MSB BANCORP INC /DE, 10-Q, 1996-08-09

MSB BANCORP INC /DE
10-Q, 1996-08-09
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 June 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 JUNE 30, 1996
----- -------------

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

<PAGE>

TABLE OF CONTENTS

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

<S> <C>
Item 1. Financial Statements

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

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

Consolidated Statements of Cash Flows (Unaudited) -- Quarters and six months ended
June 30, 1996 and 1995...................................................................................3

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

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................. 10
</TABLE>

<TABLE>
<CAPTION>
PART II -- OTHER INFORMATION
----------------------------

<S> <C>
Item 1. Legal Proceedings...................................................................................... 19

Item 2. Changes in Securities.................................................................................. 19

Item 3. Defaults upon Senior Securities........................................................................ 19

Item 4. Submission of Matters to a Vote of Security Holders.................................................... 19

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

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

Signatures...................................................................................................... 21
</TABLE>

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<PAGE>

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

ITEM 1. FINANCIAL STATEMENTS

MSB BANCORP, INC. AND SUBSIDIARY

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

<S> <C> <C>
ASSETS
Cash and due from banks................................................ $ 13,759 $ 15,862
Federal funds sold..................................................... 7,840 10,952
Securities available for sale.......................................... 57,806 75,580
Mortgage-backed securities available for sale.......................... 393,264 49,775
Loans, net............................................................. 302,521 280,512
Premises and equipment, net............................................ 15,421 12,420
Accrued interest receivable............................................ 6,053 3,219
Investments in real estate............................................. 1,044 806
Goodwill............................................................... 34,706 1,609
Other assets........................................................... 8,138 3,391
----------- -----------
Total assets..................................................... $ 840,552 $ 454,126
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits............................................................. $ 756,996 $ 388,944
Mortgagors' escrow deposits.......................................... 2,020 1,839
Accrued expenses and other liabilities............................... 11,933 18,605
ESOP obligations..................................................... 584 742
----------- -----------
Total liabilities................................................ 771,533 410,130
----------- -----------
Stockholders' Equity
Preferred stock ($.01 par value; 1,000,000 shares authorized; 600,000 shares
issued at June 30,
1996 and none issued at December 31, 1995).......................... 6 --
Common stock ($.01 par value; 5,000,000
shares authorized; 3,045,000 shares issued
at June 30, 1996 and 1,840,000 shares issued
at December 31, 1995)............................................... 30 18
Additional paid-in capital............................................ 48,304 16,198
Retained earnings..................................................... 33,180 33,110
Treasury stock, at cost (211,064 shares and 212,064 shares at
June 30, 1996 and December 31, 1995, respectively).................. (4,137) (4,157)
Unallocated ESOP stock................................................ (584) (742)
Unallocated BRP stock................................................. (237) (303)
Net unrealized loss on securities available for sale.................. (7,543) (128)
----------- -----------
Total stockholders' equity....................................... 69,019 43,996
----------- -----------
Total liabilities and stockholders' equity....................... $ 840,552 $ 454,126
=========== ===========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

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<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except shares and per share amounts)
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------
1996 1995 1996 1995
--------------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Mortgage loans.......................................... $ 5,337 $ 4,482 $ 10,553 $ 8,663
Other loans............................................. 491 306 986 557
Mortgage-backed securities.............................. 6,688 804 11,906 1,487
Securities.............................................. 1,058 1,338 2,442 2,528
Federal funds sold...................................... 166 225 978 349
---------- ---------- ---------- ----------
Total interest income............................. 13,740 7,155 26,865 13,584

INTEREST EXPENSE
Interest on deposits.................................... 7,666 3,492 15,227 6,583
Interest on borrowings.................................. -- 367 -- 367
Interest on ESOP obligation............................. 14 22 29 45
---------- ---------- ---------- ----------
Total interest expense............................ 7,680 3,881 15,256 6,995
---------- ---------- ---------- ----------
Net interest income..................................... 6,060 3,274 11,609 6,589
Provision for loan losses............................... 320 142 570 195
---------- ---------- ---------- ----------
Net interest income after provision for loan losses..... 5,740 3,132 11,039 6,394

NON-INTEREST INCOME
Service charges on deposits............................. 614 426 1,222 859
Service fees............................................ 368 117 572 250
Net realized gains (losses) on securities............... 18 (178) 17 (179)
Other non-interest income............................... 40 12 92 25
---------- ---------- ---------- ----------
1,040 377 1,903 955
NON-INTEREST EXPENSE
Salaries and employee benefits.......................... 2,138 1,339 4,178 2,752
Occupancy and equipment................................. 764 582 1,532 1,173
Federal deposit insurance premiums...................... 239 202 477 404
Other non-interest expense.............................. 2,070 667 4,163 1,300
---------- ---------- ---------- ----------
5,211 2,790 10,350 5,629
---------- ---------- ---------- ----------
Income before income taxes.............................. 1,569 719 2,592 1,720
Income tax expense...................................... 653 301 1,088 702
---------- ---------- ---------- ----------
Net income.............................................. $ 916 $ 418 $ 1,504 $ 1,018
========== ========== ========== ==========
Earnings per share ..................................... $ 0.22 $ 0.25 $ 0.35 $ 0.59
Weighted average shares outstanding..................... 2,869,563 1,695,107 2,794,939 1,713,874
========== ========== ========== ==========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

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<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

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

FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
------------- -------------

<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 1,504 $ 1,018
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on securities........................................... (17) 179
Realized gain on sale of mortgage loans................................ (71) --
Amortization of premiums/discounts on securities....................... 549 24
Proceeds from the sale of student loans................................ 496 367
Origination of mortgage loans held for sale............................ (5,267) (1,829)
Proceeds from the sale of mortgage loans............................... 6,081 1,500
Amortization of net deferred loan origination fees..................... (90) (155)
Depreciation and amortization.......................................... 615 458
Provisions for loan losses............................................. 570 195
Writedowns on real estate.............................................. 144 55
Goodwill amortization.................................................. 1,676 60
Decrease (increase) in accrued interest receivable..................... (2,834) (310)
Decrease (increase) in prepaid expenses and
other assets.......................................................... 363 2,583
Increase (decrease) in accrued expenses and
other liabilities..................................................... (6,756) (975)
Net change in Federal and State income tax
payables and receivables.............................................. 46 848
Deferred income taxes.................................................. (178) (103)
Other.................................................................. (245) (13)
---------- ----------
Net cash provided by (used in) operating activities.................. $ (3,414) $ 3,902
========== ==========

