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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, 1997
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 June 30, 1997
------- --------------
Common Stock, 2,844,153
par value $.01
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<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -- June 30, 1997
and December 31, 1996..................................................1
Consolidated Statements of Income (Unaudited) -- Quarter and Six
Months ended June 30, 1997 and 1996....................................2
Consolidated Statements of Cash Flows (Unaudited) --Six Months
ended June 30, 1997 and 1996...........................................3
Notes to Unaudited Consolidated Financial Statements...................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.....................................................18
PART II -- OTHER INFORMATION
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
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Item 1. Financial Statements
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except shares and per share amounts)
June 30, December 31,
1997 1996
---------- ------------
ASSETS
Cash and due from banks ............................ $ 19,840 $ 16,375
Federal funds sold ................................. 28,535 32,590
Securities available for sale ...................... 54,547 50,685
Mortgage-backed securities available for sale ...... 294,179 323,428
Loans, net ......................................... 355,683 338,491
Premises and equipment, net ........................ 14,491 14,869
Accrued interest receivable ........................ 5,388 5,552
Real estate owned .................................. 1,710 915
Goodwill ........................................... 30,645 32,835
Other assets ....................................... 8,884 5,176
--------- ---------
Total assets ................................. $ 813,902 $ 820,916
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits ................................... 720,741 736,161
Mortgagors' escrow deposits ...................... 2,544 1,849
Accrued expenses and other liabilities ........... 17,736 11,684
ESOP obligations ................................. 280 432
--------- ---------
Total liabilities ................................ 741,301 750,126
--------- ---------
Stockholders' Equity
Preferred stock ($.01 par value; 1,000,000
shares authorized; 600,000 shares issued
at June 30, 1997 and December 31, 1996) ........ 6 6
Common stock ($.01 par value; 5,000,000
shares authorized; 3,045,000 shares issued
at June 30, 1997 and December 31, 1996) ........ 30 30
Additional paid-in capital ...................... 48,059 48,163
Retained earnings ............................... 32,644 32,009
Treasury stock, at cost (200,847 shares and
211,064 shares at June 30, 1997 and December
31, 1996, respectively) ........................ (3,941) (4,137)
Unallocated ESOP stock .......................... (280) (432)
Unallocated BRP stock ........................... (107) (172)
Net unrealized loss on securities
available for sale ............................. (3,810) (4,677)
--------- ---------
Total stockholders' equity ................. 72,601 70,790
--------- ---------
Total liabilities and stockholders'
equity .................................... $ 813,902 $ 820,916
========= =========
See accompanying notes to the unaudited consolidated financial statements.
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MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except shares and per share amounts)
For the Quarter Ended
June 30,
----------------------
1997 1996
---- ----
INTEREST INCOME
Mortgage loans .............................. $ 6,553 $ 5,337
Other loans ................................. 665 491
Mortgage-backed securities .................. 5,101 6,688
Securities .................................. 858 1,058
Federal funds sold .......................... 520 166
---------- ----------
Total interest income ................. 13,697 13,740
INTEREST EXPENSE
Interest on deposits ........................ 7,462 7,666
Interest on ESOP obligation ................. 7 14
---------- ----------
Total interest expense ................ 7,469 7,680
---------- ----------
Net interest income ......................... 6,228 6,060
Provision for loan losses ................... 275 320
---------- ----------
Net interest income after provision
for loan losses 5,953 5,740
NON-INTEREST INCOME
Service fees ................................ 1,004 982
Net realized gains on sales of securities and
mortgage loans ........................... 47 41
Other non-interest income ................... 32 17
---------- ----------
1,083 1,040
NON-INTEREST EXPENSE
Salaries and employee benefits .............. 2,251 2,138
Occupancy and equipment ..................... 772 764
Federal deposit insurance premiums .......... 71 239
Goodwill amortization ....................... 918 921
Other non-interest expense .................. 1,208 1,149
---------- ----------
5,220 5,211
---------- ----------
Income before income taxes .................. 1,816 1,569
Income tax expense .......................... 731 653
---------- ----------
Net income .................................. $ 1,085 $ 916
========== ==========
Earnings per share .......................... $ 0.28 $ 0.22
Weighted average shares outstanding ......... 2,873,925 2,869,563
========== ==========
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For the Six Months Ended
June 30,
------------------------
1997 1996
---- ----
INTEREST INCOME
Mortgage loans .............................. 13,059 $ 10,553
Other loans ................................. 1,228 986
Mortgage-backed securities .................. 10,370 11,906
Securities .................................. 1,696 2,442
Federal funds sold .......................... 870 978
---------- ----------
Total interest income ................. 27,223 26,865
INTEREST EXPENSE
Interest on deposits ........................ 14,899 15,227
Interest on ESOP obligation ................. 16 29
---------- ----------
Total interest expense ................ 14,915 15,256
---------- ----------
Net interest income ......................... 12,308 11,609
Provision for loan losses ................... 575 570
---------- ----------
Net interest income after provision
for loan losses 11,733 11,039
NON-INTEREST INCOME
Service fees ................................ 1,899 1,794
Net realized gains on sales of securities and
mortgage loans ........................... 94 88
Other non-interest income ................... 47 21
---------- ----------
2,040 1,903
NON-INTEREST EXPENSE
Salaries and employee benefits .............. 4,391 4,178
Occupancy and equipment ..................... 1,590 1,532
Federal deposit insurance premiums .......... 153 477
Goodwill amortization ....................... 1,842 1,676
Other non-interest expense .................. 2,422 2,487
---------- ----------
10,398 10,350
---------- ----------
Income before income taxes .................. 3,375 2,592
Income tax expense .......................... 1,333 1,088
---------- ----------
Net income .................................. $ 2,042 $ 1,504
========== ==========
Earnings per share .......................... $ 0.51 $ 0.35
Weighted average shares outstanding ......... 2,873,961 2,794,939
========== ==========
See accompanying notes to the unaudited consolidated financial statements.
