SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24648
FSF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Minnesota 41-1783064
(State or other jurisdiction of incorporation (IRS employer identification no.)
or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicated the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date February 3, 2000.
----------------
Class Outstanding
----- -----------
$.10 par value common stock 2,675,387 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Materially Important Events 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, September 30,
1999 1999*
------------------------------------
(In thousands)
ASSETS
------
Cash and cash equivalents $ 12,107 $ 19,265
Securities available for sale, at fair value:
Equity securities 19,272 19,284
Mortgage-backed and related securities 15,947 15,979
Debt securities 12,723 12,794
Securities held to maturity, at amortized cost:
Debt securities (Fair value of $18,165 and $18,999) 19,374 19,937
Mortgage-backed and related securities (Fair value of $26,557 and $26,338) 27,370 27,587
Loans held for sale 4,410 5,334
Loan receivable, net 288,093 278,290
Foreclosed real estate 125 323
Accrued interest receivable 3,299 3,328
Premises and equipment 5,273 5,314
Other assets 10,449 10,659
------------------------------------
Total Assets $ 418,442 $ 418,094
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand Deposits $ 36,071 $ 32,952
Savings accounts 69,511 65,554
Certificates of deposit 126,965 133,145
------------------------------------
Total Deposits 232,547 231,651
Federal Home Loan Bank borrowings 140,919 140,967
Advances from borrowers for taxes and insurance 373 669
Other liabilities 2,479 2,482
------------------------------------
Total liabilities 376,318 375,769
------------------------------------
Stockholders' equity:
Serial preferred stock, no par value 5,000,000 shares
authorized, no shares issued - -
Common stock, $.10 par value 10,000,000 shares authorized,
4,501,277 and 4,501,277 shares issued 450 450
Additional paid in capital 43,310 43,292
Retained earnings, substantially restricted 27,121 26,627
Treasury stock at cost (1,759,390 and 1,695,390 shares) (25,364) (24,575)
Unearned ESOP shares at cost (154,620 and 162,798 shares) (1,546) (1,628)
Unearned MSP stock grants at cost (42,964 and 49,825 shares) (455) (528)
Accumulated comprehensive income (loss) (1,392) (1,313)
------------------------------------
Total Stockholders' equity 42,124 42,325
------------------------------------
Total Liabilities and Stockholders' Equity $ 418,442 $ 418,094
====================================
- --------------------------------------------------------------------------------
* The consolidated statements of financial condition at September 30, 1999 has
been taken from the audited statements of financial condition of and for that
date
See Notes to Unaudited Consolidated Financial Statements
1
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For Three Months
Ended December 31,
-----------------------------------
1999 1998
-----------------------------------
Interest income:
Loans receivable $ 6,110 $ 5,960
Mortgage-backed and related securities 655 579
Investment securities 769 964
-----------------------------------
Total interest income 7,534 7,503
-----------------------------------
Interest expense:
Deposits 2,460 2,670
Borrowed funds 1,926 2,034
-----------------------------------
Total interest expense 4,386 4,704
-----------------------------------
Net interest income 3,148 2,799
Provision for loan losses 54 114
-----------------------------------
Net interest income after provision for loan losses 3,094 2,685
-----------------------------------
Non-interest income:
Gain on sale of loans - net 346 700
Other service charges and fees 202 133
Service charges on deposit accounts 311 210
Commission income 240 231
Other 97 10
-----------------------------------
Total non-interest income 1,196 1,284
-----------------------------------
Non-interest expense:
Compensation and benefits 1,833 1,631
Occupancy and equipment 298 247
Deposit insurance premiums 34 32
Data processing 163 145
Professional fees 74 75
Other 544 419
-----------------------------------
Total non-interest expense 2,946 2,549
-----------------------------------
Income before provision for income taxes 1,344 1,420
Income tax expense 523 578
-----------------------------------
Net income $ 821 $ 842
===================================
Basic earnings per share $ 0.32 $ 0.32
Diluted earnings per share $ 0.31 $ 0.30
Cash dividend declared per common share $ 0.125 $ 0.125
