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 March 31, 2000
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 (IRS employer identification no.)
incorporation or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicated the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date May 11, 2000.
------------
Class Outstanding
----- -----------
$.10 par value common stock 2,495,455 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Materially Important Events 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, September 30,
2000 1999 *
-------------------------------
(in thousands)
ASSETS
------
Cash and cash equivalents $ 9,636 $ 19,265
Securities available for sale, at fair value:
Equity securities 19,246 19,284
Mortgage-backed and related securities 16,039 15,979
Debt securities 12,556 12,794
Securities held to maturity, at amortized cost:
Debt securities (fair value of $18,104 and $18,999) 19,380 19,937
Mortgage-backed and related securities (fair value of $26,016 and $26,338) 27,227 27,587
Loans held for sale 4,112 5,334
Loans receivable, net 302,001 278,290
Foreclosed real estate 184 323
Accrued interest receivable 3,334 3,328
Premises and equipment 5,375 5,314
Other assets 10,650 10,659
-------------------------------
Total assets $ 429,740 $ 418,094
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 36,758 $ 32,952
Savings accounts 75,113 65,554
Certificates of deposit 133,171 133,145
------------------------------
Total deposits 245,042 231,651
Federal Home Loan Bank borrowings 140,872 140,967
Advances from borrowers for taxes and insurance 705 669
Other liabilities 2,806 2,482
------------------------------
Total liabilities 389,425 375,769
------------------------------
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 43,351 43,292
Retained earnings, substantially restricted 27,670 26,627
Treasury stock at cost (1,956,322 and 1,695,390 shares) (27,785) (24,575)
Unearned ESOP shares at cost (145,354 and 162,798 shares) (1,454) (1,628)
Unearned MSP stock grants at cost (42,964 and 49,825 shares) (455) (528)
Accumulated comprehensive income (loss) (1,462) (1,313)
------------------------------
Total stockholders' equity 40,315 42,325
------------------------------
Total liabilities and stockholders' equity $ 429,740 $ 418,094
==============================
- ----------------------------------------------------
* The consolidated statements of financial condition at September 30,
1999 have 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 For Six Months
Ended March 31, Ended March 31,
-----------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------
(in thousands, except per share data)
Interest income:
Loans receivable $ 6,322 $ 5,533 $12,432 $11,493
Mortgage-backed and related securities 690 551 1,345 1,130
Investment securities 785 1,158 1,554 2,122
------------------------- -------------------------
Total interest income 7,797 7,242 15,331 14,745
Interest expense:
Deposits 2,533 2,538 4,993 5,208
Borrowed funds 2,093 1,984 4,019 4,018
------------------------- -------------------------
Total interest expense 4,626 4,522 9,012 9,226
------------------------- -------------------------
Net interest income 3,171 2,720 6,319 5,519
Provision for loan losses 54 114 108 228
------------------------- -------------------------
Net interest income after provision for loan losses 3,117 2,606 6,211 5,291
Non-interest income:
Gain on sale of loans, net 246 573 592 1,273
Other service charges and fees 235 250 437 383
Service charges on deposit accounts 297 218 608 428
Commission income 294 215 534 446
Other 184 17 281 27
------------------------- -------------------------
Total non-interest income 1,256 1,273 2,452 2,557
------------------------- -------------------------
Non-interest expense:
Compensation and benefits 1,745 1,622 3,578 3,253
Occupancy and equipment 374 300 672 547
Deposit insurance premiums 12 34 46 66
Data processing 168 119 331 264
Professional fees 93 80 167 155
Other 576 540 1,119 959
------------------------- -------------------------
Total non-interest expense 2,968 2,695 5,913 5,244
------------------------- -------------------------
Income before provision for income taxes 1,405 1,184 2,750 2,604
Income tax expense 549 491 1,072 1,069
------------------------- -------------------------
Net income $ 856 $ 693 $ 1,678 $ 1,535
========================= =========================
Basic earnings per share $ 0.35 $ 0.26 $ 0.67 $ 0.57
