MSB FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - MSB FINANCIAL CORP	msbf-06302018xex32.htm
EX-31.2 - EXHIBIT 31.2 - MSB FINANCIAL CORP	msbf-06302018xex312.htm
EX-31.1 - EXHIBIT 31.1 - MSB FINANCIAL CORP	msbf-06302018xex311.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

June 30, 2018

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: August 10, 2018:

$0.01 par value common stock 5,513,165 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 June 30, 2018 and December 31, 2017	3

	Consolidated Statements of Income for the Three and
	Six Months Ended June 30, 2018 and 2017	4

	Consolidated Statement of Changes in Stockholders’ Equity for the
	Six Months Ended June 30, 2018	5

	Consolidated Statements of Cash Flows for the Six Months
	Ended June 30, 2018 and 2017	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2:	Management's Discussion and Analysis of	24
	Financial Condition and Results of Operations

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4:	Controls and Procedures	29


PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	29

Item 1A:	Risk Factors	29

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3:	Defaults Upon Senior Securities	30

Item 4:	Mine Safety Disclosures	30

Item 5:	Other Information	30

Item 6:	Exhibits	31

SIGNATURES		32

CERTIFICATIONS

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



	June 30, 2018			December 31, 2017

(Dollars in thousands, except per share amounts)
Cash and due from banks	$	1,654		$	2,030
Interest-earning demand deposits with banks	14,660			20,279

Cash and Cash Equivalents	16,314			22,309

Securities held to maturity (fair value of $43,749 and $38,255, respectively)	44,770			38,482
Loans receivable, net of allowance for loan losses of $5,596 and $5,414, respectively	509,689			473,405
Premises and equipment, net	8,461			8,698
Federal Home Loan Bank of New York stock, at cost	4,212			2,131
Bank owned life insurance	14,392			14,197
Accrued interest receivable	1,754			1,607
Other assets	1,657			2,211

Total Assets	$	601,249		$	563,040

Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	42,687		$	36,919
Interest bearing	405,825			411,994

Total Deposits	448,512			448,913

Advances from Federal Home Loan Bank of New York	82,175			37,675
Advance payments by borrowers for taxes and insurance	772			686
Other liabilities	1,284			2,741

Total Liabilities	532,743			490,015

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; 5,513,165 and 5,768,632 issued and outstanding at June 30, 2018 and December 31, 2017, respectively	55			58
Paid-in capital	46,688			51,068
Retained earnings	23,450			23,641
Unearned common stock held by ESOP (184,942 and 190,390 shares, respectively)	(1,687		)	(1,742		)

Total Stockholders' Equity	68,506			73,025

Total Liabilities and Stockholders' Equity	$	601,249		$	563,040

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands, except per share amounts)	2018		2017		2018		2017
Interest Income:
Loans receivable, including fees	$	5,436	$	4,444	$	10,572	$	8,444
Securities	240		247		459		498
Other	62		36		136		78
Total Interest Income	5,738		4,727		11,167		9,020
Interest Expense
Deposits	935		579		1,781		1,081
Borrowings	372		224		653		420
Total Interest Expense	1,307		803		2,434		1,501

Net Interest Income	4,431		3,924		8,733		7,519
Provision for Loan Losses	90		300		180		495
Net Interest Income after Provision for Loan Losses	4,341		3,624		8,553		7,024

Non-Interest Income
Fees and service charges	91		98		174		169
Income from bank owned life insurance	98		105		195		212
Other	19		16		43		25
Total Non-Interest Income	208		219		412		406

Non-Interest Expenses
Salaries and employee benefits	1,677		1,578		3,482		3,084
Directors compensation	122		187		244		363
Occupancy and equipment	397		429		782		823
Service bureau fees	77		49		144		97
Advertising	9		5		13		8
FDIC assessment	69		37		123		70
Professional services	336		349		689		708
Other	212		184		409		382
Total Non-Interest Expenses	2,899		2,818		5,886		5,535

Income before Income Taxes	1,650		1,025		3,079		1,895
Income Tax Expense	407		293		814		614
Net Income	$	1,243	$	732	$	2,265	$	1,281

Earnings per share:
Basic	$	0.23	$	0.13	$	0.42	$	0.23
Diluted	$	0.23	$	0.13	$	0.42	$	0.23

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			Total Stockholders' Equity


Balance- January 1, 2018	$	58		$	51,068		$	23,641		$	(1,742	)	73,025

Net income	—			—			2,265			—			2,265
Allocation of ESOP stock	—			86			—			55			141
Repurchased Stock (249,837 shares)	(3		)	(4,633		)	—			—			(4,636		)
Stock-based compensation	—			167			—			—			167
Cash paid for common stock dividend	—			—			(2,456		)	—			(2,456		)

Balance - June 30, 2018	$	55		$	46,688		$	23,450		$	(1,687	)	$	68,506

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	Six Months Ended June 30,
(Dollars in thousands)	2018			2017
Cash Flows from Operating Activities:
Net Income	$	2,265		$	1,281
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	(31		)	(77		)
Depreciation and amortization of premises and equipment	287			272
Stock-based compensation and allocation of ESOP stock	307			249
Provision for loan losses	180			495
Income from bank owned life insurance	(195		)	(212		)
Increase in accrued interest receivable	(147		)	(24		)
Decrease (increase) in other assets	554			(129		)
Decrease in other liabilities	(1,456		)	(45		)
Net Cash Provided by Operating Activities	1,764			1,810

