UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Sections 13
or 15(d) of the Securities Exchange Act of 1934
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003
------------------
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period __________________ to ____________________
Commission Number: 0-24648
FSF FINANCIAL CORP.
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1783064
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 Main Street South
Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (320) 234-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filling
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2) YES NO X
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the average bid and asked price of the Registrant's Common
Stock as quoted on the National Association of Securities Dealers, Inc.,
Automated Quotations National Market on November 28, 2003, was $ 49,580,506
(1,639,025 shares at $ 30.25 per share). ------------
-----
As of November 28, 2003 there were issued and outstanding 2,344,737 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2003. (Parts I, II and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held January 20, 2004. (Part III)
PART I
FSF Financial Corp. (the "Corporation") may, from time to time, make written or
oral "forward-looking statements", including statements contained in the
Corporation's filings with the Securities and Exchange Commission (including
this annual report on Form 10-K and the exhibits thereto), in reports to
stockholders and in other communications by the Corporation, which are made in
good faith by the Corporation pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Corporation's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors, some
of which are beyond the Corporation's control. The following factors, among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: the strength of the United States economy and
the strength of the local economies in which the Corporation conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations. Other factors include the timely development of and acceptance of
new products and services of the Corporation and the perceived overall value of
these products and services by users, including the features, pricing and
quality compared to competitors' products and services; the willingness of users
to substitute competitors' products and services for the Corporation's products
and services. More factors include the success of the Corporation in gaining
regulatory approval of its products and services, when required; the impact of
changes in financial services' laws and regulations, including laws concerning
taxes, banking, securities and insurance; technological changes; acquisitions;
changes in consumer spending and saving habits and the success of the
Corporation at managing the risks resulting from these factors.
The Corporation cautions that the factors listed above are not exclusive. The
Corporation does not take it upon themselves to update any forward-looking
statement, whether written or oral, that may be made by or on behalf of the
Corporation.
ITEM 1. BUSINESS
GENERAL
FSF Financial Corp. is a Minnesota corporation organized in May, 1994 and as of
October 6, 1994, became the holding company for First Federal fsb ("First
Federal" or the "Bank"). Since becoming an operating subsidiary of the Bank,
Homeowners Mortgage Corporation ("HMC"), a mortgage banking subsidiary, has
become an integral part of the residential construction lending function. The
terms "First Federal", "Bank" and "HMC" are synonymous when used in conjunction
with residential lending and residential construction lending. See "Subsidiary
Activity".
First Federal's business consists primarily of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make a variety of loans. At September 30, 2003, First Federal operated
13 retail bank offices in Minnesota. On November 9, 2001, First Federal
completed its acquisition of the ING Bank branch facility in the St. Cloud area.
See "Item 2- Properties".
First Federal is regulated by the Office of Thrift Supervision ("OTS") and by
the Federal Deposit Insurance Corporation ("FDIC") which, through the Savings
Association Insurance Fund ("SAIF"), insures up to certain legal limits, the
deposit accounts of institutions such as First Federal. First Federal is also a
member of the Federal Home Loan Bank ("FHLB") of Des Moines, which is one of the
twelve regional banks for federally insured savings institutions and certain
other residential lending entities comprising the Federal Home Loan Bank System.
1
COMPETITION
The Corporation is one of many financial institutions serving its market area
that consists of the ten Minnesota counties of Benton, Carver, Dakota, McLeod,
Meeker, Sherburne, Sibley, Stearns, Washington and Wright. The competition for
deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions and multi-state regional
banks in the Corporation's market area. Deposit competition also includes a
number of insurance products sold by local agents and investment products such
as mutual funds and other securities sold by local and regional brokers. Loan
competition varies depending upon market conditions and comes from other insured
financial institutions such as commercial banks, thrift institutions, credit
unions, multi-state regional banks and mortgage bankers.
2
LENDING ACTIVITIES
The following table sets forth the composition of the loan portfolio in dollars
and in percentages of total loans at the dates indicated:
At September 30,
--------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
--------------------------------------------------------------------------------------------
(Dollars in Thousands)
Residential real estate:
One-to-four family (1) $ 41,415 8.5 $ 71,625 13.9 $ 81,790 19.1 $ 101,034 26.3 $ 120,884 38.8
Residential construction 263,227 53.9 239,155 46.3 142,035 33.2 82,408 21.5 42,937 13.8
Multi-family 7,703 1.6 10,095 2.0 5,922 1.4 4,737 1.2 5,635 1.8
--------------------------------------------------------------------------------------------
312,345 63.9 320,875 62.1 229,747 53.7 188,179 49.0 169,456 54.4
Agricultural loans 57,259 11.7 56,129 10.9 49,935 11.7 43,829 11.4 33,384 10.7
Land and commercial real estate 40,831 8.4 55,270 10.7 55,220 12.9 50,970 13.3 36,429 11.7
Commercial business 22,961 4.7 26,556 5.1 23,908 5.6 29,831 7.8 29,767 9.6
--------------------------------------------------------------------------------------------
121,051 24.8 137,955 26.7 129,063 30.1 124,630 32.4 99,580 32.0
Consumer:
Home equity and second mortgage 22,482 4.6 27,543 5.3 29,991 7.0 28,106 7.3 24,312 7.8
Automobile loans 11,550 2.4 9,172 1.8 13,023 3.0 13,255 3.5 7,428 2.4
Other 21,272 4.4 20,757 4.0 26,292 6.1 29,943 7.8 10,898 3.5
--------------------------------------------------------------------------------------------
Total consumer loans 55,304 11.3 57,472 11.1 69,306 16.2 71,304 18.6 42,638 13.7
--------------------------------------------------------------------------------------------
Total loans 488,700 100.0 516,302 100.0 428,116 100.0 384,113 100.0 311,674 100.0
===== ===== ===== ===== =====
Less:
Loans in process (110,657) (101,854) (73,235) (36,864) (26,156)
Net deferred fees (512) (835) (774) (711) (507)
Allowance for loan losses (1,701) (1,681) (1,541) (1,534) (1,387)
--------- --------- --------- --------- ---------
Net loans $ 375,830 $ 411,932 $ 352,566 $ 345,004 $ 283,624
========= ========= ========= ========= =========
1. Includes loans held for sale in the amount of $17.1 million, $29.2 million,
$12.1 million, $3.2 million and $5.3 million as of September 30, 2003,
2002, 2001, 2000 and 1999, respectively.
3
The following table sets forth the loan originations, loan sales and principal
payments for the periods indicated:
Years Ended September 30,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In Thousands)
Total gross loans receivable at
end of period $ 488,700 $ 516,302 $ 428,116 $ 384,113 $ 311,674
Loans originated:
Residential real estate:
One-to-four family 235,236 142,661 99,017 56,400 130,461
Residential construction 219,750 233,716 150,254 94,929 55,700
--------- --------- --------- --------- ---------
Total residential real estate 454,986 376,377 249,271 151,329 186,161
Land 7,300 8,370 14,258 7,189 5,900
Commercial business 23,258 18,449 12,912 16,149 13,033
Agricultural 54,793 55,328 42,040 38,204 28,081
Consumer 31,977 22,486 29,471 49,804 27,503
--------- --------- --------- --------- ---------
Total loans originated 572,314 481,010 347,952 262,675 260,678
Purchase of loans 4,000 19,298 27,337 32,417 40,883
Acquired in ING branch acquisition - 28,806 - - -
Sale of loan participation - - (1,600) (851) (3,000)
Sale of loans (355,097) (208,371) (129,245) (54,364) (128,925)
Principal repayments (252,778) (270,001) (235,841) (166,921) (169,131)
Other (net) 3,959 37,444 35,400 (517) 9,560
--------- --------- --------- --------- ---------
Net loan activity $ (27,602) $ 88,186 $ 44,003 $ 72,439 $ 10,065
========= ========= ========= ========= =========
Maturity of Loans
The following table sets forth the maturity of the Bank's loans at September 30,
2003. The table does not include prepayments or scheduled principal repayments
and adjustable rate mortgage loans are shown as maturing based on contractual
maturities.
