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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Sections 13
or 15(d) of the Securities Exchange Act of 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
--------------------------------------------
- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period __________________ to ____________________
Commission Number: 0-24648
FSF FINANCIAL CORP.
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1783064
(State or other jurisdiction of incorporation (I.R.S. Employer)
or organization) Identification No.)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (320) 234-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filling requirements for the past 90 days. X YES NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the average bid and asked price of the Registrant's
Common Stock as quoted on the National Association of Securities Dealers, Inc.,
Automated Quotations National Market on November 28, 2000, was $ 26,660,260
(1,706,257 shares at $ 15.625 per share).
As of November 30, 2000 there were issued and outstanding 2,386,455
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2000. (Parts I,II and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held January 16, 2001. (Part III
PART I
FSF Financial Corp. (the "Corporation") may from time to time make written or
oral "forward-looking statements", including statements contained in the
Corporation's filings with the Securities and Exchange Commission (including
this annual report on Form 10-K and the exhibits thereto), in its reports to
stockholders and in other communications by the Corporation, which are made in
good faith by the Corporation pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Corporation's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (some
of which are beyond the Corporation's control). The following factors, among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Corporation and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Corporation's products and services;
the success of the Corporation in gaining regulatory approval of its products
and services, when required; the impact of changes in financial services' laws
and regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Corporation at managing the risks
resulting from these factors.
The Corporation cautions that the listed factors are not exclusive. The
Corporation does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Corporation.
ITEM 1. BUSINESS
General
FSF Financial Corp. is a Minnesota corporation organized in May 1994, and as of
October 6, 1994, became the holding company for First Federal fsb ("First
Federal" or the "Bank"). First Federal is the resulting institution of the
merger of First State Federal Savings and Loan Association, Hutchinson, MN, and
First Federal Savings and Loan Association of Hastings, Hastings, MN. The
Corporation operates two wholly owned subsidiaries: Insurance Planners and the
Bank. Insurance Planners ("Agency") is an independent property and casualty
insurance agency located in Hutchinson, MN. The Corporation acquired the Agency
on June 1, 1998. On November 17, 1998, the Corporation acquired Homeowners
Mortgage Corporation ("HMC"), a mortgage banking company located in Vadnais
Heights, MN. As of June 1, 2000, HMC became an operating subsidiary of the Bank
following regulatory approval. See "Subsidiary Activity".
First Federal's business consists primarily of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make mortgage loans secured by residential real estate located in
Minnesota. At September 30, 2000, First Federal operated 11 retail-banking
offices in Minnesota.
First Federal is regulated by the Office of Thrift Supervision ("OTS") and by
the Federal Deposit Insurance Corporation ("FDIC"), which, through the Savings
Association Insurance Fund ("SAIF"), insures up to certain legal limits, the
deposit accounts of institutions such as First Federal. First Federal is also a
member of the Federal Home Loan Bank ("FHLB") of Des Moines, which is one of
twelve regional banks for federally insured savings institutions and certain
other residential lending entities comprising the Federal Home Loan Bank System.
1
Competition
The Corporation is one of many financial institutions serving its market area
which consists of the ten Minnesota counties of Benton, Carver, Dakota, McLeod,
Meeker, Sherburne, Sibley, Stearns, Washington and Wright. The competition for
deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions and multi-state regional
banks in the Corporation's market area. Deposit competition also includes a
number of insurance products sold by local agents and investment products such
as mutual funds and other securities sold by local and regional brokers. Loan
competition varies depending upon market conditions and comes from other insured
financial institutions such as commercial banks, thrift institutions, credit
unions, multi-state regional banks and mortgage bankers.
2
Lending Activities
The following table sets forth the composition of the loan portfolio in dollars
and in percentages of total loans at the dates indicated:
At September 30,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
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Amount % Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------------------
Residential real estate: (Dollars in Thousands)
One to four family (1) $101,034 26.3 $120,884 38.8 $157,340 52.2 $170,422 60.3 $150,102 64.7
Residential construction 82,408 21.5 42,937 13.8 21,960 7.3 20,796 7.4 19,676 8.5
Multi-family 4,737 1.2 5,635 1.8 2,975 1.0 3,370 1.2 3,753 1.6
-------------------------------------------------------------------------------------------------
188,179 49.0 169,456 54.4 182,275 60.4 194,588 68.9 173,531 74.8
Agricultural loans 43,829 11.4 33,384 10.7 22,959 7.6 - - - -
Land and commercial real estate 50,970 13.3 36,429 11.7 34,399 11.4 38,582 13.7 18,637 8.0
Commercial business 29,831 7.8 29,767 9.6 21,095 7.0 8,114 2.9 6,089 2.6
-------------------------------------------------------------------------------------------------
124,630 32.4 99,580 32.0 78,453 26.0 46,696 16.5 24,726 10.7
Consumer:
Home equity and second mortgage 28,106 7.3 24,312 7.8 23,606 7.8 20,812 7.4 17,692 7.6
Automobile loans 13,255 3.5 7,428 2.4 9,670 3.2 11,596 4.1 10,080 4.3
Other 29,943 7.8 10,898 3.5 7,605 2.5 8,821 3.1 6,075 2.6
-------------------------------------------------------------------------------------------------
Total consumer loans 71,304 18.6 42,638 13.7 40,881 13.6 41,229 14.6 33,847 14.6
-------------------------------------------------------------------------------------------------
Total loans 384,113 100.0 311,674 100.0 301,609 100.0 282,513 100.0 232,104 100.0
======== ======== ======== ======== ========
Less:
Loans in process (36,864) (26,156) (16,658) (20,364) (13,401)
Deferred fees (711) (507) (641) (703) (757)
Allowance for loan losses (1,534) (1,387) (1,035) (852) (776)
----------- ------------ ----------- ------------ -----------
Total loans, net $345,004 $283,624 $283,275 $260,594 $217,170
=========== ============ =========== ============ ===========
- -----------------------------------------
(1) Includes loans held for sale in the amount of $3.2 million, $5.3 million,
$2.7 million, $204,000 and $443,000 as of September 30, 2000, 1999, 1998,
1997 and 1996, respectively.
3
The following table sets forth the loan originations, loan purchases, loan sales
and principal payments for the periods indicated:
Years Ended September 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------
(In Thousands)
Total gross loans receivable at
end of period $ 384,113 $ 311,674 $ 301,609 $ 282,513 $ 232,104
Loans originated:
Residential real estate:
One to four family 56,400 130,461 56,768 55,144 53,801
Residential construction 94,929 55,700 23,007 12,968 12,975
Multi-family - - 240 190 -
-----------------------------------------------------------------------
Total residential real estate 151,329 186,161 80,015 68,302 66,776
Land 7,189 5,900 4,960 20,077 3,241
Commercial business 16,149 13,033 9,801 2,402 274
Agricultural 38,204 28,081 27,049 - -
Consumer 49,804 27,503 25,740 28,465 27,270
-----------------------------------------------------------------------
Total loans originated 262,675 260,678 147,565 119,246 97,561
Purchase of loans 32,417 40,883 10,832 8,528 17,447
Sale of loan participation (851) (3,000) - - -
Sale of loans (54,364) (128,925) (24,953) (6,661) (3,509)
Principal repayments (166,921) (169,131) (112,284) (72,035) (63,813)
Other (net) (517) 9,560 (2,064) 1,331 (3,031)
-----------------------------------------------------------------------
Net loan activity $ 72,439 $ 10,065 $ 19,096 $ 50,409 $ 44,655
=======================================================================
Maturity of Loans
The following table sets forth the maturity of the Bank's loans at September 30,
2000. The table does not include prepayments or scheduled principal repayments.
Prepayments and scheduled principal repayments on loans totaled $166.9 million
for the year ended September 30, 2000. Adjustable rate mortgage loans are shown
as maturing based on contractual maturities.
