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, 2002
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 April 30, 2002.
--------------
Class Outstanding
----- -----------
$.10 par value common stock 2,284,214 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
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 8
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
At At
March 31, September 30,
2002 2001
------------------------------------
(in thousands, except share data)
ASSETS
------
Cash and cash equivalents $ 24,198 $ 12,594
Securities available for sale, at fair value
Equity securities 17,959 17,946
Mortgage-backed and related securities 29,461 27,481
Debt securities 3,018 3,055
Securities held to maturity, at amortized cost:
Debt securities (fair value of $12,445 and $12,490) 12,433 12,420
Mortgage-backed and related securities (fair value of $22,562 and $25,586) 22,600 25,731
Loans held for sale 17,447 12,082
Loans receivable, net 367,332 340,484
Foreclosed real estate 327 126
Accrued interest receivable 4,098 4,777
Premises and equipment 6,172 5,439
Goodwill 4,609 2,595
Core deposit intangible 704 -
Other assets 8,943 8,901
------------------------------
Total assets $ 519,301 $ 473,631
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 61,624 $ 40,721
Savings accounts 92,894 93,428
Certificates of deposit 218,325 178,392
------------------------------------
Total deposits 372,843 312,541
Federal Home Loan Bank borrowings 98,000 113,500
Advances from borrowers for taxes and insurance 443 497
Other liabilities 4,712 5,152
------------------------------------
Total liabilities 475,998 431,690
------------------------------------
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 43,211 43,184
Retained earnings, substantially restricted 33,176 31,355
Treasury stock at cost (2,217,063 and 2,194,803 shares) (31,626) (31,146)
Unearned ESOP shares at cost (71,824 and 90,863 shares) (718) (909)
Unearned MSP stock grants at cost (42,564 and 42,964 shares) (453) (453)
Accumulated comprehensive loss (737) (540)
------------------------------------
Total stockholders' equity 43,303 41,941
------------------------------------
Total liabilities and stockholders' equity $ 519,301 $ 473,631
====================================
See Notes to Unaudited Consolidated Financial Statements
1
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Three Months Six Months
Ended March 31, Ended March 31,
------------------------- ------------------------
2002 2001 2002 2001
------------------------- ------------------------
(in thousands, except per share data)
Interest income:
Loans receivable $ 7,774 $ 7,756 $15,633 $15,612
Mortgage-backed and related securities 615 566 1,210 1,187
Investment securities 323 713 694 1,452
------------------------- ------------------------
Total interest income 8,712 9,035 17,537 18,251
Interest expense:
Deposits 2,874 3,945 6,111 7,953
Borrowed funds 1,363 1,814 2,999 3,719
------------------------- ------------------------
Total interest expense 4,237 5,759 9,110 11,672
------------------------- ------------------------
Net interest income 4,474 3,276 8,426 6,579
Provision for loan losses 275 705 425 795
------------------------- ------------------------
Net interest income after provision for loan losses 4,199 2,571 8,001 5,784
------------------------- ------------------------
Non-interest income:
Gain on sale of loans, net 862 575 2,210 947
Other service charges and fees 292 200 662 366
Service charges on deposit accounts 401 366 853 761
Commission income 272 239 528 509
Other 105 105 209 217
------------------------- ------------------------
Total non-interest income 1,932 1,485 4,462 2,800
------------------------- ------------------------
Non-interest expense:
Compensation and benefits 2,254 1,870 4,626 3,752
Occupancy and equipment 375 397 722 763
Deposit insurance premiums 14 14 29 28
Data processing 223 188 424 371
Professional fees 108 102 197 201
Other 884 555 1,663 1,142
------------------------- ------------------------
Total non-interest expense 3,858 3,126 7,661 6,257
------------------------- ------------------------
Income before provision for income taxes 2,273 930 4,802 2,327
Income tax expense 898 353 1,897 893
------------------------- ------------------------