Cash Flows from Investing Activities:
Activity in held to maturity securities:
Purchases	(8,969		)	(1,182		)
Maturities, calls and principal repayments	2,632			2,807
Net increase in loans receivable	(36,384		)	(42,594		)
Purchased loans	—			(23,399		)
Proceeds from sales of loans	—			7,250
Purchase of bank premises and equipment	(50		)	(217		)
Purchase of Federal Home Loan Bank of New York stock	(14,342		)	(6,261		)
Redemption of Federal Home Loan Bank of New York stock	12,261			5,431
Net Cash Used in Investing Activities	(44,852		)	(58,165		)

Cash Flows from Financing Activities:
Net (decrease) increase in deposits	(401		)	27,764
Advances from Federal Home Loan Bank of New York	54,500			16,000
Repayment of advances from Federal Home Loan Bank of New York	(10,000		)	—
Increase in advance payments by borrowers for taxes and insurance	86			30
Cash dividends paid to stockholders	(2,456		)	—
Net exercise of options and repurchase of shares	(36		)	—
Proceeds from exercise of stock options	—			321
Repurchase of common stock	(4,600		)	(108		)
Net Cash Provided by Financing Activities	37,093			44,007

Net Decrease in Cash and Cash Equivalents	(5,995		)	(12,348		)
Cash and Cash Equivalents – Beginning	22,309			21,382
Cash and Cash Equivalents – Ending	$	16,314		$	9,034

Supplementary Cash Flows Information
Interest paid	$	2,455		$	1,497
Income taxes paid	758			795

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 and multi-family real estate loans, commercial and industrial loans, and construction loans. It also invests in U.S. government obligations, corporate bonds, state and political subdivisions, certificate of deposits 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.

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 June 30, 2018 and for the three and six months ended June 30, 2018 and 2017. The results of operations for the three and six months ended June 30, 2018 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.

Recent Accounting Pronouncements

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 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. The Company had evaluated all of its revenue streams and determined that the majority of its revenue is derived from financial instruments that are scoped out. In addition, non-interest revenue streams were evaluated, including deposit and service charges and interchange fees. The adoption of this guidance has not changed the recognition of our current revenue sources.

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

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 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance effective January 1, 2018, did not 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 method for 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 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.

Note 3 – Earnings Per Share

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



	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, Except Per Share Data)	2018		2017		2018		2017
Numerator:
Net income	$	1,243	$	732	$	2,265	$	1,281

Denominator:
Weighted average common shares	5,331		5,540		5,400		5,530
Dilutive potential common shares	44		139		41		131
Weighted average fully diluted shares	5,375		5,679		5,441		5,661

Earnings per share:
Basic	$	0.23	$	0.13	$	0.42	$	0.23
Dilutive	$	0.23	$	0.13	$	0.42	$	0.23

For three and six months ended June 30, 2018 and June 30, 2017, there were no anti-dilutive securities.

Note 4 - Securities Held to Maturity - Continued

Note 4 - Securities Held to Maturity

All mortgage-backed securities at June 30, 2018 and December 31, 2017 have been issued by FNMA, FHLMC or GNMA and are secured by one-to-four family residential real estate. The amortized cost and fair value of securities held to maturity at June 30, 2018 and December 31, 2017, as shown below, 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.

The amortized cost of securities held to maturity and their fair values as of June 30, 2018 and December 31, 2017 are summarized as follows:



(In Thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
June 30, 2018
U.S. Government agencies:
Due within one year	$	3,500	$	—	$	22	$	3,478
Due after one year through five years	1,000		—		17		983
Due after five through ten years	3,000		—		—		3,000
Due after ten years	3,000		—		—		3,000

Total U.S. Government agencies	10,500		—		39		10,461


Mortgage-backed securities	25,630		90		513		25,207

Corporate bonds:
Due within one year	502		1		—		503
Due after one year through five years	1,500		9		—		1,509
Due after five through ten years	1,000		—		41		959
Due after ten years	4,000		—		517		3,483
Total Corporate bonds	7,002		10		558		6,454

State and political subdivisions:
Due within one year	151		—		1		150
Due after one through five years	678		—		5		673
Due after five through ten years	364		—		5		359
Total State and political subdivisions	1,193		—		11		1,182

Certificates of deposit:
Due within one year	445		1		1		445
Total Certificates of deposit	445		1		1		445

Total Securities held to maturity	$	44,770	$	101	$	1,122	$	43,749

Note 4 - Securities Held to Maturity - Continued



(In Thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
December 31, 2017
U.S. Government agencies:
Due within one year	$	3,500	$	—	$	16	$	3,484
Due after one year through five years	2,000		—		26		1,974
Total U.S. Government Agencies	5,500		—		42		5,458

