-----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, E+Z/A1y082tAmvCi4V+MMBPvVVc95fq4RCzMGdzXZ+0S9S9f6TmOEtCDGtWm04cQ ipPgIm3rVdw89ARfCvhjqw== 0000915656-98-000091.txt : 19981118 0000915656-98-000091.hdr.sgml : 19981118 ACCESSION NUMBER: 0000915656-98-000091 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98750953 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 September 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 (I.R.S. Employer of incorporation 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 September 30, 1998: 2,390,941 shares TABLE OF CONTENTS PART I - CONSOLIDATED FINANCIAL INFORMATION Page - ------------------------------------------- A. Consolidated Statements of Financial Condition 1 B. Consolidated Statements of Operations 2 C. Consolidated Statements of Shareholders' Equity 3 D. Consolidated Statements of Cash Flows 4-5 E. Notes to Consolidated Financial Statements 6-7 F. Management's Discussion and Analysis 8-28 G. Quantitative and Qualitative Disclosures about Market Risk 28 H. Selected Consolidated Financial Highlights 29-30 PART II - OTHER INFORMATION 31 PART III - SIGNATURES 32 NSS BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 30, December 31, 1998 1997 ------------- ------------ ASSETS (in thousands) - ------ Cash and Due from Banks $ 11,512 $ 11,486 Interest Bearing Deposits in Other Banks 5,880 5,555 Federal Funds Sold - 5,000 Securities: Trading, at Fair Value 3,093 1,830 Available-for-Sale, at Fair Value 189,766 178,667 Loans Receivable, Net of allowance for credit losses of $5,435 as of September 30 and $5,832 as of December 31 411,794 425,812 Loans Held-for-Sale 4,479 5,311 Accrued Interest Receivable 4,269 3,859 Federal Home Loan Bank Stock, At Cost 7,347 7,347 Other Real Estate Owned, Net 270 574 Bank Premises and Equipment, Net 3,690 3,738 Deferred Income Tax Asset, Net 1,139 361 Goodwill, Net 1,279 1,524 Other Assets 5,737 3,158 -------- -------- Total Assets $650,255 $654,222 ======== ======== LIABILITIES - ----------- Deposits - -------- Non-interest Bearing $ 33,267 $ 27,471 Savings, Money Market and NOW Accounts 188,973 174,873 Time Accounts 223,561 241,867 Total Deposits 445,801 444,211 Borrowed Funds 146,200 151,671 Accrued Expenses and Other Liabilities 2,723 2,202 ------- ------- Total Liabilities 594,724 598,084 ------- ------- SHAREHOLDERS' EQUITY - -------------------- Preferred Stock ($.01 par value, 500,000 shares authorized, none outstanding) - - Common Stock ($.01 par value, 7,000,000 shares authorized, issued 2,493,783 as of September 30 and 2,460,370 as of December 31; outstanding 2,390,941 as of September 30 and 2,434,096 as of December 31) 25 25 Additional Paid-In Capital 25,346 24,199 Retained Earnings 33,965 31,048 Other Accumulated Comprehensive Income 110 1,129 -------- -------- Total 59,446 56,401 Less: Unearned ESOP Shares 123 263 Treasury Stock (90,500 shares as of September 30)at Cost 3,792 - -------- -------- Total Shareholders' Equity 55,531 56,138 -------- -------- Total Liabilities and Shareholders' Equity $650,255 $654,222 ======== ========
See accompanying notes to consolidated financial statements. NSS BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- INTEREST AND DIVIDEND INCOME Loans, Including Fees $ 8,167 $ 8,544 $24,788 $24,841 Investment Securities and Other - ------------------------------- Taxable Interest 2,477 2,719 7,892 7,817 Dividends 657 706 1,945 1,335 ------ ------ ------ ------ Total 11,301 11,969 34,625 33,993 ------ ------ ------ ------ INTEREST EXPENSE Deposits 4,353 4,271 13,048 12,779 Borrowed Funds 1,958 2,657 6,523 6,935 ----- ----- ------ ------ Total 6,311 6,928 19,571 19,714 ----- ----- ------ ------ NET INTEREST INCOME 4,990 5,041 15,054 14,279 Provision for Credit Losses - - 150 - ----- ----- ------ ------ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 4,990 5,041 14,904 14,279 ----- ----- ------ ------ NON-INTEREST INCOME Customer Service Fees 211 201 636 607 Loan Servicing Fees 82 108 286 340 Trust Department Fees 162 154 472 432 Net Gain (Loss) on Sale of Loans and Securities (282) 516 196 879 Credit Card Fees 460 330 1,237 1,017 Other 276 198 745 354 ----- ----- ----- ----- Total Non-Interest Income 909 1,507 3,572 3,629 ----- ----- ----- ----- NON-INTEREST EXPENSE Compensation and Benefits 2,064 2,039 6,189 5,895 Occupancy, Equipment and Data Processing 656 647 1,931 1,967 Regulatory Assessments 14 13 41 41 OREO Holding Costs and Expenses 16 24 73 122 Sale of OREO (Gains) Losses, Net (17) (98) (61) (306) Credit Card Expense 383 279 1,044 824 Goodwill Amortization 82 82 245 244 Other 810 920 3,068 2,817 ----- ----- ------ ------ Total Non-Interest Expense 4,008 3,906 12,530 11,604 ----- ----- ------ ------ EARNINGS BEFORE INCOME TAXES 1,891 2,642 5,946 6,304 Provision for Income Taxes 678 965 2,136 2,433 ----- ----- ----- ----- NET EARNINGS $1,213 $1,677 $3,810 $3,871 ===== ===== ===== ===== EARNINGS PER SHARE - BASIC $0.51 $0.69 $1.59 $1.60 EARNINGS PER SHARE - ASSUMING DILUTION $0.48 $0.66 $1.49 $1.54 Weighted average shares outstanding (000's): Basic 2,384 2,418 2,393 2,408 Assuming Dilution 2,550 2,551 2,552 2,516
See accompanying notes to consolidated financial statements. NSS BANCORP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Common Paid-In Retained Shares Stock Capital Earnings ------ ------ ---------- -------- ($ in thousands) Balance - December 31, 1996 2,397,312 $24 $23,545 $26,339 Comprehensive Income: Net Income 5,565 Other, Net of Tax Total 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 Comprehensive Income: Net Income 3,810 Other, Net of Tax Total Stock Options Exercised 29,516 - 505 - Cash Dividends Paid on Common Stock - - - (893) Long-Term Incentive Compensation Plan Shares 3,897 - 142 - ESOP Shares Committed to be Released 13,932 - 500 - Treasury Stock (90,500) - - - --------- --- ------- ------- Balance - September 30, 1998 2,390,941 $25 $25,346 $33,965 ========= === ======= ======= Other Comprehensive Income: Before-Tax Tax Net-of-Tax Amount Effect Amount ---------- ------ ---------- Unrealized Gains (Losses) on Securities: Balance - December 31, 1997 $1,911 $(782) $1,129 Activity Arising During the Period (1,613) 660 (953) Less: Reclassification (112) 46 (66) ------ ---- ----- Balance - September 30, 1998 186 (76) 110 ====== ==== =====
