<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
September 30, 1996 0-20160
-----------------------------
FIRSTFED BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3820609
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or Number)
organization)
749 Lee Street, Des Plaines, Illinois 60016
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 294-6500
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 filing requirements
for the past 90 days.
Yes --X-- No -----
As of November 14, 1996, there were 3,256,216 outstanding shares of the
registrant's Common Stock, par value $.01 per share. In addition,
150,400 shares were being held as treasury stock.
<PAGE> 2
FIRSTFED BANCSHARES, INC.
Table of Contents
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements....................3
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations..................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................27
Item 2. Changes in Securities..................27
Item 3. Defaults upon Senior Securities........27
Item 4. Submission of Matters to a Vote
of Security Holders....................27
Item 5. Other Information......................27
Item 6. Exhibits and Reports of Form 8-K.......27
Form 10-Q Signatures.............................28
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FIRSTFED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited) SEPT. 30, DEC. 31,
(Dollars in thousands except 1996 1995
per share amounts) --------- ---------
ASSETS
- ------
CASH AND CASH EQUIVALENTS
Cash and Amounts Due from
Depository Institutions $ 1,656 $ 19,198
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 1,656 19,198
INVESTMENTS:
Securities Available-for-Sale 80,480 46,414
Mortgage-Backed and Related
Securities Available-for-Sale 132,817 204,169
Federal Home Loan Bank Stock 7,190 4,835
--------- ---------
TOTAL INVESTMENTS 220,487 255,418
LOANS RECEIVABLE:
First Mortgage Loans 305,290 276,288
Commercial Real Estate Loans 5,143 2,200
Consumer Loans 53,242 53,908
--------- ---------
TOTAL LOANS RECEIVABLE 363,675 332,396
Less Allowance for Possible Loan Loss ( 1,363) ( 1,379)
--------- ---------
LOANS RECEIVABLE, NET 362,312 331,017
ACCRUED INTEREST RECEIVABLE 4,985 3,461
PREMISES AND EQUIPMENT 9,955 10,260
OTHER ASSETS 3,519 3,146
--------- ---------
TOTAL ASSETS $602,914 $622,500
========= =========
<PAGE> 4
SEPT. 30, DEC. 31,
1996 1995
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits $405,790 $454,656
Short-Term Borrowings and Securities
Sold under Agreement to Repurchase 105,748 70,435
Long-Term Advances from Federal
Home Loan Bank 27,400 27,400
Advances from Borrowers for
Taxes and Insurance 1,820 5,496
Accrued Expenses and Other Liabilities 10,523 6,836
--------- ---------
TOTAL LIABILITIES 551,281 564,823
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
5,000,000 authorized shares; 3,406,616
and 4,214,427 shares issued at
9/30/96 and 12/31/95, respectively 34 28
Additional Paid-in Capital 21,850 27,229
Retained Earnings 33,710 39,373
Treasury Stock, at cost, 129,600 and
729,485 shares held at 9/30/96
and 12/31/95, respectively ( 2,190) ( 9,397)
ESOP Loan ( 1,000) ( 1,198)
Unearned Stock Award ( 93) ( 97)
Unrealized Gain (Loss) on Securities
Available-for-Sale ( 678) 1,739
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 51,633 57,677
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $602,914 $622,500
========= =========
BOOK VALUE PER COMMON SHARE $15.76 $16.55
====== ======
BOOK VALUE PER COMMON SHARE (without
effect of unrealized gain (loss) on
securities.) $15.96 $16.05
====== ======
See notes to condensed consolidated financial statements (unaudited)
<PAGE> 5
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C>
FIRSTFED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED NINE MONTHS ENDED
(Unaudited) SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(Dollars in thousands except 1996 1995 1996 1995
per share amounts) --------- --------- --------- ---------
INTEREST INCOME
Loans Receivable $ 6,900 $ 8,235 $19,818 $22,522
Mortgage-Backed and Related Securities 2,809 1,244 8,774 3,567
Securities 1,213 891 3,016 3,377
Other Interest and Dividend Income 112 127 611 612
--------- --------- --------- ---------
11,034 10,497 32,219 30,078
INTEREST EXPENSE
Deposits 5,887 6,254 18,039 17,386
Advances from Federal Home Loan Bank 1,515 703 4,031 1,909
Other Borrowed Money 295 4 711 7
--------- --------- --------- ---------
7,697 6,961 22,781 19,302
NET INTEREST INCOME 3,337 3,536 9,438 10,776
Provision for Possible Loan Losses 300 150 832 450
NET INTEREST INCOME AFTER PROVISION --------- --------- --------- ---------
FOR POSSIBLE LOAN LOSSES 3,037 3,386 8,606 10,326
NON-INTEREST INCOME
Loan Charges and Servicing Fees 183 95 568 329
Deposit Related Charges and Fees 156 148 415 368
Gain (Loss) on Sale of Securities 54 -0- 2,561 ( 52)
Gain on Sale of Loans -0- -0- -0- 1
Insurance and Annuity Commissions 81 35 163 84
Other 52 89 84 187
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 526 367 3,791 917
NON-INTEREST EXPENSE
Compensation and Benefits 1,203 1,174 3,572 3,955
Occupancy and Equipment 314 348 1,041 1,002
Federal Deposit Insurance Premium 3,336 266 3,866 731
Data Processing 186 178 591 532
Advertising 111 71 236 377
Other 423 431 1,674 1,400
--------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 5,573 2,468 10,980 7,997
INCOME BEFORE TAXES ( 2,010) 1,285 1,417 3,246
Income Tax Provision ( 753) 461 433 1,085
--------- --------- --------- ---------
NET INCOME ($ 1,257) $ 824 $ 984 $ 2,161
========= ========= ========= =========
EARNINGS PER COMMON SHARE
Primary ( $0.35) $0.20 $0.27 $0.50
Fully Diluted ( $0.35) $0.20 $0.27 $0.50
WEIGHTED AVG. PRIMARY SHARES OUTSTANDING 3,574,373 4,144,983 3,585,786 4,293,933
WGHTD. AVG. FULLY DILUTED SHARES OUTSTANDING 3,570,965 4,124,606 3,611,015 4,253,538
See notes to condensed consolidated financial statements (unaudited)
</TABLE>
<PAGE> 6
FIRSTFED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED
(Unaudited) SEPT. 30, SEPT. 30,
(Dollars in thousands) 1996 1995
--------- ---------
OPERATING ACTIVITIES
Net Income $ 984 $ 2,161
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities
Depreciation and Amortization of
Premises and Equipment 495 429
Deferred Loan Origination Fees 60 ( 80)
Amortization of Premiums and Discounts
on Mortgage-Backed and Investment
Securities, Net 1,035 95
Proceeds from Sale of Loans -0- 74
Provision for Possible Loan Losses 832 450
Net (Gain) Loss on Sale of Securities ( 2,556) 63
Stock Award Earned 4 25
Change In:
Prepaid Expenses and Other Assets 845 835
Accrued Interest Receivable ( 1,524) ( 253)
Accrued Expenses and Other Liabilities 3,687 951
