10-Q 1 msbf-03312018x10xq.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________

FORM 10-Q
(Mark One)
 
 
 
X
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended
March 31, 2018
 
 
 
OR
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934
 
 
 
 
For the transition period from
 
to
 
 
 
 
 
 
 
Commission File Number  001-37506
 
 
 
MSB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
 
 
 
MARYLAND
 
 
 
 
 
34-1981437
(State or other jurisdiction of
incorporation or organization)
 
 
 
 
 
(I.R.S. Employer
Identification Number)
 
 
 
1902 Long Hill Road, Millington, New Jersey
 
07946-0417
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's telephone number, including area code
(908) 647-4000
 
 
 
Indicate by check mark  whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]  No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [X]
 
Emerging growth company [  ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act .  [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [  ] No  [X ]
 
The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: May 11, 2018:
$0.01 par value common stock 5,518,795 shares outstanding

1



MSB FINANCIAL CORP. AND SUBSIDIARIES

INDEX
 
Page
Number
PART I - FINANCIAL INFORMATION
 
 
 
Item 1:
Consolidated Financial Statements (Unaudited)
 
 
 
 
 
Consolidated Statements of Financial Condition
 
 
at March 31, 2018 and December 31, 2017
 
 
 
 
Consolidated Statements of Income for the
 
 
Three Months Ended March 31, 2018 and 2017
 
 
 
 
Consolidated Statement of Changes in Stockholders’ Equity for the
 
 
Three Months Ended March 31, 2018
 
 
 
 
Consolidated Statements of Cash Flows for the Three Months
 
 
Ended March 31, 2018 and 2017
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
 
Item 2:
Management's Discussion and Analysis of
 
Financial Condition and Results of Operations
 
 
 
 
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4:
Controls and Procedures
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1:
Legal Proceedings
 
 
 
Item 1A:
Risk Factors
 
 
 
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3:
Defaults Upon Senior Securities
 
 
 
Item 4:
Mine Safety Disclosures
 
 
 
Item 5:
Other Information
 
 
 
Item 6:
Exhibits
 
 
SIGNATURES
 
 
CERTIFICATIONS
 

2



ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
 
March 31, 2018
 
December 31, 2017
 
 
 
 
(Dollars in thousands, except per share amounts)
 
 
 
Cash and due from banks
$
1,871

 
$
2,030

Interest-earning demand deposits with banks
15,484

 
20,279

 
 
 
 
Cash and Cash Equivalents
17,355

 
22,309

 
 
 
 
Securities held to maturity (fair value of $35,561 and $38,255, respectively)
36,375

 
38,482

Loans receivable, net of allowance for loan losses of $5,506 and $5,414, respectively
480,916

 
473,405

Premises and equipment, net
8,580

 
8,698

Federal Home Loan Bank of New York stock, at cost
3,049

 
2,131

Bank owned life insurance
14,294

 
14,197

Accrued interest receivable
1,642

 
1,607

Other assets
1,816

 
2,211

 
 
 
 
Total Assets
$
564,027

 
$
563,040

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Liabilities
 

 
 

Deposits:
 

 
 

Non-interest bearing
$
36,751

 
$
36,919

Interest bearing
397,092

 
411,994

 
 
 
 
Total Deposits
433,843

 
448,913

 
 
 
 
Advances from Federal Home Loan Bank of New York
58,075

 
37,675

Advance payments by borrowers for taxes and insurance
772

 
686

Other liabilities
1,578

 
2,741

 
 
 
 
Total Liabilities
494,268

 
490,015

 
 
 
 
Stockholders' Equity
 

 
 

Preferred stock, par value $0.01; 1,000,000 shares authorized; no shares issued or outstanding

 

Common stock, par value $0.01; 49,000,000 shares authorized; 5,524,095 and 5,768,632 issued and outstanding at March 31, 2018 and December 31, 2017, respectively
55

 
58

Paid-in capital
46,756

 
51,068

Retained earnings
24,663

 
23,641

Unearned common stock held by ESOP (187,666 and 190,390 shares, respectively)
(1,715
)
 
(1,742
)
 
 
 
 
Total Stockholders' Equity
69,759

 
73,025

 
 
 
 
Total Liabilities and Stockholders' Equity
$
564,027

 
$
563,040

See notes to unaudited consolidated financial statements.


