SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19772
HF FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 46-0418532
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 South Main Avenue, Sioux Falls, SD 57102
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(Address of principal executive office) (ZIP Code)
(605) 333-7556
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months(or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of October 29, 1996 there were outstanding 2,909,108 common shares, net
of 108,015 shares of treasury stock, with $.01 par value, of the registrant.
HF FINANCIAL CORP.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition
As of September 30, 1996 and June 30, 1996 1
Consolidated Statements of Income for the Three
Months Ended September 30, 1996 and 1995 2
Consolidated Statement of Stockholders' Equity
for the Three Months Ended September 30, 1996 3
Consolidated Statements of Cash Flows for the
for the Three Months Ended September 30, 1996 and 1995 4-5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Default upon Senior Securities 18
Item 4. Submission of Matters to a Vote
of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
ASSETS September 30, June 30,
1996 1996
------------- ----------
Cash and cash equivalents $ 18,351 $ 11,145
Securities available for sale 40,319 41,168
Loans receivable, net 423,472 413,143
Loans held for sale 6,364 7,280
Mortgage-backed securities available for sale 42,793 59,495
Accrued interest receivable 3,814 4,002
Foreclosed real estate and other properties 356 228
Office properties and equipment, at cost, net of
accumulated depreciation 15,071 15,046
Prepaid expenses and other assets 893 510
Loan servicing rights, net 976 938
Deferred income taxes 1,585 1,552
Intangible assets, net 145 152
------------- -----------
$ 554,139 $ 554,659
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 407,818 $ 398,166
Advances from Federal Home Loan Bank and other
borrowings 78,025 90,123
Advances by borrowers for taxes and insurance 6,889 4,667
Accrued interest payable 5,794 5,853
Other liabilities 5,804 4,587
------------- -----------
Total Liabilities 504,330 503,396
------------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value, 500,000 shares
authorized, none outstanding. - - - - - - - -
Common stock, $.01 par value, 5,000,000 shares
authorized, 3,017,123 shares outstanding at
September 30, 1996 and 3,051,739 shares
outstanding at June 30, 1996 (Note 3) 31 31
Additional paid-in capital 14,582 14,480
Retained earnings, substantially restricted 38,096 38,745
Unearned compensation (568) (569)
Treasury Stock (1,647) (802)
Net unrealized (loss) on securities available for
sale (685) (622)
------------- -----------
Total Stockholders' Equity 49,809 51,263
------------- -----------
$ 554,139 $ 554,659
------------- -----------
------------- -----------
See Notes to Consolidated Financial Statements.
Page1
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three months ended September 30,
-----------------------------------
1996 1995
--------- ----------
Interest and dividend income:
Loans receivable $ 9,685 $ 8,271
Mortgage-backed securities 870 1,394
Investment securities and other interest
bearing deposits 592 818
---------- ----------
11,147 10,483
---------- ----------
Interest expense:
Deposits 5,036 5,414
Advances from FHLB and other borrowed
money 1,246 1,159
---------- ----------
6,282 6,573
---------- ----------
Net interest income 4,865 3,910
Provision for losses on loans 90 - - - -
---------- ----------
Net interest income after provision for
losses on loans 4,775 3,910
---------- ----------
Noninterest income:
Loan servicing income 238 177
Loan fees and service charges 175 292
Fees on deposits 390 262
Commission and insurance income 183 230
Appraisal and inspection fees 166 172
Gain on sale of securies, net 2 58
Gain on sales of loans 131 125
Other 105 60
---------- ----------
1,390 1,376
---------- ----------
Noninterest expense:
Compensation and employee benefits 2,338 1,973
Occupancy and equipment 724 547
Federal insurance premiums and assessment 2,877 230
Other general and administrative expenses 854 812
Losses, provision for losses and expenses
on foreclosed real estate and other
properties, net 35 92
---------- ----------
6,828 3,654
---------- ----------
Income(loss) before income taxes (663) 1,632
Income tax expense (credit) (285) 624
---------- ----------
Net income (loss) $ (378) $ 1,008
---------- ----------
---------- ----------
Earnings (loss) per share:
Net income (loss) per share $ (0.12) $ 0.32
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements
Page 2
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended September 30, 1996
(Dollars In Thousands)
(Unaudited)
Additional Unrealized
Common Paid-In Retained Unearned Treasury (Loss)
Stock Capital Earnings Compensation Stock Net of tax
