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 December 31, 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 February 1, 1997 there were outstanding 3,014,331 common shares, net
of 111,815 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 December 31, 1996 and June 30, 1996 1
Consolidated Statements of Income for the Three and
Six Months Ended December 31, 1996 and 1995 2
Consolidated Statement of Stockholders' Equity
for the Six Months Ended December 31, 1996 3
Consolidated Statements of Cash Flows for the
for the Six Months Ended December 31, 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 7-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Default upon Senior Securities 20
Item 4. Submission of Matters to a Vote
of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
December 31, 1996 June 30, 1996
----------------- ---------------
Cash and cash equivalents $ 12,838 $ 11,145
Securities available for sale 38,542 41,168
Loans receivable, net 429,764 413,143
Loans held for sale 8,651 7,280
Mortgage-backed securities available for sale 40,216 59,495
Accrued interest receivable 3,768 4,002
Foreclosed real estate and other properties 329 228
Office properties and equipment, at cost, net of
accumulated depreciation 15,125 15,046
Prepaid expenses and other assets 935 510
Loan servicing rights, net 1,033 938
Deferred income taxes 1,397 1,552
Intangible assets, net 137 152
------------- ------------
$ 552,735 $ 554,659
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 413,686 $ 398,166
Advances from Federal Home Loan Bank
and other borrowings 74,102 90,123
Advances by borrowers for taxes and insurance 4,361 4,667
Accrued interest payable 5,899 5,853
Other liabilities 3,505 4,587
------------- ------------
Total Liabilities 501,553 503,396
------------- ------------
Stockholders' Equity:
Preferred stock, $.01 par value, 500,000 shares authorized,
none outstanding ---- ----
Common Stock, $.01 par value, 5,000,000 shares authorized,
3,018,131 shares outstanding at December 31, 1996 and 31 31
3,051,739 shares outstanding at June 30, 1996 (Note 3)
Additional paid-in capital 14,594 14,480
Retained Earnings, substantially restricted 39,090 38,745
Unearned compensation (566) (569)
Treasury stock, 108,015 shares repurchased at December 31,
1996 and 53,015 shares repurchased at June 30, 1996 (1,647) (802)
Net unrealized (loss) on securities available for sale (320) (622)
------------- ------------
Total Stockholders' Equity 51,182 51,263
------------- ------------
$ 552,735 $ 554,659
------------- ------------
------------- ------------
See Notes to Consolidated Financial Statements.
Page 1
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three months ended December 31, Six months ended December 31,
------------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------- ------------- ----------
Interest and dividend income:
Loans receivable $ 9,669 $ 8,870 $19,354 $17,141
Mortgage-backed securities 690 1,250 1,560 2,644
Investment-securities and other interest bearing deposits 597 767 1,189 1,585
------------ ---------- ----------- ----------
10,956 10,887 22,103 21,370
------------ ---------- ----------- ----------
Interest expense:
Deposits 5,067 5,291 10,103 10,705
Advances from FHLB and other borrowed money 1,123 1,434 2,369 2,593
------------ ---------- ----------- ----------
6,190 6,725 12,472 13,298
------------ ---------- ----------- ----------
Net interest income 4,766 4,162 9,631 8,072
Provision for losses on loans 64 ---- 154 ----
------------ ---------- ----------- ----------
Net interest income after provision for losses on loans 4,702 4,162 9,477 8,072
------------ ---------- ----------- ----------
Noninterest income:
Loan servicing income 244 182 482 359
Loan fees and service charges 273 230 448 522
Fees on deposits 391 294 781 556
Commission and insurance income 196 185 379 415
Appraisal and inspection fees 101 119 267 291
Gain on sale of securities,net ---- 73 2 131
Gain on sales of loans 150 237 281 362
Other 147 97 252 157
------------ ---------- ----------- ----------
1,502 1,417 2,892 2,793
------------ ---------- ----------- ----------
Noninterest expense:
Compensation and employee benefits 2,334 2,005 4,672 3,978
Occupancy and equipment 733 556 1,457 1,103
Federal insurance premiums and assessment 236 236 3,113 466
Other general and administrative expenses 947 794 1,801 1,606
Losses, provision for losses and expenses on foreclosed
real estate and other properties, net 39 64 74 156
------------ ---------- ----------- ----------