One to Four Land, Commercial
Family Multi-Family Business,
Real Estate and Commercial Agriculture and
Mortgages Real Estate Construction Consumer Total
-----------------------------------------------------------------------------------
(In Thousands)
Amounts Due:
Within 3 months $ 8,615 $ 17,786 $ 22,976 $ 48,056 $ 97,433
3 months to 1 year 28,917 8,789 55,389 17,284 110,379
-----------------------------------------------------------------------------------
Total due before one year 37,532 26,575 78,365 65,340 207,812
-----------------------------------------------------------------------------------
After 1 year:
1 to 3 years 7,211 15,821 - 31,685 54,717
3 to 5 years 8,333 12,365 - 37,038 57,736
5 to 10 years 20,985 2,759 - 8,214 31,958
10 to 20 years 19,928 2,230 - 2,687 24,845
Over 20 years 7,045 - - - 7,045
-----------------------------------------------------------------------------------
Total due after one year 63,502 33,175 - 79,624 176,301
-----------------------------------------------------------------------------------
Total amount due $ 101,034 $ 59,750 $ 78,365 $ 144,964 $ 384,113
===================================================================================
4
The following table sets forth, as of September 30, 2000, the dollar amount of
all loans due after September 30, 2001, based upon fixed rates of interest,
balloon rates or adjustable interest rates.
Fixed- Balloon Adjustable
Rates Rates Rates Total
-------------- -------------- -------------- -------------
(In Thousands)
One to four family real estate and construction $ 16,559 $ 9,857 $ 37,086 $ 63,502
Land, multi-family and commercial real estate 22,445 5,400 5,330 33,175
Commercial business, agricultural and consumer 34,244 - 45,380 79,624
-------------- -------------- -------------- -------------
Total $ 73,248 $ 15,257 $ 87,796 $176,301
============== ============== ============== =============
One to Four Family Mortgage Loans
The largest portion of mortgage loans are made for the purpose of enabling
borrowers to purchase one to four family residences secured by first liens on
the properties. The Bank and HMC originate balloon, adjustable rate mortgages
("ARM") and fixed rate mortgage loans secured by one to four family residences
with terms of up to 30 years. FHA and VA loans are also offered and then sold,
servicing released, in the secondary market. Borrower demand for ARM loans
versus fixed rate mortgage loans depends on various factors, including, but not
limited to, interest rates offered, the expectations of changes in the short and
long-term levels of interest rates and loan fees charged. The relative amount of
fixed rate, balloon and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. All fixed rate
loans are sold to the secondary market, some with servicing released and some
with servicing retained, which are sold to the Federal Home Loan Mortgage
Corporation ("FHLMC").
The Bank originates three, five and seven year balloon mortgage loans, the
majority of which are the three year. These mortgages contain no contractual
assurances that the loan will be renewed. At maturity, the loan is generally
rewritten and re-recorded, and if the borrower's loan payment history is
satisfactory, a new appraisal is not required. Management believes that balloon
loans have a pricing characteristic that helps offset the detrimental effect
that rising rates could have on net interest income because the balloon loans do
not contain interest rate adjustment caps. At September 30, 2000, balloon
mortgages were $25.0 million, or 7.2% of the Bank's loan portfolio.
The Bank offers ARM loans that adjust every year, with the initial adjustment
coming one, three, five, seven or ten years after origination. The loans have
terms from 10 to 30 years and the interest rates on these loans are generally
based on Treasury bill indices. The annual interest rate cap (the maximum amount
which the interest rate may be increased in a year) on the Bank's ARM loans is
generally 2.0% and the lifetime cap is generally 6.0% over the initial rate of
the loan. The Bank considers market factors and competitive rates on loans, as
well as, its own cost of funds when determining the rates on the loans it
offers. The Bank does not originate loans with negative amortization.
Residential Construction Lending.
The Bank and HMC originate residential construction loans to qualified borrowers
for construction of one to four family residences primarily located in the
Bank's market area. Construction loans are made to builders on a pre-sold,
speculative and model home basis and primarily to owners for construction of
their primary residence on a construction/permanent basis. Such loans generally
have terms from six to nine months. Loans for speculative housing construction
are made to area builders only after a thorough background check has been made.
The background check includes an analysis of the builder's financial statements,
credit reports and reference checks with sub-contractors and suppliers. The Bank
usually will have no more than two speculative or model home construction loans
outstanding at any one time to any single builder. Loan proceeds are disbursed
in increments as construction progresses and only after a physical inspection of
the project has been made. Accrued interest on loan disbursements is paid
monthly.
Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes because collateral value and
construction costs can only be estimated at the time the loan is approved. The
Bank and HMC have sought to minimize the risk by limiting construction lending
to qualified borrowers primarily in the Bank's market area, by limiting the
number of construction loans for speculative purposes outstanding at any one
time and by installing a system to inspect the property and to monitor loan
disbursements.
5
Land Acquisition and Development Loans, Commercial Real Estate and Multi-Family
Lending The Bank originates land loans on residential properties located in the
Bank's primary market area. Land lending generally involves additional risk to
the lender as compared with residential mortgage lending. This risk is
attributable to the fact that loan funds are advanced upon the security of land
under development and predicated on the future value of the property upon
completion of development. Loans on undeveloped land may run the risk of adverse
zoning changes and environmental or other restrictions on future use. Because of
these factors, the analysis of land loans requires an expertise that is
different in significant respects from that which is required for residential
lending.
Commercial real estate loans are permanent loans secured by improved property
such as office buildings, retail or wholesale facilities, industrial buildings
and other non-residential buildings. Commercial real estate loans may be
originated in amounts up to 80% of the appraised value of the mortgaged property
as determined by a certified or licensed independent appraiser.
Multi-family residential real estate loans are permanent loans secured by
apartment buildings. Of primary concern in multi-family residential real estate
lending is the borrower's creditworthiness, feasibility and cash flow potential
of the project. Loans secured by income properties generally are larger and
involve greater risk than residential mortgage loans because payments on loans
secured by income properties are often dependent on the successful operation or
management of the properties. As a result, repayment of such loans may be
subject to, more than residential real estate loans, adverse conditions in the
real estate market or the economy. In order to monitor cash flows on income
properties, the Bank requires borrowers and loan guarantors, if any, to provide
annual financial statements and rent rolls on multi-family loans. At September
30, 2000, the five largest land acquisition and development, commercial real
estate and multi-family loans ranged from $2.0 million to $4.8 million, with an
average committed outstanding balance of $3.1 million. All such loans are
current and have performed in accordance with their terms.
Commercial Business Lending
The Bank's commercial business loans are made for many purposes; including
working capital, accounts receivable, inventory, equipment and acquisitions. The
Bank has no energy or foreign loans.