One to Four Land, Commercial
Family Multi-Family Business,
Real Estate and Commercial Agriculture and
Mortgages Real Estate Construction Consumer Total
-----------------------------------------------------------------------------
Amounts Due: (In Thousands)
Within 3 months $ 1,125 $ 3,117 $ 95,246 $ 10,035 $ 109,523
3 months to 1 year 2,359 11,552 167,981 19,491 201,383
-----------------------------------------------------------------------------
Total due before one year 3,484 14,669 263,227 29,526 310,906
-----------------------------------------------------------------------------
After 1 year:
1 to 3 years 4,936 16,283 - 29,452 50,671
3 to 5 years 4,319 13,771 - 44,700 62,790
5 to 10 years 4,664 1,120 - 25,313 31,097
10 to 20 years 2,415 2,691 - 6,533 11,639
Over 20 years 21,597 - - - 21,597
-----------------------------------------------------------------------------
Total due after one year 37,931 33,865 - 105,998 177,794
-----------------------------------------------------------------------------
Total amount due $ 41,415 $ 48,534 $ 263,227 $ 135,524 $ 488,700
=============================================================================
4
The following table sets forth at September 30, 2003, the dollar amount of all
loans due after September 30, 2004, based upon fixed rates of interest, balloon
rates and adjustable rates.
Fixed- Balloon Adjustable
Rates Rates Rates Total
--------- -------- ---------- --------
(In Thousands)
One-to-four family real estate $ 31,824 $ 2,603 $ 3,504 $ 37,931
Land, multi-family and commercial real estate 11,544 10,413 11,908 33,865
Commercial business, agricultural and consumer 83,516 - 22,482 105,998
-------- -------- -------- --------
Total $126,884 $ 13,016 $ 37,894 $177,794
======== ======== ======== ========
One- to-Four Family Mortgage Loans
The largest portions of mortgage loans are made for the purpose of enabling
borrowers to purchase one- to-four family residences secured by first liens on
the properties. The Bank originates balloon, adjustable rate ("ARM") and fixed
rate mortgage loans secured by one-to-four family residences with terms of up to
30 years. FHA and VA loans are also offered and then sold, servicing released,
in the secondary market. Borrower demand for ARM loans versus fixed rate
mortgage loans depends on various factors, including but not limited to,
interest rates offered, the expectations of changes in the short and long term
levels of interest rates and loan fees charged. The relative amounts of fixed
rate, balloon and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. The majority of
fixed rate loans are sold in the secondary market, some with servicing released
and some with servicing retained.
The Bank originates three, five and seven year balloon mortgage loans, the
majority of which are in the three-year category. These mortgages contain no
contractual assurances that the loan will be renewed. At maturity, the loan is
generally rewritten and re-recorded. If the borrower's loan payment history is
satisfactory, a new appraisal is not required. Management believes that balloon
loans have a pricing characteristic that helps offset the detrimental effect
that rising rates could have on net interest income because the balloon loans do
not contain interest rate adjustment caps. At September 30, 2003, balloon
mortgages were $6.8 million or 1.8% of the Bank's loan portfolio.
The Bank offers ARM loans that adjust every year, with the initial adjustment
coming one, three, five, seven or ten years after origination. The loans have
terms from 10 to 30 years and the interest rates on these loans are generally
based on Treasury bill indices. The annual interest rate cap (the maximum amount
which the interest rate may increase in a year) on the Bank's ARM loans is
generally 2.0% and the lifetime cap is generally 6.0% over the initial rate of
the loan. The Bank considers market factors and competitive rates on loans, as
well as its own cost of funds when determining the rates on the loans it offers.
The Bank does not originate loans with negative amortization.
Residential Construction Lending
The Bank originates residential construction loans to qualified owner-occupants
for the construction of one- to-four family residential properties in multiple
states and generally have terms from six to twelve months. Construction loans
are also made to builders on a pre-sold, speculative and model home basis. Loans
for speculative housing construction are made to area builders only after a
thorough background check, which includes an analysis of the builder's financial
statements, credit reports and reference checks with sub-contractors and
suppliers, has been made. The Bank limits the number of speculative and/or model
home loans made to builders based on a review of the builder's financial
statements. Loan proceeds are disbursed through title companies in increments as
construction progresses and only after a physical inspection of the project has
been made. Accrued interest on loan disbursements is paid monthly.
Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes because collateral value and
construction costs can only be estimated at the time the loan is approved.
5
The Bank has expanded their residential construction lending in recent years and
currently does business in 44 states. The following table indicates the
percentage of construction loans outstanding by state.
% OF TOTAL
STATE OUTSTANDING
----------------------------------------------------------------
Minnesota 40.1%
Wisconsin 10.4%
Michigan 6.1%
Colorado 5.9%
40 Other States 5% or less
The majority of these loans are referred to the Bank by a network of national
home builders and are made on a construction-permanent basis. The loan is made
to the owner-occupant based on sworn construction statements and prior to any
disbursements being made, the property is inspected and various title insurance
companies obtain lien waivers. These loans generally have yields that are higher
than market interest rates. When construction is complete, a final inspection is
performed and a modification agreement is executed. The loan is then sold in the
secondary market, servicing released.
Land Acquisition and Development Loans, Commercial Real Estate and Multi-Family
Lending
The Bank originates land loans on residential properties located in the Bank's
primary market area. Land lending generally involves additional risks to the
lender as compared with residential mortgage lending. This risk is attributable
to the fact that loan funds are advanced upon the security of land under
development and predicated on the future value of the property upon completion
of development. Loans on undeveloped land may run the risk of adverse zoning
changes and environmental or other restrictions on future use. Because of these
factors, the analysis of land loans requires an expertise that is different in
significant respects from that which is required for residential lending.
Commercial real estate loans are permanent loans secured by improved property
such as office buildings, retail or wholesale facilities, industrial buildings
or other non-residential buildings. Commercial real estate loans may be
originated in amounts up to 80% of the mortgaged property's appraised value as
determined by a certified or licensed independent appraiser.
Multi-family residential real estate loans are permanent loans secured by
apartment buildings. Of primary concern in multi-family residential real estate
lending is the borrower's creditworthiness, feasibility and cash flow potential
of the project. Loans secured by income properties generally are larger and
involve greater risks than residential mortgage loans because payments are often
dependent on the successful operation or management of the properties. As a
result, repayment of such loans may be subject to, more than residential real
estate loans, adverse conditions in the real estate market or the economy. In
order to monitor cash flows on income properties, the Bank requires borrowers
and loan guarantors, if any, to provide annual financial statements and rent
rolls on multi-family loans. At September 30, 2003, the outstanding balance for
the five largest land acquisition and development, commercial real estate and
multi-family loans ranged from $2.5 million to $4.0 million with an average
committed outstanding balance of $3.1 million. All five of these loans are
current and have performed in accordance with their terms.
Commercial Business Lending
The Bank makes commercial business loans for a variety of purposes, including;
working capital, accounts receivable, inventory, equipment and acquisitions. The
Bank has no energy or foreign loans.
Residential mortgage loans are generally made on the basis of the borrower's
ability to make repayments from his or her employment income and also other
income sources. These residential mortgage loans are secured by real property
with a value that is easily ascertained. Commercial business loans are generally
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself, which is likely to be dependent upon the general
economic environment. Business assets, such as accounts receivable, equipment,
inventory and real estate may secure the Bank's commercial business loans.
