MSB BANCORP INC /DE, 10-Q, 1997-05-13

MSB BANCORP INC /DE
10-Q, 1997-05-13
SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
-----------------

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended March 31, 1997

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

For the transition period from ____________ to ____________

Commission file number 0-20187

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

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

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

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

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

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

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

Outstanding At
Class March 31, 1997
----- --------------
Common Stock, 2,837,136
par value $.01

<PAGE>

TABLE OF CONTENTS

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

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) -- March 31, 1997
and December 31, 1996................................................1

Consolidated Statements of Income (Unaudited) -- Quarters
ended March 31, 1997 and 1996........................................2

Consolidated Statements of Cash Flows (Unaudited) -- Quarters
ended March 31, 1997 and 1996........................................3

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

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 9

Item 3. Quantitative and Qualitative Disclosures
about Market Risk...................................................15

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings...................................................16

Item 2. Changes in Securities...............................................16

Item 3. Defaults upon Senior Securities.....................................16

Item 4. Submission of Matters to a Vote of Security Holders.................16

Item 5. Other Information...................................................16

Item 6. Exhibits and Reports on Form 8-K....................................16

Signatures..........................................................17

<PAGE>

ITEM 1. FINANCIAL STATEMENTS

MSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------

<S> <C> <C>
ASSETS
Cash and due from banks ...................................... $ 16,736 $ 16,375
Federal funds sold ........................................... 34,225 32,590
Securities available for sale ................................ 53,511 50,685
Mortgage-backed securities available for sale ................ 301,031 323,428
Loans, net ................................................... 343,076 338,491
Premises and equipment, net .................................. 14,598 14,869
Accrued interest receivable .................................. 4,715 5,552
Real estate owned ............................................ 1,056 915
Goodwill ..................................................... 31,913 32,835
Other assets ................................................. 9,818 5,176
--------- ---------
Total assets .............................................. $ 810,679 $ 820,916
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits .................................................. 729,546 736,161
Mortgagors' escrow deposits ............................... 1,508 1,849
Accrued expenses and other liabilities .................... 10,869 11,684
ESOP obligations .......................................... 356 432
--------- ---------
Total liabilities ......................................... 742,279 750,126
--------- ---------
Stockholders' Equity
Preferred stock ($.01 par value; 1,000,000
shares authorized; 600,000 shares issued at March 31,
1997 and December 31, 1996) ............................... 6 6
Common stock ($.01 par value; 5,000,000
shares authorized; 3,045,000 shares issued
at March 31, 1997 and December 31, 1996) ................... 30 30
Additional paid-in capital ............................... 48,117 48,163
Retained earnings ........................................ 32,266 32,009
Treasury stock, at cost (207,864 shares and 211,064
shares at March 31, 1997 and December 31, 1996,
respectively) ............................................ (4,069) (4,137)
Unallocated ESOP stock ................................... (356) (432)
Unallocated BRP stock .................................... (140) (172)
Net unrealized loss on securities available for sale ..... (7,454) (4,677)
--------- ---------
Total stockholders' equity .......................... 68,400 70,790
--------- ---------
Total liabilities and stockholders' equity .......... $ 810,679 $ 820,916
========= =========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
INTEREST INCOME
Mortgage loans ............................................... $ 6,506 $ 5,216
Other loans .................................................. 563 495
Mortgage-backed securities ................................... 5,269 5,218
Securities ................................................... 838 1,384
Federal funds sold ........................................... 350 812
----------- -----------
Total interest income .................................. 13,526 13,125

INTEREST EXPENSE
Interest on deposits ......................................... 7,437 7,561
Interest on ESOP obligation .................................. 9 15
----------- -----------
Total interest expense ................................. 7,446 7,576
----------- -----------
Net interest income .......................................... 6,080 5,549
Provision for loan losses .................................... 300 250
----------- -----------
Net interest income after provision for loan losses .......... 5,780 5,299

NON-INTEREST INCOME
Service fees ................................................. 895 812
Net realized gains (losses) on securities .................... 15 (1)
Realized gains on mortgage loans
held for sale .............................................. 32 48
Other non-interest income .................................... 15 4
----------- -----------
957 863
NON-INTEREST EXPENSE
Salaries and employee benefits ............................... 2,140 2,040
Occupancy and equipment ...................................... 818 768
Federal deposit insurance premiums ........................... 82 238
Goodwill amortization ........................................ 921 755
Other non-interest expense ................................... 1,217 1,338
----------- -----------
5,178 5,139
----------- -----------
Income before income taxes ................................... 1,559 1,023
Income tax expense ........................................... 602 435
----------- -----------
Net income ................................................... $ 957 $ 588
=========== ===========
Earnings per share ........................................... $ 0.23 0.12
Weighted average shares outstanding .......................... 2,874,830 2,720,314
=========== ===========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

2.
<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income .................................................. $ 957 $ 588
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on securities ................................ (15) 1
Realized gain on sale of mortgage loans ..................... (32) (48)
Amortization of premiums/discounts on securities ............ 266 183
Proceeds from the sale of student loans ..................... 302 232
Origination of mortgage loans held for sale ................. (3,643) (2,905)
Proceeds from the sale of mortgage loans .................... 3,740 3,478
Amortization of net deferred loan origination fees .......... (43) (53)
Depreciation and amortization ............................... 325 305
Provisions for loan losses .................................. 300 250
Write-downs on real estate .................................. 21 116
Goodwill amortization ....................................... 921 755
Decrease (increase) in accrued interest receivable .......... 837 (2,404)
Decrease (increase) in prepaid expenses and
other assets ............................................... (1,620) (160)
Increase (decrease) in accrued expenses and
other liabilities .......................................... (2,634) (6,715)
Net change in Federal and State income tax
payables and receivables ................................... 458 437
Deferred income taxes ....................................... (60) (115)
Other ....................................................... 280 (371)
---------- ----------
Net cash provided by (used in) operating activities ....... $ 360 $ (6,426)
---------- ----------

INVESTING ACTIVITIES
Net (increase) decrease in loans ............................ $ (5,784) $ (7,047)
Maturities and redemptions of debt securities ............... -- 10,400
Purchases of securities available for sale .................. (3,638) (25,337)
Proceeds from the sale of securities available for sale ..... -- 17,801
Purchases of mortgage-backed securities available for sale .. (19,346) (375,064)
Proceeds from the sale of mortgage-backed securities
available for sale ......................................... 33,243 11,685
Repayments of mortgage-backed securities available for sale . 4,446 6,406
Repayments of asset backed securities ....................... -- 143
Proceeds from the sale of real estate owned, net ............ 425 65
Purchases of property and equipment ......................... (2) (3,265)
Cash received in branch acquisition ......................... -- 380,299
---------- ----------
Net cash provided by (used in) investing activities ....... $ 9,344 $ 16,086
---------- ----------
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

