MSB BANCORP INC /DE, 10-Q, 1996-11-14

MSB BANCORP INC /DE
10-Q, 1996-11-14
SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------

FORM 10-Q

(MARK ONE)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 0-20187

MSB BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 06-1341670
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

35 MATTHEWS STREET, GOSHEN, NEW YORK 10924
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)

(914) 294-8100
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)

N/A
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .

Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.

Outstanding at
Class November 13, 1996
----- -----------------

Common Stock,
par value $.01 2,833,936

<PAGE>

TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION
-------------------------------

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) -- September 30, 1996
and December 31, 1995.................................................1

Consolidated Statements of Income (Unaudited) -- Quarters
and nine months ended September 30, 1996 and 1995.....................2

Consolidated Statements of Cash Flows (Unaudited) --
Nine months ended September 30, 1996 and 1995.........................3

Notes to Unaudited Consolidated Financial Statements..................5

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................10

PART II -- OTHER INFORMATION
----------------------------

Item 1. Legal Proceedings....................................................20

Item 2. Changes in Securities................................................20

Item 3. Defaults upon Senior Securities......................................20

Item 4. Submission of Matters to a Vote of Security Holders..................20

Item 5. Other Information....................................................20

Item 6. Exhibits and Reports on Form 8-K.....................................20

Signatures....................................................................21

<PAGE>

ITEM 1. FINANCIAL STATEMENTS

MSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1996 1995
--------------- -------------

<S> <C> <C>
ASSETS
Cash and due from banks................................................ $ 21,747 $ 15,862
Federal funds sold..................................................... 400 10,952
Securities available for sale.......................................... 52,844 75,580
Mortgage-backed securities available for sale.......................... 381,893 49,775
Loans, net............................................................. 326,796 280,512
Premises and equipment, net............................................ 15,241 12,420
Accrued interest receivable............................................ 5,271 3,219
Investments in real estate............................................. 940 806
Goodwill............................................................... 33,713 1,609
Other assets........................................................... 9,410 3,391
----------- -----------
Total assets..................................................... $ 848,255 $ 454,126
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits............................................................. $ 748,470 $ 388,944
Mortgagors' escrow deposits.......................................... 1,495 1,839
Accrued expenses and other liabilities............................... 17,703 18,605
Borrowings........................................................... 12,100 --
ESOP obligations..................................................... 519 742
----------- -----------
Total liabilities................................................ 780,287 410,130
----------- -----------
Stockholders' Equity
Preferred stock ($.01 par value; 1,000,000 shares authorized; 600,000
shares issued at September 30, 1996 and none issued at December 31,
1995)............................................................... 6 --
Common stock ($.01 par value; 5,000,000
shares authorized; 3,045,000 shares issued
at September 30, 1996 and 1,840,000 shares issued
at December 31, 1995)............................................... 30 18
Additional paid-in capital............................................ 48,211 16,198
Retained earnings..................................................... 31,614 33,110
Treasury stock, at cost (211,064 shares and 212,064 shares at
September 30, 1996 and December 31, 1995, respectively)............. (4,137) (4,157)
Unallocated ESOP stock................................................ (519) (742)
Unallocated BRP stock................................................. (205) (303)
Net unrealized loss on securities available for sale.................. (7,032) (128)
----------- -----------
Total stockholders' equity....................................... 67,968 43,996
----------- -----------
Total liabilities and stockholders' equity....................... $ 848,255 $ 454,126
=========== ===========

</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

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<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED For the Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- ----------------

<S> <C> <C> <C> <C>
INTEREST INCOME
Mortgage loans...................................... $ 5,816 $4,802 $ 16,369 $ 13,465
Other loans......................................... 567 350 1,553 907
Mortgage-backed securities.......................... 6,527 1,002 18,433 2,489
Securities.......................................... 892 1,517 3,334 4,045
Federal funds sold.................................. 51 200 1,029 549
---------- ---------- ---------- ----------
Total interest income......................... 13,853 7,871 40,718 21,455

INTEREST EXPENSE
Interest on deposits................................ 7,755 3,588 22,982 10,171
Interest on borrowings.............................. 18 667 18 1,034
Interest on ESOP obligation......................... 12 19 41 64
---------- ---------- ---------- ----------
Total interest expense........................ 7,785 4,274 23,041 11,269
Net interest income................................. 6,068 3,597 17,677 10,186
Provision for loan losses........................... 400 128 970 323
---------- ---------- ---------- ----------
Net interest income after provision for loan losses. 5,668 3,469 16,707 9,863

NON-INTEREST INCOME
Service charges on deposits......................... 663 416 1,885 1,275
Service fees........................................ 307 138 895 388
Net realized gains (losses) on securities........... (48) 22 (31) (157)
Realized gains on mortgage sales.................... 40 6 111 31
Other non-interest income........................... 2 28 7 28
---------- ---------- ---------- ----------
Total non-interest income..................... 964 610 2,867 1,565

NON-INTEREST EXPENSE
Salaries and employee benefits...................... 2,106 1,455 6,284 4,207
Occupancy and equipment............................. 801 618 2,333 1,791
Federal deposit insurance premiums.................. 264 (1) 741 403
Other non-interest expense.......................... 2,042 678 6,205 1,978
SAIF recapitalization assessment.................... 2,925 - 2,925 -
---------- ---------- ---------- ----------
Total non-interest expense.................... 8,138 2,750 18,488 8,379
---------- ---------- ---------- ----------

Income before income taxes.......................... (1,506) 1,329 1,086 3,049
Income tax expense.................................. (648) 593 440 1,295
---------- ---------- ---------- ----------
Net income.......................................... $ (858) $ 736 $ 646 $ 1,754
========== ========== ========== ==========
Earnings per share ................................. $ (0.40) $ 0.44 $ (0.06) $ 1.03
Weighted average shares outstanding................. 2,833,936 1,680,029 2,808,124 1,702,449
========== ========== ========== ==========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

- 2 -

<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>

FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1996 1995
-------------- --------------

<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 646 $ 1,754
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized losses on securities.......................................... 31 157
Realized gain on sale of mortgage loans................................ (111) (31)
Amortization of premiums/discounts on securities....................... 872 8
Proceeds from the sale of student loans................................ 1,149 1,344
Origination of mortgage loans held for sale............................ (7,909) (4,382)
Proceeds from the sale of mortgage loans............................... 8,562 4,217
Amortization of net deferred loan origination fees..................... (137) (249)
Depreciation and amortization.......................................... 932 694
Provisions for loan losses............................................. 970 323
Writedowns on real estate.............................................. 171 106
Goodwill amortization.................................................. 2,596 92
Increase in accrued interest receivable................................ (2,052) (761)
Increase in accrued interest payable................................... 13 878
Decrease in prepaid expenses and other assets.......................... 434 3,093
Increase (decrease) in accrued expenses and
other liabilities..................................................... (776) 123
Net change in Federal and State income tax
payables and receivables.............................................. (1,280) 1,247
Deferred income taxes.................................................. (479) (126)
Other.................................................................. (454) 87
---------- ----------
Net cash provided by operating activities............................ $ 3,178 $ 8,574
---------- ----------

