FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
| Maryland | 38-3203510 |
| (State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification Number) |
| Park and Kalamazoo Avenue, N.E., Marshall, Michigan | 49068 |
| (Address of principal executive offices) | (ZIP Code) |
Registrant's telephone number, including area code:(616) 781-5103
As of May 12, 2001, there were 1,243,575 shares of the Registrant's common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
MSB FINANCIAL, INC.
INDEX
| PART I. | FINANCIAL INFORMATION | 1 |
| Item 1. | Financial Statements (Unaudited) | 1 |
| Condensed Consolidated Balance Sheets | 1 | |
| Condensed Consolidated Statements of Income | 2 | |
| Condensed Consolidated Statements of Changes in Shareholders' Equity | 3 | |
| Condensed Consolidated Statements of Cash Flows | 4 | |
| Notes to Condensed Consolidated Financial Statements | 5 | |
| Item 2. | Management's Discussion and Analysis or Plan of Operation | 8 |
| PART II. | OTHER INFORMATION | 13 |
| SIGNATURES | 14 | |
| EXHIBIT INDEX | 15 | |
| March 31, 2001 | June 30, 2000 | |
| (Unaudited) | ||
| ASSETS | ||
| Cash and due from financial institutions | $1,684,378 | $1,989,335 |
| Interest-bearing deposits in other financial institutions | 1,378,307 | 1,113,043 |
| Total cash and cash equivalents | 3,062,685 | 3,102,378 |
| Securities held to maturity (fair value of $1,424 at March 31, 2001 and $2,798 at June 30, 2000) | 1,424 | 2,79 8 |
| Loans held for sale | 769,000 | 94,000 |
| Loans receivable, net of allowance for loan losses of $547,297 at March 31, 2001 and $513,159 at June 30, 2000 | 85,755,857 | 85,379,295 |
| Federal Home Loan Bank stock | 1,426,600 | 1,425,500 |
| Accrued interest receivable | 619,321 | 566,906 |
| Premises and equipment, net | 772,545 | 599,770 |
| Mortgage servicing rights | 321,469 | 303,649 |
| Other assets | 1,994,800 | 1,770,699 |
| Total Assets | $94,723,701 | $93,244,995 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||
| Liabilities | ||
| Deposits | $51,227,388 | $49,557,945 |
| Federal Home Loan Bank advances | 27,007,384 | 27,986,459 |
| Advance payments by borrowers for taxes and insurance | 461,818 | 671,608 |
| Accrued interest payable | 162,721 | 136,480 |
| Accrued expenses and other liabilities | 1,165,467 | 802,817 |
| Total Liabilities | 80,024,778 | 79,155,309 |
| Shareholders' equity | ||
| Preferred stock, $.01 par value: 2,000,000 shares authorized; none outstanding | ||
| Common stock, par value $.01: 4,000,000 shares authorized; 1,630,981 shares issued and 1,243,575 shares outstanding at March 31, 2001 and 1,630,981 shares issued and 1,265,825 shares outstanding at June 30, 2000 | 16,310 | 16,310 |
| Additional paid-in capital | 9,743,962 | 9,706,788 |
| Retained earnings, substantially restricted | 9,061,952 | 8,368,824 |
| Unearned Employee Stock Ownership Plan shares | (157,414) | (198,486) |
| Unearned Recognition and Retention Plan shares | (30,983) | (57,912) |
| Treasury stock at cost - 387,406 shares at March 31, 2001 and 365,156 shares at June 30, 2000 | (3,934,904) | (3,745,838) |
| Total Shareholders' Equity | 14,698,923 | 14,089,686 |
| Total Liabilities & Shareholders' Equity | $94,723,701 | $93,244,995 |
| Nine Months | Three Months | |||
| 2001 | 2000 | 2001 | 2000 | |
| Interest and dividend income | ||||
| Loans receivable, including fees | $5,516,169 | $4,995,096 | $1,822,841 | $1,699,257 |
| Securities held to maturity | 99 | 293 | 26 | 153 |
| Other interest and dividend income | 156,253 | 130,855 | 51,154 | 49,393 |
| 5,672,521 | 5,126,244 | 1,874,021 | 1,748,803 | |
