A UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSBA[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2003OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-20956
HFB FINANCIAL CORPORATION
A Tennessee Corporation I.R.S. Employer
Identification
No. 61-1228266
Address Telephone Number
------- ----------------
1602 Cumberland Avenue (606) 248-1095
Middlesboro, Kentucky 40965
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding twelve 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 .
The number of shares of the registrant's $1 par value common stock outstanding
at August 11, 2003 was 1,301,101.
There are a total of 19 pages filed in this document.
HFB FINANCIAL CORPORATION
I N D E X
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PAGE NO
PART I - FINANCIAL INFORMATION -------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statement of Stockholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
PART II - OTHER INFORMATION 14
SIGNATURES 15
Exhibit 31.1 CEO Certification under Section 302 of the Sarbanes-Oxley Act 16
Exhibit 31.2 CFO Certification under Section 302 of the Sarbanes-Oxley Act 17
Exhibit 32.1 CEO Certification under Section 906 of the Sarbanes-Oxley Act 18
Exhibit 32.2 CEO Certification under Section 906 of the Sarbanes-Oxley Act 19
2
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
June 30, December 31,
2003 2002
(unaudited)
Assets
Cash and cash equivalents $ 4,943,293 $ 4,967,188
Available-for-sale securities 58,555,629 70,418,282
Loans, net of allowance for loan losses of $1,391,433 and
$1,191,849 at June 30, 2003 and December 31, 2002, respectively 183,574,995 166,334,655
Premises and equipment 4,757,816 4,455,209
Federal Home Loan Bank stock 1,713,100 1,679,700
Interest Receivable 1,473,887 1,513,376
Assets held for sale 769,226 1,030,310
Other assets 819,413 330,038
Cash surrender value of life insurance 2,876,178 2,806,103
------------- -------------
Total assets $ 259,483,537 $ 253,534,861
============= =============
Liabilities
Deposits
Non-interest bearing demand $ 8,925,737 $ 6,398,430
Savings, NOW and money market 27,272,283 26,643,742
Certificate of deposits 167,511,401 166,243,106
------------- -------------
Total deposits 203,709,421 199,285,278
Short-term debt 25,000 1,375,000
Long-term debt 29,055,803 26,277,967
Interest payable 411,548 629,653
Other liabilities 2,065,621 2,386,636
------------- -------------
Total liabilities 235,267,393 229,954,534
------------- -------------
Stockholders' Equity
Issued and outstanding - 1,589,303 shares 1,589,303 1,589,303
Additional paid-in-capital 8,768,874 8,768,874
Less: Common stock acquired by Rabbi trusts for deferred
compensation plans (500,446) (500,446)
Retained earnings 15,809,922 14,867,147
Accumulated other comprehensive income 1,110,489 1,417,447
------------- -------------
26,778,142 26,142,325
Treasury stock, at cost, 288,202 shares (2,561,998) (2,561,998)
------------- -------------
Total stockholders' equity 24,216,144 23,580,327
------------- -------------
Total liabilities and stockholders' equity $ 259,483,537 $ 253,534,861
============= =============
See notes to condensed consolidated financial statements.
