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, 1999
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)
MARYLAND 38-3203510
- --------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
----
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: $7.3
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, 1999, was $9.8 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, 1999, there were issued and outstanding 1,255,806
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, 1999.
Part III of Form 10-KSB - Proxy Statement for 1999 Annual Meeting of
Shareholders.
Transitional Small Business Disclosure Format: Yes [_]; No [X]
<PAGE>
FORWARD-LOOKING STATEMENTS
MSB Financial, Inc., and its wholly-owned subsidiary, Marshall Savings
Bank, F.S.B., may from time to time make written or oral "forward-looking
statements," including statements contained in its filings with the Securities
and Exchange Commission. These forward-looking statements may be included in
this Annual Report on Form 10-KSB and the exhibits attached to it, in MSB
Financial's reports to shareholders and in other communications, which are made
in good faith by us pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the United States economy in general and the strength
of the local economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and
services and the perceived overall value of these products and services
by users, including the features, pricing and quality compared to
competitors' products and services;
o the willingness of users to substitute our products and services for
products and services of our competitors;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
The list of important factors stated above is not exclusive. We do not
undertake to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of MSB Financial or Marshall
Savings.
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
MSB Financial, Inc. was formed as a Delaware corporation in September
1994 to act as the holding company for Marshall Savings Bank F.S.B. upon the
completion of Marshall Savings' conversion from the mutual to the stock form.
MSB Financial received approval from the Office of Thrift Supervision to acquire
all of the common stock of Marshall Savings to be outstanding upon completion of
the conversion. The conversion was completed on February 6, 1995. On December 8,
1998, the shareholders approved a proposal to reincorporate MSB Financial from
the State of Delaware to the State of Maryland. All references to MSB Financial,
unless otherwise indicated, at or before February 6, 1995 refer to Marshall
Savings. References in this Form 10-KSB to "we", "us", and "our" refer to MSB
Financial and/or Marshall Savings as the context requires. MSB Financial's
common stock is quoted on The Nasdaq SmallCap Market under the symbol "MSBF".
At June 30, 1999, we had $84.5 million of assets and stockholders' equity
of $13.2 million, or 15.61% of total assets.
Marshall Savings is the only operating subsidiary of MSB Financial.
Marshall Savings is a federally chartered stock savings bank headquartered in
Marshall, Michigan. Its deposits are insured up to applicable limits by the FDIC
and are backed by the full faith and credit of the United States.
Our principal business 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, we also originate loans secured by first
mortgages on non-owner-occupied one- to four-family residences, permanent and
construction commercial and multi-family real estate and consumer loans.
We offer a variety of deposit accounts having a wide range of interest
rates and terms. We only solicit deposits in our primary market area and do not
accept brokered deposits.
Our revenues are derived principally from interest on mortgage and other
loans and mortgage banking revenues.
For information relating to our 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 our Annual Report to Shareholders attached hereto as Exhibit 13.
Our executive offices are located at 107 North Park Street, Marshall,
Michigan 49068, and our telephone number at that address is (616) 781-5103.
3
<PAGE>
MARKET AREA
We currently serve the City of Marshall and the surrounding townships of
Marshall, located in Calhoun County in Southern Michigan. We serve these areas
through our 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. We are a community-oriented financial institution offering a
variety of financial services to meet the needs of the community. Historically,
we originated fixed-rate one- to four-family real estate loans. In the early
1980's, we began the origination of adjustable-rate mortgage loans for retention
in our portfolio in order to increase the percentage of loans in our 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, we continue to
originate fixed-rate loans. Our mortgage loans are underwritten utilizing
secondary market guidelines allowing them to be saleable, without recourse,
primarily to Freddie Mac with the servicing retained in order to generate fee
income and attempt to reduce our exposure to changes in interest rates. See
"--Loan Portfolio Composition" and "--One- to Four-Family Residential Real
Estate Lending."
Our primary focus in lending activities is on the origination of
permanent and construction loans secured by first mortgages on owner-occupied
one- to four-family residences. To a lesser extent, we also originate loans
secured by first mortgages on non-owner occupied one- to four-family residences,
permanent and construction commercial real estate loans and consumer loans. At
June 30, 1999, our net loan portfolio, including loans held for sale, totaled
$77.9 million, which constituted 92.21% of our total assets.
Our 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, 1999, the maximum amount which we could loan to any one
borrower and the borrower's related entities was approximately $1.5 million. At
that date, our largest lending relationship to a single borrower or group of
related borrowers totaled $1.4 million, consisting of 15 loans to a single
borrower secured by 14 income producing properties and one residential property.
At June 30, 1999, this loan was performing in accordance with its repayment
terms.
At June 30, 1999, we had only 12 other lending relationships in excess of
$500,000, each of which was performing in accordance with its repayment terms at
such date.
4
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of our loan portfolios in dollar amounts and in
percentages. The loan amounts in the table reflect amounts as of the dates
indicated before deductions for loans held for sale, loans in process, deferred
loan fees and discounts and allowance for loan losses.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family ........................... $54,417 67.93% $50,130 65.65% $47,635 66.43%
Commercial and multi-family ................... 9,657 12.06 10,367 13.58 10,178 14.19
Construction or development ................... 6,108 7.63 5,602 7.33 5,094 7.10
------- ------ ------- ------ ------- ------
Total real estate loans ................... 70,182 87.62 66,099 86.56 62,907 87.72
------- ------ ------- ------ ------- ------
OTHER LOANS:
Consumer Loans:
Home equity lines of credit .................. 3,264 4.07 3,244 4.25 3,636 5.07
Automobile ................................... 1,575 1.97 1,792 2.35 1,671 2.33
Second mortgage .............................. 2,974 3.71 2,777 3.64 1,319 1.84
Other ........................................ 1,265 1.58 1,598 2.09 1,261 1.76
------- ------ ------- ------ ------- ------
Total consumer loans ...................... 9,078 11.33 9,411 12.33 7,887 11.00
Commercial business loans ..................... 842 1.05 852 1.11 920 1.28
------- ------ ------- ------ ------- ------
Total other loans ......................... 9,920 12.38 10,263 13.44 8,807 12.28
------- ------ ------- ------ ------- ------
Total loans receivable, gross ............. 80,102 100.00% 76,362 100.00% 71,714 100.00%
====== ====== ======
LESS:
Loans held for sale ........................... 3,159 295 150
Loans in process .............................. 1,390 2,308 2,202
Deferred loan fees and discounts .............. 287 303 319
Allowance for loan losses ..................... 452 391 303
Allowance for loss on loans held for
sale ....................................... 98 -- --
------- ------- -------
Total loans receivable, net ................... $74,716 $73,065 $68,740
======= ======= =======
</TABLE>
5
<PAGE>
The following table shows the composition of our loan portfolios by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
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 ............................... $20,311 25.36% $17,202 22.53% $14,101 19.66%
Commercial and multi-family ....................... 2,738 3.42 1,550 2.03 1,667 2.33
Construction or development ....................... 3,559 4.44 3,268 4.28 2,301 3.21
------- ------ ------- ------ ------- ------
Total fixed-rate real estate loans ............. 26,608 33.22 22,020 28.84 18,069 25.20
Consumer ........................................... 5,570 6.95 6,135 8.04 4,174 5.82
Commercial business ................................ 842 1.05 796 1.04 889 1.24
------- ------ ------- ------ ------- ------
Total fixed-rate loans ......................... 33,020 41.22 28,951 37.92 23,132 32.26
------- ------ ------- ------ ------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family(1) ............................ 34,106 42.58 32,928 43.12 33,534 46.76
Commercial and multi-family ....................... 6,919 8.64 8,817 11.54 8,511 11.87
Construction or development(2) .................... 2,549 3.18 2,334 3.06 2,793 3.89
------- ------ ------- ------ ------- ------
Total adjustable-rate real
estate loans ................................... 43,574 54.40 44,079 57.72 44,838 62.52
Consumer ........................................... 3,508 4.38 3,276 4.29 3,713 5.18
Commercial business ................................ -- -- 56 .07 31 .04
------- ------ ------- ------ ------- ------
Total adjustable-rate loans .................... 47,082 58.78 47,411 62.08 48,582 67.74
------- ------ ------- ------ ------- ------
Total loans receivable, gross .................. 80,102 100.00% 76,362 100.00% 71,714 100.00%
====== ====== ======
LESS:
Loans held for sale ................................ 3,159 295 150
Loans in process ................................... 1,390 2,308 2,202
Deferred loan fees and discounts ................... 287 303 319
Allowance for loan losses .......................... 452 391 303
Allowance for loss on loans held for
sale ............................................ 98 -- --
------- ------- -------
Total loans receivable, net ..................... $74,716 $73,065 $68,740
======= ======= =======
</TABLE>
- ----------------------
(1) Includes loans which have fixed interest rates for the first seven years
and thereafter adjust on an annual basis. Such amounts totaled $21.5
million in fiscal 1999, $18.1 million in fiscal 1998 and $16.1 million in
fiscal 1997.
(2) Includes loans which, upon conversion to permanent loans, will have fixed
interest rates for the first seven years and thereafter will adjust on an
annual basis. Such amounts totaled $1.5 million in fiscal 1999, $1.7
million in fiscal 1998 and $1.5 million in fiscal 1997.
6
<PAGE>
The following table illustrates the nominal interest rate sensitivity of
our loan portfolios at June 30, 1999. 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>
2000(2) ........................ $ 227 8.51% $ 1,937 9.11% $ 1,122 8.99% $ 107 9.61% $ 3,393 9.05%
2001 to 2004 ................... 995 8.21 134 7.99 2,782 9.03 449 8.88 4,360 8.80
2005 and following ............. 62,852 7.45 4,037 7.66 5,174 9.15 286 8.83 72,349 7.59
</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, 2000 which have
predetermined interest rates is $29.6 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $47.1
million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
Residential loan originations are generated by our marketing efforts, our
present and walk-in customers, and referrals from real estate brokers and
builders. We have focused our lending efforts primarily on the origination of
loans secured by first mortgages on owner-occupied, single-family residences in
our market area.
We currently originate adjustable-rate mortgage loans and fixed-rate
loans for retention in our loan portfolio. During the year ended June 30, 1999,
we originated $12.0 million and $31.1 million of adjustable-rate and fixed-rate
one- to four-family loans, respectively. During the same period, we sold $19.3
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 to Shareholders.
Our loans are underwritten and documented pursuant to the guidelines of
Freddie Mac. Most of the fixed-rate residential loans originated by us have
contractual terms to maturity of ten to 30 years. Our decision to hold or sell
these loans is based on our asset liability management policy and goals and the
market conditions for mortgages at any period in time. Under current policy, we
originate and sell substantially all of our fixed-rate loans with terms of 15
years or more to Freddie Mac with servicing retained. See "- Loan Originations,
Sales and Repayments" herein and "Management's Discussion and Analysis of
7
<PAGE>
Financial Condition and Results of Operations - Asset/Liability Management" in
the Annual Report to Shareholders.
We currently offer one and seven year adjustable-rate mortgage loans with
monthly principal and interest payments typically based on a 30 year
amortization schedule. The one and seven year adjustable-rate mortgage loans
generally have a stated interest rate margin over the yields on one year U.S.
Treasury securities. The interest rate on the one year adjustable-rate mortgage
loans adjusts annually. The seven year adjustable-rate mortgage loans are
fixed-rate loans for the initial stated term and then automatically convert into
one year adjustable-rate mortgage loans. We do not offer discounted initial
interest rates on adjustable-rate mortgage 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
our cost of funds. Our adjustable-rate mortgage loans are generally not
convertible into fixed-rate loans. Our one- to four-family loans are not
assumable, do not contain prepayment penalties and do not permit negative
amortization of principal. Adjustable-rate mortgage 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. We have not experienced greater delinquency rates on our
adjustable-rate mortgage loans compared to our fixed-rate residential loans. See
"- Non-Performing Assets and Classified Assets."
We also originate 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, 1999, non-owner occupied one- to four-family residential loans totaled $8.3
million or 10.4% of our gross loan portfolio.
It is our general policy not to lend more than 97% of the lesser of the
appraised value or purchase price for owner-occupied loans. We generally require
that private mortgage insurance be obtained in an amount sufficient to reduce
our exposure to 80% or below the lesser of the appraised value or purchase price
of the property.
In underwriting one- to four-family residential real estate loans, we
evaluate 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 us are appraised by independent fee appraisers approved and
qualified by the Board of Directors. We generally require 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 us generally contain a "due on sale" clause allowing us to declare
the unpaid principal balance due and payable upon the sale of the security
property.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING
We are engaged in commercial and multi-family real estate lending secured
primarily by small retail establishments, small office buildings, bed and
breakfast inns, churches and other non-residential and residential properties
located in MSB Financial's primary market area.
8
<PAGE>
Generally, the commercial and multi-family real estate loans originated
by us 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. These 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, we have originated some adjustable-rate
mortgage loans with a term of up to 25 years. We analyze 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. We generally require personal guaranties of
the borrowers in addition to the security property as collateral for such loans.
Appraisals on properties securing commercial and multi-family real estate loans
originated by us are performed by independent fee appraisers approved by the
Board of Directors. We originated $3.7 million of commercial and multi-family
real estate loans during fiscal 1999. See "- Loan Originations, Sales and
Repayments."
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. Commercial and multi-family real estate loans
typically involve large balances to single borrowers or groups of related
borrowers. Because payments on loans secured by commercial and multi-family 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
We make 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
our 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 us, 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, 1999, we had $1.9
million of construction loans to borrowers intending to live in the properties
upon completion of construction.