| Interest Expense Deposits | 1,508,724 | 1,245,282 | 501,556 | 424,412 |
| Federal Home Loan Bank advances | 1,304,767 | 1,242,404 | 419,621 | 430,922 |
| Other interest expense | 20,017 | 13,788 | 6,681 | 5,568 |
| 2,833,508 | 2,501,474 | 927,858 | 860,902 | |
| Net interest income | 2,839,013 | 2,624,770 | 946,163 | 887,901 |
| Provision for loan losses | 36,000 | 54,000 | 24,000 | 18,000 |
| Net interest income after provision for loan losses | 2,803,013 | 2,570,770 | 922,163 | 869,901 |
| Noninterest income Loan servicing fees, net | 37,766 | 51,840 | 8,804 | 18,221 |
| Net gains on sales of loans held for sale | 144,926 | 72,889 | 59,805 | 20,776 |
| Service charges on deposit accounts | 169,310 | 128,315 | 58,362 | 37,453 |
| Profit on sale of real estate owned | -- | 2,761 | -- | -- |
| Other income | 195,434 | 149,807 | 64,277 | 46,817 |
| 547,436 | 405,612 | 191,248 | 123,267 | |
| Noninterest expense Salaries and employee benefits | 786,907 | 742,666 | 269,825 | 225,262 |
| Occupancy and equipment expense | 206,241 | 195,207 | 67,516 | 61,972 |
| Data processing expense | 160,000 | 111,803 | 51,383 | 41,251 |
| Y2K expense | -- | 13,451 | -- | 175 |
| Federal deposit insurance premiums | 28,814 | 36,103 | 9,709 | 9,450 |
| Director fees | 77,745 | 94,891 | 21,450 | 31,672 |
| Correspondent bank charges | 28,038 | 27,021 | 9,168 | 8,303 |
| Provision to adjust loans held for sale to lower of cost or market | -- | 54,139 | -- | 16,292 |
| Michigan Single Business tax | 54,000 | 46,000 | 17,000 | 16,000 |
| Professional fees | 89,207 | 78,611 | 27,311 | 18,106 |
| Other expense | 356,969 | 347,176 | 106,921 | 104,009 |
| 1,787,921 | 1,747,068 | 580,283 | 532,492 | |
| Income before federal income tax expense | 1,562,528 | 1,229,314 | 533,128 | 460,676 |
| Federal income tax expense | 545,000 | 430,000 | 185,000 | 159,000 |
| Net income | $ 1,017,528 | $ 799,314 | $ 348,128 | $ 301,676 |
| Basic earnings per common share | $ 0.85 | $ 0.67 | $ 0.29 | $ 0.25 |
| Weighted average common shares outstanding | 1,195,995 | 1,192,795 | 1,197,244 | 1,201,073 |
| Diluted earnings per common share | $ 0.84 | $ 0.66 | $ 0.29 | $ 0.25 |
| Weighted average common shares and dilutive potential common shares outstanding | 1,210,106 | 1,219,629 | 1,219,101 | 1,215,758 |
| Common Stock | Additional Paid-In Capital | Retained Earnings | Unallocated Employee Stock Ownership Plan Shares | Unearned Recognition and Retention Plan Shares | Treasury Stock | Total Shareholders' Equity | |
| Balance, June 30, 1999 | $ 16,313 | $ 9,655,006 | $ 7,623,538 | $ (256,668) | $ (85,372) | $ (3,771,341) | $ 13,181,476 |
| Net income | -- | -- | 799,314 | -- | -- | -- | 799,314 |
| Cash dividends declared on common stock, net of dividends on unearned ESOP Shares ($.255 per share) | -- | -- | (305,438) | -- | -- | -- | (305,438) |
| 9,594 shares committed to be released under the ESOP | -- | 55,218 | -- | 43,653 | -- | -- | 98,871 |
| Issuance of 6,353 common shares from treasury stock due to exercise of stock options | -- | (7,623) | - -- | -- | -- | 52,730 | 45,107 |
| Amortization of RRP shares | -- | -- | -- | -- | 49,160 | -- | 49,160 |
| Forfeiture of 318 RRP shares | (3) | (2,247) | -- | -- | 2,250 | -- | -- |
| Issuance of 4,000 RRP Shares | -- | 7,550 | -- | -- | (40,750) | 33,200 | -- |
| Repurchase of 5,780 shares of Common Stock | -- | -- | -- | -- | -- | (60,427) | (60,427) |
| Balances, March 31, 2000 | $ 16,310 | $ 9,707,904 | 8,117,414 | $ (213,015) | $ (74,712) | $ (3,745,838) | $13,808,063 |
| Balances, June 30, 2000 | $ 16,310 | $ 9,706,788 | $ 8,368,824 | $ (198,486) | $ (57,912) | $ (3,745,838) | $14,089,686 |
