UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-QSB
-----------------------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending 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 0-25814
----------------------------------------
N S & L Bancorp, Inc.
---------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1709446
- -------------------------------------- -------------------
(State or other jurisdiction of I.R.S. (I.R.S. Employer
Employer Incorporation or organization) Identification No.)
P.O. Box 369, Neosho, MO 64850
- -------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(417) 451-0429
- --------------------------------------
(Registrant's telephone number)
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 twelve 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
----- -----
As of August 2, 1998, there were 649,019 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
N S & L BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
June 30, 1998
INDEX PAGE
- ----- ----
PART I-FINANCIAL INFORMATION
- ----------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited) 1-2
CONSOLIDATED STATEMENTS OF INCOME (unaudited) 3-4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 5-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7-9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-15
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES
HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES
N S & L BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
-----------------------------------------
(Unaudited)
June 30, September 30,
1998 1997
-------- -------------
(Dollars in thousands)
ASSETS
------
Cash and cash equivalents, including
interest-bearing accounts of $9,620 at $ 10,157 $ 5,521
June 30 and $4,844 at September 30
Certificates of deposit 872 377
Investment securities available-for-sale,
at fair value 230 267
Investment securities held-to-maturity
(estimated market value of $9,083 at June 30
and $13,460 at September 30) 9,638 13,473
Mortgage-backed securities held-to-maturity
(estimated market value of $3,448 at June 30
and $4,608 at September 30.) 3,344 4,473
Loans receivable, net (reserves for loan losses
of $50 at June 30 and $44 at September 30) 36,653 33,879
Accrued interest receivable 375 454
Property and equipment, less accumulated
depreciation 1,131 1,148
Intangible assets 81 84
Other assets 167 141
--------- ----------
Total assets $ 62,648 $ 59,817
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Customer deposits $ 48,087 $ 43,892
Advances from FHLB 2,000 3,000
Advances from borrowers for taxes
and insurance 217 317
Income taxes payable - current 35 35
Deferred income taxes 382 413
Other liabilities 352 335
--------- ----------
Total liabilities 51,073 47,992
--------- ----------
Commitments and contingencies -- --
Preferred stock, $.01 par value;
2,000,000 shares authorized, none
issued -- --
Common stock, $.01 par value; 8,000,000
shares authorized, 886,314 issued and
685,858 outstanding at June 30 and
711,666 at September 30 9 9
Paid-in capital 8,502 8,461
See accompanying notes to Consolidated Financial Statements.
1
N S & L BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
-----------------------------------------
(Unaudited)
June 30, September 30,
1998 1997
-------- -------------
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)
- ------------------------------------------------
Retained earnings - substantially restricted 6,584 6,494
Treasury Stock - at cost; 200,456 shares at
June 30, 1998 and 174,648 at September 30,
1997 (2,895) (2,414)
Unearned compensation (673) (780)
Unrealized gain on investment securities
available-for-sale, net of applicable
deferred income taxes 48 55
--------- ----------
Total stockholders' equity 11,575 11,825
--------- ----------
Total liabilities and stockholders'
equity $ 62,648 $ 59,817
========= ==========
See accompanying notes to Consolidated Financial Statements.
