UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-20956
HFB FINANCIAL CORPORATION
A Tennessee Corporation I.R.S. Employer
Identification No.
61-1228266
Address Telephone Number
------- ----------------
1602 Cumberland Avenue (606) 248-1095
Middlesboro, Kentucky 40965
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding twelve 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 [ ]
The number of shares of the registrant's $1 par value common
stock outstanding at September 30, 1998 was 1,089,648.
1
HFB FINANCIAL CORPORATION
I N D E X
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PAGE NO.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-14
PART II - OTHER INFORMATION 15
SIGNATURES 16
2
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
SEPTEMBER 30, JUNE 30,
1998 1998
------------ ------------
ASSETS
Cash and cash equivalents $ 5,689,624 $ 6,947,148
Trading securities 942,326 835,307
Investment securities
Available for sale 26,423,289 26,904,517
Held to maturity 19,901,360 20,546,634
------------ ------------
Total investment securities 46,324,649 47,451,151
Loans 121,318,077 117,143,613
Allowance for loan losses (1,037,813) (972,859)
------------ ------------
Net loans 120,280,264 116,170,754
Premises and equipment 2,248,430 2,220,548
Real estate owned 65,617
Federal Home Loan Bank stock 1,255,900 1,255,900
Interest receivable 1,545,011 1,407,901
Other assets 104,178 148,077
------------ ------------
Total assets $178,455,999 $176,436,786
============ ============
LIABILITIES
Deposits
Interest bearing $144,717,719 $144,622,466
Non-interest bearing 744,590 258,952
------------ ------------
Totals 145,462,309 144,881,418
Short-term borrowings 6,500,000 6,500,000
Long-term debt 5,646,053 5,661,598
Interest payable 1,287,318 580,621
Other liabilities 1,831,634 825,950
------------ ------------
Total liabilities 160,727,314 158,449,587
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value
Authorized and unissued
-- 1,000,000 shares -- --
Common stock, $1 par value
Issued and outstanding --
1,291,694 shares 1,291,694 1,291,694
Additional paid-in capital 6,195,948 6,195,948
Less: Common stock acquired by ESOP (12,427) (41,545)
Common stock acquired by Rabbi trusts
for deferred compensation plans (684,874) (313,059)
Treasury stock, at cost, 202,046 shares (2,030,955) (2,030,955)
Retained earnings 12,678,805 12,754,183
Accumulated other comprehensive income,
net unrealized gain on securities available
for sale 290,494 130,933
------------ ------------
Total stockholders' equity 17,728,685 17,987,199
------------ ------------
Total liabilities and stockholders' equity $178,455,999 $176,436,786
============ ============
See notes to consolidated financial statements.
3
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
INTEREST INCOME
Loans receivable $2,508,285 $2,394,912
Investment securities 770,909 711,540
Other dividend income 27,622 27,054
Deposits with financial
institutions 19,621 35,852
---------- ----------
Total interest income 3,326,437 3,169,358
---------- ----------
INTEREST EXPENSE
Deposits 1,830,751 1,604,149
Short term borrowings 94,925 108,242
Long term debt 84,137 14,313
---------- ----------
Total interest expense 2,009,813 1,726,704
---------- ----------
NET INTEREST INCOME 1,316,624 1,442,654
Provision for loan losses 68,299 67,955
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,248,325 1,374,699
---------- ----------
OTHER INCOME
Service charges for deposit accounts 93,306 99,518
Other customer fees 32,342 11,037
Net gain (loss) on trading securities (200,110) 167,823
Net realized gain (loss) on sales of
available for sale securities 0 7,623
Other income 6,342 9,763
---------- ----------
Total other income (68,120) 295,764
---------- ----------
OTHER EXPENSES
Salaries and employee benefits 423,704 469,618
Net occupancy expenses 49,851 51,276
Equipment expenses 52,867 58,991
Data processing fees 67,386 61,833
Deposit insurance expense 21,654 21,104
Legal and professional fees 52,146 37,558
Advertising 26,163 20,568
State franchise and deposit taxes 31,725 31,369
Other expenses 187,878 141,167
---------- ----------
Total other expenses 913,374 893,484
---------- ----------
INCOME BEFORE INCOME TAX 266,831 776,979
Income tax expense 102,487 326,529
---------- ----------
NET INCOME $ 164,344 $ 450,450
========== ==========
BASIC EARNINGS PER SHARE $ 0.15 $ 0.42
========== ==========
DILUTED EARNINGS PER SHARE $ 0.15 $ 0.41
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,089,648 1,083,626
========== ==========
See notes to consolidated financial statements.
