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MSBF > SEC Filings for MSBF > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for MSB FINANCIAL CORP.


14-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward - looking statements include:

Statements of our goals, intentions and expectations;

Statements regarding our business plans, prospects, growth and operating strategies;

Statements regarding the quality of our loan and investment portfolios; and

Estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

General economic conditions, either nationally or in our market area, that are worse than expected;

The volatility of the financial and securities markets, including changes with respect to the market value of our financial assets;

Changes in government regulation affecting financial institutions and the potential expenses associated therewith;

Changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

Our ability to enter into new markets and/or expand product offerings successfully and take advantage of growth opportunities;

Increased competitive pressures among financial services companies;

Changes in consumer spending, borrowing and savings habits;

Legislative or regulatory changes that adversely affect our business;

Adverse changes in the securities markets;

Our ability to successfully manage our growth; and

Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board.

No forward-looking statement can be guaranteed and we specifically disclaim any obligation to update any forward-looking statement.

Impact of Hurricane Sandy

Our primary market area in New Jersey was significantly impacted by Hurricane Sandy, which struck the region on October 29, 2012. Although we experienced short-term service disruptions, the storm has not had a significant effect on our ability to continue to service our customers. None of our branches sustained any significant damage as a result of the storm, although many were temporarily affected by power outages and telecommunication problems. Full power has since been restored to all of our offices. All offices remained open despite the outages.


Substantially all of our loans are secured by real estate located in our market area although we do have some loans secured by property located on the New Jersey shore. The property damage in our primary market area ranges from minor to moderate. Based on our initial assessments of where our borrowers are located within the market area, we believe that many of our borrowers will likely have experienced power outages and wind damage, and to a lesser extent, flood damage. However, we believe most of our borrowers will not have suffered catastrophic damage to their businesses or the collateral securing their loans. For our collateral dependent loans, our policy is to require property insurance on all loans (which normally covers wind damage), as well as flood insurance if the property is located within a flood zone, which should reduce our exposure to potential loss. Properties not located within flood zones are not required to have flood insurance, and thus it is likely that insurance coverage will not be available for any flood-related damage to those properties.

We do have some loans secured by properties located on the New Jersey Shore. While we are still in the process of confirming with these borrowers, we believe at this time that only a few of these properties experienced damage.

We are in the process of performing a detailed evaluation of the effects Hurricane Sandy may have had on our borrowers and our collateral, but we do not yet have sufficient information to reasonably estimate the potential financial impact of the storm on us. However, it is likely that our results of operations will be negatively impacted, and it is possible that the impact could be material. For example, it is likely that we will experience increased delinquencies and loan restructurings, particularly in the short-term as customers undertake recovery and clean-up efforts, including the submission of insurance claims. Customers may also experience disruptions in their employment status or income if their employers were affected by the storm. These increases in delinquencies and restructurings would negatively impact our cash flow and, if not timely cured, would increase our non-performing assets and reduce our net interest income. In addition, in an effort to assist our customers during this crisis, we waived certain deposit and loan fees that would have otherwise been assessed. We may also experience increased provisions for loan losses as total loan delinquencies and loan restructurings increase, and to the extent that the combination of insurance proceeds and collateral values are insufficient to cover loan balances on loans that may default. Any increased provisions for loan losses could have a material adverse effect on our results of operations.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial position and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.

The allowance for loan losses represents our best estimate of losses known and inherent in our loan portfolio that are both probable and reasonable to estimate. In determining the amount of the allowance for loan losses, we consider the losses inherent in our loan portfolio and changes in the nature and volume of our loan activities, along with general economic and real estate market conditions. We utilize a two tier approach: (1) identification of impaired loans for which specific reserves may be established; and (2) establishment of general valuation allowances on the remainder of the loan portfolio. We maintain a loan review system which provides for a systematic review of the loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loan, type of collateral and the financial condition of the borrower. Specific loan loss allowances are established for identified loans based on a review of such information and/or


appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Savings Bank's allowance for loan losses. Such agencies may require the Savings Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations.