2
N S & L BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------
(Unaudited) (Unaudited)
Quarter Ended June 30, Nine Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands) (Dollars in thousands)
Interest Income:
Loans receivable $ 684 $ 606 $1,994 $1,759
Investment securities 176 222 540 660
Mortgage-backed and
related securities 72 89 232 275
Other interest-earning
assets 101 58 254 197
------ ------ ------ ------
Total interest income 1,033 975 3,020 2,891
------ ------ ------ ------
Interest Expense:
Customer deposits 530 470 1,529 1,423
Borrowed funds 17 43 56 110
------ ------ ------ ------
Total interest expense 547 513 1,585 1,533
------ ------ ------ ------
Net interest income 486 462 1,435 1,358
Provision for loan losses -- -- 6 1
------ ------ ------ ------
Net interest income
after provision for
loan losses 486 462 1,429 1,357
------ ------ ------ ------
Noninterest Income:
Gain on sale of
investments 18 -- 18 37
Banking service charges
and fees 41 31 117 108
Loan late charges 2 1 6 5
Mortgage banking fees 59 -- 168 --
Other 3 4 4 17
------ ------ ------ ------
Total noninterest
income 123 36 313 167
------ ------ ------ ------
Noninterest Expense:
Compensation and
employee benefits 231 175 682 535
Occupancy and equipment 50 36 144 111
Deposit insurance premium 7 7 21 32
Data processing 25 15 75 61
Printing, postage,
stationery and supplies 11 14 45 47
Professional fees 8 13 42 43
Other 45 29 181 127
------ ------ ------ ------
Total noninterest
expense 377 289 1,190 956
------ ------ ------ ------
Income before taxes 232 209 552 568
Income Taxes 85 70 205 180
------ ------ ------ ------
Net income $ 147 $ 139 $ 347 $ 388
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
3
N S & L BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------
(Unaudited) (Unaudited)
Quarter Ended June 30, Nine Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands) (Dollars in thousands)
Basic earnings per share $ .23 $ .21 $ .54 $ .57
====== ====== ====== ======
Diluted earnings per share $ .23 $ .21 $ .53 $ .57
====== ====== ====== ======
Dividends per share $ .125 $ .125 $ .375 $ .375
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
4
N S & L BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------
Nine Months Ended June 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 347 $ 388
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 68 63
Amortization 3 --
Premiums and discounts on mortgage-backed
securities and investment securities (90) (74)
Loss on loans, net of recoveries 6 1
Release of ESOP shares 92 79
Vesting of MRDP shares 56 55
Gain on call of investments (15) --
Gain on sale of investments (18) (37)
Net change in operating accounts:
Accrued interest receivable 79 (13)
Other assets (26) 71
Other liabilities 20 (262)
Income taxes payable - deferred (27) 14
Income taxes payable - current 0 135
------- -------
Net cash from operating activities 495 420
------- -------
Cash flows from investing activities:
Purchase of investment securities held-to-
maturity (4,995) (2,495)
Proceeds from maturity of investment
securities held-to-maturity 8,915 475
Proceeds from maturity of investment
securities available-for-sale -- 500
Proceeds from sale of investment securities
available-for-sale 44 251
Proceeds from sale of loans -- 57
Net change in certificates of deposit (495) 1,105
Net change in loans receivable (2,780) (2,245)
Proceeds from principal payments and
maturities of mortgage-backed securities
held-to-maturity 1,149 916
Purchase of mortgage-backed securities
held-to-maturity -- (315)
Purchases of property and equipment (51) (322)
------- -------
Net cash from (used in) investing
activities $ 1,787 $(2,073)
------- -------
See accompanying notes to Consolidated Financial Statements.
5
N S & L BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-----------------------------------------
Nine Months Ended June 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
(Dollars in thousands)
Cash flows from financing activities:
Net change in demand deposits, savings
accounts, and certificates of deposit $ 4,195 $(4,426)
Net decrease in mortgage escrow funds (100) (64)
Cash advances from FHLB 1,000 3,000
Repayment of cash advances from FHLB (2,000) --
Purchase of treasury stock (481) (793)
Proceeds from stock options exercised -- 13
Cash dividends paid (260) (278)
------- -------
Net cash from (used in) financing
activities 2,354 (2,548)
------- -------
Net increase(decrease) in cash and
cash equivalents 4,636 (4,201)
Cash and cash equivalents -
beginning of period 5,521 8,853
------- -------
Cash and cash equivalents -
end of period $10,157 $ 4,652
======= =======
See accompanying notes to Consolidated Financial Statements.
6
N S & L BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE A - Basis of Presentation
- ------------------------------
The consolidated interim financial statements as of June 30, 1998 included in
this report have been prepared by the Registrant without audit. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation are reflected in the June 30, 1998
interim financial statements. The results of operations for the periods ended
June 30, 1998 and 1997 are not necessarily indicative of the operating results
for the full year. The September 30, 1997 Consolidated Statement of Financial
Condition presented with the interim financial statements was audited and
received an unqualified opinion.
NOTE B - Earnings per Share
- ---------------------------
The following information shows the amounts used in computing earnings per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock.
