-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OrXnkQeMzVAlgkjjORl/WAP8OUIPz5teZBvUXeuhkQu47ssYa0mHPrzCCLX+Y82e ttcHO7K3CeoZtAh8BBjudw== 0000882377-96-000110.txt : 19960812 0000882377-96-000110.hdr.sgml : 19960812 ACCESSION NUMBER: 0000882377-96-000110 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MSB BANCORP INC /DE CENTRAL INDEX KEY: 0000887202 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 061341670 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20187 FILM NUMBER: 96607342 BUSINESS ADDRESS: STREET 1: 35 MATTHEWS ST CITY: GOSHEN STATE: NY ZIP: 10924 BUSINESS PHONE: 9142948100 MAIL ADDRESS: STREET 1: 35 MATTHEWS ST CITY: GOSHEN STATE: NY ZIP: 10924 10-Q 1 MSB BANCORP, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-Q (MARK ONE) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-20187 MSB BANCORP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1341670 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 35 MATTHEWS STREET, GOSHEN, NEW YORK 10924 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (914) 294-8100 (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) N/A --------------------------------------------------- (Former name, former address and former fiscal year, if changed from last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Outstanding at CLASS JUNE 30, 1996 ----- ------------- Common Stock, 2,833,936 par value $.01
TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) -- June 30, 1996 and December 31, 1995....................................................................................1 Consolidated Statements of Income (Unaudited) -- Quarters and six months ended June 30, 1996 and 1995............................................................................2 Consolidated Statements of Cash Flows (Unaudited) -- Quarters and six months ended June 30, 1996 and 1995...................................................................................3 Notes to Unaudited Consolidated Financial Statements.....................................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................................. 10
PART II -- OTHER INFORMATION ---------------------------- Item 1. Legal Proceedings...................................................................................... 19 Item 2. Changes in Securities.................................................................................. 19 Item 3. Defaults upon Senior Securities........................................................................ 19 Item 4. Submission of Matters to a Vote of Security Holders.................................................... 19 Item 5. Other Information...................................................................................... 20 Item 6. Exhibits and Reports on Form 8-K....................................................................... 20 Signatures...................................................................................................... 21
-i- PART I - FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS MSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands except shares and per share amounts) JUNE 30, DECEMBER 31, 1996 1995 --------------------- --------------- ASSETS Cash and due from banks................................................ $ 13,759 $ 15,862 Federal funds sold..................................................... 7,840 10,952 Securities available for sale.......................................... 57,806 75,580 Mortgage-backed securities available for sale.......................... 393,264 49,775 Loans, net............................................................. 302,521 280,512 Premises and equipment, net............................................ 15,421 12,420 Accrued interest receivable............................................ 6,053 3,219 Investments in real estate............................................. 1,044 806 Goodwill............................................................... 34,706 1,609 Other assets........................................................... 8,138 3,391 ----------- ----------- Total assets..................................................... $ 840,552 $ 454,126 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits............................................................. $ 756,996 $ 388,944 Mortgagors' escrow deposits.......................................... 2,020 1,839 Accrued expenses and other liabilities............................... 11,933 18,605 ESOP obligations..................................................... 584 742 ----------- ----------- Total liabilities................................................ 771,533 410,130 ----------- ----------- Stockholders' Equity Preferred stock ($.01 par value; 1,000,000 shares authorized; 600,000 shares issued at June 30, 1996 and none issued at December 31, 1995).......................... 6 -- Common stock ($.01 par value; 5,000,000 shares authorized; 3,045,000 shares issued at June 30, 1996 and 1,840,000 shares issued at December 31, 1995)............................................... 30 18 Additional paid-in capital............................................ 48,304 16,198 Retained earnings..................................................... 33,180 33,110 Treasury stock, at cost (211,064 shares and 212,064 shares at June 30, 1996 and December 31, 1995, respectively).................. (4,137) (4,157) Unallocated ESOP stock................................................ (584) (742) Unallocated BRP stock................................................. (237) (303) Net unrealized loss on securities available for sale.................. (7,543) (128) ----------- ----------- Total stockholders' equity....................................... 69,019 43,996 ----------- ----------- Total liabilities and stockholders' equity....................... $ 840,552 $ 454,126 =========== ===========
See accompanying notes to the unaudited consolidated financial statements. -1- MSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands except shares and per share amounts) FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- ------------------ 1996 1995 1996 1995 --------------- -------- INTEREST INCOME Mortgage loans.......................................... $ 5,337 $ 4,482 $ 10,553 $ 8,663 Other loans............................................. 491 306 986 557 Mortgage-backed securities.............................. 6,688 804 11,906 1,487 Securities.............................................. 1,058 1,338 2,442 2,528 Federal funds sold...................................... 166 225 978 349 ---------- ---------- ---------- ---------- Total interest income............................. 13,740 7,155 26,865 13,584 INTEREST EXPENSE Interest on deposits.................................... 7,666 3,492 15,227 6,583 Interest on borrowings.................................. -- 367 -- 367 Interest on ESOP obligation............................. 14 22 29 45 ---------- ---------- ---------- ---------- Total interest expense............................ 7,680 3,881 15,256 6,995 ---------- ---------- ---------- ---------- Net interest income..................................... 6,060 3,274 11,609 6,589 Provision for loan losses............................... 320 142 570 195 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses..... 5,740 3,132 11,039 6,394 NON-INTEREST INCOME Service charges on deposits............................. 614 426 1,222 859 Service fees............................................ 368 117 572 250 Net realized gains (losses) on securities............... 18 (178) 17 (179) Other non-interest income............................... 40 12 92 25 ---------- ---------- ---------- ---------- 1,040 377 1,903 955 NON-INTEREST EXPENSE Salaries and employee benefits.......................... 2,138 1,339 4,178 2,752 Occupancy and equipment................................. 764 582 1,532 1,173 Federal deposit insurance premiums...................... 239 202 477 404 Other non-interest expense.............................. 2,070 667 4,163 1,300 ---------- ---------- ---------- ---------- 5,211 2,790 10,350 5,629 ---------- ---------- ---------- ---------- Income before income taxes.............................. 1,569 719 2,592 1,720 Income tax expense...................................... 653 301 1,088 702 ---------- ---------- ---------- ---------- Net income.............................................. $ 916 $ 418 $ 1,504 $ 1,018 ========== ========== ========== ========== Earnings per share ..................................... $ 0.22 $ 0.25 $ 0.35 $ 0.59 Weighted average shares outstanding..................... 2,869,563 1,695,107 2,794,939 1,713,874 ========== ========== ========== ==========
