UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS OF 1934
For the quarterly period ended December 31, 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 incorporation (IRS employer identification no.)
or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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 January 23, 2004.
----------------
Class Outstanding
----- -----------
$.10 par value common stock 2,381,398 shares
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 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 15
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At At
December 31, September 30,
2003 2003
------------------------------------
(in thousands, except share data)
ASSETS
------
Cash and cash equivalents:
Cash $ 3,206 $ 3,556
Interest-bearing deposits 56,383 77,045
------------------------------------
Total cash and cash equivalents 59,589 80,601
Securities available for sale, at fair value:
Equity securities 11,996 12,009
Mortgage-backed and related securities 35,107 29,923
Debt securities 12,650 12,178
Restricted stock 4,402 4,797
Loans held-for-sale 14,209 17,122
Loans receivable, net 356,109 358,708
Foreclosed real estate 1,005 1,152
Accrued interest receivable 3,977 3,960
Premises and equipment 6,357 6,331
Goodwill 3,883 3,883
Identifiable intangibles 979 1,014
Investment in life insurance 8,475 8,388
Other assets 1,368 1,086
------------------------------------
Total assets $ 520,106 $ 541,152
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 76,033 $ 69,684
Savings accounts 83,356 86,666
Certificates of deposit 225,450 234,665
------------------------------------
Total deposits 384,839 391,015
Federal Home Loan Bank borrowings 78,000 93,000
Advances from borrowers for taxes and insurance 123 233
Other liabilities 4,792 5,717
------------------------------------
Total liabilities 467,754 489,965
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 44,188 43,925
Retained earnings, substantially restricted 39,105 38,643
Treasury stock at cost (2,119,879 and 2,156,540 shares) (30,978) (31,444)
Unearned ESOP shares at cost (-0- and 7,643 shares) - (76)
Unearned MSP stock grants at cost (481) (484)
Accumulated other comprehensive income 68 173
------------------------------------
Total stockholders' equity 52,352 51,187
------------------------------------
Total liabilities and stockholders' equity $ 520,106 $ 541,152
====================================
See Notes to Unaudited Consolidated Financial Statements
1
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Three Months
Ended December 31,
--------------------------------------
2003 2002
--------------------------------------
(in thousands, except per share data)
Interest income:
Loans receivable $ 6,851 $ 8,225
Mortgage-backed and related securities 363 495
Investment securities 366 215
--------------------------------------
Total interest income 7,580 8,935
Interest expense:
Deposits 1,879 2,696
Borrowed funds 1,229 1,323
--------------------------------------
Total interest expense 3,108 4,019
--------------------------------------
Net interest income 4,472 4,916
Provision for loan losses 259 288
--------------------------------------
Net interest income after provision for loan losses 4,213 4,628
--------------------------------------
Noninterest income:
Gain on sale of loans- net 752 1,126
Other service charges and fees 364 421
Service charges on deposit accounts 661 614
Commission income 294 278
Other 104 57
--------------------------------------
Total noninterest income 2,175 2,496
--------------------------------------
Noninterest expense:
Compensation and benefits 2,757 2,778
Occupancy and equipment 472 392
Data processing 248 234
Professional fees 142 140
Other 820 794
--------------------------------------
Total noninterest expense 4,439 4,338
--------------------------------------
Income before provision for income taxes 1,949 2,786
Income tax expense 769 1,090
--------------------------------------
Net income $ 1,180 $ 1,696
======================================
Basic earnings per share $ 0.51 $ 0.77
Diluted earnings per share $ 0.48 $ 0.73
Cash dividend declared per common share $ 0.35 $ 0.30
Comprehensive income $ 1,075 $ 2,406
======================================
See Notes to Unaudited Consolidated Financial Statements
2
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended December 31,
--------------------------------------
2003 2002
--------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 1,180 $ 1,696
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 244 202
Net amortization of discounts and premiums (51) (66)
Provision for loan losses 259 288
Market value adjustment on ESOP shares 153 75
Amortization of ESOP and MSP stock compensation 54 118
Amortization of intangibles 34 43
Net loan fees deferred and amortized (42) (86)
Loans originated for sale (56,081) (80,935)
Loans sold 59,746 60,508
Gain on sale of loans (752) (1,126)
(Increase) decrease in: Accrued interest receivable (16) (321)
Life insurance (88) (106)
