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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 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
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE NASDAQ STOCK MARKET
(Title of Class) (Name of exchange on which registered)
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 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The number of shares outstanding for each of the registrant's classes of
common stock issued and outstanding as of September 5, 1997 was 6,281,875.
The aggregate market value of the voting stock held by "non-affiliates" of
the registrant (i.e., persons other than the directors and executive officers of
the registrant) was $ 89,696,012 based upon the last sales price as quoted on
The NASDAQ Stock Market for September 5, 1997.
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HF BANCORP, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
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Item 1. Description of Business..................................... 5
General.................................................. 5
Market Area and Competition.............................. 9
Weakness in the Regional Economy......................... 9
Employees................................................ 10
Effect of Governmental Policies.......................... 10
Regulation and Supervision............................... 10
Capital Requirements and Capital Categories.............. 13
Safety and Soundness Standards........................... 16
Potential Enforcement Actions............................ 18
Premiums for Deposit Insurance........................... 19
Transactions with Related Parties........................ 20
Community Reinvestment Act............................... 21
Qualified Thrift Lender Test............................. 21
Limitation on Capital Distributions...................... 22
Liquidity ............................................... 22
Branching ............................................... 23
Restrictions on Investments and Loans.................... 23
Classification of Assets................................. 24
Federal Home Loan Bank System............................ 25
Federal Reserve System................................... 25
Federal Securities Laws.................................. 26
Non Banking Regulation................................... 26
Federal and State Taxation............................... 27
Financial Industry Reform Legislation.................... 28
Federal Judicial Review.................................. 29
Factors that May Affect Future Results................... 29
Additional Item: Executive Officers...................... 30
Item 2. Properties ................................................ 31
Item 3. Legal Proceedings........................................... 32
Item 4. Submission of Matters to a Vote of Security Holders......... 32
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PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.............................. 32
Item 6. Selected Financial Data..................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 37
Overview ............................................... 37
Analysis of the Results of Operations.................... 42
Overview ................................................ 42
Net Interest Income ..................................... 42
Asset / Liability Management ............................ 46
Provision for Estimated Loan Losses ..................... 50
Other Income / Expense .................................. 51
Subsidiary activities ................................... 52
General & Administrative Expenses ....................... 52
Income Taxes ............................................ 53
Analysis of Financial Condition ......................... 54
Overview ............................................... 54
Securities Portfolio .................................... 54
Loans. . . . ......................................... 56
Credit Quality .......................................... 62
Intangible Assets ....................................... 67
Deposits. . ............................................. 70
Borrowings .............................................. 71
Liquidity .............................................. 73
Capital Resources ....................................... 74
Off Balance Sheet ....................................... 75
Impact of Inflation & Changing Prices ................... 76
Recent Accounting Pronouncements ........................ 76
Item 8. Financial Statements and Supplementary Data................. 77
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 131
PART III
Item 10. Directors and Executive Officers of the Registrant......... 131
Item 11. Executive Compensation..................................... 131
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 131
Item 13. Certain Relationships and Related Transactions............. 131
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................ 132
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INTRODUCTION
In addition to historical information, this document may include certain
forward looking statements within the meaning of the Private Securities Reform
Act of 1995 (the "Reform Act"). These forward looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market, and statements regarding the Company's mission and vision. These
forward looking statements are based upon current management expectations, and
therefore may involve risks and uncertainties. The Company's actual results,
performance, or achievements may differ materially from those suggested,
expressed, or implied by the forward looking statements due to a wide range of
factors, including:
o vacillation in general economic conditions
o legislative and regulatory changes
o monetary and fiscal policies of the federal government
o changes in tax policies, rates and regulations of federal, state, and
local tax authorities
o fluctuations in interest rates
o variation in the cost of funds
o changes in demand for the Company's products and services
o actions by competitors
o changes in the composition of the Company's loan and investment portfolios
o variation in the credit quality of the Company's assets
o alterations in accounting principles, policies, or guidelines
o changes in other economic, competitive, government, and technological
factors
Further description of the risks and uncertainties to the Company and its
business are presented in "Item 1. Description Of Business -- Factors That May
Affect Future Results".
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
H.F. Bancorp, Inc. (referred to herein on an unconsolidated basis as "HFB"
and on a consolidated basis as the "Company") 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 & Loan
Association (the "Bank") upon its conversion from a federally chartered mutual
savings association to a federally chartered stock savings association. On June
30, 1995, the Company completed its sale of 6,612,500 shares of common stock,
and used approximately 50% of the $51.1 million in net proceeds to purchase all
of the Bank's common stock issued in the Bank's conversion to stock form. Such
business combination was accounted for at historical cost in a manner similar to
a pooling of interests.
HFB's principal business is to serve as a holding company for the Bank and
for other banking or banking related subsidiaries which the Company may
establish or acquire. As a legal entity separate and distinct from its
subsidiaries, HFB's principal source of funds is its existing capital and
assets, and future dividends paid by and other funds advanced from its
subsidiaries. Legal limitations are imposed on the amount of dividends that may
be paid and loans that may be made by the Bank to HFB ( See "Item 1. Description
of Business -- Supervision and Regulation"). HFB's common stock is listed on the
Nasdaq National Market ("NASDAQ") under the symbol "HEMT".
At June 30, 1997, the Company had $984.7 million in total assets, $484.3
million in total net loans receivable, and $839.7 million in total deposits. 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"). The principal executive offices of the Company and
the Bank are located at 445 East Florida Avenue, Hemet, California, 92543,
telephone number (909) 658 - 4411, toll free (800) 540-4363, facsimile number
(909) 925 - 5398. The Bank is a member of the Federal Home Loan Bank of San
Francisco ("FHLB") and its deposit accounts are insured by the FDIC through the
Savings Association Insurance Fund ("SAIF") to the maximum extent permitted by
law.
On September 27, 1996, the Bank consummated the acquisition of Palm
Springs Savings Bank ("PSSB") by purchasing, for cash, their 1,131,446 shares of
common stock for $16.3 million. The acquisition was accounted for under purchase
accounting guidelines and therefore generated intangible assets (See "Item 7.
Management's Discussion And Analysis Of Financial Condition And The Results Of
Operations -- Intangible Assets").
On June 21, 1996, the Bank entered the Northern San Diego County market
through the purchase of three branch offices and the assumption of deposit
liabilities totaling $185.2 million from Hawthorne Savings Bank. In conjunction
with the purchase, the Bank generated a core deposit
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intangible of $6.6 million, or 3.6% of the deposits assumed. (See "Item 7.
Management's Discussion And Analysis Of Financial Condition And The Results Of
Operations -- Acquisitions").
The consolidated financial statements include the accounts of HF Bancorp,
Inc., and its wholly owned subsidiary Hemet Federal Savings & Loan Association
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 Bank, conducts 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.
The Company conducts business from nineteen branch offices and one
centralized loan servicing center, located as follows:
Greater Hemet / San Jacinto Valley Area
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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
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Oceanside Cathedral City
Rancho Bernardo Desert Hot Springs
Vista Palm Springs
Rancho Mirage
Greater City of Riverside Area Southwestern Riverside County
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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.
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Through its network of banking offices, the Bank emphasizes personalized
service focused upon two primary markets: households and small businesses. The
Bank offers a wide complement of lending products, including:
o a broad array of residential mortgage products, both fixed and adjustable
rate
o consumer loans, including home equity lines of credit, auto loans, and
personal lines of credit
o specialized financing programs to support community development
o mortgages for apartments
o commercial real estate loans
o construction lending
o commercial loans to businesses, including both revolving lines of credit
and term loans
The Bank also provides an extensive selection of deposit instruments.
These include:
o multiple checking products for both personal and business accounts
o various savings accounts, including those for minors
o tiered money markets accounts
o tax qualified deposit accounts (e.g. IRA's)
o a broad array of certificate of deposit products, with terms from 7 days
to 7 years
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The Bank also supports its customers by functioning as a federal tax
depository, providing merchant bankcard services, and supplying various forms of
electronic funds transfer. In addition, the Bank, through third party
relationships, makes various non FDIC insured investment products available to
its customers, including mutual funds and selected insurance related products.
The Company participates in the wholesale capital markets through the
management of its security portfolio and its use of various forms of wholesale
funding. The Company's security portfolio contains a variety of instruments,
including callable debentures, fixed and adjustable rate mortgage backed
securities, and collateralized mortgage obligations. The Company also
participates in the secondary market for loans as both a purchaser and a seller
of various types of mortgage products.
The Company's revenues are derived from interest on its loan and mortgage
backed securities portfolios, interest and dividends on its investment
securities, and its fee income associated with the provision of various customer
services. The Company's primary sources of funds are deposits, principal and
interest payments on its asset portfolios, and various sources of wholesale
borrowings including FHLB advances and reverse repurchase agreements. The
Company's most significant operating expenditures are its staffing expenses and
the costs associated with maintaining its branch network.
Additional information concerning the Company's business is presented
under Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations", which is incorporated herein by reference.
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MARKET AREA AND COMPETITION
The banking and financial services business in California generally, and
in the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result of:
o changes in regulation, technology, and product delivery systems, whereby
the Bank must compete with both (i) in market entities and (ii) remote
entities soliciting customers via electronic means
o the accelerating pace of consolidation among financial institutions and
the continuing mergers among commercial and investment banks
o the growth of nonbank financial services providers
The Bank competes for loans, deposits, and customers for financial
services with commercial banks, savings & loans, credit unions, thrift & loans,
securities and brokerage companies, mortgage companies, insurance firms, finance
companies, mutual funds, and other non bank service providers. Many of these
competitors are much larger than the Bank in total assets, market reach, and
capitalization; and enjoy greater access to capital markets and can offer a
broader array of products and services than the Bank can legally furnish.
In order to compete with other financial services providers, the Bank
relies upon local community involvement, personal service and the resulting
personal relationships of its staff and customers, and specialized products and
services tailored to meet its customers' needs.
WEAKNESS IN THE REGIONAL ECONOMY
Although recently improving, Southern California, including the Bank's
market area, has, throughout much of the 1990's, experienced reduced employment
and recessionary economic conditions as a result of the downsizing of the
defense industry, a slowdown in construction, and corporate mergers and
relocations. This economic backdrop led to a general weakening of real estate
values, which in some of the Bank's market areas have yet to recover to
pre-recessionary levels. The volume and quality of the Bank's loan portfolio has
been impacted by these conditions. While the Bank has experienced a general
improvement in its aggregate credit profile over the past several quarters,
there can be no assurance that the Southern California economy and real estate
market will not deteriorate; or that such deterioration, if it occurs, will not
present an adverse impact on the Company's financial condition or results of
operations.
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EMPLOYEES
As of June 30, 1997, the Company had 201 full-time employees and 74
part-time employees. The employees are not represented by a collective
bargaining unit. The Company considers its employee relations to be
satisfactory.
EFFECT OF GOVERNMENTAL POLICIES
Banking is a business that depends, in large part, upon interest rate
differentials. In general, the difference between the interest rates paid by the
Bank on its deposits and other sources of funds and the interest rates received
by the Bank on its loan and investment portfolios constitutes the major portion
of the Bank's earnings. These interest rates are highly sensitive to many
factors which are beyond the control of the Bank. Accordingly, the earnings and
growth of the Bank and the Company are subject to the influence of domestic and
foreign economic conditions, including inflation, recession, and unemployment.
The banking business is not only affected by general economic conditions,
but is also significantly influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, including the
Federal Reserve Board ("FRB"). The FRB implements national monetary policies
(with objectives such as curbing inflation and avoiding recession) by its open
market operations in United States Government securities, by changing the
required level of reserves for applicable financial firms, and by adjusting the
discount rate used for borrowings by depository institutions. The actions of the
FRB in these areas influence the demand for loans and the interest rates
associated with many of the Bank's products. The nature and impact of any future
policy changes by the FRB cannot be predicted.
REGULATION AND SUPERVISION
General
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Financial institution holding companies and insured depository
institutions are extensively regulated under both federal and state law. Set
forth below is a summary description of certain laws and regulations which
relate to the operation of the Company and its subsidiaries. The following
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
HFB, as a savings & loan holding company, is required to file certain
reports with, and otherwise comply with the rules and regulations of, the OTS
under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of the Bank are governed by the HOLA and the Federal Deposit
Insurance Act ("FDIA").
The Bank is subject to extensive regulation, examination, and supervision
by the OTS, as its primary federal regulator, and the FDIC, as the insurer of
customer deposits. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition. In addition, the
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Bank must obtain various regulatory approvals prior to conducting certain types
of business or entering into selected transactions; e.g. acquisitions of other
financial institutions. The OTS and / or the FDIC conduct periodic examinations
of the Bank's safety and soundness, its operations (including technology
utilization), and its compliance with applicable laws and regulations, including
the Community Reinvestment Act ("CRA"), the Real Estate Settlement Procedures
Act ("RESPA"), and the Bank Secrecy Act ("BSA"). These examinations are
primarily conducted for the protection of the SAIF, and are not intended to
provide any assurance to investors in the Company's common stock.
The regulatory structure provides the supervisory authorities with
extensive discretion across a wide range of the Company's operations, including,
but not limited to:
o loss reserve adequacy
o capital requirements
o credit classification
o limitation or prohibition of dividends
o assessment levels for deposit insurance and examination costs
o permissible branching
Any change in regulatory requirements or policies, whether by the OTS, the
FDIC, the FRB, or Congress, could have a material adverse impact on the Company.
Holding Company Regulation
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HFB is a non diversified unitary savings & loan holding company within the
meaning of the HOLA. As such, HFB will generally not be restricted under
existing laws as to the types of business activities in which it may engage,
provided that the Bank continues to be a qualified thrift lender ("QTL").
However, a number of potential laws are being debated in Congress which could
significantly alter the business and regulatory environment in which HFB and its
subsidiaries may operate (See "Item 1. Financial Institution Reform
Legislation").
Upon any non supervisory acquisition by the Company of another savings
institution or savings bank which that meets the QTL test and is deemed to be a
savings institution by the OTS, the Company could then become a multiple savings
& loan holding company (if the acquired institution is maintained as a separate
subsidiary), and would then be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings & loan holding company and its non FDIC insured subsidiaries
primarily to those activities permissible for bank holding companies under
Section 4(c)(8)of the Bank Holding Company Act ("BHCA") and certain other
activities authorized by OTS regulations.
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The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from:
1) acquiring more than 5% of the voting stock of another savings institution
or holding company thereof, without prior written approval of the OTS;
2) acquiring or retaining, with certain exceptions, more than 5% of a non-
subsidiary company engaged in activities other than those permitted by the
HOLA;
3) acquiring or retaining control of a depository institution that is not
insured by the FDIC.
In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and the institution involved, the effect of the
acquisition on the risk to the deposit insurance funds, the convenience and
needs of the community, and competitive factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions:
(A) the approval of interstate supervisory acquisitions by savings & loan
holding companies and
(B) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit
interstate savings & loan holding company acquisitions.
Although savings & loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS in its examination of the safety and soundness of the insured
depository institution. The OTS also has authority to order cessation of
activities or divestiture of holding company subsidiaries deemed to pose a
threat to the safety and soundness of the insured depository institution.
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CAPITAL REQUIREMENTS AND CAPITAL CATEGORIES
FIRREA Capital Requirements. OTS capital regulations, as mandated by the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"),
require savings institutions to meet three minimum capital standards (as defined
by applicable regulations):
o a 1.5% tangible capital ratio
o a 3.0% leverage (core) capital ratio
o an 8.0% risk-based capital ratio
The capital standards applicable to savings institutions must be no less
stringent than those for national banks. In addition, the prompt corrective
action ("PCA") standards discussed below also establish, in effect, the
following minimum standards:
o a 2.0% tangible capital ratio
o a 4.0% leverage (core) capital ratio (3.0% for institutions receiving the
highest regulatory rating under the CAMELS rating system)
o a 4.0% Tier One risk based capital ratio
The OTS also has the authority, after giving the affected institution
notice and an opportunity to respond, to establish specific minimum capital
requirements for a single institution which are higher than the general industry
minimum requirements presented above. The OTS can take this action upon a
determination that a higher minimum capital requirement is appropriate in light
of an institution's particular circumstances.
Tangible capital is composed of:
o common stockholders' equity (including retained earnings)
o certain noncumulative perpetual preferred stock and related earnings
o minority interests in equity accounts of consolidated subsidiaries
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less:
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o intangible assets other than certain asset servicing rights
o investments in and loans to subsidiaries engaged in activities as
principal, not permissible for a national bank
o deferred tax assets as defined under Statement of Financial Accounting
Standards ("SFAS") Number 109 - "Accounting for Income Taxes" in excess of
certain thresholds
Core capital consists of tangible capital plus various adjustments for
certain intangible assets. At June 30, 1997 and 1996, the Bank's tangible
capital was equivalent to its core capital, as the Bank did not maintain any
qualifying adjustments. In general, total assets calculated for regulatory
capital purposes exclude those assets deducted from capital in determining the
applicable capital ratio.
The risk based capital standard for savings institutions requires the
maintenance of Tier One capital (core capital) and total capital (defined as
core capital plus supplementary capital) to risk weighted assets of 4.0% and
8.0%, respectively. In determining the amount of an institution's risk weighted
assets, all assets, including certain off balance sheet positions, are
multiplied by a risk weight of 0.0% to 100.0%, as assigned by OTS regulations
based upon the amount of risk perceived as inherent in each type of asset. The
components of supplementary capital include:
o cumulative preferred stock
o long term perpetual preferred stock
o mandatory convertible securities
o certain subordinated debt
o intermediate preferred stock
o the general allowance for loan and lease losses, subject to a limit of
1.25% of risk weighted assets
Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100.0% of core capital.
As disclosed in the footnotes to the Company's audited consolidated
financial statements, at June 30, 1997, the Bank exceeded all minimum regulatory
capital requirements.
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FDICIA PCA Regulations. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") dictated that the OTS implement a system
requiring regulatory sanctions against institutions that are not adequately
capitalized, with the sanctions growing more severe the lower institution's
capital. The OTS has established specific capital ratios under the PCA
Regulations for five separate capital categories:
1. well capitalized
2. adequately capitalized
3. under capitalized
4. significantly under capitalized
5. critically undercapitalized
Under the OTS regulations implementing FDICIA, an insured depository
institution will be classified in the following categories based, in part, on
the following capital measures:
Well Capitalized
- ----------------
Total risk based capital ratio of at least 10.0%
Tier One risk based capital ratio of at least 6.0%
Leverage ratio of at least 5.0%
Adequately Capitalized
- ----------------------
Total risk based capital ratio of at least 8.0%
Tier One risk based capital ratio of at least 4.0%
Leverage ratio of at least 4.0%
Under Capitalized
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Total risk based capital ratio of less than 8.0%
Tier One risk based capital ratio of less than 4.0%
Leverage ratio of less than 4.0%
Significantly Under Capitalized
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Total risk based capital ratio of less than 6.0%
Tier One risk based capital ratio of less than 3.0%
Leverage ratio of less than 3.0%
Critically Under Capitalized
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Tangible capital of less than 2.0%
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An institution that, based upon its capital levels, is classified in one
of the top three categories may be regulated as though it were in the next lower
capital category if the appropriate federal banking agency, after notice and an
opportunity for hearing, determines that the operation or status of the
institution warrants such treatment. There are numerous mandatory supervisory
restrictions on the activities of under capitalized institutions. An institution
that is under capitalized must submit a capital restoration plan to the OTS that
the OTS may approve only if it determines that the plan is likely to succeed in
restoring the institution's capital and will not appreciably increase the risks
to which the institution is exposed. In addition, the institution's performance
under the capital restoration plan must be guaranteed by every company that
controls the institution. Under capitalized institutions may not acquire an
interest in any company, open a new branch office, or engage in a new line of
business without OTS or FDIC approval. An under capitalized institution is also
limited in its ability to increase average assets, accept brokered deposits, pay
management fees, set deposit rates, and make capital distributions. Additional
restrictions apply to significantly and critically under capitalized
institutions. In addition, the OTS maintains extensive discretionary sanctions
which may be applied to under capitalized institutions, including the issuance
of a capital directive and the replacement of senior executive officers and
directors.
As disclosed in the footnotes to the Company's audited consolidated
financial statements, at June 30, 1997, the Bank met the requirements to be
classified as a "well capitalized" institution under PCA regulations.
SAFETY AND SOUNDNESS STANDARDS
In addition to the PCA provisions discussed above based on an
institution's regulatory capital ratios, FDICIA contains several measures
intended to promote early identification of management problems at depository
institutions and to ensure that regulators intervene promptly to require
corrective action by institutions with inadequate operational and managerial
controls. The OTS has established minimum standards in this regard related to:
o internal controls, information systems, and internal audit systems
o loan documentation
o credit underwriting
o asset growth
o earnings
o compensation, fees, and benefits
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If the OTS determines that an institution fails to meet any of these
minimum standards, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standard. In the event
the institution fails to submit an acceptable plan within the time allowed by
the agency or fails in any material respect to implement an accepted plan, the
agency must, by order, require the institution to correct the deficiency and may
implement a series of supervisory sanctions.
Effective October 1, 1996, the federal banking agencies (including the
OTS) promulgated safety and soundness regulations and accompanying interagency
compliance guidelines on asset quality and earnings standards. These guidelines
provide six standards for establishing and maintaining a system to identify
problem assets and prevent those assets from deteriorating. The institution
should:
1. conduct periodic asset quality reviews to identify problem assets
2. estimate the inherent losses in those assets and establish reserves that
are sufficient to absorb estimated losses
3. compare problem asset totals to capital
4. take appropriate corrective action to resolve problem assets
5. consider the size and potential risks of material asset concentrations
6. provide periodic asset reports with adequate information for management
and the board of directors to assess the level of asset risk
These guidelines also set forth standards for evaluating and monitoring
earnings and for ensuring that earnings are sufficient for the maintenance of
adequate capital and reserves. If the institution fails to comply with a safety
and soundness standard, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan or
to implement an accepted plan may result in enforcement action.
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POTENTIAL ENFORCEMENT ACTIONS
The OTS has primary enforcement responsibility over savings institutions
and maintains the authority to bring actions against the institution and all
institution affiliated parties, as defined under the applicable regulations, for
unsafe or unsound practices in conducting their businesses or for violations of
any law, rule, regulation, condition imposed in writing by the agency, or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease and desist
order that can be judicially enforced, the termination of insurance of deposits
(in the case of the Bank), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal or prohibition orders against institution
affiliated parties, and the imposition of restrictions of sanctions under the
PCA provisions of the FDICIA. Federal law also establishes criminal penalties
for certain violations. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary financial institutions could serve as an
ancillary basis for regulatory action against the holding company. Neither HFB,
the Bank, or any subsidiaries thereof are currently subject to any enforcement
actions.
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PREMIUMS FOR DEPOSIT INSURANCE
Legislation was enacted on September 30, 1996 to address the disparity in
bank and thrift deposit insurance premiums. This legislation imposed a
requirement on all SAIF members, including the Bank, to fully recapitalize the
SAIF by paying a one time special assessment of approximately 65.7 basis points
on all assessable deposits as of March 31, 1995. This one time special
assessment resulted in the Bank recording an additional $4.8 million in FDIC
insurance expense during its quarter ended September 30, 1996.
The FDIC currently assesses its premiums based upon the insured institution's
position on two factors:
1. the institution's capital category under PCA regulations
2. the institution's supervisory category as determined by the FDIC based
upon supervisory information provided by the institution's primary federal
regulator and other information deemed pertinent by the FDIC.
The supervisory categories are:
o Group A: financially sound with only a few minor weaknesses
o Group B: demonstrates weaknesses that could result in significant
deterioration
o Group C: poses a substantial probability of loss
Annual SAIF assessment rates as of July 1, 1997 were as follows:
Assessment Rates Effective July 1, 1997 *
Group Group Group
A B C
--------- --------- ---------
Well Capitalized 0 3 17
Adequately Capitalized 3 10 24
Under Capitalized 10 24 27
- ---------------------
* Assessment figures are expressed in terms of cents per $100 of assessed
deposits.
During the quarter ended June 30, 1997, the Bank was not assessed any SAIF
insurance premiums under the above schedule.
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20
In addition to the deposit insurance premiums presented in the above
table, SAIF insured institutions must also pay FDIC premiums related to the
servicing of Financing Corporation ("FICO") bonds which were issued to help fund
the federal government costs associated with the savings & loan problems of the
late 1980's. At July 1, 1997, the Bank's premium rate for the FICO related
payments was 6.3 basis points of assessable deposits per annum.
The Budget Act passed by Congress prohibits the FDIC from setting premiums
under the above risk based schedule above the amount needed to meet the
designated reserve ratio (currently 1.25%). The latest statistics released by
the FDIC indicate that both the SAIF and the Bank Insurance Fund ("BIF")
maintain reserve ratios in excess of the designated ratio. Legislation is before
Congress which might, among many other events, merge the SAIF and BIF, and
thereby present a potential impact upon the Bank's deposit insurance premiums.
The Company's management cannot predict what legislation will be approved, if
any, and what the impact of such legislation might be upon the Company.
TRANSACTIONS WITH RELATED PARTIES
The Bank's authority to engage in transactions with related parties or
"affiliates" (e.g. any company that controls or is under common control with an
institution, including the Company and its non-savings institution subsidiaries)
is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A limits the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution. The
aggregate amount of covered transactions with all affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors,
and 10% shareholders, as well as entities such persons control, is governed by
Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other
things, such loans are required to be made on terms substantially the same as
those offered to unaffiliated individuals and to not involve more than the
normal risk of repayment. Regulation O also places individual and aggregate
limits on the types and amounts of loans the Bank may make to such persons
based, in part, on the Bank's capital position, and requires certain board
approval procedures to be followed.
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COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution,
as well as certain other lenders, to identify and delineate the communities
served through and by the institution's offices and to affirmatively meet the
credit needs of its delineated communities and to market the types of credit the
institution is prepared to extend within such communities. The CRA also requires
the OTS to assess the performance of the institution in meeting the credit needs
of its communities and to take such assessment into consideration in reviewing
applications for mergers, acquisitions, and other transactions. An
unsatisfactory CRA rating may be the basis for denying such an application.
Performance is assessed on the basis of an institution's actual lending,
service, and investment performance rather than the extent to which the
institution conducts needs assessments, documents community outreach, or
complies with other procedural requirements. In connection with its assessment
of CRA performance, the OTS assigns a rating of "outstanding," "satisfactory,"
"needs improvement" or "substantial noncompliance." Based on its most recent
examination, the Bank received a "satisfactory" rating.