3
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Income
(Unaudited)
Three-months ended Six-months ended
June 30, June 30,
2003 2002 2003 2002
Interest Income
Loans receivable $3,212,022 $2,991,981 $6,391,740 $5,916,275
Investment securities 664,128 1,037,890 1,452,197 1,984,850
Other 6,891 11,796 18,034 26,143
---------- ---------- ---------- ----------
Total interest income 3,883,041 4,041,667 7,861,971 7,927,268
---------- ---------- ---------- ----------
Interest Expense
Deposits 1,120,329 1,616,679 2,340,418 3,339,243
Short term borrowings -- -- -- --
Long term debt 318,678 249,112 621,062 475,612
---------- ---------- ---------- ----------
Total interest expense 1,439,007 1,865,791 2,961,480 3,814,855
---------- ---------- ---------- ----------
Net Interest Income 2,444,034 2,175,876 4,900,491 4,112,413
Provision for loan losses 105,000 154,127 210,000 222,485
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 2,339,034 2,021,749 4,690,491 3,889,928
---------- ---------- ---------- ----------
Other Income
Service charges for deposit accounts 268,228 200,959 503,140 376,595
Other customer fees 34,168 10,359 68,396 43,849
Net realized gain on sales of
available for sale securities -- -- 1,243 5
Other income 22,538 122,870 66,682 196,482
---------- ---------- ---------- ----------
Total other income 324,934 334,188 639,461 616,931
---------- ---------- ---------- ----------
Other Expenses
Salaries and employee benefits 921,143 774,710 1,809,010 1,427,609
Net occupancy expenses 96,206 94,453 194,398 189,553
Equipment expenses 135,957 138,124 264,435 270,657
Data processing fees 80,872 61,493 143,872 121,420
Deposit insurance expense 6,687 8,291 16,384 16,778
Legal and professional fees 150,020 178,449 263,976 307,148
Advertising 65,997 61,043 132,097 121,043
State franchise and deposit taxes 51,475 8,625 102,650 67,075
Other expenses 248,925 499,605 564,024 748,188
---------- ---------- ---------- ----------
Total other expenses 1,757,282 1,824,793 3,490,846 3,269,471
---------- ---------- ---------- ----------
Income Before Income Tax 906,686 531,144 1,839,106 1,237,388
Income tax expense 289,435 161,688 571,806 390,424
---------- ---------- ---------- ----------
Net Income $ 617,251 $ 369,456 $1,267,300 $ 846,964
========== ========== ========== ==========
Basic Earnings Per Share $ 0.49 $ 0.30 $ 1.01 $ 0.68
Diluted Earnings Per Share $ 0.49 $ 0.30 $ 1.00 $ 0.68
See notes to condensed consolidated financial statements.
4
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statement of Stockholders' Equity
Six-months ended June 30, 2003
Additional Compre-
Common Paid-in Rabbi Treasury hensive Retained
Stock Capital Trusts Stock Income Earnings
------------------------------------------------------------------------------------------
Balances, December 31, 2002 $ 1,589,303 $ 8,768,874 $ (500,446) $ (2,561,998) $ 14,867,147
Net income $ 1,267,300 1,267,300
Other comprehensive income, net of tax
Unrealized gain on securities (306,958)
------------
Comprehensive income $ 960,342
============
Cash dividend declared ($.25 per share) (324,525)
--------------------------------------------------------- --------------
June 30, 2003 (unaudited) $ 1,589,303 $ 8,768,874 $ (500,446) $ (2,561,998) $ 15,809,922
========================================================= ==============
Accumulated
Other Total
Comprehensive Stockholders'
Income Equity
--------------------------------
Balances, December 31, 2002 $ 1,417,447 $ 23,580,327
Net income 1,267,300
Other comprehensive income, net of tax
Unrealized gain on securities (306,958) (306,958)
Comprehensive income
Cash dividend declared ($.25 per share) (324,525)
--------------------------------
June 30, 2003 (unaudited) $ 1,110,489 $ 24,216,144
================================
See notes to condensed consolidated financial statements.
