-----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, J12MErX+0ItKsH71vIobkbT6jtudQgMRvJhcTBLE0j7cG2hKVc6hePsHgb7Bs4u7 vgXkLDmD8SPHLYZAlHZGOQ== 0000891554-98-000344.txt : 19980401 0000891554-98-000344.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891554-98-000344 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: AMEX 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-K SEC ACT: SEC FILE NUMBER: 001-12177 FILM NUMBER: 98582661 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-K 1 ANNUAL REPORT ================================================================================ FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 [_] 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 office-zip code) Telephone (914) 294-8100 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share American Stock Exchange Preferred Share Purchase Rights (Name of each exchange (Title of class) on which registered) 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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 25, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $92,193,000. As of March 25, 1998, 2,844,153 shares of the Registrant's common stock were outstanding. Documents Incorporated by Reference: None. ================================================================================ MSB BANCORP, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS Part I Item 1. Business ......................................................... 1 Item 2. Properties ....................................................... 35 Item 3. Legal Proceedings ................................................ 36 Item 4. Submission of Matters to a Vote of Security Holders .............. 37 Part II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters ...................................... 37 Item 6. Selected Consolidated Financial Information ...................... 38 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............................. 41 Item 7A. Quantitive and Qualitative Disclosures About Market Risk ......... 53 Item 8. Consolidated Financial Statements and Supplementary Data ......... 55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................. 91 Part III Item 10. Directors and Executive Officers of the Registrant ............... 92 Item 11. Executive Compensation ........................................... 94 Item 12. Security Ownership of Certain Beneficial Owners and Management ... 99 Item 13. Certain Relationships and Related Transactions ................... 103 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .. 104 PART I This Annual Report on Form 10-K contains forward-looking statements, including but not limited to statements regarding, among other items (i) general economic conditions and the condition of the real estate market, (ii) the adequacy of the Company's allowance for loan and real estate losses, (iii) interest rate risk and (iv) anticipated trends in the thrift industry. Forward-looking statements are typically identified by the words "believes," "expects," "anticipates," "intends," "estimates" and similar expressions. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the company's control. These include, among other changes in general, economic, market and legislative and regulatory conditions, the development of an adverse interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments and depositor and customer preferences. Actual results could differ materially from those contemplated by these forward-looking statements. There can be no assurance that the results and events contemplated by the forward-looking information contained in this Annual Report on Form 10-K will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to update or revise any forward-looking statements. ITEM 1. BUSINESS General MSB Bancorp, Inc. (the "Company") is a savings and loan holding company headquartered in Goshen, New York, which was incorporated in March 1992 under the laws of the State of Delaware. The Company was organized for the purpose of serving as the holding company for MSB Bank (the "Bank"). At December 31, 1997, the Company had total assets of $765.4 million, total deposits of $673.4 million and total stockholders' equity of $74.8 million. The principal business of the Company is directing, planning and coordinating the business activities of the Bank, and the financial condition and results of operations of the Company are primarily dependent upon the operations of the Bank. The Company also invests in securities, consisting primarily of U.S. Government and federal agency securities, federal funds and investment grade corporate notes. The Company neither owns nor leases any property, nor does the Company employ any persons other than certain officers of the Bank who are not separately compensated by the Company. The Company organized a wholly-owned subsidiary corporation, MSB Travel, in January 1996, to offer travel services to the Bank's customers. The Bank was organized in 1869 as a New York state-chartered mutual savings bank. On September 3, 1992, the Bank completed its conversion to stock form (the "Conversion"), and the Company sold 1,840,000 shares of its common stock, $0.01 par value per share (the "Common Stock"), at $10.00 per share and acquired the Bank with 50% of the net proceeds of the Conversion. On October 27, 1995, the Bank converted from a New York state-chartered savings bank to a federal savings bank in connection with the Bank's acquisition of certain assets and liabilities associated with seven branches of First Nationwide Bank, A Federal Savings Bank ("First Nationwide"). At such time, the Bank changed its name from Middletown Savings Bank to MSB Bank. As a consequence of the conversion of the Bank to a federal savings bank, 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 (the "FRB"). 1 On December 16, 1997, the Company announced the signing of a definitive merger agreement (the "Merger Agreement") with HUBCO, Inc. ("HUBCO"). HUBCO is a $3.0 billion bank holding company which currently owns commercial banks in New Jersey and Connecticut. See "The Merger." The Bank provides a broad range of banking services from its main office, which is located in Goshen, New York, and from 15 additional branch offices located in Orange, Putnam and Sullivan counties. The Bank is the largest financial institution headquartered in Orange County, New York, based on assets. The Bank's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, primarily in loans secured by owner-occupied one- to four-family, primary residence properties, commercial mortgage loans and short and medium-term investment grade debt securities. Revenues are derived principally from interest on the mortgage loan portfolio and interest and dividends on securities. The Bank's primary sources of funds are deposits, principal and interest payments and principal prepayments on loans, interest from securities and proceeds from the sales of securities. The Merger On December 16, 1997, the Company announced the signing of the Merger Agreement by and among HUBCO, the Company and the Bank. The Merger Agreement provides for the Company to be merged with HUBCO (the "Merger"), with HUBCO as the surviving corporation. HUBCO, a bank holding company incorporated in New Jersey, is the parent corporation of Hudson United Bank, a New Jersey-based bank (HUB), and Lafayette American Bank, a Connecticut-based bank ("Lafayette"). Prior to closing the Merger, HUBCO expects to complete its pending acquisition of Poughkeepsie Financial Corp. ("PFC") and PFC's subsidiary, Bank of the Hudson ("BTH"), a New York-based bank. HUBCO anticipates that BTH will serve as HUBCO's New York bank subsidiary and that MSB Bank will be merged into BTH following the Merger. Upon completion of the Merger, each share of common stock, par value $0.01 per share, of the Company ("MSB Common Stock"), other than Excluded Shares (as defined below), will be converted into a number of shares (the "Exchange Ratio") of common stock of HUBCO, no par value ("HUBCO Common Stock"). The Merger Agreement provides that the Exchange Ratio will be equal to $36.02 divided by the Median Pre-Closing Price (as defined below) of HUBCO Common Stock, provided that the Median Pre-Closing Price is between $34.97 and $37.13. ("Median Pre-Closing Price" will be determined by taking the price half-way between the closing prices of HUBCO Common Stock after discarding the four lowest and four highest closing prices during the ten-trading day period ending on the day the parties receive final federal bank regulatory approval for the Merger.) A "Minimum Exchange Ratio" of 0.97 will apply if the Median Pre-Closing Price is greater than $37.13, and a "Maximum Exchange Ratio" of 1.03 will apply if the Median Pre-Closing Price is less than $34.97. HUBCO will pay cash in lieu of issuing fractional shares. The Exchange Ratio is subject to adjustment specified in the Merger Agreement to prevent dilution. "Excluded Shares" are those shares of MSB Common Stock which are (i) held by MSB as treasury shares, or (ii) held by HUBCO or any of its subsidiaries (other than shares held as trustee or in a fiduciary capacity and shares held as collateral on or in lieu of a debt previously contracted). HUBCO currently holds all the outstanding shares of 8.75% Cumulative Convertible Preferred Stock, Series A, $.01 par value of the Company ("Series A Preferred Stock"). All Series A Preferred Stock held by HUBCO will be canceled in the Merger. While HUBCO does not currently anticipate transferring any of the Series A Preferred Stock, if it were to transfer any Series A Preferred Stock, the transferred shares (with certain limited exceptions) would be converted in the Merger into shares of a newly created series of HUBCO preferred stock having terms substantially identical to the Series A Preferred Stock (the "New HUBCO Preferred Stock" and, together with the HUBCO Common Stock, the "HUBCO Stock"). 2 The Offering and the Acquisition On September 29, 1995, 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"). On January 10, 1996, the Company sold 1,100,000 shares of Common Stock at $18 per share and 600,000 shares of Series A Preferred Stock to HUBCO 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 over allotment 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 $32.0 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 the First Nationwide Branches. The Company contributed substantially all of the proceeds of the Offering to the Bank. The closing of the Acquisition (defined below) took place on January 12, 1996 (the "Closing Date"), and 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 concurrently 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. 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 Acquisition increased the Company's market share of deposits to the largest in Orange County as well as the largest in the combined tri-county market area of Orange, Putnam and Sullivan counties. Market Area and Competition The Bank is a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. The Bank's primary deposit gathering base is concentrated in the New York counties of Orange, Putnam and Sullivan, while its current mortgage lending base extends throughout Orange, Sullivan, Putnam, Dutchess, Westchester and Ulster Counties in New York, Pike County in Pennsylvania and Sussex and Bergen Counties in New Jersey. In the past, the Bank has made multi-family residential and commercial real estate loans in New York City. However, the Bank has curtailed its lending in that area. The southern portion of Orange County is approximately 40 miles northwest of New York City. This area benefited historically from the diverse economy of the New York City area as well as from employment by local businesses. Orange County, formerly an agricultural area, now has a diverse economy based on the manufacturing, distribution and service industries. Management believes that economic growth in Orange County will continue to provide a favorable climate in which to conduct the business of the Bank. The Bank faces significant competition both in making loans and in attracting deposits. The Bank's market area has a high density of financial institutions, many of which are branches of significantly larger non-local institutions which have greater financial resources than the Bank, and all of which are competitors of the Bank to 3 varying degrees. Competition for loans comes principally from commercial banks, savings banks, credit unions, savings and loan associations, mortgage banking companies and insurance companies. The most direct competition for deposits has historically come from savings and loan associations, savings banks, commercial banks and credit unions. The Bank faces additional competition for deposits from short-term money market funds and other corporate and government securities funds and from other financial institutions such as brokerage firms and insurance companies. Lending Activities Loan Portfolio Composition. The Bank's loan portfolio consists primarily of conventional fixed-rate and adjustable-rate first mortgage loans, home equity loans, multi-family residential loans, line of credit loans, other consumer loans and commercial business loans. At December 31, 1997, the Bank's loans receivable totaled $393.5 million, of which $289.0 million, or 73.4%, were one- to four-family residential mortgage loans. Of the one- to four-family residential mortgage loans outstanding at that date, 82.1% were adjustable-rate mortgage ("ARM") loans and 17.9% were fixed rate loans. As part of the Bank's management of interest rate risk, the Bank's policy is to sell all newly originated conforming fixed-rate loans to the Federal National Mortgage Association ("FNMA"). These loans are sold to FNMA without recourse to the Bank. The Bank does not hedge this portfolio or sell loans pursuant to forward commitments. In order to maintain customer relationships, the Bank retains the servicing on the loans sold in the secondary market. At December 31, 1997, commercial real estate loans totaled $56.2 million or 14.3% of total loans receivable, and multi-family residential mortgage loans totaled $17.6 million or 4.5% of total loans receivable. The Bank's non-mortgage loans consist of commercial business loans and a variety of consumer loans. At December 31, 1997, commercial business loans amounted to $11.9 million or 3.0% of total loans receivable, and other consumer loans totaled $18.9 million or 4.8% of total loans receivable. The increases in loans are due to management's strategy of redeploying proceeds received in the Acquisition from the securities portfolio and into the loan portfolio. The Bank's loan portfolio provides a greater yield than the securities portfolio. The types of loans that the Bank may originate are regulated by federal laws and regulations. Interest rates charged by the Bank on loans are affected principally by the demand for such loans and the supply of money available for lending purposes. These factors are, in turn, affected by general and economic conditions, monetary policies of the federal government, including the FRB, legislative and tax policies and governmental budgetary matters. 4 The following table sets forth the composition of the Bank's loan portfolio in dollar amounts and in percentages of the respective portfolios at the dates indicated:
At December 31, ---------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------ ------------------ ----------------- ----------------- ------------------ Percent Percent Percent Percent Percent of of Of Of of Amount Total Amount Total Amount Total Amount Total Amount Total --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- (dollars in thousands) Mortgage loans: One- to four family(1) ... $ 288,966 73.4% $ 257,498 75.6% $ 222,172 78.6% $ 189,034 81.1% $ 145,764 78.9% Multi-family ............. 17,565 4.5 14,362 4.2 14,431 5.1 13,602 5.9 13,192 7.1 Commercial real estate ... 56,179 14.3 45,462 13.4 29,674 10.5 19,589 8.4 15,557 8.4 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total mortgage loans ... 362,710 92.2 317,322 93.2 266,277 94.2 222,225 95.4 174,513 94.4 Other loans: Commercial business ...... 11,893 3.0 8,756 2.6 5,686 2.0 3,099 1.3 2,855 1.6 Consumer ................. 17,449 4.4 12,891 3.8 9,473 3.4 7,229 3.1 6,954 3.8 Lines of credit .......... 1,472 0.4 1,487 0.4 1,173 0.4 447 0.2 469 0.2 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total other loans ..... 30,814 7.8 23,134 6.8 16,332 5.8 10,775 4.6 10,278 5.6 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total loans receivable 393,524 100.0% 340,456 100.0% 282,609 100.0% 233,000 100.0% 184,791 100.0% Less: Deferred loan fees ....... (712) 5 438 466 613 Allowances for loan losses 2,807 1,960 1,659 1,459 1,466 --------- --------- ---------- --------- ---------- Loans receivable, net .... $ 391,429 $ 338,491 $ 280,512 $ 231,075 $ 182,712 ========= ========= ========== ========= ========== Mortgage loan summary: Fixed rate loans ......... $ 53,632 14.8% $ 41,018 12.9% $ 28,493 10.7% $ 23,943 10.8% $ 29,570 16.9% Adjustable-rate loans .... 309,078 85.2 276,304 87.1 237,784 89.3 198,282 89.2 144,943 83.1 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total mortgage loans .. $ 362,710 100.0% $ 317,322 100.0% $ 266,277 100.0% $ 222,225 100.0% $ 174,513 100.0% ========= ===== ========= ===== ========= ===== ========= ===== ========= =====
- ---------- (1) One- to four-family mortgage loans include first and second mortgage loans and home equity loans. 5 Loan Originations, Sales and Servicing. The Bank originates both ARM and fixed-rate loans, the amounts of which are dependent upon relative customer demand as well as current and expected future levels of interest rates. The Bank generally does not purchase whole loans but, from time to time, purchases participations in loans originated by others. The following table sets forth the Bank's loan originations, sales and principal repayments for the periods indicated. During the periods indicated, no mortgage loans were purchased.
Year Ended December 31, -------------------------------------------------------------- 1997 1996 1995 ------------------- -------------------- ------------------- (In thousands) Mortgage loans (gross): At beginning of period................. $ 317,322 $ 266,277 $ 222,225 Mortgage loans originated One- to four-family................. 74,408 77,025 51,387 Multi-family........................ 11,155 2,206 1,591 Commercial real estate.............. 27,579 20,758 11,749 ------------ ------------ ------------- Total mortgage loans originated..... 113,142 99,989 64,727 ------------ ------------ ------------- Mortgage loan foreclosures............. (2,839) (1,044) (955) Principal repayments................... (53,856) (36,167) (12,614) Mortgage loans sold.................... (13,722) (11,015) (5,985) Home equity (net activity)............. 2,663 (718) (1,121) ------------ ------------ ------------- At end of period....................... $ 362,710 $ 317,322 $ 266,277 ============ ============ ============= Other loans (net activity): At beginning of period................. $ 23,134 $ 16,332 $ 10,775 Commercial business.................... 3,137 3,070 2,587 Consumer loans......................... 6,204 4,962 3,863 Lines of credit........................ (15) 314 726 Student loans sold to Student Loan Marketing Association.......... (1,646) (1,544) (1,619) ------------- ------------ ------------- At end of period....................... $ 30,814 $ 23,134 $ 16,332 ============ ============ =============
6 Loan Maturity. The following table shows the contractual maturity of the Bank's loan portfolio at December 31, 1997. The table does not reflect scheduled principal amortization, prepayments or repricing of ARM loans. Scheduled repayments and prepayments on mortgage loans (excluding home equity lines of credit) totaled $53.9 million, $36.2 million and $12.6 million for the years ended December 31, 1997, 1996, and 1995, respectively.
At December 31, 1997 ------------------------------------------------------------------------- One- to Total Four- Multi- Commercial Other Loans Family Family Real Estate Loans Receivable ---------- ---------- ---------- ---------- ---------- (In thousands) Contractual maturity: Within 1 year................ $ 12,606 $ 299 $ 3,520 $ 5,278 $ 21,703 After 1 year: 1 to 3 years.............. 1,305 29 2,990 11,625 15,949 3 to 5 years.............. 6,422 1,357 8,522 11,575 27,876 5 to 10 years............. 41,852 2,683 15,265 1,973 61,773 Over 10 years............. 226,781 13,197 25,882 363 266,223 ---------- ---------- ---------- ---------- ---------- Total due after one year.. $ 276,360 $ 17,266 $ 52,659 $ 25,536 371,821 ---------- ---------- ---------- ---------- ---------- Total amounts due............ $ 288,966 $ 17,565 $ 56,179 $ 30,814 393,524 ========== ========== ========== ========== Less: Deferred loan fees, net...... (712) Allowance for loan losses.... 2,807 ---------- Loans receivable, net........ $ 391,429 ==========
The following table sets forth at December 31, 1997, the dollar amount of all loans contractually due after December 31, 1998, and whether such loans have fixed or adjustable interest rates. Due After December 31, 1998 --------------------------- Fixed Adjustable Total --------------------------- (In thousands) Mortgage loans: One- to four-family ......................... $ 52,174 $224,186 $276,360 Multi-family and commercial real estate ..... 93 69,832 69,925 Other loans ................................... 23,328 2,208 25,536 -------- -------- -------- Total loans receivable ........................ $ 75,595 $296,226 $371,821 ======== ======== ======== One- to Four-Family Mortgage Loans. The Bank offers first mortgage loans secured by one- to four-family residences, including townhouse and condominium units, in its primary lending area. Loan originations are generally obtained from existing or past customers and members of the local communities located in the Bank's primary market area. The Bank originates ARM loans primarily for its portfolio. The Bank also originates fixed rate mortgage loans which are sold to FNMA generally within 15 days of their origination. See "-- Lending Activities - -- Loan Portfolio Composition." An origination fee of up to 2.0% may be charged on loans to reduce the interest rate on loans. All one- to four-family mortgage loan applications are reviewed by the Board of Directors. Originated mortgage loans in the Bank's portfolio generally include due-on-sale clauses which provide the Bank with the contractual right to declare the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. It is the Bank's policy to enforce due-on-sale provisions. Since the early 1980s, the Bank has emphasized the origination of ARM loans secured primarily by owner-occupied residences for retention in its portfolio. At December 31, 1997, 82.1% of the Bank's one- to four-family residential mortgage loans consisted of such ARM loans. ARM loans are made for terms of 10 to 30 years. The Bank offers an ARM loan secured by owner-occupied residences which may be originated in amounts up to $600,000, with a loan to value ratio of up to 95% of the appraised value of the property securing the loan, provided that private mortgage insurance is obtained on loan amounts in excess of 85% of such appraised value. The Bank originates primarily two types of ARM loans. The first ARM loan has a fixed rate for 5 years at which time the 7 interest rate begins to adjust every year. The Bank's other ARM loan product has an interest rate which adjust every year, based upon a spread above the one-year U.S. Treasury Securities Index, adjusted to constant maturity. The Bank's ARM loans are subject to limitations on interest rate increases of 2.0% per adjustment period and up to an aggregate of 6.0% over the life of the loan. The one-year ARM loan is originated at an introductory rate which is less than the fully-indexed interest rate. The introductory rate remains in effect for one year. The Bank also offers variable rate loans secured by non-owner-occupied properties, which adjust based upon a spread above either the prime rate or the one-year U.S. Treasury Securities Index, adjusted to constant maturity. These loans are made in amounts of up to $600,000 and for terms of up to 25 years. The Bank makes such loans up to 70% of the appraised value of the secured property. For the year ended December 31, 1997, the Bank originated $60.3 million of one- to four-family residential ARM loans. The retention of ARM loans, as opposed to fixed-rate residential loans, in the Bank's loan portfolio helps reduce the Bank's exposure to increases in interest rates. However, ARM loans generally pose credit risks different from the risks inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrowers rise, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected. In order to minimize risks, the borrowers of one-year ARM loans are qualified at 2.0% above the fully-indexed rate. The Bank does not originate ARM loans which provide for negative amortization. The volume and types of ARM loans originated by the Bank are affected by such market factors as the level of interest rates, competition, consumer preferences for ARM versus fixed-rate loans and the availability of funds. Although the Bank will continue to offer ARM loans, there can be no assurance that, in the future, the Bank will be able to originate a sufficient volume of adjustable rate loans to increase or maintain the proportion that these loans currently bear to total loans. The Bank's fixed-rate mortgage loans are currently originated with terms of 15 or 30 years. Fixed-rate mortgage loans are offered only on owner-occupied residences. Interest rates charged on fixed-rate loans are competitively priced on a regular basis based on market conditions. The Bank originates fixed-rate loans with loan to value ratios of up to 95% of the appraised value of the property securing the loan, provided that private mortgage insurance is obtained on loan amounts in excess of 80% of such appraised value. The Bank generally originates its fixed-rate mortgage loans in accordance with FNMA standards. For the year ended December 31, 1997, the Bank originated $14.1 million of fixed-rate one- to four-family residential mortgage loans. The Bank also originates home equity loans and home equity lines of credit, which are secured by one- to four-family, owner-occupied primary residences. These loans are originated as either fixed-rate loans or variable-rate loans with interest rates equal to the published prime rate, subject to a lifetime cap of 14.9%. Borrowers are qualified for home equity loans based on the maximum lifetime rate. Home equity loans and lines of credit are originated with loan to value ratios of up to 80% of the appraised value of the property securing the loan, less existing liens. Home equity loans and lines of credit are made in amounts of up to $100,000. Home equity lines of credit are made for terms of 30 years and allow the borrower to draw on the line for a period of 15 years. Interest only payments are due during the first 15 years of the line with principal amortization thereafter on a 15 year basis. At December 31, 1997, home equity loans and lines of credit totaled $12.3 million or 3.1% of total loans receivable. Multi-Family Lending. The Bank originates adjustable-rate multi-family loans and, in the past, had originated fixed-rate multi-family loans in its primary lending areas and in New York City. Since October 1990, the Bank has not originated loans to new customers secured by multi-family properties located outside its primary lending area. At December 31, 1997, multi-family loans totaling $3.5 million, or 20.0% of total multi-family loans, were secured by properties located in New York City, and multi-family loans totaling $14.1 million, or 80.0% of total multi-family loans, were secured by properties located in the Bank's primary lending area. Multi-family loans are originated with loan to value ratios of up to 75% of the appraised value of the property securing the loan, based on an independent appraisal. In making such loans, the Bank bases its underwriting decision primarily on the net operating income generated by the real estate to support the debt service. The Bank also considers the financial resources and 8 income level of the borrower if the property is owner-occupied, the borrower's experience in owning or managing similar property types, the marketability of the property and the Bank's lending experience with the borrower. Loans secured by properties experiencing high vacancy rates are qualified solely on the basis of the borrower's income and financial resources. The largest multi-family loan at December 31, 1997 had an outstanding balance of $4.1 million and is secured by an apartment building located in the Bank's primary lending area. This loan was current as to the payment of principal and interest as of December 31, 1997. The Bank's second largest multi-family loan had an outstanding balance of $2.4 million at December 31, 1997, and is secured by an apartment building located in the Bank's primary lending area. At December 31, 1997, this loan was current as to the payment of principal and interest. Commercial Real Estate Lending. Loans secured by commercial real estate totaled $56.2 million, or 14.3% of the Bank's total loans receivable, at December 31, 1997. Commercial real estate loans are generally originated with loan to value ratios of up to 80% of the appraised value of the property securing the loan. Such appraised value is determined by an independent appraiser previously approved by the Bank. The Bank also obtains personal guarantees on commercial real estate loans when it is able to do so. The Bank currently originates commercial real estate loans with adjustable rates based on a spread above either the published prime rate or a U.S. Treasury Securities Index, adjusted to constant maturity and typically with maturities of three to five years which generally require principal payments based on a 15-year amortization period. The Bank's commercial real estate loans are permanent loans secured by improved property located in the Bank's primary lending area, such as small office buildings, retail stores and other non-residential buildings. The largest commercial real estate loan at December 31, 1997 had an outstanding balance of $6.1 million and is secured by a golf course. The second largest commercial real estate loan had an outstanding balance of $3.7 million and is secured by warehouse and office building in an industrial park. Both loans were current as to the payment of principal and interest at December 31, 1997. Loans secured by commercial real estate properties generally involve a greater degree of risk than residential mortgage loans. Because payment on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by lending to established customers and currently restricts such loans to its primary market area. Commercial Business Lending. The Bank makes commercial business loans to businesses located in the Bank's primary market area. At December 31, 1997, commercial business loans totaled $11.9 million or 3.0% of total loans receivable. Commercial business loans include short-term (90 days or less) loans, commercial lines of credit, installment loans and medium term (up to 10 years) loans. Commercial business loans may be unsecured or secured by inventory, accounts receivable or vehicles. Commercial business loans carry adjustable interest rates based on a spread above the published prime rate. Personal guarantees are obtained on loans to closely held companies. The largest commercial business loan at December 31, 1997 had an outstanding balance of $2.2 million and was current as to the payment of principal and interest at such date. Consumer Lending. Consumer loans, which amounted to $18.9 million, or 4.8% of total loans receivable at December 31, 1997, consist primarily of line of credit loans, education loans, home improvement loans and unsecured personal loans. Loan Approval Authority and Underwriting. All loans originated by the Bank and secured by real estate must have the approval of the members of the Bank's Board of Directors. The Board of Directors meets on an as-needed basis, which is typically once a week. Consumer loans in amounts up to $25,000 may be approved by the Bank's President and Chief Executive Officer, Executive Vice President and Vice President, Retail Lending. Unsecured commercial business loans in amounts up to $40,000 and secured commercial business loans in amounts up to $100,000 may be approved by the Bank's commercial loan officers. The President and Chief Executive Officer 9 or Executive Vice President may approve unsecured commercial business loans in amounts up to $125,000 and secured commercial business loans in amounts up to $250,000. All other consumer and commercial loans must be approved by the Bank's Board of Directors. For all loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income and certain other information is verified and, if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is required and is currently performed by an independent appraiser designated and approved by the Board of Directors. The Bank requires title insurance on all first mortgage loans. Borrowers must also obtain hazard insurance prior to closing. Borrowers generally are required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums, if required. Concentrations. At December 31, 1997, the largest aggregate amount of loans outstanding to any one borrower and affiliates consisted of a commercial real estate loans totaling $6.1 million secured by a golf course. This loan is also the Bank's largest commercial real estate loan. The loan to this borrower did not exceed the Bank's "loans to one borrower" limitation at December 31, 1997, of $6.8 million. See "Regulation -- Regulation of Federal Savings Associations - -- Loans to One Borrower." At December 31, 1997, this loan was current. Delinquencies and Foreclosed Assets Delinquent Loans. The Bank's mortgage loan collection procedures include the sending of a late notice at the time a payment is over 15 days past due with a second notice being sent at the time the payment becomes 30 days past due. A letter is sent after the 45th day of delinquency. In the event that payment is not received, personal contact is made with the borrower. If payment remains uncollected, another letter is sent, and additional contact is made with the borrower. When contact is made with the borrower at any time prior to foreclosure, the Bank will attempt to obtain full payment or work out a repayment schedule with the borrower to avoid foreclosure. Most loan delinquencies are cured within 90 days, and no legal action is taken. Foreclosure notices are sent when a loan is 90 days delinquent. The Loan Policy and Review Committee generally meets monthly to review loan charge-offs, delinquency reports, criticized loan reports, loan work-outs, purchase offers on real estate owned ("ORE") and the status of other ORE properties. 10 The following table sets forth information regarding non-accrual loans, loans which are 90 days or more delinquent but on which the Bank is accruing interest and foreclosed real estate at the dates indicated. The Bank generally discontinues accruing interest on delinquent loans 90 days or more past due, at which time all accrued but uncollected interest is reversed.
At December 31, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (Dollars in thousands) Non-performing loans (loans delinquent 90 days or more): Loans in non-accrual status: One- to four-family ................................... $3,005 $3,364 $2,343 $1,507 $ 990 Multi-family .......................................... 294 69 69 62 -- Commercial real estate ................................ -- 1,125 488 182 110 ------ ------ ------ ------ ------ Total mortgage loans ............................... 3,299 4,558 2,900 1,751 1,100 Other loans ........................................... 189 217 61 15 52 ------ ------ ------ ------ ------ Total non-accrual .................................. 3,488 4,775 2,961 1,766 1,152 ------ ------ ------ ------ ------ Loans delinquent 90 days or more and in accrual status: Mortgage loans ........................................ -- -- -- -- 1 Other loans ........................................... -- -- -- -- 5 ------ ------ ------ ------ ------ Total .............................................. -- -- -- -- 6 ------ ------ ------ ------ ------ Total non-performing loans .............................. 3,488 4,775 2,961 1,766 1,158 Foreclosed real estate .................................. 2,443 915 806 716 1,301 ------ ------ ------ ------ ------ Total non-performing assets ............................. 5,931 $5,690 $3,767 $2,482 $2,459 ====== ====== ====== ====== ====== Ratio of non-performing loans to total loans ............ 0.89% 1.40% 1.05% 0.76% 0.63% Ratio of non-performing assets to total assets .......... 0.77% 0.69% 0.83% 0.61% 0.60%
The loans in the above table have been considered in connection with the Company's overall assessment of the adequacy of its allowance for loan losses. However, there can be no assurance that the Company will not have to establish additional loss provisions for these loans in the future. Classification of Assets. Federal regulations and the Company's policy require that the Company utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Company has incorporated the OTS internal asset classifications as a part of its credit monitoring system. The Company currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." If non-accrual loans had continued to realize interest in accordance with their contractual terms, approximately $313,000, $413,000 and $134,000 of interest income would have been realized for the years ended December 31, 1997, 1996 and 1995, respectively. 11 The following table sets forth information with respect to the classified assets of the Company at December 31, 1997. December 31, 1997 ------------------------------------ Substandard Doubtful Total ----------- -------- ------- (In thousands) Real estate loans: One-to-four family ................... $ 3,201 $ -- $ 3,201 Multifamily .......................... 1,990 114 2,104 Commercial and land .................. 4,012 336 4,348 ------- ------- ------- Total classified real estate loans ...... 9,203 450 9,653 Other loans ............................. 464 -- 464 ------- ------- ------- Total classified loans .................. $ 9,667 $ 450 $10,117 ======= ======= ======= Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," the Company recognizes impairment on troubled collateral dependent loans by creating a specific valuation allowance. Impaired loans totaled $6.9 million and $2.4 million, at December 31, 1997 and 1996 respectively. At December 31, 1997, and 1996, the specific valuation allowance totaled $925,000 and none, respectively. Impaired loans consisted of $6.4 million and $1.2 million of loans that are potential problem loans at December 31, 1997 and 1996, respectively, and $424,000 and $1.2 million of non-performing loans at those same respective dates. These assets have been considered in connection with the Company's overall assessment of the adequacy of its allowance for loan losses; however, there can be no assurance that the Company will not establish additional loss provisions for these assets in the future. Foreclosed Assets. At December 31, 1997, foreclosed real estate totaled $2.4 million and consisted primarily of one- to four-family properties. During 1997, the Bank charged off $188,000 relating to foreclosed properties. 12 Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experiences and other factors that warrant recognition in providing for an adequate loan loss allowance. 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. The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated:
Three Months Year Ended December 31, Ended Year Ended ------------------------------------------------------- December 31, September 30, 1997 1996 1995 1994 1993 1993 ------------- ------------ ------------- ----------- ------------ ------------- (Dollars in thousands) Balance at beginning of period.... $ 1,960 $ 1,659 $ 1,459 $ 1,466 $ 1,437 $ 1,209 Provision for loan losses......... 1,565 1,400 483 119 38 527 Loans charged off: Mortgage loans.................. 523 634 234 28 -- 71 Other........................... 384 485 73 105 12 300 ------- ------- ------- -------- ------- ------- Total loans charged off...... 907 1,119 307 133 12 371 ------- ------- ------- -------- ------- ------- Recoveries: Mortgage loans.................. 148 1 2 -- -- 2 Other........................... 41 19 22 7 3 70 ------- ------- ------- -------- ------- ------- Total recoveries............. 189 20 24 7 3 72 --------- ------- ------- -------- ------- ------- Charge-offs net of recoveries..... 718 1,099 283 126 9 299 --------- ------- ------- -------- ------- ------- Balance at end of period.......... $ 2,807 $ 1,960 $ 1,659 $ 1,459 $ 1,466 $ 1,437 ========= ======= ======= ======== ======= ======= At end of period allocated to: Mortgage loans.................. $ 2,374 $ 1,556 $ 1,328 $ 1,262 $ 1,318 $ 1,308 Other........................... 433 404 331 197 148 129 Ratio of net charge-offs during the period to average loans outstanding during the period.. 0.20% 0.36% 0.11% 0.06% 0.01% 0.18% Ratio of allowance for loan losses to net loans receivable at the end of the period....... 0.72 0.58 0.59 0.63 0.80 0.83 Ratio of allowance for loan losses to total non-performing assets at the end of the period 47.33 34.45 44.04 58.78 59.62 60.51 Ratio of allowance for loan losses to non-performing loans at the end of the period......................... 80.48 41.05 56.03 82.62 126.60 146.93
13 The following table sets forth the Bank's allocation of its allowance for loan losses to the total amount of loans in each category listed. The numbers contained in the "Amount" column indicate the allowance for loan losses allocated for each particular loan category. The numbers contained in the column entitled "Percentage of Loans in Category to Total Loans" indicate the total amount of loans in each particular category as a percentage of the Bank's total loan portfolio.
