MSBF - MSB Financial Corp. Releases Second Quarter Earnings

MILLINGTON, N.J., July 31, 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 and six months ended June 30, 2019.

The Company reported net income of $1.2 million, or $0.24 per diluted common share, for the three months ended June 30, 2019, compared to net income of $1.2 million, or $0.23 per diluted common share, for the three months ended June 30, 2018.  Net income for the six months ended June 30, 2019 was $1.7 million, or $0.33 per diluted common share, compared to net income of $2.3 million, or $0.41  per diluted common share, for the six months ended June 30, 2018.  The six months ended June 30, 2019 had been impacted by approximately $862,000 in additional 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 for the six months ended June 30, 2019 would have been $2.3 million or $0.45 per diluted share.

Highlights for the quarter:

• Return on average assets was 0.85% for the three months ended June 30, 2019 compared to 0.87% for the three months ended June 30, 2018 and return on average equity was 7.28% for the three months ended June 30, 2019 compared to 7.17% for the three months ended June 30, 2018.

• Net interest margin decreased three basis points to 3.21% for the quarter ended June 30, 2019 from 3.24% for the quarter ended June 30, 2018.

• The efficiency ratio, which is calculated by dividing non-interest expense by the sum of net interest income and non-interest income, was 62.97% for the quarter ended June 30, 2019 as compared to 62.49% for the quarter ended June 30, 2018.

• Non-performing assets represented 0.69% of total assets at June 30, 2019 compared with 0.71% at December 31, 2018. The allowance for loan losses as a percentage of total non-performing loans was 140.26% at June 30, 2019 compared to 136.83% at December 31, 2018.

• The Company’s balance sheet at June 30, 2019 reflected a decline in total assets of $3.0 million compared to December 31, 2018 due to a reduction in loans, offset by an increase in cash and cash equivalents, improved asset quality, and capital levels that exceeded regulatory standards for a well-capitalized institution.

• The effective tax rate increased to 28.5% for the quarter ended June 30, 2019 compared to 24.7% for the quarter ended June 30, 2018.

Net Interest Income

Total interest income for the three months ended June 30, 2019 increased $429,000, or 7.5%, to $6.2 million compared to $5.7 million for the second quarter of 2018. Interest income increased in the quarter ended June 30, 2019 compared to the comparable period in 2018, as a result of an increase in loan yields. Total interest expense increased by $449,000, or 34.4%, to $1.8 million, for the three months ended June 30, 2019 compared to the same period in 2018 due to higher interest rates on deposits and borrowings during the 2019 period.

Net interest income for the three months ended June 30, 2019 was flat at $4.4 million compared to the same three month period in 2018.  The annualized net interest spread was 2.94% and 3.05% for the three months ended June 30, 2019 and 2018, respectively. For the quarter ended June 30, 2019, the Company's annualized net interest margin decreased to 3.21% compared to 3.24% for the corresponding three-month period in 2018.

Total interest income for the six months ended June 30, 2019, increased $1.1 million, or 9.91%, to $12.3 million compared to $11.2 million for the six months ended June 30, 2018 as average earning assets increased $13.0 million year over year.  Total interest expense increased by $1.0 million, or 41.33%, to $3.4 million for the six months ended June 30, 2019 compared to June 30, 2018 as average interest bearing liabilities increased $4.8 million year over year and the average cost of such liabilities increased  43 basis points.

Net interest income grew $101,000, or 1.2%, to $8.8 million for the six months ended June 30, 2019 compared to $8.7 million for the six months ended June 30, 2018.  Net interest spread and net interest margin for the six months ended June 30, 2019, declined 13 and 4 basis points respectively, to 2.93% and 3.20% compared to 3.06% and 3.24% for the six months ended June 30, 2018.  Net interest income and net interest margin decreased as the Company's deposit pricing has become more competitive year over year.

Provision for Loan Losses

The loan loss provision for the three months ended June 30, 2019 was zero compared to $90,000 for the same period in 2018.     The loan loss provision for the six months ended June 30, 2019 was zero compared to $180,000 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 June 30, 2019 was $204,000, as compared to $208,000 for the same period in 2018.  Non-interest expense, which consists of salaries and employee benefits, occupancy expense, professional services and other non-interest expenses totaled $2.9 million for the quarter ended June 30, 2019 and the same period in 2018.

Non-interest income for the six months ended June 30, 2019 was $394,000, as compared to $412,000 for the same period in 2018.  Non-interest expense, totaled $6.8 million for the six months ended June 30, 2019 as compared to $5.9 million for the same period in 2018.  The increase in non-interest expense was primarily related to an increase in professional service expense.

