PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(3)
Registration No. 333-137294
Participation Interest
in up to 280,148 shares
of common stock of
MSB FINANCIAL CORP.
Millington Savings Bank 401(K) Savings and Profit Sharing Plan
This prospectus supplement is being provided to employees of Millington
Savings Bank who are participants in the Millington Savings Bank 401(k) Savings
and Profit Sharing Plan (referred to in this prospectus supplement as "the
Plan"). This supplement relates to the election by Plan participants to use a
portion of the funds in their Plan accounts to invest in shares of common stock
of MSB Financial Corp.
MSB Financial Corp. is offering for sale shares of its common stock
that will represent 45% of its outstanding common stock upon completion of this
offering. The remaining 55% of MSB Financial Corp.'s outstanding common stock
upon completion of this offering will be held by MSB Financial, MHC, the mutual
holding company parent of MSB Financial Corp. Plan participants may direct the
Plan trustee to use up to 99% of their current account balances to subscribe for
and purchase shares of MSB Financial Corp. common stock through the MSB
Financial Corp. Stock Fund. Based upon the value of the Plan's assets as of
November 7, 2006, the trustee may purchase up to 280,148 shares of MSB Financial
Corp. common stock, assuming a purchase price of $10.00 per share.
If you direct the trustee to invest plan funds in MSB Financial Corp.
common stock after the initial public offering, the trustee will purchase shares
for your account in open market transactions, and the price paid for such shares
will be the market price at the time of the purchase, which may be more or less
than the initial public offering price of $10.00 per share.
The prospectus dated November 13, 2006 of MSB Financial Corp., which we
have attached to this prospectus supplement, includes detailed information
regarding the Stock Offering, and the financial condition, results of operations
and business of Millington. This prospectus supplement provides information
regarding the 401(k) Savings and Profit Sharing Plan. You should read this
prospectus supplement together with the prospectus and keep both for future
reference.
Please refer to "Risk Factors" beginning on page 11 in the prospectus.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, nor any other state or
federal agency or any state securities commission, has approved or disapproved
these securities. Any representation to the contrary is a criminal offense.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
The date of this prospectus supplement is November 13, 2006.
This prospectus supplement may be used only in connection with offers
and sales by MSB Financial Corp. of interests or shares of common stock under
the Plan to employees of Millington Savings Bank. No one may use this prospectus
supplement to reoffer or resell interests or shares of common stock acquired
through the Plan.
You should rely only on the information contained in this prospectus
supplement and the attached prospectus. We have not authorized anyone to provide
you with information that is different.
This prospectus supplement does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make such an offer or solicitation in that
jurisdiction. Neither the delivery of this prospectus supplement and the
prospectus nor any sale of common stock shall under any circumstances imply that
there has been no change in the affairs of Millington or the Plan since the date
of this prospectus supplement, or that the information contained in this
prospectus supplement or incorporated by reference is correct as of any time
after the date of this prospectus supplement.
TABLE OF CONTENTS
THE OFFERING..................................................................................1
Securities Offered........................................................................1
Election to Purchase MSB Financial Corp. Common Stock in the Stock Offering...............2
Value of Participation Interests..........................................................2
Method of Directing Transfer..............................................................2
Time for Directing Transfer...............................................................2
Irrevocability of Transfer Direction......................................................2
Purchase Price of MSB Financial Corp. Common Stock........................................2
Direction to Purchase the Stock After the Stock Offering..................................3
Nature of a Participant's Interest in MSB Financial Corp. Common Stock....................3
Voting and Tender Rights of MSB Financial Corp. Common Stock..............................3
DESCRIPTION OF THE 401(k) SAVINGS AND PROFIT SHARING PLAN.....................................4
Introduction..............................................................................4
Eligibility and Participation.............................................................4
Contributions Under the Plan..............................................................5
Limitations on Contributions..............................................................5
Investment of Contributions...............................................................6
Benefits Under the Plan...................................................................12
Withdrawals and Distributions From the Plan...............................................12
ADMINISTRATION OF THE 401(k) SAVINGS AND PROFIT SHARING PLAN..................................14
Trustees..................................................................................14
Reports to Plan Participants..............................................................14
Plan Administrator........................................................................14
Amendment and Termination.................................................................14
Merger, Consolidation or Transfer.........................................................15
Federal Income Tax Consequences...........................................................15
Restrictions on Resale....................................................................17
SEC Reporting and Short-Swing Profit Liability............................................17
LEGAL OPINION.................................................................................18
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement
are participation interests in the Millington Savings Bank 401(k) Savings and
Profit Sharing Plan (referred to here as the "Plan"). The interests offered
under this prospectus supplement are conditioned on the completion of the Stock
Offering of MSB Financial Corp. Assuming a purchase price of $10.00 per share,
the trustee for the Plan may acquire up to 280,148 shares of MSB Financial Corp.
common stock for the MSB Financial Corp. Stock Fund. Certain subscription rights
and purchase limitations also govern your investment in MSB Financial Corp.
Stock Fund in connection with the Stock Offering. See "Persons Who May Order
Stock In The Offering" and "Purchase Limitations" in the prospectus attached to
this prospectus supplement for further discussion of the subscription rights and
purchase limitations.
This prospectus supplement contains information regarding the Plan. The
attached prospectus contains information regarding the Stock Offering and the
financial condition, results of operations and business of Millington. The
address of the principal executive office of Millington Savings Bank is 1902
Long Hill Road, Millington, New Jersey 07946. The telephone number of Millington
Savings Bank is (908) 647-3030.
Election To Purchase MSB Financial Corp. Common Stock In The Stock Offering
In connection with the Stock Offering of MSB Financial Corp., you may
direct the trustee of the Plan to transfer all or part of the funds that
represent your current beneficial interest in the assets of the Plan to purchase
MSB Financial Corp. common stock through the MSB Financial Corp. Stock Fund. The
Plan trustee will subscribe for MSB Financial Corp. common stock offered for
sale in connection with the Stock Offering in accordance with each participant's
direction. If there is not enough common stock in the Stock Offering to fill all
subscriptions, the common stock will be apportioned and the trustee for the Plan
may not be able to purchase all of the common stock you requested. In such a
case, if you elect, the trustee will purchase shares in the open market on your
behalf, after the Stock Offering, to fulfill your initial request. The trustee
may make such purchases at prices higher than the initial public offering price.
All plan participants are eligible to direct a transfer of funds to the
MSB Financial Corp. Stock Fund. However, transfer directions are subject to
subscription rights and purchase priorities. Your order for shares in the Stock
Offering will be filled based on your subscription rights. MSB Financial Corp.
has granted rights to subscribe for shares of MSB Financial Corp. common stock
to the following persons in the following order of priority: (1) persons with
$50 or more on deposit at Millington Savings Bank as of June 30, 2005 and (2)
persons with $50 or more on deposit at Millington Savings Bank as of September
30, 2006. If you fall into one of the above subscription offering categories,
you have subscription rights to purchase shares of common stock in the offering
and you may use funds in the Plan account to pay for your purchase of shares of
MSB Financial Corp. common stock. You also will be permitted to direct ongoing
purchases of the stock
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under the plan after the initial offering. See "Direction to Purchase Stock
After the Initial Offering."
Value Of Participation Interests
As of November 7, 2006, the market value of the assets of the Plan
equaled approximately $2,801,487. The plan administrator has informed each
participant of the value of his or her beneficial interest in the Plan as of
November 7, 2006. The value of Plan assets represents past contributions made to
the Plan on your behalf, plus or minus earnings or losses on the contributions,
less previous withdrawals and loans.
Method Of Directing Transfer
The last two pages of this prospectus supplement contain a form for you
to direct a transfer of current Plan assets to the MSB Financial Corp. Stock
Fund (the "Investment Form"). If you wish to transfer any portion, up to 99%, in
multiples of not less than 1%, of your beneficial interest in the assets of the
Plan to the MSB Financial Corp. Stock Fund, you should complete the Investment
Form. If you do not wish to make such an election at this time, you do not need
to take any action. The minimum investment in MSB Financial Corp. Stock Fund
during the initial public offering is $250.00. There is no minimum level of
investment after the initial offering for investment in the MSB Financial Corp.
Stock Fund.
Time For Directing Transfer
You must submit your direction to transfer amounts to the MSB Financial
Corp. Stock Fund in connection with the Stock Offering by the deadline of noon
on December 4, 2006. You should return the Investment Form to Mary Jean
Piorkowski. After the initial offering, you will still be able to direct the
investment of your account under the plan for in the MSB Financial Corp. Stock
Fund and in other investment alternatives.
Irrevocability Of Transfer Direction
You cannot change your direction to transfer amounts credited to your account in
the Plan to the MSB Financial Corp. Stock Fund prior to the completion of the
Stock Offering. Following the closing of the Stock Offering and the initial
purchase of shares in the MSB Financial Corp. Stock Fund, you may change your
investment directions, in accordance with the terms of the Plan.
Purchase Price of MSB Financial Corp. Common Stock
The trustee will use the funds transferred to the MSB Financial Corp.
Stock Fund to purchase shares of MSB Financial Corp. common stock in the Stock
Offering. The trustee will pay the same price for shares of MSB Financial Corp.
common stock as all other persons who purchase shares of MSB Financial Corp.
common stock in the offering. IF THERE IS NOT ENOUGH COMMON STOCK IN THE
OFFERING TO
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FILL ALL SUBSCRIPTIONS, THE COMMON STOCK WILL BE APPORTIONED AND THE TRUSTEE FOR
THE PLAN MAY NOT BE ABLE TO PURCHASE ALL OF THE COMMON STOCK YOU REQUESTED. IF
YOU ELECT, THE TRUSTEE WILL PURCHASE SHARES ON YOUR BEHALF AFTER THE STOCK
OFFERING IN THE OPEN MARKET, TO FULFILL YOUR INITIAL REQUEST. THE TRUSTEE MAY
MAKE SUCH PURCHASES AT PRICES HIGHER OR LOWER THAN THE $10.00 OFFERING PRICE.
Direction To Purchase MSB Financial Corp. Common Stock After the Offering
Following completion of the stock offering, you will be permitted to
direct that a certain percentage of your interest in the trust fund (up to 99%)
be transferred to the MSB Financial Corp. Stock Fund and invested in MSB
Financial Corp. common stock, or to the other investment funds available under
the plan. Alternatively, you may direct that a certain percentage of your
interest in the MSB Financial Corp. Stock Fund be transferred to the trust fund
to be invested in the other investment funds available in accordance with the
terms of the plan. You can direct future contributions made to the plan by you
or on your behalf to be invested in the MSB Financial Corp. Stock Fund.
Following your initial election, the allocation of your interest in the MSB
Financial Corp. may be changed by contacting your Human Resources representative
for the appropriate form to complete and fax to (317) 285-1728.
Nature Of A Participant's Interest In MSB Financial Corp. Common Stock
The Plan trustee will hold MSB Financial Corp. common stock in your
name on behalf of the Plan. The trustee will credit shares of common stock
acquired at your direction to your account under the Plan. Therefore, the
investment designations of other Plan participants should not affect earnings on
your Plan account.
Your account assets directed for investment in the MSB Financial Corp.
Stock Fund account after the initial offering shall be invested by the trustee
to purchase shares of MSB Financial Corp. common stock in open market
transactions. The price paid by the trustee for shares of the MSB Financial
Corp. common stock in the initial offering, or otherwise, will not exceed
"adequate consideration" as defined in Section 3(18) of the Employee Retirement
Income Security Act of 1974, as amended, or "ERISA".
Voting And Tender Rights Of MSB Financial Corp. Common Stock
The trustee generally will exercise voting and tender rights
attributable to all MSB Financial Corp. common stock held by the MSB Financial
Corp. Stock Fund, as directed by participants with interests in the MSB
Financial Corp. Stock Fund. With respect to each matter as to which holders of
MSB Financial Corp. common stock have a right to vote, you will have voting
instruction rights that reflect your proportionate interest in the MSB Financial
Corp. Stock Fund. The number of shares of MSB Financial Corp. common stock held
in the MSB Financial Corp. Stock Fund voted for and against each matter will be
proportionate to the number of voting instruction rights exercised. If there is
a tender offer for MSB Financial Corp. common stock, the Plan allots each
participant
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a number of tender instruction rights reflecting the participant's proportionate
interest in the MSB Financial Corp. Stock Fund. The percentage of shares of MSB
Financial Corp. common stock held in the MSB Financial Corp. Stock Fund that
will be tendered will be the same as the percentage of the total number of
tender instruction rights exercised in favor of the tender offer. The remaining
shares of MSB Financial Corp. common stock held in the MSB Financial Corp. Stock
Fund will not be tendered. The Plan provides that participants will exercise
their voting instruction rights and tender instruction rights on a confidential
basis.
The Trustee shall vote and, if applicable, tender the shares of MSB
Financial Corp. stock allocated to the accounts of participants for whom no
timely instructions have been received in the same proportion as those shares of
MSB Financial Corp. stock for which instructions were timely received.
DESCRIPTION OF THE PLAN
Introduction
Effective January 1, 1997, Millington Savings Bank adopted the
Millington Savings Bank Plan. Millington Savings Bank amended and restated the
plan as the Millington Savings Bank Plan effective as of January 1, 1997.
Millington Savings Bank and amended and restated the plan in its entirety
effective as of November 1, 2006 to allow Employer Securities up to 99% of a
participant's account balance as directed by the participant.
Millington Savings Bank intends for the Plan to comply, in form and in
operation, with all applicable provisions of the Internal Revenue Code and
ERISA. Millington Savings Bank may change the Plan from time to time in the
future to ensure continued compliance with these laws. Millington Savings Bank
may also amend the Plan from time to time in the future to add, modify, or
eliminate certain features of the plan, as it sees fit. Federal law provides you
with various rights and protections as a participant in the Plan, which is
governed by ERISA. However, the Pension Benefit Guaranty Corporation does not
guarantee your benefits under the Plan.
The following portions of this prospectus supplement summarize the
material provisions of the Plan. Millington Savings Bank qualifies this summary
in its entirety by reference to the full text of the Plan, as amended. You may
obtain copies of the full Plan document, and any amendments to the plan, by
sending a request to Mary Jean Piorkowski at Millington Savings Bank. You should
carefully read the entire Plan document, as amended, to understand your rights
and obligations under the Plan.
Eligibility And Participation
Salaried employees who have attained age 21 and have completed one year
of service may participate in the Plan as of the first day of the calendar
quarter after they have completed such requirement.
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As of September 6, 2006, 36 of the 36 employees of Millington Savings
Bank participated in the Plan.
Contributions Under The Plan
Employee Before-Tax Contributions. Subject to certain IRS limitations,
the Plan permits each participant to make before-tax contributions to the Plan
each payroll period of between 1% and 80% of the participant's salary.
Participants may change their rate of before-tax contributions by submitting a
form prior to each calendar quarter.
Matching Contributions. The Plan provides that Millington Savings Bank
will make matching contributions on behalf of each participant equal to 50% of
the participant's compensation, up to a maximum of 6.0% of compensation.
Millington Savings Bank makes matching contributions only for those participants
who make before-tax contributions to the Plan. If a participant stops making
before-tax contributions to the Plan, Millington Savings Bank will cease its
matching contributions on the participant's behalf.
Rollover Contributions. Millington Savings Bank allows employees who
receive a distribution from a previous employer's tax-qualified employee benefit
plan to deposit that distribution into a Rollover Contribution account under the
Plan, provided the rollover contribution satisfies IRS requirements.
Limitations On Contributions
Limitation On Employee Salary Deferrals. Although the Plan permits you
to defer up to 80% of your compensation, by law your total deferrals under the
Plan, together with similar plans, may not exceed $15,000 for 2006. Employees
who are age 50 and over may also make additional, "catch-up" contributions to
the plan, up to a maximum of $5,000 for 2006. The Internal Revenue Service
periodically increases these limitations. A participant who exceeds these
limitations must include any excess deferrals in gross income for federal income
tax purposes in the year of deferral. In addition, the participant must pay
federal income taxes on any excess deferrals when distributed by the Plan to the
participant, unless the plan distributes the excess deferrals and any related
income no later than the first April 15th following the close of the taxable
year in which the participant made the excess deferrals. Any income on excess
deferrals distributed before such date is treated, for federal income tax
purposes, as earned and received by the participant in the taxable year of the
distribution.
Limitation On Annual Additions And Benefits. As required by the
Internal Revenue Code, the Plan provides that the total amount of contributions
and forfeitures (annual additions) credited to a participant during any year
under all defined contribution plans of Millington Savings Bank (including the
Millington Savings Bank Employee Stock Ownership Plan) may not exceed the lesser
of 100% of the participant's annual compensation or $44,000 for 2006.
Limitation On Plan Contributions For Highly Compensated Employees.
Special provisions of the Internal Revenue Code limit the amount of before-tax
and matching
5
contributions that may be made to the Plan in any year on behalf of highly
compensated employees, in relation to the amount of before-tax and matching
contributions made by or on behalf of all other employees eligible to
participate in the Plan. If before-tax and matching contributions exceed these
limitations, the plan must adjust the contribution levels for highly compensated
employees.
In general, a highly compensated employee includes any employee who (1)
was a five percent owner of the sponsoring employer at any time during the year
or the preceding year, or (2) had compensation for the preceding year in excess
of $100,000 and, if the sponsoring employer so elects, was in the top 20% of
employees by compensation for such year. The preceding dollar amount applies for
2006, and may be adjusted periodically by the IRS.
Top-Heavy Plan Requirements. If the Plan is a Top-Heavy Plan for any
calendar year, Millington Savings Bank may be required to make certain minimum
contributions to the Plan on behalf of non-key employees. In general, the Plan
will be treated as a "Top-Heavy Plan" for any calendar year if, as of the last
day of the preceding calendar year, the aggregate balance of the accounts of Key
Employees exceeds 60% of the aggregate balance of the accounts of all employees
under the plan. A Key Employee is generally any employee who, at any time during
the calendar year or any of the four preceding years, is:
(1) an officer of Millington Savings Bank whose annual compensation exceeds
$140,000;
(2) a 5% owner of the employer, meaning an employee who owns more than 5% of
the outstanding stock of MSB Financial Corp., or who owns stock that
possesses more than 5% of the total combined voting power of all stock of
MSB Financial Corp.; or
(3) a 1% owner of the employer, meaning an employee who owns more than 1% of
the outstanding stock of MSB Financial Corp., or who owns stock that
possesses more than 1% of the total combined voting power of all stock of
MSB Financial Corp., AND whose annual compensation exceeds $150,000.
The foregoing dollar amounts are for 2006.
INVESTMENT OF CONTRIBUTIONS
A trust holds all amounts credited to participants' accounts under the
Plan. Through a group annuity contract issued to the Trust by American United
Life Insurance Company, the Plan offers the following investment options:
Russell Lifepoints Conservative Strategy Fund seeks high levels of current
income and, secondarily, capital appreciation. The fund is a fund of funds that
invests in other Russell funds. It pursues its investment objectives by
investing in these underlying Russell funds. Diversified Equity Fund,
Quantitative Equity Fund, International Securities Fund, Real Estate Securities
Fund, Short-term Bond Fund and Emerging Markets Fund.
6
Russell Lifepoints Moderate Strategy Fund seeks long-term capital appreciation
and high levels of current income. The fund is a fund of funds that invests in
other Russell funds. It pursues its investment objectives by investing in these
underlying Russell funds: Diversified Equity Fund, Quantitative Equity Fund,
International Securities Fund, Short-term Bond Fund, Real Estate Securities
Fund, and Emerging Markets Fund.
Russell Lifepoints Balanced Strategy Fund seeks moderate levels of current
income and long-term capital appreciation. The fund is a fund of funds that
invests in other Russell funds. It pursues its investment objectives by
investing in these underlying Russell funds: Diversified Equity Fund, Special
Growth Fund, Quantitative Equity Fund, International Securities Fund,
Diversified Bond Fund, MultiStrategy Bond Fund, Real Estate Securities Fund, and
the Emerging Markets Fund.
Russell LifePoints Growth Strategy Fund seeks long-term capital appreciation.
The fund is a fund of funds that invests in other Russell funds. It pursues its
investment objectives by investing in these underlying Russell funds:
Diversified Equity Fund, Special Growth Fund, Quantitative Equity Fund,
International Securities Fund, Real Estate Securities Fund, and the Emerging
Markets Funds.
Russell Lifepoints Equity Growth Strategy Fund seeks long-term capital
appreciation. The fund is a fund of funds that invests in other Russell funds.
It pursues its investment objectives by investing in these underlying funds:
Russell Diversified Equity fund, Special Growth Fund, Quantitative Equity Fund,
International Securities Fund, Real Estate Securities Fund, and the Emerging
Markets Fund.
AmCent Inflation Adjusted Bond Fund seeks total return. The fund normally
invests 80% of assets in inflation-adjusted securities that are backed by the
full faith and credit of the U.S. government. These issues are indexed or
otherwise structured by the U.S. Treasury to provide protection against
inflation. It may invest up to 20% of assets in securities that are not
inflation-adjusted and are issued by U.S. government agencies and
government-sponsored organizations. The fund maintains no maturity or duration
restrictions.
PIMCO High Yield Fund seeks to achieve its investment objective by investing
under normal circumstances, a majority of its assets in a diversified portfolio
of high yield securities rated below investment grade but rated at least B by
Moody's or S&P, or, if unrated, determined by PIMCO to be of comparable quality.
The remainder of the Fund's assets may be invested in investment grade fixed
income instruments. The average portfolio duration of this Fund normally varies
within a two- to six-year time frame based on PIMCO's forecast for interest
rates. The Fund may invest a portion of its assets in euro-denominated
securities of foreign issuers.
Allianz OpCap Value Fund seeks to achieve its investment objective by normally
investing a majority of its assets in common stocks of companies with market
capitalizations of more than $5 million at the time of investment and
below-average valuations whose business fundamentals are expected to improve. To
achieve income,
7
the Fund invests a portion of its assets in income-producing (e.g.,
dividend-paying) common stocks.
Neuberger Berman Partners Fund seeks growth of capital. To pursue this goal, the
Fund invests mainly in common stocks of mid- to large capitalization companies.
The fund seeks to reduce risk by diversifying among many companies and
industries. The manager looks for well-managed companies whose stock prices are
undervalued.
SSgA S&P 500 Flagship Fund purchases each security in the same capitalization
weight as it appears in the S&P 500 Index. Replication results in low turnover,
accurate tracking and low costs. SSgA's approach is to buy and hold securities,
trading only when there is a change to the composition of the S&P 500 Index or
when cash flow activity occurs. To provide 100% equity exposure, this Fund
maintains a small (generally less than 5%) position in unleveraged S&P 500 stock
index futures contracts. Futures enable better tracking of S&P 500 Index returns
and allow for greater liquidity.
T. Rowe Price Growth Stock Fund invests primarily in common stocks of
well-established growth companies. The fund manager focuses on companies having
one or more of the following characteristics: 1) Superior growth in earnings and
cash flow, 2) Ability to sustain earnings momentum even during economic
slowdowns and/or 3) Occupy a lucrative niche in the economy and is able to
expand even during times of slow economic growth.
Lord Abbett Mid-Cap Value Fund seeks capital appreciation through investments,
primarily in equity securities, which the Advisor believes to be undervalued in
the marketplace. To pursue this goal, the Fund normally invests at least 80% of
its net assets, plus the amount of any borrowings for investment purposes, in
equity securities of mid-sized companies, those with a market capitalization of
roughly $500 million to $10 billion, at the time of purchase. Equity securities
in which the Fund may invest include common stocks, convertible bonds,
convertible preferred stocks, warrants and similar instruments. In selecting
investments, the Fund, using a value approach, tries to identify stocks of
companies that have the potential for significant market appreciation, due to
growing recognition of improvement in their financial results, or increasing
anticipation of such improvement.
Dreyfus Premier Structured Midcap Fund seeks long-term capital growth. To pursue
this goal, the fund normally invests at least 80% of its assets in the stocks of
companies included in the S&P 400 Midcap Index or the Russell Midcap Index at
the time of purchase. The Fund's stock investments may include common stocks,
preferred stocks and convertible securities of U.S. and foreign issuers,
including those purchased in initial public offerings.
SSgA S&P MidCap 400 Index Strategy Fund uses a replication process. Each
security is purchased for the Strategy in the same capitalization weight as it
appears in the S&P MidCap 400 Index. Replication results in low turnover,
accurate tracking and low costs. The approach is to buy and hold securities,
trading only when there is a change to the composition of the Index or when
there is a change to the composition of the Index or when cash flow activity
occurs in the Strategy. To provide 100% equity exposure, the
8
Strategy maintains a small (generally less than 5%) position in unleveraged S&P
MidCap 400 stock index futures contracts.
AmCent Vista Fund seeks long-term capital growth. The fund invests primarily in
companies that management believes will increase in value over time. This
strategy looks for companies with earnings and revenues that are growing at an
accelerating pace. It normally invests in companies that are medium-sized and
smaller at the time of purchase, although it may purchase companies of any size.
The fund typically invests in common stocks. It may also purchase domestic and
foreign preferred stocks, non-leveraged stock index futures contracts and
options, notes, bonds and debt securities. It will generally limit the purchase
of debt securities to investment-grade obligations, except for convertible debt
securities, which may be rated below investment grade.
Dreyfus Premier Small Cap Value Fund seeks investment returns (consisting of
capital appreciation and income) that are consistently superior to the Russell
2000 Value Index. To pursue its goal, the Fund normally invests at least 80% of
its assets in stocks of small U.S. companies. The adviser uses a disciplined
process that combines computer modeling techniques, fundamental analysis and
risk management to select undervalued stocks for the Fund. The portfolio is
constructed so that its sector weightings and risk characteristics and similar
to those of the Russell 2000 Value.
Lord Abbett Small-Cap Blend Fund seeks long term growth of capital by investing
primarily in stocks of small companies. The Fund normally invests at least 80%
of its net assets, plus the amount of any borrowings for investment purposes, in
equity securities of small companies. A small company is defined as a company
having a market capitalization at the time purchase that falls within the market
capitalization range of companies in the Russell 2000 Index, a widely used
benchmark for a small-cap stock performance.
SSgA Russell 2000 Index Strategy Fund employs a replication approach to
construct a fund whose returns closely track those of the Russell 2000 Index.
Replication results in low turnover, accurate tracking and low costs. The
strategy employed is to buy and hold securities, trading only when there is a
change to the composition of the Index or when cash flow activity occurs in the
Strategy. To provide 100% exposure to the equity market and increase tracking
accuracy, the Strategy may hold Russell 2000 Index futures contracts in lieu of
cash (no more than 5% of the holdings are futures).
Fidelity Advisor Small Cap Fund normally invests primarily in common stocks. The
Fund normally invests at least 80% of assets in securities of companies with
small market capitalizations (those with market capitalizations similar to
companies in the Russell 2000 Index or the Standard & Poor's SmallCap 600
Index). The Fund invests in either "growth stocks or "value" Stocks or both. The
Fund invests in domestic and foreign issuers.
SSgA MSCI EAFE Index Strategy Fund consists of almost 1,000 stocks in 21
countries outside of North and South America, and represents approximately 85%
of the total market capitalization in those countries. The SSgA Daily MSCI EAFE
Index Strategy Fund invests in three country/regional funds, which together make
up the MSCI
9
EAE Index. Those funds include Europe, Japan, and Pacific Basin ex-Japan. This
approach allows investors to gain daily exposure to EAFE as a whole or any
combination of the three component parts.
Templeton Growth Fund, under normal market conditions, invests mainly in the
equity securities of companies located anywhere in the world, including emerging
markets. In addition to the fund's main investments, depending upon current
market conditions, the Fund may invest up to 25% of its total assets in debt
securities, and the fund may use various derivative strategies seeking to
protect its assets.
American Century Real Estate management team invests in common stocks of real
estate investment trusts (REITs), which own income-producing properties such as
offices, industrial properties, shopping centers regional malls, outlet centers,
apartments, manufactured homes, lodging/resorts, self storage, and diversified
properties.
AUL Fixed Interest Account is an interest-earning investment option, backed by
AUL's general account assets. AUL guarantees that interest will be credited at
the higher of the rate guaranteed in the group annuity contract and the current
rate declared by it. AUL may change the initial interest rate for future
contributions. New contributions are guaranteed to earn the applicable initial
interest rate for at least a one-year time period from the date contributions
are made. Changes in the initial interest rate or in the interest rate for prior
contributions will also be effective for at least one year. In no event will the
interest rate ever be below the rate guaranteed in the group annuity contract.
AUL bears the investment risk for the AUL Fixed Interest Account values and for
paying interest.
10
The annual percentage return (net of fees) for the prior three years on
the funds offered as investment choices under the Plan was:
------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------
Russell Lifepoints Conservative 2.33 3.93 N/A
------------------------------------------------------------------------------------------
Russell Lifepoints Moderate 4.03 7.12 N/A
------------------------------------------------------------------------------------------
Russell Lifepoints Balanced 6.32 10.94 N/A
------------------------------------------------------------------------------------------
Russell Lifepoints Growth Strategy 7.85 13.32 N/A
------------------------------------------------------------------------------------------
Russell Lifepoints Equity Growth Strategy 9.53 15.70 N/A
------------------------------------------------------------------------------------------
AmCent Inflation Adjusted Bond 1.86 7.41 N/A
------------------------------------------------------------------------------------------
PIMCO High Yield 1.97 8.57 22.74
------------------------------------------------------------------------------------------
Allianz OpCap Value 2.27 16.69 43.36
------------------------------------------------------------------------------------------
Neuberger Berman Partners 17.33 18.39 N/A
------------------------------------------------------------------------------------------
SSgA S&P 500Flagship 4.07 9.99 27.65
------------------------------------------------------------------------------------------
T. Rowe Price Growth Stock 5.81 9.47 29.37
------------------------------------------------------------------------------------------
Lord Abbett Mid-Cap Value 7.82 23.69 N/A
------------------------------------------------------------------------------------------
Dreyfus Premier Structured Midcap 9.55 18.84 N/A
------------------------------------------------------------------------------------------
SSgA S&P MidCap 400 Index Strategy 11.70 15.36 33.54
------------------------------------------------------------------------------------------
AmCent Vista 8.36 15.25 N/A
------------------------------------------------------------------------------------------
Dreyfus Premier Small Cap Value 2.55 24.80 N/A
------------------------------------------------------------------------------------------
Lord Abbett Small-Cap Blend 12.61 20.36 N/A
------------------------------------------------------------------------------------------
SSgA Russell 2000 Index Strategy 3.99 17.28 44.07
------------------------------------------------------------------------------------------
Fidelity Advisor Small Cap 7.00 23.24 37.75
------------------------------------------------------------------------------------------
SSgA MSCI EAFE Index Strategy 12.64 19.18 34.25
------------------------------------------------------------------------------------------
Templeton Growth 7.69 16.47 32.30
------------------------------------------------------------------------------------------
AmCent Real Estate 15.47 34.93 38.40
------------------------------------------------------------------------------------------
AUL Fixed Interest Account 3.30 3.30 4.05
------------------------------------------------------------------------------------------
The Plan now offers the MSB Financial Corp. Stock Fund as an additional
choice to the investment alternatives described above. The MSB Financial Corp.
Stock Fund invests primarily in the common stock of MSB Financial Corp.
Participants in the Plan may direct the trustee to invest any portion, up to 99%
of their Plan account balances in the MSB Financial Corp. Stock Fund.
The MSB Financial Corp. Stock Fund consists of investments in the
common stock of MSB Financial Corp. made on the effective date of the Stock
Offering. Each Participant's proportionate undivided beneficial interest in the
MSB Financial Corp. Stock Fund is measured by units. The daily unit value is
calculated by determining the market value of the common stock held and adding
to that any cash held by the trustee. This total will be divided by the number
of units outstanding to determine the unit value of the MSB Financial Corp.
Stock Fund.
Upon payment of a cash dividend, the trustee will determine the unit
value prior to distributing the dividend. The trustee may use the dividend to
purchase shares of MSB Financial Corp. Common Stock. The Trustee will, to the
extent practicable, use amounts held in the MSB Financial Corp. Stock Fund to
purchase shares of the common stock. Pending investment in the common stock,
assets held in the MSB Financial Corp. Stock Fund will be placed in bank
deposits and other short-term investments.
11
As of the date of this prospectus supplement, no shares of MSB
Financial Corp. common stock have been issued or are outstanding, and there is
no established market for MSB Financial Corp. common stock. Accordingly, there
is no record of the historical performance of the MSB Financial Corp. Stock
Fund. Performance of the MSB Financial Corp. Stock Fund depends on a number of
factors, including the financial condition and profitability of Millington and
general stock market conditions.
Once you have submitted your Investment Form, you may not make any
transfers until after the completion of the Stock Offering. After the Stock
Offering, the allocation of your interest in the Employer Stock Fund may be
changed by contacting your Human Resources representative for the appropriate
form to complete and fax to (317) 285-1728.
Benefits Under The Plan
Vesting. All participants are 100% vested in their contribution
accounts under the Plan and in any income earned on their investments. This
means that participants have a non-forfeitable right to their contributions and
any earnings on those amounts at all times. You vest in our matching
contributions according to the following schedule:
Vesting Schedule
----------------
Period of Service Percent
Recognized for vesting purposes: vested:
-------------------------------- -------
Less than 2 years 0%
2 year but less than 3 20%
3 years but less than 4 40%
4 years but less than 5 60%
5 years but less than 6 80%
---
6 years or more 100%
===
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
Withdrawals Before Termination Of Employment. You may receive
in-service distributions from the Plan under limited circumstances in the form
of non-hardship withdrawals after age 65 and hardship withdrawals and loans.
Participants age 65 or over may withdraw the net value of their
accounts.
In order to qualify for a hardship withdrawal, you must have an
immediate and substantial need to meet certain expenses and have no other
reasonably available resources to meet the financial need. If you qualify for a
hardship distribution, the trustee will make the distribution proportionately
from the investment funds in which you have invested your account balances.
12
Distribution Upon Retirement Or Disability. The standard form of
benefit upon retirement or disability is a lump sum payment. However, if the
value of a participant's accounts under the Plan exceeds $5,000, the participant
may elect to defer the lump sum payment until after retirement. However, the IRS
requires that participants receive at least a portion of their plan accounts by
the April 1st of the calendar year following the calendar year in which they
retire (or terminate service due to a disability) or the calendar year in which
they reach age 70 1/2. Participants may also choose to roll over all or a
portion of their plan accounts to an Individual Retirement Account (IRA), or to
another employer's qualified plan, if the other employer's plan permits rollover
contributions. If your Plan accounts total $1,000 or less, you will receive a
lump sum payment as soon as administratively possible after your termination of
employment. For amounts over $1,000 and up to $5,000, if you fail to either
receive the distribution directly or have it rolled over to an IRA, then the
distribution will be paid in a direct rollover to an IRA established by
Millington Savings Bank.
Distribution Upon Death. A participant's designated beneficiary will
receive the full value of a participant's accounts under the Plan upon the
participant's death. If the participant did not make a valid election regarding
the form of payment prior to death, the beneficiary will receive a lump sum
payment as soon as administratively possible. If the participant made a valid
payment election, or was otherwise scheduled to receive a deferred lump sum
payment, the beneficiary will generally receive a lump sum payment on the date
elected by the participant. Under certain circumstances, however, payment may be
made on an earlier date.
Distribution Upon Termination For Any Other Reason. If your Plan
accounts total $1,000 or less, you will receive a lump sum payment as soon as
administratively possible after your termination of employment. If the value of
your Plan accounts exceeds $5,000, you will receive a lump sum payment on your
normal retirement date. However, after completion of the proper paperwork, you
may elect to receive the value of your vested Plan accounts in a lump sum
payment prior to your normal retirement date. You may also request that the
trustee transfer the value of your accounts to an IRA or to another employer's
qualified plan, if the other employer's plan permits rollover contributions. For
amounts over $1,000 and up to $5,000, if you fail to either receive the
distribution directly or have it rolled over to an IRA, then the distribution
will be paid in a direct rollover to an IRA established by Millington Savings
Bank.
Nonalienation Of Benefits. Except with respect to federal income tax
withholding, and as provided for under a qualified domestic relations order,
benefits payable under the Plan will not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary, and any attempt to anticipate, alienate, sell, transfer, assign,
pledge, encumber, charge or otherwise dispose of any rights to benefits payable
under the Plan will be void.
APPLICABLE FEDERAL TAX LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON YOUR RIGHT TO WITHDRAW AMOUNTS HELD UNDER THE PLAN BEFORE YOUR TERMINATION OF
EMPLOYMENT
13
WITH MILLINGTON SAVINGS BANK. FEDERAL LAW MAY ALSO IMPOSE AN EXCISE TAX ON
WITHDRAWALS FROM THE PLAN BEFORE YOU ATTAIN 59 1/2 YEARS OF AGE, REGARDLESS OF
WHETHER THE WITHDRAWAL OCCURS DURING YOUR EMPLOYMENT WITH MILLINGTON SAVINGS
BANK OR AFTER TERMINATION OF EMPLOYMENT.
ADMINISTRATION OF THE PLAN
Trustee
The trustee of the Plan is the named fiduciary of the Plan for purposes
of ERISA. The board of directors of Millington Savings Bank appoints the trustee
to serve at its pleasure. The board of directors has appointed Gary T. Jolliffe,
Albert N. Olsen and Fred Rossi as trustee of the Plan.
The trustee receives, holds and invests the contributions to the Plan
in trust and distributes them to participants and beneficiaries in accordance
with the terms of the Plan and the directions of the plan administrator. The
trustee is responsible for the investment of the trust assets.
Reports To Plan Participants
The plan administrator furnishes participants quarterly statements that
show the balance in their accounts as of the statement date, contributions made
to their accounts during that period and any additional adjustments required to
reflect earnings or losses.
Plan Administrator
Millington Savings Bank currently acts as plan administrator for the
Plan. The plan administrator handles the following administrative functions:
interpreting the provisions of the plan, prescribing procedures for filing
applications for benefits, preparing and distributing information explaining the
plan, maintaining plan records, books of account and all other data necessary
for the proper administration of the plan, preparing and filing all returns and
reports required by the U.S. Department of Labor and the IRS and making all
required disclosures to participants, beneficiaries and others under ERISA.
Amendment And Termination
Millington Savings Bank expects to continue the Plan indefinitely.
Nevertheless, Millington Savings Bank may terminate the Plan at any time. If
Millington Savings Bank terminates the Plan in whole or in part, all affected
participants become fully vested in their accounts, regardless of other
provisions of the Plan. Millington Savings Bank reserves the right to make, from
time to time, changes which do not cause any part of the trust to be used for,
or diverted to, any purpose other than the exclusive benefit of participants or
their beneficiaries. Millington Savings Bank may amend the plan, however, as
necessary or desirable, in order to comply with ERISA or the Internal Revenue
Code.
14
Merger, Consolidation Or Transfer
If the Plan merges or consolidates with another plan or transfers the
trust assets to another plan, and either the Plan or the other plan is
subsequently terminated, the Plan requires that you receive a benefit
immediately after the merger, consolidation or transfer that would equal or
exceed the benefit you would have been entitled to receive immediately before
the merger, consolidation or transfer, if the Plan had terminated at that time.
Federal Income Tax Consequences
The following summarizes only briefly the material federal income tax
aspects of the Plan. You should not rely on this summary as a complete or
definitive description of the material federal income tax consequences of the
Plan. Statutory provisions change, as do their interpretations, and their
application may vary in individual circumstances. Finally, applicable state and
local income tax laws may have different tax consequences than the federal
income tax laws. YOU SHOULD CONSULT A TAX ADVISOR WITH RESPECT TO ANY
TRANSACTION INVOLVING THE PLAN, INCLUDING ANY DISTRIBUTION FROM THE PLAN.
As a "tax-qualified retirement plan," the Internal Revenue Code affords
the Plan certain tax advantages, including the following:
(1) The sponsoring employer may take an immediate tax deduction for the amount
contributed to the plan each year;
(2) participants pay no current income tax on amounts contributed by the
employer on their behalf; and
(3) earnings of the plan are tax-deferred, thereby permitting the tax-free
accumulation of income and gains on investments.
Millington Savings Bank administers the Plan to comply with the
requirements of the Internal Revenue Code as of the applicable effective date
of any change in the law. If Millington Savings Bank should receive an adverse
determination letter from the IRS regarding the Plan's tax exempt status, all
participants would generally recognize income equal to their vested interests
in the Plan, the participants would not be permitted to transfer amounts
distributed from the Plan to an IRA or to another qualified retirement plan,
and Millington Savings Bank would be denied certain tax deductions taken in
connection with the Plan.
Lump Sum Distribution. A distribution from the Plan to a participant or the
beneficiary of a participant qualifies as a lump sum distribution if it is made
within one taxable year, on account of the participant's death, disability or
separation from service, or after the participant attains age 59 1/2; and
consists of the balance credited to the participant under
15
this plan and all other profit sharing plans, if any, maintained by Millington
Savings Bank. The portion of any lump sum distribution included in taxable
income for federal income tax purposes consists of the entire amount of the lump
sum distribution, less the amount of after-tax contributions, if any, made to
any other profit-sharing plans maintained by Millington Savings Bank, if the
distribution includes those amounts.
MSB Financial Corp. Common Stock Included In Lump Sum Distribution. If a lump
sum distribution includes MSB Financial Corp. common stock, the distribution
generally is taxed in the manner described above. The total taxable amount is
reduced, however, by the amount of any net unrealized appreciation on MSB
Financial Corp. common stock; that is, the excess of the value of MSB Financial
Corp. common stock at the time of the distribution over the cost or other basis
of the securities to the trust. The tax basis of MSB Financial Corp. common
stock, for purposes of computing gain or loss on a subsequent sale, equals the
value of MSB Financial Corp. common stock at the time of distribution, less the
amount of net unrealized appreciation. Any gain on a subsequent sale or other
taxable disposition of MSB Financial Corp. common stock, to the extent of the
net unrealized appreciation at the time of distribution, is long-term capital
gain, regardless of how long you hold the MSB Financial Corp. common stock, or
the "holding period." Any gain on a subsequent sale or other taxable disposition
of MSB Financial Corp. common stock that exceeds the amount of net unrealized
appreciation upon distribution is considered long-term capital gain, regardless
of the holding period. Any gain on a subsequent sale or other taxable
disposition of MSB Financial Corp. common stock that exceeds the amount of net
unrealized appreciation at the time of distribution is considered either
short-term or long-term capital gain, depending upon the length of the holding
period. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of the distribution, to
the extent allowed under IRS regulations.
WE HAVE PROVIDED YOU WITH A BRIEF DESCRIPTION OF THE MATERIAL FEDERAL INCOME TAX
ASPECTS OF THE PLAN THAT ARE GENERALLY APPLICABLE UNDER THE INTERNAL REVENUE
CODE. WE DO NOT INTEND THIS DESCRIPTION TO BE A COMPLETE OR DEFINITIVE
DESCRIPTION OF THE FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN OR
RECEIVING DISTRIBUTIONS FROM THE PLAN. ACCORDINGLY, YOU SHOULD CONSULT A TAX
ADVISOR CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF
PARTICIPATING IN AND RECEIVING DISTRIBUTIONS FROM THE PLAN.
16
Restrictions On Resale
Any "affiliate" of MSB Financial Corp. under Rules 144 and 405 of the
Securities Act of 1933, as amended, who receives a distribution of common stock
under the Plan, may reoffer or resell such shares only under a registration
statement filed under the Securities Act of 1933, as amended, assuming the
availability of a registration statement, or under Rule 144 or some other
exemption from these registration requirements. An "affiliate" of MSB Financial
Corp. is someone who directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, MSB Financial Corp.
Generally, a director, principal officer or major shareholder of a corporation
is deemed to be an "affiliate" of that corporation.
Any person who may be an "affiliate" of MSB Financial Corp. may wish to
consult with counsel before transferring any common stock they own. In addition,
participants should consult with counsel regarding the applicability to them of
Section 16 of the Securities Exchange Act of 1934, as amended, which may
restrict the sale of MSB Financial Corp. common stock acquired under the Plan or
other sales of MSB Financial Corp. common stock.
