10-K 1 f10k_123116-5468.htm FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2016
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________________

Commission File No. 001-37506

MSB FINANCIAL CORP.
(Exact name of Registrant as specified in its Charter)

Maryland
 
34-1981437
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

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
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
 
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [  ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [  ] NO [X]
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [X] YES [  ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
(Do not check if a smaller reporting company)
 
Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES [  ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Registrant's common stock as quoted on the Nasdaq Stock Market LLC on June 30, 2016, was approximately $64.3 million.
As of March 17, 2017 there were 5,729,182 shares outstanding of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None


MSB FINANCIAL CORP.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2016

INDEX

 
PART 1
     
Page
Item 1.
 
Business
 
1
Item 1A.
 
Risk Factors
 
28
Item 1B.
 
Unresolved Staff Comments
 
28
Item 2.
 
Properties
 
28
Item 3.
 
Legal Proceedings
 
28
Item 4.
 
Mine Safety Disclosures
 
28
         
PART II
       
Item 5.
 
Market for Registrant's Common Equity, Related Stockholder Matters
   and Issuer Purchases of Equity Securities
 
 
29
Item 6.
 
Selected Financial Data
 
29
Item 7.
 
Management's Discussion and Analysis of Financial Condition
   and Results of Operations
 
 
30
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
 
40
Item 8.
 
Financial Statements and Supplementary Data
 
41
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and
   Financial Disclosure
 
 
41
Item 9A.
 
Controls and Procedures
 
41
Item 9B.
 
Other Information
 
42
         
PART III
       
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
42
Item 11.
 
Executive Compensation
 
42
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and
   Related Stockholder Matters
 
 
42
Item 13.
 
Certain Relationships and Related Transactions, and Director
   Independence
 
 
42
Item 14.
 
Principal Accounting Fees and Services
 
44
         
PART IV
       
Item 15.
 
Exhibits, Financial Statement Schedules
 
44
Item 16.
 
Summary
 
45
SIGNATURES
       


i

 PART I

Forward-Looking Statements

The Company may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the private securities litigation reform act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: The strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System ("Federal Reserve"), inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; market volatility; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Item 1. Business

General

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.
 
 
1


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.

In accordance with the provisions of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company is the successor issuer to Old MSB and all financial data included herein up through the completion of the second-step conversion is that of Old MSB.

Throughout this document, references to "we," "us," or "our" refer to the Bank or Company, or both, as the context indicates.

Change in Fiscal Year End

Effective November 17, 2014, the Company changed its fiscal year end from June 30 to December 31.

Competition

We operate in a market area with a high concentration of banking and other financial institutions, and we face substantial competition in attracting deposits and in originating loans. A number of our competitors are significantly larger institutions with greater financial and managerial resources and lending limits. Our ability to compete successfully is a significant factor affecting our growth potential and profitability.

Our competition for deposits and loans historically has come from other insured financial institutions such as local and regional commercial banks, savings institutions, and credit unions located in our primary market area. We also compete with mortgage banking and finance companies for real estate loans and with commercial banks and savings institutions for consumer loans, and we face competition for funds from investment products such as mutual funds, short-term money funds and corporate and government securities. There are large competitors operating throughout our total market area, and we also face strong competition from other community-based financial institutions.

Lending Activities

We have traditionally focused on the origination of one- to four-family loans and home equity loans and lines of credit, which together comprise a sizeable portion of the total loan portfolio. During the year, we have significantly grown our commercial real estate portfolio, which includes multi-family dwellings/apartment buildings, service/retail and mixed-use properties, churches and non-profit properties, medical and dental facilities and other commercial real estate. Additionally, we originate residential and commercial construction loans and commercial and industrial loans. Our consumer loans are comprised of automobile loans, personal loans, account loans and overdraft lines of credit.
2

Loan Portfolio Composition. The following tables analyze the composition of the Company's loan portfolio by loan category at the dates indicated.  Except as set forth below, there were no concentrations of loans exceeding 10% of total loans.

   
At
December 31,
 
At June 30,
   
2016
     
2015
     
2014
     
2014
     
2013
   
   
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
   
   
(Dollars in thousands)
Type of Loans:
                                                                     
One- to four-family real estate
 
$
160,534
 
42.28
%
   
$
154,624
 
57.07
%
   
$
144,966
 
61.19
%
   
$
143,283
 
60.50
%
   
$
136,704
 
59.79
%
 
Commercial real estate and multi-family
   
124,656
 
32.83
       
59,642
 
22.02
       
31,637
 
13.35
       
32,036
 
13.53
       
32,171
 
14.07
   
Construction
   
16,554
 
4.36
       
10,895
 
4.02
       
12,651
 
5.34
       
12,517
 
5.29
       
8,895
 
3.89
   
Home equity
   
32,262
 
8.50
       
35,002
 
12.92
       
36,847
 
15.55
       
38,484
 
16.25
       
40,682
 
17.79
   
Commercial and industrial
   
45,246
 
11.92
       
10,275
 
3.79
       
9,663
 
4.08
       
9,666
 
4.08
       
9,267
 
4.05
   
Consumer
   
446
 
0.11
       
493
 
0.18
       
1,152
 
0.49
       
832
 
0.35
       
929
 
0.41
   
                                                                       
Total loans receivable
   
379,698
 
100.00
%
     
270,931
 
100.00
%
     
236,916
 
100.00
%
     
236,818
 
100.00
%
     
228,648
 
100.00
%
 
                                                                       
Less:
                                                                     
Construction loans in process
   
(6,557)
           
(4,600)
           
(1,499)
           
(2,491
)
         
(745
)
     
Allowance for loan losses
   
(4,476)
           
(3,602)
           
(3,634)
           
(3,686
)
         
(4,270
)
     
Deferred loan fees
   
(658)
           
(417)
           
(334)
           
(366
)
         
(377
)
     
                                                                       
Total loans receivable, net
 
$
368,007
         
$
262,312
         
$
231,449
         
$
230,275
         
$
223,256
       


3

Loan Maturity Schedule. The following table sets forth the maturity of the Company's loan portfolio at December 31, 2016. Demand loans, loans having no stated maturity, and overdrafts are presented as due in one year or less. The construction loans presented in the table as of December 31, 2016 are net of $6.6 million of undistributed amounts. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.

       
At December 31, 2016
 
       
One- to Four-
Family
Real Estate
     

Commercial
and Multi-family 
Real Estate
     


Construction
     


Consumer
     


Home Equity
     
Commercial
and Industrial
     


Total
 
       
(In thousands)
 
Amounts Due:
                                                                       
  Within 1 Year
     
$
3,366
     
$
8,512
     
$
7,139
     
$
52
     
$
2,766
     
$
4,074
     
$
25,909
 
                                                                         
After 1 year:
                                                                       
1 to 5 years
       
4,481
       
12,917
       
2,858
       
63
       
9,494
       
24,441
       
54,254
 
5 to 10 years
       
9,557
       
60,136
       
-
       
-
       
10,279
       
16,201
       
96,173
 
After 10 years
       
143,130
       
43,091
       
-
       
331
       
9,723
       
530
       
196,805
 
 Total due after one year
       
157,168
       
116,144
       
2,858
       
394
       
29,496
       
41,172
       
347,232
 
                                                                         
 Total
     
$
160,534
     
$
124,656
     
$
9,997
     
$
446
     
$
32,262
     
$
45,246
     
$
373,141
 


4

The following table sets forth the dollar amount of all loans at December 31, 2016 due after December 31, 2017, which have fixed interest rates and which have floating or adjustable interest rates.

       


Fixed Rates
     
Floating or
Adjustable
Rates
     


Total
 
       
(In thousands)
 
                                 
One-to four-family real estate
     
$
114,250
     
$
42,918
     
$
157,168
 
Commercial real estate and multi-family
       
53,094
       
63,050
       
116,144
 
Construction
       
785
       
2,073
       
2,858
 
Consumer
       
63
       
331
       
394
 
Home equity
       
7,930
       
21,566
       
29,496
 
Commercial and industrial
       
20,487
       
20,685
       
41,172
 
Total
     
$
196,609
     
$
150,623
     
$
347,232
 


One- to Four-Family Real Estate Mortgages. Historically, the primary focus of our lending activity was the origination of one- to four-family first mortgage loans.  We continue to offer fixed rate, conventional mortgage loans with terms from 5 to 30 years.

We also originate adjustable rate mortgages, or ARMs, with up to 30 year terms at rates based upon the U.S. Treasury One Year Constant Maturity as an index. Our ARMs currently reset on an annual basis, beginning with the first year, and have a 200 basis point annual increase cap and a 600 basis point lifetime adjustment cap.  We do not originate "teaser" rate or negative amortization loans.

We are also offering a loan program whereby we offer an initial rate for a fixed period of time, normally 5 to 10 years, and thereafter there is one preset interest rate adjustment based on competitive rates.

Substantially all residential mortgages include "due on sale" clauses, which are provisions giving us the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party. Property appraisals on real estate securing one-to four-family residential loans are made by state certified or licensed independent appraisers and are performed in accordance with applicable regulations and policies. We require title insurance policies on all first lien one-to four-family residential loans and all home equity loans over $250,000.  Homeowners, liability, fire and, if applicable, flood insurance policies are also required.

We provide financing on residential investment properties with 5 to 30 year fixed duration mortgages. Our investment property lending product is available to individuals or proprietorships, partnerships, limited liability corporations, and corporations with personal guarantees. All investment property is underwritten on its ability substantially to carry itself, unless the property is a two‑family residence with the mortgagor living in one of the units. Preference is given to those loans where rental income covers all operating expenditures, including but not limited to principal and interest, real estate taxes, hazard insurance, utilities, maintenance, and reserve. The cash coverage ratio to cover operating expenses must be at least 1.25 times.  Any negative cash flow will be included in the borrower's total debt ratio.  At December 31, 2016, investment property loans secured by one- to four-family homes totaled $43.2 million.
5


We generally originate one-to four-family first mortgage loans for primary residences and investment properties with loan-to-value ratios ranging from 65% to 80% depending on the collateral value.

Commercial and Multi-Family Real Estate Mortgages. Our commercial real estate lending includes multi-family dwellings/apartment buildings, service/retail and mixed-use properties, churches and non-profit properties, medical and dental facilities and other commercial real estate. Our commercial real estate mortgage loans are typically a 5 to 10 year balloon mortgage.  Multi-family and commercial real estate loans can be amortized over 30 years with periodic rate resets or 15 year fixed duration mortgages. This type of lending is made available to proprietorships, partnerships, limited liability companies and corporations with personal guarantees and/or carve out guarantees. All commercial property is underwritten on its ability substantially to provide satisfactory cash flows.  A cash flow and lease analysis is performed for each property. Preference is given to those loans where rental income covers all operating expenditures, including but not limited to principal and interest, real estate tax, hazard insurance, utilities, maintenance, and reserves. The cash coverage ratio to cover operating expenses must be at least 1.20 times for multi-family and 1.25 times for all other commercial loans.  Any negative cash flow will be included in the limit on the borrower's total debt ratio. Cash from other assets of the borrower, who may own multiple properties and generate a surplus, can be made available to cover debt‑service shortages of the financed property. Maximum loan-to-value ratios on commercial real estate loans range from 65% to 80%.

The management skills of the borrower are judged on the basis of his/her professional experience and must be documented to meet the Company's satisfaction in relation to the desired project. The assets of the borrower must indicate his/her ability to support the proposed investment, both in terms of liquidity and net worth, and tangible history of the borrower's capability and experience must be evident.

Unlike single-family residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income, and which are secured by real property the value of which tends to be more easily ascertainable, multi-family and commercial real estate loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business or rental income. As a result, the availability of funds for the repayment of commercial real estate and multi-family loans may be substantially dependent on the success of the business itself, the tenants and the general economic environment. Commercial real estate and multi-family loans, therefore, have greater credit risk than one-to four-family residential mortgages or consumer loans. In addition, commercial real estate and multi-family loans generally result in larger balances to single borrowers, or related groups of borrowers and also generally require substantially greater evaluation and oversight efforts.

Construction Loans. We originate construction loans for an owner-occupied residence or to a builder with a valid contract of sale. We also provide financing for speculative residential or commercial construction and development with individual consideration given to builders based on their past performance, workmanship, and financial worth. Our construction lending includes loans for construction or major renovations or improvements of owner-occupied residences.  The portfolio consists primarily of properties held by real estate developers.

Construction loans are mortgages up to 24 months in duration. Funds are disbursed periodically upon inspections made by our inspectors on the percentage of work completed, as per the approved budget. Funds disbursed may not exceed 60% of the loan-to-value of land and 80% of the loan-to-value of improvements any time during construction. The majority of our construction loans are variable rate loans with rates tied to the prime rate published in The Wall Street Journal, plus a premium. The Bank also has established a floor rate on all transactions.  A minimum of interest-only payments on disbursed funds must be made on a monthly basis.
 
 
6

 

Construction lending is generally considered to involve a higher degree of credit risk than residential mortgage lending. If the estimate of construction cost proves to be inaccurate, we may be compelled to advance additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, there is no assurance that we will be able to recover the entire unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time.

