FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, DC 20429
Form F-4
QUARTERLY REPORT
UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR
THE QUARTER ENDED JUNE 30, 1997
FDIC Insurance Certificate No. 17944
NORWALK SAVINGS SOCIETY
(Exact name of bank as specified in its charter)
48 Wall Street, Norwalk, CT 06852
(Address of principal executive offices)
Connecticut
(State or other jurisdiction of incorporation or organization)
06-0475300
(I.R.S. Employer Identification Number)
(203) 838-4545
(Bank's telephone number, including area code)
Indicate by check mark whether the Bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Bank 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 Bank's classes of
common stock, as of the latest practicable date:
2,442,129 shares of Common Stock, par value
$.01 per share as of August 12, 1997
TABLE OF CONTENTS
I. CONSOLIDATED FINANCIAL STATEMENTS Page
A. Statement of Financial Condition 1
B. Statement of Operations 2
C. Statement of Shareholders' Equity 3
D. Statement of Cash Flows 4
E. Notes to Financial Statements 6
II. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 10
III. SIGNATURES 32
Exhibit A 33
NORWALK SAVINGS SOCIETY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, December 31,
1997 1996
------------------ ---------------------
(unaudited)
( $ in thousands )
ASSETS
Cash and due from banks $9,899 $14,978
Interest bearing deposits in other banks 3,521 2,373
Federal funds sold 1,500
-------
Securities
Trading, at fair value 2,154 3,292
Available for sale, at fair value 182,811 136,809
Loans, net of allowance for credit losses of $ 6,911 as of
June 30, 1997 & $7,334 as of December 31,1996, respectively) 443,130 410,766
Accrued interest receivable 6,165 4,034
Investment in Federal Home Loan Bank Stock, at cost 6,848 6,184
Other real estate owned, net 485 858
Bank premisies and equipment, net 3,635 3,151
Deferred income tax asset, net 1,614 2,574
Goodwill 1,687 1,754
Other assets 1,719 1,316
------------------ ---------------------
Total assets $663,668 $589,589
================== =====================
LIABILITIES
Deposits
Non interest bearing $30,514 $22,479
Savings, money market and NOW accounts 165,052 156,684
Time accounts 239,465 244,127
------------------ ---------------------
Total deposits 435,031 423,290
Borrowed funds 174,986 114,043
Accrued expenses and other liabilities 1,741 2,903
------------------ ---------------------
Total liabilities 611,758 540,236
SHAREHOLDERS' EQUITY
Preferred stock ($.01 par value, 500,000 shares
authorized, none outstanding)
------- -------
Common stock ($.01 par value, 7,000,000 shares
authorized, 2,442,129 issued; outstanding 2,410,118
as of June 30, and 2,397,312 as of December 31,) 24 24
Additional paid-in capital 23,742 23,545
Retained earnings 28,167 26,339
Net unrealized gain (loss) on securities available for sale 298 (106)
------------------ ---------------------
52,231 49,802
Less: unearned ESOP shares 321 449
------------------ ---------------------
Total shareholders' equity 51,910 49,353
------------------ ---------------------
Total liabilities and shareholders' equity $663,668 $589,589
================== =====================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30,
---------------------------------------------------------------
( $ in thousands, except shares and per share data ) 1997 1996 1997 1996
INTEREST AND DIVIDEND INCOME
Loans, including fees $8,334 $7,249 $16,297 $14,109
Investment securities and other
Taxable interest 2,524 2,628 5,098 4,752
Dividends 321 85 629 176
---------------------------------------------------------------
Total 11,179 9,962 22,024 19,037
---------------------------------------------------------------
INTEREST EXPENSE
Deposits 4,293 3,828 8,508 7,613
Borrowed funds 2,308 1,822 4,278 3,013
---------------------------------------------------------------
Total 6,601 5,650 12,786 10,626
---------------------------------------------------------------
NET INTEREST INCOME 4,578 4,312 9,238 8,411
Provision for credit losses ---- 405 ---- 805
---------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 4,578 3,907 9,238 7,606
---------------------------------------------------------------
NON-INTEREST INCOME
Customer service fees 205 158 406 328
Loan servicing fees 116 164 232 256
Trust department fees 137 148 278 278
Net gain on sale of securities 161 636 186 761
Credit card fees 393 ---- 687 ----
Other 250 43 333 147
---------------------------------------------------------------
Total non-interest income 1,262 1,149 2,122 1,770
---------------------------------------------------------------
NON-INTEREST EXPENSE
Compensation and benefits 1,835 1,699 3,707 3,453
Occupancy, equipment & data processing 648 538 1,320 1,092
Regulatory assessments 13 2 28 6
OREO holding costs and expenses 14 86 98 214
Sale of OREO, (gains) losses, net (28) 354 (208) 492
Credit card expense 298 ---- 545 ----
Goodwill amortization 81 ---- 162 ----
Other 1,052 945 2,046 1,763
---------------------------------------------------------------
Total non-interest expense 3,913 3,624 7,698 7,020
---------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 1,927 1,432 3,662 2,356
Provision for income taxes 777 17 1,468 22
---------------------------------------------------------------
NET EARNINGS $1,150 $1,415 $2,194 $2,334
===============================================================
EARNINGS PER SHARE
$0.48 $0.60 $0.91 $0.99
===============================================================
Weighted average shares outstanding (excluding
shares committed to ESOP)
2,406,841 2,375,828 2,403,639 2,371,934
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
NORWALK SAVINGS SOCIETY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Unrealized
Additional Gains Unearned Total
Common Paid-in Retained (Losses) ESOP Shareholders'
on
Shares Stock Capital Earnings Securities Shares Equity
---------- ------------------- --------- ----------- -----------------------
($ in thousands)
Balance - December 31,1994 2,329,670 $24 $22,838 $16,225 ($603) ($971) $37,513
Net Earnings 4,778 4,778
ESOP shares committed for
release 26,556 168 266 434
Stock options exercised 8,494 127 127
Adjustment of unrealized
gains, net 743 743
---------- ------------------- --------- ----------- --------- ------------
Balance - December 31,1995 2,364,720 $24 $23,133 $21,003 $140 ($705) $43,595
---------- ------------------- --------- ----------- --------- ------------
Net Earnings 5,702 5,702
Adjustment of unrealized
gains (losses), net (246) (246)
Stock options exercised 6,665 103 103
Shares distributed to Advisory
Board 230 5 5
Dividends paid (366) (366)
ESOP shares committed to be
released 25,697 304 256 560
---------- ------------------- --------- ----------- --------- ------------
Balance - December 31,1996 2,397,312 $24 $23,545 $26,339 ($106) ($449) $49,353
---------- ------------------- --------- ----------- --------- ------------
Net Earnings 2,194 2,194
Adjustment of unrealized
gains (losses), net 610 610
Tax effect of AFS (206) (206)
Dividends paid (366) (366)
ESOP shares committed to be
released 12,806 197 128 325
---------- ------------------- --------- ----------- --------- ------------
Balance - June 30,1997 2,410,118 $24 $23,742 $28,167 $298 ($321) $51,910
========== =================== ========= =========== ========= ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
NORWALK SAVINGS SOCIETY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended:
June 30,
----------------------------------------------
1997 1996
-------------------- -------------------
($ in thousands)
Cash Flows from Operating Activities
Net Earnings $2,194 $2,334
------- ------
Adjustments to Reconcile net earnings
to cash provided (used) by operating activities
Provision for Credit Losses ---- 805
Provision for Estimated OREO Losses ---- ----
Deferred Income Tax 680 ----
Provision for ESOP Benefit Cost 206 ----
Depreciation and Amortization 309 255
Goodwill Amortization 162 ----
Net Amortization (Accretion) of Discounts and
Premiums on Securities 317 261
Net (Gains) Losses on Sales of Loans & Investments (50) (761)
Net (Gains) Losses on Sales of OREO (208) 492
Net Decrease in Trading Securities 1,137 ----
(Increase) in Accrued Interest Receivable (979) (1,629)
(Increase) in Other Assets (1,194) (54)
(Decrease) in Accrued Expense and Other Liabilities (645) (245)
----- -----
Total Adjustments (265) (876)
----- -----
Net Cash Provided By (Applied to) Operating Activities 1,929 1,458
------ -----
Cash Flows from Investing Activities
