1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Securities and Exchange Commission File Number 0-25722
HF BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0576146
(State or other jurisdiction (I.R.S. Employer I.D. No.)
Of incorporation or organization)
445 E. Florida Avenue, Hemet, California 92543
(Address of principal executive offices)
Registrant's telephone number, including area code: (909) 658-4411
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
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
There were 6,281,875 shares of the Registrant's common stock outstanding
as of May 9, 1997.
2
HF BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
--------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as of
March 31, 1997, (unaudited) and June 30, 1996 3-4
Consolidated Statements of Operations (unaudited) for the
Three and Nine Months ended March 31, 1997, and 1996 5-6
Changes in Stockholders' Equity (unaudited) 7
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months ended March 31, 1997 and 1996 8-10
Notes to Consolidated Financial Statements (unaudited) 11-19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20-41
---------------------------------------------
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 42
Item 2. Changes in Securities 42
Item 3. Defaults Upon Senior Securities 42
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 5. Other Information 42
Item 6. Exhibits and Reports on Form 8-K 42
Signature Page 43
2
3
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Mar. 31 June 30,
1997 1996
---- ----
(Unaudited)
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 32,150 $100,633
Investment securities held to maturity (estimated fair value of $26,384
and $ 33,842 at March 31, 1997 and June 30, 1996, respectively) 26,934 34,666
Investment securities available for sale (amortized cost of $164,412
and $ 177,487 at March 31, 1997 and June 30, 1996, respectively) 160,346 173,171
Loans held for sale 156 --
Loans receivable (net of allowance for estimated loan losses of $5,185
and $3,068 at March 31, 1997 and June 30, 1996, respectively) 468,081 225,161
Mortgage-backed securities held to maturity (estimated fair value of $153,112
and $152,521 at March 31, 1997 and June 30, 1996, respectively) 157,306 159,262
Mortgage-backed securities available for sale (amortized cost of $88,756
and $99,888 at March 31, 1997 and June 30, 1996, respectively) 89,242 100,259
Accrued interest receivable 7,130 6,260
Investment in capital stock of the Federal Home Loan Bank, at cost 6,139 4,436
Premises and equipment, net 8,620 6,578
Real estate owned, net of valuation allowances
Acquired through foreclosure 4,716 1,079
Acquired for sale or investment 418 996
Other assets 23,217 14,415
---------- ----------
Total assets $984,455 $826,916
======== ========
3
4
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
Mar 31 June 30,
1997 1996
---- ----
(Unaudited)
(Dollars in thousands except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 840,477 $ 669,725
Advances from the Federal Home Loan Bank 50,000 70,000
Accounts payable and other liabilities 6,591 5,278
Income taxes 6,550 842
------------ ------------
Total liabilities 903,618 745,845
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 15,000,000 shares authorized; 6,612,500 issued
and 6,281,875 outstanding at March 31, 1997 and June 30, 1996 66 66
Additional paid-in capital 51,277 51,113
Retained earnings, substantially restricted 39,677 40,957
Net unrealized loss on securities available for sale, net of taxes (2,101) (2,309)
Deferred stock compensation (4,734) (5,408)
Treasury stock, 330,625 shares (3,348) (3,348)
-------------- -----------
Total stockholders' equity 80,837 81,071
-------------- -----------
Total liabilities and stockholders' equity $984,455 $826,916
======== ========
Nominal book value per share $12.87 $12.91
Tangible book value per share $11.05 $11.85
Average market price per share on the final day of the period $12.83 $ 9.97
Shares utilized in above book value calculations 6,281,875 6,281,875
See notes to consolidated financial statements
4
5
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in thousands)
INTEREST INCOME:
Interest on loans $9,016 $4,497 $23,104 $12,943
Interest on mortgage-backed securities 3,795 4,763 12,807 14,518
Interest and dividends on investment securities 4,273 3,953 13,466 9,343
------- -------- --------- --------
Total interest income 17,084 13,213 49,377 36,804
INTEREST EXPENSE:
Interest on deposit accounts 9,894 5,929 28,021 17,706
Interest on advances from the Federal Home Loan
Bank and other borrowings 679 2,263 2,510 4,864
Net interest expense of hedging transactions 762 760 2,318 2,403
-------- --------- -------- --------
Total interest expense 11,335 8,952 32,849 24,973
-------- --------- -------- --------
NET INTEREST INCOME BEFORE PROVISION
FOR ESTIMATED LOAN LOSSES 5,749 4,261 16,528 11,831
PROVISION FOR ESTIMATED LOAN LOSSES 101 419 309 622
--------- --------- -------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOAN LOSSES 5,648 3,842 16,219 11,209
OTHER INCOME (EXPENSE):
Loan and other fees 105 47 253 140
Loss from real estate operations, net (54) (75) (241) (343)
Gain on sale of mortgage-backed and investment
securities available for sale -- -- 1,030 --
Gain on sale of loans held for sale 10 -- 20 --
Savings fees 400 151 982 465
Other income 66 420 217 491
Amortization of intangible assets (579) -- (1,391) --
----------- --------- ---------- --------
Total other income (expense) (52) 543 870 753
See notes to consolidated financial statements
5
6
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in thousands except earnings per share)
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits $2,376 $1,577 $7,028 $4,999
Occupancy and equipment expense 938 510 2,474 1,501
FDIC insurance and other assessments 185 308 1,009 1,002
SAIF special assessment 0 0 4,759 0
Legal and professional services 161 120 569 357
Data processing service costs 428 209 1,182 604
Marketing 165 118 472 288
Savings expense 234 58 476 182
Other 406 390 1,188 633
-------- -------- ------- -------
Total general and administrative expenses 4,893 3,290 19,157 9,566
EARNINGS(LOSS) BEFORE INCOME TAXES
EXPENSE (BENEFIT) 703 1,095 (2,068) 2,396
INCOME TAX EXPENSE (BENEFIT) 346 296 (788) 839
------- ------- ------- -------
NET EARNINGS (LOSS) $ 357 $ 799 $(1,280) $ 1,557
======== ======== ======== =======
Net earnings (loss) per share $ 0.06 $ 0.13 ($0.22) $0.25
Weighted average common shares outstanding 5,888,629 6,127,832 5,786,046 6,155,393
See notes to consolidated financial statements
6
7
HF BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 1997
(Unaudited)
Common Additional Retained Unrealized Deferred stock Treasury Total
stock paid-in earnings loss on compensation stock
capital securities
available
for sale
---------------------------------------------------------------------------------
(In Thousands)
Balance at June 30, 1996 $66 $51,113 $40,957 ($2,309) ($5,408) ($3,348) $81,071
Net loss for the nine months
ended March 31, 1997 -- -- (1,280) -- -- -- (1,280)
Change in net unrealized loss
on securities available for sale,
net of taxes -- -- -- 208 -- -- 208
Change in deferred stock
compensation -- 164 -- -- 674 -- 838
-----------------------------------------------------------------------------------
Balance at March 31, 1997 $66 $51,277 $39,677 ($2,101) ($4,734) ($3,348) $80,837
=====================================================================================
See notes to consolidated financial statements
7
8
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED MARCH 31
-------------------
1997 1996
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) (1,280) $1,557
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Origination of loans held for sale (1,451) --
Proceeds from sale of loans held for sale 1,315 --
Provisions for estimated loan and real estate losses 422 865
Direct write-offs from real estate operations 53 121
Depreciation and amortization 900 577
Amortization of deferred loan fees (539) (283)
Amortization (accretion) of premiums (discounts) on loans
and investment and mortgage-backed securities, net 210 82
Amortization of intangible assets 1,391 --
Federal Home Loan Bank stock dividend (294) (210)
Gain on sales of loans held for sale (20) --
Loss (gain) on sales of real estate, net (112) (233)
Gain on sale of mortgage-backed and investment securities, available for sale (1,030) --
Gain on sale of premises and equipment (30) --
Increase in accrued interest receivable (870) (2,708)
Increase (decrease) in accounts payable and other liabilities 777 (24,617)
Decrease (increase) in other assets 662 (1,758)
Other, net 978 (1,240)
--------- --------
Net cash provided by (used in) operating activities 1,082 (27,847)
8
9
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED MARCH 31
-------------------
1997 1996
---- ----
(Dollars in thousands)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable (83,557) (18,898)
Purchases of mortgage-backed securities held to maturity (15,039) --
Purchases of mortgage-backed securities available for sale (51,652) (21,272)
Principal repayments on mortgage-backed securities held to maturity 14,496 18,138
Principal repayments on mortgage-backed securities available for sale 8,826 10,122
Purchases of investment securities held to maturity -- (90,804)
Purchases of investment securities available for sale (37,968) (122,000)
Principal repayments on investment securities held to maturity 502 378
Principal repayments on investment securities available for sale 4,191 5,198
Proceeds from sales of mortgage-backed and investment securities available for sale 71,381 --
Matured / called investment and mortgage backed securities held to maturity 9,352 16,000
Matured / called investment securities available for sale 36,428 50,000
Proceeds from sales of real estate owned 3,794 2,233
Additions to real estate owned 62 (123)
Proceeds from sale of premises and equipment 6 8