Net income $ 1,375 $ 577 $ 2,905 $ 1,434
========================= ========================
Basic earnings per share $ 0.64 $ 0.26 $ 1.34 $ 0.64
Diluted earnings per share $ 0.61 $ 0.25 $ 1.27 $ 0.61
Cash dividend declared per common share $ 0.25 $ 0.15 $ 0.50 $ 0.30
Comprehensive income $ 1,299 $ 837 $ 2,708 $ 2,009
========================= ========================
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Six Months
Ended March 31, Ended March 31,
------------------------- ------------------------
2002 2001 2002 2001
------------------------- ------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 1,375 $ 577 $ 2,905 $ 1,434
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 176 155 339 306
Net amortization of discounts and premiums (66) (10) (100) (18)
Provision for loan losses 275 705 425 795
Net market value adjustment on ESOP shares 39 32 76 59
Amortization of ESOP and MSP stock compensation 123 100 257 188
Amortization of intangibles 131 30 198 59
Net loan fees deferred and amortized (13) (50) (61) (77)
Loans originated for sale (49,622) (35,896) (121,188) (58,698)
Loans sold 55,292 29,904 115,823 49,281
Net gain on sale of assets - (33) - (33)
(Increase) decrease in:
Accrued interest receivable 364 482 773 365
Other assets 186 (172) (46) (274)
Increase (decrease) in other liabilities 227 98 (623) 237
------------------------- ------------------------
Net cash provided by (used in) operating activities 8,487 (4,078) (1,222) (6,376)
------------------------- ------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net 1,933 9,327 14,719 20,317
Purchase of loans (1,890) (5,354) (13,496) (13,060)
Principal payments on mortgage-related securities held to maturity 1,705 120 3,138 234
Purchase of available for sale securities (2,992) - (2,992) -
Proceeds from maturities of securities available for sale 442 8,000 698 8,000
Proceeds from the sale of securities available for sale - 450 - 450
Purchase of ING branch, net of deposits assumed - - 17,589 -
Investment in foreclosed property (9) (1) (9) (1)
Proceeds from sale of REO - 231 - 231
Purchase of equipment and property improvements (94) (120) (306) (249)
------------------------- ------------------------
Net cash provided by (used in) investing activities $ (905) $ 12,653 $ 19,341 $ 15,922
------------------------- ------------------------
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 March 31, Ended March 31,
------------------------ -----------------------
2002 2001 2002 2001
------------------------ -----------------------
(in thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits $ (4,422) $ (5,991) $ 10,719 $ 6,733
FHLB advances - 6,000 10,000 26,000
Payments on FHLB advances - (9,000) (25,500) (35,000)
Net increase (decrease) in mortgage escrow funds 176 265 (54) (6)
Treasury stock purchased (37) (649) (755) (1,093)
Net proceeds from exercise of stock options (2) 4 159 192
Dividends on common stock (545) (329) (1,084) (659)
------------------------ -----------------------
Net cash (used in) financing activities (4,830) (9,700) (6,515) (3,833)
------------------------ -----------------------
Net increase (decrease) in cash and cash equivalents 2,752 (1,125) 11,604 5,713
Cash and cash equivalents
Beginning of period 21,446 15,320 12,594 8,482
------------------------ -----------------------
End of period $24,198 $ 14,195 $ 24,198 $ 14,195
======================== =======================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 1,362 $ 1,816 $ 2,996 $ 3,718
Interest on deposits $ 2,591 $ 3,497 $ 6,525 $ 7,727
Income taxes $ 967 $ 953 $ 1,857 $ 1,190
See Notes to Unaudited Consolidated Financial Statements
4
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 1- PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
and six months ended March 31, 2002, 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
and six month periods ended March 31, 2002 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 March 31, 2002
From operations:
Interest income from external sources $ 8,554 $ 156 $ 2 $ - $ 8,712
Non-interest income from external sources 1,187 550 195 - 1,932
Inter-segment interest income 68 - 9 (77) -
Interest expense 4,237 68 - (68) 4,237
Provisions for loan losses 275 - - - 275
Depreciation and amortization 262 35 9 - 306
