MSB Financial 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)
X		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934
For the quarterly period ended				September 30, 2019
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class					Trading Symbol(s)		Name of each exchange which registered
Common Stock, Par Value $0.01 per Share					MSBF		The Nasdaq Stock Market, LLC
Indicate by check markwhether 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 every Interactive Data File required to be submitted 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 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 [X]
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:									November 8, 2019
$0.01 par value common stock 5,184,914 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 September 30, 2019 and December 31, 2018	3
	Consolidated Statements of Income for the Three and Nine
	Months Ended September 30, 2019 and 2018	4
	Consolidated Statement of Changes in Stockholders’ Equity for the Three and Nine
	Months Ended September 30, 2019 and 2018	5
	Consolidated Statements of Cash Flows for the Nine Months
	Ended September 30, 2019 and 2018	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2:	Management's Discussion and Analysis of	22
	Financial Condition and Results of Operations
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4:	Controls and Procedures	28
PART II - OTHER INFORMATION
Item 1:	Legal Proceedings	28
Item 1A:	Risk Factors	28
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3:	Defaults Upon Senior Securities	28
Item 4:	Mine Safety Disclosures	29
Item 5:	Other Information	29
Item 6:	Exhibits	30
SIGNATURES		31
CERTIFICATIONS

2

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	September 30, 2019			December 31, 2018
(Dollars in thousands, except per share amounts)
Cash and due from banks	$	1,087		$	1,558
Interest-earning demand deposits with banks	14,638			10,242
Cash and Cash Equivalents	15,725			11,800
Securities held to maturity (fair value of $37,846 and $38,569, respectively)	38,073			39,476
Loans receivable, net of allowance for loan losses of $5,661 and $5,655, respectively	507,270			502,299
Premises and equipment, net	8,136			8,180
Federal Home Loan Bank of New York stock, at cost	2,654			4,756
Bank owned life insurance	14,872			14,585
Accrued interest receivable	1,687			1,615
Other assets	2,836			1,789
Total Assets	$	591,253		$	584,500
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	47,026		$	46,690
Interest bearing	429,038			373,889
Total Deposits	476,064			420,579
Advances from Federal Home Loan Bank of New York	47,275			94,275
Advance payments by borrowers for taxes and insurance	741			749
Other liabilities	2,953			2,251
Total Liabilities	527,033			517,854
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; 5,201,016 and 5,389,054 issued and outstanding at September 30, 2019 and December 31, 2018, respectively	52			54
Paid-in capital	41,980			44,726
Retained earnings	23,738			23,498
Unearned common stock held by ESOP (171,292 and 179,464 shares, respectively)	(1,550		)	(1,632		)
Total Stockholders' Equity	64,220			66,646
Total Liabilities and Stockholders' Equity	$	591,253		$	584,500

See notes to unaudited consolidated financial statements.

3

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2019		2018		2019		2018
Interest Income:
Loans receivable, including fees	$	5,784	$	5,788	$	17,253	$	16,360
Securities	273		304		824		763
Other	122		83		376		219
Total Interest Income	6,179		6,175		18,453		17,342
Interest Expense
Deposits	1,360		1,014		3,751		2,795
Borrowings	478		406		1,528		1,059
Total Interest Expense	1,838		1,420		5,279		3,854
Net Interest Income	4,341		4,755		13,174		13,488
Provision for Loan Losses	—		60		—		240
Net Interest Income after Provision for Loan Losses	4,341		4,695		13,174		13,248
Non-Interest Income
Fees and service charges	81		78		246		252
Income from bank owned life insurance	97		97		287		292
Other	21		15		60		58
Total Non-Interest Income	199		190		593		602
Non-Interest Expenses
Salaries and employee benefits	1,581		1,625		4,988		5,107
Directors compensation	132		121		391		365
Occupancy and equipment	388		390		1,148		1,172
Service bureau fees	171		107		365		251
Advertising	6		18		19		31
FDIC assessment	—		71		89		194
Professional services	422		528		2,069		1,217
Other	219		204		623		613
Total Non-Interest Expenses	2,919		3,064		9,692		8,950
Income before Income Taxes	1,621		1,821		4,075		4,900
Income Tax Expense	505		506		1,223		1,320
Net Income	$	1,116	$	1,315	$	2,852	$	3,580
Earnings per share:
Basic	$	0.22	$	0.25	$	0.56	$	0.67
Diluted	$	0.22	$	0.24	$	0.55	$	0.66

See notes to unaudited consolidated financial statements.

