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, 2001
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 January 31, 2002.
----------------
Class Outstanding
----- -----------
$.10 par value common stock 2,281,814 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2001
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 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Materially Important Events 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, September 30,
2001 2001
-----------------------------
(in thousands)
ASSETS
------
Cash and cash equivalents $ 21,446 $ 12,594
Securities available for sale, at fair value:
Equity securities 17,953 17,946
Mortgage-backed and related securities 27,050 27,481
Debt securities 3,018 3,055
Securities held to maturity, at amortized cost:
Debt securities (fair value of $12,452 and $12,490) 12,427 12,420
Mortgage-backed and related securities (fair value of $24,302 and $25,586) 24,300 25,731
Loans held for sale 23,117 12,082
Loans receivable, net 367,730 340,484
Foreclosed real estate 265 126
Accrued interest receivable 4,462 4,777
Premises and equipment 6,254 5,439
Goodwill 4,680 2,674
Core deposit intangible 756 -
Other assets 9,115 8,822
------------------------------------
Total assets $ 522,573 $ 473,631
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 67,560 $ 40,721
Savings accounts 98,882 93,428
Certificates of deposit 210,920 178,392
------------------------------------
Total deposits 377,362 312,541
Federal Home Loan Bank borrowings 98,000 113,500
Advances from borrowers for taxes and insurance 267 497
Other liabilities 4,520 5,152
------------------------------------
Total liabilities 480,149 431,690
------------------------------------
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 43,197 43,184
Retained earnings, substantially restricted 32,344 31,355
Treasury stock at cost (2,219,463 and 2,194,803 shares) (31,623) (31,146)
Unearned ESOP shares at cost (83,027 and 90,863 shares) (830) (909)
Unearned MSP stock grants at cost (42,564 and 42,964 shares) (453) (453)
Accumulated comprehensive loss (661) (540)
------------------------------------
Total stockholders' equity 42,424 41,941
------------------------------------
Total liabilities and stockholders' equity $ 522,573 $ 473,631
====================================
See Notes to Unaudited Consolidated Financial Statements
1
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For Three Months
Ended December 31,
------------------------------------
2001 2000
------------------------------------
(In thousands, except per share data)
Interest income:
Loans receivable $ 7,859 $ 7,856
Mortgage-backed and related securities 595 621
Investment securities 371 739
------------------------------------
Total interest income 8,825 9,216
Interest expense:
Deposits 3,237 4,008
Borrowed funds 1,636 1,905
------------------------------------
Total interest expense 4,873 5,913
------------------------------------
Net interest income 3,952 3,303
Provision for loan losses 150 90
------------------------------------
Net interest income after provision for loan losses 3,802 3,213
Non-interest income:
Gain on sale of loans, net 1,348 372
Other service charges and fees 370 166
Service charges on deposit accounts 452 395
Commission income 256 270
Other 104 112
------------------------------------
Total non-interest income 2,530 1,315
------------------------------------
Non-interest expense:
Compensation and benefits 2,372 1,882
Occupancy and equipment 347 366
Deposit insurance premiums 15 14
Data processing 201 183
Professional fees 89 99
Other 779 587
------------------------------------
Total non-interest expense 3,803 3,131
------------------------------------
Income before provision for income taxes 2,529 1,397
Income tax expense 999 540
------------------------------------
Net income $ 1,530 $ 857
====================================
Basic earnings per share $ 0.70 $ 0.38
Diluted earnings per share $ 0.67 $ 0.37
Cash dividend declared per common share $ 0.250 $ 0.150
Comprehensive income $ 1,409 $ 1,172
====================================
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended
December 31,
------------------------------------
2001 2000
------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 1,530 $ 857
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 163 151
Net amortization of discounts and premiums (34) (8)
Provision for loan losses 150 90
Net market value adjustment on ESOP shares 37 27
Amortization of ESOP and MSP stock compensation 134 88
Amortization of intangibles 67 29
Net loan fees deferred and amortized (48) (27)
Loans originated for sale (71,566) (22,802)
Loans sold 60,531 19,377
(Increase) decrease in:
Accrued interest receivable 408 (117)
Other assets (232) (102)
Increase (decrease) in other liabilities (850) 139
------------------------------------
Net cash used in operating activities (9,710) (2,298)
------------------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net 12,786 10,990
Purchase of loans (11,606) (7,706)
Principal payments on mortgage-related securities held to maturity 1,433 114
Proceeds from maturities of securities available for sale 256 -
Purchase of ING branch, net of deposits assumed 17,589 -
Purchases of equipment and property improvements (212) (129)
------------------------------------
Net cash provided by investing activities $ 20,246 $ 3,269
------------------------------------
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,
------------------------------------
2001 2000
------------------------------------
(in thousands)
Cash flows from financing activities:
Net increase in deposits $ 15,141 $ 12,724
FHLB advances 10,000 20,000
Payments on FHLB advances (25,500) (26,000)
Net decrease in mortgage escrow funds (230) (271)
Treasury stock purchased (718) (444)
Proceeds from exercise of stock options 161 188
Dividends on common stock (538) (330)
------------------------------------
Net cash provided by (used in) financing activities (1,684) 5,867
------------------------------------
Net (decrease) increase in cash and cash equivalents 8,852 6,838
Cash and cash equivalents
Beginning of period 12,594 8,482
------------------------------------
End of period $ 21,446 $ 15,320
====================================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 1,634 $ 1,902
Interest on deposits 3,934 4,230
Income taxes 890 237
See Notes to Unaudited Consolidated Financial Statements
4
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1- PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
months ended December 31, 2001 include the accounts of FSF Financial
Corp. (the "Corporation") and its wholly owned subsidiaries, Insurance
Planners of Hutchinson, Inc. (the "Agency") and First Federal fsb (the
"Bank"), with its wholly owned subsidiaries, Firstate Services and
Homeowners Mortgage Corporation ("HMC"). 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 United States Generally Accepted
Accounting Principles ("GAAP"). 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 three
month period ended December 31, 2001 are not necessarily indicative of
the results which may be expected for the entire fiscal year or any
other future period. For further information, refer to the consolidated
financial statements and footnotes thereto included in the
Corporation's Annual Report of Form 10-K for the year ended September
30, 2001.
NOTE 3- BUSINESS SEGMENTS
The Corporation's wholly owned subsidiary, First Federal fsb, and HMC,
a wholly owned subsidiary of the Bank, have been identified as
reportable operating segments in accordance with the provisions of SFAS
No. 131. HMC was deemed to be a segment because it is a separate
corporation that operates independently from the Bank. HMC's mortgage
banking activity includes an origination function and it also purchases
loans from other loan originators. All loans acquired either by
origination or by purchase are intended for resale in the secondary
loan market. Insurance Planners, Firstate Services 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. The segments follow generally accepted accounting
principles as described in the summary of significant accounting
policies. Each corporation is managed separately with its own president
who reports directly to their own respective board of directors.
