MSB FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - MSB FINANCIAL CORP	msbf-09302018xex32.htm
EX-31.2 - EXHIBIT 31.2 - MSB FINANCIAL CORP	msbf-09302018xex312.htm
EX-31.1 - EXHIBIT 31.1 - MSB FINANCIAL CORP	msbf-09302018xex311.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, 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: October 31, 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 September 30, 2018 and December 31, 2017	3

	Consolidated Statements of Income for the Three and
	Nine Months Ended September 30, 2018 and 2017	4

	Consolidated Statements of Cash Flows for the Nine Months
	Ended September 30, 2018 and 2017	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2:	Management's Discussion and Analysis of	23
	Financial Condition and Results of Operations

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4:	Controls and Procedures	28


PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	28

Item 1A:	Risk Factors	28

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3:	Defaults Upon Senior Securities	28

Item 4:	Mine Safety Disclosures	28

Item 5:	Other Information	28

Item 6:	Exhibits	29

SIGNATURES		30

CERTIFICATIONS

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



	September 30, 2018			December 31, 2017

(Dollars in thousands, except per share amounts)
Cash and due from banks	$	1,254		$	2,030
Interest-earning demand deposits with banks	20,817			20,279

Cash and Cash Equivalents	22,071			22,309

Securities held to maturity (fair value of $41,765 and $38,255, respectively)	43,009			38,482
Loans receivable, net of allowance for loan losses of $5,656 and $5,414, respectively	494,848			473,405
Premises and equipment, net	8,323			8,698
Federal Home Loan Bank of New York stock, at cost	4,117			2,131
Bank owned life insurance	14,489			14,197
Accrued interest receivable	1,734			1,607
Other assets	1,803			2,211

Total Assets	$	590,394		$	563,040

Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	45,501		$	36,919
Interest bearing	392,096			411,994

Total Deposits	437,597			448,913

Advances from Federal Home Loan Bank of New York	80,075			37,675
Advance payments by borrowers for taxes and insurance	704			686
Other liabilities	2,010			2,741

Total Liabilities	520,386			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 September 30, 2018 and December 31, 2017, respectively	55			58
Paid-in capital	46,848			51,068
Retained earnings	24,765			23,641
Unearned common stock held by ESOP (182,218 and 190,390 shares, respectively)	(1,660		)	(1,742		)

Total Stockholders' Equity	70,008			73,025

Total Liabilities and Stockholders' Equity	$	590,394		$	563,040

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)	2018		2017			2018		2017
Interest Income:
Loans receivable, including fees	$	5,788	$	4,769		$	16,360	$	13,213
Securities	304		264			763		762
Other	83		50			219		128
Total Interest Income	6,175		5,083			17,342		14,103
Interest Expense
Deposits	1,014		622			2,795		1,703
Borrowings	406		271			1,059		691
Total Interest Expense	1,420		893			3,854		2,394

Net Interest Income	4,755		4,190			13,488		11,709
Provision for Loan Losses	60		490			240		985
Net Interest Income after Provision for Loan Losses	4,695		3,700			13,248		10,724

Non-Interest Income
Fees and service charges	78		87			252		256
Income from bank owned life insurance	97		101			292		313
Other	15		17			58		42
Total Non-Interest Income	190		205			602		611

Non-Interest Expenses
Salaries and employee benefits	1,625		1,577			5,107		4,661
Directors compensation	121		188			365		551
Occupancy and equipment	390		394			1,172		1,217
Service bureau fees	107		67			251		164
Advertising	18		4			31		12
FDIC assessment	71		61			194		131
Professional services	528		342			1,217		1,050
Other	204		189			613		571
Total Non-Interest Expenses	3,064		2,822			8,950		8,357

Income before Income Taxes	1,821		1,083			4,900		2,978
Income Tax Expense	506		(86		)	1,320		528
Net Income	$	1,315	$	1,169		$	3,580	$	2,450

Earnings per share:
Basic	$	0.25	$	0.21		$	0.67	$	0.44
Diluted	$	0.24	$	0.21		$	0.66	$	0.44