However, the collateral securing these loans may depreciate over time, may be
difficult to appraise or may fluctuate in value based on the success of the
business.
6
The Bank recognizes the increased risk associated with commercial business
lending. The Bank's commercial business lending policy emphasizes (1) credit
file documentation, (2) analysis of the borrower's character, (3) analysis of
the borrower's capacity to repay the loan, (4) adequacy of the borrower's
capital and collateral and (5) evaluation of the industry conditions affecting
the borrower. Analysis of the borrower's past, present and future cash flows is
also an important aspect of the Bank's credit analysis. The Bank plans to
continue to expand its commercial business lending, subject to market
conditions.
The Bank generally obtains annual financial statements from borrowers for
commercial business loans. These statements are analyzed to monitor the quality
of the loan. As of September 30, 2003, the outstanding balances for the five
largest commercial business loans ranged from $1.1 million to $7.5 million, with
an average committed balance outstanding of $3.7 million. All five loans are
current and have performed in accordance with their terms.
Agricultural Lending
The Bank originates loans to finance the purchase of farmland, livestock, farm
machinery and equipment, seed, fertilizer and for other farm related products.
Agricultural operating loans are originated at either an adjustable or fixed
rate of interest for up to one year or, in the case of livestock, upon sale.
Such loans provide for payments of principal and interest at least annually or a
lump sum payment upon maturity if the original term is less than one year. Loans
secured by agricultural machinery are generally originated as fixed rate loans
with terms of up to five years.
Agricultural real estate loans are frequently originated with adjustable rates
of interest. Generally, such loans provide for a fixed rate of interest for the
first three years adjusting annually thereafter. In addition, such loans
generally provide for a ten year term based on a twenty year amortization
schedule. Adjustable rate agricultural real estate loans are generally limited
to 80% of the value of the property securing the loan.
Agricultural lending affords the Bank the opportunity to earn yields higher than
on one-to-four family residential lending. Consequently, agricultural loans
typically have larger balances and involve a greater degree of risk than
one-to-four family residential mortgage loans. In addition, payments on loans
are dependent on the successful operation or management of the farm property
securing the loan or for which an operating loan is utilized. The success of the
loan may also be affected by any number of factors outside the control of the
farm borrower.
Weather presents one of the greatest risks as hail, drought, floods or other
conditions can severely limit crop yields and thus impair loan repayments and
the value of the underlying collateral. This risk can be diminished with
multi-peril crop insurance, which guarantees set yields to provide certainty of
repayment. Unless circumstances merit otherwise, the Bank generally requires its
borrowers to procure multi-peril crop or hail insurance. In addition, recent
changes in government support programs generally require that farmers procure
multi-peril crop insurance in order to be eligible for participation in such
programs.
Grain and livestock prices also present a risk as prices may decline prior to
sale resulting in a failure to cover production costs. The farmer, with the use
of futures contracts or options to provide a "floor" below which prices will not
fall, may reduce these risks. The Bank does not monitor nor require the use of
futures contracts or options.
Another risk is the uncertainty of government programs and other regulations.
Some farmers rely on the income from government programs to make loan payments
and if these programs are discontinued or significantly changed, cash flow
problems or defaults could result.
Finally, many farms are dependent on a limited number of key individuals whose
injury or death may result in an inability to successfully operate the farm. At
September 30, 2003, the outstanding balance on First Federal's five largest
agricultural borrowers ranged from $1.1 million to $2.8 million, with an average
committed outstanding balance of $1.9 million. All five of these loans are in
the Bank's market area, are current and have performed in accordance with their
terms.
7
Consumer and Other Loans
The Bank originates consumer loans for a variety of purposes, including home
equity, home improvement, automobile and other. Federal regulations permit
federally chartered thrift institutions to make secured and unsecured consumer
loans in an amount up to 35% of an institution's assets. The Bank originates
consumer loans in order to provide a wide range of financial services to its
customers and because the shorter terms and generally higher interest rates help
maintain a profitable spread between the Bank's average loan yield and cost of
funds.
In connection with consumer loan applications, the Bank verifies the borrower's
income and reviews credit bureau reports. In addition, the relationship of the
loan to the value of the collateral is considered. Consumer loans entail greater
risk than one-to-four family residential mortgage loans, in part because
consumer loans are secured by rapidly depreciable assets such as automobiles or
are unsecured. Repossessed collateral securing a defaulted loan may not provide
an adequate source of repayment on the outstanding loan balance since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan repayment is dependent on the borrower's continuing
financial stability and therefore more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Finally, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans in the event of a default.
Loan Approval Authority and Underwriting
The primary source of mortgage loan applications is referrals from existing or
past customers. Applications are also solicited from real estate brokers,
contractors, call-ins and walk-ins to the offices. In addition, the Bank
solicits construction loan applications from national homebuilders.
Upon receipt of any loan application from a prospective borrower, a credit
report is ordered and verifications of specific information relating to the loan
applicant's employment, income and credit standing are requested. An appraisal
or valuation determination, subject to regulatory requirements, of the real
estate intended to secure the proposed loan is undertaken. In connection with
the loan approval process, underwriters analyze the loan applications and the
property involved. All residential, home equity, multi-family, construction and
commercial real estate loans are underwritten subject to the loan underwriting
policies as approved by the Board of Directors. In general, the Board of
Directors must approve any loan in excess of $1.0 million.
Loan applicants are promptly notified of the decision by a letter setting forth
the terms and conditions of the decision. If approved, these terms and
conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged and the notice of
requirement of insurance coverage to be maintained. Title insurance or a title
opinion is required on first mortgage loans, as well as fire and casualty
insurance on all properties securing loans. Insurance must be maintained during
the entire term of the loan. Flood insurance is also required, if appropriate.
Loans to One Borrower
Under federal law, federally chartered savings banks have, subject to certain
exemptions, aggregate lending limits to one borrower equal to 15% of the
institution's unimpaired capital and surplus. As of September 30, 2003, the
outstanding balance on First Federal's five largest lending relationships
included a $4.0 million commercial line of credit, a $7.5 million line of credit
to an unaffiliated mortgage banking company, in which the Bank has been approved
by it's regulators to exceed its loans to one borrower limits as it is secured
by first mortgages. Also a $4.8 million in land development loans to a local
developer, a $4.0 million line of credit secured by real estate and a land
development loan to a local developer with a gross commitment of $6.9 million in
which there is an agreement with the borrower that the Bank will not disburse
funds over its lending limit. This is approximately 5.6% of the total loans. At
September 30, 2003, all of these loans were within the loans to one borrower
limitations, performing in accordance with their terms and at market rates of
interest.
Loan Servicing
The Bank services almost all of the loans that it retains in the portfolio.
However, HMC does not engage in any loan servicing. Loan servicing includes
collecting and remitting loan payments, accounting for principal and interest,
making advances to cover delinquent payments, making inspections of mortgaged
premises (as required), contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering the loans. Funds that have been escrowed by borrowers
for the payment of mortgage related expenses, such as property taxes,
8
hazard insurance and mortgage insurance premiums, are maintained in non-interest
bearing accounts at the Bank. At September 30, 2003, the Bank had $101,000
deposited in escrow accounts for loans serviced for others.
The following table presents information regarding the loans serviced by the
Bank for others at the dates indicated:
September 30,
-----------------------------------
2003 2002 2001
-----------------------------------
(In Thousands)
Mortgage loan portfolios serviced for:
FHLMC $ 15,811 $ 36,024 $ 42,736
Other Investors 14,307 10,069 10,232
-----------------------------------
$ 30,118 $ 46,093 $ 52,968
===================================
The Bank receives fees for servicing mortgage loans sold to others, generally
about 0.25% per annum on the declining balance of mortgage loans, to compensate
the Bank for the cost of performing the servicing functions. Another source of
loan servicing revenues is late fees on loans the Bank holds. For the years
ended September 30, 2003, 2002 and 2001, the Bank earned gross loan servicing
and late fees of $182,000, $303,000 and $276,000, respectively. The Bank retains
a portion of funds received from borrowers on the loans it services for others
as payment of the servicing fees.
