10-Q 1 f10q_123103-0096.txt FORM UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ______________ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTS OF 1934 For the quarterly period ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-24648 FSF FINANCIAL CORP. (Exact name of registrant as specified in its charter) Minnesota 41-1783064 (State or other jurisdiction of incorporation (IRS employer identification no.) or organization) 201 Main Street South, Hutchinson, Minnesota 55350-2573 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (320) 234-4500 Former name, former address and former fiscal year, if changed since last report. Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X APPLICABLE ONLY TO CORPORATE ISSUERS: Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date January 23, 2004. ---------------- Class Outstanding ----- ----------- $.10 par value common stock 2,381,398 shares FSF FINANCIAL CORP. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2003 INDEX Page Number ------ PART I - CONSOLIDATED FINANCIAL INFORMATION Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 FSF FINANCIAL CORP. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

At At ~~June~~December 3031, September 30, 2003 ~~2002~~2003 ------------------------------------ (in thousands, except share data) ASSETS ------ Cash and cash equivalents: Cash $ 533,~~799~~206 $ 143,~~615~~556 ~~Securities~~Interest-bearing ~~available~~deposits ~~for sale~~56,383 ~~at fair value Equity securities 12~~77,~~059~~045 ~~12,046 Mortgage~~-~~backed~~----------------------------------- Total cash and ~~related~~cash ~~securities~~equivalents 3759,~~073~~589 2980,~~196~~601 ~~Debt securities 12,863 -~~ Securities ~~held~~available tofor ~~maturity~~sale, at ~~amortized~~fair ~~cost~~value: ~~Debt~~Equity securities ~~(fair value of $13~~11,~~150)~~996 - 12,~~447~~009 Mortgage-backed and related securities ~~(fair~~35,107 ~~value~~29,923 ofDebt ~~$20~~securities 12,~~724)~~650 ~~- 20~~12,~~679~~178 Restricted stock 54,~~925~~402 54,~~925~~797 Loans held -for -sale 3314,~~261~~209 2917,~~242~~122 Loans receivable, net ~~362~~356,~~752~~109 ~~382~~358,~~690~~708 Foreclosed real estate 1,~~095~~005 ~~122~~1,152 Accrued interest receivable 3,~~893~~977 43,~~436~~960 Premises and equipment 6,~~348~~357 6,~~005~~331 ~~Other assets 9,418 9,690~~ Goodwill 3,883 3,883 Identifiable intangibles 979 1,~~056~~014 Investment in life insurance 8,475 8,388 Other assets 1,~~184~~368 1,086 ------------------------------------ Total assets $ ~~543~~520,~~425~~106 $ ~~532~~541,~~160~~152 ==================================== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities: Demand deposits $ 6776,~~669~~033 $ 6269,~~687~~684 Savings accounts 8883,~~181~~356 8986,~~037~~666 Certificates of deposit ~~238~~225,~~224~~450 ~~230~~234,~~200~~665 ------------------------------------ Total deposits ~~394~~384,~~074~~839 ~~381~~391,~~924~~015 Federal Home Loan Bank borrowings 9378,000 9893,000 Advances from borrowers for taxes and insurance ~~202~~123 ~~352~~233 Other liabilities 54,~~814~~792 65,~~003~~717 ------------------------------------ Total liabilities ~~493~~467,~~090~~754 ~~486~~489,~~279~~965 ~~------------------------------------~~ 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 4344,~~531~~188 43,~~101~~925 Retained earnings, substantially restricted 3839,~~171~~105 3538,~~214~~643 Treasury stock at cost (2,~~171~~119,~~590~~879 and 2,~~197~~156,~~763~~540 shares) (3130,~~586~~978) (31,~~621~~444) Unearned ESOP shares at cost (~~13,546~~-0- and 547,~~891~~643 shares) ~~(135)~~- (~~549~~76) Unearned MSP stock grants at cost (~~42,164 and 42,164 shares~~481) (~~448~~484) ~~(448)~~ Accumulated other comprehensive income ~~(loss)~~68 ~~352~~173 ~~(266)~~ ------------------------------------ Total stockholders' equity 5052,~~335~~352 4551,~~881~~187 ------------------------------------ Total liabilities and stockholders' equity $ ~~543~~520,~~425~~106 $ ~~532~~541,~~160~~152 ====================================

See Notes to Unaudited Consolidated Financial Statements 1 FSF FINANCIAL CORP. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Three Months ~~Nine Months~~ Ended ~~June~~December 3031, ~~Ended June 30,~~ ------------------------ --------------~~----------~~ 2003 2002 ~~2003 2002~~ ------------------------ --------------~~----------~~ (in thousands, except per share data) Interest income: Loans receivable $ 76,~~399~~851 $ 78,~~698~~225 ~~$23,304 $23,331~~ Mortgage-backed and related securities ~~385~~363 ~~641~~495 ~~1,347 1,851~~ Investment securities ~~394~~366 ~~338~~215 ~~1,019 1,032~~ ------------------------ --------------~~----------~~ Total interest income 87,~~178~~580 8,~~677~~935 ~~25,670 26,214~~ Interest expense: Deposits 21,~~293~~879 2,~~710~~696 ~~7,485 8,820~~ Borrowed funds 1,~~256~~229 1,~~379~~323 ~~3,818 4,378~~ ------------------------ --------------~~----------~~ Total interest expense 3,~~549~~108 4,~~089~~019 ~~11,303 13,198~~ ------------------------ --------------~~----------~~ Net interest income 4,~~629~~472 4,~~588~~916 ~~14,367 13,016~~ Provision for loan losses ~~305~~259 ~~203~~288 ~~786 628~~ ------------------------ --------------~~----------~~ Net interest income after provision for loan losses 4,~~324~~213 4,~~385~~628 ~~13,581 12,388~~ ------------------------ --------------~~----------~~ ~~Non-interest~~Noninterest income: Gain on sale of loans,- net 752 1,~~269~~126 ~~887 3,701 3,097~~ Other service charges and fees ~~461~~364 ~~344~~421 ~~1,275 1,006~~ Service charges on deposit accounts ~~663~~661 ~~444~~614 ~~1,873 1,297~~ Commission income ~~303~~294 ~~281~~278 ~~895 809~~ Other ~~102~~104 ~~101~~57 ~~265 310~~ ------------------------ --------------~~----------~~ Total ~~non-interest~~noninterest income 2,~~798~~175 2,~~057~~496 ~~8,009 6,519~~ ------------------------ --------------~~----------~~ ~~Non-interest~~Noninterest expense: Compensation and benefits 2,~~793~~757 2,~~428~~778 ~~8,500 7,114~~ Occupancy and equipment ~~449~~472 ~~374~~392 ~~1,256 1,096 Deposit insurance premiums 16 16 47 45~~ Data processing ~~254~~248 ~~241~~234 ~~744 665~~ Professional fees ~~186~~142 ~~157~~140 ~~466 354~~ Other ~~904~~820 ~~907~~794 ~~2,613 2,512~~ ------------------------ --------------~~----------~~ Total ~~non-interest~~noninterest expense 4,~~602~~439 4,~~123~~338 ~~13,626 11,786~~ ------------------------ --------------~~----------~~ Income before provision for income taxes 21,~~520~~949 2,~~319~~786 ~~7,964 7,121~~ Income tax expense ~~894~~769 ~~893 3~~1,~~022~~090 ~~2,790~~ ------------------------ --------------~~----------~~ Net income $ 1,~~626~~180 $ 1,~~426~~696 ~~$ 4,942 $ 4,331~~ ======================== ==============~~==========~~ Basic earnings per share $ 0.7251 $ 0.6577 ~~$ 2.21 $ 1.99~~ Diluted earnings per share $ 0.6848 $ 0.6173 ~~$ 2.09 $ 1.89~~ Cash dividend declared per common share $ 0.3035 $ 0.2530 ~~$ 0.90 $ 0.75~~ Comprehensive income $ 1,~~644~~075 $ 12,~~641~~406 ~~$ 5,560 $ 4,349~~ ======================== ==============~~==========~~