Proceeds from:
Sales of Loans, Investments & Mortgage Backed 47,065 20,692
Securities
Maturities of Investments & Mortgage Backed Securities 9,005 16,429
Sales of Other Real Estate Owned 939 1,954
Purchases of Investment & Mortgage Backed Securities (102,320) (73,724)
Net Increase in Loans (33,002) (53,450)
Additions to OREO ---- (110)
Additions to Goodwill (95) ----
Additions to Bank Premises & Equipment (872) (391)
----- -----
Net Cash Provided by (Applied to) Investing Activities (79,280) (88,600)
-------- --------
Cash Flows from Financing Activities
Net Increase in Deposits 11,343 23,502
Repayments of ESOP borrowing (96) (121)
Cash Dividends (366) (120)
Securities Sold under Repurchase Agreements 29,500 36,650
Repayments of Repurchase Agreements (21,200) (4,900)
Advances from FHLB of Boston 116,854 87,750
Repayments of Advances from FHLB of Boston (64,115) (48,896)
Proceeds from Exercise of Stock Options ---- 106
------- ------
Net Cash Provided by (Applied to) Financing Activities 71,920 93,971
------- ------
Increase (Decrease) in Cash and Cash Equivalents (5,431) 6,829
Cash and Cash Equivalents - Beginning 18,851 18,628
------- ------
Cash and Cash Equivalents - Ending $13,420 $25,457
======== =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
NORWALK SAVINGS SOCIETY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended:
June 30,
-----------------------------------
1997 1996
------------------ --------------
($ in thousands)
SUPPLEMENTAL DISCLOSURES of CASH FLOW INFORMATION
Cash Paid During the Period For:
Interest $12,740 $10,626
================== ==============
Income Taxes $1,468 $5
================== ==============
Non-Cash Investing and Financing Activities:
Transfer from Loans to OREO $681 $1,273
================== ==============
Loans originated in connection with sale of OREO $324 $670
================== ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
NORWALK SAVINGS SOCIETY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997
(unaudited) and December 31, 1996
NOTE 1 - NATURE OF BUSINESS AND REGULATIONS
- -------------------------------------------
The Norwalk Savings Society (Bank) provides a full range of banking services to
its local area customers. The Bank is subject to competition from various other
financial institutions, and is also subject to the regulations of certain
federal and state agencies and undergoes periodic examination by those
regulatory authorities.
The following summarizes the Bank's capital ratios at June 30, 1997, and
December 31, 1996:
Actual
--------------
June 30, Dec. 31,
Required 1997 1996
-------- ------ --------
Tier 1 risk-based capital 4.0% 13.9% 15.7%
Total risk-based capital 8.0% 15.3% 17.0%
Tier 1 leverage capital 4.0%-5.0% 7.8% 7.9%
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
The condensed consolidated financial statements in this report have not been
audited, with the exception of the information derived from the Consolidated
Statement of Financial Condition as of December 31, 1996, which information
should be read in conjunction with the Bank's audited financial statements and
footnotes thereto included in the Bank's Annual Report to Shareholders for the
year ended December 31, 1996.
The consolidated financial statements include the accounts of the Bank and its
wholly owned subsidiary, NSS Realty Corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation. In the opinion
of management, all adjustments necessary for a fair presentation of financial
position and results of operations for the interim periods presented have been
made, and all such adjustments are of a normal recurring nature.
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 date of the consolidated statement of financial condition
and income and expenses for the periods presented. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term related to the determination of the allowance for credit losses
and the valuation of other real estate owned ("OREO"). In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the
6
Bank's allowances for losses. Such agencies may require the Bank to recognize
additions to the allowances based on their judgment of information available to
them at the time of their examination.
Effective January 1, 1993, the Bank adopted SFAS 109, "Accounting for Income
Taxes", without applying its provisions to prior years. There was no impact on
the Bank's consolidated statement of operations for the year ended December 31,
1993 from the cumulative effect of the change in the method of accounting for
income taxes, due primarily to the Bank's net operating loss carryforward
position.
During the years 1993 and 1994, the Bank reflected a full valuation allowance
against its net deferred tax assets due to significant net operating loss
carryovers and uncertainty over the Bank's ability to generate sufficient and
consistent future taxable income to be able to support recognition of any
portion of its net deferred tax assets.
During the first calendar quarter of the year ended December 31, 1995,
management reviewed its current projections for future profitability and
estimated that a portion of the Bank's net deferred income tax asset as of
December 31, 1994 could be recognized in the amount of $1.2 million. The amount
was recognized through a partial adjustment of the valuation allowance for the
portion of the net deferred income tax asset attributable to a net operating
loss carry-forward benefit which management was of the opinion was realizable
during the year ended December 31, 1995. At December 31, 1995, management again
reviewed its current projections of future profitability and determined that
$1.2 million of net deferred income tax asset was more likely than not
realizable in the future.
During the fourth quarter of 1996, management reviewed the Bank's estimated
profitability for the year ended December 31, 1996 and, on a projected basis,
for the year ending December 31, 1997. Based on this review, management
determined that it was more likely than not that the Bank's net deferred tax
assets, including available future net operating loss benefits of approximately
$1.1 million, as of December 31, 1996 were realizable, and therefore, reversed
the existing valuation allowance against net deferred tax assets. Realization of
the Bank's net deferred tax assets is dependent, however, on various factors and
is not assured.
Effective January 1, 1994, the Bank applied the provisions of SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities". Under this
pronouncement, investment securities are classified into one of three
categories: held to maturity, available-for-sale or trading. The classification
is based upon management's intended holding period and, in the case of
held-to-maturity, the ability to hold the securities to maturity. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available for sale are carried at fair value with unrealized gain
or loss reported as a separate component of retained earnings, net of applicable
income tax. Trading securities are carried at fair value with unrealized gains
or losses included in earnings.
The Financial Accounting Standards Board issued a "Special Report" in November
1995. "A Guide to Implementation of SFAS 115". This guide provided additional
guidance as to the criteria for the financial statement classifications
prescribed in SFAS 115. As a result of this additional guidance, the Bank could
reassess the appropriateness of the classification of all its securities held.
In December 1995, the Bank reclassified securities Held-to-Maturity with an
aggregate amortized cost approximating $37.0 million to the classification of
Available-for-Sale at a fair value approximating $36.6 million. During the year
ended December 31, 1996, the Bank transferred securities Available-for-sale with
a carrying basis of approximately $2.2 million to the classification of Trading
and securities Held-to-Maturity with an amortized cost of approximately $30.5
million to the classification of Available-for-sale at their fair value of
approximately $30.6
7
million. The transfer of
securities Held-to-maturity to the classification of Available-for-sale was the
result of management's assessment that there was no longer a positive intent to
hold these securities to maturity based on management's revised asset/liability
management strategies. The gain or loss on investments sold is computed by the
specific identification method.
Effective January 1, 1995, the Bank implemented the provisions of SFAS Nos.
