SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-24898
MSB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland 38-3203510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization 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
Check 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 [X] No [ ]
As of February 11, 1999, there were 1,309,621 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
Consolidated Condensed Statements of Financial Condition............. 1
Consolidated Condensed Statements of Income.......................... 2
Consolidated Condensed Statements of Shareholders' Equity............ 3
Consolidated Condensed Statements of Cash Flows...................... 4
Notes to Consolidated Condensed Financial Statements................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................6-10
PART II. OTHER INFORMATION.................................. 11
SIGNATURES......................................... 12
EXHIBIT INDEX...................................... 13
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF
FINANCIAL CONDITION December
31, 1998 and June 30, 1998
- ----------------------------------------------------------------------------------------------------------------------
December 31, June 30,
1998 1998
(Unaudited)
ASSETS
Cash and due from financial institutions $ 1,727,378 $ 2,286,520
Interest-bearing deposits 1,738,467 994,193
--------------- ----------------
Total cash and cash equivalents 3,465,845 3,280,713
Securities held to maturity (fair value of $6,459 at
December 31, 1998 and $8,102 at June 30, 1998) 6,459 8,102
Loans held for sale 2,777,555 295,300
Loans receivable, net of allowance for loan losses of
$417,093 at December 31, 1998 and $391,148 at June 30, 1998 74,440,388 73,065,017
Federal Home Loan Bank stock 1,270,500 1,158,200
Accrued interest receivable 422,876 419,847
Premises and equipment, net 662,704 648,878
Mortgage servicing rights 267,220 177,006
Other assets 947,293 913,650
--------------- ----------------
Total Assets $ 84,260,840 $ 79,966,713
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 44,563,220 $ 42,815,148
Federal Home Loan Bank Advance 25,163,279 21,971,976
Advance payments by borrowers for taxes and insurance 181,288 524,739
Accrued interest payable 106,865 93,114
Accrued expenses and other liabilities 793,672 1,249,043
--------------- ----------------
Total Liabilities 70,808,324 66,654,020
Shareholders' equity
Preferred stock, $.01 par value: 2,000,000 shares
authorized; none outstanding
Common stock, par value $.01: 4,000,000 shares authorized; 1,631,315 shares
issued and 1,313,141 shares outstanding at December 31, 1998 and
1,631,315 shares
issued and 1,338,051 shares outstanding at June 30, 1998 16,313 16,313
Additional paid-in capital 9,614,841 9,533,274
Retained earnings, substantially restricted 7,347,846 6,970,925
Unallocated Employee Stock Ownership Plan shares (287,779) (318,181)
Unearned Recognition and Retention Plan shares (116,050) (146,728)
Less cost of Common Stock in Treasury- 319,494 shares at
December 31, 1998 and 293,264 shares at June 30, 1998 (3,122,655) (2,742,910)
---------------- -----------------
Total Shareholders' Equity 13,452,516 13,312,693
--------------- ----------------
Total Liabilities & Shareholders' Equity $ 84,260,840 $ 79,966,713
=============== ================
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME Six months and three
months ended December 31, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Six Months Three Months
---------- ------------
1998 1997 1998 1997
---- ---- ---- ----
Interest and dividend income
Loans, including fees $ 3,270,388 $ 3,120,736 $ 1,646,429 $ 1,581,029
Securities held to maturity 241 365 115 175
Other interest and dividends 103,810 102,977 54,292 55,389
-------------- -------------- -------------- ---------------
3,374,439 3,224,078 1,700,836 1,636,593
Interest Expense
Deposits 815,809 791,560 412,868 399,951
Federal Home Loan Bank Advance 751,431 659,993 388,048 338,472
Other interest expense 7,188 4,764 3,753 2,563
-------------- -------------- -------------- ---------------
1,574,428 1,456,317 804,669 740,986
-------------- -------------- -------------- ---------------
Net interest income 1,800,011 1,767,761 896,167 895,607
Provision for loan losses 36,000 40,000 18,000 15,000
-------------- -------------- -------------- ---------------
Net interest income after provision
for loan losses 1,764,011 1,727,761 878,167 880,607
