MSB FINANCIAL CORP - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 - MSB FINANCIAL CORP	msbf-09302017xex32.htm
EX-31.2 - EXHIBIT 31.2 - MSB FINANCIAL CORP	msbf-09302017xex312.htm
EX-31.1 - EXHIBIT 31.1 - MSB FINANCIAL CORP	msbf-09302017xex311.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, 2017

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

incorporation or organization)

(I.R.S. Employer

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

Large accelerated filer [ ]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [X]

Emerging growth company [ ]

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

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

The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: November 14, 2017:

$0.01 par value common stock 5,768,632 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, 2017 and December 31, 2016	3

	Consolidated Statements of Income for the
	Three and Nine Months Ended September 30, 2017 and 2016	4

	Consolidated Statements of Comprehensive Income for the
	Three and Nine Months Ended September 30, 2017 and 2016	5

	Consolidated Statement of Changes in Stockholders’ Equity for the
	Nine Months Ended September 30, 2017	6

	Consolidated Statements of Cash Flows for the Nine Months
	Ended September 30, 2017 and 2016	7

	Notes to Consolidated Financial Statements (Unaudited)	8

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

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4:	Controls and Procedures	35


PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	35

Item 1A:	Risk Factors	35

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3:	Defaults Upon Senior Securities	35

Item 4:	Mine Safety Disclosures	35

Item 5:	Other Information	35

Item 6:	Exhibits	36

SIGNATURES		37

CERTIFICATIONS

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



	September 30, 2017			December 31, 2016

(Dollars in thousands, except per share amounts)
Cash and due from banks	$	1,800		$	1,388
Interest-earning demand deposits with banks	6,971			19,994

Cash and Cash Equivalents	8,771			21,382

Securities held to maturity (fair value of $40,794 and $43,894, respectively)	40,752			44,104
Loans receivable, net of allowance for loan losses of $5,275 and $4,476, respectively	461,285			368,007
Premises and equipment	8,804			8,957
Federal Home Loan Bank of New York stock, at cost	3,512			1,433
Bank owned life insurance	14,097			13,784
Accrued interest receivable	1,548			1,378
Other assets	2,988			2,601

Total Assets	$	541,757		$	461,646

Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	40,504		$	44,365
Interest bearing	357,006			317,934

Total Deposits	397,510			362,299

Advances from Federal Home Loan Bank of New York	68,375			22,675
Advance payments by borrowers for taxes and insurance	700			792
Other liabilities	2,632			2,695

Total Liabilities	469,217			388,461

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; 5,768,632 and 5,714,182 issued; 5,768,632 and 5,714,182 outstanding, respectively	58			57
Paid-in capital	50,953			51,809
Retained earnings	23,369			23,370
Unallocated common stock held by ESOP (193,144 and 201,316 shares, respectively)	(1,809		)	(1,929		)
Accumulated other comprehensive loss	(31		)	(122		)

Total Stockholders' Equity	72,540			73,185

Total Liabilities and Stockholders' Equity	$	541,757		$	461,646

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three months ended September 30,					Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2017			2016		2017		2016
Interest Income:
Loans receivable, including fees	$	4,769		$	3,177	$	13,213	$	9,097
Securities held to maturity	264			276		762		1,038
Other	50			57		128		126
Total Interest Income	5,083			3,510		14,103		10,261
Interest Expense
Deposits	622			383		1,703		1,036
Borrowings	271			183		691		562
Total Interest Expense	893			566		2,394		1,598

Net Interest Income	4,190			2,944		11,709		8,663
Provision for Loan Losses	490			180		985		500
Net Interest Income after Provision for Loan Losses	3,700			2,764		10,724		8,163

Non-Interest Income
Fees and service charges	87			78		256		248
Income from bank owned life insurance	101			94		313		207
Other	17			11		42		381
Total Non-Interest Income	205			183		611		836

Non-Interest Expenses
Salaries and employee benefits	1,577			1,419		4,661		4,306
Directors compensation	188			109		551		336
Occupancy and equipment	394			382		1,217		1,064
Service bureau fees	67			134		164		639
Advertising	4			7		12		28
FDIC assessment	61			74		131		211
Professional services	342			248		1,050		860
Other	189			127		571		529
Total Non-Interest Expenses	2,822			2,500		8,357		7,973

Income before Income Taxes	1,083			447		2,978		1,026
Income Tax Expense	(86		)	146		528		343
Net Income	$	1,169		$	301	$	2,450	$	683

Earnings per share:
Basic	$	0.21		$	0.05	$	0.44	$	0.12
Diluted	$	0.21		$	0.05	$	0.44	$	0.12

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)	2017		2016			2017		2016
Net Income	$	1,169	301			2,450		683
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, $- and $5, respectively	$	—	$	(3	)	$	—	$	(8	)

Reclassification adjustment for net actuarial loss included in net income, net of tax of $(21), $12, $(61), and $8, respectively	30		(16		)	91		(12		)

Total other comprehensive income (loss)	30		(19		)	91		(20		)

Comprehensive income	$	1,199	$	282		$	2,541	$	663

See notes to unaudited consolidated financial statements.

