- --------------------------------------------------------------------------------
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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 OFFICE-ZIP CODE)
TELEPHONE (914) 294-8100
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS (Name of each exchange
(Title of class) on which registered)
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 12 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of February 25, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $47,200,600.
As of February 25, 1997, 2,837,136 shares of Registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1997 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III.
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<PAGE>
<TABLE>
MSB BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
<CAPTION>
TABLE OF CONTENTS
PART I
<S> <C>
Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................33
Item 3. Legal Proceedings..............................................................................34
Item 4. Submission of Matters to a Vote of Security Holders............................................35
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters..........................36
Item 6. Selected Consolidated Financial Information....................................................37
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................39
Item 8. Consolidated Financial Statements and Supplementary Data.......................................51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.....................................................................................84
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................84
Item 11. Executive Compensation.........................................................................84
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................84
Item 13. Certain Relationships and Related Transactions.................................................84
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................84
</TABLE>
<PAGE>
PART I
ITEM 1 BUSINESS
GENERAL
MSB Bancorp, Inc. (the "Company") is a savings and loan holding company
headquartered in Goshen, New York, which was incorporated in March 1992 under
the laws of the State of Delaware. The Company was organized for the purpose of
serving as the holding company for MSB Bank (the "Bank"). At December 31, 1996,
the Company had total assets of $820.9 million, total deposits of $736.2 million
and total stockholders' equity of $70.8 million. In July 1993, the Company
changed its fiscal year-end from September 30 to December 31. The three months
ended December 31, 1993 represented a transition period. The Company's 1994
fiscal year began on January 1, 1994. For purposes of comparing the results of
operations for fiscal 1994, the Company believes it is meaningful to use the 12
months ended December 31, 1993 (unaudited) as the basis for that comparison.
The principal business of the Company is directing, planning and
coordinating the business activities of the Bank, and the financial condition
and results of operations of the Company are primarily dependent upon the
operations of the Bank. The Company also invests in securities, consisting
primarily of U.S. Government and federal agency securities, federal funds and
investment grade corporate notes. The Company neither owns nor leases any
property, nor does the Company employ any persons other than certain officers of
the Bank who are not separately compensated by the Company. The Company
organized a wholly-owned subsidiary corporation, MSB Travel, in January 1996, to
offer travel services to the Bank's customers. MSB Travel acquired the travel
business of a travel agent in Middletown, New York.
The Bank was organized in 1869 as a New York state-chartered mutual
savings bank. On September 3, 1992, the Bank completed its conversion to stock
form (the "Conversion"), and the Company sold 1,840,000 shares of its common
stock, $0.01 par value per share (the "Common Stock"), at $10.00 per share and
acquired the Bank with 50% of the net proceeds of the Conversion.
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 Bank's
acquisition of certain assets and liabilities associated with seven branches of
First Nationwide Bank, A Federal Savings Bank ("First Nationwide"), as well as
future expansion. At such time, the Bank changed its name from Middletown
Savings Bank to MSB Bank. As a consequence of the conversion of the Bank to a
federal savings bank, the Company became a savings and loan holding company
subject to the regulation, examination and supervision of the Office of Thrift
Supervision (the "OTS"). Prior to 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 (the "FRB").
The Bank provides a broad range of banking services from its main
office, which is located in Goshen, New York, and from 15 additional branch
offices located in Orange, Putnam and Sullivan counties. The Bank is the largest
financial institution headquartered in Orange County, New York, based on assets.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations, primarily in loans secured by owner-occupied one- to four-family,
primary residence properties, and short and medium-term investment grade debt
securities. Revenues are derived principally from interest on the mortgage loan
portfolio and interest and dividends on securities. The Bank's primary sources
of funds are deposits, principal and interest payments and principal prepayments
on loans, interest and dividends from securities and proceeds from the sales of
securities.
<PAGE>
THE OFFERING AND THE ACQUISITION
On September 29, 1995, 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").
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 (the "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 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 $32.0
million. The purpose of the Offering was to raise a significant portion of the
additional capital necessary to permit the Bank to qualify as "adequately
capitalized" for regulatory capital purposes immediately following the
consummation of the acquisition of the First Nationwide Branches. The Company
contributed substantially all of the proceeds of the Offering to the Bank.
The closing of the Acquisition (defined below) took place on January
12, 1996 (the "Closing Date"), and 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 concurrently 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. 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
other First Nationwide Branches and considering that the Spring Valley Branch
has a higher cost of funds than the other First Nationwide Branches. The Branch
Disposition allowed 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 the Acquisition, the Bank acquired at their respective book values
certain assets related to the Acquired Branches, including branch facilities and
fixed operating assets associated with the Acquired Branches (the "First
Nationwide Assets") and paid a purchase price of approximately $2.9 million. The
Bank also acquired certain savings account and overdraft loans (the "First
Nationwide Loans") at face value, which totaled $1.0 million at January 12,
1996.
The Company and the Bank viewed the Acquisition as a unique opportunity
to significantly further the Company's and the Bank's business plan, which
provides for, among other things, remaining a community bank and growing both
internally and through acquisitions as opportunities arise while not precluding
the consideration of other strategic alternatives that could increase
stockholder value. The Acquisition augmented the Bank's branch network in
existing market areas, expanded the Bank's branch network into two contiguous
markets in Putnam and Sullivan counties in New York and provided the opportunity
for the Bank to increase its business and franchise substantially, without
significantly increasing incremental operating costs.
The Acquisition increased the Company's market share of deposits to the
largest in Orange County as well as the largest in the combined tri-county
market area of Orange, Putnam and Sullivan counties. This tri
2
<PAGE>
- -county area had a population of approximately 483,000, based on publicly
available data as of June 30, 1993. All of the Acquired Branches are located
within a 45 mile radius of the Company's headquarters. As the Company has been
serving depositors and borrowers in Putnam and Sullivan counties from its
existing Orange County branches, the Company is familiar with the market areas
of those counties.
The depositor base of the Acquired Branches includes approximately
23,345 households as customers, having approximately 53,540 deposit accounts.
Although there can be no assurances, the Company believes that by acquiring this
depositor base it will have significant future growth opportunities to provide
mortgage loans, consumer loans and other financial services to these depositors.
MARKET AREA AND COMPETITION
The Bank is a community-oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Bank's primary deposit gathering base is concentrated in the New York
counties of Orange, Putnam and Sullivan, while its current mortgage lending base
extends throughout Orange, Sullivan, Putnam, Dutchess and Ulster Counties in New
York, Pike County in Pennsylvania and Sussex County, New Jersey. In the past,
the Bank has made multi-family residential and commercial real estate loans in
New York City. However, the Bank has curtailed its lending in that area.
The southern portion of Orange County is approximately 40 miles
northwest of New York City. This area benefited historically from the diverse
economy of the New York City area as well as from employment by local
businesses. Orange County, formerly an agricultural area, now has a diverse
economy based on the manufacturing, distribution and service industries.
Management believes that economic growth in Orange County will continue to
provide a favorable climate in which to conduct the business of the Bank. Orange
County offers one of the fastest growing job markets among all counties in New
York State, a high rate of population growth (based on 1990 census data),
convenient access to interstate highways and proximity to the New York City
metropolitan area.
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger non-local
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. Competition for loans
comes principally from commercial banks, savings banks, credit unions, savings
and loan associations, mortgage banking companies and insurance companies. The
most direct competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Bank faces
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from other financial institutions
such as brokerage firms and insurance companies.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of conventional fixed-rate and adjustable-rate first mortgage loans,
multi-family residential loans, line of credit loans, other consumer loans and
commercial business loans. At December 31, 1996, the Bank's loans receivable
totaled $340.5 million, of which $257.5 million, or 75.6%, were one- to
four-family residential mortgage loans. Of the one- to four-family residential
mortgage loans outstanding at that date, 84.3% were adjustable-rate mortgage
("ARM") loans and 15.7% were fixed rate loans. As part of the Bank's management
of interest rate risk, the Bank's policy is to sell all newly originated
conforming fixed-rate loans to the Federal National Mortgage Association
("FNMA"). These loans are sold to FNMA without recourse to the Bank. The Bank
does not hedge this portfolio or sell loans pursuant to forward commitments. In
order to maintain customer relationships, the Bank retains the servicing on the
loans sold in the secondary market. Although the Bank's policy is to sell all
newly originated fixed-rate loans, between the third quarter of fiscal 1993 and
September 1994, the Bank had not sold any of these loans because the yields on
the fixed-rate mortgage loans were greater than the yields available on high
quality securities during that period. In September 1994, the Bank sold $10.4
million of 30-year fixed-rate mortgage loans and realized a loss of $545,000.
During 1994, the Company recognized a realized loss of $523,000 and an
unrealized loss of $190,000 on mortgage loans held for sale.
3
<PAGE>
During 1996 and 1995, realized gains on the sale of mortgage loans amounted to
$151,000 and $44,000, respectively. There were no unrealized gains or losses on
mortgage loans during 1996 or 1995. At December 31, 1996, commercial real estate
loans totaled $45.5 million or 13.4% of total loans receivable, and multi-family
residential mortgage loans totaled $14.4 million or 4.2% of total loans
receivable.
The Bank's non-mortgage loans consist of commercial business loans and
a variety of consumer loans. At December 31, 1996, commercial business loans
amounted to $8.8 million or 2.6% of total loans receivable, and other consumer
loans totaled $14.4 million or 4.2% of total loans receivable as compared to
$5.7 million or 2.0% and $10.6 million or 3.8%, respectively, at December 31,
1995. The increases in these loans are due to management's strategy of
redeploying proceeds received in the Acquisition from the securities portfolio
and into the loan portfolio. The Bank's loan portfolio provides a greater yield
than the securities portfolio.
The types of loans that the Bank may originate are regulated by federal
laws and regulations. Interest rates charged by the Bank on loans are affected
principally by the demand for such loans and the supply of money available for
lending purposes. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the FRB,
legislative and tax policies and governmental budgetary matters.
4
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and in percentages of the respective portfolios at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
--------------------- ------------------------ ------------------------- --------------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- --------- --------- ------------ ---------- ------------- ----------- -------------
MORTGAGE LOANS:
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to
four-family(1) $257,498 75.6% $222,172 78.6% $189,034 81.1% $145,764 78.9%
Multi-family .... 14,362 4.2 14,431 5.1 13,602 5.9 13,192 7.1
Commercial real
estate ........ 45,462 13.4 29,674 10.5 19,589 8.4 15,557 8.4
-------- -------- -------- ------- -------- ------- -------- -------
Total mortgage
loans ......... $317,322 93.2 266,277 94.2 222,225 95.4 174,513 94.4
OTHER LOANS:
Commercial
business ...... 8,756 2.6 5,686 2.0 3,099 1.3 2,855 1.6
Consumer ........ 12,891 3.8 9,473 3.4 7,229 3.1 6,954 3.8
Lines of credit . 1,487 0.4 1,173 0.4 447 0.2 469 0.2
-------- -------- -------- ------- -------- ------- -------- -------
Total other
loans ........ 23,134 6.8 16,332 5.8 10,775 4.6 10,278 5.6
-------- -------- -------- ------- -------- ------- -------- -------
Total loans
receivable ... 340,456 100.0% 282,609 100.0% 233,000 100.0% 184,791 100.0%
LESS:
Deferred loan
fees .......... 5 438 466 613
Allowances for
loan losses ... 1,960 1,659 1,459 1,466
------- -------- ------- --------
Loans
receivable, net $338,491 $280,512 $231,075 $182,712
======== ======== ======== ========
MORTGAGE LOAN
SUMMARY:
Fixed rate
loans.......... $ 41,018 12.9% $ 28,493 10.7% $ 23,943 10.8% $ 29,570 16.9%
Adjustable-rate
loans ......... 276,304 87.1 237,784 89.3 198,282 89.2 144,943 83.1
-------- -------- -------- ------- -------- ------- -------- -------
Total mortgage
loans.......... $317,322 100.0% $266,277 100.0% $222,225 100.0% $174,513 100.0%
======== ======== ======== ======== ======== ======= ======== =======
<CAPTION>
AT SEPTEMBER 30,
1993
-------------------------
PERCENT
OF
AMOUNT TOTAL
----------- ------------
MORTGAGE LOANS:
<S> <C> <C>
One- to
four-family(1) $138,031 79.2%
Multi-family .... 12,948 7.4
Commercial real
estate ........ 14,656 8.4
-------- -------
Total mortgage
loans ......... 165,635 95.0
OTHER LOANS:
Commercial
business ...... 2,034 1.2
Consumer ........ 6,204 3.6
Lines of credit . 460 0.2
-------- --------
Total other
loans ........ 8,698 5.0
-------- --------
Total loans
receivable ... 174,333 100.0%
LESS:
Deferred loan
fees .......... 626
Allowances for
loan losses ... 1,437
-------
Loans
receivable, net $172,270
========
MORTGAGE LOAN
SUMMARY:
Fixed rate loans $ 28,229 17.0%
Adjustable-rate
loans ......... 137,406 83.0
-------- -------
Total mortgage
loans.......... $165,635 100.0%
======== =======
</TABLE>
- -------
(1) One- to four-family mortgage loans include first and second mortgage loans
and home equity loans.
5
<PAGE>
LOAN ORIGINATIONS, SALES AND SERVICING. The Bank originates both ARM
and fixed-rate loans, the amounts of which are dependent upon relative customer
demand as well as current and expected future levels of interest rates. The Bank
generally does not purchase whole loans but, from time to time, purchases
participations in loans originated by others.
The following table sets forth the Bank's loan originations, sales and
principal repayments for the periods indicated. During the periods indicated, no
mortgage loans were purchased.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- ------------------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS (GROSS):
At beginning of period........... $ 266,277 $ 222,225 $ 174,513
Mortgage loans originated
One- to four-family........... 77,025 51,387 67,027
Multi-family.................. 2,206 1,591 1,365
Commercial real estate........ 20,758 11,749 11,093
----------- ----------- -----------
Total mortgage loans originated 99,989 64,727 79,485
----------- ----------- -----------
Mortgage loan foreclosures....... (1,044) (955) (810)
Principal repayments............. (36,167) (12,614) (21,885)
Mortgage loans sold.............. (11,015) (5,985) (10,808)
Home equity (net activity)....... (718) (1,121) 1,730
----------- ----------- -----------
At end of period................. $ 317,322 $ 266,277 $ 222,225
=========== =========== ===========
OTHER LOANS (NET ACTIVITY):
At beginning of period........... $ 16,332 $ 10,775 $ 10,278
Commercial business.............. 3,070 2,587 244
Consumer loans................... 4,962 3,863 2,976
Lines of credit.................. 314 726 (23)
Student loans sold to Student
Loan Marketing Association.... (1,544) (1,619) (2,700)
----------- ----------- -----------
At end of period................. $ 23,134 $ 16,332 $ 10,775
=========== =========== ===========
</TABLE>
6
<PAGE>
LOAN MATURITY. The following table shows the contractual maturity of
the Bank's loan portfolio at December 31, 1996. The table does not reflect
scheduled principal amortization, prepayments or repricing of ARM loans.
Scheduled repayments and prepayments on mortgage loans (excluding home equity
lines of credit) totaled $36.2 million, $12.6 million and $21.9 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------------------------------
ONE- TO TOTAL
FOUR- MULTI- COMMERCIAL OTHER LOANS
FAMILY FAMILY REAL ESTATE LOANS RECEIVABLE
------------- ------------- -------------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Contractual maturity:
Within 1 year................ $ 9,531 $ 3,153 $ 3,099 $ 5,127 $ 20,910
After 1 year:
1 to 3 years.............. 1,418 6 2,465 7,746 11,635
3 to 5 years.............. 4,090 109 5,542 8,754 18,495
5 to 10 years............. 11,294 1,720 6,516 1,117 20,647
Over 10 years............. 231,165 9,374 27,840 390 268,769
---------- ---------- ---------- ---------- ----------
Total due after one year.. $ 247,967 $ 11,209 $ 42,363 $ 18,007 $ 319,546
---------- ---------- ---------- ---------- ----------
Total amounts due............ $ 257,498 $ 14,362 $ 45,462 $ 23,134 $ 340,456
========== ========== ========== ==========
Less:
Deferred loan fees, net...... 5
Allowance for loan losses.... 1,960
----------
Loans receivable, net........ $ 338,491
==========
</TABLE>
The following table sets forth at December 31, 1996, the dollar amount
of all loans contractually due after December 31, 1997, and whether such loans
have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1997
--------------------------------------------------------
FIXED ADJUSTABLE TOTAL
--------------- --------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family................................. $ 40,028 $ 207,939 $ 247,967
Multi-family and commercial real estate............. 839 52,733 53,572
Other loans........................................... 11,760 6,247 18,007
--------- --------- ---------
Total loans receivable................................ $ 52,627 $ 266,919 $ 319,546
========= ========= =========
</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Bank offers first mortgage
loans secured by one- to four-family residences, including townhouse and
condominium units, in its primary lending area. Loan originations are generally
obtained from existing or past customers and members of the local communities
located in the Bank's primary market area. Except as to loan amount, one- to
four-family residential mortgage loans are generally underwritten according to
FNMA guidelines. The Bank originates ARM loans primarily for its portfolio. The
Bank also originates fixed rate mortgage loans which are sold to FNMA generally
within 15 days of their origination. See "-Lending Activities -- Loan Portfolio
Composition."
An origination fee of up to 2.0% may be charged on loans to reduce the
interest rate on loans. All one- to four-family mortgage loan applications are
reviewed by the Board of Directors. Originated mortgage loans in the Bank's
portfolio generally include due-on-sale clauses which provide the Bank with the
contractual right to declare the loan immediately due and payable in the event
that the borrower transfers ownership of the property without the Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions.
Since the early 1980s, the Bank has emphasized the origination of ARM
loans secured primarily by owner-occupied residences for retention in its
portfolio. At December 31, 1996, 84.3% of the Bank's one- to four-family
residential mortgage loans consisted of such ARM loans. ARM loans are made for
terms of 10 to 30 years. The Bank offers an ARM loan secured by owner-occupied
residences which may be originated in amounts up to $600,000, with a loan to
value ratio of up to 95% of the appraised value of the property securing the
loan, provided that private mortgage insurance is obtained on loan amounts in
excess of 85% of such
7
<PAGE>
appraised value. The Bank originates primarily two types of ARM loans. The first
ARM loan has a fixed rate for 5 years at which time the interest rate begins to
adjust every year. The Bank's other ARM loan product has an interest rate which
adjust every year, based upon a spread above the one-year U.S. Treasury
Securities Index, adjusted to constant maturity. The Bank's ARM loans are
subject to limitations on interest rate increases of 2.0% per adjustment period
and up to an aggregate of 6.0% over the life of the loan. The one-year ARM loan
is originated at an introductory rate which is less than the fully-indexed
interest rate. The introductory rate remains in effect for one year. The Bank
also offers variable rate loans secured by non-owner-occupied properties, which
adjust based upon a spread above either the prime rate or the one-year U.S.
Treasury Securities Index, adjusted to constant maturity. These loans are made
in amounts of up to $600,000 and for terms of up to 25 years. The Bank makes
such loans up to 70% of the appraised value of the secured property. For the
year ended December 31, 1996, the Bank originated $66.4 million of one- to
four-family residential ARM loans.
The retention of ARM loans, as opposed to fixed-rate residential loans,
in the Bank's loan portfolio helps reduce the Bank's exposure to increases in
interest rates. However, ARM loans generally pose credit risks different from
the risks inherent in fixed-rate loans, primarily because as interest rates
rise, the underlying payments of the borrowers rise, thereby increasing the
potential for default. At the same time, the marketability of the underlying
property may be adversely affected. In order to minimize risks, the borrowers of
one-year ARM loans are qualified at 2.0% above the fully-indexed rate. The Bank
does not originate ARM loans which provide for negative amortization.
The volume and types of ARM loans originated by the Bank are affected
by such market factors as the level of interest rates, competition, consumer
preferences for ARM versus fixed-rate loans and the availability of funds.
Although the Bank will continue to offer ARM loans, there can be no assurance
that, in the future, the Bank will be able to originate a sufficient volume of
adjustable rate loans to increase or maintain the proportion that these loans
currently bear to total loans.
The Bank's fixed-rate mortgage loans are currently originated with
terms of 15 or 30 years. Fixed-rate mortgage loans are offered only on
owner-occupied residences. Interest rates charged on fixed-rate loans are
competitively priced on a regular basis based on market conditions. The Bank
originates fixed-rate loans with loan to value ratios of up to 95% of the
appraised value of the property securing the loan, provided that private
mortgage insurance is obtained on loan amounts in excess of 80% of such
appraised value. The Bank generally originates its fixed-rate mortgage loans in
accordance with FNMA standards. For the year ended December 31, 1996, the Bank
originated $10.6 million of fixed-rate one- to four-family residential mortgage
loans.
The Bank also originates home equity loans and home equity lines of
credit, which are secured by one- to four-family, owner-occupied primary
residences. These loans are originated as either fixed-rate loans or
variable-rate loans with interest rates of up to 2.0% above the published prime
rate, subject to a lifetime cap of 14.9%. Borrowers are qualified for home
equity loans based on the maximum lifetime rate. Home equity loans and lines of
credit are originated with loan to value ratios of up to 80% of the appraised
value of the property securing the loan, less existing liens. Home equity loans
and lines of credit are made in amounts of up to $100,000. Home equity lines of
credit are made for terms of 30 years and allow the borrower to draw on the line
for a period of 15 years. Interest only payments are due during the first 15
years of the line with principal amortization thereafter on a 15 year basis. At
December 31, 1996, home equity loans and lines of credit totaled $28.1 million
or 8.2% of total loans receivable.
MULTI-FAMILY LENDING. The Bank originates adjustable-rate multi-family
loans and, in the past, had originated fixed-rate multi-family loans in its
primary lending areas and in New York City. Since October 1990, the Bank has not
originated loans to new customers secured by multi-family properties located
outside its primary lending area. At December 31, 1996, multi-family loans
totaling $7.2 million, or 50% of total multi-family loans, were secured by
properties located in New York City, and multi-family loans totaling $7.2
million, or 50% of total multi-family loans, were secured by properties located
in the Bank's primary lending area. Multi-family loans are originated with loan
to value ratios of up to 75% of the appraised value of the property securing the
loan, based on an independent appraisal. In making such loans, the Bank bases
its underwriting decision primarily on the net operating income generated by the
real estate to support the debt
8
<PAGE>
service. The Bank also considers the financial resources and income level of the
borrower if the property is owner-occupied, the borrower's experience in owning
or managing similar property types, the marketability of the property and the
Bank's lending experience with the borrower. Loans secured by properties
experiencing high vacancy rates are qualified solely on the basis of the
borrower's income and financial resources.
The largest multi-family loan at December 31, 1996 had an outstanding
balance of $3.1 million and is secured by an apartment building located in the
Bank's primary lending area. This loan was current as to the payment of
principal and interest as of December 31, 1996. The Bank's second largest
multi-family loan had an outstanding balance of $1.5 million at December 31,
1996, and is secured by a co-op conversion building located in New York City. At
December 31, 1996, this loan was current as to the payment of principal and
interest.
COMMERCIAL REAL ESTATE LENDING. Loans secured by commercial real estate
totaled $45.5 million, or 13.4% of the Bank's total loans receivable, at
December 31, 1996. Commercial real estate loans are generally originated with
loan to value ratios of up to 75% of the appraised value of the property
securing the loan. Such appraised value is determined by an independent
appraiser previously approved by the Bank. The Bank also obtains personal
guarantees on commercial real estate loans when it is able to do so. The Bank
currently originates commercial real estate loans with adjustable rates based on
a spread above either the published prime rate or a U.S. Treasury Securities
Index, adjusted to constant maturity and with maturities of three to five years
which typically require principal payments based on a 15-year amortization
period. The Bank's commercial real estate loans are permanent loans secured by
improved property such as small office buildings, retail stores and other
non-residential buildings. Historically, the Bank made commercial real estate
loans in New York City. However, since October 1990, the Bank has curtailed its
lending in that area.
The largest commercial real estate loan at December 31, 1996 had an
outstanding balance of $3.8 million and is secured by a warehouse and office
building in an industrial park located in the Bank's primary lending area. The
second largest commercial real estate loan had an outstanding balance of $3.5
million and is secured by agricultural real estate located in the Bank's primary
lending area. Both loans were current as to the payment of principal and
interest at December 31, 1996.
Loans secured by commercial real estate properties generally involve a
greater degree of risk than residential mortgage loans. Because payment on loans
secured by commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks by lending to
established customers and currently restricts such loans to its primary market
area.
COMMERCIAL BUSINESS LENDING. The Bank makes commercial business loans
to businesses located in the Bank's primary market area. At December 31, 1996,
commercial business loans totaled $8.8 million or 2.6% of total loans
receivable. Commercial business loans include short-term (90 days or less)
loans, commercial lines of credit, installment loans and medium term (up to 10
years) loans. Commercial business loans may be unsecured or secured by
inventory, accounts receivable or vehicles. Commercial business loans carry
adjustable interest rates based on a spread above the published prime rate.
Personal guarantees are obtained on loans to closely held companies. The largest
commercial business loan at December 31, 1996 had an outstanding balance of
$750,000 and was current as to the payment of principal and interest at such
date.
CONSUMER LENDING. Consumer loans, which amounted to $14.4 million, or
4.2% of total loans receivable at December 31, 1996, consist primarily of line
of credit loans, education loans, home improvement loans and unsecured personal
loans.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. All loans originated by the
Bank and secured by real estate must have the approval of the members of the
Bank's Board of Directors. The Board of Directors meets on an as-needed basis,
which is typically once a week. Consumer loans in amounts up to $25,000 may be
approved by the Bank's President and Chief Executive Officer, Executive Vice
President and Vice President, Retail Lending. Unsecured commercial business
loans in amounts up to $40,000 and secured commercial business loans in amounts
up to $100,000 may be approved by the Bank's commercial loan officers. The
9
<PAGE>
President and Chief Executive Officer or Executive Vice President may approve
unsecured commercial business loans in amounts up to $125,000 and secured
commercial business loans in amounts up to $250,000. All other consumer and
commercial loans must be approved by the Bank's Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered, income and
certain other information is verified and, if necessary, additional financial
information is requested. An appraisal of the real estate intended to secure the
proposed loan is required and is currently performed by an independent appraiser
designated and approved by the Board of Directors. The Bank requires title
insurance on all first mortgage loans. Borrowers must also obtain hazard
insurance prior to closing. Borrowers generally are required to advance funds on
a monthly basis together with each payment of principal and interest to a
mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes, hazard insurance premiums and private mortgage insurance
premiums, if required.
CONCENTRATIONS. At December 31, 1996, the largest aggregate amount of
loans outstanding to any one borrower and affiliates consisted of two commercial
real estate loans to two companies with respect to which the same person is one
of the guarantors for each loan. These loans aggregate $5.9 million. The larger
of the two loans, which constitutes the Bank's largest commercial real estate
loan, amounted to $3.8 million. The aggregate loans to this borrower did not
exceed the Bank's "loans to one borrower" limitation at December 31, 1996, of
$6.4 million. See "Regulation -- Regulation of Federal Savings Associations --
Loans to One Borrower." At December 31, 1996, all loans to this borrower were
current.
DELINQUENCIES AND FORECLOSED ASSETS
DELINQUENT LOANS. The Bank's mortgage loan collection procedures
include the sending of a late notice at the time a payment is over 15 days past
due with a second notice being sent at the time the payment becomes 30 days past
due. A letter is sent after the 45th day of delinquency. In the event that
payment is not received, personal contact is made with the borrower. If payment
remains uncollected, another letter is sent, and additional contact is made with
the borrower. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. Most loan
delinquencies are cured within 90 days, and no legal action is taken.
Foreclosure notices are sent when a loan is 90 days delinquent.
The Loan Policy and Review Committee generally meets monthly to review
loan charge-offs and delinquency reports, as well as all purchase offers on real
estate owned ("ORE") and the status of other ORE properties.
10
<PAGE>
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent but on which the Bank is accruing
interest and foreclosed real estate at the dates indicated. The Bank generally
discontinues accruing interest on delinquent loans 90 days or more past due, at
which time all accrued but uncollected interest is reversed.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------- AT SEPTEMBER 30,
1996 1995 1994 1993 1993
------------ ------------- ------------ ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NON-PERFORMING LOANS (LOANS
DELINQUENT 90 DAYS OR MORE):
Loans in non-accrual status:
One- to four-family........... $ 3,364 $ 2,343 $ 1,507 $ 990 $ 826
Multi-family.................. 69 69 62 -- --
Commercial real estate........ 1,125 488 182 110 110
-------- -------- -------- -------- ---------
Total mortgage loans....... 4,558 2,900 1,751 1,100 936
Other loans................... 217 61 15 52 42
Credit cards.................. -- -- -- -- --
-------- -------- -------- -------- ---------
Total non-accrual.......... 4,775 2,961 1,766 1,152 978
-------- -------- -------- -------- ---------
LOANS DELINQUENT 90 DAYS OR MORE
AND IN ACCRUAL STATUS:
Mortgage loans................ -- -- -- 1 --
Other loans................... -- -- -- 5 --
-------- -------- -------- -------- ---------
Total...................... -- -- -- 6 --
-------- -------- -------- -------- ---------
Total non-performing loans...... 4,775 2,961 1,766 1,158 978
Foreclosed real estate.......... 915 806 716 1,301 1,397
-------- -------- -------- -------- ---------
Total non-performing assets..... $ 5,690 $ 3,767 $ 2,482 $ 2,459 $ 2,375
======== ======== ======== ======== =========
Ratio of non-performing loans to
total loans ................. 1.40% 1.05% 0.76% 0.63% 0.56%
Ratio of non-performing assets to
total assets................. 0.69% 0.83% 0.61% 0.60% 0.57%
</TABLE>
At December 31, 1996 and 1995, potential problem loans, which represent
loans having more than normal credit risk amounted to $1.2 million and $539,000,
respectively. These loans were performing at December 31, 1996 and 1995.