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MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
June 30,
-----------------------------
1997 1996
------------- ------------
OPERATING ACTIVITIES
Net Income .................................... $ 2,042 $ 1,504
Adjustments to reconcile net income
to net cash provided by operating
activities:
Realized gain on sale of mortgage loans ....... (94) (88)
Amortization of premiums/discounts
on securities ............................... 518 549
Proceeds from the sale of student loans ....... 560 496
Origination of mortgage loans held
for sale .................................... (6,809) (5,267)
Proceeds from the sale of mortgage loans ...... 7,042 6,081
Amortization of net deferred loan
origination fees ............................ (87) (90)
Depreciation and amortization ................. 637 615
Provisions for loan losses .................... 575 570
Write-downs on real estate .................... 36 144
Goodwill amortization ......................... 1,842 1,676
Decrease (increase) in accrued interest
receivable .................................. 125 (2,834)
Decrease (increase) in prepaid expenses
and other assets ............................ (3,019) 363
Increase (decrease) in accrued expenses
and other liabilities ........................ 5,110 (6,756)
Net change in Federal and State income
tax payables and receivables ................. 291 46
Deferred income taxes ......................... (124) (178)
Other ......................................... 174 (245)
---------- ----------
Net cash provided by (used in)
operating activities ....................... $ 8,819 $ (3,414)
========== ==========
INVESTING ACTIVITIES
Net (increase) decrease in loans ............ (20,002) (24,272)
Maturities and redemptions of debt
securities ................................ -- 12,769
Purchases of securities available
for sale .................................. (3,638) (25,337)
Proceeds from the sale of securities
available for sale ........................ -- 28,068
Purchases of mortgage-backed securities
available for sale ........................ (19,346) (383,209)
Proceeds from the sale of mortgage-
backed securities available for sale ...... 38,085 17,383
Repayments of mortgage-backed securities
available for sale ........................ 11,277 11,636
Repayments of asset backed securities ....... -- 143
Proceeds from the sale of real estate
owned, net ................................ 651 117
Purchases of property and equipment ......... (243) (3,745)
Cash received in branch acquisition ......... -- 380,299
---------- ----------
Net cash provided by (used in)
investing activities ..................... $ 6,784 $ 13,852
========== ==========
See accompanying notes to the unaudited consolidated financial statements.
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MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
Ended June 30,
-------------------------
1997 1996
---------- ---------
FINANCING ACTIVITIES
Net change in deposits ...................... $ (15,420) $ (46,795)
Net increase (decrease) in
mortgagors' escrow deposits .............. 695 181
Repayment of ESOP loan ...................... (152) (158)
Proceeds from the sale of stock ............. -- 32,078
Payment of common stock dividends ........... (1,418) (969)
Proceeds from the exercise of stock options . 102 10
---------- ----------
Net cash provided by (used in)
financing activities ................ $ (16,193) $ (15,653)
---------- ----------
Increase (decrease) in cash and cash
equivalents .............................. $ (590) $ (5,215)
Cash and cash equivalents at beginning
of period ................................ $ 48,965 $ 26,814
---------- ----------
Cash and cash equivalents at end of
period ................................... $ 48,375 $ 21,599
========== ==========
SUPPLEMENTAL INFORMATION
Interest paid on savings deposits ........... $ 14,887 $ 15,198
Income taxes paid (received) ................ 1,088 1,093
Non-cash transactions:
Transfer of balances from loans
receivable to real estate owned .......... $ 1,550 $ 476
========== ==========
See accompanying notes to the unaudited consolidated financial statements.
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MSB Bancorp, Inc. and Subsidiaries
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 over-allotment option. The issuance and sale of the shares of Common
Stock and Preferred Stock on January 10 and February 7 are hereinafter
collectively referred to as the "Offering." 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 (the "Acquisition") of seven
("Acquired Branches") 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.
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 its name to MSB Bank.
The Company is 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
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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, 1996.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, MSB Bank and MSB Travel, Inc.,
and the Bank's wholly owned subsidiary, MSB Financial Services, Inc. Significant
inter-company transactions and amounts have been eliminated. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowances for losses and
real estate investments.
2. Earnings Per Share
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
dividends on preferred stock. 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 anti-dilutive
effect on earnings per share for the quarters and six month periods ended June
30, 1997 and 1996, it has not been incorporated in the calculation; fully
diluted and primary earnings per share are the same.
3. Allowance for Loan Losses
The allowance for loan losses is increased by provision charged to
operations and decreased by charge-offs (net of recoveries). Loans are charged
off when, in the opinion of management, the recorded investment in the loan is
uncollectible. Management's periodic evaluation of the adequacy of the allowance
considers factors such as the Bank's past loan experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers'
ability to repay, estimated value of any underlying collateral and current and
prospective economic conditions. Management believes that the allowance for loan
losses is adequate. While management estimates loan losses using the best
available information, such as independent appraisals for significant collateral
properties, no assurance can be made that future adjustments to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans,
identification of additional problem loans and other factors, both within and
outside of management's control.
