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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Sections 13
or 15(d) of the Securities Exchange Act of 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
--------------------------------
- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period __________________ to ____________________
Commission Number: 0-24648
FSF FINANCIAL CORP.
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1783064
(State or other jurisdiction of incorporation (I.R.S. Employer)
or organization) Identification No.)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (612) 234-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filling requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the average bid and asked price of the Registrant's
Common Stock as quoted on the National Association of Securities Dealers, Inc.,
Automated Quotations National Market on December 2, 1996 was $ 38,845,104
(2,690,570 shares at $14.4375 per share).
As of December 2, 1996 there were issued and outstanding 3,304,310
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1996. (Parts I, II and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held January 21, 1997. (Part III)
INDEX
PART I Page
Item 1. Business.....................................................................................1
Item 2. Properties..................................................................................19
Item 3. Legal Proceedings...........................................................................20
Item 4. Submission of Matters to a Vote of Security Holders.........................................20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................20
Item 6. Selected Financial Data ....................................................................20
Item 7. Management's Discussion of Financial Condition and Results of Operations....................20
Item 8. Financial Statements........................................................................20
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................20
PART III
Item 10. Directors and Executive Officers of the Registrant..........................................20
Item 11. Executive Compensation......................................................................20
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................20
Item 13. Certain Relationships and Related Transactions..............................................21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................21
PART I
ITEM 1. BUSINESS
General
FSF Financial Corp. (the "Company"), a Minnesota Corporation, was organized in
May, 1994, and as of October 6, 1994, became the holding company for First
Federal fsb ("First Federal" or the "Bank"). First Federal is the resulting
institution of the merger of First State Federal Savings and Loan Association,
Hutchinson, MN ("Hutchinson"), and First Federal Savings and Loan Association of
Hastings, Hastings, MN ("Hastings"). The merger of the two institutions was
completed in September, 1994 ("Merger"). Hutchinson was organized as a state
chartered mutual savings and loan association in 1933 and received a federal
charter in 1934. Hastings was initially chartered in 1881 as the "Dakota County
Building and Loan Association" and obtained a federal charter in 1968.
First Federal's business consists primarily of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make mortgage loans secured by residential real estate located in
Minnesota. At September 30, 1996, First Federal operated 11 retail banking
offices in Minnesota.
First Federal is regulated by the Office of Thrift Supervision ("OTS"), and by
the Federal Deposit Insurance Corporation ("FDIC") which, through the Savings
Association Insurance Fund ("SAIF"), insures, up to certain legal limits, the
deposit accounts of institutions such as First Federal. First Federal is also a
member of the Federal Home Loan Bank ("FHLB") of Des Moines, which is one of the
twelve regional banks for federally insured savings institutions and certain
other residential lending entities comprising the Federal Home Loan Bank System.
On October 6,1994, the Company sold 4,496,500 shares of common stock at $10.00
per share and net proceeds of $43.5 million. One-half of the net proceeds ($21.7
million) was used to purchase all of the common stock of First Federal in
connection with the conversion of First Federal from the mutual to stock form of
organization ("Conversion"). The Merger and the Conversion were accounted for as
a "pooling of interests." Consequently, no goodwill or other intangibles were
recorded as a result of this transaction.
Market Area
The Bank is authorized to make real estate loans throughout the United States.
First Federal's primary market area consists of the ten Minnesota counties of
Benton, Carver, Dakota, McLeod, Meeker, Sherburne, Sibley, Stearns, Washington,
and Wright. The market area extends from the St. Cloud area northwest of the
Minneapolis/St Paul metropolitan area to the Mississippi River southeast of the
Minneapolis/St. Paul metropolitan area. The economic composition of the market
area is extremely diverse and contains agriculture, commercial, and
manufacturing enterprises. The market area is generally considered to be a
"bedroom" community for the Minneapolis/St. Paul metropolitan area
Lending Activities
General. The Bank's loan portfolio composition consists primarily of
conventional fixed-rate, balloon and adjustable-rate first mortgage loans
secured by one-to-four family residences. The Bank also makes, to a lesser
extent, mortgage loans on multi-family residences, construction loans,
commercial real estate loans, and consumer loans. As of September 30, 1996, the
Bank's total loan portfolio (the "loan portfolio") was $232.1 million, of which
$150.1 million, or 64.7%, was secured by one-to- four family residential
dwellings. At that same date, residential construction loans, land and
commercial real estate loans, multifamily loans, and commercial business loans
totaled $19.7 million (8.5%), $18.6 million (8.0%), $3.8 million (1.6%), and
$6.1 million (2.6%), respectively. Of the one-to-four family residential
mortgage loans outstanding at that date, 48.0% were adjustable-rate mortgage
(ARM) loans, 16.7% were balloon loans, and 35.3% were fixed-rate loans.
Consumer and other loans held by the Bank totaled $33.8 million or 14.6% of
total loans outstanding at September 30, 1996, of which $17.7 million or 7.6%
consisted of home equity and second mortgage loans. At that same date,
automobile loans, loans on savings accounts, and other consumer loans totaled
$10.1million, $0.6 million and $5.5 million, respectively.
1
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the dates indicated.
At September 30,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------------------
Residential real estate: (Dollars in Thousands)
One-to-four family(1) $150,102 64.7 $121,034 64.6 $ 89,100 72.8 $92,088 73.1 $ 94,190 74.4
Residential construction 19,676 8.5 20,366 10.9 4,474 3.7 6,328 5.1 5,226 4.1
Multi-family 3,753 1.6 3,708 2.0 3,209 2.6 4,680 3.7 5,626 4.4
------------------------------------------------------------------------------------------------
173,531 74.8 145,108 77.5 96,783 79.1 103,096 81.9 105,042 82.9
Land and commercial real estate 18,637 8.0 16,951 9.0 7,024 5.7 5,565 4.4 5,266 4.2
Commercial business 6,089 2.6 2,715 1.4 439 0.4 832 0.7 884 0.7
------------------------------------------------------------------------------------------------
198,257 85.4 164,774 87.9 104,246 85.2 109,493 87.0 111,192 87.8
Consumer:
Savings accounts 563 0.2 516 0.3 437 0.4 537 0.4 617 0.5
Home equity and second mortgage 17,692 7.6 10,950 5.8 4,427 3.6 3,229 2.6 3,628 2.9
Automobile loans 10,080 4.3 8,399 4.5 6,950 5.7 6,753 5.4 6,543 5.2
Other 5,512 2.5 2,810 1.5 6,305 5.1 5,910 4.6 4,640 3.6
------------------------------------------------------------------------------------------------
Total loans 232,104 100.0 187,449 100.0 122,365 100.0 125,922 100.0 126,620 100.0
===== ===== ===== ===== =====
Less:
Loans in process (13,401) (15,010) (3,982) (3,973) (2,715)
Deferred fees (757) (613) (315) (282) (247)
Allowance for loan losses (776) (764) (748) (721) (730)
-------- -------- -------- -------- --------
Total loans, net $217,170 $171,062 $117,320 $120,946 $122,928
======== ======== ======== ======== ========
- ---------------------
(1) Includes loans held for sale in the amount of $443,000, $230,000,
$729,000, $21.6 million and $17.6 million as of September 30, 1996,
1995, 1994, 1993, and 1992, respectively.
