<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________________
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ to _______________
Commission File Number 0-24898
MSB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3203510
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
PARK AND KALAMAZOO AVENUE, N.E., MARSHALL, MICHIGAN 49068
- ------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (616) 781-5103
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of February 12, 1997, there were 642,636 shares of the Registrant's common
stock issued and outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE> 2
MSB FINANCIAL, INC.
INDEX
PART I. FINANCIAL INFORMATION........................................... 1
Item 1. Financial Statements (Unaudited)................................ 1
Consolidated Condensed Statements of Financial Condition.................. 1
Consolidated Condensed Statements of Income............................... 2
Consolidated Condensed Statements of Shareholders' Equity................. 3-4
Consolidated Condensed Statements of Cash Flows........................... 5-6
Notes to Consolidated Condensed Financial Statements...................... 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9-11
PART II. OTHER INFORMATION............................................... 12
SIGNATURES...................................................... 13
EXHIBIT INDEX................................................... 14
<PAGE> 3
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and June 30, 1996
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $1,146,338 $2,122,384
Interest-bearing deposits 523,562 57,676
------------ -----------
Total cash and cash equivalents 1,669,900 2,180,060
Securities available for sale 570,890 2,118,157
Securities held to maturity (fair value of $14,101 at
December 31,1996 and $1,016,926 at June 30, 1996) 14,101 1,016,381
Loans, net 61,164,581 52,327,685
Loans held for sale 1,224,764 957,018
Federal Home Loan Bank stock 600,000 316,700
Premises and equipment, net 601,033 530,182
Accrued interest receivable 331,120 332,240
Other assets 364,231 352,072
------------ -----------
Total Assets $66,540,620 $60,130,495
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $41,319,234 $40,452,058
Federal Home Loan Bank Advance 12,000,000 6,000,000
Advance payments by borrowers for
taxes and insurance 81,114 406,201
Accrued interest payable 55,194 44,332
SAIF special assessment
Accrued expenses and other liabilities 384,040 633,560
------------ -----------
Total Liabilities 53,839,582 47,536,151
Shareholders' equity
Preferred stock, $.01 par value: 2,000,000 shares
authorized; none outstanding
Common stock, par value $.01: 4,000,000 shares
authorized; 741,507 shares issued and outstanding
at December 31, 1996 and 740,785 shares issued and
outstanding at June 30, 1996 7,415 7,408
Additional paid-in capital 7,058,464 7,017,760
Retained earnings, substantially restricted 8,009,785 7,870,150
Net unrealized loss on securities available for sale,
net of tax benefit of $4,228 at December 31 and
$19,382 at June 30 (8,207) (37,622)
------------ -----------
15,067,457 14,857,696
Unallocated Employee Stock Ownership Plan shares (417,319) (451,399)
Unearned Recognition and Retention Plan shares (238,090) (254,200)
Less cost of Common Stock in Treasury- 93,554 shares at
December 31 and 85,219 shares at June 30 (1,711,010) (1,557,753)
------------ -----------
Total Shareholders' Equity 12,701,038 12,594,344
------------ -----------
Total Liabilities & Shareholders' Equity $66,540,620 $60,130,495
============ ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE> 4
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Six months and three months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
-------------------------- ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Interest and dividend income
Loans, including fees $2,526,789 $2,073,253 $1,321,525 1,063,029
Securities available for sale 28,179 66,034 9,158 31,504
Securities held to maturity 5,229 23,502 253 14,465
Other interest and dividends 58,892 118,865 27,645 46,366
---------- ---------- ---------- ---------
2,619,089 2,281,654 1,358,581 1,155,364
Interest Expense
Deposits 772,748 786,096 388,504 389,757
Federal Home Loan Bank Advance 261,179 154,749
Escrows 2,755 1,236
---------- ----------- ---------- ---------
1,036,682 786,096 544,489 389,757