Persons who are NOT deemed to be "affiliates" of MSB Financial Corp. at
the time of resale may resell freely any shares of MSB Financial Corp. common
stock distributed to them under the Plan, either publicly or privately, without
regard to the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended, or compliance with the restrictions and
conditions contained in the exemptions available under federal law. A person
deemed an "affiliate" of MSB Financial Corp. at the time of a proposed resale
may publicly resell common stock only under a "reoffer" prospectus or in
accordance with the restrictions and conditions contained in Rule 144 of the
Securities Act of 1933, as amended, or some other exemption from registration,
and may not use this prospectus in connection with any such resale. In general,
Rule 144 restricts the amount of common stock which an affiliate may publicly
resell in any three-month period to the greater of one percent of MSB Financial
Corp. common stock then outstanding or the average weekly trading volume
reported on the Nasdaq Stock Market during the four calendar weeks before the
sale. Affiliates may sell only through brokers without solicitation and only at
a time when MSB Financial Corp. is current in filing all required reports under
the Securities Exchange Act of 1934, as amended.
SEC Reporting And Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes
reporting and liability requirements on officers, directors and persons who
beneficially own more than ten percent of public companies such as MSB Financial
Corp. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the filing of reports of beneficial ownership. Within ten days of becoming a
person required to file reports under Section 16(a), such person must file a
Form 3 reporting initial beneficial ownership with the Securities and Exchange
Commission. Such persons must also report periodically certain changes in
beneficial ownership involving the allocation or reallocation of assets held in
their Plan accounts, either on a Form 4 within two days after
17
a transaction, or annually on a Form 5 within 45 days after the close of a
company's fiscal year.
In addition to the reporting requirements described above, Section
16(b) of the Securities Exchange Act of 1934, as amended, provides for the
recovery by MSB Financial Corp. of profits realized from the purchase and sale
or sale and purchase of its common stock within any six-month period by any
officer, director or person who beneficially owns more than ten percent of the
common stock.
The SEC has adopted rules that exempt many transactions involving the
Plan from the "short-swing" profit recovery provisions of Section 16(b). The
exemptions generally involve restrictions upon the timing of elections to buy or
sell employer securities for the accounts of any officer, director or person who
beneficially owns more than ten percent of the common stock.
Except for distributions of the common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, persons who are subject to Section 16(b) may be required, under limited
circumstances involving the purchase of common stock within six months of the
distribution, to hold the shares of common stock distributed from the Plan for
six months after the distribution date.
LEGAL OPINION
The validity of the issuance of the common stock of MSB Financial Corp.
will be passed upon by Malizia Spidi & Fisch, PC, Washington, D.C. Malizia Spidi
& Fisch, PC acted as special counsel for MSB Financial Corp. in connection with
the Stock Offering of MSB Financial Corp.
18
INVESTMENT FORM
Name of Plan: Millington Savings Bank 401(k) Savings and Profit Sharing Plan
Participant: _____________________________________________________
Social Security Number: __________________
1. INSTRUCTIONS. In connection with the offering to the public of the common
stock of MSB Financial Corp. (the "Stock Offering"), the Millington Savings Bank
401(k) Savings and Profit Sharing Plan (the "Plan") has been amended to permit
participants to direct their current account balances for their elective
deferrals, employer matching contributions, employer profit sharing, Qualified
Non-Elective Contribution Account, and rollovers into a new fund: the MSB
Financial Corp. Stock Fund ("Employer Stock Fund"). The percentage of a
participant's account transferred at the direction of the participant into the
Employer Stock Fund will be used to purchase shares of Common Stock of MSB
Financial Corp. ("Common Stock").
To direct a transfer of all or a part of the funds credited to your
accounts to the Employer Stock Fund, you should complete and file this form with
the Human Resources Department no later than 3 days prior to the expiration date
of the stock offering. A representative for the Plan Administrator will retain a
copy of this form and return a copy to you. If you need any assistance in
completing this form, please contact Mary Jean Piorkowski at 908-647-4000. If
you do not complete and return this form to the Human Resources Department by
noon on December 4, 2006, the funds credited to your accounts under the Plan
will continue to be invested in accordance with your prior investment
directions, or in accordance with the terms of the Plan if no investment
directions have been provided.
2. INVESTMENT DIRECTIONS. I hereby authorize the Plan Administrator to direct
the Trustees to invest the following amounts (prorated by contribution source)
of their elective deferrals, employer matching contributions, employer profit
sharing, Qualified Non-Elective Contribution Account, and rollovers in the
Employer Stock Fund.
Russell Lifepoints Conservative $_______
Russell Lifepoints Moderate $_______
Russell Lifepoints Balanced $_______
Russell Lifepoints Growth Strategy $_______
Russell Lifepoints Equity Growth Strategy $_______
AmCent Inflation Adjusted Bond $_______
PIMCO High Yield $_______
Allianz OpCap Value $_______
Neuberger Berman Partners $_______
SSgA S&P 500Flagship $_______
T. Rowe Price Growth Stock $_______
Lord Abbett Mid-Cap Value $_______
Dreyfus Premier Structured Midcap $_______
SSgA S&P MidCap 400 Index Strategy $_______
19
AmCent Vista $_______
Dreyfus Premier Small Cap Value $_______
Lord Abbett Small-Cap Blend $_______
SSgA Russell 2000 Index Strategy $_______
Fidelity Advisor Small Cap $_______
SSgA MSCI EAFE Index Strategy $_______
Templeton Growth $_______
AmCent Real Estate $_______
AUL Fixed Interest Account $_______
NOTE: The total percentage of directed investments, above for each fund, may not
exceed 99%.
If there is not enough Common Stock in the stock offering to fill my
subscription pursuant to the investment directions above, I hereby instruct the
Plan Trustee to purchase shares of Common Stock in the open market after the
Stock Offering to the extent necessary to fulfill my investment directions
indicated on this form. I understand that if I do not direct the Trustee by
checking the box below, the excess funds will be invested in the same manner as
new deposits have been directed.
[ ] Yes, I direct the Trustee to purchase stock in the open market, if
necessary.
3. PURCHASER INFORMATION. The ability of participants in the Plan to purchase
Common Stock in the Stock Offering and to direct their current account balances
into the Employer Stock Fund is based upon the participant's subscription
rights. Please indicate your status.
[ ] Check here if you had $50.00 or more in your account with Millington
Savings Bank Plan as of June 30, 2005.
[ ] Check here if you had $50.00 or more in your account with Millington
Savings Bank Plan as of September 30, 2006 (but not as of June 30, 2005).
4. ACKNOWLEDGMENT OF PARTICIPANT. I understand that this Investment Form shall
be subject to all of the terms and conditions of the Plan. I acknowledge that I
have received a copy of the Prospectus and the Prospectus Supplement.
____________________________________________ _____________________
Signature of Participant Date
________________________________________________________________________________
ACKNOWLEDGMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was received by
the Plan Administrator and will become effective on the date noted below.
By: ________________________________________ _____________________
Date
20
THE PARTICIPATION INTERESTS REPRESENTED BY THE COMMON STOCK OFFERED HEREBY ARE
NOT DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE BANK INSURANCE FUND OR THE
SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY MSB FINANCIAL CORP.,
MSB FINANCIAL, MHC OR MILLINGTON SAVINGS BANK. THE COMMON STOCK IS SUBJECT TO AN
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL INVESTED.
MINIMUM STOCK PURCHASE IS $ 250.00
MAXIMUM STOCK PURCHASE IS $200,000.00
PLEASE COMPLETE AND RETURN TO MARY JEAN PIORKOWSKI AT MILLINGTON SAVINGS BANK BY
NOON ON DECEMBER 4, 2006.
21
PROSPECTUS Filed Pursuant to Rule 424(b)(3)
Registration No. 333-137294
MSB FINANCIAL CORP.
(Holding Company for Millington Savings Bank)
Up to 2,199,375 Shares of Common Stock (Subject to Increase to up to
2,529,281 Shares)
MSB Financial Corp. is offering for sale shares of its common stock
that will represent 45% of its outstanding common stock upon completion of this
offering. The remaining 55% of MSB Financial Corp.'s outstanding common stock
upon completion of this offering will be held by MSB Financial, MHC, the mutual
holding company parent of MSB Financial Corp. Upon completion of the offering,
MSB Financial Corp. will have between 3,612,500 and 4,887,500 shares
outstanding, including shares that will be held by MSB Financial, MHC. The total
number of shares of MSB Financial Corp. common stock outstanding upon completion
of the offering is subject to an independent appraisal that must be updated
before the offering can be completed and may be increased to an adjusted maximum
of 5,620,625 shares without resoliciting subscribers. The shares sold in the
offering would, in that case, total 2,529,281 shares.
The offering is expected to expire at 12:00 noon, Eastern time, on
December 19, 2006. We may extend this expiration date without notice to you
until February 2, 2007, unless the Office of Thrift Supervision approves a later
date.
Keefe, Bruyette & Woods, Inc. will use its best efforts to assist us in
our selling efforts, but is not required to purchase any of the common stock
that is being offered for sale. Purchasers will not pay a commission to purchase
shares of common stock in the offering. All shares being sold are being offered
at a price of $10.00 per share. The offering will not be completed if we do not
sell a minimum of 1,625,625 shares. We have applied to have our common stock
listed for trading on the Nasdaq Global Market under the symbol "MSBF."
The minimum purchase is 25 shares. Once submitted, orders are
irrevocable unless the offering is terminated or extended beyond February 2,
2007. If the offering is extended beyond February 2, 2007, subscribers will have
the right to modify or rescind their purchase orders. We will hold funds
received with orders in a deposit account that we have established at Millington
Savings Bank for that sole purpose. We may decide during the offering also to
hold funds received with orders in a deposit account at another insured
depository institution. In either case, we will pay interest on all funds
received at a rate equal to Millington Savings Bank's regular passbook savings
rate. If we do terminate the offering, we will promptly return your funds with
interest. If we extend the offering beyond February 2, 2007, you will be given
an opportunity to confirm, modify or rescind your order, and if an affirmative
response is not received, we will promptly return your funds with interest.
This investment involves a degree of risk, including the
possible loss of principal.
Please read Risk Factors beginning on page 11.
OFFERING SUMMARY
Price Per Share: $10.00
Maximum,
Minimum Midpoint Maximum as adjusted
------- -------- ------- -----------
Number of shares......................... 1,625,625 1,912,500 2,199,375 2,529,281
Gross proceeds........................... $16,256,250 $19,125,000 $21,993,750 $25,292,810
Estimated offering expenses(1)........... $713,000 $740,000 $766,000 $796,000
Estimated net proceeds................... $15,543,250 $18,385,000 $21,227,750 $24,496,810
Estimated net proceeds per share......... $9.56 $9.61 $9.65 $9.69
--------------
(1) See Plan of Distribution and Marketing Arrangements on page 94 for a
description of the underwriting commission paid by MSB Financial Corp. in
connection with this offering.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For assistance, please contact our Stock Information Center at (877) 274-2040
Keefe, Bruyette & Woods
The date of this prospectus is November 13, 2006.
[Map Appears Here]
TABLE OF CONTENTS
Page
----
Summary..................................................................................1
Risk Factors.............................................................................11
A Warning About Forward-Looking Statements...............................................15
Use of Proceeds..........................................................................16
Our Policy Regarding Dividends...........................................................17
Market for the Stock.....................................................................18
Capitalization...........................................................................18
Pro Forma Data...........................................................................19
Historical and Pro Forma Capital Compliance..............................................24
Recent Developments......................................................................25
Selected Financial and Other Data........................................................29
Management's Discussion and Analysis of Financial Condition and Results of Operations....31
Business of MSB Financial, MHC...........................................................43
Business of MSB Financial Corp...........................................................43
Business of Millington Savings Bank......................................................43
Regulation...............................................................................65
Taxation.................................................................................73
Management...............................................................................73
The Offering.............................................................................82
Restrictions on Acquisition of MSB Financial Corp........................................101
Description of Capital Stock.............................................................103
Legal and Tax Opinions...................................................................104
Experts..................................................................................104
Change in Independent Auditor............................................................105
Registration Requirements................................................................105
Where You Can Find Additional Information................................................105
Index to Consolidated Financial Statements...............................................106
--------------------------------------------------------------------------------
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand this
offering fully, you should read this entire document carefully, including the
consolidated financial statements and the notes to the consolidated financial
statements beginning on page F-1 of this document. Throughout this document, the
terms "we", "us" or "our" refer to MSB Financial Corp. or Millington Savings
Bank, or both, as the context indicates.
MSB Financial, MHC
MSB Financial Corp.
Millington Savings Bank
MSB Financial Corp. is a federally-chartered corporation that holds all
of the capital stock of Millington Savings Bank, a state chartered savings bank
founded in 1911. Currently, 100% of the outstanding stock of MSB Financial Corp.
is held by MSB Financial, MHC, a federally-chartered mutual holding company.
Upon completion of this offering, 55% of the outstanding stock of MSB Financial
Corp. will be held by MSB Financial, MHC and 45% will be held by public
stockholders.
Millington Savings Bank offers a full range of traditional deposit and
lending services, including one-to-four family mortgage loans, home equity loans
and lines of credit, commercial real estate loans, construction loans,
commercial loans and lines of credit and consumer loans, including auto loans,
personal loans and account loans. Millington Savings Bank currently operates
from its main office in Morris County, New Jersey plus three branch offices
located in Somerset County, New Jersey. MSB Financial Corp.'s principal
executive offices are at Millington Savings Bank's main office, 1902 Long Hill
Road, Millington, New Jersey 07946-0417. The phone number at that address is
(908) 647-4000. Millington Savings Bank maintains a website at
www.millingtonsb.com.
This chart shows our current corporate structure (before this
offering).
--------------------------------------------------------------------------------
MSB Financial, MHC
--------------------------------------------------------------------------------
| 100%
--------------------------------------------------------------------------------
MSB Financial Corp.
--------------------------------------------------------------------------------
| 100%
--------------------------------------------------------------------------------
Millington Savings Bank
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This chart shows our new corporate structure (after this offering).
----------------------------- -----------------------------
MSB Financial, MHC Minority Public
Stockholders
----------------------------- -----------------------------
| 55% | 45%
--------------------------------------------------------------------------------
MSB Financial Corp.
--------------------------------------------------------------------------------
| 100%
--------------------------------------------------------------------------------
Millington Savings Bank
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Purpose of the Offering
The primary reason for our decision to sell stock is to increase our
capital to support future growth and enable us to continue to be a
well-capitalized institution. We opened our first branch office in 1998. Total
assets have grown by $101.3 million since June 30, 2002 to reach $270.2 million
at June 30, 2006, a 60% increase. We currently operate from our main office and
three branch offices. A new branch office is underway and expected to open in
late 2007.
Selling stock will also mean that Millington Savings Bank's depositors,
employees, management and directors will have an opportunity to acquire an
equity ownership interest in us and thereby obtain an economic interest in our
future operations. In addition, we intend to utilize stock benefit plans as a
means of attracting and retaining qualified and experienced officers, directors
and employees.
Use of Proceeds
Millington Savings Bank will receive 50% of the net proceeds from the
offering as a capital contribution and will use those proceeds for general
business purposes. In particular, the Bank intends to reduce its borrowings. The
Bank has had strong loan originations in recent years and has used Federal Home
Loan Bank borrowings to supplement deposits as a funding source for its lending
activities. Between June 30, 2002 and June 30, 2006, total loans grew by $99.7
million to $224.4 million, an 80% increase, while deposits grew by $40.8 million
to $194.8 million, a 26.5% increase. Borrowings at June 30, 2006 totaled $54.2
million and included $18.5 million and $23.0 million of overnight line of credit
and 30 day borrowings, respectively, which may be reduced without incurring
prepayment penalties. We had no borrowings at June 30, 2002 or 2003.
The offering proceeds may also be used to finance the possible
acquisition of other financial institutions or branches, if appropriate
opportunities arise. We do not, however, have any current understandings,
agreements or arrangements in connection with branching or acquisitions, other
than the already in progress new branch office in Bernardsville, New Jersey
which is expected to open in late 2007.
We will lend a portion of the offering proceeds to the Millington
Savings Bank Employee Stock Ownership Plan to enable it to buy up to 8% of the
shares sold in the offering. The balance of the offering proceeds will be
retained by MSB Financial Corp. and deposited with or loaned to Millington
Savings Bank, providing the Bank with funds to support the Bank's lending
activities. This will enable the Bank to reduce its outstanding Federal Home
Loan Bank borrowings. MSB Financial Corp. may also use the offering proceeds it
retains for general corporate purposes, including repurchasing shares of its
common stock, paying cash dividends or supporting acquisitions of other
financial institutions, branches or financial services companies.
Conduct of the Offering
We have granted rights to subscribe for shares of MSB Financial Corp.
common stock in the following order of priority:
o Priority 1 - depositors of Millington Savings Bank at the close of business
on June 30, 2005 with deposits of at least $50.00.
o Priority 2 - the Millington Savings Bank Employee Stock Ownership Plan.
o Priority 3 - depositors of Millington Savings Bank at the close of business
on September 30, 2006 with deposits of at least $50.00.
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o Priority 4 - depositors of Millington Savings Bank at the close of business
on October 31, 2006.
Please note: Subscription rights are not transferable, and persons with
subscription rights may not subscribe for shares for the benefit of any other
person. If you violate this prohibition, you may lose your rights to purchase
shares and may face criminal prosecution and/or other sanctions.
If we receive subscriptions for a number of shares that exceeds the
maximum of the offering range, we may be unable to fill, or may only partially
fill, your order. Shares will be allocated in order of the priorities shown
above pursuant to a formula outlined in the plan of stock issuance adopted by
our board of directors.
We are offering for sale a minimum of 1,625,625 shares and a maximum of
2,199,375 shares. The independent appraisal that we used to set the number of
shares being offered must be updated before we can complete the stock offering,
and this could result the number of shares being increased to up to an adjusted
maximum of 2,529,281 shares. We may sell that number of shares without any
notice to you. If the updated independent appraisal is higher than the adjusted
maximum, we will be required to return all subscribers' funds to them with
interest.
If we sell between the maximum and the adjusted maximum number of
shares, the Millington Savings Bank Employee Stock Ownership Plan will have the
first priority right to purchase the additional shares to the extent that its
subscription has not previously been filled. Any shares remaining will be
allocated in the order of the priorities described above. See The Stock Offering
- Subscription Offering and Subscription Rights for a description of the
allocation procedure.
We may offer shares not sold in the subscription offering to the
general public in a community offering. In the community offering, we will give
a preference first to natural persons and trusts of natural persons who reside
in Morris and Somerset Counties, New Jersey (the counties in which Millington
Savings Bank has offices), and second to other residents of New Jersey, and to
the general public after that. This part of the offering may commence
concurrently with the subscription offering or any time thereafter and may
terminate at any time without notice but no later than February 2, 2007, unless
extended.
Shares not sold in the subscription or community offering may be
offered for sale in a syndicated community offering, which would be an offering
to the general public on a best efforts basis managed by Keefe, Bruyette &
Woods. This part of the offering may terminate at any time without notice but no
later than February 2, 2007, unless extended.
We have the right to reject any orders for stock received in the
community offering and syndicated community offering.
Deadline for Ordering Stock
The subscription offering will expire at 12:00 noon, Eastern time, on
December 19, 2006. We may extend this expiration date without notice to you for
up to 45 days, until February 2, 2007. Once submitted, your order is irrevocable
unless the offering is extended beyond February 2, 2007. We may request
permission from the Office of Thrift Supervision to extend the offering beyond
February 2, 2007, but in no event may the offering be extended beyond December
19, 2008. If the offering is extended beyond February 2, 2007, we will notify
each subscriber and subscribers will have the right to confirm, modify or
rescind their subscriptions. If an affirmative response is not received, a
subscriber's subscription will be canceled and funds will be returned with
interest.
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We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
Purchase Limitations
Limitations on the purchase of stock in the offering have been set by
the plan of stock issuance adopted by our Board of Directors. These limitations
include the following:
o The minimum purchase is 25 shares.
o The maximum number of shares of stock that any individual (or individuals
through a single account) may purchase is 20,000 shares.
o The maximum number of shares of stock that any individual may purchase
together with any associate or group of persons acting in concert is 25,000
shares.
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. Thus, we may increase or
decrease the purchase limitations. In the event the maximum purchase limitation
is increased, persons who subscribed for the maximum will be notified and
permitted to increase their subscription.
Procedure for Ordering Stock
If you want to place an order for shares in the offering, you must
complete an original stock order form and send it to us together with full
payment. You must sign the certification that is on the reverse side of the
stock order form. We must receive your stock order form before the end of the
subscription offering or the end of the community offering, as appropriate. Once
we receive your order, you cannot cancel or change it without our consent. We
may, in our sole discretion, reject orders received in the community offering or
syndicated community offering either in whole or in part. If your order is
rejected in part, you cannot cancel the remainder of your order.
To ensure that we properly identify your subscription rights, you must
provide on your stock order form all of the information requested for each of
your deposit accounts as of the eligibility dates (June 30, 2005 and September
30, 2006). If you fail to do so, your subscription may be reduced or rejected if
the offering is oversubscribed.
You may pay for shares in the subscription offering or the community
offering in any of the following ways:
o In cash, if delivered in person. If you choose to pay by cash, you must
deliver the stock order and certification form and payment in person to any
branch office of Millington Savings Bank and it will be exchanged for a
bank check or money order. Please do not send cash in the mail.
o By check or money order made payable to MSB Financial Corp.,
o By authorizing withdrawal from an account at Millington Savings Bank. To
use funds in a Millington Savings Bank IRA account, you must transfer your
account to an unaffiliated institution or broker. Please contact the stock
information center as soon as possible for assistance.
We will hold funds received with orders in a deposit account that we
have established at Millington Savings Bank for that sole purpose. We may decide
during the offering also to hold funds received with orders in a deposit account
at another insured depository institution. In either case,
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we will pay interest on all funds received at a rate equal to Millington Savings
Bank's regular passbook savings rate from the date we receive your funds until
the offering is completed or terminated.
All funds authorized for withdrawal from deposit accounts with us,
including certificates of deposit, will continue to earn interest at the
applicable account or certificate of deposit rate until the offering is
completed or terminated. However, if, as a result of a withdrawal from a
certificate of deposit, the balance falls below the minimum balance requirement,
the remaining funds will be transferred to a savings account and will earn
interest at our regular passbook savings rate. There will be no early withdrawal
penalty for withdrawals from certificates of deposit used to pay for stock.
Proposed Stock Purchases by Management
Our directors and executive officers and their associates have
indicated that they intend to purchase approximately 132,000 shares of common
stock in the offering. If 1,912,500 shares are sold (the midpoint of the
offering range), their anticipated purchases would represent 3.1% of the total
shares outstanding after the offering, including shares issued to MSB Financial,
MHC.
Our Estimated Pro Forma Value
The independent appraisal by RP Financial, LC, dated as of September 1,
2006 established the estimated pro forma market value of MSB Financial Corp.
This appraisal was based on our financial condition and results of operations
and considered the effect of the additional capital to be raised in the stock
offering as well as the effect of the stock benefit plans we expect to
implement.
RP Financial has estimated that as of September 1, 2006, the pro forma
market value of MSB Financial Corp. ranged from a minimum of $38.3 million to a
maximum of $51.8 million. This valuation is based on the full pro forma market
value of MSB Financial Corp. as though 100% of the stock was being sold to the
public. The Board of Directors considered our present level of capital and our
business plans and determined that shares representing 45% of the full valuation
should be offered for sale.
Peer Group Analysis. The appraisal incorporated an analysis of a peer
group of 10 publicly traded mutual holding companies that RP Financial deemed
comparable to us. The companies in the peer group range in asset size from $100
million to $600 million and have market capitalizations ranging from $12 million
to $75 million. RP Financial examined how we compare to the peer group on
various bases, including earnings prospects, market area, management,
acquisition activity in the state of New Jersey, stock market conditions,
subscription interest, liquidity and dividend policy. RP Financial also took
into account that this type of offering is typically priced at a discount on a
price-to-book basis to publicly traded companies due to relatively high post
offering equity ratios, expected low returns on equity, and uncertainty
regarding the degree of success to be achieved in effectively deploying capital
raised in the offering, particularly in the current interest rate environment
characterized by a relatively flat yield curve.
Pricing Ratios on a Fully Converted Basis. Shown below are the average
and median price to earnings multiple and price to book value ratio of the peer
group companies and our price to earnings multiple and price to book value ratio
at the minimum, midpoint, maximum and adjusted maximum of our pro forma market
value as estimated by the appraisal. These pricing ratios are calculated on a
fully- converted basis, as though we had sold the full amount (100%) of our
estimated pro forma market value
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instead of only 45% of that value. The pricing ratios for the peer group have
also been adjusted to assume that they were fully public, with all of their
outstanding shares held by public stockholders.
Price-to-earnings Price-to-book
multiple value ratio
-------- -----------
Pricing ratios for peer group
on a fully-converted basis
--------------------------
Average.......................................... 27.0x 93.6%
Median........................................... 27.4x 92.3%
Pro forma pricing ratios for MSB Financial Corp.
on a fully-converted basis
--------------------------
Minimum.......................................... 20.6 71.8
Midpoint......................................... 23.4 76.3
Maximum.......................................... 26.0 80.0
Maximum, as adjusted............................. 28.8 83.4
The independent appraisal is not necessarily indicative of the
post-stock offering trading value. Do not assume or expect that the valuation of
MSB Financial Corp. as indicated above means that the common stock will trade at
or above the $10.00 purchase price after the stock offering is completed.
Aftermarket Performance of Other Mutual Holding Company Offerings. The
following table presents information for all mutual holding companies that
completed a minority stock offering during the period from January 1, 2005
through September 1,2006. The table presents the average percentage stock price
appreciation from the initial trading date to the dates presented in the table.
This table is not intended to indicate how our stock may perform.
Furthermore, this table presents only short-term price performance and may not
be indicative of the longer-term stock price performance of these companies. The
increase in any particular company's stock price is subject to various factors,
including, but not limited to, the amount of proceeds a company raises, the
company's historical and anticipated operating results, the nature and quality
of the company's assets, the company's market area, and the quality of
management and management's ability to deploy proceeds (such as through loans
and investments, the acquisition of other financial institutions or other
businesses, the payment of dividends and common stock repurchases). In addition,
stock prices may be affected by general market and economic conditions, the
interest rate environment, the market for financial institutions and merger or
takeover transactions, the presence of professional and other investors who
purchase stock on speculation, as well as other unforeseeable events not in the
control of management. Before you make an investment decision, we urge you to
carefully read this prospectus, including, but not limited to, the Risk Factors
beginning on page 11.
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MHC Offerings Between January 1, 2005 and September 1, 2006
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Price Performance from Initial Trading Date
------------------------------------------------------------
Closing Through
Transaction Date 1 Day 1 Week 1 Month September 1, 2006
----------- ---- ----- ------ ------- -----------------
Georgetown Bancorp, Inc. 01/06/05 2.0% -0.5% 0.5% -4.5%
BV Financial, Inc. 01/14/05 -6.5% -5.0% -0.7% -5.5%
Home Federal Bancorp, Inc. of LA 01/21/05 -1.0% 0.5% -0.8% 5.0%
Kearny Financial Corp. 02/24/05 13.9% 15.0% 11.3% 48.9%
Kentucky First Federal Bancorp 03/03/05 7.9% 12.0% 12.4% 2.2%
Prudential Bancorp, Inc. 03/30/05 -1.5% -6.5% -12.5% 33.5%
Brooklyn Federal Bancorp, Inc. 04/06/05 -0.5% -1.0% -5.0% 22.5%
FedFirst Financial Corp. 04/07/05 -6.6% -9.3% -14.5% 2.0%
Rockville Financial, Inc. 05/23/05 4.8% 10.5% 20.0% 47.0%
North Penn Bancorp, Inc. 06/02/05 10.0% 2.5% 1.5% 17.0%
Colonial Bankshares, Inc. 06/30/05 6.0% 9.9% 7.5% 26.7%
Heritage Financial Group 06/30/05 7.5% 7.5% 9.3% 41.0%
United Financial Bancorp, Inc. 07/13/05 17.5% 16.0% 17.0% 32.1%
Ottowa Savings Bancorp, Inc. 07/14/05 4.0% 5.0% 7.0% 15.4%
Wauwatosa Holdings, Inc. 10/05/05 12.5% 7.3% 9.5% 76.8%
Investors Bancorp, Inc. 10/12/05 0.2% 1.0% 5.2% 43.5%
Equitable Financial Corp. 11/09/05 0.0% -5.0% -5.5% -7.5%
Greenville Federal Fin. Corp. 01/05/06 3.8% 2.5% 0.0% -2.0%
Magyar Bancorp, Inc. 01/24/06 6.5% 5.5% 6.0% 19.2%
United Community Bancorp 03/31/06 8.0% 7.0% 5.5% 6.5%
Lake Shore Bancorp, Inc. 04/04/06 7.0% 4.8% 1.5% 8.5%
Mutual Federal Bancorp, Inc. 04/06/06 11.3% 10.0% 14.0% 10.0%
Northeast Community Bancorp Inc. 07/06/06 10.0% 12.8% 12.0% 13.0%
Seneca-Cayuga Bancorp Inc. 07/11/06 0.0% -4.0% -6.0% -4.8%
Roma Financial Corp. 07/12/06 41.0% 42.4% 46.6% 52.3%
Average 6.3% 5.6% 5.7% 20.0%
Median 6.0% 5.0% 5.5% 15.4%
While stock prices of similar institutions have, on average, increased
for the limited period presented, there can be no assurance that our stock price
will appreciate the same amount, if at all. There also can be no assurance that
our stock price will not trade below $10.00 per share.
Conditions to Completing the Offering
We cannot complete the offering unless:
o we sell at least 1,625,625 shares, the minimum of the offering range; and
o we receive the final approval of the Office of Thrift Supervision to
complete the offering.
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Market for MSB Financial Corp.'s Common Stock
We applied to have our common stock listed for trading on the Nasdaq
Global Market under the symbol "MSBF." Keefe, Bruyette & Woods currently intends
to become a market maker in the common stock, but it is under no obligation to
do so. We cannot assure you that other market makers will be obtained or that an
active and liquid trading market for the shares of common stock will develop or
if developed, will be maintained. After our common stock begins trading, you may
contact a stock broker to buy or sell shares.
Dividends
We have not yet established a dividend policy, and we have not yet made
plans as to the amount or timing of cash dividends that MSB Financial Corp. may
pay after the offering. The timing, amount and frequency of dividends will be
determined by the Board of Directors. There are also restrictions on our ability
to pay dividends. See Our Policy Regarding Dividends.
If we pay dividends to stockholders of MSB Financial Corp., it is
anticipated that dividends payable to MSB Financial, MHC would be waived. We
must receive the non-objection of the Office of Thrift Supervision of any
dividend waiver by MSB Financial, MHC. See Regulation - Regulation of MSB
Financial Corp.
Restrictions on the Acquisition of MSB Financial Corp. and Millington Savings
Bank
Federal regulations, as well as provisions contained in the charter and
bylaws of MSB Financial Corp. and Millington Savings Bank, restrict the ability
of any person, firm or entity to acquire MSB Financial Corp., Millington Savings
Bank, or their capital stock. These restrictions include the requirement that a
potential acquirer of common stock obtain the prior approval of the Office of
Thrift Supervision before acquiring in excess of 10% of the voting stock of MSB
Financial Corp. or Millington Savings Bank. Because a majority of the shares of
outstanding common stock of MSB Financial Corp. must be owned by MSB Financial,
MHC, any acquisition of MSB Financial Corp. must be approved by MSB Financial,
MHC, and MSB Financial, MHC would not be required to pursue or approve a sale of
MSB Financial Corp. even if such sale were favored by a majority of MSB
Financial Corp.'s public stockholders. Additionally, Office of Thrift
Supervision regulations prohibit anyone from acquiring more than 10% of MSB
Financial Corp.'s common stock for a period of three years following the
offering, unless such prohibition is waived by the Office of Thrift Supervision.
The current policy of the Office of Thrift Supervision is not to waive this
prohibition.
Additionally, certain provisions within MSB Financial Corp.'s charter
and bylaws limit the rights of stockholders and may deter potential takeovers or
make it more difficult and expensive to pursue a change in control or takeover
attempt that our Board of Directors opposes. As a result, you may not have an
opportunity to participate in such a transaction, and the trading price of our
stock may not rise to the level of other institutions that are more vulnerable
to hostile takeovers. Such provisions include:
o the election of directors to staggered three-year terms;
o provisions restricting stockholders from calling special meetings
of stockholders;
o the absence of cumulative voting by stockholders in elections of
directors;
o advance notice requirements for stockholder nominations and new
business; and
o the limitation of the voting rights of a single stockholder to no
more than 10% of the then- outstanding shares, including shares
held by MSB Financial, MHC, for a period of five years from the
date this stock offering is completed.
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Tax Effects of the Offering
The minority stock offering will not be a taxable transaction for
purposes of federal or state income taxes for MSB Financial, MHC, MSB Financial
Corp., Millington Savings Bank or persons eligible to subscribe for stock in the
offering. See Material Federal and State Tax Consequences of the Offering.
Stock Benefit Plans
In order to align our employees' and directors' interests closer to our
stockholders' interests, we will establish certain benefit plans that use our
stock as compensation. The Millington Savings Bank Employee Stock Ownership
Plan, for the benefit of employees eligible to participate in the plan, intends
to purchase 8% of the shares sold in the offering. We also intend to adopt a
stock option plan and a restricted stock plan for the benefit of directors and
officers no sooner than six months after the offering. Officers, directors, and
employees will not be required to pay cash for shares received under the
Millington Savings Bank Employee Stock Ownership Plan or shares received under
the restricted stock plan, but will be required to pay the exercise price to
exercise stock options. The exercise price for the options will be at least
equal to the market price of our common stock on the date of grant.
The stock benefit plans will result in additional annual employee
compensation and benefit expenses which will reduce our earnings. See Pro Forma
Data. Additionally, the implementation of the stock option plan and restricted
stock plan may dilute your ownership interest in MSB Financial Corp. if newly
issued shares are used to fund stock options and awards made under the
restricted stock plan instead of outstanding shares purchased in the open market
by MSB Financial Corp.
The following table presents information, at the midpoint of the
offering range, regarding the number of shares and options expected to be made
available under the stock benefit plans. The value of the share awards is based
on $10.00 per share; however, this does not mean you should assume the stock
will trade at or above $10.00 per share. It could trade below $10.00 per share.
The value of the option grants was determined using the Black-Scholes
option-pricing formula. See Pro Forma Data. Ultimately, the value of awards
under the stock benefit plans will depend on the actual trading price of our
stock at a particular time, which depends on numerous factors, some of which are
out of our control.
At the Midpoint of the Offering Range
-------------------------------------
Number Percentage of
Estimated of Shares/ Total Shares
Value Options Outstanding
----- ------- -----------
Employee Stock Ownership Plan.... $1,530,000 153,000 3.6%
Restricted stock................. $833,000 83,300 1.96%
Stock options.................... $847,577 208,250 4.9%
If we implement the restricted stock plan within one year of the
offering and Millington Savings Bank's tangible capital following the stock
offering is less than 10%, then the number of shares that may be awarded under
the restricted stock plan will be reduced and may not exceed 1.47% of the total
shares outstanding rather than the 1.96% shown in the table above. If, at our
discretion, we further reduce the restricted stock plan to 1.3%, we may keep the
number of shares in the employee stock ownership plan at 3.6%. If we reduce the
restricted stock plan to only 1.47% of the outstanding shares, however, then the
employee stock ownership plan would also be reduced, to 3.4%.
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See Management - Stock Benefit Plans and Pro Forma Data for more
information about the stock benefit plans.
Possible Conversion of MSB Financial, MHC to Stock Form
In the future, MSB Financial, MHC may convert from the mutual holding
company form of organization, wherein a majority of the outstanding stock is
held by the mutual holding company, to a corporation with 100% of its shares
held by public stockholders. This type of conversion transaction is commonly
known as a "second-step conversion." The Board of Directors has no current plans
to undertake a second-step conversion transaction.
Risk Factors
This investment entails various risks including the possible loss of
principal. You may not be able to sell the stock at or above the $10.00 offering
price. You should carefully read the information under Risk Factors beginning on
page 11.
Stock Information Center
For assistance, please contact the stock information center at (877)
274-2040. The stock information center's hours of operation are generally 8:30
a.m. to 3:00 p.m., Eastern time, Monday through Friday. The stock information
center is closed on weekends and holidays.
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RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
We realize income primarily from the difference between interest earned on loans
and investments and interest paid on deposits and borrowings, and changes in
interest rates may adversely affect our net interest rate spread and net
interest margin, which could hurt our earnings.
We derive our income mainly from the difference or "spread" between the
interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities. In
general, the larger the spread, the more we earn. When market rates of interest
change, the interest we receive on our assets and the interest we pay on our
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income.
Several years ago market interest rates were at historically low
levels. However, between June 2004 and June 2006, the U.S. Federal Reserve
steadily increased its target federal funds rate, raising it 17 times, from
1.00% to 5.25%. While the federal funds rate and other short-term market
interest rates, which we use as a guide to our deposit pricing, have increased,
intermediate- and long-term market interest rates, which we use as a guide to
our loan pricing, have not increased proportionately. This has led to a
"flattening" of the market yield curve, which has even "inverted" recently as
short-term rates have exceeded long-term rates over an intermediate maturity
horizon. The relatively flat yield curve has hurt our net interest rate spread
and net interest margin because the interest rates we pay on our deposits have
repriced upwards faster than the interest rates that we earn on our loans and
investments. As of June 30, 2006, we had $76.5 million in certificates of
deposit that will mature within one year. If the yield curve remains flat, these
deposits are expected to reprice upwards faster than loans and investments.
Interest rates also affect how much money we lend. For example, when
interest rates rise, the cost of borrowing increases and loan originations tend
to decrease. In addition, changes in interest rates can affect the average life
of loans and investment securities. A reduction in interest rates generally
results in increased prepayments of loans and mortgage-backed securities, as
borrowers refinance their debt in order to reduce their borrowing cost. This
causes reinvestment risk, because we generally are not able to reinvest
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. Changes in market interest rates could also reduce the
value of our financial assets. If we are unsuccessful in managing the effects of
changes in interest rates, our financial condition and results of operations
could suffer.
If we are not successful in our efforts to attract and retain deposits, our
liquidity, growth and profitability could be hurt.
Deposits are our primary source of funds to support our lending
activities. Our loan originations, however, have in recent years exceeded our
deposits, which has resulted in a loans to deposits ratio of 115% and an
increase in borrowings from $0 at June 30, 2003 to $54.2 million in Federal Home
Loan Bank advances at June 30, 2006. Our collateralized borrowing limit with the
Federal Home Loan Bank at June 30, 2006 was $56.2 million. In addition to a
limit on their availability, borrowings are generally a more expensive funding
source than deposits.
We have expanded our branch network in an effort to increase our
deposits, emphasizing core deposits in particular, but there is no guarantee
that this strategy will succeed. At June 30, 2006, $112.0
11
million or 57.5% of our total deposits were in certificates of deposit. As of
June 30, 2006, $76.5 million of our certificates of deposit are scheduled to
mature within one year. This represents 39.3% of our total deposits.
Furthermore, "jumbo" certificates of $100,000 or more are considered to be more
volatile than smaller certificate accounts, and as of June 30, 2006, $37.2
million or 19.1% of our total deposits were jumbo certificates.
The inflow of certificates of deposit and the retention of such
deposits upon maturity are significantly influenced by general interest rates
and money market conditions, making certificates of deposit traditionally a more
volatile source of funding than core deposits. Our liquidity could be reduced if
a significant amount of certificates of deposit maturing within a short period
of time were not renewed. To the extent that such deposits do not remain with
us, they may need to be replaced with borrowings which could increase our cost
of funds and negatively impact our net interest rate spread and our financial
condition.
A portion of our total loan portfolio consists of commercial real estate
mortgage loans, commercial loans and construction loans. The repayment risk
related to these types of loans is considered to be greater than the risk
related to one- to four-family residential loans.
At June 30, 2006, our loan portfolio included $23.6 million of
commercial real estate mortgage loans, $5.5 million of commercial loans and
$23.3 million of construction loans, in aggregate representing 23.3% of our
total loan portfolio. Unlike single family or one-to-four family 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 with values that tend to be more easily ascertainable,
commercial loans typically are made on the basis of the borrower's ability to
make repayment from the cash flow of the borrowers' business, which may include
rental income. The repayment of construction loans for residential and
commercial land acquisition and development, including loans to builders and
developers, is dependent, in part, on the success of the ultimate construction
project. In addition, commercial real estate mortgages and construction loans to
builders and developers generally result in larger balances to single borrowers,
or related groups of borrowers, than one- to four-family loans.
In addition, the growth in these loan categories in recent years means
that a large portion of this portfolio is unseasoned. Relatively new loans that
are "unseasoned," are considered to pose a potentially greater repayment risk
than more mature loans because they generally do not have sufficient repayment
history to indicate the likelihood of repayment in accordance with their terms.
Strong competition within our market area may limit our growth and
profitability.
Competition in the banking and financial services industry in New
Jersey is intense. Many of our competitors have substantially greater resources
and lending limits than we do and offer services that we do not or cannot
provide. Price competition for loans might result in us originating fewer loans,
or earning less on our loans, and price competition for deposits might result in
a decrease in our total deposits or higher rates on our deposits.
Our business is geographically concentrated in central New Jersey, and a
downturn in conditions in our market area could have an adverse impact on our
profitability.
A substantial amount of our loans are to individuals and businesses in
central New Jersey. Any decline in the economy of this market could have an
adverse impact on our earnings. Adverse economic changes may also have a
negative effect on the ability of our borrowers to make timely repayments of
their loans. Additionally, because we have a significant amount of real estate
loans, decreases in local real estate
12
values could adversely affect the value of property used as collateral. If we
are required to liquidate a significant amount of collateral during a period of
reduced real estate values to satisfy the debt, our earnings and capital could
be adversely affected.
If we experience loan losses in excess of our allowance, our earnings will be
adversely affected.
The risk of credit losses on loans varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the value and marketability of the collateral for the loan. Management
maintains an allowance for loan losses based upon historical experience, an
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality. If management's assumptions and judgments about the ultimate
collectibility of the loan portfolio prove to be incorrect and the allowance for
loan losses is inadequate to absorb future losses or if we are required to make
material additions to the allowance, our earnings and capital could be
significantly and adversely affected. As of June 30, 2006, our allowance for
loan losses was $921,000 which represented 0.41% of total loans and 127.39% of
non-performing loans.
After this offering, our return on equity will be low. This could negatively
impact the price of our stock.
The net proceeds from the offering will substantially increase our
equity capital. It will take a significant period of time to prudently invest
this capital. For the year ended June 30, 2006, our return on average equity,
which is the ratio of our earnings divided by our average equity capital, was
7.31%. On a pro forma basis assuming that 2,199,375 (the maximum) shares had
been sold at the beginning of the year, our return on pro forma equity for the
year ended June 30, 2006 would have been approximately 4.18%. Because the stock
market values a company based in part on its return on equity, our low return on
equity relative to our peer group could negatively affect the trading price of
our stock. See Pro Forma Data.
Additional public company and stock employee compensation and benefit expenses
following the offering will negatively impact our profitability.
Following the offering, our non-interest expense is likely to increase
as a result of the financial accounting, legal and various other additional
non-interest expenses usually associated with operating as a public company,
particularly as a result of the requirements of the Sarbanes-Oxley Act of 2002.