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 3,862 4,750
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments ( 32,187) ( 85,260)
Principal Payments on Mortgage-Backed
and Related Securities 37,874 10,984
Purchases of Mortgage-Backed and
Related Securities (112,444) ( 10,995)
Purchases of Securities ( 47,948) ( 17,473)
Proceeds from Sales and Maturities
of Securities 157,690 61,915
Change in Federal Home Loan Bank Stock ( 2,355) -0-
Purchase of Office Properties and
Equipment ( 190) ( 1,394)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES 440 ( 42,223)
<PAGE> 7
NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
1996 1995
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits ( 48,866) 45,219
Repayments of Federal Home Loan Bank
Advances ( 41,900) ( 61,400)
Proceeds from Federal Home Loan Bank
Advances 61,000 55,000
Proceeds from Other Borrowings 16,213 448
Net Change in Mortgage Escrow Funds ( 3,676) 2,438
Purchase of Common Stock for Treasury ( 4,405) ( 4,591)
Proceeds from Exercise of Stock Options,
Net of Treasury Shares issued 488 161
Payment Received on Loan to ESOP 198 278
Dividend Paid, Net of Dividend
Reinvestment Program ( 896) ( 665)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES ( 21,844) 36,888
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ( 17,542) ( 585)
CASH AND CASH EQUIVALENTS, BEGINNING 19,198 6,776
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 1,656 $ 6,191
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $22,785 $17,252
Income Taxes Paid 1,250 865
See notes to condensed consolidated financial statements (unaudited)
<PAGE> 8
<TABLE>
<CAPTION>
FIRSTFED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Nine months ended Sept. 30, 1996 and Sept. 30, 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNREALIZED
GAIN (LOSS)
ADDITIONAL UNEARNED ON ASSETS
COMMON PAID-IN RETAINED TREASURY ESOP STOCK AVAILABLE
STOCK CAPITAL EARNINGS STOCK LOAN AWARD FOR SALE TOTAL
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $28 $26,851 $38,051 ($5,197) ($1,630) ($129) ($1,127) $56,847
Net Income 2,161 2,161
Cash Dividends ($.20 per share) ( 741) ( 741)
Purchase of Treasury Stock ( 4,969) ( 4,969)
Treasury Stock Reissued as Part of
Dividend Reinvestment Program 3 73 76
Principal Payment on ESOP Loan 278 278
Proceeds from Stock Option Exercises 161 161
Treasury Stock reissued in conjunction
with stock option exercises ( 3) ( 315) 696 378
Amortization of Stock Award 25 25
Change in Unrealized Gain/Loss on Securities
Available-for-Sale 871 871
- -----------------------------------------------------------------------------------------------------------------------
Balance at Sept. 30, 1995 $28 $27,012 $39,156 ($9,397) ($1,352) ($104) ($ 256) $55,087
=======================================================================================================================
Balance at December 31, 1995 $28 $27,229 $39,373 ($9,397) ($1,198) ($ 97) $1,739 $57,677
Net Income 984 984
Cash Dividends ($.084 per share) ( 896) ( 896)
Purchase of Treasury Stock ( 4,405) ( 4,405)
Principal Payment on ESOP Loan 198 198
Shares issued in conjunction with
three-for-two stock split, and
cash paid on fractional shares 11 ( 5,379) ( 12) ( 5,380)
Treasury Stock reissued in conjunction
with stock option exercises ( 542) 1,030 488
Retirement of 538,503 shares
of common stock ( 5) ( 5,197) 10,582 5,380
Amortization of Stock Award 4 4
Change in Unrealized Gain/Loss on Securities
Available-for-Sale ( 2,417) ( 2,417)
- -----------------------------------------------------------------------------------------------------------------------
Balance at Sept. 30, 1996 $34 $21,850 $33,710 ($2,190) ($1,000) ($ 93) ($ 678) $51,633
=======================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements (unaudited)
<PAGE> 9
<TABLE>
<CAPTION>
FIRSTFED BANCSHARES, INC.
AVERAGE BALANCE SHEET
(Dollars in thousands)
See notes to condensed consolidated financial statements (unaudited)
The following table sets forth certain information related to the Company's
average balance sheet. It reflects the average yield on assets and average
cost of liabilities for the periods indicated, as derived by dividing income
or expense by the average daily balance of assets or liabilities,
respectively, for the periods indicated.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
SEPT. 30, 1996 SEPT. 30, 1995
----------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------------
Mortgage Loans $292,612 $ 5,537 7.57% $363,700 $ 6,935 7.63%
Commercial Real Estate Loans 5,056 110 8.59 -0- -0- -0-
Consumer Loans 53,382 1,253 9.39 53,974 1,300 9.63
Mortgage-Backed and
Related Securities 183,970 2,809 6.11 76,961 1,244 6.47
Investment Securities 71,985 1,183 6.57 48,354 904 7.26
Other Investments 8,949 142 6.32 7,160 114 6.35
----------------------------------------- ---------------------------------------
Total Interest-Earning Assets $615,954 $11,034 7.15% $550,149 $10,497 7.60%
Non-Interest Earning Assets 13,480 20,990
----------------------------------------- ---------------------------------------
TOTAL ASSETS $629,434 $571,139
======== ========
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 21,653 $ 98 1.78% $ 22,334 $ 101 1.79%
Money Market Accounts 20,081 215 4.27 11,256 87 3.06
Savings 69,233 434 2.50 70,528 444 2.50
Certificates of Deposit 325,664 5,140 6.30 350,517 5,622 6.36
FHLB Advances 101,345 1,515 5.85 43,133 703 6.46
Other Borrowed Funds 21,908 295 5.39 345 4 5.60
----------------------------------------- ---------------------------------------
Total Interest-Bearing
Liabilities $559,884 $ 7,697 5.45% $498,113 $ 6,961 5.54%
Non-Interest Bearing
Deposits 4,748 5,240
Other Liabilities 11,580 10,593
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES $576,212 $513,946
----------------------------------------- ---------------------------------------
Stockholders' Equity 53,222 57,193
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $629,434 $571,139
======== ========
NET INTEREST INCOME $ 3,337 $ 3,536
----------------------------------------- ---------------------------------------
NET INTEREST RATE SPREAD (1) 1.70% 2.06%
----------------------------------------- ---------------------------------------
NET INTEREST MARGIN (2) 2.16% 2.55%
----------------------------------------- ---------------------------------------
AVERAGE INTEREST-EARNINGS ASSETS TO AVERAGE
INTEREST-BEARING LIABILITIES 1.11 x 1.11 x
----------------------------------------- ---------------------------------------
</TABLE>
(1) Interest Rate Spread is calculated by subtracting the average cost of
interest-bearing liabilities from the average rate on interest-earning
assets.
