SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS OF 1934
For the quarterly period ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24648
FSF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Minnesota 41-1783064
(State or other jurisdiction of incorporation (IRS employer identification no.)
or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicated the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date February 7, 2003.
----------------
Class Outstanding
----- -----------
$.10 par value common stock 2,320,797 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2002
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Materially Important Events 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At At
December 31, September 30,
2002 2002
------------- -------------
(in thousands, except share data)
ASSETS
------
Cash and cash equivalents $ 13,098 $ 14,615
Securities available for sale, at fair value
Equity securities 12,034 12,046
Mortgage-backed and related securities 46,703 29,196
Debt securities 15,370 -
Securities held to maturity, at amortized cost:
Debt securities (fair value of $13,150) - 12,447
Mortgage-backed and related securities (fair value of $20,724) - 20,679
Restricted stock 5,925 5,925
Loans held for sale 50,796 29,242
Loans receivable, net 379,701 382,690
Foreclosed real estate 393 122
Accrued interest receivable 4,759 4,436
Premises and equipment 6,342 6,005
Other assets 9,365 9,690
Goodwill 3,883 3,883
Identifiable intangibles 1,142 1,184
--------- ---------
Total assets $ 549,511 $ 532,160
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 66,727 $ 62,687
Savings accounts 87,467 89,037
Certificates of deposit 248,314 230,200
--------- ---------
Total deposits 402,508 381,924
Federal Home Loan Bank borrowings 93,000 98,000
Advances from borrowers for taxes and insurance 201 352
Other liabilities 5,725 6,003
--------- ---------
Total liabilities 501,434 486,279
--------- ---------
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 43,385 43,101
Retained earnings, substantially restricted 36,261 35,214
Treasury stock at cost (2,180,480 and 2,197,763 shares) (31,609) (31,621)
Unearned ESOP shares at cost (44,836 and 54,891 shares) (406) (549)
Unearned MSP stock grants at cost (42,164 and 42,164 shares) (448) (448)
Accumulated other comprehensive income (loss) 444 (266)
--------- ---------
Total stockholders' equity 48,077 45,881
--------- ---------
Total liabilities and stockholders' equity $ 549,511 $ 532,160
========= =========
See Notes to Unaudited Consolidated Financial Statements
1
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Three Months
Ended December 31,
------------------
2002 2001
------ ------
(in thousands, except per share data)
Interest income:
Loans receivable $8,225 $7,859
Mortgage-backed and related securities 495 595
Investment securities 215 371
------ ------
Total interest income 8,935 8,825
Interest expense:
Deposits 2,696 3,237
Borrowed funds 1,323 1,636
------ ------
Total interest expense 4,019 4,873
------ ------
Net interest income 4,916 3,952
Provision for loan losses 288 150
------ ------
Net interest income after provision for loan losses 4,628 3,802
------ ------
Non-interest income:
Gain on sale of loans, net 1,126 1,348
Other service charges and fees 421 370
Service charges on deposit accounts 614 452
Commission income 278 256
Other 57 104
------ ------
Total non-interest income 2,496 2,530
------ ------
Non-interest expense:
Compensation and benefits 2,778 2,372
Occupancy and equipment 392 347
Deposit insurance premiums 15 15
Data processing 234 201
Professional fees 140 89
Other 779 779
------ ------
Total non-interest expense 4,338 3,803
------ ------
Income before provision for income taxes 2,786 2,529
Income tax expense 1,090 999
------ ------
Net income $1,696 $1,530
====== ======
Basic earnings per share $ 0.77 $ 0.70
Diluted earnings per share $ 0.73 $ 0.67
Cash dividend declared per common share $ 0.30 $ 0.25
Comprehensive income $2,406 $1,409
====== ======
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended December 31,
---------------------
2002 2001
-------- --------
(in thousands)
Cash flows from operating activities:
Net income $ 1,696 $ 1,530
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation 202 163
Net amortization of discounts and premiums on securities (66) (34)
Provision for loan losses 288 150