4,289 3,655 11,117 7,309
------------ ---------- ----------- ----------
Income before income taxes 1,915 1,924 1,252 3,556
Income tax expense 650 735 365 1,359
------------ ---------- ----------- ----------
Net income $1,265 $1,189 $887 $2,197
------------ ---------- ----------- ----------
------------ ---------- ----------- ----------
Earnings per share:
Net income per share $0.42 $0.39 $0.29 $0.69
------------ ---------- ----------- ----------
------------ ---------- ----------- ----------
See Notes to Consolidated Financial Statements
Page 2
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended December 31, 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 - - - - - - - - 887 - - - - - - - - - - - -
Exercise of stock options for 21,392
shares - - - - 114 - - - - - - - - - - - - - - - -
Cash dividends ($0.18 per share)
on common stock - - - - - - - - (542) - - - - - - - - - - - -
Adjustment to unrealized (loss) on - - - - - - - - - - - - - - - - - - - - 302
available for sale securities, net of tax
Purchase of 55,000 shares of treasury
stock - - - - - - - - - - - - - - - - (845) - - - -
Amortization of unearned compensation - - - - - - - - - - - - 3 - - - - - - - -
------------ ---------- -------- ------------ -------- -----------
Balance, December 31,1996 $31 $14,594 $39,090 $(566) $(1,647) $ (320)
------------ ---------- -------- ------------ -------- -----------
------------ ---------- -------- ------------ -------- -----------
See Notes to Consolidated Financial Statements
Page 3
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six months ended December 31,
-----------------------------
1996 1995
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $887 $2,197
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 154 - - - -
Depreciation 682 348
Amortization of premiums and discounts, net:
Securities (44) 30
Loans, loans held for sale and mortgage-backed securities (79) 126
Reduction in cost of intangible assets 15 15
Reduction in purchased mortgage servicing rights 61 180
Amortization of unearned compensation 3 14
Increase (decrease) in deferred loan fees (444) 145
Loans originated for resale (23,031) (28,419)
Proceeds from the sale of loans 23,245 28,781
(Gain) on sale of loans (214) (362)
(Gain) loss on sale of securities (2) (131)
Losses and provisions for losses on sales of foreclosed
real estate and other properties, net 7 (73)
(Increase)decrease in accrued interest receivable 234 (299)
(Increase) decrease in prepaid expenses and other assets (425) 193
(Gain) loss on disposal of property and equipment (1) - - - -
(Increase) in originated mortgage servicing rights (67) - - - -
Increase (decrease) in other liabilities (1,036) 2,398
(Increase) decrease in deferred income tax 155 353
----------- ---------
Net cash provided by operating activities $ 100 $ 5,496
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Sales and maturities $ 3,000 $ 14,517
Purchases - - - - (5,939)
Proceeds from sale of property and equipment 70 - - - -
Purchase of property and equipment: (830) (1,065)
Purchase of mortgage servicing rights (89) (49)
Loans purchased (8,319) (10,708)
Loans made to customers (66,372) (75,372)
Sale of participating interests in loans 5,000 7,375
Principal collected on loans 51,703 41,367
Proceeds from sale of foreclosed real estate
and other properties, net 192 552
Proceeds from sale/maturities of mortgage-backed securities 8,276 2,757
Repayment of mortgage-backed securities 11,042 5,816
----------- ---------
Net cash provided by (used in) investing activities $ 3,673 $ (20,749)
----------- ---------
----------- ---------
See Notes to Consolidated Financial Statements
Page 4
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
Six Months Ended December 31,
-----------------------------
1996 1995
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $15,520 $(5,263)
Proceeds of advances from Federal Home Loan Bank and other 22,000 55,582
borrowings
Payments on advances from Federal Home Loan Bank and other (38,021) (32,098)
borrowings
Increase (decrease) in advances by borrowers for taxes and (306) 199
insurance
Proceeds from issuance of common stock 114 - - - -
Purchase of treasury stock (845) - - - -
Cash dividends paid (542) (503)
----------- -----------
Net cash provided by (used in) financing activities $(2,080) $17,917
----------- -----------
Increase in cash and cash equivalents $1,693 $2,664
Cash and cash equivalents:
Beginning 11,145 5,485
----------- -----------
Ending $12,838 $8,149
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements.