----------- ---------- --------- ------------- --------- ------------
Balance, June 30, 1996 $ 31 $ 14,480 $ 38,745 $ (569) $ (802) $ (622)
Net income (loss) - - - - - - - - (378) - - - - - - - - - - - -
Exercise of stock options for 20,384 shares - - - - 102 - - - - - - - - - - - - - - - -
Cash dividends ($0.09 per share)
on common stock - - - - - - - - (271) - - - - - - - - - - - -
Adjustment to unrealized gains (losses) on
available for sale securities, net of tax - - - - - - - - - - - - - - - - - - - - (63)
Purchase of Treasury Stock - - - - - - - - - - - - - - - - (845) - - - -
Amortization of unearned compensation - - - - - - - - - - - - 1 - - - - - - - -
---------- ---------- --------- ----------- --------- ---------
Balance, September 30, 1996 $ 31 $ 14,582 $ 38,096 $ (568) $ (1,647) $ (685)
---------- ---------- --------- ----------- --------- ---------
---------- ---------- --------- ----------- --------- ---------
See Notes to Consolidated Financial Statements
Page 3
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended September 30,
-----------------------------------
1996 1995
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (378) $ 1,008
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for losses on loans 90 - - - -
Depreciation 336 173
Amortization of premiums and discounts,
net:
Securities 23 93
Loans, loans held for sale and mortgage-
backed securities (42) (57)
Reduction in cost of intangible assets 7 7
Reduction in purchased mortgage servicing
rights 30 90
Amortization of unearned compensation 1 8
Increase (decrease) in deferred loan fees (498) 101
Loans originated for resale (10,637) (11,146)
Proceeds from the sale of loans 10,742 11,271
(Gain) on sale of loans (105) (125)
(Gain) loss on sale of securities (2) (58)
Losses and provisions for losses on sales
of foreclosed real estate and other
properties, net 7 33
(Increase)decrease in accrued interest
receivable 188 (287)
(Increase) decrease in prepaid expenses
and other assets (383) (112)
(Gain) Loss on disposal of property and
equipment (1) - - - -
(Increase) in originated mortgage
servicing rights (26) - - - -
Increase in other liabilities 1,158 1,671
(Increase) decrease in deferred income tax (33) 320
--------- ----------
Net cash provided by operating
activities $ 477 $ 2,990
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Sales and maturities $ 1,000 $ 6,091
Purchases - - - - (5,232)
Proceeds from sale of property and
equipment 36 - - - -
Purchase of property and equipment: (396) (142)
Purchase of mortgage servicing rights (42) (29)
Loans purchased (5,067) (7,109)
Loans made to customers (28,875) (47,072)
Sale of participating interest in loans - - - - 3,750
Principal collected on loans 24,770 20,327
Proceeds from sale of foreclosed real
estate and other properties, net 118 188
Proceeds from sale/maturities of mortgage-
backed securities 8,117 2,815
Repayment of mortgage-backed securities 8,306 2,601
--------- ----------
Net cash provided by (used in) investing
activities $ 7,967 $ (23,812)
--------- ----------
See Notes to Consolidated Financial Statements
Page 4
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
Three Months Ended September 30,
-----------------------------------
1996 1995
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 9,652 $ (4,951)
Proceeds of advances from Federal Home
Loan Bank and other borrowings $5,000 37,000
Payments on advances from Federal Home
Loan Bank and other borrowings (17,098) (12,098)
Increase in advances by borrowers for
taxes and insurance 2,222 3,058
Proceeds from issuance of common stock 102 - - - -
Purchase of treasury stock (845) - - - -
Cash dividends paid (271) (251)
--------- ---------
Net cash provided by (used in) financing
activities $ (1,238) $ 22,758
--------- ---------
Increase in cash and cash equivalents $ 7,206 $ 1,936
Cash and cash equivalents:
Beginning 11,145 5,485
--------- ---------
Ending $ 18,351 $ 7,421
--------- ---------
--------- ---------
See Notes to Consolidated Financial Statements.
Page 5
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three months Ended September 30, 1996 and 1995
(Dollars in thousands)
(unaudited)
NOTE 1. SELECTED ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The foregoing consolidated financial statements are unaudited. However, in
the opinion of management, all adjustments (which consist of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. In addition, a $2.6 million accrual for the
assessment on SAIF deposits has been included the financial statements. Results
for any interim period are not necessarily indicative of results to be expected
for the year. The interim consolidated financial statements include the
accounts of HF Financial Corp. (the "Company"), its subsidiaries, HF Mortgage
Corp., HF Card Services L.L.C. and Home Federal Savings Bank, (the "Bank") and
the Bank's subsidiaries.