4
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three months ended September 30, 1998
(Unaudited)
ADDITIONAL
COMMON PAID-IN ESOP RABBI
STOCK CAPITAL DEBT* TRUSTS
---------- ---------- ---------- ----------
BALANCES, JUNE 30, 1998 $1,291,694 $6,195,948 $ (41,545) $(313,059)
Net income
Other comprehensive income -
net change in unrealized
gain on securities available
for sale
Dividends declared
Reduction of ESOP debt 29,118
Transitional fair value
adjustment of rabbi
trust shares (371,815)
---------- ---------- --------- ---------
BALANCES, SEPTEMBER 30, 1998 $1,291,694 $6,195,948 $ (12,427) $(684,874)
========== ========== ========= =========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME -
NET UNREALIZED
GAIN ON
SECURITIES TOTAL
TREASURY RETAINED AVAILABLE STOCKHOLDERS'
STOCK EARNINGS FOR SALE EQUITY
----------- ----------- ---------- -----------
BALANCES, JUNE 30, 1998 $(2,030,955) $12,754,183 $ 130,933 $17,987,199
Net income 164,344(1) 164,344
Other comprehensive income -
net change in unrealized
gain on securities available
for sale 159,561 (1) 159,561
Dividends declared (239,722) (239,722)
Reduction of ESOP debt 29,118
Transitional fair value
adjustment of rabbi
trust shares (371,815)
----------- ----------- ---------- -----------
BALANCES, SEPTEMBER 30, 1998 $(2,030,955) $12,678,805 $ 290,494 $17,728,685
=========== =========== ========== ===========
<FN>
__________
(1) Components of comprehensive income (total comprehensive
income $323,905).
* Employees Stock Ownership Plan (ESOP)
</FN>
See notes to consolidated financial statements.
5
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 164,344 $ 450,450
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 68,299 67,955
Depreciation and amortization
Property and equipment 52,800 61,016
Cost of ESOP and MRP 29,118 36,238
Investment securities (2,098) 2,282
FHLB stock dividend (21,300)
Deferred income tax 7,000
Net change in
Trading account securities (107,019) (302,183)
Interest receivable (137,110) (232,403)
Interest payable 706,697 598,063
Other assets 43,899 573
Other liabilities 543,177 406,630
----------- ----------
Net cash provided by operating
activities 1,362,107 1,074,321
----------- ----------
INVESTING ACTIVITIES
Purchases of securities available for sale (1,506,953) (1,702,778)
Purchases of securities held to maturity (505,144)
Proceeds from maturities of securities
available for sale 1,713,380 834,903
Proceeds from sales of securities available
for sale 520,648 1,284,398
Proceeds from maturities of securities
held to maturity 1,156,924 1,618,013
Net change in loans (4,243,426) (3,405,470)
Purchases of premises and equipment (80,683)
----------- -----------
Net cash used by investing activities (2,945,254) (1,370,934)
----------- ----------
(continued)
6
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---------- ----------
FINANCING ACTIVITIES
Net change in
Non interest-bearing, interest-bearing
and savings deposits $ 75,858 $ (83,354)
Certificates of deposit 505,033 (913,637)
Short term borrowings 1,000,000
Repayment of long-term debt (15,545) (14,347)
Cash dividends (239,723) (227,562)
Common stock acquired by Rabbi trusts (11,151)
----------- ----------
Net cash used by financing activities 325,623 (250,051)
----------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,257,524) (546,664)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,947,148 3,794,637
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,689,624 $3,247,973
=========== ==========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 1,066,203 $1,128,642
Income tax paid 21,000 146,314
See notes to consolidated financial statements.
7
HFB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION:
The unaudited consolidated financial information for
the three month periods ended September 30, 1998 and
1997 includes the results of operations of HFB
Financial Corporation (the "Corporation") and its
wholly owned subsidiary Home Federal Bank, Federal
Savings Bank ("Home Federal" or the "Bank"). The
accompanying unaudited financial statements have been
prepared in accordance with generally accepted
accounting principles for interim financial statements
and with the instructions to Form 10-Q. It is
suggested that these statements and notes be read in
conjunction with the financial statements and notes
thereto included in the Bank's annual report for the
year ended June 30, 1998 on Form 10-K filed with the
Securities and Exchange Commission.