Mortgage-backed securities	23,839		263		207		23,895

Corporate bonds:
Due within one year	512		3		—		515
Due after one year through five years	1,500		4		—		1,504
Due after five years through ten years	1,000		—		35		965
Due thereafter	4,000		—		209		3,791
Total Corporate bonds	7,012		7		244		6,775

State and political subdivisions:
Due within one year	151		—		1		150
Due after one through five years	680		1		4		677
Due after five through ten years	365		—		—		365
Total State and political subdivisions	1,196		1		5		1,192

Certificates of deposit:
Due within one year	935		1		1		935
Total Certificates of deposit	935		1		1		935

Total Securities held to maturity	$	38,482	$	272	$	499	$	38,255

There were no sales of securities held to maturity during the three and six month periods June 30, 2018 or 2017. At June 30, 2018 and December 31, 2017, securities held to maturity with an amortized cost and fair value of approximately $2.0 million and $1.0 million, respectfully, were pledged to secure public funds on deposit.

The following tables set forth the gross unrecognized losses and fair value of securities in an unrecognized loss position as of June 30, 2018 and December 31, 2017, and the length of time that such securities have been in an unrecognized loss position.



	Less than 12 Months				More than 12 Months				Total
	Fair Value		Gross Unrecognized Losses		Fair Value		Gross Unrecognized Losses		Fair Value		Gross Unrecognized Losses
(In Thousands)
June 30, 2018
U.S. Government agencies	$	—	$	—	$	4,462	$	39	$	4,462	$	39
Mortgage-backed securities	9,944		257		5,884		256		15,828		513
Corporate bonds	—		—		4,442		558		4,442		558
State and political subdivisions	1,182		11		—		—		1,182		11
Certificates of deposit	245		1		—		—		245		1

Total securities with gross unrecognized losses	$	11,371	$	269	$	14,788	$	853	$	26,159	$	1,122

Note 4 - Securities Held to Maturity - Continued



	Less than 12 Months				More than 12 Months				Total
	Fair Value		Gross Unrecognized Losses		Fair Value		Gross Unrecognized Losses		Fair Value		Gross Unrecognized Losses
(In Thousands)
December 31, 2017
U.S. Government agencies	$	1,000	$	1	$	4,458	$	41	$	5,458	$	42
Mortgage-backed securities	7,796		88		5,558		119		13,354		207
Corporate bonds	—		—		4,756		244		4,756		244
State and political subdivisions	655		5		—		—		655		5
Certificates of deposit	245		1		—		—		245		1

Total securities with gross unrecognized losses	$	9,696	$	95	$	14,772	$	404	$	24,468	$	499

At June 30, 2018, management concluded that the unrecognized losses summarized above (which related to four U.S. Government agency bonds, twenty mortgage-backed securities, three corporate bonds, seven state and political subdivision security and one certificate of deposit, compared to five U.S. Government agency bonds, thirteen mortgage-backed securities, three corporate bonds, two state and political subdivision bonds, and three certificate of deposit as of December 31, 2017) are temporary in nature since they are not related to the underlying credit quality of the issuer. As of June 30, 2018, 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 Loan Losses (Continued)

Note 5 - Loans Receivable and Allowance for Credit Losses

The composition of loans receivable at June 30, 2018 and December 31, 2017 was as follows:



(In Thousands)	June 30, 2018		December 31, 2017
Residential mortgage:
One-to-four family	$	151,372	$	157,876
Home equity	26,174		26,803

Total residential mortgages	177,546		184,679

Commercial loans:
Commercial and multi-family real estate	214,653		196,681
Construction	48,423		43,718
Commercial and industrial	94,140		73,465

Total commercial loans	357,216		313,864

Consumer:	608		618

Total loans receivable	535,370		499,161

Less:
Loans in process	19,594		19,868
Deferred loan fees	491		474
Allowance for loan losses	5,596		5,414

Total adjustments	25,681		25,756

Loans receivable, net	$	509,689	$	473,405

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

Allowance for Loan Losses

The following tables provide an analysis of the allowance for loan losses and the loan receivable recorded investments, 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 June 30, 2018 and 2017 and loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2017:



(In Thousands)	Residential Mortgage			Commercial and Multi-Family Real Estate		Construction		Commercial and Industrial		Consumer			Unallocated			Total
Three Months Ended June 30, 2018

Allowance for loan losses:
Balance, beginning	$	1,997		$	2,274	$	321	$	774	$	3		$	137		$	5,506
Provisions (credits)	(111		)	195		10		94		2			(100		)	$	90
Loans charged-off	—			—		—		—		(1		)	—			$	(1	)
Recoveries	1			—		—		—		—			—			$	1
Balance, ending	$	1,887		$	2,469	$	331	$	868	$	4		$	37		$	5,596

Six Months Ended June 30, 2018

Allowance for loan losses:
Balance, beginning	$	1,852		$	2,267	$	302	$	710	$	5		$	278		$	5,414
Provisions (credits)	30			202		29		158		2			(241		)	$	180
Loans charged-off	—			—		—		—		(3		)	—			$	(3	)
Recoveries	5			—		—		—		—			—			$	5
Balance, ending	$	1,887		$	2,469	$	331	$	868	$	4		$	37		$	5,596