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<PAGE>
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Quarter Ended
June 30,
------------------------
1997 1996
----------- -----------
(Dollars in thousands)
Balance at beginning of period ................ $ 2,074 $ 1,652
Provision for loan losses ..................... 275 320
LOANS CHARGED OFF
Real estate ............................... 173 112
Other loans ............................... 84 310
---------- ----------
Total loans charged off ....................... 257 422
---------- ----------
RECOVERIES
Real estate ............................... 142 1
Other loans ............................... 4 5
---------- ----------
Total recoveries .......................... 146 6
---------- ----------
Net charge-offs ........................... 111 416
---------- ----------
Balance at end of period ...................... 2,238 $ 1,556
========== ==========
Ratio of net charge-offs to
average net loans outstanding (annualized)... 0.13% 0.57%
========== ==========
Six Months Ended Year Ended
June 30, December 31
---------------------------- ------------
1997 1996 1996
----------- ----------- ------------
Balance at beginning of
period ...................... $ 1,960 $ 1,659 $ 1,659
Provision for loan losses ..... 575 570 1,400
LOANS CHARGED OFF
Real estate ............... 294 322 634
Other loans ............... 175 361 485
------ ------ ------
Total loans charged off ....... 469 683 1,119
------ ------ ------
RECOVERIES
Real estate ............... 148 1 1
Other loans ............... 24 9 19
------ ------ ------
Total recoveries .......... 172 10 20
------ ------ ------
Net charge-offs ........... 297 673 1,099
------ ------ ------
Balance at end of period ...... 2,238 $1,556 $1,960
====== ====== ======
Ratio of net charge-offs to
average net loans
outstanding (annualized) .... 0.17% 0.47% 0.36%
====== ====== ======
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4. Legal Proceedingsf
Except as described below, the Company is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.
The Company and its directors are defendants in a lawsuit, Kahn Brothers &
Co., Inc. Profit Plan and Trust et al. v. MSB Bancorp, Inc. et al., commenced by
stockholders in the Delaware Court of Chancery, New Castle County, on November
22, 1995. (The Company and its directors were defendants in a lawsuit, Pohli v.
MSB Bancorp, Inc. et al., commenced by a stockholder in the Delaware Court of
Chancery, New Castle County, on November 7, 1995. This action was consolidated
with the Kahn litigation.) The plaintiffs, who own in excess of 5% of the
outstanding shares of the Common Stock and purport to represent a class
consisting of all stockholders except the stockholder defendants, allege that
the defendant directors breached their duty of care by failing to become fully
informed about the expression of interest of HUBCO, Inc. ("HUBCO"); breached
their duty of disclosure to stockholders by not notifying the public or the
Company's stockholders of HUBCO's expression of interest; and breached their
duty of good faith and fair representation by, among other things, not
investigating whether the Acquisition constituted a reasonable alternative for
building stockholder value. The plaintiffs further allege that the Company's
offering of Common Stock in connection with the Acquisition (the "Common Stock
Offering") was not intended to enhance stockholder value, but rather was for the
purpose of diluting the ownership and voting strength of existing stockholders
and further entrenching existing management and the Board. The plaintiffs sought
to enjoin the Common Stock Offering and are also seeking damages equal to the
difference between the market price of the Common Stock on September 7, 1995,
and $35 (approximately $14,989,000 in the aggregate) or, in the alternative, the
difference between the market price of the Common Stock on October 26, 1995, and
$25 (approximately $7,394,000 in the aggregate), including interest and
attorneys' and other professional fees. In connection with this action,
plaintiffs filed a motion seeking expedited discovery and scheduling. On
December 6, 1995, in response to the plaintiffs' motion for expedited
proceedings, which was treated by the court as an application for a temporary
restraining order with respect to the Common Stock Offering, the court denied
the plaintiffs' application for such order. On December 12, 1995, the court
denied the plaintiffs' motion for re-argument. On December 18, 1995, the Company
filed an answer denying all of the substantive allegations in the complaint and
seeking, among other things, an order dismissing the complaint with prejudice.
Plaintiffs amended their complaint to include allegations relating to an
unsolicited merger proposal received by the Company from the First Empire State
Corporation ("First Empire") on December 28, 1995. Specifically, the amended
complaint alleges, among other things, that the Company's Board of Directors, in
breach of its duties of care, loyalty and disclosure, relied on the advice of
Bear, Stearns & Co., Inc. ("Bear Stearns"), the Company's financial advisor and
underwriter for the Offering, knowing that Bear Stearns could not render
independent financial advice regarding the First Empire proposal. The plaintiffs
are seeking alternative damages based on these allegations in an amount equal to
the difference between the market price of the Common Stock on December 28, 1995
and $26 (approximately $11,560,000 in the aggregate). The Company filed its
amended answer on February 1, 1996 denying all of the substantive allegations in
the amended complaint and seeking, among other things, an order dismissing the
amended complaint with prejudice. The parties have engaged in substantial
written discovery and plaintiffs have deposed all of the directors and have
requested the depositions of certain representatives of Bear Stearns. The
Company intends to continue to vigorously contest the allegations of wrongdoing
in this action.
While the Company believes that it has meritorious defenses in these
legal actions and is vigorously defending these suits, the legal responsibility
and financial impact with respect to these litigation matters cannot presently
be ascertained and, accordingly, there is risk that the final resolution of
these matters could result in the payment of monetary damages which would be
material in relation to the consolidated financial condition or results of
operations of the Company. The Company does not believe that the likelihood of
such a result is probable and has not established any specific litigation
reserves with respect to such matters.
