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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20187
MSB BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1341670
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
35 MATTHEWS STREET, GOSHEN, NEW YORK 10924
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(914) 294-8100
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
N/A
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Outstanding at
CLASS MARCH 31, 1996
Common Stock 2,832,936
par value, $.01
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets (Unaudited) -- March 31, 1996
and December 31, 1995.................................................................................... 1
Consolidated Statements of Operations (Unaudited) -- Quarters
ended March 31, 1996 and 1995............................................................................ 2
Consolidated Statements of Cash Flows (Unaudited) -- Quarters
ended March 31, 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...................................................................................... 16
Item 2. Changes in Securities.................................................................................. 16
Item 3. Defaults upon Senior Securities........................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 16
Item 5. Other Information...................................................................................... 16
Item 6. Exhibits and Reports on Form 8-K....................................................................... 16
Signatures...................................................................................................... 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------------------- --------------------
ASSETS
<S> <C> <C>
Cash and due from banks............................................. $ 13,935 $ 15,862
Federal funds sold.................................................. 28,725 10,952
Securities available for sale....................................... 70,957 75,580
Mortgage-backed securities available for sale....................... 398,145 49,775
Loans, net.......................................................... 286,297 280,512
Premises and equipment, net......................................... 15,405 12,420
Accrued interest receivable......................................... 5,623 3,219
Investments in real estate.......................................... 1,002 806
Goodwill............................................................ 35,425 1,609
Other assets........................................................ 7,742 3,391
----------- -----------
Total assets.................................................. $ 863,256 $ 454,126
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits.......................................................... $ 778,742 $ 388,944
Mortgagors' escrow deposits....................................... 1,337 1,839
Accrued expenses and other liabilities............................ 12,393 18,605
ESOP obligations.................................................. 661 742
----------- -----------
Total liabilities............................................. 793,133 410,130
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Stockholders' Equity
Preferred stock ($.01 par value; 1,000,000 shares authorized; 600,000 shares
issued at March 31,
1996 and none issued at December 31, 1995)........................ 6 --
Common stock ($.01 par value; 5,000,000
shares authorized; 3,045,000 shares issued
at March 31, 1996 and 1,840,000 shares issued
at December 31, 1995)............................................ 30 18
Additional paid-in capital......................................... 48,319 16,198
Retained earnings, substantially restricted........................ 33,022 33,110
Treasury stock, at cost (212,064 shares at
March 31, 1996 and December 31, 1995)............................ (4,157) (4,157)
Unallocated ESOP stock............................................. (661) (742)
Unallocated BRP stock.............................................. (270) (303)
Net unrealized loss on securities available for sale............... (6,166) (128)
----------- -----------
Total stockholders' equity.................................... 70,123 43,996
----------- -----------
Total liabilities and stockholders' equity.................... $ 863,256 $ 454,126
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</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
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MSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
1996 1995
INTEREST INCOME
<S> <C> <C>
Mortgage loans................................................... $ 5,216 $ 4,181
Other loans...................................................... 495 251
Mortgage-backed securities....................................... 5,218 683
Securities....................................................... 1,384 1,191
Federal funds sold............................................... 812 123
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Total interest income...................................... 13,125 6,429
INTEREST EXPENSE
Interest on deposits............................................. 7,561 3,091
Interest on ESOP obligation...................................... 15 23
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Total interest expense..................................... 7,576 3,114
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Net interest income.............................................. 5,549 3,315
Provision for loan losses........................................ 250 53
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Net interest income after provision for loan losses.............. 5,299 3,262
NON-INTEREST INCOME
Service charges on deposits...................................... 608 433
Service fees..................................................... 204 133
Net realized gains (losses) on securities........................ (1) (1)
Realized gains on mortgage loans
held for sale.................................................. 48 12
Other non-interest income........................................ 4 1
------------- -------------
863 578
NON-INTEREST EXPENSES
Salaries and employee benefits................................... 2,040 1,413
Occupancy and equipment.......................................... 768 591
Federal deposit insurance premiums............................... 238 202
Other non-interest expense....................................... 2,093 633
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5,139 2,839
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Income before income taxes....................................... 1,023 1,001
Income tax expense............................................... 435 401
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Net income....................................................... $ 588 $ 600
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Earnings per share .............................................. $ 0.12 $ 0.35
Weighted average shares outstanding.............................. 2,720,314 1,730,405
============= =============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
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MSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
1996 1995
OPERATING ACTIVITIES
<S> <C> <C>
Net Income............................................................. $ 588 $ 600
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on securities........................................... 1 1
Realized gain on sale of mortgage loans................................ (48) --
Amortization of premiums/discounts on securities....................... 183 16
Proceeds from the sale of student loans................................ 232
Origination of mortgage loans held for sale............................ (2,905) (664)
