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 March 31, 2000
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 May 12, 2000 was 1,079,557.
There are a total of 15 pages filed in this document.
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 Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Item 3. Quantative/Qualitive Disclosures about Market Risk 13
PART II - OTHER INFORMATION 14
SIGNATURES 15
2
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
(Unaudited)
MARCH 31, JUNE 30,
2000 1999
ASSETS
Cash and cash equivalents $ 4,975,778 $ 3,573,139
Trading securities 784,598 1,014,808
Investment securities
Available for sale 37,128,840 37,298,664
Held to maturity 25,520,977 21,997,870
------------- -------------
Total investment securities 62,649,817 59,296,534
Loans 126,589,145 121,953,392
Allowance for loan losses (625,477) (1,211,594)
------------- -------------
Net loans 125,963,668 120,741,798
Premises and equipment 3,419,801 2,432,475
Real estate owned 188,518 --
Federal Home Loan Bank stock 1,395,500 1,346,800
Interest receivable 1,962,469 1,821,970
Goodwill 396,495 --
Other assets 160,861 188,876
------------- -------------
Total assets $ 201,897,505 $ 190,416,400
============= =============
LIABILITIES
Deposits
Interest bearing $ 167,259,334 $ 152,971,687
Non-interest bearing 1,736,648 1,016,069
------------- -------------
Totals 168,995,982 153,987,756
Short term borrowings -- 6,500,000
Long term debt 12,545,938 10,597,501
Interest payable 1,347,988 733,041
Other liabilities 698,745 847,055
------------- -------------
Total liabilities 183,588,653 172,665,353
------------- -------------
STOCKHOLDERS' EQUITY
Issued and outstanding - 1,312,003 and
1,303,031 shares 1,312,003 1,303,031
Additional paid-in capital 6,348,279 6,303,419
Less: Common stock acquired by Rabbi trusts
for deferred compensation plans (504,737) (639,767)
Treasury stock, at cost, 202,046 shares (2,030,955) (2,030,955)
Retained earnings 14,300,276 13,501,715
Accumulated other comprehensive income (1,116,014) (686,396)
------------- -------------
Total stockholders' equity 18,308,852 17,751,047
------------- -------------
Total liabilities and stockholders' equity $ 201,897,505 $ 190,416,400
============= =============
See notes to consolidated financial statements.
3
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS ENDED NINE-MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
INTEREST INCOME
Loans receivable $2,594,545 $2,418,541 $7,652,846 $7,513,849
Investment securities 1,007,135 825,890 2,942,367 2,326,618
Other dividend income 30,928 29,523 97,913 85,570
Deposits with financial institutions 24,982 80,811 66,478 151,393
--------------- ---------------- --------------- ----------------
Total interest income 3,657,590 3,354,765 10,759,604 10,077,430
--------------- ---------------- --------------- ----------------
INTEREST EXPENSE
Deposits 1,898,386 1,794,189 5,544,290 5,434,428
Short term borrowings 5,462 93,227 110,764 282,947
Long term debt 146,494 126,489 431,071 295,123
--------------- ---------------- --------------- ----------------
Total interest expense 2,050,342 2,013,905 6,086,125 6,012,498
--------------- ---------------- --------------- ----------------
NET INTEREST INCOME 1,607,248 1,340,860 4,673,479 4,064,932
Provision for loan losses 15,000 95,384 (459,488) 229,843
--------------- ---------------- --------------- ----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,592,248 1,245,476 5,132,967 3,835,089
--------------- ---------------- --------------- ----------------
OTHER INCOME
Service charges for deposit accounts 94,773 98,220 286,814 278,061
Other customer fees 21,234 14,860 58,870 57,662
Net loss on trading securities (112,660) (25,554) (186,699) (222,835)
Net realized gain on sales of
available for sale securities -- -- -- 2,827
Other income 1,821 1,952 10,623 5,244
--------------- ---------------- --------------- ----------------
Total other income 5,168 89,478 169,608 120,959
--------------- ---------------- --------------- ----------------
OTHER EXPENSES
Salaries and employee benefits 546,490 460,158 1,568,149 1,295,484
Net occupancy expenses 81,961 46,053 210,475 143,972
Equipment expenses 68,793 57,878 183,568 160,554
Data processing fees 64,803 57,042 206,095 176,271
Deposit insurance expense 8,136 22,238 53,386 64,887
Legal and professional fees 74,158 43,946 178,422 143,604
Advertising 49,951 19,232 173,692 80,565
State franchise and deposit taxes 19,818 37,683 94,108 108,758
Other expenses 213,405 171,747 697,197 511,708
--------------- ---------------- --------------- ----------------
Total other expenses 1,127,515 915,977 3,365,092 2,685,803
--------------- ---------------- --------------- ----------------
INCOME BEFORE INCOME TAX 469,901 418,977 1,937,483 1,270,245
Income tax expense 134,984 171,803 663,419 466,295
--------------- ---------------- --------------- ----------------
=============== ================ =============== ================
NET INCOME $334,917 $247,174 $1,274,064 $803,950
=============== ================ =============== ================
BASIC EARNINGS PER SHARE $0.30 $0.22 $1.15 $0.73
DILUTED EARNINGS PER SHARE 0.30 0.22 1.14 0.72
See notes to consolidated financial statements.