See accompanying notes to the unaudited consolidated financial statements. -2- MSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) FOR THE SIX MONTHS ENDED JUNE 30, ------------------------ 1996 1995 ------------- ------------- OPERATING ACTIVITIES Net income............................................................. $ 1,504 $ 1,018 Adjustments to reconcile net income to net cash provided by operating activities: Realized gains on securities........................................... (17) 179 Realized gain on sale of mortgage loans................................ (71) -- Amortization of premiums/discounts on securities....................... 549 24 Proceeds from the sale of student loans................................ 496 367 Origination of mortgage loans held for sale............................ (5,267) (1,829) Proceeds from the sale of mortgage loans............................... 6,081 1,500 Amortization of net deferred loan origination fees..................... (90) (155) Depreciation and amortization.......................................... 615 458 Provisions for loan losses............................................. 570 195 Writedowns on real estate.............................................. 144 55 Goodwill amortization.................................................. 1,676 60 Decrease (increase) in accrued interest receivable..................... (2,834) (310) Decrease (increase) in prepaid expenses and other assets.......................................................... 363 2,583 Increase (decrease) in accrued expenses and other liabilities..................................................... (6,756) (975) Net change in Federal and State income tax payables and receivables.............................................. 46 848 Deferred income taxes.................................................. (178) (103) Other.................................................................. (245) (13) ---------- ---------- Net cash provided by (used in) operating activities.................. $ (3,414) $ 3,902 ========== ========== INVESTING ACTIVITIES Net (increase) decrease in loans....................................... $ (24,272) $ (23,702) Maturities and redemptions of debt securities.......................... 12,769 6,450 Purchases of securities available for sale............................. (25,337) (30,356) Proceeds from the sale of securities available for sale................ 28,068 -- Proceeds from the sale of securities held to maturity.................. -- 3,000 Purchases of mortgage-backed securities available for sale............. (383,209) (18,352) Proceeds from the sale of mortgage-backed securities available for sale.................................................... 17,383 -- Repayments of mortgage-backed securities available for sale............ 11,636 2,514 Repayments of asset backed securities.................................. 143 403 Proceeds from the sale of real estate owned, net....................... 117 170 Purchases of property and equipment.................................... (3,745) (711) Cash received in branch acquisition.................................... 380,299 -- ---------- ---------- Net cash provided by (used in) investing activities.................. $ 13,852 $ (60,584) ========== ==========
-3- MSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) FOR THE SIX MONTHS ENDED JUNE 30, ------------------------ 1996 1995 ------------- ------------- FINANCING ACTIVITIES Net change in deposits................................................... $ (46,795) $ 13,463 Proceeds from borrowings................................................. - 43,640 Net increase (decrease) in mortgagors' escrow deposits................... 181 753 Repayment of ESOP loan................................................... (158) (99) Proceeds from the sale of stock.......................................... 32,078 -- Payment of common stock dividends........................................ (969) (468) Purchase of treasury stock............................................... - (1790) Proceeds from the exercise of stock options.............................. 10 182 --------------- -------------- Net cash provided by (used in) financing activities................ $ (15,653) $ 55,681 ================ ============== Increase (decrease) in cash and cash equivalents......................... $ (5,215) $ (1,001) Cash and cash equivalents at beginning of period......................... 26,814 22,445 --------------- -------------- Cash and cash equivalents at end of period............................... $ 21,599 $ 21,444 =============== ============== SUPPLEMENTAL INFORMATION Interest paid on deposits................................................ $ 15,198 $ 6,583 Income taxes paid (received)............................................. $ 1,093 $ (182) ============== =============== Non-cash transactions: Transfer of balances from loans receivable to real estate owned.......................................................... $ 476 $ 498 ============== ==============
See accompanying notes to the unaudited consolidated financial statements. -4- MSB BANCORP, INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation In September, 1992, MSB Bancorp, Inc. (the "Company") completed the issuance of 1,840,000 shares of common stock in connection with the conversion of Middletown Savings Bank (the "Bank") from a mutual to a stock savings bank (the "Conversion"). Concurrent with the Conversion, the Company acquired all of the Bank's common stock. On January 10, 1996, the Company sold 1,100,000 shares of common stock at $18.00 per share and 600,000 shares of its 8.75% Cumulative Convertible Preferred Stock, Series A at $21.60 per share. On February 7, 1996, the Company sold an additional 105,000 shares of Common Stock pursuant to the underwriters' exercise of their overallotment option. The issuance and sale of the shares of Common Stock and Preferred Stock on January 10 and February 7 are hereinafter, collectively, referred to as the "Offering." Net proceeds from the Offering amounted to $32.1 million. The purpose of the Offering was to raise a significant portion of the additional capital necessary to permit the Bank to qualify as "adequately capitalized" for regulatory capital purposes immediately following the consummation of the acquisition of certain branches of First Nationwide Bank, A Federal Savings Bank ("First Nationwide"). The Bank entered into an Asset Purchase and Sale Agreement (as amended, the "First Nationwide Agreement") with First Nationwide for the acquisition of certain assets and the assumption of certain liabilities relating to eight First Nationwide branch offices located in Carmel, Liberty, Mahopac, Monticello, Port Jervis, Spring Valley, Warwick and Washingtonville, New York (the "First Nationwide Branches"). The closing took place on January 12, 1996 (the "Closing Date"), whereupon the Bank assumed the deposits (the "First Nationwide Deposits") of the First Nationwide Branches other than the Spring Valley, New York branch (the "Spring Valley Branch") and paid First Nationwide a premium of 8.0% on the First Nationwide Deposits (and on the accrued interest thereon) (the acquisition of the First Nationwide Branches other than the Spring Valley Branch being hereinafter referred to as the "Acquisition," and the First Nationwide Branches other than the Spring Valley Branch being hereinafter referred to as the "Acquired Branches"). The First Nationwide Agreement was amended to provide for the purchase of the Spring Valley Branch by the Bank from First Nationwide concurrent with the sale of such branch by the Bank to Provident Savings Bank, F.A. ("Provident"), pursuant to an Asset Purchase and Sale Agreement (as amended, the "Spring Valley Agreement") between the Bank and Provident. Pursuant to the First Nationwide Agreement, the Bank paid First Nationwide a premium of 8.0% on the deposits of the Spring Valley Branch (and on the accrued interest thereon). The Spring Valley Agreement provided for the sale of certain assets by the Bank and the assumption of certain liabilities by Provident (the "Branch Disposition") relating to the Spring Valley Branch. The closing under the Spring Valley Agreement took place on March 22, 1996, whereupon Provident assumed the deposits of the Spring Valley Branch and paid the Bank a premium of 7.05% on such deposits (and on the accrued interest thereon). The Company believes that the 7.05% premium paid by Provident to the Bank as compared to the 8.0% premium paid by the Bank to First Nationwide is reasonable given the more limited strategic importance to the Bank of the Spring Valley Branch relative to the Acquired Branches and considering that the Spring Valley Branch has a higher cost of funds than the Acquired Branches. The Branch Disposition will allow the Bank to focus on its market area of Orange, Putnam and Sullivan counties in New York. On January 12, 1996, the First Nationwide Deposits totaled $414.8 million. In addition, the Bank acquired certain assets related to the Acquired Branches, including branch facilities and fixed operating assets associated with the Acquired Branches (the "First Nationwide Assets") at a purchase price of approximately $2.9 million, and certain savings account and overdraft loans (the "First Nationwide Loans"), which totaled $1.0 million at January 12, 1996, at face value. On October 27, 1995, the Bank converted from a New York state-chartered savings bank to a federal savings bank in order to facilitate the Acquisition as well as future expansion. In addition, the Bank changed -5- its name to MSB Bank. As a consequence of the conversion, the Company became a savings and loan holding company subject to the regulation, examination and supervision of the Office of Thrift Supervision (the "OTS"). Prior to the conversion of the Bank to a federal savings bank, the Company was a bank holding company subject to the regulation, examination and supervision of the Federal Reserve Board ("FRB"). The Bank provides banking services to individual and corporate customers, with its business activities concentrated in the New York counties of Orange, Putnam and Sullivan, and the surrounding areas. The consolidated financial statements included herein have been prepared by the Company without audit. In the opinion of management, the quarterly unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented. Certain information and footnote disclosures normally included in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading, however, the results for the periods presented are not necessarily indicative of results to be expected for the entire year. The unaudited quarterly and year to date financial statements presented herein should be read in conjunction with the annual audited consolidated financial statements of the Company for the fiscal year ended December 31, 1995. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, MSB Bank, and the Bank's wholly owned subsidiaries, MSB Financial Services, Inc. and MSB Travel, Inc. ("Travel"). Significant intercompany transactions and amounts have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowances for losses and real estate investments. 2. Earnings Per Share Primary earnings per common share is calculated based upon the weighted average common shares outstanding adjusted for common stock equivalents that have a dilutive effect on the per share data. Earnings for the purpose of computing primary earnings per share consists of net income for the period less preferred stock dividends. Common stock equivalents include stock options. During the first quarter of 1996, the Company sold 600,000 shares of its 8.75% Cumulative Convertible Preferred Stock, Series A in the Offering. This stock is not considered a common stock equivalent but is used in the calculation of fully diluted earnings per share. Since the preferred stock has an antidilutive effect on earnings per share for the quarter and six months ended June 30, 1996, it has not been incorporated in the calculation; fully diluted and primary earnings per share are the same. 3. Allowance for Loan Losses At June 30, 1996, the total recorded investment in impaired loans was $1.6 million, which consisted of $530,000 of loans that are potential problem loans and $1.1 million of loans that are in non-accrual status. At June 30, 1996, all impaired loans were commercial mortgage loans that were measured with reference to the appraised value of the collateral property. At June 30, 1996, there was no allowance related to impaired loans as determined under SFAS No. 114. Interest income recognized on impaired loans was not significant for the quarter and six months ended June 30, 1996. The allowance for loan losses is increased by provision charged to operations and decreased by charge-offs (net of recoveries). Loans are charged off when, in the opinion of management, the recorded investment in the loan is uncollectible. Management's periodic evaluation of the adequacy of the allowance considers factors such as the Bank's past loan experience, known and inherent risks in the portfolio, adverse -6- situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral and current and prospective economic conditions. Management believes that the allowance for loan losses is adequate. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, identification of additional problem loans and other factors, both within and outside of management's control. Activity in the allowance for loan losses for the periods indicated is summarized as follows:
QUARTER ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31, ----------------------------- ----------------------------- 1996 1995 1996 1995 1995 -------------- ------------- --------------- -------------- (DOLLARS IN THOUSANDS) Balance at beginning of period............ $ 1,652 $ 1,504 $ 1,659 $ 1,459 $ 1,459 Provision for loan losses................. 320 142 570 195 483 LOANS CHARGED OFF Real estate..................... 112 185 322 190 234 Other loans..................... 310 49 361 56 73 -------- -------- -------- -------- -------- Total loans charged off................... 422 234 683 246 307 -------- -------- -------- -------- -------- RECOVERIES Real estate..................... 1 -- 1 2 2 Other loans..................... 5 5 9 7 22 -------- -------- -------- -------- -------- Total recoveries............... 6 5 10 9 24 -------- -------- -------- -------- -------- Net charge-offs................. 416 229 673 237 283 -------- -------- -------- -------- -------- Balance at end of period.................. $ 1,556 $ 1,417 $ 1,556 $ 1,417 $ 1,659 ======== ======== ======== ======== ======== Ratio of net charge-offs to average net loans outstanding (annualized)...... 0.57% 0.37% 0.47% 0.20% 0.11% ======== ======== ======= ======== ========
-7- 4. Securities and Mortgage-Backed Securities At June 30, 1996, market value adjustments required by SFAS No. 115 amounted to an unrealized loss of $12.6 million. The net unrealized loss of $7.5 million included as a separate component of stockholders' equity is net of deferred taxes of $5.1 million. Management does not consider any of the securities available for sale permanently impaired at June 30, 1996. 5. Legal Proceedings Except as described below, the Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company's financial condition and results of operations. Early in 1995, the Superintendent of the Banks of the State of New York (the "Superintendent") took possession of Nationar, a trust company organized under the laws of New York and owned by 67 New York savings banks, including the Bank. The Bank used Nationar for certain depository and collection services and maintained at Nationar a demand deposit account with overdraft privileges. As collateral for the overdraft privilege, the Bank executed a security agreement with Nationar's predecessor, pledging a $1.0 million U.S. Treasury Note ("Note"), the proceeds of which were held by the Superintendent, and their return was subject to the automatic stay provisions of the New York Banking Law. The Bank filed a proof of claim against Nationar regarding the Note and a motion with the New York Supreme Court, which is overseeing the Nationar liquidation, seeking relief from the automatic stay imposed by the New York Banking Law and for release and turnover of the Note. On April 15, 1996, the New York Supreme Court entered an order authorizing the release of the proceeds of the Note, including interest earned thereon, to the Bank. On November 17, 1995, five financial institutions filed objections to the duly presented proofs of claims of shareholders, including the Bank, demanding that such claims be subordinated to the claims of the general creditors. Thereafter, on February 16, 1996, the Superintendent filed his Preliminary Report of Findings in Response to Objections to Certain Claims in which he recommended that the objections to the Bank's claims be overruled. The hearing to consider and approve the Superintendent's recommendation to overrule certain objections to claims was held on April 16, 1996, and the New York Supreme Court approved the Superintendent's recommendation. The five financial institutions withdrew their objections to the Bank's claims prior to the April 16, 1996 hearing. The proceeds of the Note, with interest, were returned to the Bank during the second quarter of 1996. The Company and its directors are defendants in a lawsuit, POHLI V. MSB BANCORP, INC. ET AL., commenced by a stockholder in the Delaware Court of Chancery, New Castle County, on or about November 7, 1995. The plaintiff, purporting to represent a class consisting of all stockholders except the stockholder defendants and those affiliated with the stockholder defendants, alleges that the defendant directors have breached and continue to breach their fiduciary duties to stockholders by, among other things, failing to give due consideration to proposals to acquire the Company or its assets, for failing to maximize stockholder value and for failing to disclose all material facts to stockholders. The plaintiff, on behalf of the purported class, seeks unspecified money damages and an affirmative injunction directing the director defendants to consider and negotiate all bona fide offers or proposals to acquire the Company. On December 4, 1995, the Company filed an answer denying all of the substantive allegations contained in the complaint and seeking, among other things, an order dismissing the complaint with prejudice. The Company intends to vigorously contest the allegations of wrongdoing in this action. The Company and its directors are defendants in a lawsuit, KAHN BROTHERS & CO., INC. ET AL. V. MSB BANCORP, INC. ET AL., commenced by stockholders in the Delaware Court of Chancery, New Castle County, on or about November 22, 1995. The plaintiffs, who own in excess of 5% of the