MSB Financial Corp and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)



(Dollars in Thousands)	Common Stock			Paid-In Capital			Retained Earnings			Unallocated Common Stock Held by ESOP			Accumulated Other Comprehensive Loss			Total Stockholders' Equity


Balance- December 31, 2016	$	57		$	51,809		$	23,370		$	(1,929	)	$	(122	)	$	73,185

Net income							2,450									2,450
Other comprehensive income, net of tax													91			91
Allocation of ESOP stock				55						120						175
Exercise of stock option (273,081 shares)	3			2,575												2,578
Stock-based compensation				299												299
Cash paid for common stock dividend							(2,451		)							(2,451		)
Repurchased Stock (218,627 shares)	(2		)	(3,785		)										(3,787		)

Balance - September 30, 2017	$	58		$	50,953		$	23,369		$	(1,809	)	$	(31	)	$	72,540

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)



	Nine Months Ended September 30,
(Dollars in thousands)	2017			2016
Cash Flows from Operating Activities:
Net Income	$	2,450		$	683
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	(99		)	(72		)
Depreciation and amortization of premises and equipment	413			325
Stock-based compensation and allocation of ESOP stock	474			227
Provision for loan losses	985			500
Income from bank owned life insurance	(313		)	(207		)
(Increase) decrease in accrued interest receivable	(170		)	98
(Increase) decrease in other assets	(448		)	608
Increase (decrease) in other liabilities	89			(470		)
Net Cash Provided by Operating Activities	3,381			1,692

Cash Flows from Investing Activities:
Activity in held to maturity securities:
Purchases	(1,182		)	—
Maturities, calls and principal repayments	4,475			34,242
Net increase in loans receivable	(49,333		)	(42,312		)
Purchased loan participations	(53,024		)	(24,957		)
Sold loan participations	8,252			—
Purchase of premises and equipment	(260		)	(1,201		)
Purchase of Federal Home Loan Bank of NY stock	(11,665		)	(57		)
Redemption of Federal Home Loan Bank of NY stock	9,586			450
Purchase of bank owned life insurance	—			(6,000		)
Net Cash Used in Investing Activities	(93,151		)	(39,835		)

Cash Flows from Financing Activities:
Net increase in deposits	35,211			72,092
Advances from Federal Home Loan Bank of NY	45,700			—
Repayment of advances from Federal Home Loan Bank of New York	—			(10,000		)
(Decrease) increase in advance payments by borrowers for taxes and insurance	(92		)	77
Repurchase of common stock	(108		)	(3,215		)
Proceeds from exercise of stock options	571			—
Net exercise of options and repurchase of shares	(1,672		)	—
Cash dividends paid to stockholders	(2,451		)	—
Purchase of common stock for equity plan	—			(1,467		)
Net Cash Provided by Financing Activities	77,159			57,487

Net (decrease) increase in Cash and Cash Equivalents	(12,611		)	19,344
Cash and Cash Equivalents – Beginning	21,382			12,303
Cash and Cash Equivalents – Ending	$	8,771		$	31,647

Supplementary Cash Flows Information
Interest paid	$	2,373		$	1,604
Income taxes paid	1,016			68

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 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. 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 real estate 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 Federal Deposit Insurance Corporation. 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"), the Bank's wholly-owned subsidiary, 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 Events

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of September 30, 2017, 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, 2017 and for the three and nine months ended September 30, 2017 and 2016. The results of operations for the three and nine months ended September 30, 2017 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

Note 2 - Basis of Consolidated Financial Statement Presentation (Continued)

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-9, Revenue from Contracts with Customers (ASU 2014-9), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-9 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 2014-9 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 was initially effective for annual periods beginning after December 15, 2016, 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 2014-9 recognized at the date of adoption (which includes additional footnote disclosures). The Company has not yet decided on the method it will use to adopt the guidance.

The FASB subsequently issued ASU 2015-14 which states that public business entities should apply the guidance in ASU 2014-9 to annual reporting periods beginning after December 31, 2017, including interim reporting periods within that reporting period.

The FASB also subsequently issued ASUs Nos. 2016-8, 2016-10, 2016-12, 2016-20 and 2017-5 to augment, amend and clarify the original pronouncement. For the nine months ended September 30, 2017, approximately 98% of our revenue was comprised of interest income on financial assets and earnings on bank-owned life insurance, which are explicitly excluded from the scope of ASU 2014-09. We are still in the process of analyzing our other revenue streams that are within the scope of the guidance, primarily service fees on deposits and ATM and debit card fees, but has not yet performed an evaluation of the underlying revenue contracts, therefore we cannot make a formal assessment on the potential impact.

In January 2016, the FASB issued ASU No. 2016-1, 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. 2016-2, 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 2016-2 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 currently expect that upon adoption of ASU 2016-2, right-of-use assets and lease liabilities will be recognized in our consolidated statements of condition in amounts that will be material; however, we do not expect a material impact to our consolidated income statement.

In March 2016, the FASB issued ASU No. 2016-9, 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. The adoption of ASU 2016-9 effective January 1, 2017, did not have a material impact on our consolidated financial statements.

Note 2 - Basis of Consolidated Financial Statement Presentation (Continued)

In June 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, including adoption in the interim or annual period provided that the entire standard is adopted. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements. We have taken steps to begin preparations for implementation, such as evaluating changes to our current loss recognition model and evaluating the potential use of outside professionals for an updated model.

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), or principal payment (cash outflow-financing), (3) contingent consideration payments made soon after a business combination (cash outflow-investing), (4) proceeds from the settlement of insurance claims (classification on basis of the nature of each loss), (5) proceeds from the 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 do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In February 2017, FASB issued Accounting Standards Update No. 2017-7, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-7"). To improve the consistency, transparency, and usefulness of financial information for users, the amendments in ASU 2017-7 require that an employer disaggregate the service cost component from the other components of net benefit cost and report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in ASU 2017-7 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in ASU 2017-7 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We intend to adopt ASU 2017-7 during the first quarter of 2018 and it will have no effect on our results of operations because it only impacts the presentation of certain information on the statements of income.

In March 2017, FASB issued Accounting Standards Update No. 2017-8, "Receivables —Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities" ("ASU 2017-8"). ASU 2017-8 amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. 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 should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The effect of ASU 2017-8 would be lower interest income and a corresponding lower yield as the amortization period would be shortened. As of September 30, 2017 we do not hold any callable debt securities that were purchased at a premium. We intend to adopt ASU 2017-8 during the first quarter of 2019.

