UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
|_| 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 November 7, 2003 was 1,301,101.
There are a total of 19 pages filed in this document.
HFB FINANCIAL CORPORATION
I N D E X
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 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II - OTHER INFORMATION 14-15
SIGNATURES 15
CEO Certification under Section 302 of the Sarbanes-Oxley Act 16
CFO Certification under Section 302 of the Sarbanes-Oxley Act 17
Exhibit 99.1 18
Exhibit 99.2 19
2
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
September 30, December 31,
2003 2002
(unaudited)
Assets
Cash and cash equivalents $ 5,999,208 $ 4,967,188
Available-for-sale securities 49,858,124 70,418,282
Loans, net of allowance for loan losses of $1,494,678 and
$1,191,849 at September 30, 2003 and December 31, 2002, respectively 187,799,158 166,334,655
Premises and equipment 4,794,767 4,455,209
Federal Home Loan Bank stock 1,730,300 1,679,700
Interest Receivable 1,446,375 1,513,376
Assets held for sale 1,224,079 1,030,310
Other assets 925,303 330,038
Cash surrender value of life insurance 2,911,215 2,806,103
------------- -------------
Total assets $ 256,688,529 $ 253,534,861
============= =============
Liabilities
Deposits
Non-interest bearing demand $ 8,553,692 $ 6,398,430
Savings, NOW and money market 28,751,087 26,643,742
Certificate of deposits 164,595,319 166,243,106
------------- -------------
Total deposits 201,900,098 199,285,278
Short-term debt -- 1,375,000
Long-term debt 28,084,688 26,277,967
Interest payable 842,656 629,653
Other liabilities 1,845,387 2,386,636
------------- -------------
Total liabilities 232,672,829 229,954,534
------------- -------------
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 16,049,953 14,867,147
Accumulated other comprehensive income 670,014 1,417,447
------------- -------------
26,577,698 26,142,325
Treasury stock, at cost, 288,202 shares (2,561,998) (2,561,998)
------------- -------------
Total stockholders' equity 24,015,700 23,580,327
------------- -------------
Total liabilities and stockholders' equity $ 256,688,529 $ 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 Nine-months ended
September 30, September 30,
2003 2002 2003 2002
Interest Income
Loans receivable $3,152,047 $3,071,713 $ 9,543,787 $ 8,987,988
Investment securities 605,538 1,019,271 2,057,735 3,004,121
Other 5,192 5,379 23,226 31,522
---------- ---------- ----------- -----------
Total interest income 3,762,777 4,096,363 11,624,748 12,023,631
---------- ---------- ----------- -----------
Interest Expense
Deposits 1,055,165 1,509,570 3,395,583 4,848,812
Short term borrowings -- 490 -- --
Long term debt 337,939 251,224 959,001 727,326
---------- ---------- ----------- -----------
Total interest expense 1,393,104 1,761,284 4,354,584 5,576,138
---------- ---------- ----------- -----------
Net Interest Income 2,369,673 2,335,079 7,270,164 6,447,493
Provision for loan losses 105,000 129,227 315,000 351,712
---------- ---------- ----------- -----------
Net Interest Income After
Provision for Loan Losses 2,264,673 2,205,852 6,955,164 6,095,781
---------- ---------- ----------- -----------
Other Income
Service charges for deposit accounts 267,498 207,829 770,638 584,425
Other customer fees 24,928 27,024 93,324 70,873
Net realized gain on sales of
available for sale securities -- -- 1,243 5
Other income 52,845 40,670 119,527 237,151
---------- ---------- ----------- -----------
Total other income 345,271 275,523 984,732 892,454
---------- ---------- ----------- -----------
Other Expenses
Salaries and employee benefits 952,627 881,807 2,761,638 2,309,416
Net occupancy expenses 94,568 84,664 288,966 274,217
Equipment expenses 131,438 111,392 395,873 382,050
Data processing fees 81,144 59,947 225,016 181,367
Deposit insurance expense 8,105 11,290 24,489 28,068
Legal and professional fees 181,851 101,666 445,826 408,814
Advertising 68,561 66,000 200,658 187,043
State franchise and deposit taxes 52,295 8,131 154,945 75,206
Other expenses 258,848 339,037 822,872 1,087,225
---------- ---------- ----------- -----------
Total other expenses 1,829,437 1,663,934 5,320,283 4,933,406
---------- ---------- ----------- -----------
Income Before Income Tax 780,507 817,441 2,619,613 2,054,829
Income tax expense 215,201 253,686 787,006 644,179
---------- ---------- ----------- -----------
Net Income $ 565,306 $ 563,755 $ 1,832,607 $ 1,410,650
========== ========== =========== ===========
Basic Earnings Per Share $ 0.45 $ 0.45 $ 1.46 $ 1.16
Diluted Earnings Per Share $ 0.45 $ 0.45 $ 1.45 $ 1.15
See notes to condensed consolidated financial statements.
