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 March 31, 2003
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 (IRS employer identification no.)
incorporation or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
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 May 8, 2003.
-----------
Class Outstanding
----- -----------
$.10 par value common stock 2,320,797 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
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 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At At
March 31, September 30,
2003 2002
---------------------------------
(in thousands, except share data)
ASSETS
------
Cash and cash equivalents $ 49,114 $ 14,615
Securities available for sale, at fair value
Equity securities 12,046 12,046
Mortgage-backed and related securities 40,269 29,196
Debt securities 15,272 -
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 31,722 29,242
Loans receivable, net 371,367 382,690
Foreclosed real estate 426 122
Accrued interest receivable 3,629 4,436
Premises and equipment 6,404 6,005
Other assets 9,483 9,690
Goodwill 3,883 3,883
Identifiable intangibles 1,099 1,184
--------- ---------
Total assets $ 550,639 $ 532,160
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 70,332 $ 62,687
Savings accounts 87,724 89,037
Certificates of deposit 244,864 230,200
--------- ---------
Total deposits 402,920 381,924
Federal Home Loan Bank borrowings 93,000 98,000
Advances from borrowers for taxes and insurance 309 352
Other liabilities 5,357 6,003
--------- ---------
Total liabilities 501,586 486,279
--------- ---------
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 43,478 43,101
Retained earnings, substantially restricted 37,214 35,214
Treasury stock at cost (2,180,480 and 2,197,763 shares) (31,704) (31,621)
Unearned ESOP shares at cost (27,092 and 54,891 shares) (271) (549)
Unearned MSP stock grants at cost (42,164 and 42,164 shares) (448) (448)
Accumulated other comprehensive income (loss) 334 (266)
--------- ---------
Total stockholders' equity 49,053 45,881
--------- ---------
Total liabilities and stockholders' equity $ 550,639 $ 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 Six Months
Ended March 31, Ended March 31,
----------------- -----------------
2003 2002 2003 2002
----------------- -----------------
(in thousands, except per share data)
Interest income:
Loans receivable $ 7,680 $ 7,774 $15,905 $15,633
Mortgage-backed and related securities 467 615 962 1,210
Investment securities 410 323 625 694
----------------- -----------------
Total interest income 8,557 8,712 17,492 17,537
Interest expense:
Deposits 2,496 2,874 5,192 6,111
Borrowed funds 1,239 1,363 2,562 2,999
----------------- -----------------
Total interest expense 3,735 4,237 7,754 9,110
----------------- -----------------
Net interest income 4,822 4,474 9,738 8,426
Provision for loan losses 193 275 481 425
----------------- -----------------
Net interest income after provision for loan losses 4,629 4,199 9,257 8,001
----------------- -----------------
Non-interest income:
Gain on sale of loans, net 1,306 862 2,432 2,210
Other service charges and fees 393 292 814 662
Service charges on deposit accounts 596 401 1,210 853
Commission income 314 272 592 528
Other 106 105 163 209
----------------- -----------------
Total non-interest income 2,715 1,932 5,211 4,462
----------------- -----------------
Non-interest expense:
Compensation and benefits 2,799 2,254 5,577 4,626
Occupancy and equipment 415 375 807 722
Deposit insurance premiums 16 14 31 29
Data processing 256 223 490 424
Professional fees 140 108 280 197
Other 1,060 884 1,839 1,663
----------------- -----------------
Total non-interest expense 4,686 3,858 9,024 7,661
----------------- -----------------
Income before provision for income taxes 2,658 2,273 5,444 4,802
Income tax expense 1,038 898 2,128 1,897
----------------- -----------------
Net income $ 1,620 $ 1,375 $ 3,316 $ 2,905
================= =================
Basic earnings per share $ 0.72 $ 0.64 $ 1.49 $ 1.34
Diluted earnings per share $ 0.68 $ 0.61 $ 1.41 $ 1.27