Other non-interest expense 2,594 1,246 259 (547) 3,552
Income tax expense (benefit) 970 (47) (25) - 898
---------------------------------------------------------------
Net income $ 1,513 $ (93) $ (45) $ - $ 1,375
===============================================================
Bank HMC Consolidated
Stand-alone Stand-alone Other Eliminations Total
----------------------------------------------------------------
As of and for the three months ended March 31, 2001
From operations:
Interest income from external sources $ 8,976 $ 44 $ 15 $ - $ 9,035
Non-interest income from external sources 915 347 223 - 1,485
Inter-segment interest income 29 - 25 (54) -
Interest expense 5,763 22 - (26) 5,759
Provisions for loan losses 705 - - - 705
Depreciation and amortization 142 31 11 - 184
Other non-interest expense 1,815 652 321 154 2,942
Income tax expense (benefit) 397 (27) (17) - 353
-------------------------------------------------------------
Net income $ 673 $ (63) $ (33) $ - $ 577
=============================================================
5
Bank HMC Consolidated
Stand-alone Stand-alone Other Eliminations Total
---------------------------------------------------------------
As of and for the six months ended March 31, 2002
From operations:
Interest income from external sources $ 17,212 $ 316 $ 9 $ - $ 17,537
Non-interest income from external sources 2,460 1,622 380 - 4,462
Inter-segment interest income 187 - 21 (208) -
Interest expense 9,110 187 - (187) 9,110
Provisions for loan losses 425 - - - 425
Depreciation and amortization 450 69 18 - 537
Other non-interest expense 4,992 2,689 511 (1,068) 7,124
Income tax expense (benefit) 1,905 34 (42) - 1,897
-------------------------------------------------------------
Net income $ 2,977 $ 4 $ (76) $ - $ 2,905
=============================================================
Total Assets $ 519,117 $9,654 $42,236 $(51,706) $ 519,301
=============================================================
Bank HMC Consolidated
Stand-alone Stand-alone Other Eliminations Total
-------------------------------------------------------------
As of and for the six months ended March 31, 2001
From operations:
Interest income from external sources $ 18,128 $ 81 $ 42 $ - $ 18,251
Non-interest income from external sources 1,749 595 456 - 2,800
Inter-segment interest income 47 - 59 (106) -
Interest expense 11,679 40 - (47) 11,672
Provisions for loan losses 795 - - - 795
Depreciation and amortization 281 61 22 - 364
Other non-interest expense 4,053 1,278 621 (59) 5,893
Income tax expense (benefit) 999 (89) (17) - 893
-------------------------------------------------------------
Net income $ 1,650 $ (177) $ (39) $ - $ 1,434
=============================================================
Total Assets $ 464,748 $ 8,433 $ 40,823 $(48,532) $ 465,472
=============================================================
NOTE 4- EARNINGS PER SHARE
The earnings per share amounts are computed using the weighted average
number of shares outstanding during the periods presented. The weighted
average number of shares outstanding for basic and diluted earnings per
share computation for the quarter ended March 31, 2001 were 2,237,627
and 2,335,827, respectively. For the same period in 2002, the number of
shares outstanding for basic and diluted earnings per share computation
was 2,160,744 and 2,274,057, respectively. For the six month period
ended March 31, 2001, the weighted average number of shares outstanding
for basic and diluted earnings per share computation was 2,237,449 and
2,333,191, respectively. For the same period in 2002, the number of
shares outstanding for basic and diluted earnings per share was
2,165,779 and 2,278,649, 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. Amortization
of goodwill for the three month period ended March 31, 2002 and 2001
was $71,000 and $29,000, respectively. Amortization of goodwill for the
six month period ended March 31, 2002 and 2001 was $107,000 and
$58,000, respectively.
6
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 acquisitions 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 asset 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 ING branch
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 affected by less than one cent per share on a pro-forma
basis and considered not material for disclosure.
