SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24648
FSF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Minnesota 41-1783064
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal year,
if changed since lastreport.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicated the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date January 30, 1998.
----------------
Class Outstanding
$.10 par value common stock 3,045,575 shares
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997*
--------------------------
(In thousands)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents:
Interest bearing $ 3,223 $ 3,645
Non-interest bearing 2,378 2,490
Securities available for sale, at fair value:
Equity securities 19,945 19,311
Mortgage-backed and related securities 16,680 16,699
Debt securities 2,000 1,000
Securities held to maturity, at amortized cost:
Debt securities (estimated fair value of $36,882 and $37,065) 37,382 37,876
Mortgage-backed and related securities (estimated fair value of
$37,554 and $37,535) 38,509 38,539
Loans held for sale 739 204
Loan receivable, net 273,829 260,390
Accrued interest receivable 2,682 2,436
Premises and equipment 3,806 3,772
Other assets 1,677 1,773
----------------------
Total Assets $ 402,850 $ 388,135
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 28,251 $ 28,059
Savings accounts 48,737 47,847
Certificates of deposit 135,696 132,340
----------------------
Total deposits 212,684 208,246
Federal Home Loan Bank borrowings 143,754 133,817
Other liabilities 2,462 2,710
----------------------
Total liabilities 358,900 344,773
----------------------
Stockholders' equity:
Serial preferred stock, no par value 5,000,000 shares
authorized, no shares issued - -
----------------------
Common stock, $.10 par value 10,000,000 shares authorized,
4,501,277 and 4,501,277 shares issued 450 450
Additional paid in capital 43,349 43,334
Retained earnings, substantially restricted 24,184 23,779
Treasury stock at cost (1,486,316 and 1,491,562 shares) (20,227) (20,267)
Unearned ESOP shares at cost (226,810 and 234,745 shares) (2,268) (2,347)
Unearned MSP stock grants at cost (97,756 and 104,604 shares)
(1,035) (1,108)
Unrealized (loss) on securities available for sale (503) (479)
----------------------
Total stockholders' equity 43,950 43,362
----------------------
Total Liabilities and Stockholders' Equity $ 402,850 $ 388,135
======================
</TABLE>
- -------------------------------------------------------
* The consolidated statements of financial condition at September 30, 1997,
has been taken from the audited financial statements of financial condition
of and for that date.
See Notes to Unaudited Consolidated Financial Statements
1
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
----------------
1997 1996
----------------
(In thousands)
<S> <C> <C>
Interest income:
Loans receivable $5,689 $4,714
Mortgage-backed and related securities 797 855
Investment securities 878 995
----------------
Total interest income 7,364 6,564
----------------
Interest expense:
Deposits 2,453 2,184
Borrowed funds 2,095 1,702
----------------
Total interest expense 4,548 3,886
----------------
Net interest income 2,816 2,678
Provision for loan losses 45 30
----------------
Net interest income after provision for loan losses 2,771 2,648
----------------
Non-interest income:
Gain (loss) on loans - net 15 5
Other service charges and fees 107 96
Service charges on deposit accounts 213 164
Commission income 53 50
Other 20 23
----------------
Total non-interest income 408 338
----------------
Non-interest expense:
Compensation and benefits 1,236 1,110
Occupancy and equipment 205 184
Deposit insurance premiums 33 71
Data processing 118 98
Professional fees 69 60
Other 277 251
----------------
Total non-interest expense 1,938 1,774
----------------
Income before provision for income taxes 1,241 1,212
Income tax expense 495 490
----------------
Net income $ 746 $ 722
===============
Basic earnings per share $ 0.28 $ 0.25
Diluted earnings per share $ 0.26 $ 0.24
Common Stock dividend declared per share $0.125 $0.125
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
2
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1997 1996
--------------------------
Cash flows from operating activities: (In thousands)
<S> <C> <C>
Net income $ 746 $ 722
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 81 77
Net amortization of discounts and premiums on
securities held to maturity
(7) (9)
Provision for loan losses 45 30
Net market value adjustment on ESOP shares 50 23
Amortization of ESOP and MRP stock compensation 152 171
Net gain on real estate owned
(2) --
Net loan fees deferred and amortized 63
6
(Increase) decrease in:
Loans held for sale (136) (175)
