UNITED STATES
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 ACTS OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24648
FSF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Minnesota 41-1783064
(State or other jurisdiction of incorporation (IRS employer
or organization) identification no.)
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
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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 August 8, 2003.
-------------
Class Outstanding
----- -----------
$.10 par value common stock 2,340,737 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
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 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At At
June 30, September 30,
2003 2002
------------------------------------
(in thousands, except share data)
ASSETS
------
Cash and cash equivalents $ 53,799 $ 14,615
Securities available for sale, at fair value
Equity securities 12,059 12,046
Mortgage-backed and related securities 37,073 29,196
Debt securities 12,863 -
Securities held to maturity, at amortized cost:
Debt securities (fair value of $13,150) - 12,447
Mortgage-backed and related securities (fair value of $20,724) - 20,679
Restricted stock 5,925 5,925
Loans held for sale 33,261 29,242
Loans receivable, net 362,752 382,690
Foreclosed real estate 1,095 122
Accrued interest receivable 3,893 4,436
Premises and equipment 6,348 6,005
Other assets 9,418 9,690
Goodwill 3,883 3,883
Identifiable intangibles 1,056 1,184
------------------------------------
Total assets $ 543,425 $ 532,160
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 67,669 $ 62,687
Savings accounts 88,181 89,037
Certificates of deposit 238,224 230,200
------------------------------------
Total deposits 394,074 381,924
Federal Home Loan Bank borrowings 93,000 98,000
Advances from borrowers for taxes and insurance 202 352
Other liabilities 5,814 6,003
------------------------------------
Total liabilities 493,090 486,279
------------------------------------
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 43,531 43,101
Retained earnings, substantially restricted 38,171 35,214
Treasury stock at cost (2,171,590 and 2,197,763 shares) (31,586) (31,621)
Unearned ESOP shares at cost (13,546 and 54,891 shares) (135) (549)
Unearned MSP stock grants at cost (42,164 and 42,164 shares) (448) (448)
Accumulated other comprehensive income (loss) 352 (266)
------------------------------------
Total stockholders' equity 50,335 45,881
------------------------------------
Total liabilities and stockholders' equity $ 543,425 $ 532,160
====================================
See Notes to Unaudited Consolidated Financial Statements
1
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2003 2002 2003 2002
------------------------ ------------------------
(in thousands, except per share data)
Interest income:
Loans receivable $ 7,399 $ 7,698 $23,304 $23,331
Mortgage-backed and related securities 385 641 1,347 1,851
Investment securities 394 338 1,019 1,032
------------------------ ------------------------
Total interest income 8,178 8,677 25,670 26,214
Interest expense:
Deposits 2,293 2,710 7,485 8,820
Borrowed funds 1,256 1,379 3,818 4,378
------------------------ ------------------------
Total interest expense 3,549 4,089 11,303 13,198
------------------------ ------------------------
Net interest income 4,629 4,588 14,367 13,016
Provision for loan losses 305 203 786 628
------------------------ ------------------------
Net interest income after provision for loan losses 4,324 4,385 13,581 12,388
------------------------ ------------------------
Non-interest income:
Gain on sale of loans, net 1,269 887 3,701 3,097
Other service charges and fees 461 344 1,275 1,006
Service charges on deposit accounts 663 444 1,873 1,297
Commission income 303 281 895 809
Other 102 101 265 310
------------------------ ------------------------
Total non-interest income 2,798 2,057 8,009 6,519
------------------------ ------------------------
Non-interest expense:
Compensation and benefits 2,793 2,428 8,500 7,114
Occupancy and equipment 449 374 1,256 1,096
Deposit insurance premiums 16 16 47 45
Data processing 254 241 744 665
Professional fees 186 157 466 354
Other 904 907 2,613 2,512
------------------------ ------------------------
Total non-interest expense 4,602 4,123 13,626 11,786
------------------------ ------------------------
Income before provision for income taxes 2,520 2,319 7,964 7,121
Income tax expense 894 893 3,022 2,790
------------------------ ------------------------
Net income $ 1,626 $ 1,426 $ 4,942 $ 4,331
======================== ========================
Basic earnings per share $ 0.72 $ 0.65 $ 2.21 $ 1.99
Diluted earnings per share $ 0.68 $ 0.61 $ 2.09 $ 1.89
Cash dividend declared per common share $ 0.30 $ 0.25 $ 0.90 $ 0.75
Comprehensive income $ 1,644 $ 1,641 $ 5,560 $ 4,349
======================== ========================
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2003 2002 2003 2002
