1
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 March 31, 1997
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)
DELAWARE 38-3203510
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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 May 9, 1997, there were 629,036 shares of the Registrant's common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
2
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................ 3-4
Consolidated Condensed Statements of Cash Flows.......................... 5-6
Notes to Consolidated Condensed Financial Statements..................... 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 10-12
PART II. OTHER INFORMATION............................................ 13
SIGNATURES................................................... 14
EXHIBIT INDEX................................................ 15
3
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
March 31, 1997 and June 30, 1996
March 31, June 30,
1997 1996
----------- -----------
(Unaudited)
ASSETS
Cash and due from financial institutions $1,686,679 $2,122,384
Interest-bearing deposits 5,746,192 57,676
----------- -----------
Total cash and cash equivalents 7,432,871 2,180,060
Securities available for sale 2,118,157
Securities held to maturity (fair value of $12,543 at
March 31,1997 and $1,016,926 at June 30,1996) 12,543 1,016,381
Loans, net 64,333,797 52,327,685
Loans held for sale 1,175,925 957,018
Federal Home Loan Bank stock 1,043,700 316,700
Premises and equipment, net 589,090 530,182
Accrued interest receivable 391,663 332,240
Other assets 650,122 352,072
----------- -----------
Total Assets $75,629,711 $60,130,495
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $41,376,730 $40,452,058
Federal Home Loan Bank Advance 20,873,600 6,000,000
Advance payments by borrowers for
taxes and insurance 264,997 406,201
Accrued interest payable 74,592 44,332
Accrued expenses and other liabilities 475,621 633,560
----------- -----------
Total Liabilities 63,065,540 47,536,151
Shareholders' equity
Preferred stock, $.01 par value: 2,000,000 shares
authorized; none outstanding
Common stock, par value $.01: 4,000,000 shares
authorized; 741,507 shares issued and outstanding
at March 31, 1997 and 740,785 shares issued and
outstanding at June 30, 1996 7,415 7,408
Additional paid-in capital 7,077,208 7,017,760
Retained earnings, substantially restricted 8,181,758 7,870,150
Net unrealized loss on securities available for sale,
net of tax benefit of $19,382 at June 30 (37,622)
----------- -----------
15,266,381 14,857,696
Unallocated Employee Stock Ownership Plan shares (400,278) (451,399)
Unearned Recognition and Retention Plan shares (223,087) (254,200)
Less cost of Common Stock in Treasury- 111,471 shares at
March 31 and 85,219 shares at June 30 (2,078,845) (1,557,753)
----------- -----------
Total Shareholders' Equity 12,564,171 12,594,344
----------- -----------
Total Liabilities and Shareholders' Equity $75,629,711 $60,130,495
=========== ===========
See accompanying notes to consolidated condensed financial statements.
1
4
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Nine months and three months ended March 31, 1997 and 1996
(Unaudited)
Nine Months Three Months
------------------------ -----------------------
1997 1996 1997 1996
----------- ----------- ----------- ---------
Interest and dividend income
Loans, including fees $3,892,199 $3,166,036 $1,365,410 $1,092,783
Securities available for sale 28,179 111,592 45,558
Securities held to maturity 5,455 37,937 226 14,435
Other interest and dividends 87,044 146,231 28,152 27,366
---------- ---------- ---------- ----------
4,012,877 3,461,796 1,393,788 1,180,142
Interest Expense
Deposits 1,153,947 1,162,526 381,198 376,430
Federal Home Loan Bank Advance 468,802 21,784 207,623 21,784
Escrows 4,257 1,502
---------- ----------- ---------- ----------
1,627,006 1,184,310 590,323 398,214
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,385,871 2,277,486 803,465 781,928
Provision for loan losses 27,000 18,000 9,000 6,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,358,871 2,259,486 794,465 775,928
Non-interest income
Loan servicing fees 64,722 71,082 21,167 23,931
Gain on sales of loans 24,501 30,390 8,766 15,194
Service fees on deposit accounts 93,648 69,542 35,316 24,307
Loss on sale of securities available
for sale (47,950) (12,203)
Other 93,485 77,579 36,816 27,017
---------- ---------- ---------- ----------
228,406 248,593 89,862 90,449
Non-interest expense
Salaries and employee benefits 626,050 554,965 214,100 196,908
Buildings, occupancy and equipment 147,383 126,725 48,178 45,203
Data processing 121,131 107,709 43,300 40,083
Federal deposit insurance premiums 65,171 85,428 12,164 28,849
Director fees 90,216 80,520 28,722 28,622
