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EX-32 - EXHIBIT 32 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF - MSB FINANCIAL CORPex-32.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION CFO PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY A - MSB FINANCIAL CORPex31-2.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 OF THE SARBANES-OXLE - MSB FINANCIAL CORPex31-1.htm

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________

FORM 10-Q
(Mark One)
     
X
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   
EXCHANGE ACT OF 1934
     
For the quarterly period ended
March 31, 2017
     
OR
     
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   
EXCHANGE ACT OF 1934
     
For the transition period from
 
to
     
     
Commission File Number  001-37506
     
MSB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
     
MARYLAND
 
34-1981437
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
     
1902 Long Hill Road, Millington, New Jersey
 
07946-0417
(Address of principal executive offices)
 
(Zip Code)
     
Registrant's telephone number, including area code
(908) 647-4000
     
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]  No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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: May 12, 2017:
 
$0.01 par value common stock 5,729,182 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 March 31, 2017 and December 31, 2016
 
3
       
 
    Consolidated Statements of Income for the
   
 
    Three Months Ended March 31, 2017 and 2016
 
4
       
 
    Consolidated Statements of Comprehensive Income for the
   
 
    Three Months Ended March 31, 2017 and 2016
 
5
       
 
    Consolidated Statements of Cash Flows for the Three Months
   
 
    Ended March 31, 2017 and 2016
 
6
       
 
Notes to Consolidated Financial Statements (Unaudited)
 
7
       
Item 2:
Management's Discussion and Analysis of
 
30
 
Financial Condition and Results of Operations
   
       
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
 
36
       
Item 4:
Controls and Procedures
 
36
     
     
PART II - OTHER INFORMATION
   
     
Item 1:
Legal Proceedings
 
36
       
Item 1A:
Risk Factors
 
36
       
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
 
36
       
Item 3:
Defaults Upon Senior Securities
 
36
       
Item 4:
Mine Safety Disclosures
 
36
       
Item 5:
Other Information
 
36
       
Item 6:
Exhibits
 
37
     
SIGNATURES
 
38
     
CERTIFICATIONS
 
39
 

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

 
March 31,
December 31,
 
 
2017
2016
 
         
(Dollars in thousands, except per share amounts)
         
Cash and due from banks
$
2,051
$
1,388
 
Interest-earning demand deposits with banks
 
9,198
 
19,994
 
           
Cash and Cash Equivalents
 
11,249
 
21,382
 
           
Securities held to maturity (fair value of $42,614 and $43,894,
respectively)
 
42,716
 
44,104
 
Loans receivable, net of allowance for loan losses of $4,626 and
$4,476, respectively
 
398,447
 
368,007
 
Premises and equipment
 
8,918
 
8,957
 
Federal Home Loan Bank of New York stock, at cost
 
2,626
 
1,433
 
Bank owned life insurance
 
13,891
 
13,784
 
Accrued interest receivable
 
1,277
 
1,378
 
Other assets
 
2,784
 
2,601
 
           
Total Assets
$
481,908
$
461,646
 
           
Liabilities and Stockholders' Equity
         
Liabilities
         
Deposits:
         
Non-interest bearing
$
38,970
$
44,365
 
Interest bearing
 
315,961
 
317,934
 
           
Total Deposits
 
354,931
 
362,299
 
           
Advances from Federal Home Loan Bank of New York
 
49,175
 
22,675
 
Advance payments by borrowers for taxes and insurance
 
824
 
792
 
Other liabilities
 
2,911
 
2,695
 
           
Total Liabilities
 
407,841
 
388,461
 
           
Stockholders' Equity
         
Preferred stock, par value $0.01; 1,000,000 shares authorized; no shares issued or outstanding
 
-
 
-
 
Common stock, par value $0.01; 49,000,000 shares authorized; 5,729,182 and 5,714,182 issued; 5,729,182 and 5,714,182 outstanding, respectively
 
57
 
57
 
Paid-in capital
 
52,084
 
51,809
 
Retained earnings
 
23,919
 
23,370
 
Unallocated common stock held by ESOP (198,592 and 201,316 shares, respectively)
 
(1,902
)
(1,929
 
)
Accumulated other comprehensive loss
 
(91
)
(122
)
           
Total Stockholders' Equity
 
74,067
 
73,185
 
           
Total Liabilities and Stockholders' Equity
$
481,908
$
461,646
 
See notes to unaudited consolidated financial statements.

 
3


MSB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
Three months ended
March 31,
 
(Dollars in thousands, except per share amounts)
 
2017
   
2016
 
Interest Income:
           
Loans receivable, including fees
 
$
4,000
   
$
2,838
 
Securities held to maturity
   
251
     
431
 
Other
   
42
     
29
 
Total Interest Income
   
4,293
     
3,298
 
                 
Interest Expense
               
Deposits
   
502
     
314
 
Borrowings
   
196
     
196
 
   Total Interest Expense
   
698
     
510
 
                 
Net Interest Income
   
3,595
     
2,788
 
Provision for Loan Losses
   
195
     
130
 
Net Interest Income after Provision for Loan Losses
   
3,400
     
2,658
 
                 
Non-Interest Income
               
Fees and service charges
   
71
     
73
 
Income from bank owned life insurance
   
107
     
56
 
Other
   
9
     
12
 
Total Non-Interest Income
   
187
     
141
 
                 
Non-Interest Expenses
               
Salaries and employee benefits
   
1,506
     
1,427
 
Directors compensation
   
176
     
103
 
Occupancy and equipment
   
394
     
334
 
Service bureau fees
   
48
     
213
 
Advertising
   
3
     
11
 
FDIC assessment
   
33
     
71
 
Professional services
   
359
     
239
 
Other
   
198
     
166
 
Total Non-Interest Expenses
   
2,717
     
2,564
 
                 
Income before Income Taxes
   
870
     
235
 
Income Tax Expense
   
321
     
76
 
Net Income
 
$
549
   
$
159
 
                 
Earnings per share:
               
   Basic
 
$
0.10
   
$
0.03
 
   Diluted
 
$
0.10
   
$
0.03
 
                 
See notes to unaudited consolidated financial statements.
 



