Summary of MSB FINANCIAL CORP.

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

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward - looking statements include:

· Statements of our goals, intentions and expectations;

· Statements regarding our business plans, prospects, growth and operating strategies;

· Statements regarding the quality of our loan and investment portfolios; and

· Estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

· General economic conditions, either nationally or in our market area, that are worse than expected;

· The volatility of the financial and securities markets, including changes with respect to the market value of our financial assets;

· Changes in government regulation affecting financial institutions and the potential expenses associated therewith;

· Changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

· Our ability to enter into new markets and/or expand product offerings successfully and take advantage of growth opportunities;

· Increased competitive pressures among financial services companies;

· Changes in consumer spending, borrowing and savings habits;

· Legislative or regulatory changes that adversely affect our business;

· Adverse changes in the securities markets;

· Our ability to successfully manage our growth; and

· Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board.

No forward-looking statement can be guaranteed and we specifically disclaim any obligation to update any forward-looking statement.

Impact of Hurricane Sandy

Our primary market area in New Jersey was significantly impacted by Hurricane Sandy, which struck the region on October 29, 2012. Although we experienced short-term service disruptions, the storm has not had a significant effect on our ability to continue to service our customers. None of our branches sustained any significant damage as a result of the storm, although many were temporarily affected by power outages and telecommunication problems. Full power has since been restored to all of our offices. All offices remained open despite the outages.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial position and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.

The allowance for loan losses represents our best estimate of losses known and inherent in our loan portfolio that are both probable and reasonable to estimate. In determining the amount of the allowance for loan losses, we consider the losses inherent in our loan portfolio and changes in the nature and volume of our loan activities, along with general economic and real estate market conditions. We utilize a two tier approach: (1) identification of impaired loans for which specific reserves may be established; and (2) establishment of general valuation allowances on the remainder of the loan portfolio. We maintain a loan review system which provides for a systematic review of the loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loan, type of collateral and the financial condition of the borrower. Specific loan loss allowances are established for identified loans based on a review of such information and/or

appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment.

In addition, various regulatory agencies, as an integral part of their 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 examinations.

Although specific and general loan loss allowances are established in accordance with management's best estimate, actual losses are dependent upon future events and, as such, further provisions for loan losses may be necessary in order to increase the level of the allowance for loan losses. For example, our evaluation of the allowance includes consideration of current economic conditions, and a change in economic conditions could reduce the ability of our borrowers to make timely repayments of their loans. This could result in increased delinquencies and increased non-performing loans, and thus a need to make increased provisions to the allowance for loan losses, which would be a charge to income during the period the provision is made, resulting in a reduction to our earnings. A change in economic conditions could also adversely affect the value of the properties collateralizing our real estate loans, resulting in increased charge-offs against the allowance and reduced recoveries, and thus a need to make increased provisions to the allowance for loan losses. Furthermore, a change in the composition of our loan portfolio or growth of our loan portfolio could result in the need for additional provisions.

Comparison of Financial Condition at December 31, 2012 and June 30, 2012

General. Total assets decreased to $343.6 million at December 31, 2012, from $347.3 million at June 30, 2012, primarily due to a decrease of $18.1 million in cash and cash equivalents and a $6.8 million decrease in loans receivable, net, offset by an increase of $19.2 million in securities held to maturity. Deposits were $282.0 million at December 31, 2012, down $1.8 million compared to $283.8 million at June 30, 2012. The decrease in deposit balances was primarily due to the Company lowering its offering rates. FHLB advances were $20.0 million at both December 31, and June 30, 2012.

Total assets decreased by $3.7 million between periods, while total liabilities decreased by $1.9 million, and the ratio of average interest-earning assets to average-interest bearing liabilities decreased slightly to 109.18% for the six months ended December 31, 2012 as compared to 109.22% for year ended June 30, 2012. Stockholders' equity decreased by $1.8 million to $39.0 million at December 31, 2012 compared to $40.8 million at June 30, 2012.

