SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24648
FSF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Minnesota 41-1783064
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
201 Main Street South, Hutchinson, Minnesota 55350-2573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (320) 234-4500
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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 August 5, 1999.
--------------
Class Outstanding
----- -----------
$.10 par value common stock 2,841,487 shares
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
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 8-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Materially Important Events 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998*
-------------------------------------
(In thousands)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 37,755 $ 22,597
Securities available for sale, at fair value:
Equity securities 19,334 19,459
Mortgage-backed and related securities 15,968 16,574
Debt securities 10,838 3,010
Securities held to maturity, at amortized cost:
Debt securities (Fair value of $19,828 and $23,953) 20,430 24,412
Mortgage-backed and related securities (Fair value of $26,044 and $35,369) 27,329 36,418
Loans held for sale 6,932 2,672
Loan receivable, net 265,284 280,603
Foreclosed real estate 125 502
Accrued interest receivable 3,023 3,089
Premises and equipment 5,233 4,111
Other assets 10,335 2,785
-------------------------------------
Total Assets $ 422,586 $ 416,232
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand Deposits $ 33,122 $ 30,299
Savings accounts 59,455 53,984
Certificates of deposit 142,441 142,259
-------------------------------------
Total Deposits 226,542
235,018
Federal Home Loan Bank borrowings 141,016 144,177
Advances from borrowers for taxes and insurance 385 819
Notes payable 1,000 -
Other liabilities 2,652 2,176
-------------------------------------
Total liabilities 380,071 373,714
-------------------------------------
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 43,215 43,382
Retained earnings, substantially restricted 26,503 25,451
Treasury stock at cost (1,659,790 and 1,603,663 shares) (24,077) (23,298)
Unearned ESOP shares at cost (172,972 and 198,773 shares) (1,730) (1,988)
Unearned MSP stock grants at cost (56,672 and 77,214 shares) (600) (818)
Accumulated comprehensive income (loss) (1,246) (661)
-------------------------------------
Total Stockholders' equity 42,515 42,518
-------------------------------------
Total Liabilities and Stockholders' Equity $ 422,586 $ 416,232
=====================================
</TABLE>
- --------------------------------------------------------------------------------
* The consolidated statements of financial condition at September 30, 1998, has
been taken from the audited statements of financial condition of and for that
date.
See Notes to Unaudited Consolidated Financial Statements
1
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For Three Months For Nine Months
Ended June 30, Ended June 30,
------------------------ -------------------------
1999 1998 1999 1998
------------------------ -------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 5,586 $ 5,961 $ 17,079 $ 17,509
Mortgage-backed and related securities 576 743 1,706 2,291
Investment securities 1,105 850 3,227 2,636
------------------------ -------------------------
Total interest income 7,267 7,554 22,012 22,436
------------------------ -------------------------
Interest expense:
Deposits 2,540 2,532 7,748 7,461
Borrowed funds 1,986 2,125 6,004 6,335
------------------------ -------------------------
Total interest expense 4,526 4,657 13,752 13,796
------------------------ -------------------------
Net interest income 2,741 2,897 8,260 8,640
Provision for loan losses 114 107 342 227
------------------------ -------------------------
Net interest income after provision for loan losses 2,627 2,790 7,918 8,413
------------------------ -------------------------
Non-interest income:
Gain (loss) on sale of loans - net 624 130 1,897 241
Other service charges and fees 217 120 600 352
Service charges on deposit accounts 264 210 692 618
Commission income 226 144 672 273
Other 45 16 72 69
------------------------ -------------------------
Total non-interest income 1,376 620 3,933 1,553
------------------------ -------------------------
Non-interest expense:
Compensation and benefits 1,834 1,374 5,087 3,889
Occupancy and equipment 423 206 970 624
Deposit insurance premiums 34 33 100 98
Data processing 160 125 424 364
Professional fees 78 72 233 211
591 320 1,550 908
------------------------ -------------------------
Total non-interest expense 3,120 2,130 8,364 6,094
------------------------ -------------------------
Income before provision for income taxes 883 1,280 3,487 3,872
Income tax expense 358 513 1,427 1,549
------------------------ -------------------------
Net income $ 525 $ 767 $ 2,060 $ 2,323
======================== =========================
Basic earnings per share $ 0.20 $ 0.29 $ 0.77 $ 0.87
Diluted earnings per share $ 0.19 $ 0.27 $ 0.74 $ 0.80
Cash dividend declared per common share $0.125 $0.125 $ 0.375 $ 0.375
Comprehensive income $ 444 $ 863 $ 1,484 $ 2,131
======================== =========================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
2
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
-----------------------------------------------
1999 1998 1999 1998
-----------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities: (In thousands)
Net income $ 525 $ 767 $ 2,060 $ 2,323
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 131 92 336 260
Net amortization of discounts and premiums on
securities held to maturity (13) (6) (32) (21)
Provision for loan losses 114 107 342 227
Net market value adjustment on ESOP shares 14 48 80 149
Amortization of ESOP and MSP stock compensation 194 395 506 729
Amortization of intangibles 30 3 76 3
Net gain on sale of assets -- -- (11) (18)
Net loan fees deferred and amortized 45 12 (61) (5)
(Increase) decrease in:
Loans held for sale 854 943 1,354 (557)
