Securities which may be sold before maturity are classified as available for sale and carried at fair value with unrealized gains and losses included in accumulated other comprehensive income, a separate component of equity, on an after-tax basis. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income. Premiums and discounts on investment securities are amortized/accreted to the earlier of call or maturity. Investments in Federal Home Bank stock are excluded from securities classified as available for sale and are carried at cost.

Declines in the fair value of individual available for sale or held to maturity securities below their cost that are other than temporary, result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether another-than-temporary impairment has occurred include, among others, a downgrading of the security by the rating agency or a significant deterioration in the financial condition of the issuer.

Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) the structure of the security.

An impairment loss is recognized in earnings only when (1) the Bank intends to sell the debt security; (2) it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In situations where the Bank intends to sell or when it is more likely than not that the Company will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in stockholders’ equity as a component of other comprehensive income, net of deferred taxes.

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.

Allowance for Loan Losses

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

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

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

Real Estate Ground Rents

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

Ground rents are recorded at the lower of cost or fair value. Fair value is estimated based on the contractual value of the unconsummated redemption or sales agreements. Ground rent fees are recognized upon receipt and included in non-interest income. At March 31, 2018 and December 31, 2017, the Company’s investment includes individual ground rents ranging from $600 to $3,000, totaling $819,000 and $822,000 respectively. An allowance for losses is established when the collectability of ground rent payments becomes uncertain, typically when the ground rent payment becomes three years delinquent. At March 31, 2018 and December 31, 2017, the Company had $146,000 and $141,000 respectively, of ground rents that were three years or more delinquent and were reserved at 100%.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method. Premises and equipment are depreciated over the useful lives of the assets. Useful lives range from five to ten years for furniture, fixtures, and equipment; three to five years for software, hardware, and data handling equipment. Maintenance and repairs are charged to expense as incurred, while improvements, which extend the useful life, are capitalized and depreciated over the estimated remaining life of the asset.

Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis.

Bank-Owned Life Insurance

The Bank purchased single-premium life insurance policies on certain former officers and directors of the Bank. The net cash surrender value of those policies is classified in other assets. Appreciation in the value of the insurance policies is classified in non-interest income.

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.

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.

Advertising Costs

Advertising costs are generally expensed as incurred.

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 March 31, 2018, 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.

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.

Financial Statement Presentation

Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In January 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring 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; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization 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 organization has elected to measure the liability at fair value in a accordance with the fair value option for financial instruments. ASU 2016-01 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU 2016-01 on January 1, 2018 and it did not have a material impact on the consolidated financial statement. The Bank’s equity securities are membership stocks in the Federal Home Loan Bank and thereby excluded from fair value pricing. For exit pricing on loans, the Company used recent Merger and Acquisition Transaction Metrics compiled by S&P Global Market Intelligence for the second half of 2017. This provided the credit mark to be used along with the fair value adjustment based on the yield metrics of the portfolio.

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, “Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” which updated guidance intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The updated guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires the consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The updated guidance is effective for the Company on January 1, 2020, with early adoption permitted. The Company is currently assessing the potential impact of the new guidance on our 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 to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 will be effective for the Company on January 1, 2019, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2017-08 on our financial statements.

In May 2017, ASU 2017-09, “Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. ASU 2017-09 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on our financial statements.

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which reduced the corporate tax rate from 35% to 21%. While the effect of such tax act will be materially beneficial in future years, it does have a negative impact on those corporate entities with deferred tax assets at December 31, 2017. The primary reason is that the tax law was enacted in 2017, a year prior to the effective date of 2018. The issue centers around deferred tax assets, a balance sheet account, which are simply future tax benefits arising from timing differences between financial statement expenses and tax return deductions. These deferred tax assets are values at enacted future corporate tax rates. Consequently, in 2017, corporations that had deferred tax assets were required to make a one-time adjustment to their income statement to write-down the deferred tax asset value reported on their balance sheets to reflect the lower future tax rates even though they would not receive the benefits of those lower rates until 2018 or later.

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments allow for the reclassification of stranded tax effects in accumulated other comprehensive income (AOCI) an option rather than a requirement; however, disclosure is required if not elected. The reclassification from accumulated other comprehensive income to retained earnings results from the newly enacted federal corporate income tax rate resulting from the Tax Cuts and Job Acts signed by President Trump in December 2017. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted corporate income tax rate of 21%. Entities will have an option to adopt the standard retrospectively or in the period of adoption. The company has adopted this standard on January 1, 2018 and did not have any reclassification into retained earnings.

INVESTMENT SECURITIES

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

	March 31, 2018 (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	$	—	$	(102	)	$	898
Municipal securities		495		—		(6	)		489
Mortgage-backed securities		14,729		—		(420	)		14,309
Total investments available-for-sale	$	16,224	$	—	$	(528	)	$	15,696

	December 31, 2017
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Investments available-for-sale:
U.S. Government securities	$	1,000	$	—	$	(55	)	$	945
Municipal securities		499		—		(2	)		497
Mortgage-backed securities		15,334		—		(171	)		15,163
Total investments available-for-sale	$	16,833	$	—	$	(228	)	$	16,605

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

	March 31, 2018 (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	$	—	$	(744	)	$	11,756
Mortgage backed securities		4,780		66		(160	)		4,686
Total investments held-to-maturity	$	17,280	$	66	$	(904	)	$	16,442

	December 31, 2017
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Investments held-to-maturity:
U.S. Government securities:	$	12,500	$	—	$	(424	)	$	12,076
Mortgage-backed securities:		4,910		106		(84	)		4,932
Total U.S. Government securities	$	17,410	$	106	$	(508	)	$	17,008

Below are schedules of both available-for-sale and held-to-maturity securities with unrealized losses as of March 31, 2018 (unaudited) and December 31, 2017 and the length of time the individual security has been in a continuous unrealized loss position. Unrealized losses are the result of interest rate levels differing from those existing at the time of purchase of the securities and as to mortgage-backed securities, estimated prepayment speeds. At March 31, 2018 (unaudited) and December 31, 2017, 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.

