UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________
Commission file number 0-22937
NSS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1485317
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
48 Wall Street, Norwalk, Connecticut
(Address of principal executive offices)
06852 (203) 838-4545
(Zip Code) (Registrant's telephone #)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as the latest practicable date.
Class: Common Stock, par value $.01 per share
Outstanding at June 30, 1998: 2,378,085 shares
TABLE OF CONTENTS
PART I - CONSOLIDATED FINANCIAL INFORMATION
A. Consolidated Statements of Financial Condition
B. Consolidated Statements of Operations
C. Consolidated Statements of Shareholders' Equity
D. Consolidated Statements of Cash Flows
E. Notes to Consolidated Financial Statements
F. Management's Discussion and Analysis
G. Quantitative and Qualitative Disclosures about Market Risk
H. Selected Consolidated Financial Highlights
PART II - OTHER INFORMATION
PART III - SIGNATURES
[CAPTION]
NSS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,1998 December 31, 1997
ASSETS (in thousands)
Cash and Due from Banks $ 12,696 $ 11,486
Interest Bearing Deposits
in Other Banks 8,529 5,555
Federal Funds Sold - 5,000
Securities:
Trading, at Fair Value 2,281 1,830
Available-for-Sale, at
Fair Value 187,541 178,667
Loans Receivable, Net of
allowance for credit losses
of $5,374 as of June 30 and
$5,832 as of December 31 413,014 425,812
Loans Held-for-Sale 4,184 5,311
Accrued Interest Receivable 3,994 3,859
Federal Home Loan Bank Stock,
At Cost 7,347 7,347
Other Real Estate Owned, Net 433 574
Bank Premises and Equipment, Net 3,823 3,738
Deferred Income Tax Asset, Net 330 361
Goodwill, Net 1,360 1,524
Other Assets 6,293 3,158
Total Assets $651,825 $654,222
LIABILITIES
Deposits
Non-interest Bearing $ 36,620 $ 27,471
Savings, Money Market
and NOW Accounts 190,775 174,873
Time Accounts 231,055 241,867
Total Deposits 458,450 444,211
Borrowed Funds 136,260 151,671
Accrued Expenses and
Other Liabilities 1,974 2,202
Total Liabilities 596,684 598,084
SHAREHOLDERS' EQUITY
Preferred Stock ($.01 par value,
500,000 shares authorized,
none outstanding) - -
Common Stock ($.01 par value,
7,000,000 shares authorized,
issued 2,485,571 as of June
30 and 2,460,370 as of December
31; outstanding 2,378,085 as of
June 30 and 2,434,096 as of
December 31) 25 25
Additional Paid-In Capital 25,040 24,199
Retained Earnings 33,075 31,048
Accumulated Comprehensive Income 963 1,129
Total 59,103 56,401
Less: Unearned ESOP Shares 170 263
Treasury Stock (90,500
shares as of June 30)
at Cost 3,792 -
Total Shareholders' Equity 55,141 56,138
Total Liabilities and
Shareholders' Equity $651,825 $654,222
See accompanying notes to consolidated financial statements.
[CAPTION]
NSS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
INTEREST AND DIVIDEND INCOME
Loans, Including Fees $ 8,214 $ 8,334 $16,621 $16,297
Investment Securities and Other
Taxable Interest 2,776 2,524 5,414 5,098
Dividends 653 321 1,288 629
Total 11,643 11,179 23,323 22,024
INTEREST EXPENSE
Deposits 4,385 4,293 8,695 8,508
Borrowed Funds 2,301 2,308 4,566 4,278
Total 6,686 6,601 13,261 12,786
NET INTEREST INCOME 4,957 4,578 10,062 9,238
Provision for Credit Losses 150 - 150 -
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 4,807 4,578 9,912 9,238
NON-INTEREST INCOME
Customer Service Fees 218 205 425 406
Loan Servicing Fees 101 116 204 232
Trust Department Fees 161 137 310 278
Net Gain on Sale of Loans
and Securities 149 338 479 363
Credit Card Fees 439 393 776 687
Other 258 73 467 156
Total Non-Interest Income 1,326 1,262 2,661 2,122
NON-INTEREST EXPENSE
Compensation and Benefits 2,108 1,835 4,126 3,856
Occupancy, Equipment and
Data Processing 679 692 1,356 1,400
Regulatory Assessments 14 13 27 28
OREO Holding Costs and Expenses 26 14 56 98
Sale of OREO (Gains) Losses, Net (14) (28) (44) (208)
Credit Card Expense 364 298 662 545
Goodwill Amortization 81 81 163 162
Other 1,079 1,008 2,173 1,817
Total Non-Interest Expense 4,337 3,913 8,519 7,698
EARNINGS BEFORE INCOME TAXES 1,796 1,927 4,054 3,662
Provision for Income Taxes 638 777 1,458 1,468
NET EARNINGS $1,158 $1,150 $2,596 $2,194
EARNINGS PER SHARE - BASIC $0.49 $0.48 $1.08 $0.91
EARNINGS PER SHARE
- ASSUMING DILUTION $0.46 $0.46 $1.02 $0.88
Weighted average shares outstanding
Basic 2,376 2,407 2,398 2,404
Assuming Dilution 2,534 2,508 2,553 2,499
See accompanying notes to consolidated financial statements.
[CAPTION]
NSS BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ in thousands)
Additional
Common Paid-In Retained
Shares Stock Capital Earnings
Balance - December
31, 1996 $2,397,312 $ 24 $23,545 $26,339
Net Earnings - - - 5,565
Adjustment of Unrealized
Gains (Losses), Net - - - -
Stock Options Exercised 18,201 1 272 -
Shares Distributed to
Advisory Board 40 - 1 -
Cash Dividends Paid on
Common Stock - - - (856)
ESOP Shares Committed to
be Released 18,543 - 381 -
Balance - December
31, 1997 2,434,096 25 24,199 31,048
Accumulated Unearned Total
Comprehensive ESOP Treasury Shareholders
Income Shares Stock Equity
Balance - December
31, 1996 $ (106) $(449) $ - $49,353
Net Earnings - - - 5,565
Adjustment of Unrealized
Gains (Losses), Net 1,235 - - 1,235
Stock Options Exercised - - - 273
Shares Distributed to
Advisory Board - - - 1
Cash Dividends paid on
Common Stock - - - (856)
ESOP Share Committed
to be Released - 186 - 567
Balance - December
31, 1997 1,129 (263) - 56,138
Additional
Common Paid-In Retained
Shares Stock Capital Earnings
Net Earnings - - - 2,596
Adjustment of Unrealized
Gains (Losses), Net - - - -
Stock Options Exercised 21,516 - 386 -
Cash Dividends Paid on
Common Stock - - - (569)
Long-Term Incentive
Compensation Plan Shares 3,685 - 142 -
ESOP Shares Committed
to be Released 9,288 - 313 -
Treasury Stock (90,500) - - -
Balance - June 30, 1998 $2,378,085 $25 $25,040 $33,075
Accumulated Unearned Total
Comprehensive ESOP Treasury Shareholders
Income Shares Stock Equity
Net Earnings - - - 2,596
Adjustment of Unrealized
Gains (Losses), Net (166) - - (166)
Stock Options Exercised - - - 386
Cash Dividends Paid on
Common Stock - - - (569)
Long-Term Incentive
Compensation Plan Shares - - - 142
ESOP Shares Committed
to be Released - 93 - 406
Treasury Stock - - (3,792) (3,792)
Balance - June 30, 1998 $963 ($170) ($3,792) $55,141
See accompanying notes to consolidated financial statements.