In May 2017, FASB issued Accounting Standards Update No. 2017-9, "Scope of Modification Accounting," which clarifies Topic 718, "Compensation – Stock Compensation," such that an entity must apply modification accounting to changes

Note 2 - Basis of Consolidated Financial Statement Presentation (Continued)

in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification (the ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification); (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of this guidance to have a material impact 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)	2017		2016		2017		2016
Numerator:
Net income	$	1,169	$	301	$	2,450	$	683

Denominator:
Weighted average common shares	5,564		5,588		5,541		5,692
Dilutive potential common shares	11		82		4		76
Weighted average fully diluted shares	5,575		5,670		5,545		5,768

Earnings per share:
Basic	$	0.21	$	0.05	$	0.44	$	0.12
Dilutive	$	0.21	$	0.05	$	0.44	$	0.12

Note 4 - Securities Held to Maturity

The amortized cost of securities held to maturity and their estimated fair values as of September 30, 2017 and December 31, 2016 are summarized as follows:



(In Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2017
U.S. Government agencies:
Due within one year	$	2,000	$	—	$	1	$	1,999
Due after one year through five years	4,500		—		26		4,474

Total U.S. Government agencies	6,500		—		27		6,473


Mortgage-backed securities	24,312		393		109		24,596

Corporate bonds:
Due within one year	518		5		—		523
Due after one year through five years	1,500		11		—		1,511
Due after five through ten years	1,000		—		17		983
Due after ten years	4,000		—		217		3,783
Total Corporate bonds	7,018		16		234		6,800

State and political subdivisions:
Due within one year	100		—		—		100
Due after one through five years	660		2		1		661
Due after five through ten years	537		1		—		538
Total State and political subdivisions	1,297		3		1		1,299

Certificates of deposit:
Due within one year	1,625		2		1		1,626
Total Certificates of deposit	1,625		2		1		1,626

Total Securities held to maturity	$	40,752	$	414	$	372	$	40,794

Note 4 - Securities Held to Maturity - Continued



(In Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2016
U.S. Government agencies:
Due within one year	$	1,000	$	—	$	2	$	998
Due after one year through five years	5,500		1		40		5,461
Total U.S. Government Agencies	6,500		1		42		6,459

Mortgage-backed securities	24,663		366		224		24,805

Corporate bonds:
Due within one year	2,002		2		—		2,004
Due after one year through five years	2,032		15		13		2,034
Due after five years through ten years	1,000		—		42		958
Due thereafter	4,000		—		253		3,747
Total Corporate bonds	9,034		17		308		8,743

State and political subdivisions:
Due within one year	101		—		—		101
Due after one through five years	663		—		11		652
Due after five through ten years	538		—		18		520
Total State and political subdivisions	1,302		—		29		1,273

Certificates of deposit:
Due within one year	1,670		6		—		1,676
Due after one through five years	935		4		1		938
Total Certificates of deposit	2,605		10		1		2,614

Total Securities held to maturity	$	44,104	$	394	$	604	$	43,894

All mortgage-backed securities at September 30, 2017 and December 31, 2016 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, 2017 and December 31, 2016, as shown above, are reported in total. 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, 2017 or 2016. At September 30, 2017 and December 31, 2016, securities held to maturity with a fair value of approximately $1.0 million 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, 2017 and December 31, 2016, 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, 2017
U.S. Government agencies	$	1,992	$	8	$	4,481	$	19	$	6,473	$	27
Mortgage-backed securities	6,011		55		2,709		54		8,720		109
Corporate bonds	—		—		4,766		234		4,766		234
State and political subdivisions	163		1		—		—		163		1
Certificates of deposit	490		1		—		—		490		1

Total securities with gross unrealized losses	$	8,656	$	65	$	11,956	$	307	$	20,612	$	372



	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, 2016
U.S. Government agencies	$	5,458	$	42	$	—	$	—	$	5,458	$	42
Mortgage-backed securities	13,456		224		—		—		13,456		224
Corporate bonds	1,988		13		4,705		295		6,693		308
State and political subdivisions	1,172		28		101		1		1,273		29
Certificates of deposit	245		1		—		—		245		1

Total securities with gross unrealized losses	$	22,319	$	308	$	4,806	$	296	$	27,125	$	604

At September 30, 2017, management concluded that the unrealized losses summarized above (which related to six U.S. Government agency bonds, thirteen mortgage-backed securities, three corporate bonds, one state and political subdivision security and two certificate of deposits, compared to five U.S. Government agency bonds, fourteen mortgage-backed securities, six corporate bonds, eight state and political subdivision bonds, and one certificate of deposit as of December 31, 2016) 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, 2017 and December 31, 2016 was as follows:



(In Thousands)	September 30, 2017		December 31, 2016
Residential mortgage:
One-to-four family	$	161,679	$	160,534
Home equity	27,409		32,262

Total residential mortgages	189,088		192,796

Commercial loans:
Commercial and multi-family real estate	184,791		124,656
Construction	36,002		16,554
Commercial and industrial	73,409		45,246

Total commercial loans	294,202		186,456

Consumer:	659		446

Total loans receivable	483,949		379,698

Less:
Loans in process	16,864		6,557
Deferred loan fees	525		658
Allowance for loan losses	5,275		4,476

Total adjustments	22,664		11,691

Loans receivable, net	$	461,285	$	368,007

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.

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.

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


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.