Cash dividend declared per common share $ 0.30 $ 0.25 $ 0.60 $ 0.50
Comprehensive income $ 1,510 $ 1,299 $ 3,916 $ 2,708
================= =================
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Six Months
Ended March 31, Ended March 31,
---------------------- ----------------------
2003 2002 2003 2002
---------------------- ----------------------
(in thousands)
Cash flows from operating activities:
Net income $ 1,620 $ 1,375 $ 3,316 $ 2,905
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation 214 176 416 339
Net amortization of discounts and premiums on securities (24) (66) (90) (100)
Provision for loan losses 193 275 481 425
Net market value adjustment on ESOP shares 83 39 158 76
Amortization of ESOP and MSP stock compensation, net of taxes 136 111 278 190
Tax benefit on non-incentive stock options 57 12 457 67
Amortization of intangibles 42 131 85 198
Net loan fees deferred and amortized (171) (13) (257) (61)
(82,920) (49,622) (163,855) (121,188)
Loans originated for sale 101,993 55,292 161,375 115,823
(Increase) decrease in:
Accrued interest receivable 1,128 364 807 773
Other assets (154) 186 133 (46)
(Decrease) in other liabilities (245) 227 (981) (623)
---------------------- ----------------------
Net cash provided (used by) operating activities 21,952 8,487 2,323 (1,222)
---------------------- ----------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net 8,110 1,933 10,504 14,719
Purchase of loans - (1,890) - (13,496)
Principal payments on mortgage-related securities held to maturity - 1,705 2,178 3,138
Purchase of available for sale securities - (2,992) (4,062) (2,992)
Principal payments and proceeds from maturities of
securities available for sale 6,382 442 9,770 698
Purchase of ING branch, net of deposits assumed - - - 17,589
Investment in foreclosed property (12) - (12) -
Proceeds from sale of REO 128 (9) 250 (9)
Purchase of equipment and property improvements (275) (94) (814) (306)
---------------------- ----------------------
Net cash provided (used by) investing activities $ 14,333 $ (905) $ 17,814 $ 19,341
---------------------- ----------------------
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Six Months
Ended March 31, Ended March 31,
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
(in thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits $ 433 $ (4,422) $ 21,042 $ 10,719
FHLB advances - - - 10,000
Payments on FHLB advances - - (5,000) (25,500)
Net decrease in mortgage escrow funds 107 176 (43) (54)
Treasury stock purchased (245) (37) (846) (755)
Net proceeds from exercise of stock options 103 (2) 525 159
Dividends on common stock (667) (545) (1,316) (1,084)
-------------------- --------------------
Net cash provided (used by) financing activities (269) (4,830) 14,362 (6,515)
-------------------- --------------------
Net increase in cash and cash equivalents 36,016 2,752 34,499 11,604
Cash and cash equivalents
Beginning of period 13,098 21,446 14,615 12,594
-------------------- --------------------
End of period $ 49,114 $ 24,198 $ 49,114 $ 24,198
==================== ====================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on advances and other borrowed money $ 1,246 $ 1,362 $ 2,562 $ 2,996
Interest on deposits $ 2,590 $ 2,591 $ 5,647 $ 6,525
Income taxes $ 1,470 $ 967 $ 2,374 $ 1,857
Supplemental schedule of non-cash investing and financing activities:
Foreclosed real estate $ 149 $ 53 $ 542 $ 192
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
MARCH 31, 2003
NOTE 1- PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
and six months ended March 31, 2003 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
and six month periods ended March 31, 2003 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
agency. 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. Firstate Services is an investment
services company. HMC, a mortgage banking entity, has become an
integral part of the Bank's lending and fee income function. At March
31, 2003, 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 and HMC's banking activity as aggregated
components of a reportable business segment.
