<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------------- --------------------
COMMISSION FILE NUMBER 0-24898
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MSB FINANCIAL, INC.
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(Name of small business issuer in its charter)
DELAWARE 38-3203510
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
107 NORTH PARK STREET, MARSHALL, MICHIGAN 49068
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 781-5103
-----------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 .
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X]
State the issuer's revenues for its most recent fiscal
year: $5.9 million.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the closing price of
such stock on the Nasdaq System as of September 10, 1997, was $14.5 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of September 10, 1997, there were issued and outstanding 1,233,622
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal
year ended June 30, 1997.
Part III of Form 10-KSB - Proxy Statement for 1997 Annual Meeting of
Stockholders.
Transitional Small Business Disclosure Format: Yes ; No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
MSB Financial Inc, ("MSB Financial" or the "Company"), a Delaware
corporation, was formed in September 1994 to act as the holding company for
Marshall Savings Bank, F.S.B. (the "Bank") upon the completion of the Bank's
conversion from the mutual to the stock form (the "Conversion"). The Company
received approval from the Office of Thrift Supervision (the "OTS") to acquire
all of the common stock of the Bank to be outstanding upon completion of the
Conversion. The Conversion was completed on February 6, 1995. All references to
the Company, unless otherwise indicated, at or before February 6, 1995 refer to
the Bank. The Company's Common Stock is quoted on The Nasdaq SmallCap Market
under the symbol "MSBF".
At June 30, 1997, the Company had $74.7 million of assets and
stockholders' equity of $12.7 million (or 16.99% of total assets).
The Bank is a federally chartered stock savings bank headquartered in
Marshall, Michigan. Its deposits are insured up to applicable limits by the
Federal Deposit Insurance Corporation (the "FDIC") and are backed by the full
faith and credit of the United States.
The principal business of the Company consists of attracting retail
deposits from the general public and investing those funds primarily in
permanent and construction loans secured by first mortgages on owner-occupied,
one- to four-family residences. To a lesser extent, the Company also originates
loans secured by first mortgages on non-owner-occupied one- to four-family
residences, permanent and construction commercial real estate and consumer
loans.
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company only solicits deposits in its primary
market area and does not accept brokered deposits.
The Company's revenues are derived principally from interest on
mortgage and other loans, mortgage banking revenues and interest and dividends
on securities.
The executive offices of the Company are located at 107 North Park
Street, Marshall, Michigan 49068, and its telephone number at that address is
(616) 781-5103.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-KSB 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",
"estimate", "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
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forward-looking statements, which speak only as of the date made, and to advise
readers that various factors--including regional and national economic
conditions, 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.
MARKET AREA
The Company currently serves the City of Marshall and the surrounding
townships of Marshall, located in Calhoun County in Southern Michigan. The
Company serves these areas through its two full service offices located in
Marshall, Michigan. Major employers in the area include State Farm Insurance
Co., Eaton Corporation, Oaklawn Hospital and Walker Manufacturing Co.
LENDING ACTIVITIES
GENERAL. MSB Financial has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the community it serves. Historically, the Bank
originated fixed-rate one- to four-family real estate loans. In the early
1980's, the Bank began the origination of ARM loans for retention in its
portfolio, in order to increase the percentage of loans in its portfolio with
more frequent repricing characteristics than fixed-rate mortgage loans. As a
result of continued consumer demand for long-term fixed-rate loans, particularly
during periods of relatively low interest rates, MSB Financial has continued to
originate fixed-rate loans. The Company underwrites these mortgage loans
utilizing secondary market guidelines allowing them to be saleable, without
recourse, primarily to the Federal Home Loan Mortgage Corporation (the "FHLMC")
with the servicing retained in order to generate fee income and attempt to
reduce the Bank's exposure to changes in interest rates. See "--Loan Portfolio
Composition" and "--One- to Four-Family Residential Real Estate Lending."
The Company's primary focus in lending activities is on the origination
of permanent and construction loans secured by first mortgages on owner-occupied
one- to four-family residences. To a lesser extent, the Company also originates
loans secured by first mortgages on non-owner occupied one- to four-family
residences, permanent and construction commercial real estate and consumer
loans. At June 30, 1997, the Company's net loan portfolio totaled $68.7 million,
which constituted 92.0% of the Company's total assets.
The Loan Committee is responsible for the review and approval or denial
of all loan applications $100,000 and over. The Loan Committee currently
consists of President Cook and three other members of the Board of Directors.
Loans under $100,000 can be approved by the individual loan officers.
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At June 30, 1997, the maximum amount which the Company could have
loaned to any one borrower and the borrower's related entities was approximately
$1.4 million. At June 30, 1997, the Company had no loans or groups of loans to
related borrowers with outstanding balances in excess of this amount. At that
date, the Company's largest lending relationship to a single borrower or group
of related borrowers totaled $1.3 million consisting of 12 loans to a single
borrower secured by four income producing properties, one residential property
and four automobiles. All these loans were secured by properties located in the
Company's primary market area. There were only seven other lending relationships
in excess of $500,000 as of June 30, 1997. At June 30, 1997, each of these loans
was performing in accordance with its repayment terms.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of the Company's loan portfolios in dollar amounts
and in percentages (before deductions for loans in process, deferred loan fees
and discounts and allowance for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------
1997 1996 1995
------------------ --------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family.......................... $48,407 67.50% $36,516 64.79% $28,651 63.26%
Commercial.................................. 10,178 14.19 8,214 14.57 6,933 15.31
Construction or development................. 5,094 7.11 3,559 6.32 1,662 3.67
------- ---------- ------- ---------- ------- ----------
Total real estate loans................. 63,679 88.80 48,289 85.68 37,246 82.24
------- ---------- ------- ---------- ------- ----------
Other Loans:
Consumer Loans:
Home equity lines of credit................ 3,636 5.07 3,416 6.06 3,529 7.79
Automobile ................................ 1,671 2.33 1,670 2.96 1,290 2.85
Second mortgage............................ 547 .76 1,014 1.80 1,364 3.01
Other ..................................... 1,261 1.76 1,139 2.02 1,340 2.96
------- ---------- ------- ---------- ------- ----------
Total consumer loans.................... 7,115 9.92 7,239 12.84 7,523 16.61
Commercial business loans .................. 920 1.28 831 1.48 523 1.15
------- ---------- ------- ---------- ------- ----------
Total other loans ...................... 8,035 11.20 8,070 14.32 8,046 17.76
------- ---------- ------- ---------- ------- ----------
Total loans receivable, gross .......... 71,714 100.00% 56,359 100.00% 45,292 100.00%
========== ========== ==========
Less:
Loans held for sale ........................ 150 957 2,017
Loans in process ........................... 2,202 2,482 849
Deferred loan fees and discounts............ 319 244 203
Allowance for loan losses .................. 303 348 329
------- ------- -------
Total loans receivable, net ................ $68,740 $52,328 $41,894
======= ======= =======
</TABLE>
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The following table shows the composition of the Company's loan
portfolios by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One-to four-family.................... $ 14,873 20.74% $10,596 18.80% $ 6,723 14.84%
Commercial............................ 1,667 2.33 808 1.43 618 1.37
Construction or development........... 2,301 3.21 1,529 2.71 580 1.28
-------- -------- -------- ------- ------- ------
Total real estate loans............ 18,841 26.28 12,933 22.94 7,921 17.49
-------- -------- -------- ------- ------- ------
Consumer............................... 3,402 4.74 3,765 6.68 3,881 8.57
Commercial business.................... 889 1.24 793 1.41 498 1.10
-------- -------- -------- ------- ------- ------
Total fixed-rate loans............. 23,132 32.26 17,491 31.03 12,300 27.16
-------- -------- -------- ------- ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family................... 33,534 46.76 25,920 45.99 21,928 48.42
Commercial............................ 8,511 11.87 7,406 13.14 6,315 13.94
Construction or development........... 2,793 3.89 2,030 3.60 1,082 2.39
-------- -------- -------- ------- ------- ------
Total adjustable-rate real
estate loans....................... 44,838 62.52 35,356 62.73 29,325 64.75
-------- -------- -------- ------- ------- ------
Consumer............................... 3,713 5.18 3,474 6.17 3,642 8.04
Commercial business.................... 31 .04 38 .07 25 .05
-------- -------- -------- ------- ------- ------
Total adjustable-rate loans........ 48,582 67.74 38,868 68.97 32,992 72.84
-------- -------- -------- ------- ------- ------
Total loans receivable, gross...... 71,714 100.00% 56,359 100.00% 45,292 100.00%
======== ======= ======
Less:
Loans held for sale.................... 150 957 2,017
Loans in process....................... 2,202 2,482 849
Deferred loan fees and discounts....... 319 244 203
Allowance for loan losses.............. 303 348 329
-------- -------- -------
Total loans receivable, net......... $ 68,740 $52,328 $41,894
======== ======== =======
</TABLE>
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The following table illustrates the nominal interest rate sensitivity
of the Company's loan portfolios at June 30, 1997. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The table does not reflect the effects of
interest rate adjustments, possible prepayments or enforcement of due-on-sale
clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------------
Construction or Commercial
One-to Four-Family(1) Commercial Development Consumer Business Total
--------------------- ---------- ----------- -------- -------- -----
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During Years Ending
June 30,
- -----------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1)..................... $ 1,790 8.67% $ 403 8.88% $1,730 9.07% $ 458 9.44% $197 9.39% $ 4,578 8.95%
1999 to 2002................ 1,070 8.36 243 8.56 --- --- 2,530 9.29 510 9.10 4,353 9.00
2003 and following.......... 45,547 7.98 9,532 8.64 3,364 7.94 4,127 10.34 213 9.11 62,783 8.24
</TABLE>
- ---------------
(1) Includes demand loans.
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The total amount of loans due after June 30, 1998 which have
predetermined interest rates is $18.6 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $48.6
million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
Residential loan originations are generated by the Company's marketing
efforts, its present customers, walk-in customers and referrals from real estate
brokers and builders. The Company has focused its lending efforts primarily on
the origination of loans secured by first mortgages on owner-occupied,
single-family residences in its market area. At June 30, 1997, the Company's
one- to four-family residential mortgage loan portfolio totaled $48.4 million,
or 67.5%, of the Company's gross loan portfolio.
The Company currently originates ARM loans and fixed-rate loans for
retention in its loan portfolio. During the year ended June 30, 1997, the
Company originated $12.0 million and $12.3 million of adjustable-rate and
fixed-rate one- to four-family loans, respectively. During the same period, the
Company sold $2.9 million of fixed-rate real estate loans which were secured by
one- to four-family residences. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Asset/Liability Management" in
the Annual Report attached hereto as Exhibit 13 (the "Annual Report").
The Company's loans are underwritten and documented pursuant to the
guidelines of the FHLMC. Most of the fixed-rate residential loans originated by
the Company have contractual terms to maturity of ten to 30 years. The Company's
decision to hold or sell these loans is based on its asset liability management
policy and goals and the market conditions for mortgages at any period in time.
Under current policy, the Company originates and sells substantially all of its
fixed-rate loans with terms in excess of 15 years to FHLMC with servicing
retained. See "- Loan Originations, Sales and Repayments" herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Annual Report.
The Company's one- to four-family residential ARM loans are fully
amortizing loans with contractual maturities of up to 30 years. The interest
rates on the Company's ARM loans are subject to adjustment at one year intervals
and generally carry interest rates at a margin above the one year constant
maturities treasury index. The Company does not offer discounted initial
interest rates on its ARM loans. These loans provide for up to a 2.0% annual
adjustment over or below the prior year adjusted rate and a lifetime adjustment
of 5.0% over or below the initial rate. As a consequence of using caps and
floors, the interest rates on these loans may not be as rate sensitive as is the
Company's cost of funds. The Company's ARM loans are generally not convertible
into fixed-rate loans. All of the Company's one- to four-family loans are not
assumable, do not contain prepayment penalties and do not permit negative
amortization of principal. ARM loans generally pose different credit risks than
do fixed-rate loans, primarily because as interest rates rise, the underlying
payment by the borrower rises, increasing the potential for default. See "-
Non-Performing Assets and Classified Assets." At June 30, 1997, the Company's
one- to four-family ARM loan portfolio totaled $33.5 million or 46.8% of the
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Company's gross loan portfolio. At that date the fixed-rate, one- to four-family
residential mortgage loan portfolio totaled $14.9 million, or 20.7% of the
Company's gross loan portfolio.
The Company also originates non-owner occupied one- to four-family
residential loans. These loans are underwritten generally using the same
criteria as owner-occupied one-to four-family residential loans, but are
originated at higher rates and lower loan to value ratios than owner-occupied
loans. At June 30, 1997, non-owner occupied one- to four-family residential
loans totaled $7.6 million or 10.6% of the Company's gross loan portfolio
It is the Company's present policy generally not to lend more than
95% of the lesser of the appraised value or purchase price for owner-occupied
loans. The Company generally requires that private mortgage insurance be
obtained in an amount sufficient to reduce the Company's exposure to 80% or
below of the lesser of the appraised value or purchase price of the property.
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Properties securing one- to four-family
real estate loans made by the Company are appraised by independent fee
appraisers approved and qualified by the Board of Directors. The Company
generally requires borrowers to obtain title insurance and fire, property and
flood insurance (if necessary) in an amount not less than the value of the
security property. Real estate loans originated by the Company generally contain
a "due on sale" clause allowing the Company to declare the unpaid principal
balance due and payable upon the sale of the security property.
COMMERCIAL REAL ESTATE LENDING
In order to enhance the yield on its assets, the Company has engaged in
commercial real estate lending secured primarily by small retail establishments,
small office buildings, bed and breakfast inns, funeral homes, churches and
other non-residential and residential properties located in the Company's
primary market area. At June 30, 1997, the Company's commercial real estate loan
portfolio totaled $10.2 million, or 14.19% of the Company's gross loan
portfolio.
Generally, the commercial real estate loans originated by the Company
are one year adjustable-rate loans. The interest rates on these loans generally
provide for a margin above the one year constant maturities treasury index. The
commercial real estate loans typically do not exceed 75% of the appraised value
of the property securing the loan. The term of such loans generally does not
exceed 15 to 20 years; however, the Company has originated some ARM loans with a
term of up to 25 years. The Company analyzes the financial condition of the
borrower, the borrower's credit history, the reliability and predictability of
the net income generated by the property securing the loan and the value of the
property itself. The Company generally requires personal guaranties of the
borrowers in addition to the security property as collateral for such loans.
Appraisals on properties securing commercial real estate loans originated by the
Company are performed by independent fee appraisers approved by the Board of
Directors. The Company originated $3.5 million of commercial real estate loans
during fiscal 1997. See "- Loan Originations, Sales and Repayments."
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Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Commercial real estate loans typically involve large balances to
single borrowers or groups of related borrowers. Because payments on loans
secured by commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrower's ability to repay the loan may be impaired.
CONSTRUCTION LENDING
The Company makes construction loans to individuals for the
construction of their residences as well as to builders for the construction of
one- to four-family residences. Presently, all of these loans are secured by
property located within the Company's primary market area. At June 30, 1997, the
Company had $5.1 million in construction and development loans outstanding,
representing 7.1% of the Company's gross loan portfolio.
Construction loans to individuals for their residences generally are
structured to be converted to permanent loans at the end of the construction
phase, which typically runs six months. These construction loans have rates and
terms which match any one- to four-family loans then offered by the Company,
except that during the construction phase, the borrower pays interest only.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans. At June 30, 1997,
the Company had $2.7 million of construction loans to borrowers intending to
live in the properties upon completion of construction.
Construction loans on non-residential properties are also structured to
be converted to permanent loans at the end of the typical six month construction
phase. Non-residential construction loans, which are generally underwritten
pursuant to the same guidelines used for originating permanent non-residential
loans, totaled $685,000 at June 30, 1997.
Construction loans to builders of one- to four-family residences are
generally for a term of six months. At June 30, 1997, the Company had $1.7
million of construction loans to builders of one- to four-family residences.
These loans are generally not presold.
Construction loans are obtained principally through continued business
from builders who have previously borrowed from the Company, as well as
referrals from existing customers and walk-in customers. The application process
includes a submission to the Company of accurate plans, specifications and costs
of the project to be constructed. These items are used as a basis to determine
the appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus building).
Because of the uncertainties inherent in estimating construction costs
and the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate
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success of the project. Construction loans to borrowers other than
owner-occupants also involve many of the same risks discussed above regarding
commercial real estate loans and tend to be more sensitive to general economic
conditions than many other types of loans.
CONSUMER
Management considers consumer lending to be an important component of
its business strategy. Specifically, consumer loans generally have shorter terms
to maturity and/or adjustable rates, thus reducing the Company exposure to
changes in interest rates. Consumer loans generally carry higher rates than do
residential mortgage loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management" in
the Annual Report. In addition, management believes that offering consumer loan
products helps expand and create stronger ties to its existing customer base.
The Company currently offers a variety of secured consumer loans,
including home equity lines of credit, automobile loans, home improvement loans
and loans secured by savings deposits. The Company also offers unsecured
consumer loans. The Company currently originates substantially all of its
consumer loans in its primary market area solely on a direct basis. Direct loans
are made when the Company extends credit directly to the borrower, in contrast
to indirect loans which are obtained when loan contracts are purchased by a
Company or other institution from retailers who have extended credit to their
customers for goods or services. At June 30, 1997, the Company's consumer loans
totaled $7.1 million, or 9.92% of the Company's gross loan portfolio.
