SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 (I.R.S. employer identification no.)
incorporation or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal
year, if changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicated the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date May 5, 1998. .
Class Outstanding
----- -----------
$.10 par value common stock 2,973,432 shares
FSF FINANCIAL CORP. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Materially Important Events 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, September 30,
1998 1997*
--------------------------
(In thousands)
ASSETS
------
Cash and cash equivalents:
Interest bearing $ 10,174 $ 3,645
Non-interest bearing 2,156 2,490
Securities available for sale, at fair value:
Equity securities 19,509 19,311
Mortgage-backed and related securities 16,323 16,699
Debt securities 2,000 1,000
Securities held to maturity, at amortized cost:
Debt securities (estimated fair value of $33,870 and $37,065) 34,390 37,876
Mortgage-backed and related securities (estimated fair
value of $37,496 and $37,535) 38,380 38,539
Loans held for sale 2,103 204
Loan receivable, net 277,617 260,390
Accrued interest receivable 2,651 2,436
Premises and equipment 3,925 3,772
Other assets 1,831 1,773
-----------------------
Total Assets $ 411,059 $ 388,135
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand Deposits $ 30,638 $ 28,059
Savings accounts 50,959 47,847
Certificates of deposit 136,844 132,340
-----------------------
Total Deposits 218,441 208,246
Federal Home Loan Bank borrowings 147,193 133,817
Other liabilities 2,695 2,710
-----------------------
Total liabilities 368,329 344,773
-----------------------
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 43,287 43,334
Retained earnings, substantially restricted 24,650 23,779
Treasury stock at cost (1,552,070 and 1,491,562 shares) (21,748) (20,267)
Unearned ESOP shares at cost (217,938 and 234,745 shares) (2,179) (2,347)
Unearned MSP stock grants at cost (90,909 and 104,604 shares) (963) (1,108)
Unrealized (loss) on securities available for sale (767) (479)
-----------------------
Total Stockholders' Equity 42,730 43,362
-----------------------
Total Liabilities and Stockholders' Equity $ 411,059 $ 388,135
=======================
- ----------------------------------------------------------------------
* The consolidated statements of financial condition at September 30, 1997, has
been taken from the audited statements of financial condition of and for that
date.
See Notes to Unaudited Consolidated Financial Statements
1
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For Three Months For Six Months
Ended March 31, Ended March 31,
----------------------------------- -------------------------------
1998 1997 1998 1997
----------------------------------- -------------------------------
(In thousands, except per share data)
Interest income:
Loans receivable $ 5,859 $ 4,895 $ 11,548 $ 9,609
Mortgage-backed and related securities 751 826 1,548 1,681
Investment securities 908 1,007 1,786 2,002
----------------------------------- -------------------------------
Total interest income 7,518 6,728 14,882 13,292
----------------------------------- -------------------------------
Interest expense:
Deposits 2,476 2,356 4,929 4,540
Borrowed funds 2,115 1,655 4,210 3,357
----------------------------------- -------------------------------
Total interest expense 4,591 4,011 9,139 7,897
----------------------------------- -------------------------------
Net interest income 2,927 2,717 5,743 5,395
Provision for loan losses 75 30 120 60
----------------------------------- ------------------------------
Net interest income after provision for loan losses 2,852 2,687 5,623 5,335
----------------------------------- -------------------------------
Non-interest income:
Gain on sale of securities 11 - 11 -
Gain on loans - net 96 13 111 18
Other service charges and fees 125 90 232 186
Service charges on deposit accounts 195 158 408 322
Commission income 76 60 129 110
Other 22 22 42 45
----------------------------------- -------------------------------
Total non-interest income 525 343 933 681
----------------------------------- -------------------------------
Non-interest expense:
Compensation and benefits 1,279 1,187 2,515 2,297
Occupancy and equipment 213 202 418 386
Deposit insurance premiums 32 31 65 102
Data processing 121 96 239 194
Professional fees 70 53 139 113
Other 311 258 588 509
----------------------------------- -------------------------------
Total non-interest expense 2,026 1,827 3,964 3,601
----------------------------------- -------------------------------
Income before provision for income taxes 1,351 1,203 2,592 2,415
Income tax expense 541 478 1,036 968
----------------------------------- -------------------------------
Net income $ 810 $ 725 $ 1,556 $ 1,447