Consumer Loans. Our consumer lending products consist of new and used automobile loans, secured and unsecured personal loans, account loans and overdraft lines of credit. The maximum term for a loan on a new or used automobile is six years and four years, respectively. We will lend up to 80% of the retail value or dealer invoice on a car loan. We offer a reduction on the interest rate for car loans if payments are automatically deducted from a Millington Bank checking or statement savings account.

Our personal loans have terms of up to four years with a minimum and maximum balance of $1,000 and $5,000, respectively. A reduction to the interest rate is offered for loans with automatic debit repayment from a Millington Bank checking or statement savings account. Our account loans permit a depositor to borrow up to 90% of his or her funds on deposit with us in certificate of deposit accounts. The interest rate is the current rate paid to the depositor, plus a premium. A minimum payment of interest only is required. We also offer an overdraft line of credit with a minimum of $500 and up to a maximum of $5,000 and an interest rate tied to the prime rate published in The Wall Street Journal, plus a premium.

Consumer lending is generally considered to involve a higher degree of credit risk than residential mortgage lending. Consumer loan repayment is dependent on the borrower's continuing financial stability and can be adversely affected by job loss, divorce, illness, personal bankruptcy and other factors. The application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on consumer loans in the event of a default. Account loans are fully secured.

Home Equity Loans and Lines of Credit. We offer fixed rate home equity loans and variable rate home equity lines of credit with a minimum credit limit of $5,000. Collateral valuation is established through a variety of methods, including an on-line appraisal valuation estimator, drive-by appraisals, recent assessed tax value, purchase price or consideration value as evidenced by a deed or property search report or a report of comparable real estate properties from a licensed realtor. Loan requests over $50,000, however, require a drive-by appraisal and amounts over $100,000 require full appraisals.  Loan requests over $500,000 require Loan Committee approval. Any policy exception requires approval from the Board of Directors. The loan-to-value limit on home equity lending varies depending on the collateral value and ranges from 65% up to 80%. The variable rate on home equity lines of credit is adjusted monthly and is currently set at prime for owner occupied properties and prime plus a premium for investment properties. The fixed rate loans on investment property are also higher than fixed rate owner occupied home equity loans. We generally provide home equity financing only for a first or second lien position.

Our fixed rate home equity loans have terms of 5 to 30 years. All new variable rate home equity lines of credit have terms of 10 years interest only draw period and a 15 year repayment period with a loan to value ranging from 65% to 80%.  Our existing portfolio of home equity lines is also comprised of interest only home equity lines of credit based on a 10 year draw period and 15 year repayment period consisting of principal and interest repayments.  The loan-to-value limit on interest only home equity financing is 80% on owner-occupied property and 70% on investment property.  We also offer bridge loans with a variable rate and a 70% loan-to-value limit on owner-occupied property and 60% on investment property.
 
 
7

 
 

Commercial and Industrial Loans. We offer revolving lines of credit to businesses to finance short‑term working capital needs like accounts receivable and inventory. These lines of credit may be unsecured or secured by liquid assets, accounts receivable and inventory or real estate. We generally provide such financing for no more than a 3 year term and with a variable rate. We also offer unsecured lines of credit to high net worth borrowers for short term working capital and/or business or investment purposes. These lines have a maximum term of two years with a variable interest rate.

We also originate commercial term loans to fund longer‑term borrowing needs such as purchasing equipment, property improvements or other fixed asset needs. These loans are secured by new and used machinery, equipment, fixtures, furniture or other long-term fixed assets and have terms of 1 to 15 years. We originate commercial term loans for other general long-term business purposes, and these loans are secured by real estate. Principal and interest on commercial term loans is payable monthly.

The normal minimum amount for our commercial term loans and lines of credit is $5,000. The maximum amount is based on the loan to value limits set in our policy.  We typically do not provide working capital loans to businesses outside our normal market area or to new businesses where repayment is dependent solely on future profitable operation of the business. We avoid originating loans for which the primary source of repayment could be liquidation of the collateral securing the loan in light of poor repayment prospects. We typically require personal and/or carve out guarantees on all commercial loans, regardless of other collateral securing the loan.

The loan-to-value limits on commercial lending vary according to the collateral. Loans secured by real estate may be originated for up to an 80% loan-to-value ratio. Other limits are typically: Savings accounts-90% of the deposit amount; new equipment-75% of purchase price; and used equipment-the lesser of 75% of the purchase price or current market value.

Loans to One Borrower. The Bank's regulatory limit on total loans to any borrower or attributed to any one borrower is 15% of unimpaired capital and surplus. Accordingly, as of December 31, 2016, our loans to one borrower legal limit was approximately $9.0 million.

The Bank's lending policies require that any transaction between $500,000 and the Bank's legal lending limit must be approved by the Senior Loan Committee.  Any exceptions to policy requires prior Board approval.

At December 31, 2016, the Bank's largest lending relationship with a single borrower was an $8.5 million commercial loan to a non-depository financial institution.

Loan Originations, Purchases, Sales, Solicitation and Processing. Our customary sources of loan applications include repeat customers, referrals from realtors and other professionals, "walk-in" customers and business opportunities generated by our commercial lenders. Our residential loan originations are driven by the Bank's reputation, as opposed to being advertising driven.

We normally do not sell loans into the secondary mortgage market and did not sell any loans in the five year period ended December 31, 2016.  It is our policy to retain the loans we originate in our portfolio. We have not uniformly originated our real estate mortgage loans to meet the documentation standards to sell loans in the secondary mortgage market. We may do so, however, in the future if we find it desirable in connection with interest rate risk management to sell longer term fixed rate mortgages into the secondary mortgage market.
 
 
8

We purchased $24.2 million in whole loans which consisted of $20.6 million in commercial real estate loans and $3.6 million in one-to -four-family loans for the year ended December 31, 2016. In addition, we purchased $14.2 million in participation interests in loans originated by other banks during 2016. The Company will continue to actively utilize purchases and participations to grow the portfolio.

Loan Approval Procedures and Authority. Lending policies and loan approval limits are approved and adopted by the Board of Directors. Lending authority is vested primarily in the Senior Loan Committee comprised of the Chief Executive Officer, Chief Operating Officer, Chief Lending Officer and the Chief Credit Officer who will review and approve loans over $500,000 and up to the Bank's legal lending limit.  Each of the above individuals also has individual lending authority of up to $500,000.  Certain other Bank employees also have limited lending authority. Prior Board approval is required for all loan products with any exceptions to loan policy, regardless of amount.

Asset Quality

Loan Delinquencies and Collection Procedures. The Company's procedures for delinquent loans are as follows:

 
15 days delinquent:
late charge added, first delinquent notice mailed
 
30 days delinquent:
second delinquent notice mailed
 
45 days delinquent:
additional late charge, third delinquent notice mailed, telephone contact made
 
60 days delinquent:
telephone contact made, separate letter mailed
 
90 days delinquent:
decision made to refer to attorney to send demand letter
  120 days delinquent:  attorney to file complaint to begin legal action
        

When a loan is 90 days delinquent, the Senior Vice President and Chief Credit Officer or the President may determine to refer it to an attorney to send demand letter.  After 120 days, the attorney is able to start the foreclosure proceedings by filing a complaint with the court.  All reasonable attempts are made to collect from borrowers prior to referral to an attorney for collection. In certain instances, we may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his or her financial affairs, and we attempt to work with the borrower to establish a repayment schedule to cure the delinquency.

As to mortgage loans, if a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair value less estimated selling costs. The initial write-down of the property is charged to the allowance for loan losses. Adjustments to the carrying value of the property that result from subsequent declines in value are charged to operations in the period in which the declines occur. At December 31, 2016, we had no other real estate owned.

As to commercial loans, the Company requests updated financial statements when the loan becomes 90 days delinquent. As to account loans, the outstanding balance is collected from the related account along with accrued interest when the loan is 180 days delinquent.

Loans are reviewed on a regular basis, and all delinquencies of 60 days or more are reported to the Board of Directors. Loans are placed on nonaccrual status when they are more than 90 days delinquent, except for such loans which are "well secured" and "in the process of collection."  In addition a loan may be placed on nonaccrual status at any time if, in the opinion of management, the collection of the loan in full is doubtful. An asset is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party.  An asset is "in process of collection" if collection of the asset is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or its restoration to a current status in the near future.
 
 
9

When loans with interest accrued and unpaid are placed on nonaccrual status, the accrued interest is reversed and charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectability of the loan. At December 31, 2016, we had approximately $7.0 million of loans that were held on a nonaccrual basis, all of which were classified as impaired with $2.3 million subject to specific loss allowances totaling $203,000.

Non-Performing Assets. The following table provides information regarding our non-performing loans and other non-performing assets as of the dates indicated.

   
At
December 31,
 
 At
June 30,
 
   
2016
 
2015
   
2014
   
2014
   
2013
 
   
(Dollars in thousands)
 
Loans accounted for on a nonaccrual basis:
                                     
One-to four-family real estate
 
$
5,744
 
$
3,744
   
$
3,360
   
$
4,346
   
$
7,955
 
Commercial and multi-family real estate
   
760
   
827
     
1,239
     
1,248
     
2,587
 
Construction
   
-
   
-
     
65
     
137
     
601
 
Consumer
   
-
   
-
     
-
     
-
     
802
 
Home equity
   
126
   
803
     
430
     
1,586
     
1,502
 
Commercial and industrial
   
350
   
542
     
628
     
635
     
-
 
Total (1)
   
6,980
   
5,916
     
5,722
     
7,952
     
13,447
 
Accruing loans contractually past due
90 days or more:
                                     
One-to four-family real estate
   
-
   
235
     
310
     
310
     
501
 
Commercial real estate
   
-
   
-
     
-
     
-
     
-
 
Construction
   
-
   
-
     
-
     
-
     
-
 
Consumer
   
-
   
-
     
-
     
-
     
-
 
Home equity
   
-
   
50
     
50
     
51
     
146
 
Commercial and industrial
   
-
   
-
     
-
     
-
     
-
 
Total
   
-
   
285
     
360
     
361
     
647
 
Total non-performing loans
 
$
6,980
 
$
6,201
   
$
6,082
   
$
8,313
   
$
14,094
 
Total non-performing assets (2)
 
$
6,980
 
$
6,201
   
$
7,365
   
$
8,722
   
$
14,624
 
                                       
Accruing loans modified in troubled debt restructuring
 
$
8,459
 
$
10,962
   
$
11,525
   
$
13,439
   
$
11,848
 
                                       
Total non-performing loans to total loans
   
1.84
%
 
2.29
%
   
2.57
%
   
3.51
%
   
6.16
%
Total non-performing loans to total assets
   
1.51
%
 
1.65
%
   
1.79
%
   
2.41
%
   
4.00
%
Total non-performing assets to total assets
   
1.51
%
 
1.65
%
   
2.16
%
   
2.53
%
   
4.15
%
__________________
(1)
Includes $2.2 million, $4.1 million, $4.6 million, $3.2 million, and $6.2 million, in troubled debt restructurings at December 31, 2016, 2015, and 2014 and June 30 2014, and 2013, respectively.
(2)
Total non-performing assets consist of total non-performing loans and other real estate owned of $-, $-, $1.3 million, $409,000, and $530,000 at December 31, 2016, 2015 and 2014 and June 30, 2014, and 2013.
 
 
10

 
 
At December 31, 2016, there were no loans not disclosed in the table above where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

During the year ended December 31, 2016, gross interest income of $117,000 would have been recorded on loans accounted for on a nonaccrual basis and $124,000 would have been recorded on troubled debt restructurings if those loans had been current in accordance with their original terms. $456,000 of interest collected on such loans was included in interest income during the period.

Classified Assets. The Company in compliance with the Uniform Credit Classification and Account Management Policy adopted by the Federal Deposit Insurance Corporation, and the Company has an internal loan review program, whereby non-performing loans are classified as special mention, substandard, doubtful or loss. It is our policy to review the commercial real estate, construction, and commercial loan portfolios, in accordance with regulatory classification procedures, on at least a quarterly basis. When a loan is classified as substandard or doubtful, management is required to evaluate the loan for impairment. When management classifies a portion of a loan as loss, a reserve equal to 100% of the loss amount is required to be established or the loan is to be charged-off, if a conforming loss event has occurred.

An asset that does not currently expose the Company to a sufficient degree of risk to warrant an adverse classification, but which possesses credit deficiencies or potential weaknesses that deserve management's close attention is classified as "special mention."

An asset classified as "substandard" is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Assets so classified have well‑defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

An asset classified as "doubtful" has all the weaknesses inherent in a "substandard" asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of a loss on a doubtful asset is high.

That portion of an asset classified as "loss" is considered uncollectible and of such little value that its continuance as an asset, without charge‑off, is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be affected in the future.

Management's classification of assets is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination process.

The following table discloses the Company's classification of loans as of December 31, 2016.

     
At
December 31, 2016
 
     
(In thousands)
 
           
 
Special Mention
 
$
1,261
 
 
Substandard
   
2,044
 
 
Doubtful
   
-
 
 
Loss
   
-
 
 
Total
 
$
3,305
 


11

At December 31, 2016, 11 out of the 17 loans adversely classified, totaling $1.1 million, are included as non-performing loans in the non-performing assets table.

