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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ to _______________
Commission File Number 0-24898
MSB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3203510
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization Number)
PARK AND KALAMAZOO AVENUE, N.E., MARSHALL, MICHIGAN 49068
- --------------------------------------------------- -----
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (616) 781-5103
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of November 6, 1998, there were 1,319,641 shares of the Registrant's common
stock issued and outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
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MSB FINANCIAL, INC.
INDEX
<TABLE>
<S><C>
PART I. FINANCIAL INFORMATION ................................... 1
Item 1. Financial Statements (Unaudited)......................... 1
Consolidated Condensed Statements of Financial Condition ......... 1
Consolidated Condensed Statements of Income ...................... 2
Consolidated Condensed Statements of Shareholders' Equity ........ 3
Consolidated Condensed Statements of Cash Flows .................. 4
Notes to Consolidated Condensed Financial Statements ............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 6-9
PART II. OTHER INFORMATION........................................ 10
SIGNATURES............................................... 11
EXHIBIT INDEX............................................ 12
</TABLE>
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CONSOLIDATED CONDENSED STATEMENTS OF
FINANCIAL CONDITION
September 30, 1998 and June 30, 1998
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<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 1,657,496 $ 2,286,520
Interest-bearing deposits 1,029,709 994,193
--------------- ----------------
Total cash and cash equivalents 2,687,205 3,280,713
Securities held to maturity (fair value of $7,088 at
September 30, 1998 and $8,102 at June 30, 1998) 7,088 8,102
Loans held for sale 1,521,466 295,300
Loans receivable, net of allowance for loan losses of
$409,661 at September 30, 1998 and $391,148 at June 30, 1998 74,145,702 73,065,017
Federal Home Loan Bank stock 1,176,900 1,158,200
Accrued interest receivable 471,115 419,847
Premises and equipment, net 658,717 648,878
Mortgage servicing rights 215,321 177,006
Other assets 922,841 913,650
--------------- ----------------
Total Assets $ 81,806,355 $ 79,966,713
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 43,586,452 $ 42,815,148
Federal Home Loan Bank Advances 23,537,195 21,971,976
Advance payments by borrowers for taxes and insurance 392,891 524,739
Accrued interest payable 93,213 93,114
Accrued expenses and other liabilities 693,607 1,249,043
--------------- ----------------
Total Liabilities 68,303,358 66,654,020
Shareholders' equity
Preferred stock, $.01 par value: 2,000,000 shares
authorized; none outstanding
Common stock, par value $.01: 4,000,000 shares authorized; 1,631,315
shares issued and 1,332,941 shares outstanding at September 30, 1998 and
1,631,315 shares issued and 1,338,051 shares outstanding at
June 30, 1998 16,313 16,313
Additional paid-in capital 9,577,842 9,533,274
Retained earnings, substantially restricted 7,160,846 6,970,925
Unallocated Employee Stock Ownership Plan shares (302,980) (318,181)
Unearned Recognition and Retention Plan shares (131,389) (146,728)
Less cost of Common Stock in Treasury - 298,374 shares at
September 30, 1998 and 293,264 shares at June 30, 1998 (2,817,635) (2,742,910)
--------------- ----------------
Total Shareholders' Equity 13,502,997 13,312,693
--------------- ----------------
Total Liabilities & Shareholders' Equity $ 81,806,355 $ 79,966,713
=============== ================
</TABLE>
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See accompanying notes to consolidated condensed financial statements
1
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CONSOLIDATED CONDENSED STATEMENTS
OF INCOME
Three months ended September 30, 1998 and 1997
(Unaudited)
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<TABLE>
<CAPTION>
Three Months
------------
1998 1997
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<S> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 1,623,959 $ 1,539,707
Securities held to maturity 125 190
Other interest and dividend income 49,518 47,588
-------------- ---------------
1,673,602 1,587,485
Interest expense
Deposits 402,941 391,609
Federal Home Loan Bank advances 363,383 321,521
Other interest expense 3,435 2,201
-------------- ---------------
769,759 715,331
-------------- ---------------
NET INTEREST INCOME 903,843 872,154
Provision for loan losses 18,000 25,000
