MSB FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-32 - MSB FINANCIAL CORP	ex-32.htm
EX-31.2 - MSB FINANCIAL CORP	ex31-2.htm
EX-31.1 - MSB FINANCIAL CORP	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2016

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from

Commission File Number 001-37506

MSB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

MARYLAND

34-1981437

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

1902 Long Hill Road, Millington, New Jersey

07946-0417

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code

(908) 647-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [X]

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

The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: November 14, 2016:

$0.01 par value common stock 5,711,044 shares outstanding

MSB FINANCIAL CORP. AND SUBSIDIARIES

INDEX

		Page
		Number
PART I - FINANCIAL INFORMATION

Item 1:	Consolidated Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition
	at September 30, 2016 and December 31, 2015	2

	Consolidated Statements of Operations for the
	Three and Nine Months Ended September 30, 2016 and 2015	3

	Consolidated Statements of Comprehensive Income for the
	Three and Nine Months Ended September 30, 2016 and 2015	4

	Consolidated Statement of Changes in Stockholders' Equity
	at September 30, 2016	5

	Consolidated Statements of Cash Flows for the Nine Months
	Ended September 30, 2016 and 2015	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2:	Management's Discussion and Analysis of	29
	Financial Condition and Results of Operations

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4:	Controls and Procedures	36


PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	36

Item 1A:	Risk Factors	36

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3:	Defaults Upon Senior Securities	37

Item 4:	Mine Safety Disclosures	37

Item 5:	Other Information	37

Item 6:	Exhibits	37

SIGNATURES		38

CERTIFICATIONS		39

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	September 30,		December 31,
	2016		2015

(Dollars in thousands, except per share amounts)
Cash and due from banks	$	1,159	$	2,219
Interest-earning demand deposits with banks		30,488		10,084

Cash and Cash Equivalents		31,647		12,303

Securities held to maturity (fair value of $45,462 and $78,400, respectively)		44,676		78,995
Loans receivable, net of allowance for loan losses of $4,044 and $3,602, respectively		329,230		262,312
Premises and equipment		8,994		8,118
Federal Home Loan Bank of New York stock, at cost		1,433		1,826
Bank owned life insurance		13,675		7,468
Accrued interest receivable		1,254		1,352
Other assets		2,721		3,316

Total Assets	$	433,630	$	375,690

Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	33,653	$	28,173
Interest bearing		301,037		234,425

Total Deposits		334,690		262,598

Advances from Federal Home Loan Bank of New York		22,675		32,675
Advance payments by borrowers for taxes and insurance		820		743
Other liabilities		2,874		3,311

Total Liabilities		361,059		299,327

Stockholders' Equity
Preferred stock, par value $0.01; 1,000,000 shares authorized; no shares issued or outstanding		-		-
Common stock, par value $0.01; 49,000,000 shares authorized; issued and outstanding 5,711,044 at September 30, 2016 and 5,953,423 at December 31, 2015		57		59
Paid-in capital		51,678		56,216
Retained earnings		22,892		22,209
Unallocated common stock held by ESOP (204,070 and 212,242 shares, respectively)		(1,957)		(2,042)
Accumulated other comprehensive loss		(99)		(79)

Total Stockholders' Equity		72,571		76,363

Total Liabilities and Stockholders' Equity	$	433,630	$	375,690

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2016		2015		2016		2015
Interest Income:
Loans receivable, including fees	$	3,177	$	2,630	$	9,097	$	7,716
Securities held to maturity		276		449		1,038		1,288
Other		57		37		126		79
Total Interest Income		3,510		3,116		10,261		9,083

Interest Expense
Deposits		383		329		1,036		1,044
Borrowings		183		203		562		590
Total Interest Expense		566		532		1,598		1,634

Net Interest Income		2,944		2,584		8,663		7,449
Provision for Loan Losses		180		40		500		23
Net Interest Income after Provision for Loan Losses		2,764		2,544		8,163		7,426

Non-Interest Income
Fees and service charges		78		86		248		260
Income from bank owned life insurance		94		56		207		165
Other		11		30		381		79
Total Non-Interest Income		183		172		836		504

Non-Interest Expenses
Salaries and employee benefits		1,419		1,193		4,306		3,768
Directors compensation		109		110		336		334
Occupancy and equipment		382		316		1,064		959
Service bureau fees		134		175		639		468
Advertising		7		13		28		110
FDIC assessment		74		71		211		213
Professional services		248		182		860		550
Other		127		265		529		898
Total Non-Interest Expenses		2,500		2,325		7,973		7,300

Income before Income Taxes		447		391		1,026		630
Income Tax Expense		146		133		343		189
Net Income	$	301	$	258	$	683	$	441

Earnings per share:
Basic	$	0.05	$	0.05	$	0.12	$	0.08
Diluted	$	0.05	$	0.04	$	0.12	$	0.08

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2016			2015			2016			2015
Net Income	$	301		$	258		$	683		$	441
Other comprehensive income (loss), net of tax

Defined benefit pension plans:

Reclassification adjustment for prior service cost included in net income, net of tax of $1, $3, $5 and $9, respectively		(3	)		(4	)		(8	)		(12	)

Actuarial loss arising during the period, net of tax of $-, $(3), $- and $(9), respectively		-			4			-			12

Reclassification adjustment for net actuarial loss (gain) included in net income, net of tax of $12, $(4), $8, and $(12), respectively		(16	)		5			(12	)		16

Total other comprehensive income (loss)		(19	)		5			(20	)		16

Comprehensive income	$	282		$	263		$	663		$	457

See notes to unaudited consolidated financial statements.

MSB Financial Corp and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity

(Unaudited)

													Unallocated
													Common			Accumulated
	Shares of												Stock			Other			Total
	Common			Common				Paid-In			Retained		Held by			Comprehensive			Stockholders'
	Stock Issued			Stock				Capital			Earnings		ESOP			Loss			Equity
(Dollars in thousands)				(Dollars in thousands)
Nine Months Ended September 30, 2016
Balance – December 31, 2015		5,953,423			$	59		$	56,216		$	22,209	$	(2,042	)	$	(79	)	$	76,363

Net income												683								683
Other comprehensive income, net of tax																	(20	)		(20	)
Allocation of ESOP stock									25					85						110
Repurchased Stock		(242,379	)			(2	)		(3,213	)										(3,215	)
Purchase of common stock for equity plan									(1,467	)										(1,467	)
Stock-Based Compensation									117											117

Balance - September 30, 2016		5,711,044			$	57		$	51,678		$	22,892	$	(1,957	)	$	(99	)	$	72,571

See notes to unaudited consolidated financial statements.