Construction loans on non-residential properties are also structured to
be converted to permanent loans at the end of the typical six month construction
phase. Non-residential construction loans, which are generally underwritten
pursuant to the same guidelines used for originating permanent non-residential
loans, totaled $785,000 million at June 30, 1999.
Construction loans to builders of one- to four-family residences are
generally for a term of six months. At June 30, 1999, we had $1.7 million of
construction loans to builders of one- to four-family residences. These loans
are generally not presold.
9
<PAGE>
Construction loans are obtained principally through continued business
from builders who have previously borrowed from us, as well as referrals from
existing and walk-in customers. The application process includes a submission to
us of 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
We consider consumer lending to be an important component of our business
strategy. Specifically, consumer loans generally have shorter terms to maturity
and/or adjustable rates, thus reducing our 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 to
Shareholders. In addition, we believe that offering consumer loan products helps
expand and create stronger ties to our existing customer base.
We currently offer a variety of secured consumer loans, including home
equity lines of credit, automobile loans, home improvement loans and loans
secured by savings deposits. We also offer unsecured consumer loans. We
currently originate substantially all of our consumer loans in our primary
market area solely on a direct basis. Direct loans are made when we extend
credit directly to the borrower, in contrast to indirect loans which are
obtained when loan contracts are purchased by us or other institution from
retailers who have extended credit to their customers for goods or services.
Our 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 our existing
portfolio of these loans have 15 year terms with a minimum monthly payment
requirement of 2% of the unpaid balance. At June 30, 1999, we had $3.3 million
of home equity lines of credit outstanding, representing 4.07% of our gross loan
portfolio. At that date, we had $3.9 million of unused credit available under
our home equity line of credit program.
The underwriting standards employed by us 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.
10
<PAGE>
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 our 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
Our commercial business lending activities have encompassed loans with a
variety of purposes and security, including loans to finance inventory and
equipment. Generally, our commercial business lending has been done as an
accommodation to existing borrowers and has been limited to borrowers
headquartered, or doing business, in our primary market area.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise, and may fluctuate in value
based on the success of the business.
LOAN ORIGINATIONS, SALES AND REPAYMENTS
We originate loans through our marketing efforts, existing and walk-in
customers and referrals from real estate brokers and builders. While we
originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon the relative customer demand for loans in our market.
Demand is affected by local competition and the interest rate environment. In
the past, our 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, they were
significantly higher in fiscal 1998 and 1999 due to lower interest rates.
Substantially all fixed-rate residential mortgage loans with maturities in
excess of 15 years are sold to Freddie Mac 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 our asset/liability management program.
We sold whole loans without recourse in aggregate amounts of $19.3
million, $16.9 million and $2.9 million during the years ended June 30, 1999,
1998, 1997 respectively. When loans are sold, we typically retain the
responsibility for collecting and remitting loan payments, making certain that
real estate tax payments are made on behalf of borrowers, and otherwise
11
<PAGE>
servicing the loans. We receive a servicing fee for performing these services.
The servicing fee is recognized as income over the life of the loans. We
serviced for others mortgage loans originated and sold by us amounting to $47.3
million at June 30, 1999.
In periods of economic uncertainty, our ability to originate a large
dollar volume of real estate loans may be substantially reduced or restricted,
with a resultant decrease in related fee income and operating earnings.
The following table shows our loan origination, sale and repayment
activities for the periods indicated.
Year Ended June 30,
------------------------------
1999 1998 1997
-------- --------- --------
(In Thousands)
ORIGINATIONS BY TYPE:
Adjustable rate:
Real estate - one- to four-family(1) ........ $ 12,006 $ 11,885 $ 12,048
- commercial and multi-family 1,791 2,137 2,145
Non-real estate - consumer ................. 269 -- 274
-------- -------- --------
Total adjustable-rate ............... 14,066 14,022 14,467
-------- -------- --------
Fixed rate:
Real estate - one- to four-family .......... 31,055 25,011 12,274
- commercial and multi-family 1,881 1,699 1,371
Non-real estate - consumer ................. 4,194 2,237 2,209
- commercial business ... 440 296 440
-------- -------- --------
Total fixed-rate .................... 37,570 29,243 16,294
-------- -------- --------
Total loans originated .............. 51,636 43,265 30,761
-------- -------- --------
PURCHASES:
Consumer ..................................... -- 500 --
-------- -------- --------
Total Purchases .............................. -- 500 --
-------- -------- --------
SALES AND REPAYMENTS:
Real estate - one- to four-family .......... 19,315 16,876 2,894
-------- -------- --------
Total sales ......................... 19,315 16,876 2,894
Principal repayments ....................... 28,581 22,240 12,512
-------- -------- --------
Total reductions .................... 47,896 39,116 15,406
Increase (decrease) in other items, net .... 775 (178) 250
-------- -------- --------
Net increase ........................ $ 4,515 $ 4,471 $ 15,605
======== ======== ========
- ------------
(1) Includes $9.7 million in fiscal 1999, $9.6 million in 1998 and $8.3 million
in 1997 of adjustable-rate mortgage loans which have fixed interest rates
for the first seven year and thereafter adjust annually.
12
<PAGE>
ASSET QUALITY
When a borrower fails to make a required payment on a loan, we attempt 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, we usually send a default letter to the borrower, and if
a response is not received within a reasonable time thereafter, we institute
appropriate action to foreclose on the property. If foreclosed, the property is
sold at public auction and may be purchased by us. 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. Our procedure for
repossession and sale of consumer collateral are subject to various requirements
under Michigan consumer protection laws.
DELINQUENT LOANS. The following table sets forth our loan delinquencies
by type, by amount and by percentage of type at June 30, 1999.
<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 .................... 2 $ 15 .03% 7 $229 .42% 9 $244 .45%
Commercial Real Estate ................. 1 9 .09 1 82 .85 2 91 .94
Consumer ............................... 9 106 1.17 8 79 .87 17 185 2.04
Commercial business .................... 2 54 6.41 -- -- -- 2 54 6.41
--- --- --- --- --- ---
Total ............................. 14 $184 .23 16 $390 .49 30 $574 .72
=== === === === === ===
</TABLE>
13
<PAGE>
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our 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 4 of Notes to Consolidated
Financial Statements in the Annual Report to Shareholders for a discussion on
impaired loans. For all years presented, we have 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,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ........................................ $159 $321 $ 17 $ 18 $ --
Construction ............................................... -- -- -- -- 123
Consumer ................................................... -- 9 -- 129 78
---- ---- ---- ---- ----
Total ................................................... 159 330 17 147 201
---- ---- ---- ---- ----
Accruing loans delinquent more than 90 days:
One- to four-family ........................................ 122 277 239 303 152
Commercial real estate ..................................... 82 -- 185 -- --
Consumer ................................................... 27 6 24 25 31
Commercial business ........................................ -- 15 -- -- --
---- ---- ---- ---- ----
Total ................................................... 231 298 448 328 183
---- ---- ---- ---- ----
Foreclosed assets:
One- to four-family ........................................ -- -- 29 -- --
---- ---- ---- ---- ----
Total ................................................... -- -- 29 -- --
---- ---- ---- ---- ----
Total non-performing assets .................................. $390 $628 $494 $475 $384
==== ==== ==== ==== ====
Total as a percentage of total assets ........................ .46% .79% .66% .79% .72%
==== ==== ==== ==== ====
</TABLE>
For the year ended June 30, 1999, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $11,900. The amounts that were included in interest
income on such loans were $5,400 for the year ended June 30, 1999.
Except as discussed under the captions "Other Loans of Concern" and
"Classified Assets" below, as of June 30, 1999, 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, 1999, there was also an aggregate of
$385,000 in net book value of loans (two loans totaling $194,000 secured by one
- - to four-family estate, one loan totaling $144,000 secured by commercial real
estate and two loans totaling $47,000 secured by commercial business loans) 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
14
<PAGE>
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 our
determination of the adequacy of our allowance for loan losses.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the Office of Thrift Supervision and the FDIC, which may
order the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of our assets at June 30, 1999, we had classified
$58,000 of our assets as substandard, $355,000 as doubtful and none as loss,
representing 3.13% of the stockholders' equity or .49% of assets. We have also
classified $783,000 of our assets as special mention.
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 our loan portfolio and changes in the nature and volume of our 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.
15
<PAGE>
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 allowance will be the result of periodic
loan, property and collateral reviews and thus cannot be predicted in advance.
At June 30, 1999, we had a total allowance for loan losses of $452,000 or
115.90% of non-performing loans. See Notes 1 and 4 of the Notes to Consolidated
Financial Statements in the Annual Report to Shareholders.
The following table sets forth an analysis of the allowance for loan
losses.
Year Ended June 30,
-------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Balance at beginning of period .................... $ 391 $ 303 $ 348
Charge-offs:
Consumer ........................................ 14 14 96
----- ----- -----
14 14 96
----- ----- -----
Recoveries:
Consumer and multi-family ....................... 3 7 3
----- ----- -----
3 7 3
----- ----- -----
Net charge-offs ................................... (11) (7) (93)
Additions charged to operations ................... 72 95 48
----- ----- -----
Balance at end of period .......................... $ 452 $ 391 $ 303
===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period ..... .02% .01 % .15%
===== ===== =====
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
% 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 ......................... $154 67.93 $128 65.65% $101 66.43%
Commercial real estate ...................... 82 12.06 80 13.58 65 14.19
Construction ................................ 52 7.63 43 7.33 32 7.10
Consumer .................................... 77 11.33 72 12.33 50 11.00
Commercial business ......................... 7 1.05 7 1.11 6 1.28
Unallocated ................................. 80 -- 61 -- 49 --
---- ------ ---- ------ ---- ------
Total .................................. $452 100.00% $391 100.00% $303 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
16
<PAGE>
INVESTMENT ACTIVITIES
Marshall Savings must maintain minimum levels of investments that qualify
as liquid assets under Office of Thrift Supervision 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, we have
maintained liquid assets at levels above the minimum requirements imposed by the
Office of Thrift Supervision regulations and above levels believed adequate to
meet the requirements of normal operations, including potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At June 30, 1999, our liquidity ratio,
liquid assets as a percentage of net withdrawable savings deposits and current
borrowings, was 6.34%.
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, our investment policy is to invest funds among various
categories of investments and maturities based upon our asset/liability
management policies, concern for the highest investment quality, liquidity needs
and performance objectives. For the year ended June 30, 1999, we had an average
outstanding balance of $6,300 in securities (excluding Federal Home Loan Bank
stock) with an average yield of 6.76%. At June 30, 1999, MSB Financial's
investment securities consisted of one Freddie Mac participation certificate
totaling $4,866, with a stated maturity date of January 2003.
Our securities portfolio at June 30, 1999 contained neither tax-exempt
securities nor securities of any issuer with an aggregate book value in excess
of 10% of shareholders' equity, excluding those issued by the United States
Government or its agencies.
The following table sets forth the composition of our securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
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 .................................. $--- ---% $ --- ---% $ --- ---%
Mortgage-backed securities .................................. 5 .39 8 .69 11 1.04
------ ------ ------ ------ ------ ------
Subtotal ................................................. 5 .39 8 .69 11 1.04
Federal Home Loan Bank stock ................................ 1,271 99.61 1,158 99.31 1,044 98.96
------ ------ ------ ------ ------ ------
Total securities and Federal Home Loan Bank
stock ................................................ $1,276 100.00% $1,166 100.00% $1,055 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
The composition and maturities of the securities portfolio, excluding
equity securities and Federal Home Loan Bank stock, are indicated in the
following table.
<TABLE>
<CAPTION>
At June 30, 1999
----------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10 Total Investment
1 Year Years Years Years Securities
--------- -------- -------- -------- --------------------
Carrying Carrying Carrying Carrying Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities ........ $ -- $ 5 $ 0 $ -- $ 5 $ 5
---- -- -- ---- -- --
Total........................... $ -- $ 5 $ 0 $ -- $ 5 $ 5
==== === === ==== ==== ===
Weighted average yield............. --% 7.18% 0% --% 7.18% 7.18%
</TABLE>
SOURCES OF FUNDS
GENERAL. Our source of funds are deposits, Federal Home Loan Bank
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. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our 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. We only solicit deposits from our market
area and we do not use brokers to obtain deposits. We rely primarily on
competitive pricing policies, advertising and customer service to attract and
retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts we offer has allowed us to be competitive
in obtaining funds and to respond with flexibility to changes in consumer
demand. As customers have become more interest rate conscious, we have become
more susceptible to short-term fluctuations in deposit flows. We endeavor to
manage the pricing of our deposits in keeping with our asset/liability
management, liquidity and profitability objectives. Based on our experience, we
believe that our savings and checking accounts are relatively stable sources of
deposits. However, the ability 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.
18
<PAGE>
The following table sets forth our deposit flows during the periods
indicated.