outstanding shares of the Common Stock and purport to represent a class consisting of all stockholders except the stockholder defendants, allege that the defendant directors breached their duty of care by failing to become fully informed about the proposals of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to stockholders by not -8- notifying the public or the Company's stockholders of HUBCO's proposals; and breached their duty of good faith and fair representation by, among other things, not investigating whether the Acquisition constituted a reasonable alternative for building stockholder value. The plaintiffs further allege that the Company's offering of Common Stock in connection with the Acquisition (the "Common Stock Offering") was not intended to enhance stockholder value, but rather was for the purpose of diluting the ownership and voting strength of existing stockholders and further entrenching existing management and the Board. The plaintiffs sought to enjoin the Common Stock Offering and are also seeking damages equal to the difference between the market price of the Common Stock on September 7, 1995, and $35 (approximately $14,989,000 in the aggregate) or, in the alternative, the difference between the market price of the Common Stock on October 26, 1995, and $25 (approximately $7,394,000 in the aggregate), including interest and attorneys' and other professional fees. In connection with this action, plaintiffs filed a motion seeking expedited discovery and scheduling. On December 6, 1995, in response to the plaintiffs' motion for expedited proceedings, which was treated by the court as an application for a temporary restraining order with respect to the Common Stock Offering, the court denied the plaintiffs' application for such order. On December 12, 1995, the court denied the plaintiffs' motion for reargument. On December 18, 1995, the Company filed an answer denying all of the substantive allegations in the complaint and seeking, among other things, an order dismissing the complaint with prejudice. Plaintiffs amended their complaint to include allegations relating to an unsolicited merger proposal received by the Company from the First Empire State Corporation ("First Empire") on December 28, 1995. Specifically, the amended complaint alleges, among other things, that the Company's Board of Directors, in breach of its duties of care, loyalty and disclosure, relied on the advice of Bear, Stearns & Co. Inc. ("Bear Stearns"), the Company's financial advisor and underwriter for the Offering, knowing that Bear Stearns could not render independent financial advice regarding the First Empire proposal. The plaintiffs are seeking alternative damages based on these allegations in an amount equal to the difference between the market price of the Common Stock on December 28, 1995 and $26 (approximately $11,560,000 in the aggregate). The Company filed its amended answer on February 1, 1996 denying all of the substantive allegations in the amended complaint and seeking, among other things, an order dismissing the amended complaint with prejudice. The Company intends to vigorously contest the allegations of wrongdoing in this action. The Bank is currently a defendant in a lawsuit commenced by a former employee. The plaintiff alleges wrongful termination and seeks damages in an unspecified amount. The Bank steadfastly denies that it wrongfully discharged the plaintiff and is presenting a vigorous defense in this action. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL MSB Bancorp, Inc. (the "Company") is the holding company for MSB Bank ("MSB" or the "Bank"). The financial conditions and results of operations of the Company are primarily dependent upon the operations of the Bank. On January 10, 1996, the Company sold 1,100,000 shares of Common Stock at $18 per share and 600,000 shares of its Series A Preferred Stock at $21.60 per share. On February 7, 1996, the Company sold an additional 105,000 shares of Common Stock pursuant to the underwriters' exercise of their overallotment option. The issuance and sale of the shares of Common Stock and Series A Preferred Stock on January 10 and February 7 are hereinafter referred to, collectively, as the "Offering." Net proceeds from the Offering amounted to approximately $32.1 million. The purpose of the Offering was to raise a significant portion of the additional capital necessary to permit the Bank to qualify as "adequately capitalized" for regulatory capital purposes immediately following the acquisition of seven branches (the "Acquired Branches") from First Nationwide Bank, A Federal Savings Bank ("First Nationwide"), in January, 1996 (the "Acquisition"). Management's strategy is to increase stockholder value by remaining a community bank and growing both internally and through acquisitions of other institutions or branches of other institutions while not precluding consideration of other strategic alternatives that could increase stockholder value. In furtherance of that strategic direction, the Bank has, from time to time, approached financial institutions in its market areas seeking to acquire one or more branches from such institutions and submitted proposals to acquire one or more branches from such other institutions. In 1995, the Bank initiated discussions with the seller of the Central Valley branch, which resulted in the signing of a definitive agreement to acquire that branch in April 1995. The acquisition of that branch closed on November 10, 1995, with the Bank thereby assuming approximately $21.8 million in deposits. In addition, the Company entered into the branch acquisition agreement with First Nationwide during 1995. The Acquisition closed on January 12, 1996 with the Bank assuming $414.8 million of deposits. The Bank also acquired the related branch facilities and operating assets at a purchase price of $2.9 million and certain deposit-related loans with a face value of $1.0 million. RESULTS OF OPERATIONS The Bank's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its loan and securities portfolios and its cost of funds, consisting primarily of the interest paid on its deposits. The Bank's operating expenses principally consist of employee compensation, occupancy expenses, federal deposit insurance premiums and other general and administrative expenses. The Bank's results of operations are also significantly affected by its periodic provision for loan losses and write-downs of real estate owned. Such results are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. The Company is subject to certain legal proceedings that, if adversely determined, could materially and adversely affect the Company's results of operations. See Part II, Item 1, "Legal Proceedings." The following tables set forth information relating to the Company's balance sheet and statements of income for the quarters and six months ended June 30, 1996 and 1995, respectively, and reflect the average yield (not on a tax equivalent basis) on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The average balances of securities available for sale and trading securities are calculated based on amortized cost. The yields and costs include fees, which are considered adjustments to yields. -10-
FOR THE QUARTER ENDED JUNE 30, 1996 -------------------------------------------------------------------------- AVERAGE AVERAGE YIELD/ BALANCE INTEREST COST ------- -------- ---- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Mortgage loans, net(1)....................... $ 272,255 $ 5,337 7.88% Other loans(1)............................... 19,169 491 10.30 Mortgage-backed securities(2)................ 408,429 6,688 6.59 Other securities(3).......................... 64,855 1,058 6.56 Federal funds, overnight..................... 12,431 166 5.37 --------- --------- --------- Total interest-earning assets................ 777,139 13,740 7.11 Non-interest earning assets.................... 69,321 --------- Total assets................................. $ 846,460 ========= LIABILITIES AND RETAINED EARNINGS: Interest-bearing liabilities: Deposits: Savings accounts........................... 207,346 1,506 2.92 Super NOW accounts......................... 42,643 202 1.91 Money market accounts...................... 49,792 385 3.11 Time deposits.............................. 417,647 5,573 5.37 Borrowings................................. -- -- -- ESOP obligation.............................. 655 14 8.60 --------- -------------- --------- Total interest-bearing liabilities................................ 718,083 7,680 4.30 Other liabilities.............................. 58,700 --------- Total liabilities......................... 776,783 Retained earnings.............................. 69,677 --------- Total liabilities and retained earnings....................... $ 846,460 ========= Net interest income/ interest rate spread(4)....................... $ 6,060 2.81% ========= ========= Net earning assets/net interest margin(5)............................ $ 59,056 3.14% ========= ========= Ratio of interest-earning assets to interest-bearing liabilities............... 1.08x =========