| Net income | -- | -- | 1,017,528 | -- | -- | -- | 1,017,528 |
| Cash dividends declared on common stock, net of dividends on unearned ESOP shares ($.27 per share) | -- | -- | (324,400) | -- | -- | -- | (324,400) |
| 9,028 shares committed to be released under the ESOP | -- | 38,374 | -- | 41,072 | -- | -- | 79,446 |
| Issuance of 1,000 common shares from treasury stock due to exercise of stock options | -- | (1,200) | -- | -- | -- | 8,300 | 7,100 |
| Amortization of RRP shares | -- | -- | -- | -- | 26,929 | -- | 26,929 |
| Repurchase of 23,250 shares of common stock | -- | -- | -- | -- | -- | (197,366) | (197,366) |
| Balances, March 31, 2001 | $ 16,310 | $ 9,743,962 | $ 9,061,952 | $ (157,414) | $ (30,983) | $ (3,934,904) | $14,698,923 |
| 2001 | 2000 | |
| Cash flows from operating activities | ||
| Net income | $1,017,528 | $ 799,314 |
| Adjustments to reconcile net income to net cash from operating activities | ||
| Provision for loan losses | 36,000 | 54,000 |
| Provision to adjust loans held for sale to lower of cost or market | -- | 54,139 |
| Depreciation | 108,135 | 113,198 |
| Amortization of mortgage servicing rights | 53,331 | 38,068 |
| Employee Stock Ownership Plan expense | 79,446 | 98,871 |
| Recognition and Retention Plan expense | 26,929 | 49,160 |
| Originations of loans held for sale | (8,159,635) | (3,688,768) |
| Proceeds from sales of loans held for sale | 7,558,410 | 3,877,027 |
| Net gains on sales of loans held for sale | (144,926) | (72,889) |
| Change in assets and liabilities | ||
| Accrued interest receivable | (52,415) | (30,052) |
| Other assets | (224,101) | (490,778) |
| Accrued interest payable | 26,241 | 25,179 |
| Accrued expenses and other liabilities | 362,650 | 135,533 |
| Net cash from operating activities | 687,593 | 962,002 |
| Cash flows from investing activities | ||
| Principal paydowns on mortgage-backed securities | 1,374 | 1,689 |
| Purchase of Federal Home Loan Bank stock | (1,100) | (155,000) |
| Net change in loans | (412,562) | (6,402,198) |
| Net purchases of premises and equipment | (280,910) | (43,577) |
| Net cash from investing activities | (693,198) | (6,599,086) |
| Cash flows from financing activities | ||
| Net change in deposits | 1,669,443 | 2,350,927 |
| Proceeds from Federal Home Loan Bank advances | 26,000,000 | 19,600,000 |
| Repayments on Federal Home Loan Bank advances | (26,979,075) | (15,618,263) |
| Net change in advance payments by borrowers for taxes and insurance | (209,790) | (357,215) |
| Cash dividends paid | (324,400) | (305,438) |
| Repurchase of common stock | (197,366) | (60,427) |
| Exercise of stock options | 7,100 | 45,107 |
| Net cash from financing activities | (34,088) | 5,654,691 |
| Net change in cash and cash equivalents | (39,693) | 17,607 |
| Cash and cash equivalents at beginning of period | 3,102,378 | 2,612,258 |
| Cash and cash equivalents at end of period | $3,062,685 | $2,629,865 |
| Supplemental disclosures of cash flow information | ||
| Cash paid during the period for: | ||
| Interest | $2,807,267 | $2,476,295 |
| Income taxes | 570,000 | 440,000 |
| Supplemental disclosure of noncash investing activities Transfer from loans held for sale to loans held to maturity | -- | 2,795,178 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements include the accounts of MSB Financial, Inc. and its wholly-owned subsidiary, Marshall Savings Bank, F.S.B. after the elimination of significant intercompany transactions and accounts. The initial capitalization of MSB Financial and its acquisition of Marshall Savings Bank took place on February 6, 1995.
