-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U6d7EyW4LYjLQf6cwLh4Ba5jW+1uFxHgs3aoo6U731DggEHKnhVCwOvG1Q7HWIw8 hGrJRTafXyj+oxjIAIV9VA== 0000915656-98-000073.txt : 19980817 0000915656-98-000073.hdr.sgml : 19980817 ACCESSION NUMBER: 0000915656-98-000073 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NSS BANCORP INC CENTRAL INDEX KEY: 0001042806 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 061485317 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22937 FILM NUMBER: 98690068 BUSINESS ADDRESS: STREET 1: 48 WALL ST CITY: NORWALK STATE: CT ZIP: 06852 BUSINESS PHONE: 2038384545 MAIL ADDRESS: STREET 1: NSS BANCORP INC STREET 2: P O BOX 28 CITY: NORWALK STATE: CT ZIP: 06852 10-Q 1 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 EX-27 2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S JUNE 30, 1998 UNAUDITED BALANCE SHEET, INCOME STATEMENT AND CASH FLOW STATEMENT, AND NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 JUN-30-1998 12,696,000 8,529,000 0 2,281,000 187,541,000 0 0 418,388,000 5,374,000 651,825,000 458,450,000 136,260,000 1,974,000 0 0 0 25,000 55,116,000 651,825,000 8,214,000 3,134,000 295,000 11,643,000 4,385,000 6,686,000 4,957,000 150,000 (163,000) 4,337,000 1,796,000 1,796,000 0 0 1,158,000 0.49 0.46 3.10 3,647,000 0 0 7,500,000 5,577,000 464,000 111,000 5,374,000 5,374,000 0 0
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