Page 5
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six months Ended December 31, 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. 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, Home First Mortgage
Corp.(formerly known as 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 December 31, 1996:
Amount Percent
-------- --------
Tier I (Core) capital:
Required . . . . . . . . . . . . . . . . . $16,563 3.00%
Actual . . . . . . . . . . . . . . . . . . 41,489 7.51
Excess . . . . . . . . . . . . . . . . . . 24,926 4.51%
Risk-based capital:
Required. . . . . . . . . . . . . . . . . . $28,488 8.00%
Actual. . . . . . . . . . . . . . . . . . . 45,941 12.90
Excess. . . . . . . . . . . . . . . . . . . 17,453 4.90%
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 six month period ended December 31, 1996 and 1995 as adjusted was
3,081,316 and 3,167,271 respectively. The weighted average number of
common and common equivalent shares outstanding for the three month period
ended December 31, 1996 and 1995 as adjusted was 2,991,596 and 3,080,892
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 Home First Mortgage Corp.
(formerly known as HF Mortgage Corp. ) ("Home First"). 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 Home
First
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 TERMINOLOGY. 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 December 31, 1996, the Company had total assets of $552.7 million, a
decrease of $1.9 million from the level at June 30, 1996. The decrease in
assets was due primarily to a decrease in mortgage-backed securities of $18.9
million and in securities available for sale of $3.0 million which was partially
offset by an increase in loans receivable of $16.6, an increase in loans held
for sale of $1.4 million and an increase in cash and cash equivalents of $1.7
million. The decrease in mortgage-backed securities of $18.9 million was used
to pay down advances from Federal Home Loan Bank and other borrowings of $16.0
million. The increase in loans receivable, loans held for sale and cash and
cash equivalents was funded primarily by an increase deposits of $15.5 million,
the decrease in securities held for sale of $3.0 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
$51.2 million at December 31, 1996, primarily due to the purchase of treasury
stock of $845,000, the payment of cash dividends of $542,000 to the Company's
stockholders which was partially offset by net income of $887,000, by the
issuance of common shares of stock of $114,000 and by a reduction in the
unrealized loss on securities available for sale of $302,000.
The increase in loans receivable of $16.6 million was due primarily to
origination's and purchases exceeding amortization's 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 $18.9 million was primarily
the result of sales of $8.3 million and amortization's and prepayments of
principal of $11.1 million.
The $15.5 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 $16.0 million for the
six months ended December 31, 1996 primarily due to the payment of $38.0 million
on advances and other borrowings during the six months ended December 31, 1996.
These payments were partially offset by the Bank obtaining $22.0 million of
advances to fund loans.
Page 7
The $1.1 million decrease in advances by borrowers for taxes and insurance
was due primarily to the payment of real estate taxes in excess of receipts from
borrowers. 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 and six months ended December 31, 1996 and
1995 include fees which are considered adjustments to yield.
