=============================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 29, 1998
HUBCO, INC.
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation)
1-10699 22-2405746
------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
1000 MacArthur Boulevard
Mahwah, New Jersey 07430
(Address of principal executive offices)
(201) 236-2600
(Registrant's telephone number, including area code)
=============================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On May 29, 1998, HUBCO completed its previously announced acquisition
of MSB Bancorp, Inc. ("MSB") and MSB's wholly owned banking subsidiary, MSB Bank
by merging MSB with and into HUBCO and MSB Bank with and into Bank of the
Hudson, HUBCO's New York banking subsidiary, pursuant to the Agreement and Plan
of Merger dated as of December 15, 1997 among HUBCO, MSB, and MSB Bank. In the
merger, each share of MSB common stock was converted into 1.0209 shares of HUBCO
Common Stock. As of March 31, 1998, MSB had total assets of $753.7 million,
total deposits of $661 million and stockholders' equity of approximately $74.3
million.
Item 7. (a) Financial Statements.
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands except shares
and per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................... $ 14,549 $ 16,834
Federal funds sold............................................... 56,655 21,065
Securities available for sale.................................... 132,581 54,082
Mortgage-backed securities available for sale.................... 97,909 225,680
Loans, net....................................................... 396,532 391,429
Premises and equipment, net...................................... 13,772 14,062
Accrued interest receivable...................................... 4,234 5,049
Real estate owned................................................ 2,221 2,443
Goodwill......................................................... 28,250 29,173
Other assets..................................................... 6,964 5,550
---------- ----------
Total assets............................................... $ 753,667 $ 765,367
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits...................................................... $ 661,046 $ 673,432
Mortgagors' escrow deposits................................... 1,975 2,247
Accrued expenses and other liabilities........................ 16,149 14,730
ESOP obligations.............................................. 182 182
------------ ----------
Total liabilities............................................. 679,352 690,591
------------ ----------
Stockholders' Equity
Preferred stock ($.01 par value; 1,000,000 Shares authorized;
600,000 shares issued at March 31,
1998 and December 31, 1997).................................. 6 6
Common stock ($.01 par value; 5,000,000
shares authorized; 3,045,000 shares issued
at March 31, 1998 and December 31, 1997)..................... 30 30
Additional paid-in capital................................... 48,069 48,069
Retained earnings............................................ 31,414 31,458
Treasury stock, at cost (200,847 shares at March 31, 1998
and December 31, 1997)....................................... (3,941) (3,941)
Unallocated ESOP stock....................................... (182) (182)
Unallocated BRP stock........................................ (42) (42)
Accumulated Other Comprehensive Income
Net unrealized loss on securities available for sale......... (1,039) (622)
------------ ----------
Total stockholders' equity.............................. 74,315 74,776
------------ ----------
Total liabilities and stockholders' equity.............. $ 753,667 $ 765,367
============ ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
INTEREST INCOME
Mortgage loans.................................................. $ 7,335 $ 6,506
Other loans..................................................... 733 563
Mortgage-backed securities...................................... 1,889 5,269
Securities...................................................... 1,185 838
Federal funds sold.............................................. 1,096 350
------------- -------------
Total interest income..................................... 12,238 13,526
INTEREST EXPENSE
Interest on deposits............................................ 6,210 7,437
Interest on borrowings.......................................... 6 9
------------- -------------
Total interest expense.................................... 6,216 7,446
------------- -------------
Net interest income............................................. 6,022 6,080
Provision for loan losses....................................... 1,324 300
------------- -------------
Net interest income after provision for loan losses............. 4,698 5,780
NON-INTEREST INCOME
Service fees.................................................... 1,143 895
Net realized gains on securities................................ 63 15
Realized gains on mortgage loans held for sale.................. 69 32
Other non-interest income....................................... 8 15
------------- -------------
1,283 957
NON-INTEREST EXPENSE
Salaries and employee benefits.................................. 1,927 2,140
Occupancy and equipment......................................... 771 818
Federal deposit insurance premiums.............................. 68 82
Goodwill amortization........................................... 922 921
Other non-interest expense...................................... 1,184 1,217
------------- -------------
4,872 5,178
------------- -------------
Income before income taxes...................................... 1,109 1,559
Income tax expense.............................................. 439 602
------------- -------------
Net income...................................................... $ 670 $ 957
============= =============
Basic earnings per share ....................................... $ 0.14 $ 0.24