QUALIFIED THRIFT LENDER TEST
The qualified thrift lender ("QTL") test requires that, in at least nine
out of every twelve months, at least 65% of a savings institution's "portfolio
assets", as defined, must be invested in a limited list of qualified thrift
investments, including residential mortgages and qualifying mortgage backed
securities. Portfolio assets for the QTL test consist of tangible assets minus
o assets utilized to satisfy liquidity requirements (subject to certain
limitations)
o the value of property used by the institution to conduct its business
In 1996, the Economic Growth and Regulatory Paperwork Reduction Act
("EGRPRA") was adopted, amending the QTL test requirements to allow educational
loans, small business loans, and credit card loans to count as qualified thrift
assets without limit. The EGRPRA also amended the QTL requirements to allow
loans for personal, family, or household purposes to count as qualified thrift
assets in the reporting category limited to 20.0% of portfolio assets. Finally,
EGRPRA provided that as an alternative to the QTL test, thrifts such as the Bank
may choose to comply with the Internal Revenue Service's domestic building and
loan tax code test.
A savings institution which fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
June 30, 1997, the Bank maintained 80.0% of its portfolio assets in qualified
thrift investments and therefore met the QTL test.
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LIMITATION ON CAPITAL DISTRIBUTIONS
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The
regulators separate institutions into three tiers, which are based primarily on
an institution's capital level. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution ("Tier 1
Association") and has not been advised by the OTS that it is in need of more
than normal supervision, could after prior notice but without obtaining approval
of the OTS, make capital distributions during a calendar year equal to the
greater of (i) 100% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions would require prior regulatory approval. In the
event the Bank's capital fell below its regulatory requirements or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. At June 30, 1997,
the Bank was a Tier 1 Association.
LIQUIDITY
OTS regulations require savings institutions to maintain, for each
calendar month, an average daily balance of liquid assets (including cash,
certain time deposits, bankers' acceptances, specified United States government,
state and federal agency obligations, and balances maintained in satisfaction of
the FRB reserve requirements described below) equal to at least 5% of the
average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. The OTS may change this
liquidity requirement from time to time to an amount within a range of 4% to 10%
of such accounts and borrowings depending upon economic conditions and the
deposit flows of member institutions, and may exclude from the definition of
liquid assets any item other than cash and the balances maintained in
satisfaction of FRB reserve requirements. The Bank's average regulatory
liquidity ratio for the month of June 1997 was 5.93% and, accordingly, the Bank
was in compliance with the liquidity requirement. Monetary penalties may be
imposed for failure to meet liquidity ratio requirements. OTS regulations also
require each member institution to maintain, for each calendar month, an average
daily balance of short-term liquid assets (generally those having maturities of
12 months or less) equal to at least 1% of the average daily balance of its net
withdrawable accounts plus short-term borrowings during the preceding calendar
month. The average short-term liquidity ratio of the Bank for the month of June
1997 was 3.11%.
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The OTS has recently proposed changing the 5.0% liquidity requirement to
4.0% and has also invited Congress to consider eliminating all formal regulatory
liquidity requirements, as such are not mandated of commercial banks. The
Company's management cannot predict what changes, if any, will be eventually
implemented to regulatory liquidity requirements.
BRANCHING
OTS regulations permit nationwide branching by federally chartered savings
institutions to the extent allowed by federal statute. This permits federal
savings institutions to establish interstate networks and to geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
institutions. At this time, the Company's management has no plans to establish
physical branches outside of California, although the Bank does serve customers
domiciled outside of California via alternative delivery channels such as
telephone, mail, and ATM networks.
RESTRICTIONS ON INVESTMENTS AND LOANS
In addition to those restrictions presented above in reference to the
Liquidity and QTL Test requirements of federal savings institutions, OTS
regulations do not permit the Bank to invest directly in equity securities, non
investment grade debt securities, or real estate (other than real estate used
for the institution's offices and facilities). Indirect equity investment in
real estate through a subsidiary, such as the Bank's First Hemet Corporation
subsidiary, is permissible, but is subject to certain limitations and deductions
from regulatory capital. The Bank maintains two remaining real estate
development projects, Mayberry Estates and Vista Bonita, which are being
marketed for sale. Following the sale of these two projects, the Bank's
management intends to refrain from further real estate investment or development
activity for the foreseeable future.
Loans by a savings institution to a single borrower are generally limited
to 15% of an institution's "unimpaired capital and unimpaired surplus", as
defined by applicable regulations. Aggregate loans secured by non residential
real property are generally limited to 400% of an institution's total capital,
as defined. Because of its high portfolio concentration in residential loans and
its strong total and risk based capital positions, the Bank maintains
significant capacity to increase non residential real estate lending while
remaining within all applicable regulatory limitations.
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CLASSIFICATION OF ASSETS
Savings institutions are required to classify their assets on a regular
basis, to establish appropriate allowances for losses, and to report the results
of such classifications quarterly to the OTS. A savings institution is also
required to set aside adequate valuation allowances, and to establish
liabilities for off balance sheet items, such as letters of credit, when a loss
becomes probable and estimable. The OTS has the authority to review the
institution's classification of its assets and to determine whether additional
assets must be classified, or whether the institution's allowances must be
increased. Such instruction by the OTS to increase valuation allowances could
have a material impact upon both the Bank's reported earnings and financial
condition.
Assets are classified into one of five categories:
Pass. These assets present no apparent weakness of deficiency.
Special Mention. These assets present weaknesses or deficiencies deserving
continued monitoring and heightened management attention.
Substandard. These assets, or portions thereof, possess well defined weaknesses
which could jeopardize the timely liquidation of the asset or the realization of
the collateral at values at least equal to the Company's investment in the
asset. These assets are therefore characterized by the possibility that the
institution will sustain some loss if the deficiencies are not corrected. The
Company classifies all real estate owned for investment and real estate acquired
through foreclosure as substandard.
Doubtful. These assets, or portions thereof, present probable loss of principal,
but the amount of loss, if any, is subject to the outcome of future events which
are not fully determinable at the time of classification.
Loss. These assets, or portions thereof, present quantified losses to the
institution. The institution must either establish a specific reserve for the
amount of loss or charge off a like amount of the asset.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses ("ALLL") which,
among other things, establishes certain benchmark ratios of loan loss reserves
to classified assets (defined at those categorized as other than "Pass"). The
Company's internal credit policy is to comply with this policy statement and to
maintain adequate reserves for estimable losses. However, the determination of
estimable losses is by nature an uncertain practice, and hence no assurance can
be given that the Company's loss allowances will prove adequate to cover future
losses.
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FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Banks ("FHLB's") provide a comprehensive credit
facility to member institutions. As a member of the FHLB of San Francisco, the
Bank is required to own capital stock in that FHLB in an amount at least equal
to the greater of:
1. 1.0% of the aggregate principal amount of outstanding residential loans,
as defined, at the beginning of each calendar year
2. 5.0% of its advances from the FHLB
3. 0.3% of total assets
The Bank was in compliance with this requirement, with a $6.2 million
investment in FHLB-San Francisco capital stock at June 30, 1997. FHLB advances
must be secured by specific types of collateral, including various types of
mortgage loans and investment securities. It is the policy of the Bank's
management to maintain an excess of collateral at the FHLB-San Francisco at all
times to serve as a ready source of additional liquidity.
The FHLB's are required to provide funds to contribute toward the payment
of certain bonds issued in the past to fund the resolution of insolvent thrifts.
In addition, the FHLB's are required by statute to contribute funds toward
affordable housing programs. These requirements could reduce the amount of
dividends the FHLB's pay on their capital stock and could also negatively impact
the pricing offered for on and off balance sheet credit products -- events which
could unfavorably impact the profitability of the Company.
Legislation is currently before Congress which could significantly alter
the requirements for FHLB membership, the financial burdens placed on the FHLB's
associated with outstanding bonds, and the scope of allowable investments for
FHLB's. The Company's management is unable to predict what, if any, legislation
might eventually be passed and the potential impact of such legislation upon the
Company.
FEDERAL RESERVE SYSTEM
The FRB requires savings institutions to maintain, on a recurring cycle
basis, non interest bearing reserves against certain deposit accounts (primarily
deposit accounts that may be accessed by writing unlimited checks). The amount
of required reserves are calculated according to a formula updated periodically
by the FRB, while such requirement must be met on an average balance basis
during each two week measurement cycle. The Bank was in compliance with these
reserve requirements for the cycle which included June 30, 1997. The balances
maintained to meet the FRB reserve requirements may be used to satisfy the
liquidity requirements imposed by the OTS.
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Various proposals have been introduced in Congress to permit the payment
of interest on required reserve balances, and to permit savings institutions to
pay interest to checking account customers other than individuals, sole
proprietorships, non profit organizations, and government units. The Company's
management cannot predict the outcome, if any, of such legislative proposals.
As a financial institution, the Bank is subject to many regulations
promulgated by the FRB, including, but not limited to:
o Regulation B: Equal Credit Opportunity Act
o Regulation D: Reserve Requirements
o Regulation E: Electronic Funds Transfer
o Regulation F: Limitations On Correspondent Bank Credit Exposure
o Regulation Z: Truth In Lending Act
o Regulation CC: Expedited Funds Availability Act
o Regulation DD: Truth In Savings Act
FEDERAL SECURITIES LAWS
The Company's common stock is registered with the SEC under Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to periodic reporting requirements, proxy solicitation rules,
insider trading restrictions, tender offer rules, and other requirements under
the Exchange Act. In addition, certain activities of the Company, its executive
officers, and directors are covered under the Securities Act of 1933, as amended
(the "Securities Act").
NON BANKING REGULATION
The Company is impacted by a series of laws and regulations not specific
to the banking industry, including environmental and bankruptcy laws. There have
been recent legislative proposals to modify both environmental and bankruptcy
laws, which could present potential material impacts to the Company. The
Company's management cannot, however, predict what legislation, if any, will
eventually be adopted and the likely financial impact of such legislation, if
any. However, most of the recent legislative proposals have sought to insulate
financial institutions from liability for environmental remediation for real
property acquired through foreclosure. If approved, this legislation would
complement the Company's policies of taking steps to identify and review
environmental issues pertaining to its borrowers and the real properties
securing the loans of its borrowers prior to the extension of credit.
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FEDERAL AND STATE TAXATION
Under a tax sharing agreement, the Company files consolidated federal and
state tax returns for itself and all its subsidiaries on a fiscal year basis
under the accrual method of accounting, and is subject to taxation in a manner
similar to other like financial institutions. The Company is also subject to the
corporate Alternative Minimum Tax ("AMT"), the environmental tax, and California
State franchise taxes (at special rates applicable to financial institutions).
HFB also pays certain fees, not classified as income taxes, to the State of
Delaware as a Delaware holding company not earning income in that state.
Effective for taxable years beginning after 1995, legislation enacted in
1996 repealed, for federal purposes, the reserve method of accounting for bad
debts for thrift institutions. While thrifts qualifying as "small banks" may
continue to use the experience method, Hemet Federal, deemed a "large bank", is
required to use the specific charge off method commencing with its federal tax
return for the fiscal year ended June 30, 1997. In addition, the legislation
enacted in 1996 contains certain income recapture provisions which are discussed
below.
Thrift institutions deemed "large banks" are required to include into
income ratably over six years, beginning with the first taxable year commencing
after 1995, the institution's "applicable excess reserves". The applicable
excess reserves are the excess of:
1. the balance of the institution's reserves for losses on loans other than
supplemental reserves at the close of its last taxable year beginning
before January 1, 1996, over
2. the adjusted balance of such reserves as of the close of its last taxable
year beginning before January 1, 1988.
The Bank's applicable excess reserves at June 30, 1996 are $350,000. This
amount will be recognized into taxable income over six years at the rate of
approximately $58,000 per year starting with the taxable year ended June 30,
1997.
The adjusted pre-1988 total reserve balance of $13.8 million as of June
30, 1996 will be recaptured into taxable income:
1. in the event the Bank ceases to be a "bank" or "thrift" under applicable
IRS definitions
2. to the extent the Bank makes distributions to shareholders in excess of
post-1951 earnings and profits, redemptions, or liquidations
Federally supervised banks and savings associations are required to report
deferred tax assets and liabilities in accordance with SFAS Number 109. The
federal banking agencies issued final rules applicable to the Bank which became
effective April 1, 1995. These rules limit the amount of deferred tax assets
that are allowable in computing an institution's regulatory capital. Deferred
tax assets that can be realized for taxes paid in prior carryback years and from
future reversals of existing taxable temporary differences are generally not
limited. Deferred tax assets that can only be
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recognized through future taxable earnings are limited for regulatory capital
purposes to the lesser of:
1. the amount that can be realized with one year of the quarter end report
date, based upon projected taxable income for that year
2. 10.0% of Tier One capital
The amount of any deferred tax assets in excess of this limit would be
excluded from Tier One capital and total assets under regulatory capital
calculations.
Congress recently passed and the President signed the Taxpayer Relief Act
of 1997. This legislation presents a series of potential impacts to the Company,
including the encouragement of consumer savings through expanded IRA's and a
reduction in the federal net operating loss carryback period from three years to
two years for future tax returns. Because of the newness of this legislation,
the uncertainty of future consumer behavior, and the lack of presently available
interpretation and implementation guidance, management cannot predict the net
financial impact of the Taxpayer Relief Act of 1997 upon the Company.
FINANCIAL INDUSTRY REFORM LEGISLATION
Congress is currently developing a bill which could extensively reform the
laws and regulations applicable to the financial services industry. Topics under
consideration include:
o a relaxation or elimination of the laws separating banking from commerce
o the elimination of the federal thrift charter
o a merger of the Bank Insurance Fund ("BIF") and SAIF
o the ability of banks to sell various insurance and investment related
products
o the termination of ATM surcharges
o the merger of the OTS into the Office Of The Comptroller Of The Currency
("OCC")
o grandfathering of investments and activities currently available to
federal savings institutions but not permitted for national banks
At this time, the Company's management cannot predict what legislation, if
any, will emerge from the current hearings, and what impact such legislation
might present to the Company.
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FEDERAL JUDICIAL REVIEW
The US Supreme Court has agreed to hear a case involving the breadth of
members permitted for credit unions under applicable "common bond" regulations.
In recent years, many credit unions have attempted to increase in size and scope
by permitting progressively broader classes of membership. Federal limitations
upon the membership range of credit unions, which enjoy privileged tax status,
would be generally beneficial to the Company, and vice-versa.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discusses certain factors which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
Economic Conditions and Geographic Concentration. The Company's operations
are located in Southern California and are concentrated in Riverside and
northern San Diego counties. Although management has recently made initial
efforts to geographically diversify the Bank's loan portfolio into Northern
California, the vast majority of the Bank's credits remain concentrated in the
two Southern California counties. As a result of this geographic concentration,
the Company's results depend largely upon economic conditions in these areas,
which have been relatively volatile over the past decade. While the Southern
California economy has recently exhibited improved trends in employment and real
estate valuation, there is no assurance such progress will continue. A
deterioration in economic conditions in Riverside and northern San Diego
counties could have a material adverse impact on the quality of the Company's
loan portfolio and the demand for its products and services.
Interest Rates. By nature, all financial institutions are impacted by
changing interest rates, due to the impact of such upon the demand for new
loans, the credit profile of existing loans, and the rates received on loans and
securities and the rates paid on deposits and borrowings. As presented under
Item 7. "Management's Discussion And Analysis Of Financial Condition And The
Results Of Operations", the Company is financially exposed to both parallel
shifts in general market interest rates (particularly upward shifts) and to
changes in the relative pricing of the term structure of general market interest
rates.
Government Regulations and Monetary Policy. The financial services
industry is subject to extensive federal and state supervision and regulation.
Significant new laws, changes in existing laws, or repeals of present laws could
cause the Company's financial results to materially differ. Further, federal
monetary policy, particularly as implemented through the Federal Reserve System,
significantly affects credit conditions for the Company.
Competition. The financial services business in the Company's market areas
is highly competitive, and is becoming more so due to technological advances,
changes in the regulatory environment, and the accelerating pace of
consolidation among financial services providers. The results of the Company may
differ in future periods depending upon the nature or level of competition.
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Credit Quality. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors, and related parties
may fail to perform in accordance with the terms of their loans. The Company has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to control this risk by assessing the
likelihood of non performance, tracking loan performance, and diversifying the
credit portfolio. Such policies and procedures may not, however, prevent
unexpected losses that could have a material adverse effect on the Company's
results. For example, relatively few of the real properties securing the
Company's real estate loan portfolio are covered by earthquake insurance, with
has generally been unavailable, significantly limited in scope, or not
affordable to many of the Company's borrowers.
Other Risks. From time to time, the Company details other risks with
respect to its business and / or financial results in its filings with the SEC.
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to each
executive officer of the Company who is not also a director of the Company. The
Board of Directors appoints or reaffirms the Appointment of all of the Company's
Executive Officers each November. Each executive officer serves until the
following year or until a respective successor is appointed.
Name Age at June 30, 1997 Position Held With The Company
---- -------------------- ------------------------------
Gerry Agnes 38 Executive Vice President
Janet Riley 59 Corporate Secretary
Mark Andino 38 Vice President/Treasurer
Officers of the Bank who were Executive Officers of the Company as defined
by Rule 405 of Regulation C of the Securities and Exchange Commission.
NAME AGE POSITIONS HELD WITH THE BANK
- ---------------------- ----- ----------------------------
Jack A. Sanden 56 Senior Vice President
Robert Armstrong 53 Senior Vice President
William T. Tierney 54 Senior Vice President
Leticia J. Arciniega 43 Senior Vice President
Pamala Trotter 36 Senior Vice President
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ITEM 2. PROPERTIES
The following table sets forth information relating to each of the Company's
offices as of June 30, 1997:
Net Book Value
of Property or
Original Date Leasehold
Leased or Leased or Date of Lease Improvements at
Location Description Owned Acquired Expiration June 30, 1997
- -------- ----------- ----- -------- ---------- -------------
445 E Florida Avenue Main Office Owned 1963 -- $1,177,287
Hemet, CA
3600 Tyler St. Tyler Branch Leased 1996 2011 52,745
Riverside, CA
28031 Bradley Road Sun City Office Owned 1973 -- 291,848
Sun City, CA
1479 S San Jacinto Avenue San Jacinto Branch Leased 1986 1998 0
San Jacinto, CA
5395 Canyon Crest Drive Canyon Crest Branch Owned 1978 -- 542,264
Riverside, CA
1111 S State Street Diamond Valley Leased 1978 1999 27,271
Hemet, CA
3013 W Florida Avenue Hemet West Branch Leased 1979 2007 42,489
Hemet, CA
41815 E Florida Avenue Hemet East Branch Leased 1980 1997 13,661
Hemet, CA
5242 Arlington Avenue Hardman Center Branch Leased 1981 1997 1,221
Riverside, CA
31740 Railroad Canyon Road Canyon Lake Branch Leased 1982 1998 10,364
Canyon Lake, CA
54245 North Circle Drive Idyllwild Branch Owned 1984 -- 306,735
Idyllwild, CA
40461 Murrieta Hot Springs Road Murrieta Branch Leased 1990 2000 65,696
Murrieta, CA
916 S Santa Fe Ave. Vista Branch Owned 1996 -- 495,340
Vista, CA
810 Mission Ave. Oceanside Branch Leased 1996 2003 114,245
Oceanside, CA
15703 Bernardo Height Pkway Rancho Bernardo Branch Owned 1996 -- 997,218
San Diego, CA
420 S Palm Canyon Drive Palm Springs Branch Leased 1984 2008 210,162
Palm Springs, CA
66565 Pierson Boulevard Desert Hot Springs Branch Owned 1996 -- 334,084
Desert Hot Springs, CA
68327 Highway 111 Cathedral City Branch Leased 1993 1998 5,990
Cathedral City, CA
39800 Bob Hope Drive Rancho Mirage Branch Leased 1983 1999 195,331
Rancho Mirage, CA
800 S Sanderson Ave. Loan Center Owned 1996 -- 889,869
Hemet, CA
130 S Buena Vista Street Office Services Owned 1983 -- 276,095
Hemet, CA Support Center
Total 6,049,915
=========
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and the Bank are party to claims and legal
proceedings arising in the ordinary course of business. After considering
information furnished by counsel to the Company and the Bank, management
believes that the ultimate aggregate liability represented thereby, if any, will
not present a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Common Stock of HF Bancorp, Inc. is traded over the counter on the
NASDAQ stock market under the symbol "HEMT". The stock commenced trading on June
30, 1995, when the Company went public and sold 6,612,500 shares at a price of
$8.00 per share. On February 8, 1996, the OTS approved a five percent repurchase
program authorized by the Board of Directors of the Company. 330,625 shares were
repurchased by May 28, 1996, for a total of $3,347,578. At June 30, 1997, there
were 6,281,875 shares of the Company's Common Stock outstanding, excluding
Treasury shares.
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The following table sets forth the high and the low daily closing prices
of the Company's common stock for each of the following quarters:
Quarter Ended High Low
- ------------- ---- ---
1995
September 30, 1995 10 1/4 8 3/16
December 31, 1995 10 1/8 9 1/8
1996:
March 31, 1996 10 1/4 9 1/2
June 30, 1996 10 1/4 9 1/4
September 30, 1996 10 9 1/4
December 31, 1996 11 3/8 9 3/4
1997:
March 31, 1997 14 11
June 30, 1997 14 3/4 12 1/4
The number of holders of record of the Company's Common Stock at September
5, 1997 was 729.
The Company has paid no dividends on the Common Stock since its inception.
In the future, the Board of Directors may consider a policy of paying cash or
stock dividends on the Common Stock. However, there is no plan to commence the
payment of cash dividends during fiscal 1998.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
Set forth below are selected consolidated financial and other data of the
Company for the periods and at the dates indicated. This financial data is
derived in part from, and should be read in conjunction with, the Consolidated
Financial Statements and related Notes of the Company presented elsewhere
herein.
At June 30,
------------------------ ----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets $984,749 $826,916 $666,062 $597,452 $538,475
Loans held for sale 335 0 0 0 0
Loans receivable, net 484,334 225,161 202,397 206,370 230,773
CMOs available for sale, net 27,512 33,257 39,989 55,246 --
CMOs held to maturity, net 5,794 6,666 432 607 68,959
Mutual funds available for sale -- 15,283 15,408 15,097 --
Other investment securities
and interest-earning assets (1) 143,005 270,130 101,074 15,215 32,822
Mortgage-backed securities
available for sale, net 109,493 100,259 70,603 78,243 51,725
Mortgage-backed securities held
to maturity, net 151,369 159,262 208,090 199,696 125,618
Real estate acquired through
foreclosure, net 5,298 1,079 1,361 2,877 1,092
Real estate acquired for sale
or investment, net 418 996 2,539 2,411 2,978
Deposit accounts 839,655 669,725 472,337 480,959 470,449
Advances from the FHLB 50,000 70,000 70,000 70,000 20,000
Total equity/stockholders' equity 81,027 81,071 87,146 39,640 40,841
(footnotes at end of table)
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35
Fiscal Year Ended June 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
SELECTED OPERATING DATA:
Interest income $66,522 $50,355 $40,424 $38,084 $41,606
Interest expense (2) 44,084 34,059 28,795 26,451 28,515
------ ------ ------ ------ ------
Net interest income before
provision for estimated loan losses 22,438 16,296 11,629 11,633 13,091
Provision for estimated loan losses 384 1,054 1,202 877 1,920
Net interest income after provision
for estimated loan losses 22,054 15,242 10,427 10,756 11,171
Other income (expense) (3) 805 765 176 (5,778) 4,242
General and administrative expenses(4) 27,137 12,931 11,649 12,255 12,205
------- ------ ------ ------ ------
Earnings (loss) before income tax expense (4,278) 3,076 (1,046) (7,277) 3,208
(benefit)
Income tax expense (benefit) (1,762) 1,129 (353) (2,704) 1,338
Net earnings (loss) before cumulalative effect
of change in method of accounumug for
income taxes and cumulative effect of
change in method of accounting for
securities (2,516) 1,947 (693) (4,573) 1,870
Cumulative effect of change in method
of accounting for income taxes -- -- -- -- 448
Cumulative effect of change in method
of accounting for securities (net of
income tax effect of $2,432) (3) -- -- -- 3,435 --
----- ----- ----- --------- ------
Net earnings (loss) $ (2,516) $ 1,947 $(693) $(1,138) $ 2,318
========= ====== ===== ======= ======
Net earnings (loss) per share $(0.44) $0.33 N/A N/A N/A
Average shares outstanding for EPS 5,755,859 5,953,823 N/A N/A N/A
calculations
(footnotes at end of table)
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36
At or For the Fiscal Year Ended June 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- -----
(Dollars In Thousands)
SELECTED FINANCIAL RATIOS AND OTHER DATA (5):
PERFORMANCE RATIOS :
Return on average assets (6) (.26)% .27% (.12)% (.19)% .41%
Return on average equity (7) (3.11) 2.24 (1.63) (2.83) 5.96
Average equity to average assets 8.47 12.14 7.14 6.77 6.91
Equity to total assets at end of period 8.23 9.80 13.08 6.63 7.58
Interest rate spread during the period(8) 2.14 1.74 1.75 1.86 2.19
Net interest margin (9) 2.50 2.37 2.02 2.05 2.44
Average interest-earning assets / average interest-
bearing liabilities 1.07x 1.13x 1.06x 1.04x 1.05x
General & administrative expenses to average assets 2.84% 1.81% 1.95% 2.07% 2.17%
REGULATORY CAPITAL RATIOS (10):
Tangible capital 6.36 6.66 9.02 6.39 7.29
Core capital 6.36 6.66 9.02 6.39 7.29
Risk-based capital 16.55 24.27 29.24 19.27 18.29
ASSET QUALITY RATIOS :
Nonperforming loans / gross loans receivable(11) 1.06 0.56 1.10 1.25 3.28
Nonperforming assets / total assets (12) 1.17 0.33 0.63 1.04 1.69
Net loan charge-offs / average loans 0.40 0.31 0.58 .61 .04
Allowance for estimated loan losses / gross loans
receivable (11) 0.97 1.33 1.30 1.27 1.33
Allowances for total estimated losses / nonperforming
assets 50.90 94.18 110.71 73.07 43.52
Allowance for estimated loan losses / nonperforming
loans 91.63 235.75 118.11 101.75 40.66
OTHER DATA:
Number of deposit accounts 59,994 45,822 38,572 39,311 40,723
Full service offices 19 15 12 12 12
- -------------------------------------
(1) Includes U.S. Government and agency notes, federal funds sold, repurchase agreements and interest-earning
accounts at the FHLB, which are included in cash and cash equivalents.
(2) Includes net hedging expense of $5.1 million, $4.7 million, $4.5 million and $3.2 million and $2.9 million,
for the fiscal years ended, 1993, 1994, 1995, 1996, 1997 respectively.