[CAPTION]
NSS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash & Cash Equivalents
Six Months Ended June 30,
1998 1997
($ in thousands)
Cash Flows from Operating Activities:
Net Earnings $ 2,596 $ 2,194
Adjustments to Reconcile
Net Earnings to Net Cash
Provided (Used) by Operating Activities
Provision for Credit Losses 150 -
Deferred Income Tax 144 681
Provision for ESOP Benefit Cost 222 206
Depreciation and Amortization 304 309
Goodwill Amortization 163 162
Net Amortization of Discounts
and Premiums on Securities 713 317
Net Gains on Sales of Loans
and Securities (126) (50)
Net Gains on Sales of OREO (44) (208)
Net (Increase) Decrease in
Trading Securities (451) 1,137
Increase in Accrued Interest
Receivable (172) (979)
Increase in Other Assets (2,652) (1,194)
Decrease in Accrued Expense
and Other Liabilities (18) (646)
Total Adjustments (1,767) (265)
Net Cash Provided by Operating Activities 829 1,929
Cash Flows from Investing Activities:
Proceeds from:
Sales of Loans and Securities 40,936 47,065
Maturities of Securities 25,828 9,005
Sales of Other Real Estate Owned 602 939
Purchases of Securities (71,271) (102,320)
Net Decrease (Increase) in Loans 7,812 (33,002)
Additions to Goodwill - (95)
Additions to Bank Premises and Equipment (390) (872)
Net Cash Provided by (Applied to)
Investing Activities 3,517 (79,280)
Cash Flows from Financing Activities:
Net Increase in Deposits 14,225 11,343
Repayments of FHLBB Advances
and Other Borrowings (112,542) (64,211)
Net Increase in Repurchase Agreements 5,908 8,300
Advances from FHLB of Boston 87,430 116,854
Proceeds from Exercised Stock Options 386 -
Proceeds from Advances from Credit Line 3,792 -
Purchase of Treasury Stock (3,792) -
Cash Dividends (569) (366)
Net Cash (Applied to) Provided
by Financing Activities (5,162) 71,920
Decrease in Cash and Cash Equivalents (816) (5,431)
Cash and Cash Equivalents - Beginning 22,041 18,851
Cash and Cash Equivalents - Ending $21,225 $13,420
See accompanying notes to consolidated financial statements.
[CAPTION]
NSS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash & Cash Equivalents
Six Months Ended June 30,
1998 1997
($ in thousands)
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION
Cash Paid During the Period For:
Interest $13,184 $12,740
Income Taxes $1,458 $1,468
Non-Cash Investing and Financing Activities:
Loans Receivable Transferred to OREO $1,641 $681
Loans Originated in Connection with
Sale of OREO $1,225 $324
Exchange of Loans for Mortgage-Backed
Securities $1,176 $ -
Transfer of Loans Receivable to
Loans-Held-For-Sale $4,185 $ -
See accompanying notes to consolidated financial statements.
NSS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 (unaudited) and December 31, 1997
NOTE 1 - NATURE OF BUSINESS AND REGULATIONS
NSS Bancorp. Inc. (the Company or Bancorp) is the holding company for NSS
Bank (Bank) (formerly Norwalk Savings Society). The Bank is a Connecticut
state-chartered savings bank which provides a full range of banking
services to its local area customers in and around southern Fairfield
County, Connecticut. 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.
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, 1997,
which information should be read in conjunction with the Company's audited
financial statements and footnotes thereto included in its Annual Report
to Shareholders for the year ended December 31, 1997.
The consolidated financial statements include the accounts of Bancorp,
Bank, and the Bank's wholly owned subsidiary, NSS Realty Corporation (NSS
Realty). 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 valuation of other real estate owned ("OREO"). In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the 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.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," on January 1, 1998. SFAS No.
130 defines total comprehensive income as all changes in equity during a
period from transactions and other events and circumstances from nonowner
sources. Other comprehensive income includes revenues, expenses, gains and
losses that, under generally accepted accounting principles, are included
in comprehensive income but excluded from net income. The Company's other
comprehensive income is generally comprised of unrealized gains and losses
on securities available for sale. Disclosure of comprehensive income for
the 1998 and 1997 periods is presented in the accompanying Consolidated
Statements of Shareholders' Equity.
NOTE 3 -SUPPLEMENTAL DISCLOSURES
Additional information and supporting disclosures as to effective income
tax rates, investment securities, loans, non-performing assets 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 Company, reflected as "Other Borrowings"
on the Consolidated Statements of Financial Condition.
At the 1997 Annual Meeting, shareholders approved the formation of a bank
holding company, and NSS Bancorp, Inc. was organized effective October 1,
1997. Consolidated financial information for all periods prior to October
1, 1997 reflect the financial conditions and results of operations of only
the Bank and NSS Realty.
In February 1998, Bancorp obtained a $15 million line of credit from
another bank in connection with its Treasury Stock Repurchase Program. The
line of credit calls for interest at the prime rate, with a one year
interest-only payment requirement and a four year principal and interest
repayment term. The balance outstanding was $3.8 million at June 30, 1998.
On July 22, 1998, Bancorp's Board of Directors declared a cash dividend of
thirteen cents ($.13) per share to common shareholders of record August 10,
1998 and payable on August 20, 1998.
On June 17, 1998, the Company announced that it had entered into an
agreement with Summit Bancorp (Summit), Princeton, New Jersey, whereby the
Company would be merged with and into Summit in a stock-for-stock exchange
which is expected to close during the fourth quarter of 1998.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
NSS Bancorp, Inc. (the "Company" or "Bancorp") is the holding company for
NSS Bank ("NSS" or the "Bank"). The Company's principal asset consists of
all of the outstanding shares of the Bank. NSS Bancorp was formed
effective October 1, 1997, and is subject to regulation by the Board of
Governors of the Federal Reserve System.
NSS Bank was founded in 1849 and is a Connecticut-chartered capital stock
savings bank, with deposits insured by the Federal Deposit Insurance
Corporation ("FDIC"), headquartered in Norwalk, Connecticut. Its initial
public offering of common stock was effective June 15, 1994. Formerly
Norwalk Savings Society, in February 1998 the Bank changed its name to NSS
Bank to better reflect the nature of its operations.
As a result of the successful completion of its public offering, the Bank
had sufficient capital to meet regulatory requirements, deal with its non-
performing assets, restructure its balance sheet to improve its operating
results, and position itself for long term growth.
In 1996 and continuing into 1997, the Bank embarked on a program of
expanding its business products and services as well as continuing to
provide a full range of personal banking products and services. The Bank
acquired certain assets and assumed essentially all of the liabilities of
Fairfield First Bank & Trust Company ("FFB&T") in an FDIC-assisted
transaction and opened a full service branch office in Darien.
In October 1997 the Bank formed NSS Bancorp, Inc., a holding company, that
will allow the Company to expand or enter into other financial service
activities, capitalizing on its newly acquired business customer base and
affording it the opportunity to expand its services to its existing
consumer relationships. This reemphasis has not changed the Company's
strong commitment to the communities where its business and consumer
customers live and work.
In order to respond to the community's significant demand for credit, and
at the same time manage balance sheet growth, in 1997 and continuing in
1998, the Bank expanded its correspondent loan program, whereby it acts as
an agent for third party lenders and receives a fee for its origination
efforts.
Early in 1997, the Bank adopted an income tax strategy to grow the
investment securities portfolio with callable preferred securities which
provide dividend income, a substantial portion of which is exempt from
State and Federal income taxation. The result of this strategy is a lower
than normal effective income tax rate for the Company.
