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 March 31, 1997
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.
- --------------------------------------------------------------------------------
(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 May 1, 1997 there were outstanding 2,989,421 common shares, net of
138,315 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 March 31, 1997 and June 30, 1996 1
Consolidated Statements of Income for the Three and
Nine Months Ended March 31, 1997 and 1996 2
Consolidated Statement of Stockholders' Equity
for the Nine months ended March 31, 1997 3
Consolidated Statements of Cash Flows for the
for the Nine months ended March 31, 1997 and 1996 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)
ASSETS MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
Cash and cash equivalents $ 26,158 $ 11,145
Securities available for sale 50,770 41,168
Loans receivable, net 422,913 413,143
Loans held for sale 5,934 7,280
Mortgage-backed securities available for sale 32,137 59,495
Accrued interest receivable 3,697 4,002
Foreclosed real estate and other properties 247 228
Office properties and equipment, at cost, net of
accumulated depreciation 15,821 15,046
Prepaid expenses and other assets 869 510
Loan servicing rights, net 1,093 938
Deferred income taxes 1,517 1,552
Intangible assets, net 131 152
---------- ----------
$ 561,287 $ 554,659
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 418,226 $ 398,166
Advances from Federal Home Loan Bank
and other borrowings 73,768 90,123
Advances by borrowers for taxes and insurance 6,636 4,667
Accrued interest payable 6,651 5,853
Other liabilities 4,404 4,587
---------- ----------
Total Liabilities 509,685 503,396
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value, 500,000 shares authorized,
none outstanding ---- ----
Common Stock, $.01 par value, 5,000,000 shares authorized,
3,126,146 shares outstanding at March 31, 1997 and
3,051,739 shares outstanding at June 30, 1996 31 31
Additional paid-in capital 14,594 14,480
Retained Earnings, substantially restricted 40,127 38,745
Unearned compensation (566) (569)
Treasury stock, 128,315 shares at March 31, 1997 and 53,015
shares at June 30, 1996 (2,021) (802)
Net unrealized (loss) on securities available for sale (563) (622)
---------- ----------
Total Stockholders' Equity 51,602 51,263
---------- ----------
$ 561,287 $ 554,659
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements.
Page 1
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Share)
(Unaudited)
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
Interest and dividend income:
Loans receivable $9,468 $9,055 $28,822 $26,146
Mortgage-backed securities 602 1,271 2,162 3,915
Investment-securities and other interest bearing deposits 743 744 1,932 2,329
----------- ----------- ----------- ------------
10,813 11,020 32,916 32,390
----------- ----------- ----------- ------------
Interest expense:
Deposits 5,089 5,001 15,192 15,706
Advances from FHLB and other borrowed money 1,037 1,290 3,406 3,883
----------- ----------- ----------- ------------
6,126 6,291 18,598 19,589
----------- ----------- ----------- ------------
Net interest income 4,687 4,729 14,318 12,801
Provision for losses on loans 166 120 320 120
----------- ----------- ----------- ------------
Net interest income after provision for losses on loans 4,521 4,609 13,998 12,681
----------- ----------- ----------- ------------
Noninterest income:
Loan servicing income 370 188 852 547
Loan fees and service charges 188 147 636 669
Fees on deposits 410 292 1,191 848
Commission and insurance income 156 174 535 589
Appraisal and inspection fees 90 142 357 433
Gain on sale of securities, net 148 369 150 500
Gain on sales of loans 47 223 328 585
Other 325 80 577 237
----------- ----------- ----------- ------------
1,734 1,615 4,626 4,408
----------- ----------- ----------- ------------
Noninterest expense:
Compensation and employee benefits 2,347 2,183 7,019 6,161
Occupancy and equipment 721 624 2,178 1,727
Federal insurance premiums and assessment 43 232 3,156 698
Other general and administrative expenses 1,203 900 3,004 2,506
Losses, provision for losses and expenses on foreclosed
real estate and other properties, net 82 22 156 178
----------- ----------- ----------- ------------