Comprehensive income $ 742 $ 234
===================================
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended
December 31,
---------------------------------
1999 1998
---------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 821 $ 842
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 139 99
Net amortization of discounts and premiums on
securities held to maturity (18) (11)
Provision for loan losses 54 114
Net market value adjustment on ESOP shares 18 35
Amortization of ESOP and MSP stock compensation 154 155
Amortization of intangibles 27 16
Net gain on sale of assets (36) (11)
Net loan fees deferred and amortized (5) (7)
Loans originated for sale (14,024) (45,518)
Loans sold 14,948 37,744
(Increase) decrease in:
Accrued interest receivable 28 226
Other assets 183 283
Other liabilities 244 421
---------------------------------
Net cash provided by (used in) operating activities 2,533 (5,612)
---------------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net (1,318) 18,355
Purchase of loans (8,533) (4,250)
Principal payments on mortgage-related securities held to maturity 218 4,707
Purchase of securities available for sale - (8,000)
Proceeds from maturities of securities available for sale - 3,000
Proceeds from maturities of securities held to maturity 570 3,000
Investments in foreclosed real estate (6) (39)
Proceeds from sale of REO 240 500
Purchases of equipment and property improvements (99) (184)
Acquisition of Homeowners Mortgage Corporation, net of cash acquired - (1,245)
---------------------------------
Net cash provided by (used in) investing activities $ (8,928) $ 15,844
---------------------------------
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months
Ended
December 31,
---------------------------------
1999 1998
---------------------------------
(In thousands)
Cash flows from financing activities:
Net increase in deposits, $ 896 $ 8,318
FHLB advances 70,500 -
Payments on FHLB advances (70,548) (56)
Net short-term borrowings (200) 2,425
Net decrease in mortgage escrow funds (296) (402)
Treasury stock purchased (790) (139)
Proceeds from exercise of stock options - (332)
Dividends on common stock (325) 63
---------------------------------
Net cash provided by (used in) financing activities (763) 9,877
---------------------------------
Net (decrease) increase in cash and cash equivalents (7,158) 20,109
Cash and cash equivalents:
Beginning of period 19,265 22,597
---------------------------------
End of period $ 12,107 $ 42,706
=================================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 1,928 $ 2,003
Interest on deposits 2,629 2,603
Income taxes 238 329
Supplemental schedule of non-cash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments 8 22
Acquisition of Homeowners Mortgage Corporation non-cash
asset, net of assumed liabilities - 1,037
See Notes to Unaudited Consolidated Financial Statements
4
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
months ended December 31, 1999, include the accounts of FSF Financial
Corp. ("the Corporation") and its wholly owned subsidiaries, Homeowners
Mortgage Corporation ("HMC"), Insurance Planners of Hutchinson, Inc.
("the Agency"), First Federal fsb (the "Bank") and Firstate Services, a
wholly owned subsidiary of the Bank. All significant inter-company
accounts and transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include information or footnotes necessary for a complete
presentation of consolidated financial condition, results of
operations, and cash flows in conformity with generally accepted
accounting principles. However, all adjustments, consisting of normal
recurring accruals, which, in the opinion of management, are necessary
for fair presentation of the consolidated financial statements have
been included. The results of operations for the period ended December
31, 1999, are not necessarily indicative of the results which may be
expected for the entire fiscal year or any other period. For further
information, refer to consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1999.
NOTE 3 - BUSINESS SEGMENTS
The Corporation's reportable business segments are business units that
offer different products and services that are marketed through
different channels. The Corporation has identified its wholly-owned
subsidiaries, the Bank and HMC, as reportable business segments.
Firstate Services, the Agency and FSF Financial Corp. (the Holding
Company) did not meet the quantitative thresholds for determining
reportable segments and therefore are included in the "Other" category.
