UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 #)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to item
405 of regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based upon the market price of the registrant's common stock as of
February 28, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $68,509,055. *
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 February 28, 1998: 2,421,071 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I and II:
Portions of the Annual Report to Shareholders for the year ended December
31, 1997.
Part III:
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held May 27, 1998.
* Solely for purposes of this calculation, all executive officers and
directors of the registrant are considered affiliates. Excludes
all other shareholders beneficially owning more than 5% of the
registrant's common stock.
PART I.
ITEM 1. BUSINESS
General
On October 1, 1997 NSS Bancorp, Inc. ("Bancorp") became the holding
company for Norwalk Savings Society (the "Bank") (collectively, the
"Company"). The formation of the holding company was approved at the
Bank's annual meeting on May 20, 1997. Each of the outstanding shares of
the Bank's common stock was automatically converted and exchanged into one
share of the Bancorp's common stock. Bancorp's principal asset consists of
all of the outstanding shares of the Bank.
Historically, the principal business of the Bank has been attracting
deposits from the general public, extending loans to individuals in the
community for the purchase or construction of one-to-four family
residences, making consumer installment loans, investing in securities, and
providing typical consumer banking services. During the early 1980's, the
Bank also began to emphasize loans secured by multi-family (e.g., five or
more units) and commercial real estate, as well as construction loans, land
acquisition and development loans and, to a lesser extent, commercial
business, consumer and other loans. As a result, the Bank experienced
dramatic growth as assets increased from $185 million in 1980 to $509
million in 1988. As the local and regional economies deteriorated in 1989,
the Bank experienced increasing levels of problem loans and losses
primarily resulting from delinquencies in commercial real estate,
construction and land acquisition and development loans. From 1990 to
1995, the Bank devoted a significant portion of its resources to resolving
problems associated with high levels of non-performing assets, including
sales of OREO, loan restructurings and development for sale of a number of
residential subdivisions and condominiums held as OREO. During that
period, the Bank limited multi-family, commercial real estate, and
construction lending to borrowers purchasing OREO from the Bank
and to borrowers refinancing or restructuring currently outstanding loans.
In 1996 the Bank defined its market area as southern Fairfield County
and 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. As part of this program, the Bank sold two branch offices in
northern Fairfield County, and in July 1996, acquired certain assets and
assumed essentially all of the liabilities of Fairfield First Bank & Trust
Company ("FFB&T") in an FDIC-assisted transaction. This acquisition
provided the Bank with a significant physical presence in the eastern part
of the county and FFB&T's back office operation allowed the Bank to provide
merchant banking and other business-related services.
In 1997 it was determined that the Bank's goal would best be served by
continued geographic expansion and broadening its products and services.
The Bank opened a full service branch office in Darien in May 1997. To
expand its business relationships, the Bank initiated several new products
such as the commercial deposit sweep account and the commercial checking
line of credit. Both the Darien branch and the Fairfield branch are staffed
to allow for a dual focus to ensure that each segment of the Bank's
customer base is properly served.
In October 1997 the Bank formed Bancorp, 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.
The principal sources of funds for the Bank's activities are deposit
accounts, amortization and prepayment of loans, borrowings from the Federal
Home Loan Bank (FHLB) and funds provided from operations. The Bank's
principal sources of income are interest on loans and mortgage-backed
securities, and interest and dividends on investments. In recent years,
the Bank also has realized income from the sale of loans and mortgage-
backed and investment securities. To a lesser extent, the Bank realizes
other non-interest income, including income from service charges on deposit
accounts and credit card fees.
Market Area and Competition
The Bank has eight banking offices located in Norwalk, Wilton,
Westport, Georgetown, Fairfield and Darien. All of the Bank's office
facilities and its primary market area are located in Fairfield County,
Connecticut. The State of Connecticut is reported to be the wealthiest
state in the United States, and Fairfield County among the wealthiest
counties in terms of per capita income. Fairfield County is located in
the southwestern corner of Connecticut in close proximity to New York City.
At December 31, 1997, the unemployment rate for the Norwalk metropolitan
area was 3.0% compared to 4.6% for the State of Connecticut as a whole.
Fairfield County has a diversified mix of industry groups, including
manufacturing, service, government and corporate offices. Fairfield County
is the location for numerous headquarters of Fortune 500 industrial service
companies. Fairfield County's industrial economy includes the manufacture
of helicopters and other aircraft, sophisticated electronics, missile
parts, clothing and precision instrumentation. In addition to the
headquarters of large corporations, Fairfield County is the home for an
increasing number of small businesses as well as a large number of research
and development laboratories, which take advantage of the County's
convenient location, access to investment capital and sales opportunities,
and a highly educated labor force.
As of December 31, 1997, the latest date for which information is
available, the Bank ranked as the third largest depository institution
headquartered in Fairfield County. In addition, the Bank ranked 11th out
of 183 mortgage lenders in Fairfield County based on the number of
mortgages originated in 1997.
Intense competition exists in all major lines of business in which the
Bank is presently engaged. The Bank's market area has a significant number
of financial institutions, with offices of commercial banks, thrift
institutions and credit unions in Fairfield County alone; in addition, due
to its proximity and the number of commuters traveling to New York City,
the Bank also faces intense and varied competition for loans and deposits
with financial institutions headquartered in New York, many of which have,
or have indicated plans to have, offices in Fairfield County. Recent
federal legislation expanding interstate banking options may cause this
type of competition to increase. The Bank faces additional competition for
deposits from short-term money market funds and other securities funds
offered by brokerage firms and other financial institutions as well as
significant competition for retail products from insurance companies.
Lending Activities General. Historically the Bank, like most other savings
institutions, concentrated its lending activities on the origination of
loans secured by first mortgage liens for the purchase or refinancing of
one-to-four family residential properties. Through the 1980's, in an
effort to diversify its loan portfolio and originate higher yielding
adjustable rate loans, the Bank expanded its lending activities to
include a significant volume of permanent and construction financing
of a wide variety of real estate properties, including residential
subdivision developments, condominium developments, land and various
types of commercial properties. The Bank also emphasized various home
equity, home improvement, commercial business and consumer loan products.
However, following a sharp downturn in the New England real estate markets
in the late 1980's and early 1990's, a significant portion of the Bank's
real estate loans became non-performing.
The Bank has refocused its lending activities on maintaining and
expanding its market presence as a one-to-four family residential lender
and on maintaining current banking relationships with borrowers that have
good credit histories with the Bank. The Bank is also engaged in lending
activities to facilitate the sale of OREO, the refinancing and
restructuring of non-performing and other loans, and has expanded home
equity, home improvement and direct consumer lending including credit card
accounts as a result of the FFB&T transaction in 1996. In 1995 the Bank
resumed commercial and commercial real estate lending on a conservative
basis; a commercial lending department was established and experienced
commercial lenders have been hired to underwrite and service commercial
mortgages, working capital and equipment loans, and lines of credit for
small and medium size businesses within the Bank's market area.
Loan Portfolio Composition. The following table sets forth, at the
dates indicated, information concerning the Bank's loan portfolio in dollar
amounts and in percentages, by type of loan.
<TABLE>
<CAPTION>
At December 31,
1997 % 1996 % 1995 %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family
adjustable rate $278,231 64.37% $257,459 61.48% $231,168 64.13%
One-to-four family
fixed rate 64,510 14.92 77,160 18.42 56,360 15.63
Multi-family 5,398 1.25 7,450 1.78 8,902 2.47
Commercial real estate 55,124 12.75 46,272 11.05 44,914 12.46
Land 640 .15 828 0.20 1,290 0.36
Construction 2,942 .68 1,227 0.29 1,617 0.45
Total 406,845 94.12 390,396 93.22 344,251 95.50
Other Loans:
Commercial business 7,587 1.75 8,425 2.01 1,485 0.41
Home equity lines of credit 7,632 1.76 7,127 1.70 5,698 1.58
Home improvement and
second mortgages 2,852 .66 2,568 0.61 3,422 0.95
Passbook 1,508 .35 1,510 0.36 1,634 0.45
Credit Cards 1,409 .33 991 0.24 - -
Other consumer 4,436 1.03 7,801 1.86 3,985 1.11
Total 25,424 5.88 28,422 6.78 16,224 4.50
Total Loans
(before net items) 432,269 100.00% 418,818 100.00% 360,475 100.00%
Deduct:
Deferred loan fees 625 718 509
Allowance for credit losses 5,832 7,334 4,170
Total 6,457 8,052 4,679
Loans, net $425,812 $410,766 $355,796
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1994* % 1993* %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family
adjustable rate
$180,275 62.07% $150,333 55.82%
One-to-four family
fixed rate 42,840 14.75 39,124 14.53
Multi-family 8,605 2.96 8,391 3.12
Commercial real estate 41,367 14.24 50,259 18.66
Land 1,806 0.62 2,338 0.87
Construction 987 0.35 3,505 1.30
Total 275,880 94.99 253,950 94.30
Other Loans:
Commercial business 30 0.01 30 0.01
Home equity lines of credit 6,570 2.25 7,340 2.73
Home improvement and
second mortgages 4,392 1.51 4,727 1.76
Passbook 1,761 0.62 1,788 0.66
Credit Cards - - - -
Other consumer 1,783 0.62 1,465 0.54
Total 14,536 5.01 15,350 5.70
Total Loans
(before net items) 290,416 100.00% 269,300 100.00%
Deduct:
Deferred loan fees 704 587
Allowance for credit losses 4,827 2,532
Total 5,531 3,119
Loans, net $284,885 $266,181
</TABLE>
*Includes assets originally disclosed as in-substance foreclosures,
under then current accounting pronouncements, for the years ended
December 31, 1994 and 1993.
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1997 regarding the dollar amount of loans
maturing in the Bank's loan portfolio. Demand loans and loans having no
stated schedule of repayments and no stated maturity are reported as due
within one year. Loan amounts are net of non-accruing loans.
<TABLE>
<CAPTION>
After One After
Year through Five Years
Within Five through After
Amount One Year Years Ten Years Ten Years
(In thousands)
<S> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family
adjustable rate $276,020 $ 1,320 $ 1,702 $ 1,861 $271,137
One-to-four family
fixed rate 64,599 250 2,224 10,469 51,656
All other loans secured
by real estate 71,240 5,668 16,728 20,531 28,313
All other loans 15,563 7,100 6,053 2,300 110
Total $427,422 $14,338 $26,707 $35,161 $351,216
</TABLE>
The following table sets forth the dollar amount of all loans maturing
or repricing after December 31, 1998 by fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates
(In thousands)
<S> <C> <C>
Real estate loans:
One-to-four family $63,472 $18,556
All other loans secured
by real estate 23,759 9,303
All other loans 6,621 306
Total $93,852 $28,165
</TABLE>
Loan Portfolio Activity. The following table shows loan origination,
sale and repayment activity of the Bank at and during the periods
indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Loans at beginning of period
(before net items) $418,818 $360,475 $290,416
Add:
Loans originated:
Real estate loans:
One-to-four family
adjustable rate 60,694 102,109 78,624
One-to-four family fixed rate 16,538 23,574 18,116
Multi-family - - -
Commercial real estate 24,863 12,355 8,617
Land 58 58 525
Construction 4,328 7,516 4,784
Other loans:
Commercial business 3,890 2,995 1,965
Home improvement and
second mortgage 5,729 6,334 520
Passbook 1,156 1,132 726
Other consumer 2,433 5,911 1,424
Total loans originated 119,689 161,984 115,301
Loans Purchased - 13,724 -
Less:
Loans sold 13,156 45,319 1,296
Loans securitized - - 4,361
Loan repayments 84,473 67,800 37,462
Total loans sold,
securitized and repaid 97,629 113,119 43,119
Less:
Charged-off 2,155 2,488 1,799
Net transfers to OREO 1,143 1,758 324
Transfers to loans held-for-sale 5,311 - -
Total loans charged-off
and transfers 8,609 4,246 2,123
Net increase in loans 13,451 58,343 70,059
Loans at end of period $432,269 $418,818 $360,475
</TABLE>
One-to-Four Family Residential Lending. The Bank continues to focus
on the origination of loans secured primarily by first mortgage liens on
existing one-to-four family residences, offering a variety of fixed and
variable-rate mortgage loan products. At December 31, 1997, $342.7
million, or 79.3%, of the Bank's total loan portfolio consisted of
one-to-four family mortgage loans, substantially all of which are
conventional loans (i.e., loans that are neither insured by the Federal
Housing Administration ("FHA") nor partially guaranteed by the
Veterans Administration (the "VA")).
The Bank actively solicits one-to-four family residential mortgage
loan applications through its branch banking offices, as well as its team
of loan originators, who will complete residential loan applications
"off-site" throughout the Bank's market area. In addition, the Bank
periodically conducts first-time home buyer seminars in an effort to
develop residential loan applications and promote the Bank's community
reinvestment.
The Bank's practice is to generally originate single-family
residential loans which qualify for sale to FNMA and FHLMC underwriting
standards. In addition, the Bank has entered into agreements with several
conduits whereby these institutions will purchase loans at a pre-determined
price and on a pre-approved basis. This relationship allows the Bank to
make mortgage loans that do not conform to the Bank's asset/liability
management strategy. All of the Bank's rights and interest in such loans,
including, in some instances, the right to service the loan, are thereby
transferred to the purchasers. The Bank earns an origination fee on such
loans. The Bank presently originates both fixed-rate and adjustable-rate
mortgage loans with loan terms of 10, 15, 30 and 40 years. Adjustable-rate
mortgage loans have interest rates that adjust at annual intervals based
upon an index tied to the average yield on U. S. Treasury securities
adjusted to a constant maturity of one year. These loans typically provide
that the amount of any increase or decrease in the interest rate is limited
to two percentage points per adjustment period and is limited to an
aggregate of seven percentage points by which the rate can increase or
decrease over the life of the loan. The Bank also originates, on a limited
basis, self-insured residential loans with a maximum L.T.V. of 90% as well
as limited documentation loans.
Borrower demand for adjustable-rate versus fixed-rate mortgage loans
is a function of the level of interest rates, expectations as to future
changes in interest rates, and pricing differences between fixed-rate
mortgage loans and adjustable-rate mortgage loans. The relative amount of
fixed-rate and adjustable-rate residential loans that are originated at any
time is therefore largely determined by market and financial conditions.
At December 31, 1997, $64.5 million, or 14.9%, of the Bank's
one-to-four family residential loan portfolio consisted of loans which
provide for fixed rates of interest. Although these loans generally
provide for repayment of principal over a fixed period of 10, 15 or 30
years, it is the Bank's experience that because of prepayments and
due-on-sale clauses, such loans generally remain outstanding for a
substantially shorter period of time.
Adjustable-rate loans tend to decrease the risks to the Bank's net
interest income associated with changes in interest rates, but involve
credit risk, primarily because as interest rates rise, the payment by the
borrower rises to the extent permitted by the terms of the loan, thereby
increasing the potential for default. At the same time, the marketability
of the underlying property may be adversely affected by higher interest
rates. The Bank offers introductory rates on its adjustable-rate
residential mortgage loans, which are lower than the fully indexed rate on
adjustable-rate loans but are competitive with other lenders in the Bank's
market. The Bank typically underwrites the ability of borrowers to service
the one year adjustable-rate mortgage loans at the fully indexed rate or at
rates acceptable to the secondary markets.
The Bank's general practice is to lend up to 80% of the appraised
value of the property securing a one-to-four family residential loan.
Under certain circumstances, the Bank will lend up to 95% of the appraised
value. Except as to certain loans to facilitate the sale of residential
subdivision OREO, to the extent that a loan exceeds 80% of the appraised
value of the property, the borrower generally must obtain private mortgage
insurance on the portion of the principal amount of the loan that exceeds
80%, which effectively reduces the loss exposure to an 80% loan-to-value
ratio or less. The Bank offers self-insured residential mortgage loans to
a maximum L.T.V. of 90%. The Bank will, under certain circumstances, lend
up to 95% of appraised value to facilitate the sale of residential OREO and
up to 85% for the sale of non-residential OREO.
Appraisals on property securing the Bank's one-to-four family
residential loans are made by both independent appraisers and by the Bank's
licensed, in-house appraisal staff.
The Bank's policy also requires that appraisals be performed in
accordance with applicable federal and state laws and regulations.
Borrowers also must obtain hazard insurance prior to closing and, when
required by the United States Department of Housing and Urban Development,
flood insurance. The Bank generally has required borrowers to advance
funds, with each monthly payment of principal and interest, to a loan
escrow account from which the Bank makes disbursements for items such as
real estate taxes as they become due.
Multi-Family, Commercial Real Estate, Land and Construction Lending.
The Bank originates loans secured by multi-family and commercial real
estate located primarily within the Bank's market area. The Bank
also originates land acquisition and development loans, as well as
construction loans for one-to-four family, multi-family and commercial
real estate projects. These loan programs reflected efforts to diversify
the type of property securing loans in the Bank's portfolio and to increase
the sensitivity of the loan portfolio to changes in interest rates by
originating loans with adjustable rates tied to indices more reflective of
actual market rates. Additionally, such loans generally have higher fees
and interest rates than comparable one-to-four family residential real
estate loans. The Bank also originated fixed rate commercial mortgages
generally matched by FHLB advances of like terms.
At December 31, 1997, $5.4 million, or 1.3%, of the Bank's total loan
portfolio consisted of loans secured by multi-family properties.
Multi-family loans are comprised primarily of loans secured by income
producing properties with five to 10 residential units.
At December 31, 1997, $55.1 million, or 12.8%, of the Bank's total
loan portfolio consisted of loans secured by commercial real estate. Also
at December 31, 1997, $2.9 million, or 0.7% of the Bank's total loan
portfolio were construction loans, the majority of which were for
construction of one-to-four family residential units. Land loans to
acquire and develop real estate at December 31, 1997 amounted to $640,000
or 0.2% of the Bank's total loan portfolio. Most of the Bank's land loans
were for residential real estate development projects, and, to a lesser
extent, commercial and small industrial developments. The Bank has
curtailed the origination of land loans, except in connection with loans to
facilitate the sale of land held and under other limited circumstances.
The Bank's lending policy allows for loans secured by multi-family
properties and commercial real estate with a maximum loan-to-value ratio of
80% (or up to 85% to finance the sale of OREO). Historically, the
Bank's multi-family and commercial real estate loans have maturities of 15
to 30 years. As to current loans, the Bank typically offers maturities of
3 to 25 years and terms which provide that interest rates thereon adjust at
regular intervals of one, three, five, seven, or ten years, based upon an
index tied to a treasury securities index or the FHLB advance rate for a
period matching the repricing period of the loan. The Bank also originates
fixed rate commercial mortgages having maturities from 15 to 25 years. The
Bank generally obtains personal guarantees on loans from the principals of
the borrowing entity. Appraisals of the property securing such loans
are generally made by both independent appraisers and by the Bank's
licensed, in-house appraisal staff.
Multi-family, commercial real estate and commercial construction
lending to builders is generally considered to involve a higher degree of
risk than one-to-four family residential lending. Such lending typically
involves larger loan balances concentrated in a single property or with a
single borrower or groups of related borrowers. In addition, the payment
experience on loans secured by existing income-producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be more susceptible to adverse conditions in the real
estate markets or in the economy generally. Moreover, such financing is
generally considered to involve a higher degree of risk of loss than
long-term financing on improved, owner-occupied real estate because of the
uncertainties of construction, including the possibility of cost exceeding
the initial estimates and risk associated with the failure of the ultimate
purchaser to purchase such property, or the failure of the lender holding
take-out financing to provide such financing. The Bank has resumed such
lending, but on a limited basis consistent with prudent underwriting
standards.
Home Equity Lines of Credit, Home Improvement and Second Mortgages.
At December 31, 1997, $7.6 million, or 1.8% of the Bank's total loan
portfolio, consisted of home equity lines of credit. At that date, the
Bank had outstanding commitments for an additional $8.7 million of unused
home equity lines of credit. Also at December 31, 1997, the Bank had
outstanding a variety of home improvement loans and second mortgages
secured by one-to-four family residential properties. Although home equity
lines of credit and home improvement loans typically are secured by second
mortgage liens on residential properties, some of the Bank's home equity
lines and home improvement loans are secured by first mortgage liens on
property which is not otherwise mortgaged or subject to similar
encumbrances.
The Bank currently offers home equity lines of credit consistent with
prudent underwriting standards and favorable economic conditions. The Bank
also currently offers amortizing second mortgage loans to enable
home owners to access equity in their home. The Bank offers repayment
schedules up to 15 years. The Bank also offers installment second mortgage
loans fully amortized over five years. These loans are underwritten
based on the borrower's consumer credit and may be up to 100% of the equity
in the borrower's home. These loans do not exceed $40,000.
The Bank's current Loan Policy permits home equity and second mortgage
loans to be made for up to 80% of the appraised value of the property
securing the loan, less any existing encumbrances. Appraisals on the
property securing the Bank's home equity and second mortgage loan products
and lines are made by both independent appraisers and by the Bank's
licensed, in-house appraisal staff.
Commercial Business Lending. The Bank's Commercial Business Lending
Department offers a wide array of commercial lending and deposit services.
The Bank is offering traditional commercial and industrial loan products
and commercial real estate loans to local businesses consistent with
prudent underwriting standards. The Bank believes these loan products will
provide higher interest rates and will allow the Bank to serve the local
small business community, a market sector which is not currently being
served by large regional commercial banks or money center banks.
Management believes development of the Bank's commercial department affords
the Bank the best opportunity to increase market penetration in the Bank's
local market area.
Consumer Lending. The Bank currently offers a variety of consumer
loan products, including loans secured by passbook accounts at the Bank,
unsecured lines of credit, education and automobile loans and
personal loans. Interest rates are set from time to time and are intended
to be generally competitive in the Bank's market. The Bank is now more
actively pursuing direct consumer lending. Management believes that
higher interest rates and shorter maturities associated with this type of
lending will complement both earnings and asset/liability management
objectives. The Bank intends to actively market consumer loan products and
to build the consumer loan portfolio.
Credit Cards. The Bank currently offers consumer and business credit
cards. In addition, the Bank provides merchants services as an additional
source of fee income.
Mortgage Loan Servicing. The following table sets forth information
regarding the Bank's loan servicing portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
1997 (a) 1996 1995
(Dollars in thousands)
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
<S> <C> <C> <C> <C> <C> <C>
Loans owned and
serviced by the Bank
(before net items) $432,269 85.51% $418,818 85.74% $360,475 81.42%
Loans serviced for
others 73,279 14.49 69,680 14.26 82,281 18.58
Total loans serviced
by the Bank
(before net items) $505,548 100.00% $488,498 100.00% $442,756 100.00%
</TABLE>
(a) Includes $5.3 million of one-to-four family mortgage loans
held-for-sale.
The Bank has historically serviced loans for other institutions as a
means of maintaining customer relationships and generating fee income.
These loans are comprised of loans originated by the Bank and
securitized into participation certificates or whole loans sold to private
banking institutions or FNMA or FHLMC. Fee income derived from these loans
serviced for others totalled $296,000, $316,000 and $370,000 in
1997, 1996 and 1995, respectively.
Non-Performing, Delinquent and Classified Assets
General. At December 31, 1997, non-performing assets were comprised
of $4.8 million of non-performing loans and $574,000 of OREO. Most of the
Bank's non-performing assets consist of OREO and non-performing loans
secured by property located in the Bank's Southern Fairfield County,
Connecticut market area.
The Bank believes that the reduction in non-performing assets (see
following table) is the result of concentrated efforts by the Bank's
management and Board of Directors to improve credit quality and dispose
of problem assets. The Bank believes the improvement of the Fairfield
County residential real estate market and lower market interest rates
facilitated the reduction in non-performing assets.
The Bank's Watch List, 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 aggregated $8.5 million at December 31, 1996 and
$11.7 million at December 31, 1997. Two loans which were non-accrual at
December 31, 1996 were placed on the Watch List during 1997; these loans
have been current for the remainder of 1997. Another loan experienced
delinquency during the first half of 1997 and was placed on the Watch List;
this loan has been current for the last six months of 1997.
The Bank implemented the Accelerated Non-Performing Asset Disposition
Program in 1994 to allow the Bank to more rapidly dispose of certain
non-performing assets at discounts below their net realizable value.
The program established a $5.7 million special allowance to dispose of
$14.0 million of non-performing assets, $3.1 million allocated to the
provision for credit losses and $2.6 million allocated to the provision for
estimated losses on OREO. The Bank concluded the ADP program on December
31, 1995. In total, gross assets of $16.1 million were disposed of, and a
total of $4.6 million was charged to the ADP allowances.
The Bank continued to reduce non-performing assets in 1997 and 1996
through the normal course of business. Total non-performing assets were
$5.4 million at December 31, 1997 or 0.83% of total assets compared
to $11.3 million or 1.9% of total assets at December 31, 1996.
Non-Performing Assets. The following table sets forth the amounts of the
Bank's non-performing assets, by category at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Real estate loans:
One-to-four family $2,122 $ 2,784 $ 1,422 $ 2,402 $6,219
Multi-family 1,317 1,739 2,330 2,119 2,120
Commercial real estate 1,043 3,819 7,645 4,538 15,756
Land - - 105 509 1,180
Construction - - 450 191 590
Other loans:
Commercial 106 1,197 65 12 -
Home equity lines
of credit 175 175 395 57 141
Home improvement and
second mortgage 44 653 658 148 169
Other consumer 40 74 - - 5
Total non-performing
loans (a) (b) 4,847 10,441 13,070 9,976 26,180
OREO:
One-to-four family 250 90 148 2,257 2,246
Multi-family - - - - 548
Commercial real estate 324 586 3,386 6,480 10,555
Land - 182 733 2,885 4,475
Allowance for estimated
losses on OREO - - - (802) (194)
Total OREO, net 574 858 4,267 10,820 17,630
Total non-performing
assets, net $5,421 $11,299 $17,337 $20,796 $43,810
Total non-performing assets,
net, as a percentage of
total assets 0.83% 1.92% 3.36% 4.47% 10.24%
</TABLE>
(a) For presentation purposes, no amount of the allowance for credit
losses has been allocated to non-performing loans.