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. 

Allowance for Credit Losses. The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded credit commitments.  The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the Statement of Financial Condition date and is recorded as a reduction to loans. The reserve for unfunded credit commitments represents management's estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated Statement of Financial Condition. The allowance for credit losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. All, or part, of the principal balance of loans receivable that are deemed uncollectible are charged against the allowance when management determines that the repayment of that amount is highly unlikely.    Any subsequent recoveries are credited to the allowance.  Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible.  

Management, in determining the allowance for loan losses, considers the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. 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.  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.  The 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.

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, consumer and commercial and industrial. Some segments of the Company's loan receivable portfolio are further disaggregated into classes which allows management to better monitor risk and performance.
 
 
12


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 consists of both owner and non-owner occupied loans and is further disaggregated into owner-occupied loans and investor properties, which have medium risk due to historical activity on these type 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.  

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.

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty.  Concessions granted under a troubled debt restructuring generally involve a reduction in interest rate, a below market interest rate based on risk, or an extension of a loan's stated maturity date. Nonaccrual troubled debt restructurings 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 troubled debt restructurings are designated as impaired.
 
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.

In addition, the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation, as an integral part of their examination processes, periodically review our loan and real estate owned portfolios and the related allowance for loan losses and valuation allowance for real estate owned. They may require the allowance for loan losses or the valuation allowance for real estate owned to be increased based on their review of information available at the time of the examination, which would negatively affect our earnings.
13

The following table sets forth information with respect to the Company's allowance for loan losses for the periods indicated:

     
Year Ended
December 31,
   
Six Months Ended
December 31,
   
Year Ended June 30, 
     
2016
   
2015
   
2014
   
2014
      
2014
   
2013
   
     
(Dollars in thousands)
 
Allowance balance at beginning of period
   
$
3,602
   
$
3,634
   
$
3,579
   
$
3,686
      
$
4,270
   
$
3,065
   
Provision for loan losses
     
800
     
113
     
400
     
100
        
600
     
4,044
   
Charge-offs:
                                                      
One-to four-family real estate
     
64
     
61
     
381
     
57
        
522
     
1,574
   
Commercial and multi-family real estate
     
-
     
47
     
-
     
-
        
340
     
348
   
Construction
     
-
     
22
     
74
     
73
        
119
     
333
   
Consumer
     
12
     
-
     
11
     
2
        
9
     
5
   
Home equity
     
-
     
6
     
-
     
285
        
15
     
293
   
Commercial and industrial
     
-
     
30
     
183
     
1
        
236
     
342
   
Total charge-offs
     
76
     
166
     
649
     
418
        
1,241
     
2,895
   
                                                        
Recoveries:
                                                      
Consumer
     
1
     
-
     
-
     
-
        
-
     
-
   
One-to four-family real estate
     
16
     
7
     
61
     
6
        
35
     
42
   
Construction
     
-
     
12
     
243
     
229
        
14
     
14
   
Home equity
     
2
     
2
     
-
     
31
        
-
     
-
   
Commercial and industrial
     
131
     
-
     
-
     
-
        
8
     
-
   
Total recoveries
     
150
     
21
     
304
     
266
        
57
     
56
   
Net charge-offs
     
(74
)
   
145
     
345
     
152
        
1,184
     
2,839
   
Allowance balance at end of period
   
$
4,476
   
$
3,602
   
$
3,634
   
$
3,634
      
$
3,686
   
$
4,270
   
Total loans outstanding at end of period
   
$
379,698
   
$
270,931
   
$
236,916
   
$
236.916
      
$
236,818
   
$
228,648
   
Average loans outstanding during period
   
$
301,764
   
$
247,997
   
$
234,619
   
$
236.867
      
$
232,148
   
$
237,776
   
                                                     
Allowance for loan losses as a
     percentage of non-performing loans
     
64.13
%
   
58.09
%
   
59.75
%
   
59.75
 %
 
 
   
44.34
%
   
30.30
%
 
Allowance for loan losses as a
percentage of total loans
     
1.18
%
   
1.33
%
   
1.53
%
   
1.53
%
 
 
   
1.56
%
   
1.87
%
 
Net loans charged-off as a
percentage of average loans (six-month period annualized)
     
(0.02)
%
   
0.06
%
   
0.15
%
   
0.13
%
 
 
   
0.51
%
   
1.19
%
 


14

Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the Company's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses that may occur within the loan category since the total loan loss allowance is a valuation allocation applicable to the entire loan portfolio.


   
At
December 31,
   
At
June 30,
   
   
2016
   
2015
   
2014
   
2014
   
2013
   
   
Amount
 
Percent
of Loans
to Total
Loans
   
Amount
 
Percent
of Loans
to Total
Loans
   
Amount
 
Percent
of Loans
to Total
Loans
   
Amount
 
Percent
of Loans
to Total
Loans
   
Amount
 
Percent
of Loans
to Total
Loans
   
   
(Dollars in thousands)
 
                                                               
One-to-four family real estate
 
$
1,595
 
42.28
%
 
$
1,723
 
57.07
%
 
$
1,786
 
61.19
%
 
$
1,851
 
60.50
%
 
$
2.488
 
59.79
%
 
Commercial and multi-family real estate
   
1,441
 
32.83
     
1,015
 
22.02
     
885
 
13.35
     
860
 
13.53
     
706
 
14.07
   
Construction
   
248
 
4.36
     
143
 
4.02
     
317
 
5.34
     
379
 
5.29
     
238
 
3.89
   
Home equity
   
213
 
8.50
     
204
 
12.92
     
323
 
15.55
     
332
 
16.25
     
548
 
17.79
   
Commercial  and industrial
   
882
 
11.92
     
235
 
3.79
     
290
 
4.08
     
256
 
4.08
     
276
 
4.05
   
Consumer
   
6
 
0.11
     
9
 
0.18
     
6
 
0.49
     
8
 
0.35
     
11
 
0.41
   
Unallocated
   
91
 
-
     
273
 
-
     
27
 
-
     
-
 
-
     
3
 
-
   
Total allowance
 
$
4,476
 
100.00
%
 
$
3,602
 
100.00
%
 
$
3,634
 
100.00
%
 
$
3,686
 
100.00
%
 
$
4.270
 
100.00
%
 


15

Securities Portfolio

Our investment policy is designed to manage cash flows and foster earnings within prudent interest rate risk and credit risk guidelines. The portfolio mix is governed by our short term and long term liquidity needs. Rate‑of‑return, cash flow, rating and guarantor‑backing are also considered when making investment decisions. The purchase of principal only and stripped coupon interest only security instruments is specifically not authorized by our investment policy. Furthermore, other than government related securities which may not be rated, we only purchase securities with a rating of AAA or AA. We invest primarily in mortgage-backed securities, U.S. Government obligations, U.S. Government agency issued securities, state and political subdivision general obligations and to a lesser extent in Corporate Bonds and Certificates of Deposits.

Mortgage‑backed securities represent a participation interest in a pool of mortgages issued by U.S. government agencies or government‑sponsored enterprises, such as Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Government National Mortgage Association ("Ginnie Mae"), and the Federal National Mortgage Association ("Fannie Mae"), as well as non-government, private corporate issuers. Mortgage‑backed securities are pass‑through securities and generally yield less than the mortgage loans underlying the securities. The characteristics of the underlying pool of mortgages, i.e., fixed‑rate or adjustable‑rate, as well as prepayment risk, are passed on to the certificate holder.

Mortgage-backed securities issued or sponsored by U.S. government agencies and government‑sponsored entities are guaranteed as to the payment of principal and interest to investors.

Corporate bonds often pay higher rates than government or municipal bonds, because they tend to be riskier.  The bond holder receives interest payments (yield) and principal and is repaid on a fixed maturity date.  Corporate bonds can mature anywhere between 1 to 30 years and changes in interest rates are generally reflected in the bond prices.  Corporate bonds carry no claims to ownership and do not pay a dividend, but are considered to be less risky than stocks, since the company has to pay off all of its debts (including bonds) before it handles its obligations to stockholders.  Corporate bonds have a wide range of ratings and yields because the financial health of the issuers can vary widely,

Accounting standards require that securities be categorized as "held to maturity," "trading securities" or "available for sale," based on management's intent as to the ultimate disposition of each security. These standards allow debt securities to be classified as "held to maturity" and reported in financial statements at amortized cost if the reporting entity has the positive intent and ability to hold these securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security's prepayment risk, increases in loan demand, or other similar factors cannot be classified as "held to maturity."

At December 31, 2016, our entire securities portfolio was classified as held to maturity.  All securities were purchased with the intent to hold each security until maturity.  Securities not classified as "held to maturity" or as "trading securities" are classified as "available for sale" and are reported at fair value with unrealized gains and losses on the securities impacting equity.  The Company held no available for sale or trading securities during the years ended December 31, 2016 and 2015.

Individual securities are considered impaired when their fair values are less than their amortized cost. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are "temporary" or "other-than-temporary" in accordance with applicable accounting guidance.  Accordingly, the Company accounts for temporary impairments based upon security classification as either trading, available for sale or held to maturity.  Temporary impairments on "available for sale" securities would be recognized, on a tax-effected basis, through other comprehensive
 
 
16

 
income with offsetting entries adjusting the carrying value of the security and the balance of deferred taxes.  Temporary impairments of held to maturity securities are not recognized in the consolidated financial statements; however, information concerning the amount and duration of impairments on held to maturity securities is disclosed in the notes to the consolidated financial statements.  The carrying value of securities held in a trading portfolio would be adjusted to fair value through earnings on a quarterly basis.

Other-than-temporary impairments on securities that the Company has decided to sell or will more likely than not be required to sell prior to the full recovery of their fair value to a level equal to or exceeding amortized cost are recognized in earnings.  Otherwise, the other-than-temporary impairment is bifurcated into credit-related and noncredit-related components.  The credit-related impairment generally represents the amount by which the present value of the cash flows expected to be collected on a debt security falls below its amortized cost.  The noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. Credit-related other-than-temporary impairments are recognized in earnings while noncredit-related other-than-temporary impairments are recognized, net of deferred taxes, in other comprehensive income.

At December 31, 2016, our securities portfolio did not contain securities of any issuer, other than the U.S. Government agencies and government-sponsored enterprises, having an aggregate book value in excess of 10% of stockholders' equity.  We do not currently participate in hedging programs, interest rate caps, floors or swaps, or other activities involving the use of off-balance sheet derivative financial instruments, however, we may in the future utilize such instruments if we believe it would be beneficial for managing our interest rate risk.
17

The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our held to maturity securities portfolio at December 31, 2016. Our held to maturity securities portfolio is carried at amortized cost.  This table shows contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities of the securities held by us may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. Callable securities pose reinvestment risk because we may not be able to reinvest the proceeds from called securities at an equivalent or higher interest rate.

       
At December 31, 2016
 
       
One Year or Less
   
One to Five Years
   
Five to Ten Years
   
More than Ten Years
   
Total Investment Securities
 
       
Carrying
Value
 
Average
Yield
   
Carrying
Value
 
Average
Yield
   
Carrying
Value
 
Average
Yield
   
Carrying
Value
 
Average
Yield
   
Carrying
Value
 
Average
Yield
   
Market
Value
 
       
(Dollars in thousands)
 
                                                                                 
U.S. Government Agency Obligations
 
$
1,000
 
0.84
%
   
$
5,500
 
1.17
%
   
$
-
 
-
%
   
$
-
 
-
%
   
$
6,500
 
1.12
%
 
$
6,459
 
                                                                                 
Mortgage-Backed Securities:
                                                                               
Government National
Mortgage Association
       
-
 
-
       
-
 
-
       
9
 
2.09
       
-
 
-
       
9
 
2.09
     
9
 
Federal Home Loan
Mortgage Corporation
       
-
 
-
       
19
 
2.61
       
21
 
2.78
       
3,107
 
1.67
       
3,147
 
1.68
     
3,072
 
Federal National Mortgage
Association
       
-
 
-
       
7,000
 
2.67
       
12,051
 
2.50
       
2,456
 
1.90
       
21,507
 
2.49
     
21,724
 
Corporate bonds
       
2,002
 
1.48
       
2,032
 
2.05
       
1,000
 
3.55
       
4,000
 
4.00
       
9,034
 
2.95
     
8,743
 
State and political subdivisions
       
101
 
0.75
       
663
 
1.30
       
538
 
1.85
       
-
 
-
       
1,302
 
1.48
     
1,273
 
Certificate of deposits
       
1,670
 
1.37
       
935
 
1.43
       
-
 
-
       
-
 
-
       
2,605
 
1.39
     
2,614
 
Total
     
$
4,773
 
1.29
%
   
$
16,149
 
1.95
%
   
$
13,619
 
2.55
%
   
$
9,563
 
2.70
%
   
$
44,104
 
2.23
%
 
$
43,894
 

18

The following table sets forth the carrying value of our held to maturity securities portfolio at the dates indicated. All securities are classified as held to maturity and, therefore, are shown at amortized cost.
 
