<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, 1998
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
MSB FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
DELAWARE 38-3203510
- ------------------------------------ --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
107 NORTH PARK STREET, MARSHALL, MICHIGAN 49068
- --------------------------------------------------------------------------------
(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
---------------------------------------
(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 .
--- ---
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: $7.2 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 17, 1998, was $14.8 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 17, 1998, there were issued and outstanding 1,333,941
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Shareholders for the fiscal year
ended June 30, 1998.
Transitional Small Business Disclosure Format: Yes ; No X
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<PAGE> 2
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, 1998, the Company had $80.0 million of assets and shareholders'
equity of $13.3 million (or 16.65% 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.
For information relating to the Company's year 2000 preparedness, costs, risks
and contingency plans, see the discussion contained under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Year 2000 Issue" in the Annual Report attached hereto as Exhibit 13 (the "Annual
Report").
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.
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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 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 is 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.
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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, 1998, the Company's net
loan portfolio totaled $73.1 million, which constituted 91.4% 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 loan officers.
At June 30, 1998, the maximum amount which the Company could have loaned to
any one borrower and the borrower's related entities was approximately $1.5
million. At that date, the Company's largest lending relationship to a single
borrower or group of related borrowers totaled $1.6 million, consisting of 12
loans to a single borrower secured by four income producing properties, one
residential property, four automobiles and one motorcycle. The Company has filed
an application with its regulator requesting an exemption from the
above-mentioned lending limit for this borrower. The borrower has an excellent
payment record with the Company. Management believes the loans are adequately
collateralized, such loans are current in their repayment terms, and the
borrower maintains substantial funds with the Company. In the event an exemption
is not granted, the Company will take measures to reduce the aggregate
outstanding loan balance to this borrower.
At June 30, 1998, there were only ten other lending relationships in excess
of $500,000, each of which was performing in accordance with its repayment terms
at such date.
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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,
------------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family................ $52,558 68.83% $48,407 67.50% $36,516 64.79%
Commercial......................... 10,367 13.58 10,178 14.19 8,214 14.57
Construction or development........ 5,602 7.33 5,094 7.11 3,559 6.32
------- ------ ------- ------ ------- ------
Total real estate loans........ 68,527 89.74 63,679 88.80 48,289 85.68
------- ------ ------- ------ ------- ------
Other Loans:
Consumer Loans:
Home equity lines of credit....... 3,244 4.25 3,636 5.07 3,416 6.06
Automobile........................ 1,792 2.35 1,671 2.33 1,670 2.96
Second mortgage................... 349 .46 547 .76 1,014 1.80
Other............................. 1,598 2.09 1,261 1.76 1,139 2.02
------- ------ ------- ------- ------- ------
Total consumer loans........... 6,983 9.15 7,115 9.92 7,239 12.84
Commercial business loans.......... 852 1.11 920 1.28 831 1.48
------- ------ ------- ------ ------- ------
Total other loans.............. 7,835 10.26 8,035 11.20 8,070 14.32
------- ------ ------- ------ ------- ------
Total loans receivable, gross.. 76,362 100.00% 71,714 100.00% 56,359 100.00%
====== ====== ======
Less:
Loans held for sale................ 295 150 957
Loans in process .................. 2,308 2,202 2,482
Deferred loan fees and discounts... 303 319 244
Allowance for loan losses.......... 391 303 348
------- ------- -------
Total loans receivable, net........ $73,065 $68,740 $52,328
======= ======= =======
</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,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
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............... $19,630 25.71% $14,873 20.74% $10,596 18.80%
Commercial........................ 1,550 2.03 1,667 2.33 808 1.43
Construction or development....... 3,268 4.28 2,301 3.21 1,529 2.71
------- ------ ------- ------ ------- -----
Total real estate loans........ 24,448 32.02 18,841 26.28 12,933 22.94
------- ------ ------- ------ ------- -----
Consumer........................... 3,707 4.86 3,402 4.74 3,765 6.68
Commercial business................ 796 1.04 889 1.24 793 1.41
------- ------ ------- ------ ------- -----
Total fixed-rate loans......... 28,951 37.92 23,132 32.26 17,491 31.03
------- ------ ------- ------ ------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family(1)............ 32,928 43.12 33,534 46.76 25,920 45.99
Commercial........................ 8,817 11.54 8,511 11.87 7,406 13.14
Construction or development(2).... 2,334 3.06 2,793 3.89 2,030 3.60
------- ------ ------- ------ ------- -----
Total adjustable-rate real
estate loans................... 44,079 57.72 44,838 62.52 35,356 62.73
------- ------ ------- ------ ------- -----
Consumer........................... 3,276 4.29 3,713 5.18 3,474 6.17
Commercial business................ 56 .07 31 .04 38 .07
------- ------ ------- ------- ------- ----
Total adjustable-rate loans.... 47,411 62.08 48,582 67.74 38,868 68.97
------- ------ ------- ------ ------- -----
Total loans receivable, gross.. 76,362 100.00% 71,714 100.00% 56,359 100.00%
====== ====== ======
Less:
Loans held for sale................ 295 150 957
Loans in process................... 2,308 2,202 2,482
Deferred loan fees and discounts... 303 319 244
Allowance for loan losses.......... 391 303 348
------- ------- -------
Total loans receivable, net..... $73,065 $68,740 $52,328
======= ======= =======
</TABLE>
- -------------
(1) Includes loans which have fixed interest rates for the first seven years
and thereafter adjust on an annual basis. Such amounts totaled $18.1 million
in 1998, $16.1 million in 1997 and $8.6 million in 1996.
(2) Includes loans which have fixed interest rates for the first seven years
and thereafter adjust on an annual basis. Such amounts totaled $1.7 million
in 1998, $1.5 million in 1997 and $1.5 million in 1996.
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The following table illustrates the nominal interest rate sensitivity of
the Company's loan portfolios at June 30, 1998. 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
Mortgage(1) Development Consumer Business Total
----------- ----------- -------- -------- -----
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During Years Ending
June 30,
- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(2)................... $ 1,723 8.21% $2,656 9.14% $ 539 9.24% $ 43 9.15% $ 4,961 8.83%
2000 to 2003.............. 2,484 8.58 -- -- 2,953 8.97 481 9.17 5,918 8.82
2004 and following........ 58,718 7.90 2,946 7.63 3,491 10.35 328 8.90 65,483 8.02
</TABLE>
(1) Includes one- to four-family, multi-family and commercial real estate loans.
(2) Includes demand loans.
The total amount of loans due after June 30, 1999 which have
predetermined interest rates is $24.1 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $47.3
million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
Residential loan originations are generated by the Company's marketing
efforts, its present and 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.
The Company currently originates ARM loans and fixed-rate loans for
retention in its loan portfolio. During the year ended June 30, 1998, the
Company originated $11.9 million and $25.0 million of adjustable-rate and
fixed-rate one- to four-family loans, respectively. During the same period, the
Company sold $16.9 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.
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 of 15 years or more to FHLMC with servicing
retained. See "- Loan Originations,
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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 currently offers one and seven year ARM loans with monthly
principal and interest payments typically based on a 30 year amortization
schedule. The one and seven year ARM loans generally have a stated interest rate
margin over the yields on comparable U.S. Treasury securities. The interest rate
on the one year ARM loans adjusts annually. The seven year ARM loans are
fixed-rate loans for the initial stated term and then automatically convert into
one year ARM loans. The Company does not offer discounted initial interest rates
on its ARM loans. These loans provide for periodic and lifetime caps over 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. The Company has not experienced greater
delinquency rates on its ARM loans compared to its fixed-rate residential loans.
See "- Non-Performing Assets and Classified Assets."
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, 1998, non-owner occupied one- to four-family residential
loans totaled $7.5 million or 9.8% 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.
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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.
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 $3.8 million of commercial real estate loans
during fiscal 1998. See "- Loan Originations, Sales and Repayments."
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.
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, 1998,
the Company had $2.1 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
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loans, which are generally underwritten pursuant to the same guidelines
used for originating permanent non-residential loans, totaled $1.6 million at
June 30, 1998.
Construction loans to builders of one- to four-family residences are
generally for a term of six months. At June 30, 1998, the Company had $1.9
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 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 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.
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,
1998, the Company had $3.2 million of home
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equity lines of credit outstanding, representing 4.25% of the Company's
gross loan portfolio. At that date, the Company had $3.4 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 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
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.
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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 generally exceeded the dollar volume of the same type of
adjustable-rate loans. While these originations were only slightly higher in
fiscal 1997 and 1996, they were significantly higher in fiscal 1998 due to lower
interest rates. 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 sold whole loans without recourse in aggregate amounts of $16.9
million, $2.9 million and $4.7 million during the years ended June 30, 1998,
1997 and 1996 respectively. With relatively low interest rates during fiscal
1998, the Company's volume of fixed rate loans increased significantly resulting
in a large increase in loans sold. 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 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 $39.7 million at June 30, 1998.
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.
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The following table shows the loan origination, sale and repayment
activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1998 1997 1996
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family(1).......... $ 11,885 $12,048 $11,336
- commercial...................... 2,137 2,145 1,628
Non-real estate - consumer................... --- 274 ---
-------- ------- -------
Total adjustable-rate................. 14,022 14,467 12,964
-------- ------- -------
Fixed rate:
Real estate - one- to four-family............ 25,011 12,274 11,764
- commercial...................... 1,699 1,371 225
Non-real estate - consumer................... 2,237 2,209 3,299
- commercial business............. 296 440 388
-------- ------- --------
Total fixed-rate...................... 29,243 16,294 15,676
-------- ------- --------
Total loans originated................ 43,265 30,761 28,640
-------- ------- -------
Purchases:
Consumer....................................... 500 --- ---
-------- ------- ------
Total Purchases................................ 500 --- ---
-------- ------- ------
Sales and Repayments:
Real estate - one- to four-family............ 16,876 2,894 4,721
------- ------- -------
Total sales........................... 16,876 2,894 4,721
Principal repayments......................... 22,240 12,512 12,850
------- ------- -------
Total reductions...................... 39,116 15,406 17,571
Increase (decrease) in other items, net...... (178) 250 (1,695)
------- ------- -------
Net increase (decrease) $ 4,471 $15,605 $ 9,374
======= ======= ========
</TABLE>
- ------------
(1) Includes $9.6 million in 1998, $8.3 million in 1997 and $7.9 million in
1996 of ARM loans which have fixed interest rates for the first seven year
and thereafter adjust annually.
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 if a response is not received within a reasonable
time thereafter, the Company institutes appropriate action to
13
<PAGE> 14
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, 1998.
<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........ 9 $443 .84% 14 $579 1.10% 23 $1,022 1.94%
Consumer................... 4 20 .29 7 15 .21 11 35 .50
Commercial business........ 1 12 1.41 1 15 1.76 2 27 3.17
--- ----- -- ---- -- -----
Total 14 $475 .62 22 $609 .80 36 $1,084 1.42
== ==== == ==== == ======
</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,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family........................ $ 321 $ 17 $ 18 $ -- $ --
Construction............................... -- -- -- 123 123
Consumer................................... 9 -- 129 78 78
------ ------ ------ ------ ------
Total................................... 330 17 147 201 201
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
One- to four-family........................ 277 239 303 152 355
Commercial real estate..................... -- 185 -- -- 447
Consumer................................... 6 24 25 31 12
Commercial business........................ 15 -- -- -- --
------ ------ ------ ------ ------
Total................................... 298 448 328 183 814
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family........................ -- 29 -- -- --
------ ------ ------ ------ ------
Total................................... -- 29 -- -- --
------ ------ ------ ------ ------
Total non-performing assets.................. $ 628 $ 494 $ 475 $ 384 $1,015
====== ====== ====== ====== ======
Total as a percentage of total assets........ .79% .66% .79% .72% 2.17%
====== ====== ====== ====== ======
</TABLE>
15
<PAGE> 16
For the year ended June 30, 1998 gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $26,500. The amounts that were included in
interest income on such loans were $5,800 for the year ended June 30, 1998.
Except as discussed under the captions "Other Loans of Concern" and
"Classified Assets" below, as of June 30, 1998, 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, 1998, there was also an aggregate of
$585,000 in net book value of loans (two loans aggregating $198,000 secured by
commercial real estate and one loan totaling $387,000 secured by commercial
real estate) with respect to which past payment history 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. All loans were 30 days delinquent as of June 30,
1998.
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
16
<PAGE> 17
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, 1998, the Bank had classified
$1.3 million of its assets as substandard, $30,000 as doubtful and none as loss,
representing 9.9% of the Company's stockholders' equity or 1.6% of the Company's
assets.
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, 1998, the Company had a total allowance for loan losses of
$391,000 or 62.3% of non-performing loans. See Notes 1 and 5 of the Notes to
Consolidated Financial Statements in the Annual Report.
17
<PAGE> 18
The following table sets forth an analysis of the Company's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1998 1997 1996
---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period................... $303 $ 348 $ 329
Charge-offs:
Consumer....................................... 14 96 9
---- ------ ------
14 96 9
---- ------ ------
Recoveries:
Consumer....................................... 7 3 4
---- ------ ------
7 3 4
---- ------ ------
Net recoveries (charge-offs)..................... (7) (93) (5)
Additions charged to operations.................. 95 48 24
---- ------ ------
Balance at end of period......................... $391 $ 303 $ 348
==== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period.... .01% .15% .01%
=== === ===
</TABLE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------
% 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............ $ 143 68.83% $110 67.50% $122 64.79%
Commercial real estate......... 80 13.58 65 14.19 77 14.57
Construction................... 43 7.33 32 7.11 34 6.32
Consumer....................... 29 9.15 48 9.92 36 12.84
Commercial business............ 7 1.11 6 1.28 8 1.48
Unallocated.................... 89 --- 42 --- 71 ---
------ ------ ---- ------ ---- ------
Total..................... $ 391 100.00% $303 100.00% $348 100.00%
====== ====== ==== ====== ==== ======
</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
18
<PAGE> 19
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At June 30, 1998, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 7.44%.
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, 1998,
the Company had an average outstanding balance of $10,000 in securities
(excluding FHLB stock) with an average yield of 10.00%. At June 30, 1998, the
Company's investment securities consisted of one Federal Home Loan Mortgage
Corporation participation certificate totaling $8,000. 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.
