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 June 30, 1998
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 (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 July 30, 1998.
-------------
Class Outstanding
$.10 par value common stock 2,927,958 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Materially Important Events 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, September 30,
1998 1997*
----------------------
(In thousands)
ASSETS
------
Cash and cash equivalents:
Interest bearing $ 11,219 $ 3,645
Non-interest bearing 2,310 2,490
Securities available for sale, at fair value:
Equity securities 19,472 19,311
Mortgage-backed and related securities 16,547 16,699
Debt securities 2,000 1,000
Securities held to maturity, at amortized cost:
Debt securities (estimated fair value of $32,115 and $37,065) 32,396 37,876
Mortgage-backed and related securities (estimated fair
value of $36,886 and $37,535) 37,749 38,539
Loans held for sale 1,160 204
Loan receivable, net 281,546 260,390
Accrued interest receivable 2,976 2,436
Premises and equipment 3,995 3,772
Other assets 2,702 1,773
--------- ---------
Total Assets $ 414,072 $ 388,135
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand Deposits $ 30,347 $ 28,059
Savings accounts 53,421 47,847
Certificates of deposit 137,310 132,340
--------- ---------
Total Deposits 221,078 208,246
Federal Home Loan Bank borrowings 147,234 133,817
Other liabilities 2,546 2,710
--------- ---------
Total liabilities 370,858 344,773
--------- ---------
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 43,356 43,334
Retained earnings, substantially restricted 25,081 23,779
Treasury stock at cost (1,568,319 and 1,491,562 shares) (22,021) (20,267)
Unearned ESOP shares at cost (209,066 and 234,745 shares) (2,091) (2,347)
Unearned MSP stock grants at cost (84,062 and 104,604 shares) (890) (1,108)
Unrealized (loss) on securities available for sale (671) (479)
--------- ---------
Total Stockholders' Equity 43,214 43,362
--------- ---------
Total Liabilities and Stockholders' Equity $ 414,072 $ 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 SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For Three Months For Nine Months
Ended June 30, Ended June 30,
------------------------ --------------------
1998 1997 1998 1997
------------------------ --------------------
(In thousands, except per share data)
Interest income:
Loans receivable $ 5,961 $ 5,108 $17,509 $14,717
Mortgage-backed and related securities 743 881 2,291 2,562
Investment securities 850 944 2,636 2,946
------- ------- ------- -------
Total interest income 7,554 6,933 22,436 20,225
------- ------- ------- -------
Interest expense:
Deposits 2,532 2,384 7,461 6,924
Borrowed funds 2,125 1,720 6,335 5,077
------- ------- ------- -------
Total interest expense 4,657 4,104 13,796 12,001
------- ------- ------- -------
Net interest income 2,897 2,829 8,640 8,224
Provision for loan losses 107 30 227 90
------- ------- ------- -------
Net interest income after provision for loan losses 2,790 2,799 8,413 8,134
------- ------- ------- -------
Non-interest income:
Gain on sale of securities -- -- 11 --
Gain on loans - net 130 15 241 33
Other service charges and fees 120 126 352 312
Service charges on deposit accounts 210 187 618 509
Commission income 144 63 273 173
Other 16 20 58 65
------- ------- ------- -------
Total non-interest income 620 411 1,553 1,092
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 1,374 1,152 3,889 3,449
Occupancy and equipment 206 206 624 592
Deposit insurance premiums 33 32 98 134
Data processing 125 100 364 294
Professional fees 72 57 211 170
Other 320 281 908 790
------- ------- ------- -------
Total non-interest expense 2,130 1,828 6,094 5,429
------- ------- ------- -------
Income before provision for income taxes 1,280 1,382 3,872 3,797
Income tax expense 513 559 1,549 1,527
------- ------- ------- -------
Net income $ 767 $ 823 $ 2,323 $ 2,270
======= ======= ======= =======
Basic earnings per share $ 0.29 $ 0.31 $ 0.87 $ 0.81
Diluted earnings per share $ 0.27 $ 0.28 $ 0.80 $ 0.75
Cash dividend declared per share $ 0.125 $ 0.125 $ 0.375 $ 0.375
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Nine Months
Ended Ended
June 30, June 30,
-----------------------------------------------
1998 1997 1998 1997
-----------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 767 $ 823 $ 2,323 $ 2,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 92 83 260 239
Net amortization of discounts and premiums on