---------- ---------- ---------- ---------
NET INTEREST INCOME 1,582,407 1,495,558 814,092 765,607
Provision for loan losses 18,000 12,000 9,000 6,000
---------- ---------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,564,407 1,483,558 805,092 759,607
Non-interest income
Loan servicing fees 43,555 47,151 21,404 23,567
Gain on sales of loans 15,735 15,196 8,922 8,817
Service fees on deposit accounts 58,333 45,235 29,861 21,709
Loss on sale of securities available
for sale (35,747) (3,507)
Other 56,668 50,562 27,782 27,457
---------- ---------- ---------- ---------
138,544 158,144 84,462 81,550
Non-interest expense
Salaries and employee benefits 411,950 358,057 208,341 182,563
Buildings, occupancy and equipment 99,206 81,522 50,301 41,318
Data processing 77,831 67,626 38,536 32,114
Federal deposit insurance premiums 53,006 56,579 23,470 28,513
Director fees 61,494 51,898 31,422 29,023
Correspondent bank charges 28,177 24,827 14,512 12,567
Michigan Single Business tax 25,550 27,950 16,550 15,200
Provision (recovery) to adjust loans held
for sale to lower of cost or market (13,645) (25,990) (9,699) (27,362)
SAIF special assessment 268,752
Other 249,940 204,692 134,574 105,666
---------- ---------- ---------- ---------
1,262,261 847,161 508,007 419,602
---------- ---------- ---------- ---------
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 440,690 794,541 381,547 421,555
Federal income tax expense 149,500 270,000 131,000 142,700
---------- ---------- ---------- ---------
NET INCOME $ 291,190 $ 524,541 $ 250,547 278,855
========== ========== ========== =========
Earnings per common and common
equivalent share $ 0.47 $ 0.77 $ 0.41 0.41
========== ========== ========== =========
Average common and common
equivalent shares outstanding 616,626 679,029 615,895 687,209
========== ========== ========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 5
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Six months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Additional Loss on Securities
Common Paid-In Retained Available for Sale,
Stock Capital Earnings Net of Tax
---------- ------------ ----------- ----------------------
<S> <C> <C> <C> <C>
BALANCE, JULY 1, 1995 $7,220 $6,674,977 $7,139,068 $(41,474)
Net income 524,541
Shares committed to be released (3,421 shares)
under the Employee Stock Ownership Plan (ESOP) 23,947
Issuance of 18,772 shares of restricted stock
under the Recognition and Retention
Plan (RRP) 188 293,125
Shares earned under the RRP
Cash dividends declared on common stock, net
of dividends on unallocated ESOP Shares (135,822)
Repurchase of 29,150 shares of Common Stock
Adjustment of cost on initial public offering 1,742
Change in unrealized loss on securities
available for sale 14,399
---------- ----------- ------------ ------------
BALANCES, DECEMBER 31, 1995 $7,408 $6,993,791 $7,527,787 $ (27,075)
========== =========== ============ ============
<CAPTION>
Unallocated Unearned
Employee Stock Recognition Common Total
Ownership and Retention Stock in Shareholders'
Plan Shares Plan Shares Treasury Equity
--------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C>
BALANCE, JULY 1, 1995 $ (519,850) $13,259,941
Net income 524,541
Shares committed to be released (3,421 shares
under the Employee Stock Ownership Plan (ESOP) 34,210 58,157
Issuance of 18,772 shares of restricted stock
under the Recognition and Retention
Plan (RRP) (293,313)
Shares earned under the RRP 9,778 9,778
Cash dividends declared on common stock, net
of dividends on unallocated ESOP Shares (135,822)
Repurchase of 29,150 shares of Common Stock (531,988) (531,988)
Adjustment of cost on initial public offering 1,742
Change in unrealized loss on securities
available for sale 14,399
---------- ----------- ------------ ------------
BALANCES, DECEMBER 31, 1995 $ (485,640) $(283,535) $(531,988) $13,200,748
========== =========== ============ ============
</TABLE>
(Continued)
3
<PAGE> 6
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Six months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Additional Loss on Securities
Common Paid-In Retained Available for Sale,
Stock Capital Earnings Net of Tax
---------- ---------- ----------- -------------------
<S> <C> <C> <C> <C>
BALANCES, JULY 1, 1996 $7,408 $7,017,760 $7,870,150 $(37,622)
Net income 291,190
Shares committed to be released (3,408 shares)
under the Employee Stock Ownership Plan (ESOP) 27,263
