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| MSBF > SEC Filings for MSBF > Form 10-Q on 13-May-2009 | All Recent SEC Filings |
13-May-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;
• 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 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 March 31, 2009 and June 30, 2008
General. Total assets reached $349.9 million at March 31, 2009, compared to $308.1 million at June 30, 2008. The increase was fueled by increases in cash and cash equivalent balances and loan
Loans. Loans receivable, net, rose to $268.1 at March 31, 2009 from $254.3 million at June 30, 2008, an increase of $13.8 million, or 5.4%. As a percentage of assets, loans decreased from 82.5% to 76.6%. The Bank experienced strong demand for its home equity loans in its market area. The home equity portfolio grew by $7.2 million or 13.1% between June 30, 2008 and March 31, 2009. The one-to-four family loan portfolio grew by $5.3 million, a 3.6% increase, as did multifamily and commercial real estate loans and commercial loans, by $2.2 million or 7.2%, and $776,000 or 8.4%, respectively, while the construction loan portfolio decreased by $1.2 million or 6.9% between June 30, 2008 and March 31, 2009.
Securities. Our portfolio of securities held to maturity was at $32.9 million at March 31, 2009 as compared to $28.7 million at June 30, 2008. During the nine months ended March 31, 2009, the Bank purchased $7.3 million in securities, while maturities, calls and principal repayments totaled $3.2 million.
Premises and equipment, net. Total premises and equipment net at March 31, 2009 were $11.1 million, compared to $10.8 million at June 30, 2008, an increase of $359,000 or 3.3%. 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 March 31, 2009 were $269.4 million, compared to $225.4 million at June 30, 2008. Savings and club accounts, certificates of deposit and non-interest bearing demand accounts increased by $43.0 million, $1.1 million and $941,000, respectively, as did super NOW accounts by $293,000, while NOW and money market demand accounts decreased by $772,000, and $514,000, respectively. The increased savings account balance was the result of the Bank offering higher rates on its tiered savings account product.
Borrowings. Total borrowings at March 31, 2009 amounted to $36.4 million, compared to $37.1 million at June 30, 2008. The Bank did not commit to any additional long term borrowings during the nine months ended March 31, 2009. The Bank did not have any short-term borrowings as of March 31, 2009, and June 30, 2008.
Our investment in Federal Home Loan Bank of New York ("FHLB") stock was $2.1 million at both March 31, 2009 and June 30, 2008.
Equity. Stockholders' equity was $41.7 million at March 31, 2009 as compared to $43.4 million at June 30, 2008, reflecting a decrease of $1.7 million for the nine months ended March 31, 2009. The decrease in equity was primarily attributed to the repurchase of $2.1 million in treasury stock. Other changes in equity were due to the declaration of $192,000 in cash dividends on our common stock, and a $121,000 reduction as a result of the implementation of SFAS 158 and EITF 06-4 accounting pronouncements related to employee benefits, offset partially by $420,000 in net income, $126,000 in ESOP shares earned and $124,000 in stock-based compensation.
Comparison of Operating Results for the Three and Nine Months Ended March 31, 2009 and 2008
General. Our net income for the three months ended March 31, 2009 was $116,000, compared to net income of $170,000 for the three months ended March 31, 2008, a decrease of $54,000 or 31.8%. This decrease was the result of a decrease in non-interest income and increases in the provision for loan losses and non-interest expense; partially offset by an increase in net interest income and a decrease in income
Our net income for the nine months ended March 31, 2009 was $420,000, compared to net income of $530,000 for the nine months ended March 31, 2008, a decrease of $110,000 or 20.8%. This was the result of a decrease in non-interest income, as well as increases in non-interest expense and the provision for loan losses, offset partially by an increase in net interest income and a reduction in income taxes.
Net Interest Income. Net interest income increased by $282,000 or 14.7% to $2.2 million for the three month period ended March 31, 2009, compared to $1.9 million for the three months ended March 31, 2008. Interest income decreased by $36,000 or .9%, and interest expense decreased by $318,000 or 14.1%, for the same three month comparative periods.
The decrease of $36,000 or .9% in total interest income for the three months ended March 31, 2009, resulted from a decrease of 62 basis points in yield to 5.37%, partially offset by a 10.5% increase in average interest-earning assets. Average earning assets increased $29.3 million, to $308.3 million for the three months ended March 31, 2009, compared to $279.0 million for the three months ended March 31, 2008. Interest income on loans decreased slightly by $23,000 or .6% for the three months ended March 31, 2009, compared to the same period ended March 31, 2008 primarily due to a 57 basis point reduction in average yield to 5.56%, tempered by an increase of $23.2 million or 9.5% in average loan balances. Interest on securities held to maturity increased $68,000 or 20.8% for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, as a result of a 40 basis point increase in yield to 5.36% and a $3.1 million or 11.7% increase in the average balance. Other interest income reflected a reduction of $81,000 or 77.9% in interest income primarily due to a 425 basis point reduction to 0.81% in yield, partially offset by an increase of $3.1 million or 37.5% in average balance for the three months ended March 31, 2009, compared to the same three month period ended March 31, 2008. Balances held at the Federal Home Loan Bank during the three months ended March 31, 2009 were higher due to the increased deposit balances.