Additions to premises and equipment (1,749) (309)
Cash payment for acquisition, net of cash received (14,707) --
Purchase of FHLB stock -- (1,618)
------------ -----------
Net cash provided by (used in) investing activities (55,634) (152,947)
9
10
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED MARCH 31
-------------------
1997 1996
---- ----
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repaid to) received from FHLB $ (20,000) $ 50,000
Proceeds from other borrowings -- 49,438
(Decrease) increase in certificate accounts (11,061) 13,909
Net increase (decrease) in NOW, passbook, money market investment and
non-interest-bearing accounts 17,130 518
--------- -----------
Net cash (used in) provided by financing activities (13,931) 113,865
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (68,483) (66,929)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 100,633 88,642
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 32,150 $ 21,713
========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES-
Cash paid during the period for:
Interest on deposit accounts and other borrowings $ 5,665 $ 5,819
========= =========
Income taxes paid -- 718
========= =========
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure $ 3,764 $ 2,109
Loans to facilitate sale of real estate through foreclosure $ 896 $ 447
Purchase of Palm Springs Savings Bank:
Fair value of assets purchased, excluding cash $ 184,321 --
Fair value of liabilities assumed 169,614 --
--------
Cash payment for acquisition, net of cash received $ 14,707 --
=========
Transfer of investment securities held to maturity
to available for sale classification $ 59,022
Transfer of mortgage backed securities held to maturity to
available for sale classification $ 24,321
Transfer of interest only security held to maturity to
available for sale classification per SFAS 125 250 --
See notes to consolidated financial statements
10
11
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. Company Description and Basis of Presentation
---------------------------------------------
HF Bancorp, Inc. is a savings and loan holding company incorporated in the
State of Delaware that was organized for the purpose of acquiring all of the
capital stock of Hemet Federal Savings and Loan Association (the Association)
upon its conversion from a federally chartered mutual savings association to a
federally chartered stock savings association. On June 30, 1995, HF Bancorp,
Inc. completed its sale of 6,612,500 shares of its common stock through
subscription and community offerings to the Association's depositors, Board of
Directors, management, employees and the public and used approximately 50% of
the net proceeds from such sales to purchase all of the Association's common
stock issued in the Association's conversion to stock form. Net proceeds of the
initial offering were $51.1 million and $25.5 million was used for purchase of
the Association's common stock. Such business combination was accounted for at
historical cost in a manner similar to a pooling of interests.
On September 27, 1996, Hemet Federal Savings and Loan Association
consummated the acquisition of Palm Springs Saving Bank ("PSSB") by purchasing
their 1,131,446 shares of common stock for $16.3 million. The purchase included
acquiring a net loan portfolio of $160.7 million with an average weighted rate
of 8.47% and savings account deposits of $164.7 million with an average weighted
rate of 4.09%.
The consolidated financial statements include the accounts of HF Bancorp,
Inc. and its wholly-owned subsidiary Hemet Federal Savings and Loan Association
("Hemet Federal") and its wholly-owned subsidiaries, HF Financial Corporation,
Coachella Valley Financial Services Corporation ("CVFSC"), PSSB Insurance
Services, Inc. ("PSSBI") and HF Financial Corporation's subsidiary, First Hemet
Corporation (collectively, the Company). CVFSC served as the trustee on deeds of
trust held by Palm Springs Savings Bank. This service has been transferred to
First Hemet Corporation. PSSBI was formed to offer life insurance and other
investment products to customers of PSSB. In September of 1994, PSSBI
discontinued marketing debt and equity securities, including mutual funds, to
the general public and the PSSB customer base. HF Bancorp, Inc. and Hemet
Federal are currently in the process of consolidating HF Financial Corporation,
CVFSC, and PSSBI with and into First Hemet Corporation. First Hemet Corporation
engages in trustee services for the Association, real estate development, and
receives commissions from the sale of mortgage life insurance, fire insurance
and annuities. All material intercompany transactions, profits and balances have
been eliminated.
11
12
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The Company is subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities
and Exchange Commission ("SEC"). Headquartered in Hemet, California, the
Association conducts business from its main office and three branch offices
located in Hemet, California, three branches in Riverside, California and from
its other twelve branch offices located in Sun City, San Jacinto, Canyon Lake,
Idyllwild, Murrieta, Vista, Oceanside, Rancho Bernardo, Palm Springs, Desert Hot
Springs, Cathedral City and Rancho Mirage, California. Its deposits are insured
up to the applicable limits under the Savings Association Insurance Fund
("SAIF") of the FDIC. The Association is also a member of the Federal Home Loan
Bank of San Francisco ("FHLB").
The Association is primarily engaged in the business of attracting funds
in the form of deposits and supplementing such deposits with FHLB and other
borrowings, and investing such funds in loans secured by real estate, primarily
one-to-four family residential mortgage loans, and in consumer and business
loans. The Association has, in recent years, invested in mortgage-backed and
related securities, including collateralized mortgage obligations. To a lesser
extent, the Association invests in multi-family mortgage loans, commercial real
estate loans, construction loans, acquisition, development and land loans,
consumer loans, and business loans. The Association's revenues are derived
principally from interest on its mortgage loans, consumer loans, business loans,
mortgage-backed securities portfolio and interest and dividends on its
investment securities. The Association's primary sources of funds are deposits,
principal and interest payments on loans, investment securities and
mortgage-backed securities, FHLB advances, and other borrowings.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation have been included. The results of operations for the nine month
period ended March 31, 1997, are not necessarily indicative of the results that
may be expected for the entire fiscal year.
These consolidated financial statements and the information under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" should be read in conjunction with the audited consolidated
financial statements and notes thereto of HF Bancorp, Inc. for the year ended
June 30, 1996 included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996.
12
13
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
In addition to historical information, this document may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1996 Form 10-K.
2. Earnings Per Share
------------------
Earnings per share ("EPS") for the three and nine months ended March 31,
1997 are based on weighted average common shares outstanding calculated as
follows:
3 Months 9 Months
Ended Ended
3/31/97 3/31/97
------- -------
Total shares issued 6,612,500 6,612,500
Less:
Weighted average unallocated shares under the ESOP Plan 351,945 366,390
Reduction in shares for the Stock Compensation Plan 146,380 178,067
Shares of treasury stock 330,625 330,625
Plus:
Increase in shares for the Stock Option Plan 105,079 48,628
Weighted average shares outstanding for EPS calculations 5,888,629 5,786,046
13
14
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
3. Termination of Swap Agreements
------------------------------
On July 10, 1995, the Company terminated four interest rate swap
agreements with an aggregate outstanding notional amount of $60,000,000. At June
30, 1995, the weighted average fixed payment rate and variable payment received
rate were 9.53% and 6.11%, respectively. The Company paid a termination fee of
$4,856,000 which has been deferred for book purposes and is being amortized over
the remaining original terms of the respective swap agreements. The expected
future annual amortization is as follows: $1,811,000, $798,000 and $272,000 for
the fiscal years ended June 30, 1997, 1998 and 1999 respectively. As of March
31, 1997 the remaining deferred amount was $1,369,000.
4. Loans Receivable
----------------
The Association adopted Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures", as of July 1, 1995. These statements generally require all
creditors to account for impaired loans, except those loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. SFAS No. 114
indicates that a creditor should evaluate the collectability of both contractual
interest and contractual principal when assessing the need for loss recognition.
The Association applies the provisions of SFAS No. 114 to all loans in its
portfolio. As a majority of the Association's loans are collateral dependent,
most impaired loans are accounted for based upon the fair value of their
collateral. In applying the provisions of SFAS No. 114, the Association
considers a loan to be impaired when it is probable that the Association will be
unable to collect all contractual principal and interest in accordance with the
terms of the loan agreement. However, in determining when a loan is impaired,
management also considers the loan documentation, current loan to value ratios,
and the borrowers' current financial position. The Association considers all
loans delinquent 90 days or more and all loans that have a specific loss
allowance applied to adjust the loan to fair value as impaired.