NOTE 2. REGULATORY CAPITAL
The following table sets forth the Bank's compliance with its capital
requirements at September 30, 1996:
Amount Percent
------ -------
Tier I (Core) capital:
Required . . . . . . . . . . . . $16,614 3.00%
Actual . . . . . . . . . . . . . 40,229 7.26
Excess . . . . . . . . . . . . . 23,615 4.26%
Risk-based capital:
Required . . . . . . . . . . . . $27,994 8.00%
Actual . . . . . . . . . . . . . 44,412 12.69
Excess . . . . . . . . . . . . . 16,418 4.69%
NOTE 3. CHANGE IN CAPITAL STRUCTURE
On December 20, 1995, the Company declared a two-for-one stock split in the
form of a stock dividend of one share of common stock for each one share
outstanding, payable to shareholders of record on January 10, 1996. The payment
date was January 31, 1996. The earnings per share computations have been
retroactively adjusted based upon the new shares outstanding after the effect of
the two-for-one stock split for all periods presented.
NOTE 4. EARNINGS PER SHARE
Earnings per share is calculated by dividing net income by the weighted
average number of common and common equivalent shares outstanding, including
shares issuable upon exercise of dilutive options outstanding and have been
retroactively adjusted for the two-for-one stock split in the form of a stock
dividend payable to shareholders of record on January 10, 1996. The weighted
average number of common and common equivalent shares outstanding for the three
month period ended September 30, 1996 and 1995 as adjusted was 3,167,438 and
3,161,596 respectively.
Page 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
HF Financial Corp. ("Company") was incorporated under the laws of the State
of Delaware in November 1991 for the purpose of owning all of the outstanding
stock of Home Federal Savings Bank ("Bank") issued in the mutual to stock
conversion of the Bank. The Company acquired all of the stock of the Bank on
April 8, 1992. In October 1994, the Company acquired and began operating a new
mortgage subsidiary as HF Mortgage Corp. ("Mortgage Corp."). The activities of
the Company itself have no significant impact on the results of operations on a
consolidated basis. Unless otherwise indicated, all activities discussed herein
relate to the Company, and its direct and indirect subsidiaries, including
without limitation, the Bank, HF Card Services L.L.C. and Mortgage Corp.
The Company's net income is primarily dependent upon the difference (or
"spread") between the average yield earned on loans, securities and
mortgage-backed securities and the average rate paid on deposits and borrowings,
as well as the relative amounts of such assets and liabilities. The interest
rate spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. Net income is also
affected by, among other things, gains and losses on sales of foreclosed
property, securities available for sale, provisions for loan losses, service
charge fees, subsidiary activities, operating expenses, regulatory assessments
and income taxes.
THIS DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING TERMINOLOGY
SUCH AS "BELIEVES," "ANTICIPATES," "WILL," AND "INTENDS," OR COMPARABLE
TECHNOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. POTENTIAL
PURCHASERS OF THE COMPANY'S SECURITIES ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON SUCH FORWARD-LOOKING STATEMENTS WHICH ARE QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONS AND RISKS DESCRIBED HEREIN AND IN OTHER REPORTS FILED BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
FINANCIAL CONDITION DATA
At September 30, 1996, the Company had total assets of $554.1 million, a
decrease of $520,000 from the level at June 30, 1996. The decrease in assets was
due primarily to a decrease in mortgage-backed securities of $16.7 million which
was partially offset by an increase in loans receivable of $10.3 million and an
increase in cash and cash equivalents of $7.2 million. The decrease in
mortgage-backed securities of $16.7 million was used to pay down advances from
Federal Home Loan Bank and other borrowings of $12.1 million. The increase in
loans receivable and cash and cash equivalents was funded primarily by an
increase deposits of $9.7 million, and the remaining decrease in
mortgage-backed securities from the levels of June 30, 1996. In addition,
stockholders' equity decreased from $51.3 million at June 30, 1996 to $49.8
million at September 30, 1996, primarily due to the purchase of treasury stock
of $845,000, a net loss of $378,000, and the payment of cash dividends of
$271,000 to the Company's stockholders.
The increase in loans receivable of $10.3 million was due primarily to
originations exceeding amortizations and prepayments of principal. Loans held
for sale include loans receivable that management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rate, changes in prepayment risk or other similar factors.
The decrease in mortgage-backed securities of $16.7 million was primarily
the result of sales of $8.1million and amortizations and prepayments of
principal of $8.3 million.
The $9.7 million increase in deposits was due primarily to the Bank being
successful in increasing certificates of deposits and checking accounts from
customers.
Advances from the FHLB and other borrowings decreased $12.1 million for the
three months ended September 30, 1996 primarily due to the payment of $17.1
million on advances and other borrowings during the three months ended September
30, 1996. These payments were partially offset by the Bank obtaining $5.0
million of advances and borrowings to fund loans.