Diluted earnings per share $ 0.35 $ 0.25 $ 0.65 $ 0.55
Cash dividend declared per common share $ 0.125 $ 0.125 $ 0.25 $ 0.25
Comprehensive income $ 786 $ 797 $ 1,528 $ 1,031
========================= =========================
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Six Months
Ended Ended
March 31, March 31,
----------------------- -----------------------
----------------------- -----------------------
2000 1999 2000 1999
----------------------- -----------------------
(in thousands)
Cash flows from operating activities:
Net income $ 856 $ 693 $ 1,678 $ 1,535
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 145 106 284 205
Net amortization of discounts and premiums on
securities held to maturity (7) (8) (25) (19)
Provision for loan losses 54 114 108 228
Net market value adjustment on ESOP shares 17 31 35 66
Amortization of ESOP and MSP stock compensation 111 157 265 312
Amortization of intangibles 30 30 56 46
Net gain on sale of assets (86) - (122) (11)
Net loan fees deferred and amortized (19) (99) (24) (106)
Loans originated for sale (14,477) (40,028) (28,501) (85,546)
Loans sold 14,775 48,302 29,723 86,046
(Increase) decrease in:
Accrued interest receivable (34) (93) (6) 133
Other assets (305) (158) (122) 125
Increase (decrease) in other liabilities 430 (2,387) 674 (1,966)
----------------------- -----------------------
Net cash provided by operating activities 1,490 6,660 4,023 1,048
----------------------- -----------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net (11,529) 9,798 (12,847) 28,153
Purchase of loans (3,029) (5,000) (11,562) (9,250)
Sale of loan participations 362 - 362 -
Principal payments on mortgage-related securities held to maturity 338 2,206 556 6,913
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 sales of fixed assets 157 - 157 -
Proceeds from sale of REO - - 240 500
Purchases of equipment and property improvements (317) (508) (416) (692)
Acquisition of HMC, net of cash acquired - - - (1,245)
----------------------- -----------------------
Net cash provided by (used in) investing activities $(14,018) $ 6,496 $(22,946) $ 22,340
----------------------- -----------------------
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Six Months
Ended Ended
March 31, March 31,
----------------------- ------------------------
2000 1999 2000 1999
----------------------- ------------------------
(in thousands)
Cash flows from financing activities:
Net increase in deposits $ 12,494 $ 1,305 $ 13,390 $ 9,623
FHLB advances 16,500 - 87,000 -
Payments on FHLB advances (16,546) (53) (87,094) (109)
Net short term borrowings - (2,900) (200) (475)
Net decrease in mortgage escrow funds 332 330 36 (72)
Treasury stock purchased (2,438) (514) (3,228) (653)
Proceeds from exercise of stock options 23 246 23 309
Dividends on common stock (308) (342) (633) (674)
----------------------- ------------------------
Net cash provided by (used in) financing activities 10,057 (1,928) 9,294 7,949
----------------------- ------------------------
Net (decrease) increase in cash and cash equivalents (2,472) 11,228 (9,629) 31,337
Cash and cash equivalents
Beginning of period 12,108 42,706 19,265 22,597
----------------------- ------------------------
End of period $ 9,636 $ 53,934 $ 9,636 $ 53,934
======================= ========================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on advances and other borrowed money $ 2,041 $ 2,011 $ 3,969 $ 4,014
Interest on deposits 2,550 2,361 5,179 4,964
Income taxes 481 324 719 653
Supplemental schedule of non-cash investing and
financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments 14 34 22 56
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
MARCH 31, 2000
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
months ended March 31, 2000, 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 March 31,
2000, 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 the consolidated financial statements and
footnotes thereto included in the Company's Annual Report of 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 which are marketed through
various 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 three months ended March 31, 2000
From operations:
Interest income from external sources $ 7,727 $ 34 $ 36 $ - $ 7,797
Non-interest income from external sources 683 288 285 - 1,256
Inter-segment interest income 28 - 37 (65) -
Interest expense 4,628 29 - (31) 4,626
Provisions for loan losses 54 - - - 54