Three Months Ended December 31,
---------------------------------------------------------------------------------------
1996 1995
------------------------------------------ ------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balanced/ Paid Rate
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $ 439,512 $ 9,669 8.80% $ 403,118 $ 8,870 8.80%
Mortgage-backed securities 42,011 690 6.57% 76,706 1,250 6.52%
Other investment securities (2) 37,102 505 5.44% 51,212 664 5.19%
FHLB stock 5,222 92 7.05% 5,082 103 8.11%
-------- ------- ------ -------- ------- -------
Total interest-earning assets $ 523,847 $10,956 8.37% $ 536,118 $ 10,887 8.12%
------- ------- ------- -------
------- ------- ------- -------
Non-interest earning assets 26,901 20,504
--------- --------
Total assets $ 550,748 $ 556,622
--------- --------
--------- --------
Interest-bearing liabilities:
Deposits:
Now and money market accounts $ 70,917 $ 461 2.60% $ 58,114 $ 421 2.90%
Savings accounts 30,497 160 2.10% 30,821 183 2.38%
Certificates of deposit 302,126 4,446 5.89% 306,226 4,687 6.12%
-------- ------- ------ -------- ------- -------
Total deposits $ 403,540 $ 5,067 5.02% $ 395,161 $ 5,291 5.36%
FHLB Advances and other borrowings 79,256 1,123 5.67% 93,902 1,434 6.11%
-------- ------- ------ -------- ------- -------
Total interest-bearing liabilities $ 482,796 $ 6,190 5.13% $ 489,063 $ 6,725 5.50%
------- ------ ------- -------
------- ------ ------- -------
Other liabilities 17,300 17,639
-------- --------
Total liabilities $ 500,096 $ 506,702
Equity 50,652 49,920
-------- --------
Total liabilities and equity $ 550,748 $ 556,622
-------- --------
-------- --------
Net interest income; interest rate spread $ 4,766 3.24% $ 4,162 2.62%
------- ------ ------- -------
------- ------ ------- -------
Net interest margin (3) 3.64% 3.11%
------ -------
------ -------
Page 8
Six Months Ended December 31,
---------------------------------------------------------------------------------------
1996 1995
------------------------------------------ ------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balanced/ Paid Rate
------------ ------------ ---------- ------------ ------------ ------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $ 436,051 $19,354 8.88% $ 393,425 $ 17,141 8.71%
Mortgage-backed securities 47,891 1,560 6.51% 79,441 2,644 6.66%
Other investment securities (2) 36,769 1,002 5.45% 53,524 1,400 5.23%
FHLB stock 5,222 187 7.16% 4,879 185 7.58%
--------- ------- -------- -------- ------- -------
Total interest-earning assets 525,933 22,103 8.41% 531,269 21,370 8.04%
------- -------- ------- -------
Non-interest earning assets. 27,783 20,418
--------- ---------
Total assets $ 553,716 $ 551,687
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Now and money market accounts $ 68,951 $ 893 2.59% $ 57,255 $ 832 2.91%
Savings accounts 30,591 319 2.09% 31,044 378 2.44%
Certificates of deposit 301,542 8,891 5.90% 309,176 9,495 6.14%
--------- ------- -------- -------- ------- -------
Total deposits 401,084 10,103 5.04% 397,475 10,705 5.39%
FHLB Advances and other borrowings 83,682 2,369 5.66% 87,247 2,593 5.94%
--------- ------- -------- -------- ------- -------
Total interest-bearing liabilities 484,766 12,472 5.15% 484,722 13,298 5.49%
------- ------- ------- ------
Other liabilities 17,594 17,569
--------- --------
Total liabilities 502,360 502,291
Equity 51,356 49,396
--------- --------
Total liabilities and equity $ 553,716 $ 551,687
--------- --------
--------- --------
Net interest income; interest rate spread $ 9,631 3.26% $ 8,072 2.56%
-------- --------- ------- --------
-------- --------- ------- --------
Net interest margin (3) 3.66% 3.04%
------- --------
------- --------
- -------------------------------------------------------------------------------
(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 9
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 December 31, Six Months Ended December 31,
