UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
___________________________
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
----------------------------
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 0-20335
OSB Financial Corp.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1726499
-------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
420 S. Koeller Street, Oshkosh, Wisconsin 54901
---------------------------------------------- -----
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (414) 236-3680
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve (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 ninety (90) days.
Yes ___X___ No______
As of April 29, 1996, there were 1,119,484 shares of the Registrant's
Common Stock, $.01 par value per share, issued and outstanding.
2
OSB FINANCIAL CORP
INDEX FORM 10-Q
Part I - Financial Information Page Number
-----------
Consolidated Statements of Financial Condition 1
as of March 31, 1996 and December 31, 1995
Consolidated Statements of Income for the Quarters 2
Ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows for the Quarters 4
Ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II - Other Information
Signatures
3
Item 1. Financial Statements
OSB FINANCIAL CORP and SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
at March 31, at December 31,
1996 1995
------------ ------------
ASSETS
Cash and Cash Equivalents $6,381 $3,789
Investment Securities Available for Sale, at fair market value 21,055 29,763
Mortgage-backed Securities Available for Sale, at fair market value 48,619 49,838
Loans Held for Sale 2,042 3,070
Loans Receivable 166,550 165,392
Other Assets 9,067 8,962
----------- --------------
TOTAL ASSETS $253,714 $260,814
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit Accounts $158,937 $156,782
Borrowed Funds 58,600 64,335
Other Liabilities 4,225 7,064
----------- ---------------
Total Liabilities 221,762 228,181
----------- ---------------
Stockholders' Equity:
Common Stock (1,529,500 shares at $.01 par value at 15 15
March 31, 1996; 1,518,000 shares at December 31, 1995)
Additional Paid-in Capital 17,017 16,883
Retained Earnings, substantially restricted 24,197 23,909
Unearned Compensation, ESOP (591) (615)
Unearned Compensation, MRP's (687) (689)
Unrealized Loss on Securities Available for Sale - Net of Tax (272) (37)
------------ ---------------
39,679 39,466
Less: 340,078 Shares of Treasury Common Stock at
March 31, 1996; 302,498 at December 31, 1995, at cost (7,727) (6,833)
------------ ---------------
Total Stockholders' Equity 31,952 32,633
------------ ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $253,714 $260,814
============ ===============
See attached notes to Consolidated Financial Statements.
4
OSB FINANCIAL CORP and SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands) For the Quarter
Ended March 31,
1996 1995
---- ----
Interest Income on Loans
Mortgage Loans $2,799 $2,463
Other Loans 539 310
---------------------
Total Interest Income on Loans 3,338 2,773
----------------------
Interest and Dividend Income on Investment Securities
U.S. Treasury and Agency Bonds 353 496
Mortgage-backed Securities 840 832
Dividends - FHLB Stock 45 35
Interest-bearing Deposits 36 7
----------------------
Total Income on Investment Securities 1,274 1,370
----------------------
Total Interest and Dividend Income 4,612 4,143
----------------------
Interest Expense:
Deposit Accounts 1,880 1,868
Borrowed Funds 932 673
----------------------
Total Interest Expense 2,812 2,541
----------------------
Net Interest Income 1,800 1,602
Provision for Loan Losses 140 60
----------------------
Net Interest Income after
Provision for Loan Losses 1,660 1,542
----------------------
Non-interest Operating Income:
Loan Fees and Charges 91 93
Savings Fees and Charges - net 76 58
Other Income 87 69
----------------------
Total Non-interest Operating Income 254 220
----------------------
Gains (Losses) on Sales
Gain (Loss) on Sale of Loans 127 1
Gain (Loss) on Sale of Investments 14 0
Gain (Loss) on Sale of Other Assets (11) 0
----------------------
Total Gains on Sales 130 1
----------------------
Net Income Before Taxes and Non-Interest Expense $2,044 $1,763
----------------------
See attached notes to Consolidated Financial Statements.