=================================== ===============================
Basic earnings per share $ 0.30 $ 0.26 $ 0.58 $ 0.51
Diluted earnings per share $ 0.28 $ 0.24 $ 0.53 $ 0.47
Cash dividend declared per share $ 0.125 $ 0.125 $ 0.25 $ 0.25
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Six Months
Ended Ended
March 31, March 31,
----------------------------------------------
1998 1997 1998 1997
----------------------------------------------
Cash flows from operating activities: (In thousands)
Net income $ 810 $ 725 $ 1,556 $ 1,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 87 79 168 156
Net amortization of discounts and premiums on
securities held to maturity (8) (8) (15) (17)
Provision for loan losses 75 30 120 60
Net market value adjustment on ESOP shares 51 58 101 81
Amortization of ESOP and MSP stock compensation 182 145 334 316
Net gain on real estate owned - - (2) -
Gain on sale of available for sale securities (11) - (11) -
Gain on sale of fixed assets (5) - (5) -
Net loan fees deferred and amortized (23) 35 (17) 98
(Increase) decrease in:
Loans held for sale (1,364) 121 (1,500) (54)
Accrued interest receivable 31 36 (215) (21)
Other assets (117) 47 (133) 4
Increase (decrease) in:
Net deferred taxes 118 (2) 218 363
Accrued interest payable 44 28 44 63
Accrued income tax (275) 111 (157) 186
Accrued liabilities (126) 30 (64) (781)
Deferred compensation payable 111 35 220 54
--------------------------------------------
Net cash provided by operating activities (420) 1,470 642 1,955
--------------------------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net (1,793) (8,713) (12,956) (17,643)
Purchase of loans (2,048) - (4,773) (1,270)
Principal payments on mortgage-related securities held to maturity 129 2 159 7
Purchase of securities available for sale (24) - (1,671) -
Proceeds from sale of securities available for sale 411 - 411 -
Proceeds from maturites of securites held to maturity 3,000 1,500 3,500 1,500
Investments in foreclosed real estate - (1) (2) (1)
Proceeds from sale of REO - - 24 -
Proceeds from sale of fixed assets 5 - 5 0
Purchases of equipment and property improvements (206) (138) (321) (226)
--------------------------------------------
Net cash (used in) investing activities $ (526) $ (7,350) $(15,624) $(17,633)
--------------------------------------------
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Six Months
Ended Ended
March 31, March 31,
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
Cash flows from financing activities: (In thousands)
Net increase in deposits, $ 5,756 $ 9,222 $ 10,195 $ 21,017
Net increase (decrease) in short-term borrowings 3,438 (3,170) 13,375 (3,243)
Net increase (decrease) in mortgage escrow funds 471 407 (59) 93
Treasury stock purchased (1,938) (2,230) (2,037) (5,673)
Proceeds from exercise of stock options 291 5 388 5
Dividends on common stock (343) (357) (685) (731)
--------------------------------------------------------
Net cash provided by financing activities 7,675 3,877 21,177 11,468
--------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,729 (2,003) 6,195 (4,210)
Cash and cash equivalents:
Beginning of period 5,601 9,549 6,135 11,756
--------------------------------------------------------
End of period $ 12,330 $ 7,546 $ 12,330 $ 7,546
========================================================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on advances and other borrowed money $ 2,130 $ 1,668 $ 4,229 $ 3,356
Interest on deposits 2,418 2,349 4,866 4,513
Income taxes 700 385 1,001 428
Loans originated for sale 3,162 910 9,805 1,042
Cash received:
Loans sold 2,723 740 8,106 1,006
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments 10 4 27 20
See Notes to Unaudited Consolidated Financial Statements
4
FSF FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the
three and six month periods ended March 31, 1998, include the
accounts of FSF Financial Corp. ("the Corporation") and its wholly
owned subsidiary, First Federal fsb (the "Bank") and Firstate
Services, a wholly owned subsidiary of the Bank. The Corporation's
business is conducted principally through the Bank. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and,
therefore, do not include information or footnotes necessary for a
complete presentation of consolidated financial condition, results of
operations, and cash flows in conformity with generally accepted
accounting principles. However, all adjustments, consisting of normal
recurring accruals, which, in the opinion of management, are
necessary for fair presentation of the consolidated financial
statements have been included. The results of operations for the
period ended March 31, 1998, are not necessarily indicative of the
results which may be expected for the entire fiscal year or any other
period. For further information, refer to consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1997.
