10-Q 1 f10q_06301.htm FORM 10-Q 6-30-16 - MSB FINANCIAL CORP.
 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
June 30, 2016
     
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 or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [  ]     No  [X]
 
The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: August 15, 2016:
     
$0.01 par value common stock 5,953,423 shares outstanding



MSB FINANCIAL CORP. AND SUBSIDIARIES

INDEX

   
Page
   
Number
PART I - FINANCIAL INFORMATION
   
     
Item 1:
Consolidated Financial Statements (Unaudited)
   
       
 
    Consolidated Statements of Financial Condition
   
 
    at June 30, 2016 and December 31, 2015
 
2
       
 
    Consolidated Statements of Comprehensive Income for the
   
 
    Three and Six Months Ended June 30, 2016 and 2015
 
3
       
 
    Consolidated Statements of Cash Flows for the Six Months
   
 
    Ended June 30, 2016 and 2015
 
5
       
 
Notes to Consolidated Financial Statements (Unaudited)
 
6
       
Item 2:
Management's Discussion and Analysis of
 
27
 
Financial Condition and Results of Operations
   
       
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
 
34
       
Item 4:
Controls and Procedures
 
34
     
     
PART II - OTHER INFORMATION
   
     
Item 1:
Legal Proceedings
 
34
       
Item 1A:
Risk Factors
 
34
       
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
 
34
       
Item 3:
Defaults Upon Senior Securities
 
35
       
Item 4:
Mine Safety Disclosures
 
35
       
Item 5:
Other Information
 
35
       
Item 6:
Exhibits
 
35
     
SIGNATURES
 
36
     
CERTIFICATIONS
   

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 
June 30,
December 31,
 
2016
2015
         
(Dollars in thousands, except per share amounts)
       
Cash and due from banks
$
1,581
$
2,219
Interest-earning demand deposits with banks
 
27,134
 
10,084
         
Cash and Cash Equivalents
 
28,715
 
12,303
         
Securities held to maturity (fair value of $54,337 and $78,400,
respectively)
 
53,428
 
78,995
Loans receivable, net of allowance for loan losses of $3,869 and
$3,602, respectively
 
292,568
 
262,312
Premises and equipment
 
8,160
 
8,118
Federal Home Loan Bank of New York stock, at cost
 
1,433
 
1,826
Bank owned life insurance
 
7,581
 
7,468
Accrued interest receivable
 
1,213
 
1,352
Other assets
 
2,810
 
3,316
         
Total Assets
$
395,908
$
375,690
         
Liabilities and Stockholders' Equity
       
Liabilities
       
Deposits:
       
Non-interest bearing
$
34,787
$
28,173
Interest bearing
 
258,830
 
234,425
         
Total Deposits
 
293,617
 
262,598
         
Advances from Federal Home Loan Bank of New York
 
22,675
 
32,675
Advance payments by borrowers for taxes and insurance
 
882
 
743
Other liabilities
 
3,351
 
3,311
         
Total Liabilities
 
320,525
 
299,327
         
Stockholders' Equity
       
Preferred stock, par value $0.01; 1,000,000 shares authorized; no shares issued or outstanding
 
-
 
-
Common stock, par value $0.01; 49,000,000 shares authorized;
       5,953,423 issued and outstanding
 
59
 
59
Paid-in capital
 
54,797
 
56,216
Retained earnings
 
22,591
 
22,209
Unallocated common stock held by ESOP (206,794 and 212,242 shares, respectively)
 
(1,984)
 
(2,042)
Accumulated other comprehensive loss
 
(80)
 
(79)
         
Total Stockholders' Equity
 
75,383
 
76,363
         
Total Liabilities and Stockholders' Equity
$
395,908
$
375,690
See notes to unaudited consolidated financial statements.
 
2



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

   
Three months ended
June 30,
   
Six months ended
June 30,
 
(Dollars in thousands, except per share amounts)
 
2016
   
2015
   
2016
   
2015
 
Interest Income:
                       
Loans receivable, including fees
 
$
3,082
   
$
2,578
   
$
5,920
   
$
5,086
 
Securities held to maturity
   
331
     
435
     
762
     
839
 
Other
   
40
     
20
     
69
     
42
 
Total Interest Income
   
3,453
     
3,033
     
6,751
     
5,967
 
                                 
Interest Expense
                               
Deposits
   
339
     
350
     
653
     
715
 
Borrowings
   
183
     
198
     
379
     
387
 
   Total Interest Expense
   
522
     
548
     
1,032
     
1,102
 
                                 
Net Interest Income
   
2,931
     
2,485
     
5,719
     
4,865
 
Provision (Credit) for Loan Losses
   
190
     
35
     
320
     
(17
)
Net Interest Income after Provision (Credit) for Loan Losses
   
2,741
     
2,450
     
5,399
     
4,882
 
                                 
Non-Interest Income
                               
Fees and service charges
   
97
     
90
     
170
     
174
 
Income from bank owned life insurance
   
57
     
56
     
113
     
109
 
Other
   
358
     
23
     
370
     
49
 
Total Non-Interest Income
   
512
     
169
     
653
     
332
 
                                 
Non-Interest Expenses
                               
Salaries and employee benefits
   
1,460
     
1,495
     
2,887
     
2,575
 
Directors compensation
   
124
     
111
     
227
     
224
 
Occupancy and equipment
   
348
     
316
     
682
     
643
 
Service bureau fees
   
292
     
149
     
505
     
293
 
Advertising
   
10
     
67
     
21
     
97
 
FDIC assessment
   
66
     
71
     
137
     
142
 
Professional services
   
373
     
196
     
612
     
368
 
Other
   
236
     
312
     
402
     
633
 
Total Non-Interest Expenses
   
2,909
     
2,717
     
5,473
     
4,975
 
                                 
Income (Loss) before Income Taxes
   
344
     
(98
)
   