3.
<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

Increase (decrease) in cash and cash equivalents ............. $ 1,996 $ 15,846
Cash and cash equivalents at beginning of period ............. 48,965 $ 26,814
---------- ----------
Cash and cash equivalents at end of period ................... $ 50,961 $ 42,660
========== ==========

SUPPLEMENTAL INFORMATION
Interest paid on savings deposits ............................ $ 7,425 $ 9,133
Income taxes paid (received) ................................. 136 103

Non-cash transactions:
Transfer of balances from loans receivable to real
estate owned .............................................. $ 644 $ 307
========== ==========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

4.
<PAGE>

MSB BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

On January 10, 1996, the Company sold 1,100,000 shares of common stock
at $18 per share and 600,000 shares of its 8.75% Cumulative Convertible
Preferred Stock, Series A at $21.60 per share. On February 7, 1996, the Company
sold an additional 105,000 shares of Common Stock pursuant to the underwriters'
exercise of their over-allotment option. The issuance and sale of the shares of
Common Stock and Preferred Stock on January 10 and February 7 are hereinafter
collectively referred to as the "Offering." Proceeds from the Offering amounted
to $32.1 million. The purpose of the Offering was to raise a significant portion
of the additional capital necessary to permit the Bank to qualify as "adequately
capitalized" for regulatory capital purposes immediately following the
consummation of the acquisition (the "Acquisition") of certain branches of First
Nationwide Bank, A Federal Savings Bank ("First Nationwide").

The Bank entered into an Asset Purchase and Sale Agreement (as amended,
the "First Nationwide Agreement") with First Nationwide for the acquisition of
certain assets and the assumption of certain liabilities relating to eight First
Nationwide branch offices located in Carmel, Liberty, Mahopac, Monticello, Port
Jervis, Spring Valley, Warwick and Washingtonville, New York (the "First
Nationwide Branches"). The closing took place on January 12, 1996 (the "Closing
Date"), whereupon the Bank assumed the deposits (the "First Nationwide
Deposits") of the First Nationwide Branches.

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

On October 27, 1995, the Bank converted from a New York state-chartered
savings bank to a federal savings bank in order to facilitate the Acquisition as
well as future expansion. In addition, the Bank changed its name to MSB Bank. As
a consequence of the conversion, the Company became a savings and loan holding
company subject to the regulation, examination and supervision of the Office of
Thrift Supervision (the "OTS"). Prior to the conversion of the Bank to a federal
savings bank, the Company was a bank holding company subject to the regulation,
examination and supervision of the Federal Reserve Board ("FRB").

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

The consolidated financial statements included herein have been
prepared by the Company without audit. In the opinion of management, the
quarterly unaudited financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the consolidated
financial position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
Company believes that the

5.
<PAGE>

disclosures are adequate to make the information presented not misleading,
however, the results for the periods presented are not necessarily indicative of
results to be expected for the entire year.

The unaudited quarterly and year to date financial statements presented
herein should be read in conjunction with the annual audited consolidated
financial statements of the Company for the fiscal year ended December 31, 1996.

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

2. Earnings Per Share

Primary earnings per common share is calculated based upon the weighted
average common shares outstanding adjusted for common stock equivalents that
have a dilutive effect on the per share data. Earnings for the purpose of
computing primary earnings per share consists of net income for the period less
dividends on preferred stock. Common stock equivalents include stock options.
During the first quarter of 1996, the Company sold 600,000 shares of its 8.75%
Cumulative Convertible Preferred Stock, Series A in the Offering. This stock is
not considered a common stock equivalent but is used in the calculation of fully
diluted earnings per share. Since the preferred stock has an anti-dilutive
effect on earnings per share for the quarters ended March 31, 1997 and 1996, it
has not been incorporated in the calculation; fully diluted and primary earnings
per share are the same.

3. Allowance for Loan Losses

The allowance for loan losses is increased by provision charged to
operations and decreased by charge-offs (net of recoveries). Loans are charged
off when, in the opinion of management, the recorded investment in the loan is
uncollectible. Management's periodic evaluation of the adequacy of the allowance
considers factors such as the Bank's past loan experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers'
ability to repay, estimated value of any underlying collateral and current and
prospective economic conditions. Management believes that the allowance for loan
losses is adequate. While management estimates loan losses using the best
available information, such as independent appraisals for significant collateral
properties, no assurance can be made that future adjustments to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans,
identification of additional problem loans and other factors, both within and
outside of management's control.

6.
<PAGE>

Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEAR ENDED
----------------------- DECEMBER 31,
1997 1996 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period ............. $ 1,960 $ 1,659 $ 1,659
Provision for loan losses .................. 300 250 1,400
LOANS CHARGED OFF
Real estate ...................... 121 210 634
Other loans ...................... 91 51 485
-------- -------- --------
Total loans charged off .................... 212 261 1,119
-------- -------- --------
RECOVERIES
Real estate ...................... 6 -- 1
Other loans ...................... 20 4 19
-------- -------- --------
Total recoveries ................... 26 4 20
-------- -------- --------
Net charge-offs .................. 186 257 1,099
-------- -------- --------
Balance at end of period ................... $ 2,074 $ 1,652 $ 1,960
======== ======== ========
Ratio of net charge-offs to average
net loans outstanding (annualized) ....... 0.23% 0.36% 0.36%
</TABLE>

4. Legal Proceedings

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

The Company and its directors are defendants in a lawsuit, POHLI V. MSB
BANCORP, INC. ET AL., commenced by a stockholder in the Delaware Court of
Chancery, New Castle County, on or about November 7, 1995. The plaintiff,
purporting to represent a class consisting of all stockholders except the
stockholder defendants and those affiliated with the stockholder defendants,
alleges that the defendant directors have breached and continue to breach their
fiduciary duties to stockholders by, among other things, failing to give due
consideration to proposals to acquire the Company or its assets, for failing to
maximize stockholder value and for failing to disclose all material facts to
stockholders. The plaintiff, on behalf of the purported class, seeks unspecified
money damages and an affirmative injunction directing the director defendants to
consider and negotiate all bona fide offers or proposals to acquire the Company.
On December 4, 1995, the Company filed an answer denying all of the substantive
allegations contained in the complaint and seeking, among other things, an order
dismissing the complaint with prejudice. As of April 30, 1997, we understand
that there was an agreement in principle between the plaintiff in transaction
and the plaintiffs in the action described below to consolidate this action with
the action below. 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

7.
<PAGE>

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 eight
of the directors and have requested the depositions 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 risk that the final resolution of
these matters could result in the payment of monetary damages which would be
material in relation to the consolidated financial condition or results of
operations of the Company. The Company does not believe that the likelihood of
such a result is probable and has not established any specific litigation
reserves with respect to such matters.