However, if economic conditions deteriorate, these loans may become
non-performing in the future.
At December 31, 1996, loans delinquent 90 days or more totaled $4.8
million and included 51 one- to four-family residential loans totaling $3.4
million, virtually all of which are located in the Bank's primary lending area.
The effect on interest income of non-accrual loans was $413,000, $134,000 and
$116,000 for the years ended December 31, 1996, 1995 and 1994, respectively. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Results of Operations - Provision for Loan Losses."
FORECLOSED ASSETS. At December 31, 1996, foreclosed real estate totaled
$915,000 and consisted primarily of one- to four-family properties. During 1996,
the Bank charged off $237,000 relating to foreclosed properties.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectibility may not be reasonably assured, considers,
among other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experiences and other factors that
warrant recognition in providing for an adequate loan loss allowance. 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
11
<PAGE>
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.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED SEPTEMBER 30,
-------------------------------------- DECEMBER 31 ---------------------------
1996 1995 1994 1993 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period. $ 1,659 $ 1,459 $ 1,466 $ 1,437 $ 1,209 $ 825
Provision for loan losses...... 1,400 483 119 38 527 1,681
Loans charged off:
Mortgage loans............... 634 234 28 -- 71 858
Other........................ 485 73 105 12 300 479
------- ------- -------- ------- ------- --------
Total loans charged off... 1,119 307 133 12 371 1,337
------- ------- -------- ------- ------- --------
Recoveries:
Mortgage loans............... 1 2 -- -- 2 --
Other........................ 19 22 7 3 70 40
------- ------- -------- ------- ------- --------
Total recoveries.......... 20 24 7 3 72 40
------- ------- -------- ------- ------- --------
Charge-offs net of recoveries.. 1,099 283 126 9 299 1,297
------- ------- -------- ------- ------- --------
Balance at end of period....... $ 1,960 $ 1,659 $ 1,459 $ 1,466 $ 1,437 $ 1,209
======= ======= ======== ======= ======= ========
At end of period allocated to:
Mortgage loans............... $ 1,556 $ 1,328 $ 1,262 $ 1,318 $ 1,308 $ 801
Other........................ 404 331 197 148 129 408
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.36% 0.11% 0.06% 0.01% 0.18% 0.77%
Ratio of allowance for loan
losses to net loans
receivable at the end of the
period...................... 0.58 0.59 0.63 0.80 0.83 0.71
Ratio of allowance for loan
losses to total
non-performing assets at the
end of the period........... 34.45 44.04 58.78 59.62 60.51 28.40
Ratio of allowance for loan
losses to non-performing
loans at the end of the period 41.05 56.03 82.62 126.60 146.93 41.91
</TABLE>
12
<PAGE>
The following table sets forth the Bank's allocation of its allowance
for loan losses to the total amount of loans in each category listed. The
numbers contained in the "Amount" column indicate the allowance for loan losses
allocated for each particular loan category. The numbers contained in the column
entitled "Percentage of Loans in Category to Total Loans" indicate the total
amount of loans in each particular category as a percentage of the Bank's total
loan portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------- ------------------------- -------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF LOANS OF LOANS OF LOANS OF LOANS
IN IN IN IN
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- ---------- ---------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $ 779 75.6% $ 713 78.6% $ 921 81.1% $ 730 78.9%
Multi-family............ 26 4.2 167 5.1 217 5.9 280 7.1
Commercial real
estate................ 751 13.4 448 10.5 124 8.4 308 8.4
-------- -------- -------- ------- ------- ------- -------- -------
Total mortgage
loans............... 1,556 93.2 1,328 94.2 1,262 95.4 1,318 94.4
-------- ------- -------- ------- ------- ------- -------- -------
Other loans:
Commercial.............. 166 2.6 114 2.0 60 1.3 50 1.6
Consumer................ 238 4.2 217 3.8 137 3.3 98 4.0
Credit cards............ -- -- -- -- -- -- -- --
-------- ------- -------- ------- ------- ------- -------- -------
Total other loans..... 404 6.8 331 5.8 197 4.6 148 5.6
-------- ------- -------- ------- ------- ------- -------- -------
Total................. $ 1,960 100.0% $ 1,659 100.0% $ 1,459 100.0% $ 1,466 100.0%
======== ======= ======== ======= ======= ======= ======== =======
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------
1993 1992
---------------------- ---------------------------
PERCENTAGE PERCENTAGE
OF LOANS OF LOANS
IN IN
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $ 548 79.2% $ 415 76.5%
Multi-family............ 520 7.4 3 6.5
Commercial real
estate................ 240 8.4 383 8.8
-------- ------- -------- -------
Total mortgage
loans............... 1,308 95.0 801 91.8
-------- ------- -------- -------
Other loans:
Commercial.............. 37 1.2 35 .7
Consumer................ 92 3.8 71 3.4
Credit cards............ -- -- 302 4.1
-------- ------- -------- -------
Total other loans..... 129 5.0 408 8.2
-------- ------- -------- -------
Total................. $ 1,437 100.0% $ 1,209 100.0%
======== ======= ======== =======
</TABLE>
13
<PAGE>
The following is a summary of charge-offs and recoveries by loan type:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ------------ --------------------
1996 1995 1994 1993 1993 1992
------------ ------------ ------------- ------------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Charge-offs:
Mortgage loans:
One- to four-family...... $ 528 $ 28 $ 28 $ -- $ 71 $ 83
Multi-family............. 29 185 -- -- -- 139
Commercial real estate... 77 21 -- -- -- 636
--------- -------- -------- ---------- -------- -------
Total.................. 634 234 28 -- 71 858
--------- -------- -------- ---------- -------- -------
Other loans:
Credit cards............. -- -- -- -- 267 316
Commercial business...... 348 36 50 7 13 116
Consumer................. 137 37 55 5 20 47
--------- -------- -------- ---------- -------- -------
485 73 105 12 300 479
--------- -------- -------- ---------- -------- -------
Total charge-offs...... 1,119 307 133 12 371 1,337
--------- -------- -------- ---------- -------- -------
Recoveries:
Mortgage loans:
One- to four-family...... 1 2 -- -- 2 --
Multi-family............. -- -- -- -- -- --
Commercial real estate... -- -- -- -- -- --
--------- -------- -------- ---------- -------- -------
Total.................. 1 2 -- -- 2 --
--------- -------- -------- ---------- -------- -------
Other loans:
Credit cards............. -- -- -- -- 39 28
Commercial business...... 8 8 -- -- 7 --
Consumer................. 11 14 7 3 24 12
--------- -------- -------- ---------- -------- -------
Total.................. 19 22 7 3 70 40
--------- -------- -------- ---------- -------- -------
Total recoveries....... 20 24 7 3 72 40
--------- -------- -------- ---------- -------- -------
Net charge-offs........ $ 1,099 $ 283 $ 126 $ 9 $ 299 $ 1,297
========= ======== ======== ========== ======== =======
</TABLE>
MORTGAGE-BACKED SECURITIES
The Bank has historically invested in mortgage-backed securities as an
alternative investment during periods of low loan demand. Mortgage-backed
securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgage loans with varying interest rates and
maturities. The interest rate risk characteristics of the underlying pool of
mortgages, as well as the prepayment risk, are passed on to the holder of the
mortgage-backed securities. Consequently, in a declining interest rate
environment, there is a risk that mortgage-backed securities will prepay faster
than anticipated, and the Bank may not be able to reinvest the cash flow from
the mortgage-backed securities into comparable yielding investments. In a rising
interest rate environment, the value of the mortgage-backed securities may be
impaired.
Collateralized Mortgage Obligations ("CMOs") are typically issued by a
special-purpose entity, which may be organized in a variety of legal forms, such
as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities, which are used to collateralize the CMO. Once combined,
the cash flows are divided into "tranches" or "classes" of individual bonds,
thereby creating more predictable average duration for each bond than the
underlying pass-through pools. Accordingly, under the CMO structure, all
principal pay-downs from the various mortgage pools are allocated to a CMO's
first class until it has been paid off, then to a second class until such class
has been paid off and then to the next classes. At December 31, 1996, the
mortgage-backed securities portfolio had an estimated average life of 10.6
years. If the yield curve were to shift 300 basis points immediately, the
average life of these securities would extend to 11.6 years. The loans
underlying the mortgage-backed securities are either guaranteed by the Federal
Home Loan Mortgage
14
<PAGE>
Corporation, the Federal National Mortgage Association or are private issue
mortgage-backed securities which are virtually all rated AAA by nationally
recognized rating services.
Mortgage-backed securities held to maturity had an amortized cost and
fair value of $665,000 and $628,000, respectively, at December 31, 1994. The
Company had no mortgage-backed securities held to maturity at December 31, 1996
and 1995.
Mortgage-backed securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ---------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- ---------- ------------ ----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Collateralized mortgage
obligations:
Federal Home Loan Mortgage
Corporation............... $106,832 $105,577 $ 14,757 $ 14,682 $ 21,426 $ 20,037
Federal National Mortgage
Association............... 37,045 36,234 19,545 19,454 21,092 19,471
Other collateralized
mortgage obligations...... 163,321 159,747 3,215 3,183 2,721 2,552
Mortgage pass-throughs......... 22,672 21,870 12,440 12,456 3,159 2,943
-------- -------- -------- -------- -------- --------
Total........................ $329,870 $323,428 $ 49,957 $ 49,775 $ 48,398 $ 45,003
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth activities in the Bank's mortgage-backed
securities portfolios for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994
-------------- -------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchases of mortgage-backed securities $ 386,330 $ 29,988 $ 21,643
Sales of mortgage-backed securities.... 88,554 20,063 --
Repayments on mortgage-backed securities 16,775 8,930 6,957
----------- --------- ---------
Net increases (decreases) in
mortgage-backed securities, gross... $ 281,001 $ 995 $ 14,686
=========== ========= =========
</TABLE>
SECURITIES ACTIVITIES
The Board of Directors establishes the investment policy of the Bank.
This policy dictates that investment decisions will be made based on the safety
of the security, liquidity requirements of the Bank and potential return on the
securities. The Board of Directors delegates authority to certain executive
officers to carry out the Bank's investment policy. The Chief Executive Officer,
Executive Vice President and Chief Financial Officer meet on an as-needed basis
to make investment decisions.
The Bank's policy permits investments in various types of liquid assets
including United States Treasury obligations, securities of various federal
agencies, obligations of states, certificates of deposits, time deposits and
banker's acceptances of other financial institutions and Federal funds. The Bank
also invests in investment grade corporate debt securities, commercial paper and
other corporate obligations. The Bank does not participate in hedging programs,
interest rate swaps or joint ventures and does not invest in non-investment
grade bonds or high risk mortgage derivatives.
15
<PAGE>
The following table sets forth the amortized cost and market values of
securities available for sale at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- ---------------------------
AMORTIZED MARKET VALUE AMORTIZED MARKET VALUE AMORTIZED MARKET VALUE
COST COST COST
---------- ------------ ----------- ------------ ----------- -------------
(IN THOUSANDS)
Debt securities:
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities......... $ 10,113 $ 9,795 $ 14,495 $ 14,467 $ 33,294 $ 31,119
U.S. Government agencies......... 36,000 35,093 35,266 35,167 18,000 16,382
Industrial and financial bonds.... -- -- 13,274 13,307 -- --
Other investment grade debt 2,111 2,074 9,204 9,299 -- --
securities.................... --------- --------- ---------- --------- ----------- ---------
Total debt securities......... 48,224 46,962 72,239 72,240 51,294 47,501
--------- --------- ---------- --------- ----------- ---------
Equity securities:
Mutual funds...................... 1,221 1,129 1,146 1,114 1,211 1,066
Corporate equity securities....... 2,586 2,594 2,225 2,226 2,216 2,153
--------- --------- ---------- --------- ----------- ---------
Total equity securities....... 3,807 3,723 3,371 3,340 3,427 3,219
--------- --------- ---------- --------- ----------- ---------
Total debt and equity
securities available for sale. $ 52,031 $ 50,685 $ 75,610 $ 75,580 $ 54,721 $ 50,720
========= ========= ========== ========= =========== =========
</TABLE>
The following table sets forth certain information regarding the book
values and market values of the Bank's securities held to maturity at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------ -------------------------- -------------------------
MARKET MARKET MARKET
BOOK VALUE VALUE BOOK VALUE VALUE BOOK VALUE VALUE
------------ --------- -------------- --------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury securities......... $ -- $ -- $ -- $ -- $ 128 $ 127
U.S. Government agencies......... -- -- -- -- 982 958
Industrial and financial bonds.... -- -- -- -- 26,025 25,461
Utility bonds..................... -- -- -- -- -- --
Other investment grade debt
securities.................... -- -- -- -- 4,773 4,694
Corporate equity securities....... -- -- -- -- -- --
-------- -------- -------- ------ --------- ------
Total investment securities
held to maturity.............. $ -- $ -- $ -- $ -- $ 31,908 $31,240
======== ======== ======== ====== ========= =======
</TABLE>
16
<PAGE>
The following table sets forth certain information regarding the
carrying value, weighted average yields and maturities of the Bank's debt
securities available for sale at December 31, 1996:
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
-------------------------- ------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----------- -------------- ------------ ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities.. $ -- --% $ 5,002 5.12% $ 5,111 5.63% $-- --%
U.S. Government
securities............... -- -- 11,000 4.86 -- -- 25,000 7.27
Other investment grade
securities............... -- -- -- -- -- -- 2,111 5.56
-------- --------- ------- ------- -------- ------- ------- -------
Total..................... $ -- --% $16,002 4.94% $ 5,111 5.63% $27,111 7.14%
======== ======= ======== =======
<CAPTION>
TOTAL SECURITIES
-----------------------------------
REMAINING WEIGHTED
YEARS TO CARRYING MARKET AVERAGE
MATURITY VALUE VALUE YIELD
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities.. 4.06 $10,113 $ 9,795 5.38%
U.S. Government
securities............... 10.53 36,000 35,093 6.53
Other investment grade
securities. ............. 20.79 2,111 2,074 5.56
------- ------- --------
Total..................... $48,224 $46,962 6.25%
======= =======
</TABLE>
17
<PAGE>
There were no investment securities (exclusive of obligations of the
U.S. Government and federal agencies) issued by any one entity with a total
carrying value in excess of 10% of retained earnings at December 31, 1996.
SOURCES OF FUNDS
GENERAL. Deposits, repayments of loans and mortgage-backed securities,
maturities of securities and securities sales are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes.
During 1996, the Company primarily utilized borrowings to provide liquidity as
necessary rather than sell securities. At December 31, 1996, there were no
borrowings outstanding. In the event that the Bank is not able to generate
sufficient funds from its customer base, it has available unused lines of credit
totaling $46.0 million from the Federal Home Loan Bank ("FHLB") of New York.
DEPOSITS. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank's deposits consist of savings accounts,
Super NOW, money market, checking accounts and time deposits. The flow of
deposits is influenced significantly by general economic conditions, changes in
prevailing interest rates and competition. The Bank's deposits are obtained
primarily from the areas in which its banking offices are located. Management
determines the Bank's deposit rates based upon market conditions and local
competition. The Bank does not use brokers to obtain deposits, relying primarily
on customer service and long-standing relationships with customers to attract
and retain these deposits. Time deposits in excess of $100,000 are not actively
solicited by the Bank.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
------------ ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits....................... $ 2,232,851 $ 2,570,384 $ 964,722
Withdrawals.................... 1,916,344 2,550,102 977,416
----------- ----------- -----------
Net change in deposits......... 316,507 (1) 20,282 (2) (12,694)
Interest credited on deposits.. 30,710 13,742 10,683
----------- ----------- -----------
Total increase (decrease)
in deposits.................. $ 347,217 $ 34,024 $ (2,011)
=========== =========== ===========
</TABLE>
- -------------------------
(1) Includes $414.8 million in deposits assumed in connection with the Bank's
acquisition of the Acquired Branches from First Nationwide.
(2) Includes $21.8 million in deposits assumed in connection with the Bank's
acquisition of the Central Valley branch.
18
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
for each category of deposits presented.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ----------------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- ---------- -------- --------- ---------- -------- -------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Savings
accounts...... $193,702 26.3% 3.28% $128,696 33.1% 3.00% $142,066 40.0% 3.00%
NOW accounts... 39,242 5.3 2.00 16,833 4.3 2.00 15,154 4.3 1.75
Checking
accounts...... 47,441 6.5 -- 37,290 9.6 -- 29,728 8.4 --
------- ------- ------- ------- ------- -------
Total........ 280,385 38.1 182,819 47.0 186,948 52.7
Money market
accounts......... 52,004 7.1 4.25 44,353 11.4 3.21 42,229 11.9 3.88
Time deposits:
Within 1 year.. 293,472 39.9 5.21 117,374 30.2 5.34 85,548 24.1 4.28
Due 1 year to
3 years........ 51,568 7.0 5.44 25,772 6.6 5.62 23,056 6.5 5.22
Over 3 years... 25,027 3.4 6.08 7,342 1.9 5.92 9,925 2.8 5.36
$100,000 or
more.......... 33,705 4.5 5.45 11,284 2.9 5.47 7,214 2.0 4.71
------- ------- ------- ------- ------- -------
Total........ 403,772 54.8 5.31 161,772 41.6 5.42 125,743 35.4 4.56
------- ------- ------- ------- ------- -------
Total
deposits.... $736,161 100.0% 4.18% $388,944 100.0% 3.70% $354,920 100.0% 3.35%
======== ======= ======== ======= ======== =======
</TABLE>
At December 31, 1996, the Bank had outstanding $33.7 million in time
deposits in amounts of $100,000 or more maturing as follows:
AMOUNT
-------------
MATURITY PERIOD (IN THOUSANDS)
- ---------------
Three months or less................................. $ 6,892
Over three through six months........................ 8,852
Over six through 12 months........................... 8,914
Over 12 months....................................... 9,047
-------
Total.............................................. $33,705
=======
The following table presents by various rate categories the amount of
time deposits outstanding at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994
------------------ ------------------- ------------------
INTEREST RATE RANGE (IN THOUSANDS)
-------------------
<S> <C> <C> <C>
3.00% to 3.99%.................... $ 2,867 $ 2,341 $ 46,882
4.00% to 4.99%.................... 127,307 46,698 30,775
5.00% to 5.99%.................... 219,088 66,160 39,454
6.00% to 6.99%.................... 45,342 46,488 8,548
7.00% to 7.99%.................... 9,117 85 84
8.00% to 8.99%.................... 51 -- --
------------ ------------ ------------
Total......................... $ 403,772 $ 161,772 $ 125,743
============ ============ ============
</TABLE>
19
<PAGE>
BORROWINGS
During 1996, the Bank utilized borrowings to provide liquidity rather
than sell securities. During 1996, the sale of securities would have resulted in
a loss due to market conditions. During the fourth quarter of 1996, market
conditions improved and the Bank decided to sell securities to repay borrowings
and provide liquidity. During the second quarter of 1995, the Bank entered into
repurchase agreements with maturities ranging from three months to one year and
utilized these borrowings to increase its investments in securities available
for sale and mortgage-backed securities available for sale. At December 31,
1995, all borrowings had been repaid. The Bank may also obtain advances from the
FHLB as an alternative to retail deposit funds or repurchase agreements and may
do so in the future as part of its operating strategy. FHLB advances may also be
used to acquire certain other assets as may be deemed appropriate for investment
purposes. These advances would be collateralized primarily by certain of the
Bank's mortgage loans and mortgage-backed securities and secondarily by the
Bank's investment in capital stock of the FHLB. See "Regulation -- Regulation of
Federal Savings Associations -- Federal Home Loan Bank System." Such advances
may be made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions, including the Bank, fluctuates from time to time
in accordance with the policies of the OTS and the FHLB. At December 31, 1996,
the maximum amount of FHLB advances available to the Bank was $46.0 million,
based on the Bank's current investment in FHLB stock.
SUBSIDIARY ACTIVITIES
MSB Financial Services, Inc. ("MSB Financial"), a wholly-owned
subsidiary of the Bank, offers a full range of investment and insurance products
and services. As part of the Acquisition of the First Nationwide Branches, MSB
Financial acquired substantially all of the assets and liabilities related First
Nationwide's subsidiaries, FN Investment Center and FN Investment Center of New
York, which also offer a full range of investment and insurance products and
services.
The Company organized a wholly-owned subsidiary corporation, MSB
Travel, in January 1996, to offer travel services to the Bank's customers. MSB
Travel acquired the travel business of a travel agency located in Middletown,
New York.
SAVINGS BANK LIFE INSURANCE
As an agent bank, the Bank offers Savings Bank Life Insurance ("SBLI")
to its customers up to the legal maximum of $50,000 per insured individual and,
as a trustee bank, offers an additional $350,000 in group coverage per insured
under SBLI's Financial Institution Group Life Insurance policy. Fees generated
from SBLI are not significant, although management believes that offering SBLI
is beneficial to the Bank's relationship with its depositors and the general
public.
PERSONNEL
At December 31, 1996, the Bank had 200 full-time employees and 69
part-time employees. The employees are not represented by a collective
bargaining unit, and the Bank considers its relationship with its employees to
be good.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank.
The Bank has in the past filed a consolidated tax return with its
subsidiary MSB Financial. Generally, the Bank is subject to a maximum federal
tax rate of 34 percent. The Company filed a 1995 consolidated tax return
including the Bank and MSB Financial.
20
<PAGE>
BAD DEBT RESERVES. Prior to the enactment, on August 20, 1996, of the
Small Business Job Protection Act of 1996 (the "1996 Act"), for federal income
tax purposes, thrift institutions such as the Bank, which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debt and to make
annual additions thereto, which additions could, within specified limitations,
be deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, could be computed using an amount based on a
six-year moving average of the Bank's actual loss experience (the "Experience
Method"), or a percentage equal to 8.0% of the Bank's taxable income (the "PTI
Method"), computed without regard to this deduction and with additional
modifications and reduced by the amount of any permitted addition to the
non-qualifying reserve. Similar deductions for additions to the Bank's bad debt
reserve are permitted under the New York State Bank Franchise Tax; however, for
purposes of this tax, the effective allowable percentage under the PTI Method is
32% rather than 8%.
Under the 1996 Act, the PTI Method was repealed and the Bank, as a
"large bank" (one with assets having an adjusted basis of more than $500
million), will be unable to make additions to its tax bad debt reserve and will
be permitted to deduct bad debts only as they occur and will be required to
recapture (i.e., take into income) over a six-year period, beginning with the
Bank's taxable year beginning January 1, 1996, the excess of the balance of its
bad debt reserves (other than the supplemental reserve) as of December 31, 1995,
over the balance of such reserves as of December 31, 1987. However, under the
1996 Act, such recapture requirements will be suspended for each of the two
successive taxable years beginning January 1, 1996, in which the Bank originates
a minimum amount of certain residential loans during such years that is not less
than the average of the principal amounts of such loans made by the Bank during
its six taxable years preceding January 1, 1996. The New York State tax law has
been amended to prevent a similar recapture of the Bank's New York State tax
liability.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserves.
The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the amount so used would be includable in gross income for
federal income tax purposes, assuming a 34% corporate income tax rate.
STATE AND LOCAL TAXATION
The Company is subject to the New York State Franchise Tax on Banking
Corporations in an annual amount equal to the greater of (i) 9% of the Company's
"entire net income" allocable to New York State during the taxable year, or (ii)
the applicable alternative minimum tax. The alternative minimum tax is generally
the greatest of (a) 0.01 % of the value of the Bank's assets allocable to New
York State with certain modifications, (b) 3% of the Bank's "alternative entire
net income" allocable to New York State, or (c) $250. Entire net income is
similar to federal taxable income, subject to certain modifications (including
the fact that net operating losses cannot be carried back or carried forward)
and alternative entire net income is equal to entire net income without certain
deductions.
A Metropolitan Commuter Transportation District Surcharge on the New
York State Franchise Tax on banking corporations doing business within the
District has been applied since 1982. The Company does all of its business
within the District and is subject to this surcharge rate of 17%.
21
<PAGE>
As a Delaware business corporation, the Company is required to file
annual returns and pay annual fees and an annual franchise tax to the State of
Delaware. These taxes and fees are not material. For purposes of New York State
tax law, the Company and the Bank file a combined return.
REGULATION
GENERAL
Prior to October 27, 1995, the Bank was a New York state-chartered
savings bank and subject to extensive regulation, examination and supervision by
the Superintendent of Banks of the State of New York, as the Bank's primary
regulator, and the Federal Deposit Insurance Corporation ("FDIC"), as its
deposit insurer. In addition, as a bank holding company, the Company was subject
to the regulation, examination and supervision of the Federal Reserve Board
("FRB"). With the conversion of the Bank to a federal savings bank on October
27, 1995, the Office of Thrift Supervision ("OTS") replaced the Superintendent
of Banks of the State of New York as the Bank's chartering authority and primary
regulator and the FRB as the Company's primary regulator. As a federal savings
bank, the Bank is subject to regulation, examination and supervision by the OTS
and continues to be subject to the back-up examination and supervision of the
FDIC as its deposit insurer. The Bank is a member of the Bank Insurance Fund
("BIF"), and its deposit accounts are insured up to applicable limits by the
FDIC. The Bank pays deposit insurance assessments to both the BIF and the
Savings Association Insurance Fund ("SAIF"). The Bank is also a member of the
FHLB of New York. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approvals prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS and the FDIC conduct
periodic examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors. The
Company, as a savings and loan holding company, files certain reports with, and
otherwise complies with, the rules and regulations of the OTS and of the
Commission under the federal securities laws.
The OTS and the FDIC have significant discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
The Company as a savings and loan holding company is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and any of its non-savings
association subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
financial safety, soundness or stability of a subsidiary savings association.
The Home Owners' Loan Act, as amended ("HOLA"), prohibits a savings and
loan holding company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings association or holding company
thereof, without prior written approval of the OTS; acquiring or retaining, with
certain exceptions, more than 5.0% of a non-subsidiary savings association, a
non-subsidiary holding company or a
22
<PAGE>
non-subsidiary company engaged in activities other than those permitted by HOLA;
or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating an application by a holding company to
acquire a savings association, the OTS must consider the financial and
managerial resources and future prospects of the company and savings association
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to satisfy the qualified
thrift lender ("QTL") test. See "-- Regulation of Federal Savings Associations
- -- QTL Test" for a discussion of the QTL requirements. Upon any non-supervisory
acquisition by the Company of another savings association or savings bank that
meets the QTL test, that is deemed to be a savings association by the OTS and
that will held as a separate subsidiary, the Company would become a multiple
savings and loan holding company and would be subject to limitations on the
types of business activities in which it could engage. HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
association subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, as amended
("BHC Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings associations
in more than one state, subject to two exceptions: an acquisition of a savings
association in another state (i) in a supervisory transaction, and (ii) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined by the location of its subsidiary savings association)
and the state in which the association to be acquired is located, have each
enacted legislation allowing its savings associations to be acquired by
out-of-state holding companies on the condition that the laws of the other state
authorize such transactions on terms no more restrictive than those imposed on
the acquirer by the state of the target association. Some of these states also
impose regional limitations, which restrict such acquisitions to states within a
defined geographic region. Other states allow full nationwide banking without
any condition of reciprocity. Some states do not authorize interstate
acquisitions of savings associations.
Transactions between the Bank and the Company and its other
subsidiaries would be subject to various conditions and limitations. See "--
Regulation of Federal Savings Associations -- Transactions with Related
Parties." The Bank would have to give 30-days written notice to the OTS prior to
any declaration of the payment of any dividends or other capital distributions
to the Company. See "-- Regulation of Federal Savings Associations -- Limitation
on Capital Distributions."
Under various industry restructuring legislative proposals that have
been introduced in the Congress, all federal savings banks would be required to
convert to national or state bank charters by January 1, 1998 and would
thereafter be subject to regulation as commercial banks. All savings and loan
holding companies, in turn, would be required to register as bank holding
companies under the BHC Act, and those holding companies that were not unitary
savings and loan holding companies on September 13, 1995 would become subject to
the activities restrictions set forth in the BHC Act as well as the restrictions
on affiliations with entities primarily engaged in securities underwriting
contained in the Glass-Steagall Act ("GSA"). While the outcome of the ongoing
efforts to merge the thrift industry into the banking industry and to reorganize
and consolidate the federal regulatory structure are uncertain at this time, the
foregoing proposal, if enacted, would cause the Company to be regulated once
again as a bank holding company. As such, the Company would be subject to
examination, regulation and periodic reporting under the BHC Act, as
administered by the FRB. However, given that until October 27, 1995 the Company
was registered as a bank holding company and had been subject to the various
provisions of the BHC Act and the GSA, it is not anticipated that any
legislation that would cause the Company to once again become regulated as a
bank holding company would have any negative material impact on its business or
operations.
23
<PAGE>
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers
from the HOLA, and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of debt
securities, and certain other assets. The Bank may also establish service
corporations that may engage in activities not otherwise permissible for the
Bank, including certain real estate equity investments and securities and
insurance brokerage. These investment powers are subject to various limitations,
including: (i) a prohibition against the acquisition of any corporate debt
security that is not rated in one of the four highest rating categories; (ii) a
limit of 400% of an association's capital on the aggregate amount of loans
secured by nonresidential real estate property; (iii) a limit of 10% of an
association's assets on the aggregate amount of commercial loans; (iv) a limit
of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (v) a limit of 5.0% of assets on the
aggregate amount of non-conforming loans (loans in excess of the specific
limitations of HOLA); and (vi) a limit of the greater of 5.0% of assets or an
association's capital on the aggregate amount of certain construction loans made
for the purpose of financing what is or is expected to become residential
property.
