UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
COMMISSION FILE NUMBER: 0-27124
NHS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
California 68-0359326
---------- ----------
(State of incorporation) (I.R.S. Employer
Identification Number)
1050 Fourth Street
San Rafael, California 94901
---------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (415) 257-3761
Indicate by check mark whether 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
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Number of Shares of Common Stock Outstanding as of May 6, 1996: 2,522,827
NHS FINANCIAL, INC.
FORM 10-Q
TABLE OF CONTENTS
Item
Number Description Page
- - ------------------------------------------------------------------------------
PART I.
1. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1996 AND DECEMBER 31,1995..................................3
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995...........................4
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995...........................5
NOTES TO THE FINANCIAL CONSOLIDATED FINANCIAL STATEMENTS.............7
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................8
PART II.
OTHER INFORMATION......................................................18
SIGNATURES.............................................................19
2
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NHS FINANCIAL, INC.
Consolidated Statements of Financial Condition
March 31, 1996 December 31, 1995
------------------------------------
ASSETS
Cash, including non-interest bearing deposits $189,995 $169,202
Interest-bearing deposits 9,767,685 5,310,416
Mortgage-backed securities available for sale, at fair value 3,698,343 4,053,873
Investment securities held to maturity
(Fair value: 3/31/96, $10,849,064;12/31/95, $11,025,888) 11,000,000 11,000,000
Mortgage-backed securities held to maturity
(Fair value: 3/31/96, $8,331,611;12/31/95, $8,835,578) 8,352,801 8,829,881
Loans receivable, net 252,164,386 257,040,178
Investment in Federal Home Loan Bank of S. F., at cost 2,298,900 2,212,500
Real estate owned, net 1,220,096 1,652,666
Accrued interest receivable:
Loans 1,749,472 1,740,432
Securities 203,013 223,926
Leasehold improvements and equipment, net 792,356 842,338
Other assets 1,181,308 1,170,944
- - ---------------------------------------------------------------------------------------------------------
Total assets $292,618,355 $294,246,356
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits 229,269,106 246,952,323
Advances from Federal Home Loan Bank of San Francisco 36,000,000 21,000,000
Other liabilities 2,677,706 2,063,389
- - ---------------------------------------------------------------------------------------------------------
Total liabilities $267,946,812 $270,015,712
- - ---------------------------------------------------------------------------------------------------------
Capital stock, no par value; authorized 5,000,000 shares;
issued and outstanding, 2,522,827 shares at 3/31/96 and at 12/31/95 11,772,003 11,772,003
Unrealized loss on securities available for sale, net of tax (53,263) (27,220)
Retained earnings, substantially restricted 12,952,803 12,485,861
- - ---------------------------------------------------------------------------------------------------------
Total stockholders' equity $24,671,543 $24,230,644
- - ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $292,618,355 $294,246,356
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
3
Item 1. FINANCIAL STATEMENTS (continued)
NHS FINANCIAL, INC.
Consolidated Statements of Operations
Three Months Ended
March 31,
1996 1995
-----------------------------------
Interest Income:
Loans receivable $5,527,797 $4,655,891
Mortgage-backed securities 190,542 236,142
Other investments 269,848 181,866
- - ------------------------------------------------------------------------------------------------------
5,988,187 5,073,899
- - ------------------------------------------------------------------------------------------------------
Interest Expense:
Customer deposits 3,129,687 2,917,410
Advances from the Federal Home Loan Bank of San Francisco 450,654 280,840
- - ------------------------------------------------------------------------------------------------------
3,580,341 3,198,250
- - ------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 2,407,846 1,875,649
Provision for loan losses 140,000 -
- - ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,267,846 1,875,649
- - ------------------------------------------------------------------------------------------------------
Non-interest income:
Net gain on sale of real estate owned 146,422 1,068
Income from real estate owned 10,905 -
Loan and deposit fees 50,247 110,592
Other 3,669 22,550
- - ------------------------------------------------------------------------------------------------------
Total non-interest income 211,243 134,210
- - ------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative expense:
Compensation and benefits 714,032 655,288
Deposit insurance and regulatory assessments 178,861 142,190
Rent and occupancy 141,041 129,638
Professional fees 122,733 45,794
Depreciation and amortization 76,405 73,091
Information systems 42,358 53,702
Other 180,103 180,411
- - ------------------------------------------------------------------------------------------------------
Total general and administrative expense 1,455,533 1.280,114
Expenses of real estate owned 52,862 17,401
- - ------------------------------------------------------------------------------------------------------
Total non-interest expense 1,508,395 1,297,515
- - ------------------------------------------------------------------------------------------------------
Income before income taxes 970,694 712,344
Income taxes 402,838 295,623
- - ------------------------------------------------------------------------------------------------------
Net income $567,856 $416,721
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
Earnings per share $0.23 $0.17
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
4
Item 1. FINANCIAL STATEMENTS (continued)
NHS FINANCIAL, INC.