MSB Financial Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
(In thousands)	2016			2015

Cash Flows from Operating Activities:
Net Income	$	683		$	441
Adjustments to reconcile net income to net
cash provided by operating activities:
Net accretion of securities premiums and discounts and deferred loan fees and costs		(72	)		(24	)
Depreciation and amortization of premises and equipment		325			289
Stock-based compensation and allocation of ESOP stock		227			124
Provision for loan losses		500			23
Loss on sale of other real estate owned		-			131
Income from bank owned life insurance		(207	)		(165	)
Decrease in accrued interest receivable		98			10
Decrease in other assets		608			2
(Decrease) increase in other liabilities		(470	)		402
Net Cash Provided by Operating Activities		1,692			1,234

Cash Flows from Investing Activities:
Activity in held to maturity securities:
Purchases		-			(4,935	)
Maturities, calls and principal repayments		34,242			3,266
Net increase in loans receivable		(42,312	)		(13,875	)
Purchased loans		(24,957	)		(7,100	)
Purchase of premises and equipment		(1,201	)		(153	)
Redemption of Federal Home Loan Bank of NY stock		393			(116	)
Purchase of bank owned life insurance		(6,000	)
Capitalized improvements of other real estate owned		-			(89	)
Proceeds from sale of other real estate owned		-			947
Net Cash Used in Investing Activities		(39,835	)		(22,055	)

Cash Flows from Financing Activities:
Net increase (decrease) in deposits		72,092			(7,956	)
Net Proceeds from stock offering		-			34,799
Cash paid for stock options					(56	)
Increase (decrease) in advances from FHLB of NY		(10,000	)		2,675
Increase in advance payments by borrowers for taxes and insurance		77			130
Repurchase of common stock		(3,215	)		-
Purchase of common stock for equity plan		(1,467	)		-
Net Cash Provided by Financing Activities		57,487			29,592

Net Increase in Cash and Cash Equivalents		19,344			8,771
Cash and Cash Equivalents – Beginning		12,303			7,519
Cash and Cash Equivalents – Ending	$	31,647		$	16,290

Supplementary Cash Flows Information
Interest paid	$	1,604		$	1,631
Income taxes paid		68			251

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Organization and Business

MSB Financial Corp. (the "Company") is a Maryland-chartered corporation organized in 2014 to be the successor to MSB Financial Corp., a federal corporation ("Old MSB") upon completion of the second-step conversion of Millington Bank (the "Bank") from the two-tier mutual holding company structure to the stock holding company structure. MSB Financial, MHC (the "MHC") was the former mutual holding company for Old MSB prior to completion of the second-step conversion. In conjunction with the second-step conversion, each of the MHC and Old MSB ceased to exist. The second-step conversion was completed on July 16, 2015 at which time the Company sold 3,766,592 shares of its common stock (including 150,663 shares purchased by the Bank's employee stock ownership plan) at $10.00 per share for gross proceeds of approximately $37.7 million. Expenses related to the stock offering totaled $1.5 million and were netted against proceeds. As part of the second-step conversion, each of the outstanding shares of common stock of Old MSB held by persons other than the MHC were converted into 1.1397 shares of Company common stock with cash paid in lieu of fractional shares. As a result, a total of 2,187,242 shares were issued in the second-step conversion. As a result of the second-step conversion, all share and per share information has subsequently been revised to reflect the 1.1397 exchange ratio unless otherwise noted.

The Company's principal business is the ownership and operation of the Bank. The Bank is a New Jersey-chartered stock savings bank and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The primary business of the Bank is attracting retail deposits from the general public and using those deposits together with funds generated from operations, principal repayments on securities and loans and borrowed funds, for its lending and investing activities. The Bank's loan portfolio primarily consists of one-to-four family and home equity residential loans, commercial loans, and construction loans. It also invests in U.S. government obligations and mortgage-backed securities. The Bank is regulated by the New Jersey Department of Banking and Insurance and the FDIC. The Board of Governors of the Federal Reserve System (the "Federal Reserve") regulates the Company as a bank holding company.

The primary business of Millington Savings Service Corp (the "Service Corp") was the ownership and operation of a single commercial rental property. This property was sold during the year ended June 30, 2007. Currently the Service Corp is inactive.

Subsequent Event

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of September 30, 2016, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

Note 2 – Basis of Consolidated Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly owned subsidiary the Service Corp. All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated

financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X, and therefore, do not include all information or notes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America ("GAAP").

In the opinion of management, all adjustments, consisting of only normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements have been made at September 30, 2016 and for the nine months ended September 30, 2016 and 2015. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results which may be expected for an entire fiscal year or other interim periods.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses all available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the Bank's market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09, as modified by ASU 2015-14, ASU 2016-8, ASU 2016-10, and ASU 2016-12, is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of the pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2018.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit

risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability for all leases. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily due to the recognition of lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. The standard is required to be adopted using the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of the pending adoption of ASU 2016-02 on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, Compensation – Stock Compensation (Topic 718). This ASU changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting and cash flow classification for excess tax benefits and deficiencies, (2) forfeitures, and (3) tax withholding requirements and cash flow classification. The standard is effective for public companies for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted for the interim or annual period provided that the entire standard is adopted. If an entity early adopts the standard in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We are currently evaluating the impact of the pending adoption of ASU 2016-09 on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15: Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update address the following eight specific cash flow issues with the objective of reducing the existing diversity in practice: (1) debt prepayments or debt extinguishment cost (cash outflow-financing), (2) settlement of debt instruments with coupon interest rates insignificant to the effective interest rate, Interest payment (cash outflow-operating), principal payment (cash outflow-financing), (3) contingent consideration payments made soon after business combination (cash outflow-investing), (4) proceeds from settlement of insurance claims (classification on basis of the nature of each loss), (5) proceeds from corporate/bank-owned life insurance, proceeds (cash inflow-investing), payments (cash outflow-investing/operating), (6) distribution received from equity method investees, cumulative earnings approach (cash inflow-investing), nature of distribution approach (cash inflow-operating/investing), (7) beneficial interest in securitization transactions, assets (noncash transaction), cash receipts from trade receivable (cash inflow-investing), (8) separately identifiable cash flows (classified based on source-financing/investing/operating). The amendments in this Update are effective for public business entities for the fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact of the pending adoption of ASU 2016-15 on our consolidated financial statements.

In September 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model. Under this model,

entities will estimate credit losses over the entire contractual term of the instrument. The standard is effective for public companies in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted the interim or annual period provided that the entire standard is adopted. We are currently evaluating the impact of the pending adoption of ASU 2016-13 on our consolidated financial statements.

Note 3 – Earnings Per Share

The following table shows the computation of basic and diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,

(In Thousands, Except Per Share Data)	2016		2015		2016		2015
Numerator:
Net income	$	301	$	258	$	683	$	441
Denominator:
Weighted average common shares		5,588		5,721		5,692		5,667
Dilutive potential common shares		82		44		76		26
Weighted average fully diluted shares		5,670		5,765		5,768		5,693
Earnings per share:
Basic	$	0.05	$	0.05	$	0.12	$	0.08
Dilutive	$	0.05	$	0.04	$	0.12	$	0.08
Outstanding common stock equivalents having no dilutive effect		-		-		-		-

Note 4 - Securities Held to Maturity

The amortized cost of securities held to maturity and their estimated fair values as of September 30, 2016 and December 31, 2015 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2016	(In Thousands)

U.S. Government agencies:
Due after one year through five years	$	6,500	$	7	$	1	$	6,506

		6,500		7		1		6,506


Mortgage-backed securities		25,129		1,041		5		26,165

Corporate bonds:
Due within one year		2,006		5		1		2,010
Due after one year through five years		2,037		16		13		2,040
Due after five through ten years		1,000		-		40		960
Due after ten years		4,000		-		254		3,746
		9,043		21		308		8,756

State and political subdivisions:
Due within one year		95		1		1		95
Due after one through five years		592		1		1		592
Due after five through ten years		712		13		-		725
		1,399		15		2		1,412

Certificates of deposit:
Due after one year through five years		2,605		18		-		2,623

		2,605		18		-		2,623

	$	44,676	$	1,102	$	316	$	45,462

Note 4 - Securities Held to Maturity - Continued

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2015	(In Thousands)

U.S Government agencies:
Due after one year through five years	$	18,000	$	4	$	142	$	17,862
Due after five through ten years		8,500		2		80		8,422
Due thereafter		11,000		-		285		10,715
		37,500		6		507		36,999

Mortgage-backed securities		26,463		405		230		26,638

Corporate bonds:
Due within one year		503		2		-		505
Due after one through five years		4,069		21		4		4,086
Due after five through ten years		1,000		-		10		990
Due thereafter		4,000		-		289		3,711
		9,572		23		303		9,292

State and political subdivisions:
Due within one year		96		-		-		96
Due after one through five years		596		-		2		594
Due after five through ten years		713		5		-		718
		1,405		5		2		1,408

Certificates of deposit:
Due within one year		1,450		-		-		1,450
Due after one through five years		2,605		11		3		2,613
		4,055		11		3		4,063

	$	78,995	$	450	$	1,045	$	78,400

All mortgage-backed securities owned at September 30, 2016 and December 31, 2015 have been issued by FNMA, FHLMC or GNMA and are secured by one-to-four family residential real estate. The amortized cost and estimated fair value of securities held to maturity at September 30, 2016 and December 31, 2015, as shown above, are reported by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

There were no sales of securities held to maturity during the nine months ended September 30, 2016 or 2015. At September 30, 2016 and December 31, 2015, securities held to maturity with a fair value of approximately $1,000,000 million and $997,800, respectively, were pledged to secure public funds on deposit.