(3) Other expense of $5.8 million reported for the fiscal year ended 1994 was primarily due to a net loss from
real estate operations of $1.6 million and the lower of cost or market adjustment for securities available for
sale of $5.9 million. Upon the adoption of SFAS No. 115, the Bank reclassified certain mortgage-backed
securities previously classified as available for sale to a held to maturity classification. As a result, the
cumulative effect of the accounting change as of June 30, 1994, was to reverse the previously recorded
unrealized holding gains and losses on these securities, net of a tax effect of $2.4 million, of $3.4 million.
(4) Fiscal 1997 includes non-recurring costs of $4.8 million for the SAIF recapitalization and $3.0 million
associated with the termination of two retirement plans.
(5) Asset quality ratios and regulatory capital ratios are end of period ratios. With the exception of end of
period ratios, all ratios are based on average monthly balances during the indicated periods and are
annualized where appropriate.
(6) Return on average assets is net earnings (loss) divided by average total assets.
(7) Return on average equity is net earnings (loss) divided by average equity.
(8) The interest rate spread represents the differences between the average rate on interest-earning assets and
the average rate on interest-bearing liabilities.
(9) Represents net interest income before provision for estimated loan losses as a percentage of average interest-
earning assets.
(10) For definitions and further information relating to the Bank's regulatory capital requirements, see "Item 1.
Capital Requirements And Capital Categories."
(11) Includes all non-accrual loans, and loans delinquent 90 days or more, net of undisbursed loan funds.
(12) Nonperforming assets consist of nonperforming loans and foreclosed real estate before specific reserves and
valuation allowances. Excludes real estate held for investment.
36
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Management's discussion and analysis is written to provide greater detail
of the financial condition and the results of operations of the Company. This
analysis should be read in conjunction with the audited financial statements
contained within this report, including the notes thereto. Certain statements
included or incorporated by reference in this Form 10-K, including without
limitation statements containing the words "believes", "anticipates", "intends",
"expects", "forecasts", and words of similar import, constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act.
Such forward looking statements involve risk, uncertainties, and other factors
that may cause the actual results, performance, or achievements of the Company
to materially differ from the future results, performance, or achievements
expressed or implied by such forward looking statements. Factors which might
cause such differences include but are not limited to economic conditions,
competition, fluctuations in interest rates, credit quality, and government
regulation. For additional information concerning these factors, see "Item 1.
Business -- Factors That May Affect Future Results".
OVERVIEW
HF Bancorp, Inc. is a savings & loan holding company. Its primary
subsidiary, Hemet Federal Savings & Loan, is a federally chartered savings &
loan which operates 19 branch offices in Riverside and northern San Diego
counties. HFB was formed for the purposes of acquiring all of the stock of Hemet
Federal Savings & Loan upon that company's conversion from a mutual to a stock
form on June 30, 1995. HFB had no operations prior to June 30, 1995 and,
accordingly, the results of operations prior to such date reflect only those of
the Bank and its subsidiaries. The Company operates on a June 30 fiscal year.
The Company reported a net loss of $2.5 million for the fiscal year ended
June 30, 1997, as compared to net income of $1.9 million during the prior fiscal
year. The decline in profitability primarily resulted from three factors:
1. A one-time, $4.8 million assessment by the FDIC to recapitalize the SAIF.
2. A non recurring $3.0 million charge to accrue expenses related to the
termination of the Company's defined benefit pension plan and its
non-qualified supplemental retirement restoration plan.
3. One time operating expenses associated with the integration of three
branches purchased from Hawthorne Savings on June 21, 1996 and with the
acquisition and assimilation of Palm Springs Savings Bank, with that
transaction closing on September 27, 1996.
37
38
SAIF Assessment. On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 (the "Funds Act"). This legislation, among
other things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to increase the reserve ratio of the SAIF up to the
federally mandated 1.25% of covered deposits. 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, but accrued during the Company's first fiscal
quarter ending September 30. The pre tax charge to the Bank was $4.8 million,
which is deductible for both federal income and state franchise taxes.
The Funds Act also spread the financial obligations for the payment of the
FICO bonds across all SAIF and BIF members, with BIF deposits assessed at 20.0%
of the rate assessed against SAIF insured deposits. Full pro rata sharing of the
FICO payments between BIF and SAIF members will occur on the earlier of January
1, 2000 or the date the BIF and SAIF are merged. The Funds Act also specifies
that the BIF and SAIF will be merged on January 1, 1999 provided no savings
institutions exist as of that time.
As a result of the Funds Act, the Bank's ongoing assessment rate for FDIC
insurance declined from 23 basis points to 0 basis points, excluding assessments
in support of the FICO bonds. At June 30, 1997, the Bank's assessable deposit
base for FDIC insurance totaled $828.2 million. The annualized savings resulting
from the Funds Act therefore equates to approximately $1.9 million pre-tax.
Defined Benefit Pension Plan and Retirement Restoration Plan Terminations.
In the quarter ended June 30, 1997, the Company's management and Board Of
Directors determined to terminate two retirement plans. The defined benefit
pension plan was a traditional pension program which provided employees with
monthly retirement income based upon years of service and the employee's
earnings during the sixty months prior to retirement. This is the type of
defined benefit program which has been terminated by many companies, including
many of the Company's competitors, over the past decade, in favor of defined
contribution plans such as 401(k) programs. The Company's defined benefit
pension plan cost the Company approximately $77,000 per year in administrative
costs for actuarial, trust, and audit support services, plus the periodic
benefit expense recognition for retirement payments as calculated under SFAS
Number 87 - "Employers Accounting For Pensions". In contrast, defined
contribution programs such as 401(k) plans can be provided at significantly
lower administrative costs and are more portable than defined benefit plans.
The retirement restoration plan was a non qualified supplemental plan
designed to compensate certain highly salaried employees for the impact of the
wage caps under ERISA, which are applicable to qualified plans such as the
defined benefit pension plan.
38
39
Other factors which influenced the Company's decision to terminate the
retirement plans included:
o The existence of the qualified ESOP plan, which generated $708,000 in
periodic expense recognition during the fiscal year ended June 30, 1997.
The combined expense of the terminated plans in addition to the ESOP
placed the Company's retirement benefits costs above peer institutions.
o The defined benefit pension plan investment assets had enjoyed significant
returns during the past several years due to the rally in the capital
markets. These returns had reduced the funding shortfall associated with a
plan termination. Continuation of the defined benefit pension plan would
also have exposed those assets to reductions in value if the bull market
experienced throughout most of the 1990's reversed course.
o A significant number of employees from the Hawthorne Savings Bank and PSSB
acquisitions would have entered the defined benefit pension plan on
January 1, 1998, thereby increasing both the periodic expense recognition
under SFAS Number 87 and the cost of terminating the plan at some future
date.
The Company's management estimates the first year expense savings from the
two retirement plan terminations at approximately $400,000 -- a figure which
would have increased in future periods if the Company continued to add employees
and grant pay increases. In addition, the final cost associated with the
termination of the two retirement plans will not be ascertained until all of the
plan assets have been distributed and all regulatory approvals have been
obtained. While the amount accrued represents management's best estimate of the
total termination costs, various future events could produce an actual expense
total either higher or lower than that accrued.
39
40
Acquisition Integration Costs. In fiscal 1997, the Company incurred
significant non recurring operating costs associated with the integration of the
three branches purchased from Hawthorne Savings Bank and PSSB, which included
four branches in the Coachella Valley. The one time costs included, but were not
limited to, expenses for:
o computer systems conversion programming, testing, integration, and
balancing
o printing costs for replacement checks for customers
o the write off of PSSB assets not utilized in the continuing operation
o overtime for staff involved in the integration and conversion efforts
o telecommunications consulting, analysis, and design
The Hawthorne Savings Bank branch acquisition provided the Company with
8,605 accounts representing $185.2 million in deposits and a significant
presence in the northern San Diego County area. The PSSB acquisition brought the
Company a strong presence in the Coachella Valley, a net loan portfolio of
$160.7 million with a weighted average rate of 8.47%, and a $164.7 million
deposit portfolio with a weighted average rate of 4.09%. Since the two
acquisitions, a significant percentage of the Company's total revenues have been
derived from the new markets, with the stronger property values and economic
trends in those markets contributing to meaningful increases in loan production
and average loan size, thereby bolstering the Company's operating efficiency.
40
41
Business Strategy
- -----------------
During fiscal 1997, the Company's management implemented several key
strategies targeted at increasing long term shareholder returns while also
enhancing the Company's involvement in and contributions to the communities it
serves. The actions, which were also focused upon moving the Company forward in
its mission to evolve into a high performing, premier community bank, included:
o The aforementioned acquisitions, which provided opportunities for the
Company to prudently deploy some of its excess capital while also
expanding into adjacent, and more vibrant, markets.
o The proliferation of some of the commercial banking products and services
acquired via PSSB into the other 15 branches within the Company's network.
These products and services included merchant bankcard, small business
lending, and commercial demand deposit accounts.
o The extension of some of the historic Hemet Federal products and services
into the new Coachella Valley branches; such as mutual fund and insurance
product sales.
o The continued enhancement of the Company's management team and Board of
Directors, which included the appointment of Richard S. Cupp as President,
CEO, and Director of the Company and George P. Rutland as a Director in
July, 1997. These individuals bring many years of successful commercial
and community banking experience to the Company.
o The aforementioned termination of the two retirement plans.
o A continued focus on the Company's efficiency ratio, with a series of
efforts implemented to both enhance revenues and reduce operating costs.
Examples of achievements in this regard during fiscal 1997 included
expanded correspondent banking relationships with concomitant reductions
in item processing costs and lost float, more sophisticated liquidity and
cash management, renegotiated third party contracts, and replacement of
under performing and higher cost vendors.
o Aggressive management of the Bank's portfolio of troubled assets, leading
to expanded sales of foreclosed real estate in fiscal 1997.
The Company intends to implement additional steps to improve its financial
performance during the upcoming fiscal year while continuing the long term
strategy outlined above. Actions under consideration include alternative
delivery channels, increased secondary market activity, enhanced capital
utilization, product repricing, new services, and further modifications of the
Company's compensation and benefit programs. However, there can be no assurance
that any of such steps will be implemented, or if implemented, whether such
implementation will improve the Company's financial performance.
41
42
ANALYSIS OF THE RESULTS OF OPERATIONS
OVERVIEW
The Company reported a net loss of $2.5 million for the fiscal year ended
June 30, 1997, compared to net earnings of $1.9 million during fiscal 1996 and a
net loss of $0.7 million during fiscal 1995. The decline in profitability during
the most recent fiscal year stemmed from the significant, non recurring events
described above. Excluding the charge for the SAIF recapitalization and the
accrued expenses associated with the termination of the retirement plans, the
Company earned $2.0 million, or $0.35 per share in fiscal 1997, an increase from
earnings per share of $0.33 in fiscal 1996.
Earnings in fiscal 1997 were also impacted by the initial amortization of
the intangible assets (See "Item 7. Analysis Of Financial Condition --
Intangible Assets") created in conjunction with the Hawthorne Savings Bank
branch purchase and the PSSB acquisition. A total of $2.0 million in
amortization expense associated with intangible assets was recorded in fiscal
1997. Net income excluding the SAIF recapitalization charge, the expenses for
the retirement plan terminations, and the amortization of intangible assets,
analytically referred to as normalized tangible earnings, would have totaled
$3.2 million -- a significant improvement over prior fiscal year results.
NET INTEREST INCOME
Net interest income is the net result of:
1) interest earned on loans, mortgage backed securities, and investment
securities (collectively "interest earning assets")
2) interest paid on deposits and borrowings (collectively "interest bearing
liabilities")
3) net hedging income or expense resulting from various off balance sheet
positions
Net interest income is the single largest source of Company earnings,
consistent with the Company's role as a financial intermediary.
42
43
Net interest income is primarily affected by:
a. the average volume, cash flow frequency, and repricing characteristics of
the Company's interest-earning assets and interest-bearing liabilities
b. the absolute and relative levels and volatility of general market interest
rates
c. the amount of non accruing loans and net non earning assets
d. the interest rate spread between the yields earned and the rates paid
For the year ended June 30, 1997, net interest income totaled $22.4
million, representing an increase of $6.1 million, or 37.7%, from $16.3 million
during fiscal 1996. Net interest income in fiscal 1995 totaled $11.6 million. As
detailed in the tables which follow, the significant expansions in net interest
income achieved over the past two fiscal years primarily resulted from:
o the Company's conversion to a public company at June 30, 1995, and the
subsequent deployment of the $51.1 million in capital raised
o the purchase of the Hawthorne Savings Bank branches in northern San Diego
County
o the acquisition of Palm Springs Savings Bank
o the gradual migration of the balance sheet towards one more representative
of a community bank, combined with an expansion in the ratio of average
loans to average deposits from 43.0% in fiscal 1995 to 52.1% in fiscal
1997
o A significant reduction in net hedging expense, as the Company shifted its
focus from purchasing securities hedged by off balance sheet positions to
serving the household and small business needs of the communities in which
it operates
Over the past three fiscal years, the Company's net interest margin on
average interest earning assets expanded from 2.02% in fiscal 1995 to 2.37% in
fiscal 1996 to 2.50% in fiscal 1997. Reported net interest income in future
periods will be favorably impacted by the conclusion of the amortization periods
associated with losses on terminated interest rate swaps (See "Item 7. Off
Balance Sheet"). Management intends to continue the Company's emphasis upon
serving its communities, thereby attempting to further improve the Company's
ratio of loans to deposits, which had climbed to 57.7% at June 30, 1997. Net
interest income in future periods will also be favorably impacted by the
Company's success in providing expanded transaction account services to the
households and small businesses located in its market areas. However, there can
be no assurances that the Company will achieve future increases in its ratio of
loans to deposits, or in its amount of transaction related deposit accounts.
43
44
The following table presents the average rate earned upon each category of
earning assets, the average rate paid for each category of interest bearing
liabilities, and the resulting net interest spread, net interest margin, and
average interest margin on total assets for the years indicated.
(Dollars In Thousands)
------------------------------- -------------------------------- ------------------------------
Year Ended June 30, 1997 Year Ended June 30,1996 Year Ended June 30, 1995
------------------------------- -------------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- ------- ---- ------- -------- ---- ------- -------- ----
ASSETS:
Interest earning assets:
Real estate loans, net(1) $393,622 $31,281 7.95% $206,361 $17,111 8.29% $198,546 $15,755 7.94%
Non real estate loans, net(1) 10,768 1,126 10.46% 5,001 537 10.74% 5,745 590 10.27%
Mortgage backed securities(2) 250,379 16,969 6.78% 274,617 19,113 6.96% 277,232 18,191 6.56%
CMO's(3) 36,545 2,335 6.39% 43,075 2,905 6.74% 48,495 3,217 6.63%
FHLB stock 5,651 363 6.42% 5,394 299 5.54% 4,152 219 5.27%
Other interest earning assets(4) 200,659 14,448 7.20% 153,744 10,390 6.76% 40,856 2,452 6.00%
------- ------ ----- ------- ------ ----- ------ ----- -----
Total interest earning assets 897,624 66,522 7.41% 688,192 50,355 7.32% 575,026 40,424 7.03%
Non interest earning assets 57,048 26,970 22,204
------ ------ ------
TOTAL ASSETS 954,672 715,162 597,230
LIABILITIES & EQUITY:
Interest bearing liabilities:
Deposit accounts 775,490 38,083 4.91% 487,040 23,781 4.88% 474,947 20,628 4.34%
Net hedging expense(5) 2,872 3,192 4,526
Borrowings(6) 60,769 3,129 5.15% 123,587 7,086 5.73% 70,000 3,641 5.20%
------ ----- ----- ------- ----- ---- ------ ----- -----
Total interest bearing liabilities 836,259 44,084 5.27% 610,627 34,059 5.58% 544,947 28,795 5.28%
Non interest bearing liabilities 37,524 17,732 9,638
------ ------ -----
Total Liabilities 873,783 628,359 554,585
Equity 80,889 86,803 42,645
------- ------- ------
TOTAL LIABILITIES & EQUITY 954,672 715,162 597,230
Net interest income 22,438 16,296 11,629
Interest rate spread(7) 2.14% 1.74% 1.75%
Net interest earning assets 61,365 77,565 30,079
Net interest margin(8) 2.50% 2.37% 2.02%
Net interest income / average total 2.35% 2.28% 1.95%
assets
Interest earning assets / interest 1.07 1.13 1.06
bearing liabilities
- -----------------------------
Average balances in the above table were calculated using month end figures.
(1)In computing the average balance of loans, non accrual loans have been
included.
(2)Includes both mortgage backed securities available for sale and held to
maturity.
(3)Includes both CMO's available for sale and held to maturity.
(4)Includes federal funds sold, banker's acceptances, commercial paper,
interest earning deposit accounts, and us government and agency obligations.
(5)Represents the net expense of hedging activities from interest rate swaps,
caps, and floors, both active and terminated.
(6)Includes advances from the FHLB, reverse repurchase agreements, federal
funds purchased, and dollar reverse repurchase agreements.
(7)Interest rate spread represents the difference between the average rate on
interest earning assets and the average rate on interest bearing liabilities.
(8)Net interest margin equals net interest income before provision for estimated
losses divided by average interest earning assets.
44
45
The following table presents a comparison of interest income and interest
expense resulting from changes in the volume and rates on average interest
earning assets and average interest bearing liabilities for the years indicated.
Changes in interest income or interest expense attributable to volume changes
are calculated by multiplying the change in volume by the prior fiscal year
average interest rate. The changes in interest income or interest expense
attributable to changes in interest rates are calculated by multiplying the
change in interest rate by the prior fiscal year average volume. The changes in
interest income or interest expense attributable to the combined impact of
changes in volume and changes in interest rate are calculated by multiplying the
change in rate times the change in volume.
------------------------------------------------- -------------------------------------------
Year Ended June 30, 1997 Year Ended June 30, 1996
Compared To Compared To
Year Ended June 30, 1996 Year Ended June 30, 1995
------------------------------------------------- -------------------------------------------
(Dollars In Thousands)
Increase (Decrease) Due To: Increase (Decrease) Due To:
------------------------------------------------- -------------------------------------------
Volume/ Volume/
Volume Rate Rate Net Volume Rate Rate Net
------ ---- ---- --- ------ ---- ---- ---
INTEREST INCOME:
Real estate loans, net $15,528 $(712) $(646) $14,170 $620 $709 $28 $1,357
Non real estate loans, net 619 (14) (16) 589 (76) 27 (3) (52)
Mortgage backed securities(1) (1,685) (503) 44 (2,144) (172) 1,103 (10) 921
CMO's (441) (152) 23 (570) (360) 53 (6) (313)
FHLB Stock 14 48 2 64 66 11 3 80
Other interest earning assets 3,171 680 207 4,058 6,776 309 853 7,938
------ ---- ---- ------ ------ ---- ---- ------
TOTAL INTEREST INCOME 17,206 (653) (386) 16,167 6,854 2,212 865 9,931
INTEREST EXPENSE:
Deposit accounts 14,085 136 81 14,302 525 2,565 65 3,155
Net hedging expense 0 (320) 0 (320) 0 (1,334) 0 (1,334)
Borrowings (3,601) (723) 367 (3,957) 2,787 373 283 3,443
------- ----- ---- ------- ------ ----- --- ------
TOTAL INTEREST EXPENSE 10,484 (907) 448 10,025 3,312 1,604 348 5,264
CHANGE IN NET INTEREST INCOME $6,722 $254 $(834) $6,142 $3,542 $608 $517 $4,667
------- ----- ------ ------- ------- ----- ----- ------
- ------------------------------
(1) Includes mortgage backed securities classified as both held to maturity and available for sale.
45
46
ASSET / LIABILITY MANAGEMENT
Asset / liability management is often referred to as the management of
"interest rate risk" ("IRR"). Interest rate risk and credit risk typically
constitute the two greatest exposure factors for financial institutions. The
objective of IRR management is to maximize the net income of the Company while
controlling the volatility of both net income and net portfolio value. Financial
institutions are exposed to various types and sources of interest rate risk,
including:
Repricing Risk. This occurs when assets and liabilities reprice at different
times and / or at different magnitudes.
Basis Risk. This risk stems from the divergent movement of various indices
(e.g. LIBOR, 1 Year CMT) underlying the repricing of a firm's assets and
Liabilities.
Option Risk. This risk arises from the implicit options embedded in many
financial products, such as a mortgage borrower's ability to refinance his loan
when general market interest rates decline.
IRR management focuses upon decisions to control or accept interest rate
risk based on an understanding of the probabilities associated with the
occurrence of various future scenarios. Stated another way, IRR management
encompasses the evaluation of the likely additional return associated with an
incremental change in the IRR profile of the institution. As with credit risk,
the complete elimination of interest rate risk would curtail the Company's
profitability, as the Company earns its returns, in part, through effective risk
management. On the other hand, excessive interest rate risk would expose the
Company to potentially significant volatility in net income and market value,
and possible regulatory response under safety and soundness considerations.
The Company monitors its interest rate risk through an internal simulation
model, various management reports, and the OTS Net Portfolio Value Model. The
Company employs a variety of tools to control its aggregate interest rate risk
exposure, including both on and off balance sheet instruments (See "Item 7.
Management's Discussion And Analysis -- Off Balance Sheet"). Consistent with the
static gap table displayed below, throughout fiscal 1997, the Company maintained
a net liability sensitive position. This means that, in aggregate, the Company's
sources of funding repriced faster and / or of a greater magnitude than the
Company's assets. This net liability sensitive position translates into expanded
net interest income and average interest margins during periods of declining
market interest rates. Conversely, this position presents the likelihood of
constrained net interest income and average spreads during rising rate
environments.
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47
The following table presents the maturity and rate sensitivity of the
Company's interest earning assets and interest bearing liabilities as of June
30, 1997. The "static gap" figures, as reflected in the following table, present
the estimated difference between the amount of interest earning assets and
interest bearing liabilities repricing during future periods, adjusted for
interest rate swaps. Amounts are included in the table based upon contractual
repricing.
At June 30, 1997
----------------------------------------------------------------------------------------
3 Months 4 Through 13 Through 37 Through 61 Through More Than
Or Less 12 Months 36 Months 60 Months 120 Months 120 Months Total
------- --------- --------- --------- ---------- ---------- -----
(Dollars In Thousands)
INTEREST EARNING ASSETS: (1)
Loans Held For Sale 0 0 0 0 0 335 335
Fixed Rate Residential Loans 6 219 1,310 1,796 9,953 112,976 126,260
Adjustable Rate Residential Loans 69,467 107,129 28,121 9,838 9,272 0 223,827
Fixed Rate Multifamily Loans 0 0 18 137 650 2,126 2,931
Adjustable Rate Multifamily Loans 8,862 9,292 2,866 147 825 0 21,992
Fixed Rate Commercial RE Loans 1,280 13 655 1,579 995 196 4,718
Adjustable Rate Commercial RE Loans 22,004 32,310 2,543 1,324 0 0 58,181
Fixed Rate Construction Loans 185 304 0 0 0 11,068 11,557
Adjustable Rate Construction Loans 4,732 243 0 0 0 0 4,975
Fixed Rate Land / Lot Loans 114 484 605 447 120 712 2,482
Adjustable Rate Land / Lot Loans 6,969 4,207 0 0 0 0 11,176
HELOCs 3,672 0 0 0 0 0 3,672
Adjustable Rate Mobile Home Loans 291 396 0 0 0 0 687
Fixed Rate Consumer Loans 723 495 358 580 1,128 2,298 5,582
Adjustable Rate Commerciial Loans 5,524 333 0 0 0 0 5,857
Fixed Rate CMO's 0 0 0 0 0 5,985 5,985
Adjustable Rate CMO's 27,321 0 0 0 0 0 27,321
Fixed Rate MBS 144 0 14,223 14,204 1,158 73,833 103,562
Adjustable Rate MBS 30,153 127,147 0 0 0 0 157,300
Fixed Rate Agency Debentures 0 0 2,988 0 20,916 114,581 138,485
FHLB Stock 6,224 0 0 0 0 0 6,224
Interest Bearing Cash Equivalents 4,510 0 0 0 0 0 4,510
------ -- -- -- -- -- ------
NET INTEREST EARNING ASSETS 192,181 282,572 53,687 30,052 45,017 324,110 927,619
INTEREST BEARING LIABILITIES:
NOW Accounts 42,916 0 0 0 0 0 42,916
Savings Accounts 111,742 0 0 0 0 0 111,742
Money Market Accounts 38,620 0 0 0 0 0 38,620
Certificate Of Deposit 157,846 314,150 122,153 18,026 3,347 0 615,522
FHLB Advances 0 0 50,000 0 0 0 50,000
-- -- ------- -- -- -- -------
TOTAL INTEREST BEARING LIABILITIES 351,124 314,150 172,153 18,026 3,347 0 858,800
Impact Of Interest Rate Swaps (35,000) 0 35,000 0 0 0 0
INTEREST BEARING LIABILITIES ADJUSTED
FOR INTEREST RATE SWAPS 316,124 314,150 207,153 18,026 3,347 0 858,800
Periodic Repricing Gap (123,943) (31,578) (153,466) 12,026 41,670 324,110 68,819
Cumulative Repricing Gap (123,943) (155,521) (308,987) (296,961) (255,291) 68,819
Periodic Repricing Gap As A Percent Of
Interest Earning Assets -13.36% -3.40% -16.54% 1.30% 4.49% 34.94%
Cumulative Repricing Gap As A Percent Of
Interest Earning Assets -13.36% -16.77% -33.31% -32.01% -27.52% 7.42%
(1) Assets are presented net of premiums, discounts, and undisbursed funds. Loan balances exclude non accrual loans.
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48
Static gap analysis such as that presented on the prior page provides only
a limited, point in time view of the Company's interest rate sensitivity. The
static gap analysis also does not reflect factors such as the magnitude (versus
the timing) of future interest rate changes and asset prepayments, which are
material to the Company's cash flows due to its significant balance of mortgage
related assets. The actual impact of interest rate changes upon the Company's
net income and net portfolio value may differ from that implied by any static
gap measurement. In addition, the Company's net interest income and net
portfolio value under various future interest rate scenarios are affected by
multiple other factors not embodied in a static gap analysis, including
competition, changes in the shape of the Treasury yield curve, divergent
movement among various interest rate indices, and the speed with which interest
rates change.
