UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File 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 September 30, 1996 was 625,836.
There are a total of 16 pages filed in this document.
1
HFB FINANCIAL CORPORATION
I N D E X
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PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PART II - OTHER INFORMATION 15
SIGNATURES 16
2
HFB FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)
September 30, June 30,
Assets 1996 1996
--------------- ---------------
Cash and equivalents $2,426,052 $4,744,672
Trading securities, at fair value 453,380 246,500
Investment securities, available for sale, at market value
(amortized cost of $13,549,622 and $13,245,033 at Sept. 30, 1996
and June 30, 1996, respectively) 13,477,748 13,160,481
Investment securities, held to maturity, at amortized cost
(including unrealized gain of $29,803 at Sept. 30, 1996, market value of
$9,446,414 and $9,405,221 at Sept. 30, 1996 and June 30, 1996, respectively) 9,629,350 9,611,689
Loans receivable, net 97,759,723 95,973,650
Mortgage-backed securities, available for sale, at market value
(amortized cost of $7,538,676 and $7,857,319 at Sept. 30, 1996
and June 30, 1996, respectively) 7,394,761 7,677,022
Mortgage-backed securities, held to maturity, at amortized cost
(market value of $11,832,832 and $10,979,790 at Sept. 30, 1996
and June 30, 1996, respectively) 11,986,394 11,312,956
Accrued interest receivable 1,130,391 954,626
Real estate owned - -
Premises and equipment, net 2,324,007 2,370,438
Other assets (including prepaid income taxes of $130,387 and $13,893
at Sept. 30, 1996 and June 30, 1996, respectively) 316,552 195,763
--------------- ---------------
Total assets $146,898,358 $146,247,797
=============== ===============
Liabilities and Stockholders' Equity
Deposits $126,570,031 $126,742,237
Accrued interest on deposits 1,064,671 534,298
Advances from Federal Home Loan Bank 2,637,107 2,650,348
Advances from borrowers for taxes and insurance 151,748 137,152
Accrued expenses and other liabilities 1,386,329 570,077
Income taxes payable 57,594 41,418
--------------- ---------------
Total liabilities 131,867,480 130,675,530
=============== ===============
Commitments and contingencies - -
Stockholders' Equity
Preferred stock, $1 par value, authorized: 1,000,000 shares; none issued - -
Common stock, $1 par value; authorized: 5,000,000 shares: issued
and outstanding: 747,064 and 746,064 shares at Sept. 30, 1996 and
June 30, 1996, respectively 747,064 746,064
Additional paid-in capital 6,313,466 6,297,130
Less: Common stock acquired by ESOP with borrowed funds (180,391) (209,428)
Common stock acquired by Management Recognition Plan and
Supplemental Executive Retirement Plan (121,250) (121,250)
Common stock acquired by Rabbi trusts for deferred compensation plans (258,290) (258,290)
Treasury stock, at cost, 121,228 and 112,378 shares at Sept. 30, 1996 and
June 30, 1996, respectively (2,030,955) (1,826,405)
Net unrealized gain (loss) on securities available for sale (119,179) (149,320)
Retained earnings - substantially restricted 10,680,413 11,093,766
--------------- ---------------
Total stockholders' equity 15,030,878 15,572,267
--------------- ---------------
Total liabilities and stockholders' equity $146,898,358 $146,247,797
=============== ===============
See accompanying notes to consolidated financial statements.