The Company's securities portfolio at June 30, 1998 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,
------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------
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%
Adjustable-rate mortgage mutual fund.. -- --- --- --- 2,069 59.94
USL insurance stock................... --- --- --- --- 49 1.42
Mortgage-backed securities............ 8 .69 11 1.04 16 .46
------ ------ ---- ---- ------ -----
Subtotal........................... 8 .69 11 1.04 3,135 90.82
FHLB stock............................ 1,158 99.31 1,044 98.96 317 9.18
------ ------ ------ ------ ------ ------
Total securities and FHLB stock.... $1,166 100.00% $1,055 100.00% $3,452 100.00%
====== ====== ====== ====== ====== ======
</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, 1998
------------------------------------------------------------------------
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..... $ --- $ --- $ 8 $ --- $ 8 $ 8
----- ----- --- ----- --- ---
Total....................... $ --- $ --- $ 8 $ --- $ 8 $ 8
===== ===== === ===== === ===
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,
noninterest 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.
20
<PAGE> 21
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.
The following table sets forth the deposit flows at the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1998 1997 1996
------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance.................. $ 41,707 $ 40,452 $ 39,446
Deposits......................... 202,301 193,459 170,990
Withdrawals...................... (202,776) (193,748) (171,537)
Interest credited................ 1,583 1,544 1,553
-------- ----------- ----------
Ending balance................... $42,815 $ 41,707 $ 40,452
======== =========== =========
Net increase (decrease).......... $ 1,108 $ 1,255 $ 1,006
======== =========== =========
Percent increase (decrease)...... 2.66% 3.10% 2.55%
======== =========== =========
</TABLE>
21
<PAGE> 22
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,
------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------
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............... $ 841 1.96% $ 598 1.43% $ 346 .85%
Checking accounts (2.00%).................. 8,560 20.00 7,474 17.92 6,603 16.32
Money market deposit accounts (2.75%)...... 3,985 9.31 5,033 12.07 4,817 11.91
Passbook and statement savings (2.50%)..... 9,135 21.34 8,989 21.55 8,546 21.13
------- ------ ------- ------ -------- ------
Total Non-Certificates..................... 22,521 52.61 22,094 52.97 20,312 50.21
------- ------ ------- ------ -------- ------
Certificates:
2.00 - 4.00%............................. 756 1.76 8,540 20.48 1,267 3.13
4.01 - 6.00%............................. 18,518 43.25 10,337 24.79 16,867 41.70
6.01 - 8.00%............................. 1,020 2.38 736 1.76 2,006 4.96
8.01 - 10.00%............................ -- -- -- -- -- --
------- ------ ------- ------ -------- ------
Total Certificates......................... 20,294 47.39 19,613 47.03 20,140 49.79
------- ------ ------- ------ -------- ------
Total Deposits............................. $42,815 100.00% $41,707 100.00% $40,452 100.00%
======= ====== ======= ====== ======== ======
</TABLE>
- ------------
(1) Rates shown are at June 30, 1998.
The following table shows rate and maturity information for the
Company's certificates of deposit as of June 30, 1998.
<TABLE>
<CAPTION>
2.00- 4.01- 6.01- Percent
4.00% 6.00% 8.00% Total of Total
----- ----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing in
quarter ending:
September 30, 1998............... $ 756 $ 4,405 $ -- $ 5,161 25.43%
December 31, 1998................ -- 4,160 -- 4,160 20.50
March 31, 1999................... -- 2,237 -- 2,237 11.02
June 30, 1999.................... -- 2,398 -- 2,398 11.82
September 30, 1999............... -- 722 -- 722 3.56
December 31, 1999................ -- 644 -- 644 3.17
March 31, 2000................... -- 346 129 475 2.34
June 30, 2000.................... -- 321 239 560 2.76
Thereafter....................... -- 3,285 652 3,937 19.40%
------- ------- ------- ------- ------
Total......................... $ 756 $18,518 $1,020 $20,294 100.00%
======= ======= ======= ======= ======
Percent of total.............. 3.72% 91.25% 5.03% 100.00%
======= ======= ======= =======
</TABLE>
22
<PAGE> 23
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of June 30, 1998.
<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.... $4,630 $3,860 $4,305 $6,228 $19,023
Certificates of deposit of $100,000 or more... 531 300 330 110 1,271
------ ------ ------ ------ -------
Total certificates of deposit................. $5,161 $4,160 $4,635 $6,338 $20,294
====== ====== ====== ====== =======
</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, 1998, the Company had FHLB advances totaling $22.0
million. See Note 9 of the Notes to Consolidated Financial Statements in the
Annual Report for information on maturity dates and interest rates relating to
the Company's FHLB advances.
The following table sets forth the maximum month-end balance and
average balance of the Bank's borrowings for the periods indicated.
Year Ended June 30
------------------------------------
1998 1997 1996
------------------------------------
(In Thousands)
Maximum Balance:
FHLB advances............. $23,163 $20,874 $6,000
Average Balance:
FHLB advances............. $21,450 $12,871 $1,833
23
<PAGE> 24
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1998 1997 1996
----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Advances.......................... $21,972 $19,374 $6,000
Weighted average interest rate......... 6.24% 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 $1.6 million at June 30, 1998,
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.
At June 30, 1998, the Bank did not have any subsidiaries. However, subsequent
to June 30, 1998, the Bank formed Marshall Services, Inc., a Michigan
corporation, for the purpose of acquiring an equity ownership in a title
insurance company.
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.
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 September 1997 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
24
<PAGE> 25
total assets, to fund the operations of the OTS. The Bank's OTS assessment for
the fiscal year ended June 30, 1998, was $26,000.
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, 1998, the Bank's lending limit under this restriction was $1.5 million.
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.
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.
25
<PAGE> 26
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 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
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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. See
Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.
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, 1998, 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 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, 1998.
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
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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.
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.
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
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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 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 4%.
Penalties may be imposed upon associations for violations of the
liquid asset ratio requirement. At June 30, 1998, the Bank was in compliance
with this requirement, with an liquid asset ratio of 7.44%.
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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, 1998, 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 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
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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.
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."
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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, 1998, 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."
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, 1998, the Bank had $1.2 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 7.59% and were 8.07% for fiscal 1998.
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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.
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 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
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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.
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, 1998, the Bank's Excess for tax purposes totaled
approximately $4.7 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
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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 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 two 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 6% to 12% during fiscal 1998, and averaged 7.3% for the period,
and was approximately 8.4% during June 1998.
EMPLOYEES
At June 30, 1998, the Company had a total of 19 employees, all but one
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
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Company's premises and equipment (including land, building and furniture,
fixtures and equipment) at June 30, 1998 was $649,000. 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, 1998 was $181,000.
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.
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, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 53 of the 1998 Annual Report to Shareholders attached hereto as
Exhibit 13 is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Pages 4 to 14 of the 1998 Annual Report to Shareholders attached
hereto as Exhibit 13 is incorporated herein by reference.
36
<PAGE> 37
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in the Company's 1998 Annual Report
to Stockholders attached hereto as Exhibit 13 is incorporated herein by
reference.
ANNUAL REPORT SECTION PAGES IN ANNUAL REPORT
Report of Independent Auditors 16
Consolidated Balance Sheets as of
June 30, 1998 and 1997 17
Consolidated Statements of Income
for the Years ended June 30, 1998, 1997 and 1996 18
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended June 30, 1998, 1997 and 1996 19-21
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996 22-23
Notes to Consolidated Financial Statements 24-52
With the exception of the aforementioned information, the Company's
Annual Report to Shareholders for the year ended June 30, 1998, is not deemed
filed as part of this Annual Report on Form 10-KSB.
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.
37
<PAGE> 38
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
<TABLE>
<CAPTION>
Term
Position(s) Held Director to
Name Age(1) in the Corporation Since(2) Expire
---- ------ ------------------ -------- ------
NOMINEES
<S> <C> <C> <C> <C>
Aart VanElst 94 Chairman of the Board 1967 2001
John W. Yakimow 58 Director 1980 2001
<CAPTION>
DIRECTORS CONTINUING IN OFFICE
<S> <C> <C> <C> <C>
Richard L. Dobbins 53 Director 1979 2000
Martin L. Mitchell 47 Director 1986 2000
Charles B. Cook 50 President and Chief Executive Officer 1974 1999
Karl F. Loomis 50 Director 1995 1999
J. Thomas Schaeffer 53 Director 1989 1999
</TABLE>
- ---------------------
(1) At June 30, 1998.
(2) Includes service as a director of the Bank.
The business experience of each director of the Corporation for at
least the past five years is set forth below.
AART VANELST. Mr. VanElst has been Chairman of the Board of Directors
of the Corporation since April 1995. Mr. VanElst is a retired oil jobber, having
owned several retail service stations and a fuel oil delivery business in the
Marshall area. Mr. VanElst retired in 1979.
JOHN W. YAKIMOW. Mr. Yakimow recently retired as the General Manager
of Corporate Research and Development at Eaton Corporation located in Marshall,
Michigan. Mr. Yakimow had been employed by Eaton since 1971.
RICHARD L. DOBBINS. Mr. Dobbins is a partner in the law firm of
Dobbins, Beardslee & Grinage, P.C., with offices in Marshall and Concord,
Michigan. Mr. Dobbins' law firm may act as counsel to the Bank.
MARTIN L. MITCHELL. Mr. Mitchell is the Vice President of Program,
Starr Commonwealth, a human services organization located in Albion, Michigan.
Mr. Mitchell joined Starr in 1970.
CHARLES B. COOK. Mr. Cook is President and Chief Executive Officer of
the Corporation and the Bank. He has served in such capacities with the
Corporation since its incorporation in September
38
<PAGE> 39
1994. Mr. Cook has been employed by the Bank since 1973 and was named Chief
Executive Officer of the Bank in 1974. In 1980 he was named President of the
Bank.
DR. KARL F. LOOMIS. Dr. Loomis has been a laboratory director and
pathologist since 1983 at Regional Medical Laboratories, Inc., a laboratory
testing facility located in Battle Creek, Michigan. Dr. Loomis has served as
President and Chief Executive Officer of Regional Medical Laboratories, Inc.
since 1987.
J. THOMAS SCHAEFFER. Mr. Schaeffer is a partner in the law firm of
Schaeffer, Meyer & MacKenzie located in Marshall, Michigan. Mr. Schaeffer's law
firm acts as general counsel to the Bank.
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, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid or granted to the Corporation's Chief Executive Officer. No other officer
made in excess of $100,000 during fiscal 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Annual Compensation Awards
- ------------------------------------------------------------------------------------------------------------------------------
Other Annual Restricted All Other
Name and Principal Position Year Salary Bonus Compensation Stock Options Compensation
($) ($) ($)(2) Award($)(3) (#)(4) ($)
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Charles B. Cook, President, 1998 $107,293(1) $25,000 --- --- 9,693 $25,157(5)
CEO and Director 1997 105,375(1) 20,000 --- --- --- 21,112
1996 99,425(1) 20,000 --- $115,520 39,710 35,444
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $1,293, $3,375 and $1,425 paid to President Cook for appraisal
services rendered to the Bank on construction loans during fiscal 1998,
1997 and 1996, respectively.
39
<PAGE> 40
(2) Mr. Cook did not receive any additional benefits or perquisites which
exceeded, in the aggregate, the lesser of 10% of his salary and bonus, or
$50,000.
(3) Represents the dollar value of 7,220 shares (15,884 as adjusted for the
stock dividends discussed below) of restricted Common Stock granted to Mr.
Cook (based on the $16.00 ($7.27, as adjusted for the stock dividends
discussed below) closing price per share of the Common Stock on October
24, 1995, the date of grant). The shares of restricted stock vest in five
equal annual installments (the first installment having vested on October
24, 1996), provided the individual maintains "Continuous Service" (as
defined in the RRP) with the Corporation and/or the Bank. All dividends
paid on the restricted shares of Common Stock are held in a restricted
interest-bearing account until such shares are no longer subject to
restriction. At June 30, 1998, 9,530 shares of Common Stock (adjusted for
the 10% stock dividend paid by the Corporation on August 31, 1998 (the
"10% Stock Dividend") and the two-for-one stock split paid by the Company
in the form of a 100% stock dividend on August 7, 1997, collectively, the
"Stock Dividends") were still subject to restrictions. Based on $15.00,
the average of the closing bid and asked prices per share of the Common
Stock on June 30, 1998 (as adjusted for the Stock Dividends), the 9,530
remaining restricted shares held by Mr. Cook had an aggregate market value
of $142,920.
(4) The number of shares subject to the options have been adjusted in the
table to reflect the Stock Dividends.
(5) Represents the Bank's payment of medical and life insurance premiums of
approximately $5,684, as well as the Bank's contributions to its 401(k)
Plan of $3,780 and to the ESOP of $15,693 on behalf of Mr. Cook.
The following table sets forth certain information concerning stock options
granted by the Corporation to Mr. Cook during fiscal 1998. No stock appreciation
rights were granted during fiscal 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Option Grants in Last Fiscal Year
- -------------------------------------------------------------------------------------------------------------------------------
Individual Grants
- -------------------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Exercise or
Underlying Granted to Base
Options Granted Employees Price Expiration
Name (#)(1) in Fiscal Year ($/Sh)(1) Date
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles B. Cook 6,600 (2) 100% $16.36 10/28/07
3,093 (3) 100% 15.45 06/16/08
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted to reflect the 10% Stock Dividend.
(2) This option was fully exercisable as of the date of grant (October 28,
1997).
(3) This option is exercisable in two installments: 2,820 shares subject to
the option were exercisable on the date of grant (June 16, 1998) and the
remaining shares subject to the option are exercisable on June 16, 1999.
40
<PAGE> 41
The following table sets forth certain information concerning the
aggregate number and value of stock options held by Mr. Cook at June 30, 1998.
No stock appreciation rights have been granted by the Corporation to date.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Aggregate Options Exercised in Last Fiscal Year and FY-End Option Values
- -------------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#)(1) FY-End ($)(1)(2)
-------------------------------------------------------------------------
Shares
Acquired on Value
Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles B. Cook --- --- 25,304 24,099 $125,483 $188,225
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The number of securities underlying options and the exercise price of such
options have been adjusted for the Stock Dividends.
(2) Represents the aggregate market value of the stock options as of June 30,
1998. The market value per share of the stock options is the difference
between the market price per share of the Common Stock less the exercise
price of the stock options.
EMPLOYMENT AGREEMENT
The Bank has an employment agreement with President Cook. The
agreement provides for an annual base salary in an amount not less than the Mr.
