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, 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 0-24648
FSF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Minnesota 41-1783064
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) employer identification no.)
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 April 30, 1997.
--------------
Class Outstanding
----- -----------
$.10 par value common stock 3,062,310 shares
FSF FINANCIAL CORP. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
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 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Materially Important Events 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
March 31, September 30,
1997 199*
--------- -------------
(In thousands)
ASSETS
------
Cash and cash equivalents:
Interest bearing $ 4,387 $ 9,392
Non-interest bearing 3,159 2,364
Securities available for sale, at fair value:
Equity securities 18,295 18,231
Mortgage-backed and related
securities 16,453 16,336
Securities held to maturity, at amortized cost:
Debt securities (estimated fair value of $41,121
and $41,626) 42,865 44,349
Mortgage-backed and related securities (estimated
fair value of $37,248 and $36,915) 38,551 38,557
Loans held for sale 497 443
Loan receivable, net 235,388 216,727
Real estate owned 91 --
Accrued interest receivable 2,346 2,325
Premises and equipment 3,798 3,728
Other assets 1,482 2,184
--------- ---------
Total Assets $ 367,312 $ 354,636
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand Deposits $ 27,826 $ 27,601
Savings accounts 48,919 48,334
Certificates of deposit 133,346 113,139
--------- ---------
Total Deposits 210,091 189,074
Federal Home Loan Bank borrowings 111,451 114,693
Other liabilities 2,545 3,220
--------- ---------
Total liabilities 324,087 306,987
--------- ---------
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 43,221 43,150
Retained earnings, substantially restricted 22,784 22,068
Treasury stock at cost (1,405,967 and 1,023,083)
shares) (18,761) (13,095)
Unearned ESOP shares at cost (253,979 and
271,850 shares) (2,540) (2,719)
Unearned MSP stock grants at cost (118,254 and
131,946 shares) (1,253) (1,398)
Unrealized (loss) on securities available for
sale (676) (807)
--------- ---------
Total Stockholders' equity 43,225 47,649
--------- ---------
Total Liabilities and Stockholders' Equity $ 354,636 $ 367,312
========= =========
- ---------------------------------------
* 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.
1
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For Three Months For Six Months
Ended March 31, Ended March 31,
------------------ ----------------
1997 1996 1997 1996
------------------ ----------------
(In thousands, except per share data)
Interest income:
Loans receivable $4,895 $3,870 $9,609 $ 7,563
Mortgage-backed and related
securities 826 748 1,681 1,525
Investment securities 1,007 965 2,002 1,983
------ ------ ------ -------
Total interest income 6,728 5,583 13,292 11,071
------ ------ ------ -------
Interest expense:
Deposits 2,356 2,110 4,540 4,108
Borrowed funds 1,655 1,225 3,357 2,446
------ ------ ------ -------
Total interest expense 4,011 3,335 7,897 6,554
------ ------ ------ -------
Net interest income 2,717 2,248 5,395 4,517
Provision for loan losses 30 6 60 12
Net interest income after
provision for loan losses 2,687 2,242 5,335 4,505
------ ------ ------ -------
Non-interest income:
Gain (loss) on loans - net 13 9 18 14
Other service charges and fees 90 53 186 95
Service charges on deposit
accounts 158 178 322 351
Commission income 60 63 110 103
Other 22 16 45 61
Total non-interest income 343 319 681 624
------ ------ ------ -------
Non-interest expense:
Compensation and benefits 1,187 1,075 2,297 2,231
Occupancy and equipment 202 206 386 403
Deposit insurance premiums 31 98 102 194
Data processing 96 94 194 196
Professional fees 53 60 113 123
Other 258 239 509 471
Total non-interest expense 1,827 1,772 3,601 3,618
------ ------ ------ -------
Income before provision for income
taxes 1,203 789 2,415 1,511
Income tax expense 478 329 968 630
------ ------ ------ -------
Net income $ 725 $ 460 $1,447 $ 881
====== ====== ====== =======
Earnings per common and common
equivalent shares: $ 0.25 $ 0.13 $ 0.48 $ 0.24
Cash dividend declared per share $0.125 $0.125 $ 0.25 $ 0.25
2
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Six Months
Ended Ended
March 31, March 31,
-------------------------------------------------
1997 1996 1997 1996
-------------------------------------------------
Cash flows from operating activities: (In thousands)
Net income $ 725 $ 460 $ 1,447 $ 881
