SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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)
MARYLAND 38-3203510
- ------------------------------ -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
Park and Kalamazoo Avenue, N.E., 49068
Marshall, Michigan
- ------------------------------- -----------------------
(Address of principal (ZIP Code)
executive offices)
Registrant's telephone number, including area code: (616) 781-5103
--------------
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of May 11, 1999, there were 1,272,386 shares of the Registrant's common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE>
MSB FINANCIAL, INC.
INDEX
PART I. FINANCIAL INFORMATION...............................1
Item 1. Financial Statements (Unaudited)....................1
Consolidated Condensed Statements of Financial Condition........1
Consolidated Condensed Statements of Income.....................2
Consolidated Condensed Statements of Cash Flows.................3
Notes to Consolidated Condensed Financial Statements............4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................5
PART II. OTHER INFORMATION..................................10
SIGNATURES.........................................11
EXHIBIT INDEX......................................12
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
March 31, 1999 and June 30, 1998
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 2,045,187 $ 2,286,520
Interest-bearing deposits 766,421 994,193
----------- ------------
Total cash and cash equivalents 2,811,608 3,280,713
Securities held to maturity (fair value of
$5,522 at March 31, 1999 and $8,102 at
June 30, 1998) 5,522 8,102
Loans held for sale 4,095,457 295,300
Loans receivable, net of allowance for
loan losses of $436,617 at
March 31, 1999 and $391,148
at June 30, 1998 73,007,464 73,065,017
Federal Home Loan Bank stock 1,270,500 1,158,200
Accrued interest receivable 483,710 419,847
Premises and equipment, net 687,910 648,878
Mortgage servicing rights 283,112 177,006
Other assets 1,251,920 913,650
----------- ------------
Total Assets $83,897,203 $ 79,966,713
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $44,994,064 $ 42,815,148
Federal Home Loan Bank Advance 23,959,058 21,971,976
Advance payments by borrowers for taxes
and insurance 380,350 524,739
Accrued interest payable 112,162 93,114
Accrued expenses and other liabilities 1,094,041 1,249,043
----------- ------------
Total Liabilities 70,539,675 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 1,291,886 shares
outstanding at March 31, 1999 and 1,631,315
shares issued and 1,338,051 shares outstanding
at June 30, 1998 16,313 16,313
Additional paid-in capital 9,640,521 9,533,274
Retained earnings, substantially restricted 7,482,422 6,970,925
Unallocated Employee Stock Ownership Plan shares (272,232) (318,181)
Unearned Recognition and Retention Plan
shares (100,711) (146,728)
Less cost of Common Stock in Treasury-
339,429 shares at March 31, 1999 and
293,264 shares at June 30, 1998 (3,408,785) (2,742,910)
----------- ------------
Total Shareholders' Equity 13,357,528 13,312,693
----------- ------------
Total Liabilities & Shareholders' Equity $83,897,203 $ 79,966,713
=========== ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Nine months and three months ended March 31, 1999 and 1998
(Unaudited)
NINE MONTHS THREE MONTHS
----------- ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income
Loans, including fees $4,854,550 $4,699,597 $1,584,162 $ 1,578,860
Securities held to maturity 339 528 98 164
Other interest and dividends 162,741 160,425 58,931 57,448
---------- ---------- ---------- -----------
5,017,630 4,860,550 1,643,191 1,636,472
Interest Expense
Deposits 1,226,239 1,185,250 410,430 393,690
Federal Home Loan Bank Advance 1,129,391 1,009,025 377,960 349,032
Other interest expense 10,589 7,490 3,401 2,726
---------- ---------- ---------- -----------
2,366,219 2,201,765 791,791 745,448
---------- ---------- ---------- -----------
NET INTEREST INCOME 2,651,411 2,658,785 851,400 891,024
Provision for loan losses 54,000 55,000 18,000 15,000
---------- ---------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,597,411 2,603,785 833,400 876,024
Noninterest income
Loan servicing fees 30,685 58,417 8,875 19,646
Gain on sales of loans 238,030 183,518 53,920 72,219
Service fees on deposit accounts 122,070 115,899 35,631 39,923
Profit on sale of real estate owned 26,967 10,666
Other 133,485 112,254 43,290 43,537
