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EX-32.0 - EXHIBIT 32.0 - MB Bancorp Inctv499866_ex32-0.htm
EX-31.2 - EXHIBIT 31.2 - MB Bancorp Inctv499866_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - MB Bancorp Inctv499866_ex31-1.htm

 

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from                  to                 

 

Commission file number: 000-55341

 

  MB BANCORP, INC.  
  (Exact name of registrant as specified in its charter)  

 

  Maryland   47-1696350  
  (State or Other Jurisdiction of Incorporation or
Organization)
  (I.R.S. Employer Identification No.)  
         
  1920 Rock Spring Road, Forest Hill, Maryland   21050  
  (Address of Principal Executive Offices)   (Zip Code)  

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

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

 

As of August 8, 2018, there were 1,938,480 shares of common stock outstanding.

 

 

 

 

 

 

MB BANCORP, INC.

 

Table of Contents

 

    Page
No.
Part I. Financial Information  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 (audited) 3
     
  Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited) 5
     
  Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2018 and 2017 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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 37
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
     
Item 4. Controls and Procedures 50
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 51
     
Item 1A. Risk Factors 51
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
     
Item 3. Defaults Upon Senior Securities 51
     
Item 4. Mine Safety Disclosures 51
     
Item 5. Other Information 51
     
Item 6. Exhibits 51
     
Signatures   52

 

 2 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

ASSETS

 

   As of   As of 
   June 30,   December 31, 
   2018   2017 
(Dollars in thousands)  (unaudited)   (audited) 
         
Assets:          
Cash and due from banks  $2,576   $6,603 
Interest bearing deposits in other banks   5,007    1,362 
Total cash and cash equivalents   7,583    7,965 
           
Other interest-bearing deposits in other banks   1,245    1,245 
Investment securities available-for-sale – at fair value   15,067    16,605 
Investment securities held to maturity – amortized cost   17,122    17,410 
           
Loans, net of unearned fees   100,288    95,053 
Less allowance for loan losses   (1,353)   (1,288)
Loans, net   98,935    93,765 
           
Real estate ground rents   813    822 
Less allowance for credit losses   (143)   (141)
Ground rents, net   670    681 
           
Federal Home Loan Bank stock, at cost   1,025    754 
Property and equipment – net   3,607    3,664 
Deferred income taxes        
Bank-owned life insurance   4,634    4,574 
Accrued interest receivable and other assets   513    668 
TOTAL ASSETS  $150,401   $147,331 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
LIABILITIES:          
Deposits  $98,066   $103,308 
Federal Home Loan Bank advances   21,000    13,000 
Deferred compensation liability   144    159 
Accounts payable and other liabilities   657    504 
Total liabilities   119,867    116,971 
           
STOCKHOLDERS' EQUITY:          
Common stock .01 par value; authorized 19,000,000 shares; issued and outstanding, 1,938,480 and 1,940,200 shares at June 30, 2018 and December 31, 2017   19    19 
Additional paid-in capital   18,240    18,135 
Retained earnings - substantially restricted   14,117    13,780 
Accumulated other comprehensive loss   (554)   (229)
Unearned ESOP shares   (1,288)   (1,345)
Total stockholders' equity   30,534    30,360 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $150,401   $147,331 
           

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Three Months
Ended June 30,
   For the Six Months
Ended June 30
 
   2018   2017   2018   2017 
(Dollars in thousands, except per share amount)  (unaudited)   (unaudited) 
                 
INTEREST INCOME:                    
Interest and fees on loans  $1,136   $810   $2,085   $1,648 
Interest on federal funds sold and other investments   12    22    27    46 
Interest and dividends on investment securities   234    233    469    430 
Total interest income   1,382    1,065    2,581    2,124 
                     
INTEREST EXPENSE:                    
Interest on deposits   241    200    473    393 
Interest on short-term borrowings   34    21    51    35 
Interest on long term borrowings   27    2    55    9 
Total interest expense   302    223    579    437 
                     
NET INTEREST INCOME   1,080    842    2,002    1,687 
                     
REVERSAL FOR LOAN LOSSES   (225)       (225)    
                     
NET INTEREST INCOME AFTER REVERSAL FOR LOAN LOSSES   1,305    842    2,227    1,687 
                     
NON-INTEREST INCOME:                    
Service charges on deposit accounts   4    4    8    7 
Fees and charges on loans   17    6    24    16 
Increase in cash surrender value of life insurance   35    38    72    62 
Gain on investment securities       26        42 
Ground rent fees   12    10    22    22 
Other income   10    12    21    23 
Total non-interest income   78    96    147    172 
                     
NON-INTEREST EXPENSE:                    
Salaries and employee benefits   593    494    1,183    1,036 
Occupancy expenses   102    102    204    216 
Furniture and equipment expenses   11    10    22    19 
Legal and professional expenses   95    94    198    175 
Data processing and other outside services   74    79    156    154 
FDIC insurance premiums   9    9    18    3 
Advertising and marketing related expenses       2    2    5 
Provision (reversal) for loss on ground rents   (4)   (10)   1    (12)
Other expenses   136    135    245    271 
Total non-interest expenses   1,016    915    2,029    1,867 
                     
INCOME (LOSS) BEFORE INCOME TAXES   367    23    345    (8)
                     
INCOME TAX EXPENSE                
                     
NET INCOME (LOSS)  $367   $23   $345   $(8)
                     
Basic earnings per share  $0.20   $0.02   $0.19   $ 
                     
Diluted earnings per share  $0.20   $0.02   $0.19   $ 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
 
   2018   2017   2018   2017 
(Dollars in thousands)  (unaudited)   (unaudited) 
         
NET INCOME (LOSS)  $367   $23   $345   $(8)
OTHER COMPREHENSIVE (LOSS) INCOME ON                    
AVAILABLE-FOR-SALE INVESTMENT  SECURITIES:                    
Unrealized gains (losses) arising during the period   (26)   150    (325)   128 
Reclassification of gains included in net income       (26)       (42)
Unrealized gains (losses)  arising during the period   (26)   124    (325)   86 
Income tax benefits on unrealized gains (losses) arising during the period                
    (26)   124    (325)   86 
COMPREHENSIVE INCOME  $341   $147   $20   $78 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 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           (8)           (8)
Net unrealized gains on available- for sale securities, net of taxes of ($0)                   128    128 
Repurchase of common stock       (121)   (64)           (185)
Stock-based compensation       37        57        94 
BALANCES AT JUNE 30, 2017  $19   $18,048   $13,698   $(1,401)  $(11)  $30,353 
                               
BALANCES AT JANUARY 1, 2018  $19   $18,135   $13,780   $(1,345)  $(229)  $30,360 
Net income           345            345 
Net unrealized loss on available- for sale securities, net of taxes of ($0)                   (325)   (325)
Repurchase of common stock       (16)   (8)           (24)
Stock-based compensation       121        57        178 
BALANCES AT JUNE 30, 2018  $19   $18,240   $14,117   $(1,288)  $(554)  $30,534 

 

See accompanying notes to consolidated financial statements.