INVESTING ACTIVITIES
Net (increase) decrease in loans....................................... $ (24,272) $ (23,702)
Maturities and redemptions of debt securities.......................... 12,769 6,450
Purchases of securities available for sale............................. (25,337) (30,356)
Proceeds from the sale of securities available for sale................ 28,068 --
Proceeds from the sale of securities held to maturity.................. -- 3,000
Purchases of mortgage-backed securities available for sale............. (383,209) (18,352)
Proceeds from the sale of mortgage-backed securities
available for sale.................................................... 17,383 --
Repayments of mortgage-backed securities available for sale............ 11,636 2,514
Repayments of asset backed securities.................................. 143 403
Proceeds from the sale of real estate owned, net....................... 117 170
Purchases of property and equipment.................................... (3,745) (711)
Cash received in branch acquisition.................................... 380,299 --
---------- ----------
Net cash provided by (used in) investing activities.................. $ 13,852 $ (60,584)
========== ==========
</TABLE>

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<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

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

<S> <C> <C>
FINANCING ACTIVITIES
Net change in deposits................................................... $ (46,795) $ 13,463
Proceeds from borrowings................................................. - 43,640
Net increase (decrease) in mortgagors' escrow deposits................... 181 753
Repayment of ESOP loan................................................... (158) (99)
Proceeds from the sale of stock.......................................... 32,078 --
Payment of common stock dividends........................................ (969) (468)
Purchase of treasury stock............................................... - (1790)
Proceeds from the exercise of stock options.............................. 10 182
--------------- --------------
Net cash provided by (used in) financing activities................ $ (15,653) $ 55,681
================ ==============

Increase (decrease) in cash and cash equivalents......................... $ (5,215) $ (1,001)
Cash and cash equivalents at beginning of period......................... 26,814 22,445
--------------- --------------
Cash and cash equivalents at end of period............................... $ 21,599 $ 21,444
=============== ==============

SUPPLEMENTAL INFORMATION
Interest paid on deposits................................................ $ 15,198 $ 6,583
Income taxes paid (received)............................................. $ 1,093 $ (182)
============== ===============

Non-cash transactions:
Transfer of balances from loans receivable to real
estate owned.......................................................... $ 476 $ 498
============== ==============
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

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<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 (the "Bank") from a mutual to a stock savings bank
(the "Conversion"). Concurrent with the Conversion, the Company acquired all of
the Bank's common stock.

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

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

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

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

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<PAGE>

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

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

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

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

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

2. Earnings Per Share

Primary earnings per common share is calculated based upon the weighted
average common shares outstanding adjusted for common stock equivalents that
have a dilutive effect on the per share data. Earnings for the purpose of
computing primary earnings per share consists of net income for the period less
preferred stock dividends. Common stock equivalents include stock options.
During the first quarter of 1996, the Company sold 600,000 shares of its 8.75%
Cumulative Convertible Preferred Stock, Series A in the Offering. This stock is
not considered a common stock equivalent but is used in the calculation of fully
diluted earnings per share. Since the preferred stock has an antidilutive effect
on earnings per share for the quarter and six months ended June 30, 1996, it has
not been incorporated in the calculation; fully diluted and primary earnings per
share are the same.

3. Allowance for Loan Losses

At June 30, 1996, the total recorded investment in impaired loans was
$1.6 million, which consisted of $530,000 of loans that are potential problem
loans and $1.1 million of loans that are in non-accrual status. At June 30,
1996, all impaired loans were commercial mortgage loans that were measured with
reference to the appraised value of the collateral property. At June 30, 1996,
there was no allowance related to impaired loans as determined under SFAS No.
114. Interest income recognized on impaired loans was not significant for the
quarter and six months ended June 30, 1996.

The allowance for loan losses is increased by provision charged to
operations and decreased by charge-offs (net of recoveries). Loans are charged
off when, in the opinion of management, the recorded investment in the loan is
uncollectible. Management's periodic evaluation of the adequacy of the allowance
considers factors such as the Bank's past loan experience, known and inherent
risks in the portfolio, adverse

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<PAGE>

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 SIX MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
----------------------------- -----------------------------
1996 1995 1996 1995 1995
-------------- ------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............ $ 1,652 $ 1,504 $ 1,659 $ 1,459 $ 1,459
Provision for loan losses................. 320 142 570 195 483
LOANS CHARGED OFF
Real estate..................... 112 185 322 190 234
Other loans..................... 310 49 361 56 73
-------- -------- -------- -------- --------
Total loans charged off................... 422 234 683 246 307
-------- -------- -------- -------- --------
RECOVERIES
Real estate..................... 1 -- 1 2 2
Other loans..................... 5 5 9 7 22
-------- -------- -------- -------- --------
Total recoveries............... 6 5 10 9 24
-------- -------- -------- -------- --------
Net charge-offs................. 416 229 673 237 283
-------- -------- -------- -------- --------
Balance at end of period.................. $ 1,556 $ 1,417 $ 1,556 $ 1,417 $ 1,659
======== ======== ======== ======== ========
Ratio of net charge-offs to average
net loans outstanding (annualized)...... 0.57% 0.37% 0.47% 0.20% 0.11%
======== ======== ======= ======== ========
</TABLE>

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<PAGE>

4. Securities and Mortgage-Backed Securities

At June 30, 1996, market value adjustments required by SFAS No. 115
amounted to an unrealized loss of $12.6 million. The net unrealized loss of $7.5
million included as a separate component of stockholders' equity is net of
deferred taxes of $5.1 million. Management does not consider any of the
securities available for sale permanently impaired at June 30, 1996.

5. Legal Proceedings

Except as described below, the Company is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.