Note 4 - Securities Held to Maturity - Continued

The following tables set forth the gross unrealized losses and fair value of securities in an unrealized loss position as of September 30, 2016 and December 31, 2015, and the length of time that such securities have been in an unrealized loss position:

	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
	(In thousands)
September 30, 2016
U.S. Government agencies	$	1,000	$	1	$	-	$	-	$	1,000	$	1
Mortgage-backed securities		448		5		-		-		448		5
Corporate bonds		1,990		14		4,706		294		6,696		308
State and political subdivisions		247		1		101		1		348		2

	$	3,685	$	21	$	4,807	$	295	$	8,492	$	316


	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
	(In thousands)
December 31, 2015
U.S. Government agencies	$	9,410	$	89	$	17,083	$	418	$	26,493	$	507
Mortgage-backed securities		12,312		173		2,602		57		14,914		230
Corporate bonds		5,208		300		504		3		5,712		303
State and political subdivisions		515		2		-		-		515		2
Certificates of deposit		932		3		-		-		932		3

	$	28,377	$	567	$	20,189	$	478	$	48,566	$	1,045

At September 30, 2016, management concluded that the unrealized losses summarized above (which related to one U.S. Government agency bond, one mortgage-backed security, six corporate bonds and three state and political subdivision securities, compared to nineteen U.S. Government agency bonds, fifteen mortgage-backed securities, five corporate bonds, four state and political subdivision bonds, and four certificates of deposit as of December 31, 2015) are temporary in nature since they are not related to the underlying credit quality of the issuer. The Company does not intend to sell these securities and it is not more-likely-than-not that the Company would be required to sell these securities prior to the anticipated recovery of the remaining amortized cost. Management believes that the losses above are primarily related to the change in market interest rates. Accordingly, the Company has not recognized any other-than-temporary impairment loss on these securities.

Note 5 - Loans Receivable and Allowance for Credit Losses

The composition of loans receivable at September 30, 2016 and December 31, 2015 was as follows:

	September 30, 2016			December 31, 2015
	(In thousands)
Residential mortgage:
One-to-four family	$	157,945		$	154,624
Home equity		34,246			35,002

Total residential mortgage loans		192,191			189,626

Commercial and multi-family real estate		103,083			59,642
Construction		16,160			10,895
Commercial and industrial		29,342			10,275

Total commercial loans		148,585			80,812

Total consumer loans		458			493

Loans receivable		341,234			270,931

Loans in process		(7,228	)		(4,600	)
Deferred loan fees		(732	)		(417	)
Allowance for loan losses		(4,044	)		(3,602	)
		(12,004	)		(8,619	)

Loans receivable, net	$	329,230		$	262,312

Allowance for Loan Losses

The allowance calculation methodology includes segregation of the total loan portfolio into segments. The Company's loans receivable portfolio is comprised of the following segments: residential mortgage, commercial real estate, construction, commercial and industrial and consumer. Some segments of the Company's loan receivable portfolio are further disaggregated into classes which allow management to more accurately monitor risk and performance.

The residential mortgage loan segment is disaggregated into two classes: one-to-four family loans, which are primarily first liens, and home equity loans, which consist of first and second liens. The commercial real estate loan segment includes owner and non-owner occupied loans which have medium risk based on historical experience with these types of loans. The construction loan segment is further disaggregated into two classes: one-to-four family owner-occupied, which includes land loans, whereby the owner is known and there is less risk, and other, whereby the property is generally under development and tends to have more risk than the one-to-four family owner-occupied loans. The commercial and industrial loan segment consists of loans made for the purpose of financing the activities of commercial customers. The majority of commercial and industrial loans are secured by real estate and thus carry a lower risk than traditional commercial and industrial loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative factors. These qualitative risk factors include:

1.	Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
2.	National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
3.	Nature and volume of the portfolio and terms of loans.
4.	Experience, ability, and depth of lending management and staff.
5.	Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.
6.	Quality of the Company's loan review system, and the degree of oversight by the Company's Board of Directors.
7.	Existence and effect of any concentrations of credit and changes in the level of such concentrations.
8.	Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation.

An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Federal regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

The following tables provide an analysis of the allowance for loan losses and the loan receivable balances, by portfolio segment segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2016 and 2015:


(in thousands)	Residential Mortgage		Commercial and Multi-Family Real Estate		Construction		Commercial and Industrial		Consumer		Unallocated			Total
Three Months Ended September 30, 2016

Allowance for loan losses:
Balance, beginning	$	1,842	$	1,322	$	163	$	314	$	15	$	213	$	3,869
Provisions (credits)		(4)		61		14		222		1		(114)		180
Loans charged-off		—		—		—		—		(8)		—		(8)
Recoveries		3		—		—		—		—		—		3
Balance, ending	$	1,841	$	1,383	$	177	$	536	$	8	$	99	$	4,044

Nine Months Ended September 30, 2016

Allowance for loan losses:
Balance, beginning	$	1,927	$	1,015	$	143	$	235	$	9	$	273	$	3,602
Provisions (credits)		(38)		368		34		301		9		(174)		500
Loans charged-off		(64)		—		—		—		(11)		—		(75)
Recoveries		16		—		—		—		1		—		17
Balance, ending	$	1,841	$	1,383	$	177	$	536	$	8	$	99	$	4,044

Period-end allowance allocated to:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated for impairment		1,841		1,383		177		536		8		99		4,044
Ending Balance	$	1,841	$	1,383	$	177	$	536	$	8	$	99	$	4,044

Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	14,705	$	1,232	$	—	$	475	$	—	$	—	$	16,412
Loans collectively evaluated for impairment		177,150		101,572		8,860		28,822		458		—		316,862
Ending Balance	$	191,855	$	102,804	$	8,860	$	29,297	$	458	$	—	$	333,274

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

(in thousands)	Residential Mortgage		Commercial and Multi-Family Real Estate			Construction			Commercial and Industrial		Consumer		Unallocated			Total
Three Months Ended September 30, 2015

Allowance for loan losses:
Balance, beginning	$	2,005	$	1,007		$	197		$	3688	$	5	$	1	$	3,583
Provisions (credits)		48		4			23			(45)		6		4		40
Loans charged-off		(46)		—			—			—		—		—		(46)
Recoveries		4		—	—		—	—		—		—		—		4
Balance, ending	$	2,011	$	1,011		$	220		$	323	$	11	$	5	$	3,581

