EXHIBIT 13
<PAGE>
CORPORATE PROFILE AND STOCK MARKET INFORMATION
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Corporate Profile
FSF Financial Corp. (the "Corporation") is the holding company for First Federal
fsb ("First Federal") and Insurance Planners. Insurance Planners is an
independent property and casualty insurance agency located in Hutchinson,
Minnesota. Additionally, on November 17, 1998, the Corporation acquired
Homeowners Mortgage Corporation ("HMC"), a mortgage banking company located in
Vadnais Heights, Minnesota. As of June 1, 2000, HMC became an operating
subsidiary of First Federal (the "Bank") following regulatory approval.
First Federal's business consists primarily of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make a variety of loans. Deposits with First Federal are insured by
the Federal Deposit Insurance Corporation to applicable limits. At September 30,
2000, First Federal operated 11 retail-banking offices in Minnesota.
Stock Market Information
Since its issuance in October 1994, the Corporation's common stock has been
traded on the Nasdaq National Market. The daily stock quotation for FSF
Financial Corp. is listed in the Nasdaq National Market published in The Wall
Street Journal, the St Paul Pioneer Press and Dispatch and other leading
newspapers under the trading symbol of "FFHH". For a listing of the stock price
as published by the Nasdaq statistical report, see "Selected Quarterly Financial
Data."
The number of stockholders of record of common stock as of the record date of
November 30, 2000, was approximately 444. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At November 30, 2000, there were 2,393,955 shares issued and
outstanding.
The Corporation's ability to pay dividends to stockholders is dependent upon the
dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock form or (2) the regulatory capital requirements imposed by the
OTS.
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<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA FOR FSF FINANCIAL CORPORATION
-------------------------------------------------------------------------------------------------------------------
Financial Condition (dollars in thousands)
----------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 466,515 $ 418,094 $ 416,232 $ 388,135 $ 354,636
Loans held for sale 3,191 5,334 2,672 204 443
Loans receivable, net 341,813 278,290 280,603 260,390 216,727
Mortgage-backed securities 26,986 27,587 36,418 38,539 38,557
Mortgage-backed securities available for sale 15,369 15,979 16,574 16,699 16,336
Debt securities 18,393 19,937 24,412 37,876 44,349
Debt securities available for sale 12,728 12,794 3,010 1,000 -
Equity securities available for sale 18,246 19,284 19,459 19,311 18,231
Cash and cash equivalents (1) 8,482 19,265 22,597 6,135 11,756
Savings deposits 294,823 231,651 226,542 208,246 189,074
Other borrowings 127,500 140,967 144,177 133,817 114,693
Stockholders' equity 39,765 42,325 42,518 43,362 47,649
Summary of Operations (dollars in thousands)
---------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
Interest income $ 32,877 $ 29,420 $ 29,981 $ 27,315 $ 23,244
Interest expense 19,753 18,198 18,499 16,346 13,609
Net interest income 13,124 11,222 11,482 10,969 9,635
Provision for loan losses 216 456 302 120 42
Non-interest income 4,825 5,259 2,269 1,510 1,354
Non-interest expense (2) 11,979 11,826 8,395 7,130 8,178
Net income (2) 3,504 2,505 3,030 3,124 1,668
Other Selected Data
----------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
Return on average assets 0.81% 0.59% 0.74% 0.84% 0.69%
Return on average equity 8.54% 5.74% 6.94% 6.87% 4.25%
Average equity to average assets 9.49% 10.26% 10.70% 12.25% 15.93%
Net interest rate spread (3) 2.93% 2.39% 2.44% 2.54% 2.36%
Non-performing assets to total assets 0.28% 0.13% 0.19% 0.15% 0.06%
Allowance for loan losses to total loans 0.44% 0.48% 0.36% 0.33% 0.36%
Basic earnings per share $ 1.46 $ 0.94 $ 1.14 $ 1.13 $ 0.49
Diluted earnings per share $ 1.43 $ 0.90 $ 1.05 $ 1.04 $ 0.47
Cash dividends declared per share $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.50
Dividend payout ratio 34.40% 53.10% 44.80% 45.20% 105.40%
</TABLE>
(1) Consists of cash due from banks, interest-bearing deposits and other
investments with original maturities of less than three months.
(2) Includes a one time special assessment of $1,030,000 to recapitalize the
SAIF for the year ended September 30, 1996.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of integrating newly
acquired businesses, the ability to control costs and expenses and general
economic conditions. FSF Financial Corp. undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
General
The Corporation does not engage in any active business. The earnings of the
Corporation depend primarily on the Bank's net interest income, and to a lesser
extent, income from its recently acquired wholly owned subsidiaries: Insurance
Planners (June 1998) and Homeowners Mortgage (November 1998). Net interest
income is affected by the interest rates that the Bank receives from its loans
and investments and by the interest rates that the Bank must pay for its sources
of funds. The difference between average rates of interest earned on assets and
the average rate paid on liabilities is the "interest rate spread". When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will produce net interest income.
In addition, the Bank receives income from service charges on deposit accounts,
other service charges and fees, commission income and income from the sale of
loans to the secondary market. The Bank incurs expenses in addition to interest
expense in the form of salaries and benefits, deposit insurance, property
operations and maintenance, advertising and other related business expenses.
Earnings of the Bank are significantly affected by economic and competitive
conditions, particularly changes in interest rates, government policies and
regulations of various regulatory authorities.
Asset/Liability Management
The Bank, like other financial institutions, is vulnerable to changes in
interest rates when interest-bearing liabilities mature differently than
interest-earning assets. The lending activities of the Bank have emphasized the
origination of loans, the majority of which have a repricing term that is
substantially shorter than their amortization term and the source of funds has
been deposits and borrowings. Having interest-earning assets that reprice more
frequently than interest-bearing liabilities is generally beneficial to net
interest income during periods of increasing interest rates, such an
asset/liability mismatch is generally detrimental during periods of declining
interest rates.
In an attempt to manage its exposure to changes in interest rates, management
closely monitors interest rate risk. Management meets at least quarterly to
review the interest rate risk position and projected profitability of the Bank.
In addition, management reviews the Bank's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Bank's objectives in the most effective manner. The Board of
Directors reviews, on a quarterly basis, the Bank's asset/liability position,
including simulations of the effect of various interest rate scenarios on the
Bank's capital.
Depending on the relationship between long-term and short-term interest rates,
market conditions and consumer preferences, the Bank, may place more emphasis on
managing net interest margin rather than matching the interest rate sensitivity
of its assets and liabilities in an effort to enhance net interest income.
Management believes that the increased net interest income resulting from a
mismatch in the maturity of its asset and liability portfolios can provide high
enough returns to justify the increased exposure to sudden and unexpected
changes in interest rates.
Management attempts to reduce the Bank's interest rate risk by the way it
structures its assets and liabilities. The Bank sells all fixed rate residential
mortgages and retains for its portfolio, residential mortgages with either
adjustable interest rates or balloon provisions. These loans provide the Bank
with a repricing time frame that is substantially shorter than the contractual
term. During the 2000 fiscal year,
4
<PAGE>
the Bank originated $2.2 million of single family mortgage loans, which have
initial fixed rates for terms of one to ten years and then adjust annually off a
treasury index thereafter. The Bank also originated $3.0 million of single
family mortgage loans that have a balloon payment due in three to seven years.
Originations of construction and land development loans, which generally have a
contractual maturity of two years or less, totaled $102.1 million. At September
30, 2000, $138.7 million of real estate mortgages were adjustable rate, balloon
or construction and land development loans, representing 40.2% of total loans
and 29.7% of total assets.
Interest rate sensitivity is the result of differences in the amounts and
repricing dates of rate sensitive assets and rate sensitive liabilities. These
differences, or interest rate repricing "GAP," provide an indication of the
extent to which the net interest income is affected by future changes in
interest rates. A GAP is considered positive when the amount of interest rate
sensitive assets exceed the amount of interest rate sensitive liabilities. A GAP
is considered negative when the amount of interest rate sensitive liabilities
exceed interest rate sensitive assets. During a period of falling interest
rates, a negative GAP would tend to result in an increase in net interest
income, while a positive GAP would tend to affect net interest income adversely.
Conversely, during a period of rising interest rates, a negative GAP would tend
to result in a decrease in net interest income, while a positive GAP would tend
to result in an increase in net interest income.
The table that follows sets forth the amounts of interest-earning assets and
interest-bearing liabilities at September 30, 2000, which are expected to
reprice or mature in each of the future time periods shown.
Analysis of Repricing Mechanisms
<TABLE>
<CAPTION>
Over One Over Five
Within to Five to Ten Over Ten
One Year Years Years Years Total
------------- ------------ ------------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 86,933 $ 89,234 $ 33,483 $ 29,500 $239,150
Other loans 65,337 68,726 8,214 2,687 144,964
Investment securities 31,745 21,351 2,016 45,092 100,204
------------- ------------ ------------- ------------- ------------
Total interest-earning assets 184,015 179,311 43,713 77,279 484,318
------------- ------------ ------------- ------------- ------------
Interest-bearing liabilities:
Non-interest bearing deposits 17,294 - - - 17,294
NOW and Super now accounts 14,744 3,459 - - 18,203
Savings accounts 71,277 8,810 - - 80,087
Money market deposit accounts 1,306 161 - - 1,467
Certificates 133,762 41,607 2,403 - 177,772
Other borrowed money 35,000 25,500 67,000 - 127,500
------------- ------------ ------------- ------------- ------------
Total interest-bearing liabilities 273,383 79,537 69,403 - 422,323
------------- ------------ ------------- ------------- ------------
Interest sensitivity gap $ (89,368) $ 99,774 $ (25,690) $ 77,279 $ 61,995
============= ============ ============= ============= ============
Cumulative interest sensitivity gap $ (89,368) $ 10,406 $ (15,284) $ 61,995
============= ============ ============= =============
Cumulative ratio of interest-earning assets
to interest-bearing liabilities 0.67% 1.03% 0.96% 1.15%
============= ============ ============= =============
Cumulative ratio of cumulative interest
sensitivity gap to total assets. -19.16% 2.23% -3.28% 13.29%
============= ============ ============= =============
</TABLE>
5
<PAGE>
The table on the preceding page indicates the time periods in which
interest-earning assets and interest- bearing liabilities will mature or reprice
in accordance with their contractual terms. The following assumptions have been
used in calculating the values in the table: adjustable rate and balloon loans
have a constant prepayment rate of 6.0%, mortgages held for sale are all set to
reprice in three years or less, while remaining mortgages have prepayment rates
ranging from 4.0% to 10.0%. Consumer loans have a prepayment rate that is
constant over time at 19.0%, NOW checking, core savings deposits and money
market deposits have an increasing decay ranging from 6.0% to 30.0%. Management
utilizes its own assumptions and feels that these assumptions provide a
reasonable estimate of actual experience.
Certain shortcomings are inherent in the method of analysis presented in the
previous table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis over
the life of the assets. Further, in the event of a change in interest rate,
prepayment levels and decay rates on core deposits may deviate significantly
from those assumed in calculating the table.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Bank's market risk is comprised primarily of interest rate risk
resulting from its core banking activities of lending and deposit taking.
Interest rate risk is the risk that changes in market interest rates might
adversely affect the Bank's net interest income or the economic value of its
portfolio of assets, liabilities and off-balance sheet contracts. Management
continually develops and applies strategies to mitigate this risk. Management
does not believe that the Bank's primary market risk exposures and how those
exposures are managed in fiscal 2000 have changed when compared to fiscal 1999.
Market risk limits have been established by the Board of Directors based on the
Bank's tolerance for risk.
The Bank primarily relies on its Net Portfolio Value Model ("Model") to measure
its susceptibility to interest rate changes. Net portfolio value ("NPV") is
defined as the present value of expected cash flows from existing assets minus
the present value of expected net cash flows from existing liabilities plus or
minus the present value of net expected cash flows from existing off-balance
sheet contracts. The Bank does not currently own any derivative financial
instruments whose values are determined from underlying instruments or market
indices and whose notional or contractual amounts would not be recognized in the
financial statements. The Model estimates the current economic value of each
type of asset, liability and off-balance sheet contract after various assumed
instantaneous, parallel shifts in the Treasury yield curve both upward and
downward.