------------------------------------------- --------------------------------------
1996 vs 1995 1996 vs 1995
------------------------------------------- --------------------------------------
(Dollars in Thousands)
Increase Increase Total
(Decrease) Total (Decrease) Increase
Due to Due to Increase Due to Due to (Decreae)
Volume Rate (Decrease) Volume Rate
----------- ----------- ---------- ----------- ----------- -----------
Interest-earning assets:
Loans receivable (1) $ 801 $ (2) $ 799 $ 1,892 $ 321 $ 2,213
Mortgage-backed securities (856) 296 (560) (1,028) (56) (1,084)
Other investmentsecurities (2) (296) 137 (159) (457) 59 (398)
FHLB stock 11 (22) (11) 12 (10) 2
--------- -------- ------- -------- ------ ------
Total interest-earning assets $ (340) $ 409 $ 69 $ 419 $ 314 $ 733
--------- -------- ------- -------- ------ ------
--------- -------- ------- -------- ------ ------
Interest-bearing liabilities:
Deposits:
Now and money markets $ 156 $ (116) $ 40 $ 151 $ (90) $ 61
Savings accounts 8 (31) (23) (5) (54) (59)
Certificates of deposit (2) (239) (241) (225) (379) (604)
--------- -------- ------- -------- ------ ------
Total Deposits $ 162 $ (386) $ (224) $ (79) $ (523) $ (602)
--------- -------- ------- -------- ------ ------
FHLB Advances and other
borrowings $ (276) $ (35) $ (311) ($101) $ (123) ($224)
--------- -------- ------- -------- ------ ------
Total Interest-bearing liabilities $ (114) $ (421) $ (535) $ (180) $ (646) $ (826)
--------- -------- ------- -------- ------ -------
--------- -------- ------- -------- ------ -------
Net interest income increase $ 604 $ 1,559
------- --------
------- --------
(1) Includes interest on loans past due 90 days or more
(2) Includes primarily U. S. Government Securities
Page 10
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.
Dec 31, June 30,
------- --------
1996 1996
------- --------
Non-accruing loans:
One to four Family $ 859 $ 682
Commercial real estate 239 556
Multi-family - - - - - - - -
Mobile Homes 104 58
Consumer 633 340
Construction Loans 241 - - - -
Commercial Business 609 427
------- -----
Total $ 2,685 $ 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 $ - - - - $ 52
Commercial real estate - - - - 1
Multi-family - - - - - - - -
Mobile Homes 59 88
Consumer 270 87
Commercial Business - - - - - - - -
------- -----
Total $ 329 $ 228
------- -----
Total non-performing assets $ 3,014 $ 2,291
------- -----
------- -----
Total as a percentage of total assets 0.55% 0.41%
------- -----
------- -----
Total Non-performing loans as a
percentage of total loans 0.61% 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.
Non-performing assets increased to $3.0 million at December 31, 1996 from
$2.3 million at June 30, 1996, an increase of $723,000. In addition, the ratio
of non-performing assets to total assets, which is one indicator of credit risk
exposure, increased to 0.55% at December 31, 1996 from 0.41% at June 30, 1996.
Non-accruing loans increased to $2.7 million at December 31, 1996 from $2.1
million at June 30, 1996, an increase of $600,000. Included in the $2.7 million
of non-accruing loans were three commercial business loans to one
Page 11
borrower totaling $536,000. For the six month period ended December 31,
1996, gross interest income of $58,000 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 $72,000
was received as income on loans accounted for on a non-accrual basis.
Foreclosed assets increased to $329,000 at December 31, 1996 from $228,000
at June 30, 1996, an increase of $101,000.
At December 31, 1996, the Bank had approximately $11.8 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 December 31, 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
December 31, 1996 will be adequate in the future.
Page 12
The following table sets forth information with respect to activity in the
Bank's allowance for losses on loans during the periods indicated.