Year Ended June 30,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
Opening balance ............. $ 42,815 $ 41,707 $ 40,452
Deposits .................... 215,504 202,301 193,459
Withdrawals ................. (214,123) (202,776) (193,748)
Interest credited ........... 1,641 1,583 1,544
--------- --------- ---------
Ending balance .............. $ 45,837 $ 42,815 $ 41,707
========= ========= =========
Net increase ................ $ 3,022 $ 1,108 $ 1,255
========= ========= =========
Percent increase ............ 7.06% 2.66% 3.10%
========= ========= =========
The following table sets forth the dollar amount of deposits in the
various types of deposit programs we offered for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
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 ......................... $ 1,134 2.47% $ 841 1.96% $ 598 1.43%
Checking accounts (1.75%) ............................ 10,019 21.86 8,560 20.00 7,474 17.92
Money market deposit accounts (2.75%) ................ 3,345 7.30 3,985 9.31 5,033 12.07
Passbook and statement savings (2.50%) ............... 9,063 19.77 9,135 21.34 8,989 21.55
------- ------ ------- ------ ------- ------
Total Non-Certificates ............................... 23,561 51.40 22,521 52.61 22,094 52.97
------- ------ ------- ------ ------- ------
CERTIFICATES:
2.00 - 4.00% ........................................ 428 .93 756 1.76 8,540 20.48
4.01 - 6.00% ........................................ 20,053 43.75 18,518 43.25 10,337 24.79
6.01 - 8.00% ........................................ 1,795 3.92 1,020 2.38 736 1.76
------- ------ ------- ------ ------- ------
Total Certificates ................................... 22,276 48.60 20,294 47.39 19,613 47.03
------- ------ ------- ------ ------- ------
Total Deposits ....................................... $45,837 100.00% $42,815 100.00% $41,707 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- ------------------
(1) Rates shown are at June 30, 1999.
19
<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of June 30, 1999.
<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, 1999 ........................ $ 428 $ 4,854 $ -- $ 5,282 23.71%
December 31, 1999 ......................... -- 4,402 -- 4,402 19.76
March 31, 2000 ............................ -- 2,054 138 2,192 9.84
June 30, 2000 ............................. -- 2,145 246 2,391 10.73
September 30, 2000 ........................ -- 659 -- 659 2.96
December 31, 2000 ......................... -- 1,000 2 1,002 4.50
March 31, 2001 ............................ -- 887 -- 887 3.98
June 30, 2001 ............................. -- 688 -- 688 3.09
Thereafter ................................ -- 3,364 1,409 4,773 21.43
------- ------- ------- ------- ------
Total .................................. $ 428 $20,053 $ 1,795 $22,276 100.00%
======= ======= ======= ======= ======
Percent of total ....................... 1.92% 90.02% 8.06% 100.00%
======= ======= ======= =======
</TABLE>
The following table indicates the amount of our certificates of deposit
by time remaining until maturity as of June 30, 1999.
<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> <C>
Certificates of deposit less than $100,000 .............. $ 4,838 $ 4,167 $ 4,283 $ 7,392 $20,680
Certificates of deposit of $100,000 or more ............. 444 235 300 617 1,596
------- ------- ------- ------- -------
Total certificates of deposit ........................... $ 5,282 $ 4,402 $ 4,583 $ 8,009 $22,276
======= ======= ======= ======= =======
</TABLE>
BORROWINGS. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, can be invested
at a positive interest rate spread or when we desire additional capacity to fund
loan demand.
Our borrowings historically have consisted of advances from the Federal
Home Loan Bank of Indianapolis. 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, 1999, we had Federal Home Loan Bank advances totaling
$23.9 million. See Note 8 of the Notes to Consolidated Financial Statements in
the Annual Report to Shareholders for information on maturity dates and interest
rates relating to our Federal Home Loan Bank advances.
20
<PAGE>
The following table sets forth the maximum month-end balance and average
balance of our borrowings for the periods indicated.
Year Ended June 30,
--------------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
MAXIMUM BALANCE:
Federal Home Loan Bank advances.......... $25,163 $23,163 $20,874
AVERAGE BALANCE:
Federal Home Loan Bank advances.......... $23,914 $21,450 $12,871
The following table sets forth certain information as to our borrowings
at the dates indicated.
June 30,
---------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
Federal Home Loan Bank Advances........... $23,864 $21,972 $19,374
Weighted average interest rate............ 6.13% 6.24% 6.19%
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings bank, Marshall Savings is permitted by
Office of Thrift Supervision regulations to invest up to 2% of its assets, or
$1.7 million at June 30, 1999, in the stock of, or unsecured loans to, service
corporation subsidiaries. Marshall Savings may invest an additional 1% of its
assets in service corporations where such additional funds are used for
inner-city or community development purposes. Marshall Savings formed Marshall
Services, Inc., a Michigan corporation in August, 1998, for the purpose of
acquiring an equity ownership in a title insurance company.
REGULATION
GENERAL. Marshall Savings 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, Marshall Savings is subject to
broad federal regulation and oversight extending to all its operations. Marshall
Savings is a member of the Federal Home Loan Bank of Indianapolis and is subject
to certain limited regulation by the Board of Governors of the Federal Reserve
System. As the savings and loan holding company of Marshall Savings, MSB
Financial also is subject to federal regulation and oversight.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The Office of Thrift
Supervision has extensive authority over the operations of savings associations.
As part of this authority, we are required to file periodic reports with the
Office of Thrift Supervision and is subject to periodic examinations by the
Office of Thrift Supervision and the FDIC. The last regular Office of Thrift
Supervision and FDIC examinations of Marshall Savings were as of April 1999 and
July 31, 1990, respectively. When these examinations are conducted by the Office
21
<PAGE>
of Thrift Supervision and the FDIC, the examiners may require Marshall Savings
to provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the Office of Thrift
Supervision.
The Office of Thrift Supervision also has extensive enforcement authority
over all savings institutions and their holding companies, including Marshall
Savings and MSB Financial. 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.
Our 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, 1999,
our lending limit under this restriction was $1.5 million.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. 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 Savings Association Insurance
Fund or the Banking Insurance Fund. The FDIC also has the authority to initiate
enforcement actions against institutions, after giving the Office of Thrift
Supervision an opportunity to take action, and may terminate deposit insurance
if it determines that an institution has engaged in unsafe or unsound practices
or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually. At June 30, 1999, Marshall
Savings was classified as a well-capitalized institution.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund
and Savings Association Insurance Fund insured institutions ranged from 0 to 27
basis points. However, Savings Association Insurance Fund insured institutions
and Bank Insurance Fund insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. This amount is currently equal to about six basis
points for each $100 in domestic deposits for Savings Association Insurance Fund
members while Bank Insurance Fund insured institutions pay an assessment equal
to about 1.50 basis points for each $100 in domestic deposits. The savings
institutions assessment is expected to be reduced to about two basis points no
later than January 1, 2000, when Bank Insurance Fund insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2015.
22
<PAGE>
REGULATORY CAPITAL REQUIREMENTS. All federally insured institutions are
required to maintain minimum capital standards, including a tangible capital, a
leverage ratio (or core capital) and a risk- based capital. See Note 13 of the
Notes to Consolidated Financial Statements in the Annual Report to Shareholders.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At June 30, 1999, Marshall
Savings did not have any intangible assets.
The capital standards also require core capital equal to at least 3% to
4% of adjusted total assets, depending on an institution's supervisory rating.
Core capital generally consists of tangible capital. At June 30, 1999, we had
core capital equal to $10.1 million, or 12.02% of adjusted total assets, which
is $7.6 million above the minimum leverage ratio requirement of 3% as in effect
on that date.
The Office of Thrift Supervision risk-based requirement requires savings
associations to have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for prudently
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae or
Freddie Mac.
On June 30, 1999, we had total risk-based capital of approximately $10.6
million, including $10.1 million in core capital and $450,000 in qualifying
supplementary capital, and risk-weighted assets of $51.5 million, or total
capital of 20.48% of risk-weighted assets. This amount was $6.4 million above
the 8% requirement in effect on that date.
The Office of Thrift Supervision is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. The Office of Thrift Supervision 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 Office of
Thrift Supervision 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 Office of Thrift
Supervision 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 Office of Thrift Supervision is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
associations.
23
<PAGE>
The Office of Thrift Supervision 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 Office of Thrift Supervision or the FDIC of any of
these measures on MSB Financial or Marshall Savings may have a substantial
adverse effect on our operations and profitability.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. Office of
Thrift Supervision 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. Office of Thrift Supervision
regulations also prohibit a savings association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
A savings association may make a capital distribution without notice to
the Office of Thrift Supervision, unless it is a subsidiary of a holding
company, provided that it has a regulatory rating in the two top examination
categories, is not of supervisory concern, and would remain well- capitalized,
as defined in the Office of Thrift Supervision prompt corrective action
regulations, following the proposed distribution, and the distribution does not
exceed its net income for the calendar year-to-date plus retained net income for
the previous two calendar years (less any dividends previously paid). Savings
associations that would remain adequately capitalized following the proposed
distribution and meet the other noted requirements must notify the Office of
Thrift Supervision 30 days prior to declaring a capital distribution. All other
institutions or those seeking to exceed the noted amounts must file an
application before making the distribution.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. This test requires a savings institution 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 institutions may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, these assets primarily consist of residential housing related loans
and investments. At June 30, 1999, Marshall Savings met the test and has always
met the test since its effectiveness.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender and remains a qualified thrift lender. If an institution
does not requalify and converts to a national bank charter, it must remain
Savings Association Insurance Fund-insured until the FDIC permits it to transfer
to the Banking Insurance Fund. If an institution 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
institution is immediately ineligible to receive any new Federal Home Loan Bank
borrowings and is subject to national bank limits for payment of dividends. If
institutions has not requalified or converted to a national bank within three
years after the failure, it must sell all investments and stop
24
<PAGE>
all activities not permissible for a national bank. In addition, it must repay
promptly any outstanding Federal Home Loan Bank borrowings, which may result in
prepayment penalties. If any institution that fails the qualified thrift lender
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, 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 Community
Reinvestment Act requires the Office of Thrift Supervision, in connection with
the examination of Marshall Savings, to assess the institution's record of
meeting the credit needs of its community and to take this record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by Marshall Savings. An unsatisfactory rating may be used as the
basis for the denial of an application by the Office of Thrift Supervision.
Marshall Savings was examined for Community Reinvestment Act compliance in March
1999 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 Marshall
Savings include MSB Financial and any company which is under common control with
Marshall Savings. 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 Office of Thrift Supervision 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 Office of
Thrift Supervision. 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. MSB Financial is a unitary savings and loan
holding company subject to regulatory oversight by the Office of Thrift
Supervision. MSB Financial is required to register and file reports with the
Office of Thrift Supervision and is subject to regulation and examination by the
Office of Thrift Supervision. In addition, the Office of Thrift Supervision has
enforcement authority over MSB Financial and its non-savings association
subsidiaries which also permits the Office of Thrift Supervision to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
25
<PAGE>
As a unitary savings and loan holding company, MSB Financial generally is
not subject to activity restrictions. If MSB Financial acquires control of
another savings association as a separate subsidiary, it would become a multiple
savings and loan holding company and the activities of MSB Financial and any of
its subsidiaries (other than Marshall Savings or any other Savings Association
Insurance Fund insured savings association) would generally become subject to
additional restrictions. If we fail the qualified thrift lender test, within one
year MSB Financial must register as, and will become subject to, the significant
activity restrictions applicable to bank holding companies.
FEDERAL SECURITIES LAW. The stock of MSB Financial is registered with the
SEC under the Securities Exchange Act of 1934, as amended. MSB Financial is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Securities Exchange Act of 1934.
MSB Financial stock held by persons who are affiliates (generally
executive officers, directors and 10% shareholders) of MSB Financial may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If MSB Financial meets specified current public information
requirements, each affiliate of MSB Financial 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, 1999, Marshall Savings 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 Office of Thrift Supervision.
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
Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve
Bank.
FEDERAL HOME LOAN BANK SYSTEM. Marshall Savings is a member of the
Federal Home Loan Bank of Indianapolis, which is one of 12 regional Federal Home
Loan Banks that administer the home financing credit function of savings
associations. Each Federal Home Loan Bank serves as a reserve or central bank
for its members within its assigned region. It makes loans to members (i.e.,
advances) in accordance with policies and procedures, established by the board
of directors of the Federal Home Loan Bank, which are subject to the oversight
of the Federal Housing Finance Board. All advances from the Federal Home Loan
Bank are required to be fully secured by sufficient collateral as determined by
the Federal Home Loan Bank. In addition, all long-term advances must be used for
residential home financing.
As a member, Marshall Savings is required to purchase and maintain a
minimum amount of stock in the Federal Home Loan Bank of Indianapolis. At June
30, 1999, Marshall Savings had $1.3 million in Federal Home Loan Bank stock,
which was in compliance with this requirement. In past years, Marshall Savings
has received substantial dividends on its Federal Home Loan Bank stock. Over the
past five fiscal years these dividends have averaged 7.89% and were 8.03% for
fiscal 1999.
26
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Savings institutions that met certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended, had been permitted to establish
reserves for bad debts and to make annual additions 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 is
now computed under the experience method.
In addition to the regular income tax, corporations, including savings
institutions 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.
To the extent earnings appropriated to a savings institutions 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 institution's supplemental reserves
for losses on loans, 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,
1999, Marshall Savings excess for tax purposes totaled approximately $4.7
million.
We file consolidated federal income tax returns on a fiscal year basis
using the accrual method of accounting. Savings institutions 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.
Our 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 our opinion, any examination of still
open returns would not result in a deficiency which could have a material
adverse effect on our financial condition.