NOTE 3 - NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
necessary restated, to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months ended For the Six Months ended
March 31, March 31,
--------------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------------
Numerator:
Net income - Numerator for basic earnings
per share and diluted earnings per share--
income available to common stockholders $ 810,000 $ 725,000 $ 1,556,000 $ 1,447,000
====================================================================
Denominator:
Denominator for basic earnings per share--
weighted-average shares 2,664,544 2,780,559 2,672,847 2,850,740
Effect of dilutive securities:
Stock - based compensation plans 256,482 223,791 261,489 203,914
--------------------------------------------------------------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 2,921,026 3,004,350 2,934,336 3,054,654
====================================================================
Basic earnings per share $ 0.30 $ 0.26 $ 0.58 $ 0.51
Diluted earnings per share $ 0.28 $ 0.24 $ 0.53 $ 0.47
5
FSF FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at March 31, 1998, and September 30, 1997 totaled
955969710$411.1 million and $388.1 million, respectively. The increase of $23.0
million was a result of an increase in loans receivable and interest bearing
cash equivalents.
Cash and cash equivalents increased from $6.1 million at September 30, 1997, to
$12.3 million at March 31, 1998, or an increase of $6.2 million. The increase in
liquidity was a result of prepayments on mortgages and the sale of mortgage
loans. The Corporation utilizes excess liquidity to fund the purchase of
treasury shares and fund loans.
Securities available for sale increased $800,000 betweenbetween March 31, 1998,
and September 30, 1997, as a result of purchase of such securities.
Securities held to maturity at March 31, 1998, totaled 955969711$72.8 million,
which represents a decrease of $3.6 million or 4.95% as compared to September
30, 1997. $3.0 million in securities matured during the March quarter and the
proceeds were used to help fund the purchase of treasury shares and growth in
the loan portfolio.
Loans held for sale increased $1,899,000 to $2,103,000 at March 31, 1998 from
$204,000 at September 30, 1997. As of March 31, 1998, the Bank had a forward
commitment to sell $2,076,000 of loans held for sale to the Federal Home Loan
Mortgage Corporation ("FHLMC") and Resources Bancshares Mortgage Group, Inc.
("RBMG"), which in effect would reduce the balance of loans held for sale to
$27,000 as of March 31, 1998.
Loans receivable increased $17.2 million or 6.6% to $277.6 million at March 31,
1998, from $260.4 million at September 30, 1997. The increase in loans
receivable was comprised of $10.4 million in agricultural loans and $7.5 million
in commercial business loans. Even though residential mortgage originations
increased by $14.3 million or 61.1%, the sale of residential mortgages and the
prepayments of loans resulted in an increase in one-to-four family residential
mortgages of $1.3 million. The Bank has employed an agricultural lender with
more than 20 years of experience and has utilized agricultural and commercial
business loans to diversify their loan portfolio, mitigate the impact of
mortgage loan prepayments and enhance overall loan yield. Further more, to
supplement originations, the Bank purchased $1.9 million of commercial business
loans. The commercial loans purchased meet the risk profile established by the
Bank, generally have interest rates that are based on the "Prime" rate as
published in the Wall Street Journal, and provide the Bank with the opportunity
to continue to diversify the composition of its loan portfolio and shorten the
length of maturity of the portfolio.
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months Six Months
Ended Ended
March 31, March 31,
------------------------------------------------------------------
1998 1997 1998 1997
------------------------------- -------------------------------
(In Thousands)
Residential mortgages originated $ 19,854 $ 10,823 $ 37,701 $ 23,398
Land and commercial real estate 1,953 3,500 2,615 8,625
Agricultural loans 9,115 10,435
- -
Commercial Business 2,867 693 3,236 1,182
Consumer Loans 5,626 6,100 16,016 11,498
------------------------------- -------------------------------
Total Loans Originated 39,415 21,116 70,003 44,703
------------------------------- -------------------------------
Residential mortgages purchased 87 159 595
-
Commercial Business purchased 1,889 4,614 675
-
------------------------------- -------------------------------
Total loans purchased 1,976 4,773 1,270
-
------------------------------- -------------------------------
Total New Loans $ 41,391 $ 21,116 $ 74,776 $ 45,973
=============================== ===============================
6
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
March 31, September 30,
--------------------------------------------------
1998 1997
--------------------------------------------------
Amount % Amount %
--------------------------------------------------
(Dollars in Thousands)
Residential real estate:
One-to-four family (1) $ 171,711 58.3 $ 170,422 60.3
Residential construction 16,816 5.7 20,796 7.4
Multi-family 4,969 1.7 5,270 1.9
--------------------------------------------------
193,496 65.7 196,488 69.6
Agricultural loans 10,531 3.6 0.0
-
Land and commercial real estate 33,489 11.4 36,682 13.0
Commercial business 15,582 5.3 8,114 2.9
--------------------------------------------------
253,098 86.0 241,284 85.4
Consumer:
Savings accounts 1,638 0.6 977 0.3
Home equity and second mortgages 22,194 7.5 20,812 7.4
Automobile loans 11,046 3.8 11,596 4.1
Other 6,454 2.2 7,844 2.5
--------------------------------------------------
Total loans 294,430 100.0 282,513 100.0
============= =========
Less:
Loans in process (13,149) (20,364)
Deferred fees (605) (703)
Allowance for loan losses (956) (852)
---------- ------------------
Total loans, net $ 279,720 $ 260,594
========== ==================
- ---------------------------------------
(1) Includes loans held for sale in the amount of $2,103,000 and $204,000 as of
March 31, 1998 and September 30, 1997, respectively.