Net market value adjustment on ESOP shares 75 37
Amortization of ESOP and MSP stock compensation, net of taxes 142 79
Tax benefit on non-incentive stock options 400 55
Amortization of intangibles 43 67
Net loan fees deferred and amortized (86) (48)
Loans originated for sale (80,935) (75,188)
Loans sold 59,382 64,153
(Increase) decrease in:
Accrued interest receivable (321) 408
Other assets 287 (232)
(Decrease) in other liabilities (736) (850)
-------- --------
Net cash (used by) operating activities (19,629) (9,710)
-------- --------
Cash flows from investing activities:
Loan originations and principal payments on loans, net 2,394 12,786
Purchase of loans - (11,606)
Principal payments on mortgage-related securities held to maturity 2,178 1,433
Purchase of available for sale securities (4,062) -
Principal payments and proceeds from maturities of
securities available for sale 3,388 256
Purchase of ING branch, net of deposits assumed - 17,589
Proceeds from sale of REO 122 -
Purchase of equipment and property improvements (539) (212)
-------- --------
Net cash provided by investing activities $ 3,481 $ 20,246
-------- --------
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months
Ended December 31,
--------------------
2002 2001
-------- --------
(in thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits $ 20,609 $ 15,141
FHLB advances - 10,000
Payments on FHLB advances (5,000) (25,500)
Net decrease in mortgage escrow funds (150) (230)
Treasury stock purchased (601) (718)
Net proceeds from exercise of stock options 422 161
Dividends on common stock (649) (538)
-------- --------
Net cash provided by (used in) financing activities 14,631 (1,684)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,517) 8,852
Cash and cash equivalents
Beginning of period 14,615 12,594
-------- --------
End of period $ 13,098 $ 21,446
======== ========
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on advances and other borrowed money $ 1,316 $ 1,634
Interest on deposits $ 3,057 $ 3,934
Income taxes $ 904 $ 890
Supplemental schedule of non-cash investing and financing activities:
Foreclosed real estate $ 393 $ 139
Transfer of securities from held-to-maturity to available-for-sale $ 30,462 $ -
Unrealized gain on available-for-sale securities transferred, net of tax $ 561 $ -
See Notes to Unaudited Consolidated Financial Statements
4
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1- PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
months ended December 31, 2002 include the accounts of FSF Financial
Corp. (the "Corporation") and its wholly owned subsidiaries, Insurance
Planners of Hutchinson, Inc. (the "Agency") and First Federal fsb (the
"Bank"), with its wholly owned subsidiaries, Firstate Services and
Homeowners Mortgage Corporation ("HMC"). All significant inter-company
accounts and transactions have been eliminated in consolidation.
NOTE 2- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and therefore,
do not include information or footnotes necessary for a complete
presentation of consolidated financial condition, results of operations
and cash flows in conformity with United States Generally Accepted
Accounting Principles ("GAAP"). However, all adjustments consisting of
normal recurring accruals, which in the opinion of management are
necessary for fair presentation of the consolidated financial
statements, have been included. The results of operations for the three
month period ended December 31, 2002 are not necessarily indicative of
the results which may be expected for the entire fiscal year or any
other future period. For further information, refer to the consolidated
financial statements and footnotes thereto included in the
Corporation's Annual Report of Form 10-K for the year ended September
30, 2002.
NOTE 3- BUSINESS SEGMENTS
The Corporation is a holding company whose affiliated companies provide
financial services. The Agency is a property and casualty insurance
company. Firstate Services is an investment services company. 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, construction, consumer, commercial and
agricultural loans. HMC, a mortgage banking entity, has become an
integral part of the Bank's lending and fee income function. At
December 31, 2002, the Bank operated 13 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, therefore undergoing periodic examinations by those
regulatory authorities.