The Company's home equity lines of credit are written so that the total
commitment amount, when combined with the balance of the first mortgage lien,
may not exceed the greater of 90% of the appraised value of the property or 90%
of two times the Michigan real estate assessment value. These loans are
revolving line of credit loans with adjustable interest rates. The majority of
the Company's existing portfolio of these loans have 15 year terms with a
minimum monthly payment requirement of 2% of the unpaid balance. At June 30,
1997, the Company had $3.6 million of home equity lines of credit outstanding,
representing 5.07% of the Company's gross loan portfolio. At that date, the
Company had $3.2 million of unused credit available under its home equity line
of credit program.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, or are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent
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on the borrower's continuing financial stability and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. Although the level of
delinquencies in the Company's consumer loan portfolio has generally been low,
there can be no assurance that delinquencies will not increase in the future.
See "Asset Quality - Non-Performing Assets."
COMMERCIAL BUSINESS LENDING
At June 30, 1997, the Company had $920,000 in commercial business loans
outstanding, representing 1.28% of the Company's total loan portfolio. The
Company's commercial business lending activities have encompassed loans with a
variety of purposes and security, including loans to finance inventory and
equipment. Generally, the Company's commercial business lending has been done as
an accommodation to existing borrowers and has been limited to borrowers
headquartered, or doing business, in the Company's primary market area.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise, and may fluctuate in
value based on the success of the business.
LOAN ORIGINATIONS, SALES AND REPAYMENTS
The Company originates loans through its marketing efforts, the
Company's customer base, walk-in customers and referrals from real estate
brokers and builders. While the Company originates both adjustable-rate and
fixed-rate loans, its ability to originate loans is dependent upon the relative
customer demand for loans in its market. Demand is affected by the interest rate
environment. In the past, the Company's dollar volume of fixed-rate, one- to
four-family loans has exceeded the dollar volume of the same type of
adjustable-rate loans, although such originations were just slightly higher
during fiscal 1997, 1996 and 1995 as a result of the Company's origination of 15
year fixed-rate loans for retention in its portfolio. Substantially all
fixed-rate residential mortgage loans with maturities in excess of 15 years are
sold to FHLMC with the servicing rights retained. These loans are originated to
satisfy customer demand, generate fee income at the time of sale and produce
future servicing income consistent with the goals of the Company's
asset/liability management program. The Company did not purchase any loans
during fiscal 1997, 1996 and 1995.
The Company sold whole loans without recourse in aggregate amounts of
$2.9 million, $4.7 million and $5.2 million during the years ended June 30,
1997, 1996 and 1995, respectively. When loans are sold, the Company typically
retains the responsibility for collecting and remitting loan payments, making
certain that real estate tax payments are made on behalf of borrowers, and
otherwise servicing the loans. The Company receives a servicing fee for
performing these
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services. The servicing fee is recognized as income over the life of the loans.
The Company services for others mortgage loans that it originated and sold
amounting to $32.8 million at June 30, 1997.
In periods of economic uncertainty, the Company's ability to originate
a large dollar volume of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related fee income and operating
earnings.
The following table shows the loan origination, sale and repayment
activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family $12,048 $ 11,336 $ 5,164
- commercial 2,145 1,628 1,338
Non-real estate - consumer 274 --- 374
- commercial business --- --- 10
------- -------- -------
Total adjustable-rate 14,467 12,964 6,886
------- -------- -------
Fixed rate:
Real estate - one- to four-family 12,274 11,764 5,461
- commercial 1,371 225 417
Non-real estate - consumer 2,209 3,299 3,499
- commercial business 440 388 316
------- -------- -------
Total fixed-rate 16,294 15,676 9,693
------- -------- -------
Total loans originated 30,761 28,640 16,579
------- -------- -------
Sales and Repayments:
Real estate - one- to four-family 2,894 4,721 5,186
------- -------- -------
Total sales 2,894 4,721 5,186
Principal repayments 12,512 12,850 7,985
------- -------- -------
Total reductions 15,406 17,571 13,171
Increase (decrease) in other items, net 250 (1,695) 80
------- -------- -------
Net increase (decrease) $15,605 $ 9,374 $ 3,488
======= ======== =======
</TABLE>
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Company
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of residential loans, a late notice is sent for accounts 15 or more days
delinquent. Additional written and oral contacts may be made with the borrower
between 15 and 90 days after the due date. If the delinquency continues for a
period of over 90 days, the Company usually sends a default letter to the
borrower, and
13
<PAGE> 14
if a response is not received within a reasonable time thereafter, the Company
institutes appropriate action to foreclose on the property. If foreclosed, the
property is sold at public auction and may be purchased by the Company.
Delinquent consumer loans are handled in a generally similar manner, except that
initial contacts are made with the borrower when the payment is 10 days past
due. The Company's procedures for repossession and sale of consumer collateral
are subject to various requirements under Michigan consumer protection laws.
DELINQUENT LOANS. The following table sets forth the Company's loan
delinquencies by type, by amount and by percentage of type at June 30, 1997.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
----------------------------------------------------------------------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.......... 16 $ 794 1.64% 11 $256 .53% 27 $1,050 2.17%
Commercial real estate....... 4 599 5.88 4 185 1.82 8 784 7.70
Consumer..................... 2 12 .17 6 24 .34 8 36 .51
--- ------ --- ---- --- ------
Total................... 22 $1,405 1.96 21 $465 .65 43 $1,870 2.61
=== ====== === ==== === ======
</TABLE>
14
<PAGE> 15
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in the Company's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful. Loans more than 90 days past due, and other loans of concern,
are placed on non-accrual status, unless management determines that the loans
are well-collateralized and in the process of collection. See "Loans Receivable"
and "Allowance for Loan Losses" under Notes 1 and 5 of Notes to Consolidated
Financial Statements in the Annual Report for a discussion on impaired loans.
For all years presented, the Company has had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1997 1996 1995 1994 1993
------ ----- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family....................... $ 17 $ 18 $ -- $ -- $ --
Construction ............................. -- -- 123 123 ---
Consumer ................................. -- 129 78 78 85
---- ---- ---- ------ ----
Total ................................. 17 147 201 201 85
---- ---- ---- ------ ----
Accruing loans delinquent more than 90 days:
One- to four-family ..................... 239 303 152 355 229
Commercial real estate ................... 185 -- -- 447 180
Consumer ................................. 24 25 31 12 70
Commercial business....................... -- -- -- -- --
---- ---- ---- ------ ----
Total ................................. 448 328 183 814 479
---- ---- ---- ------ ----
Foreclosed assets:
One- to four-family ...................... 29 -- -- -- 63
---- ---- ---- ------ ----
Total ................................. 29 -- -- -- 63
---- ---- ---- ------ ----
Total non-performing assets................. $494 $475 $384 $1,015 $627
==== ==== ==== ====== ====
Total as a percentage of total assets....... .66% .79% .72% 2.17% 1.31%
==== ==== ==== ====== ====
</TABLE>
For the year ended June 30, 1997 gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $1,580. The amounts that were included in interest
income on such loans were $1,520 for the year ended June 30, 1997.
Except as discussed under the captions "Other Loans of Concern" and
"Classified Assets" below, as of June 30, 1997, there were no loans which were
not included in the table above where known information about the possible
credit problems of borrowers caused management to have serious doubts as to the
ability of the borrower to comply with present loan repayment terms and which
may result in disclosure of such loans in the future.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set
forth in the table above, as of June 30, 1997, there was also an aggregate of
$500,000 in net book value of loans (two loans aggregating $393,000 secured by
commercial real estate and two loans totaling $107,000 secured by a farm) with
respect to which known information about the possible credit
15
<PAGE> 16
problems of the borrowers have caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms and which
may result in the future inclusion of such items in the non-performing asset
categories. These loans have been considered in management's determination of
the adequacy of the Company's allowance for loan losses.
Included in other loans of concern described above is a loan the
Company originated in 1988 for $430,000 secured by an income producing property
located in Marshall, Michigan. The Company has a guaranty from a third party of
up to $70,000 on this loan. The appraised value of the property at the time of
origination was $550,000. In 1988, the Company originated a $50,000 loan to the
same borrower secured by a second lien on the same property and various personal
property of the borrower. At June 30, 1997 the balances on these two loans were
$367,000 and $26,000, respectively. The property is currently not achieving debt
service coverage and each loan was less than 90 days delinquent at June 30,
1997. Management, based on its inspection of the property and the market value
of similar properties in the vicinity of the property, believes that the
property at June 30, 1997 is adequately collateralized.
CLASSIFIED ASSETS. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS and the FDIC, which may order the establishment of
additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at June 30, 1997, the Bank had classified
$909,000 of its assets as substandard, $34,000 as doubtful and zero as loss,
representing 7.4% of the Company's stockholders' equity or 1.3% of the Company's
assets.
16
<PAGE> 17
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at
lower of cost or fair value, less estimated disposition costs. If fair value at
the date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. At June 30, 1997, the Company had a total allowance for loan losses of
$303,000 or 65.16% of non-performing loans. See Notes 1 and 5 of the Notes to
Consolidated Financial Statements in the Annual Report.
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1997 1996 1995
----- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period .................... $ 348 $ 329 $255
Charge-offs:
Consumer ........................................ 96 9 --
----- ----- ----
96 9 --
----- ----- ----
Recoveries:
Consumer ........................................ 3 4 1
----- ----- ----
3 4 1
----- ----- ----
Net recoveries (charge-offs) ...................... (93) (5) 1
Additions charged to operations ................... 48 24 73
----- ----- ----
Balance at end of period .......................... $ 303 $ 348 $329
===== ===== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period ..... .15% .01% --%
===== ===== ====
</TABLE>
17
<PAGE> 18
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- ----------------------
% of % of % of
Loans Loans Loans
in Each in Each in Each
Amount of Category Amount of Category Amount of Category
Loan Loss to Total Loan Loss to Total Loan Loss to Total
Allowance Loans Allowance Loans Allowance Loans
--------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................. $110 67.50% $122 64.79% $ 115 63.26%
Commercial real estate.............. 65 14.19 77 14.57 79 15.31
Construction........................ 32 7.11 34 6.32 19 3.67
Consumer............................ 48 9.92 36 12.84 46 16.61
Commercial business................. 6 1.28 8 1.48 6 1.15
Unallocated......................... 42 -- 71 --- 64 ---%
----- ------ ---- ------ ----- ------
Total.......................... $303 100.00% $348 100.00% $ 329 100.00%
==== ====== ==== ====== ===== ======
</TABLE>
- ------------------
INVESTMENT ACTIVITIES
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained liquid
assets at levels above the minimum requirements imposed by the OTS regulations
and above levels believed adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
At June 30, 1997, the Bank's liquidity ratio (liquid assets as a percentage of
net withdrawable savings deposits and current borrowings) was 6.87%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in investment grade
commercial paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Bank's
asset/liability management policies, concern for the highest investment quality,
liquidity needs and performance objectives.
The Company generally invests its liquid assets primarily in
interest-earning overnight deposits of the FHLB of Indianapolis, treasury
securities, mortgage-backed securities and mutual funds which invest in
adjustable-rate, mortgage-backed securities. For the year ended June 30,
18
<PAGE> 19
1997, the Company had an average outstanding balance of $643,000 in securities
(excluding FHLB stock) with an average yield of 5.29%. At June 30, 1997, the
Company's investment securities consisted of one Federal Home Loan Mortgage
Corporation participation certificate totaling $11,000. See Note 4 of the Notes
to Consolidated Financial Statements in the Annual Report for information
regarding the maturities of the Company's securities portfolio.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, which totaled $1.4 million as of June 30, 1997, plus an additional
10% if the investments are fully secured by readily marketable collateral At
June 30, 1997, the Bank was in compliance with this regulation. See "Regulation
- - Federal Regulation of Savings Associations" for a discussion of additional
restrictions on the Bank's investment activities.
The Company's securities portfolio at June 30, 1997 contained neither
tax-exempt securities nor securities of any issuer with an aggregate book value
in excess of 10% of the Company's shareholders' equity, excluding those issued
by the United States Government or its agencies.
The following table sets forth the composition of the Company's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1997 1996 1995
-------------------- ------------------ ------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
--------- ------ ------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
U.S. government securities........................ $ --- ---% $1,001 29.00% $ 499 17.03%
Adjustable-rate mortgage mutual fund.............. --- --- 2,069 59.94 2,071 70.68
USL insurance stock............................... --- --- 49 1.42 28 .96
Mortgage-backed securities........................ 11 1.04 16 .46 22 .75
------ ------ ------ ------ ------ ------
Subtotal....................................... 11 1.04 3,135 90.82 2,620 89.42
FHLB stock........................................ 1,044 98.96 317 9.18 310 10.58
------ ------ ------ ------ ------ ------
Total securities and FHLB stock................ $1,055 100.00% $3,452 100.00% $2,930 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE> 20
The composition and maturities of the securities portfolio, excluding
equity securities and FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10 Total Investment
1 Year Years Years Years Securities
--------- -------- --------- --------- -----------------------
Carrying Carrying Carrying Carrying Amortized Market
Value Value Value Value Cost Value
--------- -------- --------- --------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities. . . . $ --- $ --- $ 11 $ --- $ 11 $ 11
----- ----- ------ ------- ----- -----
Total. . . . . . . . . . . . . $ --- $ --- $ 11 $ --- $ 11 $ 11
===== ===== ====== ======= ===== =====
Weighted average yield. . . . . . ---% ---% 7.18% ---% 7.18% 7.18%
</TABLE>
SOURCES OF FUNDS
GENERAL. The Company's sources of funds are deposits, FHLB advances,
payment of principal and interest on loans, proceeds from the sale of loans,
interest earned on or sales and maturation of securities and short-term
investments, and funds provided from operations.
DEPOSITS. The Company offers a variety of deposit accounts having a
wide range of interest rates and terms. The Company's deposits consist of
passbook and statement savings accounts, money market deposit accounts, non
interest and interest-bearing checking accounts and certificate of deposit
accounts currently ranging in terms from seven days to 60 months. The Company
only solicits deposits from its market area and does not use brokers to obtain
deposits. The Company relies primarily on competitive pricing policies,
advertising and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management, liquidity and profitability
objectives. Based on its experience, the Company believes that its savings and
checking accounts are relatively stable sources of deposits. However, the
ability of the Company to attract and maintain certificates of deposit and the
rates paid on these deposits has been and will continue to be significantly
affected by market conditions.
20
<PAGE> 21
The following table sets forth the deposit flows at the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1997 1996 1995
--------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............................. $ 40,452 $ 39,446 $ 39,825
Deposits.................................... 193,459 170,990 148,704
Withdrawals................................. (193,748) (171,537) (150,547)
Interest credited........................... 1,544 1,553 1,464
---------- --------- ---------
Ending balance.............................. $ 41,707 $ 40,452 $ 39,446
========== ========= =========
Net increase (decrease)..................... $ 1,255 $ 1,006 $ (379)
========== ========= =========
Percent increase (decrease)................. 3.10% 2.55% (.95)%
==== ===== ======
</TABLE>
The following table sets forth the dollar amount of deposits in
the various types of deposit programs offered by the Company for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------
1997 1996 1995
------------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- ----------- --------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits(1):
Noninterest-bearing deposits..................... $ 598 1.43% $ 346 .85% $ 154 .39%
Checking accounts (2.00%)........................ 7,474 17.92 6,603 16.32 5,949 15.08
Money market deposit accounts (2.75%)............ 5,033 12.07 4,817 11.91 4,812 12.20
Passbook and statement savings (2.50%)........... 8,989 21.55 8,546 21.13 8,632 21.88
-------- ------- -------- ------- -------- -------
Total Non-Certificates........................... 22,094 52.97 20,312 50.21 19,547 49.55
-------- ------- -------- ------- -------- -------
Certificates:
2.00 - 4.00%................................... 8,540 20.48 1,267 3.13 1,575 3.99
4.01 - 6.00%................................... 10,337 24.79 16,867 41.70 15,098 38.28
6.01 - 8.00%................................... 736 1.76 2,006 4.96 2,622 6.65
8.01 - 10.00%.................................. --- --- --- --- 604 1.53
-------- ------- -------- ------- -------- -------
Total Certificates............................... 19,613 47.03 20,140 49.79 19,899 50.45
-------- ------- -------- ------- -------- -------
Total Deposits................................... $ 41,707 100.00% $ 40,452 100.00% $ 39,446 100.00%
======== ======= ======== ======= ======== =======
</TABLE>
- -------------
(1) Rates shown are at June 30, 1997.