Taxes

For the three months ended June 30, 2019, the Company recorded a $487,000 tax provision compared to $407,000 for the three months ended June 30, 2018. The effective tax rate increased to 28.5% for the quarter ended June 30, 2019 compared to 24.7% for the quarter ended June 30, 2018.

For the six months ended June 30, 2019, the Company recorded a $719,000 tax provision compared to a provision of $814,000 for the six months ended June 30, 2018. The effective tax rate increased to 29.3% for the six months ended June 30, 2019 compared to 26.4% for the six months ended June 30, 2018.

Quarterly Earnings Summary

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

Statement of Condition Highlights at June 30, 2019

• Total assets amounted to $581.5 million at June 30, 2019, a decrease of $3.0 million, or 0.52%, compared to December 31, 2018.

• The Company’s total loans receivable, excluding the ALLL, were $499.9 million at June 30, 2019, a decrease of $8.1 million, or 1.6%, from December 31, 2018.

• Securities held to maturity were $39.5 million at June 30, 2019, unchanged when compared to December 31, 2018.

• Deposits decreased $4.0 million, or 0.94%, to $416.6 million at June 30, 2019 compared to $420.6 million at December 31, 2018.

• Borrowings totaled $95.1 million at June 30, 2019, an increase of $800,000, or 0.85%, compared to $94.3 million at December 31, 2018.

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

Loans

At June 30, 2019, the Company’s net loan portfolio totaled $494.2 million, a decrease of $8.1 million, or 1.6%, compared to $502.3 million at December 31, 2018.  The allowance for loan losses amounted to $5.7 million at June 30, 2019 and December 31, 2018.

At June 30, 2019, the loan portfolio primarily consisted of commercial real estate loans 39.9% and residential mortgages 31.2%. Commercial and industrial loans represented 20.6% of the portfolio while construction loans accounted for 8.1% of the portfolio. Total gross loans receivable increased $1.7 million to $520.8 million at June 30, 2019 compared to $519.1 million at December 31, 2018. The slight increase primarily reflects an increase in commercial loans of $6.9 million and a decrease of $5.0 million in residential mortgages as the Company continues to focus on commercial lending.

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

Asset Quality

At June 30, 2019 and December 31, 2018 non-performing loans totaled $4.0 million and $4.1 million, or 0.69% 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 $5.7 million at June 30, 2019, a decrease of $538,000 from December 31, 2018.  The allowance for loan losses as a percentage of total loans was 1.13% and 1.11% at June 30, 2019 and at December 31, 2018, respectively, while the allowance for loan losses as a percentage of non-performing loans increased to 140.26% at June 30, 2019 from 136.83% at December 31, 2018. Non-performing loans to total loans was 0.81% at June 30, 2019 and December 31, 2018, respectively.

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

Deposits

Total deposits at June 30, 2019 decreased to $416.6 million from $420.6 million compared to year-end 2018.  Certificates of deposits (including IRAs) and non-interest demand balances increased $27.6 million and $3.1 million, respectively.  Certificates of deposits increased to $148.5 million compared to $120.9 million at year end while non-interest demand deposit account balances increased to $49.8 million compared to $46.7 million at December 31, 2018.  Additionally, money market balances increased $2.6 million to $18.8 million  compared to $16.2 million at year-end 2018.  Offsetting these increases was a decline in interest-bearing demand deposit account balances of $32.4 million to $101.7 million at June 30, 2019 from $134.1 million at December 31, 2018.

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

Capital

At June 30, 2019, the Company's total stockholders' equity amounted to $66.4 million, or 11.42% of total assets, compared to $66.6 million at December 31, 2018.  The Company’s book value per common share was $12.64 at June 30, 2019, compared to   $12.37 at December 31, 2018. The decrease in stockholders' equity was primarily due to the repurchase of 131,400 shares for $2.2 million during the year, with the remaining difference related to ESOP, restricted stock and stock option accounting activity, partially offset by net income of $1.7 million from the period.

At June 30, 2019, the Bank’s common equity tier 1 ratio was 11.31%, tier 1 leverage ratio was 10.36%, tier 1 capital ratio was 11.31% and the total capital ratio was 12.41%. 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 June 30, 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.

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 at a 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:

CEO Outlook

"Our 2nd quarter expense levels have returned to normal as compared to last quarter. Our earnings are also back to recent trends now that the Company has addressed the internal control deficiencies identified during the previous quarter,” stated Michael A. Shriner, President and Chief Executive Officer.  Mr. Shriner added, “Management and staff are once again focused on growing the Company through prudent underwriting, sensible deposit offerings and balance sheet repositioning, especially within the current interest rate environment.”

Mr. Shriner further stated “Although the Company maintains a relatively neutral interest rate sensitivity position, management will remain watchful of additional interest rate moves and incorporate counter measures to help minimize any dramatic impact to our 2019 strategic plan.”

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.