NON-PERFORMING AND PROBLEM ASSETS
Loan Collections and Delinquent Loans
The Bank's collection procedures provide that when a loan is 30 days or more
delinquent, the borrower is contacted by mail or telephone and payment is
requested. If the delinquency continues, subsequent efforts will be made to
contact the borrower. In certain instances, the Bank may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to reorganize
his financial affairs. Once a loan delinquency exceeds 60 days, it is classified
as special mention and the Bank attempts to work with the borrower to establish
a repayment schedule to cure the delinquency. If the borrower is unable to
remedy the delinquency, the Bank will institute foreclosure proceedings. If
foreclosure action is taken and the loan is not reinstated, paid in full or
refinanced, the property is sold at a judicial sale at which the Bank may be the
buyer if there are no offers to satisfy the debt. Any property acquired as the
result of foreclosure or by deed in lieu of foreclosure is classified as
foreclosed real estate until such time as it is sold or otherwise disposed of by
the Bank. At September 30, 2003, the Bank had $1.2 million of foreclosed real
estate, consisting of eight single family residential construction loans. When
foreclosed real estate is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value less related
disposition costs. Any write down of the property is charged to the allowance
for loan losses.
Non-performing Assets
Loans are reviewed on a regular basis and are placed on non-accrual status when,
in the opinion of management, the collection of additional interest is doubtful.
Residential mortgage loans are generally placed on non-accrual status when
either principal or interest is 90 days or more past due. Consumer loans are
generally charged off when the loan becomes over 90 days delinquent. Commercial
business and real estate loans are generally placed on non-accrual status when
the loan is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
9
The following table sets forth information with respect to the Bank's
non-performing assets. During the periods indicated, the Bank had no
restructured loans within the meaning of Statement of Financial Accounting
Standards (SFAS) No. 15.
At September 30,
------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 3,819 $ 3,133 $ 1,043 $ 323 $ -
Permanent loans secured by one to
four family units 483 482 78 55 205
Non-residential loans 884 74 - - -
Non-mortgage loans:
Commercial and agricultural 411 647 1,195 452 -
Consumer 442 537 637 159 22
------------------------------------------------------------
Total non-accrual loans 6,039 4,873 2,953 989 227
Foreclosed real estate and real estate
held for investment 1,152 122 126 321 323
------------------------------------------------------------
Total non-performing assets $ 7,191 $ 4,995 $ 3,079 $ 1,310 $ 550
============================================================
Total non-performing loans to net loans 1.61% 1.18% 0.84% 0.29% 0.08%
============================================================
Total non-performing loans to total assets 1.12% 0.92% 0.62% 0.21% 0.05%
============================================================
Total non-performing assets to total assets 1.33% 0.94% 0.65% 0.28% 0.13%
============================================================
There were 28 residential construction loans accounted for on a non-accrual
basis. The borrower in three of the loans lost their jobs prior to the start of
construction and negotiations continue with the title company associated with
one loan were the title company failed to identify a life estate in the
property. A flood determination company failed to identify a property that is in
a flood plain and they are attempting to rectify the error, four properties are
listed for sale and the remainder should be resolved in a satisfactory manner.
The non-residential loan is a participation with another financial institution
on a multi-use commercial/industrial building. The remaining commercial loans
should be resolved in a satisfactory manner. Loans that are in the liquidation
process are evaluated for impairment and the balances are written down to fair
value, if necessary, in accordance with SFAS 114.
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was approximately
$394,000 for the year ended September 30, 2003.
Classified Assets
Management, in compliance with regulatory guidelines, has instituted an internal
loan review program, whereby loans are classified as special mention,
substandard, doubtful or loss. As part of the classification process, all loans
are divided into two categories; homogenous and non-homogenous loans. In
general, homogenous loans are one-to-four family residential loans and consumer
loans. All other loans are considered to be non-homogenous. The Bank's Asset
Quality Committee reviews all non-homogenous loans that have exhibited weakness.
These loans are subjected to the impairment testing requirements of SFAS 114,
"Accounting by Creditors for Impairment of a Loan".
Management has established a watch list for loans that do not warrant adverse
classification but nonetheless may possess potential weaknesses and require
close attention. Assets classified as special mention are homogenous loans that
are not yet substandard. Assets classified as substandard are characterized by
the possibility that the Bank may sustain some loss if the deficiencies are not
corrected.
10
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, and 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 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. 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.
Management's evaluation of the classification of assets and the adequacy of the
reserve for loan losses is reviewed by regulatory agencies as part of their
periodic examinations. At September 30, 2003, the Bank had total classified
assets of $14.5 million, of which $9.3 million were considered substandard and
no assets were classified as doubtful or loss. For additional discussion see-
Non-Performing and Problem Assets. Special mention assets totaled $5.2 million
at September 30, 2003.
Allowance for Loan and Lease Losses and Foreclosed Real Estate
In making loans, the Bank recognizes that 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. Management
evaluates the established reserves against loan losses 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, prior loss experience,
economic conditions and overall portfolio quality. While management recognizes
and charges against the allowance for loan losses for accounts that are
determined to be uncollectible, experience indicates that at any given point in
time, possible losses may exist in the loan portfolio which are not specifically
identifiable. Therefore, based upon management's best estimate, each year an
amount may be charged to earnings to maintain the allowance for loan losses at a
level sufficient to recognize potential risk.
The Bank believes it has established its existing allowance for loan losses in
accordance with GAAP. However, there can be no assurance that banking
regulators, in reviewing the Bank's loan portfolio, will not request First
Federal to 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 may negatively affect the Bank's financial
condition and earnings.
11
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
At September 30,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------
(Dollars in Thousands)
Average loans outstanding $403,388 $383,892 $344,470 $308,721 $274,676
=================================================================
Allowance balance (beginning of period) $ 1,681 $ 1,541 $ 1,534 $ 1,387 $ 1,035
-----------------------------------------------------------------
ING branch acquisition $ - $ 274 $ - $ - $ -
-----------------------------------------------------------------
Provision (credit):
Residential and construction 983 283 85 - -
Land and Commercial real estate - - 30 60 20
Commercial/agricultural business 167 220 772 156 418
Consumer 78 308 190 - 18
-----------------------------------------------------------------
Total provision 1,228 811 1,077 216 456
Charge off:
Residential and construction 719 174
Land and Commercial real estate 73 - - - -
Commercial/agricultural business 160 282 756 - -
Consumer 341 532 371 98 142
-----------------------------------------------------------------
Total charge offs 1,293 988 1,127 98 142
Recoveries:
Commercial real estate - - 35 - -
Consumer 85 43 22 29 38
-----------------------------------------------------------------
Total recoveries 85 43 57 29 38
-----------------------------------------------------------------
Net charge offs 1,208 945 1,070 69 104
-----------------------------------------------------------------
Allowance balance (at end of period) $ 1,701 $ 1,681 $ 1,541 $ 1,534 $ 1,387
=================================================================
Allowance as percent of net loans 0.45% 0.41% 0.44% 0.44% 0.48%
Net loans charged off as a percent of
average loans 0.30% 0.25% 0.31% 0.02% 0.04%
To further monitor and assess the risk characteristics of the loan portfolio,
loan delinquencies are reviewed to consider any developing loan problems. Based
upon the procedures in place, the Bank's experience regarding charge-offs and
recoveries and the current risk elements in the portfolio, management believes
the allowance for loan losses at September 30, 2003 is adequate. However,
assessment of the adequacy of the allowance for loan losses involves subjective
judgments regarding future events and thus there can be no assurance that
additional provisions for loan losses will not be required in future periods.