Consolidated Statements of Cash Flows
Three Months Ended
March 31, 1996 March 31, 1995
------------------------------------
Cash flows from operating activities:
Net income $567,856 $416,721
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of net deferred loan origination fees (221,468) (177,219)
Amortization of premiums and discounts on mortgage-backed securities 16,957 21,473
Accretion of discounts on loans (2,681) (1,572)
Provision for loan losses 140,000 -
Net gain on sale of real estate owned (146,422) (1,068)
Depreciation and amortization of leasehold improvements and equipment 76,405 73,083
FHLBSF stock dividends (28,600) (32,100)
Decrease/(increase) in accrued interest receivable 11,873 (81,131)
(Increase)/decrease in other assets (301,305) 8,871
Decrease in income tax receivable, net 623,366 176,871
Increase in other liabilities 292,581 186,286
------------------------------------
Net cash provided by operating activities 1,028,562 590,215
------------------------------------
Cash flows from investing activities:
Net decrease/(increase) in loans resulting from originations,
net of principal collections 4,602,260 (5,798,650)
Loans purchased - (7,257,245)
Purchases of leasehold improvements and equipment (18,923) (175,623)
(Purchases)/redemption of FHLBSF stock (57,800) 145,300
Maturity or calls of securities held to maturity 9,000,000 -
Purchase of securities held to maturity (9,000,000) -
Principal repayments on securities held to maturity 458,072 156,861
Principal repayments on securities available for sale 313,348 275,415
Proceeds from sale of real estate owned 936,673 1,029,558
------------------------------------
Net cash provided by (used in) investing activities 6,233,630 (11,624,384)
------------------------------------
Cash flows from financing activities:
Net (decrease)/increase in customer deposits (17,683,217) 29,803,147
Proceeds from FHLBSF advances 15,000,000 3,700,000
Repayments of FHLBSF advances - (14,700,000)
Cash dividends (100,913) (102,113)
------------------------------------
Net cash (used in) provided by financing activities (2,784,130) 18,701,034
------------------------------------
Net increase in cash and cash equivalents 4,478,062 7,666,865
Cash and cash equivalents at the beginning of period 5,479,618 3,211,334
------------------------------------
Cash and cash equivalents at the end of period $9,957,680 $10,878,199
------------------------------------
------------------------------------
(Continued)
5
Item 1. FINANCIAL STATEMENTS (continued)
NHS FINANCIAL, INC.
Consolidated Statements of Cash Flows
Three Months Ended
March 31, 1996 March 31, 1995
------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $3,723,779 $3,212,027
------------------------------------
------------------------------------
Income taxes, net of refunds - $50,000
------------------------------------
------------------------------------
Supplemental disclosure of noncash investment and
financing activities:
Transfer of loans to real estate owned $357,681 $256,396
------------------------------------
------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
6
NHS FINANCIAL, INC.
Notes to Consolidated Financial Statements
(1) BASIS OF PRESENTATION
The financial statements of the Company presented above reflect all adjustments
consisting of normal recurring accruals which are, in the opinion of management,
necessary to present a fair statement of the results for the interim periods
presented. The unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and therefore do not include all information
and footnotes necessary for a fair presentation of financial condition, results
of operations and cash flows in accordance with generally accepted accounting
principles. Therefore, these financial statements should be read in conjunction
with the Company's 1995 Annual Report on Form 10-K which contains the latest
audited financial statements and notes thereto.
Certain of the 1995 financial statement amounts have been reclassified to
conform to the 1996 presentation.
(2) EARNINGS PER SHARE
Weighed average shares used for calculation of earnings per share for the three
months ended March 31, 1996 and 1995 were 2,522,827 shares. Earnings per share
for the first quarter of 1995 has been adjusted to give retroactive effect to a
15% stock dividend paid on February 10, 1995.
The Company has not separately reported its fully diluted earnings per share
(which includes outstanding stock options as common stock equivalents) as it is
not materially different than primary earnings per share.
(3) DIVIDEND DECLARATION
The Company declared a quarterly dividend on March 19, 1996 of $0.04 per share
payable April 19, 1996. The dividend totaling $100,913 was reflected as a
reduction of retained earnings in the accompanying Statement of Financial
Condition.
