SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-QSB
(Mark One)
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 001-33246
MSB FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
UNITED STATES 34-1981437
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1902 Long Hill Road, Millington, New Jersey 07946-0417
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (908) 647-4000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date, February 11, 2008:
$0.10 par value common stock - 5,620,625 shares outstanding
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
MSB FINANCIAL CORP AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
December 31, June 30,
2007 2007
------------- ---------
(Dollars in thousands,
except per share amount)
Assets
Cash and due from banks $ 1,965 $ 1,460
Interest-bearing demand deposits with banks 2,296 2,809
--------- ---------
Total Cash and Cash Equivalents 4,261 4,269
Trading securities 135 114
Securities held to maturity (fair value $29,201 and
$28,684, respectively) 29,110 29,336
Loans receivable, net of allowance for loan losses
of $983 and $926, respectively 241,250 233,498
Premises and equipment 9,300 8,907
Federal Home Loan Bank of New York stock, at cost 1,989 1,669
Bank owned life insurance 4,007 3,929
Accrued interest receivable 1,474 1,513
Deferred income taxes 1,055 954
Other assets 319 389
--------- ---------
Total Assets $ 292,900 $ 284,578
========= =========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing $ 8,477 $ 8,217
Interest bearing 203,377 202,901
--------- ---------
Total Deposits 211,854 211,118
Advances from Federal Home Loan Bank of NY 34,982 27,889
Advance payments by borrowers for taxes and insurance 463 505
Accrued interest payable and other liabilities 1,884 1,720
--------- ---------
Total liabilities 249,183 241,232
--------- ---------
Commitments and Contingencies - -
Stockholders' Equity
Common Stock, par value $.10; 10,000,000 shares authorized:
5,620,625 issued and outstanding 562 562
Paid-in capital 24,154 24,153
Unearned ESOP shares (1,855) (1,939)
Accumulated other comprehensive loss (51) (53)
Retained Earnings 20,907 20,623
--------- ---------
Total Stockholders' Equity 43,717 43,346
--------- ---------
Total Liabilities and Stockholders' Equity $ 292,900 $ 284,578
========= =========
See notes to consolidated financial statements.
2
MSB FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Six Months Ended Three Months Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
---------- ---------- ---------- ----------
(In Thousands, except share and
per share amounts)
Interest Income:
Loans receivable, including fees $ 7,505 $ 7,119 $ 3,802 $ 3,594
Securities held to maturity 691 587 345 293
Other 106 209 52 154
---------- ---------- ---------- ----------
Total Interest Income 8,302 7,915 4,199 4,041
---------- ---------- ---------- ----------
Interest Expense
Deposits 3,953 3,120 1,974 1,671
Borrowings 655 1,385 354 639
---------- ---------- ---------- ----------
Total Interest Expense 4,608 4,505 2,328 2,310
---------- ---------- ---------- ----------
Net Interest Income 3,694 3,410 1,871 1,731
Provision for Loan Losses 55 0 40 0
---------- ---------- ---------- ----------
Net Interest Income after Provision for Loan Losses 3,639 3,410 1,831 1,731
---------- ---------- ---------- ----------
Non-Interest Income
Fees and service charges 176 168 91 82
Income from bank owned life insurance 78 70 39 36
Unrealized gain (loss) on trading securities 21 6 11 8
Income from investment in real estate 0 32 0 17
Other 49 40 24 20
---------- ---------- ---------- ----------
Total Non-Interest Income 324 316 165 163
---------- ---------- ---------- ----------
Non-Interest Expenses
Salaries and employee benefits 1,660 1,546 759 769
Directors Compensation 127 144 64 73
Occupancy and equipment 627 599 308 299
Service bureau fees 260 276 121 135
Advertising 96 158 56 66
Other 648 513 327 283
---------- ---------- ---------- ----------
Total Non-Interest Expenses 3,418 3,236 1,635 1,625
---------- ---------- ---------- ----------
Income before Income Taxes 545 490 361 269
Income Taxes 185 175 127 97
---------- ---------- ---------- ----------
Net Income 360 315 234 172
Amortization component of net periodic pension cost, net of tax of $1 2 - 1 -
---------- ---------- ---------- ----------
Total Comprehensive Income $ 362 $ 315 $ 235 $ 172
========== ========== ========== ==========
Weighted average number of shares of common stock outstanding, basic and
diluted 5,430,219 3,091,344 5,432,335 3,091,344
========== ========== ========== ==========
Earnings per share - basic and diluted $ 0.07 $ 0.10 $ 0.04 $ 0.06
========== ========== ========== ==========
Dividends Declared per share $ 0.03 $ - $ 0.03 $ -
========== ========== ========== ==========
See notes to consolidated financial statements.
