1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
There were 6,281,875 shares of the Registrant's common stock outstanding
as of November 10, 1997.
2
HF BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
--------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as of
September 30, 1997 (unaudited), and June 30, 1997 3-4
Consolidated Statements of Operations (unaudited) for the
Three Months ended September 30, 1997, and 1996 5-6
Changes in Stockholders' Equity (unaudited) 7
Consolidated Statements of Cash Flows (unaudited) for the
Three Months ended September 30, 1997 and 1996 8-10
Introduction 11
Description of Business 12-16
Notes to Consolidated Financial Statements (unaudited) 17-21
Recent Developments 22-23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24-48
---------------------------------------------
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 49
Item 2. Changes in Securities 49
Item 3. Defaults Upon Senior Securities 49
Item 4. Submission of Matters to a Vote of Security Holders 49
Item 5. Other Information 50
Item 6. Exhibits and Reports on Form 8-K 50
Signature Page 51
2
3
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Sept. 30 June 30,
1997 1997
---- ----
(Unaudited)
(Dollars In Thousands)
ASSETS
Cash and cash equivalents $ 25,624 $18,411
Investment securities held to maturity (estimated fair value of $18,630
and $26,557 at September 30, 1997 and June 30, 1997, respectively) 18,530 26,794
Investment securities available for sale (amortized cost of $132,077
and $147,507 at September 30, 1997 and June 30, 1997, respectively) 131,573 144,997
Loans held for sale 2,921 335
Loans receivable (net of allowance for estimated loan losses of $4,301
and $4,780 at September 30, 1997 and June 30, 1997, respectively) 524,085 484,334
Mortgage-backed securities held to maturity (estimated fair value of $143,560
and $148,907 at September 30, 1997 and June 30, 1997, respectively) 144,472 151,369
Mortgage-backed securities available for sale (amortized cost of $154,267
and $108,771 at September 30, 1997 and June 30, 1997, respectively) 155,683 109,493
Accrued interest receivable 7,032 7,332
Investment in capital stock of the Federal Home Loan Bank, at cost 6,318 6,224
Premises and equipment, net 7,932 8,289
Real estate owned, net of valuation allowances
Acquired through foreclosure 5,573 5,298
Acquired for sale or investment 149 418
Repossessed Consumer Assets 14 --
Intangible assets 13,883 14,471
Other assets 6,588 6,984
--------- ---------
Total assets $1,050,377 $984,749
========== ========
3
4
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
Sept 30 June 30,
1997 1997
---- ----
(Unaudited)
(Dollars In Thousands Except Per Share Amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Checking deposits $ 74,619 $ 73,771
Savings deposits 107,854 111,742
Money market deposits 50,723 38,620
Certificates of deposit 623,833 615,522
------- -------
Total deposits $857,029 $839,655
Advances from the Federal Home Loan Bank 95,000 50,000
Accounts payable and other liabilities 6,736 6,888
Income taxes 8,318 7,179
---------- --------
Total liabilities 967,083 903,722
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 15,000,000 shares authorized; 6,612,500 issued
and 6,281,875 outstanding at September 30, 1997 and June 30, 1997 66 66
Additional paid-in capital 51,450 51,355
Retained earnings, substantially restricted 38,943 38,441
Net unrealized gain (loss) on securities available for sale, net of taxes 536 (1,050)
Deferred stock compensation (4,353) (4,437)
Treasury stock, 330,625 shares at September 30, 1997 and June 30, 1997 (3,348) (3,348)
---------- --------
Total stockholders' equity 83,294 81,027
---------- --------
Total liabilities and stockholders' equity $1,050,377 $984,749
========== ========
Nominal book value per share $13.26 $12.90
Tangible book value per share $11.58 $11.15
Average market price per share on the final trading day of the period $16.50 $14.38
Shares utilized in above book value calculations 6,281,875 6,281,875
See notes to consolidated financial statements
4
5
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
---------------------
1997 1996
---- ----
(Dollars In Thousands)
INTEREST INCOME:
Interest on loans $9,829 $5,009
Interest on mortgage-backed securities 4,617 4,655
Interest and dividends on investment securities 3,789 4,735
------ ------
Total interest income 18,235 14,399
INTEREST EXPENSE:
Interest on deposit accounts 10,383 8,138
Interest on advances from the Federal Home Loan
Bank and other borrowings 1,246 915
Net interest expense of hedging transactions 486 780
------ ------
Total interest expense 12,115 9,833
------ ------
NET INTEREST INCOME BEFORE PROVISION
FOR ESTIMATED LOAN LOSSES 6,120 4,566
PROVISION FOR ESTIMATED LOAN LOSSES 100 179
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOAN LOSSES 6,020 4,387
OTHER INCOME (EXPENSE):
Loan and other fees 97 51
Loss from real estate operations, net (443) (52)
Gain on sale of mortgage-backed and investment
securities available for sale 56 365
Gain on sale of loans held for sale 27 --
Savings fees 451 171
Other income 60 121
Amortization of intangible assets (588) (237)
------- -------
Total other income (expense) (340) 419
See notes to consolidated financial statements
5
6
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1997 1996
---- ----
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits $ 2,545 $ 1,997
Occupancy and equipment expense 982 630
FDIC insurance and other assessments 181 322
SAIF special assessment 0 4,757
Legal and professional services 124 168
Data processing service costs 471 292
Marketing 88 158
Savings expense 28 101
Other 403 350
-------- -------
Total general and administrative expenses 4,822 8,775
EARNINGS (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 858 (3,969)
INCOME TAX EXPENSE (BENEFIT) 356 (1,630)
----- --------
NET EARNINGS (LOSS) $ 502 $(2,339)
===== ========
Net earnings (loss) per share $0.08 $ (0.41)
Weighted average common shares utilized in earnings
per share calculations 5,999,068 5,700,619
See notes to consolidated financial statements
6
7
HF BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended September 30, 1997
(Unaudited)
Common Additional Retained Unrealized Deferred stock Treasury Total
stock paid-in earnings gain (loss) compensation stock
capital on
securities
available
for sale
-----------------------------------------------------------------------------------
(Dollars In Thousands)
Balance at June 30, 1997 $66 $51,355 $38,441 ($1,050) ($4,437) ($3,348) $81,027
Net income for the three months
ended September 30, 1997 -- -- 502 -- -- -- 502
Change in net unrealized loss on
securities available for sale, net
of taxes -- -- -- 1,586 -- -- 1,586
Change in deferred stock
compensation -- 95 -- -- 84 -- 179
-----------------------------------------------------------------------------------
Balance at September 30, 1997 $66 $51,450 $38,943 $536 ($4,353) ($3,348) $83,294
===================================================================================
See notes to consolidated financial statements
7
8
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30
---------------------
1997 1996
---- ----
(Dollars In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 502 $ (2,339)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Origination of loans held for sale (4,133) --
Proceeds from sale of loans held for sale 2,275 --
Provisions for estimated loan and real estate losses 526 209
Direct write-offs from real estate operations -- 2
Depreciation and amortization 350 217
Amortization of deferred loan fees (214) (118)
Amortization (accretion) of premiums (discounts) on loans
and investment and mortgage-backed securities, net 98 68
Amortization of intangible assets 588 237
Federal Home Loan Bank stock dividend (94) (89)
Gain on sales of loans held for sale (27) --
Loss (gain) on sales of real estate, net (2) 10
Gain on sale of mortgage-backed and investment securities, available for sale (56) (365)
Loss (gain) on sale of premises and equipment 1 (10)
Decrease (increase) in accrued interest receivable 300 (1,178)
(Decrease) increase in accounts payable and other liabilities (152) 5,621
Decrease (increase) in other assets 396 (2,188)
Other, net 205 (1,340)
--------- --------
Net cash provided by operating activities 563 1,417
8
9
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30
----------------------
1997 1996
---- ----
(Dollars In Thousands)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable (42,544) (50,597)
Purchases of mortgage-backed securities held to maturity -- (15,039)
Purchases of mortgage-backed securities available for sale (53,754) (9,888)
Principal repayments on mortgage-backed securities held to maturity 6,833 5,058
Principal repayments on mortgage-backed securities available for sale 6,596 3,576
Purchases of investment securities held to maturity -- --
Purchases of investment securities available for sale -- (34,970)
Principal repayments on investment securities held to maturity 272 247
Principal repayments on investment securities available for sale 1,415 1,577
Proceeds from sales of mortgage-backed and investment securities available for sale 15,609 21,150
Matured / called investment and mortgage backed securities held to maturity 8,000
Matured / called investment and mortgage backed securities available for sale -- 19,930
