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 December 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
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 February 3, 1998. .
Class Outstanding
$.10 par value common stock 2,973,282 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 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 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, September 30,
1998 1998*
---------------------------
(In thousands)
ASSETS
------
Cash and cash equivalents $ 42,706 $ 22,597
Securities available for sale, at fair value:
Equity securities 19,371 19,459
Mortgage-backed and related securities 15,710 16,574
Debt securities 8,000 3,010
Securities held to maturity, at amortized cost:
Debt securities (Fair value of $21,208 and $23,953) 21,418 24,412
Mortgage-backed and related securities (Fair value of $30,414 and $35,369) 31,716 36,418
Loans held for sale 16,060 2,672
Loan receivable, net 266,753 280,603
Foreclosed real estate 125 502
Accrued interest receivable 2,868 3,089
Premises and equipment 4,214 4,111
Other assets 4,626 2,785
----------------------
Total Assets $ 433,567 $ 416,232
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 32,861 $ 30,299
Savings accounts 56,825 53,984
Certificates of deposit 145,175 142,259
----------------------
Total deposits 234,861 226,542
Federal Home Loan Bank borrowings 144,121 144,177
Advances from borrowers for taxes and insurance 417 819
Notes payable 6,000 --
Other liabilities 4,614 2,176
----------------------
Total liabilities 390,013 373,714
----------------------
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 43,288 43,382
Retained earnings, substantially restricted 25,960 25,451
Treasury stock at cost (1,528,494 and 1,603,663 shares) (22,216) (23,298)
Unearned ESOP shares at cost (191,371 and 198,773 shares) (1,914) (1,988)
Unearned MSP stock grants at cost (70,367 and 77,214 shares) (745) (818)
Accumulated comprehensive income (loss) (1,269) (661)
----------------------
Total stockholders' equity 43,554 42,518
----------------------
Total Liabilities and Stockholders' Equity $ 433,567 $ 416,232
======================
- -------------------------------------------------------------
* The consolidated statements of financial condition at September 30, 1998,
has been taken from the audited financial 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 the Three Months Ended
December 31,
-------------------------------------
1998 1997
-------------------------------------
(In thousands)
Interest income:
Loans receivable $ 5,960 $ 5,689
Mortgage-backed and related securities 579 797
Investment securities 964 878
-------------------------------------
Total interest income 7,503 7,364
-------------------------------------
Interest expense:
Deposits 2,670 2,453
Borrowed funds 2,034 2,095
-------------------------------------
Total interest expense 4,704 4,548
-------------------------------------
Net interest income 2,799 2,816
Provision for loan losses 114
45
-------------------------------------
Net interest income after provision for loan losses 2,685 2,771
-------------------------------------
Non-interest income:
Gain (loss) on sale of loans - net 700
15
Other service charges and fees 133 107
Service charges on deposit accounts 210 213
Commission income 231
53
Other 10
20
-------------------------------------
Total non-interest income 1,284 408
-------------------------------------
Non-interest expense:
Compensation and benefits 1,631 1,236
Occupancy and equipment 247 205
Deposit insurance premiums 32
33
Data processing 145 118
Professional fees 75
69
Other 419 277
-------------------------------------
Total non-interest expense 2,549 1,938
-------------------------------------
Income before provision for income taxes 1,420 1,241
Income tax expense 578 495
-------------------------------------
Net income $ 842 $ 746
=====================================
Basic earnings per share $ 0.32 $ 0.28
Diluted earnings per share $ 0.30 $ 0.26
Cash dividend declared per common share $ 0.125 $ 0.125
Comprehensive income $ 234 $ 722
=====================================
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
December 31,
--------------------------
1998 1997
--------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 842 $ 746
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 99 81
Net amortization of discounts and premiums on
securities held to maturity (11) (7)
Provision for loan losses 114 45
Net market value adjustment on ESOP shares 35 50
Amortization of ESOP and MRP stock compensation 155 152
Amortization of intangibles 16 --
Net gain on sale of assets (11) (2)
Net loan fees deferred and amortized (7) 6
(Increase) decrease in:
Loans held for sale (7,774) (535)
Accrued interest receivable 226 (246)
Other assets 283 (16)
Increase (decrease) in:
Net deferred taxes 718 100