Proceeds from the sale of mortgage loans............................... 3,478 569
Amortization of net deferred loan origination fees..................... (53) (83)
Depreciation and amortization.......................................... 305 232
Provisions for loan losses............................................. 250 53
Writedowns on real estate.............................................. 116 41
Goodwill amortization.................................................. 755 30
Decrease (increase) in accrued interest receivable..................... (2,404) 402
Decrease (increase) in prepaid expenses and
other assets.......................................................... (160) 2,743
Increase (decrease) in accrued expenses and
other liabilities..................................................... (6,715) (2,147)
Net change in Federal and State income tax
payables and receivables.............................................. 437 337
Deferred income taxes.................................................. (115) (22)
Other.................................................................. (371) (61)
------------ ------------
Net cash provided by (used in) operating activities.................. $ (6,426) $ 2047
------------ -----------
INVESTING ACTIVITIES
Net (increase) decrease in loans....................................... $ (7,047) $ (13,149)
Maturities and redemptions of debt securities.......................... 10,400 2,000
Purchases of securities available for sale............................. (25,337) (356)
Proceeds from the sale of securities available for sale................ 17,801 --
Proceeds from the sale of securities held to maturity.................. -- 3,000
Purchases of mortgage-backed securities available for sale............. (375,064) --
Proceeds from the sale of mortgage-backed securities
available for sale.................................................... 11,685 --
Repayments of mortgage-backed securities available for sale............ 6,406 1,068
Repayments of asset backed securities.................................. 143 202
Proceeds from the sale of real estate owned, net....................... 65 170
Purchases of property and equipment.................................... (3,265) (181)
Cash received in branch acquisition.................................... 380,299 --
----------- -----------
Net cash provided by (used in) investing activities.................. $ 16,086 $ (7,246)
----------- -----------
</TABLE>
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MSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
1996 1995
FINANCING ACTIVITIES
<S> <C> <C>
Net change in deposits................................................... $ (25,049) $ 4,651
Net increase (decrease) in mortgagors' escrow deposits................... (502) 28
Repayment of ESOP loan................................................... (81) (83)
Proceeds from the sale of stock.......................................... 32,078 --
Payment of common stock dividends........................................ (260) (221)
Purchase of treasury stock............................................... -- (995)
Proceeds from the exercise of stock options.............................. -- 134
----------- -----------
Net cash provided by (used in) financing activities................ $ 6,186 $ 3,514
----------- -----------
Increase (decrease) in cash and cash equivalents......................... $ 15,846 $ (1,685 )
Cash and cash equivalents at beginning of period......................... $ 26,814 $ 22,445
----------- -----------
Cash and cash equivalents at end of period............................... $ 42,660 $ 20,760
=========== ===========
SUPPLEMENTAL INFORMATION
Interest paid on savings deposits........................................ $ 9,133 $ 3,091
Income taxes paid (received)............................................. 103 --
Non-cash transactions:
Transfer of balances from loans receivable to real
estate owned.......................................................... $ 307 $ 321
=========== ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
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MSB BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In September, 1992, MSB Bancorp, Inc. (the "Company") completed the
issuance of 1,840,000 shares of common stock in connection with the conversion
of Middletown Savings Bank (the "Bank") from a mutual to a stock savings bank
(the "Conversion"). Concurrent with the Conversion, the Company acquired all of
the Bank's common stock.
On January 10, 1996, the Company sold 1,100,000 shares of common stock
at $18 per share and 600,000 shares of its 8.75% Cumulative Convertible
Preferred Stock, Series A at $21.60 per share. On February 7, 1996, the Company
sold an additional 105,000 shares of Common Stock pursuant to the underwriters'
exercise of their overallotment option. The issuance and sale of the shares of
Common Stock and Preferred Stock on January 10 and February 7 are hereinafter
collectively referred to as the "Offering." Proceeds from the Offering amounted
to $32.1 million. The purpose of the Offering was to raise a significant portion
of the additional capital necessary to permit the Bank to qualify as "adequately
capitalized" for regulatory capital purposes immediately following the
consummation of the acquisition of certain branches of First Nationwide Bank, A
Federal Savings Bank ("First Nationwide").
The Bank entered into an Asset Purchase and Sale Agreement (as amended,
the "First Nationwide Agreement") with First Nationwide for the acquisition of
certain assets and the assumption of certain liabilities relating to eight First
Nationwide branch offices located in Carmel, Liberty, Mahopac, Monticello, Port
Jervis, Spring Valley, Warwick and Washingtonville, New York (the "First
Nationwide Branches"). The closing took place on January 12, 1996 (the "Closing
Date"), whereupon the Bank assumed the deposits (the "First Nationwide
Deposits") of the First Nationwide Branches other than the Spring Valley, New
York branch (the "Spring Valley Branch") and paid First Nationwide a premium of
8.0% on the First Nationwide Deposits (and on the accrued interest thereon) (the
acquisition of the First Nationwide Branches other than the Spring Valley Branch
being hereinafter referred to as the "Acquisition," and the First Nationwide
Branches other than the Spring Valley Branch being hereinafter referred to as
the "Acquired Branches"). The First Nationwide Agreement was amended to provide
for the purchase of the Spring Valley Branch by the Bank from First Nationwide
concurrent with the sale of such branch by the Bank to Provident Savings Bank,
F.A. ("Provident"), pursuant to an Asset Purchase and Sale Agreement (as
amended, the "Spring Valley Agreement") between the Bank and Provident. Pursuant
to the First Nationwide Agreement, the Bank paid First Nationwide a premium of
8.0% on the deposits of the Spring Valley Branch (and on the accrued interest
thereon). The Spring Valley Agreement provided for the sale of certain assets by
the Bank and the assumption of certain liabilities by Provident (the "Branch
Disposition") relating to the Spring Valley Branch. The closing under the Spring
Valley Agreement took place on March 22, 1996, whereupon Provident assumed the
deposits of the Spring Valley Branch and paid the Bank a premium of 7.05% on
such deposits (and on the accrued interest thereon). The Company believes that
the 7.05% premium paid by Provident to the Bank as compared to the 8.0% premium
paid by the Bank to First Nationwide is reasonable given the more limited
strategic importance to the Bank of the Spring Valley Branch relative to the
Acquired Branches and considering that the Spring Valley Branch has a higher
cost of funds than the Acquired Branches. The Branch Disposition will allow the
Bank to focus on its market area of Orange, Putnam and Sullivan counties in New
York.