   
At December 31,
 
   
2016
   
2015
 
   
(In thousands)
 
U.S. Government Agency Obligations
 
$
6,500
   
$
37,500
 
Government National Mortgage Association
   
9
     
10
 
Federal Home Loan Mortgage Corporation
   
3,147
     
3,860
 
Federal National Mortgage Association
   
21,507
     
22,593
 
Corporate bonds
   
9,034
     
9,572
 
State and political subdivisions
   
1,302
     
1,405
 
Certificates of deposits
   
2,605
     
4,055
 
Total securities held to maturity
 
$
44,104
   
$
78,995
 

Sources of Funds

General. Deposits are our major source of funds for lending and other investment purposes. To the extent that our loan originations may exceed the funding available from deposits, we have borrowed funds from the Federal Home Loan Bank ("FHLB") to supplement the amount of funds for lending and funding daily operations.

In addition, we derive funds from loan and mortgage‑backed securities principal repayments, interest, and proceeds from the maturity and call of investment securities. Loan and securities payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by pricing strategies and money market conditions.

Deposits. Our current deposit products include checking and savings accounts, certificates of deposit and fixed or variable rate individual retirement accounts (IRAs). Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time, if any, that the funds must remain on deposit and the applicable interest rate. Our savings account menu includes regular passbook, statement, money market and club accounts. We also offer a six-level tiered savings account. Our certificates of deposit currently range in terms from 6 months to 10 years. Our IRAs are available with the same maturities as certificates of deposit accounts, with the exception of the 30 month term. We offer a two year certificate of deposit that permits the depositor to increase the interest rate to the current two year rate once during the term.

Deposits are obtained primarily from within New Jersey. The Bank may utilize brokered deposits and a listing service as funding sources.  As of December 31, 2016, the Bank had $7.3 million in brokered deposits.  Premiums or incentives for opening accounts are sometimes offered.  Periodically we select particular certificate of deposit maturities for promotion in connection with asset/liability management and interest rate risk concerns.

The determination of deposit and certificate interest rates is based upon a number of factors, including: (1) need for funds based on loan demand, current maturities of deposits and other cash flow needs; (2) a current survey of a selected group of competitors' rates for similar products; (3) economic conditions; and (4) business plan projections.

A large percentage of our deposits are in certificates of deposit. The inflow of certificates of deposit and the retention of such deposits upon maturity are significantly influenced by general interest rates and money market conditions, making certificates of deposit traditionally a more volatile source of funding than core deposits. Our liquidity could be reduced if a significant amount of certificates of deposit maturing within a short period of time were not renewed. To the extent that such deposits do not remain with us, they may need to be replaced with borrowings which could increase our cost of funds and negatively impact our net interest rate spread and our financial condition.
19


The following table sets forth the distribution of average deposits for the periods indicated and the weighted average nominal interest rates for each period on each category of deposits presented.

       
For the Year Ended December 31,
       
2016
   
2015
 
2014
       


Average
Balance
 

Percent
of Total
Deposits
 
Weighted
Average
Nominal
Rate
   


Average
Balance
 

Percent
of Total
Deposits
 
Weighted
Average
Nominal
Rate
 
Average
Balance
 
Percent
of Total
Deposits
 
Weighted
Average
Nominal
Rate
     
(Dollars in thousands)
                                                           
Non-interest-bearing demand
   
$
34,026
 
11.38
%
 
-
%
   
$
34,248
 
12.74
%
 
-
%
 
$
24,698
 
9.26
%
 
-
%
Interest-bearing demand
       
71,843
 
24.02
   
0.28
       
46,493
 
17.30
   
0.16
     
41,217
 
15.44
   
0.14
 
Savings and club
       
103,570
 
34.63
   
0.22
       
101,106
 
37.61
   
0.22
     
103,345
 
38.72
   
0.22
 
Certificates of deposit
       
89,609
 
29.97
   
1.20
       
86,948
 
32.35
   
1.22
     
97,640
 
36.58
   
1.32
 
                                                             
Total deposits
     
$
299,048
 
100.00
%
 
0.50
%
   
$
268,795
 
100.00
%
 
0.51
%
 
$
266,900
 
100.00
%
 
0.59
%


20

The following table sets forth certificates of deposit classified by interest rate categories as of the dates indicated.

   
At
December 31,
 
   
2016
   
2015
   
2014
 
   
Amount
   
Percent of Total
     
Amount
   
Percent
of Total
   
Amount
   
Percent
of Total
 
   
(Dollars in thousands)
 
Interest Rate:
                                           
Under – 1.00%
 
$
43,795
   
42.26
%
   
$
51,005
   
59.72
%
 
$
53,795
   
57.28
%
1.00% - 1.99%
   
43,223
   
41.71
       
24,611
   
28.82
     
20,608
   
21.94
 
2.00% - 2.99%
   
12,160
   
11.74
       
4,240
   
4.96
     
7,153
   
7.61
 
3.00% - 3.99%
   
728
   
0.70
       
706
   
0.83
     
6,119
   
6.51
 
4.00% - 4.99%
   
884
   
0.85
       
884
   
1.03
     
1,018
   
1.08
 
5.00% - 5.99%
   
2,837
   
2.74
       
3,962
   
4.64
     
5,245
   
5.58
 
6.00% +
   
-
   
-
       
-
   
-
     
-
   
-
 
Total
 
$
103,627
   
100.00
%
   
$
85,408
   
100.00
%
 
$
93,938
   
100.00
%

The following table sets forth the amount and maturities of certificates of deposit at December 31, 2016.

 
Amount Due
 
 
Year Ended December 31,
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
After
2021
 
Total
 
 
(Dollars in thousands)
 
Interest Rate:
                                         
Under - 1.00%
$
39,352
 
$
4,443
 
$
-
 
$
-
 
$
-
 
$
-
 
$
43,795
 
1.00% - 1.99%
 
10,122
   
9,437
   
3,601
   
2,981
   
15,940
   
1,142
   
43,223
 
2.00% - 2.99%
 
-
   
-
   
83
   
44
   
11,239
   
794
   
12,160
 
3.00% - 3.99%
 
-
   
90
   
335
   
303
   
-
   
-
   
728
 
4.00% - 4.99%
 
-
   
846
   
38
   
-
   
-
   
-
   
884
 
5.00% - 5.99%
 
1,934
   
903
   
-
   
-
   
-
   
-
   
2,837
 
6.00% +
 
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
$
51,408
 
$
15,719
 
$
4,057
 
$
3,328
 
$
27,179
 
$
1,936
 
$
103,627
 


21

The following table shows the amount of the Company's certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2016.

 

 
 
Certificates
of Deposit
 
     
(In thousands)
 
 
Remaining Time Until Maturity:
       
 
  Within three months
 
$
9,575
 
 
  Three through six months
   
7,133
 
 
  Six through twelve months
   
10,121
 
 
  Over twelve months
   
29,541
 
 
       Total
 
$
56,370
 

Borrowings. To supplement our deposits as a source of funds for lending or investment, we have borrowed funds in the form of advances from the Federal Home Loan Bank of New York ("FHLB of NY").  At December 31, 2016, our collateralized borrowing limit with the FHLB of NY was $75.6 million and our outstanding borrowings with the FHLB of NY totaled $22.7 million. Information regarding our total borrowings as of December 31, 2016 is set forth in the following table.

   
At December 31, 2016
   
Balance
 
Rate
 
Maturity
 
(Dollars in thousands)
     
Total Borrowings:
             
Ten year fixed rate convertible advance
 
$
10,000
 
3.272%
 
November 2017
Ten year fixed rate convertible advance
 
$
10,000
 
3.460%
 
March 2018
Five year fixed rate advance
 
$
2,675
 
1.790%
 
July 2020
   
$
22,675
       
               

There were no overnight advances with the FHLB of NY as of December 31, 2016 and 2015

Advances from the FHLB of NY are typically secured by the FHLB stock and a portion of our residential mortgage loans and by other assets, mainly securities which are obligations of or guaranteed by the U.S. government. Additional information regarding our borrowings is included under Note 8 to our consolidated financial statements beginning on page F-1.

Subsidiary Activity

The Company has no direct subsidiaries other than the Bank. The Bank has one wholly owned subsidiary, Millington Savings Service Corp., formed in 1984. The service corporation is currently inactive.

Regulation and Supervision

The Bank and the Company operate in a highly regulated industry. This regulation establishes a comprehensive framework of activities in which they may engage and is intended primarily for the protection of the Deposit Insurance Fund and depositors. Set forth below is a brief description of certain laws that relate to the regulation of the Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets
 
 
22

 
and the adequacy of the allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, including changes in the regulations governing mutual holding companies, could have a material adverse impact on the Company and the Bank. The adoption of regulations or the enactment of laws that restrict the operations of the Bank and/or the Company or impose burdensome requirements upon one or both of them could reduce their profitability and could impair the value of the Bank's franchise, resulting in negative effects on the trading price of the Company's common stock.

Holding Company Regulation

General. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the "BHC Act"), and is regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Federal Reserve has enforcement authority over the Company and the Company's non-bank subsidiaries which also permits the Federal Reserve to restrict or prohibit activities that are determined to be a serious risk to the subsidiary bank. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for shareholders of the Company.

As a bank holding company, the Company is required to file with the Federal Reserve an annual report and any additional information as the Federal Reserve may require under the BHC Act. The Federal Reserve will also examine the Company and its subsidiaries.

Under the BHC Act, the Company must obtain the prior approval of the Federal Reserve before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect control of any voting shares of any bank or bank holding company if, after such acquisition, the Company would directly or indirectly own or control more than 5% of such shares.

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the BHC Act on extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on the taking of such stock or securities as collateral for loans to any borrower. Furthermore, under amendments to the BHC Act and regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or providing any property or services. Generally, this provision provides that a bank may not extend credit, lease or sell property, or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to the bank holding company, or to any other subsidiary of the bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, the bank holding company, or any subsidiary of the bank.

Extensions of credit by the Bank to executive officers, directors, and principal shareholders of the Bank or any affiliate thereof, including the Company, are subject to Section 22(h) of the Federal Reserve Act, which among other things, generally prohibits loans to any such individual where the aggregate amount exceeds an amount equal to 15% of a bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral.

Source of Strength Doctrine. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the policy of the Federal Reserve that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve regulations, or both.
 
 
23


 
Non-Banking Activities. The business activities of the Company, as a bank holding company, are restricted by the BHC Act. Under the BHC Act and the Federal Reserve's bank holding company regulations, the Company may only engage in, or acquire or control voting securities or assets of a company engaged in, (1) banking or managing or controlling banks and other subsidiaries authorized under the BHC Act and (2) any BHC Act activity the Federal Reserve has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities necessary to carry on those activities, as well as a lengthy list of activities that the Federal Reserve has determined to be so closely related to the business of banking as to be a proper incident thereto.

Financial Modernization. The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a "financial holding company." A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Act also permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies if they are "financial in nature" or "incidental" to financial activities. A bank holding company may become a financial holding company if it and each of its subsidiary banks is well capitalized and well managed, and each of its subsidiary banks has at least a "satisfactory" CRA rating. A financial holding company must provide notice to the Federal Reserve within 30 days after commencing activities previously determined by statute or by the Federal Reserve and Department of the Treasury to be permissible. The Company has not submitted notice to the Federal Reserve of its intent to be deemed a financial holding company.

Regulatory Capital Requirements. The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHC Act. The Federal Reserve's capital adequacy guidelines are similar to those imposed on the Bank by the FDIC. See "Regulation of the Bank-Regulatory Capital Requirements and "Recent Amendments to Regulatory Capital Requirements." The Federal Reserve, however, has adopted a policy statement that exempts bank holding companies with less than $1.0 billion in consolidated assets that are not engaged in significant non-banking or off-balance sheet activities and that do not have a material amount of debt or equity securities registered with the SEC from its regulatory capital requirements as long as their bank subsidiaries are well capitalized, such bank holding companies need only maintain a pro forma debt to equity ratio of less than 1.0 in order to pay dividends and repurchase stock and to be eligible for expedited treatment on applications.

Federal Securities Law. The Company's common stock is registered under Section 12(b) of the Exchange Act, and the Company is subject to the periodic reporting and other requirements of Section 12(b) of the Exchange Act.

Acquisition of ControlUnder the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve if any person (including a company), or group acting in concert, seeks to acquire "control" of a bank company.  An acquisition of "control" can occur upon the acquisition of 10% or more of the voting stock of a bank holding company or as otherwise defined by the Federal Reserve.  Under the Change in Bank Control Act, the Federal Reserve has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition.  Any company that so acquires control is then subject to regulation as a bank holding company.
 

 
24

Regulation of the Bank

General.  As a New Jersey chartered, FDIC-insured bank, the Bank is regulated by the New Jersey Department of Banking and Insurance and the FDIC. The Bank's operations are subject to extensive regulation, including restrictions or requirements with respect to loans to one borrower, the percentage of non-mortgage loans or investments to total assets, capital distributions, permissible investments and lending activities, liquidity, transactions with affiliates and community reinvestment. The Bank must file regulatory reports concerning its activities and financial condition, and must obtain regulatory approvals prior to entering into certain transactions, such as mergers with or acquisitions of other financial institutions. The New Jersey Department of Banking and Insurance and the FDIC regularly examine the Bank and prepare reports to the Bank's Board of Directors on deficiencies, if any, found in its operations. The regulatory authorities have substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements.