5
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six-months Ended
June 30,
2003 2002
Operating Activities
Net cash provided by operating activities $ 718,210 $ 1,387,848
------------ ------------
Investing Activities
Purchases of securities available for sale (15,922,541) (27,114,005)
Development costs of assets held for sale -- (32,321)
Proceeds from maturities of securities available for sale 22,153,837 15,579,567
Proceeds from sales of securities available for sale 4,955,255 5,745
Net change in loans (17,030,340) (15,793,135)
Proceeds from sales of assets held for sale 107,657 1,006,125
Proceeds from life insurance -- (2,735,094)
Purchases of premises and equipment (533,427) (36,225)
------------ ------------
Net cash used by investing activities (6,269,559) (29,119,343)
------------ ------------
Financing Activities
Net change in
Non interest-bearing, interest-bearing and
savings deposits 3,155,848 5,754,862
Certificates of deposit 1,268,295 6,462,929
Short term borrowings (1,350,000) --
Proceeds of long term debt 2,825,000 7,500,000
Repayment of long term debt (47,164) (41,587)
Cash dividends (324,525) (260,358)
Proceeds from exercise of options on common stock -- 24,655
Purchase of treasury stock -- (77,731)
------------ ------------
Net cash provided by financing activities 5,527,454 19,362,770
------------ ------------
Net Change in Cash and Cash Equivalents (23,895) (8,368,725)
Cash and Cash Equivalents, Beginning of Period 4,967,188 13,594,073
------------ ------------
Cash and Cash Equivalents, End of Period $ 4,943,293 $ 5,225,348
============ ============
Additional Cash Flows Information
Interest paid $ 3,179,585 $ 3,904,248
Income tax paid 639,000 275,437
See notes to condensed consolidated financial statements.
6
HFB FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated financial information for the
three-month periods ended June 30, 2003 and 2002 includes the results of
operations of HFB Financial Corporation (the "Company") and its wholly
owned subsidiary Home Federal Bank Corporation ("Home Federal" or the
"Bank"). The accompanying unaudited financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial statements and with the
instructions to Form 10-QSB. Certain information and note disclosures
normally included in the company's annual financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. It is suggested that
these statements and notes be read in conjunction with the financial
statements and notes thereto included in the Company's annual report for
the year ended December 31, 2002 on Form 10-KSB filed with the Securities
and Exchange Commission.
In the opinion of management, the financial information reflects all
adjustments (consisting only of normal recurring adjustments), which are
necessary for a fair presentation of the financial position, results of
operations and cash flows of the Company but should not be considered as
indicative of results for a full year.
The condensed consolidated balance sheet of the Company as of December 31,
2002 has been derived from the audited consolidated balance sheet of the
Company as of that date.
2. Non-performing Loans and Problem Assets
The following sets forth the activity in the Company's allowance for loan
losses for the three-months ended June 30, 2003 and 2002:
(Dollars in thousands)
2003 2002
---- ----
Balance January 1 $ 1,192 $ 780
Charge offs (11) (65)
Recoveries
-- 38
Provision for loan losses 210 222
------- -------
Balance June 30 $ 1,391 $ 975
======= =======
Information on impaired loans is summarized below
At June 30 2003 2002
------- -------
Impaired loans with an allowance $ 604 $ 1,122
Allowance for impaired loans (included in the Company's
allowance for loan losses) $ 134 $ 365
7
Six-months ended June 30 2003 2002
------------------------ ---- ----
Average balance of impaired loans $ 605 $ 1,521
Interest income recognized on impaired loans $ 0 $ 0
Cash-basis interest received $ 0 $ 0
3. Earnings per Share
Earnings per share (EPS) were computed as follows:
Three Months Ended June 30, 2003
---------------------------------------
Income Weighted-Average Per Share
Shares Amount
---------------------------------------
Net income $ 617,251
---------
Basic earnings per share
Income available to common
stockholders $ 617,251 1,259,488 $ 0.49
========
Effect of dilutive securities
Stock options --- 4,988
--------- ---------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $ 617,251 1,264,486 $ 0.49
========= ========= ========
Three Months Ended June 30, 2002
---------------------------------------
Income Weighted-Average Per Share
Shares Amount
---------------------------------------
Net income $ 369,456 1,246,604
---------
Basic earnings per share
Income available to common
stockholders $ 369,456 $ 0.30
=========
Effect of dilutive securities
Stock options --- 3,124
--------- ---------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $ 369,456 1,249,728 $ 0.30
========= ========= =========
4. Stock Options
At June 30, 2003 the Company has a stock-based compensation plan which is
described more fully in the notes to the Company's December 31, 2002
audited financial statements contained in the
8
Company's annual report. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price that was equal to or
greater than the market value of the underlying common stock on the grant
date. Proforma information is not presented since all options granted by
the Company were granted and vested in periods previous to those presented.