Other assets 89 393
Deferred taxes 65 (57)
Other liabilities (1,000) (279)
--------------------------------------
Net cash provided by (used in) operating activities 3,794 (19,653)
--------------------------------------
Cash flows from investing activities:
Loan originations and principal repayments on loans, net 4,565 2,394
Purchase of loans (2,500) -
Principal repayments on mortgage-related securities held-to-maturity - 2,178
Purchase of available-for-sale securities (10,849) (4,062)
Proceeds from FHLB stock redeemed 395 -
Principal repayments and proceeds from maturities of
securities available-for-sale 5,074 3,388
Investment in foreclosed real estate (122) -
Proceeds from sale of REO 585 122
Purchase of equipment and property improvements (270) (539)
--------------------------------------
Net cash (used in) provided by investing activities $ (3,122) $ 3,481
--------------------------------------
See Notes to Unaudited Consolidated Financial Statements
3
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months
Ended December 31,
--------------------------------------
2003 2002
--------------------------------------
(in thousands)
Cash flows from financing activities:
Net (decrease) increase in deposits $ (6,162) $ 20,609
Payments on FHLB advances (15,000) (5,000)
Allocated dividends used to retire debt on ESOP 25 24
Net decrease in mortgage escrow funds (110) (150)
Treasury stock purchased (137) (601)
Dividends on common stock (717) (649)
Proceeds from exercise of stock options 417 422
--------------------------------------
Net cash (used in) provided by financing activities (21,684) 14,655
--------------------------------------
Net decrease in cash and cash equivalents (21,012) (1,517)
Cash and cash equivalents
Beginning of period 80,601 14,615
--------------------------------------
End of period $ 59,589 $ 13,098
======================================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on advances and other borrowed money $ 1,224 $ 1,316
Interest on deposits $ 2,185 $ 3,057
Income taxes $ 539 $ 904
Supplemental schedule of non-cash investing and financing activities:
Foreclosed real estate $ 532 $ 393
Transfer of securities from held-to-maturity to available-for-sale $ - $ 30,462
Unrealized gain on available-for-sale securities transferred, net of tax $ - $ 561
See Notes to Unaudited Consolidated Financial Statements
4
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1- PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
months ended December 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"). Firstate Services and Homeowners Mortgage Corporation ("HMC")
are wholly owned subsidiaries of the Bank. All significant
inter-company accounts and transactions have been eliminated in the
consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United
States of America.
NOTE 2- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and therefore,
do not include information or footnotes necessary for a complete
presentation of consolidated financial condition, results of operations
and cash flows in conformity with United States Generally Accepted
Accounting Principles ("GAAP"). However, all adjustments consisting of
normal recurring accruals, which in the opinion of management are
necessary for fair presentation of the consolidated financial
statements, have been included. The results of operations for the three
month period ended December 31, 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, 2003.
NOTE 3- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months ended
December 31,
------------------------------------
2003 2002
------------------------------------
Numerator:
Net income - Numerator for basic earnings
per share and diluted earnings per share--
income available to common stockholders $1,180,000 $1,696,000
====================================
Denominator:
Denominator for basic earnings per share--
weighted-average shares 2,310,317 2,213,687
Effect of dilutive securities:
Stock - based compensation plans 144,923 134,239
------------------------------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 2,455,240 2,347,926
====================================
Basic earnings per share $ 0.51 $ 0.77
Diluted earnings per share $ 0.48 $ 0.73
5
NOTE 4- 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
Ended December 31,
--------------------------------------
2003 2002
--------------------------------------
(in thousands)
Net income, as reported $ 1,180 $ 1,696
Deduct:
Total stock-based employee compensation expense determined under the fair
value based method for all awards, net of related tax effects
4 77
--------------------------------------
Pro-forma net income $ 1,176 $ 1,619
======================================
Earnings per share:
Basic, as reported $ 0.51 $ 0.77
Basic, pro-forma $ 0.51 $ 0.73
Diluted, as reported $ 0.48 $ 0.73
Diluted, pro-forma $ 0.48 $ 0.69
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, 41,212 options were exercised at various prices in the current fiscal
year.