Bank HMC Consolidated
Stand-alone Stand-alone Other Eliminations Total
-----------------------------------------------------------------------------
As of and for the quarter ended December 31, 1999
From Operations
Interest income from external sources $ 7,507,192 $ 52,999 $ 25,826 $ - $ 7,586,017
Non-interest income from external -
sources 629,808 346,791 219,344 1,195,943
Inter-segment interest income 56,163 - 3,036,450 (3,092,613) -
Interest expense 4,384,327 60,892 - (58,875) 4,386,344
Provision for loan loss 54,000 - - - 54,000
Depreciation and Amortization 156,971 7,078 1,744 - 165,793
Other non-interest expense 2,249,478 530,047 292,262 (126,104) 2,945,683
Net Income $ 897,593 $ (68,012) $ 2,991,877 $ (3,000,000) $ 821,458
=============================================================================
Total Assets $411,494,643 $ 5,804,290 $ 44,377,536 $ (43,234,237) $418,442,232
=============================================================================
As of and for the quarter ended December 31, 1998
From Operations
Interest income from external sources $ 7,439,860 $ 49,367 $ 13,433 $ - $ 7,502,660
Non-interest income from external -
sources 614,626 462,032 206,443 1,283,101
Inter-segment interest income 35,008 - 3,041,312 (3,076,320) -
Provision for loan loss 4,666,183 73,445 - (36,239) 4,703,389
Depreciation and Amortization 114,000 - - - 114,000
Other non-interest expense 98,552 10,770 5,494 - 114,816
Income tax expense (benefit) 1,958,663 337,881 292,091 (40,081) 2,548,554
Net Income $ 786,800 $ 55,235 $ 2,999,774 $ (3,000,000) $ 841,809
=============================================================================
Total Assets $416,953,908 $15,078,369 $ 46,277,926 $ (44,743,116) $433,567,087
=============================================================================
NOTE 4 - EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented. For the
three month period ended December 31, 1999, the weighted average number
of shares outstanding for basic and diluted earnings per share
computation were 2,590,702 and 2,654,967, respectively. For the three
month period ended December 31, 1998, the weighted average number of
shares outstanding were 2,666,112 and 2,797,492, respectively.
5
FSF FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Corporation's total assets at December 31, 1999, and September 30, 1999,
totaled $418.4 million and $418.1 million, respectively. The increase of $0.3
million was primarily a result of a decrease in interest bearing cash
equivalents and an increase in loans receivable.
Cash and cash equivalents decreased from $19.3 million at September 30, 1999, to
$12.1 million at December 31, 1999, or a decrease of $7.2 million. The
Corporation utilizes excess liquidity to fund the purchase of treasury shares
and loan originations. The decrease in liquidity was primarily a result of loan
originations.
Securities available for sale decreased $115,000 between December 31, 1999, and
September 30, 1999, as a result of market value changes.
Securities held to maturity decreased from $47.5 million at September 30, 1999,
to $46.7 million at December 31, 1999. The proceeds were used to help fund the
purchase of treasury shares and pay dividends. This decrease was primarily due
to $570,000 of securities maturing during the period and principal payments from
mortgage-backed and related securities.
Loans held for sale decreased $924,000 to $4.4 million at December 31, 1999,
from $5.3 million at September 30, 1999. As of December 31, 1999, the Bank and
Homeowners had forward commitments to sell all of their loans held for sale in
the secondary market. Payments usually occur within fourteen days of funding.
Loans receivable increased $9.8 million or 3.5% to $288.1 million at December
31, 1999, from $278.3 million at September 30, 1999. Residential mortgage
originations decreased by $13.3 million, and when combined with the sale and
prepayments of residential mortgages, resulted in a decrease in one-to-four
family residential mortgages of $5.6 million. Agricultural and commercial
business loans increased by $1.3 and $2.4 million, respectively. To supplement
originations, the Bank purchased $8.5 million of commercial business loans. The
commercial loans purchased that meet the risk profile established by the Bank,
generally have interest rates that are based on the "Prime" rate as published in
the Wall Street Journal, and provide the Bank with the opportunity to continue
to diversify the composition of its loan portfolio and shorten the length of
maturity of the portfolio.