8.
<PAGE>

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

GENERAL

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

January 10, 1996, the Company sold 1,100,000 shares of Common Stock at
$18 per share and 600,000 shares of its Series A Preferred Stock at $21.60 per
share. On February 7, 1996 the Company sold an additional 105,000 shares of
Common Stock pursuant to the underwriters' exercise of their over-allotment
option. The issuance and sales of the shares of Common Stock and Series A
Preferred Stock on January 10 and February 7 are hereinafter referred to,
collectively, as the "Offering." Net proceeds from the Offering amounted to
approximately $32.1 million. The purpose of the Offering was to raise a
significant portion of the additional capital necessary to permit the Bank to
qualify as "adequately capitalized" for regulatory capital purposes immediately
following the acquisition of seven branches (the "Acquired Branches") from First
Nationwide Bank, A Federal Savings Bank ("First Nationwide"), in January, 1996
(the "Acquisition").

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

RESULTS OF OPERATIONS

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

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

The following table sets forth information relating to the Company's
balance sheet and statements of income for the quarters ended March 31, 1997
and 1996 and reflect the average yield (not on a tax equivalent basis) on assets
and average cost of liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average daily balances. The average balances of securities available for
sale and trading securities are calculated based on amortized cost. The yields
and costs include fees, which are considered adjustments to yields.

9.
<PAGE>

<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------- -------- ------- --------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans, net(1) .................. $ 318,097 $ 6,506 8.29% $ 265,433 $ 5,216 7.90%
Other loans(1) .......................... 23,239 563 9.83 17,703 495 11.25
Mortgage-backed securities .............. 322,626 5,269 6.62 319,539 5,218 6.57
Other securities ........................ 54,224 838 6.26 89,081 1,384 6.25
Federal funds, overnight ................ 27,216 350 5.22 67,107 812 4.87
--------- -------- ------- --------- -------- -------
Total interest-earning assets ........... 745,402 13,526 7.36 758,863 13,125 6.96
Non-interest earning assets ............... 65,089 68,236
--------- ---------
Total assets ............................ $ 810,491 $ 827,099
========= =========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts ...................... $ 195,697 1,570 3.25% $ 196,854 1,442 2.95%
Super NOW accounts .................... 39,148 185 1.92 40,315 196 1.96
Money market accounts ................. 51,158 525 4.16 50,084 388 3.12
Time deposits ......................... 396,456 5,157 5.28 403,289 5,535 5.52
ESOP obligation ......................... 431 9 8.47 726 15 8.31
--------- -------- ------- --------- -------- -------
Total interest-bearing
liabilities ........................... 682,890 7,446 4.42 691,268 7,576 4.41
Other liabilities ......................... 56,097 63,307
--------- ---------
Total liabilities .................... 738,987 754,575
Retained earnings ......................... 71,504 72,524
--------- ---------
Total liabilities and
retained earnings .................. $ 810,491 $ 827,099
========= =========
Net interest income/
interest rate spread(2) .................. $ 6,080 2.94% $ 5,549 2.55%
======== ======= ======== =======
Net earning assets/net
interest margin(3) ....................... $ 62,512 3.31% $ 67,595 2.94%
========= ======= ========= =======
Ratio of interest-earning assets
to interest-bearing liabilities .......... 1.09x 1.10x
</TABLE>

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

(1) In computing the average balance of loans, non-accrual loans have been
included.

(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.

(3) Net interest margin represents net interest income divided
by average interest-earning assets.

10.
<PAGE>

FINANCIAL CONDITION

The Company's total assets were $810.7 million at March 31, 1997 as
compared to $820.9 million at December 31, 1996. Securities and mortgage-backed
securities available for sale decreased $19.6 million to $354.5 million at March
31, 1997 as compared to $374.1 million at December 31, 1996. Loans, net
increased $4.6 million to $343.1 million at March 31, 1997 as compared to $338.5
million at December 31, 1996. Goodwill decreased $922,000 to $31.9 million at
March 31, 1997 as compared to $32.8 million at December 31, 1996. For these same
dates, deposits decreased $6.6 million to $729.5 million.

Total stockholders equity decreased $2.4 million to $68.4 million at
March 31, 1997 as compared to $70.8 million at December 31, 1996. This decrease
is due primarily to a $2.8 million increase in the net unrealized loss on
securities available for sale.

COMPARISON OF RESULTS OF OPERATIONS

GENERAL. Net income for the first quarter of 1997 amounted to $957,000
as compared to $588,000 for the comparable quarter in 1996.

NET INTEREST INCOME. Net interest income for the first quarter of 1997
totaled $6.1 million as compared to $5.5 million for the same quarter in 1996.
This increase is due to a 39 basis point increase in interest rate spread to
2.94% during the first quarter of 1997 as compared to 2.55% for the first
quarter of 1996. For those same periods, the Company's net interest margin
increased 37 basis points to 3.31% as compared to 2.94%. These increases are
primarily a result of the Acquisition. The proceeds from the Acquisition were
invested in securities which, in the aggregate, yield less than the Bank's loan
portfolio. The purchases of these securities were not completed until the last
week of January, 1996 until which time they earned interest at the Federal funds
rate of 5.25%. As a result, the Company earned virtually no interest rate spread
on the Acquired Deposits during that time.

INTEREST INCOME. Interest income in the first quarter of 1997 totaled
$13.5 million as compared to $13.1 million for the first quarter of 1996. This
increase is due primarily to a 40 basis point increase in the yield earned on
interest earning assets to 7.36% for the first quarter of 1997 as compared to
6.96% in 1996. The increase in the yield earned was partially offset by a
decrease in average interest earning assets of $13.5 million to $745.4 million
in the first quarter of 1997 as compared to $758.9 million for the same quarter
of 1996. The increase in the yield earned is a result of management's strategy
to re-deploy funds received in the Acquisition from the securities portfolio to
the loan portfolio. The decrease in the balance of average interest earning
assets was due primarily to an $8.1 million decrease in the average balance of
deposits. The decrease in deposits was primarily a result of run-off following
the Acquisition.