Another means of identifying and quantifying interest rate risk is via the
use of a computer simulation model that employs various mathematical techniques
and business assumptions to value a company's financial position under current
and multiple potential economic scenarios. The Company utilizes one such model
internally, and compares its results to the interest rate risk management
reports provided via the OTS Net Portfolio Value Model. Net portfolio value
refers to the estimated liquidation value of the Company's financial positions,
both on and off balance sheet, and therefore is not necessarily indicative of
the value of the Company as a going concern. The information presented in the
following table results from a lengthy series of assumptions about current and
future economic, behavioral, and financial factors, including many factors over
which the Company has no control. These assumptions include, but are not limited
to, prepayment rates on various loan portfolios ranging from 0% to 33%,
prepayment rates on various mortgage related securities ranging from 6% to 30%,
and a continuation of Treasury rates as of June 30, 1997 under the "Constant
Interest Rate" scenario. Because of the inherent uncertainty regarding the
accuracy of the assumptions utilized in both current and future periods,
management can provide no assurance that the valuations presented in the
following table are representative of what might actually be obtainable.
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49
Estimated Net Portfolio Value Of HF Bancorp, Inc. At June 30, 1997
------------------------------------------------------------------
-----------------------------------------
(Dollars In Thousands) Estimated Net Portfolio Value
-----------------------------------------
Financial Minus 2% Constant Plus 2%
Statement Parallel Interest Parallel
Value Rate Shock Rates Rate Shock
----- ---------- ----- ----------
Assets 984,749 1,012,893 980,144 919,278
Liabilities 903,722 904,861 882,603 861,192
Off Balance Sheet 0 (2,497) (1,470) (433)
Net Portfolio Value 81,027 105,535 96,071 57,653
A significant portion of the estimated increase in the net portfolio value
of the Company over its book value at June 30, 1997 derives from the Bank's
portfolio of low cost core deposits and from its portfolios of adjustable rate
loans and securities, which were generally in high investor demand at June 30,
1997. Conversely, the Company's portfolios of fixed rate mortgage backed
securities and callable Agency debentures presented estimated market values
below historical book values.
The above results of the computer modeling are directionally consistent
with those indicated by the static gap table and the OTS Net Portfolio Value
Model. The Company is exposed to increases in general market interest rates (and
benefits from declines in general market interest rates) primarily due to its
portfolios of longer term, fixed rate, Agency callable securities, customer
residential mortgages, and mortgage backed securities, for which the Company did
not maintain a like amount of match funding at June 30, 1997. The results of the
computer modeling also highlight the impact of the embedded options present in
many of the Company's mortgage related portfolios, whereby the portfolios'
amount of increase in value in declining rate environments is less than the
amount of reduction in value in rising rate environments due to the ability and
tendency of borrowers to refinance their loans, often without penalty, when
general market interest rates fall.
During the year ending June 30, 1997, the Company took a number of steps
to reduce its sensitivity to increases in general market interest rates,
including:
o the sale of $34.0 million in long term, fixed rate mortgage backed
securities
o the development and marketing of additional core deposit products
o the sale of a portion of fixed rate residential loan originations into the
secondary market
o the adoption of a loan origination program which encourages the generation
of adjustable rate mortgages through favorable pricing to the consumer
combined with incentives to the Company's sales force
o the introduction of new Prime Rate based adjustable rate loan lending
products, including three different home equity lines of credit
o the focus of secondary market loan and security purchases upon adjustable
rate assets, or fixed rate assets with limited remaining lives
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50
PROVISION FOR ESTIMATED LOAN LOSSES
Implicit in lending activities is the risk that losses will occur and that
the amount of such losses will vary over time. Consequently, the Company
maintains an allowance for credit losses by charging a provision for estimated
credit losses to earnings. Loans determined to be losses are charged against the
allowance for credit losses. The Company's allowance for credit losses is
maintained at a level considered by management to be adequate to provide for
estimated losses inherent in the existing portfolio, including commitments under
commercial and standby letters of credit.
In evaluating the adequacy of the allowance for credit losses, management
estimates the amount of potential loss for each loan that has been identified as
having greater than standard credit risk, including loans identified as
nonperforming. Loss estimates also consider the borrower's financial data and
the current valuation of collateral when appropriate. In addition to the
allowance for specific problem credits, an allowance is further allocated for
all loans in the portfolio based on the risk characteristics of particular
categories of loans including historical loss experience in the portfolio.
Additional allowance is allocated on the basis of credit risk concentrations in
the portfolio and contingent obligations under off-balance sheet commercial and
standby letters of credit.
The Company's provision for estimated loan losses declined 63.6% from $1.1
million in fiscal 1996 to $384,000 in fiscal 1997, after totalling $1.2 million
in fiscal 1995. The fiscal 1997 reduction stemmed primarily from the following
factors:
o a cessation in the decline in real estate values in the Company's primary
lending markets, with some markets demonstrating price appreciation during
the most recent fiscal year
o $77,000 in recoveries of prior charge-offs
o in excess of 70.0% of the Company's loan portfolio consisting of
residential mortgages at June 30, 1997. The Company has enjoyed a
relatively favorable credit experience with home loans
o only 2.2% of the Company's loan portfolio at June 30, 1997 was composed of
credits that were either unsecured or secured by collateral other than
real estate or deposit accounts
o a continuing reduction in total classified assets commencing in the second
quarter of fiscal 1997 (see "Credit Quality")
Loan loss provisions in future fiscal years may be higher than those
recorded in fiscal 1997 if the Company succeeds in its strategic plan of
expanding the loan portfolio in order to better serve the communities in which
it operates and in order to better utilize the Company's capital position. The
potential increase in future loan loss provisions may, however, be offset by the
enhanced asset yields obtained via servicing household and small business credit
needs.
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51
OTHER INCOME / EXPENSE
Other income has three major components:
1. non interest income from ongoing operations, such as savings fees, loan
servicing income, and commissions earned from the sale of mutual funds and
insurance related products
2. income and expenses associated with foreclosed real estate and real estate
held for investment, including provision for real estate losses, rental
income from foreclosed properties while such are being marketed for sale,
and operating costs for real estate including insurance, maintenance, and
real property taxes
3. gains and losses on sales of loan servicing, securities, and other assets
and liabilities
Non interest income from loan operating fees increased from $199,000
during fiscal 1995 and $193,000 during fiscal 1996 to $359,000 during fiscal
1997 due to the impact of the two major acquisitions and the significant
expansion in the Company's loan portfolio. Savings Fee income also increased
significantly, from $613,000 in fiscal 1995 and $620,000 in fiscal 1996 to $1.4
million in fiscal 1997, due to the volume of deposit accounts added via the two
acquisitions and because of the Company's successful marketing for additional
deposit transaction accounts. In addition, the Company has benefitted from the
closure of Riverside County branches by major commercial banks.
The Company's loss from real estate operations declined 37.8%, from
$498,000 in fiscal 1996 to $310,000 in fiscal 1997, as real estate values in the
Company's primary market areas had generally bottomed, and in some cases
commenced improving, by the 1997 fiscal year. The current fiscal year's results
also compare favorably to the $747,000 loss from real estate operations reported
in fiscal 1995. For information concerning the Company's real estate development
results, see "Subsidiary Activities", below.
Net gains on the sale of securities designated as available for sale
increased from zero in fiscal 1996 to $1.0 million in fiscal 1997, as the
Company partially restructured its balance sheet to improve capital utilization,
eliminate all mutual fund investments, and reduce interest rate risk (See "Item
7. Management's Discussion & Analysis - Asset / Liability Management").
Net gains on loans held for sale rose from zero in fiscal 1995 and fiscal
1996 to $39,000 in fiscal 1997, as in fiscal 1997 the Company commenced selling
a portion of its residential fixed rate loan production into the secondary
markets in order to manage interest rate risk.
In fiscal 1997, the Company commenced the amortization of the core deposit
intangibles generated as a result of the two acquisitions. A total of $2.0
million in core deposit intangible amortization was recorded in fiscal 1997,
including twelve months of amortization for the core deposit intangible
associated with the northern San Diego County branch purchases and nine months
of amortization for the core deposit intangible associated with the PSSB
acquisition.
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52
SUBSIDIARY ACTIVITIES
First Hemet Corporation is a wholly owned subsidiary of HF Financial
Corporation, in turn a wholly owned subsidiary of the Bank. First Hemet
Corporation provides trustee services for the Bank, is engaged in real estate
development, and receives commissions from the sale of mortgage life insurance,
fire insurance and annuities. For the fiscal years ended June 30, 1997, 1996,
and 1995, First Hemet Corporation had $1.1 million, $2.5 million, and $3.2
million in total assets, respectively.
At June 30, 1997, First Hemet Corporation maintained the following real
estate development assets:
Vista Bonita. This is a 15 residential lot subdivision located in Hemet,
California, which First Hemet Corporation is seeking to sell on a bulk basis. At
June 30, 1997, First Hemet Corporation's net investment in this property was
$269,000, which has been reduced by a valuation allowance of $288,000.
Mayberry Estates. This real estate investment consists of six one-half
acre residential lots located in Hemet, California. First Hemet Corporation is
actively marketing the property for bulk sale. At June 30, 1997, First Hemet
Corporation's net investment in this project was $149,000, which has been
reduced by a valuation allowance of $290,000.
Because of First Hemet Corporation's real estate development activities,
OTS regulations require the Bank to deduct from regulatory capital its
investment in First Hemet Corporation, which at June 30, 1997 amounted to $1.0
million. Following the sale of the above two real estate investments, the
Company intends to discontinue real estate development activities for the
foreseeable future.
GENERAL & ADMINISTRATIVE EXPENSES
General & administrative expenses excluding the SAIF special assessment
and the costs associated with the defined benefit and retirement restoration
plan terminations increased 49.9% from $12.9 million in fiscal 1996 to $19.4
million in fiscal 1997, after rising $1.3 million between fiscal 1995 and fiscal
1996. The significant increase in fiscal 1997 stemmed from two sets of factors:
1. The many non recurring operating costs borne by the Company to integrate
the two acquisitions, including data processing conversion expenses, check
printing costs, and the write-off of acquired assets not utilized in the
ongoing business of the Company
2. the ongoing costs of operating nineteen branches, a headquarters facility,
and a stand alone loan center, versus twelve branches and a headquarters
facility, as a result of the two acquisitions and the significant
expansion in credit originations generated by the Company over the most
recent fiscal year
52
53
Salaries and related expenses constitute the greatest portion of the
Company's general & administrative expenses. During fiscal 1997, salaries and
employee benefits costs (excluding the termination costs for the two retirement
plans) rose to $9.4 million from $6.8 million in fiscal 1996 and $5.8 million in
fiscal 1995. While this increase in cost has primarily resulted from the growth
of the Company, management has taken the following steps to control salaries and
benefits costs in future fiscal years:
o the aforementioned termination of the defined benefit pension plan and the
retirement restoration plan
o a requirement that employees pay a greater percentage of their medical
insurance costs
o the elimination of redundant positions during fiscal 1997 following the
integration of PSSB with the Company
Occupancy and equipment expenses were relatively constant in fiscal 1995
and 1996 at $2.0 million. These expenses increased to $3.4 million in fiscal
1997 due to the addition of seven full service branches and the establishment of
the Loan Center. Similarly, data processing costs increased from $794,000 in
fiscal 1995 to $832,000 in fiscal 1996 before rising significantly to $1.6
million in fiscal 1997, as the Company's volume of customer deposit accounts
alone expanded from less than 39,000 at June 30, 1995 to nearly 60,000 at June
30, 1997.
Management remains intently focused upon controlling general &
administrative expenses, as highlighted by the termination of the two retirement
plans as of June 30, 1997. In the coming fiscal year, management intends to
pursue other initiatives aimed at reducing the Company's efficiency ratio to a
level more in line with its peer institutions. These initiatives include, but
are not limited to, alterations in the Company's delivery of products and
services, further modifications to benefits plans, a transition to a greater
reliance upon incentive based compensation, and outsourcing functions currently
performed internally. However, there can be no assurance that the Company will
be able to implement these initiatives or, if implemented, that they will have
the desired effect of significantly reducing general & administrative expenses.
INCOME TAXES
The Company's nominal combined federal and state tax rate is approximately
41.3%. Differences between this rate and the effective tax rate for each fiscal
year arise from:
o certain operating expenses for which there is limited federal and / or
state tax deductibility
o revisions to tax expenses recognized for prior fiscal years
o adjustments to valuation allowances associated with deferred tax assets
under SFAS Number 109
See "Note 12 of the Consolidated Financial Statements" for additional
information.
53
54
ANALYSIS OF FINANCIAL CONDITION
OVERVIEW
The Company reported total assets of $984.7 million at June 30, 1997. This
represented an increase of $157.8 million, or 19.1%, from total assets of $826.9
million at June 30, 1996. During fiscal 1996, total assets increased $160.9
million, or 24.2%, from total assets of $666.1 million at June 30, 1995. The
increase in total assets in fiscal 1997 was largely generated by the PSSB
acquisition, while the rise in total assets in fiscal 1996 primarily resulted
from the purchase of the three branches from Hawthorne Savings Bank.
The overall composition of the Company's assets changed significantly in
fiscal 1997, with a reduction of the excess liquidity present at the conclusion
of the prior fiscal year, a significant increase in the loan portfolio resulting
from both enhanced origination volume and expanded loan purchases, and a
migration in the securities portfolio to more interest rate sensitive
investments. On the liability side of the balance sheet, the evolution toward
more transaction accounts continued within the deposit portfolio. These
aggregate balance sheet changes were reflective of the Company's strategic plan
of developing into one of Southern California's premier community banks.
SECURITIES PORTFOLIO
The Company maintains a portfolio of investment securities in order to
serve as a source of liquidity, to generate income (primarily net interest
income), and to contribute to the management of interest rate risk. Note 3 and
Note 4 of the Consolidated Financial Statements included in this Form 10-K set
forth information concerning the composition, estimated fair value, and maturity
distribution of the securities portfolio at June 30, 1997 and 1996.
At June 30, 1997, securities totaled $432.7 million, down 7.4% from $467.4
million at June 30, 1996, as in fiscal 1997 the Company worked to redirect cash
flows from the security portfolio into customer loans in order to bolster net
interest income, serve the Company's expanded market area, and better utilize
the Bank's strong risk based capital position.
General trends in the security portfolio during fiscal 1997 included the
focus of new purchases on adjustable rate securities or securities with limited
durations, such as seasoned Agency fixed rate balloon securities, where the then
outstanding entire principal balance is payable at a given date one or more
years in the future. This focus for new purchases was complemented by the sale
of longer term fixed rate instruments, the liquidation of all of the Company's
mutual fund investments, and the sale of all of the Company's Treasury
securities. The focus upon more interest rate sensitive securities resulted from
the Company's aggregate interest rate risk profile, which was a net liability
sensitive position throughout the 1997 fiscal year. The Treasury securities
represented a less advantageous investment than other alternatives given their
relatively low yields, the Bank's high liquidity, and the Bank's strong risk
based capital position.
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55
The securities portfolio at June 30, 1997 included three significant
concentrations:
1. $138.5 million in callable Agency bonds. These securities are fixed rate,
and present the issuer with the option to prepay the debentures at various
points in time or on various periodic cycles (e.g. quarterly). The issuer
would typically prepay the bonds when current market interest rates for
bonds with similar remaining terms fall below the cost of the Company's
securities. Therefore, in purchasing these securities, the Company
obtained comparatively higher interest rates in exchange for forfeiting
any significant capital appreciation above par in the event general market
interest rates decline.
2. $123.6 million in GNMA adjustable rate mortgage backed securities. These
securities reprice annually based upon a margin over the One Year Treasury
Constant Maturities Index as published by the Federal Reserve. The Company
has attempted to relatively uniformly distribute the annual repricing
dates of these securities in order to avoid exposure to interest rate
movements at any one point in time.
3. $72.6 million in FNMA fixed rate, thirty year mortgage backed securities
with a weighted average coupon rate of 6.51% and a weighted average
remaining maturity of 320 months carried in the held to maturity
portfolio.
Substantially all of the Company's securities other than the callable
debentures consist of securities backed by mortgages. The cash flows, total
return, and final maturities associated with mortgage backed securities can be
significantly impacted by the speed at which the underlying mortgages prepay.
Mortgages tend to repay faster as interest rates fall, and slower as interest
rates rise. As a result, the Company may be subject to "prepayment risk"
resulting from greater funds available for reinvestment at a time when available
yields are lower. Conversely, the Company may be subject to "extension risk"
resulting in lower cash flows being available for reinvestment at a time when
available yields are higher. While the Company undertakes efforts to diversify
these risks, such as by purchasing multiple pools of securities with different
coupons and interest rate reset dates, the Company remains exposed to volatility
in the fair market value, net interest income, and total returns stemming from
its mortgage backed securities.
The Company intends to concentrate future securities purchases upon
adjustable rate and low duration securities as part of its interest rate risk
management program. While such securities may often present lower initial yields
than are available via longer term, fixed rate instruments, the Company's
management believes that shareholder value is best maximized over time by
effectively managing interest rate risk. However, there can be no assurance that
an adequate supply of adjustable rate and low duration securities at acceptable
prices will be available to the Company in future periods.
55
56
LOANS
At June 30, 1997, the Company reported total net loans receivable of
$484.3 million. This represented an increase of $259.1 million, or 115.1%, over
$225.2 million in net loans receivable at June 30, 1996. In conjunction with the
PSSB acquisition, $160.7 million in net loans were added in fiscal 1997. The
Company's loan originations have increased quite significantly over the past
several years, from $19.3 million in fiscal 1995 to $38.8 million in fiscal 1996
to $135.0 million in fiscal 1997. This increase in originations has stemmed from
the rebuilding of the Company's retail (via internal offices) and wholesale (via
mortgage brokers) loan production networks. In addition, loan purchases expanded
from $0.2 million in fiscal 1995 to $13.9 million in fiscal 1996 to $53.6
million in fiscal 1997, as the Company's management moved to better deploy the
Bank's strong risk based capital position.
The following table presents the Company's loan related activity during
the fiscal years indicated.
Fiscal Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
Beginning Balance $236,383 $210,791 $215,645 $241,618 $242,366
Originations 134,988 38,820 19,321 40,440 57,981
Purchases 53,637 13,892 207 513 100
PSSB Acquisition 175,603 0 0 0 0
Sales (4,674) 0 0 (9,789) 0
Transfers To Foreclosed Real Estate (7,048) (1,931) (1,946) (5,582) (2,585)
Loans Held For Sale (335) 0 0 0 0
Principal Repayments (82,222) (25,189) (22,436) (51,555) (56,244)
Ending Balance $506,332 $236,383 $210,791 $215,645 $241,618
The Company's residential loan origination operation has emphasized the
production of adjustable rate mortgages over the past year via more aggressive
pricing, higher loan agent commissions versus fixed rate loans, and augmented
marketing support. The Company has focused upon adjustable rate mortgage
originations and purchases in order to reduce its aggregate exposure to
increases in general market interest rates (See "Item 7. Analysis Of The Results
Of Operations -- Asset / Liability Management"). For the same reason, the
Company commenced selling a portion of its residential fixed rate loan
production during fiscal 1997.
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57
Principal repayments in fiscal 1997 were inflated by:
o the Company's experience with a $12.5 million pool of adjustable rate,
residential, single family mortgages purchased in September, 1996. By June
30, 1997, all but $2.7 million of the pool's principal balance had been
repaid. The Company has ceased purchasing loans from both the originator
and the broker of this loan pool.
o periods of relatively low interest rates, which encouraged customers to
refinance their mortgages into loans presenting reduced interest rates
o the repayment of a significant volume of construction loans, as the
projects financed by the Company were completed
The following table sets forth the Company's allowances for estimated loan
losses at the dates indicated.
AT OR FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Allowance for estimated loan losses:
Balance at beginning of period........... $3,068 $2,694 $2,682 $3,157 $1,339
Net Charge-offs:
One- to-four-family..................... (865) (320) (46) (36) (10)
Multi-family............................ (26) -- -- -- --
Commercial real estate.................. (130) (304) (636) (1,062) (56)
Construction............................ (217) (10) -- -- --
Acquisition, development and land....... (210) (20) (394) (188) (21)
Loans reclassified to oreo (1) (149) -- -- -- --
Consumer................................ (38) (26) (114) (66) (15)
---- ---- ----- ----- ------
Total net charge-offs...................... (1,635) (680) (1,190) (1,352) (102)
Acquired from PSSB 2,963 -- -- -- --
Provision charged to income................ 384 1,054 1,202 877 1,920
----- ----- ----- ----- ------
Balance at end of period................... $4,780 $3,068 $2,694 $2,682 $3,157
====== ===== ===== ===== =====
- -------------------------
(1) Per SFAS Number 66.
For financial ratios addressing the Company's credit quality, please refer to
Item 6. "Selected Consolidated Financial And Other Data Of The Company".
57
58
In conjunction with the PSSB acquisition, the Company acquired a small
business loan portfolio and commercial business lending expertise, which
management has been leveraging throughout the branch system since the conclusion
of the acquisition. The Company has been marketing a more comprehensive small
business service line during the last six months of fiscal 1997, which includes
not only commercial lines of credit, but also demand deposit account analysis,
integration with third party payroll service providers, merchant bankcard
services, deposit collection via courier, and safe deposit boxes.
In fiscal 1997, the Company commenced originating home equity line of
credit ("HELOC") loans under three separately priced and marketed programs:
1. 80% or lower loan to value credits with commitments up to $100,000
2. 81% -- 90% loan to value credits with commitments up to $100,000
3. 80% or lower loan to value credits with commitments over $100,000
These revolving credit lines are priced based upon the Wall Street Journal
Prime Rate, reprice monthly, provide annual fees after the first year, present
early closure fees, and are originated at no cost to the consumer (in the case
of the first two programs). In addition, all HELOC's receive credit reviews at
least annually. At June 30, 1997, the Company had $7.7 million in HELOC credit
commitments outstanding.
The Company also commenced originating consumer loans for autos, boats, and
recreational vehicles for its own account during fiscal 1997. In prior periods,
the Company referred such business to third parties in exchange for a fee. In
fiscal 1998, the Company's management intends to evaluate the provision of
credit cards to its consumer and business customers, either of its own account
or via a third party, in order to offer a complete community banking product
line to its clients.
The Company continues to originate construction, apartment, and commercial
real estate loans. A majority of the Company's construction loans are associated
with the construction of single family residences. The Company also offers fully
amortizing loans for the purchase of land and developed housing lots. In fiscal
1998, management intends to pursue the origination of a greater volume of high
credit quality apartment and commercial real estate loans in order to better
utilize the Bank's strong risk based capital position and high available
liquidity. However, there can be no assurances that the Company will be
successful in generating such originations. In addition, commercial real estate
and multifamily loans, even though prudently underwritten, are generally
considered to involve a higher degree of credit risk than one to four family
mortgage loans.
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59
The following table presents the distribution of the Company's loan
portfolio at the dates indicated.
---------------------- ------------------- -------------------
June 30, 1997 June 30, 1996 June 30, 1995
---------------------- ------------------- -------------------
Principal Percent Principal Percent Principal Percent
Balance Of Total Balance Of Total Balance Of Total
------- -------- ------- -------- ------- --------
(Dollars In Thousands)
REAL ESTATE LOANS:
One To Four Unit Residential $355,567 70.23% $162,730 68.85% $138,074 65.49%
Multifamily / Apartments 25,584 5.05% 5,564 2.35% 5,434 2.58%
Commercial Properties 63,827 12.61% 46,222 19.55% 49,020 23.26%
Construction 31,566 6.23% 9,459 4.00% 5,920 2.81%
Land / Lots 13,827 2.73% 7,355 3.11% 6,527 3.10%
------- ----- ------ ----- ----- -----
Sub Total 490,371 96.85% 231,330 97.86% 204,975 97.24%
CONSUMER LOANS:
Mobile Home Loans 3,642 0.72% 4,158 1.76% 4,779 2.27%
Loans On Deposit Accounts 1,179 0.23% 746 0.32% 764 0.36%
Home Equity Lines Of Credit 3,597 0.71% 0 0.00% 0 0.00%
Other Consumer Loans 1,607 0.32% 149 0.06% 273 0.13%
------ ----- --- ----- --- -----
Sub Total 10,025 1.98% 5,053 2.14% 5,816 2.76%
COMMERCIAL BUSINESS LOANS 5,936 1.17% 0 0.00% 0 0.00%
TOTAL GROSS LOANS 506,332 100.00% 236,383 100.00% 210,791 100.00%
LESS:
Undisbursed Loan Funds 15,841 5,584 3,281
Unamortized Net Yield Adjustments 1,377 2,570 2,419
Allowance For Estimated Losses 4,780 3,068 2,694
TOTAL NET LOANS $484,334 $225,161 $202,397
(Table continued on the following page)
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60
(Table continued from the prior page)
--------------------- ---------------------
June 30, 1994 June 30, 1993
--------------------- ---------------------
Principal Percent Principal Percent
Balance Of Total Balance Of Total
------- -------- ------- --------
(Dollars In Thousands)
REAL ESTATE LOANS:
One To Four Unit Residential $136,459 63.28% $153,024 63.33%
Multifamily / Apartments 5,498 2.55% 5,352 2.21%
Commercial Properties 51,685 23.97% 55,488 22.97%
Construction 8,616 3.99% 11,446 4.74%
Land / Lots 6,860 3.18% 8,723 3.61%
----- ----- ----- -----
Sub Total 209,118 96.97% 234,033 96.86%
CONSUMER LOANS:
Mobile Home Loans 5,409 2.51% 5,998 2.48%
Loans On Deposit Accounts 725 0.34% 792 0.33%
Home Equity Lines Of Credit -- 0.00% -- 0.00%
Other Consumer Loans 393 0.18% 795 0.33%
------- ----- --- -----
Sub Total 6,527 3.03% 7,585 3.14%
COMMERCIAL BUSINESS LOANS 0 0.00% 0 0.00%
TOTAL GROSS LOANS 215,645 100.00% 241,618 100.00%
LESS:
Undisbursed Loan Funds 4,106 5,126
Unamortized Net Yield Adjustments 2,487 2,562
Allowance For Estimated Losses 2,682 3,157
TOTAL NET LOANS $206,370 $230,773
======== ========
For information concerning the scheduled maturities of the Company's loans
at June 30, 1997, please refer to the static gap table presented under
"Asset/Liability Management".
Since the Company lends primarily in Southern California, its real estate
loan collateral is concentrated in this region. This concentration is considered
when determining the adequacy of the Company's Allowance for Loan and Lease
Losses ("ALLL"). Commencing in the second half of fiscal 1997, the Company began
pursuing the purchase of residential loan pools which included at least some
properties in Northern California, as a means of starting to diversify its
geographic concentration. However, despite these efforts, the vast majority of
the Company's real estate collateral was located in Riverside and San Diego
counties at June 30, 1997.
