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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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 office-zip code)
Telephone (914) 294-8100
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share American Stock Exchange
Preferred Share Purchase Rights (Name of each exchange
(Title of class) on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 25, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $92,193,000.
As of March 25, 1998, 2,844,153 shares of the Registrant's common stock
were outstanding.
Documents Incorporated by Reference:
None.
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<PAGE>
MSB BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1997
TABLE OF CONTENTS
Part I
Item 1. Business ......................................................... 1
Item 2. Properties ....................................................... 35
Item 3. Legal Proceedings ................................................ 36
Item 4. Submission of Matters to a Vote of Security Holders .............. 37
Part II
Item 5. Market for Registrants' Common Equity and
Related Stockholder Matters ...................................... 37
Item 6. Selected Consolidated Financial Information ...................... 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 41
Item 7A. Quantitive and Qualitative Disclosures About Market Risk ......... 53
Item 8. Consolidated Financial Statements and Supplementary Data ......... 55
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................. 91
Part III
Item 10. Directors and Executive Officers of the Registrant ............... 92
Item 11. Executive Compensation ........................................... 94
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 99
Item 13. Certain Relationships and Related Transactions ................... 103
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .. 104
<PAGE>
PART I
This Annual Report on Form 10-K contains forward-looking statements,
including but not limited to statements regarding, among other items (i) general
economic conditions and the condition of the real estate market, (ii) the
adequacy of the Company's allowance for loan and real estate losses, (iii)
interest rate risk and (iv) anticipated trends in the thrift industry.
Forward-looking statements are typically identified by the words "believes,"
"expects," "anticipates," "intends," "estimates" and similar expressions. These
forward-looking statements are subject to a number of risks and uncertainties,
many of which are beyond the company's control. These include, among other
changes in general, economic, market and legislative and regulatory conditions,
the development of an adverse interest rate environment that adversely affects
the interest rate spread or other income anticipated from the Company's
operations and investments and depositor and customer preferences. Actual
results could differ materially from those contemplated by these forward-looking
statements. There can be no assurance that the results and events contemplated
by the forward-looking information contained in this Annual Report on Form 10-K
will in fact transpire. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to update or revise any forward-looking
statements.
ITEM 1. BUSINESS
General
MSB Bancorp, Inc. (the "Company") is a savings and loan holding company
headquartered in Goshen, New York, which was incorporated in March 1992 under
the laws of the State of Delaware. The Company was organized for the purpose of
serving as the holding company for MSB Bank (the "Bank"). At December 31, 1997,
the Company had total assets of $765.4 million, total deposits of $673.4 million
and total stockholders' equity of $74.8 million.
The principal business of the Company is directing, planning and
coordinating the business activities of the Bank, and the financial condition
and results of operations of the Company are primarily dependent upon the
operations of the Bank. The Company also invests in securities, consisting
primarily of U.S. Government and federal agency securities, federal funds and
investment grade corporate notes. The Company neither owns nor leases any
property, nor does the Company employ any persons other than certain officers of
the Bank who are not separately compensated by the Company. The Company
organized a wholly-owned subsidiary corporation, MSB Travel, in January 1996, to
offer travel services to the Bank's customers.
The Bank was organized in 1869 as a New York state-chartered mutual savings
bank. On September 3, 1992, the Bank completed its conversion to stock form (the
"Conversion"), and the Company sold 1,840,000 shares of its common stock, $0.01
par value per share (the "Common Stock"), at $10.00 per share and acquired the
Bank with 50% of the net proceeds of the Conversion.
On October 27, 1995, the Bank converted from a New York state-chartered
savings bank to a federal savings bank in connection with the Bank's acquisition
of certain assets and liabilities associated with seven branches of First
Nationwide Bank, A Federal Savings Bank ("First Nationwide"). At such time, the
Bank changed its name from Middletown Savings Bank to MSB Bank. As a consequence
of the conversion of the Bank to a federal savings bank, the Company became a
savings and loan holding company subject to the regulation, examination and
supervision of the Office of Thrift Supervision (the "OTS"). Prior to the
conversion of the Bank to a federal savings bank, the Company was a bank holding
company subject to the regulation, examination and supervision of the Federal
Reserve Board (the "FRB").
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On December 16, 1997, the Company announced the signing of a definitive
merger agreement (the "Merger Agreement") with HUBCO, Inc. ("HUBCO"). HUBCO is a
$3.0 billion bank holding company which currently owns commercial banks in New
Jersey and Connecticut. See "The Merger."
The Bank provides a broad range of banking services from its main office,
which is located in Goshen, New York, and from 15 additional branch offices
located in Orange, Putnam and Sullivan counties. The Bank is the largest
financial institution headquartered in Orange County, New York, based on assets.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations, primarily in loans secured by owner-occupied one- to four-family,
primary residence properties, commercial mortgage loans and short and
medium-term investment grade debt securities. Revenues are derived principally
from interest on the mortgage loan portfolio and interest and dividends on
securities. The Bank's primary sources of funds are deposits, principal and
interest payments and principal prepayments on loans, interest from securities
and proceeds from the sales of securities.
The Merger
On December 16, 1997, the Company announced the signing of the Merger
Agreement by and among HUBCO, the Company and 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), and Lafayette American Bank, a Connecticut-based bank ("Lafayette").
Prior to closing the Merger, HUBCO expects to complete its pending acquisition
of Poughkeepsie Financial Corp. ("PFC") and PFC's subsidiary, Bank of the Hudson
("BTH"), a New York-based bank. 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.
Upon completion of the Merger, each share of common stock, par value $0.01
per share, of the Company ("MSB Common Stock"), other than Excluded Shares (as
defined below), will be converted into a number of shares (the "Exchange Ratio")
of common stock of HUBCO, no par value ("HUBCO Common Stock"). The Merger
Agreement provides that the Exchange Ratio will be equal to $36.02 divided by
the Median Pre-Closing Price (as defined below) of HUBCO Common Stock, provided
that the Median Pre-Closing Price is between $34.97 and $37.13. ("Median
Pre-Closing Price" will be determined by taking the price half-way between the
closing prices of HUBCO Common Stock after discarding the four lowest and four
highest closing prices during the ten-trading day period ending on the day the
parties receive final federal bank regulatory approval for the Merger.) A
"Minimum Exchange Ratio" of 0.97 will apply if the Median Pre-Closing Price is
greater than $37.13, and a "Maximum Exchange Ratio" of 1.03 will apply if the
Median Pre-Closing Price is less than $34.97. HUBCO will pay cash in lieu of
issuing fractional shares. The Exchange Ratio is subject to adjustment specified
in the Merger Agreement to prevent dilution. "Excluded Shares" are those shares
of MSB Common Stock which are (i) held by MSB as treasury shares, or (ii) held
by HUBCO or any of its subsidiaries (other than shares held as trustee or in a
fiduciary capacity and shares held as collateral on or in lieu of a debt
previously contracted).
HUBCO currently holds all the outstanding shares of 8.75% Cumulative
Convertible Preferred Stock, Series A, $.01 par value of the Company ("Series A
Preferred Stock"). All Series A Preferred Stock held by HUBCO will be canceled
in the Merger. While HUBCO does not currently anticipate transferring any of the
Series A Preferred Stock, if it were to transfer any Series A Preferred Stock,
the transferred shares (with certain limited exceptions) would be converted in
the Merger into shares of a newly created series of HUBCO preferred stock having
terms substantially identical to the Series A Preferred Stock (the "New HUBCO
Preferred Stock" and, together with the HUBCO Common Stock, the "HUBCO Stock").
2
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The Offering and the Acquisition
On September 29, 1995, the Bank entered into an Asset Purchase and Sale
Agreement (as amended, the "First Nationwide Agreement") with First Nationwide
for the acquisition of certain assets and the assumption of certain liabilities
relating to eight First Nationwide branch offices located in Carmel, Liberty,
Mahopac, Monticello, Port Jervis, Spring Valley, Warwick and Washingtonville,
New York (the "First Nationwide Branches").
On January 10, 1996, the Company sold 1,100,000 shares of Common Stock at
$18 per share and 600,000 shares of Series A Preferred Stock to HUBCO at $21.60
per share. On February 7, 1996 the Company sold an additional 105,000 shares of
Common Stock pursuant to the underwriters' exercise of their over allotment
option. The issuance and sale of the shares of Common Stock and Series A
Preferred Stock on January 10 and February 7 are hereinafter referred to,
collectively, as the "Offering." Net proceeds from the Offering amounted to
approximately $32.0 million. The purpose of the Offering was to raise a
significant portion of the additional capital necessary to permit the Bank to
qualify as "adequately capitalized" for regulatory capital purposes immediately
following the consummation of the acquisition of the First Nationwide Branches.
The Company contributed substantially all of the proceeds of the Offering to the
Bank.
The closing of the Acquisition (defined below) took place on January 12,
1996 (the "Closing Date"), and the Bank assumed the deposits (the "First
Nationwide Deposits") of the First Nationwide Branches other than the Spring
Valley, New York branch (the "Spring Valley Branch") and paid First Nationwide a
premium of 8.0% on the First Nationwide Deposits (and on the accrued interest
thereon) (the acquisition of the First Nationwide Branches other than the Spring
Valley Branch being hereinafter referred to as the "Acquisition," and the First
Nationwide Branches other than the Spring Valley Branch being hereinafter
referred to as the "Acquired Branches"). The First Nationwide Agreement was
amended to provide for the purchase of the Spring Valley Branch by the Bank from
First Nationwide concurrently with the sale of such branch by the Bank to
Provident Savings Bank, F.A. ("Provident"), pursuant to an Asset Purchase and
Sale Agreement (as amended, the "Spring Valley Agreement") between the Bank and
Provident. The Spring Valley Agreement provided for the sale of certain assets
by the Bank and the assumption of certain liabilities by Provident (the "Branch
Disposition") relating to the Spring Valley Branch. The closing under the Spring
Valley Agreement took place on March 22, 1996, whereupon Provident assumed the
deposits of the Spring Valley Branch and paid the Bank a premium of 7.05% on
such deposits (and on the accrued interest thereon).
The Acquisition increased the Company's market share of deposits to the
largest in Orange County as well as the largest in the combined tri-county
market area of Orange, Putnam and Sullivan counties.
Market Area and Competition
The Bank is a community-oriented financial institution offering a variety
of financial services to meet the needs of the communities it serves. The Bank's
primary deposit gathering base is concentrated in the New York counties of
Orange, Putnam and Sullivan, while its current mortgage lending base extends
throughout Orange, Sullivan, Putnam, Dutchess, Westchester and Ulster Counties
in New York, Pike County in Pennsylvania and Sussex and Bergen Counties in New
Jersey. In the past, the Bank has made multi-family residential and commercial
real estate loans in New York City. However, the Bank has curtailed its lending
in that area.
The southern portion of Orange County is approximately 40 miles northwest
of New York City. This area benefited historically from the diverse economy of
the New York City area as well as from employment by local businesses. Orange
County, formerly an agricultural area, now has a diverse economy based on the
manufacturing, distribution and service industries. Management believes that
economic growth in Orange County will continue to provide a favorable climate in
which to conduct the business of the Bank.
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger non-local
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to
3
<PAGE>
varying degrees. Competition for loans comes principally from commercial banks,
savings banks, credit unions, savings and loan associations, mortgage banking
companies and insurance companies. The most direct competition for deposits has
historically come from savings and loan associations, savings banks, commercial
banks and credit unions. The Bank faces additional competition for deposits from
short-term money market funds and other corporate and government securities
funds and from other financial institutions such as brokerage firms and
insurance companies.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional fixed-rate and adjustable-rate first mortgage loans, home equity
loans, multi-family residential loans, line of credit loans, other consumer
loans and commercial business loans. At December 31, 1997, the Bank's loans
receivable totaled $393.5 million, of which $289.0 million, or 73.4%, were one-
to four-family residential mortgage loans. Of the one- to four-family
residential mortgage loans outstanding at that date, 82.1% were adjustable-rate
mortgage ("ARM") loans and 17.9% were fixed rate loans. As part of the Bank's
management of interest rate risk, the Bank's policy is to sell all newly
originated conforming fixed-rate loans to the Federal National Mortgage
Association ("FNMA"). These loans are sold to FNMA without recourse to the Bank.
The Bank does not hedge this portfolio or sell loans pursuant to forward
commitments. In order to maintain customer relationships, the Bank retains the
servicing on the loans sold in the secondary market. At December 31, 1997,
commercial real estate loans totaled $56.2 million or 14.3% of total loans
receivable, and multi-family residential mortgage loans totaled $17.6 million or
4.5% of total loans receivable.
The Bank's non-mortgage loans consist of commercial business loans and a
variety of consumer loans. At December 31, 1997, commercial business loans
amounted to $11.9 million or 3.0% of total loans receivable, and other consumer
loans totaled $18.9 million or 4.8% of total loans receivable. The increases in
loans are due to management's strategy of redeploying proceeds received in the
Acquisition from the securities portfolio and into the loan portfolio. The
Bank's loan portfolio provides a greater yield than the securities portfolio.
The types of loans that the Bank may originate are regulated by federal
laws and regulations. Interest rates charged by the Bank on loans are affected
principally by the demand for such loans and the supply of money available for
lending purposes. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the FRB,
legislative and tax policies and governmental budgetary matters.
4
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ----------------- ----------------- ------------------
Percent Percent Percent Percent Percent
of of Of Of of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four family(1) ... $ 288,966 73.4% $ 257,498 75.6% $ 222,172 78.6% $ 189,034 81.1% $ 145,764 78.9%
Multi-family ............. 17,565 4.5 14,362 4.2 14,431 5.1 13,602 5.9 13,192 7.1
Commercial real estate ... 56,179 14.3 45,462 13.4 29,674 10.5 19,589 8.4 15,557 8.4
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total mortgage loans ... 362,710 92.2 317,322 93.2 266,277 94.2 222,225 95.4 174,513 94.4
Other loans:
Commercial business ...... 11,893 3.0 8,756 2.6 5,686 2.0 3,099 1.3 2,855 1.6
Consumer ................. 17,449 4.4 12,891 3.8 9,473 3.4 7,229 3.1 6,954 3.8
Lines of credit .......... 1,472 0.4 1,487 0.4 1,173 0.4 447 0.2 469 0.2
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total other loans ..... 30,814 7.8 23,134 6.8 16,332 5.8 10,775 4.6 10,278 5.6
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total loans receivable 393,524 100.0% 340,456 100.0% 282,609 100.0% 233,000 100.0% 184,791 100.0%
Less:
Deferred loan fees ....... (712) 5 438 466 613
Allowances for loan losses 2,807 1,960 1,659 1,459 1,466
--------- --------- ---------- --------- ----------
Loans receivable, net .... $ 391,429 $ 338,491 $ 280,512 $ 231,075 $ 182,712
========= ========= ========== ========= ==========
Mortgage loan summary:
Fixed rate loans ......... $ 53,632 14.8% $ 41,018 12.9% $ 28,493 10.7% $ 23,943 10.8% $ 29,570 16.9%
Adjustable-rate loans .... 309,078 85.2 276,304 87.1 237,784 89.3 198,282 89.2 144,943 83.1
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total mortgage loans .. $ 362,710 100.0% $ 317,322 100.0% $ 266,277 100.0% $ 222,225 100.0% $ 174,513 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
- ----------
(1) One- to four-family mortgage loans include first and second mortgage loans
and home equity loans.
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Loan Originations, Sales and Servicing. The Bank originates both ARM and
fixed-rate loans, the amounts of which are dependent upon relative customer
demand as well as current and expected future levels of interest rates. The Bank
generally does not purchase whole loans but, from time to time, purchases
participations in loans originated by others.
The following table sets forth the Bank's loan originations, sales and
principal repayments for the periods indicated. During the periods indicated, no
mortgage loans were purchased.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995
------------------- -------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period................. $ 317,322 $ 266,277 $ 222,225
Mortgage loans originated
One- to four-family................. 74,408 77,025 51,387
Multi-family........................ 11,155 2,206 1,591
Commercial real estate.............. 27,579 20,758 11,749
------------ ------------ -------------
Total mortgage loans originated..... 113,142 99,989 64,727
------------ ------------ -------------
Mortgage loan foreclosures............. (2,839) (1,044) (955)
Principal repayments................... (53,856) (36,167) (12,614)
Mortgage loans sold.................... (13,722) (11,015) (5,985)
Home equity (net activity)............. 2,663 (718) (1,121)
------------ ------------ -------------
At end of period....................... $ 362,710 $ 317,322 $ 266,277
============ ============ =============
Other loans (net activity):
At beginning of period................. $ 23,134 $ 16,332 $ 10,775
Commercial business.................... 3,137 3,070 2,587
Consumer loans......................... 6,204 4,962 3,863
Lines of credit........................ (15) 314 726
Student loans sold to Student
Loan Marketing Association.......... (1,646) (1,544) (1,619)
------------- ------------ -------------
At end of period....................... $ 30,814 $ 23,134 $ 16,332
============ ============ =============
</TABLE>
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Loan Maturity. The following table shows the contractual maturity of the
Bank's loan portfolio at December 31, 1997. The table does not reflect scheduled
principal amortization, prepayments or repricing of ARM loans. Scheduled
repayments and prepayments on mortgage loans (excluding home equity lines of
credit) totaled $53.9 million, $36.2 million and $12.6 million for the years
ended December 31, 1997, 1996, and 1995, respectively.
<TABLE>
<CAPTION>
At December 31, 1997
-------------------------------------------------------------------------
One- to Total
Four- Multi- Commercial Other Loans
Family Family Real Estate Loans Receivable
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Contractual maturity:
Within 1 year................ $ 12,606 $ 299 $ 3,520 $ 5,278 $ 21,703
After 1 year:
1 to 3 years.............. 1,305 29 2,990 11,625 15,949
3 to 5 years.............. 6,422 1,357 8,522 11,575 27,876
5 to 10 years............. 41,852 2,683 15,265 1,973 61,773
Over 10 years............. 226,781 13,197 25,882 363 266,223
---------- ---------- ---------- ---------- ----------
Total due after one year.. $ 276,360 $ 17,266 $ 52,659 $ 25,536 371,821
---------- ---------- ---------- ---------- ----------
Total amounts due............ $ 288,966 $ 17,565 $ 56,179 $ 30,814 393,524
========== ========== ========== ==========
Less:
Deferred loan fees, net...... (712)
Allowance for loan losses.... 2,807
----------
Loans receivable, net........ $ 391,429
==========
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount of
all loans contractually due after December 31, 1998, and whether such loans have
fixed or adjustable interest rates.
Due After December 31, 1998
---------------------------
Fixed Adjustable Total
---------------------------
(In thousands)
Mortgage loans:
One- to four-family ......................... $ 52,174 $224,186 $276,360
Multi-family and commercial real estate ..... 93 69,832 69,925
Other loans ................................... 23,328 2,208 25,536
-------- -------- --------
Total loans receivable ........................ $ 75,595 $296,226 $371,821
======== ======== ========
One- to Four-Family Mortgage Loans. The Bank offers first mortgage loans
secured by one- to four-family residences, including townhouse and condominium
units, in its primary lending area. Loan originations are generally obtained
from existing or past customers and members of the local communities located in
the Bank's primary market area. The Bank originates ARM loans primarily for its
portfolio. The Bank also originates fixed rate mortgage loans which are sold to
FNMA generally within 15 days of their origination. See "-- Lending Activities
- -- Loan Portfolio Composition."
An origination fee of up to 2.0% may be charged on loans to reduce the
interest rate on loans. All one- to four-family mortgage loan applications are
reviewed by the Board of Directors. Originated mortgage loans in the Bank's
portfolio generally include due-on-sale clauses which provide the Bank with the
contractual right to declare the loan immediately due and payable in the event
that the borrower transfers ownership of the property without the Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions.
Since the early 1980s, the Bank has emphasized the origination of ARM loans
secured primarily by owner-occupied residences for retention in its portfolio.
At December 31, 1997, 82.1% of the Bank's one- to four-family residential
mortgage loans consisted of such ARM loans. ARM loans are made for terms of 10
to 30 years. The Bank offers an ARM loan secured by owner-occupied residences
which may be originated in amounts up to $600,000, with a loan to value ratio of
up to 95% of the appraised value of the property securing the loan, provided
that private mortgage insurance is obtained on loan amounts in excess of 85% of
such appraised value. The Bank originates primarily two types of ARM loans. The
first ARM loan has a fixed rate for 5 years at which time the
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<PAGE>
interest rate begins to adjust every year. The Bank's other ARM loan product has
an interest rate which adjust every year, based upon a spread above the one-year
U.S. Treasury Securities Index, adjusted to constant maturity. The Bank's ARM
loans are subject to limitations on interest rate increases of 2.0% per
adjustment period and up to an aggregate of 6.0% over the life of the loan. The
one-year ARM loan is originated at an introductory rate which is less than the
fully-indexed interest rate. The introductory rate remains in effect for one
year. The Bank also offers variable rate loans secured by non-owner-occupied
properties, which adjust based upon a spread above either the prime rate or the
one-year U.S. Treasury Securities Index, adjusted to constant maturity. These
loans are made in amounts of up to $600,000 and for terms of up to 25 years. The
Bank makes such loans up to 70% of the appraised value of the secured property.
For the year ended December 31, 1997, the Bank originated $60.3 million of one-
to four-family residential ARM loans.
The retention of ARM loans, as opposed to fixed-rate residential loans, in
the Bank's loan portfolio helps reduce the Bank's exposure to increases in
interest rates. However, ARM loans generally pose credit risks different from
the risks inherent in fixed-rate loans, primarily because as interest rates
rise, the underlying payments of the borrowers rise, thereby increasing the
potential for default. At the same time, the marketability of the underlying
property may be adversely affected. In order to minimize risks, the borrowers of
one-year ARM loans are qualified at 2.0% above the fully-indexed rate. The Bank
does not originate ARM loans which provide for negative amortization.
The volume and types of ARM loans originated by the Bank are affected by
such market factors as the level of interest rates, competition, consumer
preferences for ARM versus fixed-rate loans and the availability of funds.
Although the Bank will continue to offer ARM loans, there can be no assurance
that, in the future, the Bank will be able to originate a sufficient volume of
adjustable rate loans to increase or maintain the proportion that these loans
currently bear to total loans.
The Bank's fixed-rate mortgage loans are currently originated with terms of
15 or 30 years. Fixed-rate mortgage loans are offered only on owner-occupied
residences. Interest rates charged on fixed-rate loans are competitively priced
on a regular basis based on market conditions. The Bank originates fixed-rate
loans with loan to value ratios of up to 95% of the appraised value of the
property securing the loan, provided that private mortgage insurance is obtained
on loan amounts in excess of 80% of such appraised value. The Bank generally
originates its fixed-rate mortgage loans in accordance with FNMA standards. For
the year ended December 31, 1997, the Bank originated $14.1 million of
fixed-rate one- to four-family residential mortgage loans.
The Bank also originates home equity loans and home equity lines of credit,
which are secured by one- to four-family, owner-occupied primary residences.
These loans are originated as either fixed-rate loans or variable-rate loans
with interest rates equal to the published prime rate, subject to a lifetime cap
of 14.9%. Borrowers are qualified for home equity loans based on the maximum
lifetime rate. Home equity loans and lines of credit are originated with loan to
value ratios of up to 80% of the appraised value of the property securing the
loan, less existing liens. Home equity loans and lines of credit are made in
amounts of up to $100,000. Home equity lines of credit are made for terms of 30
years and allow the borrower to draw on the line for a period of 15 years.
Interest only payments are due during the first 15 years of the line with
principal amortization thereafter on a 15 year basis. At December 31, 1997, home
equity loans and lines of credit totaled $12.3 million or 3.1% of total loans
receivable.
Multi-Family Lending. The Bank originates adjustable-rate multi-family
loans and, in the past, had originated fixed-rate multi-family loans in its
primary lending areas and in New York City. Since October 1990, the Bank has not
originated loans to new customers secured by multi-family properties located
outside its primary lending area. At December 31, 1997, multi-family loans
totaling $3.5 million, or 20.0% of total multi-family loans, were secured by
properties located in New York City, and multi-family loans totaling $14.1
million, or 80.0% of total multi-family loans, were secured by properties
located in the Bank's primary lending area. Multi-family loans are originated
with loan to value ratios of up to 75% of the appraised value of the property
securing the loan, based on an independent appraisal. In making such loans, the
Bank bases its underwriting decision primarily on the net operating income
generated by the real estate to support the debt service. The Bank also
considers the financial resources and
8
<PAGE>
income level of the borrower if the property is owner-occupied, the borrower's
experience in owning or managing similar property types, the marketability of
the property and the Bank's lending experience with the borrower. Loans secured
by properties experiencing high vacancy rates are qualified solely on the basis
of the borrower's income and financial resources.
The largest multi-family loan at December 31, 1997 had an outstanding
balance of $4.1 million and is secured by an apartment building located in the
Bank's primary lending area. This loan was current as to the payment of
principal and interest as of December 31, 1997. The Bank's second largest
multi-family loan had an outstanding balance of $2.4 million at December 31,
1997, and is secured by an apartment building located in the Bank's primary
lending area. At December 31, 1997, this loan was current as to the payment of
principal and interest.
Commercial Real Estate Lending. Loans secured by commercial real estate
totaled $56.2 million, or 14.3% of the Bank's total loans receivable, at
December 31, 1997. Commercial real estate loans are generally originated with
loan to value ratios of up to 80% of the appraised value of the property
securing the loan. Such appraised value is determined by an independent
appraiser previously approved by the Bank. The Bank also obtains personal
guarantees on commercial real estate loans when it is able to do so. The Bank
currently originates commercial real estate loans with adjustable rates based on
a spread above either the published prime rate or a U.S. Treasury Securities
Index, adjusted to constant maturity and typically with maturities of three to
five years which generally require principal payments based on a 15-year
amortization period. The Bank's commercial real estate loans are permanent loans
secured by improved property located in the Bank's primary lending area, such as
small office buildings, retail stores and other non-residential buildings.
The largest commercial real estate loan at December 31, 1997 had an
outstanding balance of $6.1 million and is secured by a golf course. The second
largest commercial real estate loan had an outstanding balance of $3.7 million
and is secured by warehouse and office building in an industrial park. Both
loans were current as to the payment of principal and interest at December 31,
1997.
Loans secured by commercial real estate properties generally involve a
greater degree of risk than residential mortgage loans. Because payment on loans
secured by commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks by lending to
established customers and currently restricts such loans to its primary market
area.
Commercial Business Lending. The Bank makes commercial business loans to
businesses located in the Bank's primary market area. At December 31, 1997,
commercial business loans totaled $11.9 million or 3.0% of total loans
receivable. Commercial business loans include short-term (90 days or less)
loans, commercial lines of credit, installment loans and medium term (up to 10
years) loans. Commercial business loans may be unsecured or secured by
inventory, accounts receivable or vehicles. Commercial business loans carry
adjustable interest rates based on a spread above the published prime rate.
Personal guarantees are obtained on loans to closely held companies. The largest
commercial business loan at December 31, 1997 had an outstanding balance of $2.2
million and was current as to the payment of principal and interest at such
date.
Consumer Lending. Consumer loans, which amounted to $18.9 million, or 4.8%
of total loans receivable at December 31, 1997, consist primarily of line of
credit loans, education loans, home improvement loans and unsecured personal
loans.
Loan Approval Authority and Underwriting. All loans originated by the Bank
and secured by real estate must have the approval of the members of the Bank's
Board of Directors. The Board of Directors meets on an as-needed basis, which is
typically once a week. Consumer loans in amounts up to $25,000 may be approved
by the Bank's President and Chief Executive Officer, Executive Vice President
and Vice President, Retail Lending. Unsecured commercial business loans in
amounts up to $40,000 and secured commercial business loans in amounts up to
$100,000 may be approved by the Bank's commercial loan officers. The President
and Chief Executive Officer
9
<PAGE>
or Executive Vice President may approve unsecured commercial business loans in
amounts up to $125,000 and secured commercial business loans in amounts up to
$250,000. All other consumer and commercial loans must be approved by the Bank's
Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered, income and
certain other information is verified and, if necessary, additional financial
information is requested. An appraisal of the real estate intended to secure the
proposed loan is required and is currently performed by an independent appraiser
designated and approved by the Board of Directors. The Bank requires title
insurance on all first mortgage loans. Borrowers must also obtain hazard
insurance prior to closing. Borrowers generally are required to advance funds on
a monthly basis together with each payment of principal and interest to a
mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes, hazard insurance premiums and private mortgage insurance
premiums, if required.
Concentrations. At December 31, 1997, the largest aggregate amount of loans
outstanding to any one borrower and affiliates consisted of a commercial real
estate loans totaling $6.1 million secured by a golf course. This loan is also
the Bank's largest commercial real estate loan. The loan to this borrower did
not exceed the Bank's "loans to one borrower" limitation at December 31, 1997,
of $6.8 million. See "Regulation -- Regulation of Federal Savings Associations
- -- Loans to One Borrower." At December 31, 1997, this loan was current.
Delinquencies and Foreclosed Assets
Delinquent Loans. The Bank's mortgage loan collection procedures include
the sending of a late notice at the time a payment is over 15 days past due with
a second notice being sent at the time the payment becomes 30 days past due. A
letter is sent after the 45th day of delinquency. In the event that payment is
not received, personal contact is made with the borrower. If payment remains
uncollected, another letter is sent, and additional contact is made with the
borrower. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. Most loan
delinquencies are cured within 90 days, and no legal action is taken.
Foreclosure notices are sent when a loan is 90 days delinquent.
The Loan Policy and Review Committee generally meets monthly to review loan
charge-offs, delinquency reports, criticized loan reports, loan work-outs,
purchase offers on real estate owned ("ORE") and the status of other ORE
properties.
10
<PAGE>
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent but on which the Bank is accruing
interest and foreclosed real estate at the dates indicated. The Bank generally
discontinues accruing interest on delinquent loans 90 days or more past due, at
which time all accrued but uncollected interest is reversed.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans (loans
delinquent 90 days or more):
Loans in non-accrual status:
One- to four-family ................................... $3,005 $3,364 $2,343 $1,507 $ 990
Multi-family .......................................... 294 69 69 62 --
Commercial real estate ................................ -- 1,125 488 182 110
------ ------ ------ ------ ------
Total mortgage loans ............................... 3,299 4,558 2,900 1,751 1,100
Other loans ........................................... 189 217 61 15 52
------ ------ ------ ------ ------
Total non-accrual .................................. 3,488 4,775 2,961 1,766 1,152
------ ------ ------ ------ ------
Loans delinquent 90 days or more and in
accrual status:
Mortgage loans ........................................ -- -- -- -- 1
Other loans ........................................... -- -- -- -- 5
------ ------ ------ ------ ------
Total .............................................. -- -- -- -- 6
------ ------ ------ ------ ------
Total non-performing loans .............................. 3,488 4,775 2,961 1,766 1,158
Foreclosed real estate .................................. 2,443 915 806 716 1,301
------ ------ ------ ------ ------
Total non-performing assets ............................. 5,931 $5,690 $3,767 $2,482 $2,459
====== ====== ====== ====== ======
Ratio of non-performing loans to total loans ............ 0.89% 1.40% 1.05% 0.76% 0.63%
Ratio of non-performing assets to total assets .......... 0.77% 0.69% 0.83% 0.61% 0.60%
</TABLE>
The loans in the above table have been considered in connection with the
Company's overall assessment of the adequacy of its allowance for loan losses.
However, there can be no assurance that the Company will not have to establish
additional loss provisions for these loans in the future.
Classification of Assets. Federal regulations and the Company's policy
require that the Company utilize an internal asset classification system as a
means of reporting problem and potential problem assets. The Company has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Company currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all the weaknesses inherent
in those classified "Substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable."
If non-accrual loans had continued to realize interest in accordance with
their contractual terms, approximately $313,000, $413,000 and $134,000 of
interest income would have been realized for the years ended December 31, 1997,
1996 and 1995, respectively.
11
<PAGE>
The following table sets forth information with respect to the classified
assets of the Company at December 31, 1997.
December 31, 1997
------------------------------------
Substandard Doubtful Total
----------- -------- -------
(In thousands)
Real estate loans:
One-to-four family ................... $ 3,201 $ -- $ 3,201
Multifamily .......................... 1,990 114 2,104
Commercial and land .................. 4,012 336 4,348
------- ------- -------
Total classified real estate loans ...... 9,203 450 9,653
Other loans ............................. 464 -- 464
------- ------- -------
Total classified loans .................. $ 9,667 $ 450 $10,117
======= ======= =======
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," the Company recognizes
impairment on troubled collateral dependent loans by creating a specific
valuation allowance. Impaired loans totaled $6.9 million and $2.4 million, at
December 31, 1997 and 1996 respectively. At December 31, 1997, and 1996, the
specific valuation allowance totaled $925,000 and none, respectively. Impaired
loans consisted of $6.4 million and $1.2 million of loans that are potential
problem loans at December 31, 1997 and 1996, respectively, and $424,000 and $1.2
million of non-performing loans at those same respective dates.
These assets have been considered in connection with the Company's overall
assessment of the adequacy of its allowance for loan losses; however, there can
be no assurance that the Company will not establish additional loss provisions
for these assets in the future.
Foreclosed Assets. At December 31, 1997, foreclosed real estate totaled
$2.4 million and consisted primarily of one- to four-family properties. During
1997, the Bank charged off $188,000 relating to foreclosed properties.
12
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectibility may not be reasonably assured, considers,
among other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experiences and other factors that
warrant recognition in providing for an adequate loan loss allowance. In
determining the adequacy of its allowance for loan losses, management considers
the level of non-performing loans, the current status of the Bank's loan
portfolio, changes in appraised values of collateral and general economic
conditions. Although the Bank maintains its allowance for loan losses at a level
which it considers to be adequate to provide for potential losses, there can be
no assurance that such losses will not exceed the current estimated amounts. As
a result, higher provisions for loan losses may be necessary in future periods,
which would adversely affect operating results.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended Year Ended
------------------------------------------------------- December 31, September 30,
1997 1996 1995 1994 1993 1993
------------- ------------ ------------- ----------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period.... $ 1,960 $ 1,659 $ 1,459 $ 1,466 $ 1,437 $ 1,209
Provision for loan losses......... 1,565 1,400 483 119 38 527
Loans charged off:
Mortgage loans.................. 523 634 234 28 -- 71
Other........................... 384 485 73 105 12 300
------- ------- ------- -------- ------- -------
Total loans charged off...... 907 1,119 307 133 12 371
------- ------- ------- -------- ------- -------
Recoveries:
Mortgage loans.................. 148 1 2 -- -- 2
Other........................... 41 19 22 7 3 70
------- ------- ------- -------- ------- -------
Total recoveries............. 189 20 24 7 3 72
--------- ------- ------- -------- ------- -------
Charge-offs net of recoveries..... 718 1,099 283 126 9 299
--------- ------- ------- -------- ------- -------
Balance at end of period.......... $ 2,807 $ 1,960 $ 1,659 $ 1,459 $ 1,466 $ 1,437
========= ======= ======= ======== ======= =======
At end of period allocated to:
Mortgage loans.................. $ 2,374 $ 1,556 $ 1,328 $ 1,262 $ 1,318 $ 1,308
Other........................... 433 404 331 197 148 129
Ratio of net charge-offs during
the period to average loans
outstanding during the period.. 0.20% 0.36% 0.11% 0.06% 0.01% 0.18%
Ratio of allowance for loan
losses to net loans receivable
at the end of the period....... 0.72 0.58 0.59 0.63 0.80 0.83
Ratio of allowance for loan
losses to total non-performing
assets at the end of the period 47.33 34.45 44.04 58.78 59.62 60.51
Ratio of allowance for loan
losses to non-performing loans
at the end of the
period......................... 80.48 41.05 56.03 82.62 126.60 146.93
</TABLE>
13
<PAGE>
The following table sets forth the Bank's allocation of its allowance for
loan losses to the total amount of loans in each category listed. The numbers
contained in the "Amount" column indicate the allowance for loan losses
allocated for each particular loan category. The numbers contained in the column
entitled "Percentage of Loans in Category to Total Loans" indicate the total
amount of loans in each particular category as a percentage of the Bank's total
loan portfolio.