579
     
239
 
Income Tax Expense (Benefit)
   
121
     
(65
)
   
197
     
56
 
Net Income (Loss)
 
$
223
   
$
(33
)
 
$
382
   
$
183
 
                                 
Earnings per share (2015 amounts restated):
                               
   Basic
 
$
0.04
   
$
(0.01
)
 
$
0.07
   
$
0.03
 
   Diluted
 
$
0.04
   
$
(0.01
)
 
$
0.07
   
$
0.03
 
                                 
See notes to unaudited consolidated financial statements.
 



3

Consolidated Statements of Comprehensive Income – (Continued)


   
Three months ended
June 30,
   
Six months ended
June 30,
 
(Dollars in thousands, except per share amounts)
 
2016
   
2015
   
2016
   
2015
 
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 $2, $3, $4 and $6, respectively
 
$
(2
)
 
$
(4
)
 
$
(5
)
 
$
(8
)
                                 
Actuarial loss arising during the period, net of tax of $-,
   $(3), $- and $(6), respectively
   
-
     
4
     
-
     
8
 
                                 
Reclassification adjustment for net actuarial loss (gain)
   included in net income, net of tax of $(2), $(4), $(3), and
   $(8), respectively
   
2
     
6
     
4
     
11
 
                                 
Total other comprehensive income (loss)
   
-
     
6
     
(1
)
   
11
 
                                 
  Comprehensive income (loss)
 
$
223
   
$
(27
)
 
$
381
   
$
194
 
   
See notes to unaudited consolidated financial statements.
 

4

MSB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

   

Six Months Ended
June 30,   
 
(In thousands)
 
2016
   
2015
 
       
Cash Flows from Operating Activities:
           
Net Income
 
$
382
   
$
183
 
Adjustments to reconcile net income to net
               
       cash provided by (used in) operating activities:
               
     Net accretion of securities premiums and discounts and deferred loan fees and costs
   
(44
)
   
(15
)
     Depreciation and amortization of premises and equipment
   
195
     
197
 
     Stock-based compensation and allocation of ESOP stock
   
106
     
92
 
     Provision (credit) for loan losses
   
320
     
(17
)
     Loss on sale of other real estate owned
   
-
     
131
 
     Income from bank owned life insurance
   
(113
)
   
(109
)
     Decrease (increase) in accrued interest receivable
   
139
     
(383
)
     Decrease (increase) in other assets
   
508
     
(640
)
      Increase in other liabilities
   
37
     
176
 
    Net Cash Provided by (Used in) Operating Activities
   
1,530
     
(385
)
                 
Cash Flows from Investing Activities:
               
     Activity in held to maturity securities:
               
      Purchases
   
-
     
(4,490
)
      Maturities, calls and principal repayments
   
25,516
     
1,357
 
    Net increase in loans receivable
   
(30,481
)
   
(6,387
)
    Purchased loan participations
   
-
     
(7,100
)
    Purchase of premises and equipment
   
(237
)
   
(95
)
    Redemption of Federal Home Loan Bank of NY stock
   
393
     
4
 
     Capitalized improvements of other real estate owned
   
-
     
(89
)
     Proceeds from sale of other real estate owned
   
-
     
947
 
    Net Cash Used in Investing Activities
   
(4,809
)
   
(15,853
)
                 
Cash Flows from Financing Activities:
               
     Net increase (decrease) in deposits
   
31,019
     
(719
)
      Increase in subscription payable
   
-
     
76,767
 
      Cash paid for options
           
(56
)
      Decrease in advances from FHLB of NY
   
(10,000
)
   
-
 
      Increase in advance payments by borrowers for taxes and insurance
   
139
     
163
 
      Purchase of common stock for equity plan
   
(1,467
)
   