3
HFB FINANCIAL CORPORATION
Consolidated Statements of Earnings
(Unaudited)
Three months ended
September 30,
1996 1995
------------------------
Interest income:
Loans receivable $2,035,053 $1,841,885
Mortgage-backed securities 294,072 309,242
Trading account securities 1,460 -
Investment securities 380,880 264,557
Other interest-earning assets 43,348 48,570
------------ ----------
Total interest income 2,754,813 2,464,254
------------ ----------
Interest expense:
Deposits 1,575,692 1,371,173
Borrowed funds 36,424 57,098
------------ ----------
Total interest expense 1,612,116 1,428,271
------------ ----------
Net interest income 1,142,697 1,035,983
Provision for loan losses 77,747 1,950
------------ ----------
Net interest income after provision for
loan losses 1,064,950 1,034,033
------------ ----------
Noninterest income:
Loan service charges 8,633 8,918
Service charges on NOW accounts 72,229 65,268
Gain (loss) on trading account securities 53,170 -
Gain (loss) on sale of investment securities
available for sale - (625)
Gain (loss) on sale of premises and equipment - (2,590)
Other 16,279 12,929
------------ ----------
Total noninterest income 150,311 83,900
------------ ----------
Noninterest expense:
Compensation and benefits 389,410 386,965
Occupancy expense 48,882 36,289
Equipment and data processing expense 111,850 77,496
SAIF deposit insurance premium 70,669 61,666
SAIF special assessment 705,859 -
Professional services 50,707 34,107
Kentucky savings and loan tax 32,500 26,250
Other 125,384 117,375
------------ ----------
Total noninterest expense 1,535,261 740,148
------------ ----------
Earnings (loss) before income taxes (320,000) 377,785
------------ ----------
Income taxes (benefit):
Current (108,425) 124,600
Deferred 550 (400)
------------ ----------
Total income taxes (107,875) 124,200
------------ ----------
Net earnings (loss) ($212,125) $253,585
============ ==========
Earnings (loss) per share ($0.32) $0.38
============ ==========
Dividends per share $0.32 $0.32
============ ==========
See accompanying notes to consolidated financial statements.
4
HFB FINANCIAL CORPORATION
Consolidated Statement of Stockholders' Equity
Three months ended September 30, 1996
(Unaudited)
Additional MRP
Common Paid-in ESOP* and Rabbi
Stock Capital Debt SERP** Trusts
------------------------------------------------------
Balance at June 30, 1996 $746,064 $6,297,130 ($209,428) ($121,250) ($258,290)
Net earnings - - - - -
Stock issued upon exercise
of stock options 1,000 13,131 - - -
Dividends declared - - - - -
Treasury stock-
8,850 shares purchased - - - - -
Reduction of ESOP debt - 3,205 29,037 - -
Net change in unrealized gain (loss)
on securities available for sale - - - - -
------------------------------------------------------
Balance at September 30, 1996 $747,064 $6,313,466 ($180,391) ($121,250) ($258,290)
======================================================
Net Unrealized
Gain (Loss) on
Securities Total
Treasury Retained Available Stockholders'
Stock Earnings for Sale Equity
----------------------------------------------------------
Balance at June 30, 1996 ($1,826,405) $11,093,766 ($149,320) $15,572,267
Net earnings - (212,125) - (212,125)
Stock issued upon exercise
of stock options - - - 14,131
Dividends declared - (201,228) - (201,228)
Treasury stock-
8,850 shares purchased (204,550) - - (204,550)
Reduction of ESOP debt - - - 32,242
Net change in unrealized gain (loss)
on securities available for sale - - 30,141 30,141
----------------------------------------------------------
Balance at September 30, 1996 ($2,030,955) $10,680,413 ($119,179) $15,030,878
==========================================================
* Employees Stock Ownership Plan (ESOP)
** Management Recognition Plan (MRP) and Supplemental Executive Retirement Plan
(SERP)
See accompanying notes to consolidated financial statements.
