SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19772
| HF FINANCIAL CORP. | |
| (Exact name of registrant as specified in its charter) | |
| Delaware | 46-0418532 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 225 South Main Avenue, Sioux Falls, SD | 57104 |
| (Address of principal executive office) | (ZIP Code) |
| (605) 333-7556 | |
| (Registrant's telephone number, including area code) | |
| Not Applicable | |
| (Former name, former address and former fiscal year, if changed since last report) | |
Indicate by check mark 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of May 11, 2001 there were 3,680,796 issued and outstanding shares of the Registrant’s Common Stock, with $.01 par value.
HF FINANCIAL CORP.
FORM 10-Q
INDEX
Item 1.
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
| ASSETS | ||
| March 31, 2001 | June 30, 2000 | |
| (Unaudited) | ||
| Cash and cash equivalents | $58,651 | $26,417 |
| Securities available for sale | 62,450 | 60,445 |
| Mortgage-backed securities available for sale | 47,118 | 53,001 |
| Loans receivable | 551,130 | 542,494 |
| Loans held for sale | 10,553 | 8,257 |
| Accrued interest receivable | 5,279 | 5,346 |
| Office properties and equipment, at cost, net of accumulated depreciation | 13,765 | 13,717 |
| Foreclosed real estate and other properties | 1,599 | 1,594 |
| Prepaid expenses and other assets | 1,926 | 2,290 |
| Mortgage servicing rights | 2,604 | 2,171 |
| Deferred income taxes | 2,690 | 4,235 |
| Cost in excess of net assets acquired | 5,888 | 5,030 |
| $763,653 | $724,997 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||
| Liabilities | ||
| Deposits | $580,119 | $545,497 |
| Advances from Federal Home Loan Bank and other borrowings | 108,206 | 113,020 |
| Advances by borrowers for taxes and insurance | 10,106 | 6,543 |
| Accrued interest payable | 7,906 | 6,844 |
| Other liabilities | 5,125 | 6,150 |
| Total liabilities | 711,462 | 678,054 |
| Stockholders' Equity | ||
| Preferred stock, $.01 par value, 500,000 shares authorized, none outstanding | - - - - | - - - - |
| Series A Junior Participating Preferred Stock, $1.00 stated value, 50,000 shares authorized, none outstanding | - - - - | - - - - |
| Common stock, $.01 par value, 10,000,000 shares authorized, 4,786,005 and 4,769,314 shares issued at March 31, 2001 and June 30, 2000 | 48 | 48 |
| Additional paid-in capital | 15,378 | 15,260 |
| Retained earnings, substantially restricted | 52,363 | 49,824 |
| Unearned compensation | (113) | (113) |
| Accumulated other comprehensive income (loss) | 640 | (1,951) |
| Less cost of treasury stock, 1,105,209 shares | (16,125) | (16,125) |
| 52,191 | 46,943 | |
| $763,653 | $724,997 |
See Notes to Consolidated Financial Statements
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
| Three Months Ended March 31, | Nine Months Ended March 31, | |||
| 2001 | 2000 | 2001 | 2000 | |
| Interest and dividend income: | ||||
| Loans receivable | $12,741 | $11,616 | $38,714 | $33,875 |
| Mortgage-backed securities | 820 | 950 | 2,588 | 2,458 |
| Investment securities and interest-bearing deposits | 1,415 | 927 | 3,541 | 2,612 |
| 14,976 | 13,493 | 44,843 | 38,945 | |
| Interest expense: | ||||
| Deposits | 7,387 | 6,054 | 21,666 | 16,946 |
| Advances from Federal Home Loan Bank and other borrowings | 1,730 | 1,574 | 5,306 | 4,507 |
| 9,117 | 7,628 | 26,972 | 21,453 | |
| Net interest income | 5,859 | 5,865 | 17,871 | 17,492 |
| Provision for losses on loans | 310 | 874 | 1,574 | 4,412 |
| Net interest income after provision for losses on loans | 5,549 | 4,991 | 16,297 | 13,080 |
| Noninterest income: | ||||
| Fees on deposits | 870 | 643 | 2,658 | 1,982 |
| Credit card fee income | 471 | 1,245 | 2,142 | 5,968 |
| Loan servicing income | 404 | 347 | 1,171 | 1,015 |
| Commission and insurance income | 312 | 270 | 1,007 | 786 |
| Loan fees and service charges | 202 | 202 | 694 | 789 |
| Gain on sale of loans, net | 174 | 127 | 527 | 523 |
| Other | 266 | 342 | 757 | 783 |
| 2,699 | 3,176 | 8,956 | 11,846 | |
| Noninterest expense: | ||||
| Compensation and employee benefits | 3,622 | 3,320 | 10,443 | 9,446 |
| Other general and administrative expenses | 1,106 | 1,183 | 3,451 | 3,425 |
| Occupancy and equipment | 920 | 807 | 2,596 | 2,259 |
| Credit card processing expense | 560 | 647 | 2,008 | 3,100 |
| Amortization of intangible assets | 120 | 96 | 345 | 262 |
| Federal insurance premiums | 70 | 31 | 201 | 196 |
| Other | 53 | 50 | 110 | 134 |
| 6,451 | 6,134 | 19,154 | 18,822 | |
| Income before income taxes | 1,797 | 2,033 | 6,099 | 6,104 |
| Income tax expense | 709 | 716 | 2,401 | 2,143 |
| Net income | $1,088 | $1,317 | $3,698 | $3,961 |
| Earnings per share: | ||||
| Basic | $0.30 | $0.35 | $1.01 | $1.01 |
| Diluted | $0.29 | $0.34 | $1.00 | $1.00 |
See Notes to Consolidated Financial Statements
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 2001
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
| Accumulated | |||||||
| Additional | Other | ||||||
| Common | Paid-In | Retained | Unearned | Comprehensive | Treasury | ||
| Stock | Capital | Earnings | Compensation | Income (Loss) | Stock | Total | |
| Balance, June 30, 2000 | $48 | $15,260 | $49,824 | $(113) | $(1,951) | $(16,125) | $46,943 |
| Comprehensive income: | |||||||
| Net income | - - - - | - - - - | 3,698 | - - - - | - - - - | - - - - | 3,698 |
| Net change in unrealized gain/loss on securities available for sale, net of deferred taxes | - - - - | - - - - | - - - - | - - - - | 2,591 | - - - - | 2,591 |
| Comprehensive income | - - - - | - - - - | 3,698 | - - - - | 2,591 | - - - - | 6,289 |
| 11,249 shares issued under Director Restricted Stock Plan | - - - - | 100 | - - - - | - - - - | - - - - | - - - - | 100 |