------------------------- -------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 1,626 $ 1,426 $ 4,942 $ 4,331
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation 230 186 646 524
Net amortization of discounts and premiums (8) (44) (98) (144)
Provision for loan losses 305 203 786 628
Net market value adjustment on ESOP shares 89 45 247 121
Amortization of ESOP and MSP stock compensation, net of taxes 136 114 414 371
Amortization of intangibles 43 125 128 323
Net loan fees deferred and amortized (98) 163 (355) 102
Net change in loans held for sale (270) 1,459 (318) (1,696)
Gain of sale of loans, net (1,269) (887) (3,701) (3,097)
(Increase) decrease in:
Accrued interest receivable (264) (72) 543 701
Other assets 188 51 321 5
(Decrease) in other liabilities 335 656 (189) 33
------------------------- -------------------------
Net cash provided by operating activities 1,043 3,425 3,366 2,202
------------------------- -------------------------
Cash flows from investing activities:
Loan originations and principal repayments on loans, net 3,858 (4,457) 14,208 9,535
Proceeds from the sale of agricultural loans 3,669 1,241 3,823 1,968
Purchase of loans - (3,790) - (17,286)
Principal repayments on mortgage-related securities held to
maturity - 780 2,178 3,919
Purchase of available for sale securities (2,968) - (7,030) (2,992)
Principal repayments and proceeds from maturities of
securities available for sale 8,594 3,588 18,364 4,286
Purchase of ING branch, net of deposits assumed - - - 17,589
Investment in foreclosed property (131) - (143) (9)
Proceeds from sale of REO 321 - 571 -
Purchase of equipment and property improvements (175) (139) (989) (446)
------------------------- -------------------------
Net cash provided (used by) investing activities $13,168 $ (2,777) $ 30,982 $ 16,564
------------------------- -------------------------
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2003 2002 2003 2002
------------------------- -------------------------
(in thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits $ (8,826) $ (9,023) $12,216 $ 1,697
FHLB advances - - - 10,000
Payments on FHLB advances - - (5,000) (25,500)
Net decrease in mortgage escrow funds (108) (164) (150) (218)
Treasury stock purchased (26) (679) (872) (1,435)
Net proceeds from exercise of stock options 102 440 627 599
Dividends on common stock (669) (550) (1,985) (1,633)
------------------------- -------------------------
Net cash provided (used by) financing activities (9,527) (9,976) 4,836 (16,490)
------------------------- -------------------------
Net increase (decrease) in cash and cash equivalents 4,685 (9,328) 39,184 2,276
Cash and cash equivalents
Beginning of period 49,114 24,198 14,615 12,594
------------------------- -------------------------
End of period $ 53,799 $14,870 $53,799 $14,870
========================= =========================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on advances and other borrowed money $ 1,255 $ 1,382 $ 3,817 $ 4,378
Interest on deposits $ 2,316 $ 2,576 $ 7,963 $ 9,101
Income taxes $ 770 $ 854 $ 3,144 $ 2,711
Supplemental schedule of non-cash investing and financing activities:
Foreclosed real estate $ 859 $ 53 $ 1,410 $ 192
Transfer of securities from held-to-maturity to available-for-sale $ - $ - $30,462 $ -
Unrealized gain on available-for-sale securities transferred,
net of tax $ - $ - $ 561 $ -
See Notes to Unaudited Consolidated Financial Statements
4
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1- PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
and nine months ended June 30, 2003 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 nine month periods ended June 30, 2003 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, 2002.
NOTE 3- BUSINESS SEGMENTS
The Corporation is a holding company whose affiliated companies provide
financial services. The Agency is a property and casualty insurance
agency. The Bank is a community financial institution attracting
deposits from the general public and using such deposits, together with
borrowings and other funds, to make mortgage, construction, consumer,
commercial and agricultural loans. Firstate Services is an investment
services company. HMC, a mortgage banking entity, has become an
integral part of the Bank's lending and fee income function. At June
30, 2003, the Bank operated 13 retail-banking offices in Minnesota. The
Bank is subject to significant competition from other financial
institutions and is also subject to regulation by certain federal
agencies, therefore undergoing periodic examinations by those
regulatory authorities.
The Corporation's operating segments are business units that offer
different products and services that are marketed through different
channels. Firstate Services, the Agency and FSF Financial Corp., did
not meet the quantitative thresholds for determining reportable
segments and therefore are included in the "other" category. Management
has identified the Bank and HMC's banking activity as aggregated
components of a reportable business segment.