securities held to maturity (6) (6) (21) (23)
Provision for loan losses 107 30 227 90
Net market value adjustment on ESOP shares 48 60 149 141
Amortization of ESOP and MSP stock compensation 395 149 729 465
Amortization of intangibles 3 -- 3 --
Net gain on real estate owned -- -- (2) --
Gain on sale of available for sale securities -- -- (11) --
Gain on sale of fixed assets -- -- (5) --
Net loan fees deferred and amortized 12 (15) (5) 83
(Increase) decrease in:
Loans held for sale 943 140 (557) (260)
Accrued interest receivable (325) (168) (540) (189)
Other assets 63 82 (70) 86
Increase (decrease) in:
Net deferred taxes (307) (86) (89) 277
Accrued interest payable (164) 31 (120) 94
Accrued income tax 91 (22) (66) 164
Accrued liabilities 205 59 141 (722)
Deferred compensation payable 85 33 305 86
--------------------------------------------
Net cash provided by operating activities 2,009 1,193 2,651 2,801
--------------------------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net 3,957 (10,515) (8,999) (27,812)
Purchase of loans (7,945) (83) (12,718) (1,353)
Principal payments on mortgage-related securities held to maturity 631 2 790 9
Purchase of securities available for sale -- (559) (1,671) (559)
Purchase of securities held to maturity -- (1,000) -- (1,000)
Proceeds from sale of securities available for sale -- -- 411 --
Proceeds from maturites of securites held to maturity 2,000 1,000 5,500 2,500
Investments in foreclosed real estate (6) (1) (8) (2)
Proceeds from sale of REO -- 22 24 22
Proceeds from sale of fixed assets -- -- 5 0
Purchases of equipment and property improvements (130) (76) (451) (302)
--------------------------------------------
Net cash (used in) investing activities $ (1,493) $(11,210) $(17,117) $(28,497)
--------------------------------------------
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 Ended
June 30, June 30,
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits, $ 2,638 $ (3,099) $ 12,833 $ 17,919
Net increase (decrease) in short-term borrowings 41 14,432 13,416 11,189
Net increase (decrease) in mortgage escrow funds (423) (392) (482) (299)
Treasury stock purchased (2,097) (1,079) (4,134) (6,752)
Proceeds from exercise of stock options 861 4 1,249 9
Dividends on common stock (337) (343) (1,022) (1,074)
--------------------------------------------
Net cash provided by financing activities 683 9,523 21,860 20,992
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,199 (494) 7,394 (4,704)
Cash and cash equivalents:
Beginning of period 12,330 7,546 6,135 11,756
--------------------------------------------
End of period $ 13,529 $ 7,052 $ 13,529 $ 7,052
============================================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 2,122 $ 1,709 $ 6,341 $ 5,065
Interest on deposits 2,752 2,391 7,618 6,904
Income taxes 518 686 1,519 1,114
Loans originated for sale 7,967 938 17,772 1,980
Cash received:
Loans sold
8,791 723 16,897 1,729
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments 53 1 80 21
Stock acquisition of Insurance Planners 750 -- 750 --
See Notes to Unaudited Consolidated Financial Statements
4
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
and nine month periods ended June 30, 1998, include the accounts of FSF
Financial Corp. ("the Corporation") and its wholly owned subsidiaries,
Insurance Planners of Hutchinson, Inc. ("Insurance Planners"), 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 June 30,
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 Corporation's Annual Report on Form 10-K for
the year ended September 30, 1997.
NOTE 3 - BUSINESS COMBINATION
On June 1, 1998, the Corporation acquired 100% of the outstanding
common stock of Insurance Planners, a property and casualty insurance
agency. The business combination was accounted for by the purchase
method and the financial statements reflect the operating results of
Insurance Planners for the one month ended June 30, 1998. The
Corporation issued 38,691 shares of common stock held as treasury
shares to complete the acquisition. In addition, options for 30,000
common stock shares, at an exercise price of $19.125, were also issued.
The acquisition price of $750,000, resulted in an acquired identifiable
customer based intangible asset of $768,600, which will be amortized
using the straight line method over twenty five years. The acquisition
did not have a material pro-forma effect on the results of operations
for the three and nine month periods ending June 30, 1998 and 1997.
