EXHIBIT 13
FSF
[LOGO] FINANCIAL
CORPORATION
---------------------------------------------------------------
Financial Services Holding Company
ANNUAL REPORT
1999
FSF FINANCIAL CORP.
1999 ANNUAL REPORT
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TABLE OF CONTENTS
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Corporate Profile and Stock Market Information...............................1
Selected Financial and Other Data............................................2
Letter to Stockholders.......................................................3
Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................4
Independent Auditors' Report................................................15
Consolidated Statements of Financial Condition..............................16
Consolidated Statements of Income...........................................17
Consolidated Statements of Changes in Stockholders' Equity..................18
Consolidated Statements of Cash Flows.......................................19
Notes to Consolidated Financial Statements..................................21
Selected Quarterly Financial Data...........................................41
Office Locations............................................................42
Corporate Information.......................................................43
FSF FINANCIAL CORPORATION
Corporate Profile and Related Information
FSF Financial Corp. (the "Corporation") is a Minnesota corporation organized in
1994 at the direction of First Federal fsb (the "Bank") to acquire all of the
capital stock of the Bank upon its conversion from the mutual to stock form of
ownership. The Bank resulted from the merger of First Federal Savings and Loan
Association of Hastings, Hastings, Minnesota, with and into First State Federal
Savings and Loan Association, Hutchinson, Minnesota, on September 30, 1994. On
October 6, 1994, the Bank completed its mutual-to-stock conversion
("Conversion") and is currently chartered by the Office of Thrift Supervision
("OTS") as a federally-chartered stock savings bank. The Corporation is a
unitary savings and loan holding company which, under existing laws, generally
is not restricted in the types of business activities in which it may engage
provided that the Bank retains a specified amount of its assets in
housing-related investments.
The Corporation purchased all of the capital stock of the Bank with one-half of
the net proceeds from the Conversion. The Corporation also provided a loan to
the Bank's Employee Stock Ownership Plan ("ESOP") to enable the ESOP to purchase
shares of the Corporation's common stock in the initial public offering. The
note bears an interest rate and has terms and conditions which prevailed in the
marketplace at the time it was originated. The Corporation has not engaged in
any business activities to date other than the loan to the ESOP.
The Company operates three wholly owned subsidiaries, Insurance Planners,
Homeowners Mortgage Corporation and the Bank. Insurance Planners (the "Agency")
is an independent property and casualty insurance agency located in Hutchinson,
MN. The Agency was acquired by the Company on June 1, 1998. Furthermore, on
November 17, 1998, the Company acquired Homeowners Mortgage Corporation ("HMC"),
Vadnais Heights, MN. on November 17, 1998. HMC is a mortgage banking company.
The Bank conducts its business from its main office in Hutchinson, Minnesota,
and ten additional full service offices located in the Minnesota counties of
McLeod, Dakota, Meeker, Sibley, Carver, Stearns and Wright. The Bank also
operates ten automated teller machines ("ATMs"). The Bank's deposits have been
federally insured since 1934 and are currently insured up to the maximum
allowable by law as administered by the Federal Deposit Insurance Corporation
(the "FDIC"). The Bank is a community oriented savings institution offering a
variety of financial services to meet the needs of the communities it serves.
The Bank attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, primarily to originate and purchase
residential real estate, commercial real estate, multi-family loans,
construction loans, agricultural loans, commercial business loans, and consumer
loans.
Stock Market Information
Since its issuance in October 1994, the Corporation's common stock has been
traded on the Nasdaq National Market. The daily stock quotation for FSF
Financial Corp. is listed in the Nasdaq National Market published in The Wall
Street Journal, the St Paul Pioneer Press and Dispatch, and other leading
newspapers under the trading symbol of "FFHH". For a listing of the stock price
as published by the Nasdaq statistical report, see "Selected Quarterly Financial
Data."
The number of stockholders of record of common stock as of the record date of
November 30, 1999, was approximately 511. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At November 30, 1999, there were 2,805,887 shares issued and
outstanding.
The Corporation's ability to pay dividends to stockholders is dependent upon the
dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock form, or (2) the regulatory capital requirements imposed by the
OTS.
1
FSF FINANCIAL CORPORATION
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SELECTED FINANCIAL AND OTHER DATA
Financial Condition (Dollars in Thousands)
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September 30, 1999 1998 1997 1996 1995
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Total assets $418,094 $416,232 $388,135 $354,636 $304,605
Loans held for sale 5,334 2,672 204 443 230
Loans receivable, net 278,290 280,603 260,390 216,727 170,921
Mortgage-backed securities 27,587 36,418 38,539 38,557 37,110
Mortgage-backed securities available for sale 15,979 16,574 16,699 16,336 16,141
Debt securities 19,937 24,412 37,876 44,349 41,914
Debt securities available for sale 12,794 3,010 1,000 - -
Equity securities available for sale 19,284 19,459 19,311 18,231 16,165
Cash and cash equivalents (1) 19,265 22,597 6,135 11,756 14,855
Savings deposits 231,651 226,542 208,246 189,074 171,516
Other borrowings 140,967 144,177 133,817 114,693 73,807
Stockholders' equity 42,325 42,518 43,362 47,649 57,351
Summary of Operations (Dollars in Thousands)
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Year Ended September 30, 1999 1998 1997 1996 1995
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Interest income $ 29,420 $ 29,981 $ 27,315 $ 23,244 $ 19,079
Interest expense 18,198 18,499 16,346 13,609 9,472
Net interest income 11,222 11,482 10,969 9,635 9,607
Provision for loan losses 456 302 120 42 24
Non-interest income 5,259 2,269 1,510 1,354 1,127
Non-interest expense (2) 11,826 8,395 7,130 8,178 6,966
Income before cummulative effect
of change in accounting principle 2,505 3,030 3,124 1,668 2,243
Net income (2) 2,505 3,030 3,124 1,668 2,625
Other Selected Data
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Year Ended September 30, 1999 1998 1997 1996 1995
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Return on average assets before cum. eff. 0.59% 0.74% 0.84% 0.69% 0.82%
Return on average assets after cum. eff. 0.59% 0.74% 0.84% 0.69% 0.95%
Return on average equity before cum. eff. 5.74% 6.94% 6.87% 4.25% 3.83%
Return on average equity after cum. eff. 5.74% 6.94% 6.87% 4.25% 4.48%
Average equity to average assets 10.26% 10.70% 12.25% 15.93% 21.31%
Net interest rate spread (3) 2.39% 2.44% 2.54% 2.36% 2.78%
Non-performing assets to total assets 0.13% 0.19% 0.15% 0.06% 0.12%
Allowance for loan losses to total loans 0.45% 0.34% 0.30% 0.33% 0.41%
Basic earnings per share before cum eff. (2) $ 0.94 $ 1.14 $ 1.13 $ 0.49 $ 0.57
Diluted earnings per share before cum eff. (2) $ 0.90 $ 1.05 $ 1.04 $ 0.47 $ 0.55
Basic earnings per share (2) $ 0.94 $ 1.14 $ 1.13 $ 0.49 $ 0.67
Diluted earnings per share (2) $ 0.90 $ 1.05 $ 1.04 $ 0.47 $ 0.65
Cash dividends declared per share $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.375
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(1) Consists of cash due from banks, interest-bearing deposits, and other
investments with original maturities of less than three months.
(2) Includes a one-time special assessment of $1,030,000 to recapitalize the
SAIF for the year ended September 30, 1996.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities
2
[LOGO] FSF
FINANCIAL
CORP.
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201 Main Street South Hutchinson, MN 55350-2573 Tele.320-234-4500
Fax 320-234-4542
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To Our Stockholders:
Fiscal 1999 provided us with a variety of challenges and opportunities.
Refinance activity continued at a record pace and principal repayments exceeded
$136 million during the year, an increase of almost 18% over the previous year's
level. Loan production totaled more than $254 million, with slightly more than
50% of the production in one-to-four family residential mortgages. We continued
to decrease our reliance on residential lending and continue to seek a
reasonable balance between residential mortgages, construction lending,
commercial business loans, agricultural loans and consumer loans. Single family
residential loans comprised 38.8% of our loan portfolio at September 30, 1999,
compared to 64.7% of all loans at September 30, 1996.
The change in composition of our loan portfolio required an increase in our loan
loss provision. Even though we increased the loan loss provision, there was not
an increase in problem assets or non-performing assets. Non-performing assets
were 0.13% of total assets at the end of the fiscal year and all construction,
agricultural and commercial loans were performing.
During the majority of the year, liquidity continued to increase as a result of
the refinance activity. Due to the uncertainty of the interest rate environment
we were unwilling to accept the interest rate risk associated with redeploying
the funds throughout most of the year. As a result, we accepted lower interest
earnings but as rates began to move upward, primarily during the fourth quarter,
we utilized alternative investments and began decreasing our liquidity position.
The complete integration of Insurance Planners and Homeowners Mortgage
Corporation continues. With more than 150 employees in 14 locations, working for
four different companies, we implemented a comprehensive communications
solution. Due to the magnitude of the project there was some duplication of
costs, however the operational efficiencies and on-going cost savings will
provide us with the foundation necessary to continue to provide additional
electronic services to our mortgage, insurance, investment and banking
customers.
We have dedicated resources to the implementation of a sales culture - formal
service and sales training, hiring a retail sales manager, implementation of
profitability based incentive programs and marketing software introducing
customer relationship profitability. During the past year we opened a new office
in Buffalo that allowed us to expand our drive-up needs, and implement a "sales
relationship" office. However, the sales culture journey is far from over.
Our ability to maximize the potential within our family of companies will
continue to provide challenges. From the traditional banking products offered by
the Bank, to investment and estate planning provided by Firstate Investments, to
residential mortgage services of HMC, to the full line of insurance services
provided by Insurance Planners, we can meet the financial needs of our customers
but we must leverage our strengths.
Enhancing shareholder value is the number one objective of the Board of
Directors. Plateaus develop in earnings due to the absorption of businesses,
communications and technology upgrades, Y2K issues, loan loss reserve increases
due to business diversification and internet development. However we feel these
items are necessary in order to insure future growth in earnings.
Thank you for your confidence and investment in FSF Financial Corp. We hope that
you are using some of our many products and services. If not, please consider
doing so. Our best sales people are our satisfied customers.
Sincerely,
/s/Donald A. Glas /s/George B. Loban
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Donald A. Glas George B. Loban
Co-Chair/Chief Executive Officer Co-Chair/President
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of integrating newly
acquired businesses, the ability to control costs and expenses, and general
economic conditions. FSF Financial Corp. undertakes no obligation to publicly
release the results of any revisions to those forward looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
General
The Corporation does not engage in any active business. In connection with the
conversion from the mutual to stock form of ownership, the Corporation made a
loan to the Bank's employee stock ownership plan. The Corporation also receives
interest income on its investments.
The earnings of the Corporation depend primarily on the Bank's net interest
income and to a lesser extent, income from its recently acquired wholly owned
subsidiaries: Insurance Planners (June 1998) and Homeowners Mortgage (November
1998). Net interest income is affected by the interest rates that the Bank
receives from its loans and investments and by the interest rates that the Bank
must pay for its sources of funds. The difference between average rates of
interest earned on earning assets and the average rates paid on interest bearing
liabilities is the "interest rate spread". When interest earning assets equal or
exceed interest bearing liabilities, any positive interest rate spread will
produce net interest income.
In addition, the Bank receives income from service charges on deposit accounts,
other service charges and fees, commission income and income from the sale of
loans to the secondary market. The Bank incurs expenses in addition to interest
expense in the form of salaries and benefits, deposit insurance, property
operations and maintenance, advertising and other related business expenses.
Earnings of the Bank are significantly affected by economic and competitive
conditions, particularly changes in interest rates, government policies, and
regulations of various regulatory authorities.
Asset/Liability Management
The Bank, like other financial institutions, is vulnerable to changes in
interest rates to the extent that interest-bearing liabilities mature
differently than interest-earning assets. The lending activities of the Bank
have emphasized the origination of loans, the majority of which have a repricing
term which is substantially shorter than their amortization term, and the source
of funds has been deposits and borrowings. Having interest-earning assets that
reprice more frequently than interest-bearing liabilities is generally
beneficial to net interest income during periods of increasing interest rates,
such an asset/liability mismatch is generally detrimental during periods of
declining interest rates.
In an attempt to manage its exposure to changes in interest rates, management
closely monitors interest rate risk. Management meets at least quarterly to
review the interest rate risk position and projected profitability of the Bank.
In addition, management reviews the Bank's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Bank's objectives in the most effective manner. The Board of
Directors reviews on a quarterly basis the Bank's asset/liability position,
including simulations of the effect of various interest rate scenarios on the
Bank's capital.
Depending on the relationship between long-term and short-term interest rates,
market conditions and consumer preferences, the Bank, at times, may place more
emphasis on managing net interest margin rather than matching the interest rate
sensitivity of its assets and liabilities in an effort to enhance net interest
income. Management believes that the increased net interest income resulting
from a mismatch in the maturity of its assets and liability portfolios can
provide high enough returns to justify the increased exposure to sudden and
unexpected changes in interest rates.
