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 June 30, 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 (I.R.S. employer identification no.)
of 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 July 30, 1997.
-------------
Class Outstanding
$.10 par value common stock 3,036,215 shares
FSF FINANCIAL CORP. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Materially Important Events 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, September 30,
1997 1996*
---------------------------
(In thousands)
ASSETS
Cash and cash equivalents:
Interest bearing $ 4,293 $ 9,392
Non-interest bearing 2,759 2,364
Securities available for sale, at fair value:
Equity securities 18,879 18,231
Mortgage-backed and related securities 16,569 16,336
Securities held to maturity, at amortized cost:
Debt securities (estimated fair value of $41,143 and $41,626) 42,870 44,349
Mortgage-backed and related securities (estimated fair
value of $37,343 and $36,915) 38,549 38,557
Loans held for sale 702 443
Loan receivable, net 245,627 216,727
Real estate owned 72 --
Accrued interest receivable 2,514 2,325
Premises and equipment 3,791 3,728
Other assets 1,608 2,184
--------- ---------
Total Assets $ 378,233 $ 354,636
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand Deposits $ 27,858 $ 27,601
Savings accounts 48,904 48,334
Certificates of deposit 130,231 113,139
--------- ---------
Total Deposits 206,993 189,074
Federal Home Loan Bank borrowings 125,883 114,693
Other liabilities 2,424 3,220
--------- ---------
Total liabilities 335,300 306,987
--------- ---------
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 43,259 43,150
Retained earnings, substantially restricted 23,263 22,068
Treasury stock at cost (1,468,467 and 1,023,083 shares) (19,833) (13,095)
Unearned ESOP shares at cost (244,362 and 271,850 shares) (2,444) (2,719)
Unearned MSP stock grants at cost (111,451 and 131,946 shares)
(1,180) (1,398)
Unrealized (loss) on securities available for sale (582) (807)
--------- ---------
Total Stockholders' equity 42,933 47,649
--------- ---------
Total Liabilities and Stockholders' Equity $ 378,233 $ 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 Audited Financial Statements
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For Three Months For Nine Months
Ended June 30, Ended June 30,
----------------- --------------------
1997 1996 1997 1996
----------------- --------------------
(In thousands, except per share data)
Interest income:
Loans receivable $ 5,108 $ 4,070 $14,717 $11,633
Mortgage-backed and related securities 881 861 2,562 2,386
Investment securities 944 967 2,946 2,950
------- ------- ------- -------
Total interest income 6,933 5,898
------- ------- ------- -------
Interest expense:
Deposits 2,384 2,076 6,924 6,184
Borrowed funds 1,720 1,351 5,077 3,797
------- ------- ------- -------
Total interest expense 4,104 3,427 9,981
------- ------- ------- -------
Net interest income 2,829 2,471 8,224 6,988
Provision for loan losses 30 15 90 27
------- ------- ------- -------
Net interest income after provision for loan losses 2,799 2,456 8,134 6,961
------- ------- ------- -------
Non-interest income:
Gain (loss) on loans sold - net 15 3 33 17
Other service charges and fees 126 128 312 327
Service charges on deposit accounts 187 150 509 401
Commission income 63 87 173 190
Other 20 24 65 81
------- ------- ------- -------
Total non-interest income 411 392 1,092 1,016
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 1,152 1,063 3,449 3,294
Occupancy and equipment 206 193 592 596
Deposit insurance premiums 32 103 134 297
Data processing 100 97 294 293
Professional fees 57 64 170 187
Other 281 236 790 707
------- ------- ------- -------
Total non-interest expense 1,828 1,756 5,429 5,374
------- ------- ------- -------
Income before provision for income taxes 1,382 1,092 3,797 2,603
Income tax expense 559 408 1,527 1,038
------- ------- ------- -------
Net income $ 823 $ 684 $ 2,270 $ 1,565
======= ======= ======= =======
Earnings per common and common equivalent shares: $ 0.29 $ 0.21 $ 0.76 $ 0.44
Cash dividend declared per share $ 0.125 0.125 $ 0.375 $ 0.375
2
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Nine Months
Ended Ended
June 30, June 30,
-----------------------------------------------
1997 1996 1997 1996
-----------------------------------------------
Cash flows from operating activities: (In thousands)
Net income $ 823 $ 684 $ 2,270 $ 1,565
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 83 85 239 249
Net amortization of discounts and premiums on
securities held to maturity (6) (9) (23) (27)
Provision for loan losses 30 15 90 27
Net market value adjustment on ESOP shares 60 15 141 51