3
MSB FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended December 31,
-----------------------------
2007 2006
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(In Thousands)
Cash Flows from operating activities:
Net Income $ 360 $ 315
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization of loan fees and loan costs (109) (55)
Depreciation and amortization expense 274 263
Amortization component of net periodic pension cost, net of tax 2 -
ESOP Compensation 85 -
Provision for Loan Losses 55 -
Earnings on bank owned life insurance (78) (70)
Unrealized (gain) on trading securities (21) (6)
Decrease (increase) in accrued interest receivable 39 (64)
Deferred Income taxes (101) (25)
Decrease (Increase) in other assets 70 (326)
Increase in other liabilities 28 134
Increase in accrued interest payable 60 49
-------- --------
Net Cash Provided by Operating Activities 664 215
-------- --------
Cash Flows from Investing Activities:
Activity in held to maturity securities:
Proceeds from maturities, calls and principal repayments 226 216
Net increase in Loans receivable (7,698) (9,276)
Purchase of bank premises and equipment (667) (333)
Purchase Federal Home Loan Bank of New York stock (2,359) (1,505)
Redemptions of Federal Home Loan Bank of New York stock 2,039 3,390
-------- --------
Net Cash Used in Investing Activities (8,459) (7,508)
-------- --------
Cash Flows from Financing Activities:
Net Increase in deposits 736 91,859
(Decrease) in short-term borrowings (8,500) (41,500)
Long-term debt issuance 16,000 -
Repayments of long-term debt (407) (392)
(Decrease) in advance payments by borrowers for taxes and insurance (42) (47)
-------- --------
Net Cash Provided by Financing Activities 7,787 49,920
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (8) 42,627
Cash and Cash Equivalents - Beginning 4,269 5,881
-------- --------
Cash and Cash Equivalents - Ending $ 4,261 $ 48,508
======== ========
Supplementary Cash Flows Information
Interest paid $ 4,548 $ 4,457
======== ========
Income taxes paid $ 376 $ 258
======== ========
Supplemental Disclosure of Non-Cash Transactions
Dividends Declared, not yet paid $ 76 $ -
======== ========
See notes to consolidated financial statements.
4
MSB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Organization and Business
MSB Financial Corp. (the "Company") is a federally-chartered
corporation organized in 2004 for the purpose of acquiring all of the capital
stock that Millington Savings Bank (the "Bank") issued in its mutual holding
company reorganization. The Company's principal executive offices are located at
1902 Long Hill Road, Millington, New Jersey 07946-0417 and its telephone number
at that address is (908) 647-4000.
MSB Financial, MHC (the "MHC") is a federally-chartered mutual holding
company that was formed in 2004 in connection with the mutual holding company
reorganization. MSB Financial, MHC has not engaged in any significant business
since its formation. So long as MSB Financial, MHC is in existence, it will at
all times own a majority of the outstanding stock of the Company.
The Bank is a New Jersey-chartered stock savings bank and its deposits
are insured by the Federal Deposit Insurance Corporation. The Bank is regulated
by the New Jersey Department of Banking and Insurance and the Federal Deposit
Insurance Corporation. The Office of Thrift Supervision regulates MSB Financial,
MHC and the Company as savings and loan holding companies.