Management attempts to reduce the Bank's interest rate risk by the way it
structures its assets and liabilities. The Bank sells all fixed rate residential
mortgages and retains for its portfolio residential mortgages with either
adjustable interest rates or balloon provisions. These loans provide the Bank
with a repricing time frame which is substantially shorter than the contractual
term. During the 1999 fiscal year, the Bank originated $2.6 million of single
family mortgage loans which have initial fixed rates for terms of one to ten
years and then adjust annually off a treasury index thereafter. The Bank also
originated $3.3 million of single family mortgage loans that have a balloon
payment due in three to seven years. Originations of construction and land
development loans, which generally have a contractual maturity of two years or
less, totaled $55.7 million. At September 30, 1999, $130.2
4
million of real estate mortgages were adjustable rate mortgages, balloon
mortgages, or construction and land development loans, representing 41.8% of
total loans and 31.1% of total assets.
Interest rate sensitivity is the result of differences in the amounts and
repricing dates of rate-sensitive assets and rate-sensitive liabilities. These
differences, or interest rate repricing "GAP," provide an indication of the
extent to which the net interest income is affected by future changes in
interest rates. A GAP is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
GAP is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of falling
interest rates, a negative GAP would tend to result in an increase in net
interest income, while a positive GAP would tend to affect net interest income
adversely. Conversely, during a period of rising interest rates, a negative GAP
would tend to result in a decrease in net interest income, while a positive GAP
would tend to result in an increase in net interest income.
The table that follows sets forth the amounts of interest-earning assets and
interest-bearing liabilities at September 30, 1999, which are expected to
reprice or mature in each of the future time periods shown.
Analysis of Repricing Mechanisms
Over One Over Five
Within to Five to Ten Over Ten
One Year Years Years Years Total
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Interest-earning assets: (Dollars in Thousands)
Mortgage loans $ 93,510 $ 62,911 $ 21,556 $ 27,908 $205,885
Other loans 64,665 34,534 4,591 1,999 105,789
Investment securities 79,268 17,863 7,101 7,369 111,601
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Total interest-earning assets 237,443 115,308 33,248 37,276 423,275
------------- ------------- ------------- ------------- -------------
Interest-bearing liabilities:
Noninterest bearing deposits - - - - -
NOW and Super now accounts 15,140 3,449 - - 18,589
Savings accounts 58,350 7,204 - - 65,554
Money market deposit accounts 1,732 214 - - 1,946
Certificates 108,565 21,983 2,597 - 133,145
Other borrowed money 24,467 106,000 10,500 - 140,967
------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities 208,254 138,850 13,097 - 360,201
------------- ------------- ------------- ------------- -------------
Interest sensitivity gap $ 29,189 $(23,542) $ 20,151 $ 37,276 $ 63,074
============= ============= ============= ============= =============
Cumulative interest sensitivity gap $ 29,189 $ 5,647 $ 25,798 $ 63,074
============= ============= ============= =============
Cumulative ratio of interest-earning assets
to interest-bearing liabilities 1.14% 1.02% 1.07% 1.18%
============= ============= ============= =============
Cumulative ratio of cumulative interest
sensitivity gap to total assets. 6.98% 1.35% 6.17% 15.09%
============= ============= ============= =============
The table above indicates the time periods in which interest-earning assets and
interest-bearing liabilities will mature or reprice in accordance with their
contractual terms. The following assumptions have been used in calculating the
values in the table: Adjustable-rate and balloon loans have a constant
prepayment rate of 6%; mortgages held for sale are all set to reprice in three
years or less; remaining mortgages have prepayment rates ranging from 4% to 10%;
consumer loans have a prepayment rate that is constant over time at 19%; NOW
checking, core savings deposits, and money market deposits have an increasing
decay ranging from 6.0% to 30.0%. Management utilizes its own assumptions, and
feels that these assumptions provide a reasonable estimate of actual experience.
Certain shortcomings are inherent in the method of analysis presented in the
previous table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis
over the life of the assets.
5
Further, in the event of a change in interest rate, prepayment levels and decay
rates on core deposits may deviate significantly from those assumed in
calculating the table.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Bank's market risk is comprised primarily of interest rate risk
resulting from its core banking activities of lending and deposit taking.
Interest rate risk is the risk that changes in market interest rates might
adversely affect the Bank's net interest income or the economic value of its
portfolio of assets, liabilities and off-balance sheet contracts. Management
continually develops and applies strategies to mitigate this risk. Management
does not believe that the Bank's primary market risk exposures and how those
exposures are managed in fiscal 1999 have changed when compared to fiscal 1998.
Market risk limits have been established by the Board of Directors based on the
Bank's tolerance for risk.
The Bank primarily relies on its Net Portfolio Value Model (the Model) to
measure its susceptibility to interest rate changes. Net portfolio value (NPV)
is defined as the present value of expected cash flows from existing assets
minus the present value of expected net cash flows from existing liabilities
plus or minus the present value of net expected cash flows from existing
off-balance sheet contracts. The Bank does not currently own any derivative
financial instruments whose values are determined from underlying instruments or
market indices, and whose notional or contractual amounts would not be
recognized in the financial statements. The Model estimates the current economic
value of each type of asset, liability, and off-balance sheet contract after
various assumed instantaneous, parallel shifts in the Treasury yield curve both
upward and downward.
The NPV Model uses an option-based pricing approach to value one to four family
mortgages, mortgages serviced by others, and firm commitments to buy, sell, or
originate mortgages. This approach makes use of an interest rate simulation
program to generate numerous random interest rate paths that, in conjunction
with a prepayment model, are used to estimate mortgage cash flows. Prepayment
options and interest rate caps and floors contained in mortgages and
mortgage-related securities introduce significant uncertainty in estimating the
timing of cash flows for these instruments that warrants the use of this
sophisticated methodology. All other financial instruments are valued using a
static discounted cash flow method. Under this approach, the present value is
determined by discounting the cash flows the instrument is expected to generate
by the yields currently available to investors from an instrument of comparable
risk and duration.
The following table sets forth the present value estimates of the Bank at
September 30, 1999, as calculated by its NPV Model. The table shows the NPV of
the Bank under rate shock scenarios of -400 basis points to +400 basis points in
increments of 100 basis points. As market rates increase, the market value of
the Bank's large portfolio of mortgage loans and securities declines
significantly and prepayments are slow. As rates decrease, the market value of
mortgage loans and securities increase only modestly due to prepayment risk,
periodic rate caps, and other embedded options. Actual changes in market value
will differ from estimated changes set forth in this table due to various risks
and uncertainties.
Changes in Interest
Rates in Basis Net Portfolio Change NPV as % of Assets
-------------------------------------------------------- ----------------------------------------
Points (Rate Shock) $ Amount $ Change Change % NPV Ratio Change
----------------- ---------------- ----------------- --------------- ---------------------
(Dollars in thousands)
+400 bp $ 29,145 (8,913) (23.42) % 7.29 (194) bp
+300 bp 31,217 (6,841) (17.98) 7.75 (148) bp
+200 bp 33,385 (4,673) (12.28) 8.22 (101) bp
+100 bp 35,661 (2,397) (6.30) 8.72 (51) bp
0 bp 38,058 - - 9.23 -
-100 bp 40,591 2,533 6.66 9.76 53 bp
-200 bp 43,278 5,220 13.72 10.31 108 bp
-300 bp 46,142 8,084 21.24 10.90 167 bp
-400 bp 49,208 11,150 29.30 11.51 228 bp
This table shows that the Bank's economic value of equity would decrease with
rising interest rates while increasing with falling interest rates. However,
computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan repayments and deposit runoffs, and may not be indicative of actual
results. The computations do not reflect any actions the Bank may undertake in
response to changes in interest rates although management cannot always predict
future interest rates or their effect on the Bank. Certain shortcomings are
inherent in the method of analysis presented in the computation of NPV. For
example, although certain assets and liabilities may have
6
similar maturities or periods to repricing, they may react in differing degrees
to changes in market area interest rates. Additionally, certain assets, such as
adjustable rate loans, have features that restrict changes in interest rates
during the initial term and over the remaining life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable rate debt may decrease in
the event of an interest rate increase.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Corporation for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume
(changes in average volume multiplied by old rate); (2) changes in rates
(changes in rate multiplied by old average volume); (3) total changes in
rate-volume. The combined effects of changes in both volume and rate which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.
Increase (Decrease) Due To
--------------------------------------------------------------
Rate Volume Rate/Volume Total
-------------- -------------- ------------------------------
(In Thousands)
Year Ended September 30, 1999 vs 1998:
Interest income:
Loans Receivable $ (488) $ (165) $ 2 $ (651)
Mortgage-backed securities (279) (454) 45 (688)
Investment securities (319) 1,210 (113) 778
-------------- -------------- -------------- --------------
Total change in interest income (1,086) 591 (66) (561)
Interest expense:
Savings accounts (611) 796 (34) 151
FHLB Borrowings (460) 18 (10) (452)
-------------- -------------- -------------- --------------
Total change in interest expense (1,071) 814 (44) (301)
--------------------------------------------------------------
Net change in net interest income $ (15) $ (223) $ (22) $ (260)
============== ============== ============== ==============
Year Ended September 30, 1998 vs 1997:
Interest income:
Loans Receivable $ 109 $ 3,317 $ 20 $ 3,446
Mortgage-backed securities (350) (25) (3) (378)
Investment securities (308) (87) (7) (402)
-------------- -------------- -------------- --------------
Total change in interest income (549) 3,205 10 2,666
Interest expense:
Savings accounts 151 583 9 743
FHLB Borrowings (59) 1,479 (10) 1,410
-------------- -------------- -------------- --------------
Total change in interest expense 92 2,062 (1) 2,153
-------------- -------------- -------------- --------------
Net change in net interest income $ (641) $ 1,143 $ 11 $ 513
============== ============== ============== ==============
7
Average Balances
The following table sets forth information relating to the
Corporation's average yield on assets and average cost of liabilities
for the periods indicated. The yields and costs are computed by
dividing income or expense by the average balance of interest-earning
assets and interest-bearing liabilities, respectively, for the periods
indicated. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances has
caused any material difference in the information presented.
Years Ended September 30,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
-----------------------------------------------------------------------------------------
(in thousands) (in thousands) (In thousands)
Interest-Earning Assets
Loans receivable (1) $ 274,676 $22,861 8.32% $ 276,730 $ 23,512 8.50% $ 237,475 $20,066 8.45%
Mortgage-backed securities 46,398 2,318 5.00% 54,657 3,006 5.50% 55,062 3,384 6.15%
Investment securities (2) 87,987 4,241 4.82% 65,238 3,463 5.31% 66,734 3,865 5.79%
---------------------- ------------------------ -------------------
Total interest-earning assets 409,061 29,420 7.19% 396,625 29,981 7.56% 359,271 27,315 7.60%
---------------------- ------------------------ -------------------
Interest-Bearing Liabilities
NOW and money market accounts $ 31,670 289 0.91% $ 28,626 407 1.42% $ 27,463 389 1.42%
Passbook savings 3.24% 3.33% 3.15%
58,463 1,896 5.64% 50,699 1,690 3.33% 48,381 1,524 3.15%
Certificates of deposit 142,811 8,048 5.64% 136,407 7,985 5.85% 127,211 7,426 5.84%
---------------------- ------------------------ -------------------
Total deposits 232,944 10,233 4.39% 215,732 10,082 4.67% 203,055 9,339 4.60%
FHLB advances and other borrowed funds 145,690 7,965 5.47% 145,459 8,417 5.79% 120,093 7,007 5.83%
---------------------- ------------------------ -------------------
Total interest-bearing liabilities 378,634 18,198 4.81% 361,191 18,499 5.12% 323,148 16,346 5.06%
---------------------- ------------------------ -------------------
Net Interest Income $11,222 $ 11,482 $10,969
========== ============= =========
Net Interest Rate Spread (3) 2.39% 2.44% 2.54%
Net Interest Rate Margin (4) 2.74% 2.89% 3.05%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.08x 1.10x 1.11x
============ =========== ==========
(1) Average balances include non-accrual loans and loans held for sale.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest rate margin represents net interest income as a percentage of
average interest-earning assets
-8-
Changes in Financial Condition
General. Total assets increased from $416.2 million at September
30, 1998, to $418.1 million at September 30, 1999, an increase of $1.9 million
or 0.5%. The Bank and HMC continued to experience good demand for loans and
supplemented the internal loan originations ($255.7 million) with purchases of
other loans ($45.9 million) that met the interest rate risk and credit risk
criteria established by management.
Securities Available for Sale. Equity securities and
mortgage-backed and related securities available for sale decreased by $175,000
and $595,000 respectively during the 1999 fiscal year as a result of a reduction
in market value. The net unrealized losses on securities available for sale
increased from $661,000 at September 30, 1998 to $1.3 million at September 30,
1999. This increase was primarily due to the market rate of interest increasing
compared to the contractual rate. Debt securities available for sale increased
$9.8 million due to the purchase of such securities for liquidity purposes.
Securities Held to Maturity. Debt securities held to maturity
decreased from $24.4 million to $19.9 million due to maturities and the exercise
of call options by issuers. Mortgage-backed securities held to maturity
decreased from $36.4 million to $27.6 million during fiscal 1999, due to
principal repayments. The net unrealized losses on securities held to maturity
increased from $1.5 million at September 30, 1998 to $2.2 million at September
30, 1999. These increases were primarily due to the market rate of interest
increasing compared to the contractual rate.