Page 7
The $2.2 million increase in advances by borrowers for taxes and insurance
was due primarily to the receipt of escrow payments in excess of amounts paid
out. The major escrow payments are primarily paid semiannually in April and
October.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The following table presents
for the periods indicated the total dollar amount of interest income from
average interest-earning assets and the resulting yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates, and the net interest margin. The table does not reflect any
effect of income taxes. All average balances are monthly average balances and
include the balances of non-accruing loans. The yields and costs for
the three months ended September 30, 1996 and 1995 include fees which are
considered adjustments to yield.
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1996 1995
-------------------------------------- -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------------- ---------- -------- ------------ ---------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $ 432,550 $ 9,685 8.96% $ 383,732 $ 8,271 8.62%
Mortgage-backed securities 53,771 870 6.47% 82,176 1,394 6.79%
Other investment securities (2) 36,436 497 5.46% 55,835 736 5.27%
FHLB stock 5,222 95 7.28% 4,676 82 7.01%
---------- -------- ------ ---------- -------- ------
Total interest-earning assets 527,979 11,147 8.45% 526,419 10,483 7.97%
-------- ------ -------- ------
Non-interest earning assets. 28,664 20,332
---------- ----------
Total assets $ 556,643 $ 546,751
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits:
Now and money market accounts $ 68,203 $ 432 2.53% $ 56,396 $ 411 2.92%
Savings accounts 30,685 159 2.07% 31,267 195 2.49%
Certificates of deposit 300,960 4,445 5.91% 312,126 4,808 6.16%
--------- -------- ------ ---------- -------- ------
Total deposits 399,848 5,036 5.04% 399,789 5,414 5.42%
FHLB Advances and other borrowings 88,108 1,246 5.66% 81,871 1,159 5.66%
--------- -------- ------ ---------- -------- ------
Total interest-bearing liabilities 487,956 6,282 5.15% 481,660 6,573 5.46%
-------- ------ ---------- -------- ------
Other liabilities 17,889 16,220
---------- ----------
Total liabilities 505,845 497,880
Equity 50,798 48,871
---------- ----------
Total liabilities and equity $ 556,643 $ 546,751
---------- ----------
---------- ----------
Net interest income; interest rate spread $ 4,865 3.30% $ 3,910 2.51%
-------- ------ -------- ------
-------- ------ -------- ------
Net interest margin (3) 3.69% 2.97%
------ ------
------ ------
- --------------------------------------------------------------------------------------------------------------------------------
(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U.S. government securities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
Page 8
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increases and
decreases due to fluctuating outstanding balances that are due to the levels and
volatility of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
Three Months Ended September 30,
----------------------------------------
1996 vs 1995
----------------------------------------
(Dollars in Thousands)
Increase
(Decrease) Total
Due to Due to Increase
Volume Rate (Decrease)
---------- ----------- -----------
Interest-earning assets:
Loans receivable (1) $ 1,093 $ 321 $ 1,414
Mortgage-backed securities (460) (64) (524)
Other investment securities (2) (265) 26 (239)
FHLB stock 10 3 13
--------- -------- ---------
Total interest-earning assets $ 378 $ 286 $ 664
--------- -------- ---------
--------- -------- ---------
Interest-bearing liabilities:
Deposits:
Now and money markets $ 75 $ (54) $ 21
Savings accounts (3) (33) (36)
Certificates of deposit (165) (198) (363)
--------- -------- ---------
Total Deposits (93) (285) (378)
FHLB Advances and other borrowings 88 (1) 87
--------- -------- ---------
Total Interest-bearing liabilities $ (5) $ (286) $ (291)
--------- -------- ---------
--------- -------- ---------
Net interest income increase $ 955
---------
---------
- --------------------------------------------------------------------------------
(1) Includes interest on loans past due 90 days or more
(2) Includes primarily U. S. Government Securities
Page 9
ASSET QUALITY
In accordance with the Bank's internal classification of assets policy,
management evaluates the loan portfolio on a monthly basis to identify loss
potential and determine the adequacy of the allowance for possible loan losses.
The following table sets forth the amounts and categories of the Bank's
non-performing assets for the periods indicated.