NOTE 7- COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting shareholder's 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 the change for the quarter in unrealized gains and losses
on securities available for sale, net of tax.
7
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.
General
The Corporation's total assets at March 31, 2002 and September 30, 2001 totaled
$519.3 million and $473.7 million. This increase of $45.6 million was mainly the
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 $11.6 million from $12.6 million at
September 30, 2001 to $24.2 million at March 31, 2002. This increase was
primarily a result of an increase in deposits, which were assumed in the ING
branch acquisition. The Corporation utilized this excess liquidity to fund the
purchase of treasury shares and loan originations.
Securities available for sale increased $2.0 million between March 31, 2002 and
September 30, 2001, as a result of the purchase of a security for $3,000, net of
market value changes and principal payments on mortgage-backed and related
securities.
Loans held for sale increased $5.3 million to $17.4 million at March 31, 2002
from $12.1 million at September 30, 2001. As of March 31, 2002, 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 $26.8 million or 7.9% to $367.3 million at March 31,
2002 from $340.5 million at September 30, 2001. Total residential real estate
and construction loan originations increased by $105.9 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 $23.1
million. Agricultural loans increased by $2.2 million and consumer loans
decreased by $8.4 million. To supplement originations, the Bank purchased $13.5
million of commercial business loans. 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. These types of commercial loans provide the Bank with
the opportunity to continue to diversify the composition of and shorten the
length of maturity of the loan portfolio.
8
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,
----------------------------- -----------------------------
2002 2001 2002 2001
----------------------------- -----------------------------
(in thousands) (in thousands)
Loans originated:
1-4 family residential mortgages $ 27,560 $ 24,109 $ 82,523 $ 38,353
1-4 family construction loans 55,851 19,328 102,741 41,031
Land 2,050 2,846 2,350 3,083
Agriculture 22,345 21,912 30,587 28,114
Commercial business & real estate 4,867 2,121 7,457 5,861
Consumer 4,519 4,804 9,760 10,821
----------------------------- -----------------------------
Total loans originated 117,192 75,120 235,418 127,263
----------------------------- -----------------------------
Loans purchased:
Commercial business 1,890 5,354 13,496 13,060
----------------------------- -----------------------------
Total new loans $ 119,082 $ 80,474 $ 248,914 $ 140,323
============================= =============================
Acquired in ING branch acquisition $ - $ - $ 28,806 $ -
============================= =============================
Total loans sold $ 55,292 $ 29,904 $ 115,823 $ 49,281
============================= =============================
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,
2002 2001
--------------------------------------------------------------------
Amount % Amount %
--------------------------------------------------------------------
(dollars in thousands)
Residential real estate:
One-to-four family (1) $ 71,020 15.4% $ 81,790 19.1%
Residential construction 175,890 38.1% 142,035 33.2%
Multi-family 5,814 1.3% 5,922 1.4%
--------------------------------------------------------------------
252,724 54.7% 229,747 53.7%
Agricultural loans 52,183 11.3% 49,935 11.7%
Land and commercial real estate 74,060 16.0% 55,220 12.9%
Commercial business 21,749 4.7% 23,908 5.6%
---------------------------------------------------------------------
147,992 32.1% 129,063 30.1%
Consumer loans:
Home equity and second mortgages 26,972 5.8% 29,991 7.0%
Automobile loans 11,152 2.4% 13,023 3.0%
Other 22,775 4.9% 26,292 6.1%
--------------------------------------------------------------------
Total consumer loans 60,899 13.2% 69,306 16.2%
--------------------------------------------------------------------
Total loans 461,615 100.0% 428,116 100.0%
============== ==============
Less:
Loans in process (74,485) (73,235)
Deferred fees (713) (774)
Allowance for loan losses (1,638) (1,541)
-------------------- --------------------
Total loans, net $ 384,779 $ 352,566
==================== ====================
- --------------------------------------------------
1. Includes loans held for sale in the amount of $17.4 million and $12.1
million as of March 31, 2002 and September 31, 2001.
