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| MSBF > SEC Filings for MSBF > Form 10-Q on 12-Feb-2009 | All Recent SEC Filings |
12-Feb-2009
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;
• 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
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 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.
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 December 31, 2008 and June 30, 2008
General. Total assets reached $318.8 million at December 31, 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 $10.3 million or 4.6% increase in deposits, to $235.7 million at December 31, 2008, compared to $225.4 million at June 30, 2008.
Loans. Loans receivable, net, rose to $265.7 at December 31, 2008 from $254.3 million at June 30, 2008, an increase of $11.4 million, or 4.5%. As a percentage of assets, loans increased from 82.5% to 83.3%. 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 $7.8 million or 5.4% between June 30, 2008 and
Securities. Our portfolio of securities held to maturity was at $27.7 million at December 31, 2008 as compared to $28.7 million at June 30, 2008. During the six months ended December 31, 2008, no securities were purchased and maturities, calls and principal repayments totaled $1.1 million.
Premises and equipment, net. Total premises and equipment, net at December 31, 2008 were $11.3 million, compared to $10.8 million at June 30, 2008, an increase of $502,000 or 4.7%. 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 December 31, 2008 were $235.7 million, compared to $225.4 million at June 30, 2008. Savings and club accounts and non-interest bearing demand accounts increased by $23.5 million and $2.0 million, respectively, as did super NOW accounts by $52,000. Certificates of deposit decreased by $13.9 million, as did NOW, and money market demand accounts by $1.2 million, and $142,000, respectively. The shift in time deposits balances to savings account balances was the result of the Bank offering higher rates on its tiered savings account product.
Borrowings. Total borrowings at December 31, 2008 amounted to $38.9 million, compared to $37.1 million at June 30, 2008. The Bank did not commit to any additional long term borrowings during the six months ended December 31, 2008. The Bank did not have any short-term borrowings as of June 30, 2008, compared to $2.3 million at December 31, 2008. The increase in short-term borrowings was used to fund increased loan demand.
Our investment in Federal Home Loan Bank of New York ("FHLB") stock was $2.2 million at December 31, 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 $41.6 million at December 31, 2008 as compared to $43.4 million at June 30, 2008, reflecting a decrease of $1.8 million for the six months ended December 31, 2008. The decrease in equity was primarily attributed to the repurchase of $2.0 million in treasury stock. Other changes in equity were due to the declaration of $129,000 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 $2,000 reduction in accumulated other comprehensive loss, offset by $304,000 in net income, $84,000 in ESOP shares earned and $82,000 in stock-based compensation.
Comparison of Operating Results for the Three and Six Months Ended December 31, 2008 and 2007
General. Our net income for the three months ended December 31, 2008 was $133,000, compared to net income of $234,000, for the three months ended December 31, 2007, a decrease of $101,000 or 43.2%. This was primarily the result of an increase in net interest income, offset by increases in the provision for loan losses and non-interest expense and a decrease in non-interest income. Net interest income for the three months ended December 31, 2008 increased $305,000 to $2.2 million from $1.9 million for the comparable prior year quarter. The provision for loan losses reflected an increase of $27,000 to $67,000 for the three month period ended December 31, 2008, compared to $40,000 for the three month period ended December 31, 2007. Non-interest income reflected a decrease of $57,000 or 34.6%, to $108,000 for the three months ended December 31, 2008, compared to $165,000 for the three months ended December 31, 2007. Non-interest expense was $2.0 million for the three months ended December 31, 2008 compared to $1.6 million for the three months ended December 31, 2007, an increase of $368,000 or 22.5%.