21
<PAGE> 22
The following table shows rate and maturity information for the
Company's certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
2.00- 4.01- 6.01- 8.01- Percent
4.00% 6.00% 8.00% 10.00% Total of Total
--------- --------- --------- ---------- ----------- --------
(Dollars in Thousands)
Certificate accounts maturing in
quarter ending:
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997..................... $ 608 $ 4,118 $ 247 $ --- $4,973 25.36%
December 31, 1997...................... 4,121 247 --- --- 4,368 22.27
March 31, 1998......................... 1,834 246 --- --- 2,080 10.60
June 30, 1998.......................... 1,977 443 --- --- 2,420 12.34
September 30, 1998..................... --- 540 --- --- 540 2.75
December 31, 1998...................... --- 1,003 --- --- 1,003 5.11
March 31, 1999......................... --- 601 --- --- 601 3.06
June 30, 1999.......................... --- 612 --- --- 612 3.12
September 30, 1999..................... --- 524 --- --- 524 2.67
December 31, 1999...................... --- 472 --- --- 472 2.41
March 31, 2000......................... --- 35 121 --- 156 .80
June 30, 2000.......................... --- 138 226 --- 364 1.86
Thereafter............................. --- 1,358 142 --- 1,500 7.65%
------ ------- ----- --- -------- -------
Total............................... $8,540 $10,337 $ 736 $ --- $19,613 100.00%
====== ======= ===== ===== ======= ======
Percent of total.................... 43.54% 52.71% 3.75% ---% 100.00%
===== ===== ===== === ======
</TABLE>
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------------------
Over 3 Over 6
months months
3 months through through Over
or Less 6 months 12 months 12 months Total
----------- ------------ ----------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $4,659 $4,160 $4,400 $5,672 $18,891
Certificates of deposit of $100,000 or more...... 314 208 100 100 722
------ ------ ------ ------ -------
Total certificates of deposit.................... $4,973 $4,368 $4,500 $5,772 $19,613
====== ====== ====== ====== =======
</TABLE>
BORROWINGS. Although deposits are the Company's primary source of
funds, the Company may utilize borrowings when they are a less costly source of
funds, can be invested at a positive interest rate spread or when the Company
desires additional capacity to fund loan demand.
The Bank's borrowings historically have consisted of advances from the
FHLB of Indianapolis. Such advances can be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. At June 30, 1997, the Company had FHLB advances totaling $19.4
million.
22
<PAGE> 23
The following table sets forth the maximum month-end balance and
average balance of the Bank's borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances...................................... $20,874 $6,000 $ ---
Average Balance:
FHLB advances...................................... $12,871 $1,833 $ ---
</TABLE>
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Advances............................................. $19,374 $6,000 $ ---
Weighted average interest rate............................ 6.19% 5.61% ---%
</TABLE>
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings bank, the Bank is permitted by OTS
regulations to invest up to 2% of its assets, or $1.5 million at June 30, 1997,
in the stock of, or unsecured loans to, service corporation subsidiaries. The
Bank may invest an additional 1% of its assets in service corporations where
such additional funds are used for inner-city or community development purposes.
The Bank does not currently have any subsidiaries.
REGULATION
GENERAL. The Bank is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of Indianapolis and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. The
Bank is a member of the Savings Association Insurance Fund ("SAIF"), which
together with the Bank Insurance Fund (the "BIF") are the two deposit insurance
funds administered by the FDIC, and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank.
23
<PAGE> 24
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were as of October 1996 and July 31, 1990,
respectively. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Bank's OTS assessment for the
fiscal year ended June 30, 1997, was $21,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to establish offices nationwide. The Bank is in compliance with the noted
restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 1997, the Bank's lending limit under this restriction was $1.4 million
The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
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INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize
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the SAIF was enacted in September 1996. The legislation provided for a one-time
assessment to be imposed on all deposits assessed at the SAIF rates, as of March
31, 1995, in order to recapitalize the SAIF. It also provides for the merger of
the BIF and the SAIF on January 1, 1999 if no savings associations then exist.
The special assessment rate was established at .657% of deposits by the
FDIC and the resulting assessment of $269,000 was paid in November 1996. This
special assessment significantly increased noninterest expense and adversely
affected the Bank's results of operations for the year ended June 30, 1997. As a
result of the special assessment, the Bank's deposit insurance premiums was
reduced to zero based upon its current risk classification and the new
assessment schedule for SAIF insured institutions. These premiums are subject to
change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF- member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
associations, such as the Bank, 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.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1997, the Bank did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities
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solely as agent for its customers are "includable" subsidiaries that are
consolidated for capital purposes in proportion to the association's level of
ownership. For excludable subsidiaries the debt and equity investments in such
subsidiaries are deducted from assets and capital. The Bank had no subsidiaries
at June 30, 1997.
At June 30, 1997, the Bank had tangible capital of $9.5 million, or
12.8% of adjusted total assets, which is approximately $8.4 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1997, the Bank
had no intangibles which were subject to these tests.
At June 30, 1997, the Bank had core capital equal to $9.5 million, or
12.8% of adjusted total assets, which is $7.3 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1997, the Bank had no
capital instruments that qualified as supplementary capital and $303,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at June 30, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
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OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On June 30, 1997, the Bank had total capital of $9.8 million (including
$9.5 million in core capital and $303,000 in qualifying supplementary capital)
and risk-weighted assets of $47.1 million; or total capital of 20.9% of
risk-weighted assets. This amount was $6.1 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
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The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability. The Company's shareholders do not have preemptive
rights, and therefore, if the Company is directed by the OTS or the FDIC to
issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Company may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution
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without prior approval of the OTS and the FDIC if it is undercapitalized before,
or as a result of, such a distribution. As under the current rule, the OTS may
object to a capital distribution if it would constitute an unsafe or unsound
practice. No assurance may be given as to whether or in what form the
regulations may be adopted.
LIQUIDITY. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report. This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 6.87% and a short-term
liquid assets ratio of 6.87%.
ACCOUNTING. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
QUALIFIED THRIFT LENDER TEST. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At June 30, 1997, the Bank
met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC
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permits it to transfer to the BIF. If such an association has not yet
requalified or converted to a national bank, its new investments and activities
are limited to those permissible for both a savings association and a national
bank, and it is limited to national bank branching rights in its home state. In
addition, the association is immediately ineligible to receive any new FHLB
borrowings and is subject to national bank limits for payment of dividends. If
such association has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company and become subject to all restrictions on
bank holding companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in October 1996 and received a rating of "satisfactory."
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
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HOLDING COMPANY REGULATION. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
FEDERAL SECURITIES LAW. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal shareholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain noninterest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1997, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "--Liquidity."
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Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs that administer the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At June 30, 1997, the Bank had $1.0 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 7.88% and were 7.85% for fiscal 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the fiscal year ended June 30, 1997, dividends paid by the FHLB of
Indianapolis to the Bank totaled $51,000, which constitutes a $26,000 increase
from the amount of dividends received in fiscal 1996. The $20,000 dividend
received for the quarter ended June 30, 1997 reflects an annualized rate of
7.85%, or .25% above the rate for the same period in 1996.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which could, within specified formula limits, be taken
as a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" was computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) was computed under either the experience method or the percentage of
taxable income method (based on an annual election). Under the experience
method, the bad debt
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reserve deduction was an amount determined under a formula based generally upon
the bad debts actually sustained by the savings association over a period of
years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that generally applicable to corporations (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. Thrift institutions with $500 million or less in assets
may, however, continue to use the experience method. As a result, the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the specific charge-off method for post-1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The management of the Company does not believe that the
legislation will have a material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
34
<PAGE> 35
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1997, the Bank's Excess for tax purposes totaled
approximately $1.3 million.
The Company files consolidated federal income tax returns with the Bank
on a fiscal year basis using the accrual method of accounting. Savings
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings association members of
the consolidated group that are functionally related to the activities of the
savings association member.
The Company's and the Bank's federal income tax returns for the last
three years are open to possible audit by the Internal Revenue Service ("IRS").
No returns are being audited by the IRS at the current time. In the opinion of
management, any examination of still open returns (including returns
predecessors of, or entities merged into, the Bank) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Company.
MICHIGAN TAXATION. The State of Michigan imposes a tax on intangible
personal property in the amount of $.20 per $1,000 of deposits of a savings bank
or a savings and loan institution less deposits owed to the federal or Michigan
state governments, their agencies or certain other financial institutions. This
tax is currently being phased out and will be eliminated completely after the
fiscal year ending June 30, 1998. The State of Michigan also imposes a "Single
Business Tax." The Single Business Tax is a value-added type of tax and is for
the privilege of doing business in the State of Michigan. The major components
of the Single Business Tax base are compensation, depreciation and federal
taxable income, as increased by net operating loss carry forwards, if any,
utilized in arriving at federal taxable income, and decreased by the cost of
acquisition of tangible assets during the year. The tax rate is 2.30% of the
Michigan adjusted tax base. The tax returns of the Bank are open to audit by the
Michigan taxation authorities from July 1, 1993. No returns are being audited by
the Michigan taxation authority at the current time.
DELAWARE TAXATION. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
COMPETITION
The Company faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other savings institutions, commercial banks,
credit unions and mortgage bankers making loans secured
35
<PAGE> 36
by real estate located in the Company's primary market area. Other savings
institutions, commercial banks, credit unions and finance companies provide
vigorous competition in consumer lending.
The Company attracts all of its deposits through its two offices in
Marshall, Michigan. Competition for those deposits is principally from other
savings institutions, commercial banks and credit unions located in the same
communities, as well as mutual funds. The Company competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient locations.
The Company primarily serves Marshall, Michigan and its surrounding
communities. There are three commercial banks, one savings institutions other
than the Bank and two credit unions which compete for deposits and loans in the
Company's primary market area.
The Company estimates its share of the monthly mortgage loan market in
Calhoun County based on the dollar volume of such loans, ranged between
approximately 4% to 8% during fiscal 1997, and averaged 6.1% for the period, and
was approximately 7.2% during June 1997.
EMPLOYEES
At June 30, 1997, the Company had a total of 20 employees, all but two
of whom were full-time employees. The Company's employees are not represented by
any collective bargaining group. Management considers its employee relations to
be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company conducts its business through its two offices located in
Marshall, Michigan, both of which are owned by the Company. The Company believes
that its current facilities are adequate to meet the present and foreseeable
needs of the Company. The total net book value of the Company's premises and
equipment (including land, building and furniture, fixtures and equipment) at
June 30, 1997 was $577,000. See Note 7 of Notes to Consolidated Financial
Statements in the Annual Report.
The Bank maintains an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 1997 was $138,000.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved as plaintiff or defendant in
various legal actions arising in the normal course of business. Presently, the
Company is not involved in any legal proceedings that are expected to have a
material adverse impact on the consolidated financial position of the Company.
36
<PAGE> 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 51 of the attached 1997 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Pages 4 through 14 of the attached 1997 Annual Report to Stockholders
are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in the Company's 1997 Annual Report
to Stockholders is incorporated herein by reference.
<TABLE>
<CAPTION>
ANNUAL REPORT SECTION PAGES IN ANNUAL REPORT
- --------------------- ----------------------
<S> <C>
Report of Independent Auditors 16
Consolidated Statements of Financial Condition 17
as of June 30, 1997 and 1996
Consolidated Statements of Income for the Years 18
Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the 19-20
Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years 21-22
Ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 23-50
</TABLE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1997, is not deemed
filed as part of this Annual Report on Form 10-KSB.
37
<PAGE> 38
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in October 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
EXECUTIVE OFFICERS
Information concerning Executive Officers of the Company is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in October 1997, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Corporation's knowledge, based solely on a review of the copies
of such reports furnished to the Corporation and written representations that no
other reports were required, all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10 percent beneficial owners were
complied with during the fiscal year ended June 30, 1997.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in October 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
38
<PAGE> 39
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in October 1997, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in October 1997, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Index to Exhibits
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three-month period ended
June 30, 1997.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 26, 1997 By: /s/Charles B. Cook
-------------------- ---------------------------------
Charles B. Cook, President, Chief
Executive Officer, Chief
Financial Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Charles B. Cook Date: September 26, 1997
- ------------------------------------------- -------------------
Charles B. Cook, President Chief Executive
Officer, Chief Financial Officer and Director
(Principal Executive and Operating Officer and
Principal Financial and Accounting Officer)
/s/ Aart VanElst Date: September 26, 1997
- ------------------------------------------------ -------------------
Aart VanElst, Chairman of the Board
/s/John W. Yakimow Date: September 26, 1997
- ------------------------------------------------ -------------------
John W. Yakimow, Director
/s/Martin L. Mitchell Date: September 26, 1997
- ------------------------------------------------ -------------------
Martin L. Mitchell, Director
/s/ Richard L. Dobbins Date: September 26, 1997
- ------------------------------------------------ --------------------
Richard L Dobbins, Director
/s/ J. Thomas Schaeffer Date: September 26, 1997
- ------------------------------------------------ -------------------
J. Thomas Schaeffer, Director
/s/ Karl F. Loomis Date: September 26, 1997
- ------------------------------------------------ -------------------
Karl F. Loomis, Director
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document
------ --------
<S> <C>
3 The Articles of Incorporation and Bylaws, filed on September 23, 1995 as Exhibits
3.1 and 3.2, respectively, to Registrant's Registration Statement on Form S-1 (File
No. 33-81312), are incorporated herein by reference.
4 Registrant's Specimen Stock Certificate, filed on September 23, 1995 as Exhibit
4 to Registrant's Registration Statement on Form S-1 (File No. 33-81312), 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.
11 Statement re: computation of per share earnings (see Note 1 of the Notes to
Consolidated Financial Statements contained in the Annual Report to Stockholders
attached hereto as Exhibit 13).
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)
</TABLE>
<PAGE> 1
EXHIBIT 13
- --------------------------------------------------------------------------------
1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
MSB FINANCIAL, INC.
<PAGE> 2
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Section I
President's Message ............................... 1
Selected Consolidated Financial Information ....... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation .............. 4
Section II
Consolidated Financial Statements ................. 15
Section III
Stockholder Information ........................... 51
Corporate Information ............................. 52
<PAGE> 3
September 26, 1997
Dear Stockholder:
It is indeed a pleasure to present to you the Annual Report of MSB Financial,
Inc. for the fiscal year ended June 30, 1997, our second full year as a
publicly held corporation.
Net income for the year was $816,000, or $.68 per share, compared to $1.0
million, or $.77 per share for fiscal 1996, a decrease of 18.4%. The reason
for this decrease was a special one-time assessment by the Federal Deposit
Insurance Corporation's Savings Association Insurance Fund of $269,000, which
had an after tax negative effect on earnings of approximately $.15 per share.
Total assets of the Corporation grew 24.2% during the year to $74.7 million.
With continued strong loan demand in our market area, particularly for
financing single-family residential construction loans, net loans totaled $68.9
million as of June 30, 1997, compared to $53.3 million the previous year, an
increase of 29.2%. Most fixed rate residential mortgage loans with maturities
of 15 years and less are being held in portfolio and funded with Federal Home
Loan Bank advances, reflecting management's decision to portfolio these loans,
as we seek to better leverage our capital.
The Corporation has completed both 9% and 5% stock repurchase programs and is
currently engaged in an additional 5% stock repurchase program. To date, the
Corporation has repurchased a total of 234,392 shares under these repurchase
programs. The repurchases as of June 30, 1997 have been made at an average
price of $9.40, or 92.5% of book value, which we believe is an excellent
investment and a prudent use of the Corporation's capital.
On August 7, 1997 the Corporation did a 2 for 1 stock split in the form of a
100% stock dividend. With the additional stock liquidity and availability
provided by doubling the number of total shares outstanding, we hope to
increase liquidity and shareholder value.
Your Board and management are committed to continuing to build the value of
your investment. We will continue to be an organization which builds family
relationships and we are committed to our customers and to the community we
serve.
On behalf of the Board of Directors, thank you for your continued support and
your investment in MSB Financial, Inc.
Sincerely,
Charles B. Cook
President and Chief Executive Officer
<PAGE> 4
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
Total assets.......................................... $74,698 $60,130 $53,409 $46,838 $47,988
Loans receivable, net................................. 68,740 52,328 41,894 37,063 33,815
Loans held for sale, net.............................. 150 957 2,017 3,360 4,302
Investment securities................................. 11 3,135 2,620 3,068 3,057
FHLB stock............................................ 1,044 317 310 310 310
Deposits.............................................. 41,707 40,452 39,446 39,825 41,267
FHLB advances......................................... 19,374 6,000 --- --- ---
Shareholders' equity.................................. 12,690 12,594 13,260 6,264 5,875
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands, except Per Share Data)
Selected Operations Data:
- -------------------------
<S> <C> <C> <C> <C> <C>
Total interest income................................. $5,539 $4,671 $3,910 $3,341 $3,563
Total interest expense................................ 2,294 1,630 1,488 1,521 1,817
-------- -------- -------- -------- --------
Net interest income................................... 3,245 3,041 2,422 1,820 1,746
Provision for loan losses............................. 48 24 73 80 56
-------- -------- -------- -------- --------
Net interest income after provision for loan losses.. 3,197 3,017 2,349 1,740 1,690
Loan fees and service charges on deposits............. 210 192 185 191 184
Gain on sale of loans................................. 47 31 27 133 175
Other noninterest income.............................. 64 107 64 76 75
-------- -------- -------- -------- --------
Total noninterest income.............................. 321 330 276 400 434
Total noninterest expense............................. 2,244 1,823 1,360 1,487 1,205
-------- -------- -------- -------- --------
Income before taxes and cumulative effect
of change in accounting principle................... 1,274 1,524 1,265 653 919
Income tax provision.................................. 458 518 432 223 305
Cumulative effect of change in accounting principle... --- --- --- --- (40)
-------- -------- -------- -------- --------
Net income............................................ $816 $1,006 $833 $430 $574
======== ======== ======== ======== ========
Earnings per common and common equivalent share(1).... $.68 $.77 $.36 N/A N/A
======== ======== ======== ======== ========
</TABLE>
- --------------
(1)Restated for two-for-one stock split declared July 8, 1997.