5
OSB FINANCIAL CORP and SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
For the Quarter Ended
March 31,
1996 1995
----------------------
Net Income Before Taxes and Non-Interest Expense $2,044 $1,763
----------------------
Non-Interest Expense:
Compensation and Benefits 576 635
Office Buildings & Equipment 180 174
Data Processing Expense 96 90
Federal Insurance Premium 96 92
Marketing Expense 52 62
Other Expense 322 266
----------------------
Total Non-interest Expense 1,322 1,319
----------------------
Income Before Income Taxes 722 444
Income Taxes 274 167
----------------------
Net Income $448 $277
======================
Average Common Shares Outstanding 1,155,828 1,179,210
Earnings Per Share $0.39 $0.23
=======================
Cash Dividends per Share $0.14 $0.14
=======================
See attached notes to Consolidated Financial Statements.
6
OSB FINANCIAL CORP and SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Quarter
Ended March 31,
1996 1995
---- ----
Net cash provided by (used in) operating activities ($1,963) $670
---------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities 1,000 500
Proceeds from sale of investment securities 7,628 0
Principal repayments on mortgage-backed securities 909 314
Net (increase) decrease in loans (1,158) (9,393)
(Purchases) redemptions of FHLB Stock (101) (654)
Capital Expenditures (59) (132)
Capital Expenditures on Real Estate held for investment (1) (179)
Proceeds from sale of Foreclosed Properties 47 0
----------------------------
Net cash provided by (used in) investing activities 8,265 (9,544)
----------------------------
Cash flows from financing activies
Net increase (decrease) in deposits 2,155 (3,642)
Net increase (decrease) in borrowed funds (5,735) 11,600
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 790 984
Proceeds from sale of common stock 134 17
Dividends paid to stockholders (160) (164)
Purchase of 37,580 shares of Treasury Common Stock from
January - March, 1996: 14,825 shares for same period in 1995 (894) (331)
----------------------------
Net cash provided by (used in) financing activities (3,710) 8,464
----------------------------
Net increase (decrease) in cash and cash equivalents 2,592 (410)
Cash and cash equivalents at beginning 3,789 1,450
----------------------------
Cash and cash equivalents at end $6,381 $1,040
============================
See attached notes to Consolidated Financial Statements.
7
Notes to Consolidated Financial Statements
OSB Financial Corp. and Subsidiaries
1. The accompanying consolidated financial statements include the
accounts of OSB Financial Corp ("Holding Company") and its
wholly-owned subsidiary, Oshkosh Savings Bank f.s.b. ("Savings
Bank"). The data as of and for the periods ended March 31, 1996
and 1995 are unaudited but, in the opinion of management, reflect
all accruals and adjustments necessary for a fair statement of
financial condition and results from operations at the dates and
for the periods indicated. All such accruals and adjustments are
of a normal, recurring nature. The results of operations for the
quarter ended March 31, 1996 are not necessarily indicative of
results to be expected for the entire year of 1996.
2. On February 14, 1996 the Board of Directors authorized the
repurchase of up to 5% of stock outstanding, or 57,788 shares.
As of April 29, 1996, all of the shares authorized have been
purchased at an average cost of $23.86 per share.
3. In connection with the conversion on June 30, 1992, the Board of
Directors adopted the 1992 Stock Option and Incentive Plan. The
Plan was approved by stockholders on April 22, 1993.
Under the Option Plan, a number of shares equal to 10% of the
Common Stock issued in the conversion were reserved for future
issuance by the Holding Company upon exercise of stock options to
be granted to full time employees and non-employee directors of
the Holding Company and its subsidiaries from time to time under
the Option Plan. The purpose of the Option Plan is to increase
the incentive and encourage the continued employment of key
employees by facilitating their purchase of a stock interest in
the Holding Company. The Option Plan provides for a term of ten
years after which no awards may be made.
Plan activity includes:
Number of
Shares Per Share
----------- ----------
Outstanding at December 31, 1995 71,925 $11.50-24.25
Exercised January-March, 1996 (11,500)
--------
Balance at March 31, 1996 60,425 $11.50-24.25
As of March 31, 1996, 21,000 shares are vested and currently
exercisable.
8
4. As a member of the Federal Home Loan Bank (FHLB) system, the Bank
may utilize various borrowing alternatives, secured by pledges of
mortgage loans and FHLB stock.