 

 6 

 

 

MB BANCORP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For Six Months Ended 
   June 30,   June 30, 
   2018   2017 
(Dollars in thousands)  (unaudited) 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $345   $(8)
Adjustment to reconcile net income (loss) to net cash provided (used) in operating activities:          
Depreciation expense   67    64 
Increase in cash surrender value of life insurance   (60)   (48)
Net amortization/accretion of premiums and discounts   38    25 
Reversal for loan losses   (225)    
Provision (reversal) for ground rent losses   1    (12)
Non-cash compensation under stock-based benefit plan   178    94 
Decrease in accrued interest and other assets   155    57 
Gain on redemption of investment securities       (42)
Decrease in deferred compensation liability   (15)   (16)
Increase (decrease) in accounts payable and other liabilities   153    (183)
Net cash provided by (used in) operating activities   637    (69)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Net decrease in other interest bearing deposits in other banks       3,237 
Purchase of available-for-sale investments       (12,835)
Proceeds from calls/repayments of available-for-sale investments   1,172    466 
Proceeds from sale of available for sale securities       338 
Purchase of held-to-maturity investments       (1,732)
Proceeds from maturity/repayments of held-to-maturity investments   291    2,806 
Net increase in loans   (4,945)   (490)
Proceeds from sale of ground rents   10    2 
Purchase of bank-owned life insurance       (3,500)
Purchase of property, plant and equipment   (10)   (103)
Purchases of Federal Home Loan Bank stock   (271)   (208)
Net cash used in investing activities   (3,753)   (12,019)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net increase (decrease) in deposits   (5,242)   6,311 
Federal Home Loan Bank advances   30,000    34,000 
Federal Home Loan Bank repayments   (22,000)   (29,000)
Repurchase of common stock   (24)   (185)
Net cash provided by financing activities   2,734    11,126 
           
DECREASE IN CASH AND CASH EQUIVALENTS   (382)   (962)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR   7,965    9,267 
CASH AND CASH EQUIVALENTS AT END OF YEAR  $7,583   $8,305 
           
Supplemental cash flow information:          
Interest paid  $581   $440 
Income taxes paid  $   $ 
Noncash:          
Transfer of other real estate owned to loans  $   $ 

 

See accompanying notes to consolidated financial statements.

 

 7 

 

 

MB BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017 (UNAUDITED)

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

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

 

Unaudited Interim Financial Statements

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying consolidated financial statements as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 contains all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2018.

 

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

 

These statements should be read in conjunction with the audited consolidation financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations and cash flows for the three and six months ended June 30, 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.

 

 8 

 

 

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.

 

 9 

 

 

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 or reversal for loan losses which is credited 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.

 

 10 

 

 

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 June 30, 2018 and December 31, 2017, the Company’s investment includes individual ground rents ranging from $600 to $3,000, totaling $813,000 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 June 30, 2018 and December 31, 2017, the Company had $143,000 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.

 

 11 

 

 

Earnings Per Share

 

Basic per share amounts are based on the weighted average shares of common stock outstanding. Unearned ESOP shares are not included in outstanding shares. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share.

 

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 June 30, 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.

 

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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.

 

2. 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.

 

 13 

 

 

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 was effective for the Company on January 1, 2018 and did not 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.

 

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3.INVESTMENT SECURITIES

 

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

 

 

   June 30, 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   $   $(100)  $900 
Municipal securities   490        (6)   484 
Mortgage-backed securities:   14,131        (448)   13,683 
Total investments available-for-sale  $15,621   $   $(554)  $15,067 

 

 

   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:

 

   June 30, 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   $   $(743)  $11,757 
Mortgage backed securities   4,622    51    (166)   4,507 
Total investments held-to-maturity  $17,122   $51   $(909)  $16,264 

 

   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 Investments held-to-maturity  $17,410   $106   $(508)  $17,008 

 

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Below are schedules of both available-for-sale and held-to-maturity securities with unrealized losses as of June 30, 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 June 30, 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 six month period ended June 30, 2018. The Bank realized gains of $42,000 on sale of investment securities for the six month period ended June 30, 2017. Proceeds from sales of available for sale securities totaled $312,000 for six month period ended June 30, 2017 with realized gains of $8,000. During the six month period ended June 30, 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 $729,000 for the six month period ended June 30, 2017 with realized gains of $34,000.

 

   June 30, 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  $12,088   $(342)  $4,152   $(272)  $16,240   $(614)
Municipal securities           484    (6)   484    (6)
U.S. Government securities   966    (34)   11,691    (809)   12,657    (843)
Total temporarily impaired securities  $13,054   $(376)  $16,327   $(1,087)  $29,381   $(1,463)

 

   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 June 30, 2018 (unaudited) were as follows:

 

   Amortized
Cost
(in thousands)
   Fair
Value
(in thousands)
 
Due over one year through five years  $1,000   $966 
Due over five years through ten years   11,000    10,327 
Due after ten years   1,990    1,848 
Mortgage-backed securities   18,753    18,190 
Total  $32,743   $31,331 

 

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4.LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

   June 30,
2018
   December 31,
2017
 
(Dollars in thousands)  (unaudited)     
Secured by real estate:          
Residential:          
One-to four-family  $77,407   $74,266 
Multi-family   1,222    1,243 
Total   78,629    75,509 
Non-residential   14,092    13,183 
Construction and land loans   2,996    3,240 
Home equity line of credit (“HELOC”)   3,411    3,471 
           
Commercial, Consumer and other loans:          
Commercial loans   2,135    296 
Loans to depositors, secured by savings   64    128 
    101,327    95,827 
Add:          
Net (discount) premium on purchased loans       1 
Unamortized net deferred costs   46    41 
Less:          
Undisbursed portion of construction loans   (1,011)   (741)
Unearned net loan origination fees   (74)   (75)
Less allowance for loan losses   (1,353)   (1,288)
Loans receivable, net  $98,935   $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.

 

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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.

 

Commercial loans consist primarily of loans secured by equipment the borrower’s deposit balance at the Bank or business assets. The risk of loss on these loans is largely dependent on the Bank’s ability to assess the borrower’s cash flow and ability to repay the loan as well assessing the collateral value. The Bank attempts to mitigate credit risk through strict underwriting guidelines, including evaluation of the credit worthiness of the borrowers and continued monitoring of the relationship.

 

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.

 

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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 June 30, 2018, we had approximately $192,000 of unallocated reserves as compared to $155,000 as of December 31, 2017 and $216,000 as of June 30, 2017.