4,396 3,961 15,513 11,270
----------- ----------- ----------- ------------
Income before income taxes 1,859 2,263 3,111 5,819
Income tax expense 551 832 916 2,191
----------- ----------- ----------- ------------
Net income $1,308 $1,431 $2,195 $3,628
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Earnings per share:
Net income per share $0.42 $0.45 $0.70 $1.15
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
See Notes to Consolidated Financial Statements
Page 2
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended March 31, 1997
(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 ---- ---- 2,195 ---- ---- ----
Exercise of stock options for 21,392 shares ---- 114 ---- ---- ---- ----
Cash dividends ($0.27 per share)
on common stock ---- ---- (813) ---- ---- ----
Adjustment to unrealized (loss) ---- ---- ---- ---- ---- 59
on available for sale securities, net of tax
Purchase of 75,300 shares of treasury
stock ---- ---- ---- ---- (1,219) ----
Amortization of unearned compensation ---- ---- ---- 3 ---- ----
------- ----------- --------- ------------- --------- ------------
Balance, March 31, 1997 $31 $14,594 $40,127 $(566) $(2,021) $ (563)
------- ----------- --------- ------------- --------- ------------
------- ----------- --------- ------------- --------- ------------
See Notes to Consolidated Financial Statements
Page 3
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine months ended March 31,
---------------------------
1997 1996
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,195 $3,628
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 320 120
Depreciation 1,043 530
Amortization of premiums and discounts, net:
Securities 58 211
Loans, loans held for sale and mortgage-backed securities (34) 20
Reduction in cost of intangible assets 21 21
Reduction in purchased mortgage servicing rights 97 270
Amortization of unearned compensation 3 34
Increase (decrease) in deferred loan fees (361) 54
Loans originated for resale (32,715) (38,357)
Proceeds from the sale of loans 33,043 38,942
(Gain) on sale of loans (328) (585)
(Gain) loss on sale of securities (150) (500)
Losses and provisions for losses on sales of foreclosed
real estate and other properties, net 31 45
(Increase)decrease in accrued interest receivable 305 (207)
(Increase) decrease in prepaid expenses and other assets (359) 314
(Gain) loss on disposal of property and equipment (3) ----
Increase in other liabilities 615 4,450
Decrease in deferred income tax 35 395
--------- ----------
Net cash provided by operating activities $ 3,816 $ 9,385
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Sales and maturities $ 11,048 $ 32,489
Purchases (20,446) (11,459)
Proceeds from sale of property and equipment 70 ----
Purchase of property and equipment: (1,885) (1,605)
Purchase of mortgage servicing rights (252) (79)
Loans purchased (10,594) (27,124)
Loans made to customers (94,658) (110,137)
Sale of participating interests in loans 6,124 7,375
Principal collected on loans 90,503 74,180
Proceeds from sale of foreclosed real estate
and other properties, net 192 565
Purchase of mortgage-backed securities ---- (20,154)
Proceeds from sale/maturities of mortgage-backed securities 13,236 20, 617
Repayment of mortgage-backed securities 14,103 11,751
--------- ----------
Net cash provided by (used in) investing activities $ 7,441 $ (23,581)
--------- ----------
See Notes to Consolidated Financial Statements
Page 4
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
Nine months ended March 31,
---------------------------
1997 1996
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $20,060 $13,881
Proceeds of advances from Federal Home Loan Bank and other
borrowings 22,000 65,582
Payments on advances from Federal Home Loan Bank and other
borrowings (38,355) (52,130)
Increase (decrease) in advances by borrowers for taxes and
insurance 1,969 3,402
Proceeds from issuance of common stock 114 25
Purchase of treasury stock (1,219) ----
Cash dividends paid (813) (755)
--------- ----------
Net cash provided by financing activities $3,756 $30,005
--------- ----------
Increase in cash and cash equivalents $15,013 $15,809
Cash and cash equivalents:
Beginning 11,145 5,485
--------- ----------
Ending $26,158 $21,294
--------- ----------
--------- ----------
See Notes to Consolidated Financial Statements.