The NPV Model uses an option based pricing approach to value one to four family
mortgages, mortgages serviced by others and firm commitments to buy, sell or
originate mortgages. This approach makes use of an interest rate simulation
program to generate numerous random interest rate paths that, in conjunction
with a prepayment model, are used to estimate mortgage cash flows. Prepayment
options and interest rate caps and floors contained in mortgages and mortgage
related securities introduce significant uncertainty in estimating the timing of
cash flows for these instruments that warrants the use of this sophisticated
methodology. All other financial instruments are valued using a static
discounted cash flow method. Under this approach, the present value is
determined by discounting the cash flows the instrument is expected to generate
by the yields currently available to investors from an instrument of comparable
risk and duration.
6
<PAGE>
The following table sets forth the present value estimates of the Bank at
September 30, 2000, as calculated by its NPV Model. The table shows the NPV of
the Bank under rate shock scenarios of -300 to +300 basis points in increments
of 100 basis points. As market rates increase, the market value of the Bank's
large portfolio of mortgage loans and securities declines significantly and
prepayments are slow. As rates decrease, the market value of mortgage loans and
securities increase only modestly due to prepayment risk, periodic rate caps and
other embedded options. Actual changes in market value will differ from
estimated changes set forth in this table due to various risks and
uncertainties.
<TABLE>
<CAPTION>
Changes in Interest Net Portfolio Change NPV as % of Assets
Rates in Basis --------------------------------------------- -------------------------------
Points (Rate Shock) $ Amount $ Change Change % NPV Ratio Change
------------ ------------ ------------- ------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+300 bp $ 30,721 $(6,268) (16.47) % 6.72 % (120)bp
+200 bp 32,697 (4,292) (11.28) 7.11 (81)bp
+100 bp 34,782 (2,207) (5.80) 7.50 (42)bp
0 bp 36,989 - - 7.92 -
-100 bp 39,336 2,347 6.17 8.36 44 bp
-200 bp 41,841 4,852 12.75 8.82 90 bp
-300 bp 44,528 7,539 19.81 9.31 139 bp
</TABLE>
This table shows that the Bank's economic value of equity would decrease with
rising interest rates while increasing with falling interest rates. However,
computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan repayments and deposit runoffs, and may not be indicative of actual
results. The computations do not reflect any actions that the Bank may undertake
in response to changes in interest rates, because management cannot always
predict future interest rates or their effect on the Bank. Certain shortcomings
are inherent in the method of analysis presented in the computation of NPV. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in differing degrees to changes in market
area interest rates. Additionally, certain assets, such as adjustable rate loans
have features that restrict changes in interest rates during the initial term
and over the remaining life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in the table. Finally, the ability of many
borrowers to service their adjustable rate debt may decrease in the event of an
interest rate increase.
7
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Corporation for the periods indicated. For
each category of interest-earning assets and interest- bearing liabilities,
information is provided on changes attributable to (1) changes in volume
(changes in average volume multiplied by old rate), (2) changes in rates
(changes in rate multiplied by old average volume) and (3) total changes in
rate/volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) Due To
-----------------------------------------
Rate Volume Rate/Volume Total
--------- -------- ----------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Year Ended September 30, 2000 vs 1999:
Interest income:
Loans Receivable $ 1,228 $ 2,824 $ 184 $ 4,236
Mortgage-backed securities 545 (161) (34) 350
Investment securities 519 (1,469) (179) (1,129)
------- ------- ------- -------
Total change in interest income 2,292 1,194 (29) 3,457
Interest expense:
Savings accounts 622 691 62 1,375
FHLB Borrowings 616 (405) (31) 180
------- ------- ------- -------
Total change in interest expense 1,238 286 31 1,555
------- ------- ------- -------
Net change in net interest income $ 1,054 $ 908 $ (60) $ 1,902
======= ======= ======= =======
Year Ended September 30, 1999 vs 1998:
Interest income:
Loans Receivable $ (488) $ (165) $ 2 $ (651)
Mortgage-backed securities (279) (454) 45 (688)
Investment securities (319) 1,210 (113) 778
------- ------- ------- -------
Total change in interest income (1,086) 591 (66) (561)
Interest expense:
Savings accounts (611) 796 (34) 151
FHLB Borrowings (460) 18 (10) (452)
------- ------- ------- -------
Total change in interest expense (1,071) 814 (44) (301)
------- ------- ------- -------
Net change in net interest income $ (15) $ (223) $ (22) $ (260)
======= ======= ======= =======
</TABLE>
8
<PAGE>
Average Balances
The following table sets forth information relating to the Corporation's average
yield on assets and average cost of liabilities for the periods indicated. The
yields and costs are computed by dividing income or expense by the average
balance of interest-earning assets and interest-bearing liabilities,
respectively, for the periods indicated. Average balances are derived from month
end balances. Management does not believe that the use of month-end balances has
caused any material difference in the information presented.
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------- ----------------
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
---------------------------------------------------------------------- --------- -------
Interest-Earning Assets (in thousands) (in thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 308,721 $ 27,097 8.78% $ 274,676 $ 22,861 8.32% $ 276,730 $23,512 8.50%
Mortgage-backed securities 43,224 2,668 6.17% 46,398 2,318 5.00% 54,657 3,006 5.50%
Investment securities (2) 57,508 3,112 5.41% 87,987 4,241 4.82% 65,238 3,463 5.31%
-------------------- ------------------------- --------- ---------
Total interest-earning assets 409,453 32,877 8.03% 409,061 29,420 7.19% 396,625 29,981 7.56%
-------------------- ------------------------- --------- ---------
Interest-Bearing Liabilities
NOW and money market accounts $ 33,727 259 0.77% $ 31,670 289 0.91% $ 28,626 407 1.42%
Passbook savings 73,422 3,110 4.24% 58,463 1,896 3.24% 50,699 1,690 3.33%
Certificates of deposit 141,686 8,239 5.81% 142,811 8,048 5.64% 136,407 7,985 5.85%
-------------------- ------------------------- --------- ---------
Total deposits 248,835 11,608 4.66% 232,944 10,233 4.39% 215,732 10,082 4.67%
FHLB advances and other borrowed funds 138,213 8,145 5.89% 145,690 7,965 5.47% 145,459 8,417 5.79%
-------------------- ------------------------- --------- ---------
Total interest-bearing liabilities 387,048 19,753 5.10% 378,634 18,198 4.81% 361,191 18,499 5.12%
-------------------- ------------------------- --------- ---------
Net Interest Income $ 13,124 $ 11,222 $11,482
========== =========== ========
Net Interest Rate Spread (3) 2.93% 2.39% 2.44%
Net Interest Rate Margin (4) 3.21% 2.74% 2.89%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.06x 1.10x 1.11x
========== ============== ==========
</TABLE>
(1) Average balances include non-accrual loans and loans held for sale.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest rate margin represents net interest income as a percentage of
average interest-earning assets.
9
<PAGE>
Changes in Financial Condition
General
Total assets increased from $418.1 million at September 30, 1999, to $466.5
million at September 30, 2000, an increase of $48.4 million or 11.6%. The Bank
and HMC continued to experience good demand for loans and supplemented the
internal loan originations ($262.7 million) with purchases of other loans ($32.4
million) that met the interest rate risk and credit risk criteria established by
management.
Securities Available for Sale
Equity securities decreased by $1.0 million due to the sale of excess FHLB
stock. Mortgage-backed and related securities available for sale decreased by
$610,000 during the 2000 fiscal year as a result of a reduction in market value.
Debt securities available for sale decreased $66,000, also due to a reduction in
market value. The net unrealized losses on securities available for sale
increased from $1.3 million at September 30, 1999, to $1.8 million at September
30, 2000. This increase was primarily due to the market rate of interest
increasing compared to the contractual rate of interest.
Securities Held to Maturity
Debt securities held to maturity decreased from $19.9 million to $18.4 million
at September 30, 2000, due to maturities. Mortgage-backed securities held to
maturity decreased from $27.6 million to $27.0 million during fiscal 2000, due
to principal repayments. The net unrealized losses on securities held to
maturity increased from $2.2 million at September 30, 1999, to $3.3 million at
September 30, 2000. These increases were primarily due to the market rate of
interest increasing compared to the contractual rate.
Loans Held for Sale
Net loans held for sale decreased from $5.3 million at September 30, 1999, to
$3.2 million at September 30, 2000. The Bank and HMC had firm commitments to
sell these loans held for sale that were closed by September 30, 2000.
Loans Receivable
Net loans receivable increased from $278.3 million at September 30, 1999, to
$341.8 million at September 30, 2000, primarily due to an increase in
originations of construction and consumer loans. This increase of $63.5 million,
or 22.8%, was comprised of a decline in one to four family loans of $17.7
million. This was partially offset by increases in other real estate mortgages
($14.3 million), net construction loans ($38.8 million), consumer and home
equity loans ($28.7 million) and agricultural loans ($10.4 million).
The composition of the loans originated was indicative of the change in the
Corporation's loan portfolio. During the last five years, one to four family
residential mortgages decreased from 64.7% of all loans to 26.3%. The interest
rate risk profile of residential mortgages causes the Bank to sell the majority
of such loans in the secondary market. The diversification of the loan portfolio
had a positive impact on the average yield, which increased to 8.78% for the
year ended September 30, 2000, as compared to 8.32% in the prior year. See
"Average Balances".
Deposits
Total deposits increased by $63.2 million, or 27.3% during the 2000 fiscal year.
The increase in deposits was attributed to an increase in savings accounts
($14.5 million), an increase in demand deposits ($4.0 million) and a decrease in
certificates of deposit ($44.6 million). The increase in total deposits was
accompanied by an increase in the weighted average cost of funds from 4.39% to
4.66% for the years ended September 30, 1999 and 2000, respectively. The
increase in cost is primarily attributable to the change in the composition of
deposits.
Borrowings
In addition to growth in deposits, borrowings may be utilized to fund the growth
in assets. Management utilizes a least cost at the margin approach to fund
assets. As a result, borrowings are utilized as a funding source when it
provides the least cost at the margin. FHLB advances are used to fund lending
and investment activities, withdrawals from deposit accounts and other ordinary
business activity. Borrowings decreased by $13.5 million dollars during fiscal
2000 due to principal payments. The Bank was able to fund lending and
investments with loan repayments and deposit growth.
10
<PAGE>
Stockholders' Equity
At September 30, 2000, total stockholders' equity decreased $2.5 million to
$39.8 million from $42.3 million at September 30, 1999. The decrease was
primarily due to stock repurchases of approximately 400,000 shares at an
aggregate cost of $4.9 million ($12.34 average price per share), a $458,000 loss
in accumulated other comprehensive income and dividends paid of $1.2 million.
Such decreases in stockholders' equity were offset by net income of $3.5 million
for the period.
Accumulated other comprehensive income decreased as a result of changes in the
net unrealized (loss) on the available for sale securities due to fluctuations
in interest rates. Pursuant to generally accepted accounting principles,
securities available for sale are recorded at current market value and net
unrealized gains or losses on such securities are excluded from current earnings
and reported net of income taxes, as part of comprehensive income, until
realized. Because of interest rate volatility, the Corporation's accumulated
other comprehensive income could materially fluctuate for each interim period
and year-end. The decrease in market value of the investment securities
available for sale is considered temporary in nature and will not affect the
Corporation's net income until the securities are sold.
Comparison of Years Ended September 30, 2000 and 1999
Net Income
Net income increased to $3.5 million for the year ended September 30, 2000, from
$2.5 million for the year ended September 30, 1999. The increase was primarily
due to an increase in net interest income of $1.9 million.
Interest Income
Total interest income increased $3.5 million to $32.9 million for the year ended
September 30, 2000, from $29.4 million for the year ended September 30, 1999.