The Corporation's operating segments are business units that offer
different products and services that are marketed through different
channels. Firstate Services, the Agency and FSF Financial Corporation
did not meet the quantitative thresholds for determining reportable
segments and therefore are included in the "other" category. Management
has identified the Bank's activity and HMC's activity as aggregated
components of a reportable business segment.
Consolidated
Banking Other Eliminations Total
------- ------- ------------ ---------
(in thousands)
As of and for the three months ended December 31, 2002
From operations:
Interest income from external sources $ 8,932 $ 3 $ - $ 8,935
Non-interest income from external sources 2,321 175 - 2,496
Inter-segment interest income - 9 (6) 3
Interest expense 4,020 - - 4,020
Provisions for loan losses 288 - - 288
Depreciation and amortization 237 8 - 245
Other non-interest expense 3,791 308 (6) 4,093
Income tax expense (benefit) 1,140 (50) - 1,090
-------- ------- -------- --------
Net income $ 1,778 $ (82) $ - $ 1,696
======== ======= ======== ========
Total Assets $549,203 $46,898 $(46,590) $549,511
======== ======= ======== ========
5
Consolidated
Banking Other Eliminations Total
------- ------- ------------ ---------
(in thousands)
As of and for the three months ended December 31, 2001
From operations:
Interest income from external sources $ 8,818 $ 7 $ - $ 8,825
Non-interest income from external sources 2,346 184 - 2,530
Inter-segment interest income - 12 (12) -
Interest expense 4,873 - - 4,873
Provisions for loan losses 150 - - 150
Depreciation and amortization 221 9 - 230
Other non-interest expense 3,342 243 (12) 3,573
Income tax expense (benefit) 935 (17) - 918
-------- ------- -------- --------
Net Income $ 1,562 $ (32) $ - $ 1,530
======== ======= ======== ========
Total Assets $521,614 $42,286 $(41,327) $522,573
======== ======= ======== ========
Due to the integration of HMC lending activity into the Bank during
2002 (the two components have similar qualitative economic
characteristics), results of prior periods have been reclassified to
allow for comparability.
NOTE 4- EARNINGS PER SHARE
The earnings per share amounts are computed using the weighted average
number of shares outstanding during the periods presented. The weighted
average number of shares outstanding for basic and diluted earnings per
share computation for the quarter ended December 31, 2002 were
2,213,687 and 2,347,926, respectively. For the same period in 2001, the
number of shares outstanding for basic and diluted earnings per share
computation was 2,170,814 and 2,281,767, respectively. The difference
between the basic and diluted earnings per share denominator is the
effect of stock based compensation plans.
NOTE 5- EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
Goodwill Accounting Changes
The Company adopted Statement of Financial Accounting Standards (SFAS)
Statement No. 142, Goodwill and Other Intangible Assets, on October 1,
2002. Statement 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations,
ceased upon adoption of the Statement.
Pursuant to SAFS No. 147, which amended SFAS No. 72 Accounting for
Certain Acquisitions of Banking and Thrift Institutions, the
unidentifiable intangible goodwill recognized (i.e. the unamortized
excess of the fair value of liabilities assumed over the fair value of
assets acquired) was reclassified as goodwill as of the date that SFAS
142 was applied. Note that, as of such date, the carrying amount of
core deposit intangible (for which individual accounting records have
been kept) is recorded separately and continues to be amortized.
Reclassified goodwill is now accounted for in accordance with SFAS 142,
thus effectively, amortization ceased as of October 1, 2002
Impairment is the condition that exists when the carrying amount of
goodwill exceeds its implied fair value. In the event of impairment, an
impairment loss would be recognized in an amount equal to that excess.
SFAS No. 142 requires a two step impairment test to identify potential
goodwill impairment and measure the amount of the goodwill impairment
loss to be recognized. The two step impairment test is summarized as
follows:
1. Compare the fair value of the reporting unit with its carrying
amount including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired and no second step is required.
2. To measure the amount of impairment loss, compare the implied
fair value of the reporting unit goodwill with the carrying
amount of the goodwill. The impairment loss shall equal the
excess of carrying value over fair value.