-
 
    Net Cash Provided by Financing Activities
   
19,691
     
76,155
 
                 
    Net Increase in Cash and Cash Equivalents
   
16,412
     
59,917
 
Cash and Cash Equivalents – Beginning
   
12,303
     
7,519
 
Cash and Cash Equivalents – Ending
 
$
28,715
   
$
67,436
 
                 
Supplementary Cash Flows Information
               
Interest paid
 
$
1,039
   
$
1,102
 
Income taxes paid
   
68
     
-
 
See notes to unaudited consolidated financial statements.
5

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


Note 1 – Organization and Business

MSB Financial Corp. (the "Company") is a Maryland-chartered corporation organized in 2014 to be the successor to MSB Financial Corp., a federal corporation ("Old MSB") upon completion of the second-step conversion of Millington Bank (the "Bank") from the two-tier mutual holding company structure to the stock holding company structure. MSB Financial, MHC (the "MHC") was the former mutual holding company for Old MSB prior to completion of the second-step conversion.  In conjunction with the second-step conversion, each of the MHC and Old MSB ceased to exist.  The second-step conversion was completed on July 16, 2015 at which time the Company sold 3,766,592 shares of its common stock (including 150,663 shares purchased by the Bank's employee stock ownership plan) at $10.00 per share for gross proceeds of approximately $37.7 million. Expenses related to the stock offering totaled $1.5 million and were netted against proceeds. As part of the second-step conversion, each of the outstanding shares of common stock of Old MSB held by persons other than the MHC were converted into 1.1397 shares of Company common stock with cash paid in lieu of fractional shares.  As a result, a total of 2,187,242 shares were issued in the second-step conversion.  As a result of the second-step conversion, all share and per share information has subsequently been revised to reflect the 1.1397 exchange ratio unless otherwise noted.
The Company's principal business is the ownership and operation of the Bank. The Bank is a New Jersey-chartered stock savings bank and its deposits are insured by the Federal Deposit Insurance Corporation. The primary business of the Bank is attracting retail deposits from the general public and using those deposits together with funds generated from operations, principal repayments on securities and loans and borrowed funds, for its lending and investing activities. The Bank's loan portfolio primarily consists of one-to-four family and home equity residential loans, commercial loans, and construction loans. It also invests in U.S. government obligations and mortgage-backed securities. The Bank is regulated by the New Jersey Department of Banking and Insurance and the 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") 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 June 30, 2016, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

On August 12, 2016, the Company distributed $642,000 to the participants of the Executive Retirement Plan. This plan was terminated on July 1, 2015 and all expenses were accrued up through June 30, 2016 and disclosed in Note 7.


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
 
6

all information or notes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America ("GAAP").
In the opinion of management, all adjustments, consisting of only normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements have been made at June 30, 2016 and for the six months ended June 30, 2016 and 2015.  The results of operations for the six months ended June 30, 2016 are not necessarily indicative of the results which may be expected for an entire fiscal year or other interim periods.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.
A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses all available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the Bank's market area.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations.
Recent Accounting Pronouncements

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

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years
 
 
7

beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

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

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

In 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 the interim or annual period provided that the entire standard is adopted. We are currently evaluating the impact of the pending adoption of ASU 2016-13 on our consolidated financial statements.

Note 3 – Earnings Per Share

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,   
 
                         
(In Thousands, Except Per Share Data)
 
2016
   
2015
   
2016
   
2015
 
Numerator:
                       
Net income (loss)
 
$
223
   
$
(33
)
 
$
382
   
$
183
 
Denominator:
                               
Weighted average common shares
   
5,743
     
5,642
     
5,744
     
5,639
 
Dilutive potential common shares
   
78
     
-
     
74
     
15
 
     Weighted average fully diluted shares
   
5,821
     
5,642
     
5,818
     
5,654
 
Earnings per share:
                               
     Basic
 
$
0.04
   
$
(0.01
)
 
$
0.07
   
$
0.03
 
     Dilutive
 
$
0.04
   
$
(0.01
)
 
$
0.07
   
$
0.03
 
Outstanding common stock equivalents having no dilutive effect
   
-
     
308
     
-
     
308
 
 
 
8


 
Amounts shown above for weighted average shares and earnings per share for the periods ended June 30, 2015, have been restated to give effect to the second-step conversion completed in July 2015. (See Note 1 for additional details).

Note 4 - Securities Held to Maturity
The amortized cost of securities held to maturity and their estimated fair values as of June 30, 2016 and December 31, 2015 are summarized as follows:


   
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
June 30, 2016
 
(In Thousands)
 
                             
 U.S. Government agencies:
                           
Due after one year through five years
 
$
9,500
 
$
15
 
$
-
   
$
9,515
 
Due after five through ten years
   
1,000
   
-
   
-
     
1,000
 
Due after ten years
   
3,000
   
-
   
-
     
3,000
 
                             
     
13,500
   
15
   
-
     
13,515
 
                             
                             
Mortgage-backed securities
   
25,635
   
1,108
   
3
     
26,740
 
 
                           
Corporate bonds:
                           
Due within one year
   
2,510
   
8
   
1
     
2,517
 
Due after one year through five years
   
2,042
   
21
   
14
     
2,049
 
Due after five through ten years
   
1,000
   
-
   
22
     
978
 
Due after ten years
   
4,000
   
-
   
246
     
3,754
 
     
9,552
   
29
   
283
     
9,298
 
                             
State and political subdivisions:
                           
Due within one year
   
96
   
-
   
1
     
95
 
Due after one through five years
   
593
   
5
   
1
     
597
 
Due after five through ten years
   
712
   
18
   
-
     
730
 
     
1,401
   
23
   
2
     
1,422
 
                             
Certificates of deposit:
                           
Due within one year
   
735
   
-
   
-
     
735
 
Due after one year through five years
   
2,605
   
22
   
-
     
2,627
 
                             
     
3,340
   
22
   
-
     
3,362
 
                             
   
$
53,428
 
$
1,197
 
$
288
   
$
54,337
 
 
9

Note 4 - Securities Held to Maturity - Continued

   
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
December 31, 2015
 
(In Thousands)
 
                             
U.S. Government agencies:
                           
