10-Q 1 f10q_093016-5468.htm FORM 10-Q 9-30-16 - 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
September 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: November 14, 2016:
     
$0.01 par value common stock 5,711,044 shares outstanding



MSB FINANCIAL CORP. AND SUBSIDIARIES

INDEX

   
Page
   
Number
PART I - FINANCIAL INFORMATION
   
     
Item 1:
Consolidated Financial Statements (Unaudited)
   
       
 
Consolidated Statements of Financial Condition
   
 
    at September 30, 2016 and December 31, 2015
 
2
       
 
Consolidated Statements of Operations for the
   
 
    Three and Nine Months Ended September 30, 2016 and 2015
 
3
       
  Consolidated Statements of Comprehensive Income for the     
 
 Three and Nine Months Ended September 30, 2016 and 2015
 
       
 
Consolidated Statement of Changes in Stockholders' Equity
   
 
    at September 30, 2016
 
5
       
 
Consolidated Statements of Cash Flows for the Nine Months
   
 
    Ended September 30, 2016 and 2015
 
6
       
 
Notes to Consolidated Financial Statements (Unaudited)
 
7
       
Item 2:
Management's Discussion and Analysis of
 
29
 
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
 
37
       
Item 4:
Mine Safety Disclosures
 
37
       
Item 5:
Other Information
 
37
       
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)

 
September 30,
December 31,
 
2016
2015
         
(Dollars in thousands, except per share amounts)
       
Cash and due from banks
$
1,159
$
2,219
Interest-earning demand deposits with banks
 
30,488
 
10,084
         
Cash and Cash Equivalents
 
31,647
 
12,303
         
Securities held to maturity (fair value of $45,462 and $78,400,
respectively)
 
44,676
 
78,995
Loans receivable, net of allowance for loan losses of $4,044 and
$3,602, respectively
 
329,230
 
262,312
Premises and equipment
 
8,994
 
8,118
Federal Home Loan Bank of New York stock, at cost
 
1,433
 
1,826
Bank owned life insurance
 
13,675
 
7,468
Accrued interest receivable
 
1,254
 
1,352
Other assets
 
2,721
 
3,316
         
Total Assets
$
433,630
$
375,690
         
Liabilities and Stockholders' Equity
       
Liabilities
       
Deposits:
       
Non-interest bearing
$
33,653
$
28,173
Interest bearing
 
301,037
 
234,425
         
Total Deposits
 
334,690
 
262,598
         
Advances from Federal Home Loan Bank of New York
 
22,675
 
32,675
Advance payments by borrowers for taxes and insurance
 
820
 
743
Other liabilities
 
2,874
 
3,311
         
Total Liabilities
 
361,059
 
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;
       issued and outstanding 5,711,044 at September 30, 2016 and 5,953,423 at December 31, 2015
 
57
 
59
Paid-in capital
 
51,678
 
56,216
Retained earnings
 
22,892
 
22,209
Unallocated common stock held by ESOP (204,070 and 212,242 shares, respectively)
 
(1,957)
 
(2,042)
Accumulated other comprehensive loss
 
(99)
 
(79)
         
Total Stockholders' Equity
 
72,571
 
76,363
         
Total Liabilities and Stockholders' Equity
$
433,630
$
375,690
See notes to unaudited consolidated financial statements.
 
2


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

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(Dollars in thousands, except per share amounts)
 
2016
   
2015
   
2016
   
2015
 
Interest Income:
                       