3



MSB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three months ended March 31,
 
(Dollars in thousands, except per share amounts)
2018
 
2017
 
Interest Income:
 
 
 
 
Loans receivable, including fees
$
5,136

 
$
4,000

 
Securities
219

 
251

 
Other
74

 
42

 
Total Interest Income
5,429

 
4,293

 
Interest Expense
 

 
 

 
Deposits
846

 
502

 
Borrowings
281

 
196

 
Total Interest Expense
1,127

 
698

 
 
 
 
 
 
Net Interest Income
4,302

 
3,595

 
Provision for Loan Losses
90

 
195

 
Net Interest Income after Provision for Loan Losses
4,212

 
3,400

 
 
 
 
 
 
Non-Interest Income
 

 
 

 
Fees and service charges
83

 
71

 
Income from bank owned life insurance
97

 
107

 
Other
24

 
9

 
Total Non-Interest Income
204

 
187

 
 
 
 
 
 
Non-Interest Expenses
 

 
 

 
Salaries and employee benefits
1,805

 
1,506

 
Directors compensation
122

 
176

 
Occupancy and equipment
385

 
394

 
Service bureau fees
67

 
48

 
Advertising
4

 
3

 
FDIC assessment
54

 
33

 
Professional services
353

 
359

 
Other
197

 
198

 
Total Non-Interest Expenses
2,987

 
2,717

 
 
 
 
 
 
Income before Income Taxes
1,429

 
870

 
Income Tax Expense
407

 
321

 
Net Income
$
1,022

 
$
549

 
 
 
 
 
 
Earnings per share:
 

 
 

 
Basic
$
0.19

 
$
0.10

 
Diluted
$
0.19

 
$
0.10

 
See notes to unaudited consolidated financial statements.



4



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

(Dollars in Thousands)
 
Common Stock
Paid-In Capital
Retained Earnings
Unallocated Common Stock Held by ESOP
Total Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance- January 1, 2018
 
$
58

$
51,068

$
23,641

$
(1,742
)
73,025

 
 
 
 
 
 
 
Net income
 


1,022


1,022

Allocation of ESOP stock
 

22


27

49

Repurchased Stock (244,537 shares)
 
(3
)
(4,412
)


(4,415
)
Stock-based compensation
 

78



78

 
 
 
 
 
 
 
Balance - March 31, 2018
 
$
55

$
46,756

$
24,663

$
(1,715
)
$
69,759



5



MSB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
March 31,
(Dollars in thousands)
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
Net Income
$
1,022

 
$
549

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Net accretion of securities premiums and discounts and deferred loan fees and costs
(5
)
 
(26
)
Depreciation and amortization of premises and equipment
145

 
134

Stock-based compensation and allocation of ESOP stock
127

 
134

Provision for loan losses
90

 
195

Income from bank owned life insurance
(97
)
 
(107
)
(Increase) decrease in accrued interest receivable
(35
)
 
101

Decrease (increase) in other assets
395

 
(203
)
(Decrease) increase in other liabilities
(1,163
)
 
267

Net Cash Provided by Operating Activities
479

 
1,044

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

    Activity in held to maturity securities:
 

 
 

Maturities, calls and principal repayments
2,074

 
1,368

Net increase in loans receivable
(4,244
)
 
(18,737
)
Purchased loans
(3,319
)
 
(19,102
)
Proceeds from sales of loans

 
7,250

Purchase of bank premises and equipment
(27
)
 
(95
)
Purchase of Federal Home Loan Bank of New York stock
(6,804
)
 
(2,921
)
Redemption of Federal Home Loan Bank of New York stock
5,886

 
1,728

   Net Cash Used in Investing Activities
(6,434
)
 
(30,509
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net decrease in deposits
(15,070
)
 
(7,368
)
Advances from Federal Home Loan Bank of New York
30,400

 
26,500

Repayment of advances from Federal Home Loan Bank of New York
(10,000
)
 

Increase in advance payments by borrowers for taxes and insurance
86

 
32

Net exercise of options and repurchase of shares
(25
)
 

Proceeds from exercise of stock options

 
168

Repurchase of common stock
(4,390
)
 

Net Cash Provided by Financing Activities
1,001

 
19,332

 
 
 
 
Net decrease in Cash and Cash Equivalents
(4,954
)
 
(10,133
)
Cash and Cash Equivalents – Beginning
22,309

 
21,382

Cash and Cash Equivalents – Ending
$
17,355

 
$
11,249

 
 
 
 
Supplementary Cash Flows Information
 

 
 

Interest paid
$
1,151

 
$
700

See notes to unaudited consolidated financial statements.