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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. On January 10,
1996, the Company sold 1,100,000 shares of Common Stock at $18 per share and
600,000 shares of its Series A Preferred Stock at $21.60 per share. On February
7, 1996 the Company sold an additional 105,000 shares of Common Stock pursuant
to the underwriters' exercise of their over-allotment option. The issuance and
sales of the shares of Common Stock and Series A Preferred Stock on January 10
and February 7 are hereinafter referred to, collectively, as the "Offering." Net
proceeds from the Offering amounted to approximately $32.1 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 three and six month periods ended
June 30, 1997 and 1996 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 are calculated based on amortized cost. The yields and
costs include fees, which are considered adjustments to yields.
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For the Quarter Ended June 30, 1997
-----------------------------------------
Average
Average Yield/
Balance Interest Cost
--------- --------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans, net(1) ....... $321,329 $ 6,553 8.18%
Other loans(1) ............... 25,133 665 10.61
Mortgage-backed securities ... 306,113 5,101 6.68
Other securities ............. 56,325 858 6.11
Federal funds, overnight ..... 37,935 520 5.50
--------- --------- ----------
Total interest-earning assets 746,835 13,697 7.36
Non-interest earning assets .... 63,899
---------
Total assets ................. $810,734
=========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
Savings accounts ........... 204,136 1,657 3.26
Super NOW accounts ......... 39,941 192 1.93
Money market accounts ...... 51,902 538 4.16
Time deposits .............. 384,330 5,075 5.30
ESOP obligation .............. 355 7 7.91
--------- --------- ----------
Total interest-bearing
liabilities ................ 680,664 7,469 4.40
Other liabilities .............. 58,595
---------
Total liabilities ......... 739,259
Retained earnings .............. 71,475
---------
Total liabilities and
retained earnings ....... $810,734
=========
Net interest income/
interest rate spread(2) ....... $ 6,228 2.96%
========= ==========
Net earning assets/net
interest margin(3) ............ $ 66,171 3.34%
========= ==========
Ratio of interest-earning
assets to interest-bearing
liabilities .................... 1.10x
==========
------------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
-13-
<PAGE>
For the Quarter Ended June 30, 1996
-----------------------------------------
Average
Average Yield/
Balance Interest Cost
--------- --------- ----------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net(1) ....... $272,255 $ 5,337 7.88%
Other loans(1) ............... 19,169 491 10.30
Mortgage-backed securities ... 408,429 6,688 6.59
Other securities ............. 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
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(2) ....... $ 6,060 2.81%
========= ==========
Net earning assets/net
interest margin(3) ............ $ 59,056 3.14%
========= ==========
Ratio of interest-earning
assets to interest-bearing
liabilities ................... 1.08x
==========
------------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
-14-
<PAGE>
For the Six Months Ended June 30, 1997
-----------------------------------------
Average
Average Yield/
Balance Interest Cost
-------- -------- -----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans, net(1) ....... $319,723 $ 13,059 8.24%
Other loans(1) ............... 24,192 1,228 10.24
Mortgage-backed securities ... 314,299 10,370 6.65
Other securities ............. 55,182 1,696 6.20
Federal funds, overnight ..... 32,728 870 5.36
-------- -------- -----------
Total interest-earning assets 746,124 27,223 7.36
Non-interest earning assets .... 63,622
--------
Total assets ................. $809,746
========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
Savings accounts ........... 199,940 3,227 3.25
Super NOW accounts ......... 39,546 377 1.92
Money market accounts ...... 51,532 1,063 4.16
Time deposits .............. 390,359 10,232 5.29
ESOP obligation .............. 395 16 8.17
-------- -------- -----------
Total interest-bearing
liabilities ................ 681,772 14,915 4.41%
Other liabilities .............. 56,485
--------
Total liabilities ......... 738,257
Retained earnings .............. 71,489
--------
Total liabilities and
retained earnings ....... $809,746
========
Net interest income/
interest rate spread(2) ....... $ 12,308 2.95%
======== ===========
Net earning assets/net
interest margin(3) ............ $ 64,352 3.33%
========
Ratio of interest-earning
assets to interest-bearing
liabilities ................... 1.09x
===========
-15-
<PAGE>
For the Six Months Ended June 30, 1996
-----------------------------------------
Average
Average Yield/
Balance Interest Cost
-------- -------- -----------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net(1) ....... $ 268,844 $ 10,553 7.89%
Other loans(1) ............... 18,436 986 10.76
Mortgage-backed securities ... 363,984 11,906 6.58
Other securities ............. 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
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(2) ....... $ 11,609 2.69%
======== ===========
Net earning assets/net
interest margin(3) ............ $ 63,325 3.04%
======== ===========
Ratio of interest-earning assets
to interest-bearing liabilities 1.09x
===========
------------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
-16-
<PAGE>
Financial Condition
The Company's total assets were $813.9 million at June 30, 1997, as
compared to $820.9 million at December 31, 1996. Securities and mortgage-backed
securities available for sale decreased $25.4 million to $348.7 million at June
30, 1997, as compared to $374.1 million at December 31, 1996. Loans, net
increased $17.2 million to $355.7 million at June 30, 1997, as compared to
$338.5 million at December 31, 1996. This increase is due to Management's
strategy of redepoloying proceeds received in the Acquisition from the
securities portfolio into the loan portfolio. Goodwill decreased $2.2 million to
$30.6 million at June 30, 1997, as compared to $32.8 million at December 31,
1996. For these same dates, deposits decreased $15.4 million to $720.7 million.
The decrease in deposits is a result of run-off following the Acquisition and
Management's strategy of reducing the cost of time deposits. See "Interest
Expense."
Total stockholders' equity increased $1.8 million to $72.6 million at
June 30, 1997, as compared to $70.8 million at December 31, 1996. This increase
is due primarily to a $867,000 decrease in the net unrealized loss on securities
available for sale and a $635,000 increase in retained earnings.