4





MSB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


   
Three months ended
March 31,
 
(Dollars in thousands)
 
2017
   
2016
 
Net Income
 
$
549
     
159
 
Other comprehensive income (loss), net of tax:
               
                 
Defined benefit pension plans:
               
                 
Reclassification adjustment for prior service cost included in net income, net of tax of $- and $2, respectively
 
$
-
   
$
(3
)
                 
Reclassification adjustment for net actuarial loss included in net income, net of tax of $(20) and $(1), respectively
   
31
     
2
 
                 
Total other comprehensive income (loss)
   
31
     
(1
)
                 
  Comprehensive income
 
$
580
   
$
158
 
   
See notes to unaudited consolidated financial statements.
 














































5

MSB FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

   

Three Months Ended
March 31,
 
(Dollars in thousands)
 
2017
   
2016
 
       
Cash Flows from Operating Activities:
           
Net Income
 
$
549
   
$
159
 
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
   
(26
)    
(4
)
     Depreciation and amortization of premises and equipment
   
134
     
89
 
     Stock-based compensation and allocation of ESOP stock
   
134
     
39
 
     Provision for loan losses
   
195
     
130
 
     Income from bank owned life insurance
   
(107
)    
(56
)
     Decrease in accrued interest receivable
   
101
     
80
 
     (Increase) decrease in other assets
   
(203
)    
287
 
     Increase (decrease)  in other liabilities
   
267
     
(93
)
    Net Cash Provided by Operating Activities
   
1,044
     
631
 
                 
Cash Flows from Investing Activities:
               
     Activity in held to maturity securities:
               
      Purchases
   
-
     
-
 
      Maturities, calls and principal repayments
   
1,368
     
5,367
 
     Net increase in loans receivable
   
(18,737
)    
(8,502
)
    Purchased loan participations
   
(19,102
)    
-
 
    Sold loan participations
   
7,250
     
-
 
    Purchase of premises and equipment
   
(95
)    
(72
)
    Purchase of Federal Home Loan Bank of NY stock
   
(2,921
)    
-
 
    Redemption of Federal Home Loan Bank of NY stock
   
1,728
     
450
 
    Net Cash Used in Investing Activities
   
(30,509
)    
(2,757
)
                 
Cash Flows from Financing Activities:
               
     Net (decrease) increase in deposits
   
(7,368
)    
14,243
 
     Increase (decrease) in short-term advances from FHLB of NY
   
26,500
     
(10,000
)
     Proceeds from exercise of stock options
   
168
     
-
 
     Increase in advance payments by borrowers for taxes and insurance
   
32
     
95
 
    Net Cash Provided by Financing Activities
   
19,332
     
4,338
 
                 
    Net (Decrease) Increase in Cash and Cash Equivalents
   
(10,133
)    
2,212
 
Cash and Cash Equivalents – Beginning
   
21,382
     
12,303
 
Cash and Cash Equivalents – Ending
 
$
11,249
   
$
14,515
 
                 
Supplementary Cash Flows Information
               
Interest paid
 
$
700
   
$
517
 
                 
                 
                 
See notes to unaudited consolidated financial statements.
6

MSB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Note 1 – Organization and Business

MSB Financial Corp. (the "Company") is a Maryland-chartered corporation organized in 2014 to be the successor to MSB Financial Corp., a federal corporation ("Old MSB") upon completion of the second-step conversion of Millington Bank (the "Bank") from the two-tier mutual holding company structure to the stock holding company structure. MSB Financial, MHC (the "MHC") was the former mutual holding company for Old MSB prior to completion of the second-step conversion.  In conjunction with the second-step conversion, each of the MHC and Old MSB ceased to exist.
The Company's principal business is the ownership and operation of the Bank. The Bank is a New Jersey-chartered stock savings bank and its deposits are insured by the Federal Deposit Insurance Corporation. The primary business of the Bank is attracting retail deposits from the general public and using those deposits together with funds generated from operations, principal repayments on securities and loans and borrowed funds, for its lending and investing activities. The Bank's loan portfolio primarily consists of one-to-four family and home equity residential loans, commercial real estate loans, commercial loans, and construction loans. It also invests in U.S. government obligations and mortgage-backed securities. The Bank is regulated by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation. The Board of Governors of the Federal Reserve System (the "Federal Reserve") regulates the Company as a bank holding company.
The primary business of Millington Savings Service Corp (the "Service Corp"), the Bank's wholly-owned subsidiary, was the ownership and operation of a single commercial rental property. This property was sold during the year ended June 30, 2007. Currently the Service Corp is inactive.
Subsequent Event

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2017, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

Note 2 – Basis of Consolidated Financial Statement Presentation

              The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly owned subsidiary the Service Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.  These consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X, and therefore, do not include all information or notes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America ("GAAP").
In the opinion of management, all adjustments, consisting of only normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements have been made at March 31, 2017 and for the three months ended March 31, 2017 and 2016.  The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results which may be expected for an entire fiscal year or other interim periods.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.
 
7

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

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

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.  The standard was initially effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption  (which includes additional footnote disclosures).

The FASB subsequently issued ASU 2015-14 which states that public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 31, 2017, including interim reporting periods within that reporting period.

The FASB also subsequently issued ASUs Nos. 2016-08, 2016-10, 2016-12 and 2016-20 to augment, amend and clarify the original pronouncement.  Other than significantly increased disclosure, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability for all leases. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily due to the recognition of lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted.
 
 
8

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

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 2016-02, right-of-use assets and lease liabilities will be recognized in our consolidated statements of condition in amounts that will be material; however, we do not expect a material impact to our consolidated income statement.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, Compensation – Stock Compensation (Topic 718). This ASU changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting and cash flow classification for excess tax benefits and deficiencies, (2) forfeitures, and (3) tax withholding requirements and cash flow classification. The standard is effective for public companies for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted for the interim or annual period provided that the entire standard is adopted. If an entity early adopts the standard in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2016-09 effective January 1, 2017, did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument. The standard is effective for public companies in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in the interim or annual period provided that the entire standard is adopted. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements.  We have taken steps to begin preparations for implementation, such as evaluating changes to our current loss recognition model and evaluating the potential use of outside professionals for an updated model.

In August 2016, the FASB issued ASU 2016-15; Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update address the following eight specific cash flow issues with the objective of reducing the existing diversity in practice: (1) debt prepayments or debt extinguishment cost (cash outflow-financing), (2) settlement of debt instruments with coupon interest rates insignificant to the effective interest rate, interest payment (cash outflow-operating), or principal payment (cash outflow-financing), (3) contingent consideration payments made soon after a business combination (cash outflow-investing), (4) proceeds from the settlement of insurance claims (classification on basis of the nature of each loss), (5) proceeds from the corporate/bank-owned life insurance, proceeds (cash inflow-investing), payments (cash outflow-investing/operating), (6) distribution received from equity method investees, cumulative earnings approach (cash inflow-investing), nature of distribution approach (cash inflow-operating/investing), (7) beneficial interest in securitization transactions, assets (noncash transaction), cash receipts from trade receivable (cash inflow-investing), (8) separately identifiable cash flows (classified based on source-financing/investing/operating).  The amendments in this Update are effective for public business entities for the fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  An entity that elects early adoption must adopt all of the amendments in the same period.   We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
 

 
9


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

            In February 2017, FASB issued Accounting Standards Update No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"). To improve the consistency, transparency, and usefulness of financial information for users, the amendments in ASU 2017-07 require that an employer disaggregate the service cost component from the other components of net benefit cost and report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in ASU 2017-07 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We intend to adopt ASU 2017-07 during the first quarter of 2018 and it will have no effect on our results of operations because it only impacts the presentation of certain information on the statements of income.
In March 2017, FASB issued Accounting Standards Update No. 2017-08, "Receivables —Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities" ("ASU 2017-08"). ASU 2017-08 amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle.  The effect of ASU 2017-08 would be lower interest income and a corresponding lower yield as the amortization period would be shortened.  As of March 31, 2017 we do not hold any callable debt securities that were purchased at a premium.  We intend to adopt ASU 2017-08 during the first quarter of 2019.