At December, At September 30, ---------------------------------------------------------------------------------------- ----------------- 1997 1996 1995 1994 1993 1993 ---------------------------------------------------------------------------------------- ----------------- Percentage Percentage Percentage Percentage Percentage Percentage of Loans of Loans of Loans of Loans of Loans of Loans in in in in in in Category Category Category Category Category Category to Total to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) Mortgage loans: One- to four-family........ $1,100 73.4% $ 779 75.6% $ 713 78.6% $ 921 81.1% $ 730 78.9% $ 548 79.2% Multi-family ........ 111 4.5 26 4.2 167 5.1 217 5.9 280 7.1 520 7.4 Commercial real Estate ............ 1,163 14.3 751 13.4 448 10.5 124 8.4 308 8.4 240 8.4 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total mortgage Loans .......... 2,374 92.2 1,556 93.2 1,328 94.2 1,262 95.4 1,318 94.4 1,308 95.0 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Other loans: Commercial .......... 196 3.0 166 2.6 114 2.0 60 1.3 50 1.6 37 1.2 Consumer ............ 237 4.8 238 4.2 217 3.8 137 3.3 98 4.0 92 3.8 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total other loans.. 433 7.8 404 6.8 331 5.8 197 4.6 148 5.6 129 5.0 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total ............. $2,807 100.0% $1,960 100.0% $1,659 100.0% $1,459 100.0% $1,466 100.0% $1,437 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
14 The following is a summary of charge-offs and recoveries by loan type:
Three Months Year Ended December 31, Ended Year Ended ------------------------------------------------------- December 31, September 30, 1997 1996 1995 1994 1993 1993 ------------- ------------- ------------- ------------ ------------- -------------- (In thousands) Charge-offs: Mortgage loans: One- to four-family..... $ 523 $ 528 $ 28 $ 28 $ -- $ 71 Multi-family............ -- 29 185 -- -- -- Commercial real estate.. -- 77 21 -- -- -- --------- --------- -------- -------- ------- -------- Total................. 523 634 234 28 -- 71 --------- --------- -------- -------- ------- -------- Other loans: Credit cards............ -- -- -- -- -- 267 Commercial business..... 91 348 36 50 7 13 Consumer................ 293 137 37 55 5 20 --------- --------- -------- -------- ------- -------- 384 485 73 105 12 300 --------- --------- -------- -------- ------- -------- Total charge-offs..... 907 1,119 307 133 12 371 --------- --------- -------- -------- ------- -------- Recoveries: Mortgage loans: One- to four-family..... 8 1 2 -- -- 2 Multi-family............ -- -- -- -- -- -- Commercial real estate.. 140 -- -- -- -- -- --------- --------- -------- -------- ------- -------- Total................. 148 1 2 -- -- 2 --------- --------- -------- -------- ------- -------- Other loans: Credit cards............ -- -- -- -- -- 39 Commercial business..... 9 8 8 -- -- 7 Consumer................ 32 11 14 7 3 24 --------- --------- -------- -------- ------- -------- Total................. 41 19 22 7 3 70 --------- --------- -------- -------- ------- -------- Total recoveries...... 189 20 24 7 3 72 --------- --------- -------- -------- ------- -------- Net charge-offs....... $ 718 $ 1,099 $ 283 $ 126 $ 9 $ 299 ========= ========= ======== ======== ======= ========
Mortgage-Backed Securities The Bank has historically invested in mortgage-backed securities as an alternative investment during periods of low loan demand. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgage loans with varying interest rates and maturities. The interest rate risk characteristics of the underlying pool of mortgages, as well as the prepayment risk, are passed on to the holder of the mortgage-backed securities. Consequently, in a declining interest rate environment, there is a risk that mortgage-backed securities will prepay faster than anticipated, and the Bank may not be able to reinvest the cash flow from the mortgage-backed securities into comparable yielding investments. In a rising interest rate environment, the value of the mortgage-backed securities may be impaired. Collateralized Mortgage Obligations ("CMOs") are typically issued by a special-purpose entity, which may be organized in a variety of legal forms, such as a trust, a corporation or a partnership. The entity aggregates pools of pass-through securities, which are used to collateralize the CMO. Once combined, the cash flows are divided into "tranches" or "classes" of individual bonds, thereby creating more predictable average duration for each bond than the underlying pass-through pools. Accordingly, under the CMO structure, all principal pay-downs from the various mortgage pools are allocated to a CMO's first class until it has been paid off, then to a second class until such class has been paid off and then to the next classes. At December 31, 1997, the mortgage-backed securities portfolio had 15 an estimated average life of 2.6 years. If the yield curve were to shift 300 basis points immediately, the average life of these securities would extend to 5.0 years. The loans underlying the mortgage-backed securities are either guaranteed by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association or are private issue mortgage-backed securities which are virtually all rated AAA by nationally recognized rating services. Mortgage-backed securities available for sale are summarized as follows:
At December 31, ----------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ---------------------- --------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value -------- -------- -------- -------- -------- -------- (In thousands) Collateralized mortgage obligations: Federal Home Loan Mortgage Corporation............... $ 32,509 $ 32,347 $106,832 $105,577 $ 14,757 $ 14,682 Federal National Mortgage Association............... 48,491 48,211 37,045 36,234 19,545 19,454 Other collateralized mortgage obligations...... 140,400 140,193 163,321 159,747 3,215 3,183 Mortgage pass-throughs......... 4,971 4,929 22,672 21,870 12,440 12,456 -------- -------- -------- -------- -------- -------- Total........................ $226,371 $225,680 $329,870 $323,428 $ 49,957 $ 49,775 ======== ======== ======== ======== ======== ========
The following table sets forth activities in the Bank's mortgage-backed securities portfolios for the periods indicated: Year Ended December 31, ---------------------------------- 1997 1996 1995 --------- --------- --------- (In thousands) Purchases of mortgage-backed securities ... $ 53,590 $ 386,330 $ 29,988 Sales of mortgage-backed securities ....... 128,524 88,554 20,063 Repayments on mortgage-backed securities .. 27,408 16,775 8,930 Amortization of premiums .................. 1,157 1,088 101 --------- --------- --------- Net increases (decreases) in mortgage-backed securities, gross ...... $(103,499) $ 279,913 $ 894 ========= ========= ========= Securities Activities The Board of Directors establishes the investment policy of the Bank. This policy dictates that investment decisions will be made based on the safety of the security, liquidity requirements of the Bank and potential return on the securities. The Board of Directors delegates authority to certain executive officers to carry out the Bank's investment policy. The Chief Executive Officer, Executive Vice President and Chief Financial Officer meet on an as-needed basis to make investment decisions. The Bank's policy permits investments in various types of liquid assets including United States Treasury obligations, securities of various federal agencies, obligations of states, certificates of deposits, time deposits and banker's acceptances of other financial institutions and Federal funds. The Bank also invests in investment grade corporate debt securities, commercial paper and other corporate obligations. The Bank does not participate in hedging programs, interest rate swaps or joint ventures and does not invest in non-investment grade bonds or high risk mortgage derivatives. 16 The following table sets forth the amortized cost and market values of securities available for sale at the dates indicated:
At December 31, ------------------------------------------------------------------------ 1997 1996 1995 -------------------- --------------------- ----------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value -------- -------- --------- ------- ---------- --------- (In thousands) Debt securities: U.S. Treasury securities............ $ 13,082 $ 13,011 $ 10,113 $ 9,795 $ 14,495 $ 14,467 U.S. Government agencies............ 36,000 35,763 36,000 35,093 35,266 35,167 Industrial and financial bonds....... -- -- -- -- 13,274 13,307 Other investment grade debt securities 1,101 1,114 2,111 2,074 9,204 9,299 -------- -------- --------- ------- ---------- --------- Total debt securities............. 50,183 49,888 48,224 46,962 72,239 72,240 -------- -------- --------- ------- ---------- --------- Equity securities: Mutual funds......................... 1,234 1,173 1,221 1,129 1,146 1,114 Corporate equity securities.......... 3,002 3,021 2,586 2,594 2,225 2,226 -------- -------- --------- ------- ---------- --------- Total equity securities........... 4,236 4,194 3,807 3,723 3,371 3,340 -------- -------- --------- ------- ---------- --------- Total debt and equity securities available for sale................ $ 54,419 $ 54,082 $ 52,031 $50,685 $ 75,610 $ 75,580 ======== ======== ========= ======= ========== =========
17 The following table sets forth certain information regarding the carrying value, weighted average yields and maturities of the Bank's debt securities available for sale at December 31, 1997:
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Securities ------------------- ------------------ ------------------ ------------------- ------------------------- Weighted Weighted Weighted Weighted Remaining Weighted Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Market Average Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield -------- -------- -------- --------- -------- --------- -------- --------- --------- --------- ------- ------- (Dollars in thousands) U.S. Treasury securities..... $ 5,001 5.13% $ 2,987 5.88% $ 5,094 5.75% $ -- --% 2.75 $13,082 $13,011 6.20% U.S. Government Securities... 4,000 4.76 7,000 4.84 -- -- 25,000 7.27 4.0 36,000 35,763 6.52 Other investment grade Securities. 100 4.38 586 4.32 415 4.52 -- -- 4.92 1,101 1,114 4.40 ------- ---- ------- ---- -------- ---- ------- ---- ------- ------- ---- Total......... $ 9,101 4.96% $10,573 5.10% $ 5,509 5.66% $25,000 7.27% $50,183 $49,888 6.39% ======= ======= ======== ======= ======= =======
There were no investment securities (exclusive of obligations of the U.S. Government and federal agencies) issued by any one entity with a total carrying value in excess of 10% of retained earnings at December 31, 1997. 18 Sources of Funds General. Deposits, repayments of loans and mortgage-backed securities, maturities of securities and securities sales are the primary sources of the Bank's funds for use in lending, investing and for other general purposes. Borrowings totaled $55,000 at December 31, 1997 and consisted of repurchase agreements used to secure customer sweep accounts. In the event that the Bank is not able to generate sufficient funds from its customer base, it has available unused lines of credit totaling $40.6 million from the Federal Home Loan Bank ("FHLB") of New York. Deposits. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits consist of savings accounts, Super NOW, money market, checking accounts and time deposits. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition. The Bank's deposits are obtained primarily from the areas in which its banking offices are located. Management determines the Bank's deposit rates based upon market conditions and local competition. The Bank does not use brokers to obtain deposits, relying primarily on customer service and long-standing relationships with customers to attract and retain these deposits. Time deposits in excess of $100,000 are not actively solicited by the Bank. The following table presents the deposit activity of the Bank for the periods indicated:
Year Ended December 31, --------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (In thousands) Deposits............................ $ 1,894,548 $ 2,232,851 $ 2,570,384 Withdrawals......................... 1,985,930 1,916,344 2,550,102 ----------- ----------- ----------- Net change in deposits.............. (91,382) 316,507 (1) 20,282 (2) Interest credited on deposits....... 28,653 30,710 13,742 ----------- ----------- ----------- Total increase (decrease) in deposits....................... $ 62,729 $ 347,217 $ 34,024 =========== =========== ===========
- ------------------------- (1) Includes $414.8 million in deposits assumed in connection with the Bank's acquisition of the Acquired Branches from First Nationwide. (2) Includes $21.8 million in deposits assumed in connection with the Bank's acquisition of the Central Valley branch. 19 The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated and the weighted average nominal interest rates for each category of deposits presented.
At December 31, ---------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------- --------------------------- --------------------------- 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) Demand accounts: Savings accounts....... $198,779 29.5% 3.27% $193,702 26.3% 3.28% $128,696 33.1% 3.00% NOW accounts... 40,190 6.0 1.88 39,242 5.3 2.00 16,833 4.3 2.00 Checking accounts....... 51,961 7.7 -- 47,441 6.5 -- 37,290 9.6 -- -------- ----- -------- ----- -------- ----- Total........ 290,930 43.2 280,385 38.1 182,819 47.0 Money market accounts......... 52,594 7.8 4.11 52,004 7.1 4.25 44,353 11.4 3.21 Time deposits: Within 1 year.. 233,137 34.6 5.08 293,472 39.9 5.21 117,374 30.2 5.34 Due 1 year to 3 years........ 56,317 8.4 5.85 51,568 7.0 5.44 25,772 6.6 5.62 Over 3 years... 12,446 1.8 5.32 25,027 3.4 6.08 7,342 1.9 5.92 $100,000 or more........... 28,008 4.2 5.31 33,705 4.5 5.45 11,284 2.9 5.47 -------- ----- -------- ----- -------- ----- Total........ 329,908 49.0 5.24 403,772 54.8 5.31 161,772 41.6 5.42 -------- ----- -------- ----- -------- ----- Total deposits..... $673,432 100.0% 3.96% $736,161 100.0% 4.18% $388,944 100.0% 3.70% ======== ===== ======== ===== ======== =====
At December 31, 1997, the Bank had outstanding $28.0 million in time deposits in amounts of $100,000 or more maturing as follows: Maturity Period Amount - --------------- ------ (In thousands) Three months or less....................................... $ 7,031 Over three through six months.............................. 6,334 Over six through 12 months................................. 7,220 Over 12 months............................................. 7,423 ----------- Total.................................................... $ 28,008 ========== The following table presents by various rate categories the amount of time deposits outstanding at the dates indicated: At December 31, ------------------------------------------ Interest Rate Range 1997 1996 1995 - ------------------- -------- -------- -------- (In thousands) 3.00% to 3.99% .............. $ 20 $ 2,867 $ 2,341 4.00% to 4.99% .............. 73,869 127,307 46,698 5.00% to 5.99% .............. 229,123 219,088 66,160 6.00% to 6.99% .............. 19,481 45,342 46,488 7.00% to 7.99% .............. 7,363 9,117 85 8.00% to 8.99% .............. 52 51 -- -------- -------- -------- Total ................... $329,908 $403,772 $161,772 ======== ======== ======== 20 Borrowings Borrowings totaled $55,000 at December 31, 1997 and consisted of repurchase agreements used to secure customer sweep accounts. During 1996, the Bank utilized borrowings to provide liquidity rather than sell securities which would have resulted in a loss due to market conditions. During the fourth quarter of 1996, market conditions improved and the Bank decided to sell securities to repay borrowings and provide liquidity. The Bank may obtain advances from the FHLB as an alternative to retail deposit funds or repurchase agreements and may do so in the future as part of its operating strategy. FHLB advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes. These advances would be collateralized primarily by certain of the Bank's mortgage loans and mortgage-backed securities and secondarily by the Bank's investment in capital stock of the FHLB. See "Regulation -- Regulation of Federal Savings Associations -- Federal Home Loan Bank System." Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time to time in accordance with the policies of the OTS and the FHLB. At December 31, 1997, the maximum amount of FHLB advances available to the Bank was $40.6 million, based on the Bank's current investment in FHLB stock. Subsidiary Activities MSB Financial Services, Inc. ("MSBFS"), a wholly-owned subsidiary of the Bank, offers a full range of investment and insurance products and services. During 1997, MSBFS began offering trust services and also began doing business as a broker-dealer under the name MSB Investment Services. The Company organized a wholly-owned subsidiary corporation, MSB Travel, in January 1996, to offer travel services to the Bank's customers. During 1996, MSB Travel acquired the travel business of a travel agency located in Middletown, New York. Savings Bank Life Insurance As an agent bank, the Bank offers Savings Bank Life Insurance ("SBLI") to its customers up to the legal maximum of $50,000 per insured individual and, as a trustee bank, offers an additional $350,000 in group coverage per insured under SBLI's Financial Institution Group Life Insurance policy. Fees generated from SBLI are not significant, although management believes that offering SBLI is beneficial to the Bank's relationship with its depositors and the general public. Personnel At December 31, 1997, the Bank had 185 full-time employees and 71 part-time employees. On a full time equivalent basis, the bank had 214 employees. The employees are not represented by a collective bargaining unit, and the Bank considers its relationship with its employees to be good. 21 FEDERAL AND STATE TAXATION Federal Taxation General. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank. The Company has in the past filed a consolidated federal tax return with its subsidiaries MSB and Travel. Generally, the Bank is subject to a maximum federal tax rate of 34 percent. Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996 (the "1996 Act"), for federal income tax purposes, thrift institutions such as the Bank, which met certain definitional tests primarily relating to their assets and the nature of their business, were permitted to establish tax reserves for bad debt and to make annual additions thereto, which additions could, 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, could be computed using an amount based on a six-year moving average of the Bank's actual loss experience (the "Experience Method"), or a percentage equal to 8.0% 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 this tax, the effective allowable percentage under the PTI Method is 32% rather than 8%. Under the 1996 Act, the PTI Method was repealed and the Bank, as a "large bank" (one with assets having an adjusted basis of more than $500 million), may no longer make additions to its tax bad debt reserve and is permitted to deduct bad debts only as they occur and is required to recapture (i.e., take into income) over a six-year period, beginning with the Bank's taxable year beginning 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. However, under the 1996 Act, such recapture requirements was suspended for each of the two successive taxable years beginning January 1, 1996, in which the Bank originated a minimum amount of certain residential loans during such years that was not less than the average of the principal amounts of such loans made by the Bank during its six taxable years preceding January 1, 1996. Thus the Bank will begin such bad debt reserve recapture in its current taxable year. The New York State tax law has been amended to prevent a similar recapture of the Bank's New York State tax liability. The Bank had previously provided for this liability in the financial statements. Distributions. To the extent that the Bank makes "non-dividend distributions" to shareholders, such distributions will be considered to result in distributions from the balance of its bad debt reserve as of December 31, 1987 and then from the supplemental reserve for losses on loans ("Excess Distributions"), and an amount based on the Excess Distributions will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserves. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate. 22 State and Local Taxation The Company is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (i) 9% of the Company's "entire net income" allocable to New York State during the taxable year, or (ii) the applicable alternative minimum tax. The alternative minimum tax is generally the greatest of (a) 0.01 % of the value of the Bank's assets allocable to New York State with certain modifications, (b) 3% of the Bank's "alternative entire net income" allocable to New York State, or (c) $250. Entire net income is similar to federal taxable income, subject to certain modifications (including the fact that net operating losses cannot be carried back or carried forward) and alternative entire net income is equal to entire net income without certain deductions. A Metropolitan Commuter Transportation District Surcharge on the New York State Franchise Tax on banking corporations doing business within the District has been applied since 1982. The Company does all of its business within the District and is subject to this surcharge rate of 17%. As a Delaware business corporation, the Company is required to file annual returns and pay annual fees and an annual franchise tax to the State of Delaware. These taxes and fees are not material. For purposes of New York State tax law, the Company and the Bank file a combined return. 23 REGULATION General As a federal savings bank, the Bank is subject to regulation, examination and supervision by the Office of Thrift Supervision ("OTS") and is subject to the back-up examination and supervision of the Federal Deposit Insurance Corporation ("FDIC") as the Bank's deposit insurer. The Bank is a member of the Bank Insurance Fund ("BIF"), and its deposit accounts are insured up to applicable limits by the FDIC. The Bank pays deposit insurance assessments to both the BIF and the Savings Association Insurance Fund ("SAIF"). The Bank is also a member of the FHLB of New York. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Company, as a savings and loan holding company, files certain reports with, and otherwise complies with, the rules and regulations of the OTS and of the Commission under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank, and the operations of both. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations and their holding companies, and it does not purport to be a comprehensive description of all such statutes and regulations. Regulation of Savings and Loan Holding Companies The Company as a savings and loan holding company is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and any of its non-savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings association. The Home Owners' Loan Act, as amended ("HOLA"), prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5.0% of a non-subsidiary savings association, a non-subsidiary holding company or a non-subsidiary company engaged in activities other than those permitted by HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the OTS must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to satisfy the qualified thrift lender ("QTL") test. See "- Regulation of Federal Savings Associations QTL Test" for a discussion of the QTL requirements. Upon any non-supervisory acquisition by the Company of another savings association or savings bank that meets the QTL test, that is deemed to be a savings association by the OTS and that will held as a separate subsidiary, the Company would become a multiple savings and loan 24 holding company and would be subject to limitations on the types of business activities in which it could engage. HOLA limits the activities of a multiple savings and loan holding company and its non-insured association subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, as amended ("BHC Act"), subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, subject to two exceptions: an acquisition of a savings association in another state (i) in a supervisory transaction, and (ii) pursuant to authority under the laws of the state of the association to be acquired that specifically permit such acquisitions. The conditions imposed upon interstate acquisitions by those states that have enacted authorizing legislation vary. Some states impose conditions of reciprocity, which have the effect of requiring that the laws of both the state in which the acquiring holding company is located (as determined by the location of its subsidiary savings association) and the state in which the association to be acquired is located, have each enacted legislation allowing its savings associations to be acquired by out-of-state holding companies on the condition that the laws of the other state authorize such transactions on terms no more restrictive than those imposed on the acquirer by the state of the target association. Some of these states also impose regional limitations, which restrict such acquisitions to states within a defined geographic region. Other states allow full nationwide banking without any condition of reciprocity. Some states do not authorize interstate acquisitions of savings associations. Transactions between the Bank and the Company and its other subsidiaries would be subject to various conditions and limitations. See "- Regulation of Federal Savings Associations - Transactions with Related Parties." The Bank would have to give 30-days written notice to the OTS prior to any declaration of the payment of any dividends or other capital distributions to the Company. See "- Regulation of Federal Savings Associations - Limitation on Capital Distributions." Regulation of Federal Savings Associations Business Activities. The activities of federally chartered savings associations are governed by HOLA, as amended and, in certain respects, by the Federal Deposit Insurance Act (the "FDI Act"). The Bank derives its lending and investment powers from the HOLA, and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including: (i) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (ii) a limit of 400% of an association's capital on the aggregate amount of loans secured by nonresidential real estate property; (iii) a limit of 20% of an association's assets on the aggregate amount of commercial loans, with the amount of commercial loans in excess of 20% of assets being limited to small business loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (iv) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (v) a limit of 5.0% of assets on the aggregate amount of non-conforming loans (loans in excess of the specific limitations of HOLA); and (vi) a limit of the greater of 5.0% of assets or an association's capital on the aggregate amount of certain construction loans made for the purpose of financing what is or is expected to become residential property. Loans to One Borrower. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally 25 does not include real estate. At December 31, 1997, the Bank's limit on loans to one borrower was $6.8 million. At December 31, 1997, the Bank's largest aggregate amount of loans to one borrower was $6.1 million, and the second largest borrower had an aggregate balance of $5.9 million. QTL Test. HOLA requires a savings association to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least 9 months of the most recent 12-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (i) specified liquid assets up to 20% of total assets, (ii) goodwill and other intangible assets, and (iii) the value of property used to conduct the association's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of an association's portfolio assets. Recent legislation broadened the scope of "qualified thrift investments" to include 100% of an institution's credit card loans, education loans, and small business loans. A savings association may also satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986. At December 31, 1997, the Bank maintained 96.9% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in all of the prior 12 months and was, therefore, a qualified thrift lender. A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (i) engaging in any new activity not permissible for a national bank, (ii) paying dividends not permissible under national bank regulations, (iii) obtaining new advances from any FHLB, and (iv) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, within one year of the date a savings association ceases to meet the QTL test, any company controlling the association would have to register under, and become subject to the requirements of, the BHC Act. If the savings association does not re-qualify under the QTL test within the three-year period after it failed the QTL test, it would be required to terminate any activity and to dispose of any investment not permissible for a national bank and would have to repay as promptly as possible any outstanding advances from an FHLB. A savings association that has failed the QTL test may re-qualify under the QTL test and be free of such limitations, but it may do so only once. Capital Requirements. 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. See "- Prompt Corrective Regulatory Action." The OTS and the federal banking regulators have proposed amendments to their minimum capital regulations to provide that the minimum leverage capital ratio for a depository institution that has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Ratings System will be 3% and that the minimum leverage capital ratio for any other depository institution will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. 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 asset. Tangible capital is defined, generally, as common stockholder's equity (including retained earnings), certain non-cumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined 26 similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible debt securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. The OTS has adopted regulations that require a savings association with "above normal" interest rate risk to deduct a portion of capital from its total capital to account for the "above normal" interest rate risk when determining its compliance with the risk-based capital requirement. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) resulting from a hypothetical 2.0% increase or decrease in market rates of interest, divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. At the times when the 3-month Treasury bond equivalent yield falls below 4.0%, an association may compute its interest rate risk on the basis of a decrease equal to one-half of that Treasury rate rather than on the basis of 2.0%. A savings association whose measured interest rate risk exposure exceeds 2.0% would be considered to have "above normal" risk. The interest rate risk component is an amount equal to one-half of the difference between the association's measured interest rate risk and 2.0%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Any required deduction for interest rate risk becomes effective on the last day of the third quarter following the reporting date of the association's financial data on which the interest rate risk was computed. The regulations authorize the Director of the OTS to waive or defer an association's interest rate risk component on a case-by-case basis. The OTS has indefinitely deferred the implementation of the interest-rate risk component in the computation of an institution's risk-based capital requirements. The OTS continues to monitor the interest rate risk of individual institutions and retains the right to impose additional capital requirements on individual institutions. At December 31, 1997 the Bank was not required to maintain any additional risk-based capital under this rule. At December 31, 1997 the Bank met each of the OTS minimum requirements, in each case on a fully phased-in basis. The table below presents the Bank's regulatory capital as compared to the OTS regulatory capital requirements at December 31, 1997:
December 31, 1997 -------------------------------------------------------------------- Tangible Core Risk-Based ------------------- ------------------ ------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in thousands) Capital as calculated under GAAP........... $73,907 10.04% $ 73,907 10.04% $ 73,907 19.70% Deduct servicing rights.................... 17 -- 17 -- 17 -- Deduct equity investments.................. -- -- -- -- 125 0.03 Deduct goodwill............................ 29,173 3.96 29,173 3.96 29,173 7.78 Add qualifying general loan loss allowance, as limited by regulation................ -- -- -- -- 2,807 0.75 Add net unrealized loss on securities available for sale, net of taxes........ 597 0.08 597 0.08 597 0.16 --------- ---- ------ --- ---- ---------- ---- Capital, as calculated..................... 45,314 6.15 45,314 6.15 47,996 12.79 Capital, as required....................... 11,046 1.50 31,501 4.00 30,015 8.00 --------- ---- ------ --- ---- ---------- ---- Excess..................................... $ 34,268 4.65% $ 13, 813 2.15% $ 17,981 4.79% ========= ==== ====== === ==== ========== ====
Limitation on Capital Distributions. OTS regulations currently impose limitations upon capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger, and other distributions charged 27 against capital. At least 30-days written notice must be given to the OTS of a proposed capital distribution by a savings association, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. An association that has capital in excess of all fully phased-in regulatory capital requirements before and after a proposed capital distribution and that is not otherwise restricted in making capital distributions, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. See "- Prompt Corrective Regulatory Action." The OTS has proposed amendments of its capital distribution regulations to reduce regulatory burdens on savings associations. If adopted as proposed, certain savings associations will be permitted to pay capital distributions within the amounts described above for Tier 1 institutions without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Association, will continue to have to file a notice unless the specific capital distribution requires an application. Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, certain bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4.0% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4.0%. Monetary penalties may be imposed for failure to meet this liquidity requirement. The Bank's liquidity ratio at December 31, 1997 was 23.5%, which exceeded the applicable requirement. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirement. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semi-annual basis, is computed upon the savings association's total assets, including consolidated subsidiaries, as reported in the association's latest quarterly Thrift Financial Report. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (i) in states that expressly authorize branches of savings associations located in another state and (ii) to an association that qualifies as a "domestic building and loan association" under the Code, which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "- QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association 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 CRA does not establish specific lending 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, consistent with the CRA. The CRA requires the OTS, in 28 connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination. In April 1995, the OTS and the other federal banking agencies adopted amendments revising their CRA regulations. Among other things, the amended CRA regulations substitute for the prior process-based assessment factors a new evaluation system that would rate an institution based on its actual performance in meeting community needs. In particular, the proposed system would focus on three tests: (i) a lending test, to evaluate the institution's record of making loans in its service areas; (ii) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of services through its branches, automated teller machines ("ATMs") and other offices. Small savings associations are to be assessed pursuant to a streamlined approach focusing on a lesser range of information and performance standards. The term "small savings association" is defined as including associations with less than $250 million in assets or an affiliate of a holding company with banking and thrift assets of less than $1.0 billion, which would include the Bank. The amended CRA regulations also clarify how an institution's CRA performance would be considered in the application process. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions. The OTS regulations prohibit a savings association (i) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act and (ii) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit underwriting standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. An exception is made for loans to executive officers made on the same terms widely available to employees of the association or on terms that are not preferential to executive officers. In addition, extensions of credit to insiders in excess of certain limits must be approved by the association's board of directors. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including any controlling stockholder or any stockholder, attorney, appraiser and accountant who knowingly or 29 recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause a more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders and certain written agreements and conditions continue, up to $1,000,000 per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $10 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. The FDI Act, as amended by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Riegle Community Development and Regulatory Improvement Act of 1994 ("Community Development Act"), requires the OTS, together with the other federal bank regulatory agencies, to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits and such other operational and managerial standards as the agencies deem appropriate. The OTS and the federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards pursuant to FDICIA as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. The OTS and the other agencies determined that stock valuation standards were not appropriate. In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. See "- Prompt Corrective Regulatory Action." If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. The OTS and the federal bank regulatory agencies also proposed guidelines for asset quality and earnings standards. Real Estate Lending Standards. The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that (i) are secured by real estate or (ii) are made for the purpose of financing the construction of improvements on real estate. The OTS regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. Associations are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. 30 Prompt Corrective Regulatory Action. FDICIA establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, based upon the five categories of institutions established by FDICIA: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and critically undercapitalized," which are categories defined by the institution's regulatory capital ratios. Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." In addition, various mandatory supervisory actions become immediately applicable to any undercapitalized institution, including restrictions on growth of assets and other forms of expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Generally, subject to a narrow exception, FDICIA requires the applicable banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. Under the OTS regulations, generally, a federally chartered savings association is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. As of December 31, 1997, the Association met the criteria for being considered "well capitalized" by the OTS under the prompt corrective action regulations. Where appropriate, the OTS can impose corrective action by a savings and loan holding company under the "prompt corrective action" provisions of FDICIA. Insurance of Deposit Accounts. The deposits of the Bank are insured by the Bank Insurance Fund ("BIF") except for those deposits attributable to the Bank's acquisition of deposits from institutions insured by the Savings Association Insurance Fund ("SAIF"), including First Nationwide Pursuant to FDICIA, the FDIC established a new risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the new assessment system, which began in 1993, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period. The three capital categories consist of (a) well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds Act of 1996 (the "Funds Act"), both the BIF and the SAIF currently satisfy the reserve ratio requirement. If the FDIC determines that assessment rates should be increased, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and could raise insurance assessment rates in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank. The Funds Act also amended the FDIA to expand the assessment base for the payments on the FICO bonds. Beginning January 1, 1997, the assessment base for the FICO bonds included the deposits of both BIF- and SAIF-insured institutions. Until December 31, 1999, or such earlier date on which the last savings association ceases to exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual rate of assessments for the payments on the FICO bonds for 31 the semi-annual period beginning on January 1, 1997 was 0.0130% for BIF-assessable deposits and 0.0648% for SAIF-assessable deposits. For the semi-annual period beginning on July 1, 1997, the rates of assessment for the FICO bonds was 0.0126% for BIF-assessable deposits and 0.0630% for SAIF-assessable deposits. The Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999, with such merger being conditioned upon the prior elimination of the thrift charter. The Funds Act required the Secretary of the Treasury to conduct a study of relevant factors with respect to the development of a common charter for all insured depository institutions and abolition of separate charters for banks and thrifts and to report the Secretary's conclusions and findings to the Congress. The Secretary of the Treasury recommended to the Congress that the separate charter for thrifts be eliminated only if other legislation is adopted that permits bank holding companies to engage in certain non-financial activities. Absent legislation permitting bank holding companies to engage in such non-financial activities, the Secretary of the Treasury recommended that the thrift charter be retained. Proposed legislation agreed to in March 1998 by the House Committee on Banking and Financial Services and the House Committee on Commerce provides for the retention of the thrift charter and for the merger of the BIF and the SAIF on January 1, 2000. Under the FDI Act, insurance of deposits may be terminated by the FDIC 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 imposed by the FDIC or the OTS. The management of the Association does not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Home Loan Bank System. The Bank is a member of the FHLB of New York, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in the FHLB of New York in an amount at least equal to the greater of 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 1/20 of its advances (borrowings) from the FHLB of New York. The Bank was in compliance with this requirement with an investment in FHLB of New York stock at December 31, 1997, of $2.8 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. Federal Reserve System. The Bank is subject to provisions of the FRA and the FRB's regulations pursuant to which depository institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts up to $47.8 million. The amount of aggregate transaction accounts in excess of $47.8 million are currently subject to a reserve ratio of 10.0%, which ratio the FRB may adjust between 8.0% and 12%. The FRB regulations currently exempt $4.7 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy the liquidity requirements imposed by the OTS. FHLB System members are 32 also authorized to borrow from the Federal Reserve discount window, but FRB regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. 33 EXECUTIVE OFFICERS OF THE COMPANY William C. Myers - Mr. Myers is the Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Myers also serves as Chairman of the Board of MSBFS and Travel. Effective October 1, 1993, Mr. Myers was elected Chairman of the Board of Directors of the Company and the Bank. Mr. Myers joined the Bank in 1971. Mr. Myers is 52 years old, and his term as director expires in 1998. Gill Mackay - Mr. Mackay was appointed Executive Vice President, Chief Operating Officer and Treasurer on January 1, 1993. Prior to that, Mr. Mackay served as Senior Vice President, Finance and Chief Financial Officer since 1989. He joined the Bank in 1984 as Assistant Vice President of Accounting. Mr. Mackay is 51 years old. Anthony J. Fabiano - Mr. Fabiano was appointed Senior Vice President and Chief Financial Officer effective January 1, 1996. Prior to that, Mr. Fabiano served as Vice President, Finance and Chief Financial Officer since January 1, 1993. He joined the Bank in May 1992 as Vice President, Finance. Prior to that, he was a senior manager with KPMG Peat Marwick, a public accounting firm. Mr. Fabiano is 37 years old. Karen S. DeLuca - Mrs. DeLuca joined the Bank in 1985 and has served as the Corporate Secretary since 1991. Prior to that, she served as the Assistant Corporate Secretary. Mrs. DeLuca is 49 years old. The term of office of each executive officer extends until the Annual Meeting of the Board of Directors and until his or her successor is elected and duly qualified, the office is abolished or he or she is removed. Except as described in Part III hereof, there are no agreements or understandings between the Company and any person pursuant to which such person has been elected as an executive officer. 34 ITEM 2. PROPERTIES The Company's offices are located at 35 Matthews Street, Goshen, New York. At December 31, 1997, the Bank conducted its business through 16 full-service banking offices as follows:
Net Book Value at Deposits at Leased/ Lease December December Location Owned Expiration Date 31, 1997 31, 1997 - ----------------------------- ----------------- ------------------ ---------------- -------------- (In thousands) Home Office 35 Matthews Street Owned N/A $ 3,639 $ 40,551 Goshen, NY 10924 4 South Street Owned N/A 1,463 109,129 Middletown, NY 10940 Route 211 East Building is owned, 9/15/2015 708 55,456 Middletown, NY 10940 land is leased 205 East Main Street Owned N/A 981 83,557 Port Jervis, NY 12771 300 Route 17M & Still Road Owned N/A 651 43,835 Monroe, NY 10950 156 A-B Dolson Avenue Leased 5/31/2002(1) 11 27,615 Middletown, NY 10940 800 Broadway Owned N/A 479 18,441 Newburgh, NY 12550 Union Avenue Leased 11/30/04 40 12,849 Newburgh, NY 12550 401 Chester Mall Building is owned, 6/30/2008 490 16,827 Chester, NY 10918 land is leased Rt. 32 Estrada Road Owned N/A 571 20,371 Central Valley, New York 9 Mahopac Plaza Owned N/A 387 37,124 Mahopac, NY 10541 96 Gleneida Avenue Owned N/A 349 33,456 Carmel, NY 10512 21 East Main Street Owned N/A 222 25,963 Washingtonville, NY 10992 51 Main Street Owned N/A 435 35,388 Warwick, NY 10990 285 Broadway Owned N/A 583 50,055 Monticello, NY 12701 74 North Main Street Owned N/A 209 62,815 Liberty, NY 12754 --------- ---------- Total $ 11,218 $ 673,432 ========== ==========
- ------------------------ (1) The Bank holds two five-year options to renew the lease until May 2012. (2) The Bank's lease agreements are operating leases. The net book value at December 31, 1997 represents the net book value of leasehold improvements on the leased properties. 35 ITEM 3. 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. The Company and its directors are defendants in a lawsuit, Kahn Brothers & Co., Inc. Profit Plan and Trust et al. v. MSB Bancorp, Inc. et al., commenced by stockholders in the Delaware Court of Chancery, New Castle County, on November 22, 1995. (The Company and its directors were 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 November 7, 1995. This action was consolidated with the Kahn litigation, and the Kahn amended complaint is now the operative pleading.) 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 expression of interest of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to stockholders by not notifying the public or the Company's stockholders of HUBCO's expression of interest; 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 re-argument. 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 parties have engaged in substantial written discovery, and plaintiffs have deposed all of the directors and certain representatives of Bear Stearns. The Company has deposed plaintiffs' representative, Mr. Thomas Kahn. Discovery has been completed. On October 10, 1997, all the defendants served and filed with the Court a motion for summary judgment which seeks the dismissal of all the allegations in plaintiffs' amended complaint. As of January 16, 1998, defendants' motion for summary judgment was fully briefed and submitted to the Court. The Company has requested oral argument on the motion. In the meantime, the Company intends to continue to vigorously contest the allegations of wrongdoing in this action. While the Company believes that it has meritorious defenses in these legal actions and is vigorously defending these suits, the legal responsibility and financial impact with respect to these litigation matters cannot presently be ascertained and, accordingly, there is risk that the final resolution of these matters could result in the payment of monetary damages which would be material in relation to the consolidated financial condition or results 36 of operations of the Company. The Company does not believe that the likelihood of such a result is probable and has not established any specific litigation reserves with respect to such matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock has been traded on the American Stock Exchange under the symbol "MBB" since September 19, 1996. Prior to that time, the Common Stock had been traded on the NASDAQ National Market System under the symbol "MSBB" since September 3, 1992. On March 25, 1998, the last reported high and low sale prices of the Common Stock, as reported on the American Stock Exchange, were $36.50 and $36.50, respectively. As of December 31, 1997, the Company had approximately 601 stockholders of record. The following table sets forth the high and low closing sale prices for the Common Stock, and the cash dividends declared with respect thereto, for the periods indicated.