| Exercise of stock options for 5,442 shares | - - - - | 18 | - - - - | - - - - | - - - - | - - - - | 18 |
| Cash dividends paid ($0.315 per share) on common stock | - - - - | - - - - | (1,159) | - - - - | - - - - | - - - - | (1,159) |
| Balance, March 31, 2001 | $48 | $15,378 | $52,363 | $(113) | $640 | $(16,125) | $52,191 |
See Notes to Consolidated Financial Statements
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
| Nine Months Ended March 31, | ||
| 2001 | 2000 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | ||
| Net income | $3,698 | $3,961 |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Provision for losses on loans and leases | 1,574 | 4,412 |
| Depreciation | 1,446 | 1,199 |
| Amortization of premiums and discounts on securities available for sale, net | (54) | (13) |
| Amortization of intangible assets | 345 | 262 |
| Amortization of mortgage servicing rights | 200 | 231 |
| Noncash issuance of common stock | 100 | 98 |
| (Decrease) in deferred loan fees | (220) | (767) |
| Loans originated for resale | (51,131) | (51,289) |
| Proceeds from the sale of loans | 49,362 | 60,244 |
| (Gain) on sale of loans, net | (527) | (523) |
| Mortgage servicing rights capitalized | (131) | (112) |
| Realized (gain) on sale of securities, net | - - - - | (90) |
| Losses and provision for losses on sales of foreclosed real estate and other properties, net | 7 | 41 |
| (Gain) loss on disposal of office properties and equipment, net | (11) | 7 |
| Decrease (increase) in accrued interest receivable | 67 | (113) |
| Decrease in prepaid expenses and other assets | 364 | 351 |
| (Increase) decrease in deferred income taxes | (43) | 999 |
| Increase (decrease) in accrued interest payable and other liabilities | 37 | (541) |
| Net cash provided by operating activities | $5,083 | $18,357 |
| CASH FLOWS FROM INVESTING ACTIVITIES | ||
| Loans and leases purchased | (12,081) | (19,931) |
| Loans originated and held | (123,436) | (173,478) |
| Principal collected on loans and leases | 124,874 | 142,555 |
| Sale of participation interests in loans | - - - - | 8,650 |
| Mortgage-backed securities available for sale: | ||
| Sales | - - - - | 3,202 |
| Purchases | - - - - | (23,157) |
| Repayments | 8,194 | 6,333 |
| Securities available for sale: | ||
| Sales and maturities | 16,910 | 15,141 |
| Purchases | (16,993) | (15,080) |
| Proceeds from sale of office properties and equipment | 17 | 4 |
| Purchase of office properties and equipment | (1,500) | (653) |
| Purchase of mortgage servicing rights | (502) | (416) |
| Purchase of intangible assets | (1,203) | (443) |
| Proceeds from sale of foreclosed real estate and other properties, net | 641 | 800 |
| Net cash (used in) investing activities | $(5,079) | $(56,473) |
| CASH FLOWS FROM FINANCING ACTIVITIES | ||
| Net increase in deposit accounts | $34,622 | $13,532 |
| Proceeds of advances from Federal Home Loan | ||
| Bank and other borrowings | 227,081 | 195,500 |
| Payments on advances from Federal Home Loan | ||
| Bank and other borrowings | (231,895) | (163,388) |
| Increase in advances by borrowers for taxes and insurance | 3,563 | 3,202 |
| Purchase of treasury stock | - - - - | (4,869) |
| Proceeds from issuance of common stock | 18 | 35 |
| Cash dividends paid | (1,159) | (1,188) |
| Net cash provided by financing activities | $32,230 | $42,824 |
| Increase in cash and cash equivalents | $32,234 | $4,708 |
| Cash and Cash Equivalents | ||
| Beginning | 26,417 | 16,671 |
| Ending | $58,651 | $21,379 |
See Notes to Consolidated Financial Statements
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Months Ended March 31, 2001 and 2000
(Dollars in Thousands)
(Unaudited)
NOTE 1. SELECTED ACCOUNTING POLICIES
Basis of presentation:
The foregoing consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (which consist of normal recurring accruals) necessary for a fair presentation of the consolidated financial statements have been included. Results for any interim period are not necessarily indicative of results to be expected for the year. The interim consolidated financial statements include the accounts of HF Financial Corp. (the "Company"), its subsidiaries, HomeFirst Mortgage Corp. (the “Mortgage Corp.”), and the Mortgage Corp.’s subsidiary, HF Card Services L.L.C. (HF Card Services) and Home Federal Savings Bank, (the "Bank") and the Bank’s subsidiaries.
NOTE 2. REGULATORY CAPITAL
The following table sets forth the Bank’s compliance with its capital requirements at March 31, 2001:
| Amount | Percent | ||
| Tier I (core) capital: | |||
| Required | $22,449 | 3.00% | |
| Actual | 45,212 | 6.04 | |
| Excess | 22,763 | 3.04 | |
| Risk-based capital: | |||
| Required. | $40,802 | 8.00% | |
| Actual | 51,591 | 10.12 | |
| Excess | 10,789 | 2.12 | |
NOTE 3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. The weighted average number of common shares outstanding for the three month period ended March 31, 2001 and 2000 was 3,680,733 and 3,773,687, respectively. The weighted average number of common shares outstanding for the nine month period ended March 31, 2001 and 2000 was 3,678,314 and 3,905,150, respectively.
Dilutive earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive options outstanding had been exercised. The weighted average number of common and dilutive potential common shares outstanding for the three month period ended March 31, 2001 and 2000 was 3,715,749 and 3,824,280, respectively. The weighted average number of common and dilutive potential common shares outstanding for the nine month period ended March 31, 2001 and 2000 was 3,708,124 and 3,973,915, respectively.