See Notes to Unaudited Consolidated Financial Statements 2 FSF FINANCIAL CORP. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months ~~Nine Months~~ Ended ~~June~~December 3031, ~~Ended June 30,~~ ------------------------- -------------~~------------~~ 2003 2002 ~~2003 2002~~ ------------------------- -------------~~------------~~ (in thousands) Cash flows from operating activities: Net income $ 1,~~626~~180 $ 1,~~426~~696 ~~$ 4,942 $ 4,331~~ Adjustments to reconcile net income to net cash ~~used~~provided by (used in) operating activities Depreciation ~~230~~244 ~~186~~202 ~~646 524~~ Net amortization of discounts and premiums (851) (4466) ~~(98) (144)~~ Provision for loan losses ~~305~~259 ~~203~~288 ~~786~~Market ~~628 Net market~~ value adjustment on ESOP shares 89153 4575 ~~247 121~~ Amortization of ESOP and MSP stock compensation, ~~net~~54 of118 ~~taxes 136 114 414 371~~ Amortization of intangibles 34 43 ~~125 128 323~~ Net loan fees deferred and amortized (9842) ~~163~~ (~~355~~86) ~~102~~Loans ~~Net~~originated ~~change in loans held~~ for sale (~~270) 1~~56,~~459 (318~~081) (180,~~696~~935) Loans sold 59,746 60,508 Gain ofon sale of loans, ~~net~~ (~~1,269~~752) (~~887) (3~~1,~~701~~126) (~~3,097) (~~Increase) decrease in: Accrued interest receivable (~~264~~16) (72321) ~~543~~Life ~~701~~insurance (88) (106) Other assets ~~188~~89 51393 ~~321~~Deferred 5taxes 65 (~~Decrease~~57) inOther ~~other~~ liabilities ~~335~~(1,000) ~~656~~ (~~189~~279) 33 ------------------------- -------------~~------------~~ Net cash provided by (used in) operating activities ~~1,043~~ 3,~~425~~794 3(19,~~366~~653) ~~2,202~~ ------------------------- -------------~~------------~~ Cash flows from investing activities: Loan originations and principal repayments on loans, net ~~3,858 (~~4,~~457)~~565 142,~~208~~394 ~~9,535 Proceeds from the sale of agricultural loans 3,669 1,241 3,823 1,968~~ Purchase of loans - (32,~~790~~500) - ~~(17,286)~~ Principal repayments on mortgage-related securities held -to -maturity - ~~780~~ 2,178 ~~3,919~~ Purchase of available -for -sale securities (210,~~968~~849) - (74,~~030~~062) ~~(2,992)~~Proceeds from FHLB stock redeemed 395 - Principal repayments and proceeds from maturities of securities available -for -sale 85,~~594~~074 3,~~588~~388 ~~18,364 4,286 Purchase of ING branch, net of deposits assumed - - - 17,589~~ Investment in foreclosed ~~property~~real estate (~~131~~122) - ~~(143) (9)~~ Proceeds from sale of REO ~~321~~585 -122 ~~571 -~~ Purchase of equipment and property improvements (~~175~~270) (~~139~~539) ~~(989) (446)~~ ------------------------- -------------~~------------~~ Net cash ~~provided~~ (used byin) provided by investing activities $~~13,168~~ $ (23,~~777~~122) $ 303,~~982~~481 ~~$ 16,564~~ ------------------------- -------------~~------------~~

See Notes to Unaudited Consolidated Financial Statements 3 FSF FINANCIAL CORP. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Three Months ~~Nine Months~~ Ended ~~June~~December 3031, ~~Ended June 30,~~ ------------------------- -------------~~------------~~ 2003 2002 ~~2003 2002~~ ------------------------- -------------~~------------~~ (in thousands) Cash flows from financing activities: Net ~~increase~~ (decrease) increase in deposits $ (86,~~826~~162) $ (920,~~023)~~609 ~~$12,216~~Payments $on ~~1,697~~ FHLB advances -(15,000) ~~- - 10~~(5,000) ~~Payments~~Allocated ondividends ~~FHLB~~used ~~advances~~to -retire -debt ~~(5,000)~~on (ESOP 25~~,500)~~ 24 Net decrease in mortgage escrow funds (~~108~~110) (~~164) (~~150) ~~(218)~~ Treasury stock purchased (26137) (~~679~~601) Dividends on common stock (~~872~~717) (~~1,435~~649) ~~Net~~Proceeds ~~proceeds~~ from exercise of stock options ~~102~~417 ~~440~~422 ~~627 599 Dividends on common stock (669) (550) (1,985) (1,633)~~ ------------------------- -------------~~------------~~ Net cash ~~provided~~ (used byin) provided by financing activities (921,~~527~~684) (914,~~976)~~655 ~~4,836 (16,490)~~ ------------------------- -------------~~------------~~ Net ~~increase (~~decrease) in cash and cash equivalents 4(21,~~685~~012) (91,~~328~~517) ~~39,184 2,276~~ Cash and cash equivalents Beginning of period 4980,~~114~~601 ~~24,198~~ 14,615 ~~12,594~~ ------------------------- -------------~~------------~~ End of period $ 5359,~~799~~589 $~~14,870~~ ~~$53~~13,~~799~~098 ~~$14,870~~ ========================= =============~~============~~ Supplemental disclosures of cash flow information: Cash payments for: Interest on advances and other borrowed money $ 1,~~255~~224 $ 1,~~382~~316 ~~$ 3,817 $ 4,378~~ Interest on deposits $ 2,~~316~~185 $ 23,~~576~~057 ~~$ 7,963 $ 9,101~~ Income taxes $ ~~770~~539 $ ~~854~~904 ~~$ 3,144 $ 2,711~~ Supplemental schedule of non-cash investing and financing activities: Foreclosed real estate $ ~~859~~532 $ 53393 ~~$ 1,410 $ 192~~ Transfer of securities from held-to-maturity to available-for-sale $ - $ ~~- $~~30,462 ~~$ -~~ Unrealized gain on available-for-sale securities transferred, net of tax $ - $ ~~- $~~ 561 ~~$ -~~