MICHIGAN TAXATION. In prior years, the State of Michigan imposed 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 was eliminated after the fiscal year ending June 30,
1998. The State of Michigan imposes a "Single Business Tax." The Single Business
Tax is a value-added type of tax and is for the privilege of doing business in
the State of Michigan. The major components of the Single Business Tax base are
compensation, depreciation and federal taxable income, as increased by net
operating loss carry forwards, if any, utilized in arriving at federal taxable
income, and decreased by the cost of acquisition of tangible assets during the
year. The tax rate is 2.30% of the Michigan adjusted tax base. Legislation
passed in 1999 eliminates the single business tax over a 23 year period. The
elimination is accomplished by an annual rate reduction of 0.1 percentage point
27
<PAGE>
beginning January 1, 1999 and on each January 1 after 1999. Barring certain
conditions, the SBT should be fully phased out as of January 1, 2021. The tax
returns of Marshall Savings are open to audit by the Michigan taxation
authorities from July 1, 1994. No returns are being audited by the Michigan
taxation authority at the current time.
MARYLAND TAXATION. As a Maryland holding company, the holding company is
required to file an annual Maryland corporate income tax return. The tax rate is
7% of Maryland modified income. Because the holding company conducts all of its
business in Michigan, it is anticipated that the holding company's Maryland
modified income will be zero, therefore, resulting in no Maryland income tax.
COMPETITION
We face 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 our primary
market area. Other savings institutions, commercial banks, credit unions and
finance companies provide vigorous competition in consumer lending.
We attract all of our deposits through our 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. We compete for these deposits by offering
a variety of deposit accounts at competitive rates, convenient business hours,
and convenient locations.
We primarily serve Marshall, Michigan and its surrounding communities.
There are three commercial banks, one savings institution other than Marshall
Savings, and two credit unions which compete for deposits and loans in our
primary market area.
We estimate our share of the monthly mortgage loan market in Calhoun
County, based on the dollar volume of such loans, ranged between approximately
4.53% to 17.05% during fiscal 1999, and averaged 10.08% for the period, and was
approximately 17.05% during June 1999.
EMPLOYEES
At June 30, 1999, we had a total of 21 employees, all but two of whom
were full-time employees. Our employees are not represented by any collective
bargaining group and we consider our employee relations to be good.
28
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
We conduct our business through our two offices located in Marshall,
Michigan, both of which we own. We believe that our current facilities are
adequate to meet our present and foreseeable needs. The total net book value of
our premises and equipment (including land, building and furniture, fixtures and
equipment) at June 30, 1999 was $684,000. See Note 6 of Notes to Consolidated
Financial Statements in the Annual Report to Shareholders.
We maintain 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 us at June 30, 1999 was $192,000.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. Presently, we are not
involved in any legal proceedings that are expected to have a material adverse
impact on our consolidated financial position.
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, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 54 of the 1999 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 1999 Annual Report to Shareholders attached hereto
as Exhibit 13 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in MSB Financial's 1999 Annual Report
to Shareholders 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, 1999 and 1998 17
Consolidated Statements of Income for the Years
Ended June 30, 1999, 1998 and 1997 18
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended June 30, 1999, 1998 and 1997 19 - 21
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997 22 - 23
Notes to Consolidated Financial Statements 24 - 53
29
<PAGE>
With the exception of the aforementioned information, MSB Financial's
Annual Report to Shareholders for the year ended June 30, 1999, 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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
Information concerning the Directors of MSB Financial is incorporated
herein by reference from the definitive proxy statement for the annual meeting
of shareholders to be held in October 1999, a copy of which will be filed not
later than 120 days after the close of fiscal year.
EXECUTIVE OFFICERS
Information concerning the Executive Officers of MSB Financial is
incorporated herein by reference from the definitive proxy statement for the
annual meeting of shareholders to be held in October 1999, a copy of which will
be filed not later than 120 days after the close of fiscal year.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own more than 10% of a
registered class of MSB Financial 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 MSB Financial. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish us with copies
of all Section 16(a) forms they file.
30
<PAGE>
To our knowledge, based solely on a review of the copies of such reports
furnished to the us 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, 1999.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the definitive proxy statement for the annual meeting of
shareholders to be held in October 1999, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive proxy
statement for the annual meeting of shareholders to be held in October 1999, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive proxy statement for the
annual meeting of shareholders to be held in October 1999, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Index to Exhibits
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three-month period ended
June 30, 1999.
31
<PAGE>
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 28, 1999 By: /s/ Charles B. Cook
---------------------------------
Charles B. Cook, President, Chief
Executive Officer, Chief
Financial Officer and Director
(DULY AUTHORIZED REPRESENTATIVE)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/ Charles B. Cook Date: September 28, 1999
- -----------------------------------------------
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 28, 1999
- -----------------------------------------------
Aart VanElst, Chairman of the Board
/s/ John W. Yakimow Date: September 28, 1999
- -----------------------------------------------
John W. Yakimow, Director
/s/ Martin L. Mitchell Date: September 28, 1999
- -----------------------------------------------
Martin L. Mitchell, Director
/s/ Richard L. Dobbins Date: September 28, 1999
- -----------------------------------------------
Richard L Dobbins, Director
/s/ J. Thomas Schaeffer Date: September 28, 1999
- -----------------------------------------------
J. Thomas Schaeffer, Director
/s/ Karl F. Loomis Date: September 28, 1999
- -----------------------------------------------
Karl F. Loomis, Director
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document
- -------- --------------------------------------------------------------
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 Marshall Savings 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.
10.5 Registrant's 1997 Stock Option and Incentive Plan, filed as
Appendix A to the Registrants Schedule 14A filed on September
26, 1997 (File No. 0-24898).
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 Shareholders attached hereto
as Exhibit 13).
13 Annual Report to Securityholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
MSB FINANCIAL, INC.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Section I
President's Message................................................... 1
Selected Consolidated Financial Information........................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 4
Section II
Consolidated Financial Statements..................................... 15
Section III
Shareholder Information............................................... 54
Corporate Information................................................. 55
<PAGE>
September 24, 1999
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, 1999, our fourth full year as a publicly
held corporation.
Net income for the year was $1.0 million, or diluted earnings per share of $0.82
per share, compared to $1.2 million, or $0.94 per share for fiscal 1998, a
decrease of 15.2%, or 12.8% per share. Earnings were impacted by non-recurring
charges for professional fees in connection with our recent reincorporation into
a Maryland corporation and for year 2000 compliance and testing. In addition,
due to the recent increase in interest rates, a $98,000 charge was taken against
earnings to record loans held for sale at the lower of cost or market.
Net interest margin was negatively affected by increasing interest rates;
however, it remains at a healthy 4.39%, among the highest in our industry.
Total assets grew 5.6% to $84.5 million. Net loans totaled $77.9 million as of
June 30, 1999, compared to $73.4 million the previous year, an increase of 6.2%.
With a commitment to manage interest rate risk, we deemed it prudent to sell
fixed rate mortgage loans in the secondary market, which reduced net loan
growth. During the past fiscal year $19.3 million in mortgage loans were sold
with servicing retained. The resulting fee income and gain on sale of loans
contributed significantly to our net income. Our servicing portfolio now totals
$47.3 million.
Total mortgage loan originations during the last fiscal year totaled $51.6
million as we maintained our position as the Marshall area's leading mortgage
lender.
We are pleased to report that total deposits reached $45.8 million, an increase
of 7.1% from the previous year.
We continue an active stock repurchase program, with a total of 374,776 shares
repurchased at an average cost of $10.17 per share, or 97.4% 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,
/s/ Charles B. Cook
Charles B. Cook
President and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
June 30,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ---------------------------------
Total assets ........................ $84,456 $79,967 $74,698 $60,130 $53,409
Loans receivable, net ............... 74,716 73,065 68,740 52,328 41,894
Loans held for sale, net ............ 3,159 295 150 957 2,017
Investment securities ............... 5 8 11 3,135 2,620
FHLB stock .......................... 1,271 1,158 1,044 317 310
Deposits ............................ 45,837 42,815 41,707 40,452 39,446
FHLB advances ....................... 23,864 21,972 19,374 6,000 --
Shareholders' equity ................ 13,181 13,313 12,690 12,594 13,260
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- ------------------------
Total interest income ........................................ $6,634 $6,526 $5,539 $4,671 $3,910
Total interest expense ....................................... 3,145 2,947 2,294 1,630 1,488
------ ------ ------ ------ ------
Net interest income ....................................... 3,489 3,579 3,245 3,041 2,422
Provision for loan losses .................................... 72 95 48 24 73
------ ------ ------ ------ ------
Net interest income after provision for loan losses ....... 3,417 3,484 3,197 3,017 2,349
Loan servicing fees and service charges on deposits .......... 203 231 210 192 185
Gain on sale of loans ........................................ 291 259 47 31 27
Other noninterest income ..................................... 216 177 64 107 64
------ ------ ------ ------ ------
Total noninterest income ..................................... 710 667 321 330 276
Total noninterest expense .................................... 2,519 2,250 2,244 1,823 1,360
------ ------ ------ ------ ------
Income before federal income taxes ........................ 1,608 1,901 1,274 1,524 1,265
Federal income tax expense ................................... 571 678 458 518 432
------ ------ ------ ------ ------
Net income ................................................ $1,037 $1,223 $ 816 $1,006 $ 833
====== ====== ====== ====== ======
Basic earnings per common share(1) ........................... $ .85 $ .98 $ .63 $ .71 $ .32
====== ====== ====== ====== ======
Diluted earnings per common share(1) ......................... $ .82 $ .94 $ .63 $ .71 $ .32
====== ====== ====== ====== ======
</TABLE>
- -----------------
(1) Restated for two-for-one stock split declared July 8, 1997 and the 10%
stock dividend declared July 14, 1998.
2.
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<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) .............................................. 1.24% 1.57% 1.21% 1.82% 1.66%
Return on shareholders' equity (ratio of net income to
average equity) ...................................... 7.75% 9.39% 6.46% 7.67% 9.59%
Interest rate spread information:
Average during period ................................ 3.78% 4.15% 4.31% 4.83% 4.47%
Net interest margin(1) ............................... 4.39% 4.81% 5.02% 5.72% 5.03%
Ratio of operating expense to average total assets ..... 3.01% 2.89% 3.32% 3.30% 2.71%
Ratio of average interest-earning assets to average
interest-bearing liabilities ......................... 115.40% 116.73% 119.88% 128.72% 118.26%
Quality Ratios:
Non-performing loans to total gross loans .............. .49% .82% .65% .84% .85%
Non-performing assets to total assets at end of period . .46% .79% .66% .79% .72%
Allowance for loan losses to non-performing loans ...... 115.90% 62.28% 65.14% 73.32% 85.65%
Allowance for loan losses to loans receivable, net ..... .60% .53% .44% .67% .79%
Capital Ratios:
Shareholders' equity to total assets at end of period .. 15.61% 16.65% 16.99% 20.94% 24.83%
Average shareholders' equity to average assets ......... 16.02% 16.71% 18.70% 23.71% 17.29%
Dividend payout ratio(2) ............................... 37.80% 27.66% 36.51% 26.76% --
Cash dividends declared per share(3) ................... $ .31 $ .26 $ .23 $ .19 --
Other Data:
Number of full-service offices ......................... 2 2 2 2 2
</TABLE>
- --------------------
(1) Net interest income divided by average interest-earning assets.
(2) Dividends declared per share divided by 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.
3.
<PAGE>
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 Bank converted
from a mutual to a stock savings bank, and the Corporation acquired 100% of the
stock of 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 $1,037,000, $1,223,000, and
$816,000 for the years ended June 30, 1999, 1998, and 1997 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 67.9% of the Corporation's gross loan portfolio at June 30, 1999,
65.6% at June 30, 1998, and 66.4% at June 30, 1997. The Corporation originated
total loans of $51.6 million, $43.8 million, and $30.8 million during fiscal
1999, 1998, and 1997, respectively, and sold $19.3 million, $16.9 million, and
$2.9 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 $4.5 million, or 5.6%, from June 30, 1998 to
June 30, 1999. Net loans, including loans held for sale, increased from $73.4
million at June 30, 1998 to $77.9 million at June 30, 1999, an increase of 6.2%,
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 $1.9 million increase in Federal Home Loan Bank ("FHLB")
advances and a $3.0 million increase in deposit accounts.
4.
<PAGE>
Total liabilities increased $4.6 million to $71.3 million from June 30,
1998 to June 30, 1999. In addition to the increase in the FHLB advances and
deposits discussed above, were increases in advance payments by borrowers for
taxes and insurance of $84,000, or 16.0%, and accrued interest payable of
$11,000, or 12.1%. Offsetting the above increases in liabilities was a decrease
in accrued expenses and other liabilities of $388,000, or 31.1%. This decrease
in accrued expenses and other liabilities is primarily attributed to a decrease
of $553,000 in the daily funds due the Bank's official check services provider.
This decrease represents a decrease in the daily activity for official checks on
June 30, 1999 compared to June 30, 1998.
Shareholder's equity decreased $131,000, or 1.0%, from June 30, 1998 to
June 30, 1999. The repurchase of the Corporation's common stock and dividends
declared on common stock, partially offset by net income, resulted in this
decrease. During the year ended June 30, 1999, the Corporation repurchased
78,335 shares of its common stock at a total cost of $1.0 million, or $13.33 per
share, as compared to 38,610 shares during the year ended June 30, 1998, at a
total cost of $566,450, or $14.67 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 65,657 shares of its common stock and as of June 30, 1999 had repurchased
48,585 shares under this program. As of June 30, 1999, a total of 374,776 shares
of the Corporation's common stock had been repurchased at a cost of $3.8
million, or $10.17 per share. Shareholder's equity to total assets remains
strong at 15.6% at June 30, 1999, compared to 16.6% and 17.0% at June 30, 1998
and 1997, 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, gains or losses on the sales of loans 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, 1999, 1998 and 1997
was $1.0 million, $1.2 million and $816,000, 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 1.24% for fiscal 1999,
compared to 1.57% for fiscal 1998 and 1.21% (1.47% without the SAIF assessment)
for fiscal 1997. The Corporation's return on average shareholder's equity was
7.75% for fiscal 1999, compared to 9.39% for fiscal 1998 and 6.46% (7.87%
without the SAIF assessment) for fiscal 1997. Average shareholders' equity to
average assets was 16.02%, 16.71% and 18.70%, and the Corporation's dividend
payout ratio was 37.80%, 27.66% and 36.51% for the years ended June 30, 1999,
1998 and 1997, respectively.