These interim financial statements are prepared in accordance with the Securities and Exchange Commission's rules for quarterly financial information without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly our financial position at March 31, 2001 and the results of operations and its cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying condensed consolidated financial statements do not purport to contain all the necessary disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances and should be read in conjunction with the consolidated financial statements and notes included in the annual report of MSB Financial, Inc. for the year ended June 30, 2000. The results of the periods presented are not necessarily representative of the results of operations and cash flows which may be expected for the entire year.
The provision for income taxes is based upon the effective tax rate expected to be applicable for the entire year.
Certain reclassifications were made to the 2000 condensed consolidated financial statements to conform to the 2001 presentation.
NOTE 2 - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators used in the computation of the basic earnings per common share and diluted earnings per common share is presented below for the six and three month periods ended March 31, 2001 and 2000 :
| Nine Months | Three Months | |||
| 2001 | 2000 | 2001 | 2000 | |
| Basic Earnings Per Common Share | ||||
| Numerator | ||||
| Net Income | $1,017,528 | $ 799,314 | $ 348,128 | $ 301,676 |
| Denominator | ||||
| Weighted average common shares outstanding | 1,246,786 | 1,262,619 | 1,243,308 | 1,265,895 |
| Less: Average unallocated ESOP Shares | (39,180) | (51,684) | (36,171) | (48,486) |
| Less: Average nonvested RRP Shares | (11,611) | (18,140) | (9,893) | (16,336) |
| Weighted average common shares outstanding for basic earnings per common shares | 1,195,995 | 1,192,795 | 1,197,244 | 1,201,073 |
| Basic earnings per common share | $ .85 | $ .67 | $ .29 | $ .25 |
| Diluted Earnings Per Common Share | ||||
| Numerator | ||||
| Net Income | $1,017,528 | $ 799,314 | $ 348,128 | $ 301,676 |
| Denominator | ||||
| Weighted average common shares outstanding for basic earnings per common share | 1,195,995 | 1,192,795 | 1,197,244 | 1,201,073 |
| Add: Dilutive effects of average nonvested RRP shares, net of tax benefits | 2,278 | 4,930 | 3,254 | 1,604 |
| Add: Dilutive effects of assumed exercises of stock options | 11,833 | 21,904 | 18,603 | 13,081 |
| Weighted average common shares and dilutive potential common shares outstanding | 1,210,106 | 1,219,629 | 1,219,101 | 1,215,758 |
| Diluted earnings per common share | $ 0.84 | $ 0.66 | $ 0.29 | $ 0.25 |
Stock options for 81,748 shares of common stock for the nine and three month periods ending March 31, 2001, respectively, and stock options for 83,508 and 85,891 shares of common stock for both the nine and three month periods ending March 31, 2000, were not considered in computing diluted earnings per common shares because they were not dilutive.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows for the nine and three month periods ended March 31, 2001 and 2000:
| Nine Months | Three Months | |||
| 2001 | 2000 | 2001 | 2000 | |
| Balance at beginning of period | $513,159 | $452,308 | $523,255 | $490,014 |
| Provision for loan losses | 36,000 | 54,000 | 24,000 | 18,000 |
| Recoveries | 403 | 3,062 | 42 | 177 |
| Charge-offs | (2,265) | (1,857) | -- | (678) |
| Balance at end of period | $547,297 | $507,513 | $547,297 | $507,513 |
NOTE 4 - SECONDARY MORTGAGE MARKET ACTIVITIES
The following summarizes our secondary mortgage market activities for the nine and three month periods ended March 31, 2001 and 2000:
| Nine Months | Three Months | |||
| 2001 | 2000 | 2001 | 2000 | |
| Loans originated for resale, net of principal paydowns | $8,159,635 | $3,688,768 | $3,751,254 | $1,067,967 |
| Loans transferred to held to maturity | -- | 2,795,178 | -- | 2,795,178 |
| Proceeds from sales of loans originated for resale | 7,558,410 | 3,877,026 | 3,410,734 | 924,913 |
| Gain on sales of loans originated for resale | 144,926 | 72,889 | 59,805 | 20,776 |
| Portion of gain resulting from costs allocated to mortgage servicing rights | 71,151 | 38,040 | 30,525 | 9,040 |
| Loan servicing fees, net | 37,766 | 51,840 | 8,804 | 18,221 |
Loans held for sale balances at March 31, 2001 and June 30, 2000 were $769,000 and $94,000, respectively. There was no allowance to adjust loans held for sale to lower of aggregate cost or market at March 31, 2001 and June 30, 2000.