Issuance of 722 shares of restricted stock
under the RRP 7 13,441
Shares earned under the RRP
Cash dividends declared on common stock, net
of dividends on unallocated ESOP shares (151,555)
Repurchase of 8,335 shares of Common Stock
Change in unrealized loss on securities
available for sale 29,415
------ ---------- ---------- -------
BALANCES, DECEMBER 31, 1996 $7,415 $7,058,464 $8,009,785 $(8,207)
====== ========== ========== =======
<CAPTION>
Unallocated Unearned
Employee Stock Recognition Common Total
Ownership and Retention Stock in Shareholders'
Plan Shares Plan Shares Treasury Equity
--------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCES, JULY 1, 1996 $(451,399) $(254,200) $(1,557,753) $12,594,344
Net income 291,190
Shares committed to be released (3,408 share
under the Employee Stock Ownership Plan (ESOP) 34,080 61,343
Issuance of 722 shares of restricted stock
under the RRP (13,448)
Shares earned under the RRP 29,558 29,558
Cash dividends declared on common stock, net
of dividends on unallocated ESOP shares (151,555)
Repurchase of 8,335 shares of Common Stock (153,257) (153,257)
Change in unrealized loss on securities
available for sale 29,415
------------- ------------- ------------ -------------
BALANCES, DECEMBER 31, 1996 $(417,319) $(238,090) $(1,711,010) $12,701,038
============= ============= ============ =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 7
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 291,190 $ 524,541
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 18,000 12,000
Provision (recovery) to adjust loans held
for sale to lower of cost or market (13,645) (25,990)
Depreciation 52,860 42,474
Net amortization of premium (discount) 396 1,709
Employee Stock Ownership Plan expense 61,344 58,157
Recognition and Retention Plan expense 29,558 9,778
Originations of loans for sale (1,274,269) (2,743,613)
Proceeds from sales of loans originated for sale 988,416 2,990,931
Gain on sales of loans originated for sale (15,734) (11,221)
Loss on sale of securities available for sale (35,747)
Change in assets and liabilities
Accrued interest receivable 1,120 4,772
Other assets 8,435 77,413
Accrued interest payable 10,862 (10,552)
Other liabilities (249,520) 83,617
----------- -----------
Net cash from operating activities (126,734) 1,014,016
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 1,591,835
Proceeds from maturities of securities available for sale 500,000
Purchases of securities held to maturity (1,005,312)
Proceeds from maturities of securities held to maturity 1,000,000
Principal paydowns on mortgage-backed securities 1,884 2,920
Purchase of FHLB stock (283,300)
Net increase in loans (8,807,410) (2,586,738)
Purchases of premises and equipment (123,711) (195,707)
Sale of premises and equipment 13,500
----------- -----------
Net cash used in investing activities (6,620,702) (3,271,337)
</TABLE>
(Continued)
5
<PAGE> 8
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six and three months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) in advance payments
by borrowers for taxes and insurance $ (325,087) $ (269,887)
Net (decrease) increase in deposits 867,176 (309,633)
Proceeds from Federal Home Bank Advance 6,000,000
Payment of dividends on common stock (151,556) (135,822)
Repurchase of Common Stock (153,257) (531,988)
Other 1,742
---------- -----------
Net cash from financing activities 6,237,276 (1,245,588)
---------- -----------
Net change in cash and cash equivalents (510,160) (3,502,909)
Cash and cash equivalents at beginning of period 2,180,060 5,823,872
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,669,900 $2,320,963
========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $1,023,066 $796,648
Income taxes 178,299 311,000
Supplemental disclosure of noncash investing activities
Transfer from loans held for sale to loans held to maturity $47,486
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE> 9
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Six months ended December 31,1996
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated condensed financial statements include the
accounts of MSB Financial, Inc. (the "Company") and its wholly-owned
subsidiary, Marshall Savings Bank, F.S.B. ("Bank") after the elimination of
significant intercompany transactions and accounts. The initial capitalization
of the Company and its acquisition of the Bank took place on February 6, 1995.