2
<PAGE> 5
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ---------- ----------- ---------- ------------
Selected Financial Ratios and Other Data:
- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total
assets)................................................. 1.21% 1.82% 1.66% .90% 1.21%
Return on shareholders' equity (ratio of net income to
average equity)......................................... 6.46% 7.67% 9.59% 6.93% 10.16%
Interest rate spread information:
Average during period................................... 4.31% 4.83% 4.47% 3.56% 3.36%
Net interest margin(1).................................. 5.02% 5.72% 5.03% 3.99% 3.84%
Ratio of operating expense to average total assets...... 3.32% 3.30% 2.71% 3.12% 2.54%
Ratio of average interest-earning assets to average
interest-bearing liabilities............................ 1.20% 1.29% 1.18% 1.13% 1.12%
Quality Ratios:
Non-performing loans to total gross loans............... .65% .84% .85% 2.43% 1.43%
Non-performing assets to total assets at end of period.. .62% .79% .72% 2.17% 1.13%
Allowance for loan losses to non-performing loans....... 65.16% 73.32% 85.65% 31.33% 36.53%
Allowance for loan losses to loans receivable, net...... .44% .67% .79% .69% .51%
Capital Ratios:
Shareholders' equity to total assets at end of period... 16.99% 20.94% 24.83% 13.37% 12.24%
Average shareholders' equity to average assets.......... 18.70% 23.71% 17.29% 13.01% 11.88%
Dividend payout ratio(2)................................ 38.24% 27.27% --- N/A N/A
Cash dividends declared per share(3).................... $.26 $.21 --- N/A N/A
Other Data:
Number of full-service offices.......................... 2 2 2 2 2
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) Dividends declared per share divided by earnings per common and common
equivalent share.
(3) Restated for two-for-one stock split declared July 8, 1997.
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
On February 6, 1995, Marshall Savings Bank, F.S.B. (the "Bank") converted
from the mutual to stock form of ownership (the "Conversion"). On that date,
MSB Financial, Inc. (the "Corporation") issued 722,013 shares of common stock
at $10.00 per share (1,444,026 shares at $5.00 per share as restated for the
two-for-one stock split declared July 8, 1997), raising $6.1 million, net of
shares acquired by the newly formed Employee Stock Ownership Plan (the "ESOP")
and net of the costs of the Conversion. Concurrent with the issuance of the
shares, the mutual savings bank converted to a stock savings bank, and the
Corporation acquired 100% of the stock of the Bank. All references to the
Corporation prior to February 6, 1995, except where otherwise indicated, are to
the Bank.
The Corporation is headquartered in Marshall, Michigan, and through the
operations of the Bank is primarily engaged in attracting retail deposits from
the general public and investing those funds in permanent and construction
loans secured by first mortgages on owner-occupied, one- to four-family
residences. Mortgage originations are either held in the Corporation's loan
portfolio or are sold in the secondary market. To a lesser extent, the
Corporation also originates first mortgages on non-owner occupied, one- to
four-family residences, permanent and construction commercial real estate and
consumer loans. The Corporation has generated net income of $816,000,
$1,006,000, and $833,000 for the years ended June 30, 1997, 1996, and 1995
respectively, principally from net interest income.
Permanent loans secured by one- to four-family residences accounted for
approximately 67.5% of the Corporation's gross loan portfolio at June 30, 1997,
64.8% at June 30, 1996, and 63.3% at June 30, 1995. The Corporation originated
total loans of $30.8 million, $28.6 million, and $16.6 million during fiscal
1997, 1996, and 1995, respectively, and sold $2.9 million, $4.7 million, and
$5.2 million of loans, respectively during these periods. The Corporation
offers a wide variety of adjustable and fixed-rate mortgage loans, with many
pricing options and maturity choices. The Corporation also offers a full array
of consumer loans, and intends to expand such lending as a percentage of total
lending since consumer loans usually generate higher yields, have shorter terms
to maturity or reprice more frequently and afford greater opportunity for
growth in the Corporation's market area than do loans secured by one- to
four-family residences. The risks associated with consumer lending can be
greater than the risks of one- to four-family residential mortgage lending due
to the various types of collateral involved and the possible depreciation and
price volatility of such collateral. However, management does not believe that
the additional risk is substantial, or that the overall quality of the loan
portfolio will be hindered, due to the underwriting standards in place at the
Bank. For all years presented, the Corporation sold most fixed-rate one- to
four-family loans originated with terms longer than 15 years in the secondary
market.
FINANCIAL CONDITION
Total assets increased $14.6 million, or 24.2%, from June 30, 1996 to June
30, 1997. Net loans, including loans held for sale, increased from $53.3
million at June 30, 1996 to $68.9 million at
4
<PAGE> 7
June 30, 1997, an increase of 29.3%, due to the Bank retaining 15 year
fixed rate residential mortgage loans in portfolio, and strong demand for
mortgage loans, especially residential one-to-four family construction loans, in
the Corporation's market areas. This increase was funded by a $13.4 million
increase in Federal Home Loan Bank advances, and a $1.3 million increase in
deposit accounts, in conjunction with a $3.1 million decrease in securities
available for sale and securities held to maturity.
Total liabilities increased $14.5 million to $62.0 million from June 30,
1996 to June 30, 1997. In addition to the increase in the FHLB advances and
deposits discussed above, were increases in advance payments by borrowers for
taxes and insurance of $59,000, or 14.6%, and accrued interest payable of
$35,000, or 78.5%. Offsetting the increases in liabilities discussed above was
a decrease of $251,000, or 39.6%, in accrued expenses and other liabilities as
compared to June 30, 1996.
Shareholder's equity increased $96,000, or 0.8%, from June 30, 1996 to
June 30, 1997. The repurchase of the Corporation's common stock, payment of
dividends declared on common stock, offset by a positive adjustment of net
unrealized loss on securities available for sale and net income, resulted in
this increase. During the year ended June 30, 1997, the Corporation
repurchased 63,954 of its common shares at a total cost of $645,060, or $10.09
per share, as compared to 170,438 shares during the year ended June 30, 1996 at
a total cost of $1,557,753, or $9.14 per share (as restated for the two-for-one
stock split declared July 8, 1997). The Corporation is currently in the
process of repurchasing an additional 5%, or 64,264 shares, of its common stock
and as of June 30, 1997 had repurchased 36,650 shares under this program. As
of June 30, 1997, a total of 234,392 shares of the Corporation's common stock
had been repurchased at a cost of $2,202,813, or $9.40 per share.
Shareholder's equity to total assets remains strong at 17.0% at June 30, 1997
compared to 20.9% and 24.8% at June 30, 1996 and 1995, respectively.
RESULTS OF OPERATIONS
GENERAL. The Corporation'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 Corporation's non-interest income, including fee income and
service charges, and the level of its noninterest expense, including general
and administrative expense. The Corporation, 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 years ended June 30, 1997, 1996, and 1995
was $816,000, $1,006,000, and $833,000 respectively. The decline in net income
from fiscal 1996 to fiscal 1997 was primarily due to a $269,000 special
assessment by the Federal Deposit Insurance Corporation's ("FDIC") Savings
Association Insurance Fund ("SAIF").
NET INTEREST INCOME. Net interest income before provision for loan losses
for the years ended June 30, 1997, 1996, and 1995 was $3.2 million, $3.0
million, and $2.4 million, respectively. The increases were primarily
due to an increase in the volume of loans receivable, partially offset by the
increase in volume of FHLB advances used to fund these loans. Also, yield earned
on loans decreased from 9.04% in fiscal 1996 to 8.70% in fiscal 1997 due to a
decrease in loan sales in fiscal 1997 which resulted in a slower acceleration
into income of deferred loan fees, as compared to fiscal 1996.
5
<PAGE> 8
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities
and the resultant rates. No tax equivalent adjustments were made. All average
balances are monthly average balances. At June 30, 1997, non-accruing loans have
been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June, 30,
At June 30, -----------------------------------------------------------------------
1997 1997 1996
---------- --------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
---------- ------- ---- ---------- ------- ---- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)........................ 8.58% $ 61,718 $ 5,369 8.70% $ 47,609 $ 4,305 9.04%
Interest-bearing deposits.................. 5.06 1,573 85 5.40 2,168 148 6.83
Securities................................. 7.18 643 34 5.29 3,091 193 6.24
FHLB stock................................. 7.85 667 51 7.65 312 25 8.01
-------- ------- -------- -------
Total interest-earning assets(1).......... 64,601 5,539 8.57 53,180 4,671 8.78
------- -------
Other assets............................... 2,967 2,115
-------- --------
Total assets.............................. $ 67,568 $ 55,295
======== ========
Interest-Bearing Liabilities:
Savings deposits........................... 2.50 $ 8,644 213 2.46 $ 8,192 214 2.61
Checking and money market deposits......... 2.29 12,383 292 2.36 11,468 293 2.55
Certificate accounts....................... 5.35 19,989 1,035 5.18 19,823 1,039 5.24
Other...................................... 6.19 12,871 754 5.86 1,833 84 4.58
-------- ------- -------- -------
Total interest-bearing liabilities........ 53,887 2,294 4.26 41,316 1,630 3.95
------- -------
Other liabilities.......................... 1,043 868
-------- --------
Total liabilities......................... 54,930 42,184
Shareholders' equity....................... 12,638 13,111
-------- --------
Total liabilities and shareholder's
equity $ 67,568 $ 55,295
======== ========
Net interest income......................... $ 3,245 $ 3,041
======= =======
Net interest rate spread.................... 4.31% 4.83%
==== =====
Net earning assets.......................... $10,714 $ 11,864
======= ========
Net yield on average interest-earning
assets..................................... 5.02% 5.72%
==== =====
Average interest-earning assets to
average interest-bearing liabilities....... 1.20x 1.29x
==== =====
------------------------------------
<CAPTION>
Year Ended June, 30,
----------------------------------------
1995
----------------------------------------
Average Interest
Outstanding Earned/
Balance Paid Yield/Rate
------- ---- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)........................ $42,122 $3,558 8.45%
Interest-bearing deposits.................. 3,049 179 5.87
Securities................................. 2,700 151 5.59
FHLB stock................................. 310 22 7.10
------- ------
Total interest-earning assets(1).......... 48,181 3,910 8.12
------
Other assets............................... 2,053
-------
Total assets.............................. $50,234
=======
Interest-Bearing Liabilities:
Savings deposits........................... $ 8,840 238 2.69
Checking and money market deposits......... 10,504 290 2.76
Certificate accounts....................... 20,236 947 4.68
Other...................................... 1,161 13 1.12
------- ------
Total interest-bearing liabilities........ 40,741 1,488 3.65
------
Other liabilities.......................... 807
-------
Total liabilities......................... 41,548
Shareholders' equity....................... 8,686
-------
Total liabilities and shareholder's equity $50,234
=======
Net interest income......................... $2,422
======
Net interest rate spread.................... 4.47%
====
Net earning assets.......................... $ 7,440
=======
Net yield on average interest-earning
assets..................................... 5.03%
====
Average interest-earning assets to
average interest-bearing liabilities....... 1.18x
====
------------------------------------
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
6
<PAGE> 9
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------- ----------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
--------------- Increase ---------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------- ---------- ------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable..................... $1,233 $(169) $1,064 $485 $262 $747
Interest-bearing deposits............ (36) (27) (63) (57) 26 (31)
Securities........................... (133) (26) (159) 23 19 42
FHLB stock........................... 27 (1) 26 --- 3 3
------ ------- ---------- ------- ------- ----------
Total interest-earning assets........ $1,091 $(223) 868 $451 $310 761
====== ======= ---------- ======= ======= ----------
Interest-Bearing Liabilities:
Savings deposits..................... $11 $(12) $( 1) $(17) $(7) $(24)
Checking and money market deposits... 22 (23) (1) 26 (23) 3
Certificate accounts................. 9 (13) (4) ( 20) 112 92
FHLB advances and other borrowings... 640 30 670 11 60 71
------ ------- ---------- ------- ------- ----------
Total interest-bearing liabilities... $682 $(18) 664 $--- $142 142
====== ======= ---------- ======= ======= ----------
Net interest income.................. $204 $619
========== ==========
</TABLE>
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 was increased by $24,000 for the year
ended June 30, 1997, from the year ended June 30, 1996, due to management's
continuing reassessment of losses inherent in the loan portfolio. At June 30,
1997 the Corporation's allowance for loan losses totaled $303,000, or 0.44% of
net loans receivable and 65.16% of total non-performing loans. The
Corporation's provision for loan losses was $48,000 in fiscal 1997 compared to
$24,000 in fiscal 1996 and $73,000 in fiscal 1995.
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
7
<PAGE> 10
Corporation 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 is not based directly on the level of non-performing assets.
As of June 30, 1997, the Corporation's non-performing assets, consisting
of nonaccrual loans and accruing loans 90 days or more delinquent, totaled
$465,000 or 0.62% of total assets compared to $475,000 or 0.79% of total assets
as of June 30, 1996, a decrease of $10,000. Loans more than 90 days past due
and other loans of concern are placed on non-accrual status, unless management
determines that the loans are well-collateralized and in the process of
collection. The ratio of non-performing loans to total loans decreased from
0.84% at June 30, 1996 to 0.65% at June 30, 1997. There was no affiliation
between the Corporation's management and the borrowers of the above-mentioned
loans. Foreclosed real estate at June 30, 1997 totaled $29,000. The
Corporation did not have any foreclosed real estate at June 30, 1996.
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 and loan portfolio quality dictate. Although the
Corporation 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 no be required in future periods. In addition, the
determination as to the amount of its allowance for loan losses is subject to
review by the Office of Thrift Supervision (the "OTS") and the Federal Deposit
Insurance Corporation (the "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. Total noninterest income for the year ended June 30,
1997 was $321,000, compared to $330,000 in fiscal 1996 and $276,000 in fiscal
1995. This represents a decrease of $9,000 in fiscal 1997 compared to fiscal
1996 and an increase of $45,000 compared to fiscal 1995. Total noninterest
income consists primarily of net gains on the sale of loans, loan servicing
fees, net realized losses on sales of securities available for sale, service
fees on deposit accounts and other fees. The primary reason for the decrease
in noninterest income from fiscal 1996 to fiscal 1997 was net realized losses
associated with the sale of securities available for sale of $48,000 in fiscal
1997. Net gains on sales of loans held for sale continued to increase in fiscal
1997, as compared to fiscal 1996 and fiscal 1995. Included in the increase of
$16,000 during fiscal 1997, as compared to fiscal 1996, was income of $29,000
associated with the recognition of mortgage servicing rights retained at the
time of a mortgage loan sale. The period ending June 30, 1997 was the first
period mortgage servicing rights were recognized on the books of the
Corporation. In fiscal 1997, 1996 and 1995, respectively, loan sales totaled
$2.9 million, $4.7 million and $5.2 million.
NONINTEREST EXPENSE. Noninterest expense totaled $2.2 million in 1997
compared to $1.8 million in fiscal 1996 and $1.4 million in fiscal 1995.
Included in noninterest expense for 1997 was the non-recurring SAIF assessment
of $269,000, as further discussed below. Noninterest expense without the SAIF
assessment was $2.0 million for fiscal 1997. Salaries and employee benefits,
the Corporation's largest noninterest expense, increased $106,000 from fiscal
1996 to fiscal 1997, representing an increase of 13.8%, and increased $139,000
from fiscal 1995 to fiscal 1996, representing an increase of 22.3%.
Significant factors causing the increase in salaries and employee benefits were
the addition of two new employees in fiscal 1997, increased benefits expense
associated with health care insurance, and increases in expenses associated
with the Corporation's stock-based
8
<PAGE> 11
benefit plans, as a result of the Corporation's stock price. See
Note 12 of Notes to Consolidated Financial Statements contained herein.
Occupancy and equipment expense increased each year primarily due to equipment
purchases. Other expense consisting primarily of franchise taxes, stock
transfer expenses, loan related expenses and other sundry expenses increased
$37,000 in fiscal 1997 as compared to an increase of $89,000 during fiscal
1996. A significant factor affecting noninterest expense in fiscal 1995
compared to fiscal 1997 and fiscal 1996, was a $130,000 reduction in
noninterest expense due to a positive adjustment to the provision to adjust
loans held for sale to the lower of cost or market in fiscal 1995, as compared
to a $1,000 negative adjustment in fiscal 1996 and a positive adjustment of
$27,000 in fiscal 1997. The large positive adjustment in fiscal 1995 was a
result of the decline in fixed-rate mortgage interest rates during the second
half of fiscal 1995.
During the year ended June 30, 1997, Congress enacted the Deposit
Insurance Funds Act of 1996 (the "Act"), which brings major changes to the
FDIC. One such change may 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 also called for a special assessment on
SAIF-assessable deposits to capitalize the SAIF and bring the fund into parity
with the BIF. As a result of 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 $0.22 per share, to pre-tax earnings. The Bank, still
remains a well-capitalized institution for regulatory purposes.