Bank HMC Consolidated
Stand-alone Stand-alone Other Eliminations Total
--------------------------------------------------------------
As of and for the three months ended December 31, 2001 (in thousands)
From operations:
Interest income from external sources $ 8,658 $ 160 $ 7 $ - $ 8,825
Non-interest income from external sources 1,274 1,072 184 - 2,530
Inter-segment interest income 118 - 12 (130) -
Interest expense 4,873 118 - (118) 4,873
Provisions for loan losses 150 - - - 150
Depreciation and amortization 188 33 9 - 230
Other non-interest expense 2,441 1,410 243 (521) 3,573
Income tax expense (benefit) 935 81 (17) - 999
Net income (loss) $ 1,464 $ 98 $ (32) $ - $ 1,530
=============================================================
Total Assets $522,340 $18,068 $42,966 $(60,801) $522,573
=============================================================
As of and for the three months ended December 31, 2000
From operations:
Interest income from external sources $ 9,152 $ 37 $ 27 $ - $ 9,216
Non-interest income from external sources 834 248 233 - 1,315
Inter-segment interest income 17 - 34 (51) -
Interest expense 5,917 17 - (21) 5,913
Provisions for loan losses 90 - - - 90
Depreciation and amortization 139 31 11 - 181
Other non-interest expense 2,278 596 289 (213) 2,950
Income tax expense (benefit) 601 (62) 1 - 540
Net income (loss) $ 978 $ (115) $ (6) $ - $ 857
=============================================================
Total Assets $472,422 $ 4,761 $ 41,657 $(44,935) $473,905
=============================================================
5
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, 2001, the weighted average number
of shares outstanding for basic and diluted earnings per share
computations were 2,170,814 and 2,281,767, respectively. For the three
month period ended December 31, 2000, the weighted average number of
shares outstanding for basic and diluted earnings per share computation
were 2,237,370 and 2,328,713, respectively. The difference between the
basic and diluted earnings per share denominator is the effect of stock
based compensation plans.
NOTE 5 - EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Financial
Accounting Standards Statement No. 141, Business Combinations and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Statement 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon
adoption of the Statement. The Company must adopt Statement 142
effective for the fiscal year beginning October 1, 2002, and may elect
early adoption for the fiscal year beginning October 1, 2001.
Management has decided to adopt Statement 142 for the fiscal year
beginning October 1, 2002. Amortization of goodwill for the three month
period ended December 31, 2001 and 2000 was $29,000, respectively.
NOTE 6 - BRANCH ACQUISITION
On November 9, 2001, the Bank acquired the St. Cloud, Minnesota branch
facility of ING Bank, fsb. The purchase method transaction involved the
assumption of deposits and acquisition of assets as follows (in
thousands):
Deposits assumed (at fair value) $ 50,083
============
Assets acquired:
Cash $ 17,589
Loans receivable 28,806
Premises and equipment 765
Other assets 14
Core deposit intangible 794
------------
Sub-total (at fair value) $ 47,968
Cost of unidentifiable intangible asset resulting
from the excess of fair value of deposit liabilities
assumed over the fair value of acquired
identifiable asset $ 2,115
============
The unidentifiable intangible assets is recognized under FASB Statement
No. 72 Accounting for Certain Acquisitions of Banking or Thrift
Institutions. The unidentifiable intangible asset recognized under
Statement 72 is excluded from the scope of Statement 142. Statement 72
intangible asset (goodwill) continues to be subject to amortization
based upon the estimated remaining maturity of the interest rate
sensitive assets acquired (approximately 12 years) and is tax
deductible over a 15 year period. The primary reason for the
acquisition was to increase the Bank's market potential in the St.
Cloud, Minnesota area.
The results of operations for the current and comparable prior interim
periods were effected by less than one cent per share on a pro-forma
basis and considered not material for disclosure.
6
NOTE 7- COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted
accounting principles, is excluded from net income. For the
Corporation, the difference between net income and comprehensive income
consists of change for the quarter in unrealized gains and losses on
securities available for sale, net of tax.
FSF FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of integrating newly
acquired businesses, the ability to control costs and expenses and general
economic conditions. The Corporation undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
General
The Corporation's total assets at December 31, 2001 and September 30, 2001
totaled $522.6 million and $473.6 million. This increase of $49.0 million was a
result of an increase in loans held for sale, cash and cash equivalents and
loans receivable from the ING Bank branch acquisition (see Note 6 of the Notes
to Unaudited Consolidated Financial Statements).
Cash and cash equivalents increased $8.8 million from $12.6 million at September
30, 2001 to $21.4 million at December 31, 2001. The Corporation utilized excess
liquidity to fund the purchase of treasury shares and loan originations;
however, the increase was mainly a result of an increase in deposits assumed in
the ING branch acquisition.