Total interest expense decreased $318,000 or 14.1% for the three months ended March 31, 2009, compared to the three months ended March 31, 2008. Average interest-bearing liabilities increased $35.7 million or 14.8%, from $241.3 million for the three months ended March 31, 2008, to $277.0 million for the three months ended March 31, 2009, the effect of which was more than offset by a 94 basis point decrease in the average rate from 3.74% to 2.80%, for the respective periods. Interest expense on deposits decreased $323,000 or 16.9% for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, as a result of a 107 basis point reduction to 2.65% in the average rate on interest-bearing deposits, tempered by an increase of $34.4 million or 16.7% in average interest-bearing deposits. The average balance of savings balances increased $50.7 million or 103.3%, whereas average certificates of deposit reflected a decrease of $14.6 million or 11.3%, as did NOW balances with a decrease of $1.7 million or 6.5% for the quarter ended March 31, 2009 compared to the same quarter ended March 31, 2008. The average rate on savings deposits, certificates of deposit and NOW accounts decreased by 28 basis points, 130 basis points, and 29 basis points, respectively, for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. Total interest expense on borrowings increased slightly by $5,000 or 1.5% for the three months ended March 31, 2009, compared to the three months ended March 31, 2008. Federal Home Loan Bank advance average balances increased $1.3 million or 3.6%, whereas the average rate decreased by 8 basis points, from 3.88% to 3.80% for the three months ended March 31, 2009 compared to the same three month period ended March 31, 2008.
Net interest income increased $863,000 or 15.4% to $6.5 million for the nine months ended March 31, 2009, from $5.6 million for the nine months ended March 31, 2008. Interest income was $12.5
Average earning assets increased by $26.4 million or 9.7% for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008, whereas the average rate on earning assets decreased by 54 basis points to 5.54% for the nine month period ended March 31, 2009, compared to the nine month period ended March 31, 2008. Interest income on loans decreased slightly by $9,000 or .1% for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008, while average yield declined 58 basis points to 5.68%. Average loan receivable balances increased $24.4 million or 10.2% to $264.1 million for the nine months ended March 31, 2009, compared to $239.7 million for the nine months ended March 31, 2008. Interest income on securities held to maturity increased $126,000 or 12.4% for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008. Average securities held to maturity balances increased $121,000 or .4% for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008, as the yield on the investment held to maturity portfolio increased by 57 basis points to 5.37% for the nine month period ended March 31, 2009, compared to the same nine month period ended March 31, 2008. Interest income on other interest-earning assets decreased by $117,000 or 55.7% for the nine month period ended March 31, 2009, compared to the same nine month period ended March 31, 2008 as a 319 basis point decrease in yield to 1.60% was partially offset by an average balance increase of $1.9 million or 32.6%.
The $863,000 or 12.6% decrease in interest expense for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008, was primarily due to an average rate decrease of 85 basis points to 3.03% on interest-bearing liabilities, offset by an increase of $28.3 million in average interest-bearing liabilities. Interest expense on deposits decreased by $971,000 for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008. The average rate on deposits decreased 89 basis points to 2.93% and average interest-bearing deposit balances increased $18.0 million or 8.8%, from $205.1 million for the nine months ended March 31, 2008, to $223.1 million for the nine months ended March 31, 2009. Savings average balances increased $36.5 million or 75.4%, while the average rate decreased by 2 basis points for the nine months ended March 31, 2009, compared to the same nine month period ended March 31, 2008. Certificates of deposit and NOW accounts average balances decreased by $17.8 million or 13.7% and $588,000 or 2.2%, respectively, while average rates decreased 111 basis points and 28 basis points, respectively for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008. Interest expense on borrowings increased by $139,000 or 13.9% for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008. Average Federal Home Loan Bank advance balances rose by $11.9 million or 38.5%, whereas the average rate decreased by 76 basis points to 3.53% for the nine month period ended March 31, 2009, compared to the nine month period ended March 31, 2008.
Provision for Loan Losses. For the three month period ended March 31, 2009, a $91,000 provision was made, whereas a $40,000 provision was made for the same period in 2008. There were no charge-offs or recoveries of previously charged-off loans during the three month period ended March 31, 2009. There were no charge-offs and a $4,000 recovery of previously charged-off loans during the three month period ended March 31, 2008. For the nine month period ended March 31, 2009, a $223,000 provision was made, whereas a $95,000 provision was made for the same period in 2008. There were no charge offs for the nine month periods ended March 31, 2009 and March 31, 2008, respectively, and a $6,000 recovery for the nine month period ended March 31, 2008. The increased provisions reflect both the increased size of the loan portfolio and an increase in non-performing loans. The allowance for loan losses totaled $1.2 and $1.0 million, respectively, at March 31, 2009 and June 30, 2008, representing 0.45% and 0.40%, respectively of total loans. The ratio of non-performing loans to total loans was 3.02%, at March 31, 2009, as compared to 2.00% at June 30, 2008. The allowance for loan losses reflects our
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 on trading securities.