<TABLE>
<CAPTION>
At December, At September 30,
---------------------------------------------------------------------------------------- -----------------
1997 1996 1995 1994 1993 1993
---------------------------------------------------------------------------------------- -----------------
Percentage Percentage Percentage Percentage Percentage Percentage
of Loans of Loans of Loans of Loans of Loans of Loans
in in in in in in
Category Category Category Category Category Category
to Total to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to
four-family........ $1,100 73.4% $ 779 75.6% $ 713 78.6% $ 921 81.1% $ 730 78.9% $ 548 79.2%
Multi-family ........ 111 4.5 26 4.2 167 5.1 217 5.9 280 7.1 520 7.4
Commercial real
Estate ............ 1,163 14.3 751 13.4 448 10.5 124 8.4 308 8.4 240 8.4
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total mortgage
Loans .......... 2,374 92.2 1,556 93.2 1,328 94.2 1,262 95.4 1,318 94.4 1,308 95.0
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Other loans:
Commercial .......... 196 3.0 166 2.6 114 2.0 60 1.3 50 1.6 37 1.2
Consumer ............ 237 4.8 238 4.2 217 3.8 137 3.3 98 4.0 92 3.8
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total other loans.. 433 7.8 404 6.8 331 5.8 197 4.6 148 5.6 129 5.0
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total ............. $2,807 100.0% $1,960 100.0% $1,659 100.0% $1,459 100.0% $1,466 100.0% $1,437 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
14
<PAGE>
The following is a summary of charge-offs and recoveries by loan type:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended Year Ended
------------------------------------------------------- December 31, September 30,
1997 1996 1995 1994 1993 1993
------------- ------------- ------------- ------------ ------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Charge-offs:
Mortgage loans:
One- to four-family..... $ 523 $ 528 $ 28 $ 28 $ -- $ 71
Multi-family............ -- 29 185 -- -- --
Commercial real estate.. -- 77 21 -- -- --
--------- --------- -------- -------- ------- --------
Total................. 523 634 234 28 -- 71
--------- --------- -------- -------- ------- --------
Other loans:
Credit cards............ -- -- -- -- -- 267
Commercial business..... 91 348 36 50 7 13
Consumer................ 293 137 37 55 5 20
--------- --------- -------- -------- ------- --------
384 485 73 105 12 300
--------- --------- -------- -------- ------- --------
Total charge-offs..... 907 1,119 307 133 12 371
--------- --------- -------- -------- ------- --------
Recoveries:
Mortgage loans:
One- to four-family..... 8 1 2 -- -- 2
Multi-family............ -- -- -- -- -- --
Commercial real estate.. 140 -- -- -- -- --
--------- --------- -------- -------- ------- --------
Total................. 148 1 2 -- -- 2
--------- --------- -------- -------- ------- --------
Other loans:
Credit cards............ -- -- -- -- -- 39
Commercial business..... 9 8 8 -- -- 7
Consumer................ 32 11 14 7 3 24
--------- --------- -------- -------- ------- --------
Total................. 41 19 22 7 3 70
--------- --------- -------- -------- ------- --------
Total recoveries...... 189 20 24 7 3 72
--------- --------- -------- -------- ------- --------
Net charge-offs....... $ 718 $ 1,099 $ 283 $ 126 $ 9 $ 299
========= ========= ======== ======== ======= ========
</TABLE>
Mortgage-Backed Securities
The Bank has historically invested in mortgage-backed securities as an
alternative investment during periods of low loan demand. Mortgage-backed
securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgage loans with varying interest rates and
maturities. The interest rate risk characteristics of the underlying pool of
mortgages, as well as the prepayment risk, are passed on to the holder of the
mortgage-backed securities. Consequently, in a declining interest rate
environment, there is a risk that mortgage-backed securities will prepay faster
than anticipated, and the Bank may not be able to reinvest the cash flow from
the mortgage-backed securities into comparable yielding investments. In a rising
interest rate environment, the value of the mortgage-backed securities may be
impaired.
Collateralized Mortgage Obligations ("CMOs") are typically issued by a
special-purpose entity, which may be organized in a variety of legal forms, such
as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities, which are used to collateralize the CMO. Once combined,
the cash flows are divided into "tranches" or "classes" of individual bonds,
thereby creating more predictable average duration for each bond than the
underlying pass-through pools. Accordingly, under the CMO structure, all
principal pay-downs from the various mortgage pools are allocated to a CMO's
first class until it has been paid off, then to a second class until such class
has been paid off and then to the next classes. At December 31, 1997, the
mortgage-backed securities portfolio had
15
<PAGE>
an estimated average life of 2.6 years. If the yield curve were to shift 300
basis points immediately, the average life of these securities would extend to
5.0 years. The loans underlying the mortgage-backed securities are either
guaranteed by the Federal Home Loan Mortgage Corporation, the Federal National
Mortgage Association or are private issue mortgage-backed securities which are
virtually all rated AAA by nationally recognized rating services.
Mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1997 1996 1995
----------------------- ---------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Collateralized mortgage
obligations:
Federal Home Loan Mortgage
Corporation............... $ 32,509 $ 32,347 $106,832 $105,577 $ 14,757 $ 14,682
Federal National Mortgage
Association............... 48,491 48,211 37,045 36,234 19,545 19,454
Other collateralized
mortgage obligations...... 140,400 140,193 163,321 159,747 3,215 3,183
Mortgage pass-throughs......... 4,971 4,929 22,672 21,870 12,440 12,456
-------- -------- -------- -------- -------- --------
Total........................ $226,371 $225,680 $329,870 $323,428 $ 49,957 $ 49,775
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth activities in the Bank's mortgage-backed
securities portfolios for the periods indicated:
Year Ended December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Purchases of mortgage-backed securities ... $ 53,590 $ 386,330 $ 29,988
Sales of mortgage-backed securities ....... 128,524 88,554 20,063
Repayments on mortgage-backed securities .. 27,408 16,775 8,930
Amortization of premiums .................. 1,157 1,088 101
--------- --------- ---------
Net increases (decreases) in
mortgage-backed securities, gross ...... $(103,499) $ 279,913 $ 894
========= ========= =========
Securities Activities
The Board of Directors establishes the investment policy of the Bank. This
policy dictates that investment decisions will be made based on the safety of
the security, liquidity requirements of the Bank and potential return on the
securities. The Board of Directors delegates authority to certain executive
officers to carry out the Bank's investment policy. The Chief Executive Officer,
Executive Vice President and Chief Financial Officer meet on an as-needed basis
to make investment decisions.
The Bank's policy permits investments in various types of liquid assets
including United States Treasury obligations, securities of various federal
agencies, obligations of states, certificates of deposits, time deposits and
banker's acceptances of other financial institutions and Federal funds. The Bank
also invests in investment grade corporate debt securities, commercial paper and
other corporate obligations. The Bank does not participate in hedging programs,
interest rate swaps or joint ventures and does not invest in non-investment
grade bonds or high risk mortgage derivatives.
16
<PAGE>
The following table sets forth the amortized cost and market values of
securities available for sale at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- --------- ------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Treasury securities............ $ 13,082 $ 13,011 $ 10,113 $ 9,795 $ 14,495 $ 14,467
U.S. Government agencies............ 36,000 35,763 36,000 35,093 35,266 35,167
Industrial and financial bonds....... -- -- -- -- 13,274 13,307
Other investment grade debt securities 1,101 1,114 2,111 2,074 9,204 9,299
-------- -------- --------- ------- ---------- ---------
Total debt securities............. 50,183 49,888 48,224 46,962 72,239 72,240
-------- -------- --------- ------- ---------- ---------
Equity securities:
Mutual funds......................... 1,234 1,173 1,221 1,129 1,146 1,114
Corporate equity securities.......... 3,002 3,021 2,586 2,594 2,225 2,226
-------- -------- --------- ------- ---------- ---------
Total equity securities........... 4,236 4,194 3,807 3,723 3,371 3,340
-------- -------- --------- ------- ---------- ---------
Total debt and equity securities
available for sale................ $ 54,419 $ 54,082 $ 52,031 $50,685 $ 75,610 $ 75,580
======== ======== ========= ======= ========== =========
</TABLE>
17
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Bank's debt securities
available for sale at December 31, 1997:
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Securities
------------------- ------------------ ------------------ ------------------- -------------------------
Weighted Weighted Weighted Weighted Remaining Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield
-------- -------- -------- --------- -------- --------- -------- --------- --------- --------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities..... $ 5,001 5.13% $ 2,987 5.88% $ 5,094 5.75% $ -- --% 2.75 $13,082 $13,011 6.20%
U.S. Government
Securities... 4,000 4.76 7,000 4.84 -- -- 25,000 7.27 4.0 36,000 35,763 6.52
Other investment
grade Securities. 100 4.38 586 4.32 415 4.52 -- -- 4.92 1,101 1,114 4.40
------- ---- ------- ---- -------- ---- ------- ---- ------- ------- ----
Total......... $ 9,101 4.96% $10,573 5.10% $ 5,509 5.66% $25,000 7.27% $50,183 $49,888 6.39%
======= ======= ======== ======= ======= =======
</TABLE>
There were no investment securities (exclusive of obligations of the U.S.
Government and federal agencies) issued by any one entity with a total carrying
value in excess of 10% of retained earnings at December 31, 1997.
18
<PAGE>
Sources of Funds
General. Deposits, repayments of loans and mortgage-backed securities,
maturities of securities and securities sales are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes.
Borrowings totaled $55,000 at December 31, 1997 and consisted of repurchase
agreements used to secure customer sweep accounts. In the event that the Bank is
not able to generate sufficient funds from its customer base, it has available
unused lines of credit totaling $40.6 million from the Federal Home Loan Bank
("FHLB") of New York.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of savings accounts, Super
NOW, money market, checking accounts and time deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates and competition. The Bank's deposits are obtained primarily from
the areas in which its banking offices are located. Management determines the
Bank's deposit rates based upon market conditions and local competition. The
Bank does not use brokers to obtain deposits, relying primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits. Time deposits in excess of $100,000 are not actively solicited
by the Bank.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Deposits............................ $ 1,894,548 $ 2,232,851 $ 2,570,384
Withdrawals......................... 1,985,930 1,916,344 2,550,102
----------- ----------- -----------
Net change in deposits.............. (91,382) 316,507 (1) 20,282 (2)
Interest credited on deposits....... 28,653 30,710 13,742
----------- ----------- -----------
Total increase (decrease)
in deposits....................... $ 62,729 $ 347,217 $ 34,024
=========== =========== ===========
</TABLE>
- -------------------------
(1) Includes $414.8 million in deposits assumed in connection with the Bank's
acquisition of the Acquired Branches from First Nationwide.
(2) Includes $21.8 million in deposits assumed in connection with the Bank's
acquisition of the Central Valley branch.
19
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
for each category of deposits presented.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- -------- ------ -------- --------- ------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Savings
accounts....... $198,779 29.5% 3.27% $193,702 26.3% 3.28% $128,696 33.1% 3.00%
NOW accounts... 40,190 6.0 1.88 39,242 5.3 2.00 16,833 4.3 2.00
Checking
accounts....... 51,961 7.7 -- 47,441 6.5 -- 37,290 9.6 --
-------- ----- -------- ----- -------- -----
Total........ 290,930 43.2 280,385 38.1 182,819 47.0
Money market
accounts......... 52,594 7.8 4.11 52,004 7.1 4.25 44,353 11.4 3.21
Time deposits:
Within 1 year.. 233,137 34.6 5.08 293,472 39.9 5.21 117,374 30.2 5.34
Due 1 year to
3 years........ 56,317 8.4 5.85 51,568 7.0 5.44 25,772 6.6 5.62
Over 3 years... 12,446 1.8 5.32 25,027 3.4 6.08 7,342 1.9 5.92
$100,000 or
more........... 28,008 4.2 5.31 33,705 4.5 5.45 11,284 2.9 5.47
-------- ----- -------- ----- -------- -----
Total........ 329,908 49.0 5.24 403,772 54.8 5.31 161,772 41.6 5.42
-------- ----- -------- ----- -------- -----
Total
deposits..... $673,432 100.0% 3.96% $736,161 100.0% 4.18% $388,944 100.0% 3.70%
======== ===== ======== ===== ======== =====
</TABLE>
At December 31, 1997, the Bank had outstanding $28.0 million in time
deposits in amounts of $100,000 or more maturing as follows:
Maturity Period Amount
- --------------- ------
(In thousands)
Three months or less....................................... $ 7,031
Over three through six months.............................. 6,334
Over six through 12 months................................. 7,220
Over 12 months............................................. 7,423
-----------
Total.................................................... $ 28,008
==========
The following table presents by various rate categories the amount of time
deposits outstanding at the dates indicated:
At December 31,
------------------------------------------
Interest Rate Range 1997 1996 1995
- ------------------- -------- -------- --------
(In thousands)
3.00% to 3.99% .............. $ 20 $ 2,867 $ 2,341
4.00% to 4.99% .............. 73,869 127,307 46,698
5.00% to 5.99% .............. 229,123 219,088 66,160
6.00% to 6.99% .............. 19,481 45,342 46,488
7.00% to 7.99% .............. 7,363 9,117 85
8.00% to 8.99% .............. 52 51 --
-------- -------- --------
Total ................... $329,908 $403,772 $161,772
======== ======== ========
20
<PAGE>
Borrowings
Borrowings totaled $55,000 at December 31, 1997 and consisted of repurchase
agreements used to secure customer sweep accounts. During 1996, the Bank
utilized borrowings to provide liquidity rather than sell securities which would
have resulted in a loss due to market conditions. During the fourth quarter of
1996, market conditions improved and the Bank decided to sell securities to
repay borrowings and provide liquidity. The Bank may obtain advances from the
FHLB as an alternative to retail deposit funds or repurchase agreements and may
do so in the future as part of its operating strategy. FHLB advances may also be
used to acquire certain other assets as may be deemed appropriate for investment
purposes. These advances would be collateralized primarily by certain of the
Bank's mortgage loans and mortgage-backed securities and secondarily by the
Bank's investment in capital stock of the FHLB. See "Regulation -- Regulation of
Federal Savings Associations -- Federal Home Loan Bank System." Such advances
may be made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions, including the Bank, fluctuates from time to time
in accordance with the policies of the OTS and the FHLB. At December 31, 1997,
the maximum amount of FHLB advances available to the Bank was $40.6 million,
based on the Bank's current investment in FHLB stock.
Subsidiary Activities
MSB Financial Services, Inc. ("MSBFS"), a wholly-owned subsidiary of the
Bank, offers a full range of investment and insurance products and services.
During 1997, MSBFS began offering trust services and also began doing business
as a broker-dealer under the name MSB Investment Services.
The Company organized a wholly-owned subsidiary corporation, MSB Travel, in
January 1996, to offer travel services to the Bank's customers. During 1996, MSB
Travel acquired the travel business of a travel agency located in Middletown,
New York.
Savings Bank Life Insurance
As an agent bank, the Bank offers Savings Bank Life Insurance ("SBLI") to
its customers up to the legal maximum of $50,000 per insured individual and, as
a trustee bank, offers an additional $350,000 in group coverage per insured
under SBLI's Financial Institution Group Life Insurance policy. Fees generated
from SBLI are not significant, although management believes that offering SBLI
is beneficial to the Bank's relationship with its depositors and the general
public.
Personnel
At December 31, 1997, the Bank had 185 full-time employees and 71 part-time
employees. On a full time equivalent basis, the bank had 214 employees. The
employees are not represented by a collective bargaining unit, and the Bank
considers its relationship with its employees to be good.
21
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank.
The Company has in the past filed a consolidated federal tax return with
its subsidiaries MSB and Travel. Generally, the Bank is subject to a maximum
federal tax rate of 34 percent.
Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the Small
Business Job Protection Act of 1996 (the "1996 Act"), for federal income tax
purposes, thrift institutions such as the Bank, which met certain definitional
tests primarily relating to their assets and the nature of their business, were
permitted to establish tax reserves for bad debt and to make annual additions
thereto, which additions could, within specified limitations, be deducted in
arriving at their taxable income. The Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property, could be computed using an amount based on a six-year moving
average of the Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications and
reduced by the amount of any permitted addition to the non-qualifying reserve.
Similar deductions for additions to the Bank's bad debt reserve are permitted
under the New York State Bank Franchise Tax; however, for purposes of this tax,
the effective allowable percentage under the PTI Method is 32% rather than 8%.
Under the 1996 Act, the PTI Method was repealed and the Bank, as a "large
bank" (one with assets having an adjusted basis of more than $500 million), may
no longer make additions to its tax bad debt reserve and is permitted to deduct
bad debts only as they occur and is required to recapture (i.e., take into
income) over a six-year period, beginning with the Bank's taxable year beginning
January 1, 1996, the excess of the balance of its bad debt reserves (other than
the supplemental reserve) as of December 31, 1995, over the balance of such
reserves as of December 31, 1987. However, under the 1996 Act, such recapture
requirements was suspended for each of the two successive taxable years
beginning January 1, 1996, in which the Bank originated a minimum amount of
certain residential loans during such years that was not less than the average
of the principal amounts of such loans made by the Bank during its six taxable
years preceding January 1, 1996. Thus the Bank will begin such bad debt reserve
recapture in its current taxable year. The New York State tax law has been
amended to prevent a similar recapture of the Bank's New York State tax
liability. The Bank had previously provided for this liability in the financial
statements.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserves.
The amount of additional taxable income created from an Excess Distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the amount so used would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate.
22
<PAGE>
State and Local Taxation
The Company is subject to the New York State Franchise Tax on Banking
Corporations in an annual amount equal to the greater of (i) 9% of the Company's
"entire net income" allocable to New York State during the taxable year, or (ii)
the applicable alternative minimum tax. The alternative minimum tax is generally
the greatest of (a) 0.01 % of the value of the Bank's assets allocable to New
York State with certain modifications, (b) 3% of the Bank's "alternative entire
net income" allocable to New York State, or (c) $250. Entire net income is
similar to federal taxable income, subject to certain modifications (including
the fact that net operating losses cannot be carried back or carried forward)
and alternative entire net income is equal to entire net income without certain
deductions.
A Metropolitan Commuter Transportation District Surcharge on the New York
State Franchise Tax on banking corporations doing business within the District
has been applied since 1982. The Company does all of its business within the
District and is subject to this surcharge rate of 17%.
As a Delaware business corporation, the Company is required to file annual
returns and pay annual fees and an annual franchise tax to the State of
Delaware. These taxes and fees are not material. For purposes of New York State
tax law, the Company and the Bank file a combined return.
23
<PAGE>
REGULATION
General
As a federal savings bank, the Bank is subject to regulation, examination
and supervision by the Office of Thrift Supervision ("OTS") and is subject to
the back-up examination and supervision of the Federal Deposit Insurance
Corporation ("FDIC") as the Bank's deposit insurer. The Bank is a member of the
Bank Insurance Fund ("BIF"), and its deposit accounts are insured up to
applicable limits by the FDIC. The Bank pays deposit insurance assessments to
both the BIF and the Savings Association Insurance Fund ("SAIF"). The Bank is
also a member of the FHLB of New York. The Bank must file reports with the OTS
and the FDIC concerning its activities and financial condition, and it must
obtain regulatory approvals prior to entering into certain transactions, such as
mergers with, or acquisitions of, other depository institutions. The OTS and the
FDIC conduct periodic examinations to assess the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings association can engage
and is intended primarily for the protection of the insurance fund and
depositors. The Company, as a savings and loan holding company, files certain
reports with, and otherwise complies with, the rules and regulations of the OTS
and of the Commission under the federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
Regulation of Savings and Loan Holding Companies
The Company as a savings and loan holding company is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and any of its non-savings
association subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
financial safety, soundness or stability of a subsidiary savings association.
The Home Owners' Loan Act, as amended ("HOLA"), prohibits a savings and
loan holding company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings association or holding company
thereof, without prior written approval of the OTS; acquiring or retaining, with
certain exceptions, more than 5.0% of a non-subsidiary savings association, a
non-subsidiary holding company or a non-subsidiary company engaged in activities
other than those permitted by HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating an
application by a holding company to acquire a savings association, the OTS must
consider the financial and managerial resources and future prospects of the
company and savings association involved, the effect of the acquisition on the
risk to the insurance funds, the convenience and needs of the community and
competitive factors.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to satisfy the qualified thrift
lender ("QTL") test. See "- Regulation of Federal Savings Associations QTL Test"
for a discussion of the QTL requirements. Upon any non-supervisory acquisition
by the Company of another savings association or savings bank that meets the QTL
test, that is deemed to be a savings association by the OTS and that will held
as a separate subsidiary, the Company would become a multiple savings and loan
24
<PAGE>
holding company and would be subject to limitations on the types of business
activities in which it could engage. HOLA limits the activities of a multiple
savings and loan holding company and its non-insured association subsidiaries
primarily to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, as amended ("BHC Act"), subject to the
prior approval of the OTS, and to other activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings associations in
more than one state, subject to two exceptions: an acquisition of a savings
association in another state (i) in a supervisory transaction, and (ii) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined by the location of its subsidiary savings association)
and the state in which the association to be acquired is located, have each
enacted legislation allowing its savings associations to be acquired by
out-of-state holding companies on the condition that the laws of the other state
authorize such transactions on terms no more restrictive than those imposed on
the acquirer by the state of the target association. Some of these states also
impose regional limitations, which restrict such acquisitions to states within a
defined geographic region. Other states allow full nationwide banking without
any condition of reciprocity. Some states do not authorize interstate
acquisitions of savings associations.
Transactions between the Bank and the Company and its other subsidiaries
would be subject to various conditions and limitations. See "- Regulation of
Federal Savings Associations - Transactions with Related Parties." The Bank
would have to give 30-days written notice to the OTS prior to any declaration of
the payment of any dividends or other capital distributions to the Company. See
"- Regulation of Federal Savings Associations - Limitation on Capital
Distributions."
Regulation of Federal Savings Associations
Business Activities. The activities of federally chartered savings
associations are governed by HOLA, as amended and, in certain respects, by the
Federal Deposit Insurance Act (the "FDI Act"). The Bank derives its lending and
investment powers from the HOLA, and the regulations of the OTS thereunder.
Under these laws and regulations, the Bank may invest in mortgage loans secured
by residential and commercial real estate, commercial and consumer loans,
certain types of debt securities, and certain other assets. The Bank may also
establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. These investment powers are subject to
various limitations, including: (i) a prohibition against the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories; (ii) a limit of 400% of an association's capital on the aggregate
amount of loans secured by nonresidential real estate property; (iii) a limit of
20% of an association's assets on the aggregate amount of commercial loans, with
the amount of commercial loans in excess of 20% of assets being limited to small
business loans, with the amount of commercial loans in excess of 10% of assets
being limited to small business loans; (iv) a limit of 35% of an association's
assets on the aggregate amount of consumer loans and acquisitions of certain
debt securities; (v) a limit of 5.0% of assets on the aggregate amount of
non-conforming loans (loans in excess of the specific limitations of HOLA); and
(vi) a limit of the greater of 5.0% of assets or an association's capital on the
aggregate amount of certain construction loans made for the purpose of financing
what is or is expected to become residential property.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. An additional amount may be
lent, equal to 10% of unimpaired capital and surplus, if such loan or extension
of credit is fully secured by readily-marketable collateral. Such collateral is
defined to include certain debt and equity securities and bullion, but generally
25
<PAGE>
does not include real estate. At December 31, 1997, the Bank's limit on loans to
one borrower was $6.8 million. At December 31, 1997, the Bank's largest
aggregate amount of loans to one borrower was $6.1 million, and the second
largest borrower had an aggregate balance of $5.9 million.
QTL Test. HOLA requires a savings association to meet a QTL test. Under the
QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" in certain "qualified thrift investments" in at least 9
months of the most recent 12-month period. "Portfolio assets" means, in general,
an association's total assets less the sum of (i) specified liquid assets up to
20% of total assets, (ii) goodwill and other intangible assets, and (iii) the
value of property used to conduct the association's business. "Qualified thrift
investments" includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and loans for personal, family,
household and certain other purposes up to a limit of 20% of an association's
portfolio assets. Recent legislation broadened the scope of "qualified thrift
investments" to include 100% of an institution's credit card loans, education
loans, and small business loans. A savings association may also satisfy the QTL
test by qualifying as a "domestic building and loan association" as defined in
the Internal Revenue Code of 1986. At December 31, 1997, the Bank maintained
96.9% of its portfolio assets in qualified thrift investments. The Bank had also
met the QTL test in all of the prior 12 months and was, therefore, a qualified
thrift lender.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (i) engaging in any new activity not
permissible for a national bank, (ii) paying dividends not permissible under
national bank regulations, (iii) obtaining new advances from any FHLB, and (iv)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the BHC Act. If the savings association does not re-qualify under the QTL
test within the three-year period after it failed the QTL test, it would be
required to terminate any activity and to dispose of any investment not
permissible for a national bank and would have to repay as promptly as possible
any outstanding advances from an FHLB. A savings association that has failed the
QTL test may re-qualify under the QTL test and be free of such limitations, but
it may do so only once.
Capital Requirements. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3.0% of core capital to such adjusted total assets, and a
risk-based capital ratio requirement of 8.0% of core and supplementary capital
to total risk-based assets. The 3.0% core capital requirement has been
effectively superseded by the OTS' prompt corrective action regulations, which
impose a 4.0% core capital requirement for treatment as an "adequately
capitalized" thrift and a 5.0% core capital requirement for treatment as a "well
capitalized" thrift. See "- Prompt Corrective Regulatory Action." The OTS and
the federal banking regulators have proposed amendments to their minimum capital
regulations to provide that the minimum leverage capital ratio for a depository
institution that has been assigned the highest composite rating of 1 under the
Uniform Financial Institutions Ratings System will be 3% and that the minimum
leverage capital ratio for any other depository institution will be 4%, unless a
higher leverage capital ratio is warranted by the particular circumstances or
risk profile of the depository institution. In determining the amount of
risk-weighted assets for purposes of the risk-based capital requirement, a
savings association must compute its risk-based assets by multiplying its assets
and certain off-balance sheet items by risk-weights, which range from 0% for
cash and obligations issued by the United States Government or its agencies to
100% for consumer and commercial loans, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
26
<PAGE>
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible debt securities, subordinated
debt and intermediate preferred stock and the allowance for loan and lease
losses. The allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount
of supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has adopted regulations that require a savings association with
"above normal" interest rate risk to deduct a portion of capital from its total
capital to account for the "above normal" interest rate risk when determining
its compliance with the risk-based capital requirement. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) resulting from a
hypothetical 2.0% increase or decrease in market rates of interest, divided by
the estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. At the times when the 3-month
Treasury bond equivalent yield falls below 4.0%, an association may compute its
interest rate risk on the basis of a decrease equal to one-half of that Treasury
rate rather than on the basis of 2.0%. A savings association whose measured
interest rate risk exposure exceeds 2.0% would be considered to have "above
normal" risk. The interest rate risk component is an amount equal to one-half of
the difference between the association's measured interest rate risk and 2.0%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Any required deduction for
interest rate risk becomes effective on the last day of the third quarter
following the reporting date of the association's financial data on which the
interest rate risk was computed. The regulations authorize the Director of the
OTS to waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has indefinitely deferred the implementation of the
interest-rate risk component in the computation of an institution's risk-based
capital requirements. The OTS continues to monitor the interest rate risk of
individual institutions and retains the right to impose additional capital
requirements on individual institutions. At December 31, 1997 the Bank was not
required to maintain any additional risk-based capital under this rule.
At December 31, 1997 the Bank met each of the OTS minimum requirements, in
each case on a fully phased-in basis. The table below presents the Bank's
regulatory capital as compared to the OTS regulatory capital requirements at
December 31, 1997:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
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........... $73,907 10.04% $ 73,907 10.04% $ 73,907 19.70%
Deduct servicing rights.................... 17 -- 17 -- 17 --
Deduct equity investments.................. -- -- -- -- 125 0.03
Deduct goodwill............................ 29,173 3.96 29,173 3.96 29,173 7.78
Add qualifying general loan loss allowance,
as limited by regulation................ -- -- -- -- 2,807 0.75
Add net unrealized loss on securities
available for sale, net of taxes........ 597 0.08 597 0.08 597 0.16
--------- ---- ------ --- ---- ---------- ----
Capital, as calculated..................... 45,314 6.15 45,314 6.15 47,996 12.79
Capital, as required....................... 11,046 1.50 31,501 4.00 30,015 8.00
--------- ---- ------ --- ---- ---------- ----
Excess..................................... $ 34,268 4.65% $ 13, 813 2.15% $ 17,981 4.79%
========= ==== ====== === ==== ========== ====
</TABLE>
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger, and other
distributions charged
27
<PAGE>
against capital. At least 30-days written notice must be given to the OTS of a
proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (i)
100% of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (ii) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Bank would be prohibited from
making any capital distribution if, after the distribution, the Bank failed to
meet its minimum capital requirements, as described above. See "- Prompt
Corrective Regulatory Action." The OTS has proposed amendments of its capital
distribution regulations to reduce regulatory burdens on savings associations.
If adopted as proposed, certain savings associations will be permitted to pay
capital distributions within the amounts described above for Tier 1 institutions
without notice to, or the approval of, the OTS. However, a savings association
subsidiary of a savings and loan holding company, such as the Association, will
continue to have to file a notice unless the specific capital distribution
requires an application.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, certain bankers' acceptances,
specified United States Government, state or federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of its
net withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4.0%. Monetary penalties may be imposed
for failure to meet this liquidity requirement. The Bank's liquidity ratio at
December 31, 1997 was 23.5%, which exceeded the applicable requirement. The Bank
has never been subject to monetary penalties for failure to meet its liquidity
requirement.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (i) in states that expressly authorize branches of savings
associations located in another state and (ii) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "- QTL Test." The authority for a federal savings association to
establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in
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<PAGE>
connection with its examination of a savings association, to assess the
association's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
association. The CRA also requires all institutions to make public disclosure of
their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most
recent examination.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (i) a lending test, to evaluate the institution's record of making
loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing and programs benefiting low or moderate income individuals and
businesses; and (iii) a service test, to evaluate the institution's delivery of
services through its branches, automated teller machines ("ATMs") and other
offices. Small savings associations are to be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.
The term "small savings association" is defined as including associations with
less than $250 million in assets or an affiliate of a holding company with
banking and thrift assets of less than $1.0 billion, which would include the
Bank. The amended CRA regulations also clarify how an institution's CRA
performance would be considered in the application process.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (i) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (ii) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
underwriting standards, that are substantially the same or at least as favorable
to the association as those prevailing at the time for comparable transactions
with nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers
and 10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (i) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (ii) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
association's capital. An exception is made for loans to executive officers made
on the same terms widely available to employees of the association or on terms
that are not preferential to executive officers. In addition, extensions of
credit to insiders in excess of certain limits must be approved by the
association's board of directors.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings associations and has the authority to bring
enforcement action against all "institution-affiliated parties," including any
controlling stockholder or any stockholder, attorney, appraiser and accountant
who knowingly or
29
<PAGE>
recklessly participates in any violation of applicable law or regulation or
breach of fiduciary duty or certain other wrongful actions that causes or is
likely to cause a more than a minimal loss or other significant adverse effect
on an insured savings association. Civil penalties cover a wide range of
violations and actions and range from $5,000 for each day during which
violations of law, regulations, orders and certain written agreements and
conditions continue, up to $1,000,000 per day for such violations if the person
obtained a substantial pecuniary gain as a result of such violation or knowingly
or recklessly caused a substantial loss to the institution. Criminal penalties
for certain financial institution crimes include fines of up to $10 million and
imprisonment for up to 30 years. In addition, regulators have substantial
discretion to take enforcement action against an institution that fails to
comply with its regulatory requirements, particularly with respect to its
capital requirements. Possible enforcement actions range from the imposition of
a capital plan and capital directive to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings association. If action is not taken by the
Director of the OTS, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. The FDI Act, as amended by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Riegle
Community Development and Regulatory Improvement Act of 1994 ("Community
Development Act"), requires the OTS, together with the other federal bank
regulatory agencies, to prescribe standards, by regulations or guidelines,
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality, earnings, stock valuation and compensation, fees and
benefits and such other operational and managerial standards as the agencies
deem appropriate. The OTS and the federal bank regulatory agencies adopted,
effective August 9, 1995, a set of guidelines prescribing safety and soundness
standards pursuant to FDICIA as amended. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. The OTS and the other agencies determined
that stock valuation standards were not appropriate. In addition, the OTS
adopted regulations that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. See "- Prompt Corrective Regulatory Action." If an institution fails to
comply with such an order, the OTS may seek to enforce such order in judicial
proceedings and to impose civil money penalties. The OTS and the federal bank
regulatory agencies also proposed guidelines for asset quality and earnings
standards.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (i) are secured by real estate or (ii) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations
require each savings association to establish and maintain written internal real
estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying OTS guidelines, which include loan-to-value ratios
for the different types of real estate loans. Associations are also permitted to
make a limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.
30
<PAGE>
Prompt Corrective Regulatory Action. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, based upon the five
categories of institutions established by FDICIA: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and critically undercapitalized," which are categories defined by the
institution's regulatory capital ratios. Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to any undercapitalized institution,
including restrictions on growth of assets and other forms of expansion. The OTS
could also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors. Generally, subject to a narrow exception,
FDICIA requires the applicable banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. Under the
OTS regulations, generally, a federally chartered savings association is treated
as well capitalized if its total risk-based capital ratio is 10% or greater, its
Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5%
or greater, and it is not subject to any order or directive by the OTS to meet a
specific capital level. As of December 31, 1997, the Association met the
criteria for being considered "well capitalized" by the OTS under the prompt
corrective action regulations.
Where appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.
Insurance of Deposit Accounts. The deposits of the Bank are insured by the
Bank Insurance Fund ("BIF") except for those deposits attributable to the Bank's
acquisition of deposits from institutions insured by the Savings Association
Insurance Fund ("SAIF"), including First Nationwide
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the new assessment system, which began in 1993,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (a)
well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Under the regulation,
there are nine assessment risk classifications (i.e., combinations of capital
groups and supervisory subgroups) to which different assessment rates are
applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%. As a result of the
Deposit Insurance Funds Act of 1996 (the "Funds Act"), both the BIF and the SAIF
currently satisfy the reserve ratio requirement. If the FDIC determines that
assessment rates should be increased, institutions in all risk categories could
be affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. If such action is taken by
the FDIC, it could have an adverse effect on the earnings of the Bank.
The Funds Act also amended the FDIA to expand the assessment base for the
payments on the FICO bonds. Beginning January 1, 1997, the assessment base for
the FICO bonds included the deposits of both BIF- and SAIF-insured institutions.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for
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<PAGE>
the semi-annual period beginning on January 1, 1997 was 0.0130% for
BIF-assessable deposits and 0.0648% for SAIF-assessable deposits. For the
semi-annual period beginning on July 1, 1997, the rates of assessment for the
FICO bonds was 0.0126% for BIF-assessable deposits and 0.0630% for
SAIF-assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of the Treasury to conduct
a study of relevant factors with respect to the development of a common charter
for all insured depository institutions and abolition of separate charters for
banks and thrifts and to report the Secretary's conclusions and findings to the
Congress. The Secretary of the Treasury recommended to the Congress that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting bank holding companies to engage in
such non-financial activities, the Secretary of the Treasury recommended that
the thrift charter be retained. Proposed legislation agreed to in March 1998 by
the House Committee on Banking and Financial Services and the House Committee on
Commerce provides for the retention of the thrift charter and for the merger of
the BIF and the SAIF on January 1, 2000.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of the regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of New York, is required to acquire and hold
shares of capital stock in the FHLB of New York in an amount at least equal to
the greater of 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 1/20 of
its advances (borrowings) from the FHLB of New York. The Bank was in compliance
with this requirement with an investment in FHLB of New York stock at December
31, 1997, of $2.8 million. Any advances from a FHLB must be secured by specified
types of collateral, and all long-term advances may be obtained only for the
purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced.
Federal Reserve System. The Bank is subject to provisions of the FRA and
the FRB's regulations pursuant to which depository institutions may be required
to maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3.0%
of the aggregate of transaction accounts up to $47.8 million. The amount of
aggregate transaction accounts in excess of $47.8 million are currently subject
to a reserve ratio of 10.0%, which ratio the FRB may adjust between 8.0% and
12%. The FRB regulations currently exempt $4.7 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy the liquidity requirements imposed by the OTS. FHLB System members are
32
<PAGE>
also authorized to borrow from the Federal Reserve discount window, but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
33
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
William C. Myers - Mr. Myers is the Chairman of the Board, President and
Chief Executive Officer of the Company. Mr. Myers also serves as Chairman of the
Board of MSBFS and Travel. Effective October 1, 1993, Mr. Myers was elected
Chairman of the Board of Directors of the Company and the Bank. Mr. Myers joined
the Bank in 1971. Mr. Myers is 52 years old, and his term as director expires in
1998.
Gill Mackay - Mr. Mackay was appointed Executive Vice President, Chief
Operating Officer and Treasurer on January 1, 1993. Prior to that, Mr. Mackay
served as Senior Vice President, Finance and Chief Financial Officer since 1989.
He joined the Bank in 1984 as Assistant Vice President of Accounting. Mr. Mackay
is 51 years old.
Anthony J. Fabiano - Mr. Fabiano was appointed Senior Vice President and
Chief Financial Officer effective January 1, 1996. Prior to that, Mr. Fabiano
served as Vice President, Finance and Chief Financial Officer since January 1,
1993. He joined the Bank in May 1992 as Vice President, Finance. Prior to that,
he was a senior manager with KPMG Peat Marwick, a public accounting firm. Mr.
Fabiano is 37 years old.
Karen S. DeLuca - Mrs. DeLuca joined the Bank in 1985 and has served as the
Corporate Secretary since 1991. Prior to that, she served as the Assistant
Corporate Secretary. Mrs. DeLuca is 49 years old.
The term of office of each executive officer extends until the Annual
Meeting of the Board of Directors and until his or her successor is elected and
duly qualified, the office is abolished or he or she is removed. Except as
described in Part III hereof, there are no agreements or understandings between
the Company and any person pursuant to which such person has been elected as an
executive officer.
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<PAGE>
ITEM 2. PROPERTIES
The Company's offices are located at 35 Matthews Street, Goshen, New York.