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months
Ended December 31,
-------------------------------
1999 1998
-------------------------------
Loans Originated: (In Thousands)
Residential mortgages $ 37,926 $51,219
Land and commercial real estate 468 2,313
Agricultural 4,916 4,020
Commercial business 4,111 1,431
Consumer 8,559 6,667
-------------------------------
Total Loans Originated 55,980 65,650
-------------------------------
Loans Purchased:
Construction - 3,400
Commercial Business 8,533 849
-------------------------------
Total loans purchased 8,533 4,249
-------------------------------
Total New Loans $ 64,513 $ 69,899
===============================
6
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
December 31, September 30,
1999 1999
--------------------------------------------------------------------
Amount % Amount %
--------------------------------------------------------------------
Residential real estate: (Dollars in Thousands)
One-to-four family (1) $ 115,250 36.0 $ 120,884 38.8
Residential construction 49,289 15.4 42,937 13.8
Multi-family 4,106 1.3 5,635 1.8
--------------------------------------------------------------------
168,645 52.7 169,456 54.4
Agricultural loans 34,716 10.9 33,384 10.7
Land and commercial real estate 39,250 12.3 36,429 11.7
Commercial business 32,119 10.0 32,119 9.6
--------------------------------------------------------------------
274,730 85.9 269,036 86.3
Consumer:
Home equity and second mortgages 24,279 7.6 24,312 7.8
Automobile loans 7,515 2.4 7,428 2.4
Other 13,246 4.1 10,898 3.5
--------------------------------------------------------------------
Total loans 319,770 100.0 311,674 100.0
=========== ===========
Less:
Loans in process (25,339) (26,156)
Deferred fees (502) (507)
Allowance for loan losses (1,426) (1,387)
------------------- ---------------------
Total loans, net $ 292,503 $ 283,624
=================== =====================
- -----------------------------------------------------
1. Includes loans held for sale in the amount of $4.4 million and $5.3 million
as of December 30, 1999 and September 30, 1999, respectively.
Real estate owned at December 31, 1999, totaled $125,000, which consisted of two
single family residential properties. No loss is expected in the disposition of
these properties.
Deposits after interest credited increased from $231.7 million at September 30,
1999, to $232.5 million at December 31, 1999, an increase of $896,000 or 0.4%.
Overall cost of funds on deposits during the period decreased 31 basis points as
the Bank attempted to maintain deposit rates consistent with marketplace
competitors.
Federal Home Loan Bank ("FHLB") borrowing decreased $48,000 from $141.0 million
at September 30, 1999, to $140.9 million at December 31, 1999, due to principal
amortization.
The Corporation completed the repurchase of 64,000 shares of common stock to
increase the number of treasury shares to 1,759,390 at December 31, 1999.
Treasury shares are to be used for general corporate purposes, including the
issuance of shares in connection with the exercise of stock options. Total
stockholders' equity decreased $201,000 since September 30, 1999. Book value per
share increased from $16.32 at September 30, 1999, to $16.56 at December 31,
1999.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when, in the opinion of management, the collection of additional interest is
doubtful. Loans are placed on a non-accrual status when either principal or
interest is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
7
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated:
December 31, September 30,
--------------------------------
1999 1999
--------------------------------
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ - $ -
Permanent loans secured by one-to-four-family units 463 205
Permanent loans secured by non-residential real estate - -
Other - -
Non-mortgage loans:
Commercial and agricultural - -
Consumer 4 22
------------------------------
Total non-accrual loans 467 227
Foreclosed real estate 125 323
------------------------------
Total non-performing assets $ 592 $ 550
==============================
Total non-performing loans to net loans 0.16% 0.08%
==============================
Total non-performing loans to total assets 0.11% 0.05%
==============================
Total non-performing assets to total assets 0.14% 0.13%
==============================
During the three months ended December 31, 1999, and 1998, approximately $24,661
and $28,299 respectively, would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current according to the original loan
agreements for the entire period. These amounts were not included in the Bank's
interest income for the respective periods. No interest income on loans
accounted for on a non-accrual basis was included in income during any of these
periods. During the periods indicated, the Bank held no foreign loans.