Accrued interest payable 105 --
Accrued income tax (492) 118
Accrued liabilities (36) 62
Deferred compensation payable 126 109
--------------------
Net cash provided by (used in) operating activities (5,612) 663
Cash flows from investing activities:
Loan originations and principal payments on loans, net 18,355 (13,417)
Purchase of loans (4,250) (72)
Principal payments on mortgage-related securities held to maturity 4,707 30
Purchase of securities available for sale (8,000) (1,647)
Proceeds from maturities of securities available for sale 3,000 --
Proceeds from maturities of securities held to maturity 3,000 500
Investment in foreclosed real estate (39) (2)
Proceeds from sale of REO 500 24
Purchase of equipment and property improvements (184) (115)
Acquisition of Homeowners Mortgage Corporation, net of cash acquired (1,245) --
--------------------
Net cash provided by (used in) investing activities $ 15,844 $(14,699)
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Three Months Ended
December 31,
--------------------
1998 1997
--------------------
(In thousands)
Cash flows from financing activities:
Net increase in deposits, $ 8,318 $ 4,439
Proceeds from FHLB advances -- 42,000
Payments on FHLB advances (56) (33,563)
Net increase in short-term borrowings -- 1,500
Net decrease in mortgage escrow funds (402) (530)
Net increase in short-term notes payable 2,425 --
Treasury stock purchased (139) (99)
Dividends on common stock (332) (342)
Proceeds from exercise of stock options 63 97
--------------------
Net cash provided by financing activities 9,877 13,502
--------------------
Net decrease in cash and cash equivalents 20,109 (534)
Cash and cash equivalents:
Beginning of year 22,597 6,135
--------------------
End of year $ 42,706 $ 5,601
====================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 2,003 $ 2,099
Interest on deposits 2,603 2,448
Income taxes 329 301
Loans originated for sale 45,518 1,287
Cash received:
Loans sold 39,102 752
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments $ 22 $ 17
Acquisition of Homeowners Mortgage Corporation non-cash
assets, net of assumed liabilities 1,037 --
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
month period ended December 31, 1998, include the accounts of FSF
Financial Corp. ("the Corporation") and its wholly owned subsidiaries,
Homeowners Mortgage Corp. ("Homeowners"), 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 December
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, 1998.
NOTE 3 - BUSINESS COMBINATION
On November 17, 1998, the Corporation acquired 100% of the outstanding
common stock of Homeowners Mortgage Corporation ("Homeowners"), an
originator of residential mortgage loans. The business combination was
accounted for by the purchase method and the financial statements
reflect the operating results of Homeowners for the one and a half
months ended December 31, 1998. The Corporation issued 77,839 shares of
common stock held as treasury shares and $1.25 million in cash to
complete the transaction. In addition, options for 50,000 common stock
shares, at an exercise price of $15.00, were also issued. The
acquisition price of $2.5 million resulted in goodwill of approximately
$2.3 million, which will be amortized using the straight line method
over twenty-five years.
The following unaudited pro forma supplemental supplemental information
is presented based on historical financial statements of the
Corporation and Homeowners. The unaudited pro forma supplemental
information for the three months ended December 31, 1998 and 1997, was
prepared as if the acquisition had occurred as of the beginning of the
respective periods.
For the Three Months Ended
December 31,
-------------------------------------
1998 1997
-------------------------------------
(In thousands)
Interest income $ 7,516 $ 7,437
Interest expense 4,735 4,572
-------------------------------------
Net interest income 2,781 2,865
Provision for loan losses 114 45
-------------------------------------
Net interest income after provision for loan losses 2,667 2,820
-------------------------------------
Non-interest income 2,197 1,300
Non-interest expense 3,192 2,791
-------------------------------------
Income before provision for income taxes 1,672 1,329
Income tax expense 680 527
-------------------------------------
Net income $ 992 $ 802
=====================================
Basic earnings per share $ 0.37 $ 0.29
Diluted earnings per share $ 0.35 $ 0.27
Weighted average shares outstanding
Basic 2,706,761 2,758,990
Diluted 2,838,141 2,978,808
5
The pro forma supplemental information is not necessarily indicative of
the results of operations that might have occurred had the acquisition
taken place at the beginning of the period, or to project the Company's
results of operations at any future date or for any future period.