At December 31, 1997, the Bank conducted its business through 16 full-service
banking offices as follows:
<TABLE>
<CAPTION>
Net Book
Value at Deposits at
Leased/ Lease December December
Location Owned Expiration Date 31, 1997 31, 1997
- ----------------------------- ----------------- ------------------ ---------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Home Office
35 Matthews Street Owned N/A $ 3,639 $ 40,551
Goshen, NY 10924
4 South Street Owned N/A 1,463 109,129
Middletown, NY 10940
Route 211 East Building is owned, 9/15/2015 708 55,456
Middletown, NY 10940 land is leased
205 East Main Street Owned N/A 981 83,557
Port Jervis, NY 12771
300 Route 17M & Still Road Owned N/A 651 43,835
Monroe, NY 10950
156 A-B Dolson Avenue Leased 5/31/2002(1) 11 27,615
Middletown, NY 10940
800 Broadway Owned N/A 479 18,441
Newburgh, NY 12550
Union Avenue Leased 11/30/04 40 12,849
Newburgh, NY 12550
401 Chester Mall Building is owned, 6/30/2008 490 16,827
Chester, NY 10918 land is leased
Rt. 32 Estrada Road Owned N/A 571 20,371
Central Valley, New York
9 Mahopac Plaza Owned N/A 387 37,124
Mahopac, NY 10541
96 Gleneida Avenue Owned N/A 349 33,456
Carmel, NY 10512
21 East Main Street Owned N/A 222 25,963
Washingtonville, NY 10992
51 Main Street Owned N/A 435 35,388
Warwick, NY 10990
285 Broadway Owned N/A 583 50,055
Monticello, NY 12701
74 North Main Street Owned N/A 209 62,815
Liberty, NY 12754 --------- ----------
Total $ 11,218 $ 673,432
========== ==========
</TABLE>
- ------------------------
(1) The Bank holds two five-year options to renew the lease until May 2012.
(2) The Bank's lease agreements are operating leases. The net book value at
December 31, 1997 represents the net book value of leasehold improvements
on the leased properties.
35
<PAGE>
ITEM 3. 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, 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 in excess of 5% of the outstanding shares of
the Common Stock and purport to represent a class consisting of all stockholders
except the stockholder defendants, allege that the defendant directors breached
their duty of care by failing to become fully informed about the expression of
interest of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to
stockholders by not notifying the public or the Company's stockholders of
HUBCO's expression of interest; and breached their duty of good faith and fair
representation by, among other things, not investigating whether the Acquisition
constituted a reasonable alternative for building stockholder value. The
plaintiffs further allege that the Company's offering of Common Stock in
connection with the Acquisition (the "Common Stock Offering") was not intended
to enhance stockholder value, but rather was for the purpose of diluting the
ownership and voting strength of existing stockholders and further entrenching
existing management and the Board. The plaintiffs sought to enjoin the Common
Stock Offering and are also seeking damages equal to the difference between the
market price of the Common Stock on September 7, 1995, and $35 (approximately
$14,989,000 in the aggregate) or, in the alternative, the difference between the
market price of the Common Stock on October 26, 1995, and $25 (approximately
$7,394,000 in the aggregate), including interest and attorneys' and other
professional fees. In connection with this action, plaintiffs filed a motion
seeking expedited discovery and scheduling. On December 6, 1995, in response to
the plaintiffs' motion for expedited proceedings, which was treated by the Court
as an application for a temporary restraining order with respect to the Common
Stock Offering, the Court denied the plaintiffs' application for such order. On
December 12, 1995, the court denied the plaintiffs' motion for re-argument. On
December 18, 1995, the Company filed an answer denying all of the substantive
allegations in the complaint and seeking, among other things, an order
dismissing the complaint with prejudice. Plaintiffs amended their complaint to
include allegations relating to an unsolicited merger proposal received by the
Company from the First Empire State Corporation ("First Empire") on December 28,
1995. Specifically, the amended complaint alleges, among other things, that the
Company's Board of Directors, in breach of its duties of care, loyalty and
disclosure, relied on the advice of Bear, Stearns & Co., Inc. ("Bear Stearns"),
the Company's financial advisor and underwriter for the Offering, knowing that
Bear Stearns could not render independent financial advice regarding the First
Empire proposal. The plaintiffs are seeking alternative damages based on these
allegations in an amount equal to the difference between the market price of the
Common Stock on December 28, 1995 and $26 (approximately $11,560,000 in the
aggregate). The Company filed its amended answer on February 1, 1996 denying all
of the substantive allegations in the amended complaint and seeking, among other
things, an order dismissing the amended complaint with prejudice. The parties
have engaged in substantial written discovery, and plaintiffs have deposed all
of the directors and 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. The Company has requested oral argument on the motion. In the meantime,
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
36
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been traded on the American Stock Exchange under the
symbol "MBB" since September 19, 1996. Prior to that time, the Common Stock had
been traded on the NASDAQ National Market System under the symbol "MSBB" since
September 3, 1992. On March 25, 1998, the last reported high and low sale prices
of the Common Stock, as reported on the American Stock Exchange, were $36.50 and
$36.50, respectively. As of December 31, 1997, the Company had approximately 601
stockholders of record. The following table sets forth the high and low closing
sale prices for the Common Stock, and the cash dividends declared with respect
thereto, for the periods indicated.
<TABLE>
<CAPTION>
Price Range Cash Dividend
------------------- Declared per
High Low Common Share
---- --- ------------
<S> <C> <C> <C>
Fiscal year ended December 31, 1995:
First Quarter.......................... $ 23 $ 20 1/2 $ 0.15
Second Quarter......................... 24 1/2 22 0.15
Third Quarter.......................... 26 3/4 24 0.15
Fourth Quarter......................... 27 1/4 17 1/2 0.15
Fiscal year ended December 31, 1996:
First Quarter.......................... 22 17 0.15
Second Quarter......................... 18 1/4 15 0.15
Third Quarter.......................... 17 1/2 15 3/4 0.15
Fourth Quarter......................... 19 5/8 15 1/2 0.15
Fiscal year ended December 31, 1997:
First Quarter.......................... 20 1/2 16 3/4 0.15
Second Quarter......................... 20 1/8 16 3/8 0.15
Third Quarter.......................... 28 7/8 19 7/8 0.15
Fourth Quarter......................... 35 1/4 27 1/4 0.15
</TABLE>
The Company has paid a regular quarterly cash dividend on its Common Stock
since April 30, 1993 and declared a cash dividend of $0.15 per share for each of
the first, second, third and fourth quarters of 1997, 1996 and 1995. The Board
of Directors of the Company presently intends to continue the payment of regular
quarterly cash dividends on the Common Stock. However, the timing and amount of
future dividends will be within the discretion of the Board of Directors of the
Company and will depend on the earnings of the Company and its subsidiaries,
their financial condition, liquidity and capital requirements, applicable
governmental regulations and policies and other factors deemed relevant by the
Board of Directors.
The ability of savings associations to pay dividends is regulated by OTS
regulations and, in certain cases, requires OTS approval. The OTS also has the
authority to prohibit a savings association from engaging in an activity that,
in the OTS' opinion, constitutes an unsafe or unsound practice for conducting
business. Depending upon the financial condition of a savings association,
payment of dividends could be deemed to constitute such an unsafe or
37
<PAGE>
unsound practice. In addition, a savings association may not pay a dividend or
otherwise make a capital distribution if the payment thereof would cause such
savings association to fail to satisfy its capital requirements. See "Regulation
- -- Regulation of Federal Savings Associations -- Limitation on Capital
Distributions."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth selected consolidated historical financial
data of the Company at or for (i) each of the years in the four year period
ended December 31, 1997 and the year ended September 30, 1993 (the "Year End
Data") and (ii) the 12 months ended December 31, 1993. The "Financial Condition
Data," "Operations Data" and certain "Performance Ratios" contained in the Year
End Data at or for the year ended December 31, 1997 and 1996, has been derived
from financial statements audited by KPMG Peat Marwick LLP, the Company's
independent auditors. The historical "Financial Condition Data," "Operations
Data" and certain "Performance Ratios" contained in the Year End Data for each
of the years in the two years ended December 31, 1995 and for the year ended
September 30, 1993 and the "Financial Condition Data" at December 31, 1993 are
derived from financial statements that have been audited by Nugent & Haeussler,
P.C., the Company's independent public accountants for those periods. All other
information contained in the Year End Data, and the information at or for the 12
months ended December 31, 1993 are unaudited.
38
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
Year Ended 12 Months At or for the
December 31, Ended Year Ended
--------------------------------------------------- December 31, September 30,
1997 1996 1995 1994 1993(1) 1993
--------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Financial Condition Data: (In thousands)
Total assets............. $ 765,367 $ 820,916 $ 454,126 $ 405,928 $ 409,429 $ 417,332
Investments held to
maturity............... -- -- -- 31,908 143,448 162,699
Securities available for
sale................... 54,082 50,685 75,580 50,720 6,115 5,268
Mortgage-backed
securities............. 225,680 323,428 49,775 45,668 34,437 26,323
Loans, net............... 391,429 338,491 280,512 231,075 182,712 172,270
Deposits................. 673,432 736,161 388,944 354,920 356,931 359,703
Stockholders' equity..... 74,776 70,790 43,996 39,624 43,430 44,055
Operations Data:
Total interest and
dividend income........ 53,164 54,350 29,151 24,514 25,403 26,215
Interest expense......... 28,680 30,793 15,183 10,772 11,281 11,902
--------- --------- --------- --------- --------- ---------
Net interest income.... 24,484 23,557 13,968 13,742 14,122 14,313
Provision for loan losses 1,565 1,400 483 119 355 527
--------- --------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............ 22,919 22,157 13,485 13,623 13,767 13,786
--------- --------- --------- --------- --------- ---------
Net realized gains
(losses) on securities
and loans.............. 378 155 (98) (472) 1,276 1,752
Market value adjustments
on securities held for
sale................... -- -- -- -- (193) (12)
Unrealized loss on loans
held for sale ......... -- -- -- (190) -- --
Service fees and charges. 4,278 3,768 2,248 2,280 2,585 2,542
Other non-interest income 82 104 18 135 71 32
--------- --------- --------- --------- --------- ---------
Non-interest income.... 4,738 4,027 2,168 1,753 3,739 4,314
--------- --------- --------- --------- --------- ---------
Salaries and employee
benefits............... 8,419 8,304 5,771 6,073 6,389 6,373
Occupancy and equipment.. 3,188 3,145 2,415 2,346 2,465 2,557
SAIF recapitalization
assessment............. -- 2,925 -- -- -- --
Restructuring expenses... -- -- -- 1,578 -- --
Termination of
Retirement Plan for
Directors.............. 2,800 -- -- -- -- --
Goodwill
amortization........... 3,662 3,517 137 122 122 122
Other non-interest
expenses............... 5,785 5,478 3,347 3,601 3,722 3,824
--------- --------- --------- --------- --------- ---------
Non-interest expense... 23,854 23,369 11,670 13,720 12,698 12,876
--------- --------- --------- --------- --------- ---------
Income before income tax
expense................ 3,803 2,815 3,983 1,656 4,808 5,224
Income tax expense....... 1,522 1,104 1,622 626 2,165 2,312
--------- --------- --------- --------- --------- ---------
Income before cumulative
effect of accounting
change................. 2,281 1,711 2,361 1,030 2,643 2,912
Cumulative effect of
accounting change (2).. -- -- -- 117 -- 483
--------- --------- --------- --------- --------- ---------
Net income.............. $ 2,281 $ 1,711 $ 2,361 $ 1,147 $ 2,643 $ 3,395
========= ========= ========= ========= ========= =========
</TABLE>
- ------------------------
(1) In July 1993, the Company changed its fiscal year-end from September 30 to
December 31. The three months ended December 31, 1993 represented a
transition period. The Company's 1994 fiscal year began on January 1, 1994.
For purposes of comparing the results of operations for fiscal 1994, the
Company believes it is meaningful to use the 12 months ended December 31,
1993 (unaudited) as the basis for that comparison.
(2 Represents a change in the accounting for investment securities in 1994 and
income taxes in 1993.
39
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
Year Ended 12 Months At or for the
December 31, Ended Year Ended
------------------------------------------------- December 31, September 30,
1997 1996 1995 1994 1993(1) 1993
------- ------- ------- ------- ------------- ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets(2)... 0.29% 0.21% 0.54% 0.28% 0.64% 0.82%
Return on average
stockholders'
equity(2)................... 3.11 2.42 5.62 2.75 6.05 7.82
Average stockholders' equity
to average Assets............ 9.23 8.48 9.52 10.26 10.58 10.44
Stockholders' equity to total
assets........................ 9.77 8.62 9.69 9.76 10.61 10.56
Average interest rate spread.. 2.97 2.71 2.77 3.14 3.24 3.25
Net interest margin........... 3.37 3.07 3.35 3.58 3.65 3.67
Operating expenses to average
assets(3)..................... 2.59 2.42 2.61 2.93 3.02 3.07
Dividend payout ratio(4)...... 150.00 272.73 43.17 69.70 20.98 10.93
Tangible book value per share
at end of Period.............. $ 13.42 $ 11.05 $ 26.04 $ 22.32 $ 24.57 $ 24.12
Basic earnings per share (2).. 0.40 0.22 1.46 0.70 1.53 1.93
Diluted earnings per share(2). 0.40 0.22 1.42 0.68 1.48 1.88
Regulatory Capital Ratios of
The Bank (5)
Tier 1 leverage capital....... 6.2% 5.4% 9.7% 11.0% 10.4% 10.3%
Total risk-based capital...... 12.8 13.1 19.1 21.8 23.8 24.0
Asset Quality Ratios and
Other Data
Total non-performing loans.... $ 3,488 $ 4,775 $ 2,961 $ 1,766 $ 1,158 $ 978
Foreclosed real estate........ 2,443 915 806 716 1,301 1,397
------- ------- ------- ------- ------- -------
Total non-performing assets... $ 5,931 $ 5,690 $ 3,767 $ 2,482 $ 2,459 $ 2,375
======= ======= ======= ======= ======= =======
Ratio of non-performing loans
to total Loans................ 0.89% 1.40% 1.05% 0.76% 0.63% 0.56%
Ratio of non-performing
assets to total Assets........ 0.77 0.69 0.83 0.61 0.60 0.57
Ratio of net charge-offs
during the period to average
loans outstanding during the
period........................ 0.20 0.36 0.11 0.06 0.16 0.18
Ratio of allowance for loan
losses to net loans
receivable at the end of the
Period...................... 0.72 0.58 0.59 0.63 0.80 0.83
Ratio of allowance for loan
losses to
Total non-performing assets
at the end of the period...... 47.33 34.45 44.04 58.78 59.62 60.51
Ratio of allowance for loan
losses to non-performing
loans at the end of the Period 80.48 41.05 56.03 82.62 126.60 146.93
</TABLE>
- ------------------------
(1) In July 1993, the Company changed its fiscal year-end from September 30 to
December 31. The three months ended December 31, 1993 represented a
transition period. The Company's 1994 fiscal year began on January 1, 1994.
For purposes of comparing the results of operations for fiscal 1994, the
Company believes it is meaningful to use the 12 months ended December 31,
1993 (unaudited) as the basis for that comparison.
(2) Includes $2.8 million in non-recurring expenses related to the termination
of the Board Plan and $330,000 of merger related expenses in 1997,a $2.9
million pre-tax charge for SAIF assessment in 1996 and a $1.6 million
pre-tax charge for restructuring expenses in the fourth quarter of 1994.
(3) Excludes write-downs of real estate owned and, in 1997, $3.1 million of
non-recurring expenses, a $2.9 million SAIF assessment in 1996 and $1.6
million of restructuring expenses in 1994.
(4) Dividends declared per share divided by earnings per share.
(5) For periods prior to 1995, the ratios are calculated under the regulatory
capital regulations of the FDIC, which are substantially identical to the
OTS capital requirements as applied to the Bank.
40
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is designed to provide a better understanding of
the results of operations and the financial condition of the Company. This
discussion should be read in conjunction with the information included under
"Selected Consolidated Financial Information" and "Business" and the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Form 10-K.
General
In connection with the Conversion of the Bank from a mutual savings bank to
a stock savings bank on September 3, 1992, the Company sold 1,840,000 shares of
Common Stock at $10.00 per share to the public and utilized $8.4 million of the
$16.9 million net proceeds from the Conversion offering to acquire all of the
common stock of the Bank. On January 10, 1996, the Company sold 1,100,000 shares
of Common Stock at $18 per share and 600,000 shares of its Series A Preferred
Stock at $21.60 per share. On February 7, 1996 the Company sold an additional
105,000 shares of Common Stock pursuant to the underwriters' exercise of their
over-allotment option. The issuance and sales of the shares of Common Stock and
Series A Preferred Stock on January 10 and February 7 are hereinafter referred
to, collectively, as the "Offering." Net proceeds from the Offering amounted to
approximately $32.0 million. The purpose of the Offering was to raise a
significant portion of the additional capital necessary to permit the Bank to
qualify as "adequately capitalized" for regulatory capital purposes immediately
following the Acquisition.
Prior to the fourth quarter of 1997, Management's strategy was 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, from time to time, approached financial institutions in its market areas
seeking to acquire one or more branches from such institutions and submitted
proposals to acquire one or more branches from such other institutions. In 1995,
the Bank initiated discussions with the seller of the Central Valley branch,
which resulted in the signing of a definitive agreement to acquire that branch
in April 1995. The acquisition of that branch closed on November 10, 1995, with
the Bank thereby assuming approximately $21.8 million in deposits. In addition,
the Company entered into the First Nationwide Agreement during 1995. The
Acquisition closed on January 12, 1996 with the Bank assuming $414.8 million of
deposits. The Bank also acquired the branch facilities and operating assets at a
purchase price of $2.9 million and certain deposit-related loans with a face
value of $1.0 million. In deploying the funds acquired by the Bank through
acquisitions, the Bank has emphasized the origination of one- to four-family
residential mortgage loans and commercial mortgage loans while seeking to limit
credit and interest rate risk. The Bank generally limits its lending activities
to its market area and retains only ARM loans in its portfolio and sells fixed
rate loans that it originates in the secondary market.
On December 16, 1997, the Company announced the signing of the Merger
Agreement by and among HUBCO, the Company, and the Bank. The Merger Agreement
provides for the Company to be merged 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), and
Lafayette American Bank, a Connecticut-based bank ("Lafayette"). Prior to
closing the Merger, HUBCO expects to complete its pending acquisition of PFC and
PFC's subsidiary, 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.
Upon completion of the Merger, each share of MSB Common Stock, other than
Excluded Shares (as defined below), will be converted into a number of shares of
HUBCO Common Stock. The Merger Agreement provides that the Exchange Ratio will
be equal to $36.02 divided by the Median Pre-Closing Price of HUBCO Common
Stock, provided that the Median Pre-Closing Price is between $34.97 and $37.13.
("Median Pre-Closing Price" is defined generally as the median of the closing
prices of HUBCO Common Stock after discarding the four lowest and four highest
closing prices during the ten-trading day period ending on the day the
41
<PAGE>
parties receive final federal bank regulatory approval for the Merger.) A
"Minimum Exchange Ratio" of 0.97 will apply if the Median Pre-Closing Price is
greater than $37.13 and a "Maximum Exchange Ratio" of 1.03 will apply if the
Median Pre-Closing Price is less than $34.97.
HUBCO currently holds all the outstanding shares of MSB Preferred Stock.
All MSB Preferred Stock held by HUBCO will be canceled in the Merger. While
HUBCO does not currently anticipate transferring any of the MSB Preferred Stock
if it were to transfer any MSB Preferred Stock, the transferred shares (with
certain limited exceptions) would be converted in the Merger into shares of a
newly created series of HUBCO preferred stock having terms substantially
identical to the MSB Preferred Stock.
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 I, Item
III, "Legal Proceedings."
Interest Rate Sensitivity
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income while a positive gap would tend to adversely
affect net interest income.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. The amounts of assets and liabilities
which reprice or mature during a particular period were determined in accordance
with the earlier of the term to repricing or the contractual terms of the asset.
The table is intended to provide an approximation of the projected
repricing of assets and liabilities at December 31, 1997 on the basis of
contractual maturities, anticipated prepayments and scheduled rate adjustments
within a three-month period and subsequent selected time intervals. The loan
amounts in the table reflect principal balances expected to be redeployed and/or
repriced as a result of contractual amortization and contractual rate
adjustments on adjustable-rate loans. Assumed annual run-off rates for Money
Market accounts were 50% in the three months to one year category and 50% in the
one to three year category and for NOW accounts and regular savings and
statement savings accounts were 60% in the one to three year category and 20%
thereafter. The assumptions used are based on historical experience and other
data available to the Company and may not be indicative of future run-off rates,
which are impacted by, among other things, customer preferences and competitive
pricing decisions. Certain shortcomings are inherent in the methods of analysis
presented in the table setting forth the maturing and repricing of
interest-earning assets and interest-bearing liabilities. For example, although
certain assets
42
<PAGE>
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates while interest rates on other types
of assets may lag behind changes in market rates. Additionally, certain assets,
such as adjustable-rate loans, have features which restrict changes in interest
rates both on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to make scheduled payments on their
adjustable-rate loans may decrease in the event of an interest rate increase. As
a result, the actual effect of changing interest rates may differ from that
presented in the table.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------------------------------------------------------
More Than More Than More Than More Than
3 Months 3 Months 1 Year 3 Years 5 Years More Than
and Less to 1 Year to 3 Years to 5 Years to 10 Years 10 Years Total
-------- --------- ---------- ---------- ----------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1) ...... $ 51,713 $ 97,643 $ 73,176 $ 67,109 $ 42,907 $ 26,863 $359,411
Other loans(1) ......... 10,194 4,773 9,927 4,793 436 502 30,625
Federal funds........... 21,065 -- -- -- -- -- 21,065
Investment
securities(2) ........ 10,000 6,101 3,202 240 5,639 29,237 54,419
Mortgage-backed
securities(2) ........ 13,441 33,010 84,670 64,350 $ 24,008 $ 6,892 $226,371
---------- -------- -------- ---------- -------- -------- --------
Total interest-
earning assets...... $ 106,413 $141,527 $170,975 $ 136,492 $ 72,990 $ 63,494 691,891
Less:
Net deferred loan fees.. -- -- -- -- -- 712 712
---------- -------- -------- ---------- -------- -------- --------
Net interest-
earning assets...... $ 106,413 $141,527 $170,975 $ 136,492 $ 72,990 $ 64,206 $692,603
---------- -------- -------- ---------- -------- -------- --------
Interest-bearing
liabilities:
Savings accounts........ -- -- 119,269 39,755 39,755 -- 198,779
Super NOW accounts...... -- -- 24,114 8,038 8,038 -- 40,190
Money market accounts... -- 26,297 26,297 -- -- -- 52,594
Time deposits........... 85,520 168,200 63,002 13,186 -- -- 329,908
ESOP obligations........ 182 -- -- -- -- -- 182
Escrow accounts......... 1,686 561 -- -- -- -- 2,247
---------- -------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities... $ 87,388 $195,058 $232,682 $ 60,979 $ 47,793 $ -- $623,900
---------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap $ 19,025 $(53,531) $(61,707) $ 75,513 $ 25,197 $ 64,206 $ 68,703
Cumulative interest
sensitivity gap....... 19,025 (34,506) (96,213) (20,700) 4,497 68,703
Cumulative interest
sensitivity gap as a
percent of total assets 2.49% (4.51)% (12.57)% (2.70)% 0.59% 8.98%
Cumulative net interest-
earning assets as a
percent of interest-
bearing liabilities... 121.77% 87.78% 81.32% 96.40% 100.72% 111.01%
</TABLE>
- ------------------------
(1) For purposes of the gap analysis, mortgage and other loans are not reduced
by the allowance for loan losses but are reduced for non-accrual loans.
(2) For purposes of the gap analysis, securities and mortgage-backed securities
are shown at amortized cost.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the
Company's balance sheets and statements of operations at and for the years ended
December 31, 1997, 1996 and 1995, 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
43
<PAGE>
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
daily balances. The average balances of securities available for sale are
calculated based on amortized cost. The yields and costs include fees which are
considered adjustments to yields.
44
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- ------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans,
net(1)................. $ 331,437 $ 26,908 8.12% $ 285,365 $ 22,552 7.90% $ 241,937 $ 18,526 7.66%
Other loans(1)........... 26,502 2,714 10.24 19,561 2,084 10.65 12,775 1,305 10.22
Mortgage-backed
securities(2).......... 278,538 18,165 6.52 369,995 24,293 6.57 58,080 3,253 5.60
Other securities......... 56,642 3,509 6.20 65,354 4,144 6.34 91,275 5,339 5.85
Federal funds, overnight. 34,449 1,868 5.42 26,467 1,277 4.82 12,712 728 5.73
-------- --------- --------- --------- --------- --------
Total interest-earning
assets................. 727,568 53,164 7.31 766,742 54,350 7.09 416,779 29,151 6.99
Non-interest earning assets 66,759 67,561 24,497
-------- ---------
Total assets............. $794,327 $ 834,303 $ 441,276
======== ========= =========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
Savings accounts....... $202,563 $ 6,554 3.24% $ 201,414 $ 6,170 3.06% $ 131,782 3,943 2.99%
Super NOW accounts..... 39,745 752 1.89 41,107 791 1.92 14,711 277 1.88
Money market accounts.. 52,050 2,147 4.12 50,101 1,819 3.63 40,241 1,406 3.49
Time deposits.......... 365,573 19,200 5.25 408,958 21,930 5.36 150,554 8,116 5.39
Borrowings............... 66 4 6.06 561 31 5.53 21,248 1,358 6.39
ESOP obligation.......... 334 23 6.89 620 52 8.39 925 83 8.97
-------- --------- --------- --------- --------- --------
Total interest-bearing
Liabilities............ 660,331 28,680 4.34 702,761 30,793 4.38 359,461 15,183 4.22
Other liabilities.......... 60,709 60,764 39,790
-------- -------- ---------
Total liabilities..... 721,040 763,525 399,251
Retained earnings.......... 73,287 70,778 42,025
-------- -------- ---------
Total liabilities and
retained earnings... $794,327 $ 834,303 $ 441,276
======== ========= =========
Net interest income/
interest rate spread(3)... $ 24,484 2.97% $ 23,557 2.71% $ 13,968 2.77%
========= ========= ========
Net earning assets/net
interest margin(4)........ $ 67,237 3.37 $ 63,981 3.07 $ 57,318 3.35
======== ========= =========
Ratio of interest-earning
assets to interest-
bearing liabilities........ 1.10x 1.09x 1.16x
</TABLE>
- -----------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Includes mortgage-backed securities available for sale at amortized cost.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
45
<PAGE>
Rate/Volume Analysis
The following table represents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume) and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
Compared to Year Ended Compared to Year Ended
December 31, 1996 December 31, 1995
------------------------------------- ---------------------------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
-------- ------ ------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans net.... $ 3,726 $ 630 $ 4,356 $ 3,416 $ 610 $ 4,026
Other loans........... 714 (84) 630 721 58 779
Mortgage-backed
securities........... (5,965) (163) (6,128) 20,386 654 21,040
Other Securities...... (542) (93) (635) (1,615) 420 (1,195)
Federal funds......... 419 172 591 679 (130) 549
---------- ------ ------- -------- ------- -------
Total............ $ (1,648) $ 462 $(1,186) $ 23,587 $ 1,612 $25,199
---------- ------ ------- -------- ------- -------
Interest-bearing liabilities:
Deposits
Time deposits..... $ (2,286) $ (444) $(2,730) $ 13,857 $ (43) $13,814
Money market
accounts......... 73 255 328 356 57 413
Savings accounts.. 35 349 384 2,131 96 2,227
Super NOW accounts (26) (13) (39) 508 6 514
Borrowings........ (30) 3 (27) (1,165) (162) (1,327)
ESOP obligation... (21) (8) (29) (26) (5) (31)
---------- ------ ------- -------- ------- -------
Total............ $ (2,255) $ 142 $(2,113) $ 15,661 $ (51) $15,610
---------- ------ ------- -------- ------- -------
Net change in net interest
income................. $ 607 $ 320 $ 927 $ 7,926 $ 1,663 $ 9,589
========== ====== ======= ======== ======= =======
</TABLE>
Comparison of Financial Condition at December 31, 1997 and 1996
The Company's total assets were $ 765.4 million at December 31, 1997, as
compared to $820.9 million at December 31, 1996. This decrease is due primarily
to a decrease in deposits. For those same dates, deposits decreased $62.7
million to $673.4 million at December 31, 1997, as compared to $736.2 million at
December 31, 1996. The increases in yields earned were a result of the
redeployment of proceeds from the sale of mortgage-backed and other securities
into the loan portfolio. Securities and mortgage-backed securities available for
sale decreased $94.4 million to $279.8 million at December 31, 1997, as compared
to $374.1 million at December 31, 1996. Loans, net increased $52.9 million to
$391.4 million at December 31, 1997, as compared to $338.5 million at December
31, 1996. Goodwill decreased $3.7 million to $29.2 million at December 31, 1997,
as compared to $32.8 million at December 31, 1996. Real estate owned increased
$1.5 million to $2.4 million at December 31, 1997 as compared to December 31,
1996.
Total stockholders' equity increased $4.0 million to $74.8 million at
December 31, 1997, as compared to $70.8 million at December 31, 1996. This
increase is due primarily to a $4.1 million decrease in the net unrealized loss
on securities available for sale. The Bank's Tier 1 leverage capital ratio was
6.2% at December 31, 1997.
46
<PAGE>
Comparison of Results of Operations
Years Ended December 31, 1997 and 1996
General. Net income for 1997 amounted to $2.3 million as compared to $1.7
million for 1996. The results for 1997 included a pre-tax charge of $2.8 million
related to the termination of the Retirement Plan for the Board of Directors
(the "Board Plan") and $330,000 of merger-related expenses in connection with
the Company's announced Merger with HUBCO (these charges collectively referred
to herein as "non-recurring expenses"). The results for 1996 included a pre-tax
charge of $2.9 million related to the recapitalization of the Savings
Association Insurance Fund ("SAIF").
Net Interest Income. For 1997, net interest income totaled $24.5 million as
compared to $23.6 million for 1996. The interest rate spread was 2.97% and 2.71%
for 1997 and 1996, respectively. For those same periods, the net interest margin
was 3.37% and 3.07%, respectively.
Interest Income. Interest income was $53.2 million for 1997 as compared to
$54.4 million for 1996. The yield earned on interest-earning assets was 7.31%
for 1997 as compared to 7.09% for 1996. This increase in yield was offset by a
decrease of $39.2 million in average interest earnings assets to $727.6 million
for 1997, as compared to $766.7 million for 1996.
The decrease in the balance of average interest-earning assets is due
primarily to a decrease of $41.6 million in the average balances of deposits
1997, as compared to 1996. See "Interest Expense."
Interest income on mortgage loans amounted to $26.9 million in 1997, as
compared to $22.6 million in 1996. This increase is due to a $46.1 million or
16.1% increase in the average balance of mortgage loans to $331.4 million during
1997, as compared to $285.4 million in the prior year. In addition, the average
yield earned on mortgage loans increased to 8.12% in 1997 as compared to 7.90%
for 1996.
The growth in the average balance of mortgage loans was due primarily to
Management's strategy to redeploy funds received in the Acquisition from the
securities portfolio to the loan portfolio and also due to continued loan
demand. The increase in the yield earned during 1997 is primarily a result of a
new ARM product that the Bank began to offer in 1996. These ARMs are primarily
5-year fixed rate loans that convert to 1-year ARMs after the initial 5-year
period. These loans are not offered at introductory rates. The increase in yield
is also due to the repricing of one-year ARMs that were originated in 1994 and
1995 at introductory rates. These ARMs repriced to higher rates due to the
expiration of their initial lower introductory rates.
Interest income on other loans totaled $2.7 million in 1997 as compared to
$2.1 million for the prior year. This increase was primarily due to an increase
in the average balance of other loans to $26.5 million during 1997 as compared
to $19.6 million for 1996. This increase in the average balance of other loans
was partially offset by a 41 basis point decrease in the average yield earned to
10.24% for 1997, as compared to 10.65% for 1996.
Interest income on mortgage-backed securities amounted to $18.2 million for
1997, as compared to $24.3 million in 1996. This decrease was due primarily to a
decrease in the average balance of mortgage-backed securities. During 1997, the
average balance of mortgage-backed securities decreased $91.5 million or 24.7%
to $278.5 million as compared to $370.0 million for 1996. The decrease in the
average balances of mortgage-backed securities was a result of Management's
strategy to redeploy funds currently invested in securities into the loan
portfolio, which typically provides greater yields, and to fund deposit
outflows.
Interest income on other securities totaled $3.5 million in 1997 as
compared to $4.1 million in 1996. This decrease was primarily the result of an
$8.7 million decrease in the average balance of other securities to $56.6
million during 1997 as compared to the prior year. In addition, the yield earned
on these securities decreased to 6.20% during 1997 as compared to 6.34% for
1996. The decrease in the average balance of other securities is a result
47
<PAGE>
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 amounted to $1.9 million for 1997, as
compared to $1.3 million for 1996. This increase in Federal funds interest is
due to a $8.0 million increase in the average balance to $34.4 million, and a 60
basis point increase in the average yield to 5.42%. The increase in the average
balance of Federal funds is a result of the temporary investment of proceeds
from the sale of mortgage-backed and other securities. The securities were sold
to provide sufficient liquidity for loan originations and the anticipated
outflow of time deposits as a result of Management's decision to reduce the
interest rates paid on these deposits (see "Interest Expense").
Interest Expense. Interest expense totaled $28.7 million in 1997 as
compared to $30.8 million for 1996. This decrease is primarily due to a $42.4
million decrease in average interest-bearing liabilities to $660.3 million in
1997, as compared to $702.8 million for 1996. The average cost of
interest-bearing liabilities remained virtually unchanged.
Interest expense on savings accounts increased to $6.6 million in 1997 as
compared to $6.2 million for the prior year. This increase was due to a $1.1
million increase in the average balance of savings accounts to $202.6 million as
compared to 1996 and an 18 basis point increase in the average rate paid on
savings accounts to 3.24%.
Interest expense on time deposits totaled $19.2 million for 1997, as
compared to $21.9 million for 1996. This decrease is due to a $43.4 million or
10.6% decrease in the average balance to $365.6 million and an 11 basis point
decrease in the average rate paid to 5.25% in 1997. The decreases in the average
balances of deposits are due to Management's strategy to reduce the interest
rate paid on certain time deposits. Many of these time deposits were earning a
premium rate. The deposit outflow is also due to disintermediation which is
affecting many of the Bank's peer thrift institutions.
Provision for Loan Losses. The provision for loan losses was $1.6 million
for 1997 as compared to $1.4 million in 1996. Non-performing loans (loans that
are 90 days or more past due) amounted to $3.5 million or 0.89% of total loans
at December 31, 1997, as compared to $4.8 million or 1.40% of total loans at
December 31, 1996. Non-performing assets amounted to $5.9 million or 0.77% of
total assets at December 31, 1997 as compared to $5.7 million or 0.69% of total
assets at December 31, 1996. Real estate owned increased $1.5 million to $2.4
million at December 31, 1997, as compared to $915,000 at December 31, 1996.
The allowance for loan losses amounted to $2.8 million at December 31, 1997
which represented 80.5% of non-performing loans. 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 $718,000 in 1997, as compared to
$1.1 million in 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. For the years ended December 31, 1997 and 1996,
non-interest income totaled $4.7 million and $4.0 million, respectively. This
increase is due to a $510,000 increase in service fees and, a $216,000 increase
in net realized gains on securities sales, which was offset by a $22,000
decrease in other non-interest income. The increases in service fees are due
primarily to changes in MSB's fee structure on deposit products and services.
These changes were made during the third quarter of 1997 as part of a previously
announced reengineering plan.
48
<PAGE>
Non-Interest Expense. Non-interest expense amounted to $20.7 million for
the year ended December 31, 1997, as compared to $20.4 million in 1996
(excluding non-recurring expenses of $3.1 million in 1997 and the SAIF
assessment of $2.9 million in 1996). Salaries and employee benefits increased
$115,000 or 1.4% to $8.4 million for the year ended December 31, 1997. Federal
deposit insurance premiums decreased $466,000 to $275,000 for 1997 as compared
to the same period in 1996. These decreases reflect the lower insurance rates
that resulted from the payment of the SAIF special assessment in the third
quarter of 1996. Included in non-interest expense is a $2.8 million accrual for
benefits that vested upon the termination of the Board Plan. The Board Plan was
terminated in accordance with the Merger Agreement with HUBCO. Other
non-interest expenses totaled $5.2 million in 1997 as compared to $4.7 million
for 1996. This increase is due primarily to writedowns of $96,000 on certain
foreclosed properties to reflect decreases in the asking prices of these
properties in order to accelerate the sales process. In addition, other
non-interest expenses in 1997 also included a charge-off of $181,000 related to
certain official checks and transit items. These items related primarily to
differences encountered during and subsequent to the conversion of depositor
accounts assumed in the acquisition of seven branches from First Nationwide
Bank.
Years Ended December 31, 1996 and 1995
General. Net income for 1996 totaled $1.7 million as compared to $2.4
million in 1995. Net income for 1996 included a pre-tax charge of $2.9 million
related to the special one-time SAIF assessment, which was recognized by the
Company in the third quarter of 1996.