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 885,843 847,154
Noninterest income
Loan servicing fees, net 19,767 21,106
Net gain on sales of loans held for sale 76,916 42,588
Service charges on deposit accounts 43,562 34,604
Profit on sale of real estate owned 10,666
Other income 44,162 32,720
-------------- ---------------
184,407 141,684
Noninterest expense
Salaries and employee benefits 262,524 245,223
Occupancy and equipment expense 68,184 50,035
Data processing expense 47,703 43,614
Year 2000 expense 8,576
Federal deposit insurance premium 13,312 12,942
Director fees 29,497 30,472
Correspondent bank charges 14,134 14,399
Michigan Single Business tax 17,000 18,000
Advertising expense 30,520 19,686
Professional fees 44,390 24,399
Supplies expense 17,861 13,319
Other 72,727 67,229
-------------- ---------------
626,428 539,318
-------------- ---------------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 443,822 449,520
Federal income tax expense 159,000 159,000
-------------- ---------------
NET INCOME $ 284,822 $ 290,520
============== ===============
Basic earnings per share $ 0.26 $ 0.26
============== ===============
Weighted average common shares outstanding 1,247,125 1,131,956
============== ===============
Diluted earnings per share $ 0.25 $ 0.25
============== ===============
Weighted average common and diluted
potential common shares outstanding 1,299,783 1,170,102
============== ===============
</TABLE>
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See accompanying notes to consolidated condensed financial statements
2
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CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Three months ended September 30, 1998 and 1997
(Unaudited)
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<TABLE>
<CAPTION>
Unallocated
Additional Employee Stock
Common Paid-In Retained Ownership
Stock Capital Earnings Plan Shares
----- ------- -------- -----------
<S> <C> <C> <C> <C>
BALANCE, JULY 1, 1997 $ 14,830 $ 7,096,776 $ 8,372,493 $ (383,006)
Net income 290,520
Shares committed to be released (3,564 shares)
under the Employee Stock Ownership Plan (ESOP) 33,479 16,200
Shares earned under the RRP
Cash dividends declared on common stock, net
of dividends on unallocated ESOP Shares (80,991)
Repurchase of 15,000 shares of Common Stock
----------- ----------- ----------- -----------
BALANCES, SEPTEMBER 30, 1997 $ 14,830 $ 7,130,255 $ 8,582,022 $ (366,806)
=========== =========== =========== ===========
BALANCES, JULY 1, 1998 $ 16,313 $ 9,533,274 $ 6,970,925 $ (318,181)
Net income 284,822
Shares committed to be released (3,506 shares)
under the Employee Stock Ownership Plan (ESOP) 44,799 15,201
Shares earned under the RRP
Cash dividends declared on common stock, net
of dividends on unallocated ESOP shares (94,901)
Repurchase of 5,110 shares of Common Stock
Payment of Fractional shares on 10% Dividend (231)
----------- ----------- ----------- -----------
BALANCES, SEPTEMBER 30, 1998 $ 16,313 $ 9,577,842 $ 7,160,846 $ (302,980)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Unearned
Recognition Common Total
and Retention Stock in Shareholders'
Plan Shares Treasury Equity
----------- -------- ------
<S> <C> <C> <C>
BALANCE, JULY 1, 1997 $ (208,084) $ (2,202,813) $12,690,196
Net income 290,520
Shares committed to be released (3,564 shares)
under the Employee Stock Ownership Plan (ESOP) 49,679
Shares earned under the RRP 15,339 15,339
Cash dividends declared on common stock, net
of dividends on unallocated ESOP Shares (80,991)
Repurchase of 15,000 shares of Common Stock (225,000) (225,000)
----------- ------------ -----------
BALANCES, SEPTEMBER 30, 1997 $ (192,745) $ (2,427,813) $12,739,743
=========== ============ ===========
BALANCES, JULY 1, 1998 $ (146,728) $ (2,742,910) $13,312,693
Net income 284,822
Shares committed to be released (3,506 shares)
under the Employee Stock Ownership Plan (ESOP) 60,000
Shares earned under the RRP 15,339 15,339
Cash dividends declared on common stock, net
of dividends on unallocated ESOP shares (94,901)
Repurchase of 5,110 shares of Common Stock (74,725) (74,725)
Payment of Fractional shares on 10% Dividend (231)
----------- ------------ -----------
BALANCES, SEPTEMBER 30, 1998 $ (131,389) $ (2,817,635) $13,502,997
=========== ============ ===========
</TABLE>
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See accompanying notes to consolidated condensed financial statements
3
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three months ended September 30, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 284,822 $ 290,520
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 18,000 25,000
Depreciation 34,537 21,633
Amortization of mortgage servicing rights 7,335 436
Employee Stock Ownership Plan expense 60,000 49,679