FOR THE QUARTER ENDED JUNE 30, 1995 ------------------------------------------------------------ AVERAGE AVERAGE YIELD/ BALANCE INTEREST COST ------- -------- ---- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Mortgage loans, net(1)....................... $ 236,200 $ 4,482 7.61% Other loans(1)............................... 11,986 306 10.24 Mortgage-backed securities(2)................ 59,614 804 5.41 Other securities(3).......................... 98,337 1,338 5.46 Federal funds, overnight..................... 15,040 225 6.00 --------- --------- --------- Total interest-earning assets................ 421,177 7,155 6.81 Non-interest earning assets.................... 23,289 --------- Total assets................................. $ 444,466 ========= LIABILITIES AND RETAINED EARNINGS: Interest-bearing liabilities: Deposits: Savings accounts........................... 130,908 975 2.89 Super NOW accounts......................... 14,482 65 1.80 Money market accounts...................... 39,686 372 3.76 Time deposits.............................. 151,694 2,080 5.50 Borrowings................................. 22,979 367 6.41 ESOP obligation.............................. 955 22 9.24 --------- --------- --------- Total interest-bearing liabilities................................ 360,704 3,881 4.31 Other liabilities.............................. 42,137 --------- Total liabilities......................... 402,841 Retained earnings.............................. 41,625 --------- Total liabilities and retained earnings....................... $ 444,466 ========= Net interest income/ interest rate spread(4)....................... $ 3,274 2.50% ========= ========= Net earning assets/net interest margin(5)............................ $ 60,473 3.12% ========= ========= Ratio of interest-earning assets to interest-bearing liabilities............... 1.17x =========
- ------------------------ (1) In computing the average balance of loans, non-accrual loans have been included. (2) Includes mortgage-backed securities available for sale and mortgage-backed securities held to maturity. (3) Other securities includes securities held to maturity and securities available for sale. (4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average interest-earning assets. -11-
FOR THE SIX MONTHS ENDED JUNE 30, 1996 ----------------------------------------------------------------------- AVERAGE AVERAGE YIELD/ BALANCE INTEREST COST ------- -------- ---- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Mortgage loans, net(1)..................... $ 268,844 $ 10,553 7.89% Other loans(1)............................. 18,436 986 10.76 Mortgage-backed securities(2).............. 363,984 11,906 6.58 Other securities(3)........................ 76,968 2,442 6.38 Federal funds, overnight................... 39,769 978 4.95 --------- --------- --------- Total interest-earning assets.............. 768,001 26,865 7.04 Non-interest earning assets.................. 68,752 --------- Total assets............................... $ 836,753 ========= LIABILITIES AND RETAINED EARNINGS: Interest-bearing liabilities: Deposits: Savings accounts......................... 202,100 2,948 2.93 Super NOW accounts....................... 41,479 398 1.93 Money market accounts.................... 49,938 773 3.11 Time deposits............................ 410,468 11,108 5.44 Borrowings................................ -- -- -- ESOP obligation........................... 691 29 8.44 --------- --------- --------- Total interest-bearing liabilities.............................. 704,676 15,256 4.35 Other liabilities............................ 60,976 --------- Total liabilities....................... 765,652 Retained earnings............................ 71,101 --------- Total liabilities and retained earnings..................... $ 836,753 ========= Net interest income/ interest rate spread(4)..................... $ 11,609 2.69% ========= ========= Net earning assets/net interest margin(5).......................... $ 63,325 3.04% ========= ========= Ratio of interest-earning assets to interest-bearing liabilities............. 1.09x =========
FOR THE SIX MONTHS ENDED JUNE 30, 1995 ------------------------------------------------------------------- AVERAGE AVERAGE YIELD/ BALANCE INTEREST COST ------- -------- ---- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Mortgage loans, net(1)..................... $ 231,874 $ 8,663 7.53% Other loans(1)............................. 11,552 557 9.72 Mortgage-backed securities(2).............. 54,377 1,487 5.52 Other securities(3)........................ 91,904 2,528 5.55 Federal funds, overnight................... 11,908 349 5.91 --------- --------- --------- Total interest-earning assets.............. 401,615 13,584 6.82 Non-interest earning assets.................. 21,996 Total assets............................... $ 423,611 ========= LIABILITIES AND RETAINED EARNINGS: Interest-bearing liabilities: Deposits: Savings accounts......................... 133,626 1,985 3.00 Super NOW accounts....................... 14,537 132 1.83 Money market accounts.................... 40,456 770 3.84 Time deposits............................ 142,649 3,696 5.23 Borrowings................................ 11,553 367 6.41 ESOP obligation........................... 995 45 9.12 --------- --------- --------- Total interest-bearing liabilities.............................. 343,816 6,995 4.10 Other liabilities............................ 38,958 --------- Total liabilities....................... 382,774 Retained earnings............................ 40,837 Total liabilities and retained earnings..................... $ 423,661 ========= Net interest income/ interest rate spread(4)..................... $ 6,589 2.72% ========= ========= Net earning assets/net interest margin(5).......................... $ 57,799 3.31% ========= ========= Ratio of interest-earning assets to interest-bearing liabilities............. 1.17x =========
- ------------------------ (1) In computing the average balance of loans, non-accrual loans have been included. (2) Includes mortgage-backed securities available for sale and mortgage-backed securities held to maturity. (3) Other securities includes securities held to maturity and securities available for sale. (4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average interest-earning assets. -12- FINANCIAL CONDITION The Company's total assets amounted to $840.6 million at June 30, 1996 as compared to $454.1 million at December 31, 1995. Securities and mortgage-backed securities available for sale increased by $325.7 million to $451.1 million at June 30, 1996, and goodwill increased $33.1 million to $34.7 million at such date. Loans, net increased $22.0 million to $302.5 million at June 30, 1996. Deposits totaled $757.0 million at June 30, 1996 as compared to $388.9 million at December 31, 1995. The increases in total assets, securities and mortgage-backed securities, goodwill and deposits resulted primarily from the Acquisition and the Offering, which closed during the first quarter of 1996. In connection with the Acquisition, the Bank assumed approximately $414.8 million in deposits. At the time the Company planned the Acquisition, it anticipated a deposit run-off rate of 11.3% The Company believes that the increase in the run-off rate is due not only to the transition but also to the disintermediation that the industry is experiencing. Total stockholders' equity increased to $69.0 million at June 30, 1996, from $44.0 million at December 31, 1995, due to the net proceeds of the Offering, offset by a $7.4 million increase in the net unrealized loss on securities available for sale. The Bank's Tier 1 leverage capital ratio at June 30, 1996 was 5.2%, and the Company's tangible book value per share increased to $12.19 (excluding the net unrealized losses on marketable securities) from $11.67 at January 12, 1996, the closing date of the Acquisition. COMPARISON OF RESULTS OF OPERATIONS GENERAL. Net income for the second quarter of 1996 amounted to $916,000 as compared to $418,000 for the second quarter of 1995. For the six months ended June 30, 1996, net income amounted to $1.5 million as compared to $1.0 million for the same period in 1995. NET INTEREST INCOME. Net interest income for the quarter ended June 30, 1996 amounted to $6.1 million as compared to $3.3 million for the second quarter in 1995. The increase in net interest income is due primarily to the Acquisition. The interest rate spread increased 31 basis points to 2.81% during the second quarter of 1996 as compared to 2.50% for the second quarter of 1995. The Company's net interest margin was 3.14% and 3.12% for the quarters ended June 30, 1996 and 1995, respectively. For the six months ended June 30, 1996, net interest income amounted to $11.6 million as compared to $6.6 million for the same period in the prior year. The average balances of net interest-earning assets increased $5.5 million to $63.3 million during the six months ended June 30, 1996 as compared to the six months ended June 30, 1995. The Company's interest rate spread and net interest margin were 2.69% and 3.04%, respectively, for the six months ended June 30, 1996 as compared to 2.72% and 3.31%, respectively, for the six months ended June 30, 1995. The decreases in interest