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



(Dollars in thousands)	Nine Months Ended September 30,
Cash Flows from Operating Activities:	2018			2017
Net Income	$	3,580		$	2,450
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	(91		)	(99		)
Depreciation and amortization of premises and equipment	430			413
Stock-based compensation and allocation of ESOP stock	494			474
Provision for loan losses	240			985
Income from bank owned life insurance	(292		)	(313		)
Increase in accrued interest receivable	(127		)	(170		)
Decrease (increase) in other assets	408			(448		)
(Decrease) increase in other liabilities	(731		)	89
Net Cash Provided by Operating Activities	3,911			3,381

Cash Flows from Investing Activities:
Activity in held to maturity securities:
Purchases	(8,969		)	(1,182		)
Maturities, calls and principal repayments	4,375			4,475
Net increase in loans receivable	(50,202		)	(49,333		)
Purchased loans	(3,705		)	(53,024		)
Proceeds from sales of loans	32,382			8,252
Purchase of bank premises and equipment	(55		)	(260		)
Purchase of Federal Home Loan Bank of New York stock	(21,096		)	(11,665		)
Redemption of Federal Home Loan Bank of New York stock	19,110			9,586
Net Cash Used in Investing Activities	(28,160		)	(93,151		)

Cash Flows from Financing Activities:
Net (decrease) increase in deposits	(11,316		)	35,211
Advances from Federal Home Loan Bank of New York	52,400			45,700
Repayment of advances from Federal Home Loan Bank of New York	(10,000		)	—
Increase (decrease) in advance payments by borrowers for taxes and insurance	18			(92		)
Cash dividends paid to stockholders	(2,456		)	(2,451		)
Net exercise of options and repurchase of shares	(36		)	(1,672		)
Proceeds from exercise of stock options	—			571
Repurchase of common stock	(4,599		)	(108		)
Net Cash Provided by Financing Activities	24,011			77,159

Net Decrease in Cash and Cash Equivalents	(238		)	(12,611		)
Cash and Cash Equivalents – Beginning	22,309			21,382
Cash and Cash Equivalents – Ending	$	22,071		$	8,771

Supplementary Cash Flows Information
Interest paid	$	3,863		$	2,373
Income taxes paid	1,060			1,016

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 September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 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 an 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 September 30,				Nine Months Ended September 30,
(In Thousands, Except Per Share Data)	2018		2017		2018		2017
Numerator:
Net income	$	1,315	$	1,169	$	3,580	$	2,450

Denominator:
Weighted average common shares	5,330		5,564		5,377		5,541
Dilutive potential common shares	59		11		72		4
Weighted average fully diluted shares	5,389		5,575		5,449		5,545

Earnings per share:
Basic	$	0.25	$	0.21	$	0.67	$	0.44
Dilutive	$	0.24	$	0.21	$	0.66	$	0.44

For three and nine months ended September 30, 2018 and September 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 September 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 September 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 September 30, 2018 and December 31, 2017 are summarized as follows:



(In Thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
September 30, 2018
U.S. Government agencies:
Due within one year	$	3,500	$	—	$	14	$	3,486
Due after one year through five years	1,000		—		16		984
Due after five through ten years	3,000		—		8		2,992
Due after ten years	3,000		—		37		2,963

Total U.S. Government agencies	10,500		—		75		10,425


Mortgage-backed securities	24,818		50		621		24,247

Corporate bonds:
Due within one year	—		—		—		—
Due after one year through five years	1,500		8		—		1,508
Due after five through ten years	1,000		—		76		924
Due after ten years	4,000		—		513		3,487
Total Corporate bonds	6,500		8		589		5,919

State and political subdivisions:
Due within one year	150		1		1		150
Due after one through five years	678		—		9		669
Due after five through ten years	363		—		8		355
Total State and political subdivisions	1,191		1		18		1,174

Certificates of deposit:
Due within one year	—		—		—		—
Total Certificates of deposit	—		—		—		—