4

MSB Financial Corp and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

	Common Stock			Paid-In Capital			Retained Earnings			Unallocated Common Stock Held by ESOP				Total Stockholders' Equity
(Dollars in Thousands)
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
Net income	—			—			1,243			—				1,243
Allocation of ESOP stock	—			64			—			28				92
Repurchased Stock	—			(221		)	—			—				(221		)
Stock-based compensation	—			89			—			—				89
Cash paid for common stock dividend ($0.445 per share)	—			—			(2,456		)	—				(2,456		)
Balance - June 30, 2018	$	55		$	46,688		$	23,450		$	(1,687	)		$	68,506
Net income	—			—			1,315			—				1,315
Allocation of ESOP stock	—			71			—			27				98
Stock-based compensation	—			89			—			—				89
Balance - September 30, 2018	$	55		$	46,848		$	24,765		$	(1,660	)		$	70,008
Balance - January 1, 2019	$	54		$	44,726		$	23,498		$	(1,632	)		$	66,646
Net income	—			—			514			—				514
Allocation of ESOP stock	—			22			—			27				49
Repurchased Stock (22,200 shares)	—			(398		)	—			—				(398		)
Stock-based compensation	—			81			—			—				81
Balance - March 31, 2019	$	54		$	44,431		$	24,012		$	(1,605	)		$	66,892
Net income	—			—			1,222			—			Net income	1,222
Allocation of ESOP stock	—			18			—			27			Allocation of ESOP stock	45
Repurchased Stock (109,200 shares and 4,938 restricted shares)	(1		)	(1,861		)	—			—			Repurchased Stock (109,200 shares and 4,938 restricted shares)	(1,862		)
Stock-based compensation	—			82			—			—			Stock-based compensation	82
Balance - June 30, 2019	$	53		$	42,670		$	25,234		$	(1,578	)	June 30, 2019	$	66,379
Net income	—			—			1,116			—				1,116
Allocation of ESOP stock	—			55			—			28				83
Repurchased Stock (51,700 shares)	(1		)	(828		)	—			—				(829		)
Stock-based compensation	—			82			—			—				82
Cash paid for common stock dividend ($0.50 per share)	—			—			(2,612		)	—				(2,612		)
Balance - September 30, 2019	$	52		$	41,980		$	23,738		$	(1,550	)		$	64,220
See notes to unaudited consolidated financial statements.

5

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)	Nine Months Ended September 30,
Cash Flows from Operating Activities:	2019			2018
Net Income	$	2,852		$	3,580
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	(144		)	(91		)
Depreciation and amortization of premises and equipment	412			430
Stock-based compensation and allocation of ESOP stock	422			494
Provision for loan losses	—			240
Income from bank owned life insurance	(287		)	(292		)
Increase in accrued interest receivable	(72		)	(127		)
Decrease in other assets	165			408
(Decrease) in other liabilities	(509		)	(731		)
Net Cash Provided By Operating Activities	2,839			3,911
Cash Flows from Investing Activities:
Activity in held to maturity securities:
Purchases	(9,961		)	(8,969		)
Maturities, calls and principal repayments	11,337			4,375
Net decrease (increase) in loans receivable	56			(50,202		)
Purchased loans	(6,300		)	(3,705		)
Proceeds from sales of loans	1,444			32,382
Purchase of bank premises and equipment	(368		)	(55		)
Purchase of Federal Home Loan Bank of New York stock	—			(21,096		)
Redemption of Federal Home Loan Bank of New York stock	2,102			19,110
Net Cash Used in Investing Activities	(1,690		)	(28,160		)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits	55,485			(11,316		)
Advances from Federal Home Loan Bank of New York	—			52,400
Repayment of advances from Federal Home Loan Bank of New York	(47,000		)	(10,000		)
(Decrease) increase in advance payments by borrowers for taxes and insurance	(8		)	18
Cash dividends paid to stockholders	(2,612		)	(2,456		)
Net exercise of options and repurchase of shares	—			(36		)
Repurchase of common stock	(3,089		)	(4,599		)
Net Cash (Used In) Provided By Financing Activities	2,776			24,011
Net Increase (Decrease) in Cash and Cash Equivalents	3,925			(238		)
Cash and Cash Equivalents – Beginning	11,800			22,309
Cash and Cash Equivalents – Ending	$	15,725		$	22,071
Supplementary Cash Flows Information
Interest paid	$	5,277		$	3,863
Income taxes paid	1,642			1,060
Supplemental noncash disclosures
Lease liabilities arising from obtaining right-of-use assets	$	1,211		$	—

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, certificates of deposit 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 September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018.  The results of operations for the three and nine months ended September 30, 2019 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 February 2016, the FASB issued ASU No. 2016-2, "Leases" (Topic 842). This ASU revises the method for 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. The adoption of ASC 842 resulted in the recognition of a right-of-use (ROU) asset of $1.2 million and a lease liability of $1.2 million on our Consolidated Statements of Financial Condition. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. The Company has also elected not to restate comparative periods.

7

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

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 an 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 have selected an outside professional company's model to begin loading our data into and determining next steps. On October 16, 2019, the FASB voted to a delay the effective date of ASU 2016-13 for SEC filers who are smaller reporting companies (like the Company) and public entities that are not SEC filers and nonpublic entities. For these entities, the effective date for implementation of ASU 2016-13 has been deferred to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.

Note 3 – Earnings Per Share

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Per Share Data)	2019		2018		2019		2018
Numerator:
Net income	$	1,116	$	1,315	$	2,852	$	3,580
Denominator:
Weighted average common shares	5,047		5,330		5,124		5,377
Dilutive potential common shares	23		59		31		72
Weighted average fully diluted shares	5,070		5,389		5,155		5,449
Earnings per share:
Basic	$	0.22	$	0.25	$	0.56	$	0.67
Dilutive	$	0.22	$	0.24	$	0.55	$	0.66

For three and nine months ended September 30, 2019 and September 30, 2018, 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 September 30, 2019 and December 31, 2018 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 September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018 are summarized as follows:

(In Thousands)	Amortized  Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
September 30, 2019
U.S. Government agencies:
Due within one year	$	1,000	$	—	$	1	$	999
Due after one year through five years	—		—		—		—
Due after five through ten years	3,000		8		—		3,008
Due after ten years	3,000		8		—		3,008
Total U.S. Government agencies	7,000		16		1		7,015
Mortgage-backed securities	23,536		399		47		23,888
Corporate bonds:
Due within one year	1,500		1		1		1,500
Due after one year through five years	—		—		—		—
Due after five through ten years	1,000		—		74		926
Due after ten years	4,000		—		533		3,467
Total Corporate bonds	6,500		1		608		5,893
State and political subdivisions:
Due within one year	160		—		—		160
Due after one through five years	695		7		—		702
Due after five through ten years	182		6		—		188
Total State and political subdivisions	1,037		13		—		1,050
Total Securities held to maturity	$	38,073	$	429	$	656	$	37,846

