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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d) of
the Securities Exchange Act of 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1999
---------------------------
- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period __________________ to ____________________
Commission Number: 0-24648
FSF FINANCIAL CORP.
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1783064
(State or other jurisdiction of incorporation (I.R.S. Employer)
or organization) Identification No.)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (320) 234-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filling requirements for the past 90 days. 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]
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 30, 1999 was $ 25,729,056
(2,144,088 shares at $ 12.00 per share).
As of November 30, 1999 there were issued and outstanding 2,795,887 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, 1999. (Parts I, II and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held January 19, 2000. (Part III)
INDEX
PART I Page
----
Item 1. Business....................................................1
Item 2. Properties.................................................20
Item 3. Legal Proceedings..........................................21
Item 4. Submission of Matters to a Vote of Security Holders........21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................21
Item 6. Selected Financial Data ...................................21
Item 7. Management's Discussion of Financial Condition and
Results of Operations.....................................21
Item 7A. Quantitative and Qualitative Disclosure about Market
Risk .....................................................21
Item 8. Financial Statements and Supplementary Data................21
Item 9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................21
PART III
Item 10. Directors and Executive Officers of the Registrant.........22
Item 11. Executive Compensation.....................................22
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................22
Item 13. Certain Relationships and Related Transactions.............22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................22
PART I
ITEM 1. BUSINESS
General
FSF Financial Corp. (the "Company"), a Minnesota Corporation, was organized in
May, 1994, and as of October 6, 1994, became the holding company for First
Federal fsb ("First Federal" or the "Bank"). First Federal is the resulting
institution of the merger of First State Federal Savings and Loan Association,
Hutchinson, MN ("Hutchinson"), and First Federal Savings and Loan Association of
Hastings, Hastings, MN ("Hastings"). The merger of the two institutions was
completed in September, 1994 ("Merger"). Hutchinson was organized as a state
chartered mutual savings and loan association in 1933 and received a federal
charter in 1934. Hastings was initially chartered in 1881 as the "Dakota County
Building and Loan Association" and obtained a federal charter in 1968. The
Company operates three wholly owned subsidiaries, Insurance Planners, Homeowners
Mortgage Corporation ("HMC") and the Bank. Insurance Planners (the "Agency") is
an independent property and casualty insurance agency located in Hutchinson, MN.
HMC is a mortgage banking company located in Vadnais Heights, MN. The Agency was
acquired by the Company on June 1, 1998. HMC is the result of an acquisition on
November 17, 1998.
First Federal's business consists primarily of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make mortgage loans secured by residential real estate located in
Minnesota. At September 30, 1999, First Federal operated 11 retail banking
offices in Minnesota.
First Federal is regulated by the Office of Thrift Supervision ("OTS"), and by
the Federal Deposit Insurance Corporation ("FDIC") which, through the Savings
Association Insurance Fund ("SAIF"), insures, up to certain legal limits, the
deposit accounts of institutions such as First Federal. First Federal is also a
member of the Federal Home Loan Bank ("FHLB") of Des Moines, which is one of the
twelve regional banks for federally insured savings institutions and certain
other residential lending entities comprising the Federal Home Loan Bank System.
Market Area
The Bank is authorized to make loans throughout the United States. First
Federal's primary market area consists of the ten Minnesota counties of Benton,
Carver, Dakota, McLeod, Meeker, Sherburne, Sibley, Stearns, Washington, and
Wright. The market area extends from the St. Cloud area northwest of the
Minneapolis/St Paul metropolitan area to the Mississippi River southeast of the
Minneapolis/St. Paul metropolitan area. The economic composition of the market
area is extremely diverse and contains agriculture, commercial, and
manufacturing enterprises. The market area is generally considered to be a
"bedroom" community for the Minneapolis/St. Paul metropolitan area.
Lending Activities
General. 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,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------------------
Residential real estate: (Dollars in Thousands)
One-to-four family (1)......... $120,884 38.8 $157,340 52.2 $170,422 60.3 $150,102 64.7 $121,034 64.6
Residential construction ...... 42,937 13.8 21,960 7.3 20,796 7.4 19,676 8.5 20,366 10.9
Multi-family .................. 5,635 1.8 2,975 1.0 3,370 1.2 3,753 1.6 3,708 2.0
------------------------------------------------------------------------------------------------
169,456 54.4 182,275 60.4 194,588 68.9 173,531 74.8 145,108 77.4
Agricultural loans ............... 33,384 10.7 22,959 7.6 -- -- -- -- -- --
Land and commercial real estate .. 36,429 11.7 34,399 11.4 38,582 13.7 18,637 8.0 16,951 9.0
Commercial business .............. 29,767 9.6 21,095 7.0 8,114 2.9 6,089 2.6 2,715 1
269,036 86.3 260,728 86.4 241,284 85.4 198,257 85.4 164,774 87.9
------------------------------------------------------------------------------------------------
Consumer:
Home equity and second mortgage 24,312 7.8 23,606 7.8 20,812 7.4 17,692 7.6 10,950 5.8
Automobile loans .............. 7,428 2.4 9,670 3.2 11,596 4.1 10,080 4.3 8,399 4.5
Other ......................... 10,898 3.5 7,605 2.5 8,821 3.1 6,075 2.6 3,326 1.8
------------------------------------------------------------------------------------------------
Total loans 311,674 100.0 301,609 100.0 282,513 100.0 232,104 100.0 187,449 100.0
===== ===== ===== ===== =====
Less:
Loans in process .............. (26,156) (16,658) (20,364) (13,401) (15,010)
Deferred fees ................. (507) (641) (703) (757) (613)
Allowance for loan losses ..... (1,387) (1,035) (852) (776) (764)
--------- --------- --------- --------- ---------
Total loans, net ....... $283,624 $283,275 $260,594 $217,170 $171,062
========= ========= ========= ========= =========
- --------------------------------------
(1) Includes loans held for sale in the amount of $5.3 million, $2.7 million,
$204,000, $443,000 and $230,000 as of September 30, 1999, 1998, 1997, 1996,
and 1995, respectively.
The following table sets forth the loan originations, loan purchases, loan
sales, and principal payments for the periods indicated:
Years Ended September 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(In Thousands)
Total gross loans receivable at
end of period $ 311,674 $ 301,609 $ 282,513 $ 232,104 $ 187,449
Loans originated:
Residential real estate:
One-to-four family 130,461 56,768 55,144 53,801 45,988
Residential construction 55,700 23,007 12,968 12,975 21,996
Multi-family - 240 190 - 437
------------------------------------------------------------------------
Total residential real estate 186,161 80,015 68,302 66,776 68,421
Land and commercial real estate 5,900 4,960 20,077 3,241 8,588
Commercial business 13,033 9,801 2,402 274 250
Agricultural 28,081 27,049 - - -
Consumer 27,503 25,740 28,465 27,270 17,465
------------------------------------------------------------------------
Total loans originated 260,678 147,565 119,246 97,561 94,724
Purchase of loans 40,883 10,832 8,528 17,447 20,993
Sale of loan participation (3,000)
Sale of loans (128,925) (24,953) (6,661) (3,509) (810)
Principal repayments (169,131) (112,284) (72,035) (63,813) (49,651)
Other (net) 9,560 (2,064) 1,331 (3,031) (172)
------------------------------------------------------------------------
Net loan activity $ 10,065 $ 19,096 $ 50,409 $ 44,655 $ 65,084
========================================================================
2
Maturity of Loans. The following table sets forth the maturity of the Bank's
loans at September 30, 1999. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $136.0 million, $112.0 million, $72.0 million, $63.8 million, and $49.7
million for the years ended September 30, 1999, 1998, 1997, 1996 and 1995,
respectively. Adjustable-rate mortgage loans are shown as maturing based on
contractual maturities.
