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 March 31, 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 May 5, 1999.
Class Outstanding
----- -----------
$.10 par value common stock 2,914,787 shares
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 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
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
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>
March 31, September 30,
1999 1998*
---------------------------------------
(In thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 53,934 $ 22,597
Securities available for sale, at fair value:
Equity securities 19,409 19,459
Mortgage-backed and related securities 15,876 16,574
Debt securities 7,945 3,010
Securities held to maturity, at amortized cost:
Debt securities (Fair value of $20,924 and $23,953) 21,424 24,412
Mortgage-backed and related securities (Fair value of $28,344 and $35,369) 29,510 36,418
Loans held for sale 7,785 2,672
Loan receivable, net 261,940 280,603
Foreclosed real estate 125 502
Accrued interest receivable 2,961 3,089
Premises and equipment 4,615 4,111
Other assets 4,801 2,785
-----------------------------------
Total Assets $ 430,325 $ 416,232
===================================
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Liabilities:
Demand Deposits $ 33,631 $ 30,299
Savings accounts 58,614 53,984
Certificates of deposit 143,921 142,259
-----------------------------------
Total Deposits 236,166 226,542
Federal Home Loan Bank borrowings 144,068 144,177
Advances from borrowers for taxes and insurance 746 819
Notes payable 3,100 -
Other liabilities 2,312 2,176
-----------------------------------
Total liabilities 386,392 373,714
-----------------------------------
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 43,189 43,382
Retained earnings, substantially restricted 26,312 25,451
Treasury stock at cost (1,536,495 and 1,603,663 shares) (22,349) (23,298)
Unearned ESOP shares at cost (183,146 and 198,773 shares) (1,831) (1,988)
Unearned MSP stock grants at cost (63,520 and 77,214 shares) (673) (818)
Accumulated comprehensive income (loss) (1,165) (661)
-----------------------------------
Total Stockholders' equity 43,933 42,518
-----------------------------------
Total Liabilities and Stockholders' Equity $ 430,325 $ 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 Six Months
Ended March 31, Ended March 31,
----------------------------- ---------------------------
1999 1998 1999 1998
----------------------------- ---------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 5,533 $ 5,859 $ 11,493 $ 11,548
Mortgage-backed and related securities 551 751 1,130 1,548
Investment securities 1,158 908 2,122 1,786
----------------------------- ---------------------------
Total interest income 7,242 7,518 14,745 14,882
----------------------------- ---------------------------
Interest expense:
Deposits 2,538 2,476 5,208 4,929
Borrowed funds 1,984 2,115 4,018 4,210
----------------------------- ---------------------------
Total interest expense 4,522 4,591 9,226 9,139
----------------------------- ---------------------------
Net interest income 2,720 2,927 5,519 5,743
Provision for loan losses 114 75 228 120
----------------------------- ---------------------------
Net interest income after provision for loan losses 2,606 2,852 5,291 5,623
----------------------------- ---------------------------
Non-interest income:
Gain (loss) on sale of loans - net 573 96 1,273 111
Other service charges and fees 250 125 383 232
Service charges on deposit accounts 218 195 428 408
Commission income 215 76 446 129
Other 17 33 27 53
----------------------------- ---------------------------
Total non-interest income 1,273 525 2,557 933
----------------------------- ---------------------------
Non-interest expense:
Compensation and benefits 1,622 1,279 3,253 2,515
Occupancy and equipment 300 213 547 418
Deposit insurance premiums 34 32 66 65
Data processing 119 121 264 239
Professional fees 80 70 155 139
Other 540 311 959 588
----------------------------- ---------------------------
Total non-interest expense 2,695 2,026 5,244 3,964
----------------------------- ---------------------------
Income before provision for income taxes 1,184 1,351 2,604 2,592
Income tax expense 491 541 1,069 1,036
----------------------------- ---------------------------
Net income $ 693 $ 810 $ 1,535 $ 1,556
============================= ===========================
Basic earnings per share $ 0.26 $ 0.30 $ 0.57 $ 0.58
Diluted earnings per share $ 0.25 $ 0.28 $ 0.55 $ 0.53
Cash dividend declared per common share $ 0.125 $ 0.125 $ 0.25 $ 0.25
Comprehensive income $ 797 $ 546 $ 1,031 $ 1,268
============================= ===========================
</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 Six Months
Ended Ended
March 31, March 31,
