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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20187
MSB BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1341670
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
35 MATTHEWS STREET, GOSHEN, NEW YORK 10924
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(914) 294-8100
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
N/A
----------------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Outstanding at
Class March 31, 1998
----- --------------
Common Stock, 2,844,153
par value $.01
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -- March 31, 1998
and December 31, 1997.................................................1
Consolidated Statements of Income (Unaudited) -- Quarters
ended March 31, 1998 and 1997.........................................2
Consolidated Statements of Cash Flows (Unaudited) -- Quarters
ended March 31, 1998 and 1997.........................................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 and Use of Proceeds............................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 SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands except shares
and per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................... $ 14,549 $ 16,834
Federal funds sold............................................... 56,655 21,065
Securities available for sale.................................... 132,581 54,082
Mortgage-backed securities available for sale.................... 97,909 225,680
Loans, net....................................................... 396,532 391,429
Premises and equipment, net...................................... 13,772 14,062
Accrued interest receivable...................................... 4,234 5,049
Real estate owned................................................ 2,221 2,443
Goodwill......................................................... 28,250 29,173
Other assets..................................................... 6,964 5,550
---------- ----------
Total assets............................................... $ 753,667 $ 765,367
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits...................................................... $ 661,046 $ 673,432
Mortgagors' escrow deposits................................... 1,975 2,247
Accrued expenses and other liabilities........................ 16,149 14,730
ESOP obligations.............................................. 182 182
------------ ----------
Total liabilities............................................. 679,352 690,591
------------ ----------
Stockholders' Equity
Preferred stock ($.01 par value; 1,000,000 Shares authorized;
600,000 shares issued at March 31,
1998 and December 31, 1997).................................. 6 6
Common stock ($.01 par value; 5,000,000
shares authorized; 3,045,000 shares issued
at March 31, 1998 and December 31, 1997)..................... 30 30
Additional paid-in capital................................... 48,069 48,069
Retained earnings............................................ 31,414 31,458
Treasury stock, at cost (200,847 shares at March 31, 1998
and December 31, 1997)....................................... (3,941) (3,941)
Unallocated ESOP stock....................................... (182) (182)
Unallocated BRP stock........................................ (42) (42)
Accumulated Other Comprehensive Income
Net unrealized loss on securities available for sale......... (1,039) (622)
------------ ----------
Total stockholders' equity.............................. 74,315 74,776
------------ ----------
Total liabilities and stockholders' equity.............. $ 753,667 $ 765,367
============ ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
INTEREST INCOME
Mortgage loans.................................................. $ 7,335 $ 6,506
Other loans..................................................... 733 563
Mortgage-backed securities...................................... 1,889 5,269
Securities...................................................... 1,185 838
Federal funds sold.............................................. 1,096 350
------------- -------------
Total interest income..................................... 12,238 13,526
INTEREST EXPENSE
Interest on deposits............................................ 6,210 7,437
Interest on borrowings.......................................... 6 9
------------- -------------
Total interest expense.................................... 6,216 7,446
------------- -------------
Net interest income............................................. 6,022 6,080
Provision for loan losses....................................... 1,324 300
------------- -------------
Net interest income after provision for loan losses............. 4,698 5,780
NON-INTEREST INCOME
Service fees.................................................... 1,143 895
Net realized gains on securities................................ 63 15
Realized gains on mortgage loans held for sale.................. 69 32
Other non-interest income....................................... 8 15
------------- -------------
1,283 957
NON-INTEREST EXPENSE
Salaries and employee benefits.................................. 1,927 2,140
Occupancy and equipment......................................... 771 818
Federal deposit insurance premiums.............................. 68 82
Goodwill amortization........................................... 922 921
Other non-interest expense...................................... 1,184 1,217
------------- -------------
4,872 5,178
------------- -------------
Income before income taxes...................................... 1,109 1,559
Income tax expense.............................................. 439 602
------------- -------------