(b) Includes amounts previously reflected as in-substance foreclosures
under prior accounting methods in effect as of the years ended
December 31, 1993 and 1994.
Troubled debt restructurings ("TDRs") are loans as to which the Bank
has granted certain concessions in light of the borrower's financial
difficulty. The objective of the Bank in granting these concessions,
through a modification of terms, is to maximize the recovery of its
investment. This modification of terms may include a reduction in stated
rate, an extension of maturity at a more favorable rate and a reduction of
accrued interest. In the past, any TDRs entered into by the Bank were
classified as non-performing loans. The Bank may, from time to time,
engage in TDRs when appropriate. At December 31, 1997, the Bank had no
TDR's classified as non-performing.
An additional form of troubled debt restructuring that is available to
the Bank is loan splitting. In instances where cash flows are insufficient
to service total debt, the debt may be split into two separate notes,
one note at current market terms and a second at below market terms. This
practice enables a certain portion of the loan to return to performing
status. At December 31, 1997, the Bank had $1.9 million in former TDR's
which have been integrated into the Bank's performing loan portfolio based
on satisfactory performance.
Delinquent Loans. Total loans delinquent 30 to 89 days decreased to
$2.4 million as of December 31, 1997 from $4.1 million at December 31,
1996. The delinquency consisted primarily of one-to-four family
residential loans (19 loans with an approximate balance of $2.0 million).
The Bank continues to address collection of delinquent loans. Each
loan officer is assigned a portfolio of delinquent loans. Delinquent
borrowers receive written correspondence once a loan becomes 30 days past
due. A loan officer will make contact before the loan becomes 20 days past
due. A call letter will be sent out by the time a loan becomes 60 days
past due unless a work-out schedule has been agreed to with the borrower.
Foreclosure will commence after the loan becomes 90 days past due unless a
repayment schedule has been mutually accepted or the Bank determines that
foreclosure would not be in its best interests.
Because of certain provisions of Connecticut foreclosure law, the Bank
may encounter delays in its attempt to foreclose on property for which it
is mortgagee. Connecticut foreclosure law requires a lawsuit by
the foreclosing party against the mortgagor (owner) of real estate (and the
suit must name as defendants all junior lien holders). In addition,
Connecticut law protects consumers who are unemployed or under-employed,
as defined by statute, by permitting them to obtain a six-month stay of a
mortgage foreclosure action and to restructure their mortgage debt. In
general, although foreclosure actions are subject to far fewer defenses
than ordinary lawsuits, mortgagors can and sometimes do raise defenses
which, even if not meritorious, can delay the foreclosure process for
months or even years. Foreclosure in Connecticut is typically accomplished
by strict foreclosure in contrast to foreclosure by sale. Strict
foreclosure involves the rendering of a judgment by a court in favor of the
foreclosing party (e.g., a bank) and sets a date by which the property
owner (the mortgagor) and any other mortgagees must either redeem the
property by paying the foreclosing party the full amount of its debt
or lose their interest in the property. Foreclosure by sale requires a
court to appoint a committee to sell property at public auction, and
involves advertising and appraisal of the property. Foreclosure by sale
frequently imposes significant delays when compared to the strict
foreclosure process.
Management of the Bank regularly reviews delinquent loans, which are
placed on non-accrual status when, in its judgment, the probability of
collection is too uncertain to warrant further accrual. All loans 90 days
or more past due as to interest or principal are placed on non-accrual
status unless, in exceptional circumstances, the loan is both well secured
and in the process of collection. The Bank was accruing interest on four
loans which were 90 days or more past due with an aggregate principal
balance of $1.6 million at December 31, 1997.
Allowances for Credit Losses. The Bank's allowance for credit losses
was $5.8 million at December 31, 1997. The Bank's Watch List loans, unused
lines of credit, and letters of credit are taken into account in
establishing the allowance for credit losses.
The following table sets forth an analysis of the activity in the
allowance for credit losses at and during the periods indicated.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $7,334 $4,170 $4,827 $2,532 $4,567
Add:
Provision charged to operations - 4,415 2,105 690 1,000
Allowance on Acquired Loans - 1,000 - - -
ADP plan - - (1,100) 3,100 -
Recoveries 653 237 137 94 38
Less:
Charged-off:
Real estate loans:
One-to-four family 516 394 648 956 392
Multi-family 122 220 355 1 83
Commercial real estate 967 1,788 671 551 1,442
Land - 18 118 - -
Construction - - - 61 1,075
Consumer and commercial
business 550 68 7 20 81
2,155 2,488 1,799 1,589 3,073
Balance at end of period $5,832 $7,334 $4,170 $4,827 $2,532
Net charged-off $1,502 $2,251 $1,662 $1,495 $3,035
Loans outstanding
(before net items) $432,269 $418,818 $360,475 $290,416 $269,300
Ratio of net charged-off to
loans outstanding (before
net items) at end of
period 0.35% 0.54% 0.46% 0.51% 1.13%
</TABLE>
The following table sets forth, at the dates indicated, the Bank's
allocation of the allowance for credit losses to the total amount of loans
in each of the categories listed.
<TABLE>
<CAPTION>
At December 31,
1997
Percent of Percent of Loans
Total Allowance in each Category
Amount For Credit Losses to Total Loans
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage Loans
Residential (a) $1,161 19.9% 78.4%
Commercial (b) 3,854 66.1 15.0
Other Loans (c) 817 14.0 6.6
Total allowance for
credit losses $5,832 100.0% 100.0%
Ratio of allowance
for credit losses to
loans outstanding
(before net items)
at end of period 1.35%
At December 31,
1996
Percent of Percent of Loans
Total Allowance in each Category
Amount For Credit Losses to Total
Loans
(Dollars in thousands)
Mortgage Loans
Residential (a) $1,045 14.2% 79.9%
Commercial (b) 4,710 64.3 13.3
Other Loans (c) 1,579 21.5 6.8
Total allowance for
credit losses $7,334 100.0% 100.0%
Ratio of allowance
for credit losses to
loans outstanding
(before net items)
at end of period 1.75%
At December 31,
1995
Percent of Percent of Loans
Total Allowance in each Category
Amount For Credit Losses to Total Loans
(Dollars in thousands)
Mortgage Loans
Residential (a) $ 750 18.0% 79.8%
Commercial (b) 3,153 75.6 15.7
Other Loans (c) 267 6.4 4.5
Total allowance for
credit losses $4,170 100.0% 100.0%
Ratio of allowance
for credit losses to
loans outstanding
(before net items)
at end of period 1.16%
</TABLE>
(a) Includes one-to-four family loans.
(b) Includes all commercial real estate loans, multi-family, land and
construction loans.
(c) Includes commercial business, home equity lines of credit, home
improvement, second mortgages, passbook and other consumer loans.
Allowance for Estimated Losses on OREO. The following table sets
forth an analysis of the activity in the allowance for estimated losses on
OREO at and during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
<S> <C> <C> <C> <C> <C>
Allowance for Estimated Losses
on OREO 1997 1996 1995 1994 1993
(In thousands)
Balance at beginning of period $ - $ - $ 802 $ 194 $1,025
Add:
Provision charged to operations - 459 460 2,894(b) 3,975
Less:
Charged-off:
One-to-four family - - 284 449 298
Multi-family - - 58 153 224
Commercial real estate - 459 582 1,097 2,008
Land - - 338 193 840
Construction - - - 394 1,436
- 459 1,262 2,286 4,806
Balance at end of period (a) $ - $ - $ - $ 802 $ 194
</TABLE>
(a) The Bank carries OREO at net realizable value. Beginning in 1991, the
Bank established general and specific reserves against OREO to arrive
at net realizable value. Beginning in 1993, the Bank netted the
specific reserves against OREO carrying values, and continues to
maintain a general reserve when deemed necessary by management to
arrive at net realizable value.
(b) Of the $2.9 million provision charged to operations, $2.6 million was
a result of the ADP Program.
Investment Activities
General. In accordance with Statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), which the Bank adopted as of January 1, 1994,
the Bank was required to classify each security in the portfolio as either
"Held-to-Maturity", "Available-for-Sale", or "Trading Account Security".
It was the decision of management to classify substantially all of the
portfolio as Held-to-Maturity at the adoption date based upon the Bank's
ability and intent to hold, taking into account currently available
liquidity and the potential for additional liquidity afforded by the Bank's
stock conversion.
During 1996 the Bank assessed whether the Held-to-Maturity
classification was supported by management's intent due to the
repositioning of the Bank's long term objectives and financial condition;
as a result, the Bank reclassified substantially all of these investments
to Available-for-Sale. This decision required the Bank to mark each
security to market through Shareholders' equity as of December 31, 1996 and
reflect each investment at fair value.
Under Connecticut law, the Bank has authority to purchase a wide range
of investment securities. However, as a result of changes in federal
banking laws in 1991, financial institutions such as the Bank may not
engage as principals in any activities that are not permissible for a
national bank, unless the FDIC has determined that the activity would pose
no significant risk to the Bank Insurance Fund and the Bank is in
compliance with applicable capital standards. In March 1993, the Regional
Director of the FDIC approved a request by the Bank to invest in certain
listed stock and/or registered stock subject to certain conditions.
The Bank utilizes the trading account classification to account for
the portion of the equity portfolio with common stock investments in the
covered call option program. This 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. The holding
period of each investment averages one to three months and there are ten to
fifteen investment positions in the program. As required by SFAS 115 the
Bank marks the common stock and related covered call option to market
through current period earnings.
During 1997, the Bank effected various purchase and sale transactions
designed to increase yields on the existing portfolio investment levels
and, during the first six months of the year, invested a net total of
approximately $34 million in callable preferred stocks as part of its
income tax strategy. These securities accounted for a significant part of
the net growth of the portfolio providing an advantageous investment
vehicle as the stock converts in approximately 4-1/2 years to adjustable
rates which management anticipates will result in the securities being
called. An additional benefit to the tax effective yield is an
equalization provision, in the event the dividend income becomes subject to
full taxation, up to the call date.
The following table sets forth the composition of the Bank's
securities at fair value at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury securities $ - $ - $ 8,316 $24,137 $38,488
Obligations of other U.S.
Government agencies 55,257 42,120 20,366 25,240 19,633
Total $55,257 $42,120 $28,682 $49,377 $58,121
Equity Securities $39,292(a) $5,528(a) $4,844 $22 $23
</TABLE>
(a) Includes $1,830 and $3,292 classified as trading at December 31, 1997
and 1996, respectively.
The following table sets forth the maturities of the Bank's investment
securities (excluding equity securities) by amortized cost at December 31,
1997 and the weighted average yields of such securities.
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within 10 Years After 10 Years Totals
(Dollars in Thousands)
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other
Bonds
and
notes(a) $ - -% $3,000 6.60% $43,002 6.97% $9,120 7.15% $55,122 6.98%
Mortgage-
backed
securities(b) - - 2,318 7.70 9,686 7.92 73,539 7.86 85,543 7.80
Total $ - -% $5,318 7.08% $52,688 7.14% $82,659 7.78% $140,665 7.48%
</TABLE>
(a) Solely U.S. Government agencies.
(b) Solely FHLMC and FNMA participation certificates.
Mortgage-Backed Securities. Mortgage-backed securities increase the
quality of the Bank's assets because of the insurance or guarantees of
federal agencies on non-guaranteed mortgage loans. In addition, mortgage-
backed securities are more liquid than individual mortgage loans and may be
more readily available to collateralize borrowings or other obligations of
the Bank. All of the FNMA or FHLMC securities owned by the Bank at
December 31, 1997 had initial maturities of seven to thirty years, although
the Bank expects the average lives will be considerably shorter due to
principal amortization and prepayments.
The following table sets forth the activity in the Bank's
mortgage-backed securities portfolio at and during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of period $92,443 $90,281 $97,719
Purchases 47,205 38,650 44,318
Acquired in exchange for loans - - 4,361
Sales (34,630) (11,886) (38,615)
Repayments, accretion and
amortization (19,475) (24,602) (17,502)
Mortgage-backed securities
at end of period $85,543 $92,443 $90,281
</TABLE>
Sources of Funds
The primary sources of funds for the Bank's use in its lending
activities and for other general business purposes are amortization and
prepayment of loans, deposit accounts and funds provided from operations.
See "Management's Discussion and Analysis - Liquidity and Interest Rate
Risk Management".
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank attempts to control the flow of funds
in its deposit accounts according to its need for funds and the cost of
alternative sources of funds primarily through the pricing of deposits and,
to a lesser extent, by promotional activities.
Among the deposit accounts offered by the Bank at December 31, 1997
were regular passbook and statement savings accounts, which earn interest
at an annual rate of 1.99% with an effective annual yield at 2.00%.
Interest on passbook and statement savings accounts is compounded and
credited monthly. The Bank requires a minimum deposit of $5.00 to open a
passbook or statement savings account. The Super Savings Account earns
interest at annual rates of 2.23% to 3.35% with an effective annual yield
of 2.25% to 3.40%. The minimum deposit to open Super Savings Accounts is
$1,000 and the interest is compounded and credited monthly. The Bank also
offers money market accounts which are competitive with similar money
market mutual funds. The Bank requires a $2,500 minimum deposit to open
the Advantage Money Market Account. Average monthly balances of less than
$2,500 are subject to service charges. The minimum deposit to open the
Gold Money Market Account is $5,000. Average monthly balances of less than
$5,000 are subject to service charges. Interest is compounded and credited
monthly. The interest rate is reviewed weekly and adjusted as money
market conditions warrant. Minimum balance requirements for the Bank's
certificates of deposit for one year or more are $500. Certificates which
have a maturity of under one year have a minimum balance requirement
of $1,000. Interest rates on all certificates are determined by the Bank's
Funds Management Committee based on market conditions, competitive factors,
cash flow requirements of the Bank, and funding objectives. Interest
is compounded and credited monthly on all certificates. The Bank offers
checking accounts which require a $25 minimum initial deposit and bear no
interest, and NOW accounts which pay interest on balances of $1,000 or
more and require a $25 minimum initial deposit. The Bank also offers a
Municipal Sweep Now Account which requires a minimum initial deposit of
$50,000.
As an additional source of funds, the Bank offers a commercial
repurchase agreement. This account pays interest and the minimum balance
to open is $50,000. Balances in the repurchase agreement are
collateralized by government securities.
The following table sets forth, at the dates indicated, the
distribution of the Bank's deposit accounts at the dates indicated and the
weighted average cost on each category of deposits for the periods then
ended.
<TABLE>
<CAPTION>
At December 31,
1997
(Dollars in Thousands)
Percent of Weighted
Total Average
Total Deposits Cost
<S> <C> <C> <C>
Demand deposits $ 27,471 6.18% 0.00%
Savings:
Regular savings 29,455 6.63 1.99
Super savings 47,863 10.78 3.00
NOW 37,287 8.39 1.16
Money Market fund 55,541 12.50 3.17
Escrow deposits 4,727 1.07 2.80
Certificates:
Certificate accounts 204,129 45.95 5.66
Money Market certificates 37,738 8.50 4.48
Total Deposits $444,211 100.00% 3.96%
At December 31,
1996
(Dollars in Thousands)
Percent of Weighted
Total Average
Total Deposits Cost
Demand deposits $22,479 5.31% 0.00%
Savings:
Regular savings 28,096 6.64 2.06
Super savings 45,404 10.73 2.60
NOW 30,262 7.15 1.88
Money Market fund 47,957 11.33 2.95
Escrow deposits 4,965 1.17 2.83
Certificates:
Certificate accounts 197,108 46.56 6.03
Money Market certificates 47,019 11.11 5.01
Total Deposits $423,290 100.00% 3.91%
At December 31,
1995
(Dollars in Thousands)
Percent of Weighted
Total Average
Total Deposits Cost
Demand deposits $ 13,697 3.40% 0.00%
Savings:
Regular savings 28,660 7.12 1.82
Super savings 55,042 13.66 2.79
NOW 35,097 8.71 .95
Money Market fund 59,724 14.83 3.89
Escrow deposits 4,142 1.03 2.73
Certificates:
Certificate accounts 154,340 38.32 5.31
Money Market certificates 52,095 12.93 4.47
Total Deposits $402,797 100.00% 3.81%
</TABLE>
The following table sets forth the net deposit flows of the Bank
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Net deposit inflow (outflow) $ 3,781 $ 3,649 (a) $25,557
Interest 17,140 16,844 14,169
Net increase in deposits $20,921 $20,493 $39,726
</TABLE>
(a) Includes deposits assumed in the FFB&T transaction of $47.6 million,
and $48.0 million in deposits sold in the Brookfield and Bethel branch
sales (see Management Discussion and Analysis - Financial Condition).
The following table presents the amounts of the Bank's certificate
accounts at December 31, 1997 maturing during the periods reflected below
and the weighted average interest rate of such accounts at such date:
<TABLE>
<CAPTION>
Weighted Average
Amount Interest Rate
(Dollars in thousands)
Certificate accounts maturing
during the 12 months ending:
<S> <C> <C>
December 31, 1998 $146,109 5.12%
December 31, 1999 70,623 5.85
December 31, 2000 20,757 6.51
Thereafter 4,378 5.90
Total $241,867 5.47%
</TABLE>
The following table presents the maturities of the Bank's certificate
accounts in amounts of $100,000 or more at December 31, 1997 by time
remaining to maturity.
<TABLE>
<CAPTION>
Maturing
(In thousands)
<S> <C>
Six months or less $ 9,329
Over six through twelve months 5,164
Over twelve months 9,823
Total $24,316
</TABLE>
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank also utilizes borrowings from the FHLB and securities sold under
agreements to repurchase ("reverse repurchase agreements") as
alternative funding sources.
The Federal Home Loan Bank System functions in a reserve credit
capacity for savings institutions and certain other home financing
institutions. The Bank is required to own capital stock in the FHLB in
order to access the System and is authorized to apply for advances on the
security of such stock and certain of its home mortgages and other assets
(principally securities which are obligations of, or guaranteed by, the
United States) provided certain credit worthiness standards have been met.
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.
At December 31, 1997, the Bank had outstanding $110.9 million in
borrowings from the FHLB, maturing as follows:
<TABLE>
<CAPTION>
Adjustable Rate Next Interest
Due Date Adjustment Amount Rate
<S> <C> <C> <C>
May 1999 November 1997 $ 4,400 5.94%
February 2002 February 1999 10,000 5.90
Total Adjustable Rate 14,400 5.91
Fixed Rate
January 1998 - 5,000 5.78
February 1998 - 5,000 5.30
March 1998 - 10,000 5.63
April 1998 - 5,000 5.98
May 1998 - 10,000 6.13
May 1998 - 5,000 6.28
May 1998 - 5,000 5.96
June 1998 - 5,000 6.28
June 1998 - 15,000 5.87
June 1998 - 15,000 5.76
July 1998 - 5,000 5.82
July 1998 - 5,000 5.26
November 1998 - 5,000 5.90
December 2013 - 1,537(a) 6.55
Total Fixed Rate 96,537 5.85%
Total Borrowings $110,937
</TABLE>
(a) This borrowing has an amortization feature attached to it and pays
down over a term consistent with the loan it is matched against.
FHLB advances to the Bank at December 31, 1995, 1996, 1997 were $61.8
million, $82.2 million and $110.9 million, respectively.
The following table sets forth, at the dates indicated, information
concerning the Bank's reverse repurchase agreements:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(Dollar amounts in
thousands)
<S> <C> <C> <C>
Average Balance During the Year $33,847 $29,203 $6,857
Maximum Month-End Balance During the Year $40,441 $36,350 $9,310
Average Interest Rate During the Year 5.90% 5.61% 5.88%
</TABLE>
At December 31, 1997, repurchase agreements aggregating approximately
$21.0 million, $9.4 million and $10.0 million mature during the years
ending December 31, 1998, 2000 and 2002, respectively.
The following table sets forth, at the dates indicated, information
regarding the weighted average interest rate and the highest and average
month-end balances of the Bank's total borrowings.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate of total borrowings 5.88% 5.89% 6.44%
Highest outstanding balance of total borrowings $181,951 $159,903 $77,229
Average month-end balance of total borrowings $158,944 $115,465 $65,644
</TABLE>
Credit Card Services
The Bank acquired a credit card operation in conjunction with the
acquisition of certain assets of Fairfield First Bank and Trust Company in
July 1996.
The credit card function involves two primary lines of business:
merchant deposit and cardholder.
As of December 31, 1997 there was $1.4 million in credit card loans
outstanding compared to $1.0 million as of December 31, 1996.
Interest income is derived from the credit card loans and the merchant
deposit function generates fee income for the Bank.
Subsidiaries
The Bank has one wholly owned subsidiary, NSS Realty, which was formed
in 1990 for the sole purpose of developing and disposing of certain real
estate the Bank acquired through foreclosure or deed in lieu of
foreclosure. NSS Realty recorded sales of Bank owned real estate during the
year ended December 31, 1997 of $139,100, which resulted in a gain of
$68,700. At December 31, 1997, NSS Realty has one property with a book
value of $111,700. NSS Realty has one wholly owned subsidiary, NSS Westport
Development Corp., which was formed in 1992 solely for the purpose of
developing an OREO property, Sherwood Farms in Westport, CT. This
subdivision was completely sold out in 1996 and the subsidiary is currently
inactive.
Employees
160 employees were employed by the Bank as of February 28, 1998; 156
were full time equivalents.
Miscellaneous
The Bank has not obtained a material portion of its deposits from a
single customer. A material portion of the Bank's loan portfolio is not
concentrated in one industry or related group (other than residential
mortgage lending in Fairfield County, Connecticut). The Bank holds no
material patents, trademarks, licenses or concessions except as required by
regulatory authorities. The Bank has undertaken no material research
activities related to new services or the improvement of existing services,
other than routine activities in the ordinary course of the Bank's
business. The Bank conducts substantially all of its marketing research
using existing personnel, none of which is engaged full-time in such
activities.
ITEM 2.
Properties
At December 31, 1997 the Bank had eight full service banking offices
and one satellite (ATM) branch. The following table lists information at
December 31, 1997 for the properties of the Bank.
<TABLE>
<CAPTION>
Year Office Area Amount of Owned or Lease
Location Opened by Square Feet Deposits Leased Expiration
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Executive Offices:
48 Wall Street 1849 24,000 $ - Owned
Norwalk, Connecticut
Full Service
Banking Offices:
48 Wall Street 1849 2,950 158,128 Owned
Norwalk, Connecticut
117 Old Ridgefield Road 1960 3,450 42,769 Owned
Wilton, Connecticut
Rt. 7 & 107 1972 2,560 29,013 Leased June 30,2002
Georgetown, Connecticut
Main Avenue &
West Rocks Road 1974 3,560 70,841 Leased April 30,2006
Norwalk, Connecticut
578 Westport Avenue 1983 3,500 57,321 Owned
Norwalk, Connecticut
1815 Post Road East 1988 3,392 37,944 Owned
Westport, Connecticut
2000 Post Road 1996 3,300 35,564 Leased Oct. 31,2006
Fairfield, Connecticut
1089 Post Road
Darien, Connecticut 1997 3,000 12,631 Leased Sept. 30,2006
Satellite Branch
So. Norwalk Railroad
Station 1996 Free standing ATM - Leased June 14,2001
</TABLE>
$444,211
ITEM 3.
Legal Proceedings
The Company and its subsidiary are not involved in any legal
proceeding that it believes is material to its financial condition.
ITEM 4.
Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of 1997.
PART II
ITEM 5.
Market for the Company's Common Stock and Related Shareholder Matters
NSS Bancorp, Inc.'s common stock is traded over the counter on the
NASDAQ National Market System under the symbol "NSSY".
As of March 27, 1998 the latest practicable date, there were
approximately 688 shareholders of record.
Information on market prices and dividends paid for the latest two
fiscal years is included on page 29 of the Company's Annual Report to
Shareholders for the year ended December 31, 1997, which is incorporated
herein by reference, under the caption, "Market Price of Common Stock".
The Bank began paying dividends to its shareholders in 1996. The
first dividend since becoming a public company in June 1994 was $0.05 per
share payable to the shareholders of record as of the close of business on
May 6, 1996. Subsequent dividends have been declared and paid by the Bank
on a quarterly basis during 1996 and the first three quarters of 1997, and,
commencing with the fourth quarter of 1997, by Bancorp. The Board
of Directors recognizes that it is under no obligation to continue paying
dividends and will consider such a payment on a quarterly basis assuming
such action would be consistent with its primary goal of maintaining the
capital adequacy of both Bancorp and Bank. The ability of Bancorp to pay
dividends to its shareholders is primarily dependent upon the Bank's
ability and inclination to pay dividends to Bancorp. Connecticut law
prohibits the Bank from paying dividends other than to the extent of
retained net profits from the current fiscal year and two preceding full
fiscal years.
ITEM 6.
Selected Financial Data
The following tables set forth certain selected consolidated financial
and other data of the Company at or for the dates indicated. This information
should be read in conjunction with the Consolidated Financial Statements
and notes thereto included elsewhere herein. The consolidated financial
data as of and for the years ended December 31, 1993 through 1997 have been
derived from the audited Consolidated Financial Statements of the Company.