In the opinion of management, the financial
information reflects all adjustments (consisting only
of normal recurring adjustments) which are necessary
for a fair presentation of the results of operations
for such periods but should not be considered as
indicative of results for a full year.
2. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued
Statement No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display
of comprehensive income and its components in a full
set of general-purpose financial statements,
Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes
standards for disclosing information about operating
segments in interim and annual financial statements,
Statement No. 132, "Employers Disclosures About
Pensions and Other Postretirement Benefits", which
revises employers disclosures about pension and other
postretirement plans, and Statement No. 133,
"Accounting for Derivative Instruments and Hedging
activities", which requires companies to record
derivatives on the balance sheet at their fair value.
Statement No. 130 was effective for the Company for
the quarter ended September 30, 1998. Statements No.
131 and 132 were also effective for the Company
beginning in fiscal 1999 but did not have any material
impact on the Company's financial position or results
of operations. Statement No. 133 will be effective
for the Company beginning in fiscal 2000 and is also
not expected to have a material impact on the
Company's financial position or results of operations.
3. DEFERRED COMPENSATION ARRANGEMENTS "RABBI TRUSTS"
Effective September 30, 1998, the Company implemented
Emerging Issues Tasks Forces "EITF" 97-14 Accounting
for Deferred Compensation Agreements Where Amounts
Earned Are Held in a Rabbi Trust and Invested". This
EITF requires that deferred compensation obligation
arrangements where amounts earned by an employee are
invested in the stock of the employer and placed in a
"rabbi trust" be recorded as a liability at the fair
value of the Company shares held rather than at
original acquisition cost as has previously been the
case. The EITF allowed for a transition adjustment of
the excess of the September 30, 1998 fair value over
the original cost of Company shares owned to be
recorded, net of tax, as a onetime adjustment. This
excess of fair value over cost amounted to $562,400
($371,815 net of tax) at September 30. All future
increases/decreases in the deferred compensation
liability will be recognized in income.
8
3. EARNINGS PER SHARE
Earnings per share were computed as follows:
Weighted
Average Per Share
Income Shares Amount
Three Months Ended September 30, 1998 -------------------------------
Net Income $ 164
------
Basic Earnings Per Share $ .15
Income available to common stockholders 164 1,089,648
Effect of Diluted Securities
Stock options 27,194
--------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $ 164 1,115,842 $ .15
================================
Three Months Ended September 30, 1997
Net Income $ 450
------
Basic Earnings Per Share $ .42
Income available to common stockholders 450 1,083,626
Effect of Diluted Securities
Stock options 27,626
--------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $ 450 1,111,282 $ .41
================================
5. NONPERFORMING LOANS AND PROBLEM ASSETS
The following sets forth the activity in the Bank's
allowance for loan losses for the three months ended
September 30, 1998 and 1997:
(Dollars in thousands)
1998 1997
---- ---
Balance at July 1 $ 973 $710
Charge offs 3
Provision for loan losses 68 68
------ ----
Balance September 30 $1,038 $778
Ratio of net charge offs during the
period to average loans outstanding
during the period .00% .00%
====== ====
Information on impaired loans is summarized below
AT SEPTEMBER 30 1998
----
Impaired loans with an allowance $1,271
Allowance for impaired loans (included in
the Company's (allowance for loan losses) $ 356
9
THREE MONTHS ENDED SEPTEMBER 30 1998
----
Average balance of impaired loans $1,271
Interest income recognized on impaired loans 3
Cash-basis interest received 0
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL:
HFB Financial Corporation, a Tennessee Corporation, was formed
in September 1992 at the direction of Home Federal Bank, Federal
Savings Bank for the purpose of becoming a holding company for
the Bank as part of its conversion from mutual to stock form.
The Corporation's primary operation is its' investment in the
common stock of the Bank.
The Bank is principally engaged in the business of accepting
deposits from the general public and originating permanent loans
which are secured by one-to-four family residential properties
located in its market area. The Bank also originates consumer
loans and commercial real estate loans, and maintains a
substantial investment portfolio of mortgage-backed and other
investment securities.