Amortization of ESOP and MSP stock compensation 149 169 465 517
FHLB stock dividends -- -- -- (81)
Net loan fees deferred and amortized (15) 73 83 162
(Increase) decrease in:
Loans held for sale 140 (262) (260) (225)
Accrued interest receivable (168) (317) (189) (183)
Other assets 82 163 86 27
Increase (decrease) in:
Net deferred taxes (86) (99) 277 (112)
Accrued interest payable 31 1 94 (21)
Accrued income tax (22) 37 164 (107)
Accrued liabilities 59 128 (722) 158
Deferred compensation payable 33 49 86 64
-------- -------- -------- --------
Net cash provided by operating activities 1,193 732 2,801 2,064
-------- -------- -------- --------
Cash flows from investing activities:
Loan originations and principal payments on loans, net (10,515) (9,364) (27,812) (20,390)
Purchase of loans (83) (25) (1,353) (10,447)
Principal payments on mortgage-related securities held to maturity 2 5 9 33
Purchase of securities available for sale (559) (395) (559) (919)
Purchase of mortgage-related securities held to maturity -- -- -- (1,494)
Purchases of securities held to maturity (1,000) (9,000) (1,000) (19,552)
Proceeds from maturites of securites held to maturity 1,000 1,000 2,500 17,150
Investments in foreclosed real estate (1) (2) (2) (9)
Proceed from sale of REO 22 -- 22 --
Purchases of equipment and property improvements (76) (34) (302) (277)
-------- -------- -------- --------
Net cash (used in) investing activities $(11,210) $(17,815) $(28,497) $(35,905)
-------- -------- -------- --------
3
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Nine Months
Ended Ended
June 30, June 30,
----------------------------------------------
1997 1996 1997 1996
----------------------------------------------
Cash flows from financing activities: (In thousands)
Net increase (decrease) in deposits, $ (3,099) $ (435) $ 17,919 $ 16,871
Net increase in short-term borrowings 14,432 9,922 11,189 19,961
Net decrease in mortgage escrow funds (392) (359) (299) (311)
Treasury stock purchased (1,079) (4,970) (6,752) (10,559)
Proceeds from exercise of stock options 4 15 9 55
Dividends on common stock (343) (439) (1,074) (1,367)
-------- -------- -------- --------
Net cash provided by financing activities 9,523 3,734 20,992 24,650
-------- -------- -------- --------
Net increase in cash and cash equivalents (494) (13,349) (4,704) (9,191)
Cash and cash equivalents:
Beginning of period 7,546 19,013 11,756 14,855
-------- -------- -------- --------
End of period $ 7,052 $ 5,664 $ 7,052 $ 5,664
======== ======== ======== ========
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 1,709 $ 1,328 $ 5,065 $ 3,784
Interest on deposits 2,391 2,078 6,904 6,197
Income taxes 686 469 1,114 1,262
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments 1 89 21 192
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 nine month periods ended June 30, 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 June 30,
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 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.
NOTE 3 - NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities
and SFAS No. 127, Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125 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 Corporation prospectively adopted SFAS
No. 125 on January 1, 1997, which did not materially effect the
consolidated financial statements. However, in accordance with SFAS No.
127, the Corporation will defer adoption of the standard as it relates
to securities lending, dollar-rolls, repurchase agreements and similar
transactions until January 1, 1998. The Corporation does not expect the
adoption of SFAS No. 127 to have a material impact on its consolidated
financial statements.
On March 3, 1997, the FASB issued SFAS No. 128, Earnings per Share
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 adoption of this standard
will not have a material effect on the computation of EPS.
5
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, which is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No.
129 consolidates previous standards for disclosures about capital
structure into a single standard, which is its primary purpose. SFAS
No. 129 requires disclosure of certain information in three separate
categories-securities, liquidation preference of preferred stock, and
redeemable stock.
6
FSF FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at June 30, 1997, and September 30, 1996 totaled
859263119$378.2 million and $354.6 million, respectively. The increase of $23.6
million was primarily a result of an increase in loans receivable, a decrease in
interest bearing cash equivalents and the maturity of debt securities classifies
as held to maturity.