(2) Net Interest Margin is calculated by dividing net interest income by
average interest-earning assets.
<PAGE> 10
<TABLE>
<CAPTION>
FIRSTFED BANCSHARES, INC.
AVERAGE BALANCE SHEET
(Dollars in thousands)
See notes to condensed consolidated financial statements (unaudited)
The following table sets forth certain information related to the Company's
average balance sheet. It reflects the average yield on assets and average
cost of liabilities for the periods indicated, as derived by dividing income
or expense by the average daily balance of assets or liabilities,
respectively, for the periods indicated.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
----------------------------------------------------------------------------------------
SEPT. 30, 1996 SEPT. 30, 1995
----------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------------
Mortgage Loans $281,924 $15,793 7.47% $327,377 $18,729 7.63%
Commercial Real Estate Loans 3,753 246 8.76 -0- -0- -0-
Consumer Loans 53,374 3,779 9.44 52,958 3,793 9.55
Mortgage-Backed and
Related Securities 192,663 8,774 6.07 73,419 3,567 6.48
Investment Securities 66,164 3,219 6.49 73,331 3,582 6.51
Other Investments 8,692 408 6.26 8,960 407 6.06
----------------------------------------- ---------------------------------------
Total Interest-Earning Assets $606,570 $32,219 7.08% $536,045 $30,078 7.43%
Non-Interest Earning Assets 14,557 19,061
----------------------------------------- ---------------------------------------
TOTAL ASSETS $621,127 $555,106
======== ========
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 22,029 $ 295 1.79% $ 24,434 $ 314 1.72%
Money Market Accounts 14,163 395 3.72 11,198 243 2.91
Savings 69,412 1,299 2.50 71,307 1,334 2.50
Certificates of Deposit 338,068 16,050 6.16 337,394 15,495 6.14
FHLB Advances 89,672 4,031 5.91 39,918 1,909 6.39
Other Borrowed Funds 17,904 711 5.29 248 7 5.39
----------------------------------------- ---------------------------------------
Total Interest-Bearing
Liabilities $551,248 $22,781 5.50% $484,499 $19,302 5.33%
Non-Interest Bearing
Deposits 7,703 4,127
Other Liabilities 7,075 9,181
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES $566,026 $497,807
----------------------------------------- ---------------------------------------
Stockholders' Equity 55,101 57,299
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $621,127 $555,106
======== ========
NET INTEREST INCOME $ 9,438 $10,776
----------------------------------------- ---------------------------------------
NET INTEREST RATE SPREAD (1) 1.58% 2.11%
----------------------------------------- ---------------------------------------
NET INTEREST MARGIN (2) 2.07% 2.67%
----------------------------------------- ---------------------------------------
AVERAGE INTEREST-EARNINGS ASSETS TO AVERAGE
INTEREST-BEARING LIABILITIES 1.10 x 1.11 x
----------------------------------------- ---------------------------------------
</TABLE>
(1) Interest Rate Spread is calculated by subtracting the average cost of
interest-bearing liabilities from the average rate on interest-earning
assets.
(2) Net Interest Margin is calculated by dividing net interest income by
average interest-earning assets.
<PAGE> 11
FIRSTFED BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Regulation S-X. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The results of operations and other data for the quarter and nine months
ended September 30, 1996 are not necessarily indicative of results that
may be expected for the entire year ended December 31, 1996.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
financial condition of FirstFed Bancshares, Inc. (the "Company"),
including its wholly owned subsidiary, First Federal Bank, Des Plaines,
Illinois (the "Bank"), as of September 30, 1996 and December 31, 1995;
the results of the Company's operations for the three months ended
September 30, 1996 and 1995 and the nine months ended September 30, 1996
and 1995; its cash flows for the nine months ended September 30, 1996
and 1995; its changes in stockholders' equity for the nine months ended
September 30, 1996 and 1995; and its average balance sheet for the three
months ended September 30, 1996 and 1995, and the nine months ended
September 30, 1996 and 1995.
All references to number of shares issued, outstanding (primary and
fully-diluted) and held in treasury, earnings per share, and book value
per share, for periods prior to the second quarter of 1996, have been
restated as if the three-for-two stock split which occurred on May 15,
1996 had actually occurred on January 1, 1995.
Certain amounts in prior condensed consolidated financial statements
have been reclassified to conform with the September, 1996 presentation.
(2) Regulatory Capital Requirements
Pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), as implemented by regulations
promulgated by the Office of Thrift Supervision (the "OTS"), savings
institutions must meet three separate minimum capital requirements.
The following table summarizes, as of September 30, 1996, the Bank's
capital requirements under FIRREA and its actual capital ratios. As
of September 30, 1996, the Bank exceeded all current minimum regulatory
capital requirements.
<PAGE> 12
BANK ONLY
----------------------------------------------------
Actual Regulatory Excess Above
Capital Capital Req. Capital Req.
Amount % Amount % Amount %
------- ------ ------- ----- ------- ------
(Dollars in Thousands)
Risk-Based $47,938 17.43% $22,007 8.00% $25,931 9.43
Core Capital 46,576 7.76 18,012 3.00 28,564 4.76
Tang. Capital 46,576 7.76 9,006 1.50 37,570 6.26
(3) Conversion and Earnings Per Share of Common Stock
On June 30, 1992, the Bank converted from a federally chartered mutual
savings bank to a federally chartered stock savings bank. The Bank
issued all of its Common Stock to the Company and at the same time the
Company issued 3,220,000 shares of Common Stock at $10 per share, all
pursuant to a plan of conversion.
Primary and fully diluted earnings per share for the quarter were
computed by dividing net income by 3,574,373 and 3,570,965 respectively,
and for the nine months ended September 30, 1996 by 3,585,786 and
3,611,015 respectively, the weighted average number of shares of Common
Stock and Common Stock Equivalents outstanding during the quarter.
Stock options are regarded as Common Stock Equivalents and are computed
using the treasury stock method.
(4) Stock Repurchase Program
On October 24, 1995, the Company announced its intention to repurchase
up to 225,000 shares of its outstanding Common Stock in the open market.
On August 27, 1996, this program was completed, with a total of 225,000
shares repurchased at an average price of $15.35.
On August 27, 1996, the Company announced its intention to repurchase
up to 100,000 shares of its outstanding Common Stock in the open market.