Our net income for the six months ended December 31, 2008 was $304,000, compared to net income of $360,000 for the six months ended December 31, 2007, a decrease of $56,000 or 15.6%. This was primarily the result of increases in the provision for loan losses and non-interest expenses and a reduction in noninterest income. Net interest income for the six months ended December 31, 2008, increased $581,000 to $4.3 million from $3.7 million for the six months ended December 31, 2007. The provision for loan losses increased $77,000 to $132,000 for the six months ended December 31, 2008 compared to $55,000 for the six months ended December 31, 2007. Non-interest income decreased by $50,000 to $274,000 for the six months ended December 31, 2008 compared to $324,000 for the six months ended December 31, 2007. Non-interest expense increased by $508,000 to $3.9 million, compared to $3.4 million for the same six month period ended December 31, 2007.
Net Interest Income. Net interest income increased $305,000 or 16.3% to $2.2 million for the three month period ended December 31, 2008, compared to $1.9 million for the three months ended December 31, 2007. Interest income decreased by $22,000 or .5%, and interest expense decreased by $327,000 or 14.1%, for the same three month comparative periods.
The decrease of $22,000 or .5% in total interest income for the three months ended December 31, 2008, resulted from a 51 basis point decrease in yield, offset by an 8.6% increase in average balance of interest-earning assets. Average earning assets increased $23.6 million, to $298.4 million for the three months ended December 31, 2008, compared to $274.8 million for the three months ended December 31, 2007. Interest income on loans decreased by $24,000 or .6% for the three months ended December 31, 2008, compared to the same period ended December 31, 2007 primarily due to a 61 basis point reduction in average yield partially offset by an increase of $24.4 million or 10.1% in average loan balances. Interest on securities held to maturity increased by $28,000 or 8.1% for the three months ended December 31, 2008, compared to the three months ended December 31, 2007, as a result of a $1.4 million or 4.9% decrease in the average balance being more than offset by a 65 basis point increase in yield thereon. Other interest income reflected a reduction of $26,000 or 50.0% in interest income primarily due to a decrease of 244 basis points in yield partially offset by a $591,000 or 12.5% increase in average other interest-earning assets for the three months ended December 31, 2008, compared to the same three month period ended December 31, 2007.
Total interest expense decreased by $327,000 or 14.1% for the three months ended December 31, 2008, compared to the three months ended December 31, 2007. Average interest-bearing liabilities increased $26.8 million or 11.4%, from $236.7 for the three months ended December 31, 2007, to $263.5 for the three months ended December 31, 2008, the effect of which was more than offset by an 89 basis point decrease in the average rate from 3.93% to 3.04%, for the respective periods. Interest expense on deposits decreased by $347,000 or 17.6% for the three months ended December 31, 2008, compared to the three months ended December 31, 2007, as the increase of $14.4 million or 7.0% in average interest-bearing deposits more than offset by an 89 basis point decrease in the average rates on interest-bearing deposits. The Bank experienced a shift in its deposit base for the three months ended December 31, 2008, compared to the three months ended December 31, 2007, as time deposit average balances decreased $20.8 million or 16.0%, while average balances on savings deposit balances increased by $35.3 million or 73.8%. Savings account balances increased as a result of the Bank offering higher rates on its tiered savings account product. Time deposit account average rates decreased by 119 basis points, while the average rate on savings deposit accounts increased by 13 basis points for the three months ended December 31, 2008, compared to the three months ended December 31, 2007. Total interest expense on borrowings increased by $20,000 for the three months ended December 31, 2008, compared to the three months ended December 31, 2007. Federal Home Loan Bank advance average balances increased $12.5 million or 38.7%, tempered by an average rate decrease of 105 basis points, from 4.39% to 3.34% for the three months ended December 31, 2008, compared to the same three month period ended December 31, 2007.