We also will recognize additional annual employee compensation and
benefit expenses stemming from the shares granted to employees, officers and
directors under new benefit plans, including the Millington Savings Bank
Employee Stock Ownership Plan. We cannot predict the actual amount of the new
stock-related compensation and benefit expenses because applicable accounting
standards require that they be based on the fair market value of the shares of
common stock at specific points in the future; however, we expect them to be
material. Based on numerous assumptions as set forth under Pro Forma Data
beginning at page 19, if 1,912,500 shares are sold in the offering (the midpoint
of the offering range), these stock benefit plan expenses for a one year period
are estimated on a pro forma basis to be approximately $341,000, net of tax.
13
The implementation of stock-based benefit plans may dilute your ownership
interest in MSB Financial Corp.
We intend to adopt a stock option plan and a restricted stock plan
following the stock offering. These stock benefit plans will be funded through
either open market purchases or from the issuance of authorized but unissued
shares. Stockholders would experience a reduction in ownership interest in the
event newly issued shares are used to fund stock options and awards made under
the restricted stock plan. The use of newly issued shares of stock to fund the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.9%. The use of newly
issued shares of stock to fund exercises of options granted under the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.7%.
Provisions in our charter and bylaws limiting the rights of stockholders may
deter potential takeovers and may reduce the trading price of our stock.
Provisions in our charter and bylaws may make it difficult and
expensive to pursue a change in control or takeover attempt that our Board of
Directors opposes. As a result, you may not have an opportunity to participate
in such a transaction, and the trading price of our stock may not rise to the
level of other institutions that are more vulnerable to hostile takeovers. Such
provisions include:
o the election of directors to staggered three-year terms;
o provisions restricting stockholders from calling special meetings
of stockholders;
o the absence of cumulative voting by stockholders in elections of
directors;
o advance notice requirements for stockholder nominations and new
business; and
o a provision that limits the voting rights of a single stockholder
to no more than 10% of the then-outstanding shares, including
shares held by MSB Financial, MHC, for a period of five years
from the date this stock offering is completed.
Persons who purchase stock in the offering will own a minority of MSB Financial
Corp.'s common stock and will not be able to exercise voting control over most
matters put to a vote of stockholders, including any proposal regarding the
acquisition of MSB Financial Corp.
MSB Financial, MHC (the MHC) will own 55% of MSB Financial Corp.'s
common stock after the offering. The MHC's Board of Directors is comprised of
the same persons as MSB Financial Corp.'s Board of Directors and will generally
be able to exercise voting control over matters put to a vote of stockholders of
MSB Financial Corp., such as a vote on a sale or merger of MSB Financial Corp.
or other transaction in which stockholders could receive a premium for their
shares and the election of directors of MSB Financial Corp.
Our stock price may decline when trading commences.
We cannot guarantee that if you purchase shares in the offering that
you will be able to sell them at or above the $10.00 purchase price. After the
shares of our common stock begin trading, the trading price of the common stock
will be determined by the marketplace, and will be influenced not only by our
operating results but by many factors outside of our control, including
prevailing interest rates, investor perceptions and general industry,
geopolitical and economic conditions. Publicly traded stocks, including stocks
of financial institutions, have recently experienced substantial market price
volatility. These market fluctuations might not be related to the operating
performance of particular companies whose shares are traded.
14
We operate in a highly regulated environment and may be adversely affected by
changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by
the New Jersey Department of Banking and Insurance, the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. Such regulation and
supervision govern the activities in which an institution and its holding
companies may engage and are intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have extensive discretion
in connection with their supervisory and enforcement activities, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, or legislation, including changes
in the regulations governing mutual holding companies, could have a material
impact on us and our operations.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and operating
strategies;
o statements regarding the quality of our loan and investment portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
o general economic conditions, either nationally or in our market area, that
are worse than expected;
o changes in the interest rate environment that reduce our interest margins
or reduce the fair value of financial instruments;
o our ability to enter into new markets and/or expand product offerings
successfully and take advantage of growth opportunities;
o increased competitive pressures among financial services companies;
o changes in consumer spending, borrowing and savings habits;
o legislative or regulatory changes that adversely affect our business;
o adverse changes in the securities markets;
o our ability to successfully manage our growth; and
15
o changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board or the Public
Company Accounting Oversight Board.
Any of the forward-looking statements that we make in this prospectus
and in other public statements we make may turn out to be wrong because of
inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Consequently, no
forward-looking statement can be guaranteed.
USE OF PROCEEDS
We are conducting this stock offering principally to raise capital to
support our anticipated future growth. The actual net proceeds will depend on
the expenses incurred by us in connection with the offering and the total number
of shares of stock issued in the offering, which depends on the independent
valuation and market considerations. Although the actual net proceeds from the
sale of the common stock cannot be determined until the offering is completed,
we estimate that net proceeds from the sale of common stock will be between
$15.5 million and $21.2 million, or $24.5 million at the adjusted maximum. The
net proceeds may vary significantly because total expenses of the stock offering
may be significantly more or less than those estimated. Payments for shares made
through withdrawals from existing deposit accounts at Millington Savings Bank
will not result in the receipt of new funds for investment but will result in a
reduction of Millington Savings Bank's deposits and interest expense as funds
are transferred from interest- bearing certificates or other deposit accounts.
MSB Financial Corp. intends to use proceeds from the offering as
follows:
MAXIMUM,
MINIMUM MIDPOINT MAXIMUM As Adjusted
------- -------- ------- -----------
Percent Percent Percent Percent
of Net of Net of Net of Net
Amount Proceeds Amount Proceeds Amount Proceeds Amount Proceeds
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Estimated net proceeds........ $15,543 $18,385 $21,228 $24,497
Less:
Investment in the Bank........ 7,772 50.0% 9,193 50.0% 10,614 50.0% 12,249 50.0%
Loan to the Employee
Stock Ownership Plan..... 1,301 8.4% 1,530 8.3% 1,760 8.3% 2,023 8.3%
------- ------- ------- -------
Proceeds retained by
MSB Financial Corp......... $ 6,470 41.6% $ 7,662 41.7% $ 8,854 41.7% $10,225 41.7%
======= ======= ======= =======
Millington Savings Bank will receive 50% of the net proceeds from the
offering as a capital contribution and will use those proceeds for general
business purposes. In particular, the Bank intends to reduce its borrowings. The
Bank has had strong loan originations in recent years and has used Federal Home
Loan Bank borrowings to supplement deposits as a funding source for its lending
activities. Between June 30, 2002 and June 30, 2006, total loans grew by $99.7
million to $224.4 million, an 80% increase, while deposits grew by $40.8
million, a 26.5% increase and borrowings grew from $0 to $54.2 million. The
majority of borrowings at June 30, 2006 were short term borrowings, which may be
reduced without incurring prepayment penalties.
The offering proceeds may also be used to finance the possible
acquisition of other financial institutions or branches, if appropriate
opportunities arise. We do not, however, have any current
16
understandings, agreements or arrangements in connection with branching or
acquisitions, other than the already in progress new branch office in
Bernardsville, New Jersey which is expected to open in late 2007. We estimate
that the total land, construction and equipment costs incurred in opening the
Bernardsville office will reach approximately $5.4 million.
We will lend a portion of the offering proceeds to the Millington
Savings Bank Employee Stock Ownership Plan to enable it to buy up to 8% of the
shares sold in the offering. If it does not buy the full amount of its intended
common stock purchase in the offering, it may purchase shares of common stock in
the open market after the stock offering. If the purchase price of the common
stock is higher than $10 per share, the amount of proceeds required for the
purchase by the Millington Savings Bank Employee Stock Ownership Plan will
increase.
The balance of the offering proceeds will be retained by MSB Financial
Corp. and deposited with or loaned to Millington Savings Bank, providing funds
to support the Bank's lending activities. This will enable the Bank to reduce
its outstanding Federal Home Loan Bank borrowings. MSB Financial Corp. may also
use the offering proceeds it retains for general corporate purposes, including
repurchasing shares of its common stock, paying cash dividends or supporting
acquisitions of other financial institutions, branches or financial services
companies.
OUR POLICY REGARDING DIVIDENDS
We have not yet determined what our dividend policy will be, and we
have no plans or understandings as to the amount or timing of cash dividends
that MSB Financial Corp. may pay after the offering. Future declarations of
dividends by the Board of Directors will depend on a number of factors,
including investment opportunities, growth objectives, financial condition,
profitability, tax considerations, minimum capital requirements, regulatory
limitations, stock market characteristics and general economic conditions. The
timing, frequency and amount of dividends will be determined by the Board. There
can be no assurance that dividends will in fact be paid on the stock or that, if
paid, dividends will not be reduced or eliminated in future periods.
MSB Financial Corp.'s ability to pay dividends may also depend on the
receipt of dividends from Millington Savings Bank, which is subject to a variety
of regulatory limitations on the payment of dividends. See Regulation -
Regulation of Millington Savings Bank - Dividend and Other Capital Distribution
Limitations. Furthermore, as a condition to the Office of Thrift Supervision
giving its authorization to conduct the stock offering, we have agreed that we
will not initiate any action within one year of completion of the stock offering
involving the payment of a special distribution or return of capital to
stockholders of MSB Financial Corp.
If MSB Financial Corp. pays dividends to its stockholders, it is
anticipated that dividends payable to MSB Financial, MHC would be waived. We
must notify the Office of Thrift Supervision of any proposed dividend waiver by
MSB Financial, MHC. The Office of Thrift Supervision reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to any such
waiver if: (i) the waiver would not be detrimental to the safe and sound
operations of the subsidiary savings association and (ii) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's member.
17
MARKET FOR THE STOCK
There is not, at this time, any market for MSB Financial Corp.'s stock.
We have applied to have our common stock listed for trading on the Nasdaq Global
Market under the symbol "MSBF." Keefe, Bruyette & Woods has advised us that it
intends to make a market in our common stock following the offering, but it is
under no obligation to do so.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
that of any market maker. The number of active buyers and sellers of our stock
at any particular time may be limited. Under such circumstances, you could have
difficulty selling your shares of common stock. We cannot assure you that an
active and liquid trading market for the shares of common stock will develop or,
if developed, will be maintained. Nor can we assure you that, if you purchase
shares of common stock in the offering, you will be able to sell them at a price
equal to or above $10.00 per share.
CAPITALIZATION
Set forth below is the historical capitalization as of June 30, 2006 of
MSB Financial Corp. and the pro forma capitalization of MSB Financial Corp. as
of June 30, 2006 after giving effect to the offering and to the assumptions set
forth under Pro Forma Data.
Pro Forma Capitalization at June 30, 2006
---------------------------------------------------------------
MSB Maximum,
Financial Minimum Midpoint Maximum as adjusted
Corp. 1,625,625 1,912,500 2,199,375 2,529,281
Historical, at shares sold shares sold shares sold shares sold
June 30, at $10.00 at $10.00 at $10.00 at $10.00
2006 per share per share per share per share(1)
-------- -------- -------- -------- --------
(In thousands)
Deposits(2)..................................... $194,755 $194,755 $194,755 $194,755 $194,755
Borrowed funds.................................. 54,181 54,181 54,181 54,181 54,181
-------- -------- -------- -------- --------
Total deposits and borrowed funds............... $248,936 $248,936 $248,936 $248,936 $248,936
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock, no par value, 5,000,000
shares authorized; none to be issued........ - - - - -
Common stock, $0.10 par value,
10,000,000 shares authorized, assuming
shares outstanding as shown(3)(4)(5)........ 1 361 425 489 562
Additional paid-in capital(3)(4)(5)............. 199 15,382 18,160 20,939 24,135
Retained earnings............................... 19,291 19,291 19,291 19,291 19,291
Less:
Common stock acquired by
the Millington Savings Bank
Employee Stock Ownership Plan(6)............ - (1,301) (1,530) (1,760) (2,023)
Common stock acquired by the restricted
stock plan(7)............................... - (708) (833) (958) (1,102)
------- ------- ------- ------- -------
Total stockholders' equity...................... $19,491 $33,026 $35,513 $38,001 $40,863
======= ======= ======= ======= =======
---------------
(1) As adjusted to give effect to an increase in the number of shares sold
which could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect changes
in market and financial conditions.
18
(2) Does not reflect withdrawals from deposit accounts for the purchase of
stock in the offering. Any withdrawals would reduce pro forma deposits by
an amount equal to the withdrawals.
(3) Pro forma data includes shares to be held by MSB Financial, MHC after
completion of the stock offering. MSB Financial, MHC is currently the sole
stockholder of MSB Financial Corp. and holds 10,000 shares of common stock
of MSB Financial Corp. Upon completion of the offering, MSB Financial, MHC
will hold 55% of the total shares of MSB Financial Corp. to be outstanding.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to any stock option plan that may be adopted by MSB Financial
Corp. and presented for approval by the stockholders after the offering. An
amount equal to 4.9% of the total number of shares outstanding after the
offering, including shares held by MSB Financial, MHC, would be reserved
for issuance upon the exercise of options to be granted under the stock
option plan following the stock offering. See Management - Stock Benefit
Plans - Stock Option Plan.
(5) The historical additional paid-in capital amount represents the initial
capitalization of the mid-tier holding company upon its formation in 2004
($200,000 was received by MSB Financial Corp. for the 10,000 shares issued
to MSB Financial, MHC). The pro forma additional paid-in capital amounts
include this initial $200,000 capitalization. The pro forma additional
paid-in capital amounts represent the net offering proceeds, less the par
value of all shares outstanding upon completion of the offering including
the shares that will be held by MSB Financial, MHC.
(6) Assumes that 8% of the shares sold in the offering will be purchased by
the Millington Savings Bank Employee Stock Ownership Plan, and that the
funds used to acquire those shares will be borrowed from MSB Financial
Corp., concurrent with the offering. For an estimate of the impact of
the loan on earnings, see Pro Forma Data. Millington Savings Bank
intends to make scheduled discretionary contributions to the Millington
Savings Bank Employee Stock Ownership Plan sufficient to enable it to
service and repay its debt over a ten year period. The amount of shares
to be acquired by the Millington Savings Bank Employee Stock Ownership
Plan is reflected as a reduction of stockholders' equity. See
Management - Stock Benefit Plans - Employee Stock Ownership Plan. If
the Millington Savings Bank Employee Stock Ownership Plan is unable to
purchase stock in the stock offering due to an oversubscription in the
offering by eligible account holders having first priority, and the
purchase price in the open market is greater than the original $10.00
price per share, there will be a corresponding reduction in
stockholders' equity. See The Offering - Subscription Offering -
Subscription Rights.
(7) Assumes that an amount equal to 1.96% of the total number of shares
outstanding after the offering, including shares held by MSB Financial,
MHC, is purchased by the restricted stock plan following the stock
offering. The stock purchased by the restricted stock plan is reflected as
a reduction of stockholders' equity. See footnote (2) to the table under
Pro Forma Data.
PRO FORMA DATA
The net proceeds to MSB Financial Corp. are currently estimated to be
between $15.5 million and $21.2 million ($24.5 million at the adjusted maximum),
based on the following assumptions:
o shares sold in the offering will be sold in either the subscription
offering or the community offering, with no shares being sold in a
syndicated community offering;
o an amount equal to the cost of purchasing 8% of the shares sold in the
offering will be loaned to the Millington Savings Bank Employee Stock
Ownership Plan to fund its purchase at an assumed purchase price of $10.00
per share;
o expenses of the offering, including the fees and expenses of Keefe,
Bruyette & Woods, are estimated to be between approximately $713,000 at the
minimum and $766,000 at the maximum ($796,000 at the adjusted maximum); and
19
The actual net proceeds from the sale of the stock, however, cannot be
determined until the offering is completed.
The following table sets forth MSB Financial Corp.'s historical net
income and stockholders' equity prior to the offering and pro forma net income
and stockholders' equity giving effect to the offering. In preparing this table,
we have made the following assumptions:
o Pro forma earnings net income has been calculated assuming the stock had
been sold at the beginning of the period and the net proceeds had been
invested at an average yield of 5.21% for the year ended June 30, 2006,
which approximates the yield on a one-year U.S. Treasury bill on June 30,
2006. The yield on a one-year U.S. Treasury bill, rather than an arithmetic
average of the average yield on interest-earning assets and the average
rate paid on deposits, has been used to estimate income on net proceeds
because we believe that the one-year U.S. Treasury bill rate is a more
accurate estimate of the rate that would be obtained on an investment of
net proceeds from the offering. The pro forma after-tax yield (based upon a
40.0% tax rate) on the net proceeds is assumed to be 3.13% for the year
ended June 30, 2006.
o We assumed that 8.0% of the shares sold in the offering were purchased in
the offering by the Millington Savings Bank Employee Stock Ownership Plan
at a price of $10.00 per share using funds borrowed from MSB Financial
Corp. We assumed that Millington Savings Bank would make annual
contributions to the Millington Savings Bank Employee Stock Ownership Plan
in an amount at least equal to the principal and interest requirement of
the loan. We have assumed a 10-year amortization period for the loan. The
stock acquired by the Millington Savings Bank Employee Stock Ownership Plan
is reflected as a reduction of stockholders' equity. See Management - Stock
Benefit Plans - Employee Stock Ownership Plan.
o We assumed that 8.0% of the shares sold in the offering were purchased in
the offering by Millington Savings Bank's employee stock ownership plan at
a price of $10.00 per share using funds borrowed from MSB Financial Corp.
We assumed that Millington Savings Bank would make annual contributions to
the plan in an amount at least equal to the principal and interest
requirement of the loan. We have assumed a 10-year amortization period for
the loan. The stock acquired by the employee stock ownership plan is
reflected as a reduction of stockholders' equity. See Management - Stock
Benefit Plans - Employee Stock Ownership Plan.
o We assumed that the stock option plan had been approved by stockholders of
MSB Financial Corp. and that MSB Financial Corp. had reserved for future
issuance upon the exercise of options to be granted under the plan an
amount of stock equal to 4.9% of the total number of shares outstanding
after the offering, including shares held by MSB Financial, MHC. We assumed
that options for all shares reserved under the plan were granted to plan
participants at the beginning of the period and that 30% of the options
granted were non-qualified options for income tax purposes. We assumed that
the options would vest at a rate of 20% per year and that compensation
expense would be recognized on a straight-line basis over the 5-year
vesting period. See Management - Stock Benefit Plans - Stock Option Plan.
o We assumed that the restricted stock plan had been approved by stockholders
of MSB Financial Corp. and that the restricted stock plan had acquired an
amount of stock equal to 1.96% of the total number of shares outstanding
after the offering, including shares held by MSB Financial, MHC, at the
beginning of the periods presented through open market purchases at a price
of $10.00 per share using funds contributed to the restricted stock plan by
Millington Savings Bank. We assumed that all shares held by the plan were
granted to plan participants at the beginning of the period, that the
shares would vest at a rate of 20% per year and that compensation expense
will be recognized on a straight-line basis over the 5-year vesting period.
See Management - Stock Benefit Plans - Restricted Stock Plan.
o An effective tax rate of 40% is used in calculating the pro forma net
income.
20
o We did not include any withdrawals from deposit accounts to purchase shares
in the offering.
o Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of
stock, as adjusted in the pro forma earnings per share to give effect to
the purchase of shares by the Millington Savings Bank Employee Stock
Ownership Plan.
o Pro forma stockholders' equity amounts have been calculated as if the stock
had been sold on June 30, 2006 and no effect has been given to the assumed
earnings effect of the transaction.
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the amount of money that
would be distributed to stockholders if MSB Financial Corp. were liquidated. The
pro forma data does not predict how much we will earn in the future. You should
not use the following information to predict future results of operations.
The following table summarizes historical and pro forma data of MSB
Financial Corp. at or for the year ended June 30, 2006 based on the assumptions
set forth above and in the notes to the tables and should not be used as a basis
for projections of market value of the stock following the stock offering. Pro
forma stockholders' equity and pro forma book value per share do not take into
account the impact of the bad debt reserve if MSB Financial Corp. were
liquidated.
21
Pro Forma
At or For the Year Ended June 30, 2006
-------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
1,625,625 1,912,500 2,199,375 2,529,281
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in thousands,
except share and per share amounts)
Gross proceeds................................................. $16,256 $19,125 $21,994 $25,293
Less expenses.................................................. (713) (740) (766) (796)
Less ESOP funded by MSB Financial Corp......................... (1,301) (1,530) (1,760) (2,023)
Less restricted stock plan adjustment.......................... (708) (833) (958) (1,102)
------- ------- ------- -------
Estimated investable net proceeds........................... $13,534 $16,022 $18,510 $21,372
======= ======= ======= =======
Net Income:
Historical ................................................. $ 1,402 $ 1,402 $ 1,402 $ 1,402
Pro forma income on net proceeds............................ 423 501 579 668
Pro forma ESOP adjustment(1)................................ (78) (92) (106) (121)
Pro forma restricted stock plan adjustment(2)............... (85) (100) (115) (132)
Pro forma option adjustment(3).............................. (127) (149) (172) (197)
------- ------- ------- -------
Pro forma net income........................................ $ 1,535 $ 1,562 $ 1,588 $ 1,620
======= ======= ======= =======
Historical ................................................. $ 0.40 $ 0.34 $ 0.30 $ 0.26
Pro forma income on net proceeds ........................... 0.12 0.12 0.12 0.12
Pro forma ESOP on net proceeds ............................. (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment ................. (0.02) (0.02) (0.02) (0.02)
Pro forma stock option adjustment .......................... (0.04) (0.04) (0.04) (0.04)
------- ------- ------- -------
Pro forma earnings per share(5)............................. $ 0.44 $ 0.38 $ 0.34 $ 0.30
======= ======= ======= =======
Stockholders' Equity:
Historical ................................................. $19,491 $19,491 $19,491 $19,491
Estimated net proceeds...................................... 15,543 18,385 21,228 24,497
Less: common stock acquired by ESOP(1)...................... (1,301) (1,530) (1,760) (2,023)
Less: common stock acquired by restricted stock plan(2)..... (708) (833) (958) (1,102)
------- ------- ------- -------
Pro forma stockholders' equity(4)........................... $33,025 $35,513 $38,001 $40,863
======= ======= ======= =======
Book Value Per Share
Historical.................................................. $ 5.40 $ 4.59 $ 3.99 $ 3.47
Estimated net proceeds...................................... 4.30 4.33 4.34 4.36
Less: common stock acquired by ESOP......................... (0.36) (0.36) (0.36) (0.36)
Less: common stock acquired by restricted stock plan........ (0.20) (0.20) (0.20) (0.20)
------- ------- ------- -------
Pro forma book value per share(5)........................... $ 9.14 $ 8.36 $ 7.77 $ 7.27
======= ======= ======= =======
Offering price as a percentage of pro forma
book value per share........................................ 109.41% 119.62% 128.70% 137.55%
====== ====== ====== ======
Offering price to pro forma earnings per share................. 22.73 x 26.32 x 29.41 x 33.33 x
====== ====== ====== ======
22
----------------
(1) The pro forma net income assumes: (i) that Millington Savings Bank's
contribution to the Millington Savings Bank Employee Stock Ownership Plan
for the principal portion of the debt service requirement for the year
ended June 30, 2006 was made at the end of the period; and (ii) that
13,005, 15,300, 17,595, and 20,234 shares at the minimum, midpoint,
maximum, and the adjusted maximum, respectively, were committed to be
released during the year ended June 30, 2006, at an average fair value of
$10.00 per share and were accounted for as a charge to expense. If the fair
market value per share at the time shares are committed to be released is
different than $10.00 per share, the related expense recognized will be
different.
(2) The issuance of authorized but unissued shares of stock to the restricted
stock plan instead of open market purchases would dilute the voting
interests of stockholders that purchased shares in the offering by
approximately 1.9%. If the actual cost of the shares acquired by the
restricted stock plan is different than $10.00 per share, the expense
recognized will be different. There can be no assurance that stockholder
approval of the restricted stock plan will be obtained or that the actual
purchase price of the shares will be equal to $10.00 per share. See
Management - Stock Benefit Plans - Restricted Stock Plan.
(3) The pro forma net income assumes that the options granted under the stock
option plan have a value of $4.07 per option, which was determined using
the Black-Scholes-Merton option pricing formula using the following
assumptions: (i) the trading price on date of grant was $10.00 per share;
(ii) exercise price is equal to the trading price on the date of grant;
(iii) dividend yield of 0%; (iv) vesting period of 5 years and expected
life of 10 years; (v) expected volatility of 9.69%; and risk-free interest
rate of 5.15%. Because there is currently no market for MSB Financial
Corp.'s common stock, the assumed expected volatility is based on the SNL
Financial MHC index. If the fair market value per share on the date of
grant is different than $10.00, or if the assumptions used in the option
pricing formula are different from those used in preparing this pro forma
data, the value of the options and the related expense recognized will be
different. There can be no assurance that the actual fair market value per
share on the date of grant, and correspondingly the exercise price of the
options, will be $10.00 per share. The issuance of authorized but unissued
shares of stock instead of open market purchases to fund exercises of
options granted under the stock option plan would dilute the voting
interests of stockholders that purchased shares in the offering by
approximately 4.7%. See Management - Stock Benefit Plans - Stock Option
Plan.
(4) The retained earnings of MSB Financial Corp. and Millington Savings Bank
will continue to be substantially restricted after the stock offering. See
Our Policy Regarding Dividends and Regulation - Regulation of Millington
Savings Bank - Dividend and Other Capital Distribution Limitations.
(5) For purposes of calculating earnings per share, only the shares committed
to be released under the Millington Savings Bank Employee Stock Ownership
Plan were considered outstanding. For purposes of calculating book value
per share, all shares under the Millington Savings Bank Employee Stock
Ownership Plan were considered outstanding. We have also assumed that no
options granted under the stock option plan were exercised during the
period and that the trading price of MSB Financial Corp. common stock at
the end of the period was $10.00 per share. Under this assumption, using
the treasury stock method, no additional shares of stock were considered to
be outstanding for purposes of calculating earnings per share or book value
per share.
23
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents Millington Savings Bank's historical and
pro forma capital position relative to its regulatory capital requirements as of
June 30, 2006. Pro forma capital levels assume receipt by the Bank of 50% of the
net proceeds at all points of the offering range. However, such additional
amount as may be necessary will be contributed to the Bank so that the ratio of
its tangible capital to its total assets upon completion of the offering is at
least 10%. For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see Use of Proceeds, Capitalization and Pro Forma
Data. For a discussion of the capital standards applicable to Millington Savings
Bank, see Regulation - Regulation of Millington Savings Bank - Regulatory
Capital Requirements.
Pro Forma at June 30, 2006
----------------------------------------------------------------------------------------
Minimum Midpoint Maximum Maximum, as adjusted
Actual, at 1,625,625 shares sold 1,912,500 shares sold 2,199,375 shares sold 2,529,281 shares sold
June 30, 2006 at $10.00 per share at $10.00 per share at $10.00 per share at $10.00 per share(1)
------------------- -------------------- ------------------- --------------------- ----------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
GAAP Capital............ $19,292 7.14% $25,055 9.04% $26,121 9.38% $27,188 9.72% $28,415 10.10%
======= ==== ======= ==== ======= ===== ======= ===== ======= =====
Tangible Capital(3)..... $19,112 7.19% $24,875 9.12% $25,941 9.46% $27,008 9.81% $28,235 10.20%
Tangible Capital
Requirement........... 3,987 1.50 4,093 1.50 4,112 1.50 4,132 1.50 4,154 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................. $15,125 5.69% $20,782 7.62% $21,829 7.96% $22,876 8.31% $24,081 8.70%
======= ==== ======= ==== ======= ===== ======= ===== ======= =====
Core Capital............ $19,112 7.19% $24,875 9.12% $25,941 9.46% $27,008 9.81% $28,235 10.20%
Core Capital
Requirement........... 10,632 4.00 10,915 4.00 10,966 4.00 11,018 4.00 11,078 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................. $ 8,480 3.19% $13,960 5.12% $14,975 5.46% $15,990 5.81% $17,157 6.20%
======= ==== ======= ==== ======= ===== ======= ===== ======= =====
Total Risk-Based
Capital(4)(5)......... $20,033 10.99% $25,796 13.88% $26,862 14.41% $27,929 14.93% $29,156 15.52%
Risk-Based Capital
Requirement........... 14,577 8.00 14,864 8.00 14,915 8.00 14,967 8.00 15,027 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................. $ 5,456 2.99% $10,932 5.88% $11,947 6.41% $12,962 6.93% $14,129 7.52%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Reconciliation of pro forma increase in GAAP
and regulatory capital:
Bank's receipt of 50% of the net proceeds
from the offering ........................ $ 7,772 $9,193 $10,614 $12,249
Less: funding of employee stock ownership
plan ................................... (1,301) (1,530) (1,760) (2,023)
Less: funding of future restricted stock
plan ................................... (708) (833) (958) (1,102)
------- ------- ------- -------
Total pro forma increase in GAAP and
regulatory capital......................... $ 5,763 $ 6,830 $ 7,896 $ 9,124
======= ======= ======= =======
-------------------
(1) As adjusted to give effect to an increase in the number of shares issued
which could occur due to an increase in the offering range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
offerings.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. The risk-based capital level is shown as a percentage of
risk-weighted assets.
(3) Generally accepted accounting principles, referred to as "GAAP," capital
includes goodwill, intangible assets and unrealized gain (loss) on
available for sale securities, net, which are not included in regulatory
capital.
(4) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
(5) The difference between core capital and risk-based capital is attributable
to the addition of general loan loss reserves of $921,000.
24
RECENT DEVELOPMENTS
The financial information and other data in this section is derived from MSB
Financial Corp.'s audited consolidated financial statements at and for the year
ended June 30, 2006 and unaudited consolidated financial statements at and for
the three months ended September 30, 2006 and 2005. In the opinion of
management, all adjustments consisting of normal recurring adjustments that are
necessary for a fair presentation of the interim periods have been reflected.
The results of operations and other data presented for the three month period
ended September 30, 2006 do not necessarily indicate the results that may be
expected for the year ending June 30, 2007 or any other period.
Balance Sheet Data: At At
September 30, June 30,
2006 2006
(In thousands)
Total assets............................. $275,721 $270,184
Cash and cash equivalents................ 5,752 5,881
Loans receivable, net.................... 223,662 218,321
Securities held to maturity.............. 27,585 27,707
Deposits................................. 195,473 194,755
Federal Home Loan Bank advances.......... 58,736 54,181
Total stockholder's equity............... 19,634 19,491
Summary of Operations: For the Three Months
Ended September 30,
2006 2005
-------- ------
(In thousands)
Total interest income..................................... $3,874 $3,223
Total interest expense.................................... 2,195 1,367
------ -----
Net interest income.................................. 1,679 1,856
Provision for loan losses................................. - 15
------ -----
Net interest income after provision for loan losses....... 1,679 1,841
Noninterest income........................................ 153 159
Noninterest expense....................................... 1,611 1,404
------ -----
Income before income taxes................................ 221 596
Income tax provision...................................... 78 224
------ -----
Net income................................................ $ 143 $ 372
====== ======
25
At or For the
Three Months Ended
September 30,
-------------
2006 2005
------ ------
Annualized Performance Ratios:
Return on average assets (ratio of net income
to average total assets).................................. 0.21% 0.62%
Return on average equity (ratio of net income
to average equity)........................................ 2.89 8.09
Net interest rate spread.................................... 2.44 3.16
Net interest margin on average interest-earning
assets.................................................... 2.63 3.30
Average interest-earning assets to average
interest-bearing liabilities.............................. 105.65 105.72
Operating expense ratio (noninterest expenses
to average total assets)................................. 2.37 2.33
Efficiency ratio (noninterest expense divided by
sum of net interest income and noninterest
income)................................................... 87.94 69.68
Asset Quality Ratios:
Non-performing loans to total loans......................... 0.80 1.14
Non-performing assets to total assets....................... 0.66 0.95
Net charge-offs to average loans outstanding................ - 0.02
Allowance for loan losses to non-performing loans........... 50.63 37.73
Allowance for loan losses to total loans.................... 0.40 0.43
Capital Ratios:
Equity to total assets at end of period..................... 7.12 7.52
Average equity to average assets............................ 7.28 7.62
Number of Offices ............................................ 4 3
26
Comparison of Financial Condition at September 30, 2006 and June 30, 2006
General. Total assets reached $275.7 million at September 30, 2006,
compared to $270.2 million at June 30, 2006. The increase was fueled by loan
originations, the funding for which was provided primarily by an increase in
borrowed funds which grew to $58.7 million at September 30, 2006, compared to
$54.2 million at June 30, 2006, an 8.3% increase.
Loans. Loans receivable, net, rose to $223.7 million at September 30,
2006 from $218.3 million at June 30, 2006, an increase of $5.3 million, or 2.4%.
As a percentage of assets, loans increased to 81.1% from 80.8%. One-to-four
family real estate loans grew by $2.8 million or 2.4% between June 30, 2006 and
September 30, 2006. Home equity lending continued to be strong, and this
portfolio grew during the three months ended September 30, 2006 by $2.8 million
or 5.8%.
Securities. Our portfolio of securities held to maturity decreased
slightly to $27.6 million at September 30, 2006 as compared to $27.7 million at
June 30, 2006 due to principal repayments during the three months ended
September 30, 2006. We did not purchase any new securities during the three
months ended September 30, 2006, and we continue to use cash flows from the
securities portfolio to fund loan originations.
Deposits. Total deposits at September 30, 2006 were $195.5 million,
compared to $194.8 million at June 30, 2006. Certificates of deposit increased
by $2.8 million partially offsetting a decrease of $2.1 million in
interest-bearing checking and savings accounts.
Borrowings. Total borrowings at September 30, 2006 amounted to $58.7
million, compared to $54.2 million at June 30, 2006. The increase resulted from
the need to fund new loans. We anticipate using net proceeds from the stock
offering to reduce our outstanding Federal Home Loan Bank borrowings.
Our investment in Federal Home Loan Bank of New York stock was $3.0
million at September 30, 2006 compared to $2.8 million at June 30, 2006,
reflecting the increased level of borrowings.
Equity. Stockholder's equity was $19.6 million at September 30, 2006 as
compared to $19.5 million at June 30, 2006, reflecting net income for the
three-month period of $143,000.
Comparison of Operating Results for the Three Months Ended September 30, 2006
and 2005
General. Our net income for the three months ended September 30, 2006
was $143,000, a 61.6% decrease compared to net income of $372,000 for the three
months ended September 30, 2005. This was primarily the result of a $177,000 or
9.5% decrease in net interest income and a $207,000 or 14.7% increase in
non-interest expense for the three months ended September 30, 2006 as compared
to the same period in 2005. An $83,000 increase in salaries and employee
benefits expense was the largest increase in the non-interest expense category.
Net Interest Income. Net interest income for the three months ended
September 30, 2006 amounted to $1.7 million and was $177,000 or 9.5% lower than
net interest income for the three months ended September 30, 2005 of $1.9
million. A $651,000 or 20.2% increase in interest income for the three months
ended September 30, 2006 was substantially offset by a $828,000 or 60.6%
increase in interest expense.
27
The increase in interest income for the three months ended September
30, 2006 resulted from a 13.5% increase in the average balance of
interest-earning assets and a 34 basis points increase in the average yield
thereon. Our average yield on loans receivable for the three months ended
September 30, 2006 was 6.37%, 34 basis points greater than for the three months
ended September 30, 2005. The increase in yield on loans combined with a $29.9
million increase in the average balance of loans receivable for the three months
ended September 30, 2006 is responsible for the 20.2% increase in interest
income over the three months ended September 30, 2005.
The 60.6% increase in interest expense for the three months ended
September 30, 2006 is attributable to higher interest rates and borrowings
during the period. The average cost of deposits rose by 76 basis points, while
the average balance of deposits was level between periods. The average balance
of Federal Home Loan Bank advances for the three months ended September 30, 2006
was $57.5 million and the average cost thereof was 5.19%. This represents a
$32.7 million or 131.9% increase over the average balance of $24.8 million for
the three months ended September 30, 2005 and a 127 basis point increase over
the average cost of advances for the 2005 period.
Provision for Loan Losses. We did not make a loan loss provision during
the three months ended September 30, 2006. A $15,000 provision was made during
the same period in 2005. The ratio of total non-performing loans to total loans
was 1.14% at September 30, 2005 as compared to 0.80% at September 30, 2006. The
allowance for loan losses totaled $921,000 at September 30, 2006 and reflected
our estimation of the losses inherent in our loan portfolio to the extent they
are both probable and reasonable to estimate.
Non-Interest Income. This category includes fees derived from checking
accounts, ATM transactions and debit card use and mortgage related fees. It also
includes increases in the cash-surrender value of our bank owned life insurance.
Overall, non-interest income fell by $6,000 or 3.8% for the three months ended
September 30, 2006 as compared to the three months ended September 30, 2005.
Non-Interest Expenses. Total non-interest expenses grew by $207,000 or
14.7% during the three months ended September 30, 2006 to $1.6 million compared
to $1.4 million for same period in 2005.
Salaries and employee benefits expense totaled $777,000 for the three
months ended September 30, 2006, an $83,000 or 12.0% increase over $694,000 for
the three months ended September 30, 2005. Salaries and employee benefits are
our main non-interest expense and represented 48.2% and 49.4% of non-interest
expenses for the three months ended September 30, 2006 and 2005, respectively.
Non-interest expense for the 2006 period was also impacted by the
operation of the Martinsville branch office which opened in July 2006.
Income Taxes. Income tax expense for the three months ended September
30, 2006 was $78,000 or 35.3% of income before income taxes as compared to
$224,000 or 37.6% of income before income taxes for the three months ended
September 30, 2005. The reduction for the three months ended September 30, 2006
primarily reflects lower pre-tax income for that period.
28
SELECTED FINANCIAL AND OTHER DATA
The financial information and other data in this section is derived in
part from MSB Financial Corp.'s audited consolidated financial statements and
should be read together with the consolidated financial statements and the notes
thereto beginning on page F-1 of this document.
Balance Sheet Data:
At June 30,
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(In thousands)
Total assets ...................... $270,184 $237,869 $215,881 $196,766 $168,914
Cash and cash equivalents ......... 5,881 5,666 3,800 13,338 14,909
Loans receivable, net ............. 218,321 187,192 168,614 138,496 122,969
Securities held to maturity ....... 27,707 28,292 31,515 37,606 24,167
Deposits .......................... 194,755 196,931 190,500 180,343 153,920
Federal Home Loan Bank advances.xxx 54,181 21,195 7,500 -- --
Total stockholder's equity ........ 19,491 18,089 16,578 15,230 13,933
Summary of Operations:
For the Year Ended June 30,
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(In thousands)
Total interest income ............. $ 14,117 $ 11,754 $ 10,769 $ 10,524 $ 10,281
Total interest expense ............ 6,661 4,386 3,856 4,277 5,025
-------- -------- -------- -------- --------
Net interest income ............ 7,456 7,368 6,913 6,247 5,256
Provision for loan losses ......... 60 135 134 136 137
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses ................. 7,396 7,233 6,779 6,111 5,119
Noninterest income ................ 603 629 517 432 372
Noninterest expense ............... 5,763 5,432 4,900 4,448 3,489
-------- -------- -------- -------- --------
Income before taxes ............... 2,236 2,430 2,396 2,095 2,002
Income tax provision .............. 834 919 948 798 703
-------- -------- -------- -------- --------
Net income ........................ $ 1,402 $ 1,511 $ 1,448 $ 1,297 $ 1,299
======== ======== ======== ======== ========
29
At or For the Year Ended June 30,
------------------------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Performance Ratios:
Return on average assets (ratio of net income
to average total assets)......................... 0.55% 0.66% 0.70% 0.72% 0.83%
Return on average equity (ratio of net income
to average equity)............................... 7.31 8.64 9.07 8.83 9.77
Net interest rate spread........................... 2.97 3.33 3.34 3.40 3.18
Net interest margin on average interest-earning
assets........................................... 3.12 3.44 3.50 3.61 3.47
Average interest-earning assets to average
interest-bearing liabilities..................... 105.53 105.45 107.97 108.47 109.98
Operating expense ratio (noninterest expenses
to average total assets)......................... 2.25 2.37 2.38 2.47 2.22
Efficiency ratio (noninterest expense divided by
sum of net interest income and noninterest
income).......................................... 71.51 67.93 65.95 66.60 61.99
Asset Quality Ratios:
Non-performing loans to total loans................ 0.32 1.25 1.13 2.09 1.25
Non-performing assets to total assets.............. 0.27 1.01 0.92 1.51 0.92
Net charge-offs to average loans outstanding....... 0.01 0.00 0.03 0.20 0.01
Allowance for loan losses to non-performing
loans............................................ 127.39 36.31 37.44 21.94 50.16
Allowance for loan losses to total loans........... 0.41 0.45 0.42 0.46 0.63
Capital Ratios:
Equity to total assets at end of period............ 7.21 7.60 7.68 7.74 8.25
Average equity to average assets................... 7.50 7.63 7.75 8.16 8.44
Number of Offices(1): 3 3 3 3 2
---------------
(1) All of the Bank's offices are full service locations. The Martinsville
branch office opened subsequent to June 30, 2006 and is not included in the
number shown above.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects MSB Financial Corp.'s
consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our financial condition and results of
operations. You should read the information in this section in conjunction with
MSB Financial Corp.'s consolidated financial statements and accompanying notes
thereto beginning on page F-1 of this document, and the other statistical data
provided in this prospectus. Unless otherwise indicated, the financial
information presented in this section reflects the consolidated financial
condition and results of operations of MSB Financial Corp. and its direct and
indirect subsidiaries.
Overview
We were originally founded in 1911 as "Millington Building and Loan
Association," and we commenced business in a small office located over a
hardware store on Long Hill Road in Millington, New Jersey. Our operations
remained at that site and expanded into larger areas of the building until we
finally outgrew the space and in 1994 moved into a newly constructed building
adjacent to the original office. This was our sole location until 1998, when we
opened our first branch office.
Our primary business is attracting retail deposits from the general
public and using those deposits, together with funds generated from operations,
principal repayments on securities and loans and borrowed funds, for our lending
and investing activities. Our loan portfolio consists of one- to four-family
residential real estate mortgages, commercial real estate mortgages,
construction loans, commercial loans, home equity loans and lines of credit, and
other consumer loans. We also invest in U.S. government obligations and
mortgage-backed securities. At June 30, 2006, our total assets were $270.2
million. Total assets grew by 13.6% during the year ended June 30, 2006 and grew
by 10.2% the year before.
Net income for the year ended June 30, 2006 totaled $1.4 million, as
compared to $1.5 million for the year ended June 30, 2005 and $1.4 million for
the year ended June 30, 2004. Net interest income has been constrained, as our
net interest margin was compressed due to the increasing interest rate
environment. For the year ended June 30, 2006, interest income increased by
20.1% while interest expense increased by 51.9% as compared to 2005. This
followed increases for the year ended June 30, 2005 of 9.1% and 13.7% in
interest income and interest expenses, respectively, as compared to the year
ended June 30, 2004.
We have experienced strong loan demand in recent years and the
resulting growth in our loan portfolio has been significant. Between June 30,
2002 and June 30, 2006, total loans grew by $99.7 million to $224.4 million, an
80% increase. Our difficulty has been growing the deposit side of our operations
to match the growth in the lending side of our operations. During this same
period, our deposits grew by $40.8 million, a 26.5% increase.
While deposits continue to be our primary source of funds to support
our lending activities, our loan originations in recent years have exceeded our
deposits. At June 30, 2006, our total loans to deposits ratio was 115%. This has
caused us to use Federal Home Loan Bank borrowings to fund loans, and borrowings
are usually a higher cost source of funds than deposits, which means our net
interest rate spread and profitability are lower than if we did not have to
borrow funds. As of three years ago, we had zero borrowings while at June 30,
2006 our Federal Home Loan Bank advances had grown to $54.2 million. In the near
term, we anticipate reducing a portion of these borrowings with the net proceeds
from the stock offering. At June 30, 2006, the majority of our borrowings were
short term borrowings, the repayment
31
of which would not force us to incur prepayment penalties. That planned
reduction, however, does not remove the need, if we are able to continue growing
our loan portfolio, to also grow deposits and lessen our dependancy on
borrowings as a funding source.