Deposits, after interest credited, excluding the ING branch acquisition,
increased from $312.5 million at September 30, 2001 to $322.8 million at March
31, 2002, an increase of $10.3 million or 3.3%. Overall cost of funds on
deposits during the period decreased 153 basis points (100 basis points equals
1%) as the Bank attempted to maintain deposit rates consistent with market place
competitors. Demand deposits increased $1.6 million or 4.0% from September 30,
2001 to March 31, 2002. Savings account balances decreased 7.2% during the same
period, while certificates of deposit increased $8.2 million. As part of
9
the ING branch acquisition, 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 this increase in deposits to
fund the continued loan growth and reduce Federal Home Loan Bank ("FHLB")
borrowings.
The Corporation completed the repurchase of 52,553 shares of common stock which,
when netted against 30,293 shares issued in connection with the exercise of
stock options, increased the number of treasury shares to 2,217,063 at March 31,
2002. 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 $1.4 million 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 $19.96 at
March 31, 2002.
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 an 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:
March 31, September 30,
2002 2001
----------------------------------------
(in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 1,283 $ 1,043
Permanent loans secured by one-to-four family units 331 78
Non- mortgage loans:
Commercial and agricultural 499 1,195
Consumer 756 637
----------------------------------------
Total non-accrual loans 2,869 2,953
Foreclosed real estate 327 126
----------------------------------------
Total non-performing assets $ 3,196 $ 3,079
========================================
Total non-performing loans to net loans 0.75% 0.84%
========================================
Total non-performing loans to total assets 0.55% 0.62%
========================================
Total non-performing assets to total assets 0.62% 0.65%
========================================
10
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
The following table sets forth information with respect to the Corporation's
average balance sheet, interest and dividends earned and paid and related yields
and rates (dollars in thousands):
Three Months Ended March 31,
----------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
----------------------------------------------------------------------------
Assets:
Loans receivable (2) $ 382,533 $ 7,774 8.13 % $ 343,140 $ 7,756 9.04 %
Mortgage-backed securities 50,750 615 4.85 42,365 566 5.34
Investment securities (3) 52,378 323 2.47 57,085 713 5.00
----------------------- -----------------------
Total interest-earning assets 485,661 8,712 7.18 442,590 9,035 8.17
--------------------- ----------------------
Other assets 27,751 22,816
------------- -------------
Total assets $ 513,412 $ 465,406
============= =============
Liabilities:
Interest-bearing deposits $ 367,471 $ 2,874 3.13 % $ 300,644 $ 3,945 5.25 %
Borrowings 98,000 1,363 5.56 119,533 1,814 6.07
----------------------- -----------------------
Total interest-bearing 465,471 4,237 3.64 % 420,177 5,759 5.48 %
--------------------- ----------------------
Other liabilities 5,078 4,765
------------- -------------
Total liabilities 470,549 424,942
Stockholders' equity 42,863 40,464
------------- -------------
Total liabilities and stockholders'
equity $ 513,412 $ 465,406
============= =============
Net interest income $ 4,474 $ 3,276
Net spread (4) 3.54 % 2.69 %
Net margin (5) 3.69 % 2.96 %
Ratio of average interest-earning assets
to average interest-bearing
liabilities 1.04X 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 $1.4 million for the three months ended
March 31, 2002, as compared to net income of $577,000 for the three months ended
March 31, 2001. This increase in net income was $798,000 or 138.0%. The increase
in net income for second quarter 2002 was the result of increases in net
interest income and non-interest income, offset by increases in non-interest
expense. Net interest income increased $1.2 million in the second quarter of
fiscal 2002, an increase of 36.6% over second quarter 2001. Such an increase in
net interest income was the result of a 159 basis point decline in average cost
of funds. The mix of the Bank's deposits helped to stabilize its cost of funds
in this lower interest rate environment. Additionally, non-interest income
increased from the levels of one year ago, mainly due to gains on loan sales
increasing $287,000. Non-interest income was 50.1% of non-interest expense for
the quarter.