The following table sets forth the Bank's loan originations, loan purchases,
loans sales, and principal payments for the periods indicated:
Years Ended September 30,
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------
(In Thousands)
Total gross loans receivable at
end of period $ 232,104 $ 187,449 $ 122,365 $ 125,922 $ 126,620
Loans originated:
Residential real estate:
One-to-four family 53,801 45,988 42,462 49,999 46,598
Residential construction 12,975 21,996 5,064 7,164 6,343
Multi-family - 437 - - -
----------------------------------------------------------------
Total residential real estate 66,776 68,421 47,526 57,163 52,941
Land and commercial real estate 3,241 8,588 1,665 1,349 1,872
Commercial business 274 250 123 261 259
Consumer 27,270 17,465 13,438 12,019 12,167
----------------------------------------------------------------
Total loans originated 97,561 94,724 62,752 70,792 67,239
Purchase of loans 17,447 20,993 - - -
Sale of loans (3,509) (810) (19,141) (22,685) (14,046)
Principal repayments (63,813) (49,651) (49,698) (45,386) (37,459)
Other (net) (3,031) (172) 2,530 (3,419) (3,156)
----------------------------------------------------------------
Net loan activity $ 44,655 $ 65,084 $ (3,557) $ (698) $ 12,578
================================================================
2
Maturity of Loans. The following table sets forth the maturity of the Bank's
loans at September 30, 1996. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $63.8 million, $49.7 million, $49.7 million, $45.4 million, and $37.5
million for the years ended September 30, 1996, 1995, 1994, 1993 and 1992,
respectively. Adjustable-rate mortgage loans are shown as maturing based on
contractual maturities.
One-to-Four Land,
Family Multi-Family Commercial
Real Estate and Commercial Business and
Mortgages Real Estate Construction Consumer Total
-----------------------------------------------------------------------------
Amounts Due: (In Thousands)
Within 3 months $ 12,464 $ 774 $ 3,874 $ 6,232 $ 23,344
3 months to 1 year 21,782 6,607 15,802 10,508 54,699
-----------------------------------------------------------------------------
Total due before one year 34,246 7,381 19,676 16,740 78,043
-----------------------------------------------------------------------------
After 1 year:
1 to 3 years 32,893 6,786 - 11,308 50,987
3 to 5 years 21,561 7,547 - 9,058 38,166
5 to 10 years 32,511 367 - 2,830 35,708
10 to 20 years 22,983 309 - - 23,292
Over 20 years 5,908 - - - 5,908
-----------------------------------------------------------------------------
Total due after one year 115,856 15,009 - 23,196 154,061
-----------------------------------------------------------------------------
Total amount due $ 150,102 $ 22,390 $ 19,676 $ 39,936 $ 232,104
=============================================================================
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have predetermined interest rates and which have
floating or adjustable interest rates.
Fixed- Balloon Adjustable
rates Rates Rates Total
-------------- ------------- --------------- -------------
(In Thousands)
One-to four-family real estate (1) $ 50,233 $ 15,395 $ 50,228 $ 115,856
Land, multi-family and commercial real estate 11,402 2,648 959 15,009
Consumer and commercial business 23,196 - - 23,196
-------------- ------------- --------------- -------------
Total $ 84,831 $ 18,043 $ 51,187 $ 154,061
============== ============= =============== =============
(1) Includes residential construction loans.
One- to Four-Family Mortgage Loans. The largest portion of the Bank's loans are
made for the purpose of enabling borrowers to purchase one- to four-family
residences secured by first liens on the properties. The Bank originates balloon
mortgage loans, ARM loans and fixed-rate mortgage loans secured by one- to
four-family residences with loan terms up to 30 years. The Bank also offers FHA
and VA loans that are originated and then sold, servicing released, in the
secondary market. Borrower demand for balloon and ARM loans versus fixed-rate
mortgage loans depends on various factors, including, but not limited to,
interest rates offered, the expectations of changes in the short- and long-term
levels of interest rates and loan fees charged. The relative amount of
fixed-rate mortgage loans, balloon loans and ARM loans that can be originated at
any time is largely determined by the demand for each in a competitive
environment. The Bank sells all fixed-rate loans with an original maturity of
greater than twenty years to the Federal Home Loan Mortgage Corporation
("FHLMC"), with servicing retained.
The Bank originates three-, five- and seven-year balloon mortgage loans, the
majority of which are three-year balloon mortgages. These mortgages contain no
contractual assurances that the loan will be renewed. At maturity the loan is
generally rewritten and re-recorded; however, if the borrower's loan payment
history is satisfactory, a new appraisal is not required. Management believes
that balloon loans have a pricing characteristic that helps offset the
detrimental effect that rising rates could have on net interest income because
the balloon loans do not contain interest rate adjustment caps. At September 30,
1996, balloon mortgages were $25.1 million, or 10.8% of the Bank's loan
portfolio.
The Bank offers ARM loans that adjust every year, with the initial adjustment
coming one, three, five, seven or ten years after origination. The loans have
terms from 10 to 30 years and the interest rates on these loans are generally
based on the treasury bill
3
indices. The annual interest rate cap (the maximum amount by which the interest
rate may be increased in a year) on the Bank's ARM loans is generally 2.0% and
the lifetime cap is generally 6.0% over the initial rate of the loan. The Bank
considers market factors and competitive rates on loans as well as its own cost
of funds when determining the rates on the loans it offers. The Bank does not
originate loans with negative amortization.
Residential Construction Lending. The Bank originates residential construction
loans to qualified borrowers for construction of one-to-four family residential
properties located in the Bank's market area. Construction loans are made to
builders on a pre-sold, speculative and model home basis and to owners for
construction of their primary residence on a construction/permanent basis. Such
loans generally have terms from six to nine months. Loans for speculative
housing construction are made to area builders only after a thorough background
check has been made. The background check includes an analysis of the builder's
financial statements, credit reports and reference checks with sub-contractors
and suppliers. The Bank usually will have no more than two speculative or model
home construction loans outstanding at any time to any single builder. Loan
proceeds are disbursed in increments as construction progresses and only after a
physical inspection of the project is made by a Bank representative. Accrued
interest on loan disbursements is paid monthly.
Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes because collateral value and
construction costs can only be estimated at the time the loan is approved. The
Bank has sought to minimize the risk by limiting construction lending to
qualified borrowers in the Bank's market area, by limiting the number of
construction loans for speculative purposes outstanding at any time, and by
installing a system to inspect the property and to monitor the loan
disbursements.
Land Acquisition and Development, Commercial Real Estate and Multi-Family
Lending. The Bank originates land loans on residential properties located in the
Bank's primary market area. Land lending generally involves additional risks to
the lender as compared with residential mortgage lending. These risks are
attributable to the fact that loan funds are advanced upon the security of land
under development, predicated on the future value of the property upon
completion of development. Loans on undeveloped land may run the risk of adverse
zoning changes, or environmental or other restrictions on future use. Because of
these factors, the analysis of land loans requires an expertise that is
different in significant respects from that which is required for residential
lending.
Commercial real estate loans are permanent loans secured by improved property
such as office buildings, retail-wholesale facilities, industrial buildings and
other non-residential buildings. Commercial real estate loans may be originated
in amounts up to 80% of the appraised value of the mortgaged property as
determined by a certified or licensed independent appraiser.
Multi-family residential real estate loans are permanent loans secured by
apartment buildings. Of primary concern in multi-family residential real estate
lending is the borrower's creditworthiness and the feasibility and cash flow
potential of the project. Loans secured by income properties generally are
larger and involve greater risks than residential mortgage loans because
payments on loans secured by income properties are often dependent on the
successful operation or management of the properties. As a result, repayment of
such loans may be subject to a greater extent than residential real estate loans
to adverse conditions in the real estate market or the economy. In order to
monitor cash flows on income properties, the Bank requires borrowers and loan
guarantors, if any, to provide annual financial statements and rent rolls on
multi-family loans. At September 30, 1996, the five largest land acquisition and
development, commercial real estate and multi-family loans ranged from $1.1
million to $3.7 million with an average outstanding balance of $1.6 million. All
such loans were current and have performed in accordance with their terms and
the property securing such loans is in the Bank's market area.
Consumer and Other Loans. The Bank offers consumer and other loans in the form
of home equity and second mortgage loans, automobile loans and loans for other
purposes. Federal regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of an institution's assets.
The Bank originates consumer loans in order to provide a wide range of financial
services to its customers and because the shorter terms and normally higher
interest rates on such loans help maintain a profitable spread between its
average loan yield and the Bank's cost of funds.