Interest income on loans increased by $4.2 million from $22.9 million for the
year ended September 30, 1999, to $27.1 million for the year ended September 30,
2000. This was a result of a $34.0 million increase in the average balance of
loans receivable from $274.7 million at September 30, 1999, to $308.7 million at
September 30, 2000. Furthermore, the average yield increased from 8.32% at
September 30, 1999, to 8.77% at September 30, 2000. Interest income on
mortgage-backed securities increased from $2.3 million for the year ended
September 30, 1999, to $2.7 million for the year ended September 30, 2000. The
increase was primarily the result of an increase in average rate from 5.00% for
the 1999 fiscal year to 6.17% for the 2000 fiscal year. The average balance of
investment securities decreased by $30.5 million during the fiscal year and the
yield increased from 4.82% to 5.41%. The yield on interest-earning assets
increased from 7.19% for the year ended September 30, 1999, to 8.03% for the
year ended September 30, 2000. Interest income increased by $1.2 million as a
result of increased volume during the year while the changes in rates caused
interest income to increase by $2.3 million and the rate/volume change decreased
interest income by $29,000.
Interest Expense
Total interest expense increased to $19.8 million for 2000 the 2000 fiscal year
from $18.2 million for the 1999 fiscal year, as the average balance of total
interest-bearing liabilities and the average cost of funds increased. The
increased cost of deposits attendant to the growth of balances was approximately
$691,000, while the increase associated with a change in interest rates was
approximately $622,000. The cost associated with interest-bearing deposits
increased from 4.39% for the year ended September 30, 1999, to 4.66% for the
same period ended September 30, 2000. The cost associated with borrowed funds
increased to 5.89% for fiscal 2000 compared to 5.47% for fiscal 1999. $616,000
of the increase in the cost of borrowed funds was a result of increases in
rates, while increased volumes reduced interest expense by $405,000, and $31,000
of the decrease was rate/volume related.
Net Interest Income
Net interest income increased $1.9 million during the 2000 fiscal year. Changes
in interest rates caused an increase in net interest income of $1.1 million.
Volumes accounted for an increase in net interest income of $908,000 while
rate/volume differences decreased $60,000.
Provision For Loan Losses
The allowance for losses on loans is maintained at a level which is considered
by management to be adequate to absorb probable losses on existing loans that
may become uncollectible based on an evaluation of the collectibility, prior
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
11
<PAGE>
ability to pay. The allowance for loan losses is established through a provision
for loan losses charged to expense.
The Bank's loan loss provision decreased from $456,000 for the year ended
September 30, 1999, to $216,000 for the year ended September 30, 2000. The
Bank's allowance for loan losses was $1.5 million at September 30, 2000. The
allowance for loan losses represents 0.44% of total loans outstanding and 1.17%
of total non-performing assets. While the Bank maintains its allowance for loan
losses at a level which it considers to be adequate, there can be no assurance
that further additions will not be made to the loss allowances or that such
losses will not exceed the estimated amounts.
Non-interest Income
Total non-interest income decreased by $434,000 to $4.8 million for the year
ended September 30, 2000, from $5.3 million for the year ended September 30,
1999. HMC was acquired on November 17, 1998, and as a result, the consolidated
statements of income reflect twelve full months of income and expense for HMC in
fiscal 2000 but only ten and a half months of income and expense for fiscal
1999. Gains on loans sold decreased from $2.3 million for fiscal year 1999 to
$1.2 million for fiscal year 2000 and other service charges and fees decreased
from $801,000 for the year ended September 30, 1999, to $765,000 for the year
ended September 30, 2000, primarily due to rising interest rates that slowed
down the purchase and refinance markets. Continued increases in interest rates
could affect the ability to generate new loans. Service charges on deposit
accounts increased $294,000 during the periods compared, due to a combination of
an increase in the number of accounts affected and an increase in the fees
associated with deposit accounts.
Non-interest Expense
Total non-interest expense increased 1.7% to $12.0 million for the year ended
September 30, 2000, from $11.8 million for the year ended September 30, 1999.
Compensation and benefits decreased $158,000 from $7.4 million for fiscal 1999
to $7.2 million for fiscal 2000. Occupancy and equipment expense increased
$93,000, while deposit insurance premiums decreased $63,000. Professional fees
increased from $276,000 for fiscal year 1999 to $378,000 for fiscal year 2000.
Data processing increased $45,000 to $689,000 for the period ended September 30,
2000, due to processing expense associated with increased delivery of electronic
services to customers, the introduction of agricultural lending and the
expansion of commercial lending. Goodwill amortization during the year was
$91,000 for HMC and $27,000 for the Agency.
Income Tax Expense
Income tax expense increased to $2.3 million for the year ended September 30,
2000, from $1.7 million for the year ended September 30, 1999. The increase was
primarily due to a gain in pre-tax income of $1.6 million.
Comparison of Years Ended September 30, 1999 and 1998
Net Income
Net income decreased to $2.5 million for the year ended September 30, 1999, from
$3.0 million for the year ended September 30, 1998. The decrease was primarily
due to an increase in non-interest expense and non-interest income, the majority
of which was attributable to the acquisition of the Agency and HMC.
Interest Income
Total interest income decreased $561,000 to $29.4 million for the year ended
September 30, 1999, from $30.0 million for the year ended September 30, 1998.
Interest income on loans decreased by $651,000 from $23.5 million for the year
ended September 30, 1998, to $22.9 million for the year ended September 30,
1999, as a result of a $2.0 million decrease in the average balance of loans
receivable from $276.7 million at September 30, 1998, to $274.7 million at
September 30, 1999. Furthermore, the average yield decreased from 8.50% at
September 30, 1998, to 8.32% at September 30, 1999. Interest income on
mortgage-backed securities decreased from $3.0 million for the year ended
September 30, 1998, to $2.3 million for the year ended September 30, 1999. The
decrease was primarily the result of a decrease in average rate from 5.50% for
the 1998 fiscal year to 5.00% for the 1999 fiscal year and a decrease in the
average balance of $8.3 million. The average balance of investment securities
increased by $22.7 million during the fiscal year and the yield decreased from
5.31% to 4.82% The decrease in yield for investment securities was primarily
impacted by maturities and the exercise of call options by issuers. The yield on
interest earning assets decreased from 7.56% for the year ended September 30,
1998, to 7.19% for the year ended September 30, 1999. Interest income increased
by $591,000 as a result of increased volume
12
<PAGE>
during the year while the changes in rates caused interest income to decrease by
$1.1 million and the rate/volume change decreased interest income by $66,000.
Interest Expense
Total interest expense decreased to $18.2 million during 1999 from $18.5 million
in 1998 as the average balance of total interest bearing liabilities increased
and the average cost of funds decreased. The increased cost of deposits
attendant to the growth of balances was approximately $796,000 while the
decrease associated with a change in interest rates was approximately $611,000.
The cost associated with interest bearing deposits decreased from 4.67% for the
year ended September 30, 1998, to 4.39% for the same period ended September 30,
1999. The cost associated with borrowed funds decreased to 5.47% for fiscal 1999
compared to 5.79% for fiscal 1998. $460,000 of the decrease in the cost of
borrowed funds was a result of decreases in rates, while increased volumes added
$18,000 in interest expense and $10,000 of the decrease was rate/volume related.
Net Interest Income
Net interest income decreased $260,000. Changes in interest rates caused a
decrease in net interest income of $15,000, volumes accounted for a decrease in
net interest income of $223,000 and rate/volume differences decreased $22,000.
Provision For Loan Losses
The allowance for losses on loans is maintained at a level which is considered
by management to be adequate to absorb probable losses on existing loans that
may become uncollectible based on an evaluation of the collectibility, prior
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.
The Bank's loan loss provision increased from $302,000 for the year ended
September 30, 1998, to $456,000 for the year ended September 30, 1999, due to
the change in composition of the loan portfolio. The Bank's allowance for loan
losses was $1,387,000 at September 30, 1999. The allowance for loan losses
represents 0.48% of total loans outstanding and 252.2% of total non-performing
assets. While the Bank maintains its allowance for loan losses at a level which
it considers to be adequate, there can be no assurance that further additions
will not be made to the loss allowances or that such losses will not exceed the
estimated amounts.
Non-interest Income
Non-interest income and non-interest expense were impacted by acquisitions in
two ways: (1) only 4 months of income and expense for the Agency were included
in fiscal 1998 and (2) 10 1/2 months of income and expense for HMC are included
in fiscal 1999, that were not present in 1998. Total non-interest income
increased by $3.0 million to $5.3 million for the year ended September 30, 1999,
from $2.3 million for the year ended September 30, 1998. The Agency and HMC
accounted for approximately $2.7 million of the increase. Gains on loans sold
increased from $360,000 in the 1998 fiscal year to $2.3 million in the 1999
fiscal year. The gains are a result of fixed rate mortgages that were sold in
the secondary market because they do not fit the interest rate risk profile of
the Bank and also the addition of HMC. Other service charges and fees increased
from $457,000 for the year ended September 30, 1998, to $801,000 for the year
ended September 30, 1999. Service charges on deposit accounts increased $146,000
during the periods compared as a result of an increase in the number of accounts
affected, and to a lesser degree, by an increase in the fees associated with
deposit accounts. Commission income increased from $543,000 for the year ended
September 30, 1998, to $946,000 for the year ended September 30, 1999. $381,000
of the increase was a result of having the Agency for a full year.
Non-interest Expense
Total non-interest expense increased to $11.8 million for the year ended
September 30, 1999, from $8.4 million for the year ended September 30, 1998, or
40.5%. The Agency and HMC accounted for approximately $2.6 million of this
increase. Compensation and benefits increased from $5.4 million to $7.4 million
or 37.0%, due to the acquisition of HMC ($1.6 million), a full year's expense
for the Agency ($278,000) and merit increases, which averaged 4.5%. Occupancy
and equipment expense increased $467,000, and deposit insurance premiums
increased $3,000. Professional fees increased from $258,000 for fiscal year 1998
to $276,000 for fiscal year 1999. Data processing increased $152,000 to $644,000
for the period ended September 30, 1999, due to processing expense associated
with
13
<PAGE>
increased delivery of electronic services to customers, the introduction of
agricultural lending and the expansion of commercial lending and to a lesser
extent, as a result of the costs associated with the Corporation's Year 2000
compliance program. Goodwill amortization during the year was $79,000 for HMC
and $26,000 for the Agency.
Income Tax Expense
Income tax expense decreased to $1.7 million for the year ended September 30,
1999, from $2.0 million for the year ended September 30, 1998. The decrease was
primarily due to a reduction in pre-tax income of $855,000.
Liquidity and Capital Resources
The liquidity of a Corporation reflects its ability to provide funds to meet
loan requests, accommodate possible outflows in deposits and take advantage of
interest rate market opportunities. Funding of loan requests, providing for
liability outflows and management of interest rate fluctuations require a
continuous analysis in order to match the maturities of specific categories of
short term loans and investments with specific types of deposits and borrowings.
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The primary
sources of cash are net income and cash derived from investing activities.
Operating activities provided cash of $6.9 million, $7.0 million and $1.3
million during the years ended September 30, 2000, 1999 and 1998, respectively.
In fiscal 1998 and 1997, the cash flow in operating activities was primarily
influenced by the changes in accrued liabilities associated with the accrual of
the SAIF special assessment in fiscal 1997, which was paid out in fiscal 1998.
In fiscal 2000, the cash flow in operating activities was influenced primarily
by the change in loans held for sale and other liabilities.
Investing activities used $61.0 million, $2.4 million and $8.0 million during
the years ended September 30, 2000, 1999 and 1998. The primary activity of the
Bank is originating and purchasing loans and purchasing investment and
mortgage-backed securities. The primary activity of HMC is originating and
selling loans in the secondary mortgage market. During the years ended September
30, 2000, 1999 and 1998, the Corporation originated loans in the amount of
$262.7 million ($72.9 million were originated by HMC), $260.7 million and $147.6
million. The net loan originations and principal payments on loans used $32.3
million in 2000, while providing $40.0 million and using $9.9 million in 1999
and 1998, respectively. The increase in 1999 was a result of prepayment on
mortgage loans refinancing elsewhere. The purchases of loans used $32.4 million,
$40.9 million and $10.8 million in fiscal year 2000, 1999 and 1998, and were
largely comprised of commercial business loans that represented participation
interest with other financial institutions. The Bank also sold a participation
in a non-residential loan in fiscal year 2000 for $851,000. Purchases of
investment and mortgage-backed securities held to maturity used $1.2 million in
1999. Maturities, principal payments and the exercise of call provisions by the
issuers of such securities provided $2.2 million, $14.5 million and $15.6
million for the years ended September 30, 2000, 1999 and 1998. Purchases of
investment securities available for sale used $50,000, $13.0 million and $3.7
million. Maturities and the exercise of call provision by the issuers of such
securities provided $0, $3.0 million and $1.0 million for the years ended
September 30, 2000, 1999 and 1998. Other investment activities included sale of
REO property, purchase of equipment and property improvements and the net cash
acquisition of HMC. For the fiscal year 1999, the Bank acquired corporate owned
insurance policies in the amount of $5.5 million.