11
Total Interest Income
Total interest income decreased by $323,000 to $8.7 million for the three months
ended March 31, 2002. The average yield on loans decreased to 8.13% for the
quarter ended March 31, 2002 from 9.04% for the quarter ended March 31, 2001.
During the same period, the average yield on mortgage-backed securities
decreased 49 basis points. The average balance of investment securities
decreased to $52.4 million for the quarter ended March 31, 2002 from $57.1
million for the quarter ended March 31, 2001, as a result of a reduction in the
Bank's liquidity. The average yield decreased from 5.00% for the three months
ended March 31, 2001 to 2.47% for the same period in 2002.
Total Interest Expense
Total interest expense decreased to $4.2 million for the three months ended
March 31, 2002 from $5.8 million for the same period in 2001. The average
balance of interest-bearing deposits increased from $300.6 million for the three
months ended March 31, 2001 to $367.5 million for the three months ended March
31, 2002, mainly due to the ING transaction. The average cost of deposits
decreased 212 basis points from 5.25% for the three month period ended March 31,
2001 to 3.13% for the same period in 2002, 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 $21.5 million to $98.0 million for
the three months ended March 31, 2002 from $119.5 million for the three months
ended March 31, 2001. The cost of such borrowings decreased by 51 basis points
to 5.56% for the three months ended March 31, 2002 from 6.07% for the same
period in 2001. Borrowings decreased as the Bank utilized repayments of loans
and an increase in deposits to meet liquidity needs.
Net Interest Income
Net interest income increased from $3.3 million for the three months ended March
31, 2001 to $4.5 million for the same period ended March 31, 2002. Average
interest-earning assets increased $43.1 million from $442.6 million for the
three months ended March 31, 2001 to $485.7 million for the three months ended
March 31, 2002, while the average yield on those interest-earning assets
decreased from 8.17% for 2001 to 7.18% for 2002. Average interest-bearing
liabilities increased by $45.3 million to $465.5 million for the three months
ended March 31, 2002 from $420.2 million for the three months ended March 31,
2001, while the cost of those interest-bearing liabilities decreased from 5.48%
in 2001 to 3.64% in 2002.
Provision for Loan Losses
The Corporation's provision for loan losses was $275,000 for the three month
ended March 31, 2002, as compared to $705,000 for the same period in 2001.
During the quarter ended March 31, 2001, an agricultural loan in the Bank's loan
portfolio experienced deterioration. A large portion of the loan was
collateralized by stored corn, which due to the weather conditions during the
quarter, caused spoilage to the corn. Following discussions with the borrower
during the quarter, management determined that the loan was impaired and
recognized a $615,000 charge to earnings. 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 for the current period. 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.
Non-interest Income
Total non-interest income increased $447,000 during the three month period ended
March 31, 2002 to $1.9 million, as compared with the same period in 2001. 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 $575,000 at March 31. 2001 to $862,000 at March 31, 2002 and
service charges and fees increased from $200,000 to $292,000 for the same
periods. Commission income increased from $239,000 for the quarter ended March
31, 2001 to $272,000 for the quarter ended March 31, 2002.
12
Non-interest Expense
Total non-interest expense increased $732,000 or 23.4% over the periods
compared. Compensation and benefits increased $384,000 to $2.3 million at March
31, 2002, mainly due to the ING branch acquisition and the compensation
associated with the increase in loan activity mentioned above. Data processing
expense increased $35,000 to $223,000 for the period ended March 31, 2002, due
to processing expenses associated with the increased delivery of electronic
services to customers. Other non-interest expense increased $329,000 to $884,000
at March 31, 2002, mainly 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.