============= =============
Diluted earnings per share...................................... $ 0.13 $ 0.24
============= =============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income.......................................................... $ 670 $ 957
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on securities........................................ (63) (15)
Realized gain on sale of mortgage loans............................. (69) (32)
Amortization of premiums/discounts on securities.................... 425 266
Proceeds from the sale of student loans............................. 257 302
Origination of mortgage loans held for sale......................... (8,817) (3,643)
Proceeds from the sale of mortgage loans............................ 7,010 3,740
Amortization of net deferred loan origination fees.................. (23) (43)
Depreciation and amortization....................................... 308 325
Provision for loan losses........................................... 1,324 300
Write-downs on real estate.......................................... 31 21
Goodwill amortization............................................... 923 921
Decrease in accrued interest receivable............................. 815 837
Increase in prepaid expenses and other assets....................... (830) (1,620)
Increase (decrease) in accrued expenses and other liabilities....... 446 (2,634)
Net change in Federal and State income tax payables and receivables. 1,632 458
Deferred income taxes............................................... (1,372) (60)
Other............................................................... 105 280
---------- ----------
Net cash provided by (used in) operating activities............... $ 2,772 $ 360
---------- ----------
INVESTING ACTIVITIES
Net increase in loans............................................... $ (5,404) $ (5,784)
Purchases of securities available for sale.......................... (85,273) (3,638)
Proceeds from the sale of securities available for sale............. 6,232 --
Purchases of mortgage-backed securities available for sale.......... -- (19,346)
Proceeds from the sale of mortgage-backed securities
available for sale................................................. 120,318 33,243
Repayments of mortgage-backed securities available for sale......... 7,062 4,446
Proceeds from the sale of real estate owned, net.................... 575 425
Purchases of property and equipment................................. (19) (2)
---------- ----------
Net cash provided by (used in) investing activities............... $ 43,491 $ 9,344
---------- ----------
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998 1997
---------------- -------------
<S> <C> <C>
FINANCING ACTIVITIES
Net change in deposits................................................ $ (12,386) $ (6,615)
Net decrease in mortgagors' escrow deposits........................... (272) (341)
Proceeds from borrowings.............................................. 419 --
Repayment of ESOP loan................................................ -- (76)
Payment of dividends on common and preferred stock................... (719) (708)
Proceeds from the exercise of stock options........................... -- 32
---------- ---------
Net cash provided by (used in) financing activities............. (12,958) (7,708)
---------- ---------
Increase (decrease) in cash and cash equivalents...................... $ 33,305 $ 1,996
Cash and cash equivalents at beginning of period...................... 37,899 48,965
---------- ---------
Cash and cash equivalents at end of period............................ $ 71,204 $ 50,961
========== =========
SUPPLEMENTAL INFORMATION
Interest paid on savings deposits..................................... $ 6,210 $ 7,425
Income taxes paid (received).......................................... 247 136
Non-cash transactions:
Transfer of balances from loans receivable to real
estate owned....................................................... $ 596 $ 644
========== =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
On December 16, 1997, MSB Bancorp, Inc. (the "Company") announced the
signing of a Merger Agreement by and among HUBCO, Inc. ("HUBCO"), the Company,
and MSB Bank (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), Lafayette American Bank, a
Connecticut-based bank, and Bank of the Hudson, a New York-based bank ("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. The Merger is
expected to close in the second quarter.
The Bank provides banking services to individual and corporate
customers, with its business activities concentrated in the New York counties of
Orange, Putnam and Sullivan, and the surrounding areas.
The consolidated financial statements included herein have been
prepared by the Company without audit. In the opinion of management, the
quarterly unaudited financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the consolidated
financial position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
Company believes that the disclosures are adequate to make the information
presented not misleading, however, the results for the periods presented are not
necessarily indicative of results to be expected for the entire year.
The unaudited quarterly financial statements presented herein should be
read in conjunction with the annual audited consolidated financial statements of
the Company for the fiscal year ended December 31, 1997.
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. 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 and
real estate investments.
2. Earnings Per Share
For purposes of calculating basic earnings per share, the number of
weighted average shares were 2,840,473 and 2,820,451 for the first quarters of
1998 and 1997, respectively. Diluted weighted average shares included common
stock equivalents of 40,975 and 34,121 for those same respective periods.