Due after one year through five years
 
$
18,000
 
$
4
 
$
142
   
$
17,862
 
Due after five through ten years
   
8,500
   
2
   
80
     
8,422
 
Due thereafter
   
11,000
   
-
   
285
     
10,715
 
     
37,500
   
6
   
507
     
36,999
 
                             
Mortgage-backed securities
   
          26,463  
   
     405  
   
       230  
     
         26,638  
 
                             
Corporate bonds:
                           
    Due within one year
   
503
   
2
   
-
     
505
 
    Due after one through five years
   
4,069
   
 21
   
4
     
4,086
 
Due after five through ten years
   
1,000
   
-
   
10
     
990
 
Due thereafter
   
4,000
   
-
   
289
     
3,711
 
     
9,572
   
23
   
303
     
9,292
 
                             
State and political subdivisions:
                           
     Due within one year
   
96
   
-
   
-
     
96
 
     Due after one through five years
   
596
   
-
   
2
     
594
 
     Due after five through ten years
   
713
   
   5
   
-
     
718
 
     
           1,405  
   
             5  
   
        2  
     
            1,408  
 
                             
Certificates of deposit:
                           
Due within one year
   
1,450
   
-
   
-
     
1,450
 
Due after one through five years
   
2,605
   
11
   
3
     
2,613
 
     
4,055
   
11
   
3
     
4,063
 
                             
   
$
78,995
 
$
450
 
$
1,045
   
$
78,400
 

All mortgage-backed securities owned at June 30, 2016 and December 31, 2015 have been issued by FNMA, FHLMC or GNMA and are secured by one-to-four family residential real estate. The amortized cost and estimated fair value of securities held to maturity at June 30, 2016 and December 31, 2015, as shown above, are reported by contractual maturity.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were no sales of securities held to maturity during the six months ended June 30, 2016 or 2015.  At June 30, 2016 and December 31, 2015, securities held to maturity with a fair value of approximately $1.0 million and $997,800, respectively, were pledged to secure public funds on deposit.


10

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 June 30, 2016 and December 31, 2015, and the length of time that such securities have been in an unrealized loss position:


   
Less than 12 Months
 
More than 12 Months
 
Total
 
   
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
 
Gross
Unrealized
Losses
 
   
(In thousands)
 
June 30, 2016:
                                     
Mortgage-backed
   securities
 
$
516
 
$
3
 
$
-
 
$
-
 
$
           516
 
$
3
 
Corporate bonds
   
2,967
   
37
   
3,754
   
246
   
6,721
   
283
 
State and political subdivisions
   
197
   
2
   
-
   
-
   
197
   
2
 
                                       
   
$
3,680
 
$
42
 
$
3,754
 
$
246
 
$
            7,434
 
$
288
 

               
   
Less than 12 Months
 
More than 12 Months
 
Total
 
   
Estimated Fair
Value
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
 
Gross
Unrealized
Losses
 
   
(In thousands)
 
December 31, 2015
                                     
U.S. Government
agencies
 
$
9,410
 
$
89
 
$
17,083
 
$
418
 
$
26,493
 
$
507
 
Mortgage-backed
   securities
   
12,312
   
173
   
2,602
   
57
   
14,914
   
230
 
Corporate bonds
   
5,208
   
300
   
504
   
3
   
5,712
   
303
 
State and political subdivisions
   
515
   
2
   
-
   
-
   
515
   
2
 
Certificates of deposit
   
932
   
3
   
-
   
-
   
932
   
3
 
                                       
   
$
28,377
 
$
567
 
$
20,189
 
$
478
 
$
48,566
 
$
1,045
 

At June 30, 2016, management concluded that the unrealized losses summarized above (which related to one mortgage-backed security, six corporate bonds and two state and political subdivision securities, compared to nineteen U.S. Government agency bonds, fifteen mortgage-backed securities, five corporate bonds, four state and political subdivision bonds, and four certificates of deposit as of December 31, 2015) are temporary in nature since they are not related to the underlying credit quality of the issuer.  The Company does not intend to sell these securities and it is not more-likely-than-not that the Company would be required to sell these securities prior to the anticipated recovery of the remaining amortized cost.  Management believes that the losses above are primarily related to the change in market interest rates. Accordingly, the Company has not recognized any other-than-temporary impairment loss on these securities.
11


Note 5 - Loans Receivable and Allowance for Credit Losses
The composition of loans receivable at June 30, 2016 and December 31, 2015 was as follows:

 
June 30,
2016
   
December
31, 2015
 
 
(In thousands)
 
Residential mortgage:
             
One-to-four family
$
157,777
   
$
154,624
 
Home equity
 
             35,033
     
         35,002
 
               
Total residential mortgage loans
 
192,810
     
189,626
 
               
 Commercial and multi-family real estate
 
             80,014
     
          59,642
 
 Construction
 
             12,523
     
          10,895
 
 Commercial and industrial
 
             15,597
     
          10,275
 
               
Total commercial loans
 
             108,134
     
          80,812
 
               
Total consumer loans
 
463
     
493
 
               
Loans receivable
 
301,407
     
270,931
 
               
Loans in process
 
(4,331
)
   
(4,600
)
Deferred loan fees
 
(639
)
   
(417
)
Allowance for loan losses
 
(3,869
)
   
(3,602
)
   
(8,839
)
   
(8,619
)
               