Proceeds from sales of real estate acquired by foreclosure 1,565 133
Proceeds from sales of real estate held for investment 278 232
Additions to real estate owned -- (5)
Proceeds from sale of premises and equipment 41 5
Additions to premises and equipment (35) (703)
Cash payment for acquisition, net of cash received -- (14,707)
---------- --------
Net cash used in investing activities (55,724) (74,001)
9
10
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30
----------------------
1997 1996
---- ----
(Dollars In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances received from FHLB $ 45,000 $ --
Proceeds from other borrowings 50,000 --
Increase in certificate accounts 8,310 2,424
Net increase (decrease) in NOW, passbook, money market investment and
non-interest-bearing accounts 9,064 (700)
Repayment of other borrowings (50,000) --
-------- ----------
Net cash provided by financing activities 62,374 1,724
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,213 (70,860)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,411 100,633
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,624 $ 29,773
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest on deposit accounts and other borrowings $ 2,298 $ 1,403
======== ========
Income taxes paid -- --
======== ========
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure $ 2,289 $ 21
Loans to facilitate sale of real estate through foreclosure $ 227 $ 99
Purchase of Palm Springs Savings Bank:
Fair value of assets purchased, excluding cash $ -- $184,321
Fair value of liabilities assumed -- 169,614
-------- ---------
Cash payment for acquisition, net of cash received $ -- $ 14,707
======== ========
See notes to consolidated financial statements
10
11
HF BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1997
(UNAUDITED)
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, but not limited to:
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 Form 10-K "Item 1. Description Of Business -- Factors
That May Affect Future Results".
11
12
HF BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1997
(UNAUDITED)
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 & 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. The Company's common
stock is listed on the Nasdaq National Market ("NASDAQ") under the symbol
"HEMT".
At September 30, 1997, the Company had $1,050.4 million in total assets,
$524.1 million in total net loans receivable, and $857.0 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.
12
13
HF BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1997
(UNAUDITED)
On September 27, 1996, Hemet Federal Savings & Loan Association
consummated the acquisition of Palm Springs Saving Bank ("PSSB") by purchasing
their 1,131,446 shares of common stock for $16.3 million. The acquisition was
accounted for under purchase accounting guidelines and therefore generated
intangible assets (see "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 intangible of $6.6 million,
or 3.6% of the deposits assumed (see "Intangible Assets").
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, and receives commissions from the sale of
mortgage life insurance, fire insurance, and annuities. All material
intercompany transactions, profits, and balances have been eliminated.
13
14
HF BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1997
(UNAUDITED)
The Company conducts business from nineteen branch offices and one
centralized loan servicing center, located as follows:
Greater Hemet / San Jacinto Valley Area
- ----------------------------------------
Hemet - Diamond Valley
Hemet - Downtown (Main Office)
Hemet - East
Hemet - Sanderson (Loan Service Center)
Hemet - West
Idyllwild
San Jacinto
Northern San Diego County Coachella Valley
- ------------------------- ----------------
Oceanside Cathedral City
Rancho Bernardo Desert Hot Springs
Vista Palm Springs
Rancho Mirage
Greater City Of Riverside Area Southwestern Riverside County
- ------------------------------ -----------------------------
Arlington Canyon Lake
Canyon Crest Murrieta
Tyler Mall Sun City
In addition, the Company supports its customers through 24 hour telephone
banking and ATM access through an array of networks including STAR, CIRRUS,
PLUS, and NOVUS.
14
15
HF BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1997
(UNAUDITED)
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
15
16
HF BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1997
(UNAUDITED)
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 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.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation have been included. The results of operations for the three month
period ended September 30, 1997, are not necessarily indicative of the results
that may be expected for the entire fiscal year.
These consolidated financial statements and the information under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" should be read in conjunction with the audited consolidated
financial statements and notes thereto of HF Bancorp, Inc. for the fiscal year
ended June 30, 1997 included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997.
16
17
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Earnings Per Share
- ------------------
Earnings per share ("EPS") for the three months ended September 30, 1997
are based on weighted average common shares outstanding calculated as follows:
3 Months
Ended
9/30/97
-------
Total shares issued 6,612,500
Less:
Weighted average unallocated shares under the ESOP Plan 324,491
Reduction in shares for the stock award component of the Stock Based
Incentive Plan 129,275
Shares of treasury stock 330,625
Plus:
Increase in shares for the stock option component of the Stock Based
Incentive Plan 170,959
Weighted average shares outstanding for EPS calculations 5,999,068
17
18
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Termination of Swap Agreements
- ------------------------------
On July 10, 1995, the Company terminated four interest rate swap
agreements with an aggregate outstanding notional amount of $60.0 million. 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 original terms of the respective swap agreements. The expected future
annual amortization is as follows: $798,000 and $272,000 for the fiscal years
ended June 30, 1998 and 1999 respectively. As of September 30, 1997 the
remaining deferred amount was $829,000.
Defined Benefit 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. The retirement restoration
plan was a non qualified supplemental plan designed to compensate certain highly
salaried employees for the impact of wage caps under the Employee Retirement
Income Security Act ("ERISA"), which are applicable to qualified plans such as
the defined benefit pension plan.
A non-recurring $3.0 million charge to accrue expenses related to the
termination of the two retirement plans was recorded in the fourth quarter of
fiscal 1997. Management is currently in the process of arranging for the
distribution of vested plan assets to participants during the second quarter of
fiscal 1998.
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.
18
19
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Change in Accounting Principles
- -------------------------------
Effective January 1, 1998, the Company will adopt those components of SFAS
No. 125 "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES" which were postponed under SFAS No. 127
"DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN PROVISIONS OF FASB STATEMENT NO.
125". The Company is currently in the process of updating its Master Repurchase
Agreements to permit substitution of collateral involved in its repurchase
agreements conditional upon economic equivalency. Management does not believe
that the adoption of the deferred components of SFAS No. 125 will have a
significant impact on its financial statements.
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 significant impact on its
financial statements.
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
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.
19
20
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Stock Plans
- -----------
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 savings & loan association to a stock company (the "Conversion").
The ESOP subscribed for 7% of the shares of common stock issued in the
Conversion pursuant to the subscription rights granted under the ESOP plan. On
June 30, 1995, the ESOP borrowed $3,703,000 from the Company in order to fund
the purchase of common stock. The loan to the ESOP will be repaid principally
from the Company's contributions to the ESOP over a period of 9.5 years and the
collateral for the loan is the common stock purchased by the ESOP. The interest
rate for the ESOP loan is 9.0%. As of September 30, 1997, a cumulative total of
104,069 shares of common stock had been allocated to individual employee
accounts, leaving a remainder of 358,806 shares to be allocated over the
remaining life of the ESOP. Under the terms of the ESOP plan, shares are
allocated to individual employee accounts at the conclusion of each calendar
year.
At the Company's Annual Meeting of Shareholders on January 11, 1996,
shareholders approved the Hemet Federal Savings & Loan Association 1995 Master
Stock Compensation Plan (the "Stock Compensation Plan") and the HF Bancorp, Inc.