Accrued interest receivable (62) (325) 71 (540)
Other assets 54 63 179 (70)
Increase (decrease) in:
Net deferred taxes (118) (307) 509 (89)
Accrued interest payable 172 (164) 418 (120)
Accrued income tax 61 91 (161) (66)
Accrued liabilities (28) 205 (2,910) 141
Deferred compensation payable 134 85 399 305
-------------------------------------------
Net cash provided by (used in) operating activities 2,107 2,009 3,155 2,651
-------------------------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net 12,853 3,957 41,006 (8,999)
Purchase of loans (16,355) (7,945) (25,605) (12,718)
Principal payments on mortgage-related securities held to maturity 2,184 631 9,097 790
Purchase of securities available for sale (2,993) -- (10,993) (1,671)
Proceeds from sale of securities available for sale -- -- -- 411
Proceeds from maturities of securities available for sale -- -- 3,000 --
Proceeds from maturites of securities held to maturity 200 2,000 4,000 5,500
Investments in foreclosed real estate -- (6) (39) (8)
Proceeds from sale of REO -- -- 500 24
Proceeds from sale of fixed assets -- -- -- 5
Purchase paid up life insurance policies (5,495) -- (5,495) --
Purchases of equipment and property improvements (751) (130) (1,443) (451)
Acquisition of Homeowners Mortgage Corporation, net of cash acquired -- -- (1,245) --
-------------------------------------------
Net cash provided by (used in) investing activities $(10,357) $ (1,493) $ 12,783 $(17,117)
-------------------------------------------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
3
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
-----------------------------------------------
1999 1998 1999 1998
----------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from financing activities: (In thousands)
Net increase (decrease) in deposits $ (1,148) $ 2,638 $ 8,475 $ 12,833
Payments on FHLB advances (51) -- (160) --
Net increase (decrease) in short-term borrowings (3,000) 41 (3,000) 13,416
Net decrease in mortgage escrow funds (361) (423) (433) (482)
Net decrease in short-term notes payable (2,100) -- (2,575) --
Treasury stock purchased (1,762) (2,097) (2,415) (4,134)
Proceeds from exercise of stock options 27 861 336 1,249
Dividends on common stock (334) (337) (1,008) (1,022)
------------------------------------------------
Net cash provided by financing activities (8,729) 683 (780) 21,860
------------------------------------------------
Net increase in cash and cash equivalents (16,979) 1,199 15,158 7,394
Cash and cash equivalents:
Beginning of period 53,934 12,330 22,597 6,135
------------------------------------------------
End of period $ 36,955 $ 13,529 $ 37,755 $ 13,529
================================================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 1,971 $ 2,122 $ 5,985 $ 6,341
Interest on deposits 2,369 2,752 7,333 7,618
Income taxes 758 518 1,411 1,519
Loan originated for sale 30,904 7,967 116,450 17,772
Cash received:
Loans sold 31,758 8,791 117,804 16,897
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends 20 53 76 80
Acquistion of Homeowners Mortgage Corporation non-cash
asset, net of assumed liabilities -- -- 1,037 --
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
4
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
and nine month periods ended June 30, 1999, include the accounts of FSF
Financial Corp. ("the Corporation") and its wholly owned subsidiaries,
Homeowners Mortgage Corporation ("Homeowners"), Insurance Planners of
Hutchinson, Inc. ("Insurance Planners"), 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 inter-company accounts and transactions have been
eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include information or footnotes necessary for a complete
presentation of consolidated financial condition, results of
operations, and cash flows in conformity with 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 June 30,
1999, 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, 1998.
NOTE 3 - EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented. In
accordance with the Statement of Position No. 93-6, Employers'
Accounting for Employee Stock Ownership Plans, issued by the American
Institute of Certified Public Accountants, shares owned by the
Corporation's Employee Stock Ownership Plan that have not been
committed to be released are not considered to be outstanding for the
purpose of computing earnings per share. For the three month period
ended June 30, 1999, the weighted average number of shares outstanding
for basic and diluted earnings per share computation were 2,666,100 and
2,766,468, respectively. For the three month period ended June 30,
1998, the weighted average number of shares outstanding were 2,667,864
and 2,876,708, respectively. For the nine month period ended June 30,
1999, the weighted average number of shares outstanding for basic and
diluted earnings per share computation were 2,684,532 and 2,799,157,
respectively. For the nine month period ended June 30, 1998, the
weighted number of shares outstanding were 2,671,185 and 2,914,704,
respectively.
NOTE 4 - COMPREHENSIVE INCOME
Effective October 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. The statement establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income to be disclosed in the financial
statements. Comprehensive income is defined as the change in equity
during a period from transactions and other events from non-owner
sources. Comprehensive income is the total of net income and other
comprehensive income, which for the Corporation is comprised entirely
of unrealized gains and losses on securities available for sale.
NOTE 5 - BUSINESS COMBINATION
On November 17, 1998, the Corporation acquired 100% of the outstanding
common stock of Homeowners, an originator and seller of residential
mortgage loans. The business combination was accounted for by the
purchase method and the financial statements reflect the operating
results of Homeowners for the seven and a half months ended June 30,
1999. The Corporation issued 77,839 shares of common stock held as
treasury shares and $1.25 million in cash to complete the transaction.