On January 12, 1996, the First Nationwide Deposits totalled $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
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its name to MSB Bank. As a consequence of the conversion, the Company became a
savings and loan holding company subject to the regulation, examination and
supervision of the Office of Thrift Supervision (the "OTS"). Prior to the
conversion of the Bank to a federal savings bank, the Company was a bank holding
company subject to the regulation, examination and supervision of the Federal
Reserve Board ("FRB").
The Bank provides banking services to individual and corporate
customers, with its business activities concentrated in the New York counties of
Orange, Putnam and Sullivan, and the surrounding areas.
The consolidated financial statements included herein have been
prepared by the Company without audit. In the opinion of management, the
quarterly unaudited financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the consolidated
financial position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
Company believes that the disclosures are adequate to make the information
presented not misleading, however, the results for the periods presented are not
necessarily indicative of results to be expected for the entire year.
The unaudited quarterly and year to date financial statements presented
herein should be read in conjunction with the annual audited consolidated
financial statements of the Company for the fiscal year ended December 31, 1995.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, MSB Bank, and the Bank's
wholly owned subsidiaries, MSB Financial Services, Inc. and MSB Travel, Inc.
("Travel"). Significant intercompany transactions and amounts have been
eliminated. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowances for losses and real estate investments.
2. Earnings Per Share
Primary earnings per common share is calculated based upon the weighted
average common shares outstanding adjusted for common stock equivalents that
have a dilutive effect on the per share data. Earnings for the purpose of
computing primary earnings per share consists of net income for the period less
preferred stock dividends. Common stock equivalents include stock options.
During the first quarter of 1996, the Company sold 600,000 shares of its 8.75%
Cumulative Convertible Preferred Stock, Series A in the Offering. This stock is
not considered a common stock equivalent but is used in the calculation of fully
diluted earnings per share. Since the preferred stock has an antidilutive effect
on earnings per share for the quarter ended March 31, 1996, it has not been
incorporated in the calculation; fully diluted and primary earnings per share
are the same.
3. Allowance for Loan Losses
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan." Under the provisions of SFAS No. 114, 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. SFAS No. 114 requires creditors to measure impairment of a
loan 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, a
creditor shall recognize an impairment by recording a valuation allowance with a
corresponding charge to bad debt expense. This statement also applies to
restructured loans and eliminates the requirement to classify loans that are
in-substance foreclosures as foreclosed assets except for loans where the
creditor has physical possession of the underlying collateral, but not legal
title. Effective
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January 1, 1995, the Company also adopted SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures," which amends SFAS
No. 114 to allow a creditor to use existing methods for recognizing interest
income on impaired loans. SFAS No. 114 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 or fair value. As of
March 31, 1996, the total recorded investment in impaired loans was $903,000,
which consisted of $535,000 of loans that are potential problem loans and
$368,000 of loans that are in non-accrual status. In addition, the $903,000 of
impaired loans consisted of $852,000 of commercial mortgage loans that were
measured with reference to the appraised value of the collateral property and
$51,000 of commercial loans measured based on expected cash flows. At March 31,
1996, there was no allowance related to impaired loans as determined under SFAS
No. 114. Interest income recognized on impaired loans was not significant for
the quarter ended March 31, 1996.