Consolidated
Banking Other Eliminations Total
--------------------------------------------------
As of and for the three months ended June 30, 2003
From operations:
Interest income from external sources $ 8,174 $ 4 $ - $ 8,178
Non-interest income from external sources 2,581 217 - 2,798
Inter-segment interest income - 3,005 (3,005) -
Interest expense 3,549 - - 3,549
Provisions for loan losses 305 - - 305
Depreciation and amortization 266 7 - 273
Other non-interest expense 3,947 387 (5) 4,329
Income tax expense (benefit) 1,004 (110) - 894
--------------------------------------------------
Net income $ 1,684 $2,942 $(3,000) $ 1,626
==================================================
5
Consolidated
Banking Other Eliminations Total
--------------------------------------------------
As of and for the three months ended June 30, 2002
From operations:
Interest income from external sources $ 8,673 $ 4 $ - $ 8,677
Non-interest income from external sources 1,868 189 - 2,057
Inter-segment interest income - 2,008 (2,008) -
Interest expense 4,089 - - 4,089
Provisions for loan losses 203 - - 203
Depreciation and amortization 301 9 - 310
Other non-interest expense 3,533 288 (8) 3,813
Income tax expense (benefit) 917 (24) - 893
--------------------------------------------------
Net income $ 1,498 $1,928 $ (2,000) $ 1,426
==================================================
Consolidated
Banking Other Eliminations Total
--------------------------------------------------
As of and for the nine months ended June 30, 2003
From operations:
Interest income from external sources $ 25,661 $ 9 $ - $ 25,670
Non-interest income from external sources 7,394 615 - 8,009
Inter-segment interest income - 3,014 (3,014) -
Interest expense 11,303 - - 11,303
Provisions for loan losses 786 - - 786
Depreciation and amortization 753 23 - 776
Other non-interest expense 11,832 1,032 (14) 12,850
Income tax expense (benefit) 3,227 (205) - 3,022
--------------------------------------------------
Net income $ 5,154 $ 2,788 $ (3,000) $ 4,942
==================================================
Total Assets $540,836 $45,913 $(43,324) $543,425
==================================================
Consolidated
Banking Other Eliminations Total
--------------------------------------------------
As of and for the nine months ended June 30, 2002
From operations:
Interest income from external sources $ 26,202 $ 12 $ - $ 26,214
Non-interest income from external sources 5,950 569 - 6,519
Inter-segment interest income - 2,030 (2,030) -
Interest expense 13,198 - - 13,198
Provisions for loan losses 628 - - 628
Depreciation and amortization 820 27 - 847
Other non-interest expense 10,171 798 (30) 10,939
Income tax expense (benefit) 2,856 (66) - 2,790
--------------------------------------------------
Net income $ 4,479 $1,852 $ (2,000) $ 4,331
==================================================
Total Assets $509,935 $40,966 $(38,917) $511,984
==================================================
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 June 30, 2002 were 2,182,167
and 2,322,339, respectively. For the same period in 2003, the numbers
of shares outstanding for basic and diluted earnings per share
computation were 2,264,577 and 2,400,251, respectively. For the nine
months ended June 30, 2002, the weighted average number or shares
outstanding for basic and diluted earnings per share computation were
2,172,290 and 2,291,896, respectively. For the same period in 2003, the
numbers of shares outstanding for basic and diluted earnings per share
were 2,241,262 and 2,370,045, respectively. The difference between the
basic and diluted earnings per share denominator is the effect of stock
based compensation plans.
6
NOTE 5- STOCK OPTION ACCOUNTING
The Corporation accounts for stock options under the intrinsic value
method of recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
No stock-based employee compensation cost is reflected in net income,
as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation- Transition and Disclosure, is effective for
the interim period beginning after December 15, 2002 and requires
pro-forma net income and earnings per share disclosures on a quarterly
basis. The following table illustrates the effect on net income and
earnings per share as if the company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2003 2002 2003 2002
------------------------ ------------------------
(in thousands)
Net income, as reported $ 1,626 $ 1,426 $ 4,942 $ 4,331
Deduct:
Total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects - - 77 24
------------------------ ------------------------
Pro-forma net income $ 1,626 $ 1,426 $ 4,865 $ 4,307
======================== ========================
Earnings per share:
Basic, as reported $ 0.72 $ 0.65 $ 2.21 $ 1.99
Basic, pro-forma $ 0.72 $ 0.65 $ 2.17 $ 1.98
Diluted, as reported $ 0.68 $ 0.61 $ 2.09 $ 1.89
Diluted, pro-forma $ 0.68 $ 0.61 $ 2.05 $ 1.88
On November 19, 2002, the Corporation awarded 1,250 stock options from
the 1994 stock option plan and 20,687 stock options from the 1998 stock
option plan. The awards may be exercised over a ten-year period at an
exercise price of $23.00, the fair value of the Corporation's stock on
the date of the option grant. In addition, 62,621 options were
exercised at various prices in the current fiscal year.
NOTE 6- EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
Goodwill Accounting Changes
The Corporation adopted Statement of Financial Accounting Standards
(SFAS) Statement No. 142, Goodwill and Other Intangible Assets, on
October 1, 2002. 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, ceased upon adoption of the Statement.
Pursuant to SFAS No. 147, which amended SFAS No. 72 Accounting for
Certain Acquisitions of Banking and Thrift Institutions, the
unidentifiable intangible goodwill recognized (i.e. the unamortized
excess of the fair value of liabilities assumed over the fair value of
assets acquired) was reclassified as goodwill as of the date that SFAS
142 was applied. Note that as of such date, the carrying amount of core
deposit intangible (for which individual accounting records have been
kept) is recorded separately and continues to be amortized.
Reclassified goodwill is now accounted for in accordance with SFAS 142,
thus effectively, amortization ceased as of October 1, 2002.
7
Impairment is the condition that exists when the carrying amount of
goodwill exceeds its implied fair value. In the event of impairment, an
impairment loss would be recognized in an amount equal to that excess.