6



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


Note 1 – Organization and Business

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

Note 2 – Basis of Consolidated Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly owned subsidiary the Service Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.  These consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X, and therefore, do not include all information or notes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America ("GAAP").
In the opinion of management, all adjustments, consisting of only normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements have been made at March 31, 2018 and for the three months ended March 31, 2018 and 2017.  The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results which may be expected for an entire fiscal year or other interim periods.

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

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-9, "Revenue from Contracts with Customers (ASU 2014-9)", which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-9 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-9 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.  The FASB also subsequently issued ASUs Nos. 2016-8, 2016-10, 2016-12, 2016-20 and 2017-5 to augment, amend and clarify the original pronouncement.  The Company had evaluated all of its revenue streams and determined that the majority of its revenue is derived from financial instruments that are scoped out. In addition, non-interest revenue streams were evaluated, including deposit and service charges and interchange fees. The adoption of this guidance has not changed the recognition of our current revenue sources.


7


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


In January 2016, the FASB issued ASU No. 2016-1, "Financial Instruments - Overall." The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance effective January 1, 2018, did not have a material impact on our consolidated financial statements. 

In February 2016, the FASB issued ASU No. 2016-2, "Leases" (Topic 842). This ASU revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability for all leases. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily due to the recognition of lease assets and lease liabilities. ASU 2016-2 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. The standard is required to be adopted using the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We currently expect that upon adoption of ASU 2016-2, right-of-use assets and lease liabilities will be recognized in our consolidated statements of condition in amounts that will be material; however, we do not expect a material impact to our consolidated income statement.

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





Note 3 – Earnings Per Share

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

 
Three Months Ended
March 31,
(In Thousands, Except Per Share Data)
2018
 
2017
Numerator:
 
 
 
Net income
$
1,022

 
$
549

 
 
 
 
Denominator:
 

 
 

Weighted average common shares
5,470

 
5,520

Dilutive potential common shares
37

 
94

Weighted average fully diluted shares
5,507

 
5,614

 
 
 
 
Earnings per share:
 

 
 

Basic
$
0.19

 
$
0.10

Dilutive
$
0.19

 
$
0.10


For three months ended March 31, 2018 and March 31, 2017, there were no anti-dilutive securities.

8


Note 4 - Securities Held to Maturity - Continued


Note 4 - Securities Held to Maturity
All mortgage-backed securities at March 31, 2018 and December 31, 2017 have been issued by FNMA, FHLMC or GNMA and are secured by one-to-four family residential real estate. The amortized cost and fair value of securities held to maturity at March 31, 2018 and December 31, 2017, as shown below, are reported in total.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The amortized cost of securities held to maturity and their fair values as of March 31, 2018 and December 31, 2017 are summarized as follows:
(In Thousands)
Amortized
 Cost
 
Gross Unrecognized Gains
 
Gross Unrecognized Losses
 
Fair Value
March 31, 2018
 
U.S. Government agencies:
 
 
 
 
 
 
 
Due within one year
$
2,500

 
$

 
$
15

 
$
2,485

Due after one year through five years
2,000

 

 
30

 
1,970

 
 
 
 
 
 
 
 
Total U.S. Government agencies
4,500

 

 
45

 
4,455

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
23,228

 
142

 
437

 
22,933

 
 
 
 
 
 
 
 
Corporate bonds:
 

 
 

 
 

 
 

Due within one year
508

 

 
1

 
507

Due after one year through five years
1,500

 
6

 

 
1,506

Due after five through ten years
1,000

 

 
56

 
944

Due after ten years
4,000

 

 
410

 
3,590

Total Corporate bonds
7,008

 
6

 
467

 
6,547

 
 
 
 
 
 
 
 
State and political subdivisions:
 

 
 

 
 

 
 

Due within one year
151

 

 
1

 
150

Due after one through five years
679

 
1

 
7

 
673

Due after five through ten years
364

 

