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| MSBF > SEC Filings for MSBF > Form 10-Q on 13-Nov-2009 | All Recent SEC Filings |
13-Nov-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
• 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.
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 September 30, 2009 and June 30, 2009
General. Total assets reached $360.1 million at September 30, 2009, compared to $352.3 million at June 30, 2009. The increase was fueled by loan originations and purchase of securities, the funding for which was provided primarily by a $14.3 million or 5.3% increase in deposits, to $286.6 million at September 30, 2009, compared to $272.3 million at June 30, 2009.
Securities. Our portfolio of securities held to maturity was at $50.5 million at September 30, 2009 as compared to $44.7 million at June 30, 2009. Maturities, calls and principal repayments during the three months ended September 30, 2009 totaled $7.2 million. We purchased $13.0 million of new securities during the three months ended September 30, 2009.
Deposits. Total deposits at September 30, 2009 were $286.6 million, a $14.3 million increase as compared to $272.3 million at June 30, 2009. Certificate of deposit accounts increased by $7.9 million, savings and club accounts increased by $3.4 million, and demand accounts, in the aggregate, increased by $3.0 million.
Borrowings. Total borrowings at September 30, 2009 amounted to $30.0 million, compared to $36.2 million at June 30, 2009. The Bank did not make any long term borrowings during the three months ended September 30, 2009 and did not have short-term borrowings at September 30, 2009 and June 30, 2009.
Our investment in Federal Home Loan Bank of New York ("FHLB") stock was at $1.8 million at September 30, 2009 compared to $2.1 million at June 30, 2009. The decreased ownership of Federal Home Loan Bank stock resulted from the decrease in FHLB borrowings.
Equity. Stockholders' equity was $41.0 million at September 30, and June 30, 2009. Treasury stock increased by $362,000 due to repurchases. Other changes in equity were due to the declaration of $60,000 in cash dividends on our common stock, offset by $194,000 in net income, a $1,000 decrease in accumulated other comprehensive loss, $41,000 in stock based compensation and $39,000 in ESOP shares earned.
Comparison of Operating Results for the Three Months Ended September 30, 2009 and 2008
General. Our net income for the three months ended September 30, 2009 was $194,000, compared to net income of $171,000 for the three months ended September 30, 2008. The $23,000 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.
The increase in total interest income for the three months ended September 30, 2009, resulted from a 13.3% increase in the average balance of interest-earning assets, offset by a 52 basis point decrease in the average yield thereon. The increase of $20.3 million or 7.8% increase in average loan receivable balances tempered by a decrease in average yield from 5.77% to 5.31% for the three month period ended September 30, 2009, compared to the three month period ended September 30, 2008, was responsible for the decrease of $28,000 or 0.8% increase in loan receivable interest income. The increase of $16.5 million or 58.8% increase in average securities held to maturity balances resulted in an increase of $158,000 or 42.0% in income on securities held to maturity for the three months ended September 30, 2009 compared to the three months ended September 30, 2008, whereas other interest income decreased by $11,000 for the same period.
The $315,000 decrease in interest expense for the three months ended September 30, 2009 from the three months ended September 30, 2008, was attributable to an increase in deposit balances, tempered by lower interest rates on deposits during the period. The average cost of deposits decreased by 107 basis points to 2.14%, and the average balance of deposits increased by $59.5 million or 28.4% between periods, resulting in a $243,000 decrease in interest expense on deposits. Total interest expense on borrowings decreased by $72,000 from $384,000 for the three months ended September 30, 2008 to $312,000 for the three months ended September 30, 2009 as the result of a $11.1 million decrease in average borrowings.
Provision for Loan Losses. A loan loss provision of $345,000 was made during the three months ended September 30, 2009 compared to a provision of $65,000 during the three months ended September 30, 2008. The allowance for loan losses totaled $2.1 million, $1.8 million and $1.1 million respectively, at September 30, 2009, June 30, 2009, and September 30, 2008, or 0.8%, 0.6%, and 0.4%, respectively, of total loans. The ratio of non-performing loans to total loans was 4.2% at September 30, 2009, as compared to 3.4% at June 30, 2009, and 2.8% at September 30, 2008. During the three months ended September 30, 2009, there was $6,000 in charge-offs and no recoveries. During the three months ended September 30, 2008, there were no charge-offs or recoveries. The allowance for loan losses reflects our estimation of the losses inherent in our loan portfolio to the extent they are both probable and reasonable to estimate.
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 $1,000 to $167,000 for the three months ended September 30, 2009 from $166,000 for the three months ended September 30, 2008.
Non-Interest Expenses. Total non-interest expenses grew by $119,000 or 6.2% for the three months ended September 30, 2009 to $2.0 million compared to $1.9 million for the same period in 2008.
FDIC insurance premium expense totaled $115,000 for the three months ended September 30, 2009, a $65,000 or 130.0% increase over the $50,000 for the three months ended September 30, 2008, as a result of increases in assessment rates. Occupancy and equipment expense increased by $32,000 or 8.8% from $364,000 to $396,000, as did salaries and employee benefits expense by $25,000 or 2.8%, from $895,000 to $920,000 for the three months ended September 30, 2009 compared to the three months ended September 30, 2008. The increases in occupancy and equipment and salaries and employee benefits expenses reflect a full quarter of expenses in the current year related to the opening of the Bank's
Income Taxes. Income tax expense for the three months ended September 30, 2009 was $119,000 or 38.0% of income before income taxes as compared to $106,000 or 38.3% of income before income taxes for the three months ended September 30, 2008.
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 September 30, 2009, the Bank had outstanding commitments to originate loans of $3.0 million, construction loans in process of $4.1 million, unused lines of credit of $26.8 million (including $22.2 million for home equity lines of credit), and standby letters of credit of $164,000. Certificates of deposit scheduled to mature in one year or less at September 30, 2009, totaled $74.4 million.
As of September 30, 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 deposits and/or borrowings from the Federal Home Loan Bank to meet its day-to-day funding obligations when required. At September 30, 2009, its total loans to deposits ratio was 97.5%. At September 30, 2009, the Bank's collateralized borrowing limit with the Federal Home Loan Bank was $89.6 million, of which $30.0 million was outstanding. As of September 30, 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.
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, 2009, 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 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 September 30, 2009, our significant off-balance sheet commitments consisted of commitments to originate loans of $3.0 million, construction loans in process of $4.1 million, unused lines of credit of $26.8 million (including $22.2 million for home equity lines of credit), and standby letters of credit of $164,000.
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 was authorized to purchase up to $250 billion in senior perpetual preferred stock of QFIs that elect to participate in the CPP. The Treasury's investment in an individual QFI may not exceed the lesser of 3% of the QFI's risk-weighted assets or $25 billion and may not be less than 1% of risk-weighted assets. The Company did not participate in this program.
EESA also increased the maximum deposit insurance amount up to $250,000 until December 31, 2009 (subsequently extended to December 31, 2013) and removed 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.
In October 2008, the FDIC established the Temporary Liquidity Guarantee Program which consisted of two components: (i) an unlimited FDIC insurance coverage for certain transaction accounts (the "Transaction Account Guarantee") and (ii) a debt guarantee program for certain types of debt issued by financial institutions. The Company initially opted to participate in the Transaction Account Guarantee program only. In August 2009, the fees associated with participating in this program were increased and participating financial institutions were given the opportunity to opt out of continued participation. The Bank elected to opt out of this program at this point in time.
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