Recognition and Retention Plan expense 15,339 15,339
Originations of loans held for sale (5,791,225) (2,781,527)
Proceeds from sales of loans held for sale 4,596,325 2,367,900
Net gains on sales of loans held for sale (76,916) (42,588)
Change in assets and liabilities
Accrued interest receivable (51,268) (24,697)
Other assets (9,191) 28,510
Accrued interest payable 99 10,839
Other expense and other liabilities (555,436) 273,880
-------------- ---------------
Net cash from operating activities (1,467,579) 234,924
CASH FLOWS FROM INVESTING ACTIVITIES
Principal paydowns on mortgage-backed securities 1,014 846
Purchase of FHLB stock (18,700) (19,400)
Net increase in loans (1,098,685) (1,249,058)
Net purchases of premises and equipment (44,376) (11,528)
-------------- ---------------
Net cash used in investing activities (1,160,747) (1,279,140)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 771,304 218,718
Proceeds from Federal Home Loan Bank advances 4,000,000 8,000,000
Repayments on Federal Home Loan Bank advances (2,434,781) (6,112,891)
Decrease in advance payments
by borrowers for taxes and insurance (131,848) (123,798)
Payment of dividends on common stock (95,132) (80,991)
Repurchase of common stock (74,725) (225,000)
-------------- ---------------
Net cash from financing activities 2,034,818 1,676,038
-------------- ---------------
Net change in cash and cash equivalents (593,508) 631,822
Cash and cash equivalents at beginning of period 3,280,713 3,080,612
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,687,205 $ 3,712,434
============== ===============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 769,661 $ 702,292
Income taxes 25,956
</TABLE>
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See accompanying notes to consolidated condensed financial statements.
4
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MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Three months ended September 30,1998
(Unaudited)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated condensed financial statements include the
accounts of MSB Financial, Inc. (the "Company") and its wholly-owned subsidiary,
Marshall Savings Bank, F.S.B. ("Bank") after the elimination of significant
intercompany transactions and accounts. The initial capitalization of the
Company and its acquisition of the Bank took place on February 6, 1995.
These interim financial statements are prepared in accordance with the
Securities and Exchange Commission's rules for quarterly financial information
without audit and reflect all adjustments which, in the opinion of management,
are necessary to present fairly the financial position of the Company at
September 30, 1998 and the results of its operations and its cash flows for the
periods presented. All such adjustments are normal and recurring in nature. The
accompanying consolidated condensed financial statements do not purport to
contain all the necessary disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and should be
read in conjunction with the consolidated financial statements and notes thereto
included in the annual report of MSB Financial, Inc. for the year ended June 30,
1998. The results of the periods presented are not necessarily representative of
the results of operations and cash flows which may be expected for the entire
year.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
Basic and diluted earnings per share for the periods presented in 1998 and 1997
were computed under a new accounting standard effective in the quarter ended
December 31, 1997. All prior amounts have been restated to be comparable. Basic
earnings per share is based on net income divided by the weighted average number
of common shares outstanding during the period, adjusted for Employee Stock
Ownership Plan (ESOP) shares not committed for release and Recognition and
Retention Plan (RRP) shares not yet vested. Diluted earnings per share shows the
dilutive effect of additional common shares issuable under stock option plans.
Net income was $284,822 for the three month period ended September 30, 1998. The
weighted average number of common shares outstanding for the three month period
ended September 30, 1998 was 1,247,125. The weighted average of number of common
and diluted potential common shares outstanding for the three month period ended
September 30, 1998 was 1,299,783. Net income was $290,520 for the three month
period ended September 30, 1997. The weighted average number of common shares
outstanding for the three month period ended September 30, 1997 was 1,131,956.
The weighted average of number of common and diluted potential common shares
outstanding for the three month period ended September 30, 1997 was 1,170,102.