A Registration Statement on Form S-1 (File No. 333-137294), as amended,
was filed by the Company with the Securities and Exchange Commission pursuant to
the Securities Act of 1933, as amended, relating to the offer for sale of up to
2,199,375 shares (subject to increase to 2,529,281 shares) of its common stock
at $10.00 per share. The offering closed on January 4, 2007 and 2,529,281 shares
were sold for gross proceeds of $25,292,810, including 202,342 shares sold to
the Bank's newly established Employee Stock Ownership Plan ("ESOP"). Net
proceeds of the offering totaled approximately $24.5 million. Concurrent with
closing of the offering, the MHC received 3,091,344 shares of company stock in
exchange for the 10,000 shares previously owned. The MHC is the majority
stockholder of the Company owning 55% of the outstanding common stock.
Note 2 - Basis of Consolidated Financial Statement Presentation
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiary, Millington Savings Service Corp. All significant inter-company
accounts and transactions have been eliminated in consolidation. These
statements were prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles in the United States of
America ("GAAP").
In the opinion of management, all adjustments, consisting of only
normal recurring adjustments or accruals, which are necessary for a fair
presentation of the consolidated financial statements have been made at and for
the three and six month periods ended December 31, 2007 and 2006. The results of
operations for the three and six month periods ended December 31, 2007
5
and 2006 are not necessarily indicative of the results which may be expected for
an entire fiscal year or other interim periods.
The data in the consolidated statements of financial position for June
30, 2007 was derived from the Company's audited consolidated financial
statements for that date. That data, along with the interim financial
information presented in the consolidated statements of financial position,
income and comprehensive income, and cash flows should be read in conjunction
with the 2007 audited consolidated financial statements for the year ended June
30, 2007, including the notes thereto included in the Company's Annual Report on
Form 10-KSB.
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
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 date 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 management's best estimate of losses known
and inherent in the portfolio that are both probable and reasonable to estimate.
While management uses the most current information available to estimate losses
on loans, actual losses are dependent on future events and, as such, increases
in the allowance for loan losses may be necessary.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examinations.
Note 3 - Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding, exclusive of the Employee
Stock Ownership Plan ("ESOP") shares not yet committed to be released. The
10,000 shares issued to MSB Financial, MHC in connection with the formation of
the mutual holding company structure in 2004 were "replaced" with 3,091,344
shares, or 55% of the shares issued in the Company's initial public offering,
upon completion of the offering on January 4, 2007. This transaction is
analogous to a stock split or significant stock dividend, therefore, earnings
per share has been retroactively restated for all prior periods presented.
Diluted earnings per share has not differed from basic earnings per share as
there have not been any contracts or securities exercisable or which could be
converted into common stock.
Note 4 - Stock Based Compensation
The Company had no stock-based compensation as of, or prior to,
December 31, 2007.
6
Note 5 - Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements", which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
SFAS No. 157 applies to other accounting pronouncements that require or permit
fair value measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. The Company does not expect the adoption of
SFAS No. 157 to have a material impact on its financial condition, results of
operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and for interim periods within those fiscal years. The
Company does not expect the adoption of SFAS No. 159 to have a material impact
on its financial condition, results of operations or cash flows.
In September 2006, the FASB's Emerging Issues Task Force ("EITF")
issued EITF Issue No. 06-4, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements" ("EITF 06-4"). EITF 06-4 requires the recognition of a liability
related to the postretirement benefits covered by an endorsement split-dollar
life insurance arrangement. The consensus highlights that the employer (who is
also the policyholder) has a liability for the benefit it is providing to its
employee. As such, if the policyholder has agreed to maintain the insurance
policy in force for the employee's benefit during his or her retirement, then
the liability recognized during the employee's active service period should be
based on the future cost of insurance to be incurred during the employee's
retirement. Alternatively, if the policy holder has agreed to provide the
employee with a death benefit, then the liability for the future death benefit
should be recognized by following the guidance in SFAS No. 106 or Accounting
Principals Board (APB) Opinion No. 12, as appropriate. For transition, an entity
can choose to apply the guidance using either of the following approaches: (a) a
change in accounting principle through retrospective application to all periods
presented or (b) a change in accounting principle through a cumulative-effect
adjustment to the balance in retained earnings at the beginning of the year of
adoption. The adoption is required in fiscal years beginning after December 15,
2007, with early adoption permitted. The Company is currently assessing the
impact of EITF 06-4 on its consolidated financial position and results of
operations.