1995 Master Stock Option Plan (the "Stock Option Plan"), both of which became
effective as of the date of approval. These two plans were established to
provide Directors and employees in key management positions with a proprietary
interest in the Company, to attract and retain highly qualified staff, and to
more directly align the objectives of the individuals with the success of the
Company.
The Stock Compensation Plan was authorized to acquire 198,375 shares of
common stock in the open market. The Bank contributed funds to the Stock
Compensation Plan to enable the Plan trustees to acquire the authorized shares
of common stock. On February 28, 1996, the Bank acquired 198,375 shares in the
open market at a price of $10.00 per share. Stock shares are held in trust.
The Stock Option Plan was authorized to issue up to 661,250 options for
the purchase of common shares, including both Incentive Stock Options and Non
Qualified Stock Options.
20
21
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
On May 22, 1997, the Board Of Directors of HF Bancorp, Inc. adopted the
Amended and Restated HF Bancorp, Inc. Stock Based Incentive Plan (the "Incentive
Plan"). The Incentive Plan merged the Stock Compensation Plan and the Stock
Option Plan, and amended the provisions of these plans to, among other things:
o Provide benefits that were not available when the two 1995 Plans were
adopted, including the accelerated vesting of stock awards and stock
options following a change in control of the Company or the Bank
o Eliminate a number of outdated regulatory requirements no longer necessary
due to amendments to Section 16(b) of the Securities Exchange Act of 1934
(the "Exchange Act").
At September 30, 1997, a total of 37,954 shares of stock awards have
vested under the Incentive Plan. An additional 154,527 non-vested shares have
been allocated to Directors and employees in key management positions. A total
of 5,894 shares remained in the trust on an unallocated basis as of September
30, 1997. Stock awards under the Incentive Plan typically vest over a five year
period.
Of the 661,250 option shares authorized under the Incentive Plan at
September 30, 1997, options representing a total of 638,545 shares had been
granted and were outstanding as of that date. Of these 638,545 options, a total
of 125,183 options were vested at a weighted average exercise price of $10.59,
with the exercise price of individual vested options ranging from a low of $9.50
per share to a high of $14.34 per share. As of September 30, 1997, no options
had ever been exercised under the Incentive Plan or any of its predecessor
plans, and 22,705 options remained available for future grant.
At the Company's Annual Meeting of Shareholders on October 28, 1997,
shareholders approved an amendment to the Incentive Plan, which increased the
number of option shares authorized for issuance by 150,000 shares, from 661,250
shares to 811,250 shares. The Incentive Plan retains the prior Stock
Compensation Plan's limitation of 198,375 shares authorized for stock awards.
Commitments and Contingencies
- -----------------------------
At September 30, 1997, the Company maintained commitments to purchase
approximately $22.7 million in residential adjustable rate mortgage loans and to
sell approximately $1.9 million in residential fixed rate mortgage loans. In
addition, at September 30, 1997, the Company had committed to a $15.0 million
fixed rate advance from the FHLB that would fund during October, 1997.
21
22
HF BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1997
(UNAUDITED)
Recent Developments
- -------------------
Potential Federal Legislation
-----------------------------
The U.S. Congress is currently discussing a broad range of potential
legislation which could impact the financial services industry in general and
the Company in particular. Key topics under discussion include:
o the potential merger of the BIF and SAIF FDIC deposit insurance funds,
o the potential reform of financial institution charters (including the
potential elimination of the federal thrift charter),
o potential requirements for the cancellation of lender mortgage insurance
under certain circumstances,
o financial services modernization, including a possible relaxation of laws
separating commercial banking and commerce,
o potential modifications to the Federal Home Loan Bank system, including a
possible relaxation of the current mandatory membership requirement for
thrift institutions,
o possible federal controls on the amount and disclosure of ATM fees,
o regulations addressing the allowable financial relationships between
financial institutions and mortgage brokers
Proposed Accounting Statement
-----------------------------
FASB has continued to move forward towards issuing a final statement
entitled "ACCOUNTING FOR DERIVATIVE AND SIMILAR FINANCIAL INSTRUMENTS AND FOR
HEDGING ACTIVITIES". This extensive and complex drafted statement has generated
significant response throughout industry and government. Management cannot
predict what, if any, final statement might be issued and the potential impact
of such statement upon the Company's reported earnings and financial disclosure.
22
23
HF BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1997
(UNAUDITED)
Consolidation In The Financial Services Industry
------------------------------------------------
During calendar year 1997, a series of mergers and acquisitions of
financial institutions has been consummated or announced in the Company's
primary market areas. Acquired companies range from small community banks to
large financial services providers such as Great Western Bank. These mergers and
acquisitions have presented both opportunities and risks to the Company.
Opportunities have included the chance to acquire former customers of purchased
institutions, many of whom are receptive to the idea of altering their financial
institution affiliation once informed that their historical bank will disappear.
Risks have included the development of an expanded number of larger competitors,
which enjoy greater financial resources, market reach, and product depth than
the Company.
The opportunities and risks described above have been manifested in the
Company's recent experiences in various markets. For example, the closure of
competitor branches in several locations has led to an inflow of new business,
particularly transaction related deposit accounts. On the other hand, in some
markets, larger competitors with stronger and more diversified income streams
have priced selected products and services very aggressively, causing the
Company to either lose business relationships or decrease profit margins to
retain customers.
23
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
General
- -------
During the quarter ended September 30, 1997, the Company continued the
implementation of the business strategy presented in Form 10-K for the fiscal
year ended June 30, 1997. This strategy centered upon the Company's evolution
into a community bank offering a more comprehensive array of products and
services while at the same time augmenting earnings. Key objectives within this
strategy included:
o Increasing long term shareholder returns
o Improving customer service
o Enhancing employee relations
o Bolstering profitability
o Strengthening the Company's involvement in and contributions to the
communities it serves
During the first quarter of fiscal 1998, the Company realized the
following accomplishments in support of the above objectives:
|_| The Company's strong equity position was more effectively deployed, as
total assets expanded by $65.6 million on the strength of $40.9 million of
internally originated credit commitments plus the purchase of $37.7
million in adjustable rate residential mortgages in the secondary market.
|_| On September 22, 1997, the Company implemented a revised fee & service
charge schedule which had an immediate beneficial impact upon the
generation of non interest income.
|_| On September 17, 1997, Thomas R. Strait agreed to join the Bank as Senior
Vice President and Director Of Retail Banking. Mr. Strait is a fourteen
year veteran of the banking industry, with a strong track record of
success in both depository and lending functions.
|_| A total of $426,000 in write downs on real estate acquired through
foreclosure were recognized, as management determined to accelerate the
liquidation of a significant portion of the troubled assets remaining from
the PSSB acquisition.
24
25
|_| One of the Company's two remaining real estate investment properties was
sold, at a small gain, with the other property under contract for sale
during the second quarter of fiscal 1998. Following the conclusion of that
escrow, the Company will have completely exited the real estate
development business, freeing regulatory capital and other resources for
more effective deployment elsewhere.
|_| Additional ATM services were introduced and enhanced branch hours were
scheduled for implementation, to better serve the Company's expanding
transaction account base.
|_| Net income and average net interest margin improved from the same quarter
during the prior fiscal year, while nonperforming assets declined
sequentially from the prior quarter end.
Additional information concerning the above accomplishments is presented in the
pages which follow.