NOTE 2 - REPURCHASES OF COMMON STOCK
During the quarter ended September 30, 1998, the Company repurchased 5,110
shares of its common stock at a total cost of $74,725, or $14.62 per share, as
compared to 16,500 shares during the quarter ended September 30, 1997 at a total
cost of $225,000 or $13.64 per share. The Company is currently in the process of
repurchasing an additional 5%, or 67,738 shares of its common stock and as of
September 30, 1998 had repurchased 21,830 shares under this program. Approval to
repurchase the remaining 45,908 shares expires on February 11, 1999. As of
September 30, 1998, a total of 298,374 shares of the Company's common stock had
been repurchased at a total cost of $2,817,635, or $9.44 per share.
- --------------------------------------------------------------------------------
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MSB Financial, Inc. (the "Company") was incorporated under the laws of
the State of Delaware for the purpose of becoming the savings and loan holding
company of Marshall Savings Bank, F.S.B. (the "Bank") in connection with the
Bank's conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion"). On February 6, 1995 the
Conversion was completed and the Bank became a wholly-owned subsidiary of the
Company. The following discussion compares the consolidated financial condition
of the Company and the Bank at September 30, 1998 to June 30, 1998 and the
results of operations for the three month period ended September 30, 1998 with
the same periods ended September 30, 1997. This discussion should be read in
conjunction with the consolidated condensed financial statements and footnotes
included herein.
Forward-Looking Statements
When used in this Quarterly Report of Form 10-QSB or future filings by
the Company with the Securities and Exchange Commission, in the Company's press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimated", "project", "believe" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors including
regional and national economic conditions, changes in levels of market interest
rates, credit risks of lending activities, and competitive and regulatory
factors could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake and specifically disclaims any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Financial Condition
Total assets increased $1.8 million to $81.8 million from June 30, 1998
to September 30, 1998. Net loans, including loans held for sale, increased by
$2.3 million, or 3.2% for the period, due primarily to the strong demand for
mortgage loans, especially residential 1-4 family construction loans, in the
Company's market areas. This increase was primarily funded by an increase of
$1.6 million in Federal Home Loan Bank advances.
Total liabilities increased $1.6 million to $68.3 million from June 30,
1998 to September 30, 1998. In addition to the increase in the Federal Home Loan
Bank advances discussed above, was an increase in deposits of $771,000.
Offsetting the above increases in liabilities for the period were decreases in
advance payments by borrowers for taxes and insurance of $132,000 and accrued
expense and other liabilities of $555,000. The increase in accrued expense and
other liabilities represents a decrease in the funds due the Bank's official
check services provider, due to a decrease in daily activity for official checks
at September 30, 1998 compared to June 30, 1998.
The repurchase of the Company's common stock, payment of dividends
declared on common stock, and net income resulted in a net increase in
shareholders' equity of $190,000.
Results of Operations
GENERAL. The Company's results of operations depend primarily upon the level of
net interest income, which is the difference ("spread") between average yield
earned on loans and securities, interest-bearing deposits, and other
interest-earning assets, and the average rate paid on deposits and borrowed
funds, as well as competitive factors that influence interest rates, loan
demand, and deposit flows. Results of operations are also dependent upon the
level of the Company's non-interest income, including fee income and service
charges, and the level of its non-interest expense, including general and
administrative expenses. The Company, like other financial
6
<PAGE> 9
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
NET INCOME. Net income for the three months ended September 30, 1998 was
$285,000, 2.1% lower than net income of $291,000 for same period ended September
30, 1997 for the reasons discussed in detail below.
NET INTEREST INCOME. Net interest income increased $32,000, or 3.6%, to
$904,000 for the three month period ended September 30, 1998. The increase in
net interest income for the three month period ended September 30, 1998
compared to the same period in 1997 was primarily a result of an increase in
interest income. Interest income increased primarily due to the increase in the
average outstanding balance of net loans, as discussed above. The weighted
average yield on the loan portfolio for the three month period ended September
30, 1998 decreased 2 basis points to 8.77% from 8.79% for the same period ended
September 30, 1997. Interest expense increased $54,000 for three month period
ended September 30, 1998 as compared to the same period in 1997. This increase
was attributable to the interest paid on the additional Federal Home Loan
Bank advances used to fund loan growth during the three month period ended
September 30, 1998 of $42,000 when compared to the same period ended September
30, 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
The provision for loan losses decreased by $7,000 to $18,000 for the three month
period ended September 30, 1998 as compared to the three month period ended
September 30, 1997, due to management's continuing reassessment of losses
inherent in the loan portfolio. At September 30, 1998, the Company's allowance
for loan losses totaled $410,000 or 0.55% of net loans receivable and 34.17% of
total non-performing loans. At June 30, 1998, the Company's allowance for loan
losses totaled $391,000, or 0.54% of net loans receivable and 62.28% of total
non-performing loans.
