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 September 30, 2006
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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 ______________
Commission File Number 333-137294
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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, December 20, 2006:
$0.10 par value common stock - 10,000 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 Condition
at September 30, 2006 and June 30, 2006 (Unaudited) 2
Consolidated Statements of Income for the Three Months Ended
September 30, 2006 and 2005 (Unaudited) 3
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2006 and 2005 (Unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3: Quantitative and Qualitative Disclosures About Market Risk 11
Item 4: Controls and Procedures 12
PART II - OTHER INFORMATION 13
SIGNATURES 14
MSB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(Unaudited)
SEPTEMBER 30, JUNE 30,
2006 2006
------------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNT)
ASSETS
Cash and due from banks $ 1,770 $ 1,779
Interest-bearing demand deposits with banks 3,982 4,102
-------- --------
Total Cash and Cash Equivalents 5,752 5,881
Trading securities 107 109
Securities held to maturity (fair value $27,079 and
$26,821, respectively) 27,585 27,707
Loans Receivable, net of allowance for loan losses
of $921 and $921, respectively 223,662 218,321
Investment in real estate 93 97
Premises and equipment 9,015 8,899
Federal Home Loan Bank of New York stock, at cost 3,026 2,821
Bank owned life insurance 4,037 4,004
Accrued interest receivable 1,336 1,350
Deferred income taxes 747 752
Other assets 361 243
-------- --------
TOTAL ASSETS $275,721 $270,184
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Deposits $195,473 $194,755
Advances from Federal Home Loan Bank of NY 58,736 54,181
Advance payments by borrowers for taxes and insurance 465 529
Accrued interest payable and other liabilities 1,413 1,228
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TOTAL LIABILITIES 256,087 250,693
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COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDER'S EQUITY
Common Stock, par value $.10; 10,000,000 shares
authorized; 10,000 shares issued and outstanding 1 1
Paid-In Capital 199 199
Retained Earnings 19,434 19,291
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TOTAL SHAREHOLDER'S EQUITY 19,634 19,491
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $275,721 $270,184
======== ========
See notes to consolidated financial statements.
2
MSB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
Three Months Ended
September 30,
-------------------
2006 2005
------- -------
(In Thousands)
Interest Income:
Loans receivable, including fees $ 3,525 $ 2,889
Securities held to maturity 294 295
Other 55 39
------- -------
Total Interest Income 3,874 3,223
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Interest Expense
Deposits 1,449 1,124
Borrowings 746 243
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Total Interest Expense 2,195 1,367
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Net Interest Income 1,679 1,856
Provision for Loan Losses 0 15
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Net Interest Income after Provision for Loan Losses 1,679 1,841
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Non-Interest Income
Fees and service charges 86 84
Income from bank owned life insurance 34 34
Unrealized gain (loss) on trading securities (2) 11
Income from investment in real estate 15 11
Other 20 19
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Total Non-Interest Income 153 159
------- -------
Non-Interest Expenses
Salaries and employee benefits 777 694
Directors Compensation 71 72
Occupancy and equipment 300 227
Service bureau fees 141 129
Advertising 92 50
Other 230 232
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Total Non-Interest Expense 1,611 1,404
------- -------
Income before Income Taxes 221 596
Income Taxes 78 224
------- -------
Net Income $ 143 $ 372
======= =======
See notes to consolidated financial statements.
3
MSB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
MSB FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
------------------
2006 2005
------- -------
(In Thousands)
Cash Flows from operating activities:
Net Income $ 143 $ 372
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization of loan fees (35) (27)
Depreciation and amortization 128 110
Provision for Loan Losses - 15
Earnings on bank owned life insurance (34) (34)
Unrealized loss (gain) on trading securities 2 (11)
Deferred Income taxes 5 -
Decrease in accrued interest receivable 14 42
(Increase) decrease in other assets (117) 48
Increase in accrued interest payable 213 29
(Decrease) increase in other liabilities (28) 177
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Net Cash Provided by Operating Activities 291 721
------- -------
Cash Flows from Investing Activities:
Activity in held to maturity securities:
Maturities, calls and principal repayments 122 188
Net increase in Loans receivable (5,306) (8,570)
Purchase of bank premises and equipment (240) (56)
Federal Home Loan Bank of New York stock:
Purchases (965) (47)
Redemptions 760 47
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Net Cash Used in Investing Activities (5,629) (8,438)
------- -------
Cash Flows from Financing Activities:
Increase (decrease) in deposits 718 (826)
Increase in short-term borrowings 4,750 8,250
Repayments of long-term debt (195) (189)
(Decrease) in advance payments by borrowers for taxes and insurance (64) (62)
------- -------
Net Cash Provided by Financing Activities 5,209 7,173
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Net (Decrease) in Cash and Cash Equivalents (129) (544)
Cash and Cash Equivalents - Beginning 5,881 5,666
------- -------
Cash and Cash Equivalents - Ending $ 5,752 $ 5,122
------- -------
Supplementary Cash Flows Information:
Interest paid $ 1,982 $ 1,338
======= =======
Income taxes paid - $ 24
======= =======
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 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 is anticipated to close in January 2007.