Loans Held for Sale. Net loans held for sale increased from $2.7
million at September 30, 1998, to $5.3 million at September 30, 1999. The Bank
and HMC had firm commitments to sell $5.2 million of the loans held for sale
that were closed by September, 1999.
Loans Receivable. Net Loans receivable decreased due to the
continued sale of long term fixed-rate loans, from $280.6 million at September
30, 1998, to $278.3 million at September 30, 1999, a decrease of $2.3 million or
0.8%. The decrease was comprised of a decline in one-to-four family loans of
$39.1 million, which was partially offset by increases in other real estate
mortgages ($3.6 million), net construction loans ($12.6 million) , commercial
business loans ($8.7 million) and agricultural loans ($10.4 million).
Deposits. Total deposits increased by $5.1 million, or 2.3% during
the 1999 fiscal year. The increase in deposits can be attributed to an increase
in savings accounts ($11.6 million), an increase in demand deposits ($2.7
million) and a decrease in certificates of deposit ($9.1 million). The increase
in total deposits was accompanied by a decrease in the weighted average cost of
funds from 4.67% to 4.39% for the years ended September 30, 1998 and 1999,
respectively. The decrease in cost is primarily attributable to the change in
the composition of deposits.
Borrowings. In addition to growth in deposits, borrowings may be
utilized to fund the growth in assets. Management utilizes a least cost, at the
margin, approach to fund assets. As a result, borrowings are utilized as a
funding source when it provides the least cost, at the margin. FHLB advances are
used to fund lending and investment activities, withdrawals from deposit
accounts and other ordinary business activity. Borrowings decreased by $3.2
million dollars during fiscal 1999 due to principal payments. The Bank was able
to fund lending and investments with loan repayments and deposit growth.
Stockholders' Equity. Stockholders' equity decreased from $42.5
million at September 30, 1998, to $42.3 million at September 30, 1999, a
decrease of $0.2 million. The Corporation repurchased 204,754 shares of its
common stock during the year at an average price of $14.53, thereby reducing
stockholders' equity and the total number of shareholders. Furthermore,
unrealized losses on securities available for sale further decreased
stockholders' equity. Book value per share increased from $16.22 at September
30, 1998, to $16.32 at September 30, 1999.
Comparison of Years Ended September 30, 1999 and 1998
Net Income. Net income decreased to $2.5 million for the year ended
September 30, 1999, from $3.0 million for the year ended September 30, 1998. The
decrease was primarily due to an increase in non-interest expense and
non-interest income, the majority of which was attributable to the acquisition
of the Agency and HMC.
Interest Income. Total interest income decreased $561,000 to $29.4
million for the year ended September 30, 1999, from $30.0 million for the year
ended September 30, 1998. Interest income on loans decreased by $651,000 from
$23.5 million for the year ended September 30, 1998, to $22.9 million for the
year ended September 30, 1999, as a result of a $2.0 million decrease in the
average balance of loans receivable from $276.7 million at September 30, 1998,
to $274.7 million at September 30, 1999. Furthermore, the average yield
decreased from 8.50% at September 30, 1998, to 8.32% at September 30, 1999.
Interest income on mortgage-backed securities decreased from $3.0 million for
the year ended September 30, 1998, to $2.3 million for the year ended September
30, 1999. The decrease was primarily the result of a decrease in average rate
from 5.50% for the 1998 fiscal year to 5.00% for the 1999 fiscal year and a
decrease in the average balance of $8.3 million. The average balance of
investment securities increased by $22.7 million during the fiscal year and the
yield decreased from 5.31% to 4.82%.
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The decrease in yield for investment securities was primarily impacted by
maturities and the exercise of call options by issuers. The yield on
interest-earning assets decreased from 7.56% for the year ended September 30,
1998, to 7.19% for the year ended September 30, 1999. Interest income increased
by $591,000 as a result of increased volume during the year while the changes in
rates caused interest income to decrease by $1.1 million and the rate/volume
change decreased interest income by $66,000.
Interest Expense. Total interest expense decreased to $18.2 million
for 1999 from $18.5 million for 1998 as the average balance of total interest
bearing liabilities increased but the average cost of funds decreased. The
increased cost of deposits attendant to the growth of balances was approximately
$796,000 while the decrease associated with a change in interest rates was
approximately $611,000. The cost associated with interest bearing deposits
decreased from 4.67% for the year ended September 30, 1998, to 4.39% for the
same period ended September 30, 1999. The cost associated with borrowed funds
decreased to 5.47% for fiscal 1999 compared to 5.79% for fiscal 1998. $460,000
of the decrease in the cost of borrowed funds was a result of decreases in
rates, while increased volumes added $18,000 in interest expense and $10,000 of
the decrease was rate/volume related.
Net Interest Income. Net interest income decreased $260,000.
Changes in interest rates caused a decrease in net interest income of $15,000,
volumes accounted for a decrease in net interest income of $223,000 and
rate/volume differences decreased $22,000.
Provision For Loan Losses. The allowance for losses on loans is
maintained at a level which is considered by management to be adequate to absorb
probable losses on existing loans that may become uncollectible based on an
evaluation of the collectibility, prior 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.
The Bank's loan loss provision increased from $302,000 for the year ended
September 30, 1998, to $456,000 for the year ended September 30, 1999, due to
the change in composition of the loan portfolio. The Bank's allowance for loan
losses was $1,387,000 at September 30, 1999. The allowance for loan losses
represents .45% of total loans outstanding and 252.2% of total non-performing
assets. While the Bank maintains its allowance for loan losses at a level which
it considers to be adequate, there can be no assurance that further additions
will not be made to the loss allowances or that such losses will not exceed the
estimated amounts.
Non-interest Income. Non-interest income and non-interest expense
were impacted by acquisitions in two ways: (1) only 4 months of income and
expense for the Agency were included in fiscal 1998 and (2) 11 months of income
and expense for HMC are included in fiscal 1999, that were not present in 1998.
Total non-interest income increased by $3.0 million to $5.3 million for the year
ended September 30, 1999, from $2.3 million for the year ended September 30,
1998. The Agency and HMC accounted for approximately $2.7 million of the
increase. Gains on loans sold increased from $360,000 in the 1998 fiscal year to
$2.3 million in the 1999 fiscal year. The gains are a result of fixed-rate
mortgages that were sold in the secondary market because they do not fit the
interest rate risk profile of the Bank and also the addition of HMC. Other
service charges and fees increased from $457,000 for the year ended September
30, 1998 to $801,000 for the year ended September 30, 1999. Service charges on
deposit accounts increased $146,000 during the periods compared as a result of
an increase in the number of accounts affected and to a lesser degree by an
increase in the fees associated with deposit accounts. Commission income
increased from $543,000 for the year ended September 30, 1998 to $946,000 for
the year ended September 30, 1999. $381,000 of the increase was a result of
having the Agency for a full year.
Non-interest Expense. Total non-interest expense increased to $11.8
million for the year ended September 30, 1999, from $8.4 million for the year
ended September 30, 1998, or 40.5%. The Agency and HMC accounted for
approximately $2.6 million of the increase. Compensation and benefits increased
from $5.4 million to $7.4 million or 37.0%, due to the acquisition of HMC ($1.6
million), a full year's expense for the Agency ($278,000) and merit increases,
which averaged 4.5%. Occupancy and equipment expense increased $467,000. Deposit
insurance premiums increased $3,000. Professional fees increased from $258,000
for fiscal year 1998 to $276,000 for fiscal year 1999. Data processing increased
$152,000 to $644,000 for the period ended September 30, 1999, due to processing
expense associated with increased delivery of electronic services to customers,
the introduction of agricultural lending and the expansion of commercial lending
and to a lesser extent, as a result of the costs associated with the
Corporation's Year 2000 compliance program. Goodwill amortization during the
year was $79,000 for HMC and $26,000 for the Agency.
Income Tax Expense. Income tax expense decreased to $1.7 million
for the year ended September 30, 1999, from $2.0 million for the year ended
September 30, 1998. The decrease was primarily due to a decrease in pre-tax
income of $855,000.
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Comparison of Years Ended September 30, 1998 and 1997
Net Income. Net income decreased to $3.0 million for the year ended
September 30, 1998, from $3.1 million for the year ended September 30, 1997. The
decrease was primarily due to an increase in non-interest expense.
Interest Income. Total interest income increased $2.7 million to
$30.0 million for the year ended September 30, 1998, from $27.3 million for the
year ended September 30, 1997. Interest income on loans increased by $3.4
million from $20.1 million for the year ended September 30, 1997, to $23.5
million for the year ended September 30, 1998, as a result of a $39.3 million
increase in the average balance of loans receivable from $237.5 million at
September 30, 1997, to $276.7 million at September 30, 1998. Furthermore, the
average yield increased from 8.45% at September 30, 1997, to 8.50% at September
30, 1998. Interest income on mortgage-backed securities decreased from $3.4
million for the year ended September 30, 1997, to $3.0 million for the year
ended September 30, 1998. The decrease was primarily the result of a decrease in
average rate from 6.15% for the 1997 fiscal year to 5.50% for the 1998 fiscal
year. The average balance of investment securities decreased by $1.5 million
during the fiscal year and the yield decreased from 5.79% to 5.31%. The decrease
in yield for investment securities was primarily impacted by maturities and the
exercise of call options by issuers. The yield on interest-earning assets
decreased from 7.60% for the year ended September 30, 1997, to 7.56% for the
year ended September 30, 1998. Interest income increased by $3.2 million as a
result of increased volume during the year while the changes in rates caused
interest income to decrease by $549,000 and the rate/volume change increased
interest income by $10,000.
Interest Expense. Total interest expense increased to $18.5 million
for 1998 from $16.3 million for 1997 as both the average balance of total
interest bearing liabilities and the average cost of funds increased. The
increased cost of deposits attendant to the growth of balances was approximately
$583,000 while the increase associated with a change in interest rates was
approximately $151,000. The cost associated with interest bearing deposits
increased from 4.60% for the year ended September 30, 1997, to 4.67% for the
same period ended September 30, 1998. The cost associated with borrowed funds
decreased to 5.79% for fiscal 1998 compared to 5.83% for fiscal 1997. $59,000 of
the decrease in the cost of borrowed funds was a result of increases in rates,
$1.5 million of the increase was attributable to the increased volumes and
$10,000 of the decrease was rate/volume related.
Net Interest Income. Net interest income increased $513,000.
Changes in interest rates caused a decrease in net interest income of $641,000,
volumes accounted for an increase in net interest income of $1.1 million and
rate/volume differences increased $11,000.
Provision For Loan Losses. The allowance for losses on loans is
maintained at a level which is considered by management to be adequate to absorb
probable losses on existing loans that may become uncollectible based on an
evaluation of the collectibility, prior 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.
The Bank's loan loss provision increased from $120,000 for the year ended
September 30, 1997, to $302,000 for the year ended September 30, 1998, due to
the change in composition of the loan portfolio. The Bank's allowance for loan
losses was $1,035,000 at September 30, 1998. The allowance for loan losses
represents .34% of total loans outstanding and 127.6% of total non-performing
assets. While the Bank maintains its allowance for loan losses at a level which
it considers to be adequate, there can be no assurance that further additions
will not be made to the loss allowances or that such losses will not exceed the
estimated amounts.
Non-interest Income. Total non-interest income increased by
$759,000 to $2.3 million for the year ended September 30, 1998, from $1.5
million for the year ended September 30, 1997. Gains on loans sold increased
from $48,000 in the 1997 fiscal year to $360,000 in the 1998 fiscal year. The
gains are a result of fixed-rate mortgages that were sold in the secondary
market because they do not fit the interest rate risk profile of the Bank. Other
service charges and fees increased from $422,000 for the year ended September
30, 1997 to $457,000 for the year ended September 30, 1998. Service charges on
deposit accounts increased $105,000 during the periods compared as a result of
an increase in the number of accounts affected and to a lesser degree by an
increase in the fees associated with deposit accounts.
Commission income increased from $227,000 for the year ended September 30, 1997
to $543,000 for the year ended September 30, 1998. $214,000 of the increase was
a result of the acquisition of Insurance Planners, $50,000 was a result of
increased investment sales and $45,000 was due to the sale of federal crop
insurance (an ancillary activity to our agricultural lending).
Non-interest Expense. Total non-interest expense increased to $8.4
million for the year ended September 30, 1998, from $7.1 million for the year
ended September 30, 1997, or 18.3%. Compensation and benefits increased from
$4.5 million to $5.4 million or 20.2%, due to the acquisition of Insurance
Planners ($122,000), the hiring of critical management and
-11-
related support positions, including Agricultural Lending, Marketing, Community
Banking, internal audit ($400,000) and merit increases, which averaged 4.5%.
Occupancy and equipment expense increased $46,000. The Company expects increased
compensation and property costs in fiscal 1999, due to the acquisition of
Homeowners Mortgage in November, 1998. Deposit insurance premiums decreased
$36,000. Professional fees increased from $235,000 for fiscal year 1997 to
$258,000 for fiscal year 1998. Data processing increased $99,000 to $492,000 for
the period ended September 30, 1998, due to processing expense associated with
increased delivery of electronic services to customers, the introduction of
agricultural lending and the expansion of commercial lending and to a lesser
extent, as a result of the costs associated with the Corporation's Year 2000
compliance program.