---------- ---------- ---------- -----------
551,237 480,754 141,716 175,325
Noninterest expense
Salaries and employee benefits 778,609 758,930 251,465 259,620
Buildings, occupancy and equipment 206,288 153,893 67,099 54,691
Data processing 153,530 139,905 53,117 48,546
Year 2000 expense 21,799 6,432
Federal deposit insurance premiums 39,679 39,080 13,327 13,126
Director fees 90,731 88,866 29,662 26,822
Correspondent bank charges 42,189 44,972 15,072 16,268
Provision (recovery) to adjust loans held
for sale to lower of cost or market 25,765 25,766
Michigan Single Business tax 51,000 52,000 15,000 17,000
Professional fees 124,648 71,199 25,903 16,735
Other 376,635 324,353 114,817 111,140
---------- ---------- ---------- -----------
1,910,873 1,673,198 617,660 563,948
---------- ---------- ---------- -----------
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 1,237,775 1,411,341 357,456 487,401
Federal income tax expense 438,000 501,000 123,000 176,000
---------- ---------- ---------- -----------
NET INCOME 799,775 910,341 234,456 311,401
Other comprehensive income 0 0 0 0
---------- ---------- ---------- -----------
COMPREHENSIVE INCOME $ 799,775 $ 910,341 $ 234,456 $ 311,401
========== ========== ========== ===========
Basic earnings per share $ 0.65 $ 0.73 $ 0.19 $ 0.24
========== ========== ========== ===========
Weighted average common shares outstanding 1,230,269 1,246,414 1,215,780 1,271,128
========== ========== ========== ===========
Diluted earnings per share $ 0.62 $ 0.70 $ 0.19 $ 0.24
========== ========== ========== ===========
Weighted average common and diluted
potential common shares outstanding 1,280,960 1,297,838 1,232,068 1,279,003
========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Nine months ended
March 31, 1999 and 1998
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 799,775 $ 910,341
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 54,000 55,000
Provision to adjust loans held for sale
To lower of cost or market 25,765
Depreciation 103,619 76,099
Amortization of mortgage servicing rights 44,844 9,646
Employee Stock Ownership Plan expense 154,343 166,320
Recognition and Retention Plan expense 46,017 46,017
Originations of loans held for sale (19,028,511) (11,998,871)
Proceeds from sales of loans held for sale 15,179,669 11,396,305
Net gains on sales of loans held for sale (238,030) (183,518)
Change in assets and liabilities
Accrued interest receivable (63,863) (17,762)
Other assets (338,270) (275,861)
Accrued interest payable 19,048 18,344
Other expense and other liabilities (155,002) 391,899
---------- ----------
Net cash from operating activities (3,396,596) 593,959
CASH FLOWS FROM INVESTING ACTIVITIES
Principal paydowns on mortgage-backed securities 2,580 2,547
Purchase of FHLB stock (112,300) (114,500)
Net increase in loans 113,553 (2,638,366)
Net purchases of premises and equipment (142,651) (179,695)
---------- ----------
Net cash used in investing activities (138,818) (2,930,014)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,178,916 1,258,257
Proceeds from Federal Home Bank advances 8,000,000 15,500,000
Repayments on Federal Home Bank advances (6,012,918) (12,901,624)
Decrease in advance payments
by borrowers for taxes and insurance (144,389) (119,839)
Payment of dividends on common stock (288,509) (248,810)
Repurchase of common stock (681,396) (327,000)
Exercise of stock options 14,605 22,562
---------- ----------
Net cash from financing activities 3,066,309 3,183,546
---------- ----------
Net change in cash and cash equivalents (469,105) 847,491
Cash and cash equivalents at beginning of period 3,280,713 3,080,612
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,811,608 $3,928,103
========== ==========
Supplemental disclosures of cash flow
information
Cash paid during the period for:
Interest $2,347,172 $2,183,420
Income taxes 445,000 593,956
Supplemental disclosure of noncash
investing activities Transfer from loans held
for sale to loans held to maturity $ 110,000
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Nine months ended March 31, 1999
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated condensed financial statements include the
accounts of MSB Financial, Inc. (the "Company") and its wholly-owned subsidiary,
Marshall Savings Bank, F.S.B. ("Bank") after the elimination of significant
intercompany transactions and accounts. The initial capitalization of the
Company and its acquisition of the Bank took place on February 6, 1995.