Sept 30, June 30,
-------- --------
1996 1996
-------- --------
Non-accruing loans:
One to four Family $ 804 $ 682
Commercial real estate 550 556
Multi-family - - - - - - - -
Mobile Homes 56 58
Consumer 543 340
Construction Loans 447 - - - -
Commercial Business 526 427
--------- ---------
Total $ 2,926 $ 2,063
--------- ---------
Accruing loans delinquent more than 90 days:
One to four Family $ - - - - $ - - - -
Commercial real estate - - - - - - - -
Multi-family - - - - - - - -
Mobile Homes - - - - - - - -
Consumer - - - - - - - -
Commercial Business - - - - - - - -
--------- ---------
Total $ - - - - $ - - - -
--------- ---------
Foreclosed Assets:
One to four Family $ 18 $ 52
Commercial real estate - - - - 1
Multi-family - - - - - - - -
Mobile Homes 146 88
Consumer 192 87
Commercial Business - - - - - - - -
--------- ---------
Total $ 356 $ 228
--------- ---------
Total non-performing assets $ 3,282 $ 2,291
--------- ---------
--------- ---------
Total as a percentage of total assets 0.59% 0.41%
--------- ---------
--------- ---------
Total Non-performing loans as a percentage of
total loans 0.68% 0.49%
--------- ---------
--------- ---------
Generally, when a loan becomes delinquent 90 days or more, the Bank will
place the loan on a non-accrual status and, as a result, accrued interest income
on the loan is taken out of income. Future interest income is recognized on a
cash basis. The loan will remain on a non-accrual status until the borrower has
brought the loan current. Accruing loans delinquent 90 days or more are loans
that are well-secured on which the Bank anticipates full collection of principal
and interest.
Page 10
Non-performing assets increased to $3.3 million at September 30, 1996 from
$2.3 million at June 30, 1996, an increase of $991,000. In addition, the ratio
of non-performing assets to total assets, which is one indicator of credit risk
exposure, increased to 0.59% at September 30, 1996 from 0.57% at June 30, 1996.
Non-accruing loans increased to $2.9 million at September 30, 1996 from
$2.2 million at June 30, 1996, an increase of $700,000. Included in the $2.9
million of non-accruing loans was a $547,000 loan secured by a motel, a $326,000
construction loan secured by land and the partially completed dwelling. For the
three month period ended September 30, 1996, gross interest income of $119,000
would have been recognized on loans accounted for on a non-accrual basis had
such loans been current in accordance with their original terms. Gross interest
income of $112,000 was recognized as income on loans accounted for on a
non-accrual basis.
Foreclosed assets increased to $356,000 at September 30, 1996 from $228,000
at June 30, 1996, an increase of $128,000.
At September 30, 1996, the Bank had approximately $7.0 million of other
loans of concern that management has determined need to be closely monitored
because of possible credit problems of the borrowers or the cash flows of the
secured properties. These loans were considered in determining the adequacy of
the allowance for possible loan losses. The allowance for possible loan losses
is established based on management's evaluation of the risks inherent in the
loan portfolio and changes in the nature and volume of loan activity. Such
evaluation, which includes a review of all loans for which full collectability
may not be reasonably assured, considers the estimated fair market value of the
underlying collateral, economic conditions, historical loan loss experience and
other factors that warrant recognition in providing for an adequate loan loss
allowance. Although the Bank's management believes that the September 30, 1996
recorded allowance for loan losses was adequate to provide for potential losses
on the related loans, there can be no assurance that the allowance existing at
September 30, 1996 will be adequate in the future.
Page 11
The following table sets forth information with respect to activity in the
Bank's allowance for losses on loans during the periods indicated.
Three Months Ended September 30,
--------------------------------
1996 1995
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $ 4,129 $ 4,039
CHARGE-OFFS:
One- to four-family (27) - - - -
Commercial - - - - (35)
Multi-family - - - - - - - -
Consumer (72) (88)
Mobile homes (41) (74)
----------- -----------
Total charge-offs $ (140) $ (198)
----------- -----------
RECOVERIES:
One- to four-family $ - - - - $ 49
Commercial - - - - 30
Multi-family 46 1
Commercial business 1 - - - -
Consumer 48 22
Mobile homes 9 20
----------- -----------
Total recoveries $ 104 $ 122
----------- -----------
Net (charge-offs) $ (36) $ (76)
Additions (recoveries) charged to
operations 90 - - - -
----------- -----------
Balance at end of period $ 4,183 $ 3,963
----------- -----------
----------- -----------
Ratio of net (charge-offs) during the
period to average loans outstanding
during the period (0.01)% (0.02)%
----------- -----------
----------- -----------
Ratio of allowance for loan losses to
total loans at end of period 0.97% 1.01%
----------- -----------
----------- -----------
Ratio of allowance for loan losses to
non-performing loans at end of
period (1) 142.96% 141.49%
----------- -----------
----------- -----------
(1) Non-performing loans includes non-accruing loans
and accruing loans delinquent more than 90 days.
The allowance for loan losses was $4.2 million at September 30, 1996 as
compared to $4.0 million at September 30, 1995. The ratio of the allowance
for losses on loans to total loans was 0.97% at September 30, 1996 and 1.01% at
September 30, 1995. The Bank's management has considered non-performing assets
and other assets of concern in establishing the allowance for losses on loans.
The Bank will continue to monitor its allowance for possible loan losses and
make future additions or reductions in light of the level of loans in its
portfolio and as economic conditions dictate.