Interest income on mortgage loans amounted to $6.5 million for the
first quarter of 1997 as compared to $5.2 million for the first quarter of 1996.
The average balance of mortgage loans increased $52.7 million to $318.1 million
for the first quarter of 1997 as compared to $265.4 million for the first
quarter of 1996, and the average yield earned increased 39 basis points to
8.29%.

The growth in the average balance of mortgage loans was due primarily
to management's strategy to re-deploy funds received in the Acquisition from the
securities portfolio to the loan portfolio and continued loan demand. The
increase in the yields earned are primarily a result of a new ARM product
offered by the Bank. The ARMs originated by the Bank in 1996 were primarily
5-year fixed rate loans that convert to 1-year ARMs after the initial 5-year
period. These loans are not offered at introductory rates. The increase in the
yield earned on mortgage loans is also due to the repricing of one-year ARMs
that were originated in 1994 and 1995 at introductory rates. These ARMs repriced
to higher rates due to the expiration of their initial lower introductory rates.

11.
<PAGE>

Interest income on other loans amounted to $563,000 during the first
quarter of 1997, an increase of $68,000 from the same quarter in 1996. The
average balance of other loans during the first quarter of 1997 amounted to
$23.2 million, and the average yield on these loans was 9.83%. For the first
quarter of 1996, the average balance was $17.7 million, and the average yield
was 11.25%. The increase in the average balances is due primarily to improved
demand for commercial and consumer loans.

Interest income on mortgage-backed securities totaled $5.3 million
during the first quarter of 1997 as compared to $5.2 million during the first
quarter of 1996. The average balance of mortgage-backed securities increased
$3.1 million to $322.6 million for the first quarter of 1997 as compared to
$319.5 million for the first quarter of 1996. The average yield earned on
mortgage-backed securities increased 5 basis points to 6.62% in the first
quarter of 1997 as compared to the same quarter in 1996.

Interest income on other securities, which includes investments held to
maturity and securities available for sale, decreased $547,000 or 39.5% to
$837,000 in the first quarter of 1997 as compared to the same quarter in 1996.
This decrease is due primarily to a $34.9 million decrease in the average
balance of other securities to $54.2 million during the first quarter of 1997 as
compared to $89.1 million for the first quarter of 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, which
typically provides greater yields.

Interest income on Federal funds decreased $462,000 to $350,000 for the
first quarter of 1997 as compared to $812,000 in the first quarter of 1996. This
was due to a $39.9 million decrease in the average balance of Federal funds to
$27.2 million, which was partially offset by an 35 basis point increase in yield
to 5.22%. The decrease in the average balance of Federal funds is due to
proceeds from the Acquisition which were invested in Federal funds until
securities were purchased.

INTEREST EXPENSE. Interest expense was $7.4 million for the first
quarter of 1997 as compared to $7.6 million for the first quarter of 1996. This
decrease is due primarily to an $8.4 million decrease in interest-bearing
liabilities to $682.9 million during the first quarter of 1997 as compared to
$691.3 million during the first quarter in 1996. The average cost of
interest-bearing liabilities remained virtually unchanged at 4.42% as compared
to 4.41% during the first quarter 1996.

Interest expense on savings accounts increased $128,000 or 8.9% to $1.6
million during the quarter ended March 31, 1997 as compared to the comparable
1996 quarter. This increase is due primarily to a 30 basis point increase in the
average cost of savings accounts to 3.25% for the first quarter of 1997, as
compared to 2.95% for the first quarter in 1996. This was partially offset by a
$1.2 million decrease in the average balance of savings accounts to $195.7
million as compared to $196.9 million for the first quarter of 1996.

Interest expense on time deposits amounted to $5.2 million for the
first quarter of 1997 as compared to $5.5 million for the same period in 1996.
This decrease is due to a $6.8 million decrease in the average balance of time
deposits to $396.5 million for the 1997 first quarter and a decrease in the
average cost of 24 basis points to 5.28%. The decrease in the average balance of
time deposits is a result of deposit run-off following the Acquisition.

PROVISION FOR LOAN LOSSES. For the first quarter of 1997, the provision
for loan losses amounted to $300,000 as compared to $250,000 for the first
quarter of 1996. The $50,000 increase in the provision for loan losses in the
first quarter of 1997, as compared to the first quarter of 1996, is a result of
an increase in non-performing loans for those same periods. Non-performing loans
(loans that are 90 days or more past due) amounted to $4.0 million, or 1.16% of
total loans, at March 31, 1997, as compared to $4.8 million, or 1.40% of total
loans, at December 31, 1996 and $3.2 million or 1.10% of total loans, at March
31, 1996. The increase in non-performing loans at March 31, 1997, as compared to
March 31, 1996, 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 amounted

12.
<PAGE>

to $5.1 million, or 0.62% of total assets, $5.7 million, or 0.69% of total
assets, and $4.2 million, or 0.49% of total assets, at March 31, 1997, December
31, 1996 and March 31, 1996, respectively.

The allowance for loan losses amounted to $2.1 million and $1.7 million
at March 31, 1997 and 1996, respectively, which represented 51.8% and 51.0% of
non-performing loans at those respective dates. At December 31, 1996, the
allowance for loan losses amounted to $2.0 million or 41.1% of non-performing
loans. Charge-offs, net of recoveries, totaled $186,000 in the first quarter of
1997 as compared to $257,000 in the first quarter of 1996.

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

NON-INTEREST INCOME. Non-interest income amounted to $957,000 for the
first quarter of 1997 as compared to $863,000 for the same period in 1996. The
increase was due primarily to an $83,000 or 10.2% increase in service fees to
$895,000 during the first quarter of 1997 as a result of the Acquisition as well
as increased lending activities.

NON-INTEREST EXPENSE. Non-interest expense amounted to $5.2 million in
the first quarter of 1997 as compared to $5.1 million for the same period in
1996. Non-interest expense for the first quarter of 1997 includes approximately
$110,000 of legal and other costs associated with an employment-related
litigation that has since been settled. Salaries and employee benefits increased
$100,000 to $2.1 million for the first quarter of 1997 as compared to $2.0
million for the first quarter of 1996, due primarily to normal salary increases
and an increased commercial lending staff. Federal deposit insurance premiums
decreased $156,000 to $82,000 in the 1997 first quarter as compared to the 1996
first quarter. This decrease reflects the lower insurance rates that resulted
from the payment of the Savings Association Insurance Fund special assessment in
the third quarter of 1996. Goodwill amortization increased $166,000 to $921,000
reflecting a full quarter of amortization as compared to the first quarter of
1996 during which the Acquisition was completed. Other non-interest expense
decreased $121,000 to $1.2 million in the first quarter of 1997, due primarily
to the Acquisition costs incurred in the first quarter of 1996.