NET INTEREST INCOME. Net interest income before provision for loan
losses for the years ended June 30, 1999, 1998 and 1997 was $3.5 million, $3.6
million, and $3.2 million, respectively. The changes were primarily due to an
increase in the volume of loans receivable, offset by the increase in volume of
FHLB advances used to fund these loans. Also, the yield earned on loans
decreased from 8.85% in fiscal 1998 to 8.43% in fiscal 1999 due to increased
refiancing activity and the renewing of adjustable mortgages at lower rates
during fiscal 1999 period.
5.
<PAGE>
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>
At Year Ended June, 30,
June 30, -------------------------------------------------------------------------------------
1999 1999 1998 1997
-------- ---------------------------- --------------------------- ---------------------------
Average Interest Average Interest Average Interest
Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
rate Balance Paid rate Balance Paid Rate Balance Paid Rate
------ ----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1).................. 7.79% $76,187 $6,423 8.43% $71,255 $6,303 8.85% $61,718 $5,369 8.70%
Interest-bearing deposits............ 4.29 1,991 112 5.63 1,982 133 6.71 1,573 85 5.40
Securities........................... 7.18 6 -- -- 10 1 10.00 643 34 5.29
FHLB stock........................... 8.00 1,233 99 8.03 1,103 89 8.07 667 51 7.65
------ ----- ------ ----- ------ -----
Total interest-earning assets(1).... 79,417 6,634 8.35 74,350 6,526 8.78 64,601 5,539 8.57
----- ----- -----
Other assets......................... 4,184 3,569 2,967
------ ------ ------
Total assets........................ $83,601 $77,919 $67,568
======= ======= =======
Interest-Bearing Liabilities:
Savings deposits..................... 2.49 $9,680 235 2.43 $ 9,185 223 2.43 $ 8,644 213 2.46
Checking and money market deposits... 1.85 13,460 262 1.95 12,781 269 2.10 12,383 292 2.36
Certificate accounts................. 5.10 21,546 1,138 5.28 20,133 1,090 5.41 19,989 1,035 5.18
FHLB advances and other borrowings... 6.13 24,130 1,510 6.26 21,596 1,365 6.32 12,871 754 5.86
------ ----- ------ ----- ------ ---
Total interest-bearing liabilities.. 68,816 3,145 4.57 63,695 2,947 4.63 53,887 2,294 4.26
----- ----- -----
Other liabilities.................... 1,396 1,205 1,043
----- ----- -----
Total liabilities................... 70,212 64,900 54,930
Shareholders' equity................. 13,389 13,019 12,638
------ ------ ------
Total liabilities and shareholders
equity.......................... $83,601 $77,919 $67,568
======= ======= =======
Net interest income................... $3,489 $3,579 $3,245
====== ====== ======
Net interest rate spread.............. 3.78% 4.15% 4.31%
==== ==== ====
Net earning assets.................... $10,610 $10,655 $10,714
======= ======= =======
Net yield on average interest-earning
assets............................... 4.39% 4.81% 5.02%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities. 1.15x 1.17x 1.20x
==== ==== ====
</TABLE>
- --------------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
6.
<PAGE>
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 those 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,
---------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------------- -----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------ Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable ............................... $ 423 $(303) $ 120 $ 842 $ 92 $ 934
Interest-bearing deposits ...................... 1 (22) (21) 25 23 48
Securities ..................................... -- (1) (1) (49) 16 (33)
FHLB stock ..................................... 10 -- 10 35 3 38
----- ----- ----- ----- ----- -----
Total interest-earning assets ................ $ 434 $(326) 108 $ 853 $ 134 987
===== ===== ===== ===== ===== =====
Interest-Bearing Liabilities:
Savings deposits ............................... $ 12 $ -- 12 $ 13 $ (3) 10
Checking and money market deposits ............. 14 (21) (7) 9 (32) (23)
Certificate accounts ........................... 75 (27) 48 8 47 55
FHLB advances and other borrowings ............. 159 (14) 145 547 64 611
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities ........... $ 260 $ (62) 198 $ 577 $ 76 653
===== ===== ===== ===== ===== =====
Net interest income............................. $ (90) $334
===== ====
</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 decreased by $23,000 for the year ended June
30, 1999 from the year ended June 30, 1998, due to management's continuing
reassessment of losses inherent in the loan portfolio. At June 30, 1999, the
Corporation's allowance for loan losses totaled $452,000, or 0.60% of net loans
receivable and 115.90% of total non-performing loans. The Corporation's
provision for loan losses was $72,000 in fiscal 1999 compared to $95,000 in
fiscal 1998 and $48,000 in fiscal 1997.
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
7.
<PAGE>
conditions, amount and composition of the loan portfolio, estimated fair value
of underlying collateral, 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, 1999, the Corporation's non-performing assets,
consisting of non-accrual loans and accruing loans 90 days or more delinquent,
totaled $390,000 or 0.46% of total assets compared to $628,000 or 0.79% of total
assets as of June 30, 1998, a decrease of $238,000. Loans more than 90 days past
due and other loans of concern are placed on non-accrual status, unless
management determines that the loans are well-collateralized and in the process
of collection. The ratio of non-performing loans to total loans decreased from
0.82% at June 30, 1998 to 0.49% at June 30, 1999. 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 and June 30, 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 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 not 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, 1999, was $710,000, compared to $667,000 in fiscal 1998 and $321,000 in
fiscal 1997. This represents an increase of $43,000 in fiscal 1999 compared to
fiscal 1998 and an increase of $389,000 compared to fiscal 1997. 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 1999 as compared to fiscal 1998 and
fiscal 1997, were increases in net gains on sales of loans held for sale, due to
increased loan sales, of $33,000 and $244,000, respectively. Included in these
increases was income associated with the recognition of mortgage servicing
rights retained at the time of a mortgage loan sale. Gains from establishment of
mortgage servicing rights totaled $192,000 for fiscal 1999, $168,000 for fiscal
1998 and $29,000 for fiscal 1997. In fiscal 1999, 1998 and 1997, respectively,
loan sales totaled $19.3 million, $16.9 million and $2.9 million. Another reason
for the lower level of noninterest income for fiscal 1997 as compared to fiscal
1999 and fiscal 1998 were net realized losses associated with the sale of
securities available for sale of $48,000 in fiscal 1997. Also, during fiscal
1999 and fiscal 1998 gains on the sale of real estate owned totaled $27,000 and
$14,000, respectively.
NONINTEREST EXPENSE. Noninterest expense totaled $2.5 million in fiscal
1999, compared to $2.3 million in fiscal 1998 and $2.2 million in fiscal 1997.
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 $8,000 from
fiscal 1998 to fiscal 1999, representing an increase of 0.8%, and increased
$151,000 from fiscal 1997 to fiscal 1998, representing an increase of 17.4%. 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. For additional information relating to our stock-based compensation
plans see Note 11 of Notes to Consolidated Financial Statements contained in
this annual report. Other increases in noninterest expense include an increase
in professional fees of $53,000 during fiscal 1999, as compared to an increase
of $2,000 during fiscal 1998. The increase in professional fees during the 1999
period was a result of the Corporation's recent reincorporation from the state
8.
<PAGE>
of Delaware to the state of Maryland. Also, occupancy and equipment expense
increased $46,000 during fiscal 1999 as compared to an increase of $19,000
during fiscal 1998, due primarily to equipment purchases and upgrades. During
fiscal 1999 the Corporation incurred expenses of $97,000 to record loans held
for sale at the lower of cost or market, as well as $33,000 in expenses related
to the year 2000 issue. See "Year 2000 Issue" below. Other expenses consisting
primarily of franchise taxes, stock transfer expenses, loan related expenses and
other sundry expenses increased $15,000 in fiscal 1999 as compared to an
increase of $38,000 during fiscal 1998.
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 Corporation recorded a one-time charge of
$269,000 to pre-tax earnings.
FEDERAL INCOME TAX EXPENSE. Federal income tax expense for fiscal 1999
was $571,000 compared to $678,000 in fiscal 1998 and $458,000 in fiscal 1997.
The effective tax rate for federal income taxes was 35.5% in fiscal 1999, 35.7%
in fiscal 1998 and 35.9% in fiscal 1997.
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. Senior management and the Board of Directors review
the Bank's exposure to interest rate risk on a quarterly basis. The interest
rate risk is measured by computing estimated changes in net interest income and
the net portfolio value of cash flows from assets, liabilities and off-balance
sheet items within a range of assumed changes in market interest rates. If
estimated changes to net portfolio value and net interest income are not within
the limits established by the Board, the Board may direct management to adjust
the Bank's asset and liability mix to bring interest rate risk within Board
approved limits. The Board limits have been established with consideration of
the dollar impact of various rate changes and the Bank's strong capital
position.
The balance sheet consists of investments in interest-earning assets,
primarily loans, which are primarily funded by interest-bearing liabilities,
deposits and borrowings. These financial instruments have varying levels of
sensitivity to changes in market interest rates, resulting in market risk. Other
than loans that are originated and held for sale, all of our financial
instruments are for other than trading purposes. The Bank 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.
9.
<PAGE>
Net portfolio value represents the market value of equity and is equal
to the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items. This analysis assesses the risk of
loss in market risk sensitive instruments in the event of sudden and sustained
1% to 3% increases and decreases in market interest rates. The following table
sets forth the change in the Bank's net portfolio value and net interest income
at June 30, 1999 and June 30, 1998, based on internal assumptions, that would
occur upon an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
June 30, 1999 June 30, 1998
Change in ---------------------- ---------------------
Interest Rate Board Limit $ Change % Change $ change % Change
(Basis Points) % Change in NPV in NPV in NPV in NPV
-------------- -------- ------ ------ ------ ------
(Dollars in Thousands)
+300 (30)% $(1,871) (15)% $ (480) (4)%
+200 (20) (1,047) (9) (89) (1)
+100 (10) (382) (3) 111 1
-0- --- --- --- --- ---
-100 (10) (24) 0 (368) (3)
-200 (20) (216) (2) (960) (8)
-300 (30) (344) (3) (1,258) (10)
As of June 30, 1999, 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 8 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 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>
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are deposits, principal and
interest repayments on loans, interest-bearing deposits, and FHLB 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 require 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, 1999, the Bank's liquidity ratio was
6.34%.
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, 1999, the Bank had advances from the FHLB of Indianapolis
of $23.9 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, 1999, the Bank had outstanding commitments to extend
credit which amounted to $5.9 million (including $3.9 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, 1999, 1998 and 1997, the Bank originated loans for sale totaling
$22.3 million, $16.9 million and $3.0 million, respectively, and received
proceeds from the sale of such loans of $19.3 million, $16.9 million and $2.9
million, respectively. See Note 5 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, 1999, 1998 and 1997 there was a net increase in deposit accounts
of $3.0 million, $1.1 million and $1.3 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, 1999, the Bank had tangible capital and Tier 1 (core)
capital of $10.1 million, or 12.0% of adjusted total assets, which was
approximately $8.8 million and $7.6 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, 1999, the Bank had Tier 1 (core) capital of $10.1 million,
or 12.0% of average total assets, which was approximately $6.7 million above the
11.
<PAGE>
minimum requirement of 4.0% of average total assets in effect on that date. On
June 30, 1999, the Bank had risk-based capital of $10.6 million (including $10.1
in core capital), or 20.5% of risk-weighted assets of $51.5 million. This amount
was $6.4 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, 1999, the parent Corporation had $217,000 in liquid assets on hand. The
parent Corporation's primary source of liquidity on an ongoing basis are
dividends from the Bank. Dividends totaling $1.3 million were paid from the Bank
to the Corporation for the year ended June 30, 1999. For the year ended June 30,
1999, the Corporation paid dividends to shareholders totaling $385,000 and
repurchased 78,335 shares of common stock, at a total cost $1.0 million. The
Corporation has authority to repurchase under its current repurchase program an
additional 17,072 shares of Corporation common stock at June 30, 1999.
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 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 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 an
independent third party data center, and through this data center the
Corporation migrated to a new year 2000 compliant teller/bank operation platform
in November 1998. To ensure the readiness of this system, the Corporation
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
June 30, 1999, 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
12.
<PAGE>
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 $4,000 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
concerns are local utility and telecommunication companies. Our local utility
and telecommunication companies, 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 has evaluated and continues to review these
two groups for 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 has established a contingency plan to
address potential year 2000 problems. The contingency plan is reviewed and
updated as needed and will be tested prior to December 31, 1999.
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
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, 2000. 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.
13.
<PAGE>
Mortgage loans originated for sale converted into securities will be
affected by a new accounting standard for 1999. The new standard allows
classifying these securities as available for sale, trading, or held to
maturity, instead of the current requirement to classify as trading. This is not
expected to have a material effect but the effect will vary depending on the
level and designation of securitizations as well as on market price movements.