The allowance for loan losses is increased by provision charged to
operations and decreased by charge-offs (net of recoveries). Loans are charged
off when, in the opinion of management, the recorded investment in the loan is
uncollectible. Management's periodic evaluation of the adequacy of the allowance
considers factors such as the Bank's past loan experience, known and inherent
risks in the portfolio, adverse 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:
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------------------------
1996 1995 1995
------------------ ----------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.......................... $ 1,659 $ 1,459 $ 1,459
Provision for loan losses............................... 250 53 483
LOANS CHARGED OFF
Real estate................................... 210 5 234
Other loans................................... 51 7 73
---------- ---------- ----------
Total loans charged off................................. 261 12 307
---------- ---------- ----------
RECOVERIES
Real estate................................... -- 2 2
Other loans................................... 4 2 22
---------- ---------- ----------
Total recoveries........................... 4 4 24
---------- ---------- ----------
Net charge-offs............................... 257 8 283
---------- ---------- ----------
Balance at end of period................................ $ 1,652 $ 1,504 $ 1,659
========== ========== ==========
Ratio of net charge-offs to average
net loans outstanding (annualized).................... 0.36% 0.01% 0.11%
</TABLE>
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4. Securities and Mortgage-Backed Securities
Effective January 1, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
statement generally requires that debt and equity securities that have readily
determinable fair values be carried at fair value unless they are classified as
held to maturity. Securities can be classified as held to maturity and carried
at amortized cost only if the reporting entity has a positive intent and ability
to hold those securities to maturity. If not classified as held to maturity,
such securities must be classified as trading securities or securities available
for sale. Unrealized gains or losses for securities available for sale are to be
excluded from earnings and reported as a net amount in a separate component of
stockholders' equity. Unrealized gains or losses on trading securities are
included in the determination of net income.
At March 31, 1996, market value adjustments required by SFAS No. 115
amounted to an unrealized loss of $10.3 million. The net unrealized loss of $6.2
million included as a separate component of stockholders' equity is net of
deferred taxes of $4.1 million. Management does not consider any of the
securities available for sale permanently impaired at March 31, 1996.
5. Legal Proceedings
Except as described below, the Company is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.
Early in 1995, the Superintendent of the Banks of the State of New York
(the "Superintendent") took possession of Nationar, a trust company organized
under the laws of New York and owned by 67 New York savings banks, including the
Bank. The Bank used Nationar for certain depository and collection services and
maintained at Nationar a demand deposit account with overdraft privileges. As
collateral for the overdraft privilege, the Bank executed a security agreement
with Nationar's predecessor, pledging a $1.0 million U.S. Treasury Note
("Note"), the proceeds of which are currently held by the Superintendent, and
their return is subject to the automatic stay provisions of the New York Banking
Law. The Bank has filed a proof of claim against Nationar regarding the Note and
a motion with the New York Supreme Court, which is overseeing the Nationar
liquidation, seeking relief from the automatic stay imposed by the New York
Banking Law and for release and turnover of the Note. On April 15, 1996, the New
York Supreme Court entered an order authorizing the release of the proceeds of
the Note, including interest earned thereon, to the Bank. On November 17, 1995,
five financial institutions filed objections to the duly presented proofs of
claims of shareholders, including the Bank, demanding that such claims be
subordinated to the claims of the general creditors. Thereafter, on February 16,
1996, the Superintendent filed his Preliminary Report of Findings in Response to
Objections to Certain Claims in which he recommended that the objections to the
Bank's claims be overruled. The hearing to consider and approve the
Superintendent's recommendation to overrule certain objections to claims was
held on April 16, 1996, and the New York Supreme Court approved the
Superintendent's recommendation. The five financial institutions withdrew their
objections to the Bank's claims prior to the April 16, 1996 hearing. In all
likelihood, the proceeds of the Note will be returned to the Bank during the
second quarter of 1996. Management does not believe that the failure of
Nationar, including the failure to return the Note (or its proceeds) to the
Bank, will have a material effect on the financial condition of the Company or
the Bank or will adversely affect the Company's or the Bank's liquidity.
However, if the Bank were required to write off its investment in the Note, the
Company's results of operations would be materially and adversely affected.
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
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<PAGE>
to give due consideration to proposals to acquire the Company or its assets, for
failing to maximize stockholder value and for failing to disclose all material
facts to stockholders. The plaintiff, on behalf of the purported class, seeks
unspecified money damages and an affirmative injunction directing the director
defendants to consider and negotiate all bona fide offers or proposals to
acquire the Company. On December 4, 1995, the Company filed an answer denying
all of the substantive allegations contained in the complaint and seeking, among
other things, an order dismissing the complaint with prejudice. The Company
intends to vigorously contest the allegations of wrongdoing in this action.
The Company and its directors are defendants in a lawsuit, KAHN
BROTHERS & CO., INC. ET AL. V. MSB BANCORP, INC. ET AL., commenced by
stockholders in the Delaware Court of Chancery, New Castle County, on or about
November 22, 1995. The plaintiffs, who own in excess of 5% of the outstanding
shares of the Common Stock and purport to represent a class consisting of all
stockholders except the stockholder defendants, allege that the defendant
directors breached their duty of care by failing to become fully informed about
the proposals of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to
stockholders by not 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 of the First
Nationwide Branches constitutes 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 Company
filed its amended answer on February 1, 1996 denying all of the substantive
allegations in the amended complaint and seeking, among other things, an order
dismissing the amended complaint with prejudice. The Company intends to
vigorously contest the allegations of wrongdoing in this action.
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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.