NOTE 5- EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
See the Company's Annual Report dated September 30, 2003.
NOTE 6- COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting shareholder's equity that, under generally accepted
accounting principles in the United States of America, 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.
6
The following table provides information regarding the impact of the transfer on
comprehensive income.
Three Months
Ended December 31,
--------------------------------------
2003 2002
--------------------------------------
(in thousands)
Net income $ 1,180 $ 1,696
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 (168) 251
Tax (expense) benefit 63 (102)
--------------------------------------
Comprehensive income $ 1,075 $ 2,406
======================================
7
FSF FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of integrating newly
acquired businesses, the ability to control costs and expenses and general
economic conditions.
General
The Corporation's total assets at December 31, 2003 and September 30, 2003
totaled $520.1 million and $541.2 million, respectively. The decrease of $21.1
million was primarily the result of the payment of Federal Home Loan Bank
("FHLB") advances and the reduction of deposits, offset in part by a reduction
in the outstanding loan balances.
Cash and cash equivalents decreased $21.0 million from $80.6 million at
September 30, 2003 to $59.6 million at December 31, 2003, mainly due to payments
on FHLB advances. The Corporation utilizes this excess liquidity to fund 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. During this quarter ended December 31, 2003, $10.8 million
of available-for-sale securities were purchased.
Loans held for sale decreased $2.9 million to $14.2 million at December 31, 2003
from $17.1 million at September 30, 2003. As of December 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 $2.6 million to $356.1 million at December 31, 2003
from $358.7 million at September 30, 2003. The balance of consumer loans
decreased by $4.4 million, the one-to-four family loan portfolio decreased by
$5.5 million and commercial business loans increased $1.3 million. The decrease
in loans was generally the result of prepayments and refinancing activity due to
the lower interest rate environment. Construction loans decreased from $263.2
million at September 30, 2003 to $261.7 million at December 31, 2003. During
that period, the Bank also sold $836,000 of agricultural loans to Farmer Mac, an
agency of the federal government. These loans were sold, with servicing
retained, in order to allow the Bank to expand the agricultural lending base
without increasing the overall percentage of agricultural loans.
8
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months
Ended December 31,
-------------------------------------
2003 2002
-------------------------------------
(in thousands)
Loans originated:
One-to-four family residential mortgages $ 18,831 $ 70,134
Residential construction 57,725 50,345
Land 4,660 -
Agricultural 9,340 8,536
Commercial business & real estate 5,609 3,403
Consumer 2,567 5,992
-------------------------------------
Total loans originated 98,732 138,410
-------------------------------------
Loans purchased:
Commercial business 2,500 -
-------------------------------------
Total new loans $ 101,232 $ 138,410
=====================================
The following table sets forth the composition of the Bank's loans in dollars
and in percentages of total loans at the dates indicated:
December 31, September 30,
2003 2003
--------------------------------------------------------------------
Amount % Amount %
--------------------------------------------------------------------
(dollars in thousands)
Residential real estate:
One-to-four family (1) $ 35,882 7.5% $ 41,415 8.5%
Residential construction 261,748 54.7% 263,227 53.9%
Multi-family 7,611 1.6% 7,703 1.6%
--------------------------------------------------------------------
305,241 63.8% 312,345 63.9%
Agricultural loans 56,526 11.8% 57,259 11.7%
Land and commercial real estate 41,357 8.6% 40,831 8.4%
Commercial business 24,275 5.1% 22,961 4.7%
--------------------------------------------------------------------
122,158 25.5% 121,051 24.8%
Consumer loans:
Home equity and second mortgages 21,864 4.6% 22,482 4.6%
Automobile loans 10,709 2.2% 11,550 2.4%
Other 18,372 3.8% 21,272 4.4%
--------------------------------------------------------------------
Total consumer loans 50,945 10.7% 55,304 11.3%
--------------------------------------------------------------------
Total loans 478,344 100.0% 488,700 100.0%
============== ==============
Less:
Loans in process (105,867) (110,657)
Deferred fees (470) (512)
Allowance for loan losses (1,689) (1,701)
-------------------- --------------------
Total loans, net $ 370,318 $ 375,830
==================== ====================
- --------------------
1. Includes loans held for sale in the amount of $14.2 million and $17.1
million as of December 31, 2003 and September 30, 2003.
