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 December 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 0-24648
FSF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Minnesota 41-1783064
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicated the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date January 30, 1997.
----------------
Class Outstanding
$.10 par value common stock 3,177,310 shares
FSF FINANCIAL CORP. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1996
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
1996 1996*
---------------------------
ASSETS (Dollars in thousands)
------
Cash and cash equivalents:
Interest bearing $ 6,762 $ 9,392
Non-interest bearing 2,787 2,364
Securities available for sale, at fair value:
Equity securities 18,307 18,231
Mortgage-backed and related securities 16,507 16,336
Securities held to maturity, at amortized cost:
Debt securities (estimated fair value of $42,233
and $41,626) 44,358 44,349
Mortgage-backed and related securities (estimated
fair value of $37,231 and $36,915) 38,552 38,557
Loans held for sale 618 443
Loan receivable, net 226,782 216,727
Real estate owned 51 -
Accrued interest receivable 2,381 2,325
Premises and equipment 3,740 3,728
Other assets 1,528 2,184
---------------------------
Total Assets $ $362,373 $ 354,636
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 25,973 $ 27,601
Savings accounts 47,899 48,334
Certificates of deposit 126,997 113,139
---------------------------
Total deposits 200,869 189,074
Federal Home Loan Bank borrowings 114,621 114,693
Other liabilities 1,957 3,220
---------------------------
Total liabilities 317,447 306,987
---------------------------
Stockholders' equity:
Serial preferred stock, no par value 5,000,000 shares
authorized, no shares issued - -
Common stock, $.10 par value 10,000,000 shares authorized,
4,501,277 and 4,501,277 shares issued 450 450
Additional paid in capital 43,189 43,150
Retained earnings, substantially restricted 22,416 22,068
Treasury stock at cost (1,270,967 and 1,023,083 shares) (16,537) (13,095)
Unearned ESOP shares at cost (263,546 and 271,850 shares) (2,636) (2,719)
Unearned MSP stock grants at cost (125,146 and
131,946 shares) (1,325) (1,398)
Unrealized (loss) on securities available for sale (631) (807)
---------------------------
Total stockholders' equity 44,926 47,649
---------------------------
Total Liabilities and Stockholders' Equity $ 362,373 $ 354,636
===========================
- ------------------------------------------------------------
* The consolidated statements of financial condition at September 30, 1996, has
been taken from the audited statements of financial condition of and for that
date.
See Notes to Unaudited Consolidated Financial Statements
1
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended
December 31,
--------------------------------
1996 1995
--------------------------------
(In thousands, except
Interest income: per share data)
Loans receivable $ 4,714 $ 3,693
Mortgage-backed and related securities 855 777
Investment securities 995 1,018
--------------------------------
Total interest income 6,564 5,488
--------------------------------
Interest expense:
Deposits 2,184 1,998
Borrowed funds 1,702 1,221
--------------------------------
Total interest expense 3,886 3,219
--------------------------------
Net interest income 2,678 2,269
Provision for loan losses 30 6
--------------------------------
Net interest income after provision for loan losses 2,648 2,263
--------------------------------
Non-interest income:
Gain (loss) on loans - net 5 5
Other service charges and fees 96 98
Service charges on deposit accounts 164 125
Commission income 50 40
Other 23 37
--------------------------------
Total non-interest income 338 305
--------------------------------
Non-interest expense:
Compensation and benefits 1,110 1,156
Occupancy and equipment 184 197
Deposit insurance premiums 71 96
Data processing 98 102
Professional fees 60 63
Other 251 232
--------------------------------
Total non-interest expense 1,774 1,846
--------------------------------
Income before provision for income taxes 1,212 722
Income tax expense 490 301
--------------------------------
Net income $ 722 $ 421
================================
Earnings per common and common equivalent shares: $0.24 $0.11
Common Stock dividend declared per share $0.125 $0.125
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
December 31,
--------------------------------
1996 1995
--------------------------------
Cash flows from operating activities: (In thousands)
Net income $ 722 $ 421
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 77 81
Net amortization of discounts and premiums on
securities held to maturity (9) (10)
Provision for loan losses 30 6
Net market value adjustment on ESOP shares 23 17
Amortization of ESOP and MRP stock compensation 171 163
FHLB stock dividends - (81)
Net loan fees deferred and amortized 63 17