In connection with the Conversion of the Bank from a mutual savings
bank to a stock savings bank on September 3, 1992, the Company sold 1,840,000
shares of Common Stock at $10.00 per share to the public and utilized $8.4
million of the $16.9 million net proceeds from the Conversion offering to
acquire the Bank. On January 10, 1996, the Company sold 1,100,000 shares of
Common Stock at $18 per share and 600,000 shares of its Series A Preferred Stock
at $21.60 per share. On February 7, 1996 the Company sold an additional 105,000
shares of Common Stock pursuant to the underwriters' exercise of their
overallotment option. The issuance and sales of the shares of Common Stock and
Series A Preferred Stock on January 10 and February 7 are hereinafter referred
to, collectively, as the "Offering." Net proceeds from the Offering amounted to
approximately $32.1 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 table sets forth information relating to the Company's
balance sheet and statements of operations for the quarters ended March 31, 1996
and 1995 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>
FOR THE QUARTER ENDED MARCH 31,
--------------------------------
1996
--------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
--------- ---------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans, net(1) .................. $265,433 $ 5,216 7.90%
Other loans(1) .......................... 17,703 495 11.25
Mortgage-backed securities(2) ........... 319,539 5,218 6.57
Other securities(3) ..................... 89,081 1,384 6.25
Federal funds, overnight ................ 67,107 812 4.87
-------- -------- -----
Total interest-earning assets ........... 758,863 13,125 6.96
Non-interest earning assets ............... 68,236
--------
Total assets ............................ $827,099
========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts ...................... $196,854 1,442 2.95%
Super NOW accounts .................... 40,315 196 1.96
Money market accounts ................. 50,084 388 3.12
Time deposits ......................... 403,289 5,535 5.52
ESOP obligation ......................... 726 15 8.31
-------- -------- -----
Total interest-bearing
liabilities ........................... 691,268 7,576 4.41
Other liabilities ......................... 63,307
--------
Total liabilities .................... 754,575
Retained earnings ......................... 72,524
--------
Total liabilities and
retained earnings .................. $827,099
========
Net interest income/
interest rate spread(4) .................. $ 5,549 2.55%
======== ========
Net earning assets/net
interest margin(5) ....................... $ 67,595 2.94%
======== ========
Ratio of interest-earning assets
to interest-bearing liabilities........... 1.10x
FOR THE QUARTER ENDED MARCH 31,
--------------------------------
1995
--------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
--------- ---------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans, net(1) .................. $227,501 $ 4,181 7.45%
Other loans(1) .......................... 11,114 251 9.16
Mortgage-backed securities(2) ........... 49,081 683 5.64
Other securities(3) ..................... 85,401 1,191 5.66
Federal funds, overnight ................ 8,796 123 5.67
-------- -------- ----
Total interest-earning assets ........... 381,893 6,429 6.83
Non-interest earning assets ............... 20,612
--------
Total assets ............................ $402,505
========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts ...................... $136,374 1,009 3.00%
Super NOW accounts .................... 14,592 68 1.89
Money market accounts ................. 41,235 398 3.91
Time deposits ......................... 133,502 1,616 4.91
ESOP obligation ......................... 1,036 23 9.00
-------- -------- ----
Total interest-bearing
liabilities ........................... 326,739 3,114 3.87
Other liabilities ......................... 35,724
-------- -------- ----
Total liabilities ...................... 362,463
Retained earnings ......................... 40,042
--------
Total liabilities and
retained earnings .................. $402,505
========
Net interest income/
interest rate spread(4) .................. $ 3,315 2.96%
======== ====
Net earning assets/net
interest margin(5) ....................... $ 55,154 3.52%
======== ====
Ratio of interest-earning assets
to interest-bearing liabilities........... 1.17x
- - ------------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Includes mortgage-backed securities available for sale and mortgage-backed
securities held to maturity.
(3) Other securities includes securities held to maturity, securities available
for sale and trading securities.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
-11-
<PAGE>
FINANCIAL CONDITION
At March 31, 1996, total assets amounted to $863.3 million as compared to
$454.1 million at December 31, 1995. This $409.2 million increase is due to the
Acquisition. The Acquired Branches had total deposits of $414.8 million at
January 12, 1996, the closing date. As a result of the Acquisition, deposits
increased to $778.7 million at March 31, 1996 as compared to $388.9 million at
December 31, 1995. Total stockholders' equity increased $26.1 million to $70.1
million due primarily to proceeds from the Offering of $32.1 million offset by a
$6.0 million increase in the net unrealized loss on securities available for
sale.
COMPARISON OF RESULTS OF OPERATIONS
GENERAL. Net income for the first quarter of 1996 amounted to $588,000 as
compared to $600,00 for the comparable quarter in 1995.
NET INTEREST INCOME. Net interest income for the first quarter of 1996
totalled $5.5 million as compared to $3.3 million for the same quarter in 1995.