Total Securities held to maturity	$	43,009	$	59	$	1,303	$	41,765

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 nine month periods ended September 30, 2018 or 2017. At September 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, respectively, 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 September 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)
September 30, 2018
U.S. Government agencies	$	5,955	$	46	$	4,470	$	29	$	10,425	$	75
Mortgage-backed securities	6,233		149		11,718		472		17,951		621
Corporate bonds	—		—		4,411		589		4,411		589
State and political subdivisions	1,024		17		150		1		1,174		18
Certificates of deposit	—		—		—		—		—		—

Total securities with gross unrecognized losses	$	13,212	$	212	$	20,749	$	1,091	$	33,961	$	1,303

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 September 30, 2018, management concluded that the unrecognized losses summarized above (which related to six U.S. Government agency bonds, twenty-one mortgage-backed securities, three corporate bonds, seven state and political subdivision securities and zero certificates 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 September 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 September 30, 2018 and December 31, 2017 was as follows:



(In Thousands)	September 30, 2018		December 31, 2017
Residential mortgage:
One-to-four family	$	147,127	$	157,876
Home equity	25,494		26,803

Total residential mortgages	172,621		184,679

Commercial loans:
Commercial and multi-family real estate	209,283		196,681
Construction	28,788		43,718
Commercial and industrial	101,849		73,465

Total commercial loans	339,920		313,864

Consumer:	580		618

Total loans receivable	513,121		499,161

Less:
Loans in process	12,142		19,868
Deferred loan fees	475		474
Allowance for loan losses	5,656		5,414

Total adjustments	18,273		25,756

Loans receivable, net	$	494,848	$	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 September 30, 2018 and 2017 and loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2018 and December 31, 2017:



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

Allowance for loan losses:
Balance, beginning	$	1,887	$	2,469		$	331		$	868	$	4		$	37		$	5,596
Provisions (credits)	145		(109		)	(165		)	224		2			(37		)	60
Loans charged-off	—		—			—			—		(2		)	—			(2		)
Recoveries	2		—			—			—		—			—			2
Balance, ending	$	2,034	$	2,360		$	166		$	1,092	$	4		$	—		$	5,656

Nine Months Ended September 30, 2018

Allowance for loan losses:
Balance, beginning	$	1,852	$	2,267		$	302		$	710	$	5		$	278		$	5,414
Provisions (credits)	175		93			(136		)	382		4			(278		)	240
Loans charged-off	—		—			—			—		(5		)	—			(5		)
Recoveries	7		—			—			—		—			—			7
Balance, ending	$	2,034	$	2,360		$	166		$	1,092	$	4		$	—		$	5,656

September 30, 2018 allowance allocated to:
Loans individually evaluated for impairment	$	18	$	—		$	—		$	—	$	—		$	—		$	18
Loans collectively evaluated for impairment	2,016		2,360			166			1,092		4			—			5,638
Ending Balance	$	2,034	$	2,360		$	166		$	1,092	$	4		$	—		$	5,656

September 30, 2018 loan balances evaluated for:
Loans individually evaluated for impairment	$	11,648	$	1,723		$	—		$	124	$	—		$	—		$	13,495
Loans collectively evaluated for impairment	160,904		207,241			16,606			101,678		580			—			487,009
Ending Balance	$	172,552	$	208,964		$	16,606		$	101,802	$	580		$	—		$	500,504

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

September 30, 2017 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

September 30, 2017 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
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 September 30, 2018 and December 31, 2017:



(In Thousands)
As of September 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	$	1,959	$	390	$	—	$	2,349	$	142,424	$	2,284	$	147,057
Home equity	1,022		498		101		1,621		23,746		128		25,495
Commercial and multi-family real estate	716		—		—		716		207,914		334		208,964
Construction	—		—		—		—		16,606		—		16,606
Commercial and industrial	62		215		—		277		101,525		—		101,802
Consumer	6		—		—		6		574		—		580
Total	$	3,765	$	1,103	$	101	$	4,969	$	492,789	$	2,746	$	500,504

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 September 30, 2018 and December 31, 2017 and the average balances of such loans for the nine months and year, respectively, then ended:



(In Thousands)
September 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	$	10,284	$	9,956	$	328	$	17	$	10,926	$	10,434
Home equity	1,324		1,324		40		1		1,455		1,421

Commercial and multi-family real estate	1,723		1,723		—		—		2,366		1,971
Construction	—		—		—		—		—		—
Commercial and industrial	124		124		—		—		3,884		179
Consumer	—		—		—		—		—		1
Total	$	13,455	$	13,127	$	368	$	18	$	18,631	$	14,006



(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 September 30, 2018 and December 31, 2017, impaired loans listed above included $11.5 million and $11.4 million, respectively, of loans modified in troubled debt restructurings ("TDR") and as such are considered impaired under GAAP. As of September 30, 2018 and December 31, 2017, $10.6 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 $188,000 and $159,000 was recognized on impaired loans during the three months ended September 30, 2018 and 2017. The average balance of impaired loans for the three months ended September 30, 2018 and September 30, 2017 was $13.7 million and $15.7 million, respectively.

Interest income of $424,000 and $354,000 was recognized on impaired loans during the nine months ended September 30, 2018 and 2017. The average balance of impaired loans for the nine months ended September 30, 2018 and September 30, 2017 was $14.0 million and $15.8 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 September 30, 2018 and December 31, 2017:



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

Commercial and multi-family real estate	$	206,556	$	1,380	$	1,028	$	—	$	—	$	208,964
Construction	16,606		—		—		—		—		16,606
Commercial and industrial	101,425		166		211		—		—		101,802

Total	$	324,587	$	1,546	$	1,239	$	—	$	—	$	327,372

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
	Sep 30, 2018		Dec 31, 2017		Sep 30, 2018		Dec 31, 2017		Sep 30, 2018		Dec 31, 2017

Nonperforming	$	2,513	$	3,718	$	—	$	1	$	2,513	$	3,719

Performing	170,039		180,879		580		616		170,619		181,495

Total	$	172,552	$	184,597	$	580	$	617	$	173,132	$	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 $11.5 million at September 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 $10.6 million at September 30, 2018 versus $9.7 million at December 31, 2017. The total of TDRs on non-accrual status was $852,000 at September 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 September 30, 2018 and 2017. For the nine months ended September 30, 2018, 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 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.

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

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



	Nine Months Ended September 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



	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, 2018 and 2017.

There was no Other Real Estate Owned ("OREO") at September 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 September 30, 2018 and December 31, 2017, we had consumer loans with a carrying value of $367,000 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 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

Note 6 - Fair Value Measurements (Continued)

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 Company did not have any financial assets measured at fair value on a recurring basis as of September 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 September 30, 2018 and December 31, 2017:



	As of September 30, 2018
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In thousands)
Impaired loans	$	—	$	—	$	350	$	350



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

Note 6 - Fair Value Measurements (Continued)

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



	As of September 30, 2018
	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans	$	350	Appraisal of collateral	Appraisal adjustments	0% (0%)
				Liquidation expense	7.3% (7.3%)



	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 September 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 September 30, 2018	Amount		Value		Inputs		Inputs		Inputs
			(In thousands)

Financial assets:
Cash and due from banks	$	22,071	$	22,071	$	22,071	$	—	$	—
Securities held to maturity	43,009		41,765		—		41,765		—
Loans receivable	494,848		480,579		—		—		480,579
Federal Home Loan Bank of New York stock	4,117		N/A		—		—		—
Accrued interest receivable	1,734		1,734		—		195		1,539

Financial liabilities:
Deposits	437,597		438,441		—		438,441		—
Advances from Federal Home Loan Bank of New York	80,075		79,358		—		79,358		—

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		N/A		—		—		—
Accrued interest receivable	1,607		1,607		—		127		1,480

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 fair value of FHLB of New York stock is not applicable 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 September 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 September 30, 2018 and December 31, 2017

General. Total assets were $590.4 million at September 30, 2018, compared to $563.0 million at December 31, 2017, an increase of $27.4 million or 4.9%. During the period, the Company experienced growth of $21.4 million, or 4.5%, in loans receivable, net and $4.5 million, or 11.8%, in held to maturity securities. Federal Home Loan Bank of New York ("FHLBNY") stock increased $2.0 million, or 93.2%, due to an increase in borrowings during the period. The Company increased its FHLBNY overnight borrowings by $52.4 million during the nine months ended September 30, 2018.

