SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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 March 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 [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one): Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X]
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, May 15, 2007:
$0.10 par value common stock - 5,620,625 shares outstanding
MSB FINANCIAL CORP. AND SUBSIDIARIES
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Position
at March 31, 2007 and June 30, 2006 (Unaudited) 1
Consolidated Statements of Income for the Three and Nine Months Ended
March 31, 2007 and 2006 (Unaudited) 2
Consolidated Statement of Changes in Shareholders' Equity for the Nine
Months Ended March 31, 2007 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2007 and 2006 (Unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures About Market Risk 15
Item 4: Controls and Procedures 16
PART II - OTHER INFORMATION 17
SIGNATURES 18
MSB FINANCIAL CORP AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
March 31, June 30,
2007 2006
--------- ---------
(In Thousands
Except share and per share amounts)
Assets
Cash and due from banks $ 1,732 $ 1,779
Interest-bearing demand deposits with banks 3,106 4,102
--------- ---------
Total Cash and Cash Equivalents 4,838 5,881
Trading securities 117 109
Securities held to maturity (fair value $26,963 and 27,420 27,707
$26,821, respectively)
Loans Receivable, net of allowance for loan losses 233,348 218,321
of $920 and $921, respectively
Investment in real estate - 97
Premises and equipment, net 8,953 8,899
Federal Home Loan Bank of New York stock, at cost 1,692 2,821
Bank owned life insurance 3,891 4,004
Accrued interest receivable 1,401 1,350
Deferred income taxes 711 752
Other assets 323 243
--------- ---------
Total Assets $ 282,694 $ 270,184
========= =========
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 208,476 $ 194,755
Advances from Federal Home Loan Bank of NY 29,090 54,181
Advance payments by borrowers for taxes and insurance 512 529
Accrued interest payable and other liabilities 1,423 1,228
--------- ---------
Total liabilities 239,501 250,693
--------- ---------
Commitments and Contingencies - -
Shareholders' Equity
Common Stock, par value $0.10; 10,000,000 shares 561 1
authorized; 5,620,625 shares issued and outstanding
Paid-In Capital 24,148 199
Unearned ESOP Shares (1,981) -
Retained Earnings 20,465 19,291
--------- ---------
Total Shareholders' Equity 43,193 19,491
--------- ---------
Total Liabilities and Shareholders' Equity $ 282,694 $ 270,184
========= =========
See notes to consolidated financial statements.
1
MSB FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
----------------------- -----------------------
March 31, March 31, March 31, March 31,
2007 2006 2007 2006
---------- ---------- ---------- ----------
(In thousands, except share and per share amounts)
Interest Income:
Loans receivable, including fees $ 10,787 $ 9,363 $ 3,668 $ 3,361
Securities held to maturity 895 882 308 293
Other 335 119 126 40
---------- ---------- ---------- ----------
Total Interest Income 12,017 10,364 4,102 3,694
---------- ---------- ---------- ----------
Interest Expense
Deposits 4,861 3,638 1,741 1,288
Borrowings 1,725 1,085 340 478
---------- ---------- ---------- ----------
Total Interest Expense 6,586 4,723 2,081 1,766
---------- ---------- ---------- ----------
Net Interest Income 5,431 5,641 2,021 1,928
Provision for Loan Losses 0 45 0 15
---------- ---------- ---------- ----------
Net Interest Income after Provision for Loan Losses 5,431 5,596 2,021 1,913
---------- ---------- ---------- ----------
Non-Interest Income
Fees and service charges 247 252 79 79
Income from bank owned life insurance 112 98 42 34
Unrealized gain on trading securities 8 13 2 2
Income from investment in real estate 1,007 32 975 11
Other 62 58 22 21
---------- ---------- ---------- ----------
Total Non-Interest Income 1,436 453 1,120 147
---------- ---------- ---------- ----------
Non-Interest Expenses
Salaries and employee benefits 2,400 2,070 854 698
Directors Compensation 224 220 80 76
Occupancy and equipment 920 710 321 243
Service bureau fees 415 377 139 130
Advertising 215 166 57 50
Other 782 681 269 220
---------- ---------- ---------- ----------
Total Non-Interest Expense 4,956 4,224 1,720 1,417
---------- ---------- ---------- ----------
Income before Income Taxes 1,911 1,825 1,421 643
Income Taxes 737 695 562 246
---------- ---------- ---------- ----------
Net Income $ 1,174 $ 1,130 $ 859 $ 397
========== ========== ========== ==========
Net Income per common share:
basic $ 0.31 $ 0.37 $ 0.16 $ 0.13
diluted $ 0.31 $ 0.37 $ 0.16 $ 0.13
Weighted average number of common shares outstanding:
basic 3,813,666 3,091,344 5,290,413 3,091,344
diluted 3,813,666 3,091,344 5,290,413 3,091,344
See notes to consolidated financial statements.