This increase is due to a $12.4 million increase in net interest earning assets
to $67.6 million during the quarter ended March 31, 1996. The Company's interest
rate spread and net interest margin were 2.55% and 2.94%, respectively, for the
first quarter of 1996 as compared to 2.96% and 3.52%, respectively, for the
first quarter of 1995. The decreases in interest rate spread and net interest
margin were due primarily to the Acquisition. The proceeds from the Acquisition
were invested in securities which, in the aggregate, yield less than the Bank's
loan portfolio. The purchases of these securities were not completed until the
last week of January, 1996 until which time they earned interest at the Federal
funds rate of 5.25%. As a result, the Company earned virtually no interest rate
spread on the Acquired Deposits during that time. In addition, 68.5% of the
Acquired Deposits were time deposits with an average cost of 5.90%. Management
expects, although there can be no assurance, that as these time deposits mature,
the cost of deposits will decrease. The time deposits outstanding at March 31,
1996 that were acquired from First Nationwide are expected to reprice as
follows: $73.2 million in the second quarter of 1996, $64.4 million in the third
quarter of 1996 and $44.9 million in the fourth quarter of 1996.
INTEREST INCOME. Interest income in the first quarter of 1996 totaled $13.1
million as compared to $6.4 million for the first quarter of 1995. Average
interest earning assets increased $377.0 million to $758.9 million in the first
quarter of 1996 as compared to $381.9 million for the same quarter of 1995. The
average yields on interest earning assets were 6.96% and 6.83% for the first
quarters of 1996 and 1995, respectively.
Interest income on mortgage loans amounted to $5.2 million for the first
quarter of 1996 as compared to $4.2 million for the first quarter of 1995. The
average balance of mortgage loans increased $37.9 million to $265.4 million for
the first quarter of 1996 as compared to $227.5 million for the first quarter of
1995, and the average yield earned increased 45 basis points to $7.90%.
The growth in the average balance of mortgage loans was due primarily to
improved demand for adjustable-rate mortgage loans ("ARMs"). The increase in the
average yield earned was due primarily to the repricing of ARMs that were
originated in 1994 and 1995 at introductory rates. These ARMs repriced to higher
rates due to the expiration of their initial lower introductory rates and due to
the increase in short-term interest rates during 1994 and the first quarter of
1995. However, the extent to which ARMs have been repricing has slowed since the
end of the first quarter of 1995.
Interest income on other loans amounted to $495,000 during the first
quarter of 1996, an increase of $244,000 from the same quarter in 1995. The
average balance of other loans during the first quarter of 1996 amounted to
$17.7 million, and the average yield on these loans was 11.25%. For the first
quarter of 1995, the average balance was $11.1 million, and the average yield
was 9.16%. The increase in the average balances is due primarily to improved
demand for commercial and consumer loans.
Interest income on mortgage-backed securities totaled $5.2 million during
the first quarter of 1996 as compared to $683,000 during the first quarter of
1995. This $4.5 million increase is due to a $270.5 million increase in the
average balance to $319.5 million. The average yield earned on mortgage-backed
securities increased 93 basis points to 6.57% in the first quarter of 1996 as
compared to the same quarter in 1995. The increase in the average balance of
mortgage-backed securities is a result of the investment of proceeds from the
Acquisition and Offering. These proceeds totaled $409.6 million.
-12-
<PAGE>
Interest income on other securities, which includes investments held to
maturity and securities available for sale, amounted to $1.4 million and $1.2
million during the first quarters of 1996 and 1995, respectively. This $193,000
or 16.2% increase is due primarily to a 59 basis point increase in the yield
earned to 6.25%. In addition, the average balance of other securities increased
$3.7 million to $89.1 million during the first quarter of 1996 as compared to
$85.4 million for the first quarter of 1995.
Interest income on Federal funds increased $689,000 to $812,000 for the
first quarter of 1996 as compared to $123,000 in the comparable quarter of 1995.
This was due to a $58.3 million increase in the average balance of Federal funds
to $67.1 million, which was offset by an 80 basis point decrease in yield to
4.87%.
INTEREST EXPENSE. Interest expense for the first quarter of 1996 totaled
$7.6 million, a $4.5 million increase over the $3.1 million in interest expense
for the comparable 1995 quarter. The average balance of interest-bearing
liabilities increased to $691.3 million during the first quarter of 1996 from
$326.7 million for the same period in 1995. The average cost of interest bearing
liabilities increased 54 basis points to 4.41%. The growth in interest-bearing
deposits is due to the Acquisition. The Acquired Deposits totaled $414.8 at
January 12, 1996, the closing date.
Interest expense on savings accounts increased $433,000 or 42.9% to $1.4
million during the quarter ended March 31, 1996 as compared to the comparable
1995 quarter. The average balance of savings accounts totaled $196.9 million as
compared to $136.4 million for the first quarter of 1995. This increase in
average balance was offset by a 5 basis point reduction in the average cost to
2.95% for the first quarter of 1996.
Interest expense on time deposits amounted to $5.5 million for the first
quarter of 1996 as compared to $1.6 million for the same period in 1995. This
increase is due to a $269.8 million increase in the average balance of time
deposits to $403.3 million for the 1996 first quarter and an increase in the
average cost of 61 basis points to 5.52%.