Deposits after interest credited increased from $208.2 million at September 30,
1997, to $218.4 million at March 31, 1998, an increase of $10.2 million or 4.9%.
Overall cost of funds increased during the period as the Bank attempted to
maintain deposit rates consistent with marketplace competitors.
Federal Home Loan Bank ("FHLB") borrowing increased $13.4 million from $133.8
million at September 30, 1997, to $147.2 million at March 31, 1998. The
borrowings were utilized as an additional source of funding of the overall
growth in total assets.
The Corporation completed the repurchase of 101,368 shares of common stock and
when netted with the exercise of 40,860 of stock option shares, increased the
number of treasury shares to 1,552,070 at March 31, 1998. Treasury shares are to
be used for general corporate purposes, including the issuance of shares in
connection with the exercise of stock options. Total stockholders' equity
decreased from $43.4 million at September 30, 1997, to $42.7 million at March
31, 1998. The $700,000 decrease in stockholders' equity was primarily a result
of the purchase of treasury stock and the decrease in the market value of
securities available for sale. Book value per share decreased from $16.24 at
September 30, 1997, to $16.18 at March 31, 1998.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when, in the opinion of management, the collection of additional interest is
doubtful. Loans are placed on a non-accrual status when either principal or
interest is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending of the assessment of the ultimate
collectibility of the loan.
During the six months ended March 31, 1998, and 1997, approximately $50,083 and
$6,000 respectively, would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current according to the original loan
agreements for the entire period. These amounts were not included in the Bank's
interest
7
income for the respective periods. No interest income on loans accounted for on
a non-accrual basis was included in income during any of these periods. During
the periods indicated, the Bank held no foreign loans.
The following table sets forth information with respect to the Bank's
non-performing domestic loans for the periods indicated:
March 31, September 30,
----------------------------------------
1998 1997
----------------------------------------
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 394 $ 393
Permanent loans secured by one-to-four-family units 163 25
Non-mortgage loans:
Commercial - -
Consumer 118 82
----------------------------------------
Total non-accrual loans 675 500
Foreclosed real estate and real estate held for investment 52 72
----------------------------------------
Total non-performing assets $ 727 $ 572
========================================
Total non-performing loans to net loans 0.24% 0.18%
========================================
Total non-performing loans to total assets 0.16% 0.13%
========================================
Total non-performing assets to total assets 0.18% 0.14%
========================================
8
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
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:
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND DIVIDENDS
EARNED OR PAID, AND RELATED INTEREST YIELDS AND RATES
(DOLLARS IN THOUSANDS)
Three Months Ended March 31,
---------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------------------------
Loans receivable (2) $ 276,305 $ 5,859 8.48 % $231,643 $ 4,895 8.45 %
Mortgage-backed securities 55,133 751 5.45 55,032 826 6.00
Investment securities (3) 66,113 908 5.49 67,488 1,007 5.97
----------------------------- ---------------------------
Total interest-earning assets 397,551 7,518 7.56 354,163 6,728 7.60
---------------------------- -------------
Other assets 10,901 10,680
--------------- --------------
Total assets $ 408,452 $364,843
=============== ==============
Liabilities:
Interest-bearing deposits $ 214,287 $ 2,476 4.62 % $205,480 $ 2,356 4.59 %
Borrowings 147,116 2,115 5.75 113,036 1,655 5.86
----------------------------- ---------------------------
Total interest-bearing
liabilities 361,403 4,591 5.08 % 318,516 4,011 5.04 %
---------------------------- -------------
Other liabilities 3,270 2,251
--------------- --------------
Total liabilities 364,673 320,767
Stockholders' equity 43,779 44,076
--------------- --------------
Total liabilities and stockholders'
equity $ 408,452 $364,843
=============== ==============
Net interest income $ 2,927 $ 2,717
Net Spread (4) 2.48 % 2.56 %
Net Margin (5) 2.95 % 3.07 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.10X 1.11X
(1) Annualized
(2) Average balances include non-accrual loans and loans held for sale.
(3) Includes interest-bearing deposits in other financial institutions.