For the Three Months Ended June 30,
1998 1997
---- ----
Income Shares Per- Income Shares Per-
Share Share
(Numerator) (Denominator) Amount (Numerator)(Denominator) Amount
----------- ------------- ------ ----------- ------------ ------
Basic EPS:
Income available
to Common
Stockholders $147,000 637,191 $.23 $139,000 653,008 $.21
==== ====
Effect of
dilutive
securities:
Stock option -- 16,043 -- 13,433
-------- ------- -------- -------
Diluted EPS:
Income avail-
able to common
stockholders
plus stock
options $147,000 653,234 $.23 $139,000 666,441 $.21
======== ======= ==== ======== ======= ====
For the Nine Months Ended June 30,
1998 1997
---- ----
Income Shares Per- Income Shares Per-
Share Share
(Numerator) (Denominator) Amount (Numerator)(Denominator) Amount
----------- ------------- ------ ----------- ------------ ------
Basic EPS:
Income available
to Common
Stockholders
$347,000 642,056 $.54 $388,000 676,647 $.57
==== ====
Effect of
dilutive
securities:
Stock option -- 17,102 -- 8,854
-------- ------- -------- -------
Diluted EPS:
Income avail-
able to common
stockholders
plus stock
options $347,000 659,158 $.53 $388,000 685,501 $.57
======== ======= ==== ======== ======= ====
7
N S & L BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
NOTE C - Employee Stock Ownership Plan
- --------------------------------------
The Association (Neosho Savings & Loan Association, F.A.) established an ESOP
for the exclusive benefit of participating employees (all salaried employees
who have completed at least 1000 hours of service in a twelve-month period and
have attained the age of 21). The ESOP borrowed funds from the Company in an
amount sufficient to purchase 68,516 shares (8% of the Common Stock issued in
the Conversion). The loan is secured by the shares purchased and will be
repaid by the ESOP with funds from contributions made by the Association,
dividends received by the ESOP and any other earnings on ESOP assets. The
Association presently expects to contribute approximately $106,762 including
interest annually to the ESOP. Contributions will be applied to repay
interest on the loan first, then the remainder will be applied to principal.
The loan is expected to be repaid in approximately six years.
Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are allocated among
participants in proportion to their compensation relative to total
compensation of all active participants. Benefits generally become 25% vested
after each year of credited service beyond one year. Vesting is accelerated
upon retirement, death or disability of the participant. Forfeitures are
returned to the Association or reallocated to other participants to reduce
future funding costs. Benefits may be payable upon retirement, death,
disability or separation from service. Since the Association's annual
contributions are discretionary, benefits payable under the ESOP cannot be
estimated.
The Company accounts for its ESOP in accordance with Statement of Position
93-6, Employers Accounting for Employee Stock Ownership Plans. Accordingly,
the debt of the ESOP is eliminated in consolidation and the shares pledged as
collateral are reported as a part of unearned ESOP shares in the consolidated
balance sheets. Contributions to the ESOP shall be sufficient to pay
principal and interest currently due under the loan agreement. As shares are
committed to be released from collateral, the Company reports compensation
expense equal to the average market price of the shares for the respective
period, and the shares become outstanding for earnings per share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings: dividends on unallocated ESOP shares are recorded as a reduction of
debt and accrued interest. ESOP compensation expense was $30,217 and $28,485
for the three months ended June 30, 1998 and 1997 and $92,782 and $79,019 for
the nine months ended June 30, 1998 and 1997 respectively.
A summary of ESOP shares at June 30, 1998 is as follows:
Shares allocated 15,852
Shares committed for release 5,139
Unreleased shares 47,525
------
Total 68,516
======
Fair value of unreleased shares $831,688
8
N S & L BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
NOTE D - Management Recognition and Development Plan and Stock Option Plan
- --------------------------------------------------------------------------
The 1995 Management Recognition and Development Plan ("MRDP") was approved by
stockholders on January 17, 1996. The MRDP is administered by the Board of
Directors of the Company. Collectively, the Board issued 34,258 shares of the
Company's common stock, of which currently there are 28,865 shares awarded to
employees at a cost of $383,370. The MRDP shares are vesting and being
expensed over a five-year period which began on January 17, 1996. The value
of the common stock contributed to the MRDP is amortized to compensation
expense as the shares vest. MRDP expense was $18,892 and $18,518 for the
three months ended June 30, 1998 and 1997 and $55,929 and $55,000 for the nine
months ended June 30, 1998 and 1997 respectively.
Also adopted on January 17, 1996 was a Stock Option plan whereby 85,645 shares
of the Company's common stock have been reserved to be awarded to certain
officers, employees and directors. The Stock Option Plan is administered by a
committee of the Board of Directors. All options expire no later than ten
years from the date of grant. At August 6, 1998, 1,000 shares have been
exercised at the exercise price of $12.9375 per share.