Mortgage loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances on these loans at March 31, 2001 and June 30, 2000 are summarized as follows:
| March 31, 2001 | June 30, 2000 | |
| Mortgage loan portfolios serviced for FHLMC | $49,157,000 | $47,094,000 |
Custodial escrow balances maintained in connection with the foregoing serviced loans at March 31, 2001 and June 30, 2000 were $209,000 and $280,000, respectively.
NOTE 5 - REPURCHASES OF COMMON STOCK
There were no repurchases of our common stock during the quarters ended March 31, 2001 and March 31, 2000. On March 22, 2000 the Board of Directors approved a plan to repurchase up to 5%, or 63,291 shares, of our common stock. Under this repurchase program, which expired March 22, 2001, we repurchased a total of 23,250 shares at a total cost of $197,366 or $8.49 per share. At March 31, 2001 there was no repurchase plan in place. As of March 31, 2001, a total of 403,806 shares of common stock had been repurchased at a total cost of $4,071,008, or $10.08 per share.
Item 2. Management's Discussion and Analysis or Plan of Operations
MSB Financial, Inc. was formed as a Delaware corporation in September 1994 to act as the holding company for Marshall Savings Bank, F.S.B. upon the completion of Marshall Savings' conversion from the mutual to the stock form. MSB Financial received approval from the Office of Thrift Supervision to acquire all of the common stock of Marshall Savings to be outstanding upon completion of the conversion. The conversion was completed on February 6, 1995. On December 8, 1998, shareholders approved a proposal to reincorporate MSB Financial from the State of Delaware to the State of Maryland. The following discussion compares the consolidated financial condition of MSB Financial and Marshall Savings at March 31, 2001 to June 30, 2000 and the results of operations for the three and nine month periods ended March 31, 2001 with the same periods ended March 31, 2000. This discussion should be read in conjunction with the condensed consolidated financial statements and footnotes included herein. References in this Form 10-QSB to "we", "us" and "our" refer to MSB Financial and/or Marshall Savings as the context requires.
Forward-Looking Statements Disclosure
We may from time to time make written or oral "forward-looking statements". These forward-looking statements may be contained in our Quarterly Reports on Form 10-QSB and the exhibits, filings with the Securities and Exchange Commission and in other communications by us, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The words "may", "could", "should, "would", "believe", "anticipate", "estimate", "expect", "intend", "plan", and similar expressions are intended to identify forward-looking statements.
Forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions as of the date of this document and are subject to significant risks and uncertainties. The following factors, many of which are subject to change based on various other factors beyond our control, could cause our financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements:
The list of important factors stated above is not exclusive. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of MSB Financial or Marshall Savings.
Financial Condition
Total assets increased $1.5 million to $94.7 million from June 30, 2000 to March 31, 2001. Net loans, including loans held for sale, increased by $1.1 million or 1.2% for the period. This increase was funded by an increase of $1.7 million in deposits.
Total liabilities increased $869,000 to $80.0 million from June 30, 2000 to March 31, 2001. This increase primarily resulted from the increases in deposits discussed above. We also experienced increases in accrued interest payable of $26,000 and accrued expenses and other liabilities of $363,000. The increase in accrued expense and other liabilities was primarily due to an increase in funds due FHLMC on the pay off of serviced loans at quarter end with funds remitted after April 1, 2001. Offsetting the above increases in liabilities for the period were decreases in FHLB advances of $979,000 and advance payments by borrowers for taxes and insurance of $210,000. The decrease in FHLB advances was due to scheduled principal payments during the quarter. Advanced payments by borrowers for taxes and insurance decreased due to the payment of property tax payments due December 31, 2000.
Net income, offset by the payment of dividends on common stock and common stock repurchases contributed to a net increase in shareholders' equity of $609,000.
Results of Operations
General.Our results of operations depend primarily upon the level of net interest income, which is the difference between the average yield earned on loans and securities, interest-bearing deposits, and other interest-earning assets, and the average rate paid on deposits and borrowed funds, as well as competitive factors that influence interest rates, loan demand, and deposit flows. Our results of operations are also dependent upon the level of our noninterest income, including fee income and service charges, and the level of our noninterest expense, including general and administrative expenses. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-bearing liabilities mature or reprice at different times, or on a different basis, than our interest-earning assets.