 
10

Note 3 – Earnings Per Share

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



   
Three Months Ended
March 31,
 
             
(In Thousands, Except Per Share Data)
 
2017
   
2016
 
Numerator:
           
Net income
 
$
549
   
$
159
 
Denominator:
               
Weighted average common shares
   
5,520
     
5,743
 
Dilutive potential common shares
   
94
     
69
 
     Weighted average fully diluted shares
   
5,614
     
5,812
 
Earnings per share:
               
     Basic
 
$
0.10
   
$
0.03
 
     Dilutive
 
$
0.10
   
$
0.03
 



 
11



Note 4 - Securities Held to Maturity
The amortized cost of securities held to maturity and their estimated fair values as of March 31, 2017 and December 31, 2016 are summarized as follows:

(In Thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
March 31, 2017
     
                         
U.S U.S. Government agencies:
                       
Due within one year
 
$
2,000
   
$
1
   
$
1
   
$
2,000
 
Due after one year through five years
   
4,500
     
-
     
29
     
4,471
 
                                 
Total U.S. Government Agencies
   
6,500
     
1
     
30
     
6,471
 
                                 
                                 
Mortgage-backed securities
   
24,283
     
376
     
168
     
24,491
 
                                 
Corporate bonds:
                               
Due within one year
   
1,000
     
1
     
-
     
1,001
 
Due after one year through five years
   
2,028
     
16
     
-
     
2,044
 
Due after five years through ten years
   
1,000
     
-
     
27
     
973
 
Due after ten years
   
4,000
     
-
     
265
     
3,735
 
Total Corporate bonds
   
8,028
     
17
     
292
     
7,753
 
                                 
State and political subdivisions:
                               
     Due within one year
   
101
     
-
     
1
     
100
 
    Due after one year through five years
   
662
     
-
     
3
     
659
 
    Due after five years through ten years
   
537
     
-
     
8
     
529
 
Total State and political subdivisions
   
1,300
     
-
     
12
     
1,288
 
                                 
Certificates of deposit:
                               
Due within one year
   
2,160
     
5
     
-
     
2,165
 
Due after one year through five years
   
445
     
1
     
-
     
446
 
                                 
Total Certificates of deposit
   
2,605
     
6
     
-
     
2,611
 
                                 
Total Securities held to maturity
 
$
42,716
   
$
400
   
$
502
   
$
42,614
 

12

Note 4 - Securities Held to Maturity - Continued

 
 (In Thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
December 31, 2016
     
                         
U.S U.S. Government agencies:
                       
Due within one year
 
$
1,000
   
$
-
   
$
2
   
$
998
 
Due after one year through five years
   
5,500
     
1
     
40
     
5,461
 
Total U.S. Government Agencies
   
6,500
     
1
     
42
     
6,459
 
                                 
Mortgage-backed securities
   
24,663
     
366
     
224
     
24,805
 
                                 
Corporate bonds:
                               
    Due within one year
   
2,002
     
2
     
-
     
2,004
 
    Due after one year through five years
   
2,032
     
15
     
13
     
2,034
 
Due after five years through ten years
   
1,000
     
-
     
42
     
958
 
Due thereafter
   
4,000
     
-
     
253
     
3,747
 
Total Corporate bonds
   
9,034
     
17
     
308
     
8,743
 
                                 
State and political subdivisions:
                               
     Due within one year
   
101
     
-
     
-
     
101
 
     Due after one through five years
   
663
     
-
     
11
     
652
 
     Due after five through ten years
   
538
     
-
     
18
     
520
 
Total State and political subdivisions
   
1,302
     
-
     
29
     
1,273
 
                                 
Certificates of deposit:
                               
Due within one year
   
1,670
     
6
     
-
     
1,676
 
Due after one through five years
   
935
     
4
     
1
     
938
 
Total Certificates of deposit
   
2,605
     
10
     
1
     
2,614
 
                                 
Total Securities held to maturity
 
$
44,104
   
$
394
   
$
604
   
$
43,894
 

All mortgage-backed securities at March 31, 2017 and December 31, 2016 have been issued by FNMA, FHLMC or GNMA and are secured by one-to-four family residential real estate. The amortized cost and estimated fair value of securities held to maturity at March 31, 2017 and December 31, 2016, as shown above, are reported in total.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were no sales of securities held to maturity during the three months ended March 31, 2017 or 2016.  At March 31, 2017 and December 31, 2016, securities held to maturity with a fair value of approximately $1.0 million were pledged to secure public funds on deposit.


13

Note 4 - Securities Held to Maturity - Continued
The following tables set forth the gross unrealized losses and fair value of securities in an unrealized loss position as of March 31, 2017 and December 31, 2016, and the length of time that such securities have been in an unrealized loss position:


   
Less than 12 Months
   
More than 12 Months
   
Total
 
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated Fair
Value
   
Gross
Unrealized
Losses
   
Estimated Fair
Value
   
Gross
Unrealized
Losses
 
(In Thousands)
     
March 31, 2017:
                                   
U.S. Government
   agencies
 
$
5,470
   
$
30
   
$
-
   
$
-
   
$
5,470
   
$
30
 
Mortgage-backed
   securities
   
12,833
     
161
     
384
     
7
     
13,217
     
168
 
Corporate bonds
   
-
     
-
     
4,708
     
292
     
4,708
     
292
 
State and political subdivisions
   
1,288
     
12
     
-
     
-
     
1,288
     
12
 
                                                 
Total securities with gross unrealized losses
 
$
19,591
   
$
203
   
$
5,092
   
$
299
   
$
24,683
   
$
502
 

                   
   