These interim financial statements are prepared in accordance with the
Securities and Exchange Commission's rules for quarterly financial information
without audit and reflect all adjustments which, in the opinion of management,
are necessary to present fairly the financial position of the Company at March
31, 1999 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 1999 and 1998
were computed under an accounting standard effective in the quarter ended
December 31, 1997. 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 $799,775 and $234,456 for the
nine month and three month periods ended March 31, 1999. The weighted average
number of common shares outstanding for the nine and three month periods ended
March 31, 1999, were 1,230,269 and 1,215,780, respectively. The weighted average
of number of common and diluted potential common shares outstanding for the nine
and three months ended March 31, 1999, were 1,280,960 and 1,232,068,
respectively. For the nine month and three month periods ended March 31, 1998,
respectively, net income was $910,341 and $311,401. The weighted average number
of common shares outstanding for the nine and three month periods ended March
31, 1998, were 1,246,414 and 1,271,128, respectively. The weighted average
number of common and diluted potential common shares outstanding for the nine
and three month periods ended March 31, 1998, were 1,297,838 and 1,279,003,
respectively.
NOTE 2 - REPURCHASES OF COMMON STOCK
During the quarter ended March 31, 1999, the Company repurchased 21,805 shares
of its common stock at a total cost of $301,651, or $13.83 per share, as
compared to 6,600 shares during the quarter ended March 31, 1998, at a total
cost of $102,000 or $15.45 per share. On February 16, 1999, the Company's Board
of Directors approved a plan to repurchase of up to 5%, or 65,657 shares, of its
common stock. Under the current repurchase program, which expires February 16,
2000, the Company has repurchased a total of 18,285 shares at a total cost of
$251,491 or $13.75 per share. As of March 31, 1999, a total of 344,476 shares of
the Company's common stock had been repurchased at a total cost of $3,450,669,
or $10.02 per share.
<PAGE>
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. On December 8, 1998, the Company received shareholders approval and
changed its state of incorporation from Delaware to Maryland. The following
discussion compares the consolidated financial condition of the Company and the
Bank at March 31, 1999 to June 30, 1998 and the results of operations for the
three and nine month periods ended March 31, 1999 with the same periods ended
March 31, 1998. This discussion should be read in conjunction with the
consolidated condensed financial statements and footnotes included herein.
FORWARD-LOOKING STATEMENTS DISCLOSURE
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, year 2000 readiness of the Company
and its service providers, 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 $3.9 million to $83.9 million from June 30, 1998 to
March 31, 1999. Net loans, including loans held for sale, increased by $3.7
million or 5.1% 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 increases of $2.2 million in
deposits and $2.0 million in Federal Home Loan Bank advances.
Total liabilities increased $3.9 million to $70.5 million from June 30,
1998 to March 31, 1999. In addition to the increases in the deposits and Federal
Home Loan Bank advances discussed above, was an increase in accrued interest
payable of $19,000. Offsetting the above increases in liabilities for the period
were decreases in advance payments by borrowers for taxes and insurance of
$144,000 and accrued expenses and other liabilities of $155,000.
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 $45,000.
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 the average
yield earned on loans and securities, interest-bearing deposits, and other
interest-earning assets, and the average rate paid on deposits and borrowed
funds, as well as competitive factors that influence interest rates, loan
demand, and deposit flows. Results of operations are also dependent upon the
level of the Company's non-interest income, including fee income and service
charges, and the level of its non-interest expense, including general and
administrative expenses. The Company, like other financial institutions, is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different times, or on a different basis, than
its interest-earning assets.
5
<PAGE>
NET INCOME. Net income for the three months ended March 31, 1999 was $234,000,
24.7% lower than net income of $311,000 for same period ended March 31, 1998.
Net income for the nine month period ended March 31, 1999 was $800,000, 12.1%
lower than net income of $910,000 for the same period in 1998. Reasons for the
declines in net income are discussed in detail below.
