MSB Financial 10-Q 2020 Q1 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				March 31, 2020
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:									May 8, 2020
$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 March 31, 2020 and December 31, 2019	3
	Consolidated Statements of Income for the Three
	Months Ended March 31, 2020 and 2019	4
	Consolidated Statement of Changes in Stockholders’ Equity for the Three
	Months Ended March 31, 2020 and 2019	5
	Consolidated Statements of Cash Flows for the Three Months
	Ended March 31, 2020 and 2019	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2:	Management's Discussion and Analysis of	21
	Financial Condition and Results of Operations
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4:	Controls and Procedures	26
PART II - OTHER INFORMATION
Item 1:	Legal Proceedings	26
Item 1A:	Risk Factors	26
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3:	Defaults Upon Senior Securities	26
Item 4:	Mine Safety Disclosures	26
Item 5:	Other Information	26
Item 6:	Exhibits	28
SIGNATURES		29
CERTIFICATIONS

2

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	March 31, 2020			December 31, 2019
(Dollars in thousands, except per share amounts)
Cash and due from banks	$	1,242		$	1,296
Interest-earning demand deposits with banks	9,834			17,157
Cash and Cash Equivalents	11,076			18,453
Securities held to maturity (fair value of $34,818 and $35,696, respectively)	35,092			35,827
Loans receivable, net of allowance for loan losses of $5,965 and $5,722, respectively	522,941			508,022
Premises and equipment, net	7,876			8,020
Federal Home Loan Bank of New York stock, at cost	4,301			2,848
Bank owned life insurance	14,571			14,480
Accrued interest receivable	1,741			1,650
Other assets	2,837			3,786
Total Assets	$	600,435		$	593,086
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	45,856		$	47,935
Interest bearing	401,520			424,817
Total Deposits	447,376			472,752
Advances from Federal Home Loan Bank of New York	83,875			51,575
Advance payments by borrowers for taxes and insurance	776			722
Other liabilities	2,375			2,662
Total Liabilities	534,402			527,711
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; 5,184,914 issued and outstanding at March 31, 2020 and December 31, 2019	52			52
Paid-in capital	41,955			41,857
Retained earnings	25,522			24,989
Unearned common stock held by ESOP (165,844 and 168,538 shares, respectively)	(1,496		)	(1,523		)
Total Stockholders' Equity	66,033			65,375
Total Liabilities and Stockholders' Equity	$	600,435		$	593,086

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)	2020		2019
Interest Income:
Loans receivable, including fees	$	5,929	$	5,691
Securities	228		285
Other	71		132
Total Interest Income	6,228		6,108
Interest Expense
Deposits	1,385		1,126
Borrowings	297		559
Total Interest Expense	1,682		1,685
Net Interest Income	4,546		4,423
Provision for Loan Losses	250		—
Net Interest Income after Provision for Loan Losses	4,296		4,423
Non-Interest Income
Fees and service charges	122		72
Income from bank owned life insurance	95		94
Other	19		24
Total Non-Interest Income	236		190
Non-Interest Expenses
Salaries and employee benefits	1,731		1,728
Directors compensation	132		129
Occupancy and equipment	384		375
Service bureau fees	200		95
Advertising	1		7
FDIC assessment	45		46
Professional services	414		1,278
Merger expenses	525		—
Other	221		209
Total Non-Interest Expenses	3,653		3,867
Income before Income Taxes	879		746
Income Tax Expense	346		232
Net Income	$	533	$	514
Earnings per share:
Basic	$	0.11	$	0.10
Diluted	$	0.11	$	0.10

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, 2019	$	54	$	44,726		$	23,498	$	(1,632	)	$	66,646
Net income	—		—			514		—			514
Allocation of ESOP stock	—		22			—		27			49
Repurchased Stock (22,000 shares)	—		(398		)	—		—			(398		)
Stock-based compensation	—		81			—		—			81
Balance - March 31, 2019	$	54	$	44,431		$	24,012	$	(1,605	)	$	66,892
Balance - January 1, 2020	$	52	$	41,857		$	24,989	$	(1,523	)	$	65,375
Net income	—		—			533		—			533
Allocation of ESOP stock	—		16			—		27			43
Stock-based compensation	—		82			—		—			82
Balance - March 31, 2020	$	52	$	41,955		$	25,522	$	(1,496	)	$	66,033
See notes to unaudited consolidated financial statements.

5

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)	Three Months Ended March 31,
Cash Flows from Operating Activities:	2020			2019
Net Income	$	533		$	514
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	(70		)	(37		)
Depreciation and amortization of premises and equipment	144			140
Stock-based compensation and allocation of ESOP stock	125			130
Amortization of right-of-use assets	77			87
Provision for loan losses	250			—
Income from bank owned life insurance	(91		)	(94		)
Proceeds received from settlement of life insurance receivable	663			—
Increase in accrued interest receivable	(91		)	(157		)
Decrease in other assets	208			13
Decrease in other liabilities	(285		)	(19		)
Net Cash Provided By Operating Activities	1,463			577
Cash Flows from Investing Activities:
Activity in held to maturity securities:
Maturities, calls and principal repayments	711			2,491
Net (increase) decrease in loans receivable	(15,076		)	12,382
Proceeds from sales of loans	—			512
Purchase of bank premises and equipment	—			(48		)
Purchase of Federal Home Loan Bank of New York stock	(4,981		)	(2,705		)
Redemption of Federal Home Loan Bank of New York stock	3,528			4,055
Net Cash (Used in) Provided by Investing Activities	(15,818		)	16,687
Cash Flows from Financing Activities:
Net (decrease) increase in deposits	(25,376		)	12,175
Advances from Federal Home Loan Bank of New York	32,300			—
Repayment of advances from Federal Home Loan Bank of New York	—			(30,000		)
Increase (decrease) in advance payments by borrowers for taxes and insurance	54			(30		)
Repurchase of common stock	—			(398		)
Net Cash Provided by (Used in) Financing Activities	6,978			(18,253		)
Net Increase (Decrease) in Cash and Cash Equivalents	(7,377		)	(989		)
Cash and Cash Equivalents – Beginning	18,453			11,800
Cash and Cash Equivalents – Ending	$	11,076		$	10,811
Supplementary Cash Flows Information
Interest paid	$	1,653		$	1,679
Income taxes paid	—			—
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.

Risks and Uncertainties

The outbreak of COVID-19 has caused significant disruptions in the U.S. economy and has created disruption within the markets where the Company primarily operates. While there has been no material impact to the Company’s operations, COVID-19 could potentially create a business continuity issue for the Company. The Company was able to quickly and effectively deploy low cost resources to its employees so that all employees, excluding branch personnel, could operate remotely. Branch hours and operations were modified to best accommodate its staff and customers and remain compliant with State Executive Orders. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows, specifically with regards to the allowance for losses and related provision.

Congress, the President, and the Federal Reserve have taken actions to help with the economic fallout. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition, Governor Murphy announced on March 28, 2020, that financial institutions will provide mortgage forbearance and financial protections for the people of New Jersey facing economic hardship as a result of COVID-19 which could have a material impact on the Company's operations.

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, 2020 and for the three months ended March 31, 2020 and 2019.  The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results which may be expected for an entire fiscal year or other interim periods.

7

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

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 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. We are still evaluating the impact of this ASU.

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)	2020		2019
Numerator:
Net income	$	533	$	514
Denominator:
Weighted average common shares	5,018		5,198
Dilutive potential common shares	23		39
Weighted average fully diluted shares	5,041		5,237
Earnings per share:
Basic	$	0.11	$	0.10
Dilutive	$	0.11	$	0.10

For three months ended March 31, 2020 and March 31, 2019, 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, 2020 and December 31, 2019 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, 2020 and December 31, 2019, 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, 2020 and December 31, 2019 are summarized as follows:

(In Thousands)	Amortized  Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
March 31, 2020
U.S. Government agencies:
Due within one year	$	—	$	—	$	—	$	—
Due after one year through five years	—		—		—		—
Due after five through ten years	3,000		14		—		3,014
Due after ten years	3,000		9		—		3,009
Total U.S. Government agencies	6,000		23		—		6,023
Mortgage-backed securities	21,716		813		1		22,528
Corporate bonds:
Due within one year	1,500		—		2		1,498
Due after one year through five years	—		—		—		—
Due after five through ten years	1,000		—		75		925
Due after ten years	4,000		—		1,045		2,955
Total Corporate bonds	6,500		—		1,122		5,378
State and political subdivisions:
Due within one year	171		—		—		171
Due after one through five years	705		13		—		718
Due after five through ten years	—		—		—		—
Total State and political subdivisions	876		13		—		889
Total Securities held to maturity	$	35,092	$	849	$	1,123	$	34,818

9

Note 4 - Securities Held to Maturity - Continued

(In Thousands)	Amortized  Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
December 31, 2019
U.S. Government agencies:
Due within one year	$	—	$	—	$	—	$	—
Due after one year through five years	—		—		—		—
Due after five through ten years	3,000		11		—		3,011
Due thereafter	3,000		2		—		3,002
Total U.S. Government Agencies	6,000		13		—		6,013
Mortgage-backed securities	22,451		300		37		22,714
Corporate bonds:
Due within one year	1,500		2		—		1,502
Due after one year through five years	—		—		—		—
Due after five years through ten years	1,000		—		44		956
Due thereafter	4,000		—		381		3,619
Total Corporate bonds	6,500		2		425		6,077
State and political subdivisions:
Due within one year	171		—		—		171
Due after one through five years	705		16		—		721
Due after five through ten years	—		—		—		—
Total State and political subdivisions	876		16		—		892
Total Securities held to maturity	$	35,827	$	331	$	462	$	35,696

There were no sales of securities held to maturity during the three month periods ended March 31, 2020 or 2019.  At March 31, 2020 and December 31, 2019, securities held to maturity with an amortized cost and fair value of approximately $3.0 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 March 31, 2020 and December 31, 2019, 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, 2020
Mortgage-backed    securities	$	883	$	1	$	—	$	—	$	883	$	1
Corporate bonds	1,498		2		3,880		1,120		5,378		1,122
Total securities with gross unrecognized losses	$	2,381	$	3	$	3,880	$	1,120	$	6,261	$	1,123

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, 2019
Mortgage-backed    securities	$	1,716	$	8	$	3,140	$	29	$	4,856	$	37
Corporate bonds	—		—		4,574		425		4,574		425
Total securities with gross unrecognized losses	$	1,716	$	8	$	7,714	$	454	$	9,430	$	462

At March 31, 2020, management concluded that the unrecognized losses summarized above (which related to two mortgage-backed securities and five corporate bonds, compared to ten mortgage-backed securities and three corporate bonds as of December 31, 2019) are temporary in nature since they are not related to the underlying credit quality of the issuer.  As of March 31, 2020, 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 March 31, 2020 and December 31, 2019 was as follows:

(In Thousands)	March 31, 2020		December 31, 2019
Residential mortgage:
One-to-four family	$	126,750	$	130,966
Home equity	22,616		22,853
Total residential mortgages	149,366		153,819
Commercial loans:
Commercial and multi-family real estate	218,987		227,441
Construction	54,171		47,635
Commercial and industrial - Secured	66,045		63,462
Commercial and industrial - Unsecured	54,955		37,600
Total commercial loans	394,158		376,138
Consumer:	364		432
Total loans receivable	543,888		530,389
Less:
Loans in process	14,479		16,109
Deferred loan fees	503		536
Allowance for loan losses	5,965		5,722
Total adjustments	20,947		22,367
Loans receivable, net	$	522,941	$	508,022

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, 2020 and 2019 and loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2020 and December 31, 2019:

(In Thousands)	Residential  Mortgage			Commercial and Multi-Family Real Estate			Construction		Commercial and Industrial			Consumer			Unallocated		Total
Three Months Ended March 31, 2020
Allowance for loan losses:
Balance, beginning	$	1,746		$	2,612		$	433	$	929		$	2		$	—	$	5,722
Provisions (credits)	(148		)	(107		)	231		268			6			—		250
Loans charged-off	—			—			—		(9		)	(5		)	—		(14		)
Recoveries	1			—			—		6			—			—		7
Balance, ending	$	1,599		$	2,505		$	664	$	1,194		$	3		$	—	$	5,965
March 31, 2020 allowance allocated to:
Loans individually evaluated for impairment	$	122		$	71		$	—	$	—		$	—		$	—	$	193
Loans collectively evaluated for impairment	1,477			2,434			664		1,194			3			—		5,772
Ending Balance	$	1,599		$	2,505		$	664	$	1,194		$	3		$	—	$	5,965
March 31, 2020 loan balances evaluated for:
Loans individually evaluated for impairment	$	10,220		$	2,314		$	—	$	23		$	—		$	—	$	12,557
Loans collectively evaluated for impairment	139,112			216,345			39,626		120,911			355			—		516,349
Ending Balance	$	149,332		$	218,659		$	39,626	$	120,934		$	355		$	—	$	528,906

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, 2019
Allowance for loan losses:
Balance, beginning	$	2,115		$	2,187	$	222		$	1,128		$	3		$	—	$	5,655
Provisions (credits)	(50		)	137		(2		)	(85		)	—			—		—
Loans charged-off	—			—		—			—			(1		)	—		(1		)
Recoveries	3			—		—			—			1			—		4
Balance, ending	$	2,068		$	2,324	$	220		$	1,043		$	3		$	—	$	5,658
March 31, 2019 allowance allocated to:
Loans  individually evaluated for impairment	$	250		$	80	$	—		$	20		$	—		$	—	$	350
Loans  collectively evaluated for impairment	1,818			2,244		220			1,023			3			—		5,308
Ending Balance	$	2,068		$	2,324	$	220		$	1,043		$	3		$	—	$	5,658
March 31, 2019 loan balances evaluated for:
Loans individually evaluated for impairment	$	11,634		$	2,389	$	—		$	226		$	—		$	—	$	14,249
Loans collectively evaluated for impairment	153,521			203,940		19,807			103,130			456			—		480,854
Ending Balance	$	165,155		$	206,329	$	19,807		$	103,356		$	456		$	—	$	495,103

(In Thousands)	Residential  Mortgage		Commercial and Multi-Family Real Estate		Construction		Commercial and Industrial		Consumer		Unallocated		Total
At December 31, 2019
Period-end allowance balances:
Loans individually evaluated for impairment	$	234	$	74	$	—	$	—	$	—	$	—	$	308
Loans collectively evaluated for impairment	1,512		2,538		433		929		2		—		5,414
Ending Balance	$	1,746	$	2,612	$	433	$	929	$	2	$	—	$	5,722
Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	10,199	$	2,337	$	—	$	24	$	—	$	—	$	12,560
Loans collectively evaluated for impairment	143,570		224,760		31,465		100,957		432		—		501,184
Ending Balance	$	153,769	$	227,097	$	31,465	$	100,981	$	432	$	—	$	513,744

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, 2020 and December 31, 2019:

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

(In Thousands)
As of March 31, 2020	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	$	3,423	$	626	$	—	$	4,049	$	121,172	$	1,502	$	126,723
Home equity	67		525		—		592		21,101		916		22,609
Commercial and multi-family real estate	365		—		—		365		217,312		982		218,659
Construction	—		—		—		—		39,626		—		39,626
Commercial and industrial	23		—		—		23		120,911		—		120,934
Consumer	4		2		—		6		349		—		355
Total	$	3,882	$	1,153	$	—	$	5,035	$	520,471	$	3,400	$	528,906

(In Thousands)
As of December 31, 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	$	1,719	$	287	$	—	$	2,006	$	127,747	$	1,169	$	130,922
Home equity	160		—		—		160		21,744		943		22,847
Commercial and multi-family real estate	260		—		—		260		225,841		996		227,097
Construction	—		—		—		—		31,465		—		31,465
Commercial and industrial	—		—		—		—		100,981		—		100,981
Consumer	3		—		—		3		429		—		432
Total	$	2,142	$	287	$	—	$	2,429	$	508,207	$	3,108	$	513,744

Impaired Loans

The following tables provide an analysis of the impaired loans at March 31, 2020 and December 31, 2019 and the average balances of such loans for the three months and year, respectively, then ended:

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

(In Thousands)
March 31, 2020	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	$	8,608	$	1,502	$	7,106	$	114	$	9,272	$	8,584
Home equity	1,612		1,257		355		8		1,735		1,626
Commercial and multi-family real estate	2,314		1,346		968		71		3,067		2,326
Construction	—		—		—		—		—		—
Commercial and industrial	23		23		—		—		24		23
Consumer	—		—		—		—		—		—
Total	$	12,557	$	4,128	$	8,429	$	193	$	14,098	$	12,559

(In Thousands)
December 31, 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	$	8,560	$	1,169	$	7,391	$	200	$	9,215	$	9,469
Home equity	1,639		1,267		372		34		1,740		1,750
Commercial and multi-family real estate	2,337		1,362		975		74		3,080		2,357
Construction	—		—		—		—		—		—
Commercial and industrial	24		24		—		—		25		153
Consumer	—		—		—		—		—		—
Total	$	12,560	$	3,822	$	8,738	$	308	$	14,060	$	13,729

As of March 31, 2020 and December 31, 2019, impaired loans listed above included $10.9 millionand $11.3 million respectively, of loans modified in troubled debt restructurings ("TDRs") and as such are considered impaired under GAAP.  As of March 31, 2020 and December 31, 2019, $9.2 million and $9.5 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 $110,000 and $122,000 was recognized on impaired loans during the three months ended March 31, 2020 and 2019, respectively. The average balance of impaired loans for the three months ended March 31, 2020 and March 31, 2019 was $12.6 million and $14.2 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. 

16

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

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 March 31, 2020 and December 31, 2019:

(In Thousands)
As of March 31, 2020	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial and multi-family real estate	$	215,825	$	1,477	$	1,357	$	—	$	—	$	218,659
Construction	39,626		—		—		—		—		39,626
Commercial and industrial	120,855		56		23		—		—		120,934
Total	$	376,306	$	1,533	$	1,380	$	—	$	—	$	379,219

(In Thousands)
As of December 31, 2019	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial and multi-family real estate	$	223,975	$	1,490	$	1,632	$	—	$	—	$	227,097
Construction	31,465		—		—		—		—		31,465
Commercial and industrial	100,838		58		85		—		—		100,981
Total	$	356,278	$	1,548	$	1,717	$	—	$	—	$	359,543

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
	Mar 31, 2020		Dec 31, 2019		Mar 31, 2020		Dec 31, 2019		Mar 31, 2020		Dec 31, 2019
Nonperforming	$	2,418	$	2,112	$	—	$	—	$	2,418	$	2,112
Performing	146,914		151,657		355		432		147,269		152,089
Total	$	149,332	$	153,769	$	355	$	432	$	149,687	$	154,201

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

17

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

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 $10.9 million at March 31, 2020 compared with $11.3 million at December 31, 2019.  The majority of the Company's TDRs are on accrual status. Accruing TDRs totaled $9.2 million at March 31, 2020 versus $9.5 million at December 31, 2019.  The total of TDRs on non-accrual status was $1.8 million at March 31, 2020 and at December 31, 2019.

The Company did not modify any loans as a TDR during the three months ended March 31, 2020 and March 31, 2019. Federal banking regulators issued interagency statements that included guidance on accounting for loan modifications in light of the economic impact of the Coronavirus Disease 2019 (COVID-19) pandemic on March 22, 2020 and April 7, 2020. The guidance interpret current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed, in working with the staff of the FASB, that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were less than 30 days past due on its contractual payments prior to any relief are not TDRs. 

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 months ended March 31, 2020 and 2019.

There was no Other Real Estate Owned ("OREO") at March 31, 2020 and December 31, 2019. We may obtain physical possession of residential real estate collateralizing consumer mortgage loans via foreclosure or in-substance repossession. At March 31, 2020 and December 31, 2019, we had the same consumer loans with a carrying value of $760,000 and $773,000, 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:

18

Note 6 - Fair Value Measurements (Continued)

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

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

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

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

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 has no financial assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

Assets Measured at Fair Value on a Non-Recurring Basis

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

The following table summarizes those assets measured at fair value on a non-recurring basis as of March 31, 2020 and December 31, 2019:

	As of March 31, 2020
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair  Value
	(In thousands)
Impaired loans	$	—	$	—	$	347	$	347

	As of December 31, 2019
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair  Value
	(In thousands)
Impaired loans	$	—	$	—	$	338	$	338

For Level 3 assets measured at fair value on a non-recurring basis as of March 31, 2020 and December 31, 2019, the significant unobservable inputs used in fair value measurements were as follows:

19

Note 6 - Fair Value Measurements (Continued)

	As of March 31, 2020
	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans	$	347	Appraisal of collateral	Appraisal adjustments	0% (0%)
				Liquidation expense	20.56% (20.56%)

	As of December 31, 2019
	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans	$	338	Appraisal of collateral	Appraisal adjustments	0% (0%)
				Liquidation expense	20.56% (20.56%)

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.

Disclosure about Fair Value of Financial Instruments

The carrying amount and fair value (represents exit price) of financial instruments, at March 31, 2020 and December 31, 2019 were as follows:

20

Note 6 - Fair Value Measurements (Continued)

	Carrying		Fair		Level 1		Level 2		Level 3
As of March 31, 2020	Amount		Value		Inputs		Inputs		Inputs
			(In thousands)
Financial assets:
Cash and due from banks	$	11,076	$	11,076	$	11,076	$	—	$	—
Securities held to maturity	35,092		34,818		—		34,818		—
Loans receivable (1)	522,941		524,431		—		—		524,431
Accrued interest receivable	1,741		1,741		—		140		1,601
Financial liabilities:
Deposits	447,376		449,318		—		449,318		—
Advances from Federal Home Loan Bank of New York	83,875		84,257		—		84,257		—
Advance payments by borrowers for taxes and insurance	776		776		—		776		—
Accrued interest payable	114		114		—		114		—
As of December 31, 2019
Financial assets:
Cash and due from banks	$	18,453	$	18,453	$	18,453	$	—	$	—
Securities held to maturity	35,827		35,696		—		35,696		—
Loans receivable (1)	508,022		506,634		—		—		506,634
Accrued interest receivable	1,650		1,650		—		90		1,560
Financial liabilities:
Deposits	472,752		474,233		—		474,233		—
Advances from Federal Home Loan Bank of New York	51,575		51,674		—		51,674		—
Advance payments by borrowers for taxes and insurance	722		722		—		722		—
Accrued interest payable	85		85		—		85		—
(1) Includes impaired loans measured at fair value on a non-recurring basis as discussed above.

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;

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• 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;

• 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.

Risks and Uncertainties

The outbreak of COVID-19 has caused significant disruptions in the U.S. economy and has created disruption within the markets where the Company primarily operates. While there has been no material impact to the Company’s operations, COVID-19 could potentially create a business continuity issue for the Company. The Company was able to quickly and effectively deploy low cost resources to its employees so that all employees, excluding branch personnel, could operate remotely. Branch hours and operations were modified to best accommodate its staff and customers and remain compliant with State Executive Orders. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows, specifically with regards to the allowance for losses and related provision.

Congress, the President, and the Federal Reserve have taken actions to help with the economic fallout. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition, Governor Murphy announced on March 28, 2020, that financial institutions will provide mortgage forbearance and financial protections for the people of New Jersey facing economic hardship as a result of COVID-19 which could have a material impact on the Company's operations.

The Company implemented its business continuity plan quickly and effectively and continued to operate without impact to its customers. Although it is still too early to determine the ultimate impact of COVID-19 on the loan portfolio, management reviewed all relevant data at the time, including communication with its customers, to ensure the qualitative factors were appropriate. The Company does not have a significant concentration in the hardest hit industries, such as leisure, hospitality, and retail, within its commercial real estate and commercial and industrial portfolios. The Company registered with the SBA in order to provide assistance to its customers through the Payroll Protection Program. Originations for this program surpassed $6 million in an effort to help these businesses through these uncertain times. In addition, the Company provided three month deferrals in accordance with the Governor’s announcement for 80 residential loans with outstanding balances totaling approximately $19 million and 25 commercial loans with outstanding balances totaling approximately $54 million. All programs were implemented after March 31, 2020 and continued through the filing date.

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

22

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 March 31, 2020 and December 31, 2019

General. Total assets were $600.4 million at March 31, 2020, compared to $593.1 million at December 31, 2019, an increase of $7.3 million or 1.2%. During the period, the Company experienced an increase of $14.9 million, or 2.9%, in loans receivable, net. Cash and cash equivalents decreased by $7.4 million, or 40.0%, in order to finance the loan growth. Other assets decreased $949,000, or 25.1%, primarily due to the cash received for the receivable set up for the timing of the bank owned life insurance payment and a decrease in prepaid expenses during the three months ended March 31, 2020.

The ratio of average interest-earning assets to average-interest bearing liabilities was 118.9% for the three month period ended March 31, 2020 as compared to 120.6% for the three months ended March 31, 2019.

Loans. Loans receivable, net, increased by $14.9 million, or 2.9%, from $508.0 million at December 31, 2019, to $522.9 million at March 31, 2020.  Loans receivable, net, represented 87.1% of the Company's assets at March 31, 2020 compared to 85.7% at December 31, 2019. The commercial and industrial loan portfolio increased by $19.9 million during the quarter ended March 31, 2020. Additionally, the construction portfolio increased $6.5 million, while loans in process increased $1.6 million, during the first quarter as a result of borrowers starting new projects. Offsetting the increases, the Bank's commercial real estate portfolio decreased approximately $8.5 million on weaker loan demand, while the residential mortgage portfolio decreased $4.5 million to $149.4 million as of March 31, 2020, compared to $153.8 million at December 31, 2019. All other loan portfolios were consistent with year-end levels.

Securities. Our portfolio of securities held to maturity totaled $35.1 million at March 31, 2020 and $35.8 million at December 31, 2019.   There were no purchases during the three months ended March 31, 2020, while principal repayments totaled $711,000.

Deposits. Total deposits at March 31, 2020, decreased to $447.4 million from $472.8 million at year-end 2019. Interest demand and certificates of deposit (including IRAs) decreased $21.3 million and $3.9 million, respectively. Interest demand deposit account balances decreased to $120.6 million at March 31, 2020, compared to $141.9 million at December 31, 2019, while certificates of deposit decreased to $152.2 million at March 31, 2020, compared to $156.2 million at December 31, 2019. Additionally, non-interest demand decreased $2.1 million to $45.9 million at March 31, 2020, compared to $47.9 million at year-end 2019, while money market balances decreased $1.3 million to $26.4 million at March 31, 2020, compared to $27.7 million at year-end 2019. Offsetting these decreases was an increase in savings deposit account balances of $3.3 million to $102.3 million at March 31, 2020, from $99.0 million at December 31, 2019.

Borrowings. Total borrowings at March 31, 2020 were $83.9 million compared with $51.6 million at December 31, 2019. Overnight advances with the Federal Home Loan Bank of New York at March 31, 2020, were $56.2 million while there were $23.9 million outstanding at December 31, 2019.

Equity. Stockholders' equity was $66.0 million at March 31, 2020 compared to $65.4 million at December 31, 2019, an increase of $658,000, or 1.0%. The increase in stockholders' equity was primarily due to net income of $533,000 for the three months ended March 31, 2020.

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Comparison of Operating Results for the Three Months Ended March 31, 2020 and 2019

General.   The Company had net income of $533,000 for the three months ended March 31, 2020, compared to $514,000 for the three months ended March 31, 2019. The increase in net income was primarily due to a decrease in professional services expenses of $864,000, partially offset by $525,000 in merger expenses and an increase of $250,000 in the provision for loan losses. The increase in the provision expense was related to a mix of higher loan growth and qualitative factor changes the Company experienced during the three month period.

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:

	For the three months ended
	3/31/2020							3/31/2019
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	525,506		$	5,929	4.51	%	$	502,149		$	5,691	4.53	%
Securities held to maturity	35,476			228		2.57	%	37,899			285		3.01	%
Other interest-earning assets	14,491			71		1.96	%	15,157			132		3.48	%
Total interest-earning assets	575,473			6,228		4.33	%	555,205			6,108		4.40	%
Allowance for loan loss	(5,724		)					(5,656		)
Non-interest-earning assets	28,670							27,621
Total non-interest-earning assets	22,946							21,965
Total Assets	$	598,419						$	577,170
Interest-bearing liabilities:
Demand & money market	$	161,003		$	455	1.13	%	$	135,018		$	367	1.09	%
Savings and club deposits	99,599			176		0.71	%	102,209			172		0.67	%
Certificates of deposit	153,227			754		1.97	%	130,207			587		1.80	%
Total interest-bearing deposits	413,829			1,385		1.34	%	367,434			1,126		1.23	%
Federal Home Loan Bank advances	70,049			297		1.70	%	92,780			559		2.41	%
Total interest-bearing liabilities	483,878			1,682		1.39	%	460,214			1,685		1.46	%
Non-interest-bearing deposit	44,950							46,962
Other non-interest-bearing liabilities	3,306							2,623
Total Liabilities	532,134							509,799
Equity	66,285							67,371
Total Liabilities and Equity	598,419							577,170
Net Interest Income				4,546		2.94	%				4,423		2.94	%
Net Interest Margin						3.16	%						3.19	%
Ratio of Interest Earning Assets to Interest Bearing Liabilities	118.93		%					120.64		%

The Company's net interest margin decreased 3 basis points to 3.16% for the three months ended March 31, 2020 compared to 3.19% for the three months ended March 31, 2019. The yield on interest-earning assets decreased by 7 basis points year over year while the cost of interest-bearing liabilities decreased 7 basis points.

Provision for Loan Losses.  The provision for loan losses was $250,000 for the three months ended March 31, 2020 compared to a provision of $0 for the three months ended March 31, 2019. The increased provision level during the current year

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period is attributable to a mix of higher loan growth and changes to qualitative factors during the quarter ended March 31, 2020 compared to the same period in 2019. 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.  Although it is still too early to determine the ultimate impact of COVID-19 on the loan portfolio, management reviewed all relevant data at the time, including communication with its customers, to ensure the qualitative factors were appropriate. Management will continue to monitor the impact and make additional provisions as necessary. The Company had $3.4 million in nonperforming loans as of March 31, 2020, compared to $3.8 million as of March 31, 2019.  The allowance for loan losses to total loans was 1.13% and 1.14% at March 31, 2020 and 2019, respectively, while the allowance for loan losses to non-performing loans was 175.44% at March 31, 2020, compared to 147.38% at March 31, 2019.  Non-performing loans to total loans and net charge-offs to average loans outstanding were at 0.65% and 0.01%, respectively, at and for the three months ended March 31, 2020, compared to 0.78% and 0.00% at and for the three months ended March 31, 2019.

Non-Interest Income. Non-interest income increased $46,000, or 24.2%, to $236,000 during the three months ended March 31, 2020 compared to $190,000 for the three months ended March 31, 2019. Non-interest income increased primarily due to an increase in loan fees.

Non-Interest Expenses. During the three months ended March 31, 2020 and March 31, 2019, non-interest expense were $3.7 million and $3.9 million, respectively. Non-interest expense decreased $214,000 to $3.7 million for the three months ended March 31, 2020, as compared to the same period ended March 31, 2019. While professional services decreased by $864,000, the Company incurred merger related expenses of $525,000 during the three months ended March 31, 2020. Additionally, service bureau fees increased by $105,000 for the three months ended March 31, 2020 compared to the same three months period a year earlier. Service bureau fees increased primarily due to the reduction of relationship credits utilized during the three month period. 

Income Taxes. Income tax expense for the three months ended March 31, 2020 was $346,000 or 39.4% of the reported income before income taxes compared to a tax expense of $232,000 or 31.1% for the three months ended March 31, 2019. The increase in tax rate was due to the nondeductible portion of the merger related expenses.

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 March 31, 2020, the Bank had outstanding commitments to originate loans of $25.3 million, construction loans in process of $14.5 million, unused lines of credit of $73.0 million (including $59.7 million for commercial lines of credit and $12.9 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 March 31, 2020, totaled $99.9 million.

As of March 31, 2020, 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 March 31, 2020, the total loans receivable to deposits ratio was 116.9%.  At March 31, 2020, the Bank's collateralized borrowing limit with the FHLBNY was $171.1 million, of which $83.9 million was outstanding.  As of March 31, 2020, the Bank also had a $13.0 million unsecured line of credit with one financial institution that it could access if necessary.

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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 March 31, 2020, 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 March 31, 2020. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2020.

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

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

There were no material pending legal proceedings at March 31, 2020 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

The Company did not repurchase any shares of its common stock during the quarter ended March 31, 2020.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable

ITEM 5 – OTHER INFORMATION

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None

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ITEM 6 – EXHIBITS

3.2	Amended and Restated Bylaws of MSB Financial Corp.
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

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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 May 8, 2020	/s/ Michael A. Shriner
	Michael A. Shriner
	President and Chief Executive Officer
Date May 8, 2020	/s/ John S. Kaufman
	John S. Kaufman
	First Vice President and Chief Financial Officer

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