Comparison of Results of Operations
General. Net income for the second quarter of 1997 amounted to $1.1
million as compared to $916,000 for the comparable quarter in 1996. For the six
months ended June 30, 1997, net income totaled $2.0 million as compared to $1.5
million for the comparable period in 1996.
Net Interest Income. Net interest income amounted to $6.2 million for
the second quarter of 1997, as compared to $6.1 million for the second quarter
of 1996. For the six months ended June 30, 1997, net interest income totaled
$12.3 million as compared to $11.6 million for the same period in 1996. The
Company's interest rate spread was 2.96% and 2.81% for the second quarter of
1997 and 1996, respectively. The Company's net interest margin was 3.34% and
3.14%, respectively, for those same periods. For the six months ended June 30,
1997 and 1996, the interest rate spread was 2.95% and 2.69% respectively. For
those periods, the net interest margin was 3.33% and 3.04%, respectively.
Interest Income. Interest income was $13.7 million and $27.2 million the
quarter and six months ended June 30, 1997, respectively, as compared to $13.7
million and $26.9 million for the same respective periods in 1996. The yield
earned on interest-earning assets was 7.36% for both the quarter and six months
ended June 30, 1997, as compared to 7.11% and 7.04% for the same periods in
1996. These increases in yield were offset by a decrease of $30.3 million in
average interest earnings assets to $746.8 million for the second quarter of
1997, as compared to $777.1 million for the second quarter of 1996. For the six
month period ended June 30, 1997, average interest earning assets decreased to
$746.1 million as compared to $768.0 million for the six months ended June 30,
1996. The decrease in the balances of average interest-earning assets is due
primarily to decreases of $37.1 million and $22.6 million in the average
balances of deposits for the quarter and six months ended June 30, 1997, as
compared to the same periods in 1996. The decrease in deposits is a result of
run-off following the Acquisition and Management's strategy of reducing the cost
of time deposits. See "Interest Expense." The increases in yields earned were a
result of the redeployment of proceeds from the sale of mortgage-backed and
other securities into the loan portfolio. For the second quarter of 1997, the
average balance of mortgage loans increased $49.1 million to $321.3 million as
compared to the second quarter of 1996. For the six months ended June 30, 1997,
the average balance of mortgage loans increased $50.9 million to $319.7 million
as compared to the same period in the prior year.
Interest income on mortgage loans amounted to $6.6 million in the second
quarter of 1997, as compared to $5.3 million for the comparable period in 1996.
This increase is due to a $49.1 million or 18.0% increase in the average balance
of mortgage loans to $321.3 million during the second quarter of 1997, as
-17-
<PAGE>
compared to the second quarter of 1996. In addition, the average yield earned on
mortgage loans increased 30 basis points to 8.18% for the second quarter of
1997. For the six months ended June 30, 1997, interest income on mortgage loans
amounted to $13.1 million, a $2.5 million or 23.8% increase over the $10.6
million earned for the same period in 1996. This increase was due to an increase
of $50.9 million in the average balance of mortgage loans to $319.7 million
during the six months ended June 30, 1997 as compared to $268.8 million for the
six months ended June 30, 1996. In addition, the average yield earned increased
35 basis points to 8.24% for those same periods.
The growth in the average balance of mortgage loans was due primarily to
management's strategy to redeploy funds received in the Acquisition from the
securities portfolio to the loan portfolio and continued loan demand. The
increase in the yields earned are primarily a result of a new ARM product that
the Bank began to offer in 1996. These ARMs are primarily 5-year fixed rate
loans that convert to 1-year ARMs after the initial 5-year period. These loans
are not offered at introductory rates. The increase in the yield earned on
mortgage loans is also due to the repricing of one-year ARMs that were
originated in 1994 and 1995 at introductory rates. These ARMs repriced to higher
rates due to the expiration of their initial lower introductory rates.
Interest income on other loans amounted to $665,000 for the second
quarter of 1997, as compared to $491,000 for the second quarter of 1996. This
increase is due to a $6.0 million or 31.1% increase in the average balance of
other loans to $25.1 million and a 31 basis point increase in the yield earned
to 10.61%. For the six months ended June 30, 1997, interest income on other
loans totaled $1.2 million as compared to $986,000 for the same period in 1996.
This increase was primarily due to an increase in the average balance of other
loans to $24.2 million for the 1997 period as compared to $18.4 million for the
same period in 1996. This increase in the average balance of other loans was
partially offset by a 52 basis point decrease in the average yield earned to
10.24% for the six months ended June 30, 1997, as compared to the same period in
1996.
Interest income on mortgage-backed securities amounted to $5.1 million
for the second quarter of 1997, as compared to $6.7 million for the same quarter
in 1996. For the six months ended June 30, 1997, interest income on
mortgage-backed securities totaled $10.4 million, a $1.5 million decrease from
the $11.9 million earned for the same period in 1996. These decreases are due
primarily to decreases in the average balances of mortgage-backed securities.
For the second quarter of 1997, the average balance of mortgage-backed
securities decreased $102.3 million or 25.1% to $306.1 million as compared to
$408.4 million for the second quarter of 1996. For the six months ended June 30,
1997, the average balance of mortgage-backed securities decreased $49.7 million
to $314.3 million as compared to the same period in 1996. The decrease in the
average balances of mortgage-backed securities was a result of management's
strategy to redeploy funds currently invested in securities into the loan
portfolio, which typically provides greater yields.