The operations of Home Federal, and savings institutions
generally, are significantly influenced by general economic
conditions and the monetary and fiscal policies of government
regulatory agencies. Deposit flows and costs of funds are
influenced by interest rates on competing investments and
prevailing market rates of interest. Lending activities are
affected by the demand for financing real estate and other types
of loans, which in turn are influenced by the interest rates at
which such financing may be offered and other factors related to
loan demand and the availability of funds. Just as the Bank's
operations are influenced by regulatory authorities, so are its
liquidity levels and capital resources. As of September 30,
1998 , management is not aware of any current recommendations
by the regulatory authorities, which if implemented, would have
a material effect on the Bank's operations, liquidity or
resources.
FINANCIAL CONDITION
The Corporation's assets increased by 1.14% to $178.5 million at
September 30, 1998 compared to $176.4 million at June 30, 1998.
The majority of this increase is reflected in increases in loans
and interest receivable offset by decreases in cash and due from
banks and investment securities.
Cash and cash equilavents decreased by $1.2 million to $5.7
million at September 30, 1998 from $6.9 million at June 30,
1998. This increase was primarily the result of funding
increased loan volume during the three month period ended
September 30, 1998.
The Company maintains a portfolio of trading account securities
which is comprised of common stock of other financial
institutions. The portfolio was $942,000 at September 30, 1998
compared to $835,000 at June 30, 1998. Most of this increase
was attributable to increased investment activity in the
portfolio.
The loan portfolio increased by $4.2 million to $121.3 million
at September 30, 1998 from $117.1 million at June 30, 1998 due
to lower interest rates and a strong loan demand. In the
current interest rate environment, a substantial portion of
loans originated were adjustable-rate residential mortgages.
During the three months ended September 30, 1998, the Bank
originated $10.3 million in mortgages.
At September 30, 1998, the allowance for loan losses was $1.038
million or .86% of loans receivable compared to $973,000 or .83%
of loans receivable at June 30, 1998. During the three months
ended September 30, 1998, the
10
provision for loan losses was $68,000. Total nonperforming
assets were $2.5 million or 2.03% of total loans, net at
September 30, 1998 as compared to $717,000 or .62% of total
loans, net at June 30, 1998. Most of the increase in
nonperforming loans was due to several problem real estate loans
to one borrower totaling $1.3 million, which became over 90 days
past due during the quarter ended September 30, 1998. The
properties securing these loans are not generating sufficient
cash flow to fund debt service payments and the borrower was 179
days in arrears on the loans at September 30, 1998. Foreclosure
proceedings have been initiated and should be finalized in the
near future. Management has continually evaluated the
collectability of these loans and feels that any potential loss
on these loans has been adequately reserved for.
The Bank augments its lending activities and increases its asset
yields by investing in mortgage-backed securities "MBSs" and
U.S. Government securities. During the three months ended
September 30, 1998, management purchased $2.0 million in
investment securities and MBSs. These purchases were primarily
funded by proceeds from called and maturing investment
securities, principal collected on MBSs and investments, and the
sale of investment securities. At September 30, 1998, the Bank
held $26.4 million in investment securities, available for sale
with a net unrealized gain of $290,000 and $19.9 million in
investment securities held to maturity.
Total deposits increased by $581,000 million to $145.5 million
at September 30, 1998 from $144.9 million at June 30, 1998.
During the three months ended September 30, 1998, certificates
of deposit increased $505,000 and NOW accounts and savings
deposits increased $76,000. Deposit growth was slow during the
three months ended September 30, 1998 primarily due to premium
rates offered by a competing institution during the period.
The Bank's regulatory liquidity ratio was 29.8% at September 30,
1998 as compared to 26.2% at June 30, 1998. At September 30,
1998 the Bank met all the fully phased-in regulatory capital
requirements under FIRREA. Tangible, core and risk-based
capital ratios were 9.2%, 9.2% and 20.6% respectively at
September 30, 1998 as compared to 9.1%, 9.1% and 22.5% at June
30, 1998.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
Net income decreased by $286,000 to $164,000 for the three month
period ended September 30, 1998 from $450,000 for the three
month period ended September 30, 1997 . The primary reasons for
the decrease were a $126,000 decrease in net interest income
offset by a decrease of $364,000 in noninterest income, a
$20,000 increase in noninterest expense and a $224,000 decrease
in income tax expense.