Therefore, no expense would be recognized for the periods presented had the
Company applied the fair value provisions of FASB statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
5. Reclassifications
Reclassifications of certain amounts in the June 30, 2002 consolidated
statement have been made to conform to the June 30, 2003 presentation.
These reclassifications had no effect on net income.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-QSB are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties, which are described in, close proximity to such
statements and which could cause actual results to differ materially from those
anticipated as of the date of this report. Shareholders, potential investors and
other readers are urged to consider these factors in evaluating the
forward-looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included herein are
only made as of the date of this report and the Company undertakes no obligation
to publicly update such forward-looking statements to reflect subsequent events
or circumstances.
General:
HFB Financial Corporation, a Tennessee Corporation, was formed in September 1992
at the direction of Home Federal Bank, Federal Savings Bank for the purpose of
becoming a holding company for the Bank as part of its conversion from mutual to
stock form. The Company's primary operation is its investment in the common
stock of the Bank.
The Bank is principally engaged in the business of accepting deposits from the
general public and originating permanent loans, which are secured by one-to-four
family residential properties located in its market area. The Bank also
originates consumer loans and commercial real estate loans, and maintains a
substantial investment portfolio of mortgage-backed and other investment
securities. During the quarter ended December 31, 2001, the Bank converted from
a federal thrift charter to a state chartered commercial bank as a means for
management to focus more on commercial lending and other activities permissible
for commercial banks.
The operations of Home Federal are significantly influenced by general economic
conditions and the monetary and fiscal policies of government regulatory
agencies. Deposit flows and costs of funds are influenced by interest rates on
competing investments and prevailing market rates of interest. Lending
activities are affected by the demand for financing real estate and other types
of loans, which in turn are influenced by the interest rates at which such
financing may be offered and other factors related to loan demand and the
availability of funds.
Financial Condition
9
The Corporation's assets increased by 2.37% to $259.5 million at June 30, 2003
compared to $253.5 million at December 31, 2002. The majority of this increase
is reflected in increases in loans. The increase was financed primarily by
increases deposits and long-term borrowings and decreases in investment
securities.
Investment securities, available for sale, decreased $11.8 million to $58.6
million at June 30, 2003 from $70.4 million at December 31, 2002 primarily as
the result of increased prepayments on mortgage backed securities "MBSs".
Loans, net, increased by $17.3 million to $183.6 million at June 30, 2003 from
$166.3 million at December 31, 2002 as the result of continued 1-4 family
mortgage loan demand and an increase in commercial real estate loans. Since the
Bank's conversion to a commercial bank, Management has focused on originating
commercial real estate loans.
At June 30, 2003, the allowance for loan losses was $1.4 million or .76% of
loans receivable compared to $1.2 million or .71% of loans receivable at
December 31, 2002.
Total deposits increased by $4.4 million to $203.7 million at June 30, 2003 from
$199.3 million at December 31, 2002. During the three months ended June 30,
2003, certificates of deposit increased $1.3 million and NOW accounts and
savings deposits increased $3.1 million.
Long-term borrowings increased by $2.8 million to $29.1 million at June 30, 2003
from $26.3 million at December 31, 2002. These proceeds were from 10 year
advances and were used to fund the purchase of municipal securities with an
average maturity of 15 years.
At June 30, 2003, the Bank met all regulatory requirements. Tier I capital to
averaged assets was 8.7%. Tier I capital to risk-weighted assets was 14.0% and
total capital to risk-weighted assets was 14.7% at June 30, 2003 compared to
8.4%, 14.5% and 15.3%, respectively, at December 31, 2002.