NOTE 4. SEGMENT INFORMATION
The management approach is used as the conceptual basis for identifying reportable segments and is based on the way that management organizes the segments within the Company for making operating decisions, allocating resources and monitoring performance.
The Company’s reportable segments are banking, credit card and other. The “banking” segment is conducted through the subsidiary, Home Federal Savings Bank, and the “credit card” segment is conducted through the subsidiary, HF Card Services, L.L.C. The “other” segment is composed of smaller nonreportable segments, the parent company and inter-segment eliminations.
| Three Months Ended March 31, 2001 | ||||
| Credit | ||||
| Banking | Card | Other | Total | |
| (Dollars in Thousands) | ||||
| Net interest income | $5,570 | $(12) | $301 | $5,859 |
| Provision (recoveries) for losses on loans | (347) | 90 | (53) | (310) |
| Noninterest income | 1,891 | 467 | 341 | 2,699 |
| Noninterest expense | (5,301) | (605) | (545) | (6,451) |
| Income (loss) before income taxes | $1,813 | $(60) | $44 | $1,797 |
| Total assets | $748,402 | $6,069 | $9,182 | $763,653 |
| Three Months Ended March 31, 2000 | ||||
| Credit | ||||
| Banking | Card | Other | Total | |
| (Dollars in Thousands) | ||||
| Net interest income | $5,645 | $76 | $144 | $5,865 |
| Provision for losses on loans | (366) | (508) | - - - - | (874) |
| Noninterest income | 1,624 | 1,241 | 311 | 3,176 |
| Noninterest expense | (5,039) | (720) | (375) | (6,134) |
| Income (loss) before income taxes | $1,864 | $89 | $80 | $2,033 |
| Total assets | $693,949 | $7,757 | $2,174 | $703,880 |
| Nine Months Ended March 31, 2001 | ||||
| Credit | ||||
| Banking | Card | Other | Total | |
| (Dollars in Thousands) | ||||
| Net interest income | $16,890 | $159 | $822 | $17,871 |
| Provision for losses on loans | (1,041) | (437) | (96) | (1,574) |
| Noninterest income | 5,800 | 2,132 | 1,024 | 8,956 |
| Noninterest expense | (15,382) | (2,162) | (1,610) | (19,154) |
| Income (loss) before income taxes | $6,267 | $(308) | $140 | $6,099 |
| Total assets | $748,402 | $6,069 | $9,182 | $763,653 |
| Nine Months Ended March 31, 2000 | ||||
| Credit | ||||
| Banking | Card | Other | Total | |
| (Dollars in Thousands) | ||||
| Net interest income | $16,771 | $304 | $417 | $17,492 |
| Provision for losses on loans | (1,033) | (3,379) | - - - - | (4,412) |
| Noninterest income | 5,144 | 5,956 | 746 | 11,846 |
| Noninterest expense | (14,449) | (3,352) | (1,021) | (18,822) |
| Income (loss) before income taxes | $6,433 | $(471) | $142 | $6,104 |
| Total assets | $693,949 | $7,757 | $2,174 | $703,880 |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company was incorporated under the laws of the State of Delaware in November 1991 for the purpose of owning all of the outstanding stock of the Bank issued in the mutual to stock conversion of the Bank. The Company acquired all of the outstanding stock of the Bank on April 8, 1992. In May 1996, the Company formed HF Card Services and became the owner of 51% of this entity. The Company became the owner of 100% of HF Card Services effective as of July 1998. The activities of the Company itself have no significant impact on the results of operations on a consolidated basis. Unless otherwise indicated, all activities discussed herein relate to the Company, and its direct and indirect subsidiaries, including without limitation, the Bank, HF Card Services and the Mortgage Corp.
HF Card Services was established to provide secured, partially-secured and unsecured credit cards nationwide. The target market for HF Card Services was subprime credit customers who have either an insufficient credit history or a negative credit history and are unable to obtain a credit card from more traditional card issuers. The Company ceased credit card applications in March 1999.
The Company's net income is primarily dependent upon the difference (or "spread") between the average yield earned on loans, mortgage-backed securities and investments and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis, than its interest-earning assets. To better insulate itself from such risk, the Company has, over the last few years, attempted to increase both numerically and on a percentage basis its holding of consumer and commercial loans. The Company has also decreased its ratio of fixed-rate to adjustable-rate loans. The Company’s net income is also affected by, among other things, gains and losses on sales of foreclosed property, loans, mortgage-backed securities and securities available for sale, provisions for losses on loans, service charge fees, subsidiary activities, operating expenses and income taxes.
Forward-Looking Statements
This Form 10-Q and other reports issued by the Company, including reports filed with the Securities and Exchange Commission, may contain "forward-looking" statements that deal with future results, expectations, plans or performance. In addition, the Company's management may make such statements orally to the media, securities analysts, investors or others. Forward-looking statements deal with matters that do not relate strictly to historical facts. These forward-looking statements might include one or more of the following:
| • | Projections of income, revenues, earnings per share, dividends, capital expenditures, capital structure or other financial items. | |
| • | Descriptions of plans or objectives of management for future operations, products or services. | |
| • | Forecasts of future economic performance. | |
| • | Descriptions of assumptions underlying or relating to such matters. |
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may."
The Company's future results may differ materially from historical performance, and forward-looking statements about the Company's expected financial results or other plans are subject to a number of risks and uncertainties. These include but are not limited to possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins; deposit outflows; reduced demand for financial services and loan products; changes in accounting policies or guidelines, or in monetary and fiscal policies of the federal government; changes in credit and other risks posed by the Company's loan portfolios; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation; or other significant uncertainties.
Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
Financial Condition Data
At March 31, 2001, the Company had total assets of $763.7 million, an increase of $38.7 million from the level at June 30, 2000. The increase in assets was due primarily to an increase in cash and cash equivalents of $32.2 million, an increase in loans receivable of $8.6 million, and an increase of $2.3 million in loans held for sale, offset by a decrease in mortgage-backed securities of $5.9 million. Deposits increased $34.6 million from the levels at June 30, 2000. In addition, stockholders’ equity increased from $46.9 million at June 30, 2000 to $52.2 million at March 31, 2001, primarily due to net income of $3.7 million which was partially offset by the payment of cash dividends of $1.2 million.