In connection with consumer loan applications, the Bank verifies the borrower's
income and reviews a credit bureau report. In addition, the relationship of the
loan to the value of the collateral is considered. Consumer loans entail greater
risks than one-to- four family residential mortgage loans, particularly consumer
loans secured by rapidly depreciable assets such as automobiles or loans that
are unsecured. In such cases, any repossessed collateral for a defaulted loan
may not provide an adequate source of repayment of the outstanding loan balance,
since there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, consumer loan collections are dependent on the
borrower's continuing financial stability, and therefore are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At September 30, 1996,
consumer loans 90 days or more delinquent totaled $90,000 or 0.23% of such
loans. Management believes that the Bank's level of consumer loan delinquencies
is relatively low in
4
comparison to other financial institutions. No assurance can be given, however,
that the Bank's delinquency rate on consumer loans will continue to remain low
in the future.
Loan Approval Authority and Underwriting. First Federal's primary source of
mortgage loan applications is referrals from existing or past customers. In
recent years, refinancings had been a significant portion of First Federal's
originations, however, such loan originations have decreased due to the
increasing interest rate environment. The Bank also solicits applications from
real estate brokers, contractors, and call-ins and walk-ins to its offices.
First Federal advertises in local newspapers for first mortgage and home equity
loans.
Upon receipt of any loan application from a prospective borrower, a credit
report and verifications are ordered to confirm specific information relating to
the loan applicant's employment, income and credit standing. An appraisal or
valuation determination, subject to regulatory requirements, of the real estate
intended to secure the proposed loan is undertaken. First Federal utilizes the
services of Board approved appraisers and two authorized appraisers on staff at
the Bank. In connection with the loan approval process, First Federal's loan
officers analyze the loan applications and the property involved. All
residential, home equity, multi-family, construction and commercial real estate
loans are underwritten and processed at First Federal's main office by First
Federal's loan servicing department, subject to the loan underwriting policies
as approved by the Board of Directors. The Chief Executive Officer, President,
and the Directors of Lending are authorized to approve all one-to-four family
applications. Commercial real estate loans in excess of $1.0 million must be
approved by the Board of Directors.
Loan applicants are promptly notified of the decision of the Bank by a letter
setting forth the terms and conditions of the decision. If approved, these terms
and conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged to First Federal, and
the notice of requirement of insurance coverage to be maintained to protect the
Bank's interest. First Federal requires title insurance or a title opinion on
first mortgage loans and fire and casualty insurance on all properties securing
loans, which insurance must be maintained during the entire term of the loan.
The Bank also requires flood insurance, if appropriate, in order to protect
First Federal's interest in the security property.
Loans-to-One Borrower. Under federal law, federally-chartered savings banks
have, subject to certain exemptions, aggregate lending limits to one borrower
equal to 15% of the institution's unimpaired capital and surplus. As of
September 30, 1996, First Federal's five largest lending relationships included
$3.7 million in land development loans to a local developer, a $3.0 million line
of credit to an unaffiliated mortgage-banking company, a $3.0 million commercial
loan secured by stock of another Minnesota financial institution, a $3.0 million
commercial real estate loans, and a $2.0 million commercial real estate loan. At
September 30, 1996, all of these loans were within the loans to one borrower
limitations, current and at market rates of interest.
Loan Servicing. The Bank generally retains the servicing on all loans sold to
others. In addition, the Bank services substantially all of the loans which it
retains in its portfolio. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, making advances to cover
delinquent payments, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults and generally administering the
loans. Funds that have been escrowed by borrowers for the payment of
mortgage-related expenses, such as property taxes and hazard and mortgage
insurance premiums, are maintained in noninterest-bearing accounts at the Bank.
At September 30, 1996, the Bank had $235,000 deposited in escrow accounts for
its loans serviced for others.
The following table presents information regarding the loans serviced by the
Bank for others at the dates indicated.
September 30,
-------------------------------------
Mortgage loan portfolios serviced for: 1996 1995 1994
-------------------------------------
(In Thousands)
FHLMC $ 40,561 $ 43,481 $ 45,921
Other Investors 572 971 1,288
-------------------------------------
$ 41,133 $ 44,452 $ 47,209
=====================================
The Bank receives fees for servicing mortgage loans, which generally amount to
0.25% per annum on the declining balance of mortgage loans. Such fees serve to
compensate the Bank for the costs of performing the servicing functions. Other
sources of loan servicing revenues include late charges. For the years ended
September 30, 1996, 1995 and 1994, the Bank earned gross fees of $194,000,
$186,000 and $170,000, respectively from loan servicing. The Bank retains a
portion of funds received from borrowers on the loans it services for others in
payment of its servicing fees received on loans serviced for others.
Non-Performing and Problem Assets
Loan Collections and Delinquent Loans. The Bank's collection procedures provide
that when a loan is 30 days or more delinquent, the borrower is contacted by
mail and telephone and payment is requested. If the delinquency continues,
5
subsequent efforts will be made to contact the delinquent borrower. In certain
instances, the Bank may modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his financial affairs. Once a loan
delinquency exceeds 60 days it is classified as special mention and the Bank
attempts to work with the borrower to establish a repayment schedule to cure the
delinquency. If the borrower is unable to cure the delinquency, the Bank will
institute foreclosure actions. If a foreclosure action is taken and the loan is
not reinstated, paid in full or refinanced, the property is sold at a judicial
sale at which the Bank may be the buyer if there are no offers to satisfy the
debt. Any property acquired as the result of a foreclosure or by deed in lieu of
foreclosure is classified as foreclosed real estate until such time as it is
sold or otherwise disposed of by the Bank. At September 30, 1996, the Bank had
no foreclosed real estate. When foreclosed real estate is acquired, it is
recorded at the lower of the unpaid principal balance of the related loan or its
fair market value less related disposition costs. Any writedown of the property
is charged to the allowance for losses on real estate owned.
Non-performing Assets. 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. Residential mortgage loans are placed on a
non-accrual status when either principal or interest is 90 days or more past
due. Consumer loans generally are charged off when the loan becomes over 90 days
delinquent. Commercial business and real estate loans are placed on non-accrual
status when the loan 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 on the assessment of the
ultimate collectibility of the loan. At September 30, 1996, the Bank had
approximately $253,000 of loans that were more than 60 days delinquent.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods indicated
the Bank had no restructured loans within the meaning of SFAS No. 15.
At September 30,
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ - $ 209 $ - $ - $ 63
Permanent loans secured by one-to
four-family units 129 138 26 244 457
Other - - 293 347 -
Non-mortgage loans:
Commercial - - - - -
Consumer 90 33 21 12 1
----------------------------------------------------------------
Total non-accrual loans 219 380 340 603 521
Foreclosed real estate and real estate
held for investment - - 247 215 450
----------------------------------------------------------------
Total non-performing assets $ 219 $ 380 $ 587 $ 818 $ 971
================================================================
Total non-performing loans to net loans 0.10% 0.22% 0.27% 0.50% 0.42%
================================================================
Total non-performing loans to total assets 0.06% 0.12% 0.11% 0.28% 0.27%
================================================================
Total non-performing assets to total assets 0.06% 0.12% 0.20% 0.38% 0.51%
================================================================
During the years ended September 30, 1996, 1995, 1994, 1993 and 1992,
approximately $11,812, $11,593, $6,109, $38,271, and $25,262, 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.
Classified Assets. 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 "loss", a reserve equal to 100% of the loan balance is required to be
established or the loan is 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
6
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 September 30, 1996, First Federal had total classified
assets of $498,000 of which $329,000 were considered substandard, and no assets
were classified as doubtful or loss. Special mention assets totaled $169,000 at
September 30, 1996.
Allowance for Loan and Lease Losses and Foreclosed Real Estate. In making loans,
First Federal recognizes that credit losses will be experienced and that the
risk of loss will vary with, among other things, the type of loan being made,
the creditworthiness of the borrower over the term of the loan, and in the case
of a secured loan, the quality of the collateral for the loan. First Federal's
management evaluates the need to establish reserves against losses on loans and
other assets each quarter based on estimated losses on specific loans and on any
real estate held for sale or investment when a finding is made that a loss is
estimable and probable. Such evaluation includes a review of all loans for which
full collectibility may not be reasonably assured and considers, among other
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions and overall portfolio quality.