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 79 83 156 164
Net amortization of discounts and premiums on
securities held to maturity (8) (7) (17) (18)
Provision for loan losses 30 6 60 12
Net market value adjustment on ESOP shares 58 19 81 36
Amortization of ESOP and MSP stock compensation 145 185 316 348
FHLB stock dividends -- -- -- (81)
Net loan fees deferred and amortized 35 70 98 87
(Increase) decrease in:
Loans held for sale 121 1 (54) 37
Accrued interest receivable 36 259 (21) 134
Other assets 47 (49) 4 (135)
Increase (decrease) in:
Net deferred taxes (2) 49 363 (12)
Accrued interest payable 28 (16) 63 (21)
Accrued income tax 111 (307) 186 (146)
Accrued liabilities 30 38 (781) 81
Deferred compensation payable 35 (31) 54 (36)
-------- -------- -------- --------
Net cash provided by operating activities 1,470 760 1,955 1,331
-------- -------- -------- --------
Cash flows from investing activities:
Loan originations and principal payments on
loans, net (8,713) (4,286) (17,643) (11,038)
Purchase of loans -- (4,526) (1,270)
Principal payments on mortgage-related
securities held to maturity 2 20 7 28
Purchase of securities available for sale -- -- -- (523)
Purchase of Mortgage-related securities held to
maturity -- (1,494) (1,494)
Purchases of securities held to maturity -- (9,988) -- (10,552)
Proceeds from maturites of securites held to
maturity 1,500 10,650 1,500 16,150
Investments in foreclosed real estate (1) (7) (1) (7)
Purchases of equipment and property improvements (138) (56) (226) (242)
-------- -------- -------- --------
Net cash (used in) investing activities $ (7,350) $ (9,687) $(17,633) $(18,088)
-------- -------- -------- --------
3
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Six Months
Ended Ended
March 31, March 31,
--------------------------------------------
1997 1996 1997 1996
--------------------------------------------
Cash flows from financing activities: (In thousands)
Net increase (decrease) in deposits, $ 9,222 $ 9,208 $ 21,017 $ 17,306
Net increase (decrease) in short-term borrowings (3,170) (2,080) (3,243) 10,039
Net increase (decrease) in mortgage escrow funds 407 330 93 49
Treasury stock purchased (2,230) -- (5,673) (5,590)
Proceeds from exercise of stock options 5 25 5 40
Dividends on common stock (357) (438) (731) (929)
---------------------------------------
Net cash provided by financing activities 3,877 7,045 11,468 20,915
---------------------------------------
Net increase in cash and cash equivalents (2,003) (1,882) (4,210) 4,158
Cash and cash equivalents:
Beginning of period 9,549 20,895 11,756 14,855
----------------------------------------
End of period $ 7,546 $19,013 $ 7,546 $ 19,013
========================================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on advances and other borrowed money $ 1,668 $ 1,210 $ 3,356 $ 2,456
Interest on deposits 2,349 2,096 4,513
Income taxes 385 580 428
Supplemental schedule of noncash investing and financing
activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments 4 55 20 103
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
and six month periods ended March 31, 1997, 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 March 31, 1997, 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 Company'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.
NOTE 3 - NEW ACCOUNTING STANDARDS
The FASB issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS No. 125) and
SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 (SFAS No. 127) in June and December 1996, respectively.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets, and extinguishments of liabilities. It
requires entities to recognize servicing assets and liabilities for all
contracts to service financial assets, unless the assets are securitized
and all servicing is retained. The servicing assets will be measured
initially at fair values, and will be amortized over the estimated useful
lives of the servicing assets. In addition, the impairment of servicing
assets will be recognized through a valuation allowance. SFAS No. 125 also
addresses the accounting and reporting standards for securities lending,
dollar-rolls, repurchase agreements and similar transactions. The Company
prospectively adopted SFAS No. 125 on January 1, 1997. However, in
accordance with SFAS No. 127, the Company will defer adoption of the
standard as it relates to securities lending, dollar-rolls, repurchase
agreements and similar transactions until January 1, 1998. The Company
does not expect the adoption of SFAS No. 125 to have a material impact on
its consolidated financial statements.