(4) Net spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net margin represents net interest income as a percentage of average
interest-earning assets.
Net Income. The Corporation recorded net income of $810,000 for the three months
ended March 31, 1998, as compared to net income of $725,000 for the three month
period ended March 31, 1997. The increase in net income of $85,000 or 11.7% was
the result of higher net interest income.
Total Interest Income. Total interest income increased by $790,000 or 11.7% to
$7.5 million for the three months ended March 31, 1998, from $6.7 million for
the three months ended March 31, 1997, due to increases in the average balances
of interest-earning assets. The average yield on loans increased to 8.48% for
the quarter ended March 31, 1998, from 8.45% for the quarter ended March 31,
1997, due to an increased mix of higher yielding commercial business and
agricultural loans. During this same period, the average yield on
mortgage-backed securities decreased 55 basis points (100 basis points equals
1%). The average balance of investment
9
securities decreased to $66.1 million for the quarter ended March 31, 1998, from
$67.5 million for the quarter ended March 31, 1997. The average yield decreased
48 basis points from 5.97% for the three months ended March 31, 1997, to 5.49%
for the same period in 1998, as interest rates in general decreased during the
period.
Total Interest Expense. Total interest expense increased to $4.6 million for the
three months ended March 31, 1998, from $4.0 million for the same period in
1997. The average balance of interest-bearing deposits increased from $205.5
million for the three months ended March 31, 1997, to $214.3 million for the
three months ended March 31, 1998. This increase was comprised of interest
credited and an increase in certificate accounts. The average cost of deposits
increased by 3 basis points from 4.59% for the three month period ended March
31, 1997, to 4.62% for the same period in 1998, due to increased certificate
account balances. No assurance can be made that deposits can be maintained in
the future without further increasing the cost of funds if interest rates
continue to increase. The average balance of borrowings increased $34.1 million
to $147.1 million for the three months ended March 31, 1998, from $113.0 million
for the three months ended March 31, 1997. The cost of such borrowings decreased
by 11 basis points to 5.75% for the three months ended March 31, 1998, from
5.86% for the same period in 1997. Borrowings increased as the Bank utilized
borrowings to supplement deposits and meet other liquidity needs.
Net Interest Income. Net interest income increased from $2.7 million for the
three months ended March 31, 1997, to $2.9 million for the same period ended
March 31, 1998, an increase of $210,000 or 7.7%. Average interest-earning assets
increased $43.4 million, from $354.2 million for the three months ended March
31, 1997, to $397.6 million for the three months ended March 31, 1998, while the
average yield on interest-earning assets decreased 4 basis points from 7.60% for
1997 to 7.56% for 1998. Average interest bearing liabilities increased by $42.9
million to $361.4 million for the three months ended March 31, 1998, from $318.5
million for the three months ended March 31, 1997, and the cost of
interest-bearing liabilities increased from 5.04% for 1997 to 5.08% in 1998.
Provision for Loan Losses. The Bank's provision for loan losses was $75,000 for
the three months ended March 31, 1998, compared to $30,000 for the same period
in 1997. Land and commercial real estate loans decreased from 13.0% of total
loans at September 30, 1997, to 11.4% at March 31, 1998, commercial business
loans increased from 2.9% to 5.3%, respectively, and agricultural loans now
represent 3.6% of total loans. Agricultural loans, land and commercial real
estate loans and commercial business loans are generally considered to contain a
higher risk profile than single family residential mortgages. In response to
these changes, management has increased the provision for loan losses in order
to maintain allowance for loan losses at levels management considers adequate.
The Bank's allowance for loan losses was $956,000 and $808,000 at March 31,
1998, and March 31, 1997, respectively. At March 31, 1998, the Bank's allowance
for loan losses constituted 131.5% of non-performing assets as compared to
216.0% of non-performing assets at March 31, 1997. The allowance for losses on
loans is maintained at a level which is considered by management to be adequate
to absorb probable loan losses on existing loans that may become uncollectible,
based on an evaluation of the collectibility of loans and prior loan loss
experience and market conditions. The evaluation takes into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay. The allowance for loan
losses is established through a provision for loan losses charged to expense.
While the Bank maintains its allowance for losses at a level which it considers
to be adequate, there can be no assurances that further additions will not be
made to the loss allowances or that such losses will not exceed the estimated
amounts.