Unlike residential mortgage loans, which are generally made on the basis of the
borrower's ability to make repayments from his or her employment and also other
income sources, are secured by real property with a value that tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself, which is likely to be dependent upon the general economic environment.
Business assets, such as accounts receivable, equipment and inventory, as well
as real estate, sometimes, but not always, secure the Bank's commercial business
loans. However, the collateral securing these loans may depreciate over time,
may be difficult to appraise or may fluctuate in value based on the success of
the business.
The Bank recognizes the general increased risk associated with commercial
business lending. The Bank's commercial business lending policy emphasizes (1)
credit file documentation, (2) analysis of the borrower's character, (3)
analysis of the borrower's capacity to repay the loan, (4) adequacy of the
borrower's capital and collateral and (5) evaluation of the industry conditions
affecting the borrower. Analysis of the borrower's past, present and future cash
flows is also an important aspect of the Bank's credit analysis. The Bank plans
to continue to expand its commercial business lending, subject to market
conditions.
The Bank generally obtains annual financial statements from borrowers for
commercial business loans. These statements are analyzed to monitor the quality
of the loan. As of September 30, 2000, the five largest commercial business
loans ranged from $2.5 million to $6.2 million, with an average committed
balance outstanding of $3.5 million. All such loans are current and have
performed in accordance with their terms.
6
Agricultural Lending
The Bank originates loans to finance the purchase of farmland, livestock, farm
machinery and equipment, seed, fertilizer and for other farm related products.
Agricultural operating loans are originated at either an adjustable or fixed
rate of interest for up to a one year term or, in the case of livestock, upon
sale. Most agricultural operating loans have terms of one year or less. Such
loans provide for payments of principal and interest at least annually, or a
lump sum payment upon maturity if the original term is less than one year. Loans
secured by machinery are generally originated as fixed rate loans with terms of
up to five years.
Agricultural real estate loans are frequently originated with adjustable rates
of interest. Generally, such loans provide for a fixed rate of interest for the
first three years, adjusting annually thereafter. In addition, such loans
generally provide for a ten year term based on a 20 year amortization schedule.
Adjustable rate agricultural real estate loans are generally limited to 80% of
the value of the property securing the loan.
Agricultural lending affords the Bank the opportunity to earn yields higher than
those obtainable on one to four family residential lending. Nevertheless,
agricultural lending involves a greater degree of risk than one to four family
residential mortgage loans because of the typically larger loan amount. In
addition, payments on loans are dependent on the successful operation or
management of the farm property securing the loan, or for which an operating
loan is utilized. The success of the loan may also be affected by many factors
outside the control of the farm borrower.
Weather presents one of the greatest risks as hail, drought, floods or other
conditions, can severely limit crop yields and thus impair loan repayments and
the value of the underlying collateral. This risk can be reduced by the farmer
with multi-peril crop insurance, which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Bank generally does not require its borrowers to procure
multi-peril crop or hail insurance. However, recent changes in government
support programs generally require that farmers procure multi-peril crop
insurance to be eligible to participate in such programs.
Grain and livestock prices also present a risk as prices may decline prior to
sale resulting in a failure to cover production costs. The farmer with the use
of futures contracts or options to provide a "floor" below which prices will not
fall may reduce these risks. The Bank does not monitor or require the use by
borrowers of future contracts or options.
Another risk is the uncertainty of government programs and other regulations.
Some farmers rely on the income from government programs to make loan payments
and if these programs are discontinued or significantly changed, cash flow
problems or defaults could result.
Finally, many farms are dependent on a limited number of key individuals whose
injury or death may result in an inability to successfully operate the farm. At
September 30, 2000, the five largest agricultural loans ranged from $1.1 million
to $2.1 million, with an average committed outstanding balance of $1.5 million.
All such loans are in the Bank's market area, are current and have performed in
accordance with their terms.
Consumer and Other Loans
The Bank offers consumer and other loans in the form of home equity and second
mortgages, automobile and loans for other purposes. Federal regulations permit
federally chartered thrift institutions to make secured and unsecured consumer
loans up to 35% of an institution's assets. The Bank originates consumer loans
in order to provide a wide range of financial services to its customers and
because the shorter terms and normally higher interest rates help maintain a
profitable spread between its average loan yield and the Bank's cost of funds.
In connection with consumer loan applications, the Bank verifies the borrower's
income and reviews credit bureau reports. In addition, the relationship of the
loan to the value of the collateral is considered. Consumer loans entail greater
risks than one to four family residential mortgage loans, particularly because
consumer loans are secured by rapidly depreciable assets such as automobiles or
unsecured loans. In such cases, any repossessed collateral for a defaulted loan
may not provide an adequate source of repayment of the outstanding loan balance,
since there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, consumer loan collections are dependent on the
borrower's continuing financial stability, and therefore are more likely to be
adversely affected by job loss,
7
divorce, illness or personal bankruptcy. Finally, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans in the event of
a default.
Loan Approval Authority and Underwriting
The primary source of mortgage loan applications is referrals from existing or
past customers. Applications are also solicited from real estate brokers,
contractors and call-ins or walk-ins to the offices.
Upon receipt of any loan application from a prospective borrower, a credit
report is ordered and verifications of specific information relating to the loan
applicant's employment, income and credit standing are requested. An appraisal
or valuation determination, subject to regulatory requirements of the real
estate intended to secure the proposed loan, is undertaken. Licensed appraisers
and two authorized appraisers on staff at the Bank are utilized in determining
the value of property. In connection with the loan approval process,
underwriters analyze the loan applications and the property involved. All
residential, home equity, multi-family, construction and commercial real estate
loans are underwritten, subject to the loan underwriting policies as approved by
the Board of Directors. In general, the Board of Directors must approve loans in
excess of $1.0 million.
Loan applicants are promptly notified of the decision by a letter setting forth
the terms and conditions of the decision. If approved, these terms and
conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged and the notice of
requirement of insurance coverage to be maintained. Title insurance or a title
opinion is required on first mortgage loans, as well as fire and casualty
insurance on all properties securing loans. Insurance must be maintained during
the entire term of the loan. Flood insurance is also required, if appropriate.
Loans to One Borrower
Under federal law, federally chartered savings banks have, subject to certain
exemptions, aggregate lending limits to one borrower equal to 15.0% of the
institution's unimpaired capital and surplus. As of September 30, 2000, First
Federal's five largest lending relationships included a $3.5 million commercial
line of credit, a $6.2 million line of credit to an unaffiliated mortgage
banking company, a $2.9 million commercial real estate loan, a $4.9 million
commercial real estate loan and $2.9 million in land development loans to a
local developer. This is approximately 5.3% of the total loans. At September 30,
2000, all of these loans were within the loans to one borrower limitations,
performing in accordance with their terms and at market rates of interest.
Loan Servicing
The Bank services substantially all of the loans that it retains in its
portfolio. However, HMC does not engage in any loan servicing. Loan servicing
includes collecting and remitting loan payments, accounting for principal and
interest, making advances to cover delinquent payments, making inspections as
required of mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering the loans. Funds that have been escrowed by borrowers
for the payment of mortgage related expenses, such as property taxes and hazard
and mortgage insurance premiums, are maintained in non-interest bearing accounts
at the Bank. At September 30, 2000, the Bank had $318,000 deposited in escrow
accounts for its loans serviced for others.