4
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statement of Stockholders' Equity
Nine-months ended September 30, 2003
Additional
Common Paid-in Rabbi Treasury
Stock Capital Trusts Stock
------------------------------------------------------
Balances, December 31, 2002 $1,589,303 $8,768,874 ($500,446) ($2,561,998)
Net income
Other comprehensive income, net of tax
Unrealized gain on securities
Comprehensive income
Cash dividends declared ($.50 per share)
-----------------------------------------------------
September 30, 2003 (unaudited) $1,589,303 $8,768,874 ($500,446) ($2,561,998)
=====================================================
Accumulated
Compre- Other Total
hensive Retained Comprehensive Stockholders'
Income Earnings Income Equity
------------------------------------------------------------
Balances, December 31, 2002 $ 14,867,147 $ 1,417,447 $ 23,580,327
Net income $ 1,832,607 1,832,607 1,832,607
Other comprehensive income, net of tax
Unrealized gain on securities (747,433) (747,433) (747,433)
-----------
Comprehensive income $ 1,085,174
===========
Cash dividends declared ($.50 per share) (649,801) (649,801)
---------------------------------------------
September 30, 2003 (unaudited) $ 16,049,953 $ 670,014 $ 24,015,700
=============================================
See notes to condensed consolidated financial statements.
5
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine-months Ended
September 30,
2003 2002
Operating Activities
Net cash provided by operating activities $ 1,228,096 $ 2,812,333
------------ ------------
Investing Activities
Purchases of securities available for sale (16,764,230) (30,618,120)
Development costs of assets held for sale -- (32,321)
Proceeds from maturities of securities available for sale 30,946,623 19,670,515
Proceeds from sales of securities available for sale 4,955,255 5,745
Net change in loans (21,149,503) (23,438,460)
Proceeds from sales of assets held for sale 107,657 1,544,870
Proceeds from life insurance -- (2,654,256)
Purchases of premises and equipment (688,619) (232,849)
------------ ------------
Net cash used by investing activities (2,592,817) (35,754,876)
------------ ------------
Financing Activities
Net change in
Non interest-bearing, interest-bearing and
savings deposits 4,262,607 8,345,171
Certificates of deposit (1,647,787) 2,556,578
Short term borrowings (1,375,000) 1,525,000
Proceeds of long term debt 2,825,000 12,500,000
Repayment of long term debt (1,018,278) (63,015)
Cash dividends (649,801) (532,583)
Proceeds from exercise of options on common stock -- 24,655
Purchase of treasury stock -- (77,731)
------------ ------------
Net cash provided by financing activities 2,396,741 24,278,075
------------ ------------
Net Change in Cash and Cash Equivalents 1,032,020 (8,664,468)
Cash and Cash Equivalents, Beginning of Period 4,967,188 13,594,073
------------ ------------
Cash and Cash Equivalents, End of Period $ 5,999,208 $ 4,929,605
============ ============
Additional Cash Flows Information
Interest paid $ 4,141,581 $ 2,827,488
Income tax paid 967,512 292,282
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 September 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 nine-months ended September 30, 2003 and 2002:
(Dollars in thousands)
2003 2002
---- ----
Balance January 1 $ 1,192 $ 780
Charge offs (12) (79)
Recoveries -- 47
Provision for loan losses 315 351
------- -------
Balance September 30 $ 1,495 $ 1,099
======= =======
Information on impaired loans is summarized below
At September 30 2003 2002
---- ----
Impaired loans with an allowance $ 304 $ 1,154
Allowance for impaired loans (included in the Company's
allowance for loan losses) $ 30 $ 298
7
Three-months ended September 30 2003 2002
---- ----
Average balance of impaired loans $870 $1,138
Interest income recognized on impaired loans $ 9 $ 0
Cash-basis interest received $ 0 $ 0
3. Earnings per Share
Earnings per share (EPS) were computed as follows:
Three Months Ended September 30, 2003