Loans receivable, net
$
292,568
   
$
262,312
 

Allowance for Loan Losses
The allowance calculation methodology includes segregation of the total loan portfolio into segments. The Company's loans receivable portfolio is comprised of the following segments: residential mortgage, commercial real estate, construction, commercial and industrial and consumer.  Some segments of the Company's loan receivable portfolio are further disaggregated into classes which allow management to more accurately monitor risk and performance.
The residential mortgage loan segment is disaggregated into two classes: one-to-four family loans, which are primarily first liens, and home equity loans, which consist of first and second liens.  The commercial real estate loan segment includes owner and non-owner occupied loans which have medium risk based on historical experience with these types of loans.  The construction loan segment is further disaggregated into two classes: one-to-four family owner-occupied, which includes land loans, whereby the owner is known and there is less risk, and other, whereby the property is generally under development and tends to have more risk than the one-to-four family owner-occupied loans.  The commercial and industrial loan segment consists of loans made for the purpose of financing the activities of commercial customers. The majority of commercial and industrial loans are secured by real estate and thus carry a lower risk than traditional commercial and industrial loans.  The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.
12

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.
13


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 June 30, 2016 and 2015:

 
 
 (in thousands)
Residential
 Mortgage
 
 
Commercial and
Multi-Family
Real Estate
 
 
Construction
 
 
Commercial and
Industrial
 
 
Consumer
 
 
Unallocated
 
 
Total
Three Months Ended June 30, 2016
                                         
                                           
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
$
1,899
 
 
$
1,084
 
 
$
153
 
 
$
277
 
 
$
7
 
 
$
251
 
 
$
3,671
 
   Provisions (credits)
 
(66)
     
238
     
10
     
37
     
9
     
(38)
     
190
 
   Loans charged-off
 
 
 
 
     
     
     
(1)
     
     
(1)
 
   Recoveries
 
9
 
 
 
     
     
     
     
     
9
 
Balance, ending
$
1,842
 
 
$
1,322
 
 
$
163
 
 
$
314
 
 
$
15
 
 
$
213
 
 
$
3,869
 
                                                       
Six Months Ended June 30, 2016
                                                     
                                                       
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
$
1,927
 
 
$
1,015
 
 
$
143
 
 
$
235
 
 
$
9
 
 
$
273
 
 
$
3,602
 
   Provisions (credits)
 
(34)
     
307
     
20
     
79
     
8
     
(60)
     
320
 
   Loans charged-off
 
(64)
 
 
 
     
     
     
(3)
     
     
(67)
 
   Recoveries
 
13
 
 
 
     
     
     
1
     
     
14
 
Balance, ending
$
1,842
 
 
$
1,322
 
 
$
163
 
 
$
314
 
 
$
15
 
 
$
213
 
 
$
3,869
 
                                                       
Period-end allowance allocated to:
                                                     
Loans  individually evaluated for impairment
$
   
$
   
$
   
$
   
$
5
   
$
   
$
5
 
Loans  collectively evaluated for impairment
 
1,842
     
1,322
     
163
     
314
     
10
     
213
     
3,864
 
Ending Balance
$
1,842
   
$
1,322
   
$
163
   
$
314
   
$
15
   
$
213
   
$
3,869
 
                                                       
Period-end loan balances evaluated for:
                                                     
Loans  individually evaluated for impairment
$
15,214
   
$
        1,193
   
$
   
$
544
   
$
5
   
$
   
$
16,956
 
Loans  collectively evaluated for impairment
 
177,286
     
78,705
     
8,141
     
14,891
     
458
     
     
279,481
 
Ending Balance
$
192,500
   
$
79,898
   
$
8,141
   
$
15,435
   
$
463
   
$
   
$
296,437
 
                                                       

14


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


 
 
 
 (in thousands)
 
Residential
 Mortgage
 
 
Commercial and
Multi-Family
Real Estate
 
 
Construction
 
 
Commercial and
Industrial
 
 
Consumer
 
 
Unallocated
 
 
Total
Three Months Ended June 30, 2015
                                           
                                             
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
 
$
2,025
 
 
$
899
 
 
$
327
 
 
$
308
 
 
$
6
 
 
$
12
 
 
$
3,577
 
   Provisions (credits)
 
 
(7)
 
 
 
115
     
(121)
     
60
     
(1)
     
(11)
     
35
 
   Loans charged-off
 
 
(15)
 
 
 
(7)
     
(21)
     
     
     
     
(43)
 
   Recoveries
 
 
2
 
 
 
     
12
     
     
     
     
14
 
Balance, ending
 
$
2,005
 
 
$
1,007
 
 
$
197
 
 
$
368
 
 
$
5
 
 
$
1
 
 
$
3,583
 
                                                         
Six Months Ended June 30, 2015
                                                       
                                                         
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
 
$
2,109
 
 
$
885
 
 
$
317
 
 
$
290
 
 
$
6
 
 
$
27
 
 
$
3,634
 
   Provisions (credits)
 
 
(86)
 
 
 
129
     
(111)
     
78
     
(1)
     
(26)
     
(17)
 
   Loans charged-off
 
 
(22)
 
 
 
(7)
     
  (21)
     
     
     
     
(50)
 
   Recoveries
 
 
4
 
 
 
     
12
     
     
     