Results of Operations for the Three-months Ended June 30, 2003 and 2002
Net income increased by $248,000 to $617,000 for the three-month period ended
June 30, 2003 from $369,000 for the three-month period ended June 30, 2002. The
primary reasons for the increase were a $268,000 increase in net interest
income, a $49,000 decrease in the provision for loan losses and a $68,000
decrease in other expense offset by a $9,000 decrease in other income and a
$128,000 increase in income tax expense.
Interest income decreased by $159,000 for the three-month period ended June 30,
2003 as compared to the three-month period ended June 30, 2002, primarily a
result of lower yields on earning assets during the three months ended June 30,
2003.
Interest on loans increased by $220,000 to $3.212 million for the three-month
period ended June 30, 2003 as compared to $2.992 million for the three-month
period ended June 30, 2002. This increase is mainly attributable to a higher
average balance of loans during the three months ended June 30, 2003 even though
the weighted-average yield was lower than that of the quarter ended June 30,
2002.
Interest on investment securities, other dividend income and interest on
deposits with financial institutions decreased by $379,000 to $671,000 for the
three-month period ended June 30, 2003 from $1.050 million for the three-month
period ended June 30, 2002. This decrease is primarily the result of a lower
average balance of investments during the three months ended June 30, 2003. The
weighted average yield on investments during the same period was also lower than
that of the three months ended June 30, 2002.
Interest expense on deposits decreased by $497,000 to $1.120 million for the
three-month period ended June 30, 2003 from $1.617 million for the three-month
period ended June 30, 2002 as a result of a significant drop in rates paid on
deposit accounts.
10
Interest expense on short-term and long-term debt increased by $70,000 to
$319,000 for the three-month period ended June 30, 2003 from $249,000 for the
three-month period ended June 30, 2002, primarily due to a higher level of
long-term debt outstanding during the three months ended June 30, 2003.
The provision for loan losses decreased by $49,000 for the three-month period
ended June 30, 2003 as compared to the same period in 2002. The provision was
the result of management's evaluation of the adequacy of the allowance for loan
losses including consideration of recoveries of loans previously charged off,
the perceived risk exposure among loan types, actual loss experience,
delinquency rates, and current economic conditions. The Bank's allowance for
loan losses as a percent of total loans at June 30, 2003 was 0.76%.
Non-interest income decreased by $9,000 to $325,000 for the three-month period
ended June 30, 2003 as compared to $334,000 for the same period in 2002. The
decrease was largely attributable to an increase of $67,000 in service charges
on deposits, an increase of $28,000 in other customer fees offset by a $100,000
decrease in other income. The decrease in other income was primarily due to a
$88,000 decrease in gain on the sale of real estate and equipment.
Non-interest expense decreased by $68,000 to $1.757 million for the three-month
period ended June 30, 2003 as compared to $1.825 million for the same period in
2002.
Compensation and benefits increased by $146,000 to $921,000 for the three-month
period ended June 30, 2003 as compared to $775,000 for the three-months ended
June 30, 2002 primarily as the result of annual increases in salaries, wages and
commissions and a $15,000 increase in the cost of funding the Banks retirement
plan. In addition, the Banks staffing was increased due to growth and the
opening of a branch office in Jacksboro, Tennessee in January 2003. At June 30,
2003, the Bank had 75 full time equivalent employees compared to 63 at June 30,
2002.
Data processing expenses increased by $20,000 to $81,000 for the three-month
period ended June 30, 2003 as compared to $61,000 for the three-months ended
June 30, 2002 as the result of the addition of a new branch office and other
specialized programming requests.
Legal and professional fees decreased by $28,000 to $150,000 for the three-month
period ended June 30, 2003 from $178,000 for the three-month period ended June
30, 2002 primarily due to a decrease in legal expenses for the three-months
ended June 30, 2003.
Advertising expense increased by $5,000 to $66,000 for the quarter ended June
30, 2003 compared to $61,000 for the quarter ended June 30, 2002 primarily due
to a higher level of advertising activity in the current period.