As of March 31, 1997, the Association had impaired loans totalling $11.1
million which have related specific reserves of $1.6 million; there were $5.6
million of impaired loans as of March 31, 1997 for which no specific reserves
had been recorded. Impaired loans at June 30, 1996 totalled $8.9 million. The
average recorded investment in impaired loans during the nine months ended March
31, 1997 was $16.3 million. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed from interest income.
14
15
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Interest income is subsequently recognized to the extent of full cash
payments received and accepted. As of March 31, 1997 accrued interest on
impaired loans was $83,000 and interest of $577,000 was received in cash for
the nine months then ended. Interest not recognized due to non-accrual
status was $219,000 for the nine months ended March 31, 1997, compared to
$97,000 for the nine months period ended March 31, 1996. Of the $11.1 million
of impaired loans which have specific reserves established in the amount of
$1.6 million, 45.4%, or $5.0 million are current. Of the $5.6 million of
impaired loans for which no specific reserves had been recorded as of
March 31, 1997, 33.3% or $1.9 million are current.
5. Change In Accounting Principles
-------------------------------
SFAS 128
--------
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS 128") which is effective for financial
statements issued for periods ending after December 15, 1997. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires the presentation of diluted earnings per share for
entities with complex capital structures. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock, such as options, were exercised or converted into common
stock. The Company does not believe that SFAS 128 will have a material impact on
its financial statements.
SFAS 125/127
------------
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which was amended by SFAS No. 127. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with pledge of collateral. The statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. Retroactive application of this statement is
not permitted. The adoption of SFAS No. 125 did not have a material impact on
the results of operations or financial condition of the Company.
15
16
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
SFAS 123
--------
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which became effective for the Company beginning July 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share.
SFAS 121
--------
During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company
adopted this statement beginning July 1, 1996 with no material impact on the
financial condition or results of operations of the Company.
16
17
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
6. Stock Plans
-----------
The Company established for eligible employees an Employee Stock Ownership
Plan and Trust ("ESOP") which became effective upon the conversion of the
Association from a mutual to a stock association (the "Conversion"). The ESOP
subscribed for 7% of the shares of common stock issued in the Conversion
pursuant to the subscription rights granted under the ESOP plan. On June 30,
1995, the ESOP borrowed $3,703,000 from the Company in order to fund the
purchase of common stock. The loan to the ESOP will be repaid principally from
the Company's contributions to the ESOP over a period of ten years and the
collateral for the loan is the common stock purchased by the ESOP. The interest
rate for the ESOP loan is 9%. As of March 31, 1997 a total of 104,069 shares of
common stock had been allocated to individual employee accounts, leaving a
remainder of 358,806 shares to be allocated over the remaining life of the ESOP.
At the Company's Annual Meeting of Shareholders on January 11, 1996, the
shareholders approved the HF Bancorp, Inc. 1995 Master Stock Option Plan ("Stock
Option Plan") and the Hemet Federal Savings and Loan Association Master Stock
Compensation Plan (the "Stock Compensation Plan") (collectively the "Plans").
These Plans became effective as of the date of approval. The Stock Compensation
Plan was authorized to acquire 198,375 shares of common stock in the open
market. The Association contributed funds to the Stock Compensation Plan to
enable the Stock Compensation Plan trustees to acquire the necessary shares of
the common stock. On February 28, 1996, the Association acquired 198,375 shares
in the open market at a price of $10.00 per share. Stock shares are held in
trust. The amount contributed to the Stock Compensation Plan is amortized to
compensation expense as the Association's employees and directors become vested
in the shares.
The Stock Compensation Plan provides for two general types of share
grants: time based grants and performance based grants. Outside directors of the
Company receive time based grants, which become vested on a straight line basis
over the applicable grant period, typically five years. A maximum of 34,700
shares are available for grant to outside directors under the Plan. Employees
are eligible for both time based grants and performance based grants, of which
two categories are provided for in the Plan: performance grants and high
performance grants. Vesting of performance based grants is dependent upon the
financial results of the Company.
As of March 31, 1997, a total of 37,294 shares have been vested under the
Stock Compensation Plan. An additional 21,563 non-vested shares have been
allocated to outside directors under time based grants. Also as of March 31,
1997, 100,324 non-vested shares have been allocated to employees in key
management positions in order to provide them with a proprietary interest in the
Company in a manner designed to encourage such employees to remain with the
Company. Of these 100,324 shares, 75% were allocated under time based grants and
25% were allocated under performance based grants. 39,194 shares remained in the
trust on an
17
18
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
unallocated basis at March 31, 1997.
The Stock Option Plan provides for the grant of up to 661,250 shares of
Common Stock to employees in key management positions and outside directors; and
similar to the Stock Compensation Plan, it is intended to provide key management
and directors with a proprietary interest in the Company and therefore an
incentive to remain with the Company. As of March 31, 1997, options representing
a total of 528,853 shares had been granted and were outstanding. Of these
528,853 options, issued at share prices ranging from $9.50 to $11.05, 112,851
options at a weighted average share price of $10.05 were vested and none had yet
been exercised.
7. Recent Developments
-------------------
Potential Federal Legislation
- -----------------------------
The U.S. Congress is currently discussing a broad range of potential
legislation which could impact the financial services industry in general and
the Company in particular. Key topics under discussion include:
o the potential merger of the BIF and SAIF FDIC deposit insurance funds,
o the possible reform of financial institution charters (including the
potential elimination of the federal thrift charter),
o potential requirements for the cancellation of lender mortgage insurance
under certain circumstances,
o financial services modernization, including a possible relaxation of laws
separating commercial banking and commerce,
o potential modifications to the Federal Home Loan Bank system, including a
possible relaxation of the current mandatory membership requirement for
thrift institutions,
o a possible reduction in the net operating loss ("NOL") carryback period
from three years to one year, which could present negative regulatory
capital implications to the financial services industry,
o possible federal controls on the amount and disclosure of ATM fees,
o legislation addressing the allowable financial relationships between
financial institutions and mortgage brokers (generally referred to as the
"yield / spread" topic),
18
19
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Deposit Insurance Funds Act of 1996
- ------------------------------------
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996. The special assessment was recognized as an
expense in the third calendar quarter of 1996 and is tax deductible. The
Association took a pre-tax charge of $4.8 million as a result of the FDIC
special assessment during the fiscal quarter ended September 30, 1996.
As a result of the Deposit Insurance Funds Act of 1996, the FDIC lowered
SAIF general assessments to 0 to 27 basis points effective January 1, 1997; a
range comparable to that of BIF members. However, SAIF members will be assessed
at a rate of 6.5 basis points for FICO payments. The Association's invoice for
FDIC deposit insurance for the quarter ending March 31, 1997 was assessed at a
rate of 6.5 basis points (FICO related) on SAIF assessable deposits. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated, or whether the BIF
and SAIF will eventually be merged.
19
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-----------------------------------------------------------------------
General
-------
The Company is headquartered in Hemet, California and conducts
business from nineteen branch offices and one centralized loan servicing
center, located as follows:
Greater Hemet/San Jacinto Valley Area
-------------------------------------
Hemet - Diamond Valley
Hemet - Downtown (Main Office)
Hemet - East
Hemet - Sanderson (Loan Service Center)
Hemet - West
Idyllwild
San Jacinto
Northern San Diego County Coachella Valley
------------------------- ----------------
Oceanside Cathedral City
Rancho Bernardo Desert Hot Springs
Vista Palm Springs
Rancho Mirage
Greater City Of Riverside Area Southwestern Riverside County
------------------------------ -----------------------------
Arlington Canyon Lake
Canyon Crest Murrieta
Tyler Mall Sun City
In addition, the Company supports its customers through 24 hour telephone
banking and ATM access through an array of networks including STAR, CIRRUS,
PLUS, and NOVUS.
20
21
On September 27, 1996, the association consummated the acquisition of PSSB
by purchasing their 1,131,446 shares of common stock for $16.3 million. The
purchase included acquiring a net loan portfolio of $160.7 million with an
average weighted rate of 8.47% and savings account deposits of $164.7 million
with an average weighted rate of 4.09%.