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61
The following table sets forth at June 30, 1997, the amount of gross loans
receivable, including non performing loans, and whether such loans have fixed or
adjustable interest rates. Adjustable rate loans which reprice based upon
movements in the 11th District Cost Of Funds Index ("COFI") are separated from
variable rate loans which reprice based upon movements in other indices,
including the Prime Rate and the Treasury One Year Constant Maturities Index.
--------------------
Adjustable Rate
--------------------
Fixed 11th Dist. Other
Rate COFI Indices Total
---- ---- ------- -----
(Dollars In Thousands)
REAL ESTATE LOANS:
One To Four Unit Residential $128,327 $112,330 $114,910 $355,567
Multifamily / Apartments 2,950 15,859 6,775 25,584
Commercial Properties 5,663 46,412 11,752 63,827
Construction 13,192 4,059 14,315 31,566
Land / Lots 2,491 3,979 7,357 13,827
------ ------ ------ -------
Sub Total 152,623 182,639 155,109 490,371
CONSUMER LOANS:
Mobile Home Loans 2,949 693 0 3,642
Loans On Deposit Accounts 1,179 0 0 1,179
Home Equity Lines Of Credit 0 0 3,597 3,597
Other Consumer Loans 1,607 0 0 1,607
------- -- -- ------
Sub Total 5,735 693 3,597 10,025
COMMERCIAL BUSINESS LOANS 0 0 5,936 5,936
TOTAL GROSS LOANS $158,358 $183,332 $164,642 $506,332
Additional information concerning fixed and adjustable rate loans, and the
scheduled maturities thereof, including those loans contractually due more than
one year from June 30, 1997, is presented in the static gap table under
"Asset/Liability Management".
During the past fiscal year, the Company has emphasized the origination
and purchase of loans tied to adjustable rate indices other than COFI in order
to diversify its portfolio and because of concerns regarding the long term
status of the COFI, as the number of savings institutions in the 11th District
continues to decline in conjunction with merger and acquisition activity. As the
determination of the COFI becomes concentrated in fewer institutions, funding
decisions by a relatively few large institutions could potentially further
reduce the correlation of COFI to changes in general market interest rates and
the Company's cost of funds.
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62
CREDIT QUALITY
General. Although the Company's management believes that non performing
loans are generally well secured and reserved, other real estate owned is
properly valued, and potential losses are provided for in the ALLL, there can be
no assurance that future deterioration in economic conditions or collateral
values will not result in future credit losses and associated charges against
the Company's income. In regards to real estate owned via foreclosure, although
all such properties are being actively marketed, the Company's management cannot
predict when these properties will be sold or what the terms of sale will be
when they are sold. It is the Company's general policy to maintain recent
(within eighteen months) appraisals for all foreclosed properties.
Non Performing Assets. At December 31, 1997, gross non performing assets,
which include non performing loans, real estate acquired via foreclosure, and
repossessed consumer assets, totaled $11.5 million. This represented an increase
of $8.7 million from total non performing assets of $2.8 million at June 30,
1996. During fiscal 1996, non performing assets decreased $1.4 million, or
33.9%, from a total of $4.2 million at June 30, 1995. The significant increase
in non performing assets in fiscal 1997 resulted primarily from loans originated
by PSSB prior to its acquisition. Approximately $3.6 million of the $5.2 million
in non performing loans at June 30, 1997 were originated by PSSB prior to the
acquisition. In conjunction with its due diligence of PSSB, the Bank's
management and third party consultants identified the weaknesses in the PSSB
credit portfolio and required PSSB to recognize an additional $2.2 million in
loss reserves immediately prior to the consummation of the acquisition.
The following table provides information on gross non performing assets at the
dates indicated:
----------------------------------------------
At June 30,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
Non accrual loans before valuation reserves $5,217 $1,301 $2,281 $2,636 $7,764
Investment in foreclosed real estate before
valuation reserves 6,308 1,460 1,893 3,554 1,324
Investment in repossessed consumer assets
before valuation reserves 10 0 0 0 0
TOTAL GROSS NON PERFORMING ASSETS $11,535 $2,761 $4,174 $6,190 $9,088
------- ------ ------ ------ ------
Non accrual loans to gross loans 1.06% 0.56% 1.10% 1.25% 3.28%
Non performing assets to total assets 1.17% 0.33% 0.63% 1.04% 1.69%
62
63
Delinquencies. The following table sets forth delinquencies in the
Company's loan portfolio as of the dates indicated:
At June 30,
-------------------------------------
1997
-------------------------------------
60-89 Days 90 Days or More
------------------ -----------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
----- -------- ----- --------
(Dollars In Thousand)
Residential One To Four Unit 9 $1,055 31 $ 3,416
Multi Family -- -- 2 439
Commercial Real Estate 1 110 3 1,218
Construction -- -- -- --
Land / Lots 2 1,281 2 32
Commercial Business 3 295 2 57
Consumer 3 67 13 55
---- --- ---- ---
Total 18 $2,808 53 $5,217
==== ====== ==== ======
Delinquent loans to gross loans .57% 1.06%
net of undisbursed funds
---------------------------------------
1996
---------------------------------------
60-89 Days 90 Days or More
------------------ ------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loan Loans of Loans
----- ------- ----- --------
(Dollars In Thousands)
Residential One To Four Unit 7 $ 866 11 $ 982
Multi Family -- -- -- --
Commercial Real Estate -- -- -- --
Construction -- -- -- --
Land / Lots 1 93 2 319
Commercial Business -- -- -- --
Consumer -- -- -- --
----- ----- ----- -----
Total 8 $ 959 13 $1,301
===== ===== ===== ======
Delinquent loans to gross loans .42% .56%
net of undisbursed funds
(Table continued on the following page)
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64
(Table continued from the previous page)
-------------------------------------------------
1995
-------------------------------------------------
60-89 Days 90 Days or More
---------------------- ----------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
----- -------- ----- --------
(Dollars In Thousands) (
Residential One To Four Unit 5 $ 298 23 $1,993
Multi Family -- -- -- --
Commercial Real Estate -- -- 1 102
Construction -- -- -- --
Land / Lots 1 55 1 47
Commercial Business -- -- -- --
Consumer 1 15 3 139
--- ----- ---- ------
Total 7 $ 368 28 $2,281
=== ===== ==== =====
Delinquent loans to gross loans .18% 1.10%
net of undisbursed funds
The following table stratifies the Company's foreclosed properties as of June
30, 1997 by underlying collateral.
(Dollars in Thousands)
GROSS VALUATION NET PERCENT
TYPE OF PROPERTY BALANCE RESERVES BALANCE OF TOTAL
- ---------------- ------- --------- ------- --------
Residential 1 - 4 Units $2,523 $351 $2,172 40.87%
Multifamily > 4 Units 0 0 0 0.00%
Commercial / Industrial 1,712 142 1,570 29.70%
Land / Developed Lots 2,083 527 1,556 29.43%
----- --- ----- ------
Total Foreclosed Real Estate $6,318 $1,020 $5,298 100.00%
The figures reported for foreclosed real estate at June 30, 1997 include
six loans with a net investment of $804,000, before valuation allowances,
reclassified to foreclosed real estate as a result of their not meeting the
thresholds for classification as loans under SFAS Number 66.
64
65
Classified Assets. Since the PSSB acquisition, the Company's management
has diligently worked to reduce the classified asset total through various means
including aggressive collection efforts, foreclosure with subsequent property
sales, and settlement of troubled loans for less than the principal balance
owed. Total classified assets have declined from $43.5 million at September 30,
1996 (immediately following the PSSB acquisition) to $32.4 million at June 30,
1997, as detailed in the following table.
(Dollars in Thousands)
SPECIAL
DATE MENTION SUBSTANDARD DOUBTFUL LOSS TOTAL
- ---- ------- ----------- -------- ---- -----
June 30, 1996 $11,070 $8,189 $0 $3,139 $22,398
September 30, 1996 17,454 22,006 0 4,037 43,497
December 31, 1996 17,793 20,588 0 2,820 41,201
March 31, 1997 16,646 18,733 0 3,035 38,414
June 30, 1997 9,586 19,834 0 2,952 32,372
65
66
Impaired Loans. The Company adopted SFAS Number 114, - "Accounting By
Creditors For Impairment Of a Loan" as amended by SFAS Number 118, - "Accounting
By Creditors For Impairment Of A Loan - Income Recognition And Disclosures" as
of July 1, 1995 and recognized no impact upon adoption. The Company has
historically defined a loan as impaired when it meets one or more of the
following criteria:
o it is probable that the Company will be unable to collect all contractual
principal and interest in accordance with the terms of the loan agreement
o the loan is ninety or more days past due
o the loan is placed on non accrual status (although less than ninety days
past due)
o a specific valuation reserve has been allocated against the loan
o the loan has been classified as "substandard" (or worse) by an internal
credit review process
At June 30, 1997, the Company had impaired loans totaling $16.3 million,
which have related specific reserves of $1.5 million. Of this $16.3 million,
$5.7 million was fully current in regards to the timely payment of principal and
interest. Total impaired loans at June 30, 1996 were $8.9 million. The average
recorded investment in impaired loans during the twelve month period ending June
30, 1997 was $16.2 million. The increase in impaired loans during fiscal 1997
was disproportionately represented by the portfolio of loans originated by PSSB
prior to its acquisition, as highlighted in the following table which presents
information as of June 30, 1997.
PSSB
Originations
Prior To Other
Acquisition Originations Total
----------- ------------ -----
(Dollars In Thousands)
Impaired Loans With A Current Paid To Date
- ------------------------------------------
Number Of Loans 19 37 56
Principal Balance $2,062 $3,631 $5,693
Specific Reserves $144 $244 $388
Impaired Loans Without A Current Paid To Date
- ---------------------------------------------
Number Of Loans 44 53 97
Principal Balance $6,542 $4,091 $10,633
Specific Reserves $560 $555 $1,115
Total Impaired Loans
- --------------------
Number Of Loans 63 90 153
Principal Balance $8,604 $7,722 $16,326
Specific Reserves $704 $799 $1,503
The consolidated financial statements and related footnotes included in
this Form 10-K present additional information concerning the Company's impaired
loans.
66
67
INTANGIBLE ASSETS
The purchase of three branches from Hawthorne Savings and the acquisition
of PSSB each generated intangible assets. The following tables provide
information concerning the initial amount of such intangible assets, their
periodic amortization against income, and their current balances as of June 30,
1997. Under OTS regulations, intangible assets reduce regulatory capital,
resulting in lower capital ratios than would otherwise be the case.
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 6/30/97 $5,693,210
Reduction In Regulatory Capital As Of 6/30/97 $5,693,210
Reduction In Tangible Book Value As Of 6/30/97 $5,693,210
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68
ACQUISITION OF PALM SPRINGS SAVINGS BANK
- ----------------------------------------
Initial Accounting
- ------------------
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
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: Non Taxable Acquisition
Core Deposit Intangible Not Tax Deductible: 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 6/30/97 Assets Tax Liabilities Net
------ --------------- ---
Loan Premium $2,186,575 $903,191 $1,283,384
Core Deposit Intangible $8,433,460 $3,483,542 $4,949,918
---------- ---------- ----------
Total $10,620,035 $4,386,733 $6,233,302
Reduction In Regulatory Capital As Of 6/30/97
Loan Premium none
Core Deposit Intangible, Net $4,949,918
Reduction In Tangible Book Value As Of 6/30/97
Loan Premium none
Core Deposit Intangible, Net $4,949,918
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69
ACQUISITION OF PALM SPRINGS SAVINGS BANK
- ----------------------------------------
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 6/30/97 $344,434
Reduction In Regulatory Capital As Of 6/30/97 $344,434
Reduction In Tangible Book Value As Of 6/30/97 $344,434
In March of 1997, the Company commenced payment to a former officer of
PSSB 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
PSSB acquisition, as the potential cost of the contract, which existed prior to
the acquisition, was included in 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 Company. 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 Company 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 Number 109.
69
70
DEPOSITS
The Company reported total deposits of $839.7 million at June 30, 1997.
This represented an increase of $169.9 million, or 25.4%, over total deposits of
$669.7 million at June 30, 1996. The increase in deposits stemmed primarily from
the PSSB acquisition. Total deposits at June 30, 1995 were $472.3 million, with
the increase during fiscal 1996 primarily associated with the purchase of the
three Hawthorne Savings Bank branches. The following table presents the deposit
activity of the Company for the periods indicated.
For the Fiscal Year Ended June 30,
----------------------------------
1997 1996
---- ----
(Dollars In Thousands)
Beginning Balance: $ 669,725 $472,337
Branch Deposits Purchased 164,687 185,189
Customer Deposits 1,384,369 569,642
Customer Withdrawals 1,412,165 582,597
--------- -------
Withdrawals in excess of deposit (27,796) (12,955)
Interest credited on deposits 33,039 25,154
------ ------
Net increase in deposits $169,930 $197,388
Ending Balance: $839,655 $669,725
At June 30, 1997, the Company had outstanding $110.0 million in certificate of
deposit accounts in amounts of $100,000 or more, maturing as presented in the
following table.
Average
Nominal
Amount Rate
------ ----
(Dollars In Thousands)
Maturity Period:
Three months or less.................. $ 29,739 5.47%
Over three through six months......... 25,455 5.76%
Over six through 12 months............ 28,856 5.78%
Over 12 months........................ 25,930 6.08%
------- -----
Total........................... $109,980 5.78%
======= ====
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71
The Bank is currently eligible to accept brokered deposits, and has in
place agreements with two investment banking firms to obtain brokered deposits
should the need for such funds arise and should the relative pricing of such
funds compare favorably to alternative sources of liquidity. However, at June
30, 1997, the Bank had no brokered deposits outstanding.
The Company's mix of deposits has changed over recent years. For example,
at June 30, 1995, non interest bearing checking accounts constituted 1.1% of
total deposits. By June 30, 1997, this proportion had increased to 3.7%.
Transaction account (non certificate) products comprised 21.0% of total deposits
at June 30, 1996, following the Hawthorne Savings Bank branch acquisitions,
which were heavily populated with certificate accounts. This percentage
increased to 26.7% at June 30, 1997. Consistent with the objective of serving as
a premier community bank, the Company in recent years, and particularly in
fiscal 1997, has emphasized business operating accounts, consumer demand deposit
accounts, 24 hour telephone banking, ATM access, and ACH services, thereby
gradually evolving the deposit portfolio toward a reduced concentration in
certificate of deposit products, which are typically more price sensitive than
transaction accounts. The Company intends to continue encouraging the migration
of its deposit portfolio in the coming fiscal year, taking advantage of market
dissatisfaction with the service levels provided by large and merging
competitors while also improving shareholder returns through lower cost and more
stable funding. However, there can be no assurance that the Company will be
successful in this regard.
BORROWINGS
At June 30 1997, the Company had $50.0 million in total borrowings,
composed of two standard term advances from the FHLB-San Francisco. This was a
decline of $20.0 million from the $70.0 million outstanding at June 30, 1996, as
the Company during fiscal 1997 prepaid a $20.0 million advance, at no prepayment
penalty, whose rate exceeded the Bank's marginal return on liquid investments at
the time.
From time to time, the Bank utilizes other types and sources of
borrowings, including reverse repurchase agreements and putable FHLB advances.
During the upcoming fiscal year, the Bank's management intends to employ a
broader range of wholesale borrowings in an effort to increase the Bank's net
interest income, control interest rate risk, and fund the potential balance
sheet expansion associated with the more effective deployment of the Company's
capital.
71
72
The following table presents certain information regarding the Company's
borrowed funds at or for the periods ended on the dates indicated:
At or For the Year Ended June
-------------------------------------
1997 1996 1995
---- ---- ----
(Dollars In Thousands)
FHLB - Advances:
- ----------------
Average balance outstanding during period $60,769 $103,333 $70,000
Maximum amount outstanding at any month-end
during period 70,000 120,000 70,000
Balance outstanding at end of period 50,000 70,000 70,000
Weighted average interest rate during period 5.15% 5.36% 5.20%
Weighted average interest rate at end of period 4.97% 5.20% 5.20%
Other Borrowings:
- -----------------
Average balance outstanding during period -- 24,719 --
Maximum amount outstanding at any month-end
during period -- 49,438 --
Balance outstanding at end of period -- -- --
Weighted average interest rate during period -- 5.48 --
Weighted average interest rate at end of period -- -- --
Total Borrowings:
- -----------------
Average balance outstanding during period $60,769 $128,052 $70,000
Maximum amount outstanding at any month-end
during period 70,000 169,438 70,000
Balance outstanding at end of period 50,000 70,000 70,000
Weighted average interest rate during period 5.15% 5.38% 5.20%
Weighted average interest rate at end of period 4.97% 5.20% 5.20%
72
73
LIQUIDITY
Liquidity is actively managed to ensure sufficient funds are available to meet
the ongoing needs of both the Company in general and the Bank in particular.
Liquidity management includes projections of future sources and uses of funds to
ensure the availability of sufficient liquid reserves to provide for
unanticipated circumstances.
For the Bank, the primary sources of liquidity are:
o deposits
o principal and interest payments on loans, mortgage backed, and investment
securities
o retained earnings
o FHLB advances
o other borrowings, including reverse repurchase agreements
For the Bank, the primary uses of funds include:
o loan originations
o customer drawdowns on lines of credit
o loan purchases
o customer withdrawals of deposits
o interest paid on liabilities
o operating expenses
The Bank's investment portfolio is structured to provide an ongoing source
of cash from scheduled payments and anticipated prepayments from mortgage backed
securities, in addition to cash flows from periodic maturities, typically from
securities with balloon final payments. The Company's strategy over the past
year has been to reinvest available monthly cash flows, to the extent
economically and operationally feasible, into new whole loan originations and
purchases, in order to bolster net interest income and better utilize the Bank's
strong risk based capital position.
In the coming year, the Company's management intends to pursue the
acquisition of short term, unsecured lines of credit from the institution's
correspondent banks, as an additional means to provide for contingent liquidity
needs. However, there can be no assurances that the Company will be successful
in securing such lines of credit.
73
74
At June 30, 1997, the Bank maintained untapped borrowing capacity at the
FHLB-San Francisco in the amount of $178.2 million. In addition, due to the
Company's relatively low loan to deposit ratio of 57.7% at June 30, 1997, the
Company maintained significant excess collateral in both loans and securities;
collateral which is available for either liquidation or secured borrowings in
order to meet future liquidity requirements.
At June 30, 1997, cash and cash equivalents totaled $18.4 million, compared
to $100.6 million at June 30, 1996, and $88.6 million at June 30, 1995. The
figure at June 30, 1997 represented a more normalized amount, as the figures at
the two prior year ends were each inflated by particular events. At June 30,
1996, the Company had recently acquired the three branches from Hawthorne
Savings Bank and had not yet completed the longer term deployment of cash
received. At June 30, 1995, the Company had just accomplished its initial public
offering, and had also not yet completed the longer term investment of the
proceeds. It is management's intention, while ensuring adequate cash
availability for operating needs, to constrain cash and cash equivalent balances
in favor of higher yielding assets, subject to meeting all regulatory liquidity
requirements.
OTS regulations currently present two liquidity requirements. The key
requirement is based upon cash, cash equivalents, and certain short term
investments equaling at least 5.0% of deposits plus short term borrowings. The
Bank's regulatory liquidity ratio for the month of June, 1997 was 5.93%, placing
the Bank in compliance.
Liquidity needs for HFB on a stand alone basis are met through available
cash, periodic earnings, and cash flows from its investment portfolio.
CAPITAL RESOURCES
The Bank's position as a "well capitalized" financial institution under the
PCA regulatory framework is further enhanced by the additional capital present
at the HFB holding company level. The value of the additional capital in the
holding company was highlighted during June, 1997, when HFB downstreamed $5.0
million in capital to the Bank in preparation for the financial impact of the
retirement plan terminations. At June 30, 1997, the consolidated GAAP capital
position of the Bank was $72.5 million, while the consolidated GAAP capital
position of the Company was $81.0 million.
Despite the presence of capital in excess of current regulatory
requirements, the Company does not presently intend to evaluate the initiation
of cash dividend payments until the core profitability of the Company improves
and the Company displays a more regular stream of improved earnings per share.
74
75
OFF BALANCE SHEET
Over the past decade, the Company has utilized a variety of financial
instruments to control its interest rate risk and manage its net interest
margin, 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 Bank terminated four interest rate swap contracts with an
aggregate notional amount of $60.0 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.
During the twelve months ended June 30, 1997, the Company amortized $1.8
million of the deferred loss to interest expense, and charged interest expense
for $1.1 million related to current existing interest rate swaps with an
aggregate notional amount of $35.0 million. The comparable figures for the prior
fiscal year were $2.0 million and $1.2 million, respectively. The year to year
decrease in recognition of the deferred loss stemmed from the conclusion of the
amortization periods for two of the terminated swaps during fiscal 1997. The end
of the amortization period associated with another terminated swap will occur in
fiscal 1998, with the accounting impact of the final terminated swap finishing
in fiscal 1999. The conclusion of these amortization periods will result in the
Company's reporting a reduction in interest expense and effective cost of
funding, all else held constant.
Additional information concerning the Company's active and terminated interest
rate swap positions is provided in the following table.
Active Interest Rate Swaps
- --------------------------
Rate Basis Rate Basis
Notional Maturity Bank Bank Bank Bank Swap
Amount Date Receives Receives Pays Pays Resets
------ ---- -------- -------- ---- ---- ------
$20,000,000 1/06/99 3 month LIBOR Actual/360 9.800% Fixed 360/360 quarterly
$15,000,000 1/30/99 3 month LIBOR Actual/360 7.274% Fixed 360/360 quarterly
-----------
Total $35,000,000
===========
Terminated Interest Rate Swaps
- ------------------------------
Original 6/30/97 Loss Daily
Notional Termination Deferred Deferred Amortization Loss
Amount Date Loss Loss Completion Amortization
------ ---- ---- ---- ---------- ------------
$10,000,000 7/10/95 $557,730 $0 03/27/97 $890
$20,000,000 7/10/95 $1,338,145 $0 04/30/97 $2,024
$10,000,000 7/10/95 $631,816 $107,480 11/25/97 $726
$20,000,000 7/10/95 $2,328,601 $962,842 11/21/98 $1,892
------------ ---------- --------
Total $60,000,000 $4,856,292 $1,070,322
=========== =========== =========
75
76
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
most financial positions and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. Unlike industrial companies, the Company's assets and
liabilities are nearly all monetary in nature. Consequently, relative and
absolute interest rates present a greater impact on the Company's performance
and condition than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services. The Company's operating costs, however, are subject to
the impact of inflation, particularly in the case of salaries and benefits
costs, which typically constitute approximately one-half of the Company's total
general & administrative expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has recently released
the following Statements, which are discussed in footnote 1 to the Company's
consolidated financial statements included in this report, incorporated herein
by reference.
o SFAS Number 128: "Earnings Per Share"
o SFAS Number 129: "Disclosure Of Information About Capital Structure"
o SFAS Number 130: "Reporting Comprehensive Income"
o SFAS Number 131: "Disclosures About Segments Of An Enterprise and Related
Information"
The above Statements are primarily related to the disclosure and reporting
requirements applicable to the Company. As such, the Company's management does
not believe that the adoption of these Statements will have a significant impact
upon the Company's financial condition or results of operations.
76
77
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. 78
Consolidated Statements of Financial Condition as of June 30, 1996 and 1997 79
Consolidated Statements of Operations for the
Fiscal Years Ended June 30, 1995, 1996 and 1997........................ 81
Consolidated Statements of Stockholders' Equity........................... 83
Consolidated Statements of Cash Flows for the
Fiscal Years Ended June 30, 1995, 1996 and 1997........................ 84
Notes to Consolidated Financial Statements................................ 87
77
78
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HF Bancorp, Inc.
Hemet, California
We have audited the accompanying consolidated statements of financial condition
of HF Bancorp, Inc. and subsidiary (the "Company") as of June 30, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HF Bancorp, Inc. and
subsidiary as of June 30, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
August 8, 1997
78
79
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
JUNE 30,
--------------------------------
1997 1996
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 18,411 $100,633
Securities available-for-sale, at estimated fair value:
Investment securities (Note 3) 144,997 173,171
Mortgage-backed securities (Notes 4 and 11) 109,493 100,259
Securities held-to-maturity, at amortized cost:
Investment securities (Note 3) 26,794 34,666
Mortgage-backed securities (Notes 4 and 11) 151,369 159,262
Loans receivable (net of allowance for estimated loan losses of $4,780
and $3,068 at June 30, 1997 and 1996) (Notes 4, 5 and 10) 484,334 225,161
Loans held-for-sale 335
Accrued interest receivable (Note 6) 7,332 6,260
Investment in capital stock of the Federal Home Loan
Bank, at cost (Notes 4 and 10) 6,224 4,436
Premises and equipment, net (Note 7) 8,289 6,578
Real estate owned, net (Note 8):
Acquired through foreclosure 5,298 1,079
Acquired for sale or investment 418 996
Intangible assets (Note 17) 14,471 6,642
Prepaid swap termination loss (Note 15) 1,070 2,881
Prepaid pension plan expense (Note 13) 1,236
Other assets (Note 12) 5,914 3,656
-------- --------
Total assets $984,749 $826,916
======== ========
See notes to consolidated financial statements.
79
80
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
JUNE 30,
--------------------------------
1997 1996
(IN THOUSANDS)
LIABILITIES AND STOKCHOLDERS' EQUITY
Liabilities:
Deposit accounts (Note 9) $839,655 $669,725
Advances from the Federal Home Loan Bank (Note 10) 50,000 70,000
Accounts payable and other liabilities (Note 13) 6,888 5,278
Income taxes (Note 12) 7,179 842
-------- --------
Total liabilities 903,722 745,845
Commitments and contingencies (Notes 13, 14 and 15)
Stockholders' Equity (Notes 2 and 13):
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 (1997 and 1996); and
6,281,875 outstanding (1997 and 1996) 66 66
Additional paid-in capital 51,355 51,113
Retained earnings, substantially restricted 38,441 40,957
Net unrealized loss on securities available-for-sale, net of taxes (1,050) (2,309)
Deferred stock compensation (4,437) (5,408)
Treasury stock, 330,625 shares (3,348) (3,348)
-------- --------
Total stockholders' equity 81,027 81,071
-------- --------
Total liabilities and stockholders' equity $984,749 $826,916
======== ========
See notes to consolidated financial statements.