At March 31, 1996, the Bank had $58.6 million in FHLB Advances
outstanding.
The advances have fixed terms ranging from 3 to 48 months.
Interest is payable monthly; principal at maturity. Prepayments
of principal are generally not allowed.
Scheduled maturities of fixed-term advances are:
($ in Fixed Rate Variable Rate
Millions) ---------- -------------
$ % $ %
--- --- --- ---
1996 $17.1 5.77% $14.7 5.53%
1997 17.9 5.26 2.1 5.51
1997 3.5 5.96 2.1 5.51
1998 1.2 5.77 -- --
--------------------------------------------------------------------
Total $39.7 5.56% $18.9 5.53%
====================================================================
5. Effective January 1, 1996, the Bank adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights". SFAS No. 122
requires accounting recognition of the rights to service mortgage
loans for others. The total cost of the mortgage loan will be
allocated between the relative fair values of the loan and the
mortgage servicing rights ("MSRs"). The cost allocated to the
MSRs will be recognized as a separate asset and amortized over
the period of estimated servicing income. Activity during the
first quarter of 1996:
Balance 1/1/96 $ -0-
Additions (included in "Gains
on Sales of Loans" in Consolidated
Statements of Income) 90,928
Less: amortization (deducted from
"Loan Fees and Charges") 4,238
-----
Balance 3/31/96 $86,690
9
Retroactive application of SFAS No. 122 was prohibited, so there
is no effect on prior years. Originated servicing rights
resulting from the above adoption of SFAS No. 122, are amortized
over the estimated lives of the loans using the level yield
method, adjusted for prepayments.
The Savings Bank originates mortgage servicing rights on single-
family residential mortgage loans only. In valuing the mortgage
servicing rights recorded on such loans, the Savings Bank
stratifies the loans by contractual interest rate, and original
term to maturity.
6. On April 1, 1996, the Savings Bank established OSB Investments,
Inc., a Nevada investment subsidiary of the Savings Bank.
Approximately $42 million of mortgage-related securities were
transferred to the subsidiary in exchange for common stock.
On April 18, 1996, Oshkosh Financial, Inc., (OFI) a wholly owned
subsidiary of the Savings Bank, was re-activated. OFI will be
utilized to offer non-traditional products, such as annuities and
mutual funds, to the customer base. It is anticipated that this
service will be operating in June, 1996.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
-------
Management's discussion and analysis of results of operations and
financial condition is intended to assist in understanding the results of
operations and financial condition of the Corporation and the Savings Bank.
The information contained in this section should be read in conjunction
with the Consolidated Financial Statements and the accompanying Notes to
Consolidated Financial Statements.
Results of Operations
---------------------
Net income increased 61.7% from $277,000 for the quarter ended March
31, 1995 to $448,000 for the quarter ended March 31, 1996. Three key
factors contributed to the increase: an increase in net interest income
before provision for loan losses, an increase in gains on the sale of
assets, and holding non-interest expense to virtually the same level of a
year ago. These increases were partially offset by an increase in the
provision for loan losses and an increase in income taxes. The table below
highlights these details with a discussion following:
11
STATEMENT OF INCOME HIGHLIGHTS
($ in thousands)
Quarter Ended March 31,
------------------------------------------
1996 1995 $ Change % Change
------------------------------
Interest Income -
Loans 3,338 2,773 565 20.4%
Investment Securities 1,274 1,370 (96) -7.0%
Interest Expense -
Deposits (1,880) (1,868) 12 0.6%
Borrowed Funds (932) (673) 259 38.5%
------------------------------
Net interest income before 1,800 1,602 198 12.4%
Provision (140) (60) 80 133.9%
Provision for loan losses 254 220 34 15.5%
Non-Interest Income 130 1 129 n/m
Gains/(Losses) on Sales of (1,322) (1,319) 3 0.2%
Assets
Non-Interest Expense
------------------------------
Net Interest Before Taxes 722 444 278 62.6%
Income Taxes (274) (167) 107 64.1%
------------------------------
Net Income 448 277 171 61.7%
===============================
12
The operating results of the Savings Bank depend primarily on its net
interest income, or spread. The spread is the difference between interest
income on interest earning assets, loans and investment securities, and
interest expense on interest bearing liabilities, deposits and borrowings.