As of November 14, 1996, 76,900 shares had been repurchased at an
average price of $16.91.
(5) Stock Dividend
On May 15, 1996, the Company effectuated a three-for-two stock split
payable in the form of a one-for-two stock dividend. The regular
quarterly dividend rate remained at $.10 per share post-split,
representing a 50% increase in the dividend rate as a result of the
split. All references to number of shares issued, outstanding (primary
and fully-diluted) and held in treasury, earnings per share, and book
value per share, for periods prior to the second quarter of 1996, have
been restated as if the three-for-two stock split which occurred on May
15, 1996 had actually occurred on January 1, 1995.
<PAGE> 13
(6) Balance Sheet Restructure
On January 2, 1996, the Company announced that it had accomplished the
first step in its restructuring of the balance sheet of the Bank, to
become more like that of a full service community bank. The Bank, at
that time, had 73% of its balance sheet in fixed rate assets, with 49%
having a maturity of greater than five years. Management believes that
in time of interest rate volatility, a greater portion of the balance
sheet should be in adjustable rate instruments. It is management's goal
to have no more than 50% of total assets in fixed rate instruments, with
no more than 15% repricing in greater than five years by December 31,
1997. As of September 30, 1996, the Bank had 71% of its assets in fixed
rate instruments, with 34% having a maturity of greater than five years.
In January and February of 1996, the Company sold over $93 million in 15
and 30-year fixed rate mortgage-backed securities, generating net gains
of over $2.5 million, or approximately $1.5 million after related taxes.
The proceeds were invested in adjustable rate mortgage-backed and
related securities, and management intends that over time, these funds
will be reinvested in higher yielding business and commercial real
estate loans. In the short-term, the Company may experience a decline
in net interest margin until the proceeds are converted from securities
to higher yielding loans.
(7) Recapitalization of the Savings Association Insurance Fund
(the "SAIF").
On September 30, 1996, legislation was signed authorizing the
recapitalization of the SAIF through a one-time special assessment of
65.7 basis points. The Bank recorded the estimated amount of
$3,070,000, pre-tax, in the third quarter of 1996. Management
anticipates a reduction in deposit insurance premiums of approximately
$750,000 annually, beginning in January, 1997. See the "Recent
Regulatory Developments" section of the Management's Discussion and
Analysis.
(8) New Director
On June 24, 1996, the number of directors on the Company's board was
increased from eight to nine. David Michael Miller was elected as a
Class I director with a term expiring in 1999. Mr. Miller is Vice-
President at Comdisco, Inc., a locally headquartered publicly-traded
company which sells and leases new and used IBM computer equipment,
including central processing units, printers, point-of-sale devices and
satellite terminals.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Company's business activities currently consist of ownership of the
Bank, and investments in other equity securities. The Bank's principal
business consists of attracting deposits from the public and investing
these deposits, together with funds generated from operations, primarily
<PAGE> 14
in loans secured by mortgages on one-to-four family residences, consumer
loans, commercial real estate loans and commercial loans. The Bank has
recently established a new Commercial Lending Department, and it is
management's intention that commercial loans will become an increasingly
larger portion of the total loan portfolio as the balance sheet is
restructured to become more like that of a community bank. The Bank's
deposit accounts are insured to the maximum allowable by the Federal
Deposit Insurance Corporation (the "FDIC").
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its
loans, mortgage-backed securities and investment securities portfolios,
and the interest paid on deposits and borrowed funds. The Bank's
operating results are also affected, to a lesser extent, by loan
commitment and servicing fees, customer service charges, fees from
annuity and insurance products, and other income. As the Bank's
subsidiary, First Insurance Agency, begins offering complete brokerage
and mutual fund services in the fourth quarter of 1996, management
expects non-interest income to increase. Operating expenses of the Bank
include employee compensation and benefits, equipment and occupancy
costs, federal deposit insurance premiums and other administrative
expenses.
The Bank's results of operations are further affected by economic
and competitive conditions, particularly changes in market interest
rates. Results are also affected by monetary and fiscal policies of
federal agencies, and actions of regulatory authorities. Since
September 30, 1995, the Treasury yield curve, (from maturities of 3
months to 30 years), has steepened, with the short end of the curve
decreasing 38 basis points, and the long end of the curve increasing 42
basis points. Should this trend continue, it would help improve the
Bank's net interest margin which has been decreased somewhat in the
short-term by the balance sheet restructure. Also, as approximately $69
million in certificates of deposit opened in March of 1995, which
carried a rate of 7.8%, matured in September of 1996, the Bank's net
interest margin should improve.
FINANCIAL CONDITION
- -------------------
Total consolidated assets of the Company decreased by $19.6 million, or
3.15% from $622.5 million at December 31, 1995, to $602.9 million at
September 30, 1996.
Total loans receivable increased $31.3 million, or 9.41% from $332.4
million at December 31, 1995, to $363.7 million at September 30, 1996.
Loans originated during the nine month period ended September 30, 1996
were $76.9 million, of which 59% were mortgages, 4% were commercial real
estate loans, and 37% were consumer loans. In addition, $13.7 million
in adjustable rate first mortgage loans were purchased. Loans
originated for the nine months ended September 30, 1995 were $125.8
million, of which 85% were mortgages and 15% were consumer loans.
Mortgage-backed and other mortgage-related securities decreased $71.4
million or 35.00% from December 31, 1995. During this nine month
<PAGE> 15
period, proceeds from the sales of mortgage-backed securities of $140.6
million, as well as principal payments and other securities maturities
of $43.2 million, were used to purchase $112.4 million in predominantly
adjustable rate mortgage-backed securities. Non mortgage-backed
securities increased $34.1 million or 73.40% from December 31, 1995.
Most of the securities purchased were U.S. Treasury and Government
Agency Obligations. At September 30, 1996, mortgage-backed and non
mortgage-backed securities comprised 35% of total assets.
Deposits decreased to $405.8 million at September 30, 1996, from $454.7
million at December 31, 1995, a decrease of $48.9 million or 10.75%.
This decrease was a direct result of $70 million in maturing 7.8%
certificates of deposit, partially offset by increases in a new
Preferred Money Market product, and growth in both non-interest bearing
checking accounts and short-term certificates of deposit.
Short-term borrowings (due within one year) increased $35.3 million from
the December 31, 1995 balance of $70.4 million to $105.7 million at
September 30, 1996. $12.5 million of this increase was directly
attributable to an arbitrage transaction. Approximately $20 million of
this increase occurred as a result of the runoff of the maturing 7.8%
certificates of deposit. The balance of this increase was in the two
new funding sources the Bank obtained during 1995. One is a Treasury
Tax and Loan Account, which enables the U.S. Treasury to retain tax
dollars with the Company at a floating rate of interest, and the other
is a Retail Repurchase Agreement, under which a customer can lend money
to the Company which is then collateralized by a security the Company
owns. Long-term borrowings, all of which are Federal Home Loan Bank
advances, have not changed since December 31, 1995.