rate spread and net interest margin were due primarily to the Acquisition. The proceeds from the Acquisition were invested in securities which, in the aggregate, yield less than the Bank's loan portfolio. The purchases of these securities were not completed until the last week of January, 1996 until which time they earned interest at the Federal funds rate of 5.25%. As a result, the Company earned virtually no interest rate spread on the Acquired Deposits during that time. In addition, 68.5% of the Acquired Deposits were time deposits with an average cost of 5.90%. Management expects, although there can be no assurance, that as these time deposits mature, the cost of deposits will decrease. The time deposits outstanding at June 30, 1996 that were acquired from First Nationwide are expected to reprice as follows: $64.4 million in the third quarter of 1996 and $44.9 million in the fourth quarter of 1996. INTEREST INCOME. Interest income in the second quarter of 1996 totaled $13.7 million as compared to $7.2 million for the second quarter of 1995. Average interest-earning assets increased $356.0 million to $777.1 million in the second quarter of 1996 as compared to the second quarter of 1995. The average yields on interest-earning assets were 7.11% and 6.81% for the quarters ended June 30, 1996 and 1995, respectively. For the six months ended June 30, 1996, interest income amounted to $26.9 million as compared to $13.6 million for the same period in 1995. Average interest-earning assets increased $366.4 million to $768.0 million for the six months ended June 30, 1996, and the average yield earned increased 22 basis points to 7.04% as compared to the six months ended June 30, 1995. Interest income on mortgage loans amounted to $5.3 million during the second quarter of 1996 as compared to $4.5 million for the second quarter of 1995, an increase of $855,000 or 19.1%. The average -13- balance of mortgage loans increased $36.1 million or 15.3% to $272.3 million in the second quarter of 1996 as compared to $236.2 million for the second quarter of 1995. The average yields earned on mortgage loans were 7.88% and 7.61% for the second quarters of 1996 and 1995, respectively. For the six months ended June 30, 1996, interest income on mortgage loans totaled $10.6 million as compared to $8.7 for the same period in 1995. The average balance of mortgage loans increased to $268.8 million for the six months ended June 30, 1996 as compared to $231.9 million for the same period in 1995. The average yield earned on mortgage loans for the six months ended June 30, 1996 was 7.89% as compared to 7.53% for the same period in 1995. The growth in the average balance of mortgage loans was due primarily to improved demand for adjustable-rate mortgage loans ("ARMs"). The increase in the average yield earned was due primarily to the repricing of ARMs that were originated in 1994 and 1995 at introductory rates. These ARMs repriced to higher rates due to the expiration of their initial lower introductory rates and due to the increase in short-term interest rates during 1994 and the first quarter of 1995. However, the extent to which ARMs have been repricing has slowed since the end of the first quarter of 1995. Interest income on other loans increased $185,000 or 60.5% to $491,000 during the second quarter of 1996 as compared to $306,000 for the second quarter of 1995. The average balance of other loans increased $7.2 million or 59.9% to $19.2 million for the second quarter of 1996, and the yield earned on those loans increased 6 basis points to 10.30%. For the six months ended June 30, 1996, interest income on other loans totaled $986,000 as compared to $557,000 for the same period in 1995. The average balance of other loans increased $6.9 million to $18.4 million as compared to $11.6 million for the six months ended June 30, 1995. The average yield on other loans increased 104 basis points to 10.76% for the six months ended June 30, 1996 as compared to 9.72% for the same period in 1995. The increase in the average balances of other loans is due to improved demand for consumer loans and management's strategy to increase the commercial loan portfolio in order to increase the Company's interest rate spread. Interest income on mortgage-backed securities totaled $6.7 million for the second quarter of 1996, an increase of $5.9 million over the $804,000 earned in the second quarter of 1995. This increase is due primarily to a $348.8 million increase in the average balance of mortgage-backed securities to $408.4 million. In addition, the average yield earned on mortgage-backed securities increased 118 basis points to 6.59% during the second quarter of 1996 as compared to the same period in 1995. For the six months ended June 30, 1996, interest income on mortgage-backed securities totaled $11.9 million as compared to $1.5 million for the six months ended June 30, 1995. For these same periods, the average balances and yields earned were $364.0 million and 6.58%, respectively, and $54.4 million and 5.52%, respectively. The increases in the average balances of mortgage-backed securities during 1996 are a result of the investment of proceeds from the Acquisition and Offering, which totaled $409.6 million. Interest income on other securities amounted to $1.1 million during the second quarter of 1996, a decrease of $280,000 or 20.9% from the $1.3 million earned during the second quarter of 1995. This decrease is due primarily to a $33.5 million decrease in the average balance of other securities to $64.9 million during the second quarter of 1996 as compared to the same period in 1995. The yield earned on other securities increased 110 basis points to 6.56% in the second quarter of 1996 as compared to 5.46% for the same quarter in 1995. For the six months ended June 30, 1996, interest income on other securities totaled $2.4 million as compared to $2.5 million for the same period in the prior year. The average balance of other securities decreased $14.9 million or 16.3% to $77.0 million during the six months ended June 30, 1996 as compared to $91.9 million for the comparable period in the prior year. For these same periods, the yields earned on other securities increased 83 basis points to 6.38%. -14- The decreases in the average balances of other securities is a result of management's strategy to redeploy funds currently invested in securities into the loan portfolio. Loans typically provide the Company with greater yields than securities. INTEREST EXPENSE. Interest expense for the second quarter of 1996 totaled $7.7 million as compared to $3.9 million for the second quarter of 1995. The average balance of interest-bearing liabilities amounted to $718.1 million as compared to $360.7 million for the same quarter in 1995. The average cost of these interest-bearing liabilities remained virtually unchanged for those periods. For the six months ended June 30, 1996, interest expense amounted to $15.3 million as compared to $7.0 million for the same period in 1995. Average interest-bearing liabilities totaled $704.7 million during the 1996 period, representing a $360.9 million increase over average interest-bearing liabilities of $343.8 million for the six months ended June 30, 1995. The average cost of these interest-bearing liabilities was 4.35% in the six months ended June 30, 1996 as compared to 4.10% for the same period in 1995. The growth in interest-bearing liabilities is a result of the Acquisition. The Acquired Deposits totaled $414.8 million at January 12, 1996, the closing date. Interest expense on savings accounts amounted to $1.5 million for the second quarter of 1996 as compared to $975,000 for the same quarter in 1995. The average balance of savings accounts increased $76.4 million or 58.4% to $207.3 million during the second quarter of 1996 as compared to $130.9 million for the comparable period in 1995. The average cost of savings accounts for those same periods increased 3 basis points to 2.92% for the second quarter of 1996 as compared to 2.89% for the second quarter of 1995. For the six months ended June 30, 1996, interest expense on savings accounts totaled $2.9 million as compared to $2.0 million for the same period in 1995. During the six months ended June 30, 1996, the average balance of savings accounts amounted to $202.1 million as compared to $133.6 million for the same period in 1995. The average costs of these deposits were 2.93% and 3.00% during the six months ended June 30, 1996 and 1995, respectively. Interest expense on time deposits amounted to $5.6 million during the second quarter of 1996 and $2.1 million for the second quarter of 1995. The average balance of time deposits increased $266.0 million to $417.6 million in the second quarter of 1996 as compared to $151.7 million for the second quarter of 1995. The increase in the average balance was partially offset by a 13 basis point decrease in the average cost of time deposits to 5.37% For the six months ended June 30, 1996, interest expense on time deposits amounted to $11.1 million as compared to $3.7 million for the same period in the prior year. This increase in interest expense was due primarily to a $267.8 million increase in the average