In December 1997, the Company adopted a stock repurchase program under
which the Company agreed to repurchase up to 15% of its issued and
outstanding common stock at market prices in negotiated and/or open market
purchases. The original program was scheduled to expire on March 31, 1998
but was extended through the end of 1998. Under this program, in February
and March 1998, the Company acquired 90,500 shares at a cost of $3.8
million.
The Company reported net earnings of $1.2 million, or basic and diluted
earnings per common share of $.49 and $.46, respectively, for the three
months ended June 30, 1998, and $2.6 million or $1.08 basic and $1.02
diluted earnings per share for the six months ended June 30, 1998.
During the three months ended June 30, 1998, the Company declared a $.13
dividend on common stock to its shareholders. The Company's stock price
rose from $37.75 per share on January 1, 1998 to $47.25 per share on March
31, 1998 and $56.00 on June 30, 1998.
The Company's tier one leverage capital ratio was 7.9% as of June 30, 1998,
qualifying it as "well capitalized" according to standards established by
bank regulatory authorities.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended
June 30, 1998 and 1997
General
Net earnings for the three months ended June 30, 1998 were $1.2 million, or
$.49 and $.46 per common share, on a basic and diluted basis, respectively.
The Bank's net earnings were $1.2 million, or $0.48 and $0.46 per common
share on a basic and diluted basis, respectively, for the comparable period
of 1997.
The Bank recognized a $150,000 provision for credit losses in the three
months ended June 30, 1998. There was no provision for credit losses in
the same period of 1997.
There was a significant increase in correspondent loan program fees for the
three months ended June 30, 1998 compared to 1997.
There was a decrease in gains from the sales of securities and loans for
the three months ended June 30, 1998 compared to the same period in 1997.
Net Interest Income
Net interest income, which is the primary source of income for the Bank, is
the difference between the interest, fees and dividends earned on loans and
investments, and the interest paid on deposits and borrowings.
Net interest income was $5.0 million for the three months ended June 30,
1998, an increase of 8.3% over the $4.6 million for the three months ended
June 30, 1997. The $379 thousand increase resulted from an increase in
interest income of $464 thousand partially offset by an $85 thousand
increase in interest expense. The $464 thousand increase in interest
income was attributable to a $246 thousand increase in volume and a $218
thousand increase in rate, while the $85 thousand increase in interest
expense resulted from a $106 thousand increase due to volume and a $21
thousand decrease related to rate.
The 4.2% increase in interest income, from $11.2 million in 1997 to $11.6
million in 1998, was primarily attributable to the growth in the securities
portfolio, partially offset by the decrease in the interest income from the
loan portfolio. The 1.3% increase in interest expense, from $6.6 million
in 1997 to $6.7 million in 1998, resulted primarily from the increase in
interest expense attributable to the increased level of money market
deposits, partially offset by a favorable rate variance on time deposit
accounts.
On an overall basis, the Bank was able to increase its net interest income
through a combination of favorable rate spreads on its increased volume
while continuing to control the rate component of the cost of funds.
The following table summarizes the Bank's net interest income and net yield
on average interest-earning assets. Non-accruing loans are included in
average loans outstanding during the periods, and daily average amounts
were used to compute average balances.
[CAPTION]
Table 1 Three Months Ended June 30, 1998
Compared to
Three Months Ended June 30, 1997
($ thousands) 1998
Average Average
Balance Interest Rate
Interest-Earning Assets
Loans Receivable $426,574 $ 8,214 7.70%
Investment Securities 54,882 844 6.15
Mortgage-Backed Securities 97,731 1,465 6.00
Short-Term Investments 21,297 295 5.54
Marketable Equities 39,966 825 8.26
Total Interest-Earning Assets 640,450 11,643 7.27%
Non-Interest-Earning Assets
Cash and Cash Equivalents 11,091
Accrued Income Receivable 4,237
Premises and Equipment 3,661
Other 12,478
Less: Allowance for Credit
Losses (5,449)
Total Non-Interest-
Earning Assets 26,018
Total Assets $666,468
Interest-Bearing Liabilities
Deposits
Regular Savings and NOW $ 66,875 262 1.57%
Super Savings and Money Market 112,613 965 3.43
Time 237,261 3,131 5.28
Total Deposits 416,749 4,358 4.18
Borrowings 155,577 2,301 5.92
Mortgage Escrow Deposits 3,578 27 3.02
Total Interest-Bearing
Liabilities 575,904 6,686 4.64
Non-Interest-Bearing Liabilities
Non-Interest-Bearing Deposits 32,181
Other Liabilities 2,153
Total Non-Interest-Bearing
Liabilities 34,334
Shareholders' Equity 56,230
Total Liabilities and
Shareholders' Equity $666,468
Net Interest-Earning Assets
and Interest Rate Spread $ 64,546 2.64%
Net Interest Income and
Net Yield on Average
Interest-Earning Assets $ 4,957 3.10%
($ thousands) 1997
Average Average
Balance Interest Rate
Interest-Earning Assets
Loans Receivable $437,105 $ 8,334 7.63%
Investment Securities 50,849 957 7.53%
Mortgage-Backed Securities 85,827 1,487 6.93%
Short-Term Investment 11,392 167 5.86%
Marketable Equities 34,548 234 2.71%
Total Interest-Earning
Assets 619,721 11,179 7.22%
Non-Interest-Earning Assets
Cash and Cash Equivalents 10,167
Accrued Income Receivable 5,849
Premises and Equipment 3,484
Other 6,519
Less: Allowance for
Credit Losses (7,128)
Total Non-Interest-
Earning Assets 18,891
Total Assets $638,612
Interest-Bearing Liabilities
Deposits
Regular Savings and NOW $ 62,181 254 1.63%
Super Savings and Money Market 95,616 769 3.22%
Time 238,810 3,241 5.43%
Total Deposits 396,607 4,264 4.30%
Borrowings 157,643 2,308 5.86%
Mortgage Escrow Deposits 4,094 29 2.83%
Total Interest-Bearing
Liabilities 558,344 6,601 4.73%
Non-Interest-Bearing Liabilities
Non-Interest-Bearing Deposits 27,429
Other Liabilities 1,833
Total Non-Interest-
Bearing Liabilities 29,262
Shareholders' Equity 51,006
Total Liabilities and
Shareholders' Equity $638,612
Net Interest-Earning Assets
and Interest Rate Spread $ 61,377 2.49%
Net Interest Income
and Net Yield on Average
Interest-Earning Assets $4,578 2.95%
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-earning assets and interest-bearing
liabilities during the three months ended June 30, 1998 and 1997. Changes
which are attributable to both rate and volume have been allocated
proportionately.
[CAPTION]
Table 2 THREE MONTHS ENDED JUNE 30, 1998
COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET
RATE VOLUME CHANGE
(in thousands)
INTEREST INCOME
Loans Receivable $ 77 ($197) ($120)
Mortgage-Backed Securities (214) 192 (22)
Short-Term Investments (9) 137 128
Investment Securities 364 114 478
Total 218 246 464
INTEREST EXPENSE
Deposits
Savings and Other 10 (18) (8)
Super Savings and Money Market (52) (144) (196)
Time 89 21 110
Total Deposits 47 (141) (94)
Borrowings (24) 31 7
Mortgage Escrow Deposits (2) 4 2
Total 21 (106) (85)
CHANGE IN NET INTEREST INCOME $239 $140 $379
Provision for Credit Losses
The improvement in asset quality resulted in a $150 thousand provision
for credit losses in the 1998 period and no provision during the 1997
period. (See Financial Condition - Non-Performing Assets/Asset Quality).