(Increase) decrease in:
Loans held for sale (175) 36
Accrued interest receivable (57) (125)
Other assets (43) (86)
Increase (decrease) in:
Net deferred taxes 365 (61)
Accrued interest payable 35 (5)
Accrued income tax 75 161
Accrued liabilities (811) 43
Deferred compensation payable 20 (5)
--------------------------------
Net cash provided by operating activities 486 572
--------------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net (8,930) (6,752)
Purchase of loans (1,270) (5,884)
Principal payments on mortgage related securities held to maturity 5 8
Purchase of securities available for sale - (524)
Purchase of securities held to maturity - (564)
Proceeds from maturities of securities held to maturity - 5,500
Purchase of equipment and property improvements (88) (186)
--------------------------------
Net cash (used in) investing activities $ (10,283) $ (8,402)
--------------------------------
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Three Months Ended
December 31,
--------------------------------
1996 1995
--------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits, $ 11,795 $ 8,098
Net increase in short-term borrowings (73) 12,119
Net increase (decrease) in mortgage escrow funds (314) (281)
Treasury stock purchased (3,443) (5,590)
Dividends on common stock (374) (491)
Proceeds from exercise of stock options - 15
--------------------------------
Net cash provided by financing activities 7,591 13,870
--------------------------------
Net increase in cash and cash equivalents (2,206) 6,040
Cash and cash equivalents:
Beginning of year 11,755 14,855
--------------------------------
End of year $ 9,549 $ 20,895
================================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 1,688 $ 1,246
Interest on deposits 2,164 2,023
Income taxes 43 213
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments $ 16 $ 48
4
FSF FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
month period ended December 31, 1996, include the accounts of FSF
Financial Corp. ("the Corporation") and its wholly owned subsidiary,
First Federal fsb (the "Bank") and Firstate Services, a wholly owned
subsidiary of the Bank. The Corporation's business is conducted
principally through the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include information or footnotes necessary for a complete
presentation of consolidated financial condition, results of
operations, and cash flows in conformity with generally accepted
accounting principles. However, all adjustments, consisting of normal
recurring accruals, which, in the opinion of management, are necessary
for fair presentation of the consolidated financial statements have
been included. The results of operations for the period ended December
31, 1996, are not necessarily indicative of the results which may be
expected for the entire fiscal year or any other period. For further
information, refer to consolidated financial statements and footnotes
thereto included in the Corporation's Annual Report on Form 10-K for
the year ended September 30, 1996.
Reclassification
Certain items previously reported have been reclassified to conform
with the current period's reporting format.
FSF FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at December 31, 1996, and September 30, 1996
totaled 915608742$362.4 million and $354.6 million, respectively. The increase
of $7.8 million was primarily a result of an increase in loans receivable.
Cash and cash equivalents totaled 915608743$9.5 million at December 31, 1996,
which represented a decrease of $2.2 million or 18.8% as compared with September
30, 1996. The Corporation utilized cash and cash equivalents to repurchase
247,884 shares of its common stock.
Loans held for sale increased $175,000, to $618,000 at December 31, 1996, from
$443,000 at September 30, 1996. As of December 31, 1996, the Bank had a forward
commitment to sell $332,000 of loans held for sale to the Federal Home Loan
Mortgage ("FHLMC") which in effect would reduce the balance of loans held for
sale to $286,000 as of December 31, 1996.
Loans receivable, net increased $10.1 million or 4.7% to $226.8 million at
December 31, 1996, from $216.7 million at September 30, 1996. Mortgage loan
originations totaled $17.7 million during the period, and the Bank purchased
$595,000 in single-family residential mortgages and $675,000 in commercial
loans. All of the mortgages purchased were single-family residential mortgages
located within Minnesota and individually underwritten by the Bank. The loans
were adjustable rate mortgages ("ARMs") and provided a net yield to the Bank
that was approximately 25 basis points less than the Bank's origination rate.
The purchased commercial loans meet the risk profile established by the Bank,
have interest rates that are based on the "Prime" rate as published in the Wall
Street Journal, and provide the Bank with the opportunity to diversify the
composition of its loan portfolio.