2
MSB FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In Thousands) Unearned Total
Common Paid-in ESOP Retained Shareholders'
Stock Capital Shares Earnings Equity
------- -------- -------- -------- -----------
Balance - June 30, 2006 $1 $199 $0 $19,291 $19,491
Net income for the nine months 1,174 1,174
ended March 31, 2007
Issuance of common stock, 560 23,942 24,502
net of expenses
ESOP shares earned 7 42 49
Common stock acquired by ESOP (2,023) (2,023)
------- -------- -------- -------- -----------
Balance - March 31, 2007 $561 $24,148 ($1,981) $20,465 $43,193
======= ======== ======== ======== ===========
See notes to consolidated financial statements.
3
MSB Financial Corp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended March 31,
---------------------------
2007 2006
-------- --------
(In Thousands)
Cash Flows from operating activities:
Net Income $ 1,174 $ 1,130
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization of loan fees and loan costs (81) (91)
Depreciation 393 320
ESOP Compensation 49 -
Provision for Loan Losses - 45
Earnings on bank owned life insurance (112) (98)
Unrealized (gain) on trading securities (8) (13)
Realized (gain) on sale of investment in real estate (975) -
Deferred Income taxes 41 -
(Increase) in interest receivable (51) (146)
(Increase) decrease in other assets (80) 64
Increase (decrease) in accrued interest payable 22 (42)
Increase in other liabilities 173 117
-------- --------
Net Cash Provided by Operating Activities 545 1,286
-------- --------
Cash Flows from Investing Activities:
Activity in held to maturity securities:
Purchase of securities (2,000) -
Proceeds from maturities, calls and principal repayments 2,287 499
Net increase in Loans receivable (14,946) (27,152)
Purchase of bank premises and equipment (437) (545)
Proceeds from sale of investment in real estate 1,062 -
Redemption of bank owned life insurance 225 -
Federal Home Loan Bank of New York stock:
Purchases (3,313) (2,180)
Redemptions 4,442 1,425
-------- --------
Net Cash Used in Investing Activities (12,680) (27,953)
-------- --------
Cash Flows from Financing Activities:
Increase in deposits 13,721 2,412
(Decrease) increase in short-term borrowings (24,500) 23,022
Repayments of long-term debt (591) (571)
Net proceeds from issuance of stock 24,502 -
Stock acquired for ESOP plan (2,023) -
(Decrease) increase in advance payments by borrowers for taxes and insurance (17) 16
-------- --------
Net Cash Provided by Financing Activities 11,092 24,879
-------- --------
Net (Decrease) in Cash and Cash Equivalents (1,043) (1,788)
Cash and Cash Equivalents - Beginning 5,881 5,666
-------- --------
Cash and Cash Equivalents - Ending 4,838 3,878
-------- --------
Supplementary Cash Flows Information
Interest paid $ 6,564 $ 4,765
======== ========
Income taxes paid $ 764 $ 733
======== ========
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-Q 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.