While management recognizes and charges against the allowance for loan losses
accounts which are determined to be uncollectible, experience indicates that at
any point in time, possible losses may exist in the loan portfolio which are not
specifically identifiable. Therefore, based upon management's best estimate,
each year an amount may be charged to earnings to maintain the allowance for
loan losses at a level sufficient to recognize potential risk.
As a result of the decline in real estate values and the significant losses
experienced by many financial institutions, there has been a greater level of
scrutiny by regulatory authorities of the loan portfolios of financial
institutions nationwide, undertaken as part of the examination of the
institution by the OTS and FDIC. Results of recent examinations indicate that
these regulators may be applying more conservative criteria in establishing real
estate values, requiring significantly increased provisions for potential loan
losses. While First Federal believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request First
Federal to significantly increase its allowance for loan losses, or that a
deteriorating real estate market will cause First Federal to significantly
increase its allowance for loan losses, therefore negatively affecting First
Federal's financial condition and earnings.
7
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
At September 30,
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------
(Dollars in Thousands)
Total loans outstanding $ 232,104 $ 187,449 $ 122,365 $ 125,922 $ 126,620
================================================================
Average loans outstanding $ 193,202 $ 142,711 $ 119,133 $ 109,448 $ 109,044
================================================================
Allowance balance (beginning of period) $ 764 $ 748 $ 721 $ 730 $ 334
----------------------------------------------------------------
Provision (credit):
Residential - - 27 36 86
Commercial real estate - - - - 321
Consumer 42 24 6 11 5
----------------------------------------------------------------
Total provision 42 24 33 47 412
Charge-off:
Residential - - - 7 -
Commercial real estate - - - 36 -
Consumer 34 20 6 18 22
----------------------------------------------------------------
Total charge-offs 34 20 6 61 22
Recoveries:
Residential - - - - -
Commercial real estate - - - - -
Consumer 4 12 - 5 6
----------------------------------------------------------------
Total recoveries 4 12 - 5 6
----------------------------------------------------------------
Net charge-offs 30 8 6 56 16
----------------------------------------------------------------
Allowance balance (at end of period) $ 776 $ 764 $ 748 $ 721 $ 730
================================================================
Allowance as percent of total loans 0.33% 0.61% 0.61% 0.57% 0.58%
Net loans charged off as a percent of
average loans 0.02% 0.01% 0.01% 0.04% 0.01%
To further monitor and assess the risk characteristics of the loan portfolio,
loan delinquencies are reviewed to consider any developing loan problems. Based
upon the procedures in place, First Federal's past experience regarding
charge-offs and recoveries and the current risk elements in the portfolio,
management believes the allowance for loan losses at September 30, 1996, is
adequate. However, assessment of the adequacy of the allowance for loan losses
involves subjective judgments regarding future events and thus there can be no
assurance that additional provisions for loan losses will not be required in
future periods.
The following table sets forth the breakdown by loan category of the allowance
for loan losses.
September 30,
----------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------
Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
----------------------------------------------------------------------------
(Dollars in Thousands)
Real estate loans $ 426 82.8% $ 675 86.4% $ 675 84.7%
Consumer and commercial business 350 17.2% 89 13.6% 73 15.3%
----------------------------------------------------------------------------
$ 776 100.0% $ 764 100.0% $ 748 100.0%
============================================================================
Investment and Mortgage-backed Securities Activities
General. Federally-chartered thrift institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various Federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements, and loans on Federal Funds. To supplement lending activities,
subject to various restrictions, First Federal invests a portion of its assets
in commercial paper, corporate debt
8
securities and asset-backed securities (e.g., mortgage-backed securities). A
significant portion of First Federal's income during recent years has been
attributable to interest income on such securities. The Corporation does not
have the same investment limitations as the Bank.
Mortgage-backed and Related Securities. First Federal invests in residential
mortgage-backed securities guaranteed by participation certificates issues by
FHLMC and Government National Mortgage Association ("GNMA"). The mortgage-backed
securities portfolio as of September 30, 1996, consisted primarily of fixed-rate
certificates issued by the FHLMC ($9,000), GNMA ($80,000) and Real Estate
Mortgage Investment Conduits ("REMICs") ($54.8 million).
At September 30, 1996, the carrying value of mortgage-backed and related
securities held to maturity totaled $38.6 million, or 10.9% of total assets. The
market value of such securities totaled approximately $36.9 million at September
30, 1996. First Federal also held $16.3 million of mortgage-backed and related
securities that were classified available for sale.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include FHLMC, FNMA, and GNMA.
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages is primarily composed of either fixed-rate
mortgages or ARM loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
(i.e. fixed rate or adjustable-rate) as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages. Mortgage-backed securities
issued by FHLMC, FNMA, and GNMA make up a majority of the pass-through market.
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to thirty
years. In periods of declining interest rates, payments on many mortgages is
received faster than the contractual amount required, causing the estimated
lives of mortgage-related securities to be significantly shorter than expected.
REMICs are typically issued by a special-purpose entity (the "issuer"), which
may be organized in a variety of legal forms, such as a trust, a corporation, or
a partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage related securities. Once combined, the cash
flows can be divided into "tranches" or "classes" of individual securities,
thereby creating more predictable average duration for each security than the
underlying pass-through pools. Accordingly, under this security structure all
principal pay downs from the various mortgage pools are allocated to a
mortgage-related class or classes structured to have priority until it has been
paid off. Thus, these securities are intended to address the reinvestment
concerns associated with mortgage-backed securities pass-through, namely that
(i) they tend to pay off when interest rates fall, thereby taking their
relatively high coupon with them, and (ii) their expected average life may vary
significantly among the different tranches.
Some REMIC instruments are more like traditional debt instruments because they
have stated principal amounts and traditionally defined interest rate terms.
Purchasers of certain other REMIC securities are entitled to the excess, if any,
of the issuer's cash inflows, including reinvestment earnings, over the cash
outflows for debt service and administrative expenses. These mortgage related
instruments may include instruments designated as residual interests, and are
riskier in that they could result in the loss of a portion of the original
investment. Cash flows from residual interests are very sensitive to prepayments
and, thus, contain a high degree of interest-rate risk. Residual interests
represent an ownership interest in the underlying collateral, subject to the
first lien of the REMICs investors.
The REMICs held by First Federal at September 30, 1996, consisted of
floating-rate tranches. The interest rate of all of the Bank's floating-rate
securities adjusts monthly and provides the institution with net interest margin
protection in an increasing market rate environment. The securities are backed
by mortgages on one- to four-family residential real estate and have contractual
maturities up to 30 years. None of the securities are deemed to be "High Risk"
according to OTS guidelines. The securities are primarily companion tranches to
"PACs" and "TACs". PACs and TACs (Planned and Targeted Amortization Classes) are
designed to provide a specific principal and interest cash-flow. Principal
payments that are received in excess of the amount needed for the PACs and TACs
are allocated to the companion tranches. When the PACs and TACs are repaid in
full, all principal is then used to pay the companion tranches. Although the
timing of principal payments may be impacted by the amount of prepayments (the
higher the level of prepayments, the sooner the principal will be received), all
of the principal and interest payments are guaranteed.
9
Generally, it is management's intent to hold mortgage-backed securities until
maturity. In recent periods, certain mortgage-backed securities were purchased
and categorized as available for sale. These securities were purchased with the
proceeds from two FHLB advances in order to generate additional earnings spread.