Page 5
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Nine months ended March 31, 1997 and 1996
(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, HomeFirst 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 March 31, 1997:
Amount Percent
------ -------
Tier I (Core) capital:
Required . . . . . . . . . . . . . . $16,823 3.00%
Actual . . . . . . . . . . . . . . . 41,901 7.47
Excess . . . . . . . . . . . . . . . 25,078 4.47%
Risk-based capital:
Required . . . . . . . . . . . . . . $28,104 8.00%
Actual . . . . . . . . . . . . . . . 46,292 13.18
Excess . . . . . . . . . . . . . . . 18,188 5.18%
NOTE 3. 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. The weighted
average number of common and common equivalent shares outstanding for the nine
month period ended March 31, 1997 and 1996 as adjusted was 3,126,756 and
3,163,589 respectively. The weighted average number of common and common
equivalent shares outstanding for the three month period ended March 31, 1997
and 1996 as adjusted was 3,107,894 and 3,163,589 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 HomeFirst Mortgage Corp. (formerly known as HF Mortgage
Corp. ) ("HomeFirst"). In May, 1996 the Company formed a Limited Liability
Company named HF Card Services L.L.C. ("HF Card Services") and became the owner
of 51% of the membership interest of this entity. HF Card Services was
established to provide secured, partially-secured and unsecured credit cards
nationwide. 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 HomeFirst
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 March 31, 1997, the Company had total assets of $561.3 million, an
increase of $6.6 million from the level at June 30, 1996. The increase in
assets was due primarily to an increase in cash and cash equivalents of $15.0
million, in securities available for sale of $9.6 million and in loans
receivable of $9.8 million which was partially offset by a decrease in
mortgage-backed securities of $27.4 million, and a decrease in loans held for
sale of $1.4 million. The decrease in mortgage-backed securities available for
sale of $27.4 million was used to pay down advances from Federal Home Loan Bank
and other borrowings of $16.4 million. The increase in loans receivable,
securities available for sale and cash and cash equivalents was funded primarily
by an increase in deposits of $20.1 million, a decrease in loans held for sale
of $1.4 million and the remaining decrease in mortgage-backed securities from
the levels of June 30, 1996. In addition, stockholders' equity increased from
$51.3 million at June 30, 1996 to $51.6 million at March 31, 1997, primarily due
to net income of $$2.2 million, and by the issuance of common shares of stock of
$114,000, which was partially reduced by the purchase of treasury stock of
$$1.2 million, and the payment of cash dividends of $813,000 to the Company's
stockholders.
The increase in loans receivable of $9.8 million was due primarily to
originations and purchases 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 $27.4 million was primarily
the result of sales of $12.0 million and amortizations and prepayments of
principal of $15.4 million.
The $20.1 million increase in deposits was due primarily to the Bank
increasing certificates of deposits and checking accounts from customers.
Page 7
Advances from the FHLB and other borrowings decreased $16.4 million for the
nine months ended March 31, 1997 primarily due to the payment of $38.4 million
on advances and other borrowings during the nine months ended March 31, 1997.
These payments were partially offset by the Bank obtaining $22.0 million of
advances to fund loans.
The $2.0 million increase in advances by borrowers for taxes and insurance
was due primarily to receipts from borrowers exceeding payments of real estate
taxes. 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 nine months ended March 31, 1997 and 1996 include fees which are
considered adjustments to yield.
Three Months Ended March 31,
--------------------------------------------------------------------
1997 1996
--------------------------------- -------------------------------
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) $ 439,435 $ 9,468 8.62% $ 411,317 $ 9,005 8.76%
Mortgage-backed securities 37,062 602 6.50% 73,995 1,271 6.87%
Other investment securities (2) 45,988 651 5.66% 51,830 657 5.07%
FHLB stock 5,222 92 7.05% 5,222 87 6.66%
------------- --------- ------- ----------- --------- -------
Total interest-earning assets $ 527,707 $ 10,813 8.20% $ 542,364 $ 11,020 8.13%
--------- ------- --------- -------
--------- ------- --------- -------
Non-interest earning assets 27,704 21,059
------------- -----------
Total assets $ 555,411 $ 563,423
------------- -----------
------------- -----------
Interest-bearing liabilities:
Deposits:
Now and money market accounts $ 69,954 $ 445 2.54% $ 60,661 $ 399 2.63%