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
At December 31,
------------------------------------------------------
1996 1995
------------------------------------------------------
Amount % Amount %
------------------------------------------------------
Residential real estate: (Dollars in Thousands)
One-to-four family (1) $154,403 64.0 $132,320 67.8
Residential construction 17,402 7.2 16,506 8.5
Multi-family 3,676 1.5 3,564 1.8
------------------------------------------------------
175,481 72.7 152,390 78.1
Land and commercial real estate 23,339 9.7 13,746 7.0
Commercial business 6,858 2.9 1,846 1.0
------------------------------------------------------
205,678 85.3 167,982 86.1
Consumer:
Savings accounts 593 0.2 449 0.2
Home equity and second mortgage 18,739 7.8 13,235 6.8
Automobile loans 10,202 4.2 8,469 4.3
Other 6,047 2.5 4,998 2.6
------------------------------------------------------
Total loans 241,259 100.0 195,133 100.0
====== ======
Less:
Loans in process (12,275) (10,109)
Deferred fees (787) (619)
Allowance for loan losses (797) (764)
---------- ----------
Total loans, net $227,400 $183,641
========== ==========
- ------------------------------------------
(1) Includes loans held for sale in the amount of $618,000 and $194,000
as of December 31, 1996 and 1995, respectively.
6
Real estate owned consists of a single family residence. No loss is expected as
a result of disposition.
Deposits after interest credited increased from $189.1 million at September 30,
1996, to $200.9 million at December 31, 1996, an increase of $11.8 million or
6.2%. Cost of savings decreased from 4.55% for the three months ended December
31, 1995, to 4.48% for the three months ended December 31, 1996.
Federal Home Loan Bank ("FHLB") borrowings decreased slightly during the three
months ended December 31, 1996, as the Bank was able to fund its asset growth
through the increase in deposits.
The Corporation completed the repurchase of 247,884 shares of common stock,
thereby increasing the total number of treasury shares to 1,270,967 at December
31, 1996. Total stockholders' equity decreased from $47.6 million at September
30, 1996, to $44.9 million at December 31, 1996. Repurchased shares are to be
used for general corporate purposes, including the issuance of shares in
connection with the exercise of stock options. The $2.7 million decrease in
stockholders' equity was a direct result of the repurchase of additional shares
during the period. As a result of the repurchases, book value per share
increased from $15.50 at September 30, 1996, to $15.81 at December 31, 1996, an
increase of 2.0%.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when, in the opinion of management, the collection of additional interest is
doubtful. Loans are placed on a non-accrual status when either principal or
interest is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending of the assessment of the ultimate
collectibility of the loan.
During the three months ended December 31, 1996, and 1995, approximately $97,000
and $145,000 respectively, would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current according to the original loan
agreements for the entire period. These amounts were not included in the Bank's
interest income for the respective periods. No interest income on loans
accounted for on a non-accrual basis was included in income during any of these
periods. During the periods indicated the Bank had no restructured loans within
the meaning of SFAS No. 15 and the Bank held no foreign loans.
7
The following table sets forth information with respect to the Bank's
non-performing domestic loans for the periods indicated:
At December 31,
----------------------------------------------
1996 1995
----------------------------------------------
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ - $ 209
Permanent loans secured by one-to-four-family units 23 138
Non-mortgage loans:
Consumer 74 88
----------------------------------------------
Total non-accrual loans 97 435
Foreclosed real estate 51 -
----------------------------------------------
Total non-performing assets $ 148 $ 435
==============================================
Total non-performing loans to net loans 0.04% 0.08%
==============================================
Total non-performing loans to total assets 0.01% 0.23%
==============================================
Total non-performing assets to total assets 0.01% 0.23%
==============================================
Management, in compliance with regulatory guidelines, has instituted an internal
loan review program, whereby loans are classified as special mention,
substandard, doubtful or loss. When a loan is classified as substandard or
doubtful, management is required to establish a general valuation reserve for
loan losses in an amount that is deemed prudent. General allowances represent
allowances which have been established to recognize inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. (When management classifies a loan as a
loss asset, a reserve equal up to 100% of the loan balance may be established or
the loan is to be charged-off.)
An asset is considered "substandard" if it is inadequately protected by the
paying capacity and net worth of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard." with the added characteristic that the
weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions, and values. Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to a sufficient degree of
risk to warrant classification in one of the aforementioned categories but
possess credit deficiencies or potential weaknesses, including all loans over 60
days delinquent, are required to be designated "special mention" by management.
The OTS has promulgated regulations that discontinue the classification of
assets as special mention. However, the Bank continues to utilize this category.
Management's evaluation of the classification of assets and the adequacy of the
reserve for loan losses is reviewed by regulatory agencies as part of their
periodic examinations. At December 31, 1996, First Federal had total classified
assets of $549,000 of which $362,000 were considered substandard and no assets
were classified as loss. Special mention assets totaled $187,000 at December 31,
1996.