114/118, "Accounting by Creditors for Impairment of a Loan" (SFAS 114/118). The
basic provisions of these statements eliminate the financial statement
classification of in-substance foreclosed assets as OREO, resulting in the
classification of such assets and related specific allowance for credit losses
as Loans receivable. Additionally, these statements address the accounting for
loans considered impaired and the recognition of impairment. A loan is
considered impaired when, in management's judgment, current information and
events indicate it is probable that collection of all amounts due according to
the contractual terms of the loan agreement will not be met.. The provisions of
these statements are prospective, with any adjustments resulting from initial
application reflected as an adjustment to the provision for credit losses.
Insubstance foreclosed assets prior to January 1, 1995 have been reclassified to
Loans receivable for comparability purposes. The effect on the accompanying
Consolidated Financial Statements of adopting SFAS 114/118 was not significant.
Effective January 1, 1996, the Bank has implemented the provisions of SFAS Nos.
121 and 122, which implementation had no significant effect on the Bank's
financial condition or results of operations at and for the three and six month
periods ended June 30, 1997 and 1996, or at and for the year ended December 31,
1996.
NOTE 3 - SUPPLEMENTAL DISCLOSURES
- ---------------------------------
Additional information and supporting disclosures as to investment securities,
loans, other real estate owned and related allowances for losses are included in
Management's Discussion and Analysis.
NOTE 4 - OTHER SIGNIFICANT MATTERS
- ----------------------------------
On February 23, 1994, the Board of Directors unanimously adopted and approved
the Bank's plan of Conversion (Conversion) to convert from a
Connecticut-chartered mutual to a Connecticut-chartered capital stock savings
bank through amendment of its mutual charter and the sale of common stock to the
Bank's depositors and others.
The Bank commenced its subscription offering on May 4, 1994, and concluded the
offering on June 9, 1994. A total of 2,426,740 shares were issued on June 15,
1994, the effective issuance date of the securities.
As part of the Conversion, the Board of Directors adopted a tax-qualified
employee stock ownership plan (ESOP). The ESOP Trustee borrowed the funds to
purchase Conversion stock in an amount equal to 5% of the total number of shares
issued in the Conversion. The Trustee for the ESOP acquired 121,337 shares in
connection with the stock conversion through the subscription offering. The
shares were purchased with a loan obtained from a third party, guaranteed by the
Bank, reflected as "Other Borrowings" on the Consolidated Statement of Financial
Condition.
8
In addition, the Board adopted stock option plans for the benefit of the
employees and directors of the Bank (Plans). The stock option plans became
effective as a result of the approval by the Bank's stockholders on April 25,
1995. The number of shares reserved for the plans was 169,872 for the Employee
Plan and 72,802 for the Director Plan as of March 31, 1996. At the April 1996
Annual Meeting, shareholders approved an amendment of the 1994 Employee Stock
Option Plan to increase the number of shares of common stock subject to the Plan
by 100,000 from 169, 872 to 269,872 shares. In addition, the shareholders
approved an amendment to the 1994 Director Stock Option Plan to (i) increase the
number of option shares granted to each director per year from 1,000 shares to
2,000 shares (effective immediately) following the 1996 Annual Meeting and (ii)
increase the total number of shares subject to the Plan by 50,000 from 72,802 to
122, 802 shares.
At the time of Conversion, the Bank established a liquidation account in an
amount equal to its Retained Earnings as of that date. The liquidation account
will be maintained for a period of ten years from the date of the Conversion for
the benefit of eligible account holders who continue to maintain their accounts
in the Bank after Conversion. In the event of a complete liquidation ( and only
in such an unlikely event), each eligible account holder would be entitled to
receive a liquidation distribution equal to the current amount in their
subaccount balance.
The Bank may not declare or pay dividends on its stock if such declaration and
payment would violate statutory or regulatory requirements.
In the event transactions resulting from the Conversion or from future events
unrelated to the Conversion occur, causing an "ownership change", as defined by
the Internal Revenue Code, the Bank's ability to realize all of the deferred tax
assets attributable to net operating loss carryforwards may be limited.
On July 23, 1997, the NSS Board of Directors declared a cash dividend of ten
cents ($.10) per share to common shareholders of record August 8, 1997 and
payable on August 27, 1997.
NOTE 5 - NEW BRANCH
- -------------------
The Bank has recently opened a full service branch office at 1089 Post Road in
Darien, Connecticut.
NOTE 6 - PROPOSED HOLDING COMPANY
- ---------------------------------
In January 1997 the Bank's Board of Directors authorized management to pursue
the formation of a holding company. Stockholders voted in favor of this matter
at the Annual Meeting on May 20, 1997. An application to form a bank holding
company was submitted in June to the Federal Reserve Bank. On July 24, 1997, the
Federal Reserve Bank of New York granted NSS approval to form NSS Bancorp which
will be the parent company of Norwalk Savings Society and other subsidiaries.
The approval requires the incorporation of the holding company not later than
October 24, 1997.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
--------
Norwalk Savings Society reported second quarter 1997 net earnings of $1.2
million or $0.48 per share. Net earnings for the six months ended June 30, 1997
were $2.2 million or $0.91 per share.
The Bank declared a quarterly dividend of ten cents per share, payable to
shareholders of record as of the close of business on August 8, 1997.
The tier one leverage capital ratio was 7.76% as of June 30, 1997, continuing to
qualify the Bank as "well capitalized" according to standards established by the
Federal Deposit Insurance Corporation ("FDIC").
Asset quality showed significant improvement during the second quarter.
Non-performing assets, comprised of non-accrual and restructured loans
(collectively "non-performing loans"), and other real estate owned, were $9.0
million or 1.35% of total assets.
RESULTS OF OPERATIONS
---------------------
Comparison of Operating Results for the Three Months Ended
----------------------------------------------------------
June 30, 1997 and 1996.
-----------------------
Operations
- ----------
Pre-tax earnings for the three months ended June 30, 1997 were $1.9 million
compared to $1.4 million for the comparable period in 1996, representing a 35%
increase. As a result of the 1996 recognition of all remaining tax benefits
associated with the tax loss carryforwards, 1997 earnings are fully taxable. The
net earnings for the three months ended June 30, 1997 were $1.2 million or $0.48
per share compared to $1.4 million or $0.60 per share for the comparable period
in 1996, a 19% decrease in net earnings.
Net Interest Income
- -------------------
Net interest income, which is the primary source of income for the Bank, is the
difference between interest earned on loans and investments and the interest
paid on deposits and borrowings.
Net interest income was $4.6 million for the three months ended June 30, 1997
compared to $4.3 million for the same period last year. The increase in net
interest income of $266,000 for the three months ended June 30, 1997 compared to
the three months ended June 30, 1996 resulted from a $1.2 million increase in
interest income offset by a $1.0 million increase in interest expense.
10
The improvement in interest income is primarily a result of the increased level
of earning assets, particularly in the loan portfolio. In addition, the Bank
began investing in quality rated preferred stocks which are classified in the
marketable equity securities category. These issues have a callable feature
which approximates five years for the total portfolio. If not called, the
dividend rate converts to an adjustable rate tied to a margin over treasury
securities. In addition, the dividends qualify for the dividend received
deduction and each issue carries a protection feature which equalizes the owner
to the current dividend received deduction (DRD) (presently 70 percent federally
tax free) in the event that DRD is adjusted by Congress. This preferred stock
portfolio amounted to $34.1 million fair value as of June 30, 1997, with a
weighted average yield of 6.1% and a taxable equivalent yield approximating
8.9%. To a much lesser extent, the benefit was also derived from upward interest
rate increases on the Bank's loans and securities portfolios. Average
interest-earning assets improved to $619.7 million for the three months ended
June 30, 1997, compared to $551.5 million for the same period in 1996. The
continued growth of interest-earning assets was attributable to loan growth,
funded primarily by sales and paydowns of mortgage backed securities, reduced
levels of non-performing assets, and increased levels of Federal Home Loan Bank
and other borrowings. Overall, the average interest rate on earning assets for
the three months ended June 30, 1997 and 1996 was 7.22%. The most significant
improvement in interest rates came in the investment and mortgage backed
securities portfolios, reflecting the Bank's movement into longer term Federal
Agency securities as well as taking advantage of the lower trending interest
rate market and timing sales and swaps of securities.