Accrued interest receivable (246) (57)
Other assets (16) (43)
Increase (decrease) in:
Net deferred taxes 100 365
Accrued interest payable - 35
--------------------
Accrued income tax 118 75
Accrued liabilities 62 (811)
Deferred compensation payable 109 20
--------------------
Net cash provided by operating activities 1,062 486
--------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net (13,816) (8,930)
Purchase of loans (72) (1,270)
Principal payments on mortgage related securities held to maturity 30 5
Purchase of securities available for sale (1,647) -
Proceeds from maturities of securities held to maturity 500 -
Investment in foreclosed real estate (2) -
Proceeds from sale of foreclosed real estate 24 -
Purchase of equipment and property improvements (115) (88)
--------------------
Net cash (used in) investing activities $(15,098) $(10,283)
--------------------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
3
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits, $ 4,439 $ 11,795
Net increase (decrease) in short-term borrowings 9,937 (73)
Net decrease in mortgage escrow funds (530) (314)
Treasury stock purchased (99) (3,443)
Dividends on common stock (342) (374)
Proceeds from exercise of stock options 97 0
---------------------------------
Net cash provided by financing activities 13,502 7,591
---------------------------------
Net decrease in cash and cash equivalents (534) (2,206)
Cash and cash equivalents:
Beginning of year 6,135 11,755
---------------------------------
End of year $ 5,601 $ 9,549
=================================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 2,099 $ 1,688
Interest on deposits 2,448 2,164
Income taxes 301 43
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments $ 17 $ 16
</TABLE>
4
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the
three month period ended December 31, 1997, include the accounts of
FSF Financial Corp. ("the Corporation") and its wholly owned
subsidiary, First Federal fsb (the "Bank") and Firstate Services, a
wholly owned subsidiary of the Bank. The Corporation's business is
conducted principally through the Bank. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and,
therefore, do not include information or footnotes necessary for a
complete presentation of consolidated financial condition, results of
operations, and cash flows in conformity with generally accepted
accounting principles. However, all adjustments, consisting of normal
recurring accruals, which, in the opinion of management, are
necessary for fair presentation of the consolidated financial
statements have been included. The results of operations for the
period ended December 31, 1997, are not necessarily indicative of the
results which may be expected for the entire fiscal year or any other
period. For further information, refer to consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1997.
NOTE 3 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
necessary restated, to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Three Months ended
December 31,
-------------------------------------
1997 1996
-------------------------------------
<S> <C> <C>
Numerator:
Net income - Numerator for basic earnings
per share and diluted earnings per share--
income available to common stockholders $ 746,000 $ 722,000
=====================================
Denominator:
Denominator for basic earnings per share--
weighted-average shares 2,681,151 2,920,922
Effect of dilutive securities:
Employee stock options 219,818 139,230
-------------------------------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 2,900,969 3,060,152
=====================================
Basic earnings per share $ 0.28 $ 0.25
Diluted earnings per share $ 0.26 $ 0.24
</TABLE>
5
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at December 31, 1997, and September 30, 1997
totaled 859263119$402.9 million and $388.1 million, respectively. The increase
of $14.8 million was primarily a result of an increase in loans receivable, a
decrease in interest bearing cash equivalents and the purchase of securities
classified as available for sale.
Cash and cash equivalents decreased from $6.1 million at September 30, 1997, to
859263575$5.6 million at December 31, 1997. The Corporation utilized excess
liquidity to fund the purchase of treasury shares and loan originations.
Securities available for sale increased $1.6 million between September 30, 1997,
and December 31, 1997, primarily as a result of purchase of such securities.
Securities held to maturity decreased from $76.4 million at September 30, 1997,
to $75.9 million at December 31, 1997. $500,000 of securities have matured since
September 30, 1997 and the proceeds were used to help fund the purchase of
treasury shares and pay dividends.