One-to-Four Land, Commercial
Family Multi-Family Business,
Real Estate and Commercial Agriculture and
Mortgages Real Estate Construction Consumer Total
-------------------------------------------------------------------------
(In Thousands)
Amounts Due:
Within 3 months $ 16,294 $ 4,689 $ 9,637 $ 46,196 $ 76,816
3 months to 1 year 20,151 9,439 33,300 18,469 81,359
-------------------------------------------------------------------------
Total due before one year 36,445 14,128 42,937 64,665 158,175
-------------------------------------------------------------------------
After 1 year:
1 to 3 years 19,518 12,490 - 15,307 47,315
3 to 5 years 17,518 13,385 - 19,227 50,130
5 to 10 years 19,495 480 - 4,591 24,566
10 to 20 years 19,129 1,581 - 1,999 22,709
Over 20 years 8,779 - - 8,779
-------------------------------------------------------------------------
Total due after one year 84,439 27,936 - 41,124 153,499
-------------------------------------------------------------------------
Total amount due $ 120,884 $ 42,064 $ 42,937 $ 105,789 $ 311,674
=========================================================================
The following table sets forth the dollar amount of all loans due after
September 30, 2000, which have predetermined interest rates and which have
floating or adjustable interest rates.
Fixed- Balloon Adjustable
Rates Rates Rates Total
--------------- ------------ --------------- -------------
(In Thousands)
One-to four-family real estate and construction $ 42,323 $ 9,354 $ 34,762 $ 86,439
Land, multi-family and commercial real estate 9,414 9,715 8,807 27,936
Commercial business, agricultural and consumer 20,056 - 19,068 39,124
--------------- ------------ --------------- -------------
Total $ 71,793 $ 19,069 $ 62,637 $153,499
=============== ============ =============== =============
One- to Four-Family Mortgage Loans. The largest portion of mortgage loans are
made for the purpose of enabling borrowers to purchase one- to four-family
residences secured by first liens on the properties. The Bank and HMC originate
balloon mortgage loans, ARM loans and fixed-rate mortgage loans secured by one-
to four-family residences with loan terms up to 30 years. FHA and VA loans are
also offered and then sold, servicing released, in the secondary market.
Borrower demand for ARM loans versus fixed-rate mortgage loans depends on
various factors, including, but not limited to, interest rates offered, the
expectations of changes in the short- and long-term levels of interest rates and
loan fees charged. The relative amount of fixed-rate mortgage loans, balloon
loans and ARM loans that can be originated at any time is largely determined by
the demand for each in a competitive environment. All fixed-rate loans are sold
to the secondary market, some with servicing released and the bank retains
servicing on some loans sold to the Federal Home Loan Mortgage Corporation
("FHLMC").
The Bank originates three-, five- and seven-year balloon mortgage loans, the
majority of which are three-year balloon mortgages. These mortgages contain no
contractual assurances that the loan will be renewed. At maturity the loan is
generally rewritten and re-recorded; however, 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,
1999, balloon mortgages were $29.8 million, or 9.6% 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
by which the interest rate may be increased in a year) on the Bank's ARM loans
is generally 2.0% and the lifetime cap is generally 6.0% over the initial rate
of the loan. The Bank considers market factors and competitive rates on loans as
well as its own cost of funds when determining the rates on the loans it offers.
The Bank does not originate loans with negative amortization.
3
Residential Construction Lending. The Bank and HMC originate residential
construction loans to qualified borrowers for construction of one-to-four family
residential properties primarily located in the Bank's market area. Construction
loans are made to builders on a pre-sold, speculative and model home basis and
primarily to owners for construction of their primary residence on a
construction/permanent basis. Such loans generally have terms from six to nine
months. Loans for speculative housing construction are made to area builders
only after a thorough background check has been made. The background check
includes an analysis of the builder's financial statements, credit reports and
reference checks with sub-contractors and suppliers. The Bank usually will have
no more than two speculative or model home construction loans outstanding at any
time to any single builder. Loan proceeds are disbursed in increments as
construction progresses and only after a physical inspection of the project is
made. Accrued interest on loan disbursements is paid monthly.
Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes because collateral value and
construction costs can only be estimated at the time the loan is approved. The
Bank and HMC has sought to minimize the risk by limiting construction lending to
qualified borrowers primarily in the Bank's market area, by limiting the number
of construction loans for speculative purposes outstanding at any time, and by
installing a system to inspect the property and to monitor the loan
disbursements.
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. These risks are
attributable to the fact 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, 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-wholesale facilities, industrial buildings and
other non-residential buildings. Commercial real estate loans may be originated
in amounts up to 80% of the appraised value of the mortgaged property as
determined by a certified or licensed independent appraiser.
Multi-family residential real estate loans are permanent loans secured by
apartment buildings. Of primary concern in multi-family residential real estate
lending is the borrower's creditworthiness, feasibility and cash flow potential
of the project. Loans secured by income properties generally are larger and
involve greater risks than residential mortgage loans because payments on loans
secured by income properties are often dependent on the successful operation or
management of the properties. As a result, repayment of such loans may be
subject to a greater extent than residential real estate loans to 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, 1999, the five largest land acquisition and development,
commercial real estate and multi-family loans ranged from $3.2 million to $5.0
million with an average committed outstanding balance of $3.9 million. All such
loans were current and have performed in accordance with their terms.
Commercial Business Lending. The Bank's commercial business loans are for a
variety of purposes including working capital, accounts receivable, inventory,
equipment and acquisitions. The Bank has no energy or foreign loans.
Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other income
and which are secured by real property with a value that tends to be more easily
ascertainable, commercial business loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which is likely to be dependent upon the general economic environment.)
The Bank's commercial business loans are sometimes, but not always, secured by
business assets, such as accounts receivable, equipment and inventory, as well
as real estate. However, the collateral securing the loans may depreciate over
time, may be difficult to appraise, and may fluctuate in value based on the
success of the business.
The Bank recognizes the generally increased risks 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, 1999, the five largest commercial business
loans ranged from $2.5 million to $5.0 million, with an average committed
balance outstanding of $3.2 million. All such loans are current and have
performed in accordance with their terms.
4
Agricultural Lending. The Bank originates loans to finance the purchase of
farmland, livestock, farm machinery and equipment, seed, fertilizer and for
other farm related products. Agricultural operating loans are originated at
either an adjustable or fixed rate of interest for up to a one year term or, in
the case of livestock, upon sale. Most agricultural operating loans have terms
of one year or less. Such loans provide for payments of principal and interest
at least annually, or a lump sum payment upon maturity in 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 20 year amortization schedule.