Cash and cash equivalents decreased from $11.8 million at September 30, 1996, to
859263575$7.1 million at June 30, 1997. The Corporation utilized excess
liquidity to fund the purchase of treasury shares.
Securities available for sale increased $881,000 between September 30, 1996, and
June 30, 1997, as a result of an increase in the fair market value of such
securities.
Securities held to maturity decreased from $82.9 million at September 30, 1996,
to $81.4 million at June 30, 1997. $2.5 million of securities have matured since
September 30, 1996 and the proceeds were used to help fund the purchase of
treasury shares and $1.0 million of securities were purchased.
Loans held for sale increased $259,000, to $702,000 at June 30, 1997, from
$443,000 at September 30, 1996.
Loans receivable increased $28.9 million or 13.3% to $245.6 million at June 30,
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 Nine Months
Ended Ended
June 30, June 30,
--------------------------- -------------------------
1997 1996 1997 1996
--------------------------- -------------------------
Loans Originated: (In Thousands)
Residential mortgages $ 23,823 $18,729 $ 47,221 $46,415
Land and commercial real estate 2,116 1,560 10,741 2,275
Commercial Business 148 1,479 236
297
Consumer Loans 9,244 7,617 20,743 20,088
--------------------------- -------------------------
Total Loans Originated 35,480 28,054 80,184 69,014
--------------------------- -------------------------
Residential mortgages purchased 678 5,884
84 -
Commercial real estate purchased 3,000
- - -
Commercial Business purchased 25 675 1,563
-
--------------------------- -------------------------
Total loans purchased 1,353 10,447
84 25
--------------------------- -------------------------
Total New Loans $ 35,564 $28,079 $81,537 $79,461
=========================== =========================
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.
7
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:
June 30, September 30,
1997 1996
-----------------------------------------------------
Amount % Amount %
-----------------------------------------------------
Residential real estate: (Dollars in Thousands)
One-to-four family (1) $ 167,500 63.8 $ 150,102 64.7
Residential construction 16,773 6.4 19,676 8.5
Multi-family 1.3 1.6
3,449 3,753
-----------------------------------------------------
187,722 71.5 173,531 74.8
Land and commercial real estate 27,173 10.4 18,637 8.0
Commercial business 3.1 2.6
8,007 6,089
-----------------------------------------------------
222,902 85.0 198,257 85.4
Consumer:
Savings accounts 0.3 0.2
757 563
Home equity and second mortgages 19,198 7.3 17,692 7.6
Automobile loans 11,622 4.4 10,080 4.3
Other 3.0 2.5
7,910 5,512
-----------------------------------------------------
Total loans 262,389 100.0 232,104 100.0
============ =============
Less:
Loans in process (14,626) (13,401)
Deferred fees
(601) (757)
Allowance for loan losses
(833) (776)
------------- ---------------
Total loans, net $ 246,329 $ 217,170
============= ===============
- ---------------------------------------------
(1) Includes loans held for sale in the amount of $702,000 and $443,000 as of
June 30, 1997 and September 30, 1996, respectively.
Real estate owned at June 30, 1997, totaled $72,000, and consists of a total of
two 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 $207.0 million at June 30, 1997, an increase of $17.9 million or 9.5%.
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 ("FHLB") borrowings increased $11.2 million from $114.7
million at September 30, 1996, to $125.9 million at June 30, 1997. The
borrowings were utilized as an additional source of funding of the overall
growth in total assets.
The Corporation completed the repurchase of 446,384 shares of common stock,
thereby increasing the total number of treasury shares to 1,468,467 at June 30,
1997. Total stockholders' equity decreased from $47.6 million at September 30,
1996, to $42.9 million at June 30, 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 $4.7 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 $16.04 at June 30, 1997, an increase of 3.5%.
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.
8
During the nine months ended June 30, 1997, and 1996, approximately $3,036 and
$23,963 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.
The following table sets forth information with respect to the Bank's
non-performing domestic loans for the periods indicated:
June 30, 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 - 129
Non-mortgage loans:
Consumer 59 90
---------------------------------
Total non-accrual loans 59 219
Foreclosed real estate 72 -
---------------------------------
Total non-performing assets $ 131 $ 219
=================================
Total non-performing loans to net loans 0.02% 0.10%
=================================
Total non-performing loans to total assets 0.01% 0.06%
=================================
Total non-performing assets to total assets 0.03% 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 June 30, 1997, First Federal had total classified
assets of $714,000 of which $57,000 were considered substandard and no assets
were classified as loss. Special mention assets totaled $657,000 at June 30,
1997.