6
Goodwill was tested for impairment on October 1, 2002 and its fair
value exceeded the carrying value. Amortization of goodwill for the
quarter ended December 31, 2001 was $23,000. On a pro-forma basis, net
income without goodwill amortization would have been $1.6 million and
basic earnings per share $0.71 for that quarter.
Stock Option Accounting
The Corporation accounts for stock options under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation- Transition and Disclosure, is effective for the interim
period beginning after December 15, 2002 and requires pro-forma net
income and earnings per share disclosures on a quarterly basis.
Management will adopt the new standard for the quarter ended March 31,
2003.
On November 19, 2002, the Corporation awarded 1,250 stock options from
the 1994 stock option plan and 20,687 stock options from the 1998 stock
option plan. The awards may be exercised over a ten-year period and the
exercise price was $23.00, the fair value of the Corporation's stock on
the date of the option grant. In addition, 42,350 options with an
exercise price of $9.50 were exercised during the quarter.
NOTE 6- COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting shareholder's equity that, under generally accepted
accounting principles, is excluded from net income. For the
Corporation, the difference between net income and comprehensive income
consists of the change for the quarter in unrealized gains and losses
on securities available for sale, net of tax.
At September 30, 2002, the Bank had a total of $33.1 million of
securities that were classified as held-to-maturity. During the quarter
ended December 31, 2002, the Bank transferred all of the securities to
available-for-sale in accordance with SFAS 115 and SFAS 130. In order
to remain within the held-to-maturity classification the Bank must have
the ability and intent to hold the securities to maturity. Although the
Bank still has the ability to hold the securities to maturity, the
intent to hold the securities to maturity no longer exists. Based upon
a review of interest rates, potential liquidity needs, interest rate
risk characteristics of the securities and other factors, management
has determined that it would be in the best interest of the Bank to
transfer the securities. This will provide greater flexibility in
dealing with changing economic circumstances. The following table
provides information regarding the impact of the transfer on
comprehensive income.
December 31,
------------------
2002 2001
------- -------
(in thousands)
Net income $ 1,696 $ 1,530
Other comprehensive income
Unrealized holding gains on securities transferred
from held to maturity, net of tax expense 561 -
Unrealized holding gains (losses) during the period 251 (204)
Tax (expense) benefit (102) 83
------- -------
Comprehensive income $ 2,406 $ 1,409
======= =======
7
FSF FINANCIAL CORP. AND SUBSIDIARIES
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 that 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.
General
The Corporation's total assets at December 31, 2002 and September 30, 2002
totaled $549.5 million and $532.2 million. This increase of $17.3 million was
mainly the result of an increase in loans held for sale.
Cash and cash equivalents decreased $1.5 million from $14.6 million at September
30, 2002 to $13.1 million at December 31, 2002. The Corporation utilizes this
excess liquidity to fund the purchase of treasury shares and loan originations.
During the quarter ended December 31, 2002, the Corporation transferred all its
held-to-maturity debt securities and mortgage-backed and related securities to
the available-for-sale category. The net carrying amount of these securities at
the time of transfer was $31.0 million and the unrealized gain, net of income
taxes, was $561,000 (see Note 7 to financial statements). During the quarter,
$4.1 million of available-for-sale securities were purchased.
Loans held for sale increased $21.6 million to $50.8 million at December 31,
2002 from $29.2 million at September 30, 2002. As of December 31, 2002, the Bank
and HMC had forward commitments to sell all of their loans held for sale in the
secondary market. Payment for these loans usually occurs within fourteen days of
funding.
Loans receivable decreased $2.9 million to $379.8 million at December 31, 2002
from $382.7 million at September 30, 2002. Total real estate construction loan
originations increased by $9.5 million. The balance of agricultural loans
decreased by $1.8 million and consumer loans decreased by $1.2 million.