Adjustable-rate agricultural real estate loans are generally limited to 80% of
the value of the property securing the loan.
Agricultural lending affords the Bank the opportunity to earn yields higher than
those obtainable on one- to four-family residential lending. Nevertheless,
agricultural lending involves a greater degree of risk than one- to four-family
residential mortgage loans because of the typically larger loan amount. In
addition, payments on loans are dependent on the successful operation or
management of the farm property securing the loans or for which an operating
loan is utilized. The success of the loan may also be affected by many factors
outside the control of the farm borrower.
Weather presents one of the greatest risks as hail, drought, floods, or other
conditions, can severely limit crop yields and thus impair loan repayments and
the value of the underlying collateral. This risk can be reduced by the farmer
with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Bank generally does not require its borrowers to procure
multi-peril crop or hail insurance. However, recent changes in government
support programs generally require that farmers procure multi-peril crop
insurance to be eligible to participate in such programs.
Grain and livestock prices also present a risk as prices may decline prior to
sale resulting in a failure to cover production costs. These risks may be
reduced by the farmer with the use of futures contracts or options to provide a
"floor" below which prices will not fall. The Bank does not monitor or require
the use by borrowers of future contracts or options.
Another risk is the uncertainty of government programs and other regulations.
Some farmers rely on the income from government programs to make loan payments
and if these programs are discontinued or significantly changed, cash flow
problems or defaults could result.
Finally, many farms are dependent on a limited number of key individuals whose
injury or death may result in an inability to successfully operate the farm. At
September 30, 1999, the five largest agricultural loans ranged from $947,000 to
$1.5 million, with an average committed outstanding balance of $1.2 million. All
such loans are in the Bank's market area, are current and have performed in
accordance with their terms.
Consumer and Other Loans. The Bank offers consumer and other loans in the form
of home equity and second mortgage loans, automobile loans and loans for other
purposes. Federal regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of an institution's assets.
The Bank originates consumer loans in order to provide a wide range of financial
services to its customers and because the shorter terms and normally higher
interest rates on such loans help maintain a profitable spread between its
average loan yield and the Bank's cost of funds.
In connection with consumer loan applications, the Bank verifies the borrower's
income and reviews credit bureau reports. In addition, the relationship of the
loan to the value of the collateral is considered. Consumer loans entail greater
risks than one-to- four family residential mortgage loans, particularly consumer
loans secured by rapidly depreciable assets such as automobiles or loans that
are unsecured. In such cases, any repossessed collateral for a defaulted loan
may not provide an adequate source of repayment of the outstanding loan balance,
since there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, consumer loan collections are dependent on the
borrower's continuing financial stability, and therefore are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
Loan Approval Authority and Underwriting. The primary source of mortgage loan
applications is referrals from existing or past customers. Applications are also
solicited from real estate brokers, contractors, call-ins and walk-ins to its
offices.
Upon receipt of any loan application from a prospective borrower, a credit
report is ordered and verifications of specific information relating to the loan
applicant's employment, income and credit standing are requested. An appraisal
or valuation determination, subject to regulatory requirements, of the real
estate intended to secure the proposed loan is undertaken. Licensed appraisers
and two authorized appraisers on staff at the Bank are utilized in determining
the value of property. In connection with the loan approval process,
underwriters analyze the loan applications and the property involved. All
residential, home equity, multi-family, construction and commercial real estate
loans are underwritten, subject to the loan underwriting policies as approved by
the Board of Directors. In general, loans in excess of $1.0 million must be
approved by the Board of Directors.
5
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 are required on first mortgage loans and fire and casualty insurance on
all properties securing loans, which 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, 1999, First Federal's five largest lending relationships included
$4.3 million in construction loans to a local developer, a $5.0 million line of
credit to an unaffiliated mortgage-banking company, a $3.3 million commercial
real estate loan, a $5.0 million commercial real estate loan and $3.8 million in
land development loans to a local developer, which is approximately 6.9% of the
total loans. At September 30, 1999, all of these loans were within the loans to
one borrower limitations, performing in accordance with their terms, and at
market rates of interest.
Loan Servicing. The Bank services substantially all of the loans which it
retains in its portfolio. However, HMC does not engage in any loan servicing.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, making advances to cover delinquent payments, making
inspections as required of mortgaged premises, contacting delinquent mortgagors,
supervising foreclosures and property dispositions in the event of unremedied
defaults and generally administering the loans. Funds that have been escrowed by
borrowers for the payment of mortgage-related expenses, such as property taxes
and hazard and mortgage insurance premiums, are maintained in
noninterest-bearing accounts at the Bank. At September 30, 1999, the Bank had
$296,000 deposited in escrow accounts for its loans serviced for others.
The following table presents information regarding the loans serviced by the
Bank for others at the dates indicated.
September 30,
--------------------------------------------------
Mortgage loan portfolios serviced for: 1999 1998 1997
--------------------------------------------------
(In Thousands)
FHLMC $ 48,219 $ 42,038 $ 38,137
Other Investors 7,269 4,418 4,597
--------------------------------------------------
$ 55,488 $ 46,456 $ 42,734
==================================================
The Bank receives fees for servicing mortgage loans, which generally amount to
0.25% per annum on the declining balance of mortgage loans. Such fees serve to
compensate the Bank for the costs of performing the servicing functions. Other
sources of loan servicing revenues include late charges. For the years ended
September 30, 1999, 1998 and 1997, the Bank earned gross fees of $236,000,
$234,000 and $204,000, respectively from loan servicing. The Bank retains a
portion of funds received from borrowers on the loans it services for others in
payment of its servicing fees received on loans serviced for others.
Non-Performing and Problem Assets
Loan Collections and Delinquent Loans. The Bank's collection procedures provide
that when a loan is 30 days or more delinquent, the borrower is contacted by
mail and telephone and payment is requested. If the delinquency continues,
subsequent efforts will be made to contact the delinquent borrower. In certain
instances, the Bank may modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his financial affairs. Once a loan
delinquency exceeds 60 days it is classified as special mention and the Bank
attempts to work with the borrower to establish a repayment schedule to cure the
delinquency. If the borrower is unable to cure the delinquency, the Bank will
institute foreclosure actions. If a foreclosure action is taken and the loan is
not reinstated, paid in full or refinanced, the property is sold at a judicial
sale at which the Bank may be the buyer if there are no offers to satisfy the
debt. Any property acquired as the result of a foreclosure or by deed in lieu of
foreclosure is classified as foreclosed real estate until such time as it is
sold or otherwise disposed of by the Bank. At September 30, 1999, the Bank had
$323,000 of foreclosed real estate, consisting of three one-to-four family
residential loans and a commercial real estate loan. 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 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 placed on
non-accrual status when either principal or interest is 90 days or more past
due. Consumer loans are generally charged off when the loan becomes over 90 days
delinquent. Commercial business and real estate loans are generally placed on
non-accrual status when the loan is 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan. At September 30, 1999, the Bank had
approximately $289,000 of loans that were more than 60 days delinquent.
6
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods indicated
the Bank had no restructured loans within the meaning of SFAS No. 15.