These interim financial statements are prepared in accordance with the
Securities and Exchange Commission's rules for quarterly financial information
without audit and reflect all adjustments which, in the opinion of management,
are necessary to present fairly the financial position of the Company at
December 31, 1996 and the results of its operations and its cash flows for the
periods presented. All such adjustments are normal and recurring in nature.
The accompanying consolidated condensed financial statements do not purport to
contain all the necessary disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and should be
read in conjunction with the consolidated financial statements and notes
thereto included in the annual report of MSB Financial, Inc. for the year ended
June 30, 1996. The results of the periods presented are not necessarily
representative of the results of operations and cash flows which may be
expected for the entire year.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
Earnings per common share for the periods presented in 1996 and 1995 were
computed by dividing net income by the weighted average number of common shares
outstanding and common share equivalents which would arise from considering
dilutive stock options, less Employee Stock Ownership Plan (ESOP) shares not
committed to be released. Net income was $291,190 and $250,547 for the six
month and three month periods ended December 31, 1996. The weighted average
number of shares outstanding for the six and three month periods were 616,626
and 615,895, respectively. For the six month and three month periods ended
December 31, 1995, respectively, net income was $524,541 and $278,855. The
weighted average number of shares outstanding for the six and three month
periods ended December 31, 1995 were 679,029 and 678,209, respectively.
NOTE 2 - REPURCHASES OF COMMON STOCK
On November 17, 1995 the Company received a "no objection" letter from the
Office of Thrift Supervision to repurchase up to 9% (64,981 shares) of its
common stock in the open market over a twelve month period. As of March 31,
1996 the Company had completed the repurchase program with a total of 64,981
shares at an average price of $18.69 per share. On April 22, 1996, the Company
received OTS approval to repurchase up to 5% (33,790 shares) of its common
stock. As of December 31, 1996, 28,573 shares had been repurchased at an
average price of $17.37 and therefore the Company has remaining approval to
repurchase up to 5,217 shares. Approval to repurchase these shares expires on
April 22, 1997.
(Continued)
7
<PAGE> 10
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Six months ended December 31,1996
(Unaudited)
NOTE 3 - ACCOUNTING STANDARDS IMPLEMENTED IN FISCAL 1997
In March 1995, the FASB issued Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of (SFAS 121). SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of. The
Statement requires review of such assets whenever events of changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
adopted SFAS No. 121 effective July 1, 1996. Its adoption had no material
effect on the Company's consolidated financial position or results of
operations for the six months ended December 31, 1996.
In May 1995, the Financial Accounting Standards Board recently released
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights (SFAS 122). This Statement changes the accounting for
mortgage servicing rights retained by the loan originator. Under this
Statement, an entity that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells or securities those loans
with servicing rights retained should allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. Under current practice,
all such cost are assigned to the loan. The cost allocated to mortgage
servicing rights are to be recorded as a separate asset and amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights are to be periodically evaluated for
impairment. The Statement become effective for the Company as of July 1, 1996.
The adoption of SFAS No. 122 did not have a material effect on the Company's
consolidated financial position or results of operations for the six months
ended December 31, 1996.
In October 1995, the Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS 123). SFAS No. 123 encourages, but does not require,
entities to use a fair value based method to account for stock-based
compensation plans. If the fair value accounting encouraged by SFAS No. 123 is
not adopted, entities must disclose the pro forma effect on net income and on
earnings per common share had the fair value accounting been adopted. The
Corporation has elected to not adopt SFAS No. 123. However, the Company will
provide any required proforma disclosures in any future complete consolidated
financial statements. The proforma disclosures are not required in noncomplete
interim consolidated financial statements.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MSB Financial, Inc. (the "Company") was incorporated under the laws of the
State of Delaware for the purpose of becoming the savings and loan holding
company of Marshall Savings Bank, F.S.B. (the "Bank") in connection with the
Bank's conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion"). On February 6, 1995 the
Conversion was completed and the Bank became a wholly-owned subsidiary of the
Company. The following discussion compares the consolidated financial
condition of the Company and the Bank at December 31, 1996 to June 30, 1996 and
the results of operations for the three and six month periods ended December
31, 1996 with the same periods ended December 31, 1995. This discussion should
be read in conjunction with the consolidated condensed financial statements and
footnotes included herein.