<TABLE>
At or For the Year Ended December 31,
($ thousands, except per share data)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets $654,222 $589,589 $515,267 $464,901 $427,950
Treasury & other gov't.
agency securities 55,257 42,120 28,682 51,139 58,129
Mortgage-backed securities 85,948 92,453 90,339 97,270 58,219
Equity Securities 39,292 5,528 4,844 22 9
Loans Receivable, net of
deferred loan fees 431,644 418,100 359,966 289,712 268,713
Allowance for credit losses 5,832 7,334 4,170 4,827 2,532
Loans, net 425,812 410,766 355,796 284,885 266,181
OREO 574 858 4,267 11,622 17,824
Allowance for estimated losses - - - 802 194
OREO, net 574 858 4,267 10,820 17,630
Deposits 444,211 423,290 402,797 363,071 359,063
Borrowings 151,671 114,043 67,123 63,510 48,765
Shareholders' Equity/
Retained Earnings 56,138 49,353 43,595 37,513 19,712
Non-Performing Assets:
Non-performing loans 4,847 10,441 13,070 9,976 26,180
OREO, net 574 858 4,267 10,820 17,630
Total non-performing assets $5,421 $11,299 $17,337 $20,796 $43,810
Summary of Operations:
Interest and dividend income 45,869 $41,255 $33,015 $25,045 $24,520
Interest expense 26,496 23,640 18,398 13,112 13,719
Net interest and dividend income19,373 17,615 14,617 11,933 10,801
Provision for credit losses - 4,415 1,005 3,790 1,000
Net interest income after provision
for credit losses 19,373 13,200 13,612 8,143 9,801
Non-interest income:
Service charges and other income3,787 2,687 1,897 1,890 2,173
Gains (losses) on loans and
investment securities 1,459 517 798 (64) 2,410
Gain on sale of branches - 3,639 - - -
Non-interest expenses:
Provision for estimated losses
on OREO - 459 460 **2,894 3,975
Holding costs and expenses of
OREO, net (103) 903 955 532 850
Operating expenses 15,827 14,104 11,304 9,980 8,705
Income (loss) before income
taxes 8,895 4,577 3,588 (3,437) 854
Current income tax provision 1,973 175 10 50 73
Deferred income tax provision
(benefit) 1,357 (1,300) (1,200) - -
Net income (loss) $5,565 $5,702 $4,778 ($3,487) $781
Net income excluding the
effects of the
ADP Program (*, **) $2,213
Income (loss) per share $2.31 $2.39 $2.04 $(1.51) N/A
Income per share excluding
the effects of
the ADP Program (*,**) N/A N/A N/A $0.96 N/A
</TABLE>
* Includes $3.1 million allocated to loans of the total $5.7 million
one-time special charge for the Accelerated Non-Performing Asset
Disposition Program (ADP).
** Includes $2.6 million allocated to OREO of the total $5.7 million
one-time special charge for the ADP Program.
ITEM 6. (continued)
Selected Financial Data (continued)
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Performance Ratios:(***)
Return on average total
assets 0.87% 0.97% 0.76% 0.51% 0.18%
Return on average
equity/retained
earnings 10.54 12.52 8.97 7.36 3.95
Net yield on interest-
earning assets 3.11 3.12 3.17 2.96 2.84
Asset Quality Data:
Non-performing loans as
a % of loans receivable 1.12 2.50 3.63 3.44 9.72
Non-performing assets as
a % of total assets 0.83 1.92 3.36 4.47 10.24
Allowance for credit
losses as a % of
loans receivable 1.35 1.75 1.16 1.66 0.95
Allowance for credit
losses as a % of
non-performing loans 120.32 70.24 31.91 48.39 9.67
Net charge-offs to
average loans 0.34 0.56 0.53 0.56 1.13
Capital Ratios:
Tier 1 leverage capital 8.2 7.9 8.4 8.2 4.6
Tier 1 risk-based capital 15.4 15.7 16.7 14.5 8.9
Total risk-based capital 16.6 17.0 17.9 15.8 10.0
Other Selected Financial
and Statistical Data:
Loans originated during
period $119,689 $161,984 $115,301 $75,718 $55,133
Dividend payout 15.15% 6.28% N/A N/A N/A
</TABLE>
*** Ratios for 1995 and 1994 exclude the effects of the ADP Program. All
such ratios for 1994 would be negative if the ADP charge of $5.7
million was included.
ITEM 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The data required by this item is included on pages 9 through 30 of
the Company's 1997 Annual Report to Shareholders, which is incorporated by
reference herein.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
The data required by this item is included on pages 27 and 28 of the
Company's 1997 Annual Report to Shareholders, which is incorporated by
reference herein.
ITEM 8.
Financial Statements and Supplementary Data
The data required by this item is included on pages 31 through 59 of
the Company's 1997 Annual Report to Shareholders, which is incorporated by
reference herein.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
ITEM 10.
Directors and Executive Officers of the Registrant
Information regarding the directors of the Company is omitted from
this report as the Company intends to file a definitive proxy statement not
later than 120 days after the end of the fiscal year and the information
to be included therein is incorporated herein by reference.
The executive officers of the Company (other than Messrs. Judson and
Howell, who are also Directors), all of whom are subject to election
annually by the Board of Directors, are:
Jeremiah T. Dorney has been Senior Vice President of the Bank since
April 1985, and was elected Corporate Secretary in June 1988. His
responsibilities are that of Senior Operations Officer and Director of
Human Resources. Mr. Dorney's career spans 35 years of diversified banking
education and experience.
Marcus I. Braverman, C.P.A. has been Senior Vice President and
Chief Financial Officer of the Bank since January 1994. He was appointed
Treasurer in 1995. From 1988 through June 1993, he was Vice President
in the Finance Division of People's Westchester Savings Bank and Senior
Vice President in June 1993.
ITEM 11.
Executive Compensation
Information regarding remuneration of executive officers and directors
of the Company is omitted from this report as the Company intends to file
a definitive proxy statement not later than 120 days after the end of
the fiscal year and the information to be included therein is incorporated
herein by reference.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
and management is omitted from this report as the Company intends to file
a definitive proxy statement not later than 120 days after the end of
the fiscal year and the information to be included therein is incorporated
herein by reference.
ITEM 13.
Related Parties and Transactions
Information regarding certain relationships and related transactions
is omitted from this report as the Company intends to file a definitive
proxy statement not later than 120 days after the end of the fiscal year
and the information to be included therein is incorporated herein by
reference.
PART IV
ITEM 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1). The following financial statements of the Company included
in the Annual Report to Shareholders for the year ended
December 31, 1997 are incorporated herein by reference in
Item 8. The remaining information in said Annual Report is
not deemed to be filed as part of this report, except as
expressly provided herein.
(i) Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996.
(ii) Consolidated Statements of Earnings for years ended
December 31, 1997, 1996 and 1995.
(iii) Consolidated Statements of Shareholders' Equity for
years ended December 31, 1997, 1996 and 1995.
(iv) Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.
(v) Notes to Consolidated Financial Statements.
(vi) Independent Auditor's Report.
(a) (2). All financial statement schedules for which provision
is made in applicable accounting regulations are inapplicable and have
therefore been omitted.
(b) Exhibits and reports on Form 8-K.
Form 8-K dated November 21, 1997 reporting the registrant's response
to a significant shareholder communication.
Form 8-K dated December 1, 1997 reporting the adoption of a stock
repurchase program.
(c) The following documents are filed as Exhibits to this Form 10-K, as
required by Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3i
to the Company's Registration Statement on Form 8-A
filed on July 24, 1997).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3ii to the Company's Registration Statement
on Form 8-A filed on July 24, 1997).
4.1 Instruments Defining Rights of Security Holders:
Shareholders Rights Agreement; Amendment to Rights
Agreement; and Assignment of Rights Agreement
(incorporated by reference to the Company's
Registration Statement on Form 8-A as Exhibits 4,
4.1, and 4.2 thereto, filed on July 24, 1997.
10.1 Employment Agreement-Robert T. Judson (incorporated
by reference to Exhibits 10.1; 10.1.2; 10.1.3 and
10.1.4 to the Company's Registration Statement on
Form 8-A filed on July 24, 1997).
10.2 Employment Agreement-Charles F. Howell (incorporated
by reference to Exhibits 10.2.1; 10.2.2; 10.2.3 and
10.2.4 to the Company's Registration Statement on
Form 8-A filed on July 24, 1997).
10.3. Employment Agreement-Jeremiah T. Dorney
(incorporated by reference to Exhibits 10.3.1;
10.3.2; 10.3.3 and 10.3.4 to the Company's
Registration Statement on Form 8-A filed on
July 24, 1997).
10.4.1 Employment Agreement-Marcus I. Braverman
(incorporated by reference to Exhibits 10.4.1;
10.4.2; 10.4.3; and 10.4.4 to the Company's
Registration Statement on Form 8-A filed on July 24,
1997).
10.5 Divestiture Agreement between Westport Asset
Management and Norwalk Savings Society
(incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form 8-A filed
on July 24, 1997.
10.6 Norwalk Savings Society 1994 Employee Stock Option Plan
(incorporated by reference to Exhibits 4.1(a), 4.1(b)
and 4.1(c) to the Company's Registration Statement on
Form S-8 filed on December 11, 1997.
10.7 Norwalk Savings Society 1994 Director Stock Option Plan
(incorporated by reference to Exhibits 4.2(a), 4.2(b)
and 4.3(c) to the Company's Registration Statement on
Form S-8 filed on December 11, 1997.
10.8 Norwalk Savings Society Executive Incentive Plan
(incorporated by reference to Exhibits 4.3(a) and 4.3(b)
to the Company's Registration Statement on Form S-8 filed
on December 11, 1997).
11 Computation of Earnings Per Share
13 1997 Annual Report to Shareholders.
18 Consent of Friedberg, Smith & Co., P.C.
21 Subsidiaries of NSS Bancorp, Inc.
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NSS BANCORP, INC.
Date: March 25, 1998 By: /s/ Robert T. Judson
Robert T. Judson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Chief Executive Officer:
/s/ Robert T. Judson Date: March 25, 1998
Robert T. Judson
Director, President and Chief Executive Officer
(Principal executive officer)
Chief Financial Officer:
/s/ Marcus I. Braverman, CPA Date: March 25, 1998
Marcus I. Braverman, CPA
Senior Vice President, Treasurer and Chief Financial Officer
(Principal financial and accounting officer)
Directors:
/s/ Donald St. John Date: March 25, 1998
Donald St. John
Chairman of the Board
/s/ Robert T. Judson Date: March 25, 1998
Robert T. Judson
Director, President and Chief Executive Officer
/s/ Brian A. Fitzgerald Date: March 25, 1998
Brian A. Fitzgerald
Director and Corporate Secretary
/s/ Charles F. Howell Date: March 25, 1998
Charles F. Howell
Director
/s/ Herbert L. Jay Date: March 25, 1998
Herbert L. Jay
Director
/s/ Dr. Edward J. Kelley Date: March 25, 1998
Dr. Edward J. Kelley
Director
/s/ John L. Segall Date: March 25, 1998
John L. Segall
Director
/s/ Alan R. Staack Date: March 25, 1998
Alan R. Staack
Director
<TABLE>
<CAPTION>
EXHIBIT 11
NSS BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Net Income $5,565 $5,702 $4,778
Outstanding weighted average common shares,
including shares issued for exercised
stock options 2,405 2,368 2,333
Average shares committed to be released
under the ESOP 9 13 13
Weighted average shares - basic 2,414 2,381 2,346
Weighted average effect of:
- - Shares contingently issuable for
executive compensation plans 9 - -
- - Shares issuable for assumed exercise
of outstanding stock options 253 225 134
- - Shares repurchasable using the
proceeds of assumed exercise of stock
options (treasury stock) (143) (166) (129)
Weighted average shares - assuming dilution 2,533 2,440 2,351
Income Per Share:
Basic $2.31 $2.39 $2.04
Assuming Dilution $2.20 $2.34 $2.03
</TABLE>
Exhibit 13
NSS Bancorp, Inc.
1997 Annual Report
<TABLE>
<CAPTION>
FINANCIAL CONDITION DATA
December 31,
<S> <C> <C> <C> <C> <C>
($ thousands) 1997 1996 1995 1994 1993
Total assets $654,222 $589,589 $515,267 $464,901 $427,950
Investment securities 180,497 140,101 123,865 148,431 116,357
Loans receivable 432,269 418,818 360,475 290,416 269,300
Allowance for credit losses (5,832) (7,334) (4,170) (4,827) (2,532)
Deposits 444,211 423,290 402,797 363,071 359,063
Borrowed funds 151,671 114,043 67,123 63,510 48,765
Shareholders' equity/
retained earnings 56,138 49,353 43,595 37,513 19,712
OREO, net 574 858 4,267 10,820 17,630
Non-accrual/
non-performing loans 4,847 10,441 13,070 9,976 26,180
Total non-performing assets 5,421 11,299 17,337 20,796 43,810
EARNINGS DATA
($ thousands, Years ended December 31,
<S> <C> <C> <C> <C> <C>
except per share data) 1997 1996 1995 1994 1993
Net interest and
dividend income $ 19,373 $ 17,615 $ 14,617 $ 11,933 $ 10,801
Provision for credit losses 0 4,415 2,105 690 1,000
Net gains on sales of
assets and liabilities 1,459 4,156 798 (64) 2,410
All other non-interest income 3,787 2,687 1,897 1,890 2,173
OREO related costs (gain),
net (103) 1,362 1,415 826 4,825
All other non-interest
expense 15,827 14,104 11,304 9,980 8,705
Income before income
tax provisions 8,895 4,577 2,488 2,263 854
Current tax provision 1,973 175 10 50 73
Deferred tax provision
(benefit) 1,357 (1,300) (1,200) - -
Income before ADP program 5,565 5,702 3,678 2,213 781
Effect of ADP program - - 1,100 (5,700) -
Net income (loss) $ 5,565 $ 5,702 $ 4,778 ($ 3,487) $ 781
Income (loss) per share:
Basic $2.31 $2.39 $2.04 ($1.51) n\a
Assuming dilution $2.20 $2.34 $2.03 ($1.51) n\a
PERFORMANCE, CAPITAL and ASSET QUALITY RATIOS
At and for the years ended December 31,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Performance:
Tangible book value
per share $22.44 $19.90 $18.44 $16.10 n/a
Return on average assets
Before ADP program 0.87% 0.97% 0.76% 0.51% 0.18%
After ADP program n\a n\a 0.99% -0.80% n/a
Return on average equity
Before ADP program 10.54% 12.52% 8.97% 7.36% 3.95%
After ADP program n\a n\a 11.65% -11.60% n/a
Net interest margin 3.11% 3.12% 3.17% 2.96% 2.84%
Capital:
Tier 1 leverage 8.18% 7.90% 8.43% 8.20% 4.61%
Total risk-based 16.61% 17.00% 17.90% 15.79% 10.04%
Asset quality:
Non-performing assets to
total assets 0.83% 1.92% 3.36% 4.47% 10.24%
Non-performing loans to
loans receivable 1.12% 2.50% 3.63% 3.44% 9.72%
Allowance for credit losses
to non-performing loans 120.32% 70.24% 31.91% 48.39% 9.67%
Allowance for credit losses
to loans receivable 1.35% 1.75% 1.16% 1.66% 0.95%
</TABLE>
To Our Shareholders
We are pleased to report that 1997 marked another profitable year for NSS
Bancorp, Inc. Your Company continues to realize solid growth in assets,
deposits, loans and core earnings. The Company's stock price increased over
60% in 1997, and the quarterly cash dividend was doubled in the second
quarter. The combination of stock appreciation plus cash dividends
paid during the year resulted in each share of NSS stock returning 63%
to the shareholder on a total return basis.
Pre tax earnings for 1997 increased to $8.9 million from $4.6 million in
1996. Earnings per share were $2.31 in 1997 compared to $2.39 in 1996. The
Company's earnings in 1997 were fully taxable while 1996 earnings included
deferred tax benefits of $1.3 million or $0.55 per share. Non-performing
assets were reduced to 0.83% of total assets at December 31, 1997 as
compared to 1.92% of total assets at December 31, 1996.
In October we completed the formation of your holding company, NSS
Bancorp, Inc. This move will improve our competitive position by giving
your Company's management the flexibility needed to implement new
strategies to create value for shareholders over the long-term. In May we
opened a branch in Darien to enable us to expand our market share in
Southern Fairfield County. The Darien branch gained over $12 million in
deposits during its first six months of operation. In December we renovated
our Fairfield branch to provide a more attractive banking environment for
our customers.
NSS has been aggressively expanding its commercial banking operation.
The rapid pace of consolidation in the Connecticut banking industry
has resulted in the acquisition of local community banks by large
out-of-state-banks. This trend has created a void in the market and has
left many small business owners displaced. As a locally managed bank, NSS
has the ability to deliver a level of responsive service not available at
multi-billion dollar banks. Management has taken advantage of this
opportunity and will continue to rapidly grow its profitable commercial
banking business. Today we have positioned the Company as a full-service
community bank serving the consumer, mortgage, and business banking needs
of our market. Customer surveys have rated NSS's service as "excellent."
The Bank's increased volume for both commercial and retail banking services
reinforces our Company's belief that great growth potential exists for NSS.
Rapid advancement in technology offers new alternatives for more
efficient and convenient delivery of banking services. Customer usage of
the NSS BankLine, our 24-hour telephone banking service, has grown beyond
our expectations. The establishment of our internet website
(www.nssbank.com) has served to set the stage for PC banking.
Because our personal and business lives are so deeply involved in
Southern Fairfield County, officers, directors, and employees of NSS devote
time and money to a wide variety of local charities and civic
organizations. Their involvement and your Company's commitment have been
instrumental in NSS's receiving an outstanding Community Reinvestment Act
rating.
We are committed to seek ways to continue to enhance shareholder
value by increasing earnings through market share growth, using alternative
delivery systems, and maintaining high quality service while controlling
expenses. We are very aware that consolidation in the banking industry is
in vogue. In many cases, shareholder value can be enhanced by sale. We
believe that a better strategy for NSS at this time is to take advantage
of market opportunities created by the loss of many of our traditional
competitors in lower Fairfield County. By remaining independent, and being
truly the local community bank alternative, we believe we can build our
franchise and improve the shareholder's investment over both the short and
long-term. We pledge to enhance shareholder value while balancing our
responsibilities to our shareholders, customers, employees and the
communities we serve, and we will continue to work diligently to ensure
that your investment and confidence in NSS are rewarded.
Commercial Banking
Serving the banking needs of small and mid-sized businesses continues to be
an area of emphasis for NSS. Our local presence allows our Commercial
Banking team to be accessible to business owners, providing them with quick
responses. This accessibility has helped the Bank to earn credibility as a
competing commercial lender in the marketplace. In 1997, the Bank
originated $27.8 million in loans to local businesses. In addition to the
interest income generated, we benefited from the checking account
relationships we have developed with many of these customers. As a result,
commercial checking account balances increased over 64% this past year.
Our goal is to remain responsive to the needs of small and medium
sized businesses in our market. Our experienced commercial lending
staff understands the credit needs of business owners. They are
knowledgeable in our lending programs and they take genuine interest in
their customers to help them find the best possible solution.
In addition to a full line of lending programs, we offer checking
accounts and cash management services for small business customers. This
year we have expanded our commercial banking products to include sweep
investment accounts and merchant credit card deposit services. The NSS
BankLine, a 24-hour telephone banking service, provides an efficient way
for our business customers to obtain account information and transfer funds
between accounts. The system was recently enhanced to include a statement
fax feature that provides business customers with daily account balances
and transactions. This year we will add BusiNSS-Link, a PC cash management
service. Business customers will be able to initiate transactions, retrieve
account information and analyze their cash flow from their personal
computer.
Retail Banking
NSS has been serving the banking needs of consumers in Southern
Fairfield County for almost 150 years. Our commitment to providing
personalized quality service is an NSS tradition and we will continue to
operate the bank with this philosophy. Throughout 1997 our retail banking
focus was on strengthening relationships with our customers, by rewarding
them for doing more of their banking at NSS. As customers expand their
banking relationships with us, the Bank will gain stronger market presence,
thereby increasing value to shareholders.
We restructured the Schedule of Fees on our checking and savings
accounts to reward customers. When the required deposit balance is met, our
customers are rewarded with no account fees or fees for using another
bank's Automated Teller Machines. Customers who pay fees are charged a flat
dollar amount. As a result, personal checking and NOW account balances
increased by 24% over the 1996 level.
In September we introduced the Gold Money Market Account. Depositors
benefit from competitive rates, easy access to their funds with an ATM Card
and a complete package of services including no fee checking, reduced rate
consumer loans and no fee credit cards. This account serves as a
competitive alternative to a broker's money market account.
The Investment Management and Trust Services Department provides an
excellent complement to our range of deposit accounts, allowing us to
strengthen our clients' banking relationship by providing many options to
meet their investment needs. The Department's assets increased by 14.6%
during 1997.
Mortgage & Consumer Lending
NSS continues to maintain its position as a major residential
mortgage lender in Fairfield County, originating both portfolio and
correspondent loans. For the third consecutive year, originations of
residential mortgage loans exceeded $100 million. Our increased emphasis
on correspondent lending this past year allowed us to offer a broader array
of mortgage products, which produced a substantial increase in income. In
fact, income from correspondent loans increased 280% over the 1996 level.
In celebration of our upcoming 150th anniversary, the Credit Card
Department issued the "1849 Gold Rush" MasterCard and Visa cards. The
cards were designed to honor the longevity of the Bank, having
been a part of the local community since 1849. Many of our customers
have taken advantage of the low introductory fixed rate offer by
transferring balances from higher rate credit cards. They also appreciate
the local personalized service that we offer. The Bank views the credit
card program as an excellent means of solidifying customers' banking
relationships as well as being a source of additional income.
Community Involvement
Improving the quality of life of residents in the communities we
serve is a long standing tradition at NSS. Throughout 1997, many of our
officers, directors and employees gave of their time regularly to a variety
of local community causes. The school mentor program and the AmeriCares
HomeFront Project continue to have a high level of team participation. NSS
also donated funds for educational, health, cultural and low to
moderate-income housing programs.
As we look toward the year 2000, we vow to position the Bank as a leader
in providing community banking services for the long-term benefit of
our shareholders, customers and employees.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
NSS Bancorp, Inc. (the "Company" or "NSS Bancorp") is the holding
company for Norwalk Savings Society ("NSS" or the "Bank"). The Company's
principal asset consists of all of the outstanding shares of NSS. NSS
Bancorp was formed effective October 1, 1997 and is subject to regulation
by the Board of Governors of the Federal Reserve System.
Norwalk Savings Society 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.
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, and restructure its balance sheet to improve
its operating results. The years 1994 and 1995 were devoted to
converting non-performing assets to performing assets and repositioning its
balance sheet. In 1996, the Bank positioned itself for long-term growth and
profitability by redefining its market area as well as determining
the products and services to be offered to its customers.
In 1996 the Bank defined its market area as southern Fairfield
County and 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. As part of this program, in July 1996 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. This acquisition provided the Bank with a significant physical
presence in the eastern part of the county and FFB&T's back office
operation allowed the Bank to provide merchant bankcard processing and
other business-related services.
In 1997 it was determined that the Bank's goal would best be served
by continued geographic expansion and broadening its products and
services. The Bank opened a full service branch office in Darien in May
1997. To expand its business relationships, the Bank initiated several new
products such as the commercial deposit sweep account and the commercial
checking line of credit. Both the Darien branch and the Fairfield branch
are staffed to allow for a dual focus to ensure that each segment of the
Bank's customer base is properly served.
In October 1997 the Bank formed NSS Bancorp, 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 our organization's
strong commitment to the communities where its business and consumer
customers live and work.
During 1997 the Bank experienced a significant increase in commercial
non-interest bearing deposits and consumer and merchant credit card
relationships; it also expanded its support to local area small
businesses through loans for working capital, machinery and equipment and
other business-related needs. At the same time, consumer lending and
consumer deposit levels continued to increase in response to this
expansion. This new level of activity generated a significant increase in
net interest and fee-based income.
In order to respond to the community's significant demand for credit and
at the same time manage balance sheet growth, in 1997 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.
Throughout this period of expansion, the Bank has been able to continue its
program of improving asset quality. As a result of the FFB&T acquisition,
the Bank was required to purchase a portfolio of mixed quality loans
against which the Bank established an allowance for credit losses of $1.0
million. Through marketing and collection efforts, the Bank's
non-performing assets, both originated and acquired, declined
significantly. As a result of the asset quality improvement and a
substantial level of recoveries, management determined that there
was no need to add to the allowance for possible credit losses in 1997.
Early in 1997, the Bank adopted an investment 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 taxation. The results of this strategy is a lower
effective tax rate for the Company.
The Company reported net earnings of $5.6 million, or $2.31 per
share, for the year ended December 31, 1997.
During the year ended December 31, 1997, the Company paid to its
shareholders $0.35 per share in dividends as compared to $0.15 per share
for the year ended December 31, 1996. The Company's stock price rose from
$23.38 per share on January 1, 1997 to $37.75 per share on December 31,
1997. On a total return basis, stock appreciation plus cash dividends paid
in 1997 resulted in a 63% rate of return to shareholders.
The Company's tier one leverage capital ratio was 8.2% as of December 31,
1997, qualifying it as "well capitalized" according to standards
established by bank regulatory authorities.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended December 31,
1997 and 1996 General Net earnings for the year ended December 31, 1997
were $5.6 million, or $2.31 per share, compared to $5.7 million or $2.39
per share for 1996. Net earnings for 1996 included $1.3 million of deferred
tax benefits from the recognition of the benefits of operating loss
carryforwards.
The continued improvement in asset quality, coupled with substantial
recoveries in 1997 of loans previously charged-off, resulted in no
need for a provision for credit losses in 1997.
There was a significant increase in credit card, deposit and
loan-based fees for the year ended December 31, 1997 compared to 1996.
There was a significant decrease in losses and expenses associated
with OREO for the year ended December 31, 1997 compared to 1996.
There was a significant increase in income before taxes from $4.6
million for the year ended December 31, 1996 to $8.9 million for the year
ended December 31, 1997, an increase of 93%.
NSS Bancorp's 1997 earnings were fully taxable as compared to the
prior year when the earnings were, for the most part, sheltered by the
recognition of tax benefits associated with operating loss carryforwards.
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 $19.3 million for the year ended December
31, 1997, an increase of 9.7% over the $17.6 million for the year ended
December 31, 1996. The $1.7 million increase resulted from an increase in
interest income of $4.6 million partially offset by a $2.9 million increase
in interest expense. The $4.6 million increase in interest income was
attributable to a $3.7 million increase due to volume and a $0.9 million
increase due to rate, while the $2.9 million increase in interest expense
resulted from a $2.7 million increase due to volume and a $0.2 million
increase related to rate.