Net Interest Income. Net interest income for 1996 amounted to $23.6 million
as compared to $14.0 million for 1995. The increase in net interest income is
due primarily to the Acquisition as the average balance of net interest-earning
assets increased to $64.0 million from $57.3 million in 1995. The interest rate
spread decreased 6 basis points to 2.71% during 1996 as compared to 2.77% in
1995. The company's net interest margin was 3.07% and 3.35% in 1996 and 1995,
respectively. The decreases in interest rate spread and net interest margin were
due primarily to the First Nationwide Acquisition. The proceeds from the First
Nationwide Acquisition were invested in securities which, in the aggregate,
yield less than the Bank's loan portfolio. The purchases of these securities
were not completed until the last week of January 1996; until such time the
First Nationwide Acquisition and offering proceeds earned interest at the
Federal funds rate of 5.25%. As a result, the Company earned a minimal interest
rate spread on such proceeds during that time. In addition, 68.5% of the
Acquired Deposits were time deposits with an average cost of 5.90%.
Interest Income. Interest income in 1996 totaled $54.4 million as compared
to $29.2 million in 1995. Average interest-earning assets increased $350.0
million to $766.7 million in 1996 compared to $416.8 million in 1995. The
average yields on interest-earning assets were 7.09% and 6.99% in 1996 and 1995,
respectively.
Interest income on mortgage loans amounted to $22.6 million in 1996 as
compared to $18.5 in 1995, an increase of $4.0 million or 21.7%. The average
balance of mortgage loans increased $43.4 million to $285.4 million in 1996 as
compared to $241.9 million in 1995. In addition, the average yield earned on
mortgage loans increased 24 basis points to 7.90% in 1996. The growth in the
average balance of mortgage loans was due primarily to improved demand for the
Bank's adjustable-rate mortgage loans ("ARMs"). In addition, the increase in the
average yield earned was primarily due to higher rates earned on ARMs in 1996.
The Bank's ARMs originated during 1996 are primarily 5-year fixed rate loans
that convert to 1-year ARMs after the initial 5-year period.
Interest income on other loans increased to $2.1 million in 1996 as
compared to $1.3 million for 1995. The average balance of other loans increased
$6.8 million or 53.1% to $19.6 million in 1996 as compared to $12.8 million in
1995. The average yield earned on other loans increased 43 basis points to
10.65% as compared to 10.22% in 1995. The increase in the average balances of
other loans is due to certain consumer loans acquired in the First Nationwide
Acquisition and management's strategy to increase the commercial loan portfolio
in order to increase the Company's interest rate spread.
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<PAGE>
Interest income on mortgage-backed securities totaled $24.3 million in 1996
as compared to $3.3 million in 1995. This increase is due to a $311.9 million
increase in the average balance of mortgage-backed securities to $370.0 million
in 1996. In addition, the average yield on mortgage-backed securities increased
97 basis points to 6.57% in 1996 as compared to 5.60% in 1995. The increases in
the average balance of mortgage-backed securities during 1996 are a result of
the investment of proceeds from the First Nationwide Acquisition and Offering
which totaled $409.6 million.
Interest income on other securities amounted to $4.1 million in 1996, a
decrease of $1.2 million or 22.4% as compared to the $5.3 million earned in
1995. This decrease is due primarily to a $25.9 million decrease in the average
balance to $65.4 million in 1996 as compared to $91.3 million in 1995. The
decrease in the average balance of other securities was partially offset by a 49
basis point increase in the yield earned to 6.34% in 1996. The decrease in the
average balance of other securities is a result of management's strategy to
redeploy funds currently invested in securities into the loan portfolio. Loans
typically provide the Company with greater yields than securities.
Interest Expense. Interest expense in 1996 totaled $30.8 million as
compared to $15.2 million in 1995. The average balance of interest-bearing
liabilities amounted to $702.8 million in 1996 as compared to $359.5 million in
1995. The average cost of these liabilities increased 16 basis points to 4.38%
in 1996. The growth in the average balance of interest-bearing liabilities is a
result of the First Nationwide Acquisition. The Acquired Deposits totaled $414.8
million on January 12, 1996, the closing date of the First Nationwide
Acquisition.
Interest expense on savings accounts amounted to $6.2 million in 1996 as
compared to $3.9 million in 1995. The average balance of savings accounts
increased to $201.4 million in 1996 as compared to $131.8 million in 1995, an
increase of $69.6 million or 52.8%. The average cost of savings accounts
increased seven basis points to 3.06% in 1996 as compared to 2.99% in 1995. The
increase in the average balance of savings accounts is a result of the First
Nationwide Acquisition.
Interest expense on time deposits amounted to $21.9 million in 1996 as
compared to $8.1 million in 1995. The average balance of time deposits increased
$258.4 million to $409.0 million in 1996 as compared to $150.6 million in 1995.
This increase is a result of the First Nationwide Acquisition. The average cost
of time deposits decreased 3 basis points to 5.36% in 1996.
Interest expense on borrowings decreased $1.3 million in 1996 to $31,000 as
compared to $1.4 million in 1995. This decrease is due to a decrease in the
average balance of borrowings of $20.7 million to $561,000. The decrease in the
average balance is due to management's strategy in 1995 of using borrowings to
fund the purchase of securities, thereby leveraging the Bank's capital and
increasing net interest income. However, the Bank's regulatory capital position
decreased as a result of the First Nationwide Acquisition and the Bank repaid
all borrowings during the fourth quarter of 1995.
Provision for Loan Losses. The provision for loan losses amounted to $1.4
million in 1996 as compared to $483,000 in 1995. This increase is a result of
increases in loan charge-offs and the size of the loan portfolio. For 1996,
charge-offs totaled $1.1 million as compared to $307,000 for 1995. The increase
in charge-offs during 1996 is due primarily to charge-offs related to non-owner
occupied one to four-family mortgage loans with respect to which the Bank
decided, based on the condition of the underlying properties and other factors,
not to pursue foreclosure proceedings. The Bank significantly curtailed its
lending activities related to these types of loans in 1996. The charge-offs for
the year-ended December 31, 1996, also include a charge-off in the amount of
$275,000 related to an unsecured commercial loan originated prior to the First
Nationwide Acquisition. Non-performing loans (loans that are 90 days or more
past due) were $4.8 million or 1.4% of total loans at December 31, 1996, as
compared to $3.0 million or 1.05% of total loans at December 31, 1995. The
increase in non-performing loans is a result of loans originated in the
mid-1980's where the value of the underlying collateral has decreased, the
growth in the size of the loan portfolio and the amount of time required to
complete foreclosure proceedings. Non-performing assets totaled $5.7 million or
0.69% of total assets and $3.8 million or 0.83% of total assets at December 31,
1996 and 1995, respectively.
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<PAGE>
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 totaled $4.0 million in 1996 as
compared to $2.2 million in 1995. Service fees and charges increased $1.5
million or 67.6% to $3.8 million in 1996. This increase is a result of the First
Nationwide Acquisition. The increase in service charges on deposits for 1996 was
offset by waived service charges on the Acquired Deposits until March 1, 1996.
In addition, MSB waived $90,000 of additional service charges in limited
circumstances for certain of the Acquired Deposits from March 1, 1996 to June
30, 1996, for various reasons related to the transition of accounts of First
Nationwide to MSB. Although this has resulted in decreased fee income,
Management believes that waiving these service charges was important for
customer retention. Net realized securities gains amounted to $4,000 in 1996 as
compared to a net realized loss of $142,000 in 1995. Other non-interest income
amounted to $104,000 in 1996, as compared to $18,000 in 1995, and included a
$103,000 realized gain in the sale of a clock collection that was owned by the
Bank.
Non-Interest Expense. Non-interest expense amounted to $23.4 million in
1996 as compared to $11.7 million in 1995. Included in non-interest expense is a
$2.9 million pre-tax special one-time SAIF assessment. Salaries and employee
benefits increased $2.5 million to $8.3 million in 1996 primarily as a result of
adding 69 full-time equivalent employees for the Acquired Branches. Occupancy
and equipment increased $730,000 to $3.1 million in 1996 as compared to $2.4
million in 1995 and other non-interest expense increased $5.2 million to $8.3
million for these same periods. These increases are primarily due to the
operating expenses of the Acquired Branches. In addition, for 1996 as compared
to 1995, legal expenses attributed to employee and stockholder litigation
increased $107,000 to $508,000, losses on foreclosed real estate increased
$96,000 to $237,000, goodwill amortization increased $3.4 million to $3.5
million and non-recurring expenses related to the Acquisition amounted to
approximately $225,000.
Income Tax Expense. Income tax expense amounted to $1.1 million in 1996, as
compared to $1.6 million in 1995. The effective tax rates for 1996 and 1995 were
39.2% and 40.7%, respectively.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and the proceeds from the maturities of
investments. Proceeds from securities and loan sales are also a source of funds.
While maturities and scheduled amortization of loans and investments are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. For
the year ended December 31, 1997, deposits decreased $62.7 million primarily as
a result of Management's strategy of reducing the cost of time deposits. See
"--Years Ended December 31, 1997 and 1996-Interest Expense."
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 5.0%. At December 31, 1997 the Bank's liquidity ratio under OTS
regulations was 23.5%.
The primary investing activity of the Company is the origination of loans
and the purchase of securities. During the fiscal year ended December 31, 1997,
the Company originated mortgage loans totaling $113.1 million. Since 1994 the
demand for mortgage loans in the Bank's market area has remained strong. For the
year ended
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<PAGE>
December 31, 1997, originations of other loans exceeded repayments by $9.3
million. During that same period, the Company purchased securities, including
mortgage-backed securities, totaling $64.3 million.
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 7.1% and 6.7% at December 31, 1997 and 1996,
respectively. At December 31, 1997, cash and cash equivalents, as defined above,
totaled $48.1 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 $40.6 million line of credit from the FHLB of
New York. In addition, the Bank may access funds, if necessary, through the
Federal Reserve Bank of New York discount window.
At December 31, 1997, the Bank had outstanding loan commitments of $68.2
million. The Bank anticipates that it will have sufficient funds available to
meet its current loan and securities purchase commitments. Time deposits
scheduled to mature in one year or less from December 31, 1997, totaled $253.7
million. Management believes that a significant portion of such deposits will
remain with the Bank.
The Bank is subject to certain minimum leverage, tangible and risk-based
capital requirements established by regulations of the OTS. For a description of
these requirements and the Bank's compliance therewith, see "Regulation --
Regulation of Federal Savings Associations -- Capital Requirements."
Impact of Inflation and Changing Prices
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"), which require the measurement
of financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 does not require a specific format for the financial
statement, but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131") requires that
public companies report information about segments of their business in their
annual financial statements and require them to report selected segment
information in their
52
<PAGE>
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.
Year 2000
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware and equipment, both within and outside the
Company's direct control and with whom the Company electronically or
operationally interfaces (e.g., third party vendors providing data processing,
information system management, maintenance of computer systems and credit bureau
information), are likely to be affected. Furthermore, if computer systems are
not adequately changed to identify the Year 2000, many computer applications
could fail or create erroneous results. As a result, many calculations which
rely on the date field information, such as interest, payment or due dates and
other operating functions, will generate results which could be significantly
misstated, and the Company could experience a temporary inability to process
transactions, send invoices or engage in similar normal business activities. In
addition, under certain circumstances, failure to adequately address the Year
2000 Problem could adversely affect the viability of the Company's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Company's products, services and competitive condition.
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 7A. Quantitive and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure.
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<PAGE>
The Company's profitability is affected by fluctuations in interest rates.
A sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates borne by assets and
liabilities do not changes at the same speed, to the same extent, or on the same
basis. The Company monitors the impact of changes in interest rates on its net
interest income using several tools. One such measure, required to be performed
by OTS-regulated institutions, is the test specified by OTS Thrift Bulletin No.
13, "Interest Rate Risk Management." This test measures the change in interest
rates in 100 basis point increments. Net portfolio value is defined as the net
present value of assets, liabilities, and off-balance sheet contracts. Following
are the estimated impacts of immediate changes in interest rates at the
specified levels at December 31, 1997, calculated in compliance with Thrift
Bulletin No. 13:
<TABLE>
<CAPTION>
Change in Interest Rates Percent Change in:
(in basis points) Net Interest Income(1) Net Portfolio Value(2)
--------------------------------- ---------------------- ----------------------
<S> <C> <C>
+400............................ (14.05)% (18.68)%
+300............................ (9.96) (14.76)
+200............................ (5.92) (10.38)
+100............................ (2.74) (0.67)
-100............................ 2.72 0.75
-200............................ 5.55 13.10
-300............................ 9.22 20.94
-400............................ 13.27 29.81
</TABLE>
- -------------------------
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate environment versus the Net Interest Income
in the various rate scenarios.
(2) The percentage change in this column represents net portfolio value of the
Bank in a stable interest rate environment versus the net portfolio value
in the various rate scenarios.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The Company
relies primarily on its asset-liability structure to control interest rate risk.
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
has focused its efforts on increasing the Company's yield-cost spread through
retail growth opportunities.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF MSB BANCORP, INC. AND SUBSIDIARIES
Independent Auditors' Report of KPMG Peat Marwick LLP ..................... 56
Independent Auditors' Report of Nugent & Haeussler, PC .................... 57
Consolidated Balance Sheets as of December 31, 1997 and 1996 .............. 58
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 ........................................ 59
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995 .................... 60
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 .................................. 61
Notes to Consolidated Financial Statements ................................ 63
55
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MSB Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of MSB Bancorp,
Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the two-year period then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MSB Bancorp, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 27, 1998
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MSB Bancorp, Inc.
We have audited the consolidated financial statements of MSB Bancorp, Inc.
and subsidiary as listed in the accompanying index as of December 31, 1995 and
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MSB Bancorp,
Inc. and subsidiary as of December 31, 1995, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan" and Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" effective January 1, 1995.
NUGENT & HAEUSSLER, P.C.
January 30, 1996
Newburgh, New York
57
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
----------- -----------
(In thousands, except shares and
per share amounts)
<S> <C> <C>
Assets
Cash and due from banks.................................................. $ 16,834 $ 16,375
Federal funds sold....................................................... 21,065 32,590
Securities available for sale (note 3)................................... 54,082 50,685
Mortgage-backed securities available for sale (note 4)................... 225,680 323,428
Loans, net (notes 5, 6 and 14)........................................... 391,429 338,491
Premises and equipment, net (note 7)..................................... 14,062 14,869
Accrued interest receivable.............................................. 5,049 5,552
Real estate owned (note 8)............................................... 2,443 915
Goodwill................................................................. 29,173 32,835
Other assets (note 11)................................................... 5,550 5,176
----------- -----------
Total assets.......................................................... $ 765,367 $ 820,916
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Deposits (note 9)..................................................... $ 673,432 $ 736,161
Mortgagors' escrow deposits........................................... 2,247 1,849
Accrued expenses and other liabilities................................ 14,730 11,684
ESOP obligation (note 13)............................................. 182 432
----------- -----------
Total liabilities................................................. 690,591 $ 750,126
----------- -----------
Commitments and contingencies (note 14)
Stockholders' equity (notes 11, 12 and 13)
Preferred stock ($.01 par value; 1,000,000 shares authorized;
600,000 shares issued at December 31, 1997 and 1996) ............ 6 6
Common stock ($.01 par value; 5,000,000 shares authorized;
3,045,000 shares issued at December 31, 1997 and 1996) .......... 30 30
Additional paid-in capital............................................ 48,069 48,163
Retained earnings..................................................... 31,458 32,009
Treasury stock, at cost (200,847 shares and 211,064 shares at
December 31, 1997 and 1996, respectively)........................ (3,941) (4,137)
Unallocated ESOP stock................................................ (182) (432)
Unallocated BRP stock................................................. (42) (172)
Net unrealized loss on securities available for sale.................. (622) (4,677)
------------ -----------
Total stockholders' equity........................................ $ 74,776 $ 70,790
----------- -----------
Total liabilities and stockholders' equity........................ $ 765,367 $ 820,916
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
58
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended
December 31
------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands except shares
and per share amounts)
<S> <C> <C> <C>
Interest Income
Mortgage loans ............................................................. $ 26,908 $ 22,552 $ 18,526
Other loans ................................................................ 2,714 2,084 1,305
Mortgage-backed securities ................................................. 18,165 24,293 3,253
Securities ................................................................. 3,509 4,144 5,339
Federal funds sold ......................................................... 1,868 1,277 728
-------- -------- --------
Total interest income ...................................................... 53,164 54,350 29,151
Interest Expense
Interest on deposits (note 9) .............................................. 28,653 30,710 13,742
Interest on borrowings (note 10) ........................................... 4 31 1,358
Interest on ESOP obligation ................................................ 23 52 83
-------- -------- --------
Total interest expense ..................................................... 28,680 30,793 15,183
-------- -------- --------
Net interest income before provision for loan losses ........................... 24,484 23,557 13,968
Provision for loan losses (note 6) ............................................. 1,565 1,400 483
-------- -------- --------
Net interest income after provision for loan losses ............................ 22,919 22,157 13,485
-------- -------- --------
Non-Interest Income
Service fees ............................................................... 4,278 3,768 2,248
Net realized gains (losses) on securities (notes 2, 3 and 4) ............... 220 4 (142)
Net realized gains on loan sales ........................................... 158 151 44
Other non-interest income .................................................. 82 104 18
-------- -------- --------
4,738 4,027 2,168
-------- -------- --------
Non-Interest Expense
Salaries and employee benefits (note 13) ................................... 8,419 8,304 5,771
Occupancy and equipment (note 7) ........................................... 3,188 3,145 2,415
Federal deposit insurance premiums ......................................... 275 741 456
Goodwill amortization ...................................................... 3,662 3,517 137
Other non-interest expense ................................................. 5,180 4,737 2,891
Termination of Retirement Plan for Directors (note 13) ..................... 2,800 -- --
Merger-related expenses .................................................... 330 -- --
SAIF recapitalization assessment (note 18) ................................. -- 2,925 --
-------- -------- --------
23,854 23,369 11,670
-------- -------- --------
Income before income taxes ..................................................... 3,803 2,815 3,983
Income tax expense (note 11) ................................................... 1,522 1,104 1,622
-------- -------- --------
Net Income ..................................................................... $ 2,281 $ 1,711 $ 2,361
======== ======== ========
Basic earnings per share ....................................................... $ 0.40 $ 0.22 $ 1.46
======== ======== ========
Diluted earnings per share ..................................................... $ 0.40 $ 0.22 $ 1.42
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
59
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Outstanding
------------------------ Paid-In Retained
Common Preferred Par Value Capital Earnings
---------- ---------- ---------- ---------- ----------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... 1,696,983 -- $ 18 $ 16,385 $ 31,665
---------- ---------- ---------- ---------- ----------
Net income ...................... -- -- -- -- 2,361
Exercise of stock options ....... 21,204 -- -- (187) --
Purchase of treasury stock ...... (90,251) -- -- -- --
Allocation of ESOP stock ........ -- -- -- -- --
Amortization of BRP awards ...... -- -- -- -- --
Dividends declared .............. -- -- -- -- (979)
Tax benefits related to stock ... -- -- -- -- 63
compensation plans
Change in net unrealized loss on
securities available for sale,
net of tax effect -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 .... 1,627,936 -- 18 16,198 33,110
---------- ---------- ---------- ---------- ----------
Net income ...................... -- -- -- -- 1,711
Sale of Common Stock ............ 1,205,000 -- 12 19,553 --
Sale of Preferred Stock ......... -- -- 6 12,442 --
Exercise of stock options ....... 1,000 -- -- (30) --
Purchase of treasury stock ...... -- -- -- -- --
Allocation of ESOP stock ........ -- -- -- -- --
Amortization of BRP awards ...... -- -- -- -- --
Dividends declared .............. -- -- -- -- (2,852)
Tax benefits related to stock
compensation plans ........... -- -- -- -- 40
Change in net unrealized loss on
securities available for sale,
net of tax effect ............ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 .... 2,833,936 600,000 36 48,163 32,009
---------- ---------- ---------- ---------- ----------
Net income ...................... -- -- -- -- 2,281
Exercise of stock options ....... 10,217 -- -- (94) --
Allocation of ESOP stock ........ -- -- -- -- --
Amortization of BRP awards ...... -- -- -- -- --
Dividends declared .............. -- -- -- -- (2,839)
Tax benefits related to stock
compensation plans ........... -- -- -- -- 7
Change in net unrealized loss on
securities available for sale,
net of tax effect ............ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .... 2,844,153 600,000 36 48,069 31,458
========== ========== ========== ========== ==========
<CAPTION>
Common Common Net
Stock Stock Unrealized
Treasury Acquired Acquired Loss on
Stock By ESOP By BRP Securities Total
---------- ---------- ---------- ---------- ----------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... $ (2,518) $(1,051) $ (432) $ (4,443) $ 39,624
---------- ---------- ---------- ---------- ----------
Net income ...................... -- -- -- -- 2,361
Exercise of stock options ....... $ 399 -- -- -- 212
Purchase of treasury stock ...... (2,038) -- -- -- (2,038)
Allocation of ESOP stock ........ -- 309 -- -- 309
Amortization of BRP awards ...... -- -- 129 -- 129
Dividends declared .............. -- -- -- -- (979)
Tax benefits related to stock ... -- -- -- -- 63
compensation plans
Change in net unrealized loss on
securities available for sale,
net of tax effect -- -- -- 4,315 4,315
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 .... (4,157) (742) (303) (128) $ 43,996
---------- ---------- ---------- ---------- ----------
Net income ...................... -- -- -- -- 1,711
Sale of Common Stock ............ -- -- -- -- 19,565
Sale of Preferred Stock ......... -- -- -- -- 12,448
Exercise of stock options ....... 20 -- -- -- (10)
Purchase of treasury stock ...... -- -- -- -- --
Allocation of ESOP stock ........ -- 310 -- -- 310
Amortization of BRP awards ...... -- -- 131 -- 131
Dividends declared .............. -- -- -- -- (2,852)
Tax benefits related to stock
compensation plans ........... -- -- -- -- 40
Change in net unrealized loss on
securities available for sale,
net of tax effect ............ -- -- -- (4,549) (4,549)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 .... (4,137) (432) (172) (4,677) $ 70,790
---------- ---------- ---------- ---------- ----------
Net income ...................... -- -- -- -- 2,281
Exercise of stock options ....... 196 -- -- -- 102
Allocation of ESOP stock ........ -- 250 -- -- 250
Amortization of BRP awards ...... -- -- 130 -- 130
Dividends declared .............. -- -- -- -- (2,839)
Tax benefits related to stock
compensation plans ........... -- -- -- -- 7
Change in net unrealized loss on
securities available for sale,
net of tax effect ............ -- -- -- 4,055 4,055
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .... (3,941) (182) (42) (622) $ 74,776
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
60
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31
---------------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net income ................................................................. $ 2,281 $ 1,711 $ 2,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized losses (gains) on securities .................................. (220) (4) 142
Net gain on sale of loans .................................................. (158) (151) (44)
Origination of mortgage loans held for sale ................................ (14,130) (10,584) (6,944)
Proceeds from the sales of mortgage loans .................................. 13,880 11,166 6,029
Proceeds from the sale of student loans .................................... 1,646 1,544 1,619
Amortization of net deferred loan origination fees ......................... (130) (170) (299)
Amortization of premiums (discounts) on securities ......................... 1,177 1,091 68
Depreciation and amortization .............................................. 1,263 1,256 942
Provision for loan losses .................................................. 1,565 1,400 483
Write-downs of real estate owned ........................................... 188 237 141
Goodwill amortization ...................................................... 3,662 3,517 137
Decrease (increase) in accrued interest receivable ......................... 503 (2,294) (393)
Decrease (increase) in prepaid expenses and other assets ................... (1,857) 2,538 2,307
Increase (decrease) in accrued expenses and other liabilities .............. 3,094 (6,965) 9,892
Net change in Federal and State income taxes payable and
receivables .............................................................. (842) (528) 1,023
Deferred income taxes ...................................................... (351) (668) (51)
Other ...................................................................... (302) 138 248
--------- --------- ---------
Net cash provided by operating activities ................................ $ 11,269 $ 3,234 $ 17,661
--------- --------- ---------
Investing Activities
Net increase in loans ...................................................... $ (58,026) $ (62,273) $ (51,248)
Proceeds from the sale of securities held to maturity ...................... -- -- 3,000
Maturities and redemption of debt securities ............................... 49 14,143 38,650
Purchases of securities available for sale ................................. (10,724) (27,448) (47,516)
Proceeds from the sale of securities available for sale .................... 8,544 36,841 16,094
Purchases of mortgage-backed securities available for sale ................. (53,590) (386,330) (29,988)
Repayments of mortgage-backed securities available for sale ................ 27,408 16,775 8,930
Proceeds from the sale of mortgage-backed securities available
for sale ................................................................. 128,555 88,554 20,063
Repayments of asset-backed securities ...................................... -- 143 752
Proceeds from the sale of real estate owned, net ........................... 1,171 397 803
Cash received in acquisition of branch offices ............................. -- 380,299 20,934
Purchases of premises and equipment, net ................................... (460) (3,920) (2,986)
--------- --------- ---------
Net cash provided by (used in) investing activities ...................... $ 42,927 $ 57,181 $ (22,512)
--------- --------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
61
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
For the Year Ended
December 31
---------------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Financing Activities
Proceeds from Offering ................................................... -- $ 32,013 --
Net change in deposits ................................................... $ (62,729) (67,630) $ 12,217
Net increase in mortgagors' escrow deposits .............................. 398 10 117
Proceeds from borrowings ................................................. 55 12,100 43,640
Repayments of borrowings ................................................. -- (12,100) (43,640)
Repayment of ESOP loan ................................................... (250) (310) (309)
Proceeds from the exercise of stock options .............................. 102 40 212
Purchase of treasury stock ............................................... -- -- (2,038)
Payment of common and preferred stock dividends .......................... (2,838) (2,387) (979)
--------- --------- ---------
Net cash provided by (used in) financing activities ................... (65,262) (38,264) 9,220
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ......................... (11,066) 22,151 4,369
Cash and cash equivalents at beginning of year ........................... 48,965 26,814 22,445
--------- --------- ---------
Cash and cash equivalents at end of year ................................. $ 37,899 $ 48,965 $ 26,814
========= ========= =========
Supplemental Information
Interest paid on deposits ................................................ $ 28,653 $ 30,710 $ 13,742
Income taxes paid ........................................................ 2,416 2,300 613
========= ========= =========
Non-cash transactions:
Transfer of balances from loans receivable to
real estate owned .................................................... $ 2,839 $ 1,044 $ 955
========= ========= =========
Transfer of securities from the investment
portfolio to securities available for sale ........................... $ -- $ -- $ 18,576
========= ========= =========
Transfer of mortgage-backed securities to
mortgage-backed securities available for sale ........................ $ -- $ -- $ 504
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
62
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
In September 1992, MSB Bancorp, Inc. (the "Company") completed the issuance
of 1,840,000 shares of common stock in connection with the conversion of
Middletown Savings Bank (the "Bank") from a mutual to a stock savings bank (the
"Conversion"). Concurrently with the Conversion, the Company acquired all of the
Bank's common stock.
On January 10, 1996, the Company sold 1,100,000 shares of common stock at
$18 per share and 600,000 shares of its 8.75% Cumulative Convertible Preferred
Stock, Series A at $21.60 per share. On February 7, 1996, the Company sold an
additional 105,000 shares of Common Stock pursuant to the underwriters' exercise
of their over allotment option. The issuance and sale of the shares of Common
Stock and Preferred Stock on January 10 and February 7 are hereinafter
collectively referred to as the "Offering." Proceeds from the Offering amounted
to $32.0 million. The purpose of the Offering was to raise a significant portion
of the additional capital necessary to permit the Bank to qualify as "adequately
capitalized" for regulatory capital purposes immediately following the
consummation of the acquisition of certain branches of First Nationwide Bank, A
Federal Savings Bank ("First Nationwide").
In September 1995, the Bank entered into an Asset Purchase and Sale
Agreement (as amended, the "First Nationwide Agreement") with First Nationwide
pursuant to which the Bank acquired certain assets and the assumed certain
liabilities relating to seven First Nationwide branch offices located in Carmel,
Liberty, Mahopac, Monticello, Port Jervis, 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 First Nationwide
Branches, including facilities and fixed operating assets associated with the
First Nationwide Branches at a purchase price of approximately $2.9 million, and
certain savings account and overdraft loans which totaled $1.0 million at
January 12, 1996, at face value. The total amount of goodwill recorded as a
result of the Acquisition totaled $34.5 million.
On October 27, 1995, the Bank converted from a New York state-chartered
savings bank to a federal savings bank in order to facilitate the Acquisition as
well as future expansion. In addition, the Bank changed its name to MSB Bank. As
a consequence of the conversion, the Company became a savings and loan holding
company subject to the regulations, examination and supervision of the Office of
Thrift Supervision (the "OTS"). Prior to the conversion of the Bank to a federal
savings bank, the Company was a bank holding company subject to the regulation,
examination and supervision of the Federal Reserve Board ("FRB").
On December 16, 1997, the Company announced the signing of the Merger
Agreement by and among HUBCO, the Company, and 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), and Lafayette American Bank, a Connecticut-based bank ("Lafayette").
Prior to closing the Merger, HUBCO expects to complete its pending acquisition
of Poughkeepsie Financial Corp. ("PFC") and PFC's subsidiary, Bank of the Hudson
("BTH"), a New York-based bank. 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.
63
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon completion of the Merger, each share of common stock, par value $0.01
per share, of the Company ("MSB Common Stock"), other than Excluded Shares (as
defined below), will be converted into a number of shares (the "Exchange Ratio")
of common stock of HUBCO, no par value ("HUBCO Common Stock"). The Merger
Agreement provides that the Exchange Ratio will be equal to $36.02 divided by
the Median Pre-Closing Price (as defined below) of HUBCO Common Stock, provided
that the Median Pre-Closing Price is between $34.97 and $37.13. ("Median
Pre-Closing Price" will be determined by taking the price half-way between the
closing prices of HUBCO Common Stock after discarding the four lowest and four
highest closing prices during the ten-trading day period ending on the day the
parties receive final federal bank regulatory approval for the Merger.) A
"Minimum Exchange Ratio" of 0.97 will apply if the Median Pre-Closing Price is
greater than $37.13, and a "Maximum Exchange Ratio" of 1.03 will apply if the
Median Pre-Closing Price is less than $34.97. HUBCO will pay cash in lieu of
issuing fractional shares. The Exchange Ratio is subject to adjustment specified
in the Merger Agreement to prevent dilution. "Excluded Shares" are those shares
of MSB Common Stock which are (i) held by MSB as treasury shares, or (ii) held
by HUBCO or any of its subsidiaries (other than shares held as trustee or in a
fiduciary capacity and shares held as collateral on or in lieu of a debt
previously contracted).
HUBCO currently holds all the outstanding shares of 8.75% Cumulative
Convertible Preferred Stock, Series A, $.01 par value of the Company ("Series A
Preferred Stock"). All Series A Preferred Stock held by HUBCO will be canceled
in the Merger. While HUBCO does not currently anticipate transferring any of the
Series A Preferred Stock, if it were to transfer any Series A Preferred Stock,
the transferred shares (with certain limited exceptions) would be converted in
the Merger into shares of a newly created series of HUBCO preferred stock having
terms substantially identical to the Series A Preferred Stock (the "New HUBCO
Preferred Stock" and, together with the HUBCO Common Stock, the "HUBCO Stock").
The Bank provides banking services to individual and corporate customers,
with its business activities concentrated in Orange County, New York, and the
surrounding areas.
The following is a summary of the significant accounting policies followed
by the Company in the preparation of its financial statements.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, MSB Bank and MSB Travel, and the
Bank's wholly owned subsidiary, MSB Financial Services, Inc. The financial
statements have been prepared in conformity with generally accepted accounting
principles. Significant inter-company transactions and amounts have been
eliminated. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowances for losses on loans and real estate owned. The Company's
accounting policies with respect to these allowances are discussed below.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, and Federal funds sold.
64
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment and Mortgage-Backed Securities
Investment securities and mortgage-backed securities that management has
the positive intent and ability to hold until maturity are stated at cost,
adjusted for premium amortization and discount accretion, computed using the
interest method.
Securities to be held for indefinite periods of time including securities
that management intends to use as part of its asset/liability strategy, or that
may be sold in response to changes in interest rates, changes in prepayment
risk, or other similar factors are classified as available for sale and are
recorded at fair value with the unrealized appreciation of depreciation, net of
taxes, reported separately as a component of stockholders' equity.
Mortgage Loans Held for Sale
Mortgage loans originated for sale in the secondary market are carried at
the lower of cost (unpaid principal balances less net deferred loan fees) or
estimated market value in the aggregate. Net unrealized losses, if any, are
recorded through a valuation allowance which is netted against the related
loans. Adjustments to the allowances are recorded in current operations.
Realized gains and losses on the sale of loans are determined based on the cost
of the specific loans sold.
Loans
Loans, other than those held for sale and those considered impaired, are
carried at current unpaid principal balances less the allowance for loan losses
and net deferred loan fees.
Interest on loans is accrued monthly, unless management considers
collectibility to be doubtful (generally, when payments are past due three
months or more). When loans are placed on non-accrual status, unpaid interest is
reversed against interest income of the current period. Loans are returned to
accrual status when collectibility is no longer considered doubtful (generally,
when all payments have been brought current).
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is recognized in interest income using the interest method.
Deferred amounts are amortized for fixed rate loans over the contractual life of
the loans, and for adjustable rate loans over the period of time required to
adjust the contractual rate to a yield approximating a market rate at the
origination date.
The allowance for loan losses is increased by provisions charged to
operations and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance considers factors such as
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and current and prospective economic
conditions. Management believes that the allowance for loan losses is adequate.
While management estimates loan losses using the best available information,
such as independent appraisals for significant collateral properties, future
adjustments to the allowance may be necessary based on changes in economic and
real estate market conditions, further information obtained regarding known
problem loans, identification of additional problem loans, and other factors. In
addition, various regulatory agencies, as an integral part of their routine
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
65
<PAGE>
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impairment of a loan
is measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
the Company recognizes an impairment by recording a valuation allowance with a
corresponding charge to the provision for loan losses. The measurement of
impairment is applicable to all loans that are identified for evaluation of
impairment except for, among others, large groups of smaller-balance homogenous
loans, such as residential mortgage loans and consumer installment loans, that
are collectively evaluated for impairment and loans that are measured at fair
value or the lower of cost of fair value.
An insignificant payment delay, which is defined by the Company as up to 90
days, will not cause a loan to be classified as impaired. In addition, a loan is
not considered impaired when payments are delayed, but the Company expects to
collect all amounts due, including accrued interest for the period of delay. All
loans identified as impaired are evaluated independently. The Company does not
aggregate impaired loans for evaluation purposes. Payments received on impaired
loans are applied first to accrued interest, if any, and then to principal.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost, less accumulated depreciation and
amortization and are depreciated using the straight-line method over the
estimated useful lives of the respective assets. Leasehold improvements are
amortized using the straight-line method over the term of the related lease, or
the useful life of the asset, whichever is shorter.
Maintenance, repairs and minor improvements are charged to expense as
incurred, while major improvements are capitalized.
Real Estate Owned
Real estate owned include properties acquired through legal foreclosure.
These properties are initially recorded at the lower of cost or the fair value
of the property less estimated selling costs. Any resulting write-downs are
charged to the allowance for loan losses. Thereafter, these properties are
carried at the lower of cost or estimated fair value less estimated selling
costs.
Goodwill
Goodwill, which represents the excess of cost over the fair value of net
assets acquired from the acquisition of deposits, is amortized to expense over
the expected life of the acquired deposit base (10 years) using the straight
line method.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
66
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deferred tax assets and liabilities of a change in tax rates is recognized as
income in the period that includes the enactment date.
67
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") effective December 31, 1997. 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. For
purposes of calculating basic earnings per share, the number of weighted average
shares were 2,837,678, 2,779,725 and 1,616,497 for 1997, 1996 and 1995,
respectively. Diluted weighted average shares included common stock equivalents
of 31,846, 29,277 and 47,228 in 1997, 1996 and 1995, respectively.
Stock Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
As such, compensation expense would be recorded on the date of the grant only if
the current market price of underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of the grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro-forma net income and pro-forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS 123 had been applied. The Company has elected to apply
the provisions of APB Opinion No. 25 and provide the pro-forma disclosure
provisions of SFAS 123 as applicable. The Company made no stock-based awards to
employees or directors during the years ended December 31, 1997 and 1996.
(2) INVESTMENT SECURITIES HELD TO MATURITY
The Company had no investment securities classified as held to maturity at
December 31, 1997 and 1996. No investment securities were sold during 1997 and
1996. Realized gains and losses on sales of investment securities were none and
$175,000, respectively, during 1995. The proceeds from these sales totaled $3.0
million in 1995. The securities sold during 1995 had remaining terms to maturity
of less than three months. Included in realized losses for fiscal 1995 is a
$142,000 loss related to the permanent impairment of certain investment
securities.