The increase of $36,000 or .4% in interest income for the six months ended December 31, 2008 resulted from a $25.0 million increase in average earning assets, largely offset by a 49 basis point decrease in yield to 5.63%, compared to the six months ended December 31, 2007. Interest income on loans increased by $14,000 or .2% for the six months ended December 31, 2008, compared to the six months ended December 31, 2007. Average loan receivable balances increased $25.0 million or 10.5% to $262.4 million for the six months ended December 31, 2008, compared to $237.4 million for the six months ended December 31, 2007, while the yield declined to 5.73% from 6.32%. Interest income on securities held to maturity increased $58,000 or 8.4% for the six months ended December 31, 2008, compared to the six months ended December 31, 2007, due to a 64 basis point increase in yield to 5.37%. Average securities held to maturity balances decreased $1.3 million or 4.6% for the six months ended December 31, 2008, compared to the six months ended December 31, 2007. Interest income on other interest-earning assets decreased by $36,000 or 34.0% for the six month period ended December 31, 2008, compared to the same six month period ended December 31, 2007 as the yield declined by 220 basis points to 2.33% and average other interest earning-asset balances increased $1.3 million or 28.8%.
The $545,000 or 11.8% decrease in interest expense for the six months ended December 31, 2008, compared to the six months ended December 31, 2007, was primarily due to an average rate decrease of 81 basis points to 3.14% on interest-bearing liabilities, partially offset by an increase of $25.5 million in average interest-bearing liabilities. Interest expense on deposits decreased by $648,000 for the six months ended December 31, 2008, compared to the six months ended December 31, 2007. The average rate on deposits decreased 78 basis points to 3.08%, while average deposit balances increased $10.1 million or 4.9%, from $204.6 million for the six months ended December 31, 2007, to $214.7 million for the six months ended December 31, 2008. Certificates of deposit average balances decreased $19.4 million or 14.9%, as did the average rate by 102 basis points for the six months ended December 31, 2008, compared to the same six month period ended December 31, 2007. NOW accounts average balances decreased by $21,000 or .1% and the average rate by 29 basis points for the same comparative period. Savings deposit average balances increased by $29.5 million or 61.5%, as did the average rate by 14 basis points, for the six months ended December 31, 2008, compared to the six months ended December 31, 2007. Interest expense on borrowings, net of capitalized interest, increased by $103,000 for the six months ended December 31, 2008, compared to the six months ended December 31, 2007. Average Federal Home Loan Bank advance balances increased by $17.1 million or 59.5%, while the average rate decreased by 112 basis points for the six month period ended December 31, 2008, compared to the six month period ended December 31, 2007. Federal Home Loan Bank average balances increased during the six months ended December 31, 2008 to fund continued loan demand.
Provision for Loan Losses. For the three month period ended December 31, 2008, a $67,000 provision was made, whereas a $40,000 provision was made for the same period in 2007. There were no charge-offs or recoveries of previously charged-off loans for the three month periods ended December 31, 2008 and December 31, 2007, respectively. For the six month period ended December 31, 2008, a $132,000 provision was made as compared to a $55,000 provision for the same period in 2007. There were no charge-offs for the six month periods ended December 31, 2008 and December 31, 2007 respectively, and a $2,000 recovery for the six month period ended December 31, 2007. There were no recoveries of previously charged-off loans for the six months ended December 31, 2008. The allowance for loan losses totaled $1.2 and $1.0 million, respectively, at December 31, 2008 and June 30, 2008, representing 0.42% and 0.40%, respectively, of total loans. The ratio of non-performing loans to total loans was 2.31% at December 31, 2008, as compared to 2.00% at June 30, 2008. The allowance for loan losses reflects our estimation of the losses inherent in our loan portfolio to the extent they are both
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 the bank owned life insurance and unrealized gain or loss on trading securities.
Non-interest income decreased by $57,000 to $108,000 for the three months ended December 31, 2008 from $165,000 for the three months ended December 31, 2007, primarily due to a $41,000 unrealized loss to the Bank's trading security portfolio for the three months ended December 31, 2008, as compared to an $11,000 gain in the prior year period. Total non-interest income decreased from $324,000 for the six months ended December 31, 2007 to $274,000 for the six months ended December 31, 2008, primarily due to a $38,000 unrealized loss to the Bank's trading security portfolio in the current period as compared to a $21,000 gain in the prior year period.