Although specific and general loan loss allowances are established in accordance with management's best 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, 2012 and June 30, 2012

General. Total assets were $346.2 million at September 30, 2012, compared to $347.3 million at June 30, 2012, a decrease of $1.1 million or 0.3%. The Company experienced a $15.1 million or 44.6% decrease in cash and cash equivalent balances and a $1.7 million or 0.7% decrease in loan balances, net, while securities held to maturity increased by $14.8 million or 29.3%. Deposits decreased by $766,000 or 0.3%, while advances from the Federal Home Loan Bank of New York remained the same at September 30, 2012 and June 30, 2012. The increase in securities held to maturity was primarily funded by the reduction in cash and cash equivalents and loans receivable, net balances. Management decided to reduce its cash and cash equivalent balances in order to invest in higher yielding securities held to maturity, while also using the reduction in loan receivable, net balances to help fund these security purchases. The reduction in the loans receivable, net balance was primarily due to the continued decrease in new loan originations.

Total assets decreased by $1.1 million or 0.3% between periods, while total liabilities decreased by $931,000 or 0.3%, and the ratio of average interest-earning assets to average-interest bearing liabilities decreased to 107.8% for the three months ended September 30, 2012 as compared to 108.8% for year ended June 30, 2012. Stockholders' equity decreased by $194,000 or 0.6% to $40.7 million at September 30, 2012 compared to $40.9 million at June 30, 2012.

Loans. Loans receivable, net, declined $1.7 million or 0.7% from $240.5 million at June 30, 2012 to $238.8 million at September 30, 2012. As a percentage of assets, loans decreased to 69.0% from 69.2%. The Savings Bank's commercial real estate loans grew by $812,000 or 2.5%, as did commercial and industrial loans by $465,000 or 4.6%, construction loans by $70,000or 0.6%, deposit account loans by $31,000 or 4.3% and overdraft and personal loans by $10,000 and $5,000, or 6.2% and 21.7%, respectively, between June 30, 2012 and September 30, 2012. One-to-four family loans decreased $1.5 million or 1.1%, as did home equity loans by $1.8 million or 3.6% and automobile loans by $13,000 or 6.70% between June 30, 2012 and September 30, 2012.


Securities. Our portfolio of securities held to maturity totaled $65.6 million at September 30, 2012 as compared to $50.7 million at June 30, 2012. Maturities, calls and principal repayments during the three months ended September 30, 2012 totaled $15.3 million. We purchased $30.1 million of new securities during the three months ended September 30, 2012.

Deposits. Total deposits at September 30, 2012 were $283.0 million, a $766,000 decrease as compared to $283.8 million at June 30, 2012. Demand accounts increased by $1.5 million, as did savings and club accounts by $541,000, while certificate of deposit accounts decreased by $2.8 million.

Borrowings. Total borrowings at September 30, 2012 and June 30, 2012 amounted to $20.0 million. The Savings Bank did not make any long term borrowings during the three months ended September 30, 2012 and did not have short-term borrowings at September 30, 2012 and June 30, 2012.

Equity. Stockholders' equity was $40.7 million at September 30, 2012 compared to $40.9 at June 30, 2011, a decrease of $194,000 or 0.6%. The decrease in shareholders' equity was due to the repurchase of $217,000 in treasury stock and a net loss of $92,000, offset by an increase of $69,000 in paid in capital primarily related to the compensation expense attributable to the Company's stock-based compensation plan, a $42,000 decrease in unallocated common stock held by ESOP and $4,000 of other comprehensive income.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General. The Company had a net loss of $92,000 for the three months ended September 30, 2012. This compares to net income of $111,000 for the quarter ended September 30, 2011. The decrease was attributable to a decrease in net interest income and an increase in the provision for loan losses, which was offset by an increase in non-interest income and decreases in non-interest expense and income taxes.

Net Interest Income. Net interest income was $2.4 million for the quarter ended September 30, 2012 compared to $2.7 million for the quarter ended September 30, 2011, The $283,000 decrease in net interest income was the result of a $469,000 decrease in total interest income offset by a $186,000 reduction in interest expense.

The decrease in total interest income for the three months ended September 30, 2012, resulted from a 3.2% decrease in the average balance of interest-earning assets and a 46 basis point decrease in the average yield thereon. The decrease of $9.8 million or 3.9% in average loan receivable balances and a decrease in average yield from 4.91% to 4.53% for the three month period ended September 30, 2012, compared to the three month period ended September 30, 2011, was responsible for the decrease of $353,000 or 11.4% in loans receivable interest income. The increase of $929,000 or 1.6% in average securities held to maturity balances offset by a 89 basis point reduction in average yield from 3.43% to 2.54% resulted in a net decrease of $120,000 or 24.7% in interest income on securities held to maturity for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, whereas other interest income increased by $4,000 for the same period.