80
81
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------
1997 1996 1995
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest on loans $ 32,407 $ 17,648 $ 16,345
Interest on mortgage-backed securities 16,969 19,113 18,191
Interest and dividends on investment securities 17,146 13,594 5,888
------- -------- --------
Total interest income 66,522 50,355 40,424
------- -------- --------
INTEREST EXPENSE:
Interest on deposit accounts (Note 9) 38,083 23,781 20,628
Interest on advances from the Federal Home Loan Bank
and other borrowings (Notes 10 and 11) 3,129 7,086 3,641
Net interest expense of hedging transactions (Note 15) 2,872 3,192 4,526
------- ------- --------
Total interest expense 44,084 34,059 28,795
------- ------- --------
NET INTEREST INCOME BEFORE PROVISION FOR
ESTIMATED LOAN LOSSES 22,438 16,296 11,629
PROVISION FOR ESTIMATED LOAN LOSSES (Note 5) 384 1,054 1,202
------- ------- --------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES 22,054 15,242 10,427
------- ------- --------
OTHER INCOME (EXPENSE):
Other loan fee income 359 193 199
Net loss on sales of investment securities available-for-sale
(Note 3) (293) (13)
Net gain on sales of mortgage-backed securities
available-for-sale (Note 4) 1,332
Gain on sales of loans 39
Loss from real estate operations, net (Note 8) (310) (498) (747)
Amortization of intangible assets (1,979)
Savings fee income 1,402 620 613
Other income 255 450 124
------- ------- --------
Total other income 805 765 176
------- ------- --------
See notes to consolidated financial statements.
81
82
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-------------------------------------------------------
1997 1996 1995
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits (Note 13) $ 9,438 $ 6,790 $ 5,803
Occupancy and equipment expense (Note 14) 3,435 2,023 2,020
FDIC insurance and other assessments 1,260 1,322 1,239
Legal and professional services 780 489 378
Data processing service costs 1,597 832 794
Other 2,870 1,475 1,415
-------- -------- -------
19,380 12,931 11,649
-------- -------- -------
Savings Association Insurance Fund special assessment 4,757
Benefit plans termination expense (Note 13) 3,000
--------
7,757
--------
Total general and administrative expenses 27,137 12,931 11,649
-------- -------- -------
(LOSS) EARNINGS BEFORE INCOME TAX
(BENEFIT) EXPENSE (4,278) 3,076 (1,046)
INCOME TAX (BENEFIT) EXPENSE (Note 12) (1,762) 1,129 (353)
-------- -------- -------
NET (LOSS) EARNINGS $ (2,516) $ 1,947 $ (693)
======== ======== =======
(LOSS) EARNINGS PER SHARE $ (0.44) $ 0.33 N/A
======== ========= =======
See notes to consolidated financial statements.
82
83
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(IN THOUSANDS)
NET UNREALIZED GAIN
ADDITIONAL (LOSS) ON SECURITIES DEFERRED TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED AVAILABLE-FOR-SALE, STOCK TREASURY STOCKHOLDERS'
-------------------- ----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS NET OF TAXES COMPENSATION STOCK EQUITY
BALANCE, July 1, 1994 - $ - - $ - - $39,703 $ (63) $ - $ - $39,640
Net loss (693) (693)
Change in net unrealized
gain on securities
available-for-sale,
net of taxes 832 832
Issuance of common stock,
net of underwriting
expenses 6,613 66 51,004 51,070
Common stock acquired by
ESOP (3,703) (3,703)
------- -------- ------ ---- ------ ------ ----- ------ ------- --------
BALANCE, June 30, 1995 6,613 66 51,004 39,010 769 (3,703) 87,146
Net earnings 1,947 1,947
Change in net unrealized
loss on securities
available-for-sale,
net of taxes (3,078) (3,078)
Purchase of common stock
for deferred stock
compensation plans (2,260) (2,260)
Amortization of deferred
stock compensation 109 555 664
Acquisition of treasury
stock (3,348) (3,348)
------- -------- ------ ---- ------- ------ ------ ------ ------- -------
BALANCE, June 30, 1996 6,613 66 51,113 40,957 (2,309) (5,408) (3,348) 81,071
Net loss (2,516) (2,516)
Change in net unrealized
gain on securities
available-for-sale,
net of taxes 1,259 1,259
Amortization of deferred
stock compensation 242 971 1,213
------- -------- ------ ---- ------- ------- ------- ------- ------- -------
BALANCE, June 30, 1997 - $ - 6,613 $ 66 $51,355 $38,441 $(1,050) $(4,437) $(3,348) $81,027
======= ======== ====== ==== ======= ======= ======= ======= ======= =======
See notes to consolidated financial statements.
83
84
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------------------
1997 1996 1995
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (2,516) $ 1,947 $ (693)
Adjustments to reconcile net (loss) earnings
to net cash (used in) provided by operating activities:
Provisions for estimated loan and real estate losses 581 1,318 1,835
Write-down of stripped mortgage-backed security - interest only 8
Direct write-offs from real estate operations 53 142 121
Depreciation and amortization 1,271 777 820
Amortization of deferred loan fees (655) (383) (331)
Amortization (accretion) of premiums (discounts) on loans and
investment and mortgage-backed securities 355 147 (155)
Amortization of intangible assets 1,979
Amortization of cost of interest rate caps and floors 111
Federal Home Loan Bank stock dividend (379) (299) (219)
Dividends from investments in mutual funds (311)
Loss on sale of investment securities available-for-sale 293 13
Gain on sales of mortgage-backed securities (1,332)
Origination of loans held-for-sale (5,009)
Proceeds from sales of loans 4,713
Gain on sales of loans (39)
Gain on sales of real estate (94) (200) (182)
Gain on sales of premises and equipment (6) (10)
Deferred income taxes (1,593) 455 219
(Increase) decrease in accrued interest receivable (1,072) (2,940) 599
Increase (decrease) in accounts payable and other liabilities 1,075 (29,480) 27,679
Decrease (increase) in other assets 1,836 (9,153) (1,829)
Other, net 3,853 1,182 758
------- ------- -------
Net cash provided by (used in) operating activities 3,314 (36,497) 28,443
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans receivable (100,975) (24,634) 3,017
Purchases of mortgage-backed securities held-to-maturity (15,039) (23,124)
Purchases of mortgage-backed securities available-for-sale (76,946) (21,272)
Principal repayments on mortgage-backed securities held-to-maturity 21,586 24,429 14,627
Principal repayments on mortgage-backed securities available-for-sale 14,024 14,701 8,867
Proceeds from sales of mortgage-backed securities available-for-sale 56,083
Proceeds from maturities of mortgage-backed securities
held-to-maturity 1,144
Purchases of investment securities held-to-maturity (90,804) (19,052)
Proceeds from maturities and calls of investment securities held-to-
maturity 7,000 16,000
Principal repayments on investment securities held-to-maturity 648 595 168
Purchases of investment securities available-for-sale (37,968) (122,000)
See notes to consolidated financial statements.
84
85
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
(IN THOUSANDS)
Proceeds from maturities and calls of investment securities
available-for-sale $ 36,428 $ 52,000 $ 2,020
Principal repayments on investment securities available-for-sale 5,555 7,134 9,353
Proceeds from sales of investment securities available-for-sale 30,831 4,329
Proceeds from sales of real estate 3,378 2,900 3,012
Additions to real estate held for investment (6) (123) (2,203)
Proceeds from sale of premises and equipment 31 17 1,487
Additions to premises and equipment (1,850) (2,694) (222)
Redemption of Federal Home Loan Bank stock 1,800
Purchase of Federal Home Loan Bank stock (1,618) (55)
Cash payment for acquisition, net of cash received (14,707)
-------- -------- -------
Net cash (used in) provided by investing activities (70,783) (143,569) 2,224
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of deposit accounts 185,189
Net increase (decrease) in deposit accounts 5,247 12,199 (8,622)
Advances from the Federal Home Loan Bank 50,000
Repayment of advances from the Federal Home Loan Bank (20,000) (50,000)
Proceeds from other borrowings 98,875
Repayment of other borrowings (98,875)
Issuance of common stock, net of underwriting expenses and
excluding common stock acquired by ESOP 47,367
Payments to acquire common stock for deferred stock
compensation plans (1,983)
Payments to acquire treasury stock (3,348)
-------- -------- -------
Net cash (used in) provided by financing activities (14,753) 192,057 38,745
-------- -------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (82,222) 11,991 69,412
CASH AND CASH EQUIVALENTS, beginning of year 100,633 88,642 19,230
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year $ 18,411 $100,633 $88,642
======== ======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest on deposit accounts and other borrowings $ 8,660 $ 9,840 $11,222
======= ======== =======
Income taxes $ 291 $ 1,420 $ 475
======= ======== =======
See notes to consolidated financial statements.
85
86
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------------
1997 1996 1995
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure $ 7,048 $ 1,931 $ 1,946
======== ======= =======
Loans to facilitate sale of real estate acquired through foreclosure $ 2,076 $ 732 $ 1,860
======== ======= =======
Transfer of mortgage-backed securities held-to-maturity to
available-for-sale classification $24,321
=======
Transfer of investment securities held-to-maturity to available-
for-sale classification $ 250 $59,022
======== =======
Common stock acquired by ESOP $3,703
======
Purchase of Palm Springs Savings Bank:
Fair value of assets purchased, excluding cash $184,321
Liabilities assumed (169,614)
--------
Cash payment for acquisition, net of cash received $ 14,707
========
See notes to consolidated financial statements.
86
87
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS FOR PRESENTATION - HF Bancorp, Inc. (the "Company") 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 "Bank") 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 Bank'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 Bank's
common stock issued in the Bank's conversion to stock form. Such
business combination was accounted for at historical cost in a manner
similar to a pooling of interests.
At June 30, 1995, the Bank established a liquidation account in an
amount equal to its equity, as reflected in the latest statement of
financial condition used in the final conversion prospectus. The
liquidation account will be maintained for the benefit of eligible
account holders who continue to maintain their accounts at the Bank
after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases
will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank,
each eligible account holder will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current
adjusted qualifying balances for accounts then held. The liquidation
account balance was $14,800,155 at June 30, 1997.
DESCRIPTION OF BUSINESS - The Company's business consists principally of
the business of the Bank; however, it does have investments in loans,
mortgage-backed securities and other investments from which interest
income is earned (Note 18). Headquartered in Hemet, California, the Bank
conducts business from its main office and three branch offices located
in Hemet, California and from fifteen branch offices located in the
Riverside and San Diego counties of California. The Bank is regulated by
the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
Corporation (FDIC), and its deposits are insured up to the applicable
limits under the Savings Association Insurance Fund (SAIF) of the FDIC.
The Bank's revenues are derived from interest on its loan and
mortgage-backed securities portfolios, interest and dividends on its
investment securities, and its fee income associated with the provision
of various customer services. The Bank's primary sources of funds are
deposits, principal and interest payments on its assets portfolios, and
various sources of wholesale borrowings including Federal Home Loan Bank
(FHLB) advances and reverse repurchase agreements. The Bank's most
significant operating expenditures are its staffing expenses and the
costs associated with maintaining its branch network.
87
88
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of HF Bancorp, Inc. and its wholly-owned subsidiary
Hemet Federal Savings and Loan Association and its wholly-owned
subsidiaries, HF Financial Corporation, Palm Springs Savings Bank
Insurance Services, Inc., and Coachella Valley Financial Services
Corporation, and HF Financial Corporation's wholly-owned subsidiary,
First Hemet Corporation (collectively, the "Company"). First Hemet
Corporation, who provides trustee services for the Bank, is engaged in
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.
SECURITIES AVAILABLE-FOR-SALE - Securities to be held for indefinite
periods of time, including securities that management intends to use as
part of its asset/liability strategy that may be sold in response to
changes in interest rates, prepayments or other factors, are classified
as available-for-sale and carried at estimated fair value. Gains or
losses on the sale of securities are determined on the
specific-identification method. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity.
Unrealized holding gains or losses, net of tax, for securities
available-for-sale are excluded from earnings and reported as a net
amount in a separate component of stockholders' equity until realized.
SECURITIES HELD-TO-MATURITY - Securities held-to-maturity are recorded
at cost with any discount accreted or premium amortized over the life of
the security using the interest method. The Company has the positive
intent and ability to hold these securities to maturity. The Company
designates securities as held-to-maturity or available-for-sale upon
acquisition.
MORTGAGE-BACKED SECURITIES - Securities available-for-sale and
held-to-maturity include privately issued mortgage-backed securities
("MBS") and collateralized mortgage obligations ("CMO's") that expose
the Company to certain risks that are not inherent in agency securities,
primarily credit risk and liquidity risk. Because of this added risk,
private-issue securities have historically paid a greater rate of
interest than agency securities, enhancing the overall yield of the
portfolio.
LOANS RECEIVABLE - During the period of origination, loans originated as
held-for-investment are carried at amortized cost.
Interest on loans is credited to income as earned and is accrued only if
deemed collectible. Generally, interest is not accrued on loans
delinquent three payments or more. Discounts or premiums on loans are
included in loans receivable held-for-investment and are credited or
charged to income (for loans that are probable of collection) on the
interest method over the term of the loan, adjusted for anticipated
prepayments.
Loan origination and commitment fees and certain incremental direct loan
origination costs are deferred, and the net fee or cost is amortized
into interest income over the contractual lives of the related loans
held-for-investment.
88
89
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
LOANS HELD-FOR-SALE - Loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated
fair values. Gains and losses on such loans are accounted for under the
specific-identification method. Qualified loan origination fees and
costs are retained and not amortized over the contractual lives of the
related loans held-for-sale.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company has entered into various
interest rate exchange agreements as part of its asset and liability
management strategy. These exchange agreements consist of interest rate
swaps, caps and floors. Swap income and expense is recorded using the
accrual method and is classified as interest income or expense, net in
the consolidated statements of operations. The cost of the interest rate
floor and cap agreements has been capitalized and is being amortized to
interest expense over the terms of the agreements.
REAL ESTATE OWNED - Properties acquired through foreclosure are
initially recorded at the lower of cost or fair value less estimated
costs to sell through a charge to the allowance for estimated loan
losses. Subsequent declines in value are charged to operations.
Properties acquired for sale or investment are recorded at cost not to
exceed fair value.
Costs incurred that are directly related to the development of real
estate are capitalized. Costs of holding real estate under development
(principally interest and real estate taxes) are also capitalized.
Provisions for estimated losses are charged to current operations.
Recognition of gains on the sale of real estate is dependent on the
transaction meeting certain criteria relating to the nature of the
property sold and the terms of sale. Under certain circumstances, the
gain, or a portion thereof, may be deferred until the criteria are met.
Losses on disposition of real estate, including expenses incurred in
connection with the disposition, are charged to operations.
ALLOWANCES FOR ESTIMATED LOAN AND REAL ESTATE LOSSES - The Company
accounts for impaired loans in accordance with 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.
SFAS No. 114 generally requires 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 collectibility of both
contractual interest and contractual principal when assessing the need
for a loss accrual.
The Company considers a loan to be impaired when it is deemed probable
by management that the Company will be unable to collect all contractual
principal and interest payments in accordance with the terms of the
original loan agreement. However, in determining when a loan is
impaired, management also considers the loan documentation, current loan
to value ratios, and the borrower's current financial position. Included
as impaired loans are all loans delinquent 90 days or more and all
89
90
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
loans that have a specific loss allowance applied to adjust the loan to
fair value. The accrual of interest on impaired loans is discontinued
after a 90-day delinquent period or when, in management's opinion, the
borrower will be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized to the extent of
full cash payments received and accepted. The Company applies the
measurement provision of SFAS No. 114 to all loans in its portfolio.
Valuation allowances for estimated loan and real estate losses are
provided when any significant decline in value is deemed to have
occurred. Specific loss allowances are established for loans that are
deemed to be impaired, if the fair value of the loan or the collateral
is estimated to be less than the gross carrying value of the loan. In
estimating losses, management considers the estimated sales price, cost
of refurbishment, payment of delinquent taxes, cost of holding the
property (if an extended period is anticipated) and cost of disposal.
Additionally, general valuation allowances for loan and real estate
losses have been established. The estimates for these allowances are
normally influenced by current economic conditions, actual loss
experience, industry trends and other factors, such as the current
economic conditions experienced in the area in which the Company's
lending and real estate activities are concentrated. These estimates may
result in either additions to or recaptures of the current provision,
based on management's current evaluation of the loan and real estate
portfolios. Accordingly, the amounts of such loan and real estate loss
provisions (credits) can vary from period to period.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank 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 because
of economic, operating, regulatory and other conditions that may be
beyond the Company's control.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
are computed principally on the straight-line method over the estimated
useful lives of the various assets.
Depreciable lives used for the principal classes of assets are as
follows:
Furniture, fixtures and equipment 3 to 10 years
Buildings and leasehold improvements 5 to 40 years
Effective July 1, 1996, the Company adopted SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF. The statement establishes accounting standards of the
impairment of long-lived assets that either will be held and used in
operations or that will be disposed of. Accordingly, the Company
periodically evaluates the recoverability of long-lived
90
91
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
assets, such as premises and equipment and intangible assets, to ensure
the carrying value has not been impaired. The adoption of SFAS No. 121
did not have a material impact on the results of operations or financial
position of the Company.
AMORTIZATION - The Company computes amortization on the straight-line
method over the estimated useful life of the related asset.
STOCKHOLDERS' EQUITY - The Company's financial statement equity includes
tax bad debt deductions for which no provision for federal income taxes
has been made. If distributions to shareholders are made in excess of
current or accumulated earnings and profits or if stock of the Bank is
partially redeemed, this tax bad debt reserve, which approximates
$13,827,000 at June 30, 1997, will be recaptured into income at the
then-prevailing federal income tax rate. The related unrecognized
deferred tax liability is approximately $4,839,000. It is not
contemplated that the Bank will make any disqualifying distributions
that would result in the recapture of these reserves.
During 1996, the Company acquired 330,625 shares of treasury stock for
$3,348,000. Retained earnings are restricted for dividends in the amount
of $3,348,000, the cost of the treasury stock acquired. No additional
shares were repurchased during 1997.
Earnings per share for the year ended June 30, 1997 and 1996 are based
on the weighted average common shares and equivalents outstanding of
5,755,859 and 5,953,823, respectively. The total issued shares of
6,612,500 have been adjusted for the weighted average of: unallocated
shares under the Employee Stock Ownership Plan (ESOP) of 359,526 and
424,069, reduction of outstanding shares purchased for the stock
compensation plan of 166,490 and 198,375 and acquisition of shares of
treasury stock of 330,625 and 36,233, respectively.
Earnings per share are not presented for periods prior to conversion to
stock form, as no stock was outstanding.
FEDERAL AND STATE INCOME TAXES - The Company accounts for income taxes
under SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Accordingly, deferred
tax assets and liabilities represent the tax effects of the temporary
differences in the basis of certain assets and liabilities for tax and
financial statement purposes, calculated at currently effective tax
rates, of future deductible or taxable amounts attributable to events
that have been recognized on a cumulative basis in the financial
statements.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
- The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting years. Actual
results could differ from those estimates.
91
92
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
PRESENTATION OF CASH FLOWS - All highly-liquid instruments with original
maturities of three months or less are considered to be cash
equivalents. Cash equivalents consisted of federal funds sold of
$3,355,000 and $88,460,000 at June 30, 1997 and 1996, respectively, and
a repurchase agreement of $4,075,000 at June 30, 1996.
RECENT ACCOUNTING DEVELOPMENTS - On July 1, 1996, the Company adopted
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which establishes
financial accounting and reporting standards for stock-based employee
compensation plans. This statement establishes a fair-value-based method
of accounting for stock-based compensation plans. It encourages, but
does not require, entities to adopt that method in place of the
provisions of Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for all arrangements under
which employees receive shares of stock or other equity instruments of
the employer or the employer incurs liabilities to employees in amounts
based on the price of its stock. SFAS No. 123 also applies to
transactions in which an entity issues its equity instruments to acquire
goods or services from nonemployees. Those transactions must be
accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more
reliably measurable.
The Company has elected to continue to apply the accounting provisions
of APB No. 25 to its stock-based compensation awards to employees and
discloses the pro forma effect on net earnings and earnings per share as
if the fair-value-based method of accounting defined in SFAS No. 123 had
been applied (Note 13).
As of December 31, 1996, the Company adopted SFAS No. 125, ACCOUNTING
FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES, which was amended by SFAS No. 127, DEFERRAL OF THE
EFFECTIVE DATE OF CERTAIN PROVISIONS OF FASB STATEMENT NO. 125. These
statements provide accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The
reporting requirements are effective for transfers and servicing
occurring after December 31, 1996 or December 31, 1997 for certain
transactions.
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE. The
statement establishes standards for computing and presenting earnings
per share (EPS) and applies to entities with publicly held common stock
or potential common stock. This statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15,
EARNINGS PER SHARE, and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The disclosure
requirements of SFAS No. 128 are effective for periods ending after
December 15, 1997. Management does not believe that the adoption of SFAS
No. 128 will have a significant impact on its financial statements.
92
93
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
In February 1997, the FASB issued SFAS No. 129, DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE. The statement establishes standards
for disclosing information about an entity's capital structure. The
disclosure requirements of SFAS No. 129 are effective for periods ending
after December 15, 1997. Management does not believe that the adoption
of SFAS No. 129 will have a significant impact on its financial
statements.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 131 establishes standards
of reporting by publicly-held business enterprises and disclosure of
information about operating segments in annual financial statements and
to a lesser extent, in interim financial reports issued to shareholders.
SFAS Nos. 130 and 131 are effective for fiscal years beginning after
December 15, 1997. As both SFAS Nos. 130 and 131 deal with financial
statement disclosure, the Company does not anticipate the adoption of
these new standards will have a material impact on its financial
position or results of operations.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
and 1995 financial statements to conform them to the 1997 presentation.
2. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
June 30, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of June 30, 1997, the most recent notification from the OTS
categorized the Bank as well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
93
94
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios are also presented in the
table. No deductions were made for qualitative judgments by regulators.
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ------------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(DOLLARS IN THOUSANDS)
As of June 30, 1997:
Total Capital (to Risk Weighted
Assets) $64,984 16.55% $31,418 8.00% $39,273 10.00%
Core Capital (to Adjusted Tangible
Assets) 61,559 6.36% 38,729 4.00% 48,411 5.00%
Tangible Capital (to Tangible
Assets) 61,559 6.36% 14,523 1.50% N/A N/A
Tier I Capital (to Risk Weighted
Assets) 61,559 15.67% N/A N/A 23,564 6.00%
As of June 30, 1996:
Total Capital (to Risk Weighted
Assets) 55,207 24.27% 18,196 8.00% 22,744 10.00%
Core Capital (to Adjusted Tangible
Assets) 53,363 6.66% 32,062 4.00% 40,077 5.00%
Tangible Capital (to Tangible
Assets) 53,363 6.66% 12,023 1.50% N/A N/A
Tier I Capital (to Risk Weighted
Assets) 53,363 23.46% N/A N/A 13,647 6.00%
Additionally, in accordance with the Financial Institutions Reform,
Recovery and Enforcement Act ("FIRREA"), the OTS established regulations
requiring the Bank to maintain (i) core capital equal to 3% of adjusted
total assets, (ii) tangible capital equal to 1.5% of adjusted total
assets, and (iii) total capital equal to 8% of risk-weighted assets.
The following table summarizes the OTS regulatory capital requirements
under FIRREA for the Bank at June 30, 1997.
94
95
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
As indicated in the tables, the Bank's capital levels exceed all three
of the currently applicable minimum capital requirements.
JUNE 30, 1997
----------------------------------------------------------------------------------
CURRENT
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
------------------------- ------------------------- ----------------------------
AMOUNT % AMOUNT % AMOUNT %
(DOLLARS IN THOUSANDS)
Stockholder's equity
per Bank financial
statements $ 72,540 $ 72,540 $ 72,540
Adjustments:
Net unrealized loss
on debt securities
available-for-sale 1,037 1,037 1,037
Nonincludable
subsidiaries (1,026) (1,026) (1,026)
Nonqualifying
intangible assets (10,992) (10,992) (10,992)
Qualifying general
valuation allowance 3,425
-------- -------- --------
Regulatory capital 61,559 6.36 % 61,559 6.36 % 64,984 16.55 %
Minimum capital
requirement, under
FIRREA 14,523 1.50 % 38,729 4.00 % 31,418 8.00 %
-------- ---- -------- ---- -------- ----
Excess regulatory
capital $ 47,036 4.86 % $ 22,830 2.36 % $ 33,566 8.55 %
======== ==== ======== ==== ======== ====
Management believes that, under the current regulations, the Bank will
continue to meet its minimum capital requirements in the coming year.
However, events beyond the control of the Bank, such as changing
interest rates or a downturn in the economy in the areas where the Bank
has most of its loans, could adversely affect future earnings and,
consequently, the ability of the Bank to meet its future minimum capital
requirements.
OTS regulatory capital regulations require that all equity investments
in equity securities and real property (except real property used as
offices for the conduct of the business and certain real estate owned)
be deducted from total capital for purposes of the risk-based capital
standard. At June 30, 1997, the Bank's equity investments in real
property and subsidiary subject to this deduction amounted to
$1,026,000.
95
96
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
JUNE 30, 1997
----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Stripped mortgage-backed security -
interest only $ 228 $ - $ - 228
Collateralized mortgage obligations:
Agency 10,887 24 10,911
Nonagency 16,393 13 33 16,373
Federal agencies bonds/notes 119,999 2,514 117,485
--------- ---- ------ --------
$ 147,507 $ 37 $2,547 $144,997
========= ==== ====== ========
HELD-TO-MATURITY:
Collateralized mortgage obligations -
Agency $ 5,794 $ 9 $ - $ 5,803
Federal agencies bonds/notes 21,000 246 20,754
--------- ---- ------ --------
$ 26,794 $ 9 $ 246 $ 26,557
========= ==== ====== ========
96
97
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
JUNE 30, 1996
------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Collateralized mortgage obligations:
Agency $ 13,385 $ 138 $ 5 $ 13,518
Nonagency
19,495 244 19,739
Investments in mutual funds
15,601 318 15,283
Federal agencies bonds/notes 129,006 26 4,401 124,631
--------- ----- ------- ---------
$ 177,487 $ 408 $ 4,724 $ 173,171
========= ===== ======= =========
HELD-TO-MATURITY:
Stripped mortgage-backed security -
interest only $ 325 $ 10 $ - $ 335
Collateralized mortgage obligations -
Agency 6,341 113 6,228
Federal agencies bonds/notes 28,000 721 27,279
--------- ----- ------- ---------
$ 34,666 $ 10 $ 834 $ 33,842
========= ===== ======= =========
JUNE 30,
---------------------
1997 1996
Weighted average interest rate at end of period:
Investment securities held-to-maturity 7.12% 7.04%
===== =====
Investment securities available-for-sale 7.24% 7.21%
===== =====
In conjunction with the implementation of SFAS No. 125, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES, during the quarter ended March 31, 1997, the Company
transferred a $250,000 interest only security investment from the
held-to-maturity to the available-for-sale classification.