4
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine-months ended March 31, 2000
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RABBI TREASURY COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL TRUSTS STOCK INCOME EARNINGS LOSS EQUITY
-----------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1999 $1,303,031 $6,303,419 $(639,767) $(2,030,955) $13,501,715 $(686,396) $17,751,047
Net income $1,274,064 1,274,064 1,274,064
Other Comprehensive income -
net change in unrealized
loss on securities
available for sale (429,618) (429,618) (429,618)
----------
Comprehensive Income $844,446
==========
Stock issued upon exercise of 8,972 44,860 53,832
stock options
Dividends declared (475,503) (475,503)
Net change in fair value of
rabbi trust shares 135,030 135,030
------------------------------------------------ ---------------------------------------
BALANCES, MARCH 31, 2000 $1,312,003 $6,348,279 $(504,737) $(2,030,955) $14,300,276 $(1,116,014) $18,308,852
================================================ =======================================
5
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
NINE-MONTHS ENDED
MARCH 31,
2000 1999
OPERATING ACTIVITIES
Net cash provided by operating activities $2,188,372 $1,953,354
------------ ------------
INVESTING ACTIVITIES
Purchases of securities available for sale (8,346,396) (14,521,635)
Proceeds from maturities of securities available for sale 7,871,376 7,528,873
Purchases of securities held to maturity (7,874,038) (6,497,692)
Proceeds from sales of securities available for sale -- 520,648
Proceeds from maturities of securities held to maturity 4,370,423 4,956,266
Net change in loans (5,221,870) (5,298,550)
Purchases of premises and equipment (1,160,797) (512,355)
Proceeds from sale of fixed assets -- 13,000
Acquisition of deposits (net of cash acquired) (459,423) --
------------ ------------
Net cash used by investing activities (10,820,725) (13,811,445)
------------ ------------
FINANCING ACTIVITIES
Net change in
Non interest-bearing, interest-bearing
and savings deposits 3,574,604 (227,824)
Certificates of deposit 11,433,622 9,005,739
Short term borrowings (6,500,000) 1,000,000
Proceeds of long-term debt 2,000,000 5,000,000
Repayment of long-term debt (51,563) (47,588)
Cash dividends (475,503) (492,757)
Proceeds from exercise of options on common stock 53,832 63,018
Common stock acquired by Rabbi trusts -- (31,278)
------------ ------------
Net cash used by financing activities 10,034,992 14,269,310
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,402,639 2,411,219
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,573,139 6,947,148
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,975,778 $ 9,358,367
============ ============
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 5,471,178 $ 4,657,881
Income tax paid 624,105 320,864
See notes to consolidated financial statements.