Depreciation and amortization 76 53 20 - 149
Other non-interest expense 2,222 583 303 (140) 2,968
Income tax expense (benefit) 596 (64) 17 549
Net income $ 949 $ (119) $ 26 $ - $ 856
=============================================================
As of and for the three months ended March 31, 1999
From operations:
Interest income from external sources $ 7,076 $ 72 $ 94 $ - $ 7,242
Non-interest income from external sources 461 606 206 - 1,273
Inter-segment interest income 62 - 41 (103) -
Interest expense 4,478 107 - (63) 4,522
Provisions for loan losses 114 - - - 114
Depreciation and amortization 86 29 2 - 117
Other non-interest expense 2,051 389 295 (40) 2,695
Income tax expense (benefit) 402 83 6 - 491
Net income $ 592 $ 99 $ 2 $ - $ 693
=============================================================
5
Bank HMC Consolidated
Stand-alone Stand-alone Other Eliminations Total
--------------------------------------------------------------
As of and for the six months ended March 31, 2000
From operations:
Interest income from external sources $ 15,182 $ 87 $ 62 $ - $ 15,331
Non-interest income from external sources 1,313 635 504 - 2,452
Inter-segment interest income 84 - 3,074 (3,158) -
Interest expense 9,012 90 - (90) 9,012
Provisions for loan losses 108 - - - 108
Depreciation and amortization 233 60 22 - 315
Other non-interest expense 4,472 1,112 595 (266) 5,913
Income tax expense (benefit) 1,140 (94) 26 1,072
Net income $ 1,847 $ (187) $ 3,018 $ (3,000) $ 1,678
===========================================================
Total Assets $ 425,412 $ 5,416 $41,673 $(42,761) $ 429,740
===========================================================
As of and for the six months ended March 31, 1999
From operations:
Interest income from external sources $ 14,516 $ 121 $ 108 $ - $ 14,745
Non-interest income from external sources 1,076 1,068 413 - 2,557
Inter-segment interest income 96 - 3,083 (3,179) -
Interest expense 9,145 180 - (99) 9,226
Provisions for loan losses 228 - - - 228
Depreciation and amortization 185 39 8 - 232
Other non-interest expense 4,010 727 587 (80) 5,244
Income tax expense (benefit) 926 128 15 - 1,069
Net income $ 1,379 $ 154 $ 3,002 $ (3,000) $ 1,535
===========================================================
Total Assets $ 419,323 $ 9,602 $45,838 $(44,438) $ 430,325
===========================================================
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 March 31, 1999 and 2000, the weighted average
number of shares outstanding for basic and diluted earnings per share
computations were 2,720,173 and 2,429,235, respectively. For the six
month period ended March 31, 1999 and 2000, the weighted average number
of shares outstanding were 2,660,112 and 2,509,968, respectively. The
difference between the basic and diluted earnings per share denominator
is the effect of stock based compensation plans.
NOTE 5 - SELECTED QUARTERLY FINANCIAL DATA
For the Quarter Ended
-------------------------------------------------------------
December 31, March 31, December 31, March 31,
1999 2000 1998 1999
-------------------------------------------------------------
Interest income $ 7,534 $ 7,797 $ 7,364 $ 7,242
Interest expense 4,386 4,626 4,548 4,522
-------------------------------------------------------------
Net interest income 3,148 3,171 2,816 2,720
Provision for loan losses 54 54 45 114
Gain on sale of assets 346 246 15 573
Net income $ 821 $ 856 $ 746 $ 693
Basic earnings per share 0.32 0.35 0.28 0.26
Diluted earnings per share 0.31 0.35 0.26 0.25
Cash dividends declared per share $ 0.125 $ 0.125 $ 0.125 $ 0.125
Market range:
High bid (1) $ 12.50 $ 12.38 $ 20.94 $ 15.50
Low bid (1) $ 11.81 $ 10.50 $ 19.00 $ 13.56
- ------------------------------
(1) As reported by the Nasdaq Stock Market. Such over-the-counter
quotations do not reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
6
FSF FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Corporation's total assets at March 31, 2000 and September 30, 1999, totaled
$429.7 million and $418.1 million. This increase of $11.6 million was primarily
a result of a decrease in interest-bearing cash equivalents coupled with an
increase in loans receivable.
Cash and cash equivalents decreased $9.7 million from $19.3 million at September
30, 1999, to $9.6 million at March 31, 2000. The Corporation utilized excess
liquidity to fund the purchase of treasury shares and loan originations;
however, the decrease was mainly a result of new loan originations.