SFAS No. 142 requires a two step impairment test to identify potential
goodwill impairment and measure the amount of the goodwill impairment
loss to be recognized. The two step impairment test is summarized as
follows:
1. Compare the fair value of the reporting unit with its carrying
amount including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is
not considered impaired and no second step is required.
2. To measure the amount of impairment loss, compare the implied
fair value of the reporting unit goodwill with the carrying
amount of the goodwill. The impairment loss shall equal the
excess of carrying value over fair value.
Goodwill was tested for impairment on May 1, 2003 and its fair value
exceeded the carrying value. Amortization of goodwill for the three and
nine months ended June 30, 2002 was $72,000 and $166,000, respectively.
On a pro-forma basis, net income without goodwill amortization for the
same periods would have been $1.4 million and $4.4 million, while basic
earnings per share would have been $0.62 and $1.92, respectively.
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 in the United States of America, is excluded from
net income. For the Corporation, the difference between net income and
comprehensive income consists of the change, for the periods reported,
in unrealized gains and losses on securities available for sale, net of
tax.
At September 30, 2002, the Bank had a total of $33.1 million of
securities that were classified as held-to-maturity. During the quarter
ended December 31, 2002, the Bank transferred all of the securities to
available-for-sale in accordance with SFAS 115 and SFAS 130. In order
to remain within the held-to-maturity classification, the Bank must
have the ability and intent to hold the securities to maturity.
Although the Bank still has the ability to hold the securities to
maturity, the intent to hold the securities to maturity no longer
exists. Based upon a review of interest rates, potential liquidity
needs, interest rate risk characteristics of the securities and other
factors, management has determined that it would be in the best
interest of the Bank to transfer the securities. This will provide
greater flexibility in dealing with changing economic circumstances.
The following table provides information regarding the impact of the
transfer on comprehensive income.
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------
(in thousands)
Net income $ 1,626 $ 1,426 $ 4,942 $ 4,331
Other comprehensive income
Unrealized holding gains on securities transferred
from held to maturity, net of tax expense - - 561 -
Unrealized holding gains (losses) during the period 23 361 89 22
Tax (expense) benefit (5) (146) (32) (4)
------------------------------------------------------
Comprehensive income $ 1,644 $ 1,641 $ 5,560 $ 4,349
======================================================
8
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 June 30, 2003 and September 30, 2002 totaled
$543.4 million and $532.2 million, respectively. This increase of $11.2 million
was primarily the result of an increase in cash and cash equivalents, offset in
part by a reduction in the outstanding loan balances.
Cash and cash equivalents increased $39.2 million from $14.6 million at
September 30, 2002 to $53.8 million at June 30, 2003, mainly due to principal
repayments on investments and loans plus new deposits. The Corporation utilizes
this excess liquidity to fund loan originations.
During the quarter ended December 31, 2002, the Corporation transferred all its
held-to-maturity debt securities and mortgage-backed and related securities to
the available-for-sale category. The net carrying amount of these securities at
the time of transfer was $31.0 million and the unrealized gain, net of income
taxes, was $561,000 (see Note 7 to financial statements). During this fiscal
year, $7.0 million of available-for-sale securities were purchased.
Loans held for sale increased $4.1 million to $33.3 million at June 30, 2003
from $29.2 million at September 30, 2002. As of June 30, 2003, 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 decreased $19.9 million to $362.8 million at June 30, 2003 from
$382.7 million at September 30, 2002. The balance of land and commercial real
estate loans decreased by $17.1 million, consumer loans increased by $919,000,
one-to-four family loans decreased $11.6 million and commercial business loans
decreased $6.6 million. The decrease in loans was the result of prepayments and
refinancing activity due to the lower interest rate environment. Construction
loans increased from $239.2 million at September 30, 2002 to $260.2 million at
June 30, 2003. During that period, the Bank also sold $3.8 million of
agricultural loans to Farmer Mac, an agency of the federal government. These
loans were sold, with servicing retained, in order to allow the Bank to expand
their agricultural lending base without increasing the overall percentage of
agricultural loans.