Nine Months Ended September 30, 2015

Allowance for loan losses:
Balance, beginning	$	2,109	$	885		$	317		$	290	$	6	$	27	$	3,634
Provisions (credits)		(38)		133			(88)			33		5		(22)		23
Loans charged-off		(68)		(7)			(21)			—		—		—		(96)
Recoveries		8		—			12			—		—		—		20
Balance, ending	$	2,011	$	1,011		$	220		$	323	$	11	$	5	$	3,581

Period-end allowance allocated to:
Loans individually evaluated for impairment	$	1	$	—		$	—		$	—	$	6	$	—	$	7
Loans collectively evaluated for impairment		2,010		1,011			220			323		5		5		3,574
Ending Balance	$	2,011	$	1,011		$	220		$	323	$	11	$	5	$	3,581

Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	15,205	$	1,554		$	253		$	716	$	6	$	—	$	17,734
Loans collectively evaluated for impairment		169,707		49,361			7,774			10,742		505		—		238,089
Ending Balance	$	184,912	$	50,915		$	8,027		$	11,458	$	511	$	—	$	255,823

Nonaccrual and Past Due Loans

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or when management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. Certain loans may remain on accrual status if they are in the process of collection and are either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table represents the classes of the loans receivable portfolio summarized by aging categories of performing loans and nonaccrual loans as of September 30, 2016 and December 31, 2015:

As of September 30, 2016	30-59 Days Past Due and Still Accruing		60-89 Days Past Due and Still Accruing		Greater than 90 Days and Still Accruing		Total Past Due and Still Accruing		Accruing Current Balances		Nonaccrual Loans(1)		Total Loans Receivables
	(In thousands)
Residential Mortgage
One-to-four family	$	1,244	$	2,609	$	232	$	4,085	$	148,987	$	4,551	$	157,623
Home equity		655		29		50		734		33,234		264		34,232
Commercial and multi-family real estate		399		—		—		399		101,565		840		102,804
Construction
One-to-four family owner-occupied		280		—		—		280		5,361		—		5,641
Other		—		—		—		—		3,219		—		3,219
Commercial and industrial		174		—		—		174		28,769		354		29,297
Consumer		3		—		—		3		455		—		458
Total	$	2,755	$	2,638	$	282	$	5,675	$	321,590	$	6,009	$	333,274

(1)	Nonaccrual loans at September 30, 2016, included $4,897,000 that were 90 days or more delinquent, $903,000 that were 60-89 days delinquent, none that were 30-59 days delinquent, and $209,000 that were current or less than 30 days delinquent.

As of December 31, 2015	30-59 Days Past Due and Still Accruing		60-89 Days Past Due and Still Accruing		Greater than 90 Days and Still Accruing		Total Past Due and Still Accruing		Accruing Current Balances		Nonaccrual Loans (1)		Total Loans Receivables
	(In thousands)
Residential Mortgage
One-to-four family	$	4,187	$	770	$	235	$	5,192	$	145,479	$	3,744	$	154,415
Home equity		50		—		50		100		34,099		803		35,002
Commercial and multi-family real estate		—		—		—		—		58,661		827		59,488
Construction
One-to-four family owner-occupied		—		—		—		—		2,663		—		2,663
Other		—		—		—		—		3,581		—		3,581
Commercial and industrial		—		—		—		—		9,730		542		10,272
Consumer		5		2		—		7		486		—		493
Total	$	4,242	$	772	$	285	$	5,299	$	254,699	$	5,916	$	265,914

(1)	Nonaccrual loans at December 31, 2015, included $2,695,000 that were 90 days or more delinquent, $917,000 that were 60-89 days delinquent, $685,000 that were 30-59 days delinquent, and $1,618,000 that were current or less than 30 days delinquent.

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

Impaired Loans

Management evaluates individual loans in all of the loan segments (including loans in the residential mortgage and consumer segments) for possible impairment if the loan is either on nonaccrual status or is risk rated Substandard or worse or has been modified in a troubled debt restructuring. A loan is considered impaired when, based on current information and events, it is probable that the Company 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.

Once the determination has been made that a loan is impaired, impairment is measured by comparing the recorded investment in the loan to one of the following methods: (a) the present value of expected cash flows (discounted at the loan's effective interest rate), (b) the loan's observable market price or (c) the fair value of collateral adjusted for expected selling costs. The method is selected on a loan-by-loan basis with management primarily utilizing the fair value of collateral method.

When a real estate-secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

The estimated fair values of non-real estate collateral, such as accounts receivable, inventory and equipment, are determined based on the borrower's financial statements, inventory reports, accounts receivable aging schedules or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by establishing an impairment reserve for the expected loss and a charge-off against the allowance for loan losses, if applicable.

The evaluation of the need and amount of the allowance for impaired loans and whether a loan can be removed from impairment status is made on a quarterly basis. The Company's policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

The following tables provide an analysis of the impaired loans at September 30, 2016 and December 31, 2015 and the average balances of such loans for the nine months and year, respectively, then ended:

September 30, 2016 (In thousands)	Recorded Investment		Loans with No Related Reserve		Loans with Related Reserve		Related Reserve		Contractual Principal Balance		Average Recorded Investment

Residential mortgage
One-to-four family	$	13,207	$	13,207	$	-	$	-	$	13,560	$	12,867
Home equity		1,498		1,498		-		-		1,588		2,148

Commercial and multi-family real estate		1,232		1,232		-		-		1,979		1,215
Construction		-		-		-		-		-		-
Commercial and industrial		475		475		-		-		920		557
Consumer		-		-		-		-		-		1
Total	$	16,412	$	16,412	$	-	$	-	$	18,047	$	16,788

December 31, 2015 (In thousands)	Recorded Investment		Loans with No Related Reserve		Loans with Related Reserve		Related Reserve		Contractual Principal Balance		Average Recorded Investment

Residential mortgage
One-to-four family	$	12,991	$	12,895	$	96	$	3	$	13,703	$	14,109
Home equity		2,261		2,261		-		-		2,353		1,360

Commercial and multi-family real estate		1,226		1,226		-		-		1,780		1,671
Construction
One-to-four family owner- occupied		-		-		-		-		-		-
Other		-		-		-		-		-		376
Commercial and industrial		655		655		-		-		1,251		708

Consumer		-		-		-		-		-		1
Total	$	17,133	$	17,037	$	96	$	3	$	19,087	$	18,225

As of September 30, 2016 and December 31, 2015, impaired loans listed above include $11.1 million and $15.1 million, respectively, of loans previously modified in troubled debt restructurings ("TDRs") and as such are considered impaired under GAAP. As of September 30, 2016 and December 31, 2015, $9.3 million and $11.0 million, respectively, of these loans have been performing in accordance with their modified terms for an extended period of time and as such were removed from non-accrual status and considered performing.

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

Interest income of $45,000 and $188,000 was recognized on impaired loans during the three months ended September 30, 2016 and 2015. The average balance of impaired loans for the three months ended September 30, 2016 and September 30, 2015 were $16.7 million and $18.2 million, respectively. During the nine months ended September 30, 2016 and 2015, interest income of $363,000 and $573,000, respectively, was recognized on impaired loans. The average balance of impaired loans for the nine months ended September 30, 2015 was $18.5 million.

Credit Quality Indicators

Management uses an eight point internal risk rating system to monitor the credit quality of the loans in the Company's commercial real estate, construction and commercial and industrial loan segments. The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually or when credit deficiencies, such as delinquent loan payments, arise. The criticized rating categories utilized by management generally follow bank regulatory definitions. The first six risk rating categories are considered not criticized, and are aggregated as "Pass" rated. The "Special Mention" category includes assets that are currently protected, but are potentially weak, resulting in increased credit risk and deserving management's close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified "Substandard" have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified "Doubtful" have all the weaknesses inherent in loans classified "Substandard" with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a "Loss" are considered uncollectible and subsequently charged off.