8
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
The following table sets forth information with respect to the Corporation's
average balance sheet, interest and dividends earned or paid, and related yields
and rates (dollars in thousands):
Three Months Ended December 31,
----------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
----------------------------------------------------------------------------------
Loans receivable (2) $ 288,856 $ 6,110 8.46 % $ 279,399 $ 5,960 8.53 %
Mortgage-backed securities 43,459 655 6.03 51,423 579 4.50
Investment securities (3) 58,402 769 5.27 79,585 964 4.85
--------------------------- ---------------------------
Total interest-earning assets 390,717 7,534 7.71 410,407 7,503 7.31
------------- --------------
Other assets 22,760 13,437
-------------- -------------
Total assets $ 413,477 $ 423,844
============== =============
Liabilities:
Interest-bearing deposits $ 229,578 $ 2,460 4.29 % $ 232,229 $ 2,670 4.60 %
Borrowings 137,308 1,926 5.61 144,157 2,034 5.64
--------------------------- ---------------------------
Total interest-bearing
liabilities 366,886 4,386 4.78 % 376,386 4,704 5.00 %
------------- --------------
Other liabilities 4,367 3,638
-------------- -------------
Total liabilities 371,253 380,024
Stockholders' equity 42,224 43,820
-------------- -------------
Total liabilities and stockholders'
equity $ 413,477 $ 423,844
============== =============
Net interest income $ 3,148 $ 2,799
Net Spread (4) 2.93 % 2.31 %
Net Margin (5) 3.22 % 2.73 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.06X 1.09X
(1) Annualized
(2) Average balances include non-accrual loans and loans held for sale.
(3) Includes interest-bearing deposits in other financial institutions.
(4) Net spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net margin represents net interest income as a percentage of average
interest-earning assets.
9
Net Income
The Corporation recorded net income of $821,000 for the three months ended
December 31, 1999, as compared to net income of $842,000 for the three month
period ended December 31, 1998. This decrease in net income was $21,000 or 2.5%.
Total Interest Income
Total interest income increased by $31,000 or 0.4% to $7.5 million for the three
months ended December 31, 1999. The average yield on loans decreased to 8.46%
for the quarter ended December 31, 1999, from 8.53% for the quarter ended
December 31, 1998. During this same period, the average yield on mortgage-backed
securities increased 153 basis points (100 basis points equals 1%). The average
balance of investment securities decreased to $58.4 million for the quarter
ended December 31, 1999, from $79.6 million for the quarter ended December 31,
1998. This decrease was a result of securities that matured, securities that
were called and a reduction in the Bank's liquidity. The average yield increased
from 4.85% for the three months ended December 31, 1998, to 5.27% for the same
period in 1999, as excess funds or short-term investments, which provided lower
yields, were deployed into other higher earning assets.
Total Interest Expense
Total interest expense decreased to $4.4 million for the three months ended
December 31, 1999, from $4.7 million for the same period in 1998. The average
balance of interest-bearing deposits decreased from $232.2 million for the three
months ended December 31, 1998, to $229.6 million for the three months ended
December 31, 1999. This decrease was comprised of a reduction in certificates of
deposit. The average cost of deposits decreased 31 basis points from 4.60% for
the three month period ended December 31, 1998, to 4.29% for the same period in
1999, due to the mix of non-certificate account balances increasing more than
certificate accounts. No assurance can be made that deposits can be maintained
in the future without further increasing the cost of funds if interest rates
increase. The average balance of borrowings decreased $6.9 million to $137.3
million for the three months ended December 31, 1999, from $144.2 million for
the three months ended December 31, 1998. The cost of such borrowings decreased
by 3 basis points to 5.61% for the three months ended December 31, 1999, from
5.64% for the same period in 1998. Borrowings decreased as the Bank utilized the
loans and mortgage-backed securities repayments and investments to meet
liquidity needs.