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, 2017 and 2016:

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, 2017

Allowance for loan losses:
Balance, beginning	$	1,812		$	1,598		$	315	$	1,163		$	9		$	28		$	4,925
Provisions (credits)	82			278			58		27			3			42			$	490
Loans charged-off	(112		)	—			—		(29		)	—			—			$	(141	)
Recoveries	1			—			—		—			—			—			$	1
Balance, ending	$	1,783		$	1,876		$	373	$	1,161		$	12		$	70		$	5,275

Nine Months Ended September 30, 2017

Allowance for loan losses:
Balance, beginning	$	1,808		$	1,441		$	248	$	882		$	6		$	91		$	4,476
Provisions (credits)	85			478			125		309			9			(21		)	$	985
Loans charged-off	(114		)	(43		)	—		(30		)	(3		)	—			$	(190	)
Recoveries	4			—			—		—			—			—			$	4
Balance, ending	$	1,783		$	1,876		$	373	$	1,161		$	12		$	70		$	5,275

Period-end allowance allocated to:
Loans individually evaluated for impairment	$	—		$	—		$	—	$	—		$	—		$	—		$	—
Loans collectively evaluated for impairment	1,783			1,876			373		1,161			12			70			$	5,275
Ending Balance	$	1,783		$	1,876		$	373	$	1,161		$	12		$	70		$	5,275

Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	12,535		$	2,090		$	—	$	179		$	—		$	—		$	14,804
Loans collectively evaluated for impairment	176,445			182,448			19,067		73,137			659			—			$	451,756
Ending Balance	$	188,980		$	184,538		$	19,067	$	73,316		$	659		$	—		$	466,560

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, 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

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.

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, 2017 and December 31, 2016:

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



(In Thousands)
As of September 30, 2017	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

Residential Mortgage
One-to-four family	$	794	$	642	$	—	$	1,436	$	156,583	$	3,556	$	161,575
Home equity	729		434		—		1,163		26,126		116		27,405
Commercial and multi-family real estate	—		—		374		374		183,835		329		184,538
Construction	—		—		—		—		19,067		—		19,067
Commercial and industrial	46		—		—		46		73,200		70		73,316
Consumer	9		—		—		9		650		—		659
Total	$	1,578	$	1,076	$	374	$	3,028	$	459,461	$	4,071	$	466,560

(1)

Nonaccrual loans at September 30, 2017, included $2,317,000 that were 90 days or more delinquent, none that were 60-89 days delinquent, $725,000 that were 30-59 days delinquent, and $1,029,000 that were current or less than 30 days delinquent. Loans are restored to accrual status when the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time (generally six months).



(In Thousands)
As of December 31, 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

Residential Mortgage
One-to-four family	$	2,433	$	1,944	$	—	$	4,377	$	150,260	$	5,744	$	160,381
Home equity	591		34		—		625		31,500		126		32,251
Commercial and multi-family real estate	374		—		—		374		123,182		760		124,316
Construction	—		—		—		—		9,934		—		9,934
Commercial and industrial	—		—		—		—		44,805		350		45,155
Consumer	—		—		—		—		446		—		446
Total	$	3,398	$	1,978	$	—	$	5,376	$	360,127	$	6,980	$	372,483

(1)

Nonaccrual loans at December 31, 2016, included $5,521,000 that were 90 days or more delinquent, $30,000 that were 60-89 days delinquent, $964,000 that were 30-59 days delinquent, and $464,000 that were current or less than 30 days delinquent. Loans are restored to accrual status when the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time (generally six months).

Impaired Loans

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

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

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: (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.

The estimated fair values of the real estate collateral are determined primarily through third-party appraisals. 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 the 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.

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.

The following tables provide an analysis of the impaired loans at September 30, 2017 and December 31, 2016 and the average balances of such loans for the nine months and year, respectively, then ended:



(In Thousands)
September 30, 2017	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	$	11,254	$	11,254	$	—	$	—	$	11,703	$	12,427
Home equity	1,281		1,281		—		—		1,374		1,312

Commercial and multi-family real estate	2,090		2,090		—		—		2,703		1,720
Commercial and industrial	179		179		—		—		212		318
Total	$	14,804	$	14,804	$	—	$	—	$	15,992	$	15,777



(In Thousands)
December 31, 2016	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	$	12,509	$	10,395	$	2,114	$	101	$	12,891	$	12,795
Home equity	1,311		1,311		—		—		1,401		1,981

Commercial and multi-family real estate	1,529		1,529		—		—		2,149		1,278
Commercial and industrial	511		357		154		102		961		548

Consumer	—		—		—		—		—		1
Total	$	15,860	$	13,592	$	2,268	$	203	$	17,402	$	16,603

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

As of September 30, 2017 and December 31, 2016, impaired loans listed above include $11.7 million and $10.7 million, respectively, of loans modified in troubled debt restructurings ("TDR") and as such are considered impaired under GAAP. As of September 30, 2017 and December 31, 2016, $10.0 million and $8.5 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.

Interest income of $159,000 and $45,000 was recognized on impaired loans during the three months ended September 30, 2017 and 2016. The average balance of impaired loans for the three months ended September 30, 2017 and September 30, 2016 were $15.7 million and $16.7 million, respectively. During the nine months ended September 30, 2017 and 2016, interest income of $354,000 and $363,000, respectively, was recognized on impaired loans. The average balance of impaired loans for the nine months ended September 30, 2017 and September 30, 2016 was $15.8 million and $18.5 million, respectively.

Credit Quality Indicators

Management uses a nine 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 Bank's rating categories are as follows:

1 – 5: The first five risk rating categories are considered not criticized, and are aggregated as "Pass" rated.

6: "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.

7: "Substandard" loans 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. This includes loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.

8: "Doubtful" loans 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.

9: "Loss" loans are considered uncollectible and subsequently charged off.

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, 2017 and December 31, 2016:



(In Thousands)
As of September 30, 2017	Pass		Special Mention		Substandard		Doubtful		Loss		Total

Commercial and multi-family real estate	$	182,053	$	1,427	$	1,058	$	—	$	—	$	184,538
Construction	19,067		—		—		—		—		$	19,067
Commercial and industrial	72,897		218		201		—		—		$	73,316

Total	$	274,017	$	1,645	$	1,259	$	—	$	—	$	276,921

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



(In Thousands)
As of December 31, 2016	Pass		Special Mention		Substandard		Doubtful		Loss		Total

Commercial and multi-family real estate	$	122,804	$	—	$	1,512	$	—	$	—	$	124,316
Construction	8,759		1,175		—		—		—		$	9,934
Commercial and industrial	44,537		86		532		—		—		$	45,155

Total	$	176,100	$	1,261	$	2,044	$	—	$	—	$	179,405

Management further monitors the performance and credit quality of the residential portfolio 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.