---------------------------------------------
Weighted- Per Share
Income Average Shares Amount
---------------------------------------------
Net income $ 565,306
---------
Basic earnings per share
Income available to common
stockholders $ 565,306 1,261,690 $ 0.45
=========
Effect of dilutive securities
Stock options -- 5,575
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $ 565,306 1,267,265 $ 0.45
========= ========= =========
Three Months Ended September 30, 2003
---------------------------------------------
Weighted- Per Share
Income Average Shares Amount
---------------------------------------------
Net income $ 563,755 1,246,604
Basic earnings per share
Income available to common
stockholders $ 563,755 $ 0.45
=========
Effect of dilutive securities
Stock options -- 3,141
--------- ---------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $ 563,755 1,249,745 $ 0.45
========= ========= =========
4. Stock Options
At September 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 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
8
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 September 30, 2002
consolidated statement have been made to conform to the September 30, 2003
presentation.
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
The Corporation's assets increased by 1.26% to $256.7 million at September 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.
9
Investment securities, available for sale, decreased $20.5 million to $49.9
million at September 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 $21.5 million to $187.8 million at September 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
Banks conversion to a commercial bank, Management has focused on originating
commercial real estate loans.
At September 30, 2003, the allowance for loan losses was $1.5 million or .79% of
loans receivable compared to $1.2 million or .71% of loans receivable at
December 31, 2002.
Total deposits increased by $2.6 million to $201.9 million at September 30, 2003
from $199.3 million at December 31, 2002. During the nine months ended September
30, 2003, certificates of deposit decreased $1.6 million and NOW accounts and
savings deposits increased $4.2 million.
Long-term borrowings increased by $1.8 million to $28.1 million at September 30,
2003 from $26.3 million at September 30, 2002. Most of this increase originated
from 10 year advances which were used to fund the purchase of municipal
securities with an average maturity of 15 years.
At September 30, 2003, the Bank met all regulatory requirements. Tier I capital
to averaged assets was 8.8%. Tier I capital to risk-weighted assets was 14.0%
and total capital to risk-weighted assets was 14.9% at September 30, 2003
compared to 8.4%, 14.5% and 15.3%, respectively, at December 31, 2002.
Results of Operations for the Three-months Ended September 30, 2003 and 2002
Net income increased by $2,000 to $565,000 for the three-month period ended
September 30, 2003 from $563,000 for the three-month period ended September 30,
2002. The primary reasons for the increase were a $35,000 increase in net
interest income, a $24,000 decrease in the provision for loan losses, a $70,000
increase in other income and a $39,000 decrease in income tax expense offset by
a $166,000 increase in other expense.
Interest income decreased by $334,000 for the three-month period ended September
30, 2003 as compared to the three-month period ended September 30, 2002,
primarily a result of lower yields on earning assets during the three months
ended September 30, 2003.
Interest on loans increased by $80,000 to $3.152 million for the three-month
period ended September 30, 2003 as compared to $3.072 million for the
three-month period ended September 30, 2002. This increase is mainly
attributable to a higher average balance of loans during the three months ended
September 30, 2003 even though the weighted-average yield was lower than that of
the quarter ended September 30, 2002.