Loans receivable, including fees
 
$
3,177
   
$
2,630
   
$
9,097
   
$
7,716
 
Securities held to maturity
   
276
     
449
     
1,038
     
1,288
 
Other
   
57
     
37
     
126
     
79
 
Total Interest Income
   
3,510
     
3,116
     
10,261
     
9,083
 
                                 
Interest Expense
                               
Deposits
   
383
     
329
     
1,036
     
1,044
 
Borrowings
   
183
     
203
     
562
     
590
 
   Total Interest Expense
   
566
     
532
     
1,598
     
1,634
 
                                 
Net Interest Income
   
2,944
     
2,584
     
8,663
     
7,449
 
Provision for Loan Losses
   
180
     
40
     
500
     
23
 
Net Interest Income after Provision for Loan Losses
   
2,764
     
2,544
     
8,163
     
7,426
 
                                 
Non-Interest Income
                               
Fees and service charges
   
78
     
86
     
248
     
260
 
Income from bank owned life insurance
   
94
     
56
     
207
     
165
 
Other
   
11
     
30
     
381
     
79
 
Total Non-Interest Income
   
183
     
172
     
836
     
504
 
                                 
Non-Interest Expenses
                               
Salaries and employee benefits
   
1,419
     
1,193
     
4,306
     
3,768
 
Directors compensation
   
109
     
110
     
336
     
334
 
Occupancy and equipment
   
382
     
316
     
1,064
     
959
 
Service bureau fees
   
134
     
175
     
639
     
468
 
Advertising
   
7
     
13
     
28
     
110
 
FDIC assessment
   
74
     
71
     
211
     
213
 
Professional services
   
248
     
182
     
860
     
550
 
Other
   
127
     
265
     
529
     
898
 
Total Non-Interest Expenses
   
2,500
     
2,325
     
7,973
     
7,300
 
                                 
Income before Income Taxes
   
447
     
391
     
1,026
     
630
 
Income Tax Expense
   
146
     
133
     
343
     
189
 
Net Income
 
$
301
   
$
258
   
$
683
   
$
441
 
                                 
Earnings per share:
                               
   Basic
 
$
0.05
   
$
0.05
   
$
0.12
   
$
0.08
 
   Diluted
 
$
0.05
   
$
0.04
   
$
0.12
   
$
0.08
 
                                 
See notes to unaudited consolidated financial statements.
 


3

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




   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(Dollars in thousands, except per share amounts)
 
2016
   
2015
   
2016
   
2015
 
Net Income
 
$
301
   
$
258
   
$
683
   
$
441
 
Other comprehensive income (loss), net of tax
                               
                                 
Defined benefit pension plans:
                               
                                 
Reclassification adjustment for prior service cost included
   in net income, net of tax of $1, $3, $5 and $9, respectively
   
(3
)
   
(4
)
   
(8
)
   
(12
)
                                 
Actuarial loss arising during the period, net of tax of $-,
   $(3), $- and $(9), respectively
   
-
     
4
     
-
     
12
 
                                 
Reclassification adjustment for net actuarial loss (gain)
   included in net income, net of tax of $12, $(4), $8, and
   $(12), respectively
   
(16
)
   
5
     
(12
)
   
16
 
                                 
Total other comprehensive income (loss)
   
(19
)
   
5
     
(20
)
   
16
 
                                 
  Comprehensive income
 
$
282
   
$
263
   
$
663
   
$
457
 
   
See notes to unaudited consolidated financial statements.
 

4

 
MSB Financial Corp and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
 (Unaudited)

                         
Unallocated
             
                         
Common
   
Accumulated
       
   
Shares of
                   
Stock
   
Other
   
Total
 
   
Common
 
Common
   
Paid-In
   
Retained
   
Held by
   
Comprehensive
   
Stockholders'
 
   
Stock Issued
 
Stock
   
Capital
   
Earnings
   
ESOP
   
Loss
   
Equity
 
(Dollars in thousands)
     
(Dollars in thousands)
 
Nine Months Ended September 30, 2016
                                         
Balance – December 31, 2015
   
5,953,423
   
$
59
   
$
56,216
   
$
22,209
   
$
(2,042
)
 
$
(79
)
 
$
76,363
 
                                                         
Net income
                           
683
                     
683
 
Other comprehensive income, net of tax
                                           
(20
)
   
(20
)
Allocation of ESOP stock
                   
25
             
85
             
110
 
Repurchased Stock
   
(242,379
)
   
(2
)
   
(3,213
)
                           
(3,215
)
Purchase of common stock for equity plan
                   
(1,467
)
                           
(1,467
)
Stock-Based Compensation
                   
117
                             
117
 
                                                         
Balance - September 30, 2016
   
5,711,044
   
$
57
   
$
51,678
   
$
22,892
   
$
(1,957
)
 
$
(99
)
 
$
72,571
 

See notes to unaudited consolidated financial statements.
5

MSB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
   
Nine Months Ended
September 30,   
 
(In thousands)
 
2016
   
2015
 
       
Cash Flows from Operating Activities:
           
  Net Income
 
$
683
   
$
441
 
  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
   
(72
)
   