Federal Deposit Insurance. The Bank's deposits are insured to applicable limits by the FDIC. Under the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased from $100,000 to $250,000.

The FDIC has adopted a risk-based premium system that provides for quarterly assessments based on an insured institution's ranking in one of four risk categories based on their examination ratings and capital ratios. The assessment base is the institution's average consolidated assets less average tangible equity. Insured banks with more than $1.0 billion in assets must calculate quarterly average assets based on daily balances while smaller banks and newly chartered banks may use weekly averages. In the case of a merger, the average assets of the surviving bank for the quarter must include the average assets of the merged institution for the period in the quarter prior to the merger. Average assets are reduced by goodwill and other intangibles. Average tangible equity equals Tier 1 capital. For institutions with more than $1.0 billion in assets, average tangible equity is calculated on a weekly basis while smaller institutions may use the quarter-end balance. Prior to July 1, 2016, the base assessment rate for insured institutions in Risk Category I ranged between 5 to 9 basis points and for institutions in Risk Categories II, III, and IV, the assessment rate was 14, 23 and 35 basis points, respectively. An institution's assessment rate may be reduced based on the amount of its outstanding unsecured long-term debt and for institutions in Risk Categories II, III and IV may be increased based on their brokered deposits. Risk Categories are eliminated for institutions with more than $10 billion in assets which will be assessed at a rate between 5 and 35 basis points.

Effective July 1, 2016, the FDIC amended its assessment regulations for established banks (generally, an institution that has been federally insured for at least five years as of the last day of any quarter for which it is being assessed) with less than $10 billion in assets to replace the previous risk categories with updated financial ratios that are designed to better predict the risk of failure of insured institutions. The amended rules became effective during the first quarter after the designated reserve ratio of the Deposit Insurance Fund reached 1.15% and will remain in effect until the designated reserve ratio reaches 2.0%. The amended regulations set a maximum rate that banks rated CAMELS 1 or 2 may be charged and a minimum rate that CAMELS 3, 4 and 5 banks may be charged. Under the amended rules, the FDIC uses a bank's weighted average CAMELS component ratings and the following financial measures to determine assessments: Tier 1 leverage ratio; ratio of net income before taxes to total assets; ratio of non-performing loans to gross assets; and ratio of other real estate owned to gross assets. In addition, assessments take into consideration core deposits to total assets, one-year asset growth and a loan mix index. The loan mix index measures the extent to which a bank's total assets include higher risk loans. To calculate the loan mix index, each category of loan in the bank's portfolio (other than credit card loans) is divided by the bank's total assets to determine the percentage of assets represented by that loan category. Each percentage is then multiplied by that loan category's historical weighted average industry-wide charge-off rate. The sum of these numbers determines the loan mix index value for that
 
 
25

 
bank. The amended regulations are intended to be revenue neutral to the FDIC but to shift premium payments to higher risk institutions. Most institutions are expected to see lower premiums. A companion regulation assessed banks over $10 billion in assets at higher rates for two years in accordance with the requirements of the Dodd-Frank Act.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the Federal Savings and Loan Insurance Corporation. The FICO assessment rates, which are determined quarterly, averaged 0.60% of insured deposits on an annualized basis in 2015. These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements. The FDIC has promulgated capital adequacy requirements for state-chartered banks that, like the Bank, are not members of the Federal Reserve System. Effective January 1, 2015, the capital adequacy requirements were substantially revised to conform them to the international regulatory standards agreed to by the Basel Committee on Banking Supervision in the accord often referred to as "Basel III".  The final rule applies to all depository institutions as well as to all top-tier bank and savings and loan holding companies that are not subject to the Federal Reserve's Small Bank Holding Company Policy Statement.
Under the FDIC's revised capital adequacy regulations, the Bank is required to meet four minimum capital standards: (1) "Tier 1" or "core" capital leverage ratio equal to at least 4%  of total adjusted assets, (2) a common equity Tier 1 capital ratio equal to 4.5% of risk-weighted assets, (3) a Tier 1 risk-based ratio equal to 6% of risk-weighted assets, and (4) a total capital ratio equal to 8% of total risk-weighted assets. Common equity Tier 1 capital is defined as common stock instruments, retained earnings, any common equity Tier 1 minority interest and, unless the bank has made an "opt-out" election, accumulated other comprehensive income, net of goodwill and certain other intangible assets. Tier 1 or core capital is defined as common equity Tier 1 capital plus certain qualifying subordinated interests and grandfathered capital instruments. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, qualifying subordinated instruments and certain grandfathered capital instruments. An institution's risk-based capital requirements are measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. Risk weightings range from 0% for cash to 100% for property acquired through foreclosure, commercial loans, and certain other assets to 150% for exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property.
 In addition to higher capital requirements, the new capital rules require banks and covered financial institution holding companies to maintain a capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over four years beginning January 1, 2016. The fully phased-in capital buffer requirement will effectively raise the minimum required risk-based capital ratios to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital on a fully phased-in basis.
In assessing an institution's capital adequacy, the FDIC takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual institutions where necessary.
Prompt Corrective Regulatory Action. Under applicable federal statutes, the federal bank regulatory agencies are required to take "prompt corrective action" with respect to institutions that do not meet specified minimum capital requirements. For these purposes, the law establishes five capital
 
26

categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the FDIC's prompt corrective action regulations, an institution is deemed to be "well capitalized" if it has a Total Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio of 8.0% or greater, a Common Equity Tier 1 risk-based capital ratio of 6.5% or better and a leverage ratio of 5.0% or greater. An institution is "adequately capitalized" if it has a Total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital Ratio of 6.0% or greater, a Common Equity Tier 1 Capital Ratio of 4.5% or better and a Leverage Ratio of 4.0% or greater. An institution is "undercapitalized" if it has a Total Risk-Based Capital Ratio of less than 8.0%, a Tier 1 Risk-Based Capital ratio of less than 6.0%, a Common Equity Tier 1 ratio of less than 4.5% or a Leverage Ratio of less than 4.0%. An institution is deemed to be "significantly undercapitalized" if it has a Total Risk-Based Capital Ratio of less than 6.0%, a Tier 1 Risk-Based Capital Ratio of less than 4.0%, a Common Equity Tier 1 ratio of less than 3.0% or a Leverage Ratio of less than 3.0%. An institution is considered to be "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%
The prompt corrective action regulations provide for the imposition of a variety of requirements and limitations on institutions that fail to meet the above capital requirements. In particular, the FDIC may require any non-member bank that is not "adequately capitalized" to take certain action to increase its capital ratios. If the non-member bank's capital is significantly below the minimum required levels of capital or if it is unsuccessful in increasing its capital ratios, the bank's activities may be restricted.

At December 31, 2016, the Bank qualified as "well capitalized" under the prompt corrective action rules.

Community Reinvestment Act. Under the Community Reinvestment Act, every insured depository institution, including the Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act requires the depository institution's record of meeting the credit needs of its community to be assessed and taken into account in the evaluation of certain applications by such institution, such as a merger or the establishment of a branch office by the Bank. An unsatisfactory Community Reinvestment Act examination rating may be used as the basis for the denial of an application. The Bank received a "satisfactory" rating in its most recent Community Reinvestment Act examination.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of New York ("FHLB of NY"), which is one of twelve regional federal home loan banks. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by financial institutions and proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members pursuant to policies and procedures established by its board of directors.

As a member, the Bank is required to purchase and maintain stock in the FHLB of NY in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding FHLB advances.   The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral to 30% of a member's capital and limiting total advances to a member.

The FHLB is required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. In addition, these requirements could result in the FHLB imposing a higher rate of interest on advances to their members.

27

Item 1A. Risk Factors

Not applicable as the Company is a "smaller reporting company."

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

At December 31, 2016, our investment in property and equipment, net of depreciation and amortization, totaled $9.0 million, including leasehold improvements and construction in progress. The following table lists our offices.

 
Office Location
 
Year Facility
Opened
 
Leased or
Owned
         
Millington Main Office
1902 Long Hill Road
Millington, NJ
 
1994
(1)
 
Owned
Dewy Meadow Branch Office
415 King George Road
Basking Ridge, NJ
 
2002
   
Leased
RiverWalk Branch Office
675 Martinsville Road
Basking Ridge, NJ
 
2005
(2)
 
Leased
Martinsville Branch Office
1924 Washington Valley Road
Martinsville, NJ
 
2006
   
Leased
Bernardsville Branch Office
122 Morristown Road
Bernardsville, NJ
 
2008
   
Owned

__________________
(1)
The Bank's main office opened in 1911 in Millington, New Jersey. The Bank moved into its current main office in 1994.
(2)
The Bank's first branch office opened in 1998 in Liberty Corner, New Jersey. This office was relocated in 2005.

Item 3. Legal Proceedings

The Bank, from time to time, is a party to routine litigation which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans, and other issues incident to our business. There were no lawsuits pending or known to be contemplated against the Company or the Bank at December 31, 2016 that would have a material effect on operations or income.


Item 4. Mine Safety Disclosures

Not applicable
 
 
28


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information. The Company's common stock trades on the NASDAQ Stock Market under the symbol "MSBF". The table below shows the reported high and low closing prices of common stock reported by NASDAQ and dividends declared during the periods indicated. Stock price and dividend information up to July 16, 2015 is that of Old MSB but have been restated to give effect to the exchange of each share of Old MSB held by the public stockholders for 1.1397 shares of Company common stock.

   
High
 
Low
 
Dividends
 
2015
                   
 Quarter ended March 31, 2015
 
$
10.09
 
$
8.86
 
$
-
 
 Quarter ended June 30, 2015
 
$
11.67
 
$
9.84
 
$
-
 
 Quarter ended September 30, 2015
 
$
12.10
 
$
10.98
 
$
-
 
 Quarter ended December 31, 2015
 
$
12.64
 
$
11.45
 
$
-
 
                     
2016
                   
 Quarter ended March 31, 2016
 
$
12.89
 
$
12.25
 
$
-
 
 Quarter ended June 30, 2016
 
$
13.80
 
$
12.25
 
$
-
 
 Quarter ended September 30, 2016
 
$
13.90
 
$
12.93
 
$
-
 
 Quarter ended December 31, 2016
 
$
14.90
 
$
13.35
 
$
-
 
                     



Dividends. Declarations of dividends by the Board of Directors depend on a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, and general economic as well as stock market conditions. The timing, frequency and amount of dividends are determined by the Board of Directors.

Stockholders. As of March 10, 2017, there were approximately 590 shareholders of record of the Company's common stock. This number does not include brokerage firms, banks and registered clearing agents acting as nominees for an indeterminate number of beneficial ("street name") owners.

(b) Use of Proceeds.

Not applicable

(c) Issuer Purchases of Equity Securities. There were no repurchases of stock during the fourth quarter of 2016.
 

Item 6. Selected Financial Data

Not applicable as the Company is a smaller reporting company.
 

 
29

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reflects the Company's consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with the Company's consolidated financial statements and accompanying notes thereto beginning on page F‑1 following Item 16 of this Form 10-K.

Critical Accounting Policies

Our accounting policies are integral to understanding the results reported and are described in Note 2 to our consolidated financial statements beginning on page F-1. 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.

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level by management which represents the evaluation of known and inherent risks in the loan portfolio at the consolidated balance sheet date that are both probable and reasonable to estimate. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, the composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

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

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; consumer and commercial and industrial. Some segments of the Company's loan receivable portfolio are further disaggregated into classes which allows management to better 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 consists of both owner and non-owner occupied loans which have medium risk due to historical activity on these type 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 (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.  
 

 
30

The allowance consists of specific, general and unallocated components. The specific component is related to loans that are classified as impaired.  For loans 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 and is based on historical loss experience 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 and 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.

The 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.

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.
 
Loans the terms of which are modified are classified as troubled debt restructurings 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 troubled debt restructuring generally involve a reduction in interest rate below market rate given the associated credit risk, or an extension of a loan's stated maturity date. Nonaccrual troubled debt restructurings 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 troubled debt restructurings are designated as impaired until they are ultimately repaid in full or foreclosed and sold.
 
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.
 
 
31

 
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 non-real estate collateral, such as accounts receivable, inventory and equipment, are determined based on the borrower's financial statements, inventory reports, accounts receivable agings 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.


Overview

Our primary business is attracting 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 our lending and investing activities. Our loan portfolio consists of one-to-four-family residential real estate mortgages, commercial real estate mortgages, construction loans, commercial and industrial loans, home equity loans and lines of credit, and other consumer loans. We also invest in U.S. Government obligations and mortgage-backed securities and, to a lesser extent, corporate bonds.

We reported net income of $1.2 million for the year ended December 31, 2016 as compared to a net income of $443,000 for 2015.