There were no sales of investment securities for the quarter ended March 31, 2018. The Bank realized gains of $16,000 on sale of investment securities for the quarter ended March 31, 2017. Proceeds from sales of available for sale securities totaled $312,000 for the quarter ended March 31, 2017 with realized gains of $8,000. During the quarter ended March 31, 2017, the Bank also sold held-to-maturity securities which has a substantial (greater than 85%) portion of the principal paid prior to the sale of the security thus not tainting the remaining held-to-maturity portfolio. Proceeds from sales of held-to-maturity securities totaled $121,000 for the quarter ended March 31, 2017 with realized gains of $8,000.

	March 31, 2018 (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	$	12,664	$	(320	)	$	4,285	$	(260	)	$	16,949	$	(580	)
Municipal securities		489		(6	)		—		—			489		(6	)
U.S. Government securities		968		(32	)		11,685		(814	)		12,653		(846	)
Total temporarily impaired securities	$	14,121	$	(358	)	$	15,970	$	(1,074	)	$	30,091	$	(1,432	)

	December 31, 2017
	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	$	13,443	$	(117	)	$	4,499	$	(138	)	$	17,942	$	(255	)
Municipal securities		497		(2	)		—		—			497		(2	)
U.S. Government securities		987		(13	)		12,034		(466	)		13,021		(479	)
Total temporarily impaired securities	$	14,927	$	(132	)	$	16,533	$	(604	)	$	31,460	$	(736	)

The scheduled maturities of debt securities at March 31, 2018 (unaudited) were as follows:

	Amortized Cost (in thousands)		Fair Value (in thousands)
Due over one year through five years	$	1,000	$	968
Due over five years through ten years		4,000		3,754
Due after ten years		8,995		8,421
Mortgage-backed securities		19,509		18,995
Total	$	33,504	$	32,138

LOANS RECEIVABLE

Loans receivable consist of the following:

	March 31, 2018			December 31, 2017
(Dollars in thousands)	(unaudited)
Secured by real estate:
Residential:
One-to four-family	$	74,117		$	74,266
Multi-family		1,231			1,243
Total		75,348			75,509
Non-residential		13,904			13,183
Construction and land loans		3,275			3,240
Home equity line of credit (“HELOC”)		3,593			3,471

Commercial, Consumer and other loans:
Commercial loans		2,263			296
Loans to depositors, secured by savings		96			128
		98,479			95,827
Add:
Net discount on purchased loans		1			1
Unamortized net deferred costs		38			41
Less:
Undisbursed portion of construction loans		(951	)		(741	)
Unearned net loan origination fees		(75	)		(75	)
Less allowance for loan losses		(1,294	)		(1,288	)
Loans receivable, net	$	96,198		$	93,765

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

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

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

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

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

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

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

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

•

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

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

•

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

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

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

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

Unallocated Allowance. Our allowance for loan losses methodology may also include an unallocated component to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio. The unallocated allowance is prorated between the various loan categories in proportion to their totals of the calculated reserves. As of March 31, 2018, we had approximately $234,000 of unallocated reserves as compared to $155,000 as of December 31, 2017 and $285,000 as of March 31, 2017.

Allowance for loan losses and recorded investment in loans for the three months ended March 31, 2018 (unaudited) is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer			Non- residential Real Estate		Construction and Land			Total
Allowance for loan losses:
Beginning balance	$	1,043		$	158	$	87		$	1,288
Charge-offs		—			—		—			—
Recoveries		6			—		—			6
Provisions		(160	)		226		(66	)		—
Ending balance	$	889		$	384	$	21		$	1,294
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	—		$	—	$	—		$	—
Ending balance: collectively evaluated for impairment	$	889		$	384	$	21		$	1,294
Loans:
Ending balance: individually evaluated for impairment	$	2,599		$	1,132	$	1,044		$	4,775
Ending balance: collectively evaluated for impairment	$	78,701		$	12,772	$	2,231		$	93,704

Allowance for loan losses and recorded investment in loans for the three months ended March 31, 2017 (unaudited) is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial and Consumer			Non- residential Real Estate			Construction and Land			Total
Allowance for loan losses:
Beginning balance	$	973		$	158		$	87		$	1,218
Charge-offs		(4	)		(19	)		—			(23	)
Recoveries		—			—			—			—
Provisions		79			(42	)		(37	)		—
Ending balance	$	1,048		$	97		$	50		$	1,195
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	38		$	—		$	—		$	38
Ending balance: collectively evaluated for impairment	$	1,010		$	97		$	50		$	1,157
Loans:
Ending balance: individually evaluated for impairment	$	2,741		$	1,345		$	1,249		$	5,335
Ending balance: collectively evaluated for impairment	$	72,453		$	5,593		$	2,373		$	80,419

Allowance for loan losses and recorded investment in loans for the year ended December 31, 2017 is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer			Non- residential Real Estate			Construction and Land			Total
Allowance for loan losses:
Beginning balance	$	973		$	158		$	87		$	1,218
Charge-offs		(85	)		(81	)		—			(166	)
Recoveries		105			—			131			236
Provisions		50			81			(131	)		—
Ending balance	$	1,043		$	158		$	87		$	1,288
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	30		$	—		$	—		$	30
Ending balance: collectively evaluated for impairment	$	1,013		$	158		$	87		$	1,258
Loans:
Ending balance: individually evaluated for impairment	$	2,179		$	1,154		$	1,094		$	4,427
Ending balance: collectively evaluated for impairment	$	77,225		$	12,029		$	2,146		$	91,400

Credit risk profile by internally assigned classification as of March 31, 2018 (unaudited) is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer		Non-residential Real Estate		Construction and Land		Total
Non-classified	$	77,094	$	11,932	$	1,997	$	91,023
Special mention		2,025		978		233		3,236
Substandard		2,181		995		1,044		4,220
Doubtful		—		—		—		—
Loss		—		—		—		—
Total	$	81,300	$	13,905	$	3,274	$	98,479

Credit risk profile by internally assigned classification as of December 31, 2017 is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer		Non-residential Real Estate		Construction and Land		Total
Non-classified	$	74,808	$	11,181	$	1,910	$	87,899
Special mention		2,060		—		236		2,296
Substandard		2,536		2,002		1,094		5,632
Doubtful		—		—		—		—
Loss		—		—		—		—
Total	$	79,404	$	13,183	$	3,240	$	95,827