NOTE 4 - NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 132, issued February,
1998, revises disclosures about pension and other postretirement
benefits to the extent practicable, requires additional information on
changes in the benefit obligations and fair values of plan assets that
will facilitate financial analysis, and eliminates certain disclosures
that are no longer as useful. Management believes adoption of this
standard will not have a material effect on the financial disclosures
for pension and other postretirement benefits.
Statement of Financial Accounting Standards No. 133, issued June 1998,
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is effective
for the fiscal year beginning October 1, 1999. On the date of adoption,
the Corporation may transfer any held to maturity security into the
available for sale category and then be able to designate the
transferred security as a hedge item. Any unrealized holding gain or
loss on transferred securities will be reported in net income or
accumulated other comprehensive income. Management has not determined
its strategy for the adoption of Statement No. 133 or its effect on the
financial statements. If the Corporation elects to apply hedge
accounting, it is required to establish, at the inception of the hedge,
the method it will use for assessing
5
the effectiveness of the hedging activities and the measurement
approach for determining the ineffective aspect of the hedge.
NOTE 5 - EARNINGS PER SHARE
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 Nine Months ended
June 30, June 30,
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
Numerator:
Net income - Numerator for basic earnings
per share and diluted earnings per share--
income available to common stockholders $ 767,000 $ 823,000 $ 2,323,000 $ 2,270,000
===================================================================
Denominator:
Denominator for basic earnings per share--
weighted-average shares 2,667,864 2,690,870 2,671,185 2,797,450
Effect of dilutive securities:
Stock - based compensation plans 208,844 238,835 243,519 219,894
-------------------------------------------------------------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 2,876,708 2,929,705 2,914,704 3,017,344
===================================================================
Basic earnings per share $ 0.29 $ 0.31 $ 0.87 $ 0.81
Diluted earnings per share $ 0.27 $ 0.28 $ 0.80 $ 0.75
6
FSF FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at June 30, 1998, and September 30, 1997 totaled
963228899$414.1 million and $388.1 million, respectively. The increase of $26.0
million was primarily a result of increases in loans receivable and interest
bearing cash equivalents.
Cash and cash equivalents increased from $6.1 million at September 30, 1997, to
963228900$13.5 million at June 30, 1998, or an increase of $7.4 million. The
increase in liquidity was the result of prepayments on mortgages and the sale of
mortgage loans. The Corporation utilized excess liquidity to fund the purchase
of treasury shares and fund loans.
Securities available for sale increased $1 million between September 30, 1997,
and June 30, 1998, as a result of purchase of such securities.
Securities held to maturity decreased from $76.4 million at September 30, 1997,
to $70.1 million at June 30, 1998. $5.0 million of securities have matured since
September 30, 1997 and the proceeds were used to help fund the purchase of
treasury shares and growth in the loan portfolio.
Loans held for sale increased $956,000, to $1,160,000 at June 30, 1998, from
$204,000 at September 30, 1997. As of June 30, 1998, the Bank had a forward
commitment to sell $1,133,000 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 June 30, 1998.