(24
)
Depreciation and amortization of premises and equipment
   
325
     
289
 
Stock-based compensation and allocation of ESOP stock
   
227
     
124
 
Provision for loan losses
   
500
     
23
 
Loss on sale of other real estate owned
   
-
     
131
 
Income from bank owned life insurance
   
(207
)
   
(165
)
Decrease in accrued interest receivable
   
98
     
10
 
Decrease in other assets
   
608
     
2
 
(Decrease) increase in other liabilities
   
(470
)
   
402
 
      Net Cash Provided by Operating Activities
   
1,692
     
1,234
 
                 
Cash Flows from Investing Activities:
               
 Activity in held to maturity securities:
               
              Purchases
   
-
     
(4,935
)
              Maturities, calls and principal repayments
   
34,242
     
3,266
 
 Net increase in loans receivable
   
(42,312
)
   
(13,875
)
 Purchased loans
   
(24,957
)
   
(7,100
)
 Purchase of premises and equipment
   
(1,201
)
   
(153
)
 Redemption of Federal Home Loan Bank of NY stock
   
393
     
(116
)
 Purchase of bank owned life insurance
   
(6,000
)
       
 Capitalized improvements of other real estate owned
   
-
     
(89
)
 Proceeds from sale of other real estate owned
   
-
     
947
 
Net Cash Used in Investing Activities
   
(39,835
)
   
(22,055
)
                 
Cash Flows from Financing Activities:
               
Net increase (decrease) in deposits
   
72,092
     
(7,956
)
Net Proceeds from stock offering
   
-
     
34,799
 
Cash paid for stock options
           
(56
)
Increase (decrease) in advances from FHLB of NY
   
(10,000
)
   
2,675
 
Increase in advance payments by borrowers for taxes and insurance
   
77
     
130
 
Repurchase of common stock
   
(3,215
)
   
-
 
Purchase of common stock for equity plan
   
(1,467
)
   
-
 
Net Cash Provided by Financing Activities
   
57,487
     
29,592
 
                 
Net Increase in Cash and Cash Equivalents
   
19,344
     
8,771
 
Cash and Cash Equivalents – Beginning
   
12,303
     
7,519
 
Cash and Cash Equivalents – Ending
 
$
31,647
   
$
16,290
 
                 
Supplementary Cash Flows Information
               
Interest paid
 
$
1,604
   
$
1,631
 
Income taxes paid
   
68
     
251
 
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 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 ("FDIC"). 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 FDIC. 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 September 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.
 
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
 
7

financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X, and therefore, do not include all information or notes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America ("GAAP").
In the opinion of management, all adjustments, consisting of only normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements have been made at September 30, 2016 and for the nine months ended September 30, 2016 and 2015.  The results of operations for the nine months ended September 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 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
 
8

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. 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 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), principal payment (cash outflow-financing), (3) contingent consideration payments made soon after business combination (cash outflow-investing), (4) proceeds from settlement of insurance claims (classification on basis of the nature of each loss), (5) proceeds from 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 are currently evaluating the impact of the pending adoption of ASU 2016-15 on our consolidated financial statements.

In September 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,
 
9

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
September 30,
   
Nine Months Ended
September 30,
   
 
                         
(In Thousands, Except Per Share Data)
 
2016
   
2015
   
2016
   
2015
 
Numerator:
                       
Net income
 
$
301
   
$
258
   
$
683
   
$
441
 
Denominator:
                               
Weighted average common shares
   
5,588
     
5,721
     
5,692
     
5,667
 
Dilutive potential common shares
   
82
     
44
     
76
     
26
 
     Weighted average fully diluted shares
   
5,670
     
5,765
     
5,768
     
5,693
 
Earnings per share:
                               
     Basic
 
$
0.05
   
$
0.05
   
$
0.12
   
$
0.08
 
     Dilutive
 
$
0.05
   
$
0.04
   
$
0.12
   
$
0.08
 
Outstanding common stock equivalents having no dilutive effect
   
-
     
-
     
-
     
-
 



10

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


   
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
 September 30, 2016
 
(In Thousands)
 
                             
 U.S. Government agencies:
                           
Due after one year through five years
 
$
6,500
 
$
7
 
$
1
   
$
6,506
 
                             
     
6,500
   
7
   
1
     
6,506
 
                             
                             
Mortgage-backed securities
   
25,129
   
1,041
   
5
     
26,165
 
 
                           