Changes In Financial Condition From June 30, 1997 to September 30, 1997
- -----------------------------------------------------------------------
Total assets of the Company increased $65.6 million, or 6.7%, from $984.7
million at June 30, 1997 to $1,050.4 million at September 30, 1997. Net loans
receivable rose $39.8 million, or 8.2%, from $484.3 million at June 30, 1997 to
$524.1 million at September 30, 1997. The nominal and relative increases in the
loan portfolio have been strategic objectives of management, as such increases,
when conducted with prudent underwriting, provide for:
o a more effective deployment of the Company's strong capital position
o a greater return on shareholders' equity
o enhanced support of the communities in which the Company operates
Net loans held for sale increased from $335,000 at June 30, 1997 to $2.9
million at September 30, 1997, as the Company continued building its mortgage
banking operation. The Company has been expanding the volume of loans originated
for sale and the range of secondary market avenues for sale utilized in order to
better manage the Company's interest rate risk position and liquidity while also
generating gains on sale.
Investment securities held to maturity declined from $26.8 million at June
30, 1997 to $18.5 million at September 30, 1997 primarily due to the call of an
$8.0 million Agency debenture during the quarter. Investment securities
available for sale declined from $145.0 million at June 30, 1997 to $131.6
million at September 30, 1997 primarily due to the sale of $12.0 million in long
term, fixed rate Agency debentures in conjunction with the Company's interest
rate risk management program (see "Interest Rate Risk Management and Exposure").
The Company did not purchase any new investment securities during the quarter
ended September 30, 1997 due to the significant existing balances of such
securities.
25
26
Mortgage backed securities held to maturity declined 4.6% from $151.4
million at June 30, 1997 to $144.5 million at September 30, 1997, due to
amortization, which generally increased during the most recent quarter in
conjunction with new, 30 year, fixed rate, first mortgage loans being available
with interest rates below 8.0%.
Mortgage backed securities available for sale rose $46.2 million, or
42.2%, from $109.5 million at June 30, 1997 to $155.7 million at September 30,
1997. During the most recent quarter, the Company redirected all cash flows
which could not be deployed into whole loans into low duration mortgage backed
securities designated as available for sale. All security purchases during the
first fiscal quarter were composed of GNMA adjustable rate mortgage backed
securities or shorter term Agency balloon maturity mortgage backed securities,
in order to avoid adding significantly to the Company's net liability sensitive
interest rate risk exposure and in order to moderate value sensitivity until the
funds could be recycled into loan originations or purchases.
The Company's investment in the capital stock of the Federal Home Loan
Bank of San Francisco increased from $6.2 million at June 30, 1997 to $6.3
million at September 30, 1997 due to dividends credited.
The Company's net investment in real estate acquired through foreclosure
rose from $5.3 million at June 30, 1997 to $5.6 million at September 30, 1997,
as the Company continued to cycle through the portfolio of problem loans
acquired in conjunction with the PSSB purchase. Sales of foreclosed real estate
during the first quarter of fiscal 1998 totaled $1.6 million, with a significant
volume of foreclosed real estate under contract for sale at quarter end.
Net real estate acquired for investment decline from $418,000 at June 30,
1997 to $149,000 at September 30, 1997 due to the sale of the parcels designated
as the VISTA BONITA development. A gain of $9,000 was realized upon sale. At
September 30, 1997, the Company maintained a single remaining investment in real
estate held for investment, MAYBERRY ESTATES, which was under contract for sale
during the second quarter of fiscal 1998.
Other assets declined from $21.5 million at June 30, 1997 to $20.5 million
at September 30, 1997 in part due to the continued amortization of the
intangible assets generated in conjunction with the branch purchase from
Hawthorne Savings Bank and the PSSB acquisition.
26
27
Deposits increased $17.4 million during the quarter, from $839.7 million
at June 30, 1997 to $857.0 million at September 30, 1997, due to a number of
factors, including:
o A continuation of management's focus upon attracting consumer and small
business checking accounts as a means of lowering the Bank's cost of funds
and establishing customer relationships for the future sale of other
products. Checking deposits increased $848,000, or 1.1%, during the
quarter.
o Customers' positive response to the Bank's introduction of its "Platinum"
money market deposit account, which provides competitive money market
interest rates for liquid funds.
o The Bank's conducting a new customer acquisition program in July, built
around a competitively priced 4 month certificate of deposit promotion.
o The continued consolidation in the financial services industry, leaving
more customers without a local branch of their former bank and therefore
receptive to sampling Hemet Federal's quality customer service.
Advances from the Federal Home Loan Bank of San Francisco increased $45.0
million during the quarter, from $50.0 million at June 30, 1997 to $95.0 million
at September 30, 1997. The additional advances, all of which were fixed rate,
were utilized to expand the Company's balance sheet and thereby bolster net
interest income, and were composed of terms from 6 months through 3 years, with
some of the advances callable by the Federal Home Loan Bank.
Total stockholders' equity increased from $81.0 million at June 30, 1997
to $83.3 million at September 30, 1997 primarily due to the net income generated
during the fiscal first quarter and because of appreciation in the portfolios of
securities designated as available for sale. The appreciation in available for
sale securities largely stemmed from a decline in Treasury rates, as exemplified
by the bond equivalent yield for the 10 year Treasury Note declining from 6.49%
at June 30, 1997 to 6.11% at September 30, 1997.
Interest Rate Risk Management And Exposure
- ------------------------------------------
In an effort to limit the Company's exposure to interest rate changes,
management monitors and evaluates interest rate risk on an ongoing basis,
through an internal simulation and modeling process, various management reports,
and via participation with the Office of Thrift Supervision Market Value Model.
Management acknowledges that interest rate risk and credit risk compose the two
greatest financial exposures faced by the Company in the normal course of its
business.
In recent quarters, the Company has maintained a net liability
sensitivity, meaning that, in aggregate, the Company's liabilities reprice more
quickly and by a greater magnitude than do its assets. This net liability
sensitivity primarily arises from the longer term, higher duration mortgage
backed and investment securities and whole loans maintained on the Company's
balance sheet, for which the Company's only current match funding sources are
demand deposit accounts, non interest bearing liabilities, a segment of core
deposit transaction accounts, certain borrowings, and capital. The net liability
sensitivity translates to improved profitability and higher economic value
during
27
28
decreasing rate environments. Conversely, this position presents the likelihood
of constrained net interest income and average spreads during periods of
increases in general market interest rates.
During the three months ended September 30, 1997, the Company continued
its program of moderating interest rate risk while building core earnings.
Specific actions during the quarter ended September 30, 1997 included:
1. The sale of $12.0 million and the call of $8.0 million in longer term,
fixed rate Agency debentures.
2. The sale of $2.2 million in current, fixed rate, residential loan
originations.
3. The secondary market purchase of $37.7 million in adjustable rate
residential mortgages which, when added to the impact of internal
originations, increased the percentage of loans presenting adjustable
interest rates to 71.2% of total gross loans at September 30, 1997.
4. The continuation of the Company's loan origination program which
encourages the generation of adjustable rate mortgages through favorable
pricing to the customer combined with incentives to the Company's sales
force.
5. The completion of development work on a new Home Equity Line Of Credit
product which reprices monthly based upon the Wall Street Journal Prime
Rate and that offers customers a lower interest rate for an introductory
period of three billing cycles. Management intends to aggressively market
this new product commencing in the second quarter of fiscal 1998.
6. The recycling of periodic cash flows from longer term, fixed rate mortgage
backed securities and loans into adjustable rate loans or mortgage backed
securities presenting much lower duration.
Management believes that, although investment in adjustable rate assets,
some of which present initial discount, or teaser, rates, may reduce short term
earnings below amounts obtainable through investment in fixed rate or higher
duration assets, an asset portfolio containing a greater percentage of
adjustable rate product reduces the Company's exposure to adverse interest rate
fluctuations and enhances longer term profitability and economic value. This is
consistent with the overall investment policy of the Company, which is designed
to manage its aggregate interest rate sensitivity, to generate a favorable
return without incurring undue interest rate risk, to supplement the Company's
lending activities, and to provide and maintain liquidity. However, there can be
no assurance that any substantial quantity of adjustable rate loans meeting the
Company's underwriting standards will be available in the future.