Securities available for sale decreased $216,000 between March 31, 2000 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 $46.6 million at March 31, 2000. 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 $1.2 million to $4.1 million at March 31, 2000,
from $5.3 million at September 30, 1999. As of March 31, 2000, the Bank and HMC
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 $23.7 million or 8.5% to $302.0 million at March 31,
2000, from $278.3 million at September 30, 1999. Total residential real estate
loan originations decreased by $24.5 million, and when combined with the sale
and prepayments of residential mortgages, resulted in a decrease in one-to-four
family residential mortgages of $9.4 million. Agricultural and commercial
business loans increased by $6.6 million and $2.0 million, respectively. To
supplement originations, the Bank purchased $11.6 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 and shorten the length of maturity
of the loan portfolio.
The following table sets forth information on loans originated and
purchased for the periods indicated:
Three Months Six Months
Ended March 31, Ended March 31,
--------------------------------- ---------------------------------
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------------------------- ---------------------------------
(in thousands)
Loans originated:
1-4 family residential mortgages $ 13,144 $ 36,463 $ 29,283 $ 79,665
1-4 family construction loans 14,484 2,419 36,271 10,436
Land 52 62 520 2,375
Agriculture 22,814 11,489 27,730 15,509
Commercial business & real estate 5,366 5,237 9,477 6,668
Consumer 11,680 5,316 20,239 11,983
-------------------------------- ---------------------------------
Total loans originated 67,540 60,986 123,520 126,636
-------------------------------- ---------------------------------
Loans purchased:
Construction - - - 3,400
Commercial business 3,029 5,000 11,562 5,850
-------------------------------- ---------------------------------
Total loans purchased 3,029 5,000 11,562 9,250
-------------------------------- ---------------------------------
Total new loans $ 70,569 $ 65,986 $ 135,082 $ 135,886
================================ =================================
Total loans sold $ 14,775 $ 48,302 $ 29,723 $ 86,046
================================ =================================
7
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
March 31, September 30,
2000 1999
-----------------------------------------------------------
Amount % Amount %
-----------------------------------------------------------
(dollars in thousands)
Residential real estate:
One-to-four family (1) $ 111,504 33.5 $ 120,884 38.8
Residential construction 52,340 15.7 42,937 13.8
Multi-family 4,490 1.3 5,635 1.8
-----------------------------------------------------------
168,334 50.5 169,456 54.4
Agricultural loans 40,005 12.0 33,384 10.7
Land and commercial real estate 46,309 13.9 41,295 13.2
Commercial business 26,873 8.1 24,901 8.0
-----------------------------------------------------------
281,521 84.5 269,036 86.3
Consumer loans:
Home equity and second mortgages 25,456 7.6 24,312 7.8
Automobile loans 10,437 3.1 7,428 2.4
Other 15,780 4.7 10,898 3.5
-----------------------------------------------------------
Total loans 333,194 100.0 311,674 100.0
======== =========
Less:
Loans in process (25,133) (26,156)
Deferred fees (477) (507)
Allowance for loan losses (1,471) (1,387)
-------------- --------------
Total loans, net $ 306,113 $ 283,624
============== ==============
- ---------------------------
1. Includes loans held for sale in the amount of $4.1 million and
$5.3 million as of March 31, 2000 and September 30, 1999, respectively.
Real estate owned at March 31, 2000, totaled $184,000, which consisted of three
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 $245.0 million at March 31, 2000, an increase of $13.3 million or
5.7%. Overall cost of funds on deposits during the period decreased 2 basis
points as the Bank attempted to maintain deposit rates consistent with
marketplace competitors.
Federal Home Loan Bank ("FHLB") borrowing decreased $95,000 from $141.0
million at September 30, 1999, to $140.9 million at March 31, 2000, due to
principal amortization.
The Corporation completed the repurchase of 262,132 shares of common stock which
increased the number of treasury shares to 1,956,322 at March 31, 2000. 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 has decreased $2.0 million since September 30, 1999, mainly due to the
stock repurchases. Book value per share increased from $16.32 at September 30,
1999, to $17.11 at March 31, 2000.
Loans are reviewed on a regular basis and are placed on non-accrual status when,
in the opinion of management, the collection of additional interest is doubtful.
Loans are generally placed on 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.