Page 12
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
At September 30,1996 At June 30,1996
------------------------ ---------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
-------- ----------- -------- ----------
(Dollars in Thousands)
One- to four- family (1) $ 1,601 38.28% $ 1,789 43.27%
Commercial and multi-family
real estate (1) 1,092 26.11% 957 23.21%
Mobile homes 186 4.45% 191 4.62%
Consumer (2) 1,170 27.97% 1,060 25.69%
Commercial business 134 3.20% 132 3.21%
-------- ------- -------- -------
Total $ 4,183 100.00% $ 4,129 100.00%
-------- ------- -------- -------
-------- ------- -------- -------
(1) Includes construction loans.
(2) Excludes allowances for losses related to mobile home loans.
The allowance for possible losses on loans is maintained at a level which
is considered by management to be adequate to absorb possible loan losses on
existing loans that may become uncollectible, based on an evaluation of the
collectability of loans and prior loan loss experience. The evaluation takes
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. The
allowance for possible loan losses is established through a provision for
possible loan losses charged to expense.
Page 13
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
GENERAL. The Company's net income decreased $1.4 million from $1.0 million
for the three months ended September 30, 1995 to a loss of $378,000 for the
three months ended September 30, 1996. As discussed in more detail below, this
decrease was due primarily to the increase in noninterest expense of $3.2
million (including the $2.6 million SAIF assessment) which was partially offset
by an increase in net interest income of $955,000, and a decrease in income tax
expense of $909,000.
INTEREST INCOME. Interest income increased $664,000 from $10.5 million for
the three months ended September 30, 1995 to $11.1 million for the three months
ended September 30, 1996. Of this increase, $378,000 resulted from an increase
in the average balance of interest-earning assets of $1.6 million and an
increase of $286,000 was due to an increase in the average yield on
interest-earning assets from 7.97% for the three months ended September 30, 1995
to 8.45% for the three months ended September 30, 1996.
INTEREST EXPENSE. Interest expense decreased $291,000 from $6.6 million
for the three months ended September 30, 1995 to $6.3 million for the three
months ended September 30, 1996. The decrease was due to a decrease in average
rates paid on interest-bearing liabilities from 5.46% for the three months ended
September 30, 1995 to 5.15% for the three months ended September 30, 1996.
NET INTEREST MARGIN. The Company's net interest margin for the three months
ended September 30, 1996 as compared to September 30, 1995 increased 72 basis
points to 3.69%. As discussed above, the yields on interest earning assets
increased and the rates paid on interest-bearing liabilities decreased,
resulting in an increase in net interest margin. Because the Company's
interest-bearing liabilities reprice faster than its interest-earning assets,
when interest rates decrease, the Company generally experiences an increase in
its net interest margin. The opposite is generally true during a period of
increasing interest rates.
PROVISION FOR LOSSES ON LOANS. The allowance for possible losses on loans
is maintained at a level which is considered by management to be adequate to
absorb possible loan losses on existing loans that may become uncollectible,
based on an evaluation of the collectability of loans and prior loan loss
experience. The evaluation takes into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans, and current economic conditions that may affect the
borrower's ability to pay. The allowance for possible loan losses is
established through a provision for possible loan losses charged to expense.
During the three months ended September 30, 1996, the Company recorded a
provision for losses on loans of $90,000 as compared to no provision for losses
on loans for the three months ended September 30, 1995. The provision for loan
losses of $90,000 for the three months ended September 30, 1996 compared to the
same period in fiscal 1996 is primarily related to management's continued
evaluation of the loan portfolio in light of general economic conditions. See
"Asset Quality" for further discussion.
The allowance for loan losses at September 30, 1996 was $4.2 million. The
allowance increased from the June 30, 1996 balance primarily as a result of the
provision for loan losses of $90,000 exceeding net chargeoffs of $36,000. The
ratio of allowance for loan losses to non-performing loans at September 30, 1996
was 142.96% compared to 141.49% at September 30, 1995. The allowance for losses
on loans to total loans at September 30, 1996 was 0.97% compared to 1.01% at
September 30, 1995. The Bank's management believes that the September 30, 1996
recorded allowance for loan losses was adequate to provide for potential losses
on the related loans, based on its evaluation of the collectability of loans and
prior loss experience.
NONINTEREST INCOME. Noninterest income was $1.4 million for the three
months ended September 30, 1996 and for the three months ended September 30,
1995.
Loan fees and service charges decreased by $117,000 for the three months
ended September 30, 1996 as compared to the same period in the prior fiscal
year. This decrease was primarily due to a decrease in the initial service
charge collected on the origination of mortgage loans which are not subject to
amortization. This decrease was the result
Page 14
of a decrease in the amount of loans made to customers when comparing the three
months ended September 30, 1996 to the same period in the prior fiscal year
Fees on deposits increased $128,000 for the three months ended September
30, 1996 as compared to the same period in the prior fiscal year. This increase
was due to an increase in the number of transaction accounts that customers have
with the bank.