Cook's current salary and an initial term of three years. The agreement also
provides for annual extensions of one year, in addition to the then-remaining
term thereunder, on each anniversary of the effective date of the agreement
(i.e., each February 6), subject to a formal performance evaluation performed by
disinterested members of the Bank's Board of Directors. The agreement terminates
upon the employee's death, for cause, in certain events specified by OTS
regulations, or by Mr. Cook upon 90 days notice to the Bank. For the year ended
June 30, 1998, the disinterested members of Bank's Board of Directors authorized
the extension of President Cook's employment agreement for an additional year.
The employment agreement provides for payment to Mr. Cook of the
greater of his salary for the remainder of the term of the agreement, or 299% of
his base compensation, in the event there is a "change in control" of the Bank
where employment terminates involuntarily in connection with such change in
control or within twelve months thereafter. This termination payment is subject
to reduction by the amount of all other compensation to the employee deemed for
purposes of the Internal Revenue Code of 1986, as amended (the "Code") to be
contingent on a "change in control," and may not exceed three times the
employee's average annual compensation over the most recent five year period or
be non-deductible by the Bank for federal income tax purposes. For the purposes
of the employment agreement, a "change in control" is defined as any event which
would require the filing of an application for acquisition of control or notice
of change in control pursuant to 12 C.F.R. Section 574.3 or 4. Such events are
generally triggered prior to the acquisition of control of 10% of the
Corporation's common stock. The agreement guarantees participation in an
equitable manner in employee benefits applicable to executive personnel.
41
<PAGE> 42
Based on his current compensation, if Mr. Cook was terminated as of
June 30, 1998, under circumstances entitling him to severance pay as described
above, he would have been entitled to receive a lump sum cash payment of
approximately $317,000.
DIRECTOR COMPENSATION
Non-employee directors of the Corporation and the Bank receive
compensation for their service as directors. The Corporation paid its
non-employee directors a $300 monthly retainer, plus additional fees of $200 for
each regular and special board meeting attended during fiscal 1998. During the
same period, the Bank's non-employee directors received a $300 monthly retainer,
plus additional fees of $450 (except for the Chairman of the Board who received
$500) and $250 for each regular and special board meeting attended,
respectively. Each non-employee Bank board member was also paid an additional
$75 for each committee meeting attended, except for attendance at Nominating
Committee meetings for which no fees are paid.
The Corporation has entered into Deferred Fee Agreements ("DFA") with
certain of its non-employee directors. Under the DFAs, each non-employee
director may make an annual election to defer receipt of all or a portion of his
monthly director fees into a deferral account established by the Corporation on
its books. The deferred amounts allocated to the deferral account will be
credited with interest at the rate equal to the rate on high grade long-term
bonds. The DFAs are unfunded, non-qualified agreements which provide for
distribution of the amount deferred upon retirement, disability or a change in
control of the Corporation (as those terms are defined in the DFA) to
participants or their designated beneficiaries. In addition, each participant is
entitled to a death benefit payment of approximately $31,000, payable monthly
over 15 years to designated beneficiaries. Life insurance on the plan
participants has been purchased by the Corporation to fund the benefits that
will be payable under these plans.
J. Thomas Schaeffer, a director of the Corporation and the Bank, is a
partner in the law firm of Schaeffer, Meyer & MacKenzie, which firm acts as
general counsel to the Bank. The legal fees received by the law firm for
professional services rendered to the Bank during the fiscal year ended June 30,
1998 did not exceed 5% of the firm's gross revenues. Richard L. Dobbins, a
director of the Corporation and the Bank, is a partner in the law firm of
Dobbins, Beardslee & Grinage, P.C. Such firm acts as counsel to the Bank. The
legal fees received by the law firm from professional services rendered to the
Bank during the fiscal year ended June 30, 1998 did not exceed 5% of the firm's
gross revenues.
Non-employee directors also received compensation during fiscal 1998
of $250 for attendance at educational and training seminars in connection with
their service as members of the Bank's Board of Directors.
The Bank pays the premiums on a $15,000 face value life insurance
policy on behalf of each of the non-employee directors, with the exception of
Chairman VanElst who is ineligible under the policy due to his age.
42
<PAGE> 43
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of September 17, 1998, the Corporation had 1,333,941 shares of
Common Stock issued and outstanding. The following table sets forth, as of
September 17, 1998, information regarding share ownership of: (i) those persons
or entities known by management to beneficially own more than five percent of
the Corporation's Common Stock (ii) directors, nominees, and the named executive
officer, and (ii) all directors and executive officers as a group. The address
of each of the beneficial owners, except where otherwise indicated, is the same
address as the Company.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
BENEFICIAL OWNERS OWNED(1) CLASS
- -------------------------------------------------------------- ------------------------------------------
<S> <C> <C>
MSB Financial, Inc. Employee Stock Ownership Plan(2) 127,074 9.53%
WILMOCO Capital Management, L.L.C.(3) 120,538 9.04%
300 River Place, Suite 5350
Detroit, Michigan 48207
Charles B. Cook(4) 108,745 7.95%
Richard L. Dobbins(4) 69,757 5.17%
John W. Yakimow(4) 64,547 4.79%
Martin L. Mitchell(4) 62,546 4.64%
J. Thomas Schaeffer(4) 55,505 4.12%
Karl F. Loomis(4) 24,233 1.80%
Aart VanElst(4) 23,794 1.76%
Directors and executive officers of the Corporation and the
Bank as a group (7 persons)(5) 409,127 28.20%
</TABLE>
(1) All amounts in this column have been adjusted to reflect the Stock
Dividends paid by the Corporation.
(2) Represents shares held by the MSB Financial, Inc. Employee Stock
Ownership Plan (the "ESOP"), 57,074 shares of which have been
allocated to accounts of participants. Pursuant to the terms of the
ESOP, each ESOP participant has the right to direct the voting of
shares of Common Stock allocated to his or her account. First Bankers
Trust Company, N.A., Quincy, Illinois, as the trustee of the ESOP,
may be deemed to beneficially own the shares held by the ESOP which
have not been allocated to the accounts of participants. Unallocated
shares will be voted in the same proportion as the voted allocated
shares.
(3) Based on information included in a Schedule 13D filed by WILMOCO
Capital Management, L.L.C. (the "WILMOCO"), W. Howard Morris, and
Carl B. Smalls with the Securities and Exchange Commission on
February 17, 1998. Mr. Morris, the President and Chief Investment
Officer, and Mr. Smalls, the Senior Vice President, are the executive
officers and only members of WILMOCO, an investment advisor and fund
manager. WILMOCO reported sole voting and investment power with
respect to all shares of Common Stock reported in its Schedule 13D.
43
<PAGE> 44
(4) The nature of beneficial ownership for shares reported in by these
individuals is sole voting and investment power. Included in the
shares beneficially owned by the named individuals are options to
purchase shares of Common Stock as follows: Mr. Cook - 33,246 shares;
Mr. Dobbins - 14,458 shares; Mr. Yakimow - 14,457 shares; Mr.
Mitchell - 14,457 shares; Mr. Schaeffer - 14,457 shares; Mr. Loomis
- 11,280 shares; and Mr. VanElst - 14,458 shares.
(5) Includes shares held directly, as well as shares held jointly with
family members, shares held in retirement accounts, held in a
fiduciary capacity, held by certain of the group members' families,
or held by trusts of which the group member is a trustee or
substantial beneficiary, with respect to which shares the group
member may be deemed to have sole or shared voting and/or investment
powers. This amount also includes options to purchase 116,813 shares
of Common Stock granted to directors and executive officers which are
either currently exercisable or excisable within 60 days of the
Voting Record Date.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation has followed a policy of granting consumer loans and
loans secured by the borrower's personal residence to officers, directors and
employees. Loans to all officers and directors must be approved by two-thirds of
the disinterested directors and loans to employees must be approved by the
Bank's loan committee. All loans to executive officers and directors were made
in the ordinary course of business and on the same terms and conditions as those
of comparable transactions prevailing at the time, in accordance with the
Corporation's underwriting guidelines, and do not involve more than the normal
risk of collectibility or present other unfavorable features.
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, 1998.
44
<PAGE> 45
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 25, 1998 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.
<TABLE>
<S> <C>
/s/ Charles B. Cook Date: September 25, 1998
- ------------------------------------
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 25, 1998
- ------------------------------------
Aart VanElst, Chairman of the Board
/s/ John W. Yakimow Date: September 25, 1998
- ------------------------------------
John W. Yakimow, Director
/s/ Martin L. Mitchell Date: September 25, 1998
- ------------------------------------
Martin L. Mitchell, Director
/s/ Richard L. Dobbins Date: September 25, 1998
- ------------------------------------
Richard L Dobbins, Director
/s/ J. Thomas Schaeffer Date: September 25, 1998
- ------------------------------------
J. Thomas Schaeffer, Director
/s/ Karl F. Loomis Date: September 25, 1998
- ------------------------------------
Karl F. Loomis, Director
</TABLE>
<PAGE> 46
INDEX TO EXHIBITS
Exhibit
Number Document
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 Notes 1 and 2 of the
Notes to Consolidated Financial Statements contained in the Annual
Report to Stockholders attached hereto as Exhibit 13).
13 Annual Report to Securityholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27.1 Financial Data Schedule (electronic filing only)
27.2 Financial Data Schedule: 3 months ended September 30, 1997 (electronic
filing only)
27.3 Financial Data Schedule: 12 months ended June 30, 1997 (electronic
filing only)
27.4 Financial Data Schedule: 9 months ended March 31, 1997 (electronic
filing only)
27.5 Financial Data Schedule: 6 months ended December 31, 1996 (electronic
filing only)
27.6 Financial Data Schedule: 3 months ended September 30, 1996 (electronic
filing only)
<PAGE> 1
EXHIBIT 13
1998 ANNUAL REPORT
MSB FINANCIAL, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Section I
President's Message.................................................................................. 1
Selected Consolidated Financial Information.......................................................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................. 4
Section II
Consolidated Financial Statements.................................................................... 15
Section III
Shareholder Information.............................................................................. 53
Corporate Information................................................................................ 54
</TABLE>
<PAGE> 3
Dear Shareholder:
It is indeed a pleasure to present to you the Annual Report of MSB Financial,
Inc. for the fiscal year ended June 30, 1998, our third full year as a publicly
held corporation.
On August 7, 1997, the Corporation completed a 2 for 1 stock split in the form
of a 100% stock dividend. In addition, on August 31, 1998, an additional 10%
stock dividend was paid. With the additional stock liquidity and availability
provided by these stock dividends, we hope to increase trading activity and
shareholder value. The financial information provided herein has been prepared
with consideration given to both of the above stock dividends.
Net income for the year was $1.2 million, or diluted earnings per share of $0.94
per share, compared to $816,000, or $0.63 per share for fiscal 1997, an increase
of 49.8%. However, in fiscal 1997 earnings were negatively impacted by a special
one-time assessment by the Federal Deposit Insurance Corporation's Savings
Association Insurance Fund, of $269,000. This had an after tax negative impact
on earnings of approximately $0.14 per share.
Total assets of the Corporation grew 7.1% to $80.0 million. Net loans totaled
$73.4 million as of June 30, 1998, compared to $68.9 million the previous year,
an increase of 6.5%. With relatively low interest rates and a commitment to
manage interest rate risk, the Corporation deemed it prudent to sell fixed rate
mortgage loans in the secondary market, which reduced net loan growth. During
the past fiscal year $16.9 million in mortgage loans were sold with servicing
retained. The resulting fee income and gain on sale of loans contributed
significantly to the Corporation's net income.
On February 11, 1998, the Corporation announced its plan to repurchase up to 5%
of its stock. With other completed repurchased programs, the Corporation has
repurchased a total of 296,441 shares at an average cost of $9.34 per share, or
93.9% of current book value. We believe this to be an excellent investment and a
prudent use of the Corporation's capital.
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,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................................. $79,967 $74,698 $60,130 $53,409 $46,838
Loans receivable, net.................................... 73,065 68,740 52,328 41,894 37,063
Loans held for sale, net................................. 295 150 957 2,017 3,360
Investment securities.................................... 8 11 3,135 2,620 3,068
FHLB stock............................................... 1,158 1,044 317 310 310
Deposits................................................. 42,815 41,707 40,452 39,446 39,825
FHLB advances............................................ 21,972 19,374 6,000 --- ---
Shareholders' equity..................................... 13,313 12,690 12,594 13,260 6,264
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- ------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income.................................... $6,526 $ 5,539 $ 4,671 $ 3,910 $ 3,341
Total interest expense................................... 2,947 2,294 1,630 1,488 1,521
------ ------- ------- ------- -------
Net interest income................................... 3,579 3,245 3,041 2,422 1,820
Provision for loan losses................................ 95 48 24 73 80
------ ------- ------- ------- -------
Net interest income after provision for loan losses... 3,484 3,197 3,017 2,349 1,740
Loan servicing fees and service charges on deposits...... 231 210 192 185 191
Gain on sale of loans.................................... 259 47 31 27 133
Other noninterest income................................. 177 64 107 64 76
------ ------- ------- ------- -------
Total noninterest income................................. 667 321 330 276 400
Total noninterest expense................................ 2,250 2,244 1,823 1,360 1,487
------ ------- ------- ------- -------
Income before federal income taxes.................... 1,901 1,274 1,524 1,265 653
Federal income tax expense............................... 678 458 518 432 223
------ ------- ------- ------- -------
Net income............................................ $ 1,223 $ 816 $1,006 $ 833 $ 430
======== ====== ====== ======= =======
Basic earnings per common share(1)....................... $.98 $.63 $.71 $.32 N/A
==== ==== ==== ==== ===
Diluted earnings per common share(1)..................... $.94 $.63 $.71 $.32 N/A
==== ==== ==== ==== ===
- -----------------
(1) Restated for two-for-one stock split declared July 8, 1997 and the 10% stock dividend declared July 14, 1998.