We have expanded our branch network in an effort to increase our
deposits. Since 2002 we have opened two new offices and relocated an existing
office to a larger facility. We have another office scheduled to open in late
2007. Our challenge going forward is whether we can successfully grow deposits
within this expanded branch network.
Critical Accounting Policies
Our accounting policies are integral to understanding the results
reported and are described in Note 2 to our consolidated financial statements
beginning on page F-1 of this document. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the
consolidated statements of financial condition and revenues and expenses for the
periods then ended. Actual results could differ significantly from those
estimates. A material estimate that is particularly susceptible to significant
change relates to the determination of the allowance for loan losses.
The allowance for loan losses represents our best estimate of losses
known and inherent in our loan portfolio that are both probable and reasonable
to estimate. In determining the amount of the allowance for loan losses, we
consider the losses inherent in our loan portfolio and changes in the nature and
volume of our loan activities, along with general economic and real estate
market conditions. We utilize a two tier approach: (1) identification of
impaired loans for which specific reserves are established; and (2)
establishment of general valuation allowances on the remainder of the loan
portfolio. We maintain a loan review system which provides for a systematic
review of the loan portfolio and the early identification of potential impaired
loans. Such system takes into consideration, among other things, delinquency
status, size of loan, type of collateral and the financial condition of the
borrower. Specific loan loss allowances are established for identified loans
based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of the
loan portfolio, current economic conditions and management's judgment.
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events and, as such, further provisions for loan losses may be necessary
in order to increase the level of the allowance for loan losses. For example,
our evaluation of the allowance includes consideration of current economic
conditions, and a change in economic conditions could reduce the ability of our
borrowers to make timely repayments of their loans. This could result in
increased delinquencies and increased non-performing loans, and thus a need to
make increased provisions to the allowance for loan losses, which would be a
charge to income during the period the provision is made, resulting in a
reduction to our earnings. A change in economic conditions could also adversely
affect the value of the properties collateralizing our real estate loans,
resulting in increased charge-offs against the allowance and reduced recoveries,
and thus a need to make increased provisions to the allowance for loan losses.
Furthermore, a change in the composition of our loan portfolio or growth of our
loan portfolio could result in the need for additional provisions.
32
Comparison of Financial Condition at June 30, 2006 and 2005
General. Total assets reached $270.2 million at June 30, 2006, compared
to $237.9 million at June 30, 2005. The increase was fueled by loan
originations, the funding for which was provided primarily by an increase in
borrowed funds which grew to $54.2 million at June 30, 2006, compared to $21.2
million at June 30, 2005. The increase in borrowings was necessary to meet the
strong loan demand as deposits fell slightly, to $194.8 million at June 30,
2006, compared to $196.9 million at June 30, 2005. The Bank's average cost of
interest-bearing deposits for the year ended June 30, 2006 was 2.65%, 55 basis
points higher than the prior year. The Bank's strategy was to remain competitive
on rates but to limit the increase in its cost of deposits resulting from the
increasing interest rate environment as much as possible by utilizing
borrowings, which management determined to be more cost-effective than
aggressively seeking additional deposits through competitive pricing.
Total assets grew $32.3 million or 13.6% between years while total
liabilities grew by $30.9 million or 14.1%, and the ratio of average
interest-earning assets to average-interest bearing liabilities was static,
increasing only 8 basis points between years.
Loans. Loans receivable, net, rose to $218.3 million at June 30, 2006
from $187.2 million at June 30, 2005, an increase of $31.1 million, or 16.6%. As
a percentage of assets, loans increased to 80.8% from 78.7%. The Bank benefitted
from strong demand for one-to-four family and home equity loans in its market
area. One-to-four family real estate loans grew by $7.4 million or 6.5% between
June 30, 2005 and June 30, 2006. Following a 28.9% increase during the year
ended June 30, 2005, the home equity portfolio continued to grow during the year
ended June 30, 2006 and increased by $11.0 million or 28.6%. The commercial real
estate, construction, commercial and consumer loan portfolios grew also.
Securities. Our portfolio of securities held to maturity was nearly
unchanged at $27.7 million at June 30, 2006 as compared to $28.3 million at June
30, 2005. Maturities, calls and principal repayments during the year totaled
$584,000 as compared to $3.2 million during the prior year. We did not purchase
any new securities during either of the last two years as we continued to use
those cash flows to fund loan originations. We anticipate that cash flows from
the securities portfolio may continue to be used to reduce Federal Home Loan
Bank borrowings.
Deposits. Total deposits at June 30, 2006 were $194.8 million, compared
to $196.9 million at June 30, 2005. Certificates of deposit increased by $8.2
million partially offsetting a decrease of $11.1 million in interest-bearing
checking and savings accounts.
Borrowings. Total borrowings at June 30, 2006 amounted to $54.2
million, compared to $21.2 million at June 30, 2005. We anticipate using net
proceeds from the stock offering to reduce our outstanding Federal Home Loan
Bank borrowings.
Our investment in Federal Home Loan Bank of New York stock was $2.8
million at June 30, 2006 compared to $1.5 million at June 30, 2005, reflecting
the required increase in ownership of Federal Home Loan Bank stock resulting
from the increase in borrowings during the year ended June 30, 2006.
Equity. Stockholder's equity was $19.5 million at June 30, 2006 as
compared to $18.1 million at June 30, 2005, reflecting net income of $1.4
million for the year ended June 30, 2006.
33
Comparison of Operating Results for the Three Years Ended June 30, 2006
General. Our results of operations depend primarily on our net interest
income. Net interest income is the difference between the interest income we
earn on our interest-earning assets and the interest we pay on our
interest-bearing liabilities. It is a function of the average balances of loans
and investments versus deposits and borrowed funds outstanding in any one period
and the yields earned on those loans and investments and the cost of those
deposits and borrowed funds. Our results of operations are also affected by our
provision for loan losses, non-interest income and non-interest expense.
Non-interest income includes service fees and charges, including income on bank
owned life insurance. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expense and other general and administrative
expenses such as service bureau fees and advertising costs.
Our net income for the year ended June 30, 2006 was $1.4 million, a
7.2% decrease compared to net income of $1.5 million for the year ended June 30,
2005. An $88,000 or 1.2% increase in net interest income and a $75,000 decrease
in the provision for loan losses to $60,000 for the year ended June 30, 2006
from $135,000 for the year ended June 30, 2005 were not enough to negate a
$331,000 or 6.1% increase in non-interest expense for the year ended June 30,
2006. A $297,000 increase in salaries and employee benefits expense accounted
for most of the increase in non-interest expense.
Net income of $1.5 million for the year ended June 30, 2005 represented
a 4.4%increase as compared to net income for the year ended June 30, 2004 of
$1.4 million. Net interest income grew by $455,000 or 6.6% while non-interest
income rose by $112,000. These increases, however, were mostly offset by
non-interest expenses for the year ended June 30, 2005 which grew by $532,000 or
10.9% compared to the year ended June 30, 2004.
Net Interest Income. Net interest income for the year ended June 30,
2006 amounted to $7.5 million and was $88,000 or 1.2% higher than net interest
income for the year ended June 30, 2005 of $7.4 million. A $2.4 million or 20.1%
increase in interest income for the year ended June 30, 2006 was substantially
offset by a $2.3 million or 51.9% increase in interest expense so that net
interest income for the year ended June 30, 2006 was nearly flat as compared to
the year ended June 30, 2005.
The increase in interest income for the year ended June 30, 2006
resulted from an 11.6% increase in the average balance of interest-earning
assets and a 42 basis points increase in the average yield thereon. Our average
yield on loans receivable for the year ended June 30, 2006 was 6.20%, 39 basis
points greater than for the year ended June 30, 2005. The increase in yield on
loans combined with a $26.1 million increase in the average balance of loans
receivable for the year ended June 30, 2006 are primarily responsible for the
20.1% increase in interest income over the year ended June 30, 2005.
The 51.9% increase in interest expense for the year ended June 30, 2006
is largely attributable to higher borrowings during the year. The average cost
of deposits rose by 55 basis points, but the average balance of deposits was
level between years. The average balance of Federal Home Loan Bank advances for
the year ended June 30, 2006 was $37.6 million and the average cost thereof was
4.43%. This represents a $23.3 million or 163.7% increase over the average
balance of $14.3 million for the year ended June 30, 2005 and a 147 basis point
increase over the average cost of advances for the year ended June 30, 2005.
Net interest income for the year ended June 30, 2005 was $7.4 million
as compared to $6.9 million for the year ended June 30, 2004, representing a
$455,000 or 6.6% increase. Interest income for the year ended June 30, 2005 was
$11.8 million compared to $10.8 million for the year ended June 30, 2004. This
34
9.1% increase in interest income for the year ended June 30, 2005 was partially
offset by a 13.7% or $530,000 increase in interest expense.
The $1.0 million increase in interest income for the year ended June
30, 2005 resulted primarily from an 8.4% increase in the average balance of
interest-earning assets as the average yield of interest- earning assets
increased slightly between years, from 5.45% to 5.49%. Our average balance of
loans receivable for the year ended June 30, 2005 was $28.1 million or 18.5%
higher than for the year ended June 30, 2004. Interest income on loans was $1.5
million or 16.6% higher primarily as a result of the 18.5% increase in average
balance. A 10 basis point decrease in the average yield on loans from 5.91% for
the year ended June 30, 2004 to 5.81% for the year ended June 30, 2005 was
caused by a heavy amount of refinancing activity when borrowers perceived that
the historically low rate environment was ending.
The 13.7% increase in interest expense for the year ended June 30, 2005
as compared to the year ended June 30, 2004 resulted from a 232.8% or $10.0
million increase in the average balance of Federal Home Loan Bank advances and a
184 basis point increase in the average cost thereof from 1.12% for the year
ended June 30, 2004 to 2.96% for the year ended June 30, 2005. Interest expense
also rose as a result of a $10.1 million or 5.6% increase in the average balance
of interest-bearing deposits. The average cost of deposits, however, actually
fell three basis points for the year ended June 30, 2005 since much of the
growth in deposits occurred in the lower costing checking and money market
account categories.
Our net interest rate spread was 3.34% for the year ended June 30,
2004, compared to 3.33% for the year ended June 30, 2005 and 2.97% for the year
ended June 30, 2006. The spread decreased during the year ended June 30, 2006 as
our average cost of interest-bearing liabilities increased by 78 basis points to
2.94%, a 36.1% increase over the year ended June 30, 2005. The Bank's increasing
utilization of Federal Home Loan Bank advances to fund loan originations had the
effect of increasing the average cost of interest-bearing liabilities. In
comparison, the average yield on interest-earning assets increased 42 basis
points from 5.49% for the year ended June 30, 2005 to 5.91% for the year ended
June 30, 2006.
Provision for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses inherent in our loan
portfolio to the extent they are both probable and reasonable to estimate. The
allowance is established through provisions for loan losses that are charged to
income in the period they are established. We charge losses on loans against the
allowance for loan losses when we believe the collection of loan principal is
unlikely. Recoveries on loans previously charged-off are added back to the
allowance. Compared to the year ended June 30, 2004, the provision for the year
ended June 30, 2005 was essentially the same. The provision for the year ended
June 30, 2006 was substantially less and the decrease reflected the drop in
total non-performing loans from $2.4 million at June 30, 2005 to $723,000 at
June 30, 2006, which was attributable to non-performing loans being paid off.
The ratio of total non-performing loans to total loans was 1.13% at June 30,
2004 and 1.24% at June 30, 2005 and then dropped to 0.32% at June 30, 2006.
Non-Interest Income. This category includes fees derived from checking
accounts, ATM transactions and debit card use and mortgage related fees. It also
includes increases in the cash-surrender value of our bank owned life insurance.
Overall, non-interest income fell by $26,000 for the year ended June 30, 2006 as
compared to the year ended June 30, 2005 and increased by $112,000 for the year
ended June 30, 2005 as compared to the year ended June 30, 2004.
Income from fees and service charges is the largest component of
non-interest income and totaled $338,000, $322,000 and $335,000 for the years
ended June 30, 2006, 2005 and 2004.
35
Income on bank owned life insurance of $156,000 for the year ended June
30, 2005 and $162,000 for the year ended June 30, 2006 represented the next
largest component of non-interest income for those years. The Bank purchased
$3.5 million of bank owned life insurance during the year ended June 30, 2004.
Income on bank owned life insurance totaled $56,000 for the year ended June 30,
2004.
Non-interest income included income from investment in real estate of
$52,000 and $51,000 in the years ended June 30, 2005 and 2004. During the year
ended June 30, 2006, a loss from investment in real estate of $120,000 was
recorded, primarily representing a $110,000 loss related to the sale of a
property.
Non-Interest Expenses. Total non-interest expenses grew by 6.1% during
the year ended June 30, 2006 and by 10.9% during the year ended June 30, 2005.
They amounted to $5.8 million, $5.4 million and $4.9 million for the years ended
June 30, 2006, 2005 and 2004, respectively.
Salaries and employee benefits expense totaled $2.8 million for the
year ended June 30, 2006, a $297,000 or 11.9% increase over the year ended June
30, 2005. Salaries and employee benefits expense for the year ended June 30,
2005 totaled $2.5 million, a $292,000 or 13.3% increase over $2.2 million for
the year ended June 30, 2004. Salaries and employee benefits are our main
non-interest expense and represented 48.4%, 45.9% and 44.9% of non-interest
expenses for the years ended June 30, 2006, 2005 and 2004, respectively.
Included in employee benefits is an Executive Incentive Retirement Plan which we
implemented during the year ended June 30, 2004.
Non-interest expense will be impacted in future periods by the
operation of the Martinsville branch office which opened in July 2006 and the
Bernardsville branch office, which is projected to open in late 2007.
We also expect that non-interest expenses will be higher going forward
as a result of the accounting, legal and various other additional non-interest
expenses associated with operating as a public company, particularly as a result
of the requirements of the Sarbanes-Oxley Act of 2002.
Additional annual employee compensation and benefit expenses stemming
from the shares granted to employees, officers and directors under new benefit
plans will also increase non-interest expenses. We will recognize expense for
the Millington Savings Bank Employee Stock Ownership Plan when shares are
committed to be released to participants' accounts and will recognize expenses
for restricted stock awards over the vesting period of awards made to
recipients. In addition, we will be required to recognize compensation expense
related to stock options outstanding based upon the fair value of such awards at
the date of grant over the period that such awards are earned.
Income Taxes. Income tax expense for the year ended June 30, 2006 was
$834,000 as compared to $919,000 for the year ended June 30, 2005 and $948,000
for the year ended June 30, 2004. The reduction for the year ended June 30, 2006
reflects lower pre-tax income for that year as well as a slight reduction in the
effective tax rate. The reduction for the year ended June 30, 2005 as compared
to the year ended June 30, 2004 reflects a decrease in the effective tax rate
from 39.6% to 37.8%. The decrease in the effective tax rate was due to an
increase in income from bank owned life insurance, which is tax exempt.
36
Average Balance Sheet. The following tables set forth certain information at
June 30, 2006 and for the years ended June 30, 2006, 2005 and 2004. The average
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Average balances are derived from daily balances.
Year Ended June 30,
----------------------------------------------------------------------------------
At June 30, 2006 2006 2005 2004
---------------- -------------------------- --------------------------- -------------------------
Interest Average Interest Average Interest Average
Yield/ Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Cost Balance Paid Cost Balance Paid Cost Balance Paid Cost
------- ---- ------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
Interest-earning assets:
Loans(1).................... $219,242 6.28% $205,905 $12,773 6.20% $179,837 $10,457 5.81% $151,736 $ 8,967 5.91%
Securities.................. 27,707 3.93% 27,959 1,177 4.21% 29,505 1,215 4.12% 38,690 1,736 4.49%
Other interest-earning
assets(2)................. 6,923 5.34% 5,008 167 3.33% 4,636 82 1.77% 6,995 66 0.94%
-------- -------- ------- -------- ------- -------- -------
Total interest-earning
assets.................... 253,872 6.00% 238,872 14,117 5.91% 213,978 11,754 5.49% 197,421 10,769 5.45%
------- ------- -------
Non-interest-earning
assets.................... 16,312 16,719 15,292 8,534
-------- -------- -------- --------
Total assets................ $270,184 $255,591 $229,270 $205,955
======== ======== ======== ========
Interest-bearing liabilities:
NOW & money market.......... $ 30,896 0.97% $ 34,117 329 0.96% $ 36,251 334 0.92% $ 31,594 319 1.01%
Savings and club deposits... 42,696 1.49% 44,839 568 1.27% 49,757 604 1.21% 49,162 597 1.21%
Certificates of deposit..... 112,028 4.15% 109,755 4,098 3.73% 102,635 3,025 2.95% 97,803 2,892 2.96%
-------- -------- ------- -------- ------- -------- -------
Total interest-bearing
deposits.................. 185,620 3.01% 188,711 4,995 2.65% 188,643 3,963 2.10% 178,559 3,808 2.13%
Federal Home Loan Bank
advances.................. 54,181 5.12% 37,637 1,666 4.43% 14,272 423 2.96% 4,289 48 1.12%
-------- -------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............... 239,801 3.49% 226,348 6,661 2.94% 202,915 4,386 2.16% 182,848 3,856 2.11%
------- ------- -------
Non-interest-bearing
deposits.................. 9,135 8,294 7,297 5,683
Other non-interest-bearing
liabilities............... 1,757 1,782 1,572 1,461
-------- -------- -------- --------
Total liabilities........... 250,693 236,424 211,784 189,992
Stockholder's equity........ 19,491 19,167 17,486 15,963
-------- -------- -------- --------
Total liabilities and
stockholder's equity...... $270,184 $255,591 $229,270 $205,955
======== ======== ======== ========
Net interest rate
spread(3)................. 2.51% $ 7,456 2.97% $ 7,368 3.33% $ 6,913 3.34%
==== ======= ==== ======= ==== ======= ====
Net interest margin(4)...... 3.12% 3.44% 3.50%
==== ==== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities............... 105.87% 105.53% 105.45% 107.97%
====== ====== ====== ======
-----------------
(1) Non-accruing loans have been included, and the effect of such inclusion was
not material. The allowance for loan losses is excluded, while construction
loans in process and deferred fees are included.
(2) Includes Federal Home Loan Bank stock at cost and term deposits with other
financial institutions.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. (4) Net interest margin represents net interest income as a
percentage of average interest-earning assets.
37
Rate/Volume Analysis. The following table reflects the sensitivity of
our interest income and interest expense to changes in volume and in prevailing
interest rates during the periods indicated. Each category reflects the: (1)
changes in volume (changes in volume multiplied by old rate); (2) changes in
rate (changes in rate multiplied by old volume); and (3) net change. The net
change attributable to the combined impact of volume and rate has been allocated
proportionally to the absolute dollar amounts of change in each.
Year Ended Year Ended
June 30, June 30,
----------------------------- -------------------------------
2006 vs. 2005 2005 vs. 2004
----------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Interest and dividend income:
Loans ............................ $ 1,583 $ 733 $ 2,316 $ 1,643 $ (153) $ 1,490
Securities ....................... (64) 26 (38) (387) (134) (521)
Other interest-earning assets .... 7 78 85 (28) 44 16
------- ------- ------- ------- ------- -------
Increase (decrease) in
total interest income .......... 1,526 837 2,363 1,228 (243) 985
Interest expense:
NOW and money market accounts ...... $ (20) $ 15 $ (5) $ 45 $ (30) $ 15
Savings and club ................... (64) 28 (36) 7 -- 7
Certificates of deposit ............ 223 850 1,073 143 (10) 133
------- ------- ------- ------- ------- -------
Total interest-bearing deposits .. 139 893 1,032 195 (40) 155
Federal Home Loan Bank advances .... 954 289 1,243 220 155 375
------- ------- ------- ------- ------- -------
Increase in total interest expense 1,093 1,182 2,275 415 115 530
Change in net interest income ...... $ 433 $ (345) $ 88 $ 813 $ (358) $ 455
======= ======= ======= ======= ======= =======
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our assets and
liabilities are sensitive to changes in interest rates, a significant form of
market risk for us is interest rate risk, or changes in interest rates.
We derive our income mainly from the difference or "spread" between the
interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities. In
general, the larger the spread, the more we earn. When market rates of interest
change, the interest we receive on our assets and the interest we pay on our
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income.
Several years ago market interest rates were at historically low
levels. However, between June 2004 and June 2006, the U.S. Federal Reserve
steadily increased its target federal funds rate, raising it 17 times, from
1.00% to 5.25%. While the federal funds rate and other short-term market
interest rates, which we use as a guide to our deposit pricing, have increased,
intermediate- and long-term market interest rates, which we use as a guide to
our loan pricing, have not increased proportionately. This has led to a
"flattening" of the market yield curve, which has even "inverted" recently as
short-term rates have exceeded long-term rates over an intermediate maturity
horizon. The relatively flat yield curve has hurt our net interest rate spread
and net interest margin because the interest rates we pay on our deposits have
repriced upwards faster than the interest rates that we earn on our loans and
investments.
38
Quantitative Analysis. The following table presents Millington Savings
Bank's net portfolio value as of June 30, 2006. The Bank outsources its interest
rate risk modeling and the net portfolio values shown in this table were
calculated by an outside consultant, based on information provided by Millington
Savings Bank.
At June 30, 2006
---------------------------------------------------------------------
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
------------------------ -------------------------------------------
Changes in Net Portfolio Basis Point
Rates $ Amount $ Change % Change Value Ratio Change
-------- -------- -------- -------- ----------- ------
(Dollars in thousands)
+300 bp 10,282 (12,755) -55.37% 4.22% (454) bp
+200 bp 14,293 (8,743) -37.95% 5.72% (303) bp
+100 bp 18,470 (4,567) -19.82% 7.21% (154) bp
0 bp 23,037 0 0.00% 8.75% 0 bp
-100 bp 26,879 3,843 16.68% 9.97% 122 bp
-200 bp 29,532 6,495 28.20% 10.77% 201 bp
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. Although certain assets and
liabilities may have similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the market interest
rates. The interest rate on certain types of assets and liabilities, such as
demand deposits and savings accounts, may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. Certain assets, such as adjustable
rate mortgages, generally have features which restrict changes in interest rates
on a short-term basis and over the life of the asset. In the event of a change
in interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Notwithstanding the discussion above, the quantitative interest rate
analysis presented above indicates that a rapid increase in interest rates would
adversely affect our net interest margin and earnings.
Liquidity, Commitments and Capital Resources
The Bank must be capable of meeting its customer obligations at all
times. Potential liquidity demands include funding loan commitments, cash
withdrawals from deposit accounts and other funding needs as they present
themselves. Accordingly, liquidity is measured by our ability to have sufficient
cash reserves on hand, at a reasonable cost and/or with minimum losses.
Senior management is responsible for managing our overall liquidity
position and risk and is responsible for ensuring that our liquidity needs are
being met on both a daily and long term basis. The Financial Review Committee,
comprised of senior management and chaired by President and Chief Executive
Officer Gary Jolliffe, is responsible for establishing and reviewing our
liquidity procedures, guidelines, and strategy on a periodic basis.
39
Our approach to managing day-to-day liquidity is measured through our
daily calculation of investable funds and/or borrowing needs to ensure adequate
liquidity. In addition, senior management constantly evaluates our short-term
and long-term liquidity risk and strategy based on current market conditions,
outside investment and/or borrowing opportunities, short and long-term economic
trends, and anticipated short and long-term liquidity requirements. The Bank's
loan and deposit rates may be adjusted as another means of managing short and
long-term liquidity needs. We do not at present participate in derivatives or
other types of hedging instruments to meet liquidity demands, as we take a
conservative approach in managing liquidity.
At June 30, 2006, the Bank had outstanding commitments to originate
loans of $3.0 million, construction loans in process of $5.0 million, unused
lines of credit of $26.5 million and standby letters of credit of $108,000.
Certificates of deposit scheduled to mature in one year or less at June 30,
2006, totaled $76.5 million.
The Bank generates cash through borrowings from the Federal Home Loan
Bank to meet its day-to- day funding obligations. At June 30, 2006, its total
loans to deposits ratio was 115%. At June 30, 2006, the Bank's collateralized
borrowing limit with the Federal Home Loan Bank was $56.2 million, of which
$54.2 million was outstanding. As of June 30, 2006, the Bank also had a $20.0
million line of credit with a financial institution for reverse repurchase
agreements (which is a form of borrowing) that it could access if necessary.
The following tables disclose our contractual obligations and
commitments as of June 30, 2006.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
(In thousands)
Federal Home Loan Bank borrowings......... $ 54,181 $ 41,500 $ - $ 12,681 $ -
Certificates of deposit .................. 79,772 44,207 23,166 2,395 10,004
Leases ................................... 1,751 237 474 474 566
-------- -------- -------- -------- --------
Total .............................. $135,704 $ 85,944 $ 23,640 $ 15,550 $ 10,570
======== ======== ======== ======== ========
Total
Amounts Less Than After
Committed 1 Year 1-3 Years 4-5 Years 5 Years
--------- ------ --------- --------- -------
(In thousands)
Lines of credit(1) ...................... $26,546 $ 726 $ 1,646 $ 599 $23,575
Construction loans in process ........... 4,968 4,460 508 - -
Other commitments to extend credit(1).... 2,979 2,979 - - -
------- ------- ------- ------ -------
Total ............................... $34,493 $ 8,165 $ 2,154 $ 599 $23,575
======= ======= ======= ====== =======
----------------
(1) Represents amounts committed to customers.
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain its status as a
well-capitalized institution in accordance with regulatory standards. As of June
30, 2006, the Bank exceeded all applicable regulatory capital requirements. See
Note 13 to our consolidated financial statements beginning at page F-1 for more
information about the Bank's regulatory capital compliance.
40
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in
the normal course of our business of investing in loans and securities as well
as in the normal course of maintaining and improving Millington Savings Bank's
facilities. These financial instruments include significant purchase
commitments, such as commitments related to capital expenditure plans and
commitments to purchase investment securities or mortgage-backed securities, and
commitments to extend credit to meet the financing needs of our customers. At
June 30, 2006, our significant off-balance sheet commitments consisted of
commitments to originate loans of $3.0 million, construction loans in process of
$5.0 million, unused lines of credit of $26.5 million and standby letters of
credit of $108,000.
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.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those instruments. We
use the same credit policies in making commitments and conditional obligations
as we do for on-balance-sheet instruments. Since a number of commitments
typically expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. For additional information
regarding our outstanding lending commitments at June 30, 2006, see Note 14 to
our consolidated financial statements beginning on page F-1.
Impact of Inflation
The financial statements included in this document have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities of our assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels
of interest rates, is in the area of non-interest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123R,
"Share-Based Payment," which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." This statement will require that all share-based payments to
employees, including grants of employee stock options, be recognized as
compensation costs in the financial statements
41
based on their fair values. The effective date of this statement was delayed
until fiscal years beginning after June 15, 2005. The impact of the adoption of
this standard will be dependent on the nature and extent of stock-based
compensation granted in future periods. See Pro Forma Data for an illustration
of the application of this standard.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections," which establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the
newly adopted accounting principle. The statement provides guidance for
determining whether retrospective application of a change in accounting
principle is impracticable. The statement also addresses the reporting of a
correction of error by restating previously issued financial statements. SFAS
No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. We will adopt this statement as
required, and do not believe the adoption will have a material effect on our
results of operations or financial position.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments." SFAS No. 155 amends SFAS No. 133 and 140, and
improves the financial reporting of certain hybrid financial instruments by
requiring more consistent accounting that eliminates exemptions and provides a
means to simplify the accounting for these instruments. Specifically, SFAS No.
155 allows financial instruments that have embedded derivatives to be accounted
for as a whole (eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a fair value basis.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. We are required to adopt the provisions of SFAS No. 155, as applicable,
beginning on July 1, 2007. We do not believe the adoption of SFAS No. 155 will
have any impact on our financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - An Amendment of FASB Statement No. 140." SFAS No. 156
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits,
but does not require, the subsequent measurement of servicing assets and
servicing liabilities at fair value. SFAS No. 156 is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006,
which for us will be July 1, 2007. We do not believe that the adoption of SFAS
No. 156 will have any effect on our financial position or results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109"
(FIN 48), which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that companies recognize in their financial statements
the impact of a tax position only, if the company has determined based on the
technical merits of the tax position, that the tax position would more likely
than not be sustained upon an examination by the appropriate taxing authority.
The provisions of FIN 48 are effective for fiscal years beginning after December
15, 2006, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We do not believe that
the adoption of FIN 48 will have any effect on our financial position or results
of operations.
42
BUSINESS OF MSB FINANCIAL, MHC
MSB Financial, MHC is a federal mutual holding company and is subject
to regulation by the Office of Thrift Supervision. MSB Financial, MHC currently
owns 100% of the outstanding common stock of MSB Financial Corp. Upon completion
of the offering, it will own 55%. So long as MSB Financial, MHC is in existence,
it will own a majority of the outstanding common stock of MSB Financial Corp. If
MSB Financial, MHC converted to a full stock company in what is referred to as a
"second-step conversion," it would cease to exist. The Board of Directors has no
current plans to undertake a second- step transaction.
The primary business activity of MSB Financial, MHC going forward will
continue to be owning a majority of MSB Financial Corp.'s common stock. MSB
Financial, MHC, however, is authorized to engage in any other business
activities that are permissible for mutual holding companies under federal law,
including investing in loans and securities. MSB Financial, MHC does not
maintain offices separate from those of Millington Savings Bank or employ any
persons other than certain Millington Savings Bank officers. Officers of MSB
Financial, MHC are not separately compensated for their service.
BUSINESS OF MSB FINANCIAL CORP.
MSB Financial Corp. is a federal mutual holding company subsidiary and
is subject to regulation by the Office of Thrift Supervision. It was organized
for the purpose of being a holding company for Millington Savings Bank.
MSB Financial Corp.'s primary activity is and will continue to be
holding all of the stock of Millington Savings Bank. MSB Financial Corp. intends
to use the proceeds of the offering as discussed under Use of Proceeds. MSB
Financial Corp. does not maintain offices separate from those of Millington
Savings Bank or employ any persons other than certain Millington Savings Bank
officers. Officers of MSB Financial Corp. are not separately compensated for
their service.
BUSINESS OF MILLINGTON SAVINGS BANK
General
Millington Savings Bank is a New Jersey-chartered stock savings bank.
Its deposits are federally insured by the Deposit Insurance Fund as administered
by the Federal Deposit Insurance Corporation and it is regulated by the New
Jersey Department of Banking and Insurance and the Federal Deposit Insurance
Corporation.
Our primary business is attracting retail deposits from the general
public and using those deposits, together with funds generated from operations,
principal repayments on securities and loans and borrowed funds, for our lending
and investing activities. Our loan portfolio consists of one-to-four family
residential real estate mortgages, home equity loans and lines of credit,
commercial real estate mortgages, construction loans, commercial loans, and
consumer loans. We also invest in U.S. government obligations and
mortgage-backed securities. At June 30, 2006, our loan portfolio comprised
approximately 81% of our total assets, and our securities portfolio represented
10% of our total assets.
Market Area. Our main office is located in Millington, in Morris
County, New Jersey. We currently have three branch offices: one in the Dewy
Meadow Village complex and one in the RiverWalk Village complex, both located in
the Basking Ridge section of Bernards Township, and one in the
43
Martinsville section of Bridgewater, all three of which are within Somerset
County, New Jersey. A new branch is scheduled to open in Bernardsville in
Somerset County in late 2007. Morris County covers an area of 469 square miles
and contains 39 municipalities with a 2000 Census population of approximately
470,000. Somerset County covers an area of 305 square miles and contains 21
municipalities with a population of approximately 315,000. Our lending is
concentrated in central New Jersey and the source of our deposits is
predominantly the communities surrounding our offices. These communities are
demographically similar in their higher levels of education and white collar
jobs as compared to the county average, and all but one is characterized by
household income above the county average. The communities in which we are
located are generally considered to be developing or maturing markets projected
to experience increases in population and households through the next census
date of 2010.
Our business of attracting deposits and making loans is primarily
conducted within our market area. A downturn in the local economy could reduce
the amount of funds available for deposit and the ability of borrowers to repay
their loans. As a result, our profitability could decrease.
Competition. We operate in a market area with a high concentration of
banking and financial institutions, and we face substantial competition in
attracting deposits and in originating loans. A number of our competitors are
significantly larger institutions with greater financial and managerial
resources and lending limits. Our ability to compete successfully is a
significant factor affecting our growth potential and profitability.
Our competition for deposits and loans historically has come from other
insured financial institutions such as local and regional commercial banks,
savings institutions, and credit unions located in our primary market area. We
also compete with mortgage banking and finance companies for real estate loans
and with commercial banks and savings institutions for consumer loans, and we
face competition for funds from investment products such as mutual funds,
short-term money funds and corporate and government securities. There are large
competitors operating throughout our total market area, and we also face strong
competition from other community-based financial institutions.
Lending Activities
We have traditionally focused on the origination of one-to-four family
loans and home equity loans and lines of credit, which together comprise a
substantial majority of the total loan portfolio. We also provide financing for
commercial real estate, including multi-family dwellings/apartment buildings,
service/retail and mixed-use properties, churches and non-profit properties,
medical and dental facilities and other commercial real estate. In recent years,
construction loans have grown as a component of our portfolio. We also originate
commercial loans. Our consumer loans are comprised of auto loans, personal loans
and account loans.
44
Loan Portfolio Composition. The following tables analyzes the
composition of the Bank's portfolio by loan category at the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------- --------------- ---------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Dollars in thousands)
Type of Loans:
One-to-four family real estate.... $120,921 53.89% $113,488 58.50% $109,781 62.73% $ 96,085 67.55% $ 88,423 70.90%
Commercial real estate............ 23,587 10.51 17,971 9.26 17,162 9.81 12,367 8.69 11,016 8.83
Construction...................... 23,276 10.37 18,398 9.48 13,668 7.81 7,686 5.40 3,486 2.80
Consumer.......................... 1,861 0.83 1,819 0.94 1,703 0.97 1,604 1.13 2,015 1.62
Home equity....................... 49,257 21.95 38,291 19.74 29,710 16.98 21,543 15.14 17,502 14.03
Commercial........................ 5,497 2.45 4,029 2.08 2,970 1.70 2,969 2.09 2,274 1.82
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable....... 224,399 100.00% 193,996 100.00% 174,994 100.00% 142,254 100.00% 124,716 100.00%
====== ====== ====== ====== ======
Less:
Construction loans in process... (4,968) (5,719) (5,371) (2,881) (842)
Allowance for loan losses....... (921) (874) (742) (651) (783)
Deferred loan fees.............. (189) (211) (267) (226) (122)
-------- -------- -------- -------- --------
Total loans receivable, net.. $218,321 $187,192 $168,614 $138,496 $122,969
======== ======== ======== ======== ========
45
Loan Maturity Schedule. The following table sets forth the maturity of
the Bank's loan portfolio at June 30, 2006. Demand loans, loans having no stated
maturity, and overdrafts are shown as due in one year or less. Undisbursed
amounts on construction loans totaling $5.0 million at June 30, 2006 are not
shown in the table. The table shows contractual maturities and does not reflect
repricing or the effect of prepayments. Actual maturities may differ.
At June 30, 2006
------------------------------------------------------------------------------------------
One-to-Four
Family Commercial
Real Estate Real Estate Construction Consumer Home Equity Commercial Total
----------- ----------- ------------ -------- --------- ---------- ---------
(In thousands)
Amounts Due:
Within 1 Year................ $ 1,875 $ 7 $ 424 $1,309 $ - $ 739 $ 4,354
-------- ------- ------- ------ ------ ------ --------
After 1 year:
1 to 5 years............... 39,611 9,145 17,884 516 2,190 4,210 73,556
5 to 10 years.............. 12,163 4,606 - 36 13,329 485 30,619
10 to 15 years............. 29,552 8,088 - - 17,056 63 54,759
Over 15 years.............. 37,720 1,741 - - 16,682 - 56,143
-------- ------- ------- ------ ------- ------ --------
Total due after one year..... 119,046 23,580 17,884 552 49,257 4,758 215,077
-------- ------- ------- ------ ------- ------ --------
Total amount due............. $120,921 $23,587 $18,308 $1,861 $49,257 $5,497 $219,431
======== ======= ======= ====== ======= ====== ========
46
The following table sets forth the dollar amount of all loans at June
30, 2006 due after June 30, 2007, which have fixed interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
One-to-four family real estate...... $116,405 $ 2,641 $119,046
Commercial real estate.............. 23,580 - 23,580
Construction........................ - 17,884 17,884
Consumer............................ 552 - 552
Home equity......................... 30,409 18,848 49,257
Commercial.......................... 2,419 2,339 4,758
-------- ------ --------
Total............................. $173,365 $41,712 $215,077
======= ====== =======
One-to-Four Family Real Estate Mortgages. Our primary lending activity
consists of the origination of one-to-four family first mortgage loans. Fixed
rate, conventional mortgage loans are offered by the Bank with terms from 5 to
30 years. A bi-weekly payment option is available wherein a payment is made
every fourteen days via automatic deduction from the borrower's Millington
Savings Bank account.
We also originate fixed rate balloon mortgages with terms of 3 to 10
years and flexible amortizations. At the end of each term the mortgage may be
paid off in full with no penalty or, provided that the loan is in good standing
and there has been no negative change in value of the collateral, we may extend
the existing mortgage on new terms, at a new interest rate. If the mortgage is
extended, there may be additional charges at the time of each extension.
We originate adjustable rate mortgages, or ARM's, with up to 30 year
terms at rates based upon the U.S. Treasury One Year Constant Maturity as an
index. Our ARM's currently reset on an annual basis, beginning with the first
year, and have a two percent annual increase cap and a six percent lifetime
adjustment cap.
Substantially all residential mortgages include "due on sale" clauses,
which are provisions giving the lender the right to declare a loan immediately
payable if the borrower sells or otherwise transfers an interest in the property
to a third party. Property appraisals on real estate securing one-to-four family
residential loans are made by state certified or licensed independent appraisers
and are performed in accordance with applicable regulations and policies. We
require title insurance policies on all first lien one- to-four family
residential loans. Homeowners, liability, fire and, if applicable, flood
insurance policies are also required.
We provide financing on residential investment properties with either 3
to 10 year balloon mortgages or 5 to 30 year fixed duration mortgages. At the
end of each term a balloon mortgage on an investment property may be paid off in
full with no penalty or, provided that the loan is in good standing and there
has been no negative change in value of the collateral, we may extend the
existing mortgage on new terms, at a new interest rate. If the mortgage is
extended, there may be additional charges at the time of each extension. Our
investment property lending is available to individuals or proprietorships,
partnerships, limited liability corporations, and corporations with personal
guarantees. All investment property is underwritten on its ability substantially
to carry itself, unless the property is a two-family residence with the
mortgagor living in one of the units. Preference is given to those loans where
rental income covers all operating expenses, including but not limited to
principal and interest, real estate tax,
47
hazard insurance, utilities, maintenance, and reserve. Operating expenses
generally may not exceed rental income by more than 10%. Any negative cash flow
will be included in the limit on the borrower's total debt ratio.
We generally originate one-to-four family first mortgage loans, for
primary residence or investment, for up to 80% loan-to-value. Although not our
normal practice, our lending policy permits us to exceed this limit. Our
president and executive vice president are both authorized to approve a loan-to-
value ratio of up to 90%. Loans in excess of 90% loan-to-value must have private
mortgage insurance and must be approved by the Board of Directors.
Commercial Real Estate Mortgages. Our commercial real estate lending
includes multi-family dwellings/apartment buildings, service/retail and
mixed-use properties, churches and non-profit properties, medical and dental
facilities and other commercial real estate. Our commercial real estate mortgage
loans are either 3 to 10 year balloon mortgages (with a maximum amortization
period of 25 years) or 15 year fixed duration mortgages. This type of lending is
made available to proprietorships, partnerships, and corporations with personal
guarantees. All commercial property is underwritten on its ability substantially
to carry itself. A cash flow and lease analysis is performed for each property.
Preference is given to those loans where rental income covers all operating
expenses, including but not limited to principal and interest, real estate tax,
hazard insurance, utilities, maintenance, and reserve. Operating expenses may
exceed rental income by not more than 10%. Any negative cash flow will be
included in the limit on the borrower's total debt ratio. Cash from other assets
of the borrower, who may own multiple properties and generate a surplus, can be
made available to cover debt-service shortages of the financed property.
The maximum loan-to-value ratio on most commercial real estate loans we
originate is 80%. Although not our normal practice, our lending policy permits
us to originate these loans in excess of an 80% loan-to-value. Our President and
Executive Vice President are authorized to approve a loan-to-value ratio of up
to 90% on commercial real estate loans.
The management skills of the borrower are judged on the basis of
his/her professional experience and must be documented to meet the Bank's
satisfaction in relation to the desired project. The assets of the borrower must
indicate his/her ability to support the proposed investment, both in terms of
liquidity and net worth, and tangible history of the borrower's capability and
experience must be evident.
Unlike single-family 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, multi-family and commercial real estate
loans typically are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrower's business or rental income. As a
result, the availability of funds for the repayment of commercial real estate
and multi-family loans may be substantially dependent on the success of the
business itself and the general economic environment. Commercial real estate and
multi-family loans, therefore, have greater credit risk than one-to-four family
residential mortgages or consumer loans. In addition, commercial real estate and
multi-family loans generally result in larger balances to single borrowers, or
related groups of borrowers and also generally require substantially greater
evaluation and oversight efforts.
Construction Loans. We originate construction and land acquisition
loans for an owner-occupied residence or to a builder with a valid contract of
sale. With prior Board of Director approval, we also provide financing for
speculative residential or commercial construction and development. Individual
consideration is given to builders based on their past performance, workmanship,
and financial worth. Our
48
construction lending includes loans for construction or major renovations or
improvements of owner- occupied residences, however, the majority of this
portfolio consists of real estate developers.
Construction loans are mortgages with a one year duration. Funds are
disbursed periodically upon inspections made by our inspectors on the completion
of each phase, as per the approved draw schedule. Funds disbursed may not exceed
90% loan-to-value of land and improvements at any time during construction.
Interest rates on disbursed funds are based on the rate and terms set at the
time of closing. The majority of our construction lending is variable rate loans
with rates tied to the prime rate published in The Wall Street Journal, plus a
premium. Payments on disbursed funds must be made on a monthly basis. The
loan-to-value limitation on land acquisition loans is 75%.
Construction lending is generally considered to involve a higher degree
of credit risk than residential mortgage lending. If the estimate of
construction cost proves to be inaccurate, we may be compelled to advance
additional funds to complete the construction with repayment dependent, in part,
on the success of the ultimate project rather than the ability of a borrower or
guarantor to repay the loan. If we are forced to foreclose on a project prior to
completion, there is no assurance that we will be able to recover all of the
unpaid portion of the loan. In addition, we may be required to fund additional
amounts to complete a project and may have to hold the property for an
indeterminate period of time.
Consumer Loans. Our consumer lending products consist of new and used
auto loans, secured and unsecured personal loans, account loans and overdraft
lines of credit. The maximum term for a loan on a new or used automobile is six
years or four years, respectively. We will lend up to 80% of retail value or
dealer invoice on a car loan. We offer a deduction on the interest rate for car
loans with payments automatically deducted from the borrower's checking or
statement savings account with us.
Our personal loans have terms of up to four years with a minimum and
maximum balance of $1,000 and $5,000, respectively. A deduction to the interest
rate is offered for loans with automatic debit repayment from a checking or
statement savings account with us. Our account loans permit a depositor to
borrow up to 90% of his or her funds on deposit with us in certificate of
deposit accounts. The interest rate is the current rate paid to the depositor,
plus a premium. A minimum payment of interest only is required. We offer an
overdraft line of credit with a minimum of $500 and up to a maximum of $5,000
and an interest rate tied to the prime rate published in The Wall Street
Journal, plus a premium.
Consumer lending is generally considered to involve a higher degree of
credit risk than residential mortgage lending. Consumer loan repayment is
dependent on the borrower's continuing financial stability and can be adversely
affected by job loss, divorce, illness or personal bankruptcy. The application
of various federal laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on consumer loans in the event
of a default. Account loans are fully secured.