Six Months Ended December 31,
----------------------------------
1996 1995
--------- --------
(Dollars in Thousands)
Balance at beginning of period $ 4,129 $ 4,039
CHARGE-OFFS:
One- to four-family (47) (1)
Commercial - - - - (35)
Multi-family - - - - - - - -
Consumer (224) (240)
Mobile homes (112) (179)
--------- --------
Total charge-offs $ (383) $ (455)
--------- --------
RECOVERIES:
One- to four-family $ 14 $ 50
Commercial 493 55
Multi-family 46 5
Commercial business 1 - - - -
Consumer 83 53
Mobile homes 27 43
--------- --------
Total recoveries $ 664 $ 206
--------- --------
Net (charge-offs) recoveries $ 281 $ (249)
Additions charged to operations 154 - - - -
--------- --------
Balance at end of period $ 4,564 $ 3,790
--------- --------
--------- --------
Ratio of net (charge-offs) recoveries
during the period to
average loans outstanding during
the period 0.06% (0.06)%
--------- --------
--------- --------
Ratio of allowance for loan losses to
total loans at end
of period 1.03% 0.95%
--------- --------
--------- --------
Ratio of allowance for loan losses to
non-performing loans at end of
period (1) 169.73% 106.68%
--------- --------
--------- --------
(1) Non-performing loans includes non-accruing loans
and accruing loans delinquent more than 90 days.
The allowance for loan losses was $4.6 million at December 31, 1996 as
compared to $3.8 million at December 31, 1995. The ratio of the allowance
for losses on loans to total loans was 1.03% at December 31, 1996 and 0.95%
at December 31, 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 13
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
At December 31, 1996 At June 30, 1996
Percent of Percent of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
----------- ----------- ----------- -----------
(Dollars in Thousands)
One- to four-family (1) $ 1,723 37.74% $1,789 43.27%
Commercial and multi-family real
estate (1) 1,142 25.02% 957 23.21%
Mobile homes 187 4.11% 191 4.62%
Consumer (2) 1,300 28.47% 1,060 25.69%
Commercial business 212 4.65% 132 3.21%
----------- ----------- ----------- -----------
Total $ 4,564 100.00% $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 14
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
GENERAL. The Company's net income increased $76,000 from $1.2 million for
the three months ended December 31, 1995 to $1.3 million for the three months
ended December 31, 1996. As discussed in more detail below, this increase was
due primarily to an increase in net interest income of $604,000, an increase in
noninterest income of $85,000 and a decrease in income tax expense of $85,000
which was partially offset by an increase in noninterest expense of $634,000 and
an increase in the provision for losses on loans of $64,000.
INTEREST INCOME. Interest income increased $69,000 from $10.9 million for
the three months ended December 31, 1995 to $11.0 million for the three months
ended December 31, 1996. Of this increase, $409,000 resulted from an increase
in the average yield on interest-earning assets from 8.12% for the three months
ended December 31, 1995 to 8.37% for the three months ended December 31, 1996.
This increase was partially offset by $340,000 due to a decrease in the average
balance of interest-earning assets of $12.3 million.
INTEREST EXPENSE. Interest expense decreased $535,000 from $6.7 million
for the three months ended December 31, 1995 to $6.2 million for the three
months ended December 31, 1996. There was a decrease of $421,000 due to a
decrease in average rates paid on interest-bearing liabilities from 5.50% for
the three months ended December 31, 1995 to 5.13% for the three months ended
December 31, 1996 and there was a decrease of $114,000 due to a decrease in the
average balance of interest-bearing liabilities of $6.3 million.
NET INTEREST MARGIN. The Company's net interest margin for the three months
ended December 31, 1996 as compared to December 31, 1995 increased 53 basis
points to 3.64%. 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. During the three months ended December 31,
1996, the Company recorded a provision for losses on loans of $64,000 as
compared to no provision for losses on loans for the three months ended December
31, 1995. The provision for loan losses of $64,000 for the three months ended
December 31, 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.