Price Range Cash Dividend ------------------- Declared per High Low Common Share ---- --- ------------ Fiscal year ended December 31, 1995: First Quarter.......................... $ 23 $ 20 1/2 $ 0.15 Second Quarter......................... 24 1/2 22 0.15 Third Quarter.......................... 26 3/4 24 0.15 Fourth Quarter......................... 27 1/4 17 1/2 0.15 Fiscal year ended December 31, 1996: First Quarter.......................... 22 17 0.15 Second Quarter......................... 18 1/4 15 0.15 Third Quarter.......................... 17 1/2 15 3/4 0.15 Fourth Quarter......................... 19 5/8 15 1/2 0.15 Fiscal year ended December 31, 1997: First Quarter.......................... 20 1/2 16 3/4 0.15 Second Quarter......................... 20 1/8 16 3/8 0.15 Third Quarter.......................... 28 7/8 19 7/8 0.15 Fourth Quarter......................... 35 1/4 27 1/4 0.15
The Company has paid a regular quarterly cash dividend on its Common Stock since April 30, 1993 and declared a cash dividend of $0.15 per share for each of the first, second, third and fourth quarters of 1997, 1996 and 1995. The Board of Directors of the Company presently intends to continue the payment of regular quarterly cash dividends on the Common Stock. However, the timing and amount of future dividends will be within the discretion of the Board of Directors of the Company and will depend on the earnings of the Company and its subsidiaries, their financial condition, liquidity and capital requirements, applicable governmental regulations and policies and other factors deemed relevant by the Board of Directors. The ability of savings associations to pay dividends is regulated by OTS regulations and, in certain cases, requires OTS approval. The OTS also has the authority to prohibit a savings association from engaging in an activity that, in the OTS' opinion, constitutes an unsafe or unsound practice for conducting business. Depending upon the financial condition of a savings association, payment of dividends could be deemed to constitute such an unsafe or 37 unsound practice. In addition, a savings association may not pay a dividend or otherwise make a capital distribution if the payment thereof would cause such savings association to fail to satisfy its capital requirements. See "Regulation - -- Regulation of Federal Savings Associations -- Limitation on Capital Distributions." ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION The following tables set forth selected consolidated historical financial data of the Company at or for (i) each of the years in the four year period ended December 31, 1997 and the year ended September 30, 1993 (the "Year End Data") and (ii) the 12 months ended December 31, 1993. The "Financial Condition Data," "Operations Data" and certain "Performance Ratios" contained in the Year End Data at or for the year ended December 31, 1997 and 1996, has been derived from financial statements audited by KPMG Peat Marwick LLP, the Company's independent auditors. The historical "Financial Condition Data," "Operations Data" and certain "Performance Ratios" contained in the Year End Data for each of the years in the two years ended December 31, 1995 and for the year ended September 30, 1993 and the "Financial Condition Data" at December 31, 1993 are derived from financial statements that have been audited by Nugent & Haeussler, P.C., the Company's independent public accountants for those periods. All other information contained in the Year End Data, and the information at or for the 12 months ended December 31, 1993 are unaudited. 38
At or for the At or for the Year Ended 12 Months At or for the December 31, Ended Year Ended --------------------------------------------------- December 31, September 30, 1997 1996 1995 1994 1993(1) 1993 --------- --------- --------- --------- ------------- ------------- Financial Condition Data: (In thousands) Total assets............. $ 765,367 $ 820,916 $ 454,126 $ 405,928 $ 409,429 $ 417,332 Investments held to maturity............... -- -- -- 31,908 143,448 162,699 Securities available for sale................... 54,082 50,685 75,580 50,720 6,115 5,268 Mortgage-backed securities............. 225,680 323,428 49,775 45,668 34,437 26,323 Loans, net............... 391,429 338,491 280,512 231,075 182,712 172,270 Deposits................. 673,432 736,161 388,944 354,920 356,931 359,703 Stockholders' equity..... 74,776 70,790 43,996 39,624 43,430 44,055 Operations Data: Total interest and dividend income........ 53,164 54,350 29,151 24,514 25,403 26,215 Interest expense......... 28,680 30,793 15,183 10,772 11,281 11,902 --------- --------- --------- --------- --------- --------- Net interest income.... 24,484 23,557 13,968 13,742 14,122 14,313 Provision for loan losses 1,565 1,400 483 119 355 527 --------- --------- --------- --------- --------- --------- Net interest income after provision for loan losses............ 22,919 22,157 13,485 13,623 13,767 13,786 --------- --------- --------- --------- --------- --------- Net realized gains (losses) on securities and loans.............. 378 155 (98) (472) 1,276 1,752 Market value adjustments on securities held for sale................... -- -- -- -- (193) (12) Unrealized loss on loans held for sale ......... -- -- -- (190) -- -- Service fees and charges. 4,278 3,768 2,248 2,280 2,585 2,542 Other non-interest income 82 104 18 135 71 32 --------- --------- --------- --------- --------- --------- Non-interest income.... 4,738 4,027 2,168 1,753 3,739 4,314 --------- --------- --------- --------- --------- --------- Salaries and employee benefits............... 8,419 8,304 5,771 6,073 6,389 6,373 Occupancy and equipment.. 3,188 3,145 2,415 2,346 2,465 2,557 SAIF recapitalization assessment............. -- 2,925 -- -- -- -- Restructuring expenses... -- -- -- 1,578 -- -- Termination of Retirement Plan for Directors.............. 2,800 -- -- -- -- -- Goodwill amortization........... 3,662 3,517 137 122 122 122 Other non-interest expenses............... 5,785 5,478 3,347 3,601 3,722 3,824 --------- --------- --------- --------- --------- --------- Non-interest expense... 23,854 23,369 11,670 13,720 12,698 12,876 --------- --------- --------- --------- --------- --------- Income before income tax expense................ 3,803 2,815 3,983 1,656 4,808 5,224 Income tax expense....... 1,522 1,104 1,622 626 2,165 2,312 --------- --------- --------- --------- --------- --------- Income before cumulative effect of accounting change................. 2,281 1,711 2,361 1,030 2,643 2,912 Cumulative effect of accounting change (2).. -- -- -- 117 -- 483 --------- --------- --------- --------- --------- --------- Net income.............. $ 2,281 $ 1,711 $ 2,361 $ 1,147 $ 2,643 $ 3,395 ========= ========= ========= ========= ========= =========
- ------------------------ (1) In July 1993, the Company changed its fiscal year-end from September 30 to December 31. The three months ended December 31, 1993 represented a transition period. The Company's 1994 fiscal year began on January 1, 1994. For purposes of comparing the results of operations for fiscal 1994, the Company believes it is meaningful to use the 12 months ended December 31, 1993 (unaudited) as the basis for that comparison. (2 Represents a change in the accounting for investment securities in 1994 and income taxes in 1993. 39
At or for the At or for the Year Ended 12 Months At or for the December 31, Ended Year Ended ------------------------------------------------- December 31, September 30, 1997 1996 1995 1994 1993(1) 1993 ------- ------- ------- ------- ------------- ------------ (Dollars in thousands, except per share amounts) Performance Ratios: Return on average assets(2)... 0.29% 0.21% 0.54% 0.28% 0.64% 0.82% Return on average stockholders' equity(2)................... 3.11 2.42 5.62 2.75 6.05 7.82 Average stockholders' equity to average Assets............ 9.23 8.48 9.52 10.26 10.58 10.44 Stockholders' equity to total assets........................ 9.77 8.62 9.69 9.76 10.61 10.56 Average interest rate spread.. 2.97 2.71 2.77 3.14 3.24 3.25 Net interest margin........... 3.37 3.07 3.35 3.58 3.65 3.67 Operating expenses to average assets(3)..................... 2.59 2.42 2.61 2.93 3.02 3.07 Dividend payout ratio(4)...... 150.00 272.73 43.17 69.70 20.98 10.93 Tangible book value per share at end of Period.............. $ 13.42 $ 11.05 $ 26.04 $ 22.32 $ 24.57 $ 24.12 Basic earnings per share (2).. 0.40 0.22 1.46 0.70 1.53 1.93 Diluted earnings per share(2). 0.40 0.22 1.42 0.68 1.48 1.88 Regulatory Capital Ratios of The Bank (5) Tier 1 leverage capital....... 6.2% 5.4% 9.7% 11.0% 10.4% 10.3% Total risk-based capital...... 12.8 13.1 19.1 21.8 23.8 24.0 Asset Quality Ratios and Other Data Total non-performing loans.... $ 3,488 $ 4,775 $ 2,961 $ 1,766 $ 1,158 $ 978 Foreclosed real estate........ 2,443 915 806 716 1,301 1,397 ------- ------- ------- ------- ------- ------- Total non-performing assets... $ 5,931 $ 5,690 $ 3,767 $ 2,482 $ 2,459 $ 2,375 ======= ======= ======= ======= ======= ======= Ratio of non-performing loans to total Loans................ 0.89% 1.40% 1.05% 0.76% 0.63% 0.56% Ratio of non-performing assets to total Assets........ 0.77 0.69 0.83 0.61 0.60 0.57 Ratio of net charge-offs during the period to average loans outstanding during the period........................ 0.20 0.36 0.11 0.06 0.16 0.18 Ratio of allowance for loan losses to net loans receivable at the end of the Period...................... 0.72 0.58 0.59 0.63 0.80 0.83 Ratio of allowance for loan losses to Total non-performing assets at the end of the period...... 47.33 34.45 44.04 58.78 59.62 60.51 Ratio of allowance for loan losses to non-performing loans at the end of the Period 80.48 41.05 56.03 82.62 126.60 146.93
- ------------------------ (1) In July 1993, the Company changed its fiscal year-end from September 30 to December 31. The three months ended December 31, 1993 represented a transition period. The Company's 1994 fiscal year began on January 1, 1994. For purposes of comparing the results of operations for fiscal 1994, the Company believes it is meaningful to use the 12 months ended December 31, 1993 (unaudited) as the basis for that comparison. (2) Includes $2.8 million in non-recurring expenses related to the termination of the Board Plan and $330,000 of merger related expenses in 1997,a $2.9 million pre-tax charge for SAIF assessment in 1996 and a $1.6 million pre-tax charge for restructuring expenses in the fourth quarter of 1994. (3) Excludes write-downs of real estate owned and, in 1997, $3.1 million of non-recurring expenses, a $2.9 million SAIF assessment in 1996 and $1.6 million of restructuring expenses in 1994. (4) Dividends declared per share divided by earnings per share. (5) For periods prior to 1995, the ratios are calculated under the regulatory capital regulations of the FDIC, which are substantially identical to the OTS capital requirements as applied to the Bank. 40 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is designed to provide a better understanding of the results of operations and the financial condition of the Company. This discussion should be read in conjunction with the information included under "Selected Consolidated Financial Information" and "Business" and the Consolidated Financial Statements and the related notes thereto included elsewhere in this Form 10-K. General In connection with the Conversion of the Bank from a mutual savings bank to a stock savings bank on September 3, 1992, the Company sold 1,840,000 shares of Common Stock at $10.00 per share to the public and utilized $8.4 million of the $16.9 million net proceeds from the Conversion offering to acquire all of the common stock 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 over-allotment option. The issuance and sales 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 $32.0 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. Prior to the fourth quarter of 1997, Management's strategy was 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, 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 First Nationwide Agreement during 1995. The Acquisition closed on January 12, 1996 with the Bank assuming $414.8 million of deposits. The Bank also acquired the 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. In deploying the funds acquired by the Bank through acquisitions, the Bank has emphasized the origination of one- to four-family residential mortgage loans and commercial mortgage loans while seeking to limit credit and interest rate risk. The Bank generally limits its lending activities to its market area and retains only ARM loans in its portfolio and sells fixed rate loans that it originates in the secondary market. On December 16, 1997, the Company announced the signing of the Merger Agreement by and among HUBCO, the Company, and the Bank. The Merger Agreement provides for the Company to be merged with HUBCO, with HUBCO as the surviving corporation. HUBCO, a bank holding company incorporated in New Jersey, is the parent corporation of Hudson United Bank, a New Jersey-based bank (HUB), and Lafayette American Bank, a Connecticut-based bank ("Lafayette"). Prior to closing the Merger, HUBCO expects to complete its pending acquisition of PFC and PFC's subsidiary, BTH. HUBCO anticipates that BTH will serve as HUBCO's New York bank subsidiary and that MSB Bank will be merged into BTH following the Merger. Upon completion of the Merger, each share of MSB Common Stock, other than Excluded Shares (as defined below), will be converted into a number of shares of HUBCO Common Stock. The Merger Agreement provides that the Exchange Ratio will be equal to $36.02 divided by the Median Pre-Closing Price of HUBCO Common Stock, provided that the Median Pre-Closing Price is between $34.97 and $37.13. ("Median Pre-Closing Price" is defined generally as the median of the closing prices of HUBCO Common Stock after discarding the four lowest and four highest closing prices during the ten-trading day period ending on the day the 41 parties receive final federal bank regulatory approval for the Merger.) A "Minimum Exchange Ratio" of 0.97 will apply if the Median Pre-Closing Price is greater than $37.13 and a "Maximum Exchange Ratio" of 1.03 will apply if the Median Pre-Closing Price is less than $34.97. HUBCO currently holds all the outstanding shares of MSB Preferred Stock. All MSB Preferred Stock held by HUBCO will be canceled in the Merger. While HUBCO does not currently anticipate transferring any of the MSB Preferred Stock if it were to transfer any MSB Preferred Stock, the transferred shares (with certain limited exceptions) would be converted in the Merger into shares of a newly created series of HUBCO preferred stock having terms substantially identical to the MSB Preferred Stock. 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, goodwill amortization, 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 affect the Company's results of operations. See Part I, Item III, "Legal Proceedings." Interest Rate Sensitivity The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. The following table sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1997, which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The amounts of assets and liabilities which reprice or mature during a particular period were determined in accordance with the earlier of the term to repricing or the contractual terms of the asset. The table is intended to provide an approximation of the projected repricing of assets and liabilities at December 31, 1997 on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and contractual rate adjustments on adjustable-rate loans. Assumed annual run-off rates for Money Market accounts were 50% in the three months to one year category and 50% in the one to three year category and for NOW accounts and regular savings and statement savings accounts were 60% in the one to three year category and 20% thereafter. The assumptions used are based on historical experience and other data available to the Company and may not be indicative of future run-off rates, which are impacted by, among other things, customer preferences and competitive pricing decisions. Certain shortcomings are inherent in the methods of analysis presented in the table setting forth the maturing and repricing of interest-earning assets and interest-bearing liabilities. For example, although certain assets 42 and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates while interest rates on other types of assets may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to make scheduled payments on their adjustable-rate loans may decrease in the event of an interest rate increase. As a result, the actual effect of changing interest rates may differ from that presented in the table.
Year Ended December 31, 1997 --------------------------------------------------------------------------------------------- More Than More Than More Than More Than 3 Months 3 Months 1 Year 3 Years 5 Years More Than and Less to 1 Year to 3 Years to 5 Years to 10 Years 10 Years Total -------- --------- ---------- ---------- ----------- -------- ----- (Dollars in thousands) Interest-earning assets: Mortgage loans(1) ...... $ 51,713 $ 97,643 $ 73,176 $ 67,109 $ 42,907 $ 26,863 $359,411 Other loans(1) ......... 10,194 4,773 9,927 4,793 436 502 30,625 Federal funds........... 21,065 -- -- -- -- -- 21,065 Investment securities(2) ........ 10,000 6,101 3,202 240 5,639 29,237 54,419 Mortgage-backed securities(2) ........ 13,441 33,010 84,670 64,350 $ 24,008 $ 6,892 $226,371 ---------- -------- -------- ---------- -------- -------- -------- Total interest- earning assets...... $ 106,413 $141,527 $170,975 $ 136,492 $ 72,990 $ 63,494 691,891 Less: Net deferred loan fees.. -- -- -- -- -- 712 712 ---------- -------- -------- ---------- -------- -------- -------- Net interest- earning assets...... $ 106,413 $141,527 $170,975 $ 136,492 $ 72,990 $ 64,206 $692,603 ---------- -------- -------- ---------- -------- -------- -------- Interest-bearing liabilities: Savings accounts........ -- -- 119,269 39,755 39,755 -- 198,779 Super NOW accounts...... -- -- 24,114 8,038 8,038 -- 40,190 Money market accounts... -- 26,297 26,297 -- -- -- 52,594 Time deposits........... 85,520 168,200 63,002 13,186 -- -- 329,908 ESOP obligations........ 182 -- -- -- -- -- 182 Escrow accounts......... 1,686 561 -- -- -- -- 2,247 ---------- -------- -------- -------- -------- -------- -------- Total interest- bearing liabilities... $ 87,388 $195,058 $232,682 $ 60,979 $ 47,793 $ -- $623,900 ---------- -------- -------- -------- -------- -------- -------- Interest sensitivity gap $ 19,025 $(53,531) $(61,707) $ 75,513 $ 25,197 $ 64,206 $ 68,703 Cumulative interest sensitivity gap....... 19,025 (34,506) (96,213) (20,700) 4,497 68,703 Cumulative interest sensitivity gap as a percent of total assets 2.49% (4.51)% (12.57)% (2.70)% 0.59% 8.98% Cumulative net interest- earning assets as a percent of interest- bearing liabilities... 121.77% 87.78% 81.32% 96.40% 100.72% 111.01%
- ------------------------ (1) For purposes of the gap analysis, mortgage and other loans are not reduced by the allowance for loan losses but are reduced for non-accrual loans. (2) For purposes of the gap analysis, securities and mortgage-backed securities are shown at amortized cost. Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following table sets forth certain information relating to the Company's balance sheets and statements of operations at and for the years ended December 31, 1997, 1996 and 1995, and reflects 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 43 by dividing income or expense by the average balance 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 are calculated based on amortized cost. The yields and costs include fees which are considered adjustments to yields. 44
Year Ended December 31, ---------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------- -------------------------- ------------------------ Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in thousands) Assets: Interest-earning assets: Mortgage loans, net(1)................. $ 331,437 $ 26,908 8.12% $ 285,365 $ 22,552 7.90% $ 241,937 $ 18,526 7.66% Other loans(1)........... 26,502 2,714 10.24 19,561 2,084 10.65 12,775 1,305 10.22 Mortgage-backed securities(2).......... 278,538 18,165 6.52 369,995 24,293 6.57 58,080 3,253 5.60 Other securities......... 56,642 3,509 6.20 65,354 4,144 6.34 91,275 5,339 5.85 Federal funds, overnight. 34,449 1,868 5.42 26,467 1,277 4.82 12,712 728 5.73 -------- --------- --------- --------- --------- -------- Total interest-earning assets................. 727,568 53,164 7.31 766,742 54,350 7.09 416,779 29,151 6.99 Non-interest earning assets 66,759 67,561 24,497 -------- --------- Total assets............. $794,327 $ 834,303 $ 441,276 ======== ========= ========= Liabilities and Retained Earnings: Interest-bearing liabilities: Deposits: Savings accounts....... $202,563 $ 6,554 3.24% $ 201,414 $ 6,170 3.06% $ 131,782 3,943 2.99% Super NOW accounts..... 39,745 752 1.89 41,107 791 1.92 14,711 277 1.88 Money market accounts.. 52,050 2,147 4.12 50,101 1,819 3.63 40,241 1,406 3.49 Time deposits.......... 365,573 19,200 5.25 408,958 21,930 5.36 150,554 8,116 5.39 Borrowings............... 66 4 6.06 561 31 5.53 21,248 1,358 6.39 ESOP obligation.......... 334 23 6.89 620 52 8.39 925 83 8.97 -------- --------- --------- --------- --------- -------- Total interest-bearing Liabilities............ 660,331 28,680 4.34 702,761 30,793 4.38 359,461 15,183 4.22 Other liabilities.......... 60,709 60,764 39,790 -------- -------- --------- Total liabilities..... 721,040 763,525 399,251 Retained earnings.......... 73,287 70,778 42,025 -------- -------- --------- Total liabilities and retained earnings... $794,327 $ 834,303 $ 441,276 ======== ========= ========= Net interest income/ interest rate spread(3)... $ 24,484 2.97% $ 23,557 2.71% $ 13,968 2.77% ========= ========= ======== Net earning assets/net interest margin(4)........ $ 67,237 3.37 $ 63,981 3.07 $ 57,318 3.35 ======== ========= ========= Ratio of interest-earning assets to interest- bearing liabilities........ 1.10x 1.09x 1.16x
- ----------------------- (1) In computing the average balance of loans, non-accrual loans have been included. (2) Includes mortgage-backed securities available for sale at amortized cost. (3) 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 divided by average interest-earning assets. 45 Rate/Volume Analysis The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Bank's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 1997 Year Ended December 31, 1996 Compared to Year Ended Compared to Year Ended December 31, 1996 December 31, 1995 ------------------------------------- --------------------------------------- Increase/(Decrease) Due to Increase/(Decrease) Due to -------------------------- -------------------------- Volume Rate Net Volume Rate Net -------- ------ ------- -------- ------- ------- (In thousands) Interest-earning assets: Mortgage loans net.... $ 3,726 $ 630 $ 4,356 $ 3,416 $ 610 $ 4,026 Other loans........... 714 (84) 630 721 58 779 Mortgage-backed securities........... (5,965) (163) (6,128) 20,386 654 21,040 Other Securities...... (542) (93) (635) (1,615) 420 (1,195) Federal funds......... 419 172 591 679 (130) 549 ---------- ------ ------- -------- ------- ------- Total............ $ (1,648) $ 462 $(1,186) $ 23,587 $ 1,612 $25,199 ---------- ------ ------- -------- ------- ------- Interest-bearing liabilities: Deposits Time deposits..... $ (2,286) $ (444) $(2,730) $ 13,857 $ (43) $13,814 Money market accounts......... 73 255 328 356 57 413 Savings accounts.. 35 349 384 2,131 96 2,227 Super NOW accounts (26) (13) (39) 508 6 514 Borrowings........ (30) 3 (27) (1,165) (162) (1,327) ESOP obligation... (21) (8) (29) (26) (5) (31) ---------- ------ ------- -------- ------- ------- Total............ $ (2,255) $ 142 $(2,113) $ 15,661 $ (51) $15,610 ---------- ------ ------- -------- ------- ------- Net change in net interest income................. $ 607 $ 320 $ 927 $ 7,926 $ 1,663 $ 9,589 ========== ====== ======= ======== ======= =======
Comparison of Financial Condition at December 31, 1997 and 1996 The Company's total assets were $ 765.4 million at December 31, 1997, as compared to $820.9 million at December 31, 1996. This decrease is due primarily to a decrease in deposits. For those same dates, deposits decreased $62.7 million to $673.4 million at December 31, 1997, as compared to $736.2 million at December 31, 1996. The increases in yields earned were a result of the redeployment of proceeds from the sale of mortgage-backed and other securities into the loan portfolio. Securities and mortgage-backed securities available for sale decreased $94.4 million to $279.8 million at December 31, 1997, as compared to $374.1 million at December 31, 1996. Loans, net increased $52.9 million to $391.4 million at December 31, 1997, as compared to $338.5 million at December 31, 1996. Goodwill decreased $3.7 million to $29.2 million at December 31, 1997, as compared to $32.8 million at December 31, 1996. Real estate owned increased $1.5 million to $2.4 million at December 31, 1997 as compared to December 31, 1996. Total stockholders' equity increased $4.0 million to $74.8 million at December 31, 1997, as compared to $70.8 million at December 31, 1996. This increase is due primarily to a $4.1 million decrease in the net unrealized loss on securities available for sale. The Bank's Tier 1 leverage capital ratio was 6.2% at December 31, 1997. 46 Comparison of Results of Operations Years Ended December 31, 1997 and 1996 General. Net income for 1997 amounted to $2.3 million as compared to $1.7 million for 1996. The results for 1997 included a pre-tax charge of $2.8 million related to the termination of the Retirement Plan for the Board of Directors (the "Board Plan") and $330,000 of merger-related expenses in connection with the Company's announced Merger with HUBCO (these charges collectively referred to herein as "non-recurring expenses"). The results for 1996 included a pre-tax charge of $2.9 million related to the recapitalization of the Savings Association Insurance Fund ("SAIF"). Net Interest Income. For 1997, net interest income totaled $24.5 million as compared to $23.6 million for 1996. The interest rate spread was 2.97% and 2.71% for 1997 and 1996, respectively. For those same periods, the net interest margin was 3.37% and 3.07%, respectively. Interest Income. Interest income was $53.2 million for 1997 as compared to $54.4 million for 1996. The yield earned on interest-earning assets was 7.31% for 1997 as compared to 7.09% for 1996. This increase in yield was offset by a decrease of $39.2 million in average interest earnings assets to $727.6 million for 1997, as compared to $766.7 million for 1996. The decrease in the balance of average interest-earning assets is due primarily to a decrease of $41.6 million in the average balances of deposits 1997, as compared to 1996. See "Interest Expense." Interest income on mortgage loans amounted to $26.9 million in 1997, as compared to $22.6 million in 1996. This increase is due to a $46.1 million or 16.1% increase in the average balance of mortgage loans to $331.4 million during 1997, as compared to $285.4 million in the prior year. In addition, the average yield earned on mortgage loans increased to 8.12% in 1997 as compared to 7.90% for 1996. The growth in the average balance of mortgage loans was due primarily to Management's strategy to redeploy funds received in the Acquisition from the securities portfolio to the loan portfolio and also due to continued loan demand. The increase in the yield earned during 1997 is primarily a result of a new ARM product that the Bank began to offer in 1996. These ARMs are primarily 5-year fixed rate loans that convert to 1-year ARMs after the initial 5-year period. These loans are not offered at introductory rates. The increase in yield is also due to the repricing of one-year 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. Interest income on other loans totaled $2.7 million in 1997 as compared to $2.1 million for the prior year. This increase was primarily due to an increase in the average balance of other loans to $26.5 million during 1997 as compared to $19.6 million for 1996. This increase in the average balance of other loans was partially offset by a 41 basis point decrease in the average yield earned to 10.24% for 1997, as compared to 10.65% for 1996. Interest income on mortgage-backed securities amounted to $18.2 million for 1997, as compared to $24.3 million in 1996. This decrease was due primarily to a decrease in the average balance of mortgage-backed securities. During 1997, the average balance of mortgage-backed securities decreased $91.5 million or 24.7% to $278.5 million as compared to $370.0 million for 1996. The decrease in the average balances of mortgage-backed securities was a result of Management's strategy to redeploy funds currently invested in securities into the loan portfolio, which typically provides greater yields, and to fund deposit outflows. Interest income on other securities totaled $3.5 million in 1997 as compared to $4.1 million in 1996. This decrease was primarily the result of an $8.7 million decrease in the average balance of other securities to $56.6 million during 1997 as compared to the prior year. In addition, the yield earned on these securities decreased to 6.20% during 1997 as compared to 6.34% for 1996. The decrease in the average balance of other securities is a result 47 of Management's strategy to redeploy funds currently invested in securities into the loan portfolio, which typically provides greater yields. Interest income on Federal funds amounted to $1.9 million for 1997, as compared to $1.3 million for 1996. This increase in Federal funds interest is due to a $8.0 million increase in the average balance to $34.4 million, and a 60 basis point increase in the average yield to 5.42%. The increase in the average balance of Federal funds is a result of the temporary investment of proceeds from the sale of mortgage-backed and other securities. The securities were sold to provide sufficient liquidity for loan originations and the anticipated outflow of time deposits as a result of Management's decision to reduce the interest rates paid on these deposits (see "Interest Expense"). Interest Expense. Interest expense totaled $28.7 million in 1997 as compared to $30.8 million for 1996. This decrease is primarily due to a $42.4 million decrease in average interest-bearing liabilities to $660.3 million in 1997, as compared to $702.8 million for 1996. The average cost of interest-bearing liabilities remained virtually unchanged. Interest expense on savings accounts increased to $6.6 million in 1997 as compared to $6.2 million for the prior year. This increase was due to a $1.1 million increase in the average balance of savings accounts to $202.6 million as compared to 1996 and an 18 basis point increase in the average rate paid on savings accounts to 3.24%. Interest expense on time deposits totaled $19.2 million for 1997, as compared to $21.9 million for 1996. This decrease is due to a $43.4 million or 10.6% decrease in the average balance to $365.6 million and an 11 basis point decrease in the average rate paid to 5.25% in 1997. The decreases in the average balances of deposits are due to Management's strategy to reduce the interest rate paid on certain time deposits. Many of these time deposits were earning a premium rate. The deposit outflow is also due to disintermediation which is affecting many of the Bank's peer thrift institutions. Provision for Loan Losses. The provision for loan losses was $1.6 million for 1997 as compared to $1.4 million in 1996. Non-performing loans (loans that are 90 days or more past due) amounted to $3.5 million or 0.89% of total loans at December 31, 1997, as compared to $4.8 million or 1.40% of total loans at December 31, 1996. Non-performing assets amounted to $5.9 million or 0.77% of total assets at December 31, 1997 as compared to $5.7 million or 0.69% of total assets at December 31, 1996. Real estate owned increased $1.5 million to $2.4 million at December 31, 1997, as compared to $915,000 at December 31, 1996. The allowance for loan losses amounted to $2.8 million at December 31, 1997 which represented 80.5% of non-performing loans. At December 31, 1996, the allowance for loan losses amounted to $2.0 million or 41.1% of non-performing loans. Charge-offs, net of recoveries, totaled $718,000 in 1997, as compared to $1.1 million in 1996. 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. For the years ended December 31, 1997 and 1996, non-interest income totaled $4.7 million and $4.0 million, respectively. This increase is due to a $510,000 increase in service fees and, a $216,000 increase in net realized gains on securities sales, which was offset by a $22,000 decrease in other non-interest income. The increases in service fees are due primarily to changes in MSB's fee structure on deposit products and services. These changes were made during the third quarter of 1997 as part of a previously announced reengineering plan. 48 Non-Interest Expense. Non-interest expense amounted to $20.7 million for the year ended December 31, 1997, as compared to $20.4 million in 1996 (excluding non-recurring expenses of $3.1 million in 1997 and the SAIF assessment of $2.9 million in 1996). Salaries and employee benefits increased $115,000 or 1.4% to $8.4 million for the year ended December 31, 1997. Federal deposit insurance premiums decreased $466,000 to $275,000 for 1997 as compared to the same period in 1996. These decreases reflect the lower insurance rates that resulted from the payment of the SAIF special assessment in the third quarter of 1996. Included in non-interest expense is a $2.8 million accrual for benefits that vested upon the termination of the Board Plan. The Board Plan was terminated in accordance with the Merger Agreement with HUBCO. Other non-interest expenses totaled $5.2 million in 1997 as compared to $4.7 million for 1996. This increase is due primarily to writedowns of $96,000 on certain foreclosed properties to reflect decreases in the asking prices of these properties in order to accelerate the sales process. In addition, other non-interest expenses in 1997 also included a charge-off of $181,000 related to certain official checks and transit items. These items related primarily to differences encountered during and subsequent to the conversion of depositor accounts assumed in the acquisition of seven branches from First Nationwide Bank. Years Ended December 31, 1996 and 1995 General. Net income for 1996 totaled $1.7 million as compared to $2.4 million in 1995. Net income for 1996 included a pre-tax charge of $2.9 million related to the special one-time SAIF assessment, which was recognized by the Company in the third quarter of 1996. Net Interest Income. Net interest income for 1996 amounted to $23.6 million as compared to $14.0 million for 1995. The increase in net interest income is due primarily to the Acquisition as the average balance of net interest-earning assets increased to $64.0 million from $57.3 million in 1995. The interest rate spread decreased 6 basis points to 2.71% during 1996 as compared to 2.77% in 1995. The company's net interest margin was 3.07% and 3.35% in 1996 and 1995, respectively. The decreases in interest rate spread and net interest margin were due primarily to the First Nationwide Acquisition. The proceeds from the First Nationwide 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 such time the First Nationwide Acquisition and offering proceeds earned interest at the Federal funds rate of 5.25%. As a result, the Company earned a minimal interest rate spread on such proceeds during that time. In addition, 68.5% of the Acquired Deposits were time deposits with an average cost of 5.90%. Interest Income. Interest income in 1996 totaled $54.4 million as compared to $29.2 million in 1995. Average interest-earning assets increased $350.0 million to $766.7 million in 1996 compared to $416.8 million in 1995. The average yields on interest-earning assets were 7.09% and 6.99% in 1996 and 1995, respectively. Interest income on mortgage loans amounted to $22.6 million in 1996 as compared to $18.5 in 1995, an increase of $4.0 million or 21.7%. The average balance of mortgage loans increased $43.4 million to $285.4 million in 1996 as compared to $241.9 million in 1995. In addition, the average yield earned on mortgage loans increased 24 basis points to 7.90% in 1996. The growth in the average balance of mortgage loans was due primarily to improved demand for the Bank's adjustable-rate mortgage loans ("ARMs"). In addition, the increase in the average yield earned was primarily due to higher rates earned on ARMs in 1996. The Bank's ARMs originated during 1996 are primarily 5-year fixed rate loans that convert to 1-year ARMs after the initial 5-year period. Interest income on other loans increased to $2.1 million in 1996 as compared to $1.3 million for 1995. The average balance of other loans increased $6.8 million or 53.1% to $19.6 million in 1996 as compared to $12.8 million in 1995. The average yield earned on other loans increased 43 basis points to 10.65% as compared to 10.22% in 1995. The increase in the average balances of other loans is due to certain consumer loans acquired in the First Nationwide Acquisition and management's strategy to increase the commercial loan portfolio in order to increase the Company's interest rate spread. 49 Interest income on mortgage-backed securities totaled $24.3 million in 1996 as compared to $3.3 million in 1995. This increase is due to a $311.9 million increase in the average balance of mortgage-backed securities to $370.0 million in 1996. In addition, the average yield on mortgage-backed securities increased 97 basis points to 6.57% in 1996 as compared to 5.60% in 1995. The increases in the average balance of mortgage-backed securities during 1996 are a result of the investment of proceeds from the First Nationwide Acquisition and Offering which totaled $409.6 million. Interest income on other securities amounted to $4.1 million in 1996, a decrease of $1.2 million or 22.4% as compared to the $5.3 million earned in 1995. This decrease is due primarily to a $25.9 million decrease in the average balance to $65.4 million in 1996 as compared to $91.3 million in 1995. The decrease in the average balance of other securities was partially offset by a 49 basis point increase in the yield earned to 6.34% in 1996. The decrease in the average balance 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 in 1996 totaled $30.8 million as compared to $15.2 million in 1995. The average balance of interest-bearing liabilities amounted to $702.8 million in 1996 as compared to $359.5 million in 1995. The average cost of these liabilities increased 16 basis points to 4.38% in 1996. The growth in the average balance of interest-bearing liabilities is a result of the First Nationwide Acquisition. The Acquired Deposits totaled $414.8 million on January 12, 1996, the closing date of the First Nationwide Acquisition. Interest expense on savings accounts amounted to $6.2 million in 1996 as compared to $3.9 million in 1995. The average balance of savings accounts increased to $201.4 million in 1996 as compared to $131.8 million in 1995, an increase of $69.6 million or 52.8%. The average cost of savings accounts increased seven basis points to 3.06% in 1996 as compared to 2.99% in 1995. The increase in the average balance of savings accounts is a result of the First Nationwide Acquisition. Interest expense on time deposits amounted to $21.9 million in 1996 as compared to $8.1 million in 1995. The average balance of time deposits increased $258.4 million to $409.0 million in 1996 as compared to $150.6 million in 1995. This increase is a result of the First Nationwide Acquisition. The average cost of time deposits decreased 3 basis points to 5.36% in 1996. Interest expense on borrowings decreased $1.3 million in 1996 to $31,000 as compared to $1.4 million in 1995. This decrease is due to a decrease in the average balance of borrowings of $20.7 million to $561,000. The decrease in the average balance is due to management's strategy in 1995 of using borrowings to fund the purchase of securities, thereby leveraging the Bank's capital and increasing net interest income. However, the Bank's regulatory capital position decreased as a result of the First Nationwide Acquisition and the Bank repaid all borrowings during the fourth quarter of 1995. Provision for Loan Losses. The provision for loan losses amounted to $1.4 million in 1996 as compared to $483,000 in 1995. This increase is a result of increases in loan charge-offs and the size of the loan portfolio. For 1996, charge-offs totaled $1.1 million as compared to $307,000 for 1995. The increase in charge-offs during 1996 is due primarily to charge-offs related to non-owner occupied one to four-family 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. The Bank significantly curtailed its lending activities related to these types of loans in 1996. The charge-offs for the year-ended December 31, 1996, also include a charge-off in the amount of $275,000 related to an unsecured commercial loan originated prior to the First Nationwide Acquisition. Non-performing loans (loans that are 90 days or more past due) were $4.8 million or 1.4% of total loans at December 31, 1996, as compared to $3.0 million or 1.05% of total loans at December 31, 1995. The increase in non-performing loans is a result of loans originated in the mid-1980's where the value of the underlying collateral has decreased, the growth in the size of the loan portfolio and the amount of time required to complete foreclosure proceedings. Non-performing assets totaled $5.7 million or 0.69% of total assets and $3.8 million or 0.83% of total assets at December 31, 1996 and 1995, respectively. 