Net interest income for 2016 was up approximately $1.9 million, or 19.0%, as compared to 2015.   Non-interest expense increased by $366,000, or 3.7%, while non-interest income increased by $327,000 or 45.8% for the same comparative period mainly as a result of a $350,000 wire fraud settlement received in 2016 related to a loss recorded in 2014.  The net interest rate spread increased in 2016 to 2.94%, compared to 2.78% for 2015, mainly as a result of our increased loan growth.  For the year ended December 31, 2016, interest income increased by $2.0 million or 16.4% while interest expense increased by $91,000 or 4.2% as compared to 2015.

Total assets were $461.6 million at December 31, 2016, a 22.9% increase compared to $375.7 million at December 31, 2015. The increase in assets occurred primarily as the result of a $105.7 million increase in loans receivable, net, offset by a decrease of $34.9 million in securities held to maturity.   Deposits were $362.3 million at December 31, 2016, compared to $262.6 million at December 31, 2015.  FHLB advances were $22.7 million at December 31, 2016 compared to $32.7 million at December 31, 2015.

Stockholders' equity at December 31, 2016 was $73.2 million compared to our stockholders' equity at December 31, 2015 of $76.4 million. The Company had net income of $1.2 million for the year ended December 31, 2016.    The retention of earnings was offset by $3.2 million used to repurchase shares of our common stock. Our return on average equity for December 31, 2016 was 1.54% compared to 0.79% for December 31, 2015.
 
32

Comparison of Financial Condition at December 31, 2016 and 2015

General.  Total assets at December 31, 2016 were $461.6 million versus $375.7 million at December 31, 2015 with the increase attributable mainly to loan growth. During the year ended December 31, 2016, the Company experienced growth of $105.7 million or 40.3% in loans receivable, net, $9.1 million or 73.8% in cash and cash equivalents and $6.3 million or 84.6% within bank owned life insurance. Securities held for sale decreased $34.9 million primarily as a result of investment calls. Other assets and FHLB of New York stock decreased $715,000 and $393,000, respectively. Deposits increased by $99.7 million while FHLB advances decreased by $10.0 million and other liabilities decreased approximately $616,000.   

The ratio of average interest-earning assets to average-interest bearing liabilities was 131.9% for the year ended December 31, 2016 as compared to 126.8% for the year ended December 31, 2015.  Stockholders' equity decreased by $3.2 million, or 4.2%, to $73.2 million at December 31, 2016 compared to $76.4 million at December 31, 2015 primarily due to $3.2 million in stock repurchases, partially offset by earnings of $1.2 million for 2016.

Loans. Loans receivable, net, increased $105.7 million, or 40.3%, from $262.3 million at December 31, 2015 to $368.0 million at December 31, 2016. The Bank's commercial and multi-family real estate loan portfolio grew by $65.0 million, or 109.0%, since December 2015, aided in part by the closing of $34.7 million in purchased and participation loans. The commercial and industrial portfolio increased by $35.0 million on stronger loan demand, while the construction loan portfolio increased approximately $3.7 million as a result of new projects.  The residential mortgage portfolio increased $3.2 million to $192.8 million from $189.6 million as of year-end 2015.  All remaining portfolios were consistent with prior year-end levels.

Securities. The securities held to maturity portfolio totaled $44.1 million at December 31, 2016 compared to $79.0 million at December 31, 2015.  Maturities, calls and principal repayments during 2016 totaled $34.8 million and no additional securities were purchased during 2016 compared to $10.5 million of maturities, calls and principal repayments and $11.1 million of purchases during 2015.

Deposits. Total deposits at December 31, 2016 increased to $362.3 million from $262.6 million at December 31, 2015. Overall, deposits increased by $99.7 million with non-interest bearing balances increasing by $16.2 million and interest bearing deposits increasing $83.5 million since December 31, 2015 as the Company focused on deposit pricing and the development of deeper commercial and small business relationships.

Borrowings. Total borrowings were $22.7 million at December 31, 2016 compared to $32.7 million at December 31, 2015.  There were no overnight advances with the FHLB of New York at December 31, 2016 or December 31, 2015.

Equity. Stockholders' equity was $73.2 million at December 31, 2016 compared to $76.4 million at December 31, 2015, a decrease of $3.2 million or 4.2%. The decrease in shareholders' equity was primarily due to the purchase of common stock for the Company's equity plan and repurchase of common stock which resulted in a reduction of $4.7 million to equity. This reduction was partially offset by a $1.2 increase in retained earnings related to net income.

Comparison of Operating Results for the Years Ended December 31, 2016 and 2015

General. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. It is a function of the average balances of loans and investments versus deposits and borrowed funds outstanding in any one period and the yields earned on
 
 
33

 
those loans and investments and the cost of those deposits and borrowed funds. Our results of operations are also affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income includes service fees and charges, and income on bank owned life insurance. Non-interest expense includes salaries and employee benefits, occupancy and equipment expense and other general and administrative expenses such as service bureau fees and advertising costs.

The Company reported net income of $1,161,000 for December 31, 2016 compared to net income of $443,000 for the year ended December 31, 2015, representing an increase of $718,000 or 162.1%.  This increase was largely driven by $1.9 million increase in net interest income as well as $350,000 related to the recovery of a wire fraud loss from 2014. Offsetting this were an increase in the provision for loan losses of $687,000 and an increase in non-interest expense of $366,000. Income tax expense increased $469,000 for the year ended December 31, 2016 versus 2015 due to the increase in pre-tax income.

Net Interest Income.  Net interest income for the year ended December 31, 2016 totaled $12.0 million compared to $10.0 million for the year ended December 31, 2015.  Interest income for the year ended December 31, 2016 was $14.1 million compared to $12.2 million for the year end December 31, 2015, while interest expense increased by $91,000 to $2.2 million from the same period a year earlier.

Average earning assets increased $41.2 million, or 12.1%, to $381.8 million year over year while the average rate on interest earning assets increased by 0.14% to 3.72% for the year ended December 31, 2016.  The result of those variances was an increase in interest income of $2.0 million for the year ended December 31, 2016 compared to the year ended December 31, 2015.  Interest income for the year ended December 31, 2016 was $14.2 million compared to $12.2 million for the year end December 31, 2015. Interest income on loans receivable grew by $2.4 million to $12.7 million due mainly to an increase in loan volume. Average loans were $301.8 million and $248.0 million for the years ended December 31, 2016 and 2015, respectively. The average yield increased by four basis points which also contributed to the increase in interest income from loans. Average securities held to maturity declined by $22.2 million to $57.7 million from $79.9 million.  The average rate earned on the portfolio increased eight basis points to 2.24% from 2.16% for the prior year.  Overall, this resulted in a reduction of $433,000 in interest income from securities.  Other interest-earning assets, consisting of our Federal Reserve account, FHLB stock and other interest-bearing deposits with other financial institutions, increased by $9.4 million on average, to $22.3 million for the year ended December 31, 2016 compared with $12.9 million for the year ended December 31, 2015.  Offsetting this increase was a decrease in the average yield from 0.81% to 0.77%. This decline in rate was largely attributed to larger balances held at the Federal Reserve Bank earning 0.50%. The combined impact was an increase of interest income on other interest-earning assets of $68,000.

Total interest expense increase by $91,000 to $2.2 million for the year ended December 31, 2016 as a result of increased volumes and lower rates.  Overall, average interest-bearing liabilities increased $20.8 million, or 7.8% to $289.5 million for the year ended December 31, 2016 as compared to $268.6 million for the year ended December 31, 2015.  Interest expense on certificates of deposit increased $7,000 as average balances were approximately $2.7 million higher for the year ended 2016 period totaling $89.6 million compared to $86.9 million for the year ended December 31, 2015.  The average cost declined by two basis points.  Savings and club accounts averaged $103.6 million for the year ended December 31, 2016 versus $101.1 million for the year ended December 31, 2015.  A mix of volume and rate accounted for the $7,000 increase in interest expense for these accounts in 2016 as compared to the same period in 2015. Interest demand and money market accounts on average grew $25.4 million to $71.8 million which resulted in an increase in interest expense of $125,000 at December 31, 2016.  Average interest cost rose 0.12% to 0.28% from 0.16% as a result of larger balance accounts earning a higher rate of interest.  Interest expense on FHLB advances declined by $48,000 to $746,000 from $794,000 a year earlier.  The average cost of advances increased by 0.72% to 3.05% from 2.33% as a result of one long term borrowing maturing during the year yielding 0.78%. Average FHLB advances were $24.4 million for the year ended December 31, 2016 versus $34.1 million for the year ended December 31, 2015.
 
 
34


The Company's net interest spread and margin rose over the periods and were 2.94% and 3.13%, respectively for the year ended December 31, 2016 compared to 2.78% and 2.95%, respectively for the year ended December 31, 2015.

Provision for Loan Losses. The loan loss provision for the year ended December 31, 2016 was $800,000 compared to $113,000 for the year ended December 31, 2015.  The Company's management reviews the level of the allowance for loan losses on a quarterly basis based on a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions, (3) actual losses previously experienced, (4) the Company's level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable. This analysis resulted in a higher provision for loan loss being required for the period ended December 31, 2016.  The increase in the level of provision for loan loss primarily reflects loan growth year-over-year as other credit metrics generally improved year over year.  There was a stabilization of the quantitative and qualitative factors during the year ended December 31, 2016 and December 31, 2015.  The Company had $76,000 in charge-offs and $150,000 in recoveries for the year ended December 31, 2016 compared to $166,000 in charge-offs and $21,000 in recoveries for the year ended December 31, 2015.  The Company had $7.0 million in non-performing loans as of December 31, 2016, compared to $6.2 million at December 31, 2015.  The allowance for loan losses as a percentage of total loans was 1.18% and 1.33% at December 31, 2016 and December 31, 2015, respectively, while the allowance for loan losses as a percentage of non-performing loans increased slightly to 64.13% at December 31, 2016 from 58.09% at December 31, 2015. Non-performing loans to total loans were 1.84% at December 31, 2016 compared to 2.29% at December 31, 2015.  Annualized net charge-offs to average loans outstanding ratios were (0.02)% for the year ended December 31, 2016 compared to 0.06% for the year ended December 31, 2015.

Non-Interest Income. This category includes fees derived from checking accounts, ATM transactions, debit card use and other fees. It also includes increases in the cash-surrender value of our bank owned life insurance. Overall, non-interest income was $1.0 million for the year ended December 31, 2016 compared to $714,000 for the year ended December 31, 2015, an increase of $327,000 or 45.8%.

Income from fees and service charges totaled $333,000 for the year ended December 31, 2016 compared to $363,000 for the year ended December 31, 2015, a decrease of $30,000 or 8.3%.  The decrease was partially attributable to lower services fees charged during the year.

Income on bank owned life insurance was $316,000 and $222,000 for the year ended December 31, 2016 and 2015, while other non-interest income was $392,000 and $129,000 for the year ended December 31, 2016 and 2015, respectively.  Bank owned life insurance income rose due to the purchase of $6.0 million in new life insurance policies. In addition, other non-interest income rose due to a $350,000 recovery in 2016 related to a wire fraud loss recorded in 2014.

Non-Interest Expenses. Total non-interest expenses increased by $366,000, or 3.7%, during the year ended December 31, 2016 and totaled $10.4 million as compared to $10.0 million for the year ended December 31, 2015.

Salaries and employee benefits expense increased by $704,00,0 or 14.0%, to $5.7 million for the year ended December 31, 2016 compared to $5.0 million for the year ended December 31, 2015.  Salary and benefits increased due to an increase in incentive compensation and stock option and restricted stock awards granted during the second quarter of 2016 as well as normal increases in salaries and benefits expenses and additions to staff.

Professional services increased $394,000 totaling $1.1 million for the year ended December 31, 2016 compared with $706,000 for the year ended December 31, 2015.  The increase is partially attributable to the Company's transition to a managed IT solution and subsequent migration to a hosted IT solution that was not present in 2015.
 
 
35


Occupancy and equipment expense increased by $197,000, or 15.7%, to $1.5 million for the year ended December 31, 2015 compared to $1.3 million for the same period a year earlier.  The increase in occupancy and equipment expense was due to an increase in depreciation expense on capitalized assets, an increase in lease expense, and other various expenses that were classified in other expenses in the prior year.

Directors' compensation expense totaled $458,000 for the year ended December 31, 2016 compared to $395,000 for the year ended December 31, 2015, representing an increase of $63,000 or 16.0%.  The increase was primarily due to the expense recorded for stock-based compensation.

  FDIC assessment expense totaled $198,000 for the year ended December 31, 2016 compared to $286,000 for the year earlier.  The reduction in FDIC assessment expense was attributable to the fluctuation of the Company's consolidated assets and lower assessment rates during the year ended December 31, 2016 versus the year ended December 31, 2015.  Service bureau fees increased by $106,000, or 16.4%, to $752,000 for the year ended December 31, 2016 compared to $646,000 for the comparable period ended December 31, 2015 as a result of costs incurred as part of the core conversion implementation.

Other non-interest expense totaled $658,000 for the year ended December 31, 2016, compared to $1.1 million for the comparable period a year earlier, reflecting an decrease of $425,000 or 39.2% due to various decreases which include a $106,000 decrease related to OREO expenses. In addition, we further classified other expenses into their respective categories including occupancy and equipment expense.