As of June 30, 1999 there were no securitizations.
FORWARD-LOOKING STATEMENTS
We may from time to time make written or oral "forward-looking
statements". These forward-looking statements may be contained in this Annual
Report to Shareholders, in our filings with the Securities and Exchange
Commission, including our Annual Report on Form 10-KSB and its exhibits, and in
other communications by us, which are made in good faith pursuant to the "safe
harbor" provisions of the Private securities Litigation Reform Act of 1995. The
words "may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan", and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements include statements with respect to our
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties. The
following factors, many of which are subject to change based on various other
factors beyound our control, could cause our financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements:
o the strenth of the United States economy in general and the
strength of the local economies in which we conduct our operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute competitors' products and
services for our products and services;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and
insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and savings habits; and
o our success at managing the risks involved in our business.
This list of important factors is not exclusive. We do not undertake to
update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of the Corporation or the Bank.
14.
<PAGE>
MSB FINANCIAL, INC.
Marshall, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
CONTENTS
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
15.
<PAGE>
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, 1999 and 1998 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
July 23, 1999
- --------------------------------------------------------------------------------
16.
<PAGE>
<TABLE>
<CAPTION>
MSB FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
- -----------------------------------------------------------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 1,896,722 $ 2,286,520
Interest-bearing deposits in other financial institutions 715,536 994,193
------------ ------------
Total cash and cash equivalents 2,612,258 3,280,713
Securities held to maturity (fair value of
$4,866 in 1999 and $8,102 in 1998) 4,866 8,102
Loans held for sale, net of unrealized losses of
$97,942 in 1999 and $0 in 1998 3,158,577 295,300
Loans receivable, net of allowance for loan losses of
$452,308 in 1999 and $391,148 in 1998 74,716,028 73,065,017
Federal Home Loan Bank stock 1,270,500 1,158,200
Accrued interest receivable 455,481 419,847
Premises and equipment, net 684,068 648,878
Mortgage servicing rights 306,910 177,006
Other assets 1,247,474 913,650
------------ ------------
$ 84,456,162 $ 79,966,713
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 1,133,991 $ 841,012
Savings, NOW and MMDA deposits 22,427,428 21,679,740
Other time deposits 22,275,558 20,294,396
------------ ------------
Total deposits 45,836,977 42,815,148
Federal Home Loan Bank advances 23,864,235 21,971,976
Advance payments by borrowers for taxes and insurance 608,515 524,739
Accrued interest payable 104,361 93,114
Accrued expenses and other liabilities 860,598 1,249,043
------------ ------------
71,274,686 66,654,020
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 1,261,586
shares outstanding at June 30, 1999; 1,631,315
shares issued and 1,338,051 shares outstanding at
June 30, 1998 16,313 16,313
Additional paid-in capital 9,655,006 9,533,274
Retained earnings, substantially restricted 7,623,538 6,970,925
Unearned Employee Stock Ownership Plan shares (256,668) (318,181)
Unearned Recognition and Retention Plan shares (85,372) (146,728)
Treasury stock, at cost (369,729 and 293,264 common
shares in 1999 and 1998, respectively) (3,771,341) (2,742,910)
------------ ------------
13,181,476 13,312,693
------------ ------------
$ 84,456,162 $ 79,966,713
============ ============
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
17.
<PAGE>
<TABLE>
<CAPTION>
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 6,423,416 $ 6,302,986 $ 5,368,868
Securities available for sale - taxable -- -- 28,179
Securities held to maturity - taxable 426 674 5,659
Other interest and dividend income 210,868 221,886 136,095
----------- ----------- -----------
6,634,710 6,525,546 5,538,801
Interest expense
Deposits 1,634,790 1,581,785 1,540,224
Federal Home Loan Bank advances 1,496,243 1,354,597 747,489
Other interest expense 14,272 10,560 6,112
----------- ----------- -----------
3,145,305 2,946,942 2,293,825
----------- ----------- -----------
NET INTEREST INCOME 3,489,405 3,578,604 3,244,976
Provision for loan losses 72,000 95,000 48,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,417,405 3,483,604 3,196,976
Noninterest income
Loan servicing fees, net 43,427 74,917 85,421
Net gains on sales of loans held for sale 291,414 258,807 46,982
Service charges on deposit accounts 159,691 156,107 124,367
Net realized losses on sales of securities
available for sale -- -- (47,950)
Other income 215,753 177,599 111,933
----------- ----------- -----------
710,285 667,430 320,753
Noninterest expense
Salaries and employee benefits 1,026,983 1,018,836 867,468
Occupancy and equipment expense 260,547 214,675 196,000
Data processing expense 189,800 186,870 160,933
Federal deposit insurance premium 52,860 52,193 346,113
Director fees 122,863 123,938 123,824
Correspondent bank charges 56,920 60,829 57,769
Michigan Single Business tax 65,000 73,000 58,550
Y2K expense 33,270 -- --
Provision (recovery) to adjust loans held for sale
to lower of cost or market 97,942 -- (27,259)
Advertising expense 96,573 71,364 57,279
Professional fees 143,247 89,803 87,410
Supplies expense 69,800 70,021 65,129
Other expense 303,590 288,779 250,512
----------- ----------- -----------
2,519,395 2,250,308 2,243,728
----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 1,608,295 1,900,726 1,274,001
Federal income tax expense 571,000 678,000 458,000
----------- ----------- -----------
NET INCOME $ 1,037,295 $ 1,222,726 $ 816,001
=========== =========== ===========
Earnings per common and common equivalent share
Basic earnings per common share $ .85 $ .98 $ .63
=========== =========== ===========
Diluted earnings per common share $ .82 $ .94 $ .63
=========== =========== ===========
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
18.
<PAGE>
<TABLE>
<CAPTION>
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income
----- ------- -------- ------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $ 7,408 $ 7,017,760 $ 7,870,150 $ (37,622)
Comprehensive income:
Net income for 1997 -- -- 816,001 --
Other comprehensive income:
Net change in net unrealized loss on
securities available for sale, net of tax
of $19,382 -- -- -- 37,622
Total comprehensive income
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 -- --
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) --
------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1997 14,830 7,096,776 8,372,493 --
- --------------------------------------------------------------------------------------------------------------------
<PAGE>
Unearned Unearned
Employee Recognition
Stock and Total
Ownership Retention Treasury Shareholders'
Plan Shares Plan Shares Stock Equity
----------- ----------- ----- ------
BALANCE AT JUNE 30, 1996 $ (451,399) $ (254,200) (1,557,753) $ 12,594,344
Comprehensive income:
Net income for 1997 -- -- -- 816,001
Other comprehensive income:
Net change in net unrealized loss on
securities available for sale, net of tax
of $19,382 -- -- -- 37,622
------------
Total comprehensive income 853,623
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 68,393 -- -- 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 -- -- -- --
------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1997 (383,006) (208,084) (2,202,813) 12,690,196
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
19.
<PAGE>
<TABLE>
<CAPTION>
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income
----- ------- -------- ------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1997 $ 14,830 $ 7,096,776 $ 8,372,493 $ --
Comprehensive income:
Net income for 1998 -- -- 1,222,726 --
Other comprehensive income -- -- -- --
Total comprehensive income
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 -- --
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 --
- --------------------------------------------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
Unearned Unearned
Employee Recognition
Stock and Total
Ownership Retention Treasury Shareholders'
Plan Shares Plan Shares Stock Equity
----------- ----------- ----- ------
BALANCE AT JUNE 30, 1997 $ (383,006) $ (208,084) (2,202,813) $ 12,690,196
Comprehensive income:
Net income for 1998 -- -- -- 1,222,726
Other comprehensive income -- -- -- --
------------
Total comprehensive income 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 64,825 -- -- 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 (318,181) (146,728) (2,742,910) 13,312,693
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
20.
<PAGE>
<TABLE>
<CAPTION>
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income
----- ------- -------- ------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1998 $ 16,313 $ 9,533,274 $ 6,970,925 $ --
Comprehensive income:
Net income for 1999 -- -- 1,037,295 --
Other comprehensive income -- -- -- --
Total comprehensive income
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.31 per share -- -- (384,682) --
13,519 shares committed to be released
under the ESOP -- 122,878 -- --
Issuance of 1,870 common shares from
treasury stock due to exercise of stock
options -- (916) -- --
Amortization of RRP shares -- -- -- --
Repurchase of 78,335 shares of common
stock -- -- -- --
Cash paid for fractional shares -- (230) -- --
------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1999 $ 16,313 $ 9,655,006 $ 7,623,538 $ --
============ ============ ============ ============
- --------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------------------------------------------------------
Unearned Unearned
Employee Recognition
Stock and Total
Ownership Retention Treasury Shareholders'
Plan Shares Plan Shares Stock Equity
----------- ----------- ----- ------
BALANCE AT JUNE 30, 1998 $ (318,181) $ (146,728) (2,742,910) $ 13,312,693
Comprehensive income:
Net income for 1999 -- -- -- 1,037,295
Other comprehensive income -- -- -- --
------------
Total comprehensive income 1,037,295
Cash dividends declared on common
stock, net of dividends on unearned
ESOP shares - $.31 per share -- -- -- (384,682)
13,519 shares committed to be released
under the ESOP 61,513 -- -- 184,391
Issuance of 1,870 common shares from
treasury stock due to exercise of stock
options -- -- 15,521 14,605
Amortization of RRP shares -- 61,356 -- 61,356
Repurchase of 78,335 shares of common
stock -- -- (1,043,952) (1,043,952)
Cash paid for fractional shares -- -- -- (230)
------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1999 $ (256,668) $ (85,372) $ (3,771,341) $ 13,181,476
============ ============ ============ ============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21.
<PAGE>
<TABLE>
<CAPTION>
MSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1999, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,037,295 $ 1,222,726 $ 816,001
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 72,000 95,000 48,000
Provision (recovery) to adjust loans held
for sale to lower of cost or market 97,942 -- (27,259)
Depreciation 134,680 108,346 100,913
Amortization of mortgage servicing rights 62,279 18,434 1,168
Net amortization of premium (discount) -- -- 396
Employee Stock Ownership Plan expense 184,391 217,200 133,968
Recognition and Retention Plan expense 61,356 61,356 59,564
Originations of loans held for sale (22,287,159) (16,929,952) (2,992,755)
Proceeds from sales of loans held for sale 19,315,171 16,875,614 2,894,510
Net gains on sales of loans held for sale (291,414) (258,807) (46,982)
Net realized losses on sales of securities
available for sale -- -- 47,950
Change in assets and liabilities:
Accrued interest receivable (35,634) 1,074 (88,681)
Other assets (333,824) (266,763) (314,197)
Accrued interest payable 11,247 14,000 34,782
Accrued expenses and other liabilities (388,445) 866,346 (250,863)
------------ ------------ ------------
Net cash from operating activities (2,360,115) 2,024,574 416,515
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale -- -- 2,127,211
Proceeds from maturities of securities
held to maturity -- -- 1,000,000
Principal paydowns on mortgage-backed
securities held to maturity 3,236 3,353 4,530
Purchase of Federal Home Loan Bank stock (112,300) (114,500) (727,000)
Net increase in loans (1,613,011) (4,420,461) (15,509,130)
Net purchases of premises and equipment (169,870) (180,166) (147,789)
------------ ------------ ------------
Net cash from investing activities (1,891,945) (4,711,774) (13,252,178)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
22.
<PAGE>
<TABLE>
<CAPTION>
MSB FINANCIAL, INC. 28.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1999, 1998 and 1997
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 3,021,829 $ 1,108,416 $ 1,254,674
Proceeds from Federal Home Loan Bank
advances 9,000,000 19,500,000 17,500,000
Repayments on Federal Home Loan Bank
advances (7,107,741) (16,901,624) (4,126,400)
Net change in advance payments
by borrowers for taxes and insurance 83,776 59,294 59,244
Cash paid for fractional shares (230) -- --
Cash dividends paid (384,682) (334,897) (306,243)
Proceeds from exercise of stock options 14,605 22,562 --
Repurchase of common stock (1,043,952) (566,450) (645,060)
------------ ------------ ------------
Net cash from financing activities 3,583,605 2,887,301 13,736,215
------------ ------------ ------------
Net change in cash and cash equivalents 668,455 200,101 900,552
Cash and cash equivalents at beginning of period 3,280,713 3,080,612 2,180,060
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,612,258 $ 3,280,713 $ 3,080,612
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 3,134,058 $ 2,932,942 $ 2,259,043
Income taxes 565,000 723,956 497,299
Supplemental disclosure of noncash investing
activities
Transfers from loans held for sale to loans
held to maturity $ 110,000 $ -- $ 950,741
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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. 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 other comprehensive income (loss) and as a separate component of
shareholders' equity until realized.
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.
- --------------------------------------------------------------------------------
(Continued)
24.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. There were no sales of securities during the years ended June
30, 1999 and 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 those sales.
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.
SERVICING RIGHTS: Servicing rights are recognized as assets for purchased rights
and for the allocated value of retained servicing rights on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance.
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>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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, 1999 or 1998.
- --------------------------------------------------------------------------------
(Continued)
26.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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 14.
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 paid on 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 included $1,483 for the stock dividend paid on August 31,
1998.
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER COMMON SHARE: 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.