Interest expense increased to $6.6 million for the three months ended June 30,
1997 from $5.7 million for the comparable period last year. The $951,000
increase was primarily a result of the higher balances of interest bearing
liabilities combined with the Bank's cost of funds increasing 29 basis points to
the second quarter's level of 4.73% from 4.44% last year. The cost of funds
associated with deposits increased 33 basis points while the cost of funds
associated with borrowings showed a minimal decline of 9 basis points. The
"market" for borrowings or wholesale funding continues to be extremely
competitive and the reduced rate is reflective of that environment.
Overall, the Bank's net interest margin declined modestly to 2.95% for the three
months ended June 30, 1997 compared to 3.13% for the comparable period in 1996.
The following table summarizes the Bank's net interest income and net yield on
average interest-earning assets. Non-accruing loans for the purpose of this
analysis are included in average loans outstanding during the periods indicated.
For the purpose of this computation, daily average amounts were used to compute
average balances.
11
TABLE 1
Three Months Ended June 30, 1997
Compared to Three Months Ended June 30, 1996
($ thousands) 1997 1996
- -------------------------------------------------------------------- ----------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
- -------------------------------------------------------------------- ----------------------------------------
Interest-earning assets
Loans receivable $437,105 $8,334 7.63 % $384,490 $7,249 7.54 %
Investment securities 50,849 957 7.53 36,077 643 7.13
Mortgage backed securities 85,827 1,487 6.93 115,419 1,903 6.60
Short term investments 11,392 167 5.86 7,661 102 5.33
Marketable equity investments 34,548 234 2.71 7,899 65 3.29
----------- ----------- ------------- -----------
Total interest-earning assets 619,721 11,179 7.22 % 551,546 9,962 7.22 %
----------- ----------- -------- ------------- ----------- ------------
Non-interest-earning assets
Cash and cash equivalents 10,167 12,621
Accrued interest receivable 5,849 4,807
Premises and equipment 3,484 3,335
Other 6,519 9,194
Less: Allowance for credit (7,128) (4,369)
losses
----------- -------------
Total non-interest-earning 18,891 25,588
assets
----------- -------------
Total assets $638,612 $577,134
=========== =============
Interest-bearing liabilities
Deposits
Regular savings & NOW $62,181 $254 1.63 % $58,598 $209 1.43 %
Super savings & money market 95,616 769 3.22 109,052 735 2.70
Time 238,810 3,241 5.43 214,968 2,856 5.31
----------- ------------ --------------- -----------
Total deposits 396,607 4,264 4.30 382,618 3,800 3.97
Borrowings 157,643 2,308 5.86 122,474 1,822 5.95
Mortgage escrow deposits 4,094 29 2.83 3,768 28 2.97
----------- ----------- --------------- -----------
Total interest-bearing 558,344 6,601 4.73 % 508,860 5,650 4.44 %
liabilities
----------- ----------- -------- ------------- ----------- ------------
Non-interest-bearing liabilities
Non-interest-bearing deposits 27,429 22,508
Other liabilities 1,833 1,162
----------- -------------
Total non-interest-bearing 29,262 23,670
liabilities
----------- -------------
Shareholders' equity 51,006 44,604
----------- -------------
Total liabilities & $638,612 $577,134
shareholders' equity
=========== =============
Net interest-earning assets
and interest rate spread $61,377 2.49 % $42,686 2.78 %
=========== -------- ============= ------------
Net interest income & net yield
on
average interest-earning assets $4,578 2.95 % $4,312 3.13 %
=========== ======== =========== ============
12
Rate / Volume Analysis
- ----------------------
The following table presents the changes in interest and dividend income and the
changes in interest expense attributable to changes in interest rates or changes
in volume of interest-bearing assets and interest-bearing liabilities during the
periods indicated. Changes which are attributable to both rate and volume have
been allocated proportionately.
TABLE 2
Three Months Ended June 30, 1997
Compared to Three Months Ended
June 30, 1996
RATE VOLUME NET
($ thousands) CHANGE
INTEREST INCOME:
Loans receivable $87 $998 $1,085
Mortgage-backed securities 91 (507) (416)
Short term investments 11 54 65
Investment securities 25 458 483
--- ---- ---
Total 214 1,003 1,217
---- ------ -----
INTEREST EXPENSE:
Deposits
Savings & NOW (31) (14) (45)
Super savings & money market 0 (34) (34)
Time (65) (320) (385)
---- ----- -----
Total deposits (96) (368) (464)
Borrowings 28 (514) (486)
Mortgage escrow deposits 1 (2) (1)
-- --- ---
Total (67) (884) (951)
---- ----- -----
NET INTEREST INCOME $147 $119 $266
======== ============= ==========
13
Provision for Credit Losses
- ---------------------------
There was no provision for credit losses for the three months ended June 30,
1997 compared to $405,000 for the comparable period in 1996. The balance in the
allowance for credit losses account as of as of June 30, 1997 was $6.9 million
providing 81.6% coverage of non-performing loans and 1.6% of total loans. In
comparison, the allowance for credit losses account balance at June 30, 1996 was
$4.2 million, providing a coverage ratio of 40.3% of non-performing loans and
1.0% of total loans.
Although there was no provision for credit losses for the three months ended
June 30, 1997, it is management's opinion that the allowance for credit losses
is adequate based upon its review of the asset mix, the level of delinquencies,
reduced levels of chargeoff, significant levels of recoveries, and the higher
coverage of nonperforming loans.
Non-Interest Income
- -------------------
Non-Interest income consists of service charges and fees, fees derived from
servicing of loans, net realized gains on sale of securities, as well as fees
derived from the Bank's Trust Department, and, since the acquisition of
Fairfield First Bank and Trust in July 1996 fee income generated by the credit
card operation.
Non-Interest income for the three months ended June 30, 1997, was $1.3 million,
compared to $1.1 million for the comparable period of 1996. Fees from deposit
accounts were up a total of $47,000 or 29.7% in the current quarter compared to
a year ago as the Bank continues to concentrate on the generation of fee income
through expanded commercial relationships. Fees from credit card services,
aggregating $393,000 for the three months ended June 30, 1997 primarily derived
from the merchant credit card business, are new since July of 1996 and have
continually increased since the Bank acquired the business and introduced this
new service to existing customers.
Non-Interest income for the three months ended June 30, 1996 included a $627,000
gain on the Bank's investment in Hometown Bancorporation which was liquidated
shortly after the planned acquisition announcement by HUBCO, Inc. in April,
1996.
Non-Interest Expense
- --------------------
Non-Interest expense is comprised of general and administrative expenses
incurred in managing the business of the Bank and costs associated with managing
and selling OREO properties.
14
The following table indicates the elements of non-interest expense including
OREO related expense which is directly related to the level of non-performing
assets.