Other Total Accumulated Unearned Share- Comprehensive ESOP Treasury holders' Income Shares Stock Equity ------------- ------- -------- -------- ($ in thousands) Balance - December 31, 1996 $ (106) $(449) $ - $49,353 Comprehensive Income: Net Income 5,565 Other, Net of Tax 1,235 1,235 ------ Total 6,800 ------ Stock Options Exercised - - - 273 Shares Distributed to Advisory Board - - - 1 Cash Dividends Paid on Common Stock - - - (856) ESOP Shares Committed to be Released - 186 - 567 ----- ---- ---- ------ Balance - December 31, 1997 1,129 (263) - 56,138 Comprehensive Income: Net Income 3,810 Other, Net of Tax (1,019) (1,019) ------ Total 2,791 ------ Stock Options Exercised - - - 505 Cash Dividends Paid on Common Stock - - - (893) Long-Term Incentive Compensation Plan Shares - - - 142 ESOP Shares Committed to be Released - 140 - 640 Treasury Stock - - (3,792) (3,792) ---- ---- ----- ------ Balance - September 30, 1998 $110 ($123) ($3,792) $55,531 ==== === ===== ======
See accompanying notes to consolidated financial statements. NSS BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) In Cash & Cash Equivalents Nine Months Ended September 30, ----------------- 1998 1997 ---- ---- ($ in thousands) Cash Flows from Operating Activities: Net Earnings $ 3,810 $ 3,871 Adjustments to Reconcile Net Earnings ------- ------- to Net Cash Provided (Used) by Operating Activities Provision for Credit Losses 150 - Deferred Income Tax (70) 970 Provision for ESOP Benefit Cost 454 508 Depreciation and Amortization 453 461 Goodwill Amortization 245 244 Net Amortization of Discounts and Premiums on Securities 918 530 Net Gains on Sales of Loans and Securities (144) (218) Net Gains on Sales of OREO (61) (306) Net (Increase) Decrease in Trading Securities (1,263) 977 Increase in Accrued Interest Receivable (620) (787) Increase in Other Assets (1,236) (3,922) Decrease in Accrued Expense and Other Liabilities 320 2,698 ------- ------- Total Adjustments (1,494) 1,155 ------- ------- Net Cash Provided by Operating Activities 2,316 5,026 ------- ------- Cash Flows from Investing Activities: Proceeds from: Sales of Loans and Securities 53,518 61,454 Maturities of Securities 34,636 18,545 Sales of Other Real Estate Owned 712 1,206 Purchases of Securities (96,502) (120,747) Net Decrease (Increase) in Loans (8,824) (25,968) Additions to Goodwill - (95) Additions to Bank Premises and Equipment (405) (1,008) ------ ------- Net Cash Provided by (Applied to) Investing Activities 783 (66,613) ------ ------- Cash Flows from Financing Activities: Net Increase in Deposits 1,572 5,336 Repayments of FHLBB Advances and Other Borrowings (159,786) (79,819) Net Increase in Repurchase Agreements 5,906 3,300 Advances from FHLB of Boston 144,617 144,409 Proceeds from Exercised Stock Options 835 212 Proceeds from Advances from Credit Line 3,792 - Purchase of Treasury Stock (3,792) - Cash Dividends (893) (611) ------ ------ Net Cash (Applied to) Provided by Financing Activities (7,749) 72,827 ------ ------ (Decrease) Increase in Cash and Cash Equivalents (4,650) 11,240 Cash and Cash Equivalents - Beginning 22,041 18,851 ------ ------ Cash and Cash Equivalents - Ending $17,391 $30,091 ====== ======
See accompanying notes to consolidated financial statements. NSS BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) In Cash & Cash Equivalents Nine Months Ended September 30, ----------------- 1998 1997 ---- ---- ($ in thousands) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Period For: Interest $19,487 $19,654 Income Taxes $2,136 $2,433 Non-Cash Investing and Financing Activities: Loans Receivable Transferred to OREO $1,644 $681 Loans Originated in Connection with Sale of OREO $1,296 $461 Exchange of Loans for Mortgage-Backed Securities $1,176 $ - Transfer of Loans Receivable to Loans-Held-For-Sale $4,479 $ -
See accompanying notes to consolidated financial statements. NSS BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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. NSS BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 (unaudited) and December 31, 1997 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 $3.8 million at June 30, 1998. On October 28, 1998, Bancorp's Board of Directors declared a cash dividend of thirteen cents ($.13) per share to common shareholders of record November 10, 1998 and payable on November 25, 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. On November 5, 1998, shareholders of the Company approved the merger with Summit. 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 $0.51 and $0.48, respectively, for the three months ended September 30, 1998, and $3.8 million or $1.59 basic and $1.49 diluted earnings per share for the nine months ended September 30, 1998. The Company's tier one leverage capital ratio was 8.40% as of September 30,1998, qualifying it as "well capitalized" according to standards established by bank regulatory authorities. During the three months ended September 30, 1998, the Company declared a $.13 dividend on common stock to its shareholders. The Company's stock price was $37.75 per share on January 1, 1998, $47.25 per share on March 31, 1998, $56.00 on June 30, 1998, and $44.63 on September 30, 1998. RESULTS OF OPERATIONS --------------------- Comparison of Operating Results for the Three Months Ended ---------------------------------------------------------- September 30, 1998 and 1997 --------------------------- General - ------- Net earnings for the three months ended September 30, 1998 were $1.2 million, or $0.51 and $0.48 per common share, on a basic and diluted basis, respectively. The Bank's net earnings were $1.7 million, or $0.69 and $0.66 per common share on a basic and diluted basis, respectively, for the comparable period of 1997. There was no provision for credit losses in either the 1998 or 1997 periods. There was a significant decrease in gains from the sales of securities and loans, primarily due to a significant increase in unrealized losses on trading securities, for the three months ended September 30, 1998 compared to the same period in 1997. Net Interest Income - ------------------- Net interest income, which is the primary source of income for the Company, 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 $4.99 million for the three months ended September 30, 1998, a decrease of 1% from the $5.04 million for the three months ended September 30, 1997. The $51 thousand decrease resulted from a decrease in interest income of $668 thousand offset by a $617 