The following table sets forth the breakdown of the allowance for loan losses by
loan category:
September 30,
-----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
Real Estate:
One-to-four family $ 23 8.4% $ 37 13.9% $ 49 19.1% $ 59 26.3% $ 73 38.8%
Residential construction 334 53.9% 206 46.3% 117 33.2% 59 21.5% 25 13.8%
Multi-family 62 1.6% 44 1.2% 48 1.4% 47 1.2% 56 1.8%
Land and commercial real estate 320 8.4% 535 12.7% 390 12.9% 473 13.2% 486 11.7%
Agricultural loans 424 11.7% 319 10.9% 318 11.7% 245 11.4% 200 10.7%
Commercial business 214 4.7% 205 4.0% 239 5.6% 298 7.8% 297 9.6%
Consumer loans 324 11.3% 335 11.0% 380 16.1% 353 18.6% 250 13.6%
----------------------------------------------------------------------------------------
$ 1,701 100.0% $ 1,681 100.0% $ 1,541 100.0% $ 1,534 100.0% $ 1,387 100.0%
========================================================================================
12
INVESTMENT AND MORTGAGE-BACKED SECURITIES ACTIVITIES
General
Federally chartered thrift institutions have the authority to invest in various
types of liquid assets; including United States Treasury obligations, securities
of various Federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and loans on Federal Funds. To supplement lending activities, subject to various
restrictions, the Bank invests a portion of its assets in commercial paper,
corporate debt securities and asset backed securities. A significant portion of
the Bank's income during recent years has been attributable to interest income
on such securities. The Corporation does not have the same investment
limitations as the Bank.
Mortgage-Backed and Related Securities
First Federal invests in residential mortgage-backed securities guaranteed by
participation certificate issues by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA"). The mortgage-backed securities portfolio
as of September 30, 2003 consisted of $20.4 million in Real Estate Mortgage
Investment Conduits ("REMICs"), $5.9 million in a FNMA certificate and $3.7
million in FHLMC certificates.
Mortgage-backed securities represent a participation interest in a pool of
single family or multi-family mortgages. The principal and interest payments are
passed from the mortgage originator through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interest
in the form of securities to investors such as the Bank. Such quasi-governmental
agencies, which guarantee the payment of principal and interest to investors,
primarily include FHLMC, FNMA and GNMA.
Mortgage-backed securities typically are issued with stated principal amounts
and pools of mortgages that have loans with interest rates that are within a
range and have varying maturities. The underlying pool of mortgages is primarily
composed of either fixed rate or adjustable rate mortgage loans. Mortgage-backed
securities are generally referred to as mortgage participation certificates or
pass-through certificates and as a result, the interest rate risk
characteristics of the underlying pool of mortgages, as well as prepayment risk
are passed on to the certificate holder. The life of a mortgage-backed
pass-through security is equal to the life of the underlying mortgages.
Mortgage-backed securities issued by FHLMC, FNMA and GNMA make up a majority of
the pass-through market.
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to thirty
years. In periods of declining interest rates, mortgage payments are received
faster than the contractual requirement, causing the estimated lives of mortgage
related securities to be significantly shorter than expected.
REMICs are typically issued by a special purpose entity ("issuer"), which may be
organized in a variety of legal forms, such as a trust, a corporation or a
partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage-related securities. Once combined, the cash
flows can be divided into tranches or classes of individual securities, thereby
creating more predictable average duration for each security than the underlying
pass-through pools. Accordingly, under this security structure all principal pay
downs from the various mortgage pools are allocated to a mortgage related class
or classes structured to have priority until it has been paid off. Thus, these
securities are intended to address the reinvestment concerns associated with
mortgage-backed securities pass-through, namely that (i) they tend to pay off
when interest rates fall thereby taking their relatively high coupon with them
and (ii) their expected average life may vary significantly among the different
tranches.
Some REMIC instruments are more like traditional debt instruments because they
have stated principal amounts and traditionally defined interest rate terms.
Purchasers of certain other REMIC securities are entitled to any excess of the
issuer's cash inflows, including reinvestment earnings, over the cash outflows
for debt service and administrative expenses. These mortgage related instruments
may include instruments designated as residual interests and are riskier in that
they could result in the loss of a portion of the original investment. Cash
flows from residual interests are very sensitive to prepayments and thus,
contain a high degree of interest rate risk. Residual interest represents an
ownership interest in the underlying collateral, subject to the first lien of
the REMICs investors.
13
The REMICs held by the Bank at September 30, 2003 consist of floating rate
tranches. The interest rate of all the Bank's floating rate securities adjusts
monthly and provides the institution with net interest margin protection in an
increasing market rate environment. The securities are backed by mortgages on
one-to-four family residential real estate and have contractual maturities up to
30 years. None of the securities are deemed to be "high risk" according to OTS
guidelines. The securities are primarily companion tranches to "PACs" and
"TACs". PACs and TACs (Planned and Targeted Amortization Classes) are designed
to provide a specific principal and interest cash flow. Principal payments that
are received in excess of the amount needed for the PACs and TACs are allocated
to the companion tranches. When the PACs and TACs are repaid in full, all
principal is then used to pay the companion tranches. Although the timing of
principal payments may be impacted by the amount of prepayments (the higher the
level of prepayments, the sooner the principal will be received), all of the
principal and interest payments are guaranteed.
Investment Securities
The Bank is required under federal regulation to maintain a sufficient level of
liquid assets that may be invested in specified short-term securities and
certain other investments. However, the OTS does not prescribe by regulation to
a minimum amount or percentage of liquid assets. Liquidity levels may be
increased or decreased, depending upon the yields on investment alternatives and
upon management's judgement as to the attractiveness of the yields available in
relationship to other opportunities. Also expectations of future yield levels,
as well as management's projections as to the short-term demand for funds, are
used in the Bank's loan originating and other activities. These securities
consist mainly of U.S. Government Securities and U.S. Government Agency
obligations. The Bank also invests in debt and equity securities.
The Board of Directors is responsible for establishing the investment policy of
the Bank. It is designed to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk and
to compliment the Bank's lending activity. The policy currently provides for
investments available for sale.
The amount of short-term securities reflects management's strategy to provide
interest rate adjustments for securities that are shorter than their maturity.
It is the intention of management to maintain a repricing structure in the
Bank's investment portfolio that better matches the interest rate sensitivities
of its assets and liabilities. However, during periods of rapidly declining
interest rates, such investments also decline at a faster rate than the yields
on fixed rate investments. Investment decisions are made within policy
guidelines established by the Board of Directors. Unless loan demand increases,
the Bank intends to maintain its investments at current levels.
Investment Activities
Current regulatory and accounting guidelines regarding investment securities
(including mortgage-backed securities) require the Corporation to categorize
securities as held to maturity, available for sale or trading. As of September
30, 2003, the Corporation had securities classified as available for sale in the
amount of $54.1 million. There were no securities classified as trading or held
to maturity. Securities classified as available for sale are reported for
financial purposes at the fair market value with net changes in the market value
from period to period included as a separate component of stockholders' equity,
net of income taxes. At September 30, 2003, the Corporation's securities
available for sale had an amortized cost of $53.5 million and a market value of
$54.1 million. Changes in the market value of securities available for sale do
not affect the Corporation's income. In addition, changes in the market value of
securities available for sale do not affect the Bank's regulatory capital
requirements or its loan to one borrower limit.