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table presents the classes of the loans receivable portfolio summarized by the aggregate "Pass" and the criticized categories of "Special Mention", "Substandard", "Doubtful" and "Loss" within the internal risk rating system as of September 30, 2016 and December 31, 2015:

As of September 30, 2016	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In thousands)
Commercial and multi-family real estate	$	101,191	$	399	$	1,214	$	—	$	—	$	102,804
Construction
One-to-four family owner-occupied		5,641		—		—		—		—		5,641
Other		3,219		—		—		—		—		3,219
Commercial and industrial		28,671		88		538		—		—		29,297

Total	$	138,722	$	487	$	1,752	$	—	$	—	$	140,961

As of December 31, 2015	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In thousands)
Commercial and multi-family real estate	$	57,863	$	425	$	1,200	$	—	$	—	$	59,488
Construction
One-to-four family owner-occupied		2,663		—		—		—		—		2,663
Other		3,581		—		—		—		—		3,581
Commercial and industrial		9,480		94		698		—		—		10,272

Total	$	73,587	$	519	$	1,898	$	—	$	—	$	76,004

Management monitors the performance and credit quality of the residential mortgage and consumer portfolios by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status.

	Residential mortgage				Consumer				Total Residential and Consumer
	Sep. 30, 2016		Dec. 31, 2015		Sep. 30, 2016		Dec. 31, 2015		Sep. 30, 2016		Dec. 31, 2015
	(In thousands)
Nonperforming	$	5,097	$	4,832	$	—	$	—	$	5,097	$	4,832
Performing		186,758		184,585		458		493		187,216		185,078

Total	$	191,855	$	189,417	$	458	$	493	$	192,313	$	189,910

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)

Troubled Debt Restructurings

Loans the terms of which are modified are classified as a TDR if, in connection with the modification, the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a reduction in interest rate below market rates given the associated credit risk, or an extension of a loan's stated maturity date or capitalization of interest and/or escrow. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for twelve consecutive months after modification. Loans classified as TDRs are designated as impaired until they are ultimately repaid in full or foreclosed and sold. The nature and extent of impairment of TDRs, including those which experienced a subsequent default, are considered in the determination of an appropriate level of allowance for loan losses.

The recorded investment balance of TDRs totaled $11.1 million at September 30, 2016 compared with $15.1 million at December 31, 2015. The majority of the Company's TDRs are on accrual status. Accruing TDRs totaled $9.3 million at September 30, 2016 versus $11.0 million at December 31, 2015. The total of TDRs on non-accrual status was $1.8 million at September 30, 2016 and $4.1 million at December 31, 2015.

The Company did not modify any loans as a TDR during the three months ended September 30, 2016 and 2015. For the nine months ended September 30, 2016, the Company did not modify any loans as a TDR. For the nine months ended September 30, 2015, the Company modified one home equity loan with a pre-modification and post-modification balance of $167,000. An interest only period was initiated until October 2016 after which the loan is on a fifteen-year amortization schedule. In addition, the Company modified a single one-to-four family mortgage loan with a pre-modification and post-modification balance of $237,000. A twelve month period with a lower interest rate and payment was granted after which the loan returns to contractual terms.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no loans modified in TDRs during the previous 12 months and for which there was a subsequent payment default during the three and nine months ended September 30, 2016 and 2015.

There was no Other Real Estate Owned ("OREO") at September 30, 2016 and December 31, 2015. We may obtain physical possession of residential real estate collateralizing consumer mortgage loans via foreclosure or in-substance repossession. At September 30, 2016 and December 31, 2015, we had consumer loans with a carrying value of $2.9 million and $1.8 million, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.

Note 6 - Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and certain liabilities and to determine fair value disclosures.

FASB ASC Topic 820, Fair Market Value Disclosures ("ASC 820"), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

ASC 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

·	Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting 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 or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

·	Level 3 Inputs – Unobservable inputs for determining the fair values or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Assets Measured at Fair Value on a Recurring Basis

The Bank did not have any financial assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015.

Assets Measured at Fair Value on a Non-Recurring Basis

Certain financial and non-financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table summarizes those assets measured at fair value on a non-recurring basis as of September 30, 2016 and December 31, 2015:

September 30, 2016

Level 1

Inputs

Level 2

Inputs

Level 3

Inputs

Total Fair
Value

(In thousands)

Impaired loans

—

	December 31, 2015
	Level 1 Inputs			Level 2 Inputs			Level 3 Inputs			Total Fair Value
	(In thousands)
Impaired loans		$	—		$	—		$	525		$	525

For Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2015, the significant unobservable inputs used in fair value measurements were as follows:

As of December 31, 2015

Fair Value Estimate

Valuation Techniques

Unobservable

Input

Range (Weighted Average)

(Dollars in thousands)

Impaired loans

525

Appraisal of

Appraisal

collateral

adjustments

0% (0%)

Liquidation

expense

10.0% to 26.1% (13.0%)

An impaired loan is measured for impairment at the time the loan is identified as impaired. Loans are considered impaired when based on current information and events it is probable that payments of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The Company's impaired loans are generally collateral dependent and, as such, are carried at the lower of cost or estimated fair value less estimated selling costs. Fair values are estimated through current appraisals and adjusted as necessary to reflect current market conditions and as such are classified as Level 3.

Disclosure about Fair Value of Financial Instruments

Fair value of a financial instrument is defined above. Significant estimates were used for the purposes of disclosing fair values. Estimated fair values have been determined using the best available data and estimation methodology suitable for each category of financial instruments. However, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful.

The following presents the carrying amount and the fair value as of September 30, 2016 and December 31, 2015, and placement in the fair value hierarchy of the Company's financial instruments which are carried on the consolidated statement of financial condition at cost and are not recorded at fair value on a recurring basis. This table excludes financial instruments for which carrying amount approximates fair value, which includes cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable, interest and non-interest bearing demand, savings and club deposits, and accrued interest payable.

		Carrying		Fair		Level 1		Level 2			Level 3
As of September 30, 2016		Amount		Value		Inputs		Inputs			Inputs
					(In thousands)
Financial assets:
Securities held to maturity	$		44,676	$	45,462	$	-		$	45,462		$	-
Loans receivable (1)			329,230		336,839		-			-			336,839

Financial liabilities:
Certificate of deposits			93,387		94,784		-			94,784			-
Advances from Federal Home Loan Bank of New York			22,675		23,284		-			23,284			-

As of December 31, 2015
Financial assets:
Securities held to maturity	$		78,995	$	78,400	$	-		$	78,400		$	-
Loans receivable (1)			262,312		264,001		-			-			264,001

Financial liabilities:
Certificate of deposits			85,408		86,241		-			86,241			-
Advances from Federal Home Loan Bank of New York			32,675		33,428		-			33,428			-

(1) Includes impaired loans measured at fair value on a non-recurring basis as discussed above.

Methods and assumptions used to estimate fair values of financial instruments previously disclosed are as follows:

Cash and Cash Equivalents

For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Securities Held to Maturity

The fair value for securities held to maturity is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using quoted market prices for similar securities.

Loans Receivable

The fair value of loans is based upon a multitude of sources, including assumed current market rates by category and the Company's current offering rates. Both fixed and variable rate loan fair values are derived using a discounted cash flow methodology. For variable rate loans, repricing terms, including next repricing date, repricing frequency and repricing rate are factored into the discounted cash flow formula.

Federal Home Loan Bank of New York Stock

The carrying amount of Federal Home Loan Bank of New York stock approximates fair value since the Company is generally able to redeem this stock at par.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest receivable and payable approximate fair value due to the short term nature of these instruments.