NOTE E - Stock Repurchase Program
- ---------------------------------
The Company Board of Directors approved a plan to begin its fourth stock
repurchase program to acquire 68,585 shares, or approximately 10% of the
Corporation's outstanding stock. The repurchases are conducted through open
market purchases, although unsolicited negotiated transactions or other types
of repurchases could be effected. The price paid for the shares in the open
market will not exceed the lowest current independent offer quotation reported
on the Nasdaq Small-Cap Market. The number of shares purchased in the open
market during any day generally is not to exceed 25% of the average daily
trading volume of the common stock over the preceding four weeks, except for
block purchases. At August 6, 1998, 256,975 shares have been repurchased at a
cost of $3,989,278.
NOTE F - Business Acquisition
- -----------------------------
During 1997, the Association formed a new subsidiary, Crawford Acquisition
Company for the sole purpose of acquiring Crawford Mortgage and Financial
Services, Inc. On August 26, 1997, Crawford Acquisition Company acquired all
of the capital stock of Crawford Mortgage and Financial Services, Inc. and
became Crawford Mortgage, Inc.. Crawford Mortgage, Inc. is engaged in
originating mortgage loans primarily in Missouri. The results of operations
are included in the consolidated financial statements.
9
N S & L BANCORP, INC. AND SUBSIDIARY
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis included herein covers those material changes
in liquidity and capital resources that have occurred since September 30,
1997, as well as certain changes in results of operations during the three and
nine month periods ended June 30, 1998 and 1997.
The following should be read in conjunction with the Company's 10-KSB for
the year ended September 30, 1997, which contains the latest audited financial
statements and notes thereto, together with Management's Discussion and
Analysis of Financial Condition and Results of Operations as of September 30,
1997, and for the year then ended. Therefore, only material changes in
financial condition and results of operations are discussed herein.
Changes in Financial Condition
- ------------------------------
Cash and cash equivalents increased $4.6 million during the nine months
ended June 30, 1998. The increase resulted from cash received from the
maturity or calling of several investment securities and an increase of $4.2
million in customer deposits primarily as a result of some special rate
offerings. These increases were partially offset by an increase in loans of
$2.8 million, the net repayment of $1 million in FHLB advances, the purchase
of treasury stock for $481,000, and an increase in investments in certificates
of deposit of $495,000. Net loans increased $2.8 million during the nine
month period to $36.7 million as of June 30, 1998 from $33.9 million at
September 30, 1997. Loans for 1 to 4 family dwellings comprised the majority
of the increase in loans. Cash on hand and maturities of securities were used
primarily to fund the majority of the growth in loans, to purchase
certificates, to repay the cash advances and to purchase treasury stock. A
cash advance of $1 million was obtained June 19, 1998 that replaced some of
the cash used to finance the activities of the Company.
Nonperforming assets were $120,000 or .2% of total assets at June 30,
1998, compared to $75,000, or .1% of total assets at September 30, 1997.
There was $7,000 in nonaccrual loans at June 30, 1998 and $9,000 at September
30, 1997.
Comparison of the Three Months Ended June 30, 1998 to the Three Months Ended
- ----------------------------------------------------------------------------
June 30, 1997
- -------------
Net Income. Net income was $147,000 for the quarter ended June 30, 1998
compared to $139,000 for the quarter ended June 30, 1997. Net interest income
after provision for loan losses was $486,000 at June 30, 1998 compared to
$462,000 at June 30, 1997. Noninterest income increased $87,000 and
noninterest expense increased $88,000. Income tax expense increased $15,000.
Net Interest Income. Net interest income of $486,000 for the quarter
ended June 30, 1998 increased from $462,000 for the quarter ended June 30,
1997. Interest income increased $58,000 while interest expense increased
$34,000.
Interest Income. Interest income increased by $58,000 or 5.9% to $1.03
million for the quarter ended June 30, 1998 from $975,000 for the quarter
ended June 30, 1997. Interest income from loans receivable increased $78,000
to $684,000 for the quarter ended June 30, 1998 from $606,000 for the quarter
ended June 30, 1997. The increase was primarily attributable to the increase
in average loans outstanding and to a lesser extent to interest rate increases
on existing
10
N S & L BANCORP, INC. AND SUBSIDIARY
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
adjustable rate loans. Interest income from investment securities decreased
by $46,000 to $176,000 for the quarter ended June 30, 1998 from $222,000 for
the quarter ended June 30, 1997. This decrease was due to a decrease in the
balances and average rates in investment securities. Interest income from
mortgage-backed securities decreased by $17,000 to $72,000 for the quarter
ended June 30, 1998 from $89,000 for the quarter ended June 30, 1997. The
decrease was due to a decrease in the average balances in mortgage-backed
securities. Interest income from other interest-earning assets increased by
$43,000 to $101,000 for the quarter ended June 30, 1998 from $58,000 for the
quarter ended June 30, 1997. This increase was primarily due to an increase
in the interest paid on larger average balances of cash invested at Federal
Home Loan Bank of Des Moines.