INCOME TAX EXPENSE. Income tax expense for fiscal 1997 was $458,000
compared to $518,000 in fiscal 1996 and $432,000 in fiscal 1995. The effective
tax rate for federal income taxes was 35.9% in fiscal 1997, 34.0% in fiscal
1996 and 34.1% in fiscal 1995.
ASSET/LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities with short- and
intermediate-term maturities reprice more rapidly, or on a different basis,
than its interest-earning assets. Management believes it is critical to
manage the relationship between interest rates and the effect on the Bank's net
portfolio value ("NPV"). This approach calculates the difference between the
present value of expected cash flow from assets and the present value of
expected cash flows from liabilities, as well as cash flows from
off-balance-sheet contracts. Management of the Bank's assets and liabilities
is done within the context of the marketplace, but also considering limits
established by the Board of Directors on the amount of change in NPV which is
acceptable given certain interest rate changes.
The OTS requires a net market value methodology to measure the interest
rate risk exposure of thrift institutions. Under proposed OTS regulations, an
institution's "normal" level of interest rate-risk in the event of an assumed
change in interest rates is a decrease in the institution's NPV in an amount
not exceeding 2% of the present value of its assets. Thrift institutions with
greater than "normal" interest rate exposure must take a deduction from their
total capital available to meet their risk-based capital requirement. The
amount of the deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is defined as 2% of the
present value of its assets. The regulation, however, will not become
effective until the OTS evaluates the process by which savings institutions may
appeal an interest rate risk deduction determination. It is uncertain as to
when this evaluation may be completed.
9
<PAGE> 12
Furthermore, the Bank, due to its asset size and level of risk-based capital,
is exempt from this requirement. Notwithstanding the forgoing, utilizing this
measuring concept, at June 30, 1997, the Bank's interest rate risk was
considered normal under OTS regulations and no additional risk-based capital
would have been required.
Presented below, as of June 30, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments, up
and down 400 basis points compared to Board policy limits and in accordance
with OTS regulations, based on the assumptions described below. Such limits
have been established with consideration of the dollar impact of various rate
changes and the Bank's strong capital position. As illustrated, the Bank's NPV
is more sensitive to declining rates than rising rates.
<TABLE>
<CAPTION>
June 30, 1997
Change in ------------------
Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
-------------- ----------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
+400 (40)% $(1,941) (15)%
+300 (30) (1,206) (9)
+200 (20) (555) (4)
+100 (10) (151) (1)
-0- --- --- ---
-100 (10) (261) (2)
-200 (20) (994) (7)
-300 (30) (1,593) (12)
-400 (40) (1,925) (15)
</TABLE>
As of June 30, 1997, the Bank was in compliance with the Board limits regarding
changes in NPV.
Management continually works to achieve a relatively neutral position
regarding interest rate risk. In the current interest rate environment, the
Bank's customers are interested in obtaining long term credit products and
short term savings products. Management has taken action to counter this
trend. In this regard, the Bank sells most fixed rate one- to four-family
loans with a term to maturity of greater than 15 years, retains ARM loans and
has emphasized the origination of consumer loans with relatively short
maturities or periods to repricing. Fifteen year mortgage loans held for the
Bank's portfolio have been funded with 7 to 10 year amortizing FHLB mortgage
advances at a positive spread. See Note 9 of the Notes to Consolidated
Financial Statements.
On the deposit side, management has worked to reduce the impact of
interest rate changes by emphasizing low interest rate deposit products and
maintaining competitive pricing on longer term certificates of deposit.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities
10
<PAGE> 13
may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as ARM
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of repayments on loans and early withdrawals
from certificates could deviate significantly from those assumed in calculating
the above table.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are deposits, principal and interest
repayments on loans, interest-bearing deposits, and Federal Home Loan Bank
advances. 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 the 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 June 30, 1997, the Bank's
liquidity ratio was 6.87%.
Liquidity management is both a daily and long term responsibility of
management. Investments in liquid assets are adjusted based upon management's
assessment of expected loan demand, expected deposit flows, yields available on
interest-earning deposits and securities, and the objective of its
asset/liability management program. Excess liquidity is invested generally in
interest-earning overnight deposits of the FHLB of Indianapolis. The Bank also
uses its borrowing capability through the FHLB of Indianapolis.
At June 30, 1997, the Bank had advances from the FHLB of Indianapolis of
$19.4 million, used primarily to fund 15 year fixed rate and adjustable rate
one- to four-family residential mortgage loans held in the Bank's portfolio.
The Bank also uses its liquidity resources to meet ongoing commitments, to fund
maturing certificates of deposit and deposit withdrawals, and to meet operating
expenses. At June 30, 1997, the Bank had outstanding commitments to extend
credit which amounted to $4.5 million (including $3.2 million in available home
equity lines of credit). Management believes that loan repayments and other
sources of funds, such as FHLB advances, will be adequate to meet the Bank's
foreseeable liquidity needs.
The primary operating activity of the Bank in addition to the collection
of interest on interest-earning assets and the payment of interest on deposits
and borrowings is the origination of loans for sale. During the years ended
June 30, 1997, 1996 and 1995, the Bank originated loans for sale totaling $3.0
million, $4.1 million and $3.9 million, respectively and received proceeds from
the sale of such loans of $2.9 million, $4.7 million and $5.2 million,
respectively.
The primary financing activity of the Bank is deposits. For the years
ended June 30, 1997, 1996 and 1995 there was a net increase (decrease) in
deposit accounts of $1.3 million, $1.0 million,
11
<PAGE> 14
and ($379,000), respectively.
Federally 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 June 30, 1997 the Bank had tangible and leverage capital of $9.5
million, or 12.8% of adjusted total assets, which was approximately $8.4
million and $7.3 million above the minimum requirements of 1.5% and 3.0%,
respectively, of the adjusted total assets in effect on that date. On June 30,
1997 the Bank had risk-based capital of $9.8 million (including $9.5 in core
capital), or 20.9% of risk-weighted assets of $47.1 million. This amount was
$6.1 million above the 8.0% requirement in effect on that date.
The parent Corporation also has a need for, and sources of liquidity.
Liquidity is required to fund its operating expenses, fund stock repurchase
programs, as well as for the payment of any dividends to shareholders. At
June 30, 1997 the parent Corporation had $11,000 in liquid assets on hand. The
primary source of liquidity on an ongoing basis is dividends from the Bank.
Dividends totaling $936,000 were paid from the Bank to the Corporation for the
year ended June 30, 1997. For the year ended June 30, 1997, the Corporation
paid dividends to shareholders totaling $306,000 and repurchased 63,954 shares
of common stock, as restated for the two-for-one stock split declared July 8,
1997, at a total cost $645,000. The Corporation has regulatory authority to
repurchase an additional 27,614 shares of Corporation common stock at June 30,
1997, as restated for the two-for-one stock split declared July 8, 1997.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Corporation's operations. Nearly all
the assets and liabilities of the Corporation are financial, unlike most
industrial companies. As a result, the Corporation's performance is directly
impacted by changes in interest rates, which are indirectly influenced by
inflationary expectations. The Corporation's ability to match the interest
sensitivity of its financial assets to the interest sensitivity of its
financial liabilities in its asset/liability management may tend to minimize
the effect of changes in interest rates on the Corporation's performance.
Changes in interest rates do not necessarily move to the same extent as do
changes in the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standands Board (the "FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides authoritative guidance as to the accounting and financial
reporting for transfers and servicing of financial assets and extinguishments
of
12
<PAGE> 15
liabilities. 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 Statement 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 Statement also requires measuring instruments that
have a substantial prepayment risk at fair value, much like debt instruments
classified as available for sale or trading. While SFAS No. 125 supersedes
SFAS No. 122, "Accounting for Mortgage Servicing Rights", it only marginally
modifies the accounting and disclosure requirements of SFAS No. 122. SFAS No.
125, as amended by SFAS No.127, became effective on a prospective basis for
some transactions occurring after December 31, 1996 and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
1997 consolidated financial statements and the impact of complete adoption in
1998 is also not expected to be material to the consolidated financial
statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
is effective for financial statements beginning with the quarter ended December
31, 1997. SFAS No. 128 simplifies the calculation of earnings per share
("EPS") 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 will reflect the potential dilution of
securities that could share in earnings, such as stock options, warrants or
other common stock equivalents. All prior period EPS data will be restated to
conform with the new presentation methods. As the Corporation has not had
significant dilution from stock options, the new calculation methods will not
significantly change prior earnings per share disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Income tax
effects must also be shown. This Statement is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 130 is not
expected to have a material impact on the results of operations or financial
condition of the Corporation.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement is effective for financial statements for periods beginning
after December 15, 1997. The adoption of SFAS No. 131 is not expected to have
a material impact on the results of operations of financial condition of the
Corporation.
13
<PAGE> 16
FORWARD-LOOKING STATEMENTS
When used in this Annual Report to Shareholders or future filings by the
Corporation with the Securities and Exchange Commission (the "Commission"), in
the Corporation'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
Corporation 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, changes in levels of market interest rates, credit risks of lending
activities, acceptance of new products, and competitive and regulatory factors
could affect the Corporation's financial performance and could cause the
Corporation's actual results for future periods to differ materially from those
anticipated or projected. Additional risks and factors are detailed from time
to time in the Corporation's reports filed with the Commission, including the
report on Form 10-KSB for the year ended June 30, 1997.
The Corporation 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.
14
<PAGE> 17
MSB FINANCIAL, INC.
Marshall, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS .................... 16
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ... 17
CONSOLIDATED STATEMENTS OF INCOME ................ 18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY .. 19
CONSOLIDATED STATEMENTS OF CASH FLOWS ............ 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ....... 23
</TABLE>
15
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MSB Financial, Inc.
Marshall, Michigan
We have audited the accompanying consolidated statements of financial condition
of MSB Financial, Inc. as of June 30, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MSB Financial, Inc.
as of June 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1997 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
July 25, 1997
16
<PAGE> 19
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 1,502,724 $ 2,122,384
Interest-bearing deposits in other financial institutions 1,577,888 57,676
----------- -----------
Total cash and cash equivalents 3,080,612 2,180,060
Securities available for sale 2,118,157
Securities held to maturity (fair value of
$11,455 in 1997 and $1,016,926 in 1996) 11,455 1,016,381
Loans held for sale net of unrealized losses of
$0 in 1997 and $27,259 in 1996 150,000 957,018
Loans receivable, net of allowance for loan losses of
$302,903 in 1997 and $348,067 in 1996 68,739,556 52,327,685
Federal Home Loan Bank stock 1,043,700 316,700
Accrued interest receivable 420,921 332,240
Premises and equipment, net 577,058 530,182
Mortgage servicing rights 27,595
Other assets 646,887 352,072
----------- -----------
$74,697,784 $60,130,495
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 598,379 $ 346,310
Savings, NOW and MMDA deposits 21,495,688 19,965,628
Other time deposits 19,612,665 20,140,120
----------- -----------
Total deposits 41,706,732 40,452,058
Federal Home Loan Bank advances 19,373,600 6,000,000
Advance payments by borrowers for taxes and insurance 465,445 406,201
Accrued interest payable 79,114 44,332
Accrued expenses and other liabilities 382,697 633,560
----------- -----------
62,007,588 47,536,151
Shareholders' equity
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none outstanding
Common stock, $.01 par value; 4,000,000 shares
authorized; 1,483,014 shares issued and 1,248,622
shares outstanding at June 30, 1997; 740,785 shares
issued and 655,566 shares outstanding at June 30, 1996 14,830 7,408
Additional paid-in capital 7,096,776 7,017,760
Retained earnings, substantially restricted 8,372,493 7,870,150
Net unrealized loss on securities available for sale,
net of tax benefit of $0 in 1997 and $19,382 in 1996 (37,622)
Unearned Employee Stock Ownership Plan shares (383,006) (451,399)
Unearned Recognition and Retention Plan shares (208,084) (254,200)
Treasury stock, at cost (234,392 and 85,219 common
shares in 1997 and 1996, respectively) (2,202,813) (1,557,753)
----------- -----------
12,690,196 12,594,344
----------- -----------
$74,697,784 $60,130,495
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $5,368,868 $4,304,604 $3,557,993
Securities available for sale - taxable 28,179 141,426 146,850
Securities held to maturity - taxable 5,659 51,905 4,574
Other interest and dividend income 136,095 173,051 201,292
---------- ---------- ----------
5,538,801 4,670,986 3,910,709
Interest expense
Deposits 1,540,224 1,545,292 1,475,564
Federal Home Loan Bank advances 747,489 84,394
Other interest expense 6,112 12,748
---------- ---------- ----------
2,293,825 1,629,686 1,488,312
---------- ---------- ----------
NET INTEREST INCOME 3,244,976 3,041,300 2,422,397
Provision for loan losses 48,000 24,000 73,000
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,196,976 3,017,300 2,349,397
Noninterest income
Loan servicing fees, net 85,421 94,177 92,829
Net gains on sales of loans held for sale 46,982 30,715 26,612
Service charges on deposit accounts 124,367 97,683 92,766
Net realized losses on sales of securities
available for sale (47,950) (2,584)
Other income 111,933 107,398 66,555
---------- ---------- ----------
320,753 329,973 276,178
Noninterest expense
Salaries and employee benefits 867,468 761,965 622,983
Occupancy and equipment expense 196,000 174,191 164,285
Data processing expense 160,933 144,417 128,317
Federal deposit insurance premium 346,113 114,151 110,396
Director fees 123,824 112,317 76,050
Correspondent bank charges 57,769 51,137 49,730
Michigan Single Business tax 58,550 56,450 49,000
Provision (recovery) to adjust loans held for sale
to lower of cost or market (27,259) 1,270 (129,528)
Advertising expense 57,279 56,998 60,106
Professional fees 87,410 83,609 58,907
Supplies expense 65,129 53,232 45,645
Other expense 250,512 213,940 124,611
---------- ---------- ----------
2,243,728 1,823,677 1,360,502
---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 1,274,001 1,523,596 1,265,073
Federal income tax expense 458,000 518,000 431,700
---------- ---------- ----------
NET INCOME $ 816,001 $1,005,596 $ 833,373
========== ========== ==========
Earnings per common and common equivalent
share subsequent to conversion $.68 $.77 $.36
==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Loss on Unearned Unearned
Securities Employee Recognition
Additional Available for Stock and
Common Paid-In Retained Sale, Net of Ownership Retention Treasury
Stock Capital Earnings Tax Plan Shares Plan Shares Stock
------ ---------- ---------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1994 $6,305,695 $ (41,270)
Net income for 1995 833,373
Proceeds from the sale of
722,013 shares of common
stock, net of conversion costs $7,220 $6,658,689 $ (577,610)
11,552 shares committed to be released
under the Employee Stock
Ownership Plan (ESOP) 16,288 57,760
Net changes in net unrealized loss on
securities available for sale, net of tax
of ($104) (204)
------ ---------- ---------- -------------- -----------
BALANCE AT JUNE 30, 1995 7,220 6,674,977 7,139,068 (41,474) (519,850)
Net income for 1996 1,005,596
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.21 per share (274,514)
13,690 shares committed to be released
under the ESOP 47,916 68,451
Issuance of 18,772 restricted common
shares under the Recognition and
Retention Plan (RRP) 188 293,125 $ (293,313)
Amortization of RRP shares 39,113
Repurchase of 85,219 shares of common
stock $(1,557,753)
<CAPTION>
Total
Shareholders'
Equity
-------------
<S> <C>
BALANCES AT JUNE 30, 1994 $ 6,264,425
Net income for 1995 833,373
Proceeds from the sale of
722,013 shares of common
stock, net of conversion costs 6,088,299
11,552 shares committed to be released
under the Employee Stock
Ownership Plan (ESOP) 74,048
Net changes in net unrealized loss on
securities available for sale, net of tax
of ($104) (204)
-------------
BALANCE AT JUNE 30, 1995 13,259,941
Net income for 1996 1,005,596
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.21 per share (274,514)
13,690 shares committed to be released
under the ESOP 116,367
Issuance of 18,772 restricted common
shares under the Recognition and
Retention Plan (RRP)
Amortization of RRP shares 39,113
Repurchase of 85,219 shares of common
stock (1,557,753)
</TABLE>
(Continued)
19
<PAGE> 22
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Loss on Unearned Unearned
Securities Employee Recognition
Additional Available for Stock and
Common Paid-In Retained Sale, Net of Ownership Retention Treasury
Stock Capital Earnings Tax Plan Shares Plan Shares Stock
------- ---------- ---------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustment to costs related to
1995 sale of common stock $ 1,742
Net changes in net unrealized loss on
securities available for sale, net of tax
of $1,983 $ 3,852
------- ---------- ---------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1996 $ 7,408 7,017,760 $7,870,150 (37,622) $ (451,399) $ (254,200) $(1,557,753)
Net income for 1997 816,001
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.26 per share (306,243)
13,678 shares committed to be released
under the ESOP 65,575 68,393
Issuance of 722 restricted common
shares under the Recognition and
Retention Plan (RRP) 7 13,441 (13,448)
Amortization of RRP shares 59,564
Repurchase of 31,977 shares of common
stock (645,060)
Issuance of 741,507 common shares
from declaration of 2 for 1 stock split 7,415 (7,415)
Net changes in net unrealized loss on
securities available for sale, net of tax
of $19,382 37,622
------- ---------- ---------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1997 $14,830 $7,096,776 $8,372,493 $ 0 $ (383,006) $ (208,084) $(2,202,813)
======= ========== ========== =========== =========== =========== ===========
<CAPTION>
Total
Shareholders'
Equity
-------------
<S> <C>
Adjustment to costs related to
1995 sale of common stock $ 1,742
Net changes in net unrealized loss on
securities available for sale, net of tax
of $1,983 3,852
-----------
BALANCE AT JUNE 30, 1996 12,594,344
Net income for 1997 816,001
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.26 per share (306,243)
13,678 shares committed to be released
under the ESOP 133,968
Issuance of 722 restricted common
shares under the Recognition and
Retention Plan (RRP)
Amortization of RRP shares 59,564
Repurchase of 31,977 shares of common
stock (645,060)
Issuance of 741,507 common shares
from declaration of 2 for 1 stock split
Net changes in net unrealized loss on
securities available for sale, net of tax
of $19,382 37,622
-----------
BALANCE AT JUNE 30, 1997 $12,690,196
===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 816,001 $ 1,005,596 $ 833,373
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 48,000 24,000 73,000
Provision (recovery) to adjust loans held
for sale to lower of cost or market (27,259) 1,270 (129,528)
Depreciation 100,913 92,607 75,656
Amortization of mortgage servicing rights 1,168
Net amortization of premium (discount) 396 4,429 (10,770)
Employee Stock Ownership Plan expense 133,968 116,367 74,048
Recognition and Retention Plan expense 59,564 39,113
Originations of loans held for sale (2,992,755) (4,078,270) (3,903,022)
Proceeds from sales of loans held for sale 2,894,510 4,720,966 5,185,689
Net gains on sales of loans held for sale (46,982) (30,715) (26,612)
Net realized losses on sales of securities
available for sale 47,950 2,584
Stock dividend on securities available for sale (13,695)
Change in assets and liabilities:
Accrued interest receivable (88,681) (98,911) (56,107)
Other assets (314,197) (246,600) (30,458)
Accrued interest payable 34,782 8,772 11,925
Accrued expenses and other liabilities (250,863) 327,890 196,632
------------ ------------ -----------
Net cash from operating activities 416,515 1,872,819 2,296,410
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (1,022,389)
Proceeds from sales of securities available for sale 2,127,211 497,416
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 1,000,000
Principal paydowns on mortgage-backed
securities held to maturity 4,530 6,293 8,068
Purchase of Federal Home Loan Bank stock (727,000) (6,400) (400)
Net increase in loans (15,509,130) (10,010,421) (4,687,956)
Net purchases of premises and equipment (147,789) (221,128) (50,790)
------------ ------------ -----------
Net cash from investing activities (13,252,178) (10,736,968) (4,256,051)
</TABLE>
(Continued)
21
<PAGE> 24
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $1,254,674 $1,005,668 $ (378,850)
Proceeds from Federal Home Loan Bank
advances 17,500,000 6,000,000
Repayments on Federal Home Loan Bank
advances (4,126,400)
Net change in advance payments
by borrowers for taxes and insurance 59,244 45,194 (102,587)
Proceeds from sale of common stock,
net of conversion costs 1,742 6,088,299
Dividends paid (306,243) (274,514)
Repurchase of common stock (645,060) (1,557,753)
----------- ----------- ----------
Net cash from financing activities 13,736,215 5,220,337 5,606,862
----------- ----------- ----------
Net change in cash and cash equivalents 900,552 (3,643,812) 3,647,221
Cash and cash equivalents at beginning of period 2,180,060 5,823,872 2,176,651
----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,080,612 $ 2,180,060 $5,823,872
=========== =========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 2,259,043 $ 1,620,914 $1,476,387
Income taxes 497,299 598,000 345,000
Supplemental disclosure of noncash investing
activities
Transfers from loans held for sale to loans
held to maturity 950,741 447,092 216,182
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 25
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated
financial statements include the accounts of MSB Financial, Inc. ("MSB
Financial") and its wholly-owned subsidiary, Marshall Savings Bank, F.S.B. (the
"Bank") (together referred to as "the Corporation"). MSB Financial was
organized in September 1994 for the purpose of owning all of the outstanding
stock of the Bank. All significant intercompany transactions and balances have
been eliminated in consolidation. Financial information presented herein,
prior to the organization of MSB Financial reflects the financial position,
results of operations and cash flows of the Bank. The primary source of income
for the Corporation is the origination of residential real estate and consumer
loans in the Calhoun County, Michigan area through its two offices located in
Marshall, Michigan. The surrounding communities serve as the source of
substantially all of the Corporation's loan and deposit activities.