Interest income on other securities decreased $200,000 or 18.9% to
$858,000 for the second quarter of 1997, as compared to $1.1 million for the
second quarter of 1996. For the six months ended June 30, 1997, interest income
on other securities totaled $1.7 million as compared to $2.4 million for the
same period in 1996. These decreases are primarily the result of decreases in
the average balances of other securities. The average balance of other
securities was $56.3 million and $55.2 million, for the quarter and six months
ended June 30, 1997, respectively, as compared to $64.9 million and $77.0
million for the same respective periods in the prior year. In addition, the
yields earned on these securities decreased to 6.11% and 6.20% for the quarter
and six months ended June 30, 1997, respectively, as compared to 6.56% and 6.38%
for the same respective periods in the prior year. The decrease in the average
balance of securities is a result of management's strategy to redeploy funds
currently invested in securities into the loan portfolio, which typically
provides greater yields.
-18-
<PAGE>
Interest income on Federal funds amounted to $520,000 for the second
quarter of 1997, as compared to $166,000 for the second quarter of 1996. This
increase in Federal funds interest is due to a $25.5 million increase in the
average balance to $37.9 million and a 13 basis point increase in the average
yield to 5.50%. The increase in the average balance of Federal funds is a result
of the temporary investment of proceeds from the sale of mortgage-backed and
other securities. The securities were sold to provide sufficient liquidity for
loan originations and the anticipated outflow of time deposits as a result of
Management's decision to reduce the interest rates paid on these deposits (see
"Interest Expense"). For the six months ended June 30, 1997, interest income on
Federal funds amounted to $870,000 as compared to $978,000 for the same period
in 1996. This decrease is due to a $7.0 million decrease in the average balance
of Federal funds to $32.7 million offset by a 41 basis point increase in the
yield earned to 5.36% for those same periods. The decrease in the average
balance of Federal funds is due to proceeds from the Acquisition which were
received in the first quarter of 1996 and were invested in Federal funds until
securities were purchased.
Interest Expense. Interest expense was $7.5 million for the second
quarter of 1997, as compared to $7.7 million for the same quarter in 1996. For
the six months ended June 30, 1997, interest expense totaled $14.9 million as
compared to $15.3 million for the same period in 1996. These decreases are
primarily due to decreases of $37.4 million and $22.9 million in average
interest-bearing liabilities to $680.7 million and $681.8 million for the
quarter and six months ended June 30, 1997, as compared to the quarter and six
months ended June 30, 1996.
Interest expense on savings accounts increased $151,000 or 10.0% to $1.7
million for the second quarter of 1997, as compared to $1.5 million for the
second quarter 1996. For the six months ended June 30, 1997, interest expense on
savings accounts increased to $3.2 million as compared to $2.9 million for the
same period in 1996. These increases were due to increases in the average rates
paid on savings accounts which are partially offset by decreases in the average
balance of these accounts. The average rate paid on savings accounts was 3.26%
for the second quarter of 1997, as compared to 2.92% for the second quarter of
1996. For the six months ended June 30, 1997, the average rate paid on savings
accounts was 3.25% as compared to 2.93% for the same period of the prior year.
The average balances of savings accounts were $204.1 million and $199.9 million
for the quarter and six months ended June 30, 1997, as compared to $207.3
million and $202.1 million for the same respective periods in 1996.
Interest expense on time deposits totaled $5.1 million for the second
quarter of 1997, as compared to $5.6 million for the second quarter of 1996.
This decrease is due to a $33.3 million or 8.0% decrease in the average balance
to $384.3 million and a 7 basis point decrease in the average rate paid to
5.30%. For the six months ended June 30, 1997, interest expense on time deposits
totaled $10.2 million as compared to $11.1 million for the same period in 1996.
This decrease was due to a decrease in the average balance of time deposits of
$20.1 million to $390.4 million for the 1997 six month period as compared to the
same period in 1996. In addition, the average cost of these deposits decreased
15 basis points to 5.29%.
-19-
<PAGE>
Included in time deposits is approximately $50.0 million of nine-month
certificates of deposits ("CD") that are priced at a premium rate of 5.75%. A
significant number of these accounts will be maturing during the third quarter
of 1997. Management's strategy is to reduce the cost of these time deposits by
offering a lower rate at maturity. The Bank's current rate on these deposits is
5.05%. Management anticipates that many of those customers that have other
relationships with MSB will not withdraw these funds from the Bank. However,
Management anticipates that those customers that only have a nine-month CD, and
utilize no other products or services from MSB, may withdraw these funds.
Provision for Loan Losses. The provision for loan losses was $275,000
and $320,000 for the second quarters of 1997 and 1996, respectively. For the six
months ended June 30, 1997 and 1996, the provision for loan losses totaled
$575,000 and $570,000, respectively. Non-performing loans (loans that are 90
days or more past due) amounted to $3.5 million or 0.97% of total loans at June
30, 1997, as compared to $4.8 million or 1.40% of total loans at December 31,
1996 and $3.5 million or 1.01% of total loans at June 30, 1996. Non-performing
assets amounted to $5.2 million or 0.64% of total assets, $5.7 million or 0.69%
of total assets and $4.6 million or 0.54% of total assets at June 30, 1997,
December 31, 1996 and June 30, 1996, respectively.
The allowance for loan losses amounted to $2.2 million and $1.6 million
at June 30, 1997 and 1996, respectively, which represented 64.5% and 44.5% of
non-performing loans at those respective dates. At December 31, 1996, the
allowance for loan losses amounted to $2.0 million or 41.1% of non-performing
loans. Charge-offs, net of recoveries, totaled $111,000 and $297,000 for the
quarter and six months ended June 30, 1997, as compared to $416,000 and $673,000
for the same respective periods in 1996. Included in recoveries in the second
quarter of 1997 is a $141,000 recovery on a loan that the Bank partially
charged-off in 1991. The loan was subsequently restructured in 1994 and then
satisfied in 1997.