Non-interest income
Loan servicing fees 21,810 38,771 2,044 17,665
Gain on sales of loans 184,110 111,300 107,193 68,711
Service fees on deposit accounts 86,439 75,976 42,878 41,372
Profit on sale of real estate owned 26,967 10,666 26,967
Other 90,195 68,716 46,033 35,997
-------------- -------------- -------------- ---------------
409,521 305,429 225,115 163,745
Non-interest expense
Salaries and employee benefits 527,144 499,310 264,620 254,087
Buildings, occupancy and equipment 139,189 99,202 71,005 49,167
Data processing 100,413 91,360 52,710 47,746
Year 2000 expense 15,367 6,790
Federal deposit insurance premiums 26,352 25,954 13,041 13,012
Director fees 61,069 62,044 31,572 31,572
Correspondent bank charges 27,117 28,703 12,982 14,304
Michigan Single Business tax 36,000 35,000 19,000 17,000
Advertising expense 55,599 31,852 25,080 12,166
Professional fees 98,745 54,465 54,355 30,066
Other 206,218 181,360 115,630 100,812
-------------- -------------- -------------- ---------------
1,293,213 1,109,250 666,785 569,932
-------------- -------------- -------------- ---------------
Income before federal income
tax expense 880,319 923,940 436,497 474,420
Federal income tax expense 315,000 325,000 156,000 166,000
-------------- -------------- -------------- ---------------
Net income 565,319 598,940 280,497 308,420
Other comprehensive income 0 0 0 0
-------------- -------------- -------------- ---------------
Comprehensive income $ 565,319 $ 598,940 $ 280,497 $ 308,420
============== ============== ============== ===============
Basic earnings per share $ 0.45 $ 0.48 $ 0.23 $ 0.25
============== ============== ============== ==============
Weighted average common shares outstanding 1,243,788 1,255,326 1,236,616 1,250,943
============== ============== ============== ===============
Diluted earnings per share $ 0.44 $ 0.46 $ 0.22 $ 0.24
============== ============== ============== ===============
Weighted average common and diluted
Potential common shares outstanding 1,295,411 1,301,768 1,287,179 1,304,453
============== ============== ============== ===============
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF
SHAREHOLDERS' EQUITY Six months
ended December 31, 1998 and 1997
(Unaudited)
------------------------------------------------------------------------------------------
Unallocated Unearned
Additional Employee Stock Recognition Common Total
Common Paid-In Retained Ownership and Retention Stock in Shareholders'
Stock Capital Earnings Plan Shares Plan Shares Treasury Equity
----- ------- -------- ----------- ----------- -------- ------
Balance, July 1, 1997 $ 14,830 $ 7,096,776 $8,372,493 $ (383,006) $ (208,084) $(2,202,813) $12,690,196
Net income 598,940 598,940
Shares committed to be
released (7,128 shares)
under the Employee Stock
Ownership Plan (ESOP) 72,360 32,400 104,760
Shares earned under the RRP 30,678 30,678
Cash dividends declared
on common stock, net
of dividends on unallocated
ESOP Shares (162,185) (162,185)
Repurchase of 16,500 shares
of Common Stock (225,000) (225,000)
Issuance of 3,177 common
shares from treasury
stock due to exercise
of stock option (3,791) 26,353 22,562
--------- ---------- ---------- --------- ---------- ---------- ----------
Balances, December 31, 1997 $ 14,830 $7,165,345 $8,809,248 $(350,606) $ (177,406) $(2,401,460) $13,059,951
========= ========== ========== ========= ========== =========== ==========
Balances, July 1, 1998 $ 16,313 $9,533,274 $6,970,925 $(318,181) $(146,728) $(2,742,910) $13,312,693
Net income 565,319 565,319
Shares committed to be
released (6,682 shares)
under the Employee Stock
Ownership Plan (ESOP) 81,798 30,402 112,200
Shares earned under the RRP 30,678 30,678
Cash dividends declared
on common stock, net
of dividends on
unallocated ESOP shares (188,398) (188,398)
Repurchase of 26,230 shares
of Common Stock (379,745) (379,745)
Payment of Fractional
Shares on 10% Dividend (231) (231)
--------- ---------- ---------- --------- ---------- ---------- ----------
Balances, December 31, 1998 $16,313 $9,614,841 $7,347,846 $(287,779) $(116,050) $(3,122,655) $13,452,516
========= ========== ========== ========= ========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS Six months ended
December 31, 1998 and 1997
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
Cash flows from operating activities
Net income $ 565,319 $ 598,940
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 36,000 40,000
Depreciation 69,077 45,266
Amortization of mortgage servicing rights 24,197 5,370