The $186,000 decrease in interest expense for the three months ended September 30, 2012 from the three months ended September 30, 2011, was attributable to lower interest-bearing deposit balances and interest rates during the period. The average balance of deposits decreased by $6.9 million or 2.6%, and the average cost of deposits decreased by 25 basis points to 0.84% between the periods. Total interest expense on borrowings was $172,000 for both the three months ended September 30, 2012 compared to $173,000 for the three months ended September 30, 2011.


Provision for Loan Losses. A loan loss provision of $746,000 was made during the three months ended September 30, 2012 compared to a provision of $613,000 during the three months ended September 30, 2011. The allowance for loan losses totaled $2.9 million, $3.1 million and $2.8 million respectively, at September 30, 2012, June 30, 2012, and September 30, 2011, or 1.2%, 1.2%, and 1.1%, respectively, of total loans. The ratio of non-performing loans to total loans was 6.6% at September 30, 2012, as compared to 6.8% at June 30, 2012, and 6.8% at September 30, 2011. During the three months ended September 30, 2012, there were $964,000 in charge-offs and $7,000 in recoveries. During the three months ended September 30, 2011, there were $32,000 in charge-offs and no recoveries. The allowance for loan losses to total loans ratio was 1.17% at September 30, 2012 compared to 1.09% at September 30, 2011, while the allowance for loan losses to non-performing loans ratio increased from 16.0% at September 30, 2011 to 17.6% at September 30, 2012 primarily the result of lower loan balances and a higher loan loss reserve balance as of September 30, 2012 compared to the period ended September 30, 2011. Non-performing loans to total loans and net charge-offs to average loans outstanding ratios were at 6.61% and 0.39%, respectively, at September 30, 2012 compared to 6.82% and 0.01% at September 30, 2011. The Savings Bank's management reviews the level of the allowance for loan losses on a quarterly basis and establishes the provision for loan losses based on various qualitative and quantitative factors. The increase in the provision during the current period was primarily due to an increase in the historical charge-off experience.

The Savings Bank's management is taking a more aggressive approach in dealing with its non- performing loan portfolio by considering such options as "cash for keys", short sales, deed in lieu of foreclosure and loan sales as possible remedies in reducing its exposure in this area.

Non-Interest Income. Non-interest income was $159,000 for the quarter ended September 30, 2012 compared to $144,000 for the quarter ended September 30, 2011. The increase for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011 resulted from an increase of $16,000 in unrealized gains on trading securities and a $2,000 increase in bank owned life insurance income, offset by a $3,000 decrease in other non-interest income.

Non-Interest Expenses. Non-interest expense was $2.0 million for the quarter ended September 30, 2012 compared to $2.1 million for the quarter ended September 30, 2011. The decrease for the quarter ending September 30, 2012 as compared to the quarter ended September 30, 2011 resulted primarily from decreases in occupancy and equipment expense, salaries and employee benefits and professional services, offset by increases in other non-interest expense, service bureau fees and directors' compensation expense. Between the September 2012 and September 2011 quarters there were decreases of $54,000 in occupancy and equipment expense, $50,000 in salaries and employee benefits, $23,000 in professional services and $8,000 in advertising expense, while other non-interest expense increased by $35,000, as did service bureau fees by $31,000, directors' compensation by $12,000 and FDIC assessment by $1,000. The increase in directors' compensation was primarily the result of the former President/CEO, now receiving directors' compensation.

Income Taxes. The income tax benefit for the three months ended September 30, 2012 was $84,000 or 47.7% of the reported loss before income taxes compared to tax expense of $58,000 or 34.3% of income before income taxes for the three months ended September 30, 2011.

Liquidity, Commitments and Capital Resources

The Savings 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 Michael Shriner, 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 Savings 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, 2012, the Savings Bank had outstanding commitments to originate loans of $3.5 million, construction loans in process of $2.5 million, unused lines of credit of $22.4 million (including $18.9 million for home equity lines of credit), and standby letters of credit of $327,000. Certificates of deposit scheduled to mature in one year or less at September 30, 2012, totaled $67.1 million.

As of September 30, 2012, the Savings 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 Savings 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, 2012, the total loans to deposits ratio was 84.4%. At September 30, 2012, the Savings Bank's collateralized borrowing limit with the Federal Home Loan Bank was $75.5 million, of which $20.0 million was outstanding. As of September 30, 2012, the Savings 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 Savings Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of September 30, 2012, the Savings Bank exceeded all applicable regulatory capital requirements.

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