Net income...................................................... $ 670 $ 957
============= =============
Basic earnings per share ....................................... $ 0.14 $ 0.24
============= =============
Diluted earnings per share...................................... $ 0.13 $ 0.24
============= =============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income.......................................................... $ 670 $ 957
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on securities........................................ (63) (15)
Realized gain on sale of mortgage loans............................. (69) (32)
Amortization of premiums/discounts on securities.................... 425 266
Proceeds from the sale of student loans............................. 257 302
Origination of mortgage loans held for sale......................... (8,817) (3,643)
Proceeds from the sale of mortgage loans............................ 7,010 3,740
Amortization of net deferred loan origination fees.................. (23) (43)
Depreciation and amortization....................................... 308 325
Provision for loan losses........................................... 1,324 300
Write-downs on real estate.......................................... 31 21
Goodwill amortization............................................... 923 921
Decrease (increase) in accrued interest receivable.................. 815 837
Decrease (increase) in prepaid expenses and other assets............ (830) (1,620)
Increase (decrease) in accrued expenses and other liabilities....... 446 (2,634)
Net change in Federal and State income tax payables and receivables. 1,632 458
Deferred income taxes............................................... (1,372) (60)
Other............................................................... 105 280
---------- ----------
Net cash provided by (used in) operating activities............... $ 2,772 $ 360
---------- ----------
INVESTING ACTIVITIES
Net (increase) decrease in loans.................................... $ (5,404) $ (5,784)
Purchases of securities available for sale.......................... (85,273) (3,638)
Proceeds from the sale of securities available for sale............. 6,232 --
Purchases of mortgage-backed securities available for sale.......... -- (19,346)
Proceeds from the sale of mortgage-backed securities
available for sale................................................. 120,318 33,243
Repayments of mortgage-backed securities available for sale......... 7,062 4,446
Proceeds from the sale of real estate owned, net.................... 575 425
Purchases of property and equipment................................. (19) (2)
---------- ----------
Net cash provided by (used in) investing activities............... $ 43,491 $ 9,344
---------- ----------
</TABLE>
3
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998 1997
---------------- -------------
<S> <C> <C>
FINANCING ACTIVITIES
Net change in deposits................................................ $ (12,386) $ (6,615)
Net increase (decrease) in mortgagors' escrow deposits................ (272) (341)
Proceeds from borrowings.............................................. 419 --
Repayment of ESOP loan................................................ -- (76)
Payment of dividends on common and preferred stock................... (719) (708)
Proceeds from the exercise of stock options........................... -- 32
---------- ---------
Net cash provided by (used in) financing activities............. (12,958) (7,708)
---------- ---------
Increase (decrease) in cash and cash equivalents...................... $ 33,305 $ 1,996
Cash and cash equivalents at beginning of period...................... 37,899 48,965
---------- ---------
Cash and cash equivalents at end of period............................ $ 71,204 $ 50,961
========== =========
SUPPLEMENTAL INFORMATION
Interest paid on savings deposits..................................... $ 6,210 $ 7,425
Income taxes paid (received).......................................... 247 136
Non-cash transactions:
Transfer of balances from loans receivable to real
estate owned....................................................... $ 596 $ 644
========== =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
MSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
On December 16, 1997, MSB Bancorp, Inc. (the "Company") announced the
signing of a Merger Agreement by and among HUBCO, Inc. ("HUBCO"), the Company,
and MSB Bank (the "Bank"). The Merger Agreement provides for the Company to be
merged with HUBCO (the "Merger"),with HUBCO as the surviving corporation. HUBCO,
a bank holding company incorporated in New Jersey, is the parent corporation of
Hudson United Bank, a New Jersey-based bank (HUB), Lafayette American Bank, a
Connecticut-based bank, and Bank of the Hudson, a New York-based bank ("BTH").
HUBCO anticipates that BTH will serve as HUBCO's New York bank subsidiary and
that MSB Bank will be merged into BTH following the Merger. The Merger is
expected to close in the second quarter.
The Bank provides banking services to individual and corporate
customers, with its business activities concentrated in the New York counties of
Orange, Putnam and Sullivan, and the surrounding areas.
The consolidated financial statements included herein have been
prepared by the Company without audit. In the opinion of management, the
quarterly unaudited financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the consolidated
financial position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
Company believes that the disclosures are adequate to make the information
presented not misleading, however, the results for the periods presented are not
necessarily indicative of results to be expected for the entire year.