PROVISION FOR LOAN LOSSES. For the first quarter of 1996, the provision for
loan losses amounted to $250,000 as compared to $53,000 for the first quarter of
1995. Non-performing loans (loans that are 90 days or more past due) amounted to
$3.2 million, or 1.10% of total loans, at March 31, 1996, as compared to $3.0
million, or 1.05% of total loans, at December 31, 1995 and $1.8 million or 0.75%
of total loans, at March 31, 1995. Non-performing assets amounted to $4.2
million, or 0.49% of total assets, $3.8 million, or 0.83% of total assets, and
$2.5 million, or 0.61% of total assets, at March 31, 1996 and December 31, 1995
and 1994, respectively. The increase in the provision for loan losses is due
primarily to $210,000 in charge-offs 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.
The allowance for loan losses amounted to $1.7 million and $1.5 million at
March 31, 1996 and 1995, respectively, which represented 51.0% and 81.5% of
non-performing loans at those dates. Charge-offs, net of recoveries, totaled
$257,000 in the first quarter of 1996 as compared to $8,000 in the first quarter
of 1995.
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 amounted to $863,000 for the first
quarter of 1996 as compared to $578,000 for the same quarter in 1995. Service
charges on deposits increased $175,000 to $608,000, and service fees increased
$71,000 to $204,000 for the first quarter of 1996 as compared to the same
quarter in 1995. These increases are a result of the Acquisition. The Company
did not impose service charges on the Acquired Deposits until March 1, 1996; as
a result management expects that service fees and charges will increase in
future periods.
NON-INTEREST EXPENSE. Non-interest expense was $5.1 million for the first
quarter of 1996, compared to $2.8 million for the comparable quarter of 1995.
Salaries and employee benefits increased $627,000 to $2.0 million from the prior
year due to the addition of 67 full-time equivalent employees to staff
operations at the branches acquired from First Nationwide as well as at the
Central Valley, New York branch, which was
-13-
<PAGE>
acquired in November 1995. Occupancy and equipment expense also increased by
$177,000 to $768,000 from the prior year period due to these branch
acquisitions. Other non-interest expense increased by $1.5 million to $2.1
million, of which $742,000 was due to the amortization of goodwill related to
the Acquisition and $153,000 was due to non-recurring expenses related to the
Acquisition. In addition, the Company incurred $116,000 of increased legal
expenses related primarily to certain stockholder litigation. The Company also
incurred a $75,000 increase in losses on real estate owned due primarily to the
donation of a foreclosed property to a local municipality. In order to reduce
operating expenses, the Company intends to consolidate its two branches in Port
Jervis, New York, one of which was acquired from First Nationwide.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits and the proceeds from
principal and interest payments on loans and investments. Proceeds from
securities sales are also a source of funds. While maturities and scheduled
amortization of loans and investments are a predictable source of funds, deposit
flows, mortgage prepayments and prepayments of mortgage-backed securities are
greatly influenced by interest rates, economic conditions and competition.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term securities. The levels of these
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. The Company's ratios of cash and due from
banks, Federal funds and investment securities with remaining maturities of one
year or less to total deposits were 7.2% at March 31, 1996 and 10.5% at December
31, 1995. At March 31, 1996, cash and cash equivalents, as defined above,
totaled $56.0 million as compared to $42.6 million at December 31, 1995.
Liquidity management for the Bank is both a daily and long-term function of
the Bank's management strategy. Excess funds are generally invested in
short-term investments such as Federal funds. In the event that the Bank should
require funds beyond its ability to generate them internally, additional sources
of funds are available through lines of credit totaling $46.0 million from the
Federal Home Loan Bank of New York. In addition, the Bank may access funds, if
necessary, through the Federal Reserve Bank of New York discount window.
At March 31, 1996, the Bank had outstanding loan commitments of $35.5
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 March 31, 1996, totaled $346.5 million. Management believes that a
significant portion of such deposits will remain with the Bank.
The OTS regulations require savings associations to meet three minimum
capital standards: a tangible capital ratio requirement of 1.5% of total assets
as adjusted under the OTS regulations; a leverage ratio requirement of 3.0% of
core capital to such adjusted total assets; and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The 3.0% core capital requirement has been effectively superseded by the
OTS' prompt corrective action regulations, which impose a 4.0% core capital
requirement for treatment as an "adequately capitalized" thrift and a 5.0% core
capital requirement for treatment as a "well capitalized" thrift. In determining
the amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of assets.
The following table sets forth the capital position of the Bank as
calculated at March 31, 1996.
<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.......... $70,123 8.41% $70,123 8.41% $70,123 20.35%
Deduct goodwill........................... 35,425 4.25 35,425 4.25 35,425 10.28
Add qualifying general loan loss allowance,
as limited by regulation................ -- -- -- -- 1,714 0.50
Add unrealized loss on securities available
for sale, net of taxes.................. 6,166 0.74 6,166 0.74 6,166 1.79
------- ---- ------- ---- ------- -----
Capital, as calculated.................... 40,864 4.90 40,864 4.90 42,578 12.36
Capital, as required...................... 12,417 1.50 33,113 4.00 27,569 8.00
------- ---- ------- ---- ------- -----
Excess.................................... $28,447 3.40% $ 7,751 0.90% $15,009 4.36%
------- ---- ------- ---- ------- -----
</TABLE>
-14-
<PAGE>
The Board of Directors declared cash dividends of $0.15 per common
share on March 15, 1996 that was payable to stockholders of record on March 30,
1996. 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.