--------------------------------------------
1999 1998 1999 1998
--------------------------------------------
Cash flows from operating activities: (In thousands)
<S> <C> <C> <C> <C>
Net income $ 693 $ 810 $ 1,535 $ 1,556
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 106 87 205 168
Net amortization of discounts and premiums on
securities held to maturity (8) (8) (19) (15)
Provision for loan losses 114 75 228 120
Net market value adjustment on ESOP shares 31 51 66 101
Amortization of ESOP and MSP stock compensation 157 182 312 334
Amortization of intangibles 30 - 46 -
Net gain on sale of assets - (16) (11) (18)
Net loan fees deferred and amortized (99) (23) (106) (17)
(Increase) decrease in:
Loans held for sale 8,274 (1,364) 500 (1,500)
Accrued interest receivable (93) 31 133 (215)
Other assets (158) (117) 125 (133)
Increase (decrease) in:
Net deferred taxes (91) 118 627 218
Accrued interest payable 141 44 246 44
Accrued income tax 270 (275) (222) (157)
Accrued liabilities (2,846) (126) (2,882) (64)
Deferred compensation payable 139 111 265 220
--------------------------------------------
Net cash provided by (used in) operating activities 6,660 (420) 1,048 642
--------------------------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net 9,798 (1,952) 28,153 (12,956)
Purchase of loans (5,000) (1,889) (9,250) (4,773)
Principal payments on mortgage-related securities held to maturity 2,206 129 6,913 159
Purchase of securities available for sale - (24) (8,000) (1,671)
Proceeds from sale of securites available for sale - 411 - 411
Proceeds from maturities of securites available for sale - - 3,000 -
Proceeds from maturites of securites held to maturity - 3,000 3,000 3,500
Investments in foreclosed real estate - - (39) (2)
Proceeds from sale of REO - - 500 24
Proceeds from sale of fixed assets - 5 - 5
Purchases of equipment and property improvements (508) (206) (692) (321)
Acquistion of Homeowners Mortgage Corporation, net of cash acquired - - (1,245) -
--------------------------------------------
Net cash provided by (used in) investing activities $ 6,496 $ (526) $ 22,340 $(15,624)
--------------------------------------------
</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 Six Months
Ended Ended
March 31, March 31,
--------------------------------------------
1999 1998 1999 1998
--------------------------------------------
Cash flows from financing activities: (In thousands)
<S> <C> <C> <C> <C>
Net increase (decrease) in deposits, $ 1,305 $ 5,756 $ 9,623 $ 10,195
Proceeds from FHLB advances - 6,000 - 48,000
Payments on FHLB advances (53) (4,062) (109) (37,625)
Net increase in short-term borrowings - 1,500 - 3,000
Net increase (decrease) in mortgage escrow funds 330 471 (72) (59)
Net decrease in short-term notes payable (2,900) - (475) -
Treasury stock purchased (514) (1,938) (653) (2,037)
Proceeds from exercise of stock options 246 291 309 388
Dividends on common stock (342) (343) (674) (685)
--------------------------------------------
Net cash provided by financing activities (1,928) 7,675 7,949 21,177
--------------------------------------------
Net increase in cash and cash equivalents 11,228 6,729 31,337 6,195
Cash and cash equivalents:
Beginning of period 42,706 5,601 22,597 6,135
--------------------------------------------
End of period $ 53,934 $ 12,330 $ 53,934 $ 12,330
============================================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on advances and other borrowed money $ 2,011 $ 2,130 $ 4,014 $ 4,229
Interest on deposits 2,361 2,418 4,964 4,866
Income taxes 324 700 653 1,001
Loan originated for sale 40,028 3,162 85,546 9,805
Cash received:
Loans sold 48,302 2,723 86,046 8,106
Supplemental schedule of noncash investing and financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments 34 10 56 27
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
six month periods ended March 31, 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 March 31, 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 March 31, 1999, the weighted average number of shares
outstanding for basic and diluted earnings per share computation were
2,720,173 and 2,832,733, respectively. For the three month period ended
March 31, 1998, the weighted average number of shares outstanding were
2,664,544 and 2,920,026, respectively. For the six month period ended March
31, 1999, the weighted average number of shares outstanding for basic and
diluted earnings per share computation were 2,660,112 and 2,797,492,
respectively. For the six month period ended March 31, 1998, the weighted
number of shares outstanding were 2,672,847 and 2,934,336, 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 four and a half months ended March 31, 1999. The
Corporation issued 77,839
5
<PAGE>
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.