•

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

•

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

•

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

•

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

Impaired loans as of and for the three months ended March 31, 2018 (unaudited) 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	$	2,599	$	1,132	$	1,044	$	4,775
Unpaid principal balance		3,001		1,281		2,089		6,371
Average recorded investment, for the three months ended March 31, 2018		2,327		1,139		1,060		4,526
Interest income recognized		40		15		8		63
Interest income foregone		10		—		11		21
With an allowance recorded:
Recorded investment		—		—		—		—
Unpaid principal balance		—		—		—		—
Related allowance		—		—		—		—
Average recorded investment, for the three months ended March 31, 2018		—		—		—		—
Interest income recognized		—		—		—		—
Interest income foregone		—		—		—		—
Total
Recorded investment		2,599		1,132		1,044		4,775
Unpaid principal balance		3,001		1,281		2,089		6,371
Related allowance		—		—		—		—
Average recorded investment, for the three months ended March 31, 2018		2,327		1,139		1,060		4,526
Interest income recognized		40		15		8		63
Interest income foregone		10		—		11		21

Impaired loans as of and for the three months ended March 31, 2017 (unaudited) 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	$	2,231	$	1,345	$	1,249	$	4,825
Unpaid principal balance		2,471		1,648		2,286		6,405
Average recorded investment, for the three months ended March 31, 2017		2,252		1,353		1,741		5,346
Interest income recognized		47		14		12		73
Interest income foregone		4		4		18		26
With an allowance recorded:
Recorded investment		510		—		—		510
Unpaid principal balance		511		—		—		511
Related allowance		38		—		—		38
Average recorded investment, for the three months ended March 31, 2017		513		—		—		513
Interest income recognized		12		—		—		12
Interest income foregone		—		—		—		—
Total
Recorded investment		2,741		1,345		1,249		5,335
Unpaid principal balance		2,982		1,648		2,286		6,916
Related allowance		38		—		—		38
Average recorded investment, for the three months ended March 31, 2017		2,765		1,353		1,741		5,859
Interest income recognized		59		14		12		85
Interest income foregone		4		4		18		26

Impaired loans as of and for the year ended December 31, 2017 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	$	1,823	$	1,154	$	1,094	$	4,071
Unpaid principal balance		2,421		2,026		2,137		6,584
Average recorded investment, for the twelve months ended December 31, 2017		2,511		1,468		1,310		5,289
Interest income recognized		179		92		41		312
Interest income foregone		8		4		53		65
With an allowance recorded:
Recorded investment		356		—		—		356
Unpaid principal balance		357		—		—		357
Related allowance		30		—		—		30
Average recorded investment, for the twelve months ended December 31, 2017		354		—		—		354
Interest income recognized		57		—		—		57
Interest income foregone		—		—		—		—
Total
Recorded investment		2,179		1,154		1,094		4,427
Unpaid principal balance		2,778		2,026		2,137		6,941
Related allowance		30		—		—		30
Average recorded investment, for the twelve months ended December 31, 2017		2,865		1,468		1,310		5,643
Interest income recognized		236		92		41		369
Interest income foregone		8		4		53		65

An aged analysis of past due loans as of March 31, 2018 (unaudited) is as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer		Non-residential Real Estate		Construction and Land		Total
Current	$	80,743	$	13,904	$	2,685	$	97,332
30 – 59 days past due		79		—		—		79
60 – 89 days past due		9		—		—		9
Greater than 90 day past due and still accruing		—		—		—		—
Greater than 90 days past due		470		—		589		1,059
Total past due		558		—		589		1,147
Total	$	81,301	$	13,904	$	3,274	$	98,479

An aged analysis of past due loans as of December 31, 2017 are as follows:

(Dollars in thousands)	Residential Real Estate, HELOC, Commercial, and Consumer		Non-residential Real Estate		Construction and Land		Total
Current	$	78,710	$	13,183	$	2,609	$	94,502
30 – 59 days past due		115		—		—		115
60 – 89 days past due		—		—		—		—
Greater than 90 day past due and still accruing		341		—		—		341
Greater than 90 days past due		238		—		631		869
Total past due		694		—		631		1,325
Total	$	79,404	$	13,183	$	3,240	$	95,827

Non-performing loans as of March 31, 2018 (unaudited) 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	$	422	$	—	$	605	$	1,027
Other non-accrual loans		729		—		—		729
Total non-accrual loans		1,151		—		605		1,756
Accruing troubled debt restructured loans		1,049		1,132		—		2,181
Total	$	2,200	$	1,132	$	605	$	3,937

Non-performing loans as of December 31, 2017 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	$	427	$	—	$	649	$	1,076
Other non-accrual loans		430		74		—		504
Total non-accrual loans		857		74		649		1,580
Accruing troubled debt restructured loans.		1,059		1,153		—		2,212
Total	$	1,916	$	1,227	$	649	$	3,792

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

The following includes loans classified as troubled debt restructurings during the three months ended March 31, 2018 (unaudited).

(Dollars in thousands)

Number of

Contracts

Pre-
modification

Outstanding

Recorded

Investment

Post-
modification

Outstanding

Recorded

Investment

Residential real estate, commercial, and consumer

—

Non-residential real estate

—

Construction and land

—

Total

—

The following includes loans classified as troubled debt restructurings during the three months ended March 31, 2017 (unaudited).

(Dollars in thousands)

Number of

Contracts

Pre-
modification

Outstanding

Recorded

Investment

Post-
modification

Outstanding

Recorded

Investment

Residential real estate, commercial, and consumer

—

Non-residential real estate

—

Construction and land

—

Total

—

The following includes loans classified as troubled debt restructures that subsequently defaulted during the year ended March 31, 2018 (unaudited).

		During Three Months Ended March 31, 2018 (Unaudited)
(Dollars in thousands)		Number of Contracts		Recorded Investment
TDRs that subsequently defaulted
Residential real estate, commercial, and consumer	$	—	$	—
Non-residential real estate		—		—
Construction and land		—		—

The following includes loans classified as troubled debt restructures that subsequently defaulted during the three months ended March 31, 2017 (unaudited).

	During the Three Months Ended at March 31, 2017 (unaudited)
(Dollars in thousands)	Number of Contracts		Recorded Investment
TDRs that subsequently defaulted
Residential real estate, commercial, and consumer	—	$	—
Non-residential real estate	—		—
Construction and land	—		—

Loans serviced by the Bank for the benefit of others totaled $397,000 and $401,000 at March 31, 2018 (unaudited) and December 31, 2017, respectively.