8
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Three Months
At December 31,
----------------------------------------------
1996 1995
----------------------------------------------
(In Thousands)
Total loans outstanding (1) $ 227,400 $ 183,641
==============================================
Average loans outstanding $ 222,285 $ 177,352
==============================================
Allowance balance (beginning of period) $ 776 $ 764
----------------------------------------------
Provision (credit):
Residential (2) - -
Commercial real estate - -
Consumer 30 6
----------------------------------------------
Total provision 30 6
Charge-off:
Residential - -
Commercial real estate - -
Consumer 9 6
----------------------------------------------
Total charge-offs 9 6
Recoveries:
Residential - -
Commercial real estate - -
Consumer - -
----------------------------------------------
Total recoveries - -
----------------------------------------------
Net charge-offs 9 6
----------------------------------------------
Allowance balance (end of period) $ 797 $ 764
==============================================
Allowance as percent of total loans 0.35% 0.42%
Net loans charged off as a percent of average loans - -
- ----------------------------------------------------
(1) Includes total loans (including loans held for sale), net of loans in
process
(2) Includes one- to four-family and multi-family residential real estate
loans.
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Net Income. The Corporation recorded net income of $722,000 for the three months
ended December 31, 1996, as compared to net income of $421,000 for the three
month period ended December 30, 1995. The increase in net income of $301,000 or
71.5% was the result of higher net interest income. In general, interest rates
increased during the three months ended December 31, 1996, and in particular,
shorter term rates increased less than longer term rates, causing a steepening
of the yield curve. The Bank prices many of its lending products against
intermediate rates and its savings products against short term rates. As a
result of the steepening of the yield curve, average interest spread for the
three months ended December 31, 1996, increased to 2.53% from 2.23% for the
three months ended December 31, 1995. Management can make no assertions
regarding the future movement of such interest rates or the impact of interest
rate movements on the Bank's interest spread or interest margin.
Total Interest Income. Total interest income increased by $1.1 million or 20.0%
to $6.6 million for the three months ended December 31, 1996, from $5.5 million
for the three months ended December 31, 1995, due to increases in the average
balance of interest earning assets of $46.1 million and an increase in yield on
earning assets from 7.27% for the 1995 quarter to 7.55% for the same quarter in
1995. The average yield on loans increased to 8.48% for the quarter ended
December 31, 1996, from 8.06% for the quarter ended December 31, 1995. The
average balance of mortgage-backed securities increased by $1.7 million from
$53.3 million for the three months ended December 30, 1995, to $55.0 million for
the three months ended December 31, 1996. During this same period, the average
yield on mortgage-backed securities increased from 5.83% to 6.22% or 39 basis
points (100 basis points equals 1%). The increase in yields on interest earning
assets was primarily caused by the higher relative level of interest rates in
1996 versus 1995. The average balance of investment
9
securities decreased $548,000 from $71.2 million for the three months ended
December 31, 1995, to $70.7 million for the three months ended December 31,
1996, while the average yield decreased to 5.63% for 1996 from 5.72% for 1995.
Total Interest Expense. Total interest expense increased to $3.9 million for the
three months ended December 31, 1996, from $3.2 million for the same period in
1995. The average balance of interest-bearing deposits increased from $175.6
million for the three months ended December 31, 1995, to $195.0 million for the
three months ended December 31, 1996. This increase was comprised of interest
credited and an increase in certificate accounts. Even though the increase in
deposits was a result of growth in certificate accounts, the average cost of
deposits decreased by 7 basis points to 4.48% for the three months ended
December 31, 1996. No assurance can be made that deposits can be maintained in
the future without increasing the cost of funds if interest rates should
increase. The average balance of borrowings increased $34.8 million to $114.7
million for the three months ended December 31, 1996, from $79.9 million for the
three months ended December 31, 1995. The overall cost of funds decreased from
5.04% for the three months ended December 31, 1995, to 5.02% for the three
months ended December 31, 1996. The Bank utilized borrowings to supplement
deposits and meet other liquidity needs.