State deposit and franchise taxes increased by $42,000 to $51,000 for the
quarter ended June 30, 2003 compared to $9,000 for the quarter ended June 30,
2002. As a result of the Banks recent conversion from a thrift to a commercial
bank and determining the differences in the method of taxation between banks and
thrifts, deposit and franchise taxes were over accrued during the quarter ended
June 30, 2002.
Other expenses decreased by $251,000 to $249,000 for the three-month period
ended June 30, 2003 from $500,000 for the three-month period ended June 30,
2002, primarily due to a $308,000 decrease in expenses associated with the
acquisition and sale of other real estate owned, a $20,000 increase in printing
supplies resulting from a systems conversion, a $24,000 increase in other
services and fees and a $15,000 increase in telephone expense due to duplicate
service used during the conversion to a new system.
Income tax expense increased by $128,000 to $289,000 for the three-month period
ended June 30, 2003 compared to $161,000 for the three-months ended June 30,
2002 due a higher level of taxable income. The effective tax rate for the
Three-months ended June 30, 2003 was 31.92% compared to 30.44% for the same
period in 2002.
Results of Operations for the Six-months Ended June 30, 2003 and 2002
11
Net income increased by $420,000 to $1.267 million for the six-month period
ended June 30, 2003 from $847,000 for the six-month period ended June 30, 2002.
The primary reasons for the increase were a $788,000 increase in net interest
income, a $12,000 decrease in the provision for loan losses and a $22,000
increase in other income offset by a $221,000 increase in other expense and a
$181,000 increase in income tax expense.
Interest income decreased by $65,000 for the six-month period ended June 30,
2003 as compared to the six-month period ended June 30, 2002, primarily a result
of lower yields on earning assets during the six months ended June 30, 2003.
Interest on loans increased by $476,000 to $6.392 million for the six-month
period ended June 30, 2003 as compared to $5.916 million for the six-month
period ended June 30, 2002. This increase is mainly attributable to a higher
average balance of loans during the six months ended June 30, 2003 even though
the weighted-average yield was lower than that of the quarter ended June 30,
2002.
Interest on investment securities, other dividend income and interest on
deposits with financial institutions decreased by $541,000 to $1.470 million for
the six-month period ended June 30, 2003 from $2.011 million for the six-month
period ended June 30, 2002. This decrease is primarily the result of a lower
average balance of investments during the six months ended June 30, 2003. The
weighted average yield on investments during the same period was also lower than
that of the six months ended June 30, 2002.
Interest expense on deposits decreased by $999,000 to $2.340 million for the
six-month period ended June 30, 2003 from $3.339 million for the six-month
period ended June 30, 2002 as a result of a significant drop in rates paid on
deposit accounts.
Interest expense on short-term and long-term debt increased by $145,000 to
$621,000 for the six-month period ended June 30, 2003 from $476,000 for the
six-month period ended June 30, 2002, primarily due to a higher level of
long-term debt outstanding during the six months ended June 30, 2003.
The provision for loan losses decreased by $12,000 for the six-month period
ended June 30, 2003 as compared to the same period in 2002. The provision was
the result of management's evaluation of the adequacy of the allowance for loan
losses including consideration of recoveries of loans previously charged off,
the perceived risk exposure among loan types, actual loss experience,
delinquency rates, and current economic conditions. The Bank's allowance for
loan losses as a percent of total loans at June 30, 2003 was 0.76%.
Non-interest income increased by $22,000 to $639,000 for the six-month period
ended June 30, 2003 as compared to $617,000 for the same period in 2002. The
decrease was mainly attributable to an increase of $127,000 in service charges
on deposits, an increase of $25,000 in other customer fees offset by a $130,000
decrease in other income. The decrease in other income was primarily due to a
$108,000 decrease in gain on the sale of real estate and equipment.
Non-interest expense increased by $221,000 to $3.490 million for the six-month
period ended June 30, 2003 as compared to $3.269 million for the same period in
2002.