At September 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ - $ - $ 393 $ - $ 209
Permanent loans secured by one-to
four-family units 205 240 25 129 138
Permanent loans secured by non-
residential real estate - - - - -
Other -
Non-mortgage loans:
Commercial and agricultural - - - - -
Consumer 22 69 82 90 33
-----------------------------------------------------------------------
Total non-accrual loans 227 309 500 219 380
Foreclosed real estate and real estate
held for investment 323 502 72 - -
-----------------------------------------------------------------------
Total non-performing assets $ 550 $ 811 $ 572 $ 219 $ 380
=======================================================================
Total non-performing loans to net loans 0.08% 0.11% 0.19% 0.10% 0.22%
=======================================================================
Total non-performing loans to total assets 0.05% 0.07% 0.13% 0.06% 0.12%
=======================================================================
Total non-performing assets to total assets 0.13% 0.19% 0.15% 0.06% 0.12%
=======================================================================
During the years ended September 30, 1999, 1998, 1997, 1996 and 1995,
approximately $22,403, $35,317, $22,833 $11,812, and $11,593, respectively would
have been recorded on loans accounted for on a non-accrual basis if such loans
had been current according to the original loan agreements for the entire
period. These amounts were not included in the Bank's interest income for the
respective periods. No interest income on loans accounted for on a non-accrual
basis was included in income during any of these periods.
Classified Assets. Management, in compliance with regulatory guidelines, has
instituted an internal loan review program, whereby loans are classified as
special mention, substandard, doubtful or loss. When a loan is classified as
substandard or doubtful, management is required to establish a general valuation
reserve for loan losses in an amount that is deemed prudent. General allowances
represent allowances which have been established to recognize inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When management classifies a
loan as "loss", a reserve equal to 100% of the loan balance may be established
or the loan is charged-off.
An asset is considered "substandard" if it is inadequately protected by the
paying capacity and net worth of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified substandard, with the added characteristic that the
weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions, and values. Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to a sufficient degree of
risk to warrant classification in one of the aforementioned categories but
possess credit deficiencies or potential weaknesses, including all loans over 60
days delinquent, are required to be designated "special mention" by management.
The OTS has promulgated regulations that discontinue the classification of
assets as special mention. However, the Bank continues to utilize this category.
Management's evaluation of the classification of assets and the adequacy of the
reserve for loan losses is reviewed by regulatory agencies as part of their
periodic examinations. At September 30, 1999, First Federal had total classified
assets of $1.0 million of which $477,000 were considered substandard, and no
assets were classified as doubtful or loss. Special mention assets totaled
$562,000 at September 30, 1999.
7
Allowance for Loan and Lease Losses and Foreclosed Real Estate. In making loans,
First Federal 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. First Federal's
management evaluates the need to establish reserves against losses on loans and
other assets each quarter based on estimated losses on specific loans and on any
real estate held for sale or investment when a finding is made that a loss is
estimable and probable. Such evaluation includes a review of all loans for which
full collectibility may not be reasonably assured and considers, among other
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions and overall portfolio quality.
While management recognizes and charges against the allowance for loan losses
accounts which are determined to be uncollectible, experience indicates that at
any point in time, possible losses may exist in the loan portfolio which are not
specifically identifiable. Therefore, based upon management's best estimate,
each year an amount may be charged to earnings to maintain the allowance for
loan losses at a level sufficient to recognize potential risk.
Impaired loans, including all loans that are restructured in a troubled debt
restructuring involving a modification of terms, are measured at the present
value of expected future cash flows discounted at the loan's initial effective
interest rate. The fair value of the collateral of an impaired
collateral-dependent loan or an observable market price, if one exists, may be
used as an alternative to discounting. If the measure of the impaired loan is
less than the recorded investment in the loan, impairment is recognized through
the allowance for loan losses. A loan is considered impaired when, based on
current information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan
agreement.
First Federal believes it has established its existing allowance for loan losses
in accordance with GAAP. However, there can be no assurance that banking
regulators, in reviewing the Bank's loan portfolio, will not request First
Federal to significantly increase its allowance for loan losses, or that a
deteriorating real estate market or other unforeseen economic changes, may cause
First Federal to significantly increase its allowance for loan losses, therefore
negatively affecting First Federal's financial condition and earnings.
8
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
At September 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------
(Dollars in Thousands)
Total loans outstanding $311,674 $301,609 $282,513 $232,104 $187,449
=========================================================
Average loans outstanding $274,676 $276,730 $237,475 $193,202 $142,711
=========================================================
Allowance balance (beginning of period) $ 1,035 $ 852 $ 776 $ 764 $ 748
---------------------------------------------------------
Provision (credit):
Residential -- -- -- -- --
Commercial real estate 20 2 40 -- --
Land and commercial/agricultural business 418 293 -- -- --
Consumer 18 7 80 42 24
---------------------------------------------------------
Total provision 456 302 120 42 24
Charge-off:
Residential -- 45 13 -- --
Commercial real estate -- -- -- -- --
Consumer 142 87 37 34 20
---------------------------------------------------------
Total charge-offs 142 132 50 34 20
Recoveries:
Residential --
Commercial real estate --
Consumer 38 13 6 4 12
----------------------------------------------------------
Total recoveries 38 13 6 4 12
----------------------------------------------------------
Net charge-offs 104 119 44 30 8
----------------------------------------------------------
Allowance balance (at end of period) $ 1,387 $ 1,035 $ 852 $ 776 $ 764
==========================================================
Allowance as percent of total loans 0.45% 0.34% 0.30% 0.33% 0.41%
Net loans charged off as a percent of
average loans 0.04% 0.04% 0.02% 0.01% 0.01%
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, First Federal'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, 1999, is adequate.
However, assessment of the adequacy of the allowance for loan losses involves
subjective judgments regarding future events and thus there can be no assurance
that additional provisions for loan losses will not be required in future
periods.
The following table sets forth the breakdown by loan category of the allowance
for loan losses.
September 30,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------------------------------------------------------------------------------------------
(Dollars in Thousands)
Real estate loans $ 368 54.4% $ 368 60.4% $ 413 68.9% $ 426 74.8% $ 675 77.5%
Consumer and commercial business, land, 45.6% 39.6% 31.1% 25.2% 22.5%
commercial real estate and agricultural 1,019 667 439 350 89
---------------------------------------------------------------------------------------------
$ 1,387 100.0% $ 1,035 100.0% $ 852 100.0% $ 776 100.0% $ 764 100.0%
=============================================================================================
9
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, First Federal invests a portion of its assets
in commercial paper, corporate debt securities and asset-backed securities
(e.g., mortgage-backed securities). A significant portion of First Federal'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 certificates issues by
FHLMC, Federal National Mortgage Association ("FNMA") and Government National
Mortgage Association ("GNMA"). The mortgage-backed securities portfolio as of
September 30, 1999, consisted primarily of Real Estate Mortgage Investment
Conduits ("REMICs") ($43.4 million) and a FNMA certificate ($1.1 million).
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include FHLMC, FNMA, and GNMA.
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by 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
mortgages or ARM loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
(i.e. fixed rate or adjustable-rate) as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages. Mortgage-backed securities
issued by FHLMC, FNMA, and GNMA make up a majority of the pass-through market.