NONINTEREST INCOME. Noninterest income was $1.5 million for the three
months ended December 31, 1996 as compared to $1.4 million for the three months
ended December 31, 1995 an increase of $85,000.
Gain on the sale of loans decreased $87,000 to $150,000 for the three
months ended December 31, 1996 from $237,000 for the three months ended December
31, 1995. The decrease in the total gain on sale of loans is related to the
decrease in loans originated for resale when comparing the three months ended
December 31, 1996 to the three months ended December 31, 1995.
Gain on sale of securities, net decreased $73,000 for the three months
ended December 31, 1996 as compared to the same period in fiscal 1996. This
decrease is due to the Company not selling any securities during the three
months ended December 31, 1996 as compared to the same period in the prior
fiscal year.
NONINTEREST EXPENSE. Noninterest expense increased $634,000 from $3.7
million for the three months ended December 31, 1995 to $4.3 million for the
three months ended December 31, 1996. This increase resulted primarily from an
increase in compensation and employee benefits of $329,000 an increase in
occupancy and equipment of $177,000 and an increase in other general and
administrative expenses of $153,000. The increase in compensation and employee
benefits was due primarily to an increase in the number of employees for the
Bank increasing to 244 at December 31, 1996 from 236 at December 31, 1995. The
increase in occupancy and equipment was due primarily to depreciation on the new
hardware and software system that was placed in operation in May, 1996.
INCOME TAX EXPENSE. The Company's income tax expense for the three months
ended December 31, 1996 was $650,000 compared to $735,000 for the three months
ended December 31, 1995, a decrease of $85,000. This decrease was due to a
decrease in the effective tax rate to 34% for the three months ended December
31, 1996 as compared to 38% for the same period in the prior fiscal year.
Page 15
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
GENERAL. The Company's net income decreased $1.3 million from $2.2 million
for the six months ended December 31, 1995 to $887,000 for the six months ended
December 31, 1996. As discussed in more detail below, this decrease was due
primarily to the increase in noninterest expense of $3.8 million (including the
$2.6 million SAIF assessment which is discussed in the noninterest expense
section) and an increase in the provision for losses on loans of $154,000 which
were partially offset by an increase in net interest income of $1.6 million, and
a decrease in income tax expense of $1.0 million.
INTEREST INCOME. Interest income increased $773,000 from $21.4 million for
the six months ended December 31, 1995 to $22.1 million for the six months ended
December 31, 1996. This increase was primarily due to increase in interest
earned on loans. The average yield on loans increased from 8.71% to 8.88%
while the average balance of loans increased $42.7 million during this period.
The increase in interest earned on loans was partially offset by a decrease in
interest earned on mortgage-backed securities and investment securities
primarily due to decrease in the average balances of $31.6 million and $16.4
million, respectively.
INTEREST EXPENSE. Interest expense decreased $826,000 from $13.3 million
for the six months ended December 31, 1995 to $12.5 million for the six months
ended December 31, 1996. The decrease was due to a decrease in average rates
paid on interest-bearing liabilities from 5.49% for the six months ended
December 31, 1995 to 5.15% for the six months ended December 31, 1996.
NET INTEREST MARGIN. The Company's net interest margin for the six months
ended December 31, 1996 as compared to December 31, 1995 increased 62 basis
points to 3.66%. 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 six months ended December 31, 1996, the Company recorded a
provision for losses on loans of $154,000 as compared to no provision for losses
on loans for the six months ended December 31, 1995. The provision for loan
losses of $154,000 for the six months ended December 31, 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 December 31, 1996 was $4.6 million. The
allowance increased from the June 30, 1996 balance primarily as a result of the
provision for loan losses of $154,000 and of recoveries exceeding charge-offs by
$281,000. The ratio of allowance for loan losses to non-performing loans at
December 31, 1996 was 169.73% compared to 106.68% at December 31, 1995. The
allowance for losses on loans to total loans at December 31, 1996 was 1.03%
compared to 0.95% at December 31, 1995. The Bank's management believes that the
December 31, 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 $2.9 million for the six months
ended December 31, 1996 as compared to $2.8 million for the six months ended
December 31, 1995.