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total
assets).................................................. 1.57% 1.21% 1.82% 1.66% .90%
Return on shareholders' equity (ratio of net income to
average equity).......................................... 9.39% 6.46% 7.67% 9.59% 6.93%
Interest rate spread information:
Average during period.................................... 4.15% 4.31% 4.83% 4.47% 3.56%
Net interest margin(1)................................... 4.81% 5.02% 5.72% 5.03% 3.99%
Ratio of operating expense to average total assets......... 2.89% 3.32% 3.30% 2.71% 3.12%
Ratio of average interest-earning assets to average
interest-bearing liabilities............................. 116.73% 119.88% 128.72% 118.26% 112.99%
Quality Ratios:
Non-performing loans to total gross loans.................. .82% .65% .84% .85% 2.43%
Non-performing assets to total assets at end of period..... .79% .66% .79% .72% 2.17%
Allowance for loan losses to non-performing loans.......... 62.28% 65.14% 73.32% 85.65% 31.33%
Allowance for loan losses to loans receivable, net......... .53% .44% .67% .79% .69%
Capital Ratios:
Shareholders' equity to total assets at end of period...... 16.65% 16.99% 20.94% 24.83% 13.37%
Average shareholders' equity to average assets............. 16.71% 18.70% 23.71% 17.29% 13.01%
Dividend payout ratio(2)................................... 27.66% 38.10% 26.76% --- N/A
Cash dividends declared per share(3).......................
$.26 $.23 $.19 --- N/A
Other Data:
Number of full-service offices............................. 2 2 2 2 2
- -----------------
(1) Net interest income divided by average interest-earning assets.
(2) Dividends declared per share divided by diluted earnings per common share.
(3) Restated for two-for-one stock split declared July 8, 1997 and the 10% stock
dividend declared July 14, 1998.
</TABLE>
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 (1,588,429 shares at $4.55 per share as restated for
the two-for-one stock split declared July 8, 1997, and the 10% stock dividend
declared July 14, 1998), 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 $1,223,000, $816,000, and
$1,006,000 for the years ended June 30, 1998, 1997, and 1996 respectively,
principally from net interest income and increasingly from gains on sales of
mortgage loans.
Permanent loans secured by one- to four-family residences accounted for
approximately 68.8% of the Corporation's gross loan portfolio at June 30, 1998,
67.5% at June 30, 1997, and 64.8% at June 30, 1996. The Corporation originated
total loans of $43.8 million, $30.8 million, and $28.6 million during fiscal
1998, 1997, and 1996, respectively, and sold $16.9 million, $2.9 million, and
$4.7 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 $5.3 million, or 7.1%, from June 30, 1997 to
June 30, 1998. Net loans, including loans held for sale, increased from $68.9
million at June 30, 1997 to $73.4 million at June 30, 1998, an increase of 6.5%,
due to a strong demand for mortgage loans, especially residential one-to-four
family construction loans, in the Corporation's market areas. This increase was
primarily funded by a $2.6 million increase in Federal Home Loan Bank ("FHLB")
advances and a $1.1 million increase in deposit accounts.
4
<PAGE> 7
Total liabilities increased $4.6 million to $66.7 million from June 30,
1997 to June 30, 1998. In addition to the increase in the FHLB advances and
deposits discussed above, accrued expenses and other liabilities increased
$866,000, or 226.4%, as compared to June 30, 1997. This increase in accrued
expenses and other liabilities is primarily attributed to an increase of
$737,000 in the daily funds due the Bank's official check services provider.
This increase represents an increase in the daily activity for official checks
on June 30, 1998 compared to June 30, 1997. Other increases to total liabilities
included an increase in advance payments by borrowers for taxes and insurance of
$59,000, or 12.7%, and accrued interest payable of $14,000, or 17.7%.
Shareholder's equity increased $622,000, or 4.9%, from June 30, 1997 to
June 30, 1998. Net income, offset by the repurchase of the Corporation's common
stock and dividends declared on common stock, resulted in this increase. During
the year ended June 30, 1998, the Corporation repurchased 38,610 shares of its
common stock at a total cost of $566,450, or $14.67 per share, as compared to
70,349 shares during the year ended June 30, 1997, at a total cost of $645,060,
or $9.17 per share (as restated for the two-for-one stock split declared July 8,
1997, and the 10% stock dividend declared July 14, 1998). The Corporation is
currently in the process of repurchasing an additional 5%, or 67,738 shares of
its common stock and as of June 30, 1998 had repurchased 16,720 shares under
this program. As of June 30, 1998, a total of 296,441 shares of the
Corporation's common stock had been repurchased at a cost of $2,769,263, or
$9.34 per share. Shareholder's equity to total assets remains strong at 16.6% at
June 30, 1998, compared to 17.0% and 20.9% at June 30, 1997, and 1996,
respectively.
RESULTS OF OPERATIONS
GENERAL. The Corporation's results of operations depend primarily upon
the level of net interest income, which is the difference or 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, 1998, 1997, and
1996 was $1,223,000, $816,000, and $1,006,000 respectively. Net income for the
1997 period was impacted by a non-recurring, net of tax charge of $178,000 to
recapitalize the Federal Deposit Insurance Corporation's ("FDIC") Savings
Association Insurance Fund ("SAIF").
The Corporation's return on average assets was 1.57% for fiscal 1998,
compared to 1.21% (1.47% without the SAIF assessment) for fiscal 1997 and 1.82%
for fiscal 1996. The Corporation's return on average shareholder's equity was
9.39% for fiscal 1998, compared to 6.46% (7.87% without the SAIF assessment) for
fiscal 1997 and 7.67% for fiscal 1996. Average shareholders' equity to avererage
assets was 16.71%, 18.70% and 23.71% and the Corporation's dividend payout ratio
was 27.66%, 38.10% and 26.76% for the years ended June 30, 1998, 1997 and 1996,
respectively.
NET INTEREST INCOME. Net interest income before provision for loan
losses for the years ended June 30, 1998, 1997, and 1996 was $3.6 million, $3.2
million, and $3.0 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, the yield earned on
loans increased from 8.70% in fiscal 1997 to 8.85% in fiscal 1998 due to
increased loan sales during fiscal 1998 which resulted in a faster acceleration
into income of deferred loan fees, as compared to fiscal 1997.
5
<PAGE> 8
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the interest income
earned on average interest-earning assets and the resultant yields, as well as
the interest expense paid on average interest-bearing liabilities and the
resultant rates. No tax equivalent adjustments were made. All average balances
are monthly average balances. Non-accruing loans have been included in the
table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June, 30,
At June 30, --------------------------------------------------------------
1998 1998 1997
---------- ----------------------------------- -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
---------- ------------- -------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1).................... 8.44% $71,255 $6,303 8.85% $61,718 $5,369 8.70%
Interest-bearing deposits.............. 4.91 1,982 133 6.71 1,573 85 5.40
Securities............................. 7.18 10 1 10.00 643 34 5.29
FHLB stock............................. 8.00 1,103 89 8.07 667 51 7.65
------- ----- ------- ------
Total interest-earning assets(1)...... 74,350 6,526 8.78 64,601 5,539 8.57
----- ------
Other assets........................... 3,569 2,967
------- -------
Total assets.......................... $77,919 $67,568
======= =======
Interest-Bearing Liabilities:
Savings deposits....................... 2.50 $ 9,185 223 2.43 $ 8,644 213 2.46
Checking and money market deposits..... 2.23 12,781 269 2.10 12,383 292 2.36
Certificate accounts................... 5.39 20,133 1,090 5.41 19,989 1,035 5.18
FHLB advances and other borrowings..... 6.25 21,596 1,365 6.32 12,871 754 5.86
------- ----- ------- ------
Total interest-bearing liabilities.... 63,695 2,947 4.63 53,887 2,294 4.26
----- -----
Other liabilities...................... 1,205 1,043
------- -------
Total liabilities..................... 64,900 54,930
Shareholders' equity................... 13,019 12,638
------- -------
Total liabilities and shareholder's
equity.................................. $77,919 $67,568
======= =======
Net interest income..................... $3,579 $ 3,245
====== =======
Net interest rate spread................ 4.15% 4.31%
==== ====
Net earning assets...................... $10,655 $ 10,714
======= ========
Net yield on average interest-earning
Assets................................. 4.81% 5.02%
==== ====
Average interest-earning assets to
Average interest-bearing liabilities... 1.17x 1.20x
==== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended June, 30,
--------------------------------------
1996
--------------------------------------
Average Interest
Outstanding Earned/
Balance Paid Yield/Rate
------------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1).................... $47,609 $4,305 9.04%
Interest-bearing deposits.............. 2,168 148 6.83
Securities............................. 3,091 193 6.24
FHLB stock............................. 312 25 8.01
------- ------
Total interest-earning assets(1)...... 53,180 4,671 8.78
------
Other assets........................... 2,115
-------
Total assets.......................... $55,295
=======
Interest-Bearing Liabilities:
Savings deposits....................... $ 8,192 214 2.61
Checking and money market deposits..... 11,468 293 2.55
Certificate accounts................... 19,823 1,039 5.24
FHLB advances and other borrowings..... 1,833 84 4.58
------- ------
Total interest-bearing liabilities.... 41,316 1,630 3.95
------
Other liabilities...................... 868
-------
Total liabilities..................... 42,184
Shareholders' equity................... 13,111
-------
Total liabilities and shareholder's
equity.................................. $55,295
=======
Net interest income..................... $3,041
======
Net interest rate spread................ 4.83%
====
Net earning assets...................... $ 11,864
========
Net yield on average interest-earning
Assets................................. 5.72%
====
Average interest-earning assets to
Average interest-bearing liabilities... 1.29x
====
</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,
-------------------------------------------------------------------------
1998 vs.1997 1997 vs.1996
------------------------------ ---------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
----------------- ---------------- --------
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable............................... $ 842 $ 92 $ 934 $1,233 $ (169) $1,064
Interest-bearing deposits...................... 25 23 48 (36) (27) (63)
Securities..................................... (49) 16 (33) (133) (26) (159)
FHLB stock..................................... 35 3 38 27 (1) 26
------ ------ ------ ------ ------- ------
Total interest-earning assets................ $ 853 $ 134 987 $1,091 $ (223) 868
====== ====== ------ ====== ====== ------
Interest-Bearing Liabilities:
Savings deposits............................... $ 13 $ (3) 10 $ 11 $ (12) (1)
Checking and money market deposits............. 9 (32) (23) 22 (23) (1)
Certificate accounts........................... 8 47 55 9 (13) (4)
FHLB advances and other borrowings............. 547 64 611 640 30 670
------ ------ ------ ------ ------ ------
Total interest-bearing liabilities........... $ 577 $ 76 653 $ 682 $ (18) 664
====== ====== ------ ====== ====== ------
Net interest income............................. $ 334 $ 204
====== ======
</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 $47,000 for the year ended June
30, 1998 from the year ended June 30, 1997, due to management's continuing
reassessment of losses inherent in the loan portfolio. At June 30, 1998, the
Corporation's allowance for loan losses totaled $391,000, or 0.53% of net loans
receivable and 62.28% of total non-performing loans. The Corporation's provision
for loan losses was $95,000 in fiscal 1998 compared to $48,000 in fiscal 1997
and $24,000 in fiscal 1996.
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,
7
<PAGE> 10
loan commitments outstanding, delinquencies, and other factors. Because the
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, 1998, the Corporation's non-performing assets,
consisting of nonaccrual loans and accruing loans 90 days or more delinquent,
totaled $628,000 or 0.79% of total assets compared to $465,000 or 0.62% of total
assets as of June 30, 1997, an increase of $163,000. 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 increased from
0.65% at June 30, 1997 to 0.82% at June 30, 1998. There was no affiliation
between the Corporation's management and the borrowers of the above-mentioned
loans. There was no foreclosed real estate at June 30, 1998. The Corporation had
$29,000 of foreclosed real estate at June 30, 1997.
Management will continue to monitor the allowance for loan losses and
make future additions to the allowance through the provision for loan losses as
economic conditions 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 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, 1998, was $667,000, compared to $321,000 in fiscal 1997 and $330,000 in
fiscal 1996. This represents an increase of $346,000 in fiscal 1998 compared to
fiscal 1997 and an increase of $337,000 compared to fiscal 1996. 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 charges on deposit accounts and other fees. The primary reason for the
increase in noninterest income in fiscal 1998 as compared to fiscal 1997 and
fiscal 1996, were increases in net gains on sales of loans held for sale, due to
increased loan sales, of $212,000 and $228,000, respectively. Included in these
increases was income associated with the recognition of mortgage servicing
rights retained at the time of a mortgage loan sale. The periods ended June 30,
1998 and June 30, 1997, were the first periods mortgage servicing rights were
recognized on the books of the Corporation and totaled $168,000 for fiscal 1998
and $29,000 for fiscal 1997. In fiscal 1998, 1997 and 1996, respectively, loan
sales totaled $16.9 million, $2.9 million and $4.7 million. The primary reason
for the lower level of noninterest income for fiscal 1997 as compared to fiscal
1998 and fiscal 1996 were net realized losses associated with the sale of
securities available for sale of $48,000 in fiscal 1997. Also, during fiscal
1998 gains on the sale of real estate owned totaled $14,000.
NONINTEREST EXPENSE. Noninterest expense totaled $2.3 million in 1998
compared to $2.2 million in fiscal 1997 and $1.8 million in fiscal 1996.
Included in noninterest expense for fiscal 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 $151,000 from
fiscal 1997 to fiscal 1998, representing an increase of 17.4%, and increased
$106,000 from fiscal 1996 to fiscal 1997, representing an increase of 13.8%. The
most significant factors causing the increase in salaries and employee benefits
were the addition of one new employee in fiscal 1998, increased benefits expense
associated with health care insurance, and increases in expenses associated with
the Corporation's stock-based 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
8
<PAGE> 11
expenses, loan related expenses and other sundry expenses increased $38,000 in
fiscal 1998 as compared to an increase of $37,000 during fiscal 1997. See "Year
2000 Issue".
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 to pre-tax earnings. The Bank, still remains a well-capitalized
institution for regulatory purposes.
FEDERAL INCOME TAX EXPENSE. Federal income tax expense for fiscal 1998
was $678,000 compared to $458,000 in fiscal 1997 and $518,000 in fiscal 1996.
The effective tax rate for federal income taxes was 35.7% in fiscal 1998, 35.9%
in fiscal 1997 and 34.0% in fiscal 1996.
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. Furthermore, the Bank, due to its asset size and level of risk-based
capital, is exempt from this requirement.
9
<PAGE> 12
Presented below, as of June 30, 1998, 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>
Change in June 30, 1998
-----------------------
Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
---------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
+400 (40)% $(1,027) (9)%
+300 (30) (480) (4)
+200 (20) (89) (1)
+100 (10) 111 1
-0- --- --- ---
-100 (10) (368) (3)
-200 (20) (960) (8)
-300 (30) (1,258) (10)
-400 (40) (1,440) (12)
</TABLE>
As of June 30, 1998, 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 adjustable-rate mortgage
("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
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 may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. 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.