June 30, 2018 allowance allocated to:
Loans individually evaluated for impairment	$	25		$	—	$	—	$	—	$	—		$	—		$	25
Loans collectively evaluated for impairment	1,862			2,469		331		868		4			37			$	5,571
Ending Balance	$	1,887		$	2,469	$	331	$	868	$	4		$	37		$	5,596

June 30, 2018 loan balances evaluated for:
Loans individually evaluated for impairment	$	11,732		$	2,068	$	—	$	193	$	—		$	—		$	13,993
Loans collectively evaluated for impairment	165,734			212,295		28,770		93,885		608			—			$	501,292
Ending Balance	$	177,466		$	214,363	$	28,770	$	94,078	$	608		$	—		$	515,285

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 June 30, 2017

Allowance for loan losses:
Balance, beginning	$	1,785		$	1,426		$	339		$	1,022		$	7		$	47		$	4,626
Provisions (credits)	26			172			(24		)	141			4			(19		)	$	300
Loans charged-off	—			—			—			—			(2		)	—			$	(2	)
Recoveries	1			—			—			—			—			—			$	1
Balance, ending	$	1,812		$	1,598		$	315		$	1,163		$	9		$	28		$	4,925

Six Months Ended June 30, 2017

Allowance for loan losses:
Balance, beginning	$	1,808		$	1,441		$	248		$	882		$	6		$	91		$	4,476
Provisions (credits)	3			200			67			282			6			(63		)	$	495
Loans charged-off	(2		)	(43		)	—			(1		)	(3		)	—			$	(49	)
Recoveries	3			—			—			—			—			—			$	3
Balance, ending	$	1,812		$	1,598		$	315		$	1,163		$	9		$	28		$	4,925

June 30, 2017 allowance allocated to:
Loans individually evaluated for impairment	$	100		$	—		$	—		$	—		$	—		$	—		$	100
Loans collectively evaluated for impairment	1,712			1,598			315			1,163			9			28			$	4,825
Ending Balance	$	1,812		$	1,598		$	315		$	1,163		$	9		$	28		$	4,925

June 30, 2017 loan balances evaluated for:
Loans individually evaluated for impairment	$	14,562		$	1,750		$	—		$	212		$	—		$	—		$	16,524
Loans collectively evaluated for impairment	178,797			151,945			16,226			67,368			435			—			$	414,771
Ending Balance	$	193,359		$	153,695		$	16,226		$	67,580		$	435		$	—		$	431,295

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
At December 31, 2017

Period-end allowance balances:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	27	$	1	$	—	$	28
Loans collectively evaluated for impairment	1,852		2,267		302		683		4		278		$	5,386
Ending Balance	$	1,852	$	2,267	$	302	$	710	$	5	$	278	$	5,414

Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	12,609	$	2,057	$	—	$	205	$	1	$	—	$	14,872
Loans collectively evaluated for impairment	171,988		194,373		23,803		73,167		616		—		$	463,947
Ending Balance	$	184,597	$	196,430	$	23,803	$	73,372	$	617	$	—	$	478,819

Nonaccrual and Past Due Loans

The following table represents the recorded investments in classes of the loans receivable portfolio summarized by aging categories of performing loans and nonaccrual loans as of June 30, 2018 and December 31, 2017:



(In Thousands)
As of June 30, 2018	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		Total Loans Receivables

Residential Mortgage
One-to-four family	$	2,295	$	297	$	129	$	2,721	$	145,526	$	3,045	$	151,292
Home equity	775		99		470		1,344		24,789		41		26,174
Commercial and multi-family real estate	1,046		—		—		1,046		212,973		344		214,363
Construction	—		—		—		—		28,770		—		28,770
Commercial and industrial	—		100		100		200		93,878		—		94,078
Consumer	4		2		—		6		602		—		608
Total	$	4,120	$	498	$	699	$	5,317	$	506,538	$	3,430	$	515,285

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



(In Thousands)
As of December 31, 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		Total Loans Receivables

Residential Mortgage
One-to-four family	$	1,221	$	700	$	—	$	1,921	$	152,425	$	3,446	$	157,792
Home equity	605		16		157		778		25,912		115		26,805
Commercial and multi-family real estate	—		—		—		—		196,115		315		196,430
Construction	—		—		—		—		23,803		—		23,803
Commercial and industrial	68		—		—		68		73,205		99		73,372
Consumer	—		5		1		6		611		—		617
Total	$	1,894	$	721	$	158	$	2,773	$	472,071	$	3,975	$	478,819

Impaired Loans

The following tables provide an analysis of the impaired loans at June 30, 2018 and December 31, 2017 and the average balances of such loans for the six months and year, respectively, then ended:



(In Thousands)
June 30, 2018	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	$	10,078	$	9,744	$	334	$	25	$	10,689	$	10,483
Home equity	1,654		1,654		—		—		1,744		1,440

Commercial and multi-family real estate	2,068		2,068		—		—		2,706		2,054
Construction	—		—		—		—		—		—
Commercial and industrial	193		193		—		—		234		198
Consumer	—		—		—		—		—		1
Total	$	13,993	$	13,659	$	334	$	25	$	15,373	$	14,176