Early in 1995, the Superintendent of the Banks of the State of New York
(the "Superintendent") took possession of Nationar, a trust company organized
under the laws of New York and owned by 67 New York savings banks, including the
Bank. The Bank used Nationar for certain depository and collection services and
maintained at Nationar a demand deposit account with overdraft privileges. As
collateral for the overdraft privilege, the Bank executed a security agreement
with Nationar's predecessor, pledging a $1.0 million U.S. Treasury Note
("Note"), the proceeds of which were held by the Superintendent, and their
return was subject to the automatic stay provisions of the New York Banking Law.
The Bank filed a proof of claim against Nationar regarding the Note and a motion
with the New York Supreme Court, which is overseeing the Nationar liquidation,
seeking relief from the automatic stay imposed by the New York Banking Law and
for release and turnover of the Note. On April 15, 1996, the New York Supreme
Court entered an order authorizing the release of the proceeds of the Note,
including interest earned thereon, to the Bank. On November 17, 1995, five
financial institutions filed objections to the duly presented proofs of claims
of shareholders, including the Bank, demanding that such claims be subordinated
to the claims of the general creditors. Thereafter, on February 16, 1996, the
Superintendent filed his Preliminary Report of Findings in Response to
Objections to Certain Claims in which he recommended that the objections to the
Bank's claims be overruled. The hearing to consider and approve the
Superintendent's recommendation to overrule certain objections to claims was
held on April 16, 1996, and the New York Supreme Court approved the
Superintendent's recommendation. The five financial institutions withdrew their
objections to the Bank's claims prior to the April 16, 1996 hearing. The
proceeds of the Note, with interest, were returned to the Bank during the second
quarter of 1996.

The Company and its directors are defendants in a lawsuit, POHLI V. MSB
BANCORP, INC. ET AL., commenced by a stockholder in the Delaware Court of
Chancery, New Castle County, on or about November 7, 1995. The plaintiff,
purporting to represent a class consisting of all stockholders except the
stockholder defendants and those affiliated with the stockholder defendants,
alleges that the defendant directors have breached and continue to breach their
fiduciary duties to stockholders by, among other things, failing to give due
consideration to proposals to acquire the Company or its assets, for failing to
maximize stockholder value and for failing to disclose all material facts to
stockholders. The plaintiff, on behalf of the purported class, seeks unspecified
money damages and an affirmative injunction directing the director defendants to
consider and negotiate all bona fide offers or proposals to acquire the Company.
On December 4, 1995, the Company filed an answer denying all of the substantive
allegations contained in the complaint and seeking, among other things, an order
dismissing the complaint with prejudice. The Company intends to vigorously
contest the allegations of wrongdoing in this action.

The Company and its directors are defendants in a lawsuit, KAHN
BROTHERS & CO., INC. ET AL. V. MSB BANCORP, INC. ET AL., commenced by
stockholders in the Delaware Court of Chancery, New Castle County, on or about
November 22, 1995. The plaintiffs, who own in excess of 5% of the outstanding
shares of the Common Stock and purport to represent a class consisting of all
stockholders except the stockholder defendants, allege that the defendant
directors breached their duty of care by failing to become fully informed about
the proposals of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to
stockholders by not

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<PAGE>

notifying the public or the Company's stockholders of HUBCO's proposals; and
breached their duty of good faith and fair representation by, among other
things, not investigating whether the Acquisition constituted a reasonable
alternative for building stockholder value. The plaintiffs further allege that
the Company's offering of Common Stock in connection with the Acquisition (the
"Common Stock Offering") was not intended to enhance stockholder value, but
rather was for the purpose of diluting the ownership and voting strength of
existing stockholders and further entrenching existing management and the Board.
The plaintiffs sought to enjoin the Common Stock Offering and are also seeking
damages equal to the difference between the market price of the Common Stock on
September 7, 1995, and $35 (approximately $14,989,000 in the aggregate) or, in
the alternative, the difference between the market price of the Common Stock on
October 26, 1995, and $25 (approximately $7,394,000 in the aggregate), including
interest and attorneys' and other professional fees. In connection with this
action, plaintiffs filed a motion seeking expedited discovery and scheduling. On
December 6, 1995, in response to the plaintiffs' motion for expedited
proceedings, which was treated by the court as an application for a temporary
restraining order with respect to the Common Stock Offering, the court denied
the plaintiffs' application for such order. On December 12, 1995, the court
denied the plaintiffs' motion for reargument. On December 18, 1995, the Company
filed an answer denying all of the substantive allegations in the complaint and
seeking, among other things, an order dismissing the complaint with prejudice.
Plaintiffs amended their complaint to include allegations relating to an
unsolicited merger proposal received by the Company from the First Empire State
Corporation ("First Empire") on December 28, 1995. Specifically, the amended
complaint alleges, among other things, that the Company's Board of Directors, in
breach of its duties of care, loyalty and disclosure, relied on the advice of
Bear, Stearns & Co. Inc. ("Bear Stearns"), the Company's financial advisor and
underwriter for the Offering, knowing that Bear Stearns could not render
independent financial advice regarding the First Empire proposal. The plaintiffs
are seeking alternative damages based on these allegations in an amount equal to
the difference between the market price of the Common Stock on December 28, 1995
and $26 (approximately $11,560,000 in the aggregate). The Company filed its
amended answer on February 1, 1996 denying all of the substantive allegations in
the amended complaint and seeking, among other things, an order dismissing the
amended complaint with prejudice. The Company intends to vigorously contest the
allegations of wrongdoing in this action.