50 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 totaled $4.0 million in 1996 as compared to $2.2 million in 1995. Service fees and charges increased $1.5 million or 67.6% to $3.8 million in 1996. This increase is a result of the First Nationwide Acquisition. The increase in service charges on deposits for 1996 was offset by waived service charges on the Acquired Deposits until March 1, 1996. In addition, MSB waived $90,000 of additional service charges in limited circumstances for certain of the Acquired Deposits from March 1, 1996 to June 30, 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. Net realized securities gains amounted to $4,000 in 1996 as compared to a net realized loss of $142,000 in 1995. Other non-interest income amounted to $104,000 in 1996, as compared to $18,000 in 1995, and included a $103,000 realized gain in the sale of a clock collection that was owned by the Bank. Non-Interest Expense. Non-interest expense amounted to $23.4 million in 1996 as compared to $11.7 million in 1995. Included in non-interest expense is a $2.9 million pre-tax special one-time SAIF assessment. Salaries and employee benefits increased $2.5 million to $8.3 million in 1996 primarily as a result of adding 69 full-time equivalent employees for the Acquired Branches. Occupancy and equipment increased $730,000 to $3.1 million in 1996 as compared to $2.4 million in 1995 and other non-interest expense increased $5.2 million to $8.3 million for these same periods. These increases are primarily due to the operating expenses of the Acquired Branches. In addition, for 1996 as compared to 1995, legal expenses attributed to employee and stockholder litigation increased $107,000 to $508,000, losses on foreclosed real estate increased $96,000 to $237,000, goodwill amortization increased $3.4 million to $3.5 million and non-recurring expenses related to the Acquisition amounted to approximately $225,000. Income Tax Expense. Income tax expense amounted to $1.1 million in 1996, as compared to $1.6 million in 1995. The effective tax rates for 1996 and 1995 were 39.2% and 40.7%, respectively. Liquidity and Capital Resources The Company's primary sources of funds are deposits, the proceeds from principal and interest payments on loans and the proceeds from the maturities of investments. Proceeds from securities and loan sales are also a source of funds. While maturities and scheduled amortization of loans and investments are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. For the year ended December 31, 1997, deposits decreased $62.7 million primarily as a result of Management's strategy of reducing the cost of time deposits. See "--Years Ended December 31, 1997 and 1996-Interest Expense." The Bank is required to maintain an average daily balance of liquid assets as a percentage of net withdrawable deposit accounts plus short-term borrowings as defined by the regulations of the OTS. The minimum required liquidity ratio is currently 5.0%. At December 31, 1997 the Bank's liquidity ratio under OTS regulations was 23.5%. The primary investing activity of the Company is the origination of loans and the purchase of securities. During the fiscal year ended December 31, 1997, the Company originated mortgage loans totaling $113.1 million. Since 1994 the demand for mortgage loans in the Bank's market area has remained strong. For the year ended 51 December 31, 1997, originations of other loans exceeded repayments by $9.3 million. During that same period, the Company purchased securities, including mortgage-backed securities, totaling $64.3 million. 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 7.1% and 6.7% at December 31, 1997 and 1996, respectively. At December 31, 1997, cash and cash equivalents, as defined above, totaled $48.1 million as compared to $49.0 million at December 31, 1996. 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 a $40.6 million line of credit from the FHLB of New York. In addition, the Bank may access funds, if necessary, through the Federal Reserve Bank of New York discount window. At December 31, 1997, the Bank had outstanding loan commitments of $68.2 million. The Bank anticipates that it will have sufficient funds available to meet its current loan and securities purchase commitments. Time deposits scheduled to mature in one year or less from December 31, 1997, totaled $253.7 million. Management believes that a significant portion of such deposits will remain with the Bank. The Bank is subject to certain minimum leverage, tangible and risk-based capital requirements established by regulations of the OTS. For a description of these requirements and the Bank's compliance therewith, see "Regulation -- Regulation of Federal Savings Associations -- Capital Requirements." Impact of Inflation and Changing Prices The Company's financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for the financial statement, but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131") requires that public companies report information about segments of their business in their annual financial statements and require them to report selected segment information in their 52 quarterly reports issued to shareholders. SFAS 131 requires entity-wide disclosure about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. SFAS 131 supersedes FASB Statement 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 is effective for fiscal years beginning after December 15, 1997. Year 2000 The "Year 2000 Problem" centers on the inability of computer systems to recognize the Year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers will recognize "00" as the year 1900 rather than the year 2000. Like most financial service providers, the Company and its operations may be significantly affected by the Year 2000 Problem due to the nature of financial information. Software, hardware and equipment, both within and outside the Company's direct control and with whom the Company electronically or operationally interfaces (e.g., third party vendors providing data processing, information system management, maintenance of computer systems and credit bureau information), are likely to be affected. Furthermore, if computer systems are not adequately changed to identify the Year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on the date field information, such as interest, payment or due dates and other operating functions, will generate results which could be significantly misstated, and the Company could experience a temporary inability to process transactions, send invoices or engage in similar normal business activities. In addition, under certain circumstances, failure to adequately address the Year 2000 Problem could adversely affect the viability of the Company's suppliers and creditors and the creditworthiness of its borrowers. Thus, if not adequately addressed, the Year 2000 Problem could result in a significant adverse impact on the Company's products, services and competitive condition. In order to address the Year 2000 issue and to minimize its potential adverse impact, Management has begun a process to identify areas that will be affected by the Year 2000 Problem, assess its potential impact on the operations of the Company, monitor the progress of third party software vendors in addressing the matter, test changes provided by these vendors and develop contingency plans for any critical systems which are not effectively reprogrammed. The Company's plan is divided into the five phases: (1) awareness; (2) assessment; (3) renovation; (4) validation; and (5) implementation. The Company has substantially completed the first two phases of the plan. As a result of the Company's Merger with HUBCO, the Company will be converting its various computer applications to HUBCO's computer systems. The Company presently believes that HUBCO is currently working internally and with external vendors on the final three phases of the plan and that with modifications to existing software and conversions to new software, the Year 2000 Problem will be mitigated without causing a material adverse impact on the operations of the Company. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Problem could have a material impact on the operations of the Company. ITEM 7A. Quantitive and Qualitative Disclosures About Market Risk Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. 53 The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not changes at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One such measure, required to be performed by OTS-regulated institutions, is the test specified by OTS Thrift Bulletin No. 13, "Interest Rate Risk Management." This test measures the change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Following are the estimated impacts of immediate changes in interest rates at the specified levels at December 31, 1997, calculated in compliance with Thrift Bulletin No. 13:
Change in Interest Rates Percent Change in: (in basis points) Net Interest Income(1) Net Portfolio Value(2) --------------------------------- ---------------------- ---------------------- +400............................ (14.05)% (18.68)% +300............................ (9.96) (14.76) +200............................ (5.92) (10.38) +100............................ (2.74) (0.67) -100............................ 2.72 0.75 -200............................ 5.55 13.10 -300............................ 9.22 20.94 -400............................ 13.27 29.81
- ------------------------- (1) The percentage change in this column represents net interest income for 12 months in a stable interest rate environment versus the Net Interest Income in the various rate scenarios. (2) The percentage change in this column represents net portfolio value of the Bank in a stable interest rate environment versus the net portfolio value in the various rate scenarios. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. The Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management has focused its efforts on increasing the Company's yield-cost spread through retail growth opportunities. 54 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF MSB BANCORP, INC. AND SUBSIDIARIES Independent Auditors' Report of KPMG Peat Marwick LLP ..................... 56 Independent Auditors' Report of Nugent & Haeussler, PC .................... 57 Consolidated Balance Sheets as of December 31, 1997 and 1996 .............. 58 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 ........................................ 59 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 .................... 60 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 .................................. 61 Notes to Consolidated Financial Statements ................................ 63 55 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders MSB Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of MSB Bancorp, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the two-year period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MSB Bancorp, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the two-year period then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Short Hills, New Jersey January 27, 1998 56 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders MSB Bancorp, Inc. We have audited the consolidated financial statements of MSB Bancorp, Inc. and subsidiary as listed in the accompanying index as of December 31, 1995 and for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MSB Bancorp, Inc. and subsidiary as of December 31, 1995, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" effective January 1, 1995. NUGENT & HAEUSSLER, P.C. January 30, 1996 Newburgh, New York 57 MSB Bancorp, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31 December 31 1997 1996 ----------- ----------- (In thousands, except shares and per share amounts) Assets Cash and due from banks.................................................. $ 16,834 $ 16,375 Federal funds sold....................................................... 21,065 32,590 Securities available for sale (note 3)................................... 54,082 50,685 Mortgage-backed securities available for sale (note 4)................... 225,680 323,428 Loans, net (notes 5, 6 and 14)........................................... 391,429 338,491 Premises and equipment, net (note 7)..................................... 14,062 14,869 Accrued interest receivable.............................................. 5,049 5,552 Real estate owned (note 8)............................................... 2,443 915 Goodwill................................................................. 29,173 32,835 Other assets (note 11)................................................... 5,550 5,176 ----------- ----------- Total assets.......................................................... $ 765,367 $ 820,916 =========== =========== Liabilities and Stockholders' Equity Liabilities Deposits (note 9)..................................................... $ 673,432 $ 736,161 Mortgagors' escrow deposits........................................... 2,247 1,849 Accrued expenses and other liabilities................................ 14,730 11,684 ESOP obligation (note 13)............................................. 182 432 ----------- ----------- Total liabilities................................................. 690,591 $ 750,126 ----------- ----------- Commitments and contingencies (note 14) Stockholders' equity (notes 11, 12 and 13) Preferred stock ($.01 par value; 1,000,000 shares authorized; 600,000 shares issued at December 31, 1997 and 1996) ............ 6 6 Common stock ($.01 par value; 5,000,000 shares authorized; 3,045,000 shares issued at December 31, 1997 and 1996) .......... 30 30 Additional paid-in capital............................................ 48,069 48,163 Retained earnings..................................................... 31,458 32,009 Treasury stock, at cost (200,847 shares and 211,064 shares at December 31, 1997 and 1996, respectively)........................ (3,941) (4,137) Unallocated ESOP stock................................................ (182) (432) Unallocated BRP stock................................................. (42) (172) Net unrealized loss on securities available for sale.................. (622) (4,677) ------------ ----------- Total stockholders' equity........................................ $ 74,776 $ 70,790 ----------- ----------- Total liabilities and stockholders' equity........................ $ 765,367 $ 820,916 =========== ===========
See accompanying notes to the consolidated financial statements. 58 MSB Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31 ------------------------------------------ 1997 1996 1995 -------- -------- -------- (In thousands except shares and per share amounts) Interest Income Mortgage loans ............................................................. $ 26,908 $ 22,552 $ 18,526 Other loans ................................................................ 2,714 2,084 1,305 Mortgage-backed securities ................................................. 18,165 24,293 3,253 Securities ................................................................. 3,509 4,144 5,339 Federal funds sold ......................................................... 1,868 1,277 728 -------- -------- -------- Total interest income ...................................................... 53,164 54,350 29,151 Interest Expense Interest on deposits (note 9) .............................................. 28,653 30,710 13,742 Interest on borrowings (note 10) ........................................... 4 31 1,358 Interest on ESOP obligation ................................................ 23 52 83 -------- -------- -------- Total interest expense ..................................................... 28,680 30,793 15,183 -------- -------- -------- Net interest income before provision for loan losses ........................... 24,484 23,557 13,968 Provision for loan losses (note 6) ............................................. 1,565 1,400 483 -------- -------- -------- Net interest income after provision for loan losses ............................ 22,919 22,157 13,485 -------- -------- -------- Non-Interest Income Service fees ............................................................... 4,278 3,768 2,248 Net realized gains (losses) on securities (notes 2, 3 and 4) ............... 220 4 (142) Net realized gains on loan sales ........................................... 158 151 44 Other non-interest income .................................................. 82 104 18 -------- -------- -------- 4,738 4,027 2,168 -------- -------- -------- Non-Interest Expense Salaries and employee benefits (note 13) ................................... 8,419 8,304 5,771 Occupancy and equipment (note 7) ........................................... 3,188 3,145 2,415 Federal deposit insurance premiums ......................................... 275 741 456 Goodwill amortization ...................................................... 3,662 3,517 137 Other non-interest expense ................................................. 5,180 4,737 2,891 Termination of Retirement Plan for Directors (note 13) ..................... 2,800 -- -- Merger-related expenses .................................................... 330 -- -- SAIF recapitalization assessment (note 18) ................................. -- 2,925 -- -------- -------- -------- 23,854 23,369 11,670 -------- -------- -------- Income before income taxes ..................................................... 3,803 2,815 3,983 Income tax expense (note 11) ................................................... 1,522 1,104 1,622 -------- -------- -------- Net Income ..................................................................... $ 2,281 $ 1,711 $ 2,361 ======== ======== ======== Basic earnings per share ....................................................... $ 0.40 $ 0.22 $ 1.46 ======== ======== ======== Diluted earnings per share ..................................................... $ 0.40 $ 0.22 $ 1.42 ======== ======== ========
See accompanying notes to the consolidated financial statements. 59 MSB Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Shares Outstanding ------------------------ Paid-In Retained Common Preferred Par Value Capital Earnings ---------- ---------- ---------- ---------- ---------- (In thousands, except shares and per share amounts) Balance at December 31, 1994..... 1,696,983 -- $ 18 $ 16,385 $ 31,665 ---------- ---------- ---------- ---------- ---------- Net income ...................... -- -- -- -- 2,361 Exercise of stock options ....... 21,204 -- -- (187) -- Purchase of treasury stock ...... (90,251) -- -- -- -- Allocation of ESOP stock ........ -- -- -- -- -- Amortization of BRP awards ...... -- -- -- -- -- Dividends declared .............. -- -- -- -- (979) Tax benefits related to stock ... -- -- -- -- 63 compensation plans Change in net unrealized loss on securities available for sale, net of tax effect -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 .... 1,627,936 -- 18 16,198 33,110 ---------- ---------- ---------- ---------- ---------- Net income ...................... -- -- -- -- 1,711 Sale of Common Stock ............ 1,205,000 -- 12 19,553 -- Sale of Preferred Stock ......... -- -- 6 12,442 -- Exercise of stock options ....... 1,000 -- -- (30) -- Purchase of treasury stock ...... -- -- -- -- -- Allocation of ESOP stock ........ -- -- -- -- -- Amortization of BRP awards ...... -- -- -- -- -- Dividends declared .............. -- -- -- -- (2,852) Tax benefits related to stock compensation plans ........... -- -- -- -- 40 Change in net unrealized loss on securities available for sale, net of tax effect ............ -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 .... 2,833,936 600,000 36 48,163 32,009 ---------- ---------- ---------- ---------- ---------- Net income ...................... -- -- -- -- 2,281 Exercise of stock options ....... 10,217 -- -- (94) -- Allocation of ESOP stock ........ -- -- -- -- -- Amortization of BRP awards ...... -- -- -- -- -- Dividends declared .............. -- -- -- -- (2,839) Tax benefits related to stock compensation plans ........... -- -- -- -- 7 Change in net unrealized loss on securities available for sale, net of tax effect ............ -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 .... 2,844,153 600,000 36 48,069 31,458 ========== ========== ========== ========== ========== Common Common Net Stock Stock Unrealized Treasury Acquired Acquired Loss on Stock By ESOP By BRP Securities Total ---------- ---------- ---------- ---------- ---------- (In thousands, except shares and per share amounts) Balance at December 31, 1994..... $ (2,518) $(1,051) $ (432) $ (4,443) $ 39,624 ---------- ---------- ---------- ---------- ---------- Net income ...................... -- -- -- -- 2,361 Exercise of stock options ....... $ 399 -- -- -- 212 Purchase of treasury stock ...... (2,038) -- -- -- (2,038) Allocation of ESOP stock ........ -- 309 -- -- 309 Amortization of BRP awards ...... -- -- 129 -- 129 Dividends declared .............. -- -- -- -- (979) Tax benefits related to stock ... -- -- -- -- 63 compensation plans Change in net unrealized loss on securities available for sale, net of tax effect -- -- -- 4,315 4,315 ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 .... (4,157) (742) (303) (128) $ 43,996 ---------- ---------- ---------- ---------- ---------- Net income ...................... -- -- -- -- 1,711 Sale of Common Stock ............ -- -- -- -- 19,565 Sale of Preferred Stock ......... -- -- -- -- 12,448 Exercise of stock options ....... 20 -- -- -- (10) Purchase of treasury stock ...... -- -- -- -- -- Allocation of ESOP stock ........ -- 310 -- -- 310 Amortization of BRP awards ...... -- -- 131 -- 131 Dividends declared .............. -- -- -- -- (2,852) Tax benefits related to stock compensation plans ........... -- -- -- -- 40 Change in net unrealized loss on securities available for sale, net of tax effect ............ -- -- -- (4,549) (4,549) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 .... (4,137) (432) (172) (4,677) $ 70,790 ---------- ---------- ---------- ---------- ---------- Net income ...................... -- -- -- -- 2,281 Exercise of stock options ....... 196 -- -- -- 102 Allocation of ESOP stock ........ -- 250 -- -- 250 Amortization of BRP awards ...... -- -- 130 -- 130 Dividends declared .............. -- -- -- -- (2,839) Tax benefits related to stock compensation plans ........... -- -- -- -- 7 Change in net unrealized loss on securities available for sale, net of tax effect ............ -- -- -- 4,055 4,055 ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 .... (3,941) (182) (42) (622) $ 74,776 ========== ========== ========== ========== ==========
See accompanying notes to the consolidated financial statements. 60 MSB Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31 --------------------------------------------- 1997 1996 1995 --------- --------- --------- (In thousands) Operating Activities Net income ................................................................. $ 2,281 $ 1,711 $ 2,361 Adjustments to reconcile net income to net cash provided by operating activities: Net realized losses (gains) on securities .................................. (220) (4) 142 Net gain on sale of loans .................................................. (158) (151) (44) Origination of mortgage loans held for sale ................................ (14,130) (10,584) (6,944) Proceeds from the sales of mortgage loans .................................. 13,880 11,166 6,029 Proceeds from the sale of student loans .................................... 1,646 1,544 1,619 Amortization of net deferred loan origination fees ......................... (130) (170) (299) Amortization of premiums (discounts) on securities ......................... 1,177 1,091 68 Depreciation and amortization .............................................. 1,263 1,256 942 Provision for loan losses .................................................. 1,565 1,400 483 Write-downs of real estate owned ........................................... 188 237 141 Goodwill amortization ...................................................... 3,662 3,517 137 Decrease (increase) in accrued interest receivable ......................... 503 (2,294) (393) Decrease (increase) in prepaid expenses and other assets ................... (1,857) 2,538 2,307 Increase (decrease) in accrued expenses and other liabilities .............. 3,094 (6,965) 9,892 Net change in Federal and State income taxes payable and receivables .............................................................. (842) (528) 1,023 Deferred income taxes ...................................................... (351) (668) (51) Other ...................................................................... (302) 138 248 --------- --------- --------- Net cash provided by operating activities ................................ $ 11,269 $ 3,234 $ 17,661 --------- --------- --------- Investing Activities Net increase in loans ...................................................... $ (58,026) $ (62,273) $ (51,248) Proceeds from the sale of securities held to maturity ...................... -- -- 3,000 Maturities and redemption of debt securities ............................... 49 14,143 38,650 Purchases of securities available for sale ................................. (10,724) (27,448) (47,516) Proceeds from the sale of securities available for sale .................... 8,544 36,841 16,094 Purchases of mortgage-backed securities available for sale ................. (53,590) (386,330) (29,988) Repayments of mortgage-backed securities available for sale ................ 27,408 16,775 8,930 Proceeds from the sale of mortgage-backed securities available for sale ................................................................. 128,555 88,554 20,063 Repayments of asset-backed securities ...................................... -- 143 752 Proceeds from the sale of real estate owned, net ........................... 1,171 397 803 Cash received in acquisition of branch offices ............................. -- 380,299 20,934 Purchases of premises and equipment, net ................................... (460) (3,920) (2,986) --------- --------- --------- Net cash provided by (used in) investing activities ...................... $ 42,927 $ 57,181 $ (22,512) --------- --------- ---------
See accompanying notes to the consolidated financial statements. 61 MSB Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Year Ended December 31 --------------------------------------------- 1997 1996 1995 --------- --------- --------- (In thousands) Financing Activities Proceeds from Offering ................................................... -- $ 32,013 -- Net change in deposits ................................................... $ (62,729) (67,630) $ 12,217 Net increase in mortgagors' escrow deposits .............................. 398 10 117 Proceeds from borrowings ................................................. 55 12,100 43,640 Repayments of borrowings ................................................. -- (12,100) (43,640) Repayment of ESOP loan ................................................... (250) (310) (309) Proceeds from the exercise of stock options .............................. 102 40 212 Purchase of treasury stock ............................................... -- -- (2,038) Payment of common and preferred stock dividends .......................... (2,838) (2,387) (979) --------- --------- --------- Net cash provided by (used in) financing activities ................... (65,262) (38,264) 9,220 --------- --------- --------- Increase (decrease) in cash and cash equivalents ......................... (11,066) 22,151 4,369 Cash and cash equivalents at beginning of year ........................... 48,965 26,814 22,445 --------- --------- --------- Cash and cash equivalents at end of year ................................. $ 37,899 $ 48,965 $ 26,814 ========= ========= ========= Supplemental Information Interest paid on deposits ................................................ $ 28,653 $ 30,710 $ 13,742 Income taxes paid ........................................................ 2,416 2,300 613 ========= ========= ========= Non-cash transactions: Transfer of balances from loans receivable to real estate owned .................................................... $ 2,839 $ 1,044 $ 955 ========= ========= ========= Transfer of securities from the investment portfolio to securities available for sale ........................... $ -- $ -- $ 18,576 ========= ========= ========= Transfer of mortgage-backed securities to mortgage-backed securities available for sale ........................ $ -- $ -- $ 504 ========= ========= =========
See accompanying notes to the consolidated financial statements. 62 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization 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"). Concurrently 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 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 over allotment 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." Proceeds from the Offering amounted to $32.0 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"). In September 1995, the Bank entered into an Asset Purchase and Sale Agreement (as amended, the "First Nationwide Agreement") with First Nationwide pursuant to which the Bank acquired certain assets and the assumed certain liabilities relating to seven First Nationwide branch offices located in Carmel, Liberty, Mahopac, Monticello, Port Jervis, 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. On January 12, 1996, the First Nationwide Deposits totaled $414.8 million. In addition, the Bank acquired certain assets related to the First Nationwide Branches, including facilities and fixed operating assets associated with the First Nationwide Branches at a purchase price of approximately $2.9 million, and certain savings account and overdraft loans which totaled $1.0 million at January 12, 1996, at face value. The total amount of goodwill recorded as a result of the Acquisition totaled $34.5 million. 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 its name to MSB Bank. As a consequence of the conversion, the Company became a savings and loan holding company subject to the regulations, 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"). On December 16, 1997, the Company announced the signing of the Merger Agreement by and among HUBCO, the Company, and the Bank. The Merger Agreement provides for the Company to be merged with HUBCO (the "Merger"), with HUBCO as the surviving corporation. HUBCO, a bank holding company incorporated in New Jersey, is the parent corporation of Hudson United Bank, a New Jersey-based bank (HUB), and Lafayette American Bank, a Connecticut-based bank ("Lafayette"). Prior to closing the Merger, HUBCO expects to complete its pending acquisition of Poughkeepsie Financial Corp. ("PFC") and PFC's subsidiary, Bank of the Hudson ("BTH"), a New York-based bank. HUBCO anticipates that BTH will serve as HUBCO's New York bank subsidiary and that MSB Bank will be merged into BTH following the Merger. 63 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Upon completion of the Merger, each share of common stock, par value $0.01 per share, of the Company ("MSB Common Stock"), other than Excluded Shares (as defined below), will be converted into a number of shares (the "Exchange Ratio") of common stock of HUBCO, no par value ("HUBCO Common Stock"). The Merger Agreement provides that the Exchange Ratio will be equal to $36.02 divided by the Median Pre-Closing Price (as defined below) of HUBCO Common Stock, provided that the Median Pre-Closing Price is between $34.97 and $37.13. ("Median Pre-Closing Price" will be determined by taking the price half-way between the closing prices of HUBCO Common Stock after discarding the four lowest and four highest closing prices during the ten-trading day period ending on the day the parties receive final federal bank regulatory approval for the Merger.) A "Minimum Exchange Ratio" of 0.97 will apply if the Median Pre-Closing Price is greater than $37.13, and a "Maximum Exchange Ratio" of 1.03 will apply if the Median Pre-Closing Price is less than $34.97. HUBCO will pay cash in lieu of issuing fractional shares. The Exchange Ratio is subject to adjustment specified in the Merger Agreement to prevent dilution. "Excluded Shares" are those shares of MSB Common Stock which are (i) held by MSB as treasury shares, or (ii) held by HUBCO or any of its subsidiaries (other than shares held as trustee or in a fiduciary capacity and shares held as collateral on or in lieu of a debt previously contracted). HUBCO currently holds all the outstanding shares of 8.75% Cumulative Convertible Preferred Stock, Series A, $.01 par value of the Company ("Series A Preferred Stock"). All Series A Preferred Stock held by HUBCO will be canceled in the Merger. While HUBCO does not currently anticipate transferring any of the Series A Preferred Stock, if it were to transfer any Series A Preferred Stock, the transferred shares (with certain limited exceptions) would be converted in the Merger into shares of a newly created series of HUBCO preferred stock having terms substantially identical to the Series A Preferred Stock (the "New HUBCO Preferred Stock" and, together with the HUBCO Common Stock, the "HUBCO Stock"). The Bank provides banking services to individual and corporate customers, with its business activities concentrated in Orange County, New York, and the surrounding areas. The following is a summary of the significant accounting policies followed by the Company in the preparation of its financial statements. Basis of Financial Statement Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, MSB Bank and MSB Travel, and the Bank's wholly owned subsidiary, MSB Financial Services, Inc. The financial statements have been prepared in conformity with generally accepted accounting principles. Significant inter-company 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 on loans and real estate owned. The Company's accounting policies with respect to these allowances are discussed below. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, and Federal funds sold. 64 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Investment and Mortgage-Backed Securities Investment securities and mortgage-backed securities that management has the positive intent and ability to hold until maturity are stated at cost, adjusted for premium amortization and discount accretion, computed using the interest method. Securities to be held for indefinite periods of time including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, or other similar factors are classified as available for sale and are recorded at fair value with the unrealized appreciation of depreciation, net of taxes, reported separately as a component of stockholders' equity. Mortgage Loans Held for Sale Mortgage loans originated for sale in the secondary market are carried at the lower of cost (unpaid principal balances less net deferred loan fees) or estimated market value in the aggregate. Net unrealized losses, if any, are recorded through a valuation allowance which is netted against the related loans. Adjustments to the allowances are recorded in current operations. Realized gains and losses on the sale of loans are determined based on the cost of the specific loans sold. Loans Loans, other than those held for sale and those considered impaired, are carried at current unpaid principal balances less the allowance for loan losses and net deferred loan fees. Interest on loans is accrued monthly, unless management considers collectibility to be doubtful (generally, when payments are past due three months or more). When loans are placed on non-accrual status, unpaid interest is reversed against interest income of the current period. Loans are returned to accrual status when collectibility is no longer considered doubtful (generally, when all payments have been brought current). Loan fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income using the interest method. Deferred amounts are amortized for fixed rate loans over the contractual life of the loans, and for adjustable rate loans over the period of time required to adjust the contractual rate to a yield approximating a market rate at the origination date. The allowance for loan losses is increased by provisions charged to operations and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance considers factors such as the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse 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, future adjustments to the allowance may 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. In addition, various regulatory agencies, as an integral part of their routine examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. 65 A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company recognizes an impairment by recording a valuation allowance with a corresponding charge to the provision for loan losses. The measurement of impairment is applicable to all loans that are identified for evaluation of impairment except for, among others, large groups of smaller-balance homogenous loans, such as residential mortgage loans and consumer installment loans, that are collectively evaluated for impairment and loans that are measured at fair value or the lower of cost of fair value. An insignificant payment delay, which is defined by the Company as up to 90 days, will not cause a loan to be classified as impaired. In addition, a loan is not considered impaired when payments are delayed, but the Company expects to collect all amounts due, including accrued interest for the period of delay. All loans identified as impaired are evaluated independently. The Company does not aggregate impaired loans for evaluation purposes. Payments received on impaired loans are applied first to accrued interest, if any, and then to principal. Premises and Equipment Land is carried at cost. Buildings, leasehold improvements and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the term of the related lease, or the useful life of the asset, whichever is shorter. Maintenance, repairs and minor improvements are charged to expense as incurred, while major improvements are capitalized. Real Estate Owned Real estate owned include properties acquired through legal foreclosure. These properties are initially recorded at the lower of cost or the fair value of the property less estimated selling costs. Any resulting write-downs are charged to the allowance for loan losses. Thereafter, these properties are carried at the lower of cost or estimated fair value less estimated selling costs. Goodwill Goodwill, which represents the excess of cost over the fair value of net assets acquired from the acquisition of deposits, is amortized to expense over the expected life of the acquired deposit base (10 years) using the straight line method. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on 66 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. 67 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net Income Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") effective December 31, 1997. SFAS 128 established standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. For purposes of calculating basic earnings per share, the number of weighted average shares were 2,837,678, 2,779,725 and 1,616,497 for 1997, 1996 and 1995, respectively. Diluted weighted average shares included common stock equivalents of 31,846, 29,277 and 47,228 in 1997, 1996 and 1995, respectively. Stock Based Compensation Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. As such, compensation expense would be recorded on the date of the grant only if the current market price of underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro-forma net income and pro-forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro-forma disclosure provisions of SFAS 123 as applicable. The Company made no stock-based awards to employees or directors during the years ended December 31, 1997 and 1996. (2) INVESTMENT SECURITIES HELD TO MATURITY The Company had no investment securities classified as held to maturity at December 31, 1997 and 1996. No investment securities were sold during 1997 and 1996. Realized gains and losses on sales of investment securities were none and $175,000, respectively, during 1995. The proceeds from these sales totaled $3.0 million in 1995. The securities sold during 1995 had remaining terms to maturity of less than three months. Included in realized losses for fiscal 1995 is a $142,000 loss related to the permanent impairment of certain investment securities. 68 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) SECURITIES AVAILABLE FOR SALE The following is a summary of securities available for sale:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- December 31, 1997 (In thousands) - ----------------- Debt securities: United States Government and related obligations......................... $ 49,082 $ 25 $ 333 $ 48,774 Other investment grade bonds.......... 1,101 13 -- 1,114 ---------- ---------- ---------- ---------- Total debt securities..................... 50,183 38 333 49,888 Equity securities: Mutual funds.......................... 1,234 -- 61 1,173 Corporate equity...................... 3,002 19 -- 3,021 ---------- ---------- ---------- ---------- Total equity securities............... 4,236 19 61 4,194 ---------- ---------- ---------- ---------- Total debt and equity securities.......... $ 54,419 $ 57 $ 394 $ 54,082 ========== ========== ========== ========== Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- December 31, 1996 (In thousands) - ----------------- Debt securities: United States Government and related obligations......................... $ 46,113 $ -- $ 1,225 $ 44,888 Other investment grade bonds.......... 2,111 -- 37 2,074 ---------- ---------- ---------- ---------- Total debt securities..................... 48,224 -- 1,262 46,962 Equity securities: Mutual funds.......................... 1,221 -- 92 1,129 Corporate equity...................... 2,586 8 -- 2,594 ---------- ---------- ---------- ---------- Total equity securities............... 3,807 8 92 3,723 ---------- ---------- ---------- ---------- Total debt and equity securities.......... $ 52,031 $ 8 $ 1,354 $ 50,685 ========== ========== ========== ==========
69 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and estimated market value of debt securities available for sale at December 31, 1997 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.