NOTE 4 - EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented. In
accordance with the Statement of Position No. 93-6, Employers'
Accounting for Employee Stock Ownership Plans, issued by the American
Institute of Certified Public Accountants, shares owned by the
Corporation's Employee Stock Ownership Plan that have not been
committed to be released are not considered to be outstanding for the
purpose of computing earnings per share. For the three month period
ended December 31, 1998, the weighted average number of shares
outstanding for basic and diluted earnings per share computation were
2,666,112 and 2,797,492, respectively. For the three month period ended
December 31, 1997, the weighted average number of shares outstanding
were 2,681,151 and 2,900,969, respectively.
NOTE 5 - COMPREHENSIVE INCOME
Effective October 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. The statement establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income to be disclosed in the financial
statements. Comprehensive income is defined as the change in equity
during a period from transactions and other events from non-owner
sources. Comprehensive income is the total of net income and other
comprehensive income, which for the Corporation is comprised entirely
of unrealized gains and losses on securities available for sale.
NOTE 6 - NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting For Derivative Instruments and Hedging
Activities" - 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 the effectiveness of the hedging activities and the
measurement approach for determining the ineffective aspect of the
hedge.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" - issued October 1998, revises the accounting and
reporting standard for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are
substantially similar to the primary operations of a mortgage banking
enterprise. It requires that after the securitization of a mortgage
loan held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed security as a trading security.
It also requires that after the securitization of mortgage loans held,
an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This statement is
effective for the fiscal quarter beginning January 1, 1999. Management
believes adoption of this Statement will not have a material effect on
financial positions and the results of operations.
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 December 31, 1998, and September 30, 1998
totaled $433.6 million and $416.2 million, respectively. The increase of $17.4
million was primarily a result of an increase in interest bearing cash
equivalents.
Cash and cash equivalents increased from $22.6 million at September 30, 1998, to
$42.7 million at December 31, 1998, or an increase of $20.1 million. The
Corporation utilized excess liquidity to fund the purchase of treasury shares
and loan originations. The increase in liquidity was a result of prepayments on
mortgages and the sale of mortgage loans.
Securities available for sale increased $4.0 million between September 30, 1998,
and December 31, 1998, primarily as a result of purchase of such securities.
Securities held to maturity decreased from $60.8 million at September 30, 1998,
to $53.1 million at December 31, 1998. The proceeds were used to help fund the
purchase of treasury shares and pay dividends. This decrease was primarily due
to $3.0 million of securities maturing during the quarter and $4.7 million in
principal payments from mortgage-backed and related securities.
Loans held for sale increased $13.4 million, to $16.1 million at December 31,
1998, from $2.7 million at September 30, 1998. As of December 31, 1998, the Bank
had a forward commitment to sell all of its loans held for sale in the secondary
market. The increase is primarily due to Homeowners' pipeline of loans that are
funded, but payments from the sales have not been received. Payments usually
occur within fourteen days of funding.