INVESTING ACTIVITIES
Net (increase) decrease in loans....................................... $ (49,379) $ (36,723)
Maturities and redemption of debt securities........................... 14,142 16,450
Purchases of securities available for sale............................. (25,391) (42,616)
Proceeds from the sale of securities available for sale................ 31,802 23,493
Purchases of mortgage-backed securities available for sale............. (383,209) (29,674)
Proceeds from the sale of mortgage-backed securities
available for sale.................................................... 26,368 --
Repayments of mortgage-backed securities available for sale............ 14,365 5,394
Repayments of asset backed securities.................................. 143 589
Proceeds from the sale of real estate owned, net....................... 343 241
Purchases of property and equipment.................................... (3,980) (1,590)
Cash received in branch acquisition.................................... 380,299 --
---------- ----------
Net cash provided by (used in) investing activities.................. $ 5,503 $ (64,436)
---------- ----------
</TABLE>

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<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1996 1995
---------------- -----------------

<S> <C> <C>
FINANCING ACTIVITIES
Net change in deposits ......................................................... $ (55,321) $ 11,950
Proceeds from borrowings ....................................................... 12,100 38,840
Net increase (decrease) in mortgagors' escrow deposits ......................... (344) 224
Repayment of ESOP loan ......................................................... (223) (164)
Proceeds from the sale of stock ................................................ 32,078 --
Payment of common stock dividends .............................................. (1,678) (712)
Purchase of treasury stock ..................................................... -- (1,790)
Proceeds from the exercise of stock options .................................... 40 182
-------------- --------------
Net cash provided by (used in) financing activities ...................... $ (13,348) $ 48,530

Decrease in cash and cash equivalents .........m................................ $ (4,667) $ (7,332)
Cash and cash equivalents at beginning of period ............................... 26,814 22,445
-------------- --------------
Cash and cash equivalents at end of period ..................................... $ 22,147 $ 15,113
============== ==============

SUPPLEMENTAL INFORMATION
Interest paid on deposits ...................................................... $ 22,969 $ 10,171
Income taxes paid ............................................................. $ 2,203 $ 237

Non-cash transactions:
Transfer of balances from loans receivable to real
estate owned ............................................................... $ 778 $ 693

</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

- 4 -

<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

In September, 1992, MSB Bancorp, Inc. (the "Company") completed the
issuance of 1,840,000 shares of common stock in connection with the conversion
of Middletown Savings Bank (previous name of MSB Bank) (the "Bank") from a
mutual to a stock savings bank (the "Conversion"). Concurrent with the
Conversion, the Company acquired all of the Bank's common stock.

On January 10, 1996, the Company sold 1,100,000 shares of common stock
at $18.00 per share and 600,000 shares of its 8.75% Cumulative Convertible
Preferred Stock, Series A (""Series A Preferred Stock") at $21.60 per share. On
February 7, 1996, the Company sold an additional 105,000 shares of Common Stock
pursuant to the underwriters' exercise of their overallotment option. The
issuance and sale of the shares of Common Stock and Preferred Stock on January
10 and February 7 are hereinafter, collectively, referred to as the "Offering."
Net proceeds from the Offering amounted to $32.1 million. The purpose of the
Offering was to raise a significant portion of the additional capital necessary
to permit the Bank to qualify as "adequately capitalized" for regulatory capital
purposes immediately following the consummation of the acquisition of certain
branches of First Nationwide Bank, A Federal Savings Bank ("First Nationwide").

The Bank entered into an Asset Purchase and Sale Agreement dated as of
September 29, 1995 (as amended, the "First Nationwide Agreement") with First
Nationwide for the acquisition of certain assets and the assumption of certain
liabilities relating to eight First Nationwide branch offices located in Carmel,
Liberty, Mahopac, Monticello, Port Jervis, Spring Valley, Warwick and
Washingtonville, New York (the "First Nationwide Branches"). The closing took
place on January 12, 1996 (the "Closing Date"), whereupon the Bank assumed the
deposits (the "Acquired Deposits") of the First Nationwide Branches other than
the Spring Valley, New York branch (the "Spring Valley Branch") and paid First
Nationwide a premium of 8.0% on the Acquired Deposits (and on the accrued
interest thereon) (the acquisition of the First Nationwide Branches other than
the Spring Valley Branch being hereinafter referred to as the "Acquisition," and
the First Nationwide Branches other than the Spring Valley Branch being
hereinafter referred to as the "Acquired Branches"). The First Nationwide
Agreement was amended to provide for the purchase of the Spring Valley Branch by
the Bank from First Nationwide concurrent with the sale of such branch by the
Bank to Provident Savings Bank, F.A. ("Provident"), pursuant to an Asset
Purchase and Sale Agreement (as amended, the "Spring Valley Agreement") between
the Bank and Provident. Pursuant to the First Nationwide Agreement, the Bank
paid First Nationwide a premium of 8.0% on the deposits of the Spring Valley
Branch (and on the accrued interest thereon). The Spring Valley Agreement
provided for the sale of certain assets by the Bank and the assumption of
certain liabilities by Provident (the "Branch Disposition") relating to the
Spring Valley Branch. The closing under the Spring Valley Agreement took place
on March 22, 1996, whereupon Provident assumed the deposits of the Spring Valley
Branch and paid the Bank a premium of 7.05% on such deposits (and on the accrued
interest thereon). The Company believes that the 7.05% premium paid by Provident
to the Bank as compared to the 8.0% premium paid by the Bank to First Nationwide
is reasonable given the more limited strategic importance to the Bank of the
Spring Valley Branch relative to the Acquired Branches and considering that the
Spring Valley Branch has a higher cost of funds than the Acquired Branches. The
Branch Disposition will allow the Bank to focus on its market area of Orange,
Putnam and Sullivan counties in New York.

On January 12, 1996, the Acquired Deposits totaled $414.8 million. In
addition, the Bank acquired certain assets related to the Acquired Branches,
including branch facilities and fixed operating assets associated with the
Acquired Branches (the "First Nationwide Assets") at a purchase price of
approximately $2.9 million, and certain savings account and overdraft loans (the
"First Nationwide Loans"), which totaled $1.0 million at January 12, 1996, at
face value.

On October 27, 1995, the Bank converted from a New York state-chartered
savings bank to a federal savings bank in order to facilitate the Acquisition as
well as future expansion. In addition, the Bank changed

- 5 -

<PAGE>

its name to MSB Bank. As a consequence of the conversion of the Bank to a
federal savings bank, the Company became a savings and loan holding company
subject to the regulation, examination and supervision of the Office of Thrift
Supervision (the "OTS"). Prior to this conversion, the Company was a bank
holding company subject to the regulation, examination and supervision of the
Federal Reserve Board ("FRB").

The Bank provides banking services to individual and corporate
customers, with its business activities concentrated in the New York counties of
Orange, Putnam and Sullivan, and the surrounding areas.

The consolidated financial statements included herein have been
prepared by the Company without audit. In the opinion of management, the
quarterly unaudited financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the consolidated
financial position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
Company believes that the disclosures are adequate to make the information
presented not misleading, however, the results for the periods presented are not
necessarily indicative of results to be expected for the entire year.

The unaudited quarterly and year to date financial statements presented
herein should be read in conjunction with the annual audited consolidated
financial statements of the Company for the fiscal year ended December 31, 1995.

The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, MSB Bank, and the Bank's
wholly owned subsidiaries, MSB Financial Services, Inc. and MSB Travel, Inc.
("Travel"). Significant intercompany transactions and amounts have been
eliminated. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowances for losses and real estate investments.