Non-interest income decreased by $15,000 to $104,000 for the three months ended March 31, 2009, from $119,000 for the three months ended March 31, 2008. Total non-interest income decreased $65,000 from $443,000 for the nine months ended March 31, 2008 to $378,000 for the nine months ended March 31, 2009. The decrease for the three month period ended March 31, 2009 compared to the same period ended March 31, 2008, was primarily due to a $13,000 decrease in fees and service charges. The decrease for the nine month period ended March 31, 2009 compared to same period ended March 31, 2008, was primarily due to an increased unrealized loss of $66,000 to the Bank's trading security portfolio for the nine months ended March 31, 2009, as compared to a $5,000 loss in the prior year period.
Non-Interest Expenses. Total non-interest expenses grew by $290,000 or 16.7% for the three months ended March 31, 2009, compared to the three months ended March 31, 2008 and by $798,000 or 15.5% for the nine month period ended March 31, 2009 compared to the same period ended March 31, 2008.
Salaries and employee benefits expense increased $81,000 or 9.7% for the three months ended March 31, 2009, compared to the three months ended March 31, 2008. The increase in expense reflects those expenses related to the Company's stock option plan instituted in May 2008, normal salary increases and addition of personnel at the Bernardsville branch, which opened in August 2008. Directors' compensation increased $21,000 or 32.8% for the three month period ended March 31, 2009 compared to the three month period ended March 31, 2008 primarily due to the addition of the stock option plan in May 2008. Occupancy and equipment and advertising expense increased by $88,000 or 26.0%, and $11,000 or 25.6% respectively; while other expense increased $133,000 or 41.4% for the three month period ended March 31, 2009 compared to the same period ended March 31, 2008. The increase in occupancy and equipment and advertising expense primarily relates to the opening of the Bank's new Bernardsville branch, whereas the increase in other expense is primarily related to the increase in FDIC insurance premium, audit expense, and the new on-going expenses associated with the Bank's new Bernardsville branch. Service bureau fees reflected a $44,000 or 32.1% reduction primarily due to a new contract that went into effect in June 2008.
Salaries and employee benefits increased by $227,000 or 9.1% for the nine month period ended March 31, 2009 compared to the same period ended March 31, 2008. The increase in expense for the period reflects normal salary increases, the implementation of a stock option plan, in May 2008, offset by a reduction of $122,000 in the Bank's 401-k pension plan expense for the nine month period ended March 31, 2008, as a result of the plan being amended. The $62,000 increase in director's compensation was primarily due to the addition of a stock option plan in May 2008. The increase in occupancy and equipment and advertising expense of $232,000 or 24.0%, and $63,000 or 45.3%, respectively, for the nine month period ended March 31, 2009 compared to the same period ended March 31, 2008, reflects increases in expenses associated with the August 2008 opening of the Bank's Bernardsville branch. Other expense increased $325,000 or 33.5% for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008. The increase in other expense is primarily related to an increase in FDIC insurance premium, audit expense and expenses related to the operations of the Bank's new Bernardsville branch location. These increases were partially offset by a decrease of $111,000 in service bureau fees.
For the nine months ended March 31, 2009, income tax expense was $258,000 or 38.1% of income before taxes as compared to $276,000 or 34.2% of income before income taxes for the nine months ended March 31, 2008.
For both the three and nine month periods, the increase in effective tax rate was due to increased losses in the trading security portfolio, which are considered capital losses. The tax benefit on capital losses is not considered more-likely-than-not to be realized and, accordingly, has been fully reserved for.
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 March 31, 2009, the Bank had outstanding commitments to originate loans of $5.7 million, construction loans in process of $5.5 million, unused lines of credit of $27.3 million (including $23.2 million for home equity lines of credit), and standby letters of credit of $124,000. Certificates of deposit scheduled to mature in one year or less at March 31, 2009, totaled $74.4 million.
As of March 31, 2009, 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 when required. At March 31, 2009, its total loans to deposits ratio was 102.1%. At March 31, 2009, the Bank's collateralized borrowing limit with the Federal Home Loan Bank was $91.7 million, of which $36.4 million was outstanding. As of March 31, 2009, 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.
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 may 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 March 31, 2009, our significant off-balance sheet commitments consisted of commitments to originate loans of $5.7 million, construction loans in process of $5.5 million, unused lines of credit of $27.3 million (including $23.2 million for home equity lines of credit), and standby letters of credit of $124,000.
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 . . .
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