In March 2007, the EITF ratified EITF Issue No. 06-10 "Accounting for
Collateral Assignment Split-Dollar Life Insurance Agreements" (EITF 06-10). EITF
06-10 provides guidance for determining a liability for the postretirement
benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment agreement. EITF
06-10 is effective for fiscal years beginning after December 15, 2007. The
Company is currently assessing the impact of EITF 06-10 on its consolidated
financial position and results of operations.
7
In December 2007, the FASB issued proposed FASB Staff Position (FSP)
157-b, "Effective Date of FASB Statement No. 157," that would permit a one-year
deferral in applying the measurement provisions of SFAS No. 157 to non-financial
assets and non-financial liabilities (non-financial items) that are not
recognized or disclosed at fair value in an entity's financial statements on a
recurring basis (at least annually). Therefore, if the change in fair value of a
non-financial item is not required to be recognized or disclosed in the
financial statements on an annual basis or more frequently, the effective date
of application of FASB No.157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply, however, to an entity that applies SFAS No.157 in
interim or annual financial statements before proposed FSP 157-b is finalized.
The Company does not expect the adoption of FSP 157-b will have a material
impact on the Company's operating income or net earnings.
Note 6 - Retirement Plans
Periodic expenses for the Company's retirement plans, which include
the Directors' Retirement Plan and the Executive Incentive Retirement Plan,
were as follows:
Six Months Ended Three Months Ended
December 31, December 31,
--------------- ---------------
2007 2006 2007 2006
---- ---- ---- ----
(In Thousands) (In Thousands)
Service Cost $ 56 $ 51 $ 28 $ 26
Interest Cost 30 26 15 13
Amortization of Unrecognized (Gain) (2) 0 (1) 0
Amortization of Past Service Liability 6 7 3 3
---- ---- ---- ----
$ 90 $ 84 $ 45 $ 42
==== ==== ==== ====
Note 7 - Subsequent Events
On January 29, 2008, the Board of Directors authorized a stock
repurchase program pursuant to which the Company intends to repurchase up to 5%
of its outstanding shares (excluding shares held by MSB Financial, MHC, the
Company's mutual holding company), representing up to 126,464 shares. The timing
of the repurchases will depend on certain factors, including but not limited to,
market conditions and prices, the Company's liquidity requirements and
alternative uses of capital. Any repurchased shares will be held as treasury
stock and will be available for general corporate purposes.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-QSB 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:
o Statements of our goals, intentions and expectations;
o Statements regarding our business plans, prospects, growth and
operating strategies;
o Statements regarding the quality of our loan and investment
portfolios; and
o 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:
o General economic conditions, either nationally or in our market area,
that are worse than expected;
o Changes in the interest rate environment that reduce our interest
margins or reduce the fair value of financial instruments;
o Our ability to enter into new markets and/or expand product offerings
successfully and take advantage of growth opportunities;
o Increased competitive pressures among financial services companies;
o Changes in consumer spending, borrowing and savings habits;
o Legislative or regulatory changes that adversely affect our business;
o Adverse changes in the securities markets;
o Our ability to successfully manage our growth; and
o 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
9
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, 2007 and June 30, 2007
General. Total assets increased to $292.9 million at December 31, 2007,
compared to $284.6 million at June 30, 2007 due primarily to a $7.8 million
increase in loans receivable. Cash and cash equivalents were $4.3 million at
December 31, 2007 and at June 30, 2007. FHLB advances increased to $35.0 million
at December 31, 2007 compared to $27.9 million at fiscal year end primarily as a
result of increased loan demand.
Loans. Loans receivable, net, rose to $241.3 million at December 31,
2007 from $233.5 million at June 30, 2007, an increase of $7.8 million. The one
to four family loan portfolio grew by $10.4 million or 8.4% between June 30,
2007 and December 31, 2007. The commercial real estate loan portfolio grew by
$2.3 million or 7.9%, whereas the construction loan portfolio decreased by $2.5
million or 16.0%, as did the deposit account loan portfolio by $572,000 or
50.2%, the home equity loan portfolio by $485,000 or 0.9%, and the commercial
loan portfolio by $1.4 million or 16.3%.