Income Tax Expense
Income taxes increased by $545,000 to $898,000 for the three month period ended
March 31, 2002 from $353,000 for the same period in 2001, which was primary due
to an increase of $1.3 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 $92,000.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2002 AND 2001
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):
Six Months Ended March 31,
------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
------------------------------------------------------------------------------
Assets:
Loans receivable (2) $ 377,854 $ 15,633 8.27 % $ 343,524 $15,612 9.09 %
Mortgage-backed securities 51,762 1,210 4.68 42,339 1,187 5.61
Investment securities (3) 52,239 694 2.66 56,972 1,452 5.10
------------------------ ------------------------
Total interest-earning assets 481,855 17,537 7.28 442,835 18,251 8.24
----------------------- -----------------------
Other assets 26,273 22,804
------------- ------------
Total assets $ 508,128 $ 465,639
============= ============
Liabilities:
Interest-bearing deposits $ 356,512 $ 6,111 3.43 % $ 298,547 $ 7,953 5.33 %
Borrowings 103,758 2,999 5.78 122,385 3,719 6.08
------------------------ ------------------------
Total interest-bearing
liabilities 460,270 9,110 3.96 % 420,932 11,672 5.55 %
----------------------- -----------------------
Other liabilities 5,236 4,594
------------- ------------
Total liabilities 465,506
425,526
Stockholders' equity 42,622 40,113
------------- ------------
Total liabilities and stockholders'
equity $ 508,128 $ 465,639
============= ============
Net interest income $ 8,426 $ 6,579
Net spread (4) 3.32 % 2.69 %
Net margin (5) 3.42 % 2.97 %
Ratio of average interest-earning assets
to average interest-bearing 1.04X 1.05X
liabilities
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.
13
Net Income
The Corporation recorded net income of $2.9 million for the six months ended
March 31, 2002, as compared to net income of $1.4 million for the six months
ended March 31, 2001. This increase in net income was $1.5 million or 102.6%.
The increase in net income for the 2002 second quarter was the result of an
increase in net interest income and non-interest income, offset by an increase
in non-interest expense. Net interest income increased $1.8 million during the
six months ended March 31, 2002, an increase of 28.1% over the same period in
2001. Such an increase in net interest income was the result of a 159 basis
point decline in average cost of funds. The mix of the Bank's deposits helped to
stabilize its cost of funds in this lower interest rate environment.
Additionally, non-interest income increased significantly over the levels of one
year ago, with gains on the sale of loans increasing $1.3 million. Non-interest
income was 58.2% of non-interest expense for the period.
Total Interest Income
Total interest income decreased by $714,000 to $17.5 million for the six months
ended March 31, 2002. The average yield on loans decreased to 8.27% for the six
months ended March 31, 2002 from 9.09% for the six months ended March 31, 2001.
During the same period, the average yield on mortgage-backed securities
decreased 93 basis points. The average balance of investment securities
decreased to $52.2 million for the six months ended March 31, 2002 from $56.9
million for the six months ended March 31, 2001, as a result of a reduction in
the Bank's liquidity. The average yield decreased from 5.10% for the six months
ended March 31, 2001 to 2.66% for the same period in 2002.
Total Interest Expense
Total interest expense decreased to $9.1 million for the six months ended March
31, 2002 from $11.7 million for the same period in 2001. The average balance of
interest-bearing deposits increased from $298.5 million for the six months ended
March 31, 2001 to $356.5 million for the six months ended March 31, 2002, mainly
due to the ING transaction. The average cost of deposits decreased 190 basis
points from 5.33% for the six month period ended March 31, 2001 to 3.43% for the
same period in 2002, 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 $18.6 million to $103.8 million for the six months ended
March 31, 2002 from $122.4 million for the six months ended March 31, 2001. The
cost of such borrowings decreased by 30 basis points to 5.78% for the six months
ended March 31, 2002 from 6.08% for the same period in 2001. 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 $6.6 million for the six months ended March
31, 2001 to $8.4 million for the same period ended March 31, 2002. Average
interest-earning assets increased $39.1 million from $442.8 million for the six
months ended March 31, 2001 to $481.9 million for the six months ended March 31,
2002, while the average yield on those interest-earning assets decreased from
8.24% for 2001 to 7.28% for 2002. Average interest-bearing liabilities increased
by $39.4 million to $460.3 million for the six months ended March 31, 2002 from
$420.9 million for the six months ended March 31, 2001, while the cost of those
interest-bearing liabilities decreased from 5.55% in 2001 to 3.96% in 2002.