Management establishes an allowance for loan losses based on an
analysis of risk factors in the loan portfolio. This analysis includes the
evaluation of concentrations of credit, past loss experience, current economic
conditions, amount and composition of the loan portfolio, estimated fair value
of underlying collateral, loan commitments outstanding, delinquencies, and other
factors. Because the Company has had extremely low loan losses during its
history, management also considers loss experience of similar portfolios in
comparable lending markets. Accordingly, the calculation of the adequacy of the
allowance for loan losses was not based directly on the level of non-performing
assets.
As of September 30, 1998, the Company's non-performing assets,
consisting of nonaccrual loans and accruing loans 90 days or more delinquent,
totaled $1.2 million, or 1.64% of total net loans, compared to $628,000, or
0.86% of total net loans as of June 30, 1998, an increase of $610,000. Loans
greater than 90 days past due, and other designated loans of concern, are placed
on non-accrual status, unless it is determined that the loans are well
collateralized and in the process of collection. There was no real estate owned
at September 30, 1998.
Management will continue to monitor the allowance for loan losses and
make future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Company maintains its allowance for
loan losses at a level which it considers to be adequate to provide for losses,
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan losses will not be required in future
periods. In addition, management's determination as to the amount of the
allowance for loan losses is subject to review by the Office of Thrift
Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC), as part
of their examination process, which may result in the establishment of an
additional allowance based upon their judgment of the information available to
them at the time of their examination.
NONINTEREST INCOME. Noninterest income consists primarily of gains on the sale
of loans, loan servicing fees, service fees on deposit accounts and other fees.
Noninterest income increased $43,000 during the three month period ended
September 30, 1998 compared to the three month period ended September 30, 1997.
This increase was due to increases in gains on sale of loans of $34,000, due to
increased sales of mortgage loans, and an increase in service charges on deposit
account of $9,000. There were no other significant changes in the components of
noninterest income.
NONINTEREST EXPENSE. Noninterest expense was $626,000 for the three month
period ended September 30, 1998 compared to $539,000 reported for the same prior
year period, an increase of $87,000 or 16.2%. Salaries and employee benefits,
the largest component of noninterest expense, increased $17,000 for the period
ended September 30, 1998 compared to the same period in 1997. Significant
factors causing the increase in salaries
7
<PAGE> 10
and employee benefits was the addition of a full-time employee during the 1998
period and increases in expenses associated with the Company's stock-based
benefit plans, as a result of the Company's stock price. Other increases in
noninterest expense include occupancy expense of $18,000 associated with
improvements to the teller drive-up area and installation of a new ATM
machine, expenses associated with the Year 2000 issue of $9,000 and
professional fees of $20,000 associated with changing the Corporation's state
of incorporation, which will be submitted to shareholders for vote at the
upcoming annual meeting.
INCOME TAX EXPENSE. Income tax expense was $159,000 for the period
ended September 30, 1998, no change from the same period ended September 30,
1997. The Company's effective tax rate remains at approximately 34%.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits, principal and
interest repayments on loans, sales of loans, interest-bearing deposits and
securities available for sale. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and early loan prepayments
are more influenced by interest rates, general economic conditions and
competition.
Federal regulations have required the Bank to maintain minimum levels
of liquid assets. The required percentage has varied from time to time based
upon economic conditions and savings flows and is currently 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 September 30, 1998, the Bank's liquidity ratio was
6.08%.
The Company uses its liquidity resources principally to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals
and to meet operating expenses. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. At September 30,
1998, the Company had outstanding commitments to extend credit which amounted to
$9.0 million (including $3.5 million in available home equity lines of credit).