Non-interest Income. Total non-interest income increased $182,000 during the
three month period ended March 31, 1998, to $525,000 as compared to the same
period in 1997. Fixed-rate mortgage loans with terms greater than 10 years were
sold during the quarter ended March 31, 1998 for a gain of $96,000. Other
service charges and fees increased from $90,000 for the three months ended March
31, 1997, to $125,000 for the three months ended March 31, 1998, due to a higher
level of originations. Service charges on deposit accounts increased to $195,000
for the three months ended March 31, 1998, from $158,000 for the same period in
1997, an increase of $37,000 or 23.4%.
Non-interest Expense. Total non-interest expense increased $199,000 or 10.9%
over the periods compared. Compensation and benefits increased to $1,279,000 for
1998 from $1,187,000 for 1997, as a result of normal merit increases and
additional staff as a result of expansion into agricultural lending. Occupancy
expense was $213,000 for the three months ended March 31, 1998, versus $202,000
for the same period in 1997. Data processing increased $25,000 to $121,000 for
the period ended March 31, 1998, due to processing expense
10
associated with increased delivery of electronic services to customers, and to a
lesser extent, as a result of Year 2000 compliance.
Historically, date fields in computer software programs were programmed using
two digit characters to represent the year. Due to this practice, these software
applications, if not corrected prior to the year 2000, will interpret the year
as 1900 and not 2000. As a result, many calculations which rely on the date
field information, such as interest, payment or due dates and other operating
functions, will generate results which will be significantly misstated.
To prepare for this event and to minimize its potential adverse impact,
management has begun a process to identify areas that will be affected by this
issue, assess their potential impact on the operations of the Bank, monitor the
progress of third party software vendors, service providers and customers in
addressing this matter, testing changes provided by these vendors, and
developing contingency plans for any critical systems which are not effectively
reprogrammed.
The Bank's material data processing functions are performed using software
provided by a third party vendor. This vendor has advised its users that it
expects to resolve any potential problems prior to the year 2000. In addition,
this vendor will provide ongoing communication to its users to assist them in
implementing tests of the vendor's software. If this vendor is unable to correct
potential problems in time, or if tests should prove the proposed corrections to
be insufficient, it is likely that the Bank would experience significant data
processing delays, errors or failures. Such delays, errors or failures could
have a significant adverse impact on the financial condition and results of
operations of the Bank. In addition, monitoring and managing the year 2000
project will result in additional direct and indirect costs to the Bank. Direct
costs include potential charges by third party software vendors for product
enhancements, costs involved in testing software products for year 2000
compliance, and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. Total costs are estimated not to exceed
$50,000. Actual costs will be charged to earnings over the next six quarters, as
incurred.
Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business relationships with the
Bank, such as customers, vendors, payment system providers and other financial
institutions, makes it impossible to assure that a failure to achieve compliance
by one or more of these entities would not have material adverse impact on the
operations of the Bank.
Income Tax Expense. Income taxes increased by $63,000 or 13.2%, to $541,000 for
the three month period ended March 31, 1998, from $478,000 for the same period
in 1997, primarily due to the increase of $148,000 in income before tax.
11
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
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:
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND DIVIDENDS
EARNED OR PAID, AND RELATED INTEREST YIELDS AND RATES
(DOLLARS IN THOUSANDS)
Six Months Ended March 31,
-------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------------------------
Loans receivable (2) $ 271,831 $11,548 8.50 % $226,819 $ 9,609 8.47 %
Mortgage-backed securities 55,180 1,548 5.61 54,985 1,681 6.11
Investment securities (3) 64,597 1,786 5.53 68,982 2,002 5.80
-------------------------------- -----------------------------
Total interest-earning
assets 391,608 14,882 7.60 350,786 13,292 7.58
---------------------------- ---------------------
Other assets 10,717 10,654
------------------ ----------------
Total assets $ 402,325 $361,440
================== ================
Liabilities:
Interest-bearing deposits $ 211,116 $ 4,929 4.67 % $200,011 $ 4,540 4.54 %
Borrowings 144,311 4,210 5.83 113,588 3,357 5.91
-------------------------------- -----------------------------
Total interest-bearing
liabilities 355,427 9,139 5.14 % 313,599 7,897 5.04 %
---------------------------- ---------------------
Other liabilities 2,963 2,574
------------------ ----------------
Total liabilities 358,390 316,173
Stockholders' equity 43,935 45,267
------------------ ----------------
Total liabilities and stockholders'
equity $ 402,325 $361,440
================== ================
Net interest income $ 5,743 $ 5,395
Net Spread (4) 2.46 % 2.54 %
Net Margin (5) 2.93 % 3.08 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.10X 1.12X
(1) Annualized
(2) Average balances include non-accrual loans and loans held for sale.
(3) Includes interest-bearing deposits in other financial institutions.
(4) Net spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net margin represents net interest income as a percentage of average
interest-earning assets.