9

Note 4 - Securities Held to Maturity - Continued

(In Thousands)	Amortized  Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
December 31, 2018
U.S. Government agencies:
Due within one year	$	2,000	$	—	$	18	$	1,982
Due after one year through five years	—		—		—		—
Due after fiver through ten years	3,000		2		—		3,002
Due thereafter	3,000		9		—		3,009
Total U.S. Government Agencies	8,000		11		18		7,993
Mortgage-backed securities	23,936		142		299		23,779
Corporate bonds:
Due within one year	—		—		—		—
Due after one year through five years	1,500		—		13		1,487
Due after five years through ten years	1,000		—		90		910
Due thereafter	4,000		—		633		3,367
Total Corporate bonds	6,500		—		736		5,764
State and political subdivisions:
Due within one year	161		—		1		160
Due after one through five years	697		—		5		692
Due after five through ten years	182		—		1		181
Total State and political subdivisions	1,040		—		7		1,033
Total Securities held to maturity	$	39,476	$	153	$	1,060	$	38,569

There were no sales of securities held to maturity during the nine month periods ended September 30, 2019 or 2018.  At September 30, 2019 and December 31, 2018, securities held to maturity with an amortized cost and fair value of approximately $4.0 million and $2.0 million, respectively 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 September 30, 2019 and December 31, 2018, 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)
September 30, 2019
U.S. Government agencies	$	—	$	—	$	999	$	1	$	999	$	1
Mortgage-backed    securities	2,185		5		3,283		42		5,468		47
Corporate bonds	500		1		4,393		607		4,893		608
Total securities with gross unrecognized losses	$	2,685	$	6	$	8,675	$	650	$	11,360	$	656

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, 2018
U.S. Government agencies	$	—	$	—	$	1,982	$	18	$	1,982	$	18
Mortgage-backed    securities	8		1		15,205		298		15,213		299
Corporate bonds	1,487		13		4,277		723		5,764		736
State and political subdivisions	180		1		853		6		1,033		7
Total securities with gross unrecognized losses	$	1,675	$	15	$	22,317	$	1,045	$	23,992	$	1,060

At September 30, 2019, management concluded that the unrecognized losses summarized above (which related to one U.S. Government agency bond, ten mortgage-backed securities and four corporate bonds, compared to two U.S. Government agency bonds, twenty mortgage-backed securities, five corporate bonds, and six state and political subdivision bonds as of December 31, 2018) are temporary in nature since they are not related to the underlying credit quality of the issuer.  As of September 30, 2019, the Company did 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 September 30, 2019 and December 31, 2018 was as follows:

(In Thousands)	September 30, 2019		December 31, 2018
Residential mortgage:
One-to-four family	$	135,657	$	143,391
Home equity	23,385		24,365
Total residential mortgages	159,042		167,756
Commercial loans:
Commercial and multi-family real estate	216,095		212,606
Construction	45,404		29,628
Commercial and industrial - Secured	59,248		60,426
Commercial and industrial - Unsecured	51,832		48,176
Total commercial loans	372,579		350,836
Consumer:	411		540
Total loans receivable	532,032		519,132
Less:
Loans in process	18,598		10,677
Deferred loan fees	503		501
Allowance for loan losses	5,661		5,655
Total adjustments	24,762		16,833
Loans receivable, net	$	507,270	$	502,299

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 September 30, 2019 and 2018 and loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2019 and December 31, 2018:

(In Thousands)	Residential  Mortgage			Commercial and Multi-Family Real Estate		Construction		Commercial and Industrial			Consumer			Unallocated		Total
Three Months Ended September 30, 2019
Allowance for loan losses:
Balance, beginning	$	2,051		$	2,332	$	236	$	1,039		$	3		$	—	$	5,661
Provisions (credits)	(133		)	71		80		(19		)	1			—		—
Loans charged-off	—			—		—		—			(2		)	—		(2		)
Recoveries	2			—		—		—			—			—		2
Balance, ending	$	1,920		$	2,403	$	316	$	1,020		$	2		$	—	$	5,661
Nine Months Ended September 30, 2019
Allowance for loan losses:
Balance, beginning	$	2,115		$	2,187	$	222	$	1,128		$	3		$	—	$	5,655
Provisions (credits)	(203		)	216		94		(108		)	1			—		—
Loans charged-off	—			—		—		—			(3		)	—		(3		)
Recoveries	8			—		—		—			1			—		9
Balance, ending	$	1,920		$	2,403	$	316	$	1,020		$	2		$	—	$	5,661
September 30, 2019 allowance allocated to:
Loans individually evaluated for impairment	$	314		$	77	$	—	$	12		$	—		$	—	$	403
Loans collectively evaluated for impairment	1,606			2,326		316		1,008			2			—		5,258
Ending Balance	$	1,920		$	2,403	$	316	$	1,020		$	2		$	—	$	5,661
September 30, 2019 loan balances evaluated for:											��
Loans individually evaluated for impairment	$	10,838		$	2,284	$	—	$	126		$	—		$	—	$	13,248
Loans collectively evaluated for impairment	148,157			213,484		26,738		110,903			401			—		499,683
Ending Balance	$	158,995		$	215,768	$	26,738	$	111,029		$	401		$	—	$	512,931