14
Investment and Mortgage-Backed Securities Portfolio
The following table sets forth the carrying value of First Federal's investment
securities portfolio, short-term investments, FHLB stock and mortgage-backed and
related securities at the dates indicated:
September 30,
------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
Investment securities:
Debt securities held to maturity $ - $ 12,447 $ 12,420
Debt securities available for sale 12,178 - 3,055
FHLB Stock 4,797 5,925 5,925
Equity securities available for sale 12,009 12,046 12,021
-------- -------- --------
Total investment securities 28,984 30,418 33,421
Interest bearing deposits 77,045 11,018 9,767
Mortgage-backed and related securities:
Mortgage-backed and related securities held to maturity - 20,679 25,731
Mortgage-backed and related securities available for sale 29,923 29,196 27,481
-------- -------- --------
Total mortgage-backed and related securities
29,923 49,875 53,212
-------- -------- --------
Total investments $135,952 $ 91,311 $ 96,400
======== ======== ========
15
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
portfolio at September 30, 2003:
Adjustable One Year or Less One to Five Years Five to Ten More than Ten Total Investment
Years Years Securities
----------------- ----------------- ---------------- ---------------- ----------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
U. S.
Government
and Federal
Agency
obligations
available for
sale $ - -% $ 2,011 4.00% $ 8,707 5.32% $ - 0.00% $ 1,460 7.02% $ 12,178 5.28% $ 12,178
Equity
securities
available
for sale 12,009 1.77 - - - - - - - $ 12,009 1.77 12,009
FHLB Stock N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A $ 4,797 3.00 4,797
Mortgage-backed
and related
securities
available
for sale 20,411 3.31 - - 1,057 3.47 1,986 5.50 6,469 5.18 $ 29,923 4.00 29,923
Interest-bearing
deposits 77,045 0.70 - - - - - - - $ 77,045 0.70 77,045
--------- ------- ------- ------- -------- --------- --------
Total $ 109,465 1.30% $ 2,011 4.00% $ 9,764 5.12% $ 1,986 5.50% $ 7,929 5.51% $135,952 2.01% $135,952
========= ======= ======= ======= ======== ========= ========
16
DEPOSITS AND OTHER SOURCES OF FUNDS
General
Deposits are a major source of funds for the Bank's lending and other investment
purposes. In addition to deposits, the Bank derives funds from loan and
mortgage-backed securities principal payments, interest on investment
securities, proceeds from the maturity of mortgage-backed securities and
investment securities and borrowings. Loan and mortgage-backed securities
payments are a relatively stable source of funds, while general interest rates
and money market conditions significantly influence deposit inflows. Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer-term
basis for general business purposes.
Deposits
First Federal offers a wide variety of deposit accounts, constantly striving to
meet consumer's needs by offering new products. In addition to interest rate
risk management and asset/liability ratios, this is taken into consideration
prior to offering new products. Deposit account terms vary primarily as to the
required minimum balance amount, the amount of time that the funds must remain
on deposit and the applicable interest rate.
The Bank's current deposit products include regular savings, demand deposits,
NOW, money market and certificate of deposit accounts ranging in terms from 91
days to 5 years including certificates of deposit with negotiable interest rates
and balances in excess of $100,000 (jumbo certificates) and Individual
Retirement Accounts (IRAs). All checking and savings accounts are eligible for
an Express Teller ATM card. This card can be used at any Express Teller,
Fastbank, or Instant Cash ATM in Minnesota and surrounding states. With the
addition of the Plus and Cirrus network automated banking system, First
Federal's Express Teller ATM card can be used at thousands of ATM locations
throughout the United States and the world.
Deposits are obtained primarily from residents in the Minnesota counties of
McLeod, Dakota, Meeker, Sibley, Carver, Wright, Benton, Sherburne, Stearns and
Washington. First Federal attracts deposit accounts by offering a wide variety
of products, competitive interest rates, convenient locations and service hours.
The Bank uses traditional methods of advertising to attract new customers and
deposits, including radio and print media advertising.
The Bank pays interest on its deposits, which is competitive in the marketplace.
Interest rates on deposits are set weekly, based on a number of factors
including; the previous week's deposit flow, a current survey of a selected
group of competitor's rates for similar products, external data which may
influence interest rates, investment opportunities, loan demand and scheduled
maturities.
The following table indicates the amount of the Bank's certificates of deposit
of $100,000 or more by time remaining until maturity as of September 30, 2003:
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
Within three months $ 26,017
Three through six months 3,917
Six through twelve months 26,200
Over twelve months 13,129
--------
$ 69,263
========
Borrowings
Savings deposits are the primary source of funds for First Federal's lending
activities, investment activities and also for general business purposes. If
necessary, the Bank may rely upon advances from the FHLB of Des Moines to
supplement its lendable funds and to meet deposit withdrawal requirements.
Advances from the FHLB of Des Moines are typically secured by FHLB stock held by
First Federal and a portion of First Federal's residential mortgage loans and
other assets, which primarily consist of securities which are obligations of or
guaranteed by the U.S. Government.
17
Advances have been utilized when adequate spreads can be obtained and the risk
(credit risk, interest rate risk and market risk) in the transaction has been
maintained. Advances have been used to purchase mortgage-backed and related
securities and to purchase single family residential mortgages originated by
other financial institutions within the State of Minnesota.
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated:
As of and for the Years Ended
September 30,
--------------------------------------------
2003 2002 2001
--------------------------------------------
(Dollars in Thousands)
Maximum balance $ 98,000 $ 113,500 $ 127,500
Average balance 93,699 100,871 117,957
Balance at end of period 93,000 98,000 113,500
Weighted average rate:
at end of period 5.31% 5.56% 5.87%
during the period 5.43% 5.72% 6.00%
It is First Federal's policy to fund loan demand and investment opportunities
out of current loan and mortgage-backed securities repayments, investment
maturities and new deposits. However, the Bank has utilized FHLB advances to
supplement these sources. This policy may change in the future as investment
opportunities are presented or loan demand increases.
SUBSIDIARY ACTIVITY
As of September 30, 2003, the Corporation had two directly owned subsidiaries:
the Bank and the Agency.
The Bank is permitted to invest up to 2% of its assets in the capital stock of
subsidiary corporations in the form of secured or unsecured loans. An additional
investment of 1% of assets is permitted when such investments are utilized
primarily for community development purposes. As of September 30, 2003, the Bank
was authorized to invest up to approximately $10.8 million in the stock of
service corporations (based upon the 2% limitation). The Bank has two wholly
owned subsidiaries, Firstate Services, Inc. ("FSI") and Homeowners Mortgage
Corporation ("HMC"). On November 17, 1998, the Corporation acquired, in a
transaction that was a combination of stock and cash, all of the outstanding
shares of Homeowners Mortgage Corporation ("HMC"). As of June 1, 2000, HMC
became an operating subsidiary of the Bank. The transfer of HMC was recorded as
a non-cash capital contribution from the Corporation to the Bank. FSI was
incorporated in the State of Minnesota in August 1983 and is engaged in the
sale, on an agency basis, of mutual funds, annuities and life, credit life and
disability insurance products. HMC was incorporated in the State of Minnesota in
1988 and originates residential mortgage loans from two locations in Minnesota.
As of September 30, 2003, the net book value of First Federal's investment in
stock, unsecured loans and conforming loans in FSI and HMC was $103,000 and $1.9
million, respectively.
Insurance Planners (the "Agency") was incorporated in the State of Minnesota in
August 1983 and is engaged in the sale, on an agency basis, of property and
casualty insurance products. As of September 30, 2003, the net book value of the
Corporation's investment in stock, unsecured loans and conforming loans in its
subsidiary was $830,000.
18
PERSONNEL
As of September 30, 2003, the Corporation had 209 full time employees and 49
part time employees representing a total of 235.7 full time equivalents. The
employees are not represented by a collective bargaining agreement and the
Corporation believes its relationship with their employees is satisfactory.