28
29
The Company has also utilized a variety of financial instruments to manage
its interest rate risk, including off balance sheet transactions such as
interest rate agreements including swaps, caps, and floors. The Company
originally entered into its existing off balance sheet positions to
synthetically adjust the duration of the Company's liabilities to more closely
match that of its assets. On July 10, 1995, the 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 three months ended September 30, 1997, the Bank amortized
$241,000 of the deferred loss to interest expense, and charged interest expense
for $245,000 related to current existing interest rate swaps with an aggregate
notional amount of $35.0 million. During the quarter which will end on December
31, 1997, the conclusion of the amortization period for one of the terminated
interest rate swaps will be realized, then leaving a single terminated swap to
be amortized through November 21, 1998. The conclusion of these amortization
periods will result in the Bank's reporting a reduction in interest expense and
effective cost of funding, all else held constant. Additional information
concerning the Bank's current and terminated interest rate swap positions is
provided in the following table:
Summary Of Interest Rate Swaps
------------------------------
Active Interest Rate Swaps
--------------------------
Rate Basis Rate Basis
Notional Maturity Bank Bank Bank Bank Swap
Amount Date Receives Receives Pays Pays Resets
------ ---- -------- -------- ---- ---- ------
$20,000,000 01/06/99 3 month LIBOR Actual/360 9.800% Fixed 360/360 quarterly
$15,000,000 01/30/99 3 month LIBOR Actual/360 7.274% Fixed 360/360 quarterly
Total $35,000,000
Terminated Interest Rate Swaps
------------------------------
Original 9/30/97 Loss Daily
Notional Termination Deferred Deferred Amortization Loss
Amount Date Loss Loss Completion Amortization
------ ---- ---- ---- ---------- ------------
$10,000,000 07/10/95 $557,730 $0 03/27/97 $890
$20,000,000 07/10/95 $1,338,145 $0 04/30/97 $2,024
$10,000,000 07/10/95 $631,816 $40,668 11/25/97 $726
$20,000,000 07/10/95 $2,328,601 $788,811 11/21/98 $1,892
Total $60,000,000 $4,856,292 $829,479
29
30
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 September
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 9/30/97 $5,455,993
Reduction In Regulatory Capital As Of 9/30/97 $5,455,993
Reduction In Tangible Book Value As Of 9/30/97 $5,455,993
30
31
Acquisition of Palm Springs Savings Bank ("PSSB")
- -------------------------------------------------
Transaction Date 09/27/96
Nature of Transaction Non Taxable Acquisition
Accounting Methodology Employed Purchase Accounting
Total Purchase Price $16,264,536
Less: Net Book Value of Assets & Liabilities Acquired $ 9,287,912
-----------
Premium Paid Over Net Book Value $ 6,976,624
Initial Accounting For The Acquisition Debits Credits
------ -------
Loan Premium Created $2,441,000
Core Deposit Intangible Created $9,445,475
Deferred Tax Liability On Loan Premium $1,008,284
Deferred Tax Liability On Core Deposit Intangible $3,901,567
Cash Payment For PSSB Shares Above Net Book Value $6,976,624
----------- ----------
Total $11,886,475 $11,886,475
----------- -----------
Book Amortization Method / Term
Loan Premium Effective Yield / Life Of Loans Acquired
Core Deposit Intangible Straight Line / Seven Years
Tax Return Amortization Method / Term
Loan Premium Not Tax Deductible Due To Non Taxable
Acquisition
Core Deposit Intangible Not Tax Deductible Due To Non Taxable
Acquisition
Monthly Pre-Tax Charge To Book Income
Loan Premium variable based upon loan amortization
Core Deposit Intangible: Gross / Net $112,446 / $65,999
Monthly Book Amortization Reported As
Loan Premium Reduction In Interest Income
Core Deposit Intangible Non Operating Expense
Nominal Deferred
Balances As Of 09/30/97 Assets Tax Liabilities Net
------ --------------- ----
Loan Premium $ 2,105,045 $ 869,514 $1,235,531
Core Deposit Intangible $ 8,096,122 $3,344,201 $4,751,921
----------- ---------- ----------
Total $10,201,167 $4,213,715 $5,987,452
Reduction In Regulatory Capital As Of 9/30/97
Loan Premium None
Core Deposit Intangible, Net $4,751,921
Reduction In Tangible Book Value As Of 9/30/97
Loan Premium None
Core Deposit Intangible, Net $4,751,921
31
32
Acquisition of Palm Springs Savings Bank ("PSSB")
- -------------------------------------------------
Subsequent Adjustment
- ---------------------
Adjustment Date 03/01/97
Nature of Adjustment Recognition of Additional Core Deposit
Intangible Resulting From Trigger of PSSB
Officer 24 Month Salary Continuation
Agreement
Additional Core Deposit Intangible Created $362,804
Book Amortization Method / Term Straight Line / 79 months
Tax Return Amortization Method / Term Straight Line / 24 months
Monthly Pre-Tax Charge To Book Income $4,592
Monthly Book Amortization Reported As Non Operating Expense
Core Deposit Intangible Balance As Of 9/30/97 $330,657
Reduction In Regulatory Capital As Of 9/30/97 $330,657
Reduction In Tangible Book Value As Of 9/30/97 $330,657
In March of 1997, the Bank commenced payment to a former officer of Palm
Springs Saving Bank following the resignation of the executive while he was
covered under a salary continuation contract. The total payments due under the
contract were capitalized as an adjustment to the core deposit intangible
associated with the Palm Springs Savings Bank acquisition, as the potential cost
of the contract, which existed prior to the acquisition, was included within the
initial valuation of the core deposits acquired. The payments due under the
contract were not capitalized at the date of acquisition due to uncertainty
regarding whether the contract would be triggered; i.e. whether the executive
would remain with the Bank. 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 Bank can deduct the
payments for tax purposes on a faster schedule than they will be recognized for
book reporting purposes, thus generating a deferred tax liability under SFAS
109.
32
33
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 investment and mortgage backed securities 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.
33
34
During the quarter ended September 30, 1997, the Bank commenced efforts
aimed at acquiring an unsecured "federal funds" line of credit from one of the
institution's primary correspondent banks, as an additional means to provide for
contingent liquidity needs. However, there can be no assurance that the Bank
will be successful in securing such line of credit.
At September 30, 1997, the Bank maintained untapped borrowing capacity at
the FHLB-San Francisco in the amount of $128.2 million. At the same date, the
Bank was in the process of pledging approximately $100.0 million in additional
residential mortgages to the FHLB-SF in order to expand the Bank's liquidity
resources. In addition, due to the Company's relatively low loan to deposit
ratio of 61.2% at September 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 September 30, 1997, cash and cash equivalents totaled $25.6 million,
compared to $18.4 million at June 30, 1997. The increase during the most recent
fiscal quarter was associated with the investment of $8 million into a short
term repurchase agreement that was slated to fund (after maturity) a whole loan
purchase contracted to close in October 1997. 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 September, 1997 was 9.99%,
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.