Investment Securities. First Federal is required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. The Bank has generally
maintained a liquidity portfolio well in excess of regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectations of future yield levels, as well as management's projections as to
the short-term demand for funds to be used in First Federal's loan origination
and other activities. At September 30, 1996, the Bank had an investment
securities portfolio of approximately $62.6 million (17.7% of total assets),
consisting primarily of equity securities (mutual funds), U. S. Government
Securities, and U.S. government agency obligations. The market value of
investments at September 30, 1996, was $59.9 million or approximately $2.7
million below book value.
The Investment Policy of First Federal, which is established by the Board of
Directors, is designed to provide and maintain liquidity, to generate favorable
return on investments without incurring undue interest rate and credit risk, and
to compliment First Federal's lending activity. The policy currently provides
for investments held to maturity and investments available for sale.
The amount of short-term securities in excess of regulatory requirements
reflects management's strategy to provide interest rate adjustments for
securities that are shorter than their maturity. It is the intention of
management to maintain a repricing structure in the Bank's investment portfolio
that better matches the interest rate sensitivities of its assets and
liabilities. However, during periods of rapidly declining interest rates, such
investments also decline at a faster rate than the yields on fixed-rate
investments. Investment decisions are made within policy guidelines established
by the Board of Directors. Unless loan demand increases, the Bank intends to
maintain its investments at current levels.
Investment and Mortgage-backed Securities Portfolio. The following table sets
forth the carrying value of First Federal's investment securities portfolio,
short-term investments, FHLB stock, and mortgage-backed and related securities
at the dated indicated. At September 30, 1996, the market value of the
investment securities portfolio (including securities available for sale) and
mortgage-backed and related securities portfolio (including mortgage-backed
securities available for sale) was $59.9 and $53.2 million, respectively.
September 30,
---------------------------------------------------
1996 1995 1994
-------------- ------------- ---------------
Investment securities: (In Thousands)
U.S. Government and Federal
Agency Securities $ 44,349 $ 40,914 $ 22,797
Certificates of Deposit - - 100
Corporate Notes and Bonds - 1,000 -
FHLB Stock 5,736 3,692 2,188
Equity securities available for sale (1) 12,495 12,473 11,984
-------------- ------------- ---------------
Total investment securities 62,580 58,079 37,069
Interest-bearing deposits 9,392 12,448 67,389
Federal funds sold - - -
Mortgage-backed and related securities:
Mortgage-backed and related securities (2) 38,557 37,110 33,267
Mortgage-backed and related securities
available for sale 16,336 16,141 16,338
-------------- ------------- ---------------
Total mortgage-backed and related securities 54,893 53,251 49,605
-------------- ------------- ---------------
Total investments $ 126,865 $ 123,778 $ 154,063
============== ============= ===============
- -------------------------------------------------------
(1) Consists of Federated ARMS Fund and preferred stock
(2) Includes $38.4 million, $37.0 million and $33.0 million of REMICs as of
September 30, 1996, 1995, and 1994, respectively.
10
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
portfolio at September 30, 1996.
September 30, 1996
------------------------------------------------------------------------------------------------------------
Adjustable One Year or Less One to Five Years Five to Ten Years
------------------------ ------------------------ ------------------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Yalue Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
U.S. Government and
Federal
Obligations........ $ -- --% $2,496 6.70% $12,571 5.91% $15,069 5.66%
Equity Securities
available for sale... 12,495 5.83 -- -- -- -- -- --
FHLB Stock............. N/A N/A N/A N/A N/A N/A N/A N/A
Mortgage-backed and
related securities
held to maturity..... 38,557 6.26 -- -- -- -- -- --
Mortgage-backed and
related securities
available for sale... 16,336 6.38 -- -- -- -- -- --
Interest-bearing
deposits............. 9,392 5.18 -- -- -- -- -- --
------- ---- ------ ---- ------- ---- ------- ----
Total................ $76,780 6.08% $2,496 6.70% $12,571 5.91% $15,069 5.66%
======= ==== ====== ==== ======= ==== ======= ====
September 30, 1996
----------------------------------------------------------------------
More than Ten Years Total Investment Securities
------------------------- -------------------------------------------
Carrying Average Carrying Average Market
Value Yield Value Yield Value
----- ----- ----- ----- -----
U.S. Government and
Federal
Obligations........ $14,213 6.92% $ 44,349 6.16% $ 41,626
Equity Securities
available for sale... -- -- 12,495 5.83 12,495
FHLB Stock............. N/A N/A 5,736 7.00 5,736
Mortgage-backed and
related securities
held to maturity..... -- -- 38,557 6.26 36,915
Mortgage-backed and
related securities
available for sale... -- -- 16,336 6.38 16,336
Other Securities....... -- -- 9,392 5.18 9,392
------- ---- -------- ---- --------
Total................ $14,213 6.92% $126,865 6.16% $122,500
======= ==== ======== ==== ========
11
- --------------------------------------------------------------------------------
Deposits and Other Sources of Funds
- --------------------------------------------------------------------------------
General. Deposits are the major source of First Federal's funds for lending and
other investment purposes. In addition to deposits, the Bank derives funds from
loan and mortgage-backed securities principal payments, interest on investment
securities, proceeds from the maturity of mortgage-backed securities and
investment securities and borrowings. Loan and mortgage-backed securities
payments are a relatively stable source of funds, while deposit inflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They also may be used on a longer-term
basis for general business purposes.
Deposits. First Federal offers a wide variety of deposit accounts, although less
than 50% of such deposits are in fixed-term, market-rate certificate accounts.
It constantly strives to meet consumers' needs by offering new products. This,
in addition to interest rate risk management and asset/liability ratios, is
taken into consideration prior to offering new products. Deposit account terms
vary, primarily as to the required minimum balance amount, the amount of time
that the funds must remain on deposit and the applicable interest rate.
First Federal's current deposit products include regular savings, demand
deposits, NOW, money market and certificates of deposit accounts ranging in
terms from ninety-one days to five years including certificates of deposit with
negotiable interest rates and balances in excess of $100,000 (jumbo
certificates), and Individual Retirement Accounts (IRAs). All checking and
savings accounts are eligible for an Express Teller ATM card. This card can be
used at any Express Teller, Fastbank, or Instant Cash ATM in Minnesota and
surrounding states. With the addition of the Plus and Cirrus network automated
banking system, First Federal's Express Teller ATM card can be used at thousands
of ATM locations throughout the United States and the world.
Deposits are obtained primarily from residents in the Minnesota counties of
McLeod, Dakota, Meeker, Sibley, Carver, Wright, Benton, Sherburne, Stearns and
Washington. First Federal attracts deposit accounts by offering a wide variety
of products, competitive interest rates, and convenient locations and service
hours. The Bank uses traditional methods of advertising to attract new customers
and deposits, including radio and print media advertising. First Federal does
not advertise outside its market area or utilize the services of deposit brokers
and management believes that an insignificant number of deposit accounts are
held by non-residents of Minnesota.
First Federal pays interest on its deposits which are competitive in its market.
Interest rates on deposits are set weekly, based on a number of factors,
including: (1) the previous week's deposit flow; (2) a current survey of a
selected group of competitors' rates for similar products; (3) external data
which may influence interest rates; (4) investment opportunities and loan
demand; and (5) scheduled maturities.
The following table shows the amounts of First Federal's deposits by type of
account at the dates indicated.
September 30,
---------------------------------------
1996 1995 1994
---------------------------------------
(In Thousands)
NOW Accounts $ 22,416 $ 23,892 $ 31,717
Commercial Demand 5,185 3,446 1,895
Savings Accounts 48,334 48,027 48,088
---------------------------------------
75,935 75,365 81,700
---------------------------------------
Certificates of Deposit:
Under 3.00% - 477 853
3.00 to 4.00% 422 2,406 25,318
4.01 to 5.00% 28,155 23,061 20,266
5.01 to 6.00% 64,367 26,109 16,797
6.01 to 7.00% 13,693 37,079 2,449
7.01 to 8.00% 6,502 1,978 2,783
8.01% and over - 5,041 6,313
---------------------------------------
113,139 96,151 74,779
---------------------------------------
Total deposits $ 189,074 $ 171,516 $ 156,479
=======================================
12
The following table sets forth the amount and maturities of time deposits at
September 30, 1996.