Net Income.Net income for the three months ended March 31, 2001 was $348,000, 15.4% higher than net income of $302,000 for the same period ended March 31, 2000. Net income for the nine month period ended March 31, 2001 was $1.0 million, 27.3% higher than net income of $799,000 for the same period in 2000. Reasons for the increases in net income are discussed in detail below.
Net Interest Income.Net interest income increased $58,000, or 6.6%, to $946,000 for the three month period ended March 31, 2001, as compared to the same three month period in 2000. For the nine month period ended March 31, 2001, net interest income increased $214,000, or 8.2%, to $2.8 million.
The increase in net interest income during the three and nine month periods ended March 31, 2001 was primarily the result of increases in loan interest and fees. Loan interest and fees increased $124,000 during the three month period ended March 31, 2001 compared to the three month period ended March 31, 2000. For the nine month period ended March 31, 2001 loan interest and fees increased $521,000, or 10.4%, as compared to the same period in 2000. The increase in loan interest and fees during both the three and nine month periods ended March 31, 2001 was the result of the increase in net loans receivables, as well as adjustable loans renewing at higher rates. The weighted average yield on the loan portfolio for the three month period ended March 31, 2001 increased 23 basis points to 8.44% from 8.21% for the same period ended March 31, 2000. For the nine month period ended March 31, 2001 the weighted average yield on the loan portfolio was 8.52%, compared to 8.19% for the same period ended March 31, 2000, an increase of 33 basis points.
Offsetting the changes in interest income mentioned above were increases in interest expense for the three and nine month periods ended March 31, 2001 of $67,000 and $332,000, respectively, when compared to the same periods ended March 31, 2000. The increases in interest expense were primarily a result of increases in interest paid on deposits due to increased average deposit balances and increased rates paid on certificates of deposits. For the three and nine month periods ended March 31, 2001 deposit interest expense increased $77,000 and $263,000, respectively, when compared to the same periods ended March 31, 2000. During the nine month period ended March 31, 2001 as compared to the same prior year period we experienced an increase of $62,000 in interest paid on Federal Home Loan Bank advances due to an increase in the average principal balance. During the three month period ended March 31, 2001 Federal Home Loan Bank advance interest expense decreased $11,000, when compared to the same 2000 period. This decrease was primarily the result of a decision by management to renew $2.0 million in Federal Home Loan Bank advance funds into two ten year putable advances with an average rate of 4.35%. Each advance has an initial call date one year after origination and quarterly thereafter.
Provision for Loan Losses.The provision for loan losses is a result of our periodic analysis of the adequacy of the allowance for loan losses. The provision for loan losses increased to $24,000 for the three month period ended March 31, 2001 as compared $18,000 for the three month period ended March 31, 2000, due to our continuing reassessment of losses inherent in the loan portfolio. At March 31, 2001, the allowance for loan losses totaled $547,000 or 0.63% of net loans receivable and 38% of total non-performing loans. At June 30, 2000, our allowance for loan losses totaled $513,000, or 0.60% of net loans receivable and 193% of total non-performing loans.
We have established an allowance for loan losses based on an analysis of risk factors in the loan portfolio. This analysis includes the evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio, estimated fair value of underlying collateral, delinquencies, and other factors. Accordingly, the calculation of the adequacy of the allowance for loan losses was not based directly on our level of non-performing assets.
Non-performing assets include non-accrual loans, loans 90 days or more delinquent and still accruing interest, foreclosed real estate and other repossessed assets. Loans greater than 90 days past due, and other designated loans of concern, are placed on non-accrual status, unless it is determined that the loans are well collateralized and in the process of collection. The following table presents non-performing assets for the periods indicated.
| March 31 2001 | June 30, 2000 | |
| Non-accrual loans | $ 898,780 | $ 80,491 |
| Loans past due 90 days or more and still accruing interest | 539,091 | 185,071 |
| Total non-performing loans | $1,437,871 | $ 265,562 |
| Foreclosed real estate and other repossessed assets | 57,480 | - |
| Total non-performing assets | $1,495,351 | $ 265,562 |
| Total non-performing loans as a percentage of total loans | 1.67% | 0.31% |
| Total non-performing assets as a percentage of total assets | 1.58% | 0.28% |
Non-performing loans at March 31, 2001 increased $1.2 million to $1.5 million as compared to June 30, 2000. This increase was primarily the result of twelve loans totaling $821,000 to a single borrower that were transferred to non-accrual status during the quarter ended March 31, 2001. Ten loans are secured by investment properties totaling $601,000, one loan is secured by residential property totaling $215,000 and another loan is secured by lawn equipment totaling $5,000. This borrower is currently reorganizing his debts through a Chapter 11 bankruptcy. Management feels that all loans to this borrower are well collateralized and does not expect to incur any losses.