9
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months Nine Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------------------------- --------------------------
(in thousands)
Loans originated:
One-to-four family residential mortgages $ 65,051 $ 22,798 $ 183,125 $ 105,321
Residential construction 66,698 69,428 157,965 172,169
Land - 2,500 - 4,850
Agricultural 10,819 16,153 42,133 46,740
Commercial business & real estate 4,271 5,346 18,141 12,805
Consumer 4,985 6,651 27,015 16,411
-------------------------- --------------------------
Total loans originated 151,824 122,876 428,379 358,296
-------------------------- --------------------------
Loans purchased:
Commercial business - 3,790 - 17,286
-------------------------- --------------------------
Total new loans $ 151,824 $ 126,666 $ 428,379 $ 375,582
========================== ==========================
Acquired in ING branch acquisition $ - $ - $ - $ 28,806
========================== ==========================
Total loans sold $ 89,989 $ 37,736 $ 251,364 $ 153,559
========================== ==========================
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:
June 30, September 30,
2003 2002
--------------------------------------------------------------------
Amount % Amount %
--------------------------------------------------------------------
(dollars in thousands)
Residential real estate:
One-to-four family (1) $ 60,005 12.0% $ 71,625 13.9%
Residential construction 260,242 51.9% 239,155 46.3%
Multi-family 8,297 1.7% 10,095 2.0%
---------------------------------------------------------------
328,544 65.6% 320,875 62.1%
Agricultural loans 55,977 11.2% 56,129 10.9%
Land and commercial real estate 38,141 7.6% 55,270 10.7%
Commercial business 19,945 4.0% 26,556 5.1%
---------------------------------------------------------------
114,083 22.8% 137,955 26.7%
Consumer loans:
Home equity and second mortgages 22,313 4.5% 27,543 5.3%
Automobile loans 12,659 2.5% 9,172 1.8%
Other 23,419 4.7% 20,757 4.0%
---------------------------------------------------------------
Total consumer loans 58,391 11.7% 57,472 11.1%
---------------------------------------------------------------
Total loans 501,018 100.0% 516,302 100.0%
===== =====
Less:
Loans in process (102,908) (101,854)
Deferred fees (481) (835)
Allowance for loan losses (1,616) (1,681)
--------------- --------------------
Total loans, net $ 396,013 $ 411,932
=============== ====================
<FN>
- -------------------------------
(1) Includes loans held for sale in the amount of $33.3 million and $29.2
million as of June 30, 2003 and September 30, 2002.
</FN>
10
In originating 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, inherent losses may exist in the loan portfolio which
are not specifically identifiable. Therefore, based upon management's best
estimate, an amount may be charged to earnings to maintain the allowance for
loan losses at a level sufficient to recognize inherent credit risk.
Loans are evaluated for impairment in accordance with SFAS 114, 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 a charge to earnings and a reduction to the
loan balance or an increase in 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 Bank believes it has established its existing allowance for loan losses in
accordance with GAAP. The allowance for loan losses is evaluated based on a
detailed review of the loan portfolio, historic loan losses, current economic
conditions and other factors. From period to period, the outstanding balance in
various loan categories will increase and decrease thereby increasing or
decreasing the amount of the allowance attributable to particular categories.
Management believes that the resulting level of the allowance for loan losses
reflects an adequate reserve against inherent losses in the loan portfolio.
However, there can be no assurance that banking regulators, in reviewing the
Bank's loan portfolio, will not request the Bank to increase its allowance for
loan losses or that a deteriorating real estate market or other unforeseen
economic changes may cause an increase in allowance for loan losses. This is
likely to negatively affect the Bank's financial condition and earnings.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated:
June 30, September 30,
2003 2002
-----------------------------------
(dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 3,762 $ 3,133
Permanent loans secured by one-to-four family units 496 482
Non-residential loans - 74
Non- mortgage loans:
Commercial and agricultural 380 647
Consumer 527 537
-----------------------------------
Total non-accrual loans 5,165 4,873
Foreclosed real estate 1,095 122
-----------------------------------
Total non-performing assets $ 6,260 $ 4,995
===================================
Total non-performing loans to net loans 1.30% 1.18%
===================================
Total non-performing loans to total assets 0.95% 0.92%
===================================
Total non-performing assets to total assets 1.15% 0.94%
===================================
11
The residential construction loans are comprised of 24 loans. The outstanding
balance of the loans ranges from $45,000 to $354,000. The loan-to-value ratios
of the loans range between 53% and 97%. Each of the loans has been evaluated for
impairment and is carried at the lower of fair value or cost. There are 5
permanent loans secured by one-to-four family residential units that range from
$14,000 to $134,000. Commercial and agricultural loans are comprised of 8 loans.
The outstanding values of these loans range from $1,000 to $90,000. Each of the
loans has been evaluated for impairment and is carried at the lower of fair
value or cost. The consumer loan total is made up of 22 loans that range from
$1,000 to $97,000. The foreclosed real estate consists of 6 construction loans
with balances between $130,000 and $301,000, all of which are carried at the
lower of fair value or cost.
Deposits, after interest credited, increased $12.2 million from $381.9 million
at September 30, 2002 to $394.1 million at June 30, 2003. Overall cost of funds
on deposits during the period decreased 56 basis points (100 basis points equals
1%) as a result of the Bank's attempt to maintain deposit rates consistent with
competitors in the market place. Demand deposits increased $5.0 million or 7.9%
from September 30, 2002 to June 30, 2003. Savings account balances decreased
1.0% during the same period, while certificates of deposit increased $8.0
million. The Bank utilized the increase in deposits to increase liquidity and to
reduce Federal Home Loan Bank ("FHLB") borrowings.