See Notes to Unaudited Consolidated Financial Statements 4 FSF FINANCIAL CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1- PRINCIPLES OF CONSOLIDATION The unaudited consolidated financial statements as of and for the three months ended December 31, 2003 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 accounting principles generally accepted in the United States of America. NOTE 2- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with United States Generally Accepted Accounting Principles ("GAAP"). However, all adjustments consisting of normal recurring accruals, which in the opinion of management are necessary for fair presentation of the consolidated financial statements, have been included. The results of operations for the three month period ended December 31, 2003 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other future period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation's Annual Report of Form 10-K for the year ended September 30, 2003. NOTE 3- EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:

~~Consolidated~~For ~~Banking~~the ~~Other~~Three ~~Eliminations~~Months ~~Total~~ended December 31, ------------------------------------ 2003 2002 ------------------------------------ ~~As of and for the three months ended June 30, 2003 From operations~~Numerator: ~~Interest~~Net income ~~from~~- ~~external~~Numerator ~~sources~~for $basic ~~8,174~~earnings $per 4share $and -diluted $earnings ~~8,178~~per ~~Non~~share-~~interest~~- income ~~from~~available ~~external~~to ~~sources~~common ~~2,581~~stockholders ~~217 - 2~~$1,~~798 Inter-segment interest income - 3~~180,~~005~~000 (3$1,~~005) - Interest expense 3~~696,~~549~~000 -==================================== -Denominator: ~~3,549~~Denominator ~~Provisions~~ for ~~loan~~basic ~~losses~~earnings ~~305~~per share-- weighted-average ~~305~~shares ~~Depreciation~~2,310,317 ~~and~~2,213,687 ~~amortization~~Effect ~~266~~of 7dilutive -securities: ~~273~~Stock ~~Other non~~-~~interest~~ ~~expense~~based ~~3,947~~compensation ~~387~~plans ~~(5) 4~~144,~~329~~923 ~~Income tax expense (benefit) 1~~134,~~004~~239 ~~(110)~~ - ~~894~~ ----------------------------------- Denominator for diluted earnings per share-- adjusted weighted-~~------------~~average ~~Net~~shares ~~income~~and $assumed ~~1,684~~conversions $2,~~942 $(3~~455,~~000)~~240 ~~$ 1~~2,~~626~~347,926 ====================================~~==============~~ Basic earnings per share $ 0.51 $ 0.77 Diluted earnings per share $ 0.48 $ 0.73

5 NOTE 4- STOCK OPTION ACCOUNTING The Corporation accounts for stock options under the intrinsic value method of recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure, is effective for the interim period beginning after December 15, 2002 and requires pro-forma net income and earnings per share disclosures on a quarterly basis. The following table illustrates the effect on net income and earnings per share as if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

~~Consolidated~~Three ~~Banking~~Months ~~Other~~Ended ~~Eliminations~~December ~~Total~~31, --------------------------------------~~------------~~ As2003 ~~of and for the three months ended June 30,~~ 2002 ~~From operations: Interest income from external sources $ 8,673 $ 4 $~~ - ~~$ 8,677 Non~~-~~interest income from external sources 1,868 189~~ - ~~2,057 Inter~~-~~segment interest income~~ - ~~2,008 (2,008)~~ - ~~Interest expense 4,089~~ - - ~~4,089 Provisions for loan losses 203~~ - - ~~203 Depreciation and amortization 301 9~~ - ~~310 Other non~~-~~interest expense 3,533 288 (8) 3,813 Income tax expense (benefit) 917 (24)~~ - ~~893~~ -------------------------~~-------------------------~~ (in thousands) Net income, $as ~~1,498~~reported $ 1,~~928~~180 $ ~~(2,000) $~~ 1,~~426~~696 ~~==================================================~~Deduct: ~~Consolidated Banking Other Eliminations~~ Total stock-~~-------------------------------------------------~~based Asemployee ofcompensation ~~and~~expense ~~for~~determined under the ~~nine~~fair ~~months~~value ~~ended~~based ~~June~~method 30, 2003 From operations: Interest income from external sources $ 25,661 $ 9 $ - $ 25,670 Non-interest income from external sources 7,394 615 - 8,009 Inter-segment interest income - 3,014 (3,014) - Interest expense 11,303 - - 11,303 Provisions for ~~loan~~all ~~losses 786 - - 786 Depreciation and amortization 753 23 - 776 Other non-interest expense 11~~awards,~~832~~ ~~1,032~~net ~~(14)~~of ~~12,850~~related ~~Income~~ tax ~~expense~~effects ~~(benefit)~~4 ~~3,227~~77 ~~(205)~~ - ~~3,022~~ ------------------------------------- Pro-~~------------~~forma ~~Net~~net income $ 51,~~154~~176 $ 21,~~788~~619 ~~$ (3,000) $ 4,942~~ ======================================~~============~~ ~~Total~~Earnings ~~Assets~~per $540,836 $45,913 $(43,324) $543,425 ================================================== Consolidated Banking Other Eliminations Total -------------------------------------------------- As of and for the nine months ended June 30, 2002 From operationsshare: ~~Interest income from external sources $ 26~~Basic,~~202~~ $as 12reported $ -0.51 $ ~~26,214~~0.77 ~~Non-interest income from external sources 5~~Basic,~~950~~ ~~569~~ pro-forma ~~6,519~~$ ~~Inter-segment~~0.51 ~~interest~~$ ~~income~~0.73 ~~- 2~~Diluted,~~030~~ ~~(2,030)~~as -reported Interest expense 13,198 - - 13,198 Provisions for loan losses 628 - - 628 Depreciation and amortization 820 27 - 847 Other non-interest expense 10,171 798 (30) 10,939 Income tax expense (benefit) 2,856 (66) - 2,790 -------------------------------------------------- Net income $ ~~4,479~~0.48 $~~1,852~~ $0.73 (2Diluted,~~000)~~ $pro-forma ~~4,331 ================================================== Total Assets~~ $~~509,935~~ ~~$40,966~~0.48 $~~(38,917)~~ ~~$511,984 ==================================================~~0.69

On November 19, 2002, the Corporation awarded 1,250 stock options from the 1994 stock option plan and 20,687 stock options from the 1998 stock option plan. The awards may be exercised over a ten-year period at an exercise price of $23.00, the fair value of the Corporation's stock on the date of the option grant. In addition, 41,212 options were exercised at various prices in the current fiscal year. NOTE 5- EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS See the Company's Annual Report dated September 30, 2003. NOTE 6- COMPREHENSIVE INCOME Comprehensive income consists of net income and other gains and losses affecting shareholder's equity that, under generally accepted accounting principles in the United States of America, is excluded from net income. For the Corporation, the difference between net income and comprehensive income consists of the change, for the periods reported, in unrealized gains and losses on securities available for sale, net of tax. At September 30, 2002, the Bank had a total of $33.1 million of securities that were classified as held-to-maturity. During the quarter ended December 31, 2002, the Bank transferred all of the securities to available-for-sale in accordance with SFAS 115 and SFAS 130. In order to remain within the held-to-maturity classification, the Bank must have the ability and intent to hold the securities to maturity. Although the Bank still has the ability to hold the securities to maturity, the intent to hold the securities to maturity no longer exists. Based upon a review of interest rates, potential liquidity needs, interest rate risk characteristics of the securities and other factors, management has determined that it would be in the best interest of the Bank to transfer the securities. This will provide greater flexibility in dealing with changing economic circumstances. 6 The following table provides information regarding the impact of the transfer on comprehensive income.