NET INTEREST INCOME. Net interest income decreased $40,000, or 4.4%, to $851,000
for the three month period ended March 31, 1999, as compared to the same period
ending March 31, 1998. For the nine month period ended March 31, 1999 net
interest income decreased $7,000, or 0.3%, to $2.7 million. The above decreases
in net interest income were attributed to increases in interest expenese for the
three and nine month periods ended March 31, 1999 of $46,000 and $164,000,
respectively, when compared to the same periods ended March 31, 1998. The
increases in interest expense were primarily a result of increases in interest
paid on Federal Home Bank advances, due to increased advance balances. For the
three and nine month periods ended March 31, 1999 Federal Home Loan Bank advance
interest increased $29,000 and $120,000, respectively, when compared to the same
periods ended March 31, 1998. Increased average deposit balances, offset by
declining rates paid on certificates of deposits, also contributed to the
increases in interest expense discussed above. Interest paid on deposits
increased $27,000 and $41,000, respectively, for the three and nine month
periods ended March 31, 1999, as compared to the same periods ended March 31,
1998.
The weighted average yield on the loan portfolio for the three month period
ended March 31, 1999 decreased 48 basis points to 8.24% from 8.72% for the same
period ended March 31, 1998. For the nine month period ended March 31, 1999 the
weighted average yield on the loan portfolio was 8.52%, compared to 8.76% for
the same period ended March 31, 1998, a decrease of 24 basis points. The
decreases in weighted average yields for both the three and nine month periods
are primarily the result of adjustable rate mortgage loans renewing at lower
rates and increased mortgage loan refiancing to lower rates during the past nine
months. Contributing to the decrease in the weighted average yield for the three
month period ended March 31, 1999 as compared to March 31, 1998 was a $34,000
decrease in fee income due to a decrease in loan sales during the three month
period ended March 31, 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
The provision for loan losses increased by $3,000 to $18,000 for the three month
period ended March 31, 1999 as compared to the three month period ended March
31, 1998, due to management's continuing reassessment of losses inherent in the
loan portfolio. At March 31, 1999, the Company's allowance for loan losses
totaled $437,000 or 0.57% of net loans receivable and 67.65% 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 March 31, 1999, the Company's non-performing assets, consisting of
nonaccrual loans and accruing loans 90 days or more delinquent, totaled $
646,000, or 0.84% of total loans, compared to $628,000, or 0.86% of total loans
as of June 30, 1998, an increase of $18,000. 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 March 31, 1999.
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 and the Federal Deposit Insurance Corporation, 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.
6
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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 decreased $34,000 during the three month period ended March
31, 1999 compared to the three month period ended March 31, 1998. For the nine
month period ended March 31, 1999, noninterest income increased $70,000 compared
the nine month period ended March 31, 1998. The decrease during the three month
period ended March 31, 1999 was primarily due to a decrease in gains on the sale
of loans of $18,000, due to decreased sales of mortgage loans during the period.
Although gains on the sale of loans decreased during the three month period,
there was an increase during the nine month period ended March 31, 1999 of
$55,000. The increase was primarily due to an increase in gains on sale of loans
due to increased sales of mortgage loans during the nine month period. Other
increases during the nine month period included deposit account service fees of
$6,000 and profit on sale of real estate owned of $16,000. Offsetting the above
mentioned increases was a decrease in loan servicing fee income of $28,000 for
the nine month period ended March 31, 1999 as compared to the same period in
1998. This decrease is due to increased mortgage refinancing activity, which has
resulted in an increased amortization expense of mortgage servicing rights. No
other significant changes in the components of non-interest income.
NONINTEREST EXPENSE. Noninterest expense was $618,000 for the three month period
ended March 31, 1999 compared to $564,000 reported for the same prior year
period, an increase of $54,000 or 9.5%. Noninterest expense for the nine month
period ended March 31, 1999 was $1.9 million compared to $1.7 million for the
same period in 1998, an increase of $238,000 or 14.2%. Increases in noninterest
expense for the nine month period included increases in professional fees of
$53,000, a result of the Company's recent reincorporation from a Delaware into a
Maryland corporation, in building, occupancy and equipment expense of $52,000,
due to increased depreciation expense for software, teller operating system and
equipment upgrades, and data processing expense of $14,000. The Company also
recorded the following expenses during the nine month period ended March 31,
1999, of $22,000 associated with the Year 2000 issue and a $26,000 provision to
adjust loans held for sale to the lower of cost or market. The largest component
on noninterest expense, salaries and employee benefits, decreased $8,000 and
increased $20,000 for the three month and nine month periods ended March 31,
1999, respectively, compared to the same periods during 1998.