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months
Ended December 31,
-------------------
2002 2001
-------- --------
(in thousands)
Loans originated:
One-to-four family residential mortgages $ 70,134 $ 60,963
Residential construction 50,345 40,890
Land - 300
Agricultural 8,536 8,242
Commercial business & real estate 3,403 2,589
Consumer 5,992 5,240
-------- --------
Total loans originated 138,410 118,224
-------- --------
Loans purchased:
Commercial business - 11,606
-------- --------
Total new loans $138,410 $129,830
======== ========
Acquired in ING branch acquisition $ - $ 28,806
======== ========
Total loans sold $ 59,382 $ 64,153
======== ========
8
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
December 31, September 30,
2002 2002
----------------------------------------
Amount % Amount %
----------------------------------------
(dollars in thousands)
Residential real estate:
One-to-four family (1) $ 86,046 16.4% $ 71,625 13.9%
Residential construction 245,062 46.7% 239,155 46.3%
Multi-family 10,122 1.9% 10,095 2.0%
--------------------------------------
341,230 65.0% 320,875 62.1%
Agricultural loans 54,422 10.4% 56,129 10.9%
Land and commercial real estate 49,158 9.4% 55,270 10.7%
Commercial business 23,712 4.5% 26,556 5.1%
--------------------------------------
127,292 24.3% 137,955 26.7%
Consumer loans:
Home equity and second mortgages 26,012 5.0% 27,543 5.3%
Automobile loans 8,080 1.5% 9,172 1.8%
Other 22,176 4.2% 20,757 4.0%
--------------------------------------
Total consumer loans 56,268 10.7% 57,472 11.1%
--------------------------------------
Total loans 524,790 100.0% 516,302 100.0%
====== ======
Less:
Loans in process (91,835) (101,854)
Deferred fees (750) (835)
Allowance for loan losses (1,708) (1,681)
---------- ----------
Total loans, net $ 430,497 $ 411,932
========== ==========
- --------------------------------------
1. Includes loans held for sale in the amount of $50.8 million and $29.2
million as of December 31, 2002 and September 30, 2002.
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 an 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 that 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, an amount may be charged to earnings to maintain the allowance for
loan losses at a level sufficient to recognize inherent credit risk.
Loans are evaluated for impairment in accordance with SFAS 114, including all
loans that are 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 a charge to earnings and a reduction to the
loan balance or an increase in 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.
9
The Bank believes it has established its existing allowance for loan losses in
accordance with GAAP. The allowance for loan losses is evaluated based on a
detailed review of the loan portfolio, historic loan losses, current economic
conditions and other factors. From period to period the outstanding balance in
various loan categories will increase and decrease; thereby, increasing or
decreasing the amount of the allowance attributable to particular categories.
Management believes that the resulting level of the allowance for loan losses
reflects an adequate reserve against inherent losses in the loan portfolio.
However, there can be no assurance that banking regulators, in reviewing the
Bank's loan portfolio, will not request First Federal to increase its allowance
for loan losses or that a deteriorating real estate market or other unforeseen
economic changes may cause an increase in allowance for loan losses. This is
likely to negatively affect the Bank's financial condition and earnings.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated:
December 31, September 30,
2002 2002
------ ------
(dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $3,711 $3,133
Permanent loans secured by one-to-four family units 692 482
Non-residential loans - 74
Non- mortgage loans:
Commercial and agricultural 730 647
Consumer 728 537
------ ------
Total non-accrual loans 5,861 4,873
Foreclosed real estate 393 122
------ ------
Total non-performing assets $6,254 $4,995
====== ======
Total non-performing loans to net loans 1.36% 1.18%
====== ======
Total non-performing loans to total assets 1.07% 0.92%
====== ======
Total non-performing assets to total assets 1.14% 0.94%
====== ======
The residential construction loans are comprised of 24 loans. The outstanding
balance of the loans range from $42,000 to $314,000. The loan-to-value ratios of
the loans range between 31% and 80%. Each of the loans has been evaluated for
impairment and is carried at the lower of fair value or cost. There are 6
permanent loans secured by one-to-four family residential units that range from
$31,000 to $163,000. Commercial and agricultural loans are comprised of 8 loans.