Estimated Amortized Fair Cost Value ----------- ----------- (In thousands) Due in one year or less................................. $ 9,101 $ 9,076 Due after one year through five years................... 15,667 15,398 Due after five years through ten years.................. 25,415 25,414 ----------- ----------- $ 50,183 $ 49,888 =========== ===========
The following is a summary of realized securities gains (losses) for the periods indicated:
For the Year Ended December 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Debt securities Gross realized gains........................ $ 189 $ 108 $ 55 Gross realized losses....................... -- 32 45 ---------- ---------- ---------- 189 76 10 ---------- ------------ ------------ Equity securities Gross realized gains........................ -- -- 3 Gross realized losses....................... -- -- -- ------------ ---------- ---------- Net realized gains.......................... -- -- 3 ------------ ---------- ---------- Net security gains.......................... $ 189 $ 76 $ 13 ============ ========== ==========
Included in corporate equity securities at December 31, 1997 and 1996 is $2.8 million and $2.4 million, respectively, of Federal Home Loan Bank capital stock, which is restricted to sale only to member financial institutions. Proceeds from sales of debt securities totaled $8,544,000, $36,841,000 and $16,094,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 70 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE Mortgage-backed securities available for sale are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- December 31, 1997 (In thousands) - ----------------- Collateralized mortgage obligations: Federal Home Loan Mortgage Corporation....... $ 32,509 $ 17 $ 179 $ 32,347 Federal National Mortgage Association........ 48,491 8 288 48,211 Other Collateralized mortgage obligations.... 140,400 186 393 140,193 Mortgage pass throughs........................... 4,971 -- 42 4,929 ----------- ----------- ----------- ----------- $ 226,371 $ 211 $ 902 $ 225,680 =========== =========== =========== ========== December 31, 1996 - ----------------- Collateralized mortgage obligations: Federal Home Loan Mortgage Corporation....... $ 106,832 $ -- $ 1,255 $ 105,577 Federal National Mortgage Association........ 37,045 -- 811 36,234 Other Collateralized mortgage obligations.... 163,321 -- 3,574 159,747 Mortgage pass throughs........................... 22,672 -- 802 21,870 ----------- ----------- ----------- ----------- $ 329,870 $ -- $ 6,442 $ 323,428 =========== =========== =========== ===========
Gross realized gains and losses on sales of mortgage-backed securities available for sale were $64,000 and $33,000, $79,000 and $151,000, and $50,000 and $30,000, respectively, during 1997, 1996 and 1995, respectively. The proceeds from these sales amounted to $128,555,000, $88,554,000 and $20,063,000. 71 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) LOANS Loans consist of the following: December 31, ------------------------- 1997 1996 --------- --------- Real estate loans (In thousands) Residential One-to-four family dwellings ............. $ 287,914 $ 256,853 Multi-family ............................. 17,565 14,362 Held for sale ............................ 1,052 644 Commercial ................................. 56,179 45,463 --------- --------- Total real estate loans ..................... $ 362,710 $ 317,322 Other loans Secured by savings accounts ................ 714 770 Property improvement ....................... 34 97 Education .................................. 1,609 1,955 Consumer ................................... 14,358 9,368 Commercial ................................. 11,893 8,756 Checking overdraft lines of credit ......... 1,472 1,487 Other ...................................... 734 701 --------- --------- Total other loans ........................ $ 30,814 $ 23,134 --------- --------- Total loans, gross ....................... $ 393,524 $ 340,456 Net deferred loan origination fees ............. 712 (5) Allowance for loan losses ...................... (2,807) (1,960) --------- --------- Total loans, net ........................... $ 391,429 $ 338,491 ========= ========= The following table sets forth information with respect to non-performing loans which are past due 90 days or more:
December 31, -------------------------------------------- 1997 1996 1995 ---------- ---------- --------- (In thousands) Loans In non-accrual status One-to-four family residential mortgage loans.... $ 3,005 $ 3,364 $ 2,343 Multi-family mortgage loans...................... 294 69 69 Commercial mortgage loans........................ -- 1,125 488 Other loans...................................... 189 217 61 ---------- ---------- --------- Total loans in non-accrual status.............. $ 3,488 $ 4,775 $ 2,961 --------- ---------- --------- Total non-performing loans.................... $ 3,488 $ 4,775 $ 2,961 ========= ========== =========
72 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1997, the total recorded investment in impaired loans was $6.9 million which consisted of $6.4 million of potential problem loans and $424,000 of loans in non-accrual status. In addition, impaired loans consisted of $6.5 million of mortgage loans that were measured with reference to the appraised value of the collateral property and $400,000 of loans measured based on expected cash flows. As of December 31, 1996, the total recorded investment in impaired loans was $2,399,000, which consisted of $1,227,000 of loans that are potential problem loans and $1,172,000 of loans that are in non-accrual status. In addition, impaired loans consisted of $1,999,000 of commercial mortgage loans that were measured with reference to the appraised value of the collateral property and $400,000 of commercial loans measured based on expected cash flows. The average balance of impaired loans during 1997 and 1996 amounted to $5,653,000 and $1,817,000, respectively. At December 31, 1997 and 1996, the allowance related to impaired loans as determined under SFAS No. 114 amounted to $925,000 and none, respectively. Interest income recognized on impaired loans was not significant for the years ended December 31, 1997 and 1996. If non-accrual loans had continued to realize interest in accordance with their contractual terms, approximately $313,000, $413,000 and $134,000 of interest income would have been realized for the years ended December 31, 1997, 1996 and 1995, respectively. The Bank originates loans primarily in the New York counties of Orange, Ulster, Putnam and Sullivan. The ability of borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Bank's lending region. If these conditions were to deteriorate, higher levels of non-performing loans and charge-offs could occur resulting in higher provisions for loan losses. Real estate loans are comprised of adjustable rate loans of $309.1 million and fixed rate loans of $53.6 million at December 31, 1997, and $276.3 million and $41.0 million, respectively, at December 31, 1996. Certain mortgage loans originated by the Bank are sold without recourse in the secondary market to the Federal National Mortgage Association ("FNMA"). The unpaid principal balances of such serviced loans, which are not included in the balance sheets, were approximately $43.1 million and $31.2 million at December 31, 1997 and 1996, respectively. 73 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows: For the Year Ended December 31, ------------------------------ 1997 1996 1995 ------ ------ ------ (In thousands) Balance at beginning of year ............... $1,960 $1,659 $1,459 Provision charged to operations ............ 1,565 1,400 483 Loans charged off Real estate ............................ 523 634 234 Other loans ............................ 384 485 73 ------ ------ ------ $ 907 $1,119 $ 307 Recoveries Real estate ............................ 148 1 2 Other loans ............................ 41 19 22 ------ ------ ------ 189 $ 20 $ 24 ------ ------ ------ Net charge-offs ............................ 718 $1,099 $ 283 ------ ------ ------ Balance at end of year ..................... $2,807 $1,960 $1,659 ====== ====== ====== Ratio of net charge-offs to average net loans outstanding .................... 0.20% 0.36% 0.11% (7) PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 31, ---------------------- 1997 1996 ------- ------- (In thousands) Land ............................................. $ 1,801 $ 1,809 Buildings ........................................ 10,985 10,898 Furniture, fixtures and equipment ................ 7,725 9,880 Leasehold improvements ........................... 1,619 2,027 ------- ------- 22,130 24,614 Less accumulated depreciation and ............... 8,068 9,745 ------- ------- amortization Premises and equipment, net ...................... $14,062 $14,869 ======= ======= Occupancy and equipment includes depreciation and amortization of $1,263,000, $1,256,000 and $942,000 for the years ended December 31, 1997, 1996 and 1995, respectively. (8) REAL ESTATE OWNED Investments in real estate consisted of properties owned through foreclosures and amounted to $2,443,000 and $915,000 at December 31, 1997 and 1996, respectively. 74 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) DEPOSITS The following is a summary of deposits at the dates indicated:
December 31, 1997 December 31, 1996 ---------------------------- ----------------------------- Weighted Weighted Average Average Amount Nominal Rates Amount Nominal Rates -------- ------------- -------- ------------- (In thousands) Club accounts ........................................ $ 435 2.76% $ 422 2.86% NOW accounts ......................................... 40,190 1.88 39,242 2.00 Savings accounts ..................................... 198,344 3.27 193,280 3.28 Money market accounts ................................ 52,594 4.11 52,004 4.25 Time deposits ........................................ 329,908 5.24 403,772 5.31 Demand deposits ...................................... 51,961 -- 47,441 -- -------- ---- -------- ---- Total deposits ....................................... $673,432 3.96% $736,161 4.18% ======== ==== ======== ====
The maturity of time deposits is as follows:
December 31, 1997 December 31, 1996 ------------------------ ------------------------ Amount Rate Amount Rate -------- ---- -------- ---- (Dollars in thousands) Six months or less ................................... $167,183 5.06% $197,651 5.14% More than six months to one year ..................... 86,537 5.13 120,479 5.34 More than one year to three years .................... 63,002 5.85 57,258 5.46 More than three years ................................ 13,186 5.32 28,384 6.11 -------- ---- -------- ---- Total time deposits .................................. $329,908 5.24% $403,772 5.31% ======== ==== ======== ====
Time deposits issued in amounts of $100,000 or more amounted to approximately $28.0 million and $33.7 million at December 31, 1997 and 1996. Interest expense on time deposits in amounts over $100,000 amounted to approximately $1,456,000, $1,837,000 and $578,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest expense by depositor account is summarized as follows: Year Ended December 31, ------------------------------------- 1997 1996 1995 ------- ------- ------- (In thousands) Club accounts ..................... $ 27 $ 25 $ 25 NOW accounts ...................... 752 791 277 Savings accounts .................. 6,527 6,145 3,918 Money market accounts ............. 2,147 1,819 1,406 Time deposits ..................... 19,200 21,930 8,116 ------- ------- ------- Total deposits ................ $28,653 $30,710 $13,742 ======= ======= ======= (10) BORROWINGS At December 31, 1997, borrowings amounted to $55,000 and consisted of repurchase agreements that were used for customer sweep accounts. The Company had no borrowings outstanding at December 31, 1996. 75 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1996, the Company utilized advances from the Federal Home Loan Bank to provide liquidity. The maximum outstanding borrowings during 1996 were $12.1 million and interest expense related to these advances amounted to $31,000. During 1995, the Company had outstanding borrowings which consisted of repurchase agreements. Securities sold under repurchase agreements were delivered to the primary dealers who arranged the transaction. The securities remained registered in the Bank's name and were returned upon maturity and repayment of the borrowing. The maximum amount of outstanding repurchase agreements during 1995 was $43.6 million. The average balance of repurchase agreements during 1995 was $21.2 million. Interest expense on these repurchase agreements totaled $1.4 million in 1995. (11) INCOME TAXES Total income tax expense was allocated as follows:
Year Ended December 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Income from operations...................... $ 1,522 $ 1,104 $ 1,622 Stockholders' equity: Net unrealized (depreciation) appreciation on securities available for sale........ 2,700 (3,027) 2,869 -------- --------- -------- $ 4,222 $ (1,923) $ 4,491 ======== ======== ========
The components of income tax expense are as follows:
Year Ended December 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Current Federal.................................. $ 1,362 $ 1,268 $ 1,201 State.................................... 482 504 509 Deferred Federal.................................. (249) (41) (51) State.................................... (73) (249) (37) --------- -------- -------- Total.................................. $ 1,522 $ 1,104 $ 1,622 ======== ======== ========
76 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation between the provision for income taxes and the amount computed by multiplying income before income taxes by the statutory Federal income tax rate of 34% is as follows:
Year Ended December 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- (In thousands) Tax at statutory rate..................................... $ 1,293 $ 957 $ 1,354 Increase (decrease) resulting from: Excise tax on termination of pension plan.............. -- 31 -- Non-taxable interest income............................ (90) (19) (14) State income taxes, net of federal income tax benefit.. 270 168 312 Dividend received deduction............................ (20) (24) (20) Other net.............................................. 69 (9) (10) -------- -------- -------- $ 1,522 $ 1,104 $ 1,622 ========= ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
Year Ended December 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Deferred tax assets: Net unrealized loss on securities available for sale... $ 411 $ 3,111 $ 84 Deferred compensation.................................. 129 121 84 Allowance for loan losses.............................. 1,123 784 664 Post-retirement benefits............................... 761 723 687 Deferred loan fees..................................... -- 2 175 Goodwill amortization.................................. 1,078 586 95 Non-accrual interest................................... 125 165 55 -------- -------- -------- Total gross deferred tax assets.................... $ 3,627 $ 5,492 $ 1,844 -------- -------- -------- Deferred tax liabilities: Premises and equipment, primarily due to differences in depreciation....................................... $ 980 $ 782 $ 631 Tax bad debt reserves over base year amount............ 102 86 126 Deferred loan 284 -- -- fees................................................... Prepaid pension........................................ -- -- 158 -------- -------- -------- Total gross deferred tax liabilities............... 1,366 868 915 -------- -------- -------- Net deferred tax asset............................. $ 2,261 $ 4,624 $ 929 ======== ======== ========
Under tax law that existed prior to 1996, the Bank was generally allowed a special bad debt deduction in determining income for tax purposes. The deduction was based on either a specified experience formula or a percentage-of-taxable-income before such deduction. The experience method was used in preparing the income tax returns for 1995. Federal legislation was enacted in August of 1996, which repealed for tax purposes the percentage-of-taxable-income bad debt reserve method. As a result, the Bank must instead use the direct charge-off method to compute its bad debt deduction. The Federal legislation also requires the Bank to recapture its post-1987 net additions to its tax bad debt reserves. The Bank has previously provided for this liability in the financial statements. New York State enacted legislation in July of 1996, which redesignated the Bank's State bad debt reserves at December 31, 1995 as the base-year amount and also provide for future additions to the base-year reserve using the percentage-of-taxable income method. 77 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Retained earnings at December 31, 1997 includes approximately $6.0 million for which no provision for income tax has been made. This amount represents an allocation of income to bad debt deductions for tax purposes only. Events that would result in taxation of these reserves include failure to qualify as a bank for tax purposes, distributions in complete or partial liquidation, stock redemptions and excess distributions to shareholders. At December 31, 1997, the Bank had an unrecognized tax liability of $2.0 million with respect to this reserve. Management has determined that it is more likely than not that it will realize the deferred tax assets based upon the nature and timing of the items listed above. There can be no assurances, however, that there will be no significant differences in the future between taxable income and pre-tax book income if circumstances change. In order to fully realize the net deferred tax asset, the Bank will need to generate future taxable income. Management has projected that the Bank will generate sufficient taxable income to utilize the net deferred tax asset. However, there can be no assurance as to such levels of taxable income generated. (12) STOCKHOLDERS' EQUITY General Pursuant to regulations set forth by the New York State Banking Department, upon conversion from a New York State chartered mutual savings bank to a New York State Stock form savings bank in 1992, the Bank established a liquidation account in the amount of $28.1 million, its total net worth at March 31, 1992, in order to grant a priority to eligible account holders (as defined) who continue to maintain eligible deposits at the Bank. The balance of the liquidation account is reduced annually to the extent that eligible account holders reduce their eligible deposits; however, subsequent increases in eligible deposits do not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank (and only in such event), each eligible account holder would be entitled to receive a distribution from the liquidation account, after payment of all creditor's claims, in an amount proportionate to the current adjusted eligible deposit balance. Such distributions would be made prior to any payments to holders of common stock. The balance of the liquidation account was $5.8 million at December 31, 1997. Preferred Stock In connection with the Offering, the Company sold 600,000 shares of its 8.75% Cumulative Convertible Preferred Stock Series A at $21.60 per share. 78 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Series A Preferred Stock is not redeemable prior to January 10, 1999. The Series A Preferred Stock will be redeemable, at the option of the Company, in whole or in part, at any time on or after January 10, 1999, at the following per share prices (expressed as a percentage of the liquidation preference per share of Series A Preferred Stock) during the 12-month period beginning January 10, in each of the following years: Redemption Year Price ---- ---------- 1999..................................106.12% 2000..................................105.250 2001..................................104.375 2002..................................103.500 2003..................................102.625 2004..................................101.750 2005..................................100.875 2006 and thereafter...................100.000 In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Series A Preferred Stock are entitled to receive out of assets of the Company available for distribution to stockholders under applicable law, before any payment or distribution of assets is made to holders of Common Stock or any other class or series of stock ranking junior to the Series A Preferred Stock upon liquidation, liquidating distributions in the amount of $21.60 per share plus accrued and unpaid dividends (whether or not earned or declared) to the date fixed for such liquidation, dissolution or winding up. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the amounts payable with respect to the Series A Preferred Stock and any other shares of stock of the Company ranking as to any such distribution on a parity with the Series A Preferred Stock, are not paid in full, the holders of the series A Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Company in proportion to the full respective preferential amounts to which they are entitled. After payment of the full amount of the liquidation to which they are entitled, the holders shares of Series A Preferred Stock will not be entitled to any further participation in any distribution of assets by the Company. Capital Requirements The OTS regulations require savings associates 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. 79 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the capital position of the Bank as calculated at December 31, 1997 and 1996:
December 31, 1997 -------------------------------------------------------------------- Tangible Core Risk-Based ------------------- ------------------- ------------------ Amount Percent Amount Percent Amount Percent ------- ------- ------- ------- ------- ------- (In thousands) Capital as calculated under GAAP ........................ $73,907 10.04% $73,907 10.04% $73,907 19.70% Deduct servicing rights ................................. 17 -- 17 -- 17 -- Deduct equity investments ............................... -- -- -- -- 125 0.03 Deduct goodwill ......................................... 29,173 3.96 29,173 3.96 29,173 7.78 Add qualifying general loan loss allowance, as limited by regulation ............................. -- -- -- -- 2,806 0.75 Add net unrealized loss on securities available for sale, net of taxes ..................... 597 0.08 597 0.08 597 0.16 ------- ----- ------- ----- ------- ----- Capital, as calculated .................................. 45,314 6.15 45,314 6.15 47,995 12.79 Capital, as required .................................... 11,046 1.50 31,501 4.00 30,015 8.00 ------- ----- ------- ----- ------- ----- Excess .................................................. $34,268 4.65% $13,813 2.15% $17,980 4.79% ======= ===== ======= ===== ======= =====
December 31, 1997 -------------------------------------------------------------------- Tangible Core Risk-Based ------------------- ------------------- ------------------ Amount Percent Amount Percent Amount Percent ------- ------- ------- ------- ------- ------- (Dollars in thousands) Capital as calculated under GAAP ........................ $70,944 9.0% $70,944 10.04% $73,907 19.70% Deduct goodwill ......................................... 32,835 4.2 32,835 3.96 29,173 7.78 Add qualifying general loan loss allowance, as limited by regulation ............................. -- -- -- -- 2,806 0.75 Add net unrealized loss on securities available for sale, net of taxes ..................... 4,677 0.6 4,677 0.08 597 0.16 ------- ----- ------- ----- ------- ----- Capital, as calculated .................................. 42,786 5.4 42,786 6.15 47,995 12.79 Capital, as required .................................... 11,813 1.5 31,501 4.00 30,015 8.00 ------- ----- ------- ----- ------- ----- Excess .................................................. $30,973 3.9% $11,285 2.15% $17,980 4.79% ======= ===== ======= ===== ======= =====
Dividend Restrictions Delaware law stipulates that the Company may only pay dividends from its capital surplus or, if no surplus exists, from its net profits for the current and preceding year. The Bank's ability to pay dividends to the Company is also subject to various restrictions. At least 30 days' written notice must be given to the OTS of a proposed capital distribution by a savings association, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. An association that has capital in excess of all fully phased-in regulatory capital requirements before and after a proposed capital distribution and that is not otherwise restricted in making capital distributions, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net earnings for the previous four quarters. Any additional capital distributions 80 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS would require prior OTS approval. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. (13) EMPLOYEE BENEFITS Retirement Plan Prior to August 31, 1995, the Bank maintained a defined benefit pension plan which covered substantially all employees of the Bank who met certain age and length of service requirements. The Bank terminated the defined benefit plan as of August 31, 1995. Settlement of the Plan liabilities occurred in July 1996, resulting in a pre-tax gain of $32,000. The defined benefit plan allowed participants, upon retirement, to elect to receive either monthly benefit payments or a lump sum distribution. The plan was amended effective January 1, 1994 to eliminate the lump sum distribution option on a prospective basis. Thus, all vested benefits up to January 1, 1994 were grandfathered and therefore eligible for lump sum distribution. In connection with the termination of the plan, a lump sum distribution option was re-instituted for distributions to active employees. A group annuity contract was purchased to provide benefits for current retirees and active employees who elected to receive deferred monthly payments commencing at or after retirement. 401(k) Savings Plan The Bank also sponsors a 401(k) incentive savings plan (a defined contribution plan) that is offered to substantially all employees. The Bank began making discretionary contributions to the Plan on September 1, 1995, concurrent with the termination of the Bank's defined benefit plan. Salaries and employee benefits expense includes incentive savings plan expenses of $180,000, $101,000 and $92,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Employee Stock Ownership Plan The Company also maintains an Employee Stock Ownership Plan (the "ESOP") which the Bank has also adopted for substantially all its employees. The ESOP purchased 182,160 shares of the Company's common stock in the Conversion at a cost of $1,821,600 using the proceeds of a loan provided by an unrelated financial institution. The terms of the loan called for level principal payments in 28 quarterly installments commencing September 30, 1992 with interest at a variable rate equal to the prime rate. Loan payments were funded principally from the Bank's contributions to the ESOP on behalf of its eligible employees, which are charged to expense as incurred. Contributions for the years ended December 31, 1997, 1996 and 1995 amounted to approximately $250,000, $310,000 and $343,000, respectively. In September 1997, the Company refinanced the ESOP loan with the Bank. At the time of the refinancing, the principal balance was approximately $270,000. The loan calls for three equal annual payments commencing on December 31, 1997 with interest at a variable rate equal to the prime rate. 81 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Shares purchased by the ESOP are held in a suspense account for allocation to individual participant accounts as the loan is repaid. Shares are allocated annually based on the relative compensation of the participants. The cost of the unallocated shares held in the suspense account is reflected as a reduction of stockholders' equity. Bank Recognition and Retention Plans The Company established the Bank Recognition and Retention Plans and Trusts ("BRPs") as a method of providing officers and directors of the Bank with a proprietary interest in the Company. The BRPs are designed to encourage the participants to remain with the Bank. The BRPs purchased a total of 4% or 73,600 of the shares issued in the Offering which were awarded to the BRP participants. During fiscal 1992, the BRPs acquired 63,882 shares with contributions from the Bank of $736,000. The remaining 9,778 shares were acquired by the BRP in October 1992, at a cost of $112,000. Awards to plan participants vest at a rate of 20% per year commencing one year from the date of the award. As awards vest, the Bank will recognize an employee benefit expense in an amount equal to the cost basis of the stock. The expense recognized for vested benefits amounted to $130,000, $131,000 and $129,000 for the years ended December 31, 1997, 1996 and 1995, respectively. All awards granted under the BRPs to date have become fully vested. Stock Option Plans The Company's Incentive Stock Option Plan ("Employees' Plan") and the Stock Option Plan for Outside Directors ("Directors' Plan") provide for the granting of options to officers and directors of the Company. Under the terms of the Plans, options may be granted at not less than fair market value on the date of the grant. The Employees' Plan authorizes the grant of stock options and limited rights with respect to 128,800 shares of common stock of the Company, equal to 7% of the shares of common stock issued in the Conversion. Options under the Employees' Plan are exercisable on a cumulative basis in equal installments at a rate of 20% per year commencing one year from date of the grant, except that in the event of termination of employment other than as a result of death, disability, retirement, or a change in control of the Company or the Bank, options not previously exercisable will automatically expire. As of December 31, 1997, 1996 and 1995, options for the purchase of 32,755 shares, 34,755 shares and 38,755 shares, respectively, were outstanding under this Plan. At December 31, 1997, all 32,755 options outstanding under the Plan were exercisable. Options were exercised during 1997 for the purchase of 2,000 shares. No options were granted in 1997, 1996 and 1995. Upon exercise of "Limited Rights" in the event of a change in control, the employee will be entitled to receive a lump sum cash payment equal to the difference between the exercise price of the related option and the fair market value of the shares of Common Stock underlying the option. In the event of death, disability or normal retirement, the Company, if requested by the employee, may elect, in exchange for the option, to pay the employee, or beneficiary in the event of death, the amount by which the fair market value of the Common Stock exceeds the exercise price of the option on the date of the employee's termination of employment. These Rights will not be triggered by the Merger Agreement. Under the Directors' Plan, eligible outside directors were granted, concurrent with the Conversion, non-statutory options to purchase an aggregate amount of common stock of the Company equal to 3% or 55,200 of the shares of the common stock issued in the Conversion. Options for an additional 6,750 shares have been reserved for grants to subsequent outside directors. Each director received a fixed award of options, plus a number of options based upon the director's length of service. Options vest one year after the date of grant, except that in the event of death, retirement, disability or a change in control of the Bank or the Company, all options will vest immediately. The exercise price per share of each option is equal to the fair market value of the shares of 82 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS common stock on the date the option was granted. All options granted under the directors' Plan expire upon the earlier of 10 years following the date of grant or one year following the date the optionee ceases to be a Director. 8,212 options were exercised during 1997 and at December 31, 1997, options for the purchase of 41,083 shares were outstanding and fully exercisable. Other Post-Retirement Benefits In addition to pension benefits, the Company provides certain health care and life insurance benefits for retired employees, directors and their spouses. A Medicare supplement is provided through the American Association of Retired Persons for retirees who have completed 10 years of service. Retirees with 10 to 19 years of service contribute 50% of the premiums and retirees with 20 or more years of service contribute 20% of the premium costs. The health care plan provides for a $250 deductible per individual with 70% co-insurance up to $1,750 and 100% thereafter. Life insurance is provided at 90% of the amount of insurance in force at retirement and is reduced 10% a year for four years. Thereafter, life insurance is provided at 50% of the insurance in force at retirement. Dental benefits are also provided on a procedure-specific basis. The following is a reconciliation of the funded status of the plan: Year Ended December 31, ---------------------- 1997 1996 --------- ---------- (in thousands) Accumulated post-retirement benefit obligation Retirees ......................................... $ 334 $ 407 Active employees fully eligible for benefits ..... 84 -- Other active employees ........................... 630 676 ------ ------ Total ........................................ 1,048 1,083 Unrecognized gain ................................ 669 543 Unrecognized past service liability .............. 166 182 ------ ------ Accrued post-retirement benefits ................. $1,883 $1,808 ====== ====== The components of net periodic post-retirement benefit cost are as follows: Year Ended December 31, ----------------------------- 1997 1996 1995 ----- ----- ----- (in thousands) Service cost ............................... $ 88 $ 90 $ 63 Interest cost .............................. 64 80 127 Unrecognized gain .......................... (41) (23) (16) Unrecognized past service liability ........ (16) (16) -- ----- ----- ----- Total .................................. $ 95 $ 131 $ 174 ===== ===== ===== A discount rate of 7.25%, an annual rate of salary increases of 5.0% and a 7.0% increase in the assumed health care costs reducing linearly to 5.0% in 2002 were used to determine the Accumulated Post-Retirement Benefit Obligation ("APBO") at December 31, 1997. At December 31, 1996, a discount rate of 7.75%, an annual rate of salary increases of 5.5% and a 10.0% increase in the assumed health care costs reducing linearly to 5.5% in the year 2005 were used to determine the APBO. The effect of a one-percentage point increase in the assumed health care cost trend rates for each future year would be an increase in net periodic post-retirement benefits cost of $27,600 and an increase of $165,000 in the APBO. Compensation and benefits expense includes insurance premiums for retiree health care and life insurance benefits, and similar benefits for active employees of $615,000, $516,000 and $423,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 83 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Outside Directors' Retirement Plan. The Retirement Plan for Board Members of MSB Bancorp, Inc. ("Directors' Retirement Plan") was adopted as of October 21, 1994 and was subsequently amended effective as of October 31, 1997. The purpose of the Directors' Retirement Plan is to provide retirement benefits to outside directors of the Company and the Bank. The Directors' Retirement Plan, as amended effective as of October 31, 1997, provides for a normal retirement benefit to be paid to each director who retires after attaining age 65 and completing at least 10 years of "creditable service" and who agrees to provide consulting services to the Company following retirement. "Creditable service" is defined generally in the Directors' Retirement Plan, as amended, to mean service on the Company's Board of Directors, or on the Board of Directors (or board of trustees) of the Bank, including any service completed while the director was a salaried officer or employee of the Bank. The annual normal retirement benefit payable to a director upon retirement at age 65 under the Directors' Retirement Plan is calculated based on the annual retainer being paid to the director for service on the Board of Directors of the Bank or the Company (whichever is greater in the case of a member of both Boards), as in effect in the month in which the director ceases to be a member of such Board. Pursuant to the Retirement Plan, as amended, "annual retainer" means the sum of the (i) annual retainer; (ii) aggregate committee meeting fees; and (iii) property inspection fees, if any, paid to the Board member for the relevant period. The Directors' Retirement Plan also provides for the payment of a vested retirement benefit which may also commence after a director attains age 50 but prior to attainment of age 65. If a vested early retirement benefit is elected, the Directors' Retirement Plan provides for the amount of the benefit otherwise payable to be reduced by 0.5% for each month the benefit commencement date precedes the date on which the director would have attained age 65. In the event of a "change of control" of the Company, as defined in the Plan, each director would receive a benefit based upon credit for three additional years of age and service. Additionally, upon a change of control, the Directors' Retirement Plan permits each director to elect a lump sum payment of his or her benefit under the plan and for such benefit to be subject to an early retirement reduction factor of 0.25% rather than 0.5% per month. In the event a director's service terminates within the period beginning three months prior to, and ending three years after, a change of control, the director would not be required to provide consulting services in order to receive retirement benefits. The Directors' Retirement Plan was terminated effective as of December 31, 1997 and all benefits payable to participating directors (including accelerated benefits payable as a result of the Merger) were accrued and determinable as of the Plan's termination date. Effective upon the termination of the Directors' Retirement Plan, the Company accrued a $2.8 million expense for the benefits that became vested for participating directors as a result of the Plan's termination. (14) COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company has various outstanding commitments and contingent liabilities that have not been reflected in the consolidated financial statements. The principal commitments and contingent liabilities of the Company are discussed in the sections that follow. 84 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lease Commitments The future minimum lease payments under operating leases at December 31, 1997 are as follows: Year Ending December 31, Amount ------------------------ ------ (In thousands) 1998 ................................ $ 225 1999 ................................ 221 2000 ................................ 220 2001 ................................ 222 2002 ................................ 191 2003 and thereafter.................. 1,163 ------ Total minimum lease payments .... $2,242 ====== Loan Commitments and Lines of Credit At December 31, 1997 and 1996, the Company's commitments to originate loans, including unused lines of credit, were as follows: 1997 1996 ------- ------- (In thousands) Real estate loans ............................ $61,936 $36,833 Other loans .................................. 5,396 5,292 Stand-by letters of credit ................... 829 102 ------- ------- Total commitments ......................... $68,161 $42,227 ======= ======= Commitments to extend credit are contractual agreements to lend to customers within specified time periods at interest rates and on other terms based on existing market conditions. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. The Company's outstanding loan commitments and lines of credit do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. The credit risk associated with loan commitments and lines of credit is essentially the same as for outstanding loans reported in the balance sheet. Commitments and lines of credit are subject to the same credit approval process, including case-by-case evaluation of the customer's creditworthiness and related collateral requirements. Substantially all of these commitments have been entered into with customers within the Bank's lending region as described in Note 5. Loan commitments include extensions of credit with adjustable rates of $60,513,000 and $35,422,000 at December 31, 1997 and 1996, respectively, and extension of credit with fixed rates of $7,648,000 and $6,805,000 at December 31, 1997 and 1996, respectively. 85 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Company and its directors are defendants in a lawsuit, Kahn Brothers & Co., Inc. Profit Plan and Trust et al. v. MSB Bancorp, Inc. et al., commenced by stockholders in the Delaware Court of Chancery, New Castle County, on November 22, 1995. (The Company and its directors were 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 November 7, 1995. This action was consolidated with the Kahn litigation, and the Kahn amended complaint is now the operative pleading.) 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 expression of interest of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to stockholders by not notifying the public or the Company's stockholders of HUBCO's expression of interest; 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 re-argument. 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 parties have engaged in substantial written discovery, and plaintiffs have deposed all of the directors and certain representatives of Bear Stearns. The Company has deposed plaintiffs' representative, Mr. Thomas Kahn. Discovery has been completed. On October 10, 1997, all the defendants served and filed with the Court a motion for summary judgment which seeks the dismissal of all the allegations in plaintiffs' amended complaint. As of January 16, 1998, defendants' motion for summary judgment was fully briefed and submitted to the Court. The Company has requested oral argument on the motion. In the meantime, the Company intends to continue to vigorously contest the allegations of wrongdoing in this action. 86 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS While the Company believes that it has meritorious defenses in these legal actions and is vigorously defending these suits, the legal responsibility and financial impact with respect to these litigation matters cannot presently be ascertained and, accordingly, there is risk that the final resolution of these matters could result in the payment of monetary damages which would be material in relation to the consolidated financial condition or results of operations of the Company. The Company does not believe that the likelihood of such a result is probable and has not established any specific litigation reserves with respect to such matters. (15) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets at December 31, 1997 and 1996 and condensed statements of income and cash flows for the years ended December 31, 1997, 1996 and 1995 for MSB Bancorp, Inc. should be read in conjunction with the consolidated financial statements of the Company and the notes thereto. December 31, ----------------------------- BALANCE SHEET 1997 1996 -------- -------- (In thousands) ASSETS Cash and cash equivalents................ $ 215 $ 58 Federal funds............................ -- 400 Securities available for sale............ 100 25 Equity in net assets of subsidiary....... 74,133 70,825 Other assets............................. 1,554 783 -------- -------- $ 76,002 $ 72,091 ======== ======== LIABILITIES Dividends payable........................ $ 710 $ 708 Accrued expenses......................... 334 161 ESOP obligation.......................... 182 432 -------- -------- Total liabilities.................. $ 1,226 $ 1,301 -------- -------- STOCKHOLDERS' EQUITY Preferred Stock.......................... $ 6 $ 6 Common Stock............................. 30 30 Additional paid-in capital............... 48,069 48,163 Retained Earnings........................ 31,458 32,009 Treasury stock, at cost.................. (3,941) (4,137) Unallocated ESOP stock................... (182) (432) Unallocated BRP stock.................... (42) (172) Net unrealized loss on securities available for sale..................... (622) (4,677) -------- -------- Total stockholders' equity......... $ 74,776 $ 70,790 -------- -------- $ 76,002 $ 72,091 ======== ======== 87 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS OF INCOME
Year Ended December 31 -------------------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands) Interest income .............................................................. $ 15 $ 22 $ 120 Dividends from subsidiary .................................................... 3,560 953 750 -------- -------- -------- Total income ................................................................. 3,575 975 870 Expenses ..................................................................... 190 340 380 -------- -------- -------- Income before income taxes and equity in undistributed earnings of subsidiary ...................................... 3,385 635 490 Income tax expense (benefit) ................................................. (52) (91) (115) -------- -------- -------- Income before equity in undistributed earnings of subsidiary ................. 3,437 726 605 Equity in undistributed (excess distributions of) earnings of subsidiary ................................................................... (1,156) 985 1,756 -------- -------- -------- Net income ................................................................ $ 2,281 $ 1,711 $ 2,361 ======== ======== ========
STATEMENTS OF CASH FLOWS
Year Ended December 31 -------------------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands) Cash Flows From Operating Activities Net Income ................................................................... $ 2,281 $ 1,711 $ 2,361 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiary not providing funds ..................... 1,156 (985) (1,756) (Increase) decrease in other assets ...................................... (1,086) (25) 187 Increase (decrease) in accrued expenses .................................. 173 138 (65) Other .................................................................... 45 (13) 57 -------- -------- -------- Net cash (used in) provided by operating activities ...................... $ 2,569 $ 826 $ 784 -------- -------- -------- Cash Flows From Investing Activities Purchase of securities ....................................................... $ (75) $ (25) $ -- Maturities of investment securities .......................................... -- -- 2,000 -------- -------- -------- Net cash (used in) provided by investing activities .......................... $ (75) $ (25) $ 2,000 -------- -------- -------- Cash Flows From Financing Activities Proceeds from the sale of stock .............................................. $ -- $ 32,013 $ -- Infusion of capital to subsidiaries .......................................... -- (33,513) -- Proceeds from the exercise of stock dividends ............................... 102 40 212 Purchase of treasury stock ................................................... -- -- (2,038) Payment of common and preferred stock dividends .............................. (2,839) (2,387) (979) -------- -------- -------- Net cash provided by financing activities .................................... $ (2,737) $ (3,847) $ (2,805) -------- -------- -------- Net decrease in cash and cash equivalents .................................... $ (243) $ (3,046) $ (21) Cash and cash equivalents at beginning of year ............................... 458 3,504 3,525 -------- -------- -------- Cash and cash equivalents at end of year ..................................... $ 215 $ 458 $ 3,504 ======== ======== ========
88 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (16) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. Whenever possible, quoted market prices are used to estimate the fair value of a financial instrument. An active market does not exist, however, for many financial instruments. As a result, fair value estimates are made, as of a specific date, based on judgments regarding future expected cash flows, current economic conditions, risk factors and other characteristics of the financial instrument. These estimates are subjective in nature and involve uncertainties. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are made as of a specific date, they are susceptible to material changes in the near future. The information presented is based on pertinent information available to management as of December 31, 1997 and 1996. Although management is not aware of any factors, other than changes in interest rates, that would significantly affect the estimated fair values, the current estimated value of these instruments may have changed significantly since that point in time. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. Investments and Mortgage-Backed Securities The carrying amounts for short-term investments approximate fair value because they mature in 90 days or less and do not present unanticipated credit concern. The fair value of longer-term investments and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. Fair value for significant non-performing loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities Under SFAS No. 107, the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings and NOW accounts and money market and checking accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. 89 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the carrying values and estimated fair values of the Company's financial instruments at the dates indicated:
December 31, 1997 December 31, 1996 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- (In thousands) Financial Assets: Cash and due from banks ......................................... $ 16,834 16,834 $ 16,375 $ 16,375 Federal funds sold .............................................. 21,065 21,065 32,590 32,590 Securities available for sale ................................... 54,082 54,082 50,685 50,685 Mortgage-backed securities available for sale ................... 225,680 225,680 323,428 323,428 Loans, net ...................................................... 391,429 394,592 338,491 340,479 Accrued interest receivable ..................................... 5,049 5,049 5,552 5,552 Financial Liabilities: Non-interest bearing demand ..................................... 51,961 51,961 47,441 47,441 Savings and NOW ................................................. 238,969 238,969 232,944 232,944 Money market .................................................... 52,594 52,594 52,004 52,004 Time deposits ................................................... 329,908 331,520 403,772 406,160
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth Year Ended December 31, 1997 Quarter Quarter Quarter Quarter - ---------------------------- -------- -------- -------- -------- (In thousands) Quarterly Operating Data Interest income ................................................. $ 13,526 $ 13,697 $ 13,118 $ 12,823 Interest expense ................................................ 7,446 7,469 7,007 6,758 -------- -------- -------- -------- Net interest income ............................................. 6,080 6,228 6,111 6,065 Provision for loan losses ....................................... 300 275 275 715 Realized gains (losses) on securities ........................... 15 15 36 155 Other non-interest income ....................................... 942 1,068 1,249 1,258 Termination of Retirement Plan for Directors .................... -- -- -- 2,800 Non-interest expense ............................................ 5,178 5,220 5,081 5,575 -------- -------- -------- -------- Income before income taxes ...................................... 1,559 1,816 2,040 (1,612) Income tax expense .............................................. 602 731 810 (621) -------- -------- -------- -------- Net income (loss) ............................................... $ 957 $ 1,085 $ 1,230 $ (991) ======== ======== ======== ======== Basic earnings (loss) per share ................................. $ 0.24 $ 0.28 $ 0.33 $ (0.45) ======== ======== ======== ======== Diluted earnings (loss) per share ............................... $ 0.24 $ 0.28 $ 0.33 $ (0.45) ======== ======== ======== ========
90 MSB Bancorp, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Second Third Fourth Year Ended December 31, 1996 Quarter Quarter Quarter Quarter - ---------------------------- -------- -------- -------- -------- (In thousands) Quarterly Operating Data Interest income ................................................. $ 13,125 $ 13,740 $ 13,853 $ 13,632 Interest expense ................................................ 7,576 7,680 7,785 7,752 -------- -------- -------- -------- Net interest income ............................................. 5,549 6,060 6,068 5,880 Provision for loan losses ....................................... 250 320 400 430 Realized gains (losses) on securities ........................... (1) 18 (48) 35 Other non-interest income ....................................... 864 1,022 1,012 1,125 SAIF assessment ................................................. -- -- 2,925 -- Non-interest expense ............................................ 5,139 5,211 5,213 4,881 -------- -------- -------- -------- Income before income taxes ...................................... 1,023 1,569 (1,506) 1,729 Income tax expense .............................................. 435 653 (648) 664 -------- -------- -------- -------- Net income (loss) ............................................... $ 588 $ 916 $ (858) $ 1,065 ======== ======== ======== ======== Basic earnings (loss) per share ................................. $ 0.13 $ 0.23 $ (0.41) $ 0.28 ======== ======== ======== ======== Diluted earnings (loss) per share ............................... $ 0.12 $ 0.22 $ (0.41) $ 0.27 ======== ======== ======== ========
(18) SAVINGS ASSOCIATION INSURANCE FUND (SAIF) ASSESSMENT On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time assessment on FDIC-insured institutions with SAIF-assessable deposits, such as the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable November 27, 1996. The special assessment was recognized as an expense in the third quarter of 1996 and is tax deductible. The Bank incurred a pre-tax charge of $2.9 million as a result of the FDIC special assessment. The Funds Act also spreads the obligations for payment of the Financing Corporation ("FICO") bonds across all SAIF and BIF members. Beginning January 1, 1997, BIF deposits will be assessed for FICO payments at a rate of 20% of the rate assessed on SAIF deposits. The annual rate of assessments for the payments on the FICO bonds for the semi-annual period beginning on January 1, 1997 was 0.0130% for BIF-assessable deposits and 0.0648% for SAIF-assessable deposits. For the semi-annual period beginning on July 1, 1997, the rates of assessment for the FICO bonds was 0.0126% for BIF-assessable deposits and 0.0630% for SAIF-assessable deposits. The Funds Act provides that the full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act also specifies that the BIF and SAIF will be merged on January 1, 1999 provided no savings associations remain as of that time. Proposed legislation agreed to in March 1998 by the House Committee on Banking and Financial Services and the House Committee on Commerce provides for the retention of the thrift charter and for the merger of the BIF and the SAIF on January 1, 2000. As a result of the recapitalization of the SAIF, the FDIC reduced the SAIF assessment rates to a range of 0 to 27 basis points effective January 1, 1997, a range comparable to that of BIF members. However, SAIF members will continue to make the higher FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated, or whether the BIF and SAIF will eventually be merged. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 91 PART III Item 10. Directors and Officers of the Registrant. Directors The following table sets forth the names of the Company's directors, their ages and the year in which each became a director of the Company. There are no arrangements or understandings between the Company and any director pursuant to which such person was elected or nominated to be a director of the Company.