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 of deposit could deviate significantly
from those assumed in calculating the above table.
10
<PAGE> 13
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 4% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, government agency
and other securities and obligations generally having remaining maturities of
less than five years. The Bank has maintained its liquidity ratio at levels in
excess of those required. At June 30, 1998, the Bank's liquidity ratio was
7.44%.
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 to meet liquidity
needs.
At June 30, 1998, the Bank had advances from the FHLB of Indianapolis
of $22.0 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, 1998, the Bank had outstanding commitments to extend
credit which amounted to $6.0 million (including $3.4 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, 1998, 1997 and 1996, the Bank originated loans for sale totaling
$16.9 million, $3.0 million and $4.1 million, respectively, and received
proceeds from the sale of such loans of $16.9 million, $2.9 million and $4.7
million, respectively. See Note 6 of Notes to Consolidated Financial Statements
contained herein for detailed information.
The primary financing activity of the Bank is deposits. For the
years ended June 30, 1998, 1997 and 1996 there was a net increase in deposit
accounts of $1.1 million, $1.3 million, and $1.0 million, 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, 1998, the Bank had tangible capital and Tier 1 (core)
capital of $9.8 million, or 12.3% of adjusted total assets, which was
approximately $8.6 million and $7.4 million above the minimum requirements of
1.5% and 3.0%, respectively, of the adjusted total assets in effect on that
date. As of June 30, 1998, the Bank had Tier 1 (core) capital of $9.8 million,
or 12.6% of average total assets, which was
11
<PAGE> 14
approximately $6.7 million above the minimum requirement of 4.0% of average
total assets in effect on that date. On June 30, 1998, the Bank had risk-based
capital of $10.2 million (including $9.8 in core capital), or 20.7% of
risk-weighted assets of $49.3 million. This amount was $6.3 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, 1998, the parent Corporation had $217,000 in liquid assets on hand. The
primary source of liquidity on an ongoing basis are dividends from the Bank.
Dividends totaling $1.2 million were paid from the Bank to the Corporation for
the year ended June 30, 1998. For the year ended June 30, 1998, the Corporation
paid dividends to shareholders totaling $335,000 and repurchased 38,610 shares
of common stock, as restated for the 10% stock dividend declared July 14, 1998,
at a total cost $566,000. The Corporation has authority to repurchase under its
current repurchase program an additional 51,018 shares of Corporation common
stock at June 30, 1998, as restated for the 10% stock dividend declared July 14,
1998.
YEAR 2000 ISSUE
The approach of the year 2000 presents potential problems to businesses
that utilize computers in their daily operations. Some computer systems may not
be able to properly interpret dates after December 31, 1999, because they use
only two digits to indicate the year in the date. Therefore, a date using "00"
as the year may be recognized as the year 1900 rather than the year 2000. See
"Forward-Looking Statements".
The Corporation has formed a Year 2000 Committee (the "Committee") to
address the potential problems associated with the Year 2000 computer issue. The
Committee, consisting of directors, officers and employees of the Corporation,
meets on a regular basis and provides regular reports to the Board of Directors
detailing progress with the Year 2000 issue.
The Corporation's primary computer processing is provided by a data
center, and through this data center the Corporation will migrate to a new Year
2000 compliant teller/bank operation platform in late 1998. To ensure the
readiness of this system, the Corporation will perform testing of actual
customer data on a separate system after conversion to the new platform. As of
June 30, 1998, all in-house computer systems have been inspected and their risk
of a Year 2000 failure identified. Also, all corporation software is being
evaluated through vendor ensured readiness statements and testing by the
Committee. The Corporation does not use any custom-programmed software. Another
area under review are systems which utilize embedded microchips (such as in
heating, ventilation and air conditioning systems, security and other related
systems). Venders for these systems have been contacted and have indicated Year
2000 risks to be minimal.
With an issue as complex as the Year 2000, the Corporation believes
education of employees, customers and community members is vital to a better
understanding of what real dangers are posed by the arrival of the Year 2000.
Education has been provided through in-house training sessions, literature to
customers, as well as seminars offered to the community. Additional information
has been provided through the Corporation's internet site in the form of links
to various Year 2000 information sites.
Costs to the Corporation related to the Year 2000 issue are estimated
to be between $50,000 and $60,000. To date the following Year 2000 expenses have
been identified at approximately $40,000 for testing of the data center
equipment and programs, $3,000 for equipment upgrades and $2,000 for employee
and community education. It is impossible to predict the exact expenses
associated with the Year 2000 issue and additional funds may be needed for
unknown expenses related to Year 2000 testing, training, and education, as well
as system and software replacements.
12
<PAGE> 15
As with any organization that depends on technology, particularly
computer systems and software, a Year 2000 related failure poses a significant
threat to continued business operations. While the Corporation is doing
everything in its power to ensure Year 2000 readiness, we recognize that the
success of our third party providers is vital to our success. Of primary concern
are local utility and telecommunication companies. These, in addition to other
third parties such as our data center, electronic banking service providers and
financial partners, have been contacted and we are monitoring their progress
towards their own Year 2000 readiness. Another potential risk to the Corporation
includes lending and deposit relationships. The Committee is currently
evaluating these two groups and assessing any potential risks, as well as
establishing any necessary corrective procedures.
Despite careful planning by the Corporation, we recognize there may be
circumstances beyond our control that may prohibit us from operating "as usual"
after December 31, 1999. The Committee is currently in the process of
establishing a contingency plan to address potential Year 2000 problems.
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
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", was issued 1996. It revised 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 in 1997
and others beginning in 1998. The effect on the consolidated financial
statements was not material.
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. SFAS 130 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. SFAS 130 is
effective for fiscal years beginning after December 15, 1997.
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 material
operating segments in annual financial statements and requires that those
enterprises report selected information about material 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.
13
<PAGE> 16
A new accounting standard, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", will require all derivatives to be
recognized at fair value as either assets or liabilities in the consolidated
balance sheets beginning with the quarter ended September 30, 1999. Changes in
the fair value of derivatives not designated as hedging instruments are to be
recognized currently in earnings. Gains or losses on derivatives designated as
hedging instruments are either to be recognized currently in earnings or are to
be recognized as a component of other comprehensive income, depending on the
intended use of the derivatives and the resulting designations. The Corporation
does not believe adoption of this new standard will have a material impact on
its consolidated financial position or results of operations.
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, 1998.
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, 1998, 1997 and 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT AUDITORS............................................................................ 16
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.......................................................................... 17
CONSOLIDATED STATEMENTS OF INCOME.................................................................... 18
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY........................................... 19
CONSOLIDATED STATEMENTS OF CASH FLOWS................................................................ 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................................................... 24
</TABLE>
15
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
MSB Financial, Inc.
Marshall, Michigan
We have audited the accompanying consolidated balance sheets of MSB Financial,
Inc. as of June 30, 1998 and 1997 and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Grand Rapids, Michigan
July 23, 1998
16
<PAGE> 19
MSB FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 2,286,520 $ 1,502,724
Interest-bearing deposits in other financial institutions 994,193 1,577,888
--------------- ----------------
Total cash and cash equivalents 3,280,713 3,080,612
Securities held to maturity (fair value of
$8,102 in 1998 and $11,455 in 1997) 8,102 11,455
Loans held for sale, net of unrealized losses of
$0 in 1998 and $0 in 1997 295,300 150,000
Loans receivable, net of allowance for loan losses of
$391,148 in 1998 and $302,903 in 1997 73,065,017 68,739,556
Federal Home Loan Bank stock 1,158,200 1,043,700
Accrued interest receivable 419,847 420,921
Premises and equipment, net 648,878 577,058
Mortgage servicing rights 177,006 27,595
Other assets 913,650 646,887
--------------- ----------------
$ 79,966,713 $ 74,697,784
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 841,012 $ 598,379
Savings, NOW and MMDA deposits 21,679,740 21,495,688
Other time deposits 20,294,396 19,612,665
--------------- ----------------
Total deposits 42,815,148 41,706,732
Federal Home Loan Bank advances 21,971,976 19,373,600
Advance payments by borrowers for taxes and insurance 524,739 465,445
Accrued interest payable 93,114 79,114
Accrued expenses and other liabilities 1,249,043 382,697
--------------- ----------------
66,654,020 62,007,588
Shareholders' equity
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none outstanding
Common stock, $.01 par value; 4,000,000 shares authorized; 1,631,315 shares
issued and 1,338,051 shares outstanding at June 30, 1998; 1,483,014
shares issued and 1,248,622 shares outstanding at June 30, 1997 16,313 14,830
Additional paid-in capital 9,533,274 7,096,776
Retained earnings, substantially restricted 6,970,925 8,372,493
Unearned Employee Stock Ownership Plan shares (318,181) (383,006)
Unearned Recognition and Retention Plan shares (146,728) (208,084)
Treasury stock, at cost (293,264 and 234,392 common
shares in 1998 and 1997, respectively) (2,742,910) (2,202,813)
--------------- ----------------
13,312,693 12,690,196
--------------- ----------------
$ 79,966,713 $ 74,697,784
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 6,302,986 $ 5,368,868 $ 4,304,604
Securities available for sale - taxable - 28,179 141,426
Securities held to maturity - taxable 674 5,659 51,905
Other interest and dividend income 221,886 136,095 173,051
-------------- -------------- ---------------
6,525,546 5,538,801 4,670,986
Interest expense
Deposits 1,581,785 1,540,224 1,545,292
Federal Home Loan Bank advances 1,354,597 747,489 84,394
Other interest expense 10,560 6,112 -
-------------- -------------- ---------------
2,946,942 2,293,825 1,629,686
-------------- -------------- ---------------
NET INTEREST INCOME 3,578,604 3,244,976 3,041,300
Provision for loan losses 95,000 48,000 24,000
-------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,483,604 3,196,976 3,017,300
Noninterest income
Loan servicing fees, net 74,917 85,421 94,177
Net gains on sales of loans held for sale 258,807 46,982 30,715
Service charges on deposit accounts 156,107 124,367 97,683
Net realized losses on sales of securities
available for sale - (47,950) -
Other income 177,599 111,933 107,398
-------------- -------------- ---------------
667,430 320,753 329,973
Noninterest expense
Salaries and employee benefits 1,018,836 867,468 761,965
Occupancy and equipment expense 214,675 196,000 174,191
Data processing expense 186,870 160,933 144,417
Federal deposit insurance premium 52,193 346,113 114,151
Director fees 123,938 123,824 112,317
Correspondent bank charges 60,829 57,769 51,137
Michigan Single Business tax 73,000 58,550 56,450
Provision (recovery) to adjust loans held for sale
to lower of cost or market - (27,259) 1,270
Advertising expense 71,364 57,279 56,998
Professional fees 89,803 87,410 83,609
Supplies expense 70,021 65,129 53,232
Other expense 288,779 250,512 213,940
-------------- -------------- ---------------
2,250,308 2,243,728 1,823,677
-------------- -------------- ---------------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 1,900,726 1,274,001 1,523,596
Federal income tax expense 678,000 458,000 518,000
-------------- -------------- ---------------
NET INCOME $ 1,222,726 $ 816,001 $ 1,005,596
============== ============== ===============
Earnings per common and common equivalent share
Basic earnings per common share $ .98 $ .63 $ .71
========= ========= ========
Diluted earnings per common share $ .94 $ .63 $ .71
========= ========= ========
</TABLE>
See accompanying to notes to consolidated financial statements.