Net Income. The Corporation recorded net income of $1.6 million for the six
months ended March 31, 1998, as compared to net income of $1.4 million for the
six month period ended March 31, 1997. The increase was primarily attributable
to an increase in net interest income.
Total Interest Income. Total interest income increased by $1.6 million or 12.0%
to $14.9 million for the six months ended March 31, 1998, from $13.3 million for
the six months ended March 31, 1997. The yield on mortgage-backed securities
decreased to 5.61% and the yield on investment securities decreased to 5.53% for
the six months ended March 31, 1998, compared to yields of 6.11% and 5.80%,
respectively. The yield on loans receivable increased to 8.50% for the six
months ended March 31, 1998, from 8.47% for the six months ended March 31, 1997.
Furthermore, the average balance of loans receivable increased $45.0 million
during these
12
periods as a result of increased levels of mortgage originations, an increase in
home equity lines of credit, and an increase in agricultural and commercial
business loans.
Total Interest Expense. Total interest expense increased to $9.1 million for the
six months ended March 31, 1998, from $7.9 million for the six months ended
March 31, 1997. Average interest bearing liabilities increased from $313.6
million in 1997 to $355.4 million in 1998 and the cost of the liabilities
increased from 5.04% for the six months ended March 31, 1997, to 5.14% for the
six months ended March 31, 1998. Interest on deposits increased $389,000 and the
average rate increased from 4.54% to 4.67% during the comparison period. Average
borrowings increased from $113.6 million for the six months ended March 31,
1997, to $144.3 million for the six months ended March 31, 1998, and the cost of
the borrowings decreased from 5.91% to 5.83% due to the stability in interest
rates during much of the period. Management can make no assurances regarding the
future movement of interest rates which may impact earnings in future periods.
Net Interest Income. Net interest income increased from $5.4 million for the six
months ended March 31, 1997, to $5.7 million for the same period ended March 31,
1998, an increase of $348,000 or 6.5%. The increase is primarily a result of an
increase in the average balance and yield of loans receivable. The average yield
on interest-earning assets increased from 7.58% to 7.60% during the two periods
while the cost of interest-bearing liabilities increased from 5.04% to 5.14%.
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Six Months
At March 31,
--------------------
1998 1997
--------------------
(In Thousands)
Total loans outstanding (1) $294,430 $235,885
====================
Average loans outstanding $271,831 $226,819
====================
Allowance balance (beginning of period) $ 852 $ 776
--------------------
Provision (credit):
Residential (2) - -
Land and commercial real estate 46
Commercial/Agricultural business 62
Consumer 12 60
--------------------
Total provision 120 60
Charge-off:
Residential - 14
Land and commercial real estate - -
--------------------
Consumer 24 15
--------------------
Total charge-offs 24 29
Recoveries:
Residential - -
Land and commercial real estate - -
Consumer 8 1
--------------------
Total recoveries 8 1
--------------------
Net charge-offs 16 28
--------------------
Allowance balance (end of period) $ 956 $ 808
====================
Allowance as percent of total loans 0.32% 0.34%
Net loans charged off as a percent of average loans - -
- -----------------------------------------------------------
(1) Includes total loans (including loans held for sale), net of loans in
process
(2) Includes one- to four-family and multi-family residential real estate
loans.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$120,000 for the six months ended March 31, 1998 and 1997. See also "Comparison
of the Three Months Ended March 31, 1998 and 1997- Provision for Loan Losses."
Non-interest Income. Total non-interest income increased from $681,000 for the
six months ended March 31, 1997, to $933,000 for the six months ended March 31,
1998. Loans were sold in the secondary market during the six months ended March
31, 1998, with a resulting gain of $111,000 for the period compared with a gain
of
13
$18,000 for the same period in 1997. Other service charges and fees increased
from $186,000 for the 1997 fiscal year to $232,000 for the 1998 fiscal year due
to the increased level of originations and to the origination of more loans with
associated fees that could be recognized in current income. Service charges on
deposit accounts increased from $322,000 for the six months ended March 31,
1997, to $408,000 for the six months ended March 31, 1998, or 26.7%, due to an
increase in the quantity of fees charged for services.
Non-interest expense. Total non-interest expense increased $363,000 for the six
months ended March 31, 1998, to $4.0 million. Compensation and benefits
increased from $2.3 million to $2.5 million for the periods impacted by merit
increases that averaged 3.5% for all employees. Deposit insurance premiums
decreased 36.3%, as a result of the reduction in the SAIF premium. Professional
fees increased from $113,000 for the first six months of fiscal 1997 to $139,000
for the first six months of fiscal 1998.