9
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 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 June 30,
-------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
-------------------------------------------------------------------------------------
Loans receivable (2) $ 241,107 $ 5,108 8.47 % $198,301 $ 4,070 8.21 %
Mortgage-backed securities 55,061 881 6.40 55,749 6.18
861
Investment securities (3) 65,795 944 5.74 69,643 5.56
967
------------------------- -------------------------
Total interest-earning assets 361,963 6,933 7.66 323,693 5,898 7.29
--------------------------- -----------------------
Other assets 10,810 7,960
------------- --------------
Total assets $ 372,773 $331,653
============= ==============
Liabilities:
Interest-bearing deposits $ 208,542 $ 2,384 4.57 % $188,128 $ 2,076 4.41 %
Borrowings 118,667 1,720 5.80 90,557 5.97
1,351
------------------------- -------------------------
Total interest-bearing liabilities 327,209 4,104 5.02 % 278,685 4.92 %
3,427
--------------------------- -----------------------
Other liabilities 3,090
2,485
------------- --------------
Total liabilities 329,694 281,775
Stockholders' equity 43,079 49,878
------------- --------------
Total liabilities and stockholders'
equity $ 372,773 $331,653
============= ==============
Net interest income $ 2,829 $ 2,471
Net Spread (4) 2.64 % 2.37 %
Net Margin (5) 3.13 % 3.05 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.11X 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.
Net Income. The Corporation recorded net income of $823,000 for the three months
ended June 30, 1997, as compared to net income of $684,000 for the three month
period ended June 30, 1996. The increase in net income of $139,000 or 20.3% was
primarily the result of higher net interest income.
Total Interest Income. Total interest income increased by $1.0 million or 16.9%
to $6.9 million for the three months ended June 30, 1997, from $5.9 million for
the three months ended June 30, 1996, due to increases in the average balance of
interest earning assets and the average yield on those assets. The average yield
on loans increased to 8.47% for the quarter ended June 30, 1997, from 8.21% for
the quarter ended June 30, 1996. The average balance of mortgage-backed
securities decreased by $688,000 from $55.7 million for the three
10
months ended June 30, 1996, to $55.1 million for the three months ended June 30,
1997. During this same period, the average yield on mortgage-backed securities
increased from 6.18% to 6.40% or 22 basis points (100 basis points equals 1%).
The average balance of investment securities decreased to $65.8 million for the
quarter ended June 30, 1997, from $69.6 million for the quarter ended June 30,
1996. The average yield increased 18 basis points from 5.56% for the three
months ended June 30, 1996, to 5.74% for the same period in 1997, as interest
rates in general increased between the periods.
Total Interest Expense. Total interest expense increased to $4.1 million for the
three months ended June 30, 1997, from $3.4 million for the same period in 1996.
The average balance of interest-bearing deposits increased from $188.1 million
for the three months ended June 30, 1996, to $208.5 million for the three months
ended June 30, 1997. This increase was comprised of interest credited and an
increase in certificate accounts. The average cost of deposits increased by 16
basis points from 4.41% for the three months ended June 30, 1996, to 4.57% 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 should increase. The average balance of borrowings increased
$28.1million to $118.7 million for the three months ended June 30, 1997, from
$90.6 million for the three months ended June 30, 1996. The cost of borrowings
decreased 17 basis points to 5.80% for the three months ended June 30, 1997,
from 5.97% 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 $2.5 million for the
three months ended June 30, 1996, to $2.8 million for the same period ended June
30, 1997, an increase of $300,000 or 12.0%. Average interest-earning assets
increased $38.3 million, from $323.7 million for the three months ended June 30,
1996, to $362.0 million for the three months ended June 30, 1997, while the
average yield on interest-earning assets increased 37 basis points from 7.29%
for 1996 to 7.66% for 1997. Average interest bearing liabilities increased by
$48.5 million to $327.2 million for the three months ended June 30, 1997, from
$278.7 million for the three months ended June 30, 1996, and the cost of
interest-bearing liabilities increased from 4.92% for 1996 to 5.02% in 1997.