Deposits

Fair values for demand and savings and club accounts are, by definition, equal to the amount payable on demand at the reporting date. Fair values of fixed-maturity certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments with similar maturities.

Advances from Federal Home Loan Bank of New York

Fair values of advances are estimated using discounted cash flow analyses, based on rates currently available to the Company for advances from the Federal Home Loan Bank of New York with similar terms and remaining maturities.

Off-Balance Sheet Financial Instruments

Fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms, and the present credit worthiness of the counterparties. As of September 30, 2016 and December 31, 2015, the fair value of the commitments to extend credit was not considered to be material.

Note 7 – Retirement Plans

Periodic expenses for the Company's retirement plans, which include the Directors' Retirement Plan and the Executive Incentive Retirement Plan, were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(In thousands)

Service cost	$	2		$	4		$	9		$	11
Interest cost		16			20			71			59
Curtailment		(46	)		-			(46	)		-
Amortization of unrecognized loss		18			9			25			28
Amortization of past service liability		(4	)		(7	)		(13	)		(21	)
Net periodic benefit cost	$	(14	)	$	26		$	46		$	77

The Company previously disclosed in its Form 10-K for the year ended December 31, 2015 that it expected to contribute $124,000 to the Plan during the current fiscal year. As of September 30, 2016, the Company contributed $718,000. The Company decided to terminate the Director Retirement Plan effective September 1, 2016. Full distribution of the plan is expected to take place in 2018. The company previously terminated the Executive Incentive Retirement Plan in 2015 and distributed plan assets in 2016.

Note 8 – Reclassifications Out of Accumulated Other Comprehensive Income

Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (a)			Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (a)		Affected Line Item in the Consolidated Statements of Comprehensive Income (Loss)
	Three Months Ended September 30, 2016			Nine Months Ended September 30, 2016
	(In thousands)
Amortization of defined benefit pension items:
Prior service costs		$ 4	(b)		$ 13	Directors compensation
Unrecognized loss		(18)	(b)		(25)	Directors compensation
Curtailment		46	(b)		46	Directors compensation
Total before tax		32			34
Income tax expense		(13)			(14)
Total reclassifications for the period		$ 19			$ 20

Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (a)			Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (a)		Affected Line Item in the Consolidated Statements of Comprehensive Income (Loss)
	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
	(In thousands)
Amortization of defined benefit pension items:
Prior service costs		$ 7	(b)		$ 21	Directors compensation
Unrecognized loss		(9)	(b)		(28)	Directors compensation
		(2)			(7)	Total before tax
		1			3	Income tax expense
Total reclassifications for the period		$ (1)			$ (4)	Net of tax

(a) Amounts in parenthesis indicate debits to profit/loss.

(b)	These accumulated other comprehensive components are included in the computation of net periodic pension cost. (See Note 7 for additional details).

ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward – looking statements include:

·	Statements of our goals, intentions and expectations;

·	Statements regarding our business plans, prospects, growth and operating strategies;

·	Statements regarding the quality of our loan and investment portfolios; and

·	Estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

·	General economic conditions, either nationally or in our market area, that are worse than expected;

·	The volatility of the financial and securities markets, including changes with respect to the market value of our financial assets;

·	Changes in government regulation affecting financial institutions and the potential expenses associated therewith;

·	Changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

·	Our ability to enter into new markets and/or expand product offerings successfully and take advantage of growth opportunities;

·	Increased competitive pressures among financial services companies;

·	Changes in consumer spending, borrowing and savings habits;

·	Legislative or regulatory changes that adversely affect our business;

·	Adverse changes in the securities markets;

·	Our ability to successfully manage our growth; and

·	Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board.

No forward-looking statement can be guaranteed and we specifically disclaim any obligation to update any forward-looking statement.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial position and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.

The allowance for loan losses represents our best estimate of losses known and inherent in our loan portfolio that are both probable and reasonable to estimate. In determining the amount of the allowance for loan losses, we consider the losses inherent in our loan portfolio and changes in the nature and volume of our loan activities, along with general economic and real estate market conditions. We utilize a two-tier approach: (1) identification of impaired loans for which specific reserves may be established; and (2) establishment of general valuation allowances on the remainder of the loan portfolio. We maintain a loan review system which provides for a systematic review of the loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loan, type of collateral and the financial condition of the borrower. Specific loan loss allowances are established for identified loans based on a review of such information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations.

Although specific and general loan loss allowances are established in accordance with management's best estimate, actual losses are dependent upon future events and, as such, further provisions for loan losses may be necessary in order to increase the level of the allowance for loan losses. For example, our evaluation of the allowance includes consideration of current economic conditions, and a change in economic conditions could reduce the ability of our borrowers to make timely repayments of their loans. This could result in increased delinquencies and increased non-performing loans, and thus a need to make increased provisions to the allowance for loan losses, which would be a charge to income during the period the provision is made, resulting in a reduction to our earnings. A change in economic conditions could also adversely affect the value of the properties collateralizing our real estate loans, resulting in increased charge-offs against the allowance and reduced recoveries, and thus a need to make increased provisions to the allowance for loan losses. Furthermore, a change in the composition of our loan portfolio or growth of our loan portfolio could result in the need for additional provisions.

Comparison of Financial Condition at September 30, 2016 and December 31, 2015

General. Total assets were $433.6 million at September 30, 2016, compared to $375.7 million at December 31, 2015, an increase of $57.9 million or 15.4%. During the period the Company experienced growth of $66.9 million or 25.5% in loans receivable, net. The investment portfolio declined $34.3 million or 43.4% while Federal Home Loan Bank of New York ("FHLBNY") stock decreased $393,000, or 21.5% and cash and cash equivalents increased by $19.3 million or 157.2%. Other assets decreased approximately $595,000 or 17.9% due to a reduction in prepaid expenses primarily related to the 2016 services of our previous core provider that was required to be prepaid in 2015. During the period the Company experienced deposit growth of $72.1 million or 27.4% while FHLBNY advances decreased by $10.0 million or 30.6%.

The ratio of average interest-earning assets to average-interest bearing liabilities was 133.4% for the nine month period ended September 30, 2016 as compared to 124.5% for the nine months ended September 30, 2015.

Loans. Loans receivable, net, increased by $66.9 million or 25.5% from $262.3 million at December 31, 2015 to $329.2 million at September 30, 2016. Loans receivable, net represented 75.9% of the Company's assets at September 30, 2016 compared to 69.8% at December 31, 2015. The Bank's commercial and multi-family real estate loan portfolio grew by $43.4 million or 72.8% since December 31, 2015; the commercial and industrial portfolio increased by $19.1 million on stronger loan demand, while the construction loan portfolio increased approximately $2.6 million as a result of loans utilizing funds to complete projects. The residential mortgage portfolio increased $2.6 million to $192.2 million from $189.6 million as of year-end 2015. All remaining portfolios were consistent with year-end levels.

Securities. Our portfolio of securities held to maturity totaled $44.7 million at September 30, 2016 as compared to $79.0 million at December 31, 2015. Maturities, calls and principal repayments during the nine months ended September 30, 2016 totaled $34.2 million and no purchases were made during the first nine months of 2016.

Deposits. Total deposits at September 30, 2016 were $334.7 million compared with $262.6 million at December 31, 2015. Overall, deposits increased by $72.1 million with non-interest bearing balances increasing by $5.5 million while interest bearing deposits increased $66.6 million since December 31, 2015 as the Company focused on deposit pricing and the development of deeper customer relationships. Within non-interest bearing accounts, growth was experienced in business checking accounts. Interest bearing demand and money market accounts increased $56.1 million since December 31, 2015. Savings and club account growth combined with certificates of deposit increased $10.5 million during the quarter.