9
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, inherent 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.
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 probable incurred losses in the loan portfolio. However, there can be
no assurance that banking regulators, in reviewing the Bank's loan portfolio,
will not request the Bank to increase its allowance for loan losses or that a
deteriorating real estate market or other unforeseen economic changes may cause
an increase in allowance for loan losses. This is likely to negatively affect
the Bank's financial condition and earnings.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated:
December 31, September 30,
2003 2003
-----------------------------------
(dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ 4,630 $ 3,819
Permanent loans secured by one-to-four family units 800 483
Non-residential loans 884 884
Non- mortgage loans:
Commercial and agricultural 547 411
Consumer 350 442
-----------------------------------
Total non-accrual loans 7,211 6,039
Foreclosed real estate and real estate held for investment 1,005 1,152
-----------------------------------
Total non-performing assets $ 8,216 $ 7,191
===================================
Total non-performing loans to net loans 1.95% 1.61%
===================================
Total non-performing loans to total assets 1.39% 1.12%
===================================
Total non-performing assets to total assets 1.58% 1.33%
===================================
10
The nonaccrual residential construction loans are comprised of 31 loans. The
outstanding balance of the loans ranges from $46,000 to $474,000. The
loan-to-value ratios of the loans range between 53% and 97%. Each of the loans
has been evaluated for impairment and is carried at the lower of fair value or
cost. There are 6 permanent loans secured by one-to-four family residential
units that range from $29,000 to $296,000. The non-residential loan is a
participation in a commercial real estate loan with another financial
institution. A purchase agreement on the property is being negotiated.
Commercial and agricultural loans are comprised of 13 loans. The outstanding
values of these loans range from $6,000 to $199,000. 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 16 loans that range from $1,000 to $95,000.
The foreclosed real estate consists of 6 construction loans with balances
between $52,000 and $196,000 and a commercial real estate loan with a balance of
$248,000, all of which are carried at the lower of fair value or cost.
Deposits, after interest credited, decreased $6.2 million from $391.0 million at
September 30, 2003 to $384.8 million at December 31, 2003. Overall cost of funds
on deposits during the period decreased 82 basis points (100 basis points equals
1%) compared with the same three month period in 2002, as a result of the Bank's
attempt to maintain deposit rates consistent with competitors in the market
place. Demand deposits increased $6.3 million or 9.1% from September 30, 2003 to
December 31, 2003. Savings account balances decreased 3.8% during the same
period, while certificates of deposit decreased $9.2 million. The Bank utilized
the deposits for liquidity and to reduce Federal Home Loan Bank ("FHLB")
borrowings.
The Corporation completed the repurchase of 4,551 shares of common stock which,
when netted against 41,212 shares issued in connection with the exercise of
stock options, decreased the number of treasury shares to 2,119,879 at December
31, 2003. Treasury shares are used for general corporate purposes, including the
issuance of shares in connection with the exercise of stock options. Total
stockholders' equity increased $1.1 million since September 30, 2003 due to net
income and amortization of ESOP shares. Total stockholder's equity was reduced
by the amount of dividends paid during the three months of the fiscal year and
the change in accumulated comprehensive income. Accumulated other comprehensive
income decreased as a result of changes in the net unrealized gains and losses
on the available-for-sale securities due to fluctuations in interest rates .
Because of interest rate volatility, the Corporation's accumulated other
comprehensive income could materially fluctuate. Book value per share increased
from $22.30 at September 30, 2003 to $22.38 at December 31, 2003.