Earnings per Share. On March 3, 1997, the FASB issued SFAS No. 128,
Earnings per Share (SFAS No. 128) which is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
replaces APB Opinion 15, Earnings per Share, and simplifies the
computation of earnings per share (EPS) by replacing the presentation of
primary EPS with a presentation of basic EPS. In addition, the Statement
requires dual presentation of basic and diluted EPS by entities with
complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share
in the earnings of an entity, similar to fully diluted EPS. The
computation of EPS will be compatible with international standards, as the
International Accounting Standards Committee recently issued a comparable
standard.
5
FSF FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at March 31, 1997, and September 30, 1996 totaled
923821514$367.3 million and $354.6 million, respectively. The increase of $12.7
million was a result of an increase in loans receivable, a decrease in interest
bearing cash equivalents and the maturity of debt securities classified as held
to maturity.
Cash and cash equivalents decreased from $11.8 million at September 30, 1996, to
$7.5 million at March 31, 1997, or a decrease of $4.3 million. The Corporation
utilized excess liquidity to fund the purchase of treasury shares.
Securities held to maturity at March 31, 1997, totaled 923821515$42.9 million,
which represents a decrease of $1.4 million or 3.2% as compared to September 30,
1996. $1.5 million in securities matured during the March quarter and the
proceeds were used to help fund the purchase of treasury shares.
Mortgage-backed and related securities held to maturity remained at
923821516$38.6 million at March 31, 1997.
Loans held for sale increased $54,000 to $497,000 at March 31, 1997 from
$443,000 at September 30, 1996. As of March 31, 1997, the Bank had a forward
commitment to sell $47,000 of loans held for sale to the Minnesota House Finance
Agency ("MHFA") which in effect would reduce the balance of loans held for sale
to $450,000 as of March 31, 1997.
Loans receivable increased $18.6 million or 8.6% to $235.4 million at March 31,
1997, from $216.7 million at September 30, 1996.
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months Six Months
Ended Ended
March 31, March 31,
------------------ -----------------
1997 1996 1997 1996
------------------ -----------------
Loans Originated: (In Thousands)
Residential mortgages $ 10,823 $14,580 $23,398 $27,686
Land and commercial
real estate 3,500 715 8,625 715
Commercial Business 693 27 1,182 88
Consumer Loans 6,100 5,632 11,498 12,471
------------------ -----------------
Total Loans
Originated 21,116 20,954 44,703 40,960
------------------ -----------------
Residential mortgages
purchased -- -- 595 5,884
Commercial real estate
purchased -- 3,000 -- 3,000
Commercial Business
purchased -- 1,526 675 1,526
------------------ -----------------
Total loans purchased -- 4,526 1,270 10,410
------------------ -----------------
Total New Loans $ 21,116 $25,480 $45,973 $51,370
================== =================
All of the single-family residential mortgages were 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 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 continue to diversify the composition of their loan
portfolio.
6
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:
March 31, September 30,
1997 1996
----------------------------------------------
Amount % Amount %
----------------------------------------------
Residential real estate: (Dollars in Thousands)
One-to-four family (1) $ 157,595 63.9 $ 150,102 64.7
Residential construction 14,710 6.0 19,676 8.5
Multi-family 3,378 1.4 3,753 1.6
--------------------------------------------
175,683 71.2 173,531 74.8
Land and commercial real
estate 26,340 10.7 18,637 8.0
Commercial business 7,566 3.1 6,089 2.6
--------------------------------------------
209,589 84.9 198,257 85.4
Consumer:
Savings accounts 730 0.3 563 0.2
Home equity and second
mortgages 19,248 7.8 17,692 7.6
Automobile loans 10,844 4.4 10,080 4.3
Other 6,345 2.6 5,512 2.4
--------------------------------------------
Total loans 246,756 100.0 232,104 100.0
===== =====
Less:
Loans in process (9,466) (13,401)
Deferred fees (597) (757)
Allowance for loan losses (808) (776)
--------- ---------
Total loans, net $ 235,885 $ 217,170
========= ==========
- -------------------------
(1) Includes loans held for sale in the amount of $497,000 and $443,000 as of
March 31, 1997 and September 30, 1996, respectively.
Real estate owned at March 31, 1997, totaled $91,000, and consists of a total of
three single-family residential properties. No loss is expected in the
disposition of the properties.
Deposits after interest credited increased from $189.1 million at September 30,
1996, to $210.1 million at March 31, 1997, an increase of $21.0 million or
11.1%. Overall cost of funds remained level during the period as the Bank
attempted to maintain deposit rates consistent with marketplace competitors.