In addition, options for 50,000 common stock shares, at an exercise
price of $15.00, were also issued. The acquisition price of $2.5
million resulted in goodwill of approximately $2.3 million, which will
be amortized using the straight line method over twenty-five years.
5
<PAGE>
The following unaudited pro forma supplemental information is presented based on
historical financial statements of the Corporation and Homeowners. The unaudited
pro forma supplemental information for the three and nine month periods ended
June 30, 1999 and 1998, were prepared as if the acquisition had occurred as of
the beginning of the respective periods.
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
--------------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Interest income $ 7,267 $ 7,592 $ 22,026 $ 22,606
Interest expense 4,526 4,685 13,784 13,899
--------------------------------------------------------------------------
Net interest income 2,741 2,907 8,242 8,707
Provision for loan losses 114 107 342 227
--------------------------------------------------------------------------
Net interest income after provision for loan
losses 2,627 2,800 7,900 8,480
--------------------------------------------------------------------------
Non-interest income 1,376 1,375 4,847 4,292
Non-interest expense 3,120 2,720 9,008 8,438
--------------------------------------------------------------------------
Income before provision for income taxes 883 1,455 3,739 4,334
Income tax expense 358 584 1,529 1,736
--------------------------------------------------------------------------
Net income $ 525 $ 871 $ 2,210 $ 2,598
==========================================================================
Basic earnings per share $ 0.20 $ 0.32 $ 0.82 $ 0.94
Diluted earnings per share $ 0.19 $ 0.29 $ 0.79 $ 0.87
Weighted average shares outstanding
Basic 2,664,910 2,751,533 2,697,281 2,752,174
Diluted 2,775,286 2,964,631 2,811,906 2,998,351
</TABLE>
NOTE 6 - NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting For Derivative Instruments and Hedging
Activities" - issued June 1998, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. SFAS No. 137 issued on July 7, 1999, deferred Statement 133's
effective date until the fiscal year beginning October 1, 2000. On the
date of adoption, the Corporation may transfer any held to maturity
security into the available for sale category and then be able to
designate the transferred security as a hedge item. Any unrealized
holding gain or loss on transferred securities will be reported in net
income or accumulated other comprehensive income. Management has not
determined its strategy for the adoption of Statement No. 133 or its
effect on the financial statements. If the Corporation elects to apply
hedge accounting, it is required to establish, at the inception of the
hedge, the method it will use for assessing the effectiveness of the
hedging activities and the measurement approach for determining the
ineffective aspect of the hedge.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" - issued October 1998, revises the accounting and
reporting standard for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are
substantially similar to the primary operations of a mortgage banking
enterprise. It requires that after the securitization of a mortgage
loan held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed security as a trading security.
It also requires that after the securitization of mortgage loans held,
an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This statement
was effective for the fiscal quarter beginning January 1, 1999 and its
adoption did not have an effect on the Corporations financial positions
or results of operations.
6
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at June 30, 1999, and September 30, 1998 totaled
$422.6 million and $416.2 million, respectively. The increase of $6.4 million
was primarily a result of an increase in interest bearing cash equivalents,
other assets and a decrease in loans receivable.
Cash and cash equivalents increased from $22.6 million at September 30, 1998, to
$37.8 million at June 30, 1999, or an increase of $15.2 million. The Corporation
utilizes excess liquidity to fund the purchase of treasury shares and loan
originations. The increase in liquidity was primarily a result of prepayments on
mortgages and the sale of mortgage loans.
Securities available for sale increased $7.1 million between June 30, 1999, and
September 30, 1998, as a result of purchases of such securities.
Securities held to maturity decreased from $60.8 million at September 30, 1998,
to $47.8 million at June 30, 1999. The proceeds were used to help fund the
purchase of treasury shares and pay dividends. This decrease was primarily due
to $3.0 million of securities maturing during the period and $10.0 million in
principal payments from mortgage-backed and related securities
Loans held for sale increased $4.2 million to $6.9 million at June 30, 1999 from
$2.7 million at September 30, 1998. The increase is primarily due to Homeowners
pipeline of loans that are funded, but payments from the sales have not been
received. As of June 30, 1999, the Bank and Homeowners had forward commitments
to sell all of their loans held for sale in the secondary market. Payments
usually occur within fourteen days of funding.
Loans receivable decreased $15.3 million or 5.5% to $265.2 million at June 30,
1999, from $280.6 million at September 30, 1998. Even though residential
mortgage origination's increased by $91.4 million or 155.1%, the sale of
residential mortgages and the prepayments of loans resulted in a decrease in
one-to-four family residential mortgages of $27.3 million. Agricultural and
commercial business loans increased by $9.3 and $2.1 million, respectively. To
supplement origination's, the Bank purchased $22.2 million of commercial
business loans and $3.4 million of construction loans. 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 its loan portfolio and shorten the length of maturity of the
portfolio.