Employee Stock Ownership Plan expense 112,200 104,760
Recognition and Retention Plan expense 30,678 30,678
Originations of loans held for sale (14,030,959) (6,402,472)
Proceeds from sales of loans held for sale 11,508,431 6,345,916
Net gains on sales of loans held for sale (184,138) (111,428)
Change in assets and liabilities
Accrued interest receivable (3,029) (13,284)
Other assets (33,643) 18,703
Accrued interest payable 13,751 12,607
Other expense and other liabilities (455,371) 227,995
--------------- ---------------
Net cash from operating activities (2,347,487) 903,051
Cash flows from investing activities
Principal paydowns on mortgage-backed securities 1,643 1,692
Purchase of FHLB stock (112,300) (19,400)
Net increase in loans (1,301,371) (2,872,462)
Net purchases of premises and equipment (82,903) (93,534)
--------------- ----------------
Net cash used in investing activities (1,494,931) (2,983,704)
Cash flows from financing activities
Net increase in deposits $ 1,748,072 $ 651,709
Proceeds from Federal Home Bank advances 6,000,000 11,000,000
Repayments on Federal Home Bank advances (2,808,697) (9,210,633)
Decrease in advance payments
by borrowers for taxes and insurance (343,451) (305,654)
Payment of dividends on common stock (188,629) (162,185)
Repurchase of common stock (379,745) (225,000)
Exercise of stock options 22,562
-------------- ---------------
Net cash from financing activities 4,027,550 1,770,799
-------------- ---------------
Net change in cash and cash equivalents 185,132 (309,854)
Cash and cash equivalents at beginning of period 3,280,713 3,080,612
-------------- ---------------
Cash and cash equivalents at end of period $ 3,465,845 $ 2,770,758
============== ===============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 1,560,677 $ 1,438,946
Income taxes 345,000 402,956
Supplemental disclosure of noncash investing activities
Transfer from loans held for sale to loans held to maturity $ 110,000
- --------------------------------------------------------------------------------
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Six months ended December 31,1998
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated condensed financial statements include the
accounts of MSB Financial, Inc. (the "Company") and its wholly-owned subsidiary,
Marshall Savings Bank, F.S.B. ("Bank") after the elimination of significant
intercompany transactions and accounts. The initial capitalization of the
Company and its acquisition of the 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 the financial position of the Company at
December 31, 1998 and the results of its operations and its cash flows for the
periods presented. All such adjustments are normal and recurring in nature. The
accompanying consolidated condensed 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 thereto
included in the annual report of MSB Financial, Inc. for the year ended June 30,
1998. 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.
Basic and diluted earnings per share for the periods presented in 1998 and 1997
were computed under a new accounting standard effective in the quarter ended
December 31, 1997. Basic earnings per share is based on net income divided by
the weighted average number of common shares outstanding during the period,
adjusted for Employee Stock Ownership Plan (ESOP) shares not committed for
release and Recognition and Retention Plan (RRP) shares not yet vested. Diluted
earnings per share shows the dilutive effect of additional common shares
issuable under stock option plans. Net income was $565,319 and $280,497 for the
six month and three month periods ended December 31, 1998. The weighted average
number of common shares outstanding for the six and three month periods ended
December 31, 1998, were 1,243,788 and 1,236,616, respectively. The weighted
average of number of common and diluted potential common shares outstanding for
the six and three months ended December 31, 1998, were 1,295,411 and 1,287,179,
respectively. For the six month and three month periods ended December 31, 1997,
respectively, net income was $598,940 and $308,420. The weighted average number
of common shares outstanding for the six and three month periods ended December
31, 1997, were 1,255,326 and 1,250,943, respectively. The weighted average
number of common and diluted potential common shares outstanding for the six and
three month periods ended December 31, 1997, were 1,301,768 and 1,304,453,
respectively.