Corporate bonds:
                           
Due within one year
   
2,006
   
5
   
1
     
2,010
 
Due after one year through five years
   
2,037
   
16
   
13
     
2,040
 
Due after five through ten years
   
1,000
   
-
   
40
     
960
 
Due after ten years
   
4,000
   
-
   
254
     
3,746
 
     
9,043
   
21
   
308
     
8,756
 
                             
State and political subdivisions:
                           
     Due within one year
   
95
   
1
   
1
     
95
 
     Due after one through five years
   
592
   
1
   
1
     
592
 
     Due after five through ten years
   
712
   
13
   
-
     
725
 
     
1,399
   
15
   
2
     
1,412
 
                             
Certificates of deposit:
                           
Due after one year through five years
   
2,605
   
18
   
-
     
2,623
 
                             
     
2,605
   
18
   
-
     
2,623
 
                             
   
$
44,676
 
$
1,102
 
$
316
   
$
45,462
 
 
 
11

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 September 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 September 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 nine months ended September 30, 2016 or 2015.  At September 30, 2016 and December 31, 2015, securities held to maturity with a fair value of approximately $1,000,000 million and $997,800, respectively, were pledged to secure public funds on deposit.


12

Note 4 - Securities Held to Maturity - Continued
The following tables set forth the gross unrealized losses and fair value of securities in an unrealized loss position as of September 30, 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)
 
September 30, 2016
                                     
U.S. Government
agencies
 
$
1,000
 
$
1
 
$
-
 
$
-
 
$
           1,000
 
$
1
 
Mortgage-backed
   securities
   
448
   
5
   
-
   
-
   
448
   
5
 
Corporate bonds
   
1,990
   
14
   
4,706
   
294
   
6,696
   
308
 
State and political subdivisions
   
247
   
1
   
101
   
1
   
348
   
2
 
                                       
   
$
3,685
 
$
21
 
$
4,807
 
$
295
 
$
            8,492
 
$
316
 

               
   
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 September 30, 2016, management concluded that the unrealized losses summarized above (which related to one U.S. Government agency bond, one mortgage-backed security, six corporate bonds and three 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.
13


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

   
September 30,
2016
   
December 31,
2015
 
   
(In thousands)
 
Residential mortgage:
           
One-to-four family
 
$
157,945
   
$
154,624
 
Home equity
   
34,246
     
35,002
 
                 
Total residential mortgage loans
   
192,191
     
189,626
 
                 
 Commercial and multi-family real estate
   
103,083
     
59,642
 
 Construction
   
16,160
     
10,895
 
 Commercial and industrial
   
29,342
     
10,275
 
                 
Total commercial loans
   
148,585
     
80,812
 
                 
Total consumer loans
   
458
     
493
 
                 
Loans receivable
   
341,234
     
270,931
 
                 
Loans in process
   
(7,228
)
   
(4,600
)
Deferred loan fees
   
(732
)
   
(417
)
Allowance for loan losses
   
(4,044
)
   
(3,602
)
     
(12,004
)
   
(8,619
)
                 
Loans receivable, net
 
$
329,230
   
$
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.
14

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.

15


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 September 30, 2016 and 2015:

 
 
 
 (in thousands)
 
Residential
 Mortgage
 
 
Commercial and
Multi-Family
Real Estate
 
 
Construction
 
 
Commercial and
Industrial
 
 
Consumer
 
 
Unallocated
 
 
Total
Three Months Ended September  30, 2016
                                           
                                             
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
 
$
1,842
 
 
$
1,322
 
 
$
163
 
 
$
314
 
 
$
15
 
 
$
213
 
 
$
3,869
 
   Provisions (credits)
 
 
(4)
     
61
     
14
     
222
     
1
     
(114)
     
180
 
   Loans charged-off
 
 
 
 
 
     
     
     
(8)
     
     
(8)
 
   Recoveries
 
 
3
 
 
 
     
     
     
     
     
3
 
Balance, ending
 
$
1,841
 
 
$
1,383
 
 
$
177
 
 
$
536
 
 
$
8
 
 
$
99
 
 
$
4,044
 
                                                         
Nine  Months Ended September 30, 2016
                                                       
                                                         
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
 
$
1,927
 
 
$
1,015
 
 
$
143
 
 
$
235
 
 
$
9
 
 
$
273
 
 
$
3,602
 
   Provisions (credits)
 