5
HFB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
September 30,
1996 1995
--------------- ---------------
Cash flows from operating activities:
Net earnings (loss) ($212,125) $253,585
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment 57,210 28,145
Amortization of cost of ESOP 29,037 29,038
Amortization of cost of Management Recognition Plan - 18,300
Amortization of premiums and discounts on investment
securities and mortgage-backed securities 8,348 12,616
FHLB stock dividend (19,100) (17,900)
Deferred income taxes 550 (400)
Provision for loan losses 77,747 1,950
Loss (gain) on trading account securities (53,170) -
Sales of trading account securities 527,345 -
Purchases of trading account securities (681,055) -
Loss (gain) on sale of premises and equipment - 2,590
Loss (gain) on sale of investment securities
available for sale - 625
Decrease (increase) in accrued interest receivable (175,765) (110,083)
Decrease (increase) in other assets (4,295) (48,320)
Increase (decrease) in accrued interest on deposits 530,373 543,602
Increase (decrease) in accrued expenses and other liabilities 816,252 89,380
Increase (decrease) in income taxes payable (110,427) 115,450
--------------- ---------------
Net cash provided by (used in) operating 790,925 918,578
--------------- ---------------
Cash flows from investing activities:
Principal collected on investment securities
available for sale 196,834 87,579
Proceeds from sales of investment securities
available for sale - 499,375
Purchases of investment securities
available for sale (500,000) (2,475,156)
Proceeds from investment securities matured - 2,092,409
Principal collected on mortgage-backed securities
available for sale 311,053 11,418
Purchases of mortgage-backed securities - (1,010,191)
available for sale
Principal collected on mortgage-backed securities 319,351 691,576
Purchases of mortgage-backed securities (996,012) -
Mortgage loans originated, net of principal collected (2,020,761) (1,706,336)
Purchases of, net of principal collected, mortgage loans
serviced by other institutions 135,652 447,796
(Increase) decrease in consumer loans 21,746 (70,923)
Proceeds from sales of real estate owned - 93,307
Proceeds from sales of premises and equipment - 4,200
Acquisition of premises and equipment used in
Bank's business (10,779) (284,635)
--------------- ---------------
Net cash provided by (used in) investing activities ($2,542,916) ($1,619,581)
--------------- ---------------
(continued)
6
HFB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows - Continued
(Unaudited)
Three months ended
September 30,
1996 1995
--------------- ---------------
Cash flows from financing activities:
Proceeds from sale of common stock $10,000 $40,000
Purchase of treasury stock (204,550) -
Dividends paid to stockholders (201,228) (208,175)
Repayment of advances from Federal
Home Loan Bank (13,241) (12,220)
Net increase (decrease) in deposits (172,206) 1,441,510
Net increase (decrease) in advances from borrowers
for taxes and insurance 14,596 4,256
--------------- ---------------
Net cash provided by (used in) financing
activities (566,629) 1,265,371
--------------- ---------------
Net increase (decrease) in cash and cash
equivalents (2,318,620) 564,368
Cash and cash equivalents at beginning of
the period 4,744,672 4,010,205
--------------- ---------------
Cash and cash equivalents at end of
the period $2,426,052 $4,574,573
=============== ===============
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $1,081,831 $884,750
=============== ===============
Income taxes $2,002 $9,150
=============== ===============
Noncash activity:
Acquisition of real estate in settlement of
loans - -
=============== ===============
See accompanying notes to consolidated financial statements.
7
HFB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation:
The unaudited consolidated financial information for the three month
periods ended September 30, 1996 and 1995 includes the results of
operations of HFB Financial Corporation (the "Corporation") and its wholly
owned subsidiary Home Federal Bank, Federal Savings Bank ("Home Federal" or
the "Bank"). HFB Financial Corporation acquired 100 percent of the Bank's
stock during the completion of the Bank's conversion from mutual to stock
form on December 28, 1992. The accompanying unaudited financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to
Form 10-Q. It is suggested that these statements and notes be read in
conjunction with the financial statements and notes thereto included in the
Bank's annual report for the year ended June 30, 1996 on Form 10-K 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 results of operations for such
periods but should not be considered as indicative of results for a full
year.
2. Nonperforming Loans and Problem Assets
Management reviews the Bank's loans on a regular basis. After residential
mortgage loans become past due more that 90 days, the Bank generally
establishes an allowance for uncollectible interest for the amount by which
the principal balance and uncollected interest exceeds 90% of the appraised
value of the property. Commercial and multi-family real estate loans
generally are placed on non-accrual status if the borrower is placed in
bankruptcy proceedings, or management concludes that payment in full is not
likely. Consumer and commercial loans generally are charged off, or an
allowance is established for any expected loss after they become more than
90 days past due. The Bank accrues interest on delinquent loans past due
more than 90 days without establishing a reserve when management concludes
such action is warranted, such as in the event the loan is exceptionally
well collateralized or the borrower establishes the temporary nature of the
delinquency. Loans are charged off when management concludes that they are
uncollectible.
The Bank's collection procedures provide that when a loan becomes past due
30 days, the borrower is contacted in person or by telephone or mail, and
payment is requested. If payment is not promptly received, the borrower is
contacted again, and efforts are made to formulate an affirmative plan to
cure the delinquency. After a loan becomes past due 90 days the Bank
generally initiates legal proceedings. Loans delinquent 90 days or greater
and still accruing are managed based on a work out plan developed by the
Bank. Interest accrues based on the work out plan and the value of the
collateral when collateral value is more than sufficient to fully cover the
loan balance. Interest is not accrued on loans in the process of
foreclosure.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance or
its fair market value. Any required write-down of the loan to its fair
market value upon foreclosure is charged against the allowance for loan
losses.