Financial Condition
Total assets increased $6.4 million to $66.5 million from June 30, 1996 to
December 31, 1996. Net loans, including loans held for sale, increased by $9.1
million, or 17.1% for the period, due primarily to the Company's decision to
retain 15 year fixed rate residential loans in portfolio, and strong demand
for mortgage loans, especially residential 1-4 family construction loans, in
the Company's market area. This increase was funded by a $2.5 million, or 81.3%
decrease in securities available for sale and securities held to maturity, a
$867,000 increase in deposits and an increase of $6.0 million in Federal Home
Loan Bank advances. Securities available for sale decreased $1.5 million from
June 30, 1996 to December 31, 1996 due to sales during the period. Securities
held to maturity decreased $1.0 million from June 30, 1996 to December 31, 1996
due to a maturing U.S. Treasury security.
Total liabilities increased $6.3 million to $53.8 million from June 30,
1996 to December 31, 1996. In addition to the FHLB advance discussed above,
advance payments by borrowers for taxes and insurance decreased $325,000, or
80.0%, due to property tax payments payable December 1996. Interest payable
and other liabilities also decreased $239,000, or 35.2%.
The repurchase of the Company's common stock, payment of dividends
declared on common stock, combined with a positive adjustment of net unrealized
loss on securities, and net income resulted in a net increase in shareholders'
equity of $107,000.
Results of Operations
GENERAL. The Company's results of operations depend primarily upon the level
of net interest income, which is the difference ("spread") between average
yield earned on loans and securities, interest-bearing deposits, and other
interest-earning assets, and the average rate paid on deposits and borrowed
funds, as well as competitive factors that influence interest rates, loan
demand, and deposit flows. Results of operations are also dependent upon the
level of the Company's non-interest income, including fee income and service
charges, and the level of its non-interest expense, including general and
administrative expenses. The Company, like other financial institutions, is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different times, or on a different basis, than
its interest-earning assets.
NET INCOME. Net income for the three months ended December 31, 1996 was
$251,000, 10.2% lower than net income of $279,000 for the same period in 1995.
Net income for the six month period ended December 31, 1996 was $291,000,
44.5% lower than net income of $525,000 for the same period in 1995. The
decline in net income for the six month period ended December 31, 1996 was
related to the special assessment by the SAIF of $170,000, net of taxes. Net
income, without the SAIF assessment, for the six months ended December 31, 1996
was $461,000 as compared to $525,000 for the same six month period in 1995,
resulting in a decrease of $64,000, or 12.2%.
NET INTEREST INCOME. Net interest income increased $48,000, or 6.3%, to
$814,000 for the three month period ended December 31, 1996. For the six month
period ended December 31, 1996 net interest income increased $87,000, or 5.8%,
to $1.6 million. The increases in net interest income for the three month and
six month periods ended December 31, 1996 compared to the same periods in 1995
were primarily a result of an increase in interest income. Interest income
increased primarily due to the increase in net loans discussed above. The
weighted average yield on the loan portfolio for the three month period ended
December 31, 1996 decreased 52 basis points
9
<PAGE> 12
to 8.65 % from 9.17% for the same period ended December 31, 1995. For the six
month period ended December 31, 1996 the weighted average yield on the loan
portfolio was 8.63%, compared to 9.09% for the same period last year, a decrease
of 46 basis points. The decreases in weighted average yield for the periods
discussed can be attributed to the increase in net loans held in portfolio
during the periods, a significant portion of which are adjustable rate and 15
year mortgage loans, originated at interest rates below the weighted average
portfolio yield. Interest expense increased $155,000 for the three month period
ended December 31, 1996 and increased $251,000 for the six month period ended
December 31, 1996 compared to the same periods in 1995. These increases were
attributable to interest paid on Federal Home Loan Bank advances for the three
month and six month periods ended December 31, 1996 of $155,000 and $261,000,
respectively.