Securities available for sale decreased $461,000 between December 31, 2001 and
September 30, 2001, as a result of market value changes and principal payments
on mortgage backed and related securities.
Loans held for sale increased $11.0 million to $23.1 million at December 31,
2001 from $12.1 million at September 30, 2001. As of December 31, 2001, the Bank
and HMC had forward commitments to sell all of their loans held for sale in the
secondary market. Payment for these loans usually occurs within fourteen days of
funding.
Loans receivable increased $27.2 million or 8.0% to $367.7 million at December
31, 2001 from $340.5 million at September 30, 2001. Total residential real
estate and construction loan originations increased by $65.9 million and when
combined with the sale and prepayments of residential mortgages, resulted in an
increase in one-to-four family residential mortgages and construction loans of
$19.9 million. Agricultural loans decreased by $1.0 million. To supplement
originations, the Bank purchased $11.6 million of commercial business loans and
consumer loans decreased by $3.3 million. As part of the acquisition of the ING
branch, the Bank purchased $2.6 million of consumer loans and $26.2 million in
commercial and commercial real estate loans at a premium of $316,000. 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.
7
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months
Ended December 31,
-------------------------------
2001 2000
-------------------------------
(in thousands)
Loans originated:
1-4 family residential mortgages $ 60,963 $ 14,244
1-4 family construction loans 40,890 21,703
Land 300 237
Agriculture 8,242 6,202
Commercial business & real estate 2,589 3,740
Consumer 5,240 6,017
-------------------------------
Total loans originated 118,224 52,143
-------------------------------
Loans purchased:
Commercial business 11,606 7,706
-------------------------------
Total new loans $ 129,830 $ 59,849
===============================
Acquired in ING branch acquisition $ 28,806 $ -
===============================
Total loans sold $ 60,531 $ 19,377
===============================
8
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,
2001 2001
--------------------------------------------------------------------
Amount % Amount %
--------------------------------------------------------------------
(dollars in thousands)
Residential real estate:
One-to-four family (1) $ 83,396 18.0 $ 81,790 19.1
Residential construction 160,316 34.5 142,035 33.2
Multi-family 5,748 1.2 5,922 1.4
--------------------------------------------------------------------
249,460 53.7 229,747 53.7
Agricultural loans 48,948 10.5 49,935 11.7
Land and commercial real estate 75,447 16.2 55,220 12.9
Commercial business 24,548 5.3 23,908 5.6
--------------------------------------------------------------------
148,943 32.0 129,063 30.2
Consumer loans:
Home equity and second mortgages 28,260 6.1 29,991 7.0
Automobile loans 13,052 2.8 13,023 3.0
Other 24,726 5.4 26,292 6.1
--------------------------------------------------------------------
Total consumer loans 66,038 14.3 69,306 16.1
--------------------------------------------------------------------
Total loans 464,441 100.0 428,116 100.0
============== ==============
Less:
Loans in process (71,120) (73,235)
Deferred fees (726) (774)
Allowance for loan losses (1,748) (1,541)
-------------------- --------------------
Total loans, net $ 390,847 $ 352,566
==================== ====================
- --------------------------------------------------
1. Includes loans held for sale in the amount of $23.1 million and $12.1 million
as of December 31, 2001 and September 30, 2001.
Deposits, after interest credited, net of the ING branch acquisition, increased
from $312.5 million at September 30, 2001 to $327.3 million at December 31,
2001, an increase of $14.8 million or 4.7%. Overall cost of funds on deposits
during the period decreased 63 basis points (100 basis points equals 1%) as the
Bank attempted to maintain deposit rates consistent with market place
competitors. Demand deposits increased $7.5 million or 18.4% from September 30,
2001, when compared to December 31, 2001. Savings accounts decreased 0.01%
during the same period. Certificates of deposit increased $8.3 million. As part
of the branch acquisition of ING, the Bank assumed $19.3 million in demand
deposits, $6.2 million in savings accounts and $24.2 million in certificates of
deposit, at a discount of $416,000. The Bank also recorded $794,000 of core
deposit intangibles in this transaction. The Bank utilized the increase in
deposits to fund the continued loan growth and reduce Federal Home Loan Bank
("FHLB") borrowings.