18
<PAGE> 21
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Net Unrealized
Loss on Unearned
Securities Employee
Additional Available for Stock
Common Paid-In Retained Sale, Net of Ownership
Stock Capital Earnings Tax Plan Shares
----- ------- -------- --- -----------
<S> <C> <C> <C> <C> <C>
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 - $.19 per share -- -- (274,514) -- --
15,059 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 -- -- --
Amortization of RRP shares -- -- -- -- --
Repurchase of 85,219 shares of common
stock -- -- -- -- --
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)
<CAPTION>
Unearned
Recognition
and Total
Retention Treasury Shareholders'
Plan Shares Stock Equity
----------- ----- ------
<S> <C> <C> <C>
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 - $.19 per share -- -- (274,514)
15,059 shares committed to be released
under the ESOP -- -- 116,367
Issuance of 18,772 restricted common
shares under the Recognition and
Retention Plan (RRP) (293,313) -- --
Amortization of RRP shares 39,113 -- 39,113
Repurchase of 85,219 shares of common
stock -- (1,557,753) (1,557,753)
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 (254,200) (1,557,753) 12,594,344
</TABLE>
(Continued)
19
<PAGE> 22
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY Years ended
June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Net Unrealized
Loss on Unearned
Securities Employee
Additional Available for Stock
Common Paid-In Retained Sale, Net of Ownership
Stock Capital Earnings Tax Plan Shares
----- ------- -------- --- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $ 7,408 $ 7,017,760 $ 7,870,150 $ (37,622) $ (451,399)
Net income for 1997 -- -- 816,001 -- --
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.23 per share -- -- (306,243) -- --
15,046 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 -- -- --
Amortization of RRP shares -- -- -- -- --
Repurchase of 31,977 shares of common
stock -- -- -- -- --
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 -- (383,006)
<CAPTION>
Unearned
Recognition
and Total
Retention Treasury Shareholders'
Plan Shares Stock Equity
----------- ----- ------
<S> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $ (254,200) $ (1,557,753) $ 12,594,344
Net income for 1997 -- -- 816,001
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.23 per share -- -- (306,243)
15,046 shares committed to be released
under the ESOP -- -- 133,968
Issuance of 722 restricted common
shares under the Recognition and
Retention Plan (RRP) (13,448) -- --
Amortization of RRP shares 59,564 -- 59,564
Repurchase of 31,977 shares of common
stock -- (645,060) (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 (208,084) (2,202,813) 12,690,196
</TABLE>
(Continued)
20
<PAGE> 23
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Net Unrealized
Loss on Unearned
Securities Employee
Additional Available for Stock
Common Paid-In Retained Sale, Net of Ownership
Stock Capital Earnings Tax Plan Shares
----- ------- -------- --- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1997 $ 14,830 $ 7,096,776 $ 8,372,493 $ - $ (383,006)
Net income for 1998 - - 1,222,726 - -
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.26 per share - - (334,897) - -
14,262 shares committed to be released
under the ESOP - 152,375 - - 64,825
Issuance of 2,888 common shares from
treasury stock due to exercise of stock
options - (3,791) - - -
Amortization of RRP shares - - - - -
Repurchase of 35,100 shares of common
stock - - - - -
Issuance of 148,301 common shares,
including 26,660 shares held as treasury
stock, from declaration of 10% stock
dividend, net of fractional shares 1,483 2,287,914 (2,289,397) - -
----------- ------------- ------------- ----------- -----------
BALANCE AT JUNE 30, 1998 $ 16,313 $ 9,533,274 $ 6,970,925 $ - $ (318,181)
=========== ============= ============= =========== ============
<CAPTION>
Unearned
Recognition
and Total
Retention Treasury Shareholders'
Plan Shares Stock Equity
----------- ----- ------
<S> <C> <C> <C>
BALANCE AT JUNE 30, 1997 $ (208,084) $ (2,202,813) $ 12,690,196
Net income for 1998 - - 1,222,726
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.26 per share - - (334,897)
14,262 shares committed to be released
under the ESOP - - 217,200
Issuance of 2,888 common shares from
treasury stock due to exercise of stock
options - 26,353 22,562
Amortization of RRP shares 61,356 - 61,356
Repurchase of 35,100 shares of common
stock - (566,450) (566,450)
Issuance of 148,301 common shares,
including 26,660 shares held as treasury
stock, from declaration of 10% stock
dividend, net of fractional shares - - -
----------- ------------- --------------
BALANCE AT JUNE 30, 1998 $ (146,728) $ (2,742,910) $ 13,312,693
============ ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1998,
1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,222,726 $ 816,001 $ 1,005,596
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 95,000 48,000 24,000
Provision (recovery) to adjust loans held
for sale to lower of cost or market - (27,259) 1,270
Depreciation 108,346 100,913 92,607
Amortization of mortgage servicing rights 18,434 1,168 -
Net amortization of premium (discount) - 396 4,429
Employee Stock Ownership Plan expense 217,200 133,968 116,367
Recognition and Retention Plan expense 61,356 59,564 39,113
Originations of loans held for sale (16,929,952) (2,992,755) (4,078,270)
Proceeds from sales of loans held for sale 16,875,614 2,894,510 4,720,966
Net gains on sales of loans held for sale (258,807) (46,982) (30,715)
Net realized losses on sales of securities
available for sale - 47,950 -
Stock dividend on securities available for sale - - (13,695)
Change in assets and liabilities:
Accrued interest receivable 1,074 (88,681) (98,911)
Other assets (266,763) (314,197) (246,600)
Accrued interest payable 14,000 34,782 8,772
Accrued expenses and other liabilities 866,346 (250,863) 327,890
--------------- -------------- ---------------
Net cash from operating activities 2,024,574 416,515 1,872,819
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale - 2,127,211 -
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 held to maturity 3,353 4,530 6,293
Purchase of Federal Home Loan Bank stock (114,500) (727,000) (6,400)
Net increase in loans (4,420,461) (15,509,130) (10,010,421)
Net purchases of premises and equipment (180,166) (147,789) (221,128)
---------------- -------------- ---------------
Net cash from investing activities (4,711,774) (13,252,178) (10,736,968)
</TABLE>
(Continued)
22
<PAGE> 25
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1998,
1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 1,108,416 $ 1,254,674 $ 1,005,668
Proceeds from Federal Home Loan Bank
advances 19,500,000 17,500,000 6,000,000
Repayments on Federal Home Loan Bank
advances (16,901,624) (4,126,400) --
Net change in advance payments
by borrowers for taxes and insurance 59,294 59,244 45,194
Cash dividends paid (334,897) (306,243) (274,514)
Proceeds from exercise of stock options 22,562 -- --
Repurchase of common stock (566,450) (645,060) (1,557,753)
Adjustment to costs related to 1995 sale
of common stock -- -- 1,742
------------ ------------ ------------
Net cash from financing activities 2,887,301 13,736,215 5,220,337
------------ ------------ ------------
Net change in cash and cash equivalents 200,101 900,552 (3,643,812)
Cash and cash equivalents at beginning of period 3,080,612 2,180,060 5,823,872
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,280,713 $ 3,080,612 $ 2,180,060
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 2,932,942 $ 2,259,043 $ 1,620,914
Income taxes 723,956 497,299 598,000
Supplemental disclosure of noncash investing
activities
Transfers from loans held for sale to loans
held to maturity $ -- $ 950,741 $ 447,092
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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
classification and carrying value of loans held for sale, the accrued liability
for deferred compensation, the fair 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, the classification and carrying value of loans held for sale, the
fair value of stock options and the fair values of 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: 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)
24
<PAGE> 27
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Premiums and discounts on securities are recognized in interest income using the
interest method over the estimated life of the security. Gains and losses on the
sale of securities are determined using the specific identification method based
on amortized cost.
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 Corporation 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. 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.
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.
(Continued)
25
<PAGE> 28
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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.
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, 1998. Foreclosed real estate at June 30, 1997
amounted to $29,000.
(Continued)
26
<PAGE> 29
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 Corporation has a noncontributory defined benefit pension
plan and a defined contribution 401(k) 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 Corporation's
contribution is at the discretion of its Board of Directors and is limited to
the amount deductible for federal income tax purposes.
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.
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.
(Continued)
27
<PAGE> 30
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Stock Splits and Stock Dividends: Common share amounts and market values and
price per share disclosures related to stock repurchase programs, stock-based
compensation plans and earnings and dividends per share disclosures have been
restated for the 10% stock dividend declared July 14, 1998 and payable August
31, 1998 to shareholders of record on August 10, 1998; and the two-for-one stock
split effected in the form of a 100% stock dividend which was declared July 8,
1997 and paid on August 7, 1997. Stock dividends in excess of 20% are reported
by transferring the par value of the stock issued from retained earnings to
common stock. Stock dividends for 20% or less are reported by transferring the
market value, as of the ex-dividend date, of the stock issued from retained
earnings to common stock and additional paid-in capital. Fractional share
amounts are paid in cash with a reduction in retained earnings. As of June 30,
1998, common stock includes $1,483 for the stock dividend payable August 31,
1998.
(Continued)
28
<PAGE> 31
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Basic and diluted earnings per common share are
computed under a new accounting standard effective beginning with the quarter
ended December 31, 1997. All prior earnings per common share amounts have been
restated to be comparable. Basic earnings per common share is based on the net
income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for earnings per
common share calculations as they are committed to be released; unearned shares
are not considered outstanding. Recognition and retention plan ("RRP") shares
are considered outstanding for earnings per common share calculations as they
become vested. Diluted earnings per common share shows the dilutive effect of
additional potential common shares issuable under stock options and nonvested
shares issued under the RRP. Earnings and dividends per common share are
restated for all stock splits and dividends.
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.
New Accounting Pronouncements: SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued in
1996. It revised 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 in 1997 and others beginning in 1998. The
effect on the consolidated financial statements was not material.
A new accounting standard, SFAS No. 130, Reporting Comprehensive Income, will
require future reporting of comprehensive income beginning with the quarter
ended September 30, 1998. Comprehensive income is net income plus changes in the
net unrealized gain (loss) on securities available for sale, net of tax.
A new accounting standard, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, will require future reporting of additional
information related to material business segments beginning with the year ended
June 30, 1999.
A new accounting standard, SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, will require all derivatives to be recognized at fair
value as either assets or liabilities in the Consolidated Balance Sheets
beginning with the quarter ended September 30, 1999. Changes in the fair value
of derivatives not designated as hedging instruments are to be recognized
currently in earnings. Gains or losses on derivatives designated as hedging
instruments are either to be recognized currently in earnings or are to be
recognized as a component of other comprehensive income, depending on the
intended use of the derivatives and the resulting designations. The Corporation
does not believe adoption of this new standard will have a material impact on
its consolidated financial position or results of operations.
(Continued)
29
<PAGE> 32
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Numerator
Net income $ 1,222,726 $ 816,001 $ 1,005,596
============== ============= ==============
Denominator
Weighted average common shares
outstanding 1,357,606 1,414,203 1,547,323
Less: Average unallocated ESOP shares (77,131) (91,785) (106,838)
Less: Average nonvested RRP shares (28,934) (36,717) (27,532)
--------------- -------------- ---------------
Weighted average common shares
outstanding for basic earnings per
common share 1,251,541 1,285,701 1,412,953
============== ============= ==============
Basic earnings per common share $ .98 $ .63 $ .71
============== ============ ==============
<CAPTION>
Year ended June 30,
1998 1997 1996
---- ---- ----
DILUTED EARNINGS PER COMMON SHARE
Numerator
Net income $ 1,222,726 $ 816,001 $ 1,005,596
============== ============= ==============
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,251,541 1,285,701 1,412,953
Add: Dilutive effects of average
nonvested RRP shares, net of tax
benefits 7,667 - -
Add: Dilutive effects of assumed
exercises of stock options 47,149 13,425 4,299
-------------- ------------- --------------
Weighted average common shares
and dilutive potential common
shares outstanding 1,306,357 1,299,126 1,417,252
============== ============= ==============
Diluted earnings per common share $ .94 $ .63 $ .71
============== ============ ==============
</TABLE>
Stock options for 67,848 and 12,100 shares of common stock were not considered
in computing diluted earnings per common share for the years ended June 30, 1998
and 1997, respectively, because they were antidilutive.
(Continued)
30
<PAGE> 33
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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>
1998 1997
---- ----
<S> <C> <C>
FHLB overnight time deposits $ 500,975 $ 1,080,478
FHLB cash management account 493,218 497,410
-------------- ---------------
$ 994,193 $ 1,577,888
============== ===============
</TABLE>
NOTE 4 - SECURITIES
The amortized cost and fair value of securities at June 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
HELD TO MATURITY
<S> <C> <C> <C> <C>
1998
- ----
Mortgage-backed securities $ 8,102 $ - $ - $ 8,102
============== =========== =========== ===============
1997
- ----
Mortgage-backed securities $ 11,455 $ - $ - $ 11,455
============== =========== =========== ===============
</TABLE>
There were no sales of securities during the year ended June 30, 1998. 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 during the year ended June 30, 1996. No securities
classified as held to maturity under SFAS No. 115 were sold or transferred to
securities available for sale during the year ended June 30, 1998, 1997 or 1996.
The amortized cost and fair value of debt securities at June 30, 1998, by
contractual maturity, are not shown as the only debt securities held at June 30,
1998 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, 1998, 1997 and 1996
NOTE 5 - LOANS RECEIVABLE, NET
Loans at June 30 are classified as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate loans
One-to-four family $ 52,557,660 $ 48,407,584
Commercial 10,367,408 10,177,904
Construction or development 5,601,696 5,093,590
--------------- ----------------
68,526,764 63,679,078
Other loans
Consumer loans
Home equity lines of credit 3,243,830 3,636,283
Second mortgage loans 349,348 546,733
Automobile 1,791,947 1,670,424
Other 1,598,616 1,260,625
--------------- ----------------
6,983,741 7,114,065
Commercial business loans 851,733 920,219
--------------- ----------------
Total other loans 7,835,474 8,034,284
--------------- ----------------
Total loans 76,362,238 71,713,362
Less:
Loans held for sale (295,300) (150,000)
Loans in process (2,307,547) (2,202,117)
Deferred loan fees and discounts (303,226) (318,786)
Allowance for loan losses (391,148) (302,903)
---------------- ----------------
Net loans $ 73,065,017 $ 68,739,556
=============== ================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 302,903 $ 348,067 $ 329,170
Provision charged to operating expense 95,000 48,000 24,000
Recoveries credited to allowance 7,176 2,780 4,338
Loans charged off (13,931) (95,944) (9,441)
------------- ------------ ------------
Balance at end of year $ 391,148 $ 302,903 $ 348,067
============ ============ ============
</TABLE>
(Continued)
32
<PAGE> 35
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 5 - LOANS RECEIVABLE, NET (Continued)
Information regarding impaired loans is as follows for the year ended June 30,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 ` 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average investment in impaired loans $ 591,000 $603,000 $ 380,000
Interest income recognized on impaired loans
including interest income recognized on
cash basis 50,000 50,000 32,000
Interest income recognized on impaired loans
on cash basis 50,000 50,000 32,000
</TABLE>
Information regarding impaired loans at June 30, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance of impaired loans $ 586,000 $ 596,000 $ 375,000
Less: Portion for which no allowance for loan
losses is allocated (586,000) (596,000) (375,000)
---------- ---------- ----------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ - $ - $ -
========== ========== ==========
Portion of allowance for loan losses allocated
to the impaired loan balance $ - $ - $ -
========== ========== ==========
</TABLE>
(Continued)
33
<PAGE> 36
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 6 - SECONDARY MORTGAGE MARKET ACTIVITIES
The following summarizes the Corporation's secondary mortgage market activities
for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Activity during the year:
Loans originated for resale, net of
principal paydowns $ 16,929,952 $ 2,992,755 $ 4,078,270
Loans transferred to held to maturity - 950,741 447,092
Proceeds from sales of loans originated
for resale 16,875,614 2,894,510 4,720,966
Gain on sales of loans originated
for resale 258,807 46,982 30,715
Portion of gain resulting from costs
allocated to mortgage servicing rights 167,845 28,763 -
Loan servicing fees, net 74,917 85,421 94,177
Balance at June 30:
Loans held for sale $ 295,300 $ 150,000 $ 984,277
Less: Allowance to adjust loans held
for sale to lower of aggregate cost or
market - - (27,259)
--------------- --------------- ----------------
Loans held for sale, net $ 295,300 $ 150,000 $ 957,018
=============== =============== ================
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
June 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Mortgage loan portfolios serviced for:
FHLMC $ 39,748,411 $ 32,756,668 $ 34,612,290
Other investors - - 168
--------------- --------------- ----------------
$ 39,748,411 $ 32,756,668 $ 34,612,458
=============== =============== ================
</TABLE>
Custodial escrow balances maintained in connection with the foregoing serviced
loans were $245,000, $208,000 and $203,000 at June 30, 1998, 1997 and 1996,
respectively.
(Continued)
34
<PAGE> 37
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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 $ 348,338 $ 327,100
Buildings 482,145 475,758
Furniture, fixtures and equipment 587,295 481,167
--------------- ----------------
1,417,778 1,284,025
Less: Accumulated depreciation (768,900) (706,967)
--------------- ----------------
$ 648,878 $ 577,058
=============== ================
</TABLE>
NOTE 8 - DEPOSITS
The aggregate amount of short term jumbo certificates of deposit in
denominations of $100,000 or more was $1,271,000 and $722,000 at June 30, 1998
and 1997, respectively.