End of Director Name Age(1) Term Position Held with the Company Since - ---- ------ ---- ------------------------------ ----- Joan M. Costello 72 1998 Director 1972 Ralph W. Decker 70 1999 Director 1982 Joseph R. Donovan 74 1998 Director 1983 John L. Krause 65 1999 Director 1980 William C. Myers 52 1998 Chairman of the Board, President and Chief Executive Officer, Director 1992 John W. Norton 69 2000 Director 1978 Douglas Porto 67 1998 Director 1966 Nicholas J. Scali 70 2000 Director 1979 Daniel R. Snyder 48 2000 Director 1989 Frederick B. Wildfoerster, Jr. 73 1999 Director 1966
- ----------------------- (1) At February 14, 1998. Executive Officers The executive officers of the Company and Bank include Mr. Myers, who also serves as a director of the Company and the Bank, Gill Mackay, Anthony J. Fabiano, and Karen DeLuca, who do not serve as directors of the Company or the Bank. Biographical Information The principal occupation and business experience of each director and executive officer is set forth below. Directors Joan M. Costello retired as Executive Vice President of the Bank in 1991. Ralph W. Decker is a retired dentist. Joseph R. Donovan is owner of Donovan Funeral Home, Goshen, New York. Mr. Donovan also serves as a director of MSB Financial Services, Inc. John L. Krause retired in 1994 as the Superintendent of Schools in the Clarkstown, New York, Central School District. 92 William C. Myers is the Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Myers was named by the Bank's Board of Directors as President and Chief Executive Officer of the Bank on September 1, 1992. Mr. Myers serves as Chairman of the Board of MSB Financial Services, Inc. and MSB Travel, Inc. Effective October 1, 1993, Mr. Myers became Chairman of the Board of Directors of the Company and the Bank. Mr. Myers previously was Executive Vice President of the Bank and has been employed by the Bank for 26 years. John W. Norton retired in 1989 as President and Chief Executive of Horton Memorial Hospital, a position he had held for the previous 18 years. Douglas Porto retired in 1989 after 30 years as President and Chief Executive Officer of Wallace Oil Company, Inc. Mr. Porto also serves as a director of MSB Travel, Inc. Nicholas J. Scali retired as the Bank's President and Chief Executive Officer in August 1992. Effective September 30, 1993, Mr. Scali retired as Chairman of the Board. Mr. Scali serves as a director of the Retirement System Group, Inc. Daniel R. Snyder is President and owner of Mid-City Transit Corp., a school bus and transportation company. Frederick B. Wildfoerster is self-employed as an architect. Executive Officers who are not Directors Gill Mackay - Mr. Mackay was appointed Executive Vice President, Chief Operating Officer and Treasurer on January 1, 1993. Prior to that, Mr. Mackay served as Senior Vice President, Finance and Chief Financial Officer since 1989. He joined the Bank in 1984 as Assistant Vice President of Accounting. Mr. Mackay is 51 years old. Anthony J. Fabiano - Mr. Fabiano was appointed Senior Vice President and Chief Financial Officer effective January 1, 1996. Prior to that, Mr. Fabiano served as Vice President, Finance and Chief Financial Officer since January 1, 1993. He joined the Bank in May 1992 as Vice President, Finance. Prior to that, he was a senior manager with KPMG Peat Marwick, a public accounting firm. Mr. Fabiano is 37 years old. Karen S. DeLuca - Mrs. DeLuca joined the Bank in 1985 and has served as the Corporate Secretary since 1991. Prior to that, she served as the assistant Corporate Secretary. Ms. DeLuca is 49 years old. Compliance With Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act") requires the Company's directors and certain officers, and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC") and the American Stock Exchange. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of copies of such reports of ownership furnished to the Company, or written representations that no forms were necessary, the Company believes that, during the last fiscal year, all filing requirements applicable to its officers, directors and greater than ten percent stockholders were complied with. 93 Item 11. Executive Compensation. Directors' Compensation Fee Arrangements. Directors of the Company receive a $3,000 annual retainer fee. Directors of the Bank, who are not officers of the Bank, receive a $18,000 annual retainer fee. Members of the Committees receive $100 for each meeting attended. Board members who perform property inspections receive $50 per hour for their services. Directors may defer receipt of these fees by participating in the MSB Bank Directors' Deferred Compensation Plan. See "Directors' Deferred Compensation Plan." Deferred Compensation Plan. The Bank maintains the MSB Bank Directors' Deferred Compensation Plan (the "Directors' Deferred Compensation Plan"). Under the Directors' Deferred Compensation Plan, members of the Board of Directors who have been directors for at least one year may elect, prior to the time such fees are earned, to defer all or part of the fees payable to them for their service as directors. The fees so deferred are recorded on the books of the Bank as a liability in the year the fees are earned; however, the amount so deferred is not specifically "funded" by the Bank. The Directors' Deferred Compensation Plan was amended and restated effective as of June 1, 1995 to provide that any deferred fees will be deemed to be invested, at the participant's direction, among certain investment classifications established by the Compensation Committee of the Board. The current investment classifications for the Directors' Deferred Compensation Plan are based on the investment funds under the Bank's 401(k) Savings Plan. A participant's deferred fees, and any earnings or losses attributable to such fees, generally are disbursed to a director, in cash, not earlier than the time his or her service with the Board terminates due to retirement or disability, or upon attainment of age 70. Upon a change of control, as defined in the Directors' Deferred Compensation Plan, a director may elect to receive an immediate lump sum payment of his deferred amounts. In the year ended December 31, 1997, Mr. Snyder elected to defer $21,700 of his director's fee. The Bank has established an irrevocable grantor trust to hold fees deferred under the Directors' Deferred Compensation Plan. Pursuant to the terms of the trust, in the event of the Bank's insolvency, trust assets will be considered part of the general assets of the Bank, and the participants in the Directors' Deferred Compensation Plan will have no rights with respect to the trust's assets other than those of unsecured creditors. Marine Midland Bank has been appointed to serve as the independent corporate trustee of the grantor trust. This trust has been structured to comply with guidance issued from the Internal Revenue Service ("IRS") such that the establishment of the trust should not cause the Directors' Deferred Compensation Plan to be considered "funded" by the Bank and, therefore, the directors who participate in the Directors' Deferred Compensation Plan will not recognize income with respect to the deferred fees until distributions are made from the Directors' Deferred Compensation Plan. The Bank will include any trust earnings in its income. Outside Directors' Retirement Plan. In accordance with the terms of the Merger Agreement, the Company has terminated, effective as of December 31, 1997, the Retirement Plan for Board Members of MSB Bancorp, Inc. (the "Directors' Retirement Plan"). The Directors' Retirement Plan was implemented effective as of October 21, 1994 in order to provide retirement benefits to directors of the Company and the Bank. The Directors' Retirement Plan, as amended effective as of October 31, 1997, provides for a normal retirement benefit to be paid to each director who retires after attaining age 65 and completing at least 10 years of "creditable service" and who agrees to provide consulting services to the Company following retirement. "Creditable service" is defined generally in the Directors' Retirement Plan to mean service on the Company's Board of Directors, or on the Board of Directors (or board of trustees) of the Bank, including any service completed while the director was a salaried officer or employee of the Bank. The annual normal retirement benefit payable to a director upon retirement at age 65 under the Directors' Retirement Plan is calculated based on the annual retainer being paid to the director for service on the Board of Directors of the Company or the 94 Bank (whichever is greater in the case of a member of both Boards), as in effect in the month in which the director ceases to be a member of such Board. Pursuant to the Retirement Plan, as amended, "annual retainer" means the sum of the (i) annual retainer; (ii) aggregate committee meeting fees; and (iii) property inspection fees, if any, paid to the Board member for the relevant period. The Directors' Retirement Plan also provides for the payment of a vested retirement benefit upon the occurrence of certain events, including termination of the Plan, which may commence at any time after a director attains age 50 at the director's election upon retirement. The annual vested retirement benefit commencing at or after age 65 is equal to the annual normal retirement benefit multiplied by the lesser of 1.00 or the subtotal of the director's years of creditable service divided by 10. If a vested early retirement benefit is elected, the Directors' Retirement Plan provides for the amount of the benefit otherwise payable to be reduced by 0.5% for each month the benefit commencement date precedes the date on which the director would have attained age 65. In the event of a "change of control" of the Company, as defined in the Directors' Retirement Plan, each director would receive a benefit based upon credit for three additional years of age and service. Additionally, upon a change of control, the Directors' Retirement Plan permits each director to elect a lump sum payment of his or her benefit under the Plan and for such benefit to be subject to an early retirement reduction factor of 0.25% rather than 0.5% per month. In the event a director's service terminates within the period beginning three months prior to, and ending three years after, a change in control, the director would not be required to provide consulting services in order to receive retirement benefits. In accordance with the Merger Agreement, the Company has amended the Directors' Retirement Plan to provide for its termination effective as of December 31, 1997. Pursuant to the termination amendment, all benefits under the Directors' Retirement Plan have become vested and non-forfeitable, and all benefit accruals have ceased effective as of the Plan's termination date. In addition, pursuant to the terms of the Merger Agreement, the Directors' Retirement Plan has been amended to provide for each director's retirement benefit to be determined as if a change of control of the Company had occurred effective as of December 31, 1997 and for benefits to be immediately distributable to the directors. The estimated average annual benefit payable to a participant upon retirement at or after age 65 based on an average $29,400 annual retainer currently in effect for directors of the Company and assuming 10 years of service would be approximately $29,400 per year. The Directors' Retirement Plan is unfunded. All benefits payable under the Directors' Retirement Plan will be paid from the Company's current assets. As soon as practicable, the Company will either purchase an annuity to pay the directors' benefits upon retirement or will make a lump sum distribution to each director of his or her plan benefits in the 1998 calendar year. There are no tax consequences to either the director or the Company until benefits are paid out to the director. At that time, the director will recognize income in the amount of the payment, and the Company will be entitled to an offsetting deduction. The actions described above will occur whether or not the Merger is consummated. Directors' Option Plan. The Company adopted the MSB Bancorp, Inc. 1992 Stock Option Plan For Outside Directors ("Directors' Option Plan") pursuant to which each outside director at the time of the conversion of the Bank from mutual to stock ownership form ("Conversion") received an option to purchase shares of Common Stock, the amount of which was determined by a formula based on years of service on the Board, at a price of $10.00 per share. Any individual who becomes an outside director will be granted a non-statutory stock option to purchase 3,375 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock at the date of grant. However, to the extent there are less than 3,375 shares remaining for issuance under the Directors' Option Plan, such outside director shall be granted a non-statutory stock option to purchase a number of shares of Common Stock equal to the remaining shares available for issuance. No options were granted or canceled during fiscal 1997, and 8,217 options were exercised during the year. Options for 41,083 shares of Common Stock were exercisable as of December 31, 1997. 95 Executive Compensation Summary Compensation Table. The following table shows, for the fiscal years ended December 31, 1997, 1996 and 1995, the cash compensation paid by the Bank, as well as certain other compensation paid or accrued for those years, to the Chief Executive Officer and the highest paid executive officer whose base salary and bonus exceeded $100,000 in 1997 ("Named Executive Officers") of the Company. The Company has not paid any cash compensation to the Named Executive Officers. No other officers received total compensation in excess of $100,000 in fiscal 1997.
Long-Term Compensation --------------------------------------------------- Annual Compensation Awards Payouts -------------------------------------- ---------------------- ------------------------- All Other Restricted Other Annual Stock Options/ LTIP Annual Name and Salary Bonus Compensation(2) Awards(3) SARs(4) Payouts Compensation(5) Principal Position Year ($) ($) ($) ($) (#) ($) ($) ------------------ ---- ------ ----- --------------- --------- ------- ------- --------------- William C. Myers(1) Chairman of the Board, President and Chief Executive Officer...... 1997 192,069 11,875 -- -- -- -- 43,434 1996 162,490 17,262 -- -- -- -- 38,137 1995 142,934 6,365 -- -- -- -- 27,029 Gill Mackay Executive Vice President and Chief Operating Officer............ 1997 123,322 7,095 -- -- -- -- 34,082 1996 117,192 12,475 -- -- -- -- 29,801 1995 99,164 4,500 -- -- -- -- 19,296
- ------------------------ (1) Salary includes director fees paid to Mr. Myers. (2) Perquisites for the years ended December 31, 1997, December 31, 1996 and December 31, 1995 did not exceed the lesser of $50,000 or 10% of the total of salary and bonus as reported for the Named Executive Officer. (3) The Bank maintains the MSB Recognition and Retention Plans and Trusts ("BRPs") for the benefit of certain key officers and directors. Restricted stock awards made under the BRPs vest in equal installments at a rate of 20% per year. At December 31, 1997, all awards were fully vested and no additional restricted stock awards were granted. (4) The Company maintains the MSB Bancorp, Inc. 1992 Incentive Stock Option Plan ("Incentive Stock Plan") for the benefit of officers and employees. Options granted under the Incentive Stock Plan generally vest in equal installments at a rate of 20% per year over a five-year period. However, options granted under this Plan will automatically become 100% vested upon the earlier termination of an option holder's employment due to death, disability or retirement or following a change in control. At December 31, 1997, of the 32,200 options that had been originally granted to Mr. Myers, 2,000 were exercised in 1997 and 13,435 remain presently exercisable. The balance of the 32,000 options originally granted to Mr. Myers were exercised by him in prior years. Mr. Mackay was granted 19,320 options, all of which are presently exercisable. Mr. Mackay did not exercise any options in 1997. (5) Includes allocations under the Bank's Employee Stock Ownership Plan ("ESOP") of 946, 1,542, and 1,461 shares of Common Stock for 1997, 1996 and 1995 with a total market value of $35,593, $30,262 and $27,029, 96 respectively, as of December 31, 1997, 1996 and 1995 for the account of Mr. Myers and allocations under the ESOP of 763, 1,205, and 1,043 shares of Common Stock for 1997, 1996 and 1995 with a market value of $28,708, $23,648 and $19,296, respectively, as of December 31, 1997, 1996 and 1995 under the ESOP for the account of Mr. Mackay. These figures also include the dollar amounts of the employer contributions made by the Bank to its 401(k) Savings Plan on behalf of Mr. Myers and Mr. Mackay for the years ending December 31, 1997 and December 31, 1996. The dollar amounts of the contributions made by the Bank to the Plan on Mr. Myers' behalf totaled $7,841 and $7,875 for fiscal 1997 and 1996 and the dollar amounts of the Bank's contributions to the Plan on Mr. Mackay's behalf totaled $5,324 and $6,153 for these years. The Bank resumed making contributions to the 401(k) Savings Plan in fiscal 1996 due to the termination of its tax-qualified pension plan which occurred in 1995. Employment Agreements Under the Merger Agreement, HUBCO has agreed to honor Mr. Myers' existing employment agreement with the Company dated effective as of September 3, 1994, and amended effective as of September 3, 1995, September 3, 1996 and October 31, 1997 (the "Myers Employment Agreement"), provided the Company and Mr. Myers adopt certain amendments to this agreement, described below, effective at the Closing (as defined in the Merger Agreement). The Myers Employment Agreement provides for a five year term that will automatically be extended to a full five years upon a "change of control" of the Company or the Bank, as defined in the Agreement. In addition, pursuant to the amendments to the Myers Employment Agreement adopted in 1997, if a change of control of the Company or the Bank occurs, Mr. Myers or, in the event of his death, his beneficiary, would be entitled to receive a payment equal to the remaining salary payments due under the Agreement together with all other cash compensation and benefits, including life, health, dental and disability coverages, for the full five year term of the Agreement, regardless of whether his employment terminates, on a voluntary or involuntary basis, as a result of such change of control. The Myers Employment Agreement also provides that in the event the present value of the total payments to be made to Mr. Myers upon a change of control of the Company or the Bank constitute an "excess parachute payment" under Section 280G of the Code that would trigger the payment of excise taxes under Section 4999 of the Code, the Company will indemnify Mr. Myers for the amount of the excise taxes and the amount of any income and employment tax liability that would be triggered as a result of such indemnification (a "gross-up provision"). Since it is anticipated that the Merger will constitute a "change of control" of the Company and the Bank under the Myers Employment Agreement, and it is expected that the total present value of the amounts payable to Mr. Myers upon such event would constitute "excess parachute payments" under Section 280G of the Code, thereby triggering the excise taxes under Section 4999 of the Code and the application of the gross-up provision in the Myers Employment Agreement, the Company and Mr. Myers have agreed to amend the Myers Employment Agreement, in a manner acceptable to HUBCO and effective at the Closing (as defined in the Merger Agreement), to reduce the total present value of the payment to be made to Mr. Myers under the Agreement so that the aggregate amount of such distribution would not constitute an "excess parachute payment" under Section 280G of the Code. Based on Mr. Myers' current annual rate of salary of $199,500 and pursuant to the terms of the Myers Employment Agreement, as it is anticipated to be amended, if a change of control occurs on March 31, 1998, it is expected that Mr. Myers would receive a payment under the Myers Employment Agreement having a present value of approximately $561,000, including all non-cash benefits. The Merger Agreement also provides for HUBCO to honor the employment agreement entered into between the Company and Gill Mackay, adopted effective as of September 3, 1994, and subsequently amended effective as of September 3, 1995, September 3, 1996 and October 31, 1997, and the employment agreement between the Company and Anthony J. Fabiano, adopted effective as of January 1, 1996 and subsequently amended effective as of January 1, 1997 and October 31, 1997 (collectively, the "Employment Agreements"). The Merger Agreement does not require the Employment Agreements for Messrs. Mackay and Fabiano to be amended in the manner described above for Mr. Myers. 97 The Employment Agreements for Messrs. Mackay and Fabiano each provide for an initial three year term. Pursuant to the Amendatory Agreements to these Agreements adopted in 1997, the term of each executive's Employment Agreement will automatically be extended to three years in the event a "change of control" of the Company and the Bank occurs, as such term is defined in each Agreement. In addition, pursuant to such 1997 amendments, upon a change of control, each executive will automatically be entitled to receive a payment equal to the remaining salary payments due under the Employment Agreement together with all other cash compensation and benefits, including life, health, dental and disability coverages, for the full three year term of the Agreement regardless of whether the executive's employment terminates due to the change of control. The Employment Agreements each contain a gross-up provision. It is anticipated that the Merger will constitute a "change of control" under each executive's Employment Agreement. Although it is expected that the payments to be made and the benefits to be provided to each executive will constitute "excess parachute payments" that would result in the imposition of excise taxes, the determination of whether an excise tax will be due and the amount of any such tax will be made on the basis of the circumstances prevailing at the Effective Time (as defined in the Merger Agreement). Assuming a change of control were to occur on March 31, 1998, based on the current annual rate of salary in effect for Mr. Mackay and Mr. Fabiano of $135,450 and $99,750, respectively, it is anticipated that Mr. Mackay and Mr. Fabiano would receive payments having a present value of approximately $999,000 and $779,000, respectively, including the value of all non-cash benefits. Any excess parachute payments and indemnification amounts paid will not be deductible compensation expenses for the Company or the Bank. Special Termination Agreements In the Merger Agreement, HUBCO has also agreed to honor the special termination agreements the Bank has entered into with each of its Vice-Presidents which include, Mary Ellen Rogulski, Karen DeLuca, Frances C. Reilly, Frank J. Fogg, Steven R. Gleason, and Catherine Terwilliger (collectively, the "Special Termination Agreements"). Effective upon a "change of control" of the Company or the Bank, each Special Termination Agreement provides for an extension so that the remaining term of each Agreement will be three years effective upon such event, as defined int he Agreements. Each Special Termination Agreement also provides that if, at any time following a change of control of the Company or the Bank and during the term of such Agreement, the executive's employment is terminated for any reason other than "for cause" as defined in the Agreement or if the executive were to terminate his or her own employment following the change of control as a result of the executive's (i) demotion or loss of title, office or significant authority; (ii) reduction in the executive's compensation; (iii) relocation of the executive's principal place of employment; (iv) material change in the executive's working conditions; or (v) failure of the Bank (or its successor) to continue to provide employee benefit programs substantially similar to those in effect before the change of control, the executive, or, in the event of his or her death, the executive's beneficiary, would be entitled to receive a severance payment in the amount equal to the sum of (a) twice the executive's then current annual base salary; (b) the contributions that would have been made by the Bank on the executive's behalf to the Bank's 401(k) Savings Plan (and any other tax-qualified defined contribution plan it maintains in which the executive participates) for the two-year period following the executive's termination of employment; and (c) the fair market value of any stock that would have been awarded or allocated to the executive under the Bank's ESOP and any stock-based incentive compensation plan for the two-year period following the executive's termination of employment. The Bank or the Company would also be required to continue life, health, and disability insurance coverage for the remaining unexpired term of each executive's Special Termination Agreement. It is anticipated that the Merger will constitute a "change of control" under all of the Special Termination Agreements. The Special Termination Agreements provide that if the total payment to be made to an executive following a change of control constitutes an "excess parachute payment" under Section 280G 98 of the Code, the aggregate amount payable under each Agreement would be reduced to the greater of (a) one dollar below the amount which would subject the executive to the payment of an excise tax or (b) the net amount otherwise payable to the executive excluding the 20% excise tax payable to the portion of the payment constituting an "excess parachute payment." The current annual rate of salary for Ms. Rogulski, Ms. DeLuca, Ms. Reilly, Mr. Fogg, Mr. Gleason and Ms. Terwilliger is $71,400, $43,365, $67,200, $68,250, $58,800, and $63,000, respectively. Accordingly, if it is assumed that a change of control and termination were to occur on March 31, 1998, the aggregate amount payable, including non-cash benefits, to Ms. Rogulski, Ms. DeLuca, Ms. Reilly, Mr. Fogg, Mr. Gleason and Ms. Terwilliger under each executive's Special Termination Agreement would be approximately $194,000, $111,000, $170,000, $170,000, $206,000, and $159,000, respectively. Option Plan The following table provides certain information with respect to the number of shares of Common Stock acquired through the exercise of, or represented by outstanding, stock options held by the Named Executive Officers as of December 31, 1997 under the Company's Incentive Stock Plan. Also reported are the values for "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock options and the year-end price of the Common Stock, which was $37.625 per share.