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 six
month periods ended March 31, 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 Six Months Ended
March 31, March 31,
-------------------------- ----------------------------
1999 1998 1999 1998
-------------------------- ----------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Interest income $ 7,242 $ 7,577 $ 14,759 $ 15,014
Interest expense 4,522 4,642 9,258 9,214
------------------------- --------------------------
Net interest income 2,720 2,935 5,501 5,800
Provision for loan losses 114 75 228 120
------------------------- --------------------------
Net interest income after provision for loan losses 2,606 2,860 5,273 5,680
------------------------- --------------------------
Non-interest income 1,273 1,617 3,471 2,917
Non-interest expense 2,695 2,928 5,888 5,719
------------------------- --------------------------
Income before provision for income taxes 1,184 1,549 2,856 2,878
Income tax expense 491 625 1,171 1,152
------------------------- --------------------------
Net income $ 693 $ 924 $ 1,685 $ 1,726
========================= ==========================
Basic earnings per share $ 0.26 $ 0.34 $ 0.62 $ 0.63
Diluted earnings per share $ 0.25 $ 0.31 $ 0.59 $ 0.57
Weighted average shares outstanding
Basic 2,720,173 2,758,990 2,713,467 2,752,495
Diluted 2,832,733 2,978,808 2,835,399 3,025,900
</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. This
statement is effective for the fiscal year beginning October 1, 1999. 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 March 31, 1999, and September 30, 1998 totaled
$430.3 million and $416.2 million, respectively. The increase of $14.1 million
was primarily a result of an increase in interest bearing cash equivalents and a
decrease in loans receivable.
Cash and cash equivalents increased from $22.6 million at September 30, 1998, to
$53.9 million at March 31, 1999, or an increase of $31.3 million. The
Corporation utilizes excess liquidity to fund the purchase of treasury shares
and loan origination's. The increase in liquidity was primarily a result of
prepayments on mortgages and the sale of mortgage loans.
Securities available for sale increased $4.9 million between March 31, 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 $50.9 million at March 31, 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 $6.9 million in
principal payments from mortgage-backed and related securities
Loans held for sale increased $5.1 million to $7.8 million at March 31, 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 March 31, 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 $18.7 million or 6.7% to $261.9 million at March 31,
1999, from $280.6 million at September 30, 1998. The decrease in loans
receivable was primarily due to an increase of $5.3 million in agricultural
loans and a decrease in commercial business loans and one-to-four family
residential mortgages of $3.6 million and $18.9 million respectively. Even
though residential mortgage origination's increased by $52.4 million or 138.9%,
the sale of residential mortgages and the prepayments of loans resulted in a
decrease in one-to-four family residential mortgages. To supplement
origination's, the Bank purchased $5.9 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 Six Months
Ended Ended
March 31, March 31,
------------------------- ---------------------------
1999 1998 1999 1998
------------------------- ---------------------------
Loans Originated: (In Thousands)
<S> <C> <C> <C> <C>