Three Months ~~Nine Months~~ Ended ~~June~~December 3031, ~~Ended June 30,~~ ------------------------ --------------~~----------~~ 2003 2002 ~~2003 2002~~ ------------------------ --------------~~----------~~ (in thousands) Net income, ~~as reported~~ $ 1,~~626~~180 $ 1,~~426~~696 $Other ~~4,942~~comprehensive $income ~~4,331~~Unrealized ~~Deduct:~~holding ~~Total~~gains ~~stock-based~~on ~~employee~~securities ~~compensation~~transferred ~~expense~~from ~~determined~~held ~~under~~to ~~the~~maturity, ~~fair~~net ~~value~~of ~~based~~tax ~~method~~expense ~~for~~- ~~all~~561 ~~awards,~~Unrealized ~~net~~holding ofgains ~~related~~(losses) ~~tax~~during ~~effects~~the -period -(168) 77251 24Tax (expense) benefit 63 (102) ------------------------ --------------~~----------~~ ~~Pro-forma~~Comprehensive ~~net~~ income $ 1,~~626~~075 $ 12,~~426~~406 ~~$ 4,865 $ 4,307~~ ======================== ======================== Earnings per share: Basic, as reported $ 0.72 $ 0.65 $ 2.21 $ 1.99 Basic, pro-forma $ 0.72 $ 0.65 $ 2.17 $ 1.98 Diluted, as reported $ 0.68 $ 0.61 $ 2.09 $ 1.89 Diluted, pro-forma $ 0.68 $ 0.61 $ 2.05 $ 1.88

7 FSF FINANCIAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. General The Corporation's total assets at December 31, 2003 and September 30, 2003 totaled $520.1 million and $541.2 million, respectively. The decrease of $21.1 million was primarily the result of the payment of Federal Home Loan Bank ("FHLB") advances and the reduction of deposits, offset in part by a reduction in the outstanding loan balances. Cash and cash equivalents decreased $21.0 million from $80.6 million at September 30, 2003 to $59.6 million at December 31, 2003, mainly due to payments on FHLB advances. The Corporation utilizes this excess liquidity to fund loan originations. During the quarter ended December 31, 2002, the Corporation transferred all its held-to-maturity debt securities and mortgage-backed and related securities to the available-for-sale category. The net carrying amount of these securities at the time of transfer was $31.0 million and the unrealized gain, net of income taxes, was $561,000. During this quarter ended December 31, 2003, $10.8 million of available-for-sale securities were purchased. Loans held for sale decreased $2.9 million to $14.2 million at December 31, 2003 from $17.1 million at September 30, 2003. As of December 31, 2003, the Bank and HMC had forward commitments to sell all of their loans held for sale in the secondary market. Payment for these loans usually occurs within fourteen days of funding. Loans receivable decreased $2.6 million to $356.1 million at December 31, 2003 from $358.7 million at September 30, 2003. The balance of consumer loans decreased by $4.4 million, the one-to-four family loan portfolio decreased by $5.5 million and commercial business loans increased $1.3 million. The decrease in loans was generally the result of prepayments and refinancing activity due to the lower interest rate environment. Construction loans decreased from $263.2 million at September 30, 2003 to $261.7 million at December 31, 2003. During that period, the Bank also sold $836,000 of agricultural loans to Farmer Mac, an agency of the federal government. These loans were sold, with servicing retained, in order to allow the Bank to expand the agricultural lending base without increasing the overall percentage of agricultural loans. 8 The following table sets forth information on loans originated and purchased for the periods indicated:

Three Months ~~Nine Months~~ Ended ~~June~~December 3031, ~~Ended June 30,~~ -------------------------------------~~-----------------~~ 2003 2002 ~~2003 2002~~ -------------------------------------~~-----------------~~ (in thousands) ~~Net~~Loans ~~income~~originated: $One-to-four ~~1,626~~family residential mortgages $ 118,~~426~~831 $ 470,~~942~~134 $Residential 4construction 57,~~331~~725 ~~Other~~50,345 ~~comprehensive~~Land ~~income~~4,660 ~~Unrealized~~- ~~holding~~Agricultural ~~gains~~9,340 on8,536 ~~securities~~Commercial ~~transferred~~business ~~from~~& ~~held~~real toestate ~~maturity~~5,609 ~~net~~3,403 ofConsumer ~~tax~~2,567 ~~expense~~5,992 - - ~~561~~ ----------------------------------- ~~Unrealized~~Total ~~holding~~loans ~~gains~~originated ~~(losses)~~98,732 ~~during~~138,410 ~~the period 23 361 89 22 Tax (expense) benefit (5) (146) (32) (4)~~ ------------------------------------- Loans purchased: Commercial business 2,500 - ------------------------------------- ~~Comprehensive~~Total ~~income~~new $loans ~~1,644~~ $ 1101,~~641~~232 $ 5138,~~560~~410 ~~$ 4,349~~ =====================================~~=================~~

The following table sets forth the composition of the Bank's loans in dollars and in percentages of total loans at the dates indicated:

~~Three~~December ~~Months~~31, ~~Nine~~September ~~Months Ended June~~ 30, ~~Ended~~2003 ~~June~~2003 ~~30,~~ -------------------------- ------------------------------------------ ~~2003~~Amount ~~2002~~% ~~2003~~Amount ~~2002~~% -------------------------- ------------------------------------------ (dollars in thousands) ~~Loans~~Residential ~~originated~~real estate: One-to-four family ~~residential~~(1) ~~mortgages~~ $ 6535,~~051~~882 $7.5% ~~22,798~~ $ ~~183~~41,~~125~~415 $8.5% ~~105,321~~ Residential construction 66261,~~698~~748 6954.7% 263,~~428~~227 ~~157~~53.9% Multi-family 7,~~965~~611 ~~172~~1.6% 7,~~169~~703 ~~Land~~1.6% -------------------------------------------------------------------- 2305,~~500~~241 -63.8% 4312,~~850~~345 63.9% Agricultural ~~10,819~~loans 1656,~~153~~526 ~~42,133~~11.8% 4657,~~740~~259 ~~Commercial~~11.7% ~~business~~Land &and commercial real estate 441,~~271~~357 ~~5,346~~8.6% 1840,~~141~~831 ~~12,805~~8.4% ~~Consumer~~Commercial ~~4,985~~business 624,~~651~~275 ~~27,015~~5.1% 1622,~~411~~961 4.7% -------------------------- ------------------------------------------ ~~Total~~122,158 25.5% 121,051 24.8% Consumer loans: ~~originated~~Home ~~151~~equity and second mortgages 21,~~824~~864 ~~122~~4.6% 22,~~876~~482 ~~428~~4.6% Automobile loans 10,~~379~~709 ~~358~~2.2% 11,~~296~~550 2.4% Other 18,372 3.8% 21,272 4.4% -------------------------- ------------------------------------------ ~~Loans~~Total ~~purchased:~~consumer ~~Commercial~~loans ~~business - 3~~50,~~790~~945 -10.7% 1755,~~286~~304 11.3% -------------------------- ------------------------------------------ Total ~~new~~ loans ~~$ 151~~478,~~824~~344 $100.0% ~~126~~488,~~666~~700 $100.0% ~~428,379 $ 375,582~~ ==============~~============~~ ==============~~============~~ ~~Acquired~~Less: Loans in ~~ING~~process ~~branch~~(105,867) ~~acquisition~~(110,657) $Deferred -fees $(470) -(512) $Allowance -for $loan 28losses (1,~~806~~689) ~~==========================~~(1,701) ~~==========================~~-------------------- -------------------- Total loans ~~sold $ 89~~,~~989~~ $net ~~37,736~~ $ ~~251~~370,~~364~~318 $ ~~153~~375,~~559~~830 ====================~~======~~ ====================~~======~~