SEGMENTS: MSB Financial, Inc. and its subsidiary, Marshall Savings Bank, provide
a broad range of financial services to individuals and companies in Southern
Michigan. These services include demand, time and savings deposits; lending; and
cash management. While the Company's chief decision makers monitor the revenue
streams of the various Company products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Accordingly, all of
the Company's banking operations are considered by management to be aggregated
in one reportable operating segment.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized holding
gains and losses on securities available for sale, net of taxes, which is
recognized as a separate component of shareholders' equity. The accounting
standard that requires reporting comprehensive income first applies for 1999,
with prior information restated to be comparable.
NEW ACCOUNTING PRONOUNCEMENTS: 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,
2000. 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>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage loans originated for sale converted into securities will be affected by
a new accounting standard for 1999. The new standard allows classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect but the effect will vary depending on the level and designation
of securitizations as well as on market price movements. As of June 30, 1999
there were no securitizations.
RECLASSIFICATIONS: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
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>
Years ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Numerator
Net income $ 1,037,295 $ 1,222,726 $ 816,001
=========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,308,435 1,357,606 1,414,203
Less: Average unallocated ESOP shares (63,241) (77,131) (91,785)
Less: Average nonvested RRP shares (20,356) (28,934) (36,717)
----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per
common share 1,224,838 1,251,541 1,285,701
=========== =========== ===========
Basic earnings per common share $ .85 $ .98 $ .63
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(Continued)
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
DILUTED EARNINGS PER COMMON SHARE
Numerator
Net income $1,037,295 $1,222,726 $ 816,001
========== ========== ==========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,224,838 1,251,541 1,285,701
Add: Dilutive effects of average
nonvested RRP shares, net of tax
benefits 6,139 7,667 --
Add: Dilutive effects of assumed
exercises of stock options 40,515 47,149 13,425
---------- ---------- ----------
Weighted average common shares
and dilutive potential common
shares outstanding 1,271,492 1,306,357 1,299,126
========== ========== ==========
Diluted earnings per common share $ .82 $ .94 $ .63
========== ========== ==========
</TABLE>
Stock options for 67,848, 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, 1999, 1998 and 1997, because they were antidilutive.
NOTE 3 - INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS
Interest-bearing deposits in other financial institutions at June 30 consist of
the following:
1999 1998
-------- --------
FHLB overnight time deposits $200,251 $500,975
FHLB cash management account 515,285 493,218
-------- --------
$715,536 $994,193
======== ========
- --------------------------------------------------------------------------------
(Continued)
31.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE, NET
Loans at June 30 are classified as follows:
1999 1998
------------ ------------
Real estate loans
One-to-four family $ 54,417,070 $ 50,129,570
Commercial 9,656,721 10,367,408
Construction or development 6,107,904 5,601,696
------------ ------------
70,181,695 66,098,674
Other loans
Consumer loans
Home equity lines of credit 3,263,705 3,243,830
Second mortgage loans 2,974,420 2,777,438
Automobile 1,574,861 1,791,947
Other 1,265,335 1,598,616
------------ ------------
9,078,321 9,411,831
Commercial business loans 842,007 851,733
------------ ------------
Total other loans 9,920,328 10,263,564
------------ ------------
Total loans 80,102,023 76,362,238
Less:
Loans held for sale (3,256,519) (295,300)
Loans in process (1,390,142) (2,307,547)
Deferred loan fees and discounts (287,026) (303,226)
Allowance for loan losses (452,308) (391,148)
------------ ------------
Net loans $ 74,716,028 $ 73,065,017
============ ============
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
1999 1998 1997
--------- --------- ---------
Balance at beginning of year $ 391,148 $ 302,903 $ 348,067
Provision charged to operating expense 72,000 95,000 48,000
Recoveries credited to allowance 3,444 7,176 2,780
Loans charged off (14,284) (13,931) (95,944)
--------- --------- ---------
Balance at end of year $ 452,308 $ 391,148 $ 302,903
========= ========= =========
- --------------------------------------------------------------------------------
(Continued)
32.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
Information regarding impaired loans is as follows for the year ended June 30,
1999, 1998 and 1997:
1999 1998 1997
--------- --------- ---------
Average investment in impaired loans $ 375,126 $ 591,000 $ 603,000
Interest income recognized on impaired loans
including interest income recognized on
cash basis 44,000 50,000 50,000
Interest income recognized on impaired loans
on cash basis 44,000 50,000 50,000
Information regarding impaired loans at June 30, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance of impaired loans $ 164,645 $ 586,000 $ 596,000
Less: Portion for which no allowance for loan
losses is allocated (164,645) (586,000) (596,000)
--------- --------- ---------
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>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 5 - SECONDARY MORTGAGE MARKET ACTIVITIES
The following summarizes the Corporation's secondary mortgage market activities
for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Activity during the year:
Loans originated for resale, net of
principal paydowns $ 22,287,159 $ 16,929,952 $ 2,992,755
Loans transferred to held to maturity 110,000 -- 950,741
Proceeds from sales of loans originated
for resale 19,315,171 16,875,614 2,894,510
Gain on sales of loans originated
for resale 291,414 258,807 46,982
Portion of gain resulting from costs
allocated to mortgage servicing rights 192,183 167,845 28,763
Loan servicing fees, net 43,427 74,917 85,421
Balance at June 30:
Loans held for sale $ 3,256,519 $ 295,300 $ 150,000
Less: Allowance to adjust loans held
for sale to lower of aggregate cost or
market (97,942) -- --
------------ ------------ ------------
Loans held for sale, net $ 3,158,577 $ 295,300 $ 150,000
============ ============ ============
</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:
1999 1998 1997
----------- ----------- -----------
Mortgage loan portfolios serviced for:
FHLMC $47,334,139 $39,748,411 $32,756,668
Custodial escrow balances maintained in connection with the foregoing serviced
loans were $278,000, $245,000 and $208,000 at June 30, 1999, 1998 and 1997,
respectively.
- --------------------------------------------------------------------------------
(Continued)
34.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at June 30 is as follows:
1999 1998
----------- -----------
Land $ 360,007 $ 348,338
Buildings 530,906 482,145
Furniture, fixtures and equipment 678,335 587,295
----------- -----------
1,569,248 1,417,778
Less: Accumulated depreciation (885,180) (768,900)
----------- -----------
$ 684,068 $ 648,878
=========== ===========
NOTE 7 - DEPOSITS
The aggregate amount of short term jumbo certificates of deposit in
denominations of $100,000 or more was $1,596,000 and $1,271,000 at June 30, 1999
and 1998, respectively.
At June 30, 1999, the scheduled maturities of certificates of deposit are as
follows for the years ended June 30:
2000 $14,266,718
2001 3,236,350
2002 1,526,260
2003 1,050,976
2004 2,195,254
-----------
$22,275,558
- --------------------------------------------------------------------------------
(Continued)
35.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At June 30, 1999 and 1998, the Corporation had advances from the Federal Home
Loan Bank of Indianapolis as follows:
Final Maturity Date Interest Rate 1999 1998
- ------------------- ------------------ ----------- -----------
September 14, 1998 5.8700% (variable) $ -- $ 1,000,000
August 26, 1999 5.3300% (variable) 1,000,000 --
November 15, 2001 6.2100% (fixed) 1,657,164 1,902,258
March 15, 2002 6.2800% (fixed) 1,070,978 1,270,431
August 15, 2002 6.3100% (fixed) 1,933,962 2,000,000
November 15, 2002 6.1400% (fixed) 469,134 500,000
February 18, 2003 5.8000% (fixed) 936,784 1,000,000
July 15, 2003 5.8700% (fixed) 1,000,000 --
October 15, 2003 5.1000% (fixed) 1,000,000 --
March 15, 2004 6.3900% (fixed) 761,401 872,915
March 15, 2004 6.3200% (fixed) 1,883,951 2,378,323
July 15, 2004 6.5900% (fixed) 1,879,406 2,000,000
August 16, 2004 6.4600% (fixed) 938,991 1,000,000
October 15, 2004 6.3000% (fixed) 951,329 1,000,000
November 15, 2004 6.4300% (fixed) 950,715 1,000,000
February 15, 2005 5.8900% (fixed) 936,784 1,000,000
June 15, 2005 6.0500% (fixed) 1,405,177 1,500,000
September 15, 2005 5.7300% (fixed) 1,000,000 --
September 15, 2005 5.7500% (fixed) 1,000,000 --
February 15, 2006 5.8400% (fixed) 1,388,490 1,660,940
August 15, 2006 6.7300% (fixed) 1,699,969 1,887,109
----------- -----------
$23,864,235 $21,971,976
=========== ===========
Principle payments on the advances outstanding at June 30, 1999 are due in the
years ending June 30 as follows:
2000 $ 3,877,776
2001 3,183,424
2002 4,304,382
2003 4,032,923
2004 3,493,233
Thereafter 4,972,497
-----------
$23,864,235
- --------------------------------------------------------------------------------
(Continued)
36.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
These advances were required to be collateralized by at least $38,183,000 and
$35,155,000 of the Corporation's first mortgage loans under a blanket lien
arrangement at June 30, 1999 and 1998, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
An analysis of aggregate loans outstanding to directors, executive officers and
their affiliates follows:
1999 1998 1997
---- ---- ----
Aggregate balance, July 1 $ 784,000 $ 540,000 $ 501,000
New loans and renewals 396,000 498,000 136,000
Repayments and renewals (286,000) (254,000) (97,000)
--------- --------- ---------
Aggregate balance, June 30 $ 894,000 $ 784,000 $ 540,000
========= ========= =========
Total deposits from directors, executive officers and their affiliates were
$1,314,000 and $1,376,000 at June 30, 1999 and 1998, respectively.
NOTE 10 - 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, 1999, 1998
and 1997 was $67,732, $71,160 and $73,812 resulting in a deferred compensation
liability of $249,079, $181,347 and $110,187 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, 1999 and 1998 was $1,181,276 and $864,687 and is included in other assets in
the Consolidated Balance Sheets.
- --------------------------------------------------------------------------------
(Continued)
37.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - 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.
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, 1999, 1998 and 1997, contributions of $64,004
$68,160 and $71,941 respectively, were made to the ESOP. For the same respective
periods, 13,519, 14,262 and 15,046 shares with an average fair value of $13.64,
$15.23 and $8.90 per share were committed to be released, resulting in ESOP
compensation expense of $184,391, $217,200 and $133,968, respectively.
- --------------------------------------------------------------------------------
(Continued)
38.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION PLANS (Continued)
Shares held by the ESOP at June 30 are as follows:
1999 1998
---------- ----------
Allocated to participants 70,593 57,074
Unearned 56,481 70,000
---------- ----------
Total ESOP shares 127,074 127,074
========== ==========
Fair value of unearned shares $ 635,411 $1,018,000
========== ==========
Fair value of allocated shares subject
to repurchase obligation $ -- $ --
========== ==========
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 years ended
June 30, 1999 and 1998, 1,870 and 3,177 options were exercised at an average
exercise price of $7.8102 and $7.1023 per share. At June 30, 1999, there were
106,328 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, 1999, no 1995 SOP options have
expired or been canceled.
- --------------------------------------------------------------------------------
(Continued)
39.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - 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, 1999, there
were 67,878 options outstanding and there were no shares reserved for future
grants under the 1997 SOP. As of June 30, 1999, no 1998 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, 1999, 1998 and 1997.
The fair value of options granted during the years ended June 30, 1998 and 1997
is estimated using the following weighted-average information: risk-free
interest rate of 5.85%and 6.51%, expected life of 8.0 years, expected dividends
of 2.30% and 2.72% per year and expected stock price volatility of 7.57% and
6.74% per year. No options were granted during 1999.
1999 1998 1997
------------- ------------- -------------
Net income as reported $1,037,295 $1,222,726 $816,001
Proforma net income $1,014,777 $ 954,359 $774,227
Reported earnings per common and
common equivalent share
Basic $ .85 $ .98 $ .63
Diluted $ .82 $ .94 $ .63
Proforma earnings per common and
common equivalent share
Basic $ .83 $ .76 $ .60
Diluted $ .80 $ .73 $ .60
- --------------------------------------------------------------------------------
(Continued)
40.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - 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, 1999, a total of 47,467
shares were authorized for future grants. Information about option grants
follows.
Weighted-
Number Average
of Options Exercise Price
---------- --------------
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
Granted --
Exercised (1,870) 7.8102
Forfeited -- --
--------
Outstanding, June 30, 1999 174,176 10.8132
========
The weighted-average fair value per option for options granted during the years
ended June 30, 1998 and 1997 was $3.42 and $2.09. At June 30, 1999, options
outstanding had a weighted-average remaining life of 7.6 years and a range of
exercise price from $7.1023 to $16.3636.
Options exercisable at June 30 are as follows.
Weighted-
Number Average
of Options Exercise Price
---------- --------------
1997 19,378 7.1023
1998 106,052 12.8938
1999 126,730 12.0203
- --------------------------------------------------------------------------------
(Continued)
41.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - 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, 1999, 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, 1999, 1998 and 1997, $61,356,
$61,356 and $59,564, 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 12 - 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 the expiration
date, February 11, 1999, 46,470 shares had been repurchased at an average price
of $14.81 per share. On February 16, 1999, the Corporation announced a stock
repurchase plan of 5% (65,657 shares) of its common stock. As of June 30, 1999,
48,585 shares have been repurchased at an average price of $12.64 per share and,
therefore, the Corporation has remaining approval to repurchase up to 17,072
additional shares. Approval to repurchase these additional shares expires on
February 16, 2000.
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)
42.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13 - 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.