Loans held for sale increased $535,000, to $739,000 at December 31, 1997, from
$204,000 at September 30, 1997.
Loans receivable increased $13.4 million or 5.1% to $273.8 million at December
31, 1997, from $260.4 million at September 30, 1997.
The following table sets forth information on loans originated and purchased for
the periods indicated:
Three Months Ended
December 31,
-----------------------------
1997 1996
-----------------------------
Loans Originated: (In Thousands)
Residential mortgages $ 17,847 $ 12,572
Agricultural loans 1,320
-
Land and commercial real estate 662 5,125
Commercial Business 369 490
Consumer Loans 7,275 5,397
---------------------------
Total Loans Originated 27,473 23,584
---------------------------
Residential mortgages purchased 595
72
Commercial Business purchased 2,725 675
---------------------------
Total loans purchased 2,797 1,270
---------------------------
Total New Loans $ 30,270 $ 24,854
===========================
The commercial loans purchased meet the risk profile established by the Bank,
generally have interest rates that are based on the "Prime" rate as published in
the Wall Street Journal, and provide the Bank with the opportunity to continue
to diversify the composition of their loan portfolio.
6
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio in
dollars and in percentages of total loans at the date indicated:
<TABLE>
<CAPTION>
December 31, September 30,
-----------------------------------------------
1997 1997
-----------------------------------------------
Amount % Amount %
-----------------------------------------------
Residential real estate: Dollars in Thousands)
<S> <C> <C> <C> <C>
One-to-four family (1) $175,210 60.3 $ 170,422 60.3
Residential construction 18,320 6.3 20,796 7.4
Multi-family 5,337 1.8 5,270 1.9
----------------------------------------------
198,867 68.5 196,488 69.6
Agricultural loans 1,320 0.5
-
Land and commercial real estate 35,339 12.2 36,682 13.7
Commercial business 12,190 4.2 8,114 2.2
----------------------------------------------
247,716 85.3 241,284 85.5
Consumer:
Savings accounts 2,009 0.7 977 0.3
Home equity and second mortgage 21,828 7.5 20,812 7.4
Automobile loans 11,698 4.0 11,596 4.1
Other 7,121 2.5 7,844 2.7
----------------------------------------------
Total loans 290,372 100.0 282,513 100.0
========== ==========
Less:
Loans in process (14,213) (20,364)
Deferred fees (698) (703)
Allowance for loan losses (892) (852)
--------- ================
Total loans, net $274,569 $ 260,594
========== ================
</TABLE>
- -------------------------------------------------
(1) Includes loans held for sale in the amount of $739,000 and $204,000 as of
December 31, 1997 and September 30, 1997, respectively.
Real estate owned at December 31, 1997, totaled $52,000, which consisted of a
single-family residential property. No loss is expected in the disposition of
the property.
Deposits after interest credited increased from $208.2 million at September 30,
1997, to $212.7 million at December 31, 1997, an increase of $4.5 million or
2.2%. Overall cost of funds remained level during the period as the Bank
attempted to maintain deposit rates consistent with marketplace competitors.
Federal Home Loan Bank ("FHLB") borrowings increased $10.0 million from $133.8
million at September 30, 1997, to $143.8 million at December 31, 1997. The
borrowings were utilized as an additional source of funding of the overall
growth in total assets.
The Corporation completed the repurchase of 5,000 shares of common stock and
when netted with the exercise of 10,246 of stock option shares, reduced the
number of treasury shares to 1,486,316 at December 31, 1997. Treasury shares are
to be used for general corporate purposes, including the issuance of shares in
connection with the exercise of stock options. Total stockholders' equity
increased from $43.4 million at September 30, 1997, to $44.0 million at December
31, 1997. The $600,000 increase in stockholders' equity was primarily a result
of net income during the period. Book value per share increased from $16.24 at
September 30, 1997, to $16.34 at December 31, 1997.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when, in the opinion of management, the collection of additional interest is
doubtful. Loans are placed on a non-accrual status when either principal or
interest 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 of the assessment of the ultimate
collectibility of the loan.