     
16
 
Balance, ending
 
$
2,005
 
 
$
1,007
 
 
$
197
 
 
$
368
 
 
$
5
 
 
$
1
 
 
$
3,583
 
                                                         
Period-end allowance allocated to:
                                                       
Loans  individually evaluated for impairment
 
$
5
   
$
   
$
   
$
   
$
   
$
   
$
5
 
Loans  collectively evaluated for impairment
   
2,000
     
1,007
     
197
     
368
     
5
     
1
     
3,578
 
Ending Balance
 
$
2,005
   
$
1,007
   
$
197
   
$
368
   
$
5
   
$
1
   
$
3,583
 
                                                         
Period-end loan balances evaluated for:
                                                       
Loans  individually evaluated for impairment
 
$
15,690
   
$
        1,847
   
$
500
   
$
719
   
$
   
$
   
$
18,756
 
Loans  collectively evaluated for impairment
   
167,083
     
45,012
     
6,454
     
10,278
     
1,013
     
     
229,840
 
Ending Balance
 
$
182,773
   
$
46,859
   
$
6,954
   
$
10,997
   
$
1,013
   
$
   
$
248,596
 
                                                         

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.
 
15

 
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 June 30, 2016 and December 31, 2015:

As of  June 30, 2016
 
30-59 Days Past Due and Still Accruing
 
 
60-89 Days Past Due and Still Accruing
 
 
Greater than 90 Days and Still Accruing
 
 
Total
Past Due and Still Accruing
 
 
Accruing
Current
Balances
 
 
Nonaccrual
Loans(1)
 
 
Total Loans
Receivables
 
   
(In thousands)
 
Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
 
$
1,517
 
 
 $
2,586
 
 
 $
654
 
 
 $
4,757
 
 
$
148,195
 
 
$
4,527
 
 
$
157,479
 
Home equity
 
 
510
 
 
 
138
 
 
 
110
 
 
 
758
 
 
 
33,356
 
 
 
907
 
 
 
35,021
 
Commercial and multi-family real estate
 
 
 
 
 
412
 
 
 
 
 
 
412
 
 
 
78,688
 
 
 
798
 
 
 
79,898
 
Construction
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       One-to-four family
       owner-occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,955
 
 
 
 
 
 
3,955
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4,186
 
 
 
 
 
 
4,186
 
Commercial and industrial
 
 
420
 
 
 
 
 
 
 
 
 
420
 
 
 
14,596
 
 
 
419
 
 
 
15,435
 
Consumer
 
 
5
 
 
 
4
 
 
 
 
 
 
9
 
 
 
449
 
 
 
5
 
 
 
463
 
Total
 
$
2,452
 
 
$
3,140
 
 
$
764
 
 
$
6,356
 
 
$
283,425
 
 
$
6,656
 
 
$
296,437
 

(1)
Nonaccrual loans at June 30, 2016, included $1,669,000 that were 90 days or more delinquent, $461,000 that were 60-89 days delinquent, none that were 30-59 days delinquent, and $4,526,000 that were current or less than 30 days delinquent.



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

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

16

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

Impaired Loans

Management evaluates individual loans in all of the loan segments (including loans in the residential mortgage and consumer segments) for possible impairment- if the loan is either on nonaccrual status or is risk rated Substandard or worse or has been modified in a troubled debt restructuring.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Once the determination has been made that a loan is impaired, impairment is measured by comparing the recorded investment in the loan to one of the following: (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 June 30, 2016 and December 31, 2015 and the average balances of such loans for the six months and year, respectively, then ended:

June 30, 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
 
$
12,861
   
$
12,861
   
$
-
   
$
-
   
$
13,208
   
$
12,754
 
      Home equity
   
2,353
     
2,353
     
-
     
-
     
2,442
     
2,365
 
Commercial and multi-family real estate
   
1,193
     
1,193
     
-
     
-
     
1,766
     
1,209
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial and industrial
   
544
     
544
     
-
     
-
     
1,146
     
584
 
Consumer
   
5
     
-
     
5
     
5
     
5
     
2
 
Total
 
$
16,956
   
$
16,951
   
$
5
   
$
5
   
$
18,567
   
$
16,914
 
 
 
17


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

December 31, 2015
(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
 
$
12,991
   
$
12,895
   
$
96
   
$
3
   
$
13,703
   
$
14,109
 
      Home equity
   
2,261
     
2,261
     
-
     
-
     
2,353
     
1,360
 
                                                 
Commercial and multi-family real estate
   
1,226
     
1,226
     
-
     
-
     
1,780
     
1,671
 
Construction
                                               
        One-to-four family owner-occupied
   
-
     
-
     
-
     
-
     
-
     
-
 
        Other
   
-
     
-
     
-
     
-
     
-
     
376
 
Commercial and industrial
   
655
     
655
     
-
     
-
     
1,251
     
708
 
                                                 
Consumer
   
-
     
-
     
-
     
-
     
-
     
1
 
Total
 
$
17,133
   
$
17,037
   
$
96
   
$
3
   
$
19,087
   
$
18,225
 

As of June 30, 2016 and December 31, 2015, impaired loans listed above include $12.0 million and $15.1 million, respectively, of loans previously modified in troubled debt restructurings ("TDRs") and as such are considered impaired under GAAP.  As of June 30, 2016 and December 31, 2015, $9.6 million and $11.0 million, respectively, of these loans have been performing in accordance with their modified terms for an extended period of time and as such were removed from non-accrual status and considered performing.