This dividend represents the tenth consecutive quarterly cash dividend declared
since its first such dividend in the third quarter of 1993 and reflects the
Company's commitment to enhancing shareholder value.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
NHS Financial, Inc. (the "Company"), a California Corporation, is the holding
company for New Horizons Savings and Loan Association (Association). The
principal business of the Company is to attract deposits from the general public
and invest those funds in residential, construction and, to a lesser extent,
commercial real estate loans. The Company's geographical area for attracting
deposits and making real estate loans is the San Francisco Bay Area,
concentrating in Marin and Sonoma counties, and the City and County of San
Francisco. The Company conducts its business in three facilities in Marin
County; one located in San Rafael, California, another in Mill Valley,
California and the third in Novato, California.
The Company's operations are significantly influenced by general economic
conditions, the regional real estate market and by related monetary, fiscal and
regulatory policies of the federal government. Deposit flows and cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for mortgage
financing and the types of loans the Company offers, which in turn are affected
by the interest rates at which such financing may be offered and other factors
affecting the supply of housing and availability of funds.
The Company engages primarily in real estate lending for its own portfolio,
specializing in short-term fixed rate and longer term adjustable rate real
estate loans. The Company attracts and maintains deposit funds by offering
competitive interest rates and providing excellent customer service. The Company
also uses Federal Home Loan Bank of San Francisco (FHLBSF) advances and other
short term borrowings, such as reverse repurchase agreements (reverse repos) as
a supplementary source of funds.
Table One provides a summary of key operating statistics at or for the three
months ending March 31, 1996 and March 31, 1995.
TABLE ONE
At Or For The
SUMMARY OF KEY STATISTICS Three Months Ended
(in thousands, except per share data) March 31, 1996 March 31, 1995
- - --------------------------------------------------------------------------------
New loan volume $7,434 $20,359
Stockholders' equity per share $9.78 $9.70
Return on average assets 0.78% 0.61%
Return on average equity 9.27% 6.86%
Average equity to average assets 8.37% 8.84%
Interest rate spread 2.92% 2.37%
Interest margin 3.34% 2.78%
G & A expense to average assets 1.99% 1.86%
Efficiency Ratio 58.87% 64.16%
Regulatory Capital (the Association):
Tangible 8.35% 8.63%
Core (leverage) 8.35% 8.63%
Risk-based 14.55% 13.98%
Nonperforming assets to total assets 2.05% 1.14%
General Valuation Allowances to:
Gross loans 1.30% 0.96%
Nonperforming loans 72.63% 93.51%
The discussion that follows focuses on the components of the Company's financial
condition, results of operations, liquidity and regulatory matters for the three
months ended March 31, 1996.
8
FINANCIAL CONDITION
CASH AND INVESTMENTS
Income from investments provides the second largest source of income for the
Company, after interest income on loans. The Company is required by federal
regulation to maintain a specified minimum amount of liquid assets which may be
invested in specific short term securities. It is the Company's policy to
maintain a liquidity portfolio which exceeds regulatory minimum requirements.
The Company is authorized under its investment policy to invest in obligations
insured or fully guaranteed by the United States (U.S.) government, certain U.S.
government agency securities, negotiable certificates of deposits issued by
commercial banks and in other specified investments. In making investments, the
Company considers its current liquidity levels, the market rates of return, the
duration of the investment, and the level of potential interest rate risk
associated with the investment.
The Company's cash and investment portfolio consists, from time to time, of
mortgage-backed securities, callable U.S. government agency notes, certificates
of deposit and overnight investments with the FHLBSF. Cash and investments at
March 31, 1996 amounted to $33.0 million compared with $29.4 million at December
31, 1995 The increase in investments resulted primarily from the overnight
investment of cash received from principal payments made on, and the reduction
in loans receivable during the first quarter of 1996. The Company utilizes its
investment portfolio to effectively invest periodic excess cash flows in
interest earning assets, to enhance net interest income and margin and to meet
regulatory liquidity requirements.
LOAN PORTFOLIO
The Company's principal investment activity has been and continues to be the
origination of real estate loans. The Company's lending activities consist
primarily of making loans secured by first or second liens on residential and
other real estate. These loans are made in connection with purchases,
refinancing, construction or improvement of property located primarily in the
San Francisco Bay Area, concentrating in Marin, Sonoma and San Francisco
Counties. Historically, the Company has relied upon its ability to provide
customized loans for homes and for home construction. The economy of the Bay
Area counties is varied and includes industries that are industrial,
professional and agricultural, providing a balanced deposit and mortgage lending
market. The Company's loans are primarily obtained through a selected group of
independent loan brokers. Loan applications are also obtained from existing
customers and other individuals. The Company has no foreign or out of state
loans in its portfolio.