NON-INTEREST EXPENSE Three months ended:
- -------------------- ------------------
June 30,
1997 1996
---- ----
(in thousands)
Compensation $1,360 $1,260
Employee benefits 475 439
Occupancy,Equipment & Data Processing 648 538
Regulatory assessments 13 2
Marketing 158 193
Goodwill amortization 81 ---
Legal & professional 166 159
Office supplies 155 139
Credit card expense 298 ---
Insurance 32 55
Other 541 399
--- -----
Total operating expense 3,927 3,184
----- -----
Net OREO holding costs & expenses 14 86
Sale of OREO, (gains) losses, net (28) 354
Provision for estimated OREO losses ---- ----
Total OREO related expense (14) 440
---- ----
Total non-interest expense $3,913 $3,624
----- -----
Non-interest expense was $3.9 million for the three months ended June 30, 1997
compared to $3.6 million for the same period in 1996. Of the total net increase
of $289,000, $379,000 was attributable to recurring expenses in 1997 that did
not exist in the comparable period of 1996, such as goodwill amortization and
credit card expenses. Additionally, compensation and benefits increased $136,000
from the comparable period in 1996 as a result of increased staff levels in
commercial lending and the newly established credit card department as a result
of the FFB&T acquisition. Offsetting the increase were substantially lower costs
associated with OREO expense. The total cost associated with OREO favorably
impacting non-interest expense for the three months ended June 30, 1997 was a
net gain of $14,000 compared to net costs of $440,000 for the same period in
1996. The decline in OREO related expense is directly a result of the
substantial reduction of properties in the OREO portfolio.
Other operating expense accounts such as equipment, data processing, office
supplies, and legal and professional fees increased, reflecting higher levels of
the volume of the business. Regulatory assessments reflected the nominal
assessment by the regulatory agencies as a result of the recent reduction in the
insurance premium. NSS continues to qualify under the F.D.I.C.'s "well
capitalized" status which carries the lowest possible rate of F.D.I.C.
insurance.
15
Other non-interest expense increased to $541,000 for the quarter ended June 30,
1997 from $399,000 a year ago primarily as a result of additional expenses
incurred with higher levels of residential and commercial loan volume.
Provision for Income Taxes
- --------------------------
The current provision for income taxes during the three months ended June 30,
1997 represents estimated taxes owed based on taxable earnings subject to
taxation at a combined state and federal rate of approximately 40%. The
provision for income taxes for the three months ended June 30, 1996 represented
estimated minimum state income tax requirements for the periods as both federal
and state income tax liabilities were offset by loss carryforwards. As of
December 31, 1996, the Bank recognized the deferred tax benefits of all of its
available net operating loss carryforwards.
16
RESULTS OF OPERATIONS
Comparison of Operating Results for the Six Months Ended
--------------------------------------------------------
June 30, 1997 and 1996.
-----------------------
Operations
- ----------
The net earnings for the six months ended June 30, 1997 were $2.2 million or
$0.91 per share compared to net earnings of $2.3 million or $.99 per share for
the six months ended June 30, 1996. The first six months earnings for 1997 were
fully taxable compared to fully tax sheltered earnings during the first six
months of 1996.
Net Interest Income
- -------------------
Net interest income, which is the primary source of income for the Bank, is the
difference between interest earned on loans and investments and the interest
paid on deposits and borrowings.
Net interest income was $9.2 million for the six months ended June 30, 1997
compared to $8.4 million for the same period last year. The increase in net
interest income of $0.8 million from the six months ended June 30, 1996 resulted
from a $3.0 million increase in interest income offset by a $2.2 million
increase in interest expense.
The improvement in interest income is primarily a result of the increased level
of earning assets, principally loans, and to a lesser extent, marketable equity
securities. The total securities portfolio reflected interest rate improvements
primarily as a result of the Bank moving to a longer term strategy in that
portfolio. Average interest earning assets improved to $603.9 million for the
first six months of 1997 compared to $525.6 million for the same period in 1996.
Funds generated by deposit growth, dispositions of non-performing assets, and
Federal Home Loan Bank and other borrowings, all contributed to the growth in
earning assets. The average interest rate on earning assets for the six months
ended June 30, 1997 rose to 7.29% from 7.24% for the same period last year.
Interest expense increased to $12.8 million for the six months ended June 30,
1997 from $10.6 million for the comparable period last year. The $2.2 million
increase was primarily attributable to the higher balances of interest bearing
liabilities. For the six months ended June 30, 1997, the Bank's cost of funds
increased 30 basis points to 4.70% from 4.40% last year.
Overall, the Bank experienced a modest decline in net interest margin of 14
basis points to 3.06% for the six months ended June 30, 1997 from 3.20% for the
comparable period in 1996.
Table 3 summarizes the Bank's net interest income and net yield on average
interest-earning assets. Non-accruing loans for the purpose of this analysis are
included in average loans outstanding during the periods indicated. For the
purpose of this computation, daily average amounts were used to compute average
balances.
17
TABLE 3
Six Months Ended June 30, 1997
Compared to Six Months Ended June 30, 1996
($ thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
- -----------------------------------------------------------------------------------------------------------------
Interest-earning assets
Loans receivable $429,410 $16,297 7.59 % $373,861 $14,109 7.55 %
Investment securities 45,357 1,656 7.30 33,077 1,144 6.92
Mortgage backed securities 90,978 3,253 7.15 106,031 3,537 6.67
Short term investments 11,684 364 6.23 5,573 148 5.31
Marketable equity investments 26,477 454 3.43 7,070 99 2.80
------- ---- ------ ---
Total interest-earning assets 603,906 22,024 7.29 % 525,612 19,037 7.24 %
-------- ------- ----- -------- ------- -----
Non-interest-earning assets
Cash and cash equivalents 12,439 11,366
Accrued interest receivable 5,100 4,245
Premises and equipment 3,393 3,367
Other 6,909 7,931
Less: Allowance for credit losses (7,304) (4,173)
------- -------
Total non-interest-earning assets 20,537 22,735
------- ------
Total assets $624,443 $548,347
=========== ============
Interest-bearing liabilities
Deposits
Regular savings & NOW $59,834 $475 1.59 % $56,669 $421 1.49 %
Super savings & money market 94,713 1,498 3.16 110,931 1,556 2.81
Time 239,609 6,484 5.41 210,218 5,588 5.32
-------- ------ -------- ------
Total deposits 394,156 8,457 4.29 377,818 7,565 4.00
Borrowings 146,780 4,278 5.83 101,650 3,013 5.93
Mortgage escrow deposits 3,688 51 2.77 3,396 48 2.83
------ --- ------ ---
Total interest-bearing liabilities 544,624 12,786 4.70 % 482,864 10,626 4.40 %
-------- ------- ----- -------- -------
Non-interest-bearing liabilities
Non-interest-bearing deposits 26,497 19,589
Other liabilities 2,505 1,501
------ -----
Total non-interest-bearing 29,002 21,090
------- ------
liabilities
Shareholders' equity 50,817 44,393
------- ------
Total liabilities & shareholders' $624,443 $548,347
equity
=========== ============
Net interest-earning assets
and interest rate spread $59,282 2.59 % $42,748 2.84 %
----- -----
=========== ============
Net interest income & net yield on
average interest-earning assets $9,238 3.06 % $8,411 3.20 %
=========== ========== ========== =========
18
Rate / Volume Analysis
The following table presents the changes in interest and dividend income and the
changes in interest expense attributable to changes in interest rates or changes
in volume of interest-bearing assets and interest-bearing liabilities during the
first six months of 1997 and 1996. Changes which are attributable to both rate
and volume have been allocated proportionately.