The outstanding values of the loans range from $5,000 to $354,000. Each of the
loans has been evaluated for impairment and is carried at the lower of fair
value or cost. The consumer loan total is made up of 31 loans that range from
$1,500 to $97,000. The foreclosed real estate total of $393,000 consists of 2
loans with balances of $128,000 and $265,000.
Deposits, after interest credited, increased from $381.9 million at September
30, 2002 to $402.5 million at December 31, 2002, an increase of $20.6 million.
Overall cost of funds on deposits during the period decreased 43 basis points
(100 basis points equals 1%) as the Bank attempted to maintain deposit rates
consistent with market place competitors. Demand deposits increased $4.0 million
or 6.4% from September 30, 2002 to December 31, 2002. Savings account balances
decreased 1.8% during the same period, while certificates of deposit increased
$18.1 million. The Bank utilized this increase in deposits to fund the continued
loan growth and reduce Federal Home Loan Bank ("FHLB") borrowings.
The Corporation completed the repurchase of 25,067 shares of common stock which,
when netted against 42,350 shares issued in connection with the exercise of
stock options, decreased the number of treasury shares to 2,180,480 at December
31, 2002. Treasury shares are to be used for general corporate purposes,
including the issuance of shares in connection with the exercise of stock
options. Total stockholders' equity has increased $2.2 million since September
30, 2002 due to net income, reduced by dividends paid and increased by the
change in accumulated comprehensive income. Accumulated other comprehensive
income increased as a result of changes in the net unrealized (loss) on the
available-for-sale securities due to fluctuations in interest rates (see Note 7
to financial statements). Because of interest rate volatility, the Corporation's
accumulated other comprehensive income could materially fluctuate. Book value
per share increased from $20.79 at September 30, 2002 to $21.52 at December 31,
2002.
10
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
The following table sets forth information with respect to the Corporation's
average balance sheet, interest and dividends earned and paid and related yields
and rates (dollars in thousands):
Three Months Ended December 31,
---------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------
Assets:
Loans receivable (2) $ 421,560 $ 8,225 7.80 % $ 369,388 $ 7,859 8.51 %
Mortgage-backed securities 47,669 495 4.15 52,753 595 4.51
Investment securities (3) 42,221 215 2.04 52,103 371 2.85
----------------------- -----------------------
Total interest-earning assets 511,450 8,935 6.99 474,244 8.825 7.44
--------------------- ----------------------
Other assets 29,768 23,653
------------- -------------
Total assets $ 541,218 $ 497,897
============= =============
Liabilities:
Interest-bearing deposits $ 391,741 $ 2,696 2.75 % $ 341,133 $ 3,237 3.80 %
Borrowings 95,772 1,323 5.53 109,391 1,636 5.98
----------------------- -----------------------
Total interest-bearing 487,513 4,019 3.30 % 450,524 4,873 4.33 %
--------------------- ----------------------
Other liabilities 6,726 5,190
------------- -------------
Total liabilities 494,239 455,714
Stockholders' equity 46,979 42,183
------------- -------------
Total liabilities and stockholders'
equity $ 541,218 $ 497,897
============= =============
Net interest income $ 4,916 $ 3,952
Net spread (4) 3.69 % 3.11 %
Net margin (5) 3.84 % 3.33 %
Ratio of average interest-earning assets
to average interest-bearing
liabilities 1.05X 1.05X
1. Annualized.
2. Average balances include non-accrual loans and loans held for sale.
3. Includes interest-bearing deposits in other financial institutions.
4. Net spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
5. Net margin represents net interest income as a percentage of
interest-earning assets.
Net Income
The Corporation recorded net income of $1.7 million for the three months ended
December 31, 2002, as compared to net income of $1.5 million for the three
months ended December 31, 2001. This increase in net income was $166,000 or
1.5%. The increase in net income for first quarter 2003 was mainly the result of
increases in net interest income, offset by increases in non-interest expense.