Amount Due
----------------------------------------------------------------
Less than 1 - 2 2 - 3 Greater than
One Year Years Years 3 years Total
----------------------------------------------------------------
Interest Rate (In Thousands)
2.01 - 4.00% $ 3,625 $ 361 $ - $ - $ 3,986
4.01 - 6.00% 54,835 15,198 3,762 936 74,731
6.01 - 8.00% 19,523 3,256 4,429 2,321 29,529
Over 8.01% - 3,574 1,319 - 4,893
----------------------------------------------------------------
$ 77,983 $ 22,389 $ 9,510 $ 3,257 $ 113,139
================================================================
The following table indicates the amount of the Bank's certificates of deposit
of $100,000 or more by time remaining until maturity as of September 30, 1996.
Certificates of
Maturity Period Deposits
-------------
(In Thousands)
Within three months $ 4,865
Three through six months 3,798
Six through twelve months 4,779
Over twelve months 2,566
-------------
$ 16,008
=============
Borrowings. Savings deposits are the primary source of funds for First Federal's
lending and investment activities and for its general business purposes. The
Bank, if the need arises, may rely upon advances from the FHLB of Des Moines to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB of Des Moines are typically secured by
First Federal's stock in the FHLB and a portion of First Federal's residential
mortgage loans and other assets (principally securities which are obligations of
or guaranteed by the U.S. Government). First Federal has an Open Line of Credit
("LOC") in the amount of $25.0 million with the FHLB, which had an outstanding
balance of $10.0 million. The LOC requires an annual review and a commitment fee
of 0.05%. The LOC is reviewed for renewal annually. The LOC is maintained in
order to help meet on-going liquidity and cash flow needs of First Federal.
Advances have been utilized when adequate spreads can be obtained and the risk
(credit risk, interest rate risk, and market risk) in the transaction minimized.
Advances have been used to purchased mortgage-backed and related securities and
more recently to purchase single family residential mortgages originated by
other financial institutions within the state of Minnesota.
The following table sets forth certain information as to the Bank's FHLB
advances at the date indicated.
As of and for the Years Ended
September 30,
--------------------------------------
1996 1995 1994
--------------------------------------
(Dollars in Thousands)
Maximum balance $ 114,693 $ 73,807 $ 37,872
Average balance 90,408 52,688 34,080
Balance at end of period 114,693 73,807 37,688
Weighted average rate:
at end of period 5.88% 5.82% 4.15%
during the period 5.91% 5.16% 4.23%
It is First Federal's policy to fund loan demand and investment opportunities
out of current loan and mortgage-backed securities repayments, investment
maturities and new deposits. However, the Bank has utilized FHLB advances to
supplement these sources. This policy may change in the future as investment
opportunities are presented or loan demand increases.
13
Subsidiary Activity
First Federal is permitted to invest up to 2% of its assets in the capital stock
of, in secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of September 30, 1996, First Federal was authorized to invest up to
approximately $7.1 million in the stock of service corporations (based upon the
2% limitation). First Federal has one wholly-owned subsidiary, Firstate
Services, Inc. ("FSI"). FSI was incorporated in the State of Minnesota in
August, 1983, and is engaged in the sale, on an agency basis, of mutual funds,
annuities and life, credit life and disability insurance products. As of
September 30, 1996, the net book value of First Federal's investment in stock,
unsecured loans, and conforming loans in its subsidiary was $129,896. For the
fiscal year ended September 30, 1996, FSI had net income of $27,445.
Personnel
As of September 30,1996, First Federal had 71 full-time employees and 42
part-time employees, representing a total of 90.0 full-time equivalents. The
employees are not represented by a collective bargaining agreement. First
Federal believes its relationship with its employees is satisfactory.
Competition
First Federal faces strong competition in its attraction of savings deposits,
which are its primary source of funding for lending, and in the origination of
real estate loans. The Bank's competition for savings deposits and loans
historically has come from other savings institutions and commercial banks
located in First Federal's market area. However, in recent years, mortgage
bankers have captured a larger share of the mortgage market. The size and number
of mortgage bankers, as well as their decreased costs due to less regulatory
oversight, has contributed to their growth. First Federal also faces competition
for investor funds from credit unions, investment firms and insurance companies.
First Federal competes for loans and deposits by charging competitive interest
rates and loan fees, remaining efficient, marketing aggressively and providing a
wide range of services to its customers. First Federal offers all consumer
banking services such as checking accounts, certificates of deposits, retirement
accounts, consumer and mortgage loans and ancillary services such as convenient
offices and drive-up facilities, automated teller machines and overdraft
protection.
Bank Regulation
General
First Federal is a federally chartered savings bank and a member of the FHLB of
Des Moines. First Federal's deposits are insured by the FDIC through the SAIF.
First Federal is subject to examination and regulation by the OTS and the FDIC
with respect to most of its business activities, including, among others,
lending activities, capital standards, general investment authority, deposit
taking and borrowing authority, mergers and other business combinations,
establishment of branch offices, and permitted subsidiary investments and
activities. The OTS's operations, including examination activities, are funded
by assessments levied on its regulated institutions.
First Federal is further subject to regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") concerning reserves
required to be maintained against deposits and certain other matters. Financial
institutions, including the Bank, may also be subject, under certain
circumstances, to potential liability under various statutes and regulations
applicable to property owners generally, including statutes and regulations
relating to the environmental condition of real property and the remediation
thereof.
The descriptions of the statutes and regulations applicable to the Company and
First Federal set forth below and elsewhere herein do not purport to be complete
descriptions of such statutes and regulations and their effects on the Company
and First Federal. Such descriptions also do not purport to identify every
statute and regulation that may apply to the Company or the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. In
addition, FDIC regulations provide that any insured institution that falls below
a 2% minimum leverage ratio will be subject to FDIC deposit insurance
termination proceedings unless it has submitted, and is in compliance with, a
capital plan with its primary federal regulator and the FDIC. The FDIC may also
suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
14
Federal Home Loan Bank System
As a member of the FHLB System, First Federal is required to own capital stock
in its regional FHLB, the FHLB of Des Moines, in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, or 5% of its outstanding borrowings from the FHLB of Des Moines.
First Federal was in compliance with this requirement, with an investment of
$5.7 million in FHLB of Des Moines stock at September 30, 1996.
The FHLB of Des Moines serves as a reserve or central bank for the member
institutions within its assigned region, the Eighth FHLB District. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes advances to members in accordance with policies and
procedures established by the Federal Housing Finance Board and the Board of
Directors of the FHLB of Des Moines.
Current law requires each FHLB to transfer a certain portion of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"), the entity
established to raise funds to resolve troubled thrift cases, to fund the
principal and a portion of the interest on bonds issued by the REFCORP and
certain other obligations. In addition, each FHLB is required to transfer 5% of
its annual net earnings to fund certain affordable housing programs. That amount
is scheduled to increase to at least 10% of its annual net income in 1995 and
subsequent years. As a result of these requirements and other factors, the FHLB
of Des Moines has experienced reduced earnings since these provisions became
effective in 1989. It is anticipated that this may continue and that First
Federal will continue to receive a reduced level of dividends on its FHLB of Des
Moines stock in future periods. During 1996, 1995, and 1994, First Federal
recorded dividend income of $328,853, $177,660, and $159,519, respectively, on
its FHLB of Des Moines stock.
Insurance of Accounts
The FDIC administers two separate deposit insurance funds. The Bank Insurance
Fund (the "BIF") insures the deposits of commercial banks and other institutions
which were insured by the FDIC prior to the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). The SAIF
insures the deposits of savings institutions which were insured by the FSLIC
prior to the enactment of FIRREA. The FDIC is authorized to increase deposit
insurance premiums if it determines such increases are appropriate to maintain
the reserves of either the SAIF or BIF or to fund the administration of the
FDIC. In addition, the FDIC is authorized to levy emergency special assessments
on BIF and SAIF members.