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to thirty
years. In periods of declining interest rates, payments on many mortgages is
received faster than the contractual amount required, causing the estimated
lives of mortgage-related securities to be significantly shorter than expected.
REMICs are typically issued by a special-purpose entity (the "issuer"), which
may be organized in a variety of legal forms, such as a trust, a corporation, or
a partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage related securities. Once combined, the cash
flows can be divided into "tranches" or "classes" of individual securities,
thereby creating more predictable average duration for each security than the
underlying pass-through pools. Accordingly, under this security structure all
principal pay downs from the various mortgage pools are allocated to a
mortgage-related class or classes structured to have priority until it has been
paid off. Thus, these securities are intended to address the reinvestment
concerns associated with mortgage-backed securities pass-through, namely that
(i) they tend to pay off when interest rates fall, thereby taking their
relatively high coupon with them, and (ii) their expected average life may vary
significantly among the different tranches.
Some REMIC instruments are more like traditional debt instruments because they
have stated principal amounts and traditionally defined interest rate terms.
Purchasers of certain other REMIC securities are entitled to the excess, if any,
of the issuer's cash inflows, including reinvestment earnings, over the cash
outflows for debt service and administrative expenses. These mortgage related
instruments may include instruments designated as residual interests, and are
riskier in that they could result in the loss of a portion of the original
investment. Cash flows from residual interests are very sensitive to prepayments
and, thus, contain a high degree of interest-rate risk. Residual interests
represent an ownership interest in the underlying collateral, subject to the
first lien of the REMICs investors.
The REMICs held by First Federal at September 30, 1999, consisted of
floating-rate tranches. The interest rate of all of 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.
10
Investment Securities. First Federal is required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectations of future yield levels,
as well as management's projections as to the short-term demand for funds to be
used in First Federal's loan origination and other activities. These securities
consisted mainly of U.S. Government Securities and U.S. government agency
obligations. The Bank also invests in debt and equity securities.
The Investment Policy of First Federal, which is established by the Board of
Directors, is designed to provide and maintain liquidity, to generate favorable
return on investments without incurring undue interest rate and credit risk, and
to compliment First Federal's lending activity. The policy currently provides
for investments held to maturity and investments available for sale.
The amount of short-term securities in excess of regulatory requirements
reflects management's strategy to provide interest rate adjustments for
securities that are shorter than their maturity. It is the intention of
management to maintain a repricing structure in the Bank's investment portfolio
that better matches the interest rate sensitivities of its assets and
liabilities. However, during periods of rapidly declining interest rates, such
investments also decline at a faster rate than the yields on fixed-rate
investments. Investment 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 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. At September 30, 1999, the market value of the debt and
equity securities portfolio (including securities available for sale) and
mortgage-backed and related securities portfolio (including mortgage-backed
securities available for sale) was $51.1 and $42.3 million, respectively.
September 30,
--------------------------------
1999 1998 1997
-------- --------- --------
(In Thousands)
Investment securities:
Debt securities $ 19,937 $ 24,412 $ 37,876
Debt securities available for sale 12,794 3,010 1,000
FHLB Stock 7,363 7,363 6,692
Equity securities available for sale 11,921 12,096 12,619
-------- -------- --------
Total investment securities 52,015 46,881 58,187
Interest-bearing deposits 16,020 17,370 3,645
Federal funds sold -- -- --
Mortgage-backed and related securities:
Mortgage-backed and related securities 27,587 36,418 38,539
Mortgage-backed and related securities
available for sale 15,979 16,574 16,699
-------- -------- --------
Total mortgage-backed and related securities
43,566 52,992 55,238
-------- -------- --------
Total investments $111,601 $117,243 $117,070
======== ======== ========
11
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, 1999.
September
30, 1999
---------------------------------------------------------------------------------------------------------------------
More than Total
Adjustable One Year or Less One to Five Years Five to Ten Years Ten Years Investment Securities
----------------- ----------------- ----------------- ----------------- ----------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
U. S.
Government
and Federal
Agency
Obligations
held to
maturity $ - - % $ 1,570 6.07 % $ 5,067 3.62 % $ 7,087 3.78 % $ 6,213 7.47 % $ 19,937 5.07 % $ 18,999
Federal Agency
Obligations
available
for sale - - - - 12,794 6.27 - - - - 12,794 6.27 12,794
Equity
Securities
available
for sale 11,921 5.04 - - - - - - - - 11,921 5.04 11,921
FHLB Stock N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 6.35
7,363 7,363
Mortgage-
backed and
related
securities
held to
maturity
26,415 5.58 - - 2 6.50 14 7.59 1,156 7.37 27,587 5.66 26,338
Mortgage-
backed and
related
securities
available
for sale 15,979 5.47 - - - - - - - - 15,979 5.47 15,979
Interest-
bearing
deposits 16,020 5.05 - - - - - - - - 16,020 5.05 16,020
------- --------- --------- --------- --------- -------- ---------
Total $70,335 5.26 % $ 1,570 6.07 % $17,863 5.52 % $ 7,101 3.79 % $ 7,369 7.45 % $111,601 5.49 % $109,414
======= ========= ========= ========= ========= ======== =========
12
Deposits and Other Sources of Funds
General. Deposits are the major source of First Federal's funds for 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 deposit inflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They also may be used on a longer-term
basis for general business purposes.
Deposits. First Federal offers a wide variety of deposit accounts. It constantly
strives to meet consumers' needs by offering new products. This, in addition to
interest rate risk management and asset/liability ratios, is taken into
consideration prior to offering new products. Deposit account terms vary,
primarily as to the required minimum balance amount, the amount of time that the
funds must remain on deposit and the applicable interest rate.
First Federal's current deposit products include regular savings, demand
deposits, NOW, money market and certificates of deposit accounts ranging in
terms from ninety-one days to five years including certificates of deposit with
negotiable interest rates and balances in excess of $100,000 (jumbo
certificates), and Individual Retirement Accounts (IRAs). All checking and
savings accounts are eligible for an Express Teller ATM card. This card can be
used at any Express Teller, Fastbank, or Instant Cash ATM in Minnesota and
surrounding states. With the addition of the Plus and Cirrus network automated
banking system, First Federal's Express Teller ATM card can be used at thousands
of ATM locations throughout the United States and the world.
Deposits are obtained primarily from residents in the Minnesota counties of
McLeod, Dakota, Meeker, Sibley, Carver, Wright, Benton, Sherburne, Stearns and
Washington. First Federal attracts deposit accounts by offering a wide variety
of products, competitive interest rates, and convenient locations and service
hours. The Bank uses traditional methods of advertising to attract new customers
and deposits, including radio and print media advertising.
First Federal pays interest on its deposits which are competitive in its market.
Interest rates on deposits are set weekly, based on a number of factors,
including: (1) the previous week's deposit flow; (2) a current survey of a
selected group of competitors' rates for similar products; (3) external data
which may influence interest rates; (4) investment opportunities and loan
demand; and (5) scheduled maturities.
The following table shows the amounts of First Federal's deposits by type of
account at the dates indicated.