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 September 30, 2018
Allowance for loan losses:
Balance, beginning	$	1,887	$	2,469		$	331		$	868	$	4		$	37		$	5,596
Provisions (credits)	145		(109		)	(165		)	224		2			(37		)	60
Loans charged-off	—		—			—			—		(2		)	—			(2		)
Recoveries	2		—			—			—		—			—			2
Balance, ending	$	2,034	$	2,360		$	166		$	1,092	$	4		$	—		$	5,656
Nine Months Ended September 30, 2018
Allowance for loan losses:
Balance, beginning	$	1,852	$	2,267		$	302		$	710	$	5		$	278		$	5,414
Provisions (credits)	175		93			(136		)	382		4			(278		)	240
Loans charged-off	—		—			—			—		(5		)	—			(5		)
Recoveries	7		—			—			—		—			—			7
Balance, ending	$	2,034	$	2,360		$	166		$	1,092	$	4		$	—		$	5,656
September 30, 2018 allowance allocated to:
Loans  individually evaluated for impairment	$	18	$	—		$	—		$	—	$	—		$	—		$	18
Loans  collectively evaluated for impairment	2,016		2,360			166			1,092		4			—			5,638
Ending Balance	$	2,034	$	2,360		$	166		$	1,092	$	4		$	—		$	5,656
September 30, 2018 loan balances evaluated for:
Loans individually evaluated for impairment	$	11,648	$	1,723		$	—		$	124	$	—		$	—		$	13,495
Loans collectively evaluated for impairment	160,904		207,241			16,606			101,678		580			—			487,009
Ending Balance	$	172,552	$	208,964		$	16,606		$	101,802	$	580		$	—		$	500,504

14

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

(In Thousands)	Residential  Mortgage		Commercial and Multi-Family Real Estate		Construction		Commercial and Industrial		Consumer		Unallocated		Total
At December 31, 2018
Period-end allowance balances:
Loans individually evaluated for impairment	$	326	$	69	$	—	$	20	$	—	$	—	$	415
Loans collectively evaluated for impairment	1,789		2,118		222		1,108		3		—		5,240
Ending Balance	$	2,115	$	2,187	$	222	$	1,128	$	3	$	—	$	5,655
Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	11,960	$	2,411	$	—	$	243	$	—	$	—	$	14,614
Loans collectively evaluated for impairment	155,746		209,879		18,905		108,270		540		—		493,340
Ending Balance	$	167,706	$	212,290	$	18,905	$	108,513	$	540	$	—	$	507,954

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 September 30, 2019 and December 31, 2018:

(In Thousands)
As of September 30, 2019	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	$	2,174	$	20	$	—	$	2,194	$	131,917	$	1,504	$	135,615
Home equity	664		200		—		864		21,623		893		23,380
Commercial and multi-family real estate	—		—		—		—		214,835		933		215,768
Construction	—		—		—		—		26,738		—		26,738
Commercial and industrial	—		—		—		—		110,927		102		111,029
Consumer	—		—		—		—		401		—		401
Total	$	2,838	$	220	$	—	$	3,058	$	506,441	$	3,432	$	512,931

15

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

(In Thousands)
As of December 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	$	1,328	$	365	$	2	$	1,695	$	139,371	$	2,276	$	143,342
Home equity	1,602		75		—		1,677		22,079		608		24,364
Commercial and multi-family real estate	—		—		—		—		211,258		1,032		212,290
Construction	—		—		—		—		18,905		—		18,905
Commercial and industrial	—		—		—		—		108,298		215		108,513
Consumer	1		—		—		1		539		—		540
Total	$	2,931	$	440	$	2	$	3,373	$	500,450	$	4,131	$	507,954

Impaired Loans

The following tables provide an analysis of the impaired loans at September 30, 2019 and December 31, 2018 and the average balances of such loans for the nine months and year, respectively, then ended:

(In Thousands)
September 30, 2019	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	$	8,845	$	1,504	$	7,341	$	290	$	9,517	$	9,696
Home equity	1,993		894		1,099		24		2,126		1,778
Commercial and multi-family real estate	2,284		1,293		991		77		3,002		2,362
Construction	—		—		—		—		—		—
Commercial and industrial	126		114		12		12		140		185
Consumer	—		—		—		—		—		—
Total	$	13,248	$	3,805	$	9,443	$	403	$	14,785	$	14,021

(In Thousands)
December 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	$	10,224	$	1,956	$	8,268	$	298	$	10,907	$	10,392
Home equity	1,736		609		1,127		28		1,827		1,484
Commercial and multi-family real estate	2,411		1,405		1,006		69		3,067		2,059
Construction	—		—		—		—		—		—
Commercial and industrial	243		223		20		20		262		149
Consumer	—		—		—		—		—		1
Total	$	14,614	$	4,193	$	10,421	$	415	$	16,063	$	14,085

16

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

As of September 30, 2019 and December 31, 2018, impaired loans listed above included $10.4 millionand $11.4 million respectively, of loans modified in troubled debt restructurings ("TDRs") and as such are considered impaired under GAAP.  As of September 30, 2019 and December 31, 2018, $9.8 million and $10.5 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 $120,000 and $188,000 was recognized on impaired loans during the three months ended September 30, 2019 and 2018, respectively. The average balance of impaired loans for the three months ended September 30, 2019 and September 30, 2018 was $13.6 million and $13.7 million, respectively.

Interest income of $366,000 and $424,000 was recognized on impaired loans during the nine months ended September 30, 2019 and 2018, respectively. The average balance of impaired loans for the nine months ended September 30, 2019 and September 30, 2018 was $14.0 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 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 September 30, 2019 and December 31, 2018:

(In Thousands)
As of September 30, 2019	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial and multi-family real estate	$	212,690	$	1,502	$	1,576	$	—	$	—	$	215,768
Construction	26,738		—		—		—		—		26,738
Commercial and industrial	110,781		61		187		—		—		111,029
Total	$	350,209	$	1,563	$	1,763	$	—	$	—	$	353,535

17

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

(In Thousands)
As of December 31, 2018	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial and multi-family real estate	$	209,206	$	1,367	$	1,717	$	—	$	—	$	212,290
Construction	18,905		—		—		—		—		18,905
Commercial and industrial	108,025		69		419		—		—		108,513
Total	$	336,136	$	1,436	$	2,136	$	—	$	—	$	339,708

Management further monitors the performance and credit quality of the residential and consumer loan portfolios 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
	Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
Nonperforming	$	2,397	$	2,884	$	—	$	—	$	2,397	$	2,884
Performing	156,598		164,822		401		540		156,999		165,362
Total	$	158,995	$	167,706	$	401	$	540	$	159,396	$	168,246

Troubled Debt Restructurings

Loans, the terms of which are modified, are classified as a TDR if, in connection with the modification, the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a reduction in the loan's interest rate below market rates given the associated credit risk, or an extension of a loan's stated maturity date or capitalization of interest and/or escrow. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.  Loans classified as TDRs are designated as impaired until they are ultimately repaid in full or foreclosed and sold.  The nature and extent of impairment of TDRs, including those which experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses.

The recorded investment balance of TDRs totaled $10.4 million at September 30, 2019 compared with $11.4 million at December 31, 2018.  The majority of the Company's TDRs are on accrual status. Accruing TDRs totaled $9.8 million at September 30, 2019 versus $10.5 million at December 31, 2018.  The total of TDRs on non-accrual status was $624,000 at September 30, 2019 and $915,000 at December 31, 2018.

The Company did not modify any loans as a TDR during the three months ended September 30, 2019 and September 30, 2018. For the nine months ended September 30, 2019, the Company did not modify any loans as a TDR while, for the nine months ended September 30, 2018, the terms of one loan was modified into one TDR. The Company refinanced a multi-family and commercial loan that was restructured to extend the maturity date and capitalize the interest.

The following table summarizes the recorded investment class loans modified into TDRs during the nine months ended September 30, 2018:

18

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

	Nine Months Ended September 30, 2018
	Number of Contracts	Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
		(Dollars in thousands)
Commercial and multi-family real estate	1	$	374	$	392
Total	1	$	374	$	392

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.  There were no loans modified in TDRs during the previous 12 months and for which there was a subsequent payment default for the three and nine months ended September 30, 2019 and 2018.

There was no Other Real Estate Owned ("OREO") at September 30, 2019 and December 31, 2018. We may obtain physical possession of residential real estate collateralizing consumer mortgage loans via foreclosure or in-substance repossession. At September 30, 2019 and December 31, 2018, we had consumer loans with a carrying value of $782,000 and $708,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.

Note 6 - Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and certain liabilities and to determine fair value disclosures.

FASB ASC Topic 820, Fair Market Value Disclosures ("ASC 820"), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

ASC 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

• Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

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

19

Note 6 - Fair Value Measurements (Continued)

• Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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

Assets Measured at Fair Value on a Recurring Basis

The Company did not have any financial assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018.

Assets Measured at Fair Value on a Non-Recurring Basis

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

The Company did not have any financial assets measured as fair value on a non-recurring basis as of September 30, 2019.

The following table summarizes those assets measured at fair value on a non-recurring basis as of December 31, 2018:

	As of December 31, 2018
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair  Value
	(In thousands)
Impaired loans	$	—	$	—	$	350	$	350

For Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2018, the significant unobservable inputs used in fair value measurements were as follows:

	As of December 31, 2018
	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans	$	350	Appraisal of collateral	Appraisal adjustments	0% (0%)
				Liquidation expense	7.3% (7.3%)

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

20

Note 6 - Fair Value Measurements (Continued)

Disclosure about Fair Value of Financial Instruments

The carrying amount and fair value (represents exit price) of financial instruments, at September 30, 2019 and December 31, 2018 were as follows:

	Carrying		Fair		Level 1		Level 2		Level 3
As of September 30, 2019	Amount		Value		Inputs		Inputs		Inputs
			(In thousands)
Financial assets:
Cash and due from banks	$	15,725	$	15,725	$	15,725	$	—	$	—
Securities held to maturity	38,073		37,846		—		37,846		—
Loans receivable (1)	507,270		505,356		—		—		505,356
Accrued interest receivable	1,687		1,687		—		151		1,536
Financial liabilities:
Deposits	476,064		477,387		—		477,387		—
Advances from Federal Home Loan Bank of New York	47,275		46,441		—		46,441		—
Advance payments by borrowers for taxes and insurance	741		741		—		741		—
Accrued interest payable	88		88		—		88		—
As of December 31, 2018
Financial assets:
Cash and due from banks	$	11,800	$	11,800	$	11,800	$	—	$	—
Securities held to maturity	39,476		38,569		—		38,569		—
Loans receivable (1)	502,299		490,177		—		—		490,177
Accrued interest receivable	1,615		1,615		—		111		1,504
Financial liabilities:
Deposits	420,579		421,164		—		421,164		—
Advances from Federal Home Loan Bank of New York	94,275		93,839		—		93,839		—
Advance payments by borrowers for taxes and insurance	749		749		—		749		—
Accrued interest payable	86		86		—		86		—
(1) Includes impaired loans measured at fair value on a non-recurring basis as discussed above.