Loans receivable decreased $13.9 million or 4.9% to $266.8 million at December
31, 1998, from $280.6 million at September 30, 1998. The decrease in loans
receivable was comprised of an increase of $2.2 million in agricultural loans
and a decrease of $4.6 million in commercial business loans. Even though
residential mortgage originations increased by $33.4 million or 187.6%, the sale
of residential mortgages and the prepayments of loans resulted in a decrease in
one-to-four family residential mortgages. To supplement originations, the Bank
purchased $849,000 of commercial business loans and $3.4 million of construction
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 Ended
December 31,
-------------------------------------
1998 1997
-------------------------------------
(In Thousands)
Residential mortgages originated $ 51,219 $ 17,847
Land and commercial real estate 2,313 662
Agricultural loans 4,020 1,320
Commercial Business 1,431 369
Consumer Loans 6,667 7,275
-------------------------------------
Total Loans Originated 65,650 27,473
-------------------------------------
Residential mortgages purchased - 72
Construction loans purchased 3,400 -
Commercial Business purchased 849 2,725
-------------------------------------
Total loans purchased 4,249 2,797
-------------------------------------
Total New Loans $ 69,899 $ 30,270
=====================================
7
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the date indicated:
December 31, September 30,
------------------------------------------------------------
1998 1998
------------------------------------------------------------
Amount % Amount %
------------------------------------------------------------
(Dollars in Thousands)
Residential real estate:
One-to-four family (1) $157,310 52.6 $ 157,340 52.2
Residential construction 20,294 6.8 21,960 7.3
Multi-family 3,953 1.3 2,975 1.0
------------------------------------------------------------
181,557 60.7 182,275 60.4
Agricultural loans 25,202 8.4 22,959 7.6
Land and commercial real estate 35,690 11.9 34,339 11.4
Commercial business 16,483 5.5 21,095 7.0
------------------------------------------------------------
258,932 86.6 260,728 86.4
Consumer:
Home equity and second mortgages 23,190 7.8 23,606 7.8
Automobile loans 8,893 3.0 9,670 3.2
Other 8,013 2.7 7,605 2.5
------------------------------------------------------------
Total loans 299,028 100.0 301,609 100.0
=============== =============
Less:
Loans in process (14,460) (16,658)
Deferred fees (627) (641)
Allowance for loan losses (1,128) (1,035)
------------- -------------------
Total loans, net $282,813 $ 283,275
============= ===================
- ---------------------------------------------
(1) Includes loans held for sale in the amount of $16.1 million and $2.7
million as of December 31, 1998 and September 30, 1998, respectively.
Real estate owned at December 31, 1998, totaled $125,000, which consisted of two
single-family residential properties. No loss is expected in the disposition of
the properties.
Deposits after interest credited increased from $226.5 million at September 30,
1998, to $234.9 million at December 31, 1998, an increase of $8.4 million or
3.7%. Overall cost of funds on deposits decreased 12 basis points during the
period as the Bank attempted to maintain deposit rates consistent with
marketplace competitors.
Federal Home Loan Bank ("FHLB") borrowings decreased $56,000 from $144.2 million
at September 30, 1998, to $144.1 million at December 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 9,214 shares of common stock and
when netted with the exercise of 6,544 of stock option shares and the 77,839
shares used to purchase Homeowners, decreased the number of treasury shares to
1,528,494 at December 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 and stock acquisition. Total stockholders' equity
increased from $42.5 million at September 30, 1998, to $43.6 million at December
31, 1998. The $1.1 million increase in stockholders' equity was primarily a
result of the use of treasury shares in the purchase of Homeowners and the
increase in net income. Book value per share decreased from $16.26 at September
30, 1998, to $16.07 at December 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.
8
During the three months ended December 31, 1998, and 1997, approximately $28,299
and $45,043 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 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:
December 31, September 30,
----------------------------------------------
1998 1998
----------------------------------------------
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ - $ -
Permanent loans secured by one-to-four-family units 459 240
Permanent loans secured by non-residential real estate - -
Other - -
Non-mortgage loans:
Commercial and agricultural 316 -
Consumer 57 69
----------------------------------------------
Total non-accrual loans 832 309
Foreclosed real estate and real estate held for investment 125 502
----------------------------------------------
Total non-performing assets $ 957 $ 811
==============================================
Total non-performing loans to net loans 0.29% 0.11%
==============================================
Total non-performing loans to total assets 0.19% 0.07%
==============================================
Total non-performing assets to total assets 0.22% 0.19%
==============================================
9
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 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 SUBSIDIARIES
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND DIVIDENDS
EARNED OR PAID, AND RELATED INTEREST YIELDS AND RATES
(DOLLARS IN THOUSANDS)
Three Months Ended December 31,
---------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------------------
Loans receivable (2) $ 279,399 $ 5,960 8.53 % $ 267,453 $ 5,689 8.51 %
Mortgage-backed securities 51,423 579 4.50 55,225 797 5.77
Investment securities (3) 79,585 964 4.85 63,114 878 5.56
-------------------------- --------------------------
Total interest-earning assets 410,407 7,503 7.31 385,792 7,364 7.64
------------------------- -------------------------
Other assets 13,437 10,115
-------------- --------------
Total assets $ 423,844 $ 395,907
============== ==============
Liabilities:
Interest-bearing deposits $ 232,229 $ 2,670 4.60 % $ 208,015 $ 2,453 4.72 %
Borrowings 144,157 2,034 5.64 141,567 2,095 5.92
-------------------------- --------------------------
Total interest-bearing liabilities 376,386 4,704 5.00 % 349,582 4,548 5.20 %
------------------------- -------------------------
Other liabilities 3,638 2,663
-------------- --------------
Total liabilities 380,024 352,245
Stockholders' equity 43,820 43,662
-------------- --------------
Total liabilities and stockholders'
equity $ 423,844 $ 395,907
============== ==============
Net interest income $ 2,799 $ 2,816
Net Spread (4) 2.31 % 2.44 %
Net Margin (5) 2.73 % 2.92 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.09X 1.10X
(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 $842,000 for the three months
ended December 31, 1998, as compared to net income of $746,000 for the three
month period ended December 31, 1997. The increase in net income of $96,000 or
12.9% was primarily the result of an increase in non-interest income.