 
6

 
358

Total State and political subdivisions
1,194

 
1

 
14

 
1,181

 
 
 
 
 
 
 
 
Certificates of deposit:
 

 
 

 
 

 
 

Due within one year
445

 
1

 
1

 
445

Total Certificates of deposit
445

 
1

 
1

 
445

 
 
 
 
 
 
 
 
Total Securities held to maturity
$
36,375

 
$
150

 
$
964

 
$
35,561


9


Note 4 - Securities Held to Maturity - Continued


 
 (In Thousands)
Amortized
 Cost
 
Gross Unrecognized Gains
 
Gross Unrecognized Losses
 
Fair Value
December 31, 2017
 
U.S. Government agencies:
 
 
 
 
 
 
 
Due within one year
$
3,500

 
$

 
$
16

 
$
3,484

Due after one year through five years
2,000

 

 
26

 
1,974

Total U.S. Government Agencies
5,500

 

 
42

 
5,458

 
 
 
 
 
 
 
 
Mortgage-backed securities
23,839

 
263

 
207

 
23,895

 
 
 
 
 
 
 
 
Corporate bonds:
 

 
 

 
 

 
 

Due within one year
512

 
3

 

 
515

Due after one year through five years
1,500

 
4

 

 
1,504

Due after five years through ten years
1,000

 

 
35

 
965

Due thereafter
4,000

 

 
209

 
3,791

Total Corporate bonds
7,012

 
7

 
244

 
6,775

 
 
 
 
 
 
 
 
State and political subdivisions:
 

 
 

 
 

 
 

Due within one year
151

 

 
1

 
150

Due after one through five years
680

 
1

 
4

 
677

Due after five through ten years
365

 

 

 
365

Total State and political subdivisions
1,196

 
1

 
5

 
1,192

 
 
 
 
 
 
 
 
Certificates of deposit:
 

 
 

 
 

 
 

Due within one year
935

 
1

 
1

 
935

Total Certificates of deposit
935

 
1

 
1

 
935

 
 
 
 
 
 
 
 
Total Securities held to maturity
$
38,482

 
$
272

 
$
499

 
$
38,255


There were no sales of securities held to maturity during the three months ended March 31, 2018 or 2017.  At March 31, 2018 and December 31, 2017, securities held to maturity with an amortized cost and fair value of approximately $2.0 million and $1.0 million, respectfully, were pledged to secure public funds on deposit.
The following tables set forth the gross unrecognized losses and fair value of securities in an unrecognized loss position as of March 31, 2018 and December 31, 2017, and the length of time that such securities have been in an unrecognized loss position.
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Fair Value
 
Gross Unrecognized Losses
 
Fair Value
 
Gross Unrecognized Losses
 
Fair Value
 
Gross Unrecognized Losses
(In Thousands)
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
agencies
$

 
$

 
$
4,455

 
$
45

 
$
4,455

 
$
45

Mortgage-backed
   securities
10,954

 
244

 
5,257

 
193

 
16,211

 
437

Corporate bonds
507

 
1

 
4,534

 
466

 
5,041

 
467

State and political subdivisions
1,181

 
14

 

 

 
1,181

 
14

Certificates of deposit
245

 
1

 

 

 
245

 
1

 
 
 
 
 
 
 
 
 
 
 
 
Total securities with gross unrecognized losses
$
12,887

 
$
260

 
$
14,246

 
$
704

 
$
27,133

 
$
964



10


Note 4 - Securities Held to Maturity - Continued


 
Less than 12 Months
 
More than 12 Months
 
Total
 
Fair Value
 
Gross Unrecognized Losses
 
Fair Value
 
Gross Unrecognized Losses
 
Fair Value
 
Gross Unrecognized Losses
(In Thousands)
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
agencies
$
1,000

 
$
1

 
$
4,458

 
$
41

 
$
5,458

 
$
42

Mortgage-backed
   securities
7,796

 
88

 
5,558

 
119

 
13,354

 
207

Corporate bonds

 

 
4,756

 
244

 
4,756

 
244

State and political subdivisions
655

 
5

 

 

 
655

 
5

Certificates of deposit
245

 
1

 

 

 
245

 
1

 
 
 
 
 
 
 
 
 
 