Number of Securities Underlying Values of Unexercised Unexercised in-the-Money Shares Options/SARs at Options/SARs Acquired Value Fiscal Year-End at Fiscal Year-End on Exercise Realized (#) ($) (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable ---------------- ------------- -------------------------------- --------------------------- William C. Myers 2,000 18,000 13,435/0 371,142/0 Gill Mackay -- -- 19,320/0 533,715/0
As of December 31, 1997, of the 32,200 options that had been originally granted to Mr. Myers, 2,000 were exercised in 1997 and 13,435 remain presently exercisable. The balance of Mr. Myers' original option grant was exercised in prior fiscal years. Mr. Mackay had been granted 19,320 options, all of which remain presently exercisable. Mr. Mackay did not exercise any options in 1997. Item 12. Security Ownership of Certain Beneficial Owners and Management. Security Ownership of Certain Beneficial Owners The following table sets forth certain information as to those persons believed by management to be beneficial owners of more than 5% of the outstanding shares of Common Stock on February 25, 1998, as disclosed in certain reports regarding such ownership filed with the Company or with the SEC in accordance with Section 13 of the Exchange Act, by such persons and groups. Other than those persons listed below, the Company is not aware of any person or group, as such term is defined in the Exchange Act, that owns more than 5% of the Common Stock as of February 25, 1998. 99
Name and Address Number Percent of Title of Class of Beneficial Owner of Shares Class(1) - -------------- ------------------- --------- -------- Common Stock Tontine Partners, L.P. 209,700(2) 7.4% Tontine Financial Partners, L.P. and Jeffrey Gendell, Managing Member of Tontine Management, L.L.C., and Managing Member of Tontine Overseas Associate, Ltd. 200 Park Avenue, Suite 3900 New York, NY 10166 Common Stock Smith Barney Inc. 160,025(3) 5.6% 388 Greenwich Street New York, New York 10013 Common Stock Middletown Savings Bank 155,522(4) 5.5% Employee Stock Ownership Plan and Trust 35 Matthews Street Goshen, New York 10924 Common Stock Bear, Stearns & Co., Inc. 144,400(5) 5.1% 115 South Jefferson Road Whippany, New Jersey 07981 Common Stock Kahn Brothers & Co., Inc. 132,000(6) 4.6% One Exchange Plaza New York, New York 10006
- ------------------------ (1) The total number of shares of Common Stock outstanding on March 8, 1998 was 2,844,153 shares. (2) Information is based on a Schedule 13G dated December 4, 1997, in which Tontine Partners, L.P., Tontine Financial Partners, L.P.and Jeffrey Gendell, Managing Member of Tontine Management, L.L.C., and Managing Member of Tontine Overseas Associate, Ltd., have the shared dispositive power and the shared voting power over all of the shares. (3) Information is based on a Schedule 13G dated February 5, 1997, in which Smith Barney Inc. ("Smith Barney"), Smith Barney Holdings ("SB Holdings") and Travelers Group Inc. ("Travelers") disclosed that none of such entities had dispositive power over the shares and each such entity shared voting power over all of the shares. Smith Barney is a broker-dealer registered under Section 15 of the Exchange Act. Such Schedule 13G provides that SB Holdings is the sole common stockholder of Smith Barney, and Travelers is the sole stockholder of SB holdings. (4) Shares of Common Stock were acquired by the ESOP in connection with the Bank's Conversion. A committee consisting of non-employee members of the Board of Directors administers the ESOP ("ESOP Committee"). An unrelated corporate trustee for the ESOP ("ESOP Trustee") has been appointed by the Board of Directors. The Committee instructs the ESOP Trustee regarding investment of funds contributed to the ESOP. Each member of the Committee disclaims beneficial ownership of the shares of Common Stock held in the ESOP. Shares purchased by the ESOP are held in a suspense account and released for allocation to participants' accounts annually. The 100 ESOP Trustee must vote all allocated shares held in the ESOP in accordance with the instructions of the participating employees. Unallocated shares held in the suspense account will be voted by the ESOP Trustee in a manner calculated to most accurately reflect the instructions it has received from participants regarding the allocated stock, provided such instructions do not conflict with the ESOP Trustee's fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended. As of December 31, 1997, 112,306 shares of Common Stock had been allocated to participants' accounts in the ESOP and 43,216 shares were held unallocated by the ESOP Trustee. (5) Information is based on a Schedule 13G dated January 16, 1998, in which Bear, Stearns & Co., Inc. disclosed that it had sole dispositive and voting power over 128,400 shares and shared voting and dispositive power over 16,000 shares. (6) Information is based on a Schedule 13G dated January 16, 1998, in which Kahn Brothers & Company disclosed that it had sole dispositive power over all of the shares and sole voting power over all of the shares. Stock Ownership of Management The following table sets forth information with respect to the shares of Common Stock beneficially owned by each director of the Company, by each Named Executive Officer of the Company identified in the Summary Compensation Table included elsewhere herein and all directors and executive officers of the Company or the Company's wholly owned subsidiary, MSB Bank, as a group as of March 25, 1998. For purposes of this table, an individual is considered to "beneficially own" any securities (a) over which he or she exercises sole or shared voting or investment power or (b) of which he or she has the right to acquire beneficial ownership, including the right to acquire beneficial ownership by the exercise of stock options, within 60 days after March 25, 1998. As used herein, "voting power" includes the power to vote, or direct the voting of, such securities, and "investment power" includes the power to dispose, or direct the disposition of, such securities. 101
Amount and Percent of Nature of Common Beneficial Stock Name Title Ownership(1) Outstanding(8) ---- ----- ------------ -------------- William C. Myers Chairman of the Board, 39,670(2)(3) 1.4% President and Chief Executive Officer, Director Gill Mackay Executive Vice 38,756(2)(3)(5) 1.3% President and Chief Operating Officer Joan M. Costello Director 10,244(4) * Ralph W. Decker Director 30,511(4)(5) 1.1% Joseph R. Donovan Director 7,139(4) * John L. Krause Director 14,403(4) * John W. Norton Director 11,874(4) * Douglas Porto Director 17,154(4)(5) * Nicholas J. Scali Director 25,616(2)(3) * Daniel R. Snyder Director 14,794(4)(5) * Frederick B. Wildfoerster, Jr. Director 11,798(4) * All directors and executive 224,185(6)(7)(8) 7.7% officers as a group (13 persons)
- --------------------- * Less than 1% of outstanding Common Stock. (1) Except as otherwise noted, each person or relative of such person whose shares are included herein exercises sole (or shared with spouse, relative or affiliate) voting or dispositive power as to the shares reported. (2) Includes 13,435 and 19,320 shares which may be acquired by Mr. Myers and Mr. Mackay, respectively, pursuant to options granted under the Incentive Stock Plan which are presently exercisable. (3) Includes 3,796 and 5,045 shares held by the trustee of the Bank's 401(k) Savings Plan which are allocable to the accounts of Mr. Myers and Mr. Mackay, respectively, and as to which each shares voting and dispositive power. Also includes 6,794, 5,035 and 486 shares allocated to Messrs. Myers, Mackay and Scali, respectively, under the ESOP as to which each may exercise voting power, but not dispositive power, except in limited circumstances. Does not include the 43,216 shares held in the trust established for the ESOP that have not been allocated to any individual's account and as to which the members of the Bank's ESOP Committee, which consists of Dr. Decker, Dr. Krause and Mr. Porto, may be deemed to share dispositive power. Each member of the ESOP Committee disclaims beneficial ownership of such shares. (4) Includes 5,603, 6,497, 5,486, 6,128, 4,259, 8,997 and 4,113 shares which may be acquired by Dr. Decker, Messrs. Wildfoerster and Donovan, Ms. Costello, Messrs. Norton, Porto and Snyder, respectively, pursuant to options granted under the Company's Directors' Option Plan which are presently exercisable. (5) Includes shares over which individuals share voting and dispositive power (other than disclosed in notes 3 and 4) as follows: Mr. Mackay, 410 shares; Mr. Decker, 23,068 shares; Mr. Porto, 6,696 shares; and Mr. Snyder, 400 shares. 102 (6) Does not include 6,136 shares of Common Stock over which the Board of Directors shares voting power which are held by the trust established for the Directors' Deferred Compensation Plan, the MSB Bank Officers' Deferred Compensation Plan and the supplemental retirement benefits provided for in the employment agreements of Mr. Myers and Mr. Mackay to compensate them for the benefits that they cannot receive under the Company's tax-qualified employee benefit plans due to the limitations imposed under the Code. Each member of the Board of Directors disclaims beneficial ownership of such shares. (7) Excludes 3,860 shares held by the BRPs which have not been allocated as to which executive officers may share voting, but not dispositive, power. Includes 73,838 shares subject to options awarded to directors and officers under the Directors' Option Plan and Incentive Stock Plan which are presently exercisable. Includes 18,769 shares allocated to executive officers and to Mr. Scali under the ESOP, as to which such individuals may exercise voting, but not dispositive power, except in limited circumstances. Includes 10,749 shares held by the 401(k) Savings Plan trustee which are allocable to the accounts of the executive officers and as to which such officers shares voting and dispositive power. (8) Percentages with respect to each person or group of persons have been calculated on the basis of 2,844,153 shares of Common Stock, the number of shares of Common Stock outstanding as of March 25, 1998, plus the number of shares of Common Stock which such person or group has the right to acquire within 60 days after March 25, 1998 by the exercise of stock options. Item 13. Certain Relationships and Related Transactions. From time to time the Bank makes loans to its and the Company's officers, which loans are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. The Bank does not make loans to its directors or to the Company's directors. Non-executive officers and other employees of the Bank may obtain mortgage loans without the payment of points or application fees. 103 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Listed below are all financial statements and exhibits filed as part of this report: (1) The consolidated balance sheets of MSB Bancorp, Inc. and subsidiary as of December 31, 1997, 1996 and 1995 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1997 together with the related notes and the independent auditors' report of KPMG Peat Marwick LLP and Nugent and Haeussler, PC (the Company's predecessor accountant), independent certified public accountants. (2) All other schedules omitted as they are not applicable. (3) Exhibits 104 DESIGNATION DESCRIPTION - ----------- ----------- 2.1 Agreement and Plan of Merger by and among HUBCO, Inc., MSB Bancorp, Inc. and MSB Bank (Incorporated by reference to Exhibit 2.1 to the Company's Form 8-K, filed on December 17, 1997) 3.1 Certificate of Incorporation of MSB Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1, No. 33-47626, filed on July 13, 1992) 3.2 By-laws of MSB Bancorp, Inc. (Incorporated by reference to Exhibit 3.2 to the Company's Form 10-K, dated March 22, 1996) 4.1 Specimen Stock Certificate (Incorporated by reference to Exhibit 4.0 to the Registration Statement on Form S-1, No. 33-47626, filed on July 13, 1992) 4.2 Rights Agreement between MSB Bancorp, Inc. and Mellon Bank, N.A., dated as of September 16, 1994 (Incorporated by reference to Exhibit 2 to the Registration Statement on Form 8-A, filed on September 20, 1994) 4.3 Amendment No. 1, dated as of January 9, 1996, to Rights Agreement between MSB Bancorp, Inc. and Mellon Bank, N.A., dated as of September 16, 1994 (Incorporated by reference to Exhibit 4.3 to the Company's Form 10-K, dated March 22, 1996) 4.4* Amendment No. 2, dated as of December 15, 1997 to Rights Agreement between MSB Bancorp, Inc. and Mellon Bank, N.A., dated as of September 16, 1994. 4.5 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of MSB Bancorp, Inc. (Included as Exhibit A to the Rights Agreement set forth at Exhibit 4.2) 4.6 Form of Right Certificate (Included as Exhibit B to the Rights Agreement set forth at Exhibit 4.2) 4.7 Certificate of Designations, Preferences and Rights of 8.75% Cumulative Convertible Preferred Stock, Series A of MSB Bancorp, Inc. (Incorporated by reference to Exhibit 4.6 to the Company's Form 10-K, dated March 22, 1996) 4.8 Specimen Stock Certificate for 8.75% Cumulative Convertible Preferred Stock, Series A (Incorporated by reference to Exhibit 4.7 to the Company's Form 10-K, dated March 22, 1996) 4.9 Preferred Stock Purchase Agreement, dated as of January 4, 1996, by and between MSB Bancorp, Inc. and HUBCO, Inc., regarding 8.75% Cumulative Convertible Preferred Stock, Series A of MSB Bancorp, Inc. (Incorporated by reference to Exhibit 4.8 to the Company's Form 10-K, dated March 22, 1996) - ---------------------- * Included herewith. 105 DESIGNATION DESCRIPTION - ----------- ----------- 4.10 Stock Option Agreement by and between HUBCO, Inc. and MSB Bancorp, Inc. (Incorporated by reference to Exhibit No. 4.1 to the Company's Form 8-K, filed on December 17, 1997) 10.1 MSB Bank 401(k) Savings Plan, as amended and restated effective as of July 1, 1995 (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-2, No. 33-97904) 10.2 Middletown Savings Bank Employee Stock Ownership Plan and Trust, effective as of January 1, 1992 (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1, No. 33-47626) 10.3 Amendments to the Middletown Savings Bank Employee Stock Ownership Plan and Trust (Incorporated by reference to Exhibit 10.5 to the Form 10-K for the fiscal year ended December 31, 1994) 10.4 MSB Bancorp, Inc. Incentive Stock Option Plan (Incorporated by reference to Exhibit A to the Proxy Statement for the First Annual Meeting of Stockholders on January 27, 1993) 10.5 MSB Bancorp, Inc. Stock Option Plan for Outside Directors (Incorporated by reference to Exhibit B to the Proxy Statement for the First Annual Meeting of Stockholders on January 27, 1993) 10.6 MSB Bank Recognition and Retention Plan, as amended and restated effective as of June 1, 1995 (Incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-2, No. 33-97904) 10.7 MSB Bank Directors' Deferred Compensation Plan, as amended and restated effective as of June 1, 1995 (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-2, No. 33-97904) 10.8 Retirement Plan for Board Members of MSB Bancorp, Inc., adopted effective as of October 21, 1994 (Incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-2, No. 33-97904) 10.8(A)* Amendments to the Retirement Plan for Board Members of MSB Bancorp, Inc. adopted effective as of October 31, 1997 and December 1997. 10.9 MSB Bank Officers' Deferred Compensation Plan, adopted effective as of November 1, 1996 (Incorporated by reference to Exhibit 10.9 to the Form 10-K for the fiscal year ended December 31, 1997) 10.10* MSB Bank Employee Severance Compensation Plan, as amended and restated effective as of September 3, 1995 and including Amendments through December 29, 1997 - ---------------------- * Included herewith. 106 DESIGNATION DESCRIPTION - ----------- ----------- 10.11 Employment Agreement by and between MSB Bancorp, Inc. and William C. Myers, adopted effective as of September 3, 1994, as amended effective as of September 3, 1995 (Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-2, No. 33-97904) 10.11(A) Amendatory Agreement to the Employment Agreement by and between MSB Bancorp, Inc. and William C. Myers, adopted effective as of September 3, 1996 (Incorporated by reference to Exhibit 10.11(A) to the Form 10-K for the fiscal year ended December 31, 1996) 10.11(B)* Amendatory Agreement to the Employment Agreement by and between MSB Bancorp, Inc. and William C. Myers, adopted effective as of October 31, 1997 10.12 Employment Agreement by and between MSB Bancorp, Inc. and Gill Mackay, adopted effective as of September 3, 1994, as amended effective as of September 3, 1995 (Incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-2, No. 33-97904) 10.12(A) Amendatory Agreement to the Employment Agreement by and between MSB Bancorp, Inc. and Gill Mackay, adopted effective as of September 3, 1996 (Incorporated by reference to Exhibit 10.12(A) to the Form 10-K for the fiscal year ended December 31, 1996) 10.12(B)* Amendatory Agreement to the Employment Agreement by and between MSB Bancorp, Inc. and Gill Mackay, adopted effective as of October 31, 1997 10.13 Employment Agreement by and between MSB Bancorp, Inc. and Anthony J. Fabiano, effective as of January 1, 1996 (Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-2, No. 33-97904) 10.13(A) Amendatory Agreement to the Employment Agreement by and between MSB Bancorp, Inc. and Anthony J. Fabiano, effective as of January 1, 1997 (Incorporated by reference to Exhibit 10.13(A) to the Form 10-K for the fiscal year ended December 31, 1996) 10.13(B)* Amendatory Agreement to the Employment Agreement by and between MSB Bancorp, Inc. and Anthony J. Fabiano, effective as of October 31, 1997 10.14 Special Termination Agreements by and between MSB Bank and Karen DeLuca, Frances C. Reilly, Frank J. Fogg and Steven R. Gleason, respectively, adopted effective as of September 3, 1994, as amended effective as of October 27, 1995 (Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-2, No. 33-97904) 10.15 Special Termination Agreement by and between MSB Bank and Mary Ellen Rogulski adopted effective as of January 1, 1996 (Incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-2, No. 33-97904) - ---------------------- * Included herewith. 107 DESIGNATION DESCRIPTION - ----------- ----------- 10.16 Special Termination Agreement by and between MSB Bank and Catherine Terwilliger adopted effective as of March 21, 1997 (Incorporated by reference to Exhibit 10 to the Company's Form 10-Q, for the quarterly period ended March 31, 1997) 10.17 Asset Purchase and Sale Agreement, dated as of September 29, 1995, and amendment thereto, dated December 28, 1995, between Middletown Savings Bank and First Nationwide Bank, A Federal Savings Bank (Incorporated by reference to the Current Reports on Form 8-K, dated October 2, 1995 and January 2, 1996, respectively) 10.18 Asset Purchase and Sale Agreement, dated as of December 28, 1995, and Amendment No. 1 thereto, dated December 28, 1995, between MSB Bank and Provident Savings Bank, F.A. (Incorporated by reference to the Current Report on Form 8-K, dated January 2, 1996) 11* Statement re: Computation of Earnings Per Share 16 Letter re Change in Certifying Accountant (Incorporated by reference to the Company's Current Report on Form 8-K dated December 6, 1995, as amended by the Form 8-K/A dated December 11, 1995) 21* Subsidiaries of the Registrant 23.1* Consent of KPMG Peat Marwick LLP 23.2* Consent of Nugent & Haeussler, P.C. 27* Financial Data Schedule (submitted only with filing in electronic format) (b) The following Current Report on Form 8-K was filed by the Company during the fourth quarter of 1997: The Company's current report on Form 8-K dated December 15, 1997 was filed on December 17, 1997. - ---------------------- * Included herewith. 108 SIGNATURES Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Goshen, State of New York, on March 30, 1998 MSB Bancorp, Inc. By: /s/ William C. Myers ------------------------------------- William C. Myers President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ William C. Myers Director, President, Chief Executive March 30, 1998 - ------------------------------------- Officer and Chairman of the Board William C. Myers (Principal executive officer) /s/ Gill Mackay Executive Vice President March 30, 1998 - ------------------------------------- and Chief Operating Officer Gill Mackay /s/ Anthony J. Fabiano Senior Vice President and Chief March 30, 1998 - ------------------------------------- Financial Officer (Principal Anthony J. Fabiano Accounting and Financial Officer) /s/ Joan M. Costello Director March 30, 1998 - ------------------------------------- Joan M. Costello /s/ Ralph W. Decker Director March 30, 1998 - ------------------------------------- Ralph W. Decker - ------------------------------------- Director March 30, 1998 Joseph R. Donovan /s/ John L. Krause Director March 30, 1998 - ------------------------------------- John L. Krause /s/ John W. Norton Director March 30, 1998 - ------------------------------------- John W. Norton Director March 30, 1998 - ------------------------------------- Douglas Porto /s/ Nicholas J. Scali Director March 30, 1998 - ------------------------------------- Nicholas J. Scali /s/ Daniel R. Snyder Director March 30, 1998 - ------------------------------------- Daniel R. Snyder /s/ Frederick B. Wildfoerster, Jr. Director March 30, 1998 - ------------------------------------- Frederick B. Wildfoerster, Jr.
109
EX-4.4 2 AMENDMENT NO. 2 TO RIGHTS AGREEMENT EXHIBIT 4.4 Amendment No. 2 to Rights Agreement THIS AMENDMENT NO. 2 ("Amendment No. 2"), dated as of December 15, 1997, to the Rights Agreement, dated as of September 16, 1994, as amended by Amendment No. 1, dated as of January 9, 1996 (as amended, the "Rights Agreement"), by and between MSB Bancorp, Inc., a Delaware corporation (the "Corporation"), and Mellon Bank, N.A., a national banking organization having an office c/o Mellon Securities Trust Company, 120 Broadway, New York, New York 10271 (the "Rights Agent"). Unless otherwise provided herein, all capitalized terms shall have the meanings set forth in the Rights Agreement. WHEREAS, no Person has become an Acquiring Person; and WHEREAS, the Board of Directors of the Corporation, in connection with the Agreement and Plan of Merger, dated December 15, 1997 (the "Merger Agreement"), by and among the Corporation, MSB Bank and HUBCO, Inc. ("HUBCO"), has authorized the Corporation to enter into a Stock Option Agreement (the "Option Agreement") with HUBCO, which provides for the Corporation's grant to HUBCO of an option (the "Option") to purchase 600,000 shares of the Corporation's common stock, par value $.01 par share (the "Common Stock"), on the terms and conditions set forth in the Option Agreement; and WHEREAS, the Board of Directors of the Corporation, subject to certain conditions, desires to amend the Rights Agreement to exclude the acquisition of the Option and the Common Stock by HUBCO pursuant to the Option Agreement from the operation of the Rights Agreement; NOW, THEREFORE, in consideration of the premises and covenants set forth in the Rights Agreement and in this Amendment No. 2 thereto, the parties hereby agree as follows: 1. Section 1(a) of the Rights Agreement is hereby amended by inserting the following phrase immediately following the phrase "but shall not include": HUBCO, Inc. (the "Purchaser") or any Affiliate of the Purchaser as a result of the Purchaser's right to acquire, or the Purchaser's acquisition of, Common Shares of the Corporation pursuant to the Agreement and Plan of Merger, dated December 15, 1997, by and among the Corporation, MSB Bank and the Purchaser, and the related Stock Option Agreement to be entered into by and between the Purchaser and the Corporation, as the same may be amended, from time to time, 2. On and after the date of this Amendment No. 2, any reference in the Rights Agreement (including the Exhibits thereto) to "This Agreement," "hereunder," "hereof," or "herein" or words of like import shall mean and be a reference to the Rights Agreement as amended by this Amendment No. 2. 3. This Amendment No. 2 shall be effective as of the date and time of its execution. 4. This Amendment No. 2 may be executed in counterparts, and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed and attested, all as of the day and year first above written. MSB BANCORP, INC. By: /s/ William C. Myers ----------------------------- William C. Myers President and Chief Executive Officer Attest: By: /s/ Karen S. DeLuca ---------------------------- Karen S. DeLuca Corporate Secretary MELLON BANK, N.A., as Rights Agent By: /s/ Thomas J. Maupin ----------------------------- Name: Thomas J. Maupin Title: Vice President Attest: By: /s/ Jared Fassler ---------------------------- Name: Jared Fassler Title: Assistant Vice President -3- EX-10.8(A) 3 EXHIBIT A EXHIBIT 10.8(A) EXHIBIT A to the Resolutions of the October 31, 1997 Meeting of the Board of Directors of MSB Bancorp, Inc. Amendments to the Retirement Plan for Board Members of MSB Bancorp, Inc. 1. Effective as of October 31, 1997, Section 1.2 of the Plan shall be amended in its entirety to read as follows: Section 1.2 Annual Retainer means, with respect to any Board Member, an amount equal to the sum of (i) the annual retainer (ii) the aggregate committee meeting fees and (iii) property inspection fees, that would be paid to such Board Member by the Company or MSB Bank during the course of a calendar year if the Board Member had continued in service as a Board Member, with the aggregate committee meeting fees determined based on the number of meetings held by the committees on which the Board Member served during the calendar year preceding the year in which such individual ceases to be a Board Member. 2. Effective as of October 31, 1997, Section 1.16 of the Plan shall be amended by deleting the proviso ",but excluding any period during which the individual was a salaried officer of MSB or Middletown." at the end of the first sentence thereof. 3. Effective as of October 31, 1997, Section 3.1 of the Plan shall be amended by deleting the number 20 where it appears therein and replacing it with the number 10. 4. Effective as of October 31, 1997, Section 3.2 of the Plan shall be amended by deleting the number 20 where it appears therein and replacing it with the number 10. EX-10.8(A) 4 EXHIBIT A EXHIBIT 10.8(A) EXHIBIT A AMENDMENT TO THE RETIREMENT PLAN FOR BOARD MEMBERS OF MSB BANCORP, INC. Pursuant to section 5.1 of the Retirement Plan For Board Members of MSB Bancorp, Inc. ("Plan") and in accordance with the resolutions adopted by the Board of Directors of MSB Bancorp, Inc. at a duly convened meeting held on December 29, 1997, the Plan is hereby amended, effective as of December 31, 1997, as follows: 1. Article I - Section 1.2 of the Plan shall be amended by adding the following new sentence to the end thereof to read as follows: Effective as of the Plan Termination Date, Annual Retainer shall be determined based on the annual retainer, committee meeting and property inspection fees or any other payments received by a Board Member for service during the calendar year ending with the Plan Termination Date. 2. Article I - Section 1.6 of the Plan shall be amended by adding the word "or" after section 1.6(c) and then adding the following new subsection (d) immediately thereafter to read as follows: (d) the occurrence of the Plan Termination Date. 3. Article I - Section 1.17 of the Plan shall be amended by adding the following new sentence to the end thereof to read as follows: Years of Vesting Service shall not include any service by a Board Member completed on or after the Plan Termination Date. 4. Article I - Section 1.18 of the Plan shall be amended by adding the following new sentence to the end thereof to read as follows: Years of Creditable Service shall not include any service by a Board Member completed on or after the Plan Termination Date. 5. Article I - Article I shall be amended by adding the following new sections 1.19 and 1.20 to the end thereof to read as follows: Section 1.19 Plan Termination. Pursuant to resolutions adopted by the Board of Directors of MSB Bancorp, Inc. at a duly convened meeting held on Page 1 of 2 December 29, 1997, the Plan shall be terminated effective as of December 31, 1997. Effective as of such date, no Board Member may commence or recommence participation in the Plan and the benefit accrued by each Participant as of such date, which shall be determined as if a Change of Control had occurred as of such date, shall become nonforfeitable as of such date. Section 1.20 Plan Termination Date shall mean December 31, 1997. 6. Article II - Section 2.1 shall be amended by adding the following new sentence to the end thereof to read as follows: No Board Member shall be eligible to become a Participant in the Plan on or after the Plan Termination Date. 7. Article II - Section 2.2 shall be amended by adding the phrase "or upon the Plan Termination Date, whichever is earlier" to the end thereof. 8. Article III - Article III shall be amended by adding a new section 3.9 immediately to the end thereof to read as follows: Section 3.9 Effect of Plan Termination. The benefits payable to a Participant under this Plan shall be distributed to the Participant as soon as practicable following the Plan Termination Date. 9. Article V - Effective as of December 31, 1997, section 5.1 of the Plan shall be amended by adding the following new sentence at the end thereof: The Plan shall be terminated effective at the close of business on the Plan Termination Date. Page 2 of 2 EX-10.10 5 MATERIAL CONTRACTS EXHIBIT 10.10 MSB BANK EMPLOYEE SEVERANCE COMPENSATION PLAN Effective as of September 3, 1992 As amended and restated as of September 3, 1995 And Including Amendments Through December 29, 1997
TABLE OF CONTENTS Page ARTICLE I PURPOSE Section 1.1 Statement of Purpose....................................................... 1 ARTICLE II DEFINITIONS Section 2.1 Annual Compensation........................................................ 1 Section 2.2 Bank....................................................................... 1 Section 2.3 Board...................................................................... 1 Section 2.4 Change of Control.......................................................... 1 Section 2.5 Effective Date............................................................. 3 Section 2.6 Employee................................................................... 3 Section 2.7 Employer................................................................... 3 Section 2.8 ERISA...................................................................... 3 Section 2.9 Holding Company............................................................ 3 Section 2.10 Just Cause................................................................. 3 Section 2.11 Officer.................................................................... 4 Section 2.12 Payment.................................................................... 4 Section 2.13 Plan....................................................................... 4 Section 2.14 Plan Administrator......................................................... 4 ARTICLE III ELIGIBILITY Section 3.1 Participation.............................................................. 4 Section 3.2 Duration of Participation................................................... 5 ARTICLE IV PAYMENTS Section 4.1 Right to Payment........................................................... 5 Section 4.2 Termination Resulting in Right to Payment.................................. 5 (i)
Page Section 4.3 Amount of Payment.......................................................... 6 Section 4.4 Time of Payment............................................................ 7 ARTICLE V SUCCESSOR TO THE EMPLOYER Section 5.1 Assumption of Obligations.................................................. 7 ARTICLE VI ARBITRATION Section 6.1 Arbitration................................................................. 8 ARTICLE VII ADMINISTRATION Section 7.1 Named Fiduciaries.......................................................... 8 Section 7.2 Fiduciary Responsibilities................................................. 8 Section 7.3 Plan Administrator......................................................... 10 Section 7.4 Allocation of Fiduciary Responsibilities and Employment of Advisors..................................................... 11 Section 7.5 Other Administrative Provisions............................................ 11 Section 7.6 Indemnification of Fiduciaries............................................. 12 Section 7.7 Claims Procedure........................................................... 12 Section 7.8 Claims Review Procedure.................................................... 13 ARTICLE VIII AMENDMENT AND TERMINATION Section 8.1 Amendment and Termination.................................................. 13 Section 8.2 Form of Amendment or Termination........................................... 14
(ii)
Page ARTICLE IX MISCELLANEOUS Section 9.1 Rights of Employees........................................................ 14 Section 9.2 Non-alienation of Benefits................................................. 14 Section 9.3 Other Benefits............................................................. 14 Section 9.4 Construction............................................................... 14 Section 9.5 Headings................................................................... 15 Section 9.6 Governing Law.............................................................. 15 Section 9.7 Severability............................................................... 15 Section 9.8 Required Regulatory Provisions............................................. 15 Section 9.9 Withholding................................................................ 17 Section 9.10 Status as Welfare Benefit Plan Under ERISA................................. 17
(iii) MSB Bank Employee Severance Compensation Plan ARTICLE I PURPOSE Section 1.1 Statement of Purpose. MSB Bank adopts this Employee Severance Compensation Plan for the benefit of its eligible Employees, the eligible Employees of MSB Bancorp, Inc. and any other affiliates of the Bank that adopt this Plan. The Bank recognizes that, as a public company, it is subject to the possibility of a negotiated or unsolicited Change of Control which may result in a loss of employment for some of its Employees. The purpose of the Plan is to encourage Employees to continue working for the Bank with their full time and attention devoted to the Bank's affairs by providing prescribed income security in the event of a termination of employment following a Change of Control. ARTICLE II DEFINITIONS For purposes of the Plan, the following terms shall have the meanings assigned to them below, unless a different meaning is plainly indicated by the context: Section 2.1 Annual Compensation means a Participant's salary paid by the Employer as consideration for the Participant's service during the 12 months ending on the date as of which Annual Compensation is to be determined, which amounts are or would be includable in the gross income of the Participant receiving the same for federal income tax purposes. Section 2.2 Bank means, prior to October 27, 1995, Middletown Savings Bank, and, commencing October 27, 1995, MSB Bank or any successor thereto. Section 2.3 Board means the Board of Directors of MSB Bank. Section 2.4 Change of Control means the occurrence of any of the following events: (a) approval by the stockholders of the Holding Company of a transaction that would result in the reorganization, merger or consolidation of the Holding Company with one or more other persons, other than a transaction following which: -2- (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934 "Exchange Act") in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Holding Company; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Holding Company; (b) the acquisition of all or substantially all of the assets of the Holding Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Holding Company entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of the Holding Company of any transaction which would result in such an acquisition; or (c) a complete liquidation or dissolution of the Holding Company, or approval by the stockholders of the Holding Company of a plan for such liquidation or dissolution; or (d) the occurrence of any event if, immediately following such event, at least 50% of the members of the board of directors of the Holding Company do not belong to any of the following groups: (i) individuals who were members of the board of directors of the Holding Company on the Effective Date of this Plan; or (ii) individuals who first became members of the board of directors of the Holding Company after the Effective Date of this Plan either: (A) upon election to serve as a member of the board of directors of the Holding Company by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the stockholders of the board of directors of the Holding Company to serve as a member of the board of directors of the Holding Company, but only if nominated for election by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first nomination; -3- provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the board of directors of the Holding Company; or (e) an event that would be described in Section 2.4 (a), (b), (c) or (d) if the name of the Bank or an affiliate of the Bank or Holding Company that has adopted the Plan were substituted for the words "Holding Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Holding Company, the Bank or any participating affiliate, or any subsidiary of any of them, by the Holding Company, the Bank or any participating affiliate, or any subsidiary of any of them, or by any employee benefit plan maintained by any of them. For purposes of this Section 2.4, the term "person" shall have the meaning assigned to it under Sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 2.5 Effective Date means September 3, 1992. Section 2.6 Employee means any person, including an Officer, who is employed by the Employer on a full-time basis, excluding any person who has entered into and continues to be covered by, or is terminated under, an employment contract or a special termination agreement or other special severance arrangement with the Employer. Section 2.7 Employer means the Bank, the Holding Company (or their respective successors or assigns, whether by merger, consolidation, sale of assets, statutory receivership, operation of law or otherwise) and any affiliate of the Bank or Holding Company which, with the approval of the Board, and subject to such conditions as may be imposed by such Board, adopts this Plan. Section 2.8 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time (including the corresponding provisions of any succeeding law). Section 2.9 Holding Company means MSB Bancorp, Inc. Section 2.10 Just Cause means, with respect to the conduct of an Employee in connection with his employment with the Employer, personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, in each case as measured against standards generally prevailing at the relevant time in the savings and community banking industry; provided, however, that an Employee shall not be deemed to have been discharged for Just Cause unless and until he shall have received a written notice of termination from the Board, accompanied by a resolution duly adopted by affirmative vote of a majority of the entire Board at a meeting called and held for -4- such purpose (after reasonable notice to the Employee and a reasonable opportunity for the Employee to make oral and written presentations to the members of the Board, on his own behalf, or through a representative, who may be his legal counsel, to refute the grounds for the proposed determination) finding that in the good faith opinion of the Board grounds exist for discharging the Employee for "Just Cause". Section 2.11 Officer means an officer of the Employer. Section 2.12 Payment means a payment of severance compensation as provided for under Article IV. Section 2.13 Plan means the MSB Bank Employee Severance Compensation Plan as the same may be amended from time to time. Section 2.14 Plan Administrator means the Compensation Committee of the Board. ARTICLE III ELIGIBILITY Section 3.1 Participation. (a) Each Employee who, as of the Effective Date, shall have completed at least 7 years of continuous employment with the Employer or who has been elected as an Officer shall become a Participant on the Effective Date. Thereafter, each Employee who completes 7 years of continuous employment with the Employer or who has been elected as an Officer shall become a Participant on the day following the completion of such 7 year period or upon such election as an Officer. Notwithstanding the foregoing, persons who have entered into and continue to be covered by, or terminated under, an employment or special termination agreement, or other special severance arrangement, with the Employer shall not be entitled to participate in this Plan. Any Participant covered by this Plan shall not be entitled to any other termination or severance payments. (b) For purposes of Section 3.1(a), if an Employee's employment with the Employer terminates and the Employee is subsequently re-employed by the Employer prior to the second anniversary of the effective date of such termination, the Employee's periods of employment with the Employer prior to his termination of employment and subsequent to his re-employment shall be aggregated and deemed to be continuous; provided, however, that this Section 3.1(b) shall not be applied more than once with respect to determining the continuous employment of a particular Employee. -5- (c) Notwithstanding anything to the contrary contained herein, following a Change of Control no person shall be deemed to be a Participant entitled to the benefits of this Plan unless such Person was an employee of MSB Bank or MSB Bancorp, Inc. as the same existed prior to the Change of Control (i.e.,persons shall not be entitled to be Participants solely by virtue of their being employees of any entity with which MSB Bank or MSB Bancorp, Inc. combines pursuant to the Change of Control or employees of any successor to MSB Bank or MSB Bancorp, Inc. pursuant to a Change of Control). Section 3.2 Duration of Participation. A Participant shall cease to be a Participant in the Plan when the Participant ceases to be an Employee of the Employer, unless such Participant is entitled to a Payment as provided in Section 4.1 of the Plan. A Participant entitled to receipt of a Payment shall remain a Participant in this Plan until the full amount of such Payment has been paid to the Participant. ARTICLE IV PAYMENTS Section 4.1 Right to Payment. A Participant shall be entitled to receive from the Employer a Payment in the amount provided in Section 4.3 if there has been a Change of Control and if, within one year thereafter, the Participant's employment by the Employer shall terminate for any reason specified in Section 4.2, whether the termination is voluntary or involuntary. A Participant shall not be entitled to a Payment if termination occurs by reason of death, voluntary retirement, voluntary termination other than for reasons specified in Section 4.2, total and permanent disability, or for Just Cause. -6- Section 4.2 Termination Resulting in Right to Payment. A Participant shall be entitled to a Payment if his employment by the Employer terminates within one year following a Change of Control, voluntarily or involuntarily, for any one or more of the following reasons without the Participant's prior written consent: (a) The Employer reduces the Participant's base salary or rate of compensation as in effect immediately prior to the Change of Control, or as the same may have been increased thereafter (other than with the Participant's prior written consent or under a 401(k) deferral program); (b) The Employer assigns to the Participant any substantial and material duties inconsistent with the Participant's primary duties with the Employer immediately prior to the Change of Control; (c) The Employer requires the Participant to change the location of the Participant's job or office, so that such Participant will be based at a location more than 50 miles from the location of the Participant's job or office immediately prior to the Change of Control; provided, however, that such new location is not closer to Participant's home; (d) The Employer fails to provide benefit plans providing, in the aggregate, substantially similar benefits to those which the Participant is receiving immediately prior to the Change of Control (other than the ESOP and the Recognition and Retention Plan); or (e) The Employer terminates the employment of a Participant at or after a Change of Control other than for Just Cause. Section 4.3 Amount of Payment. (a) Each Participant entitled to a Payment under this Plan shall receive from the Employer a lump sum cash payment in an amount based upon the Participant's length of continuous employment by the Employer, as follows: (i) The Participant's cash payment shall equal the sum of: (A) 1/12 times such Participant's Annual Compensation during the 12 month period ending on the date of such Participant's termination of employment with the Employer or the 12 month period ending on the date of the Change of Control, whichever is higher, multiplied by (B) the number of whole years of such Participant's continuous employment with the Employer, up to a maximum of 24 years. (ii) Notwithstanding the provisions of Section 4.3(a)(i) above, if a Payment to a Participant who is a Disqualified Individual would be in an amount which, alone or in combination with other amounts to be paid to the Participant, results in an Excess -7- Parachute Payment to the Participant, the Payment hereunder to such Participant shall be reduced to the maximum amount which can be paid hereunder without resulting in an Excess Parachute Payment. The terms "Disqualified Individual" and "Excess Parachute Payment" shall have the same meaning as defined in Section 280G of the Internal Revenue Code of 1986, as amended, or any successor Section of similar import. (b) For purposes of Section 4.3(a), if an Employee's employment with the Employer terminates and the Employee is subsequently re-employed by the Employer prior to the second anniversary of the effective date of such termination, the Employee's periods of employment with the Employer prior to his termination of employment and subsequent to his re-employment shall be aggregated and deemed to be continuous; provided, however, that this Section 4.3(b) shall not be applied