For the year ended September 30, 2000, $63.2 million in cash was provided as a
result of an increase in deposits and $13.5 million in cash was paid on FHLB
advances. The purchase of treasury stock and dividends on common stock used $5.0
million and $1.2 million, respectively. During the fiscal year ended September
30, 1999, $5.1 million in cash was provided as a result of an increase in
deposits and $3.2 million was used to pay off borrowings. The purchase of
treasury stock used $2.9 million and dividends on common stock used $1.3 million
during the 1999 fiscal year. Basic and diluted earnings per share for the year
ended September 30, 2000, were $1.46 and $1.43, correspondingly. A portion of
the earnings per share was a result of the purchase of treasury stock during the
fiscal year. Financing activities provided $43.4 million during the year ended
September 30, 2000. Those same activities used $7.9 million during the year
ended September 30, 1999, and provided $23.2 million in cash during the year
ended September 30, 1998. Financing activities in the foreseeable future are
expected to primarily include changes in deposits and advances from FHLB of Des
Moines, and to a lesser extent, the repurchase of treasury shares and the
payment of dividends. See Consolidated Statements of Cash Flow for FSF Financial
Corp. and Subsidiary.
14
<PAGE>
The Bank's liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits and other cash outflows in an efficient and cost effective manner.
The Bank's primary sources of funds are deposits and scheduled amortization and
prepayments of loans and mortgage-backed security principal. During the past
several years, the Bank has used such funds primarily to fund maturing time
deposits, to pay savings withdrawals, to fund lending commitments, to purchase
new investments and to increase liquidity. The Bank funds its operations
internally and as needed with borrowed funds from the FHLB. As of September 30,
2000, such borrowed funds totaled $127.5 million. While loan repayments,
maturing investments and mortgage-backed securities are relatively predictable
sources of funds, deposit flows and loan and mortgage-backed security
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Bank is mandated under federal regulations to maintain certain specified
levels of "liquid investments," which include certain United States Government
obligations and other approved investments. In December of 1997, the OTS reduced
the requirement for banks to maintain liquid assets at, from 5.0% to not less
than 4.0% of its net withdrawable accounts plus short term borrowings. The
Bank's regulatory liquidity was 9.03%, 13.3% and 6.05% at September 30, 2000,
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 that are scheduled to mature during the
twelve months ending September 30, 2001, is approximately $133.8 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 deposits, current 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.
At September 30, 2000, the Bank and HMC had commitments to extend credit of
$38.1 million. Funds required to fill these commitments are derived primarily
from FHLB borrowings, current excess liquidity, deposit inflows, loan sales or
loan and security repayments.
OTS regulations require the Bank to maintain core capital of 4.0% of assets, of
which 2.0% must be tangible equity capital, excluding goodwill. The Bank is also
required to maintain risk-based capital equal to 8.0% of total risk-based
assets. The Bank's regulatory capital exceeded its tangible equity, tier 1
(risk- based), tier 1 (core) and risk-based capital requirements by 6.2%, 3.7%,
6.9% and 2.9%, respectively.
The Bank's risk-based capital decreased from $37.6 million to $36.1 million
during the year ended September 30, 2000. This was primarily due to the $6.0
million dividend paid by the Bank to the Corporation less the Bank's earnings of
$3.9 million and the Corporation's non-cash capital contribution transfering HMC
to the Bank of $1.1 million.
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.
Impact of Inflation and Changing Prices
The financial statements and related data have been prepared in accordance with
generally accepted accounting principles. These require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for changes in the relative purchasing power of money over time
caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders
FSF Financial Corp. and Subsidiaries
Hutchinson, MN 55350
We have audited the accompanying consolidated statements of financial condition
of FSF Financial Corp. and Subsidiaries (the Corporation) as of September 30,
2000, and 1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended September 30, 2000. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FSF Financial
Corp. and Subsidiaries as of September 30, 2000, and 1999, and the consolidated
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended September 30, 2000, in conformity with generally
accepted accounting principles.
/s/Bertram Cooper & Co., LLP
Bertram Cooper & Co., LLP
Waseca, Minnesota
October 25, 2000
16
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------
September 30,
------------------------------------
2000 1999
------------------------------------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 8,482 $ 19,265
Securities available for sale, at fair value:
Equity securities 18,246 19,284
Mortgage-backed and related securities 15,369 15,979
Debt securities 12,728 12,794
Securities held to maturity, at amortized cost:
Debt securities (Fair value of $16,974 and $18,999) 18,393 19,937
Mortgage-backed and related securities (Fair value of $25,145 and $26,338) 26,986 27,587
Loans held for sale 3,191 5,334
Loan receivable, net 341,813 278,290
Foreclosed real estate 321 323
Accrued interest receivable 4,432 3,328
Premises and equipment 5,514 5,314
Other assets 11,040 10,659
------------------------------------
Total Assets $ 466,515 $ 418,094
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 36,964 $ 32,952
Savings accounts 80,087 65,554
Certificates of deposit 177,772 133,145
------------------------------------
Total deposits 294,823 231,651
Federal Home Loan Bank borrowings 127,500 140,967
Advances from borrowers for taxes and insurance 658 669
Other liabilities 3,769 2,482
------------------------------------
Total liabilities 426,750 375,769
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 43,391 43,292
Retained earnings, substantially restricted 28,925 26,627
Treasury stock at cost (2,094,822 and 1,695,390 shares) (29,504) (24,575)
Unearned ESOP shares at cost (126,823 and 162,798 shares) (1,268) (1,628)
Unearned MSP stock grants at cost (42,964 and 49,825 shares) (458) (528)
Accumulated other comprehensive (loss) (1,771) (1,313)
------------------------------------
Total stockholders' equity 39,765 42,325
------------------------------------
Total Liabilities and Stockholders' Equity $ 466,515 $ 418,094
====================================
</TABLE>
The accompanying notes are an integral part of these statements
17
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
-------------------------------------------
2000 1999 1998
-------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 27,097 $ 22,861 $ 23,512
Mortgage-backed and related securities 2,668 2,318 3,006
Investment securities 3,112 4,241 3,463
-------------------------------------------
Total interest income 32,877 29,420 29,981
-------------------------------------------
Interest expense:
Deposits 11,608 10,233 10,082
Borrowed funds 8,145 7,965 8,417
-------------------------------------------
Total interest expense 19,753 18,198 18,499
-------------------------------------------
Net interest income 13,124 11,222 11,482
Provision for loan losses 216 456 302
-------------------------------------------
Net interest income after provision for loan losses 12,908 10,766 11,180
-------------------------------------------
Non-interest income:
Gain (loss) on loans - net 1,197 2,341 360
Other service charges and fees 765 801 457
Service charges on deposit accounts 1,262 968 822
Commission income 1,108 946 543
Other 493 203 87
-------------------------------------------
Total non-interest income 4,825 5,259 2,269
-------------------------------------------
Non-interest expense:
Compensation and benefits 7,232 7,390 5,393
Occupancy and equipment 1,406 1,313 846
Deposit insurance premiums 71 134 131
Data processing 689 644 492
Professional fees 378 276 258
Other 2,203 2,069 1,275
-------------------------------------------
Total non-interest expense 11,979 11,826 8,395
-------------------------------------------
Income before provision for income taxes 5,754 4,199 5,054
Income tax expense 2,250 1,694 2,024
-------------------------------------------
Net income 3,504 2,505 3,030
===========================================
Basic earnings per share $ 1.46 $ 0.94 $ 1.14
Diluted earnings per share $ 1.43 $ 0.90 $ 1.05
</TABLE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 3,504 $ 2,505 $ 3,030
Other comprehensive income
Unrealized (losses) on securities - - -
Unrealized holding (losses) arising during period (736) (976) (250)
Tax benefit 278 324 64
---------------------------------------------
After-tax amount (458) (652) (186)
Less: reclassification adjustment
for gains included in net income, net - - (7)
---------------------------------------------
Other comprehensive income (loss) (458) (652) (193)
---------------------------------------------
Comprehensive income $ 3,046 $ 1,853 $ 2,837
=============================================
</TABLE>
The accompanying notes are an integral part of these statements
18
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------------------
Unallocated
Retained Common Unearned Accumulated
Additional Earnings Stock Stock Other
Common Paid-in Substantially Held by Acquired by Treasury Comprehensive
Stock Capital Restricted ESOP MSP Stock (Loss) Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 $450 $43,334 $ 23,779 $(2,347) $(1,108) $(20,267) $ (479) $43,362
Net earnings - - 3,030 - - - - 3,030
Treasury stock acquired - - - - - (5,492) - (5,492)
Stock issued for stock options - (341) - - - 1,911 - 1,570
Amortization of MSP shares - 100 - - 290 - - 390
Common stock dividends
($0.50 per share) - - (1,358) - - - - (1,358)
Purchase of subsidiary - 106 - - - 550 - 656
Allocated ESOP shares - 183 - 359 - - - 542
Other comprehensive income - - - - - - (182) (182)
-------------------------------------------------------------------------------------------
Balance September 30, 1998 450 43,382 25,451 (1,988) (818) (23,298) (661) 42,518
Net earnings - - 2,505 - - - - 2,505
Treasury stock acquired - - - - - (2,912) - (2,912)
Stock issued for stock options - (145) - - - 509 - 364
Amortization of and tax on MSP shares - 54 - - 290 - - 344
Common stock dividends
($0.50 per share) - - (1,329) - - - - 1,329)
Purchase of subsidiary - (109) - - - 1,126 - 1,017
Allocated ESOP shares - 110 - 360 - - 470
Other comprehensive income - - - - - - (652) (652)
-------------------------------------------------------------------------------------------
Balance September 30, 1999 450 43,292 26,627 (1,628) (528) (24,575) (1,313) 42,325
Net earnings - - 3,504 - - - - 3,504
Treasury stock acquired - - - - - (4,947) - (4,947)
Stock issued for stock options - - - - - 18 - 18
Amortization of and tax on MSP shares - 18 - - 70 - - 88
Common stock dividends
($0.50 per share) - - (1,206) - - - - (1,206)
Allocated ESOP shares - 81 - 360 - - - 441
Other comprehensive income - - - - - (458) (458)
-------------------------------------------------------------------------------------------
Balance September 30, 2000 $450 $43,391 $ 28,925 $(1,268) $ (458) $(29,504) $ (1,771) $39,765
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
19
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
-----------------------------------------------
2000 1999 1998
-----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,504 $ 2,505 $ 3,030
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 603 490 359
Net amortization of discounts and premiums on securities
held to maturity (40) (37) (42)
Provision for loan losses 216 456 302
Net market value adjustment on ESOP shares 71 104 185
Tax benefit on stock options - 24 254
Amortization of ESOP and MRP stock compensation 451 656 650
Amortization of intangibles 118 105 10
Net gain on sale of assets (126) (11) (18)
Net loan fees deferred and amortized (203) (134) (194)
Loans originated for sale (52,221) (131,586) (27,625)
Loans sold 54,364 134,539 25,156
(Increase) decrease in:
Accrued interest receivable (1,104) (234) (653)
Other assets (435) (95) (142)
Increase (decrease) other liabilities 1,699 216 67
-----------------------------------------------
Net cash provided by operating activities 6,897 6,998 1,339
-----------------------------------------------
Cash flows from investing activities:
Loan originations and principal payments on loans, net (32,349) 40,038 (9,928)
Purchase of loans (32,417) (40,883) (10,832)
Loan participations sold 851 3,000 -
Principal payments on securities held to maturity 604 10,002 2,125
Purchase of mortgage related securities held to maturity - (1,161) -
Purchase of securities available for sale (50) (12,987) (3,671)
Proceeds from securities available for sale 1,038 - 411
Proceeds from maturities of securities available for sale - 3,000 1,000
Proceeds from maturities of securities held to maturity 1,570 4,500 13,500
Investment in foreclosed real estate (7) (38) (12)
Proceeds from sale of REO 428 500 24
Purchase paid up life insurance policies - (5,495) -
Proceeds from sale of fixed assets 157 - 5
Acquisition of Homeowners, net of cash acquired - (1,245) -
Purchase of equipment and property improvements (872) (1,677) (666)
-----------------------------------------------
Net cash used in investing activities $ (61,047) $ (2,446) $ (8,044)
-----------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements
20
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
---------------------------------------------
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits, $ 63,176 $ 5,109 $ 18,297
FHLB Advances 88,000 - 10,500
Payments on FHLB Advances (101,467) (3,210) (141)
Net short term borrowings (200) (5,726) -
Net increase (decrease) in mortgage escrow funds (12) (152) 46
Treasury stock purchased (4,947) (2,912) (5,492)
Dividends on common stock (1,206) (1,329) (1,358)
Proceeds from exercise of stock options 23 336 1,315
---------------------------------------------
Net cash provided by financing activities 43,367 (7,884) 23,167
---------------------------------------------
Net increase in cash and cash equivalents (10,783) (3,332) 16,462
Cash and cash equivalents:
Beginning of year 19,265 22,597 6,135
---------------------------------------------
End of period $ 8,482 $ 19,265 $ 22,597
============================================
Supplemental disclosures of cash flow information: Cash payments for:
Interest on advances and other borrowed money $ 8,144 $ 7,980 $ 8,464
Interest on deposits 10,828 9,588 10,220
Income taxes 1,963 1,443 1,850
Supplemental schedule of non-cash investing and
financing activities:
Reinvested amounts of capital gains and dividends
from mutual fund investments $ 72 $ 80 $ 121
Foreclosed real estate 378 197 449
Stock acquisition of Insurance Planners - -
656
Acquisition of Homeowners Mortgage Corporation non-cash
asset, net of assumed liabilities - 1,037 -
</TABLE>
The accompanying notes are an integral part of these statements
21
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
(1) Description of Business and Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of FSF Financial
Corp. (the "Corporation") and its wholly owned subsidiaries, Insurance Planners
of Hutchinson, Inc. (the "Agency") and First Federal fsb (the "Bank"). Firstate
Services and Homeowners Mortgage Corporation ("HMC") are wholly owned
subsidiaries of the Bank. All significant inter-company accounts and
transactions have been eliminated in the consolidated financial statements,
which have been prepared in conformity with generally accepted accounting
principles.