The following table sets forth information on loans originated and purchased for
the periods indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
------------------------ --------------------------
1999 1998 1999 1998
------------------------ --------------------------
Loans Originated: (In Thousands)
<S> <C> <C> <C> <C>
Residential mortgages $ 60,242 $ 21,206 $ 150,342 $ 58,908
Land and commercial real estate 408 1,797 2,782 4,412
Agricultural 7,941 8,773 23,450 21,399
Commercial Business 2,794 5,976 9,463 9,230
Consumer 7,909 7,343 19,893 20,243
------------------------ --------------------------
Total Loans Originated 79,294 45,095 205,930 114,192
------------------------ --------------------------
Residential mortgage loans - - - 159
Construction - - 3,400 -
Commercial business 16,355 2,923 22,205 7,527
------------------------ --------------------------
Total loans purchased 16,355 2,923 25,605 7,686
------------------------ --------------------------
Total New Loans $ 95,649 $ 48,018 $ 231,535 $ 121,878
======================== ==========================
</TABLE>
7
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollars and in percentages of total loans at the dates
indicated:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------------------------------------------------
Amount % Amount %
-------------------------------------------------
<S> <C> <C> <C> <C>
Residential real estate: (Dollars in Thousands)
One-to-four family (1) $ 130,033 43.9 $ 157,340 52.2
Residential construction 31,642 10.7 21,960 7.3
Multi-family 4,908 1.7 2,975 1.0
-------------------------------------------------
166,583 56.2 182,275 60.4
Agricultural loans 32,241 10.9 22,959 7.6
Land and commercial real estate 30,150 10.2 29,731 9.9
Commercial business 27,899 9.4 25,763 8.5
-------------------------------------------------
256,873 86.7 260,728 86.4
Consumer:
Home equity and second mortgages 22,896 7.7 23,606 7.8
Automobile loans 7,645 2.6 9,670 3.2
Other 8,949 3.0 7,605 2.5
-------------------------------------------------
Total loans 296,363 100.0 301,609 100.0
=========== ==========
Less:
Loans in process (22,280) (16,658)
Deferred fees (582) (641)
Allowance for loan losses (1,285) (1,035)
-------------- --------------
Total loans, net $ 272,216 $ 283,275
============== ==============
</TABLE>
- -------------------------------------------
(1) Includes loans held for sale in the amount of $6.9 million and $2.7 million
as of June 30, 1999 and September 30, 1998, respectively
Real estate owned at June 30, 1999, totaled $125,000, which consisted of two
single family residential properties. No loss is expected in the disposition of
these properties.
Other assets increased $7.5 million to $10.3 million at June 30, 1999 from $2.8
million at September 30, 1998. This increase was primarily due to goodwill added
upon the purchase of Homeowners and the purchase of single premium life
insurance policies. The life insurance policies were purchased to assist in
retaining key management personnel by providing a death benefit in excess of the
companies standard benefit of one times the employee's annual salary.
Deposits after interest credited increased from $226.5 million at September 30,
1998, to $235.0 million at June 30, 1999, an increase of $8.5 million or 3.8%.
Overall cost of funds on deposits decreased during the period 28 basis points as
the Bank attempted to maintain deposit rates consistent with marketplace
competitors.
Federal Home Loan Bank ("FHLB") borrowing decreased $3.2 million from $144.2
million at September 30, 1998, to $141.0 million at June 30, 1999, due to
repayments.
The Corporation, completed the repurchase of 169,154 shares of common stock and
when netted with the exercise of 35,188 of stock option shares and the 77,839
shares used to purchase Homeowners, increased the number of treasury shares to
1,659,790 at June 30, 1999. 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 decreased $3,000 since September 30,
1998. Book value per share increased from $16.22 at September 30, 1998, to
$16.28 at June 30, 1999.
8
<PAGE>
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.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated:
<TABLE>
<CAPTION>
June 30, September 30,
----------------------------------------
1999 1998
----------------------------------------
(In Thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential construction loans $ - $ -
Permanent loans secured by one-to-four-family units 253 240
Permanent loans secured by non-residential real estate - -
Other - -
Non-mortgage loans:
Commercial and agricultural - -
Consumer 38 69
--------------------------------
Total non-accrual loans 291 309
Foreclosed real estate 125 502
--------------------------------
Total non-performing assets $ 416 $ 811
================================
Total non-performing loans to net loans 0.10% 0.11%
================================
Total non-performing loans to total assets 0.02% 0.07%
================================
Total non-performing assets to total assets 0.10% 0.19%
================================
</TABLE>
During the nine months ended June 30, 1999, and 1998, approximately $25,000 and
$50,000 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. During the periods indicated, the Bank held no foreign loans.
9
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
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 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30
-----------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------
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) $ 272,463 $ 5,586 8.20 % $280,375 $5,961 8.50 %
Mortgage-backed securities 44,298 576 5.20 54,417 743 5.46
Investment securities (3) 93,732 1,105 4.72 66,270 850 5.13
------------------------- -------------------------
Total interest-earning assets 410,493 7,267 7.08 401,062 7,554 7.53
----------- ----------------------
Other assets 18,096 11,214
-------------- -------------
Total assets $ 428,589 $412,276
============== =============
Liabilities:
Interest-bearing deposits $ 234,512 $ 2,540 4.33 % $218,619 $2,532 4.63 %
Borrowings 144,796 1,986 5.49 147,200 2,125 5.77
------------------------- -------------------------
Total interest-bearing liabilities 379,308 4,526 4.77 % 365,819 4,657 5.09 %
------------------------- ----------------------
Other liabilities 3,583
3,193
-------------- -------------
Total liabilities 382,891 369,012
Stockholders' equity 41,685 43,264
-------------- -------------
Total liabilities and stockholders'
equity $ 428,589 $412,276
============== =============
Net interest income $ 2,741 $2,897
Net Spread (4) 2.31 % 2.44 %
Net Margin (5) 2.67 % 2.89 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.08X 1.10X
</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 $525,000 for the three months
ended June 30, 1999, as compared to net income of $ 767,000 for the three month
period ended June 30, 1998. This decrease in net income was $242,000 or 31.6%.