6
HFB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial information for the three and
nine-month periods ended March 31, 2000 and 1999 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"). 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, 1999 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. HARLAN BRANCH ACQUISITION
On October 15, 1999, the Bank acquired the deposits of the National
City Bank of Kentucky's Harlan, Kentucky branch office. In the
acquisition, the Bank purchased $17.1 million in deposits and $12,000
in fixed assets. The purchase premium was $459,000 and was calculated
on 3% of core deposits. This premium will be amortized over 84 months
on a declining balance method. The Bank is currently in the process of
purchasing the office building and real estate of this branch bank from
National City and expects to complete the transfer of title by June 30,
2000. In the interim period, the bank has placed $438,000 in escrow for
the purchase of this branch and rents the building from National City
for $3,600 per month. The Bank has opted to continue operating this
branch as a separate office and has retained the 7 persons previously
employed by National City.
1. NON-PERFORMING LOANS AND PROBLEM ASSETS
The following sets forth the activity in the Bank's allowance for loan
losses for the nine-months ended March 31, 2000 and 1999:
(Dollars in thousands)
2000 1999
---- ----
Balance July 1 $1,212 $973
Charge offs (130) (16)
Recoveries 2 -
Provision for loan losses (459) 229
------ ------
Balance March 31 $625 $1,186
Ratio of net charge offs during the period to average
loans outstanding during the period .10% .00%
====== ======
7
Information on impaired loans is summarized below
AT MARCH 31 2000
----
Impaired loans with an allowance $275
Allowance for impaired loans (included in the Company's
allowance for loan losses) $99
NINE-MONTHS ENDED MARCH 31 2000
----
Average balance of impaired loans $591
Interest income recognized on impaired loans 86
Cash-basis interest received 83
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-Q 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 Corporation'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.
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 regulatory
authorities influence the Bank's operations, so are its liquidity levels and
capital resources. As of March 31, 2000, 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.
8
FINANCIAL CONDITION
The Corporation's assets increased by 6.03% to $201.9 million at March 31, 2000
compared to $190.4 million at June 30, 1999. The majority of this increase is
reflected in increases in cash and cash equivalents, investment securities,
loans and fixed assets. These increases are financed primarily by the net of an
increase in deposits, an increase in long-term borrowing and a decrease in
short-term borrowings.
Cash and cash equivalents increased by $1.4 million to $5.0 million at March 31,
2000 from $3.6 million at June 30, 1999. This increase was primarily the result
of excess liquidity invested in overnight funds.
The Company maintains a portfolio of trading account securities, which is
comprised of common stock of other financial institutions. The portfolio was
$785,000 at March 31, 2000 compared to $1.015 million at June 30, 1999. Most of
this decrease was attributable to a decrease in the fair market value of the
portfolio.
The loan portfolio increased by $5.3 million to $126.0 million at March 31, 2000
from $120.7 million at June 30, 1999. A substantial portion of loans originated
during the last nine-month period were adjustable-rate residential mortgages.
At March 31, 2000, the allowance for loan losses was $625,000 or .49% of loans
receivable compared to $1.2 million or .99% of loans receivable at June 30,
1999. During the nine-months ended March 31, 2000, management reduced the
allowance, due to the repayment of $904,000 on impaired loans. Total
non-performing assets were $730,000 or .58% of total loans at March 31, 2000 as
compared to $1.9 million or 1.56% of total loans at June 30, 1999. The decrease
in non-performing loans was primarily due to the repayment of $874,000 on
several problem real estate loans to one borrower that totaled $1.4 million.
Over the past year, management has aggressively worked to help this borrower
find new financing with another lender. This refinancing was the source of the
$874,000 reduction and reduced the borrowers outstanding debt to $455,000. At
March 31, 2000, $99,000 was included in the allowance for loan losses,
specifically as a reserve for the remaining loans to this borrower.
The Bank augments its lending activities and increases its asset yields by
investing in mortgage-backed securities and U.S. Government securities. During
the nine-months ended March 31, 2000, management purchased $16.2 million in
investment and mortgage-backed securities. These purchases were primarily funded
by proceeds from the acquisition of the deposits in the Harlan transaction,
called and maturing investment securities, principal collected on
mortgage-backed securities and investments, and an increase in long-term
borrowing. At March 31, 2000, the Bank held $37.1 million in securities,
available for sale with a net unrealized loss of $1.1 million and $25.5 million
in securities held to maturity with a fair market value of $24.4 million.