There was $5,000 of consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure as of March 31, 2018 (unaudited).

OTHER REAL ESTATE OWNED

The balance in other real estate owned at March 31, 2018 (unaudited) and December 31, 2017 was zero.

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

		March 31, 2018		December 31, 2017
(Dollars in thousands)		(unaudited)
Beginning balance	$	—	$	—
Additions		—		—
Transfers from Loans		—		—
Transfers to Loans		—		—
Sales		—		—
Provisions		—		—
Ending balance	$	—	$	—

DEPOSITS

Deposits are summarized as follows:

	March 31, 2018		December 31, 2017
(Dollars in thousands)	(unaudited)
Non-interest-bearing deposits	$	1,515	$	1,542
NOW and Money market		20,620		21,481
Savings		14,749		14,718
Certificates of deposit		64,144		65,567
Total deposits	$	101,028	$	103,308

The aggregate amount of time deposits in denominations of $250,000 or more as of March 31, 2018 (unaudited) and December 31, 2017 was $3,000,000 and $3,165,000, respectively. Deposit amounts in excess of $250,000 generally are not insured by the Federal Deposit Insurance Corporation.

At March 31, 2018 (unaudited), the schedule maturities of certificates of deposit are as follows:

(Dollars in thousands)
2018	$	28,256
2019		14,610
2020		8,440
2021		7,936
2022		4,028
2023		874
Total	$	64,144

Executive officers’ and directors’ deposits were $144,000 and $330,000 at March 31, 2018 (unaudited) and December 31, 2017, respectively.

INCOME TAXES

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

	March 31, 2018			December 31, 2017
(Dollars in thousands)	(unaudited)
Deferred tax assets:
Deferred loan fees and costs, net	$	10		$	9
Allowance for credit losses		356			355
Deferred compensation		39			44
Severance payments		53			60
Restricted stock awards		26			14
Allowance for ground rents		40			39
Allowance for delinquent mortgage interest		103			101
Contribution carryforward		2			2
Net operating loss carryforward		1,366			1,354
Unrealized loss on available-for-sale securities		—			—
Total deferred tax assets		1,995			1,978
Valuation allowance		(1,898	)		(1,883	)
Deferred tax assets after valuation allowance		97			95
Deferred tax liabilities:
Depreciation		97			95
ESOP		—			—
Total deferred tax liabilities		97			95
Net deferred tax assets	$	—		$	—

Management evaluates deferred tax assets annually.

The provision for income taxes is comprised of the following:

	March 31, 2018		March 31, 2017
(Dollars in thousands)	(unaudited)		(unaudited)
Tax expense (benefit):
Current federal and state	$	0	$	0
Deferred tax		0		0
Total	$	—	$	—

At March 31, 2018, the Bank had approximately $4,800,000 and $5,100,000 in federal and state net operating loss carryforwards, respectively. These net operating loss carryforwards begin to expire in 2033. Realization depends on generating sufficient taxable income before the expiration of the loss carryforward period. The amount of the loss carryforward available for any one year may be limited if the Bank is subject to the alternative minimum tax.

Valuation allowance for deferred taxes for the three months ended March 31, 2018 (unaudited) and December 31, 2017 is as follows:

(Dollars in thousands)	Valuation Allowance
Balance of January 1, 2017	$	(2,608	)
Expiration of capital loss carryforwards		—
Decrease in valuation allowance		725
Balance of December 31, 2017	$	(1,883	)
Expiration of capital loss carryforwards		—
Increase in valuation allowance		(15	)
Balance of March 31, 2018	$	(1,898	)

As of December 31, 2017 and March 31, 2018, 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.

8.	STOCK BASED COMPENSATION

In May 2016, the Company’s shareholders approved a new Equity Incentive Plan (the “2016 Equity Incentive Plan’’). The 2016 Equity Incentive Plan allows for up to 84,640 shares to be issued to employees, executive officers or Directors in the form of restricted stock, and up to 211,600 shares to be issued to employees, executive officers or Directors in the form of stock options. At March 31, 2018, there were 52,500 restricted stock awards issued and outstanding and no stock option awards granted under the 2016 Equity Incentive Plan.

Permissible Awards:

Under the above plan, the following are permissible awards:

Options to purchase shares of the Company common stock, which may either be non-qualified stock options or incentive stock options under Section 422 of the U.S. Internal Revenue Code of 1986, as amended;

Restricted stock grants, which may be subject to restrictions on transferability and forfeiture; and

All awards may be granted with time-based or performance-based vesting.

Restricted Stock:

The specific terms of each restricted stock award are determined by the Compensation Committee at the date of the grant. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the grant date.

A summary of changes in the Company’s nonvested shares for the year ended December 31, 2017 and the quarter ended March 31, 2018 are as follows:

			Weighted-Average
			Grant-Date
	Shares		Fair Value
Nonvested at January 1, 2017		2,500	$	13.40
Granted		50,000		15.29
Vested		1,250		13.40
Forfeited		-		-
Nonvested at December 31, 2017		51,250	$	15.24

Nonvested at January 1, 2018		51,250	$	15.24
Granted		-		-
Vested		-		-
Forfeited		-		-
Nonvested at March 31, 2018		51,250	$	15.24

Fair Value of shares vested	$	19,688

The following table outlines the vesting schedule of the nonvested restricted stock awards as of March 31, 2018:

Year Ending December 31,	Number of restricted shares
2018		11,250
2019		10,000
2020		10,000
2021		10,000
2022		10,000
		51,250

The Company recorded restricted stock awards expense of $42,412 and $4,198 for the quarters ended March 31, 2018 and March 31, 2017, respectively. As of March 31, 2018, there was $686,232 of total unrecognized compensation cost related to nonvested shares granted under the 2016 stock incentive plan. The cost is expected to be recognized over a weighted-average period of 4.50 years.

REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of Total and Common Equity and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets. Management believes as of March 31, 2018 and December 31, 2017 that the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 2017, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events that management believes will adversely affect the Bank’s ability to remain in the well-capitalized category.