Home Equity Loans and Lines of Credit. We offer fixed rate home equity
loans and variable rate home equity lines of credit with a minimum credit limit
of $5,000. Collateral valuation is established through a variety of methods,
including an on-line appraisal valuation estimator, drive by appraisals, recent
assessed tax value, purchase price or consideration value as evidenced by a deed
or property search report or a report of real estate comparables from a licensed
realtor. Loan requests over $250,000, however, require full appraisals, and
requests over $450,000 require Board approval. The loan-to-value limit on home
equity lending is 80% on owner occupied property and 75% on investment property.
The variable rate on home equity lines of credit is adjusted monthly and is
currently set at prime for owner occupied properties and prime plus a premium
for investment properties. The fixed rate loans on
49
investment property are also higher than fixed rate owner occupied home equity
loans. We generally provide home equity financing only for a first or second
lien position.
Our fixed rate home equity loans have terms of 5 to 30 years. Our
variable rate home equity lines of credit have terms of 15 years, and we also
offer an interest only home equity line of credit based on a 10 year term. The
loan-to-value limit on interest only home equity financing is 70% on owner
occupied property and 60% on investment property. We also offer bridge loans
with a variable rate and a 70% loan- to-value limit on owner occupied property
and 60% on investment property.
Commercial Loans. We offer revolving lines of credit to businesses to
finance short-term working capital needs like accounts receivable and inventory.
These lines of credit may be unsecured or secured by accounts receivable and
inventory or real estate. We generally provide such financing for no more than a
3 year term and with a variable rate.
We also originate commercial term loans to fund longer-term borrowing
needs such as purchasing equipment, property improvements or other fixed asset
needs. These loans are secured by new and used machinery, equipment, fixtures,
furniture or other long-term fixed assets and have terms of 1 to 7 years. We
originate commercial term loans for other general long-term business purposes,
and these loans are secured by real estate. Interest on commercial term loans is
payable monthly and principal may be payable monthly or quarterly.
The normal minimum amount for our commercial term loans and lines of
credit is $5,000. We generally will not lend more than $100,000 on a commercial
line of credit or $500,000 on a commercial term loan. We typically do not
provide working capital loans to businesses outside our normal market area or to
new businesses where repayment is dependent solely on future profitable
operation of the business. We avoid originating loans for which the primary
source of repayment could be liquidation of the collateral securing the loan in
light of poor repayment prospects. We typically require personal guarantees on
all commercial loans, regardless of other collateral securing the loan.
The loan-to-value limits related to commercial lending vary according
to the collateral. Loans secured by real estate may be originated for up to 80%
loan-to-value. Other limits are as follows. Savings accounts: 90% of the deposit
amount; accounts receivable: 80% of eligible amounts receivable 60 days or less
past due or 90 days from invoice, whichever is less; inventory: 50% of raw
materials and 60% of finished goods; stocks: 50% to 75% depending on exchange or
market listing; bonds: 'A' rated or better, 90% of market value, less than 'A'
rated, 60% of market value; new equipment: 75% of purchase price; and used
equipment: lesser of 75% of purchase price or 75% of current market value.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. Accordingly, as of June 30, 2006, our loans to one borrower legal limit
was approximately $2.9 million. The Bank's loans to one borrower legal lending
limit will be higher following the stock offering because the stock offering
proceeds will increase the Bank's capital.
Loans that approach the loans to one borrower limit are fully reviewed
by the Board of Directors before being approved. The Bank's lending policies
require Board approval before any borrower's existing and/or committed
borrowings from the Bank may exceed $1.0 million in aggregate. Any single loan
in excess of $1.0 million also requires prior Board approval.
50
Loan Originations, Purchases, Sales, Solicitation and Processing. Our
customary sources of loan applications include repeat customers, referrals from
realtors and other professionals and "walk-in" customers. Our residential loan
originations are driven by the Bank's reputation, as opposed to being
advertising driven.
We normally do not sell loans into the secondary mortgage market and
did not sell any loans in the five years ended June 30, 2006. Because it has
been our policy to retain the loans we originate in our portfolio, we have not
uniformly originated our real estate mortgage loans to meet the documentation
standards to sell loans in the secondary mortgage market. We may do so, however,
in the future if we find it desirable in connection with interest rate risk
management to sell longer term fixed rate mortgages into the secondary mortgage
market.
We did not purchase any loans in the five years ended June 30, 2006 and
we have generally not purchased participation interests in loans originated by
other banks.
Loan Approval Procedures and Authority. Lending policies and loan
approval limits are approved and adopted by the Board of Directors. Lending
authority is vested primarily in President and Chief Executive Officer Gary
Jolliffe, Executive Vice President and Chief Operating Officer Michael Shriner
and Vice President and Chief Lending Officer Nancy Schmitz. Each of these
officers may approve loans within the following limits: first mortgage real
estate and construction loans up to $500,000; home equity loans up to $150,000;
consumer loans up to $150,000; and commercial loans up to $150,000. These
officers may combine their authorities to make home equity, consumer and
commercial loans up to $450,000 and first mortgage real estate and construction
loans up to $1.0 million. Prior Board approval is required for home equity,
consumer and commercial loans in excess of $450,000 and for first mortgage real
estate and construction loans in excess of $1.0 million. The Board also must
give prior approval for any aggregation of existing and/or committed loans to
one borrower that exceed $1.0 million. Certain other Bank employees also have
limited lending authority.
Asset Quality
Loan Delinquencies and Collection Procedures. The Bank's procedures for
delinquent loans are as follows:
15 days delinquent: late charge added and first delinquent notice mailed.
30 days delinquent: second delinquent notice mailed.
45 days delinquent: additional late charge added, third delinquent notice mailed
and telephone contact made.
60 days delinquent: telephone contact made and separate letter mailed.
90 days delinquent: Board of Directors makes decision to foreclose or workout.
When a loan is 90 days delinquent, the Board may determine to refer it
to an attorney for repossession or foreclosure. All reasonable attempts are made
to collect from borrowers prior to referral to an attorney for collection. In
certain instances, we may modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his or her financial affairs, and
we attempt to work with the borrower to establish a repayment schedule to cure
the delinquency.
As to mortgage loans, if a foreclosure action is taken and the loan is
not reinstated, paid in full or refinanced, the property is sold at judicial
sale at which we may be the buyer if there are no adequate offers to satisfy the
debt. Any property acquired as the result of foreclosure or by deed in lieu of
51
foreclosure is classified as real estate owned until it is sold or otherwise
disposed of. When real estate owned is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value less
estimated selling costs. The initial writedown of the property is charged to the
allowance for loan losses. Adjustments to the carrying value of the property
that result from subsequent declines in value are charged to operations in the
period in which the declines occur. At June 30, 2006, we held no real estate
owned.
As to commercial loans, the Bank requires updated financial statements
when the loan becomes 90 days delinquent. As to account loans, the outstanding
balance is collected from the related account along with accrued interest when
the loan is 180 days delinquent.
Loans are reviewed on a regular basis, and all delinquencies of 60 days
or more are reported to the Board of Directors. Loans are placed on non-accrual
status when they are more than 90 days delinquent, with the exception of loans
that may be placed on a non-accrual status at any time if, in the opinion of
management, the collection of additional interest is doubtful. Loans with a
loan-to-value ratio of 60% or less, however, are not automatically placed on
non-accrual status if more than 90 days delinquent. Interest accrued and unpaid
at the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan. At June 30, 2006, we had approximately
$424,000 of loans that were held on a non-accrual basis.
52
Non-Performing Assets. The following table provides information
regarding our non-performing loans and other non-performing assets as of the
dates indicated.
At June 30,
---------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(In thousands)
Loans accounted for on a non-accrual basis:
One-to-four family real estate..................... $ - $1,662 $ 951 $1,103 $ 520
Commercial real estate............................. - - 216 555 664
Construction....................................... - - 55 527 128
Consumer........................................... 1 13 - 10 49
Home equity........................................ 325 554 549 409 49
Commercial......................................... 98 99 124 - 125
---- ------ ------ ------ ------
Total........................................... 424 2,328 1,895 2,604 1,535
---- ------ ------ ------ ------
Accruing loans contractually past due
90 days or more:
One-to-four family real estate..................... 252 39 74 - 10
Commercial real estate............................. - - - 363 -
Construction....................................... 47 - - - -
Consumer........................................... - 2 13 - 11
Home equity........................................ - 38 - - -
Commercial......................................... - - - - 5
---- ------ ------ ------ ------
Total........................................... 299 79 87 363 26
---- ------ ------ ------ ------
Total non-performing loans........................... 723 2,407 1,982 2,967 1,561
---- ------ ------ ------ ------
Total non-performing assets.......................... $723 $2,407 $1,982 $2,967 $1,561
==== ====== ====== ====== ======
Total non-performing loans to total loans............ 0.32% 1.24% 1.13% 2.09% 1.25%
Total non-performing loans to total assets........... 0.27% 1.01% 0.92% 1.51% 0.92%
Total non-performing assets to total assets.......... 0.27% 1.01% 0.92% 1.51% 0.92%
During the year ended June 30, 2006, gross interest income of $34,000
would have been recorded on loans accounted for on a non-accrual basis if those
loans had been current, and $35,000 of interest on a cash basis as collected was
included in income.
Classified Assets. Management, in compliance with the Uniform Credit
Classification and Account Management Policy adopted by the Federal Deposit
Insurance Corporation, has instituted an internal loan review program, whereby
non-performing loans are classified as special mention, substandard, doubtful or
loss. It is our policy to review the loan portfolio, in accordance with
regulatory classification procedures, on at least a quarterly basis. When a loan
is classified as substandard or doubtful, management is required to evaluate the
loan for impairment. When management classifies a portion of a loan as loss, a
reserve equal to 100% of the loss amount is required to be established or the
loan is to be charged-off.
An asset that does not currently expose the Bank to a sufficient degree
of risk to warrant an adverse classification, but which possesses credit
deficiencies or potential weaknesses that deserve management's close attention
is classified as "special mention."
53
An asset classified as "substandard" is inadequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. Assets so classified have well-defined weaknesses and are characterized
by the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected.
An asset classified as "doubtful" has all the weaknesses inherent in a
"substandard" asset with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. The possibility of a
loss on a doubtful asset is high.
That portion of an asset classified as "loss" is considered
uncollectible and of such little value that its continuance as an asset, without
establishment of a specific valuation or charge-off, is not warranted. This
classification does not necessarily mean that an asset has absolutely no
recovery or salvage value; but rather, it is not practical or desirable to defer
writing off a basically worthless asset even though partial recovery may be
effected in the future.
Management's classification of assets is reviewed by the Board on a
regular basis and by the regulatory agencies as part of their examination
process. An independent loan review firm performs periodic reviews of our loan
portfolio.
The following table discloses the Bank's classification of assets as of
June 30, 2006.
At June 30,
2006
-----------
(In thousands)
Special Mention........................ $1,372
Substandard............................ 185
Doubtful............................... -
Loss................................... 1
-------
Total................................ $1,558
======
At June 30, 2006, $722,000 of the loans classified as "special
mention," none of the loans classified as "substandard" and all of the loans
classified as "loss" are included under non-performing assets, as shown in the
table above.
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses in our loan portfolio to the
extent they are both probable and reasonable to estimate. The allowance is
established through provisions for loan losses that are charged to income in the
period they are established. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely.
Recoveries on loans previously charged-off are added back to the allowance.
Management, in determining the allowance for loan losses, considers the
losses inherent in the loan portfolio and changes in the nature and volume of
our loan activities, along with general economic and real estate market
conditions. We establish a specific allowance for loans classified as "loss" or
that are determined to be impaired. We make provisions for loan losses to a
general allowance according to (i) the type of loan, one-to-four family real
estate mortgages, commercial real estate mortgages, construction loans,
commercial term loans and lines of credit, consumer loans and home equity loans
and lines of credit, with commercial, construction and consumer loans receiving
a higher allowance than other loan types, and
54
(ii) whether the loan is current and performing or delinquent, with higher
allowances made according to the number of days a loan is delinquent. However,
for purposes of establishing the general valuation allowance loans that are
delinquent 90 days or more are treated as current if they have a loan-to-value
ratio of less than 60%.
We maintain a loan review system which provides for a systematic review
of the loan portfolios and the early identification of potential impaired loans.
We generally review a loan for impairment as soon as the loan is 60 or more days
delinquent. A loan evaluated for impairment is deemed to be impaired when, based
on current information and events, it is probable that we will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. All loans identified as impaired are evaluated independently. We do
not aggregate such loans for evaluation purposes. Payments received on impaired
loans are applied first to unpaid interest, escrow and late charges and then to
principal.
Specific loan loss allowances are established for identified loans
based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of the
loan portfolio, current economic conditions and management's judgment. In recent
years, our charge-offs have been low and therefore our provisions for loan
losses have been reflective of other factors, including economic conditions,
annual growth of the loan portfolio respectively, as well as the increasing
percentage of commercial real estate and construction loans, home equity loans
and commercial loans relative to total loans. The decreased provision for the
year ended June 30, 2006 is attributable to the substantial drop in
non-performing loans during the year.
The estimation of the allowance for loan losses is inherently
subjective as it requires estimates and assumptions that are susceptible to
significant revisions as more information becomes available or as future events
change. Future additions to the allowance for loan losses may be necessary if
economic and other conditions in the future differ substantially from the
current operating environment. In addition, the New Jersey Department of Banking
and Insurance and the Federal Deposit Insurance Corporation, as an integral part
of their examination process, periodically review our loan and foreclosed real
estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. They may require the allowance for loan
losses or the valuation allowance for foreclosed real estate to be increased
based on their review of information available at the time of the examination,
which would negatively affect our earnings.
55
The following table sets forth information with respect to the Bank's
allowance for loan losses for the periods indicated:
Year Ended June 30,
-----------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance balance at beginning of period........... $874 $742 $651 $783 $657
---- ---- ---- ---- ----
Provision for loan losses.......................... 60 135 134 136 137
---- ---- ---- ---- ----
Charge-offs:
Commercial real estate........................... - - - 264 -
Consumer......................................... 17 3 45 5 11
---- ---- ---- ---- ----
Total charge-offs............................. 17 3 45 269 11
---- ---- ---- ---- ----
Recoveries:
Consumer......................................... 4 - 2 1 -
---- ---- ---- ---- ----
Total recoveries.............................. 4 - 2 1 -
---- ---- ---- ---- ----
Net (charge-offs) recoveries....................... $(13) $ (3) $(43) $(268) $(11)
---- ---- ---- ---- ----
Allowance balance at end of period................. $921 $874 $742 $651 $783
==== ==== ==== ==== ====
Total loans outstanding at end of period........... $224,399 $193,996 $174,994 $142,254 $124,716
======== ======== ======== ======== ========
Average loans outstanding during period............ $205,905 $179,837 $151,736 $133,119 $116,761
======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of non-performing loans.............. 127.39% 36.31% 37.44% 21.94% 50.16%
Allowance for loan losses as a
percentage of total loans....................... 0.41% 0.45% 0.42% 0.46% 0.63%
Net loans charge-offs as a
percentage of average loans..................... 0.01% 0.00% 0.03% 0.20% 0.01%
56
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation allocation applicable to the entire loan portfolio.
At June 30,
---------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------- --------------- --------------- --------------- ---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
At end of period allocated to:
One-to-four family real estate... $436 53.89% $467 58.50% $418 62.73% $362 67.55% $287 70.90%
Commercial real estate........... 108 10.51 72 9.26 85 9.81 83 8.69 352 8.83
Construction..................... 125 10.37 72 9.48 47 7.81 52 5.40 23 2.80
Consumer......................... 9 0.83 19 0.94 8 0.97 19 0.13 29 1.62
Home equity...................... 178 21.95 202 19.24 157 16.98 108 15.14 66 14.03
Commercial....................... 65 2.45 42 2.08 27 1.70 27 2.09 26 1.82
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total allowance.............. $921 100.00% $874 100.00% $742 100.00% $651 100.00% $783 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
57
Securities Portfolio
General. Our investment policy is designed to manage cash flows and
foster earnings within prudent interest rate risk and credit risk guidelines.
The portfolio mix is governed by our short term and long term liquidity needs.
Rate-of-return, cash flow, rating and guarantor-backing are also considered when
making investment decisions. The purchase of principal only and stripped coupon
interest only security instruments is specifically not authorized by our
investment policy. Furthermore, other than government related securities which
may not be rated, we only purchase securities with a rating of AAA or AA.
At June 30, 2006, our held to maturity securities portfolio totaled
$27.7 million and represented 10% of our total assets. We invest primarily in
mortgage-backed securities, U.S. government obligations and U.S. government
agency issued securities.
Mortgage-backed securities represent a participation interest in a pool
of mortgages issued by U.S. government agencies or government-sponsored
entities, such as Federal Home Loan Mortgage Corporation ("Freddie Mac"), the
Government National Mortgage Association ("Ginnie Mae"), and the Federal
National Mortgage Association ("Fannie Mae"), as well as non-government, private
corporate issuers. Mortgage-backed securities are pass-through securities and
generally yield less than the mortgage loans underlying the securities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder.
Mortgage-backed securities issued or sponsored by U.S. government
agencies and government-sponsored entities are guaranteed as to the payment of
principal and interest to investors. Private corporate issuers' mortgage-backed
securities typically offer rates above those paid on government agency issued or
sponsored securities, but lack the guaranty of those agencies.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that securities be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement No. 115 allows debt securities to be classified as "held to maturity"
and reported in financial statements at amortized cost if the reporting entity
has the positive intent and ability to hold these securities to maturity.
Securities that might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, or other
similar factors cannot be classified as "held to maturity."
Nearly all of our securities portfolio is purchased with the intent to
hold the security until maturity. At June 30, 2006, we maintained a small
trading account totaling $109,000 and the rest of our securities portfolio was
classified as held to maturity. Securities not classified as "held to maturity"
or as "trading securities" are classified as "available for sale" and are
reported at fair value with unrealized gains and losses on the securities
impacting equity.
At June 30, 2006 our securities portfolio did not contain securities of
any issuer, other than the U.S. government or its agencies, having an aggregate
book value in excess of 10% of our equity. We do not currently participate in
hedging programs, interest rate caps, floors or swaps, or other activities
involving the use of off-balance sheet derivative financial instruments,
however, we may in the future utilize such instruments if we believe it would be
beneficial for managing our interest rate risk.
58
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of our securities
portfolio at June 30, 2006. This table shows contractual maturities and does not
reflect repricing or the effect of prepayments. Actual maturities of the
securities held by us may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without prepayment
penalties. Callable securities pose reinvestment risk because we may not be able
to reinvest the proceeds from called securities at an equivalent or higher
interest rate.
At June 30, 2006
------------------------------------------------------------------------------------------------
More than
One Year or Less One to Five Years Five to Ten Years Ten Years Total Securities
---------------- ----------------- ----------------- ----------------- -----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. Government agency
obligations.................... $ 2,000 2.59% $13,000 3.09% $4,000 4.25% $5,127 5.44% $24,127 3.74% $23,273
Mortgage-Backed Securities:
Government National Mortgage
Association.................... - - - - - - 69 5.47 69 5.49 70
Federal Home Loan Mortgage
Association.................. - - - - 172 6.52 751 4.84 923 5.15 938
Federal National Mortgage
Association.................. - - 894 6.13 1,035 4.39 659 5.21 2,588 5.20 2,540
------- ---- ------- ---- ------ ---- ------ ---- ------- ---- -------
Total.......................... $ 2,000 2.59% $13,894 3.28% $5,207 4.35% $6,606 5.35% $27,707 3.93% $26,821
======= ==== ======= ==== ====== ==== ====== ==== ======= ==== =======
59
The following table sets forth the carrying value of our held to
maturity securities portfolio at the dates indicated. Securities classified as
held to maturity are shown at our amortized cost.
At June 30,
--------------------------------------
2006 2005 2004
---- ---- ----
(In thousands)
Securities Held to Maturity:
U.S. Government Agency Obligations.................... $24,127 $24,133 $26,588
Government National Mortgage Association.............. 69 87 109
Federal Home Loan Mortgage Corporation................ 923 1,206 1,630
Federal National Mortgage Association................. 2,588 2,866 3,188
------- ------- -------
Total securities held to maturity................... $27,707 $28,292 $31,515
======= ======= =======
60
Sources of Funds
General. Deposits are our major source of funds for lending and other
investment purposes. To the extent that our loan originations have exceeded the
funding available from deposits, we have borrowed funds from the Federal Home
Loan Bank to supplement the amount of funds for lending and funding daily
operations. At June 30, 2006 our total loans to deposits ratio was 115%.
In addition, we derive funds from loan and mortgage-backed securities
principal repayments, and proceeds from the maturity and call of investment
securities. Loan and securities payments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
pricing strategies and money market conditions.
Deposits. Our current deposit products include checking and savings
accounts, certificates of deposit and fixed or variable rate individual
retirement accounts (IRA's). Deposit account terms vary, primarily as to the
required minimum balance amount, the amount of time, if any, that the funds must
remain on deposit and the applicable interest rate. Our savings account menu
includes regular passbook, statement, money market and club accounts. Our
certificates of deposit currently range in terms from 6 months to 10 years. Our
IRA's are available with the same maturities as certificates of deposit
accounts, with the exception of the 30 month term. We offer a two year
certificate of deposit that permits the depositor to increase the interest rate
to the current two year rate once during the term.
In May 2006, we introduced an "Opportunity Savings Account," a
six-level tiered savings account, and a "Value Checking Account," a non-interest
bearing account with no minimum balance requirement or maintenance fees offering
unlimited check writing, free first order of checks, debit card, on-line banking
and bill paying, telephone banking and direct deposit, plus a one year safe
deposit box based on availability as well as no fee for out-of-network ATM
transactions (other than any fee charged by the financial institution operating
that ATM).
Deposits are obtained primarily from within New Jersey. The Bank has
not previously utilized the services of deposit brokers but management, at the
board's direction, is evaluating brokered deposits as a funding source. Premiums
or incentives for opening accounts are sometimes offered. We periodically select
particular certificate of deposit maturities for promotion in connection with
asset/liability management and interest rate risk concerns.
The determination of deposit and certificate interest rates is based
upon a number of factors, including: (1) need for funds based on loan demand,
current maturities of deposits and other cash flow needs; (2) a current survey
of a selected group of competitors' rates for similar products; (3) economic
conditions; and (4) business plan projections.
A large percentage of our deposits are in certificates of deposit,
which totaled 57.5% of total deposits at June 30, 2006. The inflow of
certificates of deposit and the retention of such deposits upon maturity are
significantly influenced by general interest rates and money market conditions,
making certificates of deposit traditionally a more volatile source of funding
than core deposits. Our liquidity could be reduced if a significant amount of
certificates of deposit maturing within a short period of time were not renewed.
To the extent that such deposits do not remain with us, they may need to be
replaced with borrowings which could increase our cost of funds and negatively
impact our net interest rate spread and our financial condition.
61
The following table sets forth the distribution of deposits at the Bank
at the dates indicated and the weighted average nominal interest rates for each
period on each category of deposits presented.
At June 30,
-----------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------ ------------------------------ ----------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
Non-interest-bearing
demand deposits............... $ 9,135 4.69% -% $ 8,421 4.27% -% $ 7,122 3.74% -%
Interest-bearing
demand deposits............... 30,896 15.87 0.97 35,758 18.16 0.93 35,860 18.83 0.93
Savings and club deposits........ 42,696 21.92 1.49 48,916 24.84 1.22 52,927 27.78 1.21
Certificates of deposit.......... 112,028 57.52 4.15 103,836 52.73 3.30 94,591 49.65 2.80
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits.............. $194,755 100.00% 2.87% $196,931 100.00% 2.21% $190,500 100.00% 1.90%
======== ====== ==== ======== ====== ==== ======== ====== ====
62
The following table sets forth the certificates of deposit at the Bank
classified by interest rate as of the dates indicated.
At June 30,
-----------------------------------------------------------------------------------------
2006 2005 2004
------------------------ ------------------------ -----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Interest Rate
-------------
1.00% - 1.99%............. $ 8 0.01% $ 6,091 5.87% $33,955 35.90%
2.00% - 2.99%............. 2,375 2.12 36,083 34.75 23,292 24.62
3.00% - 3.99%............. 28,049 25.04 38,192 36.78 15,300 16.18
4.00% - 4.99%............. 68,182 60.86 14,762 14.22 13,162 13.91
5.00% - 5.99%............. 13,400 11.96 7,748 7.46 7,777 8.22
6.00% - 6.99%............. 14 0.01 960 0.92 1,105 1.17
-------- ------ -------- ------ ------- ------
Total................... $112,028 100.00% $103,836 100.00% $94,591 100.00%
======== ====== ======== ====== ======= ======
The following table sets forth the amount and maturities of
certificates of deposit at the Bank at June 30, 2006.
Amount Due
-----------------------------------------------------------------------------------------
After
June 30, June 30, June 30, June 30, June 30, June 30,
Interest Rate 2007 2008 2009 2010 2011 2012
---------------- -------- -------- -------- -------- -------- --------
(In thousands)
1.00% - 1.99%............. $ 8 $ - $ - $ - $ - $ -
2.00% - 2.99%............. 2,374 1 - - - -
3.00% - 3.99%............. 23,232 3,614 1,049 - - 154
4.00% - 4.99%............. 46,489 14,045 2,732 1,729 666 2,521
5.00% - 5.99%............. 4,352 1,716 3 - - 7,329
6.00% - 6.99%............. 8 6 - - - -
------- ------- ------ ------ ---- -------
Total................. $76,463 $19,382 $3,784 $1,729 $666 $10,004
======= ======= ====== ====== ==== =======
The following table shows the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
2006.
Certificates
Remaining Time Until Maturity of Deposits
----------------------------- -----------
(In thousands)
Within three months....................... $ 8,775
Three through six months.................. 7,396
Six through twelve months................. 10,165
Over twelve months........................ 10,872
------
Total................................. $37,208
=======
Borrowings. To supplement our deposits as a source of funds for lending
or investment, we have borrowed funds in the form of advances from the Federal
Home Loan Bank. At June 30, 2006, our collateralized borrowing limit with the
Federal Home Loan Bank was $56.2 million and our outstanding
63
borrowings with the Federal Home Loan Bank totaled $54.2 million. Information
regarding our total borrowings as of June 30, 2006 are set forth in the
following table.
At June 30, 2006
-------------------------------------------
Balance Rate Maturity
------- ---- --------
(Dollars in thousands)
Total Borrowings:
Overnight Line of Credit............................. $18,500 daily adjustable next day
rate (5.42% on
June 30, 2006)
30 Day Adjustable Rate Advance....................... $23,000 daily adjustable 30 days
rate (5.41% on
June 30, 2006)
Five Year Amortizing Fixed Rate Advance.............. $2,681 3.60% August 2009
Five Year Fixed Rate Advance......................... $5,000 4.25% December 2009
Five Year Fixed Rate Advance......................... $5,000 4.28% June 2010
Short-term Federal Home Loan Bank advances generally have original
maturities of less than one year. Information regarding our short-term advances
for the dates and periods indicated are set forth in the following table.
At or For the
Year Ended June 30,
------------------------------------
2006 2005 2004
---- ---- ----
(Dollars in thousands)
Short-Term Borrowings:
Average balance outstanding............................... $24,602 $ 8,033 $ 4,289
Maximum amount outstanding
at any month-end during the period...................... 41,500 13,400 7,500
Balance outstanding at end of period...................... 41,500 7,750 7,500
Weighted average interest rate during the period.......... 4.59% 2.23% 1.12%
Weighted average interest rate at end of period........... 5.41% 3.49% 1.61%
Advances from the Federal Home Loan Bank are typically secured by the
Federal Home Loan Bank stock and a portion of our residential mortgage loans and
by other assets, mainly securities which are obligations of or guaranteed by the
U.S. government. Additional information regarding our borrowings is included
under Note 8 to our consolidated financial statements beginning on page F-1.
Subsidiary Activity
MSB Financial Corp. has no direct subsidiaries other than Millington
Savings Bank. Millington Savings Bank has one wholly-owned subsidiary,
Millington Savings Services Corp., formed in 1984. The service corporation owns
the Bank's former main office building, on which a sale is pending.
64
Personnel
As of June 30, 2006, Millington Savings Bank had 49 full time
equivalent employees. The employees are not represented by a collective
bargaining unit, and the Bank believes its relationship with the employees is
good.
Properties and Equipment
At June 30, 2006, our investment in property and equipment, net of
depreciation and amortization, totaled $8.9 million, including leasehold
improvements and construction in progress.
Year Facility Leased or
Office Location Opened Owned
--------------- ------ -----
Millington Main Office
1902 Long Hill Road 1994 Owned
Millington, NJ
Dewy Meadow Branch Office
415 King George Road 2002 Leased
Basking Ridge, NJ
RiverWalk Branch Office
675 Martinsville Road 2005(1) Leased
Basking Ridge, NJ
Martinsville Branch Office
1924 Washington Valley Road 2006 Leased
Martinsville, NJ
------------------
(1) The Bank's first branch office location opened in 1998 in Liberty Corner,
New Jersey. This office was relocated to RiverWalk Plaza in Basking Ridge,
New Jersey in 2005.
The above table does not include our Bernardsville branch office on
Morristown Road in Bernardsville, New Jersey which is in construction. The
projected opening date for this office is late 2007.
Legal Proceedings
Millington Savings Bank, from time to time, is a party to routine
litigation which arises in the normal course of business, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans, and
other issues incident to our business. There were no lawsuits pending or known
to be contemplated against MSB Financial Corp. or Millington Savings Bank at
June 30, 2006 that would have a material effect on our operations or income.
REGULATION
Millington Savings Bank and MSB Financial Corp. operate in a highly
regulated industry. This regulation establishes a comprehensive framework of
activities in which a savings and loan holding company and federal savings bank
may engage and is intended primarily for the protection of the deposit insurance
fund and depositors. Set forth below is a brief description of certain laws that
relate to the
65
regulation of Millington Savings Bank and MSB Financial Corp. The description
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulatory authorities have extensive discretion in connection with
their supervisory and enforcement activities, including the imposition of
restrictions on the operation of an institution and its holding company, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, or legislation, including changes
in the regulations governing mutual holding companies, could have a material
adverse impact on MSB Financial Corp., Millington Savings Bank, and their
operations. The adoption of regulations or the enactment of laws that restrict
the operations of Millington Savings Bank and/or MSB Financial Corp. or impose
burdensome requirements upon one or both of them could reduce their
profitability and could impair the value of Millington Savings Bank's franchise,
resulting in negative effects on the trading price of MSB Financial Corp. common
stock.
Regulation of Millington Savings Bank
General. As a New Jersey chartered, Federal Deposit Insurance
Corporation-insured savings bank, Millington Savings Bank is subject to
extensive regulation by the New Jersey Department of Banking and Insurance and
the Federal Deposit Insurance Corporation. This regulatory structure gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies
regarding the classification of assets and the level of the allowance for loan
losses. The activities of federal savings banks are subject to extensive
regulation, including restrictions or requirements with respect to loans to one
borrower, the percentage of non-mortgage loans or investments to total assets,
capital distributions, permissible investments and lending activities,
liquidity, transactions with affiliates and community reinvestment. Federal
savings banks are also subject to reserve requirements imposed by the Federal
Reserve System. A federal savings bank's relationship with its depositors and
borrowers is regulated by both state and federal law, especially in such matters
as the ownership of savings accounts and the form and content of the bank's
mortgage documents.
Millington Savings Bank must file regulatory reports concerning its
activities and financial condition, and must obtain regulatory approvals prior
to entering into certain transactions, such as mergers with or acquisitions of
other financial institutions. The New Jersey Department of Banking and Insurance
and the Federal Deposit Insurance Corporation regularly examine Millington
Savings Bank and prepares reports to Millington Savings Bank's Board of
Directors on deficiencies, if any, found in its operations. The regulatory
authorities have substantial discretion to impose enforcement action on an
institution that fails to comply with applicable regulatory requirements,
particularly with respect to its capital requirements.
Insurance of Deposit Accounts. Deposit accounts in Millington Savings
Bank are insured by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation, generally up to a maximum of $100,000 for standard accounts and
$250,000 for individual retirement accounts. The Federal Deposit Insurance
Corporation maintains a risk-based deposit insurance assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for Savings Association
Insurance Fund member institutions are determined semi-annually by the Federal
Deposit Insurance Corporation and currently range from zero basis points of
assessable deposits for the healthiest institutions to 27 basis points of
assessable deposits for the riskiest. The assessment rate for Millington Savings
Bank is currently 0%.
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In addition to assessments for deposit insurance, all Federal Deposit
Insurance Corporation-insured institutions are required to pay assessments to
the Federal Deposit Insurance Corporation to fund payments on bonds issued in
the late 1980s by a federal agency to recapitalize the predecessor to the
Savings Association Insurance Fund. These assessments will continue until the
Financing Corporation bonds mature in 2019.
The Federal Deposit Insurance Corporation may terminate an
institution's deposit insurance upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition.
Federal Deposit Insurance Reform. The Federal Deposit Insurance Reform
Act of 2005 was enacted on February 8, 2006 as a part of the Deficit Reduction
Act of 2005. Effective March 31, 2006, the Bank Insurance Fund and the Savings
Association Insurance Fund were merged into a new combined fund, called the
Deposit Insurance Fund. The Federal Deposit Insurance Reform Act will also (i)
increase deposit insurance coverage for retirement accounts to $250,000, (ii)
index the current $100,000 insurance coverage limit for standard accounts and
the new $250,000 limit for retirement accounts to reflect inflation (with
adjustments for inflation every five years, commencing January 1, 2011), (iii)
require the Federal Deposit Insurance Corporation to assess annual deposit
insurance premiums on all banks and savings institutions, (iv) give a one-time
insurance assessment credit totaling $4.7 billion to banks and savings
institutions in existence on December 31, 1996 that can be used to offset
premiums otherwise due, (v) impose a cap on the level of the Deposit Insurance
Fund and provide for dividends or rebates when the fund grows beyond a specified
threshold, (vi) adopt a historical basis concept for distributing the
aforementioned one-time credit and dividends (with each institution's historical
basis to be determined by a formula that looks back to the institution's
assessment base in 1996 and adds premiums paid since that time) and (vii)
authorize revisions to the current risk-based system for assessing premiums,
including replacing the current fixed reserve ratio requirement of 1.25% with a
range of between 1.15% and 1.5% of insured deposits.
The merger of the two deposit insurance funds required by the Federal
Deposit Insurance Reform Act was effective as of March 31, 2006. The Federal
Deposit Insurance Corporation is required to adopt final rules for the rest of
the provisions no later than 270 days after enactment. Such regulations will
result in the imposition of deposit insurance assessments on all members of the
Deposit Insurance Fund, including Millington Savings Bank, and such assessments
could have an adverse effect on the operating expenses and results of operations
of Millington Savings Bank. Millington Savings Bank's management cannot predict
the rate of any such insurance assessments or the effect of the assessments on
its operations.
Regulatory Capital Requirements. Federal Deposit Insurance Corporation
capital regulations require savings institutions to meet three minimum capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2)
"Tier 1" or "core" capital equal to at least 4% (3% if the institution has
received the highest possible rating on its most recent examination) of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. At June 30, 2006, Millington Savings Bank was in compliance with the
minimum capital standards and qualified as "well capitalized." For Millington
Savings Bank's compliance with these regulatory capital standards, see
Historical and Pro Forma Capital Compliance as well as Note 13 to the
consolidated financial statements. In assessing an institution's capital
adequacy, the Federal Deposit Insurance Corporation takes into consideration not
only these numeric factors but also qualitative factors, and has the authority
to establish higher capital requirements for individual institutions where
necessary.
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The Federal Deposit Insurance Corporation may require any savings
institution that has a risk-based capital ratio of less than 8%, a ratio of Tier
1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital
to total adjusted assets of less than 4% (3% if the institution has received the
highest rating on its most recent examination) to take certain action to
increase its capital ratios. If the savings institution's capital is
significantly below the minimum required levels of capital or if it is
unsuccessful in increasing its capital ratios, the institution's activities may
be restricted.
For purposes of the capital regulations, tangible capital is defined as
core capital less all intangible assets except for certain mortgage servicing
rights. Tier 1 or core capital is defined as common stockholders' equity,
non-cumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of consolidated subsidiaries, and certain
non-withdrawable accounts and pledged deposits of mutual savings banks.
Millington Savings Bank does not have any non-withdrawable accounts or pledged
deposits. Tier 1 and core capital are reduced by an institution's intangible
assets, with limited exceptions for certain mortgage and non-mortgage servicing
rights and purchased credit card relationships. Both core and tangible capital
are further reduced by an amount equal to the savings institution's debt and
equity investments in "non-includable" subsidiaries engaged in activities not
permissible for national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum of core and supplementary capital. The components of supplementary
capital include, among other items, cumulative perpetual preferred stock,
perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, the portion of the allowance for loan losses
not designated for specific loan losses and up to 45% of unrealized gains on
equity securities. The portion of the allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, supplementary capital is limited to 100% of core
capital. For purposes of determining total capital, a savings institution's
assets are reduced by the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements and by the amount of the
institution's equity investments (other than those deducted from core and
tangible capital) and its high loan-to-value ratio land loans and
non-residential construction loans.
A savings institution's risk-based capital requirement is measured
against risk-weighted assets, which equal the sum of each on-balance-sheet asset
and the credit-equivalent amount of each off-balance-sheet item after being
multiplied by an assigned risk weight. These risk weights range from 0% for cash
to 100% for delinquent loans, property acquired through foreclosure, commercial
loans, and certain other assets.
Dividend and Other Capital Distribution Limitations. A savings
institution, like Millington Savings Bank, that is a subsidiary of a savings and
loan holding company must file an application or a notice with the Office of
Thrift Supervision at least thirty days before making a capital distribution,
such as paying a dividend to MSB Financial Corp. The Office of Thrift
Supervision imposes various restrictions or requirements on the ability of
savings institutions to make capital distributions, including cash dividends. A
savings institution must file an application for prior approval of a capital
distribution if: (i) it is not eligible for expedited treatment under the
applications processing rules of the Office of Thrift Supervision; (ii) the
total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings institution's net income for that year to date plus the
institution's retained net income for the preceding two years; (iii) it would
not adequately be capitalized after the capital distribution; or (iv) the
distribution would violate an agreement with the
68
Office of Thrift Supervision or applicable regulations. The Office of Thrift
Supervision may disapprove a notice or deny an application for a capital
distribution if: (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statute, regulation or agreement.
Capital distributions by MSB Financial Corp., as a savings and loan
holding company, are not subject to the Office of Thrift Supervision capital
distribution rules. Because MSB Financial Corp. will retain 50% of the net
proceeds of the stock offering, the possibility that Millington Savings Bank
would need to file an application rather than a notice for capital distributions
is not expected to affect the payment of cash dividends by MSB Financial Corp.
to its stockholders or the amount of such dividends.
Safety and Soundness Standards. As required by statute, the federal
banking agencies have adopted guidelines establishing general standards relating
to internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings and compensation, fees and benefits. The guidelines require,
among other things, the implementation of appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. If it
is determined that a savings institution has failed to meet any standard
prescribed by the guidelines, the institution may be required to submit an
acceptable plan to achieve compliance with the standard.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender test or they become subject to the business activity
restrictions and branching rules applicable to national banks. To qualify as a
qualified thrift lender, a savings institution must either (i) be deemed a
"domestic building and loan association" under the Internal Revenue Code by
maintaining at least 60% of its total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans and investments in
premises of the institution or (ii) satisfy the statutory qualified thrift
lender test set forth in the Home Owners' Loan Act by maintaining at least 65%
of its portfolio assets in qualified thrift investments (defined to include
residential mortgages and related equity investments, certain mortgage-related
securities, small business loans, student loans and credit card loans). For
purposes of the statutory qualified thrift lender test, portfolio assets are
defined as total assets minus goodwill and other intangible assets, the value of
property used by the institution in conducting its business, and specified
liquid assets up to 20% of total assets. A savings institution must maintain its
status as a qualified thrift lender on a monthly basis in at least nine out of
every twelve months. Millington Savings Bank met the qualified thrift lender
test as of June 30, 2006 and in each of the last twelve months and, therefore,
qualifies as a qualified thrift lender.
A savings bank that fails the qualified thrift lender test and does not
convert to a bank charter generally will be prohibited from: (1) engaging in any
new activity not permissible for a national bank, (2) paying dividends not
permissible under national bank regulations, and (3) establishing any new branch
office in a location not permissible for a national bank in the institution's
home state. In addition, if the institution does not requalify under the
qualified thrift lender test within three years after failing the test, the
institution would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from the
Federal Home Loan Bank as promptly as possible.
Community Reinvestment Act. Under the Community Reinvestment Act, every
insured depository institution, including Millington Savings Bank, has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending
69
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The Community Reinvestment
Act requires the depository institution's record of meeting the credit needs of
its community to be assessed and taken into account in the evaluation of certain
applications by such institution, such as a merger or the establishment of a
branch office by Millington Savings Bank. An unsatisfactory Community
Reinvestment Act examination rating may be used as the basis for the denial of
an application. Millington Savings Bank received a "satisfactory" rating in its
most recent Community Reinvestment Act examination.
Federal Home Loan Bank System. Millington Savings Bank is a member of
the Federal Home Loan Bank of New York, which is one of twelve regional federal
home loan banks. Each federal home loan bank serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from funds
deposited by financial institutions and proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans to
members pursuant to policies and procedures established by its board of
directors.
As a member, Millington Savings Bank is required to purchase and
maintain stock in the Federal Home Loan Bank of New York in an amount equal to
the greater of 1% of our aggregate unpaid residential mortgage loans, home
purchase contracts or similar obligations at the beginning of each year or 5% of
our outstanding Federal Home Loan Bank advances.
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid and could continue to do so in the future. In addition, these
requirements could result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members.
The USA Patriot Act. Millington Savings Bank is subject to regulations
implementing the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
Patriot Act. The USA Patriot Act gives the federal government powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA Patriot Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA Patriot Act and the
related regulations impose the following requirements with respect to financial
institutions:
o Establishment of anti-money laundering programs that include, at
minimum: (i) internal policies, procedures, and controls; (ii)
specific designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an
independent audit function to test the anti-money laundering
program.
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o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts, including verifying the identity of customers within a
reasonable period of time.
o Establishment of appropriate, specific, and, where necessary,
enhanced due diligence policies, procedures, and controls
designed to detect and report money laundering.
o Prohibitions on establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks (foreign
banks that do not have a physical presence in any country), and
compliance with certain record keeping obligations with respect
to correspondent accounts of foreign banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on applications under
the Federal Reserve Act and the Bank Merger Act.
Regulation of MSB Financial Corp.
General. MSB Financial Corp. is a savings and loan holding company
within the meaning of Section 10 of the Home Owners' Loan Act. It is required to
file reports with the Office of Thrift Supervision and is subject to regulation
and examination by the Office of Thrift Supervision. MSB Financial Corp. must
also obtain regulatory approval from the Office of Thrift Supervision before
engaging in certain transactions, such as mergers with or acquisitions of other
financial institutions. In addition, the Office of Thrift Supervision has
enforcement authority over MSB Financial Corp. and any non-savings institution
subsidiaries. This permits the Office of Thrift Supervision to restrict or
prohibit activities that it determines to be a serious risk to Millington
Savings Bank. This regulation is intended primarily for the protection of the
depositors and not for the benefit of stockholders of MSB Financial Corp.
Activities Restrictions. As a savings and loan holding company and as a
subsidiary holding company of a mutual holding company, MSB Financial Corp. is
subject to statutory and regulatory restrictions on its business activities. The
non-banking activities of MSB Financial Corp. and its non-savings institution
subsidiaries are restricted to certain activities specified by Office of Thrift
Supervision regulation, which include performing services and holding properties
used by a savings institution subsidiary, activities authorized for savings and
loan holding companies as of March 5, 1987, and non-banking activities
permissible for bank holding companies pursuant to the Bank Holding Company Act
of 1956 or authorized for financial holding companies pursuant to the
Gramm-Leach-Bliley Act. Before engaging in any non-banking activity or acquiring
a company engaged in any such activities, MSB Financial Corp. must file with the
Office of Thrift Supervision either a prior notice or (in the case of
non-banking activities permissible for bank holding companies) an application
regarding its planned activity or acquisition.