Gross realized gains and losses on sales of investment securities
available-for-sale were $10,000 and $303,000, respectively, for the year
ended June 30, 1997. There were no sales of investment securities during
the year ended June 30, 1996. Gross realized losses from sales of
investment securities available-for-sale were $13,000 for the year ended
June 30, 1995.
97
98
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
As of June 30, 1997, the Company has pledged a $5,000,000 note with
Union Bank of California in conjunction with certain deposit accounts.
The Company's collateralized mortgage obligations are in the form of
nonequity debt instruments with stated principal amounts and stated
interest rate terms. On a monthly basis, the Company reviews the
expected recoverability of its investment in the interest only,
stripped, mortgage-backed security.
At June 30, 1997, investment securities held-to-maturity, with an
amortized cost of $26,757,000, have fixed interest rates and $37,000
have adjustable interest rates. At June 30, 1997, investment securities
available-for-sale, with an estimated fair value of $117,713,000, have
fixed interest rates and $27,284,000 have adjustable interest rates.
The scheduled maturities of federal agency bonds and notes
held-to-maturity and available-for-sale at June 30, 1997 were as
follows:
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
----------------------------- -------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(IN THOUSANDS)
Due from one to five years $ - $ - $ 2,999 $ 2,988
Due from five to ten years 16,000 15,836 5,000 4,916
Due after ten years 5,000 4,918 112,000 109,581
-------- -------- --------- ---------
$ 21,000 $ 20,754 $ 119,999 $ 117,485
========= ======== ========= =========
Collateralized mortgage obligations and the interest only,
mortgage-backed security have been excluded from the above table, as
they are not due at a single maturity date.
98
99
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
JUNE 30, 1997
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Federal National Mortgage Association $ 23,822 $ 496 $ 3 $ 24,315
Federal Home Loan Mortgage Corporation 30,454 325 12 30,767
Government National Mortgage Association 54,495 11 95 54,411
--------- ------ ------ ---------
$ 108,771 $ 832 $ 110 $ 109,493
========= ====== ====== =========
HELD-TO-MATURITY:
Federal National Mortgage Association $ 75,627 $ 19 $3,456 $ 72,190
Federal Home Loan Mortgage Corporation 6,581 242 6,823
Government National Mortgage Association 69,161 796 63 69,894
-------- ------ ------ ---------
$ 151,369 $1,057 $3,519 $ 148,907
========= ====== ====== =========
JUNE 30, 1996
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Federal National Mortgage Association $ 69,149 $ 804 $ 903 $ 69,050
Federal Home Loan Mortgage Corporation 14,953 167 47 15,073
Government National Mortgage Association 15,786 350 16,136
--------- ------ ------ ------
$ 99,888 $1,321 $ 950 $ 100,259
========= ====== ====== =========
HELD-TO-MATURITY:
Federal National Mortgage Association $ 81,515 $ 29 $6,859 $ 74,685
Federal Home Loan Mortgage Corporation 10,454 263 10,717
Government National Mortgage Association 67,293 431 605 67,119
--------- ------ ------ ---------
$ 159,262 $ 723 $7,464 $ 152,521
========= ====== ====== =========
99
100
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The weighted average interest rates on mortgage-backed securities
held-to-maturity were 6.82% and 6.81% at June 30, 1997 and 1996,
respectively. The weighted average interest rates on mortgage-backed
securities available-for-sale were 7.14% and 7.46% at June 30, 1997 and
1996, respectively.
Gross realized gains and losses on sales of mortgage-backed securities
were $1,461,000 and $129,000, respectively, for the year ended June 30,
1997. There were no sales of mortgage-backed securities during the years
ended June 30, 1996 and 1995.
As of June 30, 1997 and 1996, the Company has pledged $292,999,000 and
$211,154,000, respectively, of real estate loans, mortgage-backed
securities and its investment in the capital stock of the FHLB of San
Francisco in conjunction with certain advances from the FHLB (Note 10).
Additionally, as of June 30, 1997 and 1996, the Company has pledged
$7,422,000 and $8,346,000 of mortgage-backed securities in conjunction
with interest rate swap transactions with other brokerage agencies (Note
15).
5. LOANS RECEIVABLE
Loans receivable are summarized as follows:
JUNE 30,
--------------------------------
1997 1996
(IN THOUSANDS)
Real estate loans - collateralized by trust deeds:
One- to four-family $355,567 $162,730
Multi-family 25,584 5,564
Commercial 63,827 46,222
Construction 31,566 9,459
Acquisition, development and land 13,827 7,355
-------- --------
Real estate loans, gross 490,371 231,330
-------- --------
Other loans:
Mobile home loans 3,642 4,158
Commercial business loans 5,936
Home equity lines of credit 3,597
Loans on deposit accounts 1,179 746
Other consumer loans 1,607 149
-------- --------
Other loans, gross 15,961 5,053
-------- --------
100
101
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
JUNE 30,
--------------------------------
1997 1996
(IN THOUSANDS)
Less:
Undisbursed loan funds $(15,841) $ (5,584)
Unamortized yield adjustments
(3,563) (2,570)
Unamortized loan premiums
2,186
Allowance for estimated loan losses
(4,780) (3,068)
-------- --------
(21,998) (11,222)
-------- --------
$484,334 $225,161
======== ========
Weighted average nominal interest rate at end of period 7.90% 8.09%
===== =====
The Company serviced loans for others in the amount of $42,922,000 and
$21,175,000 as of June 30, 1997 and 1996, respectively.
As of June 30, 1997 and 1996, included in loans receivable are
adjustable rate loans with principal balances of $347,974,000 and
$107,696,000, respectively. Adjustable rate loans are indexed primarily
to the Federal Home Loan Bank's Eleventh District cost of funds index
and to various U.S. Treasury-related indices, particularly the U.S.
Treasury One-Year Constant Maturities Index.
Activity in the allowance for estimated loan losses is summarized as
follows:
YEAR ENDED JUNE 30,
----------------------------------
1997 1996 1995
(IN THOUSANDS)
Balance, beginning of year $3,068 $2,694 $2,682
Provision for estimated loan losses 384 1,054 1,202
Allowance established at acquisition
of Palm Springs Savings Bank 2,963
Charge-offs (1,712) (680) (1,190)
Recoveries 77
------ ------ ------
Balance, end of year $4,780 $3,068 $2,694
====== ====== ======
101
102
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
A summary of loan activities of executive officers and directors is as
follows:
YEAR ENDED
JUNE 30,
-----------------------
1997 1996
(IN THOUSANDS)
Balance, beginning of year $483 $455
New loans 7 116
Repayments, including payoffs (129) (88)
---- ----
Balance, end of year $361 $483
==== ====
The majority of the Company's loans are collateralized by real estate in
southern California.
Impairment of loans having recorded balances of $16,326,000 and
$8,935,000 at June 30, 1997 and 1996, respectively, has been recognized
in conformity with SFAS No. 114, as amended by SFAS No. 118. The average
recorded investment in impaired loans during the years ended June 30,
1997 and 1996 was $16,247,000 and $8,257,000, respectively. The total
allowance for loan losses related to these loans was $1,503,000 and
$1,224,000 at June 30, 1997 and 1996, respectively. At June 30, 1997 and
1996, loans totaling $5,694,000 and $7,634,000, respectively, with
specific reserves of $388,000 and $1,038,000, respectively, that the
Company has classified as impaired, are performing in accordance with
the terms of their contractual agreements. Interest income on impaired
loans of $925,000 and $707,000 was recognized in the years ended June
30, 1997 and 1996, respectively.
Nonaccrual loans totaled $5,217,000, $1,301,000 and $2,281,000 as of
June 30, 1997, 1996 and 1995, respectively. If nonaccrual loans had been
performing in accordance with their original terms, the Company would
have recorded interest income of $438,000, $124,000 and $177,000,
instead of interest income actually recognized of $169,000, $83,000 and
$100,000, for the years ended June 30, 1997, 1996 and 1995,
respectively.
102
103
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
JUNE 30,
---------------------------
1997 1996
(IN THOUSANDS)
Investment securities available-for-sale $2,426 $2,722
Mortgage-backed securities available-for-sale 678 682
Investment securities held-to-maturity 500 510
Mortgage-backed securities held-to-maturity 873 944
Loans receivable 2,854 1,364
Other 1 38
------ ------
$7,332 $6,260
====== ======
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
JUNE 30,
------------------------------
1997 1996
(IN THOUSANDS)
Land $1,956 $1,729
Buildings 5,464 4,870
Leasehold improvements 2,670 1,164
Furniture, fixtures and equipment 6,909 4,443
Automobiles 95 86
------ ------
17,094 12,292
Less accumulated depreciation and amortization (8,805) (5,714)
------ ------
$8,289 $6,578
====== ======
103
104
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
8. REAL ESTATE OWNED
Real estate owned is summarized as follows:
JUNE 30,
---------------------------
1997 1996
(IN THOUSANDS)
Real estate acquired through foreclosure $ 6,318 $ 1,460
Less allowance for estimated real estate losses (1,020) (381)
------- -------
$ 5,298 $ 1,079
======= =======
Real estate acquired for sale or investment $ 995 $ 2,532
Less allowance for estimated real estate losses (577) (1,536)
------- -------
$ 418 $ 996
======= =======
Activity in the allowance for estimated real estate losses is summarized
as follows:
YEAR ENDED JUNE 30,
----------------------------------------
1997 1996 1995
(IN THOUSANDS)
REAL ESTATE ACQUIRED THROUGH FORECLOSURE:
Balance, beginning of year $ 381 $ 532 $ 988
Provision for estimated real estate losses 148 123 91
Charge-offs, net of recoveries (274) (547)
Allowance established at acquisition of
Palm Springs Savings Bank 491
------- ------- -------
Balance, end of year $ 1,020 $ 381 $ 532
======= ======= =======
REAL ESTATE ACQUIRED FOR SALE OR INVESTMENT:
Balance, beginning of year $ 1,536 $ 1,395 $ 853
Provision for estimated real estate losses 49 141 542
Charge-offs, net of recoveries (1,008)
------- ------- -------
Balance, end of year $ 577 $ 1,536 $ 1,395
======= ======= =======
104
105
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
Loss from real estate operations, net is summarized as follows:
YEAR ENDED JUNE 30,
-------------------------------------
1997 1996 1995
(IN THOUSANDS)
Gain on sales of real estate $ 162 $ 200 $ 182
Net real estate operating costs (222) (292) (175)
Provision for estimated real estate losses (197) (264) (633)
Direct write-offs (53) (142) (121)
----- ----- -----
$(310) $(498) $(747)
===== ===== =====
9. DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows:
JUNE 30,
----------------------------------------------------------------
1997 1996
----------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE INTEREST BALANCE INTEREST
(IN THOUSANDS) RATE (IN THOUSANDS) RATE
Noninterest-bearing accounts $ 30,855 - % $ 7,746 - %
NOW accounts 42,916 1.08% 35,448 1.18%
Savings accounts 111,742 3.22% 64,257 2.71%
Money market investment accounts 38,620 3.50% 33,434 3.23%
Certificate accounts* 615,522 5.70% 528,840 5.52%
-------- ----- -------- -----
$839,655 $669,725
======== ========
Weighted average nominal interest
rate at period-end 4.84% 4.86%
===== =====
* At June 30, 1997 and 1996, included in certificate accounts are 980 and 724 accounts totaling $109,980,000
and $82,598,000, respectively, with balances of $100,000 or more.
105
106
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
(IN THOUSANDS)
NOW accounts $ 501 $ 357 $ 395
Savings accounts 3,195 1,499 1,269
Money market investment accounts 1,063 879 935
Certificate accounts 33,324 21,046 18,029
--------- --------- ---------
$ 38,083 $ 23,781 $ 20,628
========= ========= =========
Certificate accounts are scheduled to mature as follows:
JUNE 30,
--------------------------------
1997 1996
(IN THOUSANDS)
Within one year $ 471,996 $ 428,902
Within two years 92,100 64,333
Within three years 30,053 21,287
Within four years 5,240 7,685
Within five years 12,786 4,865
Thereafter 3,347 1,768
---------- ----------
$ 615,522 $ 528,840
========== ==========
106
107
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
10. ADVANCES FROM THE FEDERAL HOME LOAN BANK
At June 30, 1997, advances of $50,000,000 from the FHLB are scheduled to
mature in 1998.
The following summarizes activities in advances from the FHLB:
YEAR ENDED
JUNE 30,
-------------------------------
1997 1996
(DOLLARS IN THOUSANDS)
Average amount outstanding during the period $ 60,769 $ 103,333
========= ==========
Maximum amount outstanding at any month-end
during the period $ 70,000 $ 120,000
========= ==========
Weighted average interest rate during the period 5.15 % 5.36%
===== ====
Weighted average interest rate at the end of the period 4.97 % 5.20%
==== ====
11. OTHER BORROWINGS
From time to time, the Company enters into reverse repurchase and dollar
reverse repurchase agreements on investment and mortgage-backed
securities.
The following is a summary of activities in such agreements as of June
30, 1996:
Average amount outstanding during the period $ 24,719
========
Maximum amount outstanding at any month-end
during the period $ 49,438
========
Weighted average interest rate during the period 5.48 %
====
The Company enters into reverse repurchase and dollar reverse repurchase
agreements only with primary government securities dealers. The lender
maintains possession of the collateral securing these agreements.
107
108
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
12. INCOME TAXES
Income taxes are summarized as follows:
YEAR ENDED JUNE 30,
----------------------------------------
1997 1996 1995
(IN THOUSANDS)
Current tax (benefit) expense:
Federal $ (172) $ 632 $ (574)
State
3 42 2
------- ------- -----
(169) 674 (572)
Deferred tax (benefit) expense:
Federal (1,118) 284 219
State (475) 171
------- ------ -----
(1,593) 455 219
------- ------ -----
$(1,762) $1,129 $(353)
======= ====== =====
A reconciliation from the statutory federal income tax rate to the
consolidated effective income tax rate follows:
YEAR ENDED JUNE 30,
----------------------------------------
1997 1996 1995
(IN THOUSANDS)
Statutory federal inicome tax rate (35.0)% 35.0% (35.0)%
State franchise tax, net of federal income tax benefit (7.3) 4.5 0.2
Other 1.1 (1.8) 1.1
------ ----- ------
(41.2)% 37.7% (33.7)%
====== ===== ======
108
109
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
At June 30, 1997, 1996 and 1995, the deferred components of the
Company's total income tax liabilities (assets), as included in the
consolidated statements of financial condition, are summarized as
follows:
YEAR ENDED JUNE 30,
-------------------------------------------
1997 1996 1995
(IN THOUSANDS)
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $ 1,465 $ 1,300 $ 1,164
Depreciation 359 383
Prepaid pension, net 136 100
Capitalized interest 15 47 48
Loan fees 122
Net unrealized gains on securities available-for-sale 548
Purchase accounting adjustments - Palm Springs 4,404
Other 276 354 145
-------- ------- -------
Gross deferred tax liabilities 6,282 2,196 2,388
Deferred tax assets:
Net unrealized losses on securities available-for-sale (738) (1,635)
Bad debt reserve (1,479) (893) (727)
Loan fees (405) (622)
Provision for losses (262) (700) (636)
Premium/discount on loans (104) (104)
Real estate investments (72) (72)
State taxes (180) (29)
California net operating loss (209) (190)
Deferred gain on branch sale (191) (205)
Depreciation (391)
Prepaid pension, net (1,655)
Goodwill - Hawthorne (212)
Other (4)
-------- ------- -------
Gross deferred tax assets (5,321) (4,043) (2,351)
Valuation allowance 424 424 268
-------- ------- -------
Net deferred tax liability (asset) $ 1,385 $(1,423) $ 305
======== ======= =======
109
110
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
Gross deferred tax assets are primarily expected to be realized in 1998
and 1999.
Valuation allowances under SFAS No. 109 have been provided for state
purposes to the extent uncertainty exists as to the recoverability of
the deferred tax assets. As of June 30, 1997, 1996 and 1995, valuation
allowances were provided for a portion of the net deferred state tax
assets. Future reductions in the valuation allowance will be dependent
upon a more-likely-than-not expectation of recovery of tax benefits.
13. BENEFIT PLANS
DEFINED BENEFIT PLAN - The Bank maintains a noncontributory,
defined-benefit pension plan covering all employees who meet both
minimum age and length of service requirements and a nonqualified,
supplemental benefit plan for certain qualified officers. The Company
has determined to terminate the defined benefit plan. As a result of the
termination, an additional $2,991,000 in expense was recorded as of June
30, 1997, including the acceleration of expense recognition of
$1,236,000 in prepaid pension plan expense. Termination of the Plan is
expected in fiscal year ended June 30, 1998. Costs under the
defined-benefit pension plan are calculated and funded under the
Projected Unit Credit Actuarial Cost Method, which includes amortization
of past service costs. The Bank's funding policy is to fund pension
costs within the minimum/maximum contribution permitted under Employment
Retirement Income Security Act of 1974 ("ERISA"), as calculated by the
actuaries.
Net pension cost consists of the following:
YEAR ENDED JUNE 30,
------------------------------------
1997 1996 1995
(IN THOUSANDS)
Service cost benefits earned during the year $ 202 $348 $387
Interest cost on projected benefit obligations 607 524 483
Actual return on Plan assets (640) (971) (817)
Net amortization and deferral (45) 434 456
Adjustment to recognize the effect of curtailment 2,891
------ ---- ----
$3,015 $335 $509
====== ==== ====
110
111
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The following table sets forth the funded status of the Defined Benefit
Plan:
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
(IN THOUSANDS)
Accumulated benefit obligation:
Vested $(10,125) $(6,608) $(5,772)
Nonvested (1,040) (323) (328)
$(11,165) $(6,931) $(6,100)
======== ======= =======
Projected benefit obligation for service to June 30 $(11,165) $(8,422) $(7,102)
Plan assets at fair value at June 30 8,593 8,252 7,148
-------- ------- -------
Projected benefit obligation (in excess of) less than
Plan assets (2,572) (170) 46
Unrecognized net loss 1,367 1,382 1,024
Unrecognized net asset at July 1, 1986 being recognized
over 15 years (71) (89) (106)
Unrecognized prior service cost 113 147
-------- ------- -------
(Pension liability) prepaid pension cost recognized in
consolidated statements of financial condition $ (1,276) $ 1,236 $ 1,111
======== ======= =======
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 6.4% in 1997 and
7.5% in 1996 and 1995. The expected long-term rate of return on assets
was 8.5% in 1997, 1996 and 1995.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST - The Company established for
eligible employees an Employee Stock Ownership Plan and Trust (ESOP)
which became effective upon the conversion of the Bank from a mutual to
a stock association (the Conversion). Eligible full-time and eligible
part-time employees employed with the Bank who have been credited with
at least 1,000 hours during a 12-month period and who have attained age
21 are eligible to participate.
The ESOP subscribed for 7% (or 462,875) 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
111
112
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
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%. At June 30, 1997
and 1996, the outstanding balance of the loan was $2,962,400 and
$3,332,700 and a total of 100,231 and 46,288, respectively, shares of
common stock were cumulatively allocated to employee accounts.
Shares purchased by the ESOP will be held in a suspense account for
allocation among participants as the loan is repaid. Contributions to
the ESOP and shares released from the suspense account in an amount
proportional to the repayment of the ESOP loan will be allocated among
participants on the basis of compensation in the year of allocations.
Benefits generally become 100% vested after an employee's five years of
credited service. Prior to the completion of five years of credited
service, a participant who terminates employment for reasons other than
death, retirement or disability will not receive any benefit. Benefits
are payable upon death, retirement or disability.
The expenses related to the ESOP for the year ended June 30, 1997 and
1996 were approximately $708,000 and $665,000, respectively. At June 30,
1997 and 1996, unearned compensation related to the ESOP approximated
$2,651,000 and $3,147,000, respectively, and is shown as a reduction of
stockholders' equity in the accompanying consolidated statements of
financial condition.
DEFERRED COMPENSATION PLAN - The Bank maintains a nonqualified deferred
compensation plan (Deferred Compensation Plan) with certain directors,
whereby such directors may defer all or a portion of compensation
otherwise currently payable in exchange for the receipt at the time they
cease to serve as directors of the Bank, with a benefit at the time of
retirement as provided for in the Plan. Amounts deferred under this
program will earn interest, compounded annually, based on the highest
certificate account rate (excluding accounts requiring deposits of
$100,000 or more) in effect on January 1 of each year of the deferral or
distribution period. Directors may defer compensation for any number of
years, designated in advance. The Deferred Compensation Plan provides
that benefits are to be paid in a lump sum or annual installments over a
period of years determined by the Bank, at its discretion. The Deferred
Compensation Plan also provides that directors may elect to have their
deferred compensation, or any portion thereof, invested in stock of the
Company. Included in accounts payable and other liabilities at June 30,
1997 and 1996 are $332,000 and $524,000, respectively, of deferrals
related to the Deferred Compensation Plan.
DIRECTORS' RETIREMENT PLAN - The Bank and Company maintain a retirement
plan for those directors who have completed ten years of service or who
have both attained the age of 65 and had five years of consecutive
service as a director (Directors' Retirement Plan). The Directors'
Retirement Plan provides that a participant will receive monthly
benefits until death, equal to 60% of the basic monthly director's fee
such participant received for the last month in which they served as
director. Upon the retired participant's death, 50% of their benefit
shall continue to be paid to their surviving spouse for the balance of
the spouse's life. If the participant dies while still serving as a
director, 50% of the monthly retirement benefit that said participant
would have received had they retired the day
112
113
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
immediately preceding the date of their death shall be paid to their
surviving spouse for the balance of the spouse's life. The Directors'
Retirement Plan was terminated effective March 31, 1995, and
consequently, no new directors will be entitled to benefits under this
plan.
Net pension cost for the Director's Retirement Plan consists of the
following:
YEAR ENDED JUNE 30,
------------------------------
1997 1996 1995
(IN THOUSANDS)
Service cost benefits earned during the year $ 9 $ 8 $ 18
Interest cost on projected benefit obligations 46 44 46
Net amortization and deferral 15 9 2
---- ---- ----
$ 70 $ 61 $ 66
==== ==== ====
The following table sets forth the funded status of the Directors'
Retirement Plan:
JUNE 30,
-----------------------------------
1997 1996 1995
(IN THOUSANDS)
Accumulated benefit obligation -
Vested $ (594) $ (602) $ (659)
------- ------- -------
$ (594) $ (602) $ (659)
======= ====== ======
Projected benefit obligation for service to June 30 $ (642) $ (638) $ (659)
Unrecognized net gain (18) (37) (23)
Unrecognized net obligation at July 1, 1986
being recognized over 15 years
62 78 93
------ ------ ------
Pension liability cost recognized in consolidated
statements of financial condition $ (598) $ (597) $ (589)
====== ====== ======
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% in 1997, 1996
and 1995.
113
114
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
RETIREMENT RESTORATION PLAN - The Bank has implemented a nonqualified
retirement plan to provide any qualifying executive with additional
retirement benefits. The Company has determined to terminate the
Retirement Restoration Plan. As a result of the termination, an
additional $9,000 in expense was recorded as of June 30, 1997.
Termination of the Retirement Restoration Plan is expected in fiscal
year ended June 30, 1998. The benefits provided under such Plan will
make up the benefits lost to the participant due to application of
limitations on compensation and maximum benefits applicable to the
Bank's tax-qualified, defined-benefit plan. Benefits will be provided
under the Retirement Restoration Plan at the same time and in the same
form as the benefits will be provided under the Bank's tax-qualified,
defined-benefit plan.
Net pension cost for the Retirement Restoration Plan consists of the
following:
JUNE 30,
------------------------
1997 1996
(IN THOUSANDS)
Immediate recognition of initial liability $ - $87
Interest cost on projected benefit obligations 7
Adjustment to recognize the effect of curtailment 7
--- ---
$14 $87
=== ===
The following table sets forth the funded status of the Retirement
Restoration Plan:
JUNE 30,
------------------------
1997 1996
(IN THOUSANDS)
Accumulated benefit obligation -
Vested $ (101) $ (87)
------- ------
$ (101) $ (87)
======= ======
Projected benefit obligation for service to June 30 $ (101) $ (87)
-------- ------
Pension liability cost recognized in consolidated
statement of financial condition $ (101) $ (87)
======= =====
114
115
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% in 1997 and
1996.
STOCK BENEFIT PLANS - The Company maintains the amended and restated HF
Bancorp, Inc. Stock-Based Incentive Plan (the Plan), which amends the HF
Bancorp, Inc. 1995 Master Stock Option Plan and the 1995 Hemet Federal
Savings & Loan Association 1995 Master Stock Compensation Plan, which
were both adopted on January 11, 1996.
The Company applies Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for the Plan. Under APB No. 25,
compensation cost for stock options is measured as the excess, if any,
of the fair market value of the Company's stock at the date of grant
over the amount the director or employee must pay to acquire the stock.
Because the Plan provides for the issuance of options at a price of no
less than the fair market value at the date of grant, no compensation
cost has been recognized for the stock option components of the Plan.
Had compensation costs for the stock option components of the Plan been
determined based upon the fair value at the date of grant consistent
with SFAS No. 123, Accounting For Stock Based Compensation, the
Company's net (loss) income and (loss) earnings per share would have
been (increased) reduced to the pro forma amounts indicated below:
YEAR ENDED JUNE 30,
---------------------------------
1997 1996
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net (loss) income:
As reported $ (2,516) $ 1,947
Pro forma
(2,790) 1,831
Primary (loss) earnings per common share:
As reported $ (0.44) $ 0.33
Pro forma $ (0.48) $ 0.31
Shares utilized in EPS calculations 5,755,859 5,953,823
STOCK OPTION COMPONENT OF THE PLAN - Pursuant to the terms of the Plan,
661,250 shares of HF Bancorp, Inc. common stock are reserved for
issuance under the stock option components of the Plan. Of these 661,250
shares, 547,550 are reserved for grant as Incentive Stock Options and
113,700 shares are reserved for grant as Nonstatutory Stock Options. To
the extent that options are granted under the Plan, the shares
underlying such options are unavailable for any other use including
future grants under the Plan, except that options which terminate,
expire, or are forfeited without having been exercised may be recycled
into new grants.
115
116
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
NONSTATUTORY STOCK OPTIONS - Nonstatutory Stock Options may be granted
to employees and outside directors. The exercise price of each
Nonstatutory Stock Option is determined by the Board of Directors; and
may not be less than the fair market value of HF Bancorp, Inc. common
stock on the date of grant. The term of each Nonstatutory Stock Option
shall be determined by the Board of Directors, but in no case shall such
term exceed 10 years from the date of grant. Nonstatutory Stock Options
vest and are exercisable as determined by the Board of Directors.