Correspondent bank charges 42,770 37,671 14,593 12,844
Michigan Single Business tax 41,550 42,450 16,000 14,500
Provision (recovery) to adjust loans held
for sale to lower of cost or market 7,615 (8,539) 21,260 17,451
SAIF special assessment 268,752
Other 358,598 302,772 108,659 98,080
---------- ---------- ---------- ----------
1,769,236 1,329,701 506,976 482,540
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 818,041 1,178,378 377,351 383,837
Federal income tax expense 281,500 401,500 132,000 131,500
---------- ---------- ---------- ----------
NET INCOME $ 536,541 $ 776,878 $ 245,351 252,337
========== ========== ========== ==========
Earnings per common and common
equivalent share $ 0.87 $ 1.16 $ 0.40 0.39
========== ========== ========== ==========
Average common and common
equivalent shares outstanding 613,590 669,959 607,520 651,822
========== ========== ========== ==========
See accompanying notes to consolidated condensed financial statements.
2
5
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine months ended March 31, 1997 and 1996
(Unaudited)
Net Unrealized
Additional Loss on Securities
Common Paid-In Retained Available for Sale,
Stock Capital Earnings Net of Tax
-------- ---------- ---------- -------------------
BALANCE, JULY 1, 1995 $7,220 $6,674,977 $7,139,068 $ (41,474)
Net income 776,878
Shares committed to be released (5,131 shares)
under the Employee Stock Ownership Plan (ESOP) 35,917
Issuance of 18,772 shares of restricted stock
under the Recognition and Retention
Plan (RRP) 188 293,125
Shares earned under the RRP
Cash dividends declared on common stock, net
of dividends on unallocated ESOP Shares (198,174)
Repurchase of 64,981 shares of Common Stock
Adjustment of cost on initial public offering 1,742
Change in unrealized loss on securities
available for sale 10,089
------ ---------- ---------- ---------
BALANCES, MARCH 31, 1996 $7,408 $7,005,761 $7,717,772 $ (31,385)
====== ========== ========== =========
Unallocated Unearned
Employee Stock Recognition Common Total
Ownership and Retention Stock in Shareholders'
Plan Shares Plan Shares Treasury Equity
----------- ------------- ------------ -------------
BALANCE, JULY 1, 1995 (519,850) $13,259,941
Net income 776,878
Shares committed to be released (5,131 shares)
under the Employee Stock Ownership Plan (ESOP) 51,310 87,227
Issuance of 18,772 shares of restricted stock
under the Recognition and Retention
Plan (RRP) (293,313)
Shares earned under the RRP 24,445 24,445
Cash dividends declared on common stock, net
of dividends on unallocated ESOP Shares (198,174)
Repurchase of 64,981 shares of Common Stock (1,214,637) (1,214,637)
Adjustment of cost on initial public offering 1,742
Change in unrealized loss on securities
available for sale 10,089
----------- ------------- ------------ -----------
BALANCES, MARCH 31, 1996 $ (468,540) $(268,868) $(1,214,637) $12,747,511
========== ============= ============ ===========
(Continued)
3
6
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine months ended March 31, 1997 and 1996
(Unaudited)
Net Unrealized
Additional Loss on Securities
Common Paid-In Retained Available for Sale,
Stock Capital Earnings Net of Tax
-------- ---------- ---------- -------------------
BALANCES, JULY 1, 1996 $ 7,408 $7,017,760 $7,870,150 $(37,622)
Net income 536,541
Shares committed to be released (5,112 shares)
under the Employee Stock Ownership Plan (ESOP) 46,007
Issuance of 722 shares of restricted stock
under the RRP 7 13,441
Shares earned under the RRP
Cash dividends declared on common stock, net
of dividends on unallocated ESOP shares (224,933)
Repurchase of 26,252 shares of Common Stock
Change in unrealized loss on securities
available for sale 37,622
-------- ---------- ---------- --------
BALANCES, MARCH 31, 1997 $ 7,415 $7,077,208 $8,181,758 $ 0
======== ========== ========== ========
Unallocated Unearned
Employee Stock Recognition Common Total
Ownership and Retention Stock in Shareholders'
Plan Shares Plan Shares Treasury Equity
-------------- ------------- ------------ -------------
BALANCES, JULY 1, 1996 $(451,399) $(254,200) $(1,557,753) $12,594,344
Net income 536,541
Shares committed to be released (5,112 shares)
under the Employee Stock Ownership Plan (ESOP) 51,121 97,128
Issuance of 722 shares of restricted stock
under the RRP (13,448)
Shares earned under the RRP 44,561 44,561
Cash dividends declared on common stock, net
of dividends on unallocated ESOP shares (224,933)
Repurchase of 26,252 shares of Common Stock (521,092) (521,092)
Change in unrealized loss on securities
available for sale 37,622
---------- ------------ ------------ -------------
BALANCES, MARCH 31, 1997 $ (400,278) $(223,087) $ (2,078,845) $12,564,171
========== ============ ============ =============
See accompanying notes to consolidated condensed financial statements.