8
The following sets forth information with respect to the Bank's non-performing
assets at September 30, 1996 and June 30, 1996:
(Dollars in thousands)
September 30, June 30,
1996 1996
-------------- ---------
Loans accounted for on a nonaccrual basis (1) $ 221 $--
----- -----
Accruing loans which are contractually past due
90 days or more: (1)
Real estate $ 309 $ 657
Consumer 4 3
Commercial -- --
----- -----
$313 $ 660
----- -----
Total of nonaccrual and 90 days or more
past due loans $ 534 $ 660
Real estate owned -- --
----- -----
Total non-performing assets $ 534 $ 660
===== =====
Nonaccrual and 90 days or more past due loans
as a percentage of total loans, net .54% .69%
===== =====
Nonaccrual and 90 days or more past due loans
as a percentage of total assets .36% .45%
===== =====
Non-performing assets as a percentage of total assets .36% .45%
===== =====
(1) Interest on delinquent loans is accrued to income to the extent
considered collectible. Nonaccrual loans did not have a material effect on
the Bank's interest income for the periods ended September 30, 1996 and
June 30, 1996.
9
The following sets forth the activity in the Bank's allowance for loan losses
for the three months ended September 30, 1996:
(Dollars in thousands)
Balance at June 30, 1996 $671
Charge offs:
Domestic:
Commercial, financial and agricultural 68
Real estate-construction -
Real estate-mortgage -
Installment loans to individuals 2
----
70
----
Recoveries:
Domestic:
Commercial, financial and agricultural -
Real estate-construction -
Real estate-mortgage -
Installment loans to individuals -
----
-
----
Net charge offs: -
----
Additions charged to operations 78
----
Balance September 30, 1996 $679
====
Ratio of net charge offs during the
period to average loans outstanding
during the period .07%
====
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 "Conversion"). Prior to the Conversion, the
Corporation did not engage in any material operations and at September 30, 1996,
its primary operation was 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.
The operations of Home Federal, and savings institutions generally, 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. Just as the Bank's
operations are influenced by regulatory authorities, so are its liquidity levels
and capital resources. As of September 30, 1996, management is not aware of any
current recommendations by the regulatory authorities, which if implemented,
would have a material effect on the Bank's operations, liquidity or resources.
Asset/Liability Management
Key components of a successful asset/liability strategy are the monitoring
and managing of interest rate sensitivity of both the interest-earning asset and
interest-bearing liability portfolios. Home Federal has employed various
strategies intended to minimize the adverse affect of interest rate risk on
future operations by providing a better match between the interest rate
sensitivity of its assets and liabilities. In particular, the Bank's strategies
are intended to stabilize net interest income for the long-term by protecting
its interest rate spread against increases in interest rates. Such strategies
include the origination of adjustable-rate mortgage loans secured by one-to-four
family residential real estate and the origination of consumer and other loans
with greater interest rate sensitivities than long-term, fixed-rate residential
mortgage loans. Although customers typically prefer fixed-rate mortgage loans
in a low interest rate environment, Home Federal has been successful in
originating adjustable-rate loans in recent years. In addition, the Bank has
used excess funds to invest in various short-term investments including
mortgage-backed securities with terms of seven years or less, U.S. Government
Treasury and Agency securities with terms of ten years or less and other short-
term investments.
Asset/liability management in the form of structuring cash instruments
provides greater flexibility to adjust exposure to interest rates. During
periods of high interest rates, management believes it is prudent to offer
competitive rates on short-term deposits and less competitive rates for long-
term liabilities. This posture allows the Bank to benefit quickly from declines
in interest rates. Likewise, offering more competitive rates on long-term
deposits during the low interest rate periods allows the Bank to extend the
repricing and/or maturity of its liabilities thus reducing its exposure to
rising interest rates.
Financial Condition
The Corporation's assets increased by .48% to $146.9 million at September 30,
1996 compared to $146.2 million at June 30, 1996. This small increase was
primarily due to a reduction in the Bank's deposits from the period
11
ended June 30, 1996.