(In Thousands)	Residential mortgage				Consumer				Total Residential and Consumer
	Sep 30, 2017		Dec 31, 2016		Sep 30, 2017		Dec 31, 2016		Sep 30, 2017		Dec 31, 2016

Nonperforming	$	3,672	$	5,870	$	—	$	—	$	3,672	$	5,870

Performing	185,308		186,762		659		446		185,967		187,208

Total	$	188,980	$	192,632	$	659	$	446	$	189,639	$	193,078

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 the loan's 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 six 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, is considered in the determination of an appropriate level of allowance for loan losses.

The recorded investment balance of TDRs totaled $11.7 million at September 30, 2017 compared with $10.7 million at December 31, 2016. The majority of the Company's TDRs are on accrual status. Accruing TDRs totaled $10.0 million at September 30, 2017 versus $8.5 million at December 31, 2016. The total of TDRs on non-accrual status was $1.7 million at September 30, 2017 and $2.2 million at December 31, 2016.

The Company did not modify any loans as a TDR during three months ended September 30, 2017 and 2016. For the nine months ended September 30, 2017, the terms of twelve loans were modified into five TDRs. The Company refinanced and consolidated a one-to-four family and one home equity mortgage loan which was restructured to an adjustable interest rate from a fixed interest rate. In addition, the Company restructured a one-to-four family loan, a home equity loan and a commercial line of credit. These loans were consolidated into one one-to-four family TDR with an extended maturity date. The Company restructured a commercial loan and a multi-family real estate loan into one TDR and extended the maturity date. The Company refinanced and consolidated a one-to-four family loan and three commercial loans into a multi-family & commercial loan with an adjustable interest rate from a fixed interest rate. In addition, the Company refinanced a one-to-four family loan and capitalized the interest. For the nine months ended September 30, 2016, the Company did not modify any loans as a TDR.

The following tables summarize by class loans modified into TDRs during the nine months ended September 30, 2017:

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



	Nine Months Ended September 30, 2017
	Number of Contracts	Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
		(Dollars in thousands)

Residential Mortgage
One-to-four family	4	$	1,019	$	1,283
Home equity	2	99		—
Commercial and multi-family real estate	1	419		661
Commercial	5	283		—

Total	12	1,820		1,944

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 for the three and nine months ended September 30, 2017 and 2016.

There was no Other Real Estate Owned ("OREO") at September 30, 2017 and December 31, 2016. We may obtain physical possession of residential real estate collateralizing consumer mortgage loans via foreclosure or in-substance repossession. At September 30, 2017 and December 31, 2016, we had consumer loans with a carrying value of $1.7 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.

Note 6 - Fair Value Measurements (Continued)

•

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 of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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, 2017 and December 31, 2016.

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 Company did not have any financial assets measured as fair value on a non-recurring basis as of September 30, 2017

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



	As of December 31, 2016
	Level 1 Inputs	Level 2 Inputs	Level 3 Inputs	Total Fair Value
	(In thousands)
Impaired loans	$—	$—	$2,065	$	2,065

For Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2016, the significant unobservable inputs used in fair value measurements were as follows:



	As of December 31, 2016
	Fair Value Estimate	Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans	$2,065	Appraisal of collateral	Appraisal adjustments	0% to 22.6% (19.4%)
			Liquidation expense	5.4% to 18.3 (6.8%)

A 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

Note 6 - Fair Value Measurements (Continued)

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, 2017 and December 31, 2016, 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, 2017	Amount		Value		Inputs		Inputs		Inputs
			(In thousands)

Financial assets:
Securities held to maturity	$	40,752	$	40,794	$	—	$	40,794	$	—
Loans receivable (1)	461,285		462,942		—		—		462,942

Financial liabilities:
Certificate of deposits	124,821		126,723		—		126,723		—
Advances from Federal Home Loan Bank of New York	68,375		68,414		—		68,414		—

As of December 31, 2016

Financial assets:
Securities held to maturity	$	44,104	$	43,894	$	—	$	43,894	$	—
Loans receivable (1)	368,007		373,325		—		—		373,325

Financial liabilities:
Certificate of deposits	103,627		105,375		—		105,375		—
Advances from Federal Home Loan Bank of New York	22,675		23,087		—		23,087		—


(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

Note 6 - Fair Value Measurements (Continued)

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, 2017 and December 31, 2016, 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 September 30,					Nine Months Ended September 30,
	2017		2016			2017		2016
	(In thousands)

Service cost	$	—	$	2		$	—	$	9
Interest cost	5		16			15		71
Curtailment	—		(46		)	—		(46		)
Amortization of unrecognized loss (gain)	51		18			152		25
Amortization of past service liability	—		(4		)	—		(13		)
Net periodic benefit cost	$	56	$	(14	)	$	167	$	46

The Company previously disclosed in its Form 10-K as of December 31, 2016 that it expected to contribute $84,000 to the Plan during the current fiscal year. As of September 30, 2017, the Company contributed $63,000.

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
	Three Months Ended September 30, 2017		Nine Months Ended September 30, 2017
	(In thousands)
Amortization of defined benefit pension items:
Prior service costs	$—	(b)	$—	Directors compensation
Unrecognized loss	(51)	(b)	(152)	Directors compensation
Curtailments	—		—	Directors compensation
Total before tax	(51)		(152)	Total before tax
Income tax expense	21		61	Income tax expense
Total reclassifications for the period	$(30)		$(91)	Net of tax



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
	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
Curtailments	46		46	Directors compensation
Total before tax	32		34	Total before tax
Income tax expense	(13)		(14)	Income tax expense
Total reclassifications for the period	$19		$20	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).