2. Earnings Per Share

Primary earnings per common share is calculated based upon the weighted
average common shares outstanding adjusted for common stock equivalents that
have a dilutive effect on the per share data. Earnings for the purpose of
computing primary earnings per share consists of net income for the period less
preferred stock dividends. Common stock equivalents include stock options that
have a dilutive effect on earnings per common share. During the first quarter of
1996, the Company sold 600,000 shares of Series A Preferred Stock in the
Offering. This stock is not considered a common stock equivalent but is used in
the calculation of fully diluted earnings per share. Since the Series A
Preferred Stock has an antidilutive effect on earnings per share for the quarter
and nine months ended September 30, 1996, it has not been incorporated in the
calculation; fully diluted and primary earnings per share are the same.

3. Allowance for Loan Losses

At September 30, 1996, the total recorded investment in impaired loans
was $2.2 million, which consisted of $549,000 of loans that are potential
problem loans and $1.6 million of loans that are in non-accrual status. At
September 30, 1996, all impaired loans were commercial mortgage loans that were
measured with reference to the appraised value of the collateral property. At
September 30, 1996, there was no allowance related to impaired loans. Interest
income recognized on impaired loans was not significant for the quarter and nine
months ended September 30, 1996.

The allowance for loan losses is increased by a 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

- 6 -

<PAGE>

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:
<TABLE>
<CAPTION>

FOR THE QUARTER ENDED NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
---------------------------------- ---------------------------------- --------------
1996 1995 1996 1995 1995
-------------- -------------- -------------- -------------- --------------

<S> <C> <C> <C> <C> <C>
Balance at beginning of period...... $ 1,556 $ 1,417 $ 1,659 $ 1,459 $ 1,459
Provision for loan losses........... 400 128 970 323 483
LOANS CHARGED OFF
Real estate.................. 175 43 497 233 234
Other loans.................. 6 13 367 69 73
-------- -------- -------- -------- --------
Total loans charged off............. 181 56 864 302 307
-------- -------- -------- -------- --------
RECOVERIES
Real estate.................. -- -- 1 2 2
Other loans.................. 7 1 16 8 22
-------- -------- -------- -------- --------
Total recoveries............. 7 1 17 10 24
-------- -------- -------- -------- --------
Net charge-offs.............. 174 55 847 292 283
-------- -------- -------- -------- --------
Balance at end of period............ $ 1,782 $ 1,490 $ 1,782 $ 1,490 $ 1,659
======== ======== ======== ======== ========
Ratio of net charge-offs to average
net loans outstanding (annualized).. 0.22% 0.08% 0.38% 0.16% 0.11%
======== ======== ======== ======== ========
</TABLE>

- 7 -

<PAGE>

4. 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, POHLI V. MSB
BANCORP, INC. ET AL., commenced by a stockholder in the Delaware Court of
Chancery, New Castle County, on or about November 7, 1995. The plaintiff,
purporting to represent a class consisting of all stockholders except the
stockholder defendants and those affiliated with the stockholder defendants,
alleges that the defendant directors have breached and continue to breach their
fiduciary duties to stockholders by, among other things, failing to give due
consideration to proposals to acquire the Company or its assets, for failing to
maximize stockholder value and for failing to disclose all material facts to
stockholders. The plaintiff, on behalf of the purported class, seeks unspecified
money damages and an affirmative injunction directing the director defendants to
consider and negotiate all bona fide offers or proposals to acquire the Company.
On December 4, 1995, the Company filed an answer denying all of the substantive
allegations contained in the complaint and seeking, among other things, an order
dismissing the complaint with prejudice. This action has been dormant. No
discovery requests have been served by the plaintiffs. The Company intends to
vigorously contest the allegations of wrongdoing in this action.

The Company and its directors are defendants in a lawsuit, KAHN
BROTHERS & CO., INC. ET AL. V. MSB BANCORP, INC. ET AL., commenced by
stockholders in the Delaware Court of Chancery, New Castle County, on or about
November 22, 1995. The plaintiffs, who own in excess of 5% of the outstanding
shares of the Common Stock and purport to represent a class consisting of all
stockholders except the stockholder defendants, allege that the defendant
directors breached their duty of care by failing to become fully informed about
the proposals of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to
stockholders by not notifying the public or the Company's stockholders of
HUBCO's proposals; and breached their duty of good faith and fair representation
by, among other things, not investigating whether the Acquisition constituted a
reasonable alternative for building stockholder value. The plaintiffs further
allege that the Company's offering of Common Stock in connection with the
Acquisition (the "Common Stock Offering") was not intended to enhance
stockholder value, but rather was for the purpose of diluting the ownership and
voting strength of existing stockholders and further entrenching existing
management and the Board. The plaintiffs sought to enjoin the Common Stock
Offering and are also seeking damages equal to the difference between the market
price of the Common Stock on September 7, 1995, and $35 (approximately
$14,989,000 in the aggregate) or, in the alternative, the difference between the
market price of the Common Stock on October 26, 1995, and $25 (approximately
$7,394,000 in the aggregate), including interest and attorneys' and other
professional fees. In connection with this action, plaintiffs filed a motion
seeking expedited discovery and scheduling. On December 6, 1995, in response to
the plaintiffs' motion for expedited proceedings, which was treated by the court
as an application for a temporary restraining order with respect to the Common
Stock Offering, the court denied the plaintiffs' application for such order. On
December 12, 1995, the court denied the plaintiffs' motion for reargument. On
December 18, 1995, the Company filed an answer denying all of the substantive
allegations in the complaint and seeking, among other things, an order
dismissing the complaint with prejudice. Plaintiffs amended their complaint to
include allegations relating to an unsolicited merger proposal received by the
Company from the First Empire State Corporation ("First Empire") on December 28,
1995. Specifically, the amended complaint alleges, among other things, that the
Company's Board of Directors, in breach of its duties of care, loyalty and
disclosure, relied on the advice of Bear, Stearns & Co. Inc. ("Bear Stearns"),
the Company's financial advisor and underwriter for the Offering, knowing that
Bear Stearns could not render independent financial advice regarding the First
Empire proposal. The plaintiffs are seeking alternative damages based on these
allegations in an amount equal to the difference between the market price of the
Common Stock on December 28, 1995 and $26 (approximately $11,560,000 in the
aggregate). The Company filed its amended answer on February 1, 1996 denying all
of the substantive allegations in the amended complaint and seeking, among other
things, an order dismissing the amended complaint with prejudice. The parties
have engaged in substantial written discovery and plaintiffs have requested the

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<PAGE>

depositions of certain of the director defendants. The Company intends to
continue to vigorously contest the allegations of wrongdoing in this action.

The Bank is currently a defendant in a lawsuit commenced by a former
employee. The plaintiff alleges wrongful termination and seeks damages in an
unspecified amount. The Bank steadfastly denies that it wrongfully discharged
the plaintiff and is presenting a vigorous defense in this action.

- 9 -

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

MSB Bancorp, Inc. (the "Company") is the holding company for MSB Bank
("MSB" or the "Bank"). The financial conditions and results of operations of the
Company are primarily dependent upon the operations of the Bank.