Income Taxes. The income tax expense for the year ended December 31, 2016 was $653,000, or 36.0%, of income before taxes as compared to tax expense of $184,000, or 29.3%, of the reported income before income taxes, for the year ended December 31, 2015.  The increase of effective tax rate was attributable to a larger proportion of pre-tax income being taxable.

Average Balance Sheet. The following tables set forth certain information for the year ended December 31, 2016 and 2015.  The average yields and costs are derived by dividing interest income and expense by the average daily balance of assets and liabilities, respectively, for the periods presented.

   
Year Ended December 31,
 
   
2016
 
2015
 
   
Average
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Cost
   
Average
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Cost
 
Interest-earning assets:
                                       
Loans receivable(1)
 
$
301,764
 
$
12,745
 
4.22
%
   
$
247,997
 
$
10,376
 
4.18
%
 
Securities
   
57,743
   
1,293
 
2.24
%
     
79,868
   
1,726
 
2.16
%
 
Other interest-earning assets(2)
   
22,334
   
172
 
0.77
%
     
12,880
   
104
 
0.81
%
 
Total interest-earning assets
   
381,841
   
14,210
 
3.72
%
     
340,745
   
12,206
 
3.58
%
 
Non-interest-earning assets
   
20,560
                 
21,473
             
Total assets
 
$
402,401
               
$
362,218
             
Interest-bearing liabilities:
                                       
Interest demand & money market demand
 
$
71,843
   
200
 
0.28
%
   
$
46,493
   
75
 
0.16
%
 
Savings and club deposits
   
103,570
   
230
 
0.22
%
     
101,106
   
223
 
0.22
%
 
Certificates of deposit
   
89,609
   
1,071
 
1.20
%
     
86,948
   
1,064
 
1.22
%
 
Total interest-bearing deposits
   
265,022
   
1,501
 
0.57
%
     
234,547
   
1,362
 
0.58
%
 
FHLB of New York advances
   
24,435
   
746
 
3.05
%
     
34,087
   
794
 
2.33
%
 
Total interest-bearing liabilities
   
289,457
   
2,247
 
0.78
%
     
268,634
   
2,156
 
0.80
%
 
Non-interest-bearing deposits
   
34,026
                 
34,248
             
Other non-interest-bearing liabilities
   
3,591
                 
3,135
             
Total liabilities
   
327,074
                 
306,017
             
Stockholders' equity
   
75,327
                 
56,201
             
Total liabilities and stockholders' equity
 
$
402,401
               
$
362,218
             
                                         
Net interest income/net interest rate spread(3)
       
$
11,963
 
2.94
%
         
$
10,050
 
2.78
%
 
Net interest margin(4)
             
3.13
%
               
2.95
%
 
Ratio of interest-earning assets to
interest-bearing liabilities
   
131.92
%
               
126.84
%
           

________________
(1)
Non-accruing loans have been included, and the effect of such inclusion was not material.  The allowance for loan losses is excluded, while construction loans in process and deferred fees are included.
(2)
Includes FHLB of New York stock at cost and term deposits with other financial institutions.
(3)
Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.


36



Rate/Volume Analysis. The following table reflects the sensitivity of our interest income and interest expense to changes in volume and in prevailing interest rates during the periods indicated. Each category reflects the:  (1) changes in volume (changes in volume multiplied by past rate); (2) changes in rate (changes in rate multiplied by past volume); and (3) net change. The net change attributable to the combined impact of volume and rate has been allocated proportionally to the absolute dollar amounts of change in each.

 
Year Ended December 31,
2016 vs. 2015
   
Increase (Decrease)
     
Due to
 
   
Volume
Rate
Net
             
Interest and dividend income:
           
Loans receivable
$
2,270
$
99
$
2,369
Securities
 
(438)
 
5
 
(433)
Other interest-earning assets
 
68
 
-
 
68
Increase in total interest income
 
1,900
 
104
 
2,004
             
Interest expense:
           
Interest demand and money market accounts
 
53
 
72
 
125
Savings and club
 
5
 
2
 
7
Certificates of deposit
 
18
 
(11)
 
7
Total interest-bearing deposits
 
76
 
63
 
139
FHLB of New York advances
 
(140)
 
92
 
(48)
(Decrease) increase in total interest expense
 
(64)
 
155
 
91
             
Change in net interest income
$
1,964
$
(51)
$
1,913


Liquidity, Commitments and Capital Resources

The Bank must be capable of meeting its customer obligations at all times. Potential liquidity demands include funding loan commitments, cash withdrawals from deposit accounts and other funding needs as they present themselves. Accordingly, liquidity is measured by our ability to have sufficient cash reserves on hand, at a reasonable cost and/or with minimum losses.

Senior management is responsible for managing our overall liquidity position and risk and is responsible for ensuring that our liquidity needs are being met on both a daily and long-term basis. The Financial Review Committee, comprised of senior management and chaired by the President and Chief Executive Officer is responsible for establishing and reviewing our liquidity procedures, guidelines, and strategy on a periodic basis.

Our approach to managing day-to-day liquidity is measured through our daily calculation of investable funds and/or borrowing needs to ensure adequate liquidity. In addition, senior management constantly evaluates our short-term and long-term liquidity risk and strategy based on current market conditions, outside investment and/or borrowing opportunities, short and long-term economic trends, and anticipated short and long-term liquidity requirements. The Bank's loan and deposit rates may be adjusted as another means of managing short and long-term liquidity needs. We do not at present participate in derivatives or other types of hedging instruments to meet liquidity demands, as we take a conservative approach in managing liquidity.

At December 31, 2016, the Bank had outstanding commitments to originate loans of $3.3 million, unused lines of credit of $38.5 million (including $16.5 million for home equity lines of credit and 21.6 million for commercial lines of credit), and standby letters of credit of $359,000. Certificates of deposit scheduled to mature in one year or less at December 31, 2016, totaled $51.4 million.

The Bank had contractual obligations related to the long-term operating leases for the three branch locations that it leases (Dewy Meadow, RiverWalk and Martinsville). For additional information regarding the Bank's lease commitments as of December 31, 2016, see Note 10 to our consolidated financial statements beginning on page F-1.

The Bank has access to cash through borrowings from the FHLB, as needed, to meet its day-to-day funding obligations. At December 31, 2016, its total loans to deposits ratio was 101.58%.  At December 31, 2016, the Bank's collateralized borrowing limit with the FHLB was $75.6 million, of which $22.7 million was outstanding. As of December 31, 2016, the Bank also had a $13.0 million line of credit with a financial institution for an unsecured line of credit (which is a form of borrowing) that it could access if necessary.

Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of December 31, 2016, the Company and the Bank exceeded all applicable regulatory capital requirements.  See Note 9 to our consolidated financial statements beginning at page F-1 for more information about the Company and the Bank's regulatory capital compliance.
 
 
37


 
Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance-sheet risk in the normal course of our business of investing in loans and securities as well as in the normal course of maintaining and improving the Bank facilities. These financial instruments include significant purchase commitments such as commitments to purchase investment securities or mortgage-backed securities and commitments to extend credit to meet the financing needs of our customers. At December 31, 2016, our significant off-balance sheet commitments consisted of commitments to originate loans of $3.3 million, construction loans in process of $6.6 million, unused lines of credit of $38.5 million (including $16.5 million for home equity lines of credit and $21.6 million for commercial lines of credit) and standby letters of credit of $359,000.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Since a number of commitments typically expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For additional information regarding our outstanding lending commitments at December 31, 2016, see Note 14 to our consolidated financial statements beginning on page F-1.

Impact of Inflation

The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities of our assets and liabilities are critical to the maintenance of acceptable performance levels.

The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of non-interest expense. Expense items such as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that we have made. We are unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.
 
Recent Accounting Pronouncements

Note 2 to the consolidated financial statements is incorporated herein by reference.

38

Quarterly Results of Operations (Unaudited)

Three months ended
 
12/31/2016
 
9/30/2016
 
6/30/2016
 
3/31/2016
 
12/31/2015
 
9/30/2015
 
6/30/2015
 
3/31/2015
(In Thousands, Except Per Share Data)
                                               
Interest income
 
$
3,949
 
$
3,510
 
$
3,453
 
$
3,298
 
$
3,123
 
$
3,116
 
$
3,033
 
$
2,934
Interest expense
 
 
649
   
566
   
522
   
510
 
 
522
 
 
532
 
 
548
 
 
554
                                               
Net Interest Income
   
3,300
   
2,944
   
2,931
   
2,788
   
2,601
   
2,584
   
2,485
   
2,380
                                                 
Provision for (recovery of) loan losses
 
 
300
   
180
   
190
   
130
 
 
90
 
 
40
 
 
35
 
 
(52)
                                                 
Net Interest Income after Provision for (recovery of) Loan Losses
   
3,000
   
2,764
   
2,741
   
2,658
   
2,511
   
2,544
   
2,450
   
2,432
                                                 
Non-interest income
   
205
   
183
   
512
   
141
   
210
   
172
   
169
   
163
Non-interest expenses
 
 
2,417
   
2,500
   
2,909
   
2,564
 
 
2,724
 
 
2,325
 
 
2,717
 
 
2,258
                                                 
Income (Loss) before Income Taxes
   
788
   
447
   
344
   
235
   
(3)
   
391
   
(98)
   
337
                                                 
Income tax expense (benefit)
 
 
310
   
146
   
121
   
76
 
 
(5)
 
 
133
 
 
(65)
 
 
121
                                                 
Net Income (Loss)
 
$
478
 
$
301
 
$
223
 
$
159
 
$
2
 
$
258
 
$
(33)
 
$
216
                                                 
Earnings (Loss) per share:
                                               
Basic
 
$
0.09
 
$
0.05
 
$
0.04
 
$
0.03
 
$
-
 
$
0.05
 
$
(0.01)
 
$
0.04
Diluted
 
$
0.09
 
$
0.05
 
$
0.04
 
$
0.03
 
$
-
 
$
0.04
 
$
(0.01)
 
$
0.04
 
39

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Management of Interest Rate Risk and Market Risk

Qualitative Analysis. Because the majority of our assets and liabilities are sensitive to changes in interest rates, a significant form of market risk for us is interest rate risk, or changes in interest rates.

We derive our income mainly from the difference or "spread" between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income.

Quantitative Analysis. The following table presents the Bank's economic value of equity ("EVE") as of December 31, 2016. The Bank outsources its interest rate risk modeling and the EVE values in this table were calculated by an outside consultant, based on information provided by the Bank.


         
         
 
 
Changes in
Interest Rates
(base points)
% Change
in Pretax
Net Interest Income
Economic
Value of
Equity
 
         
 
+400
 
11.32%
18.98%
 
 
+300
 
8.70%
19.60%
 
 
+200
 
6.07%
20.19%
 
 
+100
 
3.69%
20.75%
 
 
      0
 
-
21.01%
 
 
 -100
 
-5.34%
21.32%
 
                ___________
    (1) The -200bp scenario was not disclosed due to the low prevailing interest rate environment

Future interest rates or their effect on EVE or net interest income are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs, and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in this type of computation. Although certain assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in the market interest rates. The interest rate on certain types of assets and liabilities, such as demand deposits and savings accounts, may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making calculations set forth above. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase.

Notwithstanding the discussion above, the quantitative interest rate analysis presented above indicates that a rapid increase or decrease in interest rates would adversely affect our net interest margin and earnings.
 
 
40

 
Item 8. Financial Statements and Supplementary Data

The Company's consolidated financial statements are contained in this Annual Report on Form 10‑K immediately following Item 15.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a)
Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule l3a-l5(e) promulgated under the Securities Exchange Act of 1934, as amended) as of December 31, 2016. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of December 31, 2016.

(b)
Internal Control Over Financial Reporting
1. Management's Annual Report on Internal Control Over Financial Reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a- 15(f). The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that  transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of the changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Under supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2016.


41

 
 
/s/ Michael A. Shriner   /s/ John S. Kaufman 
Michael A. Shriner
 
John S. Kaufman
President and Chief Executive Officer
 
Vice President and Chief Financial Officer
 
2.
Report of Independent Registered Public Accounting Firm
 
Not applicable as the Company is a smaller reporting company.

 
3.
Changes in Internal Control over Financial Reporting
 
No change in the Company's internal controls over financial reporting (as defined in Rule l3a-l5(f) promulgated under the Securities Exchange Act of 1934, as amended) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

 The information in the sections captioned "Proposal I – Election of Directors," "Section 16(a) Beneficial Ownership Compliance" and "Corporate Governance" in the Company's Proxy Statement for its 2016 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions.  The Code of Ethics has been posted on the Company's website and may be found at www.millingtonbank.com/about-us/investor-relations.

There have been no material changes in the procedures by which security holders may recommend nominees to the Company's Board of Directors since the date of the Company's last proxy statement mailed to its stockholders.


Item 11. Executive Compensation

The information contained in the sections captioned "Executive Compensation" and "Director Compensation" in the Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
(a)
 Security Ownership of Certain Beneficial Owners.
 
The information contained in the section captioned "Principal Holders of our Common Stock" in the Proxy Statement is incorporated herein by reference.
 

42


 
(b)
Security Ownership of Management.
 