PROVISION FOR LOAN LOSSES. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan
losses. The provision for loan losses increased by $3,000 to $9,000 for the
three month period ended December 31, 1996 as compared to the three month
period ended December 31, 1995, due to the increase in size of the loan
portfolio and management's continuing reassessment of losses inherent in the
loan portfolio. At December 31, 1996 the Company's allowance for loan losses
totaled $367,000 or 0.58% of net loans receivable and 46.8% of total
non-performing loans. At June 30, 1996, the Company's allowance for loan
losses totaled $348,000, or 0.65% of net loans receivable and 73.3% of total
non-performing loans.
Management establishes an allowance for loan losses based on an analysis
of risk factors in the loan portfolio. This analysis includes the evaluation
of concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio, estimated fair value of
underlying collateral, loan commitments outstanding, delinquencies, and other
factors. Because the Company has had extremely low loan losses during its
history, management also considers loss experience of similar portfolios in
comparable lending markets. Accordingly, the calculation of the adequacy of
the allowance for loan losses was not based directly on the level of
non-performing assets.
As of December 31, 1996, the Company's non-performing assets, consisting
of nonaccrual loans and accruing loans 90 days or more delinquent, totaled
$784,000, or 1.26% of total loans, compared to $475,000, or 0.89% of total
loans as of June 30, 1996, an increase of $309,000. The increase can be
primarily attributed to two commercial real estate loans and six other
commercial loans which were over 90 days delinquent at the end of the period.
Loans greater than 90 days past due, and other designated loans of concern, are
placed on non-accrual status, unless it is determined that the loans are well
collateralized and in the process of collection. There was no real estate
owned at December 31, 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 dictate. Although the Company maintains its allowance for
loan losses at a level which it considers to be adequate to provide for losses,
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan losses will not be required in future
periods. In addition, management's determination as to the amount of the
allowance for loan losses is subject to review by the Office of Thrift
Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC), as part
of their examination process, which may result in the establishment of an
additional allowance based upon their judgment of the information available to
them at the time of their examination.
NON-INTEREST INCOME. Non-interest income consists primarily of gains on the
sale of loans, gains or losses on sale of securities available for sale, loan
servicing fees, service fees on deposit accounts and other fees. Non-interest
income increased $3,000 during the three month period ended December 31, 1996
compared to the three month period ended December 31,1995. For the six month
period ended December 31, 1996 non-interest income decreased $20,000 compared
the six month period ended December 31, 1995. The decline for the six month
period ended December 31, 1996 was due primarily to a loss of $36,000 on the
sale of securities held for sale. There were no other significant changes in
the components of non-interest income.
NON-INTEREST EXPENSE. Non-interest expense was $508,000 for the three month
period ended December 31, 1996 compared to $420,000 reported for the same prior
year period, an increase of $88,000 or 21.0%. For the six month period ended
December 31, 1996 non-interest expense was $1.3 million including the
non-recurring SAIF assessment of $269,000. Non-interest expense without the
SAIF assessment was $994,000 for the six month period ended December 31, 1996,
compared to $847,000 for the same six month period in 1995, an increase of
$147,000 or 17.4%. Salaries and employee benefits, the largest component of
non-interest expense, increased $26,000 and $54,000 for the three month and six
month periods ended December 31, 1996, respectively, compared to the same
periods during 1995. Significant factors causing the increase in salaries and
employee
10
<PAGE> 13
benefits were the addition of two new employees and expenses associated with the
Company's Recognition and Retention Plan which was approved by shareholders in
October, 1995.
Congress recently enacted the Deposit Insurance Fund Act of 1996 (the
"Act"), which brings major changes to the Federal Deposit Insurance System.
One such change will eliminate the Bank Insurance fund ("BIF") and the SAIF,
the two insurance funds administered by the FDIC, by merging the two funds into
a single fund. The Act call for a special assessment on SAIF-assessable
deposits to capitalize the SAIF and bring the fund into parity with the BIF.
On September 30, 1996, based on an assessment of 65.7 basis points on March 31,
1995 deposit balances (as required in the Act), the Company recorded a one-time
charge of $269,000, or $.044 per share, to per-tax earnings. The Bank after
the recording of this charge to earnings still remains a well-capitalized
institution for regulatory purposes.