Borrowings. Total borrowings at September 30, 2016 were $22.7 million compared with $32.7 million at December 31, 2015. Ten million dollars of long-term borrowings matured during the period. There were no overnight advances with the FHLBNY at September 30, 2016 or December 31, 2015.

Equity. Stockholders' equity was $72.6 million at September 30, 2016 compared to $76.4 million at December 31, 2015, a decrease of $3.8 million, or 5.0%. The decrease in shareholders' equity was due to the purchase of 112,600 shares of common stock for the 2016 Equity Incentive Plan; 107,403 of those shares were subsequently granted in the form of restricted stock awards. In addition, during the third quarter, the Company repurchased 242,379 shares (approximately 4.1% of the outstanding shares prior to the commencement of the repurchase plan) of common stock under its previously-announced stock repurchase plan for a total of $3.2 million or an average price per share of $13.27. These decreases were partially offset by a $683,000 increase in retained earnings related to net income along with a $85,000 decrease in unallocated common stock held by the ESOP which is a contra-equity account.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2016 and 2015

General. During the three month period ended September 30, 2016, the Company recorded net income of $301,000 compared with a net income for three month period ended September 30, 2015 of $258,000, as increases of $360,000 in net interest income and $11,000 in non-interest income were partially offset by increases of $140,000 in the provision for loan losses and $175,000 in non-interest expense. The increase in the provision for loan losses related to the loan growth the Company experienced during the quarter. The increase in non-interest expense was largely due to an increase in salaries and employee benefits related to incentive compensation.

The Company had net income of $683,000 for the nine months ended September 30, 2016 compared to net income of $441,000 for the nine months ended September 30, 2015, as increases of $1,214,000 in net interest income and $332,000 of non-interest income were offset by increases of $477,000 in the provision for loan losses and $673,000 in non-interest expense. Non-interest income increased primarily as a result of a $350,000 settlement received from a wire fraud loss that was incurred in the fourth quarter of 2014. Offsetting the increase in income was an increase in the provision for loan loss related to the loan growth the Company experienced during the year as well as increases in salaries and employee benefits, professional services and service bureau fees. These increases were related to incentive compensation, the core data conversion, and transition to a managed IT solution.

Net Interest Income

The following tables provide information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated:

	For the three months ended
	09/30/16			09/30/15
Average Balance Sheet (In Thousands)	Average Balance	Interest Income/Expense	Yield	Average Balance	Interest Income/Expense	Yield
Interest-earning assets:
Loans Receivable	$305,405	$3,177	4.16%	$250,835	$2,630	4.19%
Securities held to maturity	47,293	276	2.33	81,394	449	2.21
Other interest-earning assets	33,412	57	0.68	24,453	37	0.61
Total interest-earning assets	386,110	3,510	3.64	356,682	3,116	3.49
Allowance for Loan Loss	(3,905)			(3,583)
Non-interest-earning assets	26,133			25,165
Total non-interest-earning assets	22,228			21,582
Total Assets	$408,338			$378,264

Interest-bearing liabilities:
Interest demand & Money market	$81,020	$60	0.30%	$47,571	$20	0.17%
Savings and club deposits	103,166	57	0.22	100,688	56	0.22
Certificates of deposit	89,365	266	1.19	83,879	253	1.21
Total interest-bearing deposits	273,551	383	0.56	232,138	329	0.57

Federal Home Loan Bank advances	22,675	183	3.23	32,530	203	2.50
Total interest-bearing liabilities	296,226	566	0.76	264,668	532	0.80

Non-interest-bearing deposit	34,455			45,169
Other non-interest-bearing liabilities	3,430			3,437
Total Liabilities	334,111			313,274

Equity	74,227			64,990
Total Liabilities and Equity	$408,338			$378,264

Net Interest Spread		2,944	2.88%		2,584	2.69%

Net Interest Margin			3.05%			2.90%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	130.34%			134.77%

	For the nine months ended
	09/30/16			09/30/15
Average Balance Sheet (In Thousands)	Average Balance	Interest Income/Expense	Yield	Average Balance	Interest Income/Expense	Yield
Interest-earning assets:
Loans Receivable	$287,688	$9,097	4.22%	$243,584	$7,716	4.22%
Securities held to maturity	62,215	1,038	2.22	80,123	1,288	2.14
Other interest-earning assets	21,136	126	0.79	13,349	79	0.79
Total interest-earning assets	371,039	10,261	3.69	337,056	9,083	3.59
Allowance for Loan Loss	(3,749)			(3,580)
Non-interest-earning assets	23,215			25,102
Total non-interest-earning assets	19,466			21,522
Total Assets	$390,505			$358,578

Interest-bearing liabilities:
Interest demand & Money market	$63,224	$118	0.25%	$47,067	$56	0.16%
Savings and club deposits	103,298	171	0.22	100,753	165	0.22
Certificates of deposit	86,512	747	1.15	88,366	823	1.24
Total interest-bearing deposits	253,034	1,036	0.55	236,186	1,044	0.59

Federal Home Loan Bank advances	25,026	562	2.99	34,563	590	2.28
Total interest-bearing liabilities	278,060	1,598	0.77	270,749	1,634	0.80

Non-interest-bearing deposit	32,687			35,524
Other non-interest-bearing liabilities	3,664			3,011
Total Liabilities	314,411			309,284

Equity	76,094			49,294
Total Liabilities and Equity	$390,505			$358,578

Net Interest Spread		8,663	2.92%		7,449	2.79%

Net Interest Margin			3.11%			2.95%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	133.44%			124.49%

The Company's net interest margin increased 15 basis points to 3.05% for the quarter ended September 30, 2016 compared to 2.90% for the quarter ended September 30, 2015. The yield on interest-earning assets increased 15 basis points year over year while the cost of interest-bearing liabilities declined four basis points. The increase in the yield on interest-earning assets was attributable to the change in our loan mix as the Company continued to increase its commercial real estate portfolio during the quarter. The decrease in the average cost of interest-bearing liabilities continues to be attributable to the lower rate environment and a more favorable funding composition comprised of a larger percentage of lower-cost deposit account balances.

For the nine months ended September 30, 2016, the net interest margin increased 16 basis points to 3.11% compared to 2.95% for the nine months ended September 30, 2015. The average yield on interest-earning assets increased 10 basis points year over year while the average cost of interest-bearing liabilities declined three basis points. Similar to the quarterly discussion, the increase in the average yield on interest-earning assets was attributable to the change in our loan mix as the Company continued to increase its commercial real estate portfolio during the year. The decrease in the cost of interest-bearing liabilities continued to be attributable to the lower rate environment and a more favorable funding composition comprised of a larger percentage of lower-cost deposit account balances.

Provision for Loan Losses. The provision for loan losses increased by $140,000 to $180,000 for the three months ended September 30, 2016 compared to a provision of $40,000 for the three months ended September 30, 2015. We recorded a provision for loan losses of $500,000 for the nine month period ended September 30, 2016, compared to a provision for loan losses of $23,000 for the year to date period ended September 30, 2015. The increased provision level during the current year period is attributable to the increased size of the loan portfolio at September 30, 2016 compared to September 30, 2015. The Company's management reviews the level of the allowance for loan losses on a quarterly basis based on a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions, (3) actual losses previously experienced, (4) the Company's level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable. The Company had $6.3 million in nonperforming loans as of September 30, 2016 compared to $6.7 million as of September 30, 2015. The allowance for loan losses to total loans ratio was 1.21% at September 30, 2016 compared to 1.40% at September 30, 2015, while the allowance for loan losses to non-performing loans ratio was 64.28% at September 30, 2016 compared to 53.83% at September 30, 2015. Non-performing loans to total loans and annualized net charge-offs to average loans outstanding ratios were at 1.89% and 0.03%, respectively, at and for the nine months ended September 30, 2016 compared to 2.60% and 0.04% at and for the nine months ended September 30, 2015.