The unaudited quarterly 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, 1997.
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. 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
For purposes of calculating basic earnings per share, the number of
weighted average shares were 2,840,473 and 2,820,451 for the first quarters of
1998 and 1997, respectively. Diluted weighted average shares included common
stock equivalents of 40,975 and 34,121 for those same respective periods.
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
5
<PAGE>
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 YEAR ENDED
MARCH 31, DECEMBER 31,
--------- ------------
1998 1997 1997
----------------- ----------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period......................... $ 2,807 $ 1,960 $ 1,960
Provision for loan losses.............................. 1,324 300 1,565
LOANS CHARGED OFF
Real estate.................................. 456 121 523
Other loans.................................. 216 91 384
---------- ---------- ----------
Total loans charged off................................ 672 212 907
---------- ---------- ----------
RECOVERIES
Real estate.................................. -- 6 148
Other loans.................................. 9 20 41
---------- ---------- ----------
Total recoveries............................... 9 26 189
---------- ---------- ----------
Net charge-offs.............................. 663 186 718
---------- ---------- ----------
Balance at end of period............................... $ 3,468 $ 2,074 $ 2,807
========== ========== ==========
Ratio of net charge-offs to average
net loans outstanding (annualized)................... 0.68% 0.23% 0.20%
</TABLE>
4. Comprehensive Income
During the first quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. In
accordance with the provisions of SFAS 130 for interim period reporting, the
Company's total comprehensive income (loss) for the first quarters of 1998 and
1997 was $253,000 and $(1,820,000), respectively. The difference between the
Company's net income and total comprehensive income for these periods relates to
the change in the net unrealized loss on securities available for sale during
the applicable period of time.
5. Legal Proceedings
Except as described below, the Company is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.
The Company and its directors are defendants in a lawsuit, KAHN
BROTHERS & CO., INC. PROFIT PLAN AND TRUST ET AL. V. MSB BANCORP, INC. ET AL.,
commenced by stockholders in the Delaware Court of Chancery, New Castle County,
on November 22, 1995. (The Company and its directors were defendants in a
lawsuit, POHLI V. MSB BANCORP, INC. ET AL., commenced by a stockholder in the
Delaware Court of Chancery, New Castle County,
7
<PAGE>
on November 7, 1995. This action was consolidated with the KAHN litigation, and
the KAHN amended complaint is now the operative pleading.) The plaintiffs, who
own approximately 4.6% of the outstanding shares of the Common Stock and purport
to represent a class consisting of all stockholders except the stockholder
defendants, allege that the defendant directors breached their duty of care by
failing to become fully informed about the expression of interest of HUBCO, Inc.
("HUBCO"); breached their duty of disclosure to stockholders by not notifying
the public or the Company's stockholders of HUBCO's expression of interest; and
breached their duty of good faith and fair representation by, among other
things, not investigating whether the Acquisition constituted a reasonable
alternative for building stockholder value. The plaintiffs further allege that
the Company's offering of Common Stock in connection with the Acquisition (the
"Common Stock Offering")) was not intended to enhance stockholder value, but
rather was for the purpose of diluting the ownership and voting strength of
existing stockholders and further entrenching existing management and the Board.
The plaintiffs sought to enjoin the Common Stock Offering and are also seeking
damages equal to the difference between the market price of the Common Stock on
September 7, 1995, and $35 (approximately $14,989,000 in the aggregate) or, in
the alternative, the difference between the market price of the Common Stock on
October 26, 1995, and $25 (approximately $7,394,000 in the aggregate), including
interest and attorneys' and other professional fees. In connection with this
action, plaintiffs filed a motion seeking expedited discovery and scheduling. On
December 6, 1995, in response to the plaintiffs' motion for expedited
proceedings, which was treated by the Court as an application for a temporary
restraining order with respect to the Common Stock Offering, the Court denied
the plaintiffs' application for such order. On December 12, 1995, the court
denied the plaintiffs' motion for re-argument. On December 18, 1995, the Company
filed an answer denying all of the substantive allegations in the complaint and
seeking, among other things, an order dismissing the complaint with prejudice.