The following table presents information regarding the loans serviced by the
Bank for others at the dates indicated:
September 30,
----------------------------------
2000 1999 1998
----------------------------------
(In Thousands)
Mortgage loan portfolios serviced for:
FHLMC $45,002 $48,219 $42,038
Other Investors 7,126 7,269 4,418
----------------------------------
$52,128 $55,488 $46,456
==================================
The Bank receives fees for servicing mortgage loans, which generally amounts to
0.25% per annum on the declining balance of mortgage loans. Such fees serve to
compensate the Bank for the cost of performing the servicing functions. Another
source of loan servicing revenues is late fees. For the years ended September
30, 2000, 1999 and 1998, the Bank earned gross fees of $247,000, $236,000 and
8
$234,000, respectively from loan servicing. The Bank retains a portion of funds
received from borrowers on the loans it services for others in payment of its
servicing fees received on loans serviced for others.
Non-Performing and Problem Assets
Loan Collections and Delinquent Loans
The Bank's collection procedures provide that when a loan is 30 days or more
delinquent, the borrower is contacted by mail and telephone and payment is
requested. If the delinquency continues, subsequent efforts will be made to
contact the borrower. In certain instances, the Bank may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to reorganize
his financial affairs. Once a loan delinquency exceeds 60 days, it is classified
as special mention and the Bank attempts to work with the borrower to establish
a repayment schedule to cure the delinquency. If the borrower is unable to cure
the delinquency, the Bank will institute foreclosure actions. If a foreclosure
action is taken and the loan is not reinstated, paid in full or refinanced, the
property is sold at a judicial sale at which the Bank may be the buyer if there
are no offers to satisfy the debt. Any property acquired as the result of a
foreclosure or by deed in lieu of foreclosure is classified as foreclosed real
estate until such time as it is sold or otherwise disposed of by the Bank. At
September 30, 2000, the Bank had $321,000 of foreclosed real estate, consisting
of two, one to four family residential loans.
Non-performing Assets
Loans are reviewed on a regular basis and are placed on non-accrual status when,
in the opinion of management, the collection of additional interest is doubtful.
Residential mortgage loans are generally placed on non-accrual status when
either principal or interest is 90 days or more past due. Consumer loans are
generally charged off when the loan becomes over 90 days delinquent. Commercial
business and real estate loans are generally placed on non-accrual status when
the loan is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At September 30, 2000, there were no accruing loans
which were contractually past due 90 days or more.
9
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods indicated,
the Bank had no restructured loans within the meaning of SFAS No. 15 and there
were no impaired loans within the meaning of SFAS 114, as amended by SFAS 118.
At September 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 323 $ - $ - $ 393 $ -
Permanent loans secured by one to
four family units 55 205 240 25 129
Permanent loans secured by non-
residential real estate - - - - -
Other - - - - -
Non-mortgage loans:
Commercial and agricultural 452 - - - -
Consumer 159 22 69 82 90
-----------------------------------------------------------------
Total non-accrual loans 989 227 309 500 219
Foreclosed real estate and real estate
held for investment 321 323 502 72 -
-----------------------------------------------------------------
Total non-performing assets $ 1,310 $ 550 $ 811 $ 572 $ 219
=================================================================
Total non-performing loans to net loans 0.29% 0.08% 0.11% 0.19% 0.10%
=================================================================
Total non-performing loans to total assets 0.21% 0.05% 0.07% 0.13% 0.06%
=================================================================
Total non-performing assets to total assets 0.28% 0.13% 0.19% 0.15% 0.06%
=================================================================
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was approximately
$48,000 for the year ended September 30, 2000.
Classified Assets
Management, in compliance with regulatory guidelines, has instituted an internal
loan review program, whereby loans are classified as special mention,
substandard, doubtful or loss. When a loan is classified as substandard or
doubtful, management is required to establish a general valuation reserve for
loan losses in an amount that is deemed prudent. General allowances represent
those that have been established to recognize inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When management classifies a loan as
loss, a reserve equal to 100% of the loan balance may be established or the loan
is charged off.
An asset is considered substandard if the paying capacity and net worth of the
obligor or the collateral inadequately protects it. Substandard assets include
those characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses present make collection or
liquidation in full, highly questionable and improbable, on the basis of
currently existing facts, conditions and values. Assets classified as loss are
those considered uncollectible and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to a sufficient
degree of risk and are not classified in one of the aforementioned categories
but possess credit deficiencies or potential weaknesses, including all loans
over 60 days delinquent, are required to be designated special mention by
management. The OTS has promulgated regulations that discontinue the
classification of assets as special mention. However, the Bank continues to
utilize this category.
Management's evaluation of the classification of assets and the adequacy of the
reserve for loan losses is reviewed by regulatory agencies as part of their
periodic examinations. At September 30, 2000, the Bank had total classified
assets of $4.4 million, of which $973,000 was considered substandard and no
assets were classified as doubtful or loss. Special mention assets totaled $3.4
million at September 30, 2000.
10
Allowance for Loan and Lease Losses and Foreclosed Real Estate
In making loans, the Bank recognizes that credit losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan, and in the
case of a secured loan, the quality of the collateral for the loan. The Bank's
management evaluates the need to establish reserves against losses on loans and
other assets each quarter based on estimated losses on specific loans and on any
real estate held for sale or investment when a finding is made that a loss is
estimable and probable. Such evaluation includes a review of all loans for which
full collectibility may not be reasonably assured and considers, among other
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions and overall portfolio quality.
While management recognizes and charges against the allowance for loan losses
accounts which are determined to be uncollectible, experience indicates that at
any point in time, possible losses may exist in the loan portfolio which are not
specifically identifiable. Therefore, based upon management's best estimate,
each year an amount may be charged to earnings to maintain the allowance for
loan losses at a level sufficient to recognize potential risk.
Impaired loans, including all loans that are restructured in a troubled debt
restructuring involving a modification of terms, are measured at the present
value of expected future cash flows discounted at the loan's initial effective
interest rate. The fair value of the collateral of an impaired collateral
dependent loan or an observable market price, if one exists, may be used as an
alternative to discounting. If the measure of the impaired loan is less than the
recorded investment in the loan, impairment is recognized through the allowance
for loan losses. A loan is considered impaired when, based on current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
The Bank believes it has established its existing allowance for loan losses in
accordance with GAAP. However, there can be no assurance that banking
regulators, in reviewing the Bank's loan portfolio, will not request First
Federal to significantly increase its allowance for loan losses or that a
deteriorating real estate market or other unforeseen economic changes, may cause
a significant increase in allowance for loan losses. This may negatively affect
the Bank's financial condition and earnings.
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated.