PENDING LEGISLATION REGARDING TAX BAD DEBT RESERVES
Under section 593 of the Internal Revenue Code, thrift institutions
such as the Bank, which meet certain definitional tests, primarily relating to
their assets and the nature of their business, are permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions may,
within specified limitations, be deducted in arriving at their taxable income.
The Bank's deduction with respect to "qualifying loans," which are generally
loans secured by certain interests in real property, may currently be computed
using an amount based on the Bank's actual loss experience (the "Experience
Method"), or a percentage equal to 8% of the Bank's taxable income (the "PTI
Method"), computed without regard to this deduction and with additional
modifications and reduced by the amount of any permitted addition to the
non-qualifying reserve. Similar deductions for additions to the Bank's bad debt
reserve are permitted under the New York State Bank Franchise Tax; however, for
purposes of these taxes, the effective allowable percentage under the PTI method
is 32% rather than 8%.
Under pending legislative proposals, section 593 of the Code would be
amended and the Bank, as a "large bank" (one with assets having an adjusted
basis of more than $500 million), would be unable to make additions to its tax
bad debt reserve, would be permitted to deduct bad debts only as they occur and
would additionally be required to recapture (that is, take into income) over a
multi-year period, beginning with the Bank's taxable year beginning on January
1, 1996, the excess of the balance of its bad debt reserves (other than the
supplemental reserve) as of December 31, 1995 over the balance of such reserves
as of December 31, 1987, or over a lesser amount if the Bank's loan portfolio
has decreased since December 31, 1987. However, such recapture requirements
would be suspended for each of two successive taxable years beginning January 1,
1996 in which the Bank originates a minimum amount of certain residential loans
based upon the average of the principal amounts of such loans made by the Bank
during its six taxable years preceding January 1, 1996. In addition, if section
593 of the Code is so amended, the Bank may be required for New York State tax
purposes to include in its entire net income the excess of its post-December 31,
1987 New York State reserves for losses on qualifying real property loans over
its reserve for losses on such loans maintained for federal income tax purposes
(the "Excess Reserves"). Accordingly, if the pending legislative proposals are
enacted in their present form, unless further legislation is adopted in New
York, the Bank may be required to take its Excess Reserves into income in
computing its New York State taxes for its taxable year beginning January 1,
1996. The Bank's post-December 31, 1987 bad debt reserve at December 31, 1995
was $217,000 for federal tax purposes and $937,000 for state tax purposes. If
that amount were recaptured, the Bank would incur an additional tax liability of
approximately $195,000. At this time, the Company cannot predict whether any
legislative proposal regarding amendments to the Code related to addition to or
recapture of its tax bad debt reserve will be adopted as proposed.
-15-
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 5 to the unaudited consolidated
financial statements ("Legal Proceedings") in Part I, Item 1, hereto is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
-16-
<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
May 13, 1996
-17-
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 31, 1995
- - --------------------------------------------------- ------------------------------------------------
WEIGHTED AVERAGE PER COMMON SHARE WEIGHTED AVERAGE PER SHARE
COMMON SHARES(1) AMOUNT(2) COMMON SHARES(1) AMOUNT
<S> <C> <C> <C>
2,720,314 $0.12 1,730,405 $0.35
</TABLE>
(1) Outstanding common stock equivalents (stock options), as calculated by the
treasury stock method, resulted in incremental shares of 38,862 and 64,501
for the quarters ended March 31, 1996 and 1995, respectively. At March 31,
1996, options to purchase up to 88,055 shares of common stock at $10.00 per
share are outstanding.
(2) Earnings excludes preferred stock dividends of $252,000.
-18-
<TABLE> <S> <C>
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,935
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 28,725
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 469,102
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 287,949
<ALLOWANCE> 1,652
<TOTAL-ASSETS> 863,256
<DEPOSITS> 778,742
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,730
<LONG-TERM> 661
0
6
<COMMON> 30
<OTHER-SE> 70,087
<TOTAL-LIABILITIES-AND-EQUITY> 863,256
<INTEREST-LOAN> 5,711
<INTEREST-INVEST> 6,602
<INTEREST-OTHER> 812
<INTEREST-TOTAL> 13,125
<INTEREST-DEPOSIT> 7,561
<INTEREST-EXPENSE> 7,576
<INTEREST-INCOME-NET> 5,549
<LOAN-LOSSES> 250
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 5,139
<INCOME-PRETAX> 1,023
<INCOME-PRE-EXTRAORDINARY> 1,023
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<YIELD-ACTUAL> 2.94
<LOANS-NON> 3,238
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,256
<LOANS-PROBLEM> 535
<ALLOWANCE-OPEN> 1,659
<CHARGE-OFFS> 261
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,652
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,652
</TABLE>