NOTE 2 - REPURCHASES OF COMMON STOCK
During the quarter ended December 31, 1998, the Company repurchased 21,120
shares of its common stock at a total cost of $305,020, or $14.44 per share, as
compared to 16,500 shares during the quarter ended December 31, 1997, at a total
cost of $225,000 or $13.64 per share. On February 11, 1997, the Company received
OTS approval to repurchase up to 5%, or 67,738 shares, of its common stock.
Approval to repurchase these shares expired on February 11, 1999, with a total
of 46,470 shares repurchased at a total cost of $688,055 or $14.81 per share. As
of December 31, 1998 a total of 322,671 shares of the Company's common stock had
been repurchased at a total cost of $3,149,000, or $9.76 per share.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
MSB Financial, Inc. (the "Company") was incorporated under the laws of
the State of Delaware for the purpose of becoming the savings and loan holding
company of Marshall Savings Bank, F.S.B. (the "Bank") in connection with the
Bank's conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion"). On February 6, 1995 the
Conversion was completed and the Bank became a wholly-owned subsidiary of the
Company. On December 8, 1998 the Company received shareholders approval and
changed its state of incorporation from Delaware to Maryland. The following
discussion compares the consolidated financial condition of the Company and the
Bank at December 31, 1998 to June 30, 1998 and the results of operations for the
three and six month periods ended December 31, 1998 with the same periods ended
December 31, 1997. This discussion should be read in conjunction with the
consolidated condensed financial statements and footnotes included herein.
Forward-Looking Statements
When used in this Quarterly Report of Form 10-QSB or future filings by
the Company with the Securities and Exchange Commission, in the Company's press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimated", "project", "believe" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors including
regional and national economic conditions, Year 2000 readiness of the Company
and its service providers, changes in levels of market interest rates, credit
risks of lending activities, and competitive and regulatory factors could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Financial Condition
Total assets increased $4.3 million to $84.3 million from June 30, 1998
to December 31, 1998. Net loans, including loans held for sale, increased by
$3.9 million, or 5.2% for the period, due primarily to the strong demand for
mortgage loans, especially residential 1-4 family construction loans, in the
Company's market areas. This increase was primarily funded by an increase of
$3.2 million in Federal Home Loan Bank advances.
Total liabilities increased $4.2 million to $70.8 million from June 30,
1998 to December 31, 1998. In addition to the increase in the Federal Home Loan
Bank advances discussed above, were increases in deposits of $1.7 million and
accrued interest payable of $14,000. Offsetting the above increases in
liabilities for the period were decreases in advance payments by borrowers for
taxes and insurance of $343,000 and accrued expenses and other liabilities of
$455,000.
The repurchase of the Company's common stock, payment of dividends
declared on common stock, and net income resulted in a net increase in
shareholders' equity of $140,000.
Results of Operations
General. The Company's results of operations depend primarily upon the level of
net interest income, which is the difference ("spread") 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. Results of operations are also dependent upon the
level of the Company's non-interest income, including fee income and service
charges, and the level of its non-interest expense, including general and
administrative expenses. The Company, like other financial institutions, is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different times, or on a different basis, than
its interest-earning assets.
Net Income. Net income for the three months ended December 31, 1998 was
$280,000, 9.1% lower than net income of $308,000 for same period ended December
31, 1997. Net income for the six month period ended December 31, 1998 was
$565,000, 5.6% lower than net income of $599,000 for the same period in 1997.
Reasons for the declinces in net income are discussed in detail below.