(In Thousands)
December 31, 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	$	11,181	$	11,181	$	—	$	—	$	11,729	$	12,256
Home equity	1,428		1,428		—		—		1,522		1,335

Commercial and multi-family real estate	2,057		2,057		—		—		2,680		1,787
Construction	—		—		—		—		—		—
Commercial and industrial	205		173		32		27		242		296
Consumer	1		—		1		1		1		1
Total	$	14,872	$	14,839	$	33	$	28	$	16,174	$	15,675

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

As of June 30, 2018 and December 31, 2017, impaired loans listed above included $11.6 million and $11.4 million, respectively, of loans modified in troubled debt restructurings ("TDR") and as such are considered impaired under GAAP. As of June 30, 2018 and December 31, 2017, $9.7 million and $9.7 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 $120,000 and $89,000 was recognized on impaired loans during the three months ended June 30, 2018 and 2017. The average balance of impaired loans for the three months ended June 30, 2018 and June 30, 2017 was $13.8 million and $16.4 million, respectively.

Interest income of $236,000 and $195,000 was recognized on impaired loans during the six months ended June 30, 2018 and 2017. The average balance of impaired loans for the six months ended June 30, 2018 and June 30, 2017 was $14.2 million and $16.2 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 recorded investment in 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 June 30, 2018 and December 31, 2017:



(In Thousands)
As of June 30, 2018	Pass		Special Mention		Substandard		Doubtful		Loss		Total

Commercial and multi-family real estate	$	211,222	$	2,082	$	1,059	$	—	$	—	$	214,363
Construction	28,770		—		—		—		—		28,770
Commercial and industrial	93,441		422		215		—		—		94,078

Total	$	333,433	$	2,504	$	1,274	$	—	$	—	$	337,211

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



(In Thousands)
As of December 31, 2017	Pass		Special Mention		Substandard		Doubtful		Loss		Total

Commercial and multi-family real estate	$	193,982	$	1,415	$	1,033	$	—	$	—	$	196,430
Construction	23,803		—		—		—		—		23,803
Commercial and industrial	72,962		182		228		—		—		73,372

Total	$	290,747	$	1,597	$	1,261	$	—	$	—	$	293,605

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
	Jun 30, 2018		Dec 31, 2017		Jun 30, 2018		Dec 31, 2017		Jun 30, 2018		Dec 31, 2017

Nonperforming	$	3,685	$	3,718	$	—	$	1	$	3,685	$	3,719

Performing	173,781		180,879		608		616		174,389		181,495

Total	$	177,466	$	184,597	$	608	$	617	$	178,074	$	185,214

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 $11.6 million at June 30, 2018 compared with $11.4 million at December 31, 2017. The majority of the Company's TDRs are on accrual status. Accruing TDRs totaled $9.7 million at June 30, 2018 versus $9.7 million at December 31, 2017. The total of TDRs on non-accrual status was $1.9 million at June 30, 2018 and $1.7 million at December 31, 2017.

The Company did not modify any loans as a TDR during the three months ended June 30, 2018. For the three months ended June 30, 2017, the terms of five loans were modified into two TDRs. 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 six months ended June 30, 2018, the terms of one loan was modified into one TDR. The Company refinanced a multi-family & commercial loan that was restructured to extend the maturity date and capitalize the interest. For the six months ended June 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.

The following tables summarize by the recorded investment class loans modified into TDRs during the three and six months ended June 30, 2018 and June 30, 2017:

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



	Six Months Ended June 30, 2018
	Number of Contracts	Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
		(Dollars in thousands)

Commercial and multi-family real estate	1	374		392


Total	1	$	374	$	392



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

Residential Mortgage
One-to-four family	2	$	444	$	405
Commercial and multi-family real estate	—	—		263
Commercial	3	153		—

Total	5	$	597	$	668



	Six Months Ended June 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 six months ended June 30, 2018 and 2017.

There was no Other Real Estate Owned ("OREO") at June 30, 2018 and December 31, 2017. We may obtain physical possession of residential real estate collateralizing consumer mortgage loans via foreclosure or in-substance repossession. At June 30, 2018 and December 31, 2017, we had consumer loans with a carrying value of $375,000 and $1.2 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

Note 6 - Fair Value Measurements (Continued)

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

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

The fair value hierarchy is as follows:


•	Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.


•	Level 3 Inputs – Unobservable inputs for determining the fair values 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 June 30, 2018 and December 31, 2017.