TABLE 4
Six Months Ended June 30, 1997
Compared to Six Months Ended
June 30, 1996
RATE VOLUME NET
($ thousands) CHANGE
INTEREST INCOME:
Loans receivable $76 $2,112 $2,188
Mortgage-backed securities 242 (526) (284)
Short term investments 30 186 216
Investment securities 94 773 867
--- ---- ---
Total 442 2,545 2,987
---- ------ -----
INTEREST EXPENSE:
Deposits
Savings & NOW (30) (24) (54)
Super savings & money 0 58 58
market
Time (102) (794) (896)
----- ----- -----
Total deposits (132) (760) (892)
Borrowings 52 (1,317) (1,265)
Mortgage escrow deposits 1 (4) (3)
-- --- ---
Total (79) (2,081) (2,160)
---- ------- -------
NET INTEREST INCOME $363 $464 $827
============ ============== ============
19
Provision for Credit Losses
- ---------------------------
There was no provision for credit losses for the six months ended June 30, 1997
compared to $805,000 for the comparable period in 1996. The balance in the
allowance for credit losses account as of June 30, 1997 was $6.9 million
providing 81.6% coverage of non-performing loans and 1.6% of total loans. In
comparison, the allowance for credit losses account balance at June 30, 1996 was
$4.2 million providing a coverage ratio of 40.3% of non-performing loans and
1.0% of total loans.
Although there was no provision for credit losses for the six months ended June
30, 1997, it is management's opinion that the allowance for credit losses is
adequate based upon its review of the asset mix, the level of delinquencies,
reduced levels of chargeoff, significant levels of recoveries, and the higher
coverage of nonperforming loans.
Non-Interest Income
- -------------------
Non-Interest income consists of service charges and fees, fees derived from
servicing of loans, net realized gains on sale of securities, as well as fees
derived from the Bank's Trust Department and since the acquisition of Fairfield
First Bank and Trust in July 1996, credit card fees.
Non-Interest income for the six months ended June 30, 1997 and 1996 was $2.1
million and $1.8 million, respectively. Fees generated by the newly acquired
Credit Card Department, combined with higher "core" business fees such as
customer service, accounts for most of the increase. The most significant
component of non-interest income for the six months ended June 30, 1996 was
gains on security sales, primarily the result of the sale of the Bank's
investment in Hometown Bancorporation.
Non-Interest Expense
- --------------------
Non-Interest expense is comprised of general and administrative expenses
incurred in managing the business of the Bank and costs associated with managing
and selling OREO properties.
Non-interest expense was $7.7 million for the six months ended June 30, 1997
compared to $7.0 million for the same period in 1996.
The table that follows indicates the elements of non-interest expense including
OREO related expense which is directly related to the level of non-performing
assets.
20
NON-INTEREST EXPENSE Six months ended:
- -------------------- -----------------
June 30,
1997 1996
---- ----
(in thousands)
Compensation $2,712 $2,552
Employee benefits 995 901
Occupancy, Equipment & Data Processing 1,320 1,092
Regulatory assessments 28 6
Marketing 264 315
Goodwill amortization 162 ----
Legal & professional 371 297
Office supplies 291 317
Credit card expense 545 ----
Insurance 104 122
Other 1,016 712
----- -----
Total operating expense 7,808 6,314
----- -----
Net OREO holding costs & expenses 98 214
Sale of OREO, (gains) losses, net (208) 492
Provision for estimated OREO losses ---- ----
----- ------
Total OREO related expense (110) 706
----- ------
Total non-interest expense $7,698 $7,020
Operating expenses increased $1.5 million to $7.8 million for the six months
ended June 30, 1997 from $6.3 million for the comparable period last year. Of
the total increase, approximately $700,000 was attributable to amortization of
goodwill and expenses relating to the Credit Card Department , both of which
were new items in 1997. Additionally, increases in compensation and benefits,
occupancy, equipment and data processing were attributable to higher volume
levels of business in 1997 as compared to 1996.
Partially offsetting the increase in the operating component of non-interest
expense, OREO related expenses declined substantially to a net revenue of
$110,000 from a net expense of $706,000 for the six months ended June 30, 1997
and 1996, respectively. Reduced levels of holding costs and expenses as the OREO
portfolio declined coupled with gains on sales of OREO properties accounted for
the overall improvement.
21
Provision for Income Taxes
- --------------------------
The current provision for income taxes during the six months ended June 30, 1997
represents estimated taxes owed based on taxable earnings subject to taxation at
a combined state and federal rate of approximately 40%. The provision for income
taxes for the six months ended June 30, 1996 represented estimated minimum state
income tax requirements as both federal and state tax liabilities were offset by
loss carryforwards. As of December 31, 1996, the Bank recognized the deferred
tax benefits of all of its available net operating loss carryforards.
22
FINANCIAL CONDITION
General
- -------
Total assets were $663.7 million as of June 30, 1997 compared to $589.6 million
as of December 31, 1996, representing an increase of $74.1 million. Total loans,
net of allowance for loan losses, were $443.1 million, an increase of $32.3
million from the $410.8 million as of December 31, 1996. Total deposits were
$435.0 million compared to $423.3 million, an increase of $11.7 million from
December 31, 1996. Shareholders' equity as of June 30, 1997 was $51.9 million
compared to $49.4 million at December 31, 1996. The tier one leverage capital
ratio was 7.8% as of June 30, 1997 and 7.9% at December 31, 1996.
Investment Securities
- ---------------------
Total securities amounted to $185.0 million and $140.1 million as of June 30,
1997 and December 31, 1996, respectively. The $44.9 million increase represented
the net effect of sales of lower yielding securities, monthly amortization
(pay-downs) of the mortgage backed securities portfolio and purchases of
approximately $100 million of various investments, primarily callable preferred
stocks that convert in approximately 4-1/2 years to adjustable rates and provide
for tax effective yield protection.
During the first six months of 1997, the Bank, through continued use of
wholesale leverage, purchased government agency callable bonds and mortgage
backed securities using FHLB borrowings, generating pre-tax income spreads
between 110 and 140 basis points. (See the section on Federal Home Loan Bank
Advances to address the trend in longer term advances.)
The Bank continued to purchase mortgage backed securities as a supplement to the
mortgage lending program.
In total, security gains for the first six months of 1997 were $186,000 compared
to $761,000 for the comparable period in 1996. In April 1996, the Bank
liquidated its investment in Hometown Bancorporation, which accounted for
$627,000 of last year's total gains for the first six months.
The following table presents a summary of the investments and other securities
portfolios as of June 30, 1997 and December 31, 1996, fair values and unrealized
gains and losses as of those dates.
23
TABLE 5
INVESTMENT & OTHER SECURITIES
($ thousands)
June 30, 1997
-------------------------------------------------------------
Amortized Unrealized Fair
Cost Holding Losses Value
Gains
------------ ------------------------------ -----------------
Available for Sale
------------------
U.S. Government & Federal
Agency Obligations $61,223 $71 $414 $60,880
Mortgage Backed Securities 84,771 466 217 85,020
Equity Securities 36,313 598 0 36,911
------- ---- -- ------
Total Available for Sale $182,307 $1,135 $631 $182,811
========= ======= ===== ========
Trading
-------
Equity Securities $2,348 $0 ($194) $2,154
======= === ====== ======
December 31, 1996
-------------------------------------------------------------
Amortized Unrealized Fair
Cost Holding Losses Value
Gains
------------ ------------------------------ -----------------
Available for Sale
U.S. Government & Federal
Agency Obligations $42,436 $145 $461 $42,120
Mortgage Backed Securities 92,443 382 372 92,453
Equity Securities 2,110 138 12 2,236
------ ---- --- -----
Total Available for Sale $136,989 $665 $845 $136,809
========= ==== ===== ========
Trading
Equity Securities $3,353 $46 $107 $3,292
======= ==== ===== ======
24
Loans
- -----
Total loans, before reductions for deferred credits, fees and the allowance for
credit losses amounted to $450.8 million, representing a $32.0 million or 7.6%
increase over the December 31, 1996 level of $418.8 million. Demand for new
residential mortgage loans continued at a good pace for the first six months of
the year. The Bank continues to focus on residential loans with emphasis on
adjustable rate products as its primary lending vehicle. As indicated by the
following table, more than 81% of NSS's loan portfolio is in first mortgage
residential loans, with 64.1% of the portfolio in adjustable rate first mortgage
loans.