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7
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 1997 and 1996
(Unaudited)
1997 1996
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $536,541 $776,878
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 27,000 18,000
Provision (recovery) to adjust loans held
for sale to lower of cost or market 7,615 (8,539)
Depreciation 77,490 67,375
Net amortization of premium 396 3,070
Employee Stock Ownership Plan expense 97,128 87,227
Recognition and Retention Plan expense 44,561 24,445
Originations of loans for sale (1,871,946) (3,755,695)
Proceeds from sales of loans originated for sale 1,622,438 4,655,831
Gain on sales of loans originated for sale (24,500) (30,380)
Loss on sales of securities available for sale 47,950
Stock dividend on securities available for sale (13,696)
Change in assets and liabilities
Accrued interest receivable (59,423) (67,811)
Loss on disposal of equipment 1,384
Other assets (269,482) (230,636)
Accrued interest payable 30,260 124
Other liabilities (157,939) (45,489)
------------ -----------
Net cash from operating activities 109,473 1,480,704
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 2,079,261
Proceeds from maturities of securities available for sale 500,000
Purchases of securities held to maturity (1,005,312)
Proceeds from maturities of securities held to maturity 1,000,000
Principal paydowns on mortgage-backed securities 3,442 4,510
Purchase of FHLB stock (727,000)
Net increase in loans (11,985,626) (6,317,987)
Purchases of premises and equipment (137,782) (231,963)
Proceeds from sale of premises and equipment 13,660
------------ -----------
Net cash used in investing activities (9,767,705) (7,037,092)
(Continued)
5
8
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 1997 and 1996
(Unaudited)
1997 1996
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) in advance payments
by borrowers for taxes and insurance $ (141,204) $ (111,812)
Net increase in deposits 924,672 1,426,144
Proceeds from Federal Home Bank Advance 14,873,600 2,000,000
Payment of dividends on common stock (224,933) (198,174)
Repurchase of Common Stock (521,092) (1,214,637)
Other 1,742
---------- -----------
Net cash from financing activities 14,911,043 1,903,263
---------- -----------
Net change in cash and cash equivalents 5,252,811 (3,653,125)
Cash and cash equivalents at beginning of period 2,180,060 5,823,872
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,432,871 $2,170,747
========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $1,592,489 $1,184,185
Income taxes 352,299 452,000
Supplemental disclosure of noncash investing activities
Transfer from loans held for sale to loans held to maturity $47,486 $447,093
See accompanying notes to consolidated condensed financial statements.
6
9
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Nine months ended March 31, 1997
(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 March
31, 1997 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, 1996. 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.
Earnings per common share for the periods presented in 1997 and 1996
were computed by dividing net income by the weighted average number of common
shares outstanding and common share equivalents which would arise from
considering dilutive stock options, less Employee Stock Ownership Plan (ESOP)
shares not committed to be released. Net income was $536,541 and $245,351 for
the nine month and three month periods ended March 31, 1997, respectively. The
weighted average number of shares outstanding for the nine and three month
periods were 613,590 and 607,520, respectively. For the nine month and three
month periods ended March 31, 1996, respectively, net income was $776,878 and
$252,337. The weighted average number of shares outstanding for the nine and
three month periods ended March 31, 1996 were 669,959 and 651,822,
respectively.