Book value per common share decreased to $15.76 at September 30, 1996
from $16.55 at December 31, 1995. This was due to the one-time SAIF
special assessment, and the change in the unrealized gain (loss) on
securities available-for-sale, from a gain of $1.7 million at December
31, 1995, to a loss of $.7 million at September 30, 1996. Without the
effect of the unrealized gain (loss), book value per common share
decreased slightly from $16.05 at December 31, 1995 to $15.96 at
September 30, 1996.
Total non-performing loans as of September 30, 1996 increased to
$814,600 or 0.14% of total assets. At December 31, 1995, non-performing
loans were $681,000 or 0.11% of total assets. Historically this number
is at the high end of the range, but below the rate experienced by the
Bank's peer group. Management believes the allowances for possible loan
losses to be adequate. Furthermore, 72.6% of non-performing loans were
single family mortgages, and the Bank has not incurred a loss on single
family mortgages within the last five years.
<PAGE> 16
The following table sets forth the amounts and categories of non-
performing loans.
Sept. 30, 1996 Dec. 31, 1995
-------------- -------------
(Dollars in Thousands)
Non-performing loans:
One-to-four family $ 592 $ 531
Consumer 223 150
------------- -------------
Total non-performing loans $ 815 $ 681
Total non-performing loans as
percentage of net loans .22% .21%
Total non-performing loans as
percentage of total assets .14% .11%
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, and funds
provided by other operations. While scheduled loan and mortgage-backed
securities repayments and maturities of short-term investments are a
relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, competition and the restructuring occurring in the banking
industry.
Current OTS regulations require the Bank to maintain cash and eligible
investments in an amount equal to at least 5% of customers' accounts and
short term borrowings to assure its ability to meet demands for
withdrawals and repayments of short term borrowings. As of September
30, 1996 and December 31, 1995, the Bank's liquidity ratio was 7% and
5%, respectively.
The Company's cash flows are a result of three principal activities:
operating activities, investing activities and financing activities.
Net cash received in operating activities, primarily interest on loans
and investments, less interest paid on deposits and borrowed funds, was
$3.9 million for the nine months ended September 30, 1996. Net cash
received in investing activities was $.4 million for the nine months
ended September 30, 1996. Security sales and maturities generated
$157.7 million while principal payments on mortgage-backed and related
securities amounted to $37.9 million. Purchases of investment
securities and mortgage-backed securities were $160.4 million, and loan
originations, net of principal payments, were $32.2 million for the nine
month period. Net cash used in financing activities amounted to $21.8
million for the nine months ended September 30, 1996, and was accounted
for mostly by the decrease in deposits, partially offset by net
increases in Federal Home Loan Bank ("FHLB") advances and other
borrowings.
The Company uses its liquidity to meet its ongoing commitments to fund
<PAGE> 17
maturing certificates of deposit and deposit withdrawals, repay
borrowings, fund existing and continuing loan commitments, and pay
operating expenses. At September 30, 1996, the Company had commitments
to originate loans totaling $14.3 million, and its customers had
approved but unused lines of credit totaling $64.2 million. The Company
considers its liquidity and capital resources to be adequate to meet its
foreseeable short and long-term needs. The Company expects to be able
to fund or refinance, on a timely basis, its material commitments and
long-term liabilities.
At September 30, 1996, the Bank had core and tangible capital of $46.6
million or 7.8% of adjusted total assets, which was approximately $28.6
million and $37.6 million above the minimum capital requirements in
effect on that date of 3.0% and 1.5%, respectively, of adjusted total
assets. On September 30, 1996, the Bank had total risk-based capital of
$47.9 million (including $46.6 million in core capital), or 17.4% of
risk-weighted assets of $275.1 million. This amount was approximately
$25.9 million above the 8.0% total risk-based capital requirement in
effect on that date.
SELECTED RATIOS
- ---------------
(unaudited) THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
1996 1995 1996 1995
--------------------------------------
Annualized Return on Avg. Equity -9.45% 7.13% 2.38% 5.03%
Annualized ROE before SAIF
special assessment 5.49% 7.13% 7.19% 5.03%
Annualized Return on Avg. Assets -0.80% 0.71% 0.21% 0.52%
Annualized ROA before SAIF
special assessment 0.46% 0.71% 0.64% 0.52%
Book Value per Share $15.76 $15.81 $15.76 $15.81
Tangible Book Value per Share $15.23 $15.13 $15.23 $15.13
Closing Market Price per Share $16.50 $13.75 $16.50 $13.75
Earnings per Primary Share ($ .35) $ .20 $ .27 $ .50
EPS before SAIF special
assessment $ .20 $ .20 $ .83 $ .50
Net Interest Margin 2.16% 2.55% 2.07% 2.67%
Non-Performing Assets to Total
Assets at End of Period 0.14% 0.08% 0.14% 0.08%
Ratio of Operating Exp. to Avg.
Total Assets, Annualized 3.54% 1.64% 2.65% 1.91%
Ratio of Oprtng. Exp. to Avg. Total
Assets before SAIF assessment 1.59% 1.64% 1.70% 1.91%
Ratio of Net Int. Inc. to Non-Int.
Expense, Annualized .60x 1.59x .86x 1.35x
Ratio of Net Int. Inc. to Non-Int.
Expense before SAIF assessment 1.33x 1.59x 1.19x 1.35x
<PAGE> 18
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND
- ------------------------------------------------------------------------
1995
- ----
GENERAL. For the three months ended September 30, 1996, the Company
recorded a net loss of $1,257,000 compared to net income of $824,000 for
the three months ended September 30, 1995. During the third quarter of
1996, the special assessment to recapitalize the SAIF was recorded in
the amount of $3,070,000, pre tax. Without the effect of this item, net
income for the three months ended September 30, 1996 would have been
$731,000, a decrease of $93,000, or 11% compared to the same quarter of
1995. This was primarily the result of a decrease in net interest
income after provision for possible loan losses of $349,000, partially
offset by an increase in non-interest income of $159,000, and a decrease
in taxes of $132,000 (prior to the tax effect on the non-recurring
item). Earnings for the period were reduced as a result of the
restructuring of the balance sheet, which resulted in a yield reduction
as 15 and 30-year fixed rate investments were replaced by adjustable
rate securities. Management intends to move into higher yielding loan
products over time, with the goal of increasing net interest margin.
The average net interest rate spread for the three month period ended
September 30, 1996 was 1.70% compared to 2.06% for the same period in
1995.