-------------------- 1. Includes loans held for sale in the amount of $14.2 million and $17.1 million as of December 31, 2003 and September 30, 2003. 9 In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the collateral for the loan. The Bank's management evaluates the need to establish reserves against losses on loans and other assets each quarter based on estimated losses on specific loans and on any real estate held for sale or investment when a finding is made that a loss is estimable and probable. Such an evaluation includes a review of all loans for which full collectibility may not be reasonably assured and considers, among other matters, the estimated market value of the underlying collateral of problem loans, prior loss experience, economic conditions and overall portfolio quality. While management recognizes and charges against the allowance for loan losses accounts that are determined to be uncollectible, experience indicates that at any point in time, inherent losses may exist in the loan portfolio which are not specifically identifiable. Therefore, based upon management's best estimate, an amount may be charged to earnings to maintain the allowance for loan losses at a level sufficient to recognize inherent credit risk. Loans are evaluated for impairment in accordance with SFAS 114, including all loans that are in a troubled debt restructuring involving a modification of terms, are measured at the present value of expected future cash flows discounted at the loan's initial effective interest rate. The fair value of the collateral of an impaired collateral dependent loan or an observable market price, if one exists, may be used as an alternative to discounting. If the measure of the impaired loan is less than the recorded investment in the loan, impairment is recognized through a charge to earnings and a reduction to the loan balance or an increase in the allowance for loan losses. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank believes it has established its existing allowance for loan losses in accordance with GAAP. The allowance for loan losses is evaluated based on a detailed review of the loan portfolio, historic loan losses, current economic conditions and other factors. From period to period, the outstanding balance in various loan categories will increase and decrease thereby increasing or decreasing the amount of the allowance attributable to particular categories. Management believes that the resulting level of the allowance for loan losses reflects probable incurred losses in the loan portfolio. However, there can be no assurance that banking regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase its allowance for loan losses or that a deteriorating real estate market or other unforeseen economic changes may cause an increase in allowance for loan losses. This is likely to negatively affect the Bank's financial condition and earnings. The following table sets forth information with respect to the Bank's non-performing assets at the dates indicated:

~~June~~December 3031, September 30, 2003 ~~2002~~2003 -----------------------------------~~---------------------------------~~ ~~Amount % Amount % --------------------------------------------------------------------~~ (dollars in thousands) ~~Residential~~Loans ~~real~~accounted ~~estate:~~for ~~One-to-four~~on ~~family~~a ~~(1)~~non-accrual $basis: ~~60,005~~Mortgage ~~12.0%~~loans: ~~$ 71,625 13.9%~~ Residential construction ~~260,242~~loans ~~51.9%~~$ ~~239~~4,~~155~~630 ~~46.3%~~$ ~~Multi-family 8~~3,~~297~~819 ~~1.7%~~Permanent ~~10,095~~loans ~~2.0%~~secured by one-to-~~-------------------------------------------------------------~~four ~~328,544~~family ~~65.6%~~units ~~320,875~~800 ~~62.1%~~483 ~~Agricultural~~Non-residential loans ~~55,977~~884 ~~11.2%~~884 ~~56,129~~Non- ~~10.9%~~mortgage ~~Land~~loans: Commercial and ~~commercial~~agricultural ~~real~~547 ~~estate~~411 ~~38,141~~Consumer ~~7.6%~~350 ~~55,270~~442 ~~10.7% Commercial business 19,945 4.0% 26,556 5.1%~~ -----------------------------------~~----------------------------~~ ~~114,083~~Total ~~22.8%~~non-accrual ~~137,955~~loans ~~26.~~7%,211 ~~Consumer~~6,039 ~~loans:~~Foreclosed ~~Home~~real ~~equity~~estate and ~~second~~real ~~mortgages~~estate ~~22,313~~held ~~4.5%~~for ~~27,543~~investment ~~5.3% Automobile loans 12~~1,~~659~~005 ~~2.5% 9,172~~ 1~~.8% Other 23~~,~~419~~152 ~~4.7% 20,757 4.0%~~ -----------------------------------~~----------------------------~~ Total ~~consumer loans 58,391 11.7% 57,472 11.1%~~ non-~~--------------------------------------------------------------~~performing ~~Total~~assets ~~loans~~$ ~~501~~8,~~018~~216 ~~100.0%~~$ ~~516~~7,~~302~~191 ~~100.0%~~ ===== ============================== ~~Less:~~Total ~~Loans~~non-performing inloans ~~process~~to ~~(102,908)~~net ~~(101,854)~~loans ~~Deferred fees (481) (835) Allowance for loan losses (~~1~~,616)~~.95% (1~~,681)~~.61% ~~--------------- -------------------- Total loans, net $ 396,013 $ 411,932~~ =============== ==================== Total non-~~------------------------------~~performing ~~(1) Includes~~ loans ~~held~~to ~~for~~total ~~sale~~assets ~~in the amount of $33~~1.339% ~~million and $29~~1.212% ~~million~~=================================== asTotal ofnon-performing ~~June~~assets ~~30,~~to ~~2003~~total ~~and~~assets ~~September~~1.58% ~~30, 2002~~1.33% ===================================