Use of Estimates in the Preparation of Financial Statements: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period, as well as the
disclosures provided. Areas involving the use of estimates and assumptions in
the accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, the value of
mortgage servicing rights, determination and carrying value of impaired loans,
the carrying value of loans held for sale, the accrued liability for deferred
compensation, the value of stock options, the realization of deferred tax
assets, and the determination of depreciation of premises and equipment
recognized in the Corporation's financial statements. Actual results could
differ from those estimates. Estimates associated with the allowance for loan
losses and the fair values of securities and other financial instruments are
particularly susceptible to material change in the near term.
Cash Equivalents: For purposes of the consolidated statements of cash flows,
the Corporation considers all highly liquid debt instruments with original
maturities when purchased of three months or less to be cash equivalents. The
Corporation reports net cash flows for customer loan and deposit transactions.
Securities Available for Sale: Securities available for sale include those the
Corporation may decide to sell due to changes in interest rates, prepayment
risks, yield and availability of alternative investments, liquidity needs, or
other factors. Securities classified as available for sale are reported at
their fair value and the related unrealized holding gain or loss is reported,
net of related income tax effects, as a separate component of shareholders'
equity until realized.
(Continued)
23
<PAGE> 26
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premiums and discounts on securities available for sale are recognized in
interest income using the interest method over the estimated life of the
security. Gains and losses on the sale of securities available for sale are
determined using the specific identification method based on amortized cost.
Securities Held to Maturity: Securities for which management has the positive
intent and the Corporation has the ability to hold to maturity are reported at
cost, adjusted for premiums and discounts that are recognized in interest
income using the interest method over the estimated life of the security.
Mortgage Banking Activities: Mortgage loans originated and intended for sale
in the secondary market are reported on the statements of financial condition
as loans held for sale and are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income.
Loan servicing fees are recognized when received and the related costs are
recognized when incurred. The Bank sells mortgages into the secondary market
at market prices, which includes consideration for normal servicing fees.
Effective July 1, 1996, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights." This
Statement changed the accounting for mortgage servicing rights retained by a
loan originator. Under this standard, if the originator sells or securitizes
mortgage loans and retains the related servicing rights, the total cost of the
mortgage loan is allocated between the loan (without the servicing rights) and
the servicing rights, based on their relative fair values. Under prior
practice, all such costs were assigned to the loan. The costs allocated to
mortgage servicing rights are now recorded as a separate asset and are
amortized in proportion to, and over the life of, the net servicing income.
The carrying value of the mortgage servicing rights are periodically evaluated
for impairment. The effect of adopting the statement was not material.
Loans Receivable: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, and net of deferred loan origination fees,
costs and discounts.
Interest income on loans is accrued over the term of the loan based on the
amount of unpaid principal, except where doubt exists as to the collectibility
of a loan, in which case the accrual of interest is discontinued. Effective
July 1, 1995, under SFAS No. 114, as amended by SFAS No. 118, the carrying
values of impaired loans are periodically adjusted to reflect cash payments,
revised estimates of future cash flows, and increases in the present value of
expected cash flows due to the passage of time. Cash payments representing
interest income are reported as such. Other cash payments are reported as
reductions in carrying value, while increases or decreases due to changes in
estimates of future payments and due to the passage of time are reported as
adjustments to the provision for loan losses.
(Continued)
24
<PAGE> 27
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Origination Fees and Costs: Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized using the level yield
method, as an adjustment to interest income over the life of the loan.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of and
amount of a loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time. While management may periodically
allocate portions of the allowance for specific problem loan situations, the
whole allowance is available for any loan charge-offs that occur. A loan is
charged-off against the allowance by management when deemed uncollectible,
although collection efforts continue and future recoveries may occur.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118, was adopted by the Company on July 1, 1995. Loans are considered
impaired if full principal or interest payments are not anticipated. Impaired
loans are carried at the present value of expected cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the loan value is deemed to be less than the
unpaid balance. The effect of adopting these standards, included in the 1996
provision for loan losses, was not material to the consolidated financial
statements.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Nonaccrual loans are
often also considered impaired. Impaired loans, or portions thereof, are
charged off when deemed uncollectible. The nature of disclosures for impaired
loans is considered generally comparable to prior nonaccrual and renegotiated
loans and non-performing and past-due asset disclosures.
(Continued)
25
<PAGE> 28
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Prior to the adoption of SFAS No. 114, loans were generally placed on a
nonaccrual basis when, in the opinion of management, collection of principal or
interest was doubtful. At the time a loan was placed on nonaccrual status,
interest previously accrued, but not collected, was charged against income.
Income on such loans was then recognized only to the extent that cash was
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments was restored, in which case the loan
was returned to accrual status.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell. There were no
foreclosed real estate properties held at June 30, 1996. Foreclosed real
estate at June 30, 1997 amounted to $29,334.
Premises and Equipment: The Corporation's premises and equipment are stated at
cost less accumulated depreciation. Buildings and related components are
depreciated using the straight-line method with useful lives ranging from 5 to
33 years. Furniture, fixtures and equipment are depreciated using the
straight-line method with useful lives ranging from 3 to 5 years. Maintenance
and repairs are charged to expense and improvements are capitalized. The cost
and accumulated depreciation applicable to assets retired or otherwise disposed
of are eliminated from the accounts and the gain or loss on disposition is
credited or charged, respectively, to operations. These assets are reviewed for
impairment under SFAS No. 121 when events indicate the carrying amount may not
be recoverable.
Income Taxes: The Corporation records income tax expense based on the amount
of taxes due on its tax return plus deferred taxes computed based on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates,
adjusted for allowances made for uncertainty regarding the realization of net
tax assets.
Employee Benefits: The Bank has a noncontributory defined benefit pension plan
and a defined contribution profit sharing plan, each covering substantially all
employees. The pension plan is funded through a multi-employer defined benefit
plan, on the individual level premium method. The defined contribution plan is
a multi-employer contributory profit sharing plan. The amount of the Bank's
contribution is at the discretion of its Board of Directors and is limited to
the amount deductible for federal income tax purposes.
(Continued)
26
<PAGE> 29
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Stock Ownership Plan: The Corporation accounts for its employee stock
ownership plan ("ESOP") in accordance with AICPA Statement of Position 93-6.
The cost of shares issued to the ESOP, but not yet allocated to participants,
are presented in the consolidated statement of financial condition as a
reduction of shareholders' equity. Compensation expense is recorded based on
the market price of the shares as they are committed to be released for
allocation to participant accounts. The difference between the market price
and the cost of shares committed to be released is recorded as an adjustment to
additional paid-in capital. Dividends on allocated ESOP shares are recorded as
a reduction of retained earnings; dividends on unearned ESOP shares are
reflected as a reduction of debt and accrued interest.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unearned ESOP shares are not considered
outstanding.
Federal Home Loan Bank System: The Bank is a member of the Federal Home Loan
Bank System and is required to invest in capital stock of the Federal Home Loan
Bank ("FHLB"). The amount of the required investment is based upon the balance
of the Bank's outstanding home mortgage loans or advances from the FHLB and is
carried at cost plus the value assigned to stock dividends.
Preferred Stock: The Board of Directors of the Corporation is authorized to
issue preferred stock from time to time in one or more series subject to
applicable provisions of law, and is authorized to fix the designations,
powers, preferences and relative participating, optional and other special
rights of such shares, including voting rights (which could be multiple or as a
separate class) and conversion rights, and the qualifications, limitations and
restrictions thereof. In the event of a proposed merger, tender offer or other
attempt to gain control of the Corporation that the Board of Directors does not
approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. The Board of Directors has no
present plans or understandings for the issuance of any preferred stock.
Concentrations of Credit Risk: The Corporation serves customers primarily in
the Calhoun County, Michigan region. No significant number of its customers
are employed at any one specific entity or in one specific industry. The
Corporation grants real estate, commercial and installment loans.
Substantially all loans are secured by specific items of collateral, primarily
residential real estate. Other financial instruments which potentially subject
the Corporation to concentrations of credit risk include deposit accounts in
other financial institutions.
Financial Instruments with Off-Balance-Sheet Risk: The Corporation, in the
normal course of business, makes commitments to make loans which are not
reflected in the financial statements. A summary of these commitments is
disclosed in Note 15.
(Continued)
27
<PAGE> 30
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Earnings per common share for the period presented
in 1997 and 1996 was 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 ESOP shares not committed
to be released. The weighted average number of shares outstanding for the 1997
and 1996 period was 1,201,162 and 1,308,896. Earnings per common share for the
period presented in 1995 was computed by dividing net income earned subsequent
to the Bank's conversion from mutual to stock form (the "conversion") by the
weighted average number of shares outstanding subsequent to the conversion on
February 6, 1995, less ESOP shares not committed to be released (Note 2). Net
income subsequent to the conversion was $475,974 for the period ended June 30,
1995. The weighted average number of shares outstanding for the 1995 period
subsequent to the conversion was 1,334,280. Common share amounts related to
the ESOP plan, stock compensation plans and earnings per share disclosures have
been restated for the two-for-one stock split effected in the form of a 100%
stock dividend which was declared on July 8, 1997 and payable August 7, 1997.
Reclassifications: Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform with the 1997 presentation.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board ("APB") Opinion 25, with expense
reported only if options are granted below market price at grant date. If
applicable, disclosures of net income and earnings per share are provided as if
the fair value method of SFAS No. 123 were used for stock-based compensation.
Impact of New Accounting Standards: In March 1997, the accounting requirements
for calculating earnings per share were revised by SFAS No. 128 "Earnings Per
Share". Basic earnings per share for the quarter ended December 31, 1997 and
later will be calculated solely on average common shares outstanding. Diluted
earnings per share will reflect the potential dilution of stock options and
other common stock equivalents. All prior calculations will be restated to be
comparable to the new methods. As the Company has not had significant dilution
from stock options, the new calculation methods will not significantly change
prior earnings per share disclosures.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in 1996. It revises the accounting
for transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996, and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
1997 consolidated financial statements and the impact of the complete adoption
in 1998 is also not expected to be material to the consolidated financial
statements.
(Continued)
28
<PAGE> 31
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income". This Statement establishes standards
for reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Income tax effects must also be shown. This
Statement is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 is not expected to have a material impact on the
results of operations or financial condition of the Corporation.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement is effective for financial statements for periods beginning
after December 15, 1997. The adoption of SFAS No. 131 is not expected to have
a material impact on the results of operations or financial condition of the
Corporation.
(Continued)
29
<PAGE> 32
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP
On June 21, 1994, the Board of Directors of the Bank, subject to regulatory
approval and approval by members of the Bank, unanimously adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of the
Corporation as the Bank's holding company. The conversion was consummated on
February 6, 1995 by amending the Bank's federal charter and the sale of the
Corporation's common stock in an amount equal to the pro forma market value of
the Corporation after giving effect to the conversion. A subscription offering
of the shares of the Corporation's common stock was offered initially to the
Bank's depositors and tax-qualified employee benefit plans of the Bank and the
Corporation, then to other members and Directors, officers and employees of the
Bank, then to the general public, with a preference to people residing in
Calhoun County, Michigan. Proceeds of $6,088,299 were received from the sale
of 722,013 common shares, after deduction of conversion costs of $554,221 and
the issuance of 115,522 shares, as restated for the two-for-one stock split
declared on July 8, 1997, for the ESOP in exchange for a note receivable from
the ESOP. Upon the closing of the stock offering, the Corporation used 50% of
the net proceeds of the conversion to purchase 100%, or 722,013, of the common
shares of the Bank. The Bank is now a wholly-owned subsidiary of the
Corporation. The conversion was an internal reorganization with historical
balances carried forward without adjustment.
NOTE 3 - INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS
Interest-bearing deposits in other financial institutions at June 30 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
FHLB overnight time deposits $ 1,080,478 $ 12,500
FHLB cash management account 497,410 45,176
----------- ----------
$ 1,577,888 $ 57,676
=========== ==========
</TABLE>
(Continued)
30
<PAGE> 33
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 4 - SECURITIES
The amortized cost and fair value of securities at June 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
1996
Adjustable rate mortgage
mutual fund $2,133,966 (64,517) $2,069,449
USL Insurance stock 41,195 $7,513 48,708
---------- ------ ---------- ----------
$2,175,161 $7,513 (64,517) $2,118,157
========== ====== ========== ==========
HELD TO MATURITY
1997
Mortgage-backed securities $ 11,455 $ 11,455
========== ==========
1996
U.S. Treasury securities $1,000,395 $ 545 $1,000,940
Mortgage-backed securities 15,986 15,986
---------- ------ ----------
$1,016,381 $ 545 $1,016,926
========== ====== ==========
</TABLE>
Proceeds from sales of securities available for sale during the year ended June
30, 1997 were $2,127,211. Gross losses of $47,950 were realized on these
sales. There were no sales of securities available for sale during the year
ended June 30, 1996. Proceeds from sales of securities available for sale
during the year ended June 30, 1995 were $497,416. Gross losses of $2,584 were
realized on these sales. No securities classified as held to maturity under
SFAS No. 115 were sold or transferred to available for sale during 1997, 1996
or 1995.