Nature of Business
The Corporation is a holding company whose subsidiaries provide financial
services. The Bank is a community financial institution attracting deposits from
the general public and using such deposits, together with borrowings and other
funds, to make mortgage, consumer, commercial and agricultural loans. At
September 30, 2000, the Bank operated 11 retail-banking offices in Minnesota.
The Bank is subject to significant competition from other financial institutions
and is also subject to regulation by certain federal agencies, therefore
undergoing periodic examinations by those regulatory authorities. The Agency is
a property and casualty insurance agency. HMC is a mortgage banking entity
located in Vadnais Heights, MN., that originates and sells residential mortgage
loans.
Use of Estimates
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of financial condition
and income and expenses for the period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties. While management uses available
information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for losses on
loans and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
Cash Equivalents (In thousands)
For purposes of the consolidated statements of cash flows, the Corporation
considers all highly liquid debt instruments with original maturities of three
months or less and money market funds to be cash equivalents. Cash and cash
equivalents include interest-bearing deposits of $5,552 and $16,020 at September
30, 2000, and 1999, respectively.
Debt and Equity Securities
The Corporation classifies its investments, including marketable equity
securities, mortgage-backed securities and mortgage related securities, in one
of three categories:
Trading Account Securities
Securities held principally for resale in the near term are classified
as trading account securities and recorded at their fair values.
Unrealized gains and losses on trading account securities are included
in other income. The Corporation did not hold any trading securities
during the three fiscal years ended September 30, 2000.
Securities Held to Maturity
Debt securities which the Corporation has the positive intent and
ability to hold to maturity, are reported at cost and adjusted for
premiums and discounts that are recognized in interest income using the
interest method over the period to maturity. Unrealized losses on held
to maturity securities reflecting a decline in value judged to be other
than temporary are charged to income.
22
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
Securities Available for Sale
Available for sale securities consist of equity securities and certain
debt securities not classified as trading securities nor as held to
maturity securities. Unrealized holding gains and losses, net of income
taxes, on available for sale securities are reported as a net amount in
a separate component of shareholders' equity until realized. Gains and
losses on the sale of available for sale securities are determined
using the specific identification method. Any decision to sell
available for sale securities would be based on various factors,
including movements in interest rates, changes in the maturity mix of
the Corporation's assets and liabilities, liquidity demands, regulatory
capital considerations and other similar factors. Premiums and
discounts are recognized in interest income using the interest method
over the period to maturity. Unrealized losses on available for sale
securities reflecting a decline in value judged to be other than
temporary are charged to income.
The Bank, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the Federal Home Loan Bank of Des
Moines ("FHLB") in varying amounts based on balances of outstanding home loans
and on amounts borrowed from the FHLB. Because no ready market exists for this
stock and it has no quoted market value, the Bank's investment in this stock is
carried at cost.
Loans Held for Sale
Mortgage loans and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans Receivable
Loans receivable, that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff, are reported at their
outstanding principal adjusted by any charge off, the allowance for loan losses
and any deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans. Discounts and premiums on purchased real estate
loans are amortized to income using the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments. Discounts
and premiums on purchased consumer loans are recognized over the expected lives
of the loans using the level yield method.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral
and current economic conditions. Loans are considered impaired if full principal
or interest payments are not anticipated in accordance with the contractual loan
terms. Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans if the value of such loans is
deemed to be less than the unpaid balance. If these allocations cause the
allowance for loan losses to require an increase, such an increase is reported
as a component of the provision for loan losses.
Uncollectible interest on loans that are contractually past due for three months
is charged off or an allowance is established, based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued. Income is subsequently recognized only until
cash payments are received and in management's judgment, the borrower's ability
to make periodic interest and principal payments returns to normal, in which
case the loan is returned to accrual status.
Loan origination fees and certain direct origination costs are capitalized with
the net fee or cost recognized as an adjustment to interest income using the
interest method.
23
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, management periodically performs valuations and
the real estate is carried at the lower of carrying amount or fair value minus
estimated costs to sell. Revenues and expenses from operations and changes to
the valuation allowance are included in operations.
Advertising Costs
The Corporation expenses all advertising costs as incurred.
Income Taxes
The Corporation calculates income taxes on the liability method. The net
deferred tax asset or liability is determined based on the tax effects of the
differences between the book and tax bases of the various assets and liabilities
of the Corporation giving current recognition to changes in tax rates and laws.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and equipment are
carried at cost, less accumulated depreciation and amortization. Buildings and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets. The costs of leasehold improvements are being
amortized using the straight-line method over the terms of the related leases.
Net gains and losses on disposal or retirement of premises and equipment are
included in other income.
Mortgage Loan Servicing Rights
The Bank has established accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on the
consistent application of the financial-components approach. This approach
requires the recognition of financial assets and servicing assets that are
controlled by the Bank and the de-recognition of financial assets and
liabilities when control is extinguished. Liabilities and derivatives incurred
or obtained in conjunction with the transfer of financial assets are measured at
fair value, if practicable. Servicing assets and other retained interest in
transferred assets are measured by allocating the carrying amount between the
assets sold and the interest retained, based on their relative fair value.
Mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate. The Bank
evaluates the mortgage servicing rights strata for impairment by estimating the
fair value based on anticipated future net cash flows, taking into consideration
prepayment predictions. The predominant characteristics used as the basis for
stratifying are loan types, period of origination and interest rates. The amount
of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
Earnings Per Share
Basic income per share amounts are computed by dividing the net income by the
weighted average number of common shares outstanding. Diluted income per share
amounts are computed by dividing net income, adjusted for the effect of assumed
conversions, by the weighted average number of common shares outstanding plus
dilutive potential common shares calculated for stock options outstanding using
the treasury stock method.
Treasury Stock
Treasury stock is recorded at cost. In the event of subsequent reissue, the
treasury stock account will be reduced by the cost of such stock on the average
cost basis with any excess proceeds credited to additional paid in capital.
Treasury stock is available for general corporate purposes.
24
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
Stock Based Compensation
Effective for the year ended September 30, 1998, the Corporation has adopted
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation." As allowed by SFAS No. 123, the Corporation has
elected to continue using the accounting methods prescribed by Accounting
Principles Board (APB) Opinion No. 25 and related interpretations, which measure
compensation cost using the intrinsic value method. See Note 10 for the impact
of the fair value of employee stock based compensation plans on net income and
earnings per share on a pro forma basis for awards granted after October 1,
1995.
Comprehensive Income
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting principles, is
excluded from net income. For the Corporation, such items consist entirely of
unrealized gains and losses on securities available for sale.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents- the carrying value of cash and cash equivalents
approximate fair value.
Debt and equity securities- fair values of debt and equity securities have been
estimated using quoted market prices.
Loans receivable- for variable rate loans, loans with balloon maturities and
loans with relatively near term maturities (such as consumer installment
loans) carrying values approximate fair values. The fair value of long-term
fixed rate loans has been estimated using present value cash flows,
discounted at a rate approximating current market rates and giving
consideration to estimated prepayment risk and credit loss factors. The
estimated fair value of loans held for sale is based on quoted market
prices of similar instruments trading in the secondary market.
Originated mortgage servicing rights- the carrying amounts of originated
mortgage servicing rights approximate fair values.
Accrued interest- the carrying amounts of accrued interest receivable
approximate their fair values.
Life Insurance policies- cash value of the policies approximates fair value.
Deposit liabilities- the fair values of demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term money
market accounts and certificates of deposits approximate their fair values
at the reporting date. Fair values of fixed rate certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short term borrowings- the carrying amounts of advances from the Federal Home
Loan Bank (FHLB) of Des Moines maturing within 90 days approximate their
fair values.
Long term borrowings- the carrying amounts of long term borrowings are estimated
using discounted cash flow analyses based on the Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
Off-balance sheet items- fair value for off-balance sheet lending commitments
are based on fees currently charges to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standings. The carrying value and fair value of
commitments to extend credit are not considered material for disclosure.
Reclassifications
Certain amounts in the prior periods presented have been reclassified to conform
to the current period financial statement presentation. These reclassifications
have no effect on previously reported net income.
25
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(2) Business Combinations
On November 17, 1998, the Corporation acquired 100% of the outstanding common
stock of HMC, an originator and seller of residential mortgage loans. The
business combination was accounted for by the purchase method, and accordingly,
the results of operations have been included in the Corporation's consolidated
financial statements since the date of acquisition. 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 is
being amortized using the straight-line method over twenty-five years. Goodwill
is evaluated for impairment based on all operations that it directly benefits
using the undiscounted cash flows method. The goodwill represents the inherent
value of the growing concern element of HMC and the ability of the Corporation
to generate a return on its investment.
The following unaudited pro forma supplemental information is presented based on
historical financial statements of the Corporation and HMC. The unaudited pro
forma supplemental information for the two years ended September 30, 1999, were
prepared as if the acquisition had occurred as of the beginning of the
respective periods.
<TABLE>
<CAPTION>
For the Two Years Ended
September 30,
--------------------------
1999 1998
--------------------------
(In thousands)
<S> <C> <C>
Interest income $ 29,434 $ 30,208
Interest Expense 18,230 18,611
--------------------------
Net interest income 11,204 11,597
Provision for loan losses 456 302
--------------------------
Net interest income after provision
for loan losses 10,748 11,295
--------------------------
Non-interest income 6,173 5,831
Non-interest expense 12,470 11,198
--------------------------
Income before provision for income taxes 4,451 5,928
Income tax expense 1,796 2,378
--------------------------
Net income $ 2,655 $ 3,550
==========================
Basic earnings per share $ 0.99 $ 1.30
Diluted earnings per share $ 0.95 $ 1.20
</TABLE>
As of June 1, 2000, HMC became an operating subsidiary of the Bank following
regulatory approval. The transfer of HMC was recorded as a non-cash capital
contribution by the Corporation to the Bank.