LIQUIDITY AND CAPITAL RESOURCES

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

The Bank is required to maintain an average daily balance of liquid
assets and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by the regulations of the OTS.
The minimum required liquidity and short-term liquidity ratios are currently
5.0% and 1.0%, respectively. At March 31, 1997 the Bank's liquidity ratio under
OTS regulations was 8.60%.

The primary investing activity of the Company is the origination of
loans and the purchase of securities. During the first quarter of 1997 and for
the year ended December 31, 1996, the Company originated mortgage loans totaling
$17.1 million and $100.1 million, respectively. For those same periods, the
Company originated other loans totaling $4.4 million and $15.9 million,
respectively. The Company purchased securities totaling $3.6 million and $27.4
million for the first quarter of 1997 and during 1996, respectively. Other
investing activities for those same periods included the purchase of
mortgage-backed securities totaling $19.3 million and $386.3 million,
respectively.

13.
<PAGE>

The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term securities. The levels of these
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. The Company's ratios of cash and due from
banks, Federal Funds and investment securities with remaining maturities of one
year or less to total deposits were 7.6% at March 31, 1997 and 6.7% at December
31, 1996. At March 31, 1997, cash and cash equivalents, as defined above,
totaled $55.3 million as compared to $49.0 million at December 31, 1996.

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

At March 31, 1997, the Bank had outstanding loan commitments of $46.8
million. The Bank anticipates that it will have sufficient funds available to
meet its current loan commitments. Time deposits scheduled to mature in one year
or less from March 31, 1997, totaled $310.0 million. Management believes that a
significant portion of such deposits will remain with the Bank.

The Bank is subject to certain minimum leverage, tangible and
risk-based capital requirements established by regulations of the OTS. These
regulations require savings associations to meet three minimum capital
standards: a tangible capital ratio requirement of 1.5% of total assets as
adjusted under the OTS regulations; a leverage ratio requirement of 3.0% of core
capital to such adjusted total assets; and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The 3.0% core capital requirement has been effectively superseded by the
OTS' prompt corrective action regulations, which impose a 4.0% core capital
requirement for treatment as an "adequately capitalized" thrift and a 5.0% core
capital requirement for treatment as a "well capitalized" thrift. In determining
the amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of assets. At March 31, 1997, the Bank exceeded all of the
OTS minimum regulatory capital requirements.

The following table sets forth the capital position of the Bank as
calculated at March 31, 1997.

<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 ....... $68,444 8.72% $68,444 8.72% $68,444 19.04%
Deduct goodwill ........................ 31,913 4.07 31,913 4.07 31,913 8.88
Add qualifying general loan loss -- -- -- -- 2,072 0.58
allowance, as limited by regulation ...
Add unrealized loss on securities 7,387 0.94 7,387 0.94 7,387 2.05
available for sale, net of taxes ......
Deduct equity investments .............. 162 0.05
Deduct servicing rights ................ 12 0.00 12 0.00 12 0.00
------- ------- ------- ------- ------- -------
Capital, as calculated ................. 43,906 5.59 43,906 5.59 45,816 12.74
Capital, as required ................... 11,775 1.50 31,399 4.00 28,759 8.00
------- ------- ------- ------- ------- -------
Excess ................................. $32,131 4.09% $12,507 1.59% $17,057 4.74%
======= ======= ======= ======= ======= =======
</TABLE>

14.
<PAGE>

The Board of Directors declared a cash dividend of $0.15 per common
share on March 21, 1997 that was payable to stockholders of record on March 31,
1997. The Company has been paying a quarterly cash dividend of $0.15 per common
share since the first quarter of 1995 and had been paying a quarterly cash
dividend of $0.13 per common share since the second quarter of 1994.

RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128) established standards for computing and presenting earnings
per share (EPS) and applies to entities with publicly held common stock or
potential common stock. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. SFAS 128 requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, and earlier
application is not permitted. SFAS 128 also requires restatement of all prior
period EPS data presented. SFAS 128 is not expected to have a material effect on
the Bank's consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

15.
<PAGE>

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

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibit 10 --Special Termination Agreement
by and between MSB Bank, MSB Bancorp, Inc.
and Catherine Terwilliger, adopted effective
as of March 21, 1997
Exhibit 11--Computation of Earnings Per
Share
Exhibit 27--Financial Data schedule*

(B) Reports on Form 8-K

None

______________________
* Submitted only with filing in electronic format.

16.
<PAGE>

SIGNATURES

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

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

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

May 12, 1997

17.

MSB BANK

SPECIAL TERMINATION AGREEMENT

This AGREEMENT is made effective as of March 21, 1997 by and
among MSB Bank (the "Bank"), a federally chartered savings institution, with its
principal administrative office at 35 Matthews Street, Goshen, New York, MSB
Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of
the State of Delaware which is the holding company for the Bank, and Catherine
Terwilliger (the "Executive").

WHEREAS, the Bank recognizes the substantial contribution
Executive has made to the Bank and wishes to protect Executive's position
therewith for the period provided in this Agreement; and

WHEREAS, Executive has been elected to and has agreed to serve
in the position of Vice President - Finance and Controller for the Bank, a
position of substantial responsibility.

NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:

1. TERM OF AGREEMENT.

(a) The term of this Agreement shall be deemed to have commenced as of
the date first above written and shall end on the later of March 20, 1999 or
(ii) the last day of any extensions of the term of this Agreement that are
provided pursuant to Section 1(b) or Section 1(c).

(b) Except as provided in Section 1(c), the term of this Agreement
shall be automatically extended for one (1) additional day each day following
March 21, 1997, unless either Executive or the Bank elects not to extend the
term of this Agreement further by giving written notice to the other party, in
which case the term of this Agreement shall be fixed and shall end on the later
of the last day of the term of this Agreement or the third anniversary of the
date such written notice is given.

(c) In the event of a Change in Control as defined in Section 2(b) of
this Agreement, Section 1(b) shall no longer be applicable, and, notwithstanding
any notice given pursuant to such Section 1(b), the term of this Agreement shall
be automatically extended to the third anniversary of the date on which such
Change in Control occurs, and shall be further extended automatically for one
(1) additional day each day following such Change in Control, unless either
Executive or the Bank elects not to extend the term of this Agreement further by
giving written notice to the other party, in which case the term of this
Agreement shall become fixed

<PAGE>

-2-

and shall end on the later of the last day of the term of this Agreement or the
third anniversary of the date such written notice is given.