Consumer loans declined approximately $2.7 million from December 31, 1996
primarily due to the fact that the portfolio of automobile leases which had been
generated on an indirect basis was repurchased by the originating company.
There were no significant sales or securitizations during the first six months
of 1997; however, in conjunction with its current strategic plan, the Bank
entered into a $10 million forward sale commitment with the Federal Home Loan
Mortgage Corporation (Freddie Mac) of which $5 million was satisfied in July
1997.
25
TABLE 6
LOAN PORTFOLIO
($ thousands)
June 30, 1997 December 31, 1996
------------- -----------------
Real Estate Loans
1 to 4 family adjustable rate $288,736 64.1% $257,459 61.5%
1 to 4 family fixed rate 78,259 17.4% 77,160 18.4%
Multi-family 6,699 1.5% 7,450 1.8%
Commercial 46,874 10.4% 46,272 11.0%
Home equity lines of credit 7,353 1.6% 7,127 1.7%
Home improvement &
second mortgages 2,842 0.6% 2,568 0.6%
Land 804 0.2% 828 0.2%
Construction 2,573 0.6% 1,227 0.3%
Total Real Estate Loans 434,140 96.4% 400,091 95.5%
Commercial Loans 8,988 2.0% 8,425 2.0%
Consumer Loans
Passbook 1,570 0.3% 1,510 0.4%
Automobile loans 2,449 0.5% 2,619 0.6%
Automobile leases 0 0.0% 3,149 0.8%
Credit cards 973 0.2% 991 0.2%
All other 2,635 0.6% 2,033 0.5%
Total Consumer Loans 7,627 1.6% 10,302 2.5%
Total Loans, gross 450,755 100% 418,818 100%
Deferred fees & credits (714) (718)
450,041 418,100
Allowance for Credit Losses (6,911) (7,334)
Total Loans, net $443,130 $410,766
26
Non-Performing Assets / Asset Quality
- -------------------------------------
The Bank's level of non-performing assets stood at $9.0 million or 1.35% of
assets as of June 30, 1997 compared to $12.5 million or 2.0% of assets as of
March 31, 1997. The $3.5 million decrease in non-performing assets was primarily
attributable to sales of two non-performing loans (amounting to $1.5 million),
appropriate collection efforts, and the improved economy in the Bank's market
area.
Sales of nine OREO properties amounted to a reduction of $985,000 in the
carrying value of OREO during the first six months of 1997.
There were no troubled debt restructures included in non-performing loans as of
June 30, 1997 or December 31, 1996.
The allowance for credit losses amounted to $6.9 million at June 30, 1997,
representing coverage of 81.6% of non-performing loans compared to $7.3 million
as of December 31, 1996, representing coverage of 70.2% of non-performing loans.
Through its credit rating system, the Bank has identified $12.3 million of
watchlist loans at June 30, 1997 compared to $8.5 million at December 31, 1996.
The increase was essentially attributable to one commercial real estate loan of
approximately $2.5 million, which the borrowers subsequently brought current in
July.
Details of the Bank's asset quality are shown in the analysis provided by the
table on the following page.
27
TABLE 7
ASSET QUALITY
($ thousands) AT JUNE 30, AT DECEMBER 31,
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
Non-performing assets
Non-accrual loans $8,468 $10,367 $10,441 $12,598 $9,489
Restructured loans --- --- --- 472 487
----------- ----------- ----------- ----------- -----------
Total non-performing loans 8,468 10,367 10,441 13,070 9,976
----------- ----------- ----------- ----------- -----------
Foreclosed assets 485 2,533 858 4,267 11,622
Allowance for estimated OREO losses --- --- --- --- (802)
----------- ----------- ----------- ----------- -----------
Total OREO 485 2,533 858 4,267 10,820
----------- ----------- ----------- ----------- -----------
Total non-performing assets $8,953 $12,900 $11,299 $17,337 $20,796
=========== =========== =========== =========== ===========
Allowance for credit losses
Balance at beginning of year $7,334 $4,170 $4,170 $4,827 $2,532
Provision for credit losses --- 805 4,415 1,005 3,790
Addition to the reserve through goodwill --- --- 1,000 --- ---
Charge-offs (892) (812) (2,488) (1,799) (1,589)
Recoveries 469 14 237 137 94
---- --- ---- ---- --
Net Charge-offs (423) (798) (2,251) (1,662) (1,495)
----- ----- ------- ------- -------
Balance at end of period $6,911 $4,177 $7,334 $4,170 $4,827
======= ======= ======= ======= ======
Allowance for estimated OREO losses
Balance at beginning of period $0 $0 $0 $802 $194
Provision for estimated OREO losses --- --- $459 460 2,894
Charge-offs --- --- ($459) (1,262) (2,286)
------ ------- -------
Balance at end of period $0 $0 $0 $0 $802
=== === === === ====
Loans receivable, net
End of period 443,130 407,692 410,766 355,796 284,885
Average 422,106 373,861 403,207 313,072 265,581
Assets, end of period 663,668 609,522 589,589 515,267 464,901
Ratios
Allowance for credit losses to total 1.56% 1.01% 1.79% 1.17% 1.69%
loans
Net charge-offs to average loans 0.10% 0.19% 0.56% 0.53% 0.56%
Non-performing loans to total loans 1.91% 2.51% 2.54% 3.67% 3.50%
Non-performing assets to total assets 1.35% 2.12% 1.92% 3.36% 4.47%
Allowance for credit losses to
non-performing loans 81.61% 40.29% 70.24% 31.91% 48.39%
28
Deposits
- --------
Total deposits as of June 30, 1997 were $435.0 million compared to $423.3
million as of December 31, 1996, representing an increase of $11.7 million or
2.7%. In terms of deposit mix, non interest bearing accounts as well as savings
and NOW account gains more than offset the decline in money market certificate
accounts. These accounts when opened are less than one year to maturity. The
customer who is inclined to open a certificate of deposit has recently been
inclined to extend maturities to two and two and a half year time frames as a
result of special rates offered by the Bank. The Bank continues to focus on the
total business deposit relationship. The Bank's goal is to attract small
business customers and capture the majority of the business banking
relationships through its commercial lending function. The Bank continues to
aggressively seek time deposits and all other types of consumer deposits, but
the best product to stimulate the Bank's net interest margin is the non-interest
bearing checking account. The Bank does not solicit nor does it accept brokered
deposits.
The following table presents a summary of deposits as of June 30, 1997 and
December 31, 1996.