The Company is primarily engaged in the business of attracting funds in
the form of deposits and supplementing such deposits with FHLB and other
borrowings, and investing such funds in loans secured by real estate, primarily
one to four family residential mortgage loans, and in consumer and business
loans The Company had in past recent years, when loan demand was not as high as
presently exists, made investments in U.S. agency backed investment securities
and mortgage-backed and related securities, including collateralized mortgage
obligations ("CMOs") that generally are either guaranteed by a Federal agency, a
government sponsored entity, or are private issuer securities that have an
investment grade of AAA. The current direction is to serve the loan demand in
the Company's expanded market areas that have grown with the branch acquisitions
in northern San Diego County from Hawthorne Savings, F.S.B. and through the
acquisition of PSSB that serves the Coachella Valley communities. To a lesser
extent, the Company invests in multi-family mortgage loans, commercial real
estate loans, construction loans, acquisition, development and land loans,
commercial business loans and consumer loans.
The Company's revenues are derived principally from interest on its loan
and mortgage-backed securities portfolios and interest and dividends on its
investment securities. The Company's primary sources of funds are deposits;
principal and interest payments on investment securities, loans, and
mortgage-backed securities; FHLB advances; and other borrowings. Through
subsidiaries, the Company also engages in residential real estate development
and receives commissions from the sale of mortgage life insurance, fire
insurance, annuities, mutual funds and derives income from trustee services.
Changes In Financial Condition From June 30, 1996 to March 31, 1997
- -------------------------------------------------------------------
Total assets of the Company increased $157.6 million, or 19.1%, from
$826.9 million at June 30, 1996 to $984.5 million at March 31, 1997, primarily
as a result of the acquisition of PSSB. Net loans receivable rose $243.1
million, or 108.0%, from $225.2 million at June 30, 1996 to $468.2 million at
March 31, 1997. The significant increase in loans outstanding was a strategic
objective identified by management to more effectively employ the Company's
capital and liquidity while also improving core earnings. The increase in loans
outstanding over the nine months ended March 31, 1997 resulted from three
primary factors:
1. $160.7 million in net loans receivable from the PSSB acquisition
2. The purchase of $48.6 million face value residential loans in the
secondary market
3. Increased loan production through the Company's retail and wholesale
loan origination networks.
21
22
Investment securities declined from $207.8 million at June 30, 1996 to
$187.3 million at March 31, 1997, as funds from sales, maturities, and calls of
these assets were primarily redirected into increased lending. During the
quarter ended December 31, 1996, the Company sold $15.6 million in shares
associated with a mutual fund concentrated in shorter duration mortgage backed
securities. At March 31, 1997, the Company maintained no investments in mutual
funds.
Mortgage backed securities fell from $259.5 million at June 30, 1996 to
$246.5 million at March 31, 1997, representing a decline of 5.0%. This
reduction, however, was the net result of two significant sets of transactions
aimed at reducing the Company's sensitivity to increases in general market
interest rates:
1. During the quarter ended December 31, 1996, the Company sold $34.0
million of long term, fixed rate, U.S. Agency mortgage backed
securities that had been accounted for as "available for sale".
2. During the quarter ended March 31, 1997, the Company purchased
$36.4 million par value GNMA ARM mortgage backed securities
which reprice annually at a spread over the One Year Treasury
Constant Maturities Index.
Funds from amortization and prepayments associated with mortgage backed
securities were largely redeployed into the whole loan portfolio.
The Company's investment in the capital stock of the Federal Home Loan
Bank increased from $4.4 million at June 30, 1996 to $6.1 million at March 31,
1997, due to the acquisition of $1.4 million in stock previously owned by PSSB
and because of stock dividends credited in the amount of $0.3 million.
The total investment in foreclosed real estate, net of valuation reserves,
rose from $1.1 million at June 30, 1996 to $4.7 million at March 31, 1997
primarily due to an inflow of foreclosed properties and loans that would become
foreclosures from PSSB. Management anticipated this increase as a result of its
due diligence process in conjunction with the acquisition, requiring PSSB to
record additional loan and real estate loss provisions totalling $2.2 million
prior to the consummation of the acquisition. During the quarter ended March 31,
1997, the Company realized a pre tax gain of $53,000 on the sale of foreclosed
real estate.
Other assets increased from $14.4 million at June 30, 1996 to $23.2
million at March 31, 1997 primarily due to the core deposit intangible recorded
in conjunction with the acquisition of PSSB (see "Acquisition Of Palm Springs
Savings Bank").
22
23
Deposits increased 25.5%, or $170.8 million, from $669.7 million at June
30, 1996 to $840.5 million at March 31, 1997 primarily due to the PSSB
acquisition that added $164.7 million in deposits. As detailed in the
Consolidated Statement Of Cash Flows, the mix of the Company's deposits is
gradually shifting away from a high concentration in certificates of deposit
toward a profile presenting a greater proportion of savings and transaction
accounts; consistent with the Company's enhanced focus on community banking.
During the nine months ended March 31, 1997, the Company has experienced a
divergence in deposit flows in the various markets in which it competes; with
deposits increasing in those markets impacted by competitor relocations or
mergers, and with deposits falling in those markets subject to aggressive price
competition from new entrants or regional institutions with significant funding
requirements.
Total equity decreased from $81.1 million at June 30, 1996 to $80.8
million at March 31, 1997, as a result of several offsetting factors:
1. The $1.3 million net loss for the nine months ended March 31, 1997
(which includes a $2.8 million after tax impact for the one time
SAIF recapitalization assessment),
2. An $838,000 reduction in the aggregate contra equity effect of the
Company's deferred compensation programs, as additional shares
became vested during the nine month period,
3. A $208,000 improvement in the net unrealized loss position, net of
taxes, on securities available for sale.
During the quarter ended March 31, 1997, however, the net unrealized loss
associated with the Company's securities available for sale increased by $1.2
million due to two factors:
A. Increases in general market interest rates, as reflected in the
Federal Reserve Board's raising its target rate for overnight
federal funds from 5.25% to 5.50% during the final week of March,
1997,
B. A rise in the volume of securities available for sale from $219.0
million to $249.6 million, as all recent security purchases have
been designated as available for sale.
23
24
Managing Interest Rate Risk And Hedging Activities
- --------------------------------------------------
In an effort to limit the Company's exposure to interest rate changes,
management monitors and evaluates interest rate risk on an ongoing basis,
through both an internal simulation and modeling process and via participation
with the Office of Thrift Supervision Market Value Model. Management
acknowledges that interest rate risk and credit risk compose the two greatest
financial exposures faced by the Company in the normal course of its business.
In recent quarters, the Company has maintained a net liability
sensitivity, meaning that, in aggregate, the Company's liabilities reprice more
quickly and by a greater magnitude than do its assets. This net liability
sensitivity primarily arises from the longer term, higher duration mortgage
backed and investment securities and whole loans maintained on the Company's
balance sheet, for which the Company's only current matched funding sources are
demand deposit accounts, non interest bearing liabilities, a segment of core
deposit transaction accounts, certain borrowings and capital. The net liability
sensitivity translates to improved profitability and higher economic value
during decreasing interest rate environments, and vice-versa for periods of
increases in general market interest rates.
During the nine months ended March 31, 1997, the Company has taken a
number of steps to moderate its exposure to interest rate risk:
1. The sale of $34.0 million in fixed rate securities and the
purchase of $36.4 million in adjustable rate securities
described under "Changes In Financial Condition";
2. The secondary market purchase of $22.8 million in residential loans
that reprice annually based upon a margin over the One Year Treasury
Constant Maturities Index;
3. The secondary market purchase of $25.8 million in residential loans
structured as three/one adjustable rate loans whereby the rate is
fixed for the first three years of the loan's life and then reverts
to a one year adjustable that reprices based upon a margin over the
One Year Treasury Constant Maturities Index;
4. The adoption of a loan origination program which encourages the
generation of adjustable rate mortgages through favorable pricing to
the customer combined with incentives to the Company's sales force;
5. The introduction of three Prime Rate based home equity line
of credit products which have been marketed throughout the
Company's branch network, resulting in $4.3 million in credit
commitments outstanding at March 31, 1997; and
6. The development and marketing of additional core deposit transaction
products, which are typically less sensitive to interest rate
changes than certificates of deposit.
24
25
Management believes that, although investment in adjustable rate assets,
some of which present initial discount, or teaser, rates, may reduce short term
earnings below amounts obtainable through investment in fixed rate or higher
duration assets, an asset portfolio containing a greater percentage of
adjustable rate product reduces the Company's exposure to adverse interest rate
fluctuations and enhances longer term profitability and economic value. This is
consistent with the overall investment policy of the Company, which is designed
to manage its aggregate interest rate sensitivity, to generate a favorable
return without incurring undue interest rate risk, to supplement the Company's
lending activities, and to provide and maintain liquidity. However, there can be
no assurance that any substantial quantity of adjustable rate loans meeting the
Company's underwriting standards will be available in the future.