Interest income of $153,000 and $183,000 was recognized on impaired loans during the three months ended June 30, 2016 and 2015. The average balance of impaired loans for the three months ended June 30, 2016 and June 30, 2015 were $16.8 million and $18.9 million, respectively. During the six months ended June 30, 2016 and 2015, interest income of $318,000 and $385,000, respectively, was recognized on impaired loans. The average balance of impaired loans for the six months ended June 30, 2015 was $18.8 million.

Credit Quality Indicators

Management uses an eight point internal risk rating system to monitor the credit quality of the loans in the Company's commercial real estate, construction and commercial and industrial loan segments.  The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually or when credit deficiencies, such as delinquent loan payments, arise. The criticized rating categories utilized by management generally follow bank regulatory definitions. The first six risk rating categories are considered not criticized, and are aggregated as "Pass" rated.  The "Special Mention" category includes assets that are currently protected, but are potentially weak, resulting in increased credit risk and deserving management's close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified "Substandard" have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified "Doubtful" have all the weaknesses inherent in loans classified "Substandard" with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a "Loss" are considered uncollectible and subsequently charged off.
18


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 June 30, 2016 and December 31, 2015:

  As of June 30, 2016
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
   
(In thousands)
 
Commercial and multi-family real estate
 
$
78,314
   
$
412
   
$
1,172
   
$
   
$
   
$
79,898
 
Construction
                                               
One-to-four family owner-occupied
   
3,955
     
     
     
     
     
3,955
 
Other
   
4,186
     
     
     
     
     
4,186
 
Commercial and industrial
   
14,883
     
90
     
462
     
     
     
15,435
 
 
                                               
Total
 
$
101,338
   
$
502
   
$
1,634
   
$
   
$
   
$
103,474
 


  As of December 31, 2015
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
   
(In thousands)
 
Commercial and multi-family real estate
 
$
57,863
   
$
425
   
$
1,200
   
$
   
$
   
$
59,488
 
Construction
                                               
One-to-four family owner-occupied
   
2,663
     
     
     
     
     
2,663
 
Other
   
3,581
     
     
     
     
     
3,581
 
Commercial and industrial
   
9,480
     
94
     
698
     
     
     
10,272
 
 
                                               
Total
 
$
73,587
   
$
519
   
$
1,898
   
$
   
$
   
$
76,004
 

Management 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. 


 
 
Residential mortgage
 
 
 
Consumer
 
 
 
Total Residential and Consumer
 
   
Jun. 30,
2016
   
Dec. 31,
2015
   
Jun. 30,
2016
   
Dec. 31,
2015
   
Jun. 30,
2016
   
Dec. 31,
2015
 
   
(In thousands)
 
Nonperforming
 
$
6,198
 
 
$
4,832
 
 
$
5
 
 
$
 
 
$
6,203
 
 
$
4,832
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
 
 
186,302
 
 
 
184,585
 
 
 
458
 
 
 
493
 
 
 
186,760
 
 
 
185,078
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
192,500
 
 
$
189,417
 
 
$
463
 
 
$
493
 
 
$
192,963
 
 
$
189,910
 
19

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

Troubled Debt Restructurings

Loans the terms of which are modified are classified as a TDR if, in connection with the modification, the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a reduction in interest rate below market rates given the associated credit risk, or an extension of a loan's stated maturity date or capitalization of interest and/or escrow. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for 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, are considered in the determination of an appropriate level of allowance for loan losses.

The recorded investment balance of TDRs totaled $12.0 million at June 30, 2016 compared with $15.1 million at December 31, 2015.  The majority of the Company's TDRs are on accrual status. Accruing TDRs totaled $9.6 million at June 30, 2016 versus $11.0 million at December 31, 2015.  The total of TDRs on non-accrual status was $2.4 million at June 30, 2016 and $4.1 million at December 31, 2015.

For the three months ended June 30, 2016, the Company did not modify any loans as a TDR. For the three months ended June 30, 2015, the Company modified a single one-to-four family mortgage loan with a pre-modification and post-modification balance of $237,000. A twelve month period with a lower interest rate and payment was granted after which the loan returns to contractual terms.

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

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

There was no Other Real Estate Owned ("OREO") at June 30, 2016 and December 31, 2015. We may obtain physical possession of residential real estate collateralizing consumer mortgage loans via foreclosure or in-substance repossession. At June 30, 2016 and December 31, 2015, we had consumer loans with a carrying value of $2.4 and $1.8 million, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.
20


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.
 
21

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Assets Measured at Fair Value on a Recurring Basis
The Bank did not have any financial assets measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015.