The following table presents the Bank’s capital position based on the March 31, 2018 (unaudited) and December 31, 2017 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					To be Well Capitalized Under the Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of March 31, 2018:
Total risk-based capital (to risk-weighted assets)	$	25,115		31.15	%	$	7,962		9.875	%	$	8,063		10.00	%
Tier I capital (to risk-weighted assets)		24,104		29.90			6,348		7.875			6,449		8.00
Tier I capital (to adjusted total assets)		24,104		16.47			5,854		4.000			7,318		5.00
Common equity tier 1 capital (to risk weighted assets)		24,104		29.90			5,139		6.375			5,240		6.50

As of December 31, 2017:											$	7,653		10.00	%
Total risk-based capital (to risk-weighted assets)	$	24,934		32.58	%	$	7,078		9.25	%		6,122		8.00
Tier I capital (to risk-weighted assets)		23,974		31.33			5,548		7.25			7,243		5.00
Tier I capital (to adjusted total assets)		23,974		16.55			5,795		4.00
Common equity tier 1 capital (to risk weighted assets)		23,974		31.33			4,400		5.75			4,974		6.50

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

	March 31, 2018			December 31, 2017
(Dollars in thousands)		(unaudited)
Total Company equity capital	$	30,128		$	30,360
LESS: Parent Only Equity		6,552			6,615
LESS: Net unrealized (losses) gains on available-for-sale securities		(528	)		(229	)
Tier 1 Capital	$	24,104		$	23,974
Tier 1 Capital	$	24,104		$	23,974
Allowance for loan and lease losses includible in Tier 2 capital		1,011			960
Total risk-based capital	$	25,115		$	24,934

10.

OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the components of other comprehensive gains and losses for the three months ended March 31, 2018 and 2017 (unaudited).

(Dollars in thousands)	Before Tax			Tax Effect		Net of Tax
Three Months Ended March 31, 2018 (unaudited)
Net unrealized loss on securities available-for-sale	$	(299	)	$	-	$	(299	)
Other Comprehensive Loss	$	(299	)	$	-	$	(299	)
Three Months Ended March 31, 2017 (unaudited)
Net unrealized loss on securities available-for-sale	$	(22	)	$	-	$	(22	)
Other Comprehensive Loss	$	(22	)	$	-	$	(22	)

The following table presents the changes in each components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2018 and 2017 (unaudited).

(Dollars in thousands)	Securities Available-for-Sale			Accumulated Other Comprehensive Loss
Three Months Ended March 31, 2018 (unaudited)
Balance at Beginning of Year	$	(229	)	$	(229	)
Other comprehensive loss		(299	)		(299	)
Balance at End of Period	$	(528	)	$	(528	)

(Dollars in thousands)	Securities Available-for-Sale			Accumulated Other Comprehensive Loss
Three Months Ended March 31, 2017 (unaudited)
Balance at Beginning of Year	$	(139	)	$	(139	)
Other comprehensive loss		(22	)		(22	)
Balance at End of Period	$	(161	)	$	(161	)

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

Details about Accumulated Other Comprehensive income (loss) Components	Amount Reclassified from Accumulated Other Comprehensive income (loss)					Affected Line Item in the Statement Where Net Income Is Presented
	March 31, 2018		March 31, 2017
(Dollars in thousands)	(unaudited)
Redemption of Investment Securities Available-for-Sale	$	—	$	(16	)	Realized gain on redemption of investment securities

		-		-		Provision for Income Tax
	$	—	$	(16	)	Net of Tax

Total Reclassifications for the Period	$	—	$	(16	)	Net of Tax

11.

EARNINGS (LOSS) 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 (loss) per share assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. The basic and diluted weighted average shares outstanding for the three months ended March 31, 2018 and 2017 are as follows:

	Three Months Ended March 31, 2018 (unaudited)
(Dollars in thousands, except per share amount)	Income (Loss) (Numerator)			Shares (Denominator)		Per Share Amount

Basic EPS
Net loss available to shareholders	$	(22	)		1,807,126	$	(0.01	)

Diluted EPS
Effect of dilutive shares		—			—		—

Net loss available to shareholders	$	(22	)		1,807,126	$	(0.01	)

	Three Months Ended March 31, 2017 (unaudited)
(Dollars in thousands, except per share amount)	Income (Loss) (Numerator)			Shares (Denominator)		Per Share Amount

Basic EPS
Net loss available to shareholders	$	(31	)		1,753,524	$	(0.02	)

Diluted EPS
Effect of dilutive shares		—			—		—

Net loss available to shareholders	$	(31	)		1,753,524	$	(0.02	)

There were no anti-dilutive shares excluded from the March 31, 2018 and 2017 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.

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

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

Loans. The Bank does not report loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for credit loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 450 “Contingencies”. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2016 and December 31, 2015, substantially all of the totally impaired loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

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

	Fair Value Measurements at March 31, 2018 (unaudited) Using:
Description (Dollars in thousands)	Fair Value March 31, 2018		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	$	898	$	—	$	898	$	—	$	—	$	—
Municipal securities		489				489
Mortgage-backed securities		14,309		—		14,309		—		—		—
Total assets measured at fair value on a recurring basis	$	15,696	$	—	$	15,696	$	—	$	—	$	—

	Fair Value Measurements at December 31, 2017 Using:
Description (Dollars in thousands)	Fair Value December 31, 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	$	945	$	—	$	945	$	—	$	—	$	—
Municipal securities		497		—		497
Mortgage-backed securities		15,163		—		15,163		—		—		—
Total assets measured at fair value on a recurring basis	$	16,605	$	—	$	16,605	$	—	$	—	$	—

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

	Fair Value Measurements at March 31, 2018 (unaudited) Using:
Description (Dollars in thousands)	Fair Value March 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Trading Gains and (Losses)		Total Changes in Fair Values Included in Period Earnings
Impaired loans:
Residential .	$	2,599	$	—	$	2,599	$	—	$	—	$	—
Commercial		1,132		—		1,132		—		—		—
Land		1,044		—		1,044		—		—		—
Construction		—		—		—		—		—		—
Other real estate owned .		—		—		—		—		—		—
Total assets measured at fair value on a non-recurring basis	$	4,775	$	—	$	4,775	$	—	$	—	$	—

	Fair Value Measurements at December 31, 2017 Using:
Description (Dollars in thousands)	Fair Value December 31, 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	$	2,149	$	—	$	1,822	$	327	$	—	$	—
Commercial		1,154		—		1,154		—		—		—
Land		1,094		—		1,094		—		—		—
Construction		—		—		—		—		—		—
Other real estate owned		—		—		—		—		—		—
Total assets measured at fair value on a non-recurring basis	$	4,397	$	—	$	4,070	$	327	$	—	$	—

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

In accordance with the disclosure requirements of ASC Topic 825, the estimated fair values of financial instruments at March 31, 2018 (unaudited) and December 31, 2017 are as follows:

(Dollars in thousands)	Carrying Value March 31, 2018 (unaudited)		Fair Value March 31, 2018 (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	$	3,905	$	3,905	$	—	$	3,905	$	—
Other interest bearing deposits in other banks		5,356		5,356		—		5,356		—
Investment securities		32,976		32,138		—		32,138		—
Federal Home Loan Bank stock		855		855		—		855		—
Loans, net		96,198		95,978		—		4.775		91,203
Bank owned life insurance		4,605		4,605		—		4,605		—
Accrued interest receivable		465		465		—		465		—
LIABILITIES
Deposits	$	101,028	$	100,096	$	—	$	—	$	100,096
FHLB advances		17,000		17,074		—		—		17,074

(Dollars in thousands)	Carrying Value December 31, 2017		Fair Value December 31, 2017		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	$	6,603	$	6,603	$	—	$	6,603	$	—
Other interest bearing deposits in other banks		2,607		2,607		—		2,607		—
Investment securities		34,015		33,613		—		33,613		—
Federal Home Loan Bank stock		754		754		—		754		—
Loans, net		93,765		94,009		—		4,070		89,939
Bank owned life insurance		4,574		4,574		—		4,574		—
Accrued interest receivable		394		394		—		394		—
LIABILITIES
Deposits	$	103,308	$	99,719	$	—	$	—	$	99,719
FHLB advances		13,000		12,978		—		—		12,978

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of March 31, 2018 (unaudited) and December 31, 2017:

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

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

Investment Securities

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

Federal Home Loan Bank Stock

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

Accrued Interest Receivable

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

Loans, Deposits and Federal Home Loan Bank Advances

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

Bank-Owned Life Insurance

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

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

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

General

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

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

Madison Bank of Maryland is a community-oriented financial institution, dedicated to serving the financial service needs of customers within its market area, which consists of Baltimore and Harford counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located primarily in our market area. Our real estate loans consist primarily of residential mortgage loans, as well as non-residential real estate loans, construction and land loans and home equity lines of credit. We currently operate out of our corporate headquarters and main office in Forest Hill, Maryland and two full-service branch offices located in Aberdeen and Perry Hall, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer. At March 31, 2018, we had total assets of $148.8 million, total deposits of $101.0 million and total equity of $30.1 million.

Our executive offices are located at 1920 Rock Spring Road, Forest Hill, Maryland 21050 and the telephone number is (410) 420-9600.

Available Information

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

Critical Accounting Policies

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

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

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

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

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

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

Balance Sheet Analysis

Assets. At March 31, 2018, our assets totaled $148.8 million, an increase of $1.5 million, or 1.02%, from total assets of $147.3 million at December 31, 2017. The increase in assets for the three months ended March 31, 2018 was due mainly to a $2.4 million, or 2.6%, increase in loans outstanding, partially offset by a $1.0 million, or 3.1% decrease in investment securities.

Loans. At March 31, 2018, residential mortgage loans totaled $75.3 million, or 76.5% of the total loan portfolio compared to $75.5 million, or 78.8% of the total loan portfolio at December 31, 2017. Residential mortgage loans decreased by $0.2 million, or 0.3%, during the three months ended March 31, 2018 primarily due to an increased level of paid off loans. Residential loan originations during the three months ended March 31, 2018 was $3.2 million as compared to $3.1 million for the comparable period for the prior year.

Non-residential real estate loans totaled $13.9 million, or 14.1% of total loans at March 31, 2018, compared to $13.2 million, or 13.8% of total loans, at December 31, 2017.

Construction and land loans totaled $3.3 million, and represented 3.3% of total loans, at March 31,

2018, compared to $3.2 million, or 3.4% of total loans, at December 31, 2017. At March 31, 2018, we had $1.5 million of construction loans, amounting to 45.1% of our construction and land loan portfolio, and $1.8 million of land loans, amounting to 54.9% of our construction and land loan portfolio.

Home equity lines of credit, all of which are secured by residential properties, totaled $3.6 million, and represented 3.6% of total loans, at March 31, 2018, compared to $3.5 million, or 3.6% of total loans at December 31, 2017.

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 $2.4 million at March 31, 2018, representing less than 2.4% of the loan portfolio.

Securities. At March 31, 2018, our securities available-for-sale, recorded at fair value, decreased by $909,000, or 5.5%, from $16.6 million at December 31, 2017 to $15.7 million at March 31, 2018. The decrease is due to payments received during the quarter. Securities available-for-sale at March 31, 2018 consisted of U.S. Agency bonds, a taxable municipal security and mortgage-backed securities, including collateralized mortgage obligations issued by U.S Government Agencies such as Freddie Mac, Fannie Mae and Ginnie Mae. At March 31, 2018, our securities held-to-maturity decreased by $130,000, or 0.7%, from $17.4 million at December 31, 2017 to $17.3 million at March 31, 2018. 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 March 31, 2018, we also held a $855,000 investment in the common stock of the Federal Home Loan Bank of Atlanta. At March 31, 2018, we held no stock in Fannie Mae and Freddie Mac.

Ground Rents. Ground rents, net amounted to $673,000 at March 31, 2018 compared to $681,000 at December 31, 2017.

Deposits. Total deposits decreased by $2.3 million, or 2.2%, to $101.0 million at March 31, 2018 from $103.3 million at December 31, 2017. Balances in non-interest-bearing deposits had no change from $1.5 million at December 31, 2017. Interest-bearing deposits decreased by $2.3 million, or 2.3%, to $99.5 million at March 31, 2018 compared to $101.8 million at December 31, 2017.

Borrowings. At March 31, 2018, we had $17.0 million in borrowings from the Federal Home Loan Bank of Atlanta compared to $13.0 million at December 31, 2017, a $4.0 million, or 30.8% increase in short term FHLB advances. During the quarter ending March 31, 2018, we had the $4.0 million of advances outstanding as of December 31, 2017 mature and we borrowed $8.0 million on a short term basis.