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

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

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

RESULTS OF OPERATIONS

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

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

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

-10-

<PAGE>

<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30,
1996
--------------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)....................... $ 272,255 $ 5,337 7.88%
Other loans(1)............................... 19,169 491 10.30
Mortgage-backed securities(2)................ 408,429 6,688 6.59
Other securities(3).......................... 64,855 1,058 6.56
Federal funds, overnight..................... 12,431 166 5.37
--------- --------- ---------
Total interest-earning assets................ 777,139 13,740 7.11
Non-interest earning assets.................... 69,321
---------
Total assets................................. $ 846,460
=========

LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................... 207,346 1,506 2.92
Super NOW accounts......................... 42,643 202 1.91
Money market accounts...................... 49,792 385 3.11
Time deposits.............................. 417,647 5,573 5.37
Borrowings................................. -- -- --
ESOP obligation.............................. 655 14 8.60
--------- -------------- ---------
Total interest-bearing
liabilities................................ 718,083 7,680 4.30
Other liabilities.............................. 58,700
---------
Total liabilities......................... 776,783
Retained earnings.............................. 69,677
---------
Total liabilities and
retained earnings....................... $ 846,460
=========
Net interest income/
interest rate spread(4)....................... $ 6,060 2.81%
========= =========
Net earning assets/net
interest margin(5)............................ $ 59,056 3.14%
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities............... 1.08x
=========
</TABLE>

<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30,
1995
------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)....................... $ 236,200 $ 4,482 7.61%
Other loans(1)............................... 11,986 306 10.24
Mortgage-backed securities(2)................ 59,614 804 5.41
Other securities(3).......................... 98,337 1,338 5.46
Federal funds, overnight..................... 15,040 225 6.00
--------- --------- ---------
Total interest-earning assets................ 421,177 7,155 6.81
Non-interest earning assets.................... 23,289
---------
Total assets................................. $ 444,466
=========

LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................... 130,908 975 2.89
Super NOW accounts......................... 14,482 65 1.80
Money market accounts...................... 39,686 372 3.76
Time deposits.............................. 151,694 2,080 5.50
Borrowings................................. 22,979 367 6.41
ESOP obligation.............................. 955 22 9.24
--------- --------- ---------
Total interest-bearing
liabilities................................ 360,704 3,881 4.31
Other liabilities.............................. 42,137
---------
Total liabilities......................... 402,841
Retained earnings.............................. 41,625
---------
Total liabilities and
retained earnings....................... $ 444,466
=========
Net interest income/
interest rate spread(4)....................... $ 3,274 2.50%
========= =========
Net earning assets/net
interest margin(5)............................ $ 60,473 3.12%
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities...............

1.17x
=========
</TABLE>

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

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

-11-

<PAGE>

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1996
-----------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
ASSETS:
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net(1)..................... $ 268,844 $ 10,553 7.89%
Other loans(1)............................. 18,436 986 10.76
Mortgage-backed securities(2).............. 363,984 11,906 6.58
Other securities(3)........................ 76,968 2,442 6.38
Federal funds, overnight................... 39,769 978 4.95
--------- --------- ---------
Total interest-earning assets.............. 768,001 26,865 7.04
Non-interest earning assets.................. 68,752
---------
Total assets...............................
$ 836,753
=========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts......................... 202,100 2,948 2.93
Super NOW accounts....................... 41,479 398 1.93
Money market accounts.................... 49,938 773 3.11
Time deposits............................ 410,468 11,108 5.44
Borrowings................................ -- -- --
ESOP obligation........................... 691 29 8.44
--------- --------- ---------
Total interest-bearing
liabilities.............................. 704,676 15,256 4.35
Other liabilities............................ 60,976
---------
Total liabilities....................... 765,652
Retained earnings............................ 71,101
---------
Total liabilities and
retained earnings..................... $ 836,753
=========
Net interest income/
interest rate spread(4)..................... $ 11,609 2.69%
========= =========
Net earning assets/net
interest margin(5).......................... $ 63,325 3.04%
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities............. 1.09x
=========
</TABLE>

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1995
-------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)..................... $ 231,874 $ 8,663 7.53%
Other loans(1)............................. 11,552 557 9.72
Mortgage-backed securities(2).............. 54,377 1,487 5.52
Other securities(3)........................ 91,904 2,528 5.55
Federal funds, overnight................... 11,908 349 5.91
--------- --------- ---------
Total interest-earning assets.............. 401,615 13,584 6.82
Non-interest earning assets.................. 21,996

Total assets...............................
$ 423,611
=========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts......................... 133,626 1,985 3.00
Super NOW accounts....................... 14,537 132 1.83
Money market accounts.................... 40,456 770 3.84
Time deposits............................ 142,649 3,696 5.23
Borrowings................................ 11,553 367 6.41
ESOP obligation........................... 995 45 9.12
--------- --------- ---------
Total interest-bearing
liabilities.............................. 343,816 6,995 4.10
Other liabilities............................ 38,958
---------
Total liabilities....................... 382,774
Retained earnings............................ 40,837

Total liabilities and
retained earnings..................... $ 423,661
=========
Net interest income/
interest rate spread(4)..................... $ 6,589 2.72%
========= =========
Net earning assets/net
interest margin(5).......................... $ 57,799 3.31%
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities............. 1.17x
=========
</TABLE>

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

-12-

<PAGE>

FINANCIAL CONDITION

The Company's total assets amounted to $840.6 million at June 30, 1996 as
compared to $454.1 million at December 31, 1995. Securities and mortgage-backed
securities available for sale increased by $325.7 million to $451.1 million at
June 30, 1996, and goodwill increased $33.1 million to $34.7 million at such
date. Loans, net increased $22.0 million to $302.5 million at June 30, 1996.
Deposits totaled $757.0 million at June 30, 1996 as compared to $388.9 million
at December 31, 1995. The increases in total assets, securities and
mortgage-backed securities, goodwill and deposits resulted primarily from the
Acquisition and the Offering, which closed during the first quarter of 1996. In
connection with the Acquisition, the Bank assumed approximately $414.8 million
in deposits. At the time the Company planned the Acquisition, it anticipated a
deposit run-off rate of 11.3% The Company believes that the increase in the
run-off rate is due not only to the transition but also to the disintermediation
that the industry is experiencing.

Total stockholders' equity increased to $69.0 million at June 30, 1996,
from $44.0 million at December 31, 1995, due to the net proceeds of the
Offering, offset by a $7.4 million increase in the net unrealized loss on
securities available for sale. The Bank's Tier 1 leverage capital ratio at June
30, 1996 was 5.2%, and the Company's tangible book value per share increased to
$12.19 (excluding the net unrealized losses on marketable securities) from
$11.67 at January 12, 1996, the closing date of the Acquisition.