Plaintiffs amended their complaint to include allegations relating to an
unsolicited merger proposal received by the Company from the First Empire State
Corporation ("First Empire") on December 28, 1995. Specifically, the amended
complaint alleges, among other things, that the Company's Board of Directors, in
breach of its duties of care, loyalty and disclosure, relied on the advice of
Bear, Stearns & Co., Inc. ("Bear Stearns"), the Company's financial advisor and
underwriter for the Offering, knowing that Bear Stearns could not render
independent financial advice regarding the First Empire proposal. The plaintiffs
are seeking alternative damages based on these allegations in an amount equal to
the difference between the market price of the Common Stock on December 28, 1995
and $26 (approximately $11,560,000 in the aggregate). The Company filed its
amended answer on February 1, 1996 denying all of the substantive allegations in
the amended complaint and seeking, among other things, an order dismissing the
amended complaint with prejudice. The parties have engaged in substantial
written discovery, and plaintiffs have deposed all of the directors and certain
representatives of Bear Stearns. The Company has deposed plaintiffs'
representative, Mr. Thomas Kahn. Discovery has been completed. On October 10,
1997, all the defendants served and filed with the Court a motion for summary
judgment which seeks the dismissal of all the allegations in plaintiffs' amended
complaint. As of January 16, 1998, defendants' motion for summary judgment was
fully briefed and submitted to the Court. On May 1, 1998, the Court heard oral
argument on the motion and reserved decision. 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.
On December 16, 1997, the Company announced the signing of the Merger
Agreement by and among HUBCO, Inc. ("HUBCO") the Company and the Bank. The
Merger Agreement provides for the Company to merge with HUBCO, with HUBCO as the
surviving corporation. HUBCO, a bank holding company incorporated in New Jersey,
is the parent corporation of Hudson United Bank, a New Jersey-based bank (HUB),
Lafayette American Bank, a Connecticut-based bank, and Bank of the Hudson, a New
York-based bank ("BTH"). HUBCO anticipates that BTH will serve as HUBCO's New
York bank subsidiary and that MSB Bank will be merged into BTH following the
Merger. The Merger is expected to close in the second quarter.
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, goodwill amortization,
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 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
consolidated average balance sheet and interest income for the quarters ended
March 31, 1998 and 1997 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
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,
-------------------------------
1998
-----------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1).................... $ 364,279 $ 7,335 8.17%
Other loans(1)............................ 30,829 733 9.64
Mortgage-backed securities................ 129,057 1,889 5.94
Other securities.......................... 81,927 1,185 5.89
Federal funds, overnight.................. 82,300 1,096 5.39
---------- --------- --------
Total interest-earning assets............. 688,392 12,238 7.21
Non-interest earning assets................. 67,377
----------
Total assets.............................. $ 755,769
==========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................ $ 200,658 1,459 2.95%
Super NOW accounts...................... 39,595 151 1.55
Money market accounts................... 52,002 486 3.79
Time deposits........................... 322,832 4,114 5.17
Borrowings................................ 385 2 2.11
ESOP obligation........................... 182 4 8.91
---------- --------- --------
Total interest-bearing
liabilities............................. 615,654 6,216 4.10
Other liabilities........................... 63,840
----------
Total liabilities...................... 679,494
Retained earnings........................... 76,275
----------
Total liabilities and
retained earnings.................... $ 755,769
==========
Net interest income/
interest rate spread(2).................... $ 6,022 3.11%
========= ========
Net earning assets/net
interest margin(3)......................... $ 72,738 3.55%
========== ========
Ratio of interest-earning assets
to interest-bearing liabilities............ 1.12x
</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.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
------------------------------------------------------------------
1997
------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1).................... $ 318,097 $ 6,506 8.29%
Other loans(1)............................ 23,239 563 9.83
Mortgage-backed securities................ 322,626 5,269 6.62
Other securities.......................... 54,224 838 6.26
Federal funds, overnight.................. 27,216 350 5.22
---------- -------- --------
Total interest-earning assets............. 745,402 13,526 7.36
Non-interest earning assets................. 65,089