The Banks net interest margin improved to 2.87% for the quarter ended March
31, 1996, from 2.76% for the same time period in 1995.
Interest on loans increased by $565,000, or 20.4%. The increase was
the factor of both an increase in the size of the portfolio and an increase
in overall portfolio yield. Commercial loans increased by $7.6 million
from March 31, 1995, to March 31, 1996. The Commercial Lending Department
began operating in late 1994. The portfolio stood at $2.9 million at the
end of the first quarter of 1995, and has subsequently grown to $10.5
million. Commercial loans, while somewhat riskier than mortgage loans,
also provide a significantly higher yield. This growth in commercial loans
is part of the Bank's strategy to improve interest spread by diversifying
the loan portfolio.
Mortgage loans increased by $7.5 million during the same time period.
Most of the growth took place in the last three quarters of 1995, when
consumers perceived rates to be relatively high. Consumers then select
adjustable rate mortgage loans over long term fixed rate loans. As part of
its interest rate risk policy, the Savings Bank retains adjustable rate
mortgage loans in its portfolio, and sells long term fixed rate loans in
the secondary market.
Early in the first quarter of 1996, mortgage interest rates dropped to
levels last seen in 1993. At times during the quarter a rate of less of 7%
was available on a fixed rate 15 year mortgage, and less than 7.5% on a 30
year mortgage. As a result, consumers opted for the fixed rate option.
The Savings Bank originated and sold in excess of $9 million of fixed rate
loans during the first quarter of 1996, versus less than $6 million for the
entire year of 1995. After reaching these lows in mid-February, the
mortgage rates increased fairly rapidly to 7.75% for a 15 year and 8.375%
for a 30 year loan at the end of March, 1996.
The overall loan yield increased from 7.41% at March 31, 1995, to
7.70% as of March 31, 1996.
Deposits increased by $4.2 million, or 2.7% from March 31, 1995, to
the end of the first quarter in 1996. Interest expense on deposits
increased by just $12,000 between the two periods, or 0.6%. This is a
result of a decrease in overall costs of deposits from 4.80% at March 31,
1995 to 4.54% at March 31, 1996. Interest expense on borrowed funds
increased by $259,000, or 38%, as a result of an increase in borrowed funds
from $50.6 million at March 31, 1995, to an average of $64.5 million during
the first quarter of 1996.
13
The provision for loan losses equaled $140,000 for the first quarter
of 1996, an increase of $80,000 or 133% compared to the first quarter of
1995. This was the result of the increase in loan portfolio, and the
desire of management to provide adequate protection for possible loan
losses. The loan loss provision is $949,000 at March 31, 1996, compared to
$691,000 a year earlier. The loan loss provision now equals 0.56% of loans
outstanding, versus 0.45% as of March 31, 1995. The loan loss reserve
currently is 271.14% of problem loans and real estate owned, compared to
88.36% a year ago. Management believes that the loan loss reserve is
adequate to cover potential future losses.
Gains on sales of loans increased from $1,000 for the first quarter of
1995 to $127,000 for the same period in 1996. As discussed in Note 5, the
recognition of income on originated mortgage servicing rights accounted for
$91,000. Net gains on sale of fixed rate mortgage loans totaled $57,000
for the quarter, compared to $1,000 a year ago. This was the result of
increased activity: $9.0 million in loan sales for the quarter ended March
31, 1996, versus $142,000 for the same period in 1995. These gains are
offset by the recognition of a $21,000 loss to mark Loans Held for Sale to
the lower of cost or market as of March 31, 1996.
Non-interest expense increased by just $3,000, or 0.2%, for the
quarter ended March 31, 1996, compared to the first quarter of 1995.
Compensation and benefits decreased by $59,000, for two primary reasons.
First, a senior officer retired in 1995 without being replaced. Second, in
accordance with SFAS No. 91, costs directly related to the origination of a
loan are deferred over the life of the loan. Due to increased mortgage
loan activity in the first quarter of 1996, compared to 1995, the amount
deferred increased by $24,000, thus reducing the expense. Other expenses
increased by $56,000. There were a number of relatively small increases in
a number of areas, including legal fees for setting up OSB Investments,
Inc. (see Note 6), other legal fees, and expenses related to preparing for
sale the last 4 units of a condominium project owned by the Savings Bank.