During the three months ended December 31, 1997, and 1996, approximately $45,043
and $8,314 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
7
<PAGE>
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. During the periods indicated the Bank held no foreign loans.
The following table sets forth information with respect to the Bank's
non-performing domestic loans for the periods indicated:
<TABLE>
<CAPTION>
December 31, September 30,
----------------------------------
1997 1997
----------------------------------
(In Thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $394 $393
Permanent loans secured by one-to-four-family units 346 25
Non-mortgage loans:
Commercial - -
Consumer 79 82
------------------------
Total non-accrual loans 819 500
Foreclosed real estate and real estate held for investment 52 72
------------------------
Total non-performing assets $871 $572
========================
Total non-performing loans to net loans 0.30% 0.18%
========================
Total non-performing loans to total assets 0.20% 0.13%
========================
Total non-performing assets to total assets 0.22% 0.14%
========================
</TABLE>
8
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
The following table sets forth information with respect to the Corporation's
average balance sheet, interest and dividends earned or paid, and related yields
and rates:
FSF FINANCIAL CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND DIVIDENDS
EARNED OR PAID, AND RELATED INTEREST YIELDS AND RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended December 31,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Assets: Balance Interest Rates (1) Balance Interest Rates (1)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (2) $ 267,453 $ 5,689 8.51 % $ 222,285 $ 4,714 8.48 %
Mortgage-backed securities 55,225 797 5.77 54,976 855 6.22
Investment securities (3) 63,114 878 5.56 70,700 995 5.63
----------------------- ------------------------
Total interest-earning assets 385,792 7,364 7.64 347,961 6,564 7.55
----------------------- -------------------------
Other assets 10,115 10,544
----------- ----------
Total assets $ 395,907 $ 358,505
=========== ==========
Liabilities:
Interest-bearing deposits $ 208,015 $ 2,453 4.72 % $ 194,972 $ 2,184 4.48 %
Borrowings 141,567 2,095 5.92 114,657 1,702 5.94
----------------------- ------------------------
Total interest-bearing liabilities 349,582 4,548 5.20 % 309,629 3,886 5.02 %
----------------------- -------------------------
Other liabilities 2,663 2,589
----------- ----------
Total liabilities 352,245 312,218
Stockholders' equity 43,662 46,288
----------- ----------
Total liabilities and stockholders'
equity $ 395,907 $ 358,505
=========== ==========
Net interest income $ 2,816 $ 2,678
Net Spread (4) 2.44 % 2.53 %
Net Margin (5) 2.92 % 3.08 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.10X 1.12X
</TABLE>
- ------------------------
(1) Annualized
(2) Average balances include non-accrual loans and loans held for sale.
(3) Includes interest-bearing deposits in other financial institutions.
(4) Net spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net margin represents net interest income as a percentage of average
interest-earning assets.
Net Income. The Corporation recorded net income of $746,000 for the three months
ended December 31, 1997, as compared to net income of $722,000 for the three
month period ended December 31, 1996. The increase in net income of $24,000 or
3.3% was primarily the result of higher net interest income.
Total Interest Income. Total interest income increased by $800,000 or 12.1% to
$7.4 million for the three months ended December 31, 1997, from $6.6 million for
the three months ended December 31, 1996, primarily due to increases in the
average balance of, and average yield on loans receivable. The average yield on
loans increased to 8.51% for the quarter ended December 31, 1997, from 8.48% for
the quarter ended December 31, 1996. During this same period, the average yield
on mortgage-backed securities decreased 45 basis points (100 basis points equals
1%). The average balance of investment securities decreased to $63.1 million for
the quarter ended December 31, 1997, from $70.7 million for the quarter ended
December 31, 1996. The average yield decreased 7 basis points from 5.63% for the
three months ended December 31, 1996, to 5.56% for the same period in 1997, as
interest rates in general decreased between the periods.