3. Allowance for Loan Losses
The allowance for loan losses is increased by provision charged to
operations and decreased by charge-offs (net of recoveries). Loans are charged
off when, in the opinion of management, the recorded investment in the loan is
uncollectible. Management's periodic evaluation of the adequacy of the allowance
considers factors such as the Bank's past loan experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers'
ability to repay, estimated value of any underlying collateral and current and
prospective economic conditions. Management believes that the allowance for loan
losses is adequate. While management estimates loan losses using the best
available information, such as independent appraisals for significant collateral
properties, no assurance can be made that future adjustments to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans,
identification of additional problem loans and other factors, both within and
outside of management's control.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------- ------------
1998 1997 1997
----------------- ----------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period......................... $ 2,807 $ 1,960 $ 1,960
Provision for loan losses.............................. 1,324 300 1,565
LOANS CHARGED OFF
Real estate.................................. 456 121 523
Other loans.................................. 216 91 384
---------- ---------- ----------
Total loans charged off................................ 672 212 907
---------- ---------- ----------
RECOVERIES
Real estate.................................. -- 6 148
Other loans.................................. 9 20 41
---------- ---------- ----------
Total recoveries............................... 9 26 189
---------- ---------- ----------
Net charge-offs.............................. 663 186 718
---------- ---------- ----------
Balance at end of period............................... $ 3,468 $ 2,074 $ 2,807
========== ========== ==========
Ratio of net charge-offs to average
net loans outstanding (annualized)................... 0.68% 0.23% 0.20%
</TABLE>
4. Comprehensive Income
During the first quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which 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
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. In
accordance with the provisions of SFAS 130 for interim period reporting, the
Company's total comprehensive income (loss) for the first quarters of 1998 and
1997 was $253,000 and $(1,820,000), respectively. The difference between the
Company's net income and total comprehensive income for these periods relates to
the change in the net unrealized loss on securities available for sale during
the applicable period of time.
5. Legal Proceedings
Except as described below, the Company is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.
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 approximately 4.6% 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. On May 1, 1998, the Court heard oral
argument on the motion and reserved decision. 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 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.
<PAGE>
The following table sets forth information relating to the Company's
consolidated average balance sheet and interest income for the quarters ended
March 31, 1998 and 1997 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 by dividing income or expense by the average
balances of assets or liabilities, respectively, for the periods shown. Average
balances are derived from average daily balances. The average balances of
securities available for sale and trading securities are calculated based on
amortized cost. The yields and costs include fees, which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998
-----------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1).................... $ 364,279 $ 7,335 8.17%
Other loans(1)............................ 30,829 733 9.64
Mortgage-backed securities................ 129,057 1,889 5.94
Other securities.......................... 81,927 1,185 5.89
Federal funds, overnight.................. 82,300 1,096 5.39
---------- --------- --------
Total interest-earning assets............. 688,392 12,238 7.21
Non-interest earning assets................. 67,377
----------
Total assets.............................. $ 755,769
==========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................ $ 200,658 1,459 2.95%
Super NOW accounts...................... 39,595 151 1.55
Money market accounts................... 52,002 486 3.79
Time deposits........................... 322,832 4,114 5.17
Borrowings................................ 385 2 2.11
ESOP obligation........................... 182 4 8.91
---------- --------- --------
Total interest-bearing
liabilities............................. 615,654 6,216 4.10
Other liabilities........................... 63,840
----------
Total liabilities...................... 679,494
Retained earnings........................... 76,275
----------
Total liabilities and
retained earnings.................... $ 755,769
==========
Net interest income/
interest rate spread(2).................... $ 6,022 3.11%
========= ========
Net earning assets/net
interest margin(3)......................... $ 72,738 3.55%
========== ========
Ratio of interest-earning assets
to interest-bearing liabilities............ 1.12x
</TABLE>
- - -----------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
<PAGE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
------------------------------------------------------------------
1997
------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1).................... $ 318,097 $ 6,506 8.29%
Other loans(1)............................ 23,239 563 9.83
Mortgage-backed securities................ 322,626 5,269 6.62
Other securities.......................... 54,224 838 6.26
Federal funds, overnight.................. 27,216 350 5.22
---------- -------- --------
Total interest-earning assets............. 745,402 13,526 7.36
Non-interest earning assets................. 65,089
----------
Total assets.............................. $ 810,491
==========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................ $ 195,697 1,570 3.25%
Super NOW accounts...................... 39,148 185 1.92
Money market accounts................... 51,158 525 4.16
Time deposits........................... 396,456 5,157 5.28
Borrowings................................ -- -- --
ESOP obligation........................... 431 9 8.47
---------- -------- --------
Total interest-bearing
liabilities............................. 682,890 7,446 4.42
Other liabilities........................... 56,097
----------
Total liabilities...................... 738,987
Retained earnings........................... 71,504
----------
Total liabilities and
retained earnings.................... $ 810,491
==========
Net interest income/
interest rate spread(2).................... $ 6,080 2.94%
======== ========
Net earning assets/net
interest margin(3)......................... $ 62,512 3.31%
========== ========
Ratio of interest-earning assets
to interest-bearing liabilities............ 1.09x
</TABLE>
- - -----------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
<PAGE>
The following table sets forth the capital position of the Bank as
calculated at March 31, 1998.