INCOME TAX EXPENSE. Income tax expense decreased $12,000 and $121,000 for the
three and six month periods ended December 31, 1996 compared to the same
periods in 1995 due to the decrease in net income. The Company's effective tax
rate remains at approximately 34%.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits, principal and
interest repayments on loans, sales of loans, interest-bearing deposits and
securities available for sale. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and early loan
prepayments are more influenced by interest rates, general economic conditions
and competition.
Federal regulations have required the Bank to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 5% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and other
securities and obligations generally having remaining maturities of less than
five years. The Bank has maintained its liquidity ratio at levels in excess of
those required. At December 31, 1996, the Bank's liquidity ratio was 6.06%.
The Company uses its liquidity resources principally to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals
and to meet operating expenses. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. At December 31,
1996, the Company had outstanding commitments to extend credit which amounted
to $3.6 million (including $3.0 million in available home equity lines of
credit). At December 31, 1996, the Company had $12 million in advances from
the FHLB of Indianapolis outstanding. Management believes that loan repayments
and other sources of funds, including Federal Home Loan Bank borrowings, will
be adequate to meet the Company's foreseeable liquidity needs.
At December 31, 1996 the Bank had tangible capital of $9.4 million, or
14.1 % of adjusted total assets which was $8.4 million above the minimum
capital requirement of $999,000, or 12.6% of adjusted total assets.
The Bank had at December 31, 1996, core capital of $9.4 million, or 14.1%
of adjusted total assets which was $7.4 million above the minimum capital
requirement of $2.0 million, or 11.1% of adjusted total assets.
At December 31, 1996, the Bank had total risk based capital of $9.8
million and risk weighted assets of $42.9 million or total risk based capital
of 22.8% of risk weighted assets. This amount was $6.4 million above the
minimum regulatory requirement of $3.4 million, or 14.8% of risk weighted
assets.
Accounting Changes
See Note 3 to the accompanying condensed consolidated Financial
Statements.
11
<PAGE> 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Shareholders' Meeting of MSB Financial, Inc. was held
on October 22, 1996 in Marshall, Michigan. At that meeting,
shareholders elected Charles B. Cook, J. Thomas Schaeffer, and
Karl F. Loomis to three year terms to the Board of Directors and
ratified the appointment of Crowe, Chizek and Company, L.L.P., as
independent auditors for the Company for the fiscal year ending
June 30, 1997.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
12
<PAGE> 15
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
MSB FINANCIAL, INC.
Registrant
Date: February 12, 1996 \s\Charles B. Cook
-------------------------------------
Charles B. Cook, President and Chief
Executive Officer (Duly Authorized
Officer)
Date: February 12, 1996 \s\Elaine R. Carbary
-------------------------------------
Elaine R. Carbary, Chief Financial
Officer (Principal Financial Officer)
13
<PAGE> 16
MSB FINANCIAL, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,146,338
<INT-BEARING-DEPOSITS> 523,562
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 570,890
<INVESTMENTS-CARRYING> 14,101
<INVESTMENTS-MARKET> 14,101
<LOANS> 62,756,738
<ALLOWANCE> 367,393
<TOTAL-ASSETS> 66,540,620
<DEPOSITS> 41,319,234
<SHORT-TERM> 6,000,000
<LIABILITIES-OTHER> 520,348
<LONG-TERM> 6,000,000
0
0
<COMMON> 7,415
<OTHER-SE> 12,693,623
<TOTAL-LIABILITIES-AND-EQUITY> 66,540,620
<INTEREST-LOAN> 2,526,789
<INTEREST-INVEST> 33,408
<INTEREST-OTHER> 58,892
<INTEREST-TOTAL> 2,619,089
<INTEREST-DEPOSIT> 772,748
<INTEREST-EXPENSE> 1,036,682
<INTEREST-INCOME-NET> 1,582,407
<LOAN-LOSSES> 18,000
<SECURITIES-GAINS> (35,747)
<EXPENSE-OTHER> 1,262,261
<INCOME-PRETAX> 440,690
<INCOME-PRE-EXTRAORDINARY> 440,690
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 291,190
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 0
<LOANS-NON> 309,811
<LOANS-PAST> 474,540
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 348,067
<CHARGE-OFFS> 0
<RECOVERIES> 1,326
<ALLOWANCE-CLOSE> 367,393
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