 
 
Total securities with gross unrecognized losses
$
9,696

 
$
95

 
$
14,772

 
$
404

 
$
24,468

 
$
499


At March 31, 2018, management concluded that the unrecognized losses summarized above (which related to four U.S. Government agency bonds, twenty mortgage-backed securities, four corporate bonds, seven state and political subdivision security and one certificate of deposit, compared to five U.S. Government agency bonds, sixteen mortgage-backed securities, three corporate bonds, four state and political subdivision bonds, and one certificate of deposit as of December 31, 2017) are temporary in nature since they are not related to the underlying credit quality of the issuer.  As of March 31, 2018, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company would be required to sell these securities prior to the anticipated recovery of the remaining amortized cost.  Management believes that the losses above are primarily related to the change in market interest rates. Accordingly, the Company has not recognized any other-than-temporary impairment loss on these securities.

11


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

Note 5 - Loans Receivable and Allowance for Credit Losses
The composition of loans receivable at March 31, 2018 and December 31, 2017 was as follows:

(In Thousands)
March 31, 2018
 
December 31, 2017
Residential mortgage:
 
 
 
One-to-four family
$
154,576

 
$
157,876

Home equity
27,051

 
26,803

 
 
 
 
Total residential mortgages
181,627

 
184,679

 
 
 
 
Commercial loans:
 

 
 

Commercial and multi-family real estate
195,951

 
196,681

Construction
49,397

 
43,718

Commercial and industrial
82,712

 
73,465

 
 
 
 
Total commercial loans
328,060

 
313,864

 
 
 
 
Consumer:
595

 
618

 
 
 
 
Total loans receivable
510,282

 
499,161

 
 
 
 
Less:
 

 
 

Loans in process
23,398

 
19,868

Deferred loan fees
462

 
474

Allowance for loan losses
5,506

 
5,414

 
 
 
 
Total adjustments
29,366

 
25,756

 
 
 
 
Loans receivable, net
$
480,916

 
$
473,405



12


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

Allowance for Loan Losses

The following tables provide an analysis of the allowance for loan losses and the loan receivable recorded investments, by portfolio segment, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2018 and 2017 and loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2017:

  (In Thousands)
Residential
 Mortgage
 
Commercial and
Multi-Family
Real Estate
 
Construction
 
Commercial and
Industrial
 
Consumer
 
Unallocated
 
Total
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 

 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
$
1,852

 
$
2,267

 
$
302

 
$
710

 
$
5

 
$
278

 
$
5,414

Provisions (credits)
141

 
7

 
19

 
64

 

 
(141
)
 
$
90

Loans charged-off

 

 

 

 
(2
)
 

 
$
(2
)
Recoveries
4

 

 

 

 

 

 
$
4

Balance, ending
$
1,997

 
$
2,274

 
$
321

 
$
774

 
$
3

 
$
137

 
$
5,506

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period-end allowance allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
35

 
$

 
$

 
$
26

 
$

 
$

 
$
61

Loans collectively evaluated for impairment
1,962

 
2,274

 
321

 
748

 
3

 
137

 
$
5,445

Ending Balance
$
1,997

 
$
2,274

 
$
321

 
$
774

 
$
3

 
$
137

 
$
5,506

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period-end loan balances evaluated for:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
11,430

 
$
2,038

 
$

 
$
196

 
$

 
$

 
$
13,664

Loans collectively evaluated for impairment
170,117

 
193,675

 
25,942

 
82,429

 
595

 

 
$
472,758

Ending Balance
$
181,547

 
$
195,713

 
$
25,942

 
$
82,625

 
$
595

 
$

 
$
486,422


13


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

  (In Thousands)
Residential
 Mortgage
 
Commercial and
Multi-Family
Real Estate
 
Construction
 
Commercial and
Industrial
 
Consumer
 
Unallocated
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 

 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning
$
1,808

 
$
1,441

 
$
248

 
$
882

 
$
6

 
$
91

 
$
4,476

Provisions (credits)
(23
)
 
28

 
91

 
141

 
2

 
(44
)
 
$
195

Loans charged-off
(2
)
 
(43
)
 

 
(1
)
 
(1
)
 

 
$
(47
)
Recoveries
2

 

 

 

 

 