26
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(3) Debt and Equity Securities (in thousands)
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values at September 30, are presented as follows:
<TABLE>
<CAPTION>
September 30, 2000
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Available for sale securities:
Equity securities
Fund Investments $ 12,522 $ - $ 651 $ 11,871
Stock in FHLB 6,375 - - $ 6,375
----------------- ----------------- ---------------- ================
Total $ 18,897 $ - $ 651 $ 18,246
================= ================= ================ ================
Mortgage backed securities:
REMICs $ 16,981 $ - $ 1,612 $ 15,369
================= ================= ================ ================
Debt Securities: $ 12,998 $ - $ 270 $ 12,728
================= ================= ================ ================
Held to maturity securities:
Debt securities:
U.S. Government and Agency $ 18,393 $ 106 $ 1,525 $ 16,974
================= ================= ================ ================
Mortgage backed securities:
REMICs $ 25,992 $ 80 $ 1,919 $ 24,153
FNMA certificates 970 - 2 $ 968
Other certificates 24 - - $ 24
----------------- ----------------- ---------------- ----------------
Total $ 26,986 $ 80 $ 1,921 $ 25,145
================= ================= ================ ================
</TABLE>
The amortized cost of debt and mortgage-backed securities at September 30, 2000,
included unamortized premiums of $208 and unaccreted discounts of $305,
respectively.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Available for sale securities:
Equity securities
Fund Investments $ 12,522 $ - $ 601 $ 11,921
Stock in FHLB 7,363 - - 7,363
---------------- ----------------- ---------------- ----------------
Total $ 19,885 $ - $ 601 $ 19,284
================= ================= ================ =================
Mortgage backed securities:
REMICs $ 16,980 $ - $ 1,002 $ 15,979
================= ================= ================ =================
Debt Securities: $ 12,988 $ 22 $ 216 $ 12,794
================= ================= ================ =================
Held to maturity securities:
Debt securities:
U.S. Government and Agency $ 18,367 $ 92 $ 1,037 $ 17,422
Other Debt Securities $ 1,570 $ 7 - $ 1,577
--------------------------------------------------------------------------
Total $ 19,937 $ 99 $ 1,037 $ 18,999
==========================================================================
Mortgage backed securities:
REMICs $ 26,415 $ 162 $ 1,414 $ 25,163
GNMA certificates 1,142 2 - 1,144
FHLMC certificates 30 1 - 31
----------------- ----------------- ---------------- -----------------
Total $ 27,587 $ 165 $ 1,414 $ 26,338
================= ================= ================ =================
</TABLE>
27
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
The amortized cost of debt and mortgage backed securities at September 30, 1999,
includes unamortized premiums of $214 and unaccreted discounts of $337,
respectively.
Gross realized gains on sales of available for sale securities were $11 for the
year ended September 30, 1998. There were no sales of securities during the two
years ended September 30, 2000 and 1999.
The scheduled maturities of securities held to maturity and securities (other
than equity securities) available for sale at September 30, 2000, were as
follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
Securities Securities
----------------------------------- -----------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1 $ 1 $ - $ -
Due from one to five years 9,188 8,366 12,998 12,728
Due from five to ten years 8,013 7,310 - -
Due after ten years 28,177 26,442 16,981 15,369
---------------- ----------------- ---------------- -----------------
Total $ 45,379 $ 42,119 $ 29,979 $ 28,097
================ ================= ================ =================
</TABLE>
For purposes of this maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted average
contractual maturities because of principal prepayments. Debt and
mortgage-backed securities carried at approximately $22.0 million at September
30, 2000, and $20.0 million at September 30, 1999 were pledged to secure public
deposits and for other purposes required or permitted by law.
(4) Loans Receivable (in thousands)
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
First mortgage loans:
Secured by one to four family residences $ 97,843 $ 115,550
Secured by other properties 43,133 28,824
Construction and Land Development loans 94,982 56,177
------------- -------------
235,958 200,551
Less:
Undisbursed portion of construction
and land development loans (36,864) (26,156)
Net deferred loan origination fees (988) (744)
------------- -------------
Subtotal first mortgage loans 198,106 173,651
------------- -------------
Consumer and other loans:
Consumer loans 43,198 18,326
Home equity and second mortgages 28,106 24,312
Commercial 29,831 29,767
Agricultural loans 43,829 33,384
------------- -------------
144,964 105,789
Add: net deferred loan origination costs 277 237
------------- -------------
Subtotal consumer and other loans 145,241 106,026
------------- -------------
Subtotal all loans 343,347 279,677
Less: allowance for loan losses (1,534) (1,387)
------------- -------------
Total $ 341,813 $ 278,290
============= =============
</TABLE>
28
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
A summary of the activity in the allowance for loan losses is as follows:
Years Ended September 30,
----------------------------------------------
2000 1999 1998
----------- ------------------ -------------
Balance, beginning of period $ 1,387 $ 1,035 $ 852
Provision for losses 216 456 302
Charge offs (98) (142) (132)
Recoveries 29 38 13
----------- ------------------ -------------
Balance, end of period $ 1,534 $ 1,387 $ 1,035
=========== ================== =============
The Bank had no loans classified as impaired at September 30, 2000, and 1999.
Loans, having carrying values of $474 and $197, were transferred to foreclosed
real estate in 2000 and 1999, respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
The aggregate amount of loans to executive officers and directors of the
Corporation were $366 and $366 at September 30, 2000, and 1999, respectively.
During 2000, repayments on loans to executive officers and directors aggregated
$259 and $136 was advanced. These loans were current at September 30, 2000.
(5) Loan Servicing (in thousands)
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans serviced for others was $52,128 and $55,488 at September 30, 2000,
and 1999, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing and included in demand deposits, were $318 and $296 at September 30,
2000, and 1999, respectively.
Capitalized mortgage servicing rights and excess servicing receivables are
summarized as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance, net of accumulated amortization $ 253 $ 201 $ 148
Amounts capitalized 19 132 98
Amortization (65) (80) (42)
Valuation adjustments - - (3)
---------- ---------- ----------
Balance, end of period $ 207 $ 253 $ 201
========== ========== ==========
</TABLE>
(6) Foreclosed Real Estate (in thousands)
Net gains on foreclosed real estate, including net revenues from operations, was
not material for the three years ended September 30, 2000. The Bank held
foreclosed real estate at September 30, 2000, and 1999, amounting to $321 and
$323, correspondingly.
29
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(7) Premises and Equipment (in thousands)
Premises and equipment are summarized as follows:
September 30,
---------------------------
2000 1999
------------ -----------
Land $ 728 $ 669
Buildings, improvements and leasehold improvements 4,838 4,637
Furniture, equipment and automobiles 4,114 3,582
------------ -----------
Total costs 9,680 8,888
Less accumulated depreciation 4,166 3,574
------------ -----------
Total $ 5,514 $ 5,314
============ ===========
At September 30, 2000, the Corporation was obligated under non-cancelable
operating leases for office space and equipment. Net rental expense under
operating leases, included in occupancy and equipment, was $436, $275 and $51
for the years ended September 30, 2000, 1999 and 1998. Projected minimum lease
commitments under the terms of the leases for the three years ending September
30, 2003, are $347, $289 and $147, respectively.
(8) Deposits (in thousands)
The aggregate amount of short-term jumbo CDs, each with a minimum denomination
of $100, was $43,910 and $20,681 in 2000 and 1999, respectively.
Interest expense is summarized as follows:
September 30,
-----------------------------------------------
2000 1999 1998
------------- ------------ ------------
Savings accounts $ 3,110 $ 1,896 $ 1,690
Demand deposits 259 289 407
Certificates of deposit 8,239 8,048 7,985
------------- ------------ ------------
$ 11,608 $ 10,233 $ 10,082
============= ============ ============
Non-interest bearing demand deposits amounted to $16,124, $12,583 and $7,477 for
the years ended September 30, 2000, 1999 and 1998, respectively.
At September 30, 2000, the scheduled maturities of certificates of deposit are
as follows:
Years Ending September 30,
--------------------------
2001 $ 128,571
2002 30,061
2003 12,723
2004 2,182
2005 and thereafter 4,235
-----------
$ 177,772
===========
30
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(9) Federal Home Loan Bank Borrowings (in thousands)
Borrowings by the Bank from the Federal Home Loan Bank of Des Moines (FHLB) are
summarized as follows:
September 30,
------------------------------------------
2000 1999
------------------ ---------------------
Fiscal Year of Maturity - Advances Weighted Weighted
---------------------------------- Amount Rate Amount Rate
---------- ------- ---------- ------
2000 $ - - % $ 24,467 5.89 %
2001 35,000 6.18 24,000
2002 25,500 6.41 - -
2003 - - - -
2004 and thereafter 67,000 5.54 92,500 5.15
---------- ------- ---------- ------
Total $ 127,500 5.88 % $ 140,967 5.39 %
========== ======= ========== ======
At September 30, 2000, borrowed funds are collateralized by stock in the FHLB,
first mortgage loans with carrying value of $96,864 and debt and mortgage-backed
securities with carrying values of $56,268 under a collateral agreement.
(10) Employee and Stock Benefit Plans (in thousands except shares)
Salary Continuation Plans
The Bank has adopted insured salary continuation plans for the benefit of
selected members of management by providing them with retirement and death
benefits. The estimated liability under the agreements is charged to income over
the expected remaining years of employment. The Bank's policy is to fund the
costs accrued with insurance contracts. Salary continuation expense amounted to
$126, $114 and $151 for the three years ended September 30, 2000, respectively.
Deferred Compensation 401(k) Plans
The Corporation provides 401(k) plans that cover substantially all employees
meeting age and length of service requirements. The plan maintained by the Bank
covers employees of both the Bank and the Agency. Employees participating in
this plan are eligible to contribute up to 15% of their annual compensation. The
plan maintained by HMC for the benefit of its employees provides for employee
contribution up to 15% of annual compensation. Both plans provide for
discretionary contributions by the employers, which are allocated to the
participants' accounts in proportion to employee contributions. The Corporation
made no discretionary contributions to these plans for the three years ended
September 30, 2000.
Supplemental Life Insurance
In addition to group term insurance benefits provided to substantially all
employees, the Bank maintains investments in insurance policies that provide
either split dollar or survivor benefits for certain key employees.
Self Insurance
The Corporation has a self-insured health plan for all its employees. The
Corporation has purchased stop loss insurance to supplement the health plan,
which will reimburse the Corporation for individual claims in excess of $25,000
annually or aggregate claims exceeding $231,600 annually.
31
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
Employee Stock Ownership Plan
The Corporation established an Employee Stock Ownership Plan (ESOP) covering all
employees, over the age of 21, with at least one year of service and who work at
least 1,000 hours during a plan year. The ESOP borrowed funds from the
Corporation to purchase a total of 359,720 shares of the Corporation's common
stock, with the loan being collateralized by the common stock. Employer
contributions, along with dividends received on unallocated shares, are being
used to repay the loan with shares being released from the Corporation's lien
proportional to the loan repayments. Annually, on September 30, the released
shares are allocated to the participants in the same proportion that their wages
bear to the total compensation of all of the participants. Unreleased ESOP
shares are not considered outstanding in calculating earnings per share.
The Corporation presents these financial statements in accordance with the AICPA
Statement of Position (SOP) No. 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." The prices of the shares issued and unreleased are charged to
unearned compensation, a contra equity account. Shares released are reported as
compensation expense equal to the current market value price of the released
shares. Dividends paid on allocated shares are charged to retained earnings and
those on unallocated shares are charged to expense.