Non-Interest Expenses. Total non-interest expenses grew by $368,000 or 22.5% to $2.0 million for the three months ended December 31, 2008, compared to $1.6 million the three months ended December 31, 2007.
Salaries and employee benefits expense increased $152,000 or 20.0% for the three months ended December 31, 2008, compared to the three months ended December 31 2007. Salaries and benefits expense increased due to the addition of personnel staff at our new Bernardsville location, normal salary increases and the adoption of a stock option plan in May 2008, partially offset by a reduction in 401(k) expense due to an amendment to the plan to reduce the Bank's contribution in December 2007. Directors' compensation increased $20,000 or 31.3% for the three month period ended December 31, 2008 compared to the three months ended December 31, 2007, as result of the implementation of a stock option plan in May 2008. Occupancy and equipment expense increased by $99,000 or 32.1%, for the three month period ended December 31, 2008 compared the three months ended December 31, 2007, as did advertising expense by $23,000 or 41.1% for the same comparative period. The increase in both occupancy and equipment and advertising expense was primarily associated with the opening of the Bank's new Bernardsville location in late summer 2008. Service bureau fees decreased by $29,000 or 24.0% for the three month period ended December 31, 2008 compared to the three months ended December 31, 2007, due to a new contract placed in service in June 2008. Other non-interest expense increased by $103,000 or 31.5% for the three months ended December 31, 2008 compared to the three months ended December 31, 2007, primarily due to increases in FDIC insurance, stationary and supply, legal, and miscellaneous operating expense.
Our non-interest expense for the six months ended December 31, 2008, increased $508,000 or 14.9% to $3.9 million from $3.4 million for the six months ended December 31, 2007. Salaries and employee benefits expense increased $146,000 or 8.8% for the six months ended December 31, 2008, compared to the six months ended December 31 2007 due to the addition of personnel staff at our new Bernardsville location, normal salary increases and the adoption of a stock option plan in May 2008, partially offset by a reduction in 401(k) expense due to an amendment to the plan to reduce the Bank's contribution in December 2007. Directors' compensation rose by $41,000 or 32.3% for the six months ended December 31, 2008 to $168,000, compared to $127,000 for the three months ended December 31, 2007, primarily due to the implementation of a stock option plan in May 2008. Occupancy and equipment expense increased by $144,000 or 23.0%, as did advertising expense by $52,000 or 54.2% or the six month period ended December 31, 2008 compared the six months ended December 31, 2007. The increase in both occupancy and equipment and advertising expense was primarily associated with the opening of the Bank's new Bernardsville location in late summer 2008. Service bureau fees decreased by $67,000 or 25.8% for the six months ended December 31, 2008 compared to the six months ended December 31, 2007, due to a new contract placed in service in June 2008. Other expense increased by $192,000 or 29.6% to $840,000 for the six month period ended December 31, 2008, compared to
Income Taxes. Income tax expense for the three months ended December 31, 2008 was $81,000 or 37.9% of income before income taxes as compared to $127,000 or 35.2% of income before income taxes for the three months ended December 31, 2007.
For the six months ended December 31, 2008, income tax expense was $187 or 38.1% of income before taxes as compared to $185,000 or 33.9% of income before income taxes for the six months ended December 31, 2007.
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 derivatives or other types of hedging instruments to meet liquidity demands, as we take a conservative approach in managing liquidity.
At December 31, 2008, the Bank had outstanding commitments to originate loans of $1.6 million, construction loans in process of $6.0 million, unused lines of credit of $28.0 million (including $23.3 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 December 31, 2008, totaled $72.3 million.
As of December 31, 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 December 31, 2008, its total loans to deposits ratio was 112.7%. At December 31, 2008, the Bank's collateralized borrowing limit with the Federal Home Loan Bank was $95.1 million, of which $36.6 million was outstanding. As of December 31, 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 December 31, 2008, the Bank exceeded all applicable regulatory capital requirements.
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 . . .
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