The amortized cost and fair value of debt securities at June 30, 1997, by
contractual maturity, are not shown as the only debt securities held at June
30, 1997 were mortgage-backed securities for which principal reductions are
expected on a monthly basis.
(Continued)
31
<PAGE> 34
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 5 - LOANS RECEIVABLE, NET
Loans at June 30 are classified as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Real estate loans
One-to-four family $ 48,407,584 $ 36,515,877
Commercial 10,177,904 8,214,498
Construction or development 5,093,590 3,558,953
------------- -------------
63,679,078 48,289,328
Other loans
Consumer loans
Home equity lines of credit 3,636,283 3,416,115
Second mortgage loans 546,733 1,013,204
Automobile 1,670,424 1,670,072
Other 1,260,625 1,139,007
------------- -------------
7,114,065 7,238,398
Commercial business loans 920,219 831,184
------------- -------------
Total other loans 8,034,284 8,069,582
------------- -------------
Total loans 71,713,362 56,358,910
Less:
Loans held for sale (150,000) (957,018)
Loans in process (2,202,117) (2,482,189)
Deferred loan fees and discounts (318,786) (243,951)
Allowance for loan losses (302,903) (348,067)
------------- -------------
Net loans $ 68,739,556 $ 52,327,685
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $348,067 $329,170 $255,064
Provision charged to operating expense 48,000 24,000 73,000
Recoveries credited to allowance 2,780 4,338 1,487
Loans charged off (95,944) (9,441) (381)
-------- --------- --------
Balance at end of year $302,903 $348,067 $329,170
======== ======== ========
</TABLE>
(Continued)
32
<PAGE> 35
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 5 - LOANS RECEIVABLE, NET (Continued)
Information regarding impaired loans is as follows for the year ended June 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Average investment in impaired loans $603,108 $380,452
Interest income recognized on impaired loans
including interest income recognized on cash basis 50,374 31,964
Interest income recognized on impaired loans on cash basis 0 0
<CAPTION>
Information regarding impaired loans at June 30, 1997 and 1996 is as follows:
1997 1996
---- ----
<S> <C> <C>
Balance of impaired loans $ 596,276 $ 375,352
Less portion for which no allowance for loan
losses is allocated (596,276) (375,352)
--------- ---------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ 0 $ 0
========= =========
Portion of allowance for loan losses allocated
to the impaired loan balance $ 0 $ 0
========= =========
</TABLE>
(Continued)
33
<PAGE> 36
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 6 - SECONDARY MORTGAGE MARKET ACTIVITIES
The following summarizes the Bank's secondary mortgage market activities for
the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Activity during the year:
Loans originated for resale, net of
principal paydowns $ 2,992,755 $ 4,078,270 $ 3,903,022
Loans transferred to held to maturity 950,741 447,092 216,182
Proceeds from sales of loans originated
for resale 2,894,510 4,720,966 5,185,689
Gain on sales of loans originated
for resale 46,982 30,715 26,612
Portion of gain resulting from costs
allocated to mortgage servicing rights 28,763
Loan servicing fees, net 85,421 94,177 92,829
Balance at June 30:
Loans held for sale $ 150,000 $ 984,277 $ 2,043,350
Less:
Allowance to adjust loans held for
sale to lower of aggregate cost or
market (27,259) (25,989)
----------- ----------- -----------
Loans held for sale, net $ 150,000 $ 957,018 $ 2,017,361
=========== =========== ===========
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Mortgage loan portfolios serviced for:
FHLMC $32,756,668 $34,612,290 $35,784,672
Other investors 168 7,006
----------- ----------- -----------
$32,756,668 $34,612,458 $35,791,678
=========== =========== ===========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing serviced
loans were $207,846, $203,274 and $191,635 at June 30, 1997, 1996 and 1995,
respectively.
(Continued)
34
<PAGE> 37
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 7 - PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land $ 327,100 $ 212,100
Buildings 475,758 475,758
Furniture, fixtures and equipment 481,167 479,265
--------- ---------
1,284,025 1,167,123
Less: Accumulated depreciation (706,967) (636,941)
--------- ---------
$ 577,058 $ 530,182
========= =========
</TABLE>
NOTE 8 - DEPOSITS
The aggregate amount of short term jumbo certificates of deposit in
denominations of $100,000 or more was $721,846 and $1,027,108 at June 30, 1997
and 1996, respectively.
At June 30, 1997, the scheduled maturities of certificates of deposit are as
follows for the years ended June 30:
<TABLE>
<S> <C>
1998 $13,840,307
1999 2,756,306
2000 1,516,489
2001 1,007,566
2002 483,417
Thereafter 8,580
-----------
$19,612,665
===========
</TABLE>
(Continued)
35
<PAGE> 38
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
At June 30, 1997 and 1996, the Corporation had advances from the Federal Home
Loan Bank of Indianapolis as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate 1997 1996
------------------ --------------- ----------- ----------
<S> <C> <C> <C>
July 18, 1996 5.5000% (fixed) $2,000,000
August 29, 1996 5.4922% (fixed) 2,000,000
July 24, 1997 5.8359% (fixed) $ 3,000,000
July 28, 1997 5.8500% (fixed) 1,500,000
August 4, 1997 5.9100% (fixed) 500,000
September 10, 1997 5.8300% (fixed) 1,000,000
November 15, 2001 6.2100% (fixed) 2,000,000
March 15, 2002 6.2800% (fixed) 1,500,000
March 15, 2004 6.3900% (fixed) 1,000,000
March 15, 2004 6.3200% (fixed) 3,000,000
July 15, 2004 6.5900% (fixed) 2,000,000
February 15, 2006 5.8400% (fixed) 1,873,600 2,000,000
August 15, 2006 6.7300% (fixed) 2,000,000
----------- ----------
$19,373,600 $6,000,000
=========== ==========
</TABLE>
Each advance is entirely payable at its respective maturity date. These
advances were collateralized by approximately $30,998,000 and $9,600,000 of the
Bank's first mortgage loans under a blanket lien arrangement at June 30, 1997
and 1996, respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
An analysis of aggregate loans outstanding to directors, executive officers and
their affiliates follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Aggregate balance, July 1 $501,397 $ 375,318 $367,126
New loans and renewals 135,700 302,891 54,121
Repayments and renewals (96,660) (176,812) (45,929)
-------- --------- --------
Aggregate balance, June 30 $540,437 $ 501,397 $375,318
======== ========= ========
</TABLE>
(Continued)
36
<PAGE> 39
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 11 - DEFERRED DIRECTOR FEES
During the year ended June 30, 1996, deferred director fee plans were
implemented for certain directors of the Corporation and the Bank. Under the
plans, the Corporation/Bank is obligated to pay each such individual or
beneficiaries the amount of fees deferred plus interest credited thereon over a
period of 15 years, beginning with the individual's termination of service. A
liability is being accrued for the obligation under these plans. The expense
incurred for the plans for the year ended June 30, 1997 and 1996 was $73,812
and $36,375 resulting in a deferred compensation liability of $110,187 and
$36,375 for the same periods. To fund the benefits that will be payable under
these plans, life insurance on the participants was purchased. The cash
surrender value of such insurance at June 30, 1997 and 1996 was $563,502 and
$279,252 and is included in Other Assets in the Consolidated Statements of
Financial Condition.
NOTE 12 - STOCK-BASED COMPENSATION PLANS
As part of the conversion transaction, the Corporation established an ESOP for
the benefit of substantially all employees. Contributions to the ESOP are made
by the Corporation and are determined by the Corporation's Board of Directors
at their discretion. The contributions may be made in the form of cash or the
Corporation's common stock. The annual contributions may not be greater than
the amount deductible for federal income tax purposes and cannot cause the
Corporation to violate regulatory capital requirements.
To fund the plan, the ESOP borrowed $577,610 from the Corporation for the
purpose of purchasing 115,522 shares of stock at $5 per share, as restated for
the two-for-one stock split declared on July 8, 1997. Principal and interest
payments on the loan are due in annual installments over a 10-year period
beginning June 30, 1995. Principal is reduced in equal amounts over the term
of the loan. Interest is payable during the term of the loan at a fixed rate
of 8.07% on the unpaid principal balance. The loan is collateralized by the
unallocated shares of the Corporation's common stock purchased with the loan
proceeds and will be repaid by the ESOP with funds from the Corporation's
contributions to the ESOP and earnings on ESOP assets.
Shares are allocated among participants each June 30 on the basis of principal
and interest payments made by the ESOP on the loan from the Corporation,
according to each participant's relative compensation. Dividends on unearned
shares are used to reduce the accrued interest and principal amount of the
ESOP's loan payable to the Corporation.
ESOP participants are entitled to receive distributions from their ESOP
accounts only upon termination of service. A participant entitled to a
distribution may require the Company to repurchase the stock in the event that
the stock is not readily tradable on an established market (referred to as the
"put option"). In general, participants are entitled to exercise the put
option for a period of not more than 60 days following the date of distribution
of the stock. As the Corporation's common stock is traded on the NASDAQ
SmallCap market under the symbol "MSBF," the provisions of the put option
currently have no effect.
(Continued)
37
<PAGE> 40
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
During the years ended June 30, 1997, 1996, and 1995, contributions of $71,941,
$77,754, and $76,406, respectively, were made to the ESOP. For the same
respective periods, 13,678, 13,690, and 11,552 shares with an average fair
value of $9.79, $8.50 and $6.41 per share, as restated for the two-for-one
stock split declared July 8, 1997, were committed to be released, resulting in
ESOP compensation expense of $133,968, $116,367 and $74,048, respectively.
Shares held by the ESOP at June 30 are as follows as restated for the
two-for-one stock split declared July 8, 1997:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Allocated to participants 38,920 25,242
Unearned 76,602 90,280
-------- --------
Total ESOP shares 115,522 115,522
======== ========
Fair value of unearned shares $890,498 $744,810
======== ========
Fair value of allocated shares subject
to the repurchase obligation $0 $0
======== ========
</TABLE>
A stock option and incentive plan ("SOP") and Recognition and Retention Plan
("RRP"), as approved by the Corporation's shareholders, were authorized by the
Board of Directors on October 24, 1995. These plans are for the benefit of
directors and certain officers of the Corporation. The RRP is a restricted
stock award plan. The SOP and RRP are administered by a Committee of Directors
of the Corporation. This Committee selects recipients and terms of awards
pursuant to the plans. The total shares made available under the SOP and RRP
plans were 144,402 and 57,760, respectively, as restated for the two-for-one
stock split declared July 8, 1997.
The Committee has awarded under the SOP options to purchase 88,084 shares of
common stock at an exercise price of $7.8125 per share (October 1995), 2,166
shares at $9.3125 per share (November 1996), and 11,000 shares at $11.0625 per
share (June 1997), which were the market prices of the Corporation's common
stock on the date of the award, as restated for the two-for-one stock split
declared July 8, 1997. At June 30, 1997, 101,250 options were outstanding and
there were 43,152 shares reserved for future grants, as restated for the
two-for-one stock split declared July 8, 1997. SOP options vest in five equal
annual installments, with the first installment vested on October 24, 1996, and
expire ten years from date of grant. No options have been exercised or
canceled.
(Continued)
38
<PAGE> 41
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
The Corporation applies APB Opinion 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plan.
Accordingly, no compensation expense has been recognized for the plan. SFAS
No. 123, "Accounting for Stock-Based Compensation," became effective for 1996
and requires disclosures for stock-based compensation awarded after December
15, 1995 for companies that do not adopt its fair value accounting method for
stock-based compensation. The effects on the Corporation's net income and
earnings per share under the provisions of SFAS No. 123 were not material for
the years ended June 30, 1996 and 1997. In future years, as additional options
are granted, the effect on net income and earnings per share may increase.
The Committee awarded 1,444 and 37,544 shares of common stock under the RRP
during the years ended June 30, 1997 and 1996, respectively, as restated for
the two-for-one stock split declared July 8, 1997. RRP awards vest in five
equal annual installments, with the first award vesting on October 24, 1996
subject to the continuous employment of the recipients and the Corporation's
achievement of certain performance standards as defined under such plans.
Compensation expense for the RRP is recognized on a pro-rata basis over the
vesting period of the awards. During the years ended June 30, 1997 and 1996,
$59,564 and $39,113, respectively, were charged to compensation expense for the
RRP. The unamortized unearned compensation value of the RRP is shown as a
reduction to shareholders' equity in the accompanying Consolidated Statements
of Financial Condition.
NOTE 13 - STOCK REPURCHASE PROGRAMS
On November 17, 1995, the Company received a "no objection" letter from the
Office of Thrift Supervision to repurchase up to 9% (129,962 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 129,962
shares at an average price of $9.35 per share. On April 22, 1996, the Company
received OTS approval to repurchase up to 5% (67,780 shares) of its common
stock. As of January 31, 1997, the Company had completed this repurchase
program with a total of 67,780 shares at an average price of $8.85 per share.
On February 11, 1997, the Company received OTS approval to repurchase up to 5%
(64,264 shares) of its common stock. As of June 30, 1997, 36,650 shares had
been repurchased at an average price of $10.59 and therefore the Company has
remaining approval to repurchase up to 27,614 shares. Approval to repurchase
these shares expires on February 11, 1998.
Repurchased shares are treated as treasury shares and are available for general
corporate purposes, including issuance in connection with stock based
compensation plans. The number of treasury shares and average price per share
have been restated for the two-for-one stock split declared July 8, 1997.
(Continued)
39
<PAGE> 42
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 14 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS
Savings institutions insured by the FDIC must meet three regulatory capital
requirements. If a requirement is not met, regulatory authorities may take
legal or administrative actions, including restrictions on growth or operations
or, in extreme cases, seizure.
The Office of Thrift Supervision ("OTS") has also issued regulations which add
an interest rate risk component to risk-based capital. Institutions whose
interest rate risk, as defined, exceeds 2% are required to maintain additional
capital of one-half the difference between its measured interest rate risk and
2%, multiplied by the market value of its assets. At June 30, 1997 and 1996,
the Bank was not required to provide additional risk-based capital under this
regulation.
The Bank's actual and required capital amounts and ratios are presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ------ ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
As of June 30, 1997
Tangible Capital $9,532 12.78% $1,119 1.50% $2,238 3.00%
Core Capital 9,532 12.78 2,238 3.00 4,476 6.00
Risk-Based Capital 9,835 20.88 3,768 8.00 4,710 10.00
As of June 30, 1996
Tangible Capital $9,315 15.46% $904 1.50% $1,808 3.00%
Core Capital 9,315 15.46 1,808 3.00 3,616 6.00
Risk-Based Capital 9,663 24.05 3,214 8.00 4,018 10.00
</TABLE>
The Qualified Thrift Lender ("QTL") test requires that approximately 65% of
assets be maintained in housing-related finance and other specified areas. If
the QTL test is not met, limits are placed on growth, branching, new
investments, FHLB advances and dividends, or the Bank must convert to a
commercial bank charter. Management believes that the QTL test has been met.
(Continued)
40
<PAGE> 43
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 14 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS (Continued)
Under OTS regulations, limitations have been imposed on all "capital
distributions" by savings institutions, including cash dividends. The
regulation establishes a three-tiered system of restrictions, with the greatest
flexibility afforded to thrifts which are both well-capitalized and given
favorable qualitative examination ratings by the OTS. For example, a thrift
which is given one of the two highest examination ratings and has "capital"
equal to its fully phased-in regulatory capital requirements (a "tier 1
institution") could, after prior notice but without the prior approval of the
OTS, make capital distributions in any year that would reduce by up to one-half
the amount of its capital which exceeds its most stringent capital requirement
at the beginning of the calendar year, as adjusted to reflect net income to
date during the calendar year. Other thrifts would be subject to more
stringent procedural and substantive requirements, the most restrictive being
prior OTS approval of any capital distribution. The Bank is a tier one
institution.
The Bank established a liquidation account of $6,264,425 which is equal to its
total net worth as of the date of the latest audited balance sheet appearing in
the final conversion prospectus. The liquidation account is maintained for the
benefit of eligible depositors who continue to maintain their accounts at the
Bank after the conversion. The liquidation account is reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
Under the most restrictive of the dividend limitations described above, at June
30, 1997, approximately $3,000,000 is available to the Bank for the payment of
dividends to the holding company.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans. The
Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to make loans is
represented by the contractual amount of those instruments. The Corporation
follows the same credit policy to make such commitments as is followed for
those loans recorded in the consolidated financial statements.