We will continue to monitor the allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic conditions dictate. Although we maintain the allowance for loan losses at a level which we consider to be adequate to provide for losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, our determination as to the amount of the allowance for loan losses is subject to review by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation, as part of their examination process, which may result in the establishment of an additional allowance based upon their judgment of the information available to them at the time of their examination.
Noninterest Income. Noninterest income consists primarily of gains on the sale of loans, loan servicing fees, service charges on deposit accounts and other fees. Noninterest income increased $68,000 during the three month period ended March 31, 2001 compared to the three month period ended March 31, 2000. For the nine month period ended March 31, 2001, noninterest income increased $142,000 compared the nine month period ended March 31, 2000. The increase during the three and nine month periods ended March 31, 2001 was primarily due to increases in net gains on the sale of loans during the three and nine month periods ended March 31, 2001 of $39,000 and $72,000, respectively, due to increased sales of mortgage loans during these periods. We also experienced increases in service charges on deposit accounts during the three and nine month periods ended March 31, 2001 as compared to the same period during 2000 of $21,000 and $41,000, respectively. The increase in service charges on deposit accounts was primarily due to an increase in the fees accessed on demand deposit overdraft items, as well as a general increase in all deposit account fees effective September 1, 2000.
Noninterest Expense.Noninterest expense was $580,000 for the three month period ended March 31, 2001 compared to $532,000 reported for the same prior year period, a increase of $48,000 or 9.0%. Noninterest expense for the nine month period ended March 31, 2001 was $1.79 million compared to $1.75 million for the same period in 2000. The largest component of noninterest expense, salaries and employee benefits, increased $45,000 and $44,000, respectively, during the three and nine months periods ended March 31, 2001 as compared to the same periods in 2000. The increases in salaries and employee benefits were the results of hiring additional personnel. Data processing expense increased $48,000 during the nine month period ended March 31, 2001 compared to the same 2000 period. The increase in data processing expense was primarily the result of a prior period rebate from our data processor of $22,000 during the 2000 period, a change in our billing due date for data processing charges during the 2001 period which resulted in an extra monthly payment of $13,000 during the period, and new monthly charges related to our web-banking program totaling $5,000. We also recorded increases in noninterest expense during the nine month period ended March 31, 2001 of $8,000 in Michigan Single Business tax and $11,000 in occupancy and equipment expense. The above mentioned increases in noninterest expense were primarily offset by decreases in the provisions to adjust loans held for sale to the lower of cost or market during the three and nine months periods ended March 31, 2000 of $16,000 and $54,000, respectively, compared to no provisions during the same 2001 periods. We also recorded a decrease in director fees of $17,000 during the nine month period ended March 31, 2001 as compared to March 31, 2000, as a result of the vesting in 2000 of the final installment of RRP shares awarded to our directors in October 1995. We also recorded decreases in year 2000 expense of $13,000 and federal deposit insurance premium of $7,000 during the nine month period ended March 31, 2001.
Federal Income Tax Expense.Federal income tax expense increased $26,000 for the three month period and $115,000 for the nine month period ended March 31, 2001 compared to the same periods in 2000 due to increases in income before federal income tax expense.
Liquidity and Capital Resources
Our principal sources of funds are deposits, principal and interest repayments on loans, sales of loans, and Federal Home Loan Bank advances. While scheduled loan repayments are relatively predictable, deposit flows and early loan prepayments are influenced more by interest rates, general economic conditions and competition.
Liquidity management is both a daily and long term responsibility management. Investments in liquid assets are adjusted bases upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits in other financial institutions and securities, and the objective of our asset/liability management program. Excess liquidity is invested generally in interest-earning overnight deposits of the Federal Home Loan Bank of Indianapolis. We also use our borrowing capability through the Federal Home Loan Bank of Indianapolis to meet liquidity needs.
At March 31, 2001, we had advances from the Federal Home Loan Bank of Indianapolis of $27.0 million, used primarily to fund 15 year fixed-rate and adjustable-rate one- to four-family residential mortgage loans held in our portfolio. We also use our liquidity resources to meet ongoing commitments, to fund maturing certificates of deposit and deposit withdrawals, and to meet operating expenses. At March 31, 2001, we had outstanding commitments to extend credit which amounted to $6.4 million (including $3.9 million in available home equity lines of credit). We believe that loan repayments and other sources of funds, including Federal Home Loan Bank advances, will be adequate to meet our foreseeable liquidity needs.