The FDIC charges an annual assessment for the insurance of deposits based on the
risk a particular institution poses to its deposit insurance fund. Under this
system as of September 30, 1996, SAIF members paid within a range of 23 cents to
31 cents per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Act"), the FDIC imposed a special
assessment on SAIF members to capitalize the SAIF at the designated reserve
level of 1.25% as of October 1, 1996. Based on the Bank's deposits as of March
31, 1995, the date of measuring the amount of the special assessment pursuant to
the Act, the Bank paid a special assessment of $1.0 million on November 27,
1996, to recapitalize the SAIF. This expense was recognized during the fourth
quarter of fiscal 1996. The FDIC is expected to lower the premium for deposit
insurance to a level necessary to maintain the SAIF at its required reserve
level; however, the range of premiums has not been determined at this time.
Pursuant to the Act, the Bank will pay, in addition to its normal deposit
insurance premium as a member of the SAIF, an amount equal to approximately 6.4
basis points toward the retirement of the Financing Corporation bonds ("FICO
Bonds") issued in the 1980's to assist in the recovery of the savings and loan
industry. Members of the Bank Insurance Fund ("BIF"), by contrast, will pay, in
addition to their normal deposit insurance premium, approximately 1.3 basis
points. Based on total deposits as of September 30, 1996, had the Act been in
effect, the Bank's FICO Bond premium would have been approximately $121,000 in
addition to its normal deposit insurance premium. Beginning no later than
January 1, 2000, the rate paid to retire the FICO Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999, provided there are no financial
institutions still chartered as savings associations at that time. Should the
insurance funds be merged before January 1, 2000, the rate paid to retire the
FICO Bonds by all members of this new fund would be equal.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires each
savings institution, as well as commercial banks and certain other lenders, to
identify the communities served by the institution and assess the credit needs
of those communities. The CRA also requires the OTS to assess an institution's
performance in meeting the credit needs of its identified communities as part of
its examination of the institution, and to take such assessments into
consideration in reviewing applications with respect to branches, mergers and
other business combinations, and savings and loan holding company acquisitions.
An unsatisfactory CRA rating may be the basis for denying such an application
and community groups have successfully protested applications on CRA grounds.
The OTS assigns CRA ratings of "outstanding, satisfactory, need to improve, or
substantial noncompliance". First Federal was rated "outstanding" in its last
CRA examination in May, 1996.
15
Regulatory Capital Requirement. The following table reflects, in both dollars
and ratios, First Federal's regulatory capital position as of September 30,
1996, as well as the requirements at that date.
First Federal fsb Required
regulatory capital minimum Excess
--------------------------------- regulatory regulatory
Amount Percent (1) capital capital
---------------------------------------------------------------
(Dollars in Thousands)
Tangible capital $ 39,239 11.28% $ 5,218 $ 34,021
Core capital 39,239 11.28% 10,436 28,803
Risk-based capital 40,014 22.79% 14,046 25,968
- ---------------------------------------
(1) Based upon a percentage of adjusted total assets for tangible and core
capital and a percentage of risk-adjusted assets for risk-based capital.
Beginning July 1, 1994, OTS regulated institutions are required to maintain
additional risk-based capital equal to one-half of the amount by which the
decline in its "net portfolio value" that would result from a hypothetical 200
basis point change (up or down, depending on which would result in the greater
reduction in net portfolio value) in interest rates on its assets and
liabilities exceeds 2% of the estimated "economic value" of its assets. The one
exception to this general rule is that if the three month Treasury bond
equivalent yield falls below 4%, an institution would measure the hypothetical
downward change at one-half of that Treasury yield. An institution's "net
portfolio value" is defined for this purpose as the difference between the
aggregate expected future cash inflows from an institution's assets and the
aggregate expected cash outflows on its liabilities, plus the net expected cash
flows from existing off-balance sheet contract, each discounted to present
value. The estimated "economic value" of an institution's assets is defined as
the discounted present value of the estimated future cash flows from its assets.
Both the "net portfolio value" and the "economic value" include, as specified in
the regulation, the book value of assets and liabilities that are not interest
rate sensitive. The OTS has stated that implementation of this amendment to its
regulations will require additional capital to be maintained only by
institutions having "above normal" interest rate risk. Based on the assets and
liabilities comprising First Federal's statement of financial condition as of
September 30, 1996, there was no increase in First Federal's minimum capital
requirement.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement
Act of 1989 ("FDICIA"), among other things, established a system of prompt
corrective action to resolve problems of undercapitalized institutions. Under
this system, the banking regulators are required to take certain supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's degree of capitalization. Under the OTS final rule
implementing the prompt corrective action provisions, an institution shall be
deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0%
or more, has a Tier I risk-based capital ratio (core or leverage capital to
risk-weighted assets) of 6.0% or more, has a leverage capital of 5.0% or more
and is not subject to any order or final capital directive to meet and maintain
a specific capital level for any capital measure, (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, Tier I risk-based
ratio of 4.0% or more and a leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of well capitalized,
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage capital ratio that is less than 4.0% (3.0% in certain circumstances),
(iv) "significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%
or a leverage capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. In addition, under certain circumstances, a federal
banking agency may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution or an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the OTS may not reclassify a significantly
undercapitalized institution as critically undercapitalized). At September 30,
1996 First Federal was a "well capitalized institution" as defined in the prompt
corrective action regulations and as such is not subject to any prompt
corrective action measures.
Dividend and Other Capital Distribution Limitations. OTS regulations require the
Bank to give the OTS 30 days advance notice of any proposed declaration of
dividends to the Holding Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Holding Company.
In addition, the Bank may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Bank below the amount required for the liquidation account established in
connection with its Conversion.
OTS regulations impose limitations upon all capital distributions by savings
institutions, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to shareholders of another institution in a
cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
16
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without approval of the
OTS, make capital distributions during a calendar year equal to the greater of
(i) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (ii) 75% of its net income over the most recent four quarter period. Any
additional capital distributions require prior regulatory approval. An
institution is further limited in its ability to pay dividends as its capital
levels decrease below its regulatory requirement. As of September 30, 1996,
First Federal was a Tier 1 institution.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under the regulation if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulation also
states that the capital distribution limitations apply to direct and indirect
distributions to affiliates, including those occurring in connection with
corporate reorganizations.
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended ("HOLA"),
requires savings institutions to meet a Qualified Thrift Lender ("QTL") test. If
an institution maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including
mortgage-backed securities) ("QTIs") on a monthly basis in nine out of every 12
months and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB of Des Moines. The required percentage of
QTIs is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. As of
September 30, 1996, First Federal was in compliance with its QTL requirement
with 90.2% of assets invested in QTIs.
Loans-to-One Borrower. See "Lending Activities -- Loans-to-One Borrower."
Transactions with Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital;
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
Branching by Federal Associations. Effective May 11, 1992, the OTS amended its
Policy Statement on Branching by Federal Savings Associations to permit
interstate branching to the full extent permitted by statute (which is
essentially unlimited). This permits savings associations with interstate
networks to diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
associations. However, the OTS will evaluate a branch's record of compliance
with the CRA. A poor CRA record may be the basis for denial of a branching
application.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At September
30, 1996, the Bank was in compliance with all applicable requirements.
Savings associations have authority to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve policy generally requires savings
associations to exhaust all other sources before borrowing from the Federal
Reserve System.
Holding Company Regulation
General. The Company is registered with the OTS as a unitary savings and loan
holding company. As such, the Company is required to register and file reports
with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries, should such subsidiaries be formed, which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association. This regulation and oversight is
intended primarily for the protection of the depositors of the Bank and not for
the benefit of stockholders of the Company. The Company also is required to file
certain reports with, and otherwise comply with, the rules and regulations of
the Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions, provided the Bank satisfies the QTL
test. If the Company acquires control of another savings association as a
separate
17
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Company and any subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition.