NONINTEREST EXPENSE. Noninterest expense increased $3.1 million from $3.7
million for the three months ended September 30, 1995 to $6.8 million for the
three months ended September 30, 1996. This increase resulted primarily from an
increase in compensation and employee benefits of $365,000 and an increase in
federal insurance premiums of $2.6 million. The increase in compensation and
employee benefits was due primarily to an increase in the number of employees
for the Bank increasing to 247 at September 30, 1996 from 220 at September 30,
1995. The increase in the federal insurance premiums of $2.6 million is the
result of the passage by Congress and the President of the United States of the
Savings Association Insurance Fund "SAIF" legislation which assessed a one time
charge of $2.6 million to the Bank in order to recapitalize the SAIF. See
"Liquidity and Capital Resources " for further discussion.
INCOME TAX EXPENSE(CREDIT). The Company's income tax expense for the
three months ended September 30, 1996 was a credit of $285,000 compared to
expense of $624,000 for the three months ended September 30, 1995, a decrease
of $909,000. This decrease was proportionate to the decrease in the Company's
income before income tax.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, advances from the Federal
Home Loan Bank, amortization and prepayments of loan principal (including
mortgage-backed securities) and, to a lesser extent, sales of mortgage loans,
sales and/or maturities of securities, mortgage-backed securities, and
short-term investments. While scheduled loan payments and maturing securities
are relatively predictable, deposit flows and loan prepayments are more
influenced by interest rates, general economic conditions, and competition. The
Bank attempts to price its deposits to meet its asset/liability objectives
consistent with local market conditions. Excess balances are invested in
overnight funds.
Mortgage Corp.'s primary source of funds is a line of credit of $843,750
from the Bank. Mortgage Corp. originates loans and sells them either to the
Bank or to secondary market investors. The line of credit is drawn upon to fund
the loans that Mortgage Corp. makes to its customers. The line of credit is
reduced when Mortgage Corp. receives funds from the investors who have purchased
the loan. Mortgage Corp. originated approximately $3.2 million of loans during
the three months ended September 30, 1996.
Federal regulations have historically required the Bank to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and current borrowings. Liquid assets for
purposes of this ratio include cash, certain time deposits, U. S. Government
and corporate securities and other obligations generally having remaining
maturities of less than five years. The Bank has historically maintained its
liquidity ratio at a level in excess of that required. At September 30, 1996,
the Bank's regulatory liquidity ratio was 12.63%.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected loan sales,
(iii) expected deposit flows, (iv) yields available on interest-bearing
deposits, and (v) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-bearing overnight deposits
and other short-term government and agency obligations. During the first three
months of fiscal 1996, the Bank required funds beyond its ability to generate
funds internally thus it used its borrowing capacity with the FHLB by obtaining
advances. The Bank renewed the open line of credit with the FHLB in January 1996
at an amount of $20.0 million which will expire in January 1997.
The Bank and Mortgage Corp. anticipate that they will have sufficient funds
available to meet current loan commitments. At September 30, 1996, the Bank and
Mortgage Corp. had outstanding commitments to originate loans of $23.1 million,
to purchase loans of $635,000 and to sell loans of $12.1 million. There were no
commitments to purchase or sell mortgage-backed securities, securities available
for sale or securities to be held to maturity.
Page 15
Although deposits are the Bank's primary source of funds, the Bank's policy
has been to utilize borrowings where the funds can be invested in either loans
or securities at a positive rate of return or to use the funds for short term
liquidity purposes. See "Financial Condition Data" for further analysis.
Savings institutions insured by the Federal Deposit Insurance Corporation
are required by the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") to meet three regulatory capital requirements. If a
requirement is not met, regulatory authorities may take legal or administrative
actions, including restrictions on growth or operations or, in extreme cases,
seizure. Institutions not in compliance may apply for an exemption from the
requirements and submit a recapitalization plan. Under these capital
requirements, at September 30, 1996 the Bank met all current capital
requirements.
The Office of Thrift Supervision ("OTS") has adopted a core capital
requirement for savings institutions comparable to the requirement for national
banks. The OTS core capital requirement is 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness.
The Bank had core capital of 7.26% at September 30, 1996.
Pursuant to FDICIA, the federal banking agencies, including the OTS, have
also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation.