Provision for income taxes increased by $107,000, or 64.1%. This is
directly related to the increase in Net Income before taxes. There is no
change in the effective tax rate.
14
Financial Condition
-------------------
The table below shows the details of the decrease in assets from
$260.8 million at December 31, 1995, to $253.7 million at March 31, 1996, a
decrease of 2.7%. A discussion follows.
As of March As of Dec. $ % Change
31, 1996 31, 1995 Change
-------------------------------------------
($ in Millions)
TOTAL ASSETS $253.7 $260.8 ($7.1) -2.72%
Cash & Equivalents 6.4 3.8 2.6 68.42%
Investment Securities 21.1 29.8 -8.7 -29.19%
---------------------------------
$27.5 $33.6 $-6.1 -18.15%
==================================
Borrowed Funds 58.6 64.3 -5.7 -8.86%
Other Liabilities 4.2 7.1 -2.9 -40.85%
---------------------------------
$62.8 $71.4 $-8.6 -12.04%
==================================
The decrease in Investment Securities is primarily due to the sale of
$7.6 million of mutual funds, leaving a balance remaining of $1.4 million.
Prior to year end 1995, mutual funds comprised 11.3% of the investment
portfolio. After the sales, that figure is 2%.
15
The proceeds of the sale of Mutual Funds was used to repay borrowing at
the Federal Home Loan Bank of Chicago. Borrowed funds decreased by $5.7
million during the quarter, or 8.86%. Additional borrowings of $5.3 million
were repaid in early April, 1996, which explains why the cash equivalents
were relatively high as of March 31, 1996.
Other liabilities decreased by $2.9 million from December 31, 1995 to
March 31, 1996. Most of the decrease relates to escrow checks disbursed in
December to mortgage customers to pay real estate taxes. The checks are
issued to all customers in December. Many customers hold on to the checks
until after year end to pay their taxes in 1996. Since these checks are
issued from an account at the Savings Bank, the liability remains on the
books until the checks have cleared.
Capital Ratios
--------------
Federal regulations require the Savings Bank to meet certain tangible,
core, and risk-based capital requirements. Tangible capital generally
consists of stockholders' equity minus certain intangible assets. Core
capital generally consists of stockholders' equity. The risk-based capital
requirements presently address risk related to both recorded assets and
off-balance sheet commitments and obligations.
The following table summarizes the Savings Bank's capital ratios and
the ratios required by regulations of the Office of Thrift Supervision at
March 31, 1996:
Tangible Core Risk-
Capital Capital Based
------- ------- Capital
-------
Bank Regulatory Percentage 10.49% 10.49% 23.38%
Required Regulatory 1.50% 3.00% 8.00%
Percentage ----- ----- -----
Excess Regulatory 8.99% 7.49% 15.38%
Percentage
($ in Thousands)
Bank Regulatory Capital $26,803 $26,803 $27,427
Required Regulatory 3,833 7,666 9,383
Capital ----- ----- -----
Excess Regulatory Capital $22,770 $19,137 $18,044
16
OSB Financial Corp. and Subsidiaries
Part II - Other Information
ITEM 1, LEGAL PROCEEDINGS
Neither OSB Financial Corp. nor the Savings Bank is a party to any material
legal proceedings at this time. From time to time the Savings Bank is
involved in various claims and legal actions arising in the ordinary course
of business.
ITEM 2, CHANGES IN SECURITIES
Not applicable.
ITEM 3, DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4, SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5, OTHER INFORMATION
None
ITEM 6, EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 -- Financial Data Schedule.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
OSB Financial Corp.
Date: 4/29/96 By: James J. Rothenbach
------------ --------------------------
James J. Rothenbach
President and Chief Executive Officer
(Duly Authorized Officer)
Date: 4/29/96 By: David A. Hayford
------------ --------------------------
David A. Hayford
Vice President - Finance
(Principal Accounting Officer)