Net interest income increased $1.0 million in the first quarter of fiscal 2003,
an increase of 24.4% over first quarter 2002. Such an increase in net interest
income was mainly the result of a 103 basis point decline in average cost of
funds. The mix of the Bank's deposits helped to stabilize its cost of funds in
this lower interest rate environment. Non-interest income was 57.5% of
non-interest expense for the quarter.
11
Total Interest Income
Total interest income increased by $110,000 to $8.9 million for the quarter
ended December 31, 2002. The average yield on loans decreased to 7.80% for the
quarter ended December 31, 2002 from 8.51% for the quarter ended December 31,
2001. During the same period, the average yield on mortgage-backed securities
decreased 36 basis points. The average balance of investment securities
decreased to $42.2 million for the quarter ended December 31, 2002 from $52.1
million for the quarter ended December 31, 2001, mainly as a result of funding
loan production. The average yield decreased from 2.85% for the three months
ended December 31, 2001 to 2.04% for the same period in 2002.
Total Interest Expense
Total interest expense decreased to $4.0 million for the three months ended
December 31, 2002 from $4.9 million for the same period in 2001. The average
balance of interest-bearing deposits increased from $341.1 million for the three
months ended December 31, 2001 to $391.7 million for the three months ended
December 31, 2002. The average cost of deposits decreased 105 basis points from
3.80% for the quarter ended December 31, 2001 to 2.75% for the same period in
2002, as the rates offered by the Bank decreased. No assurance can be made that
deposits can be maintained in the future without further increasing the cost of
funds if interest rates increase. The average balance of borrowings decreased
$13.6 million to $95.8 million for the three months ended December 31, 2002 from
$109.4 million for the three months ended December 31, 2001. The cost of such
borrowings decreased by 45 basis points to 5.53% for the quarter ended December
31, 2002 from 5.98% for the same period in 2001. Borrowings decreased as the
Bank utilized repayments of loans and an increase in deposits to meet liquidity
needs.
Net Interest Income
Net interest income increased from $4.0 million for the quarter ended December
31, 2001 to $4.9 million for the same period ended December 31, 2002. Average
interest-earning assets increased $37.3 million from $474.2 million for the
quarter ended December 31, 2001 to $511.5 million for the quarter ended December
31, 2002, while the average yield on those interest-earning assets decreased
from 7.44% for 2001 to 6.99% for 2002. Average interest-bearing liabilities
increased by $37.0 million to $487.5 million for the quarter ended December 31,
2002 from $450.5 million for the quarter ended December 31, 2001, while the cost
of those interest-bearing liabilities decreased from 4.33% in 2001 to 3.30% in
2002.
Provision for Loan Losses
The Corporation's provision for loan losses was $288,000 for the quarter ended
December 31, 2002, as compared to $150,000 for the same period in 2001.
Increases in the Bank's loan portfolio, especially increases in the residential
construction and land and commercial real estate portfolios, precipitated the
increases in the provision for loan losses for the current period. The allowance
for loan losses is established through a provision for loan losses charged to
expense. While the Corporation maintains its allowance for 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.
12
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Three Months
Ended December 31,
--------------------
2002 2001
-------- --------
(dollars in thousands)
Average loans outstanding $421,560 $369,388
-------- --------
Allowance balance (beginning of period) $ 1,681 $ 1,541
-------- --------
ING branch acquisition $ - $ 274
Provision (credit):
Residential and construction 80 -
Land and commercial real estate - -
Commercial and agricultural business 208 -
Consumer - 150
-------- --------
Total provision 288 150
Charge-offs:
Residential and construction 100 -
Commercial and agricultural business 129 71
Consumer 76 150
-------- --------
Total charge-offs 305 221
Recoveries:
Residential and construction - -
Land and commercial real estate - -
Consumer 44 4
-------- --------
Total recoveries 44 4
-------- --------
Net charge-offs 261 217
-------- --------
Allowance balance (end of period) $ 1,708 $ 1,748
======== ========
Allowance as percent of net loans 0.40% 0.45%
Net loans charged off as a percent of average loans 0.06% 0.06%
Included in the agricultural loan provision was $100,000 for an impaired loan.