Loans. Loans receivable, net, declined $6.8 million, or 2.8% from $240.5 million at June 30, 2012 to $233.8 million at December 31, 2012. As a percentage of assets, loans decreased to 68.0% from 69.2%. The Company's commercial and industrial loan portfolio grew by $437,000 or 4.3%, the commercial real estate portfolio increased by $25,000 or 0.1%, as did overdraft and personal loans by $13,000 or 8.0% and $3,000 or 13.0%, respectively, between June 30, 2012 and December 31, 2012. Home equity loans decreased by $3.1 million or 6.2%, one-to-four family loans decreased by $2.0 million or 1.4%, as did construction loans, deposit account loans and automobile loans by $61,000 or 0.1%, $52,000 or 7.1% and $29,000 or 15.0%, respectively, between June 30, 2012 and December 31, 2012.

Securities. Our portfolio of securities held to maturity was at $69.9 million at December 31, 2012 as compared to $50.7 million at June 30, 2012. Maturities, calls and principal repayments during the six months ended December 31, 2012 totaled $23.7 million. We purchased $42.8 million of new securities

during the six months ended December 31, 2012. In addition, the Bank sold all of its trading securities totaling $52,000 during the six months ended December 31, 2012.

Deposits. Total deposits at December 31, 2012 were $282.0 million, a $1.8 million decrease as compared to $283.8 million at June 30, 2012. Demand accounts increased by $2.9 million, as did savings and club accounts by $205,000, while certificate of deposit accounts decreased by $4.9 million for the six month period ended December 31, 2012.

Borrowings. Total borrowings at December 31, 2012 and June 30, 2012 amounted to $20.0 million. The Bank did not make any long term borrowings during the six months ended December 31, 2012 and did not have short-term borrowings at December 31, 2012 or June 30, 2012.

Equity. Stockholders' equity was $39.0 million at December 31, 2012 compared to $40.9 at June 30, 2012, a decrease of $1.9 million or 4.5%. The decrease in shareholders' equity was primarily due to a reported net loss of $1.7 million and the repurchase of $408,000 in treasury stock, offset by an increase of $139,000 in paid in capital primarily related to the compensation expense attributable to the Company's stock-based compensation plan, an $84,000 decrease in unallocated common stock held by our ESOP and $8,000 of other comprehensive income.

Comparison of Operating Results for the Three Months and Six Months Ended December 31, 2012 and 2011

General. The Company reported a net loss of $1.6 million for the three months ended December 31, 2012 compared to net income of $224,000, for the three months ended December 31, 2011, a decrease of $1.8 million or 803.1%. The decrease was primarily the result of a $2.6 million or 692.8% increase in the provision for loan losses, along with a $356,000 or 13.4% decrease in net interest income for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. Non-interest income reflected a decrease of $11,000 or 6.4%, to $162,000 for the three months ended December 31, 2012 compared to $173,000 for the three months ended December 31, 2011. Non-interest expense increased by $63,000 or 3.1% for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. Total non-interest expense was $2.1 million for both the three month periods ended December 31, 2012 and 2011.

The Company recorded a $1.7 million net loss for the six months ended December 31, 2012 compared to net income of $335,000, for the six months ended December 31, 2011. Net interest income for the six months ended December 31, 2012 was $4.7 million compared to $5.4 million for the six months ended December 31, 2011, a decrease of $639,000 or 11.9%. The provision for loan losses increased by $2.7 million or 276.4% for the six months ended December 31, 2012, from $988,000 for the six months ended December 31, 2011. Non-interest income increased slightly by $4,000 or 1.3% from $317,000 for the six months ended December 31, 2011 to $321,000 for the six months ended December 31, 2012. Non-interest expense increased slightly by $7,000 or 0.2% for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. Total non-interest expense was $4.1 million for both the six month periods ended December 31, 2012 and 2011.

Net Interest Income. Net interest income decreased by $356,000 or 13.4% for the three month period ended December 31, 2012, compared to the three months ended December 31, 2011. Interest income decreased by $549,000 or 15.5%, and interest expense decreased by $193,000 or 21.9%, for the same three month comparative period.