The Bank is a member of the Savings Association Insurance fund ("SAIF") and
the deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC"). On September 30, 1996, Congress passed and President
Clinton signed into law legislation to resolve the deposit insurance premium
disparity. The banking package also included extensive regulatory relief for
banks and thrifts. The banking package included a one-time special assessment on
SAIF deposits to be imposed to bring the fund's reserve ratio to the statutory
required 1.25 percent. The assessment rate was 65.7 basis points on deposits as
of March 31, 1995 resulting in an assessment of $2.6 million on its deposits as
recorded of March 31, 1995 which will be payable on November 29, 1996. In
addition, the banking package includes the following items which will affect
SAIF members: (1) Pro-rata sharing of the Financing Corporation ("FICO")
obligation among Bank Insurance Fund ("BIF") and SAIF members will begin by
January 1, 2000. From 1997 through 1999, partial sharing will occur, with SAIF
deposits assessed 6.44 basis points and BIF deposits 1.29 basis points (2)
Through December 31, 1998, the assessment rate for SAIF deposits cannot be lower
than the rate for BIF deposits (3) The FDIC is prohibited from setting the
semiannual assessment at a rate in excess of that needed to maintain or meet the
required reserve ratio. Until the funds are merged, the FDIC is permitted to
rebate or credit excess premiums to BIF members only (4) For a three-year
period, the banking regulators are authorized to prevent SAIF insured
institutions from "facilitating or encouraging" customers to shift their
deposits to BIF-insured affiliates for the purposed of evading the SAIF premium
(5) The BIF and SAIF insurance funds will merge to form the Deposit Insurance
Fund on January 1, 1999, if there are no savings associations in existence on
that date (6) Pro-rata FICO sharing will begin and the ban on deposit shifting
will end on the earlier of January 1, 2000 or when the last savings association
ceases to exist and (7) The Treasury Department is directed to report to
Congress by March 31, 1997, with its recommendations on a common charter for
banks and savings institutions. The decrease in the SAIF deposit assessment
from 23 basis points to 6.44 basis points is a savings of approximately 72% to
the Bank on an annual basis which will impact net income for the Bank and the
Company on an ongoing basis in the future.
Page 16
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
EFFECT OF NEW ACCOUNTING STANDARDS
In October 1995, the FASB issued SFAS No.123, "Accounting for Stock-Based
Compensation." This Statement establishes a new fair value-based accounting
method for stock-based compensation plans. Companies may continue to apply the
accounting provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in determining net income; however, they must make pro forma
disclosures of net income and earnings per share as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied. The disclosure
requirements of SFAS No. 123 are required beginning in fiscal 1997. The Company
plans to continue to account for such plans in accordance with APB Opinion No.
25.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement establishes basic principles that states that an entity should
recognize only assets it controls and liabilities it has incurred, assets should
be "derecognized" only when control has been surrendered, liabilities should be
"derecognized" only when they have been extinguished, and recognition of
financial assets and liabilities should not be affected by the sequence of
transactions unless the effect of the transactions is to maintain effective
control over a transferred financial asset. This Statement applies prospectively
for fiscal years beginning after December 31, 1996. This Statement is not
expected to have a material effect on the financial position and results of
operations of the Company or its subsidiaries.
On July 1, 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights". This Statement requires that a mortgage banking enterprise
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and then sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans based on their relative fair
values if it is practicable to estimate those fair values. This Statement
requires a mortgage banking enterprise to assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights. The
Bank recorded $26,000 as a gain on sale of loans as a result of adopting SFAS
No. 122 for the three month period ended September 30, 1996.
Page 17
HF FINANCIAL CORP.
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
On October 23, 1996 the Board of Directors of the Company adopted
a Shareholder Rights Plan (the "Plan"). The Plan is designed to enable HF
Financial Corp. and its Board of Directors to develop and preserve long-term
values for stockholders and to protect stockholders in the event an attempt is
made to acquire control of HF Financial Corp. through certain coercive or unfair
tactics or without an offer of fair value to all stockholders. The rights are
being issued to stockholders of record as of the close of business on November
13, 1996 and they expire on October 22, 2006. The rights will automatically
trade with HF Financial Corp.'s Common Stock. The Corporation, on October 29,
1996, filed a Registration Statement on a Form 8-A with respect to the
registration of the rights.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS OF FORM 8-K
a. No exhibits on Form 8-K are required to filed.
b. No reports were filed.
- --------------------------------------------------------------------------------
No other information is required to be filed under Part II of the form
Page 18
HF FINANCIAL CORP.
FORM 10-Q
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 Financial Corp.
-------------------------------------
(Registrant)
Date: by
------------------ ---------------------------------------
Curtis L. Hage, President
and Chief Executive Officer
(Duly Authorized Officer)
Date: by
------------------ ---------------------------------------
Donald F. Bertsch, Senior
Vice President and Chief
Financial Officer
(Principal Financial Officer)
Page 19