Total Interest Income. Total interest income increased by $139,000 or 1.9% to
$7.5 million for the three months ended December 31, 1998, from $7.4 million for
the three months ended December 31, 1997, primarily due to increases in the
average balance of loans receivable. The average yield on loans increased to
8.53% for
10
the quarter ended December 31, 1998, from 8.51% for the quarter ended December
31, 1997, due to an increased mix of higher yielding land and commercial
business and agricultural loans. During this same period, the average yield on
mortgage-backed securities decreased 127 basis points (100 basis points equals
1%), primarily impacted by the exercise of call options by the issuers. The
average balance of investment securities increased to $79.6 million for the
quarter ended December 31, 1998, from $63.1 million for the quarter ended
December 31, 1997. The average yield decreased from 5.56% for the three months
ended December 31, 1997, to 4.85% 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 December 31, 1998, from $4.5 million for the same period in
1997. The average balance of interest-bearing deposits increased from $208.0
million for the three months ended December 31, 1997, to $232.2 million for the
three months ended December 31, 1998. This increase was comprised of interest
credited and an increase in all categories of deposit accounts. The average cost
of deposits decreased by 12 basis points from 4.72% for the three months ended
December 31, 1997, to 4.60% for the same period in 1998, due to non-certificate
account balances increasing more than certificate balances. 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 $2.6 million to $144.2 million for the three months ended
December 31, 1998, from $141.6 million for the three months ended December 31,
1997. The cost of borrowings decreased 28 basis points to 5.64% for the three
months ended December 31, 1998, from 5.92% for the same period in 1997.
Borrowings increased as the Bank utilized borrowings to supplement deposits and
meet other liquidity and lending needs.
Net Interest Income. Net interest income remained level at $2.8 million for the
three months ended December 31, 1998 and December 31, 1997. Average
interest-earning assets increased $24.6 million, from $385.8 million for the
three months ended December 31, 1997, to $410.4 million for the three months
ended December 31, 1998, while the average yield on interest-earning assets
decreased from 7.64% for 1997 to 7.31% for 1998. Average interest bearing
liabilities increased by $26.8 million to $376.4 million for the three months
ended December 31, 1998, from $349.6 million for the three months ended December
31, 1997, and the cost of interest-bearing liabilities decreased from 5.20% for
1997 to 5.00% in 1998.
Provision for Loan Losses. The Bank's provision for loan losses was $114,000 for
the three months ended December 31, 1998, compared to $45,000 for the same
period in 1997. 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 $1,128,000 and $892,000 at December 31, 1998, and
December 31, 1997, respectively. At December 31, 1998, the Bank's allowance for
loan losses constituted 117.9% of non-performing assets as compared to 102.4% of
non-performing assets at December 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.