NOTE 2 - REPURCHASES OF COMMON STOCK
On November 17, 1995 the Company received a "no objection" letter from the
Office of Thrift Supervision to repurchase up to 9% (64,981 shares) of its
common stock in the open market over a twelve month period. As of March 31,
1996 the Company had completed the repurchase program with a total of 64,981
shares at an average price of $18.69 per share. On April 22, 1996, the Company
received OTS approval to repurchase up to 5% (33,790 shares) of its common
stock. As of January 31, 1997, the Company had completed this repurchase
program with a total of 33,890 shares at an average price of $17.70 per share.
On February 11, 1997, the Company received OTS approval to repurchase up to 5%
(32,132 shares) of its common stock. As of March 31, 1997, 12,600 shares had
been repurchased at an average price of $20.97 and therefore the Company has
remaining approval to repurchase up to 19,432 shares. Approval to repurchase
these shares expires on February 11, 1998.
(Continued)
7
10
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Nine months ended March 31, 1997
(Unaudited)
NOTE 3 - ACCOUNTING STANDARDS IMPLEMENTED IN FISCAL 1997
In March 1995, the FASB issued Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of (SFAS 121). SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of. The
Statement requires review of such assets whenever events of changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
adopted SFAS No. 121 effective July 1, 1996. Its adoption had no material
effect on the Company's consolidated financial position or results of
operations for the nine months ended March 31, 1997.
In May 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights (SFAS 122). This Statement changes the accounting for mortgage
servicing rights retained by the loan originator. Under this Statement, an
entity that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securities those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values. Under current practice, all such
cost are assigned to the loan. The cost allocated to mortgage servicing rights
are to be recorded as a separate asset and amortized in proportion to, and over
the life of, the net servicing income. The carrying value of the mortgage
servicing rights are to be periodically evaluated for impairment. The
Statement become effective for the Company as of July 1, 1996. The adoption of
SFAS No. 122 did not have a material effect on the Company's consolidated
financial position or results of operations for the nine months ended March 31,
1997.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based Compensation
(SFAS 123). SFAS No. 123 encourages, but does not require, entities to use a
fair value based method to account for stock-based compensation plans. If the
fair value accounting encouraged by SFAS No. 123 is not adopted, entities must
disclose the pro forma effect on net income and on earnings per common share
had the fair value accounting been adopted. The Corporation has elected to not
adopt SFAS No. 123. However, the Company will provide any required proforma
disclosures in any future complete consolidated financial statements. The
proforma disclosures are not required in noncomplete interim consolidated
financial statements.
(Continued)
8
11
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Nine months ended March 31, 1997
(Unaudited)
The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (SFAS 125). SFAS 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Example
transactions covered by SFAS No. 125 include asset securitizations, repurchase
agreements, wash sales, loan participations, transfers of loans with recourse
and servicing of loans. The Standard is based on a consistent application of a
financial-components approach that focuses on control. The Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The Statements also requires
measuring instruments that have a substantial prepayment risk at fair value,
much like debt instrument classified as available for sale or trading. While
SFAS No. 125 supersedes SFAS No. 122, Accounting for Mortgage Servicing, it
only marginally modifies the accounting and disclosure requirements described
by SFAS 122.
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128), which is
effective for financial statements beginning with year end 1997. SFAS 128
simplifies the calculation of earnings per share by replacing primary EPS with
basic EPS. It also requires dual presentation of basic EPS and diluted EPS for
entities with complex capital structures. Basic EPS includes no dilution and
is computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in earnings,
such as stock options, warrants or other common stock equivalents. The Company
expects SFAS 128 to have little impact on its earnings per share calculations
in future years, other than changing terminology from primary EPS to basic EPS.
All prior period EPS data will be restated to conform with the new
presentation.
9
12
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. The following discussion compares the consolidated financial
condition of the Company and the Bank at March 31, 1997 to June 30, 1996 and
the results of operations for the three and nine month periods ended March 31,
1997 with the same periods ended March 31, 1996. This discussion should be
read in conjunction with the consolidated condensed financial statements and
footnotes included herein.