The 11.1% increase in interest income, from $41.3 million for 1996
to $45.9 million for 1997, was primarily attributable to the growth in the
loan portfolio, augmented by a net increase in interest income from the
various segments of the Bank's securities portfolio. The 12% increase in
interest expense, from $23.6 million in 1996 to $26.5 million in 1997,
resulted primarily from the $2.6 million increase in interest expense
attributable to the increased level of borrowings.
On an overall basis, the Bank was able to shift its earning assets
into higher yielding products while controlling the rate component of
the cost of funds.
The following table summarizes the Bank's net interest income and
net yield on average interest-earning assets. Non-accruing loans are
included in average loans outstanding during the periods, and daily average
amounts were used to compute average balances.
<TABLE>
<CAPTION>
TABLE 1 - AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
($ thousands) 1997 1996
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Interest-Earning Assets
Total Loans $435,610 $33,369 7.66 % $403,207 $30,589 7.59%
Investment Securities 52,065 3,747 7.20 36,012 2,571 7.14
Mortgage-Backed Securities 86,714 6,199 7.15 104,000 7,076 6.80
Short-Term Investments 14,815 899 6.07 14,970 739 4.94
Marketable Equity
Investments 32,826 1,655 5.04 7,253 280 3.86
Total Securities 186,420 12,500 6.70 162,235 10,666 6.57
Total Interest-
Earning Assets 622,030 45,869 7.37% 565,442 41,255 7.30%
Non-Interest-Earning Assets
Cash and Cash Equivalents 9,359 9,310
Accrued Income Receivable 6,291 6,645
Premises and Equipment 3,446 3,150
Other 7,045 9,957
Less: Allowance for
Credit Losses (6,921) (4,882)
Total Non-Interest-
Earning Assets 19,220 24,180
Total Assets $641,250 $589,622
Interest-Bearing Liabilities
Deposits
Regular Savings and NOW $61,578 1,002 1.63% $ 58,599 745 1.27%
Super and Money
Market Savings 96,029 2,968 3.09 116,232 3,411 2.93
Time 240,197 13,068 5.44 227,255 12,580 5.54
Total Deposits 397,804 17,038 4.28 402,086 16,736 4.16
Borrowings 158,944 9,356 5.89 115,465 6,796 5.89
Mortgage Escrow Deposits 3,710 102 2.75 3,556 108 3.04
Total Interest-Bearing
Liabilities 560,458 26,496 4.73% 521,107 23,640 4.54%
Non-Interest-Bearing Liabilities
Non-Interest-Bearing
Deposits 26,035 18,922
Other Liabilities 1,950 4,036
Total Non-Interest-Bearing
Liabilities 27,985 22,958
Shareholders' Equity 52,807 45,557
Total Liabilities and
Shareholders' Equity $641,250 $589,622
Net Interest-Earning Assets
and Interest Rate Spread $ 61,572 2.64% $ 44,335 2.76%
Net Interest Income and
Net Yield on Average
Interest-Earning Assets $19,373 3.11% $17,615 3.12%
</TABLE>
Rate/Volume Analysis
The following table presents the changes in interest and dividend
income and the changes in interest expense attributable to changes in
interest rates or changes in volume of interest-earning assets and
interest-bearing liabilities during the years of 1997 and 1996. Changes
which are attributable to both rate and volume have been allocated
proportionately.
<TABLE>
<CAPTION>
TABLE 2 - RATE/VOLUME ANALYSIS
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
<S> <C> <C> <C>
($ thousands) Rate Volume Net Change
Interest Income:
Loans Receivable $295 $2,485 $2,780
Mortgage-Backed Securities 345 (1,222) (877)
Short-Term Investments 168 (8) 160
Investment Securities 131 2,420 2,551
Total 939 3,675 4,614
Interest Expense:
Deposits:
Savings and Other (217) (40) (257)
Super and Money Market (173) 616 443
Time 219 (707) (488)
Total Deposits (171) (131) (302)
Borrowings (3) (2,557) (2,560)
Mortgage Escrow Deposits 11 (5) 6
Total (163) (2,693) (2,856)
Change in Net Interest Income $776 $ 982 $1,758
</TABLE>
Provision for Credit Losses
The improvement in asset quality coupled with substantial recoveries in
1997 of loans previously charged-off resulted in no need for a provision
for credit losses for the year ended December 31, 1997. The provision
for credit losses for the year ended December 31, 1996 was $4.4 million.
(see Financial Condition - Non-Performing Assets/ Asset Quality).
Non-Interest Income
Non-interest income consists of deposit service charges and fees,
fees derived from servicing of loans, net realized and unrealized gains
on securities, net gain on sale of loans, fees derived from the Bank's
Trust Department and, beginning in 1996, the credit card program.
Non-interest income for the year ended December 31, 1997 was $5.2
million compared to $6.8 million for the comparable period of 1996.
The table below identifies the primary components of Non-interest
income which are Fees and Gains on Sales of Assets and Liabilities. The
fee-based elements of Non-interest income, in total, showed sustainable
improvement over the prior period.
<TABLE>
<CAPTION>
TABLE 3 - NON-INTEREST INCOME
Years Ended December 31,
<S> <C> <C>
($ thousands) 1997 1996
Non-interest Income
Loan Servicing Fees $ 324 $ 334
Other Loan Fees 160 146
Deposit Service Charges 813 763
Credit Card Fees 1,396 514
Trust Department Fees 576 552
Correspondent Loan Program Fees 302 74
Other 216 304
Total Fees 3,787 2,687
Net Gains on Securities 1,115 661
Net Gain (Loss) on Sale of Loans 344 (144)
Gain on Sale of Branches - 3,639
Total Gains on Sales of
Assets and Liabilities 1,459 4,156
Total Non-Interest Income $5,246 $6,843
</TABLE>
Non-interest income for 1997 decreased $1.6 million, or 23.5% from
1996. Total fees for the year ended December 31, 1997 were $3.8 million,
compared to $2.7 million for the year ended December 31, 1996. Of the
increase of $1.1 million or 40.7% , $0.9 million was attributable to an
increase in credit card fees. Credit card fees amounted to $1.4 million for
a full year of credit card operations during 1997, compared to $0.5 million
attributable to six months of operations during 1996.
The other component of Non-interest income is Gains on Sales of
Assets and Liabilities. The Bank's investment strategy in its Trading
portfolio is to sell covered call options against high quality equities,
primarily for yield enhancement. A significant component of net gains on
securities resulted from the premium received on expired call options. Net
gains on securities were $1.1 million compared to $661,000 for the years
ended December 31, 1997 and 1996, respectively. The increase of $454,000
amounted to a 68.7% increase. Included in the net gain on sale of
securities for the year ended December 31, 1996 was a gain of $627,000 from
the sale of the Bank's investment in Hometown Bancorporation. Also included
in Gains on Sales of Assets and Liabilities for the year ended December 31,
1996 was a gain of $3.6 million resulting from the sale of deposits in
conjunction with the sale of the Bank's Brookfield and Bethel branches.
Non-Interest Expense
Non-interest expense is comprised of general and administrative
expenses incurred in managing the business of the Bank and costs associated
with managing and selling OREO properties.
Non-interest expense was $15.7 million for the year ended December
31, 1997, compared to $15.5 million for the same period in 1996.
The table that follows indicates the elements of Non-interest
expense, including OREO related expense, which is directly related to the
level of non-performing assets.
<TABLE>
<CAPTION>
TABLE 4 - NON-INTEREST EXPENSE
Years Ended December 31,
<S> <C> <C>
($ thousands) 1997 1996
General and Administrative Expense
Compensation $ 5,769 $ 5,726
Employee Benefits 1,976 1,923
Occupancy and Equipment 1,742 1,646
Credit Card Processing 1,148 382
Data Processing 977 921
Regulatory Assessments 55 9
Marketing 779 687
Legal and Professional 872 779
Printing, Postage & Office Supplies 782 746
Insurance 217 228
Amortization of Goodwill 326 76
Other 1,184 981
Total 15,827 14,104
OREO Related Expense
Net Holding Costs and Expenses 206 352
Net (Gain) Loss on Sales of OREO (309) 551
Provision for Estimated Losses - 459
Total (103) 1,362
Total Non-Interest Expense $15,724 $15,466
</TABLE>
Overall, Non-interest expense did not increase significantly;
however, the general and administrative expense component increased $1.7
million, and the OREO related expenses decreased $1.5 million.
General and Administrative Expense
Of the total increase of $1.7 million in general and administrative
expense, an insignificant part of the increase was attributable to
compensation and benefits. The 1996 compensation and employee benefits
expense included the expanded labor force in the commercial loan and credit
card departments, additional branch personnel to enhance service capability
and incentive compensation programs for achieving the Bank's profitability
and service performance goals. The expense also included one-time payments
made for severance and other termination costs as well as a duplication of
personnel costs for a period of several months in connection with FFB&T
acquisition and the sale of the Bank's two branches. As of December 31,
1997, the Bank employed 159 people based on a full time equivalent measure,
compared to 157 people as of December 31, 1996. The savings achievable in
payroll related costs by not having the severance termination and
duplication of personnel costs reoccur in 1997, were offset by regular
salary increases and higher levels of both short and long-term performance
bonuses paid in 1997 as compared to 1996.
Occupancy and equipment costs increased $96,000 in 1997 from 1996,
attributable primarily to operating costs of the new branch in
Darien.
Credit card processing costs increased from $382,000 in 1996 to
$1.1 million in 1997. The increase of $766,000 was due to a full year of
operation, as well as increased volume levels.
Data processing costs increased from $921,000 in 1996 to $977,000
in 1997, representing an increase of $56,000 or 6.1%. The actual increase,
primarily due to increased volume during 1997, was significantly higher but
was not evident due to the non-recurring costs incurred in 1996 from the
FFB&T transaction, the branch sales, and upgrades and integration
enhancements to the Bank's EDP capabilities during that year.
Marketing expense increased to $779,000 in 1997 from $687,000 in
1996. The $92,000 increase was due primarily to increased advertising to
publicize the new expanded services and the new Darien branch location.
Expenses associated with legal and professional fees increased from
$779,000 in 1996 to $872,000 in 1997, representing an increase of $93,000
or 11.9%. This increase resulted from legal costs related to the Bank's
lending activities as well as legal and professional costs associated with
researching the legal, financial and investment opportunities of
forming a holding company, as well as related expanded financial reporting
requirements.
Amortization of goodwill increased from $76,000 in 1996 to $326,000
in 1997, an increase of $250,000 which was attributable to a full year of
amortization of the goodwill incurred from the acquisition of FFB&T in
1996.
The Other component of general and administrative expense increased
from $981,000 in 1996 to $1.2 million in 1997. The increase of $203,000
or 20.7% was primarily attributable to increased volume and inflation, with
no one category reflecting a significant increase.
OREO Related Expenses
OREO related expenses continued to decline and decreased by $1.5
million to a net gain of $103,000 in 1997 from net expense of $1.4 million
in 1996.
As of December 31, 1996 there were six properties comprising the
OREO portfolio, four of which were under contract of sale. During 1997,
the sale of these as well as additional OREO properties acquired and sold
during the year resulted in a gain of $309,000 as compared to a net loss on
properties sold of $551,000 in 1996. Additionally, there was no need for a
provision for estimated losses on OREO properties in 1997 as compared to a
provision for estimated losses of $459,000 in 1996. As of December 31,
1997, there were four properties comprising the OREO portfolio, one of
which was under contract of sale. The reduced level of OREO properties in
1997 resulted in holding costs declining from $352,000 in 1996 to $206,000
in 1997.
Provision for Income Taxes
The Company's income is subject to Federal and State taxation at a
combined rate approximating 40%. The Company's effective tax rate for the
year ended December 31, 1997 was 37.4%, substantially due to the tax
savings from the dividend earnings on the Bank's equity securities
portfolio, substantial portions of which are exempt from both State and
Federal taxation.
In 1996 the Bank recovered the remainder of the valuation allowance
against its net deferred tax assets by reflecting a deferred tax benefit in
earnings of $1.3 million. As of December 31, 1996 the Bank had recognized
all of its available net deferred tax assets.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended December 31,
1996 and 1995
Overview
Net earnings for the year ended December 31, 1996 were $5.7 million,
or $2.39 per share, compared to $4.8 million or $2.04 per share for 1995.
Net earnings for 1996 and 1995 included $1.3 million and $1.2 million,
respectively, of deferred tax benefits from the recognition of the benefits
of operating loss carryforwards.
Several significant non-recurring items were included in 1996 net
earnings. The first of these items was the gain on the sale of the branch
operations in Brookfield and Bethel, the result of the deposit premium of
$3.6 million or 7 1/2% of total deposits of $48.0 million in the two
branches. In addition, the Bank recognized a gain on the sale of its
investment in Hometown Bancorporation of $627,000.
The allowance for credit losses was increased to $7.3 million at
December 31, 1996, resulting from a provision for credit losses aggregating
$4.4 million for the year ended December 31, 1996 and a $1.0 million credit
risk allocation for the loans acquired in the FFB&T transaction.
Net Interest Income
Net interest income, which is the primary source of income for the
Bank, is the difference between the interest earned on loans and
investments and the interest paid on deposits and borrowings.
Net interest income was $17.6 million for the year ended December
31, 1996, an increase of 20.5% over the $14.6 million for the year ended
December 31, 1995. The $3.0 million increase resulted from an increase in
interest income of $8.2 million partially offset by a $5.2 million increase
in interest expense. The 25% growth in interest income, from $33.0 million
for 1995 to $41.3 million for 1996, was primarily attributable to the
growth in the mortgage and commercial loan portfolios, while the 28% growth
in interest expense, from $18.4 million in 1995 to $23.6 million in 1996,
resulted primarily from the increased levels of deposits and short-term
borrowings.
The Bank's "wholesale" borrowings, which increased 71% from 1995,
are comprised of borrowings from the Federal Home Loan Bank and reverse
repurchase agreements. These funding tools were utilized to sustain
the Bank's substantial growth in total assets over the last two years.
The Bank's plan, through the branch transactions accomplished in 1996 and
the upcoming opening of a new branch in Darien in 1997, is to move away
from higher cost borrowings from the wholesale market into less costly core
deposits, primarily from small business commercial and consumer
relationships.
The overall favorable interest rate environment played a significant role
in the Bank's net interest income improvement for 1996. The effect of
lower, more attractively priced rates (from the borrower's viewpoint) in
the residential mortgage loan market spurred activity, and the Bank's
share of that activity contributed $6.8 million of the $7.6 million volume
increase in the Bank's gross interest income, while $0.6 million of the
increase was due to rate increases, primarily in the securities portfolio.
The Bank's average cost on interest-bearing liabilities rose to
4.54% for the year 1996 from 4.29% for the year 1995. The Bank's interest
expense increased primarily as a result of the increase in the volume of
borrowed funds and secondarily from the increased volume of time deposits,
reflecting the continued shift by the consumer into time deposits from
regular savings and money market accounts. However, the Bank was able to
mitigate the effect of higher interest rates on time deposits through lower
rates on borrowed funds.
On an overall basis, approximately $2.4 million of the $3.0 million
increase in net interest income was due to increased volume, while $0.6
million of the increase in net interest income was due to favorable rate
adjustments.
As a result of all of these significant movements in interest
income and interest expense, the Bank experienced a slight decrease in its
net interest margin during the year ended December 31, 1996, from 3.17% for
1995 down to 3.12% for 1996.
The following table summarizes the Bank's net interest income and
net yield on average interest-earning assets. Non-accruing loans are
included in average loans outstanding during the periods, and daily average
amounts were used to compute average balances.
<TABLE>
<CAPTION>
TABLE 1 - AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
($ thousands) Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 1995
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Interest-Earning Assets
Loans Receivable $403,207 $30,589 7.59% $313,072 $23,666 7.56%
Investment Securities 36,012 2,571 7.14 39,490 1,961 4.97
Mortgage-Backed
Securities 104,000 7,076 6.80 98,334 6,753 6.87
Short-Term Investments 14,970 739 4.94 6,915 514 7.43
Marketable Equity
Investments 7,253 280 3.86 3,076 121 3.93
Total Interest-Earning
Assets 565,442 41,255 7.30% 460,887 33,015 7.16%
Non-Interest-Earning Assets
Cash and
Cash Equivalents 9,310 8,138
Accrued Income Receivable 6,645 3,532
Premises and Equipment 3,150 3,117
Other 9,957 10,341
Less: Allowance for
Credit Losses (4,882) (4,468)
Total Non-Interest-
Earning Assets 24,180 20,660
Total Assets $589,622 $481,547
Interest-Bearing Liabilities
Deposits
Regular Savings and NOW $58,599 745 1.27% $ 53,788 749 1.39%
Super and Money
Market Savings 116,232 3,411 2.93 123,582 3,902 3.16
Time 227,255 12,580 5.54 182,430 9,434 5.17
Total Deposits 402,086 16,736 4.16 359,800 14,085 3.91
Borrowings 115,465 6,796 5.89 65,644 4,229 6.44
Mortgage Escrow Deposits 3,556 108 3.04 3,089 84 2.72
Total Interest-Bearing
Liabilities 521,107 23,640 4.54% 428,533 18,398 4.29%
Non-Interest-Bearing Liabilities
Non-Interest-Bearing
Deposits 18,922 10,221
Other Liabilities 4,036 1,787
Total Non-Interest-
Bearing Liabilities 22,958 12,008
Shareholders' Equity 45,557 41,006
Total Liabilities and
Shareholders' Equity $589,622 $481,547
Net Interest-Earning
Assets and Interest
Rate Spread $ 44,335 2.76% $ 32,354 2.87%
Net Interest Income and
Net Yield on Average
Interest-Earning Assets $17,615 3.12% $14,617 3.17%
</TABLE>
Rate/Volume Analysis
The following table presents the changes in interest and dividend
income and the changes in interest expense attributable to changes in
interest rates or changes in volume of interest-earning assets and
interest-bearing liabilities during the years of 1996 and 1995. Changes
which are attributable to both rate and volume have been allocated
proportionately.
<TABLE>
<CAPTION>
TABLE 2 - RATE/VOLUME ANALYSIS
Year Ended December 31, 1996
($ thousands) Compared to Year Ended December 31, 1995
<S> <C> <C> <C>
Rate Volume Net Change
Interest Income:
Loans Receivable $ 94 $6,829 $6,923
Mortgage-Backed Securities (69) 392 323
Short-Term Investments (217) 442 225
Investment Securities 793 (24) 769
Total 601 7,639 8,240
Interest Expense:
Deposits:
Savings and Other 68 (64) 4
Super and Money Market 270 221 491
Time (709) (2,438) (3,147)
Total Deposits (371) (2,281) (2,652)
Borrowings 396 (2,962) (2,566)
Mortgage Escrow Deposits (10) (14) (24)
Total 15 (5,257) (5,242)
Change in Net Interest Income $616 $2,382 $2,998
Provision for Credit Losses
</TABLE>
The provision for credit losses for the year ended December 31,
1996 was $4.4 million, compared to $2.1 million for the year ended
December 31, 1995.
The allowance for credit losses as of December 31, 1996 was $7.3
million, compared to $4.2 million as of December 31, 1995. Coverage of
non-performing loans provided by the allowance for credit losses was
70.2% and 31.9% as of December 31, 1996 and 1995, respectively. Coverage
of the net loan portfolio provided by the allowance for credit losses was
1.8% and 1.2% as of December 31, 1996 and 1995, respectively.
The increase in the allowance was the result of several factors,
including the overall loan portfolio growth, the increased level of higher
risk consumer and commercial lending, the increasing average size of the
residential mortgages being originated, and the increase in the Bank's
Watch List from $5.6 million at December 31, 1995 to $6.0 million at
September 30, 1996 and $8.5 million at December 31, 1996. 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 nonperformance or
loss.
Non-Interest Income
Non-interest income consists of deposit service charges and fees,
fees derived from servicing of loans, net realized and unrealized gains
on securities, net gain on sale of loans, fees derived from the Bank's
Trust Department and, in 1996, the credit card program.
Non-interest income for the year ended December 31, 1996 was $6.8
million compared to $2.7 million for the comparable period of 1995.
The table below identifies the primary components of Non-interest
income. The core elements of Non-interest income, in total, showed
sustainable improvement over the prior period.
<TABLE>
<CAPTION>
TABLE 3 - NON-INTEREST INCOME
Years Ended December 31,
<S> <C> <C>
($ thousands) 1996 1995
Loan Servicing Fees $ 334 $ 379
Other Loan Fees 146 136
Deposit Service Charges 763 599
Credit Card Fees 514 -
Trust Department Fees 552 515
Other 378 268
Total Fees 2,687 1,897
Net Gains on Securities 661 798
Net Loss on Sale of Loans (144) -
Gain on Sale of Branches 3,639 -
Total Gains on Sales of
Assets and Liabilities 4,156 798
Total Non-Interest Income $6,843 $2,695
</TABLE>
Non-interest income for 1996 increased by $4.1 million, or 153.9%
over 1995. Service fees from deposits increased to $763,000 for the year
ended December 31, 1996 compared to $599,000 for the same period a year
ago. The 27.4% increase of $164,000 is indicative of the Bank's strategy of
establishing small business commercial account relationships, which provide
a higher level of fee income.
Excluding the gain transactions, the overall increase in fee income
was primarily attributable to the credit card fees from both the
consumer and merchant programs aggregating $514,000, which resulted from
the Bank acquiring a credit card portfolio in the FFB&T transaction in July
1996.
Included in Non-interest income for the year ended December 31,
1996 is $3.6 million of gain on deposits as a result of selling the Bank's
branch operations in Brookfield and Bethel. Included in the net gain on
sales of securities and loans was the $627,000 gain from the sale of the
Bank's investment in Hometown Bancorporation, other securities gains and
losses (both realized and unrealized as a result of the Trading portfolio
of equities), and the loss of $144,000 from the sale of $44.8 million
in five-year adjustable residential mortgages.
Non-Interest Expense
Non-interest expense is comprised of general and administrative
expenses incurred in managing the business of the Bank and costs associated
with managing and selling OREO properties.
Non-interest expense was $15.5 million for the year ended December
31, 1996, compared to $12.7 million for the same period in 1995.
The table that follows indicates the elements of Non-interest
expense, including OREO related expense, which is directly related to the
level of non-performing assets.
<TABLE>
<CAPTION>
TABLE 4 - NON-INTEREST EXPENSE
Years Ended December 31,
<S> <C> <C>
($ thousands) 1996 1995
General and Administrative Expense
Compensation $ 5,726 $ 4,665
Employee Benefits 1,923 1,567
Occupancy and Equipment 1,646 1,336
Data Processing 1,303 702
Regulatory Assessments 9 438
Marketing 687 700
Legal and Professional 779 354
Office Supplies 578 481
Insurance 228 237
Other 1,225 824
Total 14,104 11,304
OREO Related Expense
Net Holding Costs and Expenses 352 728
Net Loss on Sales of OREO 551 227
Provision for Estimated Losses 459 460
Total 1,362 1,415
Total Non-Interest Expense $15,466 $12,719
</TABLE>
Overall, Non-interest expense increased by $2.7 million or 21.6%.
The overall result was the difference between a net increase of $2.8
million in general and administrative expense and a $0.1 million decrease
in OREO related expenses. On an overall basis, there were approximately
$500,000 of nonrecurring expenses in 1996 included in the classifications
of compensation, occupancy, data processing, and other, primarily
related to the Bank's significant, one-time transactions.
General and Administrative Expense
Of the total increase of $2.8 million in general and administrative
expense, approximately $1.4 million was attributable to increased
compensation and benefits expenses. Part of the increase was the result of
the expanded labor force in the commercial loan and credit card
departments, and additional branch personnel to enhance service capability;
incentive compensation programs were also offered to all personnel for loan
origination, service performance, and Bank profitability goals. As of
December 31, 1996, the Bank employed 157 people based on a full time
equivalent measure. The comparable number as of December 31, 1995 was 146,
representing a 7.5% increase, most of which was attributable to the
commercial lending function. The balance of the increase was attributable
to an average salary increase of 4%.
Employee benefits rose $356,000 as a result of higher staff levels,
a severance package for former FFB&T employees, and an increase in
Employee Stock Ownership Program (ESOP) costs. The ESOP cost is based on
the average market price per share for NSS stock, which calculated out to
be $21.56 per share for 1996, compared to $16.33 for 1995. The price per
share increase of more than $5.00, combined with the shares allocated in
1996, resulted in an additional $128,000 of employee benefits expense.
Although the ESOP purchased the shares at the time of the stock conversion
for $10.00 per share, the accounting rules for ESOP compensation require
the expense to be based upon the average market value of the Bank's stock
during the period employees perform service to earn their allocated shares.
Occupancy and equipment costs rose $310,000 from 1995's level as a
result of increased square footage of space under lease for a period of
time in 1996. The total square footage increase was due to an overlap of
time between the FFB&T transaction and the sale of the Brookfield and
Bethel branches. Additionally, the Bank incurred significantly higher
depreciation costs on capital improvements, primarily attributable to the
updating and replacement of the automated teller machine network during the
year.
Higher data processing costs resulted for the most part from the
FFB&T transaction, the branch sales, and upgrades and integration
enhancements to the Bank's EDP capabilities during the year. In addition,
other elements of 1996 Non-interest expense not present in 1995, but likely
to continue, are the fees the Bank paid to an outside service bureau
relating to the credit card program, which amounted to $382,000 for the
year ended December 31, 1996. Expenses associated with legal and
professional fees increased as a result of the large and unusual
transactions in 1996; legal fees also increased as a result of several new
litigations related to the Bank's lending activities. Office supplies
showed slightly more than a 20% increase, attributable to outfitting the
Bank's newly acquired office in Fairfield and the Bank's generally expanded
level of operations. These increases were partially offset by the decline
in regulatory assessments from $438,000 for 1995 to $9,000 for 1996,
reflecting the full year's effect of the roll-back of FDIC insurance
assessments. The Bank qualifies as well-capitalized in accordance with FDIC
guidelines and pays the lowest rate available to member institutions.
OREO Related Expenses
In addition to the general and administrative component of Non-interest
expense, OREO related expenses declined by $53,000 to $1,362,000
for the year ended December 31, 1996.