Securities. Our portfolio of securities held to maturity decreased
slightly to $29.1 million at December 31, 2007 as compared to $29.3 million at
June 30, 2007 due to principal repayments. There were no purchases during the
six month period ended December 31, 2007. FHLB of New York stock increased by
$320,000 from $1.7 million at June 30, 2007 to $2.0 million at December 31,
2007, due to an increase in borrowing with the Federal Home Loan Bank of New
York.
Deposits. Total deposits at December 31, 2007 were $211.9 million,
compared to $211.1 million at June 30, 2007, an increase of $736,000.
Certificates of deposit, savings deposits, and non-interest bearing checking
deposits increased by $1.8 million, $402,000, and $260,000, respectively,
whereas interest bearing checking balances decreased by $1.7 million.
10
Borrowings. Total borrowings at December 31, 2007 amounted to $35.0
million, compared to $27.9 million at June 30, 2007. The increase in borrowings
primarily resulted from the need to fund an increase in loan demand in the
absence of deposit growth.
Equity. Stockholders' equity was $43.7 million at December 31, 2007 as
compared to $43.3 million at June 30, 2007, reflecting net income of $360,000,
$84,000 in earned ESOP shares, and $76,000 in dividends declared during the
six-months ended December 31, 2007.
Comparison of Operating Results for the Three and Six Months Ended December 31,
2007 and 2006
General. Our net income for the three months ended December 31, 2007
was $234,000, compared to net income of $172,000, for the three months ended
December 31, 2006, an increase of $62,000 or 36.0%. This was primarily the
result of an increase in net interest income, partially offset by increases in
the provision for loan losses and income taxes. Net interest income for the
three months ended December 31, 2007 increased $140,000 to $1.9 million from
$1.7 million for the comparable prior year quarter. The provision for loan
losses reflected an increase of $40,000 for the three month period ended
December 31, 2007, compared to the three month period ended December 31, 2006.
Non-interest income and non-interest expense remained relatively the same with a
slight increase of $2,000 or 1.2% and $10,000 or 0.6%, respectively, for the
three months ended December 31, 2007, compared to the three month period ended
December 31, 2006.
Our net income for the six months ended December 31, 2007 was $360,000,
compared to net income of $315,000 for the six months ended December 31, 2006,
an increase of $45,000 or 14.3%. This was primarily the result of an increase in
net interest income, partially offset by increases in the provision for loan
losses and non-interest expenses. Net interest income for the six months ended
December 31, 2007, increased $284,000 to $3.7 million from $3.4 million for the
six months ended December 31, 2006. The provision for loan losses increased
$55,000 for the six months ended December 31, 2007 compared to the six months
ended December 31, 2006. There was no provision for the six month period ended
December 31, 2006. Non-interest income remained relatively the same with a
slight increase of $8,000 for the six months ended December 31, 2007.
Non-interest expense increased by $182,000, compared to the same six month
period ended December 31, 2006.
Net Interest Income. Net interest income increased $140,000 or 8.1% to
$1.9 million for the three month period ended December 31, 2007, compared to
$1.7 million for the three months ended December 31, 2006. Interest income
increased by $158,000 or 3.9%, and interest expense increased slightly by
$18,000 or 0.8%, for the same three month comparative periods.