Savings accounts 30,407 153 2.01% 34,964 165 1.89%
Certificates of deposit 311,472 4,491 5.77% 306,318 4,437 5.79%
------------- --------- ------- ----------- --------- -------
Total deposits $ 411,833 $ 5,089 4.94% $ 401,943 $ 5,001 4.98%
FHLB Advances and other borrowings 74,494 1,037 5.57% 90,593 1,290 5.70%
------------- --------- ------- ----------- --------- -------
Total interest-bearing liabilities $ 486,327 $ 6,126 5.04% $ 492,536 $ 6,291 5.11%
--------- ------- --------- -------
--------- ------- --------- -------
Other liabilities 17,610 19,563
------------- -----------
Total liabilities $ 503,937 $ 512,099
Equity 51,474 51,324
------------- -----------
Total liabilities and equity $ 555,411 $ 563,423
------------- -----------
------------- -----------
Net interest income; interest rate spread $ 4,687 3.16% $ 4,729 3.02%
--------- ------- --------- -------
--------- ------- --------- -------
Net interest margin (3) 3.55% 3.49%
------- -------
------- -------
Page 8
Nine months ended March 31,
-------------------------------------------------------------------
1997 1996
-------------------------------- -------------------------------
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) $ 436,976 $ 28,822 8.79% $ 399,389 $ 26,146 8.73%
Mortgage-backed securities 44,281 2,162 6.51% 77,626 3,915 6.72%
Other investment securities (2) 39,974 1,655 5.52% 53,432 2,057 5.13%
FHLB stock 5,222 277 7.07% 4,994 272 7.26%
------------ --------- ------- ----------- --------- -------
Total interest-earning assets 526,453 32,916 8.34% 535,441 32,390 8.07%
--------- ------- --------- -------
Non-interest earning assets. 27,757 20,633
------------ -----------
Total assets $ 554,210 $ 556,074
------------ -----------
------------ -----------
Interest-bearing liabilities:
Deposits:
Now and money market accounts $ 69,634 $ 1,338 2.56% $ 58,969 $ 1,231 2.78%
Savings accounts 30,530 472 2.06% 32,351 543 2.24%
Certificates of deposit 304,853 13,382 5.85% 308,223 13,932 6.03%
------------ --------- ------- ----------- --------- -------
Total deposits 405,017 15,192 5.00% 399,543 15,706 5.24%
FHLB Advances and other borrowings 80,619 3,406 5.63% 88,362 3,883 5.86%
------------ --------- ------- ----------- --------- -------
Total interest-bearing liabilities 485,636 18,598 5.11% 487,905 19,589 5.35%
--------- ------- --------- -------
Other liabilities 17,600 18,235
------------ -----------
Total liabilities 503,236 506,140
Equity 50,974 49,934
------------ -----------
Total liabilities and equity $ 554,210 $ 556,074
------------ -----------
------------ -----------
Net interest income; interest rate spread $ 14,318 3.23% $ 12,801 2.72%
--------- ------- --------- -------
--------- ------- --------- -------
Net interest margin (3) 3.63% 3.19%
------- -------
------- -------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
(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 March 31, Nine months ended March 31,
------------------------------------- -------------------------------------
1997 vs 1996 1997 vs 1996
---------------------------------- -------------------------------
(Dollars in Thousands)
Increase Increase Total
(Decrease) Total (Decrease) Increase
Due to Due to Increase Due to Due to (Decrease)
Volume Rate (Decrease) Volume Rate
---------- --------- ---------- ---------- -------- ----------
Interest-earning assets:
Loans receivable (1) $ 611 $ (148) $ 463 $ 2,479 $ 197 $ 2,676
Mortgage-backed securities (617) (52) (669) (1,628) (125) (1,753)
Other investment securities (2) (79) 73 (6) (557) 155 (402)
FHLB stock - 5 5 12 (7) 5
---------- --------- ---------- ---------- -------- ----------
Total interest-earning assets $ (85) $ (122) $ (207) $ 306 $ 220 $ 526
---------- --------- ---------- ---------- -------- ----------
---------- --------- ---------- ---------- -------- ----------
Interest-bearing liabilities:
Deposits:
Now and money markets $ 60 $ (14) $ 46 $ 205 $ (98) $ 107
Savings accounts (23) 11 (12) (28) (43) (71)
Certificates of deposit 76 (22) 54 (148) (402) (550)
---------- --------- ---------- ---------- -------- ----------
Total Deposits $ 113 $ (25) $ 88 29 (543) (514)
---------- --------- ---------- ---------- -------- ----------
FHLB Advances and other
borrowings $ (227) $ (26) $ (253) ($327) (150) ($477)
---------- --------- ---------- ---------- -------- ----------
Total Interest-bearing liabilities $ (114) $ (51) $ (165) $ (298) $ (693) $ (991)
---------- --------- ---------- ---------- -------- ----------
---------- --------- ---------- ---------- -------- ----------
Net interest income increase
(decrease) $ (42) $ 1,517
---------- ----------
---------- ----------
- ----------------------------------------------------------------------------------------------------------------
(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.