Residential mortgages $ 38,882 $ 19,854 $ 90,101 $ 37,701
Land and commercial real estate 62 1,953 2,375 2,615
Agricultural loans 11,489 9,115 15,509 10,435
Commercial Business 5,237 2,867 6,668 3,236
Consumer Loans 5,316 5,626 11,983 16,016
------------------------- --------------------------
Total Loans Originated 60,986 39,415 126,636 70,003
------------------------- --------------------------
Residential mortgages purchased - 87 0 159
Construction loans purchased - - 3,400 -
Commercial business purchased 5,000 1,889 5,850 4,614
------------------------- --------------------------
Total loans purchased 5,000 1,976 9,250 4,773
------------------------- --------------------------
Total New Loans $ 65,986 $ 41,391 $ 135,886 $ 74,776
========================= ==========================
</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>
March 31, September 30,
1999 1998
---------------------------------------
Amount % Amount %
---------------------------------------
Residential real estate: (Dollars in Thousands)
<S> <C> <C> <C> <C>
One-to-four family (1) $ 138,392 48.6 $157,340 52.2
Residential construction 22,613 7.9 21,960 7.3
Multi-family 5,057 1.8 2,975 1.0
---------------------------------------
166,062 58.3 182,275 60.4
Agricultural loans 28,301 9.9 22,959 7.6
Land and commercial real estate 29,386 10.3 29,731 9.9
Commercial business 22,151 7.8 25,763 8.5
---------------------------------------
245,900 86.3 260,728 86.4
Consumer:
Home equity and second mortgages 23,081 8.1 23,606 7.8
Automobile loans 7,961 2.8 9,670 3.2
Other 7,853 2.8 7,605 2.5
---------------------------------------
Total loans 284,795 100.0 301,609 100.0
===== =====
Less:
Loans in process (13,322) (16,658)
Deferred fees (536) (641)
Allowance for loan losses (1,212) (1,035)
--------- --------
Total loans, net $ 269,725 $283,275
========= ========
</TABLE>
- ----------------------------
(1) Includes loans held for sale in the amount of $7.8 million and $2.7 million
as of March 31, 1999 and September 30, 1998, respectively.
Real estate owned at March 31, 1999, totaled $125,000, which consisted of two
single family residential properties. No loss is expected in the disposition of
these properties.
Deposits after interest credited increased from $226.5 million at September 30,
1998, to $236.1 million at March 31, 1999, an increase of $9.6 million or 4.2%.
Overall cost of funds on deposits decreased during the period 19 basis points as
the Bank attempted to maintain deposit rates consistent with marketplace
competitors.
Federal Home Loan Bank ("FHLB") borrowing decreased $109,000 from $144.2 million
at September 30, 1998, to $144.1 million at March 31, 1999.
The Corporation completed the repurchase of 43,254 shares of common stock and
when netted with the exercise of 32,583 of stock option shares and the 77,839
shares used to purchase Homeowners, decreased the number of treasury shares to
1,536,495 at March 31, 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 increased from $42.5
million at September 30, 1998, to $43.9 million at March 31, 1999. The $1.4
million increase in stockholders' equity was primarily a result of the use of
treasury stock in the purchase of Homeowners and current period net income. Book
value per share decreased from $16.22 at September 30, 1998, to $16.16 at March
31, 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.
During the six months ended March 31, 1999, and 1998, approximately $24,000 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.