Note 9 - Stock-Based Compensation

After shareholder approval in 2016, the MSB Financial Corp. 2016 Equity Incentive Plan (the “2016 Plan”) became effective. In addition, the Company also has the MSB Financial Corp. 2008 Stock Compensation and Incentive Plan (the “2008 Plan”). No future awards are being granted under the 2008 Plan. The 2016 Plan will terminate on the tenth anniversary of its effective date, after which no awards may be granted. Collectively, the 2008 Plan and the 2016 Plan are referred to as Stock Option Plans. Under the 2016 Plan, the Company may grant options to purchase up to

Note 9 - Stock-Based Compensation (Continued)

281,499 shares of Company’s common stock and issue up to 112,600 shares of restricted stock. At September 30, 2017, there were 71,051 shares remaining for future option grants and 5,197 shares remaining for future restricted share grants under the plan.

On July 16, 2015, the Company completed a second-step stock conversion that included the conversion of the stock options issued and outstanding under the 2008 Plan at a conversion rate of 1.1397. As a result, the number of options outstanding was increased by the conversion factor and the exercise price per share was converted to $9.4323.

On August 4, 2017, certain directors, executive officers and directors emeriti executed options to purchase 212,468 shares of Common Stock at a per share exercise price of $9.4323. In lieu of issuing shares of Common Stock upon the exercise of such options, the Company made a cash payment to such optionees equal to the excess of the closing price of the Common Stock on the Nasdaq Stock Market on August 4, 2017 of $17.30 over the per share exercise price of such options of $9.4323 multiplied by the number of options being exercised. An aggregate of $1.7 million was paid to the optionees.

During 2017, options to purchase 10,556 shares of common stock at $17.30 per share were awarded and will expire no later than ten years following the grant date. The options granted vest over a five-year service period, with 20% of the awards vesting on each anniversary date of grant. The fair value of the options granted, as computed using the Black-Scholes option-pricing model, was determined to be $3.71 per option based upon the following underlying assumptions: a risk-free interest rate, expected option life, expected stock price volatility, and dividend yield of 1.98%, 6.5 years, 15.41%, and 0.00%, respectively.

A summary of stock options at September 30, 2017 and December 31, 2016 was as follows:



	Nine months ended September 30, 2017		Year ended December 31, 2016
Stock Options:	Shares	Weighted- Average Exercise Price	Shares	Weighted- Average Exercise Price
Outstanding at beginning of period	472,973	$10.96	276,219	$9.43
Granted	10,556	17.30	210,448	13.04
Exercised	(273,081)	9.43	(3,138)	9.43
Forfeited	—	—	(10,556)	13.04
Outstanding at end of period	210,448	13.27	472,973	10.96
Nonvested at end of period	167,271	13.32	199,892	13.05
Exercisable at end of period	43,177	13.05	273,081	9.43
Weighted-average fair value of awards granted	$3.71		$2.12

The total amount of compensation cost remaining to be recognized relating to unvested option grants as of September 30, 2017 was $345,000. The weighted-average period over which the expense is expected to be recognized is 3.85 years. At September 30, 2017, the intrinsic value of options exercisable and all options outstanding was approximately $207,000 and $965,000, respectively.

The Company awarded 107,403 shares of restricted stock that vest over a five year period during the year ended December 31, 2016. The fair value of the restricted stock is equal to the fair value of the Company’s common stock on the date of grant. The total amount of compensation cost to be recognized relating to non-vested restricted stock as of September 30, 2017, was $1.0 million. The weighted-average period over which the expense is expected to be recognized is 3.75 years.

Note 9 - Stock-Based Compensation (Continued)

During the nine months ended September 30, 2017, stock-based compensation expense recorded in regard to the options and the restricted stock grants totaled $299,000. The total unrecognized stock-based compensation expense was $1.4 million as of the period ended September 30, 2017.

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, 2017 and December 31, 2016

General. Total assets were $541.8 million at September 30, 2017, compared to $461.6 million at December 31, 2016, an increase of $80.2 million or 17.4%. During the period, the Company experienced growth of $93.3 million, or 25.4%, in loans receivable, net. Federal Home Loan Bank of New York ("FHLBNY") stock increased $2.1 million, or 150.0%, due to an increase in borrowings during the period. The Company increased its FHLBNY overnight borrowings by $30.7 million during the nine months ended September 30, 2017. Offsetting these increases were a decrease in cash and cash equivalents of $12.6 million, or 58.9%, and a decrease in securities, held to maturity of $3.3 million, or 7.5%, from December 31, 2016 to September 30, 2017.

The ratio of average interest-earning assets to average-interest bearing liabilities was 125.7% for the nine month period ended September 30, 2017 as compared to 133.4% for the nine months ended September 30, 2016.

Loans. Loans receivable, net, increased by $93.3 million, or 25.4%, from $368.0 million at December 31, 2016 to $461.3 million at September 30, 2017. Loans receivable, net represented 85.1% of the Company's assets at September 30, 2017 compared to 79.7% at December 31, 2016. The Bank's commercial and multi-family real estate loan portfolio grew by $60.1 million, or 48.2%, since December 31, 2016; the commercial and industrial portfolio increased by $28.2 million on stronger loan demand, while the construction loan portfolio increased approximately $9.1 million as a result of borrowers utilizing funds to complete projects. The residential mortgage portfolio decreased $3.7 million to $189.1 million from $192.8 million as of year-end 2016. All remaining portfolios were consistent with year-end levels.

Securities. Our portfolio of securities held to maturity totaled $40.8 million at September 30, 2017 as compared to $44.1 million at December 31, 2016. Maturities, calls and principal repayments during the nine months ended September 30, 2017 totaled $4.5 million and one purchase totaling $1.2 million was made during the first nine months of 2017.