Loans receivable increased $21.1 million or 8.1% to $281.5 million at June 30,
1998, from $260.4 million at September 30, 1997. The increase in loans
receivable was comprised of $18.3 million in agricultural loans and $7.1 million
in commercial business loans. Even though residential mortgage originations
increased by $11.7 million or 24.7%, the sale of residential mortgages and the
prepayments of loans resulted in a decrease in one-to-four family residential
mortgages of $5.8 million. To supplement originations, the Bank purchased $7.5
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 by 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 Nine Months
Ended Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------------------------- --------------------------
(In Thousands)
Residential mortgages originated $ 21,206 $ 23,823 $ 58,908 $ 47,221
Land and commercial real estate 1,797 2,116 4,412 10,741
Agricultural loans 8,773 - 21,399 -
Commercial Business 5,976 297 9,230 1,479
Consumer Loans 7,343 9,244 20,243 20,743
-------------------------- --------------------------
Total Loans Originated 45,095 35,480 114,192 80,184
-------------------------- --------------------------
Residential mortgages purchased - 84 159 678
Commercial Business purchased 2,923 - 7,527 675
-------------------------- --------------------------
Total loans purchased 2,923 84 7,686 1,353
-------------------------- --------------------------
Total New Loans $ 48,018 $ 35,564 $121,878 $ 81,537
========================== ==========================
7
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
1998 1997
--------------------------------------------
Amount % Amount %
--------------------------------------------
(Dollars in Thousands)
Residential real estate:
One-to-four family (1) $ 164,608 54.7 $ 170,422 60.3
Residential construction 19,527 6.5 20,796 7.4
Multi-family 3,659 1.2 5,270 1.9
--------------------------------------------
187,794 62.4 196,488 69.6
Agricultural loans 18,302 6.1 - 0.0
Land and commercial real estate 37,903 12.6 36,682 13.0
Commercial business 15,228 5.1 8,114 2.9
--------------------------------------------
259,227 86.2 241,284 85.4
Consumer:
Home equity and second mortgages 22,629 7.5 20,812 7.4
Automobile loans 10,538 3.5 11,596 4.1
Other 8,390 2.8 8,821 2.5
--------------------------------------------
Total loans 300,784 100.0 282,513 100.0
===== =====
Less:
Loans in process (16,941) (20,364)
Deferred fees (541) (703)
Allowance for loan losses (1,048) (852)
------------ ------------
Total loans, net $ 282,254 $ 260,594
============ ============
- ------------------------------------
(1) Includes loans held for sale in the amount of $1,160,000 and $204,000 as of
June 30, 1998 and September 30, 1997, respectively.
Deposits after interest credited increased from $208.2 million at September 30,
1997, to $221.1 million at June 30, 1998, an increase of $12.9 million or 6.2%.
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") borrowings increased $13.4 million from $133.8
million at September 30, 1997, to $147.2 million at June 30, 1998. The
borrowings were utilized as an additional source of funding of the overall
growth in total assets.
The Corporation completed the repurchase of 208,218 shares of common stock and
when netted with the exercise of 131,461 of stock option shares and the 38,691
shares used to purchase Insurance Planners of Hutchinson, Inc., increased the
number of treasury shares to 1,568,319 at June 30, 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 $43.2 million at June 30,
1998. The $200,000 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 increased from $16.24 at
September 30, 1997, to $16.37 at June 30, 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 nine months ended June 30, 1998, and 1997, approximately $17,000 and
$3,000 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
8
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:
June 30, September 30,
-------------------------
1998 1997
-------------------------
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $-- 393
Permanent loans secured by one-to-four-family units 183 25
Permanent loans secured by non-residential real estate 92 --
Non-mortgage loans:
Commercial -- --
Consumer 119 82
---- ----
Total non-accrual loans 394 500
Foreclosed real estate and real estate held for
investment 452 72
---- ----
Total non-performing assets $846 $572
==== ====
Total non-performing loans to net loans 0.14% 0.18%
==== ====
Total non-performing loans to total assets 0.10% 0.13%
==== ====
Total non-performing assets to total assets 0.20% 0.14%
==== ====
9
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 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 SUBSIDIARIES
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND DIVIDENDS
EARNED OR PAID, AND RELATED INTEREST YIELDS AND RATES
(DOLLARS IN THOUSANDS)
Three Months Ended June 30,
------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
------------------------------------------------------------------------------------
Loans receivable (2) $ 280,375 $ 5,961 8.50 % $241,107 $ 5,108 8.47 %
Mortgage-backed securities 54,417 743 5.46 55,061 881 6.40
Investment securities (3) 66,270 850 5.13 65,795 944 5.74
----------------------- --------------------------
Total interest-earning assets 401,062 7,554 7.53 361,963 6,933 7.66
------------------------- ---------------------------
Other assets 11,214 10,810
----------- -------------
Total assets $ 412,276 $372,773
=========== =============
Liabilities:
Interest-bearing deposits $ 218,619 $ 2,532 4.63 % $208,542 $ 2,384 4.57 %
Borrowings 147,200 2,125 5.77 118,667 1,720 5.80
----------------------- --------------------------
Total interest-bearing liabilities 365,819 4,657 5.09 % 327,209 4,104 5.02 %
------------------------- ---------------------------
Other liabilities 3,193 2,485
----------- -------------
Total liabilities 369,012 329,694
Stockholders' equity 43,264 43,079
----------- -------------
Total liabilities and stockholders'
equity $ 412,276 $372,773
=========== =============
Net interest income $ 2,897 $ 2,829
Net Spread (4) 2.44 % 2.64 %
Net Margin (5) 2.89 % 3.13 %
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 $767,000 for the three months
ended June 30, 1998, as compared to net income of $823,000 for the three month
period ended June 30, 1997, a decrease of $56,000 or 6.8%.