TABLE 8
Deposits
- -----------------------------------------------------------------------------------------------------
June 30, 1997 December 31, 1996
($ thousands)
Demand deposits $30,514 7.0% $22,479 5.3%
Savings
Regular savings 29,709 6.8% 28,096 6.6%
Super savings 48,148 11.1% 45,404 10.7%
NOW 35,095 8.1% 30,262 7.1%
Money market 47,173 10.8% 47,957 11.3%
Escrow deposits 4,927 1.1% 4,965 1.2%
Certificates
Certificate accounts 202,935 46.7% 197,204 46.6%
Money market
certificates 36,530 8.4% 46,923 11.1%
------- ---- ------- -----
Total Deposits $435,031 100.0% $423,290 100.0%
========= ====== ========= ======
29
Federal Home Loan Bank of Boston, Advances and Other Borrowings
- ---------------------------------------------------------------
The Bank continues to utilize the FHLB as an alternative source of funds to the
traditional deposit account relationship. As of June 30, 1997, borrowings from
the FHLB amounted to $134.9 million at a weighted average rate of 5.83% and a
weighted average maturity of 1.2 years compared to $82.2 million at a weighted
average rate of 5.78% and a weighted average maturity of 1.3 years as of
December 31, 1996. In addition to borrowing from the FHLB, the Bank utilizes the
"REPO" market from time to time. There was $39.7 million outstanding in
securities sold under agreements to repurchase as of June 30, 1997 at a weighted
average rate of 5.88% and a weighted average maturity of 1.8 years. The
comparable data as of December 31, 1996 was $31.4 million at 5.73% for
approximately one year.
Shareholders' Equity
- --------------------
The Bank's Shareholders' equity at June 30, 1997 was $51.9 million compared to
$49.4 million as of December 31, 1996. The Tier 1 leverage capital ratios were
7.8% and 7.9% at June 30, 1997 and December 31, 1996, respectively.
The following table indicates required and actual levels of regulatory capital
as of June 30, 1997 and December 31, 1996.
Required Actual
-------- -----------------------
June 30, Dec. 31,
1997 1996
------- --------
Tier 1 risk-based capital..................4.0% 13.9% 15.7%
Total risk-based capital...................8.0% 15.3% 17.0%
Tier 1 leverage capital....................4.0%-5.0% 7.8% 7.9%
Asset and Liability Management
- ------------------------------
In accordance with the Asset and Liability Management policy of Norwalk Savings
Society, senior management postures the Bank towards an acceptable level of
interest rate risk in turn producing a stable net interest income in ever
changing interest rate environments. On a continual basis, at its monthly asset
and liability committee meeting and more frequently, if necessary, the level of
interest-earning assets is monitored and measured in relation to
interest-bearing liabilities, utilizing the "gap" schedule (Exhibit A) in
conjunction with other supporting documents and systems providing relevant
information. Certain assumptions are made during this process, and the
applicable assumptions to the gap schedule are indicated at the bottom of the
page at Exhibit A. These assumptions may or may not be indicative of future
withdrawals of deposits or loan repayments.
Liquidity and Capital Resources
- -------------------------------
Liquidity is the ability of the Bank to meet its cash flow requirements arising
from fluctuations in loans, securities, deposits, and other borrowings. At June
30, 1997, the Bank's primary liquidity consisting of cash,
30
cash equivalents and marketable securities (with maturities of one year or less)
was $49.4 million or 7.4% of total assets, compared to $30.6 million or 5.2% of
total assets at December 31, 1996.
The Bank's primary source of funds is deposits and other borrowings, primarily
from the FHLB. The Bank monitors its liquidity in accordance with policy
guidelines established by the Asset and Liability Management Policy and
regulatory standards, administered by the Asset and Liability Management
Committee of the Bank.
As of June 30, 1997, the Bank had approved loan commitments outstanding for one-
to four-family loans of $9.3 million. In addition, there was $7.5 million
available unused credit under the home equity line of credit facility and $0.9
million available unused credit under the overdraft protection credit line
facility. The unadvanced portion of residential construction loans amounted to
$1.7 million as of June 30, 1997. There was $1.7 million in approved loan
commitments in the Commercial Lending Department as of June 30, 1997 , $2.3 in
unused lines of credit, and $0.7 million in commercial letters of credit. There
was $1.3 million available unused credit in the credit card program.
Management believes that the Bank's liquidity position is currently adequate to
meet normal operating needs. To meet unexpected demands, the Bank maintains a
line of credit with the FHLB. At June 30, 1997, this line of credit was $10.3
million of which no amount was outstanding.
Management also believes that the Bank's capital position is currently adequate
to meet anticipated growth and does not currently have plans to raise capital
from external sources in the near future.
Market Price of Common Stock
- ----------------------------
Norwalk Savings Society trades on the (NASDAQ) National Market under the symbol
"NSSY". The following table sets forth the high/low price range of "NSSY" common
stock as reported by NASDAQ and dividends declared for the periods indicated:
1997 1996
High Low Dividend High Low Dividend
-------------------------------------------------------
First Quarter $26.25 $22.94 $.05 $22.00 $18.75 --
Second Quarter $31.00 $23.00 $.10 22.25 17.94 $.05
Third Quarter 23.13 20.88 .05
Fourth Quarter 24.88 22.75 .05
31
NORWALK SAVINGS SOCIETY
(Registrant)
Date: August 12, 1997
By_/s/Robert T. Judson____________
Robert T. Judson
President & CEO
Date: August 12, 1997
By_/s/Marcus I. Braverman_________
Marcus I. Braverman
Senior Vice President
Treasurer & CFO
(0697MDA)
32
0697gap EXHIBIT A
---------
The following table presents the Interest Rate Risk Exposure ("GAP") as of June
30, 1997.
Repricing
Repricing after one Repricing
Total Percent of within and within over
amount total one year five years five years
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Loans (1)
1 to 4 family first liens $363,873 54.83% $269,918 $20,090 $73,865
All other 78,414 11.82% 42,886 22,346 13,182
Securities
Governments & agencies 60,880 9.17% 0 0 60,880
Mortgage-backed securities (1) 85,020 12.81% 15,696 16,362 52,962
Equity securities / FHLB stock 43,161 6.50% 2,613 33,700 6,848
Short term investments 5,675 0.86% 5,675
- -----------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets 637,023 95.99% $336,788 $92,498 $207,737
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative rate sensitive assets $336,788 $429,286 $637,023
- -----------------------------------------------------------------------------------------------------------------------------------
Other assets (2) 26,645 4.01%
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 663,668 100.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders'equity
Deposits
Savings 29,709 4.48% 29,709
Super savings 48,148 7.25% 48,148
NOW 35,095 5.29% 35,095
Money market 47,173 7.11% 47,173
Escrow 4,927 0.74% 4,927
Certificates 239,465 36.08% 152,224 87,241
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 404,517 60.95% 317,276 87,241
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowings 174,986 26.37% 127,666 45,899 1,421
- -----------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities 579,503 87.32% 444,942 133,140 1,421
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative rate sensitive liabilities $444,942 $578,082 $579,503
- -----------------------------------------------------------------------------------------------------------------------------------
Other liabilities 32,255 4.86%
Shareholders' equity 51,910 7.82%
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity 663,668 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Net position of assets (liabilities) (108,154) (40,642) 206,316
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments (3), (4) ($125,111) $63,547 $61,564
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted GAP $16,957 ($104,189) $144,752
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative repricing difference (cummulative Gap) $16,957 ($87,232) $57,520
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP to total assets 2.56% -13.14% 8.67%
- -----------------------------------------------------------------------------------------------------------------------------------
Note:
(1) Included in the one year period are regularly scheduled monthly payments
to be received on Loans and Mortgage-backed securities.
(2) Not included above, as interest rate sensitive are $8.5 million in
non-accruing loans and $0.5 million in OREO property. (3) 95% of savings and NOW
accounts were reclassified to the over five year period. (4) Money market and
super savings were divided 1/3, 2/3, respectively in each of the first two
periods.
33