9
<PAGE>
Total Interest Expense. Total interest expense increased to $4.5 million for the
three months ended December 31, 1997, from $3.9 million for the same period in
1996. The average balance of interest-bearing deposits increased from $195.0
million for the three months ended December 31, 1996, to $208.0 million for the
three months ended December 31, 1997. This increase was comprised of interest
credited and an increase in certificate accounts. The average cost of deposits
increased by 24 basis points from 4.48% for the three months ended December 31,
1996, to 4.72% for the same period in 1997, due to increased certificate account
balances. No assurance can be made that deposits can be maintained in the future
without further increasing the cost of funds if interest rates should increase.
The average balance of borrowings increased $26.9 million to $141.6 million for
the three months ended December 31, 1997, from $114.7 million for the three
months ended December 31, 1996. The cost of borrowings decreased 2 basis points
to 5.92% for the three months ended December 31, 1997, from 5.94% for the same
period in 1996. Borrowings increased as the Bank utilized borrowings to
supplement deposits and meet other liquidity and lending needs.
Net Interest Income. Net interest income increased from $2.7 million for the
three months ended December 31, 1996, to $2.8 million for the same period ended
December 31, 1997, an increase of $138,000 or 5.1%. Average interest-earning
assets increased $37.8 million, from $348.0 million for the three months ended
December 31, 1996, to $385.8 million for the three months ended December 31,
1997, while the average yield on interest-earning assets increased 9 basis
points from 7.55% for 1996 to 7.64% for 1997. Average interest bearing
liabilities increased by $40.0 million to $349.6 million for the three months
ended December 31, 1997, from $309.6 million for the three months ended December
31, 1996, and the cost of interest-bearing liabilities increased from 5.02% for
1996 to 5.20% in 1997.
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
<TABLE>
<CAPTION>
For the Three Months
At December 31,
------------------------------
1997 1996
------------------------------
(In Thousands)
<S> <C> <C>
Total loans outstanding (1) $274,569 $227,400
==============================
Average loans outstanding $267,582 $222,285
==============================
Allowance balance (beginning of period)
$ 852 $ 776
------------------------------
Provision (credit):
Residential (2)
Land and commercial real estate 24 16
Commercial/Agricultural business 15 10
Consumer 6 4
------------------------------
Total provision 45 30
Charge-off:
Residential - -
Land and commercial real estate - -
Consumer 6 9
------------------------------
Total charge-offs 6 9
Recoveries:
Residential - -
Commercial real estate - -
Consumer 1 -
------------------------------
Total recoveries 1 -
------------------------------
Net charge-offs 5 9
------------------------------
Allowance balance (end of period) $ 892 $ 797
==============================
Allowance as percent of total loans 0.32% 0.35%
Net loans charge off as a percent of average loans - -
</TABLE>
- -------------------------------------------------------------
(1) Includes total loans (including loans held for sale), net of loans in
process (2) Includes one- to four-family and multi-family residential real
estate loans.
Provision for Loan Losses. The Bank's provision for loan losses was $45,000 for
the three months ended December 31, 1997, compared to $30,000 for the same
period in 1996. Land and commercial real estate loans decreased from 13.7% of
total loans at September 30, 1997 to 12.2% at December 31, 1997, and commercial
business loans increased from 2.2% to 4.2%, respectively. Agricultural loans,
land and commercial real estate loans and commercial business loans are
generally considered to contain a higher risk profile than single family
residential mortgages. In response to these changes, management has increased
the provision for loan losses in order to maintain allowance for loan losses at
levels management considers adequate. The Bank's allowance
10
<PAGE>
for loan losses was $892,000 and $797,000 at December 31, 1997, and December 31,
1996, respectively. At December 31, 1997, the Bank's allowance for loan losses
constituted 102.4% of non-performing assets as compared to 538.5% of
non-performing assets at December 31, 1996. The allowance for losses on loans is
maintained at a level which is considered by management to be adequate to absorb
probable loan losses on existing loans that may become uncollectible, based on
an evaluation of the collectibility of loans and prior loan loss experience and
market conditions. The evaluation takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. The allowance for loan losses is
established through a provision for loan losses charged to expense. While the
Bank maintains its allowance for losses at a level which it considers to be
adequate, there can be no assurances that further additions will not be made to
the loss allowances or that such losses will not exceed the estimated amounts.