On January 10, 1996, the Company sold 1,100,000 shares of Common Stock
at $18.00 per share and 600,000 shares of its Series A Preferred Stock at $21.60
per share. On February 7, 1996, the Company sold an additional 105,000 shares of
Common Stock pursuant to the underwriters' exercise of their overallotment
option. The issuance and sale of the shares of Common Stock and Series A
Preferred Stock on January 10 and February 7 are hereinafter referred to,
collectively, as the "Offering." Net proceeds from the Offering amounted to
approximately $32.1 million. The purpose of the Offering was to raise a
significant portion of the additional capital necessary to permit the Bank to
qualify as "adequately capitalized" for regulatory capital purposes immediately
following the acquisition of seven branches (the "Acquired Branches") from First
Nationwide Bank, A Federal Savings Bank ("First Nationwide"), in January, 1996
(the "Acquisition").

Management's strategy is to increase stockholder value by remaining a
community bank and growing both internally and through acquisitions of other
institutions or branches of other institutions while not precluding
consideration of other strategic alternatives that could increase stockholder
value. In furtherance of that strategic direction, the Bank has, from time to
time, approached financial institutions in its market areas seeking to acquire
one or more branches from such institutions and submitted proposals to acquire
one or more branches from such other institutions. In 1995, the Bank initiated
discussions with the seller of the Central Valley branch, which resulted in the
signing of a definitive agreement to acquire that branch in April 1995. The
acquisition of that branch closed on November 10, 1995, with the Bank thereby
assuming approximately $21.8 million in deposits. In addition, the Company
entered into the branch acquisition agreement with First Nationwide during 1995.
The Acquisition closed on January 12, 1996 with the Bank assuming $414.8 million
of deposits. The Bank also acquired the related branch facilities and operating
assets at a purchase price of $2.9 million and certain deposit-related loans
with a face value of $1.0 million.

RESULTS OF OPERATIONS

The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
its loan and securities portfolios and its cost of funds, consisting primarily
of the interest paid on its deposits. The Bank's operating expenses principally
consist of employee compensation, occupancy expenses, federal deposit insurance
premiums and other general and administrative expenses. The Bank's results of
operations are also significantly affected by its periodic provision for loan
losses and write-downs of real estate owned. Such results are also significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory
authorities.

The Company is subject to certain legal proceedings that, if adversely
determined, could materially and adversely affect the Company's results of
operations. See Part II, Item 1, "Legal Proceedings."

The following tables set forth information relating to the Company's
balance sheet and statements of income for the quarters and nine months ended
September 30, 1996 and 1995, respectively, and reflect the average yield (not on
a tax equivalent basis) on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for the
periods shown. Average balances are derived from average daily balances. The
average balances of securities available for sale and trading securities are
calculated based on amortized cost. The yields and costs include fees, which are
considered adjustments to yields.

- 10 -

<PAGE>

<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 30,
1996
-----------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)....................... $ 291,912 $ 5,816 7.93%
Other loans(1)............................... 20,123 567 11.21
Mortgage-backed securities(2)................ 396,285 6,527 6.55
Other securities(3).......................... 56,558 892 6.27
Federal funds, overnight..................... 3,590 51 5.65
--------- --------- ---------
Total interest-earning assets................ 768,468 13,853 7.17
Non-interest earning assets.................... 65,608
---------
Total assets................................. $ 834,076
=========

LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................... $ 206,241 1,637 3.16
Super NOW accounts......................... 41,869 202 1.92
Money market accounts...................... 50,348 523 4.13
Time deposits.............................. 406,170 5,393 5.28
Borrowings................................. 1,466 18 4.88
ESOP obligation.............................. 584 12 8.17
--------- --------- ---------
Total interest-bearing liabilities........... 706,678 7,785 4.38
Other liabilities.............................. 58,033
---------
Total liabilities......................... 764,711
Retained earnings.............................. 69,365
---------
Total liabilities and retained earnings... $ 834,076
=========
Net interest income/interest rate spread(4).... $ 6,068 2.79%
========= =========
Net interest earning assets/net
interest margin(5)............................ $ 61,790 3.14%
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities............... 1.09x
=========
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 30,
1995
-----------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)....................... $ 245,785 $ 4,802 7.75%
Other loans(1)............................... 13,038 350 10.65
Mortgage-backed securities(2)................ 69,333 1,002 5.73
Other securities(3).......................... 95,915 1,517 6.27
Federal funds, overnight..................... 14,181 200 5.60
--------- --------- ---------
Total interest-earning assets................ 438,252 7,871 7.13
Non-interest earning assets.................... 25,927
---------
Total assets................................. $ 464,179
=========

LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................... $ 130,668 983 2.98
Super NOW accounts......................... 14,407 71 1.96
Money market accounts...................... 38,562 309 3.18
Time deposits.............................. 157,623 2,225 5.60
Borrowings................................. 41,936 667 6.31
ESOP obligation.............................. 892 19 8.45
--------- --------- ---------
Total interest-bearing liabilities........... 384,088 4,274 4.41
Other liabilities.............................. 37,460
---------
Total liabilities......................... 421,548
Retained earnings.............................. 42,631
---------
Total liabilities and retained earnings... $ 464,179
=========
Net interest income/interest rate spread(4).... $ 3,597 2.72%
========= =========
Net interest earning assets/net
interest margin(5)............................ $ 54,164 3.26%
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities............... 1.14x
=========

- ------------------------

(1) In computing the average balance of loans, non-accrual loans have been included.
(2) Includes mortgage-backed securities available for sale and mortgage-backed securities held to maturity.
(3) Other securities includes securities held to maturity and securities available for sale.
(4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average interest-earning assets.
</TABLE>
- 11 -
<PAGE>

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996
-----------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)..................... $ 276,603 $ 16,369 7.90%
Other loans(1)............................. 19,008 1,553 10.91
Mortgage-backed securities(2).............. 374,829 18,433 6.57
Other securities(3)........................ 70,033 3,334 6.36
Federal funds, overnight................... 29,144 1,029 4.72
--------- --------- ---------
Total interest-earning assets.............. 769,617 40,718 7.07
Non-interest earning assets.................. 67,696
---------
Total assets............................... $ 837,313
=========

LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts......................... $ 203,490 4,585 3.01
Super NOW accounts....................... 41,610 600 1.93
Money market accounts.................... 50,076 1,296 3.46
Time deposits............................ 409,025 16,501 5.39
Borrowings................................ 492 18 4.89
ESOP obligation........................... 655 41 8.36
--------- --------- ---------
Total interest-bearing liabilities......... 705,348 23,041 4.36
Other liabilities............................ 61,442
---------
Total liabilities....................... 766,790
Retained earnings............................ 70,523
---------
Total liabilities and retained earnings. $ 837,313
=========
Net interest income/
interest rate spread(4)..................... $ 17,677 2.70%
========= =========
Net interest earning assets/net
interest margin(5).......................... $ 64,269 3.07%
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities............. 1.09x
=========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995
-----------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)....................... $ 236,562 $ 13,465 7.61%
Other loans(1)............................... 12,054 907 10.06
Mortgage-backed securities(2)................ 59,417 2,489 5.60
Other securities(3).......................... 93,255 4,045 5.80
Federal funds, overnight..................... 12,674 549 5.79
--------- --------- ---------
Total interest-earning assets................ 413,962 21,455 6.93
Non-interest earning assets.................... 23,319
---------
Total assets................................. $ 437,281
=========

LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................... $ 132,629 2,968 2.99
Super NOW accounts......................... 14,493 203 1.87
Money market accounts...................... 39,818 1,079 3.62
Time deposits.............................. 147,695 5,921 5.36
Borrowings................................. 21,792 1,034 6.34
ESOP obligation.............................. 960 64 8.91
--------- --------- ---------
Total interest-bearing liabilities........... 357,387 11,269 4.22
Other liabilities.............................. 38,452
---------
Total liabilities......................... 395,839
Retained earnings.............................. 41,442
---------
Total liabilities and retained earnings... $ 437,281
=========
Net interest income/interest rate spread(4).... $ 10,186 2.71%
========= =========
Net interest earning assets/net
interest margin(5)............................ $ 56,575 3.29%
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities............... 1.16x
=========

- ------------------------

FINANCIAL CONDITION

The Company's total assets amounted to $848.3 million at September 30,
1996 as compared to $454.1 million at December 31, 1995. Securities and
mortgage-backed securities available for sale increased by $309.4 million to
$434.7 million at September 30, 1996, and goodwill increased $32.4 million to
$34.0 million at such date. Loans, net increased $46.3 million to $326.8 million
at September 30, 1996. Deposits totaled $748.5 million at September 30, 1996 as
compared to $388.9 million at December 31, 1995. The increases in total assets,
securities and mortgage-backed securities, goodwill and deposits resulted
primarily from the Acquisition and the Offering, which closed during the first
quarter of 1996. In connection with the Acquisition, the Bank assumed
approximately $414.8 million in deposits. At the time the Company planned the
Acquisition, it anticipated a deposit run-off rate of 10.0%. At September 30,
1996, the actual run-off rate was 12.6%. The Company believes that the increase
in the run-off rate is due not only to the transition, but also to the general
disintermediation that the banking industry is experiencing.

Total stockholders' equity increased to $68.0 million at September 30,
1996, from $44.0 million at December 31, 1995, due to the net proceeds of the
Offering, offset by a $6.9 million increase in the net unrealized loss on
securities available for sale. The Bank's Tier 1 leverage capital ratio at
September 30, 1996 was 5.2%, and the Company's tangible book value per share
increased to $12.02 (excluding the net unrealized losses on securities available
for sale) from $11.67 at January 12, 1996, the closing date of the Acquisition.

COMPARISON OF RESULTS OF OPERATIONS

GENERAL. For the third quarter of 1996, the Company reported a net loss
of $858,000 as compared to net income of $736,000 for the third quarter of 1995.
For the nine months ended September 30, 1996, net income amounted to $646,000 as
compared to $1.8 million for the same period in 1995.

NET INTEREST INCOME. Net interest income for the quarter ended
September 30, 1996 amounted to $6.1 million as compared to $3.6 million for the
third quarter in 1995. The increase in net interest income is due primarily to
the Acquisition as the average balance of net interest-earning assets increased
to $61.8 million from $54.2 million for the same period in 1995. The interest
rate spread increased 7 basis points to 2.79% during the third quarter of 1996
as compared to 2.72% for the third quarter of 1995. The Company's net interest
margin was 3.14% and 3.26% for the quarters ended September 30, 1996 and 1995,
respectively.

For the nine months ended September 30, 1996, net interest income
amounted to $17.7 million as compared to $10.2 million for the same period in
the prior year. The average balances of net interest-earning assets increased
$7.7 million to $64.3 million during the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995. The Company's interest
rate spread and net interest margin were 2.70% and 3.07%, respectively, for the
nine months ended September 30, 1996 as compared to 2.71% and 3.29%,
respectively, for the nine months ended September 30, 1995. The decreases in
interest rate spread and net interest margin were due primarily to the
Acquisition. The proceeds from the Acquisition were invested in securities
which, in the aggregate, yield less than the Bank's loan portfolio. The
purchases of these securities were not completed until the last week of January
1996; until such time they earned interest at the Federal funds rate of 5.25%.
As a result, the Company earned a minimal interest rate spread on the Acquired
Deposits during that time. In addition, 68.5% of the Acquired Deposits were time
deposits with an average cost of 5.90%.

INTEREST INCOME. Interest income in the third quarter of 1996 totaled
$13.9 million as compared to $7.9 million for the third quarter of 1995. Average
interest-earning assets increased $330.2 million to $768.5 million in the third
quarter of 1996 as compared to the third quarter of 1995. The average yields on
interest-earning assets were 7.17% and 7.13% for the quarters ended September
30, 1996 and 1995, respectively.

- 13 -

<PAGE>

For the nine months ended September 30, 1996, interest income amounted
to $40.7 million as compared to $21.5 million for the same period in 1995.
Average interest-earning assets increased $355.7 million to $769.6 million for
the nine months ended September 30, 1996, and the average yield earned increased
14 basis points to 7.07% as compared to 6.93% for the nine months ended
September 30, 1995.

Interest income on mortgage loans amounted to $5.8 million during the
third quarter of 1996 as compared to $4.8 million for the third quarter of 1995,
an increase of $1.0 million or 21.1%. The average balance of mortgage loans
increased $46.1 million or 18.8% to $291.9 million in the third quarter of 1996
as compared to $245.8 million for the third quarter of 1995. The average yields
earned on mortgage loans were 7.93% and 7.75% for the third quarters of 1996 and
1995, respectively. For the nine months ended September 30, 1996, interest
income on mortgage loans totaled $16.4 million as compared to $13.5 for the same
period in 1995. The average balance of mortgage loans increased to $276.6
million for the nine months ended September 30, 1996 as compared to $236.6
million for the same period in 1995. The average yield earned on mortgage loans
for the nine months ended September 30, 1996 was 7.90% as compared to 7.61% for
the same period in 1995. The growth in the average balance of mortgage loans was
due primarily to improved demand for the Bank's adjustable-rate mortgage loans
("ARMs"). In addition, the increase in the average yield earned was due
primarily to higher rates offered on ARMs in 1996. The Bank's ARMs are primarily
5-year fixed rates loans that convert to 1-year ARMs after the initial 5-year
period.

Interest income on other loans increased $217,000 or 62.0% to $567,000
during the third quarter of 1996 as compared to $350,000 for the third quarter
of 1995. The average balance of other loans increased $7.1 million or 54.3% to
$20.1 million for the third quarter of 1996, and the yield earned on those loans
increased 56 basis points to 11.21%. For the nine months ended September 30,
1996, interest income on other loans totaled $1.6 million as compared to
$907,000 for the same period in 1995. The average balance of other loans
increased $7.0 million to $19.0 million for the nine months ended September 30,
1996, as compared to $12.1 million for the nine months ended September 30, 1995.
The average yield on other loans increased 85 basis points to 10.91% for the
nine months ended September 30, 1996 as compared to 10.06% for the same period
in 1995. The increase in the average balances of other loans is due to certain
consumer loans acquired in the Acquisition and management's strategy to increase
the commercial loan portfolio in order to increase the Company's interest rate
spread.

Interest income on mortgage-backed securities totaled $6.5 million for
the third quarter of 1996, an increase of $5.5 million over the $1.0 million
earned in the third quarter of 1995. This increase is due primarily to a $327.0
million increase in the average balance of mortgage-backed securities to $396.3
million. In addition, the average yield earned on mortgage-backed securities
increased 82 basis points to 6.55% during the third quarter of 1996 as compared
to the same period in 1995. For the nine months ended September 30, 1996,
interest income on mortgage-backed securities totaled $18.4 million as compared
to $2.5 million for the nine months ended September 30, 1995. For the nine
months ended September 30, 1996, the average balance of and yield earned on
mortgage-backed securities were $374.8 million and 6.57%, respectively, as
compared to $59.4 million and 5.60%, respectively for the nine months ended
September 30, 1995. The increases in the average balances of mortgage-backed
securities during 1996 are a result of the investment of proceeds from the
Acquisition and Offering, which totaled $409.6 million.