Furthermore, due to the acquisitions of Insurance Planners and Homeowners
Mortgage, the Company will experience approximately $115,000 in annual expense
due to the amortization, over a 25 year period, of goodwill associated with such
acquisitions.
Income Tax Expense. Income tax expense decreased to $2.0 million
for the year ended September 30, 1998, from $2.1 million for the year ended
September 30, 1997. The decrease was primarily due to a decrease in pre-tax
income of $175,000.
Liquidity and Capital Resources
The liquidity of a Corporation reflects its ability to provide funds to meet
loan requests, accommodate possible outflows in deposits, and take advantage of
interest rate market opportunities. Funding of loan requests, providing for
liability outflows, and management of interest rate fluctuations require a
continuous analysis in order to match the maturities of specific categories of
short-term loans and investments with specific types of deposits and borrowings.
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The primary
sources of cash were net income and cash derived from investing activities.
Operating activities provided cash of $7.0 million, $1.3 million and $3.8
million during the years ended September 30, 1999, 1998, and 1997, respectively.
In fiscal 1998 and 1997, the cash flow in operating activities was primarily
influenced by the changes in accrued liabilities associated with the accrual of
the SAIF special assessment in fiscal 1997, which was paid out in fiscal 1998.
In fiscal 1999, the cash flow in operating activities was influenced primarily
by the change in loans held for sale and other liabilities.
Investing activities used $2.4 million, $8.0 million, and $39.5 million during
the years ended September 30, 1999, 1998, and 1997, respectively. The primary
activity of the Bank is originating and purchasing loans and purchasing
investment and mortgage-backed securities. The primary activity of HMC is
originating and selling loans in the secondary mortgage market. During the years
ended September 30, 1999, 1998 and 1997, the Corporation originated loans in the
amount of $260.7 million ($104.8 million were originated by HMC), $147.6 million
and $119.2 million, respectively. The net loan origination's and principal
payments on loans provided $40.0 million in 1999 and used $9.9 million and $41.2
million in 1998 and 1997 respectively. The increase in 1999 was a result of
prepayment on mortgage loans refinancing elsewhere. The purchase of loans used
$40.9 million, $10.8 million and $2.4 million in fiscal 1999, 1998 and 1997
respectively and were largely comprised of commercial business loans that
represented participation interest with other financial institutions. The Bank
also sold a participation in a non-residential loan in fiscal year 1999 for $3.0
million. Purchase of investment and mortgage-backed securities held to maturity
used $1.2 million, $0 and $3.0 million and maturities, principal payments or the
exercise of call provisions by the issuers of such securities provided $14.5
million, $15.6 million and $9.5 million for the years ended September 30, 1999,
1998 and 1997 respectively. Purchase of investment securities available for sale
used $13.0 million, $3.7 million and $2.0 million and maturities or the exercise
of call provision by the issuers of such securities provided $3.0 million, $1.0
million and $0 for the years ended September 30, 1999, 1998 and 1997
respectively. Other investment activities included sale of REO property,
purchase of equipment and property improvements and the net cash acquisition of
HMC. For the fiscal year 1999, the Bank acquired corporate owned insurance
policies in the amount of $5.5 million.
For the year ended September 30, 1999, $5.1 million in cash was provided as a
result of an increase in deposits and $3.2 million in cash was paid on FHLB
advances. The purchase of treasury stock and dividends on common stock used $2.9
million and $1.3 million, respectively. During the fiscal year ended September
30, 1998, $18.3 million in cash was provided as a result of an increase in
deposits and $10.4 million was provided as a result of an increase in
borrowings. The purchase of treasury stock used $5.5 million and dividends on
common stock used $1.4 million during the 1998 fiscal year. Basic and diluted
earnings per share for the year ended September 30, 1999, were $0.94 and $0.90,
respectively. A portion of the earnings per share was a result of the purchase
of treasury stock during the fiscal year. Financing activities used $7.9 million
during the year ended September 30, 1999 and provided $23.2 million, and $30.0
million in cash during the years ended September 30, 1998 and 1997,
respectively. Financing activities in the foreseeable future are expected to
primarily include changes in deposits and advances from FHLB of Des Moines, and
to a lesser extent, the repurchase of treasury shares and the payment of
dividends. See Consolidated Statements of Cash Flow for FSF Financial Corp. and
Subsidiary.
12
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 source of funds are deposits and scheduled amortization and
prepayments of loan 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 FHLB. As of September 30, 1999, such
borrowed funds totaled $141.0 million. While loan repayments and maturing
investments and mortgage-backed securities are relatively predictable sources of
funds, deposit flows and loan 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 of 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 13.3%, 6.05%, and 5.12% at September 30, 1999, 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 September 30, 2000, is approximately $108.6 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 deposits, current 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 September 30, 1999, the Bank and HMC had commitments to extend credit of
$39.3 million. Funds required to fill these commitments are derived primarily
from FHLB borrowings, current excess liquidity, deposit inflows, loan sales or
loan and security repayments.
OTS regulations require the Bank to maintain core capital of 4% of assets, of
which 2.0% must be tangible equity capital, excluding goodwill. The Bank is also
required to maintain risk-based capital equal to 8% of total risk-based assets.
The Bank's regulatory capital exceeded its tangible equity, tier 1 (risk based),
tier 1 (core) and risk-based capital requirements by 7.5%, 5.0%, 10.2% and 6.3%,
respectively.
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or a downturn in the
economy in areas in which the Bank operates, could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
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.
Year 2000 issues expose the Company to a number of risks, any one of which, if
realized, could have a material adverse effect on the Company's business,
results of operations or financial condition. These risks include the
possibility that, to the extent certain vendors fail to adequately address Year
2000 issues, the Company may suffer disruptions in important services on which
the Company depends, such as telecommunications, electrical power and data
processing. Year 2000 issues could affect the Company's liquidity if customer
withdrawals in anticipation of the Year 2000 are greater than expected or if the
Company's lenders are unable to provide the Company with funds when and as
needed by the Company. Year 2000 issues also create additional credit risk to
the Company insofar as the failure of the Company's customers and counterparties
to adequately address Year 2000 issues could increase the likelihood that these
customers and counterparties become delinquent or default on the obligations to
the Company. In addition to increasing the Company's risk exposure to problem
loans, credit losses and liquidity problems, Year 2000 issues expose the Company
to increased risk of litigation losses and expenses relating to the foregoing.
There are other Year 2000 risks besides those described above that may impact
the Company's business, results of operations and financial condition.
13
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 has completed Phase 4, Validation, which involved testing of
changes to hardware and software, accompanied by monitoring and testing with
vendors. The Bank is currently in Phase 5, Implementation, which will continue
into calendar year 2000. Systems have been certified and customer and public
education efforts continue.
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 five quarters, as incurred.
The Bank has developed business resumption contingency plans specific to the
Year 2000. 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.
Impact of Inflation and Changing Prices
The financial statements and related data have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for changes in the relative purchasing power of money over time
caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact of a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
FSF Financial Corp. and Subsidiaries
Hutchinson, MN 55350
We have audited the accompanying consolidated statements of financial condition
of FSF Financial Corp. and Subsidiaries (the Corporation) as of September 30,
1999, and 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended September 30, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of FSF Financial Corp.
and Subsidiaries as of September 30, 1999, and 1998, and the consolidated
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended September 30, 1999, in conformity with generally
accepted accounting principles.
Bertram Cooper & Co., LLP
Waseca, Minnesota
October 25, 1999
15
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
------------------------
1999 1998
------------------------
(In thousands)
ASSETS
------
Cash and cash equivalents $ 19,265 $ 22,597
Securities available for sale, at fair value:
Equity securities 19,284 19,459
Mortgage-backed and related securities 15,979 16,574
Debt securities 12,794 3,010
Securities held to maturity, at amortized cost:
Debt securities (Fair value of $18,999 and $23,953) 19,937 24,412
Mortgage-backed and related securities (Fair value of $26,338 and $35,369) 27,587 36,418
Loans held for sale 5,334 2,672
Loan receivable, net 278,290 280,603
Foreclosed real estate
323 502
Accrued interest receivable 3,328 3,089
Premises and equipment 5,314 4,111
Other assets 10,659 2,785
-------------------------------
Total Assets $ 418,094 $ 416,232
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 32,952 $ 30,299
Savings accounts 65,554 53,984
Certificates of deposit 133,145 142,259
-------------------------------
Total deposits 231,651 226,542
Federal Home Loan Bank borrowings 140,967 144,177
Advances from borrowers for taxes and insurance 669 819
Other liabilities 2,482 2,176
-------------------------------
Total liabilities 375,769 373,714
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 43,292 43,382
Retained earnings, substantially restricted 26,627 25,451
Treasury stock at cost (1,695,390 and 1,603,663 shares) (24,575) (23,298)
Unearned ESOP shares at cost (162,798 and 198,773 shares) (1,628) (1,988)
Unearned MSP stock grants at cost (49,825 and 77,214 shares) (528) (818)
Accumulated other comprehensive income (loss) (1,313) (661)
-------------------------------
Total stockholders' equity 42,325 42,518
-------------------------------
Total Liabilities and Stockholders' Equity $ 418,094 $ 416,232
===============================
The accompanying notes are an integral part of these statements
16
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30,
---------------------------------------
1999 1998 1997
---------------------------------------
(In thousands)
Interest income:
Loans receivable $ 22,861 $ 23,512 $ 20,066
Mortgage-backed and related securities 2,318 3,006 3,384
Investment securities 4,241 3,463 3,865
---------------------------------------
Total interest income 29,420 29,981 27,315
---------------------------------------
Interest expense:
Deposits 10,233 10,082 9,339
Borrowed funds 7,965 8,417 7,007
---------------------------------------
Total interest expense 18,198 18,499 16,346
---------------------------------------
Net interest income 11,222 11,482 10,969
Provision for loan losses 456 302 120
---------------------------------------
Net interest income after provision for loan losses 10,766 11,180 10,849
---------------------------------------
Non-interest income:
Gain (loss) on loans - net 2,341 360
48
Other service charges and fees 801 457 422
Service charges on deposit accounts 968 822 717
Commission income 946 543 227
Other 203 87 96
---------------------------------------
Total non-interest income 5,259 2,269 1,510
---------------------------------------
Non-interest expense:
Compensation and benefits 7,390 5,393 4,487
Occupancy and equipment 1,313 846 800
Deposit insurance premiums 134 131 167
Data processing 644 492 393
Professional fees 276 258 235
Other 2,069 1,275 1,048
---------------------------------------
Total non-interest expense 11,826 8,395 7,130
---------------------------------------
Income before provision for income taxes 4,199 5,054 5,229
Income tax expense 1,694 2,024 2,105
---------------------------------------
Net income 2,505 3,030 3,124
=======================================
Basic earnings per share $ 0.94 $ 1.14 $ 1.13
Diluted earnings per share $ 0.90 $ 1.05 $ 1.04
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income $ 2,505 $ 3,030 $ 3,124
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities - - -
Unrealized holding gains (losses) arising during period (652) (182) 328
Less: reclassification adjustment
for gains included in net income - (11) -
-------------------------------------
Other comprehensive income (loss) (652) (193) 328
-------------------------------------
Comprehensive income $ 1,853 $ 2,837 $ 3,452
=====================================
The accompanying notes are an integral part of these statements
17
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unallocated Accumulated
Retained Common Unearned Other
Additional Earnings Stock Stock Comprehensive
Common Paid-in Substantially Held by Acquired by Treasury Income
Stock Capital Restricted ESOP MSP Stock (Loss) Total
----------------------------------------------------------------------------------------------
Balance, September 30, 1996 $ 450 $ 43,150 $ 22,068 $ (2,719) $ (1,398) $(13,095) $ (807) $ 47,649
Net earnings -- -- 3,124 -- -- -- -- 3,124
Treasury stock acquired -- -- -- -- -- (7,245) -- (7,245)
Stock issued for stock options -- (12) -- -- -- 73 61
Amortization of MSP shares -- 40 -- -- 290 -- -- 330
Common stock dividends
($0.50 per share) -- -- (1,413) -- -- -- -- (1,413)
Allocated ESOP shares -- 156 -- 372 -- -- -- 528
Other comprehensive income -- -- -- -- -- -- 328 328
---------------------------------------------------------------------------------------------
Balance September 30, 1997 450 43,334 23,779 (2,347) (1,108) (20,267) (479) 43,362
Net earnings -- -- 3,030 -- -- -- -- 3,030
Treasury stock acquired -- -- -- -- -- (5,492) -- (5,492)
Stock issued for stock options -- (341) -- -- -- 1,911 -- 1,570
Common stock dividends
($0.50 per share) -- -- (1,358) -- -- -- -- (1,358)
Purchase of subsidiary -- 106 -- -- -- 550 -- 656
Allocated ESOP shares -- 183 -- 359 -- -- -- 542
Other comprehensive (loss) -- -- -- -- (182) (182)
---------------------------------------------------------------------------------------------
Balance September 30, 1998 450 43,382 25,451 (1,988) (818) (23,298) (661) 42,518
Net earnings -- -- 2,505 -- -- -- -- 2,505
Treasury stock acquired -- -- -- -- -- (2,912) -- (2,912)
Stock issued for stock options -- (145) -- -- -- 509 -- 364
Amortization of and tax on MSP shares -- 54 -- -- 290 -- -- 344
Common stock dividends
($0.50 per share) -- -- (1,329) -- -- -- -- (1,329)
Purchase of subsidiary -- (109) -- -- -- 1,126 -- 1,017
Allocated ESOP shares -- 110 -- 360 -- -- -- 470
Other comprehensive (loss) -- -- -- -- -- -- (652) (652)
---------------------------------------------------------------------------------------------
Balance September 30, 1999 $ 450 $ 43,292 $ 26,627 $ (1,628) $ (528) $(24,575) $ (1,313) $ 42,325
---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
18
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
---------------------------------------------
1999 1998 1997
---------------------------------------------
In thousands)
Cash flows from operating activities:
Net income $ 2,505 $ 3,030 $ 3,124