Compensation and benefits increased by $381,000 to $1.809 million for the
six-month period ended June 30, 2003 as compared to $1.428 million for the
six-months ended June 30, 2002 primarily as the result of annual increases in
salaries, wages and commissions and a $30,000 increase in the cost of funding
the Banks retirement plan. In addition, the Banks staffing was increased due to
growth and the opening of a branch office in Jacksboro, Tennessee in January
2003. At June 30, 2003, the Bank had 78 full time equivalent employees compared
to 63 at June 30, 2002.
Data processing expenses increased by $23,000 to $144,000 for the six-month
period ended June 30, 2003 as compared to $121,000 for the six-months ended June
30, 2002 as the result of the addition of a new branch office and other
specialized programming requests.
12
Legal and professional fees decreased by $43,000 to $264,000 for the six-month
period ended June 30, 2003 from $307,000 for the six-month period ended June 30,
2002 primarily due to a decrease in legal expenses for the six-months ended June
30, 2003.
Advertising expense increased by $11,000 to $132,000 for the quarter ended June
30, 2003 compared to $121,000 for the quarter ended June 30, 2002 primarily due
to a higher level of advertising activity in the current period.
State deposit and franchise taxes increased by $36,000 to $103,000 for the
quarter ended June 30, 2003 compared to $67,000 for the quarter ended June 30,
2002. As a result of the Banks recent conversion from a thrift to a commercial
bank and determining the differences in the method of taxation between banks and
thrifts, deposit and franchise taxes were over accrued during the quarter ended
June 30, 2002.
Other expenses decreased by $184,000 to $564,000 for the six-month period ended
June 30, 2003 from $748,000 for the six-month period ended June 30, 2002,
primarily due to a $288,000 decrease in expenses associated with the acquisition
and sale of other real estate owned, a $33,000 increase in printing supplies
resulting from a systems conversion, a $30,000 increase in other services and
fees and a $26,000 increase in telephone expense due to duplicate service used
during the conversion to a new system.
Income tax expense increased by $181,000 to $571,000 for the six-month period
ended June 30, 2003 compared to $390,000 for the six-months ended June 30, 2002
due a higher level of taxable income. The effective tax rate for the six-months
ended June 30, 2003 was 31.09% compared to 31.55% for the same period in 2002.
Critical Accounting Policies
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of the
collateral if the loan is collateral dependent.
HFB FINANCIAL CORPORATION
PART II
OTHER INFORMATION
13
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
No matters were submitted to a vote of Security Holders during the
quarter ended June 30, 2003.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 CEO Certification under Section 302 of the Sarbanes-Oxley
Act
31.2 CFO Certification under Section 302 of the Sarbanes-Oxley
Act
32.1 CEO Certification under Section 906 of the Sarbanes-Oxley
Act
32.2 CFO Certification under Section 906 of the Sarbanes-Oxley
Act
b. Reports on Form 8-K
On August 11, 2003, the Company filed a form 8-K announcing that
earnings for the quarter ended June 30, 2003 were released on
August 8, 2003.
Item 7. Controls and Procedures
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of a date within 90 days prior to the
filing of this quarterly report pursuant to Rule 13a-14 of the Securities Act of
1934. Based on that review and evaluation, the CEO and CFO have concluded that
the Company's current disclosure controls and procedures, as designed and
implemented, were effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's internal controls subsequent to the date of their evaluation.
There were no significant material weaknesses identified in the course of such
review and evaluation and, therefore, no corrective measures were taken by the
Company.
HFB FINANCIAL CORPORATION
Signatures
14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned, thereunto duly authorized.
HFB FINANCIAL CORPORATION
By: /s/ David B. Cook
-------------------------
David B. Cook
President and
Chief Executive Officer
By: /s/ Stanley Alexander, Jr.
--------------------------
Stanley Alexander, Jr.
Chief Financial Officer
Dated August 11, 2003
15