Deposits. Total deposits at September 30, 2017 were $397.5 million compared with $362.3 million at December 31, 2016. Overall, deposits increased by $35.2 million, or 9.7%, with growth occurring in both consumer and business balances. The Company experienced growth in the non-transactional categories with an increase of $21.2 million in certificates of deposit, $5.2 million in money market accounts, and $5.1 million in savings accounts while transactional accounts increased $3.7 million.

Borrowings. Total borrowings at September 30, 2017 were $68.4 million compared with $22.7 million at December 31, 2016. Overnight advances with the Federal Home Loan Bank of New York at September 30, 2017 were $30.7 million while there were none at December 31, 2016. In addition, the Company executed three FHLB medium term advances for a total $15.0 million during the period. The advances were for terms of 3, 4, and 5 years with an average rate of 1.89%.

Equity. Stockholders' equity was $72.5 million at September 30, 2017 compared to $73.2 million at December 31, 2016, a decrease of $645,000, or 0.9%. The decrease in shareholders' equity was primarily due to the declaration of a $2.5 million cash dividend and $3.8 million in stock repurchases, partially offset by $2.5 million in net income and an increase of $2.6 million due to the exercise of stock options.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2017 and 2016

General. The Company had net income of $2.5 million for the nine months ended September 30, 2017 compared to net income of $683,000 for the nine months ended September 30, 2016, as an increase of $3.0 million in net interest income was partially offset by a decrease of $225,000 in non-interest income and increases of $485,000 in the provision for loan losses, $384,000 in non-interest expense and $185,000 in income tax expense. During 2016, non-interest income had included a $350,000 settlement received in the nine months ended September 30, 2016 from a wire fraud loss that was incurred in the fourth quarter of 2014. The increase in the provision expense was related to the loan growth the Company experienced during the period. The increase in income tax expense was due to higher level of pre-tax income, offset by a $406,000 tax benefit resulting from a transaction involving the exercise of stock options during the period.

During the three month period ended September 30, 2017, the Company recorded net income of $1.2 million compared with net income for the three month period ended September 30, 2016 of $301,000, with the increase due to the combined effects of an increase of $1.2 million in net interest income and a $232,000 reduction in income tax expense, offset by increases of $310,000 in the provision for loan losses and $322,000 in non-interest expenses. The increase in provision expense was related to the loan growth the Company experienced during the quarter. The net tax benefit of $86,000 compared to a tax expense of $146,000 in the 2016 period was due to the Company receiving a $406,000 tax benefit resulting from a transaction involving the exercise of stock options during the quarter.

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
	9/30/2017							9/30/2016
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	446,383		$	4,769	4.27	%	$	305,405		$	3,177	4.16	%
Securities held to maturity	41,423			264		2.55		47,293			276		2.33
Other interest-earning assets	9,526			50		2.10		33,412			57		0.68
Total interest-earning assets	497,332			5,083		4.09		386,110			3,510		3.64

Allowance for loan loss	(4,922		)					(3,905		)
Non-interest-earning assets	29,019							26,133
Total non-interest-earning assets	24,097							22,228
Total Assets	$	521,429						$	408,338

Interest-bearing liabilities:
Demand & money market	$	118,084		$	118	0.40	%	$	81,020		$	60	0.30	%
Savings and club deposits	106,950			73		0.27		103,166			57		0.22
Certificates of deposit	125,555			431		1.37		89,365			266		1.19
Total interest-bearing deposits	350,589			622		0.71		273,551			383		0.56

Federal Home Loan Bank advances	47,788			271		2.27		22,675			183		3.23
Total interest-bearing liabilities	398,377			893		0.90		296,226			566		0.76

Non-interest-bearing deposit	44,970							34,455
Other non-interest-bearing liabilities	3,964							3,430
Total Liabilities	447,311							334,111

Equity	74,118							74,227
Total Liabilities and Equity	521,429							408,338

Net Interest Spread				4,190		3.19	%				2,944		2.88	%

Net Interest Margin						3.37	%						3.05	%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	124.84		%					130.34		%



	For the nine months ended
	9/30/2017							9/30/2016
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	415,512		$	13,213	4.24	%	$	287,688		$	9,097	4.22	%
Securities held to maturity	42,190			762		2.41		62,215			1,038		2.22
Other interest-earning assets	10,156			128		1.68		21,136			126		0.79
Total interest-earning assets	467,858			14,103		4.02		371,039			10,261		3.69

Allowance for loan loss	(4,715		)					(3,749		)
Non-interest-earning assets	28,791							23,215
Total non-interest-earning assets	24,076							19,466
Total Assets	$	491,934						$	390,505

Interest-bearing liabilities:
Demand & money market	$	110,116		$	315	0.38	%	$	63,224		$	118	0.25	%
Savings and club deposits	105,237			193		0.24		103,298			171		0.22
Certificates of deposit	118,378			1,195		1.35		86,512			747		1.15
Total interest-bearing deposits	333,731			1,703		0.68		253,034			1,036		0.55

Federal Home Loan Bank advances	38,563			691		2.39		25,026			562		2.99
Total interest-bearing liabilities	372,294			2,394		0.86		278,060			1,598		0.77

Non-interest-bearing deposit	41,966							32,687
Other non-interest-bearing liabilities	3,377							3,664
Total Liabilities	417,637							314,411

Equity	74,297							76,094
Total Liabilities and Equity	$	491,934						$	390,505

Net Interest Spread				11,709		3.16	%				8,663		2.92	%

Net Interest Margin						3.34	%						3.11	%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	125.67		%					133.44		%

The Company's net interest margin increased 32 basis points to 3.37% for the quarter ended September 30, 2017 compared to 3.05% for the quarter ended September 30, 2016. The yield on interest-earning assets increased by 45 basis points year over year while the cost of interest-bearing liabilities increased 14 basis points. The increase in the yield on interest-earning assets was attributable to the increase in commercial loan volume during the quarter. The increase in the cost of interest-bearing liabilities was attributable to the increase in percentage of certificates of deposit in the deposit portfolio year over year.