The decrease of $549,000 or 15.5% in total interest income for the three months ended December 31, 2012, resulted from a 62 basis point decrease in yield and a 2.0% decrease in the average balance of interest-earning assets. Average interest earning assets decreased $6.4 million to $311.3 million for the three months ended December 31, 2012, compared to $317.7 million for the three months ended December 31, 2011. Interest income on loans decreased by $392,000 or 13.0% for the three months ended December 31, 2012, compared to the same period in 2011 primarily due to a 48 basis point reduction in average yield and a $8.7 million or 3.5% decrease in average loan balances. Interest on securities held to maturity decreased by $158,000 or 30.5% for the three months ended December 31, 2012, compared to the three months ended December 31, 2011, as a result of a $3.2 million or 5.2% increase in average balance, offset by a 111 basis point reduction in average yield. Other interest income reflected a slight increase of $1,000 or 4.8% in interest income primarily due to a 31 basis point increase in average yield offset by an average balance decrease of $956,000 or 15.1% for the three month period ended December 31, 2012 compared to the same period ended December 31, 2011.

Total interest expense decreased by $193,000 or 22.0% for the three months ended December 31, 2012, compared to the three months ended December 31, 2011. Average interest-bearing liabilities decreased $10.1 million or 3.5%, from $291.7 million for the three months ended December 31, 2011, to $281.6 million for the three months ended December 31, 2012, and the average rate paid which decreased by 23 basis points from 1.21% to 0.98%, for the respective periods. Interest expense on deposits decreased by $193,000 or 27.2% for the three months ended December 31, 2012, compared to the three months ended December 31, 2011, as a result of a $10.1 million or 3.7% decrease in average interest-bearing deposits from $271.7 million to $261.6 million and a 26 basis point reduction in average rate form 1.05% to 0.79%, for the respective periods. Time deposit average balances decreased $9.4 million or 7.5%, as did average savings deposit balances by $2.7 million or 2.4%, while NOW average balances increased by $2.0 million or 6.1% for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. Time deposit average rates decreased by 38 basis points, as did the average rates on savings deposits and NOW accounts by 13 and 2 basis points, respectively, for the three months ended December 31, 2012, compared to the three months ended December 31, 2011. Federal Home Loan Bank advance average balances were $20.0 million for both three month periods ended December 31, 2012 and December 31, 2011, as was the average rate of 3.44% for the same three month comparative periods.

Net interest income decreased $639,000 or 11.9% to $4.7 million for the six months ended December 31, 2012, from $5.4 million for the six months ended December 31, 2012. Interest income decreased by $1.0 million or 14.2%, and interest expense decrease by $379 million or 21.1% for the six month period ended December 31, 2012, compared to the six month period ended December 31, 2011.

The decrease of $1.0 million or 14.2% in interest income for the six months ended December 31, 2012 resulted from a $8.3 million decrease in average earning assets and a 54 basis point decrease in yield to 3.98%, compared to the six months ended December 31, 2011. Interest income on loans decreased by $745,000 or 12.2% for the six months ended December 31, 2012, compared to the six months ended December 31, 2011. Average loan receivable balances decreased $9.3 million or 3.7% to $241.3 million for the six months ended December 31, 2012, compared to $250.6 million for the six months ended December 31, 2011, while the average yield declined to 4.45% from 4.88%. Interest income on securities held to maturity decreased $278,000 or 27.7% for the six months ended December 31, 2012, compared to the six months ended December 31, 2011, due to a $2.1 million increase in average balances from $59.8 million for the six months ended December 31, 2011 to $61.8 million for the six months ended December 31, 2012, offset by a decline in the average yield of 102 basis points from 3.36% to 2.34% for the same six month comparative periods. Interest income on other interest-earning assets increased by $5,000 or 11.4% for the six month period ended December 31, 2012, compared to the same six month period in

2011, as the average yield increased by 43 basis points to 1.72% and average other interest earning-asset balances decreased $1.1 million or 16.5%.