The information contained in the sections captioned "Principal Holders of our Common Stock" and "Proposal I – Election of Directors" in the Proxy Statement is incorporated herein by reference.
 
(c)
Changes in Control. Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may
at a subsequent date result in a change in control of the Company.
 
(d)
Securities Authorized for Issuance Under Equity Compensation Plans. Set forth below is information as of December 31, 2016 with respect to compensation
plans under which equity securities of the Registrant are authorized for issuance.


 
Equity Compensation Plan Information
 
   
(A)

Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
(B)


Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
(C)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (A))
 
Equity compensation plans
approved by shareholders:
                   
2008 Stock Compensation
and Incentive Plan
 
273,081
 
$
9.43
   
-
   
2016 Stock Compensation
and Incentive Plan
 
199,892
   
13.05
   
81,607
   
Total
 
472,973
 
$
10.96
   
81,607
   


Item 13. Certain Relationships and Related Transactions, and Director Independence

The information contained in the sections captioned "Related Party Transactions" and "Corporate Governance" in the Proxy Statement is incorporated herein by reference.


Item 14. Principal Accounting Fees and Services


The information contained in the section captioned "Proposal II – Ratification of the Appointment of the Independent Registered Public Accounting Firm" in the Proxy Statement is incorporated herein by reference.
43

PART IV
 
Item 15. Exhibits, Financial Statement Schedules

(1) The following financial statements and the reports of independent registered public accounting firms appear in this Annual Report on Form 10-K immediately after this Item 15:

Report of Independent Registered Accountant
Consolidated Statements of Financial Condition as of December 31, 2016 and December 31, 2015
Consolidated Statements of Income For the Years Ended December 31, 2016 and December 31, 2015 
Consolidated Statements of Comprehensive Income For the Years   Ended December 31, 2016 and December 31, 2015
Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2016 and December 31, 2015
Consolidated Statements of Cash Flows Years Ended December 31, 2016 and December 31, 2015
Notes to Consolidated Financial Statements

(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

(3) The following exhibits are filed as part of this report:

3.1
Articles of Incorporation of MSB Financial Corp. *
3.2
Bylaws of MSB Financial Corp. **
4
Stock Certificate of MSB Financial Corp.*
10.1
Employment Agreement with Michael A. Shriner, As Amended and Restated **
10.2
Employment Agreement with Robert G. Russell, Jr. ***
10.3
Employment Agreement with Nancy E. Schmitz ***
10.4
Employment Agreement with John J. Bailey ***
10.5
Form of Executive Life Insurnace Agreement ****
10.6
Millington Savings Bank Directors Consultation and Retirement Plan**
10.7
Amendment to Directors' Retirement Plan*****
10.8
MSB Financial Corp. 2008 Stock Compensation and Incentive Plan, As Amended and Restated******
10.9
Millington Bank Directors Deferred Compensation Plan*****
10.10
MSB Financial Corp. 2016 Equity Incentive Plan*******
21
Subsidiaries of the Registrant
23.1
Consent of BDO USA, LLP
31.1
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document ********
101.SCH
XBRL Schema Document ********
101.CAL
XBRL Calculation Linkbase Document ********
101.LAB
XBRL Labels Linkbase Document ********
101.PRE
XBRL Presentation Linkbase Document ********
 

 
(Footnotes on following page)
44

_______________
*
Incorporated by reference to the Registrant's Form S-1 Registration Statement File No. 333-202573)
**
Incorporated by reference to the Annual Report on Form 10-K of MSB Financial Corp., (the predecessor corporation) for the fiscal year ended June 30, 2014 and filed on September 26, 2014.
***
Incorporated by reference to the Current Report on Form 8-K of the predecessor corporation dated March 16, 2015 and filed on March 20, 2015
****
Incorporated by reference to MSB Financial Corp.'s (the predecessor) Registration Statement on Form S-1 (File No. 333-137294)
*****
Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 21, 2015 and filed on December 28, 2015
******
Incorporated by reference to the Form S-8 Registration Statement (File No. 333-164264) of the predecessor corporation.
*******
Incorporated by reference to the Registrant's Form S-8 Registration Statement (File No. 333-213834).
********
Submitted as Exhibits 101 to this Form 10-K are documents formatted in XBRL (Extensible Business Reporting Language).



Item 16.  Summary


Not applicable


45


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 17, 2017.
 
   
MSB FINANCIAL CORP.
   
 
 
By:
 
 
/s/ Michael A. Shriner
     
Michael A. Shriner
     
President and Chief Executive Officer
     
(Duly Authorized Representative)
 
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below on March 17, 2017 by the following persons on behalf of the registrant and in the capacities indicated.
 
 
/s/ Michael A. Shriner
 


/s/ W. Scott Gallaway 
Michael A. Shriner
President, Chief Executive Officer and Director
 
W. Scott Gallaway
Chairman of the Board and Director
 
 
 
 
 
Dr. Thomas G. McCain
Director
 
Donald J. Musso
Director
 
/s/ Gary T. Jolliffe
 
 
 
Gary T. Jolliffe
Director
 
H. Gary Gabriel
Director
 
/s/ Lawrence B. Seidman
 
 
/s/ Raymond J. Vanaria
Lawrence B. Seidman
Director
 
 
 
Raymond J. Vanaria
Director
 
/s/ John S. Kaufman
Robert D. Vollers
Director
 
John S. Kaufman
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 
Board of Directors and Stockholders
MSB Financial Corp.
Millington, New Jersey
 
We have audited the accompanying consolidated statements of financial condition of MSB Financial Corp. and Subsidiaries (collectively the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MSB Financial Corp. and Subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 

 
/s/ BDO USA, LLP
 
Woodbridge, New Jersey
March 17, 2017

 
 

MSB Financial Corp. and Subsidiaries


Consolidated Statements of Financial Condition


 
At
December 31,
At
December 31,
 
2016
2015
         
(Dollars in thousands, except per share amounts)
       
Cash and due from banks
$
1,388
$
2,219
Interest-earning demand deposits with banks
 
19,994
 
10,084
         
Cash and Cash Equivalents
 
21,382
 
12,303
         
Securities held to maturity (fair value of $43,894 and $78,400,
respectively)
 
44,104
 
78,995
Loans receivable, net of allowance for loan losses of $4,476 and
$3,602, respectively
 
368,007
 
262,312
Premises and equipment
 
8,957
 
8,118
Federal Home Loan Bank of New York stock, at cost
 
1,433
 
1,826
Bank owned life insurance
 
13,784
 
7,468
Accrued interest receivable
 
1,378
 
1,352
Other assets
 
2,601
 
3,316
         
Total Assets
$
461,646
$
375,690
         
Liabilities and Stockholders' Equity
       
Liabilities
       
      Deposits:
       
Non-interest bearing
$
44,365
$
28,173
Interest bearing
 
317,934
 
234,425
         
Total Deposits
 
362,299
 
262,598
         
Advances from Federal Home Loan Bank of New York
 
22,675
 
32,675
Advance payments by borrowers for taxes and insurance
 
792
 
743
Other liabilities
 
2,695
 
3,311
         
Total Liabilities
 
388,461
 
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; 5,714,182 and 5,953,423 issued; 5,714,182 and 5,953,423 outstanding, respectively
 
57
 
59
Paid-in capital
 
51,809
 
56,216
Retained earnings
 
23,370
 
22,209
Unearned common stock held by ESOP (201,316 and 212,242 shares, respectively)
 
(1,929)
 
(2,042)
Accumulated other comprehensive loss
 
(122)
 
(79)
         
Total Stockholders' Equity
 
73,185
 
76,363
         
Total Liabilities and Stockholders' Equity
$
461,646
$
375,690
         
See notes to consolidated financial statements.      
 
F-1

 
MSB Financial Corp. and Subsidiaries
 
Consolidated Statements of Income

   
Year Ended
December 31,
 
   
2016
   
2015
 
(in thousands except per share amounts)
           
     
Interest Income
               
Loans receivable, including fees
 
$
12,745
   
$
10,376
 
Securities held to maturity
   
1,293
     
1,726
 
Other
   
172
     
104
 
                 
Total Interest Income
   
14,210
     
12,206
 
                 
Interest Expense
               
Deposits
   
1,501
     
1,362
 
Borrowings
   
746
     
794
 
                 
Total Interest Expense
   
2,247
     
2,156
 
                 
                 
Net Interest Income
   
11,963
     
10,050
 
                 
Provision for Loan Losses
   
800
     
113
 
                 
Net Interest Income after Provision for Loan Losses
   
11,163
     
9,937
 
                 
Non-Interest Income
               
Fees and service charges
   
333
     
363
 
Income from bank owned life insurance
   
316
     
222
 
Other
   
392
     
129
 
                 
Total Non-Interest Income
   
1,041
     
714
 
                 
Non-Interest Expenses
               
Salaries and employee benefits
   
5,729
     
5,025
 
Directors compensation
   
458
     
395
 
Occupancy and equipment
   
1,454
     
1,257
 
Service bureau fees
   
752
     
646
 
Advertising
   
41
     
109
 
Deconversion charges
   
-
     
517
 
FDIC assessment
   
198
     
286
 
Professional services
   
1,100
     
706
 
Other
   
658
     
1,083
 
                 
Total Non-Interest Expenses
   
10,390
     
10,024
 
                 
Income before Income Taxes
   
1,814
     
627
 
Income Tax Expense
   
653
     
184
 
Net Income
 
$
1,161
   
$
443
 
                 
 Earnings per share:
               
  Basic
 
$
0.21
   
$
0.08
 
   Diluted
 
$
0.20
   
$
0.08
 
                 
See notes to consolidated financial statements.                

F-2

MSB Financial Corp. and Subsidiaries



Consolidated Statements of Comprehensive Income

   
Year Ended
December 31,
 
(Dollars in thousands)
 
2016
   
2015
 
             
     
Net income
 
$
1,161
   
$
443
 
                 
Other comprehensive loss, net of tax
               
                 
Defined benefit pension plans:
               
                 
        Actuarial loss arising during period, net of tax of $33 and
         $7 for year ended December 31, 2016 and 2015, respectively
   
(50
)
   
(10)
 
                 
        Reclassification adjustment for prior service cost included in net income, net of tax of $5 and $10 for the year ended December 31, 2016 and 2015, respectively [Note A]
   
(8
)
   
(17)
 
                 
Reclassification adjustment for net actuarial loss included in net income, net of tax of ($10) and ($15) for the year ended December 31, 2016 and 2015, respectively [Note B]
   
15
     
22
 
                 
Other comprehensive loss
   
(43
)
   
(5)
 
                 
  Comprehensive income
 
$
1,118
   
$
438
 


Note A: The gross amount of prior service cost amortization is recorded in Directors' Compensation. The related tax impact is recorded in income tax expense.

Note B: The gross amount of actuarial (gain) loss amortization is recorded in Salaries and Benefits, ($3) and ($1), respectively, and Directors' Compensation, $29, and $37, respectively. The related tax expense is recorded in income tax expense.
 
See notes to consolidated financial statements.



F-3

MSB Financial Corp. and Subsidiaries


Consolidated Statements of Changes in Stockholders' Equity


               
Unallocated
             
               
Common
     
Accumulated
     
               
Stock
     
Other
 
Total
 
   
Common
 
Paid-In
 
Retained
 
Held by
 
Treasury
 
Comprehensive
 
Stockholders'
 
(Dollars in thousands)
 
Stock
 
Capital
 
Earnings
 
ESOP
 
Stock
 
Loss
 
Equity
 
       
Balance – December 31, 2014
 
$
562
 
$
24,689
 
$
21,766
 
$
(674
)
$
(5,244
)
$
(74
)
$
41,025
 
                                             
Net  income
               
443
                     
443
 
Other comprehensive loss, net of tax
                                 
(5)
   
(5
)
Allocation of ESOP stock
         
18
         
139
               
157
 
Repurchased stock (27,541 shares)
         
(352
)
                         
(352
)
Exercise of stock options (27,541 shares)
         
296
                           
296
 
Second-step conversion and stock offering, net of offering expenses
   
(503
)
 
31,565
         
(1,507
)
 
5,244
         
34,799
 
                                             
Balance – December  31, 2015
 
$
59
 
$
56,216
 
$
22,209
 
$
(2,042
)
$
-
 
$
(79
)
$
76,363
 
                                             
Net income
               
1,161
                     
1,161
 
Other comprehensive loss, net of tax
                                 
(43
)
 
(43
)
Allocation of ESOP stock
         
36
         
113
               
149
 
Repurchased stock (242,379 shares)
   
(2
)
 
(3,213
)
                         
(3,215
)
Purchase of common stock for equity plan
         
(1,467
)
                         
(1,467
)
Exercise of stock options ( 3,138 shares)
         
30
                           
30
 
Stock-based compensation
         
207
                           
207
 
                                             
Balance – December 31, 2016
 
$
57
 
$
51,809
 
$
23,370
 
$
(1,929
)
$
-
 
$
(122
)
$
73,185
 
                                             
                                             
See notes to consolidated financial statements.                                            
 
F-4

MSB Financial Corp. and Subsidiaries

 
Consolidated Statements of Cash Flows