Less than 12 Months
   
More than 12 Months
   
Total
 
   
Estimated Fair
Value
   
Gross
Unrealized
Losses
   
Estimated Fair
Value
   
Gross
Unrealized
Losses
   
Estimated Fair
Value
   
Gross
Unrealized
Losses
 
(In Thousands)
     
December 31, 2016
                                   
U.S. Government
agencies
 
$
5,458
   
$
42
   
$
-
   
$
-
   
$
5,458
   
$
42
 
Mortgage-backed
   securities
   
13,456
     
224
     
-
     
-
     
13,456
     
224
 
Corporate bonds
   
1,988
     
13
     
4,705
     
295
     
6,693
     
308
 
State and political subdivisions
   
1,172
     
28
     
101
     
1
     
1,273
     
29
 
Certificates of deposit
   
245
     
1
     
-
     
-
     
245
     
1
 
                                                 
Total securities with gross unrealized losses
 
$
22,319
   
$
308
   
$
4,806
   
$
296
   
$
27,125
   
$
604
 

At March 31, 2017, management concluded that the unrealized losses summarized above (which related to five U.S. Government agency bonds, fourteen mortgage-backed securities, three corporate bonds and eight state and political subdivision securities, compared to five U.S. Government agency bonds, fourteen mortgage-backed securities, six corporate bonds, eight state and political subdivision bonds, and one certificate of deposit as of December 31, 2016) are temporary in nature since they are not related to the underlying credit quality of the issuer.  The Company does not intend to sell these securities and it is not more-likely-than-not that the Company would be required to sell these securities prior to the anticipated recovery of the remaining amortized cost.  Management believes that the losses above are primarily related to the change in market interest rates. Accordingly, the Company has not recognized any other-than-temporary impairment loss on these securities.
14


Note 5 - Loans Receivable and Allowance for Credit Losses
The composition of loans receivable at March 31, 2017 and December 31, 2016 was as follows:

(In Thousands)
 
March 31,
2017
   
December 31,
2016
 
       
Residential mortgage:
           
One-to-four family
 
$
160,153
   
$
160,534
 
Home equity
   
30,493
     
32,262
 
                 
Total residential mortgages
   
190,646
     
192,796
 
                 
Commercial loans:
               
 Commercial and multi-family real estate
   
141,193
     
124,656
 
 Construction
   
31,978
     
16,554
 
 Commercial and industrial
   
54,887
     
45,246
 
                 
Total commercial loans
   
228,058
     
186,456
 
                 
Consumer:
   
394
     
446
 
                 
Total loans receivable
   
419,098
     
379,698
 
                 
Less:
               
Loans in process
   
15,394
     
6,557
 
Deferred loan fees
   
631
     
658
 
Allowance for loan losses
   
4,626
     
4,476
 
                 
Total adjustments
   
20,651
     
11,691
 
                 
Loans receivable, net
 
$
398,447
   
$
368,007
 

Allowance for Loan Losses
The allowance calculation methodology includes segregation of the total loan portfolio into segments. The Company's loans receivable portfolio is comprised of the following segments: residential mortgage, commercial real estate, construction, commercial and industrial and consumer.  Some segments of the Company's loan receivable portfolio are further disaggregated into classes which allow management to more accurately monitor risk and performance.
The residential mortgage loan segment is disaggregated into two classes: one-to-four family loans, which are primarily first liens, and home equity loans, which consist of first and second liens.  The commercial real estate loan segment includes owner and non-owner occupied loans which have medium risk based on historical experience with these types of loans.  The construction loan segment is further disaggregated into two classes: one-to-four family owner-occupied, which includes land loans, whereby the owner is known and there is less risk, and other, whereby the property is generally under development and tends to have more risk than the one-to-four family owner-occupied loans.  The commercial and industrial loan segment consists of loans made for the purpose of financing the activities of commercial customers. The majority of commercial and industrial loans are secured by real estate and thus carry a lower risk than traditional commercial and industrial loans.  The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.
15

Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative factors.  These qualitative risk factors include:

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

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

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


 
16


Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
The following tables provide an analysis of the allowance for loan losses and the loan receivable balances, by portfolio segment segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2017 and 2016:

 
 
Three Months Ended March 31, 2017
 
 (In Thousands)
 
Residential
Mortgage
   
Commercial and
Multi-Family
Real Estate
   
Construction
   
Commercial and
Industrial
   
Consumer
   
Unallocated
   
Total
 
                                           
Allowance for loan losses:
                                         
Balance, beginning
 
$
1,808
   
$
1,441
   
$
248
   
$
882
   
$
6
   
$
91
   
$
4,476
 
   Provisions (credits)
   
(23
)
   
28
     
91
     
141
     
2
     
(44
)
   
195
 
   Loans charged-off
   
(2
)
   
(43
)
   
     
(1
)
   
(1
)
   
     
(47
)
   Recoveries
   
2
     
     
     
     
     
     
2
 
Balance, ending
 
$
1,785
   
$
1,426
   
$
339
   
$
1,022
   
$
7
   
$
47
   
$
4,626
 
                                                         
Period-end allowance allocated to:
                                                       
Loans-  individually evaluated for impairment
 
$
100
   
$
   
$
   
$
92
   
$
   
$
   
$
192
 
Loans-  collectively evaluated for impairment
   
1,685
     
1,426
     
339
     
930
     
7
     
47
     
4,434
 
Ending balance
 
$
1,785
   
$
1,426
   
$
339
   
$
1,022
   
$
7
   
$
47
   
$
4,626
 
                                                         
Period-end loan balances evaluated for:
                                                       
Loans-  individually evaluated for impairment
 
$
14,427
   
$
1,510
   
$
   
$
371
   
$
   
$
   
$
16,308
 
Loans-  collectively evaluated for impairment
   
176,065
     
139,390
     
16,493
     
54,422
     
395
     
     
386,765
 
Ending balance
 
$
190,492
   
$
140,900
   
$
16,493
   
$
54,793
   
$
395
   
$
   
$
403,073
 
                                                         


 
17


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

 
 
Three Months Ended March 31, 2016
 
 (In Thousands)
 
Residential
Mortgage
   
Commercial and
Multi-Family
Real Estate
   
Construction
   
Commercial and
Industrial
   
Consumer
   
Unallocated
   
Total
 
                                           
Allowance for loan losses:
                                         
Balance, beginning
 
$
1,927
   
$
1,015
   
$
143
   
$
235
   
$
9
   
$
273
   
$
3,602
 
   Provisions (credits)
   
32
     
69
     
10
     
42
     
(1
)
   
(22
)
   
130
 
   Loans charged-off
   
(64
)
   
     
     
     
(2
)
   
     
(66
)
   Recoveries
   
4
     
     
     