The Corporation completed the repurchase of 36,448 shares of common stock which,
when netted against 62,621 shares issued in connection with the exercise of
stock options, decreased the number of treasury shares to 2,171,590 at June 30,
2003. Treasury shares are used for general corporate purposes, including the
issuance of shares in connection with the exercise of stock options. Total
stockholders' equity increased $4.5 million since September 30, 2002 due to net
income, the change in accumulated comprehensive income and amortization of ESOP
shares. Total stockholder's equity was reduced by the amount of dividends paid
during the nine months of the fiscal year. Accumulated other comprehensive
income increased as a result of changes in the net unrealized gains on the
available-for-sale securities due to fluctuations in interest rates (see Note 7
to financial statements). Because of interest rate volatility, the Corporation's
accumulated other comprehensive income could materially fluctuate. Book value
per share increased from $20.79 at September 30, 2002 to $22.14 at June 30,
2003.
12
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
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 June 30,
---------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------
(dollars in thousands)
Assets:
Loans receivable (2) $ 398,372 $ 7,399 7.43% $ 383,296 $ 7,698 8.03%
Mortgage-backed securities 39,795 385 3.87 51,522 641 4.98
Investment securities (3) 76,927 394 2.05 47,261 338 2.86
--------------------- -------------------
Total interest-earning assets 515,094 8,178 6.35 482,079 8,677 7.20
------------------ ----------------
Other assets 29,232 27,108
------------ ------------
Total assets $ 544,326 $ 509,187
============ ============
Liabilities:
Interest-bearing deposits $ 394,890 $ 2,293 2.32% $ 361,621 $ 2,710 3.00%
Borrowings 93,000 1,256 5.40 98,000 1,379 5.63
--------------------- -------------------
Total interest-bearing 487,890 3,549 2.91% 459,621 4,089 3.56%
------------------ ----------------
Other liabilities 6,742 5,759
------------ ------------
Total liabilities 494,632 465,380
Stockholders' equity 49,694 43,807
------------ ------------
Total liabilities and stockholders'
equity $ 544,326 $ 509,187
============ ============
Net interest income $ 4,629 $ 4,588
Net spread (4) 3.44% 3.64%
Net margin (5) 3.59% 3.81%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.06X 1.05X
<FN>
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.
</FN>
Net Income
The Corporation recorded net income of $1.6 million for the three months ended
June 30, 2003, as compared to net income of $1.4 million for the three months
ended June 30, 2002. This increase in net income was $200,000 or 14.0%. The
increase in net income for third quarter 2003 was primarily the result of
increases in net interest income and non-interest income, partially offset by
increases in non-interest expense. Net interest income increased $41,000 in the
third quarter of fiscal 2003, an increase of 1.0% over third quarter 2002. The
increase in net interest income was primarily attributable to a 65 basis point
decline in the average cost of funds. The mix of the Bank's deposits helped to
stabilize its cost of funds in this lower interest rate environment.
Non-interest income was 60.8% of non-interest expense for the quarter.
13
Total Interest Income
Total interest income decreased by $499,000 to $8.2 million for the quarter
ended June 30, 2003 from the comparable 2002 period. The average yield on loans
decreased to 7.43% for the quarter ended June 30, 2003 from 8.03% for the
quarter ended June 30, 2002. During the same period, the average yield on
mortgage-backed securities decreased 111 basis points. The average balance of
investment securities increased to $76.9 million for the quarter ended June 30,
2003 from $47.3 million for the quarter ended June 30, 2002, primarily as a
result of loan repayments and deposit growth invested. The average yield on
investment securities decreased from 2.86% for the three months ended June 30,
2002 to 2.05% for the same period in 2003.
Total Interest Expense
Total interest expense decreased to $3.5 million for the three months ended June
30, 2003 from $4.1 million for the same period in 2002. The average balance of
interest-bearing deposits increased from $361.6 million for the three months
ended June 30, 2002 to $394.9 million for the three months ended June 30, 2003.
The average cost of deposits decreased 68 basis points from 3.00% for the
quarter ended June 30, 2002 to 2.32% for the same period in 2003, as the rates
offered by the Bank on deposits 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
$5.0 million to $93.0 million for the three months ended June 30, 2003 from
$98.0 million for the three months ended June 30, 2002. The cost of borrowings
decreased by 23 basis points to 5.40% for the quarter ended June 30, 2003 from
5.63% for the same period in 2002. Borrowings decreased as the Bank utilized
repayments of loans and an increase in deposits to meet liquidity needs.
Net Interest Income
Net interest income remained at $4.6 million for the quarters ended June 30,
2002 and June 30, 2003, respectively. Average interest-earning assets increased
$33.0 million from $482.1 million for the quarter ended June 30, 2002 to $515.1
million for the quarter ended June 30, 2003, while the average yield on
interest-earning assets decreased from 7.20% for 2002 to 6.35% for 2003. Average
interest-bearing liabilities increased by $28.3 million to $487.9 million for
the quarter ended June 30, 2003 from $459.6 million for the quarter ended June
30, 2002, while the cost of interest-bearing liabilities decreased from 3.56% in
2002 to 2.91% in 2003.