balance of time deposits to $410.5 million. In addition, the average rate paid on time deposits increased 21 basis points to 5.44% during the six months ended June 30, 1996 as compared to an average rate of 5.23% for the same period in 1995. PROVISION FOR LOAN LOSSES. The provision for loan losses amounted to $320,000 for the second quarter of 1996 as compared to $142,000 for the second quarter of 1995. This increase is due primarily to an increase in net charge-offs to $416,000 for the second quarter of 1996 as compared to $229,000 for the same quarter in 1995 and also due to increases in the size of the loan portfolio. The increase in net charge-offs is primarily related to a $275,000 unsecured commercial loan that was fully charged off in the second quarter of 1996. Non-performing loans (loans that are 90 days or more past due) amounted to $3.5 million or 1.16% of total loans at June 30, 1996 as compared to $3.0 million or 1.05% of total loans at December 31, 1995 and $2.1 million or 0.83% of total loans at June 30, 1995. Non-performing assets totaled $4.6 million or 0.54% of total assets, $3.8 million or 0.83% of total assets and $3.2 million or 0.69% of total assets at June 30, 1996, December 31, 1995 and June 30, 1995, respectively. The allowance for loan losses amounted to $1.6 million and $1.4 million at June 30, 1996 and 1995, respectively. At December 31, 1995, the allowance for loan losses amounted to $1.7 million. For the six months ended June 30, 1996, the provision for loan losses amounted to $570,000 as compared to $195,000 for the same period in 1995. Net charge-offs totaled $673,000 for the six months ended June 30, 1996 as compared to $237,000 for the same period in 1995. The increase in net charge-offs is due to the $275,000 commercial loan charged off in the second quarter of 1996 and also due to $210,000 in net charge- -15- offs in the first quarter of 1996 related to certain non-performing mortgage loans with respect to which the Bank decided, based on the condition of the underlying properties and other factors, not to pursue foreclosure proceedings. In determining the adequacy of its allowance for loan losses, management considers the level of non-performing loans, the current status of the Bank's loan portfolio, changes in appraised values of collateral and general economic conditions. Although the Bank maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the current estimated amounts. As a result, higher provisions for loan losses may be necessary in future periods which would adversely affect operating results. NON-INTEREST INCOME. Non-interest income increased $663,000 to $1.0 million for the second quarter of 1996 as compared to $377,000 for the same quarter in 1995. Services charges on deposits increased to $614,000 in the second quarter of 1996 from $426,000 for the same period in 1995. Service fees increased $251,000 from the second quarter of 1995 to $368,000 for the second quarter of 1996. These increases are primarily a result of the Acquisition. Net realized gains on securities amounted to $18,000 for the second quarter of 1996 as compared to a net loss of $178,000 for the same period in 1995. For the six months ended June 30, 1996, non-interest income amounted to $1.9 million as compared to $955,000 for the same period in 1995. Service charges on deposits increased $363,000 or 42.3% to $1.2 million for the six months ended June 30, 1996 as compared to $859,000 for the same period in 1995. Service fees increased $322,000 to $572,000 for the six months ended June 30, 1996 as compared to $250,000 for the same period in 1995. Net realized securities gains increased to $17,000 for the six months ended June 30, 1996 from a net loss of $179,000 for the same period in 1995. MSB waived service charges on the Acquired Deposits until March 1, 1996. In addition, MSB has waived $90,000 of additional service charges in limited circumstances for certain of the Acquired Deposits since March 1, 1996 for various reasons related to the transition of accounts of First Nationwide to MSB. Although this has resulted in decreased fee income, management believes that waiving these service charges was important for customer retention. NON-INTEREST EXPENSE. Non-interest expense was $5.2 million for the second quarter of 1996, compared to $2.8 million for the same quarter in 1995. The second quarter of 1996 was the first full quarter to include the operating expenses of the Acquired Branches. Salaries and employee benefits increased $799,000 during the second quarter of 1996 to $2.1 million as MSB added 69 full-time equivalent employees for the Acquired Branches, the Central Valley Branch, which was acquired in November, 1995 and MSB Travel. Occupancy and equipment amounted to $764,000 for the second quarter of 1996 as compared to $582,000 for the comparable quarter in the prior year. Other non-interest expenses amounted to $2.1 million for the second quarter of 1996 as compared to $667,000 for the same period in 1995. This increase is due primarily to an $892,000 increase in goodwill amortization related to the Acquisition, $72,000 of non-recurring expenses related to the Acquisition, a $99,500 increase in printing, paper and ATM card production costs and the operating expenses of the Acquired Branches. For the six months ended June 30, 1996, total non-interest expense amounted to $10.4 million as compared to $5.6 million for the same period in 1995. For those same periods, salaries and employee benefits increased $1.4 million to $4.2 million, occupancy and equipment increased $359,000 to $1.5 million and other non-interest expense increased $2.9 million to $4.2 million. Other non-interest expense for the six months ended June 30, 1996 included $225,000 of non-recurring expenses related to the Acquisition. In addition, legal expenses increased $114,000 to $240,000 related primarily to stockholder matters; losses on foreclosed real estate increased $89,000 to $144,000; and printing, paper and ATM card production costs increased $187,000 to $317,000. INCOME TAX EXPENSE. For the second quarter of 1996, income tax expense amounted to $653,000 as compared to $301,000 for the same period in 1995. The effective income tax rates for the second quarters of 1996 and 1995 were 41.6% and 41.8%, respectively. For the six months ended June 30, 1996, income tax expense was $1.1 million as compared to $702,000 for the same period in 1995. The effective income tax rates for the six months ended June 30, 1996 and 1995 were 42.0% and 40.8%, respectively. -16- LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investments. Proceeds from securities sales are also a source of funds. While maturities and scheduled amortization of loans and investments are a predictable source of funds, deposit flows, mortgage prepayments and prepayments of mortgage-backed securities are greatly influenced by interest rates, economic conditions and competition. The Company's most liquid assets are cash and cash equivalents, which include investments in highly liquid, short-term securities. The levels of these assets are dependent on the Bank's operating, financing, lending and investing activities during any given period. The Company's ratios of cash and due from banks, Federal funds and investment securities with remaining maturities of one year or less to total deposits were 4.0% at June 30, 1996 and 10.5% at December 31, 1995. At June 30, 1996, cash and cash equivalents, as defined above, totaled $30.4 million as compared to $42.6 million at December 31, 1995. Liquidity management for the Bank is both a daily and long-term function of the Bank's management strategy. Excess funds are generally invested in short-term investments such as Federal funds. In the event that the Bank should require funds beyond its ability to generate them internally, additional sources of funds are available through lines of credit totaling $46.0 million from the Federal Home Loan Bank of New York. In addition, the Bank may access funds, if necessary, through the Federal Reserve Bank of New York discount window. At June 30, 1996, the Bank had outstanding loan commitments of $43.7 million. The Bank anticipates that it will have sufficient funds available to meet its current loan commitments. Time deposits scheduled to mature in one year or less from June 30, 1996, totaled $328.1 million. Management believes that a significant portion of such deposits will remain with the Bank. The OTS regulations require savings associations to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations; a leverage ratio requirement of 3.0% of core capital to such adjusted total assets; and a risk-based capital ratio requirement of 8.0% of core and supplementary capital to total risk-based assets. The 3.0% core capital requirement has been effectively superseded by the OTS' prompt corrective action regulations, which impose a 4.0% core capital requirement for treatment as an "adequately capitalized" thrift and a 5.0% core capital requirement for treatment as a "well capitalized" thrift. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of assets. The following table sets forth the capital position of the Bank as calculated at June 30, 1996.