Consolidated
Banking Other Eliminations Total
-----------------------------------------------------
As of and for the three months ended March 31, 2003
From operations:
Interest income from external sources $ 8,555 $ 2 $ - $ 8,557
Non-interest income from external sources 2,492 223 - 2,715
Inter-segment interest income - 5 (5) -
Interest expense 3,735 - - 3,735
Provisions for loan losses 193 - - 193
Depreciation and amortization 250 6 - 256
Other non-interest expense 4,095 340 (5) 4,430
Income tax expense (benefit) 1,082 (44) - 1,038
--------------------------------------------------
Net income $ 1,692 $ (72) $ - $ 1,620
==================================================
5
Consolidated
Banking Other Eliminations Total
----------------------------------------------------
As of and for the three months ended March 31, 2002
From operations:
Interest income from external sources $ 8,710 $ 2 $ - $ 8,712
Non-interest income from external sources 1,737 195 - 1,932
Inter-segment interest income - 9 (9) -
Interest expense 4,237 - - 4,237
Provisions for loan losses 275 - - 275
Depreciation and amortization 297 9 - 306
Other non-interest expense 3,302 259 (9) 3,552
Income tax expense (benefit) 924 (25) - 899
--------------------------------------------------
Net income $ 1,412 $ (37) $ - $ 1,375
==================================================
Consolidated
Banking Other Eliminations Total
----------------------------------------------------
As of and for the six months ended March 31, 2003
From operations:
Interest income from external sources $ 17,487 $ 5 $ - $ 17,492
Non-interest income from external sources 4,813 398 - 5,211
Inter-segment interest income - 11 (11) -
Interest expense 7,754 - - 7,754
Provisions for loan losses 481 - - 481
Depreciation and amortization 487 14 - 501
Other non-interest expense 7,886 648 (11) 8,523
Income tax expense (benefit) 2,222 (94) - 2,128
--------------------------------------------------
Net income $ 3,470 $ (154) $ - $ 3,316
==================================================
Total Assets $ 550,365 $ 46,441 $(46,167) $550,639
==================================================
Consolidated
Banking Other Eliminations Total
----------------------------------------------------
As of and for the six months ended March 31, 2002
From operations:
Interest income from external sources $ 17,528 $ 9 $ - $ 17,537
Non-interest income from external sources 4,082 380 - 4,462
Inter-segment interest income - 21 (21) -
Interest expense 9,110 - - 9,110
Provisions for loan losses 425 - - 425
Depreciation and amortization 519 18 - 537
Other non-interest expense 6,635 511 (21) 7,125
Income tax expense (benefit) 1,939 (42) - 1,897
--------------------------------------------------
Net income $ 2,981 $ (76) $ - $ 2,905
==================================================
Total Assets $518,979 $ 42,236 $(41,914) $519,301
==================================================
6
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 March 31, 2002 were 2,160,744
and 2,274,057, respectively. For the same period in 2003, the numbers
of shares outstanding for basic and diluted earnings per share
computation were 2,245,727 and 2,369,467, respectively. For the
six-month period ended March 31, 2002, the weighted average number or
shares outstanding for basic and diluted earnings per share computation
were 2,165,779 and 2,278,649, respectively. For the same period in
2003, the numbers of shares outstanding for basic and diluted earnings
per share were 2,229,707 and 2,357,596, respectively. The difference
between the basic and diluted earnings per share denominator is the
effect of stock based compensation plans.
NOTE 5- STOCK OPTION ACCOUNTING
The Corporation accounts for stock options under the intrinsic value
method of 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. The following table illustrates the effect on net income and
earnings per share as if the company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Three Months Six Months
Ended March 31, Ended March 31,
------------------------ ------------------------
2003 2002 2003 2002
------------------------ ------------------------
(in thousands)
Net income, as reported $ 1,620 $ 1,375 $ 3,316 $ 2,905
Deduct:
Total stock-based employee compensation expense
determined under the fair value based method
for all awards, net of related tax effects - - 51 23
------------------------ ------------------------
Pro-forma net income $ 1,620 $ 1,375 $ 3,265 $ 2,882
======================== ========================
Earnings per share:
Basic, as reported $ 0.72 $ 0.64 $ 1.49 $ 1.34
Basic, pro-forma $ 0.72 $ 0.64 $ 1.47 $ 1.33
Diluted, as reported $ 0.68 $ 0.61 $ 1.41 $ 1.27
Diluted, pro-forma $ 0.68 $ 0.61 $ 1.39 $ 1.27
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 at an
exercise price of $23.00, the fair value of the Corporation's stock on
the date of the option grant. In addition, 52,631 options were
exercised at various prices in the current fiscal year.