Non-Interest Income
Non-interest income consists of deposit service charges and fees, fees
derived from both servicing and originating loans for others, net
realized and unrealized gains on securities, net gain on sale of loans,
fees derived from the Bank's Trust Department and the credit card
program.
The table below identifies the primary components of Non-interest income,
which are Fees and Gains on sales of Assets.
[CAPTION]
Table 3 - Non-Interest Income Three Months Ended June 30,
($ thousands)
1998 1997
Non-Interest Income
Fee Income:
Loan Servicing Fees $ 38 $ 45
Other Loan Fees 63 71
Deposit Service Charges 218 205
Credit Card Fees 439 393
Trust Department Fees 161 137
Correspondent Loan Program Fees 208 21
Other 50 52
Total Fees 1,177 924
Gains on Sales of Assets:
Net Gains on Securities 149 338
Net Gain on Sale of Loans - -
Total Gains on Sales of Assets 149 338
Total Non-Interest Income $1,326 $1,262
Non-interest income increased from $1.26 million for the three months
ended June 30, 1997 to $1.33 million, an increase of 5.1% for the
comparable period in 1998. Total fees for the three months ended June
30, 1997 were $900 thousand compared to $1.2 million for the three months
ended June 30, 1998; the increase of $253 thousand, or 27.4%, was due
primarily to increases in correspondent loan program fees and credit card
fees.
The other component of Non-interest income is Gains on Sales of Assets.
The Bank continues to derive a significant portion of its non-interest
income from its Trading portfolio investment strategy whereby covered
call options are sold against high quality equities, primarily for yield
enhancement.
Non-Interest Expense
Non-interest expense is comprised of general and administrative expenses
incurred in managing the business of the Bank and costs associated with
managing and selling OREO properties.
The table that follows indicates the elements of Non-interest expense,
including OREO related expense, which is directly related to the level of
non-performing assets.
[CAPTION]
Table 4 - Non-Interest Expense
Three Months Ended June 30,
($ thousands)
1998 1997
General and Administrative Expense
Compensation $1,494 $1,360
Employee Benefits 614 475
Occupancy and Equipment 423 435
Credit Card Processing 364 298
Data Processing 256 257
Regulatory Assessments 14 13
Marketing 200 158
Legal and Professional 291 253
Printing, Postage and Office Supplies 218 190
Insurance 46 49
Amortization of Goodwill 81 81
Other 324 358
Total 4,325 3,927
OREO Related Expense
Net Holding Costs and Expenses 26 14
Net Gain on Sales of OREO (14) (28)
Total 12 (14)
Total Non-Interest Expense $4,337 $3,913
Non-interest expense was $3.9 million for the three months ended June 30,
1997, compared to $4.3 million for the same period in 1998, an increase
of 10.8%.
Overall, Non-interest expense did not increase significantly; however,
the general and administrative expense component increase was comprised
of three major categories: Compensation and benefits, Marketing, and
Legal and professional.
General and Administrative Expense
Of the total increase of $398 thousand in general and administrative
expense, a significant part of the increase was attributable to
compensation and benefits. The cost of the Employee stock ownership
program (ESOP) accounts for a significant portion of the benefits
expenses.
The increase in Marketing expense resulted from the continued efforts to
promote the Bank's products and services, while the increased Legal and
Professional costs resulted from costs associated with the holding
company and shareholder relations.
OREO Related Expenses
OREO related expenses continued to decline to nominal levels.
Provision for Income Taxes
The Company's income is subject to Federal and State taxation at a
combined rate approximating 40%. The Bank's effective tax rate for the
three months ended June 30, 1997 was 40.3%, compared to the Company's
effective tax rate of 35.5% for the comparable period in 1998. The
decrease was substantially due to the tax savings from the dividend
earnings on the Bank's equity securities portfolio, a substantial portion
of which is exempt from both State and Federal taxation.
[CAPTION]
Three Months Ended June 30,
1998 1997
($ thousands)
Amount % Amount %
Tax at Statutory Federal Rate $610 34.0 $655 34.0
State Tax, Net of Federal Benefit 96 5.3 128 6.6
Non-Deductible ESOP Expense Provision 55 3.1 43 2.2
Dividends Received Deduction (127) (7.1) (49) (2.5)
Other, Net 4 0.2 - -
Total $638 35.5% $777 40.3%
RESULTS OF OPERATIONS
Comparison of Operating Results for the Six Months Ended
June 30, 1998 and 1997
General
Net earnings for the six months ended June 30, 1998 were $2.6 million, or
$1.08 and $1.02 per common share, on a basic and diluted basis,
respectively. The Bank's net earnings were $2.2 million, or $.91 and
$.88 per common share on a basic and diluted basis, respectively, for the
comparable period of 1997.
The Bank recognized a $150,000 provision for credit losses in the six
months ended June 30, 1998. There was no provision for credit losses in
the same period of 1997.
There was a significant increase in correspondent loan program fees for
the six months ended June 30, 1998 compared to 1997.
There was a significant increase in gains from the sales of securities
and loans for the six months ended June 30, 1998 compared to the same
period in 1997.
Net Interest Income
Net interest income, which is the primary source of income for the Bank,
is the difference between the interest, fees and dividends earned on
loans and investments, and the interest paid on deposits and borrowings.
Net interest income was $10.1 million for the six months ended June 30,
1998, an increase of 8.9% over the $9.2 million for the six months ended
June 30, 1997. The $824 thousand increase resulted from an increase in
interest income of $1.3 million partially offset by a $475 thousand
increase in interest expense. The $1.3 million increase in interest
income was attributable to an $819 thousand increase in volume and a $480
thousand increase in rate, while the $475 thousand increase in interest
expense resulted from a $465 thousand increase due to volume and a $10
thousand increase related to rate.
The 5.9% increase in interest income, from $22.0 million in 1997 to $23.3
million in 1998, was primarily attributable to the growth in dividend
income from the investment portfolio; the increase in the interest income
from the loan portfolio was attributable primarily to rate. The 3.7%
increase in interest expense, from $12.8 million in 1997 to $13.3 million
in 1998, resulted primarily from the increase in interest expense
attributable to the increased level of money market deposits, partially
offset by a favorable rate variance on time deposit accounts, and a
significant increase in borrowings.
On an overall basis, the Bank was able to increase its net interest
income through a combination of favorable rate spreads on its increased
volume while continuing to control the rate component of the cost of
funds.
The following table summarizes the Bank's net interest income and net
yield on average interest-earning assets. Non-accruing loans are
included in average loans outstanding during the periods, and daily
average amounts were used to compute average balances.