Interest Expense. Interest expense of $547,000 for the quarter ended
June 30, 1998 increased $34,000, or 6.6%, from $513,000 for the quarter ended
June 30, 1997. The increase is attributable to an increase in the average
balances of customer deposits. The increase was partially offset by a $26,000
decrease in interest expense on borrowed money as a result of smaller average
balances of borrowed funds.
Provision for Loan Losses. Loan loss provision and actual loan losses
net of recoveries were zero for both quarters.
Noninterest Income. Noninterest income of $123,000 for the quarter ended
June 30, 1998 increased $87,000 from $36,000 for the quarter ended June 30,
1997. This increase was primarily due to mortgage banking fees of $59,000
from Crawford Mortgage and no comparable income in the comparative quarter
since Crawford was not a subsidiary at that time. There was also a gain of
$18,000 on the sale of investments by the Company in the quarter ending June
30, 1998 and no comparable sale in the quarter ended June 30, 1997.
Noninterest Expense. Noninterest expense increased $88,000, or 30.4%, to
$377,000 for the quarter ended June 30, 1998 from $289,000 for the quarter
ended June 30, 1997. This increase was largely due to a $56,000 increase in
compensation and employee benefits for the period ending June 30, 1998.
Compensation and employee benefits increased because of increased personnel to
operate Crawford Mortgage and annual salary increases effective October 1,
1997 and an increase in ESOP expense as the price of the Company's stock has
increased. Occupancy and equipment increased $14,000 of which $4,500 was for
the lease payment for Crawford Mortgage and the balance was from other normal
operating expenses.
Net Interest Margin. Net interest margin increased to 3.23% for the
three months ended June 30, 1998 compared to 3.15% for the three months ended
June 30, 1997. Income from earning assets increased by $58,000, or 5.9%,
between the two quarters and interest expense increased by $34,000, or 6.6%.
The average earning asset base increased by $1.5 million, or 2.6%. The
average interest-bearing liability base increased by $3.3 million, or 7.3%.
Comparison of the Nine Months Ended June 30, 1998 to the Nine Months Ended
- --------------------------------------------------------------------------
June 30, 1997
- -------------
Net Income. Net income decreased $41,000 to $347,000 for the nine months
ended June 30, 1998 from $388,000 for the nine months ended June 30, 1997.
Net interest income after
11
N S & L BANCORP, INC. AND SUBSIDIARY
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
provision for loan losses increased by $72,000 to $1.43 million for the nine
months ended June 30, 1998 from $1.36 million for the nine months ended June
30, 1997. Noninterest income increased by $146,000, noninterest expense
increased by $234,000 and income taxes increased by $25,000.
Net Interest Income. Net interest income of $1.44 million for the nine
months ended June 30, 1998 increased $77,000 from net interest income of $1.36
million for the nine months ended June 30, 1997. Total interest income
increased by $129,000 while interest expense increased by $52,000.
Interest Income. Total interest income increased $129,000 to $3.02
million for the nine months ended June 30, 1998 from $2.89 million for the
nine months ended June 30, 1997. The increase was comprised of increases in
income from loans receivable and other interest earning assets. The interest
income from loans increased by $235,000 to $1.99 million for the nine months
ended June 30, 1998 from $1.76 million for the nine months ended June 30,
1997. This increase was primarily due to the increase in the average
outstanding loan balances during the two periods. Income on other interest
earning assets increased by $57,000 to $254,000 for the nine months ended June
30, 1998 from $197,000 for the nine months ended June 30, 1997. This increase
was primarily due to the increase in the average balance of other interest
earning assets. The increases in interest income were offset by decreases in
income from investment securities of $120,000 to $540,000 for the period
ending June 30, 1998 from $660,000 for the period ending June 30, 1997.
Income from mortgage-backed securities decreased $43,000 to $232,000 at June
30, 1998 from $275,000 for the period ending June 30, 1997. The decreases in
mortgage-backed and investment security income was a result of lower average
balances in those investments.