68
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SECURITIES AVAILABLE FOR SALE
The following is a summary of securities available for sale:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
December 31, 1997 (In thousands)
- -----------------
<S> <C> <C> <C> <C>
Debt securities:
United States Government and related
obligations......................... $ 49,082 $ 25 $ 333 $ 48,774
Other investment grade bonds.......... 1,101 13 -- 1,114
---------- ---------- ---------- ----------
Total debt securities..................... 50,183 38 333 49,888
Equity securities:
Mutual funds.......................... 1,234 -- 61 1,173
Corporate equity...................... 3,002 19 -- 3,021
---------- ---------- ---------- ----------
Total equity securities............... 4,236 19 61 4,194
---------- ---------- ---------- ----------
Total debt and equity securities.......... $ 54,419 $ 57 $ 394 $ 54,082
========== ========== ========== ==========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
December 31, 1996 (In thousands)
- -----------------
<S> <C> <C> <C> <C>
Debt securities:
United States Government and related
obligations......................... $ 46,113 $ -- $ 1,225 $ 44,888
Other investment grade bonds.......... 2,111 -- 37 2,074
---------- ---------- ---------- ----------
Total debt securities..................... 48,224 -- 1,262 46,962
Equity securities:
Mutual funds.......................... 1,221 -- 92 1,129
Corporate equity...................... 2,586 8 -- 2,594
---------- ---------- ---------- ----------
Total equity securities............... 3,807 8 92 3,723
---------- ---------- ---------- ----------
Total debt and equity securities.......... $ 52,031 $ 8 $ 1,354 $ 50,685
========== ========== ========== ==========
</TABLE>
69
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated market value of debt securities available
for sale at December 31, 1997 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities, because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------- -----------
(In thousands)
<S> <C> <C>
Due in one year or less................................. $ 9,101 $ 9,076
Due after one year through five years................... 15,667 15,398
Due after five years through ten years.................. 25,415 25,414
----------- -----------
$ 50,183 $ 49,888
=========== ===========
</TABLE>
The following is a summary of realized securities gains (losses) for the
periods indicated:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Debt securities
Gross realized gains........................ $ 189 $ 108 $ 55
Gross realized losses....................... -- 32 45
---------- ---------- ----------
189 76 10
---------- ------------ ------------
Equity securities
Gross realized gains........................ -- -- 3
Gross realized losses....................... -- -- --
------------ ---------- ----------
Net realized gains.......................... -- -- 3
------------ ---------- ----------
Net security gains.......................... $ 189 $ 76 $ 13
============ ========== ==========
</TABLE>
Included in corporate equity securities at December 31, 1997 and 1996 is
$2.8 million and $2.4 million, respectively, of Federal Home Loan Bank capital
stock, which is restricted to sale only to member financial institutions.
Proceeds from sales of debt securities totaled $8,544,000, $36,841,000 and
$16,094,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
70
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 1997 (In thousands)
- -----------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation....... $ 32,509 $ 17 $ 179 $ 32,347
Federal National Mortgage Association........ 48,491 8 288 48,211
Other Collateralized mortgage obligations.... 140,400 186 393 140,193
Mortgage pass throughs........................... 4,971 -- 42 4,929
----------- ----------- ----------- -----------
$ 226,371 $ 211 $ 902 $ 225,680
=========== =========== =========== ==========
December 31, 1996
- -----------------
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation....... $ 106,832 $ -- $ 1,255 $ 105,577
Federal National Mortgage Association........ 37,045 -- 811 36,234
Other Collateralized mortgage obligations.... 163,321 -- 3,574 159,747
Mortgage pass throughs........................... 22,672 -- 802 21,870
----------- ----------- ----------- -----------
$ 329,870 $ -- $ 6,442 $ 323,428
=========== =========== =========== ===========
</TABLE>
Gross realized gains and losses on sales of mortgage-backed securities
available for sale were $64,000 and $33,000, $79,000 and $151,000, and $50,000
and $30,000, respectively, during 1997, 1996 and 1995, respectively. The
proceeds from these sales amounted to $128,555,000, $88,554,000 and $20,063,000.
71
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) LOANS
Loans consist of the following:
December 31,
-------------------------
1997 1996
--------- ---------
Real estate loans (In thousands)
Residential
One-to-four family dwellings ............. $ 287,914 $ 256,853
Multi-family ............................. 17,565 14,362
Held for sale ............................ 1,052 644
Commercial ................................. 56,179 45,463
--------- ---------
Total real estate loans ..................... $ 362,710 $ 317,322
Other loans
Secured by savings accounts ................ 714 770
Property improvement ....................... 34 97
Education .................................. 1,609 1,955
Consumer ................................... 14,358 9,368
Commercial ................................. 11,893 8,756
Checking overdraft lines of credit ......... 1,472 1,487
Other ...................................... 734 701
--------- ---------
Total other loans ........................ $ 30,814 $ 23,134
--------- ---------
Total loans, gross ....................... $ 393,524 $ 340,456
Net deferred loan origination fees ............. 712 (5)
Allowance for loan losses ...................... (2,807) (1,960)
--------- ---------
Total loans, net ........................... $ 391,429 $ 338,491
========= =========
The following table sets forth information with respect to non-performing
loans which are past due 90 days or more:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1996 1995
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Loans In non-accrual status
One-to-four family residential mortgage loans.... $ 3,005 $ 3,364 $ 2,343
Multi-family mortgage loans...................... 294 69 69
Commercial mortgage loans........................ -- 1,125 488
Other loans...................................... 189 217 61
---------- ---------- ---------
Total loans in non-accrual status.............. $ 3,488 $ 4,775 $ 2,961
--------- ---------- ---------
Total non-performing loans.................... $ 3,488 $ 4,775 $ 2,961
========= ========== =========
</TABLE>
72
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997, the total recorded investment in impaired loans
was $6.9 million which consisted of $6.4 million of potential problem loans and
$424,000 of loans in non-accrual status. In addition, impaired loans consisted
of $6.5 million of mortgage loans that were measured with reference to the
appraised value of the collateral property and $400,000 of loans measured based
on expected cash flows. As of December 31, 1996, the total recorded investment
in impaired loans was $2,399,000, which consisted of $1,227,000 of loans that
are potential problem loans and $1,172,000 of loans that are in non-accrual
status. In addition, impaired loans consisted of $1,999,000 of commercial
mortgage loans that were measured with reference to the appraised value of the
collateral property and $400,000 of commercial loans measured based on expected
cash flows. The average balance of impaired loans during 1997 and 1996 amounted
to $5,653,000 and $1,817,000, respectively. At December 31, 1997 and 1996, the
allowance related to impaired loans as determined under SFAS No. 114 amounted to
$925,000 and none, respectively. Interest income recognized on impaired loans
was not significant for the years ended December 31, 1997 and 1996.
If non-accrual loans had continued to realize interest in accordance with
their contractual terms, approximately $313,000, $413,000 and $134,000 of
interest income would have been realized for the years ended December 31, 1997,
1996 and 1995, respectively.
The Bank originates loans primarily in the New York counties of Orange,
Ulster, Putnam and Sullivan. The ability of borrowers to make principal and
interest payments is dependent upon, among other things, the level of overall
economic activity and the real estate market conditions prevailing within the
Bank's lending region. If these conditions were to deteriorate, higher levels of
non-performing loans and charge-offs could occur resulting in higher provisions
for loan losses. Real estate loans are comprised of adjustable rate loans of
$309.1 million and fixed rate loans of $53.6 million at December 31, 1997, and
$276.3 million and $41.0 million, respectively, at December 31, 1996.
Certain mortgage loans originated by the Bank are sold without recourse in
the secondary market to the Federal National Mortgage Association ("FNMA"). The
unpaid principal balances of such serviced loans, which are not included in the
balance sheets, were approximately $43.1 million and $31.2 million at December
31, 1997 and 1996, respectively.
73
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
For the Year Ended
December 31,
------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
Balance at beginning of year ............... $1,960 $1,659 $1,459
Provision charged to operations ............ 1,565 1,400 483
Loans charged off
Real estate ............................ 523 634 234
Other loans ............................ 384 485 73
------ ------ ------
$ 907 $1,119 $ 307
Recoveries
Real estate ............................ 148 1 2
Other loans ............................ 41 19 22
------ ------ ------
189 $ 20 $ 24
------ ------ ------
Net charge-offs ............................ 718 $1,099 $ 283
------ ------ ------
Balance at end of year ..................... $2,807 $1,960 $1,659
====== ====== ======
Ratio of net charge-offs to average
net loans outstanding .................... 0.20% 0.36% 0.11%
(7) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
----------------------
1997 1996
------- -------
(In thousands)
Land ............................................. $ 1,801 $ 1,809
Buildings ........................................ 10,985 10,898
Furniture, fixtures and equipment ................ 7,725 9,880
Leasehold improvements ........................... 1,619 2,027
------- -------
22,130 24,614
Less accumulated depreciation and ............... 8,068 9,745
------- -------
amortization
Premises and equipment, net ...................... $14,062 $14,869
======= =======
Occupancy and equipment includes depreciation and amortization of
$1,263,000, $1,256,000 and $942,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
(8) REAL ESTATE OWNED
Investments in real estate consisted of properties owned through
foreclosures and amounted to $2,443,000 and $915,000 at December 31, 1997 and
1996, respectively.
74
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) DEPOSITS
The following is a summary of deposits at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------- -----------------------------
Weighted Weighted
Average Average
Amount Nominal Rates Amount Nominal Rates
-------- ------------- -------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Club accounts ........................................ $ 435 2.76% $ 422 2.86%
NOW accounts ......................................... 40,190 1.88 39,242 2.00
Savings accounts ..................................... 198,344 3.27 193,280 3.28
Money market accounts ................................ 52,594 4.11 52,004 4.25
Time deposits ........................................ 329,908 5.24 403,772 5.31
Demand deposits ...................................... 51,961 -- 47,441 --
-------- ---- -------- ----
Total deposits ....................................... $673,432 3.96% $736,161 4.18%
======== ==== ======== ====
</TABLE>
The maturity of time deposits is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Amount Rate Amount Rate
-------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Six months or less ................................... $167,183 5.06% $197,651 5.14%
More than six months to one year ..................... 86,537 5.13 120,479 5.34
More than one year to three years .................... 63,002 5.85 57,258 5.46
More than three years ................................ 13,186 5.32 28,384 6.11
-------- ---- -------- ----
Total time deposits .................................. $329,908 5.24% $403,772 5.31%
======== ==== ======== ====
</TABLE>
Time deposits issued in amounts of $100,000 or more amounted to
approximately $28.0 million and $33.7 million at December 31, 1997 and 1996.
Interest expense on time deposits in amounts over $100,000 amounted to
approximately $1,456,000, $1,837,000 and $578,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
Interest expense by depositor account is summarized as follows:
Year Ended December 31,
-------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
Club accounts ..................... $ 27 $ 25 $ 25
NOW accounts ...................... 752 791 277
Savings accounts .................. 6,527 6,145 3,918
Money market accounts ............. 2,147 1,819 1,406
Time deposits ..................... 19,200 21,930 8,116
------- ------- -------
Total deposits ................ $28,653 $30,710 $13,742
======= ======= =======
(10) BORROWINGS
At December 31, 1997, borrowings amounted to $55,000 and consisted of
repurchase agreements that were used for customer sweep accounts. The Company
had no borrowings outstanding at December 31, 1996.
75
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company utilized advances from the Federal Home Loan Bank to
provide liquidity. The maximum outstanding borrowings during 1996 were $12.1
million and interest expense related to these advances amounted to $31,000.
During 1995, the Company had outstanding borrowings which consisted of
repurchase agreements. Securities sold under repurchase agreements were
delivered to the primary dealers who arranged the transaction. The securities
remained registered in the Bank's name and were returned upon maturity and
repayment of the borrowing. The maximum amount of outstanding repurchase
agreements during 1995 was $43.6 million. The average balance of repurchase
agreements during 1995 was $21.2 million. Interest expense on these repurchase
agreements totaled $1.4 million in 1995.
(11) INCOME TAXES
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Income from operations...................... $ 1,522 $ 1,104 $ 1,622
Stockholders' equity:
Net unrealized (depreciation) appreciation
on securities available for sale........ 2,700 (3,027) 2,869
-------- --------- --------
$ 4,222 $ (1,923) $ 4,491
======== ======== ========
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current
Federal.................................. $ 1,362 $ 1,268 $ 1,201
State.................................... 482 504 509
Deferred
Federal.................................. (249) (41) (51)
State.................................... (73) (249) (37)
--------- -------- --------
Total.................................. $ 1,522 $ 1,104 $ 1,622
======== ======== ========
</TABLE>
76
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the provision for income taxes and the amount
computed by multiplying income before income taxes by the statutory Federal
income tax rate of 34% is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Tax at statutory rate..................................... $ 1,293 $ 957 $ 1,354
Increase (decrease) resulting from:
Excise tax on termination of pension plan.............. -- 31 --
Non-taxable interest income............................ (90) (19) (14)
State income taxes, net of federal income tax benefit.. 270 168 312
Dividend received deduction............................ (20) (24) (20)
Other net.............................................. 69 (9) (10)
-------- -------- --------
$ 1,522 $ 1,104 $ 1,622
========= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net unrealized loss on securities available for sale... $ 411 $ 3,111 $ 84
Deferred compensation.................................. 129 121 84
Allowance for loan losses.............................. 1,123 784 664
Post-retirement benefits............................... 761 723 687
Deferred loan fees..................................... -- 2 175
Goodwill amortization.................................. 1,078 586 95
Non-accrual interest................................... 125 165 55
-------- -------- --------
Total gross deferred tax assets.................... $ 3,627 $ 5,492 $ 1,844
-------- -------- --------
Deferred tax liabilities:
Premises and equipment, primarily due to differences in
depreciation....................................... $ 980 $ 782 $ 631
Tax bad debt reserves over base year amount............ 102 86 126
Deferred loan 284 -- --
fees...................................................
Prepaid pension........................................ -- -- 158
-------- -------- --------
Total gross deferred tax liabilities............... 1,366 868 915
-------- -------- --------
Net deferred tax asset............................. $ 2,261 $ 4,624 $ 929
======== ======== ========
</TABLE>
Under tax law that existed prior to 1996, the Bank was generally allowed a
special bad debt deduction in determining income for tax purposes. The deduction
was based on either a specified experience formula or a
percentage-of-taxable-income before such deduction. The experience method was
used in preparing the income tax returns for 1995. Federal legislation was
enacted in August of 1996, which repealed for tax purposes the
percentage-of-taxable-income bad debt reserve method. As a result, the Bank must
instead use the direct charge-off method to compute its bad debt deduction. The
Federal legislation also requires the Bank to recapture its post-1987 net
additions to its tax bad debt reserves. The Bank has previously provided for
this liability in the financial statements. New York State enacted legislation
in July of 1996, which redesignated the Bank's State bad debt reserves at
December 31, 1995 as the base-year amount and also provide for future additions
to the base-year reserve using the percentage-of-taxable income method.
77
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retained earnings at December 31, 1997 includes approximately $6.0 million
for which no provision for income tax has been made. This amount represents an
allocation of income to bad debt deductions for tax purposes only. Events that
would result in taxation of these reserves include failure to qualify as a bank
for tax purposes, distributions in complete or partial liquidation, stock
redemptions and excess distributions to shareholders. At December 31, 1997, the
Bank had an unrecognized tax liability of $2.0 million with respect to this
reserve.
Management has determined that it is more likely than not that it will
realize the deferred tax assets based upon the nature and timing of the items
listed above. There can be no assurances, however, that there will be no
significant differences in the future between taxable income and pre-tax book
income if circumstances change. In order to fully realize the net deferred tax
asset, the Bank will need to generate future taxable income. Management has
projected that the Bank will generate sufficient taxable income to utilize the
net deferred tax asset. However, there can be no assurance as to such levels of
taxable income generated.
(12) STOCKHOLDERS' EQUITY
General
Pursuant to regulations set forth by the New York State Banking Department,
upon conversion from a New York State chartered mutual savings bank to a New
York State Stock form savings bank in 1992, the Bank established a liquidation
account in the amount of $28.1 million, its total net worth at March 31, 1992,
in order to grant a priority to eligible account holders (as defined) who
continue to maintain eligible deposits at the Bank. The balance of the
liquidation account is reduced annually to the extent that eligible account
holders reduce their eligible deposits; however, subsequent increases in
eligible deposits do not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank (and
only in such event), each eligible account holder would be entitled to receive a
distribution from the liquidation account, after payment of all creditor's
claims, in an amount proportionate to the current adjusted eligible deposit
balance. Such distributions would be made prior to any payments to holders of
common stock. The balance of the liquidation account was $5.8 million at
December 31, 1997.
Preferred Stock
In connection with the Offering, the Company sold 600,000 shares of its
8.75% Cumulative Convertible Preferred Stock Series A at $21.60 per share.
78
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Series A Preferred Stock is not redeemable prior to January 10, 1999.
The Series A Preferred Stock will be redeemable, at the option of the Company,
in whole or in part, at any time on or after January 10, 1999, at the following
per share prices (expressed as a percentage of the liquidation preference per
share of Series A Preferred Stock) during the 12-month period beginning January
10, in each of the following years:
Redemption
Year Price
---- ----------
1999..................................106.12%
2000..................................105.250
2001..................................104.375
2002..................................103.500
2003..................................102.625
2004..................................101.750
2005..................................100.875
2006 and thereafter...................100.000
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of shares of Series A Preferred Stock are
entitled to receive out of assets of the Company available for distribution to
stockholders under applicable law, before any payment or distribution of assets
is made to holders of Common Stock or any other class or series of stock ranking
junior to the Series A Preferred Stock upon liquidation, liquidating
distributions in the amount of $21.60 per share plus accrued and unpaid
dividends (whether or not earned or declared) to the date fixed for such
liquidation, dissolution or winding up. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to the Series A Preferred Stock and any other shares of stock of the
Company ranking as to any such distribution on a parity with the Series A
Preferred Stock, are not paid in full, the holders of the series A Preferred
Stock and of such other shares will share ratably in any such distribution of
assets of the Company in proportion to the full respective preferential amounts
to which they are entitled. After payment of the full amount of the liquidation
to which they are entitled, the holders shares of Series A Preferred Stock will
not be entitled to any further participation in any distribution of assets by
the Company.
Capital Requirements
The OTS regulations require savings associates to meet three minimum
capital standards: a tangible capital ratio requirement of 1.5% of total assets
as adjusted under the OTS regulations, a leverage ratio requirement of 3.0% of
core capital to such adjusted total assets and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The 3.0% core capital requirement has been effectively superseded by the
OTS' prompt corrective action regulations, which impose a 4.0% core capital
requirement for treatment as an "adequately capitalized" thrift and a 5.0% core
capital requirement for treatment as a "well capitalized" thrift. In determining
the amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of assets.
79
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the capital position of the Bank as
calculated at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Tangible Core Risk-Based
------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital as calculated under GAAP ........................ $73,907 10.04% $73,907 10.04% $73,907 19.70%
Deduct servicing rights ................................. 17 -- 17 -- 17 --
Deduct equity investments ............................... -- -- -- -- 125 0.03
Deduct goodwill ......................................... 29,173 3.96 29,173 3.96 29,173 7.78
Add qualifying general loan loss allowance,
as limited by regulation ............................. -- -- -- -- 2,806 0.75
Add net unrealized loss on securities
available for sale, net of taxes ..................... 597 0.08 597 0.08 597 0.16
------- ----- ------- ----- ------- -----
Capital, as calculated .................................. 45,314 6.15 45,314 6.15 47,995 12.79
Capital, as required .................................... 11,046 1.50 31,501 4.00 30,015 8.00
------- ----- ------- ----- ------- -----
Excess .................................................. $34,268 4.65% $13,813 2.15% $17,980 4.79%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Tangible Core Risk-Based
------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital as calculated under GAAP ........................ $70,944 9.0% $70,944 10.04% $73,907 19.70%
Deduct goodwill ......................................... 32,835 4.2 32,835 3.96 29,173 7.78
Add qualifying general loan loss allowance,
as limited by regulation ............................. -- -- -- -- 2,806 0.75
Add net unrealized loss on securities
available for sale, net of taxes ..................... 4,677 0.6 4,677 0.08 597 0.16
------- ----- ------- ----- ------- -----
Capital, as calculated .................................. 42,786 5.4 42,786 6.15 47,995 12.79
Capital, as required .................................... 11,813 1.5 31,501 4.00 30,015 8.00
------- ----- ------- ----- ------- -----
Excess .................................................. $30,973 3.9% $11,285 2.15% $17,980 4.79%
======= ===== ======= ===== ======= =====
</TABLE>
Dividend Restrictions
Delaware law stipulates that the Company may only pay dividends from its
capital surplus or, if no surplus exists, from its net profits for the current
and preceding year.
The Bank's ability to pay dividends to the Company is also subject to
various restrictions. At least 30 days' written notice must be given to the OTS
of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (i)
100% of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (ii) 75% of its net earnings for the previous four quarters. Any additional
capital distributions
80
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
would require prior OTS approval. In addition, the OTS can prohibit a proposed
capital distribution, otherwise permissible under the regulation, if the OTS has
determined that the association is in need of more than normal supervision or if
it determines that a proposed distribution by an association would constitute an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distribution
if, after the distribution, the Bank failed to meet its minimum capital
requirements, as described above.
(13) EMPLOYEE BENEFITS
Retirement Plan
Prior to August 31, 1995, the Bank maintained a defined benefit pension
plan which covered substantially all employees of the Bank who met certain age
and length of service requirements.
The Bank terminated the defined benefit plan as of August 31, 1995.
Settlement of the Plan liabilities occurred in July 1996, resulting in a pre-tax
gain of $32,000.
The defined benefit plan allowed participants, upon retirement, to elect to
receive either monthly benefit payments or a lump sum distribution. The plan was
amended effective January 1, 1994 to eliminate the lump sum distribution option
on a prospective basis. Thus, all vested benefits up to January 1, 1994 were
grandfathered and therefore eligible for lump sum distribution. In connection
with the termination of the plan, a lump sum distribution option was
re-instituted for distributions to active employees. A group annuity contract
was purchased to provide benefits for current retirees and active employees who
elected to receive deferred monthly payments commencing at or after retirement.
401(k) Savings Plan
The Bank also sponsors a 401(k) incentive savings plan (a defined
contribution plan) that is offered to substantially all employees. The Bank
began making discretionary contributions to the Plan on September 1, 1995,
concurrent with the termination of the Bank's defined benefit plan. Salaries and
employee benefits expense includes incentive savings plan expenses of $180,000,
$101,000 and $92,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Employee Stock Ownership Plan
The Company also maintains an Employee Stock Ownership Plan (the "ESOP")
which the Bank has also adopted for substantially all its employees. The ESOP
purchased 182,160 shares of the Company's common stock in the Conversion at a
cost of $1,821,600 using the proceeds of a loan provided by an unrelated
financial institution. The terms of the loan called for level principal payments
in 28 quarterly installments commencing September 30, 1992 with interest at a
variable rate equal to the prime rate. Loan payments were funded principally
from the Bank's contributions to the ESOP on behalf of its eligible employees,
which are charged to expense as incurred. Contributions for the years ended
December 31, 1997, 1996 and 1995 amounted to approximately $250,000, $310,000
and $343,000, respectively.
In September 1997, the Company refinanced the ESOP loan with the Bank. At
the time of the refinancing, the principal balance was approximately $270,000.
The loan calls for three equal annual payments commencing on December 31, 1997
with interest at a variable rate equal to the prime rate.
81
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares purchased by the ESOP are held in a suspense account for allocation
to individual participant accounts as the loan is repaid. Shares are allocated
annually based on the relative compensation of the participants. The cost of the
unallocated shares held in the suspense account is reflected as a reduction of
stockholders' equity.
Bank Recognition and Retention Plans
The Company established the Bank Recognition and Retention Plans and Trusts
("BRPs") as a method of providing officers and directors of the Bank with a
proprietary interest in the Company. The BRPs are designed to encourage the
participants to remain with the Bank. The BRPs purchased a total of 4% or 73,600
of the shares issued in the Offering which were awarded to the BRP participants.
During fiscal 1992, the BRPs acquired 63,882 shares with contributions from the
Bank of $736,000. The remaining 9,778 shares were acquired by the BRP in October
1992, at a cost of $112,000. Awards to plan participants vest at a rate of 20%
per year commencing one year from the date of the award. As awards vest, the
Bank will recognize an employee benefit expense in an amount equal to the cost
basis of the stock. The expense recognized for vested benefits amounted to
$130,000, $131,000 and $129,000 for the years ended December 31, 1997, 1996 and
1995, respectively. All awards granted under the BRPs to date have become fully
vested.
Stock Option Plans
The Company's Incentive Stock Option Plan ("Employees' Plan") and the Stock
Option Plan for Outside Directors ("Directors' Plan") provide for the granting
of options to officers and directors of the Company. Under the terms of the
Plans, options may be granted at not less than fair market value on the date of
the grant.
The Employees' Plan authorizes the grant of stock options and limited
rights with respect to 128,800 shares of common stock of the Company, equal to
7% of the shares of common stock issued in the Conversion. Options under the
Employees' Plan are exercisable on a cumulative basis in equal installments at a
rate of 20% per year commencing one year from date of the grant, except that in
the event of termination of employment other than as a result of death,
disability, retirement, or a change in control of the Company or the Bank,
options not previously exercisable will automatically expire. As of December 31,
1997, 1996 and 1995, options for the purchase of 32,755 shares, 34,755 shares
and 38,755 shares, respectively, were outstanding under this Plan. At December
31, 1997, all 32,755 options outstanding under the Plan were exercisable.
Options were exercised during 1997 for the purchase of 2,000 shares. No options
were granted in 1997, 1996 and 1995. Upon exercise of "Limited Rights" in the
event of a change in control, the employee will be entitled to receive a lump
sum cash payment equal to the difference between the exercise price of the
related option and the fair market value of the shares of Common Stock
underlying the option. In the event of death, disability or normal retirement,
the Company, if requested by the employee, may elect, in exchange for the
option, to pay the employee, or beneficiary in the event of death, the amount by
which the fair market value of the Common Stock exceeds the exercise price of
the option on the date of the employee's termination of employment. These Rights
will not be triggered by the Merger Agreement.
Under the Directors' Plan, eligible outside directors were granted,
concurrent with the Conversion, non-statutory options to purchase an aggregate
amount of common stock of the Company equal to 3% or 55,200 of the shares of the
common stock issued in the Conversion. Options for an additional 6,750 shares
have been reserved for grants to subsequent outside directors. Each director
received a fixed award of options, plus a number of options based upon the
director's length of service. Options vest one year after the date of grant,
except that in the event of death, retirement, disability or a change in control
of the Bank or the Company, all options will vest immediately. The exercise
price per share of each option is equal to the fair market value of the shares
of
82
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock on the date the option was granted. All options granted under the
directors' Plan expire upon the earlier of 10 years following the date of grant
or one year following the date the optionee ceases to be a Director. 8,212
options were exercised during 1997 and at December 31, 1997, options for the
purchase of 41,083 shares were outstanding and fully exercisable.
Other Post-Retirement Benefits
In addition to pension benefits, the Company provides certain health care
and life insurance benefits for retired employees, directors and their spouses.
A Medicare supplement is provided through the American Association of Retired
Persons for retirees who have completed 10 years of service. Retirees with 10 to
19 years of service contribute 50% of the premiums and retirees with 20 or more
years of service contribute 20% of the premium costs. The health care plan
provides for a $250 deductible per individual with 70% co-insurance up to $1,750
and 100% thereafter. Life insurance is provided at 90% of the amount of
insurance in force at retirement and is reduced 10% a year for four years.
Thereafter, life insurance is provided at 50% of the insurance in force at
retirement. Dental benefits are also provided on a procedure-specific basis.
The following is a reconciliation of the funded status of the plan:
Year Ended December 31,
----------------------
1997 1996
--------- ----------
(in thousands)
Accumulated post-retirement benefit obligation
Retirees ......................................... $ 334 $ 407
Active employees fully eligible for benefits ..... 84 --
Other active employees ........................... 630 676
------ ------
Total ........................................ 1,048 1,083
Unrecognized gain ................................ 669 543
Unrecognized past service liability .............. 166 182
------ ------
Accrued post-retirement benefits ................. $1,883 $1,808
====== ======
The components of net periodic post-retirement benefit cost are as follows:
Year Ended December 31,
-----------------------------
1997 1996 1995
----- ----- -----
(in thousands)
Service cost ............................... $ 88 $ 90 $ 63
Interest cost .............................. 64 80 127
Unrecognized gain .......................... (41) (23) (16)
Unrecognized past service liability ........ (16) (16) --
----- ----- -----
Total .................................. $ 95 $ 131 $ 174
===== ===== =====
A discount rate of 7.25%, an annual rate of salary increases of 5.0% and a
7.0% increase in the assumed health care costs reducing linearly to 5.0% in 2002
were used to determine the Accumulated Post-Retirement Benefit Obligation
("APBO") at December 31, 1997. At December 31, 1996, a discount rate of 7.75%,
an annual rate of salary increases of 5.5% and a 10.0% increase in the assumed
health care costs reducing linearly to 5.5% in the year 2005 were used to
determine the APBO. The effect of a one-percentage point increase in the assumed
health care cost trend rates for each future year would be an increase in net
periodic post-retirement benefits cost of $27,600 and an increase of $165,000 in
the APBO.
Compensation and benefits expense includes insurance premiums for retiree
health care and life insurance benefits, and similar benefits for active
employees of $615,000, $516,000 and $423,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
83
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outside Directors' Retirement Plan.
The Retirement Plan for Board Members of MSB Bancorp, Inc. ("Directors'
Retirement Plan") was adopted as of October 21, 1994 and was subsequently
amended effective as of October 31, 1997. The purpose of the Directors'
Retirement Plan is to provide retirement benefits to outside directors of the
Company and the Bank.
The Directors' Retirement Plan, as amended effective as of October 31,
1997, provides for a normal retirement benefit to be paid to each director who
retires after attaining age 65 and completing at least 10 years of "creditable
service" and who agrees to provide consulting services to the Company following
retirement. "Creditable service" is defined generally in the Directors'
Retirement Plan, as amended, to mean service on the Company's Board of
Directors, or on the Board of Directors (or board of trustees) of the Bank,
including any service completed while the director was a salaried officer or
employee of the Bank. The annual normal retirement benefit payable to a director
upon retirement at age 65 under the Directors' Retirement Plan is calculated
based on the annual retainer being paid to the director for service on the Board
of Directors of the Bank or the Company (whichever is greater in the case of a
member of both Boards), as in effect in the month in which the director ceases
to be a member of such Board. Pursuant to the Retirement Plan, as amended,
"annual retainer" means the sum of the (i) annual retainer; (ii) aggregate
committee meeting fees; and (iii) property inspection fees, if any, paid to the
Board member for the relevant period. The Directors' Retirement Plan also
provides for the payment of a vested retirement benefit which may also commence
after a director attains age 50 but prior to attainment of age 65. If a vested
early retirement benefit is elected, the Directors' Retirement Plan provides for
the amount of the benefit otherwise payable to be reduced by 0.5% for each month
the benefit commencement date precedes the date on which the director would have
attained age 65.
In the event of a "change of control" of the Company, as defined in the
Plan, each director would receive a benefit based upon credit for three
additional years of age and service. Additionally, upon a change of control, the
Directors' Retirement Plan permits each director to elect a lump sum payment of
his or her benefit under the plan and for such benefit to be subject to an early
retirement reduction factor of 0.25% rather than 0.5% per month. In the event a
director's service terminates within the period beginning three months prior to,
and ending three years after, a change of control, the director would not be
required to provide consulting services in order to receive retirement benefits.
The Directors' Retirement Plan was terminated effective as of December 31,
1997 and all benefits payable to participating directors (including accelerated
benefits payable as a result of the Merger) were accrued and determinable as of
the Plan's termination date. Effective upon the termination of the Directors'
Retirement Plan, the Company accrued a $2.8 million expense for the benefits
that became vested for participating directors as a result of the Plan's
termination.
(14) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has various outstanding
commitments and contingent liabilities that have not been reflected in the
consolidated financial statements.
The principal commitments and contingent liabilities of the Company are
discussed in the sections that follow.
84
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease Commitments
The future minimum lease payments under operating leases at December 31,
1997 are as follows:
Year Ending December 31, Amount
------------------------ ------
(In thousands)
1998 ................................ $ 225
1999 ................................ 221
2000 ................................ 220
2001 ................................ 222
2002 ................................ 191
2003 and thereafter.................. 1,163
------
Total minimum lease payments .... $2,242
======
Loan Commitments and Lines of Credit
At December 31, 1997 and 1996, the Company's commitments to originate
loans, including unused lines of credit, were as follows:
1997 1996
------- -------
(In thousands)
Real estate loans ............................ $61,936 $36,833
Other loans .................................. 5,396 5,292
Stand-by letters of credit ................... 829 102
------- -------
Total commitments ......................... $68,161 $42,227
======= =======
Commitments to extend credit are contractual agreements to lend to
customers within specified time periods at interest rates and on other terms
based on existing market conditions. Commitments generally have fixed expiration
dates or other termination clauses and may require the payment of a fee by the
customer. The Company's outstanding loan commitments and lines of credit do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully drawn
upon. The credit risk associated with loan commitments and lines of credit is
essentially the same as for outstanding loans reported in the balance sheet.
Commitments and lines of credit are subject to the same credit approval process,
including case-by-case evaluation of the customer's creditworthiness and related
collateral requirements. Substantially all of these commitments have been
entered into with customers within the Bank's lending region as described in
Note 5. Loan commitments include extensions of credit with adjustable rates of
$60,513,000 and $35,422,000 at December 31, 1997 and 1996, respectively, and
extension of credit with fixed rates of $7,648,000 and $6,805,000 at December
31, 1997 and 1996, respectively.
85
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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 in excess of 5% of the outstanding shares of
the Common Stock and purport to represent a class consisting of all stockholders
except the stockholder defendants, allege that the defendant directors breached
their duty of care by failing to become fully informed about the expression of
interest of HUBCO, Inc. ("HUBCO"); breached their duty of disclosure to
stockholders by not notifying the public or the Company's stockholders of
HUBCO's expression of interest; and breached their duty of good faith and fair
representation by, among other things, not investigating whether the Acquisition
constituted a reasonable alternative for building stockholder value. The
plaintiffs further allege that the Company's offering of Common Stock in
connection with the Acquisition (the "Common Stock Offering") was not intended
to enhance stockholder value, but rather was for the purpose of diluting the
ownership and voting strength of existing stockholders and further entrenching
existing management and the Board. The plaintiffs sought to enjoin the Common
Stock Offering and are also seeking damages equal to the difference between the
market price of the Common Stock on September 7, 1995, and $35 (approximately
$14,989,000 in the aggregate) or, in the alternative, the difference between the
market price of the Common Stock on October 26, 1995, and $25 (approximately
$7,394,000 in the aggregate), including interest and attorneys' and other
professional fees. In connection with this action, plaintiffs filed a motion
seeking expedited discovery and scheduling. On December 6, 1995, in response to
the plaintiffs' motion for expedited proceedings, which was treated by the Court
as an application for a temporary restraining order with respect to the Common
Stock Offering, the Court denied the plaintiffs' application for such order. On
December 12, 1995, the court denied the plaintiffs' motion for re-argument. On
December 18, 1995, the Company filed an answer denying all of the substantive
allegations in the complaint and seeking, among other things, an order
dismissing the complaint with prejudice. Plaintiffs amended their complaint to
include allegations relating to an unsolicited merger proposal received by the
Company from the First Empire State Corporation ("First Empire") on December 28,
1995. Specifically, the amended complaint alleges, among other things, that the
Company's Board of Directors, in breach of its duties of care, loyalty and
disclosure, relied on the advice of Bear, Stearns & Co., Inc. ("Bear Stearns"),
the Company's financial advisor and underwriter for the Offering, knowing that
Bear Stearns could not render independent financial advice regarding the First
Empire proposal. The plaintiffs are seeking alternative damages based on these
allegations in an amount equal to the difference between the market price of the
Common Stock on December 28, 1995 and $26 (approximately $11,560,000 in the
aggregate). The Company filed its amended answer on February 1, 1996 denying all
of the substantive allegations in the amended complaint and seeking, among other
things, an order dismissing the amended complaint with prejudice. The parties
have engaged in substantial written discovery, and plaintiffs have deposed all
of the directors and 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. The Company has requested oral argument on the motion. In the meantime,
the Company intends to continue to vigorously contest the allegations of
wrongdoing in this action.
86
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(15) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets at December 31, 1997 and 1996 and
condensed statements of income and cash flows for the years ended December 31,
1997, 1996 and 1995 for MSB Bancorp, Inc. should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto.