Assets Measured at Fair Value on a Non-Recurring Basis

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

The following table summarizes those assets measured at fair value on a non-recurring basis as of June 30, 2018 and December 31, 2017:

Note 6 - Fair Value Measurements (Continued)



	As of June 30, 2018
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In thousands)
Impaired loans	$	—	$	—	$	309	$	309



	As of December 31, 2017
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In thousands)
Impaired loans	$	—	$	—	$	6	$	6

For Level 3 assets measured at fair value on a non-recurring basis as of June 30, 2018 and December 31, 2017, the significant unobservable inputs used in fair value measurements were as follows:



	As of June 30, 2018
	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans	$	309	Appraisal of collateral	Appraisal adjustments	0% (0%)
				Liquidation expense	19.0% (19.0%)



	As of December 31, 2017
	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans	$	6	Appraisal of collateral	Appraisal adjustments	475.6% (475.6%)
				Liquidation expense	0% (0%)

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 carried at the lower of cost or 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

The carrying amount and fair value (represents exit price) of financial instruments, at June 30, 2018 and December 31, 2017 were as follows:

Note 6 - Fair Value Measurements (Continued)



	Carrying		Fair		Level 1		Level 2	Level 3
As of June 30, 2018	Amount		Value		Inputs		Inputs	Inputs
			(In thousands)

Financial assets:
Cash and due from banks	$	16,314	$	16,314	$	16,314
Securities held to maturity	44,770		43,749		—		43,749	—
Loans receivable	509,689		495,946		—		—	495,946
Federal Home Loan Bank of New York stock	4,212		4,212		4,212
Accrued interest receivable	1,754		1,754		1,754

Financial liabilities:
Deposits	448,512		449,561		—		449,561	—
Advances from Federal Home Loan Bank of New York	82,175		57,459		—		57,459	—

As of December 31, 2017

Financial assets:
Cash and due from banks	$	22,309	$	22,309	$	22,309
Securities held to maturity	38,482		38,255		—		38,255	—
Loans receivable	473,405		472,881		—		—	472,881
Federal Home Loan Bank of New York stock	2,131		2,131		2,131
Accrued interest receivable	1,607		1,607		1,607

Financial liabilities:
Deposits	448,913		450,580		—		450,580	—
Advances from Federal Home Loan Bank of New York	37,675		37,400		—		37,400	—

Cash and Cash Equivalents

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

Securities Held to Maturity

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

Loans Receivable

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

Federal Home Loan Bank Stock

The carrying amount of FHLB 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 deposits, savings accounts 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.

Note 6 - Fair Value Measurements (Continued)

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 FHLB 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 agreement, into account market interest rates, the remaining terms, and the present credit worthiness of the counterparties. As of June 30, 2018 and December 31,2017, the fair value of the commitments to extend credit was not considered to be material.

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 estimates, 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 June 30, 2018 and December 31, 2017

General. Total assets were $601.2 million at June 30, 2018, compared to $563.0 million at December 31, 2017, an increase of $38.2 million or 6.8%. During the period, the Company experienced growth of $36.3 million, or 7.7%, in loans receivable, net and $6.3 million, or 16.3%, in held to maturity securities. Federal Home Loan Bank of New York ("FHLBNY") stock increased $2.1 million, or 97.7%, due to an increase in borrowings during the period. The Company increased its FHLBNY overnight borrowings by $54.5 million during the six months ended June 30, 2018. Offsetting these increases were a decrease in cash and cash equivalents of $6.0 million, or 26.9%, from December 31, 2017 to June 30, 2018.

The ratio of average interest-earning assets to average-interest bearing liabilities was 119.5% for the six month period ended June 30, 2018 as compared to 126.1% for the six months ended June 30, 2017.

Loans. Loans receivable, net, increased by $36.3 million, or 7.7%, from $473.4 million at December 31, 2017 to $509.7 million at June 30, 2018. Loans receivable, net represented 84.8% of the Company's assets at June 30, 2018 compared to 84.1% at December 31, 2017. The Bank's commercial and industrial portfolio increased by $20.7 million on stronger loan demand, while the commercial real estate portfolio increased approximately $18.0 million and the construction portfolio increased $4.7 million as a result of borrowers utilizing funds to complete projects. The residential mortgage portfolio decreased $7.2 million to $177.5 million from $184.7 million as of year-end 2017. All remaining portfolios were consistent with year-end levels.

Securities. Our portfolio of securities held to maturity totaled $44.8 million at June 30, 2018 as compared to $38.5 million at December 31, 2017. Maturities, calls and principal repayments during the six months ended June 30, 2018 totaled $15.3 million and $9.0 million in purchases were made during the first six months of 2018.

Deposits. Total deposits at June 30, 2018 were $448.5 million compared with $448.9 million at December 31, 2017. Overall, deposits were relatively flat. Non-interest demand balances and savings balances increased $5.8 million and $4.1 million, respectively. Non-interest demand balances increased to $42.7 million from $36.9 million from year end while savings balances increased to $109.3 million from $105.1 million from year end. In addition, certificates of deposit (including IRA) balances increased $3.9 million to $128.2 million compared to $124.3 million from year end. Offsetting these increases were declines in money market and interest demand balances of $13.0 million and $1.2 million, respectively. Money market balances declined to $14.4 million compared to $27.4 million while interest demand balances declined to $154.0 million compared to $155.2 million from year end.

Borrowings. Total borrowings at June 30, 2018 were $82.2 million compared with $37.7 million at December 31, 2017. Overnight advances with the Federal Home Loan Bank of New York at June 30, 2018 were $54.5 million while there were none at December 31, 2017.