Net holding costs and expenses declined to $352,000 from $728,000
for the years ended December 31, 1996 and 1995, respectively. This
reduction is a result of the overall decline in the OREO portfolio. The net
balance of OREO was $0.9 million as of December 31, 1996 compared to $4.3
million at December 31, 1995. As of December 31, 1996 there were six
properties comprising the OREO portfolio, four of which were under contract
of sale.
Management's long-standing approach has been to reduce OREO as
quickly, efficiently and effectively as possible, balancing the effect of
accepting a reduced offer for an OREO property against the holding costs
associated with continued ownership. Aggregating the allowance provisions
and net losses on sales, the Bank incurred losses on OREO properties of
$1.0 million in 1996 and $687,000 in 1995.
Provision for Income Taxes
The current provision for income taxes for the year ended December
31, 1996 as well as the year ended December 31, 1995 represented estimated
minimum state and federal tax requirements for the periods inasmuch as both
federal and state income-based tax liabilities were offset by loss
carryforwards.
In 1995 the Bank recognized a portion of its net deferred tax assets in the
amount of $1.2 million by reflecting a deferred tax benefit. In 1996 the
Bank recovered the remainder of the valuation allowance against its net
deferred tax assets by reflecting a deferred tax benefit in the current
year's earnings of $1.3 million.
As of December 31, 1996 the Bank has recognized all of its available net
deferred tax assets, and future taxable earnings will be subject to
taxation at a combined state and federal rate of approximately 40%.
FINANCIAL CONDITION
General
Total assets were $654.2 million as of December 31, 1997, representing a
$64.6 million increase from the $589.6 million at December 31, 1996. Total
loans, net of allowance for credit losses, were $425.8 million, an
increase of $15.0 million from the $410.8 million as of December 31, 1996.
Total investment securities were $180.5 million as of December 31, 1997,
an increase of $40.4 million from $140.1 million as of December 31,
1996. Total deposits were $444.2 million, an increase of $20.9 million from
the December 31, 1996 level of $423.3 million. Total other borrowed money
was $151.4 million as of December 31, 1997, an increase of $37.8 million
from the December 31, 1996 level of $113.6 million. Shareholders' equity
was $56.1 million as of December 31, 1997, an increase of $6.7 million or
13.6% as compared to $49.4 million as of December 31, 1996. The Company's
Tier 1 leverage capital ratio was 8.2% as of December 31, 1997, compared
to 7.9% as of December 31, 1996.
Investment Securities
Total securities amounted to $180.5 million as of December 31, 1997
compared to $140.1 million at December 31, 1996, representing a $40.4
million increase or 28.8%. The $40.4 million increase represented the net
effect of purchases of $140.7 million of various investments, partially
offset by sales of lower yielding securities, maturities and the monthly
amortization (pay-downs) of the mortgage backed securities portfolio.
During 1997, the Bank effected various purchase and sale transactions
designed to increase yields on the existing portfolio investment
levels and, during the first six months of the year, invested a net total
of approximately $34 million in callable preferred stocks as part of
its tax advantaged investment strategy. These securities accounted for a
significant part of the net growth of the portfolio providing an
advantageous investment vehicle as the stock converts in approximately 4
1/2 years to adjustable rates which management anticipates will result in
the securities being called. An additional benefit to the tax effective
yield is an equalization provision in the event the dividend income becomes
subject to full taxation up to the call date.
In accordance with Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115), the Bank classifies each security in the portfolio as either
"Held-to-Maturity," "Available-for-Sale," or "Trading Account
Security." During 1996 management re-assessed the objectives of its
Held-to-Maturity portfolio in light of its plans to transform the Bank's
financial condition, and effective December 31, 1996 reclassified all of
its Held-to-Maturity investments to the Available-for-Sale classification.
During 1996 the Bank decided to liquidate its portfolio of utility
stocks as a result of the decision to reposition the investment security
portfolios, resulting in a net loss of $165,000. The Bank had established
two portfolios of equity securities, an Available-for-Sale portfolio of a
variety of equities and mutual funds aggregating $2.2 million at December
31, 1996, and a Trading Account group of equities for certain other common
stock equity securities against which the Bank sells covered call options
from time to time as market conditions allow.
The Bank's covered call option program which began in 1996 and
continues, is designed for yield enhancement and to lessen the Bank's
exposure to a potentially volatile stock market. In this program, the Bank
purchases shares of qualified common stock and sells a call option against
the investment. As required by SFAS 115, the Bank marks the common stock
and related covered call option to market through current period earnings.
Inasmuch as the Bank's equity investment privileges have been
grandfathered by the FDIC, it intends to continue to maintain an equity
stock portfolio. To provide direction, the Bank's Board of Directors has
established upward limits and an investment policy which includes
guidelines that the Bank's equity investments have a minimum quality rating
of "A" by a widely recognized rating service; the policy also requires
adequate diversification to avoid concentrations in lines of business and
geographic regions.
The following table presents a summary of the investments and other
securities portfolios as of December 31, 1997 and December 31,
1996, fair values and unrealized gains and losses as of those dates.
<TABLE>
<CAPTION>
TABLE 1 - INVESTMENT & OTHER SECURITIES
($ thousands) December 31, 1997
<S> <C> <C> <C> <C>
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 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
December 31, 1996
Amortized Unrealized Holding Fair
Cost Gains Losses Value
Available for Sale
U.S. Government and
Federal Agency Obligations $ 42,436 $ 145 $461 $ 42,120
Mortgage Backed Securities 92,443 382 372 92,453
Equity Securities 2,110 138 12 2,236
Total Available for Sale $136,989 $ 665 $845 $136,809
Trading
Equity Securities $ 3,353 $ 46 $107 $ 3,292
</TABLE>
Loans
Total loans, before reductions for deferred credits, fees and the
allowance for credit losses, amounted to $437.6 million as of December 31,
1997, representing an $18.8 million or 4.5% increase over the December
31, 1996 level of $418.8 million. The overall increase in the loan
portfolio was not significant. What was significant was the change in mix
which was part of a strategy to increase yield while managing growth.
<TABLE>
<CAPTION>
TABLE 2 - LOAN PORTFOLIO
($ thousands) December 31, 1997 December 31, 1996
<S> <C> <C> <C> <C>
Real Estate Loans
1 To 4 Family Adjustable Rate $278,231 63.7% $257,459 61.5%
1 To 4 Family Fixed Rate 64,510 14.7% 77,160 18.4%
1 To 4 Family Held-for-Sale 5,311 1.2% - -
Multi-Family 5,398 1.2% 7,450 1.8%
Commercial 55,124 12.6% 46,272 11.0%
Home Equity Lines Of Credit 7,632 1.7% 7,127 1.7%
Home Improvement and
Second Mortgages 2,852 0.7% 2,568 0.6%
Land 640 0.1% 828 0.2%
Construction 2,942 0.7% 1,227 0.3%
Total Real Estate Loans 422,640 96.6% 400,091 95.5%
Commercial Loans 7,587 1.7% 8,425 2.0%
Consumer Loans
Passbook 1,508 0.3% 1,510 0.4%
Automobile Loans 2,332 0.6% 2,619 0.6%
Automobile Leases - - 3,149 0.8%
Credit Cards 1,409 0.3% 991 0.2%
All Other 2,104 0.5% 2,033 0.5%
Total Consumer Loans 7,353 1.7% 10,302 2.5%
Total Loans, Gross 437,580 100% 418,818 100%
Deferred Fees and Credits (625) (718)
436,955 418,100
Allowance for Credit Losses (5,832) (7,334)
Total Loans, Net 431,123 410,766
1 To 4 Family Held for Sale (5,311) -
Loans Receivable, Net $425,812 $410,766
</TABLE>
The strong demand for new residential mortgage loans that existed
in 1996 continued into 1997 and, in response to a favorable interest rate
environment, the trend for the latter part of 1997 was to increased
levels of refinancing. In order to maintain yield, the Bank's response to
the increased level of new residential and refinancing activity was to
step-up the utilization of the correspondent loan program. In conjunction
with the management of the portfolio, the Bank also sold $13.1 million of
new originations of fixed rate residential mortgages during 1997 and as
of December 31, 1997 had identified an additional $5.3 million of
residential loans to be sold.
Management's Discussion and Analysis
The Bank continued to emphasize small business commercial lending during
1997. A significant increase in the portfolio was in the growth of
owner-occupied commercial real estate loans which grew from $46.3 million
as of December 31, 1996 to $55.1 million as of December 31, 1997 for an
increase of $8.8 million or 19%. The other portion of loans to small
business is comprised mainly of working capital lines of credit and other
similar short-term financing. As of December 31, 1996, a significant
portion of these loans resulted from the FFB&T acquisition. During 1997
these loans were for the most part collected and the portfolio at December
31, 1997 is comprised of loans originated by the Bank's newly structured
commercial lending operation which emphasizes risk minimization and
industrial diversification.
Total Consumer loans decreased by $2.9 million from $10.3 million
at December 31, 1996 to $7.4 million at December 31, 1997. This decline was
primarily due to the fact that the portfolio of automobile leases, which
had been generated on an indirect basis, was liquidated during the second
quarter of 1997.
Non-Performing Assets/Asset Quality
The Bank's level of non-performing assets continued to steadily
decline during the years 1997 and 1996. Total non-performing assets as of
December 31, 1997 were $5.4 million, representing 0.83% of total assets. As
of December 31, 1996, total non-performing assets were $11.3 million
or 1.92% of total assets.
The Bank's Watch List, 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, aggregated $8.5 million at December 31,
1996 and $11.7 million at December 31, 1997. Two loans which were
non-accrual at December 31, 1996 were placed on the Watch List during 1997
and, subsequently, these loans have been current for a majority of 1997.
Another loan experienced delinquency during the first half of 1997 and was
placed on the Watch List; this loan has been current for the last six
months of 1997.
Of the total non-performing assets, non-performing loans were $4.8
million as of December 31, 1997, compared to $10.4 million as of December
31, 1996. There were no troubled debt restructurings included in
non-performing loans as of December 31, 1997 and 1996.
The allowance for credit losses amounted to $5.8 million as of
December 31, 1997, representing coverage of 120.3% of non-performing loans,
compared to $7.3 million and 70.24% coverage of non-performing loans at
December 31, 1996. The allowance for credit losses at December 31, 1996
includes $1.0 million of credit risk allowance allocated to the loans
acquired through the FFB&T transaction. The credit risk allowance for the
FFB&T acquired loans was $575,000 as of December 31, 1997.
Net charge-offs in 1997 were $1.5 million or 34 basis points of the
average loan portfolio, compared to $2.3 million or 56 basis points,
respectively, for the year ended December 31, 1996.
The continued improvement in asset quality, coupled with substantial
recoveries in 1997, resulted in no need for a provision for credit
losses.
At December 31, 1996, the Bank had six properties comprising foreclosed
assets (OREO) for a total of $0.9 million. During 1997 the Bank foreclosed
on twelve loans and subsequently sold fourteen OREO properties. At
December 31, 1997, the Bank had four properties in OREO for a total of $0.6
million.
No allowance for estimated OREO losses was deemed necessary as of
December 31, 1997 and December 31, 1996 as a result of the minimal amount
of OREO remaining at those dates, the stabilization of the residential real
estate market during the periods, and management's assessment that the
carrying value of OREO fairly represents net realizable values at those
dates.
Details of the Bank's asset quality are shown in the analysis provided by
Table 3.
<TABLE>
<CAPTION>
TABLE 3 - ASSET QUALITY
($ thousands) At December 31,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Non-Performing Assets
Non-Accrual Loans $ 4,847 $ 10,441 $ 12,598 $ 9,489 $ 26,180
Restructured Loans - - 472 487 -
Total Non-Performing Loans 4,847 10,441 13,070 9,976 26,180
Foreclosed Assets 574 858 4,267 11,622 17,824
Allowance for Estimated OREO Losses - - - (802) (194)
Total OREO 574 858 4,267 10,820 17,630
Total Non-Performing Assets $ 5,421 $ 11,299 $ 17,337 $20,796 $ 43,810
Allowance for Credit Losses
Balance at Beginning of Period $7,334 $ 4,170 $ 4,827 $ 2,532 $ 4,567
Provision for Credit Losses - 4,415 1,005(A) 3,790 1,000
Allocated to FFB&T Acquired Loans - 1,000 - - -
Charge-Offs (2,155) (2,488) (1,799) (1,589) (3,073)
Recoveries 653 237 137 94 38
Net Charge-Offs (1,502) (2,251) (1,662) (1,495) (3,035)
Balance at End of Period $ 5,832 $ 7,334 $ 4,170 $ 4,827 $ 2,532
(A) Gross Provision of $2,105 Less ADP Credit of $1,100
Allowance for Estimated
OREO Losses
Balance at Beginning
of Period $ - $ - $ 802 $ 194 $ 1,025
Provision for Estimated
OREO Losses - 459 460 2,894 3,975
Charge-Offs - (459) (1,262) (2,286) (4,806)
Balance at End of Period $ - $ - $ - $ 802 $ 194
Loans Receivable
End of Period $432,269 $418,818 $360,475 $290,416 $269,300
Average $435,610 $403,207 $313,072 $265,581 $267,729
Total Assets, End Of Period $654,222 $589,589 $515,267 $464,901 $427,950
Ratios
Allowance for Credit Losses
to Loans Receivable 1.35% 1.75% 1.16% 1.66% 0.95%
Net Charge-Offs to Average Loans 0.34% 0.56% 0.53% 0.56% 1.13%
Non-Performing Loans
to Loans Receivable 1.12% 2.50% 3.63% 3.44% 9.72%
Non-Performing Assets
to Total Assets 0.83% 1.92% 3.36% 4.47% 10.24%
Allowance for Credit Losses
to Non-Performing Loans 120.32% 70.24% 31.91% 48.39% 9.67%
</TABLE>
Deposits
Total deposits at December 31, 1997 were $444.2 million, compared
to $423.3 million at December 31, 1996, an increase of $20.9 million or
4.9%, resulting from the Bank's strategy of obtaining core deposit
relationships from both the commercial and consumer segments of its market.
The Bank continues to seek deposits with marketing and sales efforts
concentrated on its new and diversified products. The Bank does not
solicit, nor does it accept, brokered deposits.
The following table presents a summary of deposits as of December
31, 1997 and 1996.
<TABLE>
<CAPTION>
TABLE 4 - DEPOSITS
($ thousands) December 31, 1997 December 31, 1996
<S> <C> <C> <C> <C>
Demand $ 27,471 6.2% $ 22,479 5.3%
Savings
Regular Savings 29,455 6.6% 28,096 6.6%
NOW 37,287 8.4% 30,262 7.2%
Super and Money Market Accounts
Super Savings 47,863 10.8% 45,404 10.7%
Money Market 55,541 12.5% 47,957 11.3%
Time
Certificate Accounts 204,129 45.9% 197,204 46.6%
Money Market Certificates 37,738 8.5% 46,923 11.1%
Escrow Deposits 4,727 1.1% 4,965 1.2%
Total Deposits $444,211 100.0% $423,290 100.0%
</TABLE>
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 December 31,
1997, borrowings from the FHLB totaled $110.9 million, compared to $82.2
million as of December 31, 1996. 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 December 31, 1997 there were $40.4 million of borrowings
outstanding under reverse repurchase agreements compared to $31.4 million
as of December 31, 1996.
In total, borrowings as of December 31, 1997 were $151.3 million at
a weighted average rate of 5.8% and a weighted average maturity of
1.4 years, compared to $113.6 million at a weighted average rate of 5.74%
and a weighted average maturity of 1.1 years as of December 31, 1996. As a
percentage of total assets, borrowings amounted to 23.1% as of December 31,
1997, compared to 19.3% as of December 31, 1996.
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. The outstanding
balance was $485,000, and the rate in effect as of December 31, 1996 was
6.86%. In July 1997 the Bank refinanced the ESOP obligation with a
different third party lender into a 24 month fixed-rate loan at 7.75%. The
outstanding balance was $293,000 at December 31, 1997.
Shareholders' Equity
Shareholders' equity at December 31, 1997 increased to $56.1
million from $49.4 million at December 31, 1996, reflecting Tier 1
regulatory leverage capital ratios of 8.2% and 7.9%, respectively.
The following table indicates required and actual levels of capital
for the Bank and the Company as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
TABLE 5 - REGULATORY CAPITAL
Required Actual
December 31,
<S> <C> <C> <C>
1997 1996
Company
Tier 1 Risk-Based Capital 4.0% 15.4% N/A
Total Risk-Based Capital 8.0% 16.6% N/A
Tier 1 Leverage Capital 4.0%-5.0% 8.2% N/A
Bank
Tier 1 Risk-Based Capital 4.0% 14.3% 15.7%
Total Risk-Based Capital 8.0% 15.5% 17.0%
Tier 1 Leverage Capital 4.0%-5.0% 7.6% 7.9%
</TABLE>
Liquidity and Interest Rate Risk Management
The Company seeks to achieve consistent growth in net interest
income and net income while managing volatility from changes in interest
rates. Interest rate risk management is the responsibility of the Asset
Liability Committee of management (ALCO) and is a dynamic process which
seeks to achieve the Company's overall balance sheet objectives within
changing market and business environments through appropriately diversified
investments and funding sources, and management of the Company's needs for
liquidity to support its operations, meet the credit needs of its market
area, and respond to the investment, financial service, and liquidity needs
of its depositors.
The Company's equity price risk is essentially limited to its portfolio of
trading securities, and its bond market price risk focuses on its
portfolio of available-for-sale (AFS) securities. Market price risk for
mortgages or other loans is not a significant risk for the Company,
inasmuch as the Company's loan portfolios are primarily held for investment
to maturity or sooner prepayment by the debtor.
Market risk of the AFS securities is centered primarily on a sudden
shift of interest rates at a time when sale of the securities might be
required to meet unexpected liquidity needs, or when sale would be
advantageous to the improvement of the yield in the AFS portfolio itself.
The Company's interest rate risk encompasses all of its rate-sensitive
financial instruments. The Company has no derivative financial
instruments or derivative commodity instruments.
Management of the trading portfolio of common and preferred stocks
is governed by a trading portfolio investment policy which provides
guidance on such issues as investment quality, diversification by industry
and geographic regions, and overall marketability. To enhance yield and
reduce the overall investment at risk, the Bank may also sell call options
on individual issues held in the trading portfolio.
To reduce market risk for the AFS portfolio, as well as the risk to
the Company's net income from interest rate risk, the Company has
chosen at this time to employ more traditional methods of reducing interest
rate risk rather than engage in derivative financial instruments such as
swaps, options or hedges. While this choice does not preclude management
from employing derivatives in the future to manage risk, management has no
immediate plans to do so.
Traditional means of managing interest rate risk include:
establishing a solid base of core deposit relationships;
maximizing investment in variable rate loans and investments;
limited fixed rate loans and investments to the highest quality and
shortest possible term to maturity;
ensuring the availability of several alternative sources of
funding in order to be able to respond to liquidity needs and
investment opportunities with the greatest amount of flexibility and
the least amount of cost.
Thus the Bank has established a cash management line of credit with
Federal Home Loan Bank of Boston, established wholesale borrowing
relationships with several brokerage firms to avail itself of access to
the repurchase agreement market (essentially a collateralized borrowing)
for intermediate term liquidity needs, has become a member of the Federal
Home Loan Bank of Boston in order to be able to avail itself of
advantageous, stable longer-term borrowings to lock-in interest rate spread
on fixed rate loans held for portfolio, and has established several
correspondent lending arrangements whereby the Bank acts as an originator
for certain investors for fixed rate mortgage products which the Bank
chooses not to originate for its own portfolio.
The financial risk management activities of the ALCO are governed
by a broad policy which provides specific limits for the financial risks,
including interest rate, liquidity, and market, inherent in the Company's
operations. Strategies and tactics are reviewed and monitored regularly to
ensure that the Company's financial condition is maintained within approved
risk tolerances for growth rate, investment mix, rate sensitivity, and
liquidity, while providing appropriate levels of interest rate spread to
support profitable operations and adequate regulatory capital ratios.
Table 6 presents a static measure of the Company's interest rate
risk position at December 31, 1997. The table presents the various
categories of the Company's interest-rate-sensitive financial instruments
by their contractual time to maturity, their weighted average contractual
interest rates, and their estimated fair values at December 31, 1997.
Instruments with no stated maturity are included in the one year category,
and no adjustments have been made for expected prepayments on mortgage
loans or mortgage-backed securities. Off-balance sheet financial
instruments at December 31, 1997, consisting primarily of commitments to
extend credit and existing unused lines of credit, were not significant and
have not been included in the Table.
<TABLE>
<CAPTION>
TABLE 6- RATE SENITIVE FINANCIAL INSTRUMENTS AT ESTIMATED FAIR
VALUE AND WEIGHTED AVERAGE CONTRACTUAL RATE BY YEAR OF MATURITY
Financial Instruments Scheduled to Mature in the Year
<S> <C> <C> <C> <C> <C> <C>
1998(a) 1999 2000 2001 2002 2003
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Contract Contract Contract Contract Contract Contract
Total Rate Rate Rate Rate Rate Rate
Cash Equivalents $10,555 $10,555 - - - - -
5.70% - - - - -
Securities
Trading: 1,830 1,830 - - - - -
13.00% - - - - -
Available for Sale:
U.S. Gov and Agency
Obligations 55,257 - - - - $2,996 $52,261
- - - - 6.60% 7.45%
Mortgage Backed 85,950 - - - $500 1,841 83,609
- - - 8.83% 8.02% 8.18%
Equities 268 268 - - - - -
1.80% - - - - -
Mutual Funds 2,135 2,135 - - - - -
0.00% - - - - -
Preferred Stock 35,058 - - - 25,156 5,200 4,702
- - 6.16% 5.84% 6.07%
Loans:
Held-for-Sale 5,311 5,311 - - - - -
7.25% - - - - -
Held-for-
Portfolio 443,083 20,967 3,442 7,418 5,072 5,961 400,223
9.19% 8.82% 8.19% 9.43% 9.13% 7.59%
FHLBB Stock 7,347 7,347 - - - - -
6.50% - - - - -
Deposits:
NOW Accounts (37,287)(37,287) - - - - -
1.50% - - - - -
Regular Savings(29,455)(29,455) - - - - -
1.99% - - - - -
Super/Money
Market Savings(103,404)(103,404) - - - - -
2.85% - - - - -
Escrow Accounts (4,727) (4,727) - - - - -
2.80% - - - - -
Time Accounts (241,867)(146,109)(70,623)(20,757) (3,466) (912) -
5.12% 5.85% 6.51% 5.95% 5.73% -
FHLBB Borrowings(110,940) (95,037) (4,400) - - (10,072) (1,431)
5.88% 5.94% - - 5.90% 5.86%
Repurchase
Agreements (40,582) (9,457) - (21,101) - (10,024) -
5.75% - 5.76% - 5.65% -
Other Borrowed Money(293) (293) - - - - -
7.75% - - - - -
Net $78,239 ($377,356) ($71,581) ($34,440) $27,262 ($5,010) $539,364
</TABLE>
(a) Includes all financial instruments with no scheduled maturity date.
Liquidity is the ability of the Bank to meet its cash flow requirements
arising from fluctuations in loans, securities, deposits, and other
borrowings. At December 31, 1997, the Bank's primary liquidity,
consisting of cash, cash equivalents and marketable securities with
maturities of one year or less was $54.0 million or 8.3% of total assets,
compared to $30.6 million or 5.2% of total assets at December 31, 1996. In
addition, liquidity is the ability of the Company to meet its cash flow
requirements to pay operating expenses, dividends, and to make 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 is in the process of negotiating a line of credit. The
Company may also 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 December 31, 1997, the Bank had approved loan commitments
outstanding for one-to four-family loans of $9.5 million. In addition,
there was $8.7 million of unused credit under the home equity line of
credit facility, $1.0 million under the overdraft protection credit line
facility, and $2.2 million in unused credit card lines. The unadvanced
portion of residential construction loans amounted to $1.2 million. There
were $3.1 million in approved loan commitments in the Commercial Lending
Department, $6.2 million in unused commercial lines of credit and $0.6
million in commercial letters of credit outstanding.
Management believes that the Bank'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 December 31, 1997, this
line of credit was $11.8 million of which no amount was outstanding.
Management also believes that the capital position of the Company
and the Bank are currently adequate to meet present needs and anticipated
growth, and does not currently plan to raise capital from external sources
in the near future (see Shareholders' Equity). The Company announced in
December 1997 a stock repurchase plan subject to which the Company may
elect to repurchase up to 15% of its issued and outstanding common stock.
Such repurchases, if effected, will not adversely affect the Company's
"well capitalized" status.
Market Price of Common Stock
NSS Bancorp, Inc. (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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C> <C> <C> <C>
High Low Div High Low Div (1)
First Quarter $26.25 $22.94 $0.05 $22.00 $18.75 $ -
Second Quarter $31.00 $23.00 $0.10 $22.25 $17.94 $0.05
Third Quarter $37.50 $28.25 $0.10 $23.13 $20.88 $0.05
Fourth Quarter $40.25 $31.75 $0.10 $24.88 $22.75 $0.05
</TABLE>
(1) The Bank began paying quarterly dividends during the second quarter of
1996.
At December 31, 1997 NSS Bancorp had approximately 700 shareholders of
record.
Year 2000 Compliance
The Bank, like all institutions that utilize computer technology,
is facing significant challenges associated with the inability of many
existing computer systems to process time sensitive data accurately beyond
the year 1999 (Year 2000 compliance).
Substantially all of the Bank's software systems are licensed from
an outside vendor. Primary exposure emanates from the ability of its
technology vendor to implement the necessary changes for Year 2000
compliance. The Bank has received a commitment from its major vendor to
provide the required systems modifications to ensure compliance, and
management believes those commitments will be met. If not modified or
replaced, these programs could cause system failures or miscalculations,
which could adversely affect the Bank's ability to process customer
transactions or provide customer service.
The Bank is also reviewing certain commercially available in-house
software applications to ensure Year 2000 compliance.
The Bank is monitoring the activities of its third party vendor in
developing and implementing plans to address the Year 2000 compliance.