[CAPTION]
Table 1
Six Months ended June 30, 1998
Compared to
Six Months Ended June 30, 1997
($ thousands) 1998
Average Average
Balance Interest Rate
Interest-Earning Assets
Loans Receivable $423,256 $16,621 7.85%
Investment Securities 60,773 1,700 5.59%
Mortgage-Backed Securities 96,524 3,116 6.46%
Short-Term Investments 21,864 580 5.31%
Marketable Equities 41,033 1,306 6.37%
Total Interest-Earning Assets 643,450 23,323 7.25%
Non-Interest-Earning Assets
Cash and Cash Equivalents 11,004
Accrued Income Receivable 4,618
Premises and Equipment 3,691
Other 12,646
Less: Allowance for
Credit Losses (5,433)
Total Non-Interest-
Earning Assets 26,526
Total Assets $669,976
Interest-Bearing Liabilities
Deposits
Regular Savings and NOW $ 68,378 518 1.52%
Super Savings and Money Market 116,395 1,808 3.11%
Time 234,542 6,321 5.39%
Total Deposits 419,315 8,647 4.12%
Borrowings 155,108 4,566 5.89%
Mortgage Escrow Deposits 3,884 48 2.47%
Total Interest-Bearing
Liabilities 578,307 13,261 4.59%
Non-Interest-Bearing Liabilities
Non-Interest-Bearing Deposits 33,946
Other Liabilities 2,189
Total Non-Interest-Bearing
Liabilities 36,135
Shareholders' Equity 55,534
Total Liabilities and
Shareholders' Equity $669,976
Net Interest-Earning Assets
and Interest Rate Spread $65,143 2.66%
Net Interest Income and
Net Yield on Average
Interest-Earning Assets $10,062 3.13%
Six Months Ended June 30, 1998
Compared to
Six Months Ended June 30, 1997
($ thousands) 1997
Average Average
Balance Interest Rate
Interest-Earning Assets
Loans Receivable $429,410 $16,297 7.59%
Investment Securities 45,357 1,656 7.30%
Mortgage-Backed Securities 90,978 3,253 7.15%
Short-Term Investments 11,684 364 6.23%
Marketable Equities 26,477 454 3.43%
Total Interest-Earning Assets 603,906 22,024 7.29%
Non-Interest-Earning Assets
Cash and Cash Equivalents 12,439
Accrued Income Receivable 5,100
Premises and Equipment 3,393
Other 6,909
Less: Allowance for Credit
Losses (7,304)
Total Non-Interest-Earning
Assets 20,537
Total Assets $624,443
Interest-Bearing Liabilities
Deposits
Regular Savings and NOW $ 59,834 475 1.59%
Super Savings and Money Market 94,713 1,498 3.16%
Time 239,609 6,484 5.41%
Total Deposits 394,156 8,457 4.29%
Borrowings 146,780 4,278 5.83%
Mortgage Escrow Deposits 3,688 51 2.77%
Total Interest-Bearing
Liabilities 544,624 12,786 4.70%
Non-Interest-Bearing Liabilities
Non-Interest-Bearing Deposits 26,497
Other Liabilities 2,505
Total Non-Interest-Bearing
Liabilities 29,002
Shareholders' Equity 50,817
Total Liabilities and
Shareholders' Equity $624,443
Net Interest-Earning Assets
and Interest Rate Spread $59,282 2.59%
Net Interest Income and Net Yield
on Average Interest-Earning Assets $9,238 3.06%
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-earning assets and interest-
bearing liabilities during the six months ended June 30, 1998 and 1997.
Changes which are attributable to both rate and volume have been
allocated proportionately.
[CAPTION]
Table 2
SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO
SIX MONTHS ENDED JUNE 30, 1997
NET
RATE VOLUME CHANGE
(in thousands)
INTEREST INCOME
Loans Receivable $393 $(69) $ 324
Mortgage-Backed Securities (205) 68 (137)
Short-Term Investments (15) 231 216
Investment Securities 307 589 896
Total 480 819 1,299
INTEREST EXPENSE
Deposits
Savings and Other 6 (49) (43)
Super Savings and Money Market 0 (310) (310)
Time 24 139 163
Total Deposits 30 (220) (190)
Borrowings (44) (244) (288)
Mortgage Escrow Deposits 4 (1) 3
Total (10) (465) (475)
CHANGE IN NET INTEREST INCOME $470 $354 $824
Provision for Credit Losses
The Bank provided $150,000 for loan losses in the 1998 period and no
provision during the comparable period in 1997. (See Financial Condition
- - Non-Performing Assets/Asset Quality).
Non-Interest Income
Non-interest income consists of deposit service charges and fees, fees
derived from both servicing and originating loans for others, net
realized and unrealized gains on securities, net gain on sale of loans,
fees derived from the Bank's Trust Department and the credit card
program.
The table below identifies the primary components of Non-interest income,
which are Fees and Gains on sales of Assets.
[CAPTION]
Table 3 - Non-Interest Income
Six Months Ended June 30,
($ thousands)
1998 1997
Non-Interest Income
Fee Income:
Loan Servicing Fees $ 127 $ 152
Other Loan Fees 77 80
Deposit Service Charges 425 406
Credit Card Fees 776 687
Trust Department Fees 310 278
Correspondent Loan Program Fees 362 36
Other 105 120
Total Fees 2,182 1,759
Gains on Sales of Assets:
Net Gains on Securities 360 363
Net Gain on Sale of Loans 119 -
Total Gains on Sales of Assets 479 363
Total Non-Interest Income $2,661 $2,122
Non-interest income increased from $2.1 million for the six months ended
June 30, 1997 to $2.7 million, an increase of 25.4% for the comparable
period in 1998. Total fees for the six months ended June 30, 1997 were
$1.8 million compared to $2.2 million for the six months ended June 30,
1998; the increase of $423 thousand, or 24.0%, was due primarily to
increases in correspondent loan program fees.
The other component of Non-interest income is Gains on Sales of Assets.
The Bank continues to derive a significant portion of its non-interest
income from its Trading portfolio investment strategy whereby covered
call options are sold against high quality equities, primarily for yield
enhancement. During the six months ended June 30, 1998, the Bank sold
certain residential loans which it had previously identified as Held-for-
Sale as of December 31, 1997 and recognized gains of approximately $119
thousand.
Non-Interest Expense
Non-interest expense is comprised of general and administrative expenses
incurred in managing the business of the Bank and costs associated with
managing and selling OREO properties.
The table that follows indicates the elements of Non-interest expense,
including OREO related expense, which is directly related to the level of
non-performing assets.
[CAPTION]
Table 4 - Non-Interest Expense
Six Months Ended June 30,
($ thousands)
1998 1997
General and Administrative Expense
Compensation $2,897 $2,813
Employee Benefits 1,229 1,043
Occupancy and Equipment 864 920
Credit Card Processing 661 545
Data Processing 492 480
Regulatory Assessments 27 28
Marketing 367 264
Legal and Professional 632 500
Printing, Postage and Office Supplies 421 403
Insurance 96 106
Amortization of Goodwill 163 162
Other 658 544
Total 8,507 7,808
OREO Related Expense
Net Holding Costs and Expenses 56 98
Net Gain on Sales of OREO (44) (208)
Provision for Estimated Losses - -
Total 12 (110)
Total Non-Interest Expense $8,519 $7,698
Non-interest expense was $7.7 million for the six months ended June 30,
1997, compared to $8.5 million for the same period in 1998, an increase
of 10.7%. Overall, Non-interest expense did not increase significantly.
General and Administrative Expense
Of the total increase of $700 thousand in general and administrative
expense, a significant part of the increase was attributable to
compensation and benefits. The cost of the Employee stock ownership
program (ESOP) accounts for a significant portion of the benefits
expenses.
The increase in Marketing expense resulted from the continued efforts to
promote the Bank's products and services, while the increased Legal and
Professional costs resulted from costs associated with the holding
company and shareholder relations.
OREO Related Expenses
OREO related expenses continued to decline to nominal levels.
Provision for Income Taxes
The Company's income is subject to Federal and State taxation at a
combined rate approximating 40%. The Bank's effective tax rate for the
six months ended June 30, 1997 was 40.1%, compared to the Company's
effective tax rate of 36.0% for the comparable period in 1998. The
decrease was substantially due to the tax savings from the dividend
earnings on the Bank's equity securities portfolio, a substantial portion
of which is exempt from both State and Federal taxation.