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 490 359 329
Net amortization of discounts and premiums on
securities held to maturity (37) (42) (31)
Provision for loan losses 456 302 120
Net market value adjustment on ESOP shares 104 185 141
Tax benefit on stock options 24 254 10
Amortization of ESOP and MRP stock compensation 656 650 669
Amortization of intangibles 105 10 --
Net gain on sale of assets (11) (18) --
Net loan fees deferred and amortized (134) (194) 214
Loans originated for sale (131,586) (27,625) (2,263)
Loans sold 134,539 25,156 2,103
(Increase) decrease in:
Accrued interest receivable (234) (653) (111)
Other assets (95) (142) 132
Increase (decrease) other liabilities 216 67 (589)
----------------------------------------------
Net cash provided by operating activities 6,998 1,339 3,848
Cash flows from investing activities:
Loan originations and principal payments on loans, net 40,038 (9,928) (41,245)
Purchase of loans (40,883) (10,832) (2,445)
Loan participations sold 3,000 -- --
Principal payments on securities held to maturity 10,002 2,125 19
Purchase of mortgage-related securities held to maturity (1,161) -- --
Purchase of securities available for sale (12,987) (3,671) (1,956)
Purchase of securities held to maturity -- -- (3,000)
Proceeds from securities available for sale -- 411 --
Proceeds from maturities of securities available for sale 3,000 1,000 --
Proceeds from maturities of securities held to maturity 4,500 13,500 9,500
Investment in foreclosed real estate (38) (12) (2)
Proceeds from sale of REO 500 24 22
Purchase paid up life insurance policies (5,495)
Proceeds from sale of fixed assets -- -- 5
Acquisition of Homeowners, net of cash acquired (1,245) -- --
Purchase of equipment and property improvements (1,677) (666) (373)
----------------------------------------------
Net cash (used in) investing activities $ (2,446) $ (8,044) $ (39,480)
The accompanying notes are an integral part of these statements
19
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30,
---------------------------------
1999 1998 1997
---------------------------------
(In thousands)
Cash flows from financing activities:
Net increase in deposits, $ 5,109 $ 18,297 $ 19,171
FHLB Advances -- 10,500 19,250
Payments on FHLB Advances (3,210) (141) (126)
Net short term borrowings (5,726) -- --
Net increase (decrease) in mortgage escrow funds (152) 46 305
Treasury stock purchased (2,912) (5,492) (7,245)
Dividends on common stock (1,329) (1,358) (1,413)
Proceeds from exercise of stock options 336 1,315 69
----------------------------------------
Net cash provided by financing activities (7,884) 23,167 30,011
----------------------------------------
Net increase in cash and cash equivalents (3,332) 16,462 (5,621)
Cash and cash equivalents:
Beginning of year 22,597 6,135 11,756
----------------------------------------
End of period $ 19,265 $ 22,597 $ 6,135
========================================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 7,980 $ 8,464 $ 6,976
Interest on deposits 9,588 10,220 9,188
Income taxes 1,443 1,850 1,999
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments $ 80 $ 121 $ 22
Foreclosed real estate 197 449
20
Stock acquisition of Insurance Planners -- 656
Acquisition of Homeowners Mortgage Corporation non-cash
asset, net of assumed liabilities 1,037 -- --
The accompanying notes are an integral part of these statements
20
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
(1) Description of Business and Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of FSF Financial
Corp. ("the Corporation") and its wholly owned subsidiaries, Homeowners Mortgage
Corporation ("HMC"), Insurance Planners of Hutchinson, Inc. ("the Agency"),
First Federal fsb ("the Bank") and Firstate Services, a wholly owned subsidiary
of the Bank. All significant inter-company accounts and transactions have been
eliminated in consolidated financial statements which have been prepared in
conformity with generally accepted accounting principles.
Nature of Business
The Corporation is a holding company whose subsidiaries provide financial
services. The Bank is a community financial institution attracting deposits from
the general public and using such deposits, together with borrowings and other
funds, to make mortgage, consumer, commercial and agricultural loans. At
September 30, 1999, the Bank operated 11 retail banking offices in Minnesota.
The Bank is subject to significant competition from other financial
institutions, and is also subject to regulation by certain federal agencies and
undergoes periodic examinations by those regulatory authorities. The Agency is a
property and casualty insurance company. HMC is a mortgage banking entity
located in Vadnais Heights, MN., that originates and sells residential mortgage
loans.
Use of Estimates
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of financial
condition, and income and expenses for the period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for losses on
loans and the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties. While management uses
available information to recognize losses on loans and foreclosed real estate,
future additions to the allowances may be necessary based on changes in local
economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for losses
on loans and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
Cash Equivalents (In thousands)
For purposes of the consolidated statements of cash flows, the Corporation
considers all highly liquid debt instruments with original maturities of three
months or less and money market funds to be cash equivalents. Cash and cash
equivalents include interest bearing deposits of $16,020 and $15,299 at
September 30, 1999, and 1998, respectively.
Debt and Equity Securities
The Corporation classifies its investments, including marketable equity
securities, mortgage-backed securities, and mortgage-related securities, in one
of three categories:
Trading Account Securities
Securities held principally for resale in the near term, are classified
as trading account securities and recorded at their fair values.
Unrealized gains and losses on trading account securities are included
in other income. The Corporation did not hold any trading securities
during the three fiscal years ended September 30, 1999.
Securities Held to Maturity
Debt securities which the Corporation has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums
and discounts that are recognized in interest income using the interest
method over the period to maturity. Unrealized losses on held to
maturity securities reflecting a decline in value judged to be other
than temporary are charged to income.
Securities Available for Sale
Available for sale securities consist of equity securities and certain
debt securities not classified as trading securities nor as held to
maturity securities. Unrealized holding gains and losses, net of income
taxes, on available for sale securities are reported as a net amount in
a separate component of shareholders' equity until realized. Gains and
losses on the sale of available for sale securities are determined using
the specific identification method. Any decision to sell available for
sale securities would be based on various factors,
21
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
including movements in interest rates, changes in the maturity mix of
the Corporation's assets and liabilities, liquidity demands, regulatory
capital considerations, and other similar factors. Premiums and
discounts are recognized in interest income using the interest method
over the period to maturity. Unrealized losses on available for sale
securities reflecting a decline in value judged to be other than
temporary are charged to income.
The Bank, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the Federal Home Loan Bank of Des
Moines ("FHLB") in varying amounts based on balances of outstanding home loans
and on amounts borrowed from the FHLB. Because no ready market exists for this
stock, and it has no quoted market value, the Bank's investment in this stock is
carried at cost.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal adjusted by any charge-offs, the allowance for loan losses, and any
deferred fees or costs on originated loans and unamortized premiums or discounts
on purchased loans. Discounts and premiums on purchased real estate loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Discounts and
premiums on purchased consumer loans are recognized over the expected lives of
the loans using the level yield method.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral,
and current economic conditions. Loans are considered impaired if full principal
or interest payments are not anticipated in accordance with the contractual loan
terms. Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans if the value of such loans is
deemed to be less than the unpaid balance. If these allocations cause the
allowance for loan losses to require an increase, such an increase is reported
as a component of the provision for loan losses.
Uncollectible interest on loans that are contractually past due for three months
is charged off or an allowance is established, based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments returns to
normal, in which case the loan is returned to accrual status.
Loan origination fees and certain direct origination costs are capitalized with
the net fee or cost recognized as an adjustment to interest income using the
interest method.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying amount or
fair value minus estimated costs to sell. Revenue and expenses from operations
and changes to the valuation allowance are included in operations.
Income Taxes
The Corporation calculates income taxes on the liability method, under which the
net deferred tax asset or liability is determined based on the tax effects of
the differences between the book and tax bases of the various assets and
liabilities of the Corporation giving current recognition to changes in tax
rates and laws.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and equipment are
carried at cost, less accumulated depreciation and amortization. Buildings and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets. The cost of leasehold improvements is being
amortized using the straight-line method over the terms of the related leases.
Net gains and losses on disposal or retirement of premises and equipment are
included in other income.
22
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Mortgage Loan-Servicing Rights
The Bank has established accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on the
consistent application of the financial-components approach. This approach
requires the recognition of financial assets and servicing assets that are
controlled by the Bank, and the derecognition of financial assets and
liabilities when control is extinguished. Liabilities and derivatives incurred
or obtained in conjunction with the transfer of financial assets are measured at
fair value, if practicable. Servicing assets and other retained interest in
transferred assets are measured by allocating the carrying amount between the
assets sold and the interest retained, based on their relative fair value.
Mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate. The Bank
evaluates the mortgage servicing rights strata for impairment by estimating the
fair value based on anticipated future net cash flows, taking into consideration
prepayment predictions. The predominant characteristics used as the basis for
stratifying are loan types, period of origination, and interest rates. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
Earnings Per Share
Basic income per share amounts are computed by dividing the net income by the
weighted average number of common shares outstanding. Diluted income per share
amounts were computed by dividing net income, adjusted for the effect of assumed
conversions, by the weighted average number of common shares outstanding plus
dilutive potential common shares calculated for stock options outstanding using
the treasury stock method.
Treasury Stock
Treasury stock is recorded at cost. In the event of subsequent reissue, the
treasury stock account will be reduced by the cost of such stock on the average
cost basis with any excess proceeds credited to additional paid-in capital.
Treasury stock is available for general corporate purposes.
Stock-Based Compensation
Effective for the year ended September 30, 1998, the Corporation has adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." As allowed by SFAS No.
123, the Corporation has elected to continue using the accounting methods
prescribed by Accounting Principles Board (APB) Opinion No. 25 and related
interpretations, which measure compensation cost using the intrinsic value
method. See Note 10 for the impact of the fair value of employee stock-based
compensation plans on net income and earnings per share on a pro forma basis for
awards granted after October 1, 1995.
Comprehensive Income
Effective October 1, 1998, the Corporation adopted 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.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents - The carrying value of cash and cash
equivalents approximate fair value.
Debt and equity securities - Fair values of debt and equity securities have
been estimated using quoted market prices.
Loans receivable - For variable-rate loans, loans with balloon maturities,
loans with relatively near-term maturities (such as consumer
installment loans) carrying values approximate fair values. The fair
value of long-term fixed rate loans has been estimated using present
value cash flows, discounted at a rate approximating current market
rates and giving consideration to estimated prepayment risk and credit
loss factors. The estimated fair value of loans held for sale is based
on quoted market prices of similar instruments trading in the
secondary market.
Originated mortgage servicing rights - The carrying amounts of
originated mortgage servicing rights approximate fair values.
Accrued interest - The carrying amounts of accrued interest receivable
approximate their fair values
Life Insurance Policies - Cash value of the policies approximates fair
value.
Deposit liabilities - The fair values of demand deposits are, by
definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of
deposits approximate their fair values at the reporting date. Fair
values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being
23
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term borrowings - The carrying amounts of advances from the
Federal Home Loan Bank (FHLB) of Des Moines maturing within 90
days approximate their fair values.
Long-term borrowings - The carrying amounts of amounts of long-term
borrowings are estimated using discounted cash flow analyses
based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Off-balance-sheet items - Fair value for off-balance-sheet lending
commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standings. The
carrying value and fair value of commitments to extend credit are
not considered material for disclosure.
(2) Business Combination
On June 1, 1998, the Corporation acquired 100% of the outstanding common stock
of the Agency. The business combination was accounted for by the purchase method
and the financial statements reflect the operating results of the Agency for the
four month period ended September 30, 1998. The Corporation issued 38,961 shares
of common stock held as treasury shares to complete the acquisition. The
acquisition price of $750,000, resulted in an acquired identifiable customer
based intangible asset of $674,628, 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 twelve month periods
ending September 30, 1998, 1997 and 1996.
On November 17, 1998, the Corporation acquired 100% of the outstanding common
stock of HMC, an originator and seller of residential mortgage loans. The
business combination was accounted for by the purchase method and the financial
statements reflect the operating results of HMC for the ten and a half months
ended September 30, 1999. 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 information is presented based on
historical financial statements of the Corporation and HMC. The unaudited pro
forma supplemental information for the three years ended September 30, 1999,
were prepared as if the acquisition had occurred as of the beginning of the
respective periods.