 

Allowance for loan losses and recorded investment in loans for the three and six months ended June 30, 2018 (unaudited) is as follows:

 

(Dollars in thousands) 

Residential

Real Estate,

HELOC,

and
Consumer

  

Non-
residential

Real Estate

  

Construction

and

Land

   Total 
Allowance for loan losses:                    
Beginning balance, April 1, 2018  $889   $384   $21   $1,294 
Charge-offs                
Recoveries       2    282    284 
(Reverse) Provisions   76    (17)   (284)   (225)
Ending balance, June 30, 2018  $965   $369   $19   $1,353 
                     
Beginning balance, January 1, 2018  $1,043   $158   $87   $1,288 
Charge-offs                
Recoveries   5    3    282    290 
(Reverse) Provisions   (83)   208    (350)   (225)
Ending balance, June 30, 2018.  $965   $369   $19   $1,353 
                     
Allowance for loan losses:                    
Ending balance: individually evaluated for impairment.  $   $   $   $ 
Ending balance: collectively evaluated for impairment  $965   $369   $19   $1,353 
Loans:                    
Ending balance: individually evaluated for impairment. .  $2,372   $1,261   $445   $4,078 
Ending balance: collectively evaluated for impairment  $81,867   $12,831   $2,551   $97,249 

 

Allowance for loan losses and recorded investment in loans for the three and six months ended June 30, 2017 (unaudited) is as follows:

 

(Dollars in thousands) 

Residential

Real Estate,

HELOC,

and
Consumer

  

Non-
residential

Real Estate

  

Construction

and

Land

   Total 
Allowance for loan losses:                    
Beginning balance, April 1, 2017  $1,048   $97   $50   $1,195 
Charge-offs    (45)   (62)       (107)
Recoveries    3        131    134 
Provisions   29    99    (128)    
Ending balance, June 30, 2017  $1,035   $134   $53   $1,222 
                     
Beginning balance, January 1, 2017  $973   $158   $87   $1,218 
Charge-offs   (49)   (81)       (130)
Recoveries   3        131    134 
Provisions   108    57    (165)    
Ending balance, June 30, 2017.  $1,035   $134   $53   $1,222 
Allowance for loan losses:                    
Ending balance: individually evaluated for impairment  $38   $   $   $38 
Ending balance: collectively evaluated for impairment  $997   $134   $53   $1,184 
Loans:                    
Ending balance: individually evaluated for impairment. .  $3,042   $1,091   $1,201   $5,334 
Ending balance: collectively evaluated for impairment  $72,436   $8,647   $2,680   $83,763 

 

 19 

 

 

 

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    (36)   (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 June 30, 2018 (unaudited) is as follows:

 

(Dollars in thousands)  Residential
Real Estate,
HELOC,
and Consumer
   Non-
residential
Real Estate
   Construction
and Land
   Total 
Non-classified  $80,204   $11,998   $2,321   $94,523 
Special mention   2,009    1,108    242    3,359 
Substandard   2,026    986    433    3,445 
Doubtful                
Loss                
Total  $84,239   $14,092   $2,996   $101,327 

 

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 

 

 20 

 

 

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

 

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

 

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

 

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

 

Impaired loans as of the three and for the six months ended June 30, 2018 (unaudited) is as follows:

 

(Dollars in thousands) 

Residential

Real Estate,

HELOC,

and
Consumer

  

Non-

residential

Real Estate

  

Construction

and Land

   Total 
With no related allowance recorded:                    
Recorded investment  $2,372   $1,261   $445   $4,078 
Unpaid principal balance   2,779    1,398    647    4,824 
Average recorded investment, for the three months ended June 30, 2018   2,510    1,172    640    4,322 
Interest income recognized   37    134    11    182 
Interest income foregone   10            10 
Average recorded investment, for the six months ended June 30, 2018   2,562    1,156    850    4,568 
Interest income recognized   77    148    19    244 
Interest income foregone   20            20 
With an allowance recorded:                    
Recorded investment                
Unpaid principal balance                
Related allowance                
Average recorded investment, for the three months ended June 30, 2018                
Interest income recognized                
Interest income foregone                
Average recorded investment, for the six months ended June 30, 2018                
Interest income recognized                
Interest income foregone                
Total                    
Recorded investment   2,372    1,261    445    4,078 
Unpaid principal balance   2,779    1,398    647    4,824 
Related allowance                
Average recorded investment, for the three months ended June 30, 2018   2,510    1,172    640    4,322 
Interest income recognized   37    134    11    182 
Interest income foregone   10            10 
Average recorded investment, for the six months ended June 30, 2018   2,562    1,156    850    4,568 
Interest income recognized   77    148    19    244 
Interest income foregone   20            20 

 

 21 

 

 

Impaired loans as of the three and for the six months ended June 30, 2017 (unaudited) is as follows:

 

(Dollars in thousands) 

Residential

Real Estate,

HELOC,

and
Consumer

  

Non-
residential

Real Estate

  

Construction

and Land

   Total 
With no related allowance recorded:                    
Recorded investment  $2,679   $1,091   $1,201   $4,971 
Unpaid principal balance   3,667    1,670    2,240    7,577 
Average recorded investment, for the three months ended June 30, 2017   2,724    756    816    4,296 
Interest income recognized   37    8    13    58 
Interest income foregone   9        12    21 
Average recorded investment, for the six months ended June 30, 2017   2,578    1,054    1,278    4,910 
Interest income recognized   103    23    25    151 
Interest income foregone   16        30    46 
With an allowance recorded:                    
Recorded investment   363            363 
Unpaid principal balance   363            363 
Related allowance   38            38 
Average recorded investment, for the three months ended June 30, 2017   363            363 
Interest income recognized   9            9 
Interest income foregone                
Average recorded investment, for the six months ended June 30, 2017   348            348 
Interest income recognized   9            9 
Interest income foregone                
Total                    
Recorded investment   3,042    1,091    1,201    5,334 
Unpaid principal balance   4,030    1,670    2,240    7,940 
Related allowance   38            38 
Average recorded investment, for the three months ended June 30, 2017   3,087    756    816    4,659 
Interest income recognized   46    8    13    67 
Interest income foregone   9        12    21 
Average recorded investment, for the six months ended June 30, 2017   2,926    1,054    1,278    5,258 
Interest income recognized   112    23    25    160 
Interest income foregone   16        30    46 

 

 22 

 

 

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 June 30, 2018 (unaudited) are as follows:

 

(Dollars in thousands)  Residential
Real Estate,
HELOC,
and
Consumer
   Non-
residential
Real Estate
   Construction
and Land
   Total 
Current  $83,624   $14,092   $2,996   $100,712 
30 - 59 days past due   144            144 
60 - 89 days past due   7            7 
Greater than 90 day past due and still accruing                
Greater than 90 days past due   464            464 
Total past due   615            615 
Total  $84,239   $14,092   $2,996   $101,327 

 

 23 

 

 

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 June 30, 2018 (unaudited) are as follows:

 

(Dollars in thousands)

  Residential
Real Estate,
HELOC,
and
Consumer
   Non-
residential
Real Estate
   Construction
and Land
   Total 
Non-accruing troubled debt restructured loans  $265   $   $11   $276 
Other non-accrual loans   531            531 
Total non-accrual loans   796        11    807 
Accruing troubled debt restructured loans   1,191    1,261        2,452 
Total  $1,987   $1,261   $11   $3,259 

 

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.