Note 7 - Leases

The Company leases certain premises and equipment under operating leases including one branch and the loan operations office. The Company also has a short-term lease for one additional branch that is currently being negotiated to a longer term lease. At September 30, 2019, the Company had lease liabilities totaling $1.0 million and right-of-use assets totaling $1.0 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the nine months ended September 30, 2019, the weighted average remaining lease term for operating leases was 4.2 years and the weighted average discount rate in the measurement of operating lease liabilities was 3.14%. The incremental borrowing rate for leases is generally determined by the length of the lease and are aligned with the Federal Home Loan Bank advance rates. In addition, the Company did not factor in lease renewals into the calculation as leases are typically renegotiated depending on market conditions.

21

Note 7 - Leases (Continued)

Lease costs were as follows:

	Three months ended September 30,	Nine months ended September 30,
(Dollars in thousands)	2019	2019
Operating lease cost	$86	$248
Short-term lease cost	45	136
Total lease Cost	$131	$384

Rent expense for the three and nine months ended September 30, 2018, prior to the adoption of ASU 2016-02, was $127,000 and $383,000, respectively.

There were no sale and leaseback transactions, leverage leases, finance leases, or lease transactions with related parties during the nine months ended September 30, 2019. At September 30, 2019, the Company had no leases that had not yet commenced.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

	September 30, 2019
(Dollars in thousands)
Lease payments due:
Within one year	$331
After one but within two years	323
After two but within three years	197
After three but within four years	201
After four but within five years	206
After five years	—
Total undiscounted cash flows	1,258
Discount on cash flows	(220	)
Total lease liability	$1,038

ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward – looking statements include:

• Statements of our goals, intentions and expectations;

• Statements regarding our business plans, prospects, growth and operating strategies;

• Statements regarding the quality of our loan and investment portfolios; and

• Estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• General economic conditions, either nationally or in our market area, that are worse than expected;

• The volatility of the financial and securities markets, including changes with respect to the market value of our financial assets;

• Changes in government regulation affecting financial institutions and the potential expenses associated therewith;

• Changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

• Our ability to enter into new markets and/or expand product offerings successfully and take advantage of growth opportunities;

• Increased competitive pressures among financial services companies;

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• Changes in consumer spending, borrowing and savings habits;

• Legislative or regulatory changes that adversely affect our business;

• Adverse changes in the securities markets;

• Our continued ability to manage cybersecurity risks;

• Our continued ability to successfully remediate our identified internal control weaknesses;

• Our ability to successfully manage our growth; and

• Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board.

No forward-looking statement can be guaranteed and we specifically disclaim any obligation to update any forward-looking statement.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial position and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.

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

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

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

Comparison of Financial Condition at September 30, 2019 and December 31, 2018

General. Total assets were $591.3 million at September 30, 2019, compared to $584.5 million at December 31, 2018, an increase of $6.8 million or 1.2%. During the period, the Company experienced increase of $5.0 million, or 1.0%, in loans receivable, net. Cash and cash equivalents increased by $3.9 million, or 33.26%, due to increased overnight borrowings. Other assets increased $1.0 million, or 58.5% primarily due to the implementation of the new lease accounting standard creating a new right-of-use asset for operating leases during the nine months ended September 30, 2019.

The ratio of average interest-earning assets to average-interest bearing liabilities was 120.8% for the nine month period ended September 30, 2019 as compared to 119.7% for the nine months ended September 30, 2018.

Loans. Loans receivable, net, increased by $5.0 million, or 1.0%, from $502.3 million at December 31, 2018 to $507.3 million at September 30, 2019.  Loans receivable, net represented 85.8% of the Company's assets at September 30, 2019 compared

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to 85.9% at December 31, 2018. The construction portfolio increased $15.8 million, while loans in process increased $7.9 million as a result of borrowers starting new projects. In addition, the Bank's commercial real estate portfolio increased approximately $3.5 million on stronger loan demand, while the commercial and industrial portfolio increased by $2.5 million.   The residential mortgage portfolio decreased $8.7 million to $159.0 million as of September 30, 2019 compared to $167.8 million at December 31, 2018. All remaining portfolios were consistent with year-end levels.

Securities. Our portfolio of securities held to maturity totaled $38.1 million at September 30, 2019 and $39.5 million at December 31, 2018.   Purchases during the nine months ended September 30, 2019 totaled $10.0 million while calls and maturities totaled $7.8 million and principal repayments totaled $3.5 million.

Deposits. Total deposits at September 30, 2019 increased to $476.1 million from $420.6 million at year-end 2018. Certificates of deposit (including IRAs) and interest demand balances increased $41.0 million and $17.5 million, respectively. Certificates of deposit increased to $161.8 million at September 30, 2019, compared to $120.9 million at December 31, 2018, while interest demand deposit account balances increased to $151.7 million at September 30, 2019, compared to $134.1 million at December 31, 2018. Additionally, money market balances increased $1.6 million to $17.8 million at September 30, 2019, compared to $16.2 million at year-end 2018. Offsetting these increases was a decrease in savings deposit account balances of $5.0 million to $97.8 million at September 30, 2019, from $102.7 million at December 31, 2018.

Borrowings. Total borrowings at September 30, 2019 were $47.3 million compared with $94.3 million at December 31, 2018. Overnight advances with the Federal Home Loan Bank of New York at September 30, 2019 were $19.6 million while there were $66.6 million outstanding at December 31, 2018.