The Company has also utilized a variety of financial instruments to manage
its interest rate risk, including off balance sheet transactions such as
interest rate agreements including swaps, caps, and floors. The Company
originally entered into its existing off balance sheet positions to
synthetically adjust the duration of the Company's liabilities to more closely
match that of its assets. On July 10, 1995, the Association terminated four
interest rate swap contracts with an aggregate notional amount of $60 million,
invoking a termination fee of $4.9 million which, for accounting purposes, is
being amortized to interest expense over the individual remaining contract lives
of each swap.
25
26
During the nine months ended March 31, 1997, the Association amortized
$1.5 million of the deferred loss to interest expense, and charged interest
expense for $0.8 million related to current existing interest rate swaps with an
aggregate notional amount of $35 million. During the quarter ended March 31,
1997, the end of the amortization period for one of the terminated interest rate
swaps was realized, with the amortization of an additional terminated interest
rate swap concluding in the Company's fourth fiscal quarter ending June 30,
1997. The conclusion of these amortization periods will result in the
Association's reporting a reduction in interest expense and effective cost of
funding, all else held constant. Additional information concerning the
Association's current and terminated interest rate swap positions is provided in
the following table:
Summary Of Interest Rate Swaps
------------------------------
Active Interest Rate Swaps
--------------------------
Rate Basis Rate Basis
Notional Maturity Association Association Association Association Swap
Amount Date Receives Receives Pays Pays Resets
-------- ---- -------- -------- ---- ---- ------
$20,000,000 01/06/99 3 month LIBOR Actual/360 9.800% Fixed 360/360 quarterly
$15,000,000 01/30/99 3 month LIBOR Actual/360 7.274% Fixed 360/360 quarterly
Total $35,000,000
Terminated Interest Rate Swaps
------------------------------
Original 3/31/97 Loss Daily
Notional Termination Deferred Deferred Amortization Loss
Amount Date Loss Loss Completion Amortization
-------- ----------- -------- -------- ------------ ------------
$10,000,000 07/10/95 $557,730 $0 03/27/97 $890
$20,000,000 07/10/95 $1,338,145 $60,732 04/30/97 $2,024
$10,000,000 07/10/95 $631,816 $173,567 11/25/97 $726
$20,000,000 07/10/95 $2,328,601 $1,134,978 11/21/98 $1,892
Total $60,000,000 $4,856,292 $1,369,277 $5,532
26
27
Acquisitions
- ------------
The following tables provide information concerning the acquisition of
three branches from Hawthorne Savings, FSB and the acquisition of Palm Springs
Savings Bank. Each of these transactions generated intangible assets which
reduce regulatory capital and which are being amortized against income, as
detailed below.
Acquisition of Three Hawthorne Savings Branches
- -----------------------------------------------
Transaction Date 06/21/96
Deposits Acquired $185,189,446
Initial Core Deposit Intangible Created $6,642,079
Book Amortization Method / Term Straight Line / Seven Years
Tax Return Amortization Method / Term Straight Line / Fifteen Years
Monthly Pre-Tax Charge To Book Income $79,072
Monthly Book Amortization Reported As Non Operating Expense
Core Deposit Intangible Balance As Of 3/31/97 $5,930,427
Reduction In Regulatory Capital As Of 3/31/97 $5,930,427
Reduction In Tangible Book Value As Of 3/31/97 $5,930,427
27
28
Acquisition of Palm Springs Savings Bank ("PSSB")
- -------------------------------------------------
Transaction Date 09/27/96
Nature of Transaction Non Taxable Acquisition
Accounting Methodology Employed Purchase Accounting
Total Purchase Price $16,264,536
Less: Net Book Value of Assets & Liabilities Acquired $9,287,912
-----------
Premium Paid Over Net Book Value $ 6,976,624
Initial Accounting For The Acquisition Debits Credits
------ -------
Loan Premium Created $2,441,000
Core Deposit Intangible Created $9,445,475
Deferred Tax Liability On Loan Premium $1,008,284
Deferred Tax Liability On Core Deposit Intangible $3,901,567
Cash Payment For PSSB Shares Above Net Book Value $6,976,624
----------- -----------
Total $11,886,475 $11,886,475
----------- -----------
Book Amortization Method / Term
Loan Premium Effective Yield/Life Of Loans Acquired
Core Deposit Intangible Straight Line/Seven Years
Tax Return Amortization Method / Term
Loan Premium Not Tax Deductible Due To Non Taxable
Acquisition
Core Deposit Intangible Not Tax Deductible Due To Non Taxable
Acquisition
Monthly Pre-Tax Charge To Book Income
Loan Premium variable based upon loan amortization
Core Deposit Intangible: Gross / Net $112,446 / $65,999
Monthly Book Amortization Reported As
Loan Premium Reduction In Interest Income
Core Deposit Intangible Non Operating Expense
Nominal Deferred
Balances As Of 03/31/97 Assets Tax Liabilities Net
------- --------------- ---
Loan Premium $ 2,303,450 $ 951,467 $1,351,983
Core Deposit Intangible $ 8,770,799 $ 3,622,884 $5,147,915
------------ ----------- ----------
Total $ 11,074,249 $ 4,574,351 $6,499,898
Reduction In Regulatory Capital As Of 3/31/97
Loan Premium None
Core Deposit Intangible, Net $5,147,915
Reduction In Tangible Book Value As Of 3/31/97
Loan Premium None
Core Deposit Intangible, Net $5,147,915
28
29
Acquisition of Palm Springs Savings Bank ("PSSB")
- -------------------------------------------------
Subsequent Adjustment
- ---------------------
Adjustment Date 03/01/97
Nature of Adjustment Recognition of Additional Core Deposit
Intangible Resulting From Trigger of PSSB
Officer 24 Month Salary Continuation
Agreement
Additional Core Deposit Intangible Created $362,804
Book Amortization Method / Term Straight Line / 79 months
Tax Return Amortization Method / Term Straight Line / 24 months
Monthly Pre-Tax Charge To Book Income $4,592
Monthly Book Amortization Reported As Non Operating Expense
Core Deposit Intangible Balance As Of 3/31/97 $358,212
Reduction In Regulatory Capital As Of 3/31/97 $358,212
Reduction In Tangible Book Value As Of 3/31/97 $358,212
In March of 1997, the Association commenced payment to a former officer of
Palm Springs Saving Bank following the resignation of the executive while he was
covered under a salary continuation contract. The total payments due under the
contract were capitalized as an adjustment to the core deposit intangible
associated with the Palm Springs Savings Bank acquisition, as the potential cost
of the contract, which existed prior to the acquisition, was included within the
initial valuation of the core deposits acquired. The payments due under the
contract were not capitalized at the date of acquisition due to uncertainty
regarding whether the contract would be triggered; i.e. whether the executive
would remain with the Association. This adjustment to the core deposit
intangible will be amortized over the remaining initial life of the core deposit
intangible. Because the payments are taxable to the executive, the Association
can deduct the payments for tax purposes on a faster schedule than they will be
recognized for book reporting purposes, thus generating a deferred tax liability
under SFAS 109.
29
30
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, principal and
interest payments on loans, mortgage-backed and investment securities, retained
earnings and FHLB advances and other borrowings. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
prepayments from mortgage related assets are greatly influenced by general
interest rates, economic conditions, and competition. The Association has
continued to maintain the required minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 5%. The Association's liquidity ratio was 9.2% at March 31, 1997,
compared to 12.0 % at June 30, 1996. It is the Association's intent to maintain
liquidity in a 5-6% range to take advantage of higher interest income
opportunities from mortgage, commercial, and consumer related investments. The
ratio at June 30, 1996 appeared high because the Association was still in the
process of deploying funds on a more permanent basis that were acquired in the
purchase of three branch offices from Hawthorne Savings, FSB on June 21, 1996
that provided cash in the amount of $177.9 million. The ratio at March 31, 1997
was above management's longer term average target due to the operational need to
build excess liquidity at the end of March in preparation to fund anticipated
customer deposit withdrawals for the payment of property tax and income tax
liabilities in early April.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. See Statements of Cash Flows in the Consolidated Financial
Statements included herein. The Company's primary sources of funds during the
nine months ended March 31, 1997 were its excess liquidity at the beginning of
the period, principal repayments on loans and mortgage-backed and investment
securities, calls of investment securities, and proceeds from the sales of
available for sale mortgage-backed and investment securities.
The Company has other sources of liquidity if a need for additional funds
arises; including FHLB advances and various other types of wholesale borrowings.