The Corporation completed the repurchase of 41,622 shares of common stock, which
when netted against 16,962 shares issued in connection with the exercise of
stock options, increased the number of treasury shares to 2,219,463 at December
31, 2001. 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 increased $483,000 since September 30,
2001 due to net income, less dividends and an increase in accumulated
comprehensive loss. Book value per share increased from $19.30 at September 30,
2001 to $19.68 at December 31, 2001.
9
In making loans, the Bank recognizes that credit losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan and in the
case of a secured loan, the quality of the collateral for the loan. The Bank's
management evaluates the need to establish reserves against losses on loans and
other assets each quarter based on estimated losses on specific loans and on any
real estate held for sale or investment when a finding is made that a loss is
estimable and probable. Such evaluation includes a review of all loans for which
full collectibility may not be reasonably assured and considers, among other
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions and overall portfolio quality.
While management recognizes and charges against the allowance for loan losses
accounts that are determined to be uncollectible, experience indicates that at
any point in time, possible losses may exist in the loan portfolio which are not
specifically identifiable. Therefore, based upon management's best estimate,
each year an amount may be charged to earnings to maintain the allowance for
loan losses at a level sufficient to recognize inherent credit risk.
Impaired loans, including all loans that are in a troubled debt restructuring
involving a modification of terms, are measured at the present value of expected
future cash flows discounted at the loan's initial effective interest rate. The
fair value of the collateral of an impaired collateral dependent loan or an
observable market price, if one exists, may be used as an alternative to
discounting. If the measure of the impaired loan is less than the recorded
investment in the loan, impairment is recognized through the allowance for loan
losses. A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
The allowance for loan losses is maintained at a level that represents
management's best estimates of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for losses will be
adequate to cover losses that may be realized in the future and that additional
provision for losses will not be required.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated:
December 31, September 30,
2001 2001
--------------------------------
(in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 839 $ 1,043
Permanent loans secured by one-to-four family units 325 78
Non-mortgage loans:
Commercial and agricultural 1,458 1,195
Consumer 679 637
--------------------------------
Total non-accrual loans 3,301 2,953
Foreclosed real estate 265 126
--------------------------------
Total non-performing assets $ 3,566 $ 3,079
================================
Total non-performing loans to net loans 0.84% 0.84%
================================
Total non-performing loans to total assets 0.63% 0.62%
================================
Total non-performing assets to total assets 0.68% 0.65%
================================
10
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
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,
----------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
----------------------------------------------------------------------------
Assets:
Loans receivable (2) $ 369,388 $ 7,859 8.51 % $ 343,899 $ 7,856 9.14 %
Mortgage-backed securities 52,753 595 4.51 42,313 621 5.87
Investment securities (3) 52,103 371 2.85 56,862 739 5.20
----------------------- -----------------------
Total interest-earning assets 474,244 8,825 7.44 443,074 9,216 8.32
--------------------- ----------------------
Other assets 23,653 23,792
------------- -------------
Total assets $ 497,897 $ 466,866
============= =============
Liabilities:
Interest-bearing deposits $ 341,133 $ 3,237 3.80 % $ 296,496 $ 4,008 5.41 %
Borrowings 109,391 1,636 5.98 125,174 1,905 6.09
----------------------- -----------------------
Total interest-bearing
liabilities 450,524 4,873 4.33 % 421,670 5,913 5.61 %
--------------------- ----------------------
Other liabilities 5,190 5,080
------------- -------------
Total liabilities 455,714 426,750
Stockholders' equity 42,183 40,116
------------- -------------
Total liabilities and stockholders'
equity $ 497,897 $ 466,866
============= =============
Net interest income $ 3,952 $ 3,303
Net spread (4) 3.11 % 2.71 %
Net margin (5) 3.33 % 2.98 %
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.05X 1.05X
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
interest-earning assets.