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
month periods ended September 30, 2006 and 2005. The results of operations for
the three month periods ended September 30, 2006 and 2005 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
5
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
Earnings per share was not meaningful for the three months ended September 30,
2006 and 2005, as the Company had no publicly held shares during the periods.
NOTE 4 - STOCK BASED COMPENSATION
The Company had no stock-based compensation as of, or prior to, September 30,
2006.
6
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;
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.
Any of the forward-looking statements that we make in this report and in other
public statements we make may turn out to be wrong because of inaccurate
assumptions we might make, because of the factors illustrated above or because
of other factors that we cannot foresee. Consequently, no forward-looking
statement can be guaranteed.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2006 AND JUNE 30, 2006
GENERAL. Total assets reached $275.7 million at September 30, 2006,
compared to $270.2 million at June 30, 2006. The increase was fueled by loan
originations, the funding for which was provided primarily by an increase in
borrowed funds which grew to $58.7 million at September 30, 2006, compared to
$54.2 million at June 30, 2006, an 8.3% increase.
LOANS. Loans receivable, net, rose to $223.7 million at September 30, 2006
from $218.3 million at June 30, 2006, an increase of $5.3 million, or 2.4%. As a
percentage of assets, loans increased to 81.1% from 80.8%. One-to-four family
real estate loans grew by $2.8 million or 2.4% between June 30, 2006 and
September 30, 2006. Home equity lending continued to be strong, and this
portfolio grew during the three months ended September 30, 2006 by $2.8 million
or 5.8%.
7
SECURITIES. Our portfolio of securities held to maturity decreased slightly
to $27.6 million at September 30, 2006 as compared to $27.7 million at June 30,
2006 due to principal repayments during the three months ended September 30,
2006. We did not purchase any new securities during the three months ended
September 30, 2006, and we continue to use cash flows from the securities
portfolio to fund loan originations.
DEPOSITS. Total deposits at September 30, 2006 were $195.5 million,
compared to $194.8 million at June 30, 2006. Certificates of deposit increased
by $2.8 million partially offsetting a decrease of $1.7 million in
interest-bearing checking and savings accounts.
BORROWINGS. Total borrowings at September 30, 2006 amounted to $58.7
million, compared to $54.2 million at June 30, 2006. The increase resulted from
the need to fund new loans. We anticipate using net proceeds from the stock
offering to reduce our outstanding Federal Home Loan Bank borrowings.
Our investment in Federal Home Loan Bank of New York stock was $3.0 million
at September 30, 2006 compared to $2.8 million at June 30, 2006, reflecting the
increased level of borrowings.
EQUITY. Stockholder's equity was $19.6 million at September 30, 2006 as
compared to $19.5 million at June 30, 2006, reflecting net income for the
three-month period of $143,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
AND 2005
GENERAL. Our net income for the three months ended September 30, 2006 was
$143,000, a 61.6% decrease compared to net income of $372,000 for the three
months ended September 30, 2005. This was primarily the result of a $177,000 or
9.5% decrease in net interest income and a $207,000 or 14.7% increase in
non-interest expense for the three months ended September 30, 2006 as compared
to the same period in 2005. An $83,000 increase in salaries and employee
benefits expense was the largest increase in the non-interest expense category.
NET INTEREST INCOME. Net interest income for the three months ended
September 30, 2006 amounted to $1.7 million and was $177,000 or 9.5% lower than
net interest income for the three months ended September 30, 2005 of $1.9
million. A $651,000 or 20.2% increase in interest income for the three months
ended September 30, 2006 was substantially offset by a $828,000 or 60.6%
increase in interest expense.
The increase in interest income for the three months ended September 30,
2006 resulted from a 13.5% increase in the average balance of interest-earning
assets and a 34 basis points increase in the average yield thereon. Our average
yield on loans receivable for the three months ended September 30, 2006 was
6.37%, 34 basis points greater than for the three months ended September 30,
2005. The increase in yield on loans combined with a $29.9 million increase in
the average balance of loans receivable for the three months ended September 30,
2006 is responsible for the 20.2% increase in interest income over the three
months ended September 30, 2005.