Premises and equipment increased by $987,000 to $3.4 million at March 31, 2000
from $2.4 million at June 30, 1999, primarily as the result of progress payments
made on the Bank's new operations center which is presently under construction.
The final cost is estimated at approximately $1.0 million, including furniture
and fixtures.
Other assets and goodwill increased $368,000 to $557,000 at March 31, 2000 from
$189,000 at June 30, 1999, primarily due to the unamortized core deposit
intangible resulting from the Harlan transaction, which was $396,000 at March
31, 2000, with 78 months of amortization remaining.
Total deposits increased by $15.0 million to $169.0 million at March 31, 2000
from $154.0 million at June 30, 1999. During the nine-months ended March 31,
2000, certificates of deposit increased $11.4 million. NOW accounts and savings
deposits increased $3.6 million, primarily due to the acquisition of the
deposits in Harlan on October 15, 1999. Excluding the $17.1 million in deposits
acquired in the Harlan transaction, NOW accounts and savings decreased by $1.0
million and certificates of deposit decreased by $1.9 million. The decline in
these deposits was primarily attributable to aggressive competition in the form
of premium rates offered by other institutions in our market area.
9
Short-term borrowings decreased $6.5 Million from June 30, 1999 as the result of
funding from the acquisition of the deposits of the new Harlan office. Long-term
borrowings increased by $2.0 million to $12.5 million at March 31, 2000 from
$10.5 million at June 30, 1999 due to funding needs for investment securities
and loans.
Accrued interest payable increased by $615,000 to $1.348 million at March 31,
2000 from $733,000 at June 30, 1999 due to an increase in interest-bearing
deposit accounts and the timing of interest payments.
At March 31, 2000, the Bank met all regulatory capital requirements. Tangible,
core and risk-based capital ratios were 8.5%, 8.5% and 19.7% respectively at
March 31, 2000 as compared to 9.0%, 9.0% and 21.4% at June 30, 1999.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED MARCH 31, 2000 AND 1999
Net income increased by $88,000 to $335,000 for the three-month period ended
March 31, 2000 from $247,000 for the three-month period ended March 31, 1999.
The primary reasons for the increase were a decrease of $84,000 in non-interest
income and an increase of $212,000 in non-interest expense. These items were
offset by a $266,000 increase in net interest income a $80,000 decrease in the
provision for loan losses and a $37,000 decrease in income tax expense.
Net interest income increased by $266,000 for the three-month period ended March
31, 2000 as compared to the three-month period ended March 31, 1999, primarily
as the result of higher volume.
Interest on loans increased by $176,000 to $2.595 million for the three-month
period ended March 31, 2000 as compared to $2.419 million for the three-month
period ended March 31, 1999. This increase is mainly attributable to a higher
weighted-average balance of loans receivable outstanding.
Interest on investment securities increased by $183,000 to $1.038 million for
the three-month period ended March 31, 2000 from $855,000 for the three-month
period ended March 31, 1999. This increase is primarily the result of higher
weighted-average balances during the period.
Interest on deposits increased by $104,000 to $1.898 million for the three-month
period ended March 31, 2000 from $1.794 million for the three-month period ended
March 31, 1999 as a result of higher volume.
Interest on short-term borrowings and long-term debt decreased by $68,000 to
$152,000 for the three-month period ended March 31, 2000 from $220,000 for the
three-month period ended March 31, 1999 due to lower levels of short-term
borrowing.
The provision for loan losses decreased $80,000 for the three-month period ended
March 31, 2000 as compared to the same period in 1999. 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 March 31, 2000 was .49%.
Non-interest income decreased by $84,000 to $5,000 for the three-month period
ended March 31, 2000 as compared to $89,000 for the same period in 1999. The
decrease was attributable to a net increase in realized and unrealized (losses)
on trading account securities of $87,000 offset by an increase of $3,000 in
service charges on deposits.
Non-interest expense increased by $212,000 to $1.128 million for the three-month
period ended March 31, 2000 as compared to $916,000 for the same period in 1999.
Compensation and benefits increased by $86,000 to $546,000 for the three-month
period ended March 31, 2000 as compared to $460,000 for the same period in 1999.