8
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated:
March 31, September 30,
2000 1999
----------------------------------
(in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 413 $ -
Permanent loans secured by one-to-four family units 20 205
Permanent loans secured by non-residential real estate - -
Other - -
Non-mortgage loans:
Commercial and agricultural - -
Consumer 75 22
----------------------------------
Total non-accrual loans 508 227
Foreclosed real estate 183 323
----------------------------------
Total non-performing assets $ 691 $ 550
==================================
Total non-performing loans to net loans 0.17% 0.08%
==================================
Total non-performing loans to total assets 0.12% 0.05%
==================================
Total non-performing assets to total assets 0.16% 0.13%
==================================
During the six months ended March 31, 2000 and 1999, approximately $31,404 and
$24,000 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 and
no interest income on loans accounted for on a non-accrual basis was included in
income during any of these periods either. During the periods indicated, the
Bank held no foreign loans.
9
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
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 March 31,
-----------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
-----------------------------------------------------------------------------
Assets:
Loans receivable (2) $ 295,670 $ 6,322 8.55 % $ 262,539 $ 5,533 8.43 %
Mortgage-backed securities 43,253 690 6.38 46,486 551 4.74
Investment securities (3) 57,721 785 5.44 97,323 1,158 4.76
--------------------- -----------------------
Total interest earning assets 396,644 7,797 7.86 406,348 7,242 7.13
---------------------- ---------------------
Other assets 22,378 18,352
----------- -------------
Total assets $ 419,022 $ 424,700
=========== =============
Liabilities:
Interest bearing deposits $ 232,945 $ 2,533 4.35 % $ 232,571 $ 2,538 4.37 %
Borrowings 140,903 2,093 5.94 146,544 1,984 5.42
--------------------- -----------------------
Total interest bearing liabilities 373,848 4,626 4.95 % 379,115 4,522 4.77 %
---------------------- ----------
Other liabilities 3,682 3,004
----------- -------------
Total liabilities 377,530 382,119
Stockholders' equity 41,492 42,581
----------- -------------
Total liabilities and stockholders' equity $ 419,022 $ 424,700
=========== =============
Net interest income $ 3,171 $ 2,720
Net spread (4) 2.92 % 2.36 %
Net margin (5) 3.20 % 2.68 %
Ratio of average interest earning assets
to average interest bearing liabilities 1.06X 1.07X
1. Annualized
2. Average balances include non-accrual loans and loans held for sale.
3. Includes interest bearing deposits in other financial institutions.
4. Net spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
5. Net margin represents net interest income as a percentage of average
interest earning assets.
Net Income
The Corporation recorded net income of $856,000 for the three months ended March
31, 2000, as compared to net income of $693,000 for the three month period ended
March 31, 1999. This increase in net income was $163,000 or 23.5%.
Total Interest Income
Total interest income increased by $555,000 or 7.7% to $7.8 million for the
three months ended March 31, 2000. The average yield on loans increased to 8.55%
for the quarter ended March 31, 2000, from 8.43% for the quarter ended March 31,
1999. During this same period, the average yield on mortgage-backed securities
increased 164 basis points (100 basis points equals 1%). The average balance of
investment securities decreased to $57.8 million for the quarter ended March 31,
2000, from $97.3 million for the quarter ended March 31, 1999. This decrease was
the result of securities that matured, securities that were called and a
reduction in the Bank's liquidity. The average yield increased from 4.76% for
the
10
three months ended March 31, 1999, to 5.44% for the same period in 2000, as
excess funds or short-term investments, which provided lower yields, were
deployed into other higher earning assets.
Total Interest Expense
Total interest expense increased to $4.6 million for the three months ended
March 31, 2000, from $4.5 million for the same period in 1999. The average
balance of interest-bearing deposits increased from $232.6 million for the three
months ended March 31, 1999, to $232.9 million for the three months ended March
31, 2000, mainly due to an increase in certificate of deposit accounts. The
average cost of deposits decreased 2 basis points from 4.37% for the three month
period ended March 31, 1999, to 4.35% for the same period in 2000, due to the
mix of non-certificate account balances increasing more than certificate account
balances. 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 $5.6 million to $140.9 million for the
three months ended March 31, 2000, from $146.5 million for the three months
ended March 31, 1999. The cost of such borrowings increased by 52 basis points
to 5.94% for the three months ended March 31, 2000, from 5.42% for the same
period in 1999. Borrowings decreased as the Bank utilized repayments of loans
and mortgage-backed securities to meet liquidity needs.