The following table sets forth information with respect to the Bank's
non-performing domestic loans for the periods indicated:
<TABLE>
<CAPTION>
March 31, 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 293 240
Permanent loans secured by non-residential real estate 198 -
Other - -
Non-mortgage loans:
Commercial and agricultural 338 -
Consumer 51 69
-------------------------
Total non-accrual loans 880 309
Foreclosed real estate and real estate held for investment 125 502
-------------------------
Total non-performing assets $ 1,005 $ 811
=========================
Total non-performing loans to net loans 0.33% 0.11%
=========================
Total non-performing loans to total assets 0.20% 0.07%
=========================
Total non-performing assets to total assets 0.23% 0.19%
=========================
</TABLE>
9
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 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 March 31,
----------------------------------------------------------------------
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) $262,539 $ 5,533 8.43% $276,305 $ 5,859 8.48%
Mortgage-backed securities 46,486 551 4.74 55,133 751 5.45
Investment securities (3) 97,323 1,158 4.76 66,113 908 5.49
-------------------- -------------------
Total interest-earning assets 406,348 7,242 7.12 397,551 7,518 7.56
------------------ ------------------
Other assets 18,352 10,901
-------- --------
Total assets $424,700 $408,452
======== ========
Liabilities:
Interest-bearing deposits $232,571 $ 2,538 4.37% $214,287 $ 2,476 4.62%
Borrowings 146,544 1,984 5.53 147,116 2,115 5.75
-------------------- -------------------
Total interest-bearing liabilities 379,115 4,522 4.82% 361,403 4,591 5.08%
------------------ ------------------
Other liabilities 3,004 3,270
-------- --------
Total liabilities 382,119 364,673
Stockholders' equity 42,581 43,779
-------- --------
Total liabilities and stockholders'
equity $424,700 $408,452
======== ========
Net interest income $ 2,720 $ 2,927
Net Spread (4) 2.30% 2.48 %
Net Margin (5) 2.68% 2.95 %
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.07X 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 $693,000 for the three months
ended March 31, 1999, as compared to net income of $810,000 for the three month
period ended March 31, 1998. The decrease in net income of $117,000 or 14.4%.
Total Interest Income. Total interest income decreased by $276,000 or 3.7% to
$7.2 million for the three months ended March 31, 1999, from $7.5 million for
the three months ended March 31, 1998, due to decreases in the average balances
of loans receivable and mortgage-backed securities. The average yield on loans
decreased to 8.43% for the quarter ended March 31, 1999, from 8.48% for the
quarter ended March 31, 1998, due to a general decline in interest rates. During
this same period, the average yield on mortgage-backed securities decreased 71
basis points (100 basis points equals 1%). The average balance of investment
securities increased to $97.3 million for the quarter ended March 31, 1999, from
$66.1 million for the quarter
10
<PAGE>
ended March 31, 1998 as a result of loan prepayments and the proceeds from
mortgage loans sales. The average yield decreased from 5.49% for the three
months ended March 31, 1998, to 4.76% for the same period in 1999, as interest
rates in general decreased during the period.
Total Interest Expense. Total interest expense decreased to $4.5 million for the
three months ended March 31, 1999, from $4.6 million for the same period in
1998. The average balance of interest-bearing deposits increased from $214.3
million for the three months ended March 31, 1998, to $232.6 million for the
three months ended March 31, 1999. This increase was comprised of interest
credited and an increase in all categories of deposit accounts. The average cost
of deposits decreased 25 basis points from 4.62% for the three month period
ended March 31, 1998, to 4.37% for the same period in 1999, due to
non-certificate accounts 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 continue to increase. The
average balance of borrowings decreased $572,000 to $146.5. million for the
three months ended March 31, 1999, from $147.1 million for the three months
ended March 31, 1998. The cost of such borrowings decreased by 22 basis points
to 5.53% for the three months ended March 31, 1999, from 5.75% 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 March 31, 1998, to $2.7 million for the same period ended
March 31, 1999. Average interest-earning assets increased $8.8 million, from
$397.6 million for the three months ended March 31, 1998, to $406.3 million for
the three months ended March 31, 1999, while the average yield on
interest-earning assets decreased from 7.56% for 1998 to 7.12% for 1999. Average
interest bearing liabilities increased by $17.7 million to $379.1 million for
the three months ended March 31, 1999, from $361.4 million for the three months
ended March 31, 1998, and the cost of interest-bearing liabilities decreased
from 5.08% for 1998 to 4.82% in 1999.