Fees on deposits increased $225,000 for the six months ended December 31,
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.
Gain on sale of securities, net decreased $129,000 for the six months
ended December 31, 1996 as compared to the same period in fiscal 1996. This
decrease is due to the Company selling fewer securities during the six months
ended December 31, 1996 as compared to the same period in the prior fiscal year.
Page 16
NONINTEREST EXPENSE. Noninterest expense increased $3.8 million from $7.3
million for the six months ended December 31, 1995 to $11.1 million for the six
months ended December 31, 1996. This increase resulted primarily from an
increase in compensation and employee benefits of $694,000 and an increase in
federal insurance premiums of $2.6 million, an increase in occupancy and
equipment of $354,000 and an increase in other general and administrative
expense of $195,000. The increase in compensation and employee benefits was due
primarily to an increase in the number of employees for the Bank increasing to
244 at December 31, 1996 from 236 at December 31, 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. The increase in occupancy and
equipment costs is due primarily to depreciation on the hardware and software
system that was placed in operation in May, 1996.
INCOME TAX EXPENSE. The Company's income tax expense for the six months
ended December 31, 1996 was $365,000 compared to $1.4 million for the six
months ended December 31, 1995, a decrease of $994,000. This decrease was
proportionate to the decrease in the Company's income before income tax and due
to the decrease in the effective tax rate to 29% for the six months ended
December 31, 1996 as compared to 38% for the same period in the prior fiscal
year.
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.
Home First 's primary source of funds is a line of credit of $843,750 from
the Bank and a $300,000 line of credit from the Company. Home First originates
loans and sells them either to the Bank or to secondary market investors. The
line's of credit are drawn upon to fund the loans that Home First makes to its
customers. The line's of credit are reduced when Home First receives funds
from the investors who have purchased the loans. Home First originated
approximately $5.5 million of loans during the six onths ended December 31,
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 December 31, 1996,
the Bank's regulatory liquidity ratio was 8.95%.
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 six
months of fiscal 1997, 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 1997
at an amount of $20.0 million which will expire in January 1998.
The Bank and Home First anticipate that they will have sufficient funds
available to meet current loan commitments. At December 31, 1996, the Bank and
Home First had outstanding commitments to originate loans of $23.9 million, to
purchase loans of $500,000 and to sell loans of $14.5 million. There were no
commitments to purchase or sell mortgage-backed securities, securities available
for sale or securities to be held to maturity.
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.
Page 17
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 prescribed 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 December 31, 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 (Tier 1) 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 7.51% at December 31, 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 the
Bank's deposits as recorded on 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 18
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 $68,000 as a gain on sale of loans as a result of adopting SFAS
No. 122 for the six month period ended December 31, 1996. SFAS No. 122 is
superceeded by SFAS No. 125 effective at January 1, 1997.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". This Statement defers
for one year the effective date of (a) of paragraph 15 of Statement 125 and (b)
for repurchase agreements, dollar-roll, securities lending and similar
transactions, of paragraphs 9-12 and 237(b) of Statement 125. This Statement is
not expected to have a material effect on the financial position and results of
operations of the Company or its subsidiaries.
Page 19
HF FINANCIAL CORP.
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
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 20
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: 1-5-97 by /s/ Curtis L. Hage
------------------------ ------------------------------
Curtis L. Hage, President
and Chief Executive Officer
(Duly Authorized Officer)
Date: 1-5-97 by /s/ Donald F. Bertsch
------------------------ ------------------------------
Donald F. Bertsch, Senior
Vice President and Chief
Financial Officer
(Principal Financial Officer)