 
(38)
     
368
     
34
     
301
     
9
     
(174)
     
500
 
   Loans charged-off
 
 
(64)
 
 
 
     
     
     
(11)
     
     
(75)
 
   Recoveries
 
 
16
 
 
 
     
     
     
1
     
     
17
 
Balance, ending
 
$
1,841
 
 
$
1,383
 
 
$
177
 
 
$
536
 
 
$
8
 
 
$
99
 
 
$
4,044
 
                                                         
Period-end allowance allocated to:
                                                       
Loans  individually evaluated for impairment
 
$
   
$
   
$
   
$
   
$
   
$
   
$
 
Loans  collectively evaluated for impairment
   
1,841
     
1,383
     
177
     
536
     
8
     
99
     
4,044
 
Ending Balance
 
$
1,841
   
$
1,383
   
$
177
   
$
536
   
$
8
   
$
99
   
$
4,044
 
                                                         
Period-end loan balances evaluated for:
                                                       
Loans  individually evaluated for impairment
 
$
14,705
   
$
        1,232
   
$
   
$
475
   
$
   
$
   
$
16,412
 
Loans  collectively evaluated for impairment
   
177,150
     
101,572
     
8,860
     
28,822
     
458
     
     
316,862
 
Ending Balance
 
$
191,855
   
$
102,804
   
$
8,860
   
$
29,297
   
$
458
   
$
   
$
333,274
 
                                                         


16

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

 (in thousands)
 
Residential
 Mortgage
 
 
Commercial and
Multi-Family
Real Estate
 
 
Construction
 
 
Commercial and
Industrial
 
 
Consumer
 
 
Unallocated
 
 
Total
Three Months Ended
September 30, 2015
                                           
                                             
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
 
$
2,005
 
 
$
1,007
 
 
$
197
 
 
$
3688
 
 
$
5
 
 
$
1
 
 
$
3,583
 
   Provisions (credits)
 
 
48
 
 
 
4
     
23
     
(45)
     
6
     
4
     
40
 
   Loans charged-off
 
 
(46)
 
 
 
     
     
     
     
     
(46)
 
   Recoveries
 
 
4
 
 
 
   
   
     
     
     
4
 
Balance, ending
 
$
2,011
 
 
$
1,011
 
 
$
220
 
 
$
323
 
 
$
11
 
 
$
5
 
 
$
3,581
 
                                                         
Nine Months Ended
September 30, 2015
                                                       
                                                         
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
 
$
2,109
 
 
$
885
 
 
$
317
 
 
$
290
 
 
$
6
 
 
$
27
 
 
$
3,634
 
   Provisions (credits)
 
 
(38)
 
 
 
133
     
(88)
     
33
     
5
     
(22)
     
23
 
   Loans charged-off
 
 
(68)
 
 
 
(7)
     
  (21)
     
     
     
     
(96)
 
   Recoveries
 
 
8
 
 
 
     
12
     
     
     
     
20
 
Balance, ending
 
$
2,011
 
 
$
1,011
 
 
$
220
 
 
$
323
 
 
$
11
 
 
$
5
 
 
$
3,581
 
                                                         
Period-end allowance allocated to:
                                                       
Loans  individually evaluated for impairment
 
$
1
   
$
   
$
   
$
   
$
6
   
$
   
$
7
 
Loans  collectively evaluated for impairment
   
2,010
     
1,011
     
220
     
323
     
5
     
5
     
3,574
 
Ending Balance
 
$
2,011
   
$
1,011
   
$
220
   
$
323
   
$
11
   
$
5
   
$
3,581
 
                                                         
Period-end loan balances evaluated for:
                                                       
Loans  individually evaluated for impairment
 
$
15,205
   
$
        1,554
   
$
253
   
$
716
   
$
6
   
$
   
$
17,734
 
Loans  collectively evaluated for impairment
   
169,707
     
49,361
     
7,774
     
10,742
     
505
     
     
238,089
 
Ending Balance
 
$
184,912
   
$
50,915
   
$
8,027
   
$
11,458
   
$
511
   
$
   
$
255,823
 
                                                         
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.
 