INTEREST INCOME. Interest income increased by $.5 million or 5.1% to
$11,034,000 for the three month period ended September 30, 1996 as
compared to $10,497,000 for the same period in 1995, even though the
yield on average earning assets decreased 45 basis points to 7.15% for
the quarter ended September 30, 1996 as compared to a 7.60% yield for
the same period in 1995. Contributing to the decrease in yield was the
restructuring of the balance sheet, which resulted in a greater amount
of adjustable rate mortgage-backed securities, that carried a lower
yield when purchased, as compared to last year. These securities will
gradually be converted to higher yielding loans. As discussed above,
the Bank has started a new Commercial Lending Department, and it is
expected that these types of loans will become an increasing portion of
the total loan portfolio.
INTEREST EXPENSE. Interest expense increased by $.7 million or 10.6% to
$7,697,000 for the three month period ended September 30, 1996 as
compared to $6,961,000 for the same period in 1995. This was primarily
the result of an increase in the average amount of FHLB advances and
borrowed funds, from $43.5 million for the third quarter of 1995, to
$123.3 for the third quarter of 1996. The cost of total interest-
bearing liabilities for the three months ended September 30, 1996 was
5.45% compared to 5.54% for the three months ended September 30, 1995, a
decrease of 9 basis points.
Interest on deposits decreased $.4 million, from $6.3 million for the
third quarter of 1995, to $5.9 million for the same quarter of 1996.
Most of this decrease in cost resulted from a lower average deposit
balance, particularly in long-term certificates of deposit.
<PAGE> 19
Interest expense on FHLB advances and borrowed funds was $707,000 for
the third quarter of 1995, compared to $1.8 million for the third
quarter of 1996, an increase of $1.1 million. While the rates paid on
borrowed funds have declined since last year, average balances were
higher due to management's reliance on non-deposit borrowings until the
SAIF insurance fund recapitalization issue was resolved by Congress.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan
losses totaled $300,000 for the three months ended September 30, 1996
compared to $150,000 for the three months ended September 30, 1995.
This increase resulted from a decision by management to increase the
loan loss allowance in light of recent higher write-off experience,
particularly on credit cards. The Company, and the banking industry as
a whole, is beginning to see more credit card charge-offs resulting from
personal bankruptcies. For the quarter ended September 30, 1996, 52% of
all of the Company's charge-offs were related to personal bankruptcies.
Management regularly conducts a review of its loan portfolio, write-off
experience and adequacy of allowance.
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an
analysis of the Company's allowance for possible loan losses for the
periods indicated. Three Months Ended
Sept. 30, Sept. 30,
1996 1995
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $ 1,254 $ 1,354
Charge-offs:
One-to-four family -0- -0-
Consumer 251 161
--------- ---------
Total 251 161
--------- ---------
Recoveries:
One-to-four family -0- -0-
Consumer 60 37
--------- ---------
Total 60 37
--------- ---------
Net charge-offs 191 124
Additions charged to
operations 300 150
--------- ---------
Balance at end of period $ 1,363 $ 1,380
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.05% 0.04%
Ratio of allowance to non-
performing loans 1.67x 2.90x
<PAGE> 20
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES. Net
interest income after provision for possible loan losses decreased
by $349,000 or 10.3% to $3,037,000 for the three month period ended
September 30, 1996 as compared to $3,386,000 for the three month period
ended September 30, 1995.
NON-INTEREST INCOME. Non-interest income increased by $159,000 or 43.3%
to $526,000 for the three month period ended September 30, 1996 as
compared to $367,000 for the same period in 1995. Most of this increase
was attributable to recognition of loan servicing fees, which increased
$88,000 or 92.6%, and insurance and annuity commissions which increased
$46,000 or 131.4% from the same period in 1995. In addition, gain on
the sale of securities for the third quarter of 1996 was $54,000, and
there were no sales in the third quarter of 1995.
NON-INTEREST EXPENSE. Non-interest expense was $5,573,000 for the
quarter ended September 30, 1996, compared to $2,468,000 for the same
period in 1995, an increase of $3,105,000 or 125.8%. In the current
quarter, a non-recurring expense was recorded for $3,070,000, pre-tax,
for the estimated amount due for the one-time assessment to recapitalize
the SAIF insurance fund. Without giving consideration to this item,
non-interest expense increased slightly, by $35,000 or 1.4% from the
third quarter of 1995. Management expects a reduction in the annual
deposit insurance premiums of approximately $750,000 beginning in 1997.
INCOME TAX EXPENSE. Income tax expense decreased $1,214,000 or 263.3%,
to ($753,000) for the quarter ended September 30, 1996, compared to
$461,000 for the same period in 1995, due to the effects of the SAIF
special assessment.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
- ----------------------------------------------------------------------
1995
- ----
GENERAL. Net income for the nine months ended September 30, 1996 was
$984,000 compared to $2,161,000 for the nine months ended September 30,
1995, a decrease of $1,177,000 or 54.5%. This decrease included the
one-time special assessment to recapitalize the SAIF insurance fund
which was recorded in the third quarter of 1996 in the amount of
$3,070,000, pre-tax, and a non-recurring expense recorded in the second
quarter of 1996 in the amount of $148,331, less related taxes. This
latter amount represented the final unfunded liability as a result of
the termination of the Defined Benefit Plan. These non-recurring
charges were offset by net gains on the sales of securities of
approximately $2.5 million, or $1.5 million after related taxes,
recorded during the first quarter of 1996.
In the second quarter of 1995, there were two non-recurring items
recorded. They were $271,174 for the estimated unfunded liability of
the Defined Benefit Plan, and $123,540 for compensation to former
officers, less related taxes. The amount recorded in 1996 for the
Defined Benefit Plan was significantly higher than anticipated due to a
decrease in interest rates between the termination announcement date of
<PAGE> 21
January 5, 1995, and the date the final distribution was made on May 29,
1996.
Without the effect of these non-recurring items, net income for the nine
months ended September 30, 1996 would be $3,063,000, compared to
$2,418,000 for the same period of 1995, an increase of $645,000, or
26.7%. This is primarily the result of gains on the sales of securities
and increases in other non-interest income of $2,874,000, offset by a
decrease in net interest income after provision for possible loan losses
of $1,720,000, an increase in non-interest expenses of $160,000 (prior
to the non-recurring items in both years as discussed above,) and an
increase in taxes of $349,000 (prior to the tax effect on the non-
recurring items).
Earnings for the period were reduced as a result of the restructuring of
the balance sheet, which resulted in a yield reduction as 15 and 30-year
fixed rate investments were replaced by adjustable rate products.
Management intends to move into higher yielding loan products over time,
thereby increasing net interest margin.