While the Bank expects its Year 2000 compliance to be completed on a timely
basis, there can be no assurance that the systems of other companies on
which the Bank relies will be Year 2000 compliant. In addition, the Bank
exchanges data with a number of entities, such as credit bureaus and
governmental entities. The failure of these entities to adequately address
the Year 2000 compliance could adversely affect the Bank's ability to
conduct its business.
Costs associated with modifying existing system applications have
been and will continue to be expensed as incurred. The Bank does not expect
incremental costs associated with application modifications for
Year 2000 compliance to be material. However, as the Bank progresses in
implementing its plan for addressing the Year 2000 compliance, current
estimates of costs could change, including costs as a result of the failure
of the third party vendor or other entities to adequately address the Year
2000 compliance in a timely fashion. There can be no assurance that the
Bank will not experience cost overruns or delays in connection with its
plan for modifying systems.
Management of the Bank believes it will be successful in the achievement of
its plan and does not believe that the execution of the plan will
have a material adverse affect on future operating results.
Independent Auditor's Report
The Board of Directors and Shareholders
NSS Bancorp, Inc. and Subsidiary
Norwalk, Connecticut
We have audited the accompanying consolidated statements of financial
condition of NSS Bancorp, Inc. and Subsidiary (Note 1) as of December 31,
1997 and 1996, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of NSS Bancorp, Inc. and Subsidiary at December 31, 1997
and 1996, and the consolidated results of their operations, changes in
their shareholders' equity and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
FRIEDBERG, SMITH & CO., P.C.
Bridgeport, Connecticut
February 11, 1998
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
December 31, 1997 and 1996 (Note 1)
<S> <C> <C>
($ thousands) 1997 1996
Assets
Cash and Due from Banks (Note 1) $ 11,486 $ 14,978
Interest-Bearing Deposits in
Other Banks (Notes 2 and 8) 5,555 2,373
Federal Funds Sold (Note 1) 5,000 1,500
Securities (Notes 1 and 2):
Trading, At Estimated Fair Value 1,830 3,292
Available-for-Sale,
At Estimated Fair Value 178,667 136,809
180,497 140,101
Loans Held-for-Sale (Note 1) 5,311 -
Loans Receivable, Net of Allowance
for Credit Losses of $5,832 in 1997
and $7,334 in 1996
(Notes 1, 3, 7, 14, 17 and 18) 425,812 410,766
Accrued Income Receivable
(Notes 1 and 3) 3,859 4,034
Investment in FHLBB Stock, At Cost
(Note 7) 7,347 6,184
OREO, Net (Notes 1, 4 and 14) 574 858
Bank Premises and Equipment, Net
(Notes 1, 5 and 17) 3,738 3,151
Deferred Income Tax Asset, Net
(Notes 1 and 9) 361 2,574
Other Assets (Notes 1, 3 and 18) 4,682 3,070
Total Assets $654,222 $589,589
Liabilities and Shareholders' Equity
Liabilities
Deposits (Notes 6, 17 and 18):
Non-Interest Bearing $ 27,471 $ 22,479
Interest Bearing 416,740 400,811
444,211 423,290
Advances from FHLBB (Note 7) 110,937 82,208
Securities Sold Under Agreements
to Repurchase (Notes 2 and 7) 40,441 31,350
Other Borrowings (Notes 8 and 12) 293 485
Accrued Expenses and Other Liabilities
(Note 8) 2,202 2,903
Total Liabilities 598,084 540,236
Commitments and Contingent Liabilities
(Notes 5 and 11)
Shareholders' Equity
(Notes 1, 2, 5, 8, 11, 12, 13, 16, 19 and 22)
Preferred Stock - $.01 Par Value -
500,000 Shares Authorized, None Issued - -
Common Stock - $.01 Par Value -
Authorized 7,000,000 Shares;
Issued 2,460,370 Shares in 1997
and 2,442,129 Shares in 1996;
Outstanding 2,434,096 Shares in 1997
and 2,397,312 Shares in 1996 25 24
Additional Paid-In Capital 24,199 23,545
Retained Earnings 31,048 26,339
Net Unrealized Gain (Loss)
on Securities Available-for-Sale,
Net of Tax Effect 1,129 (106)
Total 56,401 49,802
Less: Unearned ESOP Shares (263) (449)
Total Shareholders' Equity 56,138 49,353
Total Liabilities and
Shareholders' Equity $654,222 $589,589
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Years Ended December 31, 1997, 1996 and 1995 (Note 1)
($ thousands) 1997 1996 1995
<S> <C> <C> <C>
Interest and Dividend
Income (Note 1)
Interest and Fees on Loans $33,369 $30,589 $23,666
Securities:
U.S. Government and Agencies 3,747 2,571 1,961
Mortgage-Backed Securities 6,199 7,076 6,753
Marketable and Other Equities 2,040 528 358
11,986 10,175 9,072
Cash Equivalent Investments
and Other 514 491 277
Total Interest and
Dividend Income 45,869 41,255 33,015
Interest Expense
Deposits (Note 6) 17,140 16,844 14,169
Borrowed Funds (Note 7) 9,356 6,796 4,229
Total Interest Expense 26,496 23,640 18,398
Net Interest and Dividend Income 19,373 17,615 14,617
Provision for Credit Losses
(Notes 1 and 3) - 4,415 1,005
Net Interest and Dividend
Income after Provision for Credit
Losses 19,373 13,200 13,612
Non-Interest Income
Net Security Gains (Note 2) 1,115 661 798
Net Gains (Losses) on
Sales of Loans (Note 3) 344 (144) -
Net Gain on Branch Sale
(Note 17) - 3,639 -
Loan Servicing and Other Loan Fees 484 480 515
Service Charges on Deposit Accounts 813 763 599
Trust Department Fees 576 552 515
Other (Note 10) 1,914 892 268
Total Non-Interest Income 5,246 6,843 2,695
Non-Interest Expense
Salaries and Employee Benefits
(Notes 8 and 13) 7,745 7,649 6,232
Occupancy and Equipment (Note 5) 1,742 1,646 1,336
(Gains) Losses and Expenses of
OREO, Net (Note 4) (103) 1,362 1,415
Other (Notes 10, 12 and 18) 6,340 4,809 3,736
Total Non-Interest Expense 15,724 15,466 12,719
Income before Income Tax Provision 8,895 4,577 3,588
Income Tax Provision (Benefit),
Net (Notes 1 and 9) 3,330 (1,125) (1,190)
Net Income $ 5,565 $ 5,702 $ 4,778
Per Share Data (Notes 1 and 13)
Weighted Average Number of Common Shares Outstanding (thousands):
Basic 2,414 2,381 2,346
Assuming Dilution 2,533 2,440 2,351
Income Per Common Share:
Basic $2.31 $2.39 $2.04
Assuming Dilution $2.20 $2.34 $2.03
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995 (Note 1)
Un- Un- Total
Additional realized earned Share-
Common Paid-In Retained Gains ESOP holders'
($ thousands) Shares Stock Capital Earnings (Losses) Shares Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1995 2,329,670 $24 $22,838 $16,225 $ (603) $(971) $37,513
Net Income for
1995 - - - 4,778 - - 4,778
Shares Committed
to be Released
(Note 8) 26,556 - 168 - - 266 434
Stock Options
Exercised
(Note 13) 8,494 - 127 - - - 127
Change in Unrealized
Gains (Losses),
Net (Note 2) - - - - 743 - 743
Balance -
December 31, 1995 2,364,720 24 23,133 21,003 140 (705) 43,595
Net Income for 1996 - - - 5,702 - - 5,702
Cash Dividends
Paid on Common
Stock, $0.15
per share
(Note 12) - - - (366) - - (366)
Shares Committed
to be Released
(Note 8) 25,697 - 304 - - 256 560
Stock Options
Exercised
(Note 13) 6,665 - 103 - - - 103
Shares Distributed
to Advisory Board
(Note 12) 230 - 5 - - - 5
Change in
Unrealized Gains
(Losses), Net
(Note 2) - - - - (246) - (246)
Balance -
December 31, 1996 2,397,312 24 23,545 26,339 (106) (449) 49,353
Net Income for 1997 - - - 5,565 - - 5,565
Cash Dividends
Paid on Common Stock,
$0.35 per share
(Note 12) - - - (856) - - (856)
Shares Committed
to be Released
(Note 8) 18,543 - 381 - - 186 567
Stock Options
Exercised (Note 13) 18,201 1 272 - - - 273
Shares Distributed to
Advisory Board
(Note 12) 40 - 1 - - - 1
Change in Unrealized
Gains (Losses), Net
(Note 2) - - - - 1,235 - 1,235
Balance -
December 31,
1997 2,434,096 $25 $24,199 $31,048 $1,129 $(263) $56,138
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 - Increase (Decrease)
in Cash
and Cash Equivalents (Note 1)
($ thousands) 1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 5,565 $ 5,702 $ 4,778
Adjustments to Reconcile Net Income to
Net Cash Provided by
Operating
Activities:
Provision for Credit Losses - 4,415 1,005
Provision for Estimated Losses on OREO - 459 460
Provision for ESOP Benefit Cost 567 560 434
Stock Issued to Advisory Board As Compensation 1 5 -
Depreciation and Amortization 587 521 391
Goodwill Amortization 326 76 -
Net Amortization (Accretion) of Discounts and
Premiums on Securities 752 504 (954)
Deferred Income Tax Provision (Benefit) 1,357 (1,300) (1,200)
Net Gain on Branch Sale - (3,639) -
Net Realized Gains on Sales of Securities
Available-for-Sale (688) (693) (803)
Net (Gains) Losses on Sales of Loans (344) 144 -
Net (Gains) Losses on Sales of OREO (309) 551 227
Net Decrease (Increase) in Trading Securities 1,462 (847) (263)
Decrease (Increase) in Accrued Income Receivable 175 (1,022) (477)
(Increase) Decrease in Other Assets (1,842) 243 (341)
(Decrease) Increase in Accrued Expenses
and Other Liabilities (701) 1,157 945
Total Adjustments 1,343 1,134 (576)
Net Cash Provided by Operating Activities 6,908 6,836 4,202
Cash Flows from Investing Activities
Proceeds From:
Sales of Securities Available-for-Sale 81,926 37,261 62,062
Maturities & Principal Amortization of
Securities
Available-for-Sale 18,907 29,612 37,199
Sales of Loans 13,130 45,319 -
Sale of Bank Premises and Equipment - 340 -
Sales of OREO 1,218 2,917 3,288
Purchases of Loans - (13,724) -
Purchases of Securities Available-for-Sale (140,664) (81,601)(67,571)
Purchases of Securities Held-to-Maturity - (792) -
Purchases of FHLBB Stock (1,163) (2,563) (290)
Net Increase in Loans Receivable (33,768) (91,532)(72,529)
Additions to OREO - (110) (1,170)
Additions to Bank Premises and Equipment (1,174) (660) (750)
Acquisition of Goodwill (96) (1,830) -
Net Cash Used by Investing Activities (61,684) (77,363) (39,761)
Cash Flows from Financing Activities
Net Increase in Deposits from Customers 20,921 20,934 39,726
Assumption of Deposits - 47,556 -
Sale of Deposits - (44,397) -
Advances from FHLBB 65,000 68,750 32,900
Repayments of Advances from FHLBB and Other
Borrowings (36,463) (48,580) (33,887)
Net Increase in Securities
Sold Under Agreements to
Repurchase 9,091 26,750 4,600
Proceeds from Exercised Stock Options 273 103 127
Dividends Paid to Shareholders (856) (366) -
Net Cash Provided by Financing Activities 57,966 70,750 43,466
Increase in Cash and Cash Equivalents (Note 1) 3,190 223 7,907
Cash and Cash Equivalents - Beginning 18,851 18,628 10,721
Cash and Cash Equivalents - Ending $22,041 $18,851 $18,628
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year For:
Interest $26,524 $23,546 $18,458
Income Taxes $ 2,055 $ 22 $ -
Non-Cash Investing and Financing Activities:
Loans Receivable Transferred to OREO $ 1,143 $ 1,758 $ 324
Loans Originated in Connection with Sales of OREO $ 518 $ 1,350 $4,072
Exchange of Loans for Mortgage-Backed Securities $ - $ - $4,361
Transfer of Securities Available-for-Sale to Trading $ - $ 2,182 $ -
Transfer of Securities Held-to-
Maturity to Available-for-Sale $ - $ 30,514 $36,628
Transfer of Loans Receivable to Loans Held-for-Sale $ 5,311 $ - $ -
See notes to consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
1. Nature of Operations & Summary of Significant Accounting
Policies
The following is a summary of significant accounting policies
followed by NSS Bancorp, Inc.(Company) and its wholly owned subsidiary Norwalk
Savings Society (Bank) and NSS Realty Corporation (NSSR), the Bank's wholly
owned subsidiary, and reflected in the accompanying Consolidated
financial statements. The financial statements of NSSR are not significant to
either the Bank's or the Consolidated financial statements.
Formation of Holding Company
At the Bank's annual meeting on May 20, 1997, Shareholders approved
the formation of a bank holding company. On July 24, 1997, the Federal
Reserve Bank of New York approved the Bank's application to form a bank
holding company and on October 1, 1997 the Company was formed as a bank
holding company and parent company of the Bank.
Nature of Operations
The Bank is primarily engaged in the business of providing credit
secured by residential real estate and retail banking services to the consumer
segment of its service area, which is in and around the Norwalk, Connecticut
area. Its operations are regulated by the Banking Commissioner of the State of
Connecticut and its deposit accounts are insured by the Federal Deposit
Insurance Corporation, and as such its activities are subject to periodic
examination by both agencies. NSSR is a special-purpose subsidiary whose
operations consist of the development and sale of certain of the real property
acquired by the Bank in satisfaction of loans.
Principles of Consolidation
The accompanying Consolidated financial statements include the accounts of
the Company and the Bank. Inasmuch as the results of the operations of NSSR
and the financial condition of NSSR are wholly dependent on the financial and
administrative support of the Bank, separate financial information on NSSR
has not been provided. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Basis of Consolidated Financial Statement Presentation
The accompanying Consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and general practice
within the banking industry. In preparing the Consolidated financial
statements, management is required to make estimates and assumptions that
effect the reported amounts of assets, liabilities, income and expenses, and
disclosure of contingent assets and liabilities. Actual results could differ
significantly from those estimates.
Material Estimates
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the Allowance for credit losses
and the valuation of real estate acquired in satisfaction of loans (other
real estate owned or OREO). Such estimates reflect the realization that the
Bank's OREO and a substantial portion of the Bank's mortgage loans receivable
are related to real estate located in markets in and around Norwalk,
Connecticut, which have experienced value fluctuations in recent years.
While management uses available information to recognize possible losses on
loans and OREO, including the services of professional appraisers for
significant properties, future adjustments to the Allowance for credit losses
and valuation of OREO may be necessary based on changes in economic and real
estate market conditions in and around the Bank's service area. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's Allowance for credit losses and
valuation of OREO and may require the Bank to recognize adjustments based on
their judgment of information available to them at the time of their
examination.
Cash Equivalents
For the purposes of reporting cash flows in the Consolidated statements of
cash flows, cash equivalents include federal funds sold and interest-bearing
deposits in other financial institutions.
Securities
Securities are accounted for in accordance with the Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). This statement establishes
standards of financial accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities.
SFAS No. 115 requires the classification of investment securities into
categories of Held-to-maturity, Available-for-sale or Trading. Investments in
debt securities are classified as Held-to-maturity only if there is a
positive intent and ability to hold those securities to maturity. Carrying
basis is reflected at amortized cost and adjusted for any premiums or
discounts. Premiums are amortized and discounts are accreted to interest
income using the level yield method.
Securities classified as Trading comprise securities purchased in connection
with the Bank's trading activities and, as such, are expected to be sold in
the near-term. Trading securities are carried at estimated fair value with
unrealized holding gains and losses recognized in Non-interest income. Equity
securities and debt securities not classified as Held-to-maturity or Trading
are classified as Available-for-sale. Securities classified as Available-for-
sale are carried at estimated fair value, with net unrealized holding gains and
losses reported as a separate component of Shareholders' equity, net of
applicable income taxes.
A decline in the estimated fair value of any security below its carrying
value that is deemed by management to be other than temporary results in a
write-down of the individual security to its estimated fair value. Such
write-downs are recognized as a realized loss in earnings in the accompanying
Consolidated financial statements.
Mortgage-backed securities are accounted for in the same manner as debt
securities and consist of certificates that are participation interests in
pools of long-term first mortgage loans.
Gain or loss on dispositions of securities is based on the net proceeds and
adjusted carrying amount of the securities sold using the specific
identification method.
Loans Held for Sale
Loans held for sale generally consist of certain first mortgage loans that
management has identified will most likely be sold for reasons of managing
rate risk, liquidity, and/or asset growth and are reflected at the lower of
aggregate cost or estimated fair value. Net unrealized losses, if any,
resulting from estimated fair value less than cost are recognized
through a valuation allowance by a charge to earnings in the accompanying
Consolidated Financial Statements.
Loans Receivable
Loans receivable that the Bank has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reflected at amortized
cost (unpaid principal balances reduced by any partial charge-offs or
specific valuation accounts) net of any net deferred fees or costs on
originated loans or any unamortized premiums or discounts on purchased loans,
and less an Allowance for credit losses.
Effective January 1, 1995, the Bank implemented the provisions of SFAS Nos.
114/118, "Accounting by Creditors for Impairment of a Loan" (SFAS Nos.
114/118). These statements address the accounting for loans considered
impaired and the recognition of impairment. A loan is considered impaired
when, in management's judgment, current information and events indicate it is
probable that collection of all amounts due according to the contractual
terms of the loan agreement will not be met. An impairment loss is recognized
through a valuation allowance by charges to income. The provisions of these
statements are prospective, with any adjustments resulting from initial
application reflected as an adjustment to the provision for credit losses.
The effect on the accompanying Consolidated financial statements of
adopting these statements was not significant.
Interest on loans is included in income as earned based on rates applied to
principal amounts outstanding. The accrual of interest income is generally
discontinued and all previously unpaid accrued interest is reversed when a
loan becomes past due 90 days or more as to contractual payments of principal
or interest, or is determined to be impaired. Management may elect to
continue the accrual of interest when the estimated net realizable value of
collateral is sufficient to cover the principal balance and accrued interest.
Interest on purchased loans is adjusted for the accretion of discounts and
the amortization of premiums using the interest method over the contractual
lives of the loans, adjusted for estimated prepayments.
Loan origination fees and certain direct related costs are deferred, and the
net fee or cost is amortized as an adjustment of the loan yield over the life
of the related loan.
The Allowance for credit losses has been established by provisions charged to
income, decreased by loans charged off (net of recoveries). This Allowance
represents an amount which, in management's judgment, is adequate to absorb
possible losses on loans that may become uncollectible based on such factors
as the Bank's past loan loss experience, changes in the nature and volume of
the loan portfolio, current and prospective economic conditions that may
affect the borrower's ability to pay, overall portfolio quality, and review
of specific problem loans. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated
future cash flows.
Effective January 1, 1997, the Bank implemented the accounting for mortgage
servicing rights provided for in SFAS 125. This statement requires recognition
of the value of the rights to service mortgage loans (MSR's) for others as a
separate asset, however those servicing rights are acquired, and assessment for
impairment based on fair value. Capitalized MSR's are amortized to Non-interest
income in proportion to estimated mortgage service fee revenues. Any impairment
adjustments are reflected through a valuation allowance recognized by a charge
or credit to Non-interest income. The effect on the accompanying Consolidated
financial statements of adopting this statement was not significant.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization.
Depreciation is computed by accelerated and straight-line methods, generally
at rates based on estimated useful lives of the related assets. Bank premises
are generally depreciated over periods ranging from 10 to 50 years; furniture
and equipment are generally depreciated over periods ranging from 3 to 20
years. For income tax purposes, the Bank uses the appropriate depreciation
provisions of the Internal Revenue Code.
Other Real Estate Owned (OREO)
OREO includes real estate properties that are held for sale which have been
acquired through foreclosure proceedings or deeds accepted in lieu of
foreclosure. These properties are initially recorded at the lower of the
carrying value of the related loans or the estimated fair value of the real
estate acquired, with any excess of the loan balance over the estimated fair
value of the property charged to the Allowance for credit losses. Subsequent
changes in net realizable values are reflected by charges or credits to the
Allowance for estimated losses on OREO. Costs relating to the subsequent
development or improvement of a property are capitalized when value is
increased. All other holding costs and expenses, net of rental income, if
any, are expensed as incurred.
Goodwill
The goodwill acquired in connection with the Fairfield First Bank and Trust
Company transaction (Note 18) is being amortized on a straight-line basis
over six years.
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences, which are differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the enactment date.
Provisions for income taxes are computed based on all taxable revenue and
deductible expense items included in the accompanying Consolidated statements
of earnings regardless of the period in which such items are recognized for
income tax filing purposes. The Company and the Bank file consolidated
Federal and combined Connecticut income tax returns.
Employee Retirement Benefits
Employee retirement benefits and related deferred assets and/or liabilities
are accounted for in accordance with SFAS No. 106, "Employers'Accounting for
Postretirement Benefits Other than Pensions" (SFAS No. 106). Post-retirement
health care expenses are based on actuarial computations of current
and future benefits.
Earnings Per Share (EPS)
Per share data is based on the weighted average number of outstanding common
shares in accordance with the requirements of SFAS 128. EPS data for prior
years and quarterly periods have been restated accordingly.
Financial Instruments
Financial instruments include substantially all the Bank's financial assets
and liabilities, and certain off-balance-sheet rights and/or obligations.
Such items generally reflect cash and cash equivalents and contractual rights
or obligations to receive cash or other financial instruments, respectively.
Derivative financial instruments are financial instruments used to construct
a transaction that is derived from and reflects the underlying value of
assets, other instruments or various indices. The primary purpose of
derivative financial instruments is to transfer price risk associated with
the fluctuations in asset values rather than borrow or lend funds. Such items
include forward contracts, interest rate swap contracts, options and futures,
and other financial instruments with similar characteristics, which include
the Bank's off-balance-sheet financial instruments (Note 15). All derivative
financial instruments held or issued by the Bank are held or issued for
purposes other than trading.
In accordance with SFAS No. 105, "Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Concentrations of
Credit Risk," SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," and SFAS No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments," the Bank is required to
disclose information about financial instruments with off-balance-sheet
market or credit risk and concentrations of credit risk associated with its
financial instruments (Notes 14 and 15), fair values of its financial
instruments (Note 15), and information about its derivative financial
instruments (Note 15), respectively.
Reclassification
Certain reclassifications have been made to the accompanying 1996
and 1995 Consolidated financial statements to conform to the 1997
presentation.
2. Securities
Securities have been classified in the accompanying Consolidated
statements of financial condition according to management's intent. Carrying
amounts and approximate fair values of Securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997
Amortized Gross Unrealized Holding Fair
($ thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
Trading
Equity Securities $ 1,976 $ 4 $(150) $ 1,830
Available-for-Sale
U.S. Government and Agency
Obligations $ 55,122 $ 190 $ (55) $ 55,257
Mortgage-Backed Securities 85,543 461 (56) 85,948
Mutual Funds 2,183 10 (58) 2,135
Preferred Stock 33,792 1,267 - 35,059
Equity Securities 116 152 - 268
Total $176,756 $2,080 $(169) $178,667
December 31, 1996
Amortized Gross Unrealized Holding Fair
($ thousands) Cost Gains Losses
Value
Trading
Equity Securities $ 3,353 $ 46 $(107) $ 3,292
Available-for-Sale
U.S. Government and Agency
Obligations $ 42,436 $ 145 $(461) $ 42,120
Mortgage-Backed Securities 92,443 382 (372) 92,453
Mutual Funds 2,011 88 (12) 2,087
Equity Securities 99 50 - 149
Total $136,989 $ 665 $(845) $136,809
</TABLE>
<TABLE>
<CAPTION>
The scheduled contractual maturities of debt securities at December
31, 1997 were as follows:
Amortized Fair
($ thousands) Cost Value
<S> <C> <C>
Due After One Year Through Five Years $ 3,000 $ 2,996
Due After Five Years Through Ten Years 43,002 43,187
Due Over Ten Years 9,120 9,074
55,122 55,257
Mortgage-Backed Securities 85,543 85,948
Total $140,665 $141,205
</TABLE>
Proceeds and gross realized gains and losses from sales of securities
classified as Available-for-sale and Trading securities gains and losses
consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
($ thousands) 1997 1996 1995
<S> <C> <C> <C>
Available-For-Sale
Proceeds from Sales $81,926 $37,261 $62,062
Gross Realized Gains $ 776 $ 1,157 $ 985
Gross Realized Losses (88) (464) (182)
Net Realized Gains (Losses) 688 693 803
Trading
Realized Gains 683 24 -
Gross Change in Unrealized Losses (256) (56) (5)
Trading Gains (Losses), Net 427 (32) (5)
Net Security Gains $ 1,115 $ 661 $ 798
</TABLE>
During the year ended December 31, 1996, the Bank transferred securities
Available-for-sale with a carrying basis of approximately $2.2 million to the
classification of Trading and securities Held-to-maturity with an amortized
cost of approximately $30.5 million to the classification of Available-for-
sale at their estimated fair value of approximately $30.6 million. The
transfer of securities Held-to-maturity to the classification of Available-
for-sale was the result of management's assessment that there was no longer a
positive intent to hold these securities to maturity based on management's
revised asset/liability management strategies. Gross unrealized gains and losses
reflected in the accompanying Consolidated statements of earnings for the year
ended December 31, 1996 as a result of the transfer to Trading were
approximately $95,000 and $41,000, respectively. Net unrealized gains, net
of tax effect, which were reflected in the accompanying Consolidated
statements of shareholders' equity as a result of the transfer to Available-
for-sale were approximately $46,000.
At December 31, 1997, the aggregate amortized cost of securities pledged as
collateral against public funds and securities sold under agreements to
repurchase (Note 7) were approximately $6.0 million and $51.3 million,
respectively, which approximated fair values.