Total Interest Income. Total interest income decreased by $287,000 or 3.8% to
$7.3 million for the three months ended June 30, 1999, from $7.5 million for the
three months ended June 30, 1998. This was primarily due to decreases in the
average balances of loans receivable and mortgage-backed securities. The average
yield on loans decreased to 8.20% for the quarter ended June 30, 1999, from
8.50% for the quarter ended June 30, 1998, due to a general decline in interest
rates. During this same period, the average yield on mortgage-
10
<PAGE>
backed securities decreased 26 basis points (100 basis points equals 1%). The
average balance of investment securities increased to $93.7 million for the
quarter ended June 30, 1999, from $ 66.2 million for the quarter ended June 30,
1998 as a result of loan prepayments and the proceeds from mortgage loan sales.
The average yield decreased from 5.13% for the three months ended June 30, 1998,
to 4.72% for the same period in 1999, as excess funds were placed in overnight
or short-term investments which provide lower yields but greater flexibility in
an increasing rate environment.
Total Interest Expense. Total interest expense decreased to $4.5 million for the
three months ended June 30, 1999, from $4.7 million for the same period in 1998.
The average balance of interest-bearing deposits increased from $218.6 million
for the three months ended June 30, 1998, to $234.5 million for the three months
ended June 30, 1999. This increase was comprised of interest credited and an
increase in all categories of deposit accounts. The average cost of deposits
decreased 30 basis points from 4.63% for the three month period ended June 30,
1998, to 4.33% for the same period in 1999, due to the mix of non-certificate
account balances increasing more than certificate accounts. No assurance can be
made that deposits can be maintained in the future without further increasing
the cost of funds if interest rates increase. The average balance of borrowings
decreased $2.4 million to $144.8. million for the three months ended June 30,
1999, from $147.2 million for the three months ended June 30, 1998. The cost of
such borrowings decreased by 28 basis points to 5.49% for the three months ended
June 30, 1999, from 5.77% for the same period in 1998. Borrowings decreased as
the Bank utilized the increase in deposits to meet liquidity needs.
Net Interest Income. Net interest income decreased from $2.9 million for the
three months ended June 30, 1998, to $2.7 million for the same period ended June
30, 1999. Average interest-earning assets increased $9.4 million, from $401.1
million for the three months ended June 30, 1998, to $410.5 million for the
three months ended June 30, 1999, while the average yield on interest-earning
assets decreased from 7.53% for 1998 to 7.08% for 1999. Average interest bearing
liabilities increased by $13.5 million to $379.3 million for the three months
ended June 30, 1999, from $365.8 million for the three months ended June 30,
1998, and the cost of interest-bearing liabilities decreased from 5.09% for 1998
to 4.77% in 1999.
Provision for Loan Losses. The Bank's provision for loan losses was $114,000 for
the three months ended June 30, 1999, compared to $107,000 for the same period
in 1998. 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 for loan losses was $1.3 million and $1.0 million at June 30, 1999,
and June 30, 1998, respectively. At June 30, 1999, the Bank's allowance for loan
losses constituted 308.9% of non-performing assets as compared to 123.9% of
non-performing assets at June 30, 1998. 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, 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 $756,000 during the
three month period ended June 30, 1999, to $1.4 million as compared to the same
period in 1998. Gains on loans sold increased from $130,000 at June 30, 1998 to
$624,000 at June 30, 1999. $138,000 of the increase was a result of fixed rate
mortgages that were sold in the secondary market by the Bank because they did
not fit the interest rate risk profile of the Bank, and $356,000 of the increase
was due to the sale of loans made by Homeowners. Commission income increased
from $ 144,000 for the quarter ended June 30, 1998, to $226,000 for the quarter
ended June 30, 1999. This increase was primarily due to insurance agency
activities from the acquisition of Insurance Planners. Since the acquisition of
Insurance Planners occurred on June 1, 1998, the income amounts for 1998 only
include one month of insurance agency activity. Other service charges and fees
increased from $120,000 for the three months ended June 30, 1998, to $217,000
for the three months ended June 30, 1999, primarily due to an increase in
underwriting fees as a result of the acquisition of Homeowners, which was not
present in third quarter 1998.