Interest on investment securities, other dividend income and interest on
deposits with financial institutions decreased by $414,000 to $611,000 for the
three-month period ended September 30, 2003 from $1.025 million for the
three-month period ended September 30, 2002. This decrease is primarily the
result of a lower average balance of investments during the three months ended
September 30, 2003. The weighted average yield on investments during the same
period was also lower than that of the three months ended September 30, 2002.
Interest expense on deposits decreased by $454,000 to $1.055 million for the
three-month period ended September 30, 2003 from $1.509 million for the
three-month period ended September 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 $86,000 to
$338,000 for the three-month period ended September 30, 2003 from $252,000 for
the three-month period ended September 30, 2002, primarily due to a higher level
of long-term debt outstanding during the three months ended September 30, 2003.
10
The provision for loan losses decreased by $24,000 for the three-month period
ended September 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 September 30, 2003 was 0.79%.
Non-interest income increased by $70,000 to $345,000 for the three-month period
ended September 30, 2003 as compared to $275,000 for the same period in 2002.
The decrease was largely attributable to an increase of $60,000 in service
charges on deposits, an increase of $12,000 in other income offset by a $2,000
decrease in other customer fees.
Non-interest expense increased by $166,000 to $1.829 million for the three-month
period ended September 30, 2003 as compared to $1.663 million for the same
period in 2002.
Compensation and benefits increased by $71,000 to $953,000 for the three-month
period ended September 30, 2003 as compared to $882,000 for the three-months
ended September 30, 2002 primarily as the result of annual increases in
salaries, wages and commissions and a $18,000 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 September 30, 2003, the Bank had 74 full time equivalent employees
compared to 63 at September 30, 2002.
Occupancy expense increased by $10,000 to $95,000 for the three-month period
ended September 30, 2003 as compared to $85,000 for the three-months ended
September 30, 2002 primarily as the result increased expenses for repairs and
maintenance and rent for the new Jacksboro branch office.
Equipment expense increased by $20,000 to $131,000 for the three-month period
ended September 30, 2003 as compared to $111,000 for the three-months ended
September 30, 2002 primarily due to increases in depreciation for new data
processing equipment recently acquired.
Data processing expenses increased by $21,000 to $81,000 for the three-month
period ended September 30, 2003 as compared to $60,000 for the three-months
ended September 30, 2002 as the result of the addition of a new branch office
and other specialized programming requests.
Legal and professional fees increased by $80,000 to $182,000 for the three-month
period ended September 30, 2003 from $102,000 for the three-month period ended
September 30, 2002 primarily due to an increase of $40,000 in legal expenses, an
increase of $6,000 in accounting fees, an increase of $9,000 in fees for
software support and an increase of $12,000 in other consulting fees.
State deposit and franchise taxes increased by $44,000 to $52,000 for the
quarter ended September 30, 2003 compared to $8,000 for the quarter ended
September 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 September 30, 2002.
Other expenses decreased by $80,000 to $259,000 for the three-month period ended
September 30, 2003 from $339,000 for the three-month period ended September 30,
2002, primarily due to a $93,000 decrease in expenses associated with the
acquisition and sale of other real estate owned.
Income tax expense decreased by $39,000 to $215,000 for the three-month period
ended September 30, 2003 compared to $254,000 for the three-months ended
September 30, 2002 due a lower level of taxable income.
Results of Operations for the Nine-months Ended September 30, 2003 and 2002
Net income increased by $422,000 to $1.833 million for the nine-month period
ended September 30, 2003 from $1.411 million for the nine-month period ended
September 30, 2002. The primary reasons for the increase were a $823,000
increase in net interest income, a $37,000 decrease in the provision for loan
losses and a $92,000 increase in other income offset by a $387,000 increase in
other expense and a $143,000 increase in income tax expense.
11
Interest income decreased by $399,000 for the nine-month period ended September
30, 2003 as compared to the nine-month period ended September 30, 2002,
primarily a result of lower yields on earning assets during the nine months
ended September 30, 2003.