10 The nonaccrual residential construction loans are comprised of 31 loans. The outstanding balance of the loans ranges from $46,000 to $474,000. The loan-to-value ratios of the loans range between 53% and 97%. Each of the loans has been evaluated for impairment and is carried at the lower of fair value or cost. There are 6 permanent loans secured by one-to-four family residential units that range from $29,000 to $296,000. The non-residential loan is a participation in a commercial real estate loan with another financial institution. A purchase agreement on the property is being negotiated. Commercial and agricultural loans are comprised of 13 loans. The outstanding values of these loans range from $6,000 to $199,000. Each of the loans has been evaluated for impairment and is carried at the lower of fair value or cost. The consumer loan total is made up of 16 loans that range from $1,000 to $95,000. The foreclosed real estate consists of 6 construction loans with balances between $52,000 and $196,000 and a commercial real estate loan with a balance of $248,000, all of which are carried at the lower of fair value or cost. Deposits, after interest credited, decreased $6.2 million from $391.0 million at September 30, 2003 to $384.8 million at December 31, 2003. Overall cost of funds on deposits during the period decreased 82 basis points (100 basis points equals 1%) compared with the same three month period in 2002, as a result of the Bank's attempt to maintain deposit rates consistent with competitors in the market place. Demand deposits increased $6.3 million or 9.1% from September 30, 2003 to December 31, 2003. Savings account balances decreased 3.8% during the same period, while certificates of deposit decreased $9.2 million. The Bank utilized the deposits for liquidity and to reduce Federal Home Loan Bank ("FHLB") borrowings. The Corporation completed the repurchase of 4,551 shares of common stock which, when netted against 41,212 shares issued in connection with the exercise of stock options, decreased the number of treasury shares to 2,119,879 at December 31, 2003. Treasury shares are used for general corporate purposes, including the issuance of shares in connection with the exercise of stock options. Total stockholders' equity increased $1.1 million since September 30, 2003 due to net income and amortization of ESOP shares. Total stockholder's equity was reduced by the amount of dividends paid during the three months of the fiscal year and the change in accumulated comprehensive income. Accumulated other comprehensive income decreased as a result of changes in the net unrealized gains and losses on the available-for-sale securities due to fluctuations in interest rates . Because of interest rate volatility, the Corporation's accumulated other comprehensive income could materially fluctuate. Book value per share increased from $22.30 at September 30, 2003 to $22.38 at December 31, 2003. 11 COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 The following table sets forth information with respect to the Corporation's average balance sheet, interest and dividends earned and paid and related yields and rates (dollars in thousands):

~~June~~Three ~~30,~~Months ~~September~~Ended 30December 31, --------------------------------------------------------------------------- 2003 2002 --------------------------------------------------------------------------- ~~(dollars~~Interest inInterest ~~thousands)~~Average ~~Loans~~Yields ~~accounted~~& ~~for~~Average onYields a& ~~non~~Balance Interest Rates (1) Balance Interest Rates (1) -~~accrual~~-------------------------------------------------------------------------- ~~basis:~~(dollars ~~Mortgage~~in ~~loans~~thousands) Assets: ~~Residential~~Loans ~~construction~~receivable ~~loans~~(2) $ 3371,~~762~~160 $ 36,~~133~~851 ~~Permanent~~7.38 ~~loans~~% ~~secured~~$ by421,560 ~~one-to-four~~$ ~~family~~8,225 ~~units~~7.80 ~~496~~% ~~482 Non~~Mortgage-~~residential~~backed ~~loans~~securities -32,530 74363 ~~Non-~~4.46 ~~mortgage~~47,669 ~~loans:~~495 ~~Commercial~~4.15 ~~and~~Investment ~~agricultural~~securities ~~380~~(3) ~~647~~102,470 ~~Consumer~~366 ~~527~~1.43 ~~537~~42,221 215 2.04 ----------------------- ----------------------- Total ~~non~~interest-~~accrual~~earning ~~loans~~assets 5506,~~165~~160 47,~~873~~580 ~~Foreclosed~~5.99 ~~real~~511,450 ~~estate 1~~8,~~095~~935 ~~122~~6.99 --------------------- ---------------------- ~~Total~~Other ~~non~~assets 30,207 29,768 -~~performing~~------------ ------------- Total assets $ 6536,~~260~~367 $ 4541,~~995~~218 ============= =============~~=========~~ ~~Total~~Liabilities: ~~non~~Interest-~~performing~~bearing ~~loans~~deposits to$ ~~net~~388,623 ~~loans~~$ 1,879 1.3093 % 1$ 391,741 $ 2,696 2.1875 % Borrowings 90,228 1,229 5.45 95,772 1,323 5.53 ----------------------- ----------------------- Total interest-bearing liabilities 478,851 3,108 2.60 487,513 4,019 3.30 --------------------- ---------------------- Other liabilities 5,771 6,726 ------------- ------------- Total liabilities 484,622 494,239 Stockholders' equity 51,745 46,979 ------------- ------------- Total liabilities and stockholders' equity $ 536,367 $ 541,218 ============= =============~~=========~~ ~~Total~~Net ~~non-performing~~interest ~~loans~~income to$ ~~total~~4,472 ~~assets~~$ ~~0.95%~~4,916 ~~0.92%~~ ========== ==========~~===============~~ ~~Total~~Net ~~non~~spread (4) 3.39 % 3.69 % Net margin (5) 3.53 % 3.84 % Ratio of average interest-~~performing~~earning assets to ~~total~~average ~~assets~~interest-bearing 1.~~15%~~06X 01.~~94%~~05X ~~===================================~~liabilities

1. Annualized. 2. Average balances include non-accrual loans and loans held for sale. 3. Includes interest-bearing deposits in other financial institutions. 4. Net spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. 5. Net margin represents net interest income as a percentage of interest-earning assets. Net Income The Corporation recorded net income of $1.2 million for the three months ended December 31, 2003, as compared to net income of $1.7 million for the three months ended December 31, 2002. This decrease in net income was $516,000 or 30.4%. The decrease in net income for first quarter 2004 was primarily the result of a decrease in net interest income and non-interest income, coupled with an increase in non-interest expense. Net interest income decreased $444,000 in the first quarter of fiscal 2004, a decrease of 9.0% over first quarter 2003. The decrease in net interest income was primarily due to a 100 basis point decline in yields on interest earning assets offset by a 70 basis point reduction on cost of funds. The mix of the Bank's deposits helped to stabilize its cost of funds in this lower interest rate environment. Non-interest income was 49.0% of non-interest expense for the quarter. 12 Total Interest Income Total interest income decreased by $1.4 million to $7.6 million for the quarter ended December 31, 2003 from the comparable 2002 period. The average yield on loans decreased to 7.38% for the quarter ended December 31, 2003 from 7.80% for the quarter ended December 31, 2002. During the same period, the average yield on mortgage-backed securities increased 31 basis points to 4.46%. The average yield on investment securities decreased from 2.04% for the three months ended December 31, 2003 to 1.43% for the same period in 2002. Total Interest Expense Total interest expense decreased to $3.1 million for the three months ended December 31, 2003 from $4.0 million for the same period in 2002. The average cost of deposits decreased 82 basis points from 2.75% for the quarter ended December 31, 2003 to 1.93% for the same period in 2002, as the rates offered by the Bank on deposits decreased. No assurance can be made that deposits can be maintained in the future without further increasing the cost of funds if interest rates increase. The average balance of borrowings decreased $5.6 million to $90.2 million for the three months ended December 31, 2003 from $95.8 million for the three months ended December 31, 2002. The cost of borrowings decreased by 8 basis points to 5.45% for the quarter ended December 31, 2003 from 5.53% for the same period in 2002. Borrowings decreased as the Bank utilized repayments of loans and investments to meet liquidity needs. Net Interest Income Net interest income decreased by $444,000 to $4.5 million for the quarter ended December 31, 2003, from $4.9 million for the same period in 2002. Average interest-earning assets decreased $5.3 million from $511.5 million for the quarter ended December 31, 2002 to $506.2 million for the quarter ended December 31, 2003, while the average yield on interest-earning assets decreased from 6.99% for 2002 to 5.99% for 2003. Average interest-bearing liabilities decreased by $8.6 million to $478.9 million for the quarter ended December 31, 2003 from $487.5 million for the quarter ended December 31, 2002, while the cost of interest-bearing liabilities decreased from 3.30% in 2002 to 2.60% in 2003. Provision for Loan Losses The Corporation's provision for loan losses was $259,000 for the quarter ended December 31, 2003, compared to $288,000 for the same period in 2002. The allowance for loan losses is established through a provision for loan losses charged to expense. While the Corporation maintains its allowance for losses at a level which it considers to reflect probable incurred losses, 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. 13 The following table sets forth information with respect to the Bank's allowance for loan losses at the dates indicated:

For the Three Months Ended ~~June~~December 3031, ----------------------------------------~~-----------------------------------~~ 2003 2002 ----------------------------------------~~-----------------------------------~~ ~~Interest~~(dollars ~~Interest~~in ~~Average~~thousands) ~~Yields &~~ Average ~~Yields~~loans &outstanding ~~Balance~~$ ~~Interest~~371,160 ~~Rates~~$ ~~(1)~~421,560 ~~Balance Interest Rates (1)~~ ---------------------------------------- Allowance balance (beginning of period) $ 1,701 $ 1,681 ---------------------------------------- ~~(dollars~~Provision ~~in thousands~~(credit) ~~Assets~~: ~~Loans~~Residential ~~receivable~~and ~~(2)~~construction $201 ~~398,372~~80 $Land ~~7,399~~and ~~7.43%~~commercial $real ~~383,296~~estate $- ~~7,698 8.03% Mortgage~~-~~backed~~ ~~securities~~Commercial ~~39,795~~and ~~385~~agricultural ~~3.87~~business ~~51,522~~58 ~~641~~208 ~~4.98~~Consumer ~~Investment~~- ~~securities~~- ~~(3) 76,927 394 2.05 47,261 338 2.86~~ --------------------- ------------------- Total ~~interest~~provision 259 288 Charge-~~earning~~offs: ~~assets~~Residential ~~515,094~~and ~~8,178~~construction ~~6.35~~161 ~~482,079~~100 ~~8,677~~Land ~~7.20~~and commercial real estate - -~~----------------~~ Commercial and agricultural business 58 129 Consumer 97 76 ---------------- ~~Other assets 29,232 27,108~~ ------------ ------------ Total ~~assets~~charge-offs $316 ~~544,326~~305 $Recoveries: ~~509,187~~Residential ~~============~~and ~~============~~construction ~~Liabilities:~~17 ~~Interest~~-~~bearing~~ ~~deposits~~Land $and ~~394,890~~commercial $real ~~2,293~~estate ~~2.32%~~- $- ~~361,621~~Consumer $28 ~~2,710~~44 ~~3.00% Borrowings 93,000 1,256 5.40 98,000 1,379 5.63~~ --------------------- ------------------- Total ~~interest-bearing~~recoveries ~~487,890~~45 ~~3,549~~44 ~~2.91% 459,621 4,089 3.56%~~ ------------------ ---------------- ~~Other liabilities 6,742 5,759~~ ------ Net charge-offs 271 261 ----- ------------ ~~Total liabilities 494,632 465,380 Stockholders' equity 49,694 43,807~~ ------------ ------------ ~~Total~~Allowance ~~liabilities~~balance ~~and~~(end ~~stockholders'~~of ~~equity~~period) $ ~~544~~1,~~326~~689 $ ~~509~~1,~~187~~708 ============ ============================ ~~Net~~Allowance ~~interest~~as ~~income~~percent $of ~~4,629~~net $loans ~~4,588 Net spread (4) 3~~0.4446% 30.6440% Net ~~margin (5) 3.59% 3.81% Ratio of average interest-earning assets to average interest-bearing liabilities 1.06X 1.05X 1. Annualized. 2. Average balances include non-accrual~~ loans ~~and~~charged ~~loans~~off ~~held~~as ~~for~~a ~~sale.~~percent 3.of ~~Includes interest-bearing deposits in other financial institutions. 4. Net spread represents the difference between the~~ average ~~yield on interest-earning assets and the average cost of interest-bearing liabilities~~0.07% 50.06% ~~Net margin represents net interest income as a percentage of interest-earning assets.~~loans

Non-interest Income Total non-interest income decreased from $2.5 million for the quarter ended December 31, 2002 to $2.2 million for the quarter ended December 31, 2003. Gain on sale of loans decreased $374,000 over the same period in 2002 primarily due to a decrease in the refinancing market and loans that are sold in the secondary market. Other service charges and fees decreased from $421,000 for the three months ended December 31, 2002 to $364,000 for the same period ended December 31, 2003, which was mainly attributable to a decrease in the outstanding loan portfolio balance. Service charges on deposit accounts increased $47,000 due to an increase in fees charged. Non-interest Expense Total non-interest expense increased $101,000 or 23.0% from December 31, 2002 as compared to the same period in 2003. Compensation and benefits remained at $2.8 million for the periods compared. Occupancy and equipment expense increased $80,000 while data processing increased $14,000 to $248,000 for the period ended December 31, 2003, due to the delivery of additional data processing related services to our customer base. Income Tax Expense Income taxes decreased to $796,000 for the quarter ended December 31, 2003 from $1.1 million for the same period in 2002 due to a decrease of $837,000 in pretax income. 14 LIQUIDITY AND CAPITAL RESOURCES The Corporation's primary sources of funds are deposits, borrowings, principal and interest payments on loans, investments and mortgage-backed securities, sales of mortgage loans and funds provided by operations. While scheduled payments on loans, mortgage-backed securities and short-term investments are relatively predictable sources of funds, deposit flows and early loan repayments are greatly influenced by general interest rates, economic conditions and competition. The amount of certificate accounts that are scheduled to mature during the twelve months ending December 31, 2004 is approximately $169.1 million. To the extent that these deposits do not remain upon maturity, the Bank believes that it can replace these funds with new deposits, excess liquidity and FHLB advances or outside borrowings. It has been the Bank's experience that substantial portions of such maturing deposits remain at the Bank. The following table presents, as of December 31, 2003, the Company's significant fixed and determinable contractual obligations by payment date. The payment amount represents those amounts contractually due to the recipient and does not include any unamortized premiums or discounts or other similar carrying amount adjustments.