For the Three Years Ended
September 30,
----------------------------------------------
1999 1998 1997
----------------------------------------------
(In thousands)
Interest income $ 29,434 $ 30,208 $ 27,565
Interest Expense 18,230 18,611 16,384
----------------------------------------------
Net interest income 11,204 11,597 11,181
Provision for loan losses 456 302 120
----------------------------------------------
Net interest income after provision
for loan losses 10,748 11,295 11,061
----------------------------------------------
Non-interest income 6,173 5,831 3,619
Non-interest expense 12,470 11,198 9,296
----------------------------------------------
Income before provision for income taxes 4,451 5,928 5,384
Income tax expense 1,796 2,378 2,168
----------------------------------------------
Net income $ 2,655 $ 3,550 $ 3,216
==============================================
Basic earnings per share $ 0.99 $ 1.30 $ 1.14
Diluted earnings per share $ 0.95 $ 1.20 $ 1.06
24
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3) Debt and Equity Securities (in thousands)
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values at September 30 are presented as follows:
September 30, 1999
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -----------------------------------------
Available for sale securities:
Equity securities
Fund Investments $ 12,522 $ - $ 601 $ 11,921
Stock in FHLB 7,363 - - 7,363
------------- --------- ------------- -------------
Total $ 19,885 $ - $ 601 $ 19,284
============= ========= ============= =============
Mortgage backed securities:
REMICs $ 16,981 $ - $ 1,002 $ 15,979
============= ========= ============= =============
Debt Securities: $ 12,988 $ 22 $ 216 $ 12,794
============= ========= ============= =============
Held to maturity securities:
Debt securities:
U.S. Government and Agency $ 18,367 $ 92 $ 1,037 $ 17,422
Other Debt Securities $ 1,570 $ 7 $ - $ 1,577
----------------------------------------------------------
Total $ 19,937 $ 99 $ 1,037 $ 18,999
==========================================================
Mortgage backed securities:
REMICs $ 26,415 $ 162 $ 1,414 $ 25,163
FNMA certificates 1,142 $ 1,144
2 -
Other certificates 30 2 - $ 31
------------- --------- ------------- -------------
Total $ 27,587 $ 165 $ 1,414 $ 26,338
============= ========= ============= =============
The amortized cost of debt and mortgage-backed securities at September 30, 1999
included unamortized premiums of $214 and unaccreted discounts of $337,
respectively.
25
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1998
----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ------------------ ------------------ -------------
Available for sale securities:
Equity securities
Fund Investments $ 12,522 $ - $ 426 $12,096
Stock in FHLB 7,363 - - 7,363
Total $ 19,885 $ - $ 426 $19,459
================= ================== ================== =============
Mortgage backed securities:
REMICs $ 16,980 $ - $ 406 $16,574
================= ================== ================== =============
Debt Securities: $ 3,000 $ 10 $ - $ 3,010
================= ================== ================== =============
Held to maturity securities:
Debt securities:
U.S. Government and Agency $ 22,844 $ 613 $ 1,105 $22,352
Other Debt Securities $ 1,568 $ 33 - $ 1,601
----------------------------------------------------------------------------
Total $ 24,412 $ 646 $ 1,105 $23,953
============================================================================
Mortgage backed securities:
REMICs $ 36,363 $ 65 $ 1,120 $35,308
GNMA certificates 49 6 - 55
FHLMC certifiactes 6 - - 6
----------------- ------------------ ------------------ -------------
Total $ 36,418 $ 71 $ 1,120 $35,369
================= ================== ================== =============
The amortized cost of debt and mortgage backed securities at September 30, 1998,
includes unamortized premiums of $232 and unaccreted discounts of $392,
respectively.
Gross realized gains on sales of available for sale securities was $11 for the
year ended September 30, 1998 There were no sales of securities during the two
years ended September 30, 1999 and 1997.
The scheduled maturities of securities held-to-maturity and securities (other
than equity securities) available-for-sale at September 30, 1999, were as
follows:
Held-to-Maturity Available-for-Sale
Securities Securities
------------------------ ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ --------------- ----------
Due in one year or less $ 570 $ 570 $ - $ -
Due from one to five years 6,069 5,815 12,988 12,794
Due from five to ten years 7,103 6,327
- -
Due after ten years 33,782 32,625 16,981 15,979
------------ ------------ --------------- ----------
Total $ 47,524 $ 45,337 $ 29,969 $28,773
============ ============ =============== ==========
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments. Debt and
mortgage-backed securities carried at approximately $20.0 million at September
30, 1999 and $26.7 million at September 30, 1998, were pledged to secure public
deposits and for other purposes required or permitted by law.
26
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(4) Loans Receivable (in thousands)
Loans receivable are summarized as follows:
September 30,
----------------------------
1999 1998
-------------- ----------
First mortgage loans:
Secured by one-to-four family residences $ 115,550 $ 154,668
Secured by other properties 28,824 25,235
Construction and land development loans 56,177 34,098
-------------- ------------
200,551 214,001
Less:
Undisbursed portion of construction
and land development loans (26,156) (16,658)
Net deferred loan origination fees (744) (850)
-------------- ------------
Sub-total first mortgage loans 173,651 196,493
Consumer and other loans:
Consumer loans 18,326 17,275
Home equity and second mortgages 24,312 23,606
Commercial 29,767 21,095
Agricultural loans 33,384 22,960
-------------- ------------
105,789 84,936
Add: net deferred loan origination costs 237 209
-------------- ------------
Sub-total consumer and other loans 106,026 85,145
-------------- ------------
Sub-total all loans 279,677 281,638
Less: allowance for loan losses (1,387) (1,035)
-------------- ------------
Total $ 278,290 $ 280,603
============== ============
A summary of the activity in the allowance for loan losses is as follows:
Years Ended September 30,
-----------------------------------------------
1999 1998 1997
------------ ------------ -----------
Balance, beginning of period $ 1,035 $ 852 $ 776
Provision for losses 456 302 120
Charge-offs (142) (132) (50)
Recoveries 38 13 6
------------ ------------ -----------
Balance, end of period $ 1,387 $ 1,035 $ 852
============ ============ ==========
The Bank had no loans classified as impaired at September 30, 1999, and 1998.
Loans having carrying values of $197 and $449 were transferred to foreclosed
real estate in 1999 and 1998, respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
The aggregate amount of loans to executive officers and directors of the
Corporation were $366, and $489 at September 30, 1999, and 1998, respectively.
During 1999 repayments on loans to executive officers and directors aggregated
$259 and $136 was advanced.
27
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(5) Loan Servicing (in thousands)
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans serviced for others was $55,488 and $46,456 at September 30, 1999
and 1998, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were $296 and $274 at September 30,
1999 and 1998, respectively.
Capitalized mortgage servicing rights and excess servicing receivables are
summarized as follows:
Years Ended September 30,
--------------------------------
1999 1998 1997
-------- ---------- ----------
C>
Beginning balance, net of accumulated amortization $ 201 $ 148 $ 157
Amounts capitalized 132 98 20
Amortization (80) (42) (30)
Valuation adjustments - (3) 1
-------- ---------- ----------
Balance, end of period $ 253 $ 201 $ 148
======== ========== ==========
6) Foreclosed Real Estate (In thousands)
Gain on foreclosed real estate, including net revenues from operations, was not
material for the three years ended September 30, 1999. The Bank held foreclosed
real estate at September 30, 1999 and 1998 amounting to $323 and $502,
respectively.
(7) Premises and Equipment (in thousands)
Premises and equipment are summarized as follows:
September 30,
-----------------------
1999 1998
----------- ---------
Land $ 669 $ 685
Buildings and improvements 4,597 3,787
Furniture, equipment and automobiles 3,582 2,818
Leasehold improvements 40 40
----------- ----------
Total costs 8,888 7,330
Less accumulated depreciation 3,574 3,219
----------- ----------
Total $ 5,314 $ 4,111
=========== ==========
At September 30, 1999, the Corporation was obligated under non-cancelable
operating leases for office space and equipment. Net rental expense under
operating leases, included in occupancy and equipment, was $275, $51, and $58
for the years ended September 30, 1999, 1998, and 1997, respectively. The
projected minimum lease commitments under the terms of the leases at September
30, 1999, are as follows:
Rental Income Rental Expense
Fiscal as Lessor as Lessee
------------ ---------------
2000 19 435
2001 7 341
2002 - 289
2003 - 147
--------- --------------
$ 26 $ 1,212
========= ==============
28
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(8) Deposits (in thousands)
The aggregate amount of short-term jumbo CDs, each with a minimum denomination
of $100,000, was $20,681 and $24,311 in 1999 and 1998 respectively.
September 30, 1999
-------------------------------------
1999 1998 1997
------- ------- -------
Savings accounts $ 1,896 $ 1,690 $ 1,548
Demand deposits 289 407 389
Certificates of deposit 8,048 7,985 7,402
------- ------- -------
$10,233 $10,082 $ 9,339
======= ======= =======
Interest expense on deposits is summarized as follows:
At September 30, 1999, the scheduled maturities of certificates of deposit are
as follows:
Years Ending September 30,
- --------------------------
2000 108,565
2001 17,766
2002 2,890
2003 1,327
2004 and thereafter 2,597
--------
$133,145
========
(9) Federal Home Loan Bank Borrowings (in thousands)
Borrowings by the Bank from the Federal Home Loan Bank of Des Moines (FHLB) are
summarized as follows:
September 30,
----------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Fiscal Year of Maturity - Advances Weighted Weighted
Amount Rate Amount Rate
----------------------------------------------------------------
1999 $ - % $ 3,000 6.55 %
2000 24,467 5.89 24,677 5.89
2001 24,000 5.80 24,000 5.80
2002 - - - -
2003 and thereafter 92,500 5.15 92,500 5.15
-------------- ------------ -------------- -----------
Total $140,967 5.39 % $ 144,177 5.42 %
============== ============ ============== ===========
At September 30, 1999, borrowed funds are collateralized by stock in the FHLB,
first mortgage loans with carrying value of $119,262 and debt and
mortgage-backed securities with carrying values of $49,722 under a collateral
agreement.
29
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(10) Employee and Stock Benefit Plans (in thousands except shares)
Salary Continuation Plans
The Bank has adopted insured salary continuation plans for the benefit of
selected members of management by providing them with retirement and death
benefits. The estimated liability under the agreements is charged to income over
the expected remaining years of employment. The Bank's policy is to fund the
costs accrued with insurance contracts. Salary continuation expense amounted to
$119, $151, and $142 for the three years ended September 30, 1999, respectively.
Deferred Compensation 401(k) Plans
The Corporation provides 401(k) plans which cover substantially all employees
meeting age and length of service requirements. The plan maintained by the Bank
covers employees of both the Bank and the Agency. Employees participating in
this plan are eligible to contribute up to 15% of their annual compensation. The
plan maintained by HMC for the benefit of its employees provides for employee
contribution up to 15% of annual compensation. Both plans provide for
discretionary contributions by the employers which are allocated to the
participants' accounts in proportion to employee contributions. Company
contributions to these plans for the three years ended September 30, 1999 were
$0, $601 and $0, respectively.
Supplemental Life Insurance
In addition to group term insurance benefits provided to substantially all
employees, the Bank maintains investments in insurance policies that provide
either split-dollar or survivor benefits for certain key employees.
Employee Stock Ownership Plan
The Corporation established an Employee Stock Ownership Plan (ESOP) covering all
employees, over the age of 21, with at least one year of service and who work at
least 1,000 hours during a plan year. The ESOP borrowed funds from the
Corporation to purchase a total of 359,720 shares of the Corporation's Common
Stock, the loan being collateralized by the Common Stock. Employer
contributions, along with dividends received on unallocated shares, are being
used to repay the loan with shares being released from the Corporation's lien
proportional to the loan repayments. Annually, on September 30, the released
shares are allocated to the participants in the same proportion that their wages
bear to the total compensation of all of the participants. Unreleased ESOP
shares are not considered outstanding in calculating earnings per share.
The Corporation presents these financial statements in accordance with the AICPA
Statement of Position (SOP) No. 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." The price of the shares issued and unreleased are charged to
unearned compensation, a contra-equity account, and shares released are reported
as compensation expense equal to the current market value price of the released
shares. Dividends paid on allocated shares are charged to retained earnings and
those on unallocated shares are charged to expense. The total amount charged to
expense in the fiscal year ended September 30, 1999, 1998 and 1997 was $442,
$668 and $549, respectively.
A summary of the ESOP share allocation is as follows:
September 30,
------------------------------
1999 1998 1997
--------- --------- --------
Shares allocated beginning of year 160,947 124,975 87,870
Shares allocated during year 35,975 35,972 37,105
Unreleased shares 162,798 198,773 234,745
--------- ---------- --------
Total ESOP 359,720 359,720 359,720
========= ========== ========
Management Stock Plan
The Bank established the Management Stock Plan (MSP) for key officers during the
year ended September 30, 1995. Following shareholder approval of the MSP in
January 1995, the Bank purchased 179,860 shares of the Corporation's common
stock in the open market at $10.59 per share to be awarded to officers in
accordance with the provisions of the MSP. The cost of the shares awarded under
these plans is recorded as unearned compensation, a contra equity account, and
is recognized as an expense in accordance with the vesting requirements defined
by the MSP. For each of the three fiscal years ended September 30, 1999, the
amount included in compensation expense related to the MSP was $290. The
following summarizes the activity in the MSP for the three years ended September
30, 1999.