Interest Expense. Total interest expense was $1.59 million for the nine
months ended June 30, 1998, a $52,000 increase from $1.53 million for the nine
months ended June 30, 1997. An increase in the average balances of customer
deposits increased interest paid on deposits by $106,000 and was partially
offset by a decrease in interest on FHLB advances of $54,000 as the average
balance of FHLB advances decreased.
Provision for Loan Losses. Provision for loan losses increased by $5,000
to $6,000 for the six months ended June 30, 1998 from $1,000 for the six
months ended June 30, 1997. Actual loan losses, net of recoveries, were zero
for the nine months ended June 30, 1998 and 1997.
Noninterest Income. Noninterest income of $313,000 for the nine months
ended June 30, 1998 increased by $146,000 from $167,000 for the nine months
ended June 30, 1997. This increase was primarily attributable to mortgage
banking fees from Crawford Mortgage of $168,000 for the nine months ended June
30, 1998 and no mortgage banking fees for the comparable period since Crawford
was not acquired until August 1997. This increase was partially offset by the
gain on the sale of investments of $37,000 by the Company in the prior period
and $18,000 gain on the sale of investments in the current period. There was
also a decrease of $13,000 in other noninterest income as a result of
distributions from the data service center in the prior period and no
distribution this period.
12
N S & L BANCORP, INC. AND SUBSIDIARY
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Noninterest Expense. Noninterest expense increased by $234,000 to $1.19
million for the nine months ended June 30, 1998 from $956,000 for the nine
months ended June 30, 1997. Compensation and employee benefits increased by
$147,000 due to the acquisition of Crawford Mortgage and additional personnel
at both the Company and Crawford, increased expenses associated with the
employee benefits package, and annual salary increases effective October 1,
1997. Occupancy and equipment also increased by $33,000 and other expenses
increased $54,000 as a result of normal operations of the Company.
Net Interest Margin. Net interest margin of 3.29% for the nine months
ended June 30, 1998 increased .10% from 3.19% for the nine months ended June
30, 1997. Income from earning assets increased by $129,000, or 4.5% between
the two periods while interest expense increased by $52,000, or 3.4%. The
average earning asset base increased by $1.5 million or 2.6%. The average
interest-bearing liability base increased by $1.9 million or 4.3%.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans, mortgage-backed securities,
investment securities, net operating income and cash advances from Federal
Home Loan Bank of Des Moines when appropriate. While maturities and scheduled
amortization of loans and mortgage-backed securities are a somewhat
predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
The Association must maintain an adequate level of liquidity to ensure
availability of sufficient funds to support loan growth and deposit
withdrawals, satisfy financial commitments and to take advantage of investment
opportunities. During fiscal years 1996, Neosho Savings and Loan used its
sources of funds primarily to fund loan commitments, pay maturing savings
certificates and deposit withdrawals. During the fiscal year 1997, Neosho
Savings & Loan began using cash advances from Federal Home Loan Bank of Des
Moines. At June 30, 1998, Neosho Savings & Loan had FHLB advances of $2
million that were used to purchase mortgage loans and had approved loan
commitments totaling $188,000 and undisbursed loans in process of $1.02
million.
Liquid funds necessary for normal daily operations of the Association are
maintained in a working checking account and a daily time account with the
Federal Home Loan Bank of Des Moines. It is the Association's current policy
to maintain adequate collected balances in those deposit accounts to meet
daily operating expense, customer withdrawals, and fund loan demand. Funds
received from daily operating activities are deposited, on a daily basis, in
the checking account and transferred, when appropriate, to the daily time
account to enhance income.
Normal daily operating expenses are not expected to significantly change.
Noninterest expense as a percentage of average assets at 2.8% is expected to
remain basically constant. Interest expense is expected to gradually increase
as the average balance of customer accounts has increased. However, overall
interest expense should remain stable because interest is now being paid on a
smaller cash advance. The cash advance expenses are being offset as the funds
have been invested at rates higher than the expense incurred by them. Loan
interest income is
13
N S & L BANCORP, INC. AND SUBSIDIARY
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
expected to continue to increase as the average balance of loans increases and
rates on adjustable-rate loans continue to rise as those loans reprice at the
annual adjustment dates. Although customer deposits have increased in the
past quarter as a result of some special rate offerings, they are expected to
remain stable in the future.