A summary of the ESOP share allocation is as follows:
September 30,
------------------------------------
2000 1999 1998
------------ ---------- ----------
Shares allocated beginning of year 196,919 160,947 124,975
Shares allocated during year 35,972 35,975 35,972
Unreleased shares 126,829 162,798 198,773
------------ ---------- ----------
Total ESOP 359,720 359,720 359,720
============ ========== ==========
Fair value of unreleased shares $ 1,585 $ 1,913 $ 3,131
Amount charged to expense $ 323 $ 442 $ 668
Dividend used for debt reduction $ 171 $ 136 $ 77
Management Stock Plan
The Bank established the Management Stock Plan (MSP) for key officers during the
year ended September 30, 1995. Following shareholder approval of the MSP in
January 1995, the Bank purchased 179,860 shares of the Corporation's common
stock in the open market at $10.59 per share to be awarded to officers in
accordance with the provisions of the MSP. The cost of the shares awarded under
these plans is recorded as unearned compensation, a contra equity account, and
is recognized as an expense in accordance with the vesting requirements defined
by the MSP. For each of the three fiscal years ended September 30, 2000, the
amount included in compensation expense related to the MSP was $73.
The following summarizes the activity in the MSP for the three years ended
September 30, 2000.
Unawarded Awarded
Shares Shares
-------------- -------------
At September 30, 1997 42,964 82,138
Vested - (27,379)
-------------- -------------
At September 30, 1998 42,964 54,759
Vested - (27,379)
-------------- -------------
At September 30, 1999 42,964 27,380
Vested - (27,380)
Shares Granted (2,000) 2,000
-------------- -------------
At September 30, 2000 40,964 2,000
============== =============
32
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
Director's Stock Compensation Plan
In January 1998, the shareholders of the Corporation approved a stock
compensation plan for its non-employee directors. The plan granted 6,000 shares
of common stock issued from treasury that vests over a four-year period, with
1,200 shares awarded in January 1998. The compensation cost associated with this
plan is the fair value of the stock ($19.42/share) on the date that the plan was
approved by shareholders. Compensation cost included in the accompanying
financial statements for the year ended September 30, 2000 and 1999 were $23,300
and $23,292, respectively. During the year ended September 30, 2000, 1,200
shares of the total grant were vested to the plan recipients.
Stock Option Plans
The Corporation maintains the 1994 stock option plan, approved by the
Corporation's stockholders on January 17, 1995 (the 1994 Plan); and the 1998
stock option plan, approved by the Corporation's stockholders on January 20,
1998 (the 1998 Plan). These plans permit the granting of stock options, with an
exercise price equal to the fair value of the Corporation's stock on the date of
the option grant. All options granted under these plans may be exercised over a
ten-year period beginning on the date the option is granted. Awards made under
the Plans may be incentive stock plans (ISO's) as defined by Section 422 of the
Internal Revenue Code or options that do not qualify. Those options granted that
qualify as ISO's are generally exercisable on the date of the grant while those
not qualifying (non-incentive stock options granted to executives and directors
of the Corporation) vest over 3-5 years. The following summarizes the activity
in the two Plans for the three years ended September 30, 2000:
<TABLE>
<CAPTION>
Shares Available Options Shares Weighted Average
for Grant Outstanding Exercise Price
-------------------- ------------------- ---------------------
<S> <C> <C> <C>
At September 30, 1997 8,988 426,253 $ -
1998 Plan Created 300,000 - -
Granted (145,601) 145,601 19.08
Exercised - (135,957) 9.50
-------------------- ------------------- ---------------------
At September 30, 1998 163,387 435,897 12.73
Granted (90,074) 90,074 14.34
Exercised - (33,988) 9.50
Cancelled 6,582 (6,582) 19.13
-------------------- ------------------- ---------------------
At September 30, 1999 79,895 485,401 13.40
Granted (32,187) 32,187 23.30
Exercised - (3,600) 19.42
Cancelled 2,995 (2,995) 19.13
-------------------- ------------------- ---------------------
At September 30, 2000 50,703 510,993 $ 13.33
==================== =================== =====================
Shares available for future grants
1994 Plan 7,988
1998 Plan 42,715
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 2000:
----------------------------------------------------- --------------------------
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------
Weighted average
Exercise Number remaining contractual
Price Outstanding life in years Price Number
----------------------------------------------------- --------------------------
$ 9.500 256,308 4.3 $ 9.500 256,308
20.000 1,000 7.3 20.000 600
19.125 93,324 7.3 19.125 64,294
19.416 8,400 7.7 19.416 -
19.250 30,000 8.2 19.250 22,500
15.000 50,000 8.2 15.000 20,000
14.750 19,187 9.0 14.750 19,187
12.375 20,587 10.0 12.375 20,587
12.375 22,187 10.0 12.375 22,187
12.125 10,000 12.125 2,000
----------- ---------
510,993 427,663
=========== =========
33
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
The Corporation elected to follow APB 25 and related interpretations in
accounting for its employee stock options. The exercise price of the employee
stock options equal the market price of the underlying stock on the date of
grant and, therefore; no compensation expense is recognized under APB 25. Pro
forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Corporation had accounted for its
employee stock option under the fair value method of that statement. Pro forma
net income and earnings per share follows:
Years Ended September 30,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net Income
As reported $ 3,504 $ 2,505 $ 3,030
Pro forma 3,371 2,322 2,943
------------ ------------ ------------
Earnings per common share
As reported
Basic $ 1.46 $ 0.94 $ 1.14
Diluted 1.43 0.90 1.05
------------ ------------ ------------
Pro forma
Basic $ 1.41 $ 0.87 $ 1.10
Diluted 1.38 0.83 1.02
------------ ------------ ------------
The above disclosed pro forma effects of applying SFAS No. 123 to compensation
costs may not be representative of the effects on reported pro forma net income
for future years.
The fair value for each option grant is estimated on the date of the grant using
the Black Scholes Model. The Model incorporates the following assumptions for
the grants:
2000 1999 1998
----------------------------------------------
Risk free interest rate 5.45% 5.22% 5.32%
Expected life 10 years 10 years 10 years
Expected volatility 26.00% 27.00% 62.65%
Expected dividends - - -
The weighted average fair value of the options granted in fiscal 2000 and 1999
were $7.19 and $8.64 per option, respectively.
(11) Income Taxes (in thousands)
The Corporation files a consolidated federal income tax return. The Corporation
and its subsidiaries entered into a tax sharing agreement that provides for the
allocation and payment of federal and state income taxes. The provision for
income taxes of each corporation is computed on a separate company basis,
subject to certain adjustments. Income tax expense (benefit) is summarized as
follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal $ 1,565 $ 936 $ 1,650
State 509 308 534
------------ ------------ ------------
Subtotal 2,074 1,244 2,184
Deferred
Federal 132 338 (120)
State 44 112 (40)
------------ ------------ ------------
Subtotal 176 450 (160)
------------ ------------ ------------
Total income tax provision $ 2,250 $ 1,694 $ 2,024
============ ============ ============
</TABLE>
34
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
The State of Minnesota follows the Internal Revenue Code for the determination
of taxable income, in connection with temporary differences. The portion of
deferred tax assets and liabilities attributed to state income taxes is
approximately 25 percent. Temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities that can create
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
2000 1999
------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 564 $ 693
Deferred net loan fees 287 205
Securities unrealized loss 1,018 719
Allowance for loan losses 621 562
------------------- --------------------
Subtotal 2,490 2,179
Less: Valuation allowance 264 243
------------------- --------------------
Total 2,226 1,936
Deferred tax liabilities:
FHLB Stock 208 241
Tax bad debt reserve 170 213
Premises and equipment 416 375
Installment obligation sale of former building 27 28
Mortgage servicing rights 59 74
Discount on loans 3 6
Section 475 "For Sale Assets" 762 484
------------------- --------------------
Total 1,645 1,421
------------------- --------------------
Net deferred tax asset $ 581 $ 515
=================== ====================
</TABLE>
A valuation allowance was established to reduce the deferred tax asset related
to the unrealized loss on equity securities because management is uncertain if
it will be realized. The Corporation has paid sufficient taxes in prior
carryback years, which will enable it to recover the balance of the net deferred
tax assets. Therefore, no additional valuation allowance was required at
September 30, 2000, and 1999.
The actual income tax expense varied from the expected tax expense (computed by
applying the United States federal corporate income tax rate of 34 percent to
earnings before income taxes) as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,956 $ 1,428 $ 1,718
Tax exempt income (117) (95) (5)
State income taxes, net of federal tax benefit 365 278 322
Other, net 46 83 (11)
--------- --------- ---------
Total income tax provision $ 2,250 $ 1,694 $ 2,024
========= ========= =========
</TABLE>
Retained earnings at September 30, 2000 include $6,492 of which no deferred
federal income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for tax purposes only that arose in
tax years beginning before September 30, 1988, (that is the base year amount).
Reduction of the amount, so allocated for purposes other than tax bad debt
losses or adjustments arising from this carry-back of net operating losses,
would create income for tax purposes only. This would be subject to the then
current corporate income tax rate. The unrecorded deferred income tax liability
on the above amount was approximately $2,600 at September 30, 2000.
35
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(12) Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
For the Years ended
September 30,
----------------------------------------------------------
2000 1999 1998
----------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income - Numerator for basic earnings
per share and diluted earnings per share--
income available to common stockholders $ 3,504,000 $ 2,505,000 $ 3,030,000
==========================================================
Denominator:
Denominator for basic earnings per share--
weighted-average shares 2,395,287 2,663,691 2,669,586
Effect of dilutive securities:
Stock - based compensation plans 56,224 108,713 222,598
----------------------------------------------------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 2,451,511 2,772,404 2,892,184
==========================================================
Basic earnings per share $ 1.46 $ 0.94 $ 1.14
Diluted earnings per share $ 1.43 $ 0.90 $ 1.05
</TABLE>
(13) Commitments and Contingencies
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Corporation is
a defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial condition of the
Corporation.
(14) Stockholders' Equity and Regulatory Capital (in thousands)
On October 6, 1994, the Bank converted from a federally chartered mutual savings
and loan association to a federally chartered stock savings bank pursuant to a
Plan of Conversion (Conversion) via the issuance of common stock. Upon the
Conversion, the preexisting liquidation rights of the depositors of the Bank
were unchanged. Such rights are accounted for by the Bank for the benefit of
such depositors in proportion to their liquidation interests as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as defined
in the Conversion.
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators. If undertaken, these could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
36
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk
weighted assets (as defined) and of tangible and Tier 1 capital (as defined) to
adjusted total assets (as defined). Management believes that, as of September
30, 2000, the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 2000, the most recent notification from the OTS categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk based, Tier 1 risk based, and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual regulatory capital amounts, with reconciliation to the
Corporation's investment in the Bank determined in accordance with Generally
Accepted Accounting Principles (GAAP), and ratios are also presented in the
table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital, September 30, 2000 $36,943
Add: Unrealized losses on debt
securities held for sale 1,120
Less: Goodwill (2,101)
-----------
Tangible equity capital and ratio to
adjusted total assets $35,962 7.7% $ 6,947 1.5% $ 9,262 2.0%
---------------------- --------------------- ---------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $35,962 7.7% $18,524 4.0% $23,155 5.0%
---------------------- --------------------- ---------------------
Total risk based capital and ratio to
risk weighted assets $35,962 10.9% $13,257 4.0% $19,885 6.0%
----------- --------------------- ---------------------
Tier 2 risk based capital, net adjustment 106
-----------
Total risk based capital and ratio to risk
weighted assets, September 30 , 2000 $36,068 10.9% $26,513 8.0% $33,142 10.0%
====================== ===================== =====================
</TABLE>
<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, September 30, 1999 $36,534
Add: Unrealized losses on debt
securities held for sale 712
-----------
Tangible equity capital and ratio to
adjusted total assets $37,246 9.0% $ 6,201 1.5% $ 8,268 2.0%
---------------------- ---------------------- ----------------------
Tier 1 (Core) capital and ratio to
adjusted total assets $37,246 9.0% $ 16,536 4.0% $ 20,670 5.0%
---------------------- ---------------------- ----------------------
Tier 1 capital and ratio to
risk weighted assets $37,246 14.2% $ 10,528 4.0% $ 15,793 6.0%
----------- ---------------------- ----------------------
Tier 2 capital, allowance for loan losses 383
-----------
Total risk based capital and ratio to risk
weighted assets, September 30 , 1999 $37,629 14.3% $ 21,057 8.0% $ 26,321 10.0%
====================== ====================== ======================
</TABLE>
The Bank may not declare or pay cash dividends to the Corporation if the effect
would be to reduce GAAP capital below applicable regulatory capital requirements
or if such declaration and payment would otherwise violate regulatory
requirements.