At March 31, 1997, the Association had $50.0 million in advances outstanding
from the FHLB; a decline of $20.0 million from the amount outstanding at June
30, 1996. This decline resulted from the January 1997 prepayment, without
penalty, of a $20.0 million FHLB advance bearing an interest rate of 5.78%,
which was in excess of the marginal earnings rate available for the Company's
excess liquidity during the quarter ended March 31, 1997. The Company had no
other debt outstanding at March 31, 1997. The Association has available
significant unpledged collateral in the form of mortgage loans, mortgage backed
and related securities, and U.S. Government Agency Notes and Bonds that may be
used as collateral in securing financing for cash needs.
30
31
The Association must maintain capital standards as set forth by federal
regulations. As of March 31, 1997, these requirements are: 1) tangible capital
of 1.5 % of adjusted assets; 2) core capital of 4% of adjusted assets; and 3)
risk-based capital of 8.0 % of risk-weighted assets. At March 31, 1997, the
Association exceeded all minimum regulatory capital requirements as shown in the
table below:
PERCENT OF
ADJUSTED
AMOUNT TOTAL ASSETS
------ ------------
(DOLLARS IN THOUSANDS)
Tangible Capital
- ----------------
Actual capital $57,259 5.94%
Minimum required 14,466 1.50
------ ----
Excess $42,793 4.44%
======= =====
Core Capital
- ------------
Actual capital $57,259 5.94%
Minimum required 38,575 4.00
------ ----
Excess $18,684 1.94%
======= =====
PERCENT OF RISK -
AMOUNT WEIGHTED ASSETS
------ ---------------
Risk-based Capital
- ------------------
Actual capital $60,811 15.72%
Minimum required 30,944 8.00
------- ----
Excess $29,867 7.72%
======= =====
31
32
OTS regulations contain "prompt corrective action" provisions under which
insured depository institutions are to be classified into one of five categories
based primarily upon capital adequacy. The categories range from "well
capitalized" to "critically under capitalized." OTS guidelines define a "well
capitalized" institution as one which maintains:
C. A total risk-based capital ratio of 10% or greater,
D. A Tier 1 risk-based capital ratio of 6%
E. A core capital ratio of 5% or greater, and
F. Is not subject to any written capital order or directive to meet and
maintain a specific capital level of any capital measure.
The Association's Tier 1 risk based capital ratio as of March 31, 1997 was
14.80%. At March 31, 1997, the Association's regulatory capital levels exceed
the thresholds required to be classified as a "well capitalized" institution.
The Association's capital ratios detailed above do not reflect the additional
capital (and assets) maintained by the holding company.
On January 10, 1997, the Office Of Thrift Supervision ("OTS") issued
Thrift Bulletin #69: "Revised Rating System; Disclosure Of Component Ratings".
This Bulletin presented the adoption by the OTS of an updated Uniform Financial
Institutions Rating System ("FIRS"). The revised rating system is effective for
all examinations that begin after January 31, 1997. The OTS will also commence
disclosing individual component ratings for safety and soundness examinations to
thrift management and directors at the same time. The FIRS has historically been
referred to as the CAMEL rating system, which produced a composite rating of an
institution's overall condition and performance by assessing five rating
components: Capital adequacy, Asset quality, Management, Earnings, and
Liquidity. The revised rating system places additional emphasis on management's
effectiveness in identifying, measuring, monitoring, and controlling risk by
adding a sixth rating component: "Sensitivity to market risk", thereby changing
the common acronym to CAMELS. The new "S" component rating will address the
degree that changes in interest rates, commodity prices, and equity prices could
adversely affect an institution's earnings or economic capital. Management
believes that the new rating system will not materially impact the Company, as
the primary market price sensitivity maintained by the Company is interest rate
risk, which has been previously and regularly reviewed in conjunction with OTS
examinations.
Management believes that, under the current regulations, the Association
will continue to meet its minimum capital requirements in the coming year.
However, events beyond the control of the Association, such as changing interest
rates or a further downturn in the economy in the areas where the Association
has most of its loans, could adversely affect future earnings and, consequently,
the ability of the Association to meet its future minimum capital requirements.
32
33
Nonperforming and Classified Assets
- -----------------------------------
The following table sets forth information regarding non-accrual loans
delinquent 90 days or more and real estate acquired through foreclosure (REO-F).
MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
(DOLLARS IN THOUSANDS)
Non-accrual loans before valuation reserves $6,860 $1,301
Investment in REO before valuation reserves 5,534 1,460
------ ------
Total nonperforming assets $12,394 $2,761
======= ======
Nonperforming loans to gross loans 1.40% .56%
Non performing assets to total assets 1.26% .33%
The following graph presents information concerning classified assets. The
category "OAEM" refers to "other assets especially mentioned", or those assets
which present indications of potential future credit deterioration.
[A graph depicting month end balances of classified assets segregated by
category for the period June 1996 through March 1997, is presented. The
component categories are "Other Assets Especially Mentioned", "Substandard", and
"Loss". The graph illustrates how classified assets increased from $22.4
million on August 31, 1996 to $43.5 million at September 30, 1996 in conjunction
with the acquisition of Palm Springs Savings Bank in September of 1996. Since
then, classified assets have declined to $38.4 million at March 31, 1997.]
[GRAPHIC OMITTED]
OAEM SUBSTANDARD LOSS TOTAL
---- ----------- ---- -----
06-96 $11,070,083 $ 8,189,456 $3,139,484 $22,399,023
07-97 11,053,076 8,439,376 3,200,864 22,693,316
08-96 11,003,824 8,238,695 3,202,619 22,445,138
09-96 17,454,473 22,006,462 4,037,444 43,498,379
10-96 17,959,432 20,765,104 3,897,089 42,621,625
11-96 17,804,452 20,873,442 3,886,089 42,563,983
12-96 17,793,183 20,588,256 2,819,609 41,201,048
01-97 17,402,974 20,846,739 2,789,805 41,039,518
02-97 16,630,316 19,089,305 2,908,766 38,628,386
03-97 16,645,962 18,733,056 3,035,419 38,414,437
As detailed below, the Company experienced an anticipated significant
increase in classified assets upon the acquisition of PSSB in September, 1996.
During the six months since the acquisition, management has worked to reduce the
classified asset total through various means
33
34
including aggressive collection efforts, foreclosure with subsequent property
sales, and settlement of troubled assets for less than face value. As a result
of its due diligence process in conjunction with the acquisition of PSSB,
management required PSSB to recognize $2.2 million in additional loan and real
estate loss provisions prior to the consummation of the acquisition.
The Association adopted SFAS 114, as amended by SFAS 118, as of July 1,
1995 and recognized no impact upon adoption. A loan is considered impaired when
it is probable that the Association will be unable to collect all contractual
principal and interest in accordance with the terms of the loan agreement, when
a loan is ninety days or more past due, or when the loan has been classified as
"substandard" by an internal review process.
At March 31, 1997 the Association had impaired loans totalling $11.1
million, which have related specific reserves of $1.6 million; and there were
$5.6 million of impaired loans as of March 31, 1997 for which no specific
reserves had been recorded. Total impaired loans as of June 30, 1996 and
December 31, 1996 were $8.9 million and $19.9 million, respectively. The average
recorded investment in impaired loans during the nine month period ended March
31, 1997 was $16.3 million. The Association's impaired loans increased by $7.8
million during the nine months ended March 31, 1997, primarily due to $8.6
million in impaired loans obtained through the acquisition of PSSB.
Interest is accrued on impaired loans on a monthly basis except for those
loans that are 90 days or more delinquent (non-accrual loans). When a loan
becomes 90 days or more delinquent, the accrual of interest ceases and all
previously accrued interest is reversed. For the nine months ended March 31,
1997, accrued interest on impaired loans was $83,000 and interest of $577,000
was received in cash.
If all non-accrual loans had been performing in accordance with their
original loan terms and had been outstanding from the earlier of the beginning
of the period or origination, the Association would have recorded interest
income of $219,000 during the nine month period ended March 31, 1997.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. Management reviews the Association's loan
loss allowance on a monthly basis. In determining levels of risk, management
considers a variety of factors, including asset classifications, economic
trends, industry experience and trends, geographic concentrations, estimated
collateral values, management's assessment of the credit risk inherent in the
portfolio, historical loan loss experience, and the Association's underwriting
policies. The allowance for loan losses is maintained at an amount management
considers adequate to cover losses in loans receivable which are deemed probable
and estimable.
34
35
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize additions to the
allowance based on judgments different from those of management.
While management uses the best information available to make these
estimates, future adjustments to the allowances may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Association's control.