34
35
CAPITAL RESOURCES
- -----------------
The Bank must maintain capital standards as set forth by federal
regulations. As of September 30 1997, these requirements are: 1) tangible
capital of 1.5 % of adjusted assets; 2) core capital of 4% of adjusted assets;
and 3) risk-based capital of 8.0 % of risk-weighted assets. At September 30,
1997, the Bank exceeded all minimum regulatory capital requirements as shown in
the table below:
PERCENT OF
ADJUSTED
AMOUNT TOTAL ASSETS
------ ------------
(DOLLARS IN THOUSANDS)
Tangible Capital
- ----------------
Actual capital $62,659 6.07%
Minimum required 15,479 1.50
------ -----
Excess $47,180 4.57%
======= =====
Core Capital
- ------------
Actual capital $62,659 6.07%
Minimum required 41,277 4.00
------- ----
Excess $21,382 2.07%
======= =====
PERCENT OF RISK-
AMOUNT WEIGHTED ASSETS
------ ---------------
Risk-based Capital
- ------------------
Actual capital $65,567 15.48%
Minimum required 33,885 8.00
------- ------
Excess $31,682 7.48%
======= =======
35
36
OTS regulations contain "prompt corrective action" provisions under which
insured depository institutions are to be classified into one of five categories
based primarily upon capital adequacy. The categories range from "well
capitalized" to "critically under capitalized." OTS guidelines define a "well
capitalized" institution as one which maintains:
A. A total risk-based capital ratio of 10% or greater,
B. A Tier 1 risk-based capital ratio of 6%
C. A core capital ratio of 5% or greater, and
D. Is not subject to any written capital order or directive to meet and
maintain a specific capital level of any capital measure.
The Bank's Tier 1 risk based capital ratio as of September 30, 1997 was
14.79%. At September 30, 1997, the Bank's regulatory capital levels exceed the
thresholds required to be classified as a "well capitalized" institution. The
Bank's capital ratios detailed above do not reflect the additional capital (and
assets) maintained by the holding company.
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.
36
37
CREDIT PROFILE
- --------------
Nonperforming Assets
--------------------
The following table sets forth information regarding nonaccrual loans and
real estate acquired through foreclosure.
Sept 30, 1997 June 30, 1997
------------- -------------
(Dollars In Thousands)
Nonaccrual loans before valuation reserves $3,485 $5,217
Investment in foreclosed real estate before
valuation reserves 6,942 6,308
Investment in repossesed consumer assets before
valuation reserves 14 10
---------- ---------
Total nonperforming assets $10,441 $11,535
======= =======
Nonperforming loans to gross loans net of
undisbursed loan funds 0.65% 1.06%
Nonperforming assets to total assets 0.99% 1.17%
The reduction in nonperforming assets during the first quarter of fiscal
1998 primarily resulted from the Company's continuing to cycle through the
portfolio of troubled assets acquired in conjunction with the purchase of PSSB
on September 27, 1996, as highlighted by the table presented below. In addition,
a gradual recovery in real estate markets in the Company's primary lending areas
has favorably impacted the Company's aggregate credit profile.
37
38
Classified Assets
-----------------
The following graph presents information concerning classified assets. The
category "OAEM" refers to "Other Assets Especially Mentioned", or those assets
which present indications of potential future credit deterioration.
HF Bancorp, Inc
History of Classified Assets
(Dollars In Thousands)
OAEM Substandard Loss Total
---- ----------- ---- -----
December 31, 1995 $9,217 $ 9,130 $2,618 $20,965
March 31, 1996 $8,287 $10,207 $3,030 $21,524
June 30,1996 $11,070 $ 8,189 $3,140 $22,399
September 30, 1996 $17,454 $22,007 $4,037 $43,498
December 31, 1996 $17,793 $20,588 $2,820 $41,201
March 31, 1997 $16,646 $18,733 $3,035 $38,414
June 30, 1997 $9,586 $19,834 $2,952 $32,372
September 30, 1997 $8,656 $15,805 $3,051 $27,512
The Company experienced an anticipated significant increase in classified
assets upon the acquisition of PSSB in September, 1996. Since the acquisition,
management has worked to reduce the classified asset total through various means
including aggressive collection efforts, foreclosure with subsequent property
sales, and settlement of troubled assets for less than face value. As a result
of its due diligence process in conjunction with the acquisition of PSSB,
management required PSSB to recognize $2.2 million in additional loan and real
estate loss provisions prior to the consummation of the acquisition.
38
39
Impaired Loans
--------------
The Bank adopted Statement of Financial Accounting Standards (SFAS)
No.114, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN" as amended by SFAS
118, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND
DISCLOSURES", as of July 1, 1995. These statements generally require all
creditors to account for impaired loans, except those loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective interest rate
or as a practical expedient, at the loans's observable market price or the fair
value of the collateral if the loan is collateral dependent. SFAS No. 114
indicates that a creditor should evaluate the collectability of both contractual
interest and contractual principal when assessing the need for loss recognition.
The Bank applies the provision of SFAS No. 114 to all loans in its
portfolio. As a majority of the Bank's loans are collateral dependent, most
impaired loans are accounted for based upon the fair value of their collateral.
In applying the provisions of SFAS No. 114, the Bank considers a loan to be
impaired when it is probable that the Bank will be unable to collect all
contractual principal and interest in accordance with the terms of the loan
agreement. However, in determining when a loan is impaired, management also
considers the loan documentation, current loan to value ratios, and the
borrowers' current financial position. The Bank considers all nonaccrual loans
and all loans that have a specific loss allowance applied to adjust the loan to
fair value as impaired.
At September 30, 1997, the Company maintained total gross impaired loans,
before specific reserves, of $12.1 million, constituting 134 credits. This
compares favorably to total gross impaired loans of $16.3 million at June 30,
1997. A total of $1.4 million in specific reserves were established against
impaired loans at September 30, 1997. The average recorded investment in
impaired loans during the quarter ended September 30, 1997 was $13.0 million.
The Company's impaired loan portfolio at September 30, 1997 was
disproportionately represented by credits originated by PSSB prior to its
acquisition, as highlighted in the following table.
Gross Impaired Loans At September 30, 1997
(Dollars In Thousands)
Originated Originated
By By
PSSB Hemet Federal TOTAL
---- ------------- -----
Accrual Status $4,455 $4,146 $8,601
Non Accrual Status $1,939 $1,546 $3,485
TOTAL $6,394 $5,692 $12,086
39
40
The above table also highlights that many of the Company's impaired loans
at September 30, 1997 were either fully current or with only minor delinquency,
as $8.6 million (71.2%) were maintained on accrual status. Interest is accrued
on impaired loans on a monthly basis except for those loans that are 90 or more
days delinquent or those loans which are less than 90 days delinquent but where
management has identified concerns regarding the collection of the credit. For
the three months ended September 30, 1997, accrued interest on impaired loans
was $92,000 and interest of $198,000 was received in cash.
If all nonaccrual loans had been performing in accordance with their
original loan terms, the Company would have recorded interest income of $232,000
during the quarter ended September 30, 1997, instead of interest income actually
recognized on cash payments of $33,000.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. Management reviews the Bank's loan loss
allowance on a monthly basis. In determining levels of risk, management
considers a variety of factors, including asset classifications, economic
trends, industry experience and trends, geographic concentrations, estimated
collateral values, management's assessment of the credit risk inherent in the
portfolio, historical loan loss experience, and the Bank's underwriting
policies. The allowance for loan losses is maintained at an amount management
considers adequate to cover losses in loans receivable which are deemed probable
and estimable.
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 due to
economic, operating, regulatory, and other conditions that may be beyond the
Bank's control.