NOTE 6- 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.
7
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.
Goodwill was tested for impairment on October 1, 2002 and its fair
value exceeded the carrying value. Amortization of goodwill for the
three and six months ended March 31, 2002 was $71,000 and $94,000,
respectively. On a pro-forma basis, net income without goodwill
amortization for the same periods would have been $1.4 million and $3.0
million, while basic earnings per share would have been $0.67 and
$1.39, respectively.
NOTE 7- 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 periods reported, 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.
Three Months Six Months
Ended March 31, Ended March 31,
----------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------
(in thousands)
Net income $ 1,620 $ 1,375 $ 3,316 $ 2,905
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 (185) (135) 66 (339)
Tax (expense) benefit
75 59 (27) 142
----------------------------------------------------
Comprehensive income $ 1,510 $ 1,299 $ 3,916 $ 2,708
====================================================
8
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 March 31, 2003 and September 30, 2002 totaled
$550.6 million and $532.2 million, respectively. This increase of $17.4 million
was mainly the result of an increase in cash and cash equivalents.
Cash and cash equivalents increased $34.5 million from $14.6 million at
September 30, 2002 to $49.1 million at March 31, 2003, mainly due to principal
payment on investments and loans plus new deposits. 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 this fiscal
year, $4.1 million of available-for-sale securities were purchased.
Loans held for sale increased $2.5 million to $31.7 million at March 31, 2003
from $29.2 million at September 30, 2002. As of March 31, 2003, 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 $11.3 million to $371.4 million at March 31, 2003
from $382.7 million at September 30, 2002. Total real estate construction loan
originations decreased by $11.5 million. The balance of land and commercial real
estate loans decreased by $16.4 million, consumer loans increased by $5.4
million, one-to-four family loans decreased $10.4 million and commercial
business loans decreased $4.2 million.
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months Six Months
Ended March 31, Ended March 31,
------------------------- --------------------------
2003 2002 2003 2002
------------------------- --------------------------
(in thousands)
Loans originated:
One-to-four family residential mortgages $ 47,940 $ 27,560 $118,074 $ 82,523
Residential construction 40,922 55,851 91,267 102,741
Land - 2,050 - 2,350
Agricultural 22,778 22,345 31,314 30,587
Commercial business & real estate 10,467 4,867 13,870 7,457
Consumer 16,038 4,519 22,030 9,760
------------------------- --------------------------
Total loans originated 138,145 117,192 276,555 235,418
------------------------- --------------------------
Loans purchased:
Commercial business - 1,890 - 13,496
------------------------- --------------------------
Total new loans $ 138,145 $ 119,082 $276,555 $248,914
========================= ==========================
Acquired in ING branch acquisition $ - $ - $ - $ 28,806
========================= ==========================
Total loans sold $ 101,993 $ 55,292 $161,375 $115,823
========================= ==========================
9
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:
March 31, September 30,
2003 2002
--------------------------------------------------------------------
Amount % Amount %
--------------------------------------------------------------------
(dollars in thousands)
Residential real estate:
One-to-four family (1) $ 61,204 12.5% $ 71,625 13.9%
Residential construction 237,328 48.4% 239,155 46.3%
Multi-family 11,409 2.3% 10,095 2.0%
----------------------------------------------------------------
309,941 63.2% 320,875 62.1%
Agricultural loans 56,348 11.5% 56,129 10.9%
Land and commercial real estate 38,904 7.9% 55,270 10.7%
Commercial business 22,322 4.6% 26,556 5.1%
----------------------------------------------------------------
117,574 24.0% 137,955 26.7%
Consumer loans:
Home equity and second mortgages 24,139 4.9% 27,543 5.3%
Automobile loans 13,628 2.8% 9,172 1.8%
Other 25,115 5.1% 20,757 4.0%
----------------------------------------------------------------
Total consumer loans 62,882 12.8% 57,472 11.1%
----------------------------------------------------------------
Total loans 490,397 100.0% 516,302 100.0%
============== ==============
Less:
Loans in process (85,060) (101,854)
Deferred fees (589) (835)
Allowance for loan losses (1,659) (1,681)
---------------- --------------------
Total loans, net $ 403,089 $ 411,932
================ ====================
- --------------------------------------
1. Includes loans held for sale in the amount of $31.7 million and $29.2
million as of March 31, 2003 and September 30, 2002.