(d) Notwithstanding anything herein contained to the contrary: (i)
Executive's employment with the Bank may be terminated during the term of this
Agreement, subject to the terms and conditions of this Agreement; and (ii)
nothing in this Agreement shall mandate or prohibit a continuation of
Executive's employment following the expiration of the term of this Agreement
upon such terms and conditions as the Bank and Executive may mutually agree
upon.

(e) Upon the termination of Executive's employment with the Bank, any
daily extensions provided pursuant to Sections 1(b) or 1(c) shall cease (if such
extensions have not previously ceased).

2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.

(a) Upon the occurrence of a Change in Control of the Bank or the
Holding Company (as herein defined) followed at any time during the term of this
Agreement by the voluntary (for any of the bases set forth below) or involuntary
termination of Executive's employment, other than a Termination for Cause (as
defined in Section 2(c) hereof) or a termination due to Executive's death or
Disability (as defined in Section 4 hereof), the provisions of Section 3 shall
apply. Upon the occurrence of a Change in Control, Executive shall have the
right to elect to voluntarily terminate his employment at any time during the
term of this Agreement following any (i) demotion, (ii) loss of title, office or
significant authority, (iii) reduction in his annual compensation, (iv)
relocation of his principal place of employment by more than 30 miles from its
location immediately prior to the Change in Control, (v) material adverse change
in Executive's working conditions as in effect immediately prior to the Change
in Control (including, but not limited to, a change in office size or location,
secretarial or support staff availability, or office equipment and furniture),
or (vi) failure to continue to provide Executive with the vacation benefits and
coverage under the pension plans, dental plans, life insurance plans, or health,
accident or disability plans in which Executive was participating immediately
prior to the Change in Control, or with benefits or coverage under a plan or
plans providing benefits that are substantially the same as the benefits
provided to the Executive immediately prior to the Change in Control.

(b) Definition of a Change in Control. No benefit shall be payable
under this Section 2 unless there shall have been a Change in Control of the
Bank or Holding Company, as set forth below. For purposes of this Agreement, a
"Change in Control" of the Bank or Holding Company shall mean an event of a
nature that: (i) would be required to be reported in response to Item 1 of the
current report on Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii)
results in a Change of Control of the Bank or Holding Company within the meaning
of the Change in Bank

<PAGE>

-3-

Control Act and the rules and regulations promulgated thereunder by the
appropriate federal banking agency, as in effect on the date hereof; or (iii)
results in a transaction requiring prior Federal Reserve Board ("FRB") approval
under the Bank Holding Company Act of 1956 and the regulations promulgated
thereunder by the FRB, as in effect on the date hereof; or (iv) results in a
transaction requiring prior Office of Thrift Supervision ("OTS") approval under
the Home Owners' Loan Act and the regulations promulgated thereunder by the OTS,
as in effect on the date hereof. Without limiting the foregoing, a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's outstanding
securities except for any securities of the Bank purchased by the Holding
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by the Bank's Employee Stock Ownership Plan ("ESOP") and
trust; or (B) individuals who constitute the Board of Directors of the Holding
Company or the Board of Directors of the Bank on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the Nominating Committee serving under the
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, or sale of all or substantially all the assets of the
Bank or the Holding Company becomes effective, or a similar transaction occurs
in which the Bank or Holding Company is not the resulting entity; or (D) a plan
of reorganization, merger or consolidation of the Holding Company or Bank or
similar transaction with one or more corporations, which will result in the
outstanding shares of the class of securities then subject to such plan or
transaction being exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company, is approved by the stockholders
of the Holding Company in response to a proxy statement that was distributed,
soliciting proxies from stockholders of the Holding Company, by someone other
than the current management of the Holding Company; or (E) 20% or more of the
voting securities of the Bank or Holding Company then outstanding are tendered
and accepted by an offeror as of the closing of a tender offer for such
securities.

(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon a termination due to death or Disability (as
defined in Section 4 hereof) or a Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's personal dishonesty
with respect to the Bank or the Holding Company, willful misconduct, any breach
of fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any material provision of

<PAGE>

-4-

this Agreement. For purposes of this Section, no act, or failure to act on
Executive's part shall be "willful" unless done or omitted to be done, not in
good faith and without reasonable belief that the action or omission was in the
best interests of the Holding Company or the Bank. In determining incompetence,
the acts or omissions shall be measured against standards generally prevailing
in the savings institutions industry. Notwithstanding the foregoing, Executive
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to him a Notice of Termination which shall include a
copy of a resolution duly adopted by the affirmative vote of not less than
two-thirds of the members of the Board of Directors of the Bank or the Holding
Company at a meeting of such Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before such Board), finding that in the good faith opinion
of such Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Executive shall not have the
right to receive compensation or other benefits for any period after Termination
for Cause. Any stock options or limited rights granted to Executive under any
stock option plan, or any unvested awards granted to Executive under a
Recognition and Retention Plan of the Bank, the Holding Company or any
subsidiary or affiliate thereof, shall become null and void effective upon
Executive's receipt of Notice of Termination for Cause and shall not be
exercisable by Executive at any time subsequent to such Termination for Cause.

3. TERMINATION BENEFITS.

(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
the Executive's employment, other than for Termination for Cause, the Bank (or
the Holding Company, pursuant to Section 5) shall pay the Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the following: (i) two (2) times the Executive's then current annual salary,
plus the bonuses and any other cash compensation that would have been paid to
Executive during the two (2) year period immediately following Executive's Date
of Termination; (ii) the amount of any employer contributions that would have
been made on Executive's behalf during the two (2) year period immediately
following the Executive's Date of Termination under the Bank's 401(k) Savings
Plan (and any other defined contribution plan maintained by the Holding Company
or the Bank during such period); and (iii) the fair market value (determined as
of Executive's Date of Termination) of any stock that would have been awarded or
allocated to Executive during the two (2) year period immediately following the
Executive's Date of Termination under the Bank's Employee Stock Ownership Plan
or Recognition and Retention Plan (or any other stock-based employee benefit or
compensation plan or arrangement maintained by the Holding Company or the Bank
during such period). The amounts specified in subsections (ii) and (iii) of the
preceding sentence shall be determined based on the terms of the applicable plan
or plans as in effect at Executive's Date of Termination, assuming that
Executive continued to receive a salary

<PAGE>

-5-

at the level in effect upon his Date of Termination and earned the highest level
of bonuses. At the election of the Executive such payment may be made in a lump
sum or paid in equal monthly installments during the remaining term of this
Agreement. In the event that no election is made, payment to the Executive will
be made on a monthly basis during the remaining term of this Agreement.