Assets Measured at Fair Value on a Non-Recurring Basis
Certain financial and non-financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The following table summarizes those assets measured at fair value on a non-recurring basis as of June 30, 2016 and December 31, 2015:

 
June 30, 2016
 
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
 
 
(In thousands)
 
Impaired loans
 
$
   
$
   
$
   
$
 

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


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


   
As of December 31, 2015
 
   
Fair Value
Estimate
 
Valuation
Techniques
Unobservable
Input
 
Range (Weighted
Average)
 
   
(Dollars in thousands)
 
Impaired loans
 
$
525
 
Appraisal of
collateral
    Appraisal
adjustments
  0% (0%)  
              
    Liquidation
       
              
    expense
 
10.0% to 26.1% (13.0%)
 

An impaired loan is measured for impairment at the time the loan is identified as impaired.  Loans are considered impaired when based on current information and events it is probable that payments of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  The Company's impaired loans are generally collateral dependent and, as such, are carried at the lower of
 
22

cost or estimated fair value less estimated selling costs.  Fair values are estimated through current appraisals and adjusted as necessary to reflect current market conditions and as such are classified as Level 3.

Disclosure about Fair Value of Financial Instruments
Fair value of a financial instrument is defined above. Significant estimates were used for the purposes of disclosing fair values. Estimated fair values have been determined using the best available data and estimation methodology suitable for each category of financial instruments. However, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful.
The following presents the carrying amount and the fair value as of June 30, 2016 and December 31, 2015, and placement in the fair value hierarchy of the Company's financial instruments which are carried on the consolidated statement of financial condition at cost and are not recorded at fair value on a recurring basis.  This table excludes financial instruments for which carrying amount approximates fair value, which includes cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable, interest and non-interest bearing demand, savings and club deposits, and accrued interest payable.
   
Carrying
   
Fair
   
Level 1
   
Level 2
   
Level 3
 
As of June 30, 2016
 
Amount
   
Value
   
Inputs
   
Inputs
   
Inputs
 
         
(In thousands)
             
Financial assets:
                             
Securities held to maturity
 
$
53,428
   
$
54,337
   
$
-
   
$
54,337
   
$
-
 
Loans receivable (1)
   
292,568
     
298,694
     
-
     
-
     
298,694
 
                                         
Financial liabilities:
                                       
Certificate of deposits
   
86,307
     
87,290
     
-
     
87,290
     
-
 
Advances from Federal Home Loan Bank of New York
   
22,675
     
23,400
     
-
     
23,400
     
-
 
                                         
As of December 31, 2015
                                       
                                         
Financial assets:
                                       
Securities held to maturity
 
$
78,995
   
$
78,400
   
$
-
   
$
78,400
   
$
-
 
Loans receivable (1)
   
262,312
     
264,001
     
-
     
-
     
264,001
 
                                         
Financial liabilities:
                                       
Certificate of deposits
   
85,408
     
86,241
     
-
     
86,241
     
-
 
Advances from Federal Home Loan Bank of New York
   
32,675
     
33,428
     
-
     
33,428
     
-
 
                                         
(1) Includes impaired loans measured at fair value on a non-recurring basis as discussed above.
 


23


Methods and assumptions used to estimate fair values of financial instruments previously disclosed are as follows:
Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Securities Held to Maturity
The fair value for securities held to maturity is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using quoted market prices for similar securities.
Loans Receivable
The fair value of loans is based upon a multitude of sources, including assumed current market rates by category and the Company's current offering rates.  Both fixed and variable rate loan fair values are derived using a discounted cash flow methodology.  For variable rate loans, repricing terms, including next repricing date, repricing frequency and repricing rate are factored into the discounted cash flow formula.
Federal Home Loan Bank of New York Stock
The carrying amount of Federal Home Loan Bank of New York stock approximates fair value since the Company is generally able to redeem this stock at par.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest receivable and payable approximate fair value due to the short term nature of these instruments.
Deposits
Fair values for demand and savings and club accounts are, by definition, equal to the amount payable on demand at the reporting date. Fair values of fixed-maturity certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments with similar maturities.
Advances from Federal Home Loan Bank of New York
Fair values of advances are estimated using discounted cash flow analyses, based on rates currently available to the Company for advances from the Federal Home Loan Bank of New York with similar terms and remaining maturities.
Off-Balance Sheet Financial Instruments
Fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms, and the present credit worthiness of the counterparties.  As of June 30, 2016 and December 31, 2015, the fair value of the commitments to extend credit was not considered to be material.
24

Note 7 – Retirement Plans

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

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(In thousands)
 
                         
Service cost
 
$
3
   
$
3
   
$
7
   
$
7
 
Interest cost
   
32
     
19
     
55
     
39
 
Amortization of unrecognized loss (gain)
   
4
     
10
     
7
     
19
 
Amortization of past service liability
   
(5
)
   
(7
)
   
(10
)
   
(14
)
Net periodic benefit cost
 
$
34
   
$
25
   
$
59
   
$
51
 


The Company previously disclosed in its Form 10-K for the year ended December 31, 2015 that it expected to contribute $124,000 to the Plan during the current fiscal year.  As of June 30, 2016, the Company contributed $61,000.


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
June 30, 2016
 
Six Months Ended
June 30, 2016
   
   
(In thousands)
   
Amortization of defined benefit pension items:
               
Prior service costs
   
                        $       4
(b)
 
           $           9
 
Directors compensation
Unrecognized loss
   
         (4)
(b)
 
                       (7)
 
Directors compensation
Total before tax
   
           -  
   
                        2
   
Income tax expense
   
             -    
   
                       (1)
   
Total reclassifications for the period
   
    $       -    
   
           $           1
   


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
June 30, 2015
 
Six Months Ended
June 30, 2015
   
   
(In thousands)
   
Amortization of defined benefit pension items: