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| MSBF > SEC Filings for MSBF > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
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;
• 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 are 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
Although specific and general loan loss allowances are established in accordance with management's best estimate, actual losses are dependent upon future events and, as such, further provisions for loan losses may be necessary in order to increase the level of the allowance for loan losses. For example, our evaluation of the allowance includes consideration of current economic conditions, and a change in economic conditions could reduce the ability of our borrowers to make timely repayments of their loans. This could result in increased delinquencies and increased non-performing loans, and thus a need to make increased provisions to the allowance for loan losses, which would be a charge to income during the period the provision is made, resulting in a reduction to our earnings. A change in economic conditions could also adversely affect the value of the properties collateralizing our real estate loans, resulting in increased charge-offs against the allowance and reduced recoveries, and thus a need to make increased provisions to the allowance for loan losses. Furthermore, a change in the composition of our loan portfolio or growth of our loan portfolio could result in the need for additional provisions.
Comparison of Financial Condition at September 30, 2008 and June 30, 2008
General. Total assets reached $319.2 million at September 30, 2008, compared to $308.1 million at June 30, 2008. The increase was fueled by loan originations, the funding for which was provided primarily by a $10.5 million or 28.4% increase in borrowings from the Federal Home Loan Bank, to $47.6 million at September 30, 2008, compared to $37.1 million at June 30, 2008.
Loans. Loans receivable, net, rose to $262.2 at September 30, 2008 from $254.3 million at June 30, 2008, an increase of $7.9 million, or 3.1%. As a percentage of assets, loans decreased from 82.5% to 82.1%. The Bank experienced strong demand for its one-to-four family residential loans in its market area; the one-to-four family portfolio grew by $6.0 million or 4.1% during the three months ended September 30, 2008. Home equity loans grew by $3.2 million, a 5.9% increase, while commercial loans grew by $514,000 or 5.5%, and deposit account loans grew by $42,000, representing a 8.1% change from June 30, 2008. The construction loan portfolio decreased by $949,000 or 5.3%, as did commercial real estate loans by $790,000 or 2.6% and automobile and overdraft protection loans by $18,000 and $8,000 or 3.7% and 4.6%%, respectively, between June 30, 2008 and September 30, 2008.
Securities. Our portfolio of securities held to maturity was at $27.8 million at September 30, 2008 as compared to $28.7 million at June 30, 2008. During the three months ended September 30, 2008, no securities were purchased and maturities, calls and principal repayments totaled $981,000.
Premises and equipment, net. Total premises and equipment, net at September 30, 2008 were $11.4 million, compared to $10.8 million at June 30, 2008, an increase of $594,000 or 5.5%. The increase was primarily attributed to the construction of the Bank's new Bernardsville branch location which opened in August 2008.
Deposits. Total deposits at September 30, 2008 were $226.8 million, compared to $225.4 million at June 30, 2008. Savings and club accounts and non-interest bearing demand accounts increased by $11.2 million and $924,000, respectively. Certificates of deposit decreased by $8.9 million, as did NOW, money market demand and super NOW accounts by $1.3 million, $304,000 and $97,000, respectively.
Borrowings. Total borrowings at September 30, 2008 amounted to $47.6 million, compared to $37.1 million at June 30, 2008. The Bank did not commit to any additional long term borrowings during
Our investment in Federal Home Loan Bank of New York ("FHLB") stock was $2.6 million at September 30, 2008 compared to $2.1 million at June 30, 2008. The increased ownership of Federal Home Loan Bank stock resulted from the increase in FHLB borrowings.
Equity. Stockholders' equity was $42.4 million at September 30, 2008 as compared to $43.4 million at June 30, 2008, reflecting a decrease of $1.0 million for the three months ended September 30, 2008. The decrease in equity was primarily attributed to the repurchase of $1.0 million in treasury stock. Other changes in equity were due to the declaration of $66,000 in cash dividends on our common stock, a $121,000 reduction as a result of the implementation of two accounting pronouncements related to employee benefits, and a $1,000 reduction in accumulated other comprehensive loss, offset by $171,000 in net income, $44,000 in ESOP shares earned and $41,000 in stock-based compensation.
Comparison of Operating Results for the Three Months Ended September 30, 2008 and 2007
General. Our net income for the three months ended September 30, 2008 was $171,000, compared to net income of $126,000 for the three months ended September 30, 2007. The $45,000 increase in net income was due to an increase in net interest income which more than offset increases in provision for loan losses, non-interest expenses and income taxes.
Net Interest Income. Net interest income for the three months ended September 30, 2008 amounted to $2.1 million compared to $1.8 million for the three months ended September 30, 2007. The $276,000 increase in net interest income was the result of a $58,000 increase in total interest income and a $218,000 reduction in interest expense.
The increase in total interest income for the three months ended September 30, 2008, resulted from a 9.9% increase in the average balance of interest-earning assets, offset by a 47 basis point decrease in the average yield thereon. The increase of $25.6 million or 10.9% increase in average loan receivable balances tempered by a decrease in average yield from 6.33% to 5.77% for the three month period ended September 30, 2008, compared to the three month period ended September 30, 2007, was responsible for the increase of $38,000 or 1.0% increase in loan receivable interest income. Income on securities held to maturity increased $30,000 or 8.7% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, whereas other interest income decreased by $10,000 for the same period.
The $218,000 decrease in interest expense for the three months ended September 30, 2008 from the three months ended September 30, 2007, was attributable to an increase in deposit balances, tempered by lower interest rates on deposits during the period, and included the capitalization of $31,000 in interest expense related to the construction of our new Bernardsville branch. The average cost of deposits decreased by 66 basis points to 3.21%, and the average balance of deposits increased by $4.4 million or 2.2% between periods, resulting in a $301,000 decrease in interest expense on deposits. Total interest expense on borrowings increased by $114,000 from $301,000 for the three months ended September 30, 2007 to $415,000 for the three months ended September 30, 2008 as the result of an $18.4 million increase in average borrowing.
Provision for Loan Losses. A loan loss provision of $65,000 was made during the three months ended September 30, 2008 compared to $15,000 was made during the three months ended September 30, 2007. The allowance for loan losses totaled $1.1 million, $1.0 million, and $943,000 respectively, at September 30, 2008, June 30, 2008, and September 30, 2007, or 0.41%, 0.40%, and 0.39%, respectively, of total loans. The ratio of non-performing loans to total loans was 2.80% at September 30, 2008, as
Non-Interest Income. This category includes fees derived from checking accounts, ATM transactions and debit card use and mortgage related fees. It also includes increases in the cash surrender value of our bank owned life insurance. Non-interest income rose by $7,000 to $166,000 for the three months ended September 30, 2008 from $159,000 for the three months ended September 30, 2007.
Non-Interest Expenses. Total non-interest expenses grew by $140,000 or 7.9% for the three months ended September 30, 2008 to $1.9 million compared to $1.8 million for the same period in 2007.
Other expense totaled $410,000 for the three months ended September 30, 2008, a $89,000 or 27.7% increase over the $321,000 for the three months ended September 30, 2007, primarily the result of increased FDIC and other miscellaneous expense. Occupancy and equipment expense increased by $45,000 or 14.1 % from $319,000 to $364,000, as did advertising expense by $29,000 or 72.5%, from $40,000 to $69,000 for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, partly due to the opening of our new Bernardsville branch in late August 2008. Directors' compensation expense increased by $21,000 or 33.3%, from $63,000 to $84,000 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to the Stock Option Plan which was implemented in May 2008. Service bureau fees decreased by $38,000 or 27.3% from $139,000 for the three months ended September 2007, to $101,000 for the three months ended September 30, 2007, due to the reclassification of telecommunication expense. Salaries and employee benefit expense totaled $895,000 for the three months ended September 30, 2008, compared to $901,000 for the three month ended September 30, 2008, representing a $6,000 or 0.7% reduction, primarily due to a change in the employees' pension plan that took place in December 2007.
Income Taxes. Income tax expense for the three months ended September 30, 2008 was $106,000 or 38.3% of income before income taxes as compared to $58,000 or 31.5% of income before income taxes for the three months ended September 30, 2007. The increase in effective tax rate was due to a smaller portion of current period pre-tax income being derived from tax-exempt 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 President and Chief Executive Officer Gary Jolliffe, 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
At September 30, 2008, the Bank had outstanding commitments to originate loans of $2.6 million, construction loans in process of $5.4 million, unused lines of credit of $26.8 million (including $22.4 million for home equity lines of credit), and standby letters of credit of $268,000. Certificates of deposit scheduled to mature in one year or less at September 30, 2008, totaled $83.1 million.
As of September 30, 2008, the Bank had contractual obligations related to the long-term operating leases for the three branch locations that it leases (Dewy Meadow, RiverWalk and Martinsville).
The Bank generates cash through borrowings from the Federal Home Loan Bank to meet its day-to-day funding obligations. At September 30, 2008, its total loans to deposits ratio was 115.6%. At September 30, 2008, the Bank's collateralized borrowing limit with the Federal Home Loan Bank was $93.7 million, of which $36.9 million was outstanding. As of September 30, 2008, the Bank also had a $20.0 million line of credit with a financial institution for reverse repurchase agreements (which is a form of borrowing) that it could access if necessary.
Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of September 30, 2008, the Bank exceeded all applicable regulatory capital requirements.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the normal course of our business of investing in loans and securities as well as in the normal course of maintaining and improving Millington Savings Bank's facilities. These financial instruments include significant purchase commitments, such as commitments related to capital expenditure plans and commitments to purchase investment securities or mortgage-backed securities, and commitments to extend credit to meet the financing needs of our customers. At September 30, 2008, our significant off-balance sheet commitments consisted of commitments to originate loans of $2.6 million, construction loans in process of $5.4 million, unused lines of credit of $26.8 million (including $22.4 million for home equity lines of credit), and standby letters of credit of $268,000.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Since a number of commitments typically expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Recent Legislation and Other Regulatory Initiatives
On October 3, 2008, the President of the United States signed the Emergency Economic Stabilization Act of 2008 ("EESA") into law. This legislation, among other things, authorized the Secretary of Treasury ("Treasury") to establish a Troubled Asset Relief Program ("TARP") to purchase up to $700 billion in troubled assets from qualified financial institutions ("QFI"). EESA is also being interpreted by the Treasury to allow it to make direct equity investments in QFIs. Subsequent to the enactment of EESA, the Treasury announced the TARP Capital Purchase Program ("CPP") under which the Treasury will purchase up to $250 billion in senior perpetual preferred stock of QFIs that elect to
EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the FDIC's ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes.
As a condition to selling troubled assets to the TARP and/or participating in
the CPP, the QFI must agree to the Treasury's standards for executive
compensation and corporate governance. These standards generally apply to the
Chief Executive Officer, Chief Financial Officer, and next three highest
compensated officers of the QFI. In general, these standards require the QFI to:
(1) ensure that incentive compensation for senior executives does not encourage
unnecessary and excessive risk taking; (2) recoup any bonus or incentive
compensation paid to a senior executive based on financial statements that later
prove to be erroneous; (3) prohibit the QFI from making "golden parachute"
payments in connection with certain terminations of employment; and (4) not
deduct, for tax purposes, executive compensation in excess of $500,000 for each
senior executive. Participation in the CPP also results in certain restrictions
on the QFI's dividend and stock repurchase activities. These restrictions remain
in place until the Treasury no longer holds any equity or debt securities of the
QFI.
As noted above, above, the Bank exceeds the minimum regulatory capital standards by substantial margins. Furthermore, management does not currently believe that the Company has a significant exposure to troubled assets that would warrant sale of such assets under the TARP. The Company will continue to evaluate the TARP to determine if participation in it would provide a material benefit to the Company although it has determined it will not apply to participate in the CPP portion.
Concurrent with the announcement of the CPP, the FDIC also established the Temporary Liquidity Guarantee Program. This program contains two elements: (i) a debt guarantee program and (ii) an increase in deposit insurance coverage for certain types of non-interest bearing accounts. Pursuant to the debt guarantee program, newly issued senior unsecured debt of banks, thrifts or their holding companies issued on or before June 30, 2009 would be protected in the event the issuing institution subsequently fails or its holding company files for bankruptcy. Financial institutions opting to participate in this program would be charged an annualized fee equal to 75 basis points multiplied by the amount of debt being guaranteed. The amount of debt that may be guaranteed cannot exceed 125% of the institution's outstanding debt at September 30, 2008 and due to mature before June 30, 2009. The guarantee would expire by June 30, 2012 even if the debt itself has not matured. Pursuant to the temporary unlimited deposit insurance coverage, a qualifying institution may elect to provide unlimited coverage for non-interest bearing transaction deposit accounts in excess of the $250,000 limit by paying a 10 basis point surcharge on the covered amounts in excess of $250,000. All institutions will have this coverage without charge for until December 5, 2008. Institutions may choose whether to continue the coverage and be charged the surcharge. To opt out of the program, institutions must notify the FDIC by December 5, 2008. This coverage would expire on December 31, 2009. The Bank is currently evaluating the effect that this program would have on its operations.
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