(In Thousands)
NOW Accounts $ 19,366 $ 22,136 $ 24,740
Commercial Demand 13,586 8,163 3,319
Savings Accounts 65,554 53,984 47,847
------------------------------
98,506 84,283 75,906
------------------------------
Certificates of Deposit:
3.00 to 4.00% 10,013 3,744 4,204
4.01 to 5.00% 17,520 17,925 14,796
5.01 to 6.00% 66,280 52,303 50,460
6.01 to 7.00% 37,739 62,462 56,604
7.01 to 8.00% 180 3,143
--
8.01% and over 1,413 2,682 6,276
------------------------------
133,145 142,259 132,340
------------------------------
Total deposits $231,651 $226,542 $208,246
==============================
13
The following table sets forth the amount and maturities of time deposits at
September 30, 1999.
Amount Due
----------------------------------------------------------------
Less than 1 - 2 2 - 3 Greater than
One Year Years Years 3 years Total
----------------------------------------------------------------
Interest Rate (In Thousands)
2.01 - 4.00% $ 6,549 $ 3,464 $ - $ - $ 10,013
4.01 - 6.00% 74,230 3,620 2,434 3,516 83,800
6.01 - 8.00% 26,373 10,682 456 408 37,919
Over 8.00% 1,413 - - - 1,413
-------------------------------------------------------------
$ 108,565 $17,766 $ 2,890 $ 3,924 $133,145
=============================================================
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, 1999.
Certificates
of
Maturity Period Deposits
----------
(In
Thousands)
Within three months $ 7,348
Three through six months
3,133
Six through twelve months
7,911
Over twelve months
2,289
----------
$ 20,681
==========
Borrowings. Savings deposits are the primary source of funds for First Federal's
lending and investment activities and for its general business purposes. The
Bank, if the need arises, may rely upon advances from the FHLB of Des Moines to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB of Des Moines are typically secured by
First Federal's stock in the FHLB and a portion of First Federal's residential
mortgage loans and other assets (principally securities which are obligations of
or guaranteed by the U.S. Government).
Advances have been utilized when adequate spreads can be obtained and the risk
(credit risk, interest rate risk, and market risk) in the transaction minimized.
Advances have been used to purchased mortgage-backed and related securities and
to purchase single family residential mortgages originated by other financial
institutions within the state of Minnesota.
The following table sets forth certain information as to the Bank's FHLB
advances at the date indicated.
As of and for the Years Ended
September 30,
------------------------------------------
1999 1998 1997
------------------------------------------
(Dollars in Thousands)
Maximum balance $ 144,177 $ 147,234 $ 113,839
Average balance 143,123 145,459 120,093
Balance at end of period 140,967 144,177 133,817
Weighted average rate:
at end of period 5.39% 5.42% 5.83%
during the period 5.47% 5.79% 5.83%
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.
14
Subsidiary Activity
As of September 30, 1999, the Company had three directly owned subsidiaries: the
Bank, HMC and the Agency.
First Federal is permitted to invest up to 2% of its assets in the capital stock
of, in secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of September 30, 1999, First Federal was authorized to invest up to
approximately $8.4 million in the stock of service corporations (based upon the
2% limitation). First Federal has one wholly-owned subsidiary, Firstate
Services, Inc. ("FSI"). 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. As of
September 30, 1999, the net book value of First Federal's investment in stock,
unsecured loans, and conforming loans in its subsidiary was $255,172. For the
fiscal year ended September 30, 1999, FSI had net income of $58,585.
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, 1999, the net book value of the
Company's investment in stock , unsecured loans, and conforming loans in its
subsidiary was $702,150. For the fiscal year ended September 30, 1999 the Agency
had net income of $22,214.
On November 17, 1998, the Company acquired, in a transaction that was a
combination of stock and cash, all of the outstanding shares of Homeowners
Mortgage Corporation ("HMC"). HMC was incorporated in the State of Minnesota in
1988, and originates residential mortgage loans from two locations in Minnesota.
As of September 30, 1999, the net book value of the Company's investment in
stock, unsecured loans and conforming loans in its subsidiary was $3.2 million.
For the ten month period ended September 30, 1999, Homeowners had a net loss of
$63,918.
Personnel
As of September 30,1999, First Federal had 87 full-time employees and 48
part-time employees, representing a total of 115.8 full-time equivalents. The
employees are not represented by a collective bargaining agreement.
First Federal believes its relationship with its employees is satisfactory.
Competition
First Federal faces strong competition in its attraction of savings deposits,
which are its primary source of funding for lending, and in the origination of
real estate loans. The Bank's competition for savings deposits and loans
historically has come from other savings institutions and commercial banks
located in First Federal's market area. However, in recent years, mortgage
bankers have captured a larger share of the mortgage market. The size and number
of mortgage bankers, as well as their decreased costs due to less regulatory
oversight, has contributed to their growth. First Federal also faces competition
for investor funds from credit unions, investment firms and insurance companies.
First Federal competes for loans and deposits by charging competitive interest
rates and loan fees, remaining efficient, marketing aggressively and providing a
wide range of services to its customers. First Federal offers all consumer
banking services such as checking accounts, certificates of deposits, retirement
accounts, consumer and mortgage loans and ancillary services such as convenient
offices and drive-up facilities, automated teller machines and overdraft
protection.
Bank Regulation
General
First Federal is a federally chartered savings bank and a member of the FHLB of
Des Moines. First Federal's deposits are insured by the FDIC through the SAIF.
First Federal is subject to examination and regulation by the OTS and the FDIC
with respect to most of its business activities, including, among others,
lending activities, capital standards, general investment authority, deposit
taking and borrowing authority, mergers and other business combinations,
establishment of branch offices, and permitted subsidiary investments and
activities. The OTS's operations, including examination activities, are funded
by assessments levied on its regulated institutions.
First Federal is further subject to regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") concerning reserves
required to be maintained against deposits and certain other matters. Financial
institutions, including the Bank, may also be subject, under certain
circumstances, to potential liability under various statutes and regulations
applicable to property owners generally, including statutes and regulations
relating to the environmental condition of real property and the remediation
thereof.
The descriptions of the statutes and regulations applicable to the Company and
First Federal set forth below and elsewhere herein do not purport to be complete
descriptions of such statutes and regulations and their effects on the Company
and First Federal. Such descriptions also do not purport to identify every
statute and regulation that may apply to the Company or the Bank.
15
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. In
addition, FDIC regulations provide that any insured institution that falls below
a 2% minimum leverage ratio will be subject to FDIC deposit insurance
termination proceedings unless it has submitted, and is in compliance with, a
capital plan with its primary federal regulator and the FDIC. The FDIC may also
suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
Federal Home Loan Bank System
As a member of the FHLB System, First Federal is required to own capital stock
in its regional FHLB, the FHLB of Des Moines, in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, or 5% of its outstanding borrowings from the FHLB of Des Moines.
First Federal was in compliance with this requirement, with an investment of
$7.4 million in FHLB of Des Moines stock at September 30, 1999. The FHLB of Des
Moines serves as a reserve or central bank for the member institutions within
its assigned region, the Eighth FHLB District. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances to members in accordance with policies and procedures
established by the Federal Housing Finance Board and the Board of Directors of
the FHLB of Des Moines.