Federal insured savings institutions are required to maintain a minimum level of regulatory capital. If the requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. As of March 31, 2001 and June 30, 2000 Marshall Savings was categorized as well capitalized. Our actual and required capital amounts and ratios at March 31, 2001 and June 30, 2000 are presented below:
| Actual | For Regulatory Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |
| (Dollars in Thousands) | ||||||
| As of March 31, 2001 | ||||||
| Tier 1 (Core) Capital (to adjusted total assets) | $ 10,786 | 11.45% | $ 3,770 | 4.0% | $ 4,712 | 5.0% |
| Tier 1 (Core) Capital (to risk weighted assets) | 10,786 | 18.39 | 2,346 | 4.0 | 3,520 | 6.0 |
| Total Capital (to risk weighted assets) | 11,334 | 19.32 | 4,693 | 8.0 | 5,866 | 10.0 |
| As of June 30, 2000 | ||||||
| Tier 1 (Core) Capital (to adjusted total assets) | $ 10,298 | 11.21% | $ 3,676 | 4.0% | $ 4,595 | 5.0% |
| Tier 1 (Core) Capital (to risk weighted assets) | 10,298 | 18.02 | 2,286 | 4.0 | 3,429 | 6.0 |
| Total Capital (to risk weighted assets) | 10,811 | 18.92 | 4,572 | 8.0 | 5,715 | 10.0 |
New Accounting Standards
A new accounting standard, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138, requires all derivatives to be recognized at fair value as either assets or liabilities in the consolidated balance sheets beginning with the quarter ended September 30, 2000. Changes in the fair value of derivatives not designated as hedging instruments are to be recognized currently in earnings. Gains or losses on derivatives designated as hedging instruments are either to be recognized currently in earnings or are to be recognized as a component of other comprehensive income (loss), depending on the intended use of the derivatives and the resulting designations. Adoption of this new standard did not have a material impact on our consolidated financial position or results of operations, as we do not have any derivative instruments to account for under provisions of this new accounting standard.
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
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 and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
None.
Pursuant to the requirement 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.
SIGNATURES
| MSB Financial, Inc. Registrant | |
| Date: May 14, 2001 | \s\Charles B. Cook Charles B. Cook, President and Chief Executive Officer (Duly Authorized Officer) |
| Date: May 14, 2001 | \s\Elaine R. Carbary Elaine R. Carbary, Chief Financial Officer (Principal Financial Officer) |
| Exhibit No. | Description |
| 3 | Registrant's Articles of Incorporation and Bylaws, filed on February 4, 1999 as exhibits to the Registrant's Registration Statement on Form S-8 (File No. 333-71837), are incorporated here in by reference. |
| 4 | Registrant's Specimen Stock Certificate, filed on February 4, 1999 as Exhibit 4 to the Registrant's Registration Statement on Form S-8 (File No. 333-71837), is incorporated herein by reference. |
| 10.1 | Employment Agreement between the Bank and Charles B. Cook, filed on September 23, 1995 as Exhibit 10.2 to Registrant's Registration Statement on Form S-1 (File No. 33-81312), is incorporated herein by reference. |
| 10.2 | Registrant's Employee Stock Ownership Plan, filed on September 23, 1995 as Exhibit 10.3 to Registrant's Registration Statement on Form S-1 (File No. 33-81312), is incorporated herein by reference. |
| 10.3 | Registrant's 1995 Stock Option and Incentive Plan, filed as Exhibit 10(b) to Registrant's Report on Form 10-KSB for the fiscal year ended June 30, 1995 (File No. 0-24898), is incorporated herein by reference. |
| 10.4 | Registrant's Recognition and Retention Plan, filed as Exhibit 10(c) to Registrant's Report on Form 10-KSB for the fiscal year ended June 30, 1995 (File No. 0-24898), is incorporated herein by reference. |
| 10.5 | Registrant's 1997 Stock Option and Incentive Plan, filed as Appendix A to Registrants Schedule 14A filed on September 26, 1997 (File No. 0-24898). |
| 11 | Statement re: computation of earnings per share (see Note 2 of the Notes to Condensed Consolidated Financial Statements) |