Equity. Stockholders' equity was $64.2 million at September 30, 2019 compared to $66.6 million at December 31, 2018, a decrease of $2.4 million, or 3.6%. The decrease in stockholders' equity was primarily due to the repurchase of 183,100 shares for a total of $3.0 million and the declaration of a $2.6 million dividend, partially offset by net income of $2.9 million for the nine months ended September 30, 2019.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2019 and 2018

General.   The Company had net income of $1.1 million for the three months ended September 30, 2019, compared to $1.3 million for the three months ended September 30, 2018. The decrease in net income was primarily due to a decrease in net interest income of $414,000. The Company had net income of $2.9 million for the nine months ended September 30, 2019, compared to net income of $3.6 million for the nine months ended September 30, 2018, as an increase in non-interest expense of $742,000 and a decrease of $314,000 in net interest income were partially offset by a decrease of $240,000 in the provision for loan losses. The decrease in the provision expense was related to lower loan growth the Company experienced during the nine month period. The increase in non-interest expense was primarily related to an increase in professional services expense. As the Company previously disclosed, in connection with the audit, management and outside auditors identified certain material weaknesses in internal control.

Net Interest Income.

The following tables provide information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated:

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	For the three months ended
	9/30/2019							9/30/2018
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	502,632		$	5,784	4.60	%	$	499,082		$	5,788	4.64	%
Securities held to maturity	39,181			273		2.79	%	43,871			304		2.77	%
Other interest-earning assets	14,755			122		3.31	%	9,566			83		3.47	%
Total interest-earning assets	556,568			6,179		4.44	%	552,519			6,175		4.47	%
Allowance for loan loss	(5,661		)					(5,624		)
Non-interest-earning assets	28,284							27,900
Total non-interest-earning assets	22,623							22,276
Total Assets	$	579,191						$	574,795
Interest-bearing liabilities:
Demand & money market	$	129,085		$	396	1.23	%	$	155,361		$	335	0.86	%
Savings and club deposits	97,932			189		0.77	%	103,815			148		0.57	%
Certificates of deposit	154,245			775		2.01	%	127,188			531		1.67	%
Total interest-bearing deposits	381,262			1,360		1.43	%	386,364			1,014		1.05	%
Federal Home Loan Bank advances	81,863			478		2.34	%	73,077			406		2.22	%
Total interest-bearing liabilities	463,125			1,838		1.59	%	459,441			1,420		1.24	%
Non-interest-bearing deposit	46,373							43,495
Other non-interest-bearing liabilities	3,921							2,320
Total Liabilities	513,419							505,256
Equity	65,772							69,539
Total Liabilities and Equity	579,191							574,795
Net Interest Income				4,341		2.85	%				4,755		3.23	%
Net Interest Margin						3.12	%						3.44	%
Ratio of Interest Earning Assets to Interest Bearing Liabilities	120.18		%					120.26		%

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	For the nine months ended
	9/30/2019							9/30/2018
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	501,195		$	17,253	4.59	%	$	494,490		$	16,360	4.41	%
Securities held to maturity	37,963			824		2.89	%	39,365			763		2.58	%
Other interest-earning assets	14,675			376		3.42	%	9,996			219		2.92	%
Total interest-earning assets	553,833			18,453		4.44	%	543,851			17,342		4.25	%
Allowance for loan loss	(5,659		)					(5,542		)
Non-interest-earning assets	28,156							28,122
Total non-interest-earning assets	22,497							22,580
Total Assets	$	576,330						$	566,431
Interest-bearing liabilities:
Demand & money market	$	129,865		$	1,129	1.16	%	$	155,843		$	908	0.78	%
Savings and club deposits	99,747			549		0.73	%	106,291			387		0.49	%
Certificates of deposit	142,898			2,073		1.93	%	125,142			1,500		1.60	%
Total interest-bearing deposits	372,510			3,751		1.34	%	387,276			2,795		0.96	%
Federal Home Loan Bank advances	86,112			1,528		2.37	%	66,893			1,059		2.11	%
Total interest-bearing liabilities	458,622			5,279		1.53	%	454,169			3,854		1.13	%
Non-interest-bearing deposit	47,730							39,582
Other non-interest-bearing liabilities	3,214							2,264
Total Liabilities	509,566							496,015
Equity	66,764							70,416
Total Liabilities and Equity	$	576,330						$	566,431
Net Interest Income				13,174		2.91	%				13,488		3.12	%
Net Interest Margin						3.17	%						3.31	%
Ratio of Interest Earning Assets to Interest Bearing Liabilities	120.76		%					119.75		%

The Company's net interest margin decreased 32 basis points to 3.12% for the three months ended September 30, 2019 compared to 3.44% for the three months ended September 30, 2018. The yield on interest-earning assets decreased by 3 basis points year over year while the cost of interest-bearing liabilities increased 35 basis points. The increase in the cost of interest-bearing liabilities was primarily attributable to higher interest rates in the deposit portfolio year over year.

For the nine months ended September 30, 2019, the net interest margin decreased 14 basis points to 3.17% compared to 3.31% for the nine months ended September 30, 2018. The average yield on interest-earning assets increased 19 basis points year over year while the average cost of interest-bearing liabilities increased 40 basis points. The increase in the cost of interest-bearing liabilities was attributable to the increase in average borrowings combined with higher interest rates in the deposit portfolio year over year.