     
1
     
     
5
 
Balance, ending
 
$
1,899
   
$
1,084
   
$
153
   
$
277
   
$
7
   
$
251
   
$
3,671
 
                                                         
Period-end allowance allocated to:
                                                       
Loans-  individually evaluated for impairment
   
   
$
   
$
   
$
   
$
   
$
   
$
 
Loans-  collectively evaluated for impairment
   
1,899
     
1,084
     
153
     
277
     
7
     
251
     
3,671
 
Ending balance
   $
1,899
   
$
1,084
   
$
153
   
$
277
   
$
7
   
$
251
   
$
3,671
 
                                                         
Period-end loan balances evaluated for:
                                                       
Loans-  individually evaluated for impairment
   
14,890
   
$
1,209
   
$
   
$
553
   
$
   
$
   
$
16,652
 
Loans-  collectively evaluated for impairment
   
175,151
     
63,857
     
7,511
     
10,842
     
371
     
     
257,732
 
Ending balance
   $
190,041
   
$
65,066
   
$
7,511
   
$
11,395
   
$
371
   
$
   
$
274,384
 
                                                         

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


 
18


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

The following table represents the classes of the loans receivable portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2017 and December 31, 2016:

(In Thousands)
 
As of  March 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(1)
   
Total Loans
Receivables
 
       
Residential Mortgage
                                         
One-to-four family
 
$
1,079
   
$
567
   
$
   
$
1,646
   
$
152,038
   
$
6,321
   
$
160,005
 
Home equity
   
742
     
496
     
34
     
1,272
     
29,096
     
119
     
30,487
 
Commercial and multi-family real estate
   
373
     
     
     
373
     
139,777
     
750
     
140,900
 
Construction
   
     
1,182
     
     
1,182
     
15,311
     
     
16,493
 
Commercial and industrial
   
     
     
     
     
54,578
     
215
     
54,793
 
Consumer
   
2
     
1
     
     
3
     
392
     
     
395
 
Total
 
$
2,196
   
$
2,246
   
$
34
   
$
4,476
   
$
391,192
   
$
7,405
   
$
403,073
 

(1)
Nonaccrual loans at March 31, 2017, included $4,820,000 that were 90 days or more delinquent, $277,000 that were 60-89 days delinquent, $507,000 that were 30-59 days delinquent, and $1,801,000 that were current or less than 30 days delinquent.


(In Thousands)
 
 
As of  December 31, 2016
 
30-59 Days Past Due and Still Accruing
   
60-89 Days Past Due and Still Accruing
   
Greater than 90 Days and Still Accruing
   
Total
Past Due and Still Accruing
   
Accruing
Current
Balances
   
Nonaccrual
Loans (1)
   
Total Loans
Receivables
 
       
Residential Mortgage
                                         
One-to-four family
 
$
2,433
   
$
1,944
   
$
   
$
4,377
   
$
150,260
   
$
5,744
   
$
160,381
 
Home equity
   
591
     
34
     
     
625
     
31,500
     
126
     
32,251
 
Commercial and multi-family real estate
   
374
     
     
     
374
     
123,182
     
760
     
124,316
 
Construction
   
     
     
     
     
9,934
     
     
9,934
 
Commercial and industrial
   
     
     
     
     
44,805
     
350
     
45,155
 
Consumer
   
     
     
     
     
446
     
     
446
 
Total
 
$
3,398
   
$
1,978
   
$
   
$
5,376
   
$
360,127
   
$
6,980
   
$
372,483
 

(1)
Nonaccrual loans at December 31, 2016, included $5,521,000 that were 90 days or more delinquent, $30,000 that were 60-89 days delinquent, $964,000 that were 30-59 days delinquent, and $464,000 that were current or less than 30 days delinquent.

Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.

19


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

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

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

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

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

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

March 31, 2017
(In thousands)
 
Recorded
Investment
   
Loans with
No Related
Reserve
   
Loans with
Related
Reserve
   
Related
Reserve
   
Contractual
Principal
Balance
   
Average
Loan
Balances
 
                                     
Residential mortgage
                                   
      One-to-four family
 
$
13,095
   
$
11,194
   
$
1,901
   
$
100
   
$
13,196
   
$
12,802
 
      Home equity
   
1,332
     
1,332
     
-
     
-
     
1,339
     
1,322
 
                                                 
Commercial and multi-family real estate
   
1,510
     
1,510
     
-
     
-
     
1,581
     
1,519
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial and industrial
   
371
     
218
     
153
     
92
     
371
     
441
 
                                                 
Consumer
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
16,308
   
$
14,254
   
$
2,054
   
$
192
   
$
16,487
   
$
16,084
 


 
20


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

December 31, 2016
(In thousands)
 
Recorded
Investment
   
Loans with
No Related
Reserve
   
Loans with
Related
Reserve
   
Related
Reserve
   
Contractual
Principal
Balance
   
Average
Loan
Balances
 
                                     
Residential mortgage
                                   
      One-to-four family
 
$
12,509
   
$
10,395
   
$
2,114
   
$
101
   
$
12,891
   
$
12,795
 
      Home equity
   
1,311
     
1,311
     
-
     
-
     
1,401
     
1,981
 
                                                 
Commercial and multi-family real estate
   
1,529
     
1,529
     
-
     
-
     
2,149
     
1,278
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial and industrial
   
511
     
357
     
154
     
102
     
961
     
548
 
                                                 
Consumer
   
-
     
-
     
-
     
-
     
-
     
1
 
Total
 
$
15,860
   
$
13,592
   
$
2,268
   
$
203
   
$
17,402
   
$
16,603
 

As of March 31, 2017 and December 31, 2016, impaired loans listed above include $11.1 million and $10.7 million, respectively, of loans modified in troubled debt restructurings ("TDR") and as such are considered impaired under GAAP.  As of March 31, 2017 and December 31, 2016, $8.5 million, 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.

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" have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.
8: "Doubtful" have all the weaknesses inherent in loans classified "Substandard" with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. 
9: "Loss" are considered uncollectible and subsequently charged off.