Mergers and Acquisitions. MSB Financial Corp. must obtain approval from
the Office of Thrift Supervision before acquiring, directly or indirectly, more
than 5% of the voting stock of another savings institution or savings and loan
holding company or acquiring such an institution or holding company by merger,
consolidation or purchase of its assets. Federal law also prohibits a savings
and loan holding company from acquiring more than 5% of a company engaged in
activities other than those authorized for savings and loan holding companies by
federal law or acquiring or retaining control of a depository institution that
is not insured by the Federal Deposit Insurance Corporation. In evaluating an
application for MSB Financial Corp. to acquire control of a savings institution,
the Office of Thrift Supervision would consider the financial and managerial
resources and future prospects of MSB Financial Corp. and the target
71
institution, the effect of the acquisition on the risk to the insurance funds,
the convenience and the needs of the community and competitive factors.
Waivers of Dividends by MSB Financial, MHC. Office of Thrift
Supervision regulations require MSB Financial, MHC to notify the Office of
Thrift Supervision of any proposed waiver of its receipt of dividends from MSB
Financial Corp. The Office of Thrift Supervision reviews dividend waiver notices
on a case-by-case basis, and, in general, does not object to any such waiver if:
(i) the waiver would not be detrimental to the safe and sound operations of the
subsidiary savings association and (ii) the mutual holding company's board of
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members. Subject to the
non-objection of the Office of Thrift Supervision, we anticipate that MSB
Financial, MHC will waive dividends paid by MSB Financial Corp., if any.
Conversion of MSB Financial, MHC to Stock Form. Office of Thrift
Supervision regulations permit MSB Financial, MHC to convert from the mutual
form of organization to the capital stock form of organization, commonly
referred to as a second step conversion. In a second step conversion a new
holding company would be formed as the successor to MSB Financial Corp., MSB
Financial, MHC's corporate existence would end, and certain depositors of
Millington Savings Bank would receive the right to subscribe for shares of the
new holding company. In a second step conversion, each share of common stock
held by stockholders other than MSB Financial, MHC would be automatically
converted into shares of common stock of the new holding company.
Acquisition of Control. Under the federal Change in Bank Control Act, a
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire "control" of
a savings and loan holding company or savings association. An acquisition of
"control" can occur upon the acquisition of 10% or more of the voting stock of a
savings and loan holding company or savings institution or as otherwise defined
by the Office of Thrift Supervision. Under the Change in Bank Control Act, the
Office of Thrift Supervision has 60 days from the filing of a complete notice to
act, taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.
Federal Securities Laws
General. MSB Financial Corp. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 for the
registration of the common stock to be issued pursuant to the offering. Upon
completion of the offering, MSB Financial Corp. common stock will continue to be
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. MSB Financial Corp. will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 implemented
various legislative reforms addressing, among other matters, corporate
governance, auditing and accounting, executive compensation, and enhanced and
timely disclosure of corporate information. As directed by Section 302(a) of
Sarbanes-Oxley Act and the implementing rules of the Securities and Exchange
Commission, MSB Financial Corp.'s Chief Executive Officer and Chief Financial
Officer each will be required to certify that its quarterly and annual reports
do not contain any untrue statement of a material fact. The rules have several
requirements, including having these officers certify that: they are responsible
for establishing, maintaining and regularly evaluating the effectiveness of our
internal controls; they have made certain
72
disclosures to our auditors and the audit committee of the Board of Directors
about our internal controls; and they have included information in our quarterly
and annual reports about their evaluation and whether there have been
significant changes in our internal controls or in other factors that could
significantly affect internal controls.
TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations.
All thrift institutions are now subject to the same provisions as banks
with respect to deductions for bad debts. Thrift institutions that are treated
as "small banks" (the average adjusted bases for all assets of such institution
equals $500 million or less) under the Internal Revenue Code may account for bad
debts by using the experience method for determining additions to their bad debt
reserve. Thrift institutions that are not treated as small banks must now use
the specific charge-off method.
MSB Financial Corp. may exclude from its income 100% of dividends
received from Millington Savings Bank as a member of the same affiliated group
of corporations. A 70% dividends received deduction generally applies with
respect to dividends received from corporations that are not members of such
affiliated group.
MSB Financial Corp. and Millington Savings Bank file a consolidated
federal tax return with MSB Financial, MHC. Such income tax returns have not
been audited by the IRS during the past five years.
State Taxation
MSB Financial Corp. and its subsidiaries file New Jersey income tax
returns and are subject to a 9% state income tax that is calculated based on
federal taxable income, subject to certain adjustments.
The state income tax returns of MSB Financial, MHC, MSB Financial Corp.
and Millington Savings Bank have not been audited during the past five years.
For additional information, see Note 10 to the consolidated financial statements
beginning on page F-1.
MANAGEMENT
General
MSB Financial Corp.'s Board of Directors is composed of seven members,
with each director serving for a term of three years in accordance with the
requirement in MSB Financial Corp.'s bylaws that directors be divided into three
classes, as nearly equal in number as possible, with one class elected annually.
Each director of MSB Financial Corp. also serves as a director of MSB Financial,
MHC, Millington Savings Bank and Millington Savings Service Corp. MSB Financial
Corp.'s and Millington Savings Bank's officers are appointed annually by the
Board of Directors and serve at the Board's discretion.
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Current
Director Term
Age Position Since(1) Expires
--- -------- -------- -------
Directors:
----------
Albert N. Olsen 71 Chairman 1974 2009
Gary T. Jolliffe 62 Director, President and Chief Executive Officer 1992 2009
E. Haas Gallaway, Jr. 65 Director 1987 2007
W. Scott Gallaway 60 Director 2000 2007
Thomas G. McCain 68 Director 1992 2008
Ferdinand J. Rossi 64 Director 1975 2008
Michael A. Shriner 42 Director, Executive Vice President 1999 2007
and Chief Operating Officer
Senior Management:
------------------
Jeffrey E. Smith 57 Vice President and Chief Financial Officer
Nancy E. Schmitz 50 Vice President, Chief Lending Officer
and Corporate Secretary
Susan M. Schumann 56 Vice President
Betty Zangari 62 Vice President and Assistant Corporate Secretary
----------------------
(1) Indicates the year the individual first became a director of Millington
Savings Bank. Upon the formation of MSB Financial Corp. in 2004, each
person serving at that time as a director of Millington Savings Bank became
a director of MSB Financial Corp.
Biographical Information
Albert N. Olsen has been a director of Millington Savings Bank since
October 1974 and was elected chairman of the Board in December 1999. Mr. Olsen
is a certified public accountant and is president of Olsen & Thompson, P.A., a
CPA firm established in 1961. In addition, Mr. Olsen is a member of Olsen &
Thompson Investment Advisory Services, LLC. Mr. Olsen is a member of the New
Jersey Society of Certified Public Accountants and has served in various
positions with the Society, including chairman of the Committee for Management
of Accounting Practices, trustee, treasurer, vice president, president of the
Morris-Sussex-Warren Chapter and chairman of the Board and trustee of the
Society's Insurance Trust. In addition, Mr. Olsen is a member of the American
Institute of Certified Public Accountants, a past trustee and past chairman of
the Board of the Midland School Foundation and a past board member of Mrs.
Wilson's (Halfway House).
Gary T. Jolliffe joined Millington Savings Bank in January 1986 as its
executive vice president and was appointed as its president in 1990. In 1992,
Mr. Jolliffe was also appointed to the position of chief executive officer and
also became a director. Mr. Jolliffe has been a member of the Board of Governors
of the New Jersey League of Community Bankers since July 1999 serving in
numerous positions, including chairman of the New Jersey League of Community
Bankers from July 2004 to June 30, 2005. Mr. Jolliffe is a member of the Board
of Trustees of Freedom House Foundation, Glen Gardner, New Jersey, and is also a
member of the Bernardsville Rotary Club in which he has held the positions of
director, president, vice president and treasurer.
E. Haas Gallaway, Jr. has been a director of Millington Savings Bank
since October 1987. He is President and Manager of Gallaway and Crane Funeral
Home with principal offices located in Basking Ridge and a branch location
located in Bernardsville. This firm was founded by his father, E. Haas Gallaway,
Sr. in Millington in 1935 and moved to its present location in Basking Ridge in
1936. Mr. Gallaway has been associated with the firm since 1960, purchased a
minority position in the firm in
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1963 and the remainder of the corporation in 1976. He is a licensed funeral
director in the states of New Jersey and Florida. Mr. Gallaway is a member and
past president of the Morris County Funeral Directors' Association, The New
Jersey State Funeral Directors' Association, National Funeral Directors'
Association, and member and past president of the Bernardsville Rotary Club,
former director and past president of the Somerset Hills YMCA, and a past
president of the Board of Directors of Honesty House formerly of Stirling. A
life-long resident of the area, he has resided in Bernardsville since 1949
coming from Basking Ridge.
W. Scott Gallaway founded Gallaway Associates, a Real Estate Brokerage
and Appraisal firm in 1975 and sold the brokerage portion to Remax Properties
Unlimited in 2000. He remains a Broker/Salesperson with Remax Properties
Unlimited. Mr. Gallaway is a licensed Real Estate Appraiser and has served as
President and/or an Officer of numerous Professional Organizations and a member
and Past President of the Bernardsville Rotary Club. Mr. E. Haas Gallaway, Jr.
and Mr. W. Scott Gallaway are brothers.
Dr. Thomas G. McCain became principal of the Fairmount Avenue School in
Chatham, New Jersey in 1964 after having taught in Berlin, Connecticut. He left
Chatham nine years later to become Assistant Superintendent of Schools in
Freeport, New York and in 1978 was appointed Superintendent of Schools in
Bernardsville, New Jersey, the district from which he retired from public
education in 1988. Since then Mr. McCain has been president and sole owner of
Learning Builders, a firm that provides planning and training services to
schools and businesses in several states.
Ferdinand (Fred) J. Rossi has been a director of Millington Savings
Bank since 1975. He is currently the township administrator for the Township of
Morris in Morris County, New Jersey and has held that office since 1995.
Previously, Mr. Rossi served as the county administrator for Morris County, New
Jersey for 15 years, and the township clerk and then administrator for the
Township of Long Hill (formerly Passaic Township) for 12 years. He has served as
president of the New Jersey Association of County Administrators and Managers
and is a former member and president of the Bernardsville Rotary Club. A
life-long resident of the area, he was raised in Gillette and currently resides
in Millington.
Michael A. Shriner has been employed by the Bank since 1987 and became
its vice president in 1990, senior vice president in 1997, executive vice
president in 2002 and chief operating officer in 2006. He was appointed to the
Board of Directors in 1999. Mr. Shriner currently serves as chairman of the
Mortgage Steering Committee, is a member of the Residential Lending and
Affordable Housing Committee and a former member of the Consumer Lending and CRA
Committee of the New Jersey League of Community Bankers. He is a graduate of The
National School of Banking (Fairfield University). Mr. Shriner is currently the
financial secretary for the Knights of Columbus in Roselle Park, New Jersey.
Jeffrey E. Smith joined Millington Savings Bank in 1996. He was
appointed as its controller in 1998, vice president and controller in 2002, and
in 2006 became vice president and chief financial officer. Mr. Smith previously
served as vice president and controller for United National Bank in Plainfield,
New Jersey where he was employed for 11 years.
Nancy E. Schmitz has been employed by Millington Savings Bank since
1997 and started as its assistant corporate secretary and commercial lending
officer. In 1999, Ms. Schmitz became corporate secretary. In addition to being
the commercial lending officer, she has been responsible for the Bank's consumer
loan portfolio since 1997. In 2006 she became a vice president and the chief
lending officer for Millington Savings Bank. Ms. Schmitz has over 25 years
banking experience, beginning as a branch loan
75
officer for Lloyds Bank California in 1978 and serving at that institution and
others in various positions including as a commercial credit analyst, a vice
president of corporate lending and a senior corporate banking officer.
Susan M. Schumann joined Millington Savings Bank in 1984 as a teller
and has been promoted several times. She is currently a vice president and
responsible for security, marketing, advertising and facilities.
Betty Zangari joined Millington Savings Bank in 1992 as a teller and
was promoted to head teller in 1996. In 1998, Ms. Zangari became Assistant
Corporate Secretary. She was appointed Operations Supervisor in 2005 and became
a vice president in 2006.
Director Compensation
Millington Savings Bank directors currently are paid a fee of $2,200
per board meeting. The chairman of the Board of Directors currently is paid a
fee of $4,400 per board meeting. The Board has regular meetings on a monthly
basis and annually holds a special strategic planning meeting, for a total of 13
meetings per year. No additional compensation is paid for serving on the Boards
of MSB Financial Corp. or MSB Financial, MHC. Mr. Jolliffe and Mr. Shriner, as
employee directors, are not compensated for serving as directors of the Bank,
MSB Financial Corp. or MSB Financial, MHC. Each of the Bank's directors,
including the employee directors, serves on the subsidiary service corporation's
Board of Directors and is paid a $200 quarterly retainer.
Directors are paid a flat monthly fee of $300 for their committee
participation. The Board maintains an Audit Committee, an Asset/Liability
Management Committee and an Asset/Quality Committee. The Board has recently
established a Compensation Committee and a Nominating Committee.
The Audit Committee is currently comprised of Directors E. H. Gallaway,
Jr., W. S. Gallaway, McCain, Olsen and Rossi. Director Olsen serves as the audit
committee financial expert.
The Bank's Directors Consultation and Retirement Plan (the "DCRP")
provides retirement benefits to the directors of the Bank based upon the number
of years of service to the Bank's board. To be eligible to receive benefits
under the DCRP, a director generally must have completed at least 10 years of
service and must not retire from the board prior to reaching 65 years of age. If
a director agrees to become a consulting director to the Bank's board upon
retirement, he will receive a monthly payment equal to 30-60% of the highest
Bank's board fee and retainer in effect during the three-year period prior to
the date of retirement based on the number of years of service as a director.
Benefits under the DCRP begin upon a director's retirement and are paid for 120
months; provided, however, that in the event of a director's death prior to the
receipt of all monthly payments, payments shall continue to the director's
surviving spouse or estate until 120 payments have been made. The retirement
benefit amount is payable to the participant for an additional period of 24
months for each additional period of five years of service completed by the
director in excess of twenty years of service as of their actual retirement
date. In the event there is a change in control (as defined in the DCRP), all
directors will be presumed to have 20 years of service and attained age 65 under
the DCRP and each director will receive a lump sum payment equal to the present
value of future benefits payable. All payments under the plan need to be in
accordance with Code Section 409A. Benefits under the DCRP are unvested and
forfeitable until retirement at or after age 65 with at least 10 years of
service, termination of service following a change in control, disability
following at least 10 years of service or death. For the year ended June 30,
2006, the Bank's contribution and benefits paid under the DCRP totaled $24,000.
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Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the president and chief executive
officer and other named executive officers for the year ended June 30, 2006.
Annual Compensation(1)
----------------------
All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ------ ------ ----- ------------
Gary T. Jolliffe 2006 $182,598 $16,000 $78,353 (2)
President and Chief Executive Officer
Michael A. Shriner 2006 $130,312 $16,000 $28,678 (3)
Executive Vice President and Chief Operating Officer
Jeffrey E. Smith 2006 $93,444 $6,000 $20,352 (4)
Vice President and Chief Financial Officer
--------------
(1) Compensation information for the years ended 2004 and 2005 is omitted
because MSB Financial Corp. was not a reporting company under Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 during those periods.
(2) Consists of $902 for life insurance, an employer contribution to the
Millington Savings Bank 401(k) Savings and Profit Sharing Plan in the
amount of $27,237 and an award under the executive incentive retirement
plan of $50,214.
(3) Consists of $144 for life insurance, an employer contribution to the
Millington Savings Bank 401(k) Savings and Profit Sharing Plan in the
amount of $18,761 and an award under the executive incentive retirement
plan of $9,773.
(4) Consists of $485 for life insurance, an employer contribution to the
Millington Savings Bank 401(k) Savings and Profit Sharing Plan in the
amount of $12,841 and an award under the executive incentive retirement
plan of $7,026.
Employment Agreements. The Bank has entered into employment agreements
with Messrs. Jolliffe, Shriner and Smith. Mr. Jolliffe's, Mr Shriner's and Mr.
Smith's current base salaries are $197,500, $142,000 and $101,000, respectively.
Mr. Jolliffe's and Mr. Shriner's employment agreements have terms of three years
while Mr. Smith's agreement has a term of one year. Each of the agreements
provides for an annual one-year extension of the term of the agreement upon
determination of the Board of Directors that the executive's performance has met
the requirements and standards of the Board, so that the remaining term of the
agreement continues to be three years, in the case of Messrs. Jolliffe and
Shriner, and one year, in the case of Mr. Smith. If the Bank terminates Messrs.
Jolliffe, Shriner or Smith without "just cause" as defined in the agreement,
they will be entitled to a continuation of their salary from the date of
termination through the remaining term of their agreement, but in no event for a
period of less than 12 months and during the same period, the cost of obtaining
all health, life, disability, and other benefits at levels substantially equal
to those being provided on the date of termination of employment. Messrs.
Jolliffe, Shriner and Smith's employment agreements provide that if their
employment is terminated without just cause within twenty-four months of a
change in control, they will be paid an amount equal to approximately three
times their base salary for Messrs. Jolliffe and Shriner and one year in the
case of Mr. Smith. This amount may be paid in a lump sum at the employee's
discretion. If not paid in a lump sum, the amount is paid over 36 months for
Messrs. Jolliffe and Shriner and 12 months for Mr. Smith or the remaining term
of the agreement, whichever is less. If change in control payments had been made
under the agreements as of June 30, 2006, the payments would have equaled
approximately $592,000, $426,000, and $101,000, to Mr. Jolliffe, Mr. Shriner and
Mr. Smith, respectively.
77
The Bank has entered into one year employment agreements with three
other officers on terms substantially the same as Mr. Smith's agreement.
Executive Incentive Retirement Plan. The Bank's executive incentive
retirement plan provides for equal annual installments for a period of 15 years
commencing on the first day of the calendar month following the termination of
employment due to retirement, resignation, disability or death. All payments
under the plan are in accordance with Code Section 409A. The amount payable is
based on the vested balance of the executive's accumulated awards plus interest
at the prime rate published in The Wall Street Journal, credited quarterly, but
no less than 4% or greater than 12%. The annual awards are based upon the
executive's base salary in effect at the beginning of the plan year and the
Bank's net income for the prior fiscal year. The percentage vested is based on
the sum of the executive's age and years of service. The participant becomes
fully vested at age 65, death, disability or upon a change in control of the
Bank. Upon the death of the participant, the beneficiary shall receive the
remaining balance paid in a lump sum. The plan expense for the year ended June
30, 2006 was approximately $103,000.
Split Dollar Life Insurance Agreement. The Bank has entered into Life
Insurance Agreements with Officers Jolliffe, Shriner and Smith, which provide a
death benefit equal to the following: if the executive is: (i) employed by the
Bank at the time of his or her death, (ii) has retired from employment with the
Bank after completion of not less than twenty (20) years of service with the
Bank, or (iii) has retired from employment with the Bank and at such date of
retirement the sum of the executive's age and years of service equals not less
than 70, then the executive's beneficiary is entitled to payment of an amount
equal to 200% of the executive's highest annual base salary (not including
bonus, equity compensation, deferred compensation or any other forms of
compensation) in effect at the Bank at any time during the three calendar years
prior to the date of death of the executive. The maximum death benefits for
Officers Jolliffe, Shriner and Smith are approximately $375,000, $402,000 and
$367,000, respectively.
If a change in control of the Bank shall occur prior to the executive's
termination of employment or retirement, then the death benefit coverage shall
remain in effect until the executive's death, unless the agreement is otherwise
terminated pursuant to its terms prior to such date of a change in control.
Coverage under the agreement for the executive who terminates employment with
the Bank (for reasons other than death or a change in control of the Bank) prior
to completion of at least ten years of service with the Bank (and prior to the
occurrence of a change of control) will cease on his or her last day of
employment with the Bank.
401(k) Savings and Profit Sharing Plan. The Millington Savings Bank
401(k) Savings and Profit Sharing Plan is a tax-qualified defined contribution
savings plan with a profit sharing component for the benefit of all eligible
employees. The plan has a profit-sharing component and an annual contribution is
made by the Bank to the plan for all employees who have completed twelve months
of service. In addition, employees may also voluntarily elect to defer between
1% and 80% of their compensation as 401(k) savings under the plan, not to exceed
applicable limits under federal tax laws. All eligible employees receive the
profit-sharing contribution regardless of whether they defer salary under the
plan. In calendar year 2006, an employee could defer up to the lower of $15,000
or 80% of his salary. Employees age 50 and over may make catch-up contributions
($5,000 in 2006). The plan also provides for matching contributions up to a
maximum of 50% of the first 6% of a person's salary for each participant.
Employee contributions are immediately fully vested. Matching contributions and
the annual profit-sharing contribution are vested at a rate of 20% per year
after two years and completely vested after six years of service.
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The Bank's employees may use their account balances in the 401(k)
Savings and Profit Sharing Plan to pay for shares of stock in the stock
offering. Employees do not have special rights, however, to subscribe for stock
in the offering. Their eligibility to subscribe depends on whether they were
account holders with $50 on deposit at June 30, 2005 or September 30, 2006 or
account holders at October 31, 2006. Their orders will be allocated under the
normal order of subscription rights priority in the same manner as all other
eligible depositors. Following the stock offering, Bank employees may purchase
additional shares of MSB Financial Corp. common stock through the plan using
funds in their Millington Savings Bank 401(k) Savings and Profit Sharing Plan
accounts. The plan trustee will purchase such shares in regular open market
stock transactions at market prices.
Stock Benefit Plans
Employee Stock Ownership Plan. The Bank intends to establish the
Millington Savings Bank Employee Stock Ownership Plan for the exclusive benefit
of participating employees of Millington Savings Bank, to be implemented prior
to the completion of the offering. Participating employees are salaried,
full-time employees who have completed at least one year of service and have
attained the age of 21. An application for a letter of determination as to the
tax-qualified status of the Millington Savings Bank Employee Stock Ownership
Plan will be submitted to the IRS. Although no assurances can be given, we
expect that a favorable letter of determination will be received from the IRS.
The Millington Savings Bank Employee Stock Ownership Plan is to be
funded by contributions made by Millington Savings Bank in cash or common stock.
Benefits may be paid either in shares of the common stock or in cash. The
Millington Savings Bank Employee Stock Ownership Plan will borrow funds with
which to acquire up to 8% of the shares sold in the offering, which represents
3.6% of the total number of shares of common stock outstanding after the
offering, including shares held by MSB Financial, MHC.
The Millington Savings Bank Employee Stock Ownership Plan may elect, in
whole or in part, to fill its order through open market purchases subsequent to
the closing of the offering, subject to any required regulatory approval. It
intends to borrow funds from MSB Financial Corp. The loan is expected to be for
a term of ten years at an annual interest rate equal to the prime rate published
in The Wall Street Journal. Presently it is anticipated that the Millington
Savings Bank Employee Stock Ownership Plan will purchase up to 8% of the shares
sold in the offering. The loan will be secured by the shares purchased and
earnings of employee stock ownership plan assets. Shares purchased with loan
proceeds will be held in a suspense account for allocation among participants as
the loan is repaid. It is anticipated that all contributions will be
tax-deductible.
Contributions to the Millington Savings Bank Employee Stock Ownership
Plan and shares released from the suspense account will be allocated among
participants on the basis of base compensation. All participants must be
employed on the last day of a plan year, or have terminated employment following
death, disability or retirement, in order to receive an allocation. Participant
benefits become fully vested in their allocations following five years of
service.
79
Employment service before the adoption of the Millington Savings Bank Employee
Stock Ownership Plan shall be credited for the purposes of vesting.
Contributions to the Millington Savings Bank Employee Stock Ownership Plan by
Millington Savings Bank are discretionary and as a result benefits payable under
the Millington Savings Bank Employee Stock Ownership Plan cannot be estimated.
The Board of Directors has appointed the non-employee directors to a
committee that will administer the Millington Savings Bank Employee Stock
Ownership Plan and serve as its trustees. The trustees must vote all allocated
shares as directed by plan participants. Unallocated shares and allocated shares
for which no timely direction is received will be voted as directed by the Board
of Directors or the Millington Savings Bank Employee Stock Ownership Plan's
committee, subject to the trustees' fiduciary duties.
Stock Option Plan. We intend to adopt a stock option plan for the
benefit of directors and officers after the passage of at least six months
following the completion of the offering. Up to 4.9% of the total number of
shares of common stock outstanding after the offering, including shares held by
MSB Financial, MHC, will be reserved for issuance under the stock option plan.
No determinations have been made as to any specific grants to be made under the
stock option plan or the terms thereof.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers and directors with a
proprietary interest in MSB Financial Corp. as an incentive to contribute to our
success and reward directors and officers for outstanding performance. Although
the terms of the stock option plan have not yet been determined, it is expected
that the stock option plan will provide for the grant of: (1) options to
purchase the common stock intended to qualify as incentive stock options under
the Internal Revenue Code (incentive stock options); and (2) options that do not
so qualify (non-incentive stock options). The exercise price of any options will
be not less than the fair market value of the common stock on the date of grant.
Any stock option plan would be in effect for up to 10 years following the
earlier of adoption by the Board of Directors or approval by the stockholders.
Options would expire no later than 10 years following the date granted and would
expire earlier if the option committee so determines or in the event of
termination of employment. Options would be granted based upon several factors,
including seniority, job duties and responsibilities and job performance.
Restricted Stock Plan. We also intend to establish a restricted stock
plan to provide our officers and directors with a proprietary interest in MSB
Financial Corp. after the passage of at least six months following the
completion of the offering. The restricted stock plan is expected to provide for
the award of common stock, subject to vesting restrictions, to eligible officers
and directors.
We expect to contribute funds to the restricted stock plan to acquire,
in the aggregate, up to 1.96% of the total number of shares of common stock
outstanding after the offering, including shares held by MSB Financial, MHC. If
we implement the restricted stock plan within one year of the offering and
Millington Savings Bank's tangible capital following the stock offering is less
than 10%, then the number of shares that may be awarded under the restricted
stock plan will be reduced and may not exceed 1.47% of the total shares
outstanding rather than 1.96%. If, at our discretion, we further reduce the
restricted stock plan to 1.3%, we may keep the number of shares in the employee
stock ownership plan at 3.6%. If we reduce the restricted stock plan to only
1.47% of the outstanding shares, however, then the employee stock ownership plan
would also be reduced, to 3.4%.
In the event that the plan is implemented within one year of the
offering and the Bank's tangible capital following the offering is less than
10%, then the plan shares will be limited to not
80
more than 1.47% of the total number of shares of common stock outstanding after
the offering. Shares used to fund the restricted stock plan may be acquired
through open market purchases or provided from authorized but unissued shares.
No determinations have been made as to the specific terms of the restricted
stock plan.
Dilution. While our intention is to fund the stock option plan and
restricted stock plan through open market purchases, stockholders will
experience a reduction or dilution in ownership interest if the plans are
instead funded with newly-issued shares.
The issuance of authorized but unissued shares of stock to the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.9%.
The issuance of authorized but unissued shares of stock to the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.7%.
Compensation Committee Interlocks and Insider Participation
During the year ended June 30, 2006, MSB Financial Corp. had no
"interlocking" relationships in which (i) an executive officer of MSB Financial
Corp. served as a director or member of the compensation committee of another
entity, one of whose executive officers served on the Board of Directors of MSB
Financial Corp.; (ii) an executive officer of MSB Financial Corp. served as a
director of another entity, one of whose executive officers served on Board of
Directors of MSB Financial Corp.; and (iii) an executive officer of MSB
Financial Corp. served as a director or member of the compensation committee of
another entity, one of whose executive officers served as a director of MSB
Financial Corp.
Transactions with Management and Others
No directors, executive officers or their immediate family members were
engaged, directly or indirectly, in transactions with MSB Financial Corp. or any
subsidiary during the three years ended June 30, 2006 that exceeded $60,000
(excluding loans with Millington Savings Bank).
Millington Savings Bank makes loans to its officers, directors and
employees in the ordinary course of business. All directors and employees are
offered a 50 basis point reduction on interest rates for consumer loans or
primary residence mortgage loans. Such loans do not include more than the normal
risk of collectibility or present other unfavorable features. At June 30, 2006,
loans to officers and directors or their immediate family members totaled $5.4
million and were all current and performing in accordance with their terms.
Proposed Stock Purchases by Management
Preliminary indications from our directors and executive officers and
their associates are that they will subscribe for an aggregate of approximately
132,000 shares in the stock offering. If 1,912,500 shares are sold (the midpoint
of the offering range), their anticipated purchases would represent 3.1% of the
total shares outstanding after the offering, including shares issued to MSB
Financial, MHC.
The following table sets forth for each of the directors and executive
officers (including in each case all "associates" of the directors and executive
officers) the number of shares of common stock which each director and officer
have preliminarily indicated they intend to purchase.
81
Number of Dollar
Name Shares Amount
---- ---------- ---------
Albert N. Olsen.................... 25,000 $ 250,000
Ferdinand J. Rossi................. 10,000 100,000
Michael A. Shriner................. 15,000 150,000
Gary T. Jolliffe................... 20,000 200,000
W. Scott Gallaway.................. 20,000 200,000
Thomas G. McCain................... 15,000 150,000
E. Haas Gallaway, Jr............... 25,000 250,000
Jeffrey E. Smith................... 2,000 20,000
------- ----------
Total......................... 132,000 $1,320,000
======= ==========
The above table does not include purchases by the Millington Savings
Bank Employee Stock Ownership Plan and does not take into account any stock
benefit plans to be adopted following the stock offering. If the stock benefit
plans are adopted as discussed in this prospectus and were funded with newly
issued shares instead of shares acquired in open market purchases, the aggregate
ownership of directors and executive officers would increase.
Purchases of common stock in the offering by directors and executive officers
and their associates will be counted toward the minimum of 1,625,625 shares
required to be sold to public stockholders to complete the offering. Management
may, but is not required to, purchase additional shares in the offering to
satisfy this minimum, subject to the limitation on the individual maximum share
purchase limitations and the requirement that directors, executive officers and
their associates may not purchase, in the aggregate, more than 30% of the shares
sold in the offering.
THE OFFERING
The Board of Directors adopted the plan authorizing the stock offering
on July 17, 2006, subject to the approval of the Office of Thrift Supervision.
We received authorization from the Office of Thrift Supervision to conduct the
stock offering on November 13, 2006. Office of Thrift Supervision authorization
does not constitute a recommendation or endorsement of an investment in our
stock by the Office of Thrift Supervision.
General
MSB Financial Corp. will sell its common stock to eligible depositors
of Millington Savings Bank in a subscription offering and, if shares are
available, to the general public in a community offering and/or a syndicated
community offering. The stock offering will be accomplished in accordance with
the procedures set forth in the plan, the requirements of applicable laws and
regulations, and the policies of the Office of Thrift Supervision.
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We are offering for sale between 1,625,625 shares at the minimum and
2,199,375 shares at the maximum of the offering range (2,529,281 shares at the
adjusted maximum. The minimum purchase is 25 shares of common stock (minimum
investment of $250). Our common stock is being offered at a fixed price of
$10.00 per share in the offering. Interest will be paid on subscription funds
from the date the payment is received until the offering is either completed or
terminated.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
pending completion or termination of the offering, subscription funds received
by us will be invested only in investments permissible under Rule 15c2-4.
Purposes of the Stock Offering
The proceeds from the sale of common stock of MSB Financial Corp. will
provide Millington Savings Bank with new equity capital, which will support
future growth and expanded operations. While Millington Savings Bank currently
exceeds all regulatory capital requirements to be considered well capitalized,
the sale of stock, coupled with the accumulation of earnings, less dividends or
other reductions in capital, from year to year, provides a means for the orderly
preservation and expansion of Millington Savings Bank's capital base.
The offering will afford our directors, officers and employees the
opportunity to become stockholders, which we believe to be an effective
performance incentive and an effective means of attracting and retaining
qualified personnel. The offering also will provide our customers and local
community members with an opportunity to acquire our stock.
Conduct of the Offering
Subject to the limitations of the plan of stock issuance adopted by our
Board of Directors, shares of common stock are being offered in descending order
of priority in the subscription offering to:
o Eligible Account Holders (depositors at the close of business on June 30,
2005 with deposits of at least $50.00);
o the Millington Savings Bank Employee Stock Ownership Plan; and
o Supplemental Eligible Account Holders (depositors at the close of business
on September 30, 2006 with deposits of at least $50.00).
o Other Depositors (depositors at the close of business on October 31, 2006
who are not Eligible Account Holders or Supplemental Eligible Account
Holders).
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a syndicated community offering. The
community offering, if any, may commence at any time during or subsequent to the
completion of the subscription offering. A syndicated community offering, if we
conduct one, would commence just prior to, or as soon as practicable after, the
termination of the subscription offering.
83
In any community offering or syndicated community offering, we will fill orders
for our common stock in an equitable manner as determined by the Board of
Directors in order to achieve a wide distribution of the stock.
Any shares sold above the maximum of the offering range may be sold to
the Millington Savings Bank Employee Stock Ownership Plan before satisfying
remaining unfilled orders of Eligible Account Holders to fill the plan's
subscription, or the plan may purchase some or all of the shares covered by its
subscription after the offering in the open market, subject to any required
regulatory approval.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of stock
issuance to the following persons in the following order of priority:
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase, subject to the overall limitations
described under The Stock Offering - Limitations on Purchases of Common Stock,
up to the greater of (i) the maximum purchase limitation in the community
offering (i.e., 20,000 shares), (ii) one-tenth of 1% of the total shares of
common stock offered in the subscription and community offering, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock offered in the
subscription and community offering by a fraction, of which the numerator is the
total amount of the qualifying deposits of the Eligible Account Holder and the
denominator is the total amount of all qualifying deposits of all Eligible
Account Holders. If there are insufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares will be allocated to Eligible
Account Holders so as to permit each subscribing Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to the
lesser of 100 shares or the number of shares ordered. Thereafter, unallocated
shares will be allocated to remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion that each subscriber's
qualifying deposit bears to the total amount of qualifying deposits of all
subscribing Eligible Account Holders, in each case measured as of June 30, 2005,
whose subscriptions remain unfilled. Subscription rights received by officers
and directors of MSB Financial Corp. or Millington Savings Bank, and such
persons' associates, based on their increased deposits in Millington Savings
Bank in the one year preceding June 30, 2005 will be subordinated to the
subscription rights of all other Eligible Account Holders. To ensure proper
allocation of stock, each Eligible Account Holder must list on his order form
all accounts in which he had an ownership interest as of the Eligibility Record
Date. Failure to list an account, or providing incorrect information, could
result in the loss of all or a part of the subscriber's allocation.
Priority 2: The Employee Stock Ownership Plan. If there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the Millington Savings Bank Employee Stock Ownership Plan may be given
the opportunity to purchase in the aggregate up to but less than 5% of the total
number of shares of common stock issued in the offering to public stockholders
and to MSB Financial, MHC. It is expected that the Millington Savings Bank
Employee Stock Ownership Plan will purchase up to 8% of the shares sold in the
offering. To the extent that it does not purchase shares in the offering, it
intends to purchase shares in the open market purchases subsequent to the
closing of the offering, subject to any required regulatory approval.
84
Priority 3: Supplemental Eligible Account Holders. If there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the employee stock ownership plan, each Supplemental
Eligible Account Holder shall be given the opportunity to purchase, subject to
the overall limitations described under The Stock Offering - Limitations on
Purchases of Common Stock, up to the greater of (i) the maximum purchase
limitation in the community offering (i.e., 20,000 shares), (ii) one- tenth of
1% of the total shares of common stock offered in the subscription and community
offering, and (iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common stock offered in
the subscription and community offering by a fraction, of which the numerator is
the amount of the qualifying deposits of the Supplemental Eligible Account
Holder and the denominator is the total amount of all qualifying deposits of all
Supplemental Eligible Account Holders. If Supplemental Eligible Account Holders
subscribe for a number of shares which, when added to the shares subscribed for
by Eligible Account Holders and the employee stock ownership plan, is in excess
of the total number of shares offered in the offering, the shares of common
stock will be allocated among subscribing Supplemental Eligible Account Holders
first so as to permit each subscribing Supplemental Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to the
lesser of 100 shares or the number of shares ordered. Thereafter, unallocated
shares will be allocated to each subscribing Supplemental Eligible Account
Holder whose subscription remains unfilled in the same proportion that each
subscriber's qualifying deposit bear to the total amount of qualifying deposits
of all subscribing Supplemental Eligible Account Holders, in each case measured
as of September 30, 2006, whose subscriptions remain unfilled. To ensure proper
allocation of stock, each Supplemental Eligible Account Holder must list on his
order form all accounts in which he had an ownership interest as of the
Supplemental Eligibility Record Date. Failure to list an account, or providing
incorrect information, could result in the loss of all or a part of the
subscriber's allocation.
Priority 4: Other Depositors. If there are sufficient shares remaining after
satisfaction of all subscriptions by the Eligible Account Holders, the
tax-qualified employee stock benefit plans and the Supplemental Eligible Account
Holders, each Other Depositor (depositors as of October 31, 2006) who is not an
Eligible Account Holder or a Supplemental Eligible Account Holder shall have the
opportunity to purchase up to the greater of 20,000 shares of common stock or
one-tenth of 1% of the total offering of shares of common stock offered in the
subscription offering, subject to the overall purchase limitations described
under The Stock Offering - Limitations on Purchases of Common Stock. If Other
Depositors subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders, the tax-qualified employee stock
benefit plans and Supplemental Eligible Account Holders, is in excess of the
total number of shares offered in the offering, the subscriptions of Other
Depositors will be allocated among subscribing Other Depositors to permit each
subscribing Other Depositor to purchase a number of shares sufficient to make
his total allocation of common stock equal to the lesser of 100 shares or the
number of shares ordered. Any shares remaining will be allocated among the
subscribing Other Depositors whose subscriptions remain unsatisfied on a 100
shares (or whatever lesser amount is available) per order basis until all orders
have been filled or the remaining shares have been allocated.
Restrictions on Transfer of Subscription Rights and Shares. Applicable
regulations and the plan of stock issuance prohibits any person with
subscription rights, including Eligible Account Holders , Supplemental Eligible
Account Holders and Other Depositors, from transferring or entering into any
agreement or understanding to transfer the legal or beneficial ownership of the
subscription rights or the shares of common stock to be issued when subscription
rights are exercised. Subscription rights may be exercised only by the person to
whom they are granted. Each person subscribing for shares will be required to
certify that such person is purchasing shares solely for his own account and
that he has no agreement or understanding regarding the sale or transfer of the
shares. The regulations also prohibit any
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person from offering or making an announcement of an offer or intent to make an
offer to purchase subscription rights or shares of common stock before the
completion of the offering.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
which we determine involve the transfer of subscription rights.
Deadlines for Purchasing Stock
The subscription offering will terminate at 12:00 noon, Eastern time,
on December 19, 2006. We may extend this expiration date without notice to you
for up to 45 days, until February 2, 2007. Once submitted, your order is
irrevocable unless the offering is extended beyond February 2, 2007. We may
request permission from the Office of Thrift Supervision to extend the offering
beyond February 2, 2007, and the Office of Thrift Supervision may grant one or
more extensions of the offering of up to 90 days per extension, but in no event
may the offering be extended beyond December 19, 2008. If the offering is
extended beyond February 2, 2007, we will notify each subscriber and subscribers
will have the right to confirm, modify or rescind their subscriptions. If an
affirmative response is not received prior to the expiration of the
resolicitation period, a subscriber's subscription will be canceled and funds
will be returned with interest.
A community offering and a syndicated community offering, if such
offerings are conducted, may terminate at any time without notice but no later
than February 2, 2007.
Community Offering
If less than the total number of shares of common stock to be
subscribed for in the offering are sold in the subscription offering then shares
remaining unsubscribed may be made available for purchase in the community
offering to certain members of the general public. The maximum amount of common
stock that any person may purchase in the community offering is 20,000 shares,
or $200,000.
Preference in the community shall be given first to natural persons and
trusts of natural persons residing in Morris and Somerset Counties, New Jersey
and second to other natural persons and trusts of natural persons residing in
New Jersey. If shares are available for these "preferred purchasers" in the
community offering but there are insufficient shares to satisfy all orders, the
available shares will be allocated first to each preferred purchasers whose
order we accept in an amount equal to the lesser of 100 shares or the number of
shares ordered by each such subscriber, if possible. After that, unallocated
shares will be allocated among the remaining preferred purchasers whose orders
remain unsatisfied in the same proportion that the unfilled order of each such
subscriber bears to the total unfilled orders of all such subscribers. If, after
filling the orders of the first group of preferred purchasers (natural persons
and trusts of natural persons residing in Morris and Somerset Counties, New
Jersey) and then the orders of the second group of preferred purchasers (natural
persons and trusts of natural persons residing in New Jersey), shares are
available for other subscribers in the community offering but there are
insufficient shares to satisfy all orders, shares will be allocated in the same
manner as for preferred purchasers.
We will consider persons residing in one of the specified counties if
they occupy a dwelling in the county and establish an ongoing physical presence
in the county that is not merely transitory in nature. We may utilize depositor
or loan records or other evidence provided to us to make a determination as to
whether a person is a resident in one of the specified counties. In all cases,
the determination of residence status will be made by us in our sole discretion.
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The community offering, if any, may commence at any time during or
subsequent to the completion of the subscription offering. The community
offering, if any, must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by the Office of Thrift
Supervision.
If we receive regulatory approval for an extension, all subscribers
will be notified of the extension and of the duration of any extension that has
been granted, and will have the right to confirm, increase, decrease or rescind
their orders. If we do not receive an affirmative response from a subscriber to
any resolicitation, the subscriber's order will be rescinded and all funds
received will be promptly returned with interest.
The opportunity to subscribe for shares of common stock in the
community offering is subject to our right to reject orders, in whole or part,
either at the time of receipt of an order or as soon as practicable following
the expiration date of the offering. If your order is rejected in part, you will
not have the right to cancel the remainder of your order.
Syndicated Community Offering
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Keefe, Bruyette and Woods, Inc., acting as our agent. In such
capacity, Keefe, Bruyette and Woods, Inc. may form a syndicate of other
broker-dealers. Alternatively, we may sell any remaining shares in an
underwritten public offering. Neither Keefe, Bruyette and Woods, Inc. nor any
registered broker-dealer will have any obligation to take or purchase any shares
of the common stock in the syndicated community offering; however, Keefe,
Bruyette and Woods, Inc. has agreed to use its best efforts in the sale of
shares in any syndicated community offering. The syndicated community offering
would terminate no later than 45 days after the expiration of the subscription
offering, unless extended by us, with approval of the Office of Thrift
Supervision. See - Community Offering above for a discussion of rights of
subscribers in the event an extension is granted.
The opportunity to subscribe for shares of common stock in the
syndicated community offering is subject to our right to reject orders, in whole
or part, either at the time of receipt of an order or as soon as practicable
following the expiration date of the offering. If your order is rejected in
part, you will not have the right to cancel the remainder of your order.
Purchasers in the syndicated community offering are eligible to
purchase up to $200,000 of common stock (which equals 20,000 shares). We may
begin the syndicated community offering or underwritten public offering at any
time following the commencement of the subscription offering.
If we are unable to find purchasers from the general public for all
unsubscribed shares, we will make other purchase arrangements, if feasible.