Equity. Equity decreased by $232,000, or 0.8%, to $30.1 million at March 31, 2018 from

$30.4 million at December 31, 2017 primarily as the result of an increase in accumulated other comprehensive loss.

Results of Operations for the Three Months Ended March 31, 2018 and 2017

Overview. We had a net loss of $22,000 for the three months ended March 31, 2018, as compared to net loss of $31,000 for the three months ended March 31, 2017. The decrease in the net loss for the three months ended March 31, 2018 compared to the net loss in the prior year quarter, was primarily due to an increase in net interest income offset slightly by additional legal costs incurred in connection with the negotiations of standstill agreements and the appointment of two shareholders onto our Board.

Net Interest Income. Net interest income increased by $77,000, or 9.1%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase in net interest income was primarily attributable to an increase in average balance of interest-earning assets and an increase in yield on these interest-earning assets offset slightly by an increase in the cost of our interest-bearing liabilities. The increase in the average balance of interest-earning assets was due primarily to an $8.8 million, or 10.2%, increase in the average balance of loans receivable, net of unearned fees due to increased loan production during the past 12 months.

Interest on loans receivable, net of unearned fees increased by $111,000, or 13.2%, for the three months ended March 31, 2018 as compared to the comparable period in 2017, due to a $8.8 million increase in the average balance and a 11 basis point increase in the average yield.

Interest on investment securities available-for-sale increased by $50,000 for the three months ended March 31, 2018 as compared to the comparable period in 2017. There was a nine basis point increase in the average yield on investment securities available-for-sale and a $7.8 million increase in the average balance of investment securities available-for-sale. Interest on investment securities held-to-maturity decreased by $16,000 for the three months ended March 31, 2018 as compared to the comparable period in 2017. There was a two basis point increase 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 deposits increased by $39,000, or 20.2%, during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. The average balance of deposits increased by $5.7 million, or 6.1% when comparing the quarter ending March 31, 2017 to the prior year.

Interest on Federal Home Loan Bank of Atlanta advances increased by $24,000, or 114.3%, during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. The average balance of advances increased by $4.5 million, or 50.7% when comparing the quarter ending March 31, 2018 to the prior year and the cost of these advances increased by 40 basis points for the same time period as interest rates have gradually increased.

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 2018 and 2017, and non-accrual loans are included in average balances only. Loan fees are included in interest income on loans and are insignificant. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

	Three Months Ended March 31,
	2018 (unaudited)								2017 (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	$	4,499		$	15		1.33	%	$	9,933		$	24		0.98	%
Loans receivable, net of unearned fees		94,669			949		4.01			85,889			838		3.90
Investment securities available-for-sale – amortized cost		16,195			100		2.47			8,380			50		2.38
Investment securities held-to-maturity		17,231			125		2.90			19,614			141		2.88
Other interest-earning assets		758			10		5.28			515			6		4.81
Total interest-earning assets		133,352			1,199		3.60			124,331			1,059		3.41
Cash and due from banks		3,036								4,767
Allowance for credit losses		(1,293	)							(1,211	)
Other non-interest-earning assets		10,712								7,783
Total assets		145,807								135,670

Interest-bearing liabilities:
Certificates of deposit		64,303			207		1.29			58,854			176		1.19
NOW and money market		20,975			21		0.40			21,883			14		0.26
Savings		14,708			4		0.11			13,512			3		0.10
Federal Home Loan Bank advances		13,444			45		1.34			8,922			21		0.94
Total interest-bearing liabilities		113,430			277		0.98			103,171			214		0.83
Non-interest-bearing demand deposits		1,515								1,395
Other non-interest-bearing liabilities		676								870
Total liabilities		115,621								105,436
Total equity		30,186								30,234
Total liabilities and equity	$	145,807							$	135,670
Net interest income				$	922							$	845
Interest rate spread							2.62	%							2.58	%
Net interest margin							2.77	%							2.72	%
Ratio of average interest-earning assets to average interest-bearing liabilities							117.56	%							120.51	%

Provision for Loan Losses. We did not have any provision for loan losses for the three months ended March 31, 2018 and March 31, 2017. At March 31, 2018, the allowance for loan losses was $1.3 million, or 1.31% of the total loan portfolio, compared to $1.3 million, or 1.34% of the total loan portfolio, at December 31, 2017.

Non-accrual loans amounted to $1.8 million at March 31, 2018 compared to $1.6 million at December 31, 2017. The increase in non-accrual loans of $176,000 was due to one additional non-accrual loan added during the first quarter of 2018 which was previously classified as greater than 90 days delinquent but still accruing. We anticipate having a positive resolution of this loan prior to the end of this year. As a percentage of non-performing loans and accruing troubled debt restructurings, the allowance for loan losses was 32.8% at March 31, 2018 compared to 30.6% at December 31, 2017. There were $6,000 of net loan recoveries during the three months ended March 31, 2018, compared to $23,000 of net loan charge-offs during the three months ended March 31, 2017.

Non-interest Income. Total non-interest income decreased by $24,000, or 25.8%, from $93,000 for the three months ended March 31, 2017 to $69,000 for the three months ended March 31, 2018. The decrease in total non-interest income was predominately due to a $16,000 gain on sale of securities realized in 2017 and no sales of securities during 2018.

Non-interest Expenses. Total non-interest expenses increased by $44,000, or 4.5%. We had non-interest expenses of $1,013,000 for the three months ended March 31, 2018 and $969,000 for the three months ended March 31, 2017. The increase primarily was attributable to a $48,000 increase in salaries and employee benefits. During the three months ended March 31, 2018 we had additional legal costs (approximately $39,000) incurred in connection with the negotiations of standstill agreements and the appointment of two shareholders onto our Board.

Income Tax Expense. We recorded no income tax expense during the three months ended March 31, 2018 and March 31, 2017. 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 March 31, 2018, 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%.