Provision for Loan Losses. The Bank's provision for loan losses was $114,000 for
the three months ended March 31, 1999, compared to $75,000 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 $1.2 million and $956,000 at March 31, 1999, and
March 31, 1998, respectively. At March 31, 1999, the Bank's allowance for loan
losses constituted 120.6% of non-performing assets as compared to 131.5% of
non-performing assets at March 31, 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 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 $748,000 during the
three month period ended March 31, 1999, to $1.3 million as compared to the same
period in 1998. Gains on loans sold increased from $96,000 at March 31, 1998 to
$573,000 at March 31, 1999. $151,000 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 $422,000 of the increase
was due to the sale of loans made by Homeowners. Commission income increased
from $76,000 for the quarter ended March 31, 1998, to $215,000 for the quarter
ended March 31, 1999. $137,000 of the increase in commissions was a result of
insurance agency activities due to the acquisition of Insurance Planners and
$9,000 was due to the sale of federal crop insurance (an ancillary activity of
agricultural lending). Other service charges and fees increased from $125,000
for the three months ended March 31, 1998, to $250,000 for the three months
ended March 31, 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 $669,000 or 33.0%
over the periods compared. Compensation and benefits increased from $1.3 million
to $1.6 million or 26.8%, due to personnel added in the acquisitions of
Homeowners and Insurance Planners, the hiring of critical management and related
support positions, including marketing, community banking and internal audit and
merit increases, which averaged 4.5%. Occupancy and equipment expense increased
by $87,000 due primarily to the Homeowners and Insurance
11
<PAGE>
Planners acquistions. Data processing expense decreased $2,000 to $119,000 for
the period ended March 31, 1999, as a result of the costs associated with the
Corporation's Year 2000 compliance program. Professional fees increased from
$70,000 for the second quarter of fiscal 1998 to $80,000 for the second quarter
of fiscal 1999. Other expenses increased $229,000 from the quarter ended March
31, 1998 to $540,000 for the quarter ended March 31, 1999 and was comprised of
increased expenses as a result of the acquisitions of Insurance Planners and
Homeowners, not present in second quarter 1998, and an increase in marketing
expenses. $30,000 of the increase was due to goodwill associated with the
acquisitions of Insurance Planners and Homeowners.
Income Tax Expense. Income taxes decreased by $50,000 or 9.2%, to $491,000 for
the three month period ended March 31, 1999, from $541,000 for the same period
in 1998, primarily due to the decrease of $167,000 in income before tax.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 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>
Six Months Ended March 31,
----------------------------------------------------------------------
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) $271,061 $ 11,493 8.48% $271,831 $ 11,548 8.50%
Mortgage-backed securities 48,982 1,130 4.61 55,180 1,548 5.61
Investment securities (3) 88,356 2,122 4.80 64,597 1,786 5.53
-------------------- -------------------
Total interest-earning assets 408,399 14,745 7.21 391,608 14,882 7.60
------------------ ------------------
Other assets 16,684 10,717
-------- --------
Total assets $425,083 $402,325
======== ========
Liabilities:
Interest-bearing deposits $232,398 $ 5,208 4.48% $211,116 $ 4,929 4.67%
Borrowings 147,010 4,018 5.58 144,311 4,210 5.83
-------------------- -------------------
Total interest-bearing liabilities 379,408 9,226 4.91% 355,427 9,139 5.14%
------------------ ------------------
Other liabilities 2,960 2,963
-------- --------
Total liabilities 382,368 358,390
Stockholders' equity 42,751 43,935
-------- --------
Total liabilities and stockholders'
equity $425,083 $402,325
======== ========
Net interest income $ 5,519 $ 5,743
Net Spread (4) 2.30% 2.46 %
Net Margin (5) 2.70% 2.93 %
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.
12
<PAGE>
Net Income. The Corporation recorded net income of $1.5 million for the six
months ended March 31, 1999, as compared to net income of $1.6 million for the
six month period ended March 31, 1998.
Total Interest Income. Total interest income decreased by $137,000 or 0.9% to
$14.7 million for the six months ended March 31, 1999, from $14.9 million for
the six months ended March 31, 1998. The yield on mortgage-backed securities
decreased to 4.61% and the yield on investment securities decreased to 4.80% for
the six months ended March 31, 1999, compared to yields of 5.61% and 5.53%,
respectively. The yield on loans receivable decreased to 8.48% for the six
months ended March 31, 1999, from 8.50% for the six months ended March 31, 1998.