Interest income on other securities amounted to $892,000 during the
third quarter of 1996, a decrease of $625,000 or 41.2% from the $1.5 million
earned during the third quarter of 1995. This decrease is due primarily to a
$39.4 million decrease in the average balance of other securities to $56.6
million during the third quarter of 1996 as compared to the same period in 1995.
The yield earned on other securities was the same for the respective quarters.
For the nine months ended September 30, 1996, interest income on other
securities totaled $3.3 million as compared to $4.0 million for the same period
in the prior year. The average balance of other securities decreased $23.2
million or 24.9% to $70.0 million during the nine months ended September 30,
1996 as compared to $93.3 million for the comparable period in the prior year.
For these same periods, the yields earned on other securities increased 56 basis
points to 6.36%. The decreases in the average balances of other securities is a
result of management's strategy to redeploy funds currently invested in
securities into the loan portfolio. Loans typically provide the Company with
greater yields than securities.

- 14 -

<PAGE>

INTEREST EXPENSE. Interest expense for the third quarter of 1996
totaled $7.8 million as compared to $4.3 million for the third quarter of 1995.
The average balance of interest-bearing liabilities amounted to $706.7 million
in the third quarter of 1996, as compared to $384.1 million for the same quarter
in 1995. The average cost of these interest-bearing liabilities remained
virtually unchanged for those periods. For the nine months ended September 30,
1996, interest expense amounted to $23.0 million as compared to $11.3 million
for the same period in 1995. Average interest-bearing liabilities totaled $705.3
million during the 1996 period, representing a $348.0 million increase over
average interest-bearing liabilities of $357.4 million for the nine months ended
September 30, 1995. The average cost of these interest-bearing liabilities was
4.36% in the nine months ended September 30, 1996 as compared to 4.22% for the
same period in 1995. The growth in interest-bearing liabilities is a result of
the Acquisition. The Acquired Deposits totaled $414.8 million at January 12,
1996, the closing date of the Acquisition.

Interest expense on savings accounts amounted to $1.6 million for the
third quarter of 1996 as compared to $983,000 for the same quarter in 1995. The
average balance of savings accounts increased $75.6 million or 57.8% to $206.2
million during the third quarter of 1996 as compared to $130.7 million for the
comparable period in 1995. The average cost of savings accounts for those same
periods increased 18 basis points to 3.16% for the third quarter of 1996 as
compared to 2.98% for the third quarter of 1995. For the nine months ended
September 30, 1996, interest expense on savings accounts totaled $4.6 million as
compared to $3.0 million for the same period in 1995. During the nine months
ended September 30, 1996, the average balance of savings accounts amounted to
$203.5 million as compared to $132.6 million for the same period in 1995. The
average costs of these deposits were 3.01% and 2.99% during the nine months
ended September 30, 1996 and 1995, respectively. The increase in the average
balances was as a result of the Acquisition.

Interest expense on time deposits amounted to $5.4 million during the
third quarter of 1996 and $2.2 million for the third quarter of 1995. The
average balance of time deposits increased $248.5 million to $406.2 million in
the third quarter of 1996 as compared to $157.6 million for the third quarter of
1995. The increase in the average balance was partially offset by a 32 basis
point decrease in the average cost of time deposits to 5.28%. For the nine
months ended September 30, 1996, interest expense on time deposits amounted to
$16.5 million as compared to $5.9 million for the same period in the prior year.
This increase in interest expense was due primarily to a $261.3 million increase
in the average balance of time deposits to $409.0 million, resulting primarily
from the Acquisition. In addition, the average rate paid on time deposits
increased 3 basis points to 5.39% during the nine months ended September 30,
1996 as compared to an average rate of 5.36% for the same period in 1995.

PROVISION FOR LOAN LOSSES. The provision for loan losses amounted to
$400,000 for the third quarter of 1996 as compared to $128,000 for the third
quarter of 1995. This increase is due primarily to an increase in net
charge-offs to $174,000 for the third quarter of 1996 as compared to $55,000 for
the same quarter in 1995 and also due to increases in the size of the loan
portfolio. The increase in charge-offs during the third quarter of 1996 is due
primarily to $175,000 in partial charge-offs related to one- to four-family
mortgage loans in foreclosure. Non-performing loans (loans that are 90 days or
more past due) amounted to $5.0 million or 1.53% of total loans at September 30,
1996 as compared to $3.0 million or 1.05% of total loans at December 31, 1995
and $2.1 million or 0.79% of total loans at September 30, 1995. Non-performing
assets totaled $6.0 million or 0.70% of total assets, $3.8 million or 0.83% of
total assets and $3.0 million or 0.66% of total assets at September 30, 1996,
December 31, 1995 and September 30, 1995, respectively. The allowance for loan
losses amounted to $1.8 million and $1.5 million at September 30, 1996 and 1995,
respectively. At December 31, 1995, the allowance for loan losses amounted to
$1.7 million.

For the nine months ended September 30, 1996, the provision for loan
losses amounted to $970,000 as compared to $323,000 for the same period in 1995.
Net charge-offs totaled $847,000 for the nine months ended September 30, 1996 as
compared to $292,000 for the same period in 1995. The increase in net
charge-offs is due primarily to a $275,000 commercial loan charged off in the
second quarter of 1996 and also due to $210,000 in net charge-offs in the first
quarter of 1996 related to certain non-performing mortgage loans with respect to
which the Bank decided, based on the condition of the underlying properties and
other factors, not to pursue foreclosure proceedings.

- 15 -

<PAGE>

In determining the adequacy of its allowance for loan losses,
management considers the level of non-performing loans, the current status of
the Bank's loan portfolio, changes in appraised values of collateral and general
economic conditions. Although the Bank maintains its allowance for loan losses
at a level which it considers to be adequate to provide for potential losses,
there can be no assurance that such losses will not exceed the current estimated
amounts. As a result, higher provisions for loan losses may be necessary in
future periods which would adversely affect operating results.

NON-INTEREST INCOME. Non-interest income increased $354,000 to $964,000
for the third quarter of 1996 as compared to $610,000 for the same quarter in
1995. Services charges on deposits increased to $663,000 in the third quarter of
1996 from $416,000 for the same period in 1995. Service fees increased $185,000
from the third quarter of 1995 to $323,000 for the third quarter of 1996. These
increases are primarily a result of the Acquisition. Net realized losses on
securities amounted to $48,000 for the third quarter of 1996 as compared to a
net gain of $22,000 for the same period in 1995.

For the nine months ended September 30, 1996, non-interest income
amounted to $2.9 million as compared to $1.6 million for the same period in
1995. Service charges on deposits increased $610,000 or 47.8% to $1.9 million
for the nine months ended September 30, 1996 as compared to $1.3 million for the
same period in 1995. Service fees increased $507,000 to $895,000 for the nine
months ended September 30, 1996 as compared to $388,000 for the same period in
1995. Net realized losses on securities amounted to $31,000 for the nine months
ended September 30, 1996 as compared to a net loss of $157,000 for the same
period in 1995. The increase in service charges on deposits for the nine-month
period was offset by waived service charges on the Acquired Deposits until March
1, 1996. In addition, MSB waived $90,000 of additional service charges in
limited circumstances for certain of the Acquired Deposits from March 1, 1996 to
June 30, 1996, for various reasons related to the transition of accounts of
First Nationwide to MSB. Although this has resulted in decreased fee income,
management believes that waiving these service charges was important for
customer retention.