The increase of $158,000 or 3.9% in total interest income for the three
months ended December 31, 2007, resulted from a 3.0% increase in the average
balance of interest-earning assets and a 5 basis point increase in the yield
thereon. Average earning assets increased $7.9 million, to $274.8 million for
the three months ended December 31, 2007, compared to $266.9 million for the
three months ended December 31, 2006. Interest income on loans increased
$208,000 or 5.8% for the three months ended December 31, 2007, compared to the
same period ended December 31, 2006 primarily due to an increase of $15.4
million or 6.9% in average loan balances, offset in part by a 7 basis point
reduction in average yield thereon. Interest on securities held to maturity
increased $52,000 or 17.8% for the three months ended December 31, 2007,
compared to the three months ended December 31, 2006, as a result of a $1.6
million or 5.9% increase in the average balance, in addition to a 47 basis point
increase in yield. Other interest income reflected a reduction of $102,000 or
66.2 % in interest income primarily due to a decrease
11
of $9.2 million or 66.0% in average other interest-earning assets for the three
months ended December 31, 2007, compared to the same three month period ended
December 31, 2006. Balances held at the Federal Home Loan Bank during the three
months ended December 31, 2006 were higher due to the increased funds generated
by the initial IPO stock offering.
Total interest expense increased slightly by $18,000 or 0.8% for the
three months ended December 31, 2007, compared to the three months ended
December 31, 2006. Average interest-bearing liabilities decreased $16.2 million
or 6.4%, from $252.9 for the three months ended December 31, 2006, to $236.7 for
the three months ended December 31, 2007, tempered by a 28 basis points increase
in the average rate from 3.65% to 3.93%, for the respective periods. Interest
expense on deposits increased by $303,000 or 18.1% for the three months ended
December 31, 2007, compared to the three months ended December 31, 2006, as a
result of a slight increase of $1.1 million or 0.6% in average interest-bearing
deposits and a 57 basis point increase in the average rates on interest-bearing
deposits. The Bank experienced a shift in its deposit base for the three months
ended December 31, 2007, compared to the three months ended December 31, 2006,
as NOW account average balances decreased $2.6 million or 8.9%, as did savings
balances by $9.9 million or 17.1%; while average balances on higher-yielding
time deposits increased by $13.6 million or 11.6%. NOW account average rates
increased by 2 basis points, as did savings by 91 basis points and time deposits
by 25 basis points, for the three months ended December 31, 2007, as compared to
the three months ended December 31, 2006. The average 91 basis point increase in
the savings rate was the result of a new tiered savings product that was
introduced in 2007. Total interest expense on borrowings decreased by $285,000
for the three months ended December 31, 2007, compared to the three months ended
December 31, 2006. Federal Home Loan Bank advance average balances decreased
$17.4 million or 35.0%, as did the average rate by 78 basis points, from 5.15%
to 4.37% for the three months ended December 31, 2007, compared to the same
three month period ended December 31, 2006. Federal Home Loan Bank average
advances balances decreased during the three month period ended December 31,
2007 as funds from the IPO were used to pay down short-term borrowings.
Net interest income increased $284,000 or 8.3% to $3.7 million for the
six months ended December 31, 2007, from $3.4 million for the six months ended
December 31, 2006. A $387,000 or 4.9% increase in interest income was offset by
an increase of $103,000 or 2.3% in interest expense for the six month period
ended December 31, 2007, compared to the six month period ended December 31,
2006.
The increase of $387,000 or 4.9% in interest income for the six months
ended December 31, 2007, resulted from a $10.3 million increase in average
earning assets, along with a 5 basis point increase in yield, compared to the
six months ended December 31, 2006. Interest income on loans increased by
$386,000 or 5.4% for the six months ended December 31, 2007, compared to the six
months ended December 31, 2006. Average loan receivable balances increased $13.9
million or 6.2% to $237.4 million for the six months ended December 31, 2007,
compared to $223.5 million for the six months ended December 31, 2006. Interest
income on securities held to maturity increased $104,000 or 17.7% for the six
months ended December 31, 2007, compared to the six months ended December 31,
2006. Average securities held to maturity balances increased $1.6 million or
5.9% for the six months ended December 31, 2007, compared to the six months
ended December 31, 2006, primarily due to purchases made in early 2007, as the
yield on the investment held to maturity portfolio increased by 48 basis points
for the six month period ended December 31, 2007, compared to the same six month
period ended December 31, 2006. Interest income on other interest-earning assets
decreased by $103,000 or 49.3% for the six month period ended December 31, 2007,
compared to the same six month period ended December 31, 2006 as the average
other interest earning-asset balances decreased $5.2 million or
12
52.7%. Average Federal Home Loan Bank balances were lower during the six month
period ended December 31, 2007, as funds from the IPO were used to pay down
short-term borrowings.