17


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 September 30, 2016 and December 31, 2015:

As of  September  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
 
$
1,244
 
 
 $
2,609
 
 
 $
232
 
 
 $
4,085
 
 
$
148,987
 
 
$
4,551
 
 
$
157,623
 
Home equity
 
 
655
 
 
 
29
 
 
 
50
 
 
 
734
 
 
 
33,234
 
 
 
264
 
 
 
34,232
 
Commercial and multi-family real estate
 
 
399
 
 
 
 
 
 
 
 
 
399
 
 
 
101,565
 
 
 
840
 
 
 
102,804
 
Construction
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       One-to-four family
       owner-occupied
 
 
280
 
 
 
 
 
 
 
 
 
280
 
 
 
5,361
 
 
 
 
 
 
5,641
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,219
 
 
 
 
 
 
3,219
 
Commercial and industrial
 
 
174
 
 
 
 
 
 
 
 
 
174
 
 
 
28,769
 
 
 
354
 
 
 
29,297
 
Consumer
 
 
3
 
 
 
 
 
 
 
 
 
3
 
 
 
455
 
 
 
 
 
 
458
 
Total
 
$
2,755
 
 
$
2,638
 
 
$
282
 
 
$
5,675
 
 
$
321,590
 
 
$
6,009
 
 
$
333,274
 

(1)
Nonaccrual loans at September 30, 2016, included $4,897,000 that were 90 days or more delinquent, $903,000 that were 60-89 days delinquent, none that were 30-59 days delinquent, and $209,000 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.


18


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 methods: (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.

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 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.

If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by establishing an impairment reserve for the expected loss and a charge-off against the allowance for loan losses, if applicable.

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.


19


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

The following tables provide an analysis of the impaired loans at September 30, 2016 and December 31, 2015 and the average balances of such loans for the nine months and year, respectively, then ended:

September 30, 2016
(In thousands)
 
Recorded
Investment
   
Loans with
No Related
Reserve
   
Loans with
Related
Reserve
   
Related
Reserve
   
Contractual
Principal
Balance
   
Average
Recorded
Investment
 
                                     
Residential mortgage
                                   
      One-to-four family
 
$
13,207
   
$
13,207
   
$
-
   
$
-
   
$
13,560
   
$
12,867
 
      Home equity
   
1,498
     
1,498
     
-
     
-
     
1,588
     
2,148
 
                                                 
Commercial and multi-family real estate
   
1,232
     
1,232
     
-
     
-
     
1,979
     
1,215
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial and industrial
   
475
     
475
     
-
     
-
     
920
     
557
 
Consumer
   
-
     
-
     
-
     
-
     
-
     
1
 
Total
 
$
16,412
   
$
16,412
   
$
-
   
$
-
   
$
18,047
   
$
16,788
 



December 31, 2015
(In thousands)
 
Recorded
Investment
   
Loans with
No Related
Reserve
   
Loans with
Related
Reserve
   
Related
Reserve
   
Contractual
Principal
Balance
   
Average
Recorded
Investment
 
                                     
Residential mortgage
                                   
      One-to-four family
 
$
12,991
   
$
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 September 30, 2016 and December 31, 2015, impaired loans listed above include $11.1 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 September 30, 2016 and December 31, 2015, $9.3 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.


20

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

Interest income of $45,000 and $188,000 was recognized on impaired loans during the three months ended September 30, 2016 and 2015. The average balance of impaired loans for the three months ended September 30, 2016 and September 30, 2015 were $16.7 million and $18.2 million, respectively. During the nine months ended September 30, 2016 and 2015, interest income of $363,000 and $573,000, respectively, was recognized on impaired loans. The average balance of impaired loans for the nine months ended September 30, 2015 was $18.5 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.


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 September 30, 2016 and December 31, 2015:

  As of September 30, 2016
 
Pass
 
 
Special Mention
 
 
Substandard
 
 
Doubtful
 
 
Loss
 
 
Total
 
   
(In thousands)
 
Commercial and multi-family real estate
 
$
101,191
 
 
$
399
 
 
$
1,214
 
 
$
 
 
$
 
 
$
102,804
 
Construction
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family owner-occupied
 
 
5,641
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,641
 
Other
 
 
3,219
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,219
 
Commercial and industrial
 
 
28,671
 
 
 
88
 
 
 
538
 
 
 
 
 
 
 
 
 
29,297
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
138,722
 
 
$
487
 
 
$
1,752
 
 
$
 
 
$
 
 
$
140,961
 


  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