The ratio of average interest-earning assets to average-interest bearing liabilities was 119.7% for the nine month period ended September 30, 2018 as compared to 125.7% for the nine months ended September 30, 2017.

Loans. Loans receivable, net, increased by $21.4 million, or 4.5%, from $473.4 million at December 31, 2017 to $494.8 million at September 30, 2018. Loans receivable, net represented 83.8% of the Company's assets at September 30, 2018 compared to 84.1% at December 31, 2017. The Bank's commercial and industrial portfolio increased by $28.4 million on stronger loan demand, while the commercial real estate portfolio increased approximately $12.6 million. The construction portfolio decreased $14.9 million as a result of borrowers completing projects. The residential mortgage portfolio decreased $12.1 million to $172.6 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 $43.0 million at September 30, 2018 as compared to $38.5 million at December 31, 2017. Maturities, calls and principal repayments during the nine months ended September 30, 2018 totaled $4.5 million and $9.0 million in purchases were made during the first nine months of 2018.

Deposits. Total deposits at September 30, 2018 were $437.6 million compared with $448.9 million at December 31, 2017. Overall, deposits decreased $11.3 million. Money market and interest demand balances declined $14.6 million and $5.0 million, respectively. Money market balances declined to $12.8 million compared to $27.4 million while interest demand balances declined to $150.2 million compared to $155.2 million from the prior year end. In addition, savings balances decreased $2.7 million to $102.4 million from $105.1 million from year end. Offsetting the decreases were increases in non-interest demand and certificates of deposit (including IRA) balances of $8.6 million and $2.3 million, respectively. Non-interest demand balances increased to $45.5 million from $36.9 million from year end while certificates of deposit balances increased to $126.6 million compared to $124.3 million from year end.

Borrowings. Total borrowings at September 30, 2018 were $80.1 million compared with $37.7 million at December 31, 2017. Overnight advances with the Federal Home Loan Bank of New York at September 30, 2018 were $52.4 million while there were none at December 31, 2017.

Equity. Stockholders' equity was $70.0 million at September 30, 2018 compared to $73.0 million at December 31, 2017, a decrease of $3.0 million, or 4.1%. The decrease in shareholders' equity was primarily due to the repurchase of stock of $4.6 million and the payment of a special cash dividend in the aggregate amount of $2.5 million, partially offset by $3.6 million in net income.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2018 and 2017

General. The Company had net income of $1.3 million for the three months ended September 30, 2018 compared to net income of $1.2 million for the three months ended September 30, 2017, as an increase of $565,000 in net interest income and a decrease of $430,000 in the provision for loan losses, was partially offset by an increase of $242,000 in non-interest expense and $592,000 in income tax expense. The decrease in the provision expense was related to the lower loan growth the Company experienced during the period in addition to improving factors.

The Company had net income of $3.6 million for the nine months ended September 30, 2018 compared to net income of $2.5 million for the nine months ended September 30, 2017, as an increase of $1.8 million in net interest income and a decrease of $745,000 in the provision for loan losses was partially offset by an increase in non-interest expense of $593,000 and $792,000 in income tax expense. 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
	9/30/2018							9/30/2017
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	499,082		$	5,788	4.64	%	$	446,383		$	4,769	4.27	%
Securities held to maturity	43,871			304		2.77	%	41,423			264		2.55	%
Other interest-earning assets	9,566			83		3.47	%	9,526			50		2.10	%
Total interest-earning assets	552,519			6,175		4.47	%	497,332			5,083		4.09	%

Allowance for loan loss	(5,624		)					(4,922		)
Non-interest-earning assets	27,900							29,019
Total non-interest-earning assets	22,276							24,097
Total Assets	$	574,795						$	521,429