37
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(15) Concentration of Credit Risk (in thousands)
The Corporation is primarily engaged in originating mortgage, consumer and
business loans in the Minnesota counties of McLeod, Dakota, Meeker, Wright,
Carver, Washington and Sibley. The Bank offers fixed and adjustable rates of
interest on these loans that have amortization terms ranging up to thirty years.
The Corporation had cash on deposit in a financial institution in excess of
Federal deposit insurance limits of approximately $5,452 at September 30, 2000.
(16) Financial Instruments (in thousands)
The Corporation is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and forward commitments to
purchase securities. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial position. The contract or notional amount of those
instruments reflects the extent of the Bank's involvement in particular classes
of financial instruments.
The Bank's exposure to credit loss, in the event of non-performance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit, is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are unused lines of credit and loan commitments
that are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Since some of the commitments may be
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case by case basis. The amount of collateral obtained, if it
is deemed necessary, upon extension of credit is based on management's credit
evaluation of the counter party. Collateral held varies, but may include,
accounts receivable, inventory, property, plant and equipment and income
producing commercial properties. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Typically, the Bank issues letters of credit to municipalities and generally
does not require collateral for standby letters of credit.
Forward commitments to purchase securities and mortgages involve an agreement
whereby the seller agrees to make delivery at a specified future date of a
specified instrument and at a specified price or yield. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movements in securities values and interest rates.
Forward commitments to sell mortgages involve an agreement whereby the Bank
and/or HMC agrees to make delivery at a specified future date of a specified
loan, at a specified price or yield. Risks arise from the possible inability on
counterparties to meet the terms of their contracts and from movements in loan
values and interest rates.
A summary of the notional amounts of the Corporation's financial instruments at
September 30, 2000 follows:
Commitments to extend credit $ 38,091
Standby letters of credit 37
Commitments to sell loans 3,327
38
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
The carrying value and fair value of the Corporation's financial assets and
financial liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
2000 1999
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash & cash equivalents $ 8,482 $ 8,482 $ 19,265 $ 19,265
Investment securities 49,367 47,948 52,015 51,077
Mortgage-backed and related securities 42,355 40,514 43,566 42,315
Loans held for sale 3,191 3,191 5,334 5,334
Loans receivable, net 341,813 341,374 278,290 278,977
Accrued interest receivable 4,432 4,432 3,328 3,328
Life Insurance Policies 5,743 5,743 6,835 6,835
Financial Liabilities:
Deposits 294,823 292,267 231,651 232,608
Borrowings 127,500 131,555 140,967 138,239
</TABLE>
(17) Effects of New Financial 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 entities 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 determined its strategy for the adoption of Statement No.
133 and believes the adoption will not have a material effect on the financial
statements.
SFAS No. 140 was issued September 29, 2000, as a replacement to SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". Statement No. 140 is effective for transfers after March 31,
2001. It is effective for disclosures about securitizations and collateral, and
for recognition and reclassification of collateral for fiscal year ending
September 30, 2001. Adoption will not have a material effect on the financial
statements.
39
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(18) Parent Only Condensed Financial Information (in thousands)
The information should be read in conjunction with the other Notes to
Consolidated Financial Statements. Stockholder's equity differs from the
consolidated statements by the amount of consolidating ESOP and MSP adjustments.
The investment in the Bank subsidiary is carried net of the Bank's unrealized
loss on securities available for sale.
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION
September 30,
------------------------------
ASSETS 2000 1999
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 2,152 $ 278
Investment securities held to maturity - 1,570
Investment in subsidiaries 37,674 40,461
Loan to Bank ESOP 1,268 1,628
Other assets 12 67
------------- -------------
$ 41,106 $ 44,004
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 73 $ 51
Stockholders' equity:
Common stock 450 450
Additional paid in capital 43,391 43,292
Treasury stock (29,504) (24,575)
Unearned MSP stock (458) (528)
Retained earnings 28,925 26,627
Accumulated other comprehensive (loss) (1,771) (1,313)
------------- -------------
Total stockholders' equity 41,033 43,953
------------- -------------
$ 41,106 $ 44,004
============= =============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF INCOME
Years Ended September 30,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Dividends from Bank Subsidiary $ 6,000 $ 3,000 $ 4,500
Interest From:
Bank's ESOP Plan 142 159 193
Investments 133 180 309
6,275 3,339 5,002
Expense:
Non-Interest Expense 400 462 615
------------ ------------ ------------
Income before income taxes and equity in undistributed
net income of subsidiaries 5,875 2,877 4,387
Income tax (benefit) (47) (48) (54)
------------ ------------ ------------
5,922 2,925 4,441
Subsidiaries dividends received in excess of subsidiaries net income (2,418) (420) (1,423)
------------ ------------ ------------
Net income $ 3,504 $ 2,505 $ 3,018
============ ============ ============
</TABLE>
40
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(18) Parent Only Condensed Financial Information- Continued (in thousands)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
2000 1999 1998
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 3,504 $ 2,505 $ 3,030
Adjustments:
Subsidiaries dividends received in excess
of subsidiaries net income 2,418 420 1,423
(Increase) decrease in other assets 55 215 (123)
Increase (decrease)in other liabilities 22 6 82
Other 75 80 356
------------ ------------- ------------
Net cash provided by operations 6,074 3,226 4,768
------------ ------------- ------------
Cash flows from investing activities:
Proceeds from maturities of investments 1,570 - 1,500
Investment in Homeowners - (2,267) -
Proceeds from securities available for sale - - 411
------------ ------------- ------------
Net cash provided (used) by investing activities 1,570 (2,267) 1,911
------------ ------------- ------------
Cash flows from financing activities:
Payments received on ESOP bank loan 360 360 360
Purchases of treasury stock (4,947) (2,912) (5,492)
Proceeds from exercise of stock options 23 336 1,315
Payments of cash dividends (1,206) (1,381) (1,358)
------------ ------------- ------------
Net cash used in financing activities (5,770) (3,597) (5,175)
------------ ------------- ------------
Increase (decrease) in cash and cash equivalents 1,874 (2,638) 1,504
Cash and cash equivalents:
Beginning of year 278 2,916 1,412
------------ ------------- ------------
End of year $ 2,152 $ 278 $ 2,916
============ ============= ============
</TABLE>
(19) Business Segments
The Corporation's reportable business segments are business units that offer
different products and services that are marketed through different channels. In
accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information", the Corporation has identified its wholly-owned
subsidiaries First Federal, fsb, (Bank) and Homeowners Mortgage Corporation
(HMC) as reportable business segments. Both segments operate and are managed
independently.
The accounting policies and the nature of business of these segments are
described in the summary of significant accounting policies (Note 1). Management
evaluates segment performance based on segment profit or loss before income
taxes and nonrecurring gains and losses, and returns on average assets and
average equity. Transfers between segments are accounted for at market value.
Firstate Services, the Agency and FSF Financial Corporation (holding company),
did not meet the quantitative thresholds for determining reportable segments and
therefore are included in the "Other" category.
41
<PAGE>
FSF Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements- Continued
(19) Business Segments- Continued (in thousands)
(20)
<TABLE>
<CAPTION>
First Homeowners Consolidated
Federal fsb Mortgage Corp. Other Eliminations Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
As of and for the year ended September 30, 2000
Interest income from external sources $ 32,565 $ 180 $ 132 - $ 32,877
Non-interest income from external sources 2,708 1,134 982 - 4,824
Intersegment interest income 148 - 5,994 (6,142) -
Interest expense 19,760 141 - (148) 19,753
Provision for loan loss 216 - - - 216
Depreciation and Amortization 553 123 45 - 721
Other non-interest expense 9,186 2,341 1,267 (815) 11,979
Income tax expense (benefit) 2,396 (162) 16 - 2,250
Net Income (loss) 3,850 (334) 5,988 (6,000) 3,504
--------------------------------------------------------------------
Total Assets $ 464,880 $ 4,559 $ 38,452 $ (41,377) $ 466,515
====================================================================
As of and for the year ended September 30, 1999
Interest income from external sources $ 29,061 $ 171 $ 8 - $ 29,240
Non-interest income from external sources 2,189 2,180 890 - 5,259
Intersegment interest income 183 - 3,152 (3,335) -
Interest expense 18,079 301 - (182) 18,198
Provision for loan loss 456 - - - 456
Depreciation and Amortization 454 99 42 - 595
Other non-interest expense 8,683 2,333 1,214 (404) 11,826
Income tax expense (benefit) 1,652 11 31 - 1,694
Net Income (loss) 2,563 (64) 3,006 (3,000) 2,505
--------------------------------------------------------------------
Total Assets $ 413,391 $ 6,210 $ 43,058 $ (44,565) $ 418,094
====================================================================
As of and for the year ended September 30, 1998
Interest income from external sources $ 29,667 - $ 314 - $ 29,981
Non-interest income from external sources 1,758 - 511 - 2,269
Intersegment interest income 5 - 4,692 (4,697) -
Interest expense 18,494 - - (5) 18,489
Provision for loan loss 302 - - - 302
Depreciation and Amortization 355 14 369
Other non-interest expense 7,574 1,014 (193) 8,395
Income tax expense (benefit) 2,036 - (12) - 2,024
Net Income (loss) 3,013 - 4,517 (4,500) 3,030
--------------------------------------------------------------------
Total Assets $ 411,753 - $ 42,614 $ (38,135) $ 416,232
====================================================================
</TABLE>
42
<PAGE>
Selected Quarterly Financial Data (Unaudited)
For the Three Years Ended September 30, 2000
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 2000
Interest income $7,534 $7,797 $8,422 $9,124 $32,877
Interest expense 4,386 4,626 5,054 5,687 19,753
---------------------------------------------------------------------
Net Interest Income 3,148 3,171 3,368 3,437 13,124
Provision for loan losses 54 54 54 54 216
Gain on sale of assets 346 246 246 359 1,197
Net income $821 $856 $954 $873 $3,504
Basic earnings per share 0.32 0.35 0.41 0.39 1.46
Diluted earnings per share 0.31 0.35 0.40 0.38 1.43
Cash dividends declared per share $0.125 $0.125 $0.125 $0.125 $0.50
Market range:
High bid (1) $12.38 $12.38 $13.00 $12.63 $13.00
Low bid (1) $11.81 $10.50 $10.45 $11.88 $10.50
Fiscal 1999
Interest income $7,503 $7,242 $7,267 $7,408 $29,420
Interest expense 4,704 4,522 4,526 4,446 18,198
---------------------------------------------------------------------
Net Interest Income 2,799 2,720 2,741 2,962 11,222
Provision for loan losses 114 114 114 114 456
Gain on sale of assets 700 573 624 444 2,341
Net income $842 $693 $525 $445 $2,505
Basic earnings per share 0.32 0.26 0.20 0.17 0.94
Diluted earnings per share 0.30 0.25 0.19 0.17 0.90
Cash dividends declared per share $0.125 $0.125 $0.125 $0.125 $0.50
Market range:
High bid (1) $15.75 $15.50 $14.44 $14.13 $15.75
Low bid (1) $14.25 $13.56 $13.50 $11.75 $11.75
Fiscal 1998
Interest income $7,364 $7,518 $7,554 $7,545 $29,981
Interest expense 4,548 4,591 4,657 4,703 18,499
---------------------------------------------------------------------
Net Interest Income 2,816 2,927 2,897 2,842 11,482
Provision for loan losses 45 75 107 75 302
Gain on sale of assets 15 107 130 108 360
Net income $746 $810 $767 $707 $3,030
Basic earnings per share 0.28 0.30 0.29 0.27 1.14
Diluted earnings per share 0.26 0.28 0.27 0.25 1.05
Cash dividends declared per share $0.125 $0.125 $0.125 $0.125 $0.50
Market range:
High bid (1) $20.94 $20.88 $20.75 $18.50 $20.94
Low bid (1) $19.00 $19.50 $18.00 $13.38 $13.38
</TABLE>
-----------------------------------------------
(1) As reported by the Nasdaq Stock Market. Such over the counter quotations
do not reflect inter dealer prices, without retail mark up, mark down or
commission and may not necessarily represent actual transactions.
43