The increase in loans receivable of $8.6 million was due primarily to purchases and originations of principal exceeding amortization and prepayments of principal.
The increase in loans held for sale of $2.3 million was due to an increase in loans originated for sale into the secondary market at March 31, 2001.
The decrease in mortgage-backed securities of $5.9 million was primarily the result of amortization and prepayments of principal. Mortgage-backed securities were allowed to paydown without reinvestment during the first three quarters of fiscal 2001.
The $34.6 million increase in deposits was primarily due to an increase in demand accounts of $3.7 million, money market accounts of $23.8 million and certificates of deposit of $25.8 million offset by a decrease in savings accounts of $18.7 million. As of March 31, 2001, the Bank had total deposits from one local governmental entity of $25.8 million compared to $45.2 million at June 30, 2000. This decrease is seasonal and is comparable to the last two years.
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
Average Balances, Interest Rates and Yields. The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The table does not reflect any effect of income taxes. All average balances are monthly average balances and include the balances of nonaccruing loans. The yields and costs for the three and nine months ended March 31, 2001 and 2000 include fees which are considered adjustments to yield.
| THREE MONTHS ENDED MARCH 31, | ||||||
| 2001 | 2000 | |||||
| Average | Interest | Average | Interest | |||
| Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |
| Balance | Paid | Rate | Balance | Paid | Rate | |
| (Dollars in Thousands) | ||||||
| Interest-earning assets: | ||||||
| Loans receivable (1) | $568,526 | $12,741 | 9.09% | $532,996 | $11,616 | 8.77% |
| Mortgage-backed securities | 48,652 | 820 | 6.84% | 56,919 | 950 | 6.71% |
| Other investment securities (2) | 93,698 | 1,302 | 5.64% | 57,550 | 826 | 5.77% |
| FHLB stock | 6,332 | 113 | 7.24% | 6,130 | 101 | 6.63% |
| Total interest-earning assets | $717,208 | $14,976 | 8.47% | $653,595 | $13,493 | 8.30% |
| Noninterest-earning assets | 39,693 | 37,722 | ||||
| Total assets | $756,901 | $691,317 | ||||
| Interest-bearing liabilities: | ||||||
| Deposits: | ||||||
| Checking and money market | $208,568 | $1,965 | 3.82% | $167,243 | $1,438 | 3.46% |
| Savings | 40,953 | 378 | 3.74% | 45,681 | 412 | 3.63% |
| Certificates of deposit | 324,096 | 5,044 | 6.31% | 299,224 | 4,204 | 5.65% |
| Total deposits | $573,617 | $7,387 | 5.22% | $512,148 | $6,054 | 4.75% |
| FHLB advances and other borrowings | 108,948 | 1,730 | 6.44% | 111,801 | 1,574 | 5.66% |
| Total interest-bearing liabilities | $682,565 | $9,117 | 5.42% | $623,949 | $7,628 | 4.92% |
| Other liabilities | 22,965 | 21,786 | ||||
| Total liabilities | $705,530 | $645,735 | ||||
| Equity | 51,371 | 45,582 | ||||
| Total liabilities and equity | $756,901 | $691,317 | ||||
| Net interest income; interest rate spread | $5,859 | 3.05% | $5,865 | 3.38% | ||
| Net interest margin (3) | 3.31% | 3.61% | ||||
(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U.S. government and agency securities and also includes FHLB time.
(3) Net interest margin is net interest income divided by average interest-earning assets.
| NINE MONTHS ENDED MARCH 31, | ||||||
| 2001 | 2000 | |||||
| Average | Interest | Average | Interest | |||
| Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |
| Balance | Paid | Rate | Balance | Paid | Rate | |
| (Dollars in Thousands) | ||||||
| Interest-earning assets: | ||||||
| Loans receivable (1) | $566,181 | $38,714 | 9.11% | $523,416 | $33,875 | 8.61% |
| Mortgage-backed securities | 51,353 | 2,588 | 6.71% | 50,655 | 2,458 | 6.46% |
| Other investment securities (2) | 73,674 | 3,262 | 5.90% | 54,995 | 2,330 | 5.64% |
| FHLB stock | 6,261 | 279 | 5.94% | 5,821 | 282 | 6.45% |
| Total interest-earning assets | $697,469 | $44,843 | 8.56% | $634,887 | $38,945 | 8.16% |
| Noninterest-earning assets | 38,042 | 38,620 | ||||
| Total assets | $735,511 | $673,507 | ||||
| Interest-bearing liabilities: | ||||||
| Deposits: | ||||||
| Checking and money market | $195,112 | $5,806 | 3.96% | $156,894 | $3,635 | 3.08% |
| Savings | 40,643 | 1,192 | 3.91% | 44,972 | 1,096 | 3.24% |
| Certificates of deposit | 314,636 | 14,668 | 6.21% | 295,676 | 12,215 | 5.50% |
| Total deposits | $550,391 | $21,666 | 5.24% | $497,542 | $16,946 | 4.53% |
| FHLB advances and other borrowings | 113,528 | 5,306 | 6.23% | 107,757 | 4,507 | 5.57% |
| Total interest-bearing liabilities | $663,919 | $26,972 | 5.41% | $605,299 | $21,453 | 4.72% |
| Other liabilities | 21,975 | 21,197 | ||||
| Total liabilities | $685,894 | $626,496 | ||||
| Equity | 49,617 | 47,011 | ||||
| Total liabilities and equity | $735,511 | $673,507 | ||||
| Net interest income; interest rate spread | $17,871 | 3.15% | $17,492 | 3.44% | ||
| Net interest margin (3) | 3.41% | 3.67% | ||||
(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U.S. Government and agency securities and also includes FHLB time.
(3) Net interest margin is net interest income divided by average interest-earning assets.