Net Interest Income. Net interest income increased from $2.3 million for the
three months ended December 30, 1995, to $2.7 million for the same period ended
December 31, 1996, an increase of $400,000 or 17.4%. Average interest-earning
assets increased $46.0 million, from $302.0 million for the three months ended
December 30, 1995, to $348.0 million for the three months ended December 31,
1996, while the average yield on interest-earning assets increased 28 basis
points from 7.27% for 1995 to 7.55% for 1996. Average interest bearing
liabilities increased by $54.2 million to $309.6 million for the three months
ended December 31, 1996, from $255.4 million for the three months ended December
31, 1995, and the cost of interest-bearing liabilities decreased from 5.04% for
1995 to 5.02% in 1996.
Provision for Loan Losses. The Bank's provision for loan losses was $30,000 for
the three months ended December 31, 1996, compared to $6,000 for the same period
in 1995. The Bank's allowance for loan losses was $797,000 and $764,000 at
December 31, 1996, and December 31, 1995, respectively. At December 31, 1996,
the Bank's allowance for loan losses constituted 538.5% of non-performing assets
as compared to 175.6% of non-performing assets at December 31, 1995. The
allowance for losses on loans is maintained at a level which is considered by
management to be adequate to absorb probable loan losses on existing loans that
may become uncollectible, based on an evaluation of the collectibility of loans
and prior loan loss experience and market conditions. The evaluation takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. The
allowance for loan losses is established through a provision for loan losses
charged to expense. While the Bank maintains its allowance for losses at a level
which it considers to be adequate, there can be no assurances that further
additions will not be made to the loss allowances or that such losses will not
exceed the estimated amounts.
10
The following table sets forth information with respect to the Corporation's
average balance sheet, interest and dividends earned or paid, and related
interest yields and rates:
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND DIVIDENDS
EARNED OR PAID, AND RELATED INTEREST YIELDS AND RATES
(DOLLARS IN THOUSANDS)
Three Months Ended December 31,
---------------------------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------------------
Loans receivable (2) $ 222,285 $ 4,714 8.48 % $ 177,352 $ 3,693 8.06 %
Mortgage-backed securities 54,976 6.22 53,326 5.83
855 777
Investment securities (3) 70,700 5.63 71,248 1,018 5.72
995
---------------------- ----------------------
Total interest-earning assets 347,961 6,564 7.55 301,926 5,488 7.27
--------------------- ---------------------
Other assets 10,544 10,086
--------- ---------
Total assets $ 358,505 $ 312,012
========= =========
Liabilities:
Interest-bearing deposits $ 194,972 $ 2,184 4.48 % $ 175,565 $ 1,998 4.55 %
Borrowings 114,657 1,702 5.94 79,867 1,221 6.12
---------------------- ----------------------
Total interest-bearing 309,629 3,886 5.02 % 255,432 3,219 5.04 %
liabilities --------------------- ---------------------
Other liabilities 2,589 1,889
--------- ---------
Total liabilities 312,218 257,321
Stockholders' equity 46,288 54,691
--------- ---------
Total liabilities and stockholders'
equity $ 358,505 $ 312,012
========= =========
Net interest income $ 2,678 $ 2,269
Net Spread (4) 2.53 % 2.23 %
Net Margin (5) 3.08 % 3.01 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.12X 1.18X
(1) Annualized
(2) Average balances include non-accrual loans and loans held for sale.
(3) Includes interest-bearing deposits in other financial institutions.
(4) Net spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net margin represents net interest income as a percentage of average
interest-earning assets.
Non-interest Income. Total non-interest income increased $33,000 during the
three month period ended December 31, 1996, to $338,000 as compared to the same
period in 1995. Loan origination fees decreased from $98,000 for the three
months ended December 31, 1995, to $95,000 for the three months ended December
31, 1996, due to a lower level of originations. Loan and other customer service
fees increased from $125,000 for the three months ended December 31, 1995, to
$164,000 for the three months ended December 31, 1996, due to an increase in
deposit related fees.
Non-interest expense. Total non-interest expense decreased $72,000 over the
periods compared. Compensation and benefits decreased to $1,110,000 for 1996
from $1,156,000 for 1995, a decrease of approximately 4%. Occupancy expense was
$184,000 for the three months ended December 31, 1996, versus
11
$197,000 for the same period in 1995. Deposit insurance premiums decreased 26.0%
due to a decrease in the premium rate following the SAIF special assessment paid
in September, 1996. Data processing decreased from $102,000 for the three months
ended December 31, 1995, to $98,000 for the three months ended December 31,
1996, as the Bank continued to utilize cost savings and additional automation
within its data processing system. Professional fees decreased $3,000 from
$63,000 in 1995 to $60,000 in 1996.