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any SAIF-insured association. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally insured savings
institution without giving at least 60 days' written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. Such
acquisitions of control may be disapproved if it is determined, among other
things, that (a) the acquisition would substantially lessen competition; (b) the
financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interest of its
depositors; or (c) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
Subject to appropriate regulatory approvals, a bank holding company can acquire
control of a savings association, and it controls a savings association, merge
or consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. Generally, federal savings associations can acquire or be
acquired by any insured depository institution.
Federal Securities Law. The Company's stock held by persons who are affiliates
(generally officers, directors, and principal shareholders) of the Company may
not be resold without registration or unless sold in accordance with certain
sale restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Other Regulatory Events
Recapture of Post-1987 Bad-Debt Reserves. Prior to the enactment of the Small
Business Jobs Protection Act, which was signed into law on August 21, 1996,
certain thrift institutions such as the Bank were allowed deductions for bad
debts under methods more favorable than those granted to other taxpayers. The
Small Business Job Protection Act repealed the Code Section 593 reserve method
of accounting for bad debts by thrift institutions, effective for tax years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks (banks with assets of more
than $500 million) are required to use only the specific charge off method.
The amount of the applicable excess reserves will be taken into account ratably
over a six taxable year period, beginning with the first taxable year beginning
after 1995, subject to the residential loan requirement described below.
For the Bank, a small bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for losses
on qualifying real property loans and its reserve for losses on nonqualifying
loans as of the close of its last taxable year beginning before January 1, 1996,
over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what
the Bank's reserves would have been at the close of its last tax year beginning
before January 1, 1996, had the Bank always used the experience method. At
September 30, 1996, the Bank had $6.5 million of pre-1988 bad-debt reserves.
Since the percentage of taxable income method for tax bad debt deduction and the
corresponding increase in the tax bad debt reserve in excess of the base year
have been recorded as temporary differences pursuant to SFAS No. 109, this
change in the tax law will not have a material effect on the Company's financial
statements.
18
ITEM 2. PROPERTIES
The Bank operates from its main office located at 201 Main Street South,
Hutchinson, Minnesota. The Bank owns this 20,000 square feet office facility
which it built in 1985/86. The total investment in property and equipment at 201
Main Street South had a net book value of $1.4 million at September 30, 1996.
Additional offices, either owned or leased by the Bank, are set forth below with
information regarding net book value of the premises and equipment at such
facilities at September 30, 1996.
Year
Acquired or Net Book
Date Lease Value at Square
Location Expires September 30, 1996 Footage
- -------------------------- -----------------------------------------------------------------
(Dollars in thousands)
14994 Glazier Avenue
Apple Valley, MN 55124 1989 $331 3,000
19 Central Avenue
Buffalo, MN 55313 1973 103 1,800
1002 Greeley Avenue
Glencoe, MN 55336 1996 (1) 20 1,100
1320 South Frontage Road
Hastings, MN 55033 1984 822 15,000
905 Highway 15 South,
Frontage Road
Hutchinson, MN 55350 1980 226 1,400
6505 Cahill Avenue
Inver Grove Heights, MN 55075 1979 249 3,000
501 North Sibley Avenue
Litchfield, MN 55355 1978 203 2,400
200 East Frontage Road,
Highway 5
Waconia, MN 55387 1985 270 2,400
122 East Second Street
Winthrop, MN 55396 1996 (2) 9 950
113 Waite Avenue South
Waite Park, MN 56387 1998 (3) 58 550
(1) One year lease expires in April, 1997 with option to renew for one year
terms thereafter.
The Bank expects to renew the lease.
(2) Lease expires in July, 1997 with option to renew for one year terms.
The Bank expects to renew the lease.
(3) Lease expires in September, 1998 with options to renew for five year terms
The Bank leases approximately 4,535 square feet of the property in Hastings,
Minnesota to various tenants under three year operating leases. These leases
expire April 14, 1997, October 31, 1997 and December 31, 1998. The annual rents
total $36,880 in addition to each tenant's proportionate share of the operating
expenses.
19
ITEM 3. LEGAL PROCEEDINGS
First Federal, from time to time, is a party to legal proceedings in the
ordinary course of business when it enforces security interests in loans made by
it. The Bank is not engaged in any legal proceedings of a material nature at the
present time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Information relating to the market for Registrant's common equity and related
stockholder matters appears under "Corporate Profile and Stock Market
Information" in the Registrant's 1996 Annual Report to Stockholders on page 1,
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears under "Selected Financial Data" in the
Registrant's 1996 Annual Report to Stockholders on page 3 and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The above-captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Registrant's
1996 Annual Report to Stockholders on Pages 5 through 15 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiary,
together with the report thereon by Bertram Cooper & Co., LLP appears in the
Bank's 1996 Annual Report to Stockholders on pages 16 through 38 and are
incorporated herein by reference.
Quarterly Results of Operations on page 39 of the 1996 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Information with Respect
to Nominees for Director, Directors Continuing in Office, and Executive
Officers" at pages 3 to 12 the Registrant's definitive proxy statement for the
Company's Annual Meeting of Stockholders to he held on January 21, 1997 (the
"Proxy Statement"), which was filed with the Commission on December 8, 1996, and
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement at pages 8 through 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Registrant's Proxy
Statement at pages 3 through 5.
20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions is
incorporated herein by reference to the Registrant's Proxy Statement at page 14.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Bank are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
PAGE
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Financial Condition as of
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Income for the Years
Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 22
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
2.1 Plan of Conversion Merger of Hutchinson and Hastings *
2.2 Agreement of Merger *
3.1 Articles of Incorporation of FSF Financial Corp. *
3.2 Bylaws of FSF Financial Corp. *
4.0 Stock Certificate of FSF Financial Corp. *
10.1 Form of Employment Agreement with Donald A. Glas, George B.
Loban and Richard H. Burgart *
10.2 First Federal fsb Management Stock Plan
10.3 FSF Financial Corp. 1994 Stock Option Plan
11.0 Statement regarding computation of earnings per share
13.0 1996 Annual Report to Stockholders
21.0 Subsidiary Information
27.0 Financial Data Schedule **
- ---------------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, initially filed with the
Commission, on June 1, 1994, Registration No. 33-79570.
** Included with electronic filing only.
(b) Reports on Form 8-K.
On September 6, 1996, the Registrant filed a current
report on Form 8-K announcing receipt of appropriate regulatory approval for an
additional 5% common stock repurchase plan.
On December 2, 1996, the Registrant filed a current
report on Form 8-K announcing receipt of appropriate regulatory approval for
an additional 10% common stock repurchase plan.
21
SIGNATURES
Pursuant to the requirements of Section 13 o4 15(d) 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.
Dated: December 12, 1996 By: /s/ Donald A. Glas
--------------------------------------------
Donald A. Glas
Co-Chair of the Board and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated,
By: /s/ Donald A. Glas By: /s/ Richard H. Burgart
------------------------------------------ --------------------------------------------
Donald A. Glas Richard H. Burgart
Co-Chair of the Board and Chief Executive Officer Chief Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Director
Date: December 12, 1996 Date: December 12, 1996
By: /s/ George B. Loban By: /s/ Maurice P. Zweber
------------------------------------------ --------------------------------------------
George B. Loban Maurice P. Zweber
Co-Chair of the Board and President Director
Date: December 12, 1996 Date: December 12, 1996
By: /s/ Carl O. Bretzke By: /s/ Sever B. Knutson
------------------------------------------ --------------------------------------------
Carl O. Bretzke Sever B. Knutson
Director Director
Date: December 12, 1996 Date: December 12, 1996
By: /s/ Roger R. Stearns By: /s/ James J. Caturia
------------------------------------------ --------------------------------------------
Roger R. Stearns James J. Caturia
Director Director
Date: December 12, 1996 Date: December 12, 1996
By: /s/ Jerome R. Dempsey
------------------------------------------
Jerome R. Dempsey
Director
Date: December 12, 1996
22