Net Interest Income. Net interest income of $896,000 for the three month period
ended December 31, 1998 remained unchanged as compared to the three month period
ended December 31, 1997. For the six month period ended December 31, 1998 net
interest income increased $32,000, or 1.8%, to $1.8 million. The increase in net
interest income for the six month period was primarily a result of a $63,000
increase in fee income for the 1998 period. This increase in fee income was due
to increased loan sales during the six month period ended December 31, 1998
which resulted in a faster acceleration into income of deferred loan fees as
compared to the same period in 1997. The weighted average yield on the loan
portfolio for the three month period ended December 31, 1998 decreased 24 basis
points to 8.59% from 8.83% for the same period ended December 31, 1997. For the
six month period ended December 31, 1998 the weighted average yield on the loan
portfolio was 8.65%, compared to 8.82% for the same period ended December 31,
1997, a decrease of 17 basis points. The decreases in weighted average yields
are the result of adjustable rate mortgage loans renewing at lower rates.
Interest expense increased $64,000 for three month period ended December 31,
1998 and increased $118,000 for the six month period ended December 31, 1998 as
compared to the same periods in 1997. These increases are attributable to an
increase in interest paid on Federal Home Loan Bank advances, due to increased
advance balances, for the three month and six month periods ended December 31,
1998 of $50,000 and $91,000, respectively, when compared to the same periods
ended December 31, 1997.
Provision for Loan Losses. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
The provision for loan losses increased by $3,000 to $18,000 for the three month
period ended December 31, 1998 as compared to the three month period ended
December 31, 1997, due to management's continuing reassessment of losses
inherent in the loan portfolio. At December 31, 1998 the Company's allowance for
loan losses totaled $417,000 or 0.54% of net loans receivable and 54.16% of
total non-performing loans. At June 30, 1998, the Company's allowance for loan
losses totaled $391,000, or 0.54% of net loans receivable and 62.28% of total
non-performing loans.
Management establishes 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, loan commitments outstanding, delinquencies, and other
factors. Because the Company has had extremely low loan losses during its
history, management also considers loss experience of similar portfolios in
comparable lending markets. Accordingly, the calculation of the adequacy of the
allowance for loan losses was not based directly on the level of non-performing
assets.
As of December 31, 1998, the Company's non-performing assets,
consisting of nonaccrual loans and accruing loans 90 days or more delinquent,
totaled $770,000, or 1.00% of total loans, compared to $628,000, or 0.86% of
total loans as of June 30, 1998, an increase of $142,000. 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. There was no real estate owned at December 31, 1998.
Management 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 the Company maintains its allowance for
loan losses at a level which it considers 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, management's determination as to the amount of the
allowance for loan losses is subject to review by the Office of Thrift
Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC), 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 fees on deposit accounts and other fees.
Noninterest income increased $61,000 during the three month period ended
December 31, 1998 compared to the three month period ended December 31, 1997.
For the six month period ended December 31, 1998 noninterest income increased
$104,000 compared the six month period ended December 31, 1997. The increase for
the six month period ended December 31, 1998 was primarily due to an increase in
gains on sale of loans of $73,000, due to increased sales of mortgage loans
during the period. Other increases included deposit account service fees of
$10,000 and profit on sale of real estate owned of $16,000. Offsetting the above
mentioned increases was a decrease in loan servicing fee income of $17,000 for
the six month period ended December 31, 1998 as compared to the same period in
1997. This decrease is due to increased mortgage refinancing activity which has
resulted in an increased amortization expense of mortgage servicing rights. No
other significant changes in the components of non-interest income.