Non-interest Income
Total non-interest income remained the same at $2.5 million during the quarter
ended December 31, 2002. Other service charges and fees increased from $370,000
for the 3 months ended December 31, 2001 to $421,000 for the same period ended
December 31, 2002, primarily due to declining interest rates that helped boost
the purchase and refinance markets. Service charges on deposit accounts
increased $162,000 due to an increase in fees charged.
Non-interest Expense
Total non-interest expense increased $535,000 or 14.1% over the periods
compared. Compensation and benefits increased $406,000, as a result of higher
indirect administrative costs related to the higher levels of construction
lending activities. Occupancy and equipment expense increased $45,000 while
professional fees increased $51,000 over the periods compared due to expenses
incurred, an increased reliance on consultants, where appropriate, and the
increased cost of outside auditors. Data processing increased $33,000 to
$234,000 for the period ended December 31, 2002, due to the delivery of
additional data processing related services to our customer base.
Income Tax Expense
Income taxes increased by $91,000 to $1.1 million for the quarter ended December
31, 2002 from $999,000 for the same period in 2001, which was primarily due to
an increase of $257,000 in pre-tax income.
13
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, borrowings, principal
and interest payments on loans, investments and mortgage-backed securities,
sales of mortgage loans and funds provided by operations. While scheduled
payments on loans, mortgage-backed securities and short-term investments are
relatively predictable sources of funds, deposit flows and early loan repayments
are greatly influenced by general interest rates, economic conditions and
competition.
The amount of certificate accounts that are scheduled to mature during the
twelve months ending December 31, 2003 is approximately $193.9 million. To the
extent that these deposits do not remain upon maturity, the Bank believes that
it can replace these funds with new deposits, excess liquidity and FHLB advances
or outside borrowings. It has been the Bank's experience that substantial
portions of such maturing deposits remain at the Bank.
At December 31, 2002, the Bank had outstanding loan commitments of $31.5
million. Funds required to meet these commitments are derived primarily from
current excess liquidity, loan sales, advances, deposit inflows or loan and
security repayments.
OTS regulations require the Bank to maintain core capital of 4.0% 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 8.0% 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 6.0%, 7.0%,
3.6% and 3.5%, 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information regarding market risk
disclosed under the heading "Asset and Liability Management" in the
Corporation's Annual Report for the year ended September 30, 2002.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
----------------------------
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
14
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries were
engaged in any legal proceedings of a material nature at
December 31, 2002. From time to time, the Corporation is a
party to legal proceedings in the ordinary course of business
wherein it enforces its security interest in loans.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of FSF Financial Corp. *
3.2 Bylaws of FSF Financial Corp. *
4.0 Stock Certificate of FSF Financial Corp. *
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 Corp. 1996 Stock Option Plan **
10.4 FSF Financial Corp. 1998 Stock Compensation Plan ***
99.0 Certification pursuant to 18 U.S.C. Section 1350
- --------------------------------------------------------------------------------
* 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.
15
FSF FINANCIAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FSF FINANCIAL CORP.
Date: February 10, 2003 By: /s/ Donald A. Glas
------------------------------
Donald A. Glas
Chief Executive Officer
Date: February 10, 2003 By: /s/ Richard H. Burgart
------------------------------
Richard H. Burgart
Chief Financial Officer
16
SECTION 302 CERTIFICATION
I, Donald A. Glas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FSF Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 10, 2003 /s/Donald A. Glas
------------------------------------
Donald A. Glas
Chief Executive Officer
SECTION 302 CERTIFICATION
I, Richard H. Burgart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FSF Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 10, 2003 /s/ Richard H. Burgart
------------------------------------
Richard H. Burgart
Chief Financial Officer