December 31,
-----------------------------
BALANCE SHEET 1997 1996
-------- --------
(In thousands)
ASSETS
Cash and cash equivalents................ $ 215 $ 58
Federal funds............................ -- 400
Securities available for sale............ 100 25
Equity in net assets of subsidiary....... 74,133 70,825
Other assets............................. 1,554 783
-------- --------
$ 76,002 $ 72,091
======== ========
LIABILITIES
Dividends payable........................ $ 710 $ 708
Accrued expenses......................... 334 161
ESOP obligation.......................... 182 432
-------- --------
Total liabilities.................. $ 1,226 $ 1,301
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stock.......................... $ 6 $ 6
Common Stock............................. 30 30
Additional paid-in capital............... 48,069 48,163
Retained Earnings........................ 31,458 32,009
Treasury stock, at cost.................. (3,941) (4,137)
Unallocated ESOP stock................... (182) (432)
Unallocated BRP stock.................... (42) (172)
Net unrealized loss on securities
available for sale..................... (622) (4,677)
-------- --------
Total stockholders' equity......... $ 74,776 $ 70,790
-------- --------
$ 76,002 $ 72,091
======== ========
87
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended
December 31
--------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Interest income .............................................................. $ 15 $ 22 $ 120
Dividends from subsidiary .................................................... 3,560 953 750
-------- -------- --------
Total income ................................................................. 3,575 975 870
Expenses ..................................................................... 190 340 380
-------- -------- --------
Income before income taxes and equity in
undistributed earnings of subsidiary ...................................... 3,385 635 490
Income tax expense (benefit) ................................................. (52) (91) (115)
-------- -------- --------
Income before equity in undistributed earnings of subsidiary ................. 3,437 726 605
Equity in undistributed (excess distributions of) earnings of
subsidiary ................................................................... (1,156) 985 1,756
-------- -------- --------
Net income ................................................................ $ 2,281 $ 1,711 $ 2,361
======== ======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31
--------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income ................................................................... $ 2,281 $ 1,711 $ 2,361
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiary not providing funds ..................... 1,156 (985) (1,756)
(Increase) decrease in other assets ...................................... (1,086) (25) 187
Increase (decrease) in accrued expenses .................................. 173 138 (65)
Other .................................................................... 45 (13) 57
-------- -------- --------
Net cash (used in) provided by operating activities ...................... $ 2,569 $ 826 $ 784
-------- -------- --------
Cash Flows From Investing Activities
Purchase of securities ....................................................... $ (75) $ (25) $ --
Maturities of investment securities .......................................... -- -- 2,000
-------- -------- --------
Net cash (used in) provided by investing activities .......................... $ (75) $ (25) $ 2,000
-------- -------- --------
Cash Flows From Financing Activities
Proceeds from the sale of stock .............................................. $ -- $ 32,013 $ --
Infusion of capital to subsidiaries .......................................... -- (33,513) --
Proceeds from the exercise of stock dividends ............................... 102 40 212
Purchase of treasury stock ................................................... -- -- (2,038)
Payment of common and preferred stock dividends .............................. (2,839) (2,387) (979)
-------- -------- --------
Net cash provided by financing activities .................................... $ (2,737) $ (3,847) $ (2,805)
-------- -------- --------
Net decrease in cash and cash equivalents .................................... $ (243) $ (3,046) $ (21)
Cash and cash equivalents at beginning of year ............................... 458 3,504 3,525
-------- -------- --------
Cash and cash equivalents at end of year ..................................... $ 215 $ 458 $ 3,504
======== ======== ========
</TABLE>
88
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the Company to disclose estimated fair values for its financial
instruments. Whenever possible, quoted market prices are used to estimate the
fair value of a financial instrument. An active market does not exist, however,
for many financial instruments. As a result, fair value estimates are made, as
of a specific date, based on judgments regarding future expected cash flows,
current economic conditions, risk factors and other characteristics of the
financial instrument. These estimates are subjective in nature and involve
uncertainties. Changes in these judgments often have a material impact on the
fair value estimates. In addition, since these estimates are made as of a
specific date, they are susceptible to material changes in the near future. The
information presented is based on pertinent information available to management
as of December 31, 1997 and 1996. Although management is not aware of any
factors, other than changes in interest rates, that would significantly affect
the estimated fair values, the current estimated value of these instruments may
have changed significantly since that point in time. Fair value estimates,
methods, and assumptions are set forth below for the Company's financial
instruments.
Investments and Mortgage-Backed Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concern. The fair value of longer-term investments and mortgage-backed
securities, except certain state and municipal securities, is estimated based on
bid prices published in financial newspapers or bid quotations received from
securities dealers.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and non-performing categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Bank's historical experience with
repayments for each loan classification, modified, as required, by an estimate
of the effect of discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources adjusted to
reflect differences in servicing and credit costs.
Fair value for significant non-performing loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as non-interest bearing demand deposits, savings and NOW accounts and money
market and checking accounts, is equal to the amount payable on demand. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
89
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the carrying values and estimated fair values
of the Company's financial instruments at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks ......................................... $ 16,834 16,834 $ 16,375 $ 16,375
Federal funds sold .............................................. 21,065 21,065 32,590 32,590
Securities available for sale ................................... 54,082 54,082 50,685 50,685
Mortgage-backed securities available for sale ................... 225,680 225,680 323,428 323,428
Loans, net ...................................................... 391,429 394,592 338,491 340,479
Accrued interest receivable ..................................... 5,049 5,049 5,552 5,552
Financial Liabilities:
Non-interest bearing demand ..................................... 51,961 51,961 47,441 47,441
Savings and NOW ................................................. 238,969 238,969 232,944 232,944
Money market .................................................... 52,594 52,594 52,004 52,004
Time deposits ................................................... 329,908 331,520 403,772 406,160
</TABLE>
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1997 Quarter Quarter Quarter Quarter
- ---------------------------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Quarterly Operating Data
Interest income ................................................. $ 13,526 $ 13,697 $ 13,118 $ 12,823
Interest expense ................................................ 7,446 7,469 7,007 6,758
-------- -------- -------- --------
Net interest income ............................................. 6,080 6,228 6,111 6,065
Provision for loan losses ....................................... 300 275 275 715
Realized gains (losses) on securities ........................... 15 15 36 155
Other non-interest income ....................................... 942 1,068 1,249 1,258
Termination of Retirement Plan for Directors .................... -- -- -- 2,800
Non-interest expense ............................................ 5,178 5,220 5,081 5,575
-------- -------- -------- --------
Income before income taxes ...................................... 1,559 1,816 2,040 (1,612)
Income tax expense .............................................. 602 731 810 (621)
-------- -------- -------- --------
Net income (loss) ............................................... $ 957 $ 1,085 $ 1,230 $ (991)
======== ======== ======== ========
Basic earnings (loss) per share ................................. $ 0.24 $ 0.28 $ 0.33 $ (0.45)
======== ======== ======== ========
Diluted earnings (loss) per share ............................... $ 0.24 $ 0.28 $ 0.33 $ (0.45)
======== ======== ======== ========
</TABLE>
90
<PAGE>
MSB Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1996 Quarter Quarter Quarter Quarter
- ---------------------------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Quarterly Operating Data
Interest income ................................................. $ 13,125 $ 13,740 $ 13,853 $ 13,632
Interest expense ................................................ 7,576 7,680 7,785 7,752
-------- -------- -------- --------
Net interest income ............................................. 5,549 6,060 6,068 5,880
Provision for loan losses ....................................... 250 320 400 430
Realized gains (losses) on securities ........................... (1) 18 (48) 35
Other non-interest income ....................................... 864 1,022 1,012 1,125
SAIF assessment ................................................. -- -- 2,925 --
Non-interest expense ............................................ 5,139 5,211 5,213 4,881
-------- -------- -------- --------
Income before income taxes ...................................... 1,023 1,569 (1,506) 1,729
Income tax expense .............................................. 435 653 (648) 664
-------- -------- -------- --------
Net income (loss) ............................................... $ 588 $ 916 $ (858) $ 1,065
======== ======== ======== ========
Basic earnings (loss) per share ................................. $ 0.13 $ 0.23 $ (0.41) $ 0.28
======== ======== ======== ========
Diluted earnings (loss) per share ............................... $ 0.12 $ 0.22 $ (0.41) $ 0.27
======== ======== ======== ========
</TABLE>
(18) SAVINGS ASSOCIATION INSURANCE FUND (SAIF) ASSESSMENT
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on FDIC-insured institutions with SAIF-assessable deposits,
such as the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996. The special
assessment was recognized as an expense in the third quarter of 1996 and is tax
deductible. The Bank incurred a pre-tax charge of $2.9 million as a result of
the FDIC special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning January 1,
1997, BIF deposits will be assessed for FICO payments at a rate of 20% of the
rate assessed on SAIF deposits. The annual rate of assessments for the payments
on the FICO bonds for the semi-annual period beginning on January 1, 1997 was
0.0130% for BIF-assessable deposits and 0.0648% for SAIF-assessable deposits.
For the semi-annual period beginning on July 1, 1997, the rates of assessment
for the FICO bonds was 0.0126% for BIF-assessable deposits and 0.0630% for
SAIF-assessable deposits. The Funds Act provides that the full pro rata sharing
of the FICO payments between BIF and SAIF members will occur on the earlier of
January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act also
specifies that the BIF and SAIF will be merged on January 1, 1999 provided no
savings associations remain as of that time. Proposed legislation agreed to in
March 1998 by the House Committee on Banking and Financial Services and the
House Committee on Commerce provides for the retention of the thrift charter and
for the merger of the BIF and the SAIF on January 1, 2000.
As a result of the recapitalization of the SAIF, the FDIC reduced the SAIF
assessment rates to a range of 0 to 27 basis points effective January 1, 1997, a
range comparable to that of BIF members. However, SAIF members will continue to
make the higher FICO payments described above. Management cannot predict the
level of FDIC insurance assessments on an on-going basis, whether the savings
association charter will be eliminated, or whether the BIF and SAIF will
eventually be merged.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
Item 10. Directors and Officers of the Registrant.
Directors
The following table sets forth the names of the Company's directors, their
ages and the year in which each became a director of the Company. There are no
arrangements or understandings between the Company and any director pursuant to
which such person was elected or nominated to be a director of the Company.
<TABLE>
<CAPTION>
End of Director
Name Age(1) Term Position Held with the Company Since
- ---- ------ ---- ------------------------------ -----
<S> <C> <C> <C> <C>
Joan M. Costello 72 1998 Director 1972
Ralph W. Decker 70 1999 Director 1982
Joseph R. Donovan 74 1998 Director 1983
John L. Krause 65 1999 Director 1980
William C. Myers 52 1998 Chairman of the Board, President and
Chief Executive Officer, Director 1992
John W. Norton 69 2000 Director 1978
Douglas Porto 67 1998 Director 1966
Nicholas J. Scali 70 2000 Director 1979
Daniel R. Snyder 48 2000 Director 1989
Frederick B. Wildfoerster, Jr. 73 1999 Director 1966
</TABLE>
- -----------------------
(1) At February 14, 1998.
Executive Officers
The executive officers of the Company and Bank include Mr. Myers, who also
serves as a director of the Company and the Bank, Gill Mackay, Anthony J.
Fabiano, and Karen DeLuca, who do not serve as directors of the Company or the
Bank.
Biographical Information
The principal occupation and business experience of each director and
executive officer is set forth below.
Directors
Joan M. Costello retired as Executive Vice President of the Bank in 1991.
Ralph W. Decker is a retired dentist.
Joseph R. Donovan is owner of Donovan Funeral Home, Goshen, New York. Mr.
Donovan also serves as a director of MSB Financial Services, Inc.
John L. Krause retired in 1994 as the Superintendent of Schools in the
Clarkstown, New York, Central School District.
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<PAGE>
William C. Myers is the Chairman of the Board, President and Chief
Executive Officer of the Company. Mr. Myers was named by the Bank's Board of
Directors as President and Chief Executive Officer of the Bank on September 1,
1992. Mr. Myers serves as Chairman of the Board of MSB Financial Services, Inc.
and MSB Travel, Inc. Effective October 1, 1993, Mr. Myers became Chairman of the
Board of Directors of the Company and the Bank. Mr. Myers previously was
Executive Vice President of the Bank and has been employed by the Bank for 26
years.
John W. Norton retired in 1989 as President and Chief Executive of Horton
Memorial Hospital, a position he had held for the previous 18 years.
Douglas Porto retired in 1989 after 30 years as President and Chief
Executive Officer of Wallace Oil Company, Inc. Mr. Porto also serves as a
director of MSB Travel, Inc.
Nicholas J. Scali retired as the Bank's President and Chief Executive
Officer in August 1992. Effective September 30, 1993, Mr. Scali retired as
Chairman of the Board. Mr. Scali serves as a director of the Retirement System
Group, Inc.
Daniel R. Snyder is President and owner of Mid-City Transit Corp., a school
bus and transportation company.
Frederick B. Wildfoerster is self-employed as an architect.
Executive Officers who are not Directors
Gill Mackay - Mr. Mackay was appointed Executive Vice President, Chief
Operating Officer and Treasurer on January 1, 1993. Prior to that, Mr. Mackay
served as Senior Vice President, Finance and Chief Financial Officer since 1989.
He joined the Bank in 1984 as Assistant Vice President of Accounting. Mr. Mackay
is 51 years old.
Anthony J. Fabiano - Mr. Fabiano was appointed Senior Vice President and
Chief Financial Officer effective January 1, 1996. Prior to that, Mr. Fabiano
served as Vice President, Finance and Chief Financial Officer since January 1,
1993. He joined the Bank in May 1992 as Vice President, Finance. Prior to that,
he was a senior manager with KPMG Peat Marwick, a public accounting firm. Mr.
Fabiano is 37 years old.
Karen S. DeLuca - Mrs. DeLuca joined the Bank in 1985 and has served as the
Corporate Secretary since 1991. Prior to that, she served as the assistant
Corporate Secretary. Ms. DeLuca is 49 years old.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act") requires the Company's directors and certain officers, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC") and the American Stock Exchange. Officers, directors
and greater than ten percent stockholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such reports of ownership furnished
to the Company, or written representations that no forms were necessary, the
Company believes that, during the last fiscal year, all filing requirements
applicable to its officers, directors and greater than ten percent stockholders
were complied with.
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<PAGE>
Item 11. Executive Compensation.
Directors' Compensation
Fee Arrangements. Directors of the Company receive a $3,000 annual retainer
fee. Directors of the Bank, who are not officers of the Bank, receive a $18,000
annual retainer fee. Members of the Committees receive $100 for each meeting
attended. Board members who perform property inspections receive $50 per hour
for their services. Directors may defer receipt of these fees by participating
in the MSB Bank Directors' Deferred Compensation Plan. See "Directors' Deferred
Compensation Plan."
Deferred Compensation Plan. The Bank maintains the MSB Bank Directors'
Deferred Compensation Plan (the "Directors' Deferred Compensation Plan"). Under
the Directors' Deferred Compensation Plan, members of the Board of Directors who
have been directors for at least one year may elect, prior to the time such fees
are earned, to defer all or part of the fees payable to them for their service
as directors. The fees so deferred are recorded on the books of the Bank as a
liability in the year the fees are earned; however, the amount so deferred is
not specifically "funded" by the Bank. The Directors' Deferred Compensation Plan
was amended and restated effective as of June 1, 1995 to provide that any
deferred fees will be deemed to be invested, at the participant's direction,
among certain investment classifications established by the Compensation
Committee of the Board. The current investment classifications for the
Directors' Deferred Compensation Plan are based on the investment funds under
the Bank's 401(k) Savings Plan. A participant's deferred fees, and any earnings
or losses attributable to such fees, generally are disbursed to a director, in
cash, not earlier than the time his or her service with the Board terminates due
to retirement or disability, or upon attainment of age 70. Upon a change of
control, as defined in the Directors' Deferred Compensation Plan, a director may
elect to receive an immediate lump sum payment of his deferred amounts. In the
year ended December 31, 1997, Mr. Snyder elected to defer $21,700 of his
director's fee.
The Bank has established an irrevocable grantor trust to hold fees deferred
under the Directors' Deferred Compensation Plan. Pursuant to the terms of the
trust, in the event of the Bank's insolvency, trust assets will be considered
part of the general assets of the Bank, and the participants in the Directors'
Deferred Compensation Plan will have no rights with respect to the trust's
assets other than those of unsecured creditors. Marine Midland Bank has been
appointed to serve as the independent corporate trustee of the grantor trust.
This trust has been structured to comply with guidance issued from the Internal
Revenue Service ("IRS") such that the establishment of the trust should not
cause the Directors' Deferred Compensation Plan to be considered "funded" by the
Bank and, therefore, the directors who participate in the Directors' Deferred
Compensation Plan will not recognize income with respect to the deferred fees
until distributions are made from the Directors' Deferred Compensation Plan. The
Bank will include any trust earnings in its income.
Outside Directors' Retirement Plan. In accordance with the terms of the
Merger Agreement, the Company has terminated, effective as of December 31, 1997,
the Retirement Plan for Board Members of MSB Bancorp, Inc. (the "Directors'
Retirement Plan"). The Directors' Retirement Plan was implemented effective as
of October 21, 1994 in order to provide retirement benefits to directors of the
Company and the Bank.
The Directors' Retirement Plan, as amended effective as of October 31,
1997, provides for a normal retirement benefit to be paid to each director who
retires after attaining age 65 and completing at least 10 years of "creditable
service" and who agrees to provide consulting services to the Company following
retirement. "Creditable service" is defined generally in the Directors'
Retirement Plan to mean service on the Company's Board of Directors, or on the
Board of Directors (or board of trustees) of the Bank, including any service
completed while the director was a salaried officer or employee of the Bank. The
annual normal retirement benefit payable to a director upon retirement at age 65
under the Directors' Retirement Plan is calculated based on the annual retainer
being paid to the director for service on the Board of Directors of the Company
or the
94
<PAGE>
Bank (whichever is greater in the case of a member of both Boards), as in effect
in the month in which the director ceases to be a member of such Board. Pursuant
to the Retirement Plan, as amended, "annual retainer" means the sum of the (i)
annual retainer; (ii) aggregate committee meeting fees; and (iii) property
inspection fees, if any, paid to the Board member for the relevant period. The
Directors' Retirement Plan also provides for the payment of a vested retirement
benefit upon the occurrence of certain events, including termination of the
Plan, which may commence at any time after a director attains age 50 at the
director's election upon retirement. The annual vested retirement benefit
commencing at or after age 65 is equal to the annual normal retirement benefit
multiplied by the lesser of 1.00 or the subtotal of the director's years of
creditable service divided by 10. If a vested early retirement benefit is
elected, the Directors' Retirement Plan provides for the amount of the benefit
otherwise payable to be reduced by 0.5% for each month the benefit commencement
date precedes the date on which the director would have attained age 65.
In the event of a "change of control" of the Company, as defined in the
Directors' Retirement Plan, each director would receive a benefit based upon
credit for three additional years of age and service. Additionally, upon a
change of control, the Directors' Retirement Plan permits each director to elect
a lump sum payment of his or her benefit under the Plan and for such benefit to
be subject to an early retirement reduction factor of 0.25% rather than 0.5% per
month. In the event a director's service terminates within the period beginning
three months prior to, and ending three years after, a change in control, the
director would not be required to provide consulting services in order to
receive retirement benefits.
In accordance with the Merger Agreement, the Company has amended the
Directors' Retirement Plan to provide for its termination effective as of
December 31, 1997. Pursuant to the termination amendment, all benefits under the
Directors' Retirement Plan have become vested and non-forfeitable, and all
benefit accruals have ceased effective as of the Plan's termination date. In
addition, pursuant to the terms of the Merger Agreement, the Directors'
Retirement Plan has been amended to provide for each director's retirement
benefit to be determined as if a change of control of the Company had occurred
effective as of December 31, 1997 and for benefits to be immediately
distributable to the directors. The estimated average annual benefit payable to
a participant upon retirement at or after age 65 based on an average $29,400
annual retainer currently in effect for directors of the Company and assuming 10
years of service would be approximately $29,400 per year.
The Directors' Retirement Plan is unfunded. All benefits payable under the
Directors' Retirement Plan will be paid from the Company's current assets. As
soon as practicable, the Company will either purchase an annuity to pay the
directors' benefits upon retirement or will make a lump sum distribution to each
director of his or her plan benefits in the 1998 calendar year. There are no tax
consequences to either the director or the Company until benefits are paid out
to the director. At that time, the director will recognize income in the amount
of the payment, and the Company will be entitled to an offsetting deduction. The
actions described above will occur whether or not the Merger is consummated.
Directors' Option Plan. The Company adopted the MSB Bancorp, Inc. 1992
Stock Option Plan For Outside Directors ("Directors' Option Plan") pursuant to
which each outside director at the time of the conversion of the Bank from
mutual to stock ownership form ("Conversion") received an option to purchase
shares of Common Stock, the amount of which was determined by a formula based on
years of service on the Board, at a price of $10.00 per share. Any individual
who becomes an outside director will be granted a non-statutory stock option to
purchase 3,375 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock at the date of grant. However, to the extent
there are less than 3,375 shares remaining for issuance under the Directors'
Option Plan, such outside director shall be granted a non-statutory stock option
to purchase a number of shares of Common Stock equal to the remaining shares
available for issuance. No options were granted or canceled during fiscal 1997,
and 8,217 options were exercised during the year. Options for 41,083 shares of
Common Stock were exercisable as of December 31, 1997.
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<PAGE>
Executive Compensation
Summary Compensation Table. The following table shows, for the fiscal years
ended December 31, 1997, 1996 and 1995, the cash compensation paid by the Bank,
as well as certain other compensation paid or accrued for those years, to the
Chief Executive Officer and the highest paid executive officer whose base salary
and bonus exceeded $100,000 in 1997 ("Named Executive Officers") of the Company.
The Company has not paid any cash compensation to the Named Executive Officers.
No other officers received total compensation in excess of $100,000 in fiscal
1997.
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------- ---------------------- -------------------------
All
Other Restricted Other
Annual Stock Options/ LTIP Annual
Name and Salary Bonus Compensation(2) Awards(3) SARs(4) Payouts Compensation(5)
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
------------------ ---- ------ ----- --------------- --------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William C. Myers(1)
Chairman of the Board,
President and Chief
Executive Officer...... 1997 192,069 11,875 -- -- -- -- 43,434
1996 162,490 17,262 -- -- -- -- 38,137
1995 142,934 6,365 -- -- -- -- 27,029
Gill Mackay
Executive Vice President
and Chief Operating
Officer............ 1997 123,322 7,095 -- -- -- -- 34,082
1996 117,192 12,475 -- -- -- -- 29,801
1995 99,164 4,500 -- -- -- -- 19,296
</TABLE>
- ------------------------
(1) Salary includes director fees paid to Mr. Myers.
(2) Perquisites for the years ended December 31, 1997, December 31, 1996 and
December 31, 1995 did not exceed the lesser of $50,000 or 10% of the total
of salary and bonus as reported for the Named Executive Officer.
(3) The Bank maintains the MSB Recognition and Retention Plans and Trusts
("BRPs") for the benefit of certain key officers and directors. Restricted
stock awards made under the BRPs vest in equal installments at a rate of
20% per year. At December 31, 1997, all awards were fully vested and no
additional restricted stock awards were granted.
(4) The Company maintains the MSB Bancorp, Inc. 1992 Incentive Stock Option
Plan ("Incentive Stock Plan") for the benefit of officers and employees.
Options granted under the Incentive Stock Plan generally vest in equal
installments at a rate of 20% per year over a five-year period. However,
options granted under this Plan will automatically become 100% vested upon
the earlier termination of an option holder's employment due to death,
disability or retirement or following a change in control. At December 31,
1997, of the 32,200 options that had been originally granted to Mr. Myers,
2,000 were exercised in 1997 and 13,435 remain presently exercisable. The
balance of the 32,000 options originally granted to Mr. Myers were
exercised by him in prior years. Mr. Mackay was granted 19,320 options, all
of which are presently exercisable. Mr. Mackay did not exercise any options
in 1997.
(5) Includes allocations under the Bank's Employee Stock Ownership Plan
("ESOP") of 946, 1,542, and 1,461 shares of Common Stock for 1997, 1996 and
1995 with a total market value of $35,593, $30,262 and $27,029,
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<PAGE>
respectively, as of December 31, 1997, 1996 and 1995 for the account of Mr.
Myers and allocations under the ESOP of 763, 1,205, and 1,043 shares of
Common Stock for 1997, 1996 and 1995 with a market value of $28,708,
$23,648 and $19,296, respectively, as of December 31, 1997, 1996 and 1995
under the ESOP for the account of Mr. Mackay. These figures also include
the dollar amounts of the employer contributions made by the Bank to its
401(k) Savings Plan on behalf of Mr. Myers and Mr. Mackay for the years
ending December 31, 1997 and December 31, 1996. The dollar amounts of the
contributions made by the Bank to the Plan on Mr. Myers' behalf totaled
$7,841 and $7,875 for fiscal 1997 and 1996 and the dollar amounts of the
Bank's contributions to the Plan on Mr. Mackay's behalf totaled $5,324 and
$6,153 for these years. The Bank resumed making contributions to the 401(k)
Savings Plan in fiscal 1996 due to the termination of its tax-qualified
pension plan which occurred in 1995.
Employment Agreements
Under the Merger Agreement, HUBCO has agreed to honor Mr. Myers' existing
employment agreement with the Company dated effective as of September 3, 1994,
and amended effective as of September 3, 1995, September 3, 1996 and October 31,
1997 (the "Myers Employment Agreement"), provided the Company and Mr. Myers
adopt certain amendments to this agreement, described below, effective at the
Closing (as defined in the Merger Agreement). The Myers Employment Agreement
provides for a five year term that will automatically be extended to a full five
years upon a "change of control" of the Company or the Bank, as defined in the
Agreement. In addition, pursuant to the amendments to the Myers Employment
Agreement adopted in 1997, if a change of control of the Company or the Bank
occurs, Mr. Myers or, in the event of his death, his beneficiary, would be
entitled to receive a payment equal to the remaining salary payments due under
the Agreement together with all other cash compensation and benefits, including
life, health, dental and disability coverages, for the full five year term of
the Agreement, regardless of whether his employment terminates, on a voluntary
or involuntary basis, as a result of such change of control. The Myers
Employment Agreement also provides that in the event the present value of the
total payments to be made to Mr. Myers upon a change of control of the Company
or the Bank constitute an "excess parachute payment" under Section 280G of the
Code that would trigger the payment of excise taxes under Section 4999 of the
Code, the Company will indemnify Mr. Myers for the amount of the excise taxes
and the amount of any income and employment tax liability that would be
triggered as a result of such indemnification (a "gross-up provision").
Since it is anticipated that the Merger will constitute a "change of
control" of the Company and the Bank under the Myers Employment Agreement, and
it is expected that the total present value of the amounts payable to Mr. Myers
upon such event would constitute "excess parachute payments" under Section 280G
of the Code, thereby triggering the excise taxes under Section 4999 of the Code
and the application of the gross-up provision in the Myers Employment Agreement,
the Company and Mr. Myers have agreed to amend the Myers Employment Agreement,
in a manner acceptable to HUBCO and effective at the Closing (as defined in the
Merger Agreement), to reduce the total present value of the payment to be made
to Mr. Myers under the Agreement so that the aggregate amount of such
distribution would not constitute an "excess parachute payment" under Section
280G of the Code. Based on Mr. Myers' current annual rate of salary of $199,500
and pursuant to the terms of the Myers Employment Agreement, as it is
anticipated to be amended, if a change of control occurs on March 31, 1998, it
is expected that Mr. Myers would receive a payment under the Myers Employment
Agreement having a present value of approximately $561,000, including all
non-cash benefits.
The Merger Agreement also provides for HUBCO to honor the employment
agreement entered into between the Company and Gill Mackay, adopted effective as
of September 3, 1994, and subsequently amended effective as of September 3,
1995, September 3, 1996 and October 31, 1997, and the employment agreement
between the Company and Anthony J. Fabiano, adopted effective as of January 1,
1996 and subsequently amended effective as of January 1, 1997 and October 31,
1997 (collectively, the "Employment Agreements"). The Merger Agreement does not
require the Employment Agreements for Messrs. Mackay and Fabiano to be amended
in the manner described above for Mr. Myers.
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The Employment Agreements for Messrs. Mackay and Fabiano each provide for
an initial three year term. Pursuant to the Amendatory Agreements to these
Agreements adopted in 1997, the term of each executive's Employment Agreement
will automatically be extended to three years in the event a "change of control"
of the Company and the Bank occurs, as such term is defined in each Agreement.
In addition, pursuant to such 1997 amendments, upon a change of control, each
executive will automatically be entitled to receive a payment equal to the
remaining salary payments due under the Employment Agreement together with all
other cash compensation and benefits, including life, health, dental and
disability coverages, for the full three year term of the Agreement regardless
of whether the executive's employment terminates due to the change of control.
The Employment Agreements each contain a gross-up provision.
It is anticipated that the Merger will constitute a "change of control"
under each executive's Employment Agreement. Although it is expected that the
payments to be made and the benefits to be provided to each executive will
constitute "excess parachute payments" that would result in the imposition of
excise taxes, the determination of whether an excise tax will be due and the
amount of any such tax will be made on the basis of the circumstances prevailing
at the Effective Time (as defined in the Merger Agreement). Assuming a change of
control were to occur on March 31, 1998, based on the current annual rate of
salary in effect for Mr. Mackay and Mr. Fabiano of $135,450 and $99,750,
respectively, it is anticipated that Mr. Mackay and Mr. Fabiano would receive
payments having a present value of approximately $999,000 and $779,000,
respectively, including the value of all non-cash benefits. Any excess parachute
payments and indemnification amounts paid will not be deductible compensation
expenses for the Company or the Bank.
Special Termination Agreements
In the Merger Agreement, HUBCO has also agreed to honor the special
termination agreements the Bank has entered into with each of its
Vice-Presidents which include, Mary Ellen Rogulski, Karen DeLuca, Frances C.
Reilly, Frank J. Fogg, Steven R. Gleason, and Catherine Terwilliger
(collectively, the "Special Termination Agreements").
Effective upon a "change of control" of the Company or the Bank, each
Special Termination Agreement provides for an extension so that the remaining
term of each Agreement will be three years effective upon such event, as defined
int he Agreements. Each Special Termination Agreement also provides that if, at
any time following a change of control of the Company or the Bank and during the
term of such Agreement, the executive's employment is terminated for any reason
other than "for cause" as defined in the Agreement or if the executive were to
terminate his or her own employment following the change of control as a result
of the executive's (i) demotion or loss of title, office or significant
authority; (ii) reduction in the executive's compensation; (iii) relocation of
the executive's principal place of employment; (iv) material change in the
executive's working conditions; or (v) failure of the Bank (or its successor) to
continue to provide employee benefit programs substantially similar to those in
effect before the change of control, the executive, or, in the event of his or
her death, the executive's beneficiary, would be entitled to receive a severance
payment in the amount equal to the sum of (a) twice the executive's then current
annual base salary; (b) the contributions that would have been made by the Bank
on the executive's behalf to the Bank's 401(k) Savings Plan (and any other
tax-qualified defined contribution plan it maintains in which the executive
participates) for the two-year period following the executive's termination of
employment; and (c) the fair market value of any stock that would have been
awarded or allocated to the executive under the Bank's ESOP and any stock-based
incentive compensation plan for the two-year period following the executive's
termination of employment. The Bank or the Company would also be required to
continue life, health, and disability insurance coverage for the remaining
unexpired term of each executive's Special Termination Agreement.
It is anticipated that the Merger will constitute a "change of control"
under all of the Special Termination Agreements. The Special Termination
Agreements provide that if the total payment to be made to an executive
following a change of control constitutes an "excess parachute payment" under
Section 280G
98
<PAGE>
of the Code, the aggregate amount payable under each Agreement would be reduced
to the greater of (a) one dollar below the amount which would subject the
executive to the payment of an excise tax or (b) the net amount otherwise
payable to the executive excluding the 20% excise tax payable to the portion of
the payment constituting an "excess parachute payment." The current annual rate
of salary for Ms. Rogulski, Ms. DeLuca, Ms. Reilly, Mr. Fogg, Mr. Gleason and
Ms. Terwilliger is $71,400, $43,365, $67,200, $68,250, $58,800, and $63,000,
respectively. Accordingly, if it is assumed that a change of control and
termination were to occur on March 31, 1998, the aggregate amount payable,
including non-cash benefits, to Ms. Rogulski, Ms. DeLuca, Ms. Reilly, Mr. Fogg,
Mr. Gleason and Ms. Terwilliger under each executive's Special Termination
Agreement would be approximately $194,000, $111,000, $170,000, $170,000,
$206,000, and $159,000, respectively.
Option Plan
The following table provides certain information with respect to the number
of shares of Common Stock acquired through the exercise of, or represented by
outstanding, stock options held by the Named Executive Officers as of December
31, 1997 under the Company's Incentive Stock Plan. Also reported are the values
for "in-the-money" options, which represent the positive spread between the
exercise price of any such existing stock options and the year-end price of the
Common Stock, which was $37.625 per share.
<TABLE>
<CAPTION>
Number of Securities
Underlying Values of Unexercised
Unexercised in-the-Money
Shares Options/SARs at Options/SARs
Acquired Value Fiscal Year-End at Fiscal Year-End
on Exercise Realized (#) ($)
(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---------------- ------------- -------------------------------- ---------------------------
<S> <C> <C> <C> <C>
William C. Myers 2,000 18,000 13,435/0 371,142/0
Gill Mackay -- -- 19,320/0 533,715/0
</TABLE>
As of December 31, 1997, of the 32,200 options that had been originally granted
to Mr. Myers, 2,000 were exercised in 1997 and 13,435 remain presently
exercisable. The balance of Mr. Myers' original option grant was exercised in
prior fiscal years. Mr. Mackay had been granted 19,320 options, all of which
remain presently exercisable. Mr. Mackay did not exercise any options in 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as to those persons
believed by management to be beneficial owners of more than 5% of the
outstanding shares of Common Stock on February 25, 1998, as disclosed in certain
reports regarding such ownership filed with the Company or with the SEC in
accordance with Section 13 of the Exchange Act, by such persons and groups.
Other than those persons listed below, the Company is not aware of any person or
group, as such term is defined in the Exchange Act, that owns more than 5% of
the Common Stock as of February 25, 1998.
99
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number Percent of
Title of Class of Beneficial Owner of Shares Class(1)
- -------------- ------------------- --------- --------
<S> <C> <C> <C>
Common Stock Tontine Partners, L.P. 209,700(2) 7.4%
Tontine Financial Partners, L.P.
and Jeffrey Gendell, Managing
Member of Tontine
Management, L.L.C., and
Managing Member of Tontine
Overseas Associate, Ltd.
200 Park Avenue, Suite 3900
New York, NY 10166
Common Stock Smith Barney Inc. 160,025(3) 5.6%
388 Greenwich Street
New York, New York 10013
Common Stock Middletown Savings Bank 155,522(4) 5.5%
Employee Stock Ownership
Plan and Trust
35 Matthews Street
Goshen, New York 10924
Common Stock Bear, Stearns & Co., Inc. 144,400(5) 5.1%
115 South Jefferson Road
Whippany, New Jersey 07981
Common Stock Kahn Brothers & Co., Inc. 132,000(6) 4.6%
One Exchange Plaza
New York, New York 10006
</TABLE>
- ------------------------
(1) The total number of shares of Common Stock outstanding on March 8, 1998 was
2,844,153 shares.
(2) Information is based on a Schedule 13G dated December 4, 1997, in which
Tontine Partners, L.P., Tontine Financial Partners, L.P.and Jeffrey
Gendell, Managing Member of Tontine Management, L.L.C., and Managing Member
of Tontine Overseas Associate, Ltd., have the shared dispositive power and
the shared voting power over all of the shares.
(3) Information is based on a Schedule 13G dated February 5, 1997, in which
Smith Barney Inc. ("Smith Barney"), Smith Barney Holdings ("SB Holdings")
and Travelers Group Inc. ("Travelers") disclosed that none of such entities
had dispositive power over the shares and each such entity shared voting
power over all of the shares. Smith Barney is a broker-dealer registered
under Section 15 of the Exchange Act. Such Schedule 13G provides that SB
Holdings is the sole common stockholder of Smith Barney, and Travelers is
the sole stockholder of SB holdings.
(4) Shares of Common Stock were acquired by the ESOP in connection with the
Bank's Conversion. A committee consisting of non-employee members of the
Board of Directors administers the ESOP ("ESOP Committee"). An unrelated
corporate trustee for the ESOP ("ESOP Trustee") has been appointed by the
Board of Directors. The Committee instructs the ESOP Trustee regarding
investment of funds contributed to the ESOP. Each member of the Committee
disclaims beneficial ownership of the shares of Common Stock held in the
ESOP. Shares purchased by the ESOP are held in a suspense account and
released for allocation to participants' accounts annually. The
100
<PAGE>
ESOP Trustee must vote all allocated shares held in the ESOP in accordance
with the instructions of the participating employees. Unallocated shares
held in the suspense account will be voted by the ESOP Trustee in a manner
calculated to most accurately reflect the instructions it has received from
participants regarding the allocated stock, provided such instructions do
not conflict with the ESOP Trustee's fiduciary obligations under the
Employee Retirement Income Security Act of 1974, as amended. As of December
31, 1997, 112,306 shares of Common Stock had been allocated to
participants' accounts in the ESOP and 43,216 shares were held unallocated
by the ESOP Trustee.
(5) Information is based on a Schedule 13G dated January 16, 1998, in which
Bear, Stearns & Co., Inc. disclosed that it had sole dispositive and voting
power over 128,400 shares and shared voting and dispositive power over
16,000 shares.
(6) Information is based on a Schedule 13G dated January 16, 1998, in which
Kahn Brothers & Company disclosed that it had sole dispositive power over
all of the shares and sole voting power over all of the shares.
Stock Ownership of Management
The following table sets forth information with respect to the shares of
Common Stock beneficially owned by each director of the Company, by each Named
Executive Officer of the Company identified in the Summary Compensation Table
included elsewhere herein and all directors and executive officers of the
Company or the Company's wholly owned subsidiary, MSB Bank, as a group as of
March 25, 1998. For purposes of this table, an individual is considered to
"beneficially own" any securities (a) over which he or she exercises sole or
shared voting or investment power or (b) of which he or she has the right to
acquire beneficial ownership, including the right to acquire beneficial
ownership by the exercise of stock options, within 60 days after March 25, 1998.