LOANS TO ONE BORROWER. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. An additional amount may be
lent, equal to 10% of unimpaired capital and surplus, if such loan or extension
of credit is fully secured by readily-marketable collateral. Such collateral is
defined to include certain debt and equity securities and bullion, but generally
does not include real estate. At December 31, 1996, the Bank's limit on loans to
one borrower was $6.4 million. At December 31, 1996, the Bank's largest
aggregate amount of loans to one borrower was $5.9 million, and the second
largest borrower had an aggregate balance of $3.8 million.
QTL TEST. HOLA requires a savings association to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" in certain "qualified thrift investments" in at least 9
months of the most recent 12-month period. "Portfolio assets" means, in general,
an association's total assets less the sum of (i) specified liquid assets up to
20% of total assets, (ii) certain intangibles, including goodwill and credit
card and purchased mortgage servicing rights, and (iii) the value of property
used to conduct the association's business. "Qualified thrift investments"
includes various types of loans made for residential and housing purposes,
investments related to such purposes, including certain mortgage-backed and
related securities, and consumer loans up to 10% of the association's portfolio
assets. At December 31, 1996, the Bank maintained 88.8% of its portfolio assets
in qualified thrift investments. The Bank had also met the QTL test in all of
the prior 12 months and was, therefore, a qualified thrift lender.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (i) engaging in any new activity not
permissible for a national bank, (ii) paying dividends not permissible under
national bank regulations, (iii) obtaining new advances from any FHLB, and (iv)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the BHC Act. If the savings association does not re-qualify under the QTL
test within the three-year period after it failed the QTL test, it would be
required to terminate any activity and to dispose of any investment not
permissible for a national bank and would have to repay as promptly as possible
any outstanding advances from an FHLB. A savings association that has failed the
QTL test may re-qualify under the QTL test and be free of such limitations, but
it may do so only once.
CAPITAL REQUIREMENTS. 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
24
<PAGE>
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. See "-- Prompt Corrective Regulatory Action." 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 asset.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible debt securities, subordinated
debt and intermediate preferred stock and the allowance for loan and lease
losses. The allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount
of supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has adopted regulations that require a savings association with
"above normal" interest rate risk to deduct a portion of capital from its total
capital to account for the "above normal" interest rate risk when determining
its compliance with the risk-based capital requirement. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) resulting from a
hypothetical 2.0% increase or decrease in market rates of interest, divided by
the estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. At the times when the 3-month
Treasury bond equivalent yield falls below 4.0%, an association may compute its
interest rate risk on the basis of a decrease equal to one-half of that Treasury
rate rather than on the basis of 2.0%. A savings association whose measured
interest rate risk exposure exceeds 2.0% would be considered to have "above
normal" risk. The interest rate risk component is an amount equal to one-half of
the difference between the association's measured interest rate risk and 2.0%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Any required deduction for
interest rate risk becomes effective on the last day of the third quarter
following the reporting date of the association's financial data on which the
interest rate risk was computed. The regulations authorize the Director of the
OTS to waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has not yet implemented the regulatory requirement
for associations to deduct an interest-rate risk component in calculating their
risk-based capital. At December 31, 1996, the Bank was not required to maintain
any additional risk-based capital under this rule.
25
<PAGE>
At December 31, 1996, the Bank met each of the OTS capital
requirements, in each case on a fully phased-in basis. The table below presents
the Bank's regulatory capital as compared to the OTS regulatory capital
requirements at December 31, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
-------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- --------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital as calculated under GAAP........... $ 70,944 9.0% $ 70,944 9.0% $ 70,944 20.7%
Deduct goodwill............................ 32,835 4.2 32,835 4.2 32,835 9.6
Add qualifying general loan loss allowance,
as limited by regulation................ -- -- -- -- 1,960 0.6
Add net unrealized loss on securities
available for sale, net of taxes........ 4,677 0.6 4,677 0.6 4,677 1.4
------ ----- ------ ----- ------ -----
Capital, as calculated..................... 42,786 5.4 42,786 5.4 44,746 13.1
Capital, as required....................... 11,813 1.5 31,501 4.0 27,339 8.0
------ ----- ------ ----- ------ -----
Excess..................................... $ 30,973 3.9% $ 11,285 1.4% $ 17,407 5.1%
========= ===== ========= ===== ========= =====
</TABLE>
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has capital
in excess of all fully phased-in regulatory capital requirements before and
after a proposed capital distribution and that is not otherwise restricted in
making capital distributions, could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of (i) 100% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year, or (ii) 75% of its net earnings for the previous four quarters.
Any additional capital distributions would require prior OTS approval. In
addition, the OTS can prohibit a proposed capital distribution, otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, the Bank would
be prohibited from making any capital distribution if, after the distribution,
the Bank failed to meet its minimum capital requirements, as described above.
See "-- Prompt Corrective Regulatory Action."
The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings associations. Under the
proposed regulations, the approval of the OTS would be required only for an
association that is deemed to be in troubled condition or that is
undercapitalized or would be undercapitalized after the capital distribution. A
savings association would be able to make a capital distribution without notice
to or approval of the OTS if it is not held by a savings and loan holding
company, is not deemed to be in troubled condition, has received either of the
two highest composite supervisory ratings and would continue to be adequately
capitalized after such distribution. Notice would have to be given to the OTS by
any association that is held by a savings and loan holding company or that had
received a composite supervisory rating below the highest two composite
supervisory ratings. An association's capital rating would be determined under
the prompt corrective action regulations. See "-- Prompt Corrective Regulatory
Action."
LIQUIDITY. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 5.0%. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1.0%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to
26
<PAGE>
meet these liquidity requirements. The Bank's liquidity ratio at December 31,
1996 was 8.9%, which exceeded the applicable requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
ASSESSMENTS. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report.
BRANCHING. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (i) in states that expressly authorize branches of savings
associations located in another state and (ii) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "-- QTL Test." The authority for a federal savings association
to establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (i) a lending test, to evaluate the institution's record of making
loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing and programs benefiting low or moderate income individuals and
businesses; and (iii) a service test, to evaluate the institution's delivery of
services through its branches, automated teller machines ("ATMs") and other
offices. Small savings associations are to be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.
The term "small savings association" is defined as including associations with
less than $250 million in assets or an affiliate of a holding company with
banking and thrift assets of less than $1.0 billion, which would include the
Bank. The amended CRA regulations also clarify how an institution's CRA
performance would be considered in the application process.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (i) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (ii) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset
27
<PAGE>
purchases, must be on terms and under circumstances, including credit
underwriting standards, that are substantially the same or at least as favorable
to the association as those prevailing at the time for comparable transactions
with nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive
officers and 10% stockholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the FRB thereunder. Among other things, these
provisions require that extensions of credit to insiders (i) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (ii) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
association's capital. An exception is made for loans to executive officers made
on the same terms widely available to employees of the association or on terms
that are not preferential to executive officers. In addition, extensions of
credit to insiders in excess of certain limits must be approved by the
association's board of directors.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings associations and has the authority to bring
enforcement action against all "institution-affiliated parties," including any
controlling stockholder or any stockholder, attorney, appraiser and accountant
who knowingly or recklessly participates in any violation of applicable law or
regulation or breach of fiduciary duty or certain other wrongful actions that
causes or is likely to cause a more than a minimal loss or other significant
adverse effect on an insured savings association. Civil penalties cover a wide
range of violations and actions and range from $5,000 for each day during which
violations of law, regulations, orders and certain written agreements and
conditions continue, up to $1,000,000 per day for such violations if the person
obtained a substantial pecuniary gain as a result of such violation or knowingly
or recklessly caused a substantial loss to the institution. Criminal penalties
for certain financial institution crimes include fines of up to $10 million and
imprisonment for up to 30 years. In addition, regulators have substantial
discretion to take enforcement action against an institution that fails to
comply with its regulatory requirements, particularly with respect to its
capital requirements. Possible enforcement actions range from the imposition of
a capital plan and capital directive to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings association. If action is not taken by the
Director of the OTS, the FDIC has authority to take such action under certain
circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act, as amended by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the
Riegle Community Development and Regulatory Improvement Act of 1994 ("Community
Development Act"), requires the OTS, together with the other federal bank
regulatory agencies, to prescribe standards, by regulations or guidelines,
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality, earnings, stock valuation and compensation, fees and
benefits and such other operational and managerial standards as the agencies
deem appropriate. The OTS and the federal bank regulatory agencies adopted,
effective August 9, 1995, a set of guidelines prescribing safety and soundness
standards pursuant to FDICIA as amended. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. The OTS and the other agencies determined
that stock valuation standards were not appropriate. In addition, the OTS
adopted regulations that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to
28
<PAGE>
implement an accepted compliance plan, the OTS must issue an order directing
action to correct the deficiency and may issue an order directing other actions
of the types to which an undercapitalized association is subject under the
"prompt corrective action" provisions of FDICIA. See "-- Prompt Corrective
Regulatory Action." If an institution fails to comply with such an order, the
OTS may seek to enforce such order in judicial proceedings and to impose civil
money penalties. The OTS and the federal bank regulatory agencies also proposed
guidelines for asset quality and earnings standards.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (i) are secured by real estate or (ii) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations
require each savings association to establish and maintain written internal real
estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying OTS guidelines, which include loan-to-value ratios
for the different types of real estate loans. Associations are also permitted to
make a limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of five
categories based on the association's capital. Generally, a savings association
is treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of Tier 1 (core) capital to risk-weighted
assets is at least 6.0%, its ratio of Tier 1 (core) capital to total assets is
at least 5.0%, and it is not subject to any order or directive by the OTS to
meet a specific capital level. A savings association will be treated as
"adequately capitalized" if its ratio of total capital to risk-weighted assets
is at least 8.0%, its ratio of Tier 1 (core) capital to risk-weighted assets is
at least 4.0%, and its ratio of Tier 1 (core) capital to total assets is at
least 4.0% (3.0% if the association receives the highest rating on the CAMEL
financial institutions rating system). A savings association that has a total
risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 (core)
capital ratio that is less than 4.0% (3.0% leverage ratio if the association
receives the highest rating on the CAMEL financial institutions rating system)
is considered to be "undercapitalized." A savings association that has a total
risk-based capital of less than 6.0% or a Tier 1 (core) risk-based capital ratio
or a leverage ratio of less than 3.0% is considered to be "significantly
undercapitalized." A savings association that has a tangible capital to assets
ratio equal to or less than 2.0% is deemed to be "critically undercapitalized."
The elements of an association's capital for purposes of the prompt corrective
action regulations are defined generally as they are under the regulations for
minimum capital requirements. See "-- Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to mandated changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky and any further operational restrictions deemed
necessary by the OTS.
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<PAGE>
If one or more grounds exist for appointing a conservator or receiver
for an association, the OTS may require the association to issue additional debt
or stock, sell assets, be acquired by a depository association holding company
or combine with another depository association. The OTS and the FDIC have a
broad range of grounds under which they may appoint a receiver or conservator
for an insured depository association. Under FDICIA, the OTS is required to
appoint a receiver (or with the concurrence of the FDIC, a conservator) for a
critically undercapitalized association within 90 days after the association
becomes critically undercapitalized or, with the concurrence of the FDIC, to
take such other action that would better achieve the purposes of the prompt
corrective action provisions. Such alternative action can be renewed for
successive 90-day periods. However, if the association continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the OTS makes certain findings with which the FDIC concurs and the
Director of the OTS and the Chairman of the FDIC certify that the association is
viable. In addition, an association that is critically undercapitalized is
subject to more severe restrictions on its activities, and is prohibited,
without prior approval of the FDIC from, among other things, entering into
certain material transactions or paying interest on new or renewed liabilities
at a rate that would significantly increase the association's weighted average
cost of funds.
Where appropriate, the OTS can impose corrective action by a savings
and loan holding company under the "prompt corrective action" provisions of
FDICIA.
INSURANCE OF DEPOSIT ACCOUNTS. The deposits of the Bank are insured by
the Bank Insurance Fund ("BIF") except for those attributable to the Bank's
acquisition of deposits from institutions insured by the Savings Association
Insurance Fund ("SAIF"), including First Nationwide. On September 30, 1996, the
Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into law. The
Funds Act amended the Federal Deposit Insurance Act in several ways to
recapitalize the SAIF and reduce disparity in the assessment rates for BIF and
the SAIF.
The Funds Act authorized the FDIC to impose a special assessment on all
institutions with SAIF-assessable deposits in the amount necessary to
re-capitalize the SAIF. As implemented by the FDIC, the special assessment has
been fixed, subject to adjustment, at 0.657% of an institution's SAIF-assessable
deposits, and the special assessment was paid on November 27, 1996. The special
assessment was based on the amount of SAIF-assessable deposits held at March 31,
1995, as adjusted under the Funds Act. For the Bank, the special assessment on
the deposits held on March 31, 1995, and on the deposits acquired from First
Nationwide (for which the Bank assumed the liability for the special SAIF
assessment as part of the acquisition cost of such deposits), amounted to $2.9
million (before giving effect to any tax benefits).
The Funds Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank has not been so classified by the FDIC or the
OTS. In view of the re-capitalization of the SAIF, the FDIC reduced the
assessment rates for SAIF-assessable deposits for periods beginning on October
1, 1996. As would be effective for the SAIF-assessable deposits of a BIF-insured
institution, such as the Bank, the reduced assessment rates range from 0% to
0.27% of deposits.
In addition, the Funds Act expanded the assessment base for the payment
on the bonds ("FICO bonds") issued in the late 1980s by the Financing
Corporation to re-capitalize the now defunct Federal Savings and Loan Insurance
Corporation. Beginning January 1, 1997, the deposits of both BIF- and
SAIF-insured institutions will be assessed for the payments on the FICO bonds.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The FDIC has
reported that the annual rates of assessment for the payments on the FICO bonds
will be 0.013% for BIF-assessable deposits and 0.0648% for SAIF-assessable
deposits for the semi-annual period beginning on January 1, 1997.
PROPOSED REGULATION AS A NATIONAL BANK. The Funds Act requires the
Secretary of the Treasury to conduct a study of the relevant factors with
respect to the development of a common charter for all insured
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depository institutions and the abolition of separate charters for banks and
thrifts and to report the Secretary's conclusions and findings to the Congress
on or before March 31, 1997. Two bills have been introduced in Congress to
eliminate the federal thrift charter, with one requiring the federal thrift to
convert to a bank charter and the other giving the federal thrift the option to
convert to a national or state chartered bank or to a state savings and loan
association. It is uncertain at this time whether or when any of these proposals
will be enacted or, if enacted, how long the transition period that federal
savings banks will have in which to convert.
In the event that such legislation were enacted and it required the
Bank to convert to a national bank charter, the Bank would become subject to
regulation by the Office of the Comptroller of the Currency ("OCC") under the
provisions of the National Bank Act. While the lending limits, capital
requirements, CRA requirements, transactions with affiliates restrictions, and
prompt corrective action guidelines for federal savings banks and national banks
are essentially the same, the Bank would be regulated somewhat differently in
other respects as a national bank. The commercial loan and other investment
limits applicable to federally-chartered thrifts would no longer apply, and the
Bank would not be required to satisfy the QTL test set forth in the HOLA. The
amount of capital distributions that a national bank can make is slightly
different from those that may be made by a federal savings bank. Under the
National Bank Act, a national bank may pay dividends from "net profits then on
hand," which the OCC has defined as retained earnings (including surplus in
excess of required amounts that is derived from and transferred back to retained
earnings).
National banks are also subject to different regulation as to their
ability to establish and operate branch offices. Whereas a federal savings bank
possesses, subject to certain limitations, full intra-state and inter-state
branching authority, national banks are currently permitted to branch only on an
intra-state basis to the same extent as state-chartered banks in their states.
National banks will not be able to establish inter-state branches generally
until June 1, 1997, and then only through mergers with banks located in other
states. De novo interstate branching and interstate branching through branch
purchases will only be allowed if expressly authorized by the laws of the host
state where the national bank seeks to branch.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of New
York, which is one of the regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of New York, is required to acquire and hold
shares of capital stock in the FHLB of New York in an amount at least equal to
the greater of 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 1/20 of
its advances (borrowings) from the FHLB of New York. The Bank was in compliance
with this requirement with an investment in FHLB of New York stock at December
31, 1996, of $2.4 million. Any advances from a FHLB must be secured by specified
types of collateral, and all long-term advances may be obtained only for the
purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced.
FEDERAL RESERVE SYSTEM. The Bank is subject to provisions of the FRA
and the FRB's regulations pursuant to which depository institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts). The
FRB regulations generally require that reserves be maintained in the amount of
3.0% of the aggregate of transaction accounts up to $49.3 million. The amount of
aggregate transaction accounts in excess of $49.3 million are currently subject
to a reserve ratio of 10.0%, which ratio the FRB may adjust between 8.0% and
12%. The FRB regulations currently exempt $4.4 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed
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<PAGE>
by the FRB may be used to satisfy liquidity requirements imposed by the OTS.
FHLB System members are also authorized to borrow from the Federal Reserve
discount window, but FRB regulations require such institutions to exhaust all
FHLB sources before borrowing from a Federal Reserve Bank.
EXECUTIVE OFFICERS OF THE COMPANY
WILLIAM C. MYERS - Mr. Myers is the Chairman of the Board, President
and Chief Executive Officer of the Company. Mr. Myers also serves as Chairman of
the Board of MSB Financial. Effective October 1, 1993, Mr. Myers was elected
Chairman of the Board of Directors of the Company and the Bank. Mr. Myers joined
the Bank in 1971. Mr. Myers is 51 years old, and his term as director expires in
1998.
GILL MACKAY - Mr. Mackay was appointed Executive Vice President, Chief
Operating Officer and Treasurer on January 1, 1993. Prior to that, Mr. Mackay
served as Senior Vice President, Finance and Chief Financial Officer since 1989.
He joined the Bank in 1984 as Assistant Vice President of Accounting. Mr. Mackay
is 50 years old.
ANTHONY J. FABIANO - Mr. Fabiano was appointed Senior Vice President
and Chief Financial Officer effective January 1, 1996. Prior to that, Mr.
Fabiano served as Vice President, Finance and Chief Financial Officer since
January 1, 1993. He joined the Bank in May 1992 as Vice President, Finance.
Prior to that, he was a senior manager with KPMG Peat Marwick, a public
accounting firm. Mr. Fabiano is 36 years old.
KAREN S. DELUCA - Mrs. DeLuca joined the Bank in 1985 and has served as
the Corporate Secretary since 1991. Prior to that, she served as the Assistant
Corporate Secretary. Mrs. DeLuca is 48 years old.
The term of office of each executive officer extends until the Annual
Meeting of the Board of Directors and until his or her successor is elected and
duly qualified, the office is abolished or he or she is removed. Except as
described in Part III hereof, there are no agreements or understandings between
the Company and any person pursuant to which such person has been elected as an
executive officer.
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<PAGE>
ITEM 2. PROPERTIES
The Company's offices are located at 35 Matthews Street, Goshen, New
York. At December 31, 1996, the Bank conducted its business through 16
full-service banking offices as follows:
<TABLE>
<CAPTION>
NET BOOK
VALUE AT DEPOSITS AT
LEASED/ LEASE DECEMBER DECEMBER
LOCATION OWNED EXPIRATION DATE 31, 1996 31, 1996
- ----------------------------- ----------------- ------------------ ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Home Office
35 Matthews Street Owned N/A $3,786 $ 41,001
Goshen, NY 10924
4 South Street Owned N/A 1,545 119,843
Middletown, NY 10940
Route 211 East Building is owned, 9/15/2015 727 55,821
Middletown, NY 10940 land is leased
205 East Main Street Owned N/A 1,000 93,109
Port Jervis, NY 12771
300 Route 17M & Still Road Owned N/A 555 43,972
Monroe, NY 10950
156 A-B Dolson Avenue Leased 06/10/97(1) 36 27,184
Middletown, NY 10940
800 Broadway Owned N/A 489 16,329
Newburgh, NY 12550
Union Avenue Leased 11/30/04 46 20,024
Newburgh, NY 12550
401 Chester Mall Building is owned, 6/30/08 493 14,230
Chester, NY 10918 land is leased
Rt. 32 Estrada Road Owned N/A 581 19,654
Central Valley, New York
9 Mahopac Plaza Owned N/A 403 43,169
Mahopac, NY 10541
96 Gleneida Avenue Owned N/A 355 41,084
Carmel, NY 10512
21 East Main Street Owned N/A 227 29,999
Washingtonville, NY 10992
51 Main Street Owned N/A 449 38,999
Warwick, NY 10990
285 Broadway Owned N/A 594 60,244
Monticello, NY 12701
74 North Main Street Owned N/A 210 71,499
Liberty, NY 12754 ---------
Total $ 736,161
==========
</TABLE>
- ------------------------
(1) The Bank holds two five-year options to renew the lease until July 2007.
(2) The Bank's lease agreements are operating leases. The net book value at
December 31, 1996 represents the net book value of leasehold improvements
on the leased properties.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Except as described below, the Bank is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.
The Company and its directors are defendants in a lawsuit, POHLI V. MSB
BANCORP, INC. ET AL., commenced by a stockholder in the Delaware Court of
Chancery, New Castle County, on or about November 7, 1995. The plaintiff,
purporting to represent a class consisting of all stockholders except the
stockholder defendants and those affiliated with the stockholder defendants,
alleges that the defendant directors have breached and continue to breach their
fiduciary duties to stockholders by, among other things, failing to give due
consideration to proposals to acquire the Company or its assets, for failing to
maximize stockholder value and for failing to disclose all material facts to
stockholders. The plaintiff, on behalf of the purported class, seeks unspecified
money damages and an affirmative injunction directing the director defendants to
consider and negotiate all bona fide offers or proposals to acquire the Company.
On December 4, 1995, the Company filed an answer denying all of the substantive
allegations contained in the complaint and seeking, among other things, an order
dismissing the complaint with prejudice. This action has been dormant. No
discovery requests have been served by the plaintiffs. The Company intends to
vigorously contest the allegations of wrongdoing in this action.
The Company and its directors are defendants in a lawsuit, KAHN
BROTHERS & CO., INC. ET AL. V. MSB BANCORP, INC. ET AL., commenced by
stockholders in the Delaware Court of Chancery, New Castle County, on or about
November 22, 1995. The plaintiffs, who own in excess of 5% of the outstanding
shares of the Common Stock and purport to represent a class consisting of all
stockholders except the stockholder defendants, allege that the defendant
directors breached their duty of care by failing to become fully informed about
the proposals of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to
stockholders by not notifying the public or the Company's stockholders of
HUBCO's proposals; and breached their duty of good faith and fair representation
by, among other things, not investigating whether the Acquisition constituted a
reasonable alternative for building stockholder value. The plaintiffs further
allege that the Company's offering of Common Stock in connection with the
Acquisition (the "Common Stock Offering") was not intended to enhance
stockholder value, but rather was for the purpose of diluting the ownership and
voting strength of existing stockholders and further entrenching existing
management and the Board. The plaintiffs sought to enjoin the Common Stock
Offering and are also seeking damages equal to the difference between the market
price of the Common Stock on September 7, 1995, and $35 (approximately
$14,989,000 in the aggregate) or, in the alternative, the difference between the
market price of the Common Stock on October 26, 1995, and $25 (approximately
$7,394,000 in the aggregate), including interest and attorneys' and other
professional fees. In connection with this action, plaintiffs filed a motion
seeking expedited discovery and scheduling. On December 6, 1995, in response to
the plaintiffs' motion for expedited proceedings, which was treated by the court
as an application for a temporary restraining order with respect to the Common
Stock Offering, the court denied the plaintiffs' application for such order. On
December 12, 1995, the court denied the plaintiffs' motion for 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 four
of the directors and have
34
<PAGE>
requested the depositions of certain of the remaining director defendants. 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 a 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 yet established any specific litigation
reserves with respect to such matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
35
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been traded on the American Stock Exchange under
the symbol "MBB" since September 19, 1996. Prior to that time, the Common Stock
had been traded on the NASDAQ National Market System under the symbol "MSBB"
since September 3, 1992. On February 24, 1997, the last reported high and low
sale prices of the Common Stock, as reported on the American Stock Exchange,
were $18 7/8 and $18 7/8, respectively. As of December 31, 1996, the Company had
approximately 658 stockholders of record. The following table sets forth the
high and low closing sale prices for the Common Stock, and the cash dividends
declared with respect thereto, for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE CASH DIVIDEND
----------------------- DECLARED PER
HIGH LOW COMMON SHARE
---------- ---------- ------------
<S> <C> <C> <C>
Fiscal year ended December 31, 1994:
First Quarter......................................... $ 18 3/4 $ 17 1/4 $ 0.10
Second Quarter........................................ 22 17 1/4 0.10
Third Quarter......................................... 21 3/4 19 5/8 0.13
Fourth Quarter........................................ 21 3/4 20 0.13
Fiscal year ended December 31, 1995:
First Quarter......................................... 23 20 1/2 0.15
Second Quarter........................................ 24 1/2 22 0.15
Third Quarter......................................... 26 3/4 24 0.15
Fourth Quarter........................................ 27 1/4 17 1/2 0.15
Fiscal year ended December 31, 1996:
First Quarter......................................... 22 17 0.15
Second Quarter........................................ 18 1/4 15 0.15
Third Quarter......................................... 17 1/2 15 3/4 0.15
Fourth Quarter........................................ 19 5/8 15 1/2 0.15
</TABLE>
The Company has paid a regular quarterly cash dividend on its Common
Stock since April 30, 1993 and declared a cash dividend of $0.15 per share for
each of the first, second, third and fourth quarters of 1996 and 1995. The Board
of Directors of the Company presently intends to continue the payment of regular
quarterly cash dividends on the Common Stock. However, the timing and amount of
future dividends will be within the discretion of the Board of Directors of the
Company and will depend on the earnings of the Company and its subsidiaries,
their financial condition, liquidity and capital requirements, applicable
governmental regulations and policies and other factors deemed relevant by the
Board of Directors.
The ability of savings associations to pay dividends is regulated by
OTS regulations and, in certain cases, requires OTS approval. The OTS also has
the authority to prohibit a savings association from engaging in an activity
that, in the OTS' opinion, constitutes an unsafe or unsound practice for
conducting business. Depending upon the financial condition of a savings
association, payment of dividends could be deemed to constitute such an unsafe
or unsound practice. In addition, a savings association may not pay a dividend
or otherwise make a capital distribution if the payment thereof would cause such
savings association to fail to satisfy its capital requirements. See "Regulation
- -- Regulation of Federal Savings Associations -- Limitation on Capital
Distributions."
36
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth selected consolidated historical
financial data of the Company at or for (i) each of the years in the three year
period ended December 31, 1996 and the years ended September 30, 1993 and 1992
(the "Year End Data") and (ii) the 12 months ended December 31, 1993. The
"Financial Condition Data," "Operations Data" and certain "Performance Ratios"
contained in the Year End Data at or for the year ended December 31, 1996, has
been derived from financial statements audited by KPMG Peat Marwick LLP, the
Company's independent auditors. The historical "Financial Condition Data,"
"Operations Data" and certain "Performance Ratios" contained in the Year End
Data for each of the years in the two years ended December 31, 1995 and for each
of the years in the two year period ended September 30, 1993 and the "Financial
Condition Data" at December 31, 1993 are derived from financial statements that
have been audited by Nugent & Haeussler, P.C., the Company's independent public
accountants for those periods. All other information contained in the Year End
Data, and the information at or for the 12 months ended December 31, 1993 are
unaudited.
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE 12 MONTHS
YEAR ENDED ENDED AT OR FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ------------ ---------------------------
1996 1995 1994 1993(1) 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA: (IN THOUSANDS)
Total assets............. $ 820,916 $ 454,126 $ 405,928 $ 409,429 $ 417,332 $ 421,300
Investment securities
held to maturity....... -- -- 31,908 143,448 162,699 176,889
Securities available for
sale................... 50,685 75,580 50,720 6,115 5,268 27,262
Mortgage-backed
securities............. 323,428 49,775 45,668 34,437 26,323 9,930
Loans, net............... 338,491 280,512 231,075 182,712 172,270 169,344
Deposits................. 736,161 388,944 354,920 356,931 359,703 371,429
Stockholders' equity..... 70,790 43,996 39,624 43,430 44,055 42,294
OPERATIONS DATA:
Total interest and
dividend income........ 54,350 29,151 24,514 25,403 26,215 27,300
Interest expense......... 30,793 15,183 10,772 11,281 11,902 15,539
--------- --------- --------- --------- --------- ---------
Net interest income.... 23,557 13,968 13,742 14,122 14,313 11,761
Provision for loan losses 1,400 483 119 355 527 1,681
--------- --------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............. 22,157 13,485 13,623 13,767 13,786 10,080
--------- --------- --------- --------- --------- ---------
Net realized gains
(losses) on securities... 4 (142) 51 725 1,147 1,969
Market value adjustments
on securities held for
sale................... -- -- -- (193) (12) (452)
Unrealized loss on loans
held for sale............ -- -- (190) -- -- --
Net realized gain (loss)
on loan sales......... 151 44 (523) 551 605 66
Service fees and charges. 3,768 2,248 2,280 2,585 2,542 2,027
Other non-interest income 104 18 135 71 32 824
--------- --------- --------- --------- --------- ---------
Non-interest income.... 4,027 2,168 1,753 3,739 4,314 4,434
--------- --------- --------- --------- --------- ---------
Salaries and employee
benefits............... 8,304 5,771 6,073 6,389 6,373 5,767
Occupancy and equipment.. 3,145 2,415 2,346 2,465 2,557 2,166
SAIF recapitalization
assessment............. 2,925 -- -- -- -- --
Restructuring expenses. -- -- 1,578 -- -- --
Other non-interest
expenses............... 8,995 3,484 3,723 3,844 3,946 3,434
--------- --------- --------- --------- --------- ---------
Non-interest expense... 23,369 11,670 13,720 12,698 12,876 11,367
--------- --------- --------- --------- --------- ---------
Income before income tax
expense................ 2,815 3,983 1,656 4,808 5,224 3,147
Income tax expense....... 1,104 1,622 626 2,165 2,312 1,337
--------- --------- --------- --------- --------- ---------
Income before cumulative
effect of accounting
change................. 1,711 2,361 1,030 2,643 2,912 1,810
Cumulative effect of
accounting change (2).. -- -- 117 -- 483 (682)
--------- --------- --------- --------- --------- ---------
Net income............... $ 1,711 $ 2,361 $ 1,147 $ 2,643 $ 3,395 $ 1,128
========= ========= ========= ========= ========= =========
</TABLE>
- ------------------------
(1)In July 1993, the Company changed its fiscal year-end from September 30 to
December 31. The three months ended December 31, 1993 represented a
transition period. The Company's 1994 fiscal year began on January 1, 1994.