Equity. Stockholders' equity was $68.5 million at June 30, 2018 compared to $73.0 million at December 31, 2017, a decrease of $4.5 million, or 6.2%. The decrease in shareholders' equity was primarily due to the repurchase of stock of $4.5 million and the payment of a special cash dividend in the aggregate amount of $2.5 million, partially offset by $2.3 million in net income.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2018 and 2017

General. The Company had net income of $1.2 million for the three months ended June 30, 2018 compared to net income of $732,000 for the three months ended June 30, 2017, as an increase of $507,000 in net interest income and a decrease of $210,000 in the provision for loan losses, was partially offset by an increase of $81,000 in non-interest expense and $114,000 in income tax expense. The decrease in the provision expense was related to lower loan growth the Company experienced during the period.The decrease in the provision expense was related to improving factors the Company experienced during the year.

The Company had net income of $2.3 million for the six months ended June 30, 2018 compared to net income of $1.3 million for the six months ended June 30, 2017, as an increase of $1.2 million in net interest income and a decrease of $315,000 in the provision for loan losses was partially offset by an increase in non-interest expense of $351,000 and $200,000 in income tax expense and the decrease in the provision expense was related to improving factors the Company experienced during the year.

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
	6/30/2018							6/30/2017
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	500,959		$	5,436	4.34	%	$	417,065		$	4,444	4.26	%
Securities held to maturity	36,494			240		2.63	%	41,885			247		2.36	%
Other interest-earning assets	9,928			62		2.50	%	9,625			36		1.50	%
Total interest-earning assets	547,381			5,738		4.19	%	468,575			4,727		4.04	%

Allowance for loan loss	(5,538		)					(4,695		)
Non-interest-earning assets	28,125							28,978
Total non-interest-earning assets	22,587							24,283
Total Assets	$	569,968						$	492,858

Interest-bearing liabilities:
Demand & money market	$	148,661		$	277	0.75	%	$	106,094		$	102	0.38	%
Savings and club deposits	108,593			137		0.50	%	104,953			62		0.24	%
Certificates of deposit	127,793			521		1.63	%	122,855			415		1.35	%
Total interest-bearing deposits	385,047			935		0.97	%	333,902			579		0.69	%

Federal Home Loan Bank advances	74,192			372		2.01	%	37,715			224		2.38	%
Total interest-bearing liabilities	459,239			1,307		1.14	%	371,617			803		0.86	%

Non-interest-bearing deposit	38,903							43,030
Other non-interest-bearing liabilities	2,495							3,363
Total Liabilities	500,637							418,010

Equity	69,331							74,848
Total Liabilities and Equity	569,968							492,858

Net Interest Spread				4,431		3.05	%				3,924		3.18	%

Net Interest Margin						3.24	%						3.35	%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	119.19		%					126.09		%




	For the six months ended
	6/30/2018							6/30/2017
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	492,156		$	10,572	4.30	%	$	399,822		$	8,444	4.22	%
Securities held to maturity	37,074			459		2.48	%	42,581			498		2.34	%
Other interest-earning assets	10,215			136		2.66	%	10,475			78		1.49	%
Total interest-earning assets	539,445			11,167		4.14	%	452,878			9,020		3.98	%

Allowance for loan loss	(5,500		)					(4,610		)
Non-interest-earning assets	28,235							28,674
Total non-interest-earning assets	22,735							24,064
Total Assets	$	562,180						$	476,942

Interest-bearing liabilities:
Demand & money market	$	156,090		$	574	0.74	%	$	106,066		$	197	0.37	%
Savings and club deposits	107,550			239		0.44	%	104,367			120		0.23	%
Certificates of deposit	124,101			968		1.56	%	114,729			764		1.34	%
Total interest-bearing deposits	387,741			1,781		0.92	%	325,162			1,081		0.66	%

Federal Home Loan Bank advances	38,563			653		2.05	%	33,874			420		2.49	%
Total interest-bearing liabilities	426,304			2,434		1.08	%	359,036			1,501		0.84	%

Non-interest-bearing deposit	37,593							40,440
Other non-interest-bearing liabilities	2,235							3,078
Total Liabilities	466,132							402,554

Equity	70,862							74,388
Total Liabilities and Equity	$	536,994						$	476,942

Net Interest Spread				8,733		3.06	%				7,519		3.14	%

Net Interest Margin						3.24	%						3.32	%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	119.48		%					126.14		%

The Company's net interest margin decreased 11 basis points to 3.24% for the three months ended June 30, 2018 compared to 3.35% for the three months ended June 30, 2017. The yield on interest-earning assets increased by 15 basis points year over year while the cost of interest-bearing liabilities increased 28 basis points. The increase in the yield on interest-earning assets was attributable to the increase in commercial loan volume during the quarter. Commercial loans generally carry a higher rate than residential loans. The increase in the cost of interest-bearing liabilities was attributable to the increase in average demand and money market balances and higher rates in the deposit portfolio year over year.

For the six months ended June 30, 2018, the net interest margin decreased 8 basis points to 3.24% compared to 3.32% for the six months ended June 30, 2017. The average yield on interest-earning assets increased 16 basis points year over year while the average cost of interest-bearing liabilities increased 24 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 average demand and money market balances and higher rates in the deposit portfolio year over year.