COMPARISON OF RESULTS OF OPERATIONS

GENERAL. Net income for the second quarter of 1996 amounted to $916,000 as
compared to $418,000 for the second quarter of 1995. For the six months ended
June 30, 1996, net income amounted to $1.5 million as compared to $1.0 million
for the same period in 1995.

NET INTEREST INCOME. Net interest income for the quarter ended June 30,
1996 amounted to $6.1 million as compared to $3.3 million for the second quarter
in 1995. The increase in net interest income is due primarily to the
Acquisition. The interest rate spread increased 31 basis points to 2.81% during
the second quarter of 1996 as compared to 2.50% for the second quarter of 1995.
The Company's net interest margin was 3.14% and 3.12% for the quarters ended
June 30, 1996 and 1995, respectively.

For the six months ended June 30, 1996, net interest income amounted to
$11.6 million as compared to $6.6 million for the same period in the prior year.
The average balances of net interest-earning assets increased $5.5 million to
$63.3 million during the six months ended June 30, 1996 as compared to the six
months ended June 30, 1995. The Company's interest rate spread and net interest
margin were 2.69% and 3.04%, respectively, for the six months ended June 30,
1996 as compared to 2.72% and 3.31%, respectively, for the six months ended June
30, 1995. The decreases in interest rate spread and net interest margin were due
primarily to the Acquisition. The proceeds from the Acquisition were invested in
securities which, in the aggregate, yield less than the Bank's loan portfolio.
The purchases of these securities were not completed until the last week of
January, 1996 until which time they earned interest at the Federal funds rate of
5.25%. As a result, the Company earned virtually no interest rate spread on the
Acquired Deposits during that time. In addition, 68.5% of the Acquired Deposits
were time deposits with an average cost of 5.90%. Management expects, although
there can be no assurance, that as these time deposits mature, the cost of
deposits will decrease. The time deposits outstanding at June 30, 1996 that were
acquired from First Nationwide are expected to reprice as follows: $64.4 million
in the third quarter of 1996 and $44.9 million in the fourth quarter of 1996.

INTEREST INCOME. Interest income in the second quarter of 1996 totaled
$13.7 million as compared to $7.2 million for the second quarter of 1995.
Average interest-earning assets increased $356.0 million to $777.1 million in
the second quarter of 1996 as compared to the second quarter of 1995. The
average yields on interest-earning assets were 7.11% and 6.81% for the quarters
ended June 30, 1996 and 1995, respectively.

For the six months ended June 30, 1996, interest income amounted to $26.9
million as compared to $13.6 million for the same period in 1995. Average
interest-earning assets increased $366.4 million to $768.0 million for the six
months ended June 30, 1996, and the average yield earned increased 22 basis
points to 7.04% as compared to the six months ended June 30, 1995.

Interest income on mortgage loans amounted to $5.3 million during the
second quarter of 1996 as compared to $4.5 million for the second quarter of
1995, an increase of $855,000 or 19.1%. The average

-13-

<PAGE>

balance of mortgage loans increased $36.1 million or 15.3% to $272.3 million in
the second quarter of 1996 as compared to $236.2 million for the second quarter
of 1995. The average yields earned on mortgage loans were 7.88% and 7.61% for
the second quarters of 1996 and 1995, respectively.

For the six months ended June 30, 1996, interest income on mortgage loans
totaled $10.6 million as compared to $8.7 for the same period in 1995. The
average balance of mortgage loans increased to $268.8 million for the six months
ended June 30, 1996 as compared to $231.9 million for the same period in 1995.
The average yield earned on mortgage loans for the six months ended June 30,
1996 was 7.89% as compared to 7.53% for the same period in 1995.

The growth in the average balance of mortgage loans was due primarily to
improved demand for adjustable-rate mortgage loans ("ARMs"). The increase in the
average yield earned was due primarily to the repricing of ARMs that were
originated in 1994 and 1995 at introductory rates. These ARMs repriced to higher
rates due to the expiration of their initial lower introductory rates and due to
the increase in short-term interest rates during 1994 and the first quarter of
1995. However, the extent to which ARMs have been repricing has slowed since the
end of the first quarter of 1995.

Interest income on other loans increased $185,000 or 60.5% to $491,000
during the second quarter of 1996 as compared to $306,000 for the second quarter
of 1995. The average balance of other loans increased $7.2 million or 59.9% to
$19.2 million for the second quarter of 1996, and the yield earned on those
loans increased 6 basis points to 10.30%.

For the six months ended June 30, 1996, interest income on other loans
totaled $986,000 as compared to $557,000 for the same period in 1995. The
average balance of other loans increased $6.9 million to $18.4 million as
compared to $11.6 million for the six months ended June 30, 1995. The average
yield on other loans increased 104 basis points to 10.76% for the six months
ended June 30, 1996 as compared to 9.72% for the same period in 1995. The
increase in the average balances of other loans is due to improved demand for
consumer loans and management's strategy to increase the commercial loan
portfolio in order to increase the Company's interest rate spread.

Interest income on mortgage-backed securities totaled $6.7 million for the
second quarter of 1996, an increase of $5.9 million over the $804,000 earned in
the second quarter of 1995. This increase is due primarily to a $348.8 million
increase in the average balance of mortgage-backed securities to $408.4 million.
In addition, the average yield earned on mortgage-backed securities increased
118 basis points to 6.59% during the second quarter of 1996 as compared to the
same period in 1995.

For the six months ended June 30, 1996, interest income on mortgage-backed
securities totaled $11.9 million as compared to $1.5 million for the six months
ended June 30, 1995. For these same periods, the average balances and yields
earned were $364.0 million and 6.58%, respectively, and $54.4 million and 5.52%,
respectively.

The increases in the average balances of mortgage-backed securities during
1996 are a result of the investment of proceeds from the Acquisition and
Offering, which totaled $409.6 million.

Interest income on other securities amounted to $1.1 million during the
second quarter of 1996, a decrease of $280,000 or 20.9% from the $1.3 million
earned during the second quarter of 1995. This decrease is due primarily to a
$33.5 million decrease in the average balance of other securities to $64.9
million during the second quarter of 1996 as compared to the same period in
1995. The yield earned on other securities increased 110 basis points to 6.56%
in the second quarter of 1996 as compared to 5.46% for the same quarter in 1995.