Federal Home Loan Bank borrowing decreased $3.2 million from $114.7 million at
September 30, 1996, to $111.5 million at March 31, 1997, as the Bank was able to
fund its asset growth through the increase of deposits.
The Corporation repurchased 383,384 shares of common stock, thereby increasing
the total number of treasury shares to 1,405,967 at March 31, 1997. Total
stockholders' equity decreased from $47.6 million at September 30, 1996, to
$43.2 million at March 31, 1997. Repurchased shares are to be used for general
corporate purposes, including the issuance of shares in connection with the
exercise of stock options. The $4.4 million decrease in stockholders' equity was
a direct result of the repurchase of additional shares during the period. Book
value per share increased from $15.50 at September 30, 1996, to $15.87 at March
31, 1997, an increase of 2.4%.
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 six months ended March 31, 1997, and 1996, approximately $6,000 and
$7,000 respectively, would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current according to
7
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.
The following table sets forth information with respect to the Bank's
non-performing domestic loans for the periods indicated:
March 31, September 30,
---------------------------
1997 1996
---------------------------
(In Thousands)
Loans accounted for on a non-accrual
basis:
Mortgage loans:
Residential construction loans $ - $ -
Permanent loans secured by
one-to-four-family units 196 129
Non-mortgage loans:
Consumer 87 90
----------------------
Total non-accrual loans 283 219
Foreclosed real estate 91 -
----------------------
Total non-performing assets $ 374 $ 219
======================
Total non-performing loans to
net loans 0.12% 0.10%
======================
Total non-performing loans to
total assets 0.08% 0.06%
======================
Total non-performing assets to
total assets 0.10% 0.06%
======================
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 to 100% of the loan balance can 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 March 31, 1997, First Federal had total classified
assets of $785,000 of which $105,000 were considered substandard and no assets
were classified as loss. Special mention assets totaled $680,000 at March 31,
1997.
8
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The following table sets forth information with respect to the Corporation's
average balance sheet, interest and dividends earned or paid, and related 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 March 31,
-------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates(1) Balance Interest Rates (1)
------------------------------------------------------------------------------------
Loans receivable (2) $231,643 $ 4,895 8.45 % $187,982 $ 3,870 8.23 %
Mortgage-backed
securities 55,032 826 6.00 54,015 748 5.54
Investment securities 67,488 1,007 5.97 70,044 965 5.51
------------------- -------------------
Total interest-
earning assets 354,163 6,628 7.60 312,041 5,583 7.16
--------------------- --------------
Other assets 10,680 11,012
-------- --------
Total assets $364,843 $323,053
======== ========
Liabilities:
Interest-bearing
deposits $205,480 $ 2,356 4.59 % $184,218 $ 2,110 4.58 %
Borrowings 113,036 1,655 5.86 84,886 1,225 5.77
------------------- -------------------
Total interest-
bearing liabilities 318,516 4,011 5.04 % 269,104 3,335 4.96 %
---------------------- ------------
Other liabilities 2,251 1,850
-------- --------
Total
liabilities 320,767 270,954
Stockholders' equity
44,076 52,099
-------- --------
Total liabilities and
stockholders' equity $364,843 $323,053
======== ========
Net interest income $ 2,717 $ 2,248
Net Spread (4) 2.56 % 2.20 %
Net Margin (5) 3.07 % 2.88 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.11X 1.16X
(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.
Net Income. The Corporation recorded net income of $725,000 for the three months
ended March 31, 1997, as compared to net income of $460,000 for the three month
period ended March 31, 1996. The increase in net income of $265,000 or 57.6% was
the result of higher net interest income.
Total Interest Income. Total interest income increased by $1.1 million or 19.6%
to $6.7 million for the three months ended March 31, 1997, from $5.6 million for
the three months ended March 31, 1996, due to increases in both the average
balances of interest-earning assets and the average yield on those assets. The
average yield on loans increased to 8.45% for the quarter ended March 31, 1997,
from 8.23% for the quarter ended March 31, 1996. The average balance of
mortgage-backed securities increased by $1 million from $54.0 million for the
three months ended March 31, 1996, to $55.0 million for the three months ended
March 31, 1997. During this
9
same period, the average yield on mortgage-backed securities increased from
5.54% to 6.00% or 46 basis points (100 basis points equals 1%). The increase in
yield was caused by the steepening of the yield curve. During the two periods,
short-term interest rates, which have the greatest impact on the Bank's deposit
rates, continued to increase, while intermediate rates, which generally
influence lending rates, increased as well. The average balance of investment
securities decreased to $67.5 million for the quarter ended March 31, 1997, from
$70.0 million for the quarter ended March 31, 1996. The average yield increased
46 basis points from 5.51% for the three months ended March 31, 1996, to 5.97%
for the same period in 1997, as interest rates in general increased during the
period.