March 31, June 30,
--------- --------
1997 1996
--------- --------
Non-accruing loans:
One to four Family $ 881 $ 682
Commercial real estate 154 556
Multi-family ---- ----
Mobile Homes 97 58
Consumer 371 340
Commercial Business 496 427
-------- --------
Total $ 1,999 $ 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 $ 31 $ 52
Commercial real estate ---- 1
Multi-family ---- ----
Mobile Homes 105 88
Consumer 105 87
Commercial Business ---- ----
-------- --------
Total $ 241 $ 228
-------- --------
Total non-performing assets $ 2,240 $ 2,291
-------- --------
-------- --------
Total as a percentage of total assets 0.40% 0.41%
-------- --------
-------- --------
Total Non-performing loans as a percentage of total loans 0.46% 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 decreased to $2.2 million at March 31, 1997 from $2.3
million at June 30, 1996, a decrease of $51,000. In addition, the ratio of
non-performing assets to total assets, which is one indicator of credit risk
exposure, decreased to 0.40% at March 31, 1997 from 0.41% at June 30, 1996.
Non-accruing loans decreased to $2.0 million at March 31, 1997 from $2.1
million at June 30, 1996, a decrease of $64,000. Included in the $2.0 million
of non-accruing loans were two commercial business loans to one borrower
totaling
Page 11
$346,000. For the nine month period ended March 31, 1997, gross interest income
of $41,000 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 $111,000 was received as income on loans accounted for
on a non-accrual basis.
Foreclosed assets increased to $241,000 at March 31, 1997 from $228,000 at
June 30, 1996, an increase of $13,000.
At March 31, 1997, the Bank had approximately $7.3 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 March 31, 1997
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
March 31, 1997 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.
Nine months ended March 31,
---------------------------
1997 1996
--------- --------
(Dollars in Thousands)
Balance at beginning of period $ 4,129 $ 4,039
CHARGE-OFFS:
One- to four-family (76) (22)
Commercial ---- (35)
Multi-family ---- ----
Consumer (487) (402)
Mobile homes (154) (301)
-------- --------
Total charge-offs $ (717) $ (760)
-------- --------
RECOVERIES
One- to four-family $ 14 $ 50
Commercial 493 56
Multi-family 46 6
Commercial business 1 43
Consumer 170 91
Mobile homes 37 92
-------- --------
Total recoveries $ 761 $ 338
-------- --------
Net (charge-offs) recoveries $ 44 $ (422)
Additions charged to operations 320 120
-------- --------
Balance at end of period $ 4,493 $ 3,737
-------- --------
-------- --------
Ratio of net (charge-offs) recoveries during the period to
average loans outstanding during the period 0.01% (0.11)%
-------- --------
-------- --------
Ratio of allowance for loan losses to total loans at end
of period 1.04% 0.89%
-------- --------
-------- --------
Ratio of allowance for loan losses to non-performing
loans at end of period (1) 224.76% 98.76%
-------- --------
-------- --------
(1) Non-performing loans includes non-accruing loans
and accruing loans delinquent more than 90 days.
The allowance for loan losses was $4.5 million at March 31, 1997 as
compared to $3.8 million at March 31, 1996. The ratio of the allowance for
losses on loans to total loans was 1.04% at March 31, 1997 and 0.89% at March
31, 1996. 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 March 31, 1997 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) $ 1,710 38.06% $ 1,789 43.27%
Commercial and multi-family real estate (1) 1,048 23.31% 957 23.21%
Mobile homes 173 3.86% 191 4.62%
Consumer (2) 1,325 29.49% 1,060 25.69%
Commercial business 237 5.27% 132 3.21%
------- -------- -------- ----------
Total $ 4,493 100.00% $ 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 MARCH 31, 1997 AND MARCH 31, 1996
GENERAL. The Company's net income decreased $123,000 from $1.4 million for
the three months ended March 31, 1996 to $1.3 million for the three months ended
March 31, 1997. As discussed in more detail below, this decrease was due
primarily to an increase in noninterest expense of $435,000, a decrease in net
interest income of $42,000, and increase in the provision for losses on loans of
$46,000 which was partially offset by an increase in noninterest income of
$119,000 and a decrease in income tax expense of $281,000.