At September 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------
(Dollars in Thousands)
Average loans outstanding $ 308,721 $ 274,676 $ 276,730 $ 237,475 $ 193,202
=================================================================
Allowance balance (beginning of period) $ 1,387 $ 1,035 $ 852 $ 776 $ 764
-----------------------------------------------------------------
Provision (credit):
Residential - - - - -
Land and commercial real estate 60 20 2 40 -
Commercial/agricultural business 156 418 293 - -
Consumer - 18 7 80 42
-----------------------------------------------------------------
Total provision 216 456 302 120 42
Charge-off:
Residential - - 45 13 -
Commercial real estate - - - - -
Consumer 98 142 87 37 34
-----------------------------------------------------------------
Total charge-offs 98 142 132 50 34
Recoveries:
Residential - - - - -
Commercial real estate - - - - -
Consumer 29 38 13 6 4
-----------------------------------------------------------------
Total recoveries 29 38 13 6 4
-----------------------------------------------------------------
Net charge-offs 69 104 119 44 30
-----------------------------------------------------------------
Allowance balance (at end of period) $ 1,534 $ 1,387 $ 1,035 $ 852 $ 776
=================================================================
Allowance as percent of total loans 0.44% 0.48% 0.36% 0.33% 0.36%
=================================================================
Net loans charged off as a percent of
average loans 0.02% 0.04% 0.04% 0.02% 0.01%
=================================================================
11
To further monitor and assess the risk characteristics of the loan portfolio,
loan delinquencies are reviewed to consider any developing loan problems. Based
upon the procedures in place, the Bank's experience regarding charge-offs and
recoveries and the current risk elements in the portfolio, management believes
the allowance for loan losses at September 30, 2000, is adequate. However,
assessment of the adequacy of the allowance for loan losses involves subjective
judgments regarding future events and thus there can be no assurance that
additional provisions for loan losses will not be required in future periods.
The following table sets forth the breakdown by loan category of the allowance
for loan losses:
September 30,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to total to total to total to total to total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------------------------------------------------------------------------------------------
Real Estate:
One to four family $ 59 26.3% $ 73 38.8% $ 94 52.2% $ 103 60.3% $ 90 64.7%
Residential construction 59 21.5% 25 13.8% 11 7.3% 5 7.4% 6 8.5%
Multi-family 47 1.2% 56 1.8% 30 1.0% 34 1.2% 38 1.6%
Land and commercial real estate 473 13.2% 486 11.7% 347 11.4% 380 13.7% 396 8.0%
Agricultural loans 245 11.4% 200 10.7% 138 7.6% - 0.0% - 0.0%
Commercial business 298 7.8% 297 9.6% 211 7.0% 124 2.9% 61 8.0%
Consumer loans 353 18.6% 250 13.6% 204 13.5% 206 14.5% 185 9.2%
------------------------------------------------------------------------------------------------
$1,534 100.0% $1,387 100.0% $1,035 100.0% $ 852 100.0% $ 776 100.0%
================================================================================================
Investment and Mortgage-backed Securities Activities
General
Federally chartered thrift institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and loans on Federal Funds. To supplement lending activities, subject to various
restrictions, the Bank invests a portion of its assets in commercial paper,
corporate debt securities and asset backed securities (e.g., mortgage-backed
securities). A significant portion of the Bank's income during recent years has
been attributable to interest income on such securities. The Corporation does
not have the same investment limitations as the Bank.
Mortgage-backed and Related Securities
First Federal invests in residential mortgage-backed securities guaranteed by
participation certificate issues by FHLMC, Federal National Mortgage Association
("FNMA") and Government National Mortgage Association ("GNMA"). The
mortgage-backed securities portfolio as of September 30, 2000, consisted of
$43.0 million in Real Estate Mortgage Investment Conduits ("REMICs") and a $1.0
million FNMA certificate.
Mortgage-backed securities represent a participation interest in a pool of
single family or multi-family mortgages. The principal and interest payments are
passed from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interest
in the form of securities to investors such as the Bank. Such quasi-governmental
agencies, which guarantee the payment of principal and interest to investors,
primarily include FHLMC, FNMA and GNMA.
Mortgage-backed securities typically are issued with stated principal amounts,
and pools of mortgages that have loans with interest rates that are within a
range and have varying maturities back the securities. The underlying pool of
mortgages is primarily composed of either fixed rate mortgages or ARM loans.
Mortgage-backed securities are generally referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, (i.e. fixed rate or
adjustable rate) as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed, pass-through security is equal to the
life of the underlying mortgages.
12
Mortgage-backed securities issued by FHLMC, FNMA and GNMA make up a majority of
the pass-through market.
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to thirty
years. In periods of declining interest rates, payments on many mortgages are
received faster than the contractual amount required, causing the estimated
lives of mortgage related securities to be significantly shorter than expected.
REMICs are typically issued by a special purpose entity ("Issuer"), which may be
organized in a variety of legal forms, such as a trust, a corporation or a
partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage-related securities. Once combined, the cash
flows can be divided into tranches or classes of individual securities, thereby
creating more predictable average duration for each security than the underlying
pass-through pools. Accordingly, under this security structure, all principal
pay downs from the various mortgage pools are allocated to a mortgage related
class or classes structured to have priority until it has been paid off. Thus,
these securities are intended to address the reinvestment concerns associated
with mortgage-backed securities pass-through, namely that (i) they tend to pay
off when interest rates fall, thereby taking their relatively high coupon with
them and (ii) their expected average life may vary significantly among the
different tranches.
Some REMIC instruments are more like traditional debt instruments because they
have stated principal amounts and traditionally defined interest rate terms.
Purchasers of certain other REMIC securities are entitled to the excess, if any,
of the issuer's cash inflows, including reinvestment earnings, over the cash
outflows for debt service and administrative expenses. These mortgage related
instruments may include instruments designated as residual interests and are
riskier in that they could result in the loss of a portion of the original
investment. Cash flows from residual interests are very sensitive to
prepayments, and thus, contain a high degree of interest rate risk. Residual
interest represents an ownership interest in the underlying collateral, subject
to the first lien of the REMICs investors.
The REMICs held by the Bank at September 30, 2000, consisted of floating rate
tranches. The interest rates of all of the Bank's floating rate securities
adjust monthly and provide the institution with net interest margin protection
in an increasing market rate environment. The securities are backed by mortgages
on one to four family residential real estate and have contractual maturities up
to 30 years. None of the securities are deemed to be "high risk" according to
OTS guidelines. The securities are primarily companion tranches to "PACs" and
"TACs". PACs and TACs (Planned and Targeted Amortization Classes) are designed
to provide a specific principal and interest cash flow. Principal payments that
are received in excess of the amount needed for the PACs and TACs are allocated
to the companion tranches. When the PACs and TACs are repaid in full, all
principal is then used to pay the companion tranches. Although the timing of
principal payments may be impacted by the amount of prepayments (the higher the
level of prepayments, the sooner the principal will be received), all of the
principal and interest payments are guaranteed.
Investment Securities
The Bank is required under federal regulations to maintain a minimum amount of
liquid assets that may be invested in specified short-term securities and
certain other investments. Liquidity levels may be increased or decreased,
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relationship
to other opportunities. Also its expectations of future yield levels, as well as
management's projections as to the short-term demand for funds, are used in the
Bank's loan originating and other activities. These securities consist mainly of
U.S. Government Securities and U.S. Government Agency obligations. The Bank also
invests in debt and equity securities.
The Board of Directors establishes the investment policy of the Bank. It is
designed to provide and maintain liquidity, to generate favorable return on
investments without incurring undue interest rate and credit risk and to
compliment the Bank's lending activity. The policy currently provides for
investments held to maturity and investments available for sale.
The amount of short-term securities in excess of regulatory requirements
reflects management's strategy to provide interest rate adjustments for
securities that are shorter than their maturity. It is the intention of
management to maintain a repricing structure in the Bank's investment portfolio
that better matches the interest rate sensitivities of its assets and
liabilities. However, during periods of rapidly declining interest rates, such
investments also decline at a faster rate than the yields on fixed rate
investments. Investment
13
decisions are made within policy guidelines established by the Board of
Directors. Unless loan demand increases, the Bank intends to maintain its
investments at current levels.