In originating 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.
10
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:
March 31, September 30,
2003 2002
-------------------------------
(dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 3,946 $ 3,133
Permanent loans secured by one-to-four family units 857 482
Non-residential loans - 74
Non- mortgage loans:
Commercial and agricultural 145 647
Consumer 554 537
-------------------------------
Total non-accrual loans 5,502 4,873
Foreclosed real estate 426 122
-------------------------------
Total non-performing assets $ 5,928 $ 4,995
===============================
Total non-performing loans to net loans 1.36% 1.18%
===============================
Total non-performing loans to total assets 1.00% 0.92%
===============================
Total non-performing assets to total assets 1.08% 0.94%
===============================
The residential construction loans are comprised of 22 loans. The outstanding
balance of the loans ranges from $47,000 to $319,000. The loan-to-value ratios
of the loans range between 46% and 97%. Each of the loans has been evaluated for
impairment and is carried at the lower of fair value or cost. There are 7
permanent loans secured by one-to-four family residential units that range from
$38,000 to $163,000. Commercial and agricultural loans are comprised of 3 loans.
The outstanding values of the loans range from $18,000 to $75,000. 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 34 loans that range from
$1,000 to $97,000. The foreclosed real estate total of $426,000 consists of 2
construction loans with balances of $277,000 and $149,000.
Deposits, after interest credited, increased from $381.9 million at September
30, 2002 to $402.9 million at March 31, 2003, an increase of $21.0 million.
Overall cost of funds on deposits during the period decreased 56 basis points
(100 basis points equals 1%) as the Bank attempted to maintain deposit rates
consistent with market place competitors. Demand deposits increased $7.7 million
or 12.2% from September 30, 2002 to March 31, 2003. Savings account balances
decreased 1.5% during the same period, while certificates of deposit increased
$14.7 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 35,348 shares of common stock which,
when netted against 52,631 shares issued in connection with the exercise of
stock options, decreased the number of treasury shares to 2,180,480 at March 31,
2003. 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 $3.2 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 $21.79 at March 31, 2003.
11
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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 March 31,
---------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------
(dollars in thousands)
Assets:
Loans receivable (2) $ 408,460 $ 7,680 7.52 % $ 382,533 $ 7,774 8.13 %
Mortgage-backed securities 43,449 467 4.30 50,750 615 4.85
Investment securities (3) 66,857 410 2.45 52,378 323 2.47
----------------------- -----------------------
Total interest-earning assets 518,766 8,557 6.60 485,661 8,712 7.18
--------------------- ----------------------
Other assets
29,273 27,751
------------- -------------
Total assets $ 548,039 $ 513,412
============= =============
Liabilities:
Interest-bearing deposits $ 399,560 $ 2,496 2.50 % $ 367,471 $ 2,874 3.13 %
Borrowings 93,000 1,239 5.33 98,000 1,363 5.56
----------------------- -----------------------
Total interest-bearing
liabilities 492,560 3,735 3.03 % 465,471 4,237 3.64 %
--------------------- ----------------------
Other liabilities 6,914 5,078
------------- -------------
Total liabilities 499,474 470,549
Stockholders' equity 48,565 42,863
------------- -------------
Total liabilities and stockholders'
equity $ 548,039 $ 513,412
============= =============
Net interest income $ 4,822 $ 4,474
Net spread (4) 3.57 % 3.54 %
Net margin (5) 3.70 % 3.69 %
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.05X 1.04X
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 $1.6 million for the three months ended
March 31, 2003, as compared to net income of $1.4 million for the three months
ended March 31, 2002. This increase in net income was $245,000 or 17.8%. The
increase in net income for second quarter 2003 was mainly the result of
increases in net interest income partially offset by increases in non-interest
expense. Net interest income increased $348,000 in the second quarter of fiscal
2003, an increase of 8.2% over second quarter 2002. Such an increase in net
interest income was mainly the result of a 61 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 57.9% of
non-interest expense for the quarter.