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 nine month periods ended March 31, 2007 and 2006. The results of
operations for the three and nine month periods ended March 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 condition for June
30, 2006 were derived from the Company's Registration Statement on Form S-1
(File No. 333-137294). That data, along with the interim financial information
presented in the consolidated statements of financial condition, income and cash
flows, should be read in conjunction with the 2006 consolidated financial
statements as presented in the Form S-1.
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 condition
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
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, net
income per common share for those shares has been retroactively restated for all
periods presented. Earnings per share reflect the issuance of the 2,529,281
shares sold in the stock offering in addition to the shares held by MSB
Financial, MHC. Basic and diluted earnings per share are equivalent as there
were no 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, March
31, 2007.
Note 5 - Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123R,
"Share-Based Payment," which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." This statement requires that all share-based payments to employees,
including grants of employee stock options, be
6
recognized as compensation costs in the consolidated financial statements based
on their fair values. The effective date of this statement was delayed until
fiscal years beginning after June 15, 2005. The impact of the adoption of this
standard will be dependent on the nature and extent of stock-based compensation
granted in future periods.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections," which establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the
newly adopted accounting principle. The statement provides guidance for
determining whether retrospective application of a change in accounting
principle is impracticable. The statement also addresses the reporting of a
correction of error by restating previously issued financial statements. SFAS
No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. We have adopted this statement
as required, and such adoption did not have a material effect on our results of
operations or financial position.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments." SFAS No. 155 amends SFAS No. 133 and 140, and
improves the financial reporting of certain hybrid financial instruments by
requiring more consistent accounting that eliminates exemptions and provides a
means to simplify the accounting for these instruments. Specifically, SFAS No.
155 allows financial instruments that have embedded derivatives to be accounted
for as a whole (eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a fair value basis.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. We are required to adopt the provisions of SFAS No. 155, as applicable,
beginning on July 1, 2007. We do not believe the adoption of SFAS No. 155 will
have any impact on our financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - An Amendment of FASB Statement No. 140." SFAS No. 156
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits,
but does not require, the subsequent measurement of servicing assets and
servicing liabilities at fair value. SFAS No. 156 is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006,
which for us will be July 1, 2007. We do not believe that the adoption of SFAS
No. 156 will have any effect on our financial position or results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109"
(FIN 48), which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that companies recognize in their financial statements
the impact of a tax position only, if the company has determined based on the
technical merits of the tax position, that the tax position would more likely
than not be sustained upon an examination by the appropriate taxing authority.
The provisions of FIN 48 are effective for fiscal years beginning after December
15, 2006, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We do not believe that
the adoption of FIN 48 will have a material effect on our financial position or
results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157
7
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. We are currently evaluating the potential impact, if any, of
the adoption of SFAS No. 157 on our consolidated financial position, results of
operations and cash flows.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans ("SFAS 158"), which
amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The measurement date --
the date at which the benefit obligation and plan assets are measured -- is
required to be the company's fiscal year end. SFAS 158 is effective for
publicly-held companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after December 15, 2008. We are currently analyzing the effects of SFAS 158 but
expect that its implementation will not have a material impact on our
consolidated financial condition or results of operations.
On September 7, 2006, the Task Force reached a conclusion on EITF Issue
No. 06-5, "Accounting for Purchases of Life Insurance - Determining the Amount
That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance" ("EITF 06-5"). The scope of EITF
06-5 consists of six separate issues relating to accounting for life insurance
policies purchased by entities protecting against the loss of "key persons." The
six issues are clarifications of previously issued guidance on FASB Technical
Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect it to have a material impact on
the Company's consolidated financial statements.
On September 13, 2006, the Securities and Exchange Commission issued
Staff Accounting Bulleting No. 108 ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a potential current year
misstatement. Prior to SAB 108, Companies might evaluate the materiality of
financial-statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new misstatements
added in the current year, and the balance sheet approach focusing on the
cumulative amount of misstatement present in a company's balance sheet.
Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires
that companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet approach. We
have analyzed SAB 108 and determined that it will not impact our reported
results of operations or financial condition.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1,
"Accounting for Planned Major Maintenance Activities" which is effective for
fiscal years beginning after December 15, 2006. This position statement
eliminates the accrue-in-advance method of accounting for planned major
maintenance activities. We do not expect this pronouncement to have a
significant impact on the determination or reporting of our financial results.
8
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 the fiscal years beginning after
November 15, 2007, and for interim periods within those fiscal years. We are
evaluating the impact that the adoption of SFAS No. 159 will have on our
consolidated financial statements.
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:
Nine Months Ended Three Months Ended
March 31, March 31,
--------------- -----------------
2007 2006 2007 2006
---- ---- ---- ----
(In Thousands)
Service Cost $ 77 $ 88 $ 26 $ 29
Interest Cost 39 32 13 11
Amortization of Past Service Cost 10 35 3 11
---- ---- ---- ----
$126 $155 $ 42 $ 51
==== ==== ==== ====
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:
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;
9
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 condition 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, 2007 and June 30, 2006
General. Total assets were $282.7 million at March 31, 2007, compared
to $270.2 million at June 30, 2006 due primarily to a $15.0 million increase in
loans receivable. Investment
10
in real estate decreased by $97,000 due to the sale of the property adjacent to
the home office, site of the former Bank home office, at a $1.0 million gain.
Cash and cash equivalents were $4.8 million at March 31, 2007 compared to $5.9
million at June 30, 2006. Liquidity provided by the stock offering in January
2007 was responsible for a decrease in borrowed funds; FHLB advances were $29.1
million at March 31, 2007 from $54.2 million at fiscal year end.
Loans. Loans receivable, net, rose to $233.3 million at March 31, 2007
from $218.3 million at June 30, 2006, an increase of $15.0 million. The home
equity loan portfolio grew by $6.9 million or 14.0% between June 30, 2006 and
March 31, 2007. The one-to-four family real estate loan portfolio grew by $4.0
million or 3.3%, as did the commercial real estate portfolio by $3.3 million or
14.1%, and the commercial loan portfolio by $3.1 million or 55.9%. The
construction loan portfolio decreased by $2.4 million.
Securities. Our portfolio of securities held to maturity decreased
slightly to $27.4 million at March 31, 2007 as compared to $27.7 million at June
30, 2006 due to principal repayments. There was a $2.0 million purchase and a
$2.0 million maturity during the nine month period ended March 31, 2007. FHLB of
New York stock decreased by $1.1 million from $2.8 million at June 30, 2006 to
$1.7 million at March 31, 2007, due to a reduction in borrowing with the Federal
Home Loan Bank of New York.
Deposits. Total deposits at March 31, 2007 were $208.5 million,
compared to $194.8 million at June 30, 2006, an increase of $13.7 million.
Certificates of deposit increased by $11.9 million, as did savings deposits by
$3.8 million, whereas non-interest bearing checking balances decreased by $1.2
million and interest bearing checking balances by $761,000.
Borrowings. Total borrowings at March 31, 2007 amounted to $29.1
million, compared to $54.2 million at June 30, 2006. The decrease resulted from
the use of net proceeds of $24.5 million from the stock offering in January 2007
to repay Federal Home Loan Bank borrowings.
Equity. Shareholders' equity was $43.2 million at March 31, 2007 as
compared to $19.5 million at June 30, 2006, reflecting $24.5 million of net
proceeds from the stock offering completed in January 2007, and net income for
the nine-month period of $1.2 million, less the shares of Company common stock
purchased for the Bank's Employee Stock Ownership Plan ("ESOP") of $2.0 million.