 
21

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

The following table presents the classes of the loans receivable portfolio summarized by the aggregate "Pass" and the criticized categories of "Special Mention", "Substandard", "Doubtful" and "Loss" within the internal risk rating system as of March 31, 2017 and December 31, 2016:

 (In Thousands)
 As of March 31, 2017
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
       
Commercial and multi-family real estate
 
$
139,404
   
$
   
$
1,496
   
$
   
$
   
$
140,900
 
Construction
   
15,988
     
506
     
     
     
     
16,494
 
Commercial and industrial
   
54,201
     
198
     
394
     
     
     
54,793
 
 
                                               
Total
 
$
209,593
   
$
704
   
$
1,890
   
$
   
$
   
$
212,187
 


 (In Thousands)
As of December 31, 2016
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
       
Commercial and multi-family real estate
 
$
122,804
   
$
   
$
1,512
   
$
   
$
   
$
124,316
 
Construction
   
8,759
     
1,175
     
     
     
     
9,934
 
Commercial and industrial
   
44,537
     
86
     
532
     
     
     
45,155
 
 
                                               
Total
 
$
176,100
   
$
1,261
   
$
2,044
   
$
   
$
   
$
179,405
 

Management further monitors the performance and credit quality of the retail 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
 
 
Mar. 31, 2017
   
Dec. 31, 2016
   
Mar. 31, 2017
   
Dec. 31, 2016
   
Mar. 31, 2017
   
Dec. 31, 2016
 
     
Nonperforming
 
$
6,440
   
$
5,870
   
$
   
$
   
$
6,440
   
$
5,870
 
                                                 
Performing
   
184,052
     
186,762
     
395
     
446
     
184,447
     
187,208
 
 
                                               
Total
 
$
190,492
   
$
192,632
   
$
395
   
$
446
   
$
190,887
   
$
193,078
 
22


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

Troubled Debt Restructurings
Loans whose terms are modified are classified as a TDR if, in connection with the modification, the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a reduction in interest rate below market rates given the associated credit risk, or an extension of a loan's stated maturity date or capitalization of interest and/or escrow. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for 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 $11.1 million at March 31, 2017 compared with $10.7 million at December 31, 2016.  The majority of the Company's TDRs are on accrual status and totaled $8.5 million at March 31, 2017 and December 31, 2016.  The total of TDRs on non-accrual status was $2.6 million at March 31, 2017 and $2.2 million at December 31, 2016.

For the three months ended March 31, 2017, the terms of five loans were modified into three TDRs. The Company refinanced and consolidated a one-to-four family and one home equity mortgage 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 two commercial and multi-family real estate loans into one TDR and extended the maturity date.
The following tables summarize by class loans modified into TDRs during three months ended March 31, 2017:

 
Three Months Ended March 31, 2017
 
 
Number of
Contracts
 
Pre-Modification
Outstanding Recorded
Investments
 
Post-Modification
Outstanding Recorded
Investments
 
     
(Dollars in thousands)
 
Residential Mortgage
           
One-to-four family
   
2
   
$
575
   
$
878
 
Home equity
   
2
     
99
     
-
 
Commercial and multi-family real estate
   
1
     
549
     
398
 
                         
   Total
   
5
   
$
1,223
   
$
1,276
 

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 months ended March 31, 2017 and 2016.

There was no Other Real Estate Owned ("OREO") at March 31, 2017 and December 31, 2016. We may obtain physical possession of residential real estate collateralizing consumer mortgage loans via foreclosure or in-substance repossession. As of March 31, 2017 and December 31, 2016, we had consumer loans with a carrying value of $2.4 million and $1.8 million, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.
 
 
23

Note 6 - Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and certain liabilities and to determine fair value disclosures.
FASB ASC Topic 820, Fair Market Value Disclosures ("ASC 820"), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
ASC 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

Level 3 Inputs – Unobservable inputs for determining the fair values 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.

24



Note 6 - Fair Value Measurements (Continued)
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 March 31, 2017 and December 31, 2016.

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

The following table summarizes those assets measured at fair value on a non-recurring basis as of March 31, 2017 and December 31, 2016:

 
March 31, 2017
 
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
 
 
(In thousands)
 
Impaired loans
 
$
   
$
   
$
1,862
   
$
1,862
 


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

 
25


Note 6 - Fair Value Measurements (Continued)

For Level 3 assets measured at fair value on a non-recurring basis as of March 31, 2017 and December 31, 2016, the significant unobservable inputs used in fair value measurements were as follows:

   
As of March 31, 2017
   
Fair Value
Estimate
 
Valuation
Techniques
 
Unobservable
Input
 
Range
(Weighted Average)
   
(Dollars in thousands)
Impaired loans
 
$
1,862
 
Appraisal of
 
    Appraisal
   
         
Collateral
 
    adjustments
 
2% to 23.0% (21.8%)
                
    Liquidation
   
                
    expense
 
10.9% to 28.0% (27.0%)



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

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

Disclosure about Fair Value of Financial Instruments
Fair value of a financial instrument is defined above. Significant estimates were used for the purposes of disclosing fair values. Estimated fair values have been determined using the best available data and estimation methodology suitable for each category of financial instruments. However, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful.

26


Note 6 - Fair Value Measurements (Continued)

 The following presents the carrying amount and the fair value as of March 31, 2017 and December 31, 2016, and placement in the fair value hierarchy of the Company's financial instruments which are carried on the consolidated statement of financial condition at cost and are not recorded at fair value on a recurring basis.  This table excludes financial instruments for which the carrying amount approximates fair value, which includes cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable, interest and non-interest bearing demand, savings and club deposits, and accrued interest payable.
 
   
Carrying
   
Fair
   
Level 1
   
Level 2
   
Level 3
 
As of March 31, 2017
 
Amount
   
Value
   
Inputs
   
Inputs
   
Inputs
 
         
(In thousands)
             
Financial assets:
                             
Securities held to maturity
 
$
42,716
     
42,614
   
$
   
$
42,614
   
$
 
Loans receivable (1)
   
398,447
     
400,366
     
     
     
400,366
 
                                         
Financial liabilities:
                                       
Certificate of deposits
   
107,896
     
109,875
     
     
109,875
     
 
Advances from Federal Home Loan Bank of New York
   
49,175
     
49,497
     
     
49,497
     
 
                                         
As of December 31, 2016
                                       
Financial assets:
                                       
Securities held to maturity
 
$
44,104
   
$
43,894
   
$
   
$
43,894
   
$
 
Loans receivable (1)
   
368,007
     
373,325
     
     
-
     
373,325
 
                                         
Financial liabilities:
                                       
Certificate of deposits
   
103,627
     
105,375
     
     
105,375
     
 
Advances from Federal Home Loan Bank of New York
   
22,675
     
23,087
     
     
23,087
     
 
                                         
(1) Includes impaired loans measured at fair value on a non-recurring basis as discussed above.
 

Methods and assumptions used to estimate fair values of financial instruments previously disclosed are as follows:
Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Securities Held to Maturity
The fair value for securities held to maturity is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using quoted market prices for similar securities.
Loans Receivable
The fair value of loans is based upon a multitude of sources, including assumed current market rates by category and the Company's current offering rates.  Both fixed and variable rate loan fair values are derived using a discounted cash flow methodology.  For variable rate loans, repricing terms, including next repricing date, repricing frequency and repricing rate are factored into the discounted cash flow formula.