Provision for Loan Losses. The provision for loan losses decreased by $210,000 to $90,000 for the three months ended June 30, 2018 compared to a provision of $300,000 for the three months ended June 30, 2017. We recorded a provision for loan losses of $180,000 for the six month period ended June 30, 2018, compared to a provision for $495,000 for the six month period ended June 30, 2017. The decreased provision level during the current year period is attributable to improving factors during the quarter ended June 30, 2018 compared to the same period in 2017. 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 $4.1 million in nonperforming loans as of June 30, 2018 compared to $6.9 million as of June 30, 2017. The allowance for loan losses to total loans ratio was 1.09% at June 30, 2018 compared to 1.14% at June 30, 2017, while the allowance for loan losses to non-performing loans ratio was 135.53% at June 30, 2018 compared to 71.21% at June 30, 2017. Non-performing loans to total loans and net charge-offs to average loans outstanding ratios were at 0.80% and 0.00%, respectively, at and for the six months ended June 30, 2018 compared to 1.60% and 0.02% at and for the six months ended June 30, 2017.

Non-Interest Income. Non-interest income decreased $11,000, or 5.0%, to $208,000 during the three months ended June 30, 2018 compared to $219,000 for the three months ended June 30, 2017. Non-interest income was $412,000 for the six months ended June 30, 2018 compared to $406,000 for the comparable 2017 timeframe.

Non-Interest Expenses. During the three months ended June 30, 2018, non-interest expenses increased $81,000 to $2.9 million from $2.8 million for the three months ended June 30, 2017. Salaries and employee benefits increased by $99,000, or 6.3%, due to merit and infrastructure increases during the period. FDIC assessment expense increased $32,000, or 86.5%, primarily due to an increase in deposits year over year. Service bureau fees increased $28,000, or 57.1%, primarily due the reduction of relationship credits utilized during the period. Other expenses increased $28,000, or 15.22%, primarily due to debit card losses incurred during the period. Partially offsetting these increases were a decrease in directors' compensation of $65,000, or 34.8%, primarily due to the termination of the directors' retirement plan.

Non-interest expense increased $351,000 to $5.9 million for the year to date period ended June 30, 2018 as compared to the same period ended June 30, 2017. Salaries and benefits, FDIC assessment expense and service bureau fees increased by $398,000, $53,000, and $47,000, respectively, for the six months ended June 30, 2018 compared to the same six month period a year earlier. The increase in salaries and benefits was primarily due to merit and infrastructure increases during the period. In addition, FDIC assessment expense increased due to deposit growth while service bureau fees increased due to the reduction of relationship credits utilized during the period. Offsetting these increases, directors’ compensation decreased $119,000, or 32.78%, primarily due to the termination of the directors’ retirement plan.

Income Taxes. The income tax expense for the three months ended June 30, 2018 was $407,000 or 24.7% of the reported income before income taxes compared to a tax expense of $293,000 or 28.6% for the three months ended June 30, 2017. The income tax expense for the six months ended June 30, 2018 was $814,000, or 26.4% of the reported income before income taxes, compared to tax expense of $614,000, or 32.4% of the reported income before income taxes for the six months ended June 30, 2017. As a result of the passage of the Tax Cuts and Jobs Act on December 22, 2017, the federal tax rate for corporations was reduced to 21% during 2018. The increase in tax provision is attributable to an increase in pre-tax income offset by a decrease in the applicable tax rate.

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 June 30, 2018, the Bank had outstanding commitments to originate loans of $5.3 million, construction loans in process of $19.6 million, unused lines of credit of $67.0 million (including $51.7 million for commercial lines of credit and $14.9 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 June 30, 2018, totaled $43.0 million.

As of June 30, 2018, 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 June 30, 2018, the total loans receivable to deposits ratio was 113.6%. At June 30, 2018, the Bank's collateralized borrowing limit with the FHLBNY was $133.0 million, of which $82.2 million was outstanding. As of June 30, 2018, 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 June 30, 2018, 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 June 30, 2018. 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 June 30, 2018.

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 June 30, 2018 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

On August 4, 2016, the Registrant announced that it has approved a stock repurchase plan to purchase up to 595,342 shares of the Registrant’s common stock. In connection with the repurchase plan, the Registrant entered into a Rule 10b5-1 plan with Keefe. Bruyette & Wood, Inc. The following table shows shares repurchased during the quarter ended June 30, 2018.



Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs
April 1-April 30, 2018	5,300	17.95	492,216	103,126
May 1-May 31, 2018	—	—	—	—
June 1-June 30, 2018	—	—	—	—
Total	5,300	$17.95	492,216	103,126

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 August 10, 2018		/s/ Michael A. Shriner
		Michael A. Shriner
		President and Chief Executive Officer


Date August 10, 2018		/s/ John S. Kaufman
		John S. Kaufman
		First Vice President and Chief Financial Officer

MSB FINANCIAL CORP - FORM 10-Q - August 10, 2018

Attached files

MSB FINANCIAL CORP Reports