INTEREST INCOME. Interest income increased by $2.1 million or 7.1% to
$32,219,000 for the nine month period ended September 30, 1996 as
compared to $30,078,000 for the same period in 1995, even though the
yield on average earning assets decreased 35 basis points to 7.08% for
the first nine months of 1996, as compared to a 7.43% yield for the same
period in 1995. Contributing to the decrease in yield was the
restructuring of the balance sheet, which resulted in a greater amount
of adjustable rate mortgage-backed securities as compared to last year.
These securities will gradually be converted to higher yielding loans.
As discussed previously, the Bank has started a new Commercial Lending
Department, and it is expected that these types of loans will become an
increasing portion of the total loan portfolio.
INTEREST EXPENSE. Interest expense increased by $3.5 million or 18.0%
to $22,781,000 for the nine month period ended September 30, 1996 as
compared to $19,302,000 for the same period in 1995. This increase can
be attributed to two factors. The first factor is the special 7.8%
Certificate of Deposit promotion, which was held in March of 1995 and
affected the second and third quarters of 1995, but only a small portion
of the first quarter of 1995. The other factor was an increase in the
average amount of borrowed money, from $40.2 million for the first nine
months of 1995, to $107.6 for the same period of 1996. The cost of
total interest-bearing liabilities for the nine months ended September
30, 1996 was 5.50% compared to 5.33% for the nine months ended September
30, 1995, an increase of 17 basis points.
Interest on deposits increased $.6 million, from $17.4 million for the
first nine months of 1995, to $18.0 million for the first nine months of
1996. This increase was primarily the result of the March of 1995
certificate of deposit promotion.
Interest expense on FHLB advances and borrowed funds was $1.9 million
for the nine months ended September 30, 1995 compared to $4.7 million
for the same period in 1996, an increase of $2.8 million or 147.4%.
While the rates paid on borrowed funds have declined since last year,
<PAGE> 22
the volume of borrowed money increased due to management's reliance on
non-deposit borrowings until the SAIF insurance fund recapitalization
issue was resolved by Congress.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan
losses totaled $832,000 for the nine months ended September 30, 1996
compared to $450,000 for the nine months ended September 30, 1995. Of
this $382,000, or 84.9% increase, $52,000 was related to new commercial
real estate loans, for which the Company establishes a provision for
possible losses at the time the loans are recorded. The balance of this
increase resulted from a decision by management to increase the loan
loss allowance in light of recent higher write-off experience,
particularly on credit cards. The Bank, and the banking industry as a
whole, is beginning to see more credit card charge-offs resulting from
personal bankruptcies. For the nine months ended September 30, 1996,
41% of all of the charge-offs experienced by the Company were related
to personal bankruptcies. Management regularly conducts a review of
its loan portfolio, write-off experience and adequacy of allowance.
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an
analysis of the Company's allowance for possible loan losses for the
periods indicated. Nine Months Ended
Sept. 30, Sept. 30,
1996 1995
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $ 1,379 $ 1,520
Charge-offs:
One-to-four family -0- -0-
Consumer 976 672
--------- ---------
Total 976 672
--------- ---------
Recoveries:
One-to-four family -0- -0-
Consumer 128 81
--------- ---------
Total 128 81
--------- ---------
Net charge-offs 848 591
Additions charged to
operations 832 450
--------- ---------
Balance at end of period $ 1,363 $ 1,379
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.25% 0.16%
Ratio of allowance to non-
performing loans 1.67x 2.90x
<PAGE> 23
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES. Net
interest income after provision for possible loan losses decreased by
$1,720,000 or 16.7% to $8,606,000 for the nine month period ended
September 30, 1996 as compared to $10,326,000 for the nine month period
ended September 30, 1995. The average net interest rate spread for the
nine months ended September 30, 1996 was 1.58% compared to 2.11% for the
same period in 1995.
NON-INTEREST INCOME. Non-interest income increased by $374,000 or 40.8%
to $1,291,000 for the nine month period ended September 30, 1996 as
compared to $917,000 for the same period in 1995, prior to net gains on
the sale of securities from the first quarter of 1996 of $2,500,000.
The six months ended June 30, 1995 produced a net loss on the sale of
securities of $52,000. Most of the balance of the increase in non-
interest income was attributable to recognition of loan servicing fees,
which increased $239,000 or 72.6%, and insurance and annuity
commissions, which increased $79,000 or 94.1% from the same period in
1995. Deposit related fees and charges also increased $47,000 or 12.8%,
as there has been a general increase in fees charged for various Bank
services since last year.
NON-INTEREST EXPENSE. Non-interest expense was $10,980,000 for the nine
months ended September 30, 1996, compared to $7,997,000 for the same
period in 1995, an increase of $2,983,000 or 37.3%. In 1995, there were
two non-recurring items recorded. They were $271,174 for the estimated
unfunded liability of the Defined Benefit Plan, and $123,540 for
compensation to former officers, less related taxes. During the second
quarter of 1996, a non-recurring expense was recorded for $148,331,
representing the final unfunded liability as a result of the termination
of the Defined Benefit Plan. The final determination was significantly
higher than anticipated due to a decrease in interest rates between the
termination announcement date of January 5, 1995, and the date the final
distribution was made on May 29, 1996. In the third quarter of 1996,
$3,070,000 was recorded for the estimated one-time assessment to
recapitalize the SAIF insurance fund, at 65.7 basis points. Without
giving consideration to these items, non-interest expense increased
$160,000 or 2.1%, from $7,602,000 for the first nine months of 1995, to
$7,762,000 for the same period of 1996. Most of this increase can be
attributed to the operation of the Schaumburg location, opened in March
of 1995.
INCOME TAX EXPENSE. Income tax expense decreased $652,000 or 60.1%, to
$433,000 for the nine months ended September 30, 1996, compared to
$1,085,000 for the same period in 1995, due to the decrease in income as
a result of the SAIF special assessment.
<PAGE> 24
CHANGE IN ACCOUNTING PRINCIPLES AND OTHER REGULATORY ISSUES
- -----------------------------------------------------------
SFAS No. 122
On May 12, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 122 ("SFAS 122"),
"Accounting for Mortgage Servicing Rights." This statement provides
for capitalization of Mortgage Servicing Rights ("MSRs") when mortgage
loans (whether originated or purchased) are subsequently sold with
the MSRs retained. The statement applies to MSRs resulting from
mortgage loans only, and is effective for fiscal years which began
after December 15, 1995. Management anticipates that this statement
will not have a material impact on the Company's earnings or financial
condition.