11
<PAGE>
Non-interest expense. Total non-interest expense increased $990,000 or 46.5%
over the periods compared. Compensation and benefits increased from $1.4 million
to $1.8 million or 33.5%, due to the acquisitions of Homeowners and Insurance
Planners. Other factors contributing to the increase were the hiring of critical
management and related support positions, including marketing, community banking
and internal audit. Occupancy and equipment expense increased by $217,000 due
primarily to the Homeowners and Insurance Planners acquisitions. Data processing
expense increased $35,000 to $160,000 for the period ended June 30, 1999, due to
processing expenses associated with the increased delivery of electronic
services to customers, and to a lesser extent, a a result of costs associated
with the Corporation's Year 2000 compliance program. Professional fees increased
from $72,000 for the third quarter of fiscal 1998 to $78,000 for the third
quarter of fiscal 1999. Other expenses increased $271,000 from the quarter ended
June 30, 1998 to $591,000 for the quarter ended June 30, 1999 and was comprised
of amortization of goodwill as a result of the acquisitions of Insurance
Planners and Homeowners and an increase in marketing expenses.
Income Tax Expense. Income taxes decreased by $155,000 or 30.2%, to $358,000 for
the three month period ended June 30, 1999, from $513,000 for the same period in
1998, primarily due to the decrease of $397,000 in income before tax.
12
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
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 (dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
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) $ 274,959 $17,079 8.28 % $274,679 $17,509 8.50
Mortgage-backed securities 47,420 1,706 4.80 54,926 2,291 5.56
Investment securities (3) 90,124 3,227 4.77 65,155 2,636 5.39
------------------------- -------------------------
Total interest-earning assets 412,503 22,012 7.11 394,760 22,436 7.58
------------------------- ----------------------
Other assets 14,907 10,882
-------------- -------------
Total assets $ 427,410 $405,642
============== =============
Liabilities:
Interest-bearing deposits $ 233,103 $ 7,748 4.43 % $213,617 $7,461 4.66
Borrowings 145,985 6,004 5.48 145,274 6,335 5.81
------------------------- -------------------------
Total interest-bearing liabilities 379,088 13,752 4.84 % 358,891 13,796 5.13
----------- ----------------------
Other liabilities 3,228 3,040
-------------- -------------
Total liabilities 382,316 361,931
Stockholders' equity 43,284 43,711
-------------- -------------
Total liabilities and stockholders'
equity $ 427,410 $405,642
============== =============
Net interest income $ 8,260 $8,640
Net Spread (4) 2.28 % 2.45
Net Margin (5) 2.67 % 2.92
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.09X 1.10X
</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. interest-earning assets.
Net Income. The Corporation recorded net income of $2.1 million for the nine
months ended June 30, 1999, as compared to net income of $ 2.3 million for the
same nine month period ended June 30, 1998.
Total Interest Income. Total interest income decreased by $ 424,000 or 1.9% to
$22.0 million for the nine months ended June 30, 1999 , from $22.4 million for
the nine months ended June 30, 1998. The yield on mortgage-backed securities
decreased to 4.80% and the yield on investment securities decreased to 4.77% for
the nine months ended June 30, 1999, compared to yields of 5.56% and 5.39%,
respectively. The yield on
13
<PAGE>
loans receivable decreased to 8.28% for the nine months ended June 30, 1999,
from 8.50% for the nine months ended June 30, 1998.
Total Interest Expense. Total interest expense remained the same at $13.8
million for the nine months ended June 30, 1999 and 1998. Average interest
bearing liabilities increased from $ 358.9 million in 1998 to $379.1 million in
1999 and the cost of the liabilities decreased from 5.13% for the nine months
ended June 30, 1998, to 4.84% for the nine months ended June 30, 1999. The
average cost of deposits increased $287,000 and the average rate decreased from
4.66% to 4.43% during the comparison period. While average borrowings for the
two periods remained about the same, the cost of the borrowings decreased from
5.81% to 5.48% due to the downward trend in interest rates during much of the
period. Management can make no assurances regarding the future movement of
interest rates, which may impact earnings in future periods.
Net Interest Income. Net interest income decreased from $ 8.6 million for the
nine months ended June 30, 1998, to $8.3 million for the same period ended June
30, 1999, a decrease of $380,000 or 4.4%. The average yield on interest-earning
assets decreased from 7.58% to 7.11% during the two periods while the cost of
interest-bearing liabilities decreased from 5.13% to 4.84%.
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
<TABLE>
<CAPTION>
For the Nine Months
At June 30,
----------------------------------------
1999 1998
----------------------------------------
(In Thousands)
<S> <C> <C>
Total loans outstanding (1) $ 296,363 $ 299,490
========================================
Average loans outstanding $ 274,959 $ 274,679
========================================
Allowance balance (beginning of period) $ 1,035 $ 852
----------------------------------------
Provision (credit):
Residential (2) - -
Land and commercial real estate 20 2
Commercial/Agricultural business 312 218
Consumer 10 7
----------------------------------------
Total provision 342 227
Charge-off:
Residential - -
Land and commercial real estate - -
Consumer 124 40
----------------------------------------
Total charge-offs 124 40
Recoveries:
Residential - -
Land and commercial real estate - -
Consumer 32 9
----------------------------------------
Total recoveries 32 9
----------------------------------------
Net charge-offs 92 31
----------------------------------------
Allowance balance (end of period) $ 1,285 $ 1,048
========================================
Allowance as percent of total loans 0.43% 0.35%
Net loans charged off as a percent of average loans 0.03% 0.01%
</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 loss increased to
$342,000 for the nine months ended June 30, 1999 and 1998. See also "Comparison
of the Three Months Ended June 30, 1999 and 1998-
14
<PAGE>
Provision for Loan Losses."