Other purchase arrangements must be approved by the Office of Thrift Supervision
and may provide for purchases by directors, officers, their associates and other
persons in excess of the limitations provided in the plan of stock issuance and
in excess of the proposed director purchases discussed earlier, although no
purchases are currently intended. If other purchase arrangements cannot be made,
we may do any of the following: terminate the stock offering and promptly return
all funds; return all funds, then set a new offering range and notify all
subscribers to give them the opportunity to confirm, cancel or change their
orders; or take such other actions as may be permitted by the Office of Thrift
Supervision.
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Limitations on Purchases of Common Stock
The following additional limitations have been imposed on purchases of
shares of common stock:
1. The maximum number of shares which may be purchased in the
offering by any individual (or individuals through a single
account) shall not exceed 20,000 shares, or $200,000. This limit
applies to stock purchases in total in the subscription,
community and syndicated community offerings.
2. The maximum number of shares that may be purchased by any
individual together with any associate or group of persons acting
in concert is 25,000 shares, or $250,000. Any persons or entities
having the same address on an account or stock order form are
considered to be acting in concert. This limit applies to stock
purchases in total in the subscription, community and syndicated
community offerings. This limit does not apply to the Millington
Savings Bank Employee Stock Ownership Plan which may subscribe
for up to but less than 5% of the total number of shares of
common stock issued in the offering to public stockholders and to
MSB Financial, MHC.
3. The maximum number of shares which may be purchased in all
categories in the offering by our officers and directors and
their associates in the aggregate shall not exceed 30% of the
total number of shares sold in the offering.
4. The minimum order is 25 shares, or $250.
5. If the number of shares otherwise allocable to any person or that
person's associates would be in excess of the maximum number of
shares permitted as set forth above, the number of shares
allocated to that person shall be reduced to the lowest
limitation applicable to that person, and then the number of
shares allocated to each group consisting of a person and that
person's associates shall be reduced so that the aggregate
allocation to that person and his associates complies with the
above maximums, and the maximum number of shares shall be
reallocated among that person and his associates in proportion to
the shares subscribed by each (after first applying the maximums
applicable to each person, separately).
6. Depending upon market or financial conditions, with the approval
of the Office of Thrift Supervision and without notice to
subscribers, we may decrease or increase the purchase and
ownership limitations. If a purchase limitation is increased,
subscribers in the subscription offering who ordered the maximum
amount will be given the opportunity to increase their
subscriptions up to the then applicable limit. We also may, in
our sole discretion, contact other large subscribers to give them
the same opportunity. The effect of this type of resolicitation
will be an increase in the number of shares owned by subscribers
who increase their subscriptions.
7. If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation range
of up to 15% (the adjusted maximum) the additional shares will
generally be issued in the following order of priority: (a) to
fill the employee stock ownership plan's subscription; (b) if
there is an oversubscription at the Eligible Account Holder level,
to fill unfilled subscriptions of Eligible Account Holders; (c) if
there is an oversubscription at the Supplemental Eligible Account
Holder level, to fill unfilled subscriptions of Supplemental
Eligible Account Holders; (d) if there is an oversubscription at
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the Other Depositor level, to fill unfilled subscriptions of
Other Depositors; (e) to fill orders received in a community
offering; with preference given to persons who live in the local
community; and (f) to fill orders received in the syndicated
community offering. The Millington Savings Bank Employee Stock
Ownership Plan may, however, elect to fill part or all of its
stock order in the open market, after completion of the stock
offering.
8. No person will be allowed to purchase any stock if that purchase
would be illegal under any federal or state law or regulation or
would violate regulations or policies of the National Association
of Securities Dealers. We and/or our representatives may ask for
an acceptable legal opinion from any purchaser regarding the
legality of the purchase and may refuse to honor any purchase
order if that opinion is not timely furnished.
9. We have the right to reject any order submitted by a person whose
representations we believe are untrue or who we believe is
violating, circumventing or intends to violate, evade or
circumvent the terms and conditions of the plan of stock
issuance, either alone or acting in concert with others.
10. The above restrictions also apply to purchases by persons acting
in concert under applicable regulations of the Office of Thrift
Supervision. Under regulations of the Office of Thrift
Supervision, our directors are not considered to be affiliates or
a group acting in concert with other directors solely as a result
of membership on our Board of Directors.
11. In addition, in any community offering or syndicated community
offering, we must first fill orders for our common stock up to a
maximum of 2% of the total shares issued in the offering in a
manner that will achieve a wide distribution of the stock, and
thereafter any remaining shares will be allocated on an equal
number of shares per order basis, until all orders have been
filled or the shares have been exhausted.
The term "associate" of a person is defined in the plan of stock
issuance to mean:
(1) any corporation or organization of which that person is a senior
officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities;
(2) any trust or other estate in which that person has a substantial
beneficial interest or as to which that person serves as trustee
or in a similar fiduciary capacity; or
(3) an individual who is related by blood or marriage to that person
if they live in the same home as that person.
For example, a corporation for which a person serves as an officer
would be an associate of that person and all shares purchased by that
corporation would be included with the number of shares which that person
individually could purchase under the above limitations.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or
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(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
A person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party. We will
presume that certain persons are acting in concert based upon various facts,
including the fact that persons have joint account relationships or the fact
that such persons have filed joint Schedules 13D with the Securities and
Exchange Commission with respect to other companies. We reserve the right to
make an independent investigation of any facts or circumstances brought to our
attention that indicate that one or more persons acting independently or as a
group acting in concert may be attempting to violate or circumvent the
regulatory prohibition on the transferability of subscription rights.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." These
determinations are in our sole discretion and may be based on whatever evidence
we believe to be relevant, including joint account relationships or shared
addresses on the records of Millington Savings Bank.
Each person purchasing shares of the common stock in the offering will
be considered to have confirmed that his purchase does not conflict with the
maximum purchase limitation. If the purchase limitation is violated by any
person or any associate or group of persons affiliated or otherwise acting in
concert with that person, we will have the right to purchase from that person at
the $10.00 purchase price per share all shares acquired by that person in excess
of that purchase limitation or, if the excess shares have been sold by that
person, to receive the difference between the purchase price per share paid for
the excess shares and the price at which the excess shares were sold by that
person. Our right to purchase the excess shares will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by our directors and executive
officers. For certain restrictions on the common stock purchased by our
directors and executive officers, see The Offering - Restrictions on
Transferability by Directors and Executive Officers.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering by mail or in person a properly executed and
completed order form, together with full payment of the purchase price for all
shares for which subscription is made or include appropriate authorization in
the space provided on the order form for withdrawal of full payment from a
deposit account at Millington Savings Bank; provided, however, that if the
Millington Savings Bank Employee Stock Ownership Plan subscribes for shares
during the subscription offering, it will not be required to pay for the shares
at the time it subscribes but rather may pay for the shares upon completion of
the offering. All subscription rights will expire on the expiration date,
whether or not we have been able to locate each person entitled to subscription
rights. To place an order in the community offering, an investor must complete
an order form and return it prior to the applicable expiration date. Once
submitted, subscription orders cannot be revoked without our consent.
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We may, in our sole discretion, permit institutional investors to
submit irrevocable orders together with the legally binding commitment for
payment and to thereafter pay for such shares of common stock for which they
subscribe in the community offering at any time before the 48 hours prior to the
completion of the offering. This payment may be made by wire transfer. Our
interpretation of the terms and conditions of the plan of stock issuance and of
the acceptability of the order forms will be final.
To ensure that your stock purchase eligibility and priority are
properly identified, you must list all accounts on the order form, giving all
names in each account and the account number as of the appropriate eligibility
date. We will strive to identify your ownership in all accounts, but cannot
guarantee we will identify all accounts in which you have an ownership interest.
If a stock order form:
o is not delivered to a subscriber and is returned to us by the United States
Postal Service or we are unable to locate the addressee;
o is not received by us or is received after the applicable expiration date;
o is not completed correctly or executed; or
o is not accompanied by the full required payment for the shares subscribed
for, including instances where a savings account or certificate balance
from which withdrawal is authorized is unavailable, uncollected or
insufficient to fund the required payment, but excluding subscriptions by
the employee stock ownership plan;
then the subscription rights for that person will lapse as though that
person failed to return the completed order form within the time period
specified.
However, we may, but will not be required to, waive any irregularity on
any order form or require the submission of corrected order forms or the
remittance of full payment for subscribed shares by a date that we may specify.
The waiver of an irregularity on an order form in no way obligates us to waive
any other irregularity on any other order form. Waivers will be considered on a
case by case basis. We are not required to accept orders received on photocopies
or facsimile order forms, or for which payment is to be made by wire transfer or
payment from private third parties. Our interpretation of the terms and
conditions of the plan of stock issuance and of the acceptability of the order
forms will be final, subject to the authority of the Office of Thrift
Supervision.
The reverse side of the order form contains a certification form
mandated by regulation. We will not accept order forms where the certification
form is not executed. By executing and returning the certification form, you
will be certifying that you received this prospectus and acknowledging that the
common stock is not a deposit account and is not insured or guaranteed by the
federal government. You also will be acknowledging that you received disclosure
concerning the risks involved in this offering. The certification form could be
used as support to show that you understand the nature of this investment.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to the expiration date or hand delivered any later than two days
prior to the expiration date. Execution of the order form will confirm receipt
or delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
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Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. The Millington Savings Bank Employee Stock Ownership Plan may
pay for the shares it subscribes for upon completion of the offering. Payment
for shares of common stock may be made:
o in cash, if delivered in person;
o by check or money order made payable to MSB Financial Corp.; or
o for shares subscribed for in the subscription offering, by authorization of
withdrawal from deposit accounts maintained with Millington Savings Bank.
If you choose to pay by cash, you must deliver the stock order and
certification form and payment in person to any branch office of Millington
Savings Bank and it will be exchanged for a bank check or money order. Please do
not send cash in the mail.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
subscribers' checks must be made payable to MSB Financial Corp., and checks
received by the stock information center will be deposited directly to the
segregated deposit account at Millington Savings Bank established to hold funds
received as payment for shares. Interest will be paid on payments made by cash,
check or money order at Millington Savings Bank's regular passbook savings rate
of interest from the date payment is received until the offering is completed or
terminated. We may decide during the offering also to hold funds received with
orders in a deposit account at another insured depository institution. In either
case, we will pay interest on all funds received at a rate equal to Millington
Savings Bank's regular passbook savings rate.
The Millington Savings Bank Employee Stock Ownership Plan will not be
required to pay for the shares subscribed for at the time it subscribes, but
rather may pay for shares of common stock subscribed for upon the completion of
the offering; provided that there is in force from the time of its subscription
until the completion of the offering a loan commitment from an unrelated
financial institution or from us to lend to the employee stock ownership plan,
at that time, the aggregate purchase price of the shares for which it
subscribed.
Appropriate means by which account withdrawals may be authorized are
provided on the order form. If a subscriber authorizes us to withdraw the amount
of the purchase price from his or her deposit account, we will do so as of the
completion of the offering, though the account must contain the full amount
necessary for payment at the time the subscription is received. Once a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase the common stock for
which a subscription has been made until the offering has been completed or
terminated. In the case of payments authorized to be made through withdrawal
from savings accounts, all sums authorized for withdrawal will continue to earn
interest at the applicable account rate until the offering has been completed or
terminated. Sums authorized for withdrawal from a certificate of deposit will
continue to earn interest at the contract rate on the certificate until the
offering has been completed or terminated. Interest penalties for early
withdrawal applicable to certificate accounts will not apply to withdrawals
authorized for the purchase of shares. However, if a partial withdrawal results
in a certificate account with a balance less than the applicable minimum balance
requirement, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will be converted into a savings
account and will earn interest at the regular passbook savings rate subsequent
to the
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withdrawal. In the case of payments made in cash or by check or money order,
funds will be placed in a segregated account and interest will be paid by
Millington Savings Bank at the regular passbook savings rate from the date
payment is received until the offering is completed or terminated. An executed
order form, once we receive it, may not be modified, amended, or rescinded
without our consent, unless the offering is not completed within 45 days after
the conclusion of the subscription offering, in which event subscribers may be
given the opportunity to increase, decrease, or rescind their subscription for a
specified period of time. If the offering is not completed for any reason, all
funds submitted pursuant to the offerings will be promptly refunded with
interest as described above.
A subscriber interested in using funds in an individual retirement
account to purchase common stock must do so through a self-directed IRA account.
Millington Savings Bank IRA accounts are not self- directed accounts. To use
funds in an IRA account at Millington Savings Bank, a subscriber must make a
trustee-to-trustee transfer of the IRA funds held at Millington Savings Bank to
a trustee offering a self-directed IRA program with the agreement that the funds
will be used to purchase shares in the offering. There will be no early
withdrawal or Internal Revenue Service interest penalties for transfers. The new
trustee would hold the common stock in a self-directed account in the same
manner as we now hold the depositor's IRA funds. An annual administrative fee
may be payable to the new trustee. Subscribers interested in using funds in a
Millington Savings Bank IRA account to purchase common stock should contact the
stock information center as soon as possible so that the necessary forms may be
forwarded for execution and returned before the subscription offering ends. In
addition, federal laws and regulations require that officers, directors and 10%
stockholders who use self-directed IRA funds to purchase shares of common stock
in the subscription offering, make purchases for the exclusive benefit of IRA
accounts.
Federal regulations prohibit Millington Savings Bank from lending funds
or extending credit to any person to purchase the common stock in the offering.
Stock Information Center. Our stock information center is located at
the Bank's main office at 1902 Long Hill Road, Millington, New Jersey. The phone
number is (877) 274-2040. The stock information center's hours of operation are
generally 8:30 a.m. to 3.00 p.m., Eastern time, Monday through Friday.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed by our transfer agent to the persons
entitled thereto at the address noted on the order form, as soon as practicable
following completion of the offering. Any certificates returned as undeliverable
will be held until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for the common
stock are available and delivered to subscribers, subscribers may not be able to
sell the shares of stock for which they subscribed, even though trading of our
common stock may have commenced.
Restrictions on Repurchase of Shares
Under Office of Thrift Supervision regulations, we may not, for a
period of one year from the date of the completion of the offering, repurchase
any of our common stock from any person, except (1) in an offer made to all
stockholders to repurchase the common stock on a pro rata basis, approved by the
Office of Thrift Supervision, (2) the repurchase of qualifying shares of a
director, or (3) repurchases to fund restricted stock plans or tax-qualified
employee stock benefit plans, including the employee stock ownership plan. Where
extraordinary circumstances exist, the Office of Thrift Supervision may approve
the open market repurchase of up to 5% of our common stock during the first year
following the offering.
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To receive such approval, we must establish compelling and valid business
purposes for the repurchase to the satisfaction of the Office of Thrift
Supervision. Furthermore, repurchases of any common stock are prohibited if they
would cause Millington Savings Bank's regulatory capital to be reduced below the
amount required under the regulatory capital requirements imposed by the Office
of Thrift Supervision. If, in the future, the rules and regulations regarding
the repurchase of stock are liberalized, we may utilize the rules and
regulations then in effect.
How We Determined the $10.00 Per Share Price and the Number of Shares to Be
Issued in the Stock Offering
The plan of stock issuance requires that the purchase price of the
common stock must be based on the appraised pro forma market value of MSB
Financial Corp. and Millington Savings Bank, as determined on the basis of an
independent valuation. For its services in making this appraisal, RP Financial's
fees and out-of-pocket expenses are estimated to total approximately $47,000. We
have agreed to indemnify RP Financial and any employees of RP Financial who act
for or on behalf of RP Financial in connection with the appraisal against any
and all loss, cost, damage, claim, liability or expense of any kind, including
claims under federal and state securities laws, arising out of any misstatement,
untrue statement of a material fact or omission to state a material fact in the
information supplied by us to RP Financial, unless RP Financial is determined to
be negligent or otherwise at fault.
RP Financial made its appraisal in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
o the present and projected operating results and financial condition of MSB
Financial Corp. and Millington Savings Bank, which were prepared by
Millington Savings Bank and then adjusted by RP Financial to reflect the
estimated net proceeds of this offering, the estimated expense of our stock
benefit plans and the economic and demographic conditions in Millington
Savings Bank's existing marketing area as prepared by RP Financial;
o certain historical, financial and other information relating to Millington
Savings Bank prepared by Millington Savings Bank; and
o the impact of the stock offering on our net worth and earnings potential as
calculated by RP Financial.
The appraisal also incorporated an analysis of a peer group of
publicly-traded mutual holding companies that RP Financial considered to be
comparable to Millington Savings Bank. The peer group analysis conducted by RP
Financial included a total of 10 publicly-traded mutual holding companies with
total assets of more than $100 million and less than $600 million. The analysis
of comparable publicly- traded institutions included an evaluation of the
average and median price-to-earnings and price-to-book value ratios indicated by
the market prices of the peer companies. RP Financial applied the peer group's
pricing ratios, as adjusted to allow for differences between MSB Financial Corp.
and the peer group, to MSB Financial Corp.'s pro forma earnings and book value
to derive the estimated pro forma market value of MSB Financial Corp.
On the basis of the foregoing, RP Financial advised in its opinion,
dated September 1, 2006, that the estimated pro forma market value of MSB
Financial Corp. on a fully-converted basis ranged from a minimum of $36.1
million to a maximum of $48.9 million with a midpoint of $42.5 million. The
Board of Directors determined that 45% of the total shares of common stock to be
outstanding upon completion
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of the offering should be sold. Based on the estimated valuation and the $10.00
per share price, the total number of shares of common stock that MSB Financial
Corp. will issue, including shares issued to MSB Financial, MHC, will range from
a minimum of 3,612,500 shares to a maximum of 4,887,500 shares, with a midpoint
of 4,250,000 shares. The shares of MSB Financial Corp. stock that are not
offered for sale in the offering will be issued to MSB Financial, MHC, which
will own 55% of the total outstanding common stock upon completion of the
offering.
The estimated valuation range may be amended with the approval of the
Office of Thrift Supervision or if necessitated by subsequent developments in
the consolidated financial condition of MSB Financial Corp. or market conditions
generally. In the event the estimated valuation range is updated to amend the
value of MSB Financial Corp. on a fully-converted basis below $36.1 million,
which is the minimum of the estimated valuation range, or above $56.2 million,
which is the adjusted maximum of the estimated valuation range, a new appraisal
will be filed with the Office of Thrift Supervision.
RP Financial' valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing MSB Financial
Corp.'s shares. RP Financial did not independently verify the consolidated
financial statements and other information provided by us, nor did RP Financial
value independently our assets or liabilities. The valuation considers us as a
going concern and should not be considered as an indication of our liquidation
value. Moreover, because this valuation is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing common stock in the
offerings will thereafter be able to sell such shares at prices at or above the
purchase price or in the range of the valuation described above.
No sale of shares of common stock in the stock offering may be
completed unless RP Financial confirms that nothing of a material nature has
occurred which would cause it to conclude that the aggregate value of the common
stock to be issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of MSB Financial Corp. and Millington
Savings Bank. If this confirmation is not received, we may cancel the stock
offering, extend the offering period and establish a new estimated valuation and
offering range and/or estimated price range, extend, reopen or hold a new
offering or take any other action the Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of
the subscription offering, the total number of shares of common stock to be
issued may be increased or decreased without a resolicitation of subscribers,
provided that the product of the total number of shares issued times the
purchase price is not below the minimum or more than 15% above the maximum of
the estimated valuation range. If market or financial conditions change so as to
cause the aggregate value of the common stock to be issued to be below the
minimum of the estimated valuation range or more than 15% above the maximum of
this range, purchasers will be resolicited and be permitted to continue their
orders, in which case they will need to reconfirm their subscriptions prior to
the expiration of the resolicitation offering or their subscription funds will
be promptly refunded with interest, or be permitted to modify or rescind their
subscriptions. Any change in the estimated valuation range must be approved by
the Office of Thrift Supervision.
An increase in the number of shares of common stock to be issued as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and MSB Financial Corp.'s pro forma net
income and stockholders' equity on a per share basis while increasing pro forma
net income and stockholders' equity on an aggregate basis. A decrease in the
number of shares of common stock to be issued would increase both a subscriber's
ownership interest and MSB Financial
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Corp.'s pro forma net income and stockholders' equity on a per share basis while
decreasing pro forma net income and stockholders' equity on an aggregate basis.
Copies of the appraisal report of RP Financial, including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the Bank's
main office and the other locations specified under Where You Can Find More
Information. The appraisal report is an exhibit to the registration statement
filed with the Securities and Exchange Commission.
Plan of Distribution/Marketing Arrangements
We have engaged Keefe, Bruyette and Woods, Inc., a broker-dealer
registered with the National Association of Securities Dealers, as a financial
and marketing advisor in connection with the offering of our common stock. In
its role as financial and marketing advisor, Keefe, Bruyette and Woods, Inc.
will assist us in the offering as follows:
o consulting as to the securities marketing implications of any aspect of the
plan of stock issuance;
o reviewing with our Board of Directors the securities marketing implications
of the independent appraiser's appraisal of the common stock;
o reviewing all offering documents, including the prospectus, stock order
forms and related offering materials (we are responsible for the
preparation and filing of such documents);
o assisting in the design and implementation of a marketing strategy for the
offering;
o assisting us in scheduling and preparing for meetings with potential
investors and broker-dealers; and
o providing such other general advice and assistance we may request to
promote the successful completion of the offering.
For these services, Keefe, Bruyette and Woods, Inc. will receive a fee
of 1.0% of the aggregate dollar amount of the common stock sold in the
subscription and community offerings if the stock issuance is consummated,
excluding in each case shares purchased by the Millington Savings Bank Employee
Stock Ownership Plan and shares purchased by our directors, officers and
employees and their immediate families.
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Keefe, Bruyette and Woods, Inc. In such capacity, Keefe,
Bruyette and Woods, Inc. may form a syndicate of other broker-dealers. Neither
Keefe, Bruyette and Woods, Inc. nor any registered broker-dealer will have any
obligation to take or purchase any shares of the common stock in the syndicated
community offering; however, Keefe, Bruyette and Woods, Inc. has agreed to use
its best efforts in the sale of shares in any syndicated community offering. If
there is a syndicated community offering, Keefe, Bruyette and Woods, Inc. will
receive a management fee of 1.0% of the aggregate dollar amount of the common
stock sold in the syndicated community offering. The total fees payable to
Keefe, Bruyette and Woods, Inc. and other National Association of Securities
Dealers
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member firms in the syndicated community offering shall not exceed 5.5% of the
aggregate dollar amount of the common stock sold in the syndicated community
offering.
We also will reimburse Keefe, Bruyette and Woods, Inc. for its
reasonable out-of-pocket expenses (including legal fees and expenses) associated
with its marketing effort, up to a maximum of $65,000. If the plan of stock
issuance is terminated or if Keefe, Bruyette and Woods, Inc. terminates its
agreement with us in accordance with the provisions of the agreement, Keefe,
Bruyette and Woods, Inc. will only receive reimbursement of its reasonable
out-of-pocket expenses. We will indemnify Keefe, Bruyette and Woods, Inc.
against liabilities and expenses (including legal fees) incurred in connection
with certain claims or litigation arising out of or based upon untrue statements
or omissions contained in the offering material for the common stock, including
liabilities under the Securities Act of 1933.
Keefe, Bruyette and Woods, Inc. has not prepared any report or opinion
constituting a recommendation or advice to us or to persons who subscribe for
our common stock, nor has it prepared an opinion as to the fairness to us of the
purchase price or the terms of the common stock offered for sale. Keefe,
Bruyette and Woods, Inc. expresses no opinion as to the prices at which the
common stock, once issued, may trade.
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock. Other trained employees may
participate in the offering in ministerial capacities, providing clerical work
in effecting a sales transaction or answering questions of a ministerial nature.
Other questions of prospective purchasers will be directed to executive officers
or registered representatives of Keefe, Bruyette and Woods, Inc. We will rely on
Rule 3a4-1 of the Securities Exchange Act of 1934 so as to permit officers,
directors and employees to participate in the sale of our common stock. No
officer, director or employee will be compensated for his or her participation
by the payment of commissions or other remuneration based either directly or
indirectly on the transactions in the common stock.
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Restrictions on Transferability by Directors and Executive Officers
Shares of the common stock purchased by our directors or executive
officers cannot be sold for a period of one year following completion of the
offering, except for a disposition of shares after death. To ensure this
restriction is upheld, shares of the common stock issued to directors and
executive officers will bear a legend restricting their sale. Appropriate
instructions will be issued to the transfer agent with respect to applicable
restrictions on transfer of such stock. Any shares issued to directors and
executive officers as a stock dividend, stock split or otherwise with respect to
restricted stock will be subject to the same restriction.
For a period of three years following the offering, our directors and
executive officers and their associates may not, without the prior approval of
the Office of Thrift Supervision, purchase our common stock except from a broker
or dealer registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made by tax
qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual directors or executive officers.
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
the common stock to be issued in the offering. This registration does not cover
the resale of the shares. Shares of common stock purchased by persons who are
not affiliates of us may be resold without registration. Shares purchased by an
affiliate of us will have resale restrictions under Rule 144 of the Securities
Act. If we meet the current public information requirements of Rule 144, each
affiliate of ours who complies with the other conditions of Rule 144, including
those that require the affiliate's sale to be aggregated with those of certain
other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of 1%
of our outstanding shares or the average weekly volume of trading in the shares
during the preceding four calendar weeks. We may make future provisions to
permit affiliates to have their shares registered for sale under the Securities
Act under certain circumstances.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the offering, no depositor may transfer or
enter into an agreement or understanding to transfer any subscription rights or
the legal or beneficial ownership of the shares of common stock to be purchased
in the offering. Depositors who submit an order form will be required to certify
that their purchase of common stock is solely for their own account and there is
no agreement or understanding regarding the sale or transfer of their shares. We
intend to pursue any and all legal and equitable remedies after we become aware
of any agreement or understanding, and will not honor orders we reasonably
believe to involve an agreement or understanding regarding the sale or transfer
of shares.
Effects of the Stock Offering
General. The stock offering will not have any effect on Millington
Savings Bank's present business of accepting deposits and investing its funds in
loans and other investments permitted by law. The
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stock offering will not result in any change in the existing services provided
to depositors and borrowers, or in existing offices, management, and staff.
After the stock offering, Millington Savings Bank will continue to be subject to
regulation, supervision, and examination by the New Jersey Department of Banking
and Insurance and the Federal Deposit Insurance Corporation.
Deposits and Loans. Each holder of a deposit account in Millington
Savings Bank at the time of the stock offering will continue as an account
holder in Millington Savings Bank after the stock offering, and the stock
offering will not affect the deposit balance, interest rate or other terms. Each
deposit account will be insured by the Federal Deposit Insurance Corporation to
the same extent as before the stock offering. Depositors will continue to hold
their existing certificates, savings records, checkbooks and other evidence of
their accounts. The stock offering will not affect the loans of any borrower
from Millington Savings Bank. The amount, interest rate, maturity, security for,
and obligations under each loan will remain contractually fixed as they existed
prior to the stock offering.
Voting Rights. As a New Jersey chartered stock savings bank, all voting
rights of Millington Savings Bank are held solely by its sole stockholder, MSB
Financial Corp. All voting rights of MSB Financial Corp. are held solely by its
sole stockholder, MSB Financial, MHC. All voting rights of MSB Financial, MHC
are held by the Board of Directors of MSB Financial, MHC. After the stock
offering, the voting rights of MSB Financial Corp. will be held by its
stockholders. MSB Financial, MHC will own a majority of the outstanding common
stock of MSB Financial Corp., and thus the Board of Directors of MSB Financial,
MHC, which is comprised of the same individuals who are directors of MSB
Financial Corp., will control the affairs of MSB Financial Corp., including the
election of directors of MSB Financial Corp.
Material Federal and State Tax Consequences of the Offering. We have
received an opinion from Malizia Spidi & Fisch, PC on the material federal tax
consequences of the stock offering to MSB Financial Corp., the purchasers of its
common stock and the recipients of subscription rights to purchase such common
stock. The opinion has been filed as an exhibit to the registration statement of
which this prospectus is a part and covers those federal tax matters that are
material to the transaction. Such opinion is made in reliance upon various
statements, representations and declarations as to matters of fact made by us,
as detailed in the opinion. The opinion provides that:
o we will recognize no gain or loss upon the receipt of money in
exchange for shares of common stock; and
o no gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Depositors upon
the distribution to them of the nontransferable subscription
rights to purchase shares of common stock.
The opinion in the second bullet above is predicated on representations
from Millington Savings Bank, MSB Financial Corp. and MSB Financial, MHC that no
person shall receive any payment, whether in money or property, in lieu of the
issuance of subscription rights. The opinion in the second bullet above is also
based on the position that the subscription rights to purchase shares of common
stock received by Eligible Account Holders, Supplemental Eligible Account
Holders and Other Depositors have a fair market value of zero. In reaching their
opinion stated in the second bullet above, Malizia Spidi & Fisch, PC has noted
that the subscription rights will be granted at no cost to the recipients, will
be legally non-transferable and of short duration, and will provide the
recipients with the right only to purchase shares of common stock at the same
price to be paid by members of the general public in any community offering.
Malizia Spidi & Fisch, PC believes that it is more likely than not that the fair
market value of the subscription
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rights to purchase common stock is zero. Malizia Spidi & Fisch, PC has noted in
its opinion that they are not aware of the Internal Revenue Service claiming in
any similar transaction that subscription rights have any market value. In that
there are no judicial opinions or official Internal Revenue Service positions on
this issue, however, such position related to subscription rights comes to a
reasoned conclusion instead of an absolute conclusion on these issues. Such
conclusion of counsel is supported by a letter from RP Financial furnished to us
which states that the subscription rights do not have any value when they are
distributed or exercised. If the Internal Revenue Service disagrees with this
valuation of subscription rights and determines that such subscription rights
have value, income may be recognized by recipients of these rights, in certain
cases whether or not the rights are exercised. This income may be capital gain
or ordinary income, and MSB Financial Corp. could recognize gain on the
distribution of these rights. Based on the foregoing, Malizia Spidi & Fisch, PC
believes that it is more likely than not that the nontransferable subscription
rights to purchase our common stock have no value.
We are also subject to New Jersey income taxes and have received an
opinion from Beard Miller Company LLP that the stock offering will be treated
for New Jersey state tax purposes similar to the treatment of the stock offering
for federal tax purposes.
Unlike a private letter ruling from the IRS, the federal and state tax
opinions have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the New Jersey tax authorities. Eligible
Account Holders and Supplemental Eligible Account Holders are encouraged to
consult with their own tax advisers as to the tax consequences in the event the
subscription rights are determined to have any market value.
Interpretation, Amendment or Termination of the Plan of Stock Offering
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. To the extent permitted by law,
all interpretations by us of the plan of stock issuance will be final; however,
such interpretations have no binding effect on the Office of Thrift Supervision.
The plan of stock issuance provides that, if deemed necessary or desirable, we
may substantively amend the plan of stock issuance as a result of comments from
regulatory authorities or otherwise.
Completion of the offering requires the sale of all shares of the
common stock within ninety days following approval of the plan of stock issuance
by the Office of Thrift Supervision, unless an extension is granted by the
Office of Thrift Supervision. If this condition is not satisfied, the plan of
stock issuance will be terminated and we will continue our business. We may
terminate the plan of stock issuance at any time.
Conditions to the Offering
Completion of the offering is subject to several factors, including:
1. the receipt of all the required approvals of the Office of Thrift
Supervision for the issuance of common stock in the offering, and
2. the sale of 1,625,625 shares of common stock.
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If such conditions are not met before we complete the offering, all
funds received will be promptly returned with interest and all withdrawal
authorizations will be canceled. The stock purchases of our officers and
directors will be counted for purposes of meeting the minimum number of shares.
RESTRICTIONS ON ACQUISITION OF MSB FINANCIAL CORP.
General
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire MSB Financial Corp., Millington Savings
Bank or their respective capital stock are described below. Also discussed are
certain provisions in MSB Financial Corp.'s charter and bylaws which may be
deemed to affect the ability of a person, firm or entity to acquire MSB
Financial Corp.
Statutory and Regulatory Restrictions on Acquisition
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control
if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or of the public to
permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
For a period of three years following completion of the stock issuance,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of MSB Financial Corp. or Millington Savings Bank without Office of
Thrift Supervision approval.
Current Office of Thrift Supervision regulations permit a mutual
holding company to be acquired by a mutual institution or in a remutualization
transaction. However, the Office of Thrift Supervision has
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issued a policy statement indicating that it views remutualization transactions
as raising significant issues concerning disparate treatment of minority
stockholders and mutual members of the target entity and raising issues
concerning the effect on the mutual members of the acquiring entity. Under
certain circumstances, the Office of Thrift Supervision intends to give these
issues special scrutiny and reject applications providing for the
remutualization of a mutual holding company unless the applicant can clearly
demonstrate that the Office of Thrift Supervision's concerns are not warranted.
Charter and Bylaws of MSB Financial Corp.
The following discussion is a summary of certain provisions of the
charter and bylaws of MSB Financial Corp. that relate to corporate governance.
The description is necessarily general and qualified by reference to the charter
and bylaws.
Classified Board of Directors. The Board of Directors of MSB Financial
Corp. is required by the bylaws to be divided into three staggered classes as
equal in size as is possible, with one class elected annually by stockholders
for three-year terms. A classified Board promotes continuity and stability of
management of MSB Financial Corp., but makes it more difficult for stockholders
to change a majority of the directors because it generally takes at least two
annual elections of directors for this to occur. Directors are elected by a
plurality of votes cast, and because MSB Financial, MHC will own a majority of
the common stock, it will control the election of directors.
Limitation of Beneficial Ownership and Voting. For a period of three
years following the offering, Office of Thrift Supervision regulations generally
prohibit any person from acquiring or making an offer to acquire beneficial
ownership of more than 10% of the then-outstanding shares of MSB Financial Corp.
common stock without Office of Thrift Supervision prior approval.
Additionally, our charter includes a provision that limits the voting
rights of a single stockholder to no more than 10% of the then-outstanding
shares, including shares held by MSB Financial, MHC, for a period of five years
from the date this stock offering is completed.
Authorized but Unissued Shares of Capital Stock. Following the stock
offering, MSB Financial Corp. will have authorized but unissued shares of
preferred stock and common stock. See Description of Capital Stock. Although
these shares could be used by the Board of Directors of MSB Financial Corp. to
make it more difficult or to discourage an attempt to obtain control of MSB
Financial Corp. through a merger, tender offer, proxy contest or otherwise, it
is unlikely that we would use or need to use shares for these purposes because
MSB Financial, MHC will own a majority of the common stock.
Special Meetings of Stockholders. MSB Financial Corp.'s bylaws provide
that special meetings of stockholders may be called only by the chairman of the
Board, the president, or a majority of the Board of Directors, or upon the
written request of the holders of not less than one-tenth of all of the
outstanding stock of MSB Financial Corp.
How Shares are Voted. MSB Financial Corp.'s bylaws provide that there
will not be cumulative voting by stockholders for the election of MSB Financial
Corp.'s directors. No cumulative voting rights means that MSB Financial, MHC, as
the holder of a majority of the shares eligible to be voted at a meeting of
stockholders, may elect all directors of MSB Financial Corp. to be elected at
that meeting. This could prevent minority stockholder representation on MSB
Financial Corp.'s Board of Directors.
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Procedures for Stockholder Nominations. MSB Financial Corp.'s bylaws
provide that any stockholder wanting to make a nomination for the election of
directors or a proposal for new business at a meeting of stockholders must send
written notice to the Secretary of MSB Financial Corp. at least five days before
the date of the annual meeting. The bylaws further provide that if a stockholder
wanting to make a nomination or a proposal for new business does not follow the
prescribed procedures, the proposal will not be considered until an adjourned,
special, or annual meeting of the stockholders taking place thirty days or more
thereafter. Management believes that it is in the best interests of MSB
Financial Corp. and its stockholders to provide enough time for management to
disclose to stockholders information about a dissident slate of nominations for
directors. This advance notice requirement may also give management time to
solicit its own proxies in an attempt to defeat any dissident slate of
nominations if management thinks it is in the best interest of stockholders
generally. Similarly, adequate advance notice of stockholder proposals will give
management time to study such proposals and to determine whether to recommend to
the stockholders that such proposals be adopted.
Indemnification. MSB Financial Corp.'s bylaws provide for
indemnification of its officers, directors and employees to the fullest extent
authorized by the regulations of the Office of Thrift Supervision.
DESCRIPTION OF CAPITAL STOCK
General
MSB Financial Corp. is authorized to issue 10,000,000 shares of common
stock, par value $0.10 per share and 5,000,000 shares of serial preferred stock,
no par value. Upon completion of the stock offering, we will have between
3,612,500 shares of common stock at the minimum and 4,887,500 shares of common
stock at the maximum of the offering range outstanding (5,620,625 shares at the
adjusted maximum), including shares that will be held by MSB Financial, MHC.
Upon payment of the purchase price shares of common stock issued in the offering
will be fully paid and non-assessable. Each share of common stock will have the
same relative rights as, and will be identical in all respects with, each other
share of common stock. The common stock will represent non-withdrawable capital,
will not be an account of insurable type and will not be insured by the Federal
Deposit Insurance Corporation or any other governmental agency. The Board of
Directors can, without stockholder approval, issue additional shares of common
stock, although MSB Financial, MHC, so long as it is in existence, must own a
majority of MSB Financial Corp.'s outstanding shares of common stock.
Common Stock
Distributions. MSB Financial Corp. can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations which
are imposed by law. See Our Policy Regarding Dividends. The holders of common
stock of MSB Financial Corp. will be entitled to receive and share equally in
such dividends as may be declared by the Board of Directors of MSB Financial
Corp. out of funds legally available therefor. If MSB Financial Corp. issues
preferred stock, the holders thereof may have a priority over the holders of the
common stock with respect to dividends.
Voting Rights. The holders of common stock will possess exclusive
voting rights in MSB Financial Corp. The holder of shares of common stock will
be entitled to one vote for each share held on all matters subject to
stockholder vote and will not have any right to cumulate votes in the election
of directors.
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Liquidation Rights. In the event of any liquidation, dissolution, or
winding-up of MSB Financial Corp., the holders of the common stock generally
would be entitled to receive, after payment of all debts and liabilities of MSB
Financial Corp. (including all debts and liabilities of Millington Savings
Bank), all assets of MSB Financial Corp. available for distribution. If
preferred stock is issued, the holders thereof may have a priority over the
holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Because the holders of the common stock
do not have any preemptive rights with respect to any shares MSB Financial Corp.
may issue, the Board of Directors may sell shares of capital stock of MSB
Financial Corp. without first offering such shares to existing stockholders. The
common stock will not be subject to any redemption provisions.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of preferred stock and the qualifications, limitations and
restrictions of those shares as the Board of Directors may determine in its
discretion. Preferred stock may be issued in distinctly designated series, may
be convertible into common stock and may rank prior to the common stock as to
dividends rights, liquidation preferences, or both, and may have full or limited
voting rights. The issuance of preferred stock could adversely affect the voting
and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the stock offering and federal taxation will be
passed upon for us by Malizia Spidi & Fisch, PC, Washington, D.C. Matters
relating to state taxation will be passed upon for us by Beard Miller Company
LLP, Pine Brook, New Jersey. Certain legal matters will be passed upon for
Keefe, Bruyette & Woods, Inc. by Muldoon Murphy & Aguggia LLP, Washington, D.C.
EXPERTS
The consolidated financial statements of MSB Financial Corp. at June
30, 2006 and 2005 and for each of the years in the three year period ended June
30, 2006 have been included in this prospectus in reliance upon the report of
Beard Miller Company LLP, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
RP Financial, LC has consented to the publication in this document of a
summary of its letter to MSB Financial Corp. setting forth its conclusion as to
the estimated pro forma market value of the common stock and has also consented
to the use of its name and statements with respect to it appearing in this
document.
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CHANGE IN INDEPENDENT AUDITOR
On April 1, 2005, MSB Financial Corp.'s former independent auditor,
Radics & Co., LLC ("Radics"), merged with Beard Miller Company LLP to become the
Pine Brook, New Jersey office of Beard Miller. As a result of the merger, on
April 1, 2005, Radics resigned as independent auditors of MSB Financial Corp.
and MSB Financial Corp. engaged Beard Miller as its successor independent audit
firm. MSB Financial Corp.'s engagement of Beard Miller was approved by the Audit
Committee. The report of Radics on MSB Financial Corp.'s consolidated financial
statements as of and for the fiscal year ended June 30, 2004 did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. During the 2004 fiscal year,
and in connection with the audit of MSB Financial Corp.'s consolidated financial
statements for such period, and for the period from July 1, 2004 to April 1,
2005, there were no disagreements between MSB Financial Corp. and Radics on any
matter of accounting principles or practices, consolidated financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of Radics, would have caused Radics to make reference to such
matter in connection with its audit reports on MSB Financial Corp.'s
consolidated financial statements.
REGISTRATION REQUIREMENTS
Prior to completion of the offering, we will register our common stock
with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. We will be subject to the information, proxy solicitation, insider
trading restrictions, tender offer rules, periodic reporting and other
requirements of the SEC under the Securities Exchange Act of 1934. We will not
deregister the common stock under the Securities Exchange Act of 1934 for a
period of at least three years following the stock offering.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. The statements contained in this document as to the contents of any
contract or other document filed as an exhibit to the Form S-1 are, of
necessity, brief descriptions. The registration statement and exhibits can be
examined without charge at the public reference facilities of the SEC located at
100 F Street, N.E., Washington, D.C. You may obtain information on the operation
of the Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants, including MSB Financial Corp., that file
electronically with the SEC. The address for this web site is
http://www.sec.gov.
We have filed an application for approval of the stock issuance with
the Office of Thrift Supervision. This prospectus omits certain information
contained in that application. That information can be examined without charge
at the public reference facilities of the Office of Thrift Supervision located
at 1700 G Street, N.W., Washington, D.C. 20552.
A copy of our charter and bylaws, filed as exhibits to the registration
statement as well as those of Millington Savings Bank and MSB Financial, MHC,
are available without charge from MSB Financial Corp. Copies of the plan of
stock issuance are also available without charge.
105
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm..................... F-1
Consolidated Statements of Financial Condition
as of June 30, 2006 and 2005 ...................................... F-2
Consolidated Statements of Income
for the Years Ended June 30, 2006, 2005 and 2004................... F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended June 30, 2006, 2005 and 2004................... F-4
Consolidated Statements of Cash Flows
for the Years Ended June 30, 2006, 2005 and 2004................... F-5
Notes to Consolidated Financial Statements.................................. F-7
All schedules are omitted as the required information either is not
applicable or is included in the consolidated financial statements or related
notes.
106
[LOGO BMC]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder
MSB Financial Corp. and Subsidiaries
Millington, New Jersey
We have audited the accompanying consolidated statements of financial
condition of MSB Financial Corp. and subsidiaries (the "Company") as of June 30,
2006 and 2005, and the related consolidated statements of income, changes in
stockholder's equity, and cash flows for each of the years in the three-year
period ended June 30, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial position of
MSB Financial Corp. and subsidiaries as of June 30, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 2006, in conformity with
accounting principles generally accepted in the United States of America.