40
41
The following tables set forth activity in the Bank's allowances for
estimated loan losses and estimated real estate losses during the three months
ended September 30, 1997 and 1996:
Three Months Ended September 30
-------------------------------
1997 1996
---- ----
(Dollars In Thousands)
Allowance for Loan Losses:
- --------------------------
Balance at June 30 $4,780 $3,068
Allowance acquired from PSSB --- 2,963
Loan chargeoffs:
Residential real estate (235) (11)
Multifamily real estate (57) ---
Commercial real estate --- ---
Construction --- ---
Land/Lots (246) (86)
Consumer (41) ---
Commercial business --- ---
------------ ---------
Total chargeoffs (579) (97)
Loan recoveries --- ---
Provision for estimated loan losses 100 179
--------- --------
Balance at September 30 $4,301 $ 6,113
====== =======
September 30, June 30,
------------- --------
1997 1997
---- ----
Allowance for estimated loan losses as a percent of
nonperforming loans 123.43% 91.63%
Allowance for estimated loan losses as a percent of
gross loans receivable net of loans in process 0.81% 0.97%
41
42
Three Months Ended September 30
-------------------------------
1997 1996
---- ----
(Dollars In Thousands)
Allowance for Losses: Real Estate Foreclosure
- ---------------------------------------------
Balance at June 30 $ 1,020 $ 381
Allowance acquired from PSSB 0 491
Net chargeoffs (77) (8)
Provision for estimated real estate losses 426 29
----------- ----------
Balance at September 30 $ 1,369 $ 893
Allowance for Losses: Real Estate-Development
- ---------------------------------------------
Balance at June 30 $577 $1,536
Allowance acquired from PSSB 0 0
Net chargeoffs (287) 0
Provision for estimated losses 0 0
-------- -------
Balance at September 30 $290 $1,536
Total Allowances For Real Estate Losses $1,659 $2,429
====== ======
Loan charge-offs during the first quarter of fiscal 1998 were concentrated
in credits obtained in conjunction with the acquisition of PSSB, with a
particular concentration in land and developed lot loans. While the Company
continues to make new land and lots loans, the terms and underwriting for such
new credits are significantly more conservative than those historically extended
by PSSB.
42
43
The ratio of allowance for estimated loan losses to nonaccrual loans
increased from 91.63% at June 30, 1997 to 123.43% at September 30, 1997 due to a
decline in nonaccrual loans from $5.2 million to $3.5 million. The ratio of
allowance for estimated losses to gross loans receivable net of loans in process
declined from 0.97% at June 30, 1997 to 0.81% at September 30, 1997 due to a
combination of a lower nominal reserve balance and an expanded loan portfolio.
The lower ratio (0.81%) at September 30, 1997 is supported by the reductions in
classified assets and nonaccrual loans experienced by the Company, the general
recovery in real estate values in the Company's primary market areas, and by the
high concentration of residential mortgages in the current loan portfolio. At
September 30, 1997, 72.6% of the Bank's gross loan portfolio was comprised of
residential real estate loans, while 97.1% of the gross loan portfolio was
composed of loans secured by real estate.
A $287,000 chargeoff against the Company's valuation allowance for real
estate held for investment was recorded in the quarter ended September 30, 1997
in conjunction with the sale of the VISTA BONITA project. The remaining
valuation reserve for real estate held for investment is associated with the
MAYBERRY ESTATES parcel (six one-half acre developed home lots), which was under
contract for sale at September 30, 1997.
The Company's inventory of foreclosed properties and repossessed consumer
assets at September 30, 1997 is summarized in the following table. During the
quarter ended September 30, 1997, the Company recognized $426,000 in post
acquisition writedowns in order to speed the liquidation of the remaining
problem assets acquired in conjunction with the PSSB purchase.
Real Estate Acquired By Foreclosure and Repossessed Consumer Assets
(Dollars In Thousands)
Gross Valuation Net Percent
Type Of Property Balance Reserves Balance Of Total
- ---------------- ------- -------- ------- --------
Residential 1 - 4 Units $2,164 $446 $1,718 30.7%
Multifamily More Than 4 Units 0 0 0 0.0%
Commercial / Industrial 1,711 142 1,569 28.1%
Land / Developed Lots 3,067 781 2,286 40.9%
Repossessed Consumer Assets 14 0 14 0.3%
------ ---- ----- -----
Total $6,956 $1,369 $5,587 100.0%
The Bank accounts for real estate owned through foreclosure at fair market
value upon acquisition, and management believes that adequate valuation reserves
have been established based upon current market conditions. At September 30,
1997, approximately $2.9 million in foreclosed real estate was in escrow under
contract for sale.
43
44
Comparison Of Operating Results For the Three Months Ended September 30, 1997
- --------------------------------------------------------------------------------
and 1996
- --------
General
- -------
The Company reported net earnings of $502,000, or $0.08 per share, for the
three months ended September 30, 1997, compared to net earnings of $453,000, or
$0.08 per share, for the same quarter the prior fiscal year, excluding the prior
year impact of the one time assessment to recapitalize the Savings Association
Insurance Fund of the FDIC. Including the non recurring assessment, earnings in
the quarter ended September 30, 1996 were a loss of $2.3 million, equivalent to
a loss of $0.41 per share. The number of shares utilized in earnings per share
calculations increased by 298,449 from the fiscal 1997 quarter to the fiscal
1998 quarter, as shares under the Company's deferred stock compensation plans
continued to pro rata vest and due to the appreciation in the Company's common
stock, which leads to a higher number of shares for earnings per share
calculations due to the impact of the treasury stock method of accounting upon
"in the money" stock options.
When comparing results for the quarter ended September 30 for current and
prior year, it is important to note that the prior year quarter included just 4
days of the impact of the PSSB acquisition, which closed on September 27, 1996.
Due to the timing of the PSSB purchase and the growth experienced by the Company
in the most recent fiscal quarter, the Company maintained a significantly larger
average balance sheet in the current year quarter, somewhat offset by the impact
of additional operating costs associated with running a larger bank in the
recent period.
Net Interest Income
- -------------------
Net interest income increased from $4.6 million during the quarter ended
September 30, 1996 to $6.1 million during the quarter ended September 30, 1997,
representing a rise of 34.0%. The increase resulted from both a rise in interest
earning assets and an improvement in the net interest margin realized on earning
assets. Average interest earning assets rose from $789.1 million to $973.8
million (23.4%), while the average margin on earning assets expanded from 2.31%
to 2.51% (8.7%). The ratio of interest earning assets to interest bearing
liabilities remained constant between the two quarters ended September 30, at
1.08. During the quarter ended September 30, 1997, the Company continued to
improve its cash management, implementing revised transit courier schedules to
minimize lost float on checks deposited by customers.
44
45
Interest Income
- ---------------
Interest income increased $3.8 million, or 26.6%, from $14.4 million
during the quarter ended September 30, 1996 to $18.2 million during the quarter
ended September 30, 1997. Interest income on loans nearly doubled from the prior
fiscal year quarter, as average net loans outstanding rose from $238.5 million
during the fiscal 1997 quarter to $494.5 million during the most recent quarter.
This favorable volume impact was partially offset by a reduction in the average
rate earned on the loan portfolio, from 8.40% in the fiscal 1997 quarter to
7.95% during the fiscal 1998 quarter. Interest income from mortgage backed
securities declined slightly from $4.7 million in the quarter ended September
30, 1996 to $4.6 million in the quarter ended September 30, 1997, despite an
increase in average mortgage backed securities outstanding from $269.8 million
in the quarter ended September 30, 1996 to $284.3 million in the most recent
quarter. The average rate earned on mortgage backed securities declined from
6.90% during the fiscal 1997 quarter to 6.50% during the fiscal 1998 quarter, as
the Company sold a significant volume of longer term, higher yielding, fixed
rate mortgage backed securities over the past year in conjunction with its
interest rate risk management program and because general market interest rates
were lower during the fiscal 1998 period, reducing interest income from the
Company's significant position in adjustable rate mortgage backed securities.
Interest income and dividends from investment securities declined from $4.7
million in the quarter ended September 30, 1996 to $3.8 million during the most
recent quarter due to the Company's planned reduction of its investment security
portfolio in favor of customer loans and other more interest sensitive assets,
as investment securities declined from $227.0 million at September 30, 1996 to
$150.1 million at September 30, 1997.