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
-------- ---- ----------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital as calculated under GAAP....... $73,151 10.08% $73,151 10.08% $73,151 18.65%
Deduct goodwill........................ 28,250 3.89 28,250 3.89 28,250 7.20
Add qualifying general loan loss
allowance, as limited by regulation.... -- -- -- -- 3,468 0.88
Add unrealized loss on securities
available for sale, net of taxes....... 1,012 0.14 1,012 0.14 1,012 0.26
Deduct equity investments.............. -- -- -- -- 13 --
2
Deduct servicing rights................ 202 0.03 202 0.03 202 0.05
--- ---- ------- ------ -------- -----
Capital, as calculated................. 45,711 6.30 45,711 6.30 49,166 12.53
Capital, as required................... 10,883 1.50 29,022 4.00 31,383 8.00
------- -------- ------- ------ -------- -----
Excess................................. $34,828 4.80% $16,689 2.30% $17,783 4.53%
======= ======== ======= ====== ======= =====
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
----------- -----------
(In thousands, except shares and
per share amounts)
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended
December 31
------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands except shares
and per share amounts)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Outstanding
------------------------ Paid-In Retained
Common Preferred Par Value Capital Earnings
---------- ---------- ---------- ---------- ----------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== ==========
<PAGE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31
---------------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
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)
--------- --------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
For the Year Ended
December 31
---------------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 deferred tax
assets and liabilities of a change in tax rates is recognized as income in the
period that includes the enactment date.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
December 31, 1997 (In thousands)
- - -----------------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
<PAGE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
December 31, 1996 (In thousands)
- - -----------------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------- -----------
(In thousands)
<S> <C> <C>
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
=========== ===========
</TABLE>
The following is a summary of realized securities gains (losses) for the
periods indicated:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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
============ ========== ==========
</TABLE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 1997 (In thousands)
- - -----------------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1996 1995
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
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
========= ========== =========
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) DEPOSITS
The following is a summary of deposits at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------- -----------------------------
Weighted Weighted
Average Average
Amount Nominal Rates Amount Nominal Rates
-------- ------------- -------- -------------
(In thousands)
<S> <C> <C> <C> <C>
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%
======== ==== ======== ====
</TABLE>
The maturity of time deposits is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Amount Rate Amount Rate
-------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
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%
======== ==== ======== ====
</TABLE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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
========= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Tangible Core Risk-Based
------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Tangible Core Risk-Based
------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= =====
</TABLE>
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 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.
<PAGE>
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 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
======== ========
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended
December 31
--------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31
--------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1997 Quarter Quarter Quarter Quarter
- - ---------------------------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
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)
======== ======== ======== ========
</TABLE>
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1996 Quarter Quarter Quarter Quarter
- - ---------------------------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
(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.
<PAGE>
(b) The pro forma financial information statements required by this
item will be filed by amendment prior to August 12, 1998
(c) Exhibits:
(1) Agreement and Plan of Merger dated as of December 15, 1997
among HUBCO, Inc., MSB Bancorp, Inc. and MSB Bank * (Exhibit
99.2 to the December 22, 1997 Form 8-K)
* This exhibit was previously filed as an exhibit to the registrant's Form 8-K
filed with the Commission on December 22, 1997 and thus is not included in this
filing.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registration has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
HUBCO, INC.
Dated: June , 1998 By: __________________________
Kenneth T. Neilson
Chairman, President and
Chief Executive Officer