SFAS No. 123
In October of 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 123 (SFAS 123)
"Accounting for Stock Based Compensation." SFAS 123 encourages
entities to use a fair value based method to account for stock based
compensation plans. If such a fair value method is not adopted,
entities must disclose the proforma effect on net income and on
earnings per share had the accounting been adopted. The statement
applies to years beginning after December 15, 1995, and management
anticipates that it will not have a material effect on the Company.
SFAS No. 125
In June of 1996, the Financial Accounting Standards Board released
Statement of Financial Accounting Standard No. 125 (SFAS 125)
"Accounting for Transfers and Extinguishments of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishmment of liabilities. SFAS applies
after December 31, 1996 and early or retroactive application is not
permitted. Management anticipates that this statement will not have a
material effect on the Company.
RECENT REGULATORY DEVELOPMENTS
- ------------------------------
On September 30, 1996, President Clinton signed into law the "Economic
Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory
Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of
the "Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA
provides for a one-time special assessment on each depository
institution holding deposits as of March 31, 1995, which are subject to
assessment by the FDIC for the Savings Association Insurance Fund (the
"SAIF") in an amount which, in the aggregate, will increase the
designated reserve ratio of the SAIF (i.e., the ratio of the insurance
reserves of the SAIF to total SAIF-insured deposits) to 1.25% on October
1, 1996. Subject to certain exceptions, the special assessment is
<PAGE> 25
payable in full on November 27, 1996. As a SAIF member, the Bank is
subject to the special assessment.
On October 8, 1996, the FDIC adopted a final regulation implementing the
SAIF special assessment. In that regulation, the FDIC set the special
assessment rate at .657% of SAIF-assessable deposits held on March 31,
1995. The FDIC has notified the Bank that the dollar amount of the
special assessment payable by the Bank is estimated to be $3,070,000.
As a result, the Bank has taken a charge against earnings for the
quarter ended September 30, 1996, in the amount of $3,070,000. As
discussed below, however, the recapitalization of the SAIF resulting
from the special assessment should significantly reduce the Bank's
ongoing deposit insurance expense.
In light of the recapitalization of the SAIF pursuant to the special
assessment authorized by the DIFA, the FDIC, on October 8, 1996, issued
a proposed rule that would reduce regular semi-annual SAIF assessments
from the current range of .23% - .31% of deposits to a range of 0% -
.27% of deposits. Under the proposal, the new rates would be effective
for the Bank on January 1, 1997. From October 1, 1996 through December
31, 1996, SAIF-assessable institutions, such as the Bank would, under
the proposal, be assessed at rates ranging from .18% - .27% of deposits
which represents the amount the FDIC calculates as necessary to cover
the interest due for that period on outstanding obligations of the
Financing Corporation (the "FICO"), discussed below. Because SAIF-
assessable institutions have already been assessed at current rates
(i.e., .23% - .31% of deposits) for the semi-annual period ending
December 31, 1996, the proposal contemplates that the FDIC will refund
the amount collected from such institutions for the period from October
1, 1996 through December 31, 1996 which exceeds the amount due for that
period under the reduced assessment schedule. Assuming the proposal is
adopted as proposed, and assuming the Bank retains its current risk
classification under the FDIC's risk-based assessment system, the
deposit insurance assessments payable by the Bank will be reduced
significantly effective January 1, 1997, to the same level currently
paid by the Bank's BIF-member competitors.
The DIFA also provides for a merger of the BIF and SAIF on January 1,
1999. To facilitate the merger of the BIF and SAIF, the DIFA directs
the Treasury Department to conduct a study on the development of a
common charter and to submit a report, along with appropriate
legislative recommendations, to the Congress by March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a number
of statutory changes designed to eliminate duplicative, redundant or
unnecessary regulatory requirements. Further, the Regulatory Reduction
Act removes the percentage of assets limitations on the aggregate amount
of credit card and education loans that may be made by a savings
association, such as the Bank; increases from 10% to 20% of total assets
the aggregate amount of commercial loans that a savings association may
make, provided that any amount in excess of 10% of total assets
represents small business loans; allows education, small business and
credit card loans to be counted in full in determining a savings
association's compliance with the qualified thrift lender ("QTL")
test; and provides that a savings association may be deemed to meet the
<PAGE> 26
QTL test if is qualifies as a domestic building and loan association
under the Internal Revenue Code. The Regulatory Reduction Act also
clarifies the liability of a financial institution when acting as a
lender or in a fiduciary capacity, under the federal environmental
clean-up laws. Although the full impact of the Regulatory Reduction Act
on the operations of the Company and the Bank cannot be determined at
this time, management believes that the legislation will reduce
compliance costs to some extent and allow the Company and the Bank
somewhat greater operating flexibility.
On August 10, 1996, President Clinton signed into law the Small Business
Job Protection Act of 1996 (the "Job Protection Act"). Among other
things, the Job Protection Act eliminates the percent-of-taxable-income
("PTI") method for computing additions to a savings association's tax
bad debt reserves for tax years beginning after December 31, 1995, and
requires all savings associations that have used the PTI method to
recapture, over a six year period, all or a portion of their tax bad
debt reserves added since the last taxable year beginning before
January 1, 1988. The Job Protection Act allows a savings association
to postpone the recapture of bad debt reserves for up to two years if
the institution meets a minimum level of mortgage lending activity
during those years. The Bank believes that it will engage in sufficient
mortgage lending activity during 1996 and 1997 to be able to postpone
any recapture of its bad debt reserves until 1998. As a result of these
provisions of the Job Protection Act, the Bank will determine additions
to its tax bad debt reserves using the same method as a commercial bank
of comparable size, and, if the Bank were to decide to convert to a
commercial bank charter, the changes in the tax bad debt recapture rules
enacted in the Job Protection Act should make such conversion less
costly.
<PAGE> 27
PART II - OTHER INFORMATION
FIRSTFED BANCSHARES, INC.
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which
the Company or any of its subsidiaries is a party other
than ordinary routine litigation incidental to their
respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27.1 Financial Date Schedule
REPORTS ON FORM 8-K
A report on Form 8-K was filed on August 27, 1996, to
report under Item 5 that the Company completed a stock
repurchase program, announced a new stock repurchase
program, and declared a regular quarterly dividend to the
stockholders of FirstFed Bancshares, Inc. Common Stock.
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FIRSTFED BANCSHARES, INC.
Date: November 14, 1996 By: /s/ Larry G. Gillie
----------------- ---------------------------
Larry G. Gillie
President and
Chief Executive Officer
Date: November 14, 1996 By: /s/ Paul A. Larsen
----------------- ---------------------------
Paul A. Larsen
Senior Vice President,
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements at September 30, 1996
(unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000885694
<NAME> FIRSTFED BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,656
<INT-BEARING-DEPOSITS> 0
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0
0
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<NET-INCOME> 984
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<LOANS-NON> 0
<LOANS-PAST> 815
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