This increase is primarily attributable to an increase in salaries and wages of
$75,000, $35,000 which was attributable to the addition of 7 employees from the
Harlan transaction. The remaining portion of the increase was due to increases
in employee education and employee benefits.
10
Occupancy expense increased by $36,000 to $82,000 for the three-month period
ended March 31, 2000 from $46,000 for the same period in 1999. This increase was
primarily due to an increase of $11,000 for the lease of the newly acquired
Harlan branch office. The remaining portion of this increase was attributable to
increases in repairs and maintenance expense, depreciation expense and insurance
expense.
Professional services increased by $30,000 to $74,000 for the three-months ended
March 31, 2000 compared to $44,000 for the same period in 1999, primarily as the
result of $25,000 paid for a Phase II Environmental study performed on the site
of the new Harlan Branch.
Advertising expense increased by $31,000 to $50,000 for the quarter ended March
31, 2000 compared to $19,000 for the quarter ended March 31, 1999 primarily due
to a higher level of agency advertising activity in the current period.
Other expenses increased by $41,000 to $213,000 for the three-month period ended
March 31, 2000 from $172,000 for the three-month period ended March 31, 1999,
primarily due to the addition of $31,000 in core deposit intangible amortization
expense related to the Harlan transaction.
RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED MARCH 31, 2000 AND 1999
Net income increased by $470,000 to $1.274 million for the nine-month period
ended March 31, 2000 from $804,000 for the nine-month period ended March 31,
1999. The primary reasons for the increase were a $609,000 increase in net
interest income, a $689,000 decrease in provision for loan losses, a $49,000
increase non-interest income offset by a $680,000 increase in non-interest
expense and a $197,000 increase in income tax expense.
Net interest income increased by $609,000 for the nine-month period ended March
31, 2000 as compared to the nine-month period ended March 31, 1999, primarily as
the result of a higher volumes and the recognition of interest income on several
non-accrual loans, which were paid off.
Interest on loans increased by $139,000 to $7.653 million for the nine-month
period ended March 31, 2000 as compared to $7.514 million for the nine-month
period ended March 31, 1999. This increase is mainly attributable to a higher
weighted-average balance of loans receivable outstanding.
Interest on investment securities increased by $615,000 to $2.942 million for
the nine-month period ended March 31, 2000 from $2.327 million for the
nine-month period ended March 31, 1999. This increase is primarily the result of
higher weighted-average balances during the period.
Interest on deposits with other financial institutions decreased by $85,000 to
$66,000 for the nine-month period ended March 31, 2000 from $151,000 for the
nine-month period ended March 31, 1999 primarily due to a lower level of
interest-bearing cash balances.
Interest on deposits increased by $110,000 to $5.544 million for the nine-month
period ended March 31, 2000 compared to $5.434 million for the nine-month period
end March 31, 1999. This increase was primarily due to an increase in volume.
Interest on short term borrowings and long term debt decreased by $36,000 to
$542,000 for the nine-month period ended March 31, 2000 from $578,000 for the
nine-month period ended March 31, 1999 primarily due to lower levels of
short-term borrowing.
The provision for loan losses decreased $689,000 for the nine-month period ended
March 31, 2000 as compared to the same period in 1999. During the quarter ended
September 30, 1999, a total of $904,000 of impaired loans were paid off. The
amount charged off for those loans was significantly less than what was
specifically reserved for these loans and resulted in a $474,000 reduction in
the overall allowance. The provision is the result of management's evaluation of
the adequacy of the allowance for loan losses including consideration of
recoveries of loans previously charged off,
11
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, net at March 31, 2000 was .49%.
Non-interest income increased by $49,000 to $170,000 for the nine-month period
ended March 31, 2000 as compared to $121,000 for the same period in 1999. The
increase was attributable to a net decrease in realized and unrealized losses on
trading account securities of $36,000, a decrease in realized gains on available
for sale securities of $3,000, a $10,000 increase in customer fees and service
charges and an increase of $6,000 in other income. The decrease in realized and
unrealized losses on trading account securities was primarily the result of an
decrease in the market value of equity securities included in the trading
account portfolio. The trading account portfolio is comprised of common stocks
of other financial institutions.