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 $1.1 million for
the second quarter of 1997, as compared to $1.0 million for the second quarter
of 1996. This increase was due primarily to a $22,000 or 2.2% increase in
service fees to $1.0 million for the 1997 second quarter as compared to $982,000
for the second quarter of 1996. For the six months ended June 30, 1997,
non-interest income totaled $2.0 million as compared to $1.9 million for the
same period in 1996. This increase was due to a $105,000 or 5.9% increase in
service fees to $1.9 million for the 1997 six month period as compared to $1.8
million for the same period in 1996. The increase in service fees is due
primarily to the Acquisition. The Bank waived service charges on the Acquired
Deposits until March 1, 1996.
-20-
<PAGE>
Non-Interest Expense. Non-interest expense for each of the second
quarters of 1997 and 1996 totaled $5.2 million. Salaries and employee benefits
increased $113,000 to $2.3 million for the second quarter of 1997 as compared to
the second quarter of 1996 due primarily to normal annual salary increases.
Federal deposit insurance premiums decreased $168,000 to $71,000 for these same
periods, reflecting the lower insurance rates that resulted from the payment of
the Savings Association Insurance Fund ("SAIF") special assessment in the third
quarter of 1996. Other non-interest expense amounted to $1.2 million for the
1997 second quarter, an increase of $59,000 over the $1.1 million in other
expenses for the 1996 second quarter. Other non-interest expenses for the 1997
second quarter includes a one-time charge of $130,000 related to the Company's
Reengineering Plan that was implemented on July 14, 1997. See "Other Matters -
Reengineering Plan."
For the six months ended June 30, 1997, non-interest expense totaled $10.4
million, representing a $48,000 increase over the same period in 1996. This
increase is due to a $213,000 increase in salaries and benefits to $4.4 million,
a $58,000 increase in occupancy costs to $1.6 million, an increase of $166,000
to $1.8 million in goodwill amortization offset by a $324,000 decrease in
Federal deposit insurance premiums of $153,000 and a $65,000 decrease in other
non-interest expenses to $2.4 million. Other non-interest expenses for the six
months ended June 30, 1997, included $110,000 of legal and other costs related
to employment litigation that was settled. The increase in goodwill amortization
reflects a full six months of amortization as compared to 1996.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and the proceeds from the maturities of
investments. Proceeds from securities and loan sales are also a source of funds.
While maturities and scheduled amortization of loans and investments are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid
assets and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by the regulations of the OTS.
The minimum required liquidity and short-term liquidity ratios are currently
5.0% and 1.0%, respectively. At June 30, 1997 the Bank's liquidity ratio under
OTS regulations was 10.11% and its short-term liquidity ratio was 6.56%
The primary investing activity of the Company is the origination of
loans and the purchase of securities. For the quarter and six months ended June
30, 1997 and for the year ended December 31, 1996, the Company originated
mortgage loans totaling $26.7 million, $43.8 million and $100.1 million,
respectively. For those same periods, the Company originated other loans
totaling $4.9 million, $9.3 million and $15.9 million, respectively. The Company
purchased securities totaling $3.6 million and $27.4 million for the six months
ended June 30, 1997 and during 1996, respectively. Other investing activities
for those same periods included the purchase of mortgage-backed securities
totaling $19.3 million and $386.3 million, respectively.
-21-
<PAGE>
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 7.9% at June 30, 1997 and 6.7% at December
31, 1996. At June 30, 1997, cash and cash equivalents, as defined above, totaled
$57.3 million as compared to $49.0 million at December 31, 1996.
Liquidity management for the Bank is both a daily and long-term function
of the Bank's management strategy. Excess funds are generally invested in
short-term investments such as Federal funds. In the event that the Bank should
require funds beyond its ability to generate them internally, additional sources
of funds are available through a $46.0 million line of credit 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, 1997, the Bank had outstanding loan commitments of $43.2
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, 1997, totaled $283.9 million. Management believes that a
significant portion of such deposits will remain with the Bank.
The Bank is subject to certain minimum leverage, tangible and risk-based
capital requirements established by regulations of the OTS. These 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's 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.
At June 30, 1997, the Bank exceeded all of the OTS minimum regulatory capital
requirements.
The following table sets forth the capital position of the Bank as
calculated at June 30, 1997.