The Company principally originates adjustable rate mortgages (ARMs) which re-
price at six month intervals in accordance with the FHLBSF's 11th District Cost
of Funds Index (COFI). Fixed rate real estate loans are generally made with
terms of 5 years or less. Shorter fixed rate loans include construction, swing,
and land loans and generally carry terms of 12 to 18 months. As of March 31,
1996 and December 31, 1995, approximately 87% of the Company's portfolio
consisted of ARMs. By concentrating on ARMs, as well as short-term construction
and fixed rate loans with average maturities of twelve months, the Company
believes that it can better manage the sensitivity of its earnings to market
interest rate fluctuations.
New loan originations and loan participations purchased for the first three
months of 1996 were $7.4 million, a decrease of $13.0 million from $20.4 million
for the same period in 1995. In the first quarter of 1995, the Company
purchased $7.3 million of loans from local lenders. Occasional purchases of
loans and loan participations from local lenders are utilized to assist the
Company in meeting its asset/liability objectives.
First quarter 1996 loan originations were below those for the 1995 period
reflecting the slow real estate market and borrower preference during the 1996
period for fixed rate loans. The Company's future levels of loan originations
and portfolio growth will depend on the pace of recovery of the Northern
California real estate market, the extent of competition for loans in the
Company's geographical market, borrower preference for fixed or ARM loans and
the relationship of loan payoffs to borrower refinancing opportunities.
9
Table Two below is a summary of the Company's gross loan portfolio (before
deductions for construction loans in process, deferred loan fees, and allowances
for loan losses) at March 31, 1996 and December 31, 1995:
TABLE TWO
(Dollars in thousands) March 31, 1996 December 31, 1995
Amount Percent Amount Percent
------------ ---------- ------------ ----------
Mortgage loans:
One-to-four family $ 151,214 56.54% $ 157,301 57.21%
Multi-family 44,465 16.62% 43,184 15.71%
Construction 28,653 10.71% 29,722 10.81%
Commercial 38,425 14.37% 39,586 14.40%
Land 4,416 1.65% 4,812 1.75%
------------ ---------- ------------ ----------
267,173 99.89% 274,605 99.88%
Loans secured by savings accounts 291 0.11% 337 0.12%
------------ ---------- ------------ ----------
$ 267,464 100.00% $ 274,942 100.00%
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
ASSET QUALITY
DELINQUENT LOANS. When a borrower fails to make required payments on a loan
within 30 days of the due date, the loan is considered contractually
delinquent. Table Three below shows the amount of loan delinquencies by loan
type at March 31, 1996 and December 31, 1995.
TABLE THREE
Number of Days Delinquent
--------------------------------------------------------------------------------
(Dollars in thousands) 30-59 60-89 90 or more Total
--------------------------------------------------------------------------------
3/31/96 12/31/95 3/31/96 12/31/95 3/31/96 12/31/95 3/31/96 12/31/95
------- -------- ------- -------- ------- -------- ------- --------
One-to-four family $ 5,638 6,761 793 1,747 3,262 2,385 9,693 10,893
Multi-family - 262 866 867 - - 866 1,129
Construction and land 538 728 - 204 1,529 1,624 2,067 2,556
Commercial real estate 1,690 1,722 606 609 - - 2,296 2,331
--------------------------------------------------------------------------------
Total $ 7,866 9,473 2,265 3,427 4,791 4,009 14,922 16,909
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Delinquencies to Gross Loans 2.94% 3.45% 0.85% 1.25% 1.79% 1.46% 5.58% 6.15%
NONACCRUAL LOANS. It is the Company's policy to put loans that are
contractually delinquent 90 days or more on non-accrual status. Management
reviews other loans less than 90 days contractually delinquent. When the
collection of interest and principal payments on a loan appears unlikely the
loan is placed on non-accrual status. Interest income deemed uncollectible is
reversed. Income is subsequently recognized only to the extent cash payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is in accordance with the loan terms,
at which time the loan is returned to accrual status.
10
IMPAIRED LOANS. Management periodically reviews specific loans on an individual
basis. The Company considers a loan to be impaired when, based upon the
evaluation of the credit worthiness, cash flows and financial condition of the
borrower, and the condition and appraised value of the collateral, it is
unlikely that the Company will be able to collect all the principal and interest
due under the contractual terms of the loan. The Company provides, through a
charge to income, for estimated losses on impaired loans when fair value,
including consideration of potential holding and disposition costs, exceeds the
carrying value of the loan.