The $103,000 or 2.3% increase in interest expense for the six months
ended December 31, 2007, compared to the six months ended December 31, 2006, was
primarily due to an average rate increase of 30 basis points on interest-bearing
liabilities, offset by a reduction of $13.7 million in average interest-bearing
liabilities. Interest expense on deposits increased by $833,000 for the six
months ended December 31, 2007, compared to the six months ended December 31,
2006. The average rate on deposits increased 64 basis points and average deposit
balances increased $11.0 million or 5.7%, from $193.6 million for the six months
ended December 31, 2006, to $204.6 million for the six months ended December 31,
2007. Certificates of deposit average balances increased $16.0 million or 14.0%,
as did the average rate by 44 basis points for the six months ended December 31,
2007, compared to the same six month period ended December 31, 2006. Whereas,
NOW accounts and savings average balances decreased by $3.1 million or 10.7% and
$1.8 million or 3.6%, respectively, for the six months ended December 31, 2007,
compared to the six months ended December 31, 2007. Interest expense on
borrowings decreased by $730,000 for the six months ended December 31, 2007,
compared to the six months ended December 31, 2006. Average Federal Home Loan
Bank advance balances were reduced by $24.8 million or 46.2%, as was the average
rate by 62 basis points for the six month period ended December 31, 2007,
compared to the six month period ended December 31, 2006. Federal Home Loan Bank
average balances decreased during the six months ended December 31, 2007 as
funds from the IPO were used to pay down short-term borrowings.
Provision for Loan Losses. For the three month period ended December
31, 2007, a $40,000 provision was made, whereas no provision was made for the
same period in 2006. There were no charge-offs nor recoveries of previously
charged-off loans during the three month period ended December 31, 2007. There
were charge-offs and recoveries of $1,000 and $1,000, respectively, for the
three month period ended December 31, 2006. For the six month period ended
December 31, 2007, a $55,000 provision was made, whereas no provision was made
for the same period in 2006. There were no charge offs and a $2,000 recovery for
the six month period ended December 31, 2007, and charge-offs and recoveries of
$1,000 and $1,000, respectively, for the six month period end December 31, 2006.
The allowance for loan losses totaled $983,000 and $926,000, respectively, at
December 31, 2007 and June 30, 2007, representing 0.40% and 0.38%, respectively
of total loans. The ratio of non-performing loans to total loans was 1.11%, at
December 31, 2007, as compared to 0.97% at June 30, 2007. 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 the bank owned life insurance
and unrealized gain on trading securities.
Non-interest income rose by $2,000 to $165,000 for the three months
ended December 31, 2007 from $163,000 for the three months ended December 31,
2006. Total non-interest income increased from $316,000 for the six months ended
December 31, 2006 to $324,000 for the six months ended December 31, 2007 due to
increases of $8,000 in both fees and service charges and income from bank owned
life insurance; an increase of $15,000 in unrealized gain on trading securities
and a $9,000 increase in other income, offset by a reduction of $32,000 in
income from investment in real estate as a result of the sale in 2006 of a
building where a former office was located.
13
Non-Interest Expenses. Total non-interest expenses grew by $10,000 or
0.6% for the three months ended December 31, 2007, compared to the three months
ended December 31, 2006.
Salaries and employee benefits expense decreased $10,000 or 1.3% for
the three months ended December 31, 2007, compared to the three months ended
December 31 2006. The decrease reflects a $106,000 reduction in the Bank's 401-K
pension plan expense for the three month period ended December 31, 2007, as a
result of the plan being amended. This reduction was offset in part by normal
salary increases and a $41,000 increase in the Bank's ESOP expense which was
implemented in January 2007. Other expense totaled $327,000 for the three months
ended December 31, 2007, a $44,000 or 15.6% increase over the three month period
ended December 31, 2006. The increase was due primarily to the costs of being a
public company and Sarbanes-Oxley Section 404 compliance expense.