The following tables set forth activity in the Association's allowances
for estimated loan losses and estimated real estate losses during the nine
months ended March 31, 1997 and 1996:
Nine Months Ended March 31
--------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
Allowance for loan losses:
- --------------------------
Balance at June 30 $3,068 $2,694
Allowance Acquired from PSSB 2,963 --
Net Chargeoffs:
One to four family (674) (281)
Multifamily (26) --
Commercial real estate (70) (304)
Construction loans (217) (10)
Land/acquisition and development (154) (20)
Consumer (14) (20)
-------- --------
Total chargeoffs (1,155) (635)
Provision for estimated loan losses 309 613
------- -------
Balance at March 31 $5,185 $ 2,672
====== =======
35
36
Nine Months Ended March 31
--------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
Allowance for Losses: Real Estate Foreclosure
- ---------------------------------------------
Balance at June 30 $ 381 $ 532
Allowance acquired from PSSB 491 0
Net Chargeoffs (119) (30)
Provision for estimated real estate losses 65 89
------- -------
Balance at March 31 $ 818 $ 591
Allowance for Losses: Real Estate-Development
- ---------------------------------------------
Balance at June 30 $1,536 $1,395
Allowance acquired from PSSB 0 0
Net Chargeoffs (1,008) 0
Provision for estimated losses 49 153
------ ------
Balance at March 31 $ 577 $1,548
Total Allowances For Real Estate Losses $1,395 $2,139
====== ======
The ratio of allowance for estimated loan losses to gross loans decreased
from 1.33% at June 30, 1996 to 1.06% at March 31, 1997 due to:
1. a significant increase in gross loans over the nine month period as a
result of:
a. increased originations,
b. whole loan purchases, and
c. the acquisition of $175.9 million in gross loans associated with
PSSB.
2. an increase in the volume of net charge-offs; which primarily resulted
from cycling some of the problem loans acquired from PSSB through to
foreclosure or other credit settlement.
36
37
The ratio of allowance for estimated loan losses to gross non-performing
loans decreased from 235.75% at June 30, 1996, to 75.58% at March 31, 1997 due
primarily to an increase in non performing loans, from $1.3 million at June 30,
1996 to $6.9 million at March 31, 1997. The increase in non-performing loans was
largely attributable to loans acquired from Palm Springs Savings Bank; as $4.6
million of the $6.9 million in non performing loans as of March 31, 1997 were
originated by Palm Springs Savings Bank prior to its acquisition by Hemet
Federal.
The ratio of allowance for total estimated losses to total non-performing
assets decreased from 94.18% at June 30, 1996 to 48.43% at March 31, 1997,
primarily due to an increase in the level of non-performing assets of $ 9.6
million. Such increase is a result of higher levels of non-performing loans of
$5.5 million and real estate owned from foreclosure of $4.1 million. At March
31, 1997, the Company's inventory of foreclosed properties and related valuation
reserves was composed as follows:
(Dollars in thousands)
Gross Valuation Net Percent
Type Of Property Balance Reserves Balance Of Total
---------------- ------- -------- ------- --------
Residential 1 - 4 Units $2,166 $304 $1,862 39.48%
Multifamily > 4 Units 187 26 161 3.41%
Commercial / Industrial 1,061 0 1,061 22.50%
Land / Developed Lots 2,120 488 1,632 34.61%
------ ---- ------ ------
Total REO-F $5,534 $818 $4,716 100.00%
The Association accounts for real estate owned through foreclosure (REO-F)
at fair market value upon acquisition, and management believes that adequate
valuation reserves have been established based upon current and projected market
conditions.
37
38
Comparison of Operating Results for the Three Months and Nine Months Ended March
- --------------------------------------------------------------------------------
31, 1997 and 1996
- -----------------
GENERAL: The Company reported net earnings of $357,000 or $0.06 per share for
- -------
the three months ended March 31, 1997, compared to net earnings of $799,000 or
$0.13 per share for the same quarter during the prior year. During the quarter
ended March 31, 1996, the Company benefitted from $373,000 in interest on an
income tax refund credited to Other Income ($219,000 addition to net income) and
a $176,000 tax credit received from the California Franchise Tax Board. During
the quarter ended March 31, 1997, the Company realized the final conversion and
integration costs associated with the September 27, 1996 acquisition of Palm
Springs Savings Bank, increasing general & administrative expenses by $100,000.
By March 31, 1997, all staff consolidations and other operating expense
reductions associated with the acquisition were completed.
When comparing results for the quarter ended March 31 for current and prior
year, net interest income, operating fee revenue, and general & administrative
expenses are all considerably higher in 1997 than prior year due to the purchase
of three savings branches from Hawthorne Savings in June of 1996, the
acquisition of Palm Springs Savings Bank, and internal growth, particularly in
loan origination volume, experienced over the past year.
For the nine months ended March 31, 1997, the Company reported a net loss of
$1.3 million or $(0.22) per share. This loss primarily resulted from a $4.8
million pre-tax charge ($2.8 million on an after tax basis) associated with the
one time SAIF assessment assessed against all SAIF insured financial
institutions and realized by the Company in the quarter ended September 30,
1996. Exclusive of this non recurring charge, the Company's earnings for the
nine months ended March 31, 1997 would have been $1.5 million, or $0.26 per
share. For the nine months ended March 31, 1996, the Company reported net
earnings of $1.6 million, or $0.25 per share. Current fiscal year to date
results were unfavorably impacted by non recurring costs associated with the
integration of Palm Springs Savings Bank.
NET INTEREST INCOME: Net interest income increased from $4.3 million during the
- -------------------
quarter ended March 31, 1996 to $5.7 million during the quarter ended March 31,
1997; a rise of 34.9%. This increase resulted from both a rise in interest
earning assets and an improvement in the net interest margin realized on earning
assets. Average net interest earning assets rose from $714.9 million to $929.8
million (30.1%), while the average margin on net earning assets increased from
2.38% to 2.47%. The net interest margin on earning assets during the most recent
quarter was constrained versus that of the same quarter in the prior year by a
decline in the ratio of interest earning assets to interest bearing liabilities,
from 1.12 at March 31, 1996 to 1.07 at March 31, 1997. This reduction largely
stemmed from the core deposit intangibles recognized in conjunction with the
Hawthorne Savings branch purchase and the Palm Springs Savings Bank acquisition.
Net interest income rose $4.7 million or 39.7% from $11.8 million for the nine
months ended March 31, 1996 to $16.5 million for the nine months ended March 31,
1997. Similar to the results for the most recent quarter, the fiscal 1997 year
to date net interest income benefitted from both a rise in average interest
earning assets (from $671.8 million to $901.3 million, or 34.2%) and in increase
in the net interest margin on earning assets (from 2.35% to 2.45%) versus the
prior year.
38
39
INTEREST INCOME: Interest income increased $3.9 million, or 29.3%, from $13.2
- ---------------
million for the quarter ended March 31, 1996 to $17.1 million for the quarter
ended March 31, 1997. Interest income from loans doubled from the prior year
quarter, from $4.5 million to $9.0 million, as a 109.4% rise in average net
loans outstanding was somewhat offset by a reduction in average effective
portfolio rate from 8.29% to 7.94%. Interest from mortgage backed securities
declined 20.3% from $4.8 million in the quarter ended March 31, 1996 to $3.8
million in the quarter ended March 31, 1997, as there were $52.3 million (16.4%)
less in average balances outstanding during the current quarter and because
during the second fiscal quarter of 1997 $34.0 million in higher rate, higher
duration mortgage backed securities were sold in conjunction with the Company's
asset / liability management. Interest income and dividends from investment
securities rose $0.3 million, or 8.1%, from $4.0 million for the quarter ended
March 31, 1996 to $4.3 million for the quarter ended March 31, 1997.
For the nine months ended March 31, 1997, interest income was $49.4 million,
$12.6 million (34.2%) greater than the same period of the prior year. The
interest income results for the nine months year to date paralleled that of the
latest quarter, with interest from loans and interest and dividends from
investment securities increasing significantly, while interest income from
mortgage backed securities declined in association with the balance sheet
changes resulting from the acquisitions during the past year combined with
management's efforts to more effectively employ capital in whole loans versus
mortgage backed securities. Average interest earning assets rose from $671.8
million during the first nine months of fiscal 1996 to $901.3 million during the
first nine months of fiscal 1997, an increase of 34.2%. This rise in average
earning assets generated all of the year to year increase in interest income, as
the average effective rate on earning assets remained constant at 7.30% during
both nine month periods.