At June 30, 1998, the scheduled maturities of certificates of deposit are as
follows for the years ended June 30:
<TABLE>
<S> <C>
1999 $ 13,955,906
2000 2,401,710
2001 2,436,187
2002 495,697
2003 1,004,896
---------------
$ 20,294,396
===============
</TABLE>
(Continued)
35
<PAGE> 38
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
At June 30, 1998 and 1997, the Corporation had advances from the Federal Home
Loan Bank of Indianapolis as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate 1998 1997
------------- ------------- ---- ----
<S> <C> <C> <C>
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
September 14, 1998 5.8700% (variable) 1,000,000 -
November 15, 2001 6.2100% (fixed) 1,902,258 2,000,000
March 15, 2002 6.2800% (fixed) 1,270,431 1,500,000
August 15, 2002 6.3100% (fixed) 2,000,000 -
November 15, 2002 6.1400% (fixed) 500,000 -
February 18, 2003 5.8000% (fixed) 1,000,000 -
March 15, 2004 6.3900% (fixed) 872,915 1,000,000
March 15, 2004 6.3200% (fixed) 2,378,323 3,000,000
July 15, 2004 6.5900% (fixed) 2,000,000 2,000,000
August 16, 2004 6.4600% (fixed) 1,000,000 -
October 15, 2004 6.3000% (fixed) 1,000,000 -
November 15, 2004 6.4300% (fixed) 1,000,000 -
February 15, 2005 5.8900% (fixed) 1,000,000 -
June 15, 2005 6.0500% (fixed) 1,500,000 -
February 15, 2006 5.8400% (fixed) 1,660,940 1,873,600
August 15, 2006 6.7300% (fixed) 1,887,109 2,000,000
-------------- ---------------
$ 21,971,976 $ 19,373,600
============== ===============
</TABLE>
Each advance is entirely payable at its respective maturity date. These advances
were required to be collateralized by at least $35,155,000 and $30,998,000 of
the Corporation's first mortgage loans under a blanket lien arrangement at June
30, 1998 and 1997, respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
An analysis of aggregate loans outstanding to directors, executive officers and
their affiliates follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Aggregate balance, July 1 $ 540,000 $ 501,000 $ 375,000
New loans and renewals 498,000 136,000 303,000
Repayments and renewals (254,000) (97,000) (177,000)
-------------- -------------- ---------------
Aggregate balance, June 30 $ 784,000 $ 540,000 $ 501,000
============== ============== ===============
</TABLE>
(Continued)
36
<PAGE> 39
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)
Total deposits from directors, executive officers and their affiliates were
$1,376,000 and $1,183,000 at June 30, 1998 and 1997, respectively.
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 deferred directors fees for the year ended June 30, 1998, 1997
and 1996 was $71,160, $73,812 and $36,375 resulting in a deferred compensation
liability of $181,347, $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, 1998 and 1997 was $864,687 and $563,502 and is included in other assets in
the Consolidated Balance Sheets.
NOTE 12 - STOCK-BASED COMPENSATION PLANS
The Corporation has 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 127,074 shares of stock at $4.55 per share. 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.
(Continued)
37
<PAGE> 40
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
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.
During the years ended June 30, 1998, 1997 and 1996, contributions of $68,160,
$71,941 and $77,754, respectively, were made to the ESOP. For the same
respective periods, 14,262, 15,046 and 15,059 shares with an average fair value
of $15.23, $8.90 and $7.73 per share were committed to be released, resulting in
ESOP compensation expense of $217,200, $133,968 and $116,367, respectively.
Shares held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Allocated to participants 57,074 42,812
Unearned 70,000 84,262
-------------- ---------------
Total ESOP shares 127,074 127,074
============== ===============
Fair value of unearned shares $ 1,018,000 $ 890,000
============== ===============
Fair value of allocated shares subject
to repurchase obligation $ - $ -
============== ===============
</TABLE>
The 1995 stock option and incentive plan ("SOP"), as approved by the
Corporation's shareholders, was authorized by the Board of Directors on October
24, 1995 for the benefit of directors and certain officers of the Corporation.
The 1995 SOP and the 1997 SOP, discussed below, 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 1995 SOP
was 158,842. The Committee has awarded, under the 1995 SOP, options to purchase
96,892 shares of common stock at an exercise price of $7.1023 per share (October
1995), 2,383 shares of common stock at an exercise price of $8.4659 per share
(November 1996), and 12,100 shares of common stock at an exercise price of
$10.0568 per share (June 1997), which were the market prices of the
Corporation's common stock on the date of the awards. During the year ended June
30, 1998, 3,177 options were exercised at $7.1023 per share (November 1997). At
June 30, 1998, there were 108,198 options outstanding and there were 47,467
shares reserved for future grants under the 1995 SOP. The 1995 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. As of June 30, 1998, no 1995
SOP options have expired or been canceled.
(Continued)
38
<PAGE> 41
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
The 1997 SOP was approved by shareholders and directors on October 28, 1997 for
the benefit of directors, officers and employees of the Corporation. The total
shares made available under the 1997 SOP was 67,848. The Committee has awarded,
under the 1997 SOP, options to purchase 46,200 shares of common stock, expiring
ten years from the date of grant, at an exercise price of $16.3636 per share
with immediate vesting (October 1997), 2,820 shares of common stock, expiring
ten years from the date of grant, at an exercise price of $15.4545 per share
with immediate vesting (June 1998), 273 shares of common stock, expiring ten
years from the date of grant, at an exercise price of $15.4545 per share, with a
one year vesting period (June 1998) and 18,555 shares of common stock, expiring
fifteen years from the date of grant, at an exercise price of $15.4545 per share
with immediate vesting (June 1998), which were the market prices of the
Corporation's common stock on the date of the awards. At June 30, 1998, there
were 67,848 options outstanding and there were no shares reserved for future
grants under the 1997 SOP. As of June 30, 1998, no 1997 SOP options have been
exercised, expired or canceled.
SFAS No. 123, which became effective for stock-based compensation awarded during
fiscal years beginning after December 15, 1995, requires proforma disclosures
for companies that do not adopt its fair value accounting method for stock-based
employee compensation for awards granted in the first fiscal year beginning
after December 15, 1994. Accordingly, the following proforma information
presents net income and earnings per share had the fair value method been used
to measure compensation cost for stock option plans. The exercise price of
options granted is equivalent to the market value of underlying stock at the
grant date. Accordingly, compensation cost actually recognized for stock options
was $-0- for the years ended June 30, 1998, 1997 and 1996.
The fair value of options granted during the years ended June 30, 1998, 1997 and
1996 is estimated using the following weighted-average information: risk-free
interest rate of 5.85%, 6.51% and 5.95%, expected life of 8.0 years, expected
dividends of 2.30%, 2.72% and 2.82% per year and expected stock price volatility
of 7.57%, 6.74% and 6.87% per year.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 1,222,726 $ 816,001 $ 1,005,596
Proforma net income $ 954,359 $ 774,227 $ 967,248
Reported earnings per common and
common equivalent share
Basic $.98 $.63 $.71
Diluted $.94 $.63 $.71
Proforma earnings per common and
common equivalent share
Basic $.76 $.60 $.68
Diluted $.73 $.60 $.68
</TABLE>
(Continued)
39
<PAGE> 42
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
In future years, the proforma effect of not applying SFAS No 123 is expected to
increase as additional options are granted.
Stock option plans are used to reward directors, officers and employees and
provide them with an additional equity interest. Options are issued for 10 year
periods, with various vesting provisions. At June 30, 1998, a total of 47,467
shares were authorized for future grants. Information about option grants
follows.
<TABLE>
<CAPTION>
Number Weighted-average
of options exercise price
---------- --------------
<S> <C> <C>
Outstanding, June 30, 1995 - $ -
Granted 96,892 7.1023
Exercised - -
Forfeited - -
------------
Outstanding, June 30, 1996 96,892 7.1023
Granted 14,483 9.7950
Exercised - -
Forfeited - -
------------
Outstanding, June 30, 1997 111,375 7.4525
Granted 67,848 16.0735
Exercised (3,177) 7.1023
Forfeited - -
------------
Outstanding, June 30, 1998 176,046 10.7813
============
</TABLE>
The weighted-average fair value per option for options granted during the years
ended June 30, 1998, 1997 and 1996 was $3.42, $2.09 and $1.30. At June 30, 1998,
options outstanding had a weighted-average remaining life of 8.3 years and a
range of exercise price from $7.1023 to $16.3636.
Options exercisable at June 30 are as follows.
<TABLE>
<CAPTION>
Number Weighted-average
of options exercise price
---------- --------------
<S> <C> <C>
1996 - $ -
1997 19,378 7.1023
1998 106,052 12.8938
</TABLE>
(Continued)
40
<PAGE> 43
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
A Recognition and Retention Plan ("RRP"), as approved by the Corporation's
shareholders, was authorized by the Board of Directors on October 24, 1995 for
the benefit of directors, officers and employees of the Corporation. The RRP is
a restricted stock award plan administered by a Committee of the Directors of
the Corporation. The Committee selects recipients and terms of restricted stock
awards. The total shares made available under the RRP was 63,536. The Committee
awarded 1,588 shares (November 1996) and 41,298 shares (October 1995) of common
stock under the RRP during the years ended June 30, 1997 and 1996, respectively.
As of June 30, 1998, a total of 42,886 shares were awarded under the RRP and
20,650 shares were reserved for future awards. 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, 1998, 1997 and 1996, $61,356,
$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 Consolidated Balance Sheets.
NOTE 13 - STOCK REPURCHASE PROGRAMS
On November 17, 1995, the Corporation received a "no objection" letter from the
Office of Thrift Supervision to repurchase up to 9% (142,958 shares) of its
common stock in the open market over a twelve month period. As of March 31,
1996, the Corporation had completed the repurchase program with a total of
142,958 shares at an average price of $8.50 per share. On April 22, 1996, the
Corporation received OTS approval to repurchase up to 5% (74,558 shares) of its
common stock. As of January 31, 1997, the Corporation had completed this
repurchase program with a total of 74,558 shares at an average price of $8.05
per share. On February 11, 1997, the Corporation received OTS approval to
repurchase up to 5% (70,690 shares) of its common stock. As of the expiration
date, February 11, 1998, 62,205 shares had been repurchased at an average price
of $11.20 per share. On February 11, 1998, the Corporation announced a stock
repurchase plan of 5% (67,738 shares) of its common stock. As of June 30, 1998,
16,720 shares have been repurchased at an average price of $15.44 per share and,
therefore, the Corporation has remaining approval to repurchase up to 51,018
additional shares. Approval to repurchase these additional shares expires on
February 11, 1999.
Repurchased shares are treated as treasury shares and are available for general
corporate purposes, including issuance in connection with stock-based
compensation plans. Any future repurchased shares will affect the Corporation's
future earnings per common share disclosures by reducing amounts available for
investment and weighted-average shares outstanding.
(Continued)
41
<PAGE> 44
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 14 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS
Savings institutions insured by the FDIC must meet various 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 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
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Tangible Capital (to
adjusted total assets) $ 9,833 12.33% $ 1,197 1.5% $ N/A N/A%
Tier 1 (Core) Capital (to
adjusted total assets) 9,833 12.33 2,393 3.0 N/A N/A
Tier 1 (Core) Capital (to
average assets) 9,833 12.62 3,117 4.0 3,896 5.0
Tier 1 (Core) Capital (to
risk weighted assets) 9,833 19.94 1,973 4.0 2,959 6.0
Total Capital (to risk
weighted assets) 10,224 20.73 3,946 8.0 4,932 10.0
As of June 30, 1997
Tangible Capital (to
adjusted total assets) $ 9,532 12.78% $ 1,119 1.50% $ N/A N/A%
Tier 1 (Core) Capital (to
adjusted total assets) 9,532 12.78 2,238 3.00 N/A N/A
Tier 1 (Core) Capital (to
average assets) 9,532 14.11 2,703 4.00 3,378 5.00
Tier 1 (Core) Capital (to
risk weighted assets) 9,532 20.24 1,884 4.00 2,826 6.00
Total Capital (to risk
weighted assets) 9,835 20.88 3,768 8.00 4,710 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)
42
<PAGE> 45
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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 $6,264,000 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, 1998, approximately $3,100,000 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)
43
<PAGE> 46
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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 8 1 9 9 7
------- -------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
<S> <C> <C> <C> <C>
Commitments to make loans
(at market rates) $ 1,567,000 $ 1,006,000 $ 372,000 $ 974,000
Unused lines of credit and
letters of credit - 3,438,000 - 3,190,000
</TABLE>
Commitments to make loans are generally made for periods of 60 days or less. The
fixed rate loan commitments have interest rates ranging from 6.75% to 7.375% 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
$317,000.
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 Corporation'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.
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
Corporation'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 Corporation has no intention to
withdraw from the Fund.
(Continued)
44
<PAGE> 47
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 16 - RETIREMENT PLANS (Continued)
The Corporation participates in a multi-employer contributory 401(k) plan, which
covers substantially all employees. The amount of the Corporation's contribution
is at the discretion of the Corporation's Board of Directors and is limited to
the amount deductible for federal income tax purposes. The Corporation is
currently matching 50% of employees' contributions not to exceed 3% of
compensation. Contributions for the years ended June 30, 1998, 1997 and 1996
were $14,000, $12,000 and $10,000, 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 the June 30, 1996 tax
return. 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 the tax year ending June 30, 1999.
The consolidated federal income tax expense consisted of the following for the
years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current federal income tax expense $ 699,000 $ 480,500 $ 586,000
Deferred federal income tax benefit (21,000) (22,500) (68,000)
------------ ------------ ------------
Total federal income tax expense $ 678,000 $ 458,000 $ 518,000
============ ============ ============
</TABLE>
The consolidated federal income tax expense differs from that computed at the
statutory corporate federal income tax rate of 34% for the years ended June 30
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax expense
at statutory rate $ 646,247 $ 433,160 $ 518,023
ESOP expense (book greater than tax) 51,808 22,296 16,291
Other, net (20,055) 2,544 (16,314)
------------- ------------ ------------
Total federal income tax expense $ 678,000 $ 458,000 $ 518,000
============ ============ ============
</TABLE>
(Continued)
45
<PAGE> 48
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 98,000 $ 103,000
Deferred compensation 62,000 37,000
Depreciation 20,000 14,000
Capital loss carryforward 16,000 16,000
RRP expense 12,000 12,000
Allowance for loan losses 10,000 -
Other 16,500 7,500
------------ ------------
234,500 189,500
Deferred tax liabilities
Mortgage servicing rights (60,000) (9,000)
Adjustment for loans held for sale - (7,000)
Allowance for loan losses - (20,000)
Other (6,000) (6,000)
------------- ------------
(66,000) (42,000)
Valuation allowance (16,000) (16,000)
------------- ------------
Net deferred tax asset $ 152,500 $ 131,500
============ ============
</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 during
the year ended 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, 1998 or 1997. If not used, the capital loss
carryforward will expire on June 30, 2002.