At December 31, 1997, the Bank was committed to purchase approximately $10.4
million of Mortgage-backed securities.
3. Loan Receivable
The components of Loans Receivable, net in the accompanying Consolidated
statements of financial condition consisted of the following:
<TABLE>
<CAPTION>
December 31,
($ thousands) 1997 1996
<S> <C> <C>
Loans Secured by Real Estate:
One-to-Four Family Residential $353,225 $344,314
Commercial and Multi-Family 61,162 54,550
Construction and Land Development 2,942 1,227
417,329 400,091
Consumer 7,353 10,302
Commercial 7,587 8,425
Total Loans Receivable 432,269 418,818
Less: Net Deferred Fees, Premiums and Discounts (625) (718)
431,644 418,100
Allowance for Credit Losses (5,832) (7,334)
Loans Receivable, Net $425,812 $410,766
Loans receivable carry interest rate terms as follows:
December 31,
($ thousands) 1997 1996
<S> <C> <C>
Fixed Rate $ 97,763 $110,245
Variable Rate 334,506 308,573
Total Loans Receivable $432,269 $418,818
</TABLE>
<TABLE>
<CAPTION>
Activity in the Allowance for credit losses consisted of the
following:
Years Ended December 31,
($ thousands) 1997 1996 1995
<S> <C> <C> <C>
Balance - January 1 $7,334 $4,170 $4,827
Allowance on Acquired Loans (1) - 1,000 -
Provisions (Credit) for Credit Losses:
Regular - 4,415 2,105
ADP (2) - - (1,100)
Net Provision for Credit Losses - 4,415 1,005
Loans Charged-Off or Settled at Loss:
Regular (2,155) (2,488) (662)
ADP (2) - - (1,137)
Total Loans Charged-Off or Settled at Loss (2,155) (2,488) (1,799)
Recoveries of Loans Previously Charged-Off 653 237 137
Net Loans Charged-Off (1,502) (2,251) (1,662)
Balance - December 31 $5,832 $7,334 $4,170
</TABLE>
(1) In connection with the Fairfield First Bank and Trust Company transaction
(Note 18), the Bank reflected approximately $1.0 million as an allowance
against the acquired loans. This valuation allowance reflects the estimated
credit risk associated with the respective loans and was based on the Bank's
valuation analysis of the loans acquired in the transaction. The Allowance
for credit losses at December 31, 1997 includes a remaining balance in the
acquired allowance of approximately $575,000.
(2) In conjunction with the Bank's stock conversion in June 1994 (Note 12),
the Bank made a special provision for credit losses of $3.1 million and a
special provision for estimated losses on OREO of $2.6 million in order to
more rapidly dispose of certain non-performing assets at discounts below
their net realizable value. As of December 31, 1995 the Bank had absorbed
approximately $2.0 million of the special allowance for credit losses and
$2.6 million of the special allowance for OREO losses through packaged or
individual discounted sales of loans and OREO or other discounted settlements
of non-performing assets with borrowers. The Bank concluded the "Accelerated
Disposition Program" or "ADP" on December 31, 1995 and reflected a credit to
the Provision for credit losses in the amount of $1.1 million for the unused
portion of the special provisions for estimated losses. Total non-performing
assets sold or otherwise settled under the ADP aggregated approximately $3.7
million of loans and $12.4 million of OREO.
The Bank has sold the rights to receive payments of interest and principal on
certain loans while retaining the related servicing rights (Note 1).
Aggregate principal balances of loans serviced for others that are not reflected
in the accompanying Consolidated statements of financial condition approximated
$73.3 and $69.7 million at December 31, 1997 and 1996, respectively.
During the years ended December 31, 1997 and 1996, the Bank sold mortgage
loans with carrying amounts aggregating approximately $12.8 and $45.4
million, respectively. All of the sales during the year ended December 31,
1997 were sold with servicing retained, while all of the sales during the
year ended December 31, 1996 were sold with servicing released. As a result
of such sales, a net gain approximating $344,000 and a net loss approximating
$144,000 are reflected in Non-interest income in the accompanying Consolidated
statements of earnings for the years ended December 31, 1997 and
1996, respectively. There were no significant loan sales during the year
ended December 31, 1995.
At December 31, 1997, capitalized mortgage servicing rights
reflected in Other assets in the accompanying Consolidated statements of
financial position aggregated approximately $184,000, net of a valuation
allowance which approximated $50,000 (Note 1). At December 31, 1996, the Bank
had no capitalized mortgage servicing rights.
During the year ended December 31, 1995, loans securitized into
participation certificates (Note 1) issued by the Federal Home Loan Mortgage
Corporation (FHLMC), with servicing retained, aggregated approximately $4.4
million. There were no loan securitizations during the years ended December
31, 1997 or 1996.
At December 31, 1997, the Bank was committed to sell approximately $5.6
million of fixed rate mortgage loans to FHLMC.
SFAS Nos. 114/118 (Note 1) applies to loans that are individually
evaluated for impairment in accordance with the Bank's ongoing loan review
procedures. The Bank's recorded investment in impaired loans and related
Allowance for credit losses measured under SFAS Nos. 114/118 approximated $4.8
million and $0.6 million at December 31, 1997 and $10.4 million and $1.4
million at December 31, 1996, respectively. The average recorded investment in
impaired loans during the years ended December 31, 1997 and 1996 was
approximately $8.9 million and $11.7 million, respectively. During the years
ended December 31, 1997, 1996 and 1995 amounts recognized as interest income on
impaired loans were not significant. At December 31, 1997, the Bank had no
commitments outstanding to lend additional funds to debtors whose loans were
determined to be impaired.
Loans to directors and their associates aggregated approximately $289,000 and
$341,000 at December 31, 1997 and 1996, respectively. These related party
loans are made on substantially the same terms, including interest rates and
collateral requirements, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk
of collectibility.
4. Other Real Estate Owned (OREO)
OREO, net consisted of the following:
<TABLE>
<CAPTION>
December 31,
($ thousands) 1997 1996
<S> <C> <C>
Real Estate Owned:
One-to-Four Family Residential $250 $272
Commercial Real Estate 324 586
Total Real Estate Owned 574 858
Allowance for Estimated Losses - -
OREO, Net $574 $858
Activity in the Allowance for estimated losses consisted of the
following:
Years Ended December 31,
($ thousands) 1997 1996 1995
<S> <C> <C> <C>
Balance - January 1 $ - $ - $ 802
Provision Charged to Expense - 459 460
Losses Charged to the Allowance:
Regular - (459) (494)
ADP (Note 3) - - (768)
Total Losses Charged to the Allowance - (459) (1,262)
Balance - December 31 $ - $ - $ -
(Gains) Losses and expenses, net related to OREO consisted of the
following:
Years Ended December 31,
($ thousands) 1997 1996 1995
<S> <C> <C> <C>
Provision Charged to Expense $ - $ 459 $ 460
Gains on Sales (312) (73) (163)
Losses on Sales 3 624 390
(Gains) Losses on Sales, Net (309) 551 227
Holding Costs and Expenses 242 523 839
Rental Income (36) (171) (111)
Holding Costs and Expenses, Net 206 352 728
(Gains) Losses and Expenses of OREO, Net $(103) $1,362 $1,415
</TABLE>
5. Bank Premises & Equipment
Bank premises and equipment, net consisted of the following:
<TABLE>
<CAPTION>
December 31,
($ thousands) 1997 1996
<S> <C> <C>
Banking House and Land $4,086 $4,086
Furniture, Equipment and Autos 2,886 2,317
Leasehold Improvements 673 82
Total Bank Premises and Equipment 7,645 6,485
Accumulated Depreciation and Amortization (3,907) (3,334)
Bank Premises and Equipment, Net $3,738 $3,151
</TABLE>
Depreciation and amortization expense included in Non-interest expense in the
accompanying Consolidated statements of earnings for the years ended
December 31, 1997, 1996 and 1995 was approximately $587,000, $521,000 and
$391,000, respectively.
The Bank has operating leases for certain branch and administrative
offices and equipment. Rental expense of $365,000, $333,000 and $220,000 is
included in Occupancy and equipment expense in the accompanying Consolidated
statements of earnings for the years ended December 31, 1997, 1996 and 1995,
respectively. The office leases contain provisions which provide for
adjustments of the rent to reflect changes in cost of living and real estate
taxes.
During the year ended December 31, 1995, the Bank entered into an operating
lease agreement for office space with one of its directors. Amounts included
in Occupancy and equipment expense in the accompanying Consolidated statements
of earnings for the years ended December 31, 1997, 1996 and 1995 relating to
this lease aggregated approximately $49,000, $49,000 and $32,000, respectively.
Future minimum payments under non-cancellable operating leases with initial
or remaining terms of one year or more at December 31, 1997 consisted of the
following:
Years Ending December 31, Amount ($ thousands)
1998 $ 322
1999 320
2000 284
2001 237
2002 181
Thereafter 674
Total Future Minimum Lease Payments $2,018
6. Deposits
Deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
Weighted Average Weighted Average
($ thousands) Rates (a) Amount Rates (a) Amount
<S> <C> <C> <C> <C>
Demand - $ 27,471 - $ 22,479
NOW 1.00-2.47% 37,287 1.00-2.75% 30,262
Regular Savings 1.99 29,455 1.99 28,096
Money Market
and Super
Savings 2.23-3.40 103,404 1.99-2.98 93,361
Time Accounts 5.47 241,867 5.54 244,127
Escrow 2.80 4,727 3.10 4,965
Total Deposits $444,211 $423,290
</TABLE>
(a) ranges indicate tiers
Scheduled maturities of Time accounts at December 31, 1997 were as
follows:
Weighted
Year of Maturity Average Stated Rate Amount ($ thousands)
1998 5.12% $146,109
1999 5.85% 70,623
2000 6.51% 20,757
2001 5.95% 3,466
2002 5.73% 912
Total Time Accounts 5.47% $241,867
Time accounts of $100,000 or more approximated $24.3 million at December 31,
1997. Of that amount approximately $9.3 million mature in six months or less,
$5.2 million mature after six months to one year, and $9.8 million mature
after one year.
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
($ thousands) 1997 1996 1995
<S> <C> <C> <C>
NOW $ 383 $ 309 $ 242
Regular Savings 619 436 507
Money Market and Super Savings 2,967 3,411 3,902
Time Accounts 13,069 12,580 9,434
Escrow 102 108 84
Total Interest Expense on Deposits $17,140 $16,844 $14,169
</TABLE>
7. Borrowed Funds
Advances from Federal Home Loan Bank of Boston (FHLBB)
Terms of the Advances from FHLBB at December 31, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
Weighted Weighted
Average Average
Maturity/ Interest Interest
($ thousands) Reprice Date Rate Amount Rate Amount
<S> <C> <C> <C> <C> <C>
Fixed Rate 1997 -% $ - 5.72% $26,250
1998 5.92 95,000 5.91 40,000
2013 6.55 1,537(a) 6.55 1,558(a)
Adjustable Rate 1997 - - 5.61 10,000
1999/1998 5.94 4,400 5.73 4,400
2002/1998 5.90 10,000 - -
Total Advances from FHLBB $110,937 $82,208
</TABLE>
(a) amortizing with monthly payment of $10,358 and balloon payment of $917,000
at maturity
The Bank has a cash management line of credit with FHLBB approximating $11.8
million. There were no advances outstanding on the line at December 31, 1997
or 1996.
The Bank's investment in the stock of the FHLBB, mortgage loans and
mortgage-backed securities with market values as determined in accordance
with FHLBB's blanket collateral pledge agreement, at least equal to the
outstanding advances and any unused line of credit, are pledged against
outstanding advances from the FHLBB.
Securities Sold Under Agreements to Repurchase (Repurchase Agreements) (Note
2)
Information concerning Repurchase agreements consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
($ thousands) 1997 1996
<S> <C> <C>
Average Balance During the Year $33,847 $29,203
Maximum Month-End Balance During the Year $40,441 $36,350
Average Interest Rate During the Year 5.90% 5.61%
</TABLE>
Repurchase agreements aggregating approximately $9.4, $21.0, and $10.0
million mature during the years ending December 31, 1998, 2000 and 2002,
respectively.
Interest Expense
Interest expense on borrowed funds consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
<S> <C> <C> <C>
($ thousands) 1997 1996 1995
Advances from FHLBB $7,359 $5,158 $4,015
Repurchase Agreements 1,997 1,638 214
Total Interest Expense on Borrowed Funds $9,356 $6,796 $4,229
</TABLE>
8. Employee Benefit Plans
Incentive Savings Plan
The Bank sponsors an incentive savings plan which is available to substantially
all of its employees. The Bank may make a discretionary 50% match of employee
contributions up to 4% of each employee's salary. The Bank's matching expense
contributions, included in Salaries and employee benefits in the accompanying
Consolidated statements of earnings for the years ended December 31, 1997, 1996
and 1995, approximated $96,000, $86,000 and $60,000, respectively.
Postretirement Benefits Other Than Pensions
The Bank provides certain health care, dental care and life insurance
benefits to previously retired employees. The net periodic postretirement
benefit cost included in Salaries and employee benefits in the accompanying
Consolidated statements of earnings approximated $44,000 for each of the
years ended December 31, 1997, 1996 and 1995. The unrecognized transition
obligation aggregated approximately $202,000 and $224,000 at December 31, 1997
and 1996, respectively, and will be amortized over a remaining ten-year assumed
benefit period from December 31, 1997.
Employee Stock Ownership Plan (ESOP)
The Bank established a leveraged ESOP and a related trust in connection with
its stock conversion in 1994 (Note 12) as a long-term non-contributory
benefit for substantially all of its employees. In accordance with the terms
of its Plan of Conversion, the Bank sold to the ESOP 5% of the shares issued
in its conversion, or 121,337 shares at $10 per share, the stated conversion
offering price. Effective with the formation of NSS Bancorp, Inc. (Note 1),
the ESOP shares were converted to shares of NSS Bancorp, Inc. The shares were
purchased by the ESOP with the proceeds of a five-year LIBOR-based
interest-bearing loan from a third party lender, which was guaranteed by the
Bank and required the pledge of an interest-bearing deposit at the third
party lender as security for its guarantee. The loan terms also required
monthly payments of principal and interest. At December 31, 1996 and 1995 the
interest rate on the loan was 6.86%.
The ESOP refinanced the loan during 1997 with the proceeds of a two-year
fixed rate loan with another third party lender. Terms of the refinance
require monthly payments of principal including interest at 7.75%.
Additionally, the Bank guarantees the loan and the ESOP has pledged 44,000
shares of its stock in the Company as collateral for the loan. The loan is
reflected in the accompanying Consolidated statements of financial condition
as a long-term debt and a reduction of Shareholders' equity. Interest expense
on the loan included in Salaries and employee benefits expense in the
accompanying Consolidated statements of earnings approximated $28,000,
$45,000 and $60,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
The shares are held by the ESOP in trust and are committed to be issued to
employees' accounts in the ESOP ratably over a five-year period in settlement
of the Bank's agreed-upon annual ESOP benefit cost. The Bank's ESOP benefit
cost, included in Salaries and employee benefits in the accompanying
Consolidated statements of earnings, aggregated approximately $567,000,
$560,000 and $434,000 for the years ended December 31, 1997, 1996
and 1995, respectively. The difference between the annual ESOP benefit cost
and the cost basis of the shares to be committed is charged or credited to
Additional paid-in capital.
Activity in the shares subject to the ESOP consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Shares - Beginning 44,817 70,514 97,070
Shares Committed to be Released (18,543) (25,697) (26,556)
Shares - Ending 26,274 44,817 70,514
Shares Allocated to ESOP 25,697 26,556 24,267
</TABLE>
9. Income Taxes
The components of the federal and state income tax provision (benefit)
consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Current Income Tax Provision:
Federal $1,542 $ 150 $ -
State 431 25 10
Total Current Income Tax Provision 1,973 175 10
Deferred Income Tax Provision (Benefit):
Federal 955 (960) (984)
State 402 (340) (216)
Total Deferred Income Tax
Provision (Benefit) 1,357 (1,300) (1,200)
Income Tax Provision (Benefit), Net $3,330 $(1,125) $(1,190)
</TABLE>
The significant components of the deferred income tax provision (benefit)
consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Allowances for Losses $ 450 $ (869) $ 820
Basis Difference - Securities (45) (389) (265)
Deferred Compensation and Benefits (33) (106) (18)
Deferred Loan Fees 107 264 389
Depreciation (16) 75 -
Goodwill (80) - -
Net Operating Losses 1,037 3,031 1,236
Other, Net (63) (42) 26
1,357 1,964 2,188
Valuation Allowance - (3,264) (3,388)
Total Deferred Income Tax
Provision (Benefit) $1,357 $(1,300) $(1,200)
</TABLE>
The Company's effective income tax rate differed from the federal statutory
tax rate of 34% as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
($ thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Tax at Statutory Federal Rate $3,024 34.0 $ 1,556 34.0 $1,220 34.0
State Tax* 616 6.9 167 3.6 276 7.7
Capital Loss Carryover Benefit - - (95) (2.1) (200) (5.6)
Effect of ESOP 152 1.7 108 2.4 65 1.8
Dividends Received Deduction (474) (5.3) - - - -
Current Loss Carryover Benefit - - (1,930) (42.2)(1,322) (36.9)
Future Loss Carryover Benefit - - (1,037) (22.7)(1,200) (33.4)
Federal Minimum Tax - - 150 3.3 - -
Other 12 0.1 (44) (0.9) (29) (0.8)
Total and Effective Rate $3,330 37.4 $(1,125) 24.6$(1,190) (33.2)
* Net of Federal tax benefit
</TABLE>
The tax effects of significant components of temporary differences and net
unrealized gains (losses) on securities Available-for-sale that give rise to
deferred income tax assets and deferred income tax liabilities consisted of
the following:
<TABLE>
<CAPTION>
December 31,
($ thousands) 1997 1996
<S> <C> <C>
Deferred Income Tax Assets:
Allowance for Credit Losses $1,349 $1,798
Goodwill 99 19
Employee Benefits 181 149
Unrealized Trading Loss, Net 62 25
Future Loss Carryover Benefit - 1,037
Other, Net 63 -
Deferred Income Tax Asset 1,754 3,028
Deferred Income Tax Liabilities:
Depreciation 59 75
Basis Difference on Securities 59 68
Deferred Loan Fees 493 385
Deferred Income Tax Liability 611 528
Net Deferred Income Tax Asset - Operations 1,143 2,500
Tax (Provision) Benefit on Unrealized (Gains) Losses
on Securities Available-for-Sale (782) 74
Deferred Income Tax Asset, Net $ 361 $2,574
</TABLE>
At December 31, 1995, management reviewed its projections of future
profitability and determined that $1.2 million of net deferred
income tax asset was more likely than not realizable in the future.
During the fourth quarter of 1996, management reviewed the Bank's
estimated profitability for the year ended December 31, 1996 and, on a
projected basis, for the year ending December 31, 1997. Based on this review,
management determined that it was more likely than not that the Bank's net
deferred tax assets, including available future net operating loss benefits of
approximately $1.1 million as of December 31, 1996 were realizable,
and therefore, reversed the existing valuation allowance against net
deferred tax assets. Realization of the Bank's net deferred tax assets is
dependent, however, on various factors and is not assured.
During the years ended December 31, 1996 and 1995, the Bank was
able to absorb approximately $278,000 and $494,000, respectively, of
available capital loss carryforwards, the benefits of which approximated
$95,000 and $200,000, respectively, which benefits had not been previously
reflected in deferred income tax assets.
Deductions from taxable income in prior years have been claimed as
loan loss provisions for qualifying (real estate) loans in accordance with
the Internal Revenue Code. Retained earnings at December 31, 1997 includes a
tax reserve for qualifying loans aggregating approximately $4.6 million. If the
reserve is used for any purpose other than to absorb losses on loans, an
income tax liability could be incurred. Management does not anticipate that
this reserve will be made available for any purposes other than to absorb losses
on loans. In accordance with generally accepted accounting principles, no
deferred income taxes have been provided for this temporary difference.
In August 1996, Congress amended the Internal Revenue Code retroactively
to January 1, 1996 relative to existing tax bad debt reserves of
savings banks as well as to allowable methods of taking future tax bad debt
deductions. The amendment requires savings banks with "excess tax bad debt
reserves," as defined, to recapture such excess into taxable income ratably
over the next six to eight years beginning in 1996. In addition, future tax bad
debt deductions will be based solely on loan charge-offs.
Based on the Bank's tax return as filed for the year ended December 31,
1995, the Bank has an excess tax bad debt reserve approximating $1.9 million
which is subject to recapture in accordance with the change in the tax law. A
deferred income tax liability approximating $800,000 has been provided for
this temporary difference and is reflected, net, in the deferred income tax
asset related to the Allowance for credit losses.
10. Other Non-Interest Income & Other Non-Interest Expense
<TABLE>
<CAPTION>
Years Ended December 31,
($ thousands) 1997 1996 1995
<S> <C> <C> <C>
Other Non-Interest Income
Credit card fees $1,396 $ 514 $ -
All Other, None Greater than 1% of Income 518 378 268
Total $1,914 $ 892 $ 268
Other Non-Interest Expense
Advertising and Marketing $ 779 $ 687 $ 700
Legal and Professional 872 779 354
Regulatory Assessments 55 9 438
Postage, Stationery and Supplies 782 746 626
Data Processing 977 921 702
Credit Card Processing Costs 1,148 382 -
Insurance 217 228 237
Goodwill Amortization (Note 18) 326 76 -
All Other, None Greater than 1% of Income 1,184 981 679
Total Other Non-Interest Expense $6,340 $4,809 $3,736
</TABLE>
Payments to a related party for advertising services for the years ended
December 31, 1997, 1996 and 1995 approximated $456,000, $353,000 and
$316,000, respectively, significant portions of which were reimbursements for
payments by the related party to media companies.
11. Commitments & Contingencies
Off-Balance-Sheet Risk
The accompanying Consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest-rate risk and
liquidity risk. These commitments and contingent liabilities are described in
Note 15.
Litigation
The Company and the Bank are parties to certain litigation and claims arising
from the normal course of business. After consultation with legal counsel,
management is of the opinion that the liabilities, if any, arising from such
litigation and claims will not be material to the consolidated financial
condition.
12. Shareholders' Equity
Stock Conversion
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 amendmentof its mutual charter and the sale of common stock to the
Bank's depositors and others. Effective with the formation of the Company
(Note 1), such stock was converted accordingly.
As part of the Conversion, the Board of Directors adopted a tax-qualified
employee stock ownership plan (ESOP) (Note 8). In addition, the Board has
adopted stock option plans for the benefit of the employees and directors of
the Bank, which became effective following approval by the Bank's shareholders
at the Annual Meeting in April 1995. The options to be issued under the
plans are granted on a post-Conversion basis and became exercisable as of
the first annual anniversary date of the Conversion (Note 13).
At the time of Conversion, the Bank established a liquidation account in an
amount equal to its Retained earnings as of that date, which approximated
$19.7 million. The liquidation account will be maintained for a period of ten
years from the date of the Conversion for the benefit of eligible account
holders who continue to maintain their accounts in the Bank after Conversion.
In the event of a complete liquidation, each eligible account holder would be
entitled to receive a liquidation distribution equal to the current amount in
their subaccount balance.
The Company and the Bank (Note 1) may not declare or pay dividends on its
stock if such declaration and payment would violate statutory or regulatory
requirements.
Advisory Board Compensation
During the year ended December 31, 1997, the Bank compensated any new
advisory board members with shares of the Company's common stock in lieu of
cash in accordance with a new policy. During the year ended December 31,
1996, the Bank compensated all advisory board members with shares
of its common stock in lieu of cash. The Bank reflected compensation
expense in Other non-interest expense in the accompanying Consolidated
statements of earnings for the years ended December 31, 1997 and 1996 in the
amounts of approximately $1,000 and $5,000, respectively, which represented
the fair value of the shares on the dates of issuance.
Dividends
During the years ended December 31, 1997 and 1996, the Company, and
formerly the Bank (Note 1), declared and paid cash dividends on common stock
aggregating $0.35 and $0.15 per share, respectively, which totaled
approximately $856,000 and $366,000, respectively. In January 1998
the Company declared a cash dividend of $0.10 per share to shareholders
of record on February 9, 1998 and payable on February 27, 1998.
Pursuant to Connecticut law, cash dividends may be paid by the Bank
to the Company out of net profits, defined as the remainder of earnings
from current operations plus actual recoveries of loans and investments and
other assets, after deducting all current operating expenses, actual losses,
accrued dividends on preferred stock and all federal and state taxes. Total
dividends declared by the Bank in any calendar year shall not exceed the
total of its profits for that year combined with its net profits for the
preceding two years.
Preferred Stock
In May 1996, the Bank declared and paid a dividend distribution of
one "Right" for each outstanding share of its common stock. Effective
with the formation of NSS Bancorp, Inc. (Note 1), such Rights were converted
accordingly. Each Right entitles the holder to purchase from the
Company one one-hundredths of a share of preferred stock, at a price of $40.000
per one one-hundredths of a preferred share, subject to adjustment. The
Rights are not exercisable except as a result of particular events, including
certain acquisitions of 10% or more of the Company's common stock and
certain exchange offers. If not sooner exercised, the Rights will expire in
May 2006.
Preferred shares purchasable upon exercise of the Rights will not
be redeemable. Each preferred share will be entitled to a minimum
preferential quarterly dividend payment of $1 per share but will be entitled to
an aggregate dividend of 100 times the dividend declared per common
share. In the event of liquidation, the holders of the preferred shares will
be entitled to a minimum preferential liquidation payment of $100 per
share but will be entitled to an aggregate payment of 100 times the payment
made per common share. All liquidation payments are subject to the prior
rights of Bank account holders to the Bank's "Liquidation Account". Each
preferred share will have 100 votes, voting together with the common shares.
In the event of any merger, consolidation or other transaction in which
common shares are exchanged, each preferred share will be entitled to
receive 100 times the amount received per common share.