Interest Expense
- ----------------
Interest expense rose from $9.8 million during the three months ended
September 30, 1996 to $12.1 million during the three months ended September 30,
1997. This 23.2% increase stemmed from average interest bearing liabilities
expanding from $730.1 million during the prior fiscal year quarter to $903.4
million during the most recent quarter, fractionally offset by a reduction in
the average rate paid on interest bearing liabilities falling from 5.39% to
5.36%. Interest expense on deposits rose from $8.1 million for the quarter ended
September 30, 1996 to $10.4 million during the quarter ended September 30, 1997,
as average interest bearing deposits expanded from $660.1 million to $819.6
million. Interest expense on borrowings grew from $0.9 million during the
quarter ended September 30, 1996 to $1.2 million during the most recent quarter
due to a $13.8 million increase in the average balance of borrowings outstanding
combined with the average borrowing rate rising from 5.23% to 5.95%. During the
quarter ended September 30, 1997, the Company increased its use of wholesale
borrowings in conjunction with expansions in its loan and securities portfolios.
Net interest expense from hedging transactions fell 37.7% from the fiscal 1997
to the fiscal 1998 quarter, as the conclusions of the amortization periods for
the deferred losses associated with two terminated interest rate swaps were
realized in between the quarters.
45
46
Provision For Estimated Loan Losses
- -----------------------------------
The provision for estimated loan losses decreased from $179,000 during the
quarter ended September 30, 1996 to $100,000 during the quarter ended September
30, 1997, as the Company has, over the past year, achieved significant progress
in addressing the troubled assets acquired in conjunction with the PSSB
purchase. Nonperforming loans as a percent of gross loans net of loans in
process were 0.65% at September 30, 1997, versus 1.11% one year earlier. In
addition, the real estate markets where the Company maintains the vast majority
of its loans have generally improved in the past year, with the Southern
California economic recovery continuing and housing affordability remaining
favorable by historical California standards. The ratio of the allowance for
estimated loan losses as a percent of nonperforming loans was 123.4% at
September 30, 1997, almost unchanged from 123.6% a year earlier.
Other Income And Expense
- ------------------------
Other income & expense changed from income of $419,000 during the quarter
ended September 30, 1996 to expense of $340,000 during the three months ended
September 30, 1997. Loan and other fees rose from $51,000 in the prior fiscal
year quarter to $97,000 in the current fiscal year quarter, in conjunction with
the expansion in the loan portfolio. Net gains from the sale of available for
sale securities fell from $365,000 during the first quarter of fiscal 1997 to
$56,000 during the first quarter of fiscal 1998, as the prior year quarter
included significant gains on the sale of $21.2 million in mortgage backed
securities. During the most recent quarter, the Company realized gains on loans
held for sale of $27,000 in conjunction with the Company's new and gradually
expanding mortgage banking operation. The net expense from real estate
operations increased significantly from $52,000 in the quarter ended September
30, 1996 to $443,000 in the most recent fiscal quarter, as management sought to
aggressively liquidate a significant portion of the remaining problem assets
acquired with the PSSB purchase. 79% of the current quarter writedowns on
foreclosed real estate were associated with credits originated by PSSB prior to
the acquisition. Amortization of intangible assets increased from $237,000 in
the fiscal 1997 quarter to $588,000 in the most recent quarter, as the
amortization of the premium paid for PSSB did not commence until October, 1996.
Savings fees increased dramatically from $171,000 during the quarter ended
September 30, 1996 to $451,000 during the quarter ended September 30, 1997 due
to the addition of the PSSB deposit base, the new fee & service charge schedule
implemented during the most recent fiscal quarter, the Company's continuing
focus upon adding transaction accounts, and a recent, proactive program by
management to validate fee waivers.
46
47
General & Administrative Expenses
- ---------------------------------
General & administrative expenses increased by $804,000, or 20.0%, from
$4.0 million to $4.8 million for the quarters ended September 30, 1996 and 1997,
respectively. The figure for the quarter ended September 30, 1996 excludes the
one time assessment to recapitalize the SAIF insurance fund of the FDIC. The
20.0% increase was primarily attributable to:
o the additional staffing and operating overhead associated with the four
full service branches acquired through the PSSB purchase, along with
greatly expanded loan and deposit portfolios
o a $95,000 accrual in the most recent fiscal quarter for restructuring
costs anticipated to be realized in the next three months, as management
works to accelerate the Company's evolution into a community bank
General & administrative expenses (excluding the SAIF recapitalization
assessment) expressed as a percentage of total assets declined from 1.95% during
the quarter ended September 30, 1996 to 1.87% during the most recent quarter.
This decline stemmed, in part, from the various expense reduction and efficiency
improvement initiatives implemented by management. For example, during the most
recent quarter:
o the Company's health benefits program was modified to reduce annual
operating expense by approximately $75,000 per year
o two of the Company's four vehicles were sold
o the Company's loan processing and servicing operations were restructured
to provide better and more efficient customer service
o several vendors were replaced with more cost effective organizations
providing equal or better support to the Company
o the Company realized the first ongoing cost reduction from the decision to
terminate its defined benefit and supplemental retirement pension plans
during the quarter ended June 30, 1997
o the Company commenced aggressively seeking to improve its return on
occupancy costs, culminating in the lease of excess space at one branch in
the quarter just concluded for gross annual rent of $36,000
47
48
Management has recently adopted a formalized strategic planning process
aimed at improving profitability, pairing the ratio of general & administrative
expenses to average assets, and improving the Company's efficiency ratio.
Initiative areas within this planning process include a review of Company
provided benefits and alternatives for migrating more of the Company's total
compensation from fixed to variable, or incentive based, pay. Salaries and
employee benefits composed 52.8% of total general & administrative expenses
during the most recent quarter. In addition, the strategic planning process
encompasses a review of current and potential delivery alternatives for the
Company's products and services. However, there can be no assurance regarding
the degree of success to be realized from the efforts described above.
Income Taxes
- ------------
Income tax expense changed from a benefit of $1.6 million during the
quarter ended September 30, 1996 to expense of $356,000 in the quarter ended
September 30, 1997 due to the change in pre-tax income between the quarters. The
Company's nominal tax rate remained substantially unchanged between current and
prior year.
48
49
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not involved in any material pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business. Such other routine legal proceedings in the aggregate are
believed by management to be immaterial to the Company's financial
condition or results of operations.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
a) The Company's Annual Meeting of Stockholders was held on October 28,
1997.
b) Not applicable.
c) At such meeting the Company's stockholders approved the following:
1. The election of the following individuals as Directors for the term
of three years each.
For Withheld
--- --------
J. Robert Eichinger 4,687,889 35,268
Harold L. Fuller 4,688,664 34,493
Richard S. Cupp 4,688,194 34,963
2. The ratification of the Amended and Restated HF Bancorp, Inc.
Stock-Based Incentive Plan and the amendment to the plan to increase the
aggregate number of shares of common stock authorized for issuance under
such Plan by 150,000.
For Against Abstain Not Voted
--- ------- ------- ---------
4,462,721 136,551 40,055 83,830
3. The appointment of Deloitte & Touche, L.L.P, as independent auditors
of the Company for the fiscal year ending June 30, 1998.
For Against Abstain
--- ------- -------
4,689,954 14,990 18,213
49
50
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
(3) (i) Articles of Incorporation*
(ii) By-laws*
(4) Stock Certificate*
(27) Financial Data Schedule
- ------------------------------------
*Incorporated herein by reference into this document from the Exhibits to Form
S-1 Registration Statement and any amendments thereto, filed March 14, 1994,
Registration No. 33-90286.
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51
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act Of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
HF BANCORP INC.
(Registrant)
Date: November 10, 1997 By: /s/ Richard S. Cupp
--------------------
Richard S. Cupp
President
Chief Executive Officer
Date: November 10, 1997 By: /s/ Mark R. Andino
-------------------
Mark R. Andino
Vice President
Treasurer
51