The Bank's asset composition has changed due to volatility in interest rates,
aggressive competition and a strong loan demand. The largest changes in the
asset mix reflected a decrease of $2.3 million in cash and cash equivalents
which was primarily used to fund increases in loans and mortgage-backed
securities "MBS's", held to maturity "HTM". During the three months ended
September 30, 1996, the Bank originated $7.5 million in mortgages. Total loans
receivable, net increased 1.9% to $97.8 million at September 30, 1996 compared
to $96.0 million at June 30, 1996. Most of this increase consisted of 1-4
family residential adjustable-rate mortgages.
The Bank augments its lending activities and increases its asset yields by
investing in MBSs and U.S. Government securities. During the three months ended
September 30, 1996, management purchased $1.5 million in investment securities,
available for sale, "AFS" and MBSs HTM. These purchases were funded primarily
by cash and cash equivalents. The net unrealized loss on securities AFS and
MBSs AFS was $119,000 at September 30, 1996.
Accrued interest receivable increased by $175,000 from $955,000 at June 30,
1996 to $1.13 million at September 30, 1996 due to a higher volume of interest-
earning assets and the timing of interest payments.
Total deposits decreased by $200,000 to $126.5 million at September 30, 1996
from $126.7 million at June 30, 1996. The deposit mix continues to change with
low cost savings, money market deposit and NOW accounts shifting into higher
rate certificates of deposit ("CDs"). During the three months ended September
30, 1996, CDs increased $300,000, while passbook savings accounts decreased by
$600,000. NOW accounts and money market deposit accounts increased by $100,000.
In addition, CD growth was reduced substantially in the quarter ended September
30, 1996 due to a $2.0 million decline in jumbo CDs. This was the result of
aggressive competition in the local market.
Accrued interest on deposits increased by $600,000 to $1.1 million for the
three months ended September 30, 1996 from $500,000 at June 30, 1996. The
increase was primarily due to the timing of interest payments.
Accrued expenses and other liabilities increased by $800,000 during the three
months ended September 30, 1996 primarily as the result of an industry wide
special assessment to capitalize the Savings Association Insurance Fund "SAIF"
in the amount of $706,000 and the timing of payments of Kentucky saving and loan
taxes and other expenses.
Total stockholders' equity decreased $541,000 during the three months ended
September 30, 1996 primarily as the result of a declared dividend of $201,000, a
net operating loss of $212,000 and treasury stock purchased at a cost of
$204,000 offset by other increases of $76,000.
The Bank's regulatory liquidity ratio was 19.76% at September 30, 1996 as
compared to 21.29% at June 30, 1996. At September 30, 1996 the Bank met all the
fully phased-in regulatory capital requirements under FIRREA. Tangible, core
and risk-based capital ratios were 9.9%, 9.9% and 20.8% respectively at
September 30, 1996 as compared to 10.2%, 10.2% and 23.3% at June 30, 1996.
Results of Operations for the Three Months Ended September 30, 1996 and 1995
Net earnings decreased by $466,000 to ($212,000) for the three months ended
September 30, 1996 from $254,000 for the three months ended September 30, 1995.
The primary reasons for the decrease were a $107,000 increase in net interest
income, a $66,000 increase in non-interest income and a $232,000 decrease in
income tax expense offset by a $76,000 increase in provision for loan losses, a
$706,000 SAIF special assessment and an $89,000 increase in other noninterest
expenses.
12
Net interest income increased by $107,000 for the three month period ended
September 30, 1996 as compared to the three month period ended September 30,
1995. As interest rates rose, the Bank's net interest margin declined due to
it's negative gap position, but much of the effect was mitigated as a result of
higher loan volume.
Interest on loans increased by $193,000 to $2.035 million for the three month
period ended September 30, 1996 as compared to $1.842 million for the three
month period ended September 30, 1995. This increase is mainly attributable to
adjustable-rate loans repricing at higher rates and a higher volume of
originations.
Interest on MBSs decreased by $15,000 to $294,000 during the three month
period ended September 30, 1996 from $309,000 for the three month period ended
September 30, 1995 due to a lower weighted average balance.