Comparison of Operating Results for the Three and Nine Months Ended March 31,
2007 and 2006
General. Our net income for the three months ended March 31, 2007 was
$859,000, compared to net income of $397,000 for the three months ended March
31, 2006. This was primarily the result of $975,000 of income from investment in
real estate resulting primarily from the sale of the land and building which
included the Bank's former home office. Our net interest income for the three
months ended March 31, 2007 increased $93,000 from $1.9 million to $2.0 million.
Non-interest expense increased $303,000 from $1.4 million for the three months
ended March 31, 2006 to $1.7 million for the three months ended March 31, 2007,
primarily as a result of a $156,000 increase in salaries and employee benefits
and a $78,000 increase in occupancy and equipment. The increases in salaries and
employee benefits and in occupancy and equipment was largely attributable to the
opening of the Martinsville branch office. Salaries and employee benefits in the
current period also included $49,000 of expense related to the ESOP which was
implemented in January 2007.
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Our net income for the nine months ended March 31, 2007 was $1.2 million,
compared to net income of $1.1 million for the nine months ended March 31, 2006.
Increased net income was primarily the result of a $983,000 increase in
non-interest income for 2007 primarily as a result of the sale of real estate,
which was the site of our former home office. This more than offset a $732,000
increase in total non-interest expense and a $210,000 decrease in net interest
income. The increase in total non-interest expense was primarily the result of
an increase in salaries and employee benefits of $330,000 and in occupancy and
equipment of $210,000, largely the result of the opening of the Martinsville
branch. Salaries and employee benefits in the current period also included
$49,000 of expense related to the ESOP which was implemented in January 2007.
Net Interest Income. Net interest income for the three months ended
March 31, 2007 amounted to $2.0 million compared to $1.9 million for the three
months ended March 31, 2006. A $408,000 increase in total interest income for
the three months ended March 31, 2007 was substantially offset by a $315,000
increase in total interest expense.
The increase in total interest income for the three months ended March
31, 2007 resulted from a 9.1% increase in the average balance of
interest-earning assets and a 11 basis point increase in the average yield
thereon. Our average yield on loans receivable for the three months ended March
31, 2007 was 6.35%, compared to 6.33% for the three months ended March 31, 2006.
The increase in yield on loans, combined with a $18.6 million or 8.75% increase
in the average balance of loans receivable for the three months ended March 31,
2007, was responsible for the increase in interest income. The increase of
$86,000 in other interest income was the result of increased balances held at
the Federal Home Loan Bank as a result of the funds received in conjunction with
the initial public stock offering.
The $315,000 increase in interest expense for the three months ended
March 31, 2007 from the three months ended March 31, 2006 was attributable to an
increase in the amount of deposits and to higher interest rates on deposits
during the period. The average cost of deposits rose by 80 basis points, and the
average balance of deposits increased by $8.4 million or 4.4% between periods.
Total interest expense on borrowings decreased by $138,000 from $478,000 for the
three months ended March 31, 2006 to $340,000 for the three months ended March
31, 2007 as a result of a reduction in Federal Home Loan Bank advances resulting
from the use of proceeds from the sale of stock in January 2007.
Net interest income for the nine months ended March 31, 2007 amounted
to $5.4 million, compared to $5.6 million for nine months ended March 31, 2006.
The $210,000 decrease was due to an increase in interest expense from $4.7
million for the nine months ended March 31, 2006, to $6.6 million for the nine
months ended March 31, 2007. This $1.9 million increase in total interest
expense more than offset a $1.7 million increase in total interest income from
$10.4 million for the nine months ended March 31, 2006 to $12.0 million for the
nine months ended March 31, 2007.