thousand decrease in interest expense. The $668 thousand decrease in interest income was attributable to a $344 thousand decrease in volume and a $324 thousand decrease in rate, while the $617 thousand decrease in interest expense resulted from a $577 thousand decrease due to volume and a $40 thousand decrease related to rate. The 5.6% decrease in interest income, from $12.0 million in 1997 to $11.3 million in 1998, was primarily attributable to the decrease in the volume of interest income from the loan portfolio, partially offset by growth in the securities portfolio. There was also a substantial decline in interest income from securities due to declining rates. The 8.9% decrease in interest expense, from $6.9 million in 1997 to $6.3 million in 1998, resulted primarily from the decrease in interest expense attributable to the decreased level of borrowings, partially offset by an unfavorable variance on deposit accounts. On an overall basis, the Company was able to maintain its net interest income by controlling volume in order to offset the effect of margin compression resulting from declining interest rates on loans and securities during the 1998 period. The following table summarizes the Company's net interest income and net yield on average interest-earning assets. Non-accruing loans are included in average loans outstanding during the periods, and daily average amounts were used to compute average balances. Table 1 Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 ($ thousands) 1998 ------------------------------- Average Average Balance Interest Rate ------- -------- ------- Interest-Earning Assets - ----------------------- Loans Receivable $420,898 $ 8,178 7.77% Investment Securities 62,810 1,094 6.97 Mortgage-Backed Securities 81,308 1,252 6.16 Short-Term Investments 16,875 236 5.59 Marketable Equities 43,036 541 5.03 ------- ------ Total Interest-Earning Assets 624,927 11,301 7.23% ------- ------ ---- Non-Interest-Earning Assets - --------------------------- Cash and Cash Equivalents 9,078 Accrued Income Receivable 3,815 Premises and Equipment 3,589 Other 9,133 Less: Allowance for Credit Losses (5,421) Total Non-Interest-Earning ------ Assets 20,194 ------- Total Assets $645,121 ======= Interest-Bearing Liabilities - ---------------------------- Deposits Regular Savings and NOW $ 67,435 260 1.54% Super Savings and Money Market 118,513 1,014 3.42 Time 226,833 3,059 5.39 ------- ----- ---- Total Deposits 412,781 4,333 4.20 Borrowings 135,632 1,958 5.77 Mortgage Escrow Deposits 3,304 20 2.42 Total Interest-Bearing ------- ----- ---- Liabilities 551,717 6,311 4.58% ------- ----- ---- Non-Interest-Bearing Liabilities - -------------------------------- Non-Interest-Bearing Deposits 34,861 Other Liabilities 2,170 Total Non-Interest-Bearing ------- Liabilities 37,031 ------- Shareholders' Equity 56,373 ------- Total Liabilities and Shareholders' Equity $645,121 ======= Net Interest-Earning Assets and Interest Rate Spread $73,210 2.65% ====== ---- Net Interest Income and Net Yield on Average Interest-Earning Assets $4,990 3.19% ===== ====
Table 1 Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 ($ thousands) 1997 ------------------------------- Average Average Balance Interest Rate ------- -------- ------- Interest-Earning Assets - ----------------------- Loans Receivable $444,209 $ 8,544 7.69% Investment Securities 61,411 1,105 7.20 Mortgage-Backed Securities 82,070 1,397 6.81 Short-Term Investments 13,951 211 6.05 Marketable Equities 39,666 712 7.18 ------- ------ Total Interest-Earning Assets 641,307 11,969 7.47% ------- ------ ---- Non-Interest-Earning Assets - --------------------------- Cash and Cash Equivalents 12,073 Accrued Income Receivable 5,885 Premises and Equipment 3,614 Other 8,312 Less: Allowance for Credit Losses (6,679) Total Non-Interest-Earning ------- Assets 23,205 ------- Total Assets $664,512 ======= Interest-Bearing Liabilities - ---------------------------- Deposits Regular Savings and NOW $ 62,190 262 1.69% Super Savings and Money Market 94,924 724 3.05 Time 238,762 3,263 5.47 ------- ----- Total Deposits 395,876 4,249 4.29 Borrowings 179,543 2,657 5.92 Mortgage Escrow Deposits 3,557 22 2.47 Total Interest-Bearing ------- ----- Liabilities 578,976 6,928 4.79% ------- ----- ---- Non-Interest-Bearing Liabilities - -------------------------------- Non-Interest-Bearing Deposits 30,145 Other Liabilities 2,212 Total Non-Interest-Bearing ------- Liabilities 32,357 ------- Shareholders' Equity 53,179 ------- Total Liabilities and Shareholders' Equity $664,512 ======= Net Interest-Earning Assets and Interest Rate Spread $62,331 2.68% ======= ---- Net Interest Income and Net Yield on Average Interest-Earning Assets% $5,041 3.14% ===== ====
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 September 30, 1998 and 1997. Changes which are attributable to both rate and volume have been allocated proportionately. Table 2 THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 NET RATE VOLUME CHANGE ---- ------ ------ (in thousands) INTEREST INCOME - --------------- Loans Receivable $ 88 ($454) ($366) Mortgage-Backed Securities (132) (13) (145) Short-Term Investments (17) 42 25 Investment Securities (263) 81 (182) ---- ---- ---- Total (324) (344) (668) ---- ---- ---- INTEREST EXPENSE - ---------------- Deposits -------- Savings and Other 24 (22) 2 Super Savings and Money Market (95) (195) (290) Time 46 158 204 ---- ---- ---- Total Deposits (25) (59) (84) Borrowings 65 634 699 Mortgage Escrow Deposits 0 2 2 ---- ---- ---- Total 40 577 617 ---- ---- ---- CHANGE IN NET INTEREST INCOME ($284) $233 ($51) ==== ==== ====
Provision for Credit Losses - --------------------------- The improvement in asset quality resulted in no provision for credit losses in either the 1998 or 1997 periods. (See Financial Condition - Non-Performing Assets/Asset Quality). Non-Interest Income - ------------------- Non-interest income consists of deposit service charges and fees, fees derived from both servicing and originating loans for others, net realized and unrealized gains on securities, net gain on sale of loans, fees derived from the Bank's Trust Department and the credit card program. The table below identifies the primary components of Non-interest income, which are Fees and Gains on Sales of Assets. Table 3 - Non-Interest Income Three Months Ended September 30, -------------------------------- ($ thousands) 1998 1997 ---- ---- Non-Interest Income Fee Income: Loan Servicing Fees $ 48 $ 73 Other Loan Fees 34 35 Deposit Service Charges 211 201 Credit Card Fees 460 330 Trust Department Fees 162 154 Correspondent Loan Program Fees 186 144 Other 90 54 ----- ---- Total Fees 1,191 991 ----- ---- Securities Gains (Losses) from: Call Options 93 141 Trading Portfolio (394) (10) Sales 19 167 ---- ----- Net (Losses) Gains on Securities (282) 298 Net Gains on Sale of Loans - 218 ---- ----- Net (Losses) Gains on Sales of Assets (282) 516 ---- ------ Total Non-Interest Income $909 $1,507 ==== ======