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increases and decreases due to fluctuating outstanding balances that are due to the levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||
| 2001 vs 2000 | 2001 vs 2000 | |||||
| Increase | Increase | Increase | Increase | |||
| (Decrease) | (Decrease) | Total | (Decrease) | (Decrease) | Total | |
| Due to | Due to | Increase | Due to | Due to | Increase | |
| Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | |
| (Dollars in Thousands) | ||||||
| Interest-earning assets: | ||||||
| Loans receivable (1) | $734 | $391 | $1,125 | $2,829 | $2,010 | $4,839 |
| Mortgage-backed securities | (142) | 12 | (130) | 33 | 97 | 130 |
| Other investment securities (2) | 505 | (29) | 476 | 808 | 124 | 932 |
| FHLB stock | 3 | 9 | 12 | 20 | (23) | (3) |
| Total interest-earning assets | $1,100 | $383 | $1,483 | $3,690 | $2,208 | $5,898 |
| Interest-bearing liabilities: | ||||||
| Deposits: | ||||||
| Checking and money market | $364 | $163 | $527 | $1,010 | $1,162 | $2,172 |
| Savings | (45) | 11 | (34) | (117) | 213 | 96 |
| Certificates of deposit | 350 | 490 | 840 | 828 | 1,624 | 2,452 |
| Total deposits | 669 | 664 | 1,333 | 1,721 | 2,999 | 4,720 |
| FHLB advances and other borrowings | (49) | 205 | 156 | 253 | 546 | 799 |
| Total interest-bearing liabilities | $620 | $869 | $1,489 | $1,974 | $3,545 | $5,519 |
| Net interest income increase (decrease) | $(6) | $379 | ||||
(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U. S. Government and agency securities and also includes FHLB time.
Asset Quality
In accordance with the Company’s internal classification of assets policy, management evaluates the loan portfolio on a monthly basis to identify loss potential and determine the adequacy of the allowance for loan losses. The following table sets forth the amounts and categories of the Company’s nonperforming assets for the periods indicated.
| Nonperforming Assets As Of | ||
| March 31, | June 30, | |
| 2001 | 2000 | |
| (Dollars in Thousands) | ||
| Nonaccruing loans: | ||
| One- to four-family | $427 | $551 |
| Commercial | 386 | 165 |
| Multi-family | - - - - | - - - - |
| Commercial business | 1,914 | 971 |
| Consumer | 679 | 317 |
| Agriculture | 8 | 31 |
| Credit cards | - - - - | - - - - |
| Mobile homes | 45 | 43 |
| Total | $3,459 | $2,078 |
| Accruing loans delinquent more than 90 days: | ||
| One- to four-family | $1 | $- - - - |
| Commercial | - - - - | - - - - |
| Multi-family | - - - - | - - - - |
| Commercial business | - - - - | - - - - |
| Consumer | - - - - | - - - - |
| Agriculture | 23 | - - - - |
| Credit cards | 349 | 514 |
| Mobile homes | - - - - | - - - - |
| Total | $373 | $514 |
| Foreclosed assets: (2) | ||
| One- to four-family | $147 | $214 |
| Commercial | - - - - | - - - - |
| Multi-family | - - - - | - - - - |
| Commercial business | - - - - | - - - - |
| Consumer | 136 | 67 |
| Agriculture | - - - - | - - - - |
| Credit cards | - - - - | - - - - |
| Mobile homes | 17 | 15 |
| Total | $300 | $296 |
| Total nonperforming assets | $4,132 | $2,888 |
| Ratio of nonperforming assets to total assets | 0.54% | 0.40% |
| Ratio of nonperforming loans to total loans (1) | 0.67% | 0.46% |
(1) Nonperforming loans include nonaccruing loans and loans delinquent more than 90 days.
(2) Total foreclosed assets does not include land held for development.
Loans are generally classified as non-accrual when there are reasonable doubts as to the collectibility of principal and/or interest or when payment becomes 90 days past due, except loans which are well secured and in the process of collection. Interest collections on non-accrual loans, for which the ultimate collectability of principal is uncertain, are applied as principal reductions. Otherwise, such collections are applied to interest income when received. Credit card loans remain in accrual status until 120 days, when accrued interest income on the loan is taken out of income.
Nonperforming assets increased to $4.1 million at March 31, 2001 from $2.9 million at June 30, 2000, an increase of $1.2 million. In addition, the ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, increased slightly to 0.54% at March 31, 2001 as compared to 0.40% at June 30, 2000.
Nonaccruing loans increased to $3.5 million at March 31, 2001 from $2.1 million at June 30, 2000, an increase of $1.4 million. Included in nonaccruing loans at March 31, 2001 were nine loans totaling $427,000 secured by one- to four-family real estate, three loans in the amount of $386,000 secured by commercial real estate, twenty-one loans totaling $1.9 million secured by commercial business, two mobile home loans totaling $45,000, forty-three consumer loans totaling $679,000 and one agriculture loan totaling $8,000. For the three and nine months ended March 31, 2001, an additional $51,000 and $128,000 of interest income, respectively, would have been recognized on loans accounted for on a nonaccrual basis had such loans been current in accordance with their original terms.
Accruing credit card loans delinquent more than 90 days decreased to $349,000 at March 31, 2001 from $514,000 at June 30, 2000. A total of $921,000 of credit card loans were delinquent 30 days at March 31, 2001 as compared to $1.7 million at June 30, 2000. Net credit card loan charge-offs for the nine months ended March 31, 2001 were $2.4 million as compared to $7.5 million for the same period in fiscal 2000. Using historical stratification data on the current product, management expects credit card loan write-offs not to exceed $1.3 million in the next six months. Of this amount about 62% will be a charge-off against allowance for credit card loan losses, of which the Company currently maintains an allowance for credit card loan losses equal to 15% of the outstanding credit card loan balance, or about $974,000. The remaining 38% will be charged against interest income and credit card fee income in future periods.
Foreclosed assets increased from $296,000 at June 30, 2000 to $300,000 at March 31, 2001, an increase of $4,000.