The increase in interest income for the nine months ended March 31,
2007 resulted from a 11.7% increase in the average balance of interest-earning
assets and a 22 basis point increase in the average yield thereon. Our average
yield on loans receivable for the nine months ended March 31, 2007 was 6.37%, 21
basis points greater than for the nine months ended March 31, 2006. The increase
in yield on loans combined with a $23.3 million increase in the average balance
of loans receivable for the nine months ended March 31, 2007 is responsible for
the $1.4 million, or 15.2% increase in interest income on loans over the nine
months ended March 31, 2006. The increase of $216,000 in other interest income
was the result of increased balances held
12
at the Federal Home Loan Bank as a result of the funds received in conjunction
with the initial public stock offering.
The $1.9 million increase in interest expense for the nine months ended
March 31, 2007 is attributable to higher interest rates on deposits and
borrowings during the period. The average cost of deposits rose by 75 basis
points, while the average balance of deposits was higher, $189.1 million for the
2006 period and $195.3 million for the 2007 period. The average balance of
Federal Home Loan Bank advances for the nine months ended March 31, 2007 was
$45.2 million and the average cost thereof was 5.08%. This represents a $11.1
million or 32.4% increase over the average balance of $34.2 million for the nine
months ended March 31, 2006 and a 85 basis point increase over the average cost
of advances for the 2006 period. Management's challenge continues to be building
deposits in order to reduce reliance on borrowings. FHLB advances were reduced
to $29.1 million at March 31, 2007 as a result of the $24.5 million of capital
received from the initial public stock offering.
Provision for Loan Losses. We did not make a loan loss provision during
the three or nine months ended March 31, 2007. Provisions of $15,000 and $45,000
were made during the same periods in 2006. The allowance for loan losses totaled
$920,000 and $921,000, respectively, at March 31, 2007 and June 30, 2006,
representing 0.39% and 0.42%, respectively, of total loans. The ratio of
non-performing loans to total loans was 0.66%, at March 31, 2007, as compared to
0.66% at December 31, 2006, and 0.32% at June 30, 2006. There were no
charge-offs or recoveries of previously charged-off loans during the three month
period ended March 31, 2007. During the nine months ended March 31, 2007, there
was a charge-off and recovery of $1,000 and $1,000, respectively. 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.
During the three months ended March 31, 2007, non-interest income consisted
primarily of a one-time gain from investment in real estate of $975,000,
resulting from the sale of a building next to the Bank's home office, which
included a U.S. post office and the former location of the Bank's home office.
Overall, non-interest income rose by $973,000 from $147,000 for the three months
ended March 31, 2006 to $1.1 million for the three months ended March 31, 2007.
Total non-interest income increased from $453,000 for the nine months ended
March 31, 2006 to $1.4 million for the nine months ended March 31, 2007 due
almost entirely to the $1.0 million income from investment in real estate,
$975,000 of which consisted of the gain from the sale of the land and building
where the former home office was located.
Non-Interest Expenses. Total non-interest expenses grew by $303,000 or
21.4% for the three months ended March 31, 2007 to $1.7 million compared to $1.4
million for the same period in 2006.
Salaries and employee benefits expense totaled $854,000 for the three
months ended March 31, 2007, a $156,000 or 22.3% increase over $698,000 for the
three months ended March 31, 2006. The ESOP, which was implemented in January
2007, added $49,000 to current period salaries and employee benefits expense.
Occupancy and equipment also increased from $243,000 to $321,000 (32.1%) as a
result of the opening of the new branch office. Salaries and employee benefits
are our main non-interest expense and represented 49.7% and 49.3% of
non-interest expenses for the three months ended March 31, 2007 and 2006,
respectively.
13
Total non-interest expenses grew by $732,000, or 17.3% during the nine
months ended March 31, 2007 to $5.0 million compared to $4.2 million for the
same period in 2006.
Salaries and employee benefits expense totaled $2.4 million for the
nine months ended March 31, 2007, a $330,000 or 15.9% increase over $2.1 million
for the nine months ended March 31, 2006. The ESOP, which as implemented in
January 2007, added $49,000 to current period salaries and employee benefits
expense. Occupancy and equipment increased $210,000, or 29.6%, from $710,000 for
the nine months ended March 31, 2006 to $920,000 for 2007, and advertising
increased $49,000 or 29.5% from 2006 to 2007.