Non-interest Income. Total non-interest income increased $2.4 million during the
nine month period ended June 30, 1999, to $3.9 million as compared to the same
period in 1998. Gains on loans sold increased from $241,000 at June 30, 1998 to
$1.9 million at June 30, 1999. $444,000 of the increase was a result of fixed
rate mortgages that were sold in the secondary market by the Bank, because they
did not fit the interest rate risk profile of the Bank, and $1.2 million of the
increase was due to the sale of loans made by Homeowners. Commission income
increased from $ 273,000 for the nine months ended June 30, 1998, to $672,000
for the nine months ended June 30, 1999. $364,000 of the increase in commissions
was a result of insurance agency activities due to the acquisition of Insurance
Planners and $36,000 was due to the sale of federal crop insurance (an ancillary
activity of agricultural lending). Other service charges and fees increased from
$352,000 for the nine months ended June 30, 1998, to $600,000 for the nine
months ended June 30, 1999, primarily due to an increase in underwriting fees as
a result of the acquisition of Homeowners.
Non-interest expense. Total non-interest expense increased $2.3 million or 37.2%
over the periods compared. Compensation and benefits increased from $ 3.9
million to $5.1 million or 30.1%, due to the acquisitions of Homeowners and
Insurance Planners. Other factors contributing to the increase were the hiring
of critical management and related support positions, including marketing,
community banking and internal audit. Occupancy and equipment expense increased
by $346,000 due primarily to the Homeowners and Insurance Planners acquisitions.
Data processing expense increased $60,000 to $424,000 for the period ended June
30, 1999, due to processing expenses associated with increased delivery of
electronic services to customers, and to a lesser extent, as a result of the
costs associated with the Corporation's Year 2000 compliance program.
Professional fees increased $22,000 to $233,000 over the periods compared. Other
expenses increased $642,000 from the nine months ended June 30, 1998 to $1.6
million for the nine months ended June 30, 1999. This was comprised mainly of
increases in expenses as a result of the acquisitions of Insurance Planners and
Homeowners and an increase in marketing expenses. In addition, $76,000 of the
increase was due to goodwill associated with the acquisitions of Insurance
Planners and Homeowners.
Income Tax Expense. Income taxes decreased by $122,000 or 7.9%, to $1.4 million
for the nine month period ended June 30, 1999, from $1.5 million for the same
period in 1998, primarily due to the decrease in income before tax and an
increase in non-deductible expenses.
Year 2000
The Year 2000 problem exists because many computer programs use only the last
two digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900, rather than 2000. An additional
issue is that 1900 was not a leap year, whereas the year 2000 is. Therefore,
some programs may not properly provide for February 29, 2000. This anomaly could
result in miscalculations when processing critical date-sensitive information
after December 31, 1999.
The following discussion of the implications of the Year 2000 problem for the
Corporation contains numerous forward looking statements based on inherently
uncertain information. The cost of the project and the date on which the
Corporation plans to complete the internal Year 2000 modifications are based on
management's best estimates, which are derived utilizing a number of assumptions
of future events including the continued availability of internal and external
resources, third party modifications and other factors. However, there can be no
guarantee that these statements will be achieved and actual results could
differ. Moreover, although management believes it will be able to make the
necessary modifications in advance, there can be no guarantee that failure to
modify the systems would not have a material adverse effect on the Corporation.
The Corporation places a high degree of reliance on computer systems of third
parties, such as customers, suppliers, and other financial and governmental
institutions. Although the Corporation is assessing the readiness of these third
parties and preparing contingency plans, there can be no guarantee that the
failure of these third parties to modify their systems in advance of December
31, 1999 would not have a material adverse affect on the Corporation.
During fiscal 1998, the Bank adopted a Year 2000 Compliance Plan (the "Plan")
and established a Year 2000 Compliance Committee (the "Committee"). The
objectives of the Plan and the Committee are to prepare the Corporation for the
new millennium. As recommended by the Office of Thrift Supervision, the Plan
encompasses the following phases: Awareness, Assessment, Renovation, Validation
and Implementation.
These phases will enable the Corporation to identify risks, develop an action
plan, and perform adequate testing and complete affirmation that its processing
systems will be Year 2000 ready. Execution of the Plan is
15
<PAGE>
currently on target. The Bank has currently moved into Phase 5, Implementation,
which involves the installation and application of Year 2000 Ready systems.
Concurrently, the Corporation is also addressing some issues related to
subsequent phases. Prioritization of the most critical applications has been
addressed, along with contract and service agreements. The material data
processing functions for the Bank are performed and maintained by a third party
vendor. The Bank has maintained ongoing contact with this vendor so that
modification of the software for Year 2000 readiness is a top priority and all
necessary changes have been competed. Testing of critical applications is
complete. The Corporation has contacted all other material vendors and suppliers
regarding their Year 2000 state of readiness. Each of these third parties has
delivered written assurance to the Bank that they expect to be Year 2000
compliant prior to the Year 2000. The Corporation has completed contacting all
material customers and non-information technology suppliers (i.e., utility
systems, telephone systems and security systems) regarding their Year 2000 state
of readiness. The Implementation phase is to certify that systems are Year 2000
ready, along with assurances that any new systems are compliant on a
going-forward basis. The Implementation phase is targeted for completion by
September 30, 1999. Also added to the implementation phase is a customer
information and awareness program. This is being accomplished through
communication to our customers through statement stuffers and other brochures.