Non-interest expense increased by $679,000 to $3.365 million for the nine-month
period ended March 31, 2000 as compared to $2.686 million for the same period in
1999. Compensation and benefits increased by $273,000 to $1.568 million for the
nine-month period ended March 31, 2000 as compared to $1.295 million for the
same period in 1999. This increase is primarily attributable to an increase of
$159,000 in salaries and wages. The remaining portion of the increase was due to
a decrease of $85,000 in salaries and wages that are being deferred as loan
origination costs and an increase of $28,000 in employee benefits. The decrease
in salaries and wages deferred as loan origination costs decreased due to a
decrease in loan production. The increases in wages and benefits were a result
of annual wage increases and a $70,000 increase attributable to the addition of
seven employees from the Harlan transaction.
Occupancy expense increased by $67,000 to $210,000 for the nine-month period
ended March 31, 2000 compared to $144,000 for the same period in 1999. This
increase was primarily due to $20,000 in rent expense for the newly acquired
branch in Harlan, an increase of $9,000 in other rent expense, an increase of
$20,000 in repairs and maintenance expense, an increase of $6,000 in
depreciation expense and an increase of $12,000 in tax, insurance and utility
expenses.
Equipment expense increased by $23,000 to $184,000 for the nine-month period
ended March 31, 2000 compared to $161,000 for the nine-period ended March 31,
1999. The increase was due to a $14,000 increase in repairs and maintenance and
a $9,000 increase in depreciation expense.
Data processing fees increased by $30,000 to $206,000 for the nine-month period
ended March 31, 2000 from $176,000 for the nine-month period ended March 31,
1999 primarily due to one time conversion expenses incurred for the Harlan
branch acquisition.
Professional services increased by $35,000 to $178,000 for the nine-month period
ended March 31, 2000 compared to the same period in 1999. This increase is
primarily due primarily as the result of $25,000 paid for a Phase II
Environmental study performed on the site of the new Harlan Branch office and
$10,000 in fees paid for assistance in developing a new strategic plan.
Advertising expense increased by $93,000 to $174,000 for the nine-month period
ended March 31, 2000 compared to $81,000 for the nine-month period ended March
31, 1999 primarily due to a new advertising campaign launched during the current
fiscal year.
Other expenses increased by $185,000 to $697,000 for the nine-month period ended
March 31, 2000 from $512,000 for the nine-month period ended March 31, 1999
primarily as the result of $63,000 in core deposit intangible amortization for
the Harlan transaction, a $20,000 increase in printing and stationary expense, a
$41,000 increase in other real estate expense, a $21,000 increase in ATM and
other processing fees and a $14,000 increase in telephone expense.
Income tax expense increased by $197,000 to $663,000 for the nine-month period
ended March 31, 2000 compared to $466,000 for the nine-months ended March 31,
1999 due to a higher level of taxable income.
12
QUANTATIVE/QUALITIVE DISCLOSURES ABOUT MARKET RISK
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.
The Corporation uses interest rate sensitivity analysis to measure its interest
rate risk by computing changes in net portfolio value of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. Net portfolio value represents the
market value of portfolio equity and is equal to the market value of assets
minus the market value of liabilities, with adjustments made for off-balance
sheet items. This analysis assesses the risk of loss in market risk sensitive
instruments in the event of a sudden and sustained 100 to 400 basis point
increase or decrease in market interest rates with no effect given to any steps
that management might take to counter the effect of that interest rate movement.
The Corporation measures interest rate risk by modeling the change in net
portfolio value over a variety of interest rate scenarios.
The Corporation has not yet completed its interest rate sensitivity analysis for
March 31, 2000, but anticipates an increase in interest rate sensitivity as
disclosed in the annual report to shareholders' at June 30, 1999. At December
31, 1999, the Corporations net portfolio value was estimated to decline by
$7,179,000 or change 30% with an immediate rate shock reflecting an increase of
200 basis points compared to a decline of $5,761,000 and a change of 25% at June
30, 1999.
13
HFB FINANCIAL CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 March 31, 2000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibit is filed as part of this Form 10-QSB
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
None
14
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: May 12, 2000
15