NON-INTEREST EXPENSE. Non-interest expense was $8.1 million for the
third quarter of 1996, compared to $2.8 million for the same quarter in 1995.
Included in non-interest expense for the third quarter of 1996 is a $2.9 million
special assessment on SAIF assessable deposits. Salaries and employee benefits
increased $651,000 during the third quarter of 1996 to $2.1 million as MSB added
69 full-time equivalent employees for the Acquired Branches, the Central Valley
Branch, which was acquired in November, 1995 and MSB Travel. Occupancy and
equipment amounted to $801,000 for the third quarter of 1996 as compared to
$618,000 for the comparable quarter in the prior year. Other non-interest
expense amounted to $2.0 million for the third quarter of 1996 as compared to
$678,000 for the same period in 1995. This increase is due primarily to a
$920,000 increase in goodwill amortization related to the Acquisition, $167,000
in legal expenses related to litigation and a $228,000 increase in printing,
paper and ATM card production costs and the operating expenses of the Acquired
Branches.

For the nine months ended September 30, 1996, non-interest expense
amounted to $18.5 million as compared to $8.4 million for the same period in
1995. For those same periods, salaries and employee benefits increased $2.1
million to $6.3 million and occupancy and equipment increased $542,000 to $2.3
million, in each case related primarily to the Acquisition. In addition, other
non-interest expense increased $4.2 million to $6.2 million. Other non-interest
expense for the nine months ended September 30, 1996 included $225,000 of
non-recurring expenses related to the Acquisition. In addition, legal expenses
increased $276,000 to $423,000, related primarily to stockholder matters and
litigation; losses on foreclosed real estate increased $65,000 to $171,000; and
printing, paper and ATM card production costs increased $228,000 to $415,000.

INCOME TAX EXPENSE. For the third quarter of 1996, income tax expense
amounted to a tax benefit of $648,000 as compared to tax expense of $593,000 for
the same period in 1995. The effective income tax rates for the third quarters
of 1996 and 1995 were 43.0% and 44.6%, respectively. For the nine months ended
September 30, 1996, income tax expense was $440,000 as compared to $1.3 million
for the same period in 1995. The effective income tax rates for the nine months
ended September 30, 1996 and 1995 were 40.5% and 42.5%, respectively.

- 16 -

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funds are deposits and the proceeds
from principal and interest payments on loans and investments. Proceeds from
securities sales are also a source of funds. While maturities and scheduled
amortization of loans and investments are a predictable source of funds, deposit
flows, mortgage prepayments and prepayments of mortgage-backed securities are
greatly influenced by interest rates, economic conditions and competition.

The Bank is required to maintain an average daily balance of liquid
assets and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by the regulations of the OTS.
The minimum required liquidity and short-term liquidity ratios are currently
5.0% and 1.0%, respectively. At September 30, 1996, the Bank's liquidity ratio
under OTS regulations was 6.1%.

The Company's most liquid assets are cash and cash equivalents and
investments in highly liquid, short-term securities. The levels of these assets
are dependent on the Bank's operating, financing, lending and investing
activities during any given period. The Company's ratios of cash and due from
banks, Federal funds and investment securities with remaining maturities of one
year or less to total deposits were 4.4% at September 30, 1996 and 10.5% at
December 31, 1995. At September 30, 1996, cash and cash equivalents, as defined
above, totaled $33.3 million as compared to $42.6 million at December 31, 1995.
The decrease in this ratio during 1996 is a result of increased loan demand and
also due to deposit run-off from the Acquisition. Deposits decreased
approximately $55.3 million from the date of the Acquisition (January 12, 1996)
to September 30, 1996. Loans originated in the nine months ended September 30,
1996 totaled $89.8 million. The Company has utilized borrowings to provide
liquidity as necessary rather than sell securities. Due to market conditions,
the sale of securities would result in a net loss. Borrowings at September 30,
1996 totaled $12.1 million. Subsequent to September 30, 1996, market conditions
improved and the Bank sold $29.6 million of securities at a net realized gain of
$4,000. This enabled the Bank to repay borrowings and also provided liquidity.

Liquidity management for the Bank is both a daily and long-term
function of the Bank's management strategy. Excess funds are generally invested
in short-term investments such as Federal funds. In the event that the Bank
should require funds beyond its ability to generate them internally, additional
sources of funds are available through lines of credit totaling $46.0 million
from the Federal Home Loan Bank of New York. In addition, the Bank may access
funds, if necessary, through the Federal Reserve Bank of New York discount
window.

At September 30, 1996, the Bank had outstanding loan commitments of
$36.3 million. The Bank anticipates that it will have sufficient funds available
to meet its current loan commitments. Time deposits scheduled to mature in one
year or less from September 30, 1996, totaled $327.6 million. Management
believes that a significant portion of such deposits will remain with the Bank.

The OTS regulations require savings associations to meet three minimum
capital standards: a tangible capital ratio requirement of 1.5% of total assets
as adjusted under the OTS regulations; a leverage ratio requirement of 3.0% of
core capital to such adjusted total assets; and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The 3.0% core capital requirement has been effectively superseded by the
OTS' prompt corrective action regulations, which impose a 4.0% core capital
requirement for treatment as an "adequately capitalized" thrift and a 5.0% core
capital requirement for treatment as a "well capitalized" thrift. In determining
the amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of assets.

- 17 -

<PAGE>

The following table sets forth the capital position of the Bank as
calculated at September 30, 1996.

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 ...... $ 69,066 8.4% $ 69,066 8.4% $ 69,066 19.1%
Deduct goodwill ....................... 33,713 4.1 33,713 4.1 33,713 9.3
Add qualifying general loan loss
allowance, as limited by regulation . -- -- -- -- 1,782 0.5
Add unrealized loss on securities
available for sale, net of taxes .... 7,032 0.9 7,032 0.9 7,032 1.9
-------- -------- -------- -------- -------- --------
Capital, as calculated ................ 42,385 5.2 42,385 5.2 44,167 12.2
Capital, as required .................. 12,216 1.5 32,577 4.0 28,894 8.0
-------- -------- -------- -------- -------- --------
Excess ................................ $ 30,169 3.7% $ 9,808 1.2% $ 15,273 4.2%
======== ======== ======== ======== ======== ========
</TABLE>

The Board of Directors declared cash dividends of $0.15 per common
share on September 20, 1996, June 21, 1996 and March 15, 1996 that were payable
to stockholders of record on October 11, 1996, June 28 and March 30, 1996,
respectively. The Company has been paying a quarterly cash dividend of $0.15 per
common share since the first quarter of 1995 and had been paying a quarterly
cash dividend of $0.13 per common share since the second quarter of 1994.