INTEREST EXPENSE: Interest expense rose from $9.0 million during the three
- -----------------
months ended March 31, 1996 to $11.3 million during the three months ended March
31, 1997, an increase of 26.6%, as average interest bearing liabilities rose
35.8%, somewhat offset by a reduction in the average effective cost of interest
bearing liabilities from 5.62% during the 1996 period to 5.24% during the
current year period. Interest expense on deposits rose from $5.9 million for the
three months ended March 31, 1996 to $9.9 million for the same period in fiscal
1997, an increase of 66.9% generated by a similar rise in average balances.
Interest expense on borrowings declined significantly from $2.3 million during
the quarter ended March 31, 1996 to $0.7 million during the quarter ended March
31, 1997, as the Company replaced maturing FHLB advances and prepaid $20.0
million in FHLB advances with deposits from its two acquisitions.
Interest expense for the nine months ended March 31, 1997 totaled $32.8 million,
up $7.9 million or 31.5% from the same period during the prior year. The
weighted average effective cost of interest bearing liabilities declined from
5.63% during the nine months ended March 31, 1996 to 5.22% during the nine
months ended March 31, 1997. This reduction in the cost of interest bearing
liabilities resulted from decreases in average effective costs for both deposits
(5.01% to 4.81%) and borrowings (5.37% to 5.28%). In addition, the net cost of
the Company's interest rate swaps (both terminated and active), while down
$85,000 or 3.5% from year to year, also presented a smaller average cost impact
on the larger average balance sheet maintained by the Company during the current
fiscal year. The aforementioned reductions in average costs, however, were more
than offset by interest bearing liability average balance increases in
generating a greater nominal total for year to date interest expense in fiscal
1997 than during the prior year. Specifically, average interest
39
40
bearing deposit accounts rose 64.9% from $470.1 million for the nine months
ended March 31, 1996 to $776.5 million for the nine months ended March 31, 1997.
PROVISION FOR ESTIMATED LOAN LOSSES: The provision for estimated loan losses
- -------------------------------------
decreased by $318,000 or 75.9% from $419,000 for the quarter ended March 31,
1996 to $101,000 during the quarter ended March 31, 1997. The provision for
estimated loan losses for the nine month period ended March 31, 1997 decreased
$313,000, or 50.3%, from $622,000 during the nine month period ended March 31,
1996. The balance of the allowance for estimated loan losses (both general and
specific) increased from $2.7 million at March 31, 1996 to $5.2 million at March
31, 1997, as $3.0 million in allowances added by the Palm Springs Savings Bank
acquisition were somewhat offset by the charge off of specifically identified
and reserved credit losses highlighted during the due diligence process prior to
acquisition. Total non-performing loans as of March 31, 1997 were $6.9 million,
up from $2.4 million one year earlier, with $4.6 million of the non-performing
loans as of March 31, 1997 originated by Palm Springs Savings Bank prior to the
acquisition. The ratio of non-performing loans to gross loans increased from
1.06% at March 31, 1996 to 1.40% at March 31, 1997, as the portfolio acquired
from Palm Springs Savings Bank presented a higher proportion of problem credits
than that historically experienced by Hemet Federal prior to the acquisition.
OTHER INCOME & EXPENSE: Other income & expense decreased from $543,000 in income
- ----------------------
for the three months ended March 31, 1996 to a $52,000 in expense for the three
months ended March 31, 1997 due to the non recurring receipt of $373,000 in
interest on an income tax refund from the California Franchise Tax Board in the
1996 period and because of $579,000 in amortization of intangible assets during
the 1997 period following the Hawthorne Savings branch purchases and the
acquisition of Palm Springs Savings Bank. Partially offsetting the above two
items was an increase in savings fees, from $151,000 during the three months
ended March 31, 1996 to $400,000 during the three months ended March 31, 1997.
This increase resulted from the addition of deposit accounts from the two
acquisitions combined with the continuing community banking and transaction
services focus of the Company.
For the nine months ended March 31, other income & expense rose to $870,000 in
1997 from $753,000 during 1996 because of $1.0 million in gains on the sale of
mortgage backed and investment securities during the 1997 fiscal year, for which
no comparable activity occurred during the prior fiscal year. These security
gains combined with higher savings fees to more than offset the non recurrence
of the income from the interest on the State tax refund described above and the
recognition of $1.4 million in amortization of intangible assets during year to
date fiscal 1997. During the 1997 fiscal year, the Company has also commenced a
limited mortgage banking operation, whereby certain credit products (e.g. FHA
and VA loans) are originated for sale to various conduits in the secondary
market. Fiscal 1997 year to date gains on loan sales totaled $20,000. The
Company anticipates greater activity in this regard in coming periods, should
market conditions support the continued origination of applicable products.
40
41
GENERAL & ADMINISTRATIVE EXPENSES: General & administrative expenses increased
- ----------------------------------
by $1.6 million or 48.7% from $3.3 million to $4.9 million for the quarters
ended March 31, 1996 and 1997, respectively. This increase was primarily
attributable to the additional operating overhead associated with a branch
network which expanded from 12 to 19 full service locations over the past year,
with a related increase in the number of deposit accounts serviced from 37,785
to 58,992. The increase also stemmed from the Company's implementation of a
consolidated loan service center facility during the second fiscal quarter of
1997, as the number of mortgage loans serviced expanded from 2,885 at March 31,
1996 to 4,498 at March 31, 1997. General & administrative expenses expressed as
a percentage of average total assets increased from 1.78% during the three
months ended March 31, 1996 to 1.97% during the three months ended March 31,
1997, as the final non recurring expenses associated with the Palm Springs
Savings Bank integration were realized during the most recent quarter. The 1.97%
figure compares favorably to the 2.18% ratio of general & administrative
expenses to average total assets experienced during the second fiscal quarter
ended December 31, 1996.
General & administrative expenses for the nine months ended March 31, 1997 were
$19.2 million, double those for the comparable period in the prior year.
However, the 1997 fiscal year figure included a one-time FDIC insurance
assessment of $4.8 million as mandated to recapitalize the SAIF insurance fund.
Excluding the one-time SAIF assessment. total general & administrative costs
were $14.4 million and $9.6 million for the nine months ended March 31, 1997 and
1996, respectively. Expenses for salaries and employee benefits rose from $5.0
million during the nine months ended March 31, 1996 to $7.0 million during the
nine months ended March 31, 1997 due to increases in staffing associated with
the significant expansion in the Company, including the addition of seven full
service branches. General & administrative expenses excluding the one time SAIF
assessment expressed as a percentage of average total assets rose to 2.00%
during fiscal year to date 1997 versus 1.83% during the prior year. In addition
to the operating expense savings now implemented in conjunction with the
integration of the two acquisitions, the Company has during the current fiscal
year reduced its benefit accrual rate for its defined benefit pension plan, and
commenced a series of other initiatives as part of a comprehensive effort to
improve the efficiency of the organization.
INCOME TAXES: Income tax expense increased from $296,000 for the quarter ended
- ------------
March 31, 1996 to $346,000 during the quarter ended March 31, 1997 despite a
reduction in pre tax income due to the receipt of a tax credit from the
California State Franchise Tax Board in the amount of $176,000 during the 1996
quarter. The Company's nominal tax rate remained substantially unchanged between
current and prior year. For the nine months ended March 31, income tax expense
decreased from $839,000 in 1996 to a benefit of $788,000 in 1997 due to the year
to date loss in fiscal 1997 stemming from the one-time SAIF assessment.
41
42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not involved in any material pending legal proceedings
other than routine legal proceedings occurring in the ordinary
course of business. Such other routine legal proceedings in the
aggregate are believed by management to be immaterial to the Company's
financial condition or results of operations.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
(3) (i) Articles of Incorporation*
(ii) By-laws*
(4) Stock Certificate*
(27) Financial Data Schedule
B. Reports on Form 8-K
(1) A report on Form 8-K/A was filed with the Securities and Exchange
Commission on February 26, 1997, under commission file number 0-25722
reflecting a revision to the previously filed pro forma financial
information required by Article 11 of Regulation S-X regarding the
acquisition of Palm Springs Savings Bank which was completed as of the
close of business on September 27, 1996.
- ------------------------------------
*Incorporated herein by reference into this document from the Exhibits to Form
S-1 Registration Statement and any amendments thereto, filed March 14, 1994,
Registration No. 33-90286.
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43
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.
HF BANCORP INC.
(Registrant)
Date: May 9, 1997 By: /s/ J. Robert Eichinger
------------------------
J. Robert Eichinger
Chairman/President
Chief Executive Officer
Date: May 9, 1997 By: /s/ Mark R. Andino
-------------------
Mark R. Andino
Vice President/Treasurer
43