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

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

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

	March 31, 2018			December 31, 2017
(Dollars in thousands)	(unaudited)
Non-accrual loans:
Residential, home equity lines of credit and consumer	$	1,151		$	930
Non-residential		—			—
Construction and land		605			650
Total non-performing loans		1,756			1,580
Accruing loans past due 90 days or more:
Residential, home equity lines of credit and consumer		—			341
Total		—			341
Total of non-performing loans and accruing loans 90 days or more past due		1,756			1,921
Assets acquired through foreclosure		—			—
Ground rents		146			141
Total non-performing assets		1,902			2,062
Troubled debt restructurings accruing		2,181			2,212
Troubled debt restructurings accruing and total non-performing assets	$	4,083		$	4,274
Total of non-performing loans and accruing loans past due 90 days or more to total loans		1.78	%		2.00	%
Total non-performing loans to total assets		1.18			1.07
Total non-performing assets to total assets		1.28			1.40
Total non-performing loans and accruing troubled debt restructurings to total assets		2.65			2.57
Total non-performing assets and accruing troubled debt restructurings to total assets		2.74			2.90

At March 31, 2018, non-accrual loans consisted of 17 residential mortgage loans totaling $1.2 million, no non-residential loans totaling $0, three construction and land loans totaling $605,000 and no home equity lines of credit. The increase in non-performing loans at March 31, 2018 as compared to December 31, 2017 is primarily due to the addition of one new residential loan which was previously classified as past due greater than 90 days but still accruing less some loan payments and one loan recovery. We had no loan 90 days or more past due but still accruing at March 31, 2018 and two loans 90 days or more past due but still accruing at December 31, 2017.

At March 31, 2018, our largest non-performing loan relationships consisted of the following:

A $589,000 lending relationship secured by waterfront property in Queen Anne’s County on the Eastern shore of the Chesapeake Bay.

We occasionally modify loans to extend the term or make other concessions to help borrowers stay current on their loans and to avoid foreclosure. We do not forgive principal or interest on loans but have modified the interest rates on loans to rates that are below market rates. In the case of non-residential mortgage loans or large residential mortgage loans, before agreeing to modify a loan, we perform a financial analysis of the borrower to determine that the borrower will be able to comply with the terms of the loan as restructured. At March 31, 2018 and December 31, 2017, we had $3.2 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 March 31, 2018, our largest accruing troubled debt restructured loan was an $811,000 loan secured by a first mortgage on a church in Baltimore City. We restructured the loan to reduce the interest rate on the loan in 2015 and the loan has paid in accordance to the restructured terms since that time. We receive certain rental payments from proceeds of a cell tower on the property that are paid directly to us to meet the debt service requirements on these loans. In addition, the Church pays an additional amount each month that is applied to past due interest arrearages as well as a recovery of legal expenses incurred on the collection efforts of this loan.

Interest income that would have been recorded for the three months ended March 31, 2018 and 2017 had non-accrual loans been current according to their original terms, amounted to approximately $21,000 and $30,000, respectively. Interest income of $63,000 and $85,000 related to non-accrual loans was included in interest income for the three months ended March 31, 2018 and 2017, respectively.

At March 31, 2018, we had no other real estate owned.

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

	Three Months Ended March 31,
	2018			2017
(Dollars in thousands)	(unaudited)			(unaudited)
Allowance at beginning of period	$	1,288		$	1,218

Charge-Offs:
Residential, home equity lines of credit and consumer		—			(4	)
Non-residential		—			(19	)
Construction and land loans		—			—
Total charge-offs		—			(23	)

Recoveries:
Residential, home equity lines of credit and consumer		6			—
Non-residential.		—			—
Construction and land loans		—			—
Total recoveries		—			—

Net recoveries (charge-offs)		6			(23	)
(Reversal) provision for loan losses		—			—
Allowance at end of period	$	1,294		$	1,195
Allowance for loan losses to non-performing loans and accruing troubled debt restricting at end of period		32.84	%		30.62	%
Allowance for loan losses to total loans at end of period.		1.31	%		1.39	%
Net charge-offs to average loans outstanding during the period		0.00	%		0.03	%

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

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

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At March 31, 2018, cash and cash equivalents totaled $8 million and other interest-bearing deposits in other banks totaled $1.2 million. Securities classified as available-for-sale amounting to $15.7 million at March 31, 2018, provide an additional source of liquidity. In addition, at March 31, 2018, we had the ability to borrow a total of approximately $36.7 million from the Federal Home Loan Bank of Atlanta. At March 31, 2018, we had $17.0 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 March 31, 2018.

At March 31, 2018, we had $1.8 million in commitments to extend credit outstanding. Certificates of deposit due by December 31, 2018 totaled $28.3 million, or 44.0% 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, 2018. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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

Financing and Investing Activities

Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2018, 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 has been and 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 were 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 has had an adverse impact on our return on equity. To help us better manage capital, we may use capital management tools such as cash dividends and common share repurchases.

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

For the three months ended March 31, 2018 and 2017, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.

Qualitative and Quantitative Disclosures about Market Risk

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

Item 4.

Controls and Procedures

(a)

Disclosure Controls and Procedures

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

(b)

Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(c)

Changes to Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

For information regarding the Company’s risk factors, see the section entitled “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “Form 10-K”) (File No. 000-55341). As of March 31, 2018, 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 March 31, 2018.

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)

January 1-31		—		—		—		97,010
February 1-28		—		—		—		97,010
March 1-31		—		—		—		97,010
Total		—		—		—

(1) On December 8, 2017, the Company announced a program to repurchase up to 97,010 shares of its common stock. The Company’s repurchase program was set to terminate upon the completion of the purchase of 97,010 shares or on June 8, 2018 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)

10.1

Agreement, dated February 20, 2018, by and among MB Bancorp, Inc., Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P., Stilwell Partners, L.P., Stilwell Value LLC, Joseph Stilwell and Corissa J. Briglia (2)

10.2

Agreement, dated February 20, 2018, by and between MB Bancorp, Inc. and Jeffrey Thorp (2)

31.1

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

31.2

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

32.0

Section 1350 Certifications

101.0

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of 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).

(2)

Incorporated herein by reference to the exhibits filed with the Company’s Form 8-K filed with the Securities of Exchange Commission on February 21, 2018 (File No. 000-55341).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		MB BANCORP, INC

Dated: May 11, 2018	By:	/s/ Philip P. Phillips
		Philip P. Phillips
		President and Chief Executive Officer
		(principal executive officer)

Dated: May 11, 2018	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 - May 11, 2018

Attached files

MB Bancorp Inc Reports