Net Income
The Corporation recorded net income of $1.5 million for the three months ended
December 31, 2001, as compared to net income of $857,000 for the three months
ended December 31, 2000. This increase in net income was $673,000 or 78.5%. The
increase in net income for the 2002 first quarter was the result of increases in
net interest income and non-interest income, offset by increases in non-interest
expense. Net interest income increased $649,000 for the first quarter of fiscal
2002, an increase of 19.6% over first quarter 2001. Such an increase in net
interest income was the result of a 129 basis point decline in average cost of
funds. The mix of the Banks deposits helped to stabilize its cost of funds in
this lower interest rate environment. Additionally, non-interest income almost
doubled over the levels of one year ago, with gains on sale of loans increasing
$976,000. Non-interest income was 66.5% of non-interest expense for the quarter.
11
Total Interest Income
Total interest income decreased by $391,000 to $8.8 million for the three months
ended December 31, 2001. The average yield on loans decreased to 8.51% for the
quarter ended December 31, 2001 from 9.14% for the quarter ended December 31,
2000. During the same period, the average yield on mortgage-backed securities
decreased 136 basis points. The average balance of investment securities
decreased to $52.1 million for the quarter ended December 31, 2001 from $56.9
million for the quarter ended December 31, 2000, as a result of a reduction in
the Bank's liquidity. The average yield decreased from 5.20% for the three
months ended December 31, 2000 to 2.85% for the same period in 2001.
Total Interest Expense
Total interest expense decreased to $4.9 million for the three months ended
December 31, 2001 from $5.9 million for the same period in 2000. The average
balance of interest-bearing deposits increased from $296.5 million for the three
months ended December 31, 2000 to $341.1 million for the three months ended
December 31, 2001 mainly due to the ING transaction. The average cost of
deposits decreased 161 basis points from 5.41% for the three month period ended
December 31, 2000 to 3.80% for the same period in 2001, as the rates offered by
the Bank decreased. 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 $15.8 million to $109.4
million for the three months ended December 31, 2001 from $125.2 million for the
three months ended December 31, 2000. The cost of such borrowings decreased by
11 basis points to 5.98% for the three months ended December 31, 2001 from 6.09%
for the same period in 2000. Borrowings decreased as the Bank utilized
repayments of loans and the increase in deposits to meet liquidity needs.
Net Interest Income
Net interest income increased from $3.3 million for the three months ended
December 31, 2000 to $4.0 million for the same period ended December 31, 2001.
Average interest-earning assets increased $31.2 million from $443.1 million for
the three months ended December 31, 2000 to $474.2 million for the three months
ended December 31, 2001, while the average yield on those interest-earning
assets decreased from 8.32% for 2000 to 7.44% for 2001. Average interest-bearing
liabilities increased by $28.8 million to $450.5 million for the three months
ended December 31, 2001 from $421.7 million for the three months ended December
31, 2000, while the cost of those interest-bearing liabilities decreased from
5.61% in 2000 to 4.33% in 2001.
Provision for Loan Losses
The Corporation's provision for loan losses was $150,000 for the three months
ended December 31, 2001, as compared to $90,000 for the same period in 2000.
Increases in the Bank's loan portfolio, especially in regard to increases in the
residential construction and land and commercial real estate portfolios,
precipitated the increases in the provision for loan losses. Management
believes, based on a detailed review of the loan portfolio, historic loan
losses, current economic conditions and other factors, that the current level of
provision for loan losses and the resulting level of the allowance for loan
losses reflects an adequate reserve against inherent losses in the loan
portfolio. The allowance for loan losses is established through a provision for
loan losses charged to expense. While the Corporation 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.