Total Non-interest income decreased from $1.5 million for the three months ended September 30, 1997 to $909 thousand, a decrease of 39.7% for the comparable period in 1998. Total fees for the three months ended September 30, 1997 were $1.0 million compared to $1.2 million for the three months ended September 30, 1998; the increase of $200 thousand, or 20.1%, was due primarily to increases in correspondent loan program fees and credit card fees. The other component of Non-interest income is Gains and Losses 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. The sudden third quarter decline in the stock market had a significant impact on the carrying value of the Company's trading portfolio as of September 30, 1998, and resulted in a net loss on securities approximating $282,000 for the third quarter of 1998, primarily from unrealized trading portfolio losses. Non-Interest Expense - -------------------- Non-interest expense is comprised of general and administrative expenses incurred in managing the business of the Bank and costs associated with managing and selling OREO properties. The table that follows indicates the elements of Non-interest expense, including OREO related expense, which is directly related to the level of non-performing assets. Table 4 - Non-Interest Expense Three Months Ended September 30, ($ thousands) 1998 1997 General and Administrative Expense - ---------------------------------- Compensation $1,535 $1,535 Employee Benefits 529 504 Occupancy and Equipment 424 450 Data Processing 232 197 Regulatory Assessments 14 13 Credit Card Processing 383 279 Amortization of Goodwill 82 82 Marketing 181 208 Legal and Professional 91 211 Printing, Postage and Office Supplies 134 153 Insurance 41 58 Other 363 290 ----- ----- Total 4,009 3,980 OREO Related Expense ----- ----- - -------------------- Net Holding Costs and Expenses 16 24 Net Gain on Sales of OREO (17) (98) ----- ----- Total (1) (74) ----- ----- Total Non-Interest Expense $4,008 $3,906 ===== =====
Total Non-interest expense was $3.9 million for the three months ended September 30, 1997, compared to $4.0 million for the same period in 1998, an increase of 2.6%. Overall, Non-interest expense did not increase significantly. General and Administrative Expense - ---------------------------------- The most significant part of general and administrative expense is compensation and benefits. The cost of the employee stock ownership program (ESOP) accounts for a significant portion of the benefits expenses. The Company has maintained a stable level of expenses in 1998; credit card processing costs have increased due to increased volume. OREO Related Expenses - --------------------- OREO related expenses continued to decline to nominal levels. Provision for Income Taxes - -------------------------- The Company's income is subject to Federal and State taxation at a combined rate approximating 40%. The Bank's effective tax rate for the three months ended September 30, 1997 was 36.5%, compared to the Company's effective tax rate of 35.9% for the comparable period in 1998. The decrease was substantially due to the tax savings from the dividend earnings on the Bank's equity securities portfolio, a substantial portion of which is exempt from both State and Federal taxation. Three Months Ended September 30, 1998 1997 ---- ---- ($ thousands) Amount % Amount % Tax at Statutory Federal Rate $644 34.0% $898 34.0% State Tax, Net of Federal Benefit 103 5.5 159 6.0 Non-Deductible ESOP Expense Provision 60 3.2 45 1.7 Dividends Received Deduction (129) (6.8) (143) (5.4) Other, Net - - 6 0.2 ---- ---- ---- ---- Total $678 35.9% $965 36.5% ==== ==== ==== ====
RESULTS OF OPERATIONS --------------------- Comparison of Operating Results for the Nine Months Ended --------------------------------------------------------- September 30, 1998 and 1997 --------------------------- General - ------- Net earnings for the nine months ended September 30, 1998 were $3.8 million, or $1.59 and $1.49 per common share, on a basic and diluted basis, respectively. The Bank's net earnings were $3.9 million, or $1.60 and $1.54 per common share on a basic and diluted basis, respectively, for the comparable period of 1997. The Bank recognized a $150 thousand provision for credit losses in the nine months ended September 30, 1998. There was no provision for credit losses in the same period of 1997. There was a continued increase in correspondent loan program fees for the nine months ended September 30, 1998 compared to 1997. There was a significant decrease in gains from the sales of securities and loans, primarily due to a significant increase in unrealized losses on trading securities, for the nine months ended September 30, 1998 compared to the same period in 1997. Net Interest Income - ------------------- Net interest income, which is the primary source of income for the Company, 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 $15.1 million for the nine months ended September 30, 1998, an increase of 5.4% over the $14.3 million for the nine months ended September 30, 1997. The $775 thousand increase resulted from an increase in interest income of $632 thousand augmented by a $143 thousand decrease in interest expense. The $632 thousand increase in interest income was attributable to a $719 thousand increase from volume offset by an $87 thousand decrease due to rate, while the $143 thousand decrease in interest expense resulted from a $55 thousand increase due to volume and a $198 thousand decrease related to rate. The 1.9% increase in interest income, from $34.0 million in 1997 to $34.6 million in 1998, was primarily attributable to the growth in dividend income from the investment portfolio; the decrease in the interest income from the loan portfolio was attributable primarily to rate. The 0.7% decrease in interest