----------
Total assets.............................. $ 810,491
==========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Savings accounts........................ $ 195,697 1,570 3.25%
Super NOW accounts...................... 39,148 185 1.92
Money market accounts................... 51,158 525 4.16
Time deposits........................... 396,456 5,157 5.28
Borrowings................................ -- -- --
ESOP obligation........................... 431 9 8.47
---------- -------- --------
Total interest-bearing
liabilities............................. 682,890 7,446 4.42
Other liabilities........................... 56,097
----------
Total liabilities...................... 738,987
Retained earnings........................... 71,504
----------
Total liabilities and
retained earnings.................... $ 810,491
==========
Net interest income/
interest rate spread(2).................... $ 6,080 2.94%
======== ========
Net earning assets/net
interest margin(3)......................... $ 62,512 3.31%
========== ========
Ratio of interest-earning assets
to interest-bearing liabilities............ 1.09x
</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 $753.7 million at March 31, 1998, as
compared to $765.4 million at December 31, 1997. This decrease is due primarily
to the decrease in deposits. For those same dates, deposits decreased $12.4
million from $673.4 million at December 31, 1997 to $661.0 million at March 31,
1998. Securities and mortgage-backed securities available for sale decreased
$49.3 million to $230.5 million at March 31, 1998, as compared to $279.8 million
at December 31, 1997. Loans, net increased $5.1 million to $396.5 million at
March 31, 1998, as compared to $391.4 million at December 31, 1997. Goodwill
decreased $923,000 to $28.3 million at March 31, 1998, as compared to $29.2
million at December 31, 1997. Real estate owned decreased $222,000 to $2.2
million at March 31, 1998 as compared to $2.4 million at December 31, 1997.
Total stockholders' equity decreased $461,000 to $74.3 million at March
31, 1998, as compared to $74.8 million at December 31, 1997. This decrease is
due primarily to a $417,000 increase in the net unrealized loss on securities
available for sale.
COMPARISON OF RESULTS OF OPERATIONS
GENERAL. Net income for the first quarter of 1998 amounted to $670,000
as compared to $957,000 for the comparable quarter in 1997. The results for the
first quarter of 1998 include $128,000 of expenses related to the Merger and an
increase of $1.0 million in the provision for loan losses.
NET INTEREST INCOME. Net interest income for the first quarter of 1998
totaled $6.0 million as compared to $6.1 million for the same quarter in 1997.
The Company's interest rate spread increased to 3.11% during the first quarter
of 1998 as compared to 2.94% for the first quarter of 1997. For those same
periods, the Company's net interest margin increased 24 basis points to 3.55% as
compared to 3.31%.
INTEREST INCOME. Interest income in the first quarter of 1998 totaled
$12.2 million as compared to $13.5 million for the first quarter of 1997. This
decrease is due primarily to a 15 basis point decrease in the yield earned on
interest earning assets to 7.21% for the first quarter of 1998 and a decrease in
average interest earning assets of $57.0 million to $688.4 million in the first
quarter of 1998 as compared to $745.4 million for the same quarter of 1997. The
decrease in the balance of average interest earning assets was due primarily to
a $67.4 million decrease in the average balance of deposits. The decrease in
deposits was primarily a result of Management's strategy to reduce the rates
paid on deposit products.
Interest income on mortgage loans amounted to $7.3 million for the
first quarter of 1998 as compared to $6.5 million for the first quarter of 1997.
This increase was due to an increase of $46.2 million in the average balance of
mortgage loans to $364.3 million for the first quarter of 1998 as compared to
$318.1 million for the first quarter of 1997. This increase in the average
balance of mortgage loans was partially offset by a 12 basis point decline in
the average yield to 8.17%. The growth in the average balance of mortgage loans
was due primarily to strong loan demand in the Bank's lending area as a result
of the continued low interest rate environment. The low interest rates are also
the primary cause of the decrease in the yields earned on mortgage loans as
adjustable rate loans reprice to a lower rate and customers refinance loans that
have a higher rate.
Interest income on other loans amounted to $733,000 during the first
quarter of 1998, an increase of $170,000 from the same quarter in 1997. The
average balance of other loans during the first quarter of 1998 amounted to
$30.8 million, and the average yield on these loans was 9.64%. For the first
quarter of 1997, the average balance was $23.2 million, and the average yield
was 9.83%. The increase in the average balances is due primarily to Management's
strategy to redeploy funds from the securities portfolios to the loan portfolio.