Total Interest Expense. Total interest expense increased to $4.0 million for the
three months ended March 31, 1997, from $3.3 million for the same period in
1996. The average balance of interest-bearing deposits increased from $184.2
million for the three months ended March 31, 1996, to $205.5 million for the
three months ended March 31, 1997. This increase was comprised of interest
credited and an increase in certificate accounts. The average cost of deposits
increased by 1 basis point from 4.58% for the three month period ended March 31,
1996, to 4.59% for the same period in 1997. No assurance can be made that
deposits can be maintained in the future without further increasing the cost of
funds if interest rates continue to increase. The average balance of borrowings
increased $28.1 million to $113.0 million for the three months ended March 31,
1997, from $84.9 million for the three months ended March 31, 1996. The cost of
such borrowings decreased by 9 basis points to 5.86% for the three months ended
March 31, 1997, from 5.77% for the same period in 1996. Borrowings increased as
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 March 31, 1996, to $2.7 million for the same period ended
March 31, 1997, an increase of $469,000 or 20.7%. Average interest-earning
assets increased $42.2 million, from $312 million for the three months ended
March 31, 1996, to $354.2 million for the three months ended March 31, 1997,
while the average yield on interest-earning assets increased 44 basis points
from 7.16% for 1996 to 7.60% for 1997. Average interest bearing liabilities
increased by $49.4 million to $318.5 million for the three months ended March
31, 1997, from $269.1 million for the three months ended March 31, 1996, and the
cost of interest-bearing liabilities increased from 4.96% for 1996 to 5.04% in
1997.
Provision for Loan Losses. The Bank's provision for loan losses was $30,000 for
the three months ended March 31, 1997, compared to $6,000 for the same period in
1996. Commercial real estate loans increased from 7.7% of total loans at March
31, 1996, to 10.7% at March 31, 1997, and commercial business loans increased
from 1.2% to 3.1%, respectively. Commercial real estate loans and commercial
business loans are generally considered to contain a higher risk profile than
single family residential mortgages. In response to these changes, management
has increased the provision for loan losses in order to maintain allowance for
loan losses at levels management considers adequate. The Bank's allowance for
loan losses was $808,000 and $752,000 at March 31, 1997, and March 31, 1996,
respectively. At March 31, 1997, the Bank's allowance for loan losses
constituted 216.0% of non-performing assets as compared to 343.4% of
non-performing assets at March 31, 1996. 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.
Non-interest Income. Total non-interest income increased $24,000 during the
three month period ended March 31, 1997, to $343,000 as compared to the same
period in 1996. Fixed-rate mortgage loans with terms greater than 20 years were
sold during the quarter ended March 31, 1997 for a gain of $13,000. Other
service charges and fees increased from $53,000 for the three months ended March
31, 1996, to $90,000 for the three months ended March 31, 1997, due to a higher
level of originations. Loan and other customer service fees decreased to
$158,000 for the three months ended March 31, 1997, from $178,000 for the same
period in 1996, a decrease of $20,000 or 11.2%.
Non-interest expense. Total non-interest expense increased $55,000 or 3.1% over
the periods compared. Compensation and benefits increased to $1,187,000 for 1997
from $1,075,000 for 1996 due to annual merit pay
10
raises that averaged 3.5% and were effective January 1, 1997. Deposit insurance
premiums decreased $67,000 for the three months ended March 31, 1997, when
compared to the three months ended March 31, 1996, as a result of a reduction in
the premium rate following the Savings Association Insurance Fund (SAIF) special
assessment in September, 1996.