 

There was a refinance of an existing performing TDR ($944,000) during the six months ended June 30, 2018 and there was no troubled debt restructurings during the six months ended June 30, 2017 (unaudited). The loan that was refinanced experienced hardships from October 2011 through July 2013 whereby the borrowers could not make their scheduled payments and was modified in November 2013 becoming a TDR at that time. The loan performed in accordance with the modification; however the missed payments were deferred and became a balloon payment at maturity. In June 2018, the loan was refinanced and included all of the past deferred payments as well as the accrued late charges and legal expenses since there was sufficient collateral. The rate on the refinance did not change however the term was extended by approximately 3 years.

 

 24 

 

 

There were no troubled debt restructures that subsequently defaulted during the six months ended June 30, 2018 and 2017 (unaudited).

 

Loans serviced by the Bank for the benefit of others totaled $394,000 and $401,000 at June 30, 2018 (unaudited) and December 31, 2017, respectively.

 

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $519,000 as of June 30, 2018 (unaudited).

 

5.OTHER REAL ESTATE OWNED

 

The balance in other real estate owned at June 30, 2018 (unaudited) and December 31, 2017 was zero.

 

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

 

    June 30,
2018
    December 31,
2017
 
(Dollars in thousands)   (unaudited)      
Beginning balance  $   $ 
Additions        
Transfers from Loans        
Transfers to Loans        
Sales         
Provisions        
Ending balance  $   $ 

 

6.DEPOSITS

 

Deposits are summarized as follows:

 

  

June 30,

2018

    December 31,
2017
(Dollars in thousands)   (unaudited)       
Non-interest-bearing deposits  $1,830   $1,542 
NOW and Money market   20,402    21,481 
Savings   14,595    14,718 
Certificates of deposit   61,239    65,567 
Total deposits  $98,066   $103,308 

 

The aggregate amount of time deposits in denominations greater than $250,000 as of June 30, 2018 (unaudited) and December 31, 2017 was $3,224,000 and $3,165,000, respectively. Deposit amounts in excess of $250,000 generally are not insured by the Federal Deposit Insurance Corporation.

 

 25 

 

 

At June 30, 2018 (unaudited), the schedule maturities of certificates of deposit are as follows:

 

(Dollars in thousands)    
2018  $12,532 
2019   25,619 
2020   9,522 
2021   8,116 
2022   3,995 
2023   1,455 
Total  $61,239 

 

Executive officers’ and directors’ deposits were $473,000 and $330,000 at June 30, 2018 (unaudited) and December 31, 2017, respectively.

 

7.INCOME TAXES

 

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

 

   June 30,
2018
   December 31,
2017
 
(Dollars in thousands)   (unaudited)      
Deferred tax assets:          
Deferred loan fees and costs, net  $8   $9 
Allowance for credit losses   372    355 
Deferred compensation   40    44 
Severance payments   44    60 
Restricted stock awards   37    14 
Allowance for ground rents   39    39 
Allowance for delinquent mortgage interest   92    101 
Contribution carryforward   2    2 
Net operating loss carryforward   1,271    1,354 
Unrealized loss on available-for-sale securities        
Total deferred tax assets   1,905    1,978 
Valuation allowance   (1,806)   (1,883)
Deferred tax assets after valuation allowance   99    95 
Deferred tax liabilities:          
Depreciation   99    95 
ESOP        
Total deferred tax liabilities   99    95 
Net deferred tax assets  $   $ 

 

Management evaluates deferred tax assets annually.

 

 26 

 

 

The provision for income taxes is comprised of the following:

 

    June 30,
2018
    June 30,
2017
 
(Dollars in thousands)   (unaudited)    (unaudited) 
Tax expense (benefit):          
Current federal and state  $   $ 
Deferred tax        
Total  $   $ 

 

At June 30, 2018, the Bank had approximately $4,400,000 in federal and $4,800,000 in state net operating loss carryforwards. 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 six months ended June 30, 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    
Decrease in valuation allowance   77 
Balance of June 30, 2018  $(1,806)

 

As of December 31, 2017 and June 30, 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 June 30, 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:

 

 27 

 

 

·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 June 30, 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 June 30, 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 June 30, 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 $84,825 and $8,161 for the six months ended June 30, 2018 and June 30, 2017, respectively. As of June 30, 2018, there was $643,819 of total unrecognized compensation cost related to nonvested shares granted under the 2016 Equity Incentive Plan. The cost is expected to be recognized over a weighted-average period of 4.25 years.

 

 28 

 

 

9.REGULATORY CAPITAL REQUIREMENTS

 

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

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of Total and Common Equity and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets. Management believes as of June 30, 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 June 30, 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 June 30, 2018:                              
Total risk-based capital (to risk-weighted assets)  $25,647    31.49%  $8,043    9.875%  $8,144    10.00%
Tier I capital (to risk-weighted assets)   24,625    30.24    6,413    7.875    6,515    8.00 
Tier I capital (to adjusted total assets)   24,625    16.88    5,835    4.000    7,294    5.00 
Common equity tier 1 capital (to risk weighted assets)   24,625    30.24    5,191    6.375    5,293    6.50 
                               
As of December 31, 2017:                              
Total risk-based capital (to risk-weighted assets)  $24,934    32.58%  $7,078    9.25%  $7,653    10.00%
Tier I capital (to risk-weighted assets)   23,974    31.33    5,548    7.25    6,122    8.00 
Tier I capital (to adjusted total assets)   23,974    16.55    5,795    4.00    7,243    5.00 
Common equity tier 1 capital (to risk weighted assets)   23,974    31.33    4,400    5.75    4,974    6.50 

 

 

 29 

 

 

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

 

   June 30,
2018
   December 31,
2017
 
(Dollars in thousands)  (unaudited)     
Total Company equity capital  $30,534   $30,360 
LESS: Parent Only Equity   6,463    6,615 
LESS: Net unrealized (losses) gains on available-for-sale securities   (554)   (229)
Tier 1 Capital  $24,625   $23,974 
Tier 1 Capital  $24,625   $23,974 
Allowance for loan and lease losses includible in Tier 2 capital   1,022    960 
Total risk-based capital  $25,647   $24,934 

 

10.OTHER COMPREHENSIVE INCOME

 

The following table presents the components of other comprehensive gains and losses for the six months ended June 30, 2018 and 2017 (unaudited).

 

(Dollars in thousands)  Before Tax   Tax Effect   Net of Tax 
Six Months Ended June 30, 2018 (unaudited)               
Net unrealized losses on securities available-for-sale  $(325)  $-   $(325)
Other Comprehensive Loss  $(325)  $-   $(325)
Six Months Ended June 30, 2017 (unaudited)               
Net unrealized gains on securities available-for-sale  $86   $   $86 
Other Comprehensive Gain  $86   $   $86 

 

The following table presents the changes in each components of accumulated other comprehensive income, net of tax, for the six months ended June 30, 2018 and 2017 (unaudited).