Net Interest Income
Net interest income increased from $2.7 million for the three months ended March
31, 1999, to $3.2 million for the same period ended March 31, 2000. Average
interest-earning assets decreased $9.7 million from $406.3 million for the three
months ended March 31, 1999, to $396.6 million for the three months ended March
31, 2000, while the average yield on those interest-earning assets increased
from 7.13% for 1999 to 7.86% for 2000. Average interest-bearing liabilities
decreased by $5.3 million to $373.8 million for the three months ended March 31,
2000, from $379.1 million for the three months ended March 31, 1999, while the
cost of those interest-bearing liabilities increased from 4.77% in 1999 to 4.95%
in 2000.
Provision for Loan Losses
The Bank's provision for loan losses was $54,000 for the three months ended
March 31, 2000, as compared to $114,000 for the same period in 1999. During
fiscal 1999, 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 loan portfolio changes, additional provisions were
utilized to help maintain reserves at adequate levels; however, the provision
was reduced in fiscal 2000. The Bank's allowance for loan losses was $1.5
million at March 31, 2000 and $1.2 million at March 31, 1999, respectively. At
March 31, 2000, the Bank's allowance for loan losses constituted 212.9% of
non-performing assets as compared to 120.6% of non-performing assets at March
31, 1999. The allowance for losses on loans is maintained at a level which is
considered by management to be adequate to absorb probable 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 assurance
that further additions will not be made to the loss allowances or that such
losses will not exceed the estimated amounts.
Non-interest Income
Total non-interest income decreased $17,000 during the three month period ended
March 31, 2000, to $1.3 million, as compared with the same period in 1999. Gains
on loans sold decreased from $573,000 at March 31, 1999, to $246,000 at March
31, 2000, which was primarily due to rising interest rates which slowed down the
purchase and refinance markets. Continued increases in interest rates may affect
the ability to generate new loans. Commission income increased from $215,000 for
the quarter ended March 31, 1999, to $294,000 for the quarter ended March 31,
2000, while other service charges and fees decreased from $250,000 for the three
months ended March 31, 1999, to $235,000 for the three months ended March 31,
2000. Other income increased $167,000 for the three months ended March 31, 2000.
which was primarily due to $79,000 of income on investments in insurance
policies not present in second quarter 1999 and profit from the sale of property
of $86,000.
11
Non-interest Expense
Total non-interest expense increased $273,000 or 10.1% over the periods
compared. Compensation and benefits increased from $1.6 million to $1.7 million
or 7.5%. As a result of discussions being held with the U.S. Department of
Labor, the Bank may have to alter the manner in which it compensates some of its
employees, which may impact compensation expense and/or the Bank's ability to
generate additional loans and/or deposits. Occupancy and equipment expense
increased by $74,000. Data processing expense increased $49,000 to $168,000 for
the period ended March 31, 2000, due to processing expenses associated with the
increased delivery of electronic services to customers. Professional fees
increased from $80,000 for the second quarter of fiscal 1999 to $93,000 for the
second quarter of fiscal 2000. Other expenses increased from $540,000 for the
quarter ended March 31, 1999, to $576,000 for the quarter ended March 31, 2000.
Income Tax Expense
Income taxes increased by $58,000 or 11.8%, to $549,000 for the three month
period ended March 31, 2000, from $491,000 for the same period in 1999, which
was primarily due to an increase of $221,000 in income before tax. The effective
tax rate decreased by 1.5% for the same periods as the result of an increase in
tax exempt income of $79,000.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
Six Months Ended March 31,
-------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
-------------------------------------------------------------------------
Assets:
Loans receivable (2) $ 292,244 $12,432 8.51 % $ 271,061 $11,493 8.48 %
Mortgage-backed securities 43,356 1,345 6.20 48,982 1,130 4.61
Investment securities (3) 58,063 1,554 5.35 88,356 2,122 4.80
----------------------- -----------------------
Total interest earning assets 393,663 15,331 7.79 408,399 14,745 7.22
------------------------ -------------------------
Other assets 22,572 16,684
----------- -----------
Total assets $ 416,235 $ 425,083
=========== ===========
Liabilities:
Interest bearing deposits $ 231,252 $ 4,993 4.32 % $ 232,398 $ 5,208 4.48 %
Borrowings 139,331 4,019 5.77 147,010 4,018 5.47
----------------------- -----------------------
Total interest bearing liabilities 370,583 9,012 4.86 % 379,408 9,226 4.86 %
------------------------ -------------------------
Other liabilities 3,793 2,960
----------- -----------
Total liabilities 374,376 382,368
Stockholders' equity 41,859 42,715
----------- -----------
Total liabilities and stockholders' equity $ 416,235 $ 425,083
=========== ===========
Net interest income $ 6,319 $ 5,519
Net spread (4) 2.92 % 2.36 %
Net margin (5) 3.21 % 2.70 %
Ratio of average interest earning assets
to average interest bearing liabilities 1.06X 1.10X
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.