Interest on loans increased by $556,000 to $9.544 million for the nine-month
period ended September 30, 2003 as compared to $8.988 million for the nine-month
period ended September 30, 2002. This increase is mainly attributable to a
higher average balance of loans during the nine months ended September 30, 2003
even though the weighted-average yield was lower than that of the quarter ended
September 30, 2002.
Interest on investment securities, other dividend income and interest on
deposits with financial institutions decreased by $955,000 to $2.081 million for
the nine-month period ended September 30, 2003 from $3.036 million for the
nine-month period ended September 30, 2002. This decrease is primarily the
result of a lower average balance of investments during the nine months ended
September 30, 2003. The weighted average yield on investments during the same
period was also lower than that of the nine months ended September 30, 2002.
Interest expense on deposits decreased by $1.453 million to $3.396 million for
the nine-month period ended September 30, 2003 from $4.849 million for the
nine-month period ended September 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 $232,000 to
$959,000 for the nine-month period ended September 30, 2003 from $727,000 for
the nine-month period ended September 30, 2002, primarily due to a higher level
of long-term debt outstanding during the nine months ended September 30, 2003.
The provision for loan losses decreased by $37,000 for the nine-month period
ended September 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 September 30, 2003 was 0.79%.
Non-interest income increased by $92,000 to $984,000 for the nine-month period
ended September 30, 2003 as compared to $892,000 for the same period in 2002.
The increase was mainly attributable to an increase of $186,000 in service
charges on deposits, an increase of $22,000 in other customer fees offset by a
$118,000 decrease in other income. The decrease in other income was primarily
due to a $84,000 decrease in gain on the sale of real estate and equipment.
Non-interest expense increased by $387,000 to $5.320 million for the nine-month
period ended September 30, 2003 as compared to $4.933 million for the same
period in 2002.
Compensation and benefits increased by $453,000 to $2.762 million for the
nine-month period ended September 30, 2003 as compared to $2.309 million for the
nine-months ended September 30, 2002 primarily as the result of annual increases
in salaries, wages and commissions and a $48,000 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 September 30, 2003, the Bank had 74 full time equivalent employees
compared to 63 at September 30, 2002.
Data processing expenses increased by $44,000 to $225,000 for the nine-month
period ended September 30, 2003 as compared to $181,000 for the nine-months
ended September 30, 2002 as the result of the addition of a new branch office
and other specialized programming requests.
Legal and professional fees increased by $37,000 to $446,000 for the nine-month
period ended September 30, 2003 from $409,000 for the nine-month period ended
September 30, 2002 primarily due to an increase in legal expenses for the
nine-months ended September 30, 2003.
12
State deposit and franchise taxes increased by $80,000 to $155,000 for the
quarter ended September 30, 2003 compared to $75,000 for the quarter ended
September 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 September 30, 2002.
Other expenses decreased by $264,000 to $823,000 for the nine-month period ended
September 30, 2003 from $1.087 million for the nine-month period ended September
30, 2002, primarily due to a $381,000 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 $54,000 increase in other
services and fees and a $20,000 increase in telephone expense due to duplicate
service used during the conversion to a new system.
Income tax expense increased by $143,000 to $787,000 for the nine-month period
ended September 30, 2003 compared to $644,000 for the nine-months ended
September 30, 2002 due a higher level of taxable income.
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.
13
HFB FINANCIAL CORPORATION
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
No matters were submitted to a vote of Security Holders during the quarter
ended September 30, 2003.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 CEO Certification under Section 906 of the Sarbanes-Oxley Act
99.2 CFO Certification under Section 906 of the Sarbanes-Oxley Act
b. Reports on Form 8-K
On October 29, 2003, the Company filed a form 8-K announcing that
earnings for the quarter ended September 30, 2003 were released on
October 28, 2003.
On October 29, 2003, the Company filed a form 8-K announcing its
proposed plan to terminate registration of its common stock with the
Securities and Exchange Commission, which was released on October
28, 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
14
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
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 November 7, 2003
15