12
Total Interest Income
Total interest income decreased by $155,000 to $8.6 million for the quarter
ended March 31, 2003. The average yield on loans decreased to 7.52% for the
quarter ended March 31, 2003 from 8.13% for the quarter ended March 31, 2002.
During the same period, the average yield on mortgage-backed securities
decreased 55 basis points. The average balance of investment securities
increased to $66.9 million for the quarter ended March 31, 2003 from $52.4
million for the quarter ended March 31, 2002, mainly as a result of loan
repayments and deposit growth invested. The average yield decreased from 2.47%
for the three months ended March 31, 2002 to 2.45% for the same period in 2003.
Total Interest Expense
Total interest expense decreased to $3.7 million for the three months ended
March 31, 2003 from $4.2 million for the same period in 2002. The average
balance of interest-bearing deposits increased from $367.5 million for the three
months ended March 31, 2002 to $399.6 million for the three months ended March
31, 2003. The average cost of deposits decreased 63 basis points from 3.13% for
the quarter ended March 31, 2002 to 2.50% for the same period in 2003, 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 $5.0
million to $93.0 million for the three months ended March 31, 2003 from $98.0
million for the three months ended March 31, 2002. The cost of such borrowings
decreased by 23 basis points to 5.33% for the quarter ended March 31, 2003 from
5.56% for the same period in 2002. 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 $4.5 million for the quarter ended March 31,
2002 to $4.8 million for the same period ended March 31, 2003. Average
interest-earning assets increased $33.1 million from $485.7 million for the
quarter ended March 31, 2002 to $518.8 million for the quarter ended March 31,
2003, while the average yield on those interest-earning assets decreased from
7.18% for 2002 to 6.60% for 2003. Average interest-bearing liabilities increased
by $27.1 million to $492.6 million for the quarter ended March 31, 2003 from
$465.5 million for the quarter ended March 31, 2002, while the cost of those
interest-bearing liabilities decreased from 3.64% in 2002 to 3.03% in 2003.
Provision for Loan Losses
The Corporation's provision for loan losses was $193,000 for the quarter ended
March 31, 2003, as compared to $275,000 for the same period in 2002. Decreases
in the Bank's land, commercial real estate and business loan portfolios,
precipitated the decreases 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.
Non-interest Income
Total non-interest income increased from $1.9 million for the quarter ended
March 31, 2002 to $2.7 million for the quarter ended March 31, 2003. Gain on
sale of loans, increased $444,000 over the same period in 2002, due to the
declining interest rate environment, resulting in an increased refinance market
and to an increase in the number of residential construction loans that were
modified and sold in the secondary market. Other service charges and fees
increased from $292,000 for the three months ended March 31, 2002 to $393,000
for the same period ended March 31, 2003, primarily due to declining interest
rates that helped boost the purchase and refinance markets. Service charges on
deposit accounts increased $195,000 due to an increase in fees charged.
Non-interest Expense
Total non-interest expense increased $828,000 or 21.5% over the periods
compared. Compensation and benefits increased $545,000, as a result of higher
indirect administrative costs related to the higher levels of construction
lending activities. Occupancy and equipment expense increased $40,000 while
professional fees increased $32,000 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
$256,000 for the period ended March 31, 2003, due to the delivery of additional
data processing related services to our customer base.