Interest income on mortgage-backed securities totaled $1.9 million
during the first quarter of 1998 as compared to $5.3 million during the first
quarter of 1997. The average balance of mortgage-backed securities
11
<PAGE>
decreased $193.6 million to $129.1 million for the first quarter of 1998 as
compared to $322.6 million for the first quarter of 1997. The average yield
earned on mortgage-backed securities decreased 68 basis points to 5.94% in the
first quarter of 1998 as compared to the same quarter in 1997. The decrease in
the average balance of mortgage backed securities is a result, in part, of the
reallocation of funds to the loan portfolio as a result of the continued loan
demand. The proceeds from the sale of mortgage-backed securities were also
utilized to fund the outflow of deposits.
Interest income on other securities increased $351,000 to $1.2 million
in the first quarter of 1998 as compared to $838,000 for the same quarter in
1997. This increase is due primarily to a $27.7 million increase in the average
balance of other securities to $81.9 million during the first quarter of 1998 as
compared to $54.2 million for the first quarter of 1997. The increase in the
average balance of other securities is primarily a result of the reinvestment of
the proceeds from the sale of mortgage-backed securities to the securities
portfolio. The securities purchased were typically shorter term Treasury
securities that provide better liquidity than mortgage-backed securities to fund
anticipated loan demand and deposit outflow as a result of Management's decision
to reduce the interest rates paid on deposits..
Interest income on Federal funds increased $744,000 to $1.1 million for
the first quarter of 1998 as compared to $350,000 in the first quarter of 1997.
This was due to a $55.1 million increase in the average balance of Federal funds
from $27.2 million to $82.3 million. The increase in the average balance of
Federal funds is due to the temporary investment of proceeds from securities
sales. These securities were sold to provide sufficient liquidity for loan
originations and the anticipated outflow of deposits as a result of Management's
decision to reduce the interest rates paid on deposits.
INTEREST EXPENSE. Interest expense was $6.2 million for the first
quarter of 1998 as compared to $7.4 million for the first quarter of 1997. This
decrease is due primarily to a $67.2 million decrease in average
interest-bearing liabilities to $615.7 million during the first quarter of 1998
as compared to $682.9 million during the first quarter in 1997. The average cost
of interest-bearing liabilities decreased 32 basis points to 4.10% for the first
quarter of 1998 as compared to 4.42% for the first quarter of 1997.
Interest expense on savings accounts decreased $111,000 or 7.1% to $1.5
million during the quarter ended March 31, 1998 as compared to $1.6 million for
the comparable 1997 quarter. This decrease is due primarily to a 30 basis point
decrease in the average cost of savings accounts to 2.95% for the first quarter
of 1998, as compared to 3.25% for the first quarter in 1997. This was partially
offset by a $5.0 million increase in the average balance of savings accounts to
$200.7 million as compared to $195.7 million for the first quarter of 1997.
Interest expense on time deposits amounted to $4.1 million for the
first quarter of 1998 as compared to $5.2 million for the same period in 1997.
This decrease is due to a $73.6 million decrease in the average balance of time
deposits to $322.8 million for the 1998 first quarter and a decrease in the
average cost of 11 basis points to 5.17%. The decreases in the average balance
and cost of time deposits is a result of Management's strategy of reducing the
rates paid on time deposits.
PROVISION FOR LOAN LOSSES. For the first quarter of 1998, the provision
for loan losses amounted to $1.3 million as compared to $300,000 for the first
quarter of 1997. The increase in the provision for loan losses is primarily due
to the non-performance of loans to one commercial customer. Total loans
outstanding to this borrower and its affiliates totaled $2.3 million. The
increase in the loan loss provision is also due to an increase in charge-offs.
Charge-offs totaled $672,000 for the first quarter of 1998 as compared to
$212,000 for the first quarter of 1997. Non-performing loans (loans that are 90
days or more past due) amounted to $4.2 million, or 1.04% of total loans, at
March 31, 1998, as compared to $3.5 million, or 0.89% of total loans, at
December 31, 1997 and $4.0 million or 1.16% of total loans, at March 31, 1997.