[CAPTION]
Six Months Ended June 30,
1998 1997
($ thousands)
Amount % Amount %
Tax at Statutory Federal Rate $1,378 34.0% $1,245 34.0%
State Tax, Net of Federal Benefit 220 5.4% 242 6.6%
Non-Deductible ESOP Expense Provision 104 2.6% 79 2.2%
Dividends Received Deduction (250) (6.2%) (99) (2.7%)
Other, Net 6 0.2% 1 0.0%
Total $1,458 36.0% $1,468 40.1%
FINANCIAL CONDITION
General
Total assets were $651.8 million as of June 30, 1998 representing a $2.4
million decrease from the $654.2 million at December 31, 1997. Total
loans, net of allowance for credit losses, were $413.0 million, a
decrease of $12.8 million from the $425.8 million as of December 31,
1997. Total investment securities were $189.8 million as of June 30,
1998, an increase of $9.3 million from $180.5 million as of December 31,
1997. Total deposits were $458.5 million, an increase of $14.3 million
from the December 31, 1997 level of $444.2 million. Total other borrowed
money was $136.3 million as of June 30, 1998, a decrease of $15.4 million
from the December 31, 1997 level of $151.7 million. Shareholders' equity
was $55.1 million as of June 30, 1998, a decrease of $1.0 million from
the December 31, 1997 level of $56.1 million. The Company's tier one
leverage capital ratio was 7.9% as of June 30, 1998, compared to 8.2% as
of December 31, 1997.
Investment Securities
Total securities amounted to $189.8 million as of June 30, 1998 compared
to $180.5 million at December 31, 1997, representing a $9.3 million
increase or 5.2%. The activity in the investment securities portfolio
resulted from a number of Government Agency Bonds being called during the
first quarter and the Bank reinvested the proceeds into fixed-rate
mortgage-backed securities; during the second quarter the Bank increased
its level of investments in equity securities, primarily in trust
preferred issues, when significant amounts of mortgage-backed securities
prepaid during the period.
The Bank's covered call option program is designed for yield enhancement
and to lessen the Bank's exposure to a potentially volatile stock market.
In this program, the Bank purchases shares of qualified common stock and
sells a call option against the investment. As required by SFAS 115, the
Bank marks the common stock and related covered call option to market
through current period earnings.
Inasmuch as the Bank's equity investment privileges have been
grandfathered by the FDIC, it intends to continue to maintain an equity
stock portfolio. To provide direction, the Bank's Board of Directors has
established upward limits and an investment policy which includes
guidelines that the Bank's equity investments have a minimum quality
rating of "A" by a widely recognized rating service; the policy also
requires adequate diversification to avoid concentrations in lines of
business and geographic regions.
The following table presents a summary of the investments and other
securities portfolios as of June 30, 1998 and December 31, 1997, fair
values and unrealized gains and losses as of those dates.
[CAPTION]
Table 5 - Investment & Other Securities
($ thousands)
June 30, 1998
Amortized Unrealized Holding Fair
Cost Gains Losses Value
Available-for-Sale
U.S. Government and Federal
Agency Obligations $ 35,517 $ 100 $ - $ 35,617
Mortgage-Backed Securities 84,765 154 327 84,592
Equity Securities and Other 65,643 1,795 106 67,332
Total Available-for-Sale $185,925 $2,049 $433 $187,541
Trading
Equity Securities $2,398 $ - $117 $ 2,281
December 31, 1997
Amortized Unrealized Holding Fair
Cost Gains Losses Value
Available-for-Sale
U.S. Government and Federal
Agency Obligations $ 55,122 $ 190 $ 55 $ 55,257
Mortgage-Backed Securities 85,543 461 56 85,948
Equity Securities and Other 36,091 1,429 58 37,462
Total Available-for-Sale $176,756 $2,080 $169 $178,667
Trading
Equity Securities $1,976 $ 4 $150 $1,830
Loans
Total loans, before reductions for deferred credits, fees and the
allowance for credit losses, amounted to $423.1 million as of June 30,
1998, representing a $14.5 million or 3.3% decrease from the December 31,
1997 level of $437.6 million. The overall decrease in the loan portfolio
was not significant. The change in mix in the portfolio reflects the
dynamics of the current interest rate markets.
During the first six months of 1998, the Bank's response to the increased
level of demand for the 30-year residential fixed-rate mortgage was to
utilize the correspondent loan program. Additionally, in conjunction
with the management of the portfolio, the Bank sold or securitized $5.6
million, of which $5.3 million was identified as loans held-for-sale as
of December 31, 1997. At June 30, 1998, the Bank has identified $4.2
million of residential loans held-for-sale.
[CAPTION]
Table 6 - Loan Portfolio
($ thousands)
June 30, 1998 December 31, 1997
Real Estate Loans
One-to-Four Family
Adjustable Rate $257,450 60.85% $278,231 63.59%
One-to-Four Fixed Rate 70,888 16.76% 64,510 14.74%
One-to-Four Held-For-Sale 4,185 0.99% 5,311 1.21%
Multi-Family 2,829 0.67% 5,398 1.24%
Commercial Real Estate 57,532 13.60% 55,124 12.60%
Home Equity Lines-of-Credit 7,406 1.75% 7,632 1.74%
Home Improvement and Second
Mortgage 4,167 0.98% 2,852 0.65%
Land 552 0.13% 640 0.15%
Construction 2,847 0.67% 2,942 0.67%
Total 407,856 96.40% 422,640 96.59%
Commercial Loans 7,463 1.76% 7,587 1.73%
Consumer Loans
Passbook 1,204 0.29% 1,508 0.34%
Automobile Loans 2,048 0.48% 2,332 0.53%
Credit Cards 1,838 0.43% 1,409 0.32%
Other Consumer 2,661 0.64% 2,104 0.49%
Total 7,751 1.84% 7,353 1.68%
Total Loans, Gross 423,070 100.00% 437,580 100.00%
Deferred Fees and Credits (498) (625)
422,572 436,955
Allowance for Credit Losses (5,374) (5,832)
Total Loans, Net 417,198 431,123
One-to-four Family
Held-For-Sale (4,184) (5,311)
Loans, Net $413,014 $425,812
Non-Performing Assets/Asset Quality
The Bank's level of non-performing assets continued to steadily decline
during the years 1996, 1997 and continued into 1998. Total non-
performing assets as of June 30, 1998 were $4.1 million or .63% of
total assets. As of December 31, 1997 non-performing assets were $5.4
million, representing 0.83% of total assets.
The Bank's Watch List is comprised of loans which have been identified
by the Bank's credit analysis system as exhibiting more than usual risk
of non-performance or loss. The Bank's Watch List was $7.5 million at
June 30, 1998, compared to $11.7 million at December 31, 1997.
Of the total non-performing assets, non-performing loans were $3.6
million as of June 30, 1998 compared to $4.8 million as of December 31,
1997. There were no troubled debt restructurings included in non-
performing loans as of December 31, 1997 and June 30, 1998.
The allowance for credit losses amounted to $5.4 million as of June 30,
1998 representing coverage of 147.3% compared to $5.8 million as of
December 31, 1997, representing coverage of 120.3% of non-performing
loans. The credit risk allowance for the FFB&T acquired loans was $573
thousand as of June 30, 1998.