Income Tax Expense. Income taxes increased by $189,000 or 62.8%, to $490,000 for
the three month period ended December 31, 1996, from $301,000 for the same
period in 1995, primarily due to the increase of $490,000 in income before tax.
Liquidity and Capital Resources
Under current Office of Thrift Supervision ("OTS") regulations, the Bank must
have core capital equal to 3% of total assets and risk-based capital equal to 8%
of risk-weighted assets, of which 1.5% must be tangible capital. The OTS has
proposed amending its regulations in such a manner that would increase the core
capital requirements for most thrift institutions to 4% or 5%, depending upon
the institutions financial condition and other factors. Although the final form
of the regulation cannot be foreseen, if adopted as proposed, the Bank would
expect its core capital requirements to increase to at least 4%.
On December 31, 1996, the Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
---------------------------------------
(Dollars in thousands)
Tangible capital $ 39,878 11.1 %
Tangible capital requirement
5,380 1.5
---------------------------------------
Excess over requirement $ 34,498 9.6 %
=======================================
Core capital $ 39,878 11.1 %
Core capital requirement 10,760 3.0
---------------------------------------
Excess over requirement $ 29,118 8.1 %
=======================================
Risk based capital $ 40,675 8.1 %
Risk based capital requirement 14,622 8.0
---------------------------------------
Excess over requirement $ 26,053 14.3 %
=======================================
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or a downturn in the
economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
The Bank's liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits, and other cash outflows in an efficient, cost effective manner. The
Bank's primary sources of funds are deposits and scheduled amortization and
principal payment of loans and mortgage-backed securities. During the past
several years, the Bank has used such funds primarily to fund maturing time
deposits, pay savings withdrawals, fund lending commitments, purchase new
investments, and increase liquidity. The Bank is currently able to fund the
majority of its operations internally and uses borrowed funds from the Federal
Home Loan Bank of Des Moines when deemed appropriate by management. As of
December 31, 1996, such borrowed funds totaled $114.6 million. Loan payments,
maturing investments and mortgage-backed security prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments", which include certain United States government
obligations and other approved investments. Current regulations require the Bank
to maintain liquid assets of not less than 5% of its net withdrawable accounts
plus short term borrowings. Short term liquid assets must consist of not less
than 1% of such accounts and borrowings, which amount is also included within
the 5% requirements. Those levels may be changed from time to time by the
regulators to reflect current economic conditions. The Bank has generally
maintained liquidity far in excess of
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regulatory requirements. The Bank's regulatory liquidity was 7.0% and 6.1% at
December 31, 1996, and September 30, 1996, respectively, and its short term
liquidity was 7.0% and 6.1%, at such dates, respectively.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending June 30, 1997, was approximately $78.8 million. To the
extent that these deposits do not remain at the Bank upon maturity, the Bank
believes that it can replace these funds with new deposits, excess liquidity,
FHLB advances or outside borrowings. It has been the Bank's experience that a
substantial portion of such maturing deposits remain at the Bank.
At December 31, 1996, the Bank had loan commitments outstanding of $5.2 million
and no commitments to purchase mortgage-backed securities. Funds required to
fill these commitments are derived primarily from current excess liquidity,
advances, deposit inflows or loan and security repayments.
IMPACT OF INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements of the Corporation and notes
thereto, presented elsewhere herein, have been prepared in accordance with GAAP,
which requires the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Corporation's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Corporation
are financial. As a result, interest rates have a greater impact on the
Corporation's performance than do the general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Bank was engaged in any legal
proceeding of a material nature at December 31, 1996. From
time to time, the Corporation is a party to legal proceedings
in the ordinary course of business wherein it enforces it
security interest in loans.
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 MATERIALLY IMPORTANT EVENTS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11: Statement regarding computation of earnings
per share.
Exhibit 27: Financial Data Schedule (only included in
electronic filing)
(b) Reports on Form 8-K
On December 3, 1996, the Corporation filed a current
report on Form 8-K announcing OTS approval of a 10%
stock repurchase plan (Items 5, 7).
13
FSF FINANCIAL CORP. AND SUBSIDIARY
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.
FSF FINANCIAL CORP.
Date: January 31, 1997 By: /s/ Donald A. Glas
- ----------------------- -----------------------
Donald A. Glas
Chief Executive Officer
Date: January 31, 1997 By: /s/ Richard H. Burgart
- ---------------------- -----------------------
Richard H. Burgart
Chief Financial Officer
14