Noninterest Expense. Noninterest expense was $667,000 for the three month period
ended December 31, 1998 compared to $570,000 reported for the same prior year
period, an increase of $97,000 or 17.0%. Noninterest expense for the six month
period ended December 31, 1998 was $1.3 million compared to $1.1 million for the
same period in 1997, an increase of 16.6%. Increases in noninterest expense for
the six month period included increases in professional fees of $44,000, a
result of the Company's recent reincorporation from a Delaware into a Maryland
corporation, and in building, occupancy and equipment expense of $40,000, due to
increased depreciation expense for software, teller operating system and
equipment upgrades. The largest component on noninterest expense, salaries and
employee benefits, increased $11,000 and $28,000 for the three month and six
month periods ended December 31, 1998, respectively, compared to the same
periods during 1997. Significant factors causing the increase in salaries and
employee benefits were the addition of another full-time employee during 1998
period and increases in expenses associated with the Company's benefit plans.
Income Tax Expense. Income tax expense decreased $10,000 for the three and six
month periods ended December 31, 1998 compared to the same periods in 1997 due
to the decrease in net income. The Company's effective tax rate remains at
approximately 34%.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits, principal and
interest repayments on loans, sales of loans, interest-bearing deposits and
securities available for sale. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and early loan prepayments
are more influenced by interest rates, general economic conditions and
competition.
Federal regulations require the Bank to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 4% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and other
securities and obligations generally having remaining maturities of less than
five years. The Bank has maintained its liquidity ratio at levels in excess of
those required. At December 31, 1998, the Bank's liquidity ratio was 7.45%.
The Company uses its liquidity resources principally to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals
and to meet operating expenses. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. At December 31,
1998, the Company had outstanding commitments to extend credit which amounted to
$4.8 million (including $3.7 million in available home equity lines of credit).
At December 31, 1998, the Company had $25.2 million in advances from the FHLB of
Indianapolis outstanding. Management believes that loan repayments and other
sources of funds, including Federal Home Loan Bank borrowings, will be adequate
to meet the Company's foreseeable liquidity needs.
Federal insured savings institutions are required to maintain a minimum
level of regulatory capital. The OTS has established capital standards,
including a tangible capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to such savings
associations. These capital requirements must be generally as stringent as the
comparable capital requirements for national banks. The OTS is also authorized
to impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
As of December 31, 1998, the Bank had tangible capital and Tier 1
(core) capital of $10.0 million, or 11.8% or adjusted total assets, which was
approximately $8.7 million and $7.5 million above the minimum requirements of
1.5% and 3.0%, respectively, of the adjusted total assets in effect on that
date. As of December 31, 1998, the Bank had Tier 1 (core) capital of $10.0
million, or 11.9% of average total assets, which was approximately $6.6 million
above the minimum requirement of 4.0% of average total assets in effect on that
date. On December 31, 1998, the Bank had risk-based capital of $10.4 million
(including $10.0 million in core capital), or 20.0% of risk-weighted assets of
$52.1 million. This amount was $6.2 million above the 8.0% requirement in effect
on that date.
Year 2000 Issue
The approach of the year 2000 presents potential problems to businesses
that utilize computers in their daily operations. Some computer systems may not
be able to properly interpret dates after December 31, 1999, because they use
only two digits to indicate the year in the date. Therefore, a date using "00"
as the year may be recognized as the year 1900 rather than the year 2000. See
"Forward-Looking Statements".
Financial institution regulators recently have increased their focus
upon year 2000 compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council has issued several interagency statements on
Year 2000 Project Management Awareness. These statements require financial
institutions to, among other things, examine the year 2000 issue on their
customers, suppliers and borrowers. These statements also require each federally
insured regulated financial institution to survey its exposure, measure its risk
and prepare a plan to address the year 2000 issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions, such as the Bank, to assure resolution of any
year 2000 problems. The federal banking agencies have asserted that year 2000
testing and certification is a key safety and soundness issue in conjunction
with regulatory exams and, thus, that an institution's failure to address
appropriately the year 2000 issue could result in supervisory action, including
the reduction of the institution's supervisory ratings, the denial of
applications for approval of mergers or acquisitions, or the imposition of civil
money penalties.
The Company has formed a Year 2000 Committee (the "Committee") to
address the potential problems associated with the Year 2000 computer issue. The
Committee, consisting of directors, officers and employees of the Company, meets
on a regular basis and provides regular reports to the Board of Directors
detailing progress with the Year 2000 issue.