11
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Three Months
At December 31,
----------------------------------------------
1998 1997
----------------------------------------------
(In Thousands)
Total loans outstanding (1) $ 269,901 $ 274,569
==============================================
Average loans outstanding $ 279,399 $ 267,582
==============================================
Allowance balance (beginning of period) $ 1,035 $ 852
----------------------------------------------
Provision (credit):
Residential (2) - -
Land and commercial/agricultural business 114 24
Consumer - 6
----------------------------------------------
Total provision 114 30
Charge-off:
Residential - -
Commercial real estate - -
Consumer 26 6
----------------------------------------------
Total charge-offs 26 6
Recoveries:
Residential - -
Commercial real estate - -
Consumer 5 1
----------------------------------------------
Total recoveries 5 1
----------------------------------------------
Net charge-offs 21 5
----------------------------------------------
Allowance balance (end of period) $ 1,128 $ 892
==============================================
Allowance as percent of total loans 0.42% 0.32%
Net loans charge 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 $876,000 during the
three month period ended December 31, 1998, to $1,284,000 as compared to the
same period in 1997. Gains on loans sold increased from $15,000 at December 31,
1997 to $700,000 at December 31, 1998. $267,000 of the increase was a result of
fixed rate mortgages that were sold in the secondary market by the Bank, because
they did not fit the interest rate risk profile of the Bank, and $418,000 of the
increase was due to the sale of loans made by Homeowners. Commission income
increased from $53,000 for the quarter ended December 31, 1997, to $231,000 for
the quarter ended December 31, 1998. $138,000 of the increase in commissions was
a result of the insurance agency activities due to the acquisition of Insurance
Planners and $25,000 was due to the sale of federal crop insurance (an ancillary
activity of agricultural lending). Other service charges and fees increased from
$107,000 for the three months ended December 31, 1997, to $133,000 for the three
months ended December 31, 1998, an increase of $26,000 or 24.3%.
Non-interest expense. Total non-interest expense increased $611,000 or 31.5%
over the periods compared. Compensation and benefits increased from $1.2 million
to $1.6 million or 32.0%, due to commissions generated by personnel added in the
acquisitions of Homeowners and Insurance Planners, the hiring of critical
management and related support positions, including Marketing, Community
Banking, internal audit and merit increases, which averaged 4.5%. Occupancy and
equipment expense increased by $42,000. Data processing expense increased
$27,000 to $145,000 for the period ended December 31, 1998, due to processing
expenses associated with increased delivery of electronic services to customers,
and to a lesser extent, as a result of the costs associated with the
Corporation's Year 2000 compliance program. Professional fees increased from
$69,000 for the first quarter of fiscal 1998 to $75,000 for the first quarter of
fiscal 1999. Other expenses increased $142,000 from the quarter ended December
31, 1997 to $419,000 for the quarter ended December 31, 1998 and was comprised
of increased expenses as a result of the acquisitions of Insurance Planners and
Homeowners, not present in first quarter 1998, and an increase in marketing
expenses. $16,000 of the increase was due to goodwill associated with the
acquisitions of Insurance Planners and Homeowners.
12
Income Tax Expense. Income taxes increased by $83,000 or 16.8%, to $578,000 for
the three month period ended December 31, 1998, from $495,000 for the same
period in 1997, primarily due to the increase of $179,000 in income before tax.
Year 2000
The Year 2000 problem exists because many computer programs use only the last
two digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900, rather than 2000. An additional
issue is that 1900 was not a leap year, whereas the year 2000 is. Therefore,
some programs may not properly provide for February 29, 2000. This anomaly could
result in miscalculations when processing critical date-sensitive information
after December 31, 1999.
The following discussion of the implications of the Year 2000 problem for the
Bank, contains numerous forward looking statements based on inherently uncertain
information. The cost of the project and the date on which the Bank plans to
complete the internal Year 2000 modifications are based on management's best
estimates, which are derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. However, there can be no guarantee that
these statements will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse effect on the Bank.
The Bank places a high degree of reliance on computer systems of third parties,
such as customers, suppliers, and other financial and governmental institutions.
Although the Bank is assessing the readiness of these third parties and
preparing contingency plans, there can be no guarantee that the failure of these
third parties to modify their systems in advance of December 31, 1999 would not
have a material adverse affect on the Bank.