11
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 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 December 31,
---------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------
Interest Interest
Average Yields & Average Yields &
Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------
(dollars in thousands)
Assets:
Loans receivable (2) $ 371,160 $ 6,851 7.38 % $ 421,560 $ 8,225 7.80 %
Mortgage-backed securities 32,530 363 4.46 47,669 495 4.15
Investment securities (3) 102,470 366 1.43 42,221 215 2.04
----------------------- -----------------------
Total interest-earning assets 506,160 7,580 5.99 511,450 8,935 6.99
--------------------- ----------------------
Other assets 30,207 29,768
------------- -------------
Total assets $ 536,367 $ 541,218
============= =============
Liabilities:
Interest-bearing deposits $ 388,623 $ 1,879 1.93 % $ 391,741 $ 2,696 2.75 %
Borrowings 90,228 1,229 5.45 95,772 1,323 5.53
----------------------- -----------------------
Total interest-bearing
liabilities 478,851 3,108 2.60 487,513 4,019 3.30
--------------------- ----------------------
Other liabilities 5,771 6,726
------------- -------------
Total liabilities 484,622 494,239
Stockholders' equity 51,745 46,979
------------- -------------
Total liabilities and stockholders'
equity $ 536,367 $ 541,218
============= =============
Net interest income $ 4,472 $ 4,916
========== ==========
Net spread (4) 3.39 % 3.69 %
Net margin (5) 3.53 % 3.84 %
Ratio of average interest-earning assets
to average interest-bearing 1.06X 1.05X
liabilities
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 $1.2 million for the three months ended
December 31, 2003, as compared to net income of $1.7 million for the three
months ended December 31, 2002. This decrease in net income was $516,000 or
30.4%. The decrease in net income for first quarter 2004 was primarily the
result of a decrease in net interest income and non-interest income, coupled
with an increase in non-interest expense. Net interest income decreased $444,000
in the first quarter of fiscal 2004, a decrease of 9.0% over first quarter 2003.
The decrease in net interest income was primarily due to a 100 basis point
decline in yields on interest earning assets offset by a 70 basis point
reduction on 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 49.0% of non-interest expense for the quarter.
12
Total Interest Income
Total interest income decreased by $1.4 million to $7.6 million for the quarter
ended December 31, 2003 from the comparable 2002 period. The average yield on
loans decreased to 7.38% for the quarter ended December 31, 2003 from 7.80% for
the quarter ended December 31, 2002. During the same period, the average yield
on mortgage-backed securities increased 31 basis points to 4.46%. The average
yield on investment securities decreased from 2.04% for the three months ended
December 31, 2003 to 1.43% for the same period in 2002.
Total Interest Expense
Total interest expense decreased to $3.1 million for the three months ended
December 31, 2003 from $4.0 million for the same period in 2002. The average
cost of deposits decreased 82 basis points from 2.75% for the quarter ended
December 31, 2003 to 1.93% for the same period in 2002, as the rates offered by
the Bank on deposits 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 $5.6
million to $90.2 million for the three months ended December 31, 2003 from $95.8
million for the three months ended December 31, 2002. The cost of borrowings
decreased by 8 basis points to 5.45% for the quarter ended December 31, 2003
from 5.53% for the same period in 2002. Borrowings decreased as the Bank
utilized repayments of loans and investments to meet liquidity needs.
Net Interest Income
Net interest income decreased by $444,000 to $4.5 million for the quarter ended
December 31, 2003, from $4.9 million for the same period in 2002. Average
interest-earning assets decreased $5.3 million from $511.5 million for the
quarter ended December 31, 2002 to $506.2 million for the quarter ended December
31, 2003, while the average yield on interest-earning assets decreased from
6.99% for 2002 to 5.99% for 2003. Average interest-bearing liabilities decreased
by $8.6 million to $478.9 million for the quarter ended December 31, 2003 from
$487.5 million for the quarter ended December 31, 2002, while the cost of
interest-bearing liabilities decreased from 3.30% in 2002 to 2.60% in 2003.
Provision for Loan Losses
The Corporation's provision for loan losses was $259,000 for the quarter ended
December 31, 2003, compared to $288,000 for the same period in 2002. 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 reflect probable incurred losses, 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.