Investment Activities
Current regulatory and accounting guidelines regarding investment securities
(including mortgage-backed securities) require the Corporation to categorize
securities as "held to maturity," "available for sale" or "trading." As of
September 30, 2000, the Corporation had securities classified as "held to
maturity" and "available for sale" in the amounts of $45.4 million and $46.3
million, respectively, and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair market value with net changes in the market value from period to
period included as a separate component of stockholders' equity, net of income
taxes. At September 30, 2000, the Corporation's securities available for sale
had an amortized cost of $48.9 million and a market value of $46.3 million
(unrealized loss, net of tax of $1.7 million). Changes in the market value of
securities available for sale do not affect the Corporation's income. In
addition, changes in the market value of securities available for sale do not
affect the Bank's regulatory capital requirements or its loan to one borrower
limit.
Investment and Mortgage-backed Securities Portfolio
The following table sets forth the carrying value of First Federal's investment
securities portfolio, short-term investments, FHLB stock and mortgage-backed and
related securities at the dates indicated.
September 30,
----------------------------------------------
2000 1999 1998
----------- --------------- ---------------
(In Thousands)
Investment securities:
Debt securities $ 18,393 $ 19,937 $ 24,412
Debt securities available for sale 12,728 12,794 3,010
FHLB Stock 6,375 7,363 7,363
Equity securities available for sale 11,871 11,921 12,096
----------- --------------- ---------------
Total investment securities 49,367 52,015 46,881
Interest bearing deposits 5,552 16,020 17,370
Federal funds sold - - -
Mortgage-backed and related securities:
Mortgage-backed and related securities 26,986 27,587 36,418
Mortgage-backed and related securities
available for sale 15,369 15,979 16,574
----------- --------------- ---------------
Total mortgage-backed and related securities 42,355 43,566 52,992
----------- --------------- ---------------
Total investments $ 97,274 $ 111,601 $ 117,243
=========== =============== ===============
14
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
portfolio at September 30, 2000:
September 30, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Adjustable One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
----------------- ---------------- ----------------- ----------------- ------------------- -----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
U. S.
Government
and Federal
Agency
Obligations
held to $ - -% $ - 0.00% $ 9,188 4.10% $ 3,000 3.89% $ 6,205 7.47% $18,393 5.20% $16,974
maturity
Federal
Agency
Obligations
available
for sale - - - - 12,728 6.27 - - - - $12,728 6.27 12,728
Equity
Securities
available
for sale 11,871 5.74 - - - - - - - $11,871 5.74 11,871
FHLB Stock N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A $ 6,375 6.82 6,375
Mortgage-
backed
and
related
securities
held to
maturity
25,992 5.44 - - 1 6.50 16 7.59 977 7.37 $26,986 5.98 25,145
Mortgage-
backed
and
related
securities
available
for sale
15,369 5.87 - - - - - - - - $15,369 5.87 15,369
Interest-
bearing
deposits
5,552 5.05 - - - - - - - - $ 5,552 5.05 5,552
------ --------- ------- ------- ------- ------- -------
Total $58,784 5.83% $ - 0.00% $21,917 5.36% $ 3,016 3.90% $ 7,182 7.45% $97,274 5.82% $94,014
====== ========= ======= ======= ======= ======= =======
15
Deposits and Other Sources of Funds
General
Deposits are a major source of funds for the Bank's lending and other investment
purposes. In addition to deposits, the Bank derives funds from loan and
mortgage-backed securities principal payments, interest on investment
securities, proceeds from the maturity of mortgage-backed securities and
investment securities and borrowings. Loan and mortgage-backed securities
payments are a relatively stable source of funds, while general interest rates
and money market conditions significantly influence deposit inflows. Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They also may be used on a longer term
basis for general business purposes.
Deposits
First Federal offers a wide variety of deposit accounts. It constantly strives
to meet consumer's needs by offering new products. This, in addition to interest
rate risk management and asset/liability ratios, is taken into consideration
prior to offering new products. Deposit account terms vary, primarily as to the
required minimum balance amount, the amount of time that the funds must remain
on deposit and the applicable interest rate.
The Bank's current deposit products include regular savings, demand deposits,
NOW, money market and certificate of deposit accounts ranging in terms from 91
days to 5 years including certificates of deposit with negotiable interest rates
and balances in excess of $100,000 (jumbo certificates) and Individual
Retirement Accounts (IRAs). All checking and savings accounts are eligible for
an Express Teller ATM card. This card can be used at any Express Teller,
Fastbank, or Instant Cash ATM in Minnesota and surrounding states. With the
addition of the Plus and Cirrus network automated banking system, First
Federal's Express Teller ATM card can be used at thousands of ATM locations
throughout the United States and the world.
Deposits are obtained primarily from residents in the Minnesota counties of
McLeod, Dakota, Meeker, Sibley, Carver, Wright, Benton, Sherburne, Stearns and
Washington. First Federal attracts deposit accounts by offering a wide variety
of products, competitive interest rates and convenient locations and service
hours. The Bank uses traditional methods of advertising to attract new customers
and deposits, including radio and print media advertising.
The Bank pays interest on its deposits that are competitive in the marketplace.
Interest rates on deposits are set weekly, based on a number of factors,
including: (1) the previous week's deposit flow, (2) a current survey of a
selected group of competitor's rates for similar products, (3) external data
which may influence interest rates, (4) investment opportunities and loan demand
and (5) scheduled maturities.
The following table indicates the amount of the Bank's certificates of deposit
of $100,000 or more by time remaining until maturity as of September 30, 2000:
Certificates of
Maturity Period Deposits
--------------- ---------------
(In Thousands)
Within three months $ 15,734
Three through six months 13,975
Six through twelve months 10,142
Over twelve months 18,972
--------------
$ 58,823
==============
Borrowings.
Savings deposits are a primary source of funds for First Federal's lending and
investment activities and also for general business purposes. The Bank, if the
need arises, may rely upon advances from the FHLB of Des Moines to supplement
its supply of lendable funds and to meet deposit withdrawal requirements.
Advances from the FHLB of Des Moines are typically secured by First Federal's
stock in the FHLB and a portion of First Federal's residential mortgage loans
and other assets (principally securities which are obligations of or guaranteed
by the U.S. Government).
16
Advances have been utilized when adequate spreads can be obtained and the risk
(credit risk, interest rate risk and market risk) in the transaction minimized.
Advances have been used to purchase mortgage-backed and related securities and
to purchase single family residential mortgages originated by other financial
institutions within the state of Minnesota.
The following table sets forth certain information as to the Bank's FHLB
advances at the date indicated:
As of and for the Years Ended
September 30,
--------------------------------------------
2000 1999 1998
--------------------------------------------
(Dollars in Thousands)
Maximum balance $ 140,967 $ 144,177 $ 147,234
Average balance 138,213 143,123 145,459
Balance at end of period 127,500 140,967 144,177
Weighted average rate:
at end of period 5.89% 5.39% 5.42%
during the period 5.88% 5.47% 5.79%
It is First Federal's policy to fund loan demand and investment opportunities
out of current loan and mortgage-backed securities repayments, investment
maturities and new deposits. However, the Bank has utilized FHLB advances to
supplement these sources. This policy may change in the future as investment
opportunities are presented or loan demand increases.