For the six months ended June 30, 1996, interest income on other securities
totaled $2.4 million as compared to $2.5 million for the same period in the
prior year. The average balance of other securities decreased $14.9 million or
16.3% to $77.0 million during the six months ended June 30, 1996 as compared to
$91.9 million for the comparable period in the prior year. For these same
periods, the yields earned on other securities increased 83 basis points to
6.38%.

-14-

<PAGE>

The decreases in the average balances of other securities is a result of
management's strategy to redeploy funds currently invested in securities into
the loan portfolio. Loans typically provide the Company with greater yields than
securities.

INTEREST EXPENSE. Interest expense for the second quarter of 1996 totaled
$7.7 million as compared to $3.9 million for the second quarter of 1995. The
average balance of interest-bearing liabilities amounted to $718.1 million as
compared to $360.7 million for the same quarter in 1995. The average cost of
these interest-bearing liabilities remained virtually unchanged for those
periods.

For the six months ended June 30, 1996, interest expense amounted to $15.3
million as compared to $7.0 million for the same period in 1995. Average
interest-bearing liabilities totaled $704.7 million during the 1996 period,
representing a $360.9 million increase over average interest-bearing liabilities
of $343.8 million for the six months ended June 30, 1995. The average cost of
these interest-bearing liabilities was 4.35% in the six months ended June 30,
1996 as compared to 4.10% for the same period in 1995.

The growth in interest-bearing liabilities is a result of the Acquisition.
The Acquired Deposits totaled $414.8 million at January 12, 1996, the closing
date.

Interest expense on savings accounts amounted to $1.5 million for the
second quarter of 1996 as compared to $975,000 for the same quarter in 1995. The
average balance of savings accounts increased $76.4 million or 58.4% to $207.3
million during the second quarter of 1996 as compared to $130.9 million for the
comparable period in 1995. The average cost of savings accounts for those same
periods increased 3 basis points to 2.92% for the second quarter of 1996 as
compared to 2.89% for the second quarter of 1995.

For the six months ended June 30, 1996, interest expense on savings
accounts totaled $2.9 million as compared to $2.0 million for the same period in
1995. During the six months ended June 30, 1996, the average balance of savings
accounts amounted to $202.1 million as compared to $133.6 million for the same
period in 1995. The average costs of these deposits were 2.93% and 3.00% during
the six months ended June 30, 1996 and 1995, respectively.

Interest expense on time deposits amounted to $5.6 million during the
second quarter of 1996 and $2.1 million for the second quarter of 1995. The
average balance of time deposits increased $266.0 million to $417.6 million in
the second quarter of 1996 as compared to $151.7 million for the second quarter
of 1995. The increase in the average balance was partially offset by a 13 basis
point decrease in the average cost of time deposits to 5.37%

For the six months ended June 30, 1996, interest expense on time deposits
amounted to $11.1 million as compared to $3.7 million for the same period in the
prior year. This increase in interest expense was due primarily to a $267.8
million increase in the average balance of time deposits to $410.5 million. In
addition, the average rate paid on time deposits increased 21 basis points to
5.44% during the six months ended June 30, 1996 as compared to an average rate
of 5.23% for the same period in 1995.

PROVISION FOR LOAN LOSSES. The provision for loan losses amounted to
$320,000 for the second quarter of 1996 as compared to $142,000 for the second
quarter of 1995. This increase is due primarily to an increase in net
charge-offs to $416,000 for the second quarter of 1996 as compared to $229,000
for the same quarter in 1995 and also due to increases in the size of the loan
portfolio. The increase in net charge-offs is primarily related to a $275,000
unsecured commercial loan that was fully charged off in the second quarter of
1996. Non-performing loans (loans that are 90 days or more past due) amounted to
$3.5 million or 1.16% of total loans at June 30, 1996 as compared to $3.0
million or 1.05% of total loans at December 31, 1995 and $2.1 million or 0.83%
of total loans at June 30, 1995. Non-performing assets totaled $4.6 million or
0.54% of total assets, $3.8 million or 0.83% of total assets and $3.2 million or
0.69% of total assets at June 30, 1996, December 31, 1995 and June 30, 1995,
respectively. The allowance for loan losses amounted to $1.6 million and $1.4
million at June 30, 1996 and 1995, respectively. At December 31, 1995, the
allowance for loan losses amounted to $1.7 million.

For the six months ended June 30, 1996, the provision for loan losses
amounted to $570,000 as compared to $195,000 for the same period in 1995. Net
charge-offs totaled $673,000 for the six months ended June 30, 1996 as compared
to $237,000 for the same period in 1995. The increase in net charge-offs is due
to the $275,000 commercial loan charged off in the second quarter of 1996 and
also due to $210,000 in net charge-

-15-

<PAGE>

offs in the first quarter of 1996 related to certain non-performing mortgage
loans with respect to which the Bank decided, based on the condition of the
underlying properties and other factors, not to pursue foreclosure proceedings.

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

NON-INTEREST INCOME. Non-interest income increased $663,000 to $1.0 million
for the second quarter of 1996 as compared to $377,000 for the same quarter in
1995. Services charges on deposits increased to $614,000 in the second quarter
of 1996 from $426,000 for the same period in 1995. Service fees increased
$251,000 from the second quarter of 1995 to $368,000 for the second quarter of
1996. These increases are primarily a result of the Acquisition. Net realized
gains on securities amounted to $18,000 for the second quarter of 1996 as
compared to a net loss of $178,000 for the same period in 1995.

For the six months ended June 30, 1996, non-interest income amounted to
$1.9 million as compared to $955,000 for the same period in 1995. Service
charges on deposits increased $363,000 or 42.3% to $1.2 million for the six
months ended June 30, 1996 as compared to $859,000 for the same period in 1995.
Service fees increased $322,000 to $572,000 for the six months ended June 30,
1996 as compared to $250,000 for the same period in 1995. Net realized
securities gains increased to $17,000 for the six months ended June 30, 1996
from a net loss of $179,000 for the same period in 1995. MSB waived service
charges on the Acquired Deposits until March 1, 1996. In addition, MSB has
waived $90,000 of additional service charges in limited circumstances for
certain of the Acquired Deposits since March 1, 1996 for various reasons related
to the transition of accounts of First Nationwide to MSB. Although this has
resulted in decreased fee income, management believes that waiving these service
charges was important for customer retention.