/s/Beard Miller Company LLP
Beard Miller Company LLP
Pine Brook, New Jersey
August 8, 2006
F-1
MSB FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
------------------------------------
2006 2005
--------------- ---------------
(Dollars in Thousands, except Per
Share Amounts)
ASSETS
Cash and due from banks $ 1,779 $ 2,140
Interest-earning demand deposits with banks 4,102 3,526
--------------- ---------------
Cash and Cash Equivalents 5,881 5,666
Trading securities 109 82
Securities held to maturity (fair value of $26,821 and $28,095, respectively) 27,707 28,292
Loans receivable, net of allowance for loan losses of $921 and $874, respectively 218,321 187,192
Investment in real estate 97 825
Premises and equipment 8,899 8,438
Federal Home Loan Bank of New York stock, at cost 2,821 1,503
Bank owned life insurance 4,004 3,842
Accrued interest receivable 1,350 1,088
Deferred income taxes 752 676
Other assets 243 265
--------------- ---------------
Total Assets $270,184 $237,869
=============== ===============
LIABILITIES AND RETAINED EARNINGS
LIABILITIES
Deposits:
Non-interest bearing $ 9,135 $ 8,421
Interest bearing 185,620 188,510
--------------- ---------------
Total Deposits 194,755 196,931
Advances from Federal Home Loan Bank of New York 54,181 21,195
Advance payments by borrowers for taxes and insurance 529 470
Other liabilities 1,228 1,184
--------------- ---------------
Total Liabilities 250,693 219,780
--------------- ---------------
COMMITMENTS AND CONTINGENCIES - -
--------------- ---------------
STOCKHOLDER'S EQUITY
Common stock, par value $0.10; 10,000,000 shares authorized; 10,000 shares issued 1 1
and outstanding
Paid-in capital 199 199
Retained earnings 19,291 17,889
--------------- ---------------
Total Stockholder's Equity 19,491 18,089
--------------- ---------------
Total Liabilities and Stockholder's Equity $270,184 $237,869
=============== ===============
See notes to consolidated financial statements.
------------------------------------------------------------------------------------------------------------------------------------
F-2
MSB FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30,
------------------------------------------------------
2006 2005 2004
---------------- ---------------- ---------------
(In Thousands, Except Per Share Amounts)
INTEREST INCOME
Loans receivable, including fees $12,773 $10,457 $ 8,967
Securities held to maturity 1,177 1,215 1,736
Other 167 82 66
---------------- ---------------- ---------------
Total Interest Income 14,117 11,754 10,769
---------------- ---------------- ---------------
INTEREST EXPENSE
Deposits 4,995 3,963 3,808
Borrowings 1,666 423 48
---------------- ---------------- ---------------
Total Interest Expense 6,661 4,386 3,856
---------------- ---------------- ---------------
Net Interest Income 7,456 7,368 6,913
PROVISION FOR LOAN LOSSES 60 135 134
---------------- ---------------- ---------------
Net Interest Income after Provision for Loan Losses 7,396 7,233 6,779
---------------- ---------------- ---------------
NON-INTEREST INCOME
Fees and service charges 338 322 335
Income from Bank Owned Life Insurance 162 156 56
Unrealized gain on trading securities 27 14 5
Income from investment in real estate - 52 51
Other 76 85 70
---------------- ---------------- ---------------
Total Non-Interest Income 603 629 517
---------------- ---------------- ---------------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,790 2,493 2,201
Directors compensation 307 280 255
Occupancy and equipment 961 970 849
Service bureau fees 502 496 446
Advertising 235 232 213
Loss from investment in real estate 120 - -
Other 848 961 936
---------------- ---------------- ---------------
Total Non-Interest Expenses 5,763 5,432 4,900
---------------- ---------------- ---------------
Income before Income Taxes 2,236 2,430 2,396
INCOME TAXES 834 919 948
---------------- ---------------- ---------------
Net Income $ 1,402 $ 1,511 $ 1,448
================ ================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, BASIC 10 10 10
AND DILUTED
================ ================ ===============
EARNINGS PER SHARE - BASIC AND DILUTED $140.20 $151.10 $144.80
================ ================ ===============
See notes to consolidated financial statements.
------------------------------------------------------------------------------------------------------------------------------------
F-3
MSB FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Total
Common Paid-In Retained Stockholder's
Stock Capital Earnings Equity
--------------- ---------------- ---------------- ---------------
(In Thousands)
BALANCE - JUNE 30, 2003 $ - $ - $15,230 $15,230
Issuance of common stock to MSB Financial,
MHC 1 199 - 200
Initial funding of MSB Financial, MHC - - (300) (300)
Net income - - 1,448 1,448
--------------- ---------------- ---------------- ---------------
BALANCE - JUNE 30, 2004 1 199 16,378 16,578
Net income - - 1,511 1,511
--------------- ---------------- ---------------- ---------------
BALANCE - JUNE 30, 2005 1 199 17,889 18,089
Net income - - 1,402 1,402
--------------- ---------------- ---------------- ---------------
BALANCE - JUNE 30, 2006 $ 1 $199 $19,291 $19,491
=============== ================ ================ ===============
See notes to consolidated financial statements.
------------------------------------------------------------------------------------------------------------------------------------
F-4
MSB FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
------------------------------------------------------
2006 2005 2004
---------------- ---------------- ---------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,402 $ 1,511 $ 1,448
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization (accretion) of securities premiums and
discounts 1 2 2
Net amortization of loan fees (122) (145) (163)
Depreciation and amortization expense 505 488 439
Provision for loan losses 60 135 134
Earnings on bank owned life insurance (162) (156) (56)
Unrealized gain on trading securities (27) (14) (5)
Realized loss on sale of investment in real estate 110 - -
(Increase) in accrued interest receivable (262) (115) (35)
Deferred income taxes (76) (120) (84)
(Increase) decrease in other assets 22 (107) 35
Increase in other liabilities 118 360 45
Increase (decrease) in interest payable (74) (47) 9
---------------- ---------------- ---------------
Net Cash Provided by Operating Activities 1,495 1,792 1,769
---------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES Activity in held to maturity securities:
Purchases - - (16,994)
Maturities, calls and principal repayments 584 3,221 23,083
Net increase in loans receivable (31,067) (18,568) (30,089)
Proceeds from sale of investment in real estate 558 - -
Purchase of bank owned life insurance - - (3,500)
Purchase of bank premises and equipment (906) (4,532) (1,364)
Purchase of Federal Home Loan Bank of New York stock (3,594) (211) (55)
Redemptions of Federal Home Loan Bank of New York stock 2,276 - -
---------------- ---------------- ---------------
Net Cash Used in Investing Activities (32,149) (20,090) (28,919)
---------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (2,176) 6,431 10,158
Net increase in short-term borrowings 33,750 250 7,500
Proceeds from long-term debt - 14,000 -
Repayments of long-term debt (764) (555) -
Increase in advance payments by borrowers for taxes and insurance 59 38 54
Initial capitalization of mutual holding company - - (300)
Sale of capital stock to mutual holding company - - 200
---------------- ---------------- ---------------
Net Cash Provided by Financing Activities 30,869 20,164 17,612
---------------- ---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 215 1,866 (9,538)
CASH AND CASH EQUIVALENTS - BEGINNING 5,666 3,800 13,338
---------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS - ENDING $ 5,881 $ 5,666 $ 3,800
================ ================ ===============
See notes to consolidated financial statements.
------------------------------------------------------------------------------------------------------------------------------------
F-5
MSB FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
------------------------------------------------------
2006 2005 2004
---------------- ---------------- ---------------
(In Thousands)
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid $ 6,735 $ 4,433 $ 3,847
================ ================ ===============
Income taxes paid $ 967 $ 1,015 $ 1,098
================ ================ ===============
Transfer of premises and equipment to investment in real estate $ - $ 711 $ -
================ ================ ===============
See notes to consolidated financial statements.
------------------------------------------------------------------------------------------------------------------------------------
F-6
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
On February 11, 2004, the Board of Directors of Millington Savings Bank ("MSB"
or the Savings Bank) adopted a Plan of Reorganization from a State Mutual
Savings Bank to a State Mutual Savings Bank Holding Company (the "Plan").
Pursuant to the Plan, the MSB reorganized as follows:
(i) The MSB organized MSB Financial, MHC ("MHC"), a Mutual Holding
Company;
(ii) The MHC organized MSB Financial Corp. ("SHC" or the Company), a stock
holding company, as a wholly-owned subsidiary;
(iii) The MHC organized an interim stock savings bank ("Interim") as a
wholly-owned subsidiary; and
(iv) The MSB exchanged its charter for a stock savings bank charter and
became a stock savings bank (the "Savings Bank") with MSB's
depositors receiving an interest in a liquidation account established
in the Savings Bank and constructively receiving shares of stock in
the Savings Bank for their equity interest (i.e., voting and
liquidation rights) in MSB (the "Bank Conversion"). At the same time,
Interim merged with and into the Savings bank. As part of the Plan,
the Savings Bank's ownership interest in MHC was cancelled and all of
the initially issued stock of the Savings Bank constructively held by
the Savings Bank stockholders was transferred to MHC in exchange for
membership interests in MHC. At the conclusion of these steps, the
former members (i.e., the depositors) of MSB owned all of MHC by
virtue of their membership interests in MHC, MHC owned all the
outstanding stock of SHC, and SHC owned all of the outstanding stock
of the Savings Bank.
The Plan was approved by the Commissioner of the New Jersey Department of
Banking and the Office of Thrift Supervision. Additionally, a letter of
non-objection was received from the Federal Deposit Insurance Corporation.
A special meeting of depositors of the MSB ("Special Meeting") to approve the
Plan was held in accordance with New Jersey banking laws.
Following the completion of the Reorganization on February 11, 2004, all
depositors who had membership or liquidation rights with respect to the Savings
Bank continue to have such rights solely with respect to the MHC as long as they
continue to hold deposit accounts with the Savings Bank.
Although SHC is authorized to issue stock to persons other than MHC, SHC has not
issued stock to such persons. As of June 30, 2006, the MHC remains the owner of
100% of the issued and outstanding shares of the Company. Should stock be issued
to persons other than MHC in the future, the SHC will always be a majority-owned
subsidiary of MHC as long as MHC is in existence. See Note 17 for information
regarding the stock issuance plan approved by the Board of Directors on July 17,
2006.
SHC and MHC are authorized to exercise all rights and powers authorized to a
corporation, a bank holding company and a New Jersey State mutual savings and
loan holding company, respectively, subject to restrictions applicable to bank
holding companies and savings bank holding companies under federal and New
Jersey law. Currently, the only business activity of MHC is to hold all of the
outstanding stock of SHC and the only business activity of SHC is to hold all of
the outstanding stock of the Savings Bank.
The primary business of the SHC is the ownership and operation of the Savings
Bank. The Savings Bank is principally engaged in the business of attracting
deposits from the general public and using these deposits, together with other
funds, to purchase securities and to make loans secured by real estate.
--------------------------------------------------------------------------------
F-7
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidated Financial Statement Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the Savings Bank and Millington Savings
Service Corp. (the "Service Corp."). All significant intercompany accounts
and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the consolidated statements of
financial condition and revenues and expenses for the periods then ended.
Actual results could differ significantly from those estimates.
A material estimate that is particularly susceptible to significant changes
relates to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans, future additions
to the allowance for loan losses may be necessary based on changes in
economic conditions in the Savings Bank's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Savings Bank's allowance for
loan losses. Such agencies may require the Savings Bank to recognize
additions to the allowance for loan losses based on their judgments about
information available to them at the time of their examination.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and interest-bearing deposits with original maturities of
three months or less.
Securities
Investments in debt securities that the Savings Bank has the positive
intent and ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with
unrealized holding gains and losses included in earnings. Debt and equity
securities not classified as trading securities nor as held-to-maturity
securities are classified as available for sale securities and reported at
fair value, with unrealized holding gains or losses, net of applicable
income taxes, reported in a separate component of stockholder's equity.
Individual securities are considered impaired when fair value is less than
amortized cost. Management evaluates on a monthly basis whether any
securities are other-than-temporarily impaired. In making this
determination, we consider the extent and duration of the impairment, the
nature and financial health of the issuer, other factors relevant to
specific securities, and our ability and intent to hold securities for a
period of time sufficient to allow for any anticipated recovery in market
value. If a security is determined to be other-than-temporarily impaired,
an impairment loss is charged to operations.
Discounts and premiums on securities are accreted/amortized to maturity by
use of the level-yield method. Gain or loss on sales of securities is based
on the specific identification method.
--------------------------------------------------------------------------------
F-8
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Risk
The Savings Bank's lending activities are concentrated in loans secured by
real estate located primarily in the State of New Jersey.
Loans Receivable
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses and deferred loan fees. Loan origination fees and certain
direct loan origination costs are deferred and accreted/amortized as an
adjustment of yield over the contractual lives of the related loans.
The Savings Bank provides an allowance for uncollected interest on loans
that are contractually delinquent ninety days or more. The allowance is
established by a charge to interest income equal to all interest previously
accrued. Income is subsequently recognized only to the extent that cash
payments are received until such collections result in the reduction of the
loan's delinquent status to under ninety days, at which time the loan is
returned to accrual status.
Allowance for Loan Losses
An allowance for loan losses is maintained at a level that represents
management's best estimate of losses known and inherent in the loan
portfolio that are both probable and estimable. The allowance for loan
losses is established through a provision for loan losses charged to
operations. The allowance is reduced by loans charged off and increased by
recoveries, if any, of amounts previously charged off. Management of the
Savings Bank, in determining the allowance for loan losses, considers the
risks inherent in its loan portfolio and changes in the nature and volume
of its loan activities, along with the general economic and real estate
market conditions. The Savings Bank utilizes a two tier approach: (1)
identification of impaired loans and establishment of specific loss
allowances on such loans; and (2) establishment of general valuation
allowances on the remainder of its loan portfolio. The Savings Bank
maintains a loan review system which allows for a periodic review of its
loan portfolio and the early identification of potential impaired loans.
Such system takes into consideration, among other things, delinquency
status, size of loans, type of collateral and financial condition of the
borrowers. Specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of the
underlying collateral. General loan loss allowances are based upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions
and management's judgment. Although management believes that adequate
specific and general loan loss allowances are established, actual losses
are dependent upon future events and, as such, further additions to the
level of the loan loss allowance may be necessary.
A loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that the Savings Bank will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. All loans identified as impaired are evaluated
independently. The Savings Bank does not aggregate such loans for
evaluation purposes. Payments received on impaired loans are applied first
to accrued interest receivable and then to principal.
Investment in Real Estate
Investment in real estate consists of real property originally acquired for
banking operations and subsequently used as rental property. Net income
from operations is recorded in operations as earned. Depreciation charges
are computed on the straight line method over the estimated useful life of
the property.
--------------------------------------------------------------------------------
F-9
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premises and Equipment
Premises and equipment are comprised of land, at cost, and buildings,
building improvements, furnishings and equipment and leasehold
improvements, at cost, less accumulated depreciation and amortization.
Depreciation and amortization charges are computed on the straight-line
method over the following estimated useful lives:
Years
---------------------
Building and improvements 5 - 50
Furnishings and equipment 3 - 15
Leasehold improvements Shorter of useful
life or term of lease
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to operations in the
year incurred. Rental income is netted against occupancy costs in the
consolidated statements of income.
Bank Owned Life Insurance
Bank owned life insurance is carried at net cash surrender value. The
change in the net asset value is recorded as a component of non-interest
income.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return with the MHC. Federal income taxes are allocated based on the
contribution of their respective income or loss to the consolidated income
tax return. Separate state income tax returns are filed.
Federal and state income taxes have been provided on the basis of reported
income. The amounts reflected on the income tax returns differ from these
provisions due principally to temporary differences in the reporting of
certain items of income and expense for financial reporting and income tax
reporting purposes. Deferred income taxes are recorded to recognize such
temporary differences.
Off-Balance Sheet Credit-Related Financial Instruments
In the ordinary course of business, we enter into commitments to extend
credit, including commitments under lines of credit. Such financial
instruments are recorded when they are funded.
Business and Interest Rate Risk
The Company's primary business is the ownership and operation of the
Savings Bank. The Savings Bank is principally engaged in the business of
attracting deposits from the general public and using these deposits,
together with other funds, to purchase securities and to make loans secured
by real estate. The potential for interest-rate risk exists as a result of
the generally shorter duration of the Savings Bank's interest-sensitive
liabilities compared to the generally longer duration of its
interest-sensitive assets. In a rising rate environment, liabilities will
reprice faster than assets, thereby reducing net interest income. For this
reason, management regularly monitors the maturity structure of the Savings
Bank's assets and liabilities in order to measure its level of
interest-rate risk and to plan for future volatility. The primary business
of the Service Corp. is the ownership and operation of a single commercial
rental property.
--------------------------------------------------------------------------------
F-10
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassification
Certain amounts for the years ended June 30, 2005 and 2004 have been
reclassified to conform to the current year's presentation.
NOTE 3 - SECURITIES HELD TO MATURITY
The amortized cost of securities held to maturity and their approximate fair
values are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- ---------------- ---------------
(In Thousands)
June 30, 2006:
U.S. Government agencies $24,127 $ - $854 $23,273
Mortgage-backed securities 3,580 32 64 3,548
--------------- ---------------- ---------------- ---------------
$27,707 $32 $918 $26,821
=============== ================ ================ ===============
June 30, 2005:
U.S. Government agencies $24,133 $ 1 $288 $23,846
Mortgage-backed securities 4,159 92 2 4,249
--------------- ---------------- ---------------- ---------------
$28,292 $ 93 $290 $28,095
=============== ================ ================ ===============
All mortgage-backed securities at June 30, 2006 and 2005 have been issued by
FNMA, FHLMC or GNMA.
The amortized cost and estimated fair value of securities held to maturity at
June 30, 2006, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---------------- ---------------
(In Thousands)
U.S. Government agencies:
Due within one year $ 2,000 $ 1,966
Due after one year through five years 13,000 12,483
Due after five years through ten years 4,000 3,943
Due thereafter 5,127 4,881
---------------- ---------------
24,127 23,273
Mortgage-backed securities 3,580 3,548
---------------- ---------------
$27,707 $26,821
================ ===============
--------------------------------------------------------------------------------
F-11
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SECURITIES HELD TO MATURITY (CONTINUED)
There were no sales of securities held to maturity during the years ended June
30, 2006, 2005 and 2004. At June 30, 2006 and 2005, securities held to maturity
with a carrying value of approximately $481,000 and $488,000, respectively, were
pledged to secure public funds on deposit.
The following table shows the gross unrealized losses and fair value of
securities in an unrealized loss position, and the length of time that such
securities have been in a continuous unrealized loss position:
Less than 12 Months More than 12 Months Total
------------------------------ ------------------------------ -----------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------------- -------------- -------------- -------------- -------------- --------------
(In Thousands)
June 30, 2006:
U.S. Government
agencies $1,044 $ 47 $22,192 $807 $23,236 $854
Mortgage-backed
securities 1,113 63 80 1 1,193 64
-------------- -------------- -------------- -------------- -------------- --------------
$2,157 $110 $22,272 $808 $24,429 $918
============== ============== ============== ============== ============== ==============
June 30, 2005:
U.S. Government
agencies $ - $ - $22,712 $288 $22,712 $288
Mortgage-backed
securities 214 1 58 1 272 2
-------------- -------------- -------------- -------------- -------------- --------------
$ 214 $ 1 $22,770 $289 $22,984 $290
============== ============== ============== ============== ============== ==============
At June 30, 2006, management concluded that the unrealized losses above (which
related to thirteen U.S. Government Agency bonds and five Fannie Mae or Freddie
Mac mortgage-backed securities) are temporary in nature since they are not
related to the underlying credit quality of the issuers and the Company has the
ability and intent to hold these securities for a time necessary to recover
their cost. The losses above are primarily related to market interest rates.
--------------------------------------------------------------------------------
F-12
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS RECEIVABLE
The composition of loans receivable at June 30, 2006 and 2005 is as follows:
2006 2005
---------------- ---------------
(In Thousands)
Real estate mortgage:
One-to-four family $120,921 $113,488
Commercial 23,587 17,971
---------------- ---------------
144,508 131,459
---------------- ---------------
Real estate construction 23,276 18,398
---------------- ---------------
Consumer:
Deposit account 1,167 1,156
Equity 49,257 38,291
Automobile 464 418
Personal 77 94
Overdraft protection 153 151
---------------- ---------------
51,118 40,110
---------------- ---------------
Commercial 5,497 4,029
---------------- ---------------
Total Loans 224,399 193,996
Loans in process (4,968) (5,719)
Allowance for loan losses (921) (874)
Deferred loan fees (189) (211)
---------------- ---------------
$218,321 $187,192
================ ===============
At June 30, 2006, 2005 and 2004, loans serviced by the Savings Bank for the
benefit of others totaled approximately $535,000, $560,000 and $583,000,
respectively.
The following table presents changes in the allowance for loan losses for the
years ended June 30, 2006, 2005 and 2004:
2006 2005 2004
---------------- ---------------- ---------------
(In Thousands)
Balance, beginning $874 $742 $651
Provision charged to operations 60 135 134
Loans charged off (17) (3) (45)
Recoveries of loans previously charged off 4 - 2
---------------- ---------------- ---------------
Balance, ending $921 $874 $742
================ ================ ===============
--------------------------------------------------------------------------------
F-13
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS RECEIVABLE (CONTINUED)
At and during the years ended June 30, 2006 and 2005, the Savings Bank had no
loans that are considered to be impaired. Loans on which the accrual of interest
has been discontinued amounted to $424,000 and $2,328,000 at June 30, 2006 and
2005, respectively. During the years ended June 30, 2006, 2005, and 2004
$35,000, $104,000, and $78,000 respectively, in interest was collected and
recognized on these loans. During the years ended June 30, 2006, 2005, and 2004
had all such loans been performing in accordance with their original terms,
interest income of $34,000, $155,000, and $118,000, respectively, would have
been recognized. The Savings Bank is not committed to lend additional funds on
these non-accrual loans.
NOTE 5 - PREMISES AND EQUIPMENT
The components of premises and equipment at June 30, 2006 and 2005 are as
follows:
2006 2005
---------------- ---------------
(In Thousands)
Land $ 671 $ 671
Buildings and improvements 3,166 3,119
Leasehold improvements 1,241 1,241
Furnishings and equipment 2,031 1,918
Leasehold improvements/construction in process 4,680 3,934
---------------- ---------------
11,789 10,883
Accumulated depreciation and amortization (2,890) (2,445)
---------------- ---------------
$ 8,899 $ 8,438
================ ===============
Depreciation and amortization expense on premises and equipment totaled
$445,000, $469,000, and $418,000 during the years ended June 30, 2006, 2005, and
2004, respectively.
NOTE 6 - ACCRUED INTEREST RECEIVABLE
The components of interest receivable at June 30, 2006 and 2005 are as follows:
2006 2005
---------------- ---------------
(In Thousands)
Loans $1,047 $ 791
Securities held to maturity 303 297
---------------- ---------------
$1,350 $1,088
================ ===============
--------------------------------------------------------------------------------
F-14
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEPOSITS
Deposits at June 30, 2006 and 2005 consist of the following major
classifications:
2006 2005
--------------------------------- ---------------------------------
Average Average
Amount Rate Amount Rate
--------------- ------------- --------------- -------------
(Dollars in Thousands)
Non-interest bearing demand $ 9,135 - % $ 8,421 - %
NOW 26,968 0.95 30,325 0.88
Super NOW 1,339 1.00 2,376 1.00
Savings and club 42,696 1.49 48,916 1.22
Money market demand 2,589 1.15 3,057 1.15
Certificates of deposit 112,028 4.15 103,836 3.30
--------------- ---------------
$194,755 2.87 % $196,931 2.21 %
=============== ===============
A summary of certificates of deposit by maturity at June 30, 2006 is as follows
(in thousands):
Year ended June 30:
2007 $ 76,463
2008 19,382
2009 3,784
2010 1,729
2011 666
Thereafter 10,004
----------------
$112,028
================
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $37,208,000 and $32,323,000 at June 30, 2006 and 2005,
respectively. Generally, deposits in excess of $100,000 are not insured by the
FDIC.
A summary of interest expense for the years ended June 30, 2006, 2005 and 2004
is as follows:
2006 2005 2004
---------------- ---------------- ---------------
(In Thousands)
Demand $ 329 $ 334 $ 319
Savings and club 568 604 597
Certificates of deposit 4,098 3,025 2,892
---------------- ---------------- ---------------
$4,995 $3,963 $3,808
================ ================ ===============
--------------------------------------------------------------------------------
F-15
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
The Savings Bank has various credit facilities with the Federal Home Loan Bank,
which expire on July 31, 2006, and provide borrowings up to $56,163,000.
Short-term borrowings against this facility totaled $41,500,000 and $7,750,000
as of June 30, 2006 and 2005, respectively. The interest rate on short-term
borrowings at June 30, 2006 and 2005 was 5.42% and 3.49%, respectively.
Long-term debt due to the Federal Home Loan Bank at June 30, 2006 and 2005,
consisted of the following:
Fixed
Interest
Maturity Rate 2006 2005
------------------------------------------------------------------- ------------ ---------------- ---------------
(In Thousands)
August 11, 2009 3.60 % $ 2,681 $ 3,445
December 30, 2009 4.25 5,000 5,000
June 1, 2010 4.28 5,000 5,000
---------------- ---------------
4.12 % $12,681 $13,445
================ ===============
The advances are secured by a blanket assignment of unpledged and qualifying
mortgage loans.
NOTE 9 - LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Savings Bank leases two branch locations under long-term operating leases.
Future minimum lease payments by year and in the aggregate, under noncancellable
operating leases with initial or remaining terms of one year or more, consisted
of the following at June 30, 2006 (in thousands):
2007 $ 237
2008 237
2009 237
2010 237
2011 237
Thereafter 566
----------------
$1,751
================
The minimum payments have not been reduced by minimum sublease rentals of
$579,000 due in the future under noncancellable subleases.
The total rental expense for all leases for the years ended June 30, 2006, 2005,
and 2004 was approximately $242,000, $237,000, and $192,000 respectively.
--------------------------------------------------------------------------------
F-16
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES
The income tax provision consists of the following for the years ended June 30,
2006, 2005 and 2004:
2006 2005 2004
---------------- ---------------- ---------------
(In Thousands)
Current:
Federal $701 $ 805 $ 799
State 209 233 233
---------------- ---------------- ---------------
910 1,038 1,032
---------------- ---------------- ---------------
Deferred:
Federal (57) (93) (65)
State (19) (26) (19)
---------------- ---------------- ---------------
(76) (119) (84)
---------------- ---------------- ---------------
$834 $ 919 $ 948
================ ================ ===============
A reconciliation of the statutory federal income tax at a rate of 34% to the
income tax expense included in the statements of income at June 30, 2006, 2005
and 2004 is as follows:
2006 2005 2004
------------------------- ------------------------- -------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------------ ----------- ------------ ----------- ------------- -----------
(Dollars in Thousands)
Federal income tax at statutory rate $760 34.0 % $826 34.0 % $815 34.0 %
State tax, net of federal benefit 125 5.6 137 5.6 141 5.9
Other (51) (2.3) (44) (1.8) (8) (0.3)
------------ ----------- ------------ ----------- ------------- -----------
$834 37.3 % $919 37.8 % $948 39.6 %
============ =========== ============ =========== ============= ===========
--------------------------------------------------------------------------------
F-17
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (CONTINUED)
The components of the net deferred tax asset at June 30, 2006 and 2005 are as
follows:
2006 2005
---------------- ---------------
(In Thousands)
Deferred tax assets:
Depreciation $ 39 $ 26
Allowance for loan losses 368 349
Uncollected interest 7 45
Benefit plans 326 251
Debit card loss 12 5
---------------- ---------------
752 676
Deferred tax liabilities - -
---------------- ---------------
Net Deferred Tax Asset $752 $676
================ ===============
Retained earnings include $1,466,000 at June 30, 2006 and 2005, for which no
provision for income tax has been made. These amounts represent deductions for
bad debt reserves for tax purposes which were only allowed to savings
institutions which met certain definitional tests prescribed by the Internal
Revenue Code of 1986, as amended. The Small Business Job Protection Act of 1996
eliminated the special bad debt deduction granted solely to thrifts. Under the
terms of the Act, there would be no recapture of the pre-1988 (base year)
reserves. However, these pre-1988 reserves would be subject to recapture under
the rules of the Internal Revenue Code if the Savings Bank itself pays a cash
dividend in excess of earnings and profits, or liquidates. The Act also provides
for the recapture of deductions arising from "applicable excess reserve" defined
as the total amount of reserve over the base year reserve. The Savings Bank's
total reserve exceeds the base year reserve and deferred taxes have been
provided for this excess.
--------------------------------------------------------------------------------
F-18
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - BENEFIT PLANS
Directors' Retirement Plan
The Savings Bank has a directors' retirement plan, which provides that any
director meeting specified age and service requirements may retire and
continue to be paid. This plan is unfunded.
The following table sets forth the plan's funded status and activity for
the years ended June 30, 2006 and 2005:
2006 2005
---------------- ---------------
(Dollars In Thousands)
Actuarial present value of benefit obligations $563 $525
================ ===============
Projected benefit obligation - beginning $600 $468
Service cost 21 16
Interest cost 36 31
Actuarial loss 1 11
Annuity payment (24) (24)
Plan amendment - 98
---------------- ---------------
Projected benefit obligation - ending $634 $600
================ ===============
Plan assets at fair value - beginning $ - $ -
Employer contribution 24 24
Settlements/payments (24) (24)
---------------- ---------------
Plan assets at fair value - ending $ - $ -
================ ===============
Projected benefit obligation in excess of fair value $634 $600
Unrecognized loss 2 2
Unrecognized past service liability (86) (133)
Amount contributed in the fourth quarter (6) (6)
---------------- ---------------
Accrued pension cost included in other liabilities $544 $463
================ ===============
Assumptions:
Discount rate 6.25% 6.13%
Fee increase 3.25% 3.25%
--------------------------------------------------------------------------------
F-19
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - BENEFIT PLANS (CONTINUED)
Directors' Retirement Plan (Continued)
Net periodic pension cost for the years ended June 30, 2006 and 2005 included
the following:
2006 2005 2004
------------- ------------- ------------
(Dollars In Thousands)
Service cost $ 21 $16 $13
Interest cost 36 31 28
Amortization of unrecognized past service liability 47 40 36
------------- ------------- ------------
Net periodic plan cost $104 $87 $77
============= ============= ============
Assumptions:
Discount rate 6.13% 6.13% 6.25%
Fee increase 3.25% 3.25% N/A
The Savings Bank's contribution and benefits paid amounted to $24,000 for the
years ended June 30, 2006 and 2005.
For the year ended June 30, 2007, the Savings Bank's expects to contribute
$27,000 to the plan.
Estimated future benefit payments for years ending June 30, which reflect
expected future service, as appropriate, are as follows (in thousands):
2007 $ 27
2008 36
2009 47
2010 45
2011 62
2012 - 2016 408
Executive Incentive Retirement Plan
The Savings Bank has an unfunded, non-qualified executive incentive
retirement plan covering all eligible executives. The plan provides for
either a lump sum payment or equal annual installments for a period of 15
years commencing on the first day of the calendar month following the
termination of employment due to retirement, resignation, disability or
death. The amount payable is based on the vested balance of the executive's
accumulated awards plus interest. The annual awards are based upon the
executive's base salary in effect at the beginning of the plan year and the
Savings Bank's net income for the prior fiscal year. The percentage vested
is based on the sum of the executive's age and years of service. The plan
expense for the year ended June 30, 2006, 2005, and 2004 was approximately
$103,000, $63,000 and $29,000, respectively. The unfunded liability totaled
approximately $195,000 and $92,000 at June 30, 2006 and 2005, respectively.
--------------------------------------------------------------------------------
F-20
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - BENEFIT PLANS (CONTINUED)
401(k) Savings and Profit Sharing Plan
The Savings Bank sponsors a savings and profit sharing plan, pursuant to Section
401(k) of the Internal Revenue Code, for all eligible employees. The plan has a
profit sharing component paid annually by the Savings Bank of 11% of each
eligible employee's compensation. Employees may also elect to defer up to 80% of
their compensation, not to exceed applicable limits under federal tax law. The
Savings Bank will match 50% of the first 6% of the employee's salary deferral up
to a maximum of 3% of each employee's compensation. The Plan expense amounted to
approximately $220,000, $185,000 and $188,000 for the years ended June 30, 2006,
2005, and 2004, respectively.
NOTE 12 - TRANSACTIONS WITH OFFICERS AND DIRECTORS
The Savings Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with its officers, directors,
their immediate families, and affiliated companies (commonly referred to as
related parties), on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others. These
persons were indebted to the Savings Bank for loans totaling $5,427,000 and
$4,427,000 at June 30, 2006 and 2005, respectively. During 2006, $2,080,000 of
new loans and $1,080,000 of repayments were made.
NOTE 13 - REGULATORY CAPITAL
The Savings Bank is subject to various regulatory capital requirements
administered by Federal and State banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of tangible, core and risk-based capital as defined in the
regulations. Management believes, as of June 30, 2006 and 2005, that the Savings
Bank met all capital adequacy requirements to which it is subject.
As of January 18, 2006, the most recent notification from the regulators
categorized the Savings Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Savings
Bank must maintain minimum core, Tier 1 risk-based and total risk-based ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
--------------------------------------------------------------------------------
F-21
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - REGULATORY CAPITAL (CONTINUED)
The following tables present a reconciliation of capital per accounting
principles generally accepted in the United States of America ("GAAP") and
regulatory capital and information as to the Savings Bank's capital levels at
the dates presented:
June 30,
-----------------------------------
2006 2005
---------------- ---------------
(In Thousands)
GAAP capital $19,292 $17,890
Investment in subsidiary (180) (181)
---------------- ---------------
Core and tangible capital 19,112 17,709
General valuation allowance 921 874
---------------- ---------------
$20,033 $18,583
================ ===============
To be Well
Capitalized under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ----------- ------- ---------- -------
(Dollars In Thousands)
June 30, 2006:
Tangible $19,112 7.19% $=> 3,987 =>1.50% N/A N/A
Core (leverage) 19,112 7.19 =>10,632 =>4.00 $=>13,290 => 5.00%
Tier 1 risk-based 19,112 10.49 N/A N/A =>10,933 => 6.00
Total risk-based 20,033 10.99 =>14,577 =>8.00 =>18,222 =>10.00
June 30, 2005:
Tangible $17,709 7.58% $=> 3,502 =>1.50% N/A N/A
Core (leverage) 17,709 7.58 => 9,339 =>4.00 $=>11,674 => 5.00%
Tier 1 risk-based 17,709 11.51 N/A N/A => 9,234 => 6.00
Total risk-based 18,583 12.07 =>12,312 =>8.00 =>15,390 =>10.00
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Savings Bank 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 extend credit and letters of
credit. Such commitments involve, to varying degrees, elements of credit, and
interest rate risk in excess of the amount recognized in the statements of
financial condition.
--------------------------------------------------------------------------------
F-22
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Savings Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
The Savings Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
At June 30, 2006 and 2005, the following financial instruments were outstanding
whose contract amounts represent credit risk:
2006 2005
---------------- ---------------
(In Thousands)
Commitments to grant loans $ 2,979 $ 7,017
Unfunded commitments under lines of credit 26,546 22,974
Standby letters of credit 108 255
---------------- ---------------
$29,633 $30,246
================ ===============
At June 30, 2006, the commitments to grant loans included $2,479,000 of fixed
rate mortgage loans with interest rates ranging from 5.75% to 9.00% and $500,000
of variable rate construction loans with an initial interest rate ranging from
8.25% to 9.00%. Of the unfunded commitments under lines of credit at June 30,
2006, $23,806,000 was available under a homeowner's equity lending program,
$634,000 was available under an overdraft protection lending program and
$2,106,000 was available under commercial lines of credit. Amounts outstanding
under these programs were assessed interest ranging from 0.50% below the prime
rate to 4.00% over the prime rate. At June 30, 2006, amounts drawn on standby
letters of credit were assessed rates of 2.00% over rate being earned on the
passbook collateralizing the credit.
At June 30, 2005, the commitments to grant loans included $4,817,000 of fixed
rate mortgage loans with interest rates ranging from 4.63% to 6.88% and
$2,200,000 of variable rate construction loans with an initial interest rate of
6.75%. Of the unfunded commitments under lines of credit at June 30, 2005,
$20,586,000 was available under a homeowner's equity lending program, $558,000
was available under an overdraft protection lending program and $1,830,000 was
available under commercial lines of credit. Amounts outstanding under these
programs were assessed interest ranging from 2.00% below the prime rate to 5.00%
over the prime rate. At June 30, 2005, amounts drawn on standby letters of
credit were assessed rates ranging from 1.00% over the prime rate of 1.50% over
the prime rate.
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. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Savings Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Savings Bank upon extension of credit, is based on
management's credit evaluation. Collateral held varies but primarily includes
residential and income-producing commercial real estate properties.
--------------------------------------------------------------------------------
F-23
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Standby letters of credit are conditional commitments issued by the Savings Bank
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending other loan commitments. The Savings Bank requires collateral
supporting these letters of credit when deemed necessary. Management believes
that the proceeds obtained through a liquidation of such collateral would be
sufficient to cover the maximum potential amount of future payments required
under the corresponding guarantees. The amount of the liability as of June 30,
2006 and 2005 for guarantees under standby letters of credit issued is not
material.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced liquidation sale. Significant estimations were used for the
purposes of this disclosure. Estimated fair values have been determined using
the best available data and estimation methodology suitable for each category of
financial instruments. However, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Savings
Bank could have realized in a sales transaction on the dates indicated. The
estimated fair value amounts have been measured as of their respective year
ends, and have not been reevaluated or updated for purposes of these financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Savings Bank since a fair value calculation is only provided
for a limited portion of the Savings Bank's assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Savings Bank's disclosures, and those of
other companies may not be meaningful. The fair value estimates, methods and
assumptions for financial instruments are set forth below.
Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount is a reasonable estimate
of fair value.
Securities Held to Maturity and Trading Securities
The fair values for securities held to maturity and trading securities are
based on quoted market prices, where available. If quoted market prices are
not available, fair value is estimated using quoted market prices for
similar securities.
Loans Receivable
The fair value of loans receivable 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, of such loans.
Federal Home Loan Bank Stock
The carrying amount of Federal Home Loan Bank stock approximates fair
value.
--------------------------------------------------------------------------------
F-24
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and payable approximates
fair value.
Deposits
Fair values for demand deposits, savings accounts and club accounts are, by
definition, equal to the amount payable on demand at the reporting date.
Fair values of fixed-maturity certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on similar instruments with similar maturities.
Short-Term Borrowings and Long-term Debt
Fair values of borrowings are estimated using discounted cash flow
analyses, based on rates currently available to the Savings Bank for
advances from the Federal Home Loan Bank with similar terms and remaining
maturities.
Off-Balance Sheet Financial Instruments
Fair values of commitments to extend credit are estimated using the fees
currently charged to enter into similar agreements, taking into account
market interest rates, the remaining terms, and the present credit
worthiness of the counterparties.
As of June 30, 2006 and 2005, the fair value of the commitments to extend
credit were not considered to be material.
The carrying amounts and estimated fair values of the Savings Bank's financial
instruments at June 30,2006 and 2005 are as follows:
2006 2005
---------------------------- -----------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
-------- -------------- -------- --------------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 5,881 $ 5,881 $ 5,666 $ 5,666
Trading securities 109 109 82 82
Securities held to maturity 27,707 26,821 28,292 28,095
Loans receivable 218,321 212,546 187,192 186,291
Federal Home Loan Bank stock 2,821 2,821 1,503 1,503
Accrued interest receivable 1,350 1,350 1,088 1,088
Financial liabilities:
Deposits 194,755 193,902 196,931 196,910
Advances from Federal Home Loan Bank
of New York 54,181 53,596 21,195 21,140
Accrued interest payable 114 114 186 186
--------------------------------------------------------------------------------
F-25
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PARENT ONLY FINANCIAL STATEMENTS
Statements of Financial Condition
June 30,
-----------------------------------
2006 2005
---------------- ---------------
(In Thousands)
ASSETS
Cash and due from banks $ 199 $ 199
Investment in subsidiaries 19,292 17,890
---------------- ---------------
Total Assets $19,491 $18,089
================ ===============
STOCKHOLDER'S EQUITY
Stockholder's equity:
Common stock 1 1
Paid-in capital 199 199
Retained earnings 19,291 17,889
---------------- ---------------
Total Stockholder's Equity $19,491 $18,089
================ ===============
Statements of Income
Year Ended June 30,
------------------------------------------------------
2006 2005 2004
---------------- ---------------- ---------------
(In Thousands)
Dividend from savings bank $ - $ - $ 200
Equity in undistributed earnings of subsidiaries 1,402 1,512 1,248
---------------- ---------------- ---------------
Income Before Income Taxes 1,402 1,512 1,448
Income tax expense - 1 -
---------------- ---------------- ---------------
Net Income $1,402 $1,511 $1,448
================ ================ ===============
--------------------------------------------------------------------------------
F-26
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PARENT ONLY FINANCIAL STATEMENTS (CONTINUED)
Statements of Cash Flows
Year Ended June 30,
------------------------------------------------------
2006 2005 2004
---------------- ---------------- ---------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,402 $1,511 $1,448
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiaries (1,402) (1,512) (1,248)
---------------- ---------------- ---------------
Net Cash Provided by (Used in) Operating
Activities - (1) 200
---------------- ---------------- ---------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Purchase of common stock of savings bank - - (200)
---------------- ---------------- ---------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from sale of common stock to MHC - - 200
---------------- ---------------- ---------------
Net Increase (Decrease) in Cash and Cash
Equivalents - (1) 200
CASH AND CASH EQUIVALENTS - BEGINNING 199 200 -
---------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS - ENDING $ 199 $ 199 $ 200
================ ================ ===============
NOTE 17 - STOCK OFFERING
On July 17, 2006, the Board of Directors of the MHC, Company and Savings Bank
adopted a plan of stock issuance pursuant to which the Company will sell common
stock representing a minority ownership of the estimated pro forma market value
of the Company, which will be determined by an independent appraisal, to
eligible depositors of the Bank in a subscription offering and, if necessary, to
the general public of the community and/or in a syndicated offering. The
majority of the common stock will continue to be owned by the MHC. The Plan is
subject to approval of the Office of Thrift Supervision.
Cost incurred in connection with the offering will be recorded as reduction of
the proceeds from offering. If the transaction is not consummated, all cost
incurred in connection with the transaction will be expensed. At June 30, 2006,
no offering costs had been incurred.
--------------------------------------------------------------------------------
F-27
MSB FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Stock-Based Payments
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123 (revised 2004), "Share-Based Payment." This statement
revises the original guidance contained in SFAS No. 123 and supersedes
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and its related implementation guidance. Under SFAS
No. 123 (revised 2004), an entity such as the Bank will be required to
measure the cost of employee services received in exchange for any award of
equity instruments made after June 30, 2006, based on the grant-date fair
value of the award (with limited exceptions) and recognize such cost over
the period during which an employee is required to provide service in
exchange for the award (usually the vesting period). For stock options and
similar instruments, grant-date fair value will be estimated using
option-pricing models adjusted for the unique characteristics of
instruments (unless observable market prices for the same or similar
instruments are available). SFAS No. 123 (revised 2004) will not have any
effect on the Company's existing historical financial statements as the
Company has not had and does not currently have any stock-based
compensation grants which would be subject to SFAS No. 123 (revised 2004).
However, should the Company grant stock compensation awards in the future,
any such awards will require the recording of compensation expense.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." The Statement requires retroactive application of a voluntary
change in accounting principle to prior period financial statements unless
it is impracticable. SFAS No. 154 also requires that a change in method of
depreciation, amortization, or depletion for long-lived, non-financial
assets be accounted for as a change in accounting estimate that is affected
by a change in accounting principle. SFAS No. 154 replaces APB Opinion 20,
"Accounting Changes," and SFAS 3, "Reporting Accounting Changes in Interim
Financial Statements." SFAS No. 154 will be effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. Management currently believes that adoption of the
provisions of SFAS No. 154 will not have a material impact on the Company's
consolidated financial statements.
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F-28
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which the offer or solicitation would be unlawful. The affairs of MSB
Financial Corp. and its subsidiaries may change after the date of this
prospectus. Delivery of this document and the sales of shares made hereunder
does not mean otherwise.
MSB Financial Corp.
Holding Company for Millington Savings Bank
Up to 2,199,375 Shares of Common Stock
(Subject to Increase to Up to 2,529,281 Shares)
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PROSPECTUS
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Keefe, Bruyette & Woods
November 13, 2006
Until the later of December 17, 2006, or 25 days after commencement of the
syndicated community offering, if any, whichever is later, all dealers effecting
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.