Total Interest Expense. Total interest expense increased to $9.2 million for the
six months ended March 31, 1999, from $9.1 million for the six months ended
March 31, 1998. Average interest bearing liabilities increased from $355.4
million in 1998 to $379.1 million in 1999 and the cost of the liabilities
decreased from 5.14% for the six months ended March 31, 1998, to 4.91% for the
six months ended March 31, 1999. The average cost of deposits increased $279,000
and the average rate decreased from 4.67% to 4.48% during the comparison period.
Average borrowings increased from $144.3 million for the six months ended March
31, 1998, to $147.0 million for the six months ended March 31, 1999, and the
cost of the borrowings decreased from 5.83% to 5.58% due to the stability 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 $5.7 million for the six
months ended March 31, 1998, to $5.5 million for the same period ended March 31,
1999, a decrease of $224,000 or 3.9%. The average yield on interest-earning
assets decreased from 7.60% to 7.21% during the two periods while the cost of
interest-bearing liabilities decreased from 5.14% to 4.91%.
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
For the Six Months
At March 31,
--------------------------
1999 1998
--------------------------
(In Thousands)
Total loans outstanding (1) $ 284,795 $294,430
==========================
Average loans outstanding $271,061 $271,831
==========================
Allowance balance (beginning of period) $ 1,035 $ 852
--------------------------
Provision (credit):
Residential (2) 20 -
Land and commercial real estate 10 46
Commercial/Agricultural business 198 62
Consumer - 12
--------------------------
Total provision 228 120
Charge-off:
Residential - -
Land and commercial real estate - -
Consumer 72 24
--------------------------
Total charge-offs 72 24
Recoveries:
Residential - -
Land and commercial real estate - -
Consumer 21 8
--------------------------
Total recoveries 21 8
--------------------------
Net charge-offs 51 16
--------------------------
Allowance balance (end of period) $ 1,212 $ 956
==========================
Allowance as percent of total loans 0.43% 0.32%
Net loans charged off as a percent of average loans 0.02% 0.01%
- -------------------------------
(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.
13
<PAGE>
Provision for Loan Losses. The Bank's provision for loan loss increased to
$228,000 for the six months ended March 31, 1999 and 1998. See also "Comparison
of the Three Months Ended March 31, 1999 and 1998- Provision for Loan Losses."
Non-interest Income. Total non-interest income increased $1.6 million during the
six month period ended March 31, 1999, to $2.6 million as compared to the same
period in 1998. Gains on loans sold increased from $111,000 at March 31, 1998 to
$1.3 million at March 31, 1999. $307,000 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 $855,000 of the
increase was due to the sale of loans made by Homeowners. Commission income
increased from $129,000 for the six months ended March 31, 1998, to $446,000 for
the six months ended March 31, 1999. $275,000 of the increase in commissions was
a result of insurance agency activities due to the acquisition of Insurance
Planners and $35,000 was due to the sale of federal crop insurance (an ancillary
activity of agricultural lending). Other service charges and fees increased from
$232,000 for the six months ended March 31, 1998, to $383,000 for the six months
ended March 31, 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 $1.3 million or 32.3%
over the periods compared. Compensation and benefits increased from $2.5 million
to $3.3 million or 29.3%, due to personnel added in the acquisitions of
Homeowners and Insurance Planners, the hiring of critical management and related
support positions, including marketing, community banking and internal audit and
merit increases, which averaged 4.5%. Occupancy and equipment expense increased
by $129,000. Data processing expense increased $25,000 to $264,000 for the
period ended March 31, 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 $16,000 to $155,000 over the periods
compared. Other expenses increased $371,000 from the six months ended March 31,
1998 to $959,000 for the six months ended March 31, 1999 and was comprised
mainly of increased expenses as a result of the acquisitions of Insurance
Planners and Homeowners, not present in the same period in 1998, and an increase
in marketing expenses. $46,000 of the increase was due to goodwill associated
with the acquisitions of Insurance Planners and Homeowners.
Income Tax Expense. Income taxes increased by $33,000 or 3.2%, to $1,069,000 for
the six month period ended March 31, 1999, from $1,036,000 for the same period
in 1998, primarily due to the increase 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.
