MSBF - MSB Financial Corp. Releases First Quarter Earnings

MILLINGTON, N.J., April 30, 2019 (GLOBE NEWSWIRE) -- MSB Financial Corp. (NASDAQ: MSBF) (the “Company”), parent company of Millington Bank, reported today the results of its operations for the three months ended March 31, 2019.

The Company reported net income of $514,000, or $0.10 per diluted common share, for the three months ended March 31, 2019, compared to net income of $1,022,000, or $0.19 per diluted common share, for the three months ended March 31, 2018.  The reduction in the current period was due to an $862,000 increase in professional expenses year over year in connection with the first audit of the Company's internal control over financial reporting.  As the Company previously disclosed, in connection with the audit, management and outside auditors identified certain material weaknesses in internal control.  While none of these material weaknesses resulted in any misstatement or material change to the reported results, they did cause the scope of the audit and consequently the related expense to increase significantly.  Adjusting for the expense associated with the change in procedures, net income would have been $1.1 million or $0.21 per diluted share.

Michael A. Shriner, President and Chief Executive Officer, stated "We believe we have addressed the weaknesses and will continue to closely monitor compliance with the new procedures we have established.  We are very hopeful that, going forward, the expense associated with the audits of our financial statements and internal control over financial reporting will be reduced."

Mr Shriner commented, "While many of these procedures are more common in larger, more complex institutions, I believe the Company as a whole, and consequently shareholders, will more than benefit in the long run from the comprehensive review of our loans and deposits, as well as the efficiencies we will pick up from the implementation of these enhancements to our internal controls.  Apart from this expense, I was pleased with our quarterly results.  Net income, adjusted for the additional expense, would have been $1.1 million, or $0.21 per diluted share, as compared to $1.0 million, or $0.19 per diluted share, for the first quarter of 2018. Asset quality continues to improve as well."

Highlights for the quarter:

• Return on average assets was 0.36% for the three months ended March 31, 2019 compared to 0.74% for the three months ended March 31, 2018 and return on average equity was 3.05% for the three months ended March 31, 2019 compared to 5.65% for the three months ended March 31, 2018.
  
  
• Net interest margin decreased five basis points to 3.19% for the quarter ended March 31, 2019 from 3.24% for the quarter ended March 31, 2018.
  
  
• The efficiency ratio, which is calculated by dividing non-interest expense by the sum of net interest income and non-interest income, was 83.83% for the quarter ended March 31, 2019 as compared to 66.29% for the quarter ended March 31, 2018.
  
  
• Non-performing assets represented 0.68% of total assets at March 31, 2019 compared with 0.71% at December 31, 2018. The allowance for loan losses as a percentage of total non-performing loans was 147.38% at March 31, 2019 compared to 136.83% at December 31, 2018.
  
  
• The Company’s balance sheet at March 31, 2019 reflected a decline in total assets of $16.4 million compared to December 31, 2018, improved asset quality, and capital levels that exceeded regulatory standards for a well-capitalized institution.
  
  
• The effective tax rate increased to 31.1% for the quarter ended March 31, 2019 compared to 28.5% for the quarter ended March 31, 2018.

Net Interest Income

Total interest income for the three months ended March 31, 2019 increased $679,000, or 12.5%, to $6.1 million compared to $5.4 million for the first quarter of 2018. Interest income increased in the quarter ended March 31, 2019 compared to the comparable period in 2018, primarily due to a $18.9 million increase in average loan balances. Total interest expense increased by $558,000, or 49.5%, to $1.7 million, for the three months ended March 31, 2019 compared to the same period in 2018 due to a combination of higher deposit rates and an increase in the average balance of borrowings outstanding during the 2019 period.

Net interest income for the three months ended March 31, 2019 increased $121,000, or 2.8%, to $4.4 million compared to $4.3 million for the same three-month period in 2018. The change for the three months ended March 31, 2019 was primarily a result of an increase in average earning assets of $23.8 million partially offset by decreasing margin. The annualized net interest spread was 2.94% and 3.07% for the three months ended March 31, 2019 and 2018, respectively. For the quarter ended March 31, 2019, the Company's annualized net interest margin decreased to 3.19% compared to 3.24% for the corresponding three-month period in 2018.

Provision for Loan Losses

The loan loss provision for the three months ended March 31, 2019 was zero compared to $90,000 for the same period in 2018.  The decrease in the level of provision for loan loss primarily reflects lower loan growth in the current period in addition to the improvement of other credit metrics year over year.

Non-Interest Income and Non-Interest Expense

Non-interest income for the three months ended March 31, 2019 was $190,000, as compared to $204,000 for the same period in 2018 primarily due to a decrease in fees and service charges.  Non-interest expense, which consists of salaries and employee benefits, occupancy expense, professional services and other non-interest expenses totaled $3.9 million for the quarter ended March 31, 2019 as compared to $3.0 million for the same period in 2018. The increase in non-interest expense was primarily related to an increase professional service expense. As the Company previously disclosed, in connection with the audit, management and outside auditors identified certain material weaknesses in internal control.

Taxes

For the three months ended March 31, 2019, the Company recorded a $232,000 tax provision compared to $407,000 for the three months ended March 31, 2018. The effective tax rate increased to 31.1% for the quarter ended March 31, 2019 compared to 28.5% for the quarter ended March 31, 2018.

Quarterly Earnings Summary

The following table presents condensed consolidated statements of income data for the periods indicated.

Condensed Consolidated Statements of Income (unaudited)

(dollars in thousands, except for per share data)

Statement of Condition Highlights at March 31, 2019

• Total assets amounting to $568.1 million at March 31, 2019, a decrease of $16.4 million, or 2.81%, compared to December 31, 2018.
  