Net interest income decreased by $126,000 for the three month
period ended September 30, 1998 as compared to the three month
period ended September 30, 1997. Interest expense increased
during the quarter, primarily as the result of a higher interest
cost on deposits.
Interest on loans increased by $113,000 to $2.508 million for
the three month period ended September 30, 1998 as compared to
$2.395 million for the three month period ended September 30,
1997. This increase is mainly attributable to a higher weighted
average balance of loans receivable outstanding.
Interest on investment securities increased by $59,000 to
$771,000 for the three month period ended September 30, 1998
from $712,000 for the three month period ended September 30,
1997. This increase is primarily the result of higher weighted
average balances during the period.
Interest on deposits with other financial institutions decreased
by $16,000 to $20,000 for the three month period ended September
30, 1998 from $36,000 for the three month period ended September
30, 1997 primarily due to a lower level of interest-bearing cash
balances.
Interest on deposits increased by $227,000 to $1.831 million for
the three month period ended September 30, 1998 from $1.604
million for the three month period ended September 30, 1997 as
a result of higher volume and a
11
change in the overall deposit mix. Lower rate savings accounts
declined, while more costly certificates of deposit increased.
Interest on short term borrowings and long term debt increased
by $57,000 to $179,000 for the three month period ended
September 30, 1998 from $122,000 for the three month period
ended September 30, 1997 due to higher levels of borrowing.
The provision for loan losses was $68,000 for the three month
periods ended September 30, 1998 and 1997. The provision was
the result of Management's evaluation of the adequacy of the
allowance for loan losses including consideration of recoveries
of loans previously charged off, the perceived risk exposure
among loan types, actual loss experience, delinquency rates,
and current economic conditions. The Bank's allowance for loan
losses as a percent of total loans at September 30, 1998 was
.86%.
The Banks non-interest income decreased by $364,000 to ($68,000)
for the three month period ended September 30, 1998 as compared
to $296,000 for the same period in 1997. The decrease was
attributable to a net decrease in realized and unrealized gains
(losses) on trading account securities and realized gains on
available for sale securities of $375,000 and an increase of
$13,000 in other customer fees and other income. Losses on
trading account securities during the three months ended
September 30, 1998 totaled $200,000 and were primarily the
result of a reduction in the market value of securities included
in the trading account portfolio. The trading account portfolio
is comprised of common stocks of other financial institutions
which were adversely affected by the recent decline in the
equities market.
Non-interest expense increased by $20,000 to $913,000 for the
three month period ended September 30, 1998 as compared to
$893,000 for the same period in 1997. Compensation and benefits
decreased by $46,000 to $424,000 for the three month period
ended September 30, 1998 as compared to $470,000 for the same
period in 1997. This decrease is primarily attributable to a
general decrease in salaries and wages.
Occupancy expense decreased by $1,000 to $50,000 for the three
month period ended September 30, 1998 compared to $51,000 for
the same period in 1997 and equipment expense decreased by
$6,000 to $53,000 for the three month period ended September 30,
1998 from $59,000 for the three month period ended September 30,
1997. These decreases were primarily due to lower depreciation
expense.
Data processing fees increased by $5,000 to $67,000 for the
three month period ended September 30, 1998 from $62,000 for the
three month period ended September 30, 1997 primarily due to an
increased level of data processing services.
Legal and professional fees increased by $15,000 for the three
month period ended September 30, 1998 primarily due to higher
consulting fees.
Advertising expense increased by $5,000 to $26,000 for the
quarter ended September 30, 1998 compared to $21,000 for the
quarter ended September 30, 1997 primarily due to a new
advertising campaign.
Other expenses increased by $47,000 to $188,000 for the three
month period ended September 30, 1998 from $141,000 for the
three month period ended September 30, 1997 as the result of a
$25,000 loss resulting from employee theft. The remaining
increases were comprised of various other expense categories.
Income tax expense decreased by $225,000 to $102,000 for the
three month period ended September 30, 1998 compared to
$327,000 for the three months ended September 30, 1997 due to
decreased earnings.
YEAR 2000
The Company has completed an assessment of its computer systems,
including its information and non-information
12
systems, and identified those systems that it believes could be
affected by the Year 2000 issue. It has also developed an
implementation plan to address the issue and is in the process
of testing its internal mission critical hardware and software
systems to determine if they are Year 2000 compliant. While the
Company has exposure to several risks related to Year 2000, the
primary risk to the Company of not complying with Year 2000 is
the potential inability to correctly process and record customer
loan and deposit transactions.