Provision for Loan Losses
The Corporation's provision for loan losses was $305,000 for the quarter ended
June 30, 2003, compared to $203,000 for the same period in 2002. The increase in
the provision for loan losses was primarily attributable to an increase in the
Bank's charge-offs for residential construction loans. 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 from $2.1 million for the quarter ended June
30, 2002 to $2.8 million for the quarter ended June 30, 2003. Gain on sale of
loans, increased $382,000 over the same period in 2002, primarily due to an
increase in the number of residential construction loans that were modified and
sold in the secondary market. Other service charges and fees increased from
$344,000 for the three months ended June 30, 2002 to $461,000 for the same
period ended June 30, 2003, primarily due to declining interest rates that
helped boost the purchase and refinance markets. Service charges on deposit
accounts increased $219,000 due to an increase in fees charged.
Non-interest Expense
Total non-interest expense increased $479,000 or 11.2% over the periods
compared. Compensation and benefits increased $365,000, as a result of higher
indirect administrative costs related to the increased levels of construction
lending activities and increased Employee Stock Ownership Plan (ESOP) expense.
Repayment of the ESOP loan was accelerated by one year and thereby increased the
related expense. Occupancy and equipment expense increased $75,000 while
professional fees increased $29,000 over the periods compared due to expenses
incurred in connection with the use of consultants and the increased cost of
outside auditors. Data processing increased $13,000 to $254,000 for the period
ended June 30, 2003, due to the delivery of additional data processing related
services to our customer base.
14
Income Tax Expense
Income taxes increased to $894,000 for the quarter ended June 30, 2003 from
$893,000 for the same period in 2002.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2003 AND 2002
Nine Months Ended June 30,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
-------------------------------------------------------------------------------
(dollars in thousands)
Assets:
Loans receivable (2) $ 409,417 $ 23,304 7.59% $ 379,668 $ 23,331 8.19%
Mortgage-backed securities 43,653 1,347 4.11 51,682 1,851 4.78
Investment securities (3) 61,912 1,019 2.19 50,580 1,032 2.72
----------------------- ----------------------
Total interest-earning assets 514,982 25,670 6.65 481,930 26,214 7.25
-------------------- ------------------
Other assets 29,426 26,571
------------ -----------
Total assets $ 544,408 $ 508,501
============ ===========
Liabilities:
Interest-bearing deposits $ 395,368 $ 7,485 2.52% $ 358,215 $ 8,820 3.28%
Borrowings 93,934 3,818 5.42 101,839 4,378 5.73
----------------------- ----------------------
Total interest-bearing 489,302 11,303 3.08% 460,054 13,198 3.83%
-------------------- ------------------
Other liabilities 6,988 5,320
------------ -----------
Total liabilities 496,290 465,374
Stockholders' equity 48,118 43,127
------------ -----------
Total liabilities and stockholders'
equity $ 544,408 $ 508,501
============ ===========
Net interest income $ 14,367 $ 13,016
Net spread (4) 3.57% 3.42%
Net margin (5) 3.72% 3.60%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.05X 1.05X
<FN>
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.
</FN>
Net Income
The Corporation recorded an increase in net income of $611,000 or 14.1% to $4.9
million for the nine months ended June 30, 2003, compared to net income of $4.3
million for the comparable 2002 period. The increase in net income for nine
months ended June 30, 2003 was primarily the result of increases in net interest
income and non-interest income partially offset by increases in non-interest
expense. Net interest income increased $1.4 million in the third quarter of
fiscal 2003, an increase of 10.4% over third quarter 2002. The increase in net
interest income was primarily attributable to a 75 basis point decline in the
average cost of funds. The mix of the Bank's deposits helped to stabilize its
cost of funds in this lower interest rate environment. Non-interest income was
58.8% of non-interest expense for the period.
15
Total Interest Income
Total interest income decreased by $544,000 to $25.7 million for the nine months
ended June 30, 2003, from the comparable 2002 period. The average yield on loans
decreased to 7.59% for the nine months ended June 30, 2003 from 8.19% for the
nine months ended June 30, 2002. During the same period, the average yield on
mortgage-backed securities decreased 67 basis points. The average balance of
investment securities increased to $61.9 million for the nine months ended June
30, 2003 from $50.6 million for the nine months ended June 30, 2002. The average
yield on investment securities decreased from 2.72% for the nine months ended
June 30, 2002 to 2.19% for the same period in 2003.
Total Interest Expense
Total interest expense decreased to $11.3 million for the nine months ended June
30, 2003 from $13.2 million for the same period in 2002. The average balance of
interest-bearing deposits increased from $358.2 million for the nine months
ended June 30, 2002 to $395.4 million for the nine months ended June 30, 2003.