Income Tax Expense. Income taxes increased by $149,000 or 45.3%, to $478,000 for
the three month period ended March 31, 1997, from $329,000 for the same period
in 1996, primarily due to the increase of $414,000 in income before tax.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
The following table sets forth information with respect to the Corporation's
average balance sheet, interest and dividends earned or paid, and related 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)
Six Months Ended March 31,
----------------------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
----------------------------------------------------------------------------------------
Loans receivable (2) $ 226,819 $ 9,609 8.47 % $182,342 $ 7,563 8.30 %
Mortgage-backed securities 54,985 1,681 6.11 53,799 1,525 5.67
Investment securities (3) 68,982 2,002 5.80 70,686 1,983 5.61
------------------------ ---------------------------
Total interest-earning assets 350,786 13,292 7.58 306,827 11,071 7.22
----------------------------- ---------------------------
Other assets 10,654 10,077
------------ --------------
Total assets $ 361,440 $316,904
============ ==============
Liabilities:
Interest-bearing deposits $ 200,011 $ 4,540 4.54 % $179,984 $ 4,108 4.56 %
Borrowings 113,588 3,357 5.91 81,193 2,446 6.03
------------------------ ---------------------------
Total interest-bearing liabilities 313,599 7,897 5.04 % 261,177 6,554 5.02 %
----------------------------- ---------------------------
Other liabilities 2,574 1,877
------------ --------------
Total liabilities 316,173 263,054
Stockholders' equity 45,267 53,850
------------ --------------
Total liabilities and stockholders'
equity $ 361,440 $316,904
============ ==============
Net interest income $ 5,395 $ 4,517
Net Spread (4) 2.54 % 2.20 %
Net Margin (5) 3.08 % 2.94 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.12X 1.17X
(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.
11
Net Income. The Corporation recorded net income of $1,447,000 for the six months
ended March 31, 1997, as compared to net income of $881,000 for the six month
period ended March 31, 1996. The increase was primarily attributable to an
increase in net interest income.
Total Interest Income. Total interest income increased by $2.2 million or 19.8%
to $13.3 million for the six months ended March 31, 1997, from $11.1 million for
the six months ended March 31, 1996. The yield on mortgage-backed securities
increased to 6.11% and the yield on investment securities increased to 5.80% for
the six months ended March 31, 1997, compared to yields of 5.67% and 5.61%,
respectively. The yield on loans receivable increased to 8.47% for the six
months ended March 31, 1997, from 8.30% for the six months ended March 31, 1996.
Furthermore, the average balance of loans receivable increased $44.5 million
during these periods as a result of increased levels of mortgage originations,
the purchase of single-family residential mortgages, and an increase the home
equity lines of credit.
Total Interest Expense. Total interest expense increased to $7.9 million for the
six months ended March 31, 1997, from $6.6 million for the six months ended
March 31, 1996. Average interest bearing liabilities increased from $261.2
million in 1996 to $313.6 million in 1997 and the cost of the liabilities
increased from 5.02% for the six months ended March 31, 1996, to 5.04% for the
six months ended March 31, 1997. Interest on deposits increased $432,000 and the
average rate decreased from 4.56% to 4.54% during the comparison period. Average
borrowings increased from $81.2 million for the six months ended March 31, 1996,
to $113.6 million for the six months ended March 31, 1997, and the cost of the
borrowings decreased from 6.03% to 5.91% due to the stability in interest rates
during much of the period. Management can make no assurances regarding the
future movement of interest rates which may impact earnings in future periods.
Net Interest Income. Net interest income increased from $4.5 million for the six
months ended March 31, 1996, to $5.4 million for the same period ended March 31,
1997, an increase of $830,000 or 18.4%. The increase is mostly a result of an
increase in net spread from 2.20% for the six months ended March 31, 1996, to
2.54% for the six months ended March 31, 1997. The average yield on
interest-earning assets increased from 7.22% to 7.58% during the two periods
while the cost of interest-bearing liabilities increased from 5.02% to 5.04%.
12
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Six
Months
At March 31,
-----------------------
1997 1996
-----------------------
(In Thousands)
Total loans outstanding (1) $235,885 $ 192,323
=======================
Average loans outstanding $226,819 $ 182,342
=======================
Allowance balance (beginning
of period) $ 776 $ 764
-----------------------
Provision (credit):
Residential (2)
- -
Commercial real estate
- -
Consumer 60 12
-----------------------
Total provision 60 12
Charge-off:
Residential 14 -
Commercial real estate - -
Consumer 15 25
Total charge-offs 29 25
Recoveries:
Residential - -
Commercial real estate - -
Consumer 1 1
-----------------------
Total recoveries 1 1
-----------------------
Net charge-offs 28 24
-----------------------
Allowance balance (end of
period) $ 808 $ 752
=======================
Allowance as percent of 0.34% 0.39%
total loans
Net loans charge 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.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$60,000 for the six months ended March 31, 1997 and 1996.. See also "Comparison
of the Three Months Ended March 31, 1997 and 1996- Provision for Loan Losses."