30
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Unawarded Awarded
Shares Shares
--------- ---------
At September 30, 1996 42,964 109,517
Vested - (27,379)
--------- ---------
At September 30, 1997 42,964 82,138
Vested - (27,379)
--------- ---------
At September 30, 1998 42,964 54,759
Vested - (27,379)
--------- ---------
At September 30, 1999 42,964 27,380
========= =========
Director's Stock Compensation Plan
In January 1998, the shareholders of the Corporation approved a stock
compensation plan for its non-employee directors. The plan granted 6,000 shares
of common stock issued from treasury that vests over a four year period, with
1,200 shares awarded in January 1998. The compensation cost associated with this
plan is the fair value of the stock ($19.42/share) on the date the plan was
approved by shareholders. Compensation cost included in the accompanying
financial statements for the year ended September 30, 1999 and 1998 were $23,292
and $40,814 respectively. During the year ended September 30, 1999, 1,200 shares
of the total grant were vested to the plan recipients.
Stock Option Plans
The Corporation maintains the 1994 stock option plan, approved by the
Corporation's stockholders on January 17, 1995 (the 1994 Plan); and the 1998
stock option plan, approved by the Corporation's stockholders on January 20,
1998 (the 1998 Plan). These plans permit the granting of stock options, with an
exercise price equal to the fair value of the Corporation's stock on the date of
the option grant. All options granted under these plans may be exercised over a
ten-year period beginning on the date the option is granted. Awards made under
the Plans may be incentive stock plans (ISO's) as defined by Section 422 of the
Internal Revenue Code or options that do not qualify. Those options granted that
qualify as ISO's are generally exercisable on the date of the grant while those
not qualifying (non-incentive stock options granted to executives and directors
of the Corporation) vest over 3-5 years. The following summarizes the activity
in the two Plans for the three years ended September 30, 1999: [OBJECT OMITTED]
The following table summarizes information about stock options outstanding at
September 30, 1999:
Shares Available Options Shares Weighted Average
for Grant Outstanding Exercise Price
------------------ ------------------ ------------------
At September 30, 1996 7,488 433,158 $
Exercised - (5,405) 9.50
Cancelled 1,500 (1,500) 9.50
------------------ ------------------ ------------------
At September 30, 1997 8,988 426,253 -
1998 Plan Created 300,000 - -
Granted (145,601) 145,601 19.18
Exercised - (135,957) 9.50
------------------ ------------------ ------------------
At September 30, 1998 163,387 435,897 12.73
Granted (90,074) 90,074 14.34
Exercised - (33,988) 9.50
Cancelled 6,582 (6,582) 19.13
------------------ ------------------ ------------------
At September 30, 1999 79,895 485,401 $ 13.40
================== ================== ==================
Shares available for future grants
1994 Plan 7,988
1998 Plan 71,907
31
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Weighted average
Exercise Number remaining contractual
Price Outstanding life in years Number Price
- --------------------------------------------------------------------------------------------------
$ 9.500 256,308 5.3 190,861 $ 9.500
20.000 1,000 8.3 400 20.000
19.125 96,019 8.3 50,457 19.125
19.416 12,000 8.3 4,800 19.416
19.250 30,000 8.7 15,000 19.250
15.000 50,000 9.2 10,000 15.000
14.750 19,387 9.2 19,387 14.750
12.375 20,687 10.0 20,687 12.375
------------
485,401
============
The Corporation elected to follow APB 25 and related interpretations in
accounting for its employee stock options. The exercise price of the employee
stock options equal the market price of the underlying stock on the date of
grant and, therefore, no compensation expense is recognized, under APB 25.
Proforma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Corporation had accounted for
its employee stock option under the fair value method of that statement.
Proforma net income and earnings per share for fiscal years 1999 and 1998
follow:
1999 1998
------------------ ------------------
Net Income
As reported $ 2,505 $ 3,030
Pro forma 2,322 2,943
Earnings per common share
As reported
Basic $ 0.94 $ 1.14
Diluted 0.90 1.05
Pro forma
Basic $ 0.87 $ 1.10
Diluted 0.83 1.02
The above disclosed pro forma effects of applying SFAS No. 123 to compensation
costs may not be representative of the effects on reported pro forma net income
for future years.
The fair value for each option grant is estimated on the date of the grant using
the Black Scholes Model. The Model incorporates the following assumptions for
the grants:
1999 1998
-----------------------
Risk free interest rate 5.22% 5.32%
Expected life 10 years 10 years
Expected volatility 27.00% 62.65%
Expected dividends - -
The weighted average fair value of the options granted in fiscal 1999 and 1998
were $8.64 and $11.33 per option, respectively.
32
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(11) Income Taxes (in thousands)
The Corporation files a consolidated federal income tax return. The Corporation
and its subsidiaries entered into a tax-sharing agreement that provides for the
allocation and payment of federal and state income taxes. The provision for
income taxes of each corporation is computed on a separate company basis,
subject to certain adjustments. Income tax expense (benefit) is summarized as
follows:
September 30,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
Current
Federal $ 936 $ 1,650 $ 1,494
State 308 534 498
------------- ------------- -------------
Subtotal 1,244 2,184 1,992
Deferred
Federal 338 (120) 85
State 112 (40) 28
------------- ------------- -------------
Subtotal 450 (160) 113
------------- ------------- -------------
Total income tax provision $ 1,694 $ 2,024 $ 2,105
============= ============= =============
The State of Minnesota follows the Internal Revenue Code for the determination
of taxable income, in connection with temporary differences. The State portion
of deferred tax assets and liabilities is approximately 25 percent. Temporary
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities that can create deferred tax assets and liabilities
are as follows:
September 30,
----------------------
1999 1998
--------- ---------
Deferred tax assets:
Deferred compensation $ 693 $ 866
Deferred net loan fees 205 265
Securities unrealized loss 719 324
Allowance for loan losses 562 419
----------- ----------
Subtotal 2,179 1,874
Less: Valuation allowance 243 172
----------- ----------
Total 1,936 1,702
Deferred tax liabilities:
FHLB Stock 241 241
Tax bad debt reserve 213 256
Premises and equipment 375 337
Installment obligation sale of former building 28 29
Mortgage servicing rights 74 43
Discount on loans 6
7
Section 475 "For Sale Assets" 484 161
----------- ----------
Total 1,421 1,074
----------- ----------
Net deferred tax asset $ 515 $ 628
=========== ==========
The valuation allowance was established to reduce the deferred tax asset related
to the unrealized loss on equity securities because management is uncertain that
more likely than not it will be realized. The Corporation has paid sufficient
taxes in prior carryback years which will enable it to recover the balance of
the net deferred tax assets, and therefore, no additional valuation allowance
was required at September 30, 1999 and 1998.
33
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The actual income tax expense varied from the expected tax expense (computed by
applying the United States federal corporate income tax rate of 34 percent to
earnings before income taxes) as follows:
Years Ended September 30,
1999 1998 1997
------------- ------------ ----------
Computed "expected" tax expense $ 1,333 $ 1,718 $ 1,778
Exempt dividends - (5) (8)
State income taxes, net of federal tax benefit 278 322 336
Other, net 83 (11) (1)
------------- ------------ ----------
Total income tax provision $ 1,694 $ 2,024 $ 2,105
============= ============ ==========
Retained earnings at September 30, 1999, includes $6,492 for which no deferred
federal income tax liability has been recognized. This amount represents an
allocation of income to bad-debt deductions for tax purposes only that arose in
tax years beginning before September 30, 1988, (that is, the base-year amount).
Reduction of the amount so allocated for purposes other than tax bad-debt losses
or adjustments arising from this carryback of net operating losses would create
income for tax purposes only, which would be subject to the then-current
corporate income-tax rate. The unrecorded deferred income-tax liability on the
above amount was approximately $2,600 at September 30, 1999.
(12) Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
For the Years ended
September 30,
------------------------------------------
1999 1998 1997
------------------------------------------
Numerator:
Net income - Numerator for basic earnings
per share and diluted earnings per share--
income available to common stockholders $ 2,505,000 $ 3,030,000 $ 3,124,000
===========================================
Denominator:
Denominator for basic earnings per share--
weighted-average shares 2,663,691 2,669,586 2,763,481
Effect of dilutive securities:
Stock - based compensation plans 108,713 222,598 230,656
-------------------------------------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 2,772,404 2,892,184 2,994,137
===========================================
Basic earnings per share $ 0.94 $ 1.14 $ 1.13
Diluted earnings per share $ 0.90 $ 1.05 $ 1.04
(13) Contingencies (in thousands)
Loans Sold During 1982, the Bank sold loans subject to recourse provisions. The
balance of these loans at September 30, 1999, and 1998 was $208 and $238,
respectively. The loans had interest rates ranging from 9.50% to 9.875% with an
original balance of $3,400 and were sold to FHLMC.
34
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(14) Stockholders' Equity and Regulatory Capital (in thousands)
On October 6, 1994, the Bank converted from a federally chartered mutual savings
and loan association to a federally chartered stock savings bank pursuant to a
Plan of Conversion (the Conversion) via the issuance of common stock. Upon the
Conversion, the preexisting liquidation rights of the depositors of the Bank
were unchanged. Such rights are accounted for by the Bank for the benefit of
such depositors in proportion to their liquidation interests as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as defined,
in the Conversion.
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). Management believes, as of
September 30, 1999, that the Bank meets all capital adequacy requirements to
which it is subject.
As of September 30, 1999, and 1998, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual regulatory capital amounts, with reconciliation to the
Corporation's investment in the Bank determined in accordance with Generally
Accepted Accounting Principles (GAAP), and ratios, are also presented in the
table below.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- --------------------
GAAP capital, September 30, 1999 $ 36,534
Add: Unrealized losses on debt
securities held for sale 712
-----------
Tangible equity capital and ratio to
adjusted total assets $ 37,246 9.0% $ 6,201 1.5% $ 8,268 2.0%
-------------------- -------------------- --------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $ 37,246 9.0% $ 16,536 4.0% $ 20,670 5.0%
-------------------- -------------------- --------------------
Total risk-based capital and ratio to
risk-weighted assets $ 37,246 14.2% $ 10,528 4.0% $ 15,793 6.0%
--------- -------------------- --------------------
Tier 2 risk-based capital, net adjustment 383
-----------
Total risk-based capital and ratio to
risk-weighted assets, September 30 , 1999 $ 37,629 14.3% $ 21,057 8.0% $ 26,321 10.0%
==================== ==================== ====================
35
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- --------------------
GAAP capital, September 30, 1998 $ 37,220
Add: Unrealized losses on debt
securities held for sale 236
-----------
Tangible equity capital and ratio to
adjusted total assets $ 37,456 9.1% $ 6,168 1.5% $ 8,229 2.0%
-------------------- -------------------- --------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $ 37,456 9.1% $ 16,457 3.0% $ 20,560 5.0%
-------------------- -------------------- --------------------
Tier 1 capital and ratio to
risk-weighted assets $ 37,456 15.5% $ 9,645 4.0% $ 14,467 6.0%
--------- -------------------- --------------------
Tier 2 capital, allowance for loan losses 1,035
-----------
Total risk-based capital and ratio to
risk-weighted assets, September 30 , 1998 $ 38,491 16.0% $ 1,920 8.0% $ 24,112 10.0%
==================== ==================== ====================
The Bank may not declare or pay cash dividends to the Corporation if the effect
would be to reduce GAAP capital below applicable regulatory capital requirements
or if such declaration and payment would otherwise violate regulatory
requirements.
(15) Concentration of Credit Risk (in thousands)
The Corporation is primarily engaged in originating mortgage, consumer, and
business loans in the Minnesota counties of McLeod, Dakota, Meeker, Wright,
Carver, Washington and Sibley. The Bank offers fixed and adjustable rates of
interest on these loans which have amortization terms ranging up to thirty
years.
The Corporation had cash on deposit in a financial institution in excess of
Federal deposit insurance limits of approximately $15,841 at September 30, 1999.
(16) Financial Instruments (in thousands)
The Corporation is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and forward commitments to
purchase securities. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial position. The contract or notional amount of those
instruments reflect the extent of the Bank's involvement in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are unused lines of credit and loan commitments
which are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Since some of the commitments may be
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if it
is deemed necessary, upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income producing
commercial properties. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Typically, the Bank
issues letters of credit to municipalities and generally does not require
collateral for standby letters of credit.
36
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Forward commitments to purchase securities and mortgages involve an agreement
whereby the seller agrees to make delivery at a specified future date of a
specified instrument, at a specified price or yield. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movements in securities values and interest rates.
Forward commitments to sell mortgages involve an agreement whereby the Bank
and/or HMC agrees to make delivery at a specified future date of a specified
loan, at a specified price or yield. Risks arise from the possible inability on
counterparties to meet the terms of their contracts and from movements in loan
values and interest rates.