Total Interest Income. Total interest income increased by $700,000 or 10.1% to
$7.6 million for the three months ended June 30, 1998, from $6.9 million for the
three months ended June 30, 1997, due to increases in the average balance of
interest earning assets. The average yield on loans increased to 8.50% for the
quarter ended June 30, 1998, from 8.47% for the quarter ended June 30, 1997, due
to an increased mix of higher yielding commercial business and agricultural
loans. The average balance of mortgage-backed securities decreased by $700,000
from $55.1 million for the three months ended June 30, 1997, to $54.4 million
for the three months ended June 30, 1998. During this same period, the average
yield on mortgage-backed securities
10
decreased from 6.40% to 5.46% or 94 basis points (100 basis points equals 1%).
The average balance of investment securities increased to $66.3 million for the
quarter ended June 30, 1998, from $65.8 million for the quarter ended June 30,
1997. The average yield decreased 61 basis points from 5.74% for the three
months ended June 30, 1997, to 5.13% for the same period in 1998, as interest
rates in general decreased between the periods.
Total Interest Expense. Total interest expense increased to $4.7 million for the
three months ended June 30, 1998, from $4.1 million for the same period in 1997.
The average balance of interest-bearing deposits increased from $208.5 million
for the three months ended June 30, 1997, to $218.6 million for the three months
ended June 30, 1998. This increase was comprised of interest credited and an
increase in total deposit accounts. The average cost of deposits increased by 6
basis points from 4.57% for the three months ended June 30, 1997, to 4.63% for
the same period in 1998. No assurance can be made that deposits can be
maintained in the future without further increasing the cost of funds if
interest rates should increase. The average balance of borrowings increased
$28.5 million to $147.2 million for the three months ended June 30, 1998, from
$118.7 million for the three months ended June 30, 1997. The cost of borrowings
decreased 3 basis points to 5.77% for the three months ended June 30, 1998, from
5.80% 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 $2.8 million for the
three months ended June 30, 199, to $2.9 million for the same period ended June
30, 1998. Average interest-earning assets increased $39.1 million, from $362.0
million for the three months ended June 30, 1997, to $401.1 million for the
three months ended June 30, 1998, while the average yield on interest-earning
assets decreased 13 basis points from 7.66% for 1997 to 7.53% for 1998. Average
interest bearing liabilities increased by $38.6 million to $365.8 million for
the three months ended June 30, 1998, from $327.2 million for the three months
ended June 30, 1997, and the cost of interest-bearing liabilities increased from
5.02% for 1997 to 5.09% in 1998.
Provision for Loan Losses. The Bank's provision for loan losses was $107,000 for
the three months ended June 30, 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 12.6% at June 30, 1998, and commercial business loans
increased from 2.9% to 5.1%, respectively. 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
$1,048,000 and $833,000 at June 30, 1998, and June 30, 1997, respectively. At
June 30, 1998, the Bank's allowance for loan losses constituted 123.9% of
non-performing assets as compared to 635.9% of non-performing assets at June 30,
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. See also "Comparison of the Nine
Months Ended June 30, 1998 and 1997 -- Provision for Loan Losses."
Non-interest Income. Total non-interest income increased $209,000 during the
three month period ended June 30, 1998, to $620,000 as compared to the same
period in 1997. Fixed-rate loans with terms greater than 10 years were sold
during the quarter ended June 30, 1998 for a gain of $130,000. Service charges
on deposit accounts increased from $187,000 for the three months ended June 30,
1997, to $210,000 for the three months ended June 30, 1998, an increase of
$37,000 or 12.3%. Commission income increased $81,000 or 128.6% to $144,000 for
the quarter ended June 30, 1998, from $63,000 for the quarter ended June 30,
1997, due to increased sales and the purchase of Insurance Planners of
Hutchinson, Inc.