For purposes of comparing the results of operations for fiscal 1994, the
Company believes it is meaningful to use the 12 months ended December 31,
1993 (unaudited) as the basis for that comparison.
(2)Represents a change in the accounting for investment securities in 1994,
income taxes in 1993 and post-retirement benefits in 1992.
37
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR AT OR FOR AT OR FOR THE YEAR ENDED
ENDED DECEMBER 31, THE 12 SEPTEMBER 30,
-------------------------------------- MONTHS ENDED -------------------------
DECEMBER 31,
1996 1995 1994 1993(1) 1993 1992
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets(2).... 0.21% 0.54% 0.28% 0.64% 0.82% 0.30%
Return on average stockholders'
equity(2).................... 2.42 5.62 2.75 6.05 7.82 4.03
Average stockholders' equity to
average assets............... 8.48 9.52 10.26 10.58 10.44 7.43
Stockholders' equity to total
assets....................... 8.62 9.69 9.76 10.61 10.56 10.04
Average interest rate spread... 2.71 2.77 3.14 3.24 3.25 2.88
Net interest margin............ 3.07 3.35 3.58 3.65 3.67 3.33
Operating expenses to average
assets(3).................... 2.42 2.61 2.93 3.02 3.07 2.98
Dividend payout ratio(4)....... 272.73 43.17 69.70 20.98 10.93 --
Tangible book value per share at
end of period................ $ 11.05 $ 26.04 $ 22.32 $ 24.57 $ 24.12 $ --
Earnings per share(2).......... 0.22 1.39 0.66 1.43 1.83 --
REGULATORY CAPITAL RATIOS OF
THE BANK (5)
Tier 1 leverage capital........ 5.4% 9.7% 11.0% 10.4% 10.3% 9.8%
Total risk-based capital....... 13.1 19.1 21.8 23.8 24.0 23.3
ASSET QUALITY RATIOS AND OTHER
DATA
Total non-performing loans..... $ 4,775 $ 2,961 $ 1,766 $ 1,158 $ 978 $ 2,885
Foreclosed real estate......... 915 806 716 1,301 1,397 1,372
---------- ------- --------- ---------- ---------- ----------
Total non-performing assets.... $ 5,690 $ 3,767 $ 2,482 $ 2,459 $ 2,375 $ 4,257
========== ======= ========= ========== ========== ==========
Ratio of non-performing loans to
total loans.................. 1.40% 1.05% 0.76% 0.63% 0.56% 1.68%
Ratio of non-performing assets
to total assets.............. 0.69 0.83 0.61 0.60 0.57 1.01
Ratio of net charge-offs during
the period to average loans
outstanding during the
period....................... 0.36 0.11 0.06 0.16 0.18 0.77
Ratio of allowance for loan
losses to netloans receivable
at the end of the period..... 0.58 0.59 0.63 0.80 0.83 0.71
Ratio of allowance for loan
losses to total non-performing
assets at the end of the
period....................... 34.45 44.04 58.78 59.62 60.51 28.40
Ratio of allowance for loan
losses to non-performing loans
at the end of the period..... 41.05 56.03 82.62 126.60 146.93 41.91
</TABLE>
- ------------------------
(1) In July 1993, the Company changed its fiscal year-end from September 30 to
December 31. The three months ended December 31, 1993 represented a
transition period. The Company's 1994 fiscal year began on January 1, 1994.
For purposes of comparing the results of operations for fiscal 1994, the
Company believes it is meaningful to use the 12 months ended December 31,
1993 (unaudited) as the basis for that comparison.
(2) Includes a $2.9 million pre-tax charge for SAIF assessment in 1996 and a
$1.6 million pre-tax charge for restructuring expenses in the fourth
quarter of 1994.
(3) Excludes write-downs of real estate owned and, in 1996 a $2.9 million SAIF
assessment and in 1994, $1.6 million of restructuring expenses.
(4) Dividends declared per share divided by earnings per share.
(5) For periods prior to 1995, the ratios are calculated under the regulatory
capital regulations of the FDIC, which are substantially identical, as
applied to the Bank, to the OTS capital requirements.
38
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is designed to provide a better understanding
of the results of operations and the financial condition of the Company. This
discussion should be read in conjunction with the information included under
"Selected Consolidated Financial Information" and "Business" and the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Form 10-K.
GENERAL
In connection with the Conversion of the Bank from a mutual savings
bank to a stock savings bank on September 3, 1992, the Company sold 1,840,000
shares of Common Stock at $10.00 per share to the public and utilized $8.4
million of the $16.9 million net proceeds from the Conversion offering to
acquire all of the common stock 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 $32.0 million. The purpose of the Offering
was to raise a significant portion of the additional capital necessary to permit
the Bank to qualify as "adequately capitalized" for regulatory capital purposes
immediately following the Acquisition.
During 1994, the Company announced plans to repurchase up to 5.0% or
84,134 shares of its outstanding Common Stock. This repurchase program was
completed during the second quarter of 1995. At December 31, 1996, the Company
had 211,064 shares of treasury stock that were purchased at a cost of $4.1
million.
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 First Nationwide Agreement during 1995. The Acquisition closed
on January 12, 1996 with the Bank assuming $414.8 million of deposits. The Bank
also acquired the 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.
In deploying the funds acquired by the Bank through acquisitions, the
Bank has emphasized the origination of one- to four-family residential mortgage
loans and commercial mortgage loans while seeking to limit credit and interest
rate risk. The Bank generally limits its lending activities to its market area
and retains only ARM loans in its portfolio and sells fixed rate loans that it
originates in the secondary market. As part of its effort to increase its
mortgage loan originations, the Bank (i) during 1994, began using loan
originators who are compensated on a commission basis, (ii) hired a business
development officer to increase commercial loan originations and (iii)
restructured the lending department, thereby reducing considerably the
processing time period between a loan commitment and a loan closing. These
efforts in part resulted in total mortgage loan originations of $100.1 million,
$64.7 million and $79.5 million for the years ended December 31, 1996, 1995 and
1994, respectively.
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
39
<PAGE>
administrative expenses. The Bank's results of operations are also significantly
affected by its periodic provision for loan losses, write-downs of real estate
owned and securities held for sale and, in 1994, by realized losses on loan
sales. 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.
INTEREST RATE SENSITIVITY
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income while a positive gap would tend to adversely
affect net interest income.
The following table sets forth the amount of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. The amounts of assets and liabilities
which reprice or mature during a particular period were determined in accordance
with the earlier of the term to repricing or the contractual terms of the asset.
The table is intended to provide an approximation of the projected
repricing of assets and liabilities at December 31, 1996 on the basis of
contractual maturities, anticipated prepayments and scheduled rate adjustments
within a three-month period and subsequent selected time intervals. The loan
amounts in the table reflect principal balances expected to be redeployed and/or
repriced as a result of contractual amortization and contractual rate
adjustments on adjustable-rate loans. Assumed annual run-off rates for Money
Market accounts were 50% in the three months to one year category and 50% in the
one to three year category and for NOW accounts and regular savings and
statement savings accounts were 60% in the one to three year category and 20%
thereafter. The assumptions used are based on historical experience and other
data available to the Company and may not be indicative of future run-off rates,
which are impacted by, among other things, customer preferences and competitive
pricing decisions. Certain shortcomings are inherent in the methods of analysis
presented in the table setting forth the maturing and repricing of
interest-earning assets and interest-bearing liabilities. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates while interest rates on
other types of assets may lag behind changes in market rates. Additionally,
certain assets, such as adjustable-rate loans, have features which restrict
changes in interest rates both on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to make scheduled
payments on their adjustable-rate loans may decrease in the event of an interest
rate increase. As a result, the actual effect of changing interest rates may
differ from that presented in the table.
40
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
3 MONTHS 3 MONTHS 1 YEAR 3 YEARS 5 YEARS MORE THAN
AND LESS TO 1 YEAR TO 3 YEARS TO 5 YEARS TO 10 YEARS 10 YEARS TOTAL
-------- --------- ---------- ---------- ----------- -------- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1) $ 56,787 $ 112,359 $ 68,382 $ 45,385 $ 22,320 $ 7,531 $ 312,764
Other loans(1) 8,662 3,805 7,955 2,139 44 312 22,917
Federal funds 32,590 -- -- -- -- -- 32,590
Investment securities(2) 13,807 -- 6,002 -- 7,222 25,000 52,031
Mortgage-backed
securities(2) 51,880 24,696 62,807 61,187 50,190 79,110 329,870
-------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets $ 163,726 $ 140,860 $ 145,146 $ 108,711 $ 79,776 $ 111,953 $ 750,172
Less:
Net deferred loan fees -- -- -- -- -- 5 5
-------- -------- -------- -------- -------- -------- --------
Net interest-earning
assets $ 163,726 $ 140,860 $ 145,146 $ 108,711 $ 79,776 $ 111,948 $ 750,167
INTEREST-BEARING
LIABILITIES:
Savings accounts -- -- 116,222 38,740 38,740 -- 193,702
Super NOW accounts -- -- 23,546 7,848 7,848 -- 39,242
Money market accounts -- 26,002 26,002 -- -- -- 52,004
Time deposits 84,425 233,705 57,258 28,384 -- -- 403,772
ESOP obligations 432 -- -- -- -- -- 432
Escrow accounts 1,387 462 -- -- -- -- 1,849
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $ 86,244 $ 260,169 $ 223,028 $ 74,972 $ 46,588 $ -- $ 691,001
Interest sensitivity gap $ 77,482 $ (119,309) $ (77,882) $ 33,739 $ 33,188 $ 111,948 59,166
Cumulative interest
sensitivity gap 77,482 (41,827) (119,709) (85,970) (52,782) 59,166
Cumulative interest
sensitivity
gap as a percent of
total assets 9.44% (5.10)% (14.58)% (10.47)% (6.43)% 7.21%
Cumulative net
interest-earning assets
as a percent of
interest-bearing
liabilities 189.84% 87.93% 78.98% 86.66% 92.36% 108.56%
</TABLE>
- ------------------------
(1) For purposes of the gap analysis, mortgage and other loans are not reduced
by the allowance for loan losses but are reduced for non-accrual loans.
(2) Investment securities include securities held to maturity, securities
available for sale and trading securities. For purposes of the gap
analysis, securities and mortgage-backed securities are shown at amortized
cost.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the
Company's balance sheets and statements of operations at and for the years ended
December 31, 1996, 1995 and 1994, and reflects the average yield (not on a tax
equivalent basis) on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance 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 are calculated based on amortized
cost. The yields and costs include fees which are considered adjustments to
yields.
41
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995
-------------------------------------- --------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)... $ 285,365 $ 22,552 7.90% $ 241,937 $ 18,526 7.66%
Other loans(1)........... 19,561 2,084 10.65 12,775 1,305 10.22
Mortgage-backed
securities(2)......... 369,995 24,293 6.57 58,080 3,253 5.60
Other securities(3)...... 65,354 4,144 6.34 91,275 5,339 5.85
Federal funds, overnight. 26,467 1,277 4.82 12,712 728 5.73
--------- ---------- --------- ----------
Total interest-earning
assets................ 766,742 54,350 7.09 416,779 29,151 6.99
Non-interest earning assets 67,561 24,497
--------- ------
Total assets............. $ 834,303 $ 441,276
======== ========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing
liabilities:
Deposits:
Savings accounts....... $ 201,414 $ 6,170 3.06% $ 131,782 3,943 2.99%
Super NOW accounts..... 41,107 791 1.92 14,711 277 1.88
Money market accounts.. 50,101 1,819 3.63 40,241 1,406 3.49
Time deposits.......... 408,958 21,930 5.36 150,554 8,116 5.39
Borrowings............... 561 31 5.53 21,248 1,358 6.39
ESOP obligation.......... 620 52 8.39 925 83 8.97
--------- ---------- --------- ----------
Total interest-bearing
liabilities............ 702,761 30,793 4.38 359,461 15,183 4.22
Other liabilities.......... 60,764 39,790
-------- ---------
Total liabilities..... 763,525 399,251
Retained earnings.......... 70,778 42,025
-------- ---------
Total liabilities and
retained earnings... $ 834,303 $ 441,276
======== =========
Net interest income/
interest rate spread(4)... $ 23,557 2.71% $ 13,968 2.77%
========== ==========
Net earning assets/net
interest margin(5)........ $ 63,981 3.07 $ 57,318 3.35
========= =========
Ratio of interest-earning
assets to interest-bearing
liabilities............... 1.09x 1.16x
</TABLE>
---------------------------------------
1994
---------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- --------
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)... $ 192,848 $ 13,640 7.07%
Other loans(1)........... 10,192 946 9.28
Mortgage-backed
securities(2)......... 48,795 2,716 5.57
Other securities(3)...... 118,931 6,683 5.62
Federal funds, overnight. 12,874 529 4.11
--------- ---------
Total interest-earning
assets................ 383,640 24,514 6.39
Non-interest earning assets 23,123
---------
Total assets............. $ 406,763
========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing
liabilities:
Deposits:
Savings accounts....... $ 154,739 $ 4,617 2.98%
Super NOW accounts..... 15,134 260 1.72
Money market accounts.. 45,501 1,339 2.94
Time deposits.......... 114,681 4,467 3.90
Borrowings............... -- -- --
ESOP obligation.......... 1,241 89 7.17
--------- ---------
Total interest-bearing
liabilities............ 331,296 10,772 3.25
Other liabilities.......... 33,754
---------
Total liabilities..... 365,050
Retained earnings.......... 41,713
---------
Total liabilities and
retained earnings..... $ 406,763
=========
Net interest income/
interest rate spread(4)... $ 13,742 3.14%
=========
Net earning assets/net
interest margin(5)........ $ 52,344 3.58
=========
Ratio of interest-earning
assets to interest-bearing
liabilities............... 1.16x
- ------------------------
(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 include securities held to maturity, securities available
for sale and trading securities.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
42
<PAGE>
RATE/VOLUME ANALYSIS
The following table represents the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume) and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------- -----------------------------------------
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
---------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------------ ------------ ---------- ----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans net.... $ 3,416 $ 610 $ 4,026 $ 3,689 $ 1,197 $ 4,886
Other loans........... 721 58 779 257 102 359
Mortgage-backed
securities......... 20,386 654 21,040 520 17 537
Other Securities...... (1,615) 420 (1,195) (1,608) 264 (1,344)
Federal funds......... 679 (130) 549 (7) 206 199
--------- ------- ------- -------- ------- -------
Total............ $ 23,587 $ 1,612 $25,199 $ 2,851 $ 1,786 $ 4,637
--------- ------- ------- ------- ------- -------
INTEREST-BEARING
LIABILITIES:
Deposits
Time deposits..... $ 13,857 $ (43) $13,814 $ 1,638 $ 2,011 $ 3,649
Money market
accounts........ 356 57 413 (166) 233 67
Savings accounts.. 2,131 96 2,227 (687) 13 (674)
Super NOW accounts 508 6 514 (7) 24 17
Borrowings........ (1,165) (162) (1,327) 1,358 -- 1,358
ESOP obligation... (26) (5) (31) (26) 20 (6)
--------- ------- ------- ------- ------- -------
Total............ $ 15,661 $ (51) $15,610 $ 2,110 $2,301 $ 4,411
--------- ------- ------- ------- ------ -------
Net change in net interest
income................. $ 7,926 $ 1,663 $ 9,589 $ 741 $ (515) $ 226
========= ======= ======= ======= ======= =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND 1995
The Company's total assets amounted to $820.9 million at December 31,
1996, as compared to $454.1 million at December 31, 1995. Securities and
mortgage-backed securities available for sale increased by $248.8 million to
$374.1 million at December 31, 1996, and goodwill increased $31.2 million to
$32.8 million at such date. Loans, net increased $58.0 million to $338.5 million
as compared to $280.5 million at December 31, 1995. Deposits increased $347.2
million to $736.2 at December 31, 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.
Total stockholders' equity increased to $70.8 million at December 31,
1996, from $44.0 million at December 31, 1995, due to the net proceeds of the
Offering, offset by a $4.5 million increase in the net unrealized loss on
securities available for sale. The Bank's Tier 1 leverage capital ratio at
December 31, 1996 was 5.4%.
43
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. Net income for 1996 totaled $1.7 million as compared to $2.4
million in 1995. Net income for 1996 included a pre-tax charge of $2.9 million
related to a special one-time assessment on Savings Association Insurance fund
("SAIF") assessable deposits held by all insured depository institutions in
order to recapitalize the SAIF. This assessment was recognized by the Company in
the third quarter of 1996.
NET INTEREST INCOME. Net interest income for 1996 amounted to $23.6
million as compared to $14.0 million for 1995. The increase in net interest
income is due primarily to the Acquisition as the average balance of net
interest-earning assets increased to $64.0 million from $57.3 million in 1995.
The interest rate spread decreased 6 basis points to 2.71% during 1996 as
compared to 2.77% in 1995. The company's net interest margin was 3.07% and 3.35%
in 1996 and 1995, respectively. The decreases in interest rate spread and net
interest margin were due primarily to the Acquisition. The proceeds from the
Acquisition were invested in securities which, in the aggregate, yield less than
the Bank's loan portfolio. The purchases of these securities were not completed
until the last week of January 1996; until such time the Acquisition and
offering proceeds earned interest at the Federal funds rate of 5.25%. As a
result, the Company earned a minimal interest rate spread on such proceeds
during that time. In addition, 68.5% of the Acquired Deposits were time deposits
with an average cost of 5.90%.
INTEREST INCOME. Interest income in 1996 totaled $54.4 million as
compared to $29.2 million in 1995. Average interest-earning assets increased
$350.0 million to $766.7 million in 1996 compared to $416.8 million in 1995. The
average yields on interest-earning assets were 7.09% and 6.99% in 1996 and 1995,
respectively.
Interest income on mortgage loans amounted to $22.6 million in 1996 as
compared to $18.5 in 1995, an increase of $4.0 million or 21.7%. The average
balance of mortgage loans increased $43.4 million to $285.4 million in 1996 as
compared to $241.9 million in 1995. In addition, the average yield earned on
mortgage loans increased 24 basis points to 7.90% in 1996. The growth in the
average balance of mortgage loans was due primarily to improved demand for the
Bank's adjustable-rate mortgage loans ("ARMs"). In addition, the increase in the
average yield earned was primarily due to higher rates earned on ARMs in 1996.
The Bank's ARMs originated during 1996 are primarily 5-year fixed rate loans
that convert to 1-year ARMs after the initial 5-year period.
Interest income on other loans increased to $2.1 million in 1996 as
compared to $1.3 million for 1995. The average balance of other loans increased
$6.8 million or 53.1% to $19.6 million in 1996 as compared to $12.8 million in
1995. The average yield earned on other loans increased 43 basis points to
10.65% as compared to 10.22% in 1995. The increase in the average balances of
other loans is due to certain consumer loans acquired in the Acquisition and
management's strategy to increase the commercial loan portfolio in order to
increase the Company's interest rate spread.
Interest income on mortgage-backed securities totaled $24.3 million in
1996 as compared to $3.3 million in 1995. This increase is due to a $311.9
million increase in the average balance of mortgage-backed securities to $370.0
million in 1996. In addition, the average yield on mortgage-backed securities
increased 97 basis points to 6.57% in 1996 as compared to 5.60% in 1995. The
increases in the average balance 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 $4.1 million in 1996, a
decrease of $1.2 million or 22.4% as compared to the $5.3 million earned in
1995. This decrease is due primarily to a $25.9 million decrease in the average
balance to $65.4 million in 1996 as compared to $91.3 million in 1995. The
decrease in the average balance of other securities was partially offset by a 49
basis point increase in the yield earned to 6.34% in 1996. The decrease in the
average balance 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.
44
<PAGE>
INTEREST EXPENSE. Interest expense in 1996 totaled $30.8 million as
compared to $15.2 million in 1995. The average balance of interest-bearing
liabilities amounted to $702.8 million in 1996 as compared to $359.5 million in
1995. The average cost of these liabilities increased 16 basis points to 4.38%
in 1996. The growth in the average balance of interest-bearing liabilities is a
result of the Acquisition. The Acquired Deposits totaled $414.8 million on
January 12, 1996, the closing date of the Acquisition.
Interest expense on savings accounts amounted to $6.2 million in 1996
as compared to $3.9 million in 1995. The average balance of savings accounts
increased to $201.4 million in 1996 as compared to $131.8 million in 1995, an
increase of $69.6 million or 52.8%. The average cost of savings accounts
increased seven basis points to 3.06% in 1996 as compared to 2.99% in 1995. The
increase in the average balance of savings accounts is a result of the
Acquisition.
Interest expense on time deposits amounted to $21.9 million in 1996 as
compared to $8.1 million in 1995. The average balance of time deposits increased
$258.4 million to $409.0 million in 1996 as compared to $150.6 million in 1995.
This increase is a result of the Acquisition. The average cost of time deposits
decreased 3 basis points to 5.36% in 1996.
Interest expense on borrowings decreased $1.3 million in 1996 to
$31,000 as compared to $1.4 million in 1995. This decrease is due to a decrease
in the average balance of borrowings of $20.7 million to $561,000. The decrease
in the average balance is due to management's strategy in 1995 of using
borrowings to fund the purchase of securities, thereby leveraging the Bank's
capital and increasing net interest income. However, the Bank's regulatory
capital position decreased as a result of the Acquisition and the Bank repaid
all borrowings during the fourth quarter of 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses amounted to
$1.4 million in 1996 as compared to $483,000 in 1995. This increase is a result
of increases in loan charge-offs and the size of the loan portfolio. For 1996,
charge-offs totaled $1.1 million as compared to $307,000 for 1995. The increase
in charge-offs during 1996 is due primarily to charge-offs related to non-owner
occupied one to four-family mortgage loans with respect to which the Bank
decided, based on the condition of the underlying properties and other factors,
not to pursue foreclosure proceedings. The Bank significantly curtailed its
lending activities related to these types of loans in 1996. The charge-offs for
the year-ended December 31, 1996, also include a charge-off in the amount of
$275,000 related to an unsecured commercial loan originated prior to the
Acquisition. Non-performing loans (loans that are 90 days or more past due) were
$4.8 million or 1.4% of total loans at December 31, 1996, as compared to $3.0
million or 1.05% of total loans at December 31, 1995. The increase in
non-performing loans is a result of loans originated in the mid-1980's where the
value of the underlying collateral has decreased, the growth in the size of the
loan portfolio and the amount of time required to complete foreclosure
proceedings. Non-performing assets totaled $5.7 million or 0.69% of total assets
and $3.8 million or 0.83% of total assets at December 31, 1996 and 1995,
respectively.
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 total $4.0 million in 1996 as
compared to $2.2 million in 1995. Service fees and charges increased $1.5
million or 67.6% to $3.8 million in 1996. This increase is a result of the
Acquisition. The increase in service charges on deposits for 1996 was offset by
waived service charges on the Acquired Deposits until March 1, 1996. In
addition, MSB waived $90,000 of additional service charges in limited
circumstances for certain of the Acquired Deposits from March 1, 1996 to June
30, 1996, for various reasons related to the transition of accounts of First
Nationwide to MSB. Although this has resulted in decreased fee income,
management believes that waiving these service charges was important for
customer retention. Net realized securities gains amounted to $4,000 in 1996 as
compared to a net realized loss of
45
<PAGE>
$142,000 in 1995. Other non-interest income amounted to $104,000 in 1996, as
compared to $18,000 in 1995, and included a $103,000 realized gain in the sale
of a clock collection that was owned by the Bank.
NON-INTEREST EXPENSE. Non-interest expense amounted to $23.4 million in
1996 as compared to $11.7 million in 1995. Included in non-interest expense is a
$2.9 million pre-tax special one-time assessment on Savings Association
Insurance Fund ("SAIF") assessable deposits held by all depository institutions
in order to recapitalize the SAIF. Salaries and employee benefits increased $2.5
million to $8.3 million in 1996 primarily as a result of adding 69 full-time
equivalent employees for the Acquired Branches. Occupancy and equipment
increased $730,000 to $3.1 million in 1996 as compared to $2.4 million in 1995
and other non-interest expense increased $5.2 million to $8.3 million for these
same periods. These increases are primarily due to the operating expenses of the
Acquired Branches. In addition, for 1996 as compared to 1995, legal expenses
attributed to employee and stockholder litigation increased $107,000 to
$508,000, losses on foreclosed real estate increased $96,000 to $237,000,
goodwill amortization increased $3.4 million to $3.5 million and non-recurring
expenses related to the Acquisition amounted to approximately $225,000.
INCOME TAX EXPENSE. Income tax expense amounted to $1.1 million in
1996, as compared to $1.6 million in 1995. The effective tax rates for 1996 and
1995 were 39.2% and 40.7%, respectively.
YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL. Net income for 1995 totaled $2.4 million, a $1.2 million
increase from the $1.1 million earned in 1994. The net income for 1994 includes
a pre-tax restructuring charge of $1.6 million and $117,000 of income related to
the cumulative effect of an accounting change.
NET INTEREST INCOME. Net interest income for 1995 amounted to $14.0
million as compared to $13.7 million for 1994, an increase of $226,000 or 1.6%.
The Company's interest rate spread and net interest margin in 1995 were 2.77%
and 3.35%, respectively, as compared to 3.14% and 3.58%, respectively, in 1994.
INTEREST INCOME. Interest income in 1995 amounted to $29.2 million, an
increase of $4.6 million or 18.9% from the $24.5 million earned in 1994. Average
interest earning assets increased $33.1 million or 8.6% to $416.8 million during
1995. The average yield earned on interest earning assets was 6.99% in 1995 as
compared to 6.39% in 1994.
Interest income on mortgage loans amounted to $18.5 million in 1995 as
compared to $13.6 million in 1994, representing an increase of $4.9 million or
35.8%. The average balance of mortgage loans increased to $241.9 million in 1995
as compared to $192.8 million in 1994, an increase of 25.5%. The average yield
on mortgage loans increased 59 basis points to 7.66% in 1995 as compared to
7.07% in 1994.
The growth in the average balance of mortgage loans was due primarily
to improved demand for ARMs. The increase in the average yield earned was due
primarily to the repricing of ARMs that were originated in 1994 at introductory
rates. These ARMs repriced to higher rates due to the expiration of their
initial lower introductory rates and due to the increase in short-term interest
rates during 1994 and the first quarter of 1995. However, the extent to which
ARMs have been repricing has slowed since the end of the first quarter of 1995.
Interest income on other loans amounted to $1.3 million in 1995 as
compared to $946,000 in 1994, an increase of $359,000 or 38.0%. During 1995, the
average balance of other loans increased $2.6 million or 25.3% to $12.8 million
as compared to 1994. The average yield earned on other loans was 10.22% in 1995
as compared to 9.28% in 1994.
Interest income on mortgage-backed securities totaled $3.3 million in
1995 as compared to $2.7 million in 1994. The average balance of mortgage-backed
securities increased $9.3 million or 19.0% to $58.1 million in 1995 as compared
to $48.8 million in 1994. The average yield earned on mortgage-backed securities
was 5.60% in 1995 as compared to 5.57% in 1994. The increase in the average
balance of mortgage-backed
46
<PAGE>
securities was due to management's strategy to purchase mortgage-backed
securities using borrowings to fund such purchases.
Interest income on other securities, which include investments held to
maturity and securities available for sale, amounted to $5.3 million in 1995 as
compared to $6.7 million in 1994, representing a decrease of $1.3 million or
20.1%. During 1995, the average balance of other securities decreased $27.7
million or 23.3% to $91.3 million, and the average yield earned increased 23
basis points to 5.85%. The decrease in the average balance of other securities
was due to management's strategy of increasing the size of the loan portfolio
using the proceeds from the maturities and sales of debt securities.
INTEREST EXPENSE. Interest expense for 1995 amounted to $15.2 million
as compared to $10.8 million in 1994, representing an increase of $4.4 million
or 40.9%. Average interest-bearing liabilities totaled $359.5 million in 1995,
an increase of $28.2 million or 8.5%, as compared to an average balance of
$331.3 million in 1994. The average cost of interest-bearing liabilities
increased 97 basis points in 1995 to 4.22% as compared to 1994.
Interest on savings accounts in 1995 totaled $3.9 million as compared
to $4.6 million in 1994. The average balance of savings accounts decreased $23.0
million or 14.8% to $131.8 million in 1995 as compared to $154.7 million in
1994. The decrease in the average balance of savings accounts was due to higher
interest rates offered by the Bank on time deposits in 1995 than in 1994. As the
yields on time deposits increase, depositors typically move funds from savings
accounts to time deposits.