Current law requires each FHLB to transfer a certain portion of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"), the entity
established to raise funds to resolve troubled thrift cases, to fund the
principal and a portion of the interest on bonds issued by the REFCORP and
certain other obligations. In addition, each FHLB is required to transfer 10% of
its annual net earnings to fund certain affordable housing programs. As a result
of these requirements and other factors, the FHLB of Des Moines has experienced
reduced earnings since these provisions became effective in 1989. It is
anticipated that this may continue and that First Federal will continue to
receive a reduced level of dividends on its FHLB of Des Moines stock in future
periods. During 1999, 1998, and 1997, First Federal recorded dividend income of
$466,665, $491,888, and $417,929, respectively, on its FHLB of Des Moines stock.
Insurance of Accounts
The FDIC administers two separate deposit insurance funds. Generally, the Bank
Insurance Fund (the "BIF") insures the deposits of commercial banks and the SAIF
insures the deposits of savings institutions. The FDIC is authorized to increase
deposit insurance premiums if it determines such increases are appropriate to
maintain the reserves of either the SAIF or BIF or to fund the administration of
the FDIC. In addition, the FDIC is authorized to levy emergency special
assessments on BIF and SAIF members.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires each
savings institution, as well as commercial banks and certain other lenders, to
identify the communities served by the institution and assess the credit needs
of those communities. The CRA also requires the OTS to assess an institution's
performance in meeting the credit needs of its identified communities as part of
its examination of the institution, and to take such assessments into
consideration in reviewing applications with respect to branches, mergers and
other business combinations, and savings and loan holding company acquisitions.
An unsatisfactory CRA rating may be the basis for denying such an application
and community groups have successfully protested applications on CRA grounds.
The OTS assigns CRA ratings of "outstanding, satisfactory, need to improve, or
substantial noncompliance". First Federal was rated "satisfactory" in its last
CRA examination in May, 1999.
Regulatory Capital Requirement. The following table reflects, in both dollars
and ratios, First Federal's regulatory capital position as of September 30,
1999, as well as the requirements at that date.
Required
First Federal fsb minimum Excess
regulatory capital regulatory regulatory
Amount Percent(1) capital capital
-------------------------------------------------
(Dollars in Thousands)
Tangible equity $37,246 9.0% $ 6,201 $31,045
Tier 1 (Core) capital 37,246 9.0% 16,536 $20,710
Tier 1 risk-based capital 37,246 14.2% 10,528 $26,718
Total risk-based capital 37,629 14.3% 21,057 $16,572
- -----------------------------------------
(1)Based upon a percentage of adjusted total assets for tangible and core
capital and a percentage of risk-adjusted assets for risk-based capital.
16
OTS regulated institutions are required to maintain additional risk-based
capital equal to one-half of the amount by which the decline in its "net
portfolio value" that would result from a hypothetical 200 basis point change
(up or down, depending on which would result in the greater reduction in net
portfolio value) in interest rates on its assets and liabilities exceeds 2% of
the estimated "economic value" of its assets. The one exception to this general
rule is that if the three month Treasury bond equivalent yield falls below 4%,
an institution would measure the hypothetical downward change at one-half of
that Treasury yield. An institution's "net portfolio value" is defined for this
purpose as the difference between the aggregate expected future cash inflows
from an institution's assets and the aggregate expected cash outflows on its
liabilities, plus the net expected cash flows from existing off-balance sheet
contract, each discounted to present value. The estimated "economic value" of an
institution's assets is defined as the discounted present value of the estimated
future cash flows from its assets. Both the "net portfolio value" and the
"economic value" include, as specified in the regulation, the book value of
assets and liabilities that are not interest rate sensitive. The OTS has stated
that implementation of this amendment to its regulations will require additional
capital to be maintained only by institutions having "above normal" interest
rate risk. Based on the assets and liabilities comprising First Federal's
statement of financial condition as of September 30, 1999, there was no
additional increase required in First Federal's minimum capital requirement.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement
Act of 1989 ("FDICIA"), among other things, established a system of prompt
corrective action to resolve problems of undercapitalized institutions. Under
this system, the banking regulators are required to take certain supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's degree of capitalization. Under the OTS final rule
implementing the prompt corrective action provisions, an institution shall be
deemed to be (i) "well capitalized" if it has total (risk-based) capital of
10.0% or more, has a Tier I (risk-based) capital ratio of 6.0% or more, has Tier
1 (core) capital of 5.0% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital
measure, (ii) "adequately capitalized" if it has a total (risk-based) capital
ratio of 8.0% or more, Tier I (risk-based) ratio of 4.0% or more and a Tier 1
(core) capital ratio of 4.0% or more (3.0% under certain circumstances) and does
not meet the definition of well capitalized, (iii) "undercapitalized" if it has
a total (risk-based) capital ratio that is less than 6.0%, a Tier I (risk-based)
capital ratio that is less than 4.0% or a Tier 1 (core) capital ratio that is
less than 4.0% (3.0% in certain circumstances), (iv) "significantly
undercapitalized" if it has a total (risk-based) capital ratio that is less than
6.0%, a Tier I (risk-based) capital ratio that is less than 3.0% or a Tier 1
(core) capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. In addition, under certain circumstances, a federal
banking agency may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution or an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the OTS may not reclassify a significantly
undercapitalized institution as critically undercapitalized). At September 30,
1999 First Federal was a "well capitalized institution" as defined in the prompt
corrective action regulations and as such is not subject to any prompt
corrective action measures.
Dividend and Other Capital Distribution Limitations. The OTS imposes various
restrictions or requirements on the ability of savings institutions to capital
distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan holding
company, such as the Association after the conversion, 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.
In addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that the distribution would constitute an unsafe or unsound practice.
A federal savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be unable to
meet any one of its minimum regulatory capital requirements. Further, a federal
savings institution cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended ("HOLA"),
requires savings institutions to meet a Qualified Thrift Lender ("QTL") test. If
an institution maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including
mortgage-backed securities) ("QTIs") on a monthly basis in nine out of every 12
months and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB of Des Moines. The required percentage of
QTIs is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. As of
September 30, 1999, First Federal was in compliance with its QTL requirement
with 74.4% of assets invested in QTIs.
17
Loans-to-One Borrower. See "Lending Activities -- Loans-to-One Borrower."
Transactions with Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital;
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company, the
Agency, HMC and any company which would be under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of any affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
Branching by Federal Associations. Effective May 11, 1992, the OTS amended its
Policy Statement on Branching by Federal Savings Associations to permit
interstate branching to the full extent permitted by statute (which is
essentially unlimited). This permits savings associations with interstate
networks to diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
associations. However, the OTS will evaluate a branch's record of compliance
with the CRA. A poor CRA record may be the basis for denial of a branching
application.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At September
30, 1999, the Bank was in compliance with all applicable requirements.
Savings associations have authority to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve policy generally requires savings
associations to exhaust all other sources before borrowing from the Federal
Reserve System.
Holding Company Regulation
General. The Company is registered with the OTS as a unitary savings and loan
holding company. As such, the Company 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 Company 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 Company. The Company also is required to file
certain reports with, and otherwise comply with, the rules and regulations of
the Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions, provided the Bank satisfies the QTL
test. If the Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any subsidiaries (other than the
Bank or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL and were acquired in a supervisory acquisition.