Non-Interest Income. Non-interest income increased $11,000, or 6.4%, to $183,000 during the three months ended September 30, 2016 compared to $172,000 for the three months ended September 30, 2015. Income from bank owned life insurance increased by $38,000 which was partially offset by decreases of $8,000 in fees and service charges and $19,000 in other non-interest income. Non-interest income was $836,000 for the nine months ended September 30, 2016 compared to $504,000 for the comparable 2015 timeframe. The increase of $332,000 or 65.9% year over year in the nine month period was primarily attributable to a $350,000 settlement from a wire loss the Company incurred and expensed in the fourth quarter of 2014.

Non-Interest Expenses. During the three months ended September 30, 2016, non-interest expenses increased $175,000 to $2.5 million from $2.3 million for the three months ended September 30, 2015. The increase was primarily attributable to increases in salaries and employee benefits, professional services and occupancy and equipment expense that were partially offset by a decrease in other expenses. Salaries and benefits increased by $250,000 or 21.0% due to an increase in incentive compensation and stock option and restricted stock awards granted during the second quarter of 2016 as well as normal increases in salaries and benefits expenses and additions to staff. Professional services increased by $66,000 or 36.3% as the Company completed its transition to a managed IT solution and is migrating to a hosted IT solution that was not present in 2015. Occupancy and equipment increased $66,000 or 20.9% due to increased depreciation expense. Other non-interest expenses declined $138,000 primarily as a result of a $150,000 decrease in expenses related to OREO.

Non-interest expense increased $673,000 to $8.0 million for the nine months ended September 30, 2016 compared to $7.3 million for the same period ended September 30, 2015. Salaries and benefits, professional services and service bureau fees increased by $538,000, $310,000, and $171,000, respectively, for the nine months ended September 30, 2016 compared to the same nine month period a year earlier. The increase in salaries and benefits was primarily due to an increase in incentive compensation and stock option and restricted stock awards granted during the second quarter 2016 as well as normal increases in salaries and benefits expenses and additions to staff. As previously discussed, the increase in professional services and service bureau fees was primarily the result of the Company's transition to a managed IT solution and subsequent transition to a hosted IT solution and the Company's full data conversion that was completed on May 13, 2016. Other non-interest expense decreased $369,000 primarily due to the absence of any other real estate owned expense during the period ended September 30, 2016.

Income Taxes. The income tax expense for the three months ended September 30, 2016 was $146,000 or 32.7% of the reported income before income taxes compared to a tax expense of $133,000 or 34.0% of the reported income before income taxes for the three months ended September 30, 2015. The income tax expense for the nine months ended September 30, 2016 was $343,000 or 33.4% of the reported income before income taxes compared to tax expense of $189,000 or 30.0% of the reported income before income taxes for the nine months ended September 30, 2015.

Liquidity, Commitments and Capital Resources

The Bank must be capable of meeting its customer obligations at all times. Potential liquidity demands include funding loan commitments, cash withdrawals from deposit accounts and other funding needs as they present themselves. Accordingly, liquidity is measured by our ability to have sufficient cash reserves on hand, at a reasonable cost and/or with minimum losses.

Senior management is responsible for managing our overall liquidity position and risk and is responsible for ensuring that our liquidity needs are being met on both a daily and long term basis. The Financial Review Committee, comprised of senior management and chaired by the President and Chief Executive Officer, is responsible for establishing and reviewing our liquidity procedures, guidelines, and strategy on a periodic basis.

Our approach to managing day-to-day liquidity is measured through our daily calculation of investable funds and/or borrowing needs to ensure adequate liquidity. In addition, senior management constantly evaluates our short-term and long-term liquidity risk and strategy based on current market conditions, outside investment and/or borrowing opportunities, short and long-term economic trends, and anticipated short and long-term liquidity requirements. The Bank's loan and deposit rates may be adjusted as another means of managing short and long-term liquidity needs. We do not at present participate in derivatives or other types of hedging instruments to meet liquidity demands, as we take a conservative approach in managing liquidity.

At September 30, 2016, the Bank had outstanding commitments to originate loans of $7.1 million, construction loans in process of $7.2 million, unused lines of credit of $20.5 million (including $15.8 million for home equity lines of credit), and standby letters of credit of $359,000. Certificates of deposit scheduled to mature in one year or less at September 30, 2016, totaled $47.3 million.

As of September 30, 2016, the Bank had contractual obligations related to the long-term operating leases for the three branch locations that it leases (Dewy Meadow, RiverWalk and Martinsville).

The Bank generates cash through deposits and/or borrowings from the FHLBNY to meet its day-to-day funding obligations when required. At September 30, 2016, the total loans receivable to deposits ratio was 99.6%. At September 30, 2016, the Bank's collateralized borrowing limit with the FHLBNY was $105.5 million, of which $22.7 million was outstanding. As of September 30, 2016, the Bank also had a $33.0 million line of credit with two financial institutions for reverse repurchase agreements (which is a form of borrowing) that it could access if necessary.

Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of September 30, 2016, the Bank exceeded all applicable regulatory capital requirements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 – CONTROLS AND PROCEDURES

An evaluation was performed under the supervision, and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule l3a-l5(e) promulgated under the Securities Exchange Act of 1934, as amended) as of September 30, 2016. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2016.

No change in the Company's internal controls over financial reporting (as defined in Rule l3a-l5(f) promulgated under the Securities Exchange Act of 1934, as amended) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

There were no material pending legal proceedings at September 30, 2016 to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

ITEM 1A – RISK FACTORS

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

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

MSB Financial Corp. (the "Registrant") announced that on June 2, 2016 it received the non-objection of the Federal Reserve Bank of New York to purchase up to 112,600 shares of the Registrant's common stock in order to fund future awards of restricted stock that may be made under the Registrant's 2016 Equity Incentive Plan that was approved by stockholders at the Annual Meeting of Stockholders held on April 22, 2016. Such purchases will be made from time to time in the open market, through block trades, in privately negotiated stock purchases or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. As such purchases are dependent on various factors including market conditions, there can be no guarantee as to the timing or exact number of shares that are purchased. On August 4, 2016, The Registrant announced that it has approved a stock repurchased to purchase up to 595,342 shares of the Registrant's common stock. In connection with the repurchase plan, the Registrant entered into a Rule 10b5-1 plan with Keefe. Bruyette & Wood, Inc.

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs
July 1- July 31, 2016	-	-	-	-
August 1-August 31, 2016	242,379	$13.27	242,379	352,963
September 1-September 30, 2016	-	-	-	-
Total	242,379	$13.27	242,379	352,963

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable

ITEM 5 – OTHER INFORMATION

None

ITEM 6 – EXHIBITS

31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.LAB	XBRL Labels Linkbase Document
101.PRE	XBRL Presentation Linkbase Document
101.DEF	XBRL Definition Linkbase Document

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.

		MSB FINANCIAL CORP.
		(Registrant)


Date November 14, 2016		/s/ Michael A. Shriner
		Michael A. Shriner
		President and Chief Executive Officer


Date November 14, 2016		/s/ John S. Kaufman
		John S. Kaufman
		Vice President and Chief Financial Officer

MSB FINANCIAL CORP - FORM 10-Q - November 14, 2016

Attached files

MSB FINANCIAL CORP Reports