Interest-bearing liabilities:
Demand & money market	$	155,361		$	335	0.86	%	$	118,084		$	118	0.40	%
Savings and club deposits	103,815			148		0.57	%	106,950			73		0.27	%
Certificates of deposit	127,188			531		1.67	%	125,555			431		1.37	%
Total interest-bearing deposits	386,364			1,014		1.05	%	350,589			622		0.71	%

Federal Home Loan Bank advances	73,077			406		2.22	%	47,788			271		2.27	%
Total interest-bearing liabilities	459,441			1,420		1.24	%	398,377			893		0.90	%

Non-interest-bearing deposit	43,495							44,970
Other non-interest-bearing liabilities	2,320							3,964
Total Liabilities	505,256							447,311

Equity	69,539							74,118
Total Liabilities and Equity	574,795							521,429

Net Interest Income				4,755		3.23	%				4,190		3.19	%

Net Interest Margin						3.44	%						3.37	%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	120.26		%					124.84		%




	For the nine months ended
	9/30/2018							9/30/2017
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	494,490		$	16,360	4.41	%	$	415,512		$	13,213	4.24	%
Securities held to maturity	39,365			763		2.58	%	42,190			762		2.41	%
Other interest-earning assets	9,996			219		2.92	%	10,156			128		1.68	%
Total interest-earning assets	543,851			17,342		4.25	%	467,858			14,103		4.02	%

Allowance for loan loss	(5,542		)					(4,715		)
Non-interest-earning assets	28,122							28,791
Total non-interest-earning assets	22,580							24,076
Total Assets	$	566,431						$	491,934

Interest-bearing liabilities:
Demand & money market	$	155,843		$	908	0.78	%	$	110,116		$	315	0.38	%
Savings and club deposits	106,291			387		0.49	%	105,237			193		0.24	%
Certificates of deposit	125,142			1,500		1.60	%	118,378			1,195		1.35	%
Total interest-bearing deposits	387,276			2,795		0.96	%	333,731			1,703		0.68	%

Federal Home Loan Bank advances	66,893			1,059		2.11	%	38,563			691		2.39	%
Total interest-bearing liabilities	454,169			3,854		1.13	%	372,294			2,394		0.86	%

Non-interest-bearing deposit	39,582							41,966
Other non-interest-bearing liabilities	2,264							3,377
Total Liabilities	496,015							417,637

Equity	70,416							74,297
Total Liabilities and Equity	$	566,431						$	491,934

Net Interest Income				13,488		3.12	%				11,709		3.16	%

Net Interest Margin						3.31	%						3.34	%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	119.75		%					125.67		%

The Company's net interest margin increased 7 basis points to 3.44% for the three months ended September 30, 2018 compared to 3.37% for the three months ended September 30, 2017. The yield on interest-earning assets increased by 38 basis points year over year while the cost of interest-bearing liabilities increased 34 basis points. The increase in the yield on interest-earning assets was primarily attributable to three commercial loan prepayment penalties received during the quarter totaling $280,000, or 20 basis points of the increase. The increase in the cost of interest-bearing liabilities was attributable to the increase in average borrowings combined with higher rates in the deposit portfolio year over year.

For the nine months ended September 30, 2018, the net interest margin decreased 3 basis points to 3.31% compared to 3.34% for the nine months ended September 30, 2017. The average yield on interest-earning assets increased 23 basis points year over year while the average cost of interest-bearing liabilities increased 27 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 in addition to three commercial loan prepayment penalties totaling $282,000, or 7 basis points of the increase. The increase in the cost of interest-bearing liabilities was attributable to the increase in average borrowings combined with higher rates in the deposit portfolio year over year.

Provision for Loan Losses. The provision for loan losses decreased by $430,000 to $60,000 for the three months ended September 30, 2018 compared to a provision of $490,000 for the three months ended September 30, 2017. We recorded a provision for loan losses of $240,000 for the nine month period ended September 30, 2018, compared to a provision of $985,000 for the nine month period ended September 30, 2017. The decreased provision level during the current year period is attributable to

improving factors during the quarter ended September 30, 2018 compared to the same period in 2017 and slowed loan growth. 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 $2.8 million in nonperforming loans as of September 30, 2018 compared to $4.4 million as of September 30, 2017. The allowance for loan losses to total loans ratio was 1.13% at September 30, 2018 and 2017, respectively, while the allowance for loan losses to non-performing loans ratio was 198.67% at September 30, 2018 compared to 118.67% at September 30, 2017. Non-performing loans to total loans and net charge-offs to average loans outstanding ratios were at 0.57% and 0.00%, respectively, at and for the nine months ended September 30, 2018 compared to 0.95% and 0.06% at and for the nine months ended September 30, 2017.

Non-Interest Income. Non-interest income decreased $15,000, or 7.3%, to $190,000 during the three months ended September 30, 2018 compared to $205,000 for the three months ended September 30, 2017. Non-interest income was $602,000 for the nine months ended September 30, 2018 compared to $611,000 for the comparable 2017 timeframe.

Non-Interest Expenses. During the three months ended September 30, 2018, non-interest expenses increased $242,000 to $3.1 million from $2.8 million for the three months ended September 30, 2017. Professional services increased by $186,000, or 54.4%, due to services related to the implementation of Sarbanes-Oxley additional compliance requirements. Service bureau fees increased $40,000, or 59.7%, primarily due the reduction of relationship credits utilized during the period. Partially offsetting these increases were a decrease in directors' compensation of $67,000, or 35.6%, primarily due to the termination of the directors' retirement plan.

Non-interest expense increased $593,000 to $9.0 million for the year to date period ended September 30, 2018 as compared to the same period ended September 30, 2017. Salaries and benefits, professional services expense and service bureau fees increased by $446,000, $167,000, and $87,000, respectively, for the nine months ended September 30, 2018 compared to the same nine month period a year earlier. The increase in salaries and benefits was primarily due to merit and infrastructure increases during the period. In addition, professional services expense increased due to services related to the implementation of Sarbanes-Oxley compliance while service bureau fees increased due to the reduction of relationship credits utilized during the period. FDIC assessment expense increased $63,000 due to deposit growth. Offsetting these increases, directors’ compensation decreased $186,000, or 33.76%, primarily due to the termination of the directors’ retirement plan.

Income Taxes. The income tax expense for the three months ended September 30, 2018 was $506,000 or 27.8% of the reported income before income taxes compared to a tax expense of $(86,000) or 7.9% for the three months ended September 30, 2017. The income tax expense for the nine months ended September 30, 2018 was $1,320,000, or 26.9% of the reported income before income taxes, compared to tax expense of $528,000, or 17.7% of the reported income before income taxes for the nine months ended September 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 the tax provision is attributable to an increase in pre-tax income offset by a decrease in the applicable tax rate. The increase in the effective tax rate in the 2018 periods is due to a permanent tax deduction that was taken in the 2017 period due to non-qualified options that were exercised during the 2017 period.

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, 2018, the Bank had outstanding commitments to originate loans of $18.8 million, construction loans in process of $12.1 million, unused lines of credit of $71.7 million (including $56.6 million for commercial lines of credit and $15.0 million for home equity lines of credit), and standby letters of credit of $159,000. Certificates of deposit scheduled to mature in one year or less at September 30, 2018, totaled $41.5 million.

As of September 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 branches).

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, 2018, the total loans receivable to deposits ratio was 113.1%. At September 30, 2018, the Bank's collateralized borrowing limit with the FHLBNY was $137.4 million, of which $80.1 million was outstanding. As of September 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 September 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 September 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 September 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 September 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

The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2018.

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 October 31, 2018		/s/ Michael A. Shriner
		Michael A. Shriner
		President and Chief Executive Officer


Date October 31, 2018		/s/ John S. Kaufman
		John S. Kaufman
		First Vice President and Chief Financial Officer

MSB FINANCIAL CORP - FORM 10-Q - October 31, 2018

Attached files

MSB FINANCIAL CORP Reports