Financial Condition
Total assets increased $15.5 million to $75.6 million from June 30, 1996
to March 31, 1997. Net loans, including loans held for sale, increased by
$12.2 million, or 22.9% for the period, due primarily to the Company's decision
to retain 15 year fixed rate residential loans in portfolio, and strong demand
for mortgage loans, especially residential 1-4 family construction loans, in
the Company's market area. This increase was funded by a $3.1 million, or 99.6%
decrease in securities available for sale and securities held to maturity, a
$925,000 increase in deposits and an increase of $14.9 million in Federal Home
Loan Bank advances. Securities available for sale decreased $2.1 million from
June 30, 1996 to March 31, 1997 due to sales during the period. Securities
held to maturity decreased $1.0 million from June 30, 1996 to March 31, 1997
due to a maturing U.S. Treasury security.
Total liabilities increased $15.5 million to $63.1 million from June
30, 1996 to March 31, 1997. Offsetting the increase in the FHLB advances
and deposits discussed above were advance payments by borrowers for taxes and
insurance which decreased $141,000, or 34.8%. Interest payable and other
liabilities also decreased $128,000, or 18.8%.
The repurchase of the Company's common stock, payment of dividends
declared on common stock, combined with a positive adjustment of net unrealized
loss on securities, and net income resulted in a net increase in shareholders'
equity of $30,000.
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 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 March 31, 1997 was $245,000,
2.8% lower than net income of $252,000 for the same period in 1996. Net
income for the nine month period ended March 31, 1997 was $537,000, 30.9% lower
than net income of $777,000 for the same period in 1996. The decline in net
income for the nine month period ended March 31, 1997 was related to the
special assessment by the SAIF of $170,000, net of taxes. Net income, without
the SAIF assessment, for the nine months ended March 31, 1997 was $707,000 as
compared to $777,000 for the same nine month period in 1996, resulting in a
decrease of $70,000, or 9.0%.
NET INTEREST INCOME. Net interest income increased $22,000, or 2.8%, to
$803,000 for the three month period ended March 31, 1997. For the nine month
period ended March 31, 1997 net interest income increased $108,000, or 4.8%, to
$2.4 million. The increases in net interest income for the three month and
nine month periods ended March 31, 1997 compared to the same periods in 1996
were primarily a result of an increase in interest income. Interest income
increased primarily due to the increase in net loans discussed above. The
weighted average yield on the loan portfolio for the three month period ended
March 31, 1997 decreased 67 basis
10
13
points to 8.45% from 9.12% for the same period ended March 31, 1996. For
the nine month period ended March 31, 1997 the weighted average yield on the
loan portfolio was 8.57%, compared to 9.09% for the same period last year, a
decrease of 52 basis points. The decreases in weighted average yield for the
periods discussed can be attributed to the increase in net loans held in
portfolio during the periods, a significant portion of which are adjustable
rate and 15 year mortgage loans, originated at interest rates below the
weighted average portfolio yield. Interest expense increased $192,000 for the
three month period ended March 31, 1997 and increased $443,000 for the nine
month period ended March 31, 1997 compared to the same periods in 1996. These
increases were attributable to interest paid on Federal Home Loan Bank advances
for the three month and nine month periods ended March 31, 1997 of $208,000 and
$469,000, respectively.
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 $9,000 for the
three month period ended March 31, 1997 as compared to the three month period
ended March 31, 1996, due to the increase in size of the loan portfolio and
management's continuing reassessment of losses inherent in the loan portfolio.
At March 31, 1997 the Company's allowance for loan losses totaled $377,000 or
0.58% of net loans receivable and 48.6% of total non-performing loans. At June
30, 1996, the Company's allowance for loan losses totaled $348,000, or 0.65% of
net loans receivable and 73.3% 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 March 31, 1997, the Company's non-performing assets, consisting
of nonaccrual loans and accruing loans 90 days or more delinquent, totaled
$775,000, or 1.17% of total loans, compared to $475,000, or 0.89% of total
loans as of June 30, 1996, an increase of $300,000. The increase can be
primarily attributed to two commercial real estate loans totaling $524,000,
which were accruing loans over 90 days delinquent at the end of the period.