Non-interest Income. Total non-interest income increased $70,000 during the
three month period ended December 31, 1997, to $408,000 as compared to the same
period in 1996. Fixed-rate loans with terms greater than 20 years were sold
during the quarter ended December 31, 1997 for a gain of $15,000. Service
charges on deposit accounts increased from $164,000 for the three months ended
December 31, 1996, to $213,000 for the three months ended December 31, 1997, an
increase of $49,000 or 29.9%.
Non-interest expense. Total non-interest expense increased $164,000 or 9.2% over
the periods compared. Compensation and benefits increased to $1,236,000 for 1997
from $1,110,000 for 1996. Occupancy expense was $205,000 for the three months
ended December 31, 1997, versus $184,000 for the same period in 1996. Deposit
insurance premiums decreased 53.5%, as a result of the reduction in the SAIF
premium. Professional fees increased from $60,000 for the first quarter of
fiscal 1997 to $69,000 for the first quarter of fiscal 1998. Data processing
increased $20,000 from the quarter ended December 31, 1996 to $118,000 for the
quarter ended December 31, 1997.
Historically, date fields in computer software programs were programmed using
two digit characters to represent the year. Due to this practice, these software
applications, if not corrected prior to the year 2000, will interpret the year
as 1900 and not 2000. As a result, many calculations which rely on the date
field information, such as interest, payment or due dates and other operating
functions, will generate results which will be significantly misstated.
To prepare for this event and to minimize its potential adverse impact,
management has begun a process to identify areas that will be affected by this
issue, assess their potential impact on the operations of the Bank, monitor the
progress of third party software vendors in addressing this matter, testing
changes provided by these vendors, and developing contingency plans for any
critical systems which are not effectively reprogrammed.
The Bank's material data processing functions are performed using software
provided by a third party vendor. This vendor has advised its users that it
expects to resolve any potential problems prior to the year 2000. In addition,
this vendor will provide ongoing communication to its users to assist them in
implementing tests of the vendor's software. If this vendor is unable to correct
potential problems in time, or if tests should prove the proposed corrections to
be insufficient, it is likely that the Bank would experience significant data
processing delays, errors or failures. Such delays, errors or failures could
have a significant adverse impact on the financial condition and results of
operations of the Bank. In addition, monitoring and managing the year 2000
project will result in additional direct and indirect costs to the Bank. Direct
costs include potential charges by third party software vendors for product
enhancements, costs involved in testing software products for year 2000
compliance, and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. Total costs are estimated not to exceed
$50,000. Actual costs will be charged to earnings over the next seven quarters,
as incurred.
Income Tax Expense. Income taxes increased by $5,000 or 1%, to $495,000 for the
three month period ended December 31, 1997, from $490,000 for the same period in
1997, primarily due to the increase of $29,000 in income before tax.
11
<PAGE>
Liquidity and Capital Resources
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of tangible and Tier 1 capital (as
defined) to adjusted total assets (as defined).