This is also being accomplished through staff training to help our employees
answer any question that our customers may have. Monitoring and managing the
Year 2000 project will result in additional direct and indirect costs to the
Corporation. 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 managing software vendor progress, testing enhanced
software products and implementing any necessary contingency plans. Total direct
costs are estimated not to exceed $50,000, of which $40,000 has already been
expensed. Actual costs will be charged to earnings over the next three quarters,
as incurred.
The Corporation is developing remediation contingency plans and business
resumption contingency plans specific to the Year 2000. Remediation contingency
plans address the actions to be taken if the current approach to remediating a
system is falling behind schedule or otherwise appears to be in jeopardy of
failing to deliver a Year 2000 ready system when needed. Business resumption
contingency plans address the actions that would be taken if critical business
functions can not be carried out in the normal manner upon entering the next
century due to system or supplier failure.
Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business relationships with the
Corporation, such as public utilities, customers, vendors, payment system
providers and other financial institutions, makes it impossible to assure that a
failure to achieve compliance by one or more of these entities would not have
material adverse impact on the operations of the Bank.
Liquidity and Capital Resources
The Corporation's primary sources for funds are deposits, borrowings, principal
and interest payments on loans, investments and mortgage-backed securities,
sales of mortgage loans, and funds provided by operations. While scheduled
payments on loans, mortgage-backed securities and short-term investments are
relatively predictable source of funds, deposit flows and early loan repayments
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. Federal regulations reduced the
requirement for Banks to maintain liquid assets from 5% to not less than 4% of
its 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 15.5% and 6.3% at
June 30, 1999, and 1998, 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 March 31, 2000, was approximately $106.8 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,
and FHLB advances or outside borrowings. It has been the Bank's experience that
substantial portions of such maturing deposits remain at the Bank.
16
<PAGE>
At June 30, 1999, the Bank and Homeowners had loan commitments outstanding of
$4.1 million. Funds required to fill these commitments are derived primarily
from current excess liquidity, loan sales, advances, deposit inflows or loan and
security repayments.
Regulations require the Bank to maintain minimum amounts and ratios of tangible
capital and leverage capital to average assets, and risk-based capital to
risk-weighted assets. The following table sets forth the Bank's actual capital,
required capital amounts and ratios at June 30, 1999 which, at that date,
exceeded the capital adequacy requirements:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital, June 30, 1999 $ 35,772
Add: Unrealized losses on debt
securities held for sale
695
-----------
Tangible equity capital and ratio to
adjusted total assets $ 36,467 8.7% $ 6,237 1.5% $ 8,317 2.0%
--------------------- -------------------- --------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $ 36,467 8.7% $ 16,634 4.0% $ 20,792 5.0%
--------------------- -------------------- --------------------
Total risk-based capital and ratio to
risk-weighted assets $ 36,467 14.5% $ 10,097 4.0% $ 15,145 6.0%
---------- -------------------- --------------------
Tier 2 risk-based capital, Net adjustments 662
-----------
Total risk-based capital and ratio to
risk-weighted assets, June 30, 1999 $ 37,129 14.7% $ 20,194 8.0% $ 25,242 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.
There were no significant changes for the nine months ended June 30, 1999, from
the information presented in the annual report on Form 10-K for the year ended
September 30, 1998, concerning quantitative disclosures about market risk.
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
Generally Accepted Accounting Principles (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.
17
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries were
engaged in any legal proceeding of a material nature at June
30, 1999. 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 included in electronic filing).
(b) Reports on Form 8-K
None
18
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FSF FINANCIAL CORP.
Date: August 5, 1999 By: /s/ Donald A. Glas
- --------------------- -----------------------
Donald A. Glas
Chief Executive Officer
Date: August 5, 1999 By: /s/ Richard H. Burgart
- --------------------- ----------------------
Richard H. Burgart
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,755
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,140
<INVESTMENTS-CARRYING> 47,759
<INVESTMENTS-MARKET> 45,872
<LOANS> 296,363
<ALLOWANCE> 1,285
<TOTAL-ASSETS> 422,586
<DEPOSITS> 235,018
<SHORT-TERM> 141,016
<LIABILITIES-OTHER> 4,037
<LONG-TERM> 0
0
0
<COMMON> 450
<OTHER-SE> 42,065
<TOTAL-LIABILITIES-AND-EQUITY> 422,586
<INTEREST-LOAN> 17,079
<INTEREST-INVEST> 4,933
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,012
<INTEREST-DEPOSIT> 7,748
<INTEREST-EXPENSE> 6,004
<INTEREST-INCOME-NET> 8,260
<LOAN-LOSSES> 342
<SECURITIES-GAINS> 1,897
<EXPENSE-OTHER> 8,364
<INCOME-PRETAX> 3,487
<INCOME-PRE-EXTRAORDINARY> 2,060
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,060
<EPS-BASIC> .77
<EPS-DILUTED> .74
<YIELD-ACTUAL> 2.67
<LOANS-NON> 416
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,035
<CHARGE-OFFS> 124
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 1,285
<ALLOWANCE-DOMESTIC> 1,285
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