Interest on investment securities increased by $116,000 to $381,000 for the
three month period ended September 30, 1996 from $265,000 for the three month
period ended September 30, 1995. This increase was primarily the result of
matured securities being replaced with higher yielding instruments.
Interest on other interest-bearing assets decreased by $6,000 to $43,000 for
the three month period ended September 30, 1996 from $49,000 for the three month
period ended September 30, 1995 due to a lower volume of cash and cash
equivalents.
Interest on deposits increased by $205,000 to $1.576 million for the three
month period ended September 30, 1996 from $1.371 million for the three month
period ended September 30, 1995 as a result of higher volume and a change in the
overall deposit mix. Lower rate savings accounts declined, while CDs increased.
Interest on borrowed funds decreased by $21,000 to $36,000 for the three
month period ended September 30, 1996 from $57,000 for the three month period
ended September 30, 1995 due to lower levels of borrowing.
Provision for loan losses was $78,000 for the three month period ended
September 30, 1996 as compared to $2,000 for the three month period ended
September 30, 1995. The increase in the provision was a 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. During the three month period ended September 30,
1996, a provision of $68,000 was made to cover possible losses on a
participation loan secured by commercial real estate. Subsequent to the quarter
ended September 30, 1996, the property collateralizing the loan was sold at
auction to the loan participants. The remaining balance of this loan is $221,000
and management feels that the provision made is adequate to cover any losses.
The Bank's allowance for loan losses as a percent of total loans at September
30, 1996 was .69%.
The Banks non-interest income increased by $66,000 to $150,000 for the three
month period ended September 30, 1996 as compared to $84,000 for the same period
in 1995. Service charges on deposit accounts increased by $7,000, the net loss
on the sale of investments and equipment decreased by $3,000 and gains on
trading account securities were $53,000 for the quarter ended September 30,
1996. There were no significant changes in any other single category of non-
interest income.
Non-interest expense increased by $795,000 to $1.535 million for the three
month period ended September 30, 1996 as compared to $740,000 for the same
period in 1995. The special SAIF assessment to rebuild the SAIF fund was signed
into law on September 30, 1996. The Bank's assessment was $706,000 and was
expensed in its entirety during the quarter ended September 30, 1996.
Occupancy expense increased by $13,000 to $49,000 compared to $36,000 for the
same period in 1995. This increase was mainly the result of expenses associated
with the Bank's new branch office in New Tazewell, Tennessee.
Equipment and data processing expense increased by $35,000 to $112,000 for
the three month period ended
13
September 30, 1996 from $77,000 for the three month period ended September 30,
1995 primarily due to $10,000 in processing fees attributable to three ATMs the
Bank placed into service during the quarter ended December 31, 1995 and a
$25,000 increase in depreciation and maintenance expense associated with the New
Tazewell branch and renovations to the Bank's main office during the past year.
The Bank's Federal deposit insurance premium increased by $9,000 to $70,000
for the period ended September 30, 1996 compared to $61,000 for the same period
in 1995 due to a higher level of deposits. As a result of the legislation
enacted to recapitalize the SAIF, the Bank's federal deposit insurance premium
will be effectively reduced by approximately $18,000 per month beginning January
1, 1997.
Professional services increased by $17,000 to $51,000 for the three month
period ended September 30, 1996 as compared to $34,000 for the same period in
1995 due to an increase of $3,000 in legal expenses and an increase in
consulting fees of $14,000. The Bank employed consultants to improve its
operations during the quarter ended September 30, 1996. The project was
completed in November 1996 and the associated expense ended at that point.
Kentucky savings and loan tax increased by $6,000 to $32,000 at September 30,
1996 from $26,000 at September 30, 1995 due to a higher level of deposits.
Other expense increased by $8,000 to $125,000 for three the month period
ended September 30, 1996 from $117,000 for the three month period ended
September 30, 1995. This increase was attributable to small increases affecting
several expense categories.
Income taxes decreased by $232,000 to ($108,000) for the three month period
ended September 30, 1996 compared to $124,000 for the three months ended
September 30, 1995 due to a net loss incurred, which resulted in a tax benefit
for the period.
14
HFB FINANCIAL CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults in 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 on Form 8-K
a. Exhibits
Exhibit 27 Financial Data Schedule
15
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 8, 1996
16