27


Note 6 - Fair Value Measurements (Continued)

Federal Home Loan Bank of New York Stock
The carrying amount of Federal Home Loan Bank of New York stock approximates fair value since the Company is generally able to redeem this stock at par.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest receivable and payable approximate fair value due to the short term nature of these instruments.
Deposits
Fair values for demand and savings and club accounts are, by definition, equal to the amount payable on demand at the reporting date. Fair values of fixed-maturity certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments with similar maturities.
Advances from Federal Home Loan Bank of New York
Fair values of advances are estimated using discounted cash flow analyses, based on rates currently available to the Company for advances from the Federal Home Loan Bank of New York with similar terms and remaining maturities.
Off-Balance Sheet Financial Instruments
Fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms, and the present credit worthiness of the counterparties.  As of March 31, 2017 and December 31, 2016, the fair value of the commitments to extend credit was not considered to be material.
28

Note 7 – Retirement Plans
The Bank had a Directors' Retirement Plan, which provided that certain directors meeting specified age and service requirements may retire and continue to be paid. This plan is unfunded. Effective September 1, 2016, the Company terminated its Directors' Retirement Plan. The Company has between 12 and 24 months from the time the plan was terminated to distribute all funds to the plan's participants. The Company currently expects to distribute the funds in early 2018.
Periodic expenses for the Company's retirement plans, which include the Directors' Retirement Plan and the Executive Incentive Retirement Plan, were as follows:

   
Three Months Ended
 
   
March 31,
 
   
2017
   
2016
 
   
(In thousands)
 
             
Service cost
 
$
-
   
$
4
 
Interest cost
   
5
     
23
 
Amortization of unrecognized loss
   
51
     
3
 
Amortization of past service liability
   
-
     
(5
)
Net periodic benefit cost
 
$
56
   
$
25
 


 
The Company previously disclosed in its Form 10-K as of December 31, 2016 that it expected to contribute $84,000 to the Plan during the current fiscal year.  As of March 31, 2017, the Company contributed $21,000.

Note 8 – Reclassifications Out of Accumulated Other Comprehensive Income

Details about Accumulated
Other Comprehensive
Income (Loss) Components
 
Amount Reclassified
from Accumulated
Other Comprehensive
Income  (Loss) (a)
 
Amount Reclassified
from Accumulated
Other Comprehensive
Income (Loss) (a)
 
Affected Line Item
in the Consolidated
Statements of Comprehensive
Income (Loss)
   
Three Months Ended
 March 31, 2017
 
Three Months Ended
March 31, 2016
   
   
(In thousands)
   
Amortization of defined benefit pension items:
               
Prior service costs
   
$
 -
  
(b)
 
$
 5
 
 
Directors compensation
Unrecognized loss
   
 
 (51
(b)
 
 
(3 )  
Directors compensation
Total before tax
   
 
 (51    
 
 2      
Income tax expense
   
 
 20      
(1
)      
Total reclassifications for the period
   
$     
 (31
)
   
$
 1
 
   
 
(a)
Amounts in parenthesis indicate debits to profit/loss.
(b)
These accumulated other comprehensive components are included in the computation of net periodic pension cost.  (See Note 7 for additional details).


29


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
 
 
30

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

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

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

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

General. Total assets were $481.9 million at March 31, 2017, compared to $461.6 million at December 31, 2016, an increase of $20.3 million or 4.4%. During the period the Company experienced growth of $30.4 million or 8.3% in loans receivable, net. Federal Home Loan Bank of New York ("FHLBNY") stock increased $1.2 million, or 83.3%, due to increased borrowings during the period. The Company increased its FHLBNY overnight borrowings by $26.5 million, or 116.9%, during the quarter ended March 31, 2017. Offsetting these increases was a decrease in cash and cash equivalents of $10.1 million or 47.4%.

The ratio of average interest-earning assets to average-interest bearing liabilities was 126.2% for the three month period ended March 31, 2017 as compared to 134.7% for the three months ended March 31, 2016.

Loans. Loans receivable, net, increased by $30.4 million, or 8.3%, from $368.0 million at December 31, 2016 to $398.4 million at March 31, 2017.  Loans receivable, net represented 82.7% of the Company's assets at March 31, 2017 compared to 79.7% at December 31, 2016.  The Bank's commercial and multi-family real estate loan portfolio grew by $16.5 million, or 13.3%, since December 31, 2016; the commercial and industrial portfolio increased by $9.6 million on stronger loan demand, while the construction loan portfolio increased approximately $6.6 million as a result of loans utilizing funds to complete projects.  The residential mortgage portfolio decreased $2.2 million to $190.6 million from $192.8 million as of year-end 2016. All remaining portfolios were consistent with year-end levels.
 
 
31

 
Securities. Our portfolio of securities held to maturity totaled $42.7 million at March 31, 2017 as compared to $44.1 million at December 31, 2016.   Maturities, calls and principal repayments during the three months ended March 31, 2017 totaled $1.4 million and no purchases were made during the first three months of 2017.

Deposits. Total deposits at March 31, 2017 were $354.9 million compared with $362.3 million at December 31, 2016.  Overall, deposits decreased by $7.4 million, or 2.0%, with growth occurring in consumer deposits offset by a few large business relationships utilizing cash for their business needs. The Company experienced growth in the non-transactional categories with an increase of $4.3 million in certificates of deposit, $2.7 million in money market accounts, and $1.8 million in savings accounts while transactional accounts decreased $16.1 million.

Borrowings. Total borrowings at March 31, 2017 were $49.2 million compared with $22.7 million at December 31, 2016. Overnight advances with the Federal Home Loan Bank of New York at March 31, 2017 were $26.5 million while there were none at December 31, 2016.

Equity. Stockholders' equity was $74.1 million at March 31, 2017 compared to $73.2 million at December 31, 2016, an increase of $882,000, or 1.2%. The increase in shareholders' equity was primarily due to a $549,000 increase in retained earnings related to net income.

Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016
 
GeneralThe Company recorded net income of $549,000 for the three months ended March 31, 2017 compared with net income for the three-month period ended March 31, 2016 of $159,000, due to an increase of $807,000 in net interest income partially offset by increases of $65,000 in the provision for loan losses and $153,000 in non-interest expense.