Provision for Loan Losses
The Corporation's provision for loan losses was $425,000 for the six months
ended March 31, 2002, as compared to $795,000 for the same period in 2001. See
also "Comparison of the Three Months Ended March 31, 2002 and 2001- Provision
for Loan Losses."
14
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Six Months
Ended March 31,
----------------------------------------
2002 2001
----------------------------------------
(in thousands)
Average loans outstanding $ 377,854 $ 343,524
========================================
Average balance (beginning of period) $ 1,541 $ 1,534
========================================
ING branch acquisition $ 274 $ -
========================================
Provision (credit):
Residential - -
Land and commercial real estate - 25
Commercial and agricultural business 200 670
Consumer 225 100
----------------------------------------
Total provision 425 795
Charge-offs:
Residential - -
Commercial and agricultural business 276 654
Consumer 335 93
----------------------------------------
Total charge-offs 611 747
Recoveries:
Residential - -
Land and commercial real estate - -
Consumer 9 13
----------------------------------------
Total recoveries 9 13
----------------------------------------
Net charge-offs 602 734
----------------------------------------
Allowance balance (end of period) $ 1,638 $ 1,595
========================================
Allowance as percent of net loans 0.43% 0.42%
Net loans charged off as a percent of average loans 0.16% 0.21%
Non-interest Income
Total non-interest income increased $1.7 million during the six month period
ended March 31, 2002 to $4.5 million, as compared with the same period in 2001.
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 $947,000 at March 31, 2001 to $2.2 million at March 31, 2002 and
service charges and fees increased from $366,000 to $662,000 for the same
periods. Service charges on deposit accounts increased from $761,000 for the six
months ended March 31, 2001 to $853,000 for the six months ended March 31, 2002.
Non-interest Expense
Total non-interest expense increased $1.4 million or 22.4% over the periods
compared. Compensation and benefits increased $874,000 to $4.6 million at March
31, 2002, mainly due to the ING branch acquisition and the compensation
associated with the increase in loan activity mentioned above. Data processing
expense increased $53,000 to $424,000 for the period ended March 31, 2002, due
to processing expenses associated with the increased delivery of electronic
services to customers. Other non-interest expense increased $521,000 to $1.7
million at March 31, 2002, due mainly 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.
Income Tax Expense
Income taxes increased by $1.0 million to $1.9 million for the six month period
ended March 31, 2002 from $893,000 for the same period in 2001, which was
primarily due to an increase of $2.5 million in income before tax. The effective
tax rate decreased by 1.5% for the same periods as a result of an increase in
tax exempt income of $183,000.
15
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 March 31, 2002 is approximately $160.7 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 March 31, 2002, the Bank and HMC had outstanding loan commitments of $1.2
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 5.8%, 3.3%,
6.7% and 2.9%, 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.
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, 2002. 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
The Annual Meeting of Stockholders of the Company was held on
January 15, 2002 and the following matters were voted upon.
Proposal I- Election of Directors for terms to expire in 2004
FOR WITHHELD
--- --------
James J. Caturia 2,117,501 18,100
Jerome R. Dempsey 2,117,501 18,100
Donald A. Glas 2,117,501 18,100
Proposal II- To ratify the appointment of Larson Allen
Weishair & Co., LLP as independent accountants of the Company
for the fiscal year ending September 30, 2002.
FOR AGAINST ABSTAIN
--- ------- -------
2,127,774 3,925 3,902
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.
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 3, 2002 By: /s/ Donald A. Glas
- ------------------- ------------------
Donald A. Glas
Chief Executive Officer
Date: May 3, 2002 By: /s/ Richard H. Burgart
- ------------------- ----------------------
Richard H. Burgart
Chief Financial Officer
18