The $379,000 or 21.1% decrease in interest expense for the six months ended December 31, 2012, compared to the six months ended December 31, 2011, was primarily due to a decrease of $8.5 million in average interest-bearing liabilities balances and an average rate decrease of 23 basis points to 1.00%. Interest expense on deposits decreased by $378,000 or 26.0% for the six months ended December 31, 2012, compared to the six months ended December 31, 2011, as a result of a $8.5 million or 3.2% decrease in average interest-bearing deposits from $271.4 million to $262.9 million and a 25 basis point reduction in average rate from 1.07% to 0.82%, for the respective periods. NOW account average balances increased by $2.5 million or 7.7% for the six month period ended December 31, 2012 compared to the six months ended December 31, 2011, were as time deposit and savings average balances decreased by $7.8 million and $3.3 million, or 6.2% and 2.9%, respectively, for the same comparative periods. The average rates on time, savings deposits and NOW accounts decreased by 36 basis points, 15 basis points and 2 basis points, respectively, for the six months ended December 31, 2012, compared to the same six month period ended December 31, 2011. Federal Home Loan Bank advance average balances were $20.0 million for both six month periods ended December 31, 2012 and December 31, 2011, as was the average rate of 3.44% for both six month periods.

Provision for Loan Losses. The loan loss provision for the three and six months ended December 31, 2012 was $3.0 million and $3.7 million, respectively, compared to $375,000 and $988,000 for the same periods ended December 31, 2011. The Company's management reviews the level of the allowance for loan losses on a quarterly basis based on a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions,
(3) actual losses previously experienced, (4) the Company's level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable. The Company experienced $507,000 in net charge-offs (consisting of $549,000 in charge-offs and $42,000 in recoveries) for the three month period ended December 2012 compared to $463,000 in net charge-offs (consisting of $463,000 in charge-offs and no recoveries) for the three month period ended December 31, 2011. In addition, the Company experienced $1,464,000 in net charge-offs (consisting of $1,513,000 in charge-offs, comprising of $628,000 in one-to-four family loans, $404,000 in home equity loans, $249,000 in construction loans and $232,000 in commercial and industrial loans, respectively, and $49,000 in recoveries) for the six month period ended December 31, 2012 compared to $495,000 in net charge-offs (consisting of $495,000 in charge-offs and no recoveries) for the six months ended December 31, 2011.

The Company's provision for loan losses for the three months ended December 31, 2012 totaled $3.0 million based on the level of allowance for loan losses the Company's management deemed necessary, based on its quarterly review of the allowance for loan losses as of December 31, 2012. The provision for loan losses for the quarter ended December 31, 2012 included $2.0 million deemed necessary to support the Company's planned asset disposition strategy approved by the Board Directors during the quarter ended December 31, 2012. This strategy was implemented in an attempt to rapidly reduce the dollar amount of non-performing loans in the Company's loan portfolio. The Company has incurred this additional loss at this time in order to mitigate significant costs associated with the foreclosure process, which can currently take up to three years to complete. Based on the Company's prior history, loans in the foreclosure process will experience prolonged expenses in the form of legal fees, property taxes, utilities, property maintenance, as well as asset depreciation due to neglect of the property.

As part of the aforementioned strategy, the Company performed an analysis to identify loans which will be part of this disposition strategy made available to the Company, which includes short sales, cash for keys, deeds in lieu of foreclosure and/or the bulk sale of loans. The analysis provided management with a way to estimate the additional reserves required to complete the asset disposition strategy. The Company feels that these losses are both probable and estimable and, accordingly, has recorded an additional provision for the quarter ended December 31, 2012. The Company's management team is actively engaged with borrowers and buyers to expedite the asset disposition strategy and will continue doing so until desired amount of non-performing loans have been removed from the Company's loan portfolio.

The Company had $15.8 million in non-performing loans as of December 31, 2012, compared to $15.7 million as of December 31, 2011. The allowance for loan losses to total loans ratio was 2.20% at December 31, 2012, compared to 1.06% at December 31, 2011, while the allowance for loan losses to non-performing loans ratio increased from 16.93% at December 31, 2011 to 33.71% at December 31, 2012, primarily due to the increase in the allowance for loan losses during the first six months of this fiscal year. Non-performing loans to total loans and net charge-offs to average loans outstanding ratios were at 6.54% and 0.61%, respectively, at and for the six months ended December 31, 2012 compared to 6.28% and 0.20% at and for the six months ended December 31, 2011.

Non-Interest Income. This category includes fees derived from checking accounts, ATM transactions and debit card use and mortgage related fees. It also includes increases in the cash-surrender value of the bank owned life insurance and any unrealized gain or loss on trading securities.