FEDERAL INCOME TAX EXPENSE. Federal income tax expense decreased $53,000 and
$63,000 for the three and nine month periods ended March 31, 1999 compared to
the same periods in 1998 due to the decrease in net income. The Company's
effective tax rate remains at approximately 34%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits, principal and
interest repayments on loans, sales of loans, interest-bearing deposits and
securities available for sale. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and early loan prepayments
are more influenced by interest rates, general economic conditions and
competition.
Federal regulations require 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, percentage 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 March 31, 1999, the Bank's liquidity ratio was 8.53%.
The Company uses its liquidity resources principally to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals
and to meet operating expenses. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. At March 31, 1999,
the Company had outstanding commitments to extend credit which amounted to $8.1
million (including $3.8 million in available home equity lines of credit). At
March 31, 1999, the Company had $24.0 million in advances from the Federal Home
Loan Bank of Indianapolis outstanding. Management believes that loan repayments
and other sources of funds, including Federal Home Loan Bank advances, 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 Office of Thrift Supervision 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. As of March 31, 1999, the Bank had tangible capital
and Tier 1 (core) capital of $10.3 million, or
7
<PAGE>
12.3% or adjusted total assets, which was approximately $9.1 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 March 31, 1999, the Bank had
Tier 1 (core) capital of $10.3 million, or 12.1% of average total assets, which
was approximately $6.9 million above the minimum requirement of 4.0% of average
total assets in effect on that date. On March 31, 1999, the Bank had risk-based
capital of $10.7 million (including $10.3 million in core capital), or 20.8% of
risk-weighted assets of $51.5 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 Disclosure".
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 Bank, 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 institution's 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.
The Company 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 Company, meets
on a regular basis and provides regular reports to the Board of Directors
detailing progress with the year 2000 issue.
The Company's primary computer processing is provided by an independent
third party data center, and through this data center the Company migrated to a
new year 2000 compliant teller/bank operation platform in November 1998. To
ensure the readiness of this system, the Company performed testing of actual
customer data on a separate system during March 1999. No year 2000 processing
problems were detected during this testing. As of March 31, 1999, all in-house
computer systems have been inspected and their risk of a year 2000 failure
identified. Also, all Company software is being evaluated through vendor ensured
readiness statements and testing by the Committee. The Company 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 Company 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 Company's internet site in the form of links to various
year 2000 information sites.
Costs to the Company 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 $3,000 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.
8
<PAGE>
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 Company 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 our 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 Company 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. There can be no assurance that the systems of these third
parties will be converted on a timely basis, which could have material adverse
affect on our business, financial condition and results of operations.
The Committee is currently in the process of establishing a contingency
plan to address potential year 2000 problems. Despite careful planing by the
Companyrporation, we recognize there may be circumstances beyond our control
that may prohibit us from operating "as usual" after December 31, 1999.
9
<PAGE>
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
See Exhibit Index.
(b) Reports on Form 8-K
None.
10
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
MSB FINANCIAL, INC.
Registrant
Date: May 17, 1999 \s\Charles B. Cook
------------------------------------
Charles B. Cook, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 17, 1999 \s\Elaine R. Carbary
------------------------------------
Elaine R. Carbary, Chief Financial
Officer (Principal Financial Officer)
11
<PAGE>
MSB FINANCIAL, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3 Registrant's Articles of Incorporation and Bylaws, filed on
February 4, 1999 as exhibits to the Registrant's Registration
Statement on Form S-8 (File No. 333-71837), are incorporated here
in by reference.
4 Registrant's Specimen Stock Certificate, filed on February 4,
1999 as Exhibit 4 to the Registrant's Registration Statement on
Form S-8 (File No. 333-71837), 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 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.
10.3 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 earnings per share (see Note 1 of
the Notes to Consolidated Financial Statements)
27 Financial Data Schedule (electronic filing only)
12
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<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 MARCH 31, 1999 AND IS QUALIFIED IN IT'S ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
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