(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by the
Executive's voluntary or involuntary termination of employment, other than
Termination for Cause or termination due death or Disability, the Bank shall
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Bank or the Holding
Company for the Executive and his family prior to his termination. Such coverage
and payments shall cease upon the expiration of the remaining term of the
Agreement.

(c) As of the effective date of this Agreement, and annually as of the
first business day of January or soon thereafter, Executive shall make the
election referred to in Section 3(a) hereof with respect to whether the amounts
that may become payable under said Section 3(a) following a Change of Control
shall be paid in a lump sum or on a monthly basis. Such election shall be
irrevocable for the year for which such election is made and shall continue in
effect until the executive has made his next annual election. Following a Change
in Control, no further annual elections shall be permitted and Executive's most
recent election preceding such Change in Control shall remain in effect
thereafter.

(d) Notwithstanding the preceding paragraphs of this Section 3, in the
event that:

(i) the aggregate payments or benefits to be made or afforded
to the Executive under said paragraphs (the "Termination Benefits")
would be deemed to include an "excess parachute payment" under Section
280G of the Internal Revenue Code of 1986 (the "Code") or any successor
thereto, and

(ii) if such Termination Benefits were reduced to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00)
less than an amount equal to three (3) times Executive's "base amount,"
as determined in accordance with said Section 280G, and the
Non-Triggering Amount would be greater than the aggregate value of the
Termination Benefits (without such reduction) minus the amount of tax
required to be paid by the Executive thereon by Section 4999 of the
Code, then the Termination Benefits shall be reduced to the
Non-Triggering Amount. The allocation of the reduction required hereby
among the Termination Benefits provided by the preceding paragraphs of
this Section 3 shall be determined by the Executive.

<PAGE>

-6-

4. NOTICE OF TERMINATION.

(a) Any purported termination by the Bank, the Holding Company or by
Executive shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.

(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that Executive shall not have returned to the performance of his
duties on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination which, in the instance of Termination for Cause, shall be
immediate.

(c) For purposes of this Agreement, "Disability" shall have the meaning
set forth in the group long-term disability plan or policy maintained by the
Bank for employees as of the effective date of this Agreement, or if no such
plan or policy is maintained on such date, "Disability" shall mean a condition
of total incapacity, mental or physical, for further performance of duty with
the Bank, which incapacity is likely to be permanent, as shall have been
determined by a doctor selected by the Bank and acceptable to the Executive or
his legal representatives.

5. SOURCE OF PAYMENTS.

It is intended by the parties hereto that all payments
provided in this Agreement shall be paid in cash or check from the general funds
of the Bank. The Holding Company, however, guarantees payment and provision of
all amounts and benefits due hereunder to the Executive and, if such amounts and
benefits due from the Bank are not timely paid or provided by the Bank, such
amounts and benefits shall be paid or provided by the Holding Company.

6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.

This Agreement contains the entire understanding between the
parties hereto and supersedes any prior agreement between the Bank, the Holding
Company and the Executive, except that this Agreement shall not affect or
operate to reduce any benefit or compensation inuring to the Executive of a kind
elsewhere provided. No provision of this Agreement shall be interpreted to mean
that the Executive is subject to receiving fewer benefits than those available
to him without reference to this Agreement.

<PAGE>

-7-

Nothing in this Agreement shall confer upon the Executive the
right to continue in the employ of Bank or shall impose on the Bank any
obligation to employ or retain the Executive in its employ for any period.

7. NO ATTACHMENT.

(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.

(b) This Agreement shall be binding upon, and inure to the benefit of,
the Executive, the Bank, the Holding Company and their respective successors and
assigns.

8. MODIFICATION AND WAIVER.

(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.

(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.

9. REQUIRED REGULATORY PROVISIONS.

(a) The Board of Directors of the Bank may terminate the Executive's
employment at any time, but any termination by such Board, other than
Termination for Cause, or termination due to death or Disability shall not
prejudice the Executive's right to compensation or other benefits under this
Agreement. The Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in Section
2 hereinabove.

(b) Notwithstanding anything herein contained to the contrary, any
payments to the Executive by the Bank, whether pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with Section
18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. ss.1828(k),
and any regulations promulgated thereunder.

<PAGE>

-8-

(c) Notwithstanding anything herein contained to the contrary, if the
Executive is suspended from office and/or temporarily prohibited from
participating in the conduct of the affairs of the Bank pursuant to a notice
served under Section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(3)
or 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as
of the date of service of such notice, unless stayed by appropriate proceedings.
If the charges in such notice are dismissed, the Bank, in its discretion, may
(i) pay to the Executive all or part of the compensation withheld while the
Bank's obligations hereunder were suspended and (ii) reinstate, in whole or in
part, any of the obligations which were suspended.

(d) Notwithstanding anything herein contained to the contrary, if the
Executive is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Section 8(e)(4) or
8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(4) or (g)(1), all prospective
obligations of the Bank under this Agreement shall terminate as of the effective
date of the order, but vested rights and obligations of the Bank and the
Executive shall not be affected.

(e) Notwithstanding anything herein contained to the contrary, if the
Bank is in default (within the meaning of Section 3(x)(1) of the FDI Act, 12
U.S.C. ss.1813(x)(1), all prospective obligations of the Bank under this
Agreement shall terminate as of the date of default, but vested rights and
obligations of the Bank and the Executive shall not be affected.

(f) Notwithstanding anything herein contained to the contrary, all
prospective obligations of the Bank hereunder shall be terminated, except to the
extent that a continuation of this Agreement is necessary for the continued
operation of the Bank: (i) by the Director of the Office of Thrift Supervision
("OTS") or his designee or the Federal Deposit Insurance Corporation ("FDIC"),
at the time the FDIC enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the FDI
Act, 12 U.S.C. ss.1823(c); (ii) by the Director of the OTS or his designee at
the time such Director or designee approves a supervisory merger to resolve
problems related to the operation of the Bank or when the Bank is determined by
such Director to be in an unsafe or unsound condition. The vested rights and
obligations of the parties shall not be affected.

10. SEVERABILITY.

If, for any reason, any provision of this Agreement, or any
part of any provision, is held invalid, such invalidity shall not affect any
other provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.