INTEREST INCOME. Interest income decreased $207,000 from $11.0 million for
the three months ended March 31, 1996 to $10.8 million for the three months
ended March 31, 1997. There was a decrease of $85,000 due to a decrease in the
average balance of interest-earning assets of $14.7 million and there was a
decrease of $122,000 due primarily to a decrease in the average yield on loans
receivable from 8.76% for the three months ended March 31, 1996 to 8.62% for the
three months ended March 31, 1997.
INTEREST EXPENSE. Interest expense decreased $165,000 from $6.3 million
for the three months ended March 31, 1996 to $6.1 million for the three months
ended March 31, 1997. There was a decrease of $114,000 due to a decrease in the
average balance of interest-bearing liabilities of $6.3 million and there was a
decrease of $51,000 due to a decrease in the average rates paid on
interest-bearing liabilities from 5.11% for the three months ended March 31,
1996 to 5.04% for the three months ended March 31, 1997.
NET INTEREST MARGIN. The Company's net interest margin for the three months
ended March 31, 1997 as compared to March 31, 1996 increased 6 basis points to
3.55%. 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 March 31,
1997, the Company recorded a provision for losses on loans of $166,000 as
compared to a provision for losses on loans of $120,000 for the three months
ended March 31, 1996. The provision for loan losses of $166,000 for the three
months ended March 31, 1997 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 $1.7 million for the three
months ended March 31, 1997 as compared to $1.6 million for the three months
ended March 31, 1996 an increase of $119,000.
Gain on sale of securities, net decreased $221,000 for the three months
ended March 31, 1997 as compared to the same period in fiscal 1996. This
decrease is due to the Company having a lower amount of activity during the
three months ended March 31, 1997 as compared to the same period in the prior
fiscal year which resulted in fewer gains on sales of securities.
The increase in other noninterest income of $245,000 for the three months
ended March 31, 1997 as compared to the same period in fiscal 1996 is primarily
due to fees received on unsecured credit cards of $236,000. This represents
processing fees, interchange fees, annual fees and other miscellaneous fees.
This unsecured credit card program is new in fiscal 1997.
NONINTEREST EXPENSE. Noninterest expense increased $435,000 from $4.0
million for the three months ended March 31, 1996 to $4.4 million for the three
months ended March 31, 1997. This increase resulted primarily from an increase
in compensation and employee benefits of $164,000 an increase in occupancy and
equipment of $97,000 and an increase in other general and administrative
expenses of $303,000 which was partially offset by a reduction in the federal
insurance premiums and assessment of $189,000. The increase in compensation and
employee benefits was due primarily to an increase in the number of employees
for the Bank increasing to 254 at March 31, 1997 from 242 at March 31, 1996.
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. The
decrease in the federal insurance premiums and assessments was due primarily to
the reduction in the assessment 23 basis points for the three months ended March
31, 1996 to 6.44 basis points for the three months ended March 31, 1997.
Page 15
INCOME TAX EXPENSE. The Company's income tax expense for the three months
ended March 31, 1997 was $551,000 compared to $832,000 for the three months
ended March 31, 1996, a decrease of $281,000. This decrease was proportionate
to the decrease in the Company's income before income tax and due to a decrease
in the effective tax rate to 30% for the three months ended March 31, 1997 as
compared to 37% for the same period in the prior fiscal year.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
GENERAL. The Company's net income decreased $1.4 million from $3.6 million
for the nine months ended March 31, 1996 to $2.2 million for the nine months
ended March 31, 1997. As discussed in more detail below, this decrease was due
primarily to the increase in noninterest expense of $4.2 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 $200,000 which
were partially offset by an increase in net interest income of $1.5 million, an
increase in noninterest income of $218,000 and a decrease in income tax expense
of $1.3 million.
INTEREST INCOME. Interest income increased $526,000 from $32.4 million for
the nine months ended March 31, 1996 to $32.9 million for the nine months ended
March 31, 1997. This increase was primarily due to increase in interest earned
on loans. The average yield on loans increased from 8.73% to 8.79% while the
average balance of loans increased $37.6 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 $33.3 million and $13.5
million, respectively.