REGULATION
Set forth below is a brief description of certain laws related to the regulation
of the Corporation and the Bank. The description does not purport to be complete
and is qualified in its entirety by reference to applicable laws and
regulations.
REGULATION OF THE CORPORATION
Recent Legislation to Curtail Corporate Accounting Irregularities
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Act"). The Securities and Exchange Commission (the "SEC") has promulgated
certain regulations pursuant to the Act and will continue to propose additional
implementing or clarifying regulations as necessary in furtherance of the Act.
The passage of the Act and the regulations implemented by the SEC subject
publicly traded companies to additional and more cumbersome reporting
regulations and disclosure. Compliance with the Act and corresponding
regulations may increase the Company's expenses.
General
The Corporation is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Corporation is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries, should such
subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Corporation.
As a unitary savings and loan holding company, the Corporation generally is not
subject to any restrictions on its business activities. While the
Gramm-Leach-Bliley Act ("GLB Act"), enacted in November 1999, terminated the
"unitary thrift holding company" exemption from activity restrictions on a
prospective basis, the Corporation enjoys grandfathered status under this
provision of the GLB Act because it acquired the Bank prior to May 4, 1999. As a
result, the GLB Act did not affect the Corporation's freedom from activity
restrictions as a unitary savings and loan holding company. However, if the
Corporation were to acquire control of an additional savings association, its
business activities would be subject to restriction under the Home Owners' Loan
Act. Furthermore, if the Corporation were in the future to sell control of the
Bank to any other company, such company would not succeed to the Corporation's
grandfathered status under the GLB Act and would be subject to the same activity
restrictions. The continuation of the Corporation's exemption from restrictions
on business activities as a unitary savings and loan holding company is also
subject to the Corporation's continued compliance with the Qualified Thrift
Lender ("QTL") test. See "-Regulation of the Bank- Qualified Thrift Lender
Test."
REGULATION OF THE BANK
General
Set forth below is a brief description of certain laws that relate to the
regulation of the Bank. The description does not purport to be complete and is
qualified in its entirety be reference to applicable laws and regulations. As a
federally chartered, SAIF-insured savings association, the Bank is subject to
extensive regulation by the OTS and the FDIC; consequently, lending activities
and other investment activity must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares
reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated, to a great extent by
federal and state law, especially in such matters as the ownership of savings
accounts and the form and content of the Bank's mortgage documents.
19
The Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
savings institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. This structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
Insurance of Deposit Accounts
The deposit accounts held by the Bank are insured by the SAIF to a maximum of
$100,000 or each insured member (as defined by law and regulation). Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the institution's primary regulator.
The Bank is required to pay insurance premiums, based on a percentage of its
insured deposits, to the FDIC for insurance of its deposits by the SAIF. The
FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. The FDIC has set the deposit
insurance assessment rates for SAIF-member institutions for the first six months
of 2004 at 0% to 0.27% of insured deposits on an annualized basis, with the
assessment rate for most savings institutions set at 0%.
In addition, all FDIC insured institutions are required to pay assessments to
the FDIC at an annual rate of approximately 0.003% of insured deposits to fund
interest payments on bonds issued by the Financing Corporation ("FICO"), an
agency of the Federal Government established to recapitalize the predecessor to
the SAIF. These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a
leverage ratio (core capital) equal to at least 3.0% of total adjusted assets
and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted
assets.
Dividend and Other Capital Distribution Limitations
The OTS imposes various restrictions or requirements on the ability of savings
institutions to make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan holding
company, such as the Bank, must file an application or a notice with the OTS at
least 30 days before making a capital distribution. Savings associations are not
required to file an application for permission to make a capital distribution
and need only file a notice if the following conditions are met: (1) they are
eligible for expedited treatment under OTS regulations, (2) they would remain
adequately capitalized after the distribution, (3) the annual amount of capital
distribution does not exceed net income for that year to date added to retained
net income for the two preceding years and (4) the capital distribution would
not violate any agreements between the OTS and the savings association or any
OTS regulations. Any other situation would require an application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (1) make the savings association undercapitalized,
significantly undercapitalized or critically undercapitalized, (2) raise safety
or soundness concerns or (3) violate a statute, regulation or agreement with the
OTS (or with the FDIC), or a condition imposed in an OTS approved application or
notice. Further, a federal savings association, like the Bank, can not
distribute regulatory capital that is needed for its liquidation account.
Qualified Thrift Lender Test
Federal savings institutions must meet one of two Qualified Thrift Lender
("QTL") tests. To qualify as a QTL, a savings institution must either (1) be
deemed a "domestic building and loan association" under the Internal Revenue
Code by maintaining at least 60% of its total assets in specified types of
assets, including cash, certain government securities, loans secured by and
other assets related to residential real property, educational loans and
investments in premises of the institution or (2) satisfy the statutory QTL test
set forth in the Home Owner's Loan Act by maintaining at least 65% of its
"portfolio assets" in
20
certain "Qualified Thrift Investments" (defined to include residential mortgages
and related equity investments, certain mortgage-related securities, small
business loans, student loans and credit card loans and 50% of certain community
development loans). For purposes of the statutory QTL test, portfolio assets are
defined as total assets minus intangible assets, property used by the
institution in conducting its business and liquid assets equal to 20% of total
assets. A savings institution must maintain its status as a QTL on a monthly
basis in at least nine out of every twelve months. A failure to qualify as a QTL
results in a number of sanctions, including the imposition of certain operating
restrictions and a restriction on obtaining additional advances from its FHLB.
At September 30, 2003, the Bank was in compliance with its QTL requirement.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Des Moines, which is one of twelve regional
FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB system. It makes loans to
members (i.e. advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Des Moines. This amount must be equal to at least 2 basis points of the Bank's
assets at December 31, 2002 and 4.45% of outstanding FHLB advances.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board might be used to satisfy the
liquidity requirements that are imposed by the OTS. At September 30, 2003, the
Bank was in compliance with these Federal Reserve Board requirements.
21
ITEM 2. PROPERTIES
The Bank operates from its main office located at 201 Main Street South,
Hutchinson, Minnesota. The Bank owns this 20,000 square foot office facility
which it built in 1985/86. The total investment in property and equipment at 201
Main Street South had a net book value of $2.0 million at September 30, 2003.
Additional offices, either owned or leased by the Bank, are set forth below with
information regarding net book value of the premises and equipment at such
facilities at September 30, 2003.
Year
Acquired or Net Book
Date Lease Value at Square
Location Expires September 30, 2003 Footage
- -------------------------------- ---------------------------------------------
(Dollars in thousands)
14994 Glazier Avenue
Apple Valley, MN 55124 1989 $238 3,000
305 10th Avenue S
Buffalo, MN 55313 1999 871 5,620
1002 Greeley Avenue
Glencoe, MN 55336 2000 392 1,980
1320 South Frontage Road
Hastings, MN 55033 1984 903 15,000
905 Highway 15 South,
Frontage Road
Hutchinson, MN 55350 1980 180 1,400
6505 Cahill Avenue
Inver Grove Heights, MN 55075 1979 215 3,000
501 North Sibley Avenue
Litchfield, MN 55355 1978 128 2,400
200 East Frontage Road,
Highway 5
Waconia, MN 55387 1985 250 2,400
122 East Second Street
Winthrop, MN 55396 2004 (1) 19 950
113 Waite Avenue South
Waite Park, MN 56387 2004 (2) 38 700
135 3rd Avenue SW
Hutchinson, MN 55350 2007 (3) 2 1,200
1001 Labore Industrial Court Suite E
Vadnais Heights, MN 55110 2006 (4) 209 7,748
1113 West Saint Germain Street
Saint Cloud, MN 56302 2001 (5) 907 8,360
1. Lease expires in July 2004 with option to renew for one-year terms. The
Bank expects to renew the lease.