In the event that the Company is acquired in a merger or other
business combination, proper provision shall be made so that each holder of
a Right shall thereafter have the right to receive, upon the exercise
thereof at the then current exercise price of the Right, that number of shares
of common stock of the surviving company which at the time of such
transaction would have a market value of four times the exercise price of the
Rights.
At any time prior to the close of business on the date that Rights
holders become entitled to purchase preferred shares, the Company may
redeem the Rights in whole, but not in part, at a price of $.001 per Right as
adjusted.
13. Stock Options & Executive Incentive Plans
Stock Option Plan
During the year ended December 31, 1995, the Bank's Shareholders
approved stock option plans (Plans) for the benefit of the Bank's employees
and directors. Under the Plans, 169,872 and 72,802 shares of the Bank's
common stock were reserved for the Employee and Director Plans,
respectively. In April 1996, the Shareholders approved increasing the shares of
common stock reserved by 150,000 shares. Effective with the formation of the
Company (Note 1), such options to purchase common stock were converted
accordingly.
At December 31, 1997, 359,314 shares of common stock remained
reserved under the Company's plans. Included in this amount are 108,477 shares
of common stock reserved for the Director Plans and 250,837 shares of common
stock reserved for the Employee Plans.
The Company accounts for its stock options under APB 25 (Note 1).
Accordingly, at the time options are granted no accounting entry is
made; however, when options are exercised, proceeds are credited to
Common stock for the par value of the options purchased and the excess of the
option price over the par value of shares issued is credited to Additional
paid-in capital. The exercise price of options granted equaled the fair
market value of the shares on the dates granted.
The following table summarizes the shares subject to options under
the Plans for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Directors Employees Total
<S> <C> <C> <C>
Outstanding at January 1, 1996 46,108 169,804 215,912
Granted in 1996 12,000 30,000(c) 42,000
Exercised in 1996 (2,831) (3,834) (6,665)
Canceled in 1996 - (5,666) (5,666)
Outstanding at December 31, 1996 55,277 190,304 245,581
Granted in 1997 12,000 36,000(c) 48,000
Exercised in 1997 (3,000) (15,201) (18,201)
Outstanding at December 31, 1997 64,277(a) 211,103(b) 275,380(d)
Exercisable at December 31, 1997:
Options 64,277 146,770 211,047
Average Exercise Price $17.94 $15.80 $16.45
</TABLE>
(a) Exercisable at prices ranging from $15 to $26.88.
(b) Exercisable at prices ranging from $15 to $36.00.
(c) Exercisable based on three-year vesting schedules from the dates of grant.
(d) Expire after 10 years from dates of grant.
Executive Incentive Plan
During the year ended December 31, 1995, the Bank's Shareholders approved an
incentive plan for certain of the Bank's executives. The Plan has a 10-year
term during which awards of common stock can be made based on specific
performance goals over a three-year period. Under the plan, 100,000
shares of the Company's common stock have been reserved. Effective with the
formation of the Company (Note 1), such reserved shares were converted
accordingly. The first measurement period covers the period January 1, 1995 to
December 31, 1997. The Bank reflected expense provisions of approximately
$42,000 and $200,000 in Salaries and employee benefits in the accompanying
Consolidated statements of earnings for the years ended December 31, 1997 and
1996, respectively, relative to this plan; no compensation expense was
reflected for the year ended December 31, 1995.
In accordance with SFAS No. 123 (Note 1), the Company has elected
to continue accounting for its stock options under APB 25. Had compensation
cost for the Company's stock option plans been determined based on the fair
value at the grant dates for awards granted during the years ended December 31,
1997, 1996 and 1995, which is consistent with the method under SFAS No. 123,
the Company's net income and per share data would have been reduced to
the pro forma amounts as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
($ thousands, except per share data) 1997 1996 1995
<S> <C> <C> <C>
Net Income
As Reported $5,565 $5,702 $4,778
Pro Forma $5,189 $5,456 $4,650
Income Per Share
Basic:
As Reported $2.31 $2.39 $2.04
Pro Forma $2.15 $2.29 $1.98
Assuming Dilution:
As Reported $2.20 $2.34 $2.03
Pro Forma $2.05 $2.23 $1.97
</TABLE>
14. Sigificant Group Concentration of Credit Risk
The concentration of the Bank's loan portfolio by type of loan at
December 31, 1997 and 1996 is set forth in Note 3. A substantial portion
of these loans are collateralized by real estate located in markets in
and around Norwalk, Connecticut. The Bank also has loan commitments, including
unused lines of credit and amounts not yet advanced on construction loans,
secured by real estate substantially located in these same markets. In
addition, a substantial portion of the Bank's OREO at December 31, 1997 is
located in those same markets. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio and the recovery of a
substantial portion of the carrying amount of its OREO are particularly
susceptible to changes in real estate market conditions in and around Norwalk,
Connecticut.
In the normal course of business the Bank may have deposits in correspondent
accounts substantially in excess of depository insurance limits. To
reduce the credit risk associated with such activities, the Bank
periodically reviews the financial condition of such correspondent banks.
15. Financial Instruments
Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and basically includes commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
amounts recognized in the accompanying Consolidated statements of financial
condition. The contract or notional amounts of these instruments
reflect the extent of the Bank's involvement in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of non-performance
by the counterparty for commitments to extend credit is represented by the
contractual notional amount of those instruments.
Commitments to Extend Credit
Loan commitments are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
financial instruments are recorded in the financial statements when they are
funded or when related fees are incurred or received. Loan commitments are
subject to the same credit policies as loans and generally have fixed
expiration dates or other termination clauses. Since commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained is
based on management's credit evaluation of the counterparty. Collateral held
is primarily residential and commercial real property. Interest rates
are generally variable with the exception of the unadvanced portions of
construction loans, which have fixed rates of interest and generally mature
within one year.
The contractual notional amounts of the Bank's credit commitments
consisted of the following:
<TABLE>
<CAPTION>
December 31,
($ thousands) 1997 1996
<S> <C> <C>
Loan Commitments
Commitments to Extend Credit:
One-to-Four Family Residences $9,542 $4,054
Commercial Loans 3,123 2,581
Letters of Credit 646 603
Unadvanced Portion of Construction Loans 1,209 1,823
Unused Lines of Credit:
Home Equity 8,659 7,771
Consumer Loans 963 833
Consumer Credit Cards 2,167 1,080
Commercial Loans 6,169 1,689
</TABLE>
Fair Value of Financial Instruments
Estimating the fair values of financial instruments reflected in
the Consolidated statements of financial condition includes the use of
information that is highly subjective. The subjective factors
include, among other things, the estimated timing and amount of cash flows,
risk characteristics, and credit quality and interest rates, all of
which are subject to change. As a result, fair values estimated could be
significantly different from amounts actually realized or paid at settlement or
maturity of the financial instruments. The following methods and assumptions
were used to estimate the fair values of each class of financial instruments:
Cash and equivalent investments. For those short-term instruments,
the carrying amount is a reasonable estimate of fair value.
Securities. Fair values are based on quoted market prices.
Loans held-for-sale and loans receivable. Fair value for certain
homogeneous categories of loans is estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. Fair value for other types of loans is estimated by
discounting future cash flows using current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Accrued income receivable and Investment in FHLBB stock. The
carrying amounts approximate fair value.
Deposit liabilities. Carrying amounts for checking, NOW accounts,
regular and club savings, money market and mortgagors' escrow accounts are
reasonable estimates of fair value, since they generally represent amounts
payable on demand. Fair value of time deposits is estimated to be the present
value of the deposits using rates currently offered for deposits of similar
remaining maturities.
Advances from FHLBB. The fair values of advances and borrowings
from the FHLBB are estimated using rates which approximate the rates
currently being offered by the FHLBB for similar remaining maturities.
Securities sold under agreements to repurchase and Other
borrowings. The fair value of these borrowings is estimated using rates which
approximate rates currently being offered for similar borrowings and remaining
maturities.
Off-balance-sheet financial instruments. The fair values of
commitments to extend credit and unadvanced lines of credit are estimated based
on interest rates and fees currently charged to enter into similar
transactions, considering the remaining terms of the commitments and the
creditworthiness of the potential borrowers.
Using the preceding assumptions, the estimated fair values of
financial instruments reflected on the Consolidated statements of financial
condition consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
Carrying Fair Carrying Fair
($ thousands) Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial Assets
Cash and Due from Banks $ 11,486 $ 11,486 $ 14,978 $ 14,978
Federal Funds Sold and
Interest-Bearing
Deposits in Other Banks 10,555 10,555 3,873 3,873
Securities 180,497 180,497 140,101 140,101
Loans Held-for-Sale 5,311 5,311 - -
Total Loans Receivable 432,269 443,083 418,818 411,200
Accrued Interest Receivable 3,859 3,859 4,034 4,034
Investment in FHLBB Stock 7,347 7,347 6,184 6,184
Financial Liabilities
Deposits 444,211 445,900 423,292 424,740
Advances from FHLBB 110,937 110,940 82,208 81,958
Securities Sold Under
Agreements to Repurchase 40,441 40,582 31,350 31,369
Other Borrowings 293 293 485 485
Off-Balance-Sheet Financial Instruments
Commitments to Extend Credit * (a) * (a)
(a) Amounts were not significant.
</TABLE>
16. Regulatory Matters & Capital Adequacy
The Company, on a consolidated basis, and the Bank are subject to
risk-based capital standards regulations of the Federal Reserve Board and the
Federal Deposit Insurance Corporation, respectively. These risked-based
standards require a minimum ratio of total capital to risk-weighted assets of
8.0%. Of the required capital, 4.0% must be Tier 1 capital (primarily
Shareholders' Equity).
The Federal Reserve Board has supplemented these standards with a
minimum leverage ratio of 3.0% of Tier 1 capital to total assets. The Federal
Reserve Board has indicated that all but the most highly ranked bank holding
companies should maintain a leverage ratio of 4.0% to 5.0% of Tier 1 capital to
total assets. The Federal Deposit Insurance Corporation has adopted a similar
requirement.
The following table summarizes the capital ratios of the Company
and the Bank at December 31, 1997:
Leverage Risk-Based
Capital Tier 1 Total
NSS Bancorp, Inc. and Subsidiary 8.18% 15.36% 16.61%
Norwalk Savings Society 7.55% 14.27% 15.52%
17. Branch Sale
In October 1996, the Bank sold two of its branch office operations,
comprised of deposits aggregating approximately $48.0 million, loans
aggregating approximately $210,000, and premises and equipment amounting to
approximately $307,000. As a result of the sale, the accompanying Consolidated
statements of earnings for the year ended December 31, 1996 includes a total
gain, reflected in Non-interest income, of approximately $3.64 million,
which includes a deposit premium gain of approximately $3.6 million and
a gain of approximately $33,000 from the sale of assets.
18. Acquisition of Assets & Related Liabilities
FAIRFIELD FIRST BANK & TRUST COMPANY (FFB&T)
In July 1996, the Bank assumed essentially all liabilities, primarily
$47.6 million in deposits, and acquired certain assets of FFB&T, in an
FDIC-assisted transaction. Certain of the commercial real estate
loans acquired from the FDIC were simultaneously sold to another bank at
an amount in excess of the Bank's bid price to the FDIC.
The Bank has allocated the net purchase price to the assets
acquired and the liabilities assumed based upon their fair values. The
net acquired loans were reflected at a fair value of approximately
$13.7 million, which was net of a valuation allowance of $1.0 million
(Note 3), and the excess of the purchase price over the net assets
acquired, which approximated $1.8 million and which management deems
to represent a core deposit intangible, has been reflected
as Goodwill. Goodwill net of accumulated amortization approximated
$1.5 million and $1.8 million at December 31, 1997 and 1996,
respectively, and is included in Other Assets in the accompanying
Consolidated statements of financial condition. During the year ended
December 31, 1997, the Bank and the FDIC completed a final settlement,
which increased Goodwill approximately $95,000.
Goodwill amortization included in Other non-interest expense in the
accompanying Consolidated statements of earnings for the years
ended December 31, 1997 and 1996 approximated $325,600 and $76,000,
respectively (Note 10).
19. Condensed Financial Information
NSS BANCORP, INC. (PARENT COMPANY ONLY)
The condensed Statement of financial condition of NSS Bancorp, Inc.
(Note 1)
is as follows:
<TABLE>
<CAPTION>
($ thousands) December 31, 1997
<S> <C>
Assets
Cash in Bank Subsidiary $ 4,019
Investment in Bank Subsidiary, at Equity 52,346
Other Assets 66
Total Assets $56,431
Liabilities and Shareholders' Equity
Liabilities
Notes Payable - Bank $ 293
Shareholders' Equity
Preferred Stock -
Common Stock 25
Additional Paid-In Capital 24,199
Retained Earnings 32,177(a)
Less: Unearned ESOP Shares (263)
Total Shareholders' Equity 56,138
Total Liabilities and Shareholders' Equity $56,431
(a) includes net unrealized gain on securities available-for-sale
of $1,129, net of tax effect
</TABLE>
The condensed Statement of earnings of NSS Bancorp, Inc. is as follows:
<TABLE>
<CAPTION>
For The Initial Fiscal
Period ended
(Dollar amounts in thousands,
except per share data) December 31, 1997
<S> <C>
Income
Dividends from Subsidiary $4,245
Expenses
Interest Expense 6
Other 90
Total Expense 96
Income Before Income Taxes and Change in Equity of Subsidiary 4,149
Income Tax Benefit (59)
Income Before Change in Equity of Subsidiary 4,208
Change in Equity of Subsidiary (2,514)
Net Income $1,694
Per Share Data (Notes 1 and 13)
Weighted Average Common Shares Outstanding (thousands):
Basic 2,431
Assuming Dilution 2,577
Net Income Per Common Share:
Basic $0.70
Assuming Dilution $0.66
</TABLE>
The condensed changes in the components of Shareholders' Equity of
NSS Bancorp, Inc. for the initial period from October 1, 1997 to
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Unearned
Stock Capital Earnings ESOP Shares
(a)
<S> <C> <C> <C> <C>
Balance - October 1, 1997 $ - $ - $ - $ -
Formation (Note 1) 25 24,107 30,749 (291)
Net Income - - 1,694 -
Cash Dividends Declared on
Common Stock (Note 12) - - (245) -
Stock Options Exercised (4,067 shares) - 60 - -
Change in Unrealized Gains (Losses)
of Investment
Securities Held by Bank
Subsidiary (Note 2) - - (21) -
ESOP Shares Committed to be Released - 31 - 28
Shares Distributed to Advisory
Board (Note 12) - 1 - -
Balance - December 31, 1997 $25 $24,199 $32,177 $(263)
</TABLE>
(a) includes net unrealized gain on available-for-sale securites,
net of tax effect.
The condensed Statement of cash flows of NSS Bancorp, Inc. for the
initial period October 1, 1997 to December 31, 1997 is as follows
($ thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating Activities
Dividends Received from Subsidiary $4,245
Interest Paid (6)
Cash Paid to Suppliers (39)
Net Cash Provided by Operating Activities 4,200
Cash Flows from Investing Activities
Cash Paid to Subsidiary Bank to Transfer Unearned ESOP shares (291)
Cash Flows from Financing Activities
Cash Received from Subsidiary Bank to Transfer Notes Payable -
Bank 342
Payments on Notes Payable - Bank (47)
Dividends Paid to Shareholders (245)
Proceeds from Exercise of Stock Options 60
Net Cash Provided by Financing Activities 110
Net Increase in Cash 4,019
Cash - Beginning -
Cash - End of Year $4,019
A reconciliation of net income to cash provided by operating activities is as
follows ($ thousands):
Net Income $1,694
Items Not Resulting in Cash Flow:
Change in Equity of Undistributed Earnings of Subsidiary 2,514
Increase in Income Tax Benefits Receivable (59)
Decrease in Other Assets 51
Net Cash Flow Provided by Operating Activities $4,200
</TABLE>
20. Recent Accounting Pronouncements
In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements, and
requires that the accumulated balance of other comprehensive income be
reported separately from retained earnings in the Consolidated statements of
financial condition. The Company will be required to implement this statement
in 1998. Management has not yet determined the effect, if any, which this
statement may have on the future presentation of the Company's consolidated
financial statements.
21. Quarterly Results of Operations (Unaudited)
The quarterly results of consolidated operations consisted of the
following ($ thousands, except per share data):
<TABLE>
<CAPTION>
Quarters Ended
<S> <C> <C> <C> <C>
12/31/97 9/30/97 6/30/97 3/31/97
Interest and Dividend Income $11,876 $11,969 $11,179 $10,845
Interest Expense 6,782 6,928 6,601 6,185
Net Interest and Dividend Income 5,094 5,041 4,578 4,660
Provision for Credit Losses - - - -
Non-Interest Income 1,617 1,507 1,262 860
Non-Interest Expense 4,120 3,906 3,913 3,785
Income Taxes 897 965 777 691
Net Income $ 1,694 $ 1,677 $ 1,150 $ 1,044
Income Per Share - Basic $0.70 $0.69 $0.48 $0.43
Income Per Share - Assuming
Dilution $0.66 $0.66 $0.46 $0.42
Weighted Average Shares - Basic 2,431 2,418 2,407 2,400
Weighted Average Shares -
Assuming Dilution 2,577 2,551 2,508 2,490
Quarters Ended
12/31/96 9/30/96 6/30/96 3/31/96
Interest and Dividend Income $10,920 $11,298 $9,962 $9,075
Interest Expense 6,376 6,638 5,650 4,976
Net Interest and Dividend Income 4,544 4,660 4,312 4,099
Provision for Credit Losses 3,205 405 405 400
Non-Interest Income 4,574 499 1,149 621
Non-Interest Expense 5,003 3,443 3,624 3,396
Income Taxes (1,147) - 17 5
Net Income $ 2,057 $ 1,311 $1,415 $ 919
Income Per Share - Basic $0.85 $0.55 $0.60 $0.39
Income Per Share - Assuming
Dilution $0.83 $0.54 $0.58 $0.38
Weighted Average Shares - Basic 2,394 2,388 2,376 2,368
Weighted Average Shares -
Assuming Dilution 2,466 2,446 2,424 2,420
</TABLE>
22. Significant Shareholder Communication
In November 1997, the Company received notice from a significant
shareholder suggesting that the Company seriously explore a sale of the Company
as a way of enhancing shareholder value. The Company issued a public
response that it has continually articulated and implemented a strategy of
enhancing shareholder value by remaining a community-based, independent
financial institution and that its strategy will continue to serve
shareholders well for the foreseeable future.
Directors and Officers
NSS Bancorp, Inc.
Board Of Directors
Donald St. John, Chairman
Brian A. Fitzgerald
Charles F. Howell
Herbert L. Jay
Robert T. Judson
Dr. Edward J. Kelley
John L. Segall
Alan R. Staack
Officers
Robert T. Judson
President & CEO
Charles F. Howell
Executive Vice President & COO
Jere T. Dorney
Senior Vice President & Secretary
Marcus I. Braverman, CPA
Senior Vice President, Treasurer & CFO
Mary D. Ladewig
Assistant Corporate Secretary
NSS Bank
Board Of Directors
Donald St. John, Chairman
Brian A. Fitzgerald
Charles F. Howell
Herbert L. Jay
Robert T. Judson
Dr. Edward J. Kelley
John L. Segall
Alan R. Staack
Executive Officers
Robert T. Judson
President & CEO
Charles F. Howell
Executive Vice President & COO
Jere T. Dorney
Senior Vice President & Secretary
Marcus I. Braverman, CPA
Senior Vice President, Treasurer & CFO
Vice Presidents
Larry L. Bentley
New Business Development
Barbara Budnick
Commercial Loan Officer
Lawrence J. Bues
Manager Commercial Loans
Judy M. DeVito
Loan Servicing
John J. Duffy, Jr.
Trust & Investment Management
Kevin G. Gilmartin
Area Manager
Richard J. Homberger
Loan Origination
Robert J. Iannotti
Finance & Controller
Darryl W. Johnson
Commercial Loan Officer
Robert A. Locke
Private Banking
John A. Lynn
Operations
Wendy A. Macedo
Area Manager
E. Diana Napier
Marketing
Richard J. Stumpf
Consumer Lending
Stephen A. Thomas
Loan Appraisal
John J. Troy
Area Manager
Assistant Vice Presidents
Nancy Austin
Credit Card Manager
Norma J. Bell
Westport Avenue Branch Manager
Joan Gilmartin
Fairfield Branch Manager
Dianne Merkey
Commercial Loan Officer
Willard M. Miley
Caldor Branch Manager
James Oligino
Trust & Investment Management
Lawrence A. Ruttenberg
Branch Coordinator
D. Valerie Watson
Main Office Branch Manager
Linda West
Commercial Loan Officer
Assistant Treasurers
H. Joyce Deering
Collections
Roula Stefanidis
Finance
Michael C. Ventre
Purchasing
Assistant Corporate Secretary
Mary D. Ladewig
Advisory Board
Attorney Thomas T. Adams
Attorney William D. Allen
William R. Amundsen
Robert W. Andre
Alfred Cioppa, Jr.
Nicholas DePalma
Frank DiCostanzo
William T. Gardella, Sr.
William L. Gault
Donald E. Gaynor
John M. Green
Harvey L. Jacobs
Attorney William D. Lane
Dr. Kevin F. McCaul
Bruce Minoff
Lea Mintz
Richard A. Moccia
Daniel F. O'Connor
Dr. Jeremiah A. O'Connor
John P. O'Connor
Dr. Rudolph A. Passero
Rita F. Siegel
Attorney John J. Ryan
Calvin W. Smith
Edith M. Smith
Lawrence A. Somma, Jr.
Shareholder Reference
CORPORATE HEADQUARTERS
NSS Bancorp, Inc.
48 Wall Street
Norwalk, CT 06850
(203) 838-4545
FAX (203) 899-2523
INVESTOR RELATIONS
Marcus I. Braverman, CPA
Senior Vice President
Treasurer & CFO
NSS Bancorp, Inc.
48 Wall Street, P.O. Box 28
Norwalk, CT 06852
1-800-315-3115
STOCK TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
450 West 33rd Street, 15th Floor
New York, NY 10001-2697
1-800-851-9677
CORPORATE COUNSEL
Tyler Cooper & Alcorn, L.L.P.
City Place, 35th Floor
Hartford, CT 06103-3488
INDEPENDENT PUBLIC ACCOUNTANTS
Friedberg, Smith & Co., P.C.
Certified Public Accountants
855 Main Street
Bridgeport, CT 06604-4915
To obtain a copy of the Company's Annual Report on Form 10K, please
direct
your inquiry to:
NSS Bancorp, Inc.
Shareholder Information
48 Wall Street, P.O. Box 28
Norwalk, CT 06852
Attn: Marcus I. Braverman, CPA
NSS Bancorp, Inc. is traded over the counter and quoted on the
NASDAQ
National Market System under the symbol "NSSY".
Office Locations
DARIEN
1089 Post Road
Darien, CT 06820
Manager: John Troy, VP
FAIRFIELD
2000 Post Road
Fairfield, CT 06430
Manager: Joan Gilmartin, AVP
GEORGETOWN
Route 7 & 57-107
Georgetown, CT 06829
Manager: Geneffa Lucci
NORWALK
48 Wall Street
Norwalk, CT 06850
Manager: Valerie Watson, AVP
NORWALK
578 Westport Avenue
Norwalk, CT 06851
Manager: Norma J. Bell, AVP
NORWALK
Route 7
West Rocks Road
Norwalk, CT 06851
Manager: Willard M. Miley, AVP
WESTPORT
1815 Post Road East
Westport, CT 06880
Manager: Andrea Barron
WILTON
117 Old Ridgefield Road
Wilton, CT 06897
Manager: Kevin Gilmartin, VP
SATELLITE OFFICE
South Norwalk Railroad Station
Free Standing ATM
EXHIBIT 18.3
NSS BANCORP, INC.
CONSENT OF FRIEDBERG, SMITH & CO., P.C.
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
NSS Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statement of
NSS Bancorp, Inc. (the "Company") on Form S-8 (File No. ____________) of
our report dated February 11, 1998, on our audits of the consolidated
financial statements of the Company as of December 31, 1997 and 1996, and
for the years ended December 31, 1997, 1996 and 1995, which report is
included in the Company's Annual Report to Shareholders for the year ended
December 31, 1997 and incorporated by reference in the Company's Annual Report
on Form 10-K.
/s/ Friedberg, Smith & Co., P.C.
Bridgeport, Connecticut
March 27, 1998
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Norwalk Savings Society (changed to "NSS Bank"), a Connecticut state
chartered savings bank.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's December 31, 1997 audited balance sheet, income statement and cash
flow statement, and notes thereto, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,486,000
<INT-BEARING-DEPOSITS> 5,555,000
<FED-FUNDS-SOLD> 5,000,000
<TRADING-ASSETS> 1,830,000
<INVESTMENTS-HELD-FOR-SALE> 178,667,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 431,644,000
<ALLOWANCE> 5,832,000
<TOTAL-ASSETS> 654,222,000
<DEPOSITS> 444,211,000
<SHORT-TERM> 47,271,000
<LIABILITIES-OTHER> 2,202,000
<LONG-TERM> 104,400,000
0
0
<COMMON> 25,000
<OTHER-SE> 56,113,000
<TOTAL-LIABILITIES-AND-EQUITY> 654,222,000
<INTEREST-LOAN> 33,369,000
<INTEREST-INVEST> 11,986,000
<INTEREST-OTHER> 514,000
<INTEREST-TOTAL> 45,869,000
<INTEREST-DEPOSIT> 17,140,000
<INTEREST-EXPENSE> 26,496,000
<INTEREST-INCOME-NET> 19,373,000
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 1,115,000
<EXPENSE-OTHER> 15,724,000
<INCOME-PRETAX> 8,895,000
<INCOME-PRE-EXTRAORDINARY> 8,895,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,565,000
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 2.20
<YIELD-ACTUAL> 3.11
<LOANS-NON> 4,847,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,700,000
<ALLOWANCE-OPEN> 7,334,000
<CHARGE-OFFS> 2,155,000
<RECOVERIES> 653,000
<ALLOWANCE-CLOSE> 5,832,000
<ALLOWANCE-DOMESTIC> 5,832,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