 
32


 
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
 
   
03/31/17
   
03/31/16
 
Average Balance Sheet
(In Thousands)
 
Average
Balance
   
Interest
Income/
Expense
   
Yield
   
 
Average
Balance
   
Interest
Income/
Expense
   
Yield
 
Interest-earning assets:
                                   
Loans receivable
 
$
382,386
   
$
4,000
     
4.18
%
 
$
271,815
   
$
2,838
     
4.18
%
Securities held to maturity
   
43,285
     
251
     
2.32
     
76,932
     
431
     
2.24
 
Other interest-earning assets
   
11,335
     
42
     
1.48
     
8,430
     
29
     
1.38
 
Total interest-earning assets
   
437,006
     
4,293
     
3.93
     
357,177
     
3,298
     
3.69
 
Allowance for loan loss
   
(4,524
)
                   
(3,622
)
               
Non-interest-earning assets
   
28,367
                     
21,646
                 
Total non-interest-earning assets
   
23,843
                     
18,024
                 
Total Assets
 
$
460,849
                   
$
375,201
                 
                                                 
Interest-bearing liabilities:
                                               
NOW & money market
 
$
106,037
   
$
95
     
0.36
%
 
$
48,453
   
$
21
     
0.17
%
Savings and club deposits
   
103,774
     
58
     
0.22
     
102,445
     
56
     
0.22
 
Certificates of deposit
   
106,513
     
349
     
1.31
     
84,437
     
237
     
1.12
 
Total interest-bearing deposits
   
316,324
     
502
     
0.63
     
235,335
     
314
     
0.53
 
                                                 
Federal Home Loan Bank advances
   
29,992
     
196
     
2.61
     
29,754
     
196
     
2.63
 
Total interest-bearing liabilities
   
346,316
     
698
     
0.81
     
265,089
     
510
     
0.77
 
                                                 
Non-interest-bearing deposit
   
37,821
                     
29,621
                 
Other non-interest-bearing liabilities
   
2,789
                     
3,819
                 
Total Liabilities
   
386,926
                     
298,529
                 
                                                 
Equity
   
73,923
                     
76,672
                 
Total Liabilities and Equity
 
$
460,849
                   
$
375,201
                 
                                                 
Net Interest Spread
           
3,595
     
3.12
%
           
2,788
     
2.92
%
                                                 
Net Interest Margin
                   
3.29
%
                   
3.12
%
                                                 
Ratio of Interest Earning Assets to Interest Bearing Liabilities
   
126.19
%
                   
134.74
%
               
                                                 

The Company's net interest margin increased 17 basis points to 3.29% for the quarter ended March 31, 2017 compared to 3.12% for the quarter ended March 31, 2016. The yield on interest-earning assets increased 24 basis points year over year while the cost of interest-bearing liabilities increased four basis points. The increase in the yield on interest-earning assets was attributable to the change in our loan mix as the Company continued to increase its commercial real estate portfolio during the quarter. The
 
 
33

 
increase in the cost of interest-bearing liabilities was attributable to the increase in volume of certificates of deposit year over year.

Provision for Loan Losses.  The provision for loan losses increased by $65,000 to $195,000 for the three months ended March 31, 2017 compared to a provision of $130,000 for the three months ended March 31, 2016. The increased provision level during the current quarter period is attributable to the increased size of the loan portfolio at March 31, 2017 compared to March 31, 2016. The Company's management reviews the level of the allowance for loan losses on a quarterly basis based on a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions, (3) actual losses previously experienced, (4) the Company's level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable.  The Company had $7.4 million in nonperforming loans as of March 31, 2017 compared to $5.8 million as of March 31, 2016.  The allowance for loan losses to total loans ratio was 1.15% at March 31, 2017 compared to 1.32% at March 31, 2016, while the allowance for loan losses to non-performing loans ratio was 62.19% at March 31, 2017 compared to 63.82% at March 31, 2016.  Non-performing loans to total loans and net charge-offs to average loans outstanding ratios were at 1.84% and 0.05%, respectively, at and for the three months ended March 31, 2017 compared to 2.07% and 0.09% at and for the three months ended March 31, 2016.

Non-Interest Income. Non-interest income increased $46,000, or 32.6%, to $187,000 during the three months ended March 31, 2017 compared to $141,000 for the three months ended March 31, 2016. The increase was primarily attributable to an increase of $51,000, or 91.1%, in Bank Owned Life Insurance income year over year.

Non-Interest Expenses. During the three months ended March 31, 2017, non-interest expenses increased $153,000 to $2.7 million from $2.6 million for the three months ended March 31, 2016. The increase was attributable to increases in multiple expense categories. Director's compensation increased $73,000, or 70.1% due to the dissolution of the director retirement plan and the issuance of restricted stock and stock options that were not present in 2016. Professional services increased by $120,000 as the Company completed its transition to a hosted IT solution that was not present in 2016. Occupancy and Equipment expenses increased $60,000, or 18.0% primarily due to software depreciation expenses on the core system. Offsetting these increases were reductions in service bureau fees and the FDIC assessment of $165,000 and $38,000, respectively. These decreases are primarily related to a lower contract cost on our core system and a reduction in insurance rate due to a change the FDIC made in the third quarter of 2016.

Income Taxes. The income tax expense for the three months ended March 31, 2017 was $321,000 or 36.9% of the reported income before income taxes compared to tax expense of $76,000 or 32.3% of the reported income before income taxes for the three months ended March 31, 2016. The higher current period effective rate is due to a larger portion of pre-tax income coming from taxable sources.

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
 
 
34

 
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 March 31, 2017, the Bank had outstanding commitments to originate loans of $8.8 million, construction loans in process of $15.4 million, unused lines of credit of $48.7 million (including $34.2 million for commercial lines of credit and $12.1 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 March 31, 2017, totaled $52.7 million.

As of March 31, 2017, the Bank had contractual obligations related to the long-term operating leases for the three branch locations that it leases (Dewy Meadow, RiverWalk and Martinsville).

The Bank generates cash through deposits and/or borrowings from the FHLBNY to meet its day-to-day funding obligations when required.  At March 31, 2017, the total loans to deposits ratio was 112.3%. At March 31, 2017, the Bank's collateralized borrowing limit with the FHLBNY was $76.5 million, of which $49.2 million was outstanding. As of March 31, 2017, the Bank also had a $13.0 million unsecured line of credit with one financial institution that it could access if necessary.

Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of March 31, 2017, the Bank exceeded all applicable regulatory capital requirements.

35


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 March 31, 2017. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of March 31, 2017.

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


PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

There were no material pending legal proceedings at March 31, 2017 to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. 


ITEM 1A – RISK FACTORS

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


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

The Company did not repurchase any shares of its common stock during the quarter ended March 31, 2017.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable

ITEM 5 – OTHER INFORMATION

None

36


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
37


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 May 12, 2017
  /s/ Michael A. Shriner
   
Michael A. Shriner
   
President and Chief Executive Officer
     
     
Date May 12, 2017
  /s/ John S. Kaufman 
   
John S. Kaufman
   
Vice President and Chief Financial Officer



 
38