As of December 31, 1997, the most recent notification from the OTS categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual regulatory capital amounts and ratios, are also presented in
the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ---------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
GAAP captial, December 31, 1997 $ 39,254
Add: Unrealized losses on debt
securities held for sale 178
----------
Tangible capital and ratio to
adjusted total assets $ 39,432 9.9% $ 5,980 1.5%
------------------------ ----------------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $ 39,432 9.9% $ 11,970 3.0% $ 19,933 5.0%
------------------------ ---------------------------- ------------------------
Tier 1 capital and ratio to
risk-weighted assets $ 39,432 18.1% $ 8,734 4.0% $ 13,101 6.0%
-------------- ---------------------------- ------------------------
Tier 2 capital, allowance for loan losses 892
----------
Total risk-based capital and ratio to
risk-weighted assets, December 31, 1997 $ 40,324 18.5% $ 17,468 8.0% $ 21,835 10.0%
======================== ============================ ========================
</TABLE>
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or a downturn in the
economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
The Bank's liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits, and other cash outflows in an efficient, cost effective manner. The
Bank's primary sources of funds are deposits and scheduled amortization and
principal payment of loans and mortgage-backed securities. During the past
several years, the Bank has used such funds primarily to fund maturing time
deposits, pay savings withdrawals, fund lending commitments, purchase new
investments, and increase liquidity. The Bank is currently able to fund the
majority of its operations internally and uses borrowed funds from the Federal
Home Loan Bank of Des Moines when deemed appropriate by management. As of
December 31, 1997, such borrowed funds totaled $143.8 million. Loan payments,
maturing investments and mortgage-backed security prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments", which include certain United States government
obligations and other approved investments. In December, 1997, the federal
regulators reduced the requirement for Banks to maintain liquid assets from 5%
to not less than 4% of its
12
<PAGE>
net withdrawable accounts plus short term borrowing, and eliminated the
requirement to maintain not less than 1% of short term liquid asset of such
accounts and borrowings. The Bank's regulatory liquidity was 5.4% and 7.0% at
December 31, 1997, and 1996, respectively. The options from the previous method
were used in the current period, which are more restrictive.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending December 31, 1998, is approximately $86.7 million. To the
extent that these deposits do not remain at the Bank upon maturity, the Bank
believes that it can replace these funds with new deposits, excess liquidity,
FHLB advances or outside borrowings. It has been the Bank's experience that a
substantial portion of such maturing deposits remain at the Bank.
At December 31, 1997, the Bank had loan commitments outstanding of $4.6 million.
Funds required to fill these commitments are derived primarily from current
excess liquidity, advances, deposit inflows or loan and security repayments.
IMPACT OF INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements of the Corporation and notes
thereto, presented elsewhere herein, have been prepared in accordance with GAAP,
which requires the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Corporation's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Corporation
are financial. As a result, interest rates have a greater impact on the
Corporation's performance than do the general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Bank was engaged in any legal
proceeding of a material nature at December 31, 1997. From time
to time, the Corporation is a party to legal proceedings in the
ordinary course of business wherein it enforces its security
interest in loans.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule (only in
electronic filing).
(b) Reports on Form 8-K
On December 16, 1997, the Corporation filed a current report
on Form 8-K announcing Board of Director's approval of a 10%
stock repurchase plan (Items 5, 7).
13
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FSF FINANCIAL CORP.
Date: January 30, 1998 By: /s/ Donald A. Glas
- ----------------------- -----------------------
Donald A. Glas
Chief Executive Officer
Date: January 30, 1998 By: /s/ Richard H. Burgart
- ----------------------- ----------------------
Richard H. Burgart
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,601
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,625
<INVESTMENTS-CARRYING> 75,891
<INVESTMENTS-MARKET> 74,436
<LOANS> 275,460
<ALLOWANCE> (892)
<TOTAL-ASSETS> 402,850
<DEPOSITS> 212,684
<SHORT-TERM> 143,754
<LIABILITIES-OTHER> 2,462
<LONG-TERM> 0
0
0
<COMMON> 450
<OTHER-SE> 43,500
<TOTAL-LIABILITIES-AND-EQUITY> 402,850
<INTEREST-LOAN> 5,689
<INTEREST-INVEST> 1,675
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,364
<INTEREST-DEPOSIT> 2,453
<INTEREST-EXPENSE> 2,095
<INTEREST-INCOME-NET> 2,816
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 1,938
<INCOME-PRETAX> 1,241
<INCOME-PRE-EXTRAORDINARY> 746
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 746
<EPS-PRIMARY> .28<F1>
<EPS-DILUTED> .26
<YIELD-ACTUAL> 2.92
<LOANS-NON> 871
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 852
<CHARGE-OFFS> 6
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 892
<ALLOWANCE-DOMESTIC> 892
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
BASIC EPS
</FN>
</TABLE>