REAL ESTATE OWNED. Real estate acquired through foreclosure is recorded at
estimated fair value (including consideration of costs of holding and
disposition) at the time of foreclosure. Valuations are periodically performed
and related adjustments, if any, are made as a charge to income when the
carrying value exceeds fair value. At March 31, 1996, the Company's real estate
owned (REO) portfolio had an aggregate fair market value of $1.2 million and
consisted of four residential properties, two parcels of land, and one multi-
family and commercial mixed use property. At December 31, 1995, the Company's
real estate owned portfolio had an aggregate fair market value of $1.7 million
and consisted of four residential properties, two parcels of land, and one
multi-family and commercial mixed use property. During the first quarter of
1996, the Company sold REO properties with a carrying value of $790,251 and
recorded a gain on sale of REO of $146,422.
The following Table Four sets forth information with respect to the Company's
nonperforming assets at March 31, 1996 and December 31,1995.
TABLE FOUR
(Dollars in thousands) March 31, 1996 December 31, 1995
--------------- ------------------
Percentage Percentage
Book of Book of
Value Total Assets Value Total Assets
--------- ------------ --------- ------------
Nonaccrual loans:
One-to-four family $ 3,305 1.13% $ 2,436 0.83%
Construction and land 2,187 0.75% 2,206 0.75%
--------- -------- --------- --------
5,492 1.88% 4,642 1.58%
Real estate acquired by foreclosure:
One-to-four family 841 0.29% 984 0.33%
Multi-family 318 0.11% 607 0.21%
Land 61 0.02% 62 0.02%
--------- -------- --------- --------
1,220 0.42% 1,653 0.56%
Charge-offs of nonaccrual loans (701) -0.24% (633) -0.22%
--------- -------- --------- --------
Net nonperforming assets $ 6,011 2.05% $ 5,662 1.92%
--------- -------- --------- --------
--------- -------- --------- --------
Table Five below sets forth the relationship of the Company's General Valuation
Allowances (GVA) to loans and assets at March 31, 1996 and December 31, 1995.
TABLE FIVE
March 31, 1996 December 31, 1995
---------------------------------
Ratios of:
GVA / nonperforming assets 57.89% 61.96%
GVA / gross loans 1.30% 1.28%
GVA / nonperforming loans 72.63% 87.50%
As of March 31, 1996, the Company had three mortgage loans for which certain
concessions were granted to the borrowers in light of their financial
difficulties. Such concessions include the extension of maturity dates and/or
the lowering of interest rates or payments. No reductions in the principal
amount of the loans have been granted. The objective of these modifications in
terms (i.e., troubled debt restructurings) is to maximize the recovery of the
Company's investment. The principal balance of the three loans falling under
the definition of troubled debt restructurings amounted to $3.9 million as of
March 31, 1996. All such loans were current according to their modified terms.
11
ASSET CLASSIFICATION SYSTEM
Under federal regulations, each insured institution is required to classify its
assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and , if appropriate, direct the Company to classify them. Under the
regulations, assets are subject to evaluation under a classification system with
three categories: substandard, doubtful and loss. The regulations have also
created a special mention category. This category includes assets which do not
currently expose an insured institution to a sufficient degree of risk to
warrant classification, but do possess credit deficiencies or potential
weaknesses deserving management's close attention. During 1995, management
continues to monitor and classify assets that pose credit weaknesses or exhibit
declines in market value.
At March 31, 1996, the percentage of classified assets to total assets increased
to 7.24% from 6.38% at December 31, 1995 and increased from 3.15% at March 31,
1995. At March 31, 1996 $21.2 million was classified as substandard, compared
with $18.8 million at December 31, 1995, compared with $8.2 million at March 31,
1995. At March 31,1996, December 31, 1995, and at March 31, 1995 there were no
assets classified as doubtful or loss. The increase in classified assets
reflects the related increase in delinquencies during 1995 and the first quarter
of 1996 and the Company's adoption in 1995 of more stringent technical criteria
for identifying non-delinquent classified assets.
VALUATION ALLOWANCES
The Company maintains an overall loan loss reserve to cover estimated potential
losses in the portfolio. This GVA is provided through periodic charges to
income and is determined based upon management's analysis. This analysis
incorporates a number of factors including current economic considerations and
the level of classified and nonperforming loans, management's assessment of
credit risk inherent in its portfolio, past loss experience, and the Company's
underwriting practices.
The provision for loan losses for the three months ended March 31, 1996 was
$140,000. There was no provision for loan losses for the three months ended
March 31, 1995.