Net charge-offs in the first six months of 1998 were $608 thousand or
14 basis points of the average loan portfolio, compared to $423
thousand or 10 basis points of the average loan portfolio for the six
months ended June 30, 1997.
Details of the Bank's asset quality are shown in the analysis provided
by the following table.
[CAPTION]
Asset Quality
At June 30,
($ thousands) 1998 1997
Non-Performing Assets
Non-Accrual Loans $ 3,647 $ 8,468
Restructured Loans - -
Total Non-Performing Loans 3,647 8,468
Foreclosed Assets 433 485
Allowance for Estimated OREO Losses - -
Total OREO 433 485
Total Non-Performing Assets $ 4,080 $ 8,953
Allowance for Credit Losses
Balance at Beginning of Period $ 5,832 $ 7,334
Provision for Credit Losses 150 -
Allocated to FFB&T Acquired Loans - -
Charge-Offs (1,174) (892)
Recoveries 566 469
Net Charge-Offs (608) (423)
Balance at End of Period $ 5,374 $ 6,911
Allowance for Estimated OREO Losses
Balance at Beginning of Period $ - $ -
Provision for Estimated OREO Losses - -
Charge-Offs - -
Balance at End of Period $ - $ -
Loans Receivable, gross
End of Period 418,886 450,755
Average 423,256 429,410
Assets, end of Period 651,825 663,668
Ratios
Allowance for Credit Losses to
Total Loans 1.28% 1.56%
Net Charge-Offs to Average Loans 0.14% 0.10%
Non-Performing Loans to Total Loans 0.87% 1.91%
Non-Performing Assets to Total Assets 0.63% 1.35%
Allowance for Credit Losses to
Non-Performing Loans 147.35% 81.61%
At December 31,
1997 1996 1995
Non-Performing Assets
Non-Accrual Loans $4,847 $10,441 $12,598
Restructured Loans - - 472
Total Non-Performing Loans 4,847 10,441 13,070
Foreclosed Assets 574 858 4,267
Allowance for Estimated OREO Losses - - -
Total OREO 574 858 4,267
Total Non-Performing Assets $5,421 $11,299 $17,337
Allowance for Credit Losses
Balance at Beginning of Period $7,334 $ 4,170 $ 4,827
Provision for Credit Losses - 4,415 1,005
Allocated to FFB&T Acquired Loans - 1,000 -
Charge-Offs (2,155) (2,488) (1,799)
Recoveries 653 237 137
Net Charge-Offs (1,502) (2,251) (1,662)
Balance at End of Period $5,832 $7,334 $4,170
Allowance for Estimated OREO Losses
Balance at Beginning of Period $ - $ - $ 802
Provision for Estimated OREO Losses - 459 460
Charge-Offs - (459) (1,262)
Balance at End of Period $ - $ - $ -
Loans Receivable, gross
End of Period 432,269 418,818 360,475
Average 435,610 403,207 323,072
Assets, end of Period 654,222 589,589 515,267
Ratios
Allowance for Credit Losses
to Total Loans 1.35% 1.75% 1.16%
Net Charge-Offs to Average Loans 0.34% 0.56% 0.53%
Non-Performing Loans to Total Loans 1.12% 2.49% 3.63%
Non-Performing Assets to Total Assets 0.83% 1.92% 3.36%
Allowance for Credit Losses to
Non-Performing Loans 120.32% 70.24% 31.91%
Deposits
Total deposits at June 30, 1998 were $458.5 million compared to $444.2
million at December 31, 1997, an increase of $14.3 million or 3.2%.
The Bank continues to seek deposits with marketing and sales efforts
concentrated on its new and diversified products. The Bank does not
solicit, nor does it accept, brokered deposits.
The following table presents a summary of deposits as of June 30, 1998
and December 31, 1997.
[CAPTION]
Table 8 - Deposits
June 30, 1998 December 31, 1997
($ in thousands)
Demand Deposits $ 36,620 8.0% $ 27,471 6.2%
Savings
Regular Savings 29,491 6.4% 29,455 6.6%
Super Savings 44,254 9.7% 47,863 10.8%
NOW 39,095 8.5% 37,287 8.4%
Money Market 73,282 16.0% 55,541 12.5%
Escrow Deposits 4,653 1.0% 4,727 1.1%
Certificates
Certificate Accounts 182,378 39.8% 204,129 45.9%
Money Market Certificates 48,677 10.6% 37,738 8.5%
Total Deposits $458,450 100.0% $444,211 100.0%
Federal Home Loan Bank of Boston Advances and Other Borrowings
The Bank continues to utilize the FHLB as a source of funds alternative
to the traditional deposit account relationship. As of June 30, 1998
borrowings totaled $85.9 million compared to $110.9 million as of
December 31, 1997. In addition, the Bank increased the use of the
reverse repurchase agreement as a means to borrow funds. These
agreements are essentially collateralized borrowings, similar to FHLB
borrowings, and to the extent that the rates and terms are more
favorable, the Bank utilizes the reverse repurchase agreement in lieu
of an FHLB borrowing. As of June 30, 1998, borrowings outstanding
under reverse repurchase agreements were $46.4 million compared to
$40.4 million as of December 31, 1997.
The Company has reflected the guaranty of the ESOP loan as an
obligation in accordance with applicable accounting requirements. This
loan was a five-year adjustable rate loan (convertible to a fixed rate
at the Bank's option) with interest and principal payable monthly. In
1997 the Company refinanced the loan into a two-year fixed rate loan.
The outstanding balance was $193 thousand as of June 30, 1998.
Borrowings from the FHLB, reverse repurchase agreements and the ESOP
loan amounted to $136.3 million as of June 30, 1998 at a weighted
average rate of 5.7% and a weighted average maturity of 1.9 years,
compared to $151.7 million at a weighted average rate of 5.8% and a
weighted average maturity of 1.4 years at December 31, 1997. As a
percentage of total assets, these borrowings amounted to 20.9% as of
June 30, 1998 compared to 23.2% as of December 31, 1997.
As a means of financing the repurchases of its stock, the Company
arranged for a line of credit from another bank in the amount of $15.0
million. As of June 30, 1998 there was $3.8 million in the outstanding
balance.
Shareholders' Equity
Shareholders' equity at June 30, 1998 decreased to $55.1 million from
$56.1 million at December 31, 1997, reflecting tier 1 regulatory
leverage capital ratios of 7.9% and 8.2%, respectively.
As of June 30, 1998, in conjunction with the Company's stock repurchase
program, the Company had acquired 90,500 shares at a cost of $3.8
million.
The following table indicates required and actual levels of capital for
the Company and the Bank as of June 30, 1998 and December 31, 1997.
[CAPTION]
Regulatory Capital Required Actual Actual
June 30, 1998 December 31, 1997
Company
Tier 1 Risk-Based Capital 4.0% 14.3% 15.4%
Total Risk-Based Capital 8.0% 15.5% 16.6%
Tier 1 Leverage Capital 4.0% - 5.0% 7.9% 8.2%
Bank
Tier 1 Risk-Based Capital 4.0% 14.1% 14.3%
Total Risk-Based Capital 8.0% 15.4% 15.5%
Tier 1 Leverage Capital 4.0% - 5.0% 7.8% 7.6%
Liquidity and Interest Rate Management
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, 1998 the Bank's primary liquidity, consisting
of cash, cash equivalents, marketable securities with maturities of one
year or less and loans held for sale was $82.1 million or 12.6% of
total assets. In addition, liquidity is the ability of the Company to
meet its cash flow requirements to pay operating expenses, dividends,
and other payments as may be necessary.