Interest on time deposits amounted to $8.1 million in 1995, an increase
of $3.6 million or 81.7% over the $4.5 million paid in 1994. The average cost of
time deposits in 1995 was 5.39% as compared to 3.90% in 1994. Interest rates
increased throughout 1994, and, accordingly, the Bank began to increase the
interest rates offered on time deposits so as to remain competitive with other
institutions. As a result, customers began moving funds out of short-term
deposit products, such as savings accounts, and into time deposits.
Interest expense on borrowings amounted to $1.4 million for 1995. The
Company had no borrowings in the prior year. The average balance of borrowings
was $21.2 million. The average interest cost of the borrowings was 6.39%.
PROVISION FOR LOAN LOSSES. For 1995, the provision for loan losses
amounted to $483,000 as compared to $119,000 in 1994. Non-performing loans
(loans that are 90 days or more past due) amounted to $3.0 million or 1.05% of
total loans at December 31, 1995 as compared to $1.8 million or 0.76% of total
loans at December 31, 1994. Non-performing assets amounted to $3.8 million or
0.83% of total assets at December 31, 1995 as compared to $2.5 million or 0.61%
of total assets at December 31, 1994.
The allowance for loan losses amounted to $1.7 million and $1.5 million
at December 31, 1995 and 1994, respectively, which represented 56.0% and 82.6%
of non-performing loans at those dates. Charge-offs, net of recoveries, totaled
$283,000 in 1995 as compared to $126,000 in 1994.
At December 31, 1995 and 1994, potential problem loans, which represent
loans having more than normal credit risk, or loans that have been restructured
but which are not 90 days or more past due, amounted to $1.2 million and $1.6
million, respectively. At December 31, 1995, these loans were performing.
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.
47
<PAGE>
NON-INTEREST INCOME. Non-interest income amounted to $2.2 million for
1995 as compared to $1.8 million for the prior year. Service fees and charges
decreased $32,000 or 1.4% to $2.2 million for 1995 due primarily to an $80,000
decrease in fees earned on the sale of mutual funds.
Net realized losses on securities during 1995 amounted to $142,000 as
compared to securities gains in the prior year of $51,000. During the second
quarter of 1995, the Company recorded a $142,000 securities loss due to the
permanent impairment of certain securities. During 1994, the Company recognized
the realized loss of $545,000 and an unrealized loss of $190,000 on mortgage
loans held for sale. In addition, during the first quarter of 1994, the Company
recognized a $106,000 gain on the sale of ATMs. This gain is included in other
non-interest income.
NON-INTEREST EXPENSE. Non-interest expense amounted to $11.7 million in
1995 as compared to $13.7 million in 1994, representing a decrease of $2.1
million or 14.9%. This decrease is due primarily to a $1.6 million restructuring
charge in the fourth quarter of 1994. In addition, salaries and employee
benefits decreased $302,000 and Federal deposit insurance premiums decreased
$361,000. The reduction in salaries and employee benefits is due to a reduction
in the number of employees as a result of the restructuring that MSB implemented
in the fourth quarter of 1994. The annual cost savings of this restructuring
totaled $680,000 since none of the employees were replaced. The cost savings was
offset by the addition of the Central Valley branch, which was acquired in
November 1995, overtime costs related to the conversion of the Central Valley
branch and the seven branches acquired from First Nationwide in January 1996 and
by normal salary increases. Other non-interest expense amounted to $3.0 million
in 1995 as compared to $2.9 million in 1994. This increase is due primarily to
$104,000 of expenses related to branch acquisitions and a $109,000 increase in
legal expenses. The increase in legal expenses is primarily related to certain
shareholder litigation and changes in certain employee benefit plans.
INCOME TAX EXPENSE. Income tax expense totaled $1.6 million for 1995 as
compared to $626,000 in 1994. The effective income tax rate for 1995 and 1994
was 40.7% and 37.8%, respectively.
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE. The Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," on January 1, 1994. As a
result, the Company recorded the reversal of unrealized holding losses on
securities that were classified as available for sale prior to January 1, 1994.
These unrealized holding losses, that were charged to earnings in prior periods
and are excluded from earnings under SFAS No. 115, amounted to $117,000, net of
taxes.
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. For
the year ended December 31, 1996, deposits increased $347.2 million primarily as
a result of the Acquisition in which the Bank assumed $414.8 million in
deposits.
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 December 31, 1996 the Bank's liquidity ratio
under OTS regulations was 8.9%.
The primary investing activity of the Company is the origination of
loans and the purchase of securities. During the fiscal year ended December 31,
1996, the Company originated mortgage loans totaling $100.1 million. Since 1994
the demand for mortgage loans in the Bank's market area has remained strong. For
the year ended December 31, 1996, originations of other loans exceeded
repayments by $6.8 million. During that same period, the Company purchased
securities totaling $27.4 million. Other investing activities included the
purchase of mortgage-backed securities totaling $386.3 million during 1996.
48
<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 6.7% at December 31, 1996 and 10.5% at
December 31, 1995. At December 31, 1996, cash and cash equivalents, as defined
above, totaled $49.0 million as compared to $40.7 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 a $46.0 million line of credit from the
FHLB of New York. In addition, the Bank may access funds, if necessary, through
the Federal Reserve Bank of New York discount window.
At December 31, 1996, the Bank had outstanding loan commitments of
$42.2 million and commitments to purchase securities totaling $12.0 million. The
Bank anticipates that it will have sufficient funds available to meet its
current loan and securities purchase commitments. Time deposits scheduled to
mature in one year or less from December 31, 1996, totaled $318.1 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. For a
description of these requirements and the Bank's compliance therewith, see
"Regulation -- Regulation of Federal Savings Associations -- Capital
Requirements."
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP"), which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125). SFAS 125 amends portions of SFAS
115, amends and extends to all servicing assets and liabilities the accounting
standards for mortgages servicing rights now in SFAS 65, and supersedes SFAS
122. The statement provides consistent standards for distinguishing transfers of
financial assets which are sales from transfers that are secured borrowings.
Those standards are based upon consistent application of a financial components
approach that focuses on control. The statement also defines accounting
treatment for servicing assets and other retained interest in the assets that
are transferred. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. In December 1996, the FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain provisions of FASB Statement No. 125
an amendment of FASB Statement No. 125" which defers for one year the effective
date (a) of paragraph 15 of SFAS No. 125 and (b) for repurchase agreement,
dollar-roll, securities lending and similar transactions, of paragraphs 9-12 and
237(b) of SFAS No. 125. The adoption of these statements are not expected to
have a material effect on the Bank's financial condition or results of
operations.
49
<PAGE>
OTHER MATTERS
This Annual Report contains forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
business of the Company and the Bank that are subject to various factors which
could cause actual results to differ materially from these estimates. These
factors include, changes in general, economic, market and legislative and
regulatory conditions, the development of an adverse interest rate environment
that adversely affects the interest rate spread or other income anticipated from
the Company's operations and investments and depositor and customer preferences.
50
<PAGE>
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF MSB BANCORP, INC. AND SUBSIDIARIES
Independent Auditors' Report of KPMG Peat Marwick LLP.........................52
Independent Auditors' Report of Nugent & Haeussler, PC........................53
Consolidated Balance Sheets as of December 31, 1996 and 1995..................54
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994...............................................................55
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994................................56
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994...............................................................57
Notes to Consolidated Financial Statements....................................59
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MSB Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of MSB
Bancorp, Inc. and Subsidiaries (the "Company") as listed in the accompanying
index as of December 31, 1996, and for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our 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, changes in stockholders' equity 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
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MSB Bancorp, Inc.
We have audited the consolidated financial statements of MSB Bancorp,
Inc. and subsidiary as listed in the accompanying index as of December 31, 1995
and 1994 and for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MSB Bancorp,
Inc. and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flow for each of the years in the two year period
ended December 31, 1995, in conformity with generally accepted principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan" and Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" effective January 1, 1995.
/s/ Nugent & Haeussler, P.C.
NUGENT & HAEUSSLER, P.C.
January 30, 1996
Newburgh, New York
<PAGE>
<TABLE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31 DECEMBER 31
1996 1995
---------------- ---------------
(IN THOUSANDS, EXCEPT SHARES AND
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and due from banks.................................................. $ 16,375 $ 15,862
Federal funds sold....................................................... 32,590 10,952
Securities available for sale (note 3)................................... 50,685 75,580
Mortgage-backed securities available for sale (note 4)................... 323,428 49,775
Loans, net (notes 5, 6 and 14)........................................... 338,491 280,512
Premises and equipment, net (note 7)..................................... 14,869 12,420
Accrued interest receivable.............................................. 5,552 3,219
Real estate owned (note 8)............................................... 915 806
Goodwill................................................................. 32,835 1,609
Other assets (note 11)................................................... 5,176 3,391
------------- -------------
Total Assets.......................................................... $ 820,916 $ 454,126
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (note 9)..................................................... $ 736,161 $ 388,944
Mortgagors' escrow deposits........................................... 1,849 1,839
Accrued expenses and other liabilities................................ 11,684 18,605
ESOP obligation (note 13)............................................. 432 742
------------- ------------
Total Liabilities................................................. $ 750,126 $ 410,130
------------- ------------
Commitments and contingencies (note 14)
Stockholders' equity (notes 11, 12 and 13)
Preferred stock ($.01 par value; 1,000,000 shares authorized; 600,000
shares and none issued at December 31, 1996 and 1995, respectively)
6 --
Common stock ($.01 par value; 5,000,000 shares authorized; 3,045,000
shares and 1,840,000 shares issued at December 31, 1996 and 1995,
respectively..................................................... 30 18
Additional paid-in capital............................................ 48,163 16,198
Retained earnings..................................................... 32,009 33,110
Treasury stock, at cost (211,064 and 212,064 shares at December 31, 1996
and 1995, respectively).......................................... (4,137) (4,157)
Unallocated ESOP stock................................................ (432) (742)
Unallocated BRP stock................................................. (172) (303)
Net unrealized loss on securities available for sale.................. (4,677) (128)
------------- ------------
Total stockholders' equity........................................ $ 70,790 $ 43,996
------------- -------------
Total Liabilities and Stockholders' Equity........................ $ 820,916 $ 454,126
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
54
<PAGE>
<TABLE>
<CAPTION>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED
DECEMBER 31
----------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS EXCEPT SHARES AND PER SHARE AMOUNTS)
INTEREST INCOME
<S> <C> <C> <C>
Mortgage loans............................................... $ 22,552 $ 18,526 $ 13,640
Other loans.................................................. 2,084 1,305 946
Mortgage-backed securities................................... 24,293 3,253 2,716
Securities................................................... 4,144 5,339 6,683
Federal funds sold........................................... 1,277 728 529
------------ ----------- -----------
Total interest income........................................ 54,350 29,151 24,514
INTEREST EXPENSE
Interest on deposits (note 9)................................ 30,710 13,742 10,683
Interest on borrowings (note 10)............................. 31 1,358 --
Interest on ESOP obligation.................................. 52 83 89
------------ ----------- -----------
Total interest expense....................................... 30,793 15,183 10,772
------------ ----------- -----------
Net interest income before provision for loan losses............. 23,557 13,968 13,742
Provision for loan losses (note 6)............................... 1,400 483 119
------------ ----------- -----------
Net interest income after provision for loan losses.............. 22,157 13,485 13,623
------------ ----------- -----------
NON-INTEREST INCOME
Service fees................................................. 3,768 2,248 2,280
Net realized gains (losses) on securities (notes 2, 3 and 4). 4 (142) 51
Realized gains (losses) on loan sales........................ 151 44 (523)
Change in unrealized loss on loans held for sale............. -- -- (190)
Other non-interest income.................................... 104 18 135
------------ ----------- -----------
4,027 2,168 1,753
------------ ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits (note 13)..................... 8,304 5,771 6,073
Occupancy and equipment (note 7)............................. 3,145 2,415 2,346
Federal deposit insurance premiums........................... 741 456 817
Restructuring expenses....................................... -- -- 1,578
Other non-interest expense................................... 8,254 3,028 2,906
SAIF recapitalization assessment (note 18)................... 2,925 -- --
------------ ----------- -----------
23,369 11,670 13,720
------------ ----------- -----------
Income before income taxes....................................... 2,815 3,983 1,656
Income tax expense (note 11)..................................... 1,104 1,622 626
------------ ----------- -----------
Income before cumulative effect of accounting change............. 1,711 2,361 1,030
Cumulative effect of accounting change (note 1).................. -- -- 117
------------ ----------- -----------
Net Income....................................................... $ 1,711 $ 2,361 $ 1,147
============ =========== ===========
Net income per share before cumulative effect of accounting change
$ 0.22 $ 1.39 $ 0.59
Cumulative effect of accounting change........................... -- -- .07
------------ ----------- -----------
Net income per share............................................. $ 0.22 $ 1.39 $ 0.66
============ =========== ===========
Weighted average shares outstanding.............................. 2,823,862 1,694,982 1,732,086
============ =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
55
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON NET
SHARES OUTSTANDING STOCK STOCK UNREALIZED
------------------ PAID-IN RETAINED TREASURY ACQUIRED ACQUIRED LOSS ON
COMMON PREFERRED PAR VALUE CAPITAL EARNINGS STOCK BY ESOP BY BRP SECURITIES
------ --------- --------- ------- -------- ----- ------- ------ ----------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993..... 1,691,700 -- $ 18 $ 16,837 $ 31,037 $ (2,456) $ (1,380) $ (610) $ (16)
--------- ------ ------ ------- ------ ----- ------ ------ -------
Net income....................... -- -- -- -- $ 1,147 -- -- -- --
Exercise of stock options........ 64,437 -- -- $ (452) -- $ 1,097 -- -- --
Purchase of treasury stock....... (59,154) -- -- -- -- (1,159) -- -- --
Allocation of ESOP stock......... -- -- -- -- -- -- 329 -- --
Amortization of BRP awards....... -- -- -- -- -- -- -- 178 --
Dividends declared............... -- -- -- -- (822) -- -- -- --
Tax benefits related to stock
compensation plans............ -- -- -- -- 303 -- -- -- --
Change in net unrealized loss on
securities available for
sale, net of tax effect....... -- -- -- -- -- -- -- -- $ (4,427)
---------- ------ ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1994..... 1,696,983 -- $ 18 $ 16,385 $ 31,665 $ (2,518) $ (1,051)$ (432) $ (4,443)
---------- ------ ------ ------ ------ ------ ------ ------- ------
Net income....................... -- -- -- -- 2,361 -- -- -- --
Exercise of stock options........ 21,204 -- -- $ (187) -- $ 399 -- -- --
Purchase of treasury stock....... (90,251) -- -- -- (2,038) -- -- --
Allocation of ESOP stock......... -- -- -- -- -- -- 309 -- --
Amortization of BRP awards....... -- -- -- -- -- -- -- 129 --
Dividends declared............... -- -- -- -- (979) -- -- -- --
Tax benefits related to stock
compensation plans............ -- -- -- -- 63 -- -- -- --
Change in net unrealized loss on
securities available for
sale, net of tax effect....... -- -- -- -- -- -- -- -- $ 4,315
--------- ------ -------- -------- --------- --------- -------- --------- ---------
Balance at December 31, 1995..... 1,627,936 -- 18 16,198 33,110 (4,157) (742) (303) (128)
---------- ------ -------- -------- --------- ---------- --------- ---------- ---------
Net income....................... -- -- -- -- 1,711 -- -- -- --
Sale of Common Stock............. 1,205,000 -- 12 19,553 -- -- -- -- --
Sale of Preferred Stock.......... 600,000 6 12,442 -- -- -- -- --
Exercise of stock options........ 1,000 -- -- (30) -- 20 -- -- --
Purchase of treasury stock....... -- --
Allocation of ESOP stock......... -- -- -- -- -- -- 310 -- --
Amortization of BRP awards....... -- -- -- -- -- -- -- 131 --
Dividends declared............... -- -- -- -- (2,852) -- -- -- --
Tax benefits related to stock
compensation plans............ -- -- -- -- 40 -- -- -- --
Change in net unrealized loss on
securities available for
sale, net of tax effect....... -- -- -- -- -- -- -- -- (4,549)
--------- ------ -------- -------- --------- --------- -------- --------- ---------
Balance at December 31, 1996..... 2,833,936 600,000 36 48,163 32,009 (4,137) (432) (172) (4,677)
========== ======= ======== ======== ========= ========= ======== ========= =========
</TABLE>
TOTAL
-----
Balance at December 31, 1993..... $ 43,430
------
Net income....................... $ 1,147
Exercise of stock options........ 645
Purchase of treasury stock....... (1,159)
Allocation of ESOP stock......... 329
Amortization of BRP awards....... 178
Dividends declared............... (822)
Tax benefits related to stock
compensation plans............ 303
Change in net unrealized loss on
securities available for
sale, net of tax effect....... (4,427)
------
Balance at December 31, 1994..... $ 39,624
------
Net income....................... $ 2,361
Exercise of stock options........ 212
Purchase of treasury stock....... (2,038)
Allocation of ESOP stock......... 309
Amortization of BRP awards....... 129
Dividends declared............... (979)
Tax benefits related to stock
compensation plans............ 63
Change in net unrealized loss on
securities available for
sale, net of tax effect....... 4,315
--------
Balance at December 31, 1995..... $ 43,996
---------
Net income....................... 1,711
Sale of Common Stock............. 19,565
Sale of Preferred Stock.......... 12,448
Exercise of stock options........ (10)
Purchase of treasury stock.......
Allocation of ESOP stock......... 310
Amortization of BRP awards....... 131
Dividends declared............... (2,852)
Tax benefits related to stock
compensation plans............ 40
Change in net unrealized loss on
securities available for
sale, net of tax effect....... (4,549)
--------
Balance at December 31, 1996..... $ 70,790
========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
56
<PAGE>
<TABLE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
-----------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 1,711 $ 2,361 $ 1,147
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized losses (gains) on securities........................... (4) 142 (51)
Net (gain) loss on sale of loans................................ (151) (44) 523
Origination of mortgage loans held for sale..................... (10,584) (6,944) (6,263)
Proceeds from the sales of mortgage loans....................... 11,166 6,029 10,285
Proceeds from the sale of student loans......................... 1,544 1,619 2,700
Proceeds from the sale of trading securities.................... -- -- 3,730
Purchases of trading securities................................. -- -- (3,984)
Amortization of net deferred loan origination fees.............. (170) (299) (236)
Amortization of premiums (discounts) on securities.............. 1,091 68 --
Depreciation and amortization................................... 1,256 942 958
Provision for loan losses....................................... 1,400 483 119
Write-downs of real estate owned................................ 237 141 216
Goodwill amortization........................................... 3,517 137 122
Decrease (increase) in accrued interest receivable.............. (2,294) (393) 326
Decrease (increase) in prepaid expenses and other assets........ 2,538 2,307 (207)
Increase (decrease) in accrued expenses and other liabilities... (6,965) 9,892 1,850
Net change in Federal and State income taxes payable
and receivables............................................... (528) 1,023 (430)
Deferred income taxes........................................... (668) (51) (31)
Other........................................................... 138 248 219
--------- --------- ---------
Net cash provided by operating activities..................... $ 3,234 $ 17,661 $ 10,993
--------- --------- ---------
INVESTING ACTIVITIES
Net increase in loans........................................... $ (62,273) $ (51,248) $ (55,704)
Purchases of investment securities.............................. -- -- (6,980)
Proceeds from the sale of securities held to maturity........... -- 3,000 4,000
Maturities and redemption of debt securities.................... 14,143 38,650 41,000
Purchases of securities available for sale...................... (27,448) (47,516) (31,313)
Proceeds from the sale of securities available for sale......... 36,841 16,094 50,840
Purchases of mortgage-backed securities available for sale...... (386,330) (29,988) (21,643)
Repayments of mortgage-backed securities available for sale..... 16,775 8,930 6,957
Proceeds from the sale of mortgage-backed securities
available for sale........................................... 88,554 20,063 --
Repayments of asset-backed securities........................... 143 752 3,082
Proceeds from the sale of real estate owned, net................ 397 803 539
Cash received in acquisition of branch offices.................. 380,299 20,934 --
Purchases of premises and equipment, net........................ (3,920) (2,986) (1,072)
--------- --------- ---------
Net cash provided by (used in) investing activities........... $ 57,181 $ (22,512) $ (10,294)
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
57
<PAGE>
<TABLE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
---------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from Offering.................................... $ 32,013 -- --
Net change in deposits.................................... (67,630) $ 12,217 $ (2,011)
Net increase in mortgagors' escrow deposits............... 10 117 772
Proceeds from borrowings.................................. 12,100 43,640 --
Repayments of borrowings.................................. (12,100) (43,640) --
Repayment of ESOP loan.................................... (310) (309) (329)
Proceeds from the exercise of stock options............... 40 212 645
Purchase of treasury stock................................ -- (2,038) (1,159)
Payment of common and preferred stock dividends........... (2,387) (979) (770)
--------- --------- ---------
Net cash provided by (used in) financing activities.... (38,264) 9,220 (2,852)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.......... 22,151 4,369 (2,153)
Cash and cash equivalents at beginning of year............ 26,814 22,445 24,598
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 48,965 $ 26,814 $ 22,445
========= ========= =========
SUPPLEMENTAL INFORMATION
Interest paid on deposits................................. $ 30,710 $ 13,742 $ 10,683
Income taxes paid......................................... 2,300 613 1,205
========= ========= =========
Non-cash transactions:
Transfer of balances from loans receivable to real estate
owned................................................. $ 1,044 $ 955 $ 810
========= ========= =========
Transfer of securities from the investment portfolio to
securities available for sale......................... $ -- $ 18,576 $ 95,278
========= ========= =========
Transfer of mortgage-backed securities to mortgage-backed
securities available for sale......................... $ -- $ 504 $ 31,311
========= ========= =========
Transfer of loans from held for sale to loans........... $ -- $ -- $ 9,464
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
58
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
In September 1992, MSB Bancorp, Inc. (the "Company") completed the
issuance of 1,840,000 shares of common stock in connection with the conversion
of Middletown Savings Bank (the "Bank") from a mutual to a stock savings bank
(the "Conversion"). Concurrently with the Conversion, the Company acquired all
of the Bank's common stock.
On January 10, 1996, the Company sold 1,100,000 shares of common stock
at $18 per share and 600,000 shares of its 8.75% Cumulative Convertible
Preferred Stock, Series A at $21.60 per share. On February 7, 1996, the Company
sold an additional 105,000 shares of Common Stock pursuant to the underwriters'
exercise of their over allotment option. The issuance and sale of the shares of
Common Stock and Preferred Stock on January 10 and February 7 are hereinafter
collectively referred to as the "Offering." Proceeds from the Offering amounted
to $32.0 million. The purpose of the Offering was to raise a significant portion
of the additional capital necessary to permit the Bank to qualify as "adequately
capitalized" for regulatory capital purposes immediately following the
consummation of the acquisition of certain branches of First Nationwide Bank, A
Federal Savings Bank ("First Nationwide").
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") and 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
concurrently 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") related to the Spring Valley Branch. The Spring Valley Agreement
provided, among other things, that the Branch Disposition close 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 was
reasonable given the more limited strategic importance to the Bank of the Spring
Valley Branch relative to the other First Nationwide Branches and considering
that the Spring Valley Branch has a higher cost of funds than the other First
Nationwide Branches. The Branch Disposition allows 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 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. The total amount of goodwill recorded as a result of the Acquisition
totaled $34.5 million.
59
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 27, 1995, the Bank converted from a New York state-chartered
savings bank to a federal savings bank in order to facilitate the Acquisition as
well as future expansion. In addition, the Bank changed its name to MSB Bank. As
a consequence of the conversion, the Company became a savings and loan holding
company subject to the regulations, examination and supervision of the Office of
Thrift Supervision( the "OTS"). Prior to the conversion of the Bank to a federal
savings bank, the Company was a bank holding company subject to the regulation,
examination and supervision of the Federal Reserve Board ("FRB").
The Bank provides banking services to individual and corporate
customers, with its business activities concentrated in Orange County, New York,
and the surrounding areas.
The following is a summary of the significant accounting policies
followed by the Company in the preparation of its financial statements.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, MSB Bank and MSB Travel, and
the Bank's wholly owned subsidiary, MSB Financial Services, Inc. The financial
statements have been prepared in conformity with generally accepted accounting
principles. Significant inter-company transactions and amounts have been
eliminated. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowances for losses on loans and real estate owned. The Company's
accounting policies with respect to these allowances are discussed below.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, and Federal funds sold.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment securities and mortgage-backed securities that management
has the positive intent and ability to hold until maturity are stated at cost,
adjusted for premium amortization and discount accretion, computed using the
interest method.
Securities to be held for indefinite periods of time including
securities that management intends to use as part of its asset/liability
strategy, or that may be sold in response to changes in interest rates, changes
in prepayment risk, or other similar factors are classified as available for
sale and are recorded at fair value with the unrealized appreciation of
depreciation, net of taxes, reported separately as a component of stockholders'
equity.
As of January 1, 1994, the Company reclassified securities with
carrying values of $95.5 million as available for sale. These securities had a
market value of $96.8 million on January 1, 1994. In addition, mortgage-backed
securities with an amortized cost of $31.3 million and a fair value of $31.4
million were classified as available for sale at January 1, 1994. The adoption
of SFAS No. 115 on January 1, 1994 resulted in an unrealized gain of $846,000,
which was net of deferred taxes of $562,000, and was included as a separate
component of stockholders' equity. In addition, the Company recognized in
income, as the cumulative effect of an accounting change, the reversal of
unrealized holding losses of $117,000, net of taxes, that were previously
charged to earnings, but are excluded from earnings under SFAS No. 115.
60
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated for sale in the secondary market are carried
at the lower of cost (unpaid principal balances less net deferred loan fees) or
estimated market value in the aggregate. Net unrealized losses, if any, are
recorded through a valuation allowance which is netted against the related
loans. Adjustments to the allowances are recorded in current operations.
Realized gains and losses on the sale of loans are determined based on the cost
of the specific loans sold.
LOANS
Loans, other than those held for sale, are carried at current unpaid
principal balances less the allowance for loan losses and net deferred loan
fees.
Interest on loans is accrued monthly, unless management considers
collectibility to be doubtful (generally, when payments are past due three
months or more). When loans are placed on non-accrual status, unpaid interest is
reversed against interest income of the current period. Loans are returned to
accrual status when collectibility is no longer considered doubtful (generally,
when all payments have been brought current).
Loan fees and certain direct loan origination costs are deferred and
the net fee or cost is recognized in interest income using the interest method.
Deferred amounts are amortized for fixed rate loans over the contractual life of
the loans, and for adjustable rate loans over the period of time required to
adjust the contractual rate to a yield approximating a market rate at the
origination date.
The allowance for loan losses is increased by provisions charged to
operations and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance considers factors such as
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and current and prospective economic
conditions. Management believes that the allowance for loan losses is adequate.
While management estimates loan losses using the best available information,
such as independent appraisals for significant collateral properties, future
adjustments to the allowance may be necessary based on changes in economic and
real estate market conditions, further information obtained regarding known
problem loans, identification of additional problem loans, and other factors. In
addition, various regulatory agencies, as an integral part of their routine
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
Effective January 1, 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." Under the provisions of SFAS
No. 114, a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. SFAS No. 114 requires
creditors to measure impairment of a loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate or at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize an impairment by
recording a valuation allowance with a corresponding charge to the provision for
loan losses. This statement also applies to restructured loans and eliminates
the requirement to classify loans that are in-substance foreclosed as foreclosed
assets except for loans where the creditor has physical possession of the
underlying collateral, but not legal title. Effective January 1, 1995, the
Company also adopted SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," which amends SFAS No. 114 to allow a
creditor to use existing methods for recognizing interest income on impaired
loans. SFAS No. 114 is applicable to all loans that are identified for
evaluation of impairment except for, among others, large groups of
smaller-balance homogenous loans,
61
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
such as residential mortgage loans and consumer installment loans, that are
collectively evaluated for impairment and loans that are measured at fair value
or the lower of cost of fair value.
An insignificant payment delay, which is defined by the Bank as up to
90 days, will not cause a loan to be classified as impaired. In addition, a loan
is not considered impaired when payments are delayed, but the Bank expects to
collect all amounts due, including accrued interest for the period of delay. All
loans identified as impaired are evaluated independently. The Bank does not
aggregate impaired loans for evaluation purposes. Payments received on impaired
loans are applied first to accrued interest, if any, and then to principal.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and amortization and are depreciated using the straight-line method
over the estimated useful lives of the respective assets. Leasehold improvements
are amortized using the straight-line method over the term of the related lease,
or the useful life of the asset, whichever is shorter.
Maintenance, repairs and minor improvements are charged to expense as
incurred, while major improvements are capitalized.
REAL ESTATE OWNED
Real estate owned include properties acquired through legal
foreclosure. These properties are initially recorded at the lower of cost or the
fair value of the property less estimated selling costs. Any resulting
write-downs are charged to the allowance for loan losses. Thereafter, these
properties are carried at the lower of cost or estimated fair value less
estimated selling costs, with any adjustments recorded in a valuation allowance.
GOODWILL
Goodwill, which represents the excess of cost over the fair value of
net assets acquired from the acquisition of deposits, is amortized to expense
over the expected life of the acquired deposit base (10 years) using the
straight line method.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income in the
period that includes the enactment date.
NET INCOME PER SHARE
Net income per share is calculated based upon the weighted average
number of shares outstanding adjusted for common stock equivalents that have a
dilutive effect on the per share data.