 

(Dollars in thousands)  Securities
Available-for-
Sale
   Accumulated Other
Comprehensive
Income
 
Six Months Ended June 30, 2018 (unaudited)          
Balance at Beginning of Year  $(229)  $(229)
Other comprehensive loss   (325)   (325)
Balance at End of Period  $(554)  $(554)

 

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

 

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

 

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Details about Accumulated Other Comprehensive Income
Components
  Amount Reclassified
from Accumulated
Other Comprehensive
Income
   Affected Line Item in the Statement
Where Net Income Is Presented
   June 30,
2018
   June 30,
2017
    
(Dollars in thousands)  (unaudited)    
Redemption of Investment Securities Available-for-Sale   $   $(42)  Realized gain on redemption of investment securities
              
    -    -   Provision for Income Tax
   $   $(42)  Net of Tax
              
              
Total Reclassifications for the Period  $   $(42)  Net of Tax

 

11.EARNINGS PER SHARE

 

Basic per share amounts are based on the weighted average shares of common stock outstanding. Unearned ESOP shares are not included in outstanding shares. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. The basic and diluted weighted average shares outstanding for the three and six months ended June 30, 2018 and 2017 are as follows:  

 

   Three Months Ended June 30, 2018 (unaudited) 
(Dollars in thousands, except per share amount)  Income 
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
 
             
Basic EPS               

Net income available to shareholders

  $367    1,809,833   $0.20 
               

Diluted EPS

          
Effect of dilutive shares   -    -    - 
                
Net income available to shareholders  $367    1,809,833   $0.20 
     
   Six Months Ended June 30, 2018 (unaudited) 
(Dollars in thousands, except per share amount)  Income 
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
 
             
Basic EPS               
Net income available to shareholders  $345    1,808,479   $0.19 
                
Diluted EPS               
Effect of dilutive shares            
                
Net income available to shareholders  $345    1,808,479   $0.19 

 

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   Three Months Ended June 30, 2017 (unaudited) 
(Dollars in thousands, except per share amount)  Income (Loss)
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
 
             
Basic EPS               
Net loss available to shareholders  $23    1,748,729   $0.02 
                
Diluted EPS               
Effect of dilutive shares   -    -    - 
                
Net loss available to shareholders  $23    1,748,729   $0.02 
     
   Six Months Ended June 30, 2017 (unaudited) 
(Dollars in thousands, except per share amount)  Income (Loss)
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
 
             
Basic EPS               
Net loss available to shareholders  $(8)   1,751,116   $(0.00)
                
Diluted EPS               
Effect of dilutive shares   -    -    - 
                
Net loss available to shareholders  $(8)   1,751,116   $(0.00)

 

There were no anti-dilutive shares excluded from the June 30, 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.

 

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

 

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

 

   Fair Value Measurements at June 30, 2018 (unaudited) Using: 
Description  (Dollars in thousands) 

Fair Value

June 30,

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  $900   $   $900   $   $   $ 
U.S. Municipal securities   484        484             
Mortgage-backed securities   13,683        13,683             
Total assets measured at fair value on a recurring basis  $15,067   $   $15,067   $   $   $ 

 

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   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 June 30, 2018 (unaudited) Using:
Description (Dollars in thousands) 

Fair Value

June 30,

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   $2,372   $   $2,372   $   $   $ 
Commercial    1,261        1,261             
Land    445        445             
Construction                        
Other real estate owned                         
Total assets measured at fair value on a non-recurring basis   $4,078   $   $4,078   $   $   $ 

 

 34 

 

 

   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 June 30, 2018 (unaudited) and December 31, 2017 are as follows:

 

(Dollars in thousands) 

Carrying Value

June 30,

2018

(unaudited)

  

Fair Value

June 30,
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  $2,576   $2,576   $   $2,576   $ 
Other interest bearing deposits in other banks   6,252    6,252        6,252     
Investment securities   32,189    31,331        31,331     
Federal Home Loan Bank stock   1,025    1,025        1,025     
Loans, net   98,935    98,561        4,078    94,483 
Bank owned life insurance   4,634    4,634        4,634     
Accrued interest receivable   399    399        399     
LIABILITIES                         
Deposits  $98,066   $97,037   $   $   $97,037 
FHLB advances   21,000    20,964            20,964 

 

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(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 June 30, 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.

 

 36 

 

 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

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

 

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

 

General

 

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

 

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

 

Madison Bank of Maryland is a community-oriented financial institution, dedicated to serving the financial service needs of customers within its market area, which consists of Baltimore and Harford counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located primarily in our market area. Our real estate loans consist primarily of residential mortgage loans, as well as non-residential real estate loans, construction and land loans and home equity lines of credit. We currently operate out of our corporate headquarters and main office in Forest Hill, Maryland and two full-service branch offices located in Aberdeen and Perry Hall, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer. At June 30, 2018, we had total assets of $150.4 million, total deposits of $98.1 million and total equity of $30.5 million.

 

 37 

 

 

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

 

Available Information

 

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

 

Critical Accounting Policies

 

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

 

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

 

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

 

 38 

 

 

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

 

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

 

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

 

Balance Sheet Analysis

 

Assets. At June 30, 2018, our assets totaled $150.4 million, an increase of $3.1 million, or 2.1%, from total assets of $147.3 million at December 31, 2017. The increase in assets for the six months ended June 30, 2018 was due mainly to a $5.2 million, or 5.5%, increase in loans outstanding, partially offset by a $1.8 million, or 5.4% decrease in investment securities.

 

Loans. At June 30, 2018, residential mortgage loans totaled $78.6 million, or 77.6% 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 increased by $3.1 million, or 4.13%, during the six months ended June 30, 2018 primarily due to increased level of new loan originations. Residential loan originations during the six months ended June 30, 2018 was $8.7 million as compared to $6.3 million for the comparable period for the prior year.

 

Non-residential real estate loans totaled $14.1 million, or 13.9% of total loans at June 30, 2018, compared to $13.2 million, or 13.8% of total loans, at December 31, 2017. Non-residential mortgage loans increased by $909,000, or 6.9%, during the six months ended June 30, 2018 primarily due to increased loan originations.

 

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Construction and land loans totaled $3.0 million, and represented 2.96% of total loans, at June 30, 2018, compared to $3.2 million, or 3.38% of total loans, at December 31, 2017. At June 30, 2018, we had $1.7 million of construction loans, amounting to 58.0% of our construction and land loan portfolio, and $1.3 million of land loans, amounting to 42.0% of our construction and land loan portfolio.

 

Home equity lines of credit, all of which are secured by residential properties, totaled $3.4 million, or 3.4% of total loans, at June 30, 2018, compared to $3.5 million, or 37% 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 $2.2 million at June 30, 2018, representing less than 2.2% of the loan portfolio as compared to $424,000 at December 31, 2017.