Net Interest Income
Net interest income increased from $2.8 million for the three months ended
December 31, 1998, to $3.1 million for the same period ended December 31, 1999.
Average interest-earning assets decreased $19.7 million, from $410.4 million for
the three months ended December 31, 1998, to $390.7 million for the three months
ended December 31, 1999, while the average yield on interest-earning assets
increased from 7.31% for 1998 to 7.71% for 1999. Average interest-bearing
liabilities decreased by $9.5 million to $366.9 million for the three months
ended December 31, 1999, from $376.4 million for the three months ended December
31, 1998, and the cost of interest-bearing liabilities decreased from 5.00% in
1998 to 4.78% in 1999.
Provision for Loan Losses
The Bank's provision for loan losses was $54,000 for the three months ended
December 31, 1999, compared to $114,000 for the same period in 1998. During
fiscal 1998, the composition of the Bank's loan portfolio changed substantially.
In general, agricultural loans, land and commercial real estate loans and
commercial business loans are considered to contain a higher risk profile than
single family residential mortgages. In order to account for the higher risk
profile associated with the changes, additional provisions were utilized to help
maintain reserves at adequate levels. The provision was reduced in fiscal 1999.
The Bank's allowance for loan losses was $1.4 million and $1.1 million at
December 31, 1999, and December 31, 1998, respectively. At December 31, 1999,
the Bank's allowance for loan losses constituted 240.9% of non-performing assets
as compared to 117.9% of non-performing assets at December 31, 1998. The
allowance for losses on loans is maintained at a level which is considered by
management to be adequate to absorb probable loan losses on existing loans that
may become uncollectible, based on an evaluation of the collectibility of loans,
prior loan loss experience and market conditions. The evaluation takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrower's ability to pay. The
allowance for loan losses is established through a provision for loan losses
charged to expense. While the Bank maintains its allowance for losses at a level
which it considers to be adequate, there can be no assurances that further
additions will not be made to the loss allowances or that such losses will not
exceed the estimated amounts.
10
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Three Months
At December 31,
----------------------------------
1999 1998
----------------------------------
(In Thousands)
Total loans outstanding (1) $ 292,503 $ 269,901
==================================
Average loans outstanding $ 288,856 $ 279,399
==================================
Allowance balance (beginning of period) $ 1,387 $ 1,035
----------------------------------
Provision (credit):
Residential (2) - -
Land and commercial real estate 20 -
Commercial/Agricultural business 34 114
Consumer - -
----------------------------------
Total provision 54 114
Charge-off:
Residential - -
Land and commercial real estate - -
Consumer 24 26
----------------------------------
Total charge-offs 24 26
Recoveries:
Residential - -
Land and commercial real estate - -
Consumer 9 5
----------------------------------
Total recoveries 9 5
----------------------------------
Net charge-offs 15 21
----------------------------------
Allowance balance (end of period) $ 1,426 $ 1,128
==================================
Allowance as percent of total loans 0.49% 0.42%
Net loans charged off as a percent of
average loans 0.00% 0.01%
- -----------------------------------------------------------------
(1) Includes total loans (including loans held for sale), net of loans in
process
(2) Includes one-to-four family and multi-family residential real estate loans
Non-interest Income
Total non-interest income decreased $88,000 during the three month period ended
December 31, 1999, to $1.2 million as compared to the same period in 1998. Gains
on loans sold decreased from $700,000 at December 31, 1998, to $146,000 at
December 31, 1999. The decrease was primarily due to rising interest rates which
slowed down the purchase and refinance markets. Continued increases in interest
rates could affect the ability to generate new loan originations. Commission
income increased from $231,000 for the quarter ended December 31, 1998, to
$240,000 for the quarter ended December 31, 1999, due to the acquisition of HMC
in November, 1998. Other service charges and fees increased from $133,000 for
the three months ended December 31, 1998, to $202,000 for the three months ended
December 31, 1999, primarily due to an increase in underwriting fees as a result
of the acquisition of HMC.