INTEREST EXPENSE. Interest expense decreased $1.0 million from $19.6
million for the nine months ended March 31, 1996 to $18.6 million for the nine
months ended March 31, 1997. The decrease was due to a decrease in average
rates paid on interest-bearing liabilities from 5.35% for the nine months ended
March 31, 1996 to 5.11% for the nine months ended March 31, 1997.
NET INTEREST MARGIN. The Company's net interest margin for the nine months
ended March 31, 1997 as compared to March 31, 1996 increased 44 basis points to
3.63%. 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 nine months ended March 31, 1997, the Company recorded a
provision for losses on loans of $320,000 as compared to $120,000 for the nine
months ended March 31, 1996. The provision for loan losses of $320,000 for the
nine months ended March 31, 1997 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 March 31, 1997 was $4.5 million. The
allowance increased from the June 30, 1996 balance primarily as a result of the
provision for loan losses of $320,000 and of recoveries exceeding charge-offs by
$44,000. The ratio of allowance for loan losses to non-performing loans at March
31, 1997 was 224.76% compared to 98.76% at March 31, 1996. The allowance for
losses on loans to total loans at March 31, 1997 was 1.04% compared to 0.89% at
March 31, 1996. The Bank's management believes that the March 31, 1997 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 $4.6 million for the nine
months ended March 31, 1997 as compared to $4.4 million for the nine months
ended March 31, 1996.
Page 16
Fees on deposits increased $343,000 for the nine months ended March 31,
1997 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 $350,000 for the nine months
ended March 31, 1997 as compared to the same period in fiscal 1996. This
decrease is due to the Company having a lower amount of activity during the nine
months ended March 31, 1997 as compared to the same period in the prior fiscal
year which resulted in fewer gains on sales of securities.
The increase in other noninterest income of $340,000 for the nine months
ended March 31, 1997 as compared to the same period in fiscal 1996 is primarily
due to an increase in fees received on unsecured credit cards of $236,000. This
represents processing fees, interchange fees, annual fees and other
miscellaneous fees. This unsecured credit card program is new in fiscal 1997.
NONINTEREST EXPENSE. Noninterest expense increased $4.2 million from $11.3
million for the nine months ended March 31, 1996 to $15.5 million for the nine
months ended March 31, 1997. This increase resulted primarily from an increase
in compensation and employee benefits of $858,000 and an increase in federal
insurance premiums of $2.5 million, an increase in occupancy and equipment of
$451,000 and an increase in other general and administrative expense of
$498,000. The increase in compensation and employee benefits was due primarily
to an increase in the number of employees for the Bank increasing to 254 at
March 31, 1997 from 242 at March 31, 1996. The increase in the federal
insurance premiums of $2.5 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 nine months
ended March 31, 1997 was $916,000 compared to $2.2 million for the nine months
ended March 31, 1996, a decrease of $1.3 million. 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 nine months ended March
31, 1997 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.
HomeFirst's primary source of funds is a line of credit of $850,000 from
the Bank and a $300,000 line of credit from the Company. HomeFirst originates
loans and sells them either to the Bank or to secondary market investors. The
lines of credit are drawn upon to fund the loans that HomeFirst makes to its
customers. The lines of credit are reduced when HomeFirst receives funds from
the investors who have purchased the loans. HomeFirst originated approximately
$8.4 million of loans during the nine months ended March 31, 1997.
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 March 31, 1997, the
Bank's regulatory liquidity ratio was 14.36%.
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
Page 17
agency obligations. During the first nine 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 HomeFirst anticipate that they will have sufficient funds
available to meet current loan commitments. At March 31, 1997, the Bank and
HomeFirst had outstanding commitments to originate loans of $13.0 million, to
purchase loans of $2.7 million and to sell loans of $11.5 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.
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 March 31, 1997 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 7.47% at March 31, 1997.
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 was paid 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 nine month period ended March 31, 1997. SFAS No. 122 is
superceded 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: May 7, 1997 by /s/ Curtis L. Hage
---------------- -----------------------------
Curtis L. Hage, President
and Chief Executive Officer
(Duly Authorized Officer)
Date: May 7, 1997 by /s/ Donald F. Bertsch
---------------- -------------------------------
Donald F. Bertsch, Senior
Vice President and Chief
Financial Officer
(Principal Financial Officer)
Page 21