TANGIBLE CORE RISK-BASED ---------------------------------- ------------------------------ --------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) Capital as calculated under GAAP....... $ 69,377 8.5% $ 69,377 8.5% $ 69,377 20.3% Deduct goodwill........................ 34,706 4.2 34,706 4.2 34,706 10.2 Add qualifying general loan loss allowance, as limited by regulation.. -- -- -- -- 1,556 0.5 Add unrealized loss on securities available for sale, net of taxes..... 7,543 0.9 7,543 0.9 7,543 2.2 -------- --------- --------- --------- --------- --------- Capital, as calculated................. 42,214 5.2 42,214 5.2 43,770 12.8 Capital, as required................... 12,086 1.5 32,231 4.0 27,359 8.0 --------- --------- --------- --------- --------- --------- Excess................................. $ 30,128 3.7% $ 9,983 1.2% $ 16,411 4.8% ========= ========= ========= ========= ========= =========
The Board of Directors declared cash dividends of $0.15 per common share on June 21, 1996 and March 15, 1996 that were payable to stockholders of record on June 28 and March 30, 1996, respectively. The Company has been paying a quarterly cash dividend of $0.15 per common share since the first quarter of 1995 and had been paying a quarterly cash dividend of $0.13 per common share since the second quarter of 1994. -17- PROPOSED LEGISLATION ON DEPOSIT INSURANCE During the quarter ended June 30, 1996, representatives of the federal banking agencies and other interested parties continued to work for legislative action to recapitalize the Savings Association Insurance Fund ("SAIF") and to resolve the disparity between the deposit insurance assessments paid by institutions insured under the SAIF and those insured under the Bank Insurance Fund ("BIF"). The deposits of the Bank are insured by the BIF except for those attributable to the Bank's acquisition of deposits from SAIF-insured institutions, including First Nationwide. The various legislative proposals discussed by the Congress have generally followed the features of the recapitalization legislation that were part of the Balanced Budget Act of 1995, which was vetoed by the President for reasons unrelated to the SAIF recapitalization. A continuing feature of the legislative proposals is a special one-time SAIF assessment to be paid with respect to deposits subject to SAIF assessments. Estimates of the special assessment have ranged from 80 to 90 basis points on such SAIF-assessable deposits as of March 31, 1995. For the Company, an 80 basis point special assessment on its SAIF-assessable deposits as of March 31, 1995 and on the deposits acquired from First Nationwide (for which the Bank assumed the liability for the special SAIF assessment as part of the acquisition cost), would be approximately $4.0 million (before giving effect to any tax benefits). Various holding companies with SAIFinsured institutions are continuing to implement plans to establish BIF-insured subsidiaries in order to facilitate the migration of deposits from its SAIF-insured subsidiaries to its BIF-insured institutions, and the federal regulators have begun to approve such BIF-insured subsidiaries. In the absence of a legislative recapitalization of the SAIF, any significant reduction in SAIFassessable deposits could result in an increase of the SAIF assessment rates. At this time, the Company cannot predict whether any legislative proposal to recapitalize the SAIF and to resolve the BIF-SAIF assessment disparity will be adopted or, if so, in what form. Until such time as such legislation is adopted, it is expected that the Company will continue to pay deposit insurance assessments for its SAIF-assessable deposits at rates substantially in excess of the rates assessed a comparably rated institution on its BIF-assessable deposits. LEGISLATION REGARDING TAX BAD DEBT RESERVES Under section 593 of the Internal Revenue Code, thrift institutions such as the Bank, which meet certain definitional tests, primarily relating to their assets and the nature of their business, are permitted to establish a tax reserve for bad debts and to make annual additions thereto, which additions may, within specified limitations, be deducted in arriving at their taxable income. The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, may currently be computed using an amount based on the Bank's actual loss experience (the "Experience Method"), or a percentage equal to 8% of the Bank's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. Similar deductions for additions to the Bank's bad debt reserve are permitted under the New York State Bank Franchise Tax; however, for purposes of these taxes, the effective allowable percentage under the PTI Method is 32% rather than 8%. Under the Small Business Job Protection Act of 1996 (the "1996 Act"), as passed by the House and Senate on August 2, 1996, section 593 of the Code would be amended and the Bank, as a "large bank" (one with assets having an adjusted basis of more than $500 million), would be unable to make additions to its tax bad debt reserve. The bank would be permitted to deduct bad debts only as they occur and would additionally be required to recapture (that is, take into income) over a multi-year period, beginning with the Bank's taxable year beginning on January 1, 1996, the excess of the balance of its bad debt reserves (other than the supplemental reserve) as of December 31, 1995 over the balance of such reserves as of December 31, 1987, or over a lesser amount if the Bank's loan portfolio has decreased since December 31, 1987. However, such recapture requirements would be suspended for each of two successive taxable years beginning January 1, 1996 in which the Bank originates a minimum amount of certain residential loans based upon the average of the principal amounts of such loans made by the Bank during its six taxable years preceding January 1, 1996. The Bank's post-December 31, 1987 bad debt reserve at December 31, 1995 was $217,000. It is anticipated that the President will sign the 1996 Act in the near future, in which case the Bank would incur an additional tax liability of approximately $195,000. The New York State tax law has been amended to prevent a similar recapture of the Bank's bad debt reserve, and to permit continued future use of the bad debt reserve methods, for purposes of determining the Bank's New York State tax liability. -18- PART II -- OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS The information set forth in Note 5 to the unaudited consolidated financial statements ("Legal Proceedings") in Part I, Item 1, hereto is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders (the "Meeting") on May 23, 1996. The purpose of the meeting was to vote on the following proposals: 1. The election of three directors for terms of three years each; 2. The amendment of the Company's Certificate of Incorporation to eliminate the provisions that prohibit record owners of the Company's common stock who beneficially own in excess of 10% of the outstanding shares of common stock (the "Limit") from voting any shares of common stock in excess of the Limit; 3. The ratification of the appointment of KPMG Peat Marwick LLP as independent auditors of the Company for the year ending December 31, 1996; and 4. A stockholder proposal, if introduced at the Meeting. With respect to Proposal 1, all of the directors nominated by the Company were elected at the Meeting. In addition, Proposal 3 was approved at the Meeting. However, Proposals 2 and 4 were not approved. The voting results for the Proposals were as follows: Proposal 1: Ralph W. Decker For 2,133,811 Against 327,365 John L. Krause For 2,134,311 Against 326,865 Frederick B. Wildfoerster, Jr. For 2,132,457 Against 328,719 Broker Non-Votes: None Proposal 2: For 1,492,371 Against 275,227 Abstain 26,212 Broker Non-Votes: 667,366 Proposal 2 required an affirmative vote of at least 80% of the Company's outstanding Common Stock on April 1, 1996. Accordingly, this proposal was defeated. -19- Proposal 3: For 2,276,701 Against 76,700 Abstain 107,775 Broker Non-Votes: None Proposal 4: For 578,095 Against 1,041,305 Abstain 109,422 Broker Non-Votes: 732,354 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibit 11 -- Computation of Earnings Per Share Exhibit 27 -- Financial Data Schedule* (B) Reports on Form 8-K None - ----------------- * Submitted only with filing in electronic format. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MSB BANCORP, INC. -------------------------------- (Registrant) By: /s/ Anthony J. Fabiano -------------------------------- Anthony J. Fabiano Senior Vice President and Chief Financial and Accounting Officer August 9, 1996 -21- EX-11 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE FOR THE QUARTER ENDED --------------------- JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- Net income............................... $ 916,000 $ 418,000 Preferred stock dividends................ 283,500 -- ----------- ----------- Net income applicable to common stock.... 632,500 418,000 Weighted average common shares........... 2,869,563 1,695,107 ----------- ----------- Earnings per common share................ $ 0.22 $ 0.25 =========== =========== FOR THE SIX MONTHS ENDED ------------------------ JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- Net income.............................. $ 1,504,000 $ 1,018,000 Preferred stock dividends............... 535,500 -- -------------- -------------- Net income applicable to common stock... $ 968,500 $ 1,018,000 Weighted average common shares.......... 2,794,839 1,713,874 -------------- -------------- Earnings per common share............... $ 0.35 $ 0.59 ============== ============== -22- EX-27 3 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the consolidated condensed statement of financial condition and the consolidated condensed statement of income and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1996 JUN-30-1996 13,759 7,840 0 0 451,070 0 0 304,078 1,557 840,552 756,996 0 13,953 584 30 0 6 68,983 840,552 11,539 14,348 978 26,865 15,227 15,256 11,609 570 17 10,350 2,592 2,592 0 0 1,504 0.35 0.35 3.03 3,521 0 694 530 1,659 683 10 1,556 0 0 1,556
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