Non-interest Expense
Total non-interest expense increased $397,000 or 15.6% over the periods
compared. HMC was acquired on November 17, 1998, and as a result, the
consolidated statements of income reflect three full months of income expense
for HMC in fiscal 1999 but only one and a half months of income expense for
fiscal 1998. Compensation and benefits increased from $1.6 million to $1.8
million or 12.4%, due to the acquisition of HMC. Occupancy and equipment expense
increased by $51,000 due primarily to the HMC acquisition also. Data processing
expense increased $2,000 to $34,000 for the period ended December 31, 1999, due
to processing expenses associated with the increased delivery of electronic
services to customers, and to a lesser extent, a result of costs associated with
the Corporation's Year 2000 readiness program. Professional fees decreased from
$75,000 for the first quarter of fiscal 1998 to $74,000 for the first quarter of
fiscal 1999. Other expenses increased from $125,000 for the quarter ended
December 31, 1998, to $544,000 for the quarter ended December 31, 1999, and was
comprised of increased expenses as a result of the acquisition of HMC and the
goodwill amortization associated with it.
Income Tax Expense
Income taxes decreased by $55,000 or 9.5%, to $523,000 for the three month
period ended December 31, 1999, from $578,000 for the same period in 1998,
primarily due to the decrease of $76,000 in income before tax.
11
YEAR 2000
Like many financial institutions, we rely on computers to conduct our business
and information systems processing. Industry experts were concerned that on
January 1, 2000, some computers might not be able to interpret the new year
properly, causing computer malfunctions. Some banking industry experts remain
concerned that some computers may not be able to interpret additional dates in
the Year 2000 properly. We have operated and evaluated our computer operating
systems following January 1, 2000, and have not identified any errors or
experienced any computer system malfunctions. We will continue to monitor our
information systems to assess whether our systems are at risk of misinterpreting
any future dates and will develop appropriate contingency plans to prevent any
potential system malfunction or correct any system failures.
The Corporation has not been informed of any such problem experienced by its
vendors or its customers, nor by any of the municipal agencies that provide
services to the Corporation.
Nevertheless, it is too soon to conclude that there will not be any problems
arising from the Year 2000 problem, particularly at some of the Corporation's
vendors. The Corporation will continue to monitor its significant vendors of
goods and services with respect to Year 2000 problems they may encounter as
those issues may affect the Corporation's ability to continue operations, or
might adversely affect the Corporation's financial position, results of
operations and cash flows. The Corporation does not believe at this time that
these potential problems will materially impact the ability of the Corporation
to continue its operations, however, no assurance can be given that this will be
the case.
The expectations of the Corporation contained in this section on Year 2000 are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by the
forward looking statements. All forward looking statements in this section are
based on information available to the Corporation on the date of this document,
and the Corporation assumes no obligation to update such forward looking
statements.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources for funds are deposits, borrowings, principal
and interest payments on loans, investments and mortgage-backed securities,
sales of mortgage loans and funds provided by operations. While scheduled
payments on loans, mortgage-backed securities and short-term investments are
relatively predictable sources of funds, deposit flows and early loan repayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments", which include certain United States government
obligations and other approved investments. Federal regulations reduced the
requirement for Banks to maintain liquid assets from 5% to not less than 4% of
its net withdrawable accounts plus short term borrowing, and eliminated the
requirement to maintain not less than 1% of short term liquid assets of such
accounts and borrowings. The Bank's regulatory liquidity was 7.3% and 11.7% at
December 31, 1999 and 1998, respectively. The options from the previous method
were used in the current period, which are more restrictive.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending December 31, 2000, is approximately $91.9 million. To the
extent that these deposits do not remain at the Bank upon maturity, the Bank
believes that it can replace these funds with new deposits, excess liquidity and
FHLB advances or outside borrowings. It has been the Bank's experience that
substantial portions of such maturing deposits remain at the Bank.