However, all Nonstatutory Options granted will be immediately vested and
exercisable in the event the optionee terminates his employment due to
death, disability, or a change in control of Hemet Federal Savings &
Loan or HF Bancorp, Inc. In the event optionee's employment is
terminated for cause, all optionee rights under the optionee's
Nonstatutory Options expire immediately. In the event optionee
terminates his employment due to reasons other than death, disability, a
change in control, and termination for cause, optionee's Nonstatutory
Stock Options shall be exercisable only to the extent that such options
were exercisable at the date of termination, and for a period of three
months following termination except in the case of retirement, which
provides for an exercise period of twelve months following termination.
The Nonstatutory Stock Options do not provide for the granting of stock
appreciation rights; however, all options were granted in tandem with
limited stock appreciation rights exercisable in the event of a change
in control of Hemet Federal Savings & Loan or HF Bancorp, Inc., as
defined by the Plan.
INCENTIVE STOCK OPTIONS - Incentive Stock Options may be granted to
employees. The exercise price of each Incentive Stock Option is
determined by the Board of Directors, but may not be less than the fair
market value of HF Bancorp, Inc. common stock on the date of grant. The
term of each Incentive Stock Option shall be determined by the Board of
Directors, but in no case shall such term exceed 10 years from the date
of grant. Incentive Stock Options vest and are exercisable as determined
by the Board of Directors. The Board of Directors may select various
conditions or performance goals which must be satisfied prior to the
Incentive Stock Options' becoming exercisable. Incentive Stock Options
are designed to comply with Section 422 of the Internal Revenue Code
(IRC). However, any Incentive Stock Options failing to qualify under the
IRC are converted to Nonstatutory Stock Options.
All Incentive Stock Options granted will be immediately vested and
exercisable in the event the optionee terminates his employment due to
death, disability, or a change in control of Hemet Federal Savings &
Loan or HF Bancorp, Inc. In the event the optionee's employment is
terminated for cause, all optionee rights under the optionee's Incentive
Stock Options expire immediately. In the event the optionee terminates
his employment due to reasons other than death, disability, a change in
control, and termination for cause, optionee's Incentive Stock Options
shall be exercisable only to the extent that such options were
exercisable at the date of termination, and for a period of three months
following termination except in the case of retirement, which provides
for an exercise period of twelve months following termination (although,
in the event of retirement, exercising after three months will result in
a loss of incentive stock option treatment under the IRC). The Incentive
Stock Options do not provide for the granting of stock appreciation
rights; however, all options were granted in tandem with limited stock
appreciation rights exercisable in the event of a change in control of
Hemet Federal Savings & Loan or HF Bancorp, Inc., as defined by the
Plan.
116
117
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The Stock Option components of the Plan as of June 30, 1997 and 1996,
and changes during the years then ended, consist of the following:
JUNE 30,
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Options outstanding at the
beginning of the fiscal year 595,340 $ 10.04 - $ -
Granted 44,000 10.06 595,340 10.04
Canceled 116,155 9.97
Exercised
Options outstanding at
fiscal year end 523,185 10.06 595,340 10.04
Options exercisable at
fiscal year end 109,183 10.04
Weighted average remaining
Contractual life of options
outstanding at fiscal year end 8.5 years 9.5 years
Weighted average information
for options granted during the
fiscal year:
Fair value $4.37 $4.05
Assumptions utilized in the
Black-Scholes option-pricing
model:
Dividend yield 0.00 % 0.00 %
Expected stock price volatility 18.30 % 18.30 %
Risk-free interest rate 6.52 % 5.65 %
Expected option lives 8 years 8 years
Options to purchase 138,065 and 65,910 shares were available for future
grants as of June 30, 1997 and June 30, 1996, respectively.
117
118
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
At the July 24, 1997 Board of Directors meeting, 99,000 options for the
purchase of shares were issued at the then-current market price of HF
Bancorp, Inc. common stock ($14.34), leaving 39,065 shares available for
future option grants.
STOCK AWARD COMPONENT OF THE PLAN - The Company established the stock
award component of the Plan as a method of providing directors,
officers, and employees with a proprietary interest in the Company in a
manner designed to encourage such persons to remain with the Company and
to improve the performance of the Company. The Company contributed
$1,983,750 from available liquid assets on February 28, 1996 to purchase
198,375 shares in the open market at an average cost of $10.00 per
share. This contribution represents deferred compensation which is
initially recorded as a reduction in stockholders' equity and then is
ratably charged to compensation expense over the vesting period of the
actual stock awards.
The Plan provides for two types of stock awards: time-based grants and
performance-based grants. Outside directors of the Company receive
time-based grants, which vest on a straight-line basis over the
applicable period, as determined by the Board of Directors. Employees
are eligible for both time-based grants and performance-based grants.
Vesting of performance-based grants is dependent upon achievement of the
criteria established by the Board of Directors for each stock award.
All stock awards granted will be immediately vested and exercisable in
the event the award recipient terminates his employment due to death,
disability, or a change in control of Hemet Federal Savings & Loan or HF
Bancorp, Inc. In the event the award recipient terminates his employment
due to any reason other than death, disability, or a change in control,
all unvested stock awards become null and void.
During the fiscal years ended June 30, 1997 and 1996, the Company
recorded $354,000 and $198,000, respectively, in compensation expense
related to the stock award component of the Plan. During the fiscal year
ended June 30, 1995, no compensation expense was recorded related to the
Plan.
A summary of the status of the stock award component of the Plan as
of June 30, 1997 and 1996, and changes during the years ended on
those dates, is presented below:
JUNE 30,
------------------------------
1997 1996
Stock awards outstanding at the beginning of the fiscal year 195,075 -
Granted 195,075
Canceled 35,894
Vested 37,954
Stock awards outstanding at the end of the fiscal year 121,227 195,075
Available for future awards at the end of the fiscal year 39,194 3,300
118
119
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
At the July 24, 1997 Board of Directors meeting, 33,300 shares were
granted, leaving 5,894 shares available for future stock awards.
14. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business, in order to meet the financing
needs of its customers. These financial instruments represent
commitments to fund loans. Commitments are issued following the
Company's evaluation of each applicant's creditworthiness on a
case-by-case basis. At June 30, 1997, the Company had outstanding loan
funding commitments of $10,129,000, substantially all of which were
adjustable rate commitments. Commitments to fund loans are agreements to
lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee.
Also, external market forces impact the probability of commitments being
exercised; therefore, total commitments outstanding do not necessarily
represent future cash requirements.
As of June 30, 1997, minimum future operating lease commitments of the
Company for real and personal property are as follows:
First year $ 897,000
Second year 740,000
Third year 584,000
Fourth year 520,000
Fifth year 513,000
Thereafter 2,987,000
------------
$ 6,241,000
============
Included in general and administrative expenses are rents and other
leasehold expenses which approximated $928,000, $520,000 and, $468,000
for the years ended June 30, 1997, 1996 and 1995, respectively.
The Company is involved in litigation concerning various transactions
entered into during the normal course of business. Management does not
believe that settlement of such litigation will have a material effect
on the Company's financial position or results of operations.
The Company has negotiated employment agreements with its chief
executive and operating officers. The employment agreements provide for
the payment of severance benefits upon termination.
119
120
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
15. INTEREST RATE RISK MANAGEMENT - OFF-BALANCE SHEET ACTIVITIES
From 1987 to 1993, the Company entered into various interest rate
exchange agreements in order to reduce the interest rate risk associated
with long-term fixed-rate mortgages and short-term liabilities. These
agreements were designated as hedges of short-term liabilities,
specifically deposit accounts with no specified maturity date or with
maturity dates of less than one year which were expected to be renewed
or replaced with other deposits upon their maturity.
The Company pays a fixed rate and earns a variable rate, three-month
LIBOR on interest rate swap agreements with notional amounts of
$35,000,000 as of June 30, 1997 and 1996, and $110,000,000 as of June
30, 1995. The agreements are due to mature on various dates through
1999. At June 30, 1997, 1996 and 1995, the weighted average
fixed-payment rate and variable-payment received rate were 8.72% and
5.85%, 8.72% and 5.49% and 9.17% and 6.15%, respectively.
At June 30, 1997, outstanding notional amounts and maturity dates of
interest rate exchange agreements are summarized as follows:
NOTIONAL
AMOUNT
INTEREST RATE SWAPS (IN THOUSANDS)
Maturity date:
January 6, 1999 $ 20,000
January 30, 1999 15,000
--------
$ 35,000
=========
Net interest expense (income) recorded by the Company on interest rate
swap, cap and floor agreements is summarized as follows:
YEAR ENDED JUNE 30,
----------------------------------------
1997 1996 1995
(IN THOUSANDS)
Interest rate swaps $1,061 $1,217 $4,452
Interest rate caps 106
Interest rate floors, net of amortization (32)
Amortization of deferred loss on swap termination 1,811 1,975
------ ------ ------
$2,872 $3,192 $4,526
====== ====== ======
120
121
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
There are certain risks associated with swaps, floors and caps,
including the risk that the counterparty may default and that there may
not be an exact correlation between the indices on which the
interest-rate swap agreements are based and the terms of the hedged
liabilities. In order to offset these risks, the Company generally
enters into interest-rate swap, floor and cap agreements only with
nationally recognized securities firms and monitors the credit status of
counterparties, the level of collateral for such swaps and caps, and the
correlation between the hedged liabilities and indices utilized. There
is no assurance that, in the event interest rates change, the swaps,
floors and caps will move on the same basis or in the same amounts as
its cost of funds.
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 and
is being amortized over the remaining terms of the respective swap
agreements.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated
fair value amounts have been determined by the Company, using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange.
121
122
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.
JUNE 30, 1997
--------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents $ 18,411 $ 18,411
Investment securities available-for-sale 144,997 144,997
Mortgage-backed securities available-for-sale 109,463 109,463
Investment securities held-to-maturity 26,794 26,557
Mortgage-backed securities held-to-maturity 151,369 148,907
Loans receivable 484,334 487,902
Loans held-for-sale 335 348
Federal Home Loan Bank stock 6,224 6,224
LIABILITIES:
Term deposit accounts $ 615,522 $ 615,922
Other deposit accounts 224,133 224,133
Advances from the Federal Home Loan Bank 50,000 49,271
OFF-BALANCE SHEET UNREALIZED GAINS (LOSSES):
Commitments $ 3
Interest-rate swap agreements (1,473)
JUNE 30, 1996
--------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents $ 100,633 $ 100,633
Investment securities available-for-sale 173,171 173,171
Mortgage-backed securities available-for-sale 100,259 100,259
Investment securities held-to-maturity 34,666 33,842
Mortgage-backed securities held-to-maturity 159,262 152,521
Loans receivable 225,161 229,195
Federal Home Loan Bank stock 4,436 4,436
122
123
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
JUNE 30, 1996
--------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
(IN THOUSANDS)
LIABILITIES:
Term deposit accounts $ 528,840 $ 530,453
Other deposit accounts 140,885 140,885
Advances from the Federal Home Loan Bank 70,000 68,066
OFF-BALANCE SHEET UNREALIZED GAINS (LOSSES):
Commitments $ 9
Interest-rate swap agreements (2,063)
The estimated fair values of investment securities and mortgage-backed
securities are based on quoted market prices or dealer quotes. If quoted
market prices are not available, estimated fair values are based on
quoted market prices of comparable instruments.
The fair value of loans receivable is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of nonperforming loans with a
principal balance of approximately $5,217,000 and $1,301,000 at June 30,
1997 and 1996, respectively, was not estimated because it is not
practicable to reasonably assess the credit adjustment that would be
applied in the marketplace for such loans. These nonperforming loans
have a weighted average interest rate of 8.32% and 8.84% as of June 30,
1997 and 1996, respectively, and are due at various dates through 2025.
The estimated fair value of Federal Home Loan Bank stock is based on its
redemption value.
The fair value of term deposit accounts is estimated using the rates
currently offered for deposits of similar remaining maturities. The
estimated fair value of other deposit accounts is the amount payable on
demand at June 30, 1997 and 1996.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of advances
from the Federal Home Loan Bank.
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments, the estimated fair
value also considers the difference between current levels of interest
rates and the committed rates.
123
124
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The fair value of interest-rate swap agreements is the estimated amount
that the Company would receive or pay to terminate the interest-rate
swap agreements at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap
counterparties.
The fair value of accrued interest receivable and accrued interest
payable is estimated at book value.
The fair value estimates presented herein are based on pertinent
information available to management as of June 30, 1997 and 1996.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively re-evaluated for purposes of these consolidated
financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented
herein.
17. BUSINESS ACQUISITIONS
In September 1996, the Company acquired Palm Springs Savings Bank ("Palm
Springs") for approximately $16,300,000. The Company acquired all
outstanding shares of common stock of Palm Springs, including total
deposits of $164,687,000 as well as other items for four branches in the
Coachella Valley communities. The acquisition was accounted for under
the purchase accounting method. In conjunction with the acquisition, the
Company recorded a core deposit intangible of $9,808,000. The intangible
balance is included in intangible assets on the consolidated statement
of financial condition. Amortization is calculated on a straight-line
basis, over seven years, with total amortization of $1,030,000 recorded
for the year ended June 30, 1997.
The following unaudited pro forma financial information presents the
combined results of operations as if the acquisition had taken place on
July 1, 1995, after giving effect to purchase accounting adjustments.
124
125
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The weighted average number of shares used in the calculation
of earnings per share was 5,755,859 (1997) and 5,953,823 (1996).
(IN THOUSANDS)
Interest income on loans and investments $ 69,870 $ 65,477 (1)
Interest expense 45,822 42,225
--------- ---------
Net interest income before provision for estimated
loan losses 24,048 23,252
Provision for estimated loan losses 2,245 1,774
--------- ---------
Net interest income after provision for estimated
loan losses 21,803 21,478
Other operating income 97 450 (2)
General and administrative expenses 30,328 18,414
--------- ---------
(Loss) earnings before income tax (benefit) expense (8,428) 3,514
Income tax (benefit) expense (3,304) 1,316
--------- ---------
Net (loss) earnings $ (5,124) $ 2,198
========= =========
(Loss) earnings per share $ (0.89) $ 0.37
========= =========
(1) Includes the estimated effect of amortization of loan premium.
(2) Includes the estimated effect of amortization of intangible assets.
The results of operations since the date of the acquisition is included
in the accompanying consolidated statement of operations.
During June 1996, the Company acquired deposit accounts totaling
approximately $185,189,000 and certain other assets of three branches in
San Diego County. A premium of approximately $6,642,000 was paid, all of
which was allocated to core deposit intangible to be amortized, on a
straight-line basis, over seven years. The balance is included in
intangible assets in the accompanying consolidated statements of
financial condition. Amortization of $949,000 was recorded for the year
ended June 30, 1997 and no amortization was recorded for the year ended
June 30, 1996.
125
126
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
Intangible assets are summarized as follows:
YEAR ENDED JUNE 30,
----------------------------
1997 1996
(IN THOUSANDS)
Hawthorne Savings Bank:
Intangible asset $ 6,642 $ 6,642
Less accumulated amortization (949)
------- ------
5,693 6,642
Palm Springs Savings Bank:
Intangible asset 9,808
Less accumulated amortization (1,030)
------- ------
8,778
------- ------
$14,471 $ 6,642
======= ======
126
127
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
18. PARENT COMPANY FINANCIAL INFORMATION
The following presents the unconsolidated financial statements of the
parent company only, HF Bancorp, Inc. (Note 1).
HF BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
----------------------------
1997 1996
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents $ 92 $ 4,313
Securities available-for-sale, at estimated fair value:
Investment securities (amortized cost of $2,999 at June 30, 1997) 2,988
Mortgage-backed securities (amortized cost of $4,056 and $15,025
at June 30, 1997 and 1996, respectively) 4,045 14,608
Accrued interest receivable 25 93
Investment in subsidiary 70,753 58,406
Receivables from subsidiary 3,100 3,483
Other assets 4
Income taxes 24 168
------- -------
Total assets $81,031 $81,071
======= =======
TOTAL LIABILITIES $ 4 $ -
TOTAL STOCKHOLDERS' EQUITY 81,027 81,071
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $81,031 $81,071
======= =======
127
128
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
HF BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
----------------------------------------
1997 1996 1995
(IN THOUSANDS)
INTEREST INCOME:
Interest on loans $ 283 $ 317 $ -
Interest on mortgage-backed securities 484 946
Interest - Other 358 468
------- ------- -------
Total interest income 1,125 1,731
------- ------- -------
OTHER EXPENSE -
Loss on sale of investment securities available-for-sale 7
------- ------- -------
GENERAL AND ADMINISTRATIVE EXPENSES:
Legal and professional services 119 76
Salaries and employee benefits 55 55
Other 333 320
------- ------- -------
Total general and administrative expenses 507 451
------- ------- -------
EQUITY IN NET (LOSS) EARNINGS OF
SUBSIDIARY (2,862) 1,224 (693)
------- ------- -------
(LOSS) EARNINGS BEFORE INCOME TAX EXPENSE (2,251) 2,504 (693)
INCOME TAX EXPENSE 265 557
------- ------- -------
NET (LOSS) EARNINGS $(2,516) $ 1,947 $ (693)
======= ======= =======
128
129
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
HF BANCORP, INC. (PARENT COMPANY ONLY)
SUMMARY STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(2,516) $ 1,947 $ (693)
Adjustments to reconcile net (loss) earnings to cash
provided by operating activities:
Amortization (accretion) of premiums (discounts) on
investments and mortgage-backed securities 2 (12)
Loss on sale of mortgage-backed securities 7
Decrease (increase) in accrued interest receivable 68 (93)
Decrease (increase) in receivables from subsidiary 13 (150)
Increase in liabilities 4
Increase in other assets (4)
(Increase) decrease in income tax asset (19) 4
Equity in net loss (earnings) of subsidiary 2,892 (1,224) 693
-------- ------- --------
Net cash provided by operating activities 447 472
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (2,999)
Purchases of mortgage-backed securities available-
for-sale (4,384) (16,153)
Principal repayments on mortgage-backed securities
available-for-sale 621 1,140
Proceeds from sales of mortgage-backed securities
available-for-sale 14,724
Capital contribution to subsidiary (13,000) (25,535)
Loan to subsidiary (3,703)
Paydown of loan to subsidiary 370 370
-------- ------- --------
Net cash used in investing activities (4,668) (14,643) (29,238)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock
(3,348)
Net proceeds from issuance of common stock 51,070
------- -------- --------
Net cash (used in) provided by financing activities (3,348) 51,070
------- -------- --------
129
130
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
HF BANCORP, INC. (PARENT COMPANY ONLY)
SUMMARY STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED JUNE 30,
---------------------------------------------
1997 1996 1995
(IN THOUSANDS)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $ (4,221) $ (17,519) $21,832
CASH AND CASH EQUIVALENTS,
beginning of year 4,313 21,832
-------- --------- -------
CASH AND CASH EQUIVALENTS, end of year $ 92 $ 4,313 $21,832
======== ========= =======
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results:
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
1997:
Interest income $ 14,399 $ 17,894 $ 17,084 $ 17,145
Interest expense 9,833 11,680 11,335 11,236
Provision for estimated loan losses 179 29 101 75
Net (loss) earnings (2,339) 702 357 (1,236)
(Loss) earnings per share (0.41) .12 .06 (0.21)
1996:
Interest income $ 11,117 $ 12,473 $ 13,213 $ 13,552
Interest expense 7,606 8,415 8,952 9,086
Provision for estimated loan losses 145 58 419 432
Net earnings 214 544 799 390
Earnings per share .03 .09 .13 .07
130
131
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on October 28, 1997,
on pages 6 through 8. Information concerning executive officers who are not
directors is contained in Part I of this report pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on October 28, 1997, on pages 11 through 19 (excluding
the Report of the Compensation Committee on pages 11 through 13 and the Stock
Performance Graph on page 14).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on October 28,
1997, on page 4 and 6 through 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on October 28, 1997, on page 19.
131
132
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated
Financial Statements under Item 8.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are
not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
(b) Reports on Form 8-K Filed During the Quarter Ended June 30, 1997
None
(c) Exhibits Required by Securities and Exchange Commission Regulation
S-K
132
133
Exhibit Number
- --------------
3.1 Amended Certificate of Incorporation of HF Bancorp, Inc.*
3.2 Bylaws of HF Bancorp, Inc.*
4.0 Stock Certificate of HF Bancorp, Inc.*
10.1 Form of Employment Agreement entered into between the Association and
Mr. Cupp
10.2 Form of Employment Agreement entered into between the Company and Mr.
Cupp
10.3 Form of Employment Agreement entered into between the Association and
Mr. Agnes
10.4 Form of Employment Agreement entered into between the Company and Mr.
Agnes
10.5 Hemet Federal Savings and Loan Association Employee Stock Ownership
Plan and Trust*
10.6 Hemet Federal Savings and Loan Association Retirement Restoration Plan**
10.7 Hemet Federal Savings and Loan Association Directors Deferred Fee Stock
Unit Plan**
10.8 Hemet Federal Savings and Loan Association Management Deferred Compen-
sation Plan**
10.9 HF Bancorp, Inc. 1995 Master Stock Option Plan***
21 Subsidiaries of HF Bancorp, Inc. See "Part II - Item 7- Subsidiary
Activities," which information is incorporated herein by reference
27 Financial Data Schedule
- --------------------------
* 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.
** Incorporated herein by reference into this document from the Form 10-K
for the fiscal year ended June 30, 1995 filed with the Commission on
September 27, 1995, file No. 0-27522.
*** Incorporated herein by reference from the Proxy Statement for the
Annual Meeting of Stockholders for the 1997 fiscal year filed with the
Commission on September 25, 1997.
133
134
SIGNATURE
Pursuant to the requirements of Section 13 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.
By: /s/ Richard S. Cupp
------------------------------
Richard S. Cupp
Dated: September 25,1997 President and Chief Executive Officer
-----------------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Name Title Date
---- ----- ----
/s/ Richard S. Cupp President and Chief September 25, 1997
- ---------------------------- Executive Officer
Richard S. Cupp (principal executive officer)
/s/ Gerald A. Agnes Executive Vice President September 25, 1997
- ------------------------------
Gerald A. Agnes
/s/ Mark R. Andino Vice President and Treasurer September 25, 1997
- ------------------------------ (principal financial and
Mark R. Andino accounting officer)
/s/ J. Robert Eichinger Chairman of the Board September 25, 1997
- ------------------------------
J. Robert Eichinger
/s/ Norman M. Coulson Director September 25, 1997
- ------------------------------
Norman M. Coulson
/s/ Dr. Robert K. Jabs Director September 25, 1997
- ------------------------------
Dr. Robert K. Jabs
/s/ George P. Rutland Director September 25, 1997
- ------------------------------
George P. Rutland
/s/ Patricia A. "Corky" Larson Director September 25, 1997
- ------------------------------
Patricia A. "Corky" Larson
/s/ Harold L. Fuller Director September 25, 1997
- -------------------------------
Harold L. Fuller
/s/ Leonard E. Searl Director September 25, 1997
- -------------------------------
Leonard E. Searl
135
CORPORATE INFORMATION
HF BANCORP, INC.
DIRECTORS
J. Robert Eichinger, Chairman
Norman M. Coulson
Richard S. Cupp
Harold L. Fuller
Dr. Robert K. Jabs
Patricia A. "Corky" Larson
George P. Rutland
Leonard E. Searl
HF BANCORP, INC.
EXECUTIVE OFFICERS
Richard S. Cupp, President and Chief Executive Officer
Gerald A. Agnes, Executive Vice President
Mark R. Andino, Vice President, Treasurer
Janet E. Riley, Corporate Secretary
HEMET FEDERAL SAVINGS AND LOAN ASSOCIATION OFFICERS
Richard S. Cupp, President and Chief Executive Officer
Gerald A. Agnes, Executive Vice President, Chief Operating Officer
Mark R. Andino, Sr. Vice President, Chief Financial Officer
Leticia J. Arciniega, Sr. Vice President, Information Services
Robert J. Armstrong, Sr. Vice President, Chief Loan Officer
Jack A. Sanden, Sr. Vice President, Real Estate Services
William K. Tierney, Sr. Vice President, Administrative Services
Pamala S. Trotter, Sr. Vice President, Human Resources
BRANCH DIRECTORY
445 E. Florida Avenue, Hemet, California
3600 Tyler St., Riverside, California
28031 Bradley Road, Sun City, California
1479 S. San Jacinto Avenue, San Jacinto, California
5395 Canyon Crest Drive, Riverside, California
1111 S. State Street, Hemet, California
3013 W. Florida Avenue, Hemet, California
41815 E. Florida Avenue, Hemet, California
5242 Arlington Avenue, Riverside, California
31740 Railroad Canyon Road, Canyon Lake, California
54245 North Circle Drive, Idyllwild, California
40461 Murrieta Hot Springs Road, Murrieta, California
961 S. Santa Fe, Vista, California
815 Mission Ave., Oceanside, California
15703 Bernardo Heights Parkway, San Diego, California
420 S Palm Canyon Dr., Palm Springs, California
66565 Pierson Blvd, Desert Hot Springs, California
68327 Highway 111, Cathedral City, California
39800 Bob Hope Dr., Rancho Mirage, California
Stock Listing Information
The stock of HF Bancorp, Inc. is traded over-the-counter on the Nasdaq Stock
Market under the symbol "HEMT". Daily quotations are included in the Nasdaq
Stock Market stock tables published in leading dailies and other business
publications.
STOCK PRICE INFORMATION
Shares of common stock were made available to qualified subscribers at $8.00 per
share during the initial public offering on June 30, 1995. The table below
shows the reported high and low closing prices of the common stock during the
periods indicated in fiscal 1997. The closing price of a common share on June
30, 1997 was $14 3/8.
Quarter Ended
- -------------
High Low
---- ---
September 30,1996 $10 $9 1/4
December 31, 1996 $11 3/8 $9 3/4
March 31, 1997 $14 $11
June 30, 1997 $14 3/4 $12 1/4
STOCK TRANSFER AGENT
American Securities Transfer & Trust, Lakewood, Colorado
INVESTOR RELATIONS
Stockholder and general inquiries regarding HF Bancorp, Inc. should be
directed to:
Richard S. Cupp
HF Bancorp, Inc.
P.O. Box 12006
Hemet, Ca 92546
1-800-540-4363 ext 2101
LEGAL COUNSEL
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
AUDITOR
Deloitte & Touche LLP
1000 Wilshire Blvd
Los Angeles, California 90017