Non-interest Expense. Total non-interest expense increased $302,000 or 16.5%
over the periods compared. Compensation and benefits increased to $1,374,000 for
1998 from $1,152,000 for 1997, as a result of normal merit increases and
additional staff as a result of expansion into agricultural and commercial
lending. Occupancy expense remained level at $206,000. Data processing increased
$25,000 to $125,000 for the period ended June 30, 1998, due to processing
expense associated with increased delivery of electronic services to
11
customers, and to a lesser extent, as a result of the costs associated with the
Corporation's Year 2000 compliance program.
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 identified areas that will be affected by this issue, assessed
their potential impact on the operations of the Bank, monitors the progress of
third party software vendors, service providers and customers in addressing this
matter, is testing changes provided by these vendors, and continues to develop
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 decreased by $46,000 or 8.2%, to $513,000 for
the three month period ended June 30, 1998, from $559,000 for the same period in
1997.
12
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 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 SUBSIDIARIES
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND DIVIDENDS
EARNED OR PAID, AND RELATED INTEREST YIELDS AND RATES
(DOLLARS IN THOUSANDS)
Nine Months Ended June 30,
-----------------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
-----------------------------------------------------------------------------------
Loans receivable (2) $ 274,679 $17,509 8.50 % $231,696 $14,717 8.47 %
Mortgage-backed securities 54,926 2,291 5.56 55,019 2,562 6.21
Investment securities (3) 65,155 2,636 5.39 68,247 2,946 5.76
---------------------- ------------------------
Total interest-earning assets 394,760 22,436 7.58 354,962 20,225 7.60
----------------------------- ---------------------------
Other assets 10,882 10,677
---------- -----------
Total assets $ 405,642 $365,639
========== ===========
Liabilities:
Interest-bearing deposits $ 213,617 $ 7,461 4.66 % $201,757 $ 6,924 4.58 %
Borrowings 145,274 6,335 5.81 116,662 5,077 5.80
---------------------- ------------------------
Total interest-bearing liabilities 358,891 13,796 5.13 % 318,419 12,001 5.03 %
----------------------------- ---------------------------
Other liabilities 3,040 2,537
---------- -----------
Total liabilities 361,931 320,956
Stockholders' equity 43,711 44,683
---------- -----------
Total liabilities and stockholders'
equity $ 405,642 $365,639
========== ===========
Net interest income $ 8,640 $ 8,224
Net Spread (4) 2.45 % 2.57 %
Net Margin (5) 2.92 % 3.09 %
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's net income remained stable at $2.3 million for the
nine months ended June 30, 1998 and 1997.
Total Interest Income. Total interest income increased by $2.2 million or 10.9%
to $22.4 million for the nine months ended June 30, 1998, from $20.2 million for
the nine months ended June 30, 1997. The yields on mortgage-backed and
investment securities decreased 65 and 37 basis points, respectively, for the
nine months ended June 30, 1998, compared to the same period ended June 30,
1997. The yield on loans receivable increased 3 basis points for the nine months
ended June 30, 1998. Furthermore, the average balance of loans receivable
increased $43.0 million during these periods as a result of an increase in all
types of loans originated.
13
Total Interest Expense. Total interest expense increased $1.8 million. Average
interest bearing liabilities increased from $318.4 million in 1997 to $358.9
million in 1998 and the cost of the liabilities increased from 5.03% for the
nine months ended June 30, 1997, to 5.13% for the nine months ended June 30,
1998. Interest on deposits increased $537,000 and the average rate increased
from 4.58% to 4.66% during the comparison period. Average borrowings increased
from $116.7 million for the nine months ended June 30, 1997, to $145.3 million
for the nine months ended June 30, 1998, and the cost of the borrowings
increased from 5.80% to 5.81%. Management can make no assurances regarding the
future movement of interest rates and their impact on earnings in future
periods.
Net Interest Income. Net interest income increased from $8.2 million for the
nine months ended June 30, 1997, to $8.6 million for the same period ended June
30, 1998, an increase of $400,000 or 4.9%. The increase is mostly a result of an
increase in interest income.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$227,000 for the nine months ended June 30, 1998 and 1997. See also "Comparison
of the Three Months Ended June 30, 1998 and 1997 -- Provision for Loan Losses."