As used herein, "voting power" includes the power to vote, or direct the voting
of, such securities, and "investment power" includes the power to dispose, or
direct the disposition of, such securities.
101
<PAGE>
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Common
Beneficial Stock
Name Title Ownership(1) Outstanding(8)
---- ----- ------------ --------------
<S> <C> <C> <C>
William C. Myers Chairman of the Board, 39,670(2)(3) 1.4%
President and Chief
Executive Officer,
Director
Gill Mackay Executive Vice 38,756(2)(3)(5) 1.3%
President and Chief
Operating Officer
Joan M. Costello Director 10,244(4) *
Ralph W. Decker Director 30,511(4)(5) 1.1%
Joseph R. Donovan Director 7,139(4) *
John L. Krause Director 14,403(4) *
John W. Norton Director 11,874(4) *
Douglas Porto Director 17,154(4)(5) *
Nicholas J. Scali Director 25,616(2)(3) *
Daniel R. Snyder Director 14,794(4)(5) *
Frederick B. Wildfoerster, Jr. Director 11,798(4) *
All directors and executive 224,185(6)(7)(8) 7.7%
officers as a group
(13 persons)
</TABLE>
- ---------------------
* Less than 1% of outstanding Common Stock.
(1) Except as otherwise noted, each person or relative of such person whose
shares are included herein exercises sole (or shared with spouse, relative
or affiliate) voting or dispositive power as to the shares reported.
(2) Includes 13,435 and 19,320 shares which may be acquired by Mr. Myers and
Mr. Mackay, respectively, pursuant to options granted under the Incentive
Stock Plan which are presently exercisable.
(3) Includes 3,796 and 5,045 shares held by the trustee of the Bank's 401(k)
Savings Plan which are allocable to the accounts of Mr. Myers and Mr.
Mackay, respectively, and as to which each shares voting and dispositive
power. Also includes 6,794, 5,035 and 486 shares allocated to Messrs.
Myers, Mackay and Scali, respectively, under the ESOP as to which each may
exercise voting power, but not dispositive power, except in limited
circumstances. Does not include the 43,216 shares held in the trust
established for the ESOP that have not been allocated to any individual's
account and as to which the members of the Bank's ESOP Committee, which
consists of Dr. Decker, Dr. Krause and Mr. Porto, may be deemed to share
dispositive power. Each member of the ESOP Committee disclaims beneficial
ownership of such shares.
(4) Includes 5,603, 6,497, 5,486, 6,128, 4,259, 8,997 and 4,113 shares which
may be acquired by Dr. Decker, Messrs. Wildfoerster and Donovan, Ms.
Costello, Messrs. Norton, Porto and Snyder, respectively, pursuant to
options granted under the Company's Directors' Option Plan which are
presently exercisable.
(5) Includes shares over which individuals share voting and dispositive power
(other than disclosed in notes 3 and 4) as follows: Mr. Mackay, 410 shares;
Mr. Decker, 23,068 shares; Mr. Porto, 6,696 shares; and Mr. Snyder, 400
shares.
102
<PAGE>
(6) Does not include 6,136 shares of Common Stock over which the Board of
Directors shares voting power which are held by the trust established for
the Directors' Deferred Compensation Plan, the MSB Bank Officers' Deferred
Compensation Plan and the supplemental retirement benefits provided for in
the employment agreements of Mr. Myers and Mr. Mackay to compensate them
for the benefits that they cannot receive under the Company's tax-qualified
employee benefit plans due to the limitations imposed under the Code. Each
member of the Board of Directors disclaims beneficial ownership of such
shares.
(7) Excludes 3,860 shares held by the BRPs which have not been allocated as to
which executive officers may share voting, but not dispositive, power.
Includes 73,838 shares subject to options awarded to directors and officers
under the Directors' Option Plan and Incentive Stock Plan which are
presently exercisable. Includes 18,769 shares allocated to executive
officers and to Mr. Scali under the ESOP, as to which such individuals may
exercise voting, but not dispositive power, except in limited
circumstances. Includes 10,749 shares held by the 401(k) Savings Plan
trustee which are allocable to the accounts of the executive officers and
as to which such officers shares voting and dispositive power.
(8) Percentages with respect to each person or group of persons have been
calculated on the basis of 2,844,153 shares of Common Stock, the number of
shares of Common Stock outstanding as of March 25, 1998, plus the number of
shares of Common Stock which such person or group has the right to acquire
within 60 days after March 25, 1998 by the exercise of stock options.
Item 13. Certain Relationships and Related Transactions.
From time to time the Bank makes loans to its and the Company's officers,
which loans are made in the ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and do not involve more than
the normal risk of collectibility or present other unfavorable features. The
Bank does not make loans to its directors or to the Company's directors.
Non-executive officers and other employees of the Bank may obtain mortgage loans
without the payment of points or application fees.
103
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed as part of
this report:
(1) The consolidated balance sheets of MSB Bancorp, Inc. and
subsidiary as of December 31, 1997, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended
December 31, 1997 together with the related notes and the independent
auditors' report of KPMG Peat Marwick LLP and Nugent and Haeussler, PC
(the Company's predecessor accountant), independent certified public
accountants.
(2) All other schedules omitted as they are not applicable.
(3) Exhibits
104
<PAGE>
DESIGNATION DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger by and among HUBCO, Inc., MSB
Bancorp, Inc. and MSB Bank (Incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K, filed on December 17,
1997)
3.1 Certificate of Incorporation of MSB Bancorp, Inc.
(Incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1, No. 33-47626, filed on July 13, 1992)
3.2 By-laws of MSB Bancorp, Inc. (Incorporated by reference to
Exhibit 3.2 to the Company's Form 10-K, dated March 22, 1996)
4.1 Specimen Stock Certificate (Incorporated by reference to
Exhibit 4.0 to the Registration Statement on Form S-1, No.
33-47626, filed on July 13, 1992)
4.2 Rights Agreement between MSB Bancorp, Inc. and Mellon Bank,
N.A., dated as of September 16, 1994 (Incorporated by
reference to Exhibit 2 to the Registration Statement on Form
8-A, filed on September 20, 1994)
4.3 Amendment No. 1, dated as of January 9, 1996, to Rights
Agreement between MSB Bancorp, Inc. and Mellon Bank, N.A.,
dated as of September 16, 1994 (Incorporated by reference to
Exhibit 4.3 to the Company's Form 10-K, dated March 22, 1996)
4.4* Amendment No. 2, dated as of December 15, 1997 to Rights
Agreement between MSB Bancorp, Inc. and Mellon Bank, N.A.,
dated as of September 16, 1994.
4.5 Certificate of Designations, Preferences and Rights of Series
A Junior Participating Preferred Stock of MSB Bancorp, Inc.
(Included as Exhibit A to the Rights Agreement set forth at
Exhibit 4.2)
4.6 Form of Right Certificate (Included as Exhibit B to the
Rights Agreement set forth at Exhibit 4.2)
4.7 Certificate of Designations, Preferences and Rights of 8.75%
Cumulative Convertible Preferred Stock, Series A of MSB
Bancorp, Inc. (Incorporated by reference to Exhibit 4.6 to
the Company's Form 10-K, dated March 22, 1996)
4.8 Specimen Stock Certificate for 8.75% Cumulative Convertible
Preferred Stock, Series A (Incorporated by reference to
Exhibit 4.7 to the Company's Form 10-K, dated March 22, 1996)
4.9 Preferred Stock Purchase Agreement, dated as of January 4,
1996, by and between MSB Bancorp, Inc. and HUBCO, Inc.,
regarding 8.75% Cumulative Convertible Preferred Stock,
Series A of MSB Bancorp, Inc. (Incorporated by reference to
Exhibit 4.8 to the Company's Form 10-K, dated March 22, 1996)
- ----------------------
* Included herewith.
105
<PAGE>
DESIGNATION DESCRIPTION
- ----------- -----------
4.10 Stock Option Agreement by and between HUBCO, Inc. and MSB
Bancorp, Inc. (Incorporated by reference to Exhibit No. 4.1
to the Company's Form 8-K, filed on December 17, 1997)
10.1 MSB Bank 401(k) Savings Plan, as amended and restated
effective as of July 1, 1995 (Incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-2, No.
33-97904)
10.2 Middletown Savings Bank Employee Stock Ownership Plan and
Trust, effective as of January 1, 1992 (Incorporated by
reference to Exhibit 10.4 to the Registration Statement on
Form S-1, No. 33-47626)
10.3 Amendments to the Middletown Savings Bank Employee Stock
Ownership Plan and Trust (Incorporated by reference to
Exhibit 10.5 to the Form 10-K for the fiscal year ended
December 31, 1994)
10.4 MSB Bancorp, Inc. Incentive Stock Option Plan (Incorporated
by reference to Exhibit A to the Proxy Statement for the
First Annual Meeting of Stockholders on January 27, 1993)
10.5 MSB Bancorp, Inc. Stock Option Plan for Outside Directors
(Incorporated by reference to Exhibit B to the Proxy
Statement for the First Annual Meeting of Stockholders on
January 27, 1993)
10.6 MSB Bank Recognition and Retention Plan, as amended and
restated effective as of June 1, 1995 (Incorporated by
reference to Exhibit 10.9 to the Registration Statement on
Form S-2, No. 33-97904)
10.7 MSB Bank Directors' Deferred Compensation Plan, as amended
and restated effective as of June 1, 1995 (Incorporated by
reference to Exhibit 10.7 to the Registration Statement on
Form S-2, No. 33-97904)
10.8 Retirement Plan for Board Members of MSB Bancorp, Inc.,
adopted effective as of October 21, 1994 (Incorporated by
reference to Exhibit 10.8 to the Registration Statement on
Form S-2, No. 33-97904)
10.8(A)* Amendments to the Retirement Plan for Board Members of MSB
Bancorp, Inc. adopted effective as of October 31, 1997 and
December 1997.
10.9 MSB Bank Officers' Deferred Compensation Plan, adopted
effective as of November 1, 1996 (Incorporated by reference
to Exhibit 10.9 to the Form 10-K for the fiscal year ended
December 31, 1997)
10.10* MSB Bank Employee Severance Compensation Plan, as amended and
restated effective as of September 3, 1995 and including
Amendments through December 29, 1997
- ----------------------
* Included herewith.
106
<PAGE>
DESIGNATION DESCRIPTION
- ----------- -----------
10.11 Employment Agreement by and between MSB Bancorp, Inc. and
William C. Myers, adopted effective as of September 3, 1994,
as amended effective as of September 3, 1995 (Incorporated by
reference to Exhibit 10.10 to the Registration Statement on
Form S-2, No. 33-97904)
10.11(A) Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and William C. Myers, adopted
effective as of September 3, 1996 (Incorporated by reference
to Exhibit 10.11(A) to the Form 10-K for the fiscal year
ended December 31, 1996)
10.11(B)* Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and William C. Myers, adopted
effective as of October 31, 1997
10.12 Employment Agreement by and between MSB Bancorp, Inc. and
Gill Mackay, adopted effective as of September 3, 1994, as
amended effective as of September 3, 1995 (Incorporated by
reference to Exhibit 10.11 to the Registration Statement on
Form S-2, No. 33-97904)
10.12(A) Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and Gill Mackay, adopted effective
as of September 3, 1996 (Incorporated by reference to Exhibit
10.12(A) to the Form 10-K for the fiscal year ended December
31, 1996)
10.12(B)* Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and Gill Mackay, adopted effective
as of October 31, 1997
10.13 Employment Agreement by and between MSB Bancorp, Inc. and
Anthony J. Fabiano, effective as of January 1, 1996
(Incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-2, No. 33-97904)
10.13(A) Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and Anthony J. Fabiano, effective
as of January 1, 1997 (Incorporated by reference to Exhibit
10.13(A) to the Form 10-K for the fiscal year ended December
31, 1996)
10.13(B)* Amendatory Agreement to the Employment Agreement by and
between MSB Bancorp, Inc. and Anthony J. Fabiano, effective
as of October 31, 1997
10.14 Special Termination Agreements by and between MSB Bank and
Karen DeLuca, Frances C. Reilly, Frank J. Fogg and Steven R.
Gleason, respectively, adopted effective as of September 3,
1994, as amended effective as of October 27, 1995
(Incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-2, No. 33-97904)
10.15 Special Termination Agreement by and between MSB Bank and
Mary Ellen Rogulski adopted effective as of January 1, 1996
(Incorporated by reference to Exhibit 10.17 to the
Registration Statement on Form S-2, No. 33-97904)
- ----------------------
* Included herewith.
107
<PAGE>
DESIGNATION DESCRIPTION
- ----------- -----------
10.16 Special Termination Agreement by and between MSB Bank and
Catherine Terwilliger adopted effective as of March 21, 1997
(Incorporated by reference to Exhibit 10 to the Company's
Form 10-Q, for the quarterly period ended March 31, 1997)
10.17 Asset Purchase and Sale Agreement, dated as of September 29,
1995, and amendment thereto, dated December 28, 1995, between
Middletown Savings Bank and First Nationwide Bank, A Federal
Savings Bank (Incorporated by reference to the Current
Reports on Form 8-K, dated October 2, 1995 and January 2,
1996, respectively)
10.18 Asset Purchase and Sale Agreement, dated as of December 28,
1995, and Amendment No. 1 thereto, dated December 28, 1995,
between MSB Bank and Provident Savings Bank, F.A.
(Incorporated by reference to the Current Report on Form 8-K,
dated January 2, 1996)
11* Statement re: Computation of Earnings Per Share
16 Letter re Change in Certifying Accountant (Incorporated by
reference to the Company's Current Report on Form 8-K dated
December 6, 1995, as amended by the Form 8-K/A dated December
11, 1995)
21* Subsidiaries of the Registrant
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of Nugent & Haeussler, P.C.
27* Financial Data Schedule (submitted only with filing in
electronic format)
(b) The following Current Report on Form 8-K was filed by the Company
during the fourth quarter of 1997:
The Company's current report on Form 8-K dated December 15, 1997 was filed
on December 17, 1997.
- ----------------------
* Included herewith.
108
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange
Act of 1934, the Registrant certifies that it has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Goshen, State of New York, on March 30, 1998
MSB Bancorp, Inc.
By: /s/ William C. Myers
-------------------------------------
William C. Myers
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ William C. Myers Director, President, Chief Executive March 30, 1998
- ------------------------------------- Officer and Chairman of the Board
William C. Myers (Principal executive officer)
/s/ Gill Mackay Executive Vice President March 30, 1998
- ------------------------------------- and Chief Operating Officer
Gill Mackay
/s/ Anthony J. Fabiano Senior Vice President and Chief March 30, 1998
- ------------------------------------- Financial Officer (Principal
Anthony J. Fabiano Accounting and Financial Officer)
/s/ Joan M. Costello Director March 30, 1998
- -------------------------------------
Joan M. Costello
/s/ Ralph W. Decker Director March 30, 1998
- -------------------------------------
Ralph W. Decker
- ------------------------------------- Director March 30, 1998
Joseph R. Donovan
/s/ John L. Krause Director March 30, 1998
- -------------------------------------
John L. Krause
/s/ John W. Norton Director March 30, 1998
- -------------------------------------
John W. Norton
Director March 30, 1998
- -------------------------------------
Douglas Porto
/s/ Nicholas J. Scali Director March 30, 1998
- -------------------------------------
Nicholas J. Scali
/s/ Daniel R. Snyder Director March 30, 1998
- -------------------------------------
Daniel R. Snyder
/s/ Frederick B. Wildfoerster, Jr. Director March 30, 1998
- -------------------------------------
Frederick B. Wildfoerster, Jr.
</TABLE>
109
EXHIBIT 4.4
Amendment No. 2 to Rights Agreement
THIS AMENDMENT NO. 2 ("Amendment No. 2"), dated as of December 15, 1997, to
the Rights Agreement, dated as of September 16, 1994, as amended by Amendment
No. 1, dated as of January 9, 1996 (as amended, the "Rights Agreement"), by and
between MSB Bancorp, Inc., a Delaware corporation (the "Corporation"), and
Mellon Bank, N.A., a national banking organization having an office c/o Mellon
Securities Trust Company, 120 Broadway, New York, New York 10271 (the "Rights
Agent"). Unless otherwise provided herein, all capitalized terms shall have the
meanings set forth in the Rights Agreement.
WHEREAS, no Person has become an Acquiring Person; and
WHEREAS, the Board of Directors of the Corporation, in connection with the
Agreement and Plan of Merger, dated December 15, 1997 (the "Merger Agreement"),
by and among the Corporation, MSB Bank and HUBCO, Inc. ("HUBCO"), has authorized
the Corporation to enter into a Stock Option Agreement (the "Option Agreement")
with HUBCO, which provides for the Corporation's grant to HUBCO of an option
(the "Option") to purchase 600,000 shares of the Corporation's common stock, par
value $.01 par share (the "Common Stock"), on the terms and conditions set forth
in the Option Agreement; and
WHEREAS, the Board of Directors of the Corporation, subject to certain
conditions, desires to amend the Rights Agreement to exclude the acquisition of
the Option and the Common Stock by HUBCO pursuant to the Option Agreement from
the operation of the Rights Agreement;
NOW, THEREFORE, in consideration of the premises and covenants set forth in
the Rights Agreement and in this Amendment No. 2 thereto, the parties hereby
agree as follows:
1. Section 1(a) of the Rights Agreement is hereby amended by inserting the
following phrase immediately following the phrase "but shall not include":
HUBCO, Inc. (the "Purchaser") or any Affiliate of the Purchaser
as a result of the Purchaser's right to acquire, or the
Purchaser's acquisition of, Common Shares of the Corporation
pursuant to the Agreement and Plan of Merger, dated December 15,
1997, by and among the Corporation, MSB Bank and the Purchaser,
and the related Stock Option Agreement to be entered into by and
between the Purchaser and the Corporation, as the same may be
amended, from time to time,
2. On and after the date of this Amendment No. 2, any reference in the
Rights Agreement (including the Exhibits thereto) to "This Agreement,"
"hereunder," "hereof," or "herein" or words of like import shall mean and be a
reference to the Rights Agreement as amended by this Amendment No. 2.
<PAGE>
3. This Amendment No. 2 shall be effective as of the date and time of its
execution.
4. This Amendment No. 2 may be executed in counterparts, and each of such
counterparts shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to
be duly executed and attested, all as of the day and year first above written.
MSB BANCORP, INC.
By: /s/ William C. Myers
-----------------------------
William C. Myers
President and Chief
Executive Officer
Attest:
By: /s/ Karen S. DeLuca
----------------------------
Karen S. DeLuca
Corporate Secretary
MELLON BANK, N.A.,
as Rights Agent
By: /s/ Thomas J. Maupin
-----------------------------
Name: Thomas J. Maupin
Title: Vice President
Attest:
By: /s/ Jared Fassler
----------------------------
Name: Jared Fassler
Title: Assistant Vice President
-3-
EXHIBIT 10.8(A)
EXHIBIT A
to the
Resolutions of the October 31, 1997
Meeting of the Board of Directors of MSB Bancorp, Inc.
Amendments to the Retirement Plan for Board Members of MSB Bancorp, Inc.
1. Effective as of October 31, 1997, Section 1.2 of the Plan shall be amended in
its entirety to read as follows:
Section 1.2 Annual Retainer means, with respect to any Board
Member, an amount equal to the sum of (i) the annual retainer
(ii) the aggregate committee meeting fees and (iii) property
inspection fees, that would be paid to such Board Member by the
Company or MSB Bank during the course of a calendar year if the
Board Member had continued in service as a Board Member, with the
aggregate committee meeting fees determined based on the number
of meetings held by the committees on which the Board Member
served during the calendar year preceding the year in which such
individual ceases to be a Board Member.
2. Effective as of October 31, 1997, Section 1.16 of the Plan shall be amended
by deleting the proviso ",but excluding any period during which the individual
was a salaried officer of MSB or Middletown." at the end of the first sentence
thereof.
3. Effective as of October 31, 1997, Section 3.1 of the Plan shall be amended by
deleting the number 20 where it appears therein and replacing it with the number
10.
4. Effective as of October 31, 1997, Section 3.2 of the Plan shall be amended by
deleting the number 20 where it appears therein and replacing it with the number
10.
EXHIBIT 10.8(A)
EXHIBIT A
AMENDMENT TO THE
RETIREMENT PLAN FOR BOARD MEMBERS OF MSB BANCORP, INC.
Pursuant to section 5.1 of the Retirement Plan For Board Members of MSB
Bancorp, Inc. ("Plan") and in accordance with the resolutions adopted by the
Board of Directors of MSB Bancorp, Inc. at a duly convened meeting held on
December 29, 1997, the Plan is hereby amended, effective as of December 31,
1997, as follows:
1. Article I - Section 1.2 of the Plan shall be amended by adding the following
new sentence to the end thereof to read as follows:
Effective as of the Plan Termination Date, Annual Retainer shall
be determined based on the annual retainer, committee meeting and
property inspection fees or any other payments received by a
Board Member for service during the calendar year ending with the
Plan Termination Date.
2. Article I - Section 1.6 of the Plan shall be amended by adding the word "or"
after section 1.6(c) and then adding the following new subsection (d)
immediately thereafter to read as follows:
(d) the occurrence of the Plan Termination Date.
3. Article I - Section 1.17 of the Plan shall be amended by adding the following
new sentence to the end thereof to read as follows:
Years of Vesting Service shall not include any service by a Board
Member completed on or after the Plan Termination Date.
4. Article I - Section 1.18 of the Plan shall be amended by adding the following
new sentence to the end thereof to read as follows:
Years of Creditable Service shall not include any service by a
Board Member completed on or after the Plan Termination Date.
5. Article I - Article I shall be amended by adding the following new sections
1.19 and 1.20 to the end thereof to read as follows:
Section 1.19 Plan Termination. Pursuant to resolutions
adopted by the Board of Directors of MSB Bancorp, Inc. at a duly
convened meeting held on
Page 1 of 2
<PAGE>
December 29, 1997, the Plan shall be terminated effective as of
December 31, 1997. Effective as of such date, no Board Member may
commence or recommence participation in the Plan and the benefit
accrued by each Participant as of such date, which shall be
determined as if a Change of Control had occurred as of such
date, shall become nonforfeitable as of such date.
Section 1.20 Plan Termination Date shall mean December 31, 1997.
6. Article II - Section 2.1 shall be amended by adding the following new
sentence to the end thereof to read as follows:
No Board Member shall be eligible to become a Participant in the
Plan on or after the Plan Termination Date.
7. Article II - Section 2.2 shall be amended by adding the phrase "or upon the
Plan Termination Date, whichever is earlier" to the end thereof.
8. Article III - Article III shall be amended by adding a new section 3.9
immediately to the end thereof to read as follows:
Section 3.9 Effect of Plan Termination.
The benefits payable to a Participant under this Plan shall
be distributed to the Participant as soon as practicable
following the Plan Termination Date.
9. Article V - Effective as of December 31, 1997, section 5.1 of the Plan shall
be amended by adding the following new sentence at the end thereof:
The Plan shall be terminated effective at the close of business
on the Plan Termination Date.
Page 2 of 2
EXHIBIT 10.10
MSB BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN
Effective as of September 3, 1992
As amended and restated as of September 3, 1995
And Including Amendments Through December 29, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
ARTICLE I
PURPOSE
<S> <C> <C>
Section 1.1 Statement of Purpose....................................................... 1
ARTICLE II
DEFINITIONS
Section 2.1 Annual Compensation........................................................ 1
Section 2.2 Bank....................................................................... 1
Section 2.3 Board...................................................................... 1
Section 2.4 Change of Control.......................................................... 1
Section 2.5 Effective Date............................................................. 3
Section 2.6 Employee................................................................... 3
Section 2.7 Employer................................................................... 3
Section 2.8 ERISA...................................................................... 3
Section 2.9 Holding Company............................................................ 3
Section 2.10 Just Cause................................................................. 3
Section 2.11 Officer.................................................................... 4
Section 2.12 Payment.................................................................... 4
Section 2.13 Plan....................................................................... 4
Section 2.14 Plan Administrator......................................................... 4
ARTICLE III
ELIGIBILITY
Section 3.1 Participation.............................................................. 4
Section 3.2 Duration of Participation................................................... 5
ARTICLE IV
PAYMENTS
Section 4.1 Right to Payment........................................................... 5
Section 4.2 Termination Resulting in Right to Payment.................................. 5
(i)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 4.3 Amount of Payment.......................................................... 6
Section 4.4 Time of Payment............................................................ 7
ARTICLE V
SUCCESSOR TO THE EMPLOYER
Section 5.1 Assumption of Obligations.................................................. 7
ARTICLE VI
ARBITRATION
Section 6.1 Arbitration................................................................. 8
ARTICLE VII
ADMINISTRATION
Section 7.1 Named Fiduciaries.......................................................... 8
Section 7.2 Fiduciary Responsibilities................................................. 8
Section 7.3 Plan Administrator......................................................... 10
Section 7.4 Allocation of Fiduciary Responsibilities and
Employment of Advisors..................................................... 11
Section 7.5 Other Administrative Provisions............................................ 11
Section 7.6 Indemnification of Fiduciaries............................................. 12
Section 7.7 Claims Procedure........................................................... 12
Section 7.8 Claims Review Procedure.................................................... 13
ARTICLE VIII
AMENDMENT AND TERMINATION
Section 8.1 Amendment and Termination.................................................. 13
Section 8.2 Form of Amendment or Termination........................................... 14
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page
ARTICLE IX
MISCELLANEOUS
<S> <C> <C>
Section 9.1 Rights of Employees........................................................ 14
Section 9.2 Non-alienation of Benefits................................................. 14
Section 9.3 Other Benefits............................................................. 14
Section 9.4 Construction............................................................... 14
Section 9.5 Headings................................................................... 15
Section 9.6 Governing Law.............................................................. 15
Section 9.7 Severability............................................................... 15
Section 9.8 Required Regulatory Provisions............................................. 15
Section 9.9 Withholding................................................................ 17
Section 9.10 Status as Welfare Benefit Plan Under ERISA................................. 17
</TABLE>
(iii)
<PAGE>
MSB Bank
Employee Severance Compensation Plan
ARTICLE I
PURPOSE
Section 1.1 Statement of Purpose.
MSB Bank adopts this Employee Severance Compensation Plan for the benefit
of its eligible Employees, the eligible Employees of MSB Bancorp, Inc. and any
other affiliates of the Bank that adopt this Plan. The Bank recognizes that, as
a public company, it is subject to the possibility of a negotiated or
unsolicited Change of Control which may result in a loss of employment for some
of its Employees. The purpose of the Plan is to encourage Employees to continue
working for the Bank with their full time and attention devoted to the Bank's
affairs by providing prescribed income security in the event of a termination of
employment following a Change of Control.
ARTICLE II
DEFINITIONS
For purposes of the Plan, the following terms shall have the meanings
assigned to them below, unless a different meaning is plainly indicated by the
context:
Section 2.1 Annual Compensation means a Participant's salary paid by the
Employer as consideration for the Participant's service during the 12 months
ending on the date as of which Annual Compensation is to be determined, which
amounts are or would be includable in the gross income of the Participant
receiving the same for federal income tax purposes.
Section 2.2 Bank means, prior to October 27, 1995, Middletown Savings Bank,
and, commencing October 27, 1995, MSB Bank or any successor thereto.
Section 2.3 Board means the Board of Directors of MSB Bank.
Section 2.4 Change of Control means the occurrence of any of the following
events:
(a) approval by the stockholders of the Holding Company of a transaction
that would result in the reorganization, merger or consolidation of the Holding
Company with one or more other persons, other than a transaction following
which:
<PAGE>
-2-
(i) at least 51% of the equity ownership interests of the entity
resulting from such transaction are beneficially owned (within the meaning
of Rule 13d-3 promulgated under the Securities Exchange Act of 1934
"Exchange Act") in substantially the same relative proportions by persons
who, immediately prior to such transaction, beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of
the outstanding equity ownership interests in the Holding Company; and
(ii) at least 51% of the securities entitled to vote generally in the
election of directors of the entity resulting from such transaction are
beneficially owned (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) in substantially the same relative proportions by persons
who, immediately prior to such transaction, beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of
the securities entitled to vote generally in the election of directors of
the Holding Company;
(b) the acquisition of all or substantially all of the assets of the
Holding Company or beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of the outstanding securities
of the Holding Company entitled to vote generally in the election of directors
by any person or by any persons acting in concert, or approval by the
stockholders of the Holding Company of any transaction which would result in
such an acquisition; or
(c) a complete liquidation or dissolution of the Holding Company, or
approval by the stockholders of the Holding Company of a plan for such
liquidation or dissolution; or
(d) the occurrence of any event if, immediately following such event, at
least 50% of the members of the board of directors of the Holding Company do not
belong to any of the following groups:
(i) individuals who were members of the board of directors of the
Holding Company on the Effective Date of this Plan; or
(ii) individuals who first became members of the board of directors of
the Holding Company after the Effective Date of this Plan either:
(A) upon election to serve as a member of the board of directors
of the Holding Company by affirmative vote of three-quarters of the
members of such board, or of a nominating committee thereof, in office
at the time of such first election; or
(B) upon election by the stockholders of the board of directors
of the Holding Company to serve as a member of the board of directors
of the Holding Company, but only if nominated for election by
affirmative vote of three-quarters of the members of such board, or of
a nominating committee thereof, in office at the time of such first
nomination;
<PAGE>
-3-
provided, however, that such individual's election or nomination did not result
from an actual or threatened election contest (within the meaning of Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents (within the meaning of Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on
behalf of the board of directors of the Holding Company; or
(e) an event that would be described in Section 2.4 (a), (b), (c) or (d) if
the name of the Bank or an affiliate of the Bank or Holding Company that has
adopted the Plan were substituted for the words "Holding Company" therein.
In no event, however, shall a Change of Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Holding Company, the
Bank or any participating affiliate, or any subsidiary of any of them, by the
Holding Company, the Bank or any participating affiliate, or any subsidiary of
any of them, or by any employee benefit plan maintained by any of them. For
purposes of this Section 2.4, the term "person" shall have the meaning assigned
to it under Sections 13(d)(3) or 14(d)(2) of the Exchange Act.
Section 2.5 Effective Date means September 3, 1992.
Section 2.6 Employee means any person, including an Officer, who is
employed by the Employer on a full-time basis, excluding any person who has
entered into and continues to be covered by, or is terminated under, an
employment contract or a special termination agreement or other special
severance arrangement with the Employer.
Section 2.7 Employer means the Bank, the Holding Company (or their
respective successors or assigns, whether by merger, consolidation, sale of
assets, statutory receivership, operation of law or otherwise) and any affiliate
of the Bank or Holding Company which, with the approval of the Board, and
subject to such conditions as may be imposed by such Board, adopts this Plan.
Section 2.8 ERISA means the Employee Retirement Income Security Act of
1974, as amended from time to time (including the corresponding provisions of
any succeeding law).
Section 2.9 Holding Company means MSB Bancorp, Inc.
Section 2.10 Just Cause means, with respect to the conduct of an Employee
in connection with his employment with the Employer, personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, or willful violation of
any law, rule or regulation (other than traffic violations or similar offenses)
or final cease and desist order, in each case as measured against standards
generally prevailing at the relevant time in the savings and community banking
industry; provided, however, that an Employee shall not be deemed to have been
discharged for Just Cause unless and until he shall have received a written
notice of termination from the Board, accompanied by a resolution duly adopted
by affirmative vote of a majority of the entire Board at a meeting called and
held for
<PAGE>
-4-
such purpose (after reasonable notice to the Employee and a reasonable
opportunity for the Employee to make oral and written presentations to the
members of the Board, on his own behalf, or through a representative, who may be
his legal counsel, to refute the grounds for the proposed determination) finding
that in the good faith opinion of the Board grounds exist for discharging the
Employee for "Just Cause".
Section 2.11 Officer means an officer of the Employer.
Section 2.12 Payment means a payment of severance compensation as provided
for under Article IV.
Section 2.13 Plan means the MSB Bank Employee Severance Compensation Plan
as the same may be amended from time to time.
Section 2.14 Plan Administrator means the Compensation Committee of the
Board.
ARTICLE III
ELIGIBILITY
Section 3.1 Participation.
(a) Each Employee who, as of the Effective Date, shall have completed at
least 7 years of continuous employment with the Employer or who has been elected
as an Officer shall become a Participant on the Effective Date. Thereafter, each
Employee who completes 7 years of continuous employment with the Employer or who
has been elected as an Officer shall become a Participant on the day following
the completion of such 7 year period or upon such election as an Officer.
Notwithstanding the foregoing, persons who have entered into and continue to be
covered by, or terminated under, an employment or special termination agreement,
or other special severance arrangement, with the Employer shall not be entitled
to participate in this Plan. Any Participant covered by this Plan shall not be
entitled to any other termination or severance payments.
(b) For purposes of Section 3.1(a), if an Employee's employment with the
Employer terminates and the Employee is subsequently re-employed by the Employer
prior to the second anniversary of the effective date of such termination, the
Employee's periods of employment with the Employer prior to his termination of
employment and subsequent to his re-employment shall be aggregated and deemed to
be continuous; provided, however, that this Section 3.1(b) shall not be applied
more than once with respect to determining the continuous employment of a
particular Employee.
<PAGE>
-5-
(c) Notwithstanding anything to the contrary contained herein, following a
Change of Control no person shall be deemed to be a Participant entitled to the
benefits of this Plan unless such Person was an employee of MSB Bank or MSB
Bancorp, Inc. as the same existed prior to the Change of Control (i.e.,persons
shall not be entitled to be Participants solely by virtue of their being
employees of any entity with which MSB Bank or MSB Bancorp, Inc. combines
pursuant to the Change of Control or employees of any successor to MSB Bank or
MSB Bancorp, Inc. pursuant to a Change of Control).
Section 3.2 Duration of Participation.
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an Employee of the Employer, unless such Participant is
entitled to a Payment as provided in Section 4.1 of the Plan. A Participant
entitled to receipt of a Payment shall remain a Participant in this Plan until
the full amount of such Payment has been paid to the Participant.
ARTICLE IV
PAYMENTS
Section 4.1 Right to Payment.
A Participant shall be entitled to receive from the Employer a Payment in
the amount provided in Section 4.3 if there has been a Change of Control and if,
within one year thereafter, the Participant's employment by the Employer shall
terminate for any reason specified in Section 4.2, whether the termination is
voluntary or involuntary. A Participant shall not be entitled to a Payment if
termination occurs by reason of death, voluntary retirement, voluntary
termination other than for reasons specified in Section 4.2, total and permanent
disability, or for Just Cause.
<PAGE>
-6-
Section 4.2 Termination Resulting in Right to Payment.
A Participant shall be entitled to a Payment if his employment by the
Employer terminates within one year following a Change of Control, voluntarily
or involuntarily, for any one or more of the following reasons without the
Participant's prior written consent:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change of Control, or as the
same may have been increased thereafter (other than with the Participant's prior
written consent or under a 401(k) deferral program);
(b) The Employer assigns to the Participant any substantial and material
duties inconsistent with the Participant's primary duties with the Employer
immediately prior to the Change of Control;
(c) The Employer requires the Participant to change the location of the
Participant's job or office, so that such Participant will be based at a
location more than 50 miles from the location of the Participant's job or office
immediately prior to the Change of Control; provided, however, that such new
location is not closer to Participant's home;
(d) The Employer fails to provide benefit plans providing, in the
aggregate, substantially similar benefits to those which the Participant is
receiving immediately prior to the Change of Control (other than the ESOP and
the Recognition and Retention Plan); or
(e) The Employer terminates the employment of a Participant at or after a
Change of Control other than for Just Cause.
Section 4.3 Amount of Payment.
(a) Each Participant entitled to a Payment under this Plan shall receive
from the Employer a lump sum cash payment in an amount based upon the
Participant's length of continuous employment by the Employer, as follows:
(i) The Participant's cash payment shall equal the sum of: (A) 1/12
times such Participant's Annual Compensation during the 12 month period
ending on the date of such Participant's termination of employment with the
Employer or the 12 month period ending on the date of the Change of
Control, whichever is higher, multiplied by (B) the number of whole years
of such Participant's continuous employment with the Employer, up to a
maximum of 24 years.
(ii) Notwithstanding the provisions of Section 4.3(a)(i) above, if a
Payment to a Participant who is a Disqualified Individual would be in an
amount which, alone or in combination with other amounts to be paid to the
Participant, results in an Excess
<PAGE>
-7-
Parachute Payment to the Participant, the Payment hereunder to such
Participant shall be reduced to the maximum amount which can be paid
hereunder without resulting in an Excess Parachute Payment. The terms
"Disqualified Individual" and "Excess Parachute Payment" shall have the
same meaning as defined in Section 280G of the Internal Revenue Code of
1986, as amended, or any successor Section of similar import.
(b) For purposes of Section 4.3(a), if an Employee's employment with the
Employer terminates and the Employee is subsequently re-employed by the Employer
prior to the second anniversary of the effective date of such termination, the
Employee's periods of employment with the Employer prior to his termination of
employment and subsequent to his re-employment shall be aggregated and deemed to
be continuous; provided, however, that this Section 4.3(b) shall not be applied
more than once with respect to determining the continuous employment of a
particular Employee.