The Company's primary computer processing is provided by a data center,
and through this data center the Company migrated to a new Year 2000 compliant
teller/bank operation platform in November 1998. To ensure that readiness of
this system, the Company will perform testing of actual customer data on a
separate system in March 1999. As of December 31, 1998, all in-house computer
systems have been inspected and their risk of a Year 2000 failure identified.
Also, all company software is being evaluated through vendor ensured readiness
statements and testing by the Committee. The Company does not use any
custom-programmed software. Another area under review are systems which utilize
embedded microchips (such as in heating, ventilation and air conditioning
systems, security and other related systems). Venders for these systems have
been contacted and have indicated Year 2000 risks to be minimal.
With an issue as complex as the Year 2000, the Company believes
education of employees, customers and community members is vital to a better
understanding of what real dangers are posed by the arrival of the Year 2000.
Education has been provided through in-house training sessions, literature to
customers, as well as seminars offered to the community. Additional information
has been provided through the Company's internet site in the form of links to
various Year 2000 information sites.
Costs to the Company related to the Year 2000 issue are estimated to be
between $50,000 and $60,000. To date the following Year 2000 expenses have been
identified at approximately $40,000 for testing of the data center equipment and
programs, $3,000 for equipment upgrades and $2,000 for employee and community
education. It is impossible to predict the exact expenses associated with the
Year 2000 issue and additional funds may be needed for unknown expenses related
to Year 2000 testing, training, and education, as well as system and software
replacements.
As with any organization that depends on technology, particularly
computer systems and software, a Year 2000 related failure poses a significant
threat to continued business operations. While the Company is doing everything
in its power to ensure Year 2000 readiness, we recognize that the success of our
third party providers is vital to our success. Of primary concern are local
utility and telecommunication companies. These, in addition to our third parties
such as our data center, electronic banking service providers and financial
partners, have been contacted and we are monitoring their progress towards their
own Year 2000 readiness. Another potential risk to the Corporation includes
lending and deposit relationships. The Committee is currently evaluating these
two groups and assessing any potential risks, as well as establishing any
necessary corrective procedures. There can be no assurance that the systems of
these third parties will be converted on a timely basis, which could have
material adverse affect on our business, financial condiation and results of
operations.
The Committee is currently in the process of establishing a contingency
plan to address potential Year 2000 problems. Despite careful planing by the
Corporation, we recognize there may be circumstances beyond our control that may
prohibit us from operating "as usual" after December 31, 1999.
PART II. OTHER INFORMATION
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
The Annual Shareholders' Meeting of MSB Financial, Inc. was
held on December 8, 1998 in Marshall, Michigan. At that
meeting the shareholders elected the following persons to
three year terms to the Board of Directors. Aart VanElst by a
vote of 973,889 for and 66,084 against. John W. Yakimow by a
vote of 986,209 for and 53,764 against. Shareholders ratified
the Reincorporation Proposal of change the Company's state of
incorporation from Delaware to Maryland by a vote of 808,772
for, 61,863 against, 4,576 abstentions and 164,662 non-votes.
Also approved was the appointment of Crowe, Chizek and
Company, L.L.P., as independent auditors for the Company for
the fiscal year ending June 30, 1999, with a vote of 985,424
for, 50,028 against and 4,521 abstentions.
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.
SIGNATURES
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.
MSB Financial, Inc.
Registrant
Date: February 12, 1999 \s\Charles B. Cook
----------------------------------------
Charles B. Cook, President and Chief
Executive Officer (Duly Authorized
Officer)
Date: February 12, 1999 \s\Elaine R. Carbary
----------------------------------------
Elaine R. Carbary, Chief Financial
Officer (Principal Financial Officer)
MSB FINANCIAL, INC.
EXHIBIT INDEX
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 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.
10.3 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.
11 Statement re: computation of per earnings per share (see Note
1 of the Notes to Consolidated Financial Statements contained
in this Form 10-QSB).
27 Financial Data Schedule (electronic filing only).