The following Table Six sets forth an analysis of the Company's allowance for
loan and real estate losses for the three months ending March 31, 1996 and 1995.
TABLE SIX
(Dollars in thousands) 1996 1995
---------------------------
Loan loss allowance at beginning of year $ 3,508 3,412
Provision for loan losses 140 -
Charge offs, net of recoveries (169) (142)
---------------------------
Loan loss allowance at March 31 $ 3,479 3,270
---------------------------
---------------------------
Loan loss allowance at March 31:
General valuation allowance (GVA) $ 3,479 2,575
Specific loss allowances $ - 695
---------------------------
$ 3,479 3,270
---------------------------
---------------------------
During the third quarter of 1995, the Company adopted the direct charge-off
method of accounting for non-performing loans, as well as for performing loans
considered by management to be impaired. As of December 31, 1995 and March 31,
1996, no specific valuation allowances were outstanding. This change in
procedure did not effect current loss provisions and will not alter provisions
for general loan losses in future periods.
12
Management considers its allowance for losses to be adequate to cover losses
from loan and REO assets. However, future adjustments may be necessary and
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making such determinations. In addition, various
regulatory agencies review the Company's allowances for losses as a part of
their examination process. Such agencies may require the Company to recognize
additions to this allowance based on their judgment relating to information
available to them at the time of their examination.
CUSTOMER DEPOSITS, FHLBSF ADVANCES AND OTHER BORROWINGS
Deposits are the major source of the Company's funds for lending and other
investment purposes. The Company obtains deposits primarily through its retail
branches and offers a broad selection of deposit instruments including NOW
accounts, money market accounts, regular savings accounts, checking accounts,
certificates of deposit and retirement savings plans. While the deregulation of
insured deposits has allowed the Company to be more competitive in obtaining
funds and given it more flexibility to meet the threat of net deposit outflows,
it has also resulted in a more volatile cost of funds. The Company's interest
rates paid on deposits are not determined by regulatory authorities but rather
by prevailing market conditions.
The Company regularly evaluates its internal cost of funds, measures its cost of
deposits against the costs of alternative sources of funds, surveys deposit
rates offered by competing institutions, reviews liquidity and executes rate
changes when deemed appropriate. The Company's primary strategy for attracting
and retaining deposits is to emphasize superior customer service and personal
attention, and to pay competitive interest rates on deposits.
During the first quarter of 1996, customer deposits decreased $17.7 million from
balances at December 31, 1995. The decrease was primarily the result of a
reduction in deposit rates the Company offered during the quarter combined with
the maturity and repricing of approximately $107 million of relatively high cost
certificates of deposit. Approximately $53 million of these maturing deposits
represented deposits obtained during the first quarter of 1995 as a result of a
one-time marketing program which promoted certificates of deposit by offering
attractive rates and other terms.
The Company may rely upon advances from the FHLBSF to supplement its supply of
funds for lending and investment purposes. Advances may also be used to fund
large deposit withdrawals. Advances from the FHLBSF are typically secured by
the Company's stock in the FHLBSF and by pledges of certain real estate loans
and securities. The Company had pledged loans and securities with outstanding
principal balances of approximately $91.3 million at March 31, 1996.
At March 31, 1996, FHLBSF advances and other borrowings amounted to $36.0
million compared to $21.0 million at December 31, 1995 and $14.0 million at
March 31, 1995. The Company had no other borrowings at March 31, 1996, December
31, 1995 or March 31, 1995. The increases in FHLBSF advances were used to
replace maturing higher costing deposits and to obtain specific maturities of
liabilities as determined by the Company's asset/liability analysis, and to
assist in reducing the Company's overall cost of funds.
13
CAPITAL
In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA) stipulated the requirement that insured savings institutions meet three
separate capital requirements. Those requirements are to have tangible capital
of 1.5% of adjusted total assets, core capital of 3% of adjusted total assets
and risk-based capital equal to 8.0% of risk-weighted assets.
In response to the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), the Office of Thrift Supervision (OTS) adopted final rules, effective
December 19, 1992, based upon FDICIA's five capital tiers: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. The rules provide that a savings institution is
"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.
At March 31, 1996, the Association's regulatory capital substantially exceeds
the requirements of each regulatory capital and the Association is considered
"well capitalized" as of that date. Table Seven provides a comparison of the
Association's regulatory capital to its minimum requirement at March 31, 1996.