Non-interest income decreased by $11,000 or 6.4% to $162,000 for the three months ended December 31, 2012 from $173,000 for the three months ended December 31, 2011, primarily due to a $9,000 or 22.2% reduction in other non-interest income and a $4,000 or 4.9% decrease in fees and service charges, offset by a $5,000 increase in income from bank owned life insurance for the current period. The Company did not have an unrealized gain on its trading security portfolio during the current period compared to a $3,000 unrealized gain recorded for the three months ended December 31, 2011. Total non-interest income increased $4,000 or 1.3% from $317,000 for the six months ended December 31, 2011 to $321,000 for the six months ended December 31, 2012, primarily due to a $1,000 unrealized gain on the Company's trading security portfolio during the current six month period ended December 31, 2012 period as compared to an $12,000 unrealized loss for the same six month period ended December 31, 2011. Income from bank owned life insurance increased $7,000 or 6.9% for the six months ended December 31, 2012 from the six months ended December 31, 2011, while other non-interest income decreased $12,000 or 17.7%, as did fees and service charges by $4,000 or 2.4% for the six months ended December 31, 2012 compared to December 31, 2011.

Non-Interest Expenses. Total non-interest expense was essentially flat when comparing the three and six month periods ended December 31, 2012 with their respective corresponding periods in the prior fiscal year. For the three months ended December 31, 2012, total non-interest expense increased by $63,000 or 3.1% compared to the same period ended December 31, 2011. Professional services, salaries and employee benefits, and service bureau fees increased by $46,000, $29,000 and $19,000 or 36.8%, 3.0% and 17.6%, respectively, as did directors' compensation by $13,000 or 11.2% and other non-interest expense by $3,000 or 1.2%, while occupancy and equipment, advertising and FDIC assessment expenses decreased by $28,000, $16,000 and $3,000 or 7.4%, 33.3% and 4.0%, respectively, for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. The increase in professional services was due to higher consultant expense and audit and examination expense, while the increase in employee benefits expense was primarily due to an increase in staffing during the quarter ended December 31, 2012, and higher benefit cost related to retirement plans. The increase in directors' compensation expense was due to an increase in the number of directors receiving fees. The former President and CEO who continues to serve as a director, retired as an officer as of December 31, 2011. Prior to his retirement as an officer, he was not separately compensated as a director. The increase in service bureau fees was related to the expansion of services. The decrease in occupancy and equipment expense was related to a decrease in utility and depreciation expense, while the decrease in advertising expense was due to a reduction in spending, for the three months ended December 31, 2012 compared to the three months ended December 31, 2011.

Our non-interest expense for the six months ended December 31, 2012, increased slightly by $7,000 or 0.2% compared to the six months ended December 31, 2011. Service bureau fees, other non-interest expense, directors' compensation expense and professional services expense increased by $50,000, $38,000, $25,000 and $23,000 or 23.2%, 8.7%, 10.8% and 8.8%, respectively for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. Correspondingly, occupancy and equipment expense, advertising and salary and employee benefits expense decreased by $82,000, $24,000 and $21,000 or 10.4%, 25.0% and 1.1%, respectively, as did FDIC assessment expense decreased by $2,000 or 1.4%, for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. The increase in service bureau fees was related to the expansion of services, while the increase in other non-interest expense was related to increases in other real estate and miscellaneous operating expenses. The increase in directors' compensation was attributable to a retirement arrangement agreement with the former President and CEO who sits on the Board of Directors, while the increase in professional services expense was related to an increases in consultant and audit and examination expenses for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. The decrease in occupancy and equipment expense was related to reductions in building taxes, depreciation, computer equipment and utility expenses for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. The decrease in advertising expense was attributable to last year's 100th year anniversary promotion, and the decrease in salaries and benefits expense was primarily attributable to the retirement of the former President & CEO of the Company, as of December 31, 2011, who was succeeded by the former Executive Vice President whose position was not replaced.

Income Taxes. The income tax benefit for the three months ended December 31, 2012 was $1.0 million or 39.9% of the reported loss before income taxes as compared to tax expense of $182,000 or 44.8% of income before income taxes for the three months ended December 31, 2011. The income tax benefit for the six . . .