~~Nine~~in ~~Months~~thousands ~~Ended June 30,~~ ----------------------------------------------------------~~---------------------~~ ~~2003~~One ~~2002~~One ~~-------------------------------------------------------------------------------~~to ~~Interest~~Over ~~Interest~~Year ~~Average~~or ~~Yields~~Three &Three ~~Average~~Less ~~Yields~~Years &Years ~~Balance~~Total ~~Interest Rates (1) Balance Interest Rates (1)~~ ---------------------------------------------------------- Long-~~--------------------~~Term ~~(dollars~~Debt inFHLB ~~thousands)~~borrowings ~~Assets: Loans receivable (2)~~ $ ~~409~~6,~~417~~000 $ 2310,~~304~~000 ~~7.59%~~ $ ~~379~~62,~~668~~000 $ ~~23,331 8.19% Mortgage-backed securities 43,653 1,347 4.11 51,682 1,851 4.~~78 ~~Investment securities (3) 61~~,~~912~~000 1,019 2.19 50,580 1,032 2.72 ----------------------- ---------------------- Total interest-earning assets 514,982 25,670 6.65 481,930 26,214 7.25 -------------------- ------------------ Other assets 29,426 26,571 ------------ ----------- Total assets $ 544,408 $ 508,501 ============ =========== Liabilities: Interest-bearing deposits $ 395,368 $ 7,485 2.52% $ 358,215 $ 8,820 3.28% Borrowings 93,934 3,818 5.42 101,839 4,378 5.73 ----------------------- ---------------------- Total interest-bearing 489,302 11,303 3.08% 460,054 13,198 3.83% -------------------- ------------------ Other liabilities 6,988 5,320 ------------ ----------- Total liabilities 496,290 465,374 Stockholders' equity 48,118 43,127 ------------ ----------- Total liabilities and stockholders' equity $ 544,408 $ 508,501 ============ ======================= ~~Net~~Other ~~interest~~Contractual ~~income~~Obligations $Non-cancelable ~~14,367~~operating leases $ ~~13,016~~364 ~~Net~~$ ~~spread~~696 ~~(4)~~$ ~~3.57%~~104 ~~3.42%~~$ ~~Net~~1,164 ~~margin~~Unused ~~(5)~~lines ~~3.72% 3.60% Ratio~~ of ~~average~~credit ~~interest~~39,342 -~~earning~~ ~~assets to average interest~~-~~bearing~~ ~~liabilities~~$ ~~1.05X~~39,342 ~~1.05X~~Standby 1.letters ~~Annualized.~~of 2.credit ~~Average~~221 ~~balances~~- ~~include non~~-~~accrual~~ ~~loans~~$ ~~and~~221 ~~loans~~Development ~~held~~letters ~~for~~of ~~sale.~~credit 3.6,709 ~~Includes~~- ~~interest~~-~~bearing~~ ~~deposits~~$ in6,709 ~~other~~Commitments ~~financial~~to ~~institutions.~~sell 4.loans ~~Net~~15,197 ~~spread represents the difference between the average yield on interest~~-~~earning~~ ~~assets and the average cost of interest~~-~~bearing~~ ~~liabilities.~~$ 5.15,197 ~~Net~~Commitments ~~margin~~to ~~represents~~extend ~~net~~credit ~~interest~~1,195 ~~income~~- ~~as a percentage of interest~~-~~earning~~ ~~assets.~~$ 1,195

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 7.1%, 8.9%, 4.6% and 5.4%, respectively. 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes from the information regarding market risk disclosed under the heading "Asset and Liability Management" in the Corporation's Annual Report for the year ended September 30, 2003. 15 CONTROLS AND PROCEDURES The Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 16 ITEM 1. LEGAL PROCEEDINGS Neither the Corporation nor any of its subsidiaries were engaged in any legal proceedings of a material nature at December 31, 2003. From time to time, the Corporation is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in loans. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION (a) Not applicable. (b) Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report.

~~For~~3.1 ~~the~~Articles ~~Nine~~of ~~Months~~Incorporation ~~Ended~~of ~~June~~FSF ~~30,~~Financial ~~----------------------------------------~~Corp. ~~2003~~* ~~2002~~3.2 ~~----------------------------------------~~Bylaws ~~(dollars~~of inFSF ~~thousands)~~Financial ~~Average~~Corp. ~~loans~~* ~~outstanding~~4.0 $Stock ~~409,417~~Certificate ~~$ 379,668 ---------------------------------------- Allowance balance (beginning~~ of ~~period)~~FSF $Financial ~~1,681~~Corp. $* 10.1~~,541~~ ~~----------------------------------------~~Form ~~ING~~of ~~branch~~Employment ~~acquisition~~Agreement $with -Donald $A. ~~274~~Glas, ~~Provision~~George ~~(credit):~~B. ~~Residential~~Loban and ~~construction~~Richard ~~568~~H. ~~100~~Burgart ~~Land~~* ~~and~~10.2 ~~commercial~~First ~~real~~Federal ~~estate~~fsb -Management -Stock ~~Commercial~~Plan ~~and~~** ~~agricultural~~10.3 ~~business~~FSF ~~167~~Financial ~~220~~Corp. ~~Consumer~~1996 51Stock ~~308~~Option ~~----------------------------------------~~Plan ~~Total~~** ~~provision~~10.4 ~~786~~FSF ~~628~~Financial ~~Charge-offs:~~Corp. ~~Residential~~1998 ~~and~~Stock ~~construction~~Compensation ~~431~~Plan -*** ~~Land~~31.0 ~~and~~Rule ~~commercial real estate 73 87 Commercial and agricultural business 160 276 Consumer 257 411~~ 13a-~~---------------------------------------~~14(a) ~~Total~~Certifications ~~charge-offs~~32.0 ~~921~~Certification ~~774~~pursuant ~~Recoveries:~~to ~~Residential~~Section ~~and~~906 ~~construction~~of -the Sarbanes-Oxley ~~Land~~Act ~~and~~of ~~commercial~~2002. ~~real~~(b) ~~estate~~Reports -on -Form ~~Consumer 70 34~~ 8-~~---------------------------------------~~K ~~Total~~(i) ~~recoveries~~The 70Company 34furnished ~~----------------------------------------~~a ~~Net~~current ~~charge-offs~~report ~~851~~on ~~740~~Form 8-~~---------------------------------------~~K ~~Allowance~~on ~~balance~~October ~~(end of period) $ 1~~29,~~616~~ $2003 ~~1,703~~pursuant ~~========================================~~to ~~Allowance~~items as7 ~~percent~~and of12 ~~net~~to ~~loans~~report ~~0.41%~~operating ~~0.44%~~results ~~Net~~for ~~loans~~the ~~charged~~quarter ~~off~~ended asSeptember a30, ~~percent of average loans 0~~2003.~~21% 0.19%~~

-------------------------------------------------------------------------------- * Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement initially filed with the Commission on June 1, 1994. Registration No. 33-79570. ** Incorporated herein by reference into this document from the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 17, 1996 and filed with the Commission on December 13, 1995. *** Incorporated herein by reference into this document from the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 20, 1998 and filed with the Commission on December 10, 1997. 17 FSF FINANCIAL CORP. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FSF FINANCIAL CORP. Date: January 26, 2004 By: /s/ Donald A. Glas ----------------------- Donald A. Glas Chief Executive Officer Date: January 26, 2004 By: /s/ Richard H. Burgart ----------------------- Richard H. Burgart Chief Financial Officer 18 SECTION 302 CERTIFICATION I, Donald A. Glas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FSF Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 26, 2004 /s/Donald A. Glas --------------------------------- Donald A. Glas Chief Executive Officer SECTION 302 CERTIFICATION I, Richard H. Burgart, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FSF Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 26, 2004 /s/Richard H. Burgart --------------------------------- Richard H. Burgart Chief Financial Officer 19

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