Provision for Loan Losses. The Bank's provision for loan losses was $30,000 for
the three months ended June 30, 1997, compared to $15,000 for the same period in
1996. Land and commercial real estate loans increased from 7.1% of total loans
at June 30, 1996, to 10.4% at June 30, 1997, and commercial business loans
increased from 1.6% 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 $833,000 and $762,000 at June 30, 1997, and June
30, 1996, respectively. At June 30, 1997, the Bank's allowance for loan losses
constituted 635.9% of non-performing assets as compared to 347.9% of
non-performing assets at June 30, 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 $19,000 during the
three month period ended June 30, 1997, to $411,000 as compared to the same
period in 1996. Fixed-rate loans with terms greater than 20 years were sold
during the quarter ended June 30, 1997 for a gain of $15,000. Service charges on
deposit accounts increased from $150,000 for the three months ended June 30,
1996, to $187,000 for the three months ended June 30, 1997, an increase of
$37,000 or 24.7%.
Non-interest expense. Total non-interest expense increased $72,000 or 4.1% over
the periods compared. Compensation and benefits increased to $1,152,000 for 1997
from $1,063,000 for 1996. Occupancy expense was $206,000 for the three months
ended June 30, 1997, versus $193,000 for the same period in 1996. Deposit
insurance premiums decreased 68.9%, as a result of the reduction in the SAIF
premium. Professional fees decreased from $64,000 for the third quarter of
fiscal 1996 to $57,000 for the third quarter of fiscal 1997.
11
Income Tax Expense. Income taxes increased by $151,000 or 37.0%, to $559,000 for
the three month period ended June 30, 1997, from $408,000 for the same period in
1996, primarily due to the increase of $290,000 in income before tax.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 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)
Nine Months Ended June 30,
-------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
-------------------------------------------------------------------------------------
Loans receivable (2) $ 231,696 $14,717 8.47 % $187,228 $11,633 8.28 %
Mortgage-backed securities 55,019 2,562 6.21 54,037 2,386 5.89
Investment securities (3) 68,247 2,946 5.76 69,102 2,950 5.69
------------------------- ------------------------
Total interest-earning assets 354,962 20,225 7.60 310,367 16,969 7.29
--------------------------- -----------------------
Other assets 10,677 10,160
------------- -------------
Total assets $ 365,639 $320,527
============= =============
Liabilities:
Interest-bearing deposits $ 201,757 $ 6,924 4.58 % $182,085 $ 6,184 4.53 %
Borrowings 116,662 5,077 5.80 84,337 3,797 6.00
------------------------- ------------------------
Total interest-bearing liabilities 318,419 12,001 5.03 % 266,422 9,981 5.00 %
--------------------------- -----------------------
Other liabilities 2,537 1,820
------------- -------------
Total liabilities 320,956 268,242
Stockholders' equity 44,683 52,285
------------- -------------
Total liabilities and stockholders'
equity $ 365,639 $320,527
============= =============
Net interest income $ 8,224 $ 6,988
Net Spread (4) 2.57 % 2.29 %
Net Margin (5) 3.09 % 3.00 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.11X 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.
Net Income. The Corporation recorded net income of $2.3 million for the nine
months ended June 30, 1997, as compared to net income of $1.6 million for the
nine month period ended June 30, 1996. The increase primarily was attributable
to an increase in net interest income.
Total Interest Income. Total interest income increased by $3.2 million or 18.8%
to $20.2 million for the nine months ended June 30, 1997, from $17.0 million for
the nine months ended June 30, 1996. The yields on mortgage-backed securities
increased 32 and 7 basis points, respectively, for the nine months ended June
30,
12
1997, compared to the same period ended June 30, 1996. The yield on loans
receivable increased 19 basis points for the nine months ended June 30, 1997.
Furthermore, the average balance of loans receivable increased $44.5 million
during these periods as a result of an increase in all types of loans
originated.
Total Interest Expense. Total interest expense increased $2.0 million. Average
interest bearing liabilities increased from $266.4 million in 1996 to $318.4
million in 1997 and the cost of the liabilities increased from 5.00% for the
nine months ended June 30, 1996, to 5.03% for the nine months ended June 30,
1997. Interest on deposits increased $740,000 and the average rate increased
from 4.53% to 4.58% during the comparison period. Average borrowings increased
from $84.3 million for the nine months ended June 30, 1996, to $116.7 million
for the nine months ended June 30, 1997, and the cost of the borrowings
decreased from 6.00% to 5.80%, due to the use of specially priced advances from
FHLB and to a lessor extent, to the relative stability of interest rates during
most of the period. Management can make no assurances regarding the future
movement of interest rates and their impact on earnings in future periods.