 

Securities. At June 30, 2018, our securities available-for-sale, recorded at fair value, decreased by $1.5 million, or 9.3%, from $16.6 million at December 31, 2017 to $15.1 million at June 30, 2018. The decrease is due to the payments during the quarter. Securities available-for-sale at June 30, 2018 consisted of U.S. Agency bonds, mortgage-backed securities, including collateralized mortgage obligations issued by U.S Government Agencies such as Freddie Mac, Fannie Mae and Ginnie Mae, and taxable state municipal bonds. At June 30, 2018, our securities held-to-maturity decreased by $288,000, or 1.7%, from $17.4 million at December 31, 2017 to $17.1 million at June 30, 2018. Securities held-to-maturity at June 30, 2018 consisted of U.S. Agency bonds and mortgage-backed securities issued by U.S Government Agencies such as Freddie Mac, Fannie Mae and Ginnie Mae. Our securities portfolio is used to invest excess funds for increased yield and manage interest rate risk. At June 30, 2018, we also held a $1.0 million investment in the common stock of the Federal Home Loan Bank of Atlanta. At June 30, 2018, we held no stock in Fannie Mae and Freddie Mac.

 

Ground Rents. Ground rents, net amounted to $670,000 at June 30, 2018 compared to $681,000 at December 31, 2017.

 

Deposits. Total deposits decreased by $5.2 million, or 5.07%, to $98.1 million at June 30, 2018 from $103.3 million at December 31, 2017. Balances in non-interest-bearing deposits increased by $288,000, or 18.7%, from $1.5 million at December 31, 2017. Interest-bearing deposits decreased by $5.6 million, or 5.43%, to $96.2 million at June 30, 2018 compared to $101.8 million at December 31, 2017. As deposits are becoming more competitive, we are relying on short-term FHLB advances to fund our loan growth in the current period.

 

Borrowings. At June 30, 2018, we had $21.0 million in borrowings from the Federal Home Loan Bank of Atlanta compared to $13.0 million at December 31, 2017, a $8.0 million, or 61.5% increase in FHLB advances. During the six months ending June 30, 2018, we had the following advances: a $4.0 million advance maturing on December 14, 2018 with a 1.41% rate, a $5.0 million advance maturing on October 6, 2027 with a 1.10% rate and a $12.0 million daily rate credit advance with a 2.16% rate. FHLB advances increased to fund our loan growth and were used as an alternative to higher costs certificates of deposit.

 

Equity. Equity increased by $174,000, or 0.6%, to $30.5 million at June 30, 2018 from $30.4 million at December 31, 2017 primarily due to the increase in net income offset slightly by the decrease in accumulated other comprehensive loss and by the repurchase of common shares during the six months ended June 30, 2018.

 

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Results of Operations for the Three Months Ended June 30, 2018 and 2017

 

Overview. We had net income of $367,000 for the three months ended June 30, 2018, as compared to net income of $23,000 for the three months ended June 30, 2017. The increase in net income for the three months ended June 30, 2018 was primarily due to a negative loan loss provision of $225,000 and an increase in net interest income.

 

Net Interest Income. Net interest income increased by $238,000, or 28.3%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The increase in net interest income was primarily attributable to an increase in net interest margin caused by the increase in average loans outstanding for the period and the increase in yield on average earning assets offset slightly by the yield on interest bearing liabilities. During the quarter, the Bank was able to recognize deferred and/or delinquent interest on loans that became current or refinanced during the period. The increase in the average balance of interest-earning assets was due primarily to a $14.5 million or 17.1% increase in the average balance of loans receivable, net of unearned fees (growth from new loan originations).

 

Interest on loans receivable, net of unearned fees, increased by $326,000, or 40.2%, for the three months ended June 30, 2018 as compared to the comparable period in 2017, due to a $14.5 million increase in the average balance and a 75 basis point increase in the average yield from 3.83% at June 30, 2017 to 4.58% at June 30, 2018.

 

Interest on investment securities available-for-sale decreased by $8,000 for the three months ended June 30, 2018 as compared to the comparable period in 2017. There was a 16 basis point decrease in the average yield on investment securities available-for-sale and a $300,000 decrease in the average balance of investment securities available-for-sale. Interest on investment securities held-to-maturity increased by $4,000 for the three months ended June 30, 2018 as compared to the comparable period in 2017. There was a 25 basis point increase in the average yield on investment securities held-to-maturity and a $1.0 million decrease in the average balance of investment securities held-to-maturity.

 

Interest paid on certificates of deposit increased by $40,000, or 22.5%, during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, due to a 21 basis point increase in the average cost of certificates of deposit and $2.5 million increase in the average balance of certificates of deposit outstanding.

 

Interest on Federal Home Loan Bank of Atlanta advances increased by $38,000, or 165.2%, during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. There was a 71 basis point increase in the average cost of advances due to the rising rate environment and $4.8 million increase in average advances outstanding.

 

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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 June 30, 
   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  $2,892   $12    1.66%  $7,741   $22    .1.14%
Loans receivable, net of unearned fees   99,165    1,136    4.58    84,702    810    3.83 
Investment securities available-for-sale – amortized cost   15,413    98    2.54    15,713    106    2.70 
Investment securities held-to-maturity   17,106    123    2.88    18,104    119    2.63 
Other interest-earning assets   797    13    6.52    689    8    4.64 
Total interest-earning assets   135,373    1,382    4.08    126,949    1,065    3.36 
Cash and due from sbanks   1,962              5,020           
Allowance for credit losses   (1,430)             (1,285)          
Other non-interest-earning assets   9,598              9,325           
Total assets  $145,503             $140,009           
                               
Interest-bearing liabilities:                              
Certificates of deposit  $62,151   $218    1.40%  $59,693   $178    1.19%
NOW and money market   20,216    19    .38    23,033    18    .31 
Savings   14,780    4    .11    14,536    4    .11 
Federal Home Loan Bank advances   15,637    61    1.56    10,846    23    .85 
Total interest-bearing liabilities   112,784    302    1.07    108,108    223    .83 
Non-interest-bearing demand deposits   1,722              1,341           
Other non-interest-bearing liabilities   177              290           
Total liabilities   114,683              109,739           
Total equity   30,820              30,270           
Total liabilities and equity  $145,503             $140,009           
Net interest income       $1,080             $842      
Interest rate spread             3.01%             2.53%
Net interest margin             3.19%             2.65%
Ratio of average interest-earning assets to average interest-bearing liabilities             120.03%             117.43%

 

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Provision for Loan Losses. We recorded a negative $225,000 provision for loan losses for the three months ended June 30, 2018, compared to no provision for loan losses for the three months ended June 30, 2017. During the quarter ending June 30, 2018 we had $284,000 of net recoveries of the allowance for loan losses. At June 30, 2018, the allowance for loan losses was $1.4 million, or 1.33% of the total loan portfolio, compared to $1.3 million, or 1.34% of the total loan portfolio, at December 31, 2017.

 

There was a net loan charge-off recovery of $284,000 during the three months ended June 30, 2018, compared to net loan charge-offs of $19,000 during the three months ended June 30, 2017.