2. Lease expires in September 2004.
3. Lease expires in April 2007.
4. Lease expires in January 2006.
5. Property acquired on November 9, 2001.
22
The Bank leases approximately 1,040 square feet of the property in Hastings,
Minnesota under an operating lease set to expire April 14, 2004, with annual
rents totaling $8,356 in addition to their proportionate share of the operating
expenses.
The Agency operates from its main office at 135 3rd Avenue Southeast,
Hutchinson, Minnesota and also has an office within the Bank's building in
Buffalo, Minnesota. Those facilities are covered by a month to month lease under
the terms of an expense sharing agreement.
HMC operates from its main office located at 1001 Labore Industrial Court,
Vadnais Heights, Minnesota and also has an office within the Bank's building in
Hastings, Minnesota. These facilities are covered by a month to month lease
under the terms of an expense sharing agreement.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and First Federal, from time to time, is a party to legal
proceedings in the ordinary course of business when it enforces security
interests in loans made by it. The Corporation and First Federal are not engaged
in any legal proceedings of a material nature at the present time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
For additional information relating to the market for the Corporation's common
equity and related stockholder matters, see "Corporate Profile and Stock Market
Information" in the Registrant's 2003 Annual Report to Stockholders on page 1
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The above captioned information appears under "Selected Financial Data" in the
Corporation's 2003 Annual Report to Stockholders on page 2 and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The above captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
2003 Annual Report to stockholders on pages 4 through 14 and is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The above information appears under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Registrant's 2003 Annual
Report to Stockholders on pages 4 through 14 and is incorporated herein by
reference.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Corporation and its subsidiaries,
together with the report thereon by Crowe Chizek and Company LLC appears in the
2003 Annual Report to Stockholders on pages 15 through 42 and are incorporated
herein by reference.
Quarterly Results of Operations on page 42 of the Annual Report is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
On May 9, 2003, Larson, Allen, Weishair & Co., LLP ("Larson Allen"), Certified
Public Accountants, resigned as the Company's independent auditors and the
Company appointed Crowe Chizek and Company LLC ("Crowe Chizek") as its new
independent auditors. The decision to change accountants was approved by the
Company's Board of Directors. Larson Allen's reports on the Company's
consolidated financial statements for the two fiscal years ended September 30,
2002 did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with audits of the two fiscal years ended September 30, 2002 and
any subsequent interim period preceding the date hereof, there were no
disagreements or reportable events between the Company and Larson Allen on any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which, if not resolved to the satisfaction of
Larson Allen, would have caused them to make a reference to the subject matter
of the disagreements or reportable events in connection with their reports.
During the two most recent fiscal years and the subsequent interim period to the
date hereof, the Company did not consult with Crowe Chizek regarding the
application of accounting principals to any transaction or as to any accounting,
auditing or financial reporting issues.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information contained under the sections captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Proposal I--Election of Directors" and
"Biographical Information" in the 2003 Proxy Statement (the "Proxy Statement")
are incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions. A copy of the Company's Code of Ethics
will be furnished, without charge, to any person who requests such copy by
writing to the Secretary, FSF Financial Corp., 201 Main Street South,
Hutchinson, Minnesota 55350.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Director and Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof--Security Ownership of Certain
Beneficial Owners" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof--Security Ownership of Certain
Beneficial Owners" and "Proposal I - Election of Directors" of
the Proxy Statement.
(c) Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, in which the
operation may, at a subsequent date result in a change in control
of the Corporation.
(d) EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
------------------------------------------------------------------------------------
Equity compensation plans
- -------------------------
approved by shareholders:
- -------------------------
1994 Stock Option Plan 55,848 $ 9.68 7,481
1998 Stock Option Plan 242,115 16.93 1,185
Restricted Stock Plan 2,800 N/A 38,964
- ---------------------
Equity compensation plans
- -------------------------
not approved by shareholders (1) - $ - -
-----------------------------
--------------------------------------------------------------------------
TOTAL 300,763 15.43 47,630
(1) Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
section captioned "Certain Relationships and Related Transactions" in the Proxy
Statement.
25
PART IV
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this item as incorporated herein by reference to
the Section entitled Audit Fees and All Other Fees in the Proxy Statement.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) The consolidated statements of financial condition of the Corporation
and subsidiaries as of September 30, 2003 and 2002 and the related
consolidated statements of operations, comprehensive income, changes
in stockholders' equity and cash flows for the three fiscal years
ended September 30, 2003, together with the related notes and the
independent auditors' report of Crowe Chizek and Company LLC,
independent certified public accountants, are incorporated by
reference to pages 15 through 42 of the 2003 Annual Report to
Stockholders.
(2) Financial Schedules
The Company is filing herewith the Report of its Independent Auditor
on its Consolidated Financial Statements for the fiscal years ended
September 30, 2002 and 2001, which has been excluded from its Annual
Report to Stockholders for the fiscal year ended September 30, 2003 in
accordance with Note 1 to Rule 14a-3(b)(1).
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of FSF Financial Corporation *
3.2 Bylaws of FSF Financial Corporation *
4.0 Stock Certificate of FSF Financial Corporation *
10.1 Form of Employment Agreement with Donald A. Glas, George B. Loban and
Richard H. Burgart *
10.2 First Federal fsb Management Stock Plan **
10.3 FSF Financial Corporation 1996 Stock Option Plan **
10.4 FSF Financial Corporation 1998 Stock Compensation Plan ***
13.0 Portions of the 2002 Annual Report to Stockholders
21.0 Subsidiary Information (See "Item 1-Business")
23.1 Consent of Crowe Chizek and Company LLC
23.2 Consent of Larson, Allen, Weishair & Co., LLP
31.0 Rule 13a-14(a)/15d-14(a) Certifications
32.0 Section 1350 Certification
(b) Reports on Form 8-k
The Registrant filed a Report on Form 8-K pursuant to items
7 and 12 on July 22, 2003, to report earnings for the
quarter ended June 30, 2003.
- --------------------------------------------------------------------------------
* 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.
26
Larson Allen SM
CPAs, Consultants & Advisors
www.larsonallen.com
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
FSF Financial Corp. and Subsidiaries
Hutchinson, Minnesota
We have audited the accompanying consolidated statements of financial condition
of FSF Financial Corp. and Subsidiaries ("the Corporation") as of September 30,
2002 and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows for each of the two fiscal years
in the period ended September 30, 2002. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Corporation as
of September 30, 2002 and the consolidated results of their operations and their
cash flows for each of the fiscal years in the two-year period ended September
30, 2002, in conformity with accounting principles generally accepted in the
United State of America.
/s/Larson, Allen, Weishair & Co., LLP
Larson, Allen, Weishair & Co., LLP
Austin, Minnesota
October 26, 2002
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FSF FINANCIAL CORP.
Dated: December 18, 2003 By: /s/ Donald A. Glas
---------------------------------
Donald A. Glas
Co-Chair of the Board and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
By: /s/ Donald A. Glas By: /s/ Richard H. Burgart
------------------------------------------------- --------------------------------------------
Donald A. Glas Richard H. Burgart
Co-Chair of the Board and Chief Executive Officer Chief Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Director
Date: December 18, 2003 Date: December 18, 2003
By: /s/ George B. Loban By: /s/ Sever B. Knutson
------------------------------------------------- --------------------------------------------
George B. Loban Sever B. Knutson
Co-Chair of the Board and President Director
Date: December 18, 2003 Date: December 18, 2003
By: /s/ Roger R. Stearns By: /s/ James J. Caturia
------------------------------------------------- --------------------------------------------
Roger R. Stearns James J. Caturia
Director Director
Date: December 18, 2003 Date: December 18, 2003
By: /s/ Jerome R. Dempsey
-------------------------------------------------
Jerome R. Dempsey
Director
Date: December 18, 2003