Net Interest Income. Net interest income increased from $7.0 million for the
nine months ended June 30, 1996, to $8.2 million for the same period ended June
30, 1997, an increase of $1.2 million or 17.1%. The increase is mostly a result
of an increase in net spread from 2.29% for the nine months ended June 30, 1996,
to 2.57% for the nine months ended June 30, 1997.
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Nine Months
At June 30,
----------------------------------------------
1997 1996
----------------------------------------------
(In Thousands)
Total loans outstanding (1) $ 246,329 $ 201,885
==============================================
Average loans outstanding $ 231,696 $ 187,228
==============================================
Allowance balance (beginning of period) $ 776 $ 764
----------------------------------------------
Provision (credit):
Residential (2) - -
Commercial real estate 30 -
Consumer 60 27
----------------------------------------------
Total provision 90 27
Charge-off:
Residential 14 -
Commercial real estate - -
Consumer 22 30
----------------------------------------------
Total charge-offs 36 30
Recoveries:
Residential 1 -
Commercial real estate - -
Consumer 2 1
----------------------------------------------
Total recoveries 3 1
----------------------------------------------
Net charge-offs 33 29
----------------------------------------------
Allowance balance (end of period) $ 833 $ 762
==============================================
Allowance as percent of total loans 0.34% 0.38%
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.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$90,000 for the nine months ended June 30, 1997 and 1996. See also "Comparison
of the Three Months Ended June 30, 1997 and 1996 -- Provision for Loan Losses."
Non-interest Income. Total non-interest income increased from $1.0 million for
the nine months ended June 30, 1996, to $1.1 million for the nine months ended
June 30, 1997. Loans were sold in the secondary market
13
during the nine months ended June 30, 1997, with a resulting gain of $33,000 for
the period compared with a gain of $17,000 for the same period in 1996. Other
service charges and fees decreased from $327,000 for the 1996 fiscal year to
$312,000 for the 1997 fiscal year due to the decreased level of originations.
Service charges on deposit accounts increased from $401,000 for the nine months
ended June 30, 1996, to $509,000 for the nine months ended June 30, 1997, or
26.9%, due to increases in fees charged and the number of accounts.
Non-interest expense. Total non-interest expense remained stable at $5.4 million
for the nine months ended June 30, 1997. Compensation and benefits increased
from $3.3 million to $3.4 million for the periods, impacted by merit increases
that averaged 3.5% for all employees. Deposit insurance premiums decreased
54.9%, as a result of the reduction in SAIF premium. Professional fees decreased
from $187,000 for the first nine months of fiscal 1996 to $170,000 for the first
nine months of fiscal 1997.
Income Tax Expense. Income tax expense increased from $1.0 million for the nine
months ended June 30, 1996, to $1.5 million 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 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 June 30, 1997, the Bank was in compliance with its three regulatory capital
requirements as follows:
Amount Percent
--------------------------------------------
(Dollars in thousands)
Tangible capital $ 38,383 10.3 %
Tangible capital requirement 5,611 1.5
--------------------------------------------
Excess over requirement $ 32,772 8.8 %
============================================
Core capital $ 38,383 10.3 %
Core capital requirement 11,221 3.0
--------------------------------------------
Excess over requirement $ 27,162 7.3 %
============================================
Risk based capital $ 39,216 20.1 %
Risk based capital requirement 15,615 8.0
--------------------------------------------
Excess over requirement $ 23,601 12.1 %
============================================
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 June
30, 1997, such borrowed funds totaled $125.9 million. Loan payments, maturing
investments and mortgage-backed security prepayments are greatly influenced by
general interest rates, economic conditions and competition.
14
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 5.4% and 5.4% at June 30, 1997, and September 30, 1996,
respectively, and its short term liquidity was 6.1% and 6.1%, at such dates,
respectively.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending June 30, 1998, is approximately $76.2 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 June 30, 1997, the Bank had loan commitments outstanding of $3.7 million.
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 June 30, 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
Not applicable
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Not applicable
15
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
16
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: July 30, 1997 By: /s/ Donald A. Glas
- ------------------- ------------------
Donald A. Glas
Chief Executive Officer
Date: July 30, 1997 By: /s/ Richard H. Burgart
- -------------------- ----------------------
Richard H. Burgart
Chief Financial Officer
17