Our non-interest expense for the six months ended December 31, 2007,
increased $182,000 or 5.6% to $3.4 million from $3.2 million for the six months
ended December 31, 2006. Salaries and employee benefits expense increased
$114,000 or 7.4% for the six months ended December 31, 2007, compared to the six
months ended December 31 2006, which included a $106,000 reduction in the Bank's
401-K pension plan expense, as a result of the plan being amended, more than
offsetting the decrease were normal salary increases and $85,000 in ESOP expense
incurred during the six months ended December 31, 2007. In addition, the number
of personnel increased for the six months ended December 31, 2007, compared to
the same period ended December 31, 2006. Other expense increased by $135,000 or
26.3% to $648,000 for the six month period ended December 31, 2007, compared to
$513,000 for the same period ended December 31, 2006. The increase in other
expense was attributable to the costs associated with being a public company and
Sarbanes-Oxley Section 404 compliance expense. Advertising expense decreased by
$62,000 or 39.2% to $96,000, compared to $158,000 for the six month period ended
December 31, 2006. The reduction in expense was primarily due to the additional
expense incurred last year with the opening of the Martinsville branch which
opened at the end of July 2006.
Income Taxes. Income tax expense for the three months ended December
31, 2007 was $127,000 or 35.2% of income before income taxes as compared to
$97,000 or 36.1% of income before income taxes for the three months ended
December 31, 2006.
For the six months ended December 31, 2007, income tax expense was
$185,000 or 33.9% of income before taxes as compared to $175,000 or 35.7% of
income before income taxes for the six months ended December 31, 2006.
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 minimal 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.
14
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, 2007, the Bank had outstanding commitments to originate
loans of $2.0 million, construction loans in process of $6.1 million, unused
lines of credit of $28.2 million and standby letters of credit of $268,000. At
December 31, 2007 the Company had commitments for building improvements in the
amount of approximately $2.1 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 2007, totaled $106.5 million.
The Bank generates cash through borrowings from the Federal Home Loan
Bank to meet its day-to-day funding obligations. The Bank's borrowings from the
Federal Home Loan Bank increased from $27.9 million at June 30, 2007 to $35.0
million at December 31, 2007 as a result of an increase in loan balances. At
December 31, 2007, the Bank's total deposits to loans ratio was 87.8%. At
December 31, 2007, the Bank's collateralized borrowing limit with the Federal
Home Loan Bank was $104.4 million, of which $35.0 million was outstanding. As of
December 31, 2007, 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 well-capitalized and profitable
financial organization, the Bank actively seeks to maintain its status in
accordance with regulatory standards. At December 31, 2007 the Bank exceeded all
applicable minimum 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 our 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 December 31, 2007, our
significant off-balance sheet commitments primarily consisted of commitments to
originate loans of $2.0 million, construction loans in process of $6.1 million,
unused lines of credit of $28.2 million and standby letters of credit of
$268,000.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those instruments. We
use the same credit policies in making commitments and conditional obligations
as we do for on-balance-sheet instruments. Since a number of commitments
typically expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
15
At December 31, 2007 the Company had commitments for building
improvements in the amount of approximately $2.1 million.
16
ITEM 3 - CONTROLS AND PROCEDURES
An evaluation was performed under the supervision, and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule l3a-l5(e)
promulgated under the Securities Exchange Act of 1934, as amended) as of
December 31, 2007. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective as of December 31, 2007.
No change in the Company's internal controls over financial reporting
(as defined in Rule l3a-l5(f) promulgated under the Securities Exchange Act of
1934, as amended) occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no material pending legal proceedings at December 31, 2007
to which the Company or its subsidiaries is a party other than ordinary
routine litigation incidental to their respective businesses.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
31 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(a)
32 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MSB FINANCIAL CORP.
(Registrant)
Date: February 13, 2008 /s/Gary T. Jolliffe
------------------------------------------
Gary T. Jolliffe
President and Chief Executive Officer
Date: February 13, 2008 /s/Jeffrey E. Smith
------------------------------------------
Jeffrey E. Smith
Vice President and Chief Financial Officer
19