The Company believes that it has met the majority of the
requirements that have been established for the banking industry
by the Federal Financial Institution Examination Council
"FFIEC". These standards require that a series of procedures be
performed by financial institutions within established time
frames to reduce the risk of noncompliance with the Year 2000
issue. While the Company believes that it will meet all of the
FFIEC requirements and that its mission critical systems will be
in compliance with Year 2000, it can give no assurance that this
will occur.
The Company is currently developing a business resumption
contingency plan that would take effect if its internal systems,
or the systems of those material vendors on which it is reliant,
would not be compliant with Year 2000 requirements.
The Company outsources a significant portion of its data
processing to an outside provider. A worst case scenario for
the Company would likely involve non-compliance with Year 2000
by its primary data processor in such a manner that would leave
the Company in a position where it could not correctly process
and record customer loan and deposit transactions. While the
Company plans to test its data processing system for compliance
with Year 2000, it cannot guarantee that the systems of this and
other companies on which the Company's systems rely will be
timely converted and not have a material effect on the Company.
The Company has, through September 30, 1998, incurred certain
costs related to Year 2000. A portion of these costs were
incurred in connection with the recent conversion of the
Company's primary data processing system. Costs incurred
through September 30, 1998 total approximately $326,000 and
include $205,000 for equipment, $65,000 for software, $12,000
for de-conversion fees that were paid to the previous data
processing provider, $38,000 for training and $6,000 for the
initial assessment. At September 30, 1998, the Company expects
to incur additional costs associated with testing but does not
expect these costs to be material to the Company's financial
condition or results of operations.
The Company does not have, at September 30, 1998 any material
commitments to purchase new equipment, software or to incur
material costs to modify its existing system and does not
believe that any material amounts of its existing computer
hardware or software is impaired. The Company has assessed the
impact of Year 2000 on its commercial lending customers, and
believes that the impact, in terms of potential credit exposure,
is not material. The majority of the Company's commercial
lending portfolio consists of commercial real estate loans that
are made to companies that are not highly technology intensive.
ASSET/LIABILITY MANAGEMENT
Key components of a successful asset/liability strategy are the
monitoring and managing of interest rate sensitivity of both the
interest-earning asset and interest-bearing liability
portfolios. Home Federal has employed various strategies
intended to minimize the adverse affect of interest rate risk on
future operations by providing a better match between the
interest rate sensitivity of its assets and liabilities. In
particular, the Bank's strategies are intended to stabilize net
interest income for the long-term by protecting its interest
rate spread against increases in interest rates. Such
strategies include the origination of adjustable-rate
mortgage loans secured by one-to-four family residential real
estate and the origination of consumer and other loans with
greater interest rate sensitivities than long-term, fixed-rate
residential mortgage loans. Although customers typically prefer
fixed-rate mortgage loans in a low interest rate environment,
Home Federal has been successful in originating adjustable-rate
loans in recent years. In addition, the Bank has used excess
funds to invest in various short-term investments including
mortgage-backed securities with terms of seven years or less,
U.S. Government Treasury and Agency securities with terms of ten
years
13
or less and other short-term investments.
Asset/liability management in the form of structuring cash
instruments provides greater flexibility to adjust exposure to
interest rates. During periods of high interest rates,
management believes it is prudent to offer competitive rates on
short-term deposits and less competitive rates for long-term
liabilities. This posture allows the Bank to benefit quickly
from declines in interest rates. Likewise, offering more
competitive rates on long-term deposits during the low interest
rate periods allows the Bank to extend the repricing and/or
maturity of its liabilities thus reducing its exposure to rising
interest rates.
14
HFB FINANCIAL CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27.1 Financial Data Schedule for three
month period ended September 30,
1998
Exhibit 27.2 Restated Financial Data Schedule for
three month period ended September
30, 1997
15
HFB FINANCIAL CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed in
its behalf by the undersigned, thereunto duly authorized.
HFB FINANCIAL CORPORATION
By: /s/ David B. Cook
-----------------------
David B. Cook
President and
Chief Executive Officer
By: /s/ Stanley Alexander, Jr.
--------------------------
Stanley Alexander, Jr.
Chief Financial Officer
Dated: November 5, 1998
16