(c) The Participant shall not be required to mitigate damages on the amount
of the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
Section 4.4 Time of Payment.
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than 10 business days after the termination of the Participant's
employment. If any Participant should die after termination of such
Participant's employment but before receiving the Payment to which he is
entitled, such unpaid amounts shall be paid to the Participant's personal
representative or the Participant's estate.
ARTICLE V
SUCCESSOR TO THE EMPLOYER
Section 5.1 Assumption of Obligations.
The Employer shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all of the business or assets of the Employer, expressly and
unconditionally to assume and agree to perform the Employer's obligations under
this Plan, in the same manner and to the same extent that the Employer would be
required to perform if no such succession or assignment had taken place.
<PAGE>
-8-
ARTICLE VI
ARBITRATION
Section 6.1 Arbitration.
Any dispute or controversy arising under or in connection with the Plan
shall be settled exclusively by arbitration, conducted before a panel of three
arbitrators sitting in a location within 50 miles from the location of the Bank,
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the award of the arbitrator in any court
having jurisdiction. The arbitrator shall have the right to award costs and
expenses, including legal fees, to any party as the arbitrator deems
appropriate.
ARTICLE VII
ADMINISTRATION
Section 7.1 Named Fiduciaries.
The term "Named Fiduciary" shall mean (but only to the extent of the
responsi bilities of each of them) the Plan Administrator and the Bank. This
Article VII is intended to allocate to each Named Fiduciary the responsibility
for the prudent execution of the functions as signed to him or it, and none of
such responsibilities or any other responsibility shall be shared by two or more
of such Named Fiduciaries. Whenever one Named Fiduciary is required by the Plan
to follow the directions of another Named Fiduciary, the two Named Fiduciaries
shall not be deemed to have been assigned a shared responsibility, but the
responsibility of the Named Fidu ciary giving the directions shall be deemed his
sole responsibility, and the responsibility of the Named Fiduciary receiving
those directions shall be to follow them insofar as such instructions are on
their face proper under applicable law.
Section 7.2 Fiduciary Responsibilities.
Each Named Fiduciary and any other fiduciary under the Plan shall discharge
its duties with respect to the Plan solely in the interests of the Participants
and their beneficiaries:
(a) For the exclusive purposes of providing benefits to Participants and
their beneficiaries, and defraying reasonable expenses of administering the
Plan;
<PAGE>
-9-
(b) With the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent man acting in a like capacity and familiar with
such matters would use in the conduct of an enterprise of a like character and
with like aims; and
(c) In accordance with the documents and instruments governing the Plan
insofar as such documents and instruments are consistent with the provisions of
Title I of ERISA.
<PAGE>
-10-
Section 7.3 Plan Administrator.
The Plan Administrator, shall, subject to the responsibilities of the
Board, have the responsibility for the day-to-day control, management, operation
and administration of the Plan. The Plan Administrator shall have the following
responsibilities:
(a) To maintain records necessary or appropriate for the administration of
the Plan;
(b) To give and receive such instructions, notices, information, materials,
reports and certifications as may be necessary or appropriate in the
administration of the Plan;
(c) To prescribe forms and make rules and regulations consistent with the
terms of the Plan and with the interpretations and other actions of the Bank;
(d) To require such proof or evidence of any matter from any person as may
be necessary or appropriate in the administration of the Plan;
(e) To prepare and file, distribute or furnish all reports, plan
descriptions, and other information concerning the Plan, including, without
limitation, filings with the Secretary of Labor and employee communications as
shall be required of the Plan Administrator under ERISA;
(f) To determine any question arising in connection with the Plan,
including any question of Plan interpretation, and the Plan Administrator's
decision or action in respect thereof shall be final and conclusive and binding
upon all persons having an interest under the Plan;
(g) To review and dispose of claims under the Plan filed pursuant to
Section 7.7;
(h) If the Plan Administrator shall determine that by reason of illness,
senility, insanity, or for any other reason, it is undesirable to make any
payment to the person entitled thereto, to direct the application of any amount
so payable to the use or benefit of such person in any manner that he may deem
advisable or to direct in his discretion the withholding of any payment under
the Plan due to any person under legal disability until a representative
competent to receive such payment in his behalf shall be appointed pursuant to
law;
(i) To discharge such other responsibilities or follow such directions as
may be assigned or given by the Bank;
(j) To perform any duty or take any action which is allocated to the Plan
Administrator under the Plan; and
(k) To engage such legal, actuarial, accounting and other professional
services as the Plan Administrator may deem proper.
<PAGE>
-11-
The Plan Administrator shall have the power and authority necessary or
appropriate to carry out its responsibilities.
Section 7.4 Allocation of Fiduciary Responsibilities
and Employment of Advisors.
Any Named Fiduciary may:
(a) Allocate any of his or its responsibilities under the Plan to such
other person or persons as he or it may designate, provided that such allocation
and designation shall be in writing and filed with the Plan Administrator;
(b) Employ one or more persons to render advice to him or it with regard to
any of his or its responsibilities under the Plan; and
(c) Consult with counsel, who may be counsel to the Bank.
Section 7.5 Other Administrative Provisions.
(a) Any person whose claim has been denied in whole or in part must exhaust
the administrative review procedures provided in Section 7.8 prior to initiating
any claim for judicial review.
(b) No bond or other security shall be required of the Plan Administrator,
or any officer or Employee of the Bank to whom fiduciary responsibilities are
allocated by a Named Fiduciary, except as may be required by ERISA.
(c) Subject to any limitation on the application of this Section 7.5(c)
pursuant to ERISA, neither the Plan Administrator, nor any officer or Employee
of the Bank to whom fiduciary responsibilities are allocated by a Named
Fiduciary, shall be liable for any act of omis sion or commission by himself or
by another person, except for his own individual willful and intentional
malfeasance.
(d) The Plan Administrator may, except with respect to actions under
Section 7.8, shorten, extend or waive the time (but not beyond 60 days) required
by the Plan for filing any notice or other form with the Plan Administrator, or
taking any other action under the Plan.
(e) Any person, group of persons, committee, corporation or organization
may serve in more than one fiduciary capacity with respect to the Plan.
(f) Any action taken or omitted by any fiduciary with respect to the Plan,
including any decision, interpretation, claim denial or review on appeal, shall
be conclusive and binding on the Employer and all interested parties and shall
be subject to judicial modification or
<PAGE>
-12-
reversal only to the extent it is determined by a court of competent
jurisdiction that such action or omission was arbitrary and capricious and
contrary to the terms of the Plan.
Section 7.6 Indemnification of Fiduciaries.
The Bank shall indemnify, to the fullest extent permitted by applicable
law, any director, officer or employee of the Bank who is or was or agrees to
serve in any capacity in connection with the management, operation,
interpretation or administration of the Plan against any loss, cost, expense or
exposure of any name or nature whatsoever which such an individual may incur by
reason of the fact that he or she is made a party to or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, investigative or administrative, relating to his or her
service in connection with the Plan, and against the costs and expenses of
defending or settling any claim, action, suit or proceeding, including legal
fees, costs and expenses; provided, however, that he or she acted in good faith
and in a manner which he or she reasonably believed to be consistent with his or
her responsibility in connection with the Plan, and that, in the case of any
criminal action or proceeding, he or she had no reason to believe that his or
her conduct was unlawful; and provided, further, that the indemnity provided
hereunder shall apply to losses, costs, expenses and exposures hereafter
incurred whether or not the acts or omissions giving rise thereto occurred
before or after September 3, 1995. Unless otherwise required by applicable law,
this Section 7.6 shall not be rescinded or modified so as to materially reduce
the indemnification provided hereunder without first giving 30 days' advance
written notice of such rescission or modification to each individual then
entitled to indemnification hereunder, or so as to materially reduce the
indemnification provided hereunder with respect to actions taken or omitted to
be taken prior to the effective date of such rescission or modification. The
Bank may satisfy its obligation under this Section 7.6 in whole or in part by
purchase of a policy or policies of insurance, but no insurer shall have any
rights against the Bank arising out of this Section 7.6.
Section 7.7 Claims Procedure.
Any claim relating to benefits under the Plan shall be filed with the Plan
Administrator on a form prescribed by it. If a claim is denied in whole or in
part, the Plan Administrator shall give the claimant written notice of such
denial, which notice shall specifically set forth:
(a) the reasons for the denial;
(b) the pertinent Plan provisions on which the denial was based;
(c) any additional material or information necessary for the claimant to
perfect his claim and an explanation of why such material or information is
needed; and
(d) an explanation of the Plan's procedure for review of the denial of the
claim.
<PAGE>
-13-
In the event that the claim is not granted and notice of denial of a claim is
not furnished by the 30th day after such claim was filed, the claim shall be
deemed to have been denied on that day for the purpose of permitting the
claimant to request review of the claim.
Section 7.8 Claims Review Procedure.
Any person whose claim filed pursuant to Section 7.7 has been denied in
whole or in part by the Plan Administrator may request review of the claim by
the Bank, upon a form prescribed by the Plan Administrator. The claimant shall
file such form (including a statement of his position) with the Bank no later
than 60 days after the mailing or delivery of the written notice of denial
provided for in Section 7.7, or, if such notice is not provided, within 60 days
after such claim is deemed denied pursuant to Section 7.7. The claimant shall be
permitted to review pertinent documents. A decision shall be rendered by the
Bank and communicated to the claimant not later than 30 days after receipt of
the claimant's written request for review. However, if the Bank finds it
necessary, due to special circumstances (for example, the need to hold a
hearing), to extend this period and so notifies the claimant in writing, the
decision shall be rendered as soon as practicable, but in no event later than
120 days after the claimant's request for review. The Bank's decision shall be
in writing and shall specifically set forth:
(a) The reasons for the decision; and
(b) The pertinent Plan provisions on which the decision is based.
Any such decision of the Bank shall be binding upon the claimant and the Bank,
and the Bank shall take appropriate action to carry out such decision.
ARTICLE VIII
AMENDMENT AND TERMINATION
Section 8.1 Amendment and Termination.
The Bank intends to keep this Plan in effect, but the Bank expressly
reserves the right to terminate or amend the Plan, in whole or in part, at any
time by action of the Board; provided, however, that if a Change of Control
occurs, the Plan no longer shall be subject to amendment, change, substitution,
deletion, revocation or termination in any respect whatsoever, until such time
as the first anniversary of the Change of Control shall have occurred and the
successor or surviving entity following the Change of Control shall have paid
all amounts due to Participants hereunder whose employment has been terminated
in connection with or subsequent to the Change of Control, at which point the
Board of Directors of such successor or surviving entity shall have the right to
amend or terminate this Plan.
<PAGE>
-14-
Section 8.2 Form of Amendment or Termination.
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer of the Bank, certifying
that the amendment or termination has been approved by the Board. A proper
amendment to the Plan automatically shall effect a corresponding amendment to
all Participants' rights hereunder. A proper termination of the Plan
automatically shall effect a termination of all Participants' rights and
benefits hereunder.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Rights of Employees.
No Employee shall have any right or claim to any benefit under the Plan
except in accordance with the provisions of the Plan. The establishment of the
Plan shall not be construed as conferring upon any Employee or other person any
legal right to continuation of employment or to any terms or conditions of
employment, nor as limiting or qualifying the right of the Employer to discharge
any Employee.
Section 9.2 Non-alienation of Benefits.
The right to receive a benefit under the Plan shall not be subject in any
manner to anticipation, alienation, or assignment, nor shall such right be
liable for or subject to debts, contracts, liabilities, or torts.
Section 9.3 Other Benefits.
Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an Employee of the Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock bonus,
stock ownership or any employment agreement or other plan or arrangement.
Section 9.4 Construction.
Whenever appropriate in the Plan, words used in the singular may be read in
the plural; words used in the plural may be read in the singular; and the
masculine gender shall be
<PAGE>
-15-
deemed equally to refer to the feminine gender or the neuter. Any reference to a
Section number shall refer to a Section of this Plan, unless otherwise stated.
Section 9.5 Headings.
The headings of Articles and Sections are included solely for convenience
of reference, and if there is any conflict between such headings and the text of
the Plan, the text shall control.
Section 9.6 Governing Law.
Except to the extent preempted by federal law, the Plan shall be construed,
administered and enforced according to the laws of the State of New York
applicable to contracts between citizens and residents of the State of New York
entered into and to be performed entirely within such jurisdiction.
Section 9.7 Severability.
The invalidity or unenforceability, in whole or in part, of any provision
of this Plan shall in no way affect the validity or enforceability of the
remainder of such provision or of any other provision of this Plan, and any
provision, or part thereof, deemed to be invalid or unenforceable shall be
reformed as necessary to render it valid and enforceable to the maximum possible
extent.
Section 9.8 Required Regulatory Provisions.
The following provisions are included for the purposes of complying with
various laws, rules and regulations applicable to the Bank:
(a) Notwithstanding anything herein contained to the contrary, any payments
to an Employee by the Bank, whether pursuant to this Plan 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.
(b) Notwithstanding anything herein contained to the contrary, if the
Employee 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 Plan 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 Employee all or part of
<PAGE>
-16-
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.
(c) Notwithstanding anything herein contained to the contrary, if the
Employee 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 Plan shall terminate as of the effective date
of the order, but vested rights and obligations of the Bank and the Employee
shall not be affected.
(d) 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 Plan shall
terminate as of the date of default, but vested rights and obligations of the
Bank and the Employee shall not be affected.
(e) 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 Plan 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.
<PAGE>
-17-
Section 9.9 Withholding.
Payments from this Plan shall be subject to all applicable federal, state
and local income withholding taxes.
Section 9.10 Status as Welfare Benefit Plan Under ERISA.
This Plan is an "employee welfare benefit plan" within the meaning of
Section 3(1) of ERISA and shall be construed, administered and enforced
according to the provisions of ERISA, including but not limited to, those
provisions of ERISA regarding the award of reasonable attorneys' fees and costs,
if applicable.
EXHIBIT 10.11(B)
AMENDATORY AGREEMENT
This AMENDATORY AGREEMENT ("Agreement") is made effective as of October 17,
1997 by and between MSB BANCORP, INC. ("Holding Company"), a corporation
organized under the laws of Delaware, with its principal administrative office
at 35 Matthews Street, Goshen, New York, and WILLIAM C. MYERS ("Executive"). Any
reference to "Savings Bank" herein shall mean MSB Bank, a wholly owned
subsidiary of the Holding Company, or any successor thereto.
W I T N E S S E T H :
WHEREAS, the Holding Company and the Executive entered into an employment
agreement dated September 3, 1994 ("Employment Agreement"), which was amended
effective as of September 3, 1995 and September 3, 1996; and
WHEREAS, the Holding Company and Executive desire to amend the Employment
Agreement, effective as of October 17, 1997;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
FIRST. Section 2(a) of the Employment Agreement shall be amended in its
entirety to read as follows:
(a) The period of Executive's employment under this Agreement ("Employment
Period") shall be deemed to have commenced as of the date first above written
and shall end on December 31, 2002, subject to such extensions, if any, as are
provided by the Holding Company pursuant to Section 2(b).
SECOND. Section 2(b) of the Employment Agreement shall be amended in its
entirety to read as follows:
(b) Beginning on January 1, 1998, the Employment Period shall be
automatically extended for one (1) additional day each day, unless either
Executive or the Holding Company elects not to extend the Employment Period
further by giving written notice to the other party, in which case the
Employment Period shall be fixed and shall end on the later of the last day of
the Employment Period specified in such notice or the fifth anniversary of the
date such written notice is given.
- 1 -
<PAGE>
THIRD. Section 5(b) of the Employment Agreement shall be amended in its
entirety to read as follows:
(b) If any of the events described in Section 5(a)
constituting a Change in Control have occurred or the Board has
determined that a Change in Control has occurred, Executive shall
be entitled to the payments and benefits provided in paragraphs
(c), (d), (e), (f), (g) and (h) of this Section 5 on the date
such Change in Control occurs, without regard to whether
Executive's employment with the Holding Company or the Savings
Bank terminates in connection with such Change in Control. The
benefits to be provided under, and the amounts payable pursuant
to, this Section 5 shall be provided and be payable to the
Executive, or in the event of his subsequent death, to his
beneficiary or beneficiaries, or to his estate, as the case may
be, without regard to proof of damages and without regard to the
Executive's efforts, if any, to mitigate damages, and shall not
be offset by, or reduced in respect of, any compensation or
benefits paid or provided, or to be paid or provided, to
Executive as a continuing employee of the Holding Company, the
Savings Bank or their successors or assigns, following the Change
in Control. The Holding Company and Executive hereby stipulate
that the damages which may be incurred by Executive following any
Change in Control are not capable of accurate measurement as of
the date first above written and that such liquidated damages
constitute reasonable damages under the circumstances.
FOURTH. Section 5(c) of the Employment Agreement shall be amended in its
entirety to read as follows:
(c) Upon the occurrence of a Change in Control, the Holding
Company shall be obligated to pay (or to cause the Savings Bank
to pay) 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) the amount of Base Salary, bonuses and any
other cash compensation that would have been paid to Executive
during the remaining Employment Period (including, but not
limited to, any compensation paid to Executive as a member of the
Board of Directors of the Holding Company); (ii) the amount of
any employer contributions that would have been made on
Executive's behalf under the Savings Bank's 401(k) Savings Plan
(and any other defined contribution plan maintained by the
Holding Company or the Savings Bank) during the remaining
Employment Period; (iii) the fair market value (determined as of
the date of the Change in Control) of any stock that would have
been awarded or allocated to Executive under the Savings Bank's
ESOP or BRP (or any other stock-based employee benefit or
compensation plan or arrangement maintained by the Holding
Company or the Savings Bank) during the remaining Employment
Period; (iv) the lump sum present value of the benefits which the
Executive would have accrued under the Savings Bank's Retirement
Plan (and any other defined benefit plan maintained by the
Holding Company or the Savings Bank) during the remaining
Employment
- 2 -
<PAGE>
Period; and (v) the lump sum present value of the additional benefits which
Executive would have accrued under Section 3(d) of this Agreement during the
remaining Employment Period. The amounts specified in the preceding sentence
shall be determined based on the terms of the applicable plan or plans
(including the actuarial assumptions used therein) as in effect on the date of
the Change in Control, assuming that, during the remaining Employment Period,
Executive continued to receive his Base Salary at the level in effect on the
date of the Change in Control, earned the highest level of bonuses in effect for
him prior to the Change in Control and made the maximum amount of employee
contributions permitted or required under the applicable plan or plans. At the
election of the Executive, which election is to be made within thirty (30) days
of the date of the Change in Control, the sum of the amounts to be paid under
this Section 5(c) shall be paid in a lump sum or paid in equal monthly
installments during the remaining Employment Period. In the event that no
election is made, payment to the Executive will be made on a monthly basis
during the remaining Employment Period.
FIFTH. Section 5(d) of the Employment Agreement shall be amended in its
entirety to read as follows:
(d) Upon the occurrence of a Change in Control, the Holding
Company will cause to be continued, during the remaining
Employment Period, life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Savings
Bank or the Holding Company for Executive and his family
immediately prior to the Change in Control.
SIXTH. Section 5(g) of the Employment Agreement shall be redesignated
Section 5(h), and any cross-references thereto shall be modified accordingly,
and a new Section 5(g) shall be added to the Employment Agreement to read as
follows:
(g) Upon the occurrence of a Change in Control, the Holding
Company will cause to cause to be continued, during the remaining
Employment Period, at no cost to Executive, the fringe benefits
and perquisites made available or provided to Executive
immediately prior to the Change in Control, including, but not
limited to, use of an automobile (comparable to a Lincoln
Continental or a better quality and including gasoline), cellular
and automobile telephones and a pager, as provided to Executive
by the Holding Company or the Savings Bank immediately prior to
the Change in Control, and payment of all membership fees, dues,
capital contributions and other expenses for membership in such
clubs, associations or other organizations for which expenses
were paid by the Holding Company or the Savings Bank on behalf of
the Executive prior to the Change in Control, including, but not
limited to, any fees associated with attending state and national
annual bank conventions and the American Community Bankers
Presidents' Seminar. Regardless of whether Executive remains
employed by the Holding Company or
- 3 -
<PAGE>
the Savings Bank, or their successors or assigns, he shall be
provided, during the remaining Employment Period, with a private
office comparable in size with his office prior to the Change in
Control which shall not be more than 30 miles from the location
of his principal place of employment immediately prior to the
Change in Control, a corporate credit card, the right to receive
frequent flyer miles for any business travel, a private telephone
number, secretarial services and other support services and
facilities comparable to those provided to him by the Holding
Company and the Savings Bank immediately prior to the Change in
Control. In the event that Executive remains employed by the
Holding Company or the Savings Bank, or their successors or
assigns, following the Change in Control, Executive's principal
place of employment shall be the office described in the
preceding sentence.
SEVENTH. Except as expressly amended herein, the Employment Agreement shall
remain in full force and effect and the definitions therein are incorporated in
this Amendatory Agreement by reference.
- 4 -
<PAGE>
IN WITNESS WHEREOF, MSB BANCORP, INC. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
director, and Executive has signed this Agreement, on the 31st day of October,
1997.
ATTEST: MSB BANCORP, INC.
/s/ Karen DeLuca By: /s/ Ralph W. Decker
- ---------------- -----------------------
SECRETARY RALPH W. DECKER
KAREN DELUCA CHAIRMAN OF THE COMPENSATION COMMITTEE
[SEAL]
WITNESS:
/s/ William C. Myers
- -------------------- --------------------
WILLIAM C. MYERS
- 5 -
EXHIBIT 10.12(B)
AMENDATORY AGREEMENT
This AMENDATORY AGREEMENT ("Agreement") is made effective as of October 17,
1997 by and between MSB BANCORP, INC. ("Holding Company"), a corporation
organized under the laws of Delaware, with its principal administrative office
at 35 Matthews Street, Goshen, New York, and GILL MACKAY ("Executive"). Any
reference to "Savings Bank" herein shall mean MSB Bank, a wholly owned
subsidiary of the Holding Company, or any successor thereto.
W I T N E S S E T H :
WHEREAS, the Holding Company and the Executive entered into an employment
agreement dated September 3, 1994 ("Employment Agreement"), which was amended
effective as of September 3, 1995 and September 3, 1996; and
WHEREAS, the Holding Company and Executive desire to amend the Employment
Agreement, effective as of October 17, 1997;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
FIRST. Section 2(a) of the Employment Agreement shall be amended in its
entirety to read as follows:
(a) The period of Executive's employment under this Agreement ("Employment
Period") shall be deemed to have commenced as of the date first above written
and shall end on December 31, 2000, subject to such extensions, if any, as are
provided by the Holding Company pursuant to Section 2(b).
SECOND. Section 2(b) of the Employment Agreement shall be amended in its
entirety to read as follows:
(b) Beginning on January 1, 1998, the Employment Period shall be
automatically extended for one (1) additional day each day, unless either
Executive or the Holding Company elects not to extend the Employment Period
further by giving written notice to the other party, in which case the
Employment Period shall be fixed and shall end on the later of the last day of
the Employment Period specified in such notice or the third anniversary of the
date such written notice is given.
- 1 -
<PAGE>
THIRD. Section 5(b) of the Employment Agreement shall be amended in its
entirety to read as follows:
(b) If any of the events described in Section 5(a)
constituting a Change in Control have occurred or the Board has
determined that a Change in Control has occurred, Executive shall
be entitled to the payments and benefits provided in paragraphs
(c), (d), (e), (f), (g) and (h) of this Section 5 on the date
such Change in Control occurs, without regard to whether
Executive's employment with the Holding Company or the Savings
Bank terminates in connection with such Change in Control. The
benefits to be provided under, and the amounts payable pursuant
to, this Section 5 shall be provided and be payable to the
Executive, or in the event of his subsequent death, to his
beneficiary or beneficiaries, or to his estate, as the case may
be, without regard to proof of damages and without regard to the
Executive's efforts, if any, to mitigate damages, and shall not
be offset by, or reduced in respect of, any compensation or
benefits paid or provided, or to be paid or provided, to
Executive as a continuing employee of the Holding Company, the
Savings Bank or their successors or assigns, following the Change
in Control. The Holding Company and Executive hereby stipulate
that the damages which may be incurred by Executive following any
Change in Control are not capable of accurate measurement as of
the date first above written and that such liquidated damages
constitute reasonable damages under the circumstances.
FOURTH. Section 5(c) of the Employment Agreement shall be amended in its
entirety to read as follows:
(c) Upon the occurrence of a Change in Control, the Holding
Company shall be obligated to pay (or to cause the Savings Bank
to pay) 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) the amount of Base Salary, bonuses and any
other cash compensation that would have been paid to Executive
during the remaining Employment Period; (ii) the amount of any
employer contributions that would have been made on Executive's
behalf under the Savings Bank's 401(k) Savings Plan (and any
other defined contribution plan maintained by the Holding Company
or the Savings Bank) during the remaining Employment Period;
(iii) the fair market value (determined as of the date of the
Change in Control) of any stock that would have been awarded or
allocated to Executive under the Savings Bank's ESOP or BRP (or
any other stock-based employee benefit or compensation plan or
arrangement maintained by the Holding Company or the Savings
Bank) during the remaining Employment Period; (iv) the lump sum
present value of the benefits which the Executive would have
accrued under the Savings Bank's Retirement Plan (and any other
defined benefit plan maintained by the Holding Company or the
Savings Bank) during the remaining Employment Period; and (v) the
lump sum present value of the additional benefits which Executive
would have accrued under Section 3(d) of this Agreement during
the remaining Employment Period. The amounts specified in the
preceding sentence shall be determined based on the terms of the
- 2 -
<PAGE>
applicable plan or plans (including the actuarial assumptions
used therein) as in effect on the date of the Change in Control,
assuming that, during the remaining Employment Period, Executive
continued to receive his Base Salary at the level in effect on
the date of the Change in Control, earned the highest level of
bonuses in effect for him prior to the Change in Control and made
the maximum amount of employee contributions permitted or
required under the applicable plan or plans. At the election of
the Executive, which election is to be made within thirty (30)
days of the date of the Change in Control, the sum of the amounts
to be paid under this Section 5(c) shall be paid in a lump sum or
paid in equal monthly installments during the remaining
Employment Period. In the event that no election is made, payment
to the Executive will be made on a monthly basis during the
remaining Employment Period.
FIFTH. Section 5(d) of the Employment Agreement shall be amended in its
entirety to read as follows:
(d) Upon the occurrence of a Change in Control, the Holding
Company will cause to be continued, during the remaining
Employment Period, life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Savings
Bank or the Holding Company for Executive and his family
immediately prior to the Change in Control.
SIXTH. Section 5(g) of the Employment Agreement shall be redesignated
Section 5(h), and any cross-references thereto shall be modified accordingly,
and a new Section 5(g) shall be added to the Employment Agreement to read as
follows:
(g) Upon the occurrence of a Change in Control, the Holding
Company will cause to cause to be continued, during the remaining
Employment Period, at no cost to Executive, the fringe benefits
and perquisites made available or provided to Executive
immediately prior to the Change in Control, including, but not
limited to, use of the automobile and the cellular and automobile
telephones provided to Executive by the Holding Company or the
Savings Bank immediately prior to the Change in Control, and
payment of all membership fees, dues, capital contributions and
other expenses for membership in such clubs, associations or
other organizations for which expenses were paid by the Holding
Company or the Savings Bank on behalf of the Executive prior to
the Change in Control. In the event that Executive's employment
continues with the Holding Company or the Savings Bank, or their
successors or assigns, following the Change in Control,
Executive's principal place of employment shall be not more than
30 miles from the location of his principal place of employment
immediately prior to the Change in Control and he shall be
provided with a private office, secretarial services and other
support services and facilities comparable to those provided to
him by the Holding Company and the Savings Bank immediately prior
to the Change in Control.
- 3 -
<PAGE>
SEVENTH. Except as expressly amended herein, the Employment Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, MSB BANCORP, INC. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
director, and Executive has signed this Agreement, on the 31st day of October,
1997.
ATTEST: MSB BANCORP, INC.
/s/ Karen DeLuca By: /s/ William C. Myers
- ---------------- ------------------------
Secretary WILLIAM C. MYERS
KAREN DELUCA President and Chief Executive Officer
[SEAL]
WITNESS:
/s/ Gill Mackay
---------------
GILL MACKAY
- 4 -
EXHIBIT 10.13(B)
AMENDATORY AGREEMENT
This AMENDATORY AGREEMENT ("Agreement") is made effective as of October 17,
1997 by and between MSB BANCORP, INC. ("Holding Company"), a corporation
organized under the laws of Delaware, with its principal administrative office
at 35 Matthews Street, Goshen, New York, and ANTHONY J. FABIANO ("Executive").
Any reference to "Savings Bank" herein shall mean MSB Bank, a wholly owned
subsidiary of the Holding Company, or any successor thereto.
W I T N E S S E T H :
WHEREAS, the Holding Company and the Executive entered into an employment
agreement dated January 1, 1996 ("Employment Agreement"), which was amended
effective as of January 1, 1997; and
WHEREAS, the Holding Company and Executive desire to amend the Employment
Agreement, effective as of October 17, 1997;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
FIRST. Section 2(a) of the Employment Agreement shall be amended in its
entirety to read as follows:
(a) The period of Executive's employment under this
Agreement ("Employment Period") shall be deemed to have commenced
as of the date first above written and shall end on December 31,
2000, subject to such extensions, if any, as are provided by the
Holding Company pursuant to Section 2(b).
SECOND. Section 2(b) of the Employment Agreement shall be amended in its
entirety to read as follows:
(b) Beginning on January 1, 1998, the Employment Period
shall be automatically extended for one (1) additional day each
day, unless either Executive or the Holding Company elects not to
extend the Employment Period further by giving written notice to
the other party, in which case the Employment Period shall be
fixed and shall end on the later of the last day of the
Employment Period specified in such notice or the third
anniversary of the date such written notice is given.
- 1 -
<PAGE>
THIRD. Section 5(b) of the Employment Agreement shall be amended in its
entirety to read as follows:
(b) If any of the events described in Section 5(a)
constituting a Change in Control have occurred or the Board has
determined that a Change in Control has occurred, Executive shall
be entitled to the payments and benefits provided in paragraphs
(c), (d), (e), (f), (g) and (h) of this Section 5 on the date
such Change in Control occurs, without regard to whether
Executive's employment with the Holding Company or the Savings
Bank terminates in connection with such Change in Control. The
benefits to be provided under, and the amounts payable pursuant
to, this Section 5 shall be provided and be payable to the
Executive, or in the event of his subsequent death, to his
beneficiary or beneficiaries, or to his estate, as the case may
be, without regard to proof of damages and without regard to the
Executive's efforts, if any, to mitigate damages, and shall not
be offset by, or reduced in respect of, any compensation or
benefits paid or provided, or to be paid or provided, to
Executive as a continuing employee of the Holding Company, the
Savings Bank or their successors or assigns, following the Change
in Control. The Holding Company and Executive hereby stipulate
that the damages which may be incurred by Executive following any
Change in Control are not capable of accurate measurement as of
the date first above written and that such liquidated damages
constitute reasonable damages under the circumstances.
FOURTH. Section 5(c) of the Employment Agreement shall be amended in its
entirety to read as follows:
(c) Upon the occurrence of a Change in Control, the Holding
Company shall be obligated to pay (or to cause the Savings Bank
to pay) 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) the amount of Base Salary, bonuses and any
other cash compensation that would have been paid to Executive
during the remaining Employment Period; (ii) the amount of any
employer contributions that would have been made on Executive's
behalf under the Savings Bank's 401(k) Savings Plan (and any
other defined contribution plan maintained by the Holding Company
or the Savings Bank) during the remaining Employment Period;
(iii) the fair market value (determined as of the date of the
Change in Control) of any stock that would have been awarded or
allocated to Executive under the Savings Bank's ESOP or BRP (or
any other stock-based employee benefit or compensation plan or
arrangement maintained by the Holding Company or the Savings
Bank) during the remaining Employment Period; (iv) the lump sum
present value of the benefits which the Executive would have
accrued under the Savings Bank's Retirement Plan (and any other
defined benefit plan maintained by the Holding Company or the
Savings Bank) during the remaining Employment Period; and (v) the
lump sum present value of the additional benefits which Executive
would have accrued under Section 3(d) of this Agreement during
the remaining Employment Period. The amounts specified in the
preceding sentence shall be determined based on the terms of the
- 2 -
<PAGE>
applicable plan or plans (including the actuarial
assumptions used therein) as in effect on the date of the
Change in Control, assuming that, during the remaining
Employment Period, Executive continued to receive his Base
Salary at the level in effect on the date of the Change in
Control, earned the highest level of bonuses in effect for
him prior to the Change in Control and made the maximum
amount of employee contributions permitted or required under
the applicable plan or plans. At the election of the
Executive, which election is to be made within thirty (30)
days of the date of the Change in Control, the sum of the
amounts to be paid under this Section 5(c) shall be paid in
a lump sum or paid in equal monthly installments during the
remaining Employment Period. In the event that no election
is made, payment to the Executive will be made on a monthly
basis during the remaining Employment Period.
FIFTH. Section 5(d) of the Employment Agreement shall be amended in its
entirety to read as follows:
(d) Upon the occurrence of a Change in Control, the Holding
Company will cause to be continued, during the remaining
Employment Period, life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Savings
Bank or the Holding Company for Executive and his family
immediately prior to the Change in Control.
SIXTH. Section 5(g) of the Employment Agreement shall be redesignated
Section 5(h), and any cross-references thereto shall be modified accordingly,
and a new Section 5(g) shall be added to the Employment Agreement to read as
follows:
(g) Upon the occurrence of a Change in Control, the Holding
Company will cause to cause to be continued, during the remaining
Employment Period, at no cost to Executive, the fringe benefits
and perquisites made available or provided to Executive
immediately prior to the Change in Control, including, but not
limited to, use of the automobile and the cellular and automobile
telephones provided to Executive by the Holding Company or the
Savings Bank immediately prior to the Change in Control, and
payment of all membership fees, dues, capital contributions and
other expenses for membership in such clubs, associations or
other organizations for which expenses were paid by the Holding
Company or the Savings Bank on behalf of the Executive prior to
the Change in Control. In the event that Executive's employment
continues with the Holding Company or the Savings Bank, or their
successors or assigns, following the Change in Control,
Executive's principal place of employment shall be not more than
30 miles from the location of his principal place of employment
immediately prior to the Change in Control and he shall be
provided with a private office, secretarial services and other
support services and facilities comparable to those provided to
him by the Holding Company and the Savings Bank immediately prior
to the Change in Control.
- 3 -
<PAGE>
SEVENTH. Except as expressly amended herein, the Employment Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, MSB BANCORP, INC. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
director, and Executive has signed this Agreement, on the 31st day of October,
1997.
ATTEST: MSB BANCORP, INC.
/s/ Karen DeLuca By: /s/ William C. Myers
- ---------------- ------------------------
Secretary WILLIAM C. MYERS
KAREN DELUCA President and Chief Executive Officer
[SEAL]
WITNESS:
/s/ Anthony J. Fabiano
- ---------------------- ----------------------
ANTHONY J. FABIANO
- 4 -
EXHIBIT 11
Computation of Net Income per Share
For the Year Ended December 31, 1997
------------------------------------
Net income......................................... $ 2,281,000
Preferred stock dividends.......................... 1,134,000
--------------
Net income applicable to common shares............. $ 1,147,000
Weighted average common shares - basic............. 2,837,678
--------------
Basic earnings per common share.................... $ 0.40
==============
For purposes of computing diluted earnings per share, diluted weighted
average shares included common stock equivalents of 31,846.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
MSB Bank (organized under the law of the United States)
MSB Financial Services, Inc. (incorporated in the State of New York)
MSB Travel, Inc. (incorporated in the State of New York)
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
MSB Bancorp, Inc.
We consent to incorporation by reference in the registration statement on Form
S-8 of MSB Bancorp, Inc. of our report dated January 27, 1998, relating to the
consolidated balance sheets of MSB Bancorp, Inc. and Subsidiaries as of December
31, 1997 and 1996 and the related consolidated statements of income, changes in
shockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1997, which report is included in the December 31,
1997 annual report on Form 10-K of MSB Bancorp, Inc.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 30, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
MSB Bancorp, Inc.
We consent to incorporation by reference in the registration statement on Form
S-8 of MSB Bancorp, Inc. of our report dated January 30, 1996, relating to the
consolidated statements of financial condition of MSB Bancorp, Inc. and
Subsidiaries as of December 31, 1995 and 1994 and for the years then ended and
the related consolidated statements of income, changes in shockholders' equity,
and cash flows for each of the years in the two-year period ended December 31,
1995, which report is included in the December 31, 1997 annual report on Form
10-K of MSB Bancorp, Inc.
NUGENT & HAEUSSLER, P.C.
March 30, 1998
Newburgh, New York
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed statement of financial condition and the consolidated
condensed statement of income and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> $16,834
<INT-BEARING-DEPOSITS> 0
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<TRADING-ASSETS> 0
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<LOANS> 393,524
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<EXPENSE-OTHER> 23,854
<INCOME-PRETAX> 3,803
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<EXTRAORDINARY> 0
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<NET-INCOME> 2,281
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 3.37
<LOANS-NON> 3,488
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<LOANS-TROUBLED> 2,283
<LOANS-PROBLEM> 6,400
<ALLOWANCE-OPEN> 1,960
<CHARGE-OFFS> 907
<RECOVERIES> 189
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</TABLE>