 
$
2

Balance, ending
$
1,785

 
$
1,426

 
$
339

 
$
1,022

 
$
7

 
$
47

 
$
4,626

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period-end allowance allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans  individually evaluated for impairment
$
100

 
$

 
$

 
$
92

 
$

 
$

 
$
192

Loans  collectively evaluated for impairment
1,685

 
1,426

 
339

 
930

 
7

 
47

 
$
4,434

Ending Balance
$
1,785

 
$
1,426

 
$
339

 
$
1,022

 
$
7

 
$
47

 
$
4,626

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period-end loan balances evaluated for:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
14,427

 
$
1,510

 
$

 
$
371

 
$

 
$

 
$
16,308

Loans collectively evaluated for impairment
176,065

 
139,390

 
16,493

 
54,422

 
395

 

 
$
386,765

Ending Balance
$
190,492

 
$
140,900

 
$
16,493

 
$
54,793

 
$
395

 
$

 
$
403,073

  (In Thousands)
Residential
 Mortgage
 
Commercial and
Multi-Family
Real Estate
 
Construction
 
Commercial and
Industrial
 
Consumer
 
Unallocated
 
Total
At December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period-end allowance balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$

 
$

 
$
27

 
$
1

 
$

 
$
28

Loans collectively evaluated for impairment
1,852

 
2,267

 
302

 
683

 
4

 
278

 
$
5,386

Ending Balance
$
1,852

 
$
2,267

 
$
302

 
$
710

 
$
5

 
$
278

 
$
5,414

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period-end loan balances evaluated for:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
12,609

 
$
2,057

 
$

 
$
205

 
$
1

 
$

 
$
14,872

Loans collectively evaluated for impairment
171,988

 
194,373

 
23,803

 
73,167

 
616

 

 
$
463,947

Ending Balance
$
184,597

 
$
196,430

 
$
23,803

 
$
73,372

 
$
617

 
$

 
$
478,819


Nonaccrual and Past Due Loans
The following table represents the recorded investments in classes of the loans receivable portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2018 and December 31, 2017:


14


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

(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2018
30-59 Days Past Due and Still Accruing
 
60-89 Days Past Due and Still Accruing
 
Greater than 90 Days and Still Accruing
 
Total
Past Due and Still Accruing
 
Accruing
Current
Balances
 
Nonaccrual
Loans
 
Total Loans
Receivables
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
1,470

 
$
820

 
$
187

 
$
2,477

 
$
148,906

 
$
3,112

 
$
154,495

Home equity
1,352

 
573

 
45

 
1,970

 
25,038

 
44

 
27,052

Commercial and multi-family real estate

 
380

 
1,034

 
1,414

 
194,003

 
296

 
195,713

Construction

 

 

 

 
25,942

 

 
25,942

Commercial and industrial
337

 

 

 
337

 
82,192

 
96

 
82,625

Consumer
10

 

 

 
10

 
585

 

 
595

Total
$
3,169

 
$
1,773

 
$
1,266

 
$
6,208

 
$
476,666

 
$
3,548

 
$
486,422


(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
30-59 Days Past Due and Still Accruing
 
60-89 Days Past Due and Still Accruing
 
Greater than 90 Days and Still Accruing
 
Total
Past Due and Still Accruing
 
Accruing
Current
Balances
 
Nonaccrual
Loans
 
Total Loans
Receivables
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
1,221

 
$
700

 
$

 
$
1,921

 
$
152,425

 
$
3,446

 
$
157,792

Home equity
605

 
16

 
157

 
778

 
25,912

 
115

 
26,805

Commercial and multi-family real estate

 

 

 

 
196,115

 
315

 
196,430

Construction

 

 

 

 
23,803

 

 
23,803

Commercial and industrial
68

 

 

 
68

 
73,205

 
99

 
73,372

Consumer

 
5

 
1

 
6

 
611

 

 
617

Total
$
1,894

 
$
721

 
$
158

 
$
2,773

 
$
472,071

 
$
3,975

 
$
478,819


Impaired Loans

The following tables provide an analysis of the impaired loans at March 31, 2018 and December 31, 2017 and the average balances of such loans for the three months and year, respectively, then ended:


15


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

(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
Recorded Investment
 
Loans with
 No Related
 Reserve
 
Loans with
 Related
 Reserve
 
Related
 Reserve
 
Contractual
 Principal
 Balance
 
Average
 Recorded Investment
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
10,191

 
$
9,852

 
$
341

 
$
35

 
$
10,760

 
$
10,686

Home equity
1,239

 
1,239

 

 

 
1,328

 
1,333

 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multi-family real estate
2,038

 
2,038

 

 

 
2,672

 
2,048

Construction

 

 

 

 

 

Commercial and industrial
196

 
165

 
31

 
26

 
236

 
200

Consumer

 

 

 

 

 
1

Total
$
13,664

 
$
13,294

 
$
372

 
$
61

 
$
14,996

 
$
14,268

(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
Recorded Investment
 
Loans with
 No Related
 Reserve
 
Loans with
 Related
 Reserve
 
Related
 Reserve
 
Contractual
 Principal
 Balance
 
Average
 Recorded Investment
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
11,181

 
$
11,181

 
$

 
$

 
$
11,729

 
$
12,256

Home equity
1,428

 
1,428

 

 

 
1,522

 
1,335

 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multi-family real estate
2,057

 
2,057

 

 

 
2,680

 
1,787

Construction

 

 

 

 

 

Commercial and industrial
205

 
173

 
32

 
27

 
242

 
296

Consumer
1

 

 
1

 
1

 
1

 
1

Total
$
14,872

 
$
14,839

 
$
33

 
$
28

 
$
16,174

 
$
15,675


As of March 31, 2018 and December 31, 2017, impaired loans listed above include $11.6 million and $11.4 million, respectively, of loans modified in troubled debt restructurings ("TDR") and as such are considered impaired under GAAP.  As of March 31, 2018 and December 31, 2017, $9.7 million and $9.7 million, respectively, of these loans have been performing in accordance with their modified terms for an extended period of time and as such were removed from non-accrual status and considered performing.

Interest income of $116,000 and $105,000 was recognized on impaired loans during the three months ended March 31, 2018 and 2017. The average balance of impaired loans for the three months ended March 31, 2018 and March 31, 2017 were $14.3 million and $16.1 million, respectively.
 
Credit Quality Indicators

Management uses a nine point internal risk rating system to monitor the credit quality of the loans in the Company's commercial real estate, construction and commercial and industrial loan segments.  The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually or when credit deficiencies, such as delinquent loan payments, arise. The criticized rating categories utilized by management generally follow bank regulatory definitions.

The Bank's rating categories are as follows:
1 – 5: The first five risk rating categories are considered not criticized, and are aggregated as "Pass" rated.
6: "Special Mention" category includes assets that are currently protected, but are potentially weak, resulting in increased credit risk and deserving management's close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. 
7: "Substandard" loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  This includes loans that are

16


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

inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.
8: "Doubtful" loans have all the weaknesses inherent in loans classified "Substandard" with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. 
9: "Loss" loans are considered uncollectible and subsequently charged off.

The following table presents the recorded investment in classes of the loans receivable portfolio summarized by the aggregate "Pass" and the criticized categories of "Special Mention", "Substandard", "Doubtful" and "Loss" within the internal risk rating system as of March 31, 2018 and December 31, 2017:

(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2018
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multi-family real estate
$
192,595

 
$
2,098

 
$
1,020

 
$

 
$

 
$
195,713

Construction
25,942

 

 

 

 

 
25,942

Commercial and industrial
81,982

 
422

 
221

 

 

 
82,625

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
300,519

 
$
2,520

 
$
1,241

 
$

 
$

 
$
304,280


(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multi-family real estate
$
193,982

 
$
1,415

 
$
1,033

 
$

 
$

 
$
196,430

Construction
23,803

 

 

 

 

 
23,803

Commercial and industrial
72,962

 
182

 
228

 

 

 
73,372

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
290,747

 
$
1,597

 
$
1,261

 
$

 
$

 
$
293,605


Management further monitors the performance and credit quality of the residential portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status. 

(In Thousands)
Residential mortgage
 
Consumer
 
Total Residential and Consumer
 
Mar 31, 2018
 
Dec 31, 2017
 
Mar 31, 2018
 
Dec 31, 2017
 
Mar 31, 2018
 
Dec 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Nonperforming
$
3,201

 
$
3,718

 
$

 
$