12
Net Income
The Corporation recorded net income of $1.7 million for the six months ended
March 31, 2000, as compared to net income of $1.5 million for the six month
period ended March 31, 1999. This increase in net income was $143,000 or 9.3%.
Total Interest Income
Total interest income increased by $586,000 or 4.0% to $15.3 million for the six
months ended March 31, 2000. The average yield on loans increased to 8.51% for
the six months ended March 31, 2000, from 8.48% for the six months ended March
31, 1999. During the same period, the average yield on mortgage-backed
securities increased 159 basis points (100 basis points equals 1%). The average
balance of investment securities decreased to $58.1 million for the six months
ended March 31, 2000, from $88.4 million for the six months ended March 31,
1999. 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 4.80% for the six months ended March 31, 1999, to 5.35% for the same period
in 2000, 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 $9.0 million for the six months ended March
31, 2000, from $9.2 million for the same period in 1999. The average balance of
interest-bearing deposits decreased from $232.4 million for the six months ended
March 31, 1999, to $231.3 million for the six months ended March 31, 2000. The
average cost of deposits decreased 16 basis points from 4.48% for the six month
period ended March 31, 1999, to 4.32% for the same period in 2000, due to the
mix of non-certificate account balances increasing more than certificate account
balances. 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 $7.7 million to $139.3 million for the
six months ended March 31, 2000, from $147.0 million for the six months ended
March 31, 1999. The cost of such borrowings increased by 30 basis points to
5.77% for the six months ended March 31, 2000, from 5.47% for the same period in
1999. Borrowings decreased as the Bank utilized repayments of loans and
mortgage-backed securities to meet liquidity needs.
Net Interest Income
Net interest income increased from $5.5 million for the six months ended March
31, 1999, to $6.3 million for the same period ended March 31, 2000. Average
interest-earning assets decreased $14.7 million, from $408.4 million for the six
months ended March 31, 1999, to $393.7 million for the six months ended March
31, 2000, while the average yield on those interest-earning assets increased
from 7.22% for 1999 to 7.79% for 2000. Average interest-bearing liabilities
decreased by $8.8 million to $370.6 million for the six months ended March 31,
2000, from $379.4 million for the six months ended March 31, 1999, while the
overall cost of those interest-bearing liabilities remained the same at 4.86%.
Provision for Loan Losses
The Bank's provision for loan loss decreased to $108,000 for the six months
ended March 31, 2000, from $228,000 for the same period in 1999. See also
"Comparison of the Three Months Ended March 31, 2000 and 1999 Provision for Loan
Losses."
13
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Six Months
At March 31,
-------------------------------
2000 1999
-------------------------------
(in thousands)
Total loans outstanding (1) $ 306,113 $ 284,795
===============================
Average loans outstanding $ 292,244 $ 271,061
===============================
Allowance balance (beginning of period) $ 1,387 $ 1,035
-------------------------------
Provision (credit):
Residential (2) - 20
Land and commercial real estate 30 10
Commercial & agricultural business 78 198
Consumer - -
-------------------------------
Total provision 108 228
Charge-offs:
Residential - -
Land and commercial real estate - -
Consumer 37 72
-------------------------------
Total charge-offs 37 72
-------------------------------
Recoveries:
Residential - -
Land and commercial real estate - -
Consumer 13 21
-------------------------------
Total recoveries 13 21
-------------------------------
Net charge-offs 24 51
-------------------------------
Allowance balance (end of period) $ 1,471 $ 1,212
===============================
Allowance as percent of total loans 0.48% 0.43%
Net loans charged off as a percent of average loans 0.01% 0.02%
- -------------------------------
1. Includes total loans (including loans held for sale), net of loans in
process, deferred fees and allowance for losses.