14
<PAGE>
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, perform adequate testing and complete affirmation that
its processing systems will be Year 2000 ready. Execution of the Plan is
currently on target. The Bank is currently in Phase 4, Validation, which
involves testing of changes to hardware and software, accompanied by monitoring
and testing with vendors. 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 is expected to be accomplished, though there is no assurance, by June 30,
1999. Testing of critical applications is approximately 90% 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 Validation phase is targeted for completion by June 30, 1999. 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.
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. 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 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. In December, 1997, the federal
regulators 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 March 31, 1999, and 1998, respectively. The options from the
previous method were used in the current period, which are more restrictive.
15
<PAGE>
The amount of certificate accounts which are scheduled to mature during the
twelve months ending March 31, 2000, was approximately $94.7 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 March 31, 1999, the Bank and Homeowners had loan commitments outstanding of
$2.1 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 Banks actual capital
and required capital amounts and ratios at March 31, 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 captial, March 31, 1999 $ 35,260
Add: Unrealized losses on debt
securities held for sale 690
--------
Tangible equity capital and ratio to
adjusted total assets $ 35,950 8.6% $ - 1.5% $ - 2.0%
----------------- ------------------- ------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $ 35,950 8.6% $ - 4.0% $ - 5.0%
----------------- ------------------- ------------------
Total risk-based capital and ratio to
risk-weighted assets $ 35,950 14.7% $ 9,773 4.0% $ 14,659 6.0%
------- ------------------- ------------------
Tier 2 risk-based capital, allowance for loan losses 1,212
--------
Total risk-based capital and ratio to
risk-weighted assets, March 31, 1999 $ 37,162 15.2% $ 19,546 8.0% $ 24,432 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 six months ended March 31, 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.
16
<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 March 31, 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
The annual meeting of shareholders of the Corporation was held on
January 19, 1999, and the following items were presented:
Election of Directors Donald A. Glas, James J. Caturia and Jerome R.
Dempsey for terms of three years ending in 2002. Donald A. Glas
received 2,481,523 votes in favor and 190,523 votes were withheld.
James J. Caturia received 2,480,893 votes in favor and 191,153 votes
were withheld. Jerome R. Dempsey received 2,480,893 votes in favor and
191,153 votes were withheld.
Ratification of the appointment of Bertram Cooper & Co., LLP as the
Corporation's auditors for the 1999 fiscal year. Bertram Cooper & Co.,
LLP was ratified as the Corporation's auditors with 2,652,066 votes
for, 11,271 votes against, and 8,709 abstentions.
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
On March 12, 1999, the Corporation filed a current report on
Form 8-K announcing Board of Director's approval of a stock
repurchase plan totaling 170,000 shares. (Items 5, 7)
17
<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: May 5, 1999 By: /s/ Donald A. Glas
- ------------------ ----------------------------
Donald A. Glas
Chief Executive Officer
Date: May 5, 1999 By: /s/ Richard H. Burgart
- ------------------ ---------------------------
Richard H. Burgart
Chief Financial Officer
<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1999
<CASH> 53,934
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,230
<INVESTMENTS-CARRYING> 50,934
<INVESTMENTS-MARKET> 49,268
<LOANS> 284,795
<ALLOWANCE> 1,212
<TOTAL-ASSETS> 430,325
<DEPOSITS> 236,166
<SHORT-TERM> 144,068
<LIABILITIES-OTHER> 6,158
<LONG-TERM> 0
0
0
<COMMON> 450
<OTHER-SE> 43,483
<TOTAL-LIABILITIES-AND-EQUITY> 430,325
<INTEREST-LOAN> 5,533
<INTEREST-INVEST> 1,709
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,242
<INTEREST-DEPOSIT> 2,538
<INTEREST-EXPENSE> 1,984
<INTEREST-INCOME-NET> 2,720
<LOAN-LOSSES> 114
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,695
<INCOME-PRETAX> 1,184
<INCOME-PRE-EXTRAORDINARY> 693
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 693
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</TABLE>