TABLE SEVEN
Excess over
(Dollars in thousands) Actual at 3-31-96 Requirement Requirement
--------------------- ----------------------- --------------------
Capital Ratio Capital Ratio Capital Ratio
FIRREA Capital Standards:
Tangible $24,425 8.35% $4,389 1.50% $20,036 6.85%
Core (leverage) 24,425 8.35% 8,778 3.00% 15,647 5.35%
Risk-based 26,736 14.55% 14,699 8.00% 12,037 6.55%
FDICIA Capital Standards (Well Capitalized):
Core (leverage) 24,425 8.35% 14,629 5.00% 9,796 3.35%
Tier 1 risk-based 24,425 13.29% 11,024 6.00% 13,401 7.29%
Total risk-based 26,736 14.55% 18,374 10.00% 8,362 4.55%
14
RESULTS OF OPERATIONS
GENERAL
The Company earned $567,856 or $.23 per share for the first quarter ended March
31, 1996 compared with earnings of $416,721 or $.17 per share for the like
quarter a year ago. The increase in earnings was a result of a greatly improved
interest margin as discussed below.
INTEREST RATE SPREAD AND MARGIN
Table Eight below shows yields earned and rates paid on various assets and
liabilities for the periods and as of the dates indicated.
TABLE EIGHT
Three months ending March 31,
1996 1995
- - -----------------------------------------------------------------------------
Average Yield:
Loan portfolio (1) 8.63% 7.61%
Mortgage-backed securities 6.10% 6.22%
Other interest earning assets (2) 5.63% 6.46%
------------ ------------
Total average yield: 8.32% 7.52%
------------ ------------
Average Cost:
Deposits 5.41% 5.13%
FHLBSF advances 5.37% 5.37%
------------ ------------
Total average cost: 5.40% 5.15%
------------ ------------
Interest rate spread 2.92% 2.37%
Interest margin 3.34% 2.78%
At March 31, At December 31,
1996 1995
- - -----------------------------------------------------------------------------
Average Yield:
Loan portfolio (1) 8.62% 8.56%
Mortgage-backed securities 6.14% 6.14%
Other interest earning assets (2) 5.77% 5.35%
------------ ------------
Total average yield: 8.29% 8.31%
------------ ------------
Average Cost:
Deposits 5.28% 5.84%
FHLBSF advances 5.42% 5.46%
------------ ------------
Total average cost: 5.30% 5.81%
------------ ------------
Interest rate spread 2.99% 2.50%
Interest margin 3.37% 2.90%
(1) The yield on the loan portfolio includes the effect of amortization of
deferred loan fees and discounts.
(2) Included in other interest earning assets are investment securities,
stockof the FHLBSF and overnight deposits.
15
The Company's net interest income is determined by both its interest rate spread
and net interest margin. Interest rate spread is the difference between the
yields earned on interest-earning assets and the rates paid on deposits and
borrowings. Margin is interest rate spread adjusted for the excess of
interest-earning assets over interest-costing liabilities and is a major
determinant of net interest income. The Company's interest rate spread and
margin are influenced by changes in market interest rates. The Company's
liabilities tend to respond to interest rate movements more rapidly than its
assets.
The Company's net interest income increased $532,000 to $2.4 million for the
three months ended March 31, 1996 compared with $1.9 million for the same period
in 1995. The Company's net interest margin was 3.34% for the first quarter of
1996 compared with 2.78% for the same period in 1995.
This increase in interest rate spread was primarily due to a substantial
increase in the Company's yield on assets. Overall, the Company's loan portfolio
yields for the three months ending March 31, 1995 and March 31, 1996 increased
from 7.61% to 8.63%, respectively. The Company's adjustable rate mortgage loans
are tied to, and reprice based on, the FHLBSF 11th District Cost of Funds Index
(COFI). COFI is considered a "lagging" index, which means that it lags the
movement in market interest rates. With over 80% of the Company's loan
portfolio in six-month adjustable rate COFI mortgages, the lag between the rise
and fall of COFI and the repricing of the Company's loan portfolio has had a
significant impact on the Company's interest rate spread, margin and interest
income. The Company's ARM loans repriced and its yields increased significantly
in mid 1995 as a result of the substantial upward movement of COFI during the
fourth quarter of 1994 and the first quarter of 1995. The Company benefited
from an additional upward movement in COFI with another slight increase in its
ARM portfolio yields at year end 1995.
INTEREST ON LOANS AND INVESTMENTS
Total interest income increased 18% to $6.0 million for the quarter ending March
31, 1996 from $5.1 for the same period in 1995. The Company's average earning
assets for the quarters ending March 31, 1996 and 1995 were $287.8 million and
$269.8 million, respectively, a 7% increase. The increase in interest income
arose primarily from upward repricing adjustments to the Company's ARM loans
subsequent to March 31, 1995 (discussed above), and secondarily, from greater
average earning assets in the 1996 period.