LEGISLATION ON DEPOSIT INSURANCE

The deposits of the Bank are insured by the Bank Insurance Fund ("BIF")
except for those attributable to the Bank's acquisition of deposits from
institutions insured by the Savings Association Insurance Fund ("SAIF"),
including First Nationwide. On September 30, 1996, the Deposit Insurance Funds
Act of 1996 (the "Funds Act") was enacted into law. The Funds Act amended the
Federal Deposit Insurance Act in several ways to recapitalize the SAIF and
reduce the disparity in the assessment rates for BIF and the SAIF.

The Funds Act authorized the FDIC to impose a special assessment on all
institutions with SAIFassessable deposits in the amount necessary to
recapitalize the SAIF. As implemented by the FDIC, the special assessment has
been fixed, subject to adjustment, at 0.657% of an institution's SAIF-assessable
deposits, and the special assessment will be paid on November 27, 1996. The
special assessment is based on the amount of SAIF-assessable deposits held at
March 31, 1995, as adjusted under the Funds Act. For the Bank, the special
assessment on the deposits held on March 31, 1995, and on the deposits acquired
from First Nationwide (for which the Bank assumed the liability for the special
SAIF assessment as part of the acquisition cost of such deposits), would be $2.9
million (before giving effect to any tax benefits).

The Funds Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank has not been so classified by the FDIC or the
OTS. In view of the recapitalization of the SAIF, the FDIC proposed on October
8, 1996, a reduction in the assessment rate for SAIF-assessable deposits for
periods beginning on October 1, 1996. As would be effective for the
SAIF-assessable deposits of a BIF-insured institution, such as the Bank, the
proposed assessment rates would range from 0% to 0.27% of deposits.

In addition, the Funds Act expanded the assessment base for the
payments on the bonds ("FICO bonds") issued in the late 1980s by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation. Beginning January 1, 1997, the deposits of both BIF- and
SAIF-insured institutions will be assessed for the payments on the FICO bonds.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. It has been
estimated that the rates of assessment for the payments on the FICO bonds will
be 0.0129% for BIF-assessable deposits and 0.0644% for SAIF-assessable deposits
beginning on January 1, 1997.

The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter. The Secretary of the Treasury is

- 18 -

<PAGE>

required to conduct a study of relevant factors with respect to the development
of a common charter for all insured depository institutions and abolition of
separate charters for banks and thrifts and to report the Secretary's
conclusions and findings to the Congress on or before March 31, 1997.

LEGISLATION REGARDING TAX BAD DEBT RESERVES

Prior to the enactment, on August 20, 1996, of the Small Business Job
Protection Act of 1996 (the "1996 Act"), for federal income tax purposes, thrift
institutions such as the Bank, which met certain definitional tests primarily
relating to their assets and the nature of their business, were permitted to
establish tax reserves for bad debts and to make annual additions thereto, which
additions could, within specified limitations, be deducted in arriving at their
taxable income. The Bank's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, could be
computed using an amount based on a six-year moving average of the Bank's actual
loss experience (the "Experience Method"), or a percentage equal to 8.0% of the
Bank's taxable income (the "PTI Method"), computed without regard to this
deduction and with additional modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Similar deductions for
additions to the Banks's bad debt reserve are permitted under the New York State
Bank Franchise Tax; however, for purposes of this tax, the effective allowable
percentage under the PTI method is 32% rather than 8%.

Under the 1996 Act, the PTI Method was repealed and the Bank, as a
"large bank" (one with assets having an adjusted basis of more than $500
million), will be unable to make additions to its tax bad debt reserve, will be
permitted to deduct bad debts only as they occur and will be required to
recapture (I.E., take into income) over a six-year period, beginning with the
Bank's taxable year beginning January 1, 1996, the excess of the balance of its
bad debt reserves (other than the supplemental reserve) as of December 31, 1995
over the greater of the balance of such reserves as of December 31, 1987 (or
over a lesser amount if the Bank's loan portfolio decreased since December 31,
1987). However, under the 1996 Act, such recapture requirements will be
suspended for each of the two successive taxable years beginning January 1, 1996
in which the Bank originates a minimum amount of certain residential loans
during such years that is not less than the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding January 1,
1996. [Since the Bank has already provided a deferred income tax liability of
this amount for financial reporting purposes, there will be no adverse impact to
the Bank's financial condition or results of operations from the enactment of
this legislation.] The New York State tax law has been amended to prevent a
similar recapture of the Bank's New York State tax liability.

- 19 -

<PAGE>

PART II -- OTHER INFORMATION
-----------------

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 4 to the unaudited consolidated
financial statements ("Legal Proceedings") in Part I, Item 1, hereto is
incorporated herein by reference.

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibit 11 -- Computation of Earnings Per Share
Exhibit 27 -- Financial Data Schedule*

(B) Reports on Form 8-K
None

- -------------
* Submitted only with filing in electronic format.

- 20 -

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

MSB BANCORP, INC.
---------------------------------------------
(Registrant)

By: /s/ Anthony J. Fabiano
------------------------------------
Anthony J. Fabiano
Senior Vice President and Chief
Financial and Accounting Officer

November 13, 1996

- 21 -

<PAGE>

EXHIBIT 11

COMPUTATION OF NET INCOME PER SHARE

FOR THE QUARTER ENDED
--------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------------- ------------------------

<S> <C> <C>
Net Income (loss)........................................ $ (858,000) $ 736,000
Preferred stock dividends................................ 283,500 -
-------------- --------------
Net income (loss) applicable to common stock............. (1,141,500) 736,000
Weighted average common shares........................... 2,833,936 1,680,029
-------------- --------------
Earnings per common share................................ $ (0.40) $ 0.44
============== ==============

FOR THE NINE MONTHS ENDED
--------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------------- ------------------------

Net Income............................................... $ 646,000 $ 1,754,000
Preferred stock dividends................................ 819,000 -
-------------- --------------
Net income (loss) applicable to common stock............. (173,000) 1,754,000
Weighted average common shares........................... 2,808,124 1,720,449
-------------- --------------
Earnings per common share................................ $ (0.06) $ 1.03
============== ==============
</TABLE>

- 22 -

<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed statement of financial condition and the consolidated
condensed statement of income and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 21,747
<INT-BEARING-DEPOSITS> 400
<FED-FUNDS-SOLD> 12,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 434,737
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 326,796
<ALLOWANCE> 1,782
<TOTAL-ASSETS> 848,255
<DEPOSITS> 748,470
<SHORT-TERM> 0
<LIABILITIES-OTHER> 19,198
<LONG-TERM> 519
0
6
<COMMON> 30
<OTHER-SE> 67,932
<TOTAL-LIABILITIES-AND-EQUITY> 848,255
<INTEREST-LOAN> 17,922
<INTEREST-INVEST> 21,767
<INTEREST-OTHER> 1,029
<INTEREST-TOTAL> 40,718
<INTEREST-DEPOSIT> 22,982
<INTEREST-EXPENSE> 23,401
<INTEREST-INCOME-NET> 17,677
<LOAN-LOSSES> 970
<SECURITIES-GAINS> (31)
<EXPENSE-OTHER> 18,488
<INCOME-PRETAX> 1,086
<INCOME-PRE-EXTRAORDINARY> 1,086
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 646
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<YIELD-ACTUAL> 3.07
<LOANS-NON> 5,029
<LOANS-PAST> 0
<LOANS-TROUBLED> 687
<LOANS-PROBLEM> 549
<ALLOWANCE-OPEN> 1,659
<CHARGE-OFFS> 864
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 1,782
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,782

</TABLE>