Provision for Loan Losses.  The provision for loan losses decreased by $60,000 to zero for the three months ended September 30, 2019 compared to a provision of $60,000 for the three months ended September 30, 2018. We recorded no provision for loan losses for the nine month period ended September 30, 2019, compared to a provision for $240,000 for the nine month period ended September 30, 2018. The decreased provision level during the current year period is attributable to improving factors coupled with lower loan growth during the quarter ended September 30, 2019 compared to the same period in 2018. The Company's management reviews the level of the allowance for loan losses on a quarterly basis based on a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions, (3) actual losses previously experienced, (4) the Company's level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable.  The

26

Company had $3.4 million in nonperforming loans as of September 30, 2019 compared to $2.8 million as of September 30, 2018.  The allowance for loan losses to total loans was 1.10% and 1.13% at September 30, 2019 and 2018, respectively, while the allowance for loan losses to non-performing loans was 164.95% at September 30, 2019 compared to 198.67% at September 30, 2018.  Non-performing loans to total loans and net charge-offs to average loans outstanding were at 0.67% and 0.00%, respectively, at and for the nine months ended September 30, 2019 compared to 0.57% and 0.00% at and for the nine months ended September 30, 2018.

Non-Interest Income. Non-interest income increased $9,000, or 4.7%, to $199,000 during the three months ended September 30, 2019 compared to $190,000 for the three months ended September 30, 2018. Non-interest income was $593,000 for the nine months ended September 30, 2019 compared to $602,000 for the comparable 2018 timeframe.

Non-Interest Expenses. During the three months ended September 30, 2019 and September 30, 2018, non-interest expense were $2.9 million and $3.1 million, respectively. Non-interest expense increased $742,000 to $9.7 million for the nine months ended September 30, 2019, as compared to the same period ended September 30, 2018. Professional services and service bureau fees increased by $852,000 and $114,000, respectively, for the nine months ended September 30, 2019 compared to the same nine months period a year earlier. As the Company previously disclosed, in connection with the Company's first audit of internal control over financial reporting, management and outside auditors identified certain material weaknesses in internal control. Service bureau fees increased $114,000, or 45.42%, primarily due to the reduction of relationship credits utilized during the nine month period. 

Income Taxes. Income tax expense for the three months ended September 30, 2019 was $505,000 or 31.2% of the reported income before income taxes compared to a tax expense of $506,000 or 27.8% for the three months ended September 30, 2018. The income tax expense for the nine months ended September 30, 2019 was $1.2 million, or 30.0% of the reported income before income taxes, compared to tax expense of $1.3 million, or 26.9% of the reported income before income taxes for the nine months ended September 30, 2018. The increase in tax rate was due to the true up of tax expense to the return during the third quarter.

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 September 30, 2019, the Bank had outstanding commitments to originate loans of $13.8 million, construction loans in process of $18.6 million, unused lines of credit of $63.0 million (including $49.7 million for commercial lines of credit and $13.3 million for home equity lines of credit), and standby letters of credit of $513,000. Certificates of deposit scheduled to mature in one year or less at September 30, 2019, totaled $86.4 million.

As of September 30, 2019, the Bank had contractual obligations related to the long-term operating leases for two branch locations that it leases (Loan Production Office and Martinsville branches).

The Bank generates cash through deposits and/or borrowings from the FHLBNY to meet its day-to-day funding obligations when required.  At September 30, 2019, the total loans receivable to deposits ratio was 106.6%.  At September 30, 2019, the Bank's collateralized borrowing limit with the FHLBNY was $166.1 million, of which $47.3 million was outstanding.  As of September 30, 2019, the Bank also had a $13.0 million unsecured line of credit with one financial institution that it could access if necessary.

27

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 September 30, 2019, the Bank exceeded all applicable regulatory capital requirements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 – CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule l3a-l5(e) promulgated under the Securities Exchange Act of 1934, as amended) as of December 31, 2018. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's disclosure controls and procedures were not effective due to the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 29, 2019.

There have been no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, although our remediation efforts with respect to the identified material weaknesses are well underway, our material weaknesses will not be considered remediated until new internal controls are operational for a period of time and are tested, and management concludes that these controls are operating effectively. With respect to the identified material weaknesses, management presently believes that such material weaknesses will be remediated within twelve months of when the remediation efforts commenced.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

There were no material pending legal proceedings at September 30, 2019 to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. 

ITEM 1A – RISK FACTORS

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

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

On December 17, 2018, the Company announced that it had approved a stock repurchase plan to purchase up to 273,150 shares of the Company's stock. In connection with the repurchase plan, the Company entered into a Rule 10b5-1 plan with Keefe, Bruyette & Wood, a Stifel Company. The following table shows shares repurchased during the quarter ended September 30, 2019.

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) that may be purchased Under the Plans or Programs
July 1-July 31, 2019	19,300	$	15.80	224,648	48,502
August 1-August 31, 2019	11,000	16.27		235,648	37,502
September 1-September 30, 2019	21,400	16.00		257,048	16,102
Total	51,700	$	15.98	257,048	16,102

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

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Note 9 - Stock-Based Compensation (Continued)

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable

ITEM 5 – OTHER INFORMATION

None

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ITEM 6 – EXHIBITS

31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.LAB	XBRL Labels Linkbase Document
101.PRE	XBRL Presentation Linkbase Document
101.DEF	XBRL Definition Linkbase Document

30

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MSB FINANCIAL CORP.
	(Registrant)
Date November 8, 2019	/s/ Michael A. Shriner
	Michael A. Shriner
	President and Chief Executive Officer
Date November 8, 2019	/s/ John S. Kaufman
	John S. Kaufman
	First Vice President and Chief Financial Officer

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