Non-interest Income. Total non-interest income increased from $624,000 for the
six months ended March 31, 1996, to $681,000 for the six months ended March 31,
1997. Loans were sold in the secondary market during the six months ended March
31, 1997, with a resulting gain of $18,000 for the period compared with a gain
of $14,000 for the same period in 1996. Other service charges and fees increased
from $95,000 for the 1996 fiscal year to $186,000 for the 1997 fiscal year due
to the increased level of originations and to the origination of more loans with
associated fees that could be recognized in current income. Service charges on
deposit accounts decreased from $351,000 for the six months ended March 31,
1996, to $322,000 for the six months ended March 31, 1997, or 8.3%, due to a
decrease in the quantity of fees charged for services.
Non-interest expense. Total non-interest expense remained stable at $3.6 million
for the six months ended March 31, 1997. Compensation and benefits increased
from $2.2 million to $2.3 million for the periods impacted by merit increases
that averaged 3.5% for all employees. Deposit insurance premiums decreased
47.4%, as a result of the reduction in SAIF premium. Professional fees decreased
from $123,000 for the first six months of fiscal 1996 to $113,000 for the first
six months of fiscal 1997.
Income Tax Expense. Income tax expense increased from $630,000 for the six
months ended March 31, 1996, to $968,000 for the same period in 1997 as a result
of an increase in income before taxes.
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
13
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 March 31, 1997, the Bank was in compliance with its three regulatory capital
requirements as follows:
Amount Percent
--------------------------
(Dollars in thousands)
Tangible capital $ 38,642 10.6
Tangible capital requirement 5,448 1.5
--------------------------
Excess over requirement $ 33,194 9.1 %
==========================
Core capital $ 38,642 10.6 %
Core capital requirement 10,896 3.0
--------------------------
Excess over requirement $ 27,746 7.6 %
==========================
Risk based capital $ 39,450 21.0 %
Risk based capital requirement 15,029 8.0
--------------------------
Excess over requirement $ 24,421 13.0 %
==========================
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 March
31, 1997, such borrowed funds totaled $111.5 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 regulatory requirements. The Bank's
regulatory liquidity was 6.8% and 6.1% at March 31, 1997, and September 30,
1996, respectively, and its short term liquidity was 6.8% and 6.1%, at such
dates, respectively.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending March 31, 1998, is approximately $81.9 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 March 31, 1997, the Bank had loan commitments outstanding of $1.6 million.
Funds required to fill these commitments are derived primarily from current
excess liquidity, FHLB advances, deposit inflows or loan and security
repayments.
14
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 March 31, 1997. From time to time, the
Corporation is a party to legal proceedings in the ordinary course of business
such as claims to enforce liens, condemnation proceedings on properties in which
the Bank holds security interests, claims involving the making and servicing of
loans and other issues applicable to the business of the Corporation.
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
The annual meeting of shareholders of the Corporation was held on
January 21, 1997, and the following items were presented:
Election of Directors George B. Loban, Sever B. Knutson, and Roger
R. Stearns for terms of three years ending in 2000. George B. Loban
received 2,866,311 votes in favor and 3,984 votes were withheld.
Sever B. Knutson received 2,666,211 votes in favor and 204,084
votes were withheld. Roger R. Stearns received 2,665,511 votes in
favor and 204,784 votes were withheld.
Ratification of the appointment of Bertram Cooper & Co. as the
Corporation's auditors for the 1997 fiscal year. Bertram Cooper &
Co. was ratified as the Corporation's auditors with 2,857,910 votes
for, 7,000 votes against, and 5,385 abstentions.
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
None
15
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: April 30, 1997 By: /s/ Donald A. Glas
- --------------------- ------------------
Donald A. Glas
Chief Executive Officer
Date: April 30, 1997 By: /s/ Richard H. Burgart
- --------------------- ----------------------
Richard H. Burgart
Chief Financial Officer