12
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,
----------------------------------
2001 2000
----------------------------------
(in thousands)
Average loans outstanding $ 369,388 $ 343,899
==================================
Allowance balance (beginning of period) $ 1,541 $ 1,534
==================================
ING branch acquisition $ 274 $ -
Provision (credit):
Residential - -
Land and commercial real estate - 25
Commercial & agricultural business - 65
Consumer 150 -
----------------------------------
Total provision 150 90
Charge-offs:
Residential - -
Commercial and agricultural business 71 39
Consumer 150 40
----------------------------------
Total charge-offs 221 79
Recoveries:
Residential - -
Land and commercial real estate - -
Consumer 4 5
----------------------------------
Total recoveries 4 5
----------------------------------
Net charge-offs 217 74
----------------------------------
Allowance balance (end of period) $ 1,748 $ 1,550
==================================
Allowance as percent of net loans 0.45% 0.45%
Net loans charged off as a percent of average 0.06% 0.02%
loans
Non-interest Income
Total non-interest income increased $1.2 million during the three-month period
ended December 31, 2001 to $2.5 million, as compared with the same period in
2000. Due to the low interest rate environment, loan volume on new home
purchases and existing home refinances increased significantly. Since the Bank
sells all of its fixed rate loans into the secondary loan market, gains on loans
sold increased from $372,000 at December 31, 2000 to $1.3 million at December
31, 2001 and service charges and fees increased from $166,000 to $370,000 for
the same periods. Other income decreased $8,000 for the three months ended
December 31, 2001. Commission income decreased from $270,000 for the quarter
ended December 31, 2000 to $256,000 for the quarter ended December 31, 2001
Non-interest Expense
Total non-interest expense increased $672,000 or 21.5% over the periods
compared. Compensation and benefits increased $490,000 to $2.4 million at
December 31, 2001, mainly due to the ING branch acquisition and compensation
associated with the increase in loan activity mentioned above. Data processing
expense increased $18,000 to $201,000 for the period ended December 31, 2001,
due to processing expenses associated with the increased delivery of electronic
services to customers. Other non-interest expense increased $192,000 to $779,000
at December 31, 2001, due to the amortization of core deposit intangibles
associated with the ING branch acquisition and the indirect cost associated with
the increase in loan activity mentioned above.
13
Income Tax Expense
Income taxes increased by $459,000 to $999,000 for the three month period ended
December 31, 2001 from $540,000 for the same period in 2000, which was primarily
due to an increase of $1.1 million 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 $91,000.
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 amount of certificate accounts that are scheduled to mature during the
twelve months ending December 31, 2002 is approximately $143.6 million. To the
extent that these deposits do not remain 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, 2001, the Bank and HMC had outstanding loan commitments of $2.0
million. Funds required to meet these commitments are derived primarily from
current excess liquidity, loan sales, advances, deposit inflows or loan and
security repayments.
OTS regulations require the Bank to maintain core capital of 4.0% of assets, of
which 2.0% must be tangible equity capital, excluding goodwill. The Bank is also
required to maintain risk-based capital equal to 8.0% of total risk-based
assets. The Bank's regulatory capital exceeded its tangible equity, tier 1
(risk-based), tier 1 (core) and risk-based capital requirements by 5.4%, 2.9%,
6.3% and 2.6%, respectively.
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.
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, 2001.
14
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries were
engaged in any legal proceedings of a material nature at
December 31, 2001. 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) The following exhibits are filed as part of this report.
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 ***
- --------------------------------------------------------------------------------
* 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.
15
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 1, 2002 By: /s/ Donald A. Glas
- ------------------------ -----------------------
Donald A. Glas
Chief Executive Officer
Date: February 1, 2002 By: /s/ Richard H. Burgart
- ------------------------ -----------------------
Richard H. Burgart
Chief Financial Officer
16