  
• The Company’s total gross loans receivable were $495.1 million at March 31, 2019, a decrease of $12.9 million, or 2.5%, from December 31, 2018.
  
  
• Securities held to maturity were $37.0 million at March 31, 2019, a decrease of $2.5 million, or 6.3%, compared to December 31, 2018.
  
  
• Deposits increased $12.2 million or 2.89%, to $432.8 million at March 31, 2019 compared to $420.6 million at December 31, 2018.
  
  
• Borrowings totaled $64.3 million at March 31, 2019, a decrease of $30.0 million, or 31.8%, compared to $94.3 million at December 31, 2018.

The following table presents condensed consolidated statements of condition data as of the dates indicated.

Condensed Consolidated Statements of Condition (unaudited)

(in thousands)

Loans

At March 31, 2019, the Company’s net loan portfolio totaled $489.4 million, a decrease of $12.9 million, or 2.6%, compared to $502.3 million at December 31, 2018.  The allowance for loan losses amounted to $5.7 million at March 31, 2019 and December 31, 2018.

At March 31, 2019, the loan portfolio primarily consisted of commercial real estate loans (40.3%) and residential mortgages (32.2%). Commercial and industrial loans represented 20.2% of the portfolio while construction loans accounted for 7.3% of the portfolio. Total gross loans receivable decreased $6.0 million to $513.1 million at March 31, 2019 compared to $519.1 million at December 31, 2018. The decrease primarily reflects a $10.8 million decrease in commercial and industrial - secured loans and a $6.0 million decrease in commercial real estate loans. Additionally there was a $2.6 million decrease in residential mortgages as the Company continues to focus on commercial lending.  Offsetting these decreases was an increase in the construction loan portfolio of $7.7 million compared to December 31, 2018.

The following table shows the composition of the Company's loan portfolio as of the dates indicated.

Loans (unaudited)

(dollars in thousands)

Asset Quality

At March 31, 2019 and December 31, 2018 non-performing loans totaled $3.8 million and $4.1 million, or 0.68% and 0.71% of total assets, respectively.  Nonperforming loans decreased slightly since year end as one relationship was resolved in the quarter.  Total delinquent loans (including nonperforming delinquent loans) were $5.8 million at March 31, 2019, a decrease of $476,000 from December 31, 2018 due to a decrease in loans past due 90 days or more.  The allowance for loan losses as a percentage of total loans was 1.14% and 1.11% at March 31, 2019 and at December 31, 2018, respectively, while the allowance for loan losses as a percentage of non-performing loans increased to 147.38% at March 31, 2019 from 136.83% at December 31, 2018. Non-performing loans to total loans decreased to 0.78% at March 31, 2019 from 0.81% at December 31, 2018 primarily due to a decrease in nonperforming loans.

The following table presents the components of non-performing assets and other asset quality data for the periods indicated.

?(dollars in thousands, unaudited)?

Deposits

Total deposits at March 31, 2019 increased to $432.8 million from $420.6 million compared to year-end 2018.  Certificates of deposits (including IRAs) and non-interest demand balances increased $18.7 million and $2.7 million, respectively.  Certificates of deposits increased to $139.6 million compared to $120.9 million at year end while non-interest demand deposit account balances increased to $49.4 million compared to $46.7 million.  Additionally, money market balances increased $1.0 million to $17.2 million compared to $16.2 million at year-end 2018.  Offsetting these increases was a decline in interest demand deposit account balances of $10.7 million to $123.4 million at March 31, 2019 from $134.1 million from year end at December 31, 2018.

The following table shows the composition of the Company's deposits as of the dates indicated.

Deposits (unaudited)

(dollars in thousands)

Capital

At March 31, 2019, the Company's total stockholders' equity amounted to $66.9 million, or 11.77% of total assets, compared to $66.6 million at December 31, 2018.  The Company’s book value per common share was $12.46 at March 31, 2019, compared to $12.37 at December 31, 2018. The increase in shareholders' equity was primarily due to net income of $514,000, offset by the repurchase of 22,200 shares common stock during the quarter at a total cost of $398,000, with the remaining difference related to ESOP, restricted stock and stock option accounting activity.

At March 31, 2019, the Bank’s common equity tier 1 ratio was 12.25%, tier 1 leverage ratio was 10.86%, tier 1 capital ratio was 12.25% and the total capital ratio was 13.38%. At December 31, 2018, the Bank’s common equity tier 1 ratio was 11.90%, tier 1 leverage ratio was 10.71%, tier 1 capital ratio was 11.90%, and the total capital ratio was 13.00%.  At March 31, 2019, the Bank was in compliance with all applicable regulatory capital requirements.

The following table sets forth the Company's consolidated average statements of condition for the periods presented.

Condensed Consolidated Average Statements of Condition (unaudited)

(dollars in thousands)

Non-GAAP Financial Measures

This release references adjusted net income, which is a non-GAAP (Generally Accepted Accounting Principles) financial measure.  Adjusted net income is derived from GAAP net income less the $862,000 in additional expenses associated with the expanded audit scope and identification of material weaknesses and tax effected rate of 31%.  We believe the presentation of adjusted net income is appropriate as it better enables an investor to analyze the performance of our core business year over year without the impact of unusual items.

The following tables reconcile adjusted net income to net income and adjusted diluted earnings per share to diluted earnings per share:

Forward Looking Statement Disclaimer

The foregoing release may contain forward-looking statements concerning the financial condition, results of operations and business of the Company. We caution that such statements are subject to a number of uncertainties and actual results could differ materially, and, therefore, readers should not place undue reliance on any forward-looking statements. Factors that may cause actual results to differ from those contemplated include our continued ability to grow the loan portfolio, the impact of the passage of the Tax Cuts and Jobs Act, our continued ability to manage cybersecurity risks and our continued ability to successfully remediate our identified internal control weaknesses.