A summary of the notional amounts of the Corporation's financial instruments at
September 30, 1999 follows:
Commitments to extend credit $ 39,263
Standby letters of credit 17
Commitments to sell loans 5,238
The carrying value and fair value of the Corporation's financial assets and
financial liabilities are as follows:
September 30,
---------------------------------------------------
1999 1998
--------------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------- -------------------
Financial assets:
Cash & cash equivalents $ 19,265 $ 19,265 $ 22,597 22,597
Investment securities 52,015 51,077 46,881 46,422
Mortgage-backed and related securities 43,566 42,315 52,992 51,943
Loans held for sale 5,334 5,334 2,672 2,672
Loans receivable, net 278,290 278,977 280,603 282,857
Accrued interest receivable 3,328 3,328 3,089 3,089
Life Insurance Policies 6,835 6,835 1,178 1,178
Financial liabilities:
Deposits 231,651 232,608 226,542 226,909
Borrowings 140,967 138,239 144,177 146,042
(17) Effects of New Financial 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. SFAS No. 137 issued on July 7, 1999, deferred Statement 133's
effective date until the fiscal year beginning October 1, 2000. 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.
37
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(18) Parent Only Condensed Financial Information (in thousands)
This information should be read in conjunction with the other Notes to
Consolidated Financial Statements. Stockholders' equity differs from the
consolidated statements by the amount of consolidating ESOP and MSP adjustments.
The investment in the Bank subsidiary is carried net of the Banks' unrealized
loss on securities available for sale.
STATEMENT OF FINANCIAL CONDITION
September 30,
---------------------
ASSETS 1999 1998
--------- --------
Cash and cash equivalents $ 278 $ 2,809
Investment securities held to maturity 1,570 1,568
Investment in subsidiaries 40,461 37,904
Loan to Bank ESOP 1,628 1,988
Other assets 282 67
-------- --------
$ 44,004 $ 44,551
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 51 $ 45
Stockholders' equity:
Common stock 450 450
Additional paid-in capital 43,292 43,382
Treasury stock (24,575) (23,298)
Unearned MSP stock (528) (818)
Retained earnings 25,314 24,790
-------- --------
Total stockholders' equity 43,953 44,506
-------- --------
$ 44,004 $ 44,551
======== ========
STATEMENT OF INCOME
Years Ended September 30,
1999 1998 1997
-------- -------- --------
Income:
Dividends from Bank Subsidiary $ 3,000 $ 4,500 $ 4,202
Interest From:
Bank's ESOP Plan 159 193 222
Investments 180 309 343
-------- -------- --------
3,339 5,002 4,767
Expense:
Non-Interest Expense 462 615 566
-------- -------- --------
Income before income taxes and equity in undistributed
net income of subsidiaries 2,877 4,387 4,201
Income tax (benefit) expense (48) (54) (1)
-------- -------- --------
2,925 4,441 4,202
Subsidiaries dividends received in excess of subsidiaries net income (420) (1,423) (1,078)
-------- -------- --------
Net income $ 2,505 $ 3,018 $ 3,124
======== ======== ========
38
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(18) Parent Only Condensed Financial Information - Continued (in thousands)
STATEMENT OF CASH FLOWS
Years Ended September 30,
1999 1998 1997
--------------- ---------- ------------
Cash flows from operating activities:
Net Income $ 2,505 $ 3,030 $ 3,124
Adjustments:
Subsidiaries dividends received in excess
of subsidiaries net income 420 1,423 1,078
(Increase) decrease in other assets 215 (123) 10
Increase in other liabilities 6 82 27
Other 80 356 115
------------ ----------- -----------
Net cash provided by operations 3,226 4,768 4,354
Cash flows from investing activities:
Proceeds from maturities of investments - 1,500 1,500
Investment in Homeowners (2,267) - -
Proceeds from securities available for sale - 411 -
------------ ----------- -----------
Net cash provided by investing activities (2,267) 1,911 1,500
Cash flows from financing activities:
Payments received on ESOP bank loan 360 360 371
Purchases of treasury stock (2,912) (5,492) (7,245)
Proceeds from exercise of stock options 336 1,315 73
Payments of cash dividends (1,381) (1,358) (1,413)
------------ ----------- -----------
Net cash used in financing activities (3,597) (5,175) (8,214)
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents (2,638) 1,504 (2,360)
Cash and cash equivalents:
Beginning of year 2,916 1,412 3,772
------------ ----------- -----------
End of year $ 278 $ 2,916 $ 1,412
============ =========== ===========
(19) Business Segments
The Corporation's reportable business segments are business units that offer
different products and services that are marketed through different channels.
In accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information". The Corporation has identified its wholly-owned
subsidiaries First Federal, fsb, (the Bank) and Homeowners Mortgage Corporation
(HMC) as reportable business segments. Both segments operate and are managed
independently. Additionally, HMC is not regulated by the Office of Thrift
Supervision.
The accounting policies and the nature of business of these segments are
described in the summary of significant accounting policies (Note 1).
Management evaluates segment performance based on segment profit or loss before
income taxes and nonrecurring gains and losses, and returns on average assets
and average equity. Transfers between segments are accounted for at market
value.
Firstate Services, the Agency and FSF Financial Corporation (the holding
company), did not meet the quantitative thresholds for determining reportable
segments and therefore are included in the "Other" category.
39
First Homeowners Consolidated
Federal fsb Mortgage Corp. Other Eliminations Total
---------------------------------------------------------------------------------
As of and for the year ended September 30, 1999
From Operations
Interest income from external sources $ 29,061 $ 171 $ 8 $ - $ 29,240
Non-interest income from external sources 2,189 2,180 890 - 5,259
Inter-segment interest income 183 - 3,152 (3,335) -
Interest expense 18,079 301 - (182) 18,198
Provision for loan loss 456 - - - 456
Depreciation and Amortization 454 99 42 - 595
Other non-interest expense 8,683 2,333 1,214 (404) 11,826
Net Income $ 2,563 $ (64) $ 3,006 $ (3,000) $ 2,505
=============================================================================
Total Assets $ 413,391 $ 6,210 $ 43,058 $ (44,565) $ 418,094
=============================================================================
As of and for the year ended September 30, 1998
From Operations
Interest income from external sources $ 29,667 - $ 314 $ - $ 29,981
Non-interest income from external sources 1,758 - 511 - 2,269
Inter-segment interest income 5 - 4,692 (4,697) -
Provision for loan loss 302 - - - 302
Depreciation and Amortization 355 - 14 - 369
Other non-interest expense 7,574 - 1,014 (193) 8,395
Income tax expense (benefit) 2,036 - (12) - 2,024
Net Income $ 3,013 - $ 4,517 $ (4,500) $ 3,030
=============================================================================
Total Assets $ 411,753 - $ 42,614 $ (38,135) $ 416,232
=============================================================================
As of and for the year ended September 30, 1997
From Operations
Interest income from external sources $ 26,969 - $ 346 $ - $ 27,315
Non-interest income from external sources 1,284 - 226 - 1,510
Inter-segment interest income 4 - 4,426 (4,430) -
Interest expense 16,346 - - - 16,346
Provision for loan loss 120 - - - 120
Depreciation and Amortization 329 - - - 329
Other non-interest expense 6,594 - 759 (223) 7,130
Income tax expense (benefit) 2,091 - 14 - 2,105
Net Income $ 3,102 - $ 4,224 $ (4,202) $ 3,124
=============================================================================
Total Assets $ 384,390 - $ 26,916 $ (23,171) $ 388,135
=============================================================================
40
Selected Quarterly Financial Data (Unaudited)
For Three Years Ended September 30, 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------------------------------------------------
Fiscal 1999
Interest income $ 7,503 $ 7,242 $ 7,267 $ 7,408 $29,420
Interest expense 4,704 4,522 4,526 4,446 18,198
-------------------------------------------------
Net Interest Income 2,799 2,720 2,741 2,962 11,222
Provision for loan losses 114 114 114 114 456
Gain on sale of assets 700 573 624 444 2,341
Net income $ 842 $ 693 $ 525 $ 445 $ 2,505
Basic earnings per share 0.32 0.26 0.20 0.17 0.94
Diluted earnings per share 0.30 0.25 0.19 0.17 0.90
Cash dividends declared per share $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.50
Market range:
High bid (1) $ 15.75 $ 15.50 $ 14.44 $ 14.13 $ 15.75
Low bid (1) $ 14.25 $ 13.56 $ 13.50 $ 11.75 $ 11.75
Fiscal 1998
Interest income $ 7,364 $ 7,518 $ 7,554 $ 7,545 $29,981
Interest expense 4,548 4,591 4,657 4,703 18,499
-------------------------------------------------
Net Interest Income 2,816 2,927 2,897 2,842 11,482
Provision for loan losses 45 75 107 75 302
Gain on sale of assets 15 107 130 108 360
Net income $ 746 $ 810 $ 767 $ 707 $ 3,030
Basic earnings per share 0.28 0.30 0.29 0.27 $ 1.14
Diluted earnings per share 0.26 0.28 0.27 0.25 $ 1.05
Cash dividends declared per share $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.50
Market range:
High bid (1) $ 20.94 $ 20.88 $ 20.75 $ 18.50 $ 20.94
Low bid (1) $ 19.00 $ 19.50 $ 18.00 $ 13.38 $ 13.38
Fiscal 1997
Interest income $ 6,564 $ 6,728 $ 6,933 $ 7,090 27,315
Interest expense 3,886 4,011 4,104 4,345 16,346
-------------------------------------------------
Net Interest Income 2,678 2,717 2,829 2,745 10,969
Provision for loan losses 30 30 30 30 120
Gain on sale of assets 5 13 15 15 48
Net income $ 722 $ 725 $ 823 $ 854 $ 3,124
Basic earnings per share 0.25 0.26 0.31 0.32 $ 1.13
Diluted earnings per share 0.24 0.24 0.28 0.29 $ 1.04
Cash dividends declared per share $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.50
Market range:
High bid (1) $ 15.13 $ 18.25 $ 18.13 $ 21.00 $ 21.00
Low bid (1) $ 12.75 $ 14.75 $ 16.38 $ 17.25 $ 12.75
- ------------------------
(1) As reported by the Nasdaq Stock Market. Such over-the-counter quotations do
not reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
41
- --------------------------------------------------------------------------------
FSF Financial Corporation
-------------------------
Corporate Office
201 Main Street South
Hutchinson, MN 55350-2573
(320) 234-4500
- --------------------------------------------------------------------------------
FIRST FEDERAL fsb
-----------------
Office Locations
Hutchinson Main Office Hastings Office
201 Main Street South 1320 South Frontage Road
Hutchinson, MN 55350-2573 Hastings, MN 55033-2426
(320) 234-4500 (651) 437-6169
Hutchinson South Office Apple Valley Office
905 Hwy. 15 South Frontage Road 14994 Glazier Avenue
Hutchinson, MN 55350 Apple Valley, MN 55124-7498
(320) 234-4563 (651) 432-6840
Buffalo Office Glencoe Office
305 10th Avenue S, PO Box 338 1002 Greeley Avenue
Buffalo, MN 55313-0338 Glencoe, MN 55336-2128
(320) 682-3035 (320) 864-5541
Inver Grove Heights Office Litchfield Office
6505 Cahill Avenue East 501 North Sibley Avenue, PO Box 577
Inver Grove Heights, MN 55076-2022 Litchfield, MN 55355-0577
(651) 455-1553 (320) 693-2861
Waconia Office Waite Park Office
200 East Frontage Road, Hwy 5, PO Box 287 113 Waite Avenue South, PO Box 641
Waconia, MN 55387-0287 Waite Park, MN 56387-0641
(612) 442-2141 (320) 656-1133
Winthrop Office
122 East Second Street, PO
Box 424 Winthrop, MN
55396-0424
(507) 647-5356
- --------------------------------------------------------------------------------
Insurance Planners
------------------
Hutchinson Office Buffalo Office
135 3rd Avenue Southeast 305 10th Avenue S, P.O. Box 338
Hutchinson, MN 55350 Buffalo, MN 55313
(320) 587-2299 (612) 682-3035
- --------------------------------------------------------------------------------
Homeowners Mortgage Corporation
-------------------------------
Vadnais Heights Office Hastings Office
1001 Labore Industrial Court, Suite E 1320 South Frontage Road
Vadnais Heights, MN 55110 Hastings, MN 55033
(651) 415-1020
- --------------------------------------------------------------------------------
42
Our Board of Directors and Management Team
Board of Directors of FSF Financial Corporation and First Federal fsb
Donald A. Glas, Co-Chair of the Board George B. Loban, Co-Chair of the Board
Richard H. Burgart James J. Caturia
Jerome R. Dempsey Sever B. Knutson
Roger R. Stearns
Executive Officers of FSF Financial Corporation
and First Federal fsb
Donald A. Glas George B. Loban
Chief Executive Officer President
Richard H. Burgart
Chief Financial Officer & Corporate Secretary
- --------------------------------------------------------------------------------
Corporate Counsel Special Counsel
Mackall Crounse & Moore Malizia, Spidi & Fisch, P.C.
1400 AT&T Tower One Franklin Square
901 Marquette Avenue 1301 K Street NW, Ste. 700 East
Minneapolis, MN 55402 Washington, DC 20005
Independent Auditors Transfer Agent and Registrar
Bertram Cooper & Co. LLP American Securities Transfer, Inc.
110 Second Avenue SE 1825 Lawrence
Waseca, MN 56093 Denver, CO 80202
FSF
[LOGO] FINANCIAL
CORPORATION
---------------------------------------------------------------
Financial Services Holding Company
201 Main Street South, Hutchinson, MN 55350-2573 320-234-4500