(Continued)
41
<PAGE> 44
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONTINGENCIES (Continued)
Financial instruments with off-balance-sheet risk approximated the following at
June 30:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------------------- --------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
Commitments to make loans
(at market rates) $372,200 $974,000 $753,500 $1,760,000
Unused lines of credit and
letters of credit 3,189,917 2,616,855
</TABLE>
Commitments to make loans are generally made for period of 60 days or less.
The fixed rate loan commitments have interest rates ranging from 7.5% to 7.875%
and maturities ranging from 15 years to 30 years.
The Corporation does not anticipate any losses as a result of these
commitments. In addition, commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Collateral obtained upon exercise of the commitment is
determined using the Corporation's credit evaluation of the borrower, and may
include business assets, real estate and other items. Since many commitments
to make loans expire without being used, the amount does not necessarily
represent future cash commitments.
The Corporation has entered into an employment agreement with one of its
officers. Under the terms of the agreement, certain events leading to
separation from the Corporation could result in a cash payment aggregating
approximately $305,000.
The Corporation and its subsidiary are subject to certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial position of the Corporation.
NOTE 16 - RETIREMENT PLANS
The Bank's pension plan is part of a multi-employer defined benefit pension
plan. The benefits are based on each employee's years of service and on the
average of the highest five consecutive annual salaries prior to retirement.
The benefits are reduced by a specified percentage of the employee's social
security benefit. An employee becomes fully vested upon completion of five
years of qualifying service. The plan is currently overfunded and does not
require an annual contribution. Specific plan asset and accumulated benefit
information for the Bank's portion of the Fund is not available. Under the
Employee Retirement Income Security Act ("ERISA"), a contributor to a
multi-employer pension plan may be liable in the event of complete or partial
withdrawal for the benefit payments guaranteed under ERISA. The Bank has no
intention to withdraw from the Fund.
(Continued)
42
<PAGE> 45
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 16 - RETIREMENT PLANS (Continued)
The Bank participates in a multi-employer contributory profit sharing plan,
which covers substantially all employees. The amount of the Bank's
contribution is at the discretion of the Bank's Board of Directors and is
limited to the amount deductible for federal income tax purposes. The Bank is
currently matching 50% of employees' contributions not to exceed 3% of
compensation. Contributions for the years ended June 30, 1997, 1996 and 1995
were $12,086, $10,311 and $6,284, respectively.
NOTE 17 - FEDERAL INCOME TAXES
The Corporation and the Bank file a consolidated federal income tax return on a
fiscal year basis. Prior to fiscal year 1997, if certain conditions were met
in determining taxable income as reported on the consolidated federal income
tax return, the Bank was allowed a special bad debt deduction based on a
percentage of taxable income (8% for 1996) or on specified experience formulas.
The Bank did not use the percentage of taxable income method for tax returns
as of June 30, 1996 or 1995. Tax legislation passed in August 1996 now
requires the Bank to deduct a provision for bad debts for tax purposes based on
actual loss experience and recapture the excess bad debt reserve accumulated in
tax years after 1987. The related amount of deferred tax liability which must
be recaptured is approximately $123,000 and is payable over a six-year period
beginning no later than 1999.
The consolidated federal income tax expense consisted of the following for the
years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current federal income tax expense $480,500 $586,000 $438,700
Deferred federal income tax benefit (22,500) (68,000) (7,000)
-------- -------- --------
Total federal income tax expense $458,000 $518,000 $431,700
======== ======== ========
</TABLE>
The consolidated federal income tax expense differs from that computed at the
statutory corporate federal income tax rate of 34% as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax expense
at statutory rate $433,160 $518,023 $430,125
ESOP expense (book greater than tax) 22,296 16,291 5,538
Other, net 2,544 (16,314) (3,963)
-------- -------- --------
Total federal income tax expense $458,000 $518,000 $431,700
======== ======== ========
Effective tax rate 35.95% 34.00% 34.12%
</TABLE>
(Continued)
43
<PAGE> 46
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 17 - FEDERAL INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets
Deferred loan fees $103,000 $83,000
Deferred compensation 37,000 26,000
Depreciation 14,000 21,000
Capital loss carryforward 16,000
RRP expense 12,000
Other 7,500 1,000
Net unrealized loss on securities available for sale 19,000
-------- --------
189,500 150,000
Deferred tax liabilities
Mortgage servicing rights (9,000)
Adjustment for loans held for sale (7,000) (14,000)
Allowance for loan losses (20,000) (1,000)
Other (6,000) (7,000)
-------- --------
(42,000) (22,000)
Valuation allowance (16,000)
-------- --------
Net deferred tax asset $131,500 $128,000
======== ========
</TABLE>
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits relating to
such assets will not be realized. Management established a valuation allowance
for the benefits associated with losses on mutual fund securities sales at June
30, 1997, since such losses were capital in nature and can only be realized
through offsetting capital gains. Sources of capital gains were not available
at June 30, 1997. Management determined that no such allowance was required at
June 30, 1996.
Federal income tax laws provide savings banks with additional bad debt
deductions through 1987, totaling $1,272,000 for the Bank. Accounting
standards do not require a deferred tax liability to be recorded on this
amount, which liability otherwise would total $432,000 at June 30, 1997 and
1996. If the Bank were liquidated or otherwise ceases to be a bank or if tax
laws were to change, the $432,000 would be recorded as expense.
(Continued)
44
<PAGE> 47
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of the Corporation's financial
instruments were as follows as of June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $3,080,612 $3,081,000 $2,180,060 $2,180,000
Securities available for sale 2,118,157 2,118,000
Securities held to maturity 11,455 11,000 1,016,381 1,017,000
Loans held for sale 150,000 150,000 957,018 957,000
Loans receivable, net 68,739,556 69,465,000 52,327,685 52,417,000
Federal Home Loan Bank stock 1,043,700 1,044,000 316,700 317,000
Accrued interest receivable 420,921 421,000 332,240 332,000
Mortgage servicing rights 27,595 28,000
Cash surrender value of life
insurance 563,502 564,000 279,252 279,000
Financial liabilities
Deposits (41,706,732) (41,614,000) (40,452,058) (40,363,000)
Federal Home Loan Bank
advances (19,373,600) (18,456,000) (6,000,000) (5,791,000)
Advance payments by borrowers
for taxes and insurance (465,445) (465,000) (406,201) (406,000)
Accrued interest payable (79,114) (79,000) (44,332) (44,000)
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Carrying amount is a reasonable estimate of fair value for cash and cash
equivalents, Federal Home Loan Bank stock, accrued interest receivable and
payable, mortgage servicing rights, cash surrender value of life insurance,
noninterest-bearing demand deposits, savings, NOW and money market deposits,
and advance payments by borrowers for taxes and insurance.
Fair value of other financial instruments is estimated as follows:
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar instruments.
(Continued)
45
<PAGE> 48
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Loans held for sale and loans receivable
For certain homogeneous categories of loans, such as some residential mortgages
and other consumer loans, fair value is estimated using quoted market prices
for securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Certificates of deposit
The fair value of fixed-maturity certificates of deposit is estimated by
discounting cash flows using the rates currently offered for deposits of
similar remaining maturities.
Federal Home Loan Bank advances
The fair values for these advances are determined by discounting cash flows
using rates currently offered for advances of similar terms and remaining
maturities.
Commitments
The fair value of commitments to make loans is estimated using the fees
currently charged to enter similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair value of unused lines of credit and letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties at the
reporting date. The fair value of these commitments was immaterial at the
reporting date presented.
(Continued)
46
<PAGE> 49
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of MSB Financial, Inc. is as follows as of June
30:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 10,621 $ 222,690
Certificate of deposit in subsidiary bank 13,328 6,188
Loans receivable from subsidiary bank and ESOP 2,404,327 2,462,088
Investment in subsidiary bank 9,531,768 9,277,377
Dividend receivable from subsidiary bank 576,416 532,911
Other assets 221,690 110,418
----------- -----------
Total assets $12,758,150 $12,611,672
=========== ===========
LIABILITIES
Accrued expenses and other liabilities $ 67,954 $ 17,328
SHAREHOLDERS' EQUITY 12,690,196 12,594,344
----------- -----------
Total liabilities and shareholders' equity $12,758,150 $12,611,672
=========== ===========
</TABLE>
(Continued)
47
<PAGE> 50
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
February 6,
Year Ended Year Ended 1995 through
June 30, June 30, June 30,
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable $ 37,925 $ 42,904 $ 18,276
Dividends from subsidiary bank 936,163 1,102,784 854,874
---------- ---------- ------------
974,088 1,145,688 873,150
Interest expense - other 2,122
---------- ---------- ------------
NET INTEREST INCOME 971,966 1,145,688 873,150
Other income 9,047 2,620
Operating expenses 225,012 192,575 51,379
---------- ---------- ------------
INCOME BEFORE FEDERAL INCOME TAX
EXPENSE AND EXCESS DISTRIBUTED
EARNINGS OF SUBSIDIARY BANK 756,001 955,733 821,771
Federal income tax expense (benefit) (60,000) (50,000) (11,300)
---------- ---------- ------------
INCOME BEFORE EXCESS DISTRIBUTED
EARNINGS OF SUBSIDIARY BANK 816,001 1,005,733 833,071
Excess distributed earnings of subsidiary
bank (137) (357,097)
---------- ---------- ------------
NET INCOME $ 816,001 $1,005,596 $ 475,974
========== ========== ============
</TABLE>
(Continued)
48
<PAGE> 51
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS CASH FLOWS
<TABLE>
<CAPTION>
February 6,
Year Ended Year Ended 1995 through
June 30, June 30, June 30,
1997 1996 1995
---------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 816,001 $1,005,596 $ 475,974
Adjustments to reconcile net income to net
cash provided by operating activities
Excess distributed earnings of subsidiary bank 137 357,097
Change in
Dividends receivable from subsidiary bank (43,505) 321,963 (854,874)
Other assets (111,272) (99,119) (11,300)
Accrued expenses and other liabilities 50,626 (5,102) 22,430
---------- ----------- ------------
Net cash from operating activities 711,850 1,223,475 (10,673)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificate of deposit
in subsidiary bank (7,140) (6,188)
Loan to subsidiary bank (2,000,000)
Loan to ESOP (577,610)
Repayments on loan receivable from ESOP 34,524 35,541 57,761
Purchase of stock in subsidiary bank 3,335,000
---------- ----------- ------------
Net cash from investing activities 27,384 (1,970,647) 3,854,849
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock (645,060) (1,557,753)
Payment of dividends (306,243) (274,514)
Proceeds from sale of common stock, net
of conversion costs 1,742 6,665,909
---------- ----------- ------------
Net cash from financing activities (951,303) (1,830,525) 6,665,909
---------- ----------- ------------
Net change in cash (212,069) (2,577,697) 2,800,387
Cash at beginning of period 222,690 2,800,387
---------- ----------- ------------
CASH AT END OF PERIOD $ 10,621 $ 222,690 $ 2,800,387
========== =========== ============
</TABLE>
(Continued)
49
<PAGE> 52
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 20 - FEDERAL DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the
Savings Association Insurance Fund ("SAIF"). A recapitalization plan signed
into law on September 30, 1996 provided for a one-time assessment of 65.7 basis
points applied to all SAIF deposits as of March 31, 1995. Based on the Bank's
deposits as of this date, a one-time assessment of approximately $269,000 was
paid and recorded as federal deposit insurance premium expense for the year
ended June 30, 1997.
50
<PAGE> 53
MSB FINANCIAL, INC.
SHAREHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:30 a.m., Tuesday, October
28, 1997, at Schuler's Restaurant located at 115 South Eagle Street, Marshall,
Michigan.
STOCK LISTING
The Corporation's stock is traded on the Nasdaq SmallCap Market under the
symbol "MSBF".
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices since the
Corporation's Common Stock began trading on February 6, 1995. The information
set forth in the table below was provided by the Nasdaq, as restated for the
two-for-one stock split declared July 8, 1997. Such information reflects
interdealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
---------------------------------------------------------- -----------------------------------------
High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 9.375 $ 8.250 $0.0625 First Quarter $8.875 $7.250 $0.0500
Second Quarter $ 9.875 $ 9.125 $0.0625 Second Quarter $9.125 $7.750 $0.0500
Third Quarter $10.875 $ 9.500 $0.0625 Third Quarter $9.750 $9.000 $0.0500
Fourth Quarter $11.625 $10.375 $0.0700 Fourth Quarter $9.000 $7.875 $0.0625
Fiscal 1995
----------------------------------------------------------
High Low Dividends
<S> <C> <C> <C>
Third Quarter (1) $ 5.875 $ 5.375 $ ---
Fourth Quarter $ 8.000 $ 5.750 $ ---
(1) Reflects the period form February 6, 1995 through March 31, 1995
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note 14 of
the Notes to Consolidated Financial Statements included in this Annual Report.
As of August 29, 1997, the Corporation had 526 stockholders of record and
1,233,622 outstanding shares of Common Stock.
SHAREHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
Charles B. Cook, President Registrar and Transfer Company
MSB Financial, Inc. 10 Commerce Drive
107 North Park Street Cranford, New Jersey 07016
Marshall, Michigan 49068 (908) 272-8511
(616) 781-5103
ANNUAL AND OTHER REPORTS
The Corporation is required to file an annual report on Form 10-KSB for its
fiscal year ended June 30, 1997 with the Securities and Exchange Commission.
Copies of the Form 10-KSB annual report and the Corporation's quarterly reports
may be obtained without charge by contacting: Charles B. Cook, President, MSB
Financial, Inc. 107 North Park Street, Marshall, Michigan 49068.
51
<PAGE> 54
MSB FINANCIAL, INC.
CORPORATE INFORMATION
<TABLE>
<S> <C>
CORPORATION AND BANK ADDRESS Telephone: (616) 781-5103
107 North Park Street Fax: (616) 781-8412
Marshall, Michigan 49068
DIRECTORS OF THE BOARD
Charles B. Cook Aart VanElst
President and Chief Executive Officer of MSB Chairman of the Board of MSB Financial, Inc
Financial, Inc. and Marshall Savings Bank, F.S.B. and Marshall Savings Bank, F.S.B., Retired oil
Marshall, Michigan jobber
Marshall, Michigan
Martin L. Mitchell J. Thomas Schaeffer
Vice President of Program, Starr Commonwealth Partner, Law firm of Schaeffer, Meyer &
Albion, Michigan MacKenzie
Marshall, Michigan
Richard L. Dobbins John W. Yakimow
Partner, Law firm of Dobbins, Beardslee & General Manager of Corporate Research and
Grinage, P.C. Development at Eaton Corporation
Marshall, Michigan Marshall, Michigan
Karl F. Loomis
President and Chief Executive Officer of Regional
Medical Laboratories, Inc.
Battle Creek, Michigan
MSB FINANCIAL, INC. AND MARSHALL SAVINGS BANK, F.S.B.
EXECUTIVE OFFICERS
Charles B. Cook
President, Chief Executive Officer
and Chief Financial Officer
INDEPENDENT AUDITORS SPECIAL COUNSEL
Crowe, Chizek and Company LLP Silver, Freedman & Taff, L.L.P.
400 Riverfront Plaza Building 1100 New York Avenue, N.W.
55 Campau N.W. Seventh Floor, East Tower
Grand Rapids, Michigan 49503 Washington, D.C. 20005
</TABLE>
52
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary State of
Percent of Incorporation or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S><C>
MSB Financial, Inc. Marshall Savings Bank, FSB 100% Federal
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of MSB Financial, Inc.'s (the "Company's") Recognition and Retention
Plan (File No. 333-2234) and 1995 Stock Option and Incentive Plan (File No.
333-2232) on Form S-8 of our report, dated July 25, 1997, on the consolidated
financial statements incorporated by reference in the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1997.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
September 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,502,724
<INT-BEARING-DEPOSITS> 1,577,888
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 11,455
<INVESTMENTS-MARKET> 11,455
<LOANS> 69,192,459
<ALLOWANCE> 302,903
<TOTAL-ASSETS> 74,697,784
<DEPOSITS> 41,706,732
<SHORT-TERM> 6,000,000
<LIABILITIES-OTHER> 927,256
<LONG-TERM> 13,373,600
0
0
<COMMON> 14,830
<OTHER-SE> 12,675,366
<TOTAL-LIABILITIES-AND-EQUITY> 74,697,784
<INTEREST-LOAN> 5,368,868
<INTEREST-INVEST> 33,838
<INTEREST-OTHER> 136,095
<INTEREST-TOTAL> 5,538,801
<INTEREST-DEPOSIT> 1,540,224
<INTEREST-EXPENSE> 2,293,825
<INTEREST-INCOME-NET> 3,244,976
<LOAN-LOSSES> 48,000
<SECURITIES-GAINS> (47,950)
<EXPENSE-OTHER> 2,243,728
<INCOME-PRETAX> 1,274,001
<INCOME-PRE-EXTRAORDINARY> 816,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 816,001
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
<YIELD-ACTUAL> 5.02
<LOANS-NON> 16,848
<LOANS-PAST> 447,822
<LOANS-TROUBLED> 500,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 348,067
<CHARGE-OFFS> 95,944
<RECOVERIES> 2,780
<ALLOWANCE-CLOSE> 302,903
<ALLOWANCE-DOMESTIC> 260,903
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 42,000
</TABLE>