Non-performing assets amounted to $6.4 million, or 0.85% of total assets, $5.9
million, or 0.77% of total assets, and $5.1 million, or 0.62% of total assets,
at March 31, 1998, December 31, 1997 and March 31, 1997, respectively.
12
<PAGE>
The allowance for loan losses amounted to $3.5 million and $2.1 million
at March 31, 1998 and 1997, respectively, which represented 83.5% and 51.8% of
non-performing loans at those respective dates. At December 31, 1997, the
allowance for loan losses amounted to $2.8 million or 80.5% of non-performing
loans.
In determining the adequacy of its allowance for loan losses,
Management considers the level of non-performing loans, the current status of
the Bank's loan portfolio, changes in appraised values of collateral and general
economic conditions. Although the Bank maintains its allowance for loan losses
at a level which it considers to be adequate to provide for potential losses,
there can be no assurance that such losses will not exceed the current estimated
amounts. As a result, higher provisions for loan losses may be necessary in
future periods, which would adversely affect operating results.
NON-INTEREST INCOME. Non-interest income amounted to $1.3 million and
$957,000 for the first quarters of 1998 and 1997, respectively. This increase is
due to a $248,000 or 27.7% increase in service fees and an $85,000 increase in
net realized gains on securities and mortgage loan sales, offset by a $7,000
decrease in other non-interest income. The increase in service fees is due
primarily to a $100,000 increase in service fees earned by MSB Investment Group
("MSBIG") and changes in MSB's fee structure on deposit products and services.
The changes to MSB's fee structure were made during the third quarter of 1997 as
part of a previously announced reengineering plan. MSBIG is a NASD member
broker-dealer that provides investment advisory, brokerage and insurance
services.
NON-INTEREST EXPENSE. Non-interest expense amounted to $4.9 million for
the first quarter of 1998 as compared to $5.2 million for the first quarter of
1997. Salaries and employee benefits decreased $213,000 during the first quarter
of 1998 to $1.9 million as compared to the same quarter in 1997. Occupancy and
equipment decreased $47,000 to $771,000 for those same periods. Other
non-interest expenses decreased $33,000 during the first quarter of 1998 to $1.2
million as compared to the same period in 1997 and included $128,000 of Merger
related expenses.
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 payments on and
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 as a percentage of net withdrawable deposit accounts plus short-term
borrowings as defined by the regulations of the OTS. The minimum required
liquidity ratio is currently 4.0%. At March 31, 1998 the Bank's liquidity ratio
under OTS regulations was 28.57%.
The primary investing activity of the Company is the origination of
loans and the purchase of securities. During the first quarter of 1998 and for
the year ended December 31, 1997, the Company originated mortgage loans totaling
$25.7 million and $113.1 million, respectively. For those same periods, the
Company originated other loans totaling $4.8 million and $19.1 million,
respectively. The Company purchased securities, including mortgage-backed
securities, totaling $85.3 million and $64.3 million for the first quarter of
1998 and during 1997, respectively.
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 12.6% at
13
<PAGE>
March 31, 1998 and 7.1% at December 31, 1997. At March 31, 1998, cash and cash
equivalents, as defined above, totaled $83.1 million as compared to $48.1
million at December 31, 1997.
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 $40.6 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, 1998, the Bank had outstanding loan commitments of $52.2
million. The Bank anticipates that it will have sufficient funds available to
meet its current loan commitments. Time deposits scheduled to mature in one year
or less from March 31, 1998, totaled $241.5 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, 1998, 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, 1998.