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. Nonaccrual loans at the end
of the period consisted primarily of seven commercial business loans to a
single borrower totaling $96,000. There was no real estate owned as of March
31, 1997.
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.
NON-INTEREST INCOME. Non-interest income consists primarily of gains on the
sale of loans, gains or losses on sale of securities available for sale, loan
servicing fees, service fees on deposit accounts and other fees. Non-interest
income decreased $1,000 during the three month period ended March 31, 1997
compared to the three month period ended March 31,1996. For the nine month
period ended March 31, 1997 non-interest income decreased $20,000 compared the
nine month period ended March 31, 1996. The decline for the nine month period
ended March 31, 1997 was due primarily to a loss of $48,000 on the sale of
securities available for sale. There were no other significant changes in the
components of non-interest income.
NON-INTEREST EXPENSE. Non-interest expense was $507,000 for the three month
period ended March 31, 1997 compared to $483,000 reported for the same prior
year period, an increase of $24,000 or 5.0%. For the nine month period ended
March 31, 1997 non-interest expense was $1.8 million including the
non-recurring SAIF assessment of $269,000. Non-interest expense without the
SAIF assessment was $1.5 million for the nine month period ended March 31,
1997, compared to $1.3 million for the same nine month period in 1996, an
increase of $200,000 or 15.4%. Salaries and employee benefits, the largest
component of non-interest expense, increased $17,000 and $71,000 for the three
month and nine month periods ended March 31, 1997, respectively, compared to
the same periods during 1996. Significant factors causing the increase in
salaries and employee benefits were
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the addition of two new employees and expenses associated with the Company's
Recognition and Retention Plan which was approved by shareholders in October,
1995.
Congress recently enacted the Deposit Insurance Fund Act of 1996 (the
"Act"), which brings major changes to the Federal Deposit Insurance System.
One such change will eliminate the Bank Insurance Fund ("BIF") and the SAIF,
the two insurance funds administered by the FDIC, by merging the two funds into
a single fund. The Act call for a special assessment on SAIF-assessable
deposits to capitalize the SAIF and bring the fund into parity with the BIF.
On September 30, 1996, based on an assessment of 65.7 basis points on March 31,
1995 deposit balances (as required in the Act), the Company recorded a one-time
charge of $269,000, or $.044 per share, to per-tax earnings. The Bank after
the recording of this charge to earnings still remains a well-capitalized
institution for regulatory purposes.
INCOME TAX EXPENSE. Income tax expense increased $1,000 and decreased $120,000
for the three and nine month periods ended March 31, 1997 compared to the same
periods in 1996 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 have required 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 5% 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 March 31, 1997, the Bank's liquidity ratio was 5.22%.
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 March 31,
1997, the Company had outstanding commitments to extend credit which amounted
to $3.8 million (including $3.0 million in available home equity lines of
credit). At March 31, 1997, the Company had $20.1 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.
At March 31, 1997 the Bank had tangible capital of $9.7 million, or 12.9 %
of adjusted total assets which was $8.6 million above the minimum capital
requirement of $1.1 million, or 11.4% of adjusted total assets.
The Bank had at March 31, 1997, core capital of $9.7 million, or 12.9% of
adjusted total assets which was $7.5 million above the minimum capital
requirement of $2.2 million, or 9.9% of adjusted total assets.
At March 31, 1997, the Bank had total risk based capital of $10.1 million
and risk weighted assets of $46.1 million or total risk based capital of 22.0%
of risk weighted assets. This amount was $6.4 million above the minimum
regulatory requirement of $3.7 million, or 14.0% of risk weighted assets.
Accounting Changes
See Note 3 to the accompanying condensed consolidated Financial
Statements.
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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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
None
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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 9, 1997 \s\ Charles B. Cook
-------------------------------------
Charles B. Cook, President and Chief
Executive Officer (Duly Authorized
Officer)
Date: May 9, 1997 \s\ Elaine R. Carbary
-------------------------------------
Elaine R. Carbary, Chief Financial
Officer (Principal Financial Officer)
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MSB FINANCIAL, INC.
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
27 Financial Data Schedule (electronic 16
filing only)
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