At March 31, 2001, the Bank had approximately $23.3 million of other loans of concern that management has determined need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties. These loans were considered in determining the adequacy of the allowance for possible loan losses. The allowance for possible loan losses is established based on management's evaluation of the risks inherent in the loan portfolio and changes in the nature and volume of loan activity. Such evaluation, which includes a review of all loans for which full collectability may not be reasonably assured, considers the estimated fair market value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. Although the Company's management believes that the March 31, 2001 recorded allowance for loan losses was adequate to provide for potential losses on the related loans, there can be no assurance that the allowance existing at March 31, 2001 will be adequate in the future.
The following table sets forth information with respect to activity in the Company’s allowance for loan losses during the periods indicated.
| Nine Months Ended | ||
| 3/31/2001 | 3/31/2000 | |
| (Dollars in Thousands) | ||
| Balance at beginning of period | $8,475 | $11,991 |
| Charge-offs: | ||
| One- to four-family | (21) | (31) |
| Commercial | - - - - | - - - - |
| Multi-family | - - - - | - - - - |
| Commercial business | (328) | (20) |
| Consumer | (787) | (644) |
| Agriculture | - - - - | (11) |
| Credit cards | (2,678) | (8,412) |
| Mobile homes | (31) | (30) |
| Total charge-offs | $(3,845) | $(9,148) |
| Recoveries: | ||
| One- to four-family | $- - - - | $11 |
| Commercial | - - - - | 6 |
| Multi-family | - - - - | - - - - |
| Commercial business | - - - - | - - - - |
| Consumer | 211 | 219 |
| Agriculture | - - - - | - - - - |
| Credit cards | 239 | 935 |
| Mobile homes | 12 | 29 |
| Total recoveries | $462 | $1,200 |
| Net (charge-offs) | $(3,383) | $(7,948) |
| Additions charged to operations | 1,574 | 4,412 |
| Additions from acquisition | 97 | - - - - |
| Balance at end of period | $6,763 | $8,455 |
| Ratio of net (charge-offs) during the period to average loans outstanding during the period | (0.60)% | (1.52)% |
| Ratio of allowance for loan losses to total loans at end of period | 1.19% | 1.56% |
| Ratio of allowance for loan losses to nonperforming loans at end of period (1) | 176.49% | 374.45% |
(1) Nonperforming loans include nonaccruing loans and accruing loans delinquent more than 90 days.
The distribution of the Company’s allowance for loan losses at the dates indicated is summarized as follows:
| At March 31, 2001 | At June 30, 2000 | |||
| Percent of | Percent of | |||
| Loans in | Loans in | |||
| Each | Each | |||
| Category to | Category to | |||
| Amount | Total Loans | Amount | Total Loans | |
| (Dollars in Thousands) | ||||
| One- to four-family | $1,329 | 22.69% | $1,299 | 23.23% |
| Commercial and multi-family real estate (1) | 1,396 | 23.83% | 1,442 | 25.79% |
| Commercial business | 1,058 | 18.07% | 844 | 15.10% |
| Consumer (2) | 1,640 | 28.00% | 1,536 | 27.47% |
| Agricultural | 321 | 5.48% | 323 | 5.77% |
| Credit cards | 974 | 1.16% | 2,976 | 1.66% |
| Mobile homes | 45 | 0.77% | 55 | 0.98% |
| Total | $6,763 | 100.00% | $8,475 | 100.00% |
(1) Includes construction loans.
(2) Excludes allowance for loan losses relating to mobile home loans and credit card loans.
The allowance for loan losses was $6.8 million at March 31, 2001 as compared to $8.5 million at June 30, 2000. The ratio of the allowance for loan losses to total loans was 1.19% at March 31, 2001 and 1.52% at June 30, 2000. The Company’s management has considered nonperforming assets and other assets of concern in establishing the allowance for loan losses. The Company continues to monitor its allowance for possible loan losses and make future additions or reductions in light of the level of loans in its portfolio and as economic conditions dictate.
The current level of the allowance for loan losses is a result of management's assessment of the risks within the portfolio based on the information revealed in credit reporting processes. The Company utilizes a risk-rating system on all commercial business, agricultural, construction and multi-family and commercial real estate loans, including purchased loans, that exceed $250,000. A monthly credit review is performed on all types of loans to establish the necessary reserve based on the estimated risk within the portfolio. This assessment of risk takes into account the composition of the loan portfolio, historical loss experience for each loan category, previous loan experience, concentrations of credit, current economic conditions and other factors that in management’s judgment deserve recognition. As of March 31, 2001, $974,000 of the $6.8 million allowance for loan losses was reserved for the credit card loan portfolio. Regulators have reviewed the Company's methodology for determining allowance requirements on the Company’s loan portfolio and have made no recommendations for increases in the allowances during the nine month period ended March 31, 2001 and year ended June 30, 2000.
Comparison of the Nine Months Ended March 31, 2001 and March 31, 2000
General. The Company's net income decreased $263,000 for the nine months ended March 31, 2001 as compared to the nine months ended March 31, 2000. As discussed in more detail below, this decrease was due primarily to a decrease in noninterest income of $2.9 million, an increase in noninterest expense of $332,000 and an increase in income tax expense of $258,000 which were partially offset by an increase in net interest income of $379,000 and a decrease in the provision for losses on loans of $2.8 million.
Interest Income. Interest income increased $5.9 million from $38.9 million for the nine months ended March 31, 2000 to $44.8 million for the nine months ended March 31, 2001. The $62.6 million increase of average earning assets resulted in a $3.7 million increase in interest income. The average yield on interest-earning assets increased from 8.16% to 8.56% for the nine months ended March 31, 2000 and March 31, 2001, respectively.
Interest Expense. Interest expense increased $5.5 million from $21.5 million for the nine months ended March 31, 2000 to $27.0 million for the nine months ended March 31, 2001. A $3.5 million increase in interest expense was the result of the increase in the average rate paid on interest-bearing liabilities from 4.72% to 5.41% for the nine months ended March 31, 2000 and March 31, 2001, respectively. In addition, the average balance of interest-bearing liabilities increased $58.6 million at March 31, 2001 as compared to the same period in the prior fiscal year.
Net Interest Income. The Company's net interest income for the nine months ended March 31, 2001 increased $379,000 to $17.9 million compared to $17.5 million for the same period in fiscal 2000. The increase in net interest income reflects an overall increase in net earning assets offset by a reduction in the net interest spread on average earning assets to 3.15% for the nine months ended March 31, 2001 from 3.44% for the same period in fiscal 2000.