The average cost of deposits decreased 76 basis points from 3.28% for the nine
months ended June 30, 2002 to 2.52% for the same period in 2003, as the rates
offered by the Bank on deposits 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
$7.9 million to $93.9 million for the nine months ended June 30, 2003 from
$101.8 million for the nine months ended June 30, 2002. The cost of borrowings
decreased by 31 basis points to 5.42% for the nine months ended June 30, 2003
from 5.73% for the same period in 2002. 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 $13.0 million for the nine months ended June
30, 2002 to $14.4 million for the same period ended June 30, 2003. Average
interest-earning assets increased $33.1 million from $481.9 million for the nine
months ended June 30, 2002 to $515.0 million for the nine months ended June 30,
2003, while the average yield on interest-earning assets decreased from 7.25%
for 2002 to 6.65% for 2003. Average interest-bearing liabilities increased by
$29.2 million to $489.3 million for the nine months ended June 30, 2003 from
$460.1 million for the nine months ended June 30, 2002, while the cost of
interest-bearing liabilities decreased from 3.83% in 2002 to 3.08% in 2003.
Provision for Loan Losses
The Corporation's provision for loan losses was $786,000 for the nine months
ended June 30, 2003, compared to $628,000 for the same period in 2002. The
increase in the provision for loan losses was primarily attributable to an
increase in the Bank's charge-offs for residential construction loans. 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.
16
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Nine Months
Ended June 30,
----------------------------------------
2003 2002
----------------------------------------
(dollars in thousands)
Average loans outstanding $ 409,417 $ 379,668
----------------------------------------
Allowance balance (beginning of period) $ 1,681 $ 1,541
----------------------------------------
ING branch acquisition $ - $ 274
Provision (credit):
Residential and construction 568 100
Land and commercial real estate - -
Commercial and agricultural business 167 220
Consumer 51 308
----------------------------------------
Total provision 786 628
Charge-offs:
Residential and construction 431 -
Land and commercial real estate 73 87
Commercial and agricultural business 160 276
Consumer 257 411
----------------------------------------
Total charge-offs 921 774
Recoveries:
Residential and construction - -
Land and commercial real estate - -
Consumer 70 34
----------------------------------------
Total recoveries 70 34
----------------------------------------
Net charge-offs 851 740
----------------------------------------
Allowance balance (end of period) $ 1,616 $ 1,703
========================================
Allowance as percent of net loans 0.41% 0.44%
Net loans charged off as a percent of average loans 0.21% 0.19%
Non-interest Income
Total non-interest income increased from $6.5 million for the nine months ended
June 30, 2002 to $8.0 million for the nine months ended June 30, 2003. Other
service charges and fees increased from $1.0 million for the nine months ended
June 30, 2002 to $1.3 million for the same period ended June 30, 2003, primarily
due to declining interest rates that helped boost the purchase and refinance
markets. Gain on sale of loans, net increased $604,000 over the same period in
2002, due to the declining interest rate environment, resulting in an increased
refinance market. Service charges on deposit accounts increased $576,000 due to
an increase in fees charged.
Non-interest Expense
Total non-interest expense increased $1.8 million or 15.6% over the periods
compared. Compensation and benefits increased $1.5 million, as a result of
higher indirect administrative costs related to the increased levels of
construction lending activities and increased Employee Stock Ownership Plan
(ESOP) expense. Repayment of the ESOP loan was accelerated by one year and
thereby increased the related expense. Occupancy and equipment expense increased
$160,000 while professional fees increased $112,000 over the periods compared
due to expenses incurred in connection with the use of consultants and the
increased cost of outside auditors. Data processing increased $79,000 to
$744,000 for the nine months ended June 30, 2003, due to the delivery of
additional data processing related services to our customer base.
Income Tax Expense
Income taxes increased by $232,000 to $3.0 million for the nine months ended
June 30, 2003 from $2.8 million for the same period in 2002, which was primarily
due to an increase of $843,000 in pre-tax income. A state income tax refund of
approximately $119,000 impacted the nominal tax rate for the comparative
periods. The refund was the result of an apportionment formula related to the
multi-state residential construction lending.
17
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 June 30, 2004 is approximately $166.7 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 June 30, 2003, the Bank had outstanding loan commitments of $5.3 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 6.2%, 7.6%,
3.7% and 4.1%, 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, 2002.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, the Registrant's principal executive officer and principal financial
officer have concluded that the Registrant's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act")) are effective to ensure that information required
to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in
----------------------------
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
18
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries were
engaged in any legal proceedings of a material nature at June
30, 2003. 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 AND USE OF PROCEEDS
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 INFORMATION
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 ***
31.0 Section 302 Certifications
32.0 Certification Pursuant to 18 U.S.C. 1350 Pursuant to
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
(i) The Company furnished a current report on Form 8-K on
April 22, 2003 pursuant to items 7 and 9 to report
operating results for the quarter ended March 31, 2003.
(ii) A report on Form 8-K was filed on May 9, 2003 pursuant
to items 4 and 7 to announce the resignation of the
Company's independent auditors and the appointment of
the Company's new independent auditors.
___________
* 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.
19
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: August 8, 2003 By: /s/ Donald A. Glas
-------------- -----------------------------
Donald A. Glas
Chief Executive Officer
Date: August 8, 2003 By: /s/ Richard H. Burgart
-------------- -----------------------------
Richard H. Burgart
Chief Financial Officer
20