Non-interest expense for the 2007 periods, particularly salaries and
employee benefits, occupancy, equipment and advertising expenses, was impacted
by the operation of the Martinsville branch office, which opened in July 2006.
Income Taxes. Income tax expense for the three months ended March 31,
2007 was $562,000 or 39.5% of income before income taxes as compared to $246,000
or 38.3% of income before income taxes for the three months ended March 31,
2006.
Income tax expense for the nine months ended March 31, 2007 was
$737,000 or 38.6% of income before income taxes as compared to $695,000 or 38.1%
of income before income taxes for the nine months ended March 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 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, 2007, the Bank had outstanding commitments to originate
loans of $4.8 million, construction loans in process of $5.3 million, unused
lines of credit of $24.2 million and standby letters of credit of $138,000.
Certificates of deposit scheduled to mature in one year or less at March 31,
2007, totaled $95.4 million.
14
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 decreased from $54.2 million at June 30, 2006 to $29.1
million at March 31, 2007 as a result of $24.5 million of net proceeds from the
initial public stock offering completed in January 2007. At March 31, 2007, the
Bank's total deposits to loans ratio was 89.3%. At March 31, 2007, the Bank's
collateralized borrowing limit with the Federal Home Loan Bank was $91.6
million, of which $12.1 million was outstanding. As of March 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. Primarily as a result of the $24.5 million
of net proceeds from the initial public stock offering completed in January
2007, the total shareholders' equity of MSB Financial Corp. increased from $19.5
million at June 30, 2006 to $43.2 million at March 31, 2007 (15.3% of assets),
allowing the Bank to greatly exceed 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 Millington Savings Bank's
facilities. These financial instruments include significant purchase
commitments, such as commitments related to capital expenditure plans and
commitments to purchase investment securities or mortgage-backed securities, and
commitments to extend credit to meet the financing needs of our customers. At
March 31, 2007, our significant off-balance sheet commitments primarily
consisted of commitments to originate loans of $4.8 million, construction loans
in process of $5.3 million, unused lines of credit of $24.2 million and standby
letters of credit of $138,000.
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our most significant form of market risk is interest rate risk because
the majority of our assets and liabilities are monetary instruments. Our assets,
consisting primarily of mortgage loans, have generally longer maturities than
our liabilities, consisting primarily of short-term deposits. We derive our
income mainly from the difference or "spread" between the interest earned on
loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. In general, the
larger the spread, the more we earn. When market rates of interest change, the
interest we receive on our assets and the interest we pay on our liabilities
will fluctuate. This can cause decreases in our spread and can adversely affect
our income.
15
Future interest rates or their effect on net interest income are not
predictable. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rate on certain
types of assets and liabilities, such as demand deposits and savings accounts,
may fluctuate in advance of changes in market interest rates, while rates on
other types of assets and liabilities may lag behind changes in market interest
rates. Certain assets, such as adjustable rate mortgages, generally have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. In the event of an interest rate increase, an increased
credit risk may result as the ability of many borrowers to service their debt
may decrease.
Management of the Company does not believe that there has been a
material adverse change in market risk during the three months ended March 31,
2007.
ITEM 4 - 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 March
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 March 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.
16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no material pending legal proceedings at March 31, 2007 to
which the Company or its subsidiaries is a party other that ordinary
routine litigation incidental to their respective businesses.
ITEM 1A - RISK FACTORS
This item is not yet applicable to the Company because the Company has
not yet filed an annual report on Form 10-K.
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
17
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: May 15, 2007 /s/Gary T. Jolliffe
------------------------------------------
Gary T. Jolliffe
President and Chief Executive Officer
Date: May 15, 2007 /s/Jeffrey E. Smith
------------------------------------------
Jeffrey E. Smith
Vice President and Chief Financial Officer
18