Subsidiary Activity
As of September 30, 2000, the Corporation had two directly owned subsidiaries:
the Bank and the Agency.
The Bank is permitted to invest up to 2% of its assets in the capital stock of
subsidiary corporations in the form of secured or unsecured loans. An additional
investment of 1% of assets is permitted when such investments are utilized
primarily for community development purposes. As of September 30, 2000, under
such limitations, the Bank was authorized to invest up to approximately $9.3
million in the stock of service corporations (based upon the 2% limitation). The
Bank has two wholly owned subsidiaries, Firstate Services, Inc. ("FSI") and
Homeowners Mortgage Corporation ("HMC"). FSI was incorporated in the State of
Minnesota in August 1983, and is engaged in the sale, on an agency basis, of
mutual funds, annuities and life, credit life and disability insurance products.
HMC was incorporated in the State of Minnesota in 1988 and originates
residential mortgage loans from two locations in Minnesota. As of September 30,
2000, the net book value of First Federal's investment in stock, unsecured loans
and conforming loans in FSI was $290,000 and HMC was $2.9 million. For the
fiscal year ended September 30, 2000, FSI had net income of $35,030 and HMC had
net loss of $333,487.
Insurance Planners ("Agency") was incorporated in the State of Minnesota in
August 1983, and is engaged in the sale, on an agency basis, of property and
casualty insurance products. As of September 30, 2000, the net book value of the
Corporation's investment in stock, unsecured loans and conforming loans in its
subsidiary was $732,757. For the fiscal year ended September 30, 2000 the Agency
had net income of $30,607.
On November 17, 1998, the Corporation acquired, in a transaction that was a
combination of stock and cash, all of the outstanding shares of Homeowners
Mortgage Corporation ("HMC"). As of June 1, 2000, HMC became an operating
subsidiary of the Bank following regulatory approval. The transfer of HMC was
recorded as a non-cash capital contribution from the Corporation to the Bank.
Personnel
As of September 30, 2000, the Bank had 126 full time employees and 48 part time
employees, representing a total of 135 full time equivalents. The employees are
not represented by a collective bargaining agreement and the Bank believes its
relationship with their employees is satisfactory.
17
Regulation
Set forth below is a brief description of certain laws which related to the
regulation of the Corporation and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Recent Regulation
The Gramm-Leach-Bliley Act (the "Act") became effective March 11, 2000, which
permits qualifying bank holding companies to become financial holding companies
and thereby affiliate with securities firms and insurance companies and engage
in other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making,
sponsoring mutual funds and investment companies, insurance underwriting and
agency, merchant banking activities, and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from engaging in
non-financial activities or from affiliating with an non-financial entity. As a
grandfathered unitary thrift holding company, the Corporation will retain its
authority to engage in non-financial activities. However, the Act will have few
direct effects on the operations or powers of federal savings associations or of
savings and loan holding companies.
The Act imposes significant new financial privacy obligations and reporting
requirements on all financial institutions, including federal savings
associations. Specifically, the statute, among other things, will require
financial institutions (a) to establish privacy policies and disclose them to
customers both at the commencement of a customer relationship and on an annual
basis and (b) to permit customers to opt out of a financial institution's
disclosure of financial information to nonaffiliated third parties. The Act
requires the federal financial regulators to promulgate regulations implementing
these provisions within six months of enactment, and the statute's privacy
requirements will take effect one year after enactment.
Regulation of the Corporation
General
The Corporation is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Corporation is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries, should such
subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Corporation.
As a unitary savings and loan holding company, the Corporation generally is not
subject to activity restrictions, provided the Bank satisfies the Qualified
Thrift Lender ("QTL") test. The Act terminated the "unitary thrift holding
company exemption" for all companies that applied to acquire savings
associations after May 4, 1999. Since the Corporation is grandfathered under
this provision of the Act, its unitary holding company powers and authorities
were not affected. However, if the Corporation were to acquire control of an
additional savings association, its business activities would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if the Corporation
were in the future to sell control of the Bank to any other company, such
company would not succeed to the Corporation 's grandfathered status under the
Act and would be subject to the same business activity restrictions. See "-
Regulation of the Bank - Qualified Thrift Lender Test."
18
Regulation of the Bank
General
Set forth below is a brief description of certain laws that relate to the
regulation of the Bank. The description does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations. As a
federally chartered, SAIF-insured savings association, the Bank is subject to
extensive regulation by the OTS and the FDIC. Lending activities and other
investments must comply with various federal statutory and regulatory
requirements. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares
reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
savings institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
Insurance of Deposit Accounts
The deposit accounts held by the Bank are insured by the SAIF to a maximum of
$100,000 for each insured member (as defined by law and regulation). Insurance
of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the institution's primary regulator.
The Bank is required to pay insurance premiums based on a percentage of its
insured deposits to the FDIC for insurance of its deposits by the SAIF. The FDIC
also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which
primarily insures commercial bank deposits. The FDIC has set the deposit
insurance assessment rates for SAIF-member institutions for the first six months
of 2000 at 0% to .027% of insured deposits on an annualized basis, with the
assessment rate for most savings institutions set at 0%.
In addition, all FDIC-insured institutions are required to pay assessments to
the FDIC at an annual rate of approximately .0212% of insured deposits to fund
interest payments on bonds issued by the Financing Corporation ("FICO"), an
agency of the Federal government established to recapitalize the predecessor to
the SAIF. These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a
leverage ratio (core capital) equal to at least 3% of total adjusted assets, and
(3) a risk-based capital requirement equal to 8.0% of total risk-weighted
assets.
Dividend and Other Capital Distribution Limitations.
The OTS imposes various restrictions or requirements on the ability of savings
institutions to make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan holding
company, such as the Bank must file an application or a notice with the OTS at
least 30 days before making a capital distribution. Savings associations are not
required to file an application for permission to make a capital distribution
and need only file a notice if the following conditions are met: (1) they are
eligible for expedited treatment under OTS regulations, (2) they would remain
adequately capitalized after the distribution, (3) the annual amount of capital
distribution does not exceed net income for that year to date added to retained
net income for the two preceding years, and (4) the capital distribution would
not violate any agreements
19
between the OTS and the savings association or any OTS regulations. Any other
situation would require an application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test
Federal savings institutions must meet one of two Qualified Thrift Lender
("QTL") tests. To qualify as a QTL, a savings institution must either (i) be
deemed a "domestic building and loan association" under the Internal Revenue
Code by maintaining at least 60% of its total assets in specified types of
assets, including cash, certain government securities, loans secured by and
other assets related to residential real property, educational loans and
investments in premises of the institution or (ii) satisfy the statutory QTL
test set forth in the Home Owner's Loan Act by maintaining at least 65% of its
"portfolio assets" in certain "Qualified Thrift Investments" (defined to include
residential mortgages and related equity investments, certain mortgage-related
securities, small business loans, student loans and credit card loans and 50% of
certain community development loans). For purposes of the statutory QTL test,
portfolio assets are defined as total assets minus intangible assets, property
used by the institution in conducting its business and liquid assets equal to
10% of total assets. A savings institution must maintain its status as a QTL on
a monthly basis in at least nine out of every 12 months. A failure to qualify as
a QTL results in a number of sanctions, including the imposition of certain
operating restrictions and a restriction on obtaining additional advances from
its FHLB. At September 30, 2000, the Bank was in compliance with its QTL
requirement.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Des Moines, which is one of 12 regional
FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Des Moines in an amount equal to at least 1% of its aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year.