more than once with respect to determining the continuous employment of a particular Employee. (c) The Participant shall not be required to mitigate damages on the amount of the Payment by seeking other employment or otherwise, nor shall the amount of such Payment be reduced by any compensation earned by the Participant as a result of employment after termination of employment hereunder. Section 4.4 Time of Payment. The Payment to which a Participant is entitled shall be paid to the Participant by the Employer or the successor to the Employer, in cash and in full, not later than 10 business days after the termination of the Participant's employment. If any Participant should die after termination of such Participant's employment but before receiving the Payment to which he is entitled, such unpaid amounts shall be paid to the Participant's personal representative or the Participant's estate. ARTICLE V SUCCESSOR TO THE EMPLOYER Section 5.1 Assumption of Obligations. The Employer shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Employer, expressly and unconditionally to assume and agree to perform the Employer's obligations under this Plan, in the same manner and to the same extent that the Employer would be required to perform if no such succession or assignment had taken place. -8- ARTICLE VI ARBITRATION Section 6.1 Arbitration. Any dispute or controversy arising under or in connection with the Plan shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location within 50 miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. The arbitrator shall have the right to award costs and expenses, including legal fees, to any party as the arbitrator deems appropriate. ARTICLE VII ADMINISTRATION Section 7.1 Named Fiduciaries. The term "Named Fiduciary" shall mean (but only to the extent of the responsi bilities of each of them) the Plan Administrator and the Bank. This Article VII is intended to allocate to each Named Fiduciary the responsibility for the prudent execution of the functions as signed to him or it, and none of such responsibilities or any other responsibility shall be shared by two or more of such Named Fiduciaries. Whenever one Named Fiduciary is required by the Plan to follow the directions of another Named Fiduciary, the two Named Fiduciaries shall not be deemed to have been assigned a shared responsibility, but the responsibility of the Named Fidu ciary giving the directions shall be deemed his sole responsibility, and the responsibility of the Named Fiduciary receiving those directions shall be to follow them insofar as such instructions are on their face proper under applicable law. Section 7.2 Fiduciary Responsibilities. Each Named Fiduciary and any other fiduciary under the Plan shall discharge its duties with respect to the Plan solely in the interests of the Participants and their beneficiaries: (a) For the exclusive purposes of providing benefits to Participants and their beneficiaries, and defraying reasonable expenses of administering the Plan; -9- (b) With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (c) In accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA. -10- Section 7.3 Plan Administrator. The Plan Administrator, shall, subject to the responsibilities of the Board, have the responsibility for the day-to-day control, management, operation and administration of the Plan. The Plan Administrator shall have the following responsibilities: (a) To maintain records necessary or appropriate for the administration of the Plan; (b) To give and receive such instructions, notices, information, materials, reports and certifications as may be necessary or appropriate in the administration of the Plan; (c) To prescribe forms and make rules and regulations consistent with the terms of the Plan and with the interpretations and other actions of the Bank; (d) To require such proof or evidence of any matter from any person as may be necessary or appropriate in the administration of the Plan; (e) To prepare and file, distribute or furnish all reports, plan descriptions, and other information concerning the Plan, including, without limitation, filings with the Secretary of Labor and employee communications as shall be required of the Plan Administrator under ERISA; (f) To determine any question arising in connection with the Plan, including any question of Plan interpretation, and the Plan Administrator's decision or action in respect thereof shall be final and conclusive and binding upon all persons having an interest under the Plan; (g) To review and dispose of claims under the Plan filed pursuant to Section 7.7; (h) If the Plan Administrator shall determine that by reason of illness, senility, insanity, or for any other reason, it is undesirable to make any payment to the person entitled thereto, to direct the application of any amount so payable to the use or benefit of such person in any manner that he may deem advisable or to direct in his discretion the withholding of any payment under the Plan due to any person under legal disability until a representative competent to receive such payment in his behalf shall be appointed pursuant to law; (i) To discharge such other responsibilities or follow such directions as may be assigned or given by the Bank; (j) To perform any duty or take any action which is allocated to the Plan Administrator under the Plan; and (k) To engage such legal, actuarial, accounting and other professional services as the Plan Administrator may deem proper. -11- The Plan Administrator shall have the power and authority necessary or appropriate to carry out its responsibilities. Section 7.4 Allocation of Fiduciary Responsibilities and Employment of Advisors. Any Named Fiduciary may: (a) Allocate any of his or its responsibilities under the Plan to such other person or persons as he or it may designate, provided that such allocation and designation shall be in writing and filed with the Plan Administrator; (b) Employ one or more persons to render advice to him or it with regard to any of his or its responsibilities under the Plan; and (c) Consult with counsel, who may be counsel to the Bank. Section 7.5 Other Administrative Provisions. (a) Any person whose claim has been denied in whole or in part must exhaust the administrative review procedures provided in Section 7.8 prior to initiating any claim for judicial review. (b) No bond or other security shall be required of the Plan Administrator, or any officer or Employee of the Bank to whom fiduciary responsibilities are allocated by a Named Fiduciary, except as may be required by ERISA. (c) Subject to any limitation on the application of this Section 7.5(c) pursuant to ERISA, neither the Plan Administrator, nor any officer or Employee of the Bank to whom fiduciary responsibilities are allocated by a Named Fiduciary, shall be liable for any act of omis sion or commission by himself or by another person, except for his own individual willful and intentional malfeasance. (d) The Plan Administrator may, except with respect to actions under Section 7.8, shorten, extend or waive the time (but not beyond 60 days) required by the Plan for filing any notice or other form with the Plan Administrator, or taking any other action under the Plan. (e) Any person, group of persons, committee, corporation or organization may serve in more than one fiduciary capacity with respect to the Plan. (f) Any action taken or omitted by any fiduciary with respect to the Plan, including any decision, interpretation, claim denial or review on appeal, shall be conclusive and binding on the Employer and all interested parties and shall be subject to judicial modification or -12- reversal only to the extent it is determined by a court of competent jurisdiction that such action or omission was arbitrary and capricious and contrary to the terms of the Plan. Section 7.6 Indemnification of Fiduciaries. The Bank shall indemnify, to the fullest extent permitted by applicable law, any director, officer or employee of the Bank who is or was or agrees to serve in any capacity in connection with the management, operation, interpretation or administration of the Plan against any loss, cost, expense or exposure of any name or nature whatsoever which such an individual may incur by reason of the fact that he or she is made a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, investigative or administrative, relating to his or her service in connection with the Plan, and against the costs and expenses of defending or settling any claim, action, suit or proceeding, including legal fees, costs and expenses; provided, however, that he or she acted in good faith and in a manner which he or she reasonably believed to be consistent with his or her responsibility in connection with the Plan, and that, in the case of any criminal action or proceeding, he or she had no reason to believe that his or her conduct was unlawful; and provided, further, that the indemnity provided hereunder shall apply to losses, costs, expenses and exposures hereafter incurred whether or not the acts or omissions giving rise thereto occurred before or after September 3, 1995. Unless otherwise required by applicable law, this Section 7.6 shall not be rescinded or modified so as to materially reduce the indemnification provided hereunder without first giving 30 days' advance written notice of such rescission or modification to each individual then entitled to indemnification hereunder, or so as to materially reduce the indemnification provided hereunder with respect to actions taken or omitted to be taken prior to the effective date of such rescission or modification. The Bank may satisfy its obligation under this Section 7.6 in whole or in part by purchase of a policy or policies of insurance, but no insurer shall have any rights against the Bank arising out of this Section 7.6. Section 7.7 Claims Procedure. Any claim relating to benefits under the Plan shall be filed with the Plan Administrator on a form prescribed by it. If a claim is denied in whole or in part, the Plan Administrator shall give the claimant written notice of such denial, which notice shall specifically set forth: (a) the reasons for the denial; (b) the pertinent Plan provisions on which the denial was based; (c) any additional material or information necessary for the claimant to perfect his claim and an explanation of why such material or information is needed; and (d) an explanation of the Plan's procedure for review of the denial of the claim. -13- In the event that the claim is not granted and notice of denial of a claim is not furnished by the 30th day after such claim was filed, the claim shall be deemed to have been denied on that day for the purpose of permitting the claimant to request review of the claim. Section 7.8 Claims Review Procedure. Any person whose claim filed pursuant to Section 7.7 has been denied in whole or in part by the Plan Administrator may request review of the claim by the Bank, upon a form prescribed by the Plan Administrator. The claimant shall file such form (including a statement of his position) with the Bank no later than 60 days after the mailing or delivery of the written notice of denial provided for in Section 7.7, or, if such notice is not provided, within 60 days after such claim is deemed denied pursuant to Section 7.7. The claimant shall be permitted to review pertinent documents. A decision shall be rendered by the Bank and communicated to the claimant not later than 30 days after receipt of the claimant's written request for review. However, if the Bank finds it necessary, due to special circumstances (for example, the need to hold a hearing), to extend this period and so notifies the claimant in writing, the decision shall be rendered as soon as practicable, but in no event later than 120 days after the claimant's request for review. The Bank's decision shall be in writing and shall specifically set forth: (a) The reasons for the decision; and (b) The pertinent Plan provisions on which the decision is based. Any such decision of the Bank shall be binding upon the claimant and the Bank, and the Bank shall take appropriate action to carry out such decision. ARTICLE VIII AMENDMENT AND TERMINATION Section 8.1 Amendment and Termination. The Bank intends to keep this Plan in effect, but the Bank expressly reserves the right to terminate or amend the Plan, in whole or in part, at any time by action of the Board; provided, however, that if a Change of Control occurs, the Plan no longer shall be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever, until such time as the first anniversary of the Change of Control shall have occurred and the successor or surviving entity following the Change of Control shall have paid all amounts due to Participants hereunder whose employment has been terminated in connection with or subsequent to the Change of Control, at which point the Board of Directors of such successor or surviving entity shall have the right to amend or terminate this Plan. -14- Section 8.2 Form of Amendment or Termination. The form of any proper amendment or termination of the Plan shall be a written instrument signed by a duly authorized officer of the Bank, certifying that the amendment or termination has been approved by the Board. A proper amendment to the Plan automatically shall effect a corresponding amendment to all Participants' rights hereunder. A proper termination of the Plan automatically shall effect a termination of all Participants' rights and benefits hereunder. ARTICLE IX MISCELLANEOUS Section 9.1 Rights of Employees. No Employee shall have any right or claim to any benefit under the Plan except in accordance with the provisions of the Plan. The establishment of the Plan shall not be construed as conferring upon any Employee or other person any legal right to continuation of employment or to any terms or conditions of employment, nor as limiting or qualifying the right of the Employer to discharge any Employee. Section 9.2 Non-alienation of Benefits. The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation, or assignment, nor shall such right be liable for or subject to debts, contracts, liabilities, or torts. Section 9.3 Other Benefits. Neither the provisions of this Plan nor the Payment provided for hereunder shall reduce any amounts otherwise payable, or in any way diminish the Participant's rights as an Employee of the Employer, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock ownership or any employment agreement or other plan or arrangement. Section 9.4 Construction. Whenever appropriate in the Plan, words used in the singular may be read in the plural; words used in the plural may be read in the singular; and the masculine gender shall be -15- deemed equally to refer to the feminine gender or the neuter. Any reference to a Section number shall refer to a Section of this Plan, unless otherwise stated. Section 9.5 Headings. The headings of Articles and Sections are included solely for convenience of reference, and if there is any conflict between such headings and the text of the Plan, the text shall control. Section 9.6 Governing Law. Except to the extent preempted by federal law, the Plan shall be construed, administered and enforced according to the laws of the State of New York applicable to contracts between citizens and residents of the State of New York entered into and to be performed entirely within such jurisdiction. Section 9.7 Severability. The invalidity or unenforceability, in whole or in part, of any provision of this Plan shall in no way affect the validity or enforceability of the remainder of such provision or of any other provision of this Plan, and any provision, or part thereof, deemed to be invalid or unenforceable shall be reformed as necessary to render it valid and enforceable to the maximum possible extent. Section 9.8 Required Regulatory Provisions. The following provisions are included for the purposes of complying with various laws, rules and regulations applicable to the Bank: (a) Notwithstanding anything herein contained to the contrary, any payments to an Employee by the Bank, whether pursuant to this Plan or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. ss.1828(k), and any regulations promulgated thereunder. (b) Notwithstanding anything herein contained to the contrary, if the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Bank pursuant to a notice served under Section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(3) or 1818(g)(1), the Bank's obligations under this Plan shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Bank, in its discretion, may (i) pay to the Employee all or part of -16- the compensation withheld while the Bank's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. (c) Notwithstanding anything herein contained to the contrary, if the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(4) or (g)(1), all prospective obligations of the Bank under this Plan shall terminate as of the effective date of the order, but vested rights and obligations of the Bank and the Employee shall not be affected. (d) Notwithstanding anything herein contained to the contrary, if the Bank is in default (within the meaning of Section 3(x)(1) of the FDI Act, 12 U.S.C. ss.1813(x)(1), all prospective obligations of the Bank under this Plan shall terminate as of the date of default, but vested rights and obligations of the Bank and the Employee shall not be affected. (e) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Bank hereunder shall be terminated, except to the extent that a continuation of this Plan is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision ("OTS") or his designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDI Act, 12 U.S.C. ss.1823(c); (ii) by the Director of the OTS or his designee at the time such Director or designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. -17- Section 9.9 Withholding. Payments from this Plan shall be subject to all applicable federal, state and local income withholding taxes. Section 9.10 Status as Welfare Benefit Plan Under ERISA. This Plan is an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA and shall be construed, administered and enforced according to the provisions of ERISA, including but not limited to, those provisions of ERISA regarding the award of reasonable attorneys' fees and costs, if applicable.
EX-10.11(B) 6 MATERIAL CONTRACTS EXHIBIT 10.11(B) AMENDATORY AGREEMENT This AMENDATORY AGREEMENT ("Agreement") is made effective as of October 17, 1997 by and between MSB BANCORP, INC. ("Holding Company"), a corporation organized under the laws of Delaware, with its principal administrative office at 35 Matthews Street, Goshen, New York, and WILLIAM C. MYERS ("Executive"). Any reference to "Savings Bank" herein shall mean MSB Bank, a wholly owned subsidiary of the Holding Company, or any successor thereto. W I T N E S S E T H : WHEREAS, the Holding Company and the Executive entered into an employment agreement dated September 3, 1994 ("Employment Agreement"), which was amended effective as of September 3, 1995 and September 3, 1996; and WHEREAS, the Holding Company and Executive desire to amend the Employment Agreement, effective as of October 17, 1997; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: FIRST. Section 2(a) of the Employment Agreement shall be amended in its entirety to read as follows: (a) The period of Executive's employment under this Agreement ("Employment Period") shall be deemed to have commenced as of the date first above written and shall end on December 31, 2002, subject to such extensions, if any, as are provided by the Holding Company pursuant to Section 2(b). SECOND. Section 2(b) of the Employment Agreement shall be amended in its entirety to read as follows: (b) Beginning on January 1, 1998, the Employment Period shall be automatically extended for one (1) additional day each day, unless either Executive or the Holding Company elects not to extend the Employment Period further by giving written notice to the other party, in which case the Employment Period shall be fixed and shall end on the later of the last day of the Employment Period specified in such notice or the fifth anniversary of the date such written notice is given. - 1 - THIRD. Section 5(b) of the Employment Agreement shall be amended in its entirety to read as follows: (b) If any of the events described in Section 5(a) constituting a Change in Control have occurred or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the payments and benefits provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 on the date such Change in Control occurs, without regard to whether Executive's employment with the Holding Company or the Savings Bank terminates in connection with such Change in Control. The benefits to be provided under, and the amounts payable pursuant to, this Section 5 shall be provided and be payable to the Executive, or in the event of his subsequent death, to his beneficiary or beneficiaries, or to his estate, as the case may be, without regard to proof of damages and without regard to the Executive's efforts, if any, to mitigate damages, and shall not be offset by, or reduced in respect of, any compensation or benefits paid or provided, or to be paid or provided, to Executive as a continuing employee of the Holding Company, the Savings Bank or their successors or assigns, following the Change in Control. The Holding Company and Executive hereby stipulate that the damages which may be incurred by Executive following any Change in Control are not capable of accurate measurement as of the date first above written and that such liquidated damages constitute reasonable damages under the circumstances. FOURTH. Section 5(c) of the Employment Agreement shall be amended in its entirety to read as follows: (c) Upon the occurrence of a Change in Control, the Holding Company shall be obligated to pay (or to cause the Savings Bank to pay) Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the following: (i) the amount of Base Salary, bonuses and any other cash compensation that would have been paid to Executive during the remaining Employment Period (including, but not limited to, any compensation paid to Executive as a member of the Board of Directors of the Holding Company); (ii) the amount of any employer contributions that would have been made on Executive's behalf under the Savings Bank's 401(k) Savings Plan (and any other defined contribution plan maintained by the Holding Company or the Savings Bank) during the remaining Employment Period; (iii) the fair market value (determined as of the date of the Change in Control) of any stock that would have been awarded or allocated to Executive under the Savings Bank's ESOP or BRP (or any other stock-based employee benefit or compensation plan or arrangement maintained by the Holding Company or the Savings Bank) during the remaining Employment Period; (iv) the lump sum present value of the benefits which the Executive would have accrued under the Savings Bank's Retirement Plan (and any other defined benefit plan maintained by the Holding Company or the Savings Bank) during the remaining Employment - 2 - Period; and (v) the lump sum present value of the additional benefits which Executive would have accrued under Section 3(d) of this Agreement during the remaining Employment Period. The amounts specified in the preceding sentence shall be determined based on the terms of the applicable plan or plans (including the actuarial assumptions used therein) as in effect on the date of the Change in Control, assuming that, during the remaining Employment Period, Executive continued to receive his Base Salary at the level in effect on the date of the Change in Control, earned the highest level of bonuses in effect for him prior to the Change in Control and made the maximum amount of employee contributions permitted or required under the applicable plan or plans. At the election of the Executive, which election is to be made within thirty (30) days of the date of the Change in Control, the sum of the amounts to be paid under this Section 5(c) shall be paid in a lump sum or paid in equal monthly installments during the remaining Employment Period. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining Employment Period. FIFTH. Section 5(d) of the Employment Agreement shall be amended in its entirety to read as follows: (d) Upon the occurrence of a Change in Control, the Holding Company will cause to be continued, during the remaining Employment Period, life, medical, dental and disability coverage substantially identical to the coverage maintained by the Savings Bank or the Holding Company for Executive and his family immediately prior to the Change in Control. SIXTH. Section 5(g) of the Employment Agreement shall be redesignated Section 5(h), and any cross-references thereto shall be modified accordingly, and a new Section 5(g) shall be added to the Employment Agreement to read as follows: (g) Upon the occurrence of a Change in Control, the Holding Company will cause to cause to be continued, during the remaining Employment Period, at no cost to Executive, the fringe benefits and perquisites made available or provided to Executive immediately prior to the Change in Control, including, but not limited to, use of an automobile (comparable to a Lincoln Continental or a better quality and including gasoline), cellular and automobile telephones and a pager, as provided to Executive by the Holding Company or the Savings Bank immediately prior to the Change in Control, and payment of all membership fees, dues, capital contributions and other expenses for membership in such clubs, associations or other organizations for which expenses were paid by the Holding Company or the Savings Bank on behalf of the Executive prior to the Change in Control, including, but not limited to, any fees associated with attending state and national annual bank conventions and the American Community Bankers Presidents' Seminar. Regardless of whether Executive remains employed by the Holding Company or - 3 - the Savings Bank, or their successors or assigns, he shall be provided, during the remaining Employment Period, with a private office comparable in size with his office prior to the Change in Control which shall not be more than 30 miles from the location of his principal place of employment immediately prior to the Change in Control, a corporate credit card, the right to receive frequent flyer miles for any business travel, a private telephone number, secretarial services and other support services and facilities comparable to those provided to him by the Holding Company and the Savings Bank immediately prior to the Change in Control. In the event that Executive remains employed by the Holding Company or the Savings Bank, or their successors or assigns, following the Change in Control, Executive's principal place of employment shall be the office described in the preceding sentence. SEVENTH. Except as expressly amended herein, the Employment Agreement shall remain in full force and effect and the definitions therein are incorporated in this Amendatory Agreement by reference. - 4 - IN WITNESS WHEREOF, MSB BANCORP, INC. has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officer and director, and Executive has signed this Agreement, on the 31st day of October, 1997. ATTEST: MSB BANCORP, INC. /s/ Karen DeLuca By: /s/ Ralph W. Decker - ---------------- ----------------------- SECRETARY RALPH W. DECKER KAREN DELUCA CHAIRMAN OF THE COMPENSATION COMMITTEE [SEAL] WITNESS: /s/ William C. Myers - -------------------- -------------------- WILLIAM C. MYERS - 5 - EX-10.12(B) 7 AMENDATORY AGREEMENT EXHIBIT 10.12(B) AMENDATORY AGREEMENT This AMENDATORY AGREEMENT ("Agreement") is made effective as of October 17, 1997 by and between MSB BANCORP, INC. ("Holding Company"), a corporation organized under the laws of Delaware, with its principal administrative office at 35 Matthews Street, Goshen, New York, and GILL MACKAY ("Executive"). Any reference to "Savings Bank" herein shall mean MSB Bank, a wholly owned subsidiary of the Holding Company, or any successor thereto. W I T N E S S E T H : WHEREAS, the Holding Company and the Executive entered into an employment agreement dated September 3, 1994 ("Employment Agreement"), which was amended effective as of September 3, 1995 and September 3, 1996; and WHEREAS, the Holding Company and Executive desire to amend the Employment Agreement, effective as of October 17, 1997; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: FIRST. Section 2(a) of the Employment Agreement shall be amended in its entirety to read as follows: (a) The period of Executive's employment under this Agreement ("Employment Period") shall be deemed to have commenced as of the date first above written and shall end on December 31, 2000, subject to such extensions, if any, as are provided by the Holding Company pursuant to Section 2(b). SECOND. Section 2(b) of the Employment Agreement shall be amended in its entirety to read as follows: (b) Beginning on January 1, 1998, the Employment Period shall be automatically extended for one (1) additional day each day, unless either Executive or the Holding Company elects not to extend the Employment Period further by giving written notice to the other party, in which case the Employment Period shall be fixed and shall end on the later of the last day of the Employment Period specified in such notice or the third anniversary of the date such written notice is given. - 1 - THIRD. Section 5(b) of the Employment Agreement shall be amended in its entirety to read as follows: (b) If any of the events described in Section 5(a) constituting a Change in Control have occurred or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the payments and benefits provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 on the date such Change in Control occurs, without regard to whether Executive's employment with the Holding Company or the Savings Bank terminates in connection with such Change in Control. The benefits to be provided under, and the amounts payable pursuant to, this Section 5 shall be provided and be payable to the Executive, or in the event of his subsequent death, to his beneficiary or beneficiaries, or to his estate, as the case may be, without regard to proof of damages and without regard to the Executive's efforts, if any, to mitigate damages, and shall not be offset by, or reduced in respect of, any compensation or benefits paid or provided, or to be paid or provided, to Executive as a continuing employee of the Holding Company, the Savings Bank or their successors or assigns, following the Change in Control. The Holding Company and Executive hereby stipulate that the damages which may be incurred by Executive following any Change in Control are not capable of accurate measurement as of the date first above written and that such liquidated damages constitute reasonable damages under the circumstances. FOURTH. Section 5(c) of the Employment Agreement shall be amended in its entirety to read as follows: (c) Upon the occurrence of a Change in Control, the Holding Company shall be obligated to pay (or to cause the Savings Bank to pay) Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the following: (i) the amount of Base Salary, bonuses and any other cash compensation that would have been paid to Executive during the remaining Employment Period; (ii) the amount of any employer contributions that would have been made on Executive's behalf under the Savings Bank's 401(k) Savings Plan (and any other defined contribution plan maintained by the Holding Company or the Savings Bank) during the remaining Employment Period; (iii) the fair market value (determined as of the date of the Change in Control) of any stock that would have been awarded or allocated to Executive under the Savings Bank's ESOP or BRP (or any other stock-based employee benefit or compensation plan or arrangement maintained by the Holding Company or the Savings Bank) during the remaining Employment Period; (iv) the lump sum present value of the benefits which the Executive would have accrued under the Savings Bank's Retirement Plan (and any other defined benefit plan maintained by the Holding Company or the Savings Bank) during the remaining Employment Period; and (v) the lump sum present value of the additional benefits which Executive would have accrued under Section 3(d) of this Agreement during the remaining Employment Period. The amounts specified in the preceding sentence shall be determined based on the terms of the - 2 - applicable plan or plans (including the actuarial assumptions used therein) as in effect on the date of the Change in Control, assuming that, during the remaining Employment Period, Executive continued to receive his Base Salary at the level in effect on the date of the Change in Control, earned the highest level of bonuses in effect for him prior to the Change in Control and made the maximum amount of employee contributions permitted or required under the applicable plan or plans. At the election of the Executive, which election is to be made within thirty (30) days of the date of the Change in Control, the sum of the amounts to be paid under this Section 5(c) shall be paid in a lump sum or paid in equal monthly installments during the remaining Employment Period. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining Employment Period. FIFTH. Section 5(d) of the Employment Agreement shall be amended in its entirety to read as follows: (d) Upon the occurrence of a Change in Control, the Holding Company will cause to be continued, during the remaining Employment Period, life, medical, dental and disability coverage substantially identical to the coverage maintained by the Savings Bank or the Holding Company for Executive and his family immediately prior to the Change in Control. SIXTH. Section 5(g) of the Employment Agreement shall be redesignated Section 5(h), and any cross-references thereto shall be modified accordingly, and a new Section 5(g) shall be added to the Employment Agreement to read as follows: (g) Upon the occurrence of a Change in Control, the Holding Company will cause to cause to be continued, during the remaining Employment Period, at no cost to Executive, the fringe benefits and perquisites made available or provided to Executive immediately prior to the Change in Control, including, but not limited to, use of the automobile and the cellular and automobile telephones provided to Executive by the Holding Company or the Savings Bank immediately prior to the Change in Control, and payment of all membership fees, dues, capital contributions and other expenses for membership in such clubs, associations or other organizations for which expenses were paid by the Holding Company or the Savings Bank on behalf of the Executive prior to the Change in Control. In the event that Executive's employment continues with the Holding Company or the Savings Bank, or their successors or assigns, following the Change in Control, Executive's principal place of employment shall be not more than 30 miles from the location of his principal place of employment immediately prior to the Change in Control and he shall be provided with a private office, secretarial services and other support services and facilities comparable to those provided to him by the Holding Company and the Savings Bank immediately prior to the Change in Control. - 3 - SEVENTH. Except as expressly amended herein, the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, MSB BANCORP, INC. has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officer and director, and Executive has signed this Agreement, on the 31st day of October, 1997. ATTEST: MSB BANCORP, INC. /s/ Karen DeLuca By: /s/ William C. Myers - ---------------- ------------------------ Secretary WILLIAM C. MYERS KAREN DELUCA President and Chief Executive Officer [SEAL] WITNESS: /s/ Gill Mackay --------------- GILL MACKAY - 4 - EX-10.13(B) 8 AMENDATORY AGREEMENT EXHIBIT 10.13(B) AMENDATORY AGREEMENT This AMENDATORY AGREEMENT ("Agreement") is made effective as of October 17, 1997 by and between MSB BANCORP, INC. ("Holding Company"), a corporation organized under the laws of Delaware, with its principal administrative office at 35 Matthews Street, Goshen, New York, and ANTHONY J. FABIANO ("Executive"). Any reference to "Savings Bank" herein shall mean MSB Bank, a wholly owned subsidiary of the Holding Company, or any successor thereto. W I T N E S S E T H : WHEREAS, the Holding Company and the Executive entered into an employment agreement dated January 1, 1996 ("Employment Agreement"), which was amended effective as of January 1, 1997; and WHEREAS, the Holding Company and Executive desire to amend the Employment Agreement, effective as of October 17, 1997; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: FIRST. Section 2(a) of the Employment Agreement shall be amended in its entirety to read as follows: (a) The period of Executive's employment under this Agreement ("Employment Period") shall be deemed to have commenced as of the date first above written and shall end on December 31, 2000, subject to such extensions, if any, as are provided by the Holding Company pursuant to Section 2(b). SECOND. Section 2(b) of the Employment Agreement shall be amended in its entirety to read as follows: (b) Beginning on January 1, 1998, the Employment Period shall be automatically extended for one (1) additional day each day, unless either Executive or the Holding Company elects not to extend the Employment Period further by giving written notice to the other party, in which case the Employment Period shall be fixed and shall end on the later of the last day of the Employment Period specified in such notice or the third anniversary of the date such written notice is given. - 1 - THIRD. Section 5(b) of the Employment Agreement shall be amended in its entirety to read as follows: (b) If any of the events described in Section 5(a) constituting a Change in Control have occurred or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the payments and benefits provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 on the date such Change in Control occurs, without regard to whether Executive's employment with the Holding Company or the Savings Bank terminates in connection with such Change in Control. The benefits to be provided under, and the amounts payable pursuant to, this Section 5 shall be provided and be payable to the Executive, or in the event of his subsequent death, to his beneficiary or beneficiaries, or to his estate, as the case may be, without regard to proof of damages and without regard to the Executive's efforts, if any, to mitigate damages, and shall not be offset by, or reduced in respect of, any compensation or benefits paid or provided, or to be paid or provided, to Executive as a continuing employee of the Holding Company, the Savings Bank or their successors or assigns, following the Change in Control. The Holding Company and Executive hereby stipulate that the damages which may be incurred by Executive following any Change in Control are not capable of accurate measurement as of the date first above written and that such liquidated damages constitute reasonable damages under the circumstances. FOURTH. Section 5(c) of the Employment Agreement shall be amended in its entirety to read as follows: (c) Upon the occurrence of a Change in Control, the Holding Company shall be obligated to pay (or to cause the Savings Bank to pay) Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the following: (i) the amount of Base Salary, bonuses and any other cash compensation that would have been paid to Executive during the remaining Employment Period; (ii) the amount of any employer contributions that would have been made on Executive's behalf under the Savings Bank's 401(k) Savings Plan (and any other defined contribution plan maintained by the Holding Company or the Savings Bank) during the remaining Employment Period; (iii) the fair market value (determined as of the date of the Change in Control) of any stock that would have been awarded or allocated to Executive under the Savings Bank's ESOP or BRP (or any other stock-based employee benefit or compensation plan or arrangement maintained by the Holding Company or the Savings Bank) during the remaining Employment Period; (iv) the lump sum present value of the benefits which the Executive would have accrued under the Savings Bank's Retirement Plan (and any other defined benefit plan maintained by the Holding Company or the Savings Bank) during the remaining Employment Period; and (v) the lump sum present value of the additional benefits which Executive would have accrued under Section 3(d) of this Agreement during the remaining Employment Period. The amounts specified in the preceding sentence shall be determined based on the terms of the - 2 - applicable plan or plans (including the actuarial assumptions used therein) as in effect on the date of the Change in Control, assuming that, during the remaining Employment Period, Executive continued to receive his Base Salary at the level in effect on the date of the Change in Control, earned the highest level of bonuses in effect for him prior to the Change in Control and made the maximum amount of employee contributions permitted or required under the applicable plan or plans. At the election of the Executive, which election is to be made within thirty (30) days of the date of the Change in Control, the sum of the amounts to be paid under this Section 5(c) shall be paid in a lump sum or paid in equal monthly installments during the remaining Employment Period. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining Employment Period. FIFTH. Section 5(d) of the Employment Agreement shall be amended in its entirety to read as follows: (d) Upon the occurrence of a Change in Control, the Holding Company will cause to be continued, during the remaining Employment Period, life, medical, dental and disability coverage substantially identical to the coverage maintained by the Savings Bank or the Holding Company for Executive and his family immediately prior to the Change in Control. SIXTH. Section 5(g) of the Employment Agreement shall be redesignated Section 5(h), and any cross-references thereto shall be modified accordingly, and a new Section 5(g) shall be added to the Employment Agreement to read as follows: (g) Upon the occurrence of a Change in Control, the Holding Company will cause to cause to be continued, during the remaining Employment Period, at no cost to Executive, the fringe benefits and perquisites made available or provided to Executive immediately prior to the Change in Control, including, but not limited to, use of the automobile and the cellular and automobile telephones provided to Executive by the Holding Company or the Savings Bank immediately prior to the Change in Control, and payment of all membership fees, dues, capital contributions and other expenses for membership in such clubs, associations or other organizations for which expenses were paid by the Holding Company or the Savings Bank on behalf of the Executive prior to the Change in Control. In the event that Executive's employment continues with the Holding Company or the Savings Bank, or their successors or assigns, following the Change in Control, Executive's principal place of employment shall be not more than 30 miles from the location of his principal place of employment immediately prior to the Change in Control and he shall be provided with a private office, secretarial services and other support services and facilities comparable to those provided to him by the Holding Company and the Savings Bank immediately prior to the Change in Control. - 3 - SEVENTH. Except as expressly amended herein, the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, MSB BANCORP, INC. has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officer and director, and Executive has signed this Agreement, on the 31st day of October, 1997. ATTEST: MSB BANCORP, INC. /s/ Karen DeLuca By: /s/ William C. Myers - ---------------- ------------------------ Secretary WILLIAM C. MYERS KAREN DELUCA President and Chief Executive Officer [SEAL] WITNESS: /s/ Anthony J. Fabiano - ---------------------- ---------------------- ANTHONY J. FABIANO - 4 - EX-11 9 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 Computation of Net Income per Share For the Year Ended December 31, 1997 ------------------------------------ Net income......................................... $ 2,281,000 Preferred stock dividends.......................... 1,134,000 -------------- Net income applicable to common shares............. $ 1,147,000 Weighted average common shares - basic............. 2,837,678 -------------- Basic earnings per common share.................... $ 0.40 ============== For purposes of computing diluted earnings per share, diluted weighted average shares included common stock equivalents of 31,846. EX-21 10 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT MSB Bank (organized under the law of the United States) MSB Financial Services, Inc. (incorporated in the State of New York) MSB Travel, Inc. (incorporated in the State of New York) EX-23.1 11 AUDITORS' CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors MSB Bancorp, Inc. We consent to incorporation by reference in the registration statement on Form S-8 of MSB Bancorp, Inc. of our report dated January 27, 1998, relating to the consolidated balance sheets of MSB Bancorp, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in shockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1997, which report is included in the December 31, 1997 annual report on Form 10-K of MSB Bancorp, Inc. KPMG Peat Marwick LLP Short Hills, New Jersey March 30, 1998 EX-23.2 12 AUDITORS' CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders MSB Bancorp, Inc. We consent to incorporation by reference in the registration statement on Form S-8 of MSB Bancorp, Inc. of our report dated January 30, 1996, relating to the consolidated statements of financial condition of MSB Bancorp, Inc. and Subsidiaries as of December 31, 1995 and 1994 and for the years then ended and the related consolidated statements of income, changes in shockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1995, which report is included in the December 31, 1997 annual report on Form 10-K of MSB Bancorp, Inc. NUGENT & HAEUSSLER, P.C. March 30, 1998 Newburgh, New York EX-27 13 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. 1000 12-MOS DEC-31-1997 JAN-1-1997 DEC-31-1997 $16,834 0 21,065 0 279,762 0 0 393,524 2,807 765,367 673,432 55 14,675 182 0 6 30 74,740 765,367 29,622 21,674 1,868 53,164 28,653 28,680 24,484 1,565 220 23,854 3,803 3,803 0 0 2,281 0.40 0.40 3.37 3,488 0 2,283 6,400 1,960 907 189 2,807 0 0 2,807
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