At June 30, 1998, certificates of deposit amounted to $31 million, or 65%
of Neosho Savings and Loan's total deposits, including $26.6 million of fixed
rate certificates scheduled to mature within twelve months. Historically,
Neosho Savings and Loan has been able to retain a significant amount of its
deposits as they mature. Management believes it has adequate resources to
fund all loan commitments from savings deposits, loan payments and maturities
of investment securities.
The Office of Thrift Supervision requires a thrift institution to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4% of the average daily balance of its net
withdrawable deposits and short-term borrowings. Neosho Savings and Loan's
liquidity ratio was 39.51% and its short-term liquidity ratio was 25.12% at
June 30, 1998. Neosho Savings and Loan consistently maintains liquidity
levels in excess of regulatory requirements, and believes this is an
appropriate strategy for proper asset and liability management.
The Office of Thrift Supervision requires institutions such as the
Association to meet certain tangible, core, and risk-based capital
requirements. Tangible capital generally consists of stockholders' equity
minus certain intangible assets. Core capital generally consists of
stockholders' equity. The risk-based capital requirements presently address
risk related to both recorded assets and off-balance sheet commitments and
obligations. The following table summarizes the Association's capital ratios
at June 30, 1998.
Percent of Adjusted
Amount Total Assets
------------------------------
(Unaudited)
(Dollars in thousands)
Tangible capital $ 9,267 14.98%
Tangible capital requirement 928 1.50
-------- -----
Excess $ 8,339 13.48%
======== =====
Core capital $ 9,267 14.98%
Core capital requirement 2,474 4.00
-------- -----
Excess $ 6,793 10.98%
======== =====
Risk-based capital $ 9,317 34.78%
Risk-based capital requirement 2,143 8.0
-------- -----
Excess $ 7,174 26.78%
======== =====
14
N S & L BANCORP, INC. AND SUBSIDIARY
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Year 2000 Issue
- ---------------
The Company has researched the "Year 2000" problem and developed a plan to
identify and correct any potential problems that may affect operations.
The Company uses FISERV of Des Moines, Iowa as its data center. FISERV has
upgraded their systems for Y2K and proxy testing of those systems is scheduled
for September 1998. In the first quarter of 1999, the Company will be testing
connectivity with FISERV. Costs for testing are estimated to be $5,500.00.
The ISC on-line teller system has been adapted for Y2K by a software supplier
in Washington State at a cost of $2,240. The Company also has PC Teller
on-line stations at both the Main and Branch locations and more Stations are
currently being added. PC Teller is being certified Y2K through testing by
FISERV. In addition, all personal computers have been upgraded and tested for
compliance with Y2K.
A safe deposit box software program is not Y2K and compliant and a replacement
program will be ordered for $1,500.
All ATM cards have a maturity date of December 1999 and will be replaced in a
mass reissuance planned for the third quarter of 1998. The replacement cards
have been ordered and are on hand. Total cost of this project, including
postage, is expected to be less than $2,000.
The Company has three ATMs that require minor upgrades of software, which has
been ordered. The expense for these upgrades is expected to be minimal.
Contingency plans include the possible use of another data center or an
in-house system. in the event the current data processor (FISERV) is not Y2K
on or before December 31, 1998. Two data centers and two sources for
"in-house" systems have been located as a part of our contingency plan.
Contacts have been made with third party vendors, such as the electric
company, and no Y2K problems have been noted. Although there are some
expenditures necessary as previously listed and scheduled to be completed
within the next six months, there are no known problems that are material to
the Company's business, operations or financial conditions. In the event that
FISERV does not make its systems Year 2000 compliant and the Company is not
able to switch to an alternative data center or "in-house" system in a timely
manner, Year 2000 problems could interrupt the operations of the Company and
have a significant adverse effect on the Company's financial condition and
results of operations.
15
N S & L BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1, LEGAL PROCEEDINGS
Neither the Registrant nor the Association is a party to any material legal
proceedings at this time. From time to time the Association is involved in
various claims and legal actions arising in the ordinary course of business.
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
None.
ITEM 5, OTHER INFORMATION
None.
ITEM 6, EXHIBITS AND REPORT ON FORM 8-K
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
N S & L Bancorp, Inc.
Date August 10, 1998 By: /s/ C.R. Rick Butler
--------------------------------
C.R. 'Rick' Butler
President
CEO
By: /s/ Carol Guest
--------------------------------
Carol Guest
Treasurer