<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....... $73,151 10.08% $73,151 10.08% $73,151 18.65%
Deduct goodwill........................ 28,250 3.89 28,250 3.89 28,250 7.20
Add qualifying general loan loss
allowance, as limited by regulation.... -- -- -- -- 3,468 0.88
Add unrealized loss on securities
available for sale, net of taxes....... 1,012 0.14 1,012 0.14 1,012 0.26
Deduct equity investments.............. -- -- -- -- 13 --
2
Deduct servicing rights................ 202 0.03 202 0.03 202 0.05
--- ---- ------- ------ -------- -----
Capital, as calculated................. 45,711 6.30 45,711 6.30 49,166 12.53
Capital, as required................... 10,883 1.50 29,022 4.00 31,383 8.00
------- -------- ------- ------ -------- -----
Excess................................. $34,828 4.80% $16,689 2.30% $17,783 4.53%
======= ======== ======= ====== ======= =====
</TABLE>
14
<PAGE>
The Board of Directors declared a cash dividend of $0.14 per common
share on March 20, 1998 that was payable to stockholders of record on March 31,
1998. In addition, the Company redeemed its Stockholders Rights Plan in
connection with the Merger and paid $0.01 per share of Common Stock to each
stockholder of record on March 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131") requires that
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. SFAS 131 requires
entity-wide disclosure about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS 131 supersedes FASB Statement 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company does not believe that the
adoption of SFAS 131 will have a material impact on its financial statements.
YEAR 2000
In order to address the Year 2000 issue and to minimize its potential
adverse impact, Management has begun a process to identify areas that will be
affected by the Year 2000 problem, assess its potential impact on the operations
of the Company, monitor the progress of third party software vendors in
addressing the matter, test changes provided by these vendors and develop
contingency plans for any critical systems which are not effectively
reprogrammed. The Company's plan is divided into the five phases:
(1) awareness; (2) assessment; (3) renovation; (4) validation; and (5)
implementation.
The Company has substantially completed the first two phases of the
plan. As a result of the Company's Merger with HUBCO, the Company will be
converting its various computer applications to HUBCO's computer systems. The
Company presently believes that HUBCO is currently working internally and with
external vendors on the final three phases of the plan and that with
modifications to existing software and conversions to new software, the Year
2000 problem will be mitigated without causing a material adverse impact on the
operations of the Company. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 problem could have a
material impact on the operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first quarter of 1998, there were no significant changes in
the Company's assessment of market risk as reported in Item 7A of the Company's
Form 10-K.
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 AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 11--Computation of Earnings Per Share
Exhibit 27--Financial Data schedule*
(B) Reports on Form 8-K
None
- ----------------------
* Submitted only with filing in electronic format.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MSB BANCORP, INC.
-------------------------------
(Registrant)
By: /s/ Anthony J. Fabiano
--------------------------------
Anthony J. Fabiano
Senior Vice President and Chief
Financial and Accounting Officer
May 13, 1998
17
EXHIBIT 11
<TABLE>
<CAPTION>
COMPUTATION OF NET INCOME PER SHARE
FOR THE QUARTER ENDED
---------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Net income $ 670,000 $ 957,000
Preferred stock dividends........................... 283,500 283,500
------------ ------------
Net income applicable to common stock............... 386,500 673,500
============ ============
Weighted average common shares...................... 2,840,473 2,820,451
Basic earnings per common share..................... $ 0.14 $ 0.24
============ ============
</TABLE>
For purposes of computing diluted earnings per share, diluted weighted average
shares included common stock equivalents of 40,975 and 34,121 for the first
quarter of 1998 and 1997, respectively.
<TABLE> <S> <C>
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,549
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 56,655
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 230,490
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 400,000
<ALLOWANCE> 3,468
<TOTAL-ASSETS> 753,667
<DEPOSITS> 661,046
<SHORT-TERM> 474
<LIABILITIES-OTHER> 17,650
<LONG-TERM> 182
0
6
<COMMON> 30
<OTHER-SE> 74,279
<TOTAL-LIABILITIES-AND-EQUITY> 753,667
<INTEREST-LOAN> 8,068
<INTEREST-INVEST> 3,074
<INTEREST-OTHER> 1,096
<INTEREST-TOTAL> 12,238
<INTEREST-DEPOSIT> 6,210
<INTEREST-EXPENSE> 6,216
<INTEREST-INCOME-NET> 6,022
<LOAN-LOSSES> 1,324
<SECURITIES-GAINS> 63
<EXPENSE-OTHER> 4,872
<INCOME-PRETAX> 1,109
<INCOME-PRE-EXTRAORDINARY> 1,109
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 670
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 3.55
<LOANS-NON> 4,153
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,283
<LOANS-PROBLEM> 4,100
<ALLOWANCE-OPEN> 2,807
<CHARGE-OFFS> 672
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 3,468
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,468
</TABLE>