expense, from $19.7 million in 1997 to $19.6 million in 1998, resulted primarily from the increase in interest expense attributable to the increased level of money market deposits, partially offset by favorable rate and volume variances on time deposit accounts, and a significant decrease in the volume of borrowings. On an overall basis, the Company was able to increase its net interest income through a combination of favorable rate spreads on its increased volume while continuing to control the rate component of the cost of funds. The following table summarizes the Company's net interest income and net yield on average interest-earning assets. Non-accruing loans are included in average loans outstanding during the periods, and daily average amounts were used to compute average balances. Table 1 Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 ($ thousands) 1998 --------------------------- Average Average Balance Interest Rate ------- -------- ------- Interest-Earning Assets - ----------------------- Loans Receivable $424,682 $24,788 7.78% Investment Securities 57,525 3,017 6.99 Mortgage-Backed Securities 92,256 4,369 6.31 Short-Term Investments 19,823 857 5.76 Marketable Equities 40,989 1,594 5.19 Total Interest-Earning ------- ------ ---- Assets 635,275 34,625 7.27% ------- ------ ---- Non-Interest-Earning Assets - --------------------------- Cash and Cash Equivalents 10,420 Accrued Income Receivable 4,096 Premises and Equipment 3,637 Other 11,362 Less: Allowance for Credit Losses (5,439) Total Non-Interest-Earning ------- Assets 24,076 ------- Total Assets $659,351 ======= Interest-Bearing Liabilities - ---------------------------- Deposit ------- Regular Savings and NOW $ 67,061 778 1.55% Super Savings and Money Market 114,580 2,823 3.29 Time 233,785 9,379 5.35 ------- ------ ---- Total Deposits 415,426 12,980 4.17 Borrowings 148,929 6,523 5.84 Mortgage Escrow Deposits 3,486 68 2.60 Total Interest-Bearing ------- ------ ---- Liabilities 567,841 19,571 4.60% Non-Interest-Bearing Liabilities - -------------------------------- Non-Interest-Bearing Deposits 33,075 Other Liabilities 2,158 Total Non-Interest-Bearing ------ Liabilities 35,233 ------ Shareholders' Equity 56,277 ------ Total Liabilities and Shareholders' Equity $659,351 ======= Net Interest-Earning Assets and Interest Rate Spread $67,434 2.67% ====== ---- Net Interest Income and Net Yield on Average Interest-Earning Assets $15,054 3.16% ====== ====
Table 1 Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 ($ thousands) 1997 --------------------------- Average Average Balance Interest Rate ------- -------- ------- Interest-Earning Assets - ----------------------- Loans Receivable $434,342 $24,841 7.63% Investment Securities 50,708 2,754 7.24 Mortgage-Backed Securities 88,009 4,770 7.23 Short-Term Investments 12,439 573 6.14 Marketable Equities 30,874 1,055 4.56 Total Interest-Earning ------- ------ Assets 616,372 33,993 7.34% ------- ------ ---- Non-Interest-Earning Assets - --------------------------- Cash and Cash Equivalents 11,527 Accrued Income Receivable 5,767 Premises and Equipment 3,520 Other 7,851 Less: Allowance for Credit Losses (7,095) Total Non-Interest-Earning ------- Assets 21,570 ------- Total Assets $637,942 ======= Interest-Bearing Liabilities - ---------------------------- Deposits -------- Regular Savings and NOW $60,620 735 1.62% Super Savings and Money Market 94,915 2,221 3.12 Time 239,195 9,750 5.43 ------- ------ Total Deposits 394,730 12,706 4.29 Borrowings 157,701 6,935 5.86 Mortgage Escrow Deposits 3,644 73 2.67 Total Interest-Bearing ------- ------ Liabilities 556,075 19,714 4.73% ------- ------ ---- Non-Interest-Bearing Liabilities - -------------------------------- Non-Interest-Bearing Deposits 28,211 Other Liabilities 1,994 Total Non-Interest-Bearing ------- Liabilities 30,205 ------- Shareholders' Equity 51,662 ------- Total Liabilities and Shareholders' Equity $637,942 ======= Net Interest-Earning Assets and Interest Rate Spread $60,297 2.61% ====== ---- Net Interest Income and Net Yield on Average Interest-Earning Assets $14,279 3.09% ====== ====
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 nine months ended September 30, 1998 and 1997. Changes which are attributable to both rate and volume have been allocated proportionately. Table 2 NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 NET RATE VOLUME CHANGE ---- ------ ------ (in thousands) INTEREST INCOME - --------------- Loans Receivable $237 ($290) $(53) Mortgage-Backed Securities (457) 56 (401) Short-Term Investments (5) 289 284 Investment Securities 138 664 802 ---- ---- ---- Total (87) 719 632 ---- ---- ---- INTEREST EXPENSE - ---------------- Deposits -------- Savings and Other 10 (53) (43) Super Savings and Money Market 0 (602) (602) Time 154 217 371 ---- ---- ---- Total Deposits 164 (438) (274) Borrowings 32 380 412 Mortgage Escrow Deposits 2 3 5 ---- ---- ---- Total 198 (55) 143 ---- ---- ---- CHANGE IN NET INTEREST INCOME $111 $664 $775 ==== ==== ====
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. Table 3 - Non-Interest Income Nine Months Ended September 30, ------------------------------- Non-Interest Income 1998 1997 ---- ---- Fee Income: Loan Servicing Fees $ 176 $ 223 Other Loan Fees 110 117 Deposit Service Charges 636 607 Credit Card Fees 1,237 1,017 Trust Department Fees 472 432 Correspondent Loan Program Fees 548 180 Other 197 174 ----- ----- Total Fees 3,376 2,750 ----- ----- Securities Gains (Losses) from: Call Options 164 374 Trading Portfolio (112) 69 Sales 25 218 ----- ----- Net (Losses) Gains on Securities 77 661 Net Gains on Sale of Loans 119 218 ----- ----- Net Gains on Sales of Assets 196 879 ----- ----- Total Non-Interest Income $3,572 $3,629 ===== =====