13
Income Tax Expense
Income taxes increased by $140,000 to $1.0 million for the quarter ended March
31, 2003 from $898,000 for the same period in 2002, which was primarily due to
an increase of $385,000 in pre-tax income.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
Six Months Ended March 31,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
-------------------------------------------------------------------------------
(dollars in thousands)
Assets:
Loans receivable (2) $ 415,082 $ 15,905 7.66 % $ 377,854 $ 15,633 8.27 %
Mortgage-backed securities 45,582 962 4.22 51,762 1,210 4.68
Investment securities (3) 54,404 625 2.30 52,239 694 2.66
------------------------ ------------------------
Total interest-earning assets 515,068 17,492 6.79 481,855 17,537 7.28
----------------------- -----------------------
Other assets 29,523 26,273
------------- -------------
Total assets $ 544,591 $ 508,128
============= =============
Liabilities:
Interest-bearing deposits $ 395,608 $ 5,192 2.62 % $ 356,512 $ 6,111 3.43 %
Borrowings 94,401 2,562 5.43 103,758 2,999 5.78
------------------------ ------------------------
Total interest-bearing
liabilities 490,009 7,754 3.16 % 460,270 9,110 3.96
----------------------- -----------------------
Other liabilities 7,115 5,236
------------- -------------
Total liabilities 497,124 465,506
Stockholders' equity 47,467 42,622
------------- -------------
Total liabilities and stockholders'
equity $ 544,591 $ 508,128
============= =============
Net interest income $ 9,738 $ 8,426
Net spread (4) 3.63 % 3.32 %
Net margin (5) 3.78 % 3.42 %
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.05X 1.04X
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 $3.3 million for the six months ended
March 31, 2003, as compared to net income of $2.9 million for the six months
ended March 31, 2002. This increase in net income was $411,000 or 14.1%. The
increase in net income for six months ended March 31, 2003 was mainly the result
of increases in net interest income partially offset by increases in
non-interest expense. Net interest income increased $1.3 million in the second
quarter of fiscal 2003, an increase of 15.6% over second quarter 2002. Such an
increase in net interest income was mainly the result of a 80 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 57.7% of non-interest expense for the period.
14
Total Interest Income
Total interest income decreased by $45,000 to $17.5 million for the six months
ended March 31, 2003. The average yield on loans decreased to 7.66% for the six
months ended March 31, 2003 from 8.27% for the six months ended March 31, 2002.
During the same period, the average yield on mortgage-backed securities
decreased 46 basis points. The average balance of investment securities
increased to $54.4 million for the quarter ended March 31, 2003 from $52.2
million for the six months ended March 31, 2002. The average yield decreased
from 2.66% for the six months ended March 31, 2002 to 2.30% for the same period
in 2003.
Total Interest Expense
Total interest expense decreased to $7.8 million for the six months ended March
31, 2003 from $9.1 million for the same period in 2002. The average balance of
interest-bearing deposits increased from $356.5 million for the six months ended
March 31, 2002 to $395.6 million for the six months ended March 31, 2003. The
average cost of deposits decreased 81 basis points from 3.43% for the six months
ended March 31, 2002 to 2.62% for the same period in 2003, 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 $9.4 million to $94.4
million for the six months ended March 31, 2003 from $103.8 million for the six
months ended March 31, 2002. The cost of such borrowings decreased by 35 basis
points to 5.43% for the six months ended March 31, 2003 from 5.78% for the same
period in 2002. 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 $8.4 million for the six months ended March
31, 2002 to $9.7 million for the same period ended March 31, 2003. Average
interest-earning assets increased $33.2 million from $481.9 million for the six
months ended March 31, 2002 to $515.1 million for the six months ended March 31,
2003, while the average yield on those interest-earning assets decreased from
7.28% for 2002 to 6.79% for 2003. Average interest-bearing liabilities increased
by $29.7 million to $490.0 million for the six months ended March 31, 2003 from
$460.3 million for the six months ended March 31, 2002, while the cost of those
interest-bearing liabilities decreased from 3.96% in 2002 to 3.16% in 2003.