For the nine months ended September 30, 2017, the net interest margin increased 23 basis points to 3.34% compared to 3.11% for the nine months ended September 30, 2016. The average yield on interest-earning assets increased 33 basis points year over year and the average cost of interest-bearing liabilities increased nine basis points. Similar to the quarterly discussion, the increase in the average yield on interest-earning assets was attributable to the increase in commercial loan volume year over year. The increase in the cost of interest-bearing liabilities was attributable to the increase in percentage of certificates of deposit in the deposit portfolio year over year.

Provision for Loan Losses. The provision for loan losses increased by $310,000 to $490,000 for the three months ended September 30, 2017 compared to a provision of $180,000 for the three months ended September 30, 2016. We recorded a provision for loan losses of $985,000 for the nine month period ended September 30, 2017, compared to a provision for $500,000 for the nine month period ended September 30, 2016. The increased provision level during the current year period is attributable to the increased size of the loan portfolio at September 30, 2017 compared to September 30, 2016. 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 $4.4 million in nonperforming loans as of September 30, 2017 compared to $6.3 million as of September 30, 2016. The allowance for loan losses to total loans ratio was 1.13% at September 30, 2017 compared to 1.21% at September 30, 2016, while the allowance for loan losses to non-performing loans ratio was 118.69% at September 30, 2017 compared to 64.28% at September 30, 2016. Non-performing loans to total loans and net charge-offs to average loans outstanding ratios were at 0.95% and 0.06%, respectively, at and for the nine months ended September 30, 2017 compared to 1.89% and 0.03% at and for the nine months ended September 30, 2016.

Non-Interest Income. Non-interest income increased $22,000, or 12.0%, to $205,000 during the three months ended September 30, 2017 compared to $183,000 for the three months ended September 30, 2016. Non-interest income was $611,000 for the nine months ended September 30, 2017 compared to $836,000 for the comparable 2016 time frame. The decrease of $225,000, or 26.9%, year over year is primarily attributable to a $350,000 settlement received during the 2016 period from a wire loss the Company incurred and expensed in the fourth quarter of 2014, partially offset by an increase of $106,000 in income from bank owned life insurance as a result of $6.0 million purchased in 2016.

Non-Interest Expenses. During the three months ended September 30, 2017, non-interest expenses increased $322,000 to $2.8 million from $2.5 million for the three months ended September 30, 2016. Salaries and employee benefits increased by $158,000, or 11.1%, as the need for increased staffing occurred. Professional service expenses increased $94,000, or 37.9%, primarily due to the Company converting to a hosted IT environment. Directors' compensation increased $79,000, or 72.5%, primarily due to the termination of the directors' retirement plan as well as the expense associated with stock options and restricted stock awards. Partially offsetting these increases were a decrease in service bureau fees of $67,000, or 50.0% primarily due to relationship credits utilized during the quarter that were not utilized in 2016.

Non-interest expense increased $384,000 to $8.4 million for the year to date period ended September 30, 2017 as compared to $8.0 million for the same period ended September 30, 2016. Salaries and benefits, Directors' compensation and professional services increased by $355,000, $215,000, and $190,000, respectively, for the nine months ended September 30, 2017 compared to the same nine month period a year earlier. The increase in salaries and benefits was primarily due to an increase need in staffing as well as the expense associated with the stock options and restricted stock awards granted during June 2016. Directors' compensation increased primarily due to the termination of the directors' retirement plan as well as the expense associated with stock options and restricted stock awards. Professional services increased primarily due to the Company converting to a hosted IT environment. In addition, Occupancy and equipment expenses increased $153,000, or 14.4% primarily attributable to the software depreciation on the core system and the expenses associated with the closing of the Dewy Meadow location. Offsetting these increases was a decrease in service bureau fees of $475,000 or 74.3%. The decrease in service bureau fees was primarily the result of the Company's full data conversion that was completed on May 13, 2016.

Income Taxes. The income tax benefit for the three months ended September 30, 2017 was $86,000 or (7.9%) of the reported income before income taxes compared to a tax expense of $146,000 or 32.7% for the three months ended September 30, 2016. The income tax expense for the nine months ended September 30, 2017 was $528,000, or 17.7% of the reported income before income taxes, compared to tax expense of $343,000, or 33.4% of the reported income before income taxes for the nine months ended September 30, 2016. The change in tax rate is a result of a permanent tax deduction for the 2017 period due to restricted stock that vested during the quarter in addition to non-qualified stock options that were exercised during the quarter.

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, 2017, the Bank had outstanding commitments to originate loans of $33.3 million, construction loans in process of $16.9 million, unused lines of credit of $41.2 million (including $27.2 million for commercial lines of credit and $13.6 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, 2017, totaled $49.6 million.

As of September 30, 2017, the Bank had contractual obligations related to the long-term operating leases for the three branch locations that it leases (Loan Production Office, 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, 2017, the total loans receivable to deposits ratio was 116.0%. At September 30, 2017, the Bank's collateralized borrowing limit with the FHLBNY was $81.1 million, of which $68.4 million was outstanding. As of September 30, 2017, the Bank also had a $13.0 million unsecured line of credit with one financial institution 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, 2017, the Company and 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, 2017. 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, 2017.

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, 2017 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

The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2017.

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, 2017		/s/ Michael A. Shriner
		Michael A. Shriner
		President and Chief Executive Officer


Date November 14, 2017		/s/ John S. Kaufman
		John S. Kaufman
		First Vice President and Chief Financial Officer

MSB FINANCIAL CORP - FORM 10-Q - November 14, 2017

Attached files

MSB FINANCIAL CORP Reports