Income Tax Expense. Income tax expense increased from $968,000 for the six
months ended March 31, 1997, to $1,036,000 for the same period in 1998 as a
result of an increase in income before taxes.
Liquidity and Capital Resources
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of tangible and Tier 1 capital (as
defined) to adjusted total assets (as defined).
As of December 31, 1997, the most recent notification from the OTS categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual regulatory capital amounts and ratios, are also presented in
the table below.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------- ----------------------- -------------------------
GAAP captial, March 31, 1998 $ 35,412
Add: Unrealized losses on debt
securities held for sale 391
--------------
Tangible capital and ratio to
adjusted total assets $ 35,803 8.9% $ 6,069 1.5%
----------------------------- -----------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $ 35,803 8.9% $ 12,138 3.0% $ 20,229 5.0%
----------------------------- ----------------------- --------------------
Tier 1 capital and ratio to
risk-weighted assets $ 35,803 15.8% $ 16,183 4.0% $ 24,275 6.0%
--------------- ----------------------- --------------------
Tier 2 capital, allowance for loan losses 956
--------------
Total risk-based capital and ratio to
risk-weighted assets, March 31, 1998 $ 36,759 16.2% $ 18,110 8.0% $ 22,638 10.0%
============================= ======================= ====================
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or a downturn in the
economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
14
The Bank's liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits, and other cash outflows in an efficient, cost effective manner. The
Bank's primary sources of funds are deposits and scheduled amortization and
principal payment of loans and mortgage-backed securities. During the past
several years, the Bank has used such funds primarily to fund maturing time
deposits, pay savings withdrawals, fund lending commitments, purchase new
investments, and increase liquidity. The Bank is currently able to fund the
majority of its operations internally and uses borrowed funds from the Federal
Home Loan Bank of Des Moines when deemed appropriate by management. As of March
31, 1998, such borrowed funds totaled $147.2 million. Loan payments, maturing
investments and mortgage-backed security prepayments are greatly influenced by
general interest rates, economic conditions and competition.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments", which include certain United States government
obligations and other approved investments. In December, 1997, the federal
regulators reduced the requirement for Banks to maintain liquid assets from 5%
to not less than 4% of its net withdrawable accounts plus short term borrowing,
and eliminated the requirement to maintain not less than 1% of short term liquid
asset of such accounts and borrowings. The Bank's regulatory liquidity was 6.3%
and 6.8% at March 31, 1998, and 1997, respectively. The options from the
previous method were used in the current period, which are more restrictive.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending March 31, 1998, was approximately $88.2 million. To the
extent that these deposits do not remain at the Bank upon maturity, the Bank
believes that it can replace these funds with new deposits, excess liquidity,
FHLB advances or outside borrowings. It has been the Bank's experience that a
substantial portion of such maturing deposits remain at the Bank.
At March 31, 1998, the Bank had loan commitments outstanding of $3.7 million.
Funds required to fill these commitments are derived primarily from current
excess liquidity, advances, deposit inflows or loan and security repayments.
IMPACT OF INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements of the Corporation and notes
thereto, presented elsewhere herein, have been prepared in accordance with GAAP,
which requires the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Corporation's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Corporation
are financial. As a result, interest rates have a greater impact on the
Corporation's performance than do the general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Bank was engaged in any
legal proceeding of a material nature at March 31, 1998.
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
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Corporation was
held on January 20, 1998, and the following items were
presented:
Election of Directors Richard H. Burgart and Roger R.
Stearns for terms of three years ending in 2001. Richard
H. Burgart received 2,481,523 votes in favor and 190,523
votes were withheld. Roger R. Stearns received 2,480,893
votes in favor and 191,153 votes were withheld.
Ratification of the appointment of Bertram Cooper & Co.,
LLP as the Corporation's auditors for the 1998 fiscal
year. Bertram Cooper & Co. was ratified as the
Corporation's auditors with 2,652,066 votes for, 11,271
votes against, and 8,709 abstentions.
Approval of the FSF Financial Corp. 1998 Stock
Compensation Plan. There were 1,427,578 votes in favor,
516,532 votes against and 15,573 votes abstained.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule (only included
in electronic filing).
(b) Reports on Form 8-K
None
16
FSF FINANCIAL CORP. AND SUBSIDIARY
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 5, 1998 By: /s/ Donald A. Glas
- ------------------ ------------------
Donald A. Glas
Chief Executive Officer
Date: May 5, 1998 By: /s/ Richard H. Burgart
- ------------------ ----------------------
Richard H. Burgart
Chief Financial Officer