The Company's liquidity is provided by dividends from its wholly owned
subsidiary, the Bank. The Bank's ability to pay dividends is
restricted by Connecticut law to the Bank's net profits in the current
year, plus retained net profits from the two most recent fiscal years.
The Company may effect borrowings from time to time to meet specific
liquidity needs.
The Bank's primary sources of funds are 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, 1998, the Bank had approved loan commitments outstanding
for one-to four-family loans of $8.9 million. In addition, there was
$9.8 million of unused credit under the home equity line-of-credit
facility, $1.0 million under the overdraft protection credit line
facility, and $2.7 million in unused credit card lines. The unadvanced
portion of residential construction loans amounted to $1.8 million.
There were $8.4 million in approved loan commitments and $1.2 million
in approved line-of-credit commitments in the Commercial Lending
Department, $3.9 million in unused commercial lines of credit and $0.2
million in commercial letters of credit outstanding.
Management believes that the Company's liquidity is currently in a
position to meet normal operating needs. To meet unexpected demands,
the Bank maintains a line of credit with the FHLB. At June 30, 1998,
this line of credit was $11.8 million, of which no amount was
outstanding.
Management also believes that the capital positions of the Company and
the Bank are currently adequate to meet present needs and anticipated
growth. (See Shareholders' Equity).
Market Price of Common Stock
NSS Bancorp (Norwalk Savings Society prior to October 1, 1997) trades
on the NASDAQ National Market under the symbol "NSSY".
The following table sets forth the high/low price range as reported by
NASDAQ and dividends paid for the periods indicated:
[CAPTION]
1998 1997
High Low Div. High Low Div.
First Quarter $48.50 $36.63 $0.10 $26.25 $22.94 $0.05
Second Quarter $57.13 $42.00 $0.13 $31.00 $23.00 $0.10
Third Quarter $ - $ - $ - $37.50 $28.25 $0.10
Fourth Quarter $ - $ - $ - $40.25 $31.75 $0.10
1996
High Low Div.
First Quarter $22.00 $18.75 $ -
Second Quarter $22.25 $17.94 $0.05(a)
Third Quarter $23.13 $20.88 $0.05
Fourth Quarter $24.88 $22.75 $0.05
(a) The Bank began paying dividends in the second quarter of 1996.
At June 30, 1998 NSS Bancorp had approximately 700 shareholders of
record.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There has been no material change from December 31, 1997 to June 30,
1998, in either the qualitative or quantitative market risks, from the
disclosures provided in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
[CAPTION]
NSS BANCORP, INC. SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
FINANCIAL CONDITION DATA June 30,
($ thousands) 1998 1997
Total assets $651,825 $663,668
Investment securities 189,822 184,965
Loans receivable 418,388 450,041
Allowance for credit losses (5,374) (6,911)
Deposits 458,450 435,031
Borrowed funds 136,260 174,986
Shareholders' equity 55,141 51,910
OREO, net 433 485
Non-accrual/non-performing loans 3,647 8,468
Total non-performing assets 4,080 8,953
EARNINGS DATA Six Months June 30,
($ thousands, except per share data) 1998 1997
Net interest income $10,062 $9,238
Provision for credit losses 150 0
Net gains on sales of assets
and liabilities 349 186
Other non-interest income 2,312 1,936
OREO related costs (gain), net 12 (110)
Other non-interest expense 8,507 7,808
Income before income tax provisions 4,054 3,662
Current tax provision 1,314 788
Deferred tax provision (benefit) 144 680
Income before ADP program 2,596 2,194
Effect of ADP program 0 0
Net income (loss) $2,596 $2,194
Income per share: Basic $ 1.08 $ 0.91
Income per share: Assuming Dilution $ 1.02 $ 0.88
NSS BANCORP, INC. SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
FINANCIAL CONDITION DATA December 31,
($ thousands) 1997 1996 1995
Total assets $654,222 $589,589 $515,267
Investment securities 180,497 140,101 123,865
Loans receivable 431,644 418,100 359,966
Allowance for credit losses (5,832) (7,334) (4,170)
Deposits 444,211 423,290 402,797
Borrowed funds 151,671 114,043 67,123
Shareholders' equity 56,138 49,353 43,595
OREO, net 574 858 4,267
Non-accrual/non-performing loans 4,847 10,441 13,070
Total non-performing assets 5,421 11,299 17,337
EARNINGS DATA Years ended December 31,
($ thousands, except per share data) 1997 1996 1995
Net interest income $19,373 $17,615 $14,617
Provision for credit losses 0 4,415 2,105
Net gains on sales of assets
and liabilities 1,459 4,156 798
Other non-interest income 3,787 2,687 1,897
OREO related costs (gain), net (103) 1,362 1,415
Other non-interest expense 15,827 14,104 11,304
Income before income tax provisions 8,895 4,577 2,488
Current tax provision 1,973 175 10
Deferred tax provision (benefit) 1,357 (1,300) (1,200)
Income before ADP program 5,565 5,702 3,678
Effect of ADP program 0 0 1,100
Net income (loss) $5,565 $5,702 $4,778
Income per share: Basic $ 2.31 $ 2.39 $ 2.04
Income per share: Assuming Dilution $ 2.20 $ 2.34 $ 2.03
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (cont.)
PERFORMANCE, CAPITAL and ASSET QUALITY RATIOS
Six Months June 30,
1998 1997
Performance:
Tangible book value per share
at period end $22.62 $20.84
Return on average assets:
Before ADP program 0.78% 0.71%
After ADP program n/a n/a
Return on average equity
Before ADP program 9.24% 8.62%
After ADP program n/a n/a
Net interest margin 3.13% 3.06%
Capital:
Tier 1 leverage 7.92% 7.76%
Total risk-based 15.51% 15.28%
Asset quality:
Non-performing assets to total assets 0.63% 1.35%
Non-performing loans to total loans 0.87% 1.91%
Allowance for credit losses to
non-performing loans 147.35% 81.61%
Allowance for credit losses to
loans receivable 1.28% 1.56%
Years ended December 31,
1997 1996 1995
Performance:
Tangible book value per
share at period end $22.44 $19.90 $18.44
Return on average assets:
Before ADP program 0.87% 0.97% 0.76%
After ADP program n/a n/a 0.99%
Return on average equity
Before ADP program 10.54% 12.52% 8.97%
After ADP program n/a n/a 11.65%
Net interest margin 3.11% 3.12% 3.17%
Capital:
Tier 1 leverage 8.18% 7.90% 8.43%
Total risk-based 16.61% 17.00% 17.90%
Asset quality:
Non-performing assets
to total assets 0.83% 1.92% 3.36%
Non-performing loans
to total loans 1.12% 2.50% 3.63%
Allowance for credit losses
to non-performing loans 120.32% 70.24% 31.91%
Allowance for credit losses
to loans receivable 1.35% 1.75% 1.16%
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
1. July 2, 1998...The Company reported that it had entered into an
agreement dated June 17, 1998 which provided for the merger of the
company with and into Summit Bancorp, Princeton, New Jersey, in a
stock-for-stock exchange which is expected to close in the fourth
quarter of 1998.
Exhibit Index
Exhibit Pages of
Number this Report
27.2 Financial Data Schedule 33 - 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the
undersigned duly authorized.
NSS BANCORP, Inc.
Registrant
Date : August 13, 1998 by: /s/ Robert T. Judson
Robert T. Judson
President & CEO
Date : August 13, 1998 by: /s/ Marcus I. Braverman, CPA
Marcus I. Braverman
Sr. VP, Treasurer & CFO