During the nine months ended March 31, 2001, the Company increased its average balances of commercial and consumer loans. The Company anticipates activity in this type of lending to continue in future years, subject to market demand. In addition, the Company sells the majority of conventional single-family residential real estate loan originations into the secondary market. Net interest income is expected to trend upward as a result of this lending activity as interest rate yields are generally higher on these types of loans compared to the yield provided by conventional single-family residential real estate loans. This lending activity is considered to carry a higher level of risk due to the nature of the collateral and the size of the individual loans. As such, the Company anticipates continued increases in its allowance for loan losses.
Provision for Losses on Loans. During the nine months ended March 31, 2001, the Company recorded a provision for losses on loans of $1.6 million as compared to $4.4 million for the nine months ended March 31, 2000, a decrease of $2.8 million. A majority of the decrease is related to reduction of the subprime credit card loan portfolio from $10.5 million at March 31, 2000 to $6.6 million at March 31, 2001. See "Asset Quality" for further discussion.
Noninterest Income. Noninterest income was $9.0 million for the nine months ended March 31, 2001 as compared to $11.8 million for the nine months ended March 31, 2000, a decrease of $2.9 million.
The decrease in credit card fee income of $3.8 million for the nine months ended March 31, 2001 as compared to the same period in fiscal 2000 is primarily due to a decrease in fees received on unsecured credit cards. This is a result of the credit card portfolio decreasing from $10.5 million at March 31, 2000 as compared to $6.6 million at March 31, 2001. The fee income represents interchange fees, annual/monthly fees, late fees and other miscellaneous fees. This credit card program was initiated in fiscal 1997. The Company ceased credit card applications in March 1999. This decreased the level of these fees. Interest income on credit card loans is included in interest income on loans.
Fees on deposits increased $676,000 due to an increase in volume from deposits acquired in new branch acquisitions/openings during the last half of fiscal 2000 and the first three quarters of fiscal 2001.
Commission and insurance income from the sale of financial and insurance products increased $221,000 primarily due to a greater emphasis on the production of noninterest income revenue.
Noninterest Expense. Noninterest expense increased $332,000 as compared to the same period in the prior fiscal year primarily due to increases in compensation and employee benefits of $997,000, occupancy and equipment of $337,000 and amortization of intangible assets of $83,000 (increases primarily related to seven new bank branches opened and two non-bank operations acquired since September of 1999) offset by a decrease in credit card processing expenses of $1.1 million. This expense represents costs for collecting loans and servicing credit cards for the unsecured credit card program.
Income tax expense. The Company's income tax expense for the nine months ended March 31, 2001 was $2.4 million as compared to $2.1 million for the nine months ended March 31, 2000, an increase of $258,000. This increase was primarily due to the increase in the Company’s effective tax rate from 35.11% for the nine months ended March 31, 2000 to 39.37% for the nine months ended March 31, 2001.
Comparison of the Three Months Ended March 31, 2001 and March 31, 2000
General. The Company's net income decreased $229,000 to $1.1 million for the three months ended March 31, 2001 as compared to $1.3 million for the three months ended March 31, 2000. As discussed in more detail below, this decrease was due primarily to a decrease in net interest income of $6,000, a decrease in noninterest income of $477,000, an increase in noninterest expense of $317,000 offset by a decrease in provision for losses on loans of $564,000 and a decrease in income tax expense of $7,000.
Interest Income. Interest income increased $1.5 million from $13.5 million for the three months ended March 31, 2000 to $15.0 million for the three months ended March 31, 2001. The $63.6 million increase of average earning assets resulted in a $1.1 million increase in interest income. The average yield on interest-earning assets increased from 8.30% to 8.47% for the three months ended March 31, 2000 and March 31, 2001, respectively.
Interest Expense. Interest expense increased $1.5 million from $7.6 million for the three months ended March 31, 2000 to $9.1 million for the three months ended March 31, 2001. An $869,000 increase in interest expense was the result of the increase in the average rate paid on interest-bearing liabilities from 4.92% to 5.42% for the three months ended March 31, 2000 and March 31, 2001, respectively. In addition, the average balance of interest-bearing liabilities increased $58.6 million at March 31, 2001 as compared to the same period in the prior fiscal year.
Net Interest Income. The Company's net interest income for the three months ended March 31, 2001 decreased $6,000 as compared to the same period in fiscal 2000. The decrease in net interest income reflects a reduction in the net interest spread on average earning assets to 3.05% for the three months ended March 31, 2001 from 3.38% offset by an overall increase in net earning assets for the same period in fiscal 2000.
During the three months ended March 31, 2001, the Company increased its average balances of commercial loans. The Company anticipates activity in this type of lending to continue in future years, subject to market demand. In addition, the Company sells the majority of conventional single-family residential real estate loan originations into the secondary market. Net interest income is expected to trend upward as a result of this lending activity as interest rate yields are generally higher on these types of loans compared to the yield provided by conventional single-family residential real estate loans. This lending activity is considered to carry a higher level of risk due to the nature of the collateral and the size of the individual loans. As such, the Company anticipates continued increases in its allowance for loan losses.
Provision for Losses on Loans. During the three months ended March 31, 2001, the Company recorded a provision for losses on loans of $310,000 as compared to $874,000 for the three months ended March 31, 2000, a decrease of $564,000. A majority of the decrease is related to reduction of the subprime credit card loan portfolio from $10.5 million at March 31, 2000 to $6.6 million at March 31, 2001. See "Asset Quality" for further discussion.
Noninterest Income. Noninterest income was $2.7 million for the three months ended March 31, 2001 as compared to $3.2 million for the three months ended March 31, 2000, a decrease of $477,000.
The decrease in credit card fee income of $774,000 for the three months ended March 31, 2001 as compared to the same period in fiscal 2000 is primarily due to a decrease in fees received on unsecured credit cards. This is a result of the credit card portfolio decreasing from $10.5 million at March 31, 2000 as compared to $6.6 million at March 31, 2001. The fee income represents interchange fees, annual/monthly fees, late fees and other miscellaneous fees. This credit card program was initiated in fiscal 1997. The Company ceased credit card applications in March 1999. This decreased the level of these fees. Interest income on credit card loans is included in interest income on loans.