During fiscal 1998, the Bank adopted a Year 2000 Compliance Plan (the "Plan")
and established a Year 2000 Compliance Committee (the "Committee"). The
objectives of the Plan and the Committee are to prepare the Bank for the new
millennium. As recommended by the Office of Thrift Supervision, the Plan
encompasses the following phases: Awareness, Assessment, Renovation, Validation
and Implementation. These phases will enable the Bank to identify risks, develop
an action plan, perform adequate testing and complete affirmation that its
processing systems will be Year 2000 ready. Execution of the Plan is currently
on target. The Bank is currently in Phase 4, Validation, which involves testing
of changes to hardware and software, accompanied by monitoring and testing with
vendors. Concurrently, the Bank is also addressing some issues related to
subsequent phases. Prioritization of the most critical applications has been
addressed, along with contract and service agreements. The material data
processing functions for the Bank are performed and maintained by a third party
vendor. The Bank has maintained ongoing contact with this vendor so that
modification of the software for Year 2000 readiness is a top priority and is
expected to be accomplished, though there is no assurance, by June 30, 1999.
Testing of critical applications is approximately 90% complete. The Bank has
contacted all other material vendors and suppliers regarding their Year 2000
state of readiness. Each of these third parties has delivered written assurance
to the Bank that they expect to be Year 2000 compliant prior to the Year 2000.
The Bank has completed contacting all material customers and non-information
technology suppliers (i.e., utility systems, telephone systems and security
systems) regarding their Year 2000 state of readiness. The Validation phase is
targeted for completion by June 30, 1999. The Implementation phase is to certify
that systems are Year 2000 ready, along with assurances that any new systems are
compliant on a going-forward basis. The Implementation phase is targeted for
completion by September 30, 1999.
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 managing software vendor progress, testing
enhanced software products and implementing any necessary contingency plans.
Total direct costs are estimated not to exceed $50,000. Actual costs will be
charged to earnings over the next four quarters, as incurred.
The Bank is developing remediation contingency plans and business resumption
contingency plans specific to the Year 2000. Remediation contingency plans
address the actions to be taken if the current approach to remediating a system
is falling behind schedule or otherwise appears to be in jeopardy of failing to
deliver a Year
13
2000 ready system when needed. Business resumption contingency plans address the
actions that would be taken if critical business functions can not be carried
out in the normal manner upon entering the next century due to system or
supplier failure.
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.
Liquidity and Capital Resources
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
prepayments of loans and mortgage-backed security principal. 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 funds its operations internally
and as needed with borrowed funds from the Federal Home Loan Bank of Des Moines.
As of December 31, 1998, such borrowed funds totaled $144.1 million. While loan
repayments and maturing investments and mortgage-backed securities are
relatively predictable sources of funds, deposit flows 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 borrowings.
The Bank's regulatory liquidity was 11.7% and 5.4% at December 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 December 31, 1999, is approximately $89.7 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 December 31, 1998, the Bank had loan commitments outstanding of $4.5 million.
Funds required to fill these commitments are derived primarily from current
excess liquidity, advances, deposit inflows or loan and security repayments.
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, December 31, 1998 $34,483
Add: Unrealized losses on debt
securities held for sale 756
---------
Tangible equity capital and ratio to
adjusted total assets $35,239 8.4% $ 6,259 1.5%
---------------------- ---------------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $35,239 8.4% $12,518 3.0% $20,863 5.0%
---------------------- --------------------------- ---------------------------
Total risk-based capital and ratio to
risk-weighted assets $35,239 14.6% $16,691 4.0% $25,036 6.0%
------------- --------------------------- ---------------------------
Tier 2 risk-based capital,
allowance for loan losses 1,127
---------
Total risk-based capital and ratio to
risk-weighted assets, December 31, 1998 $36,366 15.0% $19,352 8.0% $24,191 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
14
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.
There were no significant changes for the three months ended December 31, 1998
from the information presented in the annual report on Form 10-K for the year
ended September 30, 1998, concerning quantitative disclosures about market risk.
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
Generally Accepted Accounting Principles (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 its subsidiaries were
engaged in any legal proceeding of a material nature at
December 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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule (only in electronic
filing).
(b) Reports on Form 8-K
None
15
FSF FINANCIAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FSF FINANCIAL CORP.
Date: February 3, 1998 By: /s/ Donald A. Glas
- ----------------------- -----------------------
Donald A. Glas
Chief Executive Officer
Date: February 3, 1998 By: /s/ Richard H. Burgart
- ---------------------- ----------------------
Richard H. Burgart
Chief Financial Officer