-22-
<PAGE>
Tangible
Amount Percent
---------- ----------
(Dollars in thousands)
Capital as calculated under GAAP ........ $ 72,172 9.19%
Deduct goodwill ........... ............. 30,645 3.90
Add qualifying general loan loss
allowance, as limited by regulation .... -- --
Add unrealized loss on
securities available for sale,
net of taxes............................ 3,758 0.48
Deduct equity investments ............... -- --
Deduct servicing rights ................. 14 0.00
---------- ----------
Capital, as calculated .................. 45,271 5.76
Capital, as required .................... 11,784 1.50
---------- ----------
Excess .................................. $ 33,487 4.26%
========== ==========
Core Risk-Based
Amount Percent Amount Percent
---------- --------- ---------- ---------
(Dollars in thousands)
Capital as calculated
under GAAP $72,172 9.19% $ 72,172 19.72%
Deduct goodwill ........... 30,645 3.90 30,645 8.37
Add qualifying general
loan loss allowance, as
limited by regulation -- -- 2,237 0.61
Add unrealized loss
on securities available for
sale, net of taxes 3,758 0.48 3,758 1.03
Deduct equity investments . -- -- 162 .04
Deduct servicing rights ... 14 0.00 14 0.00
----- ----- ------- ------
Capital, as calculated .... 45,271 5.76 47,346 12.94
Capital, as required ...... 31,423 4.00 29,282 8.00
----- ----- ------- ------
Excess .................... $13,848 1.76% $ 18,064 4.94%
===== ===== ======= ======
-23-
<PAGE>
The Board of Directors declared a cash dividend of $0.15 per common
share on June 20, 1997 that was payable to stockholders of record on June 30,
1997. 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.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") established standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. SFAS 128 requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, and earlier
application is not permitted. SFAS 128 also requires restatement of all prior
period EPS data presented. Management does not expect the adoption of SFAS 128
to have a significant effect on the Company's EPS calculation.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 does not require a specific format for the financial
statement, but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131") requires that
public companies report information about segments of their business in their
annual financial statements and require them to report selected segment
information in their quarterly reports issued to shareholders. SFAS 131 requires
entity-wide disclosure about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS 131 supersedes FASB Statement 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 is effective for fiscal years
beginning after December 15, 1997.
-24-
<PAGE>
Other Matters - Reengineering Plan
On July 14, 1997, the Company announced a reengineering plan (the "Plan")
designed to increase the Company's earnings and stockholder value. The Plan is
anticipated to result in approximately $600,000 in additional net income in 1997
and approximately $1.7 million in additional net income on an annual basis
thereafter.
The major components of the Plan are as follows:
- Financial Initiatives - Repurchase of up to 5% or 142,000 shares of the
Company's common stock.
- Expense Reduction Initiatives - Expected to
result in an annual cost savings of $1.3 million.
- Product Pricing Initiatives - Change in deposit fee structure expected to
increase fees by $435,000 annually. In addition, the Bank has changed its
pricing strategy on time deposits and reduced the rates being paid on
these deposits, which is expected to result in decreased interest
expense.
- New Products and Services - The Company will start offering insurance
and limited trust services which is expected to generate additional fee
income.
This report contains certain forward looking statements consisting of estimates
with respect to the financial condition, results of operations and business of
the Company and the Bank as a result of the adoption of the reengineering Plan.
These estimates are subject to various factors that could cause actual results
to differ materially from these estimates. Such factors include (i) the effect
that an adverse movement in interest rates could have on the expected cost
savings or income enhancements, (ii) customer preferences, (iii) national and
local economic conditions, (iv) national and local competition, (v) higher than
anticipated operating expenses and (vi) a lower level of or higher cost for
deposits than anticipated.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
-25-
<PAGE>
Part II--OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 4 to the unaudited consolidated financial
statements ("Legal Proceedings") in Part I, Item 1, hereto is incorporated
herein by reference.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Meeting") on
April 24, 1997. 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; and
3. The ratification of the appointment of KPMG Peat Marwick LLP
as independent auditors of the Company for the year ending
December 31, 1997.
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, Proposal 2 was not approved. The voting results for the Proposals were
as follows:
Proposal 1: John W. Norton For 2,213,716
Withheld 391,660
Nicholas J. Scali For 2,213,864
Withheld 391,512
Daniel R. Snyder For 2,214,116
Withheld 391,260
Broker Non-Votes 231,760
Proposal 2: For 1,464,585
Against 333,731
Abstain 16,642
Broker Non-Votes 1,022,178
Proposal 2 required an affirmative vote of at least 80% of the Company's
outstanding Common Stock on February 25, 1997. Accordingly, this proposal was
defeated.
-26-
<PAGE>
Proposal 3: For 2,436,307
Against 153,438
Abstain 15,631
Broker Non-Votes: 231,760
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*
Exhibit 99--Independent Auditors' Report. The
Company is filing an amended independent auditors'
report of KPMG Peat Marwick LLP. This amendment
corrects a typographical error in the independent
auditors' report that was originally filed as part
of the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
(b) Reports on Form 8-K
None
* Submitted only with filing in electronic format.
-27-
<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)
ppp
By: /s/ Anthony J. Fabiano
Anthony J. Fabiano
Senior Vice President and Chief
Financial and Accounting Officer
August 12, 1997
-28-
<PAGE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
For The Quarter Ended
---------------------------------
June 30, 1997 June 30, 1996
------------- -------------
Net income ............................... $1,085,000 $ 916,000
Preferred stock dividends .............. 283,500 283,500
---------- ----------
Net income applicable to common stock .. $ 801,500 $ 632,500
========== ==========
Weighted average common shares ......... 2,873,925 2,869,563
Earnings per common share .............. $ 0.28 $ 0.22
========== ==========
For The Six Months Ended
---------------------------------
June 30, 1997 June 30, 1996
------------- -------------
Net income ............................... $2,042,000 $ 1,504,000
Preferred stock dividends .............. 567,000 535,500
---------- ----------
Net income applicable to common stock .. $1,475,000 $ 968,500
========== ==========
Weighted average common shares ......... 2,873,961 2,794,939
Earnings per common share .............. $ 0.51 $ 0.35
========== ==========
-29-
<PAGE>
Exhibit 99
Independent Auditors' Report
The Board of Directors and Stockholders
MSB Bancorp, Inc.:
We have audited the consolidated financial statements of MSB Bancorp, Inc. and
Subsidiaries as listed in the accompanying index as of December 31, 1996 and for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MSB Bancorp,
Inc. and Subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 27, 1997
-30-
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