<PAGE>

-9-

11. HEADINGS FOR REFERENCE ONLY.

The headings of sections and paragraphs herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.

12. GOVERNING LAW.

The validity, interpretation, performance, and enforcement of
this Agreement shall be governed by New York law.

13. CONFLICTS WITH LAWS AND REGULATIONS.

Any provisions of this Agreement which conflict with any
federal law or regulation which is in existence on the date of execution hereof
shall be invalid and of no force or effect.

14. ARBITRATION.

Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction; provided,
however, that the Executive shall be entitled to seek specific performance of
his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.

In the event any dispute or controversy arising under or in
connection with Executive's termination is resolved in favor of the Executive,
whether by judgment, arbitration or settlement, Executive shall be entitled to
the payment of all back-pay, including salary, bonuses and any other cash
compensation, fringe benefits and any compensation and benefits due Executive
under this Agreement.

15. PAYMENT OF COSTS AND LEGAL FEES.

All reasonable costs and legal fees paid or incurred by the
Executive pursuant to any dispute or question of interpretation relating to this
Agreement shall be paid or reimbursed by the Bank (which payments are guaranteed
by the Holding Company pursuant to Section 5 hereof) if Executive is successful
on the merits pursuant to a legal judgment, arbitration or settlement.

<PAGE>

-10-

16. INDEMNIFICATION.

The Bank shall provide Executive (including his legal
representatives, successors and assigns) with coverage under a standard
directors' and officers' liability insurance policy at its expense, or in lieu
thereof, shall indemnify Executive (including his legal representatives,
successors and assigns) for reasonable costs and expenses incurred by Executive
in defending or settling any judicial or administrative proceeding, or
threatened proceeding, whether civil, criminal or otherwise, including any
appeal or other proceeding for review.

Indemnification by the Bank shall be made only upon (i) the
final judgment on the merits in the favor of the Executive, or (ii) in case of
settlement, in case of final judgment against Executive or in the case of final
judgment in favor of Executive other than on the merits, if a majority of the
disinterested directors of the Bank determine Executive was acting in good faith
within the scope of Executive's employment or authority.

Any such indemnification of Executive for such expenses and
liabilities are to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements, such settlements to be
approved by the Board of Directors of the Bank, if such action is brought
against Executive in his capacity as an officer or trustee of the Bank, provided
however, such indemnity shall not extend to matters as to which Executive is
finally adjudged to be liable for willful misconduct in the performance of his
duties.

17. SUCCESSOR TO THE BANK.

The Bank or the Holding Company shall require any successor or
assignee, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to all or substantially all the business or assets of the Bank or the
Holding Company, expressly and unconditionally to assume and agree to perform
the Bank's and Holding Company's obligations under this Agreement, in the same
manner and to the same extent that the Bank and Holding Company would be
required to perform if no such succession or assignment had taken place.

<PAGE>

18. SIGNATURES.

IN WITNESS WHEREOF, MSB Bank and MSB Bancorp, Inc. have caused
this Agreement to be executed and their respective seals to be affixed hereunto
by their duly authorized officers and Executive has signed this Agreement, on
the 26th day of March, 1997.

ATTEST: MSB Bank

/s/ Karen Deluca By: /s/ William C. Myers
- --------------------------- ---------------------------
Secretary William C. Myers
Karen DeLuca President and Chief Executive Officer

[NOTARY SEAL]

ATTEST: MSB Bancorp, Inc.

/s/ Karen Deluca By: /s/ William C. Myers
- --------------------------- ---------------------------
Secretary William C. Myers
Karen DeLuca President and Chief Executive Officer

[NOTARY SEAL]

WITNESS:

/s/ Richard J. Talbut /s/ Catherine Terwilliger
- --------------------------- ---------------------------
Catherine Terwilliger

<PAGE>

STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )

On this 26th day of March, 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 Drive Middletown, New York, that he is President
and Chief Executive Officer of MSB BANK, the savings institution described in
and which executed the foregoing instrument; that he knows the seal of said
savings institution; that the seal affixed to said instrument is such saving
institution's seal; that it was so affixed by order of the Board of Directors of
said savings institution; and that he signed his name thereto by like order.

/s/ Karen Deluca
------------------------------
Notary Public

STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )

On this 26th day of March, 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 Drive Middletown, New York, that he is President
and Chief Executive Officer 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

STATE OF NEW YORK )
: ss.:
COUNTY OF ORANGE )

On this 26th day of March, 1997, before me personally came
Catherine Terwilliger, 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 she resides at Box 129, Wallkill, New York, and that she signed her
name to the foregoing instrument.

/s/ Karen Deluca
------------------------------
Notary Public

EXHIBIT 11

COMPUTATION OF NET INCOME PER SHARE

FOR THE QUARTER ENDED
--------------------------------
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------

NET INCOME $ 957,000 $ 588,000
PREFERRED STOCK DIVIDENDS .................. 283,500 252,000
---------- ----------

NET INCOME APPLICABLE TO COMMON STOCK ...... 673,500 336,000
========== ==========

WEIGHTED AVERAGE COMMON SHARES ............. 2,874,830 2,720,314

EARNINGS PER COMMON SHARE .................. $ 0.23 $ 0.12
========== ==========

18.

<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and the consolidated statement of
income and is qualified in its entirety by reference to such financial
statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 16,736
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 34,225
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 354,542
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 345,150
<ALLOWANCE> 2,074
<TOTAL-ASSETS> 810,679
<DEPOSITS> 729,546
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12,377
<LONG-TERM> 356
0
6
<COMMON> 30
<OTHER-SE> 68,364
<TOTAL-LIABILITIES-AND-EQUITY> 810,679
<INTEREST-LOAN> 7,069
<INTEREST-INVEST> 6,107
<INTEREST-OTHER> 350
<INTEREST-TOTAL> 13,526
<INTEREST-DEPOSIT> 7,437
<INTEREST-EXPENSE> 7,446
<INTEREST-INCOME-NET> 6,080
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 5,178
<INCOME-PRETAX> 1,559
<INCOME-PRE-EXTRAORDINARY> 1,559
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 957
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
<YIELD-ACTUAL> 3.31
<LOANS-NON> 3,000,994
<LOANS-PAST> 0
<LOANS-TROUBLED> 614
<LOANS-PROBLEM> 2,120
<ALLOWANCE-OPEN> 1,960
<CHARGE-OFFS> 212
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 2,074
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,074

</TABLE>