Liquidity Requirements
All savings associations are required to maintain an average daily balance of
liquid assets equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW, and Super NOW checking accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy the
liquidity requirements that are imposed by the OTS. At September 30, 2000, the
Bank was in compliance with these Federal Reserve Board requirements.
20
ITEM 2. PROPERTIES
The Bank operates from its main office located at 201 Main Street South,
Hutchinson, Minnesota. The Bank owns this 20,000 square foot office facility
which it built in 1985/86. The total investment in property and equipment at 201
Main Street South had a net book value of $1.6 million at September 30, 2000.
Additional offices, either owned or leased by the Bank and HMC, are set forth
below with information regarding net book value of the premises and equipment at
such facilities at September 30, 2000.
Year
Acquired or Net Book
Date Lease Value at Square
Location Expires September 30, 2000 Footage
- ------------------------------------------- -------------------------------------------------------------------
(Dollars in thousands)
14994 Glazier Avenue
Apple Valley, MN 55124 1989 265 3,000
305 10th Avenue S
Buffalo, MN 55313 1999 1,109 5,620
1002 Greeley Avenue
Glencoe, MN 55336 2000 453 1,980
1320 South Frontage Road
Hastings, MN 55033 1984 934 15,000
905 Highway 15 South,
Frontage Road
Hutchinson, MN 55350 1980 189 1,400
6505 Cahill Avenue
Inver Grove Heights, MN 55075 1979 309 3,000
501 North Sibley Avenue
Litchfield, MN 55355 1978 169 2,400
200 East Frontage Road,
Highway 5
Waconia, MN 55387 1985 314 2,400
122 East Second Street
Winthrop, MN 55396 2000 (1) 19 950
113 Waite Avenue South
Waite Park, MN 56387 2003 (2) 41 550
135 3rd Avenue SW
Hutchinson, MN 55350 2001 (3) 25 1,200
1001 Labore Industrial Court Suite E
Vadnais Heights, MN 55110 2001 (4) 77 7,748
1. Lease expires in July 2001 with option to renew for one year terms. The
Bank expects to renew the lease.
2. Lease expires in September 2003 with an option to renew for an additional
five year term.
3. Lease expires in September 2001 with an option to renew for one year terms.
4. Lease expires in January 2001 with the option to renew for two additional
years.
21
The Bank leases approximately 3,600 square feet of the property in Hastings,
Minnesota under two, three year operating leases. These leases will expire April
14, 2003, and May 10, 2001, with combined annual rents totaling $22,797 in
addition to their proportionate share of the operating expenses.
The Agency operates from its main office located at 135 3rd Avenue Southeast,
Hutchinson, Minnesota and also has an office within the Bank's building in
Buffalo, Minnesota. Those facilities are covered by a month to month lease under
the terms of an expense sharing agreement.
HMC operates from its main office located at 1001 Labore Industrial Court,
Vadnais Heights, Minnesota and also has an office within the Bank's building in
Hastings, Minnesota. These facilities are covered by a month to month lease
under the terms of an expense sharing agreement.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Corporation is a party to legal proceedings in the
ordinary course of business when it enforces security interests in loans made.
The Corporation is not engaged in any legal proceedings of a material nature at
the present time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
For additional information relating to the market for the Corporation's common
equity and related stockholder matters, see "Corporate Profile and Stock Market
Information" in the Registrant's 2000 Annual Report to Stockholders (the "Annual
Report") on page 1, and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The above captioned information appears under "Selected Financial Data" in the
Corporation's Annual Report to Stockholders on page 2 and is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The above captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Registrant's
Annual Report on pages 4 through 15 and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The above information appears under Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Registrant's Annual Report
on pages 4 through 7 and is incorporated herein by reference.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Corporation and its subsidiaries,
together with the report thereon by Bertram Cooper & Co., LLP appears in the
Annual Report on pages 16 through 42 and are incorporated herein by reference.
Quarterly Results of Operations on page 43 of the Annual Report is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE CORPORATION
The information contained under the sections captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Proposal I-- Election of Directors" and "--
Biographical Information" in the 2001 Proxy Statement (the "Proxy Statement")
are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Director and Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof -- Security Ownership of Certain
Beneficial Owners" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof -- Security Ownership of Certain
Beneficial Owners" and "Proposal I -- Election of Directors"
of the Proxy Statement.
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
section captioned Certain Relationships and Related Transactions.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Bank are incorporated by
reference to the following indicated pages of the 2000 Annual Report
to Stockholders.
Page
----
Independent Auditors' Report......................................................................16
Consolidated Statements of Financial Condition as of
September 30, 2000 and 1999..............................................................17
Consolidated Statements of Income for the Years
Ended September 30, 2000, 1999 and 1998..................................................18
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 2000, 1999 and 1998............................................19
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999 and 1999........................................................20
Notes to Consolidated Financial Statements........................................................22
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are files as part of this report.
3.1 Articles of Incorporation of FSF Financial Corporation *
3.2 Bylaws of FSF Financial Corporation *
4.0 Stock Certificate of FSF Financial Corporation *
10.1 Form of Employment Agreement with Donald A. Glas, George B. Loban and
Richard H. Burgart *
10.2 First Federal fsb Management Stock Plan **
10.3 FSF Financial Corporation 1996 Stock Option Plan **
10.4 FSF Financial Corporation 1998 Stock Compensation Plan ***
13.0 Portions of the 2000 Annual Report to Stockholders
21.0 Subsidiary Information (see Item 1- "Subsidiary Activities")
23.0 Consent of Accountant
27.0 Financial Data Schedule ****
- --------------------------------------------------------------------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, initially filed with the Commission, on
June 1, 1994, Registration No. 33-79570.
** Incorporated herein by reference into this document from the Registrant's
Proxy Statement for the Annual Meeting of Stockholders held on January 17,
1996 and filed with the Commission on December 13, 1995.
*** Incorporated herein by reference into this document from the Registrant's
proxy statement for the Annual Meeting of Stockholders held on January 20,
1998 and filed with the Commission on December 10, 1997.
**** Included with electronic filing only.
24
Signatures
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FSF Financial Corp.
Dated: December 11, 2000 By: /s/ Donald A. Glas
--------------------------------
Donald A. Glas
Co-Chair of the Board and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated,
By: /s/ Donald A. Glas By: /s/ Richard H. Burgart
------------------ ----------------------
Donald A. Glas Richard H. Burgart
Co-Chair of the Board and Chief Executive Officer Chief Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Director
Date: December 11, 2000 Date: December 11, 2000
By: /s/ George B. Loban By: /s/ Sever B. Knutson
------------------- --------------------
George B. Loban Sever B. Knutson
Co-Chair of the Board and President Director
Date: December 11, 2000 Date: December 11, 2000
By: /s/ Roger R. Stearns By: /s/ James J. Caturia
------------------- --------------------
Roger R. Stearns James J. Caturia
Director Director
Date: December 11, 2000 Date: December 11, 2000
By: /s/ Jerome R. Dempsey
---------------------
Jerome R. Dempsey
Director
Date: December 11, 2000
25