Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended

March 31, 2019

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from

Commission File Number 001-37506

MSB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

MARYLAND

34-1981437

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1902 Long Hill Road, Millington, New Jersey

07946-0417

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code

(908) 647-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically 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]

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

The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
May 10, 2019:

$0.01 par value common stock 5,366,854 shares outstanding

MSB FINANCIAL CORP. AND SUBSIDIARIES

INDEX



		Page Number
PART I - FINANCIAL INFORMATION

Item 1:	Consolidated Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition
	at March 31, 2019 and December 31, 2018	4

	Consolidated Statements of Income for the Three
	Months Ended March 31, 2019 and 2018	5

	Consolidated Statement of Changes in Stockholders’ Equity for the Three
	Months Ended March 31, 2019 and 2018	6

	Consolidated Statements of Cash Flows for the Three Months
	Ended March 31, 2019 and 2018	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2:	Management's Discussion and Analysis of	22
	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	27

Item 1A:	Risk Factors	27

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3:	Defaults Upon Senior Securities	28

Item 4:	Mine Safety Disclosures	28

Item 5:	Other Information	28

Item 6:	Exhibits	29

SIGNATURES		30

CERTIFICATIONS

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



	March 31, 2019			December 31, 2018

(Dollars in thousands, except per share amounts)
Cash and due from banks	$	1,040		$	1,558
Interest-earning demand deposits with banks	9,771			10,242

Cash and Cash Equivalents	10,811			11,800

Securities held to maturity (fair value of $36,444 and $38,569, respectively)	36,982			39,476
Loans receivable, net of allowance for loan losses of $5,658 and $5,655, respectively	489,445			502,299
Premises and equipment, net	8,088			8,180
Federal Home Loan Bank of New York stock, at cost	3,406			4,756
Bank owned life insurance	14,679			14,585
Accrued interest receivable	1,772			1,615
Other assets	2,910			1,789

Total Assets	$	568,093		$	584,500

Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	49,429		$	46,690
Interest bearing	383,325			373,889

Total Deposits	432,754			420,579

Advances from Federal Home Loan Bank of New York	64,275			94,275
Advance payments by borrowers for taxes and insurance	719			749
Other liabilities	3,453			2,251

Total Liabilities	501,201			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; 5,366,854 and 5,389,054 issued and outstanding at March 31, 2019 and December 31, 2018, respectively	54			54
Paid-in capital	44,431			44,726
Retained earnings	24,012			23,498
Unearned common stock held by ESOP (176,740 and 179,464 shares, respectively)	(1,605		)	(1,632		)

Total Stockholders' Equity	66,892			66,646

Total Liabilities and Stockholders' Equity	$	568,093		$	584,500

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three months ended March 31,
(Dollars in thousands, except per share amounts)	2019		2018
Interest Income:
Loans receivable, including fees	$	5,691	$	5,136
Securities	285		219
Other	132		74
Total Interest Income	6,108		5,429
Interest Expense
Deposits	1,126		846
Borrowings	559		281
Total Interest Expense	1,685		1,127

Net Interest Income	4,423		4,302
Provision for Loan Losses	—		90
Net Interest Income after Provision for Loan Losses	4,423		4,212

Non-Interest Income
Fees and service charges	72		83
Income from bank owned life insurance	94		97
Other	24		24
Total Non-Interest Income	190		204

Non-Interest Expenses
Salaries and employee benefits	1,728		1,805
Directors compensation	129		122
Occupancy and equipment	375		385
Service bureau fees	95		67
Advertising	7		4
FDIC assessment	46		54
Professional services	1,278		353
Other	209		197
Total Non-Interest Expenses	3,867		2,987

Income before Income Taxes	746		1,429
Income Tax Expense	232		407
Net Income	$	514	$	1,022

Earnings per share:
Basic	$	0.10	$	0.19
Diluted	$	0.10	$	0.19

See notes to unaudited consolidated financial statements.

MSB Financial Corp and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2019 and 2018

(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

Balance - January 1, 2019	$	54		$	44,726		$	23,498	$	(1,632	)	$	66,646
Net income							514					514
Allocation of ESOP stock				81					27			108
Repurchased stock (22,200 shares)				(398		)						(398		)
Stock-based compensation				22								22
Balance - March 31, 2019	$	54		$	44,431		$	24,012	$	(1,605	)	$	66,892
See notes to consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



(Dollars in thousands)	Three Months Ended March 31,
Cash Flows from Operating Activities:	2019			2018
Net Income	$	514		$	1,022
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	(37		)	(5		)
Depreciation and amortization of premises and equipment	140			145
Stock-based compensation and allocation of ESOP stock	130			127
Amortization of right-of-use assets	87			—
Provision for loan losses	—			90
Income from bank owned life insurance	(94		)	(97		)
Increase in accrued interest receivable	(157		)	(35		)
Decrease in other assets	13			395
Decrease in other liabilities	(19		)	(1,163		)
Net Cash Provided By Operating Activities	577			479

Cash Flows from Investing Activities:
Activity in held to maturity securities:
Maturities, calls and principal repayments	2,491			2,074
Net decrease (increase) in loans receivable	12,382			(4,244		)
Purchased loans	—			(3,319		)
Proceeds from sales of loans	512			—
Purchase of bank premises and equipment	(48		)	(27		)
Purchase of Federal Home Loan Bank of New York stock	(2,705		)	(6,804		)
Redemption of Federal Home Loan Bank of New York stock	4,055			5,886
Net Cash Provided By (Used in) Investing Activities	16,687			(6,434		)

Cash Flows from Financing Activities:
Net increase (decrease) in deposits	12,175			(15,070		)
Advances from Federal Home Loan Bank of New York	—			30,400
Repayment of advances from Federal Home Loan Bank of New York	(30,000		)	(10,000		)
(Decrease) increase in advance payments by borrowers for taxes and insurance	(30		)	86
Net exercise of options and repurchase of shares	—			(25		)
Repurchase of common stock	(398		)	(4,390		)
Net Cash (Used In) Provided By Financing Activities	(18,253		)	1,001

Net Decrease in Cash and Cash Equivalents	(989		)	(4,954		)
Cash and Cash Equivalents – Beginning	11,800			22,309
Cash and Cash Equivalents – Ending	$	10,811		$	17,355

Supplementary Cash Flows Information
Interest paid	$	1,679		$	1,151
Income taxes paid	—			—
Supplemental noncash disclosures
Lease liabilities arising from obtaining right-of-use assets	$	1,211		$	—

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Organization and Business

MSB Financial Corp. (the "Company") is a Maryland-chartered corporation organized in 2014 to be the successor to MSB Financial Corp., a federal corporation ("Old MSB") upon completion of the second-step conversion of Millington Bank (the "Bank") from the two-tier mutual holding company structure to the stock holding company structure. MSB Financial, MHC (the "MHC") was the former mutual holding company for Old MSB prior to completion of the second-step conversion. In conjunction with the second-step conversion, each of the MHC and Old MSB ceased to exist.

The Company's principal business is the ownership and operation of the Bank. The Bank is a New Jersey-chartered stock savings bank and its deposits are insured by the Federal Deposit Insurance Corporation. The primary business of the Bank is attracting retail deposits from the general public and using those deposits together with funds generated from operations, principal repayments on securities and loans and borrowed funds, for its lending and investing activities. The Bank's loan portfolio primarily consists of one-to-four family and home equity residential loans, commercial and multi-family real estate loans, commercial and industrial loans, and construction loans. It also invests in U.S. government obligations, corporate bonds, state and political subdivisions, certificate of deposits and mortgage-backed securities. The Bank is regulated by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation. The Board of Governors of the Federal Reserve System (the "Federal Reserve") regulates the Company as a bank holding company.

The primary business of Millington Savings Service Corp (the "Service Corp"), the Bank's wholly-owned subsidiary, was the ownership and operation of a single commercial rental property. This property was sold during the year ended June 30, 2007. Currently the Service Corp is inactive.

Note 2 – Basis of Consolidated Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly owned subsidiary the Service Corp. All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X, and therefore, do not include all information or notes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America ("GAAP").

In the opinion of management, all adjustments, consisting of only normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements have been made at March 31, 2019 and for the three months ended March 31, 2019 and 2018 . The results of operations for the three months ended March 31, 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 Accounting Standards Update (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 of existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired

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

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.

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 evaluating the potential use of outside professionals for an updated model.

Note 3 – Earnings Per Share

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



	Three Months Ended March 31,
(In Thousands, Except Per Share Data)	2019		2018
Numerator:
Net income	$	514	$	1,022

Denominator:
Weighted average common shares	5,198		5,470
Dilutive potential common shares	39		37
Weighted average fully diluted shares	5,237		5,507

Earnings per share:
Basic	$	0.10	$	0.19
Dilutive	$	0.10	$	0.19

For three months ended March 31, 2019 and March 31, 2018 , there were no anti-dilutive securities.

Note 4 - Securities Held to Maturity - Continued

Note 4 - Securities Held to Maturity

All mortgage-backed securities at March 31, 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 March 31, 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 March 31, 2019 and December 31, 2018 are summarized as follows:



(In Thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
March 31, 2019
U.S. Government agencies:
Due within one year	$	2,000	$	—	$	10	$	1,990
Due after one year through five years	—		—		—		—
Due after five through ten years	3,000		3		—		3,003
Due after ten years	3,000		6		—		3,006

Total U.S. Government agencies	8,000		9		10		7,999


Mortgage-backed securities	21,443		214		160		21,497

Corporate bonds:
Due within one year	—		—		—		—
Due after one year through five years	1,500		1		1		1,500
Due after five through ten years	1,000		—		69		931
Due after ten years	4,000		—		527		3,473
Total Corporate bonds	6,500		1		597		5,904

State and political subdivisions:
Due within one year	161		1		1		161
Due after one through five years	696		3		—		699
Due after five through ten years	182		3		1		184
Total State and political subdivisions	1,039		7		2		1,044

Total Securities held to maturity	$	36,982	$	231	$	769	$	36,444

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 three month periods ended March 31, 2019 or 2018 . At March 31, 2019 and December 31, 2018 , securities held to maturity with an amortized cost and fair value of approximately $2.0 million 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, 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)
March 31, 2019
U.S. Government agencies	$	—	$	—	$	1,990	$	10	$	1,990	$	10
Mortgage-backed securities	2		1		12,417		159		12,419		160
Corporate bonds	500		1		4,403		596		4,903		597
State and political subdivisions	—		—		332		2		332		2

Total securities with gross unrecognized losses	$	502	$	2	$	19,142	$	767	$	19,644	$	769



	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 March 31, 2019 , management concluded that the unrecognized losses summarized above (which related to two U.S. Government agency bonds, sixteen mortgage-backed securities, four corporate bonds and two state and political subdivision securities, 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 March 31, 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.

Note 5 - Loans Receivable and Allowance for Credit Losses

The composition of loans receivable at March 31, 2019 and December 31, 2018 was as follows:



(In Thousands)	March 31, 2019		December 31, 2018
Residential mortgage:
One-to-four family	$	140,043	$	143,391
Home equity	25,160		24,365

Total residential mortgages	165,203		167,756

Commercial loans:
Commercial and multi-family real estate	206,653		212,606
Construction	37,319		29,628
Commercial and industrial - Secured	49,640		60,426
Commercial and industrial - Unsecured	53,791		48,176

Total commercial loans	347,403		350,836

Consumer:	470		540

Total loans receivable	513,076		519,132

Less:
Loans in process	17,443		10,677
Deferred loan fees	530		501
Allowance for loan losses	5,658		5,655

Total adjustments	23,631		16,833

Loans receivable, net	$	489,445	$	502,299

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, 2019 and 2018 and loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 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 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

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, 2018

Allowance for loan losses:
Balance, beginning	$	1,852	$	2,267	$	302	$	710	$	5		$	278		$	5,414
Provisions (credits)	141		7		19		64		—			(141		)	90
Loans charged-off	—		—		—		—		(2		)	—			(2		)
Recoveries	4		—		—		—		—			—			4
Balance, ending	$	1,997	$	2,274	$	321	$	774	$	3		$	137		$	5,506


March 31, 2018 allowance allocated to:
Loans individually evaluated for impairment	$	35	$	—	$	—	$	26	$	—		$	—		$	61
Loans collectively evaluated for impairment	1,962		2,274		321		748		3			137			5,445
Ending Balance	$	1,997	$	2,274	$	321	$	774	$	3		$	137		$	5,506

March 31, 2018 loan balances evaluated for:
Loans individually evaluated for impairment	$	11,430	$	2,038	$	—	$	196	$	—		$	—		$	13,664
Loans collectively evaluated for impairment	170,117		193,675		25,942		82,429		595			—			472,758
Ending Balance	$	181,547	$	195,713	$	25,942	$	82,625	$	595		$	—		$	486,422



(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 March 31, 2019 and December 31, 2018 :

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



(In Thousands)
As of March 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	$	1,921	$	100	$	—	$	2,021	$	135,939	$	2,041	$	140,001
Home equity	831		54		—		885		23,688		581		25,154
Commercial and multi-family real estate	293		—		—		293		205,018		1,018		206,329
Construction	—		—		—		—		19,807		—		19,807
Commercial and industrial	39		—		—		39		103,118		199		103,356
Consumer	5		—		—		5		451		—		456
Total	$	3,089	$	154	$	—	$	3,243	$	488,021	$	3,839	$	495,103



(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 March 31, 2019 and December 31, 2018 and the average balances of such loans for the three months and year, respectively, then ended:

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



(In Thousands)
March 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	$	9,933	$	1,724	$	8,209	$	235	$	10,625	$	10,079
Home equity	1,701		544		1,157		15		1,803		1,718

Commercial and multi-family real estate	2,389		1,019		1,370		80		3,050		2,400
Construction	—		—		—		—		—		—
Commercial and industrial	226		206		20		20		251		235
Consumer	—		—		—		—		—		—
Total	$	14,249	$	3,493	$	10,756	$	350	$	15,729	$	14,432



(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

As of March 31, 2019 and December 31, 2018 , impaired loans listed above included $11.3 million and $11.4 million respectively, of loans modified in troubled debt restructurings ("TDRs") and as such are considered impaired under GAAP. As of March 31, 2019 and December 31, 2018 , $10.4 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 $122,000 and $116,000 was recognized on impaired loans during the three months ended March 31, 2019 and 2018 , respectively. The average balance of impaired loans for the three months ended March 31, 2019 and March 31, 2018 was $14.2 million and $14.3 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.

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, 2019 and December 31, 2018 :



(In Thousands)
As of March 31, 2019	Pass		Special Mention		Substandard		Doubtful		Loss		Total

Commercial and multi-family real estate	$	203,106	$	1,529	$	1,694	$	—	$	—	$	206,329
Construction	19,807		—		—		—		—		19,807
Commercial and industrial	102,892		65		399		—		—		103,356

Total	$	325,805	$	1,594	$	2,093	$	—	$	—	$	329,492



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



(In Thousands)	Residential mortgage				Consumer				Total Residential and Consumer
	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018

Nonperforming	$	2,622	$	2,884	$	—	$	—	$	2,622	$	2,884

Performing	162,533		164,822		456		540		162,989		165,362

Total	$	165,155	$	167,706	$	456	$	540	$	165,611	$	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

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

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 $11.3 million at March 31, 2019 compared with $11.4 million at December 31, 2018 . The majority of the Company's TDRs are on accrual status. Accruing TDRs totaled $10.4 million at March 31, 2019 versus $10.5 million at December 31, 2018 . The total of TDRs on non-accrual status was $873,000 at March 31, 2019 and $915,000 at December 31, 2018 .

The Company did not modify any loans as a TDR during the three months ended March 31, 2019 . For the three months ended March 31, 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 three months ended March 31, 2018 :



	Three Months Ended March 31, 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 months ended March 31, 2019 and 2018 .

There was no Other Real Estate Owned ("OREO") at March 31, 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 March 31, 2019 and December 31, 2018 , we had consumer loans with a carrying value of $691,000 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

Note 6 - Fair Value Measurements (Continued)

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.


•	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 March 31, 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 following table summarizes those assets measured at fair value on a non-recurring basis as of March 31, 2019 and December 31, 2018 :



	As of March 31, 2019
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In thousands)
Impaired loans	$	—	$	—	$	347	$	347

Note 6 - Fair Value Measurements (Continued)



	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 March 31, 2019 and December 31, 2018 , the significant unobservable inputs used in fair value measurements were as follows:



	As of March 31, 2019
	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans	$	347	Appraisal of collateral	Appraisal adjustments	0% (0%)
				Liquidation expense	7.3% (7.3%)



	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.

Disclosure about Fair Value of Financial Instruments

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

Note 6 - Fair Value Measurements (Continued)



	Carrying		Fair		Level 1		Level 2		Level 3
As of March 31, 2019	Amount		Value		Inputs		Inputs		Inputs
			(In thousands)

Financial assets:
Cash and due from banks	$	10,811	$	10,811	$	10,811	$	—	$	—
Securities held to maturity	36,982		36,444		—		36,444		—
Loans receivable (1)	489,445		481,335		—		—		481,335
Accrued interest receivable	1,772		1,772		—		177		1,595

Financial liabilities:
Deposits	432,754		433,745		—		433,745		—
Advances from Federal Home Loan Bank of New York	64,275		62,844		—		62,844		—
Advance payments by borrowers for taxes and insurance	719		719		—		719		—
Accrued interest payable	92		92		—		92		—

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. The leases generally also include real estate taxes and common area maintenance ("CAM") charges in the annual rental payments. The Company accounts for the lease and non-lease components separately as such amounts are readily determinable.

At March 31, 2019 , the Company had lease liabilities totaling $1.2 million and right-of-use assets totaling $1.1 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the three months ended March 31, 2019 , the weighted average remaining lease term for operating leases was 4.8 years and the weighted average discount rate in the measurement of operating lease liabilities was 3.14% . The incremental borrowing rate for leases are 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.

Lease costs were as follows:

Note 6 - Fair Value Measurements (Continued)



	Three months ended March 31,
(Dollars in thousands)	2019
Operating lease cost	$76
Short-term lease cost	46
Total lease Cost	$122

Rent expense for the three months ended March 31, 2018 , prior to the adoption of ASU 2016-02, was $128,000 .

There were no sale and leaseback transactions, leverage leases, finance leases, or lease transactions with related parties during the three months ended March 31, 2019 . At March 31, 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:



	Three months ended March 31,
(Dollars in thousands)	2019
Lease payments due:
Within one year	$329
After one but within two years	333
After two but within three years	254
After three but within four years	199
After five years	306
Total undiscounted cash flows	1,421
Discount on cash flows	(237	)
Total lease liability	$1,184

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;


•	Changes in consumer spending, borrowing and savings habits;


•	Legislative or regulatory changes that adversely affect our business;


•	Adverse changes in the securities markets;


•	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 March 31, 2019 and December 31, 2018

General. Total assets were $568.1 million at March 31, 2019 , compared to $584.5 million at December 31, 2018 , a decrease of $16.4 million or 2.8% . During the period, the Company experienced declines of $12.9 million , or 2.6% , in loans receivable, net and $2.5 million , or 6.3% , in held to maturity securities. Federal Home Loan Bank of New York ("FHLBNY") stock decreased $1.4 million , or 28.4% , due to required redemptions as a result of decreased borrowings during the period. The Company decreased its FHLBNY overnight borrowings by $30.0 million million during the three months ended March 31, 2019 .

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

Loans. Loans receivable, net, decreased by $12.9 million , or 2.6% , from $502.3 million at December 31, 2018 to $489.4 million at March 31, 2019 . Loans receivable, net represented 86.2% of the Company's assets at March 31, 2019 compared to 85.9% at December 31, 2018 . The Bank's commercial and industrial portfolio decreased by $5.2 million on weaker loan demand, while the commercial real estate portfolio decreased approximately $6.0 million . The construction portfolio increased $7.7 million

as a result of borrowers starting new projects. The residential mortgage portfolio decreased $2.6 million to $165.2 million as of March 31, 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 $37.0 million at March 31, 2019 as compared to $39.5 million at December 31, 2018 . Principal repayments during the three months ended March 31, 2019 totaled $2.5 million; there were no maturities, calls, or purchases during the first three months of 2019 .

Deposits. Total deposits at March 31, 2019 were $432.8 million compared with $420.6 million at December 31, 2018 . Overall, deposits increased $12.2 million. Certificate of deposits (including IRAs) and non-interest demand balances increased $18.7 million and $2.7 million , respectively. Certificates of deposit balances increased to $139.6 million compared to $120.9 million and non-interest demand balances increased to $49.4 million from $46.7 million compared to December 31, 2018 . Money market balances increased $1.0 million to $17.2 million at March 31, 2019 compared to $16.2 million at year end. In addition, savings balances increased $369,000 to $103.1 million from $102.7 million from year end. Offsetting these increases was a decrease in interest demand balances of $10.7 million . Interest demand balances declined to $123.4 million compared to $134.1 million at the prior year end.

Borrowings. Total borrowings at March 31, 2019 were $64.3 million compared with $94.3 million at December 31, 2018 . Overnight advances with the Federal Home Loan Bank of New York at March 31, 2019 were $36.6 million while there were $66.6 million at December 31, 2018 .

Equity. Stockholders' equity was $66.9 million at March 31, 2019 compared to $66.6 million at December 31, 2018 , an increase of $246,000 , or 0.4% . The increase in shareholders' equity was primarily due to net income of $514,000 , offset by the repurchase of 22,200 shares of common stock during the quarter at a total cost of $398,000 .

Comparison of Operating Results for the Three Months Ended March 31, 2019 and 2018

General . The Company had net income of $514,000 for the three months ended March 31, 2019 compared to net income of $1.0 million for the three months ended March 31, 2018 , as an increase of $121,000 in net interest income, a decrease of $90,000 in the provision for loan losses and a decrease of $175,000 in income tax expense, were more than offset by an increase of $880,000 in non-interest expense. The decrease in the provision expense was related to the lower loan growth the Company experienced during the period in addition to improving factors. The increase in non-interest expense was primarily related to an increase in professional service 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:



	For the three months ended
	3/31/2019							3/31/2018
Average Balance Sheet (In Thousands)	Average Balance			Interest Income/ Expense		Yield		Average Balance			Interest Income/ Expense		Yield
Interest-earning assets:
Loans receivable	$	502,149		$	5,691	4.53	%	$	483,255		$	5,136	4.25	%
Securities held to maturity	37,899			285		3.01	%	37,661			219		2.33	%
Other interest-earning assets	15,157			132		3.48	%	10,505			74		2.82	%
Total interest-earning assets	555,205			6,108		4.40	%	531,421			5,429		4.09	%

Allowance for loan loss	(5,656		)					(5,461		)
Non-interest-earning assets	27,621							28,346
Total non-interest-earning assets	21,965							22,885
Total Assets	$	577,170						$	554,306

Interest-bearing liabilities:
Demand & money market	$	135,018		$	367	1.09	%	$	163,667		$	297	0.73	%
Savings and club deposits	102,209			172		0.67	%	106,495			101		0.38	%
Certificates of deposit	130,207			587		1.80	%	120,360			448		1.49	%
Total interest-bearing deposits	367,434			1,126		1.23	%	390,522			846		0.87	%

Federal Home Loan Bank advances	92,780			559		2.41	%	53,191			281		2.11	%
Total interest-bearing liabilities	460,214			1,685		1.46	%	443,713			1,127		1.02	%

Non-interest-bearing deposit	46,962							36,211
Other non-interest-bearing liabilities	2,623							1,972
Total Liabilities	509,799							481,896

Equity	67,371							72,410
Total Liabilities and Equity	577,170							554,306

Net Interest Income				4,423		2.94	%				4,302		3.07	%

Net Interest Margin						3.19	%						3.24	%

Ratio of Interest Earning Assets to Interest Bearing Liabilities	120.64		%					119.77		%

The Company's net interest margin decreased 5 basis points to 3.19% for the three months ended March 31, 2019 compared to 3.24% for the three months ended March 31, 2018 . The yield on interest-earning assets increased by 31 basis points year over year while the cost of interest-bearing liabilities increased 44 basis points. The increase in the cost of interest-bearing liabilities was attributable to the increase in average borrowings combined with higher rates in the deposit portfolio year over year.

Provision for Loan Losses . The provision for loan losses decreased by $90,000 to zero for the three months ended March 31, 2019 compared to a provision of $90,000 for the three months ended March 31, 2018 . The decreased provision level during the current year period is attributable to improving factors coupled with lower loan growth during the quarter ended March 31, 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 Company had $3.8 million in nonperforming loans as of March 31, 2019 compared to $4.8 million as of March 31, 2018 . The allowance for loan losses to total loans ratio was 1.14% and 1.13% at March 31, 2019 and 2018 , respectively, while the allowance for loan losses to non-performing loans ratio was 147.38% at March 31, 2019 compared to 114.37% at March 31, 2018 . Non-performing loans to total loans and net charge-offs to average loans outstanding ratios were at 0.78% and 0.00% , respectively, at and for the three months ended March 31, 2019 compared to 0.99% and 0.00% at and for the three months ended March 31, 2018 .

Non-Interest Income . Non-interest income decreased $14,000 , or 6.9% , to $190,000 during the three months ended March 31, 2019 compared to $204,000 for the three months ended March 31, 2018 primarily due to a decrease in fees and service charges.

Non-Interest Expenses . During the three months ended March 31, 2019 , non-interest expenses increased $880,000 to $3.9 million from $3.0 million for the three months ended March 31, 2018 . The increase in non-interest expense was primarily related to an increase in professional service expense. Professional services increased by $925,000 , or 262.04% . As the Company previously disclosed, in connection with the audit, management and outside auditors identified certain material weaknesses in internal control. Service bureau fees increased $28,000, or 41.8%, primarily due to the reduction of relationship credits utilized during the period.

Income Taxes . Income tax expense for the three months ended March 31, 2019 was $232,000 or 31.1% of the reported income before income taxes compared to a tax expense of $407,000 or 28.5% for the three months ended March 31, 2018 . The decrease in the tax provision is attributable to a decrease in pre-tax income.

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, 2019 , the Bank had outstanding commitments to originate loans of $17.4 million , construction loans in process of $5.7 million , unused lines of credit of $93.3 million (including $63.2 million for commercial lines of credit and $12.2 million for home equity lines of credit), and standby letters of credit of $578,000 . Certificates of deposit scheduled to mature in one year or less at March 31, 2019 , totaled $53.0 million .

As of March 31, 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 March 31, 2019 , the total loans receivable to deposits ratio was 113.1% . At March 31, 2019 , the Bank's collateralized borrowing limit with the FHLBNY was $144.5 million , of which $64.3 million was outstanding. As of March 31, 2019 , the Bank also had a $13.0 million unsecured line of credit with one financial institution that it could access if necessary.

Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of March 31, 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 the 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 March 31, 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 March 31, 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 is 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 Keef, Bruyette & Wood, a Stifel Company. The following table shows shares repurchased during the quarter ended March 31, 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
January 1-January 31, 2019	4,000	$	17.82	77,948	195,202
February 1-February 28, 2019	8,600	17.94		86,548	186,602
March 1-March 31, 2019	9,600	18.01		96,148	177,002
Total	22,200	$	17.92	96,148	177,002

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable

ITEM 5 – OTHER INFORMATION

None

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

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 10, 2019		/s/ Michael A. Shriner
		Michael A. Shriner
		President and Chief Executive Officer


Date May 10, 2019		/s/ John S. Kaufman
		John S. Kaufman
		First Vice President and Chief Financial Officer