Total Non-interest income decreased from $3.63 million for the nine months ended September 30, 1997 to $3.57 million, a decrease of 1.6% for the comparable period in 1998. Total fees for the nine months ended September 30, 1997 were $2.8 million compared to $3.4 million for the nine months ended September 30, 1998; the increase of $626 thousand, or 22.8%, was due primarily to increases in correspondent loan program fees and credit card fees. The other component of Non-interest income is Gains on Sales of Assets. The Bank continues to derive a significant portion of its non-interest income from its Trading portfolio investment strategy whereby covered call options are sold against high quality equities, primarily for yield enhancement. However, the sudden decline in the investment markets during the third quarter of 1998 resulted in significant market value declines in the Bank's trading portfolio during the third quarter. Non-Interest Expense - -------------------- Non-interest expense is comprised of general and administrative expenses incurred in managing the business of the Bank and costs associated with managing and selling OREO properties. The table that follows indicates the elements of Non-interest expense, including OREO related expense, which is directly related to the level of non-performing assets. Table 4 - Non-Interest Expense Nine Months Ended September 30, ------------------------------- ($ thousands) 1998 1997 General and Administrative Expense ---- ---- - ---------------------------------- Compensation $ 4,479 $ 4,396 Employee Benefits 1,710 1,499 Occupancy and Equipment 1,288 1,370 Data Processing 642 597 Regulatory Assessments 41 41 Credit Card Processing 1,044 824 Amortization of Goodwill 245 244 Marketing 548 472 Legal and Professional 784 700 Printing, Postage and Office Supplies 555 556 Insurance 137 164 Other 1,045 925 ------ ------ Total 12,518 11,788 OREO Related Expense ------ ------ - -------------------- Net Holding Costs and Expenses 73 122 Net Gain on Sales of OREO (61) (306) Provision for Estimated Losses - - ------ ------ Total 12 (184) ------ ------ Total Non-Interest Expense $12,530 $11,604 ====== ======
Total Non-interest expense was $11.6 million for the nine months ended September 30, 1997, compared to $12.5 million for the same period in 1998, an increase of 8.0%. Overall, Non-interest expense did not increase significantly. General and Administrative Expense - ---------------------------------- Of the total increase of $730 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 $211 thousand increase was primarily due to increased ESOP expense due to the increased market value of the Company's stock. The increase in Marketing expense resulted from continued efforts to promote the Bank's products and services, while Legal and Professional costs resulted from costs associated with the holding company and shareholder relations. Credit card processing costs increased $220 thousand, or 26.7%, reflecting the increased levels of the volume of this business. OREO Related Expenses - --------------------- OREO related expenses continued to decline to nominal levels. Provision for Income Taxes - -------------------------- The Company's income is subject to Federal and State taxation at a combined rate approximating 40%. The Bank's effective tax rate for the nine months ended September 30, 1997 was 38.6%, compared to the Company's effective tax rate of 35.9% for the comparable period in 1998. The decrease was substantially due to the tax savings from the dividend earnings on the Bank's equity securities portfolio, a substantial portion of which is exempt from both State and Federal taxation. Nine Months Ended September 30, 1998 1997 ---- ---- ($ thousands) Amount % Amount % Tax at Statutory Federal Rate $2,022 34.0% $2,143 34.0% State Tax, Net of Federal Benefit 323 5.4 401 6.4 Non-Deductible ESOP Expense Provision 164 2.8 124 2.0 Dividends Received Deduction (379) (6.4) (242) (3.9) Other, Net 6 0.1 7 0.1 ----- ---- ----- ---- Total $2,136 35.9% $2,433 38.6% ===== ==== ===== ====
FINANCIAL CONDITION ------------------- General - ------- Total assets were $650.3 million as of September 30, 1998 representing a $4.0 million decrease from the $654.2 million at December 31, 1997. Total loans, net of allowance for credit losses, were $411.8 million, a decrease of $14.0 million from the $425.8 million as of December 31, 1997. Total investment securities were $192.9 million as of September 30, 1998, an increase of $12.4 million from $180.5 million as of December 31, 1997. Total deposits were $445.8 million, an increase of $1.6 million from the December 31, 1997 level of $444.2 million. Total other borrowed money was $146.2 million as of September 30, 1998, a decrease of $5.5 million from the December 31, 1997 level of $151.7 million. Shareholders' equity was $55.5 million as of September 30, 1998, a decrease of $0.6 million from the December 31, 1997 level of $56.1 million. The Company's tier one leverage capital ratio was 8.4% as of September 30, 1998, compared to 8.2% as of December 31, 1997. Investment Securities - --------------------- Total securities amounted to $192.9 million as of September 30, 1998 compared to $180.5 million at December 31, 1997, representing a $12.4 million increase or 6.8%. The activity in the investment securities portfolio resulted from a number of Government Agency Bonds being called during the first quarter and the Bank reinvested the proceeds into fixed- rate mortgage-backed securities; during the second quarter the Bank increased its level of investments in equity securities, primarily in trust preferred issues, when significant amounts of mortgage-backed securities prepaid during the period. The Bank's covered call option program is designed for yield enhancement and to lessen the Bank's exposure to a potentially volatile stock market. In this program, the Bank purchases shares of qualified common stock and sells a call option against the investment. As required by SFAS 115, the Bank marks the common stock and related covered call option to market through current period earnings. Inasmuch as the Bank's equity investment privileges have been grandfathered by the FDIC, it intends to continue to maintain an equity stock portfolio. To provide direction, the Bank's Board of Directors has established upward limits and an investment policy which includes guidelines that the Bank's equity investments have a minimum quality rating of "A" by a widely recognized rating service; the policy also requires adequate diversification to avoid concentrations in lines of business and geographic regions. The following table presents a summary of the investments and other securities portfolios as of September 30, 1998 and December 31, 1997, fair values and unrealized gains and losses as of those dates. Table 5 - Investment & Other Securities ----------------------------- ($ thousands) September 30, 1998 ---------------------------------------- Amortized Unrealized Holding Fair Cost Gains Losses Value Available-for-Sale --------- ---------- ------- ----- ------------------ U.S. Government and Federal Agency Obligations $ 35,393 $ 104 $ - $ 35,497 Mortgage-Backed Securities 75,527 166 325 75,368 Equity Securities and Other 78,663 1,277 1,039 78,901 ------- ----- ----- ------- Total Available-for-Sale $189,583 $18 $572 $189,766 ======= ===== ===== ======= Trading ------- Equity Securities $3,647 $18 $572 $3,093 ----- ---- ---- ----- 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 loans held for sale, deferred credits, fees and the allowance for credit losses, amounted to $422.2 million as of September 30, 1998, representing a $15.4 million or 3.5% 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 residential mortgage portfolio reflects the dynamics of the current interest rate markets. The $14.4 million decrease in real estate loans resulted essentially from a $33 million decrease in adjustable rate one- to-four family loans, offset by an $11.0 million increase in fixed rate one-to-four family loans and an $8.8 million increase in commercial real estate loans. During the first nine 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 September 30, 1998, the Bank has identified $4.5 million of residential loans held-for-sale. Table 6 - Loan Portfolio ($ thousands) September 30, 1998 December 31,1997 Real Estate Loans ------------------ ---------------- - ----------------- One-to-Four Family Adjustable Rate $245,242 58.09% $278,231 63.59% One-to-Four Fixed Rate 75,417 17.86 64,510 14.74 One-to-Four Held-For-Sale 4,479 1.06 5,311 1.21 Multi-Family 2,820 0.67 5,398 1.24 Commercial Real Estate 63,879 15.13 55,124 12.60 Home Equity Lines-of-Credit 7,448 1.76 7,632 1.74 Home Improvement and Second Mortgage 4,131 0.98 2,852 0.65 Land 1,120 0.27 640 0.15 Construction 3,712 0.88 2,942 0.67 ------- ------ ------- ----- Total 408,248 96.70 422,640 96.59 ------- ------ ------- ----- Commercial Loans 6,789 1.61 7,587 1.73 - ---------------- ------- ------ ------- ----- Consumer Loans - -------------- Passbook 1,122 0.27 1,508 0.34 Automobile Loans 1,878 0.44 2,332 0.53 Credit Cards 1,824 0.43 1,409 0.32 Other Consumer 2,317 0.55 2,104 0.49 ------- ------- ------- ------ Total 7,141 1.69 7,353 1.68 ------- ------- ------- ------ Total Loans, Gross 422,178 100.00% 437,580 100.00% Deferred Fees and Credits (470) ======= (625)====== ------- ------- 421,708 436,955 Allowance for Credit Losses (5,435) (5,832) ------- ------- Total Loans, Net 416,273 431,123 One-to-four Family Held-For-Sale (4,479) (5,311) ------- ------- Loans, Net $411,794 $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 September 30, 1998 were $3.9 million or 0.61% 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 $6.8 million at September 30, 1998, compared to $11.7 million at December 31, 1997. Of the total non-performing assets, non-performing loans were $3.7 million as of September 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 $329 thousand in such loans as of September 30, 1998. The allowance for credit losses amounted to $5.4 million as of September 30, 1998 representing coverage of 146.1% 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 $554 thousand as of September 30, 1998. Net charge-offs in the first nine months of 1998 were $547 thousand or 13 basis points of the average loan portfolio, compared to $885 thousand or 21 basis points of the average loan portfolio for the nine months ended September 30, 1997. Details of the Bank's asset quality are shown in the analysis provided by the following table. Asset Quality At September 30, ---------------- ($ thousands) 1998 1997 ---- ---- Non-Performing Assets - --------------------- Non-Accrual Loans $3,391 $7,479 Restructured Loans 329 - ----- ----- Total Non-Performing Loans 3,720 7,479 ----- ----- Foreclosed Assets 270 180 Allowance for Estimated OREO Losses - - ----- ----- Total OREO 270 180 ----- ----- Total Non-Performing Assets $3,990 $7,659 ===== ===== 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 (1,276) (1,519) Recoveries 729 634 ----- ----- Net Charge-Offs (547) (885) ----- ----- Balance at End of Period $5,435 $6,449 ===== ===== 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 $417,699 $436,323 Average $423,314 $427,247 Assets, end of Period $650,255 $670,749 Ratios - ------ Allowance for Credit Losses to Total Loans 1.30% 1.48% Net Charge-Offs to Average Loans 0.13% 0.21% Non-Performing Loans to Total Loans 0.89% 1.71% Non-Performing Assets to Total Assets 0.61% 1.14% Allowance for Credit Losses to Non-Performing Loans 146.10% 86.23%
Asset Quality At December 31, -------------------------- ($ thousands) 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 September 30, 1998 were $445.8 million compared to $444.2 million at December 31, 1997, an increase of $1.6 million or 0.36%. The Bank continues to seek deposits with marketing and sales efforts concentrated on its new and diversified products. The Bank does not solicit, nor does it accept, brokered deposits. The following table presents a summary of deposits as of September 30, 1998 and December 31, 1997. Table 8 - Deposits September 30, 1998 December 31, 1997 ($ in thousands) Demand Deposits $ 33,267 7.5%$ $ 27,471 6.2% Savings Regular Savings 28,999 6.5 29,455 6.6 Super Savings 42,869 9.6 47,863 10.8 NOW 38,231 8.6 37,287 8.4 Money Market 75,962 17.0 55,541 12.5 Escrow Deposits 2,912 0.7 4,727 1.1 Certificates Certificate Accounts 178,882 40.1 204,129 45.9 Money Market Certificates 44,679 10.0 37,738 8.5 ------- ----- ------- ----- Total Deposits $445,801 100.0% $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 September 30, 1998 borrowings totaled $95.9 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 September 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 Company'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 $142 thousand as of September 30, 1998. Borrowings from the FHLB, reverse repurchase agreements and the ESOP loan amounted to $142.4 million as of September 30, 1998 at a weighted average rate of 5.7% and a weighted average maturity of 1.7 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 21.9% as of September 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 September 30, 1998 there was $3.8 million in the outstanding balance. Shareholders' Equity - -------------------- Shareholders' equity at September 30, 1998 decreased to $55.5 million from $56.1 million at December 31, 1997, reflecting tier 1 regulatory