2. Includes one-to-four family and multi-family residential real estate loans.
Non-interest Income
Total non-interest income decreased $105,000 for the six month period ended
March 31, 2000, to $2.5 million, as compared with the same period in 1999. HMC
was acquired on November 17, 1998, and as a result, the consolidated statements
of income reflect six full months of income and expense for HMC in fiscal 2000
but only four and a half months of income and expense for fiscal 1999. Gains on
loans sold decreased from $1.3 million at March 31, 1999, to $592,000 at March
31, 2000, 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 loans. Commission income increased from $446,000 for the
six months ended March 31, 1999, to $534,000 for the six months ended March 31,
2000. Other service charges and fees increased from $383,000 for the six months
ended March 31, 1999, to $437,000 for the six months ended March 31, 2000,
primarily due to an increase in underwriting fees as a result of the acquisition
of HMC. Other income increased $254,000 for the six months ended March 31, 2000,
to $281,000, mainly due to $155,000 of income on investments in insurance
policies not present in fiscal year 1999 and profit from the sale of property of
$86,000.
Non-Interest Expense
Total non-interest expense increased $669,000 or 12.8% over the periods
compared. Compensation and benefits increased from $3.3 million to $3.6 million
or 10.0%, primarily due to the acquisition of HMC. Occupancy and equipment
expense increased by $125,000, largely from the HMC acquisition also. Data
processing expense increased $67,000 to $331,000 for the period ended March 31,
2000, due to processing expenses associated with the increased delivery of
electronic services to customers, and to a lesser extent, as a result of costs
associated with the Corporation's Year 2000 readiness program. Professional fees
increased from $155,000 for the first six months of fiscal 1999 to $167,000 for
the first six months of fiscal 2000. Other expenses increased from $959,000 for
the six months ended March 31, 1999, to $1.1 million for the six months ended
March 31, 2000, and was comprised of increased expenses as a result of the
acquisition of HMC and the goodwill amortization associated with it.
14
Income Tax Expense
Income taxes increased by $3,000 to $1.1 million for the six month period ended
March 31, 2000. The effective tax rate decreased by 1.5% for the same periods as
the result of an increase in tax exempt income of $155,000.
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 failure.
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 of 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 borrowings 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 7.0% and 15.5% at
March 31, 2000 and 1999, 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 March 31, 2001, is approximately $100.3 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.
15
At March 31, 2000, the Bank and HMC had outstanding loan commitments of
$798,000. Funds required to fill these commitments are derived primarily from
current excess liquidity, loan sales, advances, deposit inflows or loan and
security repayments.
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 March 31, 2000, 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, March 31, 2000 $35,353
Add: Unrealized losses on debt
securities held for sale 824
-------------
Tangible equity capital and ratio to
adjusted total assets 36,177 8.5% 6,387 1.5% 8,516 2.0%
--------------------- --------------------- ---------------------
Tier 1 (core) capital and ratio to
adjusted total assets 36,177 8.5% 17,032 4.0% 21,290 5.0%
--------------------- --------------------- ---------------------
Total risk-based capital and ratio to
risk-weighted assets 36,177 12.5% 11,549 4.0% 17,323 6.0%
-------- --------------------- ---------------------
Tier 2 risk-based capital, net adjustments 773
-------------
Total risk-based capital and ratio to
risk-weighted assets, March 31, 2000 $36,950 12.8% $23,098 8.0% $28,872 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 six months ended March 31, 2000, 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%.
16
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries were
engaged in any legal proceedings of a material nature at March
31, 2000. 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
(b) Reports on Form 8-K
17
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: May 12, 2000 By: /s/ Donald A. Glas
- ------------------- --------------------------------
Donald A. Glas
Chief Executive Officer
Date: May 12, 2000 By: /s/ Richard H. Burgart
- ------------------- --------------------------------
Richard H. Burgart
Chief Financial Officer
18