INTEREST ON CUSTOMER DEPOSITS AND BORROWINGS
During the first quarter ended March 31, 1996, total interest expense increased
12% to $3.6 million from $3.2 million during the same period a year ago.
Average interest-costing liabilities increased $16.8 million, or 7%, from $248.4
million for the first quarter 1995 to $265.2 million for the first quarter 1996.
The quarter to quarter increase in interest expense is due primarily to the
higher average interest costing liability balances and secondarily to the
greater interest paid during part of the first quarter of 1996 until the
maturity of higher cost certificates of deposit during the quarter (see Customer
Deposits above).
PROVISION FOR LOAN LOSSES
See discussion under VALUATION ALLOWANCES above.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income and non-interest expense by major categories are shown in
the Consolidated Statements of Operations for the three months ended March 31,
1996 and 1995.
Non-interest income was $211,000 and $134,000 for the quarters ended March 31,
1996 and 1995, respectively. Non-interest income for the first quarter of 1996
includes $146,000 for gains on sales of real estate owned compared with only
$1,000 during the first quarter of 1995. The largest category of non-interest
income is loan and deposit fees including loan late charges and penalty fees on
customer early deposit withdrawals. Loan and deposit fees for the first quarter
of 1995 included deposit withdrawal penalties of $80,000, compared with $8,000
in the first quarter of 1996. Relatively higher market interest rates and a
one-time certificate of deposit program in effect during the first quarter of
1995 resulted in certain depositors withdrawing their certificates of deposit
prior to maturity.
16
Non-interest expense includes general and administrative expenses (G&A) and
expenses of real estate owned. G&A expenses increased to $1.5 million from $1.3
million for the three months ended March 31, 1996, compared with the same 1995
period. The ratio of G&A expenses to average assets increased slightly to 1.99%
for the quarter ended March 31, 1996 compared with 1.86% for the same quarter a
year ago. This increase in G&A expenses can be attributed to additional
expenditures for enhancing the Company's loan review and asset evaluation
processes. The Company improved its efficiency ratio to 58.6% for the first
three months of 1996, which is lower than the 64.2% for the first three months
of 1995. The efficiency ratio is calculated by dividing general and
administrative expense by operating income, net of non-recurring gains, and
measures the productivity of an institution's operations.
Compensation and benefits increased $59,000 or 9% in 1996 compared to 1995 due
primarily to the addition of staff related to the loan review and asset
evaluation processes. Deposit insurance and regulatory assessments increased
$37,000 or 26% during the first quarter of 1996 due primarily to the higher
deposit balance during the third and fourth quarters of 1995 (Deposit
assessments for any quarter are based on average deposit balances for the prior
two quarters). Professional fees increased $75,000 during the first quarter
compared to the same period a year ago primarily due to the utilization of
professional sources in the credit analysis of certain loans and assets and to
non-recurring legal and filing costs relating to formation of the Company.
Information systems costs decreased $11,000 during the first quarter of 1996
compared to the same period a year ago as a result of cost savings arising from
conversion to a different data processing service bureau during the second
quarter of 1995.
LIQUIDITY
The Company's primary sources of funds include loan and securities repayment,
net deposit inflows, and advances from the FHLBSF, collateralized short-term
borrowings and cash flows generated from operations. The Company uses its
liquidity resources principally to fund real estate loans, repay maturing
borrowings, fund maturing deposit certificates and deposit withdrawals and
provide for its foreseeable short and long-term needs. The Company expects to
be able to fund or refinance, on a timely basis, its commitments and
liabilities. OTS regulations require a savings institution to maintain a
specified ratio of liquidity, such that its liquid assets are not less than 5%
of the monthly average balance of its total deposits and its borrowings due in
one year or less. At March 31, 1996 and December 31, 1995, the Association had
liquidity ratios of 9.06% and 8.38%, respectively.
17
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company was not involved in any claims or lawsuits which, in the opinion of
management, could have a material effect on the financial position of the
Company.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF COMMON STOCKHOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
NHS FINANCIAL, INC.
(Registrant)
Date: May 6, 1996 /s/ JAMES W. BARNETT
--------------------------------------------------
JAMES W. BARNETT
President and Chief Executive Officer
Date: May 6, 1996 /s/ ALBERT J. THOMSON
--------------------------------------------------
ALBERT J. THOMSON
Senior Vice President and Chief Financial Officer
Date: May 6, 1996 /s/ JARED L. BOOK
--------------------------------------------------
JARED L. BOOK
Vice President and Chief Accounting Officer
19