Fees on deposits increased $227,000 due to an increase in volume from deposits acquired in new branch acquisitions/openings during the last half of fiscal 2000 and the first three quarters of fiscal 2001.
Commission and insurance income from the sale of financial and insurance products increased $42,000 primarily due to a greater emphasis on the production of noninterest income revenue.
Noninterest Expense. Noninterest expense increased $317,000 as compared to the same period in the prior fiscal year primarily due to increases in compensation and employee benefits of $302,000 and occupancy and equipment of $113,000 offset by a decrease in credit card processing expenses of $87,000.
Income tax expense. The Company's income tax expense for the three months ended March 31, 2001 was $709,000 as compared to $716,000 for the three months ended March 31, 2000, a decrease of $7,000. This decrease was primarily due to the decrease of $236,000 in the Company’s income before income taxes to $1.8 million as compared to the same period in the prior fiscal year.
Liquidity and Capital Resources
The Bank’s primary sources of funds are deposits, FHLB advances, amortization and prepayments of loan principal (including mortgage-backed securities) and, to a lesser extent, sales of mortgage loans, sales and/or maturities of securities, mortgage-backed securities, and short-term investments. While scheduled loan payments and maturing securities are relatively predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions, and competition. The Bank attempts to price its deposits to meet its asset/liability objectives consistent with local market conditions. Excess balances are invested in overnight funds.
Federal regulations have historically required the Bank to maintain minimum levels of liquid assets. The required percentage has varied from time to time based upon economic conditions and savings flows and is currently 4% of net withdrawable savings deposits and current borrowings. Liquid assets for purposes of this ratio include cash, certain time deposits, U.S. government and corporate securities and other obligations generally having remaining maturities of less than five years. The Bank has historically maintained its liquidity ratio at a level in excess of that required by these regulations. At March 31, 2001, the Bank's liquidity ratio was 11.78%.
Liquidity management is both a daily and long-term responsibility of management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) the objectives of its asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. During the nine months ended March 31, 2001, the Bank generated funds internally that allowed it to pay down FHLB advances and decrease borrowings with the FHLB by $10.5 million. See “Financial Condition Data” for further discussion.
The Bank anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 2001, the Bank had outstanding commitments to originate or purchase loans of $30.7 million and to sell loans of $20.9 million. At March 31, 2001, the Bank had no commitments to purchase or sell securities.
Although deposits are the Bank’s primary source of funds, the Bank’s policy has been to utilize borrowings where the funds can be invested in either loans or securities at a positive rate of return or to use the funds for short term liquidity purposes. See “Financial Condition Data” for further analysis.
The Company currently has in effect a stock buy back program in which up to 10% of the common stock of the Company outstanding on April 22, 2001 may be acquired through April 30, 2002. No shares of common stock have been purchased pursuant to this current program. Pursuant to a series of stock buy back programs initiated by the Company since 1996, the Company has purchased an aggregate of 1,105,209 shares of common stock through March 31, 2001.
Savings institutions insured by the Federal Deposit Insurance Corporation are required by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") to meet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization plan. Under these capital requirements, at March 31, 2001, the Bank met all current capital requirements.
The Office of Thrift Supervision (“OTS”) has adopted a core capital requirement for savings institutions comparable to the requirement for national banks. The OTS core capital requirement is 3% of total adjusted assets for thrifts that receive the highest supervisory rating for safety and soundness. The Bank had core capital of 6.04% at March 31, 2001.
Pursuant to the Federal Deposit Insurance Corporation Insurance Act (“FDICIA”), the federal banking agencies, including the OTS, have also proposed regulations authorizing the agencies to require a depository institution to maintain additional total capital to account for concentration of credit risk and the risk of non-traditional activities. No assurance can be given as to the final form of any such regulation.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.
The composition of the Bank’s balance sheet results in maturity mismatches between interest-earning assets and interest-bearing liabilities. The scheduled maturities of the Bank’s fixed rate interest-earning assets are longer than the scheduled maturities of its fixed rate interest-bearing liabilities. This mismatch exposes the Bank to interest rate risk. In a rising rate scenario, as measured by the OTS interest rate risk exposure simulation model, the estimated market or portfolio value (“PV”) of the Bank’s assets would decline in value to a greater degree than the change in the PV of the Bank’s liabilities, thereby reducing net portfolio value (“NPV”), the estimated market value of its shareholders’ equity.
As of September 30, 2000, under a rate shock scenario of plus 200 basis points (“bp”), the Bank’s pre-shock NPV ratio (NPV as a % of PV of assets) was estimated in the OTS model to be 9.25%. The post-shock NPV ratio was estimated to be 8.88%, a decline of 37bp. As of December 31, 2000, the most recent report available, the post-shock ratio for a 200 bp increase in market interest rates was estimated to be 8.00%, a decrease of 44bp from the pre-shock NPV ratio estimate of 8.43%.
In managing market risk and the asset/liability mix, the Bank has placed its emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. The effect of this policy will generally be to reduce the Bank’s sensitivity to interest rate changes. The goal of this policy is to provide a relatively consistent level of net interest income in varying interest rate cycles and to minimize the potential for significant fluctuations from period to period.
HF FINANCIAL CORP.
FORM 10-Q
PART II. OTHER INFORMATION
None
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
None
Item 6. Exhibits and Reports on Form 8-K
None
No other information is required to be filed under Part II of the form.
HF FINANCIAL CORP.
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.
| HF Financial Corp. | |||
| (Registrant) | |||
| Date: | May 14, 2001 | by /s/ Curtis L. Hage | |
| Curtis L. Hage, Chairman, President | |||
| And Chief Executive Officer | |||
| (Duly Authorized Officer) | |||
| Date: | May 14, 2001 | by /s/ Brent E. Johnson | |
| Brent E. Johnson, Senior Vice President, | |||
| Chief Financial Officer And Treasurer | |||
| (Principal Financial and Accounting Officer) | |||