Provision for Loan Losses
The Corporation's provision for loan losses was $481,000 for the six months
ended March 31, 2003, as compared to $425,000 for the same period in 2002.
Increases in the Bank's charge-offs for residential construction loans, coupled
with a decrease in the Bank's land, commercial real estate and business loans,
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.
15
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Six Months
Ended March 31,
--------------------
2003 2002
--------------------
(dollars in thousands)
Average loans outstanding $415,082 $377,854
--------------------
Allowance balance (beginning of period) $ 1,681 $ 1,541
--------------------
ING branch acquisition $ - $ 274
Provision (credit):
Residential and construction 143 -
Land and commercial real estate 107 -
Commercial and agricultural business 208 200
Consumer 23 225
--------------------
Total provision 481 425
Charge-offs:
Residential and construction 153 -
Land and commercial real estate 73
Commercial and agricultural business 160 276
Consumer 168 335
--------------------
Total charge-offs 554 611
Recoveries:
Residential and construction - -
Land and commercial real estate - -
Consumer 51 9
--------------------
Total recoveries 51 9
--------------------
Net charge-offs 503 602
--------------------
Allowance balance (end of period) $ 1,659 $ 1,638
====================
Allowance as percent of net loans 0.41% 0.43%
Net loans charged off as a percent of average loans 0.13% 0.16%
Included in the agricultural loan provision was $100,000 for an impaired loan.
Non-interest Income
Total non-interest income increased from $4.5 million for the six months ended
March 31, 2002 to $5.2 million for the six months ended March 31, 2003. Other
service charges and fees increased from $662,000 for the six months ended March
31, 2002 to $814,000 for the same period ended March 31, 2003, primarily due to
declining interest rates that helped boost the purchase and refinance markets.
Gain on sale of loans, net increased $222,000 over the same period in 2002, due
to the declining interest rate environment, resulting in an increased refinance
market. Service charges on deposit accounts increased $357,000 due to an
increase in fees charged.
Non-interest Expense
Total non-interest expense increased $1.4 million or 17.8% over the periods
compared. Compensation and benefits increased $951,000, as a result of higher
indirect administrative costs related to the higher levels of construction
lending activities. Occupancy and equipment expense increased $85,000 while
professional fees increased $83,000 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 $66,000 to
$490,000 for the six months ended March 31, 2003, due to the delivery of
additional data processing related services to our customer base.
Income Tax Expense
Income taxes increased by $231,000 to $2.1 million for the six months ended
March 31, 2003 from $1.9 million for the same period in 2002, which was
primarily due to an increase of $642,000 in pre-tax income.
16
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 March 31, 2003 is approximately $184.6 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 March 31, 2003, the Bank had outstanding loan commitments of $9.5 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 6.3%, 7.8%,
3.8% and 4.2%, 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.
17
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries were
engaged in any legal proceedings of a material nature at March
31, 2003. 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
The Annual Meeting of Stockholders of the Company was held on
January 21, 2003 and the following matters were voted upon.
Proposal I- Election of Directors for terms to expire in 2006
FOR WITHHELD
--- --------
Sever B. Knutson 2,150,636 13,942
George B. Loban 2,149,436 15,142
Proposal II- To ratify the appointment of Larson Allen
Weishair & Co., LLP as independent accountants of the Company
for the fiscal year ending September 30, 2003.
FOR AGAINST ABSTAIN
--- ------- -------
2,161,791 510 2,277
ITEM 5. OTHER INFORMATION
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 ***
(b) None.
- --------------------------------------------------------------------------------
* 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.
18
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: May 8, 2003 By: /s/ Donald A. Glas
-------------------------------
Donald A. Glas
Chief Executive Officer
Date: May 8, 2003 By: /s/ Richard H. Burgart
-------------------------------
Richard H. Burgart
Chief Financial Officer
19
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: May 8, 2003 /s/Donald A. Glas
---------------------------
Donald A. Glas
Chief Executive Officer
20
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: May 8, 2003 /s/ Richard H. Burgart
---------------------------
Richard H. Burgart
Chief Financial Officer
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