62
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. As such, compensation expense would be recorded on the date of
the grant only if the current market price of underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123) which permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of the grant. Alternatively,
SFAS 123 also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro-forma net income and pro-forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to apply the provisions of APB Opinion No. 25 and provide the
pro-forma disclosure provisions of SFAS 123 as applicable. The Company made no
stock-based awards to employees or directors during the years ended December 31,
1996 and 1995.
(2) INVESTMENT SECURITIES HELD TO MATURITY
The Company had no investment securities classified as held to maturity
at December 31, 1996 and 1995. No investment securities were sold during 1996.
Realized gains and losses on sales of investment securities were none
and $175,000, respectively, during 1995 and none and $3,000, respectively,
during fiscal 1994. The proceeds from these sales totaled $3.0 million and $4.0
million in 1995 and 1994, respectively. The securities sold during 1995 and 1994
had remaining terms to maturity of less than three months. Included in realized
losses for fiscal 1995 is a $142,000 loss related to the permanent impairment of
certain investment securities.
63
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SECURITIES AVAILABLE FOR SALE
The following is a summary of securities available for sale:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
- -----------------
Debt securities:
United States Government and related
obligations................................ $ 46,113 $ -- $ 1,225 $ 44,888
Other investment grade bonds................. 2,111 -- 37 2,074
---------- ---------- ---------- ----------
Total debt securities............................ 48,224 -- 1,262 46,962
Equity securities:
Mutual funds................................. 1,221 -- 92 1,129
Corporate equity............................. 2,586 8 -- 2,594
---------- ---------- ---------- ----------
Total equity securities...................... 3,807 8 92 3,723
---------- ---------- ---------- ----------
Total debt and equity securities................. $ 52,031 $ 8 $ 1,354 $ 50,685
========== ========== ========== ==========
<CAPTION>
GROSS GROSS
DECEMBER 31, 1995 AMORTIZED UNREALIZED UNREALIZED FAIR
- ----------------- COST GAINS LOSSES VALUE
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Debt securities:
United States Government and related
obligations................................ $ 49,761 $ 332 $ 459 $ 49,634
Industrial and financial bonds............... 13,274 51 18 13,307
Other investment grade bonds................. 9,204 95 -- 9,299
---------- ---------- ---------- ----------
Total debt securities............................ 72,239 478 477 72,240
Equity securities:
Mutual funds................................. 1,146 -- 32 1,114
Corporate equity............................. 2,225 8 7 2,226
---------- ---------- ---------- ----------
Total equity securities...................... 3,371 8 39 3,340
---------- ---------- ---------- ----------
Total debt and equity securities................. $ 75,610 $ 486 $ 516 $ 75,580
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of debt securities
available for sale at December 31, 1996 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities, because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................................................ $ -- $ --
Due after one year through five years.............................................. 16,002 15,593
Due after five years through ten years............................................. 5,111 4,850
Due after ten years................................................................ 27,111 26,519
----------- -----------
$ 48,224 $ 46,962
=========== ===========
</TABLE>
64
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of realized securities gains (losses) for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities
Gross realized gains....................................... $ 108 $ 55 $ 449
Gross realized losses...................................... 32 45 395
76 $ 10 $ 54
---------- ---------- ----------
Equity securities
Gross realized gains....................................... -- 3 --
Gross realized losses...................................... -- -- --
---------- ---------- ----------
Net realized gains......................................... -- 3 --
---------- ---------- ----------
Net security gains......................................... $ 76 $ 13 $ 54
========== ========== ==========
</TABLE>
Included in securities available for sale at December 31, 1995, was an
interest earning deposit in the amount of $4.9 million. This amount was being
held in escrow pending the completion of the Acquisition and Branch Disposition.
In addition, included in corporate equity securities at December 31, 1996 and
1995 is $2.4 million and $2.1 million, respectively, of Federal Home Loan Bank
capital stock, which is restricted to sale only to member financial
institutions.
Proceeds from sales of debt securities totaled $36,841,000, $16,094,000
and $50,840,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
- -----------------
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation....... $ 106,832 $ -- $ 1,255 $ 105,577
Federal National Mortgage Association........ 37,045 -- 811 36,234
Other Collateralized mortgage obligations.... 163,321 -- 3,574 159,747
Mortgage pass throughs........................... 22,672 -- 802 21,870
----------- ----------- ----------- -----------
$ 329,870 $ -- $ 6,442 $ 323,428
=========== =========== =========== ===========
DECEMBER 31, 1995
- -----------------
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation....... $ 14,757 $ 40 $ 115 $ 14,682
Federal National Mortgage Association........ 19,545 26 117 19,454
Other Collateralized mortgage obligations.... 3,215 -- 32 3,183
Mortgage pass throughs........................... 12,440 47 31 12,456
----------- ----------- ----------- -----------
$ 49,957 $ 113 $ 295 $ 49,775
=========== =========== =========== ===========
</TABLE>
Gross realized gains and losses on sales of mortgage-backed securities
available for sale were $79,000 and $151,000, and $50,000 and $30,000,
respectively, during 1996 and 1995, respectively. The proceeds from these sales
amounted to $88,554,000 and $20,063,000. No mortgage-backed securities available
for sale were sold in 1994.
65
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Real estate loans
Residential
One-to-four family dwellings........................ $ 256,853 $ 221,097
Multi-family........................................ 14,362 14,431
Held for sale....................................... 644 1,075
Commercial............................................ 45,463 29,674
-------------- --------------
Total real estate loans................................ $ 317,322 $ 266,277
Other loans
Secured by savings accounts........................... 770 562
Property improvement.................................. 97 182
Education............................................. 1,955 2,156
Consumer.............................................. 9,368 5,895
Commercial............................................ 8,756 5,686
Checking overdraft lines of credit.................... 1,487 1,173
Other................................................. 701 678
-------------- --------------
Total other loans................................... $ 23,134 $ 16,332
------------- --------------
Net deferred loan origination fees........................ $ (5) $ (438)
Allowance for loan losses................................. (1,960) (1,659)
-------------- --------------
Total loans, net...................................... $ 338,491 $ 280,512
============== ==============
</TABLE>
The following table sets forth information with respect to
non-performing loans which are past due 90 days or more:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans in non-accrual status
One-to-four family residential mortgage loans.... $ 3,364 $ 2,343 $ 1,507
Multi-family mortgage loans...................... 69 69 62
Commercial mortgage loans........................ 1,125 488 182
Other loans...................................... 217 61 15
---------- ---------- ----------
Total loans in non-accrual status.............. $ 4,775 $ 2,961 $ 1,766
---------- ---------- ----------
Total non-performing loans.................... $ 4,775 $ 2,961 $ 1,766
========== ========== ==========
</TABLE>
As of December 31, 1996, the total recorded investment in impaired
loans was $2,399,000, which consisted of $1,227,000 of loans that are potential
problem loans and $1,172,000 of loans that are in non-accrual status. In
addition, impaired loans consisted of $1,999,000 of commercial mortgage loans
that were measured with reference to the appraised value of the collateral
property and $400,000 of commercial loans measured based on expected cash flows.
As of December 31, 1995, the total recorded investment in impaired loans was
$916,000, which consisted of $539,000 of loans that are potential problem loans
and $377,000 of loans that are in non-accrual status. In addition, impaired
loans consisted of $857,000 of commercial mortgages that were measured based on
expected cash flows. The average balance of impaired loans during 1996 and 1995
amounted to $1,817,000 and $982,000, respectively. At December 31, 1996 and
1995, 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 years ended December 31, 1996 and 1995.
The effect on interest income of non-accrual loans amounted to
$413,000, $134,000 and $116,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
66
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank originates loans primarily in the New York counties of Orange,
Ulster, Putnam and Sullivan. The ability of borrowers to make principal and
interest payments is dependent upon, among other things, the level of overall
economic activity and the real estate market conditions prevailing within the
Bank's lending region. If these conditions were to deteriorate, higher levels of
non-performing loans and charge-offs could occur resulting in higher provisions
for loan losses. Real estate loans are comprised of adjustable rate loans of
$276.3 million and fixed rate loans of $41.0 million at December 31, 1996, and
$237.8 million and $28.5 million, respectively, at December 31, 1995.
Certain mortgage loans originated by the Bank are sold without recourse
in the secondary market to the Federal National Mortgage Association ("FNMA").
The unpaid principal balances of such serviced loans, which are not included in
the statements of condition, were approximately $31.2 million and $21.2 million
at December 31, 1996 and 1995, respectively.
(6) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period................................ $ 1,659 $ 1,459 $ 1,466
Provision charged to operations............................... 1,400 483 119
Loans charged off
Real estate............................................... 634 234 28
Other loans............................................... 485 73 105
---------- ---------- ----------
1,119 $ 307 $ 133
Recoveries
Real estate............................................... 1 2 --
Other loans............................................... 19 22 7
---------- ---------- ----------
$ 20 $ 24 $ 7
---------- ---------- ----------
Net charge-offs............................................... $ 1,099 $ 283 $ 126
---------- ---------- ----------
Balance at end of period...................................... $ 1,960 $ 1,659 $ 1,459
========== ========== ==========
Ratio of net charge-offs to average net loans outstanding..... 0.36% 0.11% 0.06%
</TABLE>
67
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land......................................................................... $ 1,809 $ 1,232
Buildings.................................................................... 10,898 9,108
Furniture, fixtures and equipment............................................ 9,880 8,805
Leasehold improvements....................................................... 2,027 1,884
---------- ----------
24,614 21,029
Less accumulative depreciation and amortization.............................. 9,745 8,609
---------- ----------
Premises and equipment, net.................................................. $ 14,869 $ 12,420
========== ==========
</TABLE>
Occupancy and equipment includes depreciation and amortization of
$1,256,000, $942,000 and $958,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
(8) REAL ESTATE OWNED
Investments in real estate consisted of properties owned through
foreclosures and amounted to $915,000 and $806,000 at December 31, 1996 and
1995, respectively.
(9) DEPOSITS
The following is a summary of deposits at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE NOMINAL AVERAGE
AMOUNT RATES AMOUNT NOMINAL RATES
------------- ---------------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Club accounts.................................... $ 422 2.86% $ 391 3.00%
NOW accounts..................................... 39,242 2.00 16,833 2.00
Savings accounts................................. 193,280 3.28 128,305 3.00
Money market accounts............................ 52,004 4.25 44,353 3.21
Time deposits.................................... 403,772 5.31 161,772 5.42
Demand deposits.................................. 47,441 -- 37,290 --
---------- ----------- ---------- ---------
Total deposits................................... $ 736,161 4.18% $ 388,944 3.70%
========== =========== ========== =========
</TABLE>
The maturity of time deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------- --------------------------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Six months or less............................... $ 197,651 5.14% $ 84,325 5.36%
More than six months to one year................. 120,479 5.34 42,063 5.33
More than one year to three years................ 57,258 5.46 27,624 5.62
More than three years............................ 28,384 6.11 7,760 5.93
---------- --------- ---------- ---------
Total time deposits.............................. $ 403,772 5.31% $ 161,772 5.42%
========== ========= ========== =========
</TABLE>
68
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Time deposits issued in amounts of $100,000 or more amounted to
approximately $33.7 million and $11.3 million at December 31, 1996 and 1995.
Interest expense on these deposits amounted to approximately $1,837,000,
$578,000 and $274,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Interest expense by depositor account is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Club accounts.................................. $ 25 $ 25 $ 25
NOW accounts................................... 791 277 260
Savings accounts............................... 6,145 3,918 4,592
Money market accounts.......................... 1,819 1,406 1,339
Time deposits.................................. 21,930 8,116 4,467
-------- -------- ---------
Total deposits............................. $ 30,710 $ 13,742 $ 10,683
======== ======== =========
</TABLE>
(10) BORROWINGS
The Company had no borrowings outstanding at December 31, 1996 and
1995. During 1996, the Company utilized advances from the Federal Home Loan Bank
to provide liquidity. The maximum outstanding borrowings during 1996 were $12.1
million and interest expense related to these advances amounted to $31,000.
During 1995, the Company had outstanding borrowings which consisted of
repurchase agreements. Securities sold under repurchase agreements were
delivered to the primary dealers who arranged the transaction. The securities
remained registered in the Bank's name and were returned upon maturity and
repayment of the borrowing. The maximum amount of outstanding repurchase
agreements during 1995 was $43.6 million. The average balance of repurchase
agreements during 1995 was $21.2 million. Interest expense on these repurchase
agreements totaled $1.4 million in 1995.
(11) INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal.................................. $ 1,268 $ 1,201 $ 535
State.................................... 504 509 123
Deferred
Federal.................................. (419) (51) (25)
State.................................... (249) (37) (7)
-------- -------- ---------
Total.................................. $ 1,104 $ 1,622 $ 626
======== ======== =========
</TABLE>
69
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the provision for income taxes and the amount
computed by multiplying income before income taxes by the statutory Federal
income tax rate of 34% is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate..................................... $ 957 $ 1,354 $ 563
Increase (decrease) resulting from:
Excise tax on termination of pension plan.............. 31 -- --
Non-taxable interest income............................ (19) (14) (44)
State income taxes, net of federal income tax benefit.. 168 312 77
Dividend received deduction............................ (24) (20) (27)
Other net.............................................. (9) (10) 57
-------- -------- -------
$ 1,104 $ 1,622 $ 626
======== ======== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net unrealized loss on securities available for sale... $ 3,111 $ 84 $ 2,953
Deferred compensation.................................. 121 84 76
Allowance for loan losses.............................. 784 664 583
Post-retirement benefits............................... 723 687 645
Deferred loan fees..................................... 2 175 187
Goodwill amortization.................................. 586 95 64
Non-accrual interest................................... 165 55 34
-------- -------- ---------
Total gross deferred tax assets.................... $ 5,492 $ 1,844 $ 4,542
Deferred tax liabilities:
Premises and equipment, primarily due to differences in
depreciation....................................... $ 782 $ 631 $ 529
Tax bad debt reserves over base year amount............ 86 126 102
Prepaid pension........................................ -- 158 159
-------- -------- ---------
Total gross deferred tax liabilities............... 868 915 790
-------- -------- ---------
Net deferred tax asset............................. $ 4,624 $ 929 $ 3,752
======== ======== =========
</TABLE>
Under tax law that existed prior to 1996, the Bank was generally
allowed a special bad debt deduction in determining income for tax purposes. The
deduction was based on either a specified experience formula or a
percentage-of-taxable-income before such deduction. The experience method was
used in preparing the income tax returns for 1995 and 1994. Federal legislation
was enacted in August of 1996, which repealed for tax purposes the
percentage-of-taxable-income bad debt reserve method. As a result, the Bank must
instead use the direct charge-off method to compute its bad debt deduction. The
Federal legislation also requires the Bank to recapture its post-1987 net
additions to its tax bad debt reserves. The Bank has previously provided for
this liability in the financial statements. New York State enacted legislation
in July of 1996, which redesignated the Bank's State bad debt reserves at
December 31, 1995 as the base-year amount and also provide for future additions
to the base-year reserve using the percentage-of-taxable income method.
Retained earnings at December 31, 1996 includes approximately $6
million for which no provision for income tax has been made. This amount
represents an allocation of income to bad debt deductions for tax purposes only.
Events that would result in taxation of these reserves include failure to
qualify as a bank for tax purposes, distributions in complete or partial
liquidation, stock redemptions and excess distributions
70
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to shareholders. At December 31, 1996, the Bank had an unrecognized tax
liability of $2 million with respect to this reserve.
Management has determined that it is more likely than not that it will
realize the deferred tax assets based upon the nature and timing of the items
listed above. There can be no assurances, however, that there will be no
significant differences in the future between taxable income and pre-tax book
income if circumstances change. In order to fully realize the net deferred tax
asset, the Bank will need to generate future taxable income. Management has
projected that the Bank will generate sufficient taxable income to utilize the
net deferred tax asset. However, there can be no assurance as to such levels of
taxable income generated.
(12) STOCKHOLDERS' EQUITY
GENERAL
Pursuant to regulations set forth by the New York State Banking
Department, upon conversion from a New York State chartered mutual savings bank
to a New York State Stock form savings bank in 1992, the Bank established a
liquidation account in the amount of $28.1 million, its total net worth at March
31, 1992, in order to grant a priority to eligible account holders (as defined)
who continue to maintain eligible deposits at the Bank. The balance of the
liquidation account is reduced annually to the extent that eligible account
holders reduce their eligible deposits; however, subsequent increases in
eligible deposits do not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank (and
only in such event), each eligible account holder would be entitled to receive a
distribution from the liquidation account, after payment of all creditor's
claims, in an amount proportionate to the current adjusted eligible deposit
balance. Such distributions would be made prior to any payments to holders of
common stock. The balance of the liquidation account was $7.1 million at
December 31, 1996.
PREFERRED STOCK
In connection with the Offering, the Company sold 600,000 shares of its
8.75% Cumulative Convertible Preferred Stock Series A at $21.60 per share.
The Series A Preferred Stock is not redeemable prior to January 10,
1999. The Series A Preferred Stock will be redeemable, at the option of the
Company, in whole or in part, at any time on or after January 10, 1999, at the
following per share prices (expressed as a percentage of the liquidation
preference per share of Series A Preferred Stock) during the 12-month period
beginning January 10, in each of the following years:
Redemption
Year Price
---- -----
1999..................................106.12%
2000..................................105.250
2001..................................104.375
2002..................................103.500
2003..................................102.625
2004..................................101.750
2005..................................100.875
2006 and thereafter...................100.000
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of shares of Series A Preferred Stock
are entitled to receive out of assets of the Company available for distribution
to stockholders under applicable law, before any payment or distribution of
assets is made to holders of Common Stock or any other class or series of stock
ranking junior to the Series A
71
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Stock upon liquidation, liquidating distributions in the amount of
$21.60 per share plus accrued and unpaid dividends (whether or not earned or
declared) to the date fixed for such liquidation, dissolution or winding up. If
upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the amounts payable with respect to the Series A Preferred Stock and
any other shares of stock of the Company ranking as to any such distribution on
a parity with the Series A Preferred Stock, are not paid in full, the holders of
the series A Preferred Stock and of such other shares will share ratably in any
such distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidation to which they are entitled, the holders shares of
Series A Preferred Stock will not be entitled to any further participation in
any distribution of assets by the Company.
CAPITAL REQUIREMENTS
The OTS regulations require savings associates to meet three minimum
capital standards: a tangible capital ratio requirement of 1.5% of total assets
as adjusted under the OTS regulations, a leverage ratio requirement of 3.0% of
core capital to such adjusted total assets and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The 3.0% core capital requirement has been effectively superseded by the
OTS' prompt corrective action regulations, which impose a 4.0% core capital
requirement for treatment as an "adequately capitalized" thrift and a 5.0% core
capital requirement for treatment as a "well capitalized" thrift. In determining
the amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of assets.
The following table sets forth the capital position of the Bank as
calculated at December 31, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
-------- ---- ----------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital as calculated under GAAP........... $ 70,944 9.0% $ 70,944 9.0% $ 70,944 20.7%
Deduct goodwill............................ 32,835 4.2 32,835 4.2 32,835 9.6
Add qualifying general loan loss allowance,
as limited by regulation................ -- -- -- -- 1,960 0.6
Add net unrealized loss on securities
available for sale, net of taxes........ 4,677 0.6 4,677 0.6 4,677 1.4
------ ----- --------- ----- ------ -----
Capital, as calculated..................... 42,786 5.4 42,786 5.4 44,746 13.1
Capital, as required....................... 11,813 1.5 31,501 4.0 27,339 8.0
------ ----- --------- ----- ------ -----
Excess..................................... $ 30,973 3.9% $ 11,285 1.4% $ 17,407 5.1%
========= ===== ========= ===== ========= =====
</TABLE>
DIVIDEND RESTRICTIONS
Delaware law stipulates that the Company may only pay dividends from
its capital surplus or, if no surplus exists, from its net profits for the
current and preceding year.
The Bank's ability to pay dividends to the Company is also subject to
various restrictions. At least 30 days' written notice must be given to the OTS
of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (i)
100% of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in
72
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capital requirements) at the beginning of the calendar year, or (ii) 75% of its
net earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Bank would be prohibited from
making any capital distribution if, after the distribution, the Bank failed to
meet its minimum capital requirements, as described above.
(13) EMPLOYEE BENEFITS
RETIREMENT PLAN
Prior to August 31, 1995, the Bank maintained a defined benefit pension
plan which covered substantially all employees of the Bank who met certain age
and length of service requirements.
The Bank terminated the defined benefit plan as of August 31, 1995.
Settlement of the Plan liabilities occurred in July 1996, resulting in a pre-tax
gain of $32,000.
The following is a reconciliation of the funded status of the Bank's
defined benefit plan:
<TABLE>
<CAPTION>
JULY 31, 1996 DECEMBER 31, 1995
------------- -----------------
POST
Actuarial present value of benefit obligations SETTLEMENT CURTAILMENT
---------- -----------
<S> <C> <C>
Accumulated benefit obligation-vested................. $ 3,173 $ 3,173
Accumulated benefit obligation--non-vested............. 294 294
---------- -----------
Projected benefit obligation.......................... 3,467 3,467
Plan assets, at fair value............................ 4,501 5,100
---------- -----------
Plan assets in excess of projected benefit obligation. 1,034 1,633
Unrecognized net transition asset..................... (40) (40)
Unrecognized net transition past experience different
from that assumed.................................. (63) (63)
---------- -----------
Prepaid pension expense.......................... $ 931 $ 1,530
========== ===========
</TABLE>
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................... $ -- $ 123 $ 196
Interest cost................................... -- 211 306
Actual return on plan assets.................... -- (237) 32
Net amortization and deferral................... -- (11) (412)
-------- -------- --------
Net pension expense........................ -- $ 86 $ 122
======== ======== ========
</TABLE>
A discount rate of 7.50% and 8.00% for the years ended December 31,
1995 and 1994, respectively, was used in determining the actuarial present value
of the projected benefit obligation ("PBO"). The rate of increase in future
compensation levels used in calculating the PBO was 6.05% for 1995 and 5.5% for
1994. The expected long-term rate of return on plan assets was 8% in both 1995
and 1994.
The defined benefit plan allowed participants, upon retirement, to
elect to receive either monthly benefit payments or a lump sum distribution. The
plan was amended effective January 1, 1994 to eliminate the lump sum
distribution option. However, all vested benefits up to January 1, 1994 were
grandfathered and therefore eligible for lump sum distribution. In connection
with the termination of the plan, a lump sum
73
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
distribution option was re-instituted for distributions to active employees. A
group annuity contract was purchased to provide benefits for current retirees
and active employees who elected to receive deferred monthly payments commencing
at or after retirement.
SAVINGS PLAN
The Bank also sponsors an incentive savings plan (a defined
contribution plan) that is offered to substantially all employees. The Bank
began making discretionary contributions to the Plan on September 1, 1995,
concurrent with the termination of the Bank's defined benefit plan. Salaries and
employee benefits expense includes incentive savings plan expense of $101,000,
$92,000 and $18,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
Concurrently with the Offering, the Company adopted an Employee Stock
Ownership Plan (the "ESOP") for substantially all employees. The ESOP purchased
182,160 shares of the Company's common stock in the Conversion at a cost of
$1,821,600 using the proceeds of a loan provided by an unrelated financial
institution. The terms of the loan call for level principal payments in 28
quarterly installments commencing September 30, 1992 with interest at a variable
rate equal to the prime rate. Loan payments are being funded over a seven-year
period principally from the Company's contributions to the ESOP, which are
charged to expense as incurred. Contributions for the years ended December 31,
1996, 1995 and 1994 amounted to approximately $310,000, $343,000 and $418,000,
respectively.
Shares purchased by the ESOP are held in a suspense account for
allocation to individual participant accounts as the loan is repaid. Shares are
allocated annually based on the relative compensation of the participants. The
cost of the unallocated shares held in the suspense account is reflected as a
reduction of stockholders' equity.
BANK RECOGNITION AND RETENTION PLAN
The Company established the Bank Recognition and Retention Plans
("BRP's") as a method of providing officers and directors of the Bank with a
proprietary interest in the Company. The BRP's are designed to encourage the
participants to remain with the Bank. The BRP's purchased a total of 4% or
73,600 of the shares issued in the Offering which were awarded to the BRP
participants. During fiscal 1992, the BRP's acquired 63,882 shares with
contributions from the Bank of $736,000. The remaining 9,778 shares were
acquired by the BRP in October 1992, at a cost of $112,000. Awards to plan
participants vest at a rate of 20% per year commencing one year from the date of
the award. As awards vest, the Bank will recognize an employee benefit expense
in an amount equal to the cost basis of the stock. The expense recognized for
vested benefits amounted to $131,000, $129,000 and $178,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
STOCK OPTION PLAN
The Company's Incentive Stock Option Plan ("Employees' Plan") and the
Stock Option Plan for Outside Directors ("Director's Plan") provide for the
granting of options to directors and officers of the Company. Under the terms of
the plans, options may be granted at not less than fair market value on the date
of the grant.
The Employees' Plan authorizes the grant of stock options and limited
rights with respect to 128,800 shares of common stock of the Company, equal to
7% of the shares of common stock issued in the Conversion. Options under the
Employees' Plan are exercisable on a cumulative basis in equal installments at a
rate of 20% per year commencing one year from date of the grant, except that in
the event of termination of employment other than as a result of death,
disability, retirement, or a change in control of the Company or the Bank,
options not previously exercisable will automatically expire. As of December 31,
74
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996, 1995 and 1994, options for the purchase of 34,755 shares, 38,755 shares
and 55,059 shares, respectively, were outstanding under this plan. At December
31, 1996, 24,451 shares were exercisable. Options exercised during 1996 amounted
to 4,000 shares. No options were granted in 1996, 1995 and 1994. Upon exercise
of "Limited Rights" in the event of a change in control, the employee will be
entitled to receive a lump sum cash payment equal to the difference between the
exercise price of the related option and the fair market value of the shares of
Common Stock underlying the option. In the event of death, disability or normal
retirement, the Company, if requested by the employee, may elect, in exchange
for the option, to pay the employee, or beneficiary in the event of death, the
amount by which the fair market value of the Common Stock exceeds the exercise
price of the option on the date of the employee's termination of employment.
Under the Director's Plan, Directors were granted, concurrent with the
Conversion, non-statutory options to purchase an aggregate amount of Common
Stock of the Company equal to 3% or 55,200 of the shares of the Common Stock
issued in the Conversion. Options for an additional 6,750 shares have been
reserved for grants to subsequent outside Directors. Each Director received a
fixed award of options, plus a number of options based upon the Director's
length of service. Options vest one year after the date of grant, except that in
the event of death, retirement, disability or a change in control of the Bank or
the Company, all options will vest immediately. The exercise price per share of
each option is equal to the fair market value of the shares of Common Stock on
the date the option was granted. All options granted under the Director's Plan
expire upon the earlier of 10 years following the date of grant or one year
following the date the optionee ceases to be a Director. There were no options
exercised during 1996.
OTHER RETIREMENT BENEFITS
In addition to pension benefits, the Company provides certain health
care and life insurance benefits for retired employees and their spouses. A
Medicare supplement is provided through the American Association of Retired
Persons for retirees who have completed 10 years of service. Retirees with 10 to
19 years of service contribute 50% of the premiums and retirees with 20 or more
years contribute 20% of the premium. The health care plan provides for a $250
deductible per individual with 70% co-insurance up to $1,750 and 100%
thereafter. Life insurance is provided at 90% of the amount of insurance in
force at retirement and is reduced 10% a year for four years. Thereafter, life
insurance is provided at 50% of the insurance in force at retirement. Dental
benefits are also provided on a procedure-specific basis.
The following is a reconciliation of the funded status of the plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated post-retirement benefit obligation
Retirees........................................................... $ 407 $ 424 $ 703
Active employees fully eligible for benefits....................... -- -- 204
Other active employees............................................. 676 568 630
-------- -------- ---------
Total.......................................................... 1,083 992 $ 1,537
Unrecognized gain (loss)........................................... 543 526 75
Unrecognized past service liability................................ 182 199 --
-------- -------- ---------
Accrued post-retirement benefits................................... $ 1,808 $ 1,717 $ 1,612
======== ======== =========
</TABLE>
75
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net periodic post-retirement benefit cost are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost....................................................... $ 90 $ 63 $ 75
Interest cost...................................................... 80 127 130
Unrecognized gain.................................................. (23) (16) --
Unrecognized past service liability................................ (16) -- --
-------- -------- ---------
Total.......................................................... $ 131 $ 174 $ 205
======== ======== =========
</TABLE>
A discount rate of 7.75%, an annual rate of salary increases of 6.5%
and a 10% increase in the assumed healthcare costs reducing linearly to 5.5% in
2005 were used to determine the Accumulated Post-Retirement Benefit Obligation
("APBO") at December 31, 1996. A discount rate of 7.5%, an annual rate of salary
increases of 6.5% and a 10% increase in the assumed healthcare costs reducing
linearly to 5.5% in 2005 were used to determine the APBO at December 31, 1995.
For fiscal 1994, a discount rate of 8.25%, an annual rate of salary increases of
6.5% and a 10.5% increase in the assumed health care costs reducing linearly to
5.5% in the year 2005 were used. The effect of a one-percentage point increase
in the assumed health care cost trend rates for each future year would be an
increase in net periodic post-retirement benefits cost of $21,300 and an
increase of $166,000 in the APBO.
Compensation and benefits expense includes insurance premiums for
retiree health care and life insurance benefits, and similar benefits for active
employees of $473,000, 423,000 and $486,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
(14) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has various outstanding
commitments and contingent liabilities that have not been reflected in the
consolidated financial statements.