As of June 30, 1999, the Bank was categorized as well capitalized. 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, 1999
Tangible Capital (to
adjusted total assets) $10,100 12.02% $ 1,261 1.5% $ N/A N/A%
Tier 1 (Core) Capital (to
adjusted total assets) 10,100 12.02 2,522 3.0 N/A N/A
Tier 1 (Core) Capital (to
average assets) 10,100 12.03 3,359 4.0 4,199 5.0
Tier 1 (Core) Capital (to
risk weighted assets) 10,100 19.60 2,061 4.0 3,092 6.0
Total Capital (to risk
weighted assets) 10,552 20.48 4,123 8.0 5,154 10.0
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 12.47 3,155 4.0 3,943 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
</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)
43.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13 - 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 for the Company's stock offering related to
converting from a mutual to a stock ownership structure. 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, 1999, approximately $3,100,000 is available to the Bank for the payment of
dividends to the holding company.
- --------------------------------------------------------------------------------
(Continued)
44.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 14 - 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.
Financial instruments with off-balance-sheet risk approximated the following at
June 30:
1999 1998
---- ----
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
Commitments to make loans
(at market rates) $1,021,000 977,000 $1,567,000 $1,006,000
Unused lines of credit and
letters of credit -- 3,857,000 -- 3,438,000
Commitments to make loans are generally made for periods of 60 days or less. The
fixed rate loan commitments have interest rates ranging from 7.25% to 8.00% at
June 30, 1999 (6.75% to 7.375% at June 30, 1998) 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
$329,000.
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.
- --------------------------------------------------------------------------------
(Continued)
45.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 15 - 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.
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, 1999, 1998 and 1997
were $13,000, $14,000 and $12,000, respectively.
NOTE 16 - FEDERAL INCOME TAXES
The Corporation and the Bank file a consolidated federal income tax return on a
fiscal year basis. Tax legislation passed in August 1996 requires the Bank to
deduct a provision for bad debts for tax purposes based on actual loss
experience rather than a percentage of taxable income as allowed prior to fiscal
year 1997, and recapture the excess bad debt reserve accumulated in tax years
after 1987. The related amount of tax is approximately $123,000 and is payable
over a six-year period beginning no later than the tax year ending June 30,
1999. For the tax year ending June 30, 1999, one-sixth or $20,500 of the tax is
currently payable. The remaining tax of $102,500 will be paid over the five year
period beginning June 30, 2000 through June 30, 2004.
The consolidated federal income tax expense consisted of the following for the
years ended June 30:
1999 1998 1997
--------- --------- ---------
Current federal income tax expense $ 584,500 $ 699,000 $ 480,500
Deferred federal income tax benefit (13,500) (21,000) (22,500)
--------- --------- ---------
Total federal income tax expense $ 571,000 $ 678,000 $ 458,000
========= ========= =========
- --------------------------------------------------------------------------------
(Continued)
46.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 16 - FEDERAL INCOME TAXES (Continued)
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:
1999 1998 1997
--------- --------- ---------
Expected federal income tax expense
at statutory rate $ 546,820 $ 646,247 $ 433,160
ESOP expense (book greater than tax) 41,779 51,808 22,296
Other, net (17,599) (20,055) 2,544
--------- --------- ---------
Total federal income tax expense $ 571,000 $ 678,000 $ 458,000
========= ========= =========
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:
1999 1998
--------- ---------
Deferred tax assets
Deferred loan fees $ 93,000 $ 98,000
Deferred compensation 85,000 62,000
Depreciation 21,000 20,000
Capital loss carryforward 16,000 16,000
RRP expense 14,000 12,000
Allowance for loan losses 51,000 10,000
Other 12,000 16,500
--------- ---------
292,000 234,500
Deferred tax liabilities
Mortgage servicing rights (104,000) (60,000)
Other (6,000) (6,000)
--------- ---------
(110,000) (66,000)
Valuation allowance (16,000) (16,000)
--------- ---------
Net deferred tax asset $ 166,000 $ 152,500
========= =========
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, 1999 or 1998. 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, 1999 and 1998. 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)
47.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 17 - 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,612,258 $ 2,612,000 $ 3,280,713 $ 3,281,000
Securities held to maturity 4,866 5,000 8,102 8,000
Loans held for sale 3,158,577 3,159,000 295,300 295,000
Loans receivable, net 74,716,028 74,517,000 73,065,017 73,793,000
Federal Home Loan Bank stock 1,270,500 1,271,000 1,158,200 1,158,000
Accrued interest receivable 455,481 455,000 419,847 420,000
Mortgage servicing rights 306,910 307,000 177,006 177,000
Cash surrender value of life
insurance 1,181,276 1,181,000 864,687 865,000
Financial liabilities
Deposits (45,836,977) (45,712,000) (42,815,148) (42,843,000)
Federal Home Loan Bank
advances (23,864,235) (23,332,000) (21,971,976) (21,655,000)
Advance payments by borrowers
for taxes and insurance (608,515) (609,000) (524,739) (525,000)
Accrued interest payable (104,361) (104,000) (93,114) (93,000)
</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)
48.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 17 - 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.
TIME DEPOSITS
The fair value of fixed-maturity time certificates of deposit is estimated by
discounting cash flows using the rates currently offered for time 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)
49.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 18 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
--------------June 30,--------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and (losses) on
securities available for sale $ -- $ -- $ 9,054
Reclassification adjustments for
losses included in net income -- -- 47,950
--------- ---------- --------
Net change in net unrealized loss on
securities available for sale -- -- 57,004
Tax effects -- -- (19,382)
--------- ---------- --------
Other comprehensive income $ -- $ -- $ 37,622
========= ========== ========
</TABLE>
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of MSB Financial, Inc. is as follows:
CONDENSED BALANCE SHEETS
June 30, 1999 and 1998
1999 1998
----------- -----------
ASSETS
Cash and due from financial institutions $ 216,582 $ 216,988
Certificate of deposit in subsidiary bank 18,069 17,663
----------- -----------
Total cash and cash equivalents 234,651 234,651
Loans receivable from subsidiary bank and ESOP 1,988,805 2,346,566
Investment in subsidiary bank 10,099,986 9,832,538
Dividend receivable from subsidiary bank 515,774 667,134
Other assets 467,074 338,084
----------- -----------
Total assets $13,306,290 $13,418,973
=========== ===========
LIABILITIES
Accrued expenses and other liabilities $ 124,814 $ 106,280
SHAREHOLDERS' EQUITY 13,181,476 13,312,693
----------- -----------
Total liabilities and shareholders' equity $13,306,290 $13,418,973
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
50.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
------------Years ended June 30,------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans receivable $ 28,356 $ 33,082 $ 37,925
Dividends from subsidiary bank 1,177,190 1,334,875 936,163
----------- ----------- -----------
1,205,546 1,367,957 974,088
Interest expense - other 5,188 3,834 2,122
----------- ----------- -----------
NET INTEREST INCOME 1,200,358 1,364,123 971,966
Other income 21,079 15,072 9,047
Operating expenses 258,142 214,469 225,012
----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAX
EXPENSE 963,295 1,164,726 756,001
Federal income tax expense (benefit) (74,000) (58,000) (60,000)
----------- ----------- -----------
NET INCOME $ 1,037,295 $ 1,222,726 $ 816,001
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
51.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS CASH FLOWS
--------------Years ended June 30,----------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,037,295 $ 1,222,726 $ 816,001
Adjustments to reconcile net income to net
cash provided by operating activities
Change in
Dividends receivable from subsidiary bank 151,360 (90,718) (43,505)
Other assets (128,990) (116,394) (111,272)
Accrued expenses and other liabilities 18,534 38,326 50,626
----------- ----------- -----------
Net cash from operating activities 1,078,199 1,053,940 711,850
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments on loan receivable from subsidiary
bank 300,000 -- --
Repayments on loan receivable from ESOP 36,060 35,547 34,524
----------- ----------- -----------
Net cash from investing activities 336,060 35,547 34,524
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (384,682) (334,897) (306,243)
Cash paid for fractional shares (230) -- --
Proceeds from exercise of stock options 14,605 22,562 --
Repurchase of common stock (1,043,952) (566,450) (645,060)
----------- ----------- -----------
Net cash from financing activities (1,414,259) (878,785) (951,303)
----------- ----------- -----------
Net change in cash and cash equivalents -- 210,702 (204,929)
Cash and cash equivalents at beginning of period 234,651 23,949 228,878
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 234,651 $ 234,651 $ 23,949
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
52.
<PAGE>
MSB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
53.
<PAGE>
MSB FINANCIAL, INC.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:30 a.m., Tuesday, October
26, 1999, 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. This information has been 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 1999 Fiscal 1998
----------------------------------------- ----------------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter $16.875 $14.000 $ 0.0750 First Quarter $16.364 $10.795 $ 0.0636
Second Quarter $15.563 $11.000 $ 0.0750 Second Quarter $17.727 $14.545 $ 0.0636
Third Quarter $15.250 $13.000 $ 0.0800 Third Quarter $17.273 $14.545 $ 0.0682
Fourth Quarter $13.500 $11.125 $ 0.0800 Fourth Quarter $16.364 $14.545 $ 0.0682
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations, regulatory
restrictions and Maryland law. Regulatory restrictions on dividend payments are
described in Note 13 of the Notes to Consolidated Financial Statements included
in this Annual Report.
As of September 1, 1999, the Corporation had 493 stockholders of record and
1,255,806 outstanding shares of Common Stock.
SHAREHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
Charles B. Cook, President Registrar and Transfer Company
MSB Financial, Inc. 311 Cox Street
107 North Park Street Roselle, New Jersey 07203
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, 1999 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.
54
<PAGE>
<TABLE>
<CAPTION>
MSB FINANCIAL, INC.
CORPORATE INFORMATION
<S> <C>
CORPORATION AND BANK ADDRESS
107 North Park Street
Marshall, Michigan 49068 Telephone: (616) 781-5103
Fax: (616) 781-8412
DIRECTORS OF THE BOARD
Charles B. Cook Aart VanElst
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF MSB CHAIRMAN OF THE BOARD OF MSB FINANCIAL, INC.
FINANCIAL, INC. AND MARSHALL SAVINGS BANK, F.S.B. AND MARSHALL SAVINGS BANK, F.S.B., RETIRED OIL
MARSHALL, MICHIGAN JOBBER
MARSHALL, MICHIGAN
Martin L. Mitchell J. Thomas Schaeffer
VICE PRESIDENT AMD CHIEF OPERATIONS OFFICER, PARTNER, LAW FIRM OF SCHAEFFER, MEYER &
STARR COMMONWEALTH MACKENZIE
ALBION, MICHIGAN MARSHALL, MICHIGAN
John W. Yakimow
Richard L. Dobbins RETIRED GENERAL MANAGER OF CORPORATE
PARTNER, LAW FIRM OF DOBBINS, BEARDSLEE & RESEARCH AND DEVELOPMENT AT EATON
GRINAGE, P.C. CORPORATION
MARSHALL, MICHIGAN MARSHALL, MICHIGAN
Karl F. Loomis
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF REGIONAL
MEDICAL LABORATORIES, INC.
BATTLE CREEK, MICHIGAN
MSB FINANCIAL, INC. AND MARSHALL SAVINGS BANK, F.S.B.
EXECUTIVE OFFICERS
Charles B. Cook
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INDEPENDENT AUDITORS SPECIAL COUNSEL
Crowe, Chizek and Company LLP Silver, Freedman & Taff, L.L.P.
400 Riverfront Plaza Building 1100 New York Avenue, N.W.
55 Campau N.W. Seventh Floor, East Tower
Grand Rapids, Michigan 49503 Washington, D.C. 20005
</TABLE>
55
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State of
Percent of Incorporation or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
MSB Financial, Inc. Marshall Savings Bank, FSB 100% Federal
Marshall Savings Marshall Services, Inc. 100% Michigan
Bank, FSB
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), 1995 Stock Option and Incentive Plan (File No.
333-2232) and 1997 Stock Option and Incentive Plan (File No. 333-71837) on Form
S-8 of our report, dated July 23, 1999, 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, 1999.
/s/ Crowe, Chizek and Company LLP
Grand Rapids, Michigan
September 24, 1999
<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 PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,896,722
<INT-BEARING-DEPOSITS> 715,536
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4,866
<INVESTMENTS-MARKET> 4,866
<LOANS> 78,326,913
<ALLOWANCE> 452,308
<TOTAL-ASSETS> 84,456,162
<DEPOSITS> 45,836,977
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,573,474
<LONG-TERM> 23,864,235
0
0
<COMMON> 16,313
<OTHER-SE> 13,165,163
<TOTAL-LIABILITIES-AND-EQUITY> 84,456,162
<INTEREST-LOAN> 6,423,416
<INTEREST-INVEST> 426
<INTEREST-OTHER> 210,868
<INTEREST-TOTAL> 6,634,710
<INTEREST-DEPOSIT> 1,634,790
<INTEREST-EXPENSE> 3,145,305
<INTEREST-INCOME-NET> 3,489,405
<LOAN-LOSSES> 72,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,519,395
<INCOME-PRETAX> 1,608,295
<INCOME-PRE-EXTRAORDINARY> 1,037,295
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,037,295
<EPS-BASIC> 0.85
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 4.39
<LOANS-NON> 158,683
<LOANS-PAST> 231,682
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 385,000
<ALLOWANCE-OPEN> 391,148
<CHARGE-OFFS> 14,284
<RECOVERIES> 3,444
<ALLOWANCE-CLOSE> 452,308
<ALLOWANCE-DOMESTIC> 372,308
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 80,000
</TABLE>