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any SAIF-insured association. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally insured savings
institution without giving at least 60 days' written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. Such
acquisitions of control may be disapproved if it is determined, among other
things, that (a) the acquisition would substantially lessen competition; (b) the
financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interest of its
depositors; or (c) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
Subject to appropriate regulatory approvals, a bank holding company can acquire
control of a savings association, and it controls a savings association, merge
or consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. Generally, federal savings associations can acquire or be
acquired by any insured depository institution.
18
Federal Securities Law. The Company's stock held by persons who are affiliates
(generally officers, directors, and principal shareholders) of the Company may
not be resold without registration or unless sold in accordance with certain
sale restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Recent Developments - Financial Modernization. On November 12, 1999, President
Clinton signed into law the Gramm-Leach-Bliley Act (the "Act") which will,
effective March 11, 2000, permit qualifying bank holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.
The Act defines "financial in nature" to include securities underwriting,
dealing and market making; sponsoring mutual funds and investment companies;
insurance underwriting and agency; merchant banking activities; and activities
that the Board has determined to be closely related to banking. A qualifying
national bank also may engage, subject to limitations on investment, in
activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development, and real estate
investment, through a financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from engaging in
nonfinancial activities or from affiliating with an nonfinancial entity. As a
grandfathered unitary thrift holding company, the Company will retain its
authority to engage in nonfinancial activities.
19
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 feet office facility
which it built in 1985/86. The total investment in property and equipment at 201
Main Street South had a net book value of $1.7 million at September 30, 1999.
Additional offices, either owned or leased by the Bank and HMC, are set forth
below with information regarding net book value of the premises and equipment at
such facilities at September 30, 1999.
Year
Acquired or Net Book
Date Lease Value at Square
Location Expires September 30, 1999 Footage
- ------------------------- --------------------------------------------
(Dollars in thousands)
14994 Glazier Avenue
Apple Valley, MN 55124 1989 $257 3,000
19 Central Avenue
Buffalo, MN 55313 1973 71 1,800
305 10th Avenue S
Buffalo, MN 55313 1999 1,188 5,620
1002 Greeley Avenue
Glencoe, MN 55336 2000(1) 57 1,100
1320 South Frontage Road
Hastings, MN 55033 1984 851 15,000
905 Highway 15 South,
Frontage Road
Hutchinson, MN 55350 1980 204 1,400
6505 Cahill Avenue
Inver Grove Heights, MN 55075 1979 329 3,000
501 North Sibley Avenue
Litchfield, MN 55355 1978 183 2,400
200 East Frontage Road,
Highway 5
Waconia, MN 55387 1985 339 2,400
122 East Second Street
Winthrop, MN 55396 2000 (2) 8 950
113 Waite Avenue South
Waite Park, MN 56387 2003 (3) 52 550
135 3rd Avenue SW
Hutchinson, MN 55350 2001 (4) 33 1,200
1001 Labore Industrial Court
Suite E
Vadnais Heights, MN 55110 2001 (5) 60 7,748
(1) One year lease expires in April, 2000 with option to renew for one year
terms thereafter. The Bank expects to renew the lease.
(2) Lease expires in July, 2000 with option to renew for one year terms. The
Bank expects to renew the lease.
(3) Lease expires in September, 2003 with an option to renew for an additional
five year term.
(4) Lease expires September, 2001 with an option to renew for one year terms.
(5) Lease expires January, 2001 with the option to renew for 2 additional
years.
20
The Bank leases approximately 1,400 square feet of the property in Hastings,
Minnesota under a three year operating lease. This lease will expire April 14,
2000, with annual rents totaling $8,317 in addition to their proportionate share
of the operating expenses.
The Agency operates from its main office located at 135 3rd Avenue Southeast,
Hutchinson, Minnesota and also has an office within the Bank's building in
Buffalo, Minnesota. Those facilities are covered by a month to month lease under
the terms of an expense sharing agreement.
HMC operates from its main office located at 1001 Labore Industrial Court,
Vadnais Heights, Minnesota and also has an office within the Bank's building in
Hastings, Minnesota. These facilities are covered by a month to month lease
under the terms of an expense sharing agreement.
ITEM 3. LEGAL PROCEEDINGS
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 Bank is not engaged in any legal proceedings of a material nature at the
present time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
In connection with the acquisitions of the Agency and HMC, the Company issued an
additional 116,800 shares of common stock, and registered the shares with the
Securities and Exchange Commission on July 21, 1999.
For additional information relating to the market for Registrant's common equity
and related stockholder matters, see "Corporate Profile and Stock Market
Information" in the Registrant's 1999 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
Registrant's 1999 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
1999 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 1999 Annual
Report to Stockholders on pages 4 through 7 and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiary,
together with the report thereon by Bertram Cooper & Co., LLP appears in the
Bank's 1999 Annual Report to Stockholders on pages 15 through 40 and are
incorporated herein by reference.
Quarterly Results of Operations on page 41 of the 1999 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
21
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Information with Respect
to Nominees for Director, Directors Continuing in Office, and Executive
Officers" at pages 3 to 8 the Registrant's definitive proxy statement for the
Company's Annual Meeting of Stockholders to be held on January 18, 2000 (the
"Proxy Statement"), which was filed with the Commission on December 10, 1999,
and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement at pages 8 through 14.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Registrant's Proxy
Statement at pages 2 through 5.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions is
incorporated herein by reference to the Registrant's Proxy Statement at page 15.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Bank are incorporated by
reference to the following indicated pages of the 1999 Annual Report to
Stockholders. PAGE
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . 15
Consolidated Statements of Financial Condition as of
September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Income for the Years
Ended September 30, 1999, 1998 and 1997 . . . . . . . . . . . . . 17
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1999, 1998 and 1997 . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . 21
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial statements or
the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
2.1 Plan of Conversion Merger of Hutchinson and Hastings *
2.2 Agreement of Merger *
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***
13.0 1999 Annual Report to Stockholders
21.0 Subsidiary Information
22
23.0 Consent of Accountant
27.0 Financial Data Schedule ****
- ---------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, initially filed with the Commission, on
June 1, 1994, Registration No. 33-79570.
** Incorporated herein by reference into this document from the Registrant's
proxy statement for the Annual Meeting of Stockholders held on January 17,
1996, and filed with the Commission on December 13, 1995.
*** Incorporated herein by reference into this document from the Registrant's
proxy statement for the Annual Meeting of Stockholders held on January 20,
1998, and filed with the Commission on December 10, 1997.
**** Included with electronic filing only.
23
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 10, 1999 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 Chief Financial Officer
and Chief Executive Officer and Treasurer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Director
Date: December 10, 1999 Date: December 10, 1999
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 10, 1999 Date: December 10, 1999
By: /s/ Roger R. Stearns By: /s/ James J. Caturia
-------------------- --------------------
Roger R. Stearns James J. Caturia
Director Director
Date: December 10, 1999 Date: December 10, 1999
By: /s/ Jerome R. Dempsey
---------------------
Jerome R. Dempsey
Director
Date: December 10, 1999