The 60.6% increase in interest expense for the three months ended September
30, 2006 is attributable to higher interest rates and borrowings during the
period. The average cost of deposits rose by 76 basis points, while the average
balance of deposits was level between periods. The average balance of Federal
Home Loan Bank advances for the three months ended
8
September 30, 2006 was $57.5 million and the average cost thereof was 5.19%.
This represents a $32.7 million or 131.9% increase over the average balance of
$24.8 million for the three months ended September 30, 2005 and a 127 basis
point increase over the average cost of advances for the 2005 period.
PROVISION FOR LOAN LOSSES. We did not make a loan loss provision during the
three months ended September 30, 2006. A $15,000 provision was made during the
same period in 2005. The allowance for loan losses was $921,000, $921,000 and
$879,000 at September 30, 2006, June 30, 2006, and September 30, 2005,
respectively, representing 0.40%, 0.41% and 0.43% of total loans. The ratio of
non-performing loans to total loans was 0.80%, 0.32% and 1.14% at September 30,
2006, June 30, 2006, and September 30, 2005, respectively. During the three
months ended September 30, 2006, there were no loan charge-offs or recoveries of
loans previously charged off. During the three months ended September 30, 2005,
loans totaling $9,000 were charged off and no recoveries of previously charged
off were recorded. 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.
Overall, non-interest income fell by $6,000 or 3.8% for the three months ended
September 30, 2006 as compared to the three months ended September 30, 2005.
NON-INTEREST EXPENSES. Total non-interest expenses grew by $207,000 or
14.7% during the three months ended September 30, 2006 to $1.6 million compared
to $1.4 million for the same period in 2005.
Salaries and employee benefits expense totaled $777,000 for the three
months ended September 30, 2006, an $83,000 or 12.0% increase over $694,000 for
the three months ended September 30, 2005. Salaries and employee benefits are
our main non-interest expense and represented 48.2% and 49.4% of non-interest
expenses for the three months ended September 30, 2006 and 2005, respectively.
Non-interest expense for the 2006 period, 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 September 30,
2006 was $78,000 or 35.3% of income before income taxes as compared to $224,000
or 37.6% of income before income taxes for the three months ended September 30,
2005. The reduction for the three months ended September 30, 2006 primarily
reflects lower pre-tax income for that period.
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.
9
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.
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 will require that all share-based payments to
employees, including grants of employee stock options, be recognized as
compensation costs in the 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 will adopt this
10
statement as required, and do not believe the adoption will 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 any 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 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 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 upon adoption 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.
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.
The following table presents Millington Savings Bank's net portfolio value
as of June 30, 2006. The Bank outsources its interest rate risk modeling and the
net portfolio values shown in this table were calculated by an outside
consultant, based on information provided by Millington Savings Bank. Management
of the Company does not believe that there has been a material adverse change in
market risk during the three months ended September 30, 2006.
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At June 30, 2006
---------------------------------------------------------------------------------------------------------
Net Portfolio Value as
Net Portfolio Value % of Present Value of Assets
----------------------------------------------- -------------------------------
Net
Portfolio
Changes in Value Basis Point
Rates(1) $ Amount $ Change % Change Ratio Change
------------------ ------------- ------------ ------------ ------------- --------------
(Dollars in thousands)
+300bp 10,282 (12,755) -55.37% 4.22% (454) bp
+200bp 14,293 (8,743) -37.95% 5.72% (303) bp
+100bp 18,470 (4,567) -19.82% 7.21% (154) bp
0bp 23,037 0 0% 8.75% 0 bp
-100bp 26,879 3,843 16.68% 9.97% 122 bp
-200bp 29,532 6,495 28.20% 10.77% 201 bp
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. 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 which restrict changes in interest rates
on a short-term basis and over the life of the asset. In the event of a change
in interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Notwithstanding the discussion above, the quantitative interest rate
analysis presented above indicates that a rapid increase in interest rates would
adversely affect our net interest margin and earnings.
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
September 30, 2006. Based on such evaluation, the Company's Chief Executive
12
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective as of September 30, 2006.
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.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no material pending legal proceedings at September 30, 2006
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
Not Applicable
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
13
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: December 27, 2006 /s/ Gary T. Jolliffe
----------------------------------------------
Gary T. Jolliffe
President and Chief Executive Officer
Date: December 27, 2006 /s/ Jeffrey E. Smith
----------------------------------------------
Jeffrey E. Smith
Vice President and Chief Financial Officer
14