 

Non-interest Income. Total non-interest income was $78,000 and $96,000 for the three months ended June 30, 2018 and 2017. The decrease in total non-interest income was due to a $26,000 gain on sale of securities recognized in 2017 offset slightly by the increase in late charges received on loans in the current year.

 

Non-interest Expenses. Total non-interest expenses increased by $101,000, or 11.0%. We had non-interest expenses of $1.0 million for the three months ended June 30, 2018 and $915,000 for the three months ended June 30, 2017. The increase primarily was attributable to a $99,000 increase in salaries and employee benefits, which was predominately due to the $77,000 increase in restricted stock awards expense recognized in the current year as compared to the prior year.

 

Income Tax Expense. We recorded no income tax expense during the three months ended June 30, 2018 and June 30, 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 June 30, 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%.

 

Results of Operations for the Six Months Ended June 30, 2018 and 2017

 

Overview. We had net income of $345,000 for the six months ended June 30, 2018, as compared to a net loss of $8,000 for the six months ended June 30, 2017. The increase in net income for the six months ended June 30, 2018 was primarily due to a negative loan loss provision of $225,000 and an increase in net interest income.

 

Net Interest Income. Net interest income increased by $315,000, or 18.7%, for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase in net interest income was primarily attributable to an increase in net interest margin caused by the increase in average loans outstanding for the period and the increase in yield on average earning assets, offset slightly by the yield on interest bearing liabilities. During the six month period ending June 30, 2018, the Bank was able to recognize deferred and/or delinquent interest on loans that became current or refinanced during the period. The increase in the average balance of interest-earning assets was due primarily to a $12.3 million or 14.4% increase in the average balance of loans receivable, net of unearned fees (growth from new loan originations) offset slightly by the decline in investment securities.

 

Interest on loans receivable, net of unearned fees increased by $437,000, or 26.5%, for the six months ended June 30, 2018 as compared to the comparable period in 2017, due to a $12.3 million increase in the average balance and a 41 basis point increase in the average yield from 3.86% at June 30, 2017 to 4.27% at June 30, 2018.

 

Interest on investment securities available-for-sale increased by $42,000 for the six months ended June 30, 2018 as compared to the comparable period in 2017. There was an eight basis point decrease in the average yield on investment securities available-for-sale and $3.7 million increase in the average balance of investment securities available-for-sale. Interest on investment securities held-to-maturity decreased by $12,000 for the six months ended June 30, 2018 as compared to the comparable period in 2017. There was a 13 basis point increase in the average yield on investment securities held-to-maturity and a $1.7 million decrease in the average balance of investment securities held-to-maturity.

 

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Interest on certificates of deposit increased by $71,000, or 20.1%, during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, due to a 14 basis point increase in the average cost of certificates of deposit and $4.2 million increase in average certificates of deposit outstanding. The increase in cost of certificates of deposit was due to higher interest rate environment and competition for deposits.

 

Interest on Federal Home Loan Bank of Atlanta advances increased by $62,000, or 140.9%, during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. There was a 57 basis point increase in the average cost of advances due to the rising rate environment and $4.7 million increase in average advances outstanding.

 

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.

 

   Six Months Ended June 30, 
   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  $3,691   $27    1.46%  $8,831   $46    1.04%
Loans receivable, net of unearned fees   97,573    2,085    4.27    85,292    1,648    3.86 
Investment securities available-for-sale – amortized cost   15,802    198    2.51    12,067    156    2.59 
Investment securities held-to-maturity   17,168    248    2.89    18,855    260    2.76 
Other interest-earning assets   778    23    5.91    689    14    4.06 
Total interest-earning assets   135,012    2,581    3.82    125,734    2,124    3.38 
Cash and due from banks   2,496              4,894           
Allowance for credit losses   (1,362)             (1,248)          
Other non-interest-earning assets   9,407              8,471           
Total assets  $145,553             $137,851           
                               
Interest-bearing liabilities:                              
Certificates of deposit  $63,221   $425    1.34%  $59,069   $354    1.20%
NOW and money market   20,594    40    .39    22,461    32    .28 
Savings   14,744    8    .11    14,027    7    .10 
Federal Home Loan Bank advances   14,547    106    1.46    9,890    44    .89 
Total interest-bearing liabilities   113,106    579    1.02    105,447    437    .83 
Non-interest-bearing demand deposits   1,619              1,368           
Other non-interest-bearing liabilities   323              784           
Total liabilities   115,048              107,599           
Total equity   30,505              30,252           
Total liabilities and equity  $145,553             $137,851           
Net interest income       $2,002             $1,687      
Interest rate spread             2.80%             2.55%
Net interest margin             2.97%             2.68%
Ratio of average interest-earning assets to average interest-bearing liabilities             119.37%             119.24%

 

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Provision for Loan Losses. We recorded a negative $225,000 provision for loan losses for the six months ended June 30, 2018, compared to no provision for loan losses for the six months ended June 30, 2017. During the six month period ending June 30, 2018 we had $289,000 of net recoveries of the allowance for loan losses. At June 30, 2018, the allowance for loan losses was $1.4 million, or 1.33% 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 $807,000 at June 30, 2018 compared to $1.6 million at December 31, 2017. The decrease in non-accrual loans of $773,000 was due to $661,000 of principal payments received on non-accrual loans, $347,000 of non-accrual loans returning to accruing status and one new non-accrual loan of $236,000. The new non-accrual loan for the six month period ending June 30, 2018 went to foreclosure in July 2018 and was sold at foreclosure. We anticipate the sale will be ratified by the courts during the fourth quarter of 2018 and we expect to realize a full recovery of all of our principal balance as well as delinquent late charges and collection costs. As a percentage of non-performing loans and accruing troubled debt restructurings, the allowance for loan losses was 41.5% at June 30, 2018 compared to 34.0% at December 31, 2017. There were net loan recoveries of $289,000 during the six months ended June 30, 2018, compared to net loan recoveries of $4,000 during the six months ended June 30, 2017.

 

Non-interest Income. Total non-interest income decreased by $25,000, or 14.5%, from $172,000 for the six months ended June 30, 2017 to $148,000 for the six months ended June 30, 2018. The decrease in total non-interest income was due to a $42,000 gain on sale of securities in 2017 offset slightly by increase in charges on loans and increased income from bank-owned life insurance.

 

Non-interest Expenses. Total non-interest expenses increased by $162,000, or 8.7%. We had non-interest expenses of $2.0 million for the six months ended June 30, 2018 and $1.9 million for the six months ended June 30, 2017. The increase primarily was attributable to a $147,000 increase in salaries and employee benefits ($77,000 increase in restricted stock awards expense and the remainder due to higher salary expenses).

 

Income Tax Expense. We recorded no income tax expense during the six months ended June 30, 2018 and June 30, 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 June 30, 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.