13
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Three Months
Ended December 31,
----------------------------------------
2003 2002
----------------------------------------
(dollars in thousands)
Average loans outstanding $ 371,160 $ 421,560
----------------------------------------
Allowance balance (beginning of period) $ 1,701 $ 1,681
----------------------------------------
Provision (credit):
Residential and construction 201 80
Land and commercial real estate - -
Commercial and agricultural business 58 208
Consumer - -
----------------------------------------
Total provision 259 288
Charge-offs:
Residential and construction 161 100
Land and commercial real estate - -
Commercial and agricultural business 58 129
Consumer 97 76
----------------------------------------
Total charge-offs 316 305
Recoveries:
Residential and construction 17 -
Land and commercial real estate - -
Consumer 28 44
----------------------------------------
Total recoveries 45 44
----------------------------------------
Net charge-offs 271 261
----------------------------------------
Allowance balance (end of period) $ 1,689 $ 1,708
========================================
Allowance as percent of net loans 0.46% 0.40%
Net loans charged off as a percent of average 0.07% 0.06%
loans
Non-interest Income
Total non-interest income decreased from $2.5 million for the quarter ended
December 31, 2002 to $2.2 million for the quarter ended December 31, 2003. Gain
on sale of loans decreased $374,000 over the same period in 2002 primarily due
to a decrease in the refinancing market and loans that are sold in the secondary
market. Other service charges and fees decreased from $421,000 for the three
months ended December 31, 2002 to $364,000 for the same period ended December
31, 2003, which was mainly attributable to a decrease in the outstanding loan
portfolio balance. Service charges on deposit accounts increased $47,000 due to
an increase in fees charged.
Non-interest Expense
Total non-interest expense increased $101,000 or 23.0% from December 31, 2002 as
compared to the same period in 2003. Compensation and benefits remained at $2.8
million for the periods compared. Occupancy and equipment expense increased
$80,000 while data processing increased $14,000 to $248,000 for the period ended
December 31, 2003, due to the delivery of additional data processing related
services to our customer base.
Income Tax Expense
Income taxes decreased to $796,000 for the quarter ended December 31, 2003 from
$1.1 million for the same period in 2002 due to a decrease of $837,000 in pretax
income.
14
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, borrowings, principal
and interest payments on loans, investments and mortgage-backed securities,
sales of mortgage loans and funds provided by operations. While scheduled
payments on loans, mortgage-backed securities and short-term investments are
relatively predictable sources of funds, deposit flows and early loan repayments
are greatly influenced by general interest rates, economic conditions and
competition.
The amount of certificate accounts that are scheduled to mature during the
twelve months ending December 31, 2004 is approximately $169.1 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.
The following table presents, as of December 31, 2003, the Company's significant
fixed and determinable contractual obligations by payment date. The payment
amount represents those amounts contractually due to the recipient and does not
include any unamortized premiums or discounts or other similar carrying amount
adjustments.
in thousands
----------------------------------------------------------
One One to Over
Year or Three Three
Less Years Years Total
----------------------------------------------------------
Long-Term Debt
FHLB borrowings $ 6,000 $ 10,000 $ 62,000 $ 78,000
==========================================================
Other Contractual Obligations
Non-cancelable operating leases $ 364 $ 696 $ 104 $ 1,164
Unused lines of credit 39,342 - - $ 39,342
Standby letters of credit 221 - - $ 221
Development letters of credit 6,709 - - $ 6,709
Commitments to sell loans 15,197 - - $ 15,197
Commitments to extend credit 1,195 - - $ 1,195
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 7.1%, 8.9%,
4.6% and 5.4%, 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, 2003.
15
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.
16
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries were
engaged in any legal proceedings of a material nature at
December 31, 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 AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
(a) Not applicable.
(b) 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 ***
31.0 Rule 13a-14(a) Certifications
32.0 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
(i) The Company furnished a current report on Form 8-K on
October 29, 2003 pursuant to items 7 and 12 to report
operating results for the quarter ended September 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.
17
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: January 26, 2004 By: /s/ Donald A. Glas
-----------------------
Donald A. Glas
Chief Executive Officer
Date: January 26, 2004 By: /s/ Richard H. Burgart
-----------------------
Richard H. Burgart
Chief Financial Officer
18
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision 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 report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: January 26, 2004 /s/Donald A. Glas
---------------------------------
Donald A. Glas
Chief Executive Officer
SECTION 302 CERTIFICATION
I, Richard H. Burgart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FSF Financial
Corp.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision 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 report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: January 26, 2004 /s/Richard H. Burgart
---------------------------------
Richard H. Burgart
Chief Financial Officer
19