At December 31, 1999, the Bank and Homeowners had loan commitments outstanding
of $487,000. Funds required to fill these commitments are derived primarily from
current excess liquidity, loan sales, advances, deposit inflows or loan and
security repayments.
12
Regulations require the Bank to maintain minimum amounts and ratios of tangible
capital and leverage capital to average assets and risk-based capital to
risk-weighted assets. The following table sets forth the Bank's actual capital,
required capital amounts and ratios at December 31, 1999, which, at that date,
exceeded the capital adequacy requirements.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ----------------------
GAAP capital, December 31, 1999 $ 34,430
Add: Unrealized losses on debt
securities held for sale 779
------------
Tangible equity capital and ratio to
adjusted total assets $ 35,209 8.6% $ 6,178 1.5% $ 8,237 2.0%
--------------------- --------------------- ----------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $ 35,209 8.6% $ 16,475 4.0% $ 20,594 5.0%
--------------------- --------------------- ----------------------
Total risk-based capital and ratio to
risk-weighted assets $ 35,209 12.9% $ 10,898 4.0% $ 16,347 6.0%
--------- --------------------- ----------------------
Tier 2 risk-based capital, Net adjustments 550
------------
Total risk-based capital and ratio to
risk-weighted assets, December 31, 1999 $ 35,759 13.1% $ 21,796 8.0% $ 27,245 10.0%
===================== ===================== ======================
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or a downturn in the
economy in areas in which the Bank operates, could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
There were no significant changes for the three months ended December 31, 1999,
from the information presented in the annual report on Form 10-K for the year
ended September 30, 1999, concerning quantitative disclosures about market risk.
IMPACT OF INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements of the Corporation and notes
thereto, presented elsewhere herein, have been prepared in accordance with
Generally Accepted Accounting Principles (GAAP), which requires the measurement
of financial position and operating results in terms of historical dollars
without considering the change in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Corporation's operations. Unlike most industrial companies, nearly
all the assets and liabilities of the Corporation are financial. As a result,
interest rates have a greater impact on the Corporation's performance than do
the general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information regarding market risk
disclosed under the heading "Asset and Liability Management" in the
Corporation's Annual Report for the year ended September 30, 1999.
Further, the Bank paid a dividend to the Corporation in the amount of $3.0
million in December 1999, which reduced its capital and its net portfolio value
("NPV") by approximately 7.7%.
13
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries were
engaged in any legal proceeding of a material nature at
December 31, 1999. From time to time, the Corporation is a
party to legal proceedings in the ordinary course of business
wherein it enforces its security interest in loans.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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. 1996 Stock Option Plan **
10.4 FSF Financial Corp. 1998 Stock Compensation Plan ***
13.0 1999 Annual Report to Stockholders
21.0 Subsidiary Information
23.0 Consent of Accountant
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.
** Incorporated herein by reference into this document from the Registrant's
proxy statement for the Annual Meeting of Stockholders held on January
17, 1996, and filed with the Commission on December 13, 1995.
*** Incorporated herein by reference into this document from the Registrant's
proxy statement for the Annual Meeting of Stockholders held on January
20, 1998, and filed with the Commission on December 10, 1997.
**** Included with electronic filing only
(b) Reports of Form 8-K
On September 27, 1999, the Corporation filed a current report on
Form 8-K regarding the adoption of a stock repurchase plan.
14
FSF FINANCIAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FSF FINANCIAL CORP.
Date: February 4, 2000 By: /s/ Donald A. Glas
- ----------------------- ------------------
Donald A. Glas
Chief Executive Officer
Date: February 4, 2000 By: /s/ Richard H. Burgart
- ----------------------- ----------------------
Richard H. Burgart
Chief Financial Officer
15