NON-INTEREST EXPENSE. Non-interest expense was $5.2 million for the second
quarter of 1996, compared to $2.8 million for the same quarter in 1995. The
second quarter of 1996 was the first full quarter to include the operating
expenses of the Acquired Branches. Salaries and employee benefits increased
$799,000 during the second quarter of 1996 to $2.1 million as MSB added 69
full-time equivalent employees for the Acquired Branches, the Central Valley
Branch, which was acquired in November, 1995 and MSB Travel. Occupancy and
equipment amounted to $764,000 for the second quarter of 1996 as compared to
$582,000 for the comparable quarter in the prior year. Other non-interest
expenses amounted to $2.1 million for the second quarter of 1996 as compared to
$667,000 for the same period in 1995. This increase is due primarily to an
$892,000 increase in goodwill amortization related to the Acquisition, $72,000
of non-recurring expenses related to the Acquisition, a $99,500 increase in
printing, paper and ATM card production costs and the operating expenses of the
Acquired Branches.

For the six months ended June 30, 1996, total non-interest expense amounted
to $10.4 million as compared to $5.6 million for the same period in 1995. For
those same periods, salaries and employee benefits increased $1.4 million to
$4.2 million, occupancy and equipment increased $359,000 to $1.5 million and
other non-interest expense increased $2.9 million to $4.2 million. Other
non-interest expense for the six months ended June 30, 1996 included $225,000 of
non-recurring expenses related to the Acquisition. In addition, legal expenses
increased $114,000 to $240,000 related primarily to stockholder matters; losses
on foreclosed real estate increased $89,000 to $144,000; and printing, paper and
ATM card production costs increased $187,000 to $317,000.

INCOME TAX EXPENSE. For the second quarter of 1996, income tax expense
amounted to $653,000 as compared to $301,000 for the same period in 1995. The
effective income tax rates for the second quarters of 1996 and 1995 were 41.6%
and 41.8%, respectively. For the six months ended June 30, 1996, income tax
expense was $1.1 million as compared to $702,000 for the same period in 1995.
The effective income tax rates for the six months ended June 30, 1996 and 1995
were 42.0% and 40.8%, respectively.

-16-

<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 Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term securities. The levels of these
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. The Company's ratios of cash and due from
banks, Federal funds and investment securities with remaining maturities of one
year or less to total deposits were 4.0% at June 30, 1996 and 10.5% at December
31, 1995. At June 30, 1996, cash and cash equivalents, as defined above, totaled
$30.4 million as compared to $42.6 million at December 31, 1995.

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

At June 30, 1996, the Bank had outstanding loan commitments of $43.7
million. The Bank anticipates that it will have sufficient funds available to
meet its current loan commitments. Time deposits scheduled to mature in one year
or less from June 30, 1996, totaled $328.1 million. Management believes that a
significant portion of such deposits will remain with the Bank.

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

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

<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....... $ 69,377 8.5% $ 69,377 8.5% $ 69,377 20.3%
Deduct goodwill........................ 34,706 4.2 34,706 4.2 34,706 10.2
Add qualifying general loan loss
allowance, as limited by regulation.. -- -- -- -- 1,556 0.5
Add unrealized loss on securities
available for sale, net of taxes..... 7,543 0.9 7,543 0.9 7,543 2.2
-------- --------- --------- --------- --------- ---------
Capital, as calculated................. 42,214 5.2 42,214 5.2 43,770 12.8
Capital, as required................... 12,086 1.5 32,231 4.0 27,359 8.0
--------- --------- --------- --------- --------- ---------
Excess................................. $ 30,128 3.7% $ 9,983 1.2% $ 16,411 4.8%
========= ========= ========= ========= ========= =========
</TABLE>

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

-17-

<PAGE>

PROPOSED LEGISLATION ON DEPOSIT INSURANCE

During the quarter ended June 30, 1996, representatives of the federal
banking agencies and other interested parties continued to work for legislative
action to recapitalize the Savings Association Insurance Fund ("SAIF") and to
resolve the disparity between the deposit insurance assessments paid by
institutions insured under the SAIF and those insured under the Bank Insurance
Fund ("BIF"). The deposits of the Bank are insured by the BIF except for those
attributable to the Bank's acquisition of deposits from SAIF-insured
institutions, including First Nationwide. The various legislative proposals
discussed by the Congress have generally followed the features of the
recapitalization legislation that were part of the Balanced Budget Act of 1995,
which was vetoed by the President for reasons unrelated to the SAIF
recapitalization. A continuing feature of the legislative proposals is a special
one-time SAIF assessment to be paid with respect to deposits subject to SAIF
assessments. Estimates of the special assessment have ranged from 80 to 90 basis
points on such SAIF-assessable deposits as of March 31, 1995. For the Company,
an 80 basis point special assessment on its SAIF-assessable deposits as of March
31, 1995 and on the deposits acquired from First Nationwide (for which the Bank
assumed the liability for the special SAIF assessment as part of the acquisition
cost), would be approximately $4.0 million (before giving effect to any tax
benefits). Various holding companies with SAIFinsured institutions are
continuing to implement plans to establish BIF-insured subsidiaries in order to
facilitate the migration of deposits from its SAIF-insured subsidiaries to its
BIF-insured institutions, and the federal regulators have begun to approve such
BIF-insured subsidiaries. In the absence of a legislative recapitalization of
the SAIF, any significant reduction in SAIFassessable deposits could result in
an increase of the SAIF assessment rates.

At this time, the Company cannot predict whether any legislative
proposal to recapitalize the SAIF and to resolve the BIF-SAIF assessment
disparity will be adopted or, if so, in what form. Until such time as such
legislation is adopted, it is expected that the Company will continue to pay
deposit insurance assessments for its SAIF-assessable deposits at rates
substantially in excess of the rates assessed a comparably rated institution on
its BIF-assessable deposits.

LEGISLATION REGARDING TAX BAD DEBT RESERVES

Under section 593 of the Internal Revenue Code, thrift institutions
such as the Bank, which meet certain definitional tests, primarily relating to
their assets and the nature of their business, are permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions may,
within specified limitations, be deducted in arriving at their taxable income.
The Bank's deduction with respect to "qualifying loans," which are generally
loans secured by certain interests in real property, may currently be computed
using an amount based on the Bank's actual loss experience (the "Experience
Method"), or a percentage equal to 8% of the Bank's taxable income (the "PTI
Method"), computed without regard to this deduction and with additional
modifications and reduced by the amount of any permitted addition to the
non-qualifying reserve. Similar deductions for additions to the Bank's bad debt
reserve are permitted under the New York State Bank Franchise Tax; however, for
purposes of these taxes, the effective allowable percentage under the PTI Method
is 32% rather than 8%.

Under the Small Business Job Protection Act of 1996 (the "1996 Act"),
as passed by the House and Senate on August 2, 1996, section 593 of the Code
would be amended and the Bank, as a "large bank" (one with assets having an
adjusted basis of more than $500 million), would be unable to make additions to
its tax bad debt reserve. The bank would be permitted to deduct bad debts only
as they occur and would additionally be required to recapture (that is, take
into income) over a multi-year period, beginning with the Bank's taxable year
beginning on January 1, 1996, the excess of the balance of its bad debt reserves
(other than the supplemental reserve) as of December 31, 1995 over the balance
of such reserves as of December 31, 1987, or over a lesser amount if the Bank's
loan portfolio has decreased since December 31, 1987. However, such recapture
requirements would be suspended for each of two successive taxable years
beginning January 1, 1996 in which the Bank originates a minimum amount of
certain residential loans based upon the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding January 1,
1996. The Bank's post-December 31, 1987 bad debt reserve at December 31, 1995
was $217,000. It is anticipated that the President will sign the 1996 Act in the
near future, in which case the Bank would incur an additional tax liability of
approximately $195,000. The New York State tax law has been amended to prevent a
similar recapture of the Bank's bad debt reserve, and to permit continued future
use of the bad debt reserve methods, for purposes of determining the Bank's New
York State tax liability.

-18-

<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

The Company held its Annual Meeting of Stockholders (the "Meeting") on
May 23, 1996. The purpose of the meeting was to vote on the following proposals:

1. The election of three directors for terms of three years each;

2. The amendment of the Company's Certificate of Incorporation to
eliminate the provisions that prohibit record owners of the
Company's common stock who beneficially own in excess of 10% of
the outstanding shares of common stock (the "Limit") from voting
any shares of common stock in excess of the Limit;

3. The ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company for the year ending December
31, 1996; and

4. A stockholder proposal, if introduced at the Meeting.

With respect to Proposal 1, all of the directors nominated by the Company were
elected at the Meeting. In addition, Proposal 3 was approved at the Meeting.
However, Proposals 2 and 4 were not approved. The voting results for the
Proposals were as follows:

Proposal 1: Ralph W. Decker For 2,133,811
Against 327,365

John L. Krause For 2,134,311
Against 326,865

Frederick B. Wildfoerster, Jr. For 2,132,457
Against 328,719

Broker Non-Votes: None

Proposal 2: For 1,492,371
Against 275,227
Abstain 26,212

Broker Non-Votes: 667,366

Proposal 2 required an affirmative vote of at least 80% of the
Company's outstanding Common Stock on April 1, 1996.
Accordingly, this proposal was defeated.

-19-

<PAGE>

Proposal 3: For 2,276,701
Against 76,700
Abstain 107,775

Broker Non-Votes: None

Proposal 4: For 578,095
Against 1,041,305
Abstain 109,422

Broker Non-Votes: 732,354

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

(B) Reports on Form 8-K
None

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

-20-

<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

August 9, 1996

-21-

EXHIBIT 11

COMPUTATION OF NET INCOME PER SHARE

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

Net income............................... $ 916,000 $ 418,000

Preferred stock dividends................ 283,500 --
----------- -----------

Net income applicable to common stock.... 632,500 418,000

Weighted average common shares........... 2,869,563 1,695,107
----------- -----------

Earnings per common share................ $ 0.22 $ 0.25
=========== ===========

FOR THE SIX MONTHS ENDED
------------------------
JUNE 30, 1996 JUNE 30, 1995
------------- -------------

Net income.............................. $ 1,504,000 $ 1,018,000

Preferred stock dividends............... 535,500 --
-------------- --------------

Net income applicable to common stock... $ 968,500 $ 1,018,000

Weighted average common shares.......... 2,794,839 1,713,874
-------------- --------------

Earnings per common share............... $ 0.35 $ 0.59
============== ==============

-22-

<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> JUN-30-1996
<CASH> 13,759
<INT-BEARING-DEPOSITS> 7,840
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 451,070
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 304,078
<ALLOWANCE> 1,557
<TOTAL-ASSETS> 840,552
<DEPOSITS> 756,996
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,953
<LONG-TERM> 584
<COMMON> 30
0
6
<OTHER-SE> 68,983
<TOTAL-LIABILITIES-AND-EQUITY> 840,552
<INTEREST-LOAN> 11,539
<INTEREST-INVEST> 14,348
<INTEREST-OTHER> 978
<INTEREST-TOTAL> 26,865
<INTEREST-DEPOSIT> 15,227
<INTEREST-EXPENSE> 15,256
<INTEREST-INCOME-NET> 11,609
<LOAN-LOSSES> 570
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 10,350
<INCOME-PRETAX> 2,592
<INCOME-PRE-EXTRAORDINARY> 2,592
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,504
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 3.03
<LOANS-NON> 3,521
<LOANS-PAST> 0
<LOANS-TROUBLED> 694
<LOANS-PROBLEM> 530
<ALLOWANCE-OPEN> 1,659
<CHARGE-OFFS> 683
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 1,556
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,556

</TABLE>