leverage capital ratios of 8.4% and 8.2%, respectively. As of September 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 September 30, 1998 and December 31, 1997. Regulatory Capital Required Actual Actual -------- September 30, December 31, 1998 1997 Company ------------- ------------ - ------- Tier 1 Risk-Based Capital 4.0% 14.10% 15.4% Total Risk-Based Capital 8.0% 15.35% 16.6% Tier 1 Leverage Capital 4.0% - 5.0% 8.40% 8.2% Bank Tier 1 Risk-Based Capital 4.0% 13.92% 14.3% Total Risk-Based Capital 8.0% 15.17% 15.5% Tier 1 Leverage Capital 4.0% - 5.0% 8.27% 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 September 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 $85.4 million or 13.1% 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 September 30, 1998, the Bank had approved loan commitments outstanding for one-to four-family loans of $9.2 million. In addition, there was $9.2 million of unused credit under the home equity line-of- credit facility, $1.1 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 $2.1 million. There were $4.5 million in approved loan commitments and $0.9 million in approved line-of-credit commitments in the Commercial Lending Department, $3.0 million in unused commercial lines of credit and $0.3 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 September 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: 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 $58.75 $41.00 $0.13 $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 $0.05
(a) The Bank began paying dividends in the second quarter of 1996. At September 30, 1998 NSS Bancorp had approximately 700 shareholders of record. Year 2000 Compliance - -------------------- There has been no substantive change in the status and progress of the Company's efforts to attain Year 2000 compliance, from the disclosure provided in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS There has been no material change from December 31, 1997 to September 30, 1998, in either the qualitative or quantitative market risks, from the disclosures provided in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NSS BANCORP, INC. SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS FINANCIAL CONDITION DATA September 30, ------------- ($ thousands) 1998 1997 ---- ---- Total assets $650,255 $670,749 Investment securities 192,859 180,523 Loans receivable 417,229 442,772 Allowance for credit losses (5,435) (6,449) Deposits 445,801 428,627 Borrowed funds 146,200 181,933 Shareholders' equity 55,531 54,590 OREO, net 270 180 Non-accrual/non-performing loans 3,720 7,479 Total non-performing assets 3,990 7,659
EARNINGS DATA Nine Months September 30, ($ thousands, except per share data) 1998 1997 ---- ---- Net interest income $15,054 $14,279 Provision for credit losses 150 0 Net gains (Losses) on sales of Assets and liabilities 196 879 Other non-interest income 3,376 2,750 OREO related costs (gain), net 12 (184) Other non-interest expense 12,518 11,788 Income before income tax provisions 5,946 6,304 Current tax provision 2,223 1,463 Deferred tax provision (benefit) (87) 970 Income before ADP program 3,810 3,871 Effect of ADP program 0 0 Net income (loss) $3,810 $3,871 Income per share: Basic $1.59 $1.60 Income per share: Assuming Dilution $1.49 $1.54
NSS BANCORP, INC. SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS FINANCIAL CONDITION DATA December 31, ($ 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 (Losses) 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 Nine Months September 30, Years Ended December 31, ------------- ------------------------ ASSET QUALITY RATIOS 1998 1997 1997 1996 1995 ---- ---- ---- ---- ---- Performance: Tangible book value per share at period end $22.47 $21.83 $22.44 $19.90 $18.44 Return on average assets: Before ADP program 0.77% 0.81% 0.87% 0.97% 0.76% After ADP program n/a n/a n/a n/a 0.99% Return on average equity Before ADP program 9.03% 9.99% 10.54% 12.52% 8.97% After ADP program n/a n/a n/a n/a 11.65% Net interest margin 3.16% 3.09% 3.11% 3.12% 3.17% Capital: Tier 1 leverage 8.40% 7.78% 8.18% 7.90% 8.43% Total risk-based 15.35% 15.87% 16.61% 17.00% 17.90% Asset quality: Non-performing assets to total assets 0.61% 1.14% 0.83% 1.92% 3.36% Non-performing loans to total loans 0.89% 1.71% 1.12% 2.50% 3.63% Allowance for credit losses to non-performing loans 146.10% 86.23% 120.32% 70.24% 31.91% Allowance for credit losses to loans receivable 1.30% 1.48% 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 - ----------------------------------------- Not applicable Exhibit Index - ------------- Exhibit Pages of Number this Report ------ ----------- 11.3 Earnings Per Share 33 27.3 Financial Data Schedule 34 - 35 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: November 12, 1998 by: /s/ Robert T. Judson ----------------- Robert T. Judson President & CEO Date: November 12, 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 SEPTEMBER 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 STATEMENT. 9-MOS DEC-30-1998 SEP-30-1998 11,512,000 5,880,000 0 3,093,000 189,766,000 0 0 417,229,000 5,435,000 650,255,000 445,801,000 146,200,000 2,723,000 0 0 0 25,000 55,506,000 650,255,000 8,167,000 3,003,000 131,000 11,301,000 4,353,000 6,311,000 4,990,000 0 (282,000) 4,008,000 1,891,000 1,213,000 0 0 1,213,000 0.51 0.48 3.19 3,391,000 0 329,000 6,800,000 5,374,000 102,000 163,000 5,435,000 5,435,000 0 0
EX-11.3 3 EXHIBIT 11.3 EARNINGS PER SHARE Nine Months Ended Three Months Ended Amounts in thousands, September 30, September 30, except per share data 1998 1997 1998 1997 ---- ---- ---- ---- Net Income $3,810 $3,871 $1,213 $1,677 Weighted average common shares, including shares issued for exercised options 2,386 2,401 2,382 2,416 Average shares committed to be released under the ESOP 7 7 2 2 ----- ---- ---- ---- Weighted average shares - basic 2,393 2,408 2,384 2,418 Weighted average effect of: Shares contingently issuable under executive compensation plans 7 3 9 3 Shares issuable for assumed exercise of outstanding stock options 257 257 250 279 Share repurchasable using the proceeds of assumed exercise of stock options (105) (152) (93) (149) ----- ----- ----- ----- Weighted average shares - assuming dilution 2,552 2,516 2,550 2,551 ===== ===== ===== ===== Earnings per share: Basic $1.59 $1.60 $0.51 $0.69 Assuming dilution $1.49 $1.54 $0.48 $0.66
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