At September 30, 1998, the Company had $23.5 million in advances from the FHLB
of Indianapolis outstanding. Management believes that loan repayments and other
sources of funds, including Federal Home Loan Bank borrowings, will be adequate
to meet the Company's foreseeable liquidity needs.
Federal insured savings institutions are required to maintain a minimum
level of regulatory capital. The OTS has established capital standards,
including a tangible capital requirement, a leverage ration (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 September 30, 1998, the Bank had tangible capital and Tier 1
(core) capital of $10.2 million, or 12.5% of adjusted total assets, which was
approximately $9.0 million and $7.8 million above the minimum requirements of
1.5% and 3.0%, respectively, of the adjusted total assets in effect on that
date. As of September 30, 1998, the Bank had Tier 1 (core) capital of $10.2
million, or 12.6% of average total assets, which was approximately $7.0 million
above the minimum requirement of 4.0% of average total assets in effect on that
date. On September 30, 1998, the Bank had risk-based capital of $10.6 million
(including $10.2 million in core capital), or 20.9% of risk-weighted assets of
$51.0 million. This amount was $6.6 million above the 8.0% requirement in effect
on that date.
Year 2000 Issue
The approach of the year 2000 presents potential problems to businesses
that utilize computers in their daily operations. Some computer systems may not
be able to properly interpret dates after December 31, 1999, because they use
only two digits to indicate the year in the date. Therefore, a date using "00"
as the year may be recognized as the year 1900 rather than the year 2000. See
"Forward-Looking Statements".
Financial institution regulators recently have increased their focus
upon year 2000 compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council has issued several interagency statements on
Year 2000 Project Management Awareness. These statements require financial
institutions to, among other things, examine the year 2000 issue on their
customers, suppliers and borrowers. These statements also require each
federally insured regulated financial institution to survey its exposure,
measure its risk and prepare a plan to address the year 2000 issue. In addition,
the federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions, such as the Association, to assure
resolution of any year 2000 problems. The federal banking agencies have asserted
that year 2000 testing and certification is a key safety and soundness issue in
conjunction with regulatory exams and, thus, that an institutions failure to
address appropriately the year 2000 issue could result in supervisory action,
including the reduction of the institution's supervisory ratings, the denial of
applications for approval of mergers or acquisitions, or the imposition of civil
money penalties.
8
<PAGE> 11
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 November 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
September 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.
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.
9
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
10
<PAGE> 13
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
MSB FINANCIAL, INC.
Registrant
Date: November 11, 1998 \s\Charles B. Cook
------------------
Charles B. Cook, President and Chief
Executive Officer (Duly Authorized
Officer)
Date: November 11, 1998 \s\Elaine R. Carbary
--------------------
Elaine R. Carbary, Chief Financial
Officer (Principal Financial Officer)
11
<PAGE> 14
MSB FINANCIAL, INC.
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
27 Financial Data Schedule 13
12
<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, 1998 AND IS QUALIFIED IN IT'S ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,657,496
<INT-BEARING-DEPOSITS> 1,029,709
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 7,088
<INVESTMENTS-MARKET> 7,088
<LOANS> 76,076,829
<ALLOWANCE> 409,661
<TOTAL-ASSETS> 81,806,355
<DEPOSITS> 43,586,452
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,179,711
<LONG-TERM> 23,527,195
0
0
<COMMON> 16,313
<OTHER-SE> 13,486,684
<TOTAL-LIABILITIES-AND-EQUITY> 81,806,355
<INTEREST-LOAN> 1,623,959
<INTEREST-INVEST> 125
<INTEREST-OTHER> 49,418
<INTEREST-TOTAL> 1,673,602
<INTEREST-DEPOSIT> 402,941
<INTEREST-EXPENSE> 769,759
<INTEREST-INCOME-NET> 903,843
<LOAN-LOSSES> 18,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 626,428
<INCOME-PRETAX> 443,822
<INCOME-PRE-EXTRAORDINARY> 284,822
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 284,822
<EPS-PRIMARY> .26
<EPS-DILUTED> .25
<YIELD-ACTUAL> 0
<LOANS-NON> 329,427
<LOANS-PAST> 908,166
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 391,148
<CHARGE-OFFS> 0
<RECOVERIES> 513
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