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, 1998 and 1997. 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)
46
<PAGE> 49
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of the Corporation's financial
instruments were as follows as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,280,713 $ 3,281,000 $ 3,080,612 $ 3,081,000
Securities held to maturity 8,102 8,000 11,455 11,000
Loans held for sale 295,300 295,000 150,000 150,000
Loans receivable, net 73,065,017 73,793,000 68,739,556 69,465,000
Federal Home Loan Bank stock 1,158,200 1,158,000 1,043,700 1,044,000
Accrued interest receivable 419,847 420,000 420,921 421,000
Mortgage servicing rights 177,006 177,000 27,595 28,000
Cash surrender value of life
insurance 864,687 865,000 563,502 564,000
Financial liabilities
Deposits (42,815,148) (42,843,000) (41,706,732) (41,614,000)
Federal Home Loan Bank
advances (21,971,976) (21,655,000) (19,373,600) (18,456,000)
Advance payments by borrowers
for taxes and insurance (524,739) (525,000) (465,445) (465,000)
Accrued interest payable (93,114) (93,000) (79,114) (79,000)
</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 held to maturity
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)
47
<PAGE> 50
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Loans held for sale and loans receivable, net
For certain homogeneous categories of loans, such as some residential mortgages
and other consumer loans, fair value is estimated using quoted market prices for
such loans or 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. In addition, when computing the estimated fair value for
loans receivable, the allowance for loan losses is subtracted from the
calculated fair value for consideration of credit risk issues.
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 dates.
The fair value of these commitments was immaterial at the reporting dates
presented.
(Continued)
48
<PAGE> 51
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of MSB Financial, Inc. is as follows:
CONDENSED BALANCE SHEETS
June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 216,988 $ 10,621
Certificate of deposit in subsidiary bank 17,663 13,328
--------------- ----------------
Total cash and cash equivalents 234,651 23,949
Loans receivable from subsidiary bank and ESOP 2,346,566 2,404,327
Investment in subsidiary bank 9,832,538 9,531,768
Dividend receivable from subsidiary bank 667,134 576,416
Other assets 338,084 221,690
--------------- ----------------
Total assets $ 13,418,973 $ 12,758,150
=============== ================
LIABILITIES
Accrued expenses and other liabilities $ 106,280 $ 67,954
SHAREHOLDERS' EQUITY 13,312,693 12,690,196
--------------- ----------------
Total liabilities and shareholders' equity $ 13,418,973 $ 12,758,150
=============== ================
</TABLE>
(Continued)
49
<PAGE> 52
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF INCOME
------------------Years ended June 30,-----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans receivable $ 33,082 $ 37,925 $ 42,904
Dividends from subsidiary bank 1,334,875 936,163 1,102,784
--------------- --------------- ----------------
1,367,957 974,088 1,145,688
Interest expense - other 3,834 2,122 -
--------------- --------------- ----------------
NET INTEREST INCOME 1,364,123 971,966 1,145,688
Other income 15,072 9,047 2,620
Operating expenses 214,469 225,012 192,575
--------------- --------------- ----------------
INCOME BEFORE FEDERAL INCOME TAX
EXPENSE AND EXCESS DISTRIBUTED
EARNINGS OF SUBSIDIARY BANK 1,164,726 756,001 955,733
Federal income tax expense (benefit) (58,000) (60,000) (50,000)
--------------- --------------- ----------------
INCOME BEFORE EXCESS DISTRIBUTED
EARNINGS OF SUBSIDIARY BANK 1,222,726 816,001 1,005,733
Excess distributed earnings of subsidiary
bank - - (137)
--------------- --------------- ----------------
NET INCOME $ 1,222,726 $ 816,001 $ 1,005,596
=============== =============== ================
</TABLE>
(Continued)
50
<PAGE> 53
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS CASH FLOWS
<TABLE>
<CAPTION>
----------------Years ended June 30,---------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,222,726 $ 816,001 $ 1,005,596
Adjustments to reconcile net income to net
cash provided by operating activities
Excess distributed earnings of subsidiary bank - - 137
Change in
Dividends receivable from subsidiary bank (90,718) (43,505) 321,963
Other assets (116,394) (111,272) (99,119)
Accrued expenses and other liabilities 38,326 50,626 (5,102)
---------------- --------------- ----------------
Net cash from operating activities 1,053,940 711,850 1,223,475
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to subsidiary bank - - (2,000,000)
Repayments on loan receivable from ESOP 35,547 34,524 35,541
---------------- --------------- ----------------
Net cash from investing activities 35,547 34,524 (1,964,459)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (334,897) (306,243) (274,514)
Proceeds from exercise of stock options 22,562 - -
Repurchase of common stock (566,450) (645,060) (1,557,753)
Adjustment to costs related to 1995 sale
of common stock - - 1,742
---------------- --------------- ----------------
Net cash from financing activities (878,785) (951,303) (1,830,525)
---------------- --------------- ----------------
Net change in cash and cash equivalents 210,702 (204,929) (2,571,509)
Cash and cash equivalents at beginning of period 23,949 228,878 2,800,387
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 234,651 $ 23,949 $ 228,878
================ =============== ================
</TABLE>
(Continued)
51
<PAGE> 54
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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.
52
<PAGE> 55
MSB FINANCIAL, INC.
SHAREHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:30 a.m., Tuesday, November
24, 1998, 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 for the Corporation's
Common Stock for the periods indicated. 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, and the 10% stock dividend declared July 14, 1998. Such
information reflects interdealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
----------------------------------------- ----------------------------------------
High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
First Quarter $16.364 $10.795 $ 0.0636 First Quarter $8.523 $7.500 $ 0.0568
Second Quarter $17.727 $14.545 $ 0.0636 Second Quarter $8.977 $8.295 $ 0.0568
Third Quarter $17.273 $14.545 $ 0.0682 Third Quarter $9.886 $8.636 $ 0.0568
Fourth Quarter $16.364 $14.545 $ 0.0682 Fourth Quarter $10.568 $9.432 $ 0.0636
</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 September 1, 1998, the Corporation had 511 stockholders of record and
1,335,441 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, 1998 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.
53
<PAGE> 56
MSB FINANCIAL, INC.
CORPORATE INFORMATION
CORPORATION AND BANK
ADDRESS
Telephone: (616) 781-5103
107 North Park Street Fax: (616) 781-8412
Marshall, Michigan 49068
<TABLE>
<CAPTION>
DIRECTORS OF THE BOARD
<S> <C>
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 & MacKenzie
Albion, Michigan 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
</TABLE>
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
54
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary State of
Percent of Incorporation or
Parent Subsidiary Ownership Organization
- ------ ---------- --------- ------------
<S> <C> <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 23, 1998, 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, 1998.
/s/ Crowe, Chizek and Company LLP
Grand Rapids, Michigan
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FOLLOWING SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S ANNUAL REPORT ON FORM
10-KSB FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,286,520
<INT-BEARING-DEPOSITS> 994,193
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 8,102
<INVESTMENTS-MARKET> 8,102
<LOANS> 73,751,465
<ALLOWANCE> 391,148
<TOTAL-ASSETS> 79,966,713
<DEPOSITS> 42,815,148
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,866,896
<LONG-TERM> 21,971,976
0
0
<COMMON> 16,313
<OTHER-SE> 13,296,380
<TOTAL-LIABILITIES-AND-EQUITY> 79,966,713
<INTEREST-LOAN> 6,302,986
<INTEREST-INVEST> 674
<INTEREST-OTHER> 221,886
<INTEREST-TOTAL> 6,525,546
<INTEREST-DEPOSIT> 1,581,785
<INTEREST-EXPENSE> 2,946,942
<INTEREST-INCOME-NET> 3,578,604
<LOAN-LOSSES> 95,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,250,308
<INCOME-PRETAX> 1,900,726
<INCOME-PRE-EXTRAORDINARY> 1,222,726
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,222,726
<EPS-PRIMARY> 0.98<F1>
<EPS-DILUTED> 0.94<F1>
<YIELD-ACTUAL> 4.81
<LOANS-NON> 329,816
<LOANS-PAST> 298,678
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 585,000
<ALLOWANCE-OPEN> 302,903
<CHARGE-OFFS> 13,931
<RECOVERIES> 7,176
<ALLOWANCE-CLOSE> 391,148
<ALLOWANCE-DOMESTIC> 302,148
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 89,000
<FN>
<F1>ABOVE EARNINGS PER SHARE AMOUNTS HAVE BEEN ADJUSTED FOR THE 10% STOCK
DIVIDEND DECLARED JULY 14, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FOLLOWING SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S QUARTERLY REPORT ON FORM
10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,534,687
<INT-BEARING-DEPOSITS> 2,177,747
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 10,609
<INVESTMENTS-MARKET> 10,609
<LOANS> 70,859,756
<ALLOWANCE> 316,142
<TOTAL-ASSETS> 77,014,079
<DEPOSITS> 41,925,450
<SHORT-TERM> 4,000,000
<LIABILITIES-OTHER> 1,088,177
<LONG-TERM> 17,260,709
0
0
<COMMON> 14,830
<OTHER-SE> 12,724,913
<TOTAL-LIABILITIES-AND-EQUITY> 77,014,079
<INTEREST-LOAN> 1,539,707
<INTEREST-INVEST> 190
<INTEREST-OTHER> 47,588
<INTEREST-TOTAL> 1,587,485
<INTEREST-DEPOSIT> 391,609
<INTEREST-EXPENSE> 715,331
<INTEREST-INCOME-NET> 872,154
<LOAN-LOSSES> 25,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 539,318
<INCOME-PRETAX> 449,520
<INCOME-PRE-EXTRAORDINARY> 290,520
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290,520
<EPS-PRIMARY> 0.26<F1>
<EPS-DILUTED> 0.25<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 16,589
<LOANS-PAST> 769,006
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 302,903
<CHARGE-OFFS> 12,241
<RECOVERIES> 480
<ALLOWANCE-CLOSE> 316,142
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Above Earnings Per Share amounts have been adjusted for the two-for-one
stock split declared July 8, 1997 and the 10% Stock dividend declared
July 14, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<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> 0.63<F1>
<EPS-DILUTED> 0.63<F1>
<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
<FN>
<F1>Above Earnings Per Share amounts have been adjusted for the two-for-one
stock split declared July 8, 1997 and the 10% stock dividend declared July 14,
1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,686,679
<INT-BEARING-DEPOSITS> 5,746,192
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 12,543
<INVESTMENTS-MARKET> 12,543
<LOANS> 65,887,111
<ALLOWANCE> 377,389
<TOTAL-ASSETS> 75,629,711
<DEPOSITS> 41,376,730
<SHORT-TERM> 9,500,000
<LIABILITIES-OTHER> 815,210
<LONG-TERM> 11,373,600
0
0
<COMMON> 7,415
<OTHER-SE> 12,556,756
<TOTAL-LIABILITIES-AND-EQUITY> 75,629,711
<INTEREST-LOAN> 3,892,199
<INTEREST-INVEST> 33,634
<INTEREST-OTHER> 87,044
<INTEREST-TOTAL> 4,012,877
<INTEREST-DEPOSIT> 1,153,947
<INTEREST-EXPENSE> 1,627,006
<INTEREST-INCOME-NET> 2,385,871
<LOAN-LOSSES> 27,000
<SECURITIES-GAINS> (47,950)
<EXPENSE-OTHER> 1,769,236
<INCOME-PRETAX> 818,041
<INCOME-PRE-EXTRAORDINARY> 818,041
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 536,541
<EPS-PRIMARY> 0.41<F1>
<EPS-DILUTED> 0.41<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 113,201
<LOANS-PAST> 661,978
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 367,393
<CHARGE-OFFS> 0
<RECOVERIES> 996
<ALLOWANCE-CLOSE> 377,389
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Above Earnings Per Share amounts have been adjusted for the two-for-one stock
split declared July 8, 1997 and the 10% stock dividend declared July 14, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<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> 0.22<F1>
<EPS-DILUTED> 0.22<F1>
<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
<FN>
<F1>
Above Earnings Per Share amounts have been adjusted for the two-for-one stock
split declared July 8, 1997 and the 10% Stock dividend declared July 14, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,871,593
<INT-BEARING-DEPOSITS> 35,528
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,120,898
<INVESTMENTS-CARRYING> 15,009
<INVESTMENTS-MARKET> 15,009
<LOANS> 58,436,976
<ALLOWANCE> 358,393
<TOTAL-ASSETS> 62,831,792
<DEPOSITS> 41,115,087
<SHORT-TERM> 4,000,000
<LIABILITIES-OTHER> 1,121,043
<LONG-TERM> 4,000,000
0
0
<COMMON> 7,408
<OTHER-SE> 12,588,254
<TOTAL-LIABILITIES-AND-EQUITY> 62,831,792
<INTEREST-LOAN> 1,205,265
<INTEREST-INVEST> 23,996
<INTEREST-OTHER> 31,247
<INTEREST-TOTAL> 1,260,508
<INTEREST-DEPOSIT> 384,244
<INTEREST-EXPENSE> 492,194
<INTEREST-INCOME-NET> 768,314
<LOAN-LOSSES> 9,000
<SECURITIES-GAINS> (32,240)
<EXPENSE-OTHER> 754,254
<INCOME-PRETAX> 59,143
<INCOME-PRE-EXTRAORDINARY> 59,143
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,643
<EPS-PRIMARY> 0.03<F1>
<EPS-DILUTED> 0.03<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 116,709
<LOANS-PAST> 375,291
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 348,067
<CHARGE-OFFS> 0
<RECOVERIES> 1,326
<ALLOWANCE-CLOSE> 358,393
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 358,393
<FN>
<F1>Above Earnings Per Share amounts have been adjusted for the two-for-one stock
split declared July 8, 1997 and the 10% Stock dividend declared July 14, 1998.
</FN>
</TABLE>