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
At June 30,
--------------------------------------
1998 1997
--------------------------------------
(In Thousands)
Total loans outstanding (1) $ 299,490 $ 246,329
======================================
Average loans outstanding $ 274,679 $ 231,696
======================================
Allowance balance (beginning of period) $ 852 $ 776
--------------------------------------
Provision (credit):
Residential (2) - -
Land and commercial real estate 2 -
Commercial/Agricultural business 218 30
Consumer 7 60
--------------------------------------
Total provision 227 90
Charge-off:
Residential - 14
Land and commercial real estate - -
Consumer 40 22
--------------------------------------
Total charge-offs 40 36
Recoveries:
Residential - 1
Land and commercial real estate - -
Consumer 9 2
--------------------------------------
Total recoveries 9 3
--------------------------------------
Net charge-offs 31 33
--------------------------------------
Allowance balance (end of period) $ 1,048 $ 833
======================================
Allowance as percent of total loans 0.35% 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.
Non-interest Income. Total non-interest income increased from $1.1 million for
the nine months ended June 30, 1997, to $1.6 million for the nine months ended
June 30, 1998. Loans were sold in the secondary market during the nine months
ended June 30, 1998, with a resulting gain of $241,000 for the period compared
with a gain of $33,000 for the same period in 1997. Other service charges and
fees increased from $312,000 for the 1997 fiscal year to $352,000 for the 1998
fiscal year due to the increased level of originations and to origination of
more loans with associated fees that could be recognized in current income.
Service charges on deposit accounts increased from $509,000 for the nine months
ended June 30, 1997, to $618,000 for the nine months ended June 30, 1998, or
21.4%, due to increases in fees charged and the number of accounts.
14
Non-interest Expense. Total non-interest expense increased by $665,000 or 12.2%
over the periods compared. Compensation and benefits increased from $3.4 million
to $3.9 million for the periods, impacted by merit increases that averaged 3.5%
for all employees and the expansion into agricultural and commercial lending.
Deposit insurance premiums decreased 26.9%, as a result of the reduction in SAIF
premium. Professional fees increased from $170,000 for the first nine months of
fiscal 1997 to $211,000 for the first nine months of fiscal 1998. See also
"Comparison of the Three Months Ended June 30, 1998 and 1997 - Non-Interest
Expense."
Income Tax Expense. Income tax expense remained level at $1.5 million for the
nine months ended June 30, 1998.
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.
On June 30, 1998, the Bank was in compliance with its three regulatory capital
requirements as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------------- -------------------------
GAAP Captial, June 30, 1998 $ 36,333
Add: Unrealized losses on debt
securities held for sale 258
----------
Tangible capital and ratio to
adjusted total assets $ 36,591 9.0% $ 6,116 1.5%
------------------- -------------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $ 36,591 9.0% $ 12,231 3.0% $ 26,385 5.0%
------------------- ------------------------- -------------------------
Tier 1 capital and ratio to
risk-weighted assets $ 36,591 15.6% $ 9,381 4.0% $ 14,071 6.0%
--------- ------------------------- -------------------------
Tier 2 capital, allowance for loan losses 1,048
----------
Total risk-based capital and ratio to
risk-weighted assets, June 30, 1998 $ 37,639 16.1% $ 18,761 8.0% $ 23,452 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.
15
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 June
30, 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 OTS reduced
the requirement for Banks to maintain liquid assets from 5% to not less than 4%
of its net withdrawable accounts plus short term borrowings. The Bank's
regulatory liquidity was 5.6% and 5.4% at June 30, 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 June 30, 1998, is approximately $77.1 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 June 30, 1998, the Bank had commitments to originate loans of $2.6 million
and unused lines of credit on commercial agricultural and consumer loans of
$26.0 million. The Bank also had a commitment to purchase a $2 million security
to be classified as available for sale. 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 any of it's subsidiaries were engaged in
any legal proceeding of a material nature at June 30, 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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
16
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
17
FSF FINANCIAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FSF FINANCIAL CORP.
Date: July 30, 1998 By: /s/ Donald A. Glas
- ------------------- ---------------------------------------------
Donald A. Glas
Chief Executive Officer
Date: July 30, 1998 By: /s/ Richard H. Burgart
- -------------------- --------------------------------------------
Richard H. Burgart
Chief Financial Officer
18