 

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

 

   June 30,
2018
   December 31,
2017
 
(Dollars in thousands)  (unaudited)     
Non-accrual loans:          
Residential, home equity lines of credit and consumer  $796   $930 
Non-residential        
Construction and land   11    650 
Total   807    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   807    1,921 
Assets acquired through foreclosure        
Ground rents   143    141 
Total non-performing assets   950    2,062 
Troubled debt restructurings accruing   2,452    2,212 
Troubled debt restructurings accruing and total non-performing assets  $3,402   $4,274 
Total of non-performing loans and accruing loans past due 90 days or more to total loans   0.80%   2.00%
Total non-performing loans to total assets   0.54    1.07 
Total non-performing assets to performing assets   0.63    1.40 
           
Total non-performing loans and accruing troubled  debt restructurings to total assets   2.17    2.57 
Total non-performing assets and accruing troubled  debt restructurings to total assets   2.26    2.90 
           

 

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At June 30, 2018 non-accrual loans consisted of 15 residential mortgage loans totaling $796,000 and one construction and land loan totaling $11,000. The decrease in non-performing loans at June 30, 2018 as compared to December 31, 2017 is primarily the result of $661,000 of principal payments received on non-accrual loans, $347,000 of non-accrual loans returning to accruing status and one new non-accrual loan of $236,000 (currently $229,000 of unpaid principal). The new non-accrual loan for the six month period ending June 30, 2018 went to foreclosure in July 2018 and was sold at foreclosure. We anticipate the sale will be ratified by the courts during the fourth quarter of 2018 and we expect to realize a full recovery of all of our principal balance as well as delinquent late charges and collection costs. We had no loans 90 days or more past due but still accruing at June 30, 2017 and one loan (the new non-accrual loan mentioned above) at December 31, 2017.

 

At June 30, 2018, our largest non-performing loan relationships consisted of the following:

 

·A $229,000 loan secured by a first mortgage residential property in Carroll County. This collateral property had a foreclosure in July 2018 and was sold at foreclosure. We anticipate the sale will be ratified by the courts during the fourth quarter of 2018 and we will have a full recovery of all of our principal balance as well as delinquent late charges and collection costs.

 

·A $209,000 loan secured by a first mortgage residential property in Harford County. The loan customer declared bankruptcy and is currently making both pre-petition and post-petition loan payments on this loan.

 

·A $191,000 loan secured by a first mortgage residential property in Stafford, Virginia. The loan customer declared bankruptcy and we are currently working through the bankruptcy courts.

 

We occasionally modify loans to extend the term or make other concessions to help borrowers stay current on their loans and to avoid foreclosure. We do not forgive principal or interest on loans but have modified the interest rates on loans to rates that are below market rates. In the case of non-residential mortgage loans or large residential mortgage loans, before agreeing to modify a loan, we perform a financial analysis of the borrower to determine that the borrower will be able to comply with the terms of the loan as restructured. At June 30, 2018 and December 31, 2017, we had $2.5 million and $2.2 million, respectively, in modified loans, which are also referred to as troubled debt restructurings, on which we continue to accrue interest.

 

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

 

At June 30, 2018, our largest accruing troubled debt restructured loan was a $944,000 non-residential loan secured by a first mortgage on a church in Baltimore City. We refinanced the loan in June 2018 to properly amortize the loan by extending the term by approximately three years. We receive certain rental payments from proceeds of a cell tower on the property that are paid directly to us to meet a portion of the debt service requirements on the loan and the church pays the remaining amount each month.

 

Interest income that would have been recorded for the six months ended June 30, 2018 and 2017 had non-accrual loans been current according to their original terms, amounted to approximately $20,000 and $46,000, respectively. Interest income of $244,000 and $160,000 related to non-accrual loans was included in interest income for the six months ended June 30, 2018 and 2017, respectively.

 

At June 30, 2018, we had no other real estate owned.

 

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

 

   Six Months Ended
June 30,
 
   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       (49)
Non-residential       (81)
Construction and land loans        
Total charge-offs       (130)
           
Recoveries:          
Residential, home equity lines of credit and consumer   5    3 
Non-residential   3    131 
Construction and land loans   282     
Total recoveries   290    134 
           
Net charge-offs   (290)   (4)
(Reversal) provision for loan losses   (225)    
Allowance at end of period  $1,353   $1,222 
Allowance for loan losses to non-performing loans and accruing troubled debt restructuring at end of period   41.49%   27.96%
Allowance for loan losses to total loans at end of period   1.33%   1.39%
Net charge-offs to average loans outstanding during the period   (0.29)%   0.00%

 

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

 

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

 

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At June 30, 2018, cash and cash equivalents totaled $7.6 million. Securities classified as available-for-sale amounting to $15.1 million at June 30, 2018, provide an additional source of liquidity. In addition, at June 30, 2018, we had the ability to borrow a total of approximately $37.1 million from the Federal Home Loan Bank of Atlanta. At June 30, 2018, we had $21.0 million in Federal Home Loan Bank advances outstanding. In addition, we maintain a $2.5 million line of credit with another bank and access to the Federal Reserve Bank Discount Window. No amounts were outstanding under such lines of credit at June 30, 2018.

 

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At June 30, 2018, we had $1.0 million in commitments to extend credit outstanding. Certificates of deposit due by December 31, 2018 totaled $12.5 million, or 20.5% 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 June 30, 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 will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations was enhanced by the capital from the offering, resulting in increased net interest-earning assets and income. However, the large increase in equity resulting from the capital raised in the offering, initially, has had an adverse impact on our return on equity. Following the offering, we may use capital management tools such as cash dividends and common share repurchases. However, under Office of the Comptroller of the Currency regulations, we will not be allowed to repurchase any shares during the first year following the offering, except to fund the restricted stock awards under the equity benefit plan after its approval by shareholders, unless extraordinary circumstances exist and we receive regulatory approval.

 

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

 

For the six months ended June 30, 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.

 

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Item 3. Qualitative and Quantitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

(a)Disclosure Controls and Procedures

 

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

 

(b)Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the six months ended June 30, 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 June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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 June 30, 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 June 30, 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)
                 
April 1-30         97,010
May 1-31         97,010
June 1-30   1,720 (2) 14.25     97,010
Total   1,720   14.25      

 

 

(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. On June 4, 2018, the Company announced to extend the program to repurchase up to 97,010 shares of its common stock.

(2) Former bank employees exercised a put option from the Employee Stock Ownership Plan for their vested shares.

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

  3.1 Articles of Incorporation of MB Bancorp, Inc. (1)
     
  3.2 Bylaws of MB Bancorp, Inc. (1)
     
  31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

  31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
  32.0 Section 1350 Certifications
     
  101.0 The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 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 Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.

 

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

 

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SIGNATURES

 

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

 

      MB BANCORP, INC.
       
Dated: August 8, 2018 By: /s/ Philip P. Phillips
      Philip P. Phillips
      President and Chief Executive Officer
      (principal executive officer)
       
Dated: August 8, 2018 By: /s/ John M. Wright
      John M. Wright
      Executive Vice President and Chief Financial Officer
      (principal financial and accounting officer)

 

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