The principal commitments and contingent liabilities of the Company are
discussed in the sections that follow.
LEASE COMMITMENTS
The future minimum lease payments under operating leases at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------
(IN THOUSANDS)
<S> <C> <C>
1997................................. $ 228
1998................................. 176
1999................................. 171
2000................................. 169
2001................................. 169
2002 and thereafter.................. 1,332
--------
Total minimum lease payments $ 2,245
========
</TABLE>
76
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOAN COMMITMENTS AND LINES OF CREDIT
At December 31, 1996 and 1995, the Company's commitments to originate
loans, including unused lines of credit, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Real estate loans........................................... $ 36,833 $ 23,595
Other loans................................................. 5,292 3,947
Stand-by letters of credit.................................. 102 105
---------- ----------
Total commitments........................................ $ 42,227 $ 27,647
========= ==========
</TABLE>
Commitments to extend credit are contractual agreements to lend to
customers within specified time periods at interest rates and on other terms
based on existing market conditions. Commitments generally have fixed expiration
dates or other termination clauses and may require the payment of a fee by the
customer. The Company's outstanding loan commitments and lines of credit do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully drawn
upon. The credit risk associated with loan commitments and lines of credit is
essentially the same as for outstanding loans reported in the balance sheet.
Commitments and lines of credit are subject to the same credit approval process,
including case-by-case evaluation of the customer's creditworthiness and related
collateral requirements. Substantially all of these commitments have been
entered into with customers within the Bank's lending region as described in
Note 5. Loan commitments include extensions of credit with adjustable rates of
$35,422,000 and $23,447,000 at December 31, 1996 and 1995, respectively, and
extension of credit with fixed rates of $6,805,000 and $4,200,000 at December
31, 1996 and 1995, respectively.
LEGAL PROCEEDINGS
Except as described below, the Bank is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.
The Company and its directors are defendants in a lawsuit, POHLI V. MSB
BANCORP, INC. ET AL., commenced by a stockholder in the Delaware Court of
Chancery, New Castle County, on or about November 7, 1995. The plaintiff,
purporting to represent a class consisting of all stockholders except the
stockholder defendants and those affiliated with the stockholder defendants,
alleges that the defendant directors have breached and continue to breach their
fiduciary duties to stockholders by, among other things, failing to give due
consideration to proposals to acquire the Company or its assets, for failing to
maximize stockholder value and for failing to disclose all material facts to
stockholders. The plaintiff, on behalf of the purported class, seeks unspecified
money damages and an affirmative injuction 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 continued in the complaint and seeking, among other things, an order
dismissing the complaint with prejudice. This action has been dormant. No
discovery requests have been served by the plaintiffs. The Company intends to
vigorously contest the allegations of wrongdoing in this action.
The Company and its directors are defendants in a lawsuit, KAHN
BROTHERS & CO., INC. ET AL. V. MSB BANCORP, INC. ET AL., commenced by
stockholders in the Delaware Court of Chancery, New Castle County, on or about
November 22, 1995. The plaintiffs, who own in excess of 5% of the outstanding
shares of the Common Stock and purport to represent a class consisting of all
stockholders except the stockholder defendants, allege that the defendant
directors breached their duty of care by failing to become fully informed about
the proposals of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to
stockholders by not notifying the
77
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 four of the directors and have
requested the depositions of certain of the remaining director defendants. 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 a 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 yet established any specific litigation
reserves with respect to such matters.
OTHER COMMITMENTS
At December 31, 1990, the Company had commitments to purchase $12.0
million of securities. These securities will be classified as available for sale
and were purchased in the normal course of business.
(15) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets at December 31, 1996, 1995 and
condensed statements of income and cash flows for the years ended December 31,
1996, 1995 and 1994 for MSB Bancorp, Inc. should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto.
78
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
BALANCE SHEET 1996 1995
---- ----
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash and cash equivalents.................................. $ 58 $ 3,104
Federal funds.............................................. 400 400
Securities available for sale.............................. 25 --
Equity in net assets of subsidiary......................... 70,825 41,207
Other assets............................................... 783 294
------------ -----------
$ 72,091 $ 45,005
============ -----------
LIABILITIES
Dividends payable.......................................... $ 708 $ 244
Accrued expenses........................................... 161 23
ESOP obligation............................................ 432 742
------------ -----------
Total liabilities.................................... $ 1,301 $ 1,009
============ -----------
STOCKHOLDERS' EQUITY
Preferred Stock............................................ $ 6 $ --
Common Stock............................................... 30 18
Additional paid-in capital................................. 48,163 16,198
Retained Earnings.......................................... 32,009 33,110
Treasury stock, at cost.................................... (4,137) (4,157)
Unallocated ESOP stock..................................... (432) (742)
Unallocated BRP stock...................................... (172) (303)
Net unrealized loss on securities available for sale....... (4,677) (128)
------------ -----------
Total stockholders' equity........................... $ 70,790 $ 43,996
------------ -----------
$ 72,091 $ 45,005
============ ===========
STATEMENTS OF INCOME
YEAR ENDED
DECEMBER 31
-----------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Interest income............................................... $ 22 $ 120 $ 233
Dividends from subsidiary..................................... 953 750 835
Realized securities gains..................................... -- -- 4
--------- --------- ----------
Total income.................................................. 975 870 1,072
Expenses...................................................... 340 380 273
--------- --------- ----------
Income before income taxes and equity in undistributed
earnings of subsidiary..................................... 635 490 799
Income tax expense (benefit).................................. (91) (115) 4
--------- --------- ----------
Income before equity in undistributed earnings of subsidiary.. 726 605 795
Equity in undistributed earnings of subsidiary................ 985 1,756 352
--------- --------- ----------
Net income................................................. $ 1,711 $ 2,361 $ 1,147
========= ========= ==========
</TABLE>
79
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
STATEMENTS OF CASH FLOWS DECEMBER 31
----------------------------------------
1996 1995 1994
---- ---- ----
Cash Flows From Operating Activities (IN THOUSANDS)
<S> <C> <C> <C>
Net Income.................................................... $ 1,711 $ 2,361 $ 1,147
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiary not providing funds...... (985) (1,756) (352)
Securities (gains) losses................................. -- -- (4)
(Increase) decrease in other assets....................... (25) 187 (24)
Increase (decrease) in accrued expenses................... 138 (65) (25)
Other ................................................... (13) 57 --
---------- ---------- ---------
Net cash provided by operating activities................. $ 826 $ 784 $ 742
---------- ---------- ---------
Cash Flows From Investing Activities
Purchase of securities........................................ (25) $ -- $ (989)
Sales of securities held for sale............................. -- -- 985
Maturities of investment securities........................... -- 2,000 1,000
---------- ---------- ---------
Net cash used by investing activities......................... $ (25) $ 2,000 $ 996
---------- ---------- ---------
Cash Flows From Financing Activities
Proceeds from the sale of stock............................... 32,013 -- --
Infusion of capital to subsidiaries........................... (33,513) -- --
Proceeds from the exercise of stock dividends................ 40 212 645
Purchase of treasury stock.................................... -- (2,038) (1,159)
Payment of common and preferred stock dividends............... (2,387) (979) (770)
---------- ---------- ---------
Net cash provided by financing activities..................... $ (3,847) $ (2,805) $ (1,284)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents.......... $ (3,046) $ (21) $ 454
Cash and cash equivalents at beginning of year................ 3,504 3,525 3,071
---------- ---------- ---------
Cash and cash equivalents at end of year...................... $ 458 $ 3,504 $ 3,525
========== ========== =========
</TABLE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the Company to disclose estimated fair values for its financial
instruments. Whenever possible, quoted market prices are used to estimate the
fair value of a financial instrument. An active market does not exist, however,
for many financial instruments. As a result, fair value estimates are made, as
of a specific date, based on judgments regarding future expected cash flows,
current economic conditions, risk factors and other characteristics of the
financial instrument. These estimates are subjective in nature and involve
uncertainties. Changes in these judgments often have a material impact on the
fair value estimates. In addition, since these estimates are made as of a
specific date, they are susceptible to material changes in the near future. The
information presented is based on pertinent information available to management
as of December 31, 1996 and 1995. Although management is not aware of any
factors, other than changes in interest rates, that would significantly affect
the estimated fair values, the current estimated value of these instruments may
have changed significantly since that point in time. Fair value estimates,
methods, and assumptions are set forth below for the Company's financial
instruments.
80
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concern. The fair value of longer-term investments and mortgage-backed
securities, except certain state and municipal securities, is estimated based on
bid prices published in financial newspapers or bid quotations received from
securities dealers.
LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage and other consumer. Each loan
category is further segmented into fixed and adjustable rate interest terms and
by performing and non-performing categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Bank's historical experience with
repayments for each loan classification, modified, as required, by an estimate
of the effect of discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources adjusted to
reflect differences in servicing and credit costs.
Fair value for significant non-performing loans is based on recent
external appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
are judgmentally determined using available market information and specific
borrower information.
DEPOSIT LIABILITIES
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as non-interest bearing demand deposits, savings and NOW accounts and money
market and checking accounts, is equal to the amount payable on demand. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The following is a summary of the carrying values and estimated fair
values of the Company's financial instruments at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks....................... $ 16,375 $ 16,375 $ 15,862 $ 15,862
Federal funds sold............................ 32,590 32,590 10,952 10,952
Securities available for sale................. 50,685 50,685 75,580 75,580
Mortgage-backed securities available for sale. 323,428 323,428 49,775 49,775
Loans, net.................................... 338,491 340,479 280,950 284,056
Accrued interest receivable................... 5,552 5,552 3,219 3,219
Financial Liabilities:
Non-interest bearing demand................... 47,441 47,441 37,290 37,290
Savings and NOW............................... 232,944 232,944 145,529 145,529
Money market.................................. 52,004 52,004 44,353 44,353
Time deposits................................. 403,772 406,160 161,772 162,009
</TABLE>
81
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Quarterly Operating Data
Interest income............................... $ 13,125 $ 13,740 $ 13,853 $ 13,632
Interest expense.............................. 7,576 7,680 7,785 7,752
--------- --------- --------- --------
Net interest income........................... 5,549 6,060 6,068 5,880
Provision for loan losses..................... 250 320 400 430
Realized gains (losses) on securities......... (1) 18 (48) 35
Other non-interest income..................... 864 1,022 1,012 1,125
SAIF assessment............................... -- -- 2,925 --
Non-interest expense.......................... 5,139 5,211 5,213 4,881
--------- --------- --------- --------
Income before income taxes.................... 1,023 1,569 (1,506) 1,729
Income tax expense............................ 435 653 (648) 664
--------- --------- --------- --------
Net income (loss)............................. $ 588 $ 916 $ (858) $ 1,065
========= ========= ========= ========
Net income (loss) per share................... $ 0.12 $ 0.22 $ (0.40) $ 0.27
========= ========= ========= ========
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1995 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- ------- ------- ------- -------
Quarterly Operating Data.........................
Interest income............................... $ 6,429 $ 7,155 $ 7,871 $ 7,696
Interest expense.............................. 3,114 3,881 4,274 3,914
--------- --------- -------- -------
Net interest income........................... 3,315 3,274 3,597 3,782
Provision for loan losses..................... 53 142 128 160
Realized gains (losses) on securities......... (1) (178) 22 15
Other non-interest income..................... 579 555 588 588
Non-interest expense.......................... 2,839 2,790 2,750 3,291
--------- --------- -------- -------
Income before income taxes.................... 1,001 719 1,329 934
Income tax expense............................ 401 301 593 327
--------- --------- -------- -------
Net income.................................... $ 600 $ 418 $ 736 $ 607
========= ========= ======== =======
Net income (loss) per share................... $ 0.35 $ 0.25 $ 0.44 $ 0.36
========= ========= ======== =========
</TABLE>
82
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SAVINGS ASSOCIATION INSURANCE FUND (SAIF) ASSESSMENT
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposes
a special one-time assessment on SAIF member institutions, including the Bank,
to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a
special assessment of 65.7 basis points on SAIF assessable deposits held as of
March 31, 1995, payable November 27, 1996. The special assessment was recognized
as an expense in the third quarter of 1996 and is tax deductible. The Bank
incurred a pre-tax charge of $2.9 million as a result of the FDIC special
assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning January 1,
1997, BIF deposits will be assessed for FICO payments at a rate of 20% of the
rate assessed on SAIF deposits. Based on current estimates by the FDIC, BIF
deposits will be assessed a FICO payment of 1.3 basis points, while SAIF
deposits will pay an estimated 6.5 basis points on the FICO bonds. Full pro rata
sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds
Act specifies that the BIF and SAIF will be merged on January 1, 1999 provided
no savings associations remain as of that time.
The Funds Act requires the Secretary of the Treasury to conduct a study
of the relevant factors with respect to the development of a common charter for
all insured depository institutions and the abolition of separate charters for
banks and thrifts and to report the Secretary's conclusions and findings to the
Congress on or before March 31, 1997. Two bills have been introduced in Congress
to eliminate the federal thrift charter, with one requiring the federal thrift
to convert to a bank charter and the other giving the federal thrift the option
to convert to a national or state chartered bank or to a state savings and loan
association. It is uncertain at this time whether or when any of these proposals
will be enacted or, if enacted, how long the transition period that federal
savings banks will have in which to convert.
As a result of the Funds Act and recently passed legislation, SAIF
assessments will be lowered to 0 to 27 basis points effective January 1, 1997, a
range comparable to that of BIF members. However, SAIF members will continue to
make the higher FICO payments described above. Management cannot predict the
level of FDIC insurance assessments on an on-going basis, whether the savings
association charter will be eliminated, or whether the BIF and SAIF will
eventually be merged.
83
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information included in the Proxy Statement for the 1997
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference: "Election of Directors," "Meetings of the Board and Committees of the
Board" and "Executive Compensation."
ITEM 11. EXECUTIVE COMPENSATION
The following information included in the Proxy Statement is
incorporated herein by reference: "Directors' Compensation" and "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included in the Proxy Statement is
incorporated herein by reference: "Voting Securities," "Security Ownership of
Certain Beneficial Owners" and "Stock Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information included in the Proxy Statement is
incorporated herein by reference: "Transactions with Certain Related Persons."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and
exhibits filed as part of this report:
(1) The consolidated balance sheets of MSB Bancorp,
Inc. and subsidiary as of December 31, 1996, 1995 and
1994 and the related consolidated statements of
income, changes in stockholders' equity and cash
flows for each of the years in the three year period
ended December 31, 1996, together with the related
notes and the independent auditors' report of KPMG
Peat Marwick LLP and Nugent and Haeussler, PC (the
Company's predecessor accountant), independent
certified public accountants.
(2) All other schedules omitted as they are not
applicable.
(3) Exhibits
84
<PAGE>
DESIGNATION DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of MSB Bancorp, Inc.
(Incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1, No. 33-47626, filed on July 13, 1992)
3.2 By-laws of MSB Bancorp, Inc. (Incorporated by reference to
Exhibit 3.2 to the Company's Form 10-K, dated March 22, 1996)
4.1 Specimen Stock Certificate (Incorporated by reference to
Exhibit 4.0 to the Registration Statement on Form S-1, No.
33-47626, filed on July 13, 1992)
4.2 Rights Agreement between MSB Bancorp, Inc. and Mellon Bank,
N.A., dated as of September 16, 1994 (Incorporated by
reference to Exhibit 2 to the Registration Statement on Form
8-A, filed on September 20, 1994)
4.3 Amendment No. 1, dated as of January 9, 1996, to Rights
Agreement between MSB Bancorp, Inc. and Mellon Bank, N.A.,
dated as of September 16, 1994 (Incorporated by reference to
Exhibit 4.3 to the Company's Form 10-K, dated March 22, 1996)
4.4 Certificate of Designations, Preferences and Rights of Series
A Junior Participating Preferred Stock of MSB Bancorp, Inc.
(Included as Exhibit A to the Rights Agreement set forth at
Exhibit 4.2)
4.5 Form of Right Certificate (Included as Exhibit B to the Rights
Agreement set forth at Exhibit 4.2)
4.6 Certificate of Designations, Preferences and Rights of 8.75%
Cumulative Convertible Preferred Stock, Series A of MSB
Bancorp, Inc. (Incorporated by reference to Exhibit 4.6 to the
Company's Form 10-K, dated March 22, 1996)
4.7 Specimen Stock Certificate for 8.75% Cumulative Convertible
Preferred Stock, Series A (Incorporated by reference to
Exhibit 4.7 to the Company's Form 10-K, dated March 22, 1996)
4.8 Preferred Stock Purchase Agreement, dated as of January 4,
1996, by and between MSB Bancorp, Inc. and HUBCO, Inc.,
regarding 8.75% Cumulative Convertible Preferred Stock, Series
A of MSB Bancorp, Inc. (Incorporated by reference to Exhibit
4.8 to the Company's Form 10-K, dated March 22, 1996)
10.1 MSB Bank 401(k) Savings Plan, as amended and restated
effective as of July 1, 1995 (Incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-2, No.
33-97904)
10.2 Middletown Savings Employee Stock Ownership Plan and Trust,
effective as of January 1, 1992 (Incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-1, No.
33-47626)
85
<PAGE>
DESIGNATION DESCRIPTION
- ----------- -----------
10.3 Amendments to the Middletown Savings Bank Employee Stock
Ownership Plan and Trust (Incorporated by reference to Exhibit
10.5 to the Form 10-K for the fiscal year ended December 31,
1994)
10.4 MSB Bancorp, Inc. Incentive Stock Option Plan (Incorporated by
reference to Exhibit A to the Proxy Statement for the First
Annual Meeting of Stockholders on January 27, 1993)
10.5 MSB Bancorp, Inc. Stock Option Plan for Outside Directors
(Incorporated by reference to Exhibit B to the Proxy Statement
for the First Annual Meeting of Stockholders on January 27,
1993)
10.6 MSB Bank Recognition and Retention Plan, as amended and
restated effective as of June 1, 1995 (Incorporated by
reference to Exhibit 10.9 to the Registration Statement on
Form S-2, No. 33-97904)
10.7 MSB Bank Directors' Deferred Compensation Plan, as amended and
restated effective as of June 1, 1995 (Incorporated by
reference to Exhibit 10.7 to the Registration Statement on
Form S-2, No. 33-97904)
10.8 Retirement Plan for Board Members of MSB Bancorp, Inc.,
adopted effective as of October 21, 1994 (Incorporated by
reference to Exhibit 10.8 to the Registration Statement on
Form S-2, No. 33-97904)
10.9 MSB Bank Officers' Deferred Compensation Plan, adopted
effective as of November 1, 1996
10.10 MSB Bank Employee Severance Compensation Plan, as amended and
restated effective as of September 3, 1995 (Incorporated by
reference to Exhibit 10.14 to the Registration Statement on
Form S-2, No. 33-97904)
10.11 Employment Agreement by and between MSB Bancorp, Inc. and
William C. Myers, adopted effective as of September 3, 1994,
as amended effective as of September 3, 1995 (Incorporated by
reference to Exhibit 10.10 to the Registration Statement on
Form S-2, No. 33-97904)
10.11(A) Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and William C. Myers, adopted
effective as of September 3, 1996
10.12 Employment Agreement by and between MSB Bancorp, Inc. and Gill
Mackay, adopted effective as of September 3, 1994, as amended
effective as of September 3, 1995 (Incorporated by reference
to Exhibit 10.11 to the Registration Statement on Form S-2,
No. 33-97904)
10.12(A) Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and Gill Mackay, adopted effective
as of September 3, 1996
86
<PAGE>
DESIGNATION DESCRIPTION
- ----------- -----------
10.13 Employment Agreement by and between MSB Bancorp, Inc. and
Anthony J. Fabiano, effective as of January 1, 1996
(Incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-2, No. 33-97904)
10.13(A) Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and Anthony J. Fabiano, effective as
of January 1, 1997
10.14 Special Termination Agreements by and between MSB Bank and
Karen DeLuca, Frances C. Reilly, Frank J. Fogg, Steven R.
Gleason and Jane G. Matheson, respectively, adopted effective
as of September 3, 1994, as amended effective as of October
27, 1995 (Incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-2, No. 33-97904)
10.15 Special Termination Agreements by and between MSB Bank and
Stephen W. Dederick and Mary Ellen Rogulski, respectively,
adopted effective as of January 1, 1996 (Incorporated by
reference to Exhibit 10.17 to the Registration Statement on
Form S-2, No. 33-97904)
10.16 Asset Purchase and Sale Agreement, dated as of September 29,
1995, and amendment thereto, dated December 28, 1995, between
Middletown Savings Bank and First Nationwide Bank, A Federal
Savings Bank (Incorporated by reference to the Current Reports
on Form 8-K, dated October 2, 1995 and January 2, 1996,
respectively)
10.17 Asset Purchase and Sale Agreement, dated as of December 28,
1995, and Amendment No. 1 thereto, dated December 28, 1995,
between MSB Bank and Provident Savings Bank, F.A.
(Incorporated by reference to the Current Report on Form 8-K,
dated January 2, 1996)
11 Statement re: Computation of Earnings Per Share
16 Letter re Change in Certifying Accountant (Incorporated by
reference to the Company's Current Report on Form 8-K dated
December 6, 1995, as amended by the Form 8-K/A dated December
11, 1995)
21 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21 to the Company's Form 10-K, dated March 22, 1996)
27 Financial Data Schedule (submitted only with filing in
electronic format)
99 Proxy Statement for the 1997 Annual Meeting of Stockholders
(to be filed pursuant to Rule 14a-6 under the Securities
Exchange Act of 1934, as amended)
(b) The Company did not file any Current Reports on Form 8-K
during the fourth quarter of 1996.
87
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the Town of Goshen, State of New York, on March 3, 1997.
MSB Bancorp, Inc.
By: /s/ William C. Myers
--------------------------
William C. Myers
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Wiliam C. Myers Director, President, Chief Executive March 3, 1997
- ------------------------------------- Officer and Chairman of the Board
William C. Myers (Principal executive officer)
/s/ Gill Mackay Executive Vice President March 3, 1997
- ------------------------------------- and Chief Operating Officer
Gill Mackay
/s/ Anthony J. Fabiano Senior Vice President and Chief March 3, 1997
- ------------------------------------- Financial Officer (Principal
Anthony J. Fabiano Accounting and Financial Officer)
/s/ Joan M. Costello Director March 3, 1997
- -------------------------------------
Joan M. Costello
- ------------------------------------- Director March 3, 1997
Ralph W. Decker
/s/ Joseph R. Donovan Director March 3, 1997
- -------------------------------------
Joseph R. Donovan
/s/ John L. Krause Director March 3, 1997
- -------------------------------------
John L. Krause
/s/ John W. Norton Director March 3, 1997
- -------------------------------------
John W. Norton
/s/ Douglas Porto Director March 3, 1997
- -------------------------------------
Douglas Porto
/s/ Nicholas J. Scali Director March 3, 1997
- -------------------------------------
Nicholas J. Scali
/s/ Daniel R. Snyder Director March 3, 1997
- -------------------------------------
Daniel R. Snyder
/s/ Frederick B. Wildfoerster, Jr. Director March 3, 1997
- -------------------------------------
Frederick B. Wildfoerster, Jr.
</TABLE>
88
EXHIBIT 10.9
------------
MSB Bank Officers' Deferred Compensation Plan, adopted effective
as of November 1, 1996
<PAGE>
MSB BANK
OFFICERS' DEFERRED COMPENSATION PLAN
EFFECTIVE AS OF NOVEMBER 1, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
---------
DEFINITIONS
-----------
SECTION 1.1 ADMINISTRATOR............................................. 1
SECTION 1.2 BANK...................................................... 1
SECTION 1.3 BASIC CONTRIBUTIONS....................................... 1
SECTION 1.4 BENEFICIARY............................................... 1
SECTION 1.5 BOARD..................................................... 1
SECTION 1.6 CODE...................................................... 1
SECTION 1.7 COMPENSATION ............................................. 1
SECTION 1.8 COMMITTEE................................................. 1
SECTION 1.9 COMPENSATION REDUCTION AGREEMENT.......................... 1
SECTION 1.10 DEFERRABLE COMPENSATION................................... 1
SECTION 1.11 EFFECTIVE DATE............................................ 2
SECTION 1.12 EXCHANGE ACT.............................................. 2
SECTION 1.13 401(K) PLAN............................................... 2
SECTION 1.14 HARDSHIP.................................................. 2
SECTION 1.15 HOLDING COMPANY........................................... 2
SECTION 1.16 INVESTMENT CLASSIFICATION................................. 2
SECTION 1.17 INVESTMENT FUNDS.......................................... 2
SECTION 1.18 LIMITATIONS............................................... 2
SECTION 1.19 MEMORANDUM ACCOUNT........................................ 2
SECTION 1.20 OFFICER................................................... 2
SECTION 1.21 PARTICIPANT............................................... 2
SECTION 1.22 PARTICIPATING COMPANY..................................... 2
SECTION 1.23 PLAN...................................................... 2
ARTICLE II
----------
PARTICIPATION
-------------
SECTION 2.1 ELECTION TO PARTICIPATE................................... 3
SECTION 2.2 CHANGES IN PARTICIPATION.................................. 3
ARTICLE III
-----------
DEFERRED AMOUNTS
----------------
SECTION 3.1 IN GENERAL................................................ 4
(i)
<PAGE>
Page
----
SECTION 3.2 ADJUSTMENTS TO MEMORANDUM ACCOUNTS........................ 4
SECTION 3.3 VESTING................................................... 5
ARTICLE IV
----------
TRUST
-----
SECTION 4.1 ESTABLISHMENT OF TRUST.................................... 5
SECTION 4.2 CONTRIBUTIONS TO TRUST.................................... 5
SECTION 4.3 UNFUNDED CHARACTER OF PLAN................................ 5
ARTICLE V
---------
DISTRIBUTIONS
-------------
SECTION 5.1 HARDSHIP DISTRIBUTIONS.................................... 6
SECTION 5.2 DISTRIBUTIONS TO PARTICIPANTS............................. 6
SECTION 5.3 DISTRIBUTIONS TO BENEFICIARIES............................ 6
ARTICLE VI
----------
CHANGE OF CONTROL
-----------------
SECTION 6.1 CHANGE OF CONTROL DEFINED................................. 7
SECTION 6.2 PARTICIPANTS' OPTIONS UPON A CHANGE OF CONTROL............ 9
ARTICLE VII
-----------
MISCELLANEOUS PROVISIONS
------------------------
SECTION 7.1 NOTICE AND ELECTION....................................... 9
SECTION 7.2 CONSTRUCTION AND LANGUAGE................................. 9
SECTION 7.3 NON-ALIENATION OF BENEFITS................................ 9
SECTION 7.4 INDEMNIFICATION........................................... 9
SECTION 7.5 SEVERABILITY.............................................. 10
SECTION 7.6 WAIVER.................................................... 10
SECTION 7.7 GOVERNING LAW............................................. 10
SECTION 7.8 NO DEPOSIT ACCOUNT........................................ 10
SECTION 7.9 AMENDMENT AND TERMINATION................................. 10
SECTION 7.10 SUCCESSORS AND ASSIGNS.................................... 10
(ii)
<PAGE>
MSB BANK
--------
OFFICERS' DEFERRED COMPENSATION PLAN
------------------------------------
ARTICLE I
---------
DEFINITIONS
-----------
The following definitions shall apply for the purposes of this
Plan unless a different meaning is clearly indicated by the context:
SECTION 1.1 ADMINISTRATOR means any person, committee,
corporation or organization appointed by the Committee to perform the
responsibilities assigned to the Administrator hereunder.
SECTION 1.2 BANK means MSB Bank or any successor thereto.
SECTION 1.3 BASIC CONTRIBUTIONS means the amounts defined in
ection 1.7 of the 401(k) Plan.
SECTION 1.4 BENEFICIARY means the person or persons designated
by the Participant under Section 5.2(b) of the Plan.
SECTION 1.5 BOARD means the Board of Directors of the Bank.
SECTION 1.6 CODE means the Internal Revenue Code of 1986
(including the corresponding provisions of any succeeding law).
SECTION 1.7 COMPENSATION means, during any period, the base
compensation paid to an Officer by the Bank during such period, prior to any
reduction pursuant to a Compensation Reduction Agreement under the 401(k) Plan.
Base compensation shall include salary, Basic Contributions to the 401(k) Plan,
wages and wage continuation payments to an Officer who is absent due to illness
or disability of a short-term nature and commissions not in excess of $50,000,
and shall exclude overtime, commissions in excess of $50,000, expense
allowances, severance pay, fees, bonuses, contributions other than Basic
Contributions made by the Bank to the 401(k) Plan, and contributions made by the
Bank to any other pension, insurance, welfare, or other employee benefit plan.
SECTION 1.8 COMMITTEE means the Compensation Committee of the
Board.
SECTION 1.9 COMPENSATION REDUCTION AGREEMENT means the
agreement defined in Section 1.15 of the 401(k) Plan.
SECTION 1.10 DEFERRABLE COMPENSATION means, with respect to
any calendar year, the amount of an Officer's Compensation, if any, which cannot
be contributed by the Officer
<PAGE>
-2-
as Basic Contributions to the 401(k) Plan in accordance with the terms of
Section 4.1 of the 401(k) Plan due to the Limitations.
SECTION 1.11 EFFECTIVE DATE means November 1, 1996.
SECTION 1.12 EXCHANGE ACT means the Securities Exchange Act of
1934, as amended (including the corresponding provisions of any succeeding law).
SECTION 1.13 401(K) PLAN means the Bank's 401(k) Savings Plan.
SECTION 1.14 HARDSHIP means a condition described in Section
2.2(b).
SECTION 1.15 HOLDING COMPANY means MSB Bancorp, Inc.
SECTION 1.16 INVESTMENT CLASSIFICATION means a hypothetical
investment classification in which a Participant's Memorandum Account shall be
deemed to be invested for purposes of crediting or charging earnings, losses,
appreciation or depreciation with respect to the Participant's Memorandum
Account, in accordance with Section 3.3(c). For purposes of the Plan, the
Investment Funds shall be used as the models for the Investment Classifications.
SECTION 1.17 INVESTMENT FUNDS means the investment funds
established from time to time by the Bank for the investment of participant
accounts maintained under the 401(k) Plan.
SECTION 1.18 LIMITATIONS means the limitations that may be
imposed by Sections 401(a)(17), 401(k)(3) and 402(g) of the Code on the amount
of Basic Contributions that an Officer may make to the 401(k) Plan.
SECTION 1.19 MEMORANDUM ACCOUNT means, with respect to a
Participant, an account maintained by the Bank to which is credited the amount
of the Participant's deferred Deferrable Compensation together with any earnings
and appreciation thereon, and against which are charged any losses, depreciation
or distributions thereof, pursuant to Section 3.3 and Articles V and VI.
SECTION 1.20 OFFICER means an employee who is an
administrative executive in regular and continued service with the Bank, the
Holding Company or any other Participating Company.
SECTION 1.21 PARTICIPANT means an Officer or former Officer
who has a Memorandum Account under the Plan.
SECTION 1.22 PARTICIPATING COMPANY means the Bank, the Holding
Company, and any other company which, with the prior approval of the Bank, may
adopt this Plan.
SECTION 1.23 PLAN means the MSB Bank Officers' Deferred
Compensation Plan.
<PAGE>
-3-
ARTICLE II
----------
PARTICIPATION
-------------
SECTION 2.1 ELECTION TO PARTICIPATE.
(a) Any Officer who is a participant in the 401(k) Plan and
whose Basic Contributions to such Plan have been or are expected to be limited
by the Limitations may elect to become a Participant in the Plan by submitting
to the Administrator a written election, on a form prescribed by the
Administrator, to defer the receipt of all or any portion of his Deferrable
Compensation. In no event shall any portion of an Officer's Compensation for a
calendar year be deferred under this Plan until such Officer has made the
maximum amount of Basic Contributions to the 401(k) Plan permissible under the
Limitations for such calendar year and in no event shall the sum of (i) the
Officer's Compensation deferred under this Plan for any calendar year and (ii)
the Officer's Basic Contributions made to the 401(k) Plan for such calendar
year, exceed 10% of the Officer's Compensation for such year.
(b) An election made pursuant to this Section 2.1 shall be
made on or before the last day of any calendar year and shall be effective for
the calendar year following the calendar year in which such election is made and
all subsequent calendar years unless a change in participation is elected
pursuant to Section 2.2. Notwithstanding the foregoing sentence, an initial
election made by an Officer and filed with the Administrator during the thirty
(30) day period immediately following the later of the Effective Date of the
Plan or the date the Officer first becomes eligible to participate in the Plan
may be effective for Deferrable Compensation earned on or after the date on
which such election is filed with the Administrator. The percentage of an
Officer's Compensation to be deferred under this Plan, rather than contributed
to the 401(k) Plan as Basic Contributions, which may be expressed in less than
whole percentages, shall be deducted from such Officer's paycheck for each
payroll period which begins on or after the effective date of the Officer's
election under this Section 2.1 or Section 2.2.
SECTION 2.2 CHANGES IN PARTICIPATION.
(a) An election by an Officer pursuant to Section 2.1 shall
continue in effect until such Officer's termination of participation in the
401(k) Plan; PROVIDED, HOWEVER, that the Officer may, by written election filed
with the Administrator, increase or decrease the portion of his Deferrable
Compensation to be deferred, or discontinue such deferral altogether. Such
election shall be effective with respect to Deferrable Compensation earned after
the calendar year in which such election is filed with the Administrator;
PROVIDED, HOWEVER, that if an election provides for the decrease or
discontinuance of the Officer's deferral of Deferrable Compensation and is made
on account of a Hardship, as defined in Section 2.2(b), such election shall be
effective with respect to Deferrable Compensation earned after the last day of
the payroll period during which such election is filed. In the event that a
Participant ceases to be an Officer or in the event that an Officer ceases to
defer receipt of his Deferrable Compensation, the balance in his Memorandum
Account shall continue to be adjusted in accordance with Article III. An Officer
who has filed a written election to cease deferring receipt of his Deferrable
<PAGE>
-4-
Compensation may thereafter again file an election to defer receipt of his
Deferrable Compensation in the same manner described in Section 2.1, effective
for the calendar year subsequent to the calendar year in which he files the new
election.
(b) For purposes of Section 2.2(a), an Officers' election to
decrease or discontinue his deferral of Deferrable Compensation shall be deemed
to be made on account of a Hardship if the Committee has determined, in its sole
discretion, that such change is made on account of an unanticipated emergency
caused by an event beyond the control of the Officer which results in an
immediate and heavy financial need of the Officer and is necessary to satisfy
such financial need.
ARTICLE III
-----------
DEFERRED AMOUNTS
----------------
SECTION 3.1 IN GENERAL.
The Administrator shall maintain a separate Memorandum Account
for each Participant. Credits, charges, and other adjustments to each
Participant's Memorandum Account shall be made in accordance with this Article
III. Neither the Bank nor any Participating Company shall fund its liability for
the balances credited to a Memorandum Account, but each shall reflect its
liability for such balances on its books. The Holding Company may, on such terms
and conditions as it, in its sole discretion, shall establish, agree to assume
the liability for the payment of that portion of a Participant's Memorandum
Account attributable to service for the Bank or other Participating Companies.
SECTION 3.2 ADJUSTMENTS TO MEMORANDUM ACCOUNTS.
(a) Each Participant's Memorandum Account shall be deemed to
be invested in the Investment Classification or Investment Classifications
modeled after the Investment Funds in the same proportions that such Participant
has elected to invest his Basic Contributions under the 401(k) Plan.
(b) Each Participant's Memorandum Account shall be adjusted to
reflect an amount of earnings, losses, appreciation or depreciation, as
appropriate with respect to the Investment Classification or Investment
Classifications in which the Participant's Memorandum Account is deemed to be
invested.
(c) The Memorandum Account established for each Participant
shall be adjusted from time to time, but in no event less frequently than
monthly to reflect:
(i) credits of Deferrable Compensation;
<PAGE>
-5-
(ii) credits reflecting income, dividends and appreciation
attributable to the appropriate Investment Classifications;
(iii) charges for losses or depreciation attributable to
the appropriate Investment Classifications; and
(iv) charges for payments to the Participant or his
Beneficiary.
SECTION 3.3 VESTING.
All amounts credited to a Participant's Memorandum Account
shall be 100% vested at all times.
ARTICLE IV
----------
TRUST
-----
SECTION 4.1 ESTABLISHMENT OF TRUST.
The Bank may establish a trust fund which may be used by the
Bank to accumulate funds to satisfy its liabilities to Participants under the
Plan; PROVIDED, HOWEVER, that the assets of such trust shall be subject to the
claims of the creditors of the Bank in the event that it is determined that the
Bank is insolvent or that grounds exist for the appointment of a conservator or
receiver of the Bank; and PROVIDED, FURTHER, that the trust agreement shall
contain such terms, conditions and provisions as shall be necessary to cause the
Bank to be considered the owner of the trust fund for federal, state or local
income tax purposes with respect to all amounts contributed to the trust fund or
any income attributable to the investments of the trust fund. The Bank shall pay
all costs and expenses incurred in establishing and maintaining such trust and
the Plan. Any payments made to a Participant or Beneficiary from a trust
established under this Section 4.1 shall offset payments which would otherwise
be payable by the Bank in the absence of the establishment of such trust.
SECTION 4.2 CONTRIBUTIONS TO TRUST.
If a trust is established in accordance with Section 4.1, the
Bank shall make contributions to such trust in such amounts and at such times as
may be specified by the Committee.
SECTION 4.3 UNFUNDED CHARACTER OF PLAN.
Notwithstanding the establishment of a trust pursuant to
Section 4.1, the Plan shall be unfunded. Any liability of the Bank or another
Participating Company to any person with respect to benefits payable under the
Plan shall be based solely upon such contractual obligations, if any, as shall
be created by the Plan, and shall give rise only to a claim against
<PAGE>
-6-
the general assets of the Bank or such Participating Company. No such liability
shall be deemed to be secured by any pledge or any other encumbrance on any
specific property of the Bank or a Participating Company.
ARTICLE V
---------
DISTRIBUTIONS
-------------
SECTION 5.1 HARDSHIP DISTRIBUTIONS.
In the event that a Participant has incurred a Hardship, as
defined in Section 2.2(b), the Committee may, in its sole discretion, allow such
Participant to obtain a lump sum withdrawal of an amount credited to his
Memorandum Account that does not exceed the amount necessary to alleviate the
Hardship.
SECTION 5.2 DISTRIBUTIONS TO PARTICIPANTS.
(a) Upon a Participant's termination of service with the Bank
and all Participating Companies, an amount equal to the balance in such
Participant's Memorandum Account shall be paid in cash to the Participant in
either (i) a lump sum payment or, (ii) in the Committee's sole discretion, in
equal annual or semi-annual installment payments over a period not to exceed
sixty (60) months. In the event payment is to be made in installments, each
installment shall be equal to the balance credited to the Participant's
Memorandum Account as of the last day of the month ending immediately prior to
the date as of which payment is to be made, divided by the number of installment
payments remaining to be paid (including the payment then being computed). Any
portion of the balance credited to the Participant's Memorandum Account with
respect to which a payment has not been made shall continue to be adjusted
pursuant to Section 3.3, in accordance with the Investment Classifications in
which the Participant's Memorandum Account is deemed to be invested, until a
distribution with respect to such amount has been made.
(b) Distributions shall be made, or commence, within 30 days
of the date the Participant becomes entitled to payment pursuant to this Section
5.2.
SECTION 5.3 DISTRIBUTIONS TO BENEFICIARIES.
(a) A Participant may designate a Beneficiary or Beneficiaries
by filing a written notice with the Administrator prior to the Participant's
death, in such form and manner as the Administrator may prescribe. A Participant
who has designated a Beneficiary or Beneficiaries may change or revoke such
designation prior to the Participant's death by means of a similar written
instrument.
(b) In the event that a Participant dies before receiving
payment of his entire Memorandum Account, payment of the value of the deceased
Participant's Memorandum
<PAGE>
-7-
Account shall be made in a lump sum to his Beneficiary or Beneficiaries. If no
Beneficiary shall have been designated or if any such designation shall be
ineffective, or in the event that no designated Beneficiary survives the
Participant, payment of the value of the Participant's Memorandum Account shall
be made to the Participant's personal representative, or if no personal
representative is appointed within 6 months of the Participant's death, to his
surviving spouse, or if he has no surviving spouse, to his then living
descendants, per stirpes, in the same manner and at the same time as the
Participant's Memorandum Account would have been paid to the Participant had he
lived.
ARTICLE VI
----------
CHANGE OF CONTROL
-----------------
SECTION 6.1 CHANGE OF CONTROL DEFINED.
A Change of Control shall be deemed to have occurred upon the
happening of any of the following events:
(a) approval by the stockholders of the Holding Company of a
transaction that would result in the reorganization, merger or consolidation of
the Holding Company with one or more other persons, other than a transaction
following which:
(i) at least 51% of the equity ownership interests of the
entity resulting from such transaction are beneficially owned (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) in
substantially the same relative proportions by persons who, immediately
prior to such transaction, beneficially owned (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) at least 51% of the
outstanding equity ownership interests in the Holding Company; and
(ii) at least 51% of the securities entitled to vote generally
in the election of directors of the entity resulting from such
transaction are beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) in substantially the same relative
proportions by persons who, immediately prior to such transaction,
beneficially owned (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Holding Company;
(b) the acquisition of all or substantially all of the assets
of the Holding Company or beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of the outstanding securities
of Holding Company entitled to vote generally in the election of directors by
any person or by any persons acting in concert, or approval by the stockholders
of the Holding Company of any transaction which would result in such an
acquisition; or
<PAGE>
-8-
(c) a complete liquidation or dissolution of the Holding
Company, or approval by the stockholders of the Holding Company of a plan for
such liquidation or dissolution; or
(d) the occurrence of any event if, immediately following such
event, at least 50% of the members of the board of directors of the Holding
Company do not belong to any of the following groups:
(i) individuals who were members of the board of
directors of the Holding Company on the date on which such Officer
first became a Participant; or
(ii) individuals who first became members of the board of
directors of the Holding Company after such date either:
(A) upon election to serve as a member of the board
of directors of the Holding Company by affirmative vote of
three-quarters of the members of such board, or of a
nominating committee thereof, in office at the time of such
first election; or
(B) upon election by the stockholders of the Holding
Company to serve as a member of the board of directors of the
Holding Company, but only if nominated for election by
affirmative vote of three-quarters of the members of the board
of directors of the Holding Company, or of a nominating
committee thereof, in office at the time of such first
nomination;
PROVIDED, HOWEVER, that such individual's election or nomination did
not result from an actual or threatened election contest (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents
(within the meaning of Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act) other than by or on behalf of the board of directors
of the Holding Company;
(e) in the case of any Participant who is or was an Officer of
the Bank or a Participating Company other than the Bank or the Holding Company,
an event that would be described in Section 6.1(a), (b), (c) or (d) if the name
of the Bank or such other Participating Company were substituted for the words
"Holding Company" therein.
In no event, however, shall a Change of Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Holding Company, the
Bank or any Participating Company, or any subsidiary of any of them, by the
Holding Company, the Bank or any Participating Company, or any subsidiary of any
of them, or by any employee benefit plan maintained by any of them. For purposes
of this Section 6.1 the term "person" shall have the meaning assigned to it
under Sections 13(d)(3) or 14(d)(2) of the Exchange Act.
<PAGE>
-9-
SECTION 6.2 PARTICIPANTS' OPTIONS UPON A CHANGE OF
CONTROL
In the event of a Change of Control, the Memorandum Account
maintained for a Participant shall continue to be held by the Administrator and
distributed in accordance with the terms of the Plan; PROVIDED, HOWEVER, that
the Participant may, by written notice delivered to the Administrator no later
than 60 days after the occurrence of the Change of Control, direct the Bank, the
Holding Company or any other Participating Companies or their respective
successors to distribute the value of his Memorandum Account in a lump sum
payment within 30 days after receipt of the Participant's written direction. In
the event that a Participant does not make such election, his Memorandum Account
shall continue to be maintained and adjusted in accordance with the terms of the
Plan.
ARTICLE VII
-----------
MISCELLANEOUS PROVISIONS
------------------------
SECTION 7.1 NOTICE AND ELECTION.
The Committee shall provide a copy of this Plan and the
resolutions of adoption to each Officer who becomes eligible to participate,
together with a form on which the Officer may notify the Committee of his
election whether to become a Participant, which form, if he so elects, he may
complete, sign and return to the Committee.
SECTION 7.2 CONSTRUCTION AND LANGUAGE.
Wherever appropriate in the Plan, words used in the singular
may be read in the plural, words used in the plural may be read in the singular,
and words importing the masculine gender shall be deemed equally to refer to the
feminine or the neuter. Any reference to an Article or Section shall be to an
Article or Section of the Plan, unless otherwise indicated. The headings of
Articles and Sections are included solely for convenience of reference. If there
is any conflict between such headings and the text of the Plan, the text shall
control.
SECTION 7.3 NON-ALIENATION OF BENEFITS.
The right to receive a benefit under the Plan shall not be
subject in any manner to anticipation, alienation or assignment, nor shall
rights be liable for or subject to debts, contracts, liabilities or torts.
SECTION 7.4 INDEMNIFICATION.
Each Participating Company shall indemnify, hold harmless and
defend its Officers, Participants, and their Beneficiaries against their
reasonable costs, including legal fees, incurred by them or arising out of any
action, suit or proceeding in which they may be involved, as a result of their
efforts, in good faith, to defend or enforce terms of the Plan.
<PAGE>
-10-
SECTION 7.5 SEVERABILITY.
A determination that any provision of the Plan is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
SECTION 7.6 WAIVER.
Failure to insist upon strict compliance with any of the
terms, covenants or conditions of the Plan shall not be deemed a waiver of such
term, covenant or condition. A waiver of any provision of the Plan must be made
in writing, designated as a waiver, and signed by the party against whom its
enforcement is sought. Any waiver or relinquishment of any right or power
hereunder at any one or more times shall not be deemed a waiver or
relinquishment of such right or power at any other time or times.
SECTION 7.7 GOVERNING LAW.
The Plan shall be construed, administered and enforced
according to the laws of the State of New York without giving effect to the
conflict of laws principles thereof, except to the extent that such laws are
preempted by the federal laws of the United States.
SECTION 7.8 NO DEPOSIT ACCOUNT.
Nothing in this Plan shall be held or construed to establish
any deposit account for any Participant or any deposit liability on the part of
the Bank or any other financial institution which is a Participating Company.
Participants' rights hereunder shall be equivalent to those of a general
unsecured creditor.
SECTION 7.9 AMENDMENT AND TERMINATION.
(a) The Bank reserves the right, in its sole and absolute
discretion, at any time and from time to time, by action of the Board, to amend
the Plan in whole or in part. In no event, however, shall any such amendment
adversely affect the right of any Participant or Beneficiary to receive any
benefits accrued under the Plan on or before the later of the date on which such
amendment is adopted or the date on which it is made effective, without such
Participants or Beneficiary's consent.
(b) The Bank also reserves the right, in its sole and absolute
discretion, by action of the Board, to terminate the Plan. In such event, no
additional Deferrable Compensation shall be deferred from and after the later of
the date on which a resolution terminating the Plan is duly adopted by the Board
or the effective date of such termination, but benefits under the Plan shall
continue to be payable at the time and in the manner provided herein.
SECTION 7.10 SUCCESSORS AND ASSIGNS
The provisions of the Plan will inure to the benefit of and be
binding upon the Participants and their respective legal representatives and
testate or intestate distributes, and each
<PAGE>
-11-
Participating Company and their respective successors and assigns, including any
successor by merger or consolidation or a statutory receiver or any other person
or firm or corporation to which all or substantially all of the assets and
business of any Participating Company may be sold or otherwise transferred.
EXHIBIT 10.11(A)
----------------
Amendatory Agreement to the Employment Agreement by and between
MSB Bancorp, Inc. and William C. Myers, adopted effective
as of September 3, 1996
<PAGE>
AMENDATORY AGREEMENT
This AMENDATORY AGREEMENT ("Agreement") is made effective as
of September 3, 1996 by and between MSB Bancorp, Inc. ("Holding Company"), a
corporation organized under the laws of Delaware, with its principal
administrative office at 35 Matthews Street, Goshen, New York, and William C.
Myers ("Executive"). Any reference to "Savings Bank" herein shall mean MSB Bank,
a wholly owned subsidiary of the Holding Company, or any successor thereto.
WITNESSETH:
-----------
WHEREAS, the Holding Company and the Executive entered into an
employment agreement dated September 3, 1994 ("Employment Agreement"), which was
amended effective as of September 3, 1995; and
WHEREAS, the Holding Company and Executive desire to amend the
Employment Agreement, effective as of September 3, 1996; and
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, and upon the other terms and conditions hereinafter provided,
the parties hereby agree as follows:
FIRST. Section 2(a) of the Employment Agreement shall be
amended in its entirety to read as follows:
(a) The period of Executive's employment under this Agreement
("Employment Period") shall be deemed to have commenced as of the date
first above written and shall end on September 2, 2001; PROVIDED,
HOWEVER, that except as provided in Section 2(b), the Employment Period
shall be automatically extended for one (1) additional day each day
following September 3, 1998, unless either Executive or the Holding
Company elects not to extend the Employment Period further by giving
written notice to the other party, in which case the Employment Period
shall be fixed and shall end on the later of the last day of the
Employment Period specified in such notice or the third anniversary of
the date such written notice is given.
SECOND. Section 2(b) of the Employment Agreement shall be
amended by deleting the date referenced therein and replacing it with September
3, 1998.
THIRD. Except as expressly amended herein, the Employment
Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, MSB Bancorp, Inc. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and director, and Executive has signed this Agreement, on the
23rd day of August, 1996.
ATTEST: MSB Bancorp, Inc.
/s/ Karen DeLuca By: /s/ Ralph W. Decker
- ---------------- ---------------------------
(Duly Authorized Director)
Ralph W. Decker
[SEAL]
WITNESS:
/s/ Karen DeLuca /s/ William C. Myers
- ----------------------------- -----------------------------
William C. Myers
- 2 -
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )
On this 23rd day of August, 1996, before me personally came
Ralph W. Decker, to me known, who, being by me duly sworn, did depose and say
that he resides at R.D. #4, Box 274, Goshen New York 10924, that he is Director
of MSB BANCORP, INC., the bank holding company described in and which executed
the foregoing instrument; that _he knows the seal of said bank holding company;
that the seal affixed to said instrument is such bank holding company's seal;
that it was so affixed by order of the Board of Directors of said bank holding
company; and that he signed his name thereto by like order.
/s/ Karen DeLuca
-------------------------
Notary Public
[NOTARIAL SEAL]
STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )
On this 23rd day of August, 1996, before me personally came
William C. Myers, to me known, and known to me to be the individual described in
the foregoing instrument, who, being by me duly sworn, did depose and say that
he resides at 115 Vincent Drive, Middletown, New York 10940, and that he signed
his name to the foregoing instrument.
/s/ Karen DeLuca
-------------------------
Notary Public
[NOTARIAL SEAL]
- 3 -
EXHIBIT 10.12(A)
----------------
Amendatory Agreement to the Employment Agreement by and between
MSB Bancorp, Inc. and Gill Mackay, adopted effective
as of September 3, 1996
<PAGE>
AMENDATORY AGREEMENT
This AMENDATORY AGREEMENT ("Agreement") is made effective as
of September 3, 1996 by and between MSB Bancorp, Inc. ("Holding Company"), a
corporation organized under the laws of Delaware, with its principal
administrative office at 35 Matthews Street, Goshen, New York, and Gill Mackay
("Executive"). Any reference to "Savings Bank" herein shall mean MSB Bank, a
wholly owned subsidiary of the Holding Company, or any successor thereto.
WITNESSETH:
----------
WHEREAS, the Holding Company and the Executive entered into an
employment agreement dated September 3, 1994, which was amended effective as of
September 3, 1995 ("Employment Agreement"); and
WHEREAS, the Holding Company and Executive desire to amend the
Employment Agreement, effective as of September 3, 1996; and
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, and upon the other terms and conditions hereinafter provided,
the parties hereby agree as follows:
FIRST. Section 2(a) of the Employment Agreement shall be
amended in its entirety to read as follows:
(a) The period of Executive's employment under this Agreement
("Employment Period") shall be deemed to have commenced as of the date
first above written and shall end on September 2, 1999; PROVIDED,
HOWEVER, that, except as provided in Section 2(b), the Employment
Period shall be automatically extended for one (1) additional day each
day following September 3, 1997, unless either Executive or the Holding
Company elects not to extend the Employment Period further by giving
written notice to the other party, in which case the Employment Period
shall be fixed and shall end on the later of the last day of the
Employment Period specified in such notice or the second anniversary of
the date such written notice is given.
SECOND. Section 2(b) of the Employment Agreement shall be
amended by deleting the date referenced therein and replacing it with September
3, 1997.
THIRD. Except as expressly amended herein, the Employment
Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, MSB Bancorp, Inc. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and director, and Executive has signed this Agreement, on the
23rd day of August, 1996.
ATTEST: MSB Bancorp, Inc.
/s/ Karen DeLuca BY: /s/ William C. Myers
- ---------------- ------------------------
Secretary William C. Myers
Karen DeLuca President and Chief Executive Officer
[SEAL]
WITNESS:
/s/ Karen DeLuca /s/ Gill Mackay
- ---------------- ------------------------
Gill Mackay
- 2 -
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )
On this 23rd day of August, 1996, before me personally came
William C. Myers, to me known, who, being by me duly sworn, did depose and say
that he resides at 115 Vincent Drive Middletown, NY 10940, that he is Chairman,
Pres. & CEO of MSB BANCORP, INC., the bank holding company described in and
which executed the foregoing instrument; that he knows the seal of said bank
holding company; that the seal affixed to said instrument is such bank holding
company's seal; that it was so affixed by order of the Board of Directors of
said bank holding company; and that he signed his name thereto by like order.
/s/ Karen DeLuca
-------------------------
Notary Public
[NOTARIAL SEAL]
STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )
On this 26th day of August, 1996, before me personally came
Gill Mackay, to me known, and known to me to be the individual described in the
foregoing instrument, who, being by me duly sworn, did depose and say that he
resides at 12 Coldenhill Rd. Newburgh, NY 12250, and that he signed his name to
the foregoing instrument.
/s/ Karen DeLuca
-------------------------
Notary Public
[NOTARIAL SEAL]
- 3 -
EXHIBIT 10.13(A)
----------------
Amendatory Agreement to the Employment Agreement by and between
MSB Bancorp, Inc. and Anthony J. Fabiano, effective
as of January 1, 1997
<PAGE>
AMENDATORY AGREEMENT
This AMENDATORY AGREEMENT ("Agreement") is made effective as
of January 1, 1997 by and between MSB Bancorp, Inc. ("Holding Company"), a
corporation organized under the laws of Delaware, with its principal
administrative office at 35 Matthews Street, Goshen, New York, and Anthony J.
Fabiano ("Executive"). Any reference to "Savings Bank" herein shall mean MSB
Bank, a wholly owned subsidiary of the Holding Company, or any successor
thereto.
WITNESSETH:
----------
WHEREAS, the Holding Company and the Executive entered into an
employment agreement dated January 1, 1996 ("Employment Agreement"); and
WHEREAS, the Holding Company and Executive desire to amend the
Employment Agreement, effective as of January 1, 1997;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, and upon the other terms and conditions hereinafter provided,
the parties hereby agree as follows:
FIRST. Section 2(a) of the Employment Agreement shall be
amended in its entirety to read as follows:
(a) The period of Executive's employment under this Agreement
("Employment Period") shall be deemed to have commenced as of the date
first above written and shall end on December 31, 1999; PROVIDED,
HOWEVER, that except as provided in Section 2(b), the Employment Period
shall be automatically extended for one (1) additional day each day
following January 1, 1998, unless either Executive or the Holding
Company elects not to extend the Employment Period further by giving
written notice to the other party, in which case the Employment Period
shall be fixed and shall end on the later of the last day of the
Employment Period specified in such notice or the third anniversary of
the date such written notice is given.
SECOND. Section 2(b) of the Employment Agreement shall be
amended by deleting the date referenced therein and replacing it with January 1,
1998.
THIRD. Except as expressly amended herein, the Employment
Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, MSB Bancorp, Inc. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and director, and Executive has signed this Agreement, on the
17th day of January, 1997.
ATTEST: MSB Bancorp, Inc.
/s/ Karen DeLuca By: /s/ William C. Myers
- ---------------- ------------------------------
Secretary Duly Authorized Director
Karen DeLuca
[SEAL]
WITNESS:
/s/ Karen DeLuca /s/ Anthony J. Fabiano
- ---------------- -----------------------------
Anthony J. Fabiano
- 2 -
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )
On this 17th day of January, 1997, before me personally came
William C. Myers, to me known, who, being by me duly sworn, did depose and say
that he resides at 115 Vincent St. Middletown, NY, that he is Chairman, Pres. &
CEO of MSB BANCORP, INC., the bank holding company described in and which
executed the foregoing instrument; that he knows the seal of said bank holding
company; that the seal affixed to said instrument is such bank holding company's
seal; that it was so affixed by order of the Board of Directors of said bank
holding company; and that he signed his name thereto by like order.
/s/ Karen DeLuca
-------------------------
Notary Public
[NOTARIAL SEAL]
STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )
On this 17th day of January, 1997, before me
personally came Anthony J. Fabiano, to me known, and known to me to be the
individual described in the foregoing instrument, who, being by me duly sworn,
did depose and say that he resides at 10 Sycamre Terrace Mahopac, NY, and that
he signed his name to the foregoing instrument.
/s/ Karen DeLuca
-------------------------
Notary Public
- 3 -
EXHIBIT 11
----------
Statement re: Computation of Earnings per Share
<PAGE>
EXHIBIT 11
Computation of Net Income per Share
For The Year Ended December 31, 1996
------------------------------------
Net income $1,711,000
Preferred stock dividends 1,102,000
---------
Net income applicable to common shares $ 609,000
Weighted average common shares 2,823,862
Earnings per common share $ 0.22
===========
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed statement of financial condition and the consolidated
condensed statement of income and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,375
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 32,590
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 374,113
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 340,181
<ALLOWANCE> 1,690
<TOTAL-ASSETS> 820,916
<DEPOSITS> 736,161
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,533
<LONG-TERM> 432
0
6
<COMMON> 30
<OTHER-SE> 70,754
<TOTAL-LIABILITIES-AND-EQUITY> 820,916
<INTEREST-LOAN> 24,636
<INTEREST-INVEST> 28,437
<INTEREST-OTHER> 1,277
<INTEREST-TOTAL> 54,350
<INTEREST-DEPOSIT> 30,710
<INTEREST-EXPENSE> 30,793
<INTEREST-INCOME-NET> 23,557
<LOAN-LOSSES> 1,400
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 23,369
<INCOME-PRETAX> 2,815
<INCOME-PRE-EXTRAORDINARY> 2,815
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,711
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 3.07
<LOANS-NON